Answer Bank

44 Financial Accounting and Reporting – IFRS® Standards: Electronic Question Bank ICAEW 2024
Exam 1

1 Calrose Ltd
Marking guide

Marks

1.1 Statement of profit or loss and OCI

Revenue ½
Cost of sales 1½
Administrative expenses 1
Other operating costs 1
Finance cost 3
Income tax 1
Other comprehensive income 1
Statement of financial position
Property, plant and equipment 4
Right-of-use asset 1
Inventories ½
Receivables ½
Share capital ½
Share premium ½
Revaluation surplus 1
Retained earnings 1
Trade and other payables ½
Taxation ½
Borrowings 2
Lease liability 1½
Presentation 1
23½
22
1.2 Explanation 5
Extracts 2½
7½
5
1.3 ½ to 1 mark per valid point 5½
Maximum 3
30

ICAEW 2024 Electronic Answer Bank 45

 1.1 Calrose Ltd
Statement of profit or loss and other comprehensive income for the year ended 31 December 20X1
£
Revenue 2,256,800
Cost of sales (W1) (1,471,031)
Gross profit 785,769
Administrative expenses (W1) (377,915)
Other operating costs (W1) (324,100)
Operating profit 83,754
Finance costs (14,000 – 10,000 + 415 (W5) – 3,375 (W4)) (1,040)
Profit before tax 82,714
Income tax (16,000 + 3,200) (19,200)
Profit for the year 63,514
Other comprehensive income
Gain on property revaluation (W3) 993,000
Total comprehensive income for the year 1,056,514

Statement of financial position as at 31 December 20X1

£ £
ASSETS
Non-current assets
Property, plant and equipment (W2) 2,096,620
Right-of-use asset (W6) 13,582

Current assets
Inventories 122,400
Trade and other receivables 180,700
303,100
Total assets 2,413,302

EQUITY AND LIABILITIES

Ordinary share capital 300,000
Share premium account 40,000
Revaluation surplus (W3) 1,285,100
Retained earnings (454,100 + 63,514) 517,614
Equity 2,142,714

Non-current liabilities
Lease liability (W5) 5,288

Current liabilities
Trade and other payables 120,300
Lease liability (10,373 + 415)(W5) 5,500
Borrowings (100,000 + 23,500) 123,500
Taxation 16,000
265,300
Total equity and liabilities 2,413,302

46 Financial Accounting and Reporting – IFRS® Standards: Electronic Question Bank ICAEW 2024
 WORKINGS
(1) Allocation of expenses

Other
Cost of sales Admin exp operating costs
£ £ £
Per TB 1,405,200 306,900 299,100
Opening inventory 117,600
Closing inventory (122,400)
Government grant 25,000
Depreciation charges (W2) 70,631 71,015
1,471,031 377,915 324,100
(2) Property, plant and equipment
Land and
buildings Plant
£ £
Cost b/f 756,800
Less: Acc depreciation (400,100)
Carrying amount b/f 356,700
Revaluation on 1 January 20X1 1,670,800

Depreciation charges
On machine subject to grant (25,000  20%  6/12) (2,500)
On other plant ((356,700 – 50,000)  20%) (61,340)
On buildings ((1,670,800 – 250,500) ÷ 20) (71,015)

Construction costs 225,600

Borrowing costs (W4) 3,375
Less: Government grant (25,000)
1,599,785 496,835
Total PPE 2,096,620

(3) Revaluation surplus

£
Per TB 292,100
Revaluation in OCI (1,670,800 – 677,800) 993,000
1,285,100

(4) Borrowing costs

£
55,000  4.5% 2,475
45,000  4% × 6/12 900
3,375

(5) Lease liability

Initial measurement £
1 Jan 20X2 5,500 / 1.04 5,288
1 Jan 20X3 5,500 / 1.04 2 5,085
Present value of future lease payments 10,373

ICAEW 2023 Answer Bank 47

 Subsequent measurement
Capital
Balance balance Interest @ Balance
Year end b/f Payment remaining 4% c/f
£ £ £ £ £
31 December 20X1 10,373 - 10,373 415 10,788
31 December 20X2 10,788 (5,500) 5,288 212 5,500

Tutorial note
The lease liability is initially measured at the present value of the future lease payments. The
lease liability at 31 December 20X1 is £10,788, consisting of a current liability of £5,500 (being
the payment due on 1 January 20X2) and a non-current liability of £5,288 (being the capital
balance outstanding for the year to 31 December 20X2 before interest is applied).

(6) Right-of-use asset

£
Initial lease liability (W5) 10,373
Deposit 10,000
Right-of-use asset 20,373

Depreciation over the lease term/useful life of three years £20,373/3 years = £6,791
Carrying amount at 31 December 20X1 = 20,373 – 6,791 = £13,582
1.2 UK GAAP differences re government grant
Calrose Ltd has deducted the grant from the cost of the asset in accordance with its accounting
policy. It has therefore offset the £25,000 government grant against the cost of machine. IAS 20
allows this treatment but also permits the government grant to be separately reported as deferred
income.
Under FRS 102, Calrose Ltd would not have the option to deduct the grant from the cost of the asset.
Instead an entity has the choice to use the performance model or the accrual model. Under the
performance model the grant would be recognised as income when the performance conditions are
met. Here there are no conditions so the grant can be recognised immediately. Assuming Calrose Ltd
would choose to use the accrual model under UK GAAP, the grant would instead be recognised as
deferred income, hence showing the government grant as part of liabilities and then releasing it over
the useful life of the machine. The overall impact on profit is the same as under IAS 20 as instead of
reduced depreciation a deferred income release is made:
£
Other operating income (25,000 × 20%  6/12) 2,500

Creditors: amounts falling due within one year

Deferred income ((25,000 – 2,500)  20%) 4,500

Creditors: amounts falling due after more than one year

Deferred income (25,000 – 2,500 – 4,500) 18,000

1.3 Distributable profits

Calrose Ltd is a private company therefore its distributable profits are measured as accumulated
realised profits less accumulated realised losses. This will usually equate to the retained earnings
balance.

48 Financial Accounting and Reporting – IFRS® Standards: Electronic Question Bank ICAEW 2024
 However, any additional depreciation on revalued non-current assets can be added back to
profits for the purpose of determining distributable profits. Calrose Ltd's distributable profits will
therefore be £549,714 (517,614 + 32,100).
Share capital is a non-distributable reserve, as is the share premium account, as these are not
part of the company's realised profits.
The revaluation surplus is generally an unrealised profit/is only recognised when the asset is sold
and is therefore not distributable.

2 Bomba Ltd
Marking guide

Marks

2.1 Explanation of matter

Related party transaction 12
Financial liability 11
Change of accounting policy 8
31
Maximum 20
2.2 ½ to 1 mark per valid point 14½
Maximum 6
26

2.1 Bomba Ltd

(1) Related party transaction
Roy (the finance director) is a member of the key management personnel of Bomba Ltd and
therefore is a related party per IAS 24, Related Party Disclosures. This transaction is therefore a
related party transaction.
Related party transactions should be disclosed if the information provided by that disclosure is
material, as it is assumed to be in this case. Disclosure should include:
• the nature of the related party relationship (sale to one of the directors);
• the amount of the transaction (£1,000);
• any outstanding balance at the year end (£1,000);
• any special terms and conditions attached to the outstanding balance;
• any provision against the outstanding balance; and
• details of any guarantees given or received.
The fact that the transaction took place on an arm's length basis may be disclosed, but only if this
can be substantiated, but this seems unlikely here. There is no requirement to identify related
parties by name.
It is possible, given the fact that Roy is in personal financial difficulties, that the outstanding
balance (within trade receivables) will need to be written off.
Depreciation should have been charged on the electric car for two months ie, £4,000 (60,000 ×
40% × 2/12). The disposal of the electric car has not been correctly recorded. Property, plant and
equipment should be reduced by the carrying amount of the electric car of £56,000 (60,000 –
4,000) and a loss on disposal recognised of £55,000 (56,000 – 1,000) be recorded, with the
£1,000 taken out of other operating income. Profit for the year will therefore decrease by
£60,000 (1,000 + 4,000 + 55,000).

ICAEW 2023 Answer Bank 49

 Tutorial note
In the Financial Accounting and Reporting exam, you should assume all related party transactions
are material, unless the question states they are immaterial.

(2) Financial liability

Per IAS 32, Financial Instruments: Presentation, the irredeemable preference shares should be
classified as a financial liability because there is a contractual obligation to deliver cash, due to
the right to receive a fixed and mandatory dividend. Furthermore, the dividends are cumulative,
so if the annual dividend is not paid it is rolled up into the following year's payment. Classification
as liability (as opposed to the legal form of equity) recognises the substance of the transaction.
Financial liabilities are initially recognised at fair value, which is normally the transaction price.
Thereafter the preference shares should be accounted for at amortised cost using the effective
interest method. The effective interest rate is equivalent to the annual dividend rate of 4% as the
shares are not redeemable.
At 31 December 20X1 the preference shares should be shown as a
non-current liability of £500,000 and revenue should be reduced by £500,000. The appropriate
amount of the annual dividend, being £15,000 (500,000  4%  9/12) should be accrued,
disclosed as a current liability and included within finance costs in the statement of profit or loss.
Profit for the year will therefore reduce by £515,000.
(3) Change of accounting policy
IAS 2, Inventories allows companies to calculate cost using either the FIFO basis or a weighted
average basis. If this basis of measurement is changed this constitutes a change in accounting
policy.
A change in accounting policy per IAS 8, Accounting Policies, Changes in Accounting Estimates
and Errors is only permitted if required by an IFRS Standard or if it results in the financial
statements showing reliable and more relevant information. A change in accounting policy must
be applied retrospectively. This means that Bomba Ltd should adjust the comparative amounts
for each prior period presented as if the new accounting policy had always been applied.
Therefore, Bomba Ltd should have restated the following items in the comparative amounts (ie
for the year ended 31 December 20X0) within the financial statements for the year ended 31
December 20X1:
• Retained earnings at 1 January 20X0 in the statement of changes in equity increased by
£13,100 (£245,100 – £232,000), disclosed as a prior period adjustment.
• Closing inventories in the statement of financial position increased by £10,500 to be
£252,300.
• Cost of sales in the statement of profit or loss increased by £2,600 (£13,100 – £10,500).
The effect of the adjustment to retained earnings at 1 January 20X0 and cost of sales for the year
ended 31 December 20X0 is to increase retained earnings at 31 December 20X0 by £10,500
(£13,100 – £2,600).
In the 20X1 statement of profit or loss, cost of sales will increase by £10,500 (as a result of the
increase in opening inventories at 1 January 20X1) and profits will decrease by the same amount.
The retained earnings balance is unchanged because the brought forward balance is increased by
£10,500 and profit for the year decreased by £10,500.
2.2 Ethical issues
The fact that Roy has bought an electric car from the company at what appears to be a bargain price,
and no other director has authorised this means that Roy's integrity is in question, as this may be
fraud. Furthermore, as a Chartered Accountant, he should be aware that related party transactions

50 Financial Accounting and Reporting – IFRS® Standards: Electronic Question Bank ICAEW 2024
 should be disclosed if the information resulting from that disclosure is material. Although the amount
involved may be relatively small, the transaction is material and so should be disclosed. Roy stating
that no disclosure of the transaction was necessary either calls his integrity into question again, as he
does not wish to disclose this matter, so that the other directors will not become aware of the sale, or
he is lacking in professional competence and due care.
Also, the fact that Roy did not correctly record the disposal of the electric car could indicate a lack of
professional competence and due care. However, it could also point to a lack of independence and
integrity, as if the disposal had been correctly recorded, profit for the year would decrease by £56,000
and his bonus for the year would be reduced. The existence of the bonus, and Roy's own financial
difficulties lead to a clear self-interest threat.
Roy has also failed to record the issue of the irredeemable preference shares correctly. Although this is
a more complex issue, as a Chartered Accountant, he should still be aware of how this matter should
be treated. Posting the cash receipt to revenue and failing to accrue for the dividend has further
overstated profits, by £515,000. Again, this points to a lack of professional competence and due care
or of independence and integrity.
Further possible indications of a lack of integrity or a lack of professional competence and due care is
Roy's failure to adjust opening inventories for the change of accounting policy. Again, failure to do this
has overstated the profit for the year, by £10,500.
There is a possible intimidation threat to Jasmine from Roy as he is her superior, she knows he is in financial
difficulties, and that he is relying on the bonus.
Jasmine should take the following steps:
• On Roy's return, discuss each of the errors found with him, explaining the correct financial
reporting treatment to him.
• If Roy's knowledge appears to be out of date, tactfully suggest that he goes on an update course.
• Ensure the financial statements are corrected.
• If necessary, seek the support of the managing director/the board.
• Document all discussions.
• If she finds herself in a difficult situation, or caught between Roy and the managing director, or
subject to any sort of intimation threat, consult the ICAEW helpline.

ICAEW 2023 Answer Bank 51

3 Japonica Ltd
Marking guide

Marks

3.1 Consolidated statement of cash flows

Cash generated from operations:
Amortisation charge 1
Increase in inventories 1
Decrease in receivables 1
Increase in payables 1
Cash flows from investing activities:
Purchase of PPE ½
Purchase of intangibles 2
Acquisition of subsidiary 1½
Cash flows from financing activities:
Dividends paid to NCI 1½
Movement in cash and cash equivalents ½
Presentation 1
11
Maximum 10
3.2 Provisions note 4½
Narrative 7
11½
8
3.3 Limitations of financial statements
1 per relevant point up to 9
Maximum 4
22

3.1 Japonica Ltd

Consolidated statement of cash flows for the year ended 31 December 20X1
£ £
Cash flows from operating activities
Cash generated from operations (Note) 314,800
Income tax paid (43,600)
Net cash from operating activities 271,200
Cash flows from investing activities
Purchase of property, plant and equipment
(345,700 – 209,200) (136,500)
Purchase of intangible assets (W1) (112,520)
Acquisition of Kilijira Ltd net of cash acquired
(400,000 – 2,400) (397,600)
Net cash used in investing activities (646,620)
Cash flows from financing activities
Proceeds from issue of ordinary share capital 250,000
Dividends paid (100,000)
Dividends paid to non-controlling interests (W2) (51,160)
Net cash used in financing activities 98,840
Net decrease in cash and cash equivalents (276,580)
Cash and cash equivalents at beginning of period 12,200
Cash and cash equivalents at end of period (264,380)

52 Financial Accounting and Reporting – IFRS® Standards: Electronic Question Bank ICAEW 2024
 Note: Reconciliation of profit before tax to cash generated from operations
£
Profit before tax 250,600
Amortisation charge 12,500
Depreciation charge 102,300
Increase in inventories (356,200 – 206,300) (149,900)
Decrease in trade and other receivables (145,900 – 198,100) 52,200
Increase in trade and other payables (199,800 – 152,700) 47,100
Cash generated from operations 314,800

WORKINGS
(1) INTANGIBLE ASSETS
£ £
B/d 57,120 CPL 12,500
Cash (β) 112,520
Goodwill (400,000 –
(463,300  80%)) 29,360 C/d 186,500
199,000 199,000

(2) NON-CONTROLLING INTERESTS

£ £
Cash (β) 51,160 B/d –
Acquisition (463,300 
20%) 92,660
C/d 82,600 CPL 41,100
133,760 133,760
3.2 Provisions note
Claim by customer Warranty provision Claim re
cyberattack
£ £ £
At 1 January 20X1 – – 150,000
Profit or loss charge 45,352 4,360 60,000
Unwinding of discount 2,268 – –
At 31 December 20X1 47,620 4,360 210,000

The provision for the claim made by a customer relates to a claim which arose on 1 January 20X1 due
to the delivery of faulty goods to a customer. The provision has been discounted to a present value
using a discount rate of 5%. The claim is expected to be settled in January 20X3.
The warranty provision relates to potential claims under a one year warranty scheme introduced on 1
July 20X1. The provision represents the directors' best estimate of likely claims, using an expected
value.
The provision for the claim relating to the cyber-attack relates to a claim which arose in the previous
financial year when the company was the target of a cyber-attack. Although the claim was initially
expected to be settled for £150,000, lawyers now estimate that it will be settled for £210,000. The
claim is due to come to court shortly.
WORKINGS
(1) Legal claim
50,000 ÷ 1.052 = 45,352
Unwinding of discount = 45,352  5% = 2,268
(2) Warranty provision
(24,000  10%) + (49,000  4%) = 4,360

ICAEW 2023 Answer Bank 53

 3.3 Limitations of financial statements
Financial statements have a number of limitations as set out below:
• Financial statements are prepared to a specific date. The information when published is
therefore historic. Although historic information is useful in assessing how a company has been
performing it is limited in the amount of information that it can provide about a company's
future performance.
• Financial statements are prepared in a standardised manner with much of the information
aggregated. While this means that it is easier to compare information between companies
because it is presented in a similar manner it also means that the content of standardised and
aggregated information may be difficult to identify.
• Financial statements only contain a limited amount of narrative information about the business
which can provide valuable insight into the company's future, for example, how it is operating,
what the company's plans are for the future, the risks facing the company, such as number of
competitors in the market and the management structure.
• Financial statements are based on estimates and judgements and hence figures are not an exact
number. Management in different organisations may make slightly different assumptions and
judgements and hence include slightly different figures.
• Companies use different accounting policies which means that exact comparisons cannot always
be made. However, disclosure of accounting policies means that users can identify differences.

4 Arborio plc
Marking guide

Marks

Consolidated statement of profit or loss

Revenue 1½
Cost of sales 2½
Operating expenses 2½
Investment income 2½
Share of profit of associate 1½
Income tax expense 1
Profit from discontinued operations 4

Statement of changes in equity (extract)

Balance at 1 January 20X1 2½
Total comprehensive income 2
Eliminated on disposal 2
Dividends 1½
Presentation 1
24½
Maximum 22

54 Financial Accounting and Reporting – IFRS® Standards: Electronic Question Bank ICAEW 2024
 Arborio plc
Consolidated statement of profit or loss for the year ended 31 December 20X1
Continuing operations £
Revenue (W1) 1,139,100
Cost of sales (W1) (521,700)
Gross profit 617,400
Operating expenses (W1) (197,650)
Operating profit (W1) 419,750
Investment income (W1) 21,300
Share of profit of associate (W3) 3,680
Profit before tax 444,730
Income tax expense (W1) (167,000)
Profit for the year from continuing operations 277,730
Discontinued operations
Profit for the year from discontinued operations (W6) 40,064
Profit for the period 317,794

Profit attributable to
Owners of Arborio plc (β) 284,512
Non-controlling interests (W2) 33,282
317,794
Consolidated statement of changes in equity for the year ended 31 December 20X1 (extract)
Non-controlling
interests
£
At 1 January 20X1 (W7) 297,912
Total comprehensive income for the year 33,282
Eliminated on disposal of subsidiary (W6) (108,324)
Dividends (350,000  25p  20%) (17,500)
At 31 December 20X1 205,370
WORKINGS
(1) Consolidation schedule
Arborio plc Wehani Ltd Adj Consol
£ £ £ £
Revenue 762,500 400,600 1,139,100
– Inter-co trading (24,000)

Cost of sales – per Q (398,700) (142,300)

– Inter-co trading 24,000
– PURP (4,000 + 700) (W4) (4,700) (521,700)

Op expenses – per Q (101,200) (81,450)

– FV deprec (50,000 ÷ 5yrs) (10,000)
– Impairment of goodwill (5,000) (197,650)

Investment income 401,300

– Basmati Ltd disposal
proceeds (310,000)
– Wehani Ltd (350,000  25p  80%) (70,000) 21,300
Tax (132,000) (35,000) (167,000)
131,850

ICAEW 2023 Answer Bank 55

 (2) Non-controlling interests in year
£
Wehani Ltd (131,850 (W1)  20%) 26,370
Basmati Ltd (23,040 (W6)  30%) 6,912
33,282
(3) Share of profit of associate – Opus Ltd
£
Share of post-acquisition retained earnings ((50,800 – 41,600)  40%) 3,680

(4) PURP
Wehani Ltd Opus Ltd
% £ £
SP 120 24,000 10,500
Cost (100) (20,000) (8,750)
GP 20 4,000 1,750
 40% 700

(5) Goodwill – Basmati Ltd

£ £
Consideration transferred 276,000
Non-controlling interests at acquisition (325,400 
30%) 97,620
373,620
Less: fair value of identifiable assets acquired and
liabilities assumed
Share capital 300,000
Retained earnings 25,400
(325,400)
Goodwill 48,220
Impairment brought forward (8,000)
Goodwill at date of disposal 40,220

(6) Profit from discontinued operations – Basmati Ltd

£ £
Sale proceeds 310,000
Less: Carrying amount of goodwill at disposal (W5) (40,220)
Carrying amount of net assets at disposal
Share capital 300,000
Retained earnings (38,040 + (92,160  3/12 =
23,040)) 61,080
(361,080)
Add back: Attributable to non-controlling interests
(361,080  30%) 108,324
Profit on disposal 17,024
Add: Profit for the year 23,040
40,064

56 Financial Accounting and Reporting – IFRS® Standards: Electronic Question Bank ICAEW 2024
 (7) Non-controlling interests at 1 January 20X1
£
Wehani Ltd ((350,000 + 592,500 + 40,000)  20%) 196,500
Basmati Ltd ((300,000 + 38,040)  30%) 101,412
297,912
(8) Non-controlling interests at 31 December 20X1 (for proof only)
£
Wehani Ltd ((350,000 + 592,500 + 141,850 + 30,000 – 87,500)
 20%) 205,370

ICAEW 2023 Answer Bank 57