ACCA paper p2 corporate reporting

Professional Examinations Paper P2 (INT and UK) Corporate Reporting EXAM KIT P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by: Kaplan Publishing UK Unit 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 ii KA PL AN P U BLI SH IN G CONTENTS Page Index to questions and answers v Analysis of past papers xi Exam technique xiii Paper specific information xv Kaplan’s recommended revision approach xix Kaplan’s detailed revision plan xxiii Technical update xxvii Section Practice questions UK GAAP focus questions 115 Answers to practice questions 119 UK GAAP focus answers 448 December 2014 exam questions 457 Answers to December 2014 exam questions 465 KA PL AN P U BLI SH IN G i ii P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G 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 as possible This includes step by step guidance on how best to use our Kaplan material (Complete text, pocket notes and exam kit) at this stage in your studies • Enhanced tutorial answers packed with specific key answer tips, technical tutorial notes and exam technique tips from our experienced tutors • Complementary online resources including full tutor debriefs and question assistance to point you in the right direction when you get stuck You will find a wealth of other resources to help you with your studies on the following sites: www.MyKaplan.co.uk www.accaglobal.com/students/ UK GAAP Focus The Examiner has indicated that, for the purposes of this exam, International Financial Reporting Standards (IFRS) are the main accounting standards examined in the preparation of financial information 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 iv KA PL AN P U BLI SH IN G INDEX TO QUESTIONS AND ANSWERS INTRODUCTION Note that the majority of the questions within the kit are past ACCA exam questions, the more recent questions (from 2005) are labelled as such in the index Many of the old ACCA questions within this kit have been adapted to reflect the current style of paper and also the latest examinable documents If changed in any way from the original version, 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 KAPLAN PUBLISHING v P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G 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 vi KA PL AN P U BLI SH IN G IN DE X TO Q UE S T ION S A N D A N S WE R S SECTION A-TYPE QUESTIONS Page number Question Answer Past exam (Adapted) Group financial statements Marchant (P/L and OCI - disposal) 119 Jun 14 (A) Angel (Statement of cash flows) 131 Dec 13 (A) Trailer (SFP – complex group) 10 139 Jun 13 (A) Minny (SFP – complex group) 13 151 Dec 12 (A) Robby (SFP – step acquisition) 16 161 Jun 12 (A) Traveler (SFP – share transactions) 19 172 Dec 11 (A) Rose (SFP – forex) 21 183 Jun 11 (A) Jocatt Group (Statement of cash flows) 24 192 Dec 10 (A) Ashanti (P/L and OCI – disposal) 28 201 Jun 10 (A) 10 Grange (SFP – share transactions) 30 211 Dec 09 (A) 11 Bravado (SFP – step acquisition) 33 221 Jun 09 (A) 12 Warrburt (Statement of cash flows) 36 232 Dec 08 (A) 13 Ribby, Hall and Zian (SFP – forex) 41 240 Jun 08 (A) 14 Andash (Statement of cash flows) 43 250 Dec 06 (A) 15 Parsley (P/L and OCI - forex) 47 256 16 Memo (SFP and P/L and OCI – forex) 49 263 17 Zambeze (Statement of cash flows) 52 270 SECTION B-TYPE QUESTIONS Reporting standards 18 Aspire 56 275 Jun 14 19 Minco 57 280 Jun 14 20 Havanna 58 285 Dec 13 (A) 21 Bental 60 290 Dec 13 (A) 22 Verge 61 295 Jun 13 23 Janne 63 301 Jun 13 24 Coate 64 306 Dec 12 (A) 25 Blackcutt 66 309 Dec 12 (A) 26 William 67 312 Jun 12 (A) 27 Ethan 68 315 Jun 12 28 Decany 69 318 Dec 11 29 Scramble 71 321 Dec 11 KA PL AN P U BLI SH IN G v ii P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G 30 Lockfine 72 324 Jun 11 (A) 31 Alexandra 73 327 Jun 11 32 Margie 75 330 Dec 10 33 Greenie 76 333 Dec 10 34 Cate 78 338 Jun 10 (A) 35 Seltec 79 343 Jun 10 (A) 36 Key 80 347 Dec 09 37 Aron 82 352 Jun 09 38 Marrgrett 83 358 Dec 08 39 Norman 84 361 Jun 08 (A) 40 Macaljoy 85 364 Dec 07 41 Wader 87 369 Jun 07 (A) 42 Router 89 373 Jun 07 (A) 43 Egin 90 376 Jun 06 (A) 44 Tyre 91 380 Jun 06 (A) 45 Prochain 92 383 Jun 06 46 Panel 94 386 Dec 05 (A) 47 Vident 95 389 Jun 05 48 Artwright 96 392 49 Lucky Dairy 98 394 50 Shires Property Construction 99 397 51 Boomerang 101 402 Essay style questions 52 Debt and equity 103 408 Jun 14 (A) 53 Zack 104 410 Dec 13 54 Lizzer 105 413 Jun 13 55 Jayach 107 417 Dec 12 (A) 56 IFRS for SME Applied 108 421 Dec 10 (A) 57 Holcombe 109 425 Jun 10 58 Corporate Reporting 110 429 Dec 08 59 Management Commentary 110 433 60 Revenue Recognition 111 435 61 Impairment of Financial Assets 112 438 62 Impairment of Non-financial Assets 112 440 63 Integrated Reporting 113 442 64 Conceptual Framework 114 446 v ii i KA PL AN P U BLI SH IN G IN DE X TO Q UE S T ION S A N D A N S WE R S Page number Question Answer Past exam (Adapted) UK GAAP focus 65 Joey 115 448 Dec 14 (A) 66 Katye 115 449 Dec 14 67 Trailer 116 451 Jun 13 (A) 68 IFRS for SME and FRS 102 116 452 Dec 10 (A) 69 Herbie 117 454 KA PL AN P U BLI SH IN G ix P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G x KA PL AN P U BLI SH IN G 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 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 KA PL AN P U BLI SH IN G xi x P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G Remember that in the real examination, all you have to 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 EXAMINER COMMENTS We have included the examiner's comments to many examination questions in this kit for you to see the main pitfalls that students fall into with regard to technical content However, too many times in the general section of the report, the examiner comments that students had failed due to: • “misallocation of time” • “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 xx KA PL AN P U BLI SH IN G KA PL AN ’S RE CO M ME N DE D RE VI SI ON APP R OA CH THE KAPLAN PAPER P2 REVISION PLAN Stage 1: Assess areas of strengths and weaknesses Review the topic listings in the revision table plan below Determine whether or not the area is one with which you are comfortable Comfortable with the technical content Not comfortable with the technical content 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 Tests Review the pocket notes on this area 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 KA PL AN P U BLI SH IN G xx i P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G Fill in the self-assessment box below and decide on your best course of action Comfortable with question attempt Only revisit when comfortable with questions on all topic areas Not comfortable with question attempts Focus on these areas by: • Reworking test your understanding 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 • Reattempting an exam standard question in that area, on a timed, closed book basis 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”) xx i i KA PL AN P U BLI SH IN G KAPLAN’S DETAILED REVISION PLAN Topic Complete Text Chapter Pocket note Chapter Questions to attempt Tutor guidance The financial reporting framework 1 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 accountant Appraisal of financial performance and position Q57(a) Q1(c) Q2(c) Q3(b) Q52 Date attempted Self assessment Ensure that you can apply the ACCA Code of Ethics to a practical scenario This is likely to be asked as part of a question, and may also require consideration of other accounting issues Reporting financial performance Performance reporting 3, 3, Q20 Q22 Non-current assets 5 Q6 Q45 Q49 KA PL AN P U BLI SH IN G This could include revenue recognition per IFRS 15, plus discontinued activities and non-current assets held for sale per IFRS There are several reporting standards within this heading In particular, the accounting requirements of IAS 16, IAS 36 and IAS 38 are regularly examined xx i i i P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G Foreign currency transactions and subsidiaries Leases 17 Q18 Q15 Q20 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 Employee benefits Q40(a) Ensure that you understand how to account for defined benefit and defined contribution schemes per IAS 19 Share-based payment Q27 Ensure that you understand how to account for both cash-settled transactions and equity-settled transactions per IFRS Q47 Provisions and events after the reporting period 10 Q40(b) Ensure that you know when a legal or constructive obligation arises per IAS 37, and can apply the definition of an adjusting and non-adjusting event per IAS 10 Financial instruments 11 Q21 Ensure that you understand and can apply recognition, measurement and classification rules relating to financial instruments per IAS 32 and IFRS Q35 Q48 xx i v Ensure that you know how to account for exchange differences arising on overseas transactions within an individual company’s financial statements KA PL AN P U BLI SH IN G KA PL AN ’S DE T AILE D RE V ISI ON P L A N 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 reporting 13 Q39 Ensure that you can define a reportable segment per IFRS and apply the definition to information provided Related parties 14 Q43 Ensure you can identify related parties 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 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 Current issues 18 Q63 12 Q50 Q56 14 Q60 Q61 KA PL AN P U BLI SH IN G Ensure that you understand accounting issues associated with SMEs, as well as the reasons for, and the accounting treatment of, an entity reconstruction Regularly review the IASB web site for current developments, together with the ACCA web site for articles relevant to paper P2 xx v P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G Group financial statements Basic groups 19 15 Complex structures 20 16 Ensure that you understand the standard workings required for subsidiaries in group financial statements, as well as key definitions per IFRS 10, IFRS 11 and IFRS 12 Q3 Q4 Changes in group structure 21, 23 16, 18 Q1 Q5 Q10 Foreign currency subsidiaries 22 Statements of cash flows 24 17 Q7 Q15 19 Q2 Q8 Ensure that you understand how control is exercised in complex structures, and the impact upon standard workings required Ensure that you know how to account for transactions where control is either gained, lost or retained Ensure that you know how to consolidate a foreign subsidiary in accordance with IAS 21 Ensure that you know the format of a statement of cash flows per IAS 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 xx v i KA PL AN P U BLI SH IN G TECHNICAL UPDATE Since September 2013, there have been some additions and amendments to the P2 examinable documents The key issues are summarised below IFRS FINANCIAL INSTRUMENTS Although parts of IFRS 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 KA PL AN P U BLI SH IN G xx v i i P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G 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 Loss allowances Loss allowances must be recognised for financial assets that are debt instruments and which are measured at amortised cost or at fair value through other comprehensive income If the credit risk on the financial asset has increased significantly since initial recognition then the loss allowance should be equal to the lifetime expected credit losses If the credit risk on the financial asset has not increased significantly since initial recognition, the loss allowance should be equal to 12-month expected credit losses 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 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 xx v i ii KA PL AN P U BLI SH IN G TE CHN I C AL U PD A TE 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 KA PL AN P U BLI SH IN G xx i x P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G 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: • • • • • xx x 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 KA PL AN P U BLI SH IN G Section PRACTICE QUESTIONS SECTION A-TYPE QUESTIONS GROUP FINANCIAL STATEMENTS MARCHANT (JUNE 14 EXAM) Walk in the footsteps of a top tutor 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 Revenue Cost of sales Gross profit Other income Administrative costs Other expenses Operating profit Finance costs Finance income Profit before tax Income tax expense Profit for the year Other comprehensive income – revaluation surplus Total comprehensive income for year KA PL AN P U BLI SH IN G Marchant $m 400 (312) –––– 88 21 (15) (35) –––– 59 (5) –––– 60 (19) –––– 41 –––– 10 –––– 51 –––– Nathan $m 115 (65) –––– 50 (9) (19) –––– 29 (6) –––– 28 (9) –––– 19 –––– – –––– 19 –––– Option $m 70 (36) ––– 34 (12) (8) ––– 16 (4) ––– 20 (5) ––– 15 ––– – ––– 15 ––– P AP ER P ( IN T AN D U K) : CO RP OR A TE RE PO R TIN G The following information is relevant to the preparation of the group statement of profit or loss and other comprehensive income: On 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 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 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 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 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 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 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 The following information relates to Marchant’s pension scheme: Plan assets at May 2013 Defined benefit obligation at May 2013 Service cost for year ended 30 April 2014 Discount rate at May 2013 Re-measurement loss in year ended 30 April 2014 Past service cost 30 April 2014 $m 48 50 10% The pension costs have not been accounted for in total comprehensive income KA PL AN P U BLI SH IN G PR AC T ICE Q UE S T ION S : S EC TI ON On 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 On 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 A loss on an effective cash flow hedge of Nathan of $3 million has been included in the subsidiary’s finance costs Ignore the taxation effects of the above adjustments unless specified Any expense adjustments should be amended in other expenses Required: (a) (b) (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 2014 (5 marks) 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 not reflect the financial value of an entity Required: Discuss the directors’ views above as regards the use of fair value in IFRSs and the fact that IFRSs not reflect the financial value of an entity (9 marks) (c) Marchant plans to update its production process and the directors feel that technology-led production is the only feasible way in which the company can remain competitive Marchant operates from a leased property and the leasing arrangement was established in order to maximise taxation benefits However, the financial statements have not shown a lease asset or liability to date KA PL AN P U BLI SH IN G ... information 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... 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... ACCA exam questions, the more recent questions (from 2005) are labelled as such in the index Many of the old ACCA questions within this kit have been adapted to reflect the current style of paper