ACCA paper p2 corporate reporting EXAM KIT

In addition to the examiner’s technical answer, enhanced with key answer tips and tutorial notes in this exam kit, online you can find an answer debrief by a top tutor that: • works thro

Professional Examinations

Paper P2 (INT and UK)

Corporate Reporting

EXAM KIT

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Published by:

Kaplan Publishing UK

Unit 2 The Business Centre

Molly Millar’s Lane

Wokingham

Berkshire

RG41 2QZ

ISBN: 978-1-78415-233-8

© Kaplan Financial Limited, 2015

Printed and bound in Great Britain

The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties Please consult your appropriate professional adviser as necessary Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials

All rights reserved No part of this examination may be reproduced or transmitted in any form or

by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing

Acknowledgements

The past ACCA examination questions are the copyright of the Association of Chartered Certified Accountants The original answers to the questions from June 1994 onwards were produced by the examiners themselves and have been adapted by Kaplan Publishing

We are grateful to the Chartered Institute of Management Accountants and the Institute of Chartered Accountants in England and Wales for permission to reproduce past examination questions The answers have been prepared by Kaplan Publishing

CONTENTS

Page

Section

Key features in this edition

In addition to providing a wide ranging bank of real past exam questions, we have also included

in this edition:

• An analysis of all of the recent new syllabus examination papers

• Paper specific information and advice on exam technique

• Our recommended approach to make your revision for this particular subject as effective

The majority of the UK syllabus examination paper will be the same as the international paper, which is based on IFRS The UK paper will also test some differences between UK GAAP and the IFRS for small and medium entities There could be a focus on legal requirements, rather than accounting standard requirements It is anticipated that the differences will account for no more than 20% of the UK P2 paper

UK syllabus students should refer to the list of examinable documents for the UK examination which identifies the main areas of difference between the IFRS for small and medium entities and

UK GAAP and the extent to which those differences are examinable at P2 This document is available on the ACCA web site at www.accaglobal.com

To assist UK syllabus students, additional questions and answers based on examinable UK content are included within this Exam Kit

Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details

Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions

INDEX TO QUESTIONS AND ANSWERS

this is indicated in the end column of the index with the mark (A).

The pilot paper is included at the end of the kit The final question of this pilot paper has been replaced because the subject matter covered, and the style of the coverage, is not reflective of current examinable documents or exam style

KEY TO THE INDEX

PAPER ENHANCEMENTS

We have added the following enhancements to the answers in this exam kit:

Key answer tips

All answers include key answer tips to help your understanding of each question

Tutorial note

All answers include more tutorial notes to explain some of the technical points in more detail

Top tutor tips

For selected questions, we “walk through the answer” giving guidance on how to approach the questions with helpful ‘tips from a top tutor’, together with technical tutor notes

These answers are indicated with the “footsteps” icon in the index

ONLINE ENHANCEMENTS

Timed question with Online tutor debrief

For selected questions, we recommend that they are to be completed in full exam conditions (i.e properly timed in a closed book environment)

In addition to the examiner’s technical answer, enhanced with key answer tips and tutorial notes

in this exam kit, online you can find an answer debrief by a top tutor that:

• works through the question in full

• points out how to approach the question

• how to ensure that the easy marks are obtained as quickly as possible, and

• emphasises how to tackle exam questions and exam technique

These questions are indicated with the “clock” icon in the index

Online question assistance

Have you ever looked at a question and not know where to start, or got stuck part way through? For selected questions, we have produced “Online question assistance” offering different levels of guidance, such as:

• ensuring that you understand the question requirements fully, highlighting key terms and the meaning of the verbs used

• how to read the question proactively, with knowledge of the requirements, to identify the topic areas covered

• assessing the detail content of the question body, pointing out key information and explaining why it is important

• help in devising a plan of attack

With this assistance, you should then be able to attempt your answer confident that you know what is expected of you

These questions are indicated with the “signpost” icon in the index

Online question enhancements and answer debriefs are available on MyKaplan:

www.MyKaplan.co.uk

SECTION A-TYPE QUESTIONS

Page number Question Answer Past exam (Adapted)

Group financial statements

SECTION B-TYPE QUESTIONS

Reporting standards

30 Lockfine 72 324 Jun 11 (A)

Essay style questions

Page number Question Answer Past exam (Adapted)

UK GAAP focus

ANALYSIS OF PAST PAPERS

The table below summarises the key topics that have been tested in the most recent P2 INT exams (up to December 2014)

The questions and answers in this edition of the exam kit have been amended, where appropriate, to reflect changes to the style of the exam and also the latest examinable documents

The December 2014 exam questions and answers from the INT P2 paper are included in Sections

3 and 4 of the exam kit Where a past examination question is not included in this edition of the exam kit, it is indicated with an (E)

IFRS for SME

EXAM TECHNIQUE

• Use the allocated 15 minutes reading and planning time at the beginning of the exam:

– read the questions and examination requirements carefully, and

– begin planning your answers

Please note that it is prohibited to write in the answer booklet during the reading time

• Divide the time you spend on questions in proportion to the marks on offer:

– there are 1.8 minutes available per mark in the examination

– within that, try to allow time at the end of each question to review your answer and address any obvious issues

Whatever happens, always keep your eye on the clock and do not over run on any part of

any question!

• If you get completely stuck with a question:

– leave space in your answer book, and

– return to it later

• Stick to the question and tailor your answer to what you are asked

– pay particular attention to the verbs in the question

• If you do not understand what a question is asking, state your assumptions

Even if you do not answer in precisely the way the examiner hoped, you should be given some credit, if your assumptions are reasonable

• You should do everything you can to make things easy for the marker

The marker will find it easier to identify the points you have made if your answers are legible

• Written questions:

Your answer should have:

– a clear structure, including headings and paragraphs to provide focus

Be concise and stay on topic You will score no marks if you do not answer the question

• Computations:

It is essential to include all your workings in your answers – method marks are available

Many computational questions require the use of a standard format:

e.g standard formats for financial statements

Be sure you know these formats thoroughly before the exam and use the layouts that you see

in the answers given in this book and in model answers

• Reports, memos and other documents:

Some questions ask you to present your answer in the form of a report, a memo, a letter or other document

Make sure that you use the correct format – there could be easy marks to gain here

PAPER SPECIFIC INFORMATION

THE EXAM

FORMAT OF THE EXAM

Number of marks

Question 1: Group accounts and discussion including ethics

Section B: choice of two from three available questions @ 25 marks each

––––

100 Total time allowed: 3 hours plus 15 minutes reading and planning time –––– Note that:

• Question 1 will focus on preparation of group financial statements for 35 marks There may also be an additional element, such as calculation of the gain or loss on disposal of a subsidiary The remainder of the question is likely to be discursive, perhaps based upon the appropriateness of a particular accounting treatment within the group accounts and will require application of ethical and professional principles to information within the question

• Question 1 is also likely to require technical knowledge of reporting standards to be applied

as part of the consolidation exercise

• Questions 2 and 3 are likely to be multi-transactional questions They will often be presented in the form of a scenario with an entity in the final stages of preparing their annual financial statements, with technical issues still to resolve This may also include use

of incorrect accounting treatments which will require identification, correction and explanation

• Questions 2 and 3 are likely to require both quantitative and qualitative assessment of information provided, perhaps with a summary of corrected or adjusted amounts to include

in the financial statements Discursive explanation of relevant issues will be required and may be in the form of a report or memorandum

• Question 4 is invariably an essay-style question, usually comprising a current issue or a theoretical or conceptual issue for discussion This may include a relatively small computation element The importance of awareness of current issues in accounting cannot

be emphasised too much, including knowledge of articles from Student Accountant

• Note that, for paper P2, two professional marks are available for each question in section B

of the examination As only two from the three available questions must be attempted, a maximum of four professional marks are available per examination You must answer each part of the question to be awarded the full two marks

PASS MARK

The pass mark for all ACCA Qualification examination papers is 50%

UK GAAP FOCUS

The Examiner has indicated that up to 20% of an examination paper may comprise specific UK

GAAP content This could consist of an individual question or elements of more than one question from either or both sections of the examination paper It may comprise of discursive and/or numerical content and requirements, and will test the differences between UK standards and IFRS for small and medium entities Note that the UK syllabus examination paper will be denominated

in dollars (identified as $); this Exam Kit adopts the same notation and style for UK syllabus content

READING AND PLANNING TIME

Remember that all three hour paper based examinations have an additional 15 minutes reading and planning time

ACCA GUIDANCE

ACCA guidance on the use of this time is as follows:

This additional time is allowed at the beginning of the examination to allow candidates to read the questions and to begin planning their answers before they start to write in their answer books

This time should be used to ensure that all the information and, in particular, the exam requirements are properly read and understood

During this time, candidates may only annotate their question paper They may not write anything

in their answer booklets until told to do so by the invigilator

KAPLAN GUIDANCE

As there is some choice in Section B, there is a decision to make regarding which one of the optional questions to drop, together with the decision of which order you should attempt the questions

Therefore, in relation to P2, we recommend that you take the following approach with your reading and planning time:

• Skim through the whole paper, assessing the level of difficulty of each question

• Write down on the question paper next to the mark allocation the amount of time you should spend on each part Do this for each part of every question

• Decide which optional question to drop and the order in which you think you will attempt

It is usual however that student tackle their least favourite topic and/or the most difficult question in their opinion last

Whatever your approach, you must make sure that you leave enough time to attempt all questions fully and be very strict with yourself in timing each question

• For each question in turn, read the requirements and then the detail of the question

carefully

Always read the requirement first as this enables you to focus on the detail of the question with the specific task in mind

For computational questions:

Highlight key numbers/information and key words in the question, scribble notes to yourself on the question paper to remember key points in your answer

Jot down proformas required if applicable

For written questions:

Take notice of the format required (e.g letter, memo, notes) and identify the recipient of the answer You need to do this to judge the level of financial sophistication required in your answer and whether the use of a formal reply or informal bullet points would be satisfactory

Plan your beginning, middle and end and the key areas to be addressed and your use of titles and sub-titles to enhance your answer

For all questions:

Spot the easy marks to be gained in a question and parts which can be performed independently of the rest of the question For example, noting relevant reporting standards and unusual accounting treatments, laying out basic proformas correctly etc Make sure that you do these parts first when you tackle the question

Don’t go overboard in terms of planning time on any one question – you need a good measure of the whole paper and a plan for all of the questions at the end of the

15 minutes

By covering all questions you can often help yourself as you may find that facts in one question may remind you of things you should put into your answer relating to a different question

• With your plan of attack in mind, start answering your chosen question with your plan to

hand, as soon as you are allowed to start

Always keep your eye on the clock and do not over run on any part of any question!

DETAILED SYLLABUS

The detailed syllabus and study guide written by the ACCA can be found at:

www.accaglobal.com/students/

KAPLAN’S RECOMMENDED REVISION APPROACH

QUESTION PRACTICE IS THE KEY TO SUCCESS

Success in professional examinations relies upon you acquiring a firm grasp of the required knowledge at the tuition phase In order to be able to do the questions, knowledge is essential However, the difference between success and failure often hinges on your exam technique on the day and making the most of the revision phase of your studies

The Kaplan complete text is the starting point, designed to provide the underpinning knowledge

to tackle all questions However, in the revision phase, pouring over text books is not the answer

Kaplan Online progress tests help you consolidate your knowledge and understanding and are a

useful tool to check whether you can remember key topic areas

Kaplan pocket notes are designed to help you quickly revise a topic area, however you then need

to practice questions There is a need to progress to full exam standard questions as soon as possible, and to tie your exam technique and technical knowledge together

The importance of question practice cannot be over-emphasised

The recommended approach below is designed by expert tutors in the field, in conjunction with their knowledge of the examiner and their recent real exams

The approach taken for the fundamental papers is to revise by topic area However, with the professional stage papers, a multi topic approach is required to answer the scenario based questions

You need to practice as many questions as possible in the time you have left

OUR AIM

Our aim is to get you to the stage where you can attempt exam standard questions confidently, to time, in a closed book environment, with no supplementary help (i.e to simulate the real examination experience)

Practising your exam technique on real past examination questions, in timed conditions, is also vitally important for you to assess your progress and identify areas of weakness that may need more attention in the final run up to the examination

In order to achieve this we recognise that initially you may feel the need to practice some questions with open book help and exceed the required time

The approach below shows you which questions you should use to build up to coping with exam standard question practice, and references to the sources of information available should you need to revisit a topic area in more detail

Remember that in the real examination, all you have to do is:

• attempt all questions required by the exam

• only spend the allotted time on each question, and

• get them at least 50% right!

Try and practice this approach on every question you attempt from now to the real exam

• “running out of time” and

• showing signs of “spending too much time on an earlier question and clearly rushing the answer to a subsequent question”

Good exam technique is vital

THE KAPLAN PAPER P2 REVISION PLAN

Stage 1: Assess areas of strengths and weaknesses

Stage 2: Practice questions

Follow the order of revision of topics as recommended in the revision table plan below and attempt the questions in the order suggested

Try to avoid referring to text books and notes and the model answer until you have completed your attempt

Try to answer the question in the allotted time

Review your attempt with the model answer and assess how much of the answer you achieved in the allocated exam time

Comfortable

with the technical content with the technical content Not comfortable

Read the relevant chapter(s) in Kaplan’s Complete Text Attempt the Test your understanding examples if unsure of an area Attempt appropriate Online Progress

Fill in the self-assessment box below and decide on your best course of action

Note that:

The “footsteps questions” give guidance on exam techniques and how you should have

approached the question

The “clock questions” have an online debrief where a tutor talks you through the exam technique and approach to that question and works the question in full

Stage 3: Final pre-exam revision

We recommend that you attempt at least one three hour mock examination containing a set of

previously unseen exam standard questions

It is important that you get a feel for the breadth of coverage of a real exam without advanced knowledge of the topic areas covered – just as you will expect to see on the real exam day

Ideally this mock should be sat in timed, closed book, real exam conditions and could be:

• a mock examination offered by your tuition provider, and/or

• the pilot paper in the back of this exam kit, and/or

• the last real examination paper (available shortly afterwards on MyKaplan with “enhanced walk through answers” and a full “tutor debrief”)

Comfortable with question attempt Not comfortable with question attempts

Only revisit when comfortable with

questions on all topic areas

Focus on these areas by:

examples in Kaplan’s Complete Text

• Revisiting the technical content from Kaplan’s pocket notes

• Working any remaining questions on that area in the exam kit

question in that area, on a timed, closed book basis

KAPLAN’S DETAILED REVISION PLAN

Text Chapter

Pocket note Chapter

Questions

to attempt

Tutor guidance Date

attempted Self assessment

The financial reporting

framework 1 1 Q57(a) Q55 Ensure that you are able to define, discuss and apply the elements of

financial statements as identified in The Framework It is also important to know and be able to apply the rules and

definitions in IFRS 13 Fair Value

Measurement

The professional and

ethical duty of the

Q45 Q49

There are several reporting standards within this heading In particular, the accounting requirements of IAS 16, IAS

36 and IAS 38 are regularly examined

Q23 Q57(b)

Ensure that you can classify and explain the differences between finance and operating leases per IAS 17 and that you can account for sale and leaseback transactions

account for defined benefit and defined contribution schemes per IAS 19

Q47

Ensure that you understand how to account for both cash-settled transactions and equity-settled transactions per IFRS 2

Provisions and events

after the reporting

period

constructive obligation arises per IAS 37, and can apply the definition of an adjusting and non-adjusting event per IAS 10

Q35 Q48

Ensure that you understand and can apply recognition, measurement and classification rules relating to financial instruments per IAS 32 and IFRS 9

Income taxes 12 10 Q34

Q46

The main focus is likely to be deferred tax, with recognition of temporary differences to create deferred tax assets and liabilities per IAS 12

segment per IFRS 8 and apply the definition to information provided

per IAS 24, and the implications for any transactions which they may enter into

Changes in accounting

regulation and reporting 15, 17 11, 13 Q30 Q63 Ensure that you know how to account for the first-time adoption of IFRS The

growing importance of integrated reporting is also likely to be a key topic

Specialised entities and

specialised transactions 16 12 Q50 Q56 Ensure that you understand accounting issues associated with SMEs, as well as

the reasons for, and the accounting treatment of, an entity reconstruction

Q61

Regularly review the IASB web site for current developments, together with the ACCA web site for articles relevant to paper P2

Group financial

statements

workings required for subsidiaries in group financial statements, as well as key definitions per IFRS 10, IFRS 11 and IFRS 12

Q4

Ensure that you understand how control

is exercised in complex structures, and the impact upon standard workings required

Foreign currency

subsidiaries 22 17 Q15 Q7 Ensure that you know how to consolidate a foreign subsidiary in

accordance with IAS 21

Statements of cash

flows 24 19 Q2 Q8 Ensure that you know the format of a statement of cash flows per IAS 7 and

can deal with changes in group structure within the statement

Note that not all of the questions are referred to in the programme above We have recommended an approach to build up from the basic to exam standard questions The remaining questions are available in the kit for extra practice for those who require more questions on some areas

TECHNICAL UPDATE

Since 1 September 2013, there have been some additions and amendments to the P2 examinable documents The key issues are summarised below

IFRS 9 FINANCIAL INSTRUMENTS

Although parts of IFRS 9 had been issued previously, the IASB has added a new business model in relation to financial asset accounting New sections on impairments and hedge accounting have also now been issued The key new content is summarised below:

Financial assets

Investments in equity

Investments in equity instruments (such as an investment in the ordinary shares of another entity) are normally measured at fair value through profit or loss It is possible to designate an equity instrument as fair value through other comprehensive income, provided that the following conditions are complied with:

• the equity instrument must not be held for trading, and

• there must have been an irrevocable choice for this designation upon initial recognition of the asset

Investments in debt

Financial assets that are debt instruments can be measured in one of three ways:

An investment in a debt instrument is measured at amortised cost if:

• The financial asset is held within a business model whose aim is to collect the contractual cash flows

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding

An investment in a debt instrument is measured at fair value through other comprehensive income if:

• The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding

An investment in a debt instrument that is not measured at amortised cost or fair value through other comprehensive income will be measured at fair value through profit or loss

Financial asset impairments

Definitions

Credit loss: The difference between all contractual cash flows that are due to an entity in

accordance with the contract and all the cash flow that the entity expects to receive (i.e all cash shortfalls), discounted at the original effective interest rate

Expected credit losses: The weighted average of credit losses with the respective risks of a default

occurring as the weights

Lifetime expected credit losses: The expected credit losses that result from all possible default

events over the expected life of a financial instrument

12-month expected credit losses: The portion of lifetime expected credit losses that represent

the expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date

The loss allowance should always be measured at an amount equal to lifetime credit losses for

trade receivables and contract assets (recognised in accordance with IFRS 15 Revenue from

Contracts with Customers) if they do not have a significant financing component

Adjustments to the loss allowance are charged (or credited) to the statement of profit or loss

Hedge accounting

Criteria

Under IFRS 9, hedge accounting rules can only be applied if the hedging relationship meets the following criteria:

• The hedging relationship consists only of eligible hedging instruments and hedged items

• At the inception of the hedge there must be formal documentation identifying the hedged item and the hedging instrument

• The hedging relationship is effective

• If the hedged item is a forecast transaction, then the transaction must be highly probable

Accounting treatment of a fair value hedge

At the reporting date:

• The hedging instrument will be remeasured to fair value

• The carrying amount of the hedged item will be adjusted for the change in fair value since the inception of the hedge

The gain (or loss) on the hedging instrument and the loss (or gain) on the hedged item will be recorded:

• in profit or loss in most cases, but

• in other comprehensive income if the hedged item is an investment in equity that is measured at fair value through other comprehensive income

Accounting treatment of a cash flow hedge

For cash flow hedges, the hedging instrument will be remeasured to fair value at the reporting date The gain or loss is recognised in other comprehensive income However, if the gain or loss

on the hedging instrument since the inception of the hedge is greater than the loss or gain on the hedged item then the excess gain or loss on the instrument must be recognised in profit or loss

IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS

IFRS 15 adopts a five step process to revenue recognition:

(1) Identify the contract

A contract is an agreement between two or more parties that creates enforceable rights and obligations

A contract can be agreed in writing, verbally, or through other customary business practices

(2) Identify the separate performance obligations within a contract

Performance obligations are promises to transfer distinct goods or services to a customer The distinct performance obligations within a contract must be identified

(3) Determine the transaction price

The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer Amounts collected on behalf of third parties (such as sales tax) are excluded

If the consideration promised in a contract includes a variable amount, an entity must estimate the amount that the entity will be entitled to in exchange for satisfying the performance obligations The estimated amount of variable consideration can only be included in the transaction price if it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty is resolved

(4) Allocate the transaction price to the performance obligations in the contract

The total transaction price should be allocated to each performance obligation in proportion to stand-alone selling prices

The best evidence of a stand-alone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers

(5) Recognise revenue when (or as) a performance obligation is satisfied

For each performance obligation identified, an entity must determine at contract inception whether it satisfies the performance obligation over time or satisfies the performance obligation at a point in time

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

• the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs

• the entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced, or

• the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date

For a performance obligation satisfied over time, an entity recognises revenue over time by measuring the progress towards complete satisfaction of that performance obligation

If a performance obligation is not satisfied over time then it is satisfied at a point in time The entity must determine the point in time at which a customer obtains control of a promised asset The following are indicators of the transfer of control:

• The entity has a present right to payment for the asset

• The customer has legal title to the asset

• The entity has transferred physical possession of the asset

• The customer has the significant risks and rewards of ownership of the asset

• The customer has accepted the asset

Section 1

PRACTICE QUESTIONS

SECTION A-TYPE QUESTIONS

GROUP FINANCIAL STATEMENTS

The following draft financial statements relate to Marchant, a public limited company

Marchant Group: Draft statements of profit or loss and other comprehensive income for the year ended 30 April 2014

Marchant Nathan Option

The following information is relevant to the preparation of the group statement of profit or loss and othercomprehensive income:

1 On 1 May 2012, Marchant acquired 60% of the equity interests of Nathan, a public limited company The purchase consideration comprised cash of $80 million and the fair value of the identifiable net assets acquired was $110 million at that date The fair value of the non-controlling interest (NCI) in Nathan was $45 million on 1 May

2012 Marchant wishes to use the ‘full goodwill’ method for all acquisitions The share capital and retained earnings of Nathan were $25 million and $65 million respectively and other components of equity were $6 million at the date of acquisition The excess of the fair value of the identifiable net assets at acquisition is due to non-depreciable land

Goodwill has been impairment tested annually and as at 30 April 2013 had reduced

in value by 20% However at 30 April 2014, the impairment of goodwill had reversed and goodwill was valued at $2 million above its original value This upward change in value has already been included in above draft financial statements of Marchant prior to the preparation of the group accounts

2 Marchant disposed of an 8% equity interest in Nathan on 30 April 2014 for a cash consideration of $18 million and had accounted for the gain or loss in other income The carrying value of the net assets of Nathan at 30 April 2014 was $120 million before any adjustments on consolidation Marchant accounts for investments in

subsidiaries using IFRS 9 Financial Instruments and has made an election to show

gains and losses in other comprehensive income The carrying value of the investment in Nathan was $90 million at 30 April 2013 and $95 million at 30 April

2014 before the disposal of the equity interest

3 Marchant acquired 60% of the equity interests of Option, a public limited company,

on 30 April 2012 The purchase consideration was cash of $70 million Option’s identifiable net assets were fair valued at $86 million and the NCI had a fair value of

$28 million at that date On 1 November 2013, Marchant disposed of a 40% equity interest in Option for a consideration of $50 million Option’s identifiable net assets were $90 million and the value of the NCI was $34 million at the date of disposal The remaining equity interest was fair valued at $40 million After the disposal, Marchant exerts significant influence Any increase in net assets since acquisition has been reported in profit or loss and the carrying value of the investment in Option had not changed since acquisition Goodwill had been impairment tested and no impairment was required No entries had been made in the financial statements of Marchant for this transaction other than for cash received

4 Marchant sold inventory to Nathan for $12 million at fair value Marchant made a loss on the transaction of $2 million and Nathan still holds $8 million in inventory at the year end

5 The following information relates to Marchant’s pension scheme:

$m

The pension costs have not been accounted for in total comprehensive income

6 On 1 May 2012, Marchant purchased an item of property, plant and equipment for

$12 million and this is being depreciated using the straight line basis over 10 years with a zero residual value At 30 April 2013, the asset was revalued to $13 million but

at 30 April 2014, the value of the asset had fallen to $7 million Marchant uses the revaluation model to value its non-current assets The effect of the revaluation at

30 April 2014 had not been taken into account in total comprehensive income but depreciation for the year had been charged

7 On 1 May 2012, Marchant made an award of 8,000 share options to each of its seven directors The condition attached to the award is that the directors must remain employed by Marchant for three years The fair value of each option at the grant date was $100 and the fair value of each option at 30 April 2014 was $110 At

30 April 2013, it was estimated that three directors would leave before the end of three years Due to an economic downturn, the estimate of directors who were going

to leave was revised to one director at 30 April 2014 The expense for the year as regards the share options had not been included in profit or loss for the current year and no directors had left by 30 April 2014

8 A loss on an effective cash flow hedge of Nathan of $3 million has been included in the subsidiary’s finance costs

9 Ignore the taxation effects of the above adjustments unless specified Any expense adjustments should be amended in other expenses

Required:

(a) (i) Prepare a consolidated statement of profit or loss and other comprehensive

income for the year ended 30 April 2014 for the Marchant Group (30 marks) (ii) Explain, with suitable calculations, how the sale of the 8% interest in Nathan should be dealt with in the group statement of financial position at 30 April

(b) The directors of Marchant have strong views on the usefulness of the financial statements after their move to International Financial Reporting Standards (IFRSs) They feel that IFRSs implement a fair value model Nevertheless, they are of the opinion that IFRSs are failing users of financial statements as they do not reflect the financial value of an entity

A new financial controller joined Marchant just after the financial year end of 30 April

2014 and is presently reviewing the financial statements to prepare for the upcoming audit and to begin making a loan application to finance the new technology The financial controller feels that the lease relating to both the land and buildings should

be treated as a finance lease but the finance director disagrees The finance director does not wish to recognise the lease in the statement of financial position and therefore wishes to continue to treat it as an operating lease The finance director feels that the lease does not meet the criteria for a finance lease, and it was made clear by the finance director that showing the lease as a finance lease could jeopardise the loan application

Required:

Discuss the ethical and professional issues which face the financial controller in the

(Total: 50 marks)

The following draft group financial statements relate to Angel, a public limited company:

Angel Group: Statement of financial position as at 30 November 2013

Equity and liabilities

Angel Group: Statement of profit or loss and other comprehensive income for the year ended 30 November 2013

–––––

––––– Profit attributable to:

–––––

142 ––––– Other comprehensive income:

Items that will not be reclassified to profit or loss

–––––

––––– Items that may be reclassified to profit or loss

––––– Total items that may be reclassified subsequently to profit or loss 3

Total comprehensive income attributable to:

Angel Group: Extracts from statement of changes in equity for the year ended

30 November 2013

Share capital Retained earnings

Other components

of equity – financial assets reserve

Other components

of equity – revaluation reserve

controlling interest

The following information relates to the financial statements of the Angel Group:

(i) Angel decided to renovate a building which had a zero book value at 1 December

2012 As a result, $3 million was spent during the year on its renovation On

30 November 2013, Angel received a cash grant of $2 million from the government to cover some of the refurbishment cost and the creation of new jobs which had resulted from the use of the building The grant related equally to both job creation and renovation The only elements recorded in the financial statements were a charge to revenue for the refurbishment of the building and the receipt of the cash grant, which has been credited to additions of property, plant and equipment (PPE) The building was revalued at 30 November 2013 at $7 million

Angel treats grant income on capital-based projects as deferred income

(ii) On 1 December 2012, Angel acquired all of the share capital of Sweety for

$30 million The book values and fair values of the identifiable assets and liabilities of Sweety at the date of acquisition are set out below, together with their tax base Goodwill arising on acquisition is not deductible for tax purposes There were no other acquisitions in the period The tax rate is 30% The fair values in the table below have been reflected in the year-end balances of the Angel Group

Carrying values

$ million Tax base $ million

Fair values

$million (excluding deferred taxation)

(iv) The property, plant and equipment (PPE) comprises the following:

$m

Additions at cost including assets acquired on the purchase of subsidiary 80

(v) Angel has constructed a machine which is a qualifying asset under IAS 23 Borrowing

Costs and has paid construction costs of $4 million This amount has been charged to

other expenses Angel Group paid $11 million in interest in the year, which includes

$1 million of interest which Angel wishes to capitalise under IAS 23 There was no deferred tax implication regarding this transaction

The disposal proceeds were $63 million The gain on disposal is included in administrative expenses

(vi) Angel purchased a 30% interest in an associate for cash on 1 December 2012 The net assets of the associate at the date of acquisition were $280 million The associate made a profit after tax of $40 million and paid a dividend of $10 million out of these profits in the year ended 30 November 2013

(vii) An impairment test carried out at 30 November 2013 showed that goodwill and other intangible assets were impaired The impairment of goodwill relates to 100% owned subsidiaries

(viii) The following schedule relates to the financial assets owned by Angel:

$m

––––

–––– The sale proceeds of the financial assets were $40 million Profit on the sale of the financial assets is included in ‘other income’ in the financial statements

(ix) The finance costs were all paid in cash in the period

Required:

(a) Prepare a consolidated statement of cash flows using the indirect method for the Angel Group plc for the year ended 30 November 2013 in accordance with the

requirements of IAS 7 Statement of Cash Flows

Note: The notes to the statement of cash flows are not required (35 marks)

(b) The directors of Angel are confused over several issues relating to IAS 7 Statement of

Cash Flows They wish to know the principles utilised by the International Accounting

Standards Board in determining how cash flows are classified, including how entities determine the nature of the cash flows being analysed

They have entered into the following transactions after the year end and wish to know how to deal with them in a cash flow statement, as they are unsure of the meaning of the definition of cash and cash equivalents

Angel had decided after the year end to deposit the funds with the bank in two term deposit accounts as follows:

(i) $3 million into a 12-month term account, earning 3.5% interest The cash can

be withdrawn by giving 14 days’ notice but Angel will incur a penalty, being the loss of all interest earned

(ii) $7 million into a 12-month term account earning 3% interest The cash can be withdrawn by giving 21 days’ notice Interest will be paid for the period of the deposit but if money is withdrawn, the interest will be at the rate of 2%, which

is equivalent to the bank’s stated rate for short-term deposits

Angel is confident that it will not need to withdraw the cash from the higher-rate deposit within the term, but wants to keep easy access to the remaining $7 million to cover any working capital shortfalls which might arise

Required:

Discuss the above views of the directors regarding the fact that codes of ethics are

(Total: 50 marks)

(a) Trailer, a public limited company, operates in the manufacturing sector Trailer has investments in two other companies The draft statements of financial position at

31 May 2013 are as follows: