2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf

ialter ym a as tud http://freeaccastudymaterial.com fre ea cc fb.com/freeaccastudymaterial join us on facebook @ fb.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.com .co m To download more visit http://freeaccastudymaterial.com To download more visit http://freeaccastudymaterial.com FINAL ASSESSMENT SCRIPT SUBMISSION FORM Script marking is only available to Classroom, Live Online and Distance Learning students enrolled on appropriate Kaplan courses. Address: …………………………………………………………………………………..…....... ………………………………………………………..……………………………………..…......... ………………………………………………………............…………………….................. Kaplan Student Number: …………………………………………………………….....… ter ial Your email address: ym a ACCA – Paper P2 (INT/UK) Corporate Reporting September and December 2015 Final Assessment • • Please complete your personal details above. All scripts should ideally be submitted to your Kaplan centre for marking via email to help speed up the marking process. Please scan this form and your answer script in a single PDF and email it to your Kaplan centre. Alternatively you may post your script to us. If so, please use the correct Royal Mail tariff (large letter). Classroom students may submit scripts to their local centre in person. You will be provided with the dated receipt below which you should retain as proof of submission. as • • tud Instructions Centre ea Date received cc Note: If you are a sponsored student, your result will form part of the report to your employer. Office use Date received from marker Date returned to student Student's overall mark fre Marker’s initials Date sent to marker Receipt – only issued if script submitted by classroom student in person to Kaplan centre:  -------------------------------------------------------------------------------------------------------------------------------------Name: ....................................................................... Received by: ............................................................ Script: ....................................................................... Date: ...................................................................... join us on facebook @ fb.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.com .co m Name: …………….…………………………………………..………………..…..……….….… To download more visit http://freeaccastudymaterial.com Marking Report Time management • Handwriting • Presentation and layout • Use of English • Points clearly and concisely made • Relevance of answers to question • Coverage and depth of answer • Accuracy of calculations • Calculations crossreferenced to workings • All parts of the requirement attempted • Length of answers equates to marks available • ter ial • Read the question carefully ym a For each question, please provide suitable constructive comments Question Number Exam Technique Comments ea cc as tud General Comments join us on facebook @ fb.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.com 2 When commenting about the script performance, please ensure on individual questions and on overall assessment your comments cover areas of examination technique including: fre 1 .co m Notice to Markers ter ym a tud Reading time: 15 minutes Writing time: 3 hours as Time allowed cc This paper is divided into two sections This question is compulsory and MUST be answered Section B TWO questions ONLY to be answered ea Section A Do not open this paper until instructed by the supervisor fre This question paper must not be removed from the examination hall Kaplan Publishing/Kaplan Financial join us on facebook @ fb.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.com .co m (INT/UK) To download more visit http://freeaccastudymaterial.com September and December 2015 Paper P2 Corporate Reporting ial ACCA FINAL ASSESSMENT . including photocopying. consequential or otherwise arising in relation to the use of such materials. 2015 fre 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. indirect. incidental.com ial ter ym a tud as cc ea © Kaplan Financial Limited.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims. Please consult your appropriate professional adviser as necessary. electronic or mechanical. All rights reserved. without prior permission from Kaplan Publishing. No part of this examination may be reproduced or transmitted in any form or by any means. 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.To download more visit http://freeaccastudymaterial.com . 2 KA PL AN P U BLI SH IN G join us on facebook @ fb.co m AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G . recording. or by any information storage and retrieval system. whether direct. had a remaining useful life of 5 years. Amortisation is presented in administrative expenses. Tiles sold 70% of the ordinary shares of Hardwood for $170 million. Goodwill arising on the acquisition of Hardwood had not been impaired. Hardwood does not meet the criteria to be presented as a discontinued operation. Tiles has posted no accounting entries in respect of Hardwood in its individual financial statements. The fair value of Hardwood’s net assets at the acquisition date was $100 million and the non-controlling interest at the acquisition date was measured at its fair value of $23 million. The non-controlling interest in Carpet at the acquisition date was calculated as its proportionate share of the fair value of the subsidiary’s identifiable net assets. In the current year. The fair value of the 10% holding at 30 April 20X5 was $11. at 1 May 20X3. At the acquisition date. Hardwood’s identifiable net assets were $140 million at the disposal date.To download more visit http://freeaccastudymaterial. fre ea cc as 1 KA PL AN P U BLI SH IN G join us on facebook @ fb. The excess of the fair value of the identifiable net assets over their carrying amounts at the acquisition date was due to a broadcasting licence which. On 1 February 20X5.co m Tiles is a public limited company which has investments in a number of other companies. the share capital and retained earnings of Carpet were $10 million and $57 million respectively and other components of equity were $8 million.com/freeaccastudymaterial 3 To download more visit http://freeaccastudymaterial. The draft statements of profit or loss for Tiles and its investments for the year ended 30 April 20X5 are presented below: ter 1 .5 million.com Tiles $m 216 (89) ––––– 127 (15) (18) ––––– 94 3 (10) ––––– 87 (17) ––––– 70 ––––– . 2 Tiles purchased 80% of the ordinary shares in Hardwood four years ago for $130 million. Tiles’ remaining 10% holding in the shares of Hardwood had a fair value of $11 million on 1 February 20X5 and was designated to be measured at fair value through other comprehensive income. These companies prepare their financial statements in accordance with International Financial Reporting Standards. The fair value of the identifiable net assets acquired was $90 million.com FIN AL AS SE SS ME N T QUE S TIO N S SECTION A This question is compulsory and MUST be answered Gross profit Distribution costs Administrative expenses ym a Operating profit Investment income Finance costs Profit before taxation Taxation Profit for the period Hardwood $m 166 (84) ––––– 82 (12) (30) ––––– 40 4 (8) ––––– 36 (10) ––––– 26 ––––– ial Revenue Cost of sales Carpet $m 128 (62) ––––– 66 (16) (22) ––––– 28 1 (5) ––––– 24 (6) ––––– 18 ––––– tud The following notes are relevant to the preparation of the consolidated financial statements: Tiles purchased 80% of the ordinary shares of Carpet on 1 May 20X3 for $96 million. Saffron relies on finance in the form of local-currency bank loans. Tiles recorded a financial asset at $20 million and recognised the interest received during the year in profit or loss. On that date.co m On 30 April 20X5. The recoverable amount of the net assets of Carpet was $113 million. 6 On 1 March 20X5. Tiles sold goods to a customer located overseas for CU25 million. Tiles purchased an item of property. Saffron’s line of business is different from the rest of the Cumin group. All of the goods had been sold to third parties by 30 April 20X5. Cumin’s functional currency is the dollar. (35 marks) cc (a) fre ea Saffron. Assume that any loss allowances required in respect of financial assets have already been correctly accounted for. On 30 April 20X5. The applicable tax rate is 20%. plant and equipment for $30 million and attributed it a 30 year useful life. 5 On 1 May 20X4. Any adjustments required to profit in respect of this transaction should be presented in investment income. Required: (b) Apply the rules in IAS 21 The Effects of Changes in Foreign Exchange Rates to determine the functional currency of Saffron. On 1 May 20X4. the invoice had not been settled. Tiles made a loan of $20 million to a key supplier.com 3 . There have been no prior goodwill impairments.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G 4 During the year.0 4. and it operates with considerable autonomy.7 ym a 1 March 20X5 30 April 20X5 Foreign exchange gains and losses are presented in administrative expenses. The broadcasting licence (note 1) has not been sold.To download more visit http://freeaccastudymaterial. Tiles sold goods to Carpet for $14 million. an entity unrelated to the Tiles group. Interest is charged in arrears at 2% per annum.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. as tud 7 Required: Prepare the consolidated statement of profit or loss and other comprehensive income for the Tiles Group for the year ended 30 April 20X5. Tiles has not yet accounted for this revaluation or for any deferred tax relating to the asset. operates in a country whose currency is the Franc (FR). The loan is due to be repaid at par on 30 April 20X7. Any dollar receipts are immediately converted into Francs. (9 marks) (c) Discuss the importance of ethical behaviour when producing consolidated financial statements. a surveyor valued the asset at $32 million. rather than intra-group finance. (6 marks) (Total: 50 marks) 4 KA PL AN P U BLI SH IN G join us on facebook @ fb. CU: $1 5. The depreciation charge for the year has been accounted for. goodwill impairment testing was performed in relation to Carpet. retained earnings of $80 million and other components of equity of $9 million. Saffron’s ordinary shares are 90% owned by another entity called Cumin. The asset’s cost is written down for tax purposes at a rate of 10% per annum. The sale was correctly recorded by Tiles but no other accounting entries have been posted in respect of this transaction. 8 Ignore the taxation effects of adjustments unless specified. The following exchange rates are relevant: ter ial . Market rates of interest are currently 8%. Saffron makes 70% of its sales in Francs and 30% of its sales in dollars ($). By 30 April 20X5. Carpet had share capital of $10 million. com FIN AL AS SE SS ME N T QUE S TIO N S SECTION B TWO questions ONLY to be answered (a) .5m to the bank for proceeds of $6 million. it sold property. This contract was designated as a cash flow hedge. Professional marks will be awarded in question 2 for the clarity and quality of the presentation and discussion.000 on 30 April 20X4.000.com $ 250 15 ial 2 .000 Dinar (DN) on 31 December 20X4. Brick is prohibited from selling the license to other mobile phone operators. (5 marks) Brick needed to raise finance during the period and therefore entered into a sale and finance leaseback transaction. Under this promotion.000 would cost $228. Note: the mark allocation is shown against each of the four events above. This price includes a new handset and network access. It prepares its financial statements under International Financial Reporting Standards and has a year end of 30 April 20X4. Brick launched a promotion during the year to attract new customers to its network. payable at the end of each month. On 1 May 20X3.000 due annually in arrears. DN400. The fair value of the futures contract at 30 April 20X4 had risen to $30. on 1 February 20X4. Market research has shown that most customers are extremely satisfied with current network speeds.To download more visit http://freeaccastudymaterial.000 for $200. This was then leased back on a 15 year term. Under the terms of purchase. plant and equipment with a carrying amount of $4. The normal retail price of these elements is as follows: Handset Network access (per month) On 1 May 20X3. It is therefore widely believed that this ‘next generation’ of mobile phone services will not gain mainstream popularity until 20X6 at the earliest.com/freeaccastudymaterial 5 To download more visit http://freeaccastudymaterial. (6 marks) ea (d) cc Based on published exchange rates.co m Brick is a company that manufactures and sells mobile phones and mobile phone contracts. (5 marks) fre Required: Discuss how the above events should be accounted for in the financial statements of Brick for the year ended 30 April 20X4. all necessary documentation was completed. (7 marks) Brick must pay a fee of 400. with payments of $650. ym a (b) ter In total. (2 marks) (Total: 25 marks) KA PL AN P U BLI SH IN G join us on facebook @ fb. Brick bid $100m for a license to use the radio spectrum for the next generation of mobile phone services. The rate of interest implicit in the lease is 7. 100. The directors of Brick have become increasingly concerned about exchange rate fluctuations and therefore. These services will be offered to customers from 20X5.000 new customers signed up for this promotion.000 on 31 December 20X4. customers sign a non-cancellable contract to subscribe to the Brick network for twelve months. and all hedge effectiveness criteria were met.1%. The cost is $30 per month. The contracts all began on 1 March 20X4. entered into a futures contract to buy DN400. as (c) tud Some investment analysts have argued in the press that Brick may have over-paid for this license. co m Golden Gate owns investment properties. it had an estimated net sales price of CU2. Golden Gate purchased a property located overseas for CU2m. Their financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). which have generally increased below the level of inflation. some believe that the announcement of the Fund is simply a public relations exercise.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. no further benefits or compensation will be paid to members. The terms of the Fund are as follows: . This property is to be sold in the ordinary course of business. On 30 June 20X4.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G Golden Gate is a newly formed public limited company involved in property development. its contributions were equivalent to 1% of wages and salaries. and many employees remain sceptical about Golden Gate’s commitment to it.com (a) ial 3 . a decision was made to relocate Golden Gate’s key business functions in an attempt to reduce operating costs.5m. The following exchange rates are relevant: ea (d) cc The directors wish to know how they should have accounted for the Fund. Golden Gate’s contributions into the Fund are voluntary. This valuation was confirmed post year-end. Although the sales prices of similar properties are available. (b) During the year ended 30 June 20X4. As a result. tud • as Previously.1 3.0 (5 marks) KA PL AN P U BLI SH IN G join us on facebook @ fb. receive an annual lump sum based on their number of years of service. the directors believe that a fair value measurement based on their estimates of future rental income would more faithfully represent the value of the properties to Golden Gate. However. The decision to relocate was communicated to those affected in June 20X4. The directors of Golden Gate do not believe that the cost of $3m should be shown in the financial statements for the year ended 30 June 20X4 because no expenditure has been incurred. Whilst the fund is in existence members will. upon retirement. On 1 February 20X4. Relocation expenses will not be paid until August 20X4 and are estimated at $3m. (5 marks) (c) Golden Gate has a defined contribution pension scheme that all employees are enrolled into. In the year ended 30 April 2015. which are measured at fair value. Golden Gate can cancel the Fund at any point. If cancelled.To download more visit http://freeaccastudymaterial. The following accounting issues have arisen in the year ended 30 June 20X4 and need to be resolved. in the year ended 30 June 20X4. The directors are unsure as to whether this complies with the requirements of IFRS. (8 marks) fre Date 1 February 20X4 30 June 20X4 6 CU:$1 2. There have been significant fluctuations in the currency markets. the national press have been critical of Golden Gate because of its low levels of employee remuneration. it set up an additional fund (Fund) as a way of enhancing post-retirement benefits. (5 marks) ter • • ym a • Employees with more than two years’ service will be automatically enrolled into the Fund. The investment properties are held to earn rental income in the long term. have been increasingly criticised in recent years.4 million and approximated their fair values. However.co m Professional marks will be awarded in question 3 for the clarity and quality of the presentation and discussion. The standard defines an associate as an entity over which an investor has ‘significant influence’. (4 marks) (iii) Outline potential criticisms of equity accounting. explain what is meant by ‘significant influence’. The carrying amounts of the net assets of Kata at that date were $2. ial 4 . KA PL AN P U BLI SH IN G join us on facebook @ fb. (2 marks) (Total: 25 marks) (a) Required: (ii) Explain what is meant by ‘equity accounting’. (5 marks) ter Within the context of IAS 28. plant & equipment Inventories as Total assets cc Share capital Retained earnings Loans Equity and liabilities $m 14 1 –––– 15 –––– 1 2 12 –––– 15 –––– fre ea The directors of Bolo are unsure whether to treat Kata as an associate or a subsidiary in the consolidated financial statements. Note: the mark allocation is shown against each of the four events above. The statement of financial position for Kata as at 31 December 20X4 was as follows: tud Property. Bolo measures non-controlling interests using the proportion of net assets method.com A revised version of IAS 28 Investments in Associates and Joint Ventures was issued in May 2011. . and its purpose. IAS 28 states that associates should be accounted for using the equity method in the consolidated financial statements. Bolo purchased 45% of the ordinary shares of Kata. Consideration paid was $3 million. (5 marks) ym a (b) (i) On 1 January 20X4.To download more visit http://freeaccastudymaterial. They believe that this decision will have a minimal impact on the consolidated financial statements and is therefore unimportant.com FIN AL AS SE SS ME N T QUE S TIO N S Required: Discuss how the above events should be accounted for in the financial statements of Golden Gate for the year ended 30 June 20X4. equity accounting. Provide examples to illustrate your answer.com/freeaccastudymaterial 7 To download more visit http://freeaccastudymaterial. When relevant. co m • a subsidiary.com ial (Total: 25 marks) . (2 marks) ter ym a tud as cc ea fre 8 KA PL AN P U BLI SH IN G join us on facebook @ fb. or • an associate.To download more visit http://freeaccastudymaterial.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G Required: Discuss and compare the impact on the consolidated financial statements of Bolo if the investment in Kata is accounted for as: . (9 marks) Professional marks will be awarded in question 4 for the clarity and quality of the presentation and discussion.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. co m To download more visit http://freeaccastudymaterial.ter ial ACCA ym a Paper P2 (INT/UK) tud Corporate Reporting cc as September and December 2015 fre ea Final Assessment – Answers To gain maximum benefit.com .com . do not refer to these answers until you have completed the final assessment questions and submitted them for marking. join us on facebook @ fb.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. com . incidental. No part of this examination may be reproduced or transmitted in any form or by any means. 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. whether direct. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims. All rights reserved. and consequential or otherwise arising in relation to the use of such materials. without prior permission from Kaplan Publishing.co m AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G . 2015 fre ea 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. 2 K APL AN P UB LI SHIN G join us on facebook @ fb. recording. indirect.com ial ter ym a tud as cc © Kaplan Financial Limited.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. or by any information storage and retrieval system. Please consult your appropriate professional adviser as necessary.To download more visit http://freeaccastudymaterial. including photocopying. electronic or mechanical. 0 4. Part (c) covers ethics.co m ial Consolidated statement of profit or loss and other comprehensive income for the year ended 30 April 20X5 ter (a) ym a Revenue ($216 + $128 + (9/12 × $166) – $14 (W6)) Cost of sales ($89 + $62 + (9/12 × $84) – $14 (W6)) Gross profit Distribution costs ($15 + $16 + (9/12 × $12)) Administrative expenses (W11) as tud Profit from operations Profit on disposal (W5) Investment income ($3 + $1 + (9/12 × $4) – $3.1 (W9) + $1. Part (b) of the question requires knowledge and application of the rules governing functional currency.2 (30. Make sure that your answer is specific to the question. Remember to start your answer by stating relevant definitions and rules per the accounting standard (IAS 21).0) (85. and this is something which should be expected within the compulsory question.6) 3.0 –––––– 104.0 (W9)) Finance costs ($10 + $5 + (9/12 × $8)) cc Profit before taxation Taxation ($17 + $6 + (9/12 × $10) + $0.0 (0.com/freeaccastudymaterial 3 To download more visit http://freeaccastudymaterial.0) –––––– 254.2) –––––– 129.com FIN AL AS SE SS ME N T AN S WE R S 1 TILES Key answer tips . .4 (W7)) Profit for the period $m Marks 454.9) –––––– 101.3 fre ea Other comprehensive income Items that will not be reclassified to profit or loss in future periods Gain on financial asset (W5) Revaluation of property. Tiles lost control of Hardwood during the year.0 (W6) 1.0 (W11) 4.3 19.com Part (a) of this question is a group accounting question.0 (W5) 2.0 (W6) (21. plant and equipment (W7) Income tax relating to items that will not be reclassified to profit or loss (W7) Total comprehensive income for the period 0.2 –––––– KA PL AN P U BLI SH IN G join us on facebook @ fb.5 (200.0 1.0) –––––– 132.5 (40. Hardwood is therefore consolidated until the disposal date and a profit or loss on disposal must be calculated.To download more visit http://freeaccastudymaterial.9 1.5 3.0 1. and then apply these to the scenario.0 1.0 1. com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.0 1.0 1.5 (bal. fig.) Non-controlling interest (W10) .4 6.3 –––––– .com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G 0.9 –––––– 104.) 2.0 4.0 2.5 (bal.0 –––––– 35. fig.To download more visit http://freeaccastudymaterial.com 94.0 1.) ial Total comprehensive income attributable to: Equity holders of Tiles (bal.3 6.0 –––––– (W1) Group structure cc Tiles Carpet 80% for 9/12 year Hardwood fre ea 80% for full year 4 K APL AN P UB LI SHIN G join us on facebook @ fb.0 1.) Non-controlling interest (W10) tud ym a ter Presentation of profit/TCI split (even if left blank) Labelling OCI as items that will not be reclassified to P/L Pro-rating of Hardwood’s results Calculation of excess amortisation (W2) Calculation of group impairment loss (W3) Calculation of Carpet’s goodwill (W4) Calculation of revaluation gain (W7) Calculation of deferred tax (W7) Calculation of forex gain (W8) Calculation of financial asset fair value (W9) Calculation of financial asset impairment (W9) Calculation of financial asset interest adjustment (W9) Maximum marks as Workings 1.0 1.0 2.0 (W10) 97.0 1.9 –––––– 101.0 1.0 1.co m Profit attributable to: Equity holders of Tiles (bal.2 –––––– 0. 5 ––––– 1 max ––––– KA PL AN P U BLI SH IN G join us on facebook @ fb. (1 mark) .0 Marks 0.0 –––––– (W4) 1 1 –––––– 3 max –––––– The impairment loss is allocated to the group based on shareholding.0 –––––– 138.com The excess amortisation on the licence is $3m per year ($15m/5 years).0 Marks 2 (W2) 24.co m Share capital Other components Retained earnings Licence (bal.0 ––––– 0.0) ––––– 24. cc (W4) Goodwill of Carpet ea Consideration NCI at acquisition (20% × $90m (W2)) FV of net assets at acquisition (W2) fre Goodwill pre-impairment $m 96.0 18. (1 mark) as The goodwill attributable to the NCI is not recognised under the share of net assets method.com/freeaccastudymaterial 5 To download more visit http://freeaccastudymaterial.0) –––––– 25. Therefore the NCI share of the impairment is not recognised.0 6.5 (90. date $m 10 9 80 15 .To download more visit http://freeaccastudymaterial. This is recorded in administrative expenses (W11).com FIN AL AS SE SS ME N T AN S WE R S (W2) Carpet’s net assets –––– 90 –––– Rep. fig) Excess amortization (2 years × $3m (see note below)) Acq’n $m 10 8 57 15 (6) –––– 108 –––– ial Rep. The impairment loss attributable to the group is therefore $20 million ($25m × 80%).0 (113.5 0. date net assets (W2) Recoverable amount tud Impairment ym a Goodwill (W4) Notional NCI ($24m × (20/80)) ter (W3) Carpet impairment review $m 108. com Goodwill at disposal .5 Goodwill disposed: Consideration NCI at acquisition Net assets at acquisition 130 23 (100) ––––– 0.5 0.5 0. the deferred tax liability required is $1m (($32m – $27m) × 20%).5 million ($11.co m 181 . (1 mark for deferred tax liability) 6 K APL AN P UB LI SHIN G join us on facebook @ fb. as (W6) Intra-group trading The intragroup trading of $14 million must be removed from revenue and cost of sales. of reval.5 23 8 ym a –––– Profit on disposal 31 –––– 19 –––– –––––– 4 max –––––– tud The interest retained is initially recognised at $11 million and must be revalued to its fair value of $11.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G (W5) Profit on disposal Proceeds from disposal Fair value of interest retained $m 170 11 –––– $m Marks 0.To download more visit http://freeaccastudymaterial.5 0. gain) The deferred tax balance is calculated based on the difference between the asset’s carrying amount of $32m and its tax base of $27m ($30m × 90%).com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.0m) will be recorded in other comprehensive income. Dr PPE $3m Cr OCI $3m (1 mark for calc.5 0.5 0. The revaluation gain that needs to be recorded in other comprehensive income is therefore $3m ($32m – $29m).5 million at the reporting date. Since the shares have been designated to be measured at fair value through other comprehensive income. the asset had a carrying amount of $29m (29/30 × $30m).5 ial (53) (140) NCI at disposal: NCI at acquisition NCI % of post-acquisition net assets (20% × ($140 – $100)) ter Net assets at disposal: 0. a gain of $0. As such.5m – $11. $14m Cr Cost of sales $14m cc Dr Revenue ea (W7) Revaluation fre Before the revaluation. 3m (1 mark for calc.co m (W8) Foreign exchange The transaction would initially be recorded at the historic rate of exchange. Currently.3m (CU25/4. 1 mark for discount rates) tud Date cc The asset should have been written down on initial recognition from $20 million to $16.3m ($5. Dr OCI ($3m × 20%) $0.3m – $5.4 20. giving a loss of $3.0m (1 mark for calc. of forex gain) ter Dr Receivables ym a The loan to the supplier is a financial asset and so should initially be recorded at its fair value. Tiles has only $0.9 million. Dr Profit or loss $3. Therefore the investment income that should have been recorded is $1. as 30/4/X5 30/4/X6 30/4/X7 Cash flow $m 0.com FIN AL AS SE SS ME N T AN S WE R S The deferred tax relating to the $3m revaluation gain is recorded in OCI.9 2 ––––– (1 mark for cash flows.083 16.9m × 8%).08 0. . the interest rate on the loan is not at a market rate.0m Cr Profit or loss $1. meaning that investment income must be increased by $1. rate Present value Marks $m 1/1. The receivable is a monetary asset and so is retranslated at the reporting date using the closing rate of exchange.com The foreign exchange gain of $0. of interest adjustment) KA PL AN P U BLI SH IN G join us on facebook @ fb. Dr Financial asset $1. Therefore.19 ––––– Fair value 16.34 1/1. the fair value must be calculated by discounting the future cash receipts to present value using the market rate of interest. This means that revenue and a corresponding receivable would have been recorded at $5m (CU25m/5). of impairment loss) fre ea Investment income should be recognised using the effective rate of interest of 8%.7). However.1 million in profit or loss.4 million ($16.1m Cr Financial asset $3.3m (W9) Financial asset ial $0. This gives a year end receivable of $5.com/freeaccastudymaterial 7 To download more visit http://freeaccastudymaterial.37 1/1. The remainder of the deferred tax is recorded in profit or loss.0m) is recorded in the statement of profit or loss.082 0.4 ––––– Disc.0m .To download more visit http://freeaccastudymaterial.1m (1 mark for calc.0 million.4m (1 mark for profit/OCI split) Cr Deferred tax liability $1. Cr Profit or loss $0.4 million ($20m × 2%).6m Dr Tax expense in P/L $0.4 0. 0 (3. (Secondary indicators: 2 marks max) K APL AN P UB LI SHIN G join us on facebook @ fb.5 0.0 (0.To download more visit http://freeaccastudymaterial.0 22.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.com $m 19.9m).5 3.0 1. (1 mark) cc (b) as tud Tiles Carpet Hardwood (9/12 × $30) Excess amortisation (W2) Goodwill impairment (W3) Foreign exchange (W8) Marks $m 18.5 ––––– 1 max ––––– .0 1.0) ––––– 15. 1.5 ––––– 1 max ––––– (W11) Administrative expenses ym a The total profit attributable to the NCI is $6.0 The functional currency is the currency of the primary economic environment where an entity operates.5 0.co m $m 18.2 ––––– An entity should consider the following when determining its functional currency: • • the currency that mainly influences sales prices for goods and services ea • the currency of the country whose competitive forces and regulations mainly determine the sales price of goods and services fre the currency that mainly influences labour.3) ––––– 85.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G (W10) Profit attributable to the non-controlling interest Marks × 20% $m 0.5 Profit of Hardwood (9/12 × $26m) .0 22. materials and other costs of providing goods and services.5 $m ––––– 3.0 Profit of Carpet Excess amortisation (W2) ––––– 3.0m + $3.0 20.9 ––––– Profit attributable to NCI 0.9 million ($3.0 ––––– Profit attributable to NCI Marks ter × 20% ial ––––– 19. (Primary indicators: 2 marks max) The following factors should also be considered: 8 • the currency in which funds from financing activities are generated • the currency in which receipts from operating activities are retained. . (1 mark) tud (c) ym a All things considered.To download more visit http://freeaccastudymaterial. (1 mark) Saffron is relatively autonomous from the rest of the Cumin group. (1 mark) (IAS 21 application: 4 marks max) (Part b: 9 marks max) Financial statements are important to a range of user groups. (1 mark) cc Whether a relationship of control or significant influence exists. The financial position of the group will therefore look stronger due to the absence of this debt. banks. rather than being carried out with a significant degree of autonomy • whether transactions with the reporting entity are a high or a low proportion of the foreign operation’s activities. suggesting that Francs are the functional currency. employees and suppliers. (1 mark) . Identifying the acquisition date. suggesting that Francs are the functional currency. ea • • • • • • as The production of consolidated financial statements requires judgement in a number of areas. Establishing the fair value of the identifiable net assets a subsidiary. Therefore. such as: fre (1 mark per example of judgement: 2 marks max) These decisions will impact on the users’ perception of the performance and position of the group: If an investee has significant debt then management may have a motivation to exclude it from consolidation by arguing that no control is exercised. These groups rely on the directors to faithfully represent the performance and position of the company. KA PL AN P U BLI SH IN G join us on facebook @ fb. it is essential that the directors adhere to the requirements of IFRS 3 and IFRS 10.com FIN AL AS SE SS ME N T AN S WE R S When determining the functional currency of a foreign subsidiary. suggesting that its functional currency is not the dollar. Establishing the fair value of the NCI at acquisition.com Any operating receipts in dollars are immediately converted to Francs. (1 mark) A faithful representation is often presumed to have been provided if accounting standards have been complied with.co m • (Group indicators: 2 marks max) (IAS 21 knowledge: 5 marks max) Saffron makes most of its sales in Francs.com/freeaccastudymaterial 9 To download more visit http://freeaccastudymaterial. suggesting that Francs are the functional currency. the following should be considered to determine if its functional currency is the same as its parent: whether the activities of the foreign operation are carried out as an extension of the reporting entity. Identifying the acquiring company. (1 mark) ial ter Saffron takes out finance in its local currency. Establishing the fair value of the consideration paid for a subsidiary. it would seem that the functionary currency of Saffron is the Franc. such as shareholders. Attempting to disguise control relationships or to account using incorrect fair values shows a lack of integrity. professional behaviour. and professional competence and due care.com If such a decision has been motivated by a desire to achieve bonus targets.To download more visit http://freeaccastudymaterial. This would improve gearing and would also improve asset turnover ratios. (1 mark per reasonable example of F/S impact of judgement: 2 marks max) . (1 mark) Integrity is defined as being honest and straight-forward. satisfy the goals of shareholders or to meet bank covenants.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G By under-stating the fair value of contingent payments required to acquire a subsidiary. This sets out the importance of the fundamental principles of confidentiality. (1 mark) ial (a) (b) (c) Group statement P or L and OCI Functional currency Ethical issues Marks 35 9 6 ––– 50 ––– fre ea cc as tud Total ym a Marking scheme ter (Part c: 6 marks max) 10 K APL AN P UB LI SHIN G join us on facebook @ fb.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.co m Professional ethics is a vital part of the accountancy profession and ACCA members are bound by its Code of Ethics and Conduct. then this demonstrates a lack of objectivity. objectivity. (1 mark) . integrity. liabilities and goodwill in the consolidated statements will be understated. The key rule to remember is that any profit made on the sale itself is deferred and released to profit or loss over the lease term. Revenue could therefore be allocated based on the stand-alone selling price of each component.7% × 100.com Part (b) requires knowledge of both IAS 38 Intangible Assets and IAS 36 Impairment of Assets. Part (a) tests revenue recognition. (1 mark) The contract price should be allocated to the separate performance obligations based on stand-alone selling prices. The accounting treatment of a hedge is actually relatively simple.000) and this should be recognised on 1 March 20X4 when control of the good passes. In the exam.000). (1 mark) The revenue relating to the network access is $15. ial ter Part (c) tests cash flow hedge accounting.com FIN AL AS SE SS ME N T AN S WE R S 2 BRICK Key answer tips . The total recommended retail price of the individual elements is $430 ($250 + ($15 × 12 months)).com/freeaccastudymaterial 11 To download more visit http://freeaccastudymaterial. (1 mark) as The handset and the other services have been sold together at a discount to the normal individual retail price. so only $2. (1 mark) tud Revenue should be recognised when (or as) a performance obligation is satisfied. (1 mark) (Knowledge of IFRS 15: 3 marks max) cc The total contact price is $360 ($30 × 12 months).1m × 2/12) should be recognised as revenue in the year ended 30 April 20X4.To download more visit http://freeaccastudymaterial. (1 mark) ea The revenue related to the sale of the handsets is $20. . but many students are confused by the terminology in the questions.co m This question covers a number of standards that have proved popular with the P2 examiner. Make sure that you read the question very carefully. Two months’ worth of service have been provided to the customers. (a) ym a Part (d) covers the accounting treatment of a sale and finance leaseback. (1 mark) KA PL AN P U BLI SH IN G join us on facebook @ fb.5m ($15. A thorough understanding of these topics is therefore essential.9m ($250 × 83. Ensure that you get the easy marks available for stating the relevant rules from IFRS 15 Revenue from Contracts with Customers before trying to apply them to the scenario. (1 mark) fre Revenue from the network access should be recognised over time because the service is simultaneously received and consumed by the customer. IFRS 15 says that the separate performance obligations within a contract must be identified.7% × 100.1m ($15 × 12 months × 83. The contract therefore means that customers pay 83. watch out for assets that were over-paid for or which are not performing as well as expected – they require an impairment review.7% of the normal recommended retail price. com Intangible assets that are not yet ready for use are tested for impairment annually.4m ($23. thus reducing the value-in-use.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G Brick has received $6m ($30 × 2 months × 100. (1 mark) If a cash flow hedge meets all required conditions then the portion of the gain or loss on the instrument that is determined to be an effective hedge shall be recognised in other comprehensive income and the ineffective portion should be recognised in profit or loss. it may have to be tested for impairment as part of a larger cash generating unit (CGU). Therefore. This means that its fair value less costs to sell is $nil. (1 mark) fre (c) ea cc The fact that significant cash inflows are not expected until 20X6 will mean that impairment is more likely. (1 mark) . (1 mark) The discount rate used should be a pre-tax rate that reflects market assessments of the time value of money and the risks specific to the asset. (1 mark) ter An impairment review involves comparing the asset’s carrying value to its recoverable amount. (1 mark) ym a The value in use will be determined by estimating the future cash flows that will be derived from the asset and discounting them to present value.9m + $2. (1 mark) (Basic IAS 38 knowledge: 1 mark max) ial All assets with indications of impairment should be tested for impairment. (1 mark) (Knowledge of IAS 36: 1 mark max) tud The press reports would suggest that Brick has overpaid for the license and therefore that the carrying amount is too high. (1 mark) (Application of IFRS 15: 4 marks max) (Part a: 7 marks max) Purchased intangible assets are initially recognised at cost. the license should be recognised at $100m. no amortisation will be charged until 20X5. (1 mark) as Since a license does not generate cash inflows and outflows by itself. Therefore.4m – $6m) should be recognised as a receivable on the statement of financial position.4m ($20.To download more visit http://freeaccastudymaterial. (1 mark) (Application of IAS 36: 3 marks max) (Part b: 5 marks max) A cash flow hedge is the hedge of the exposure to variability in cash flows that are attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and that could affect profit or loss. (1 mark) Any impairment loss would be recognised in the statement of profit or loss.co m (b) Intangible assets should be amortised over their useful economic life when the asset is ready for use. (1 mark) . Therefore the difference of $17.5m). (1 mark) The licence cannot be sold. (1 mark) If this was the case. (1 mark) (Knowledge of IFRS 9: 2 marks max) 12 K APL AN P UB LI SHIN G join us on facebook @ fb. This is because cash flows arising further in the future will be discounted more heavily.000) but has recognised revenue of $23. any impairment would firstly be set off against goodwill within the CGU and then allocated to the other assets on a pro-rata basis. The recoverable amount is the higher of the fair value less costs to sell and the value in use.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. any profit on disposal should be deferred and recognised over the lease term.000 will be recorded in profit or loss.000 will be recognised in other comprehensive income and the remaining gain of $2.4m ($6m/15 years) and the asset will be held on the statement of financial position at a carrying value of $5.6m ($6m – $0. (1 mark) (IAS 17 application: 5 marks) (Part d: 6 marks max) ACCA Marking scheme Revenue Intangibles and impairment Cash flow hedge Sale and leaseback Professional marks fre (a) (b) (c) (d) ea cc as The liability will be reduced by the cash repayment of $0. (1 mark) At 30 April 20X4.000 over the same period. there will be no accounting entries when the futures contract is entered into.com (Part c: 5 marks max) .1m). (1 mark) (Application of IFRS 9: 3 max) ial (d) Under a sale and finance leaseback.000 – $200. (1 mark) . Brick is expecting to have to pay $28.426m ($6m × 7.65m). This will give rise to a finance cost of $0.776m ($6m + $0.5m/15 years) will be released to profit or loss in the current period. $0. increased by $28. The fair value of the hedging instrument has.000 than they were at the inception of the hedge (1 February 20X4).1%) in the statement of profit or loss.000) to acquire DN 400. (1 mark) Total KA PL AN P U BLI SH IN G join us on facebook @ fb. The liability will therefore be held on the statement of financial position at $5.4m ($1.65m.5m – $0. (1 mark) The lease liability will be increased by the rate of interest implicit in the lease. however. (1 mark) tud The depreciation expense recognised in the statement of profit or loss will be $0.4m).com FIN AL AS SE SS ME N T AN S WE R S Assuming that there is no purchase price.1m ($1. (1 mark) An asset and corresponding finance lease liability should be recognised at the fair value of $6 million.000. the futures contract will be recognised as a financial asset at its fair value of $30. A gain of $28.To download more visit http://freeaccastudymaterial.000 more ($228. Therefore.co m At 30 April 20X4. leaving deferred profit on the statement of financial position of $1. (1 mark) ter (IAS 17 knowledge: 1 mark) ym a The gain on disposal of $1.com/freeaccastudymaterial Marks 7 5 5 6 2 ––– 25 ––– 13 To download more visit http://freeaccastudymaterial.5m ($6m – $4.5m) is deferred and released to profit or loss over the lease term.426m – $0. If you miss out a part then you will lose professional marks.co m In Section B questions. Remember to attempt all parts of the question. the standard emphasises the use of level one inputs wherever possible. fre • • • ea (b) cc As such. (1 mark) (Knowledge of IAS 37: 3 marks max) 14 K APL AN P UB LI SHIN G join us on facebook @ fb. this is likely to constitute a level 2 input. the following criteria must be satisfied: There must be a present obligation from a past event There must be a probable outflow of economic benefit The costs to settle the obligation must be capable of being estimated reliably. location and age to determine the fair value of their properties. make sure that you demonstrate your knowledge of the relevant rules from the accounting standards before applying them to the scenario. (1 mark) Level 2 inputs are inputs other than quoted prices in level one which are observable for the asset or liability to be measured. ial IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This means that there must be a market which is trading with sufficient frequency and volume for identical assets or liabilities to achieve a reliable estimate of fair value. (1 mark) ym a ter When determining a fair value. Although adjustments would be required for differences such as size.com (a) . These are unadjusted quoted prices on an active market. (1 mark) tud Level 3 inputs are unobservable inputs. For instance. there are easy marks to obtain for stating how a fair value should be measured (part a) and when a provision should be recognised (part b). (1 mark) (IFRS 13 knowledge: 3 marks max) Forecasts of future rental income are a level 3 input and must not be used to determine a fair value if level 1 or 2 inputs can be obtained. a constructive obligation must exist at the reporting date. (1 mark) (IFRS 13 application: 2 marks max) (Part (a): 5 marks max) To recognise a provision as per IAS 37. (1 mark) (2 marks if given in full) To recognise a restructuring provision.To download more visit http://freeaccastudymaterial.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G 3 GOLDEN GATE Key answer tips . (1 mark) as Golden Gate has access to selling price for similar properties.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. (1 mark) A restructuring provision should not include costs associated with the ongoing activities of the business. the sales price of similar properties should be used to determine the fair value of the investment properties. These should be kept to a minimum and used only when insufficient data can be obtained from level 1 and 2 inputs. (1 mark) ial (c) . (1 mark) (Application of IAS 37: 2 marks max) (Part b: 5 marks max) ter A constructive obligation is where past practice or published policies have created a valid expectation that the entity will discharge certain responsibilities. (1 mark) . investment risk (that assets invested will be insufficient to meet expected benefits) falls. (1 mark) Therefore it could be argued that Golden Gate does bear some actuarial and investment risk because. (1 mark) as However. (1 mark) However. (1 mark) fre Moreover. (1 mark) cc The scheme can be cancelled at any point and therefore no legal obligation exists. on employees. (1 mark) ea It would also seem to be no constructive obligation to pay benefits because the Fund is new and therefore there is no past practice of paying benefits to retired members. of greater importance is the fact that Golden Gate has no obligation to pay benefits to Fund members. (1 mark) Under defined contribution plans. Golden Gate has historically paid low levels remuneration to employees. relocation costs relate to the future conduct of the business and therefore no provision is required. if it continues with the Fund. The employees are therefore unlikely to have a valid expectation that Golden Gate would continue with the Fund.com FIN AL AS SE SS ME N T AN S WE R S A constructive obligation does exist at the reporting date because the restructuring has been communicated to those affected. actuarial risk (that benefits will be less than expected) falls. the Fund should be accounted for as a defined contribution scheme.To download more visit http://freeaccastudymaterial. (1 mark) ym a Under defined contribution plans.com Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. (1 mark) (IAS 19 knowledge: 3 marks max) tud It is possible that the money in the Fund will not be sufficient to pay employees the retirement benefits stated in the plan.com/freeaccastudymaterial 15 To download more visit http://freeaccastudymaterial. it would need to make up for this shortfall. (1 mark) Defined benefit plans are post-employment plans that are not defined contribution plans. in substance. in substance.co m The directors are correct in their assertion that no provision is allowed (although their reasoning is incorrect). (1 mark) This means that the contributions payable in the period should be recognised as an expense in profit or loss. (1 mark) KA PL AN P U BLI SH IN G join us on facebook @ fb. particularly if its cost is higher than expected. (1 mark) As a result of Golden Gate’s lack of a legal or constructive obligation to pay further contributions if the level of assets is insufficient. on employees. Per IAS 21. At the reporting date.12m ($0. NRV should be translated at the exchange rate ruling on the date when it was determined. (1 mark) (Application of IAS 2 and IAS 21: 3 marks max) (Part d: 5 marks max) fre ea Total Marks 5 5 8 5 2 ––– 25 ––– Fair values Provisions Pensions Inventory and exchange rates Professional marks cc (a) (b) (c) (d) as ACCA Marking scheme 16 K APL AN P UB LI SHIN G join us on facebook @ fb.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G Tutorial note . inventory must be valued at the lower of cost and net realisable value (NRV). a foreign currency transaction should be initially recorded by applying the spot rate on the date of the transaction.83m (CU2. (1 mark) tud The inventory must therefore be written down from its cost of $0. (1 mark) The NRV of the inventory is $0.co m You may have concluded that the Fund should be treated as a defined benefit pension plan.0). (IAS 19 application: 5 marks max) (Part b total: 8 marks) (d) (1 mark) Items to be sold in the ordinary course of business are inventory.83m. as long as your argument is clear and you have applied IAS 19 to the scenario.95m to its NRV of $0.5m/3.com Inventory is initially recorded at cost.To download more visit http://freeaccastudymaterial. (1 mark) (1 mark) ter As a non-monetary asset.1).com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.83m) in the statement of profit or loss. ial Per IAS 21. This will give rise to an expense of $0. (1 mark) ym a (Knowledge of IAS 2 and IAS 21: 2 marks max) The inventory should initially be recorded at $0. the cost of the inventory is not re-translated.95m – $0. You would still score 1 mark per point. (1 mark) .95m (CU2m/2. (1 mark) fre Distributions received from an investee reduce the carrying amount of the investment. as • • • • • ea The carrying amount of the investment is adjusted to recognise the investor’s share of the profit (or loss) and other comprehensive income of the investee after the date of acquisition.com/freeaccastudymaterial 17 To download more visit http://freeaccastudymaterial. the investment is initially recognised at cost.co m Question 4 is always an essay-style question requirement.To download more visit http://freeaccastudymaterial. (1 mark) ial (i) ter Significant influence is assumed when the investor holds at least 20 per cent of the voting power of the investee. unless it can be demonstrated that this is not the case. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.com FIN AL AS SE SS ME N T AN S WE R S 4 EQUITY ACCOUNTING Key answer tips . (1 mark) ym a It is assumed that an investor does not have significant influence over an investee if they hold less than twenty per cent of the voting power.com (a) . It is therefore a current issue that the examiner may expect you to be familiar with. (1 mark) Significant influence is usually evidenced in one of the following ways: tud (1 mark each) (Part a (i): 5 marks max) Under the equity method. Equity accounting is an issue that has been the focus of recent articles in Accounting and Business magazine. unless it can be clearly demonstrated that this is not the case. or upon a theoretical or conceptual issue. which can include a small computational or applied element. (1 mark) cc (ii) Representation on the board of directors Participation in policy making processes Material transactions between the entity and its investee Interchange of management personnel Provision of essential technical information. (1 mark) A majority ownership by another company does not preclude the investor from having significant influence. It may focus upon current issues in financial reporting. (1 mark) KA PL AN P U BLI SH IN G join us on facebook @ fb. (1 mark) The investor’s share of the profit (or loss) and other comprehensive income of the investee in the reporting period is recognised in the statement of profit or loss and other comprehensive income. For instance. Therefore. (1 mark) . (1 mark) tud Examples of these net asset changes include: • • as Issues of share capital to parties other than the investor Buybacks of equity instruments from shareholders other than the investor • Equity-settled share-based payments.co m (Part a (ii): 4 marks max) Purpose and nature There is confusion about the purpose of equity accounting. the investor’s share of the gains must not be recognised). but they are expensed when purchasing a subsidiary. the treatment adopted by different companies may be inconsistent. (1 mark) (iii) . but that there is no elimination of sales and purchases. other than those recorded in profit or loss or other comprehensive income. (1 mark) 18 (Part a (iii): 5 marks max) K APL AN P UB LI SHIN G join us on facebook @ fb. (1 mark) However. (1 mark each) Elimination cc There is no specific guidance on how the investor’s share of gains from transactions with the investee should be eliminated. this decision can have a hugely material impact on the financial statements. and receivables and payables) between the group and an associate are no eliminated. However.com Proposed amendments to IAS 28 have been criticised as short-term measures that do not address the need to establish a clear conceptual basis for equity accounting.To download more visit http://freeaccastudymaterial.e. (1 mark) ial ter Cost IAS 28 does not specify how to calculate the cost of an associate. (1 mark) Judgement fre Distinguishing between significant influence and control is judgemental and in some cases can be difficult. (1 mark) ea It could be argued that it is contradictory to eliminate the group’s share of unrealised profits from transactions with an associate. (1 mark) IAS 28 does not specify how to treat changes in the net assets of an associate.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G Transactions and balances (such as sales and purchases.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. (1 mark) Other net asset changes ym a Transactions costs are often added onto the carrying amount of financial instruments. the investor can only recognise gains from transactions with the investee to the extent of the unrelated investors’ interests in the investee (i. is it a type of one-line consolidation or a way of valuing a financial instrument? (1 mark) This leads to diversity in how equity accounting is applied. 65 million (W2). gross profit and profit from operations. such as revenue.92 million compared with an investment in the associate of $3. liabilities. incomes and expenses of Kata would be consolidated in full.To download more visit http://freeaccastudymaterial. (1 mark) This may have the effect of making the group look riskier than if equity accounting was used. This amounts to $0.com Associate . consolidating Kata’s large PPE balance may have a detrimental impact on the group’s non-current asset turnover. . (1 mark) ter In the statement of profit or loss.0m)).com/freeaccastudymaterial 19 To download more visit http://freeaccastudymaterial. (1 mark) Profit or loss fre Consolidating the incomes and expenses of Kata line by line will impact key profit or loss figures.4m – $1.27 million (45% × ($2m – ($2. Goodwill of $1. (1 mark) tud This will make the group look more asset rich. the group would show its share of Kata’s profit of $0. (1 mark) ea A higher gearing ratio may make it harder for the group to raise finance in the future.27 million (W3).27 million (W3). (1 mark) KA PL AN P U BLI SH IN G join us on facebook @ fb. (1 mark) Increased revenues will make the group’s market share look more impressive.92 million (W1) would be recognised. which may help it to raise finance in the future. The group would recognise a non-controlling interest in respect of Kata of $1.27 million). The group would recognise its share of Kata’s post-acquisition retained earnings. thus making the group look less efficient at generating profits.co m • (1 mark per point) (Subsidiary: 3 marks max) ial The investment in Kata at the year-end would be carried at $3. (1 mark) Comparison of impact Assets ym a (Associate: 1 marks max) Consolidating Kata would lead to a higher non-current asset position than if equity accounting was used (PPE of $14 million and goodwill of $1. (1 mark) Liabilities as However. (1 mark) cc Consolidating the loans of Kata may have a negative impact on the group’s gearing ratio.com FIN AL AS SE SS ME N T AN S WE R S (b) Subsidiary If accounted for as a subsidiary: • • • The assets. 27 ––––– fre ea Note: the same answer could be obtained by taking the group’s share of the post-acquisition movement in the associate’s net assets (equivalent to the movement in its share capital and retained earnings).0 0.4m) Fair value of net assets at acquisition $m 3. This may have a positive impact on investor perception. the group would simply shows its share of Kata’s profits as a single line below profit from operations. .32 (2.92 ––––– .4m – $1.co m (1 mark) (Impact: 5 marks max) Workings (W1) Goodwill (W2) Non-controlling interest tud (W3) Investment in associate ial ym a NCI at acquisition NCI % of post-acq’n net assets 55% × ($3m – $2.0 1. (1 mark) If Kata was accounted for using the equity method.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial. This would therefore have no impact (positive or negative) on the group’s operating profit.27 ––––– 3.0m)) $m 1.33 ––––– 1.65 ––––– $m 3. (a) (b) Total 20 (Part b: 9 marks max) Marking scheme (i) Significant influence (ii) Equity accounting (iii) Criticisms Impact on F/S Professional marks Marks 5 4 5 9 2 ––– 25 ––– K APL AN P UB LI SHIN G join us on facebook @ fb.40) ––––– 1.com AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G Kata is profitable so consolidating its results will improve the group’s profit from operations.To download more visit http://freeaccastudymaterial.com Consideration NCI at acquisition (55% × $2.32 0.4m) ter Goodwill cc as Cost Group % of post-acq’n P/L 45% × ($2m – ($2. com/freeaccastudymaterial join us on facebook @ fb.com/freeaccastudymaterial To download more visit http://freeaccastudymaterial.com fre ea cc fb.co m To download more visit http://freeaccastudymaterial.ial ter ym a as tud http://freeaccastudymaterial.com .com .