2 P

ACCA P2 Corporate Reporting
June 2014

Live Online 2 Days Revision Note

Lesco Group Limited, April 2015
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, without the prior written permission of Lesco Group Limited.

Tips for June2014 P2 exam:

Q1: Foreign sub consolidation (SFP)
But make sure you are happy with consol I/S & consol cash flow

Q2/Q3: make sure you prepare well for Q23 in revision note

Q4: Articles in the back by examiner

Revision plan

Q1 Plan:
(All questions are updated in this note as well as answers)

DEC2008 Q1 Warrburt group-group statement of cash flow
June2010 Q1 Ashanti-group statement of profit or loss and OCI
DEC2010 Q1 Jocatt Group-group statement of cash flow
June2011 Q1 Rose Foreign Sub (similar to June2008 Q1 Ribby(video))
DEC2011 Q1 Traveler- group statement of financial position
DEC2012 Q1 Minny-complex group
June2013 Q1 Trailer-complex group

Supplementary questions: [homework]
[Covered in the video and make sure you do them then watch them]
1. June2007 Q1 Glove-complex group[video]
2. June2008 Q1 Ribby-Foreign sub consol
3. June2009 Q1 Bravado- simple group

Q2+Q3 revision plan:
Deferred tax question (Kesare)
June2009 Q2 Aron(financial instrument)
June2010 Q2 Cate (mix)
June2011 Q3 Alexandra
DEC2011 Q3
June2012 Q3
June2012 Q2
DEC2012 Q2
DEC2012 Q3
June2013 Q2
June2013 Q3

Q4 revision plan
June2010 Q4 Holcombe (IAS17 lease)
June2011 Grainger (IFRS9)
Q Wallet(IFRS10,11,12) + investment entity+liability&equity
DEC2010 Q4 SMEs
Articles from examiner

DEC2008 Q1 (updated) (Group statement of cash flow)
WARRBURT GROUP: STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER
2013
30 NOV 2013 30
NOV 2012

WARRBURT GROUP: STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 NOVEMBER 2013

WARRBURT GROUP: STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30
NOVEMBER 2013 ($m)
The following information relates to the financial statements of Warrburt.

(i) Warrburt holds investments in equity instruments (IEI) which are owned by the
parent company. At 1 December 2012, the total carrying amount of those
investments was $150m. In respect of $112m of this $150m, Warrburt had made
an irrevocable election under IFRS 9 for changes in fair value to go through other
comprehensive income (items that will not be reclassified to profit or loss). The
remaining $38m related to an investment in the shares of Alburt, in respect of
which changes in fair value had been taken to profit or loss for the year. During the
year, the investment in Alburt was sold for $45m, with the fair value gain shown in
other income in the financial statements. The following schedule summarises the
changes:

Alburt Other Total
CV at 1 DEC 2012 38 112 150
Less sales of IEI at FV (45) - (45)
Add gain on derecognition/revaluation of
IEI
7 30 37
CV at 30 NOV 2013 - 142 142

Deferred tax of $3 million arising on the $30m revaluation gain above has been
taken into account in other comprehensive income for the year.

$m Share
capital
Retained
earnings
IEI Revaluation
surplus
(PPE)
Total Non-
controlling
interest
Total
equity
Balance at 1
DEC 2012
595 454 16 4 1,069 53 1,122
Share capital
issued
55 55 55
Dividends (9) (9) (5) (14)
Total
comprehensive
income for the
year
(78) 27 2 (49) (2) (51)
Balance at
30NOV 2013
650 367 43 6 1,066 46 1,112
(ii) The retirement benefit liability is shown as a long-term provision in the
statement of financial position and comprises the following: ($m)

Liability at 1DEC 2012 96
Expense for period 10
Contributions to scheme(paid) (10)
Actuarial losses 4
Liability at 30 NOV 2013 100

Warrburt recognises remeasurement gains and losses in other comprehensive
income in the period in which they occur, in accordance with IAS 19 (revised 2011).
The benefits paid in the period by the trustees of the scheme were $3 million. There
is no tax impact with regards to the retirement benefit liability.

(iii) The property, plant and equipment (PPE) in the statement of financial position
comprises the following: ($m)

CV at 1 DEC2012 360
Additions at cost 78
Gains on property revaluation 4
Disposals (56)
Depreciation (36)
Carrying value at 30 NOV 2013 350
Plant and machinery with a carrying value of $1 million had been destroyed by fire
in the year. The asset was replaced by the insurance company with new plant and
machinery which was valued at $3 million. The machines were acquired directly by
the insurance company and no cash payment was made to Warrburt.

The company included the net gain on this transaction in additions at cost and as a
deduction from administrative expenses.

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

Deferred tax of $2 million has been deducted in arriving at the gains on property
revaluation figure in other comprehensive income (items that will not be
reclassified to profit or loss).

The remaining additions of PPE comprised imported plant and equipment from an
overseas supplier on 30 June 2013. The cost of the PPE was 380 million dinars with
280 million dinars being paid on 31 October 2013 and the balance to be paid on 31
December 2013.

The rates of exchange were as follows:
Dinars to $
30 June 2013 5
31 Otc 2013 4.9
30 NOV 2013 4.8

Exchange gains and losses are included in administrative expenses.
(iv) Warrburt purchased a 25% interest in an associate for cash on 1 December
2012. The net assets of the associate at the date of acquisition were $300 million.
The associate made a profit after tax of $24 million and paid a dividend of $8 million
out of these profits in the year ended 30 November 2013.

(v) An impairment test had been carried out at 30 November 2013, on goodwill and
other intangible assets. The result showed that goodwill was impaired by $20 million
and other intangible assets by $12 million.

(vi) The short term provisions relate to finance costs which are payable within six
months.
Warrburts directors are concerned about the results for the year in the statement
of profit or loss and other comprehensive income and the subsequent effect on the
statement of cash flows. They have suggested that the proceeds of the sale of
property, plant and equipment and the sale of investments in equity instruments
should be included in cash generated from operations. The directors are afraid of
an adverse market reaction to their results and of the importance of meeting
targets in order to ensure job security, and feel that the adjustments for the
proceeds would enhance the cash health of the business.

Required
(a) Prepare a group statement of cash flows for Warrburt for the year ended 30
November 2013 in accordance with IAS 7 Statement of cash flows, using the
indirect method. (35 marks)

(b) Discuss the key issues which the statement of cash flows highlights regarding
the cash flow of the
company. (10 marks)

(c) Discuss the ethical responsibility of the company accountant in ensuring that
manipulation of the statement of cash flows, such as that suggested by the
directors, does not occur. (5 marks)

Note: requirements (b) and (c) include 2 professional marks in total for the quality
of the discussion.
(Total = 50 marks)

June2010 Q1 (Group Statement of profit or loss and OCI)
The following financial statements relate to Ashanti, a public limited
company.

consolidated statement of profit or loss and other comprehensive income for
the year ended 30 April 2014

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

(i) On 1 May 2012, Ashanti acquired 70% of the equity interests of Bochem,
a public limited company. The purchase consideration comprised cash of
$150 million and the fair value of the identifiable net assets was $160
million at that date. The fair value of the non-controlling interest in Bochem
was $54 million on 1 May 2012. Ashanti wishes to use the full goodwill
method for all acquisitions. The share capital and retained earnings of
Bochem were $55 million and $85 million respectively and other
components of equity were $10 million at the date of acquisition. The excess
of the fair value of the identifiable net assets at acquisition is due to an
increase in the value of plant, which is depreciated on the straight-line
method and has a five year remaining life at the date of acquisition. Ashanti
disposed of a 10% equity interest to the non- controlling interests (NCI) of
Bochem on 30 April 2014 for a cash consideration of $34 million. The
carrying value of the net assets of Bochem at 30 April 2014 was $210
million before any adjustments on consolidation. Goodwill has been
impairment tested annually and as at 30 April 2013 had reduced in value by
15% and at 30 April 2014 had lost a further 5% of its original value before
the sale of the equity interest to the NCI. The goodwill impairment should be
allocated between group and NCI on the basis of equity shareholding.
(ii) Bochem acquired 80% of the equity interests of Ceram, a public limited
company, on 1 May 2012. The purchase consideration was cash of $136
million. Cerams identifiable net assets were fair valued at $115 million and
the NCI of Ceram attributable to Ashanti had a fair value of $26 million at
that date. On 1 November 2013, Bochem disposed of 50% of the equity of
Ceram for a consideration of $90 million.

Cerams identifiable net assets were $160 million and the consolidated value
of the NCI of Ceram attributable to Bochem was $35 million at the date of
disposal. The remaining equity interest of Ceram held by Bochem was fair
valued at $45 million. After the disposal, Bochem can still exert significant
influence. Goodwill had been impairment tested and no impairment had
occurred. Cerams profits are deemed to accrue evenly over the year.

(iii) Ashanti has sold inventory to both Bochem and Ceram in October 2013.
The sale price of the inventory was $10 million and $5 million respectively.
Ashanti sells goods at a gross profit margin of 20% to group companies and
third parties. At the year-end, half of the inventory sold to Bochem
remained unsold but the entire inventory sold to Ceram had been sold to
third parties.

(iv) On 1 May 2011, Ashanti purchased a $20 million five-year bond with
semi annual interest of 5% payable on 31 October and 30 April. The
purchase price of the bond was $2162 million. The effective annual interest
rate is 8% or 4% on a semi annual basis. The bond is held at amortised cost.
At 1 May 2013 the amortised cost of the bond was $21.046 million. The
issuer of the bond did pay the interest due on 31 October 2013 and 30 April
2014, but was in financial trouble at 30 April 2014. Ashanti feels that as at
30 April 2014, the bond is impaired and that the best estimates of total
future cash receipts are $234 million on 30 April 2015 and $8 million on 30
April 2016. The current interest rate for discounting cash flows as at 30 April
2014 is 10%. No accounting entries have been made in the financial
statements for the above bond since 30 April 2013. (You should assume the
annual compound rate is 8% for discounting the cash flows.)
(v) Ashanti sold $5 million of goods to a customer who recently made an
announcement that it is restructuring its debts with its suppliers including
Ashanti. It is probable that Ashanti will not recover the amounts outstanding.
The goods were sold after the announcement was made although the order
was placed prior to the announcement. Ashanti wishes to make an
additional allowance of $8 million against the total receivable balance at the
year end, of which $5 million relates to this sale.
(vi) Ashanti owned a piece of property, plant and equipment (PPE) which
cost $12 million and was purchased on 1 May 2012. It is being depreciated
over 10 years on the straight-line basis with zero residual value. On 30 April
2013, it was revalued to $13 million and on 30 April 2014, the PPE was
revalued to $8 million. The whole of the revaluation loss had been posted to
other comprehensive income and depreciation has been charged for the
year. It is Ashantis company policy to make all necessary transfers for
excess depreciation following revaluation.

(vii) The salaried employees of Ashanti are entitled to 25 days paid leave
each year. The entitlement accrues evenly over the year and unused leave
may be carried forward for one year. The holiday year is the same as the
financial year. At 30 April 2014, Ashanti has 900 salaried employees and the
average unused holiday entitlement is three days per employee. 5% of
employees leave without taking their entitlement and there is no cash
payment when an employee leaves in respect of holiday entitlement. There
are 255 working days in the year and the total annual salary cost is $19
million. No adjustment has been made in the financial statements for the
above and there was no opening accrual required for holiday entitlement.

(viii) As permitted by IFRS 9 Financial instruments all group companies have
made an irrecoverable election to recognise changes in the fair value of
investments in equity instruments in other comprehensive income (items
that will not be reclassified to profit or loss).

(ix) Ignore any taxation effects of the above adjustments and the disclosure
requirements of IFRS 5 Non-current assets held for sale and discontinued
operations.

Required

(a) Prepare a consolidated statement of profit or loss and other
comprehensive income for the year ended 30 April 2014 for the Ashanti
Group. (35 marks)

DEC2010 Q1 updated (Group statement of cash flow)

The following draft group financial statements relate to Jocatt, a public limited
company.
JOCATT GROUP
STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER
2013 2012
$m $m

JOCATT GROUP STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE
INCOME FOR THE YEAR ENDED 30 NOVEMBER 2013

JOCATT GROUP STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 NOVEMBER
2013

$m Share
capital
Retained
earnings
Investment
in equity
instrument
Revaluation
surplus
(PPE)
Total Non-
controlling
interest
Total
equity
Balance at 1
DEC 2012
275 324 4 16 619 36 655
Share capital
issued
15 15 15
Dividends (5) (5) (13) (18)
Right issue 2 2
acquisitions 20 20
Total
comprehensive
income for the
year
32 2 (7) 27 10 37
Balance at
30NOV 2013
290 351 6 9 656 55 711

The following information relates to the financial statements of Jocatt.
(i) On 1 December 2011, Jocatt acquired 8% of the ordinary shares of Tigret. Jocatt
had treated this as an investment in equity instruments in the financial statements
to 30 November 2012 with changes in fair value taken to profit or loss for the year.
There were no changes in fair value in the year to 30 November 2012. On 1 January
2013, Jocatt acquired a further 52% of the ordinary shares of Tigret and gained
control of the company. The consideration for the acquisitions was as follows.

Holding Consideration($m)
1 DEC 2011 8% 4
1 JAN 2013 52% 30
60% 34

At 1 January 2013, the fair value of the 8% holding in Tigret held by Jocatt at the
time of the business
combination was $5 million and the fair value of the non-controlling interest in
Tigret was $20 million. The purchase consideration at 1 January 2013 comprised
cash of $15 million and shares of $15 million.

The fair value of the identifiable net assets of Tigret, excluding deferred tax assets
and liabilities, at the date of acquisition comprised the following.

$m
PP&E 15
Intangible assets 18
Trade receivables 5
Cash 7

The tax base of the identifiable net assets of Tigret was $40 million at 1 January
2013. The tax rate of Tigret is 30%.
(ii) On 30 November 2013,Tigret made a rights issue on a 1 for 4 basis. The issue
was fully subscribed and raised $5 million in cash.

(iii) Jocatt purchased a research project from a third party including certain patents
on 1 December 2012 for $8 million and recognised it as an intangible asset. During
the year, Jocatt incurred further costs, which included $2 million on completing the
research phase, $4 million in developing the product for sale and $1 million for the
initial marketing costs. There were no other additions to intangible assets in the
period other than those on the acquisition of Tigret.

(iv) Jocatt operates a defined benefit scheme. The current service costs for the year
ended 30 November 2013 are $10 million. Jocatt enhanced the benefits on 1
December 2012.The total cost of the enhancement is $2 million. The interest on
plan assets was $8 million for the year and Jocatt recognises remeasurement gains
and losses in accordance with IAS 19 as revised in 2011.

(v) Jocatt owns an investment property. During the year, part of the heating system
of the property, which had a carrying value of $05 million, was replaced by a new
system, which cost $1 million. Jocatt uses the fair value model for measuring
investment property.

(vi) Jocatt had exchanged surplus land with a carrying value of $10 million for cash
of $15 million and plant valued at $4 million. The transaction has commercial
substance. Depreciation for the period for property, plant and equipment was $27
million.

(vii) Goodwill relating to all subsidiaries had been impairment tested in the year to
30 November 2013 and any impairment accounted for. The goodwill impairment
related to those subsidiaries which were 100% owned.

(viii) Deferred tax of $1 million arose in the year on the gains on investments in
equity in the year where the irrevocable election was made to take changes in fair
value through other comprehensive income

(ix) The associate did not pay any dividends in the year.

Required
(a) Prepare a consolidated statement of cash flows for the Jocatt Group using the
indirect method under IAS 7 Statements of cash flows.

Note. Ignore deferred taxation other than where it is mentioned in the question. (35
marks)

Rose June2011 Q1
Rose, a public limited company, operates in the mining sector. The draft statements
of financial position are as follows, at 30 April 2011:

The following information is relevant to the preparation of the group financial
statements:
1 On 1 May 2010, Rose acquired 70% of the equity interests of Petal, a public
limited company. The purchase consideration comprised cash of $94 million. The
fair value of the identifiable net assets recognised by Petal was $120 million
excluding the patent below. The identifiable net assets of Petal at 1 May 2010
included a patent which had a fair value of $4 million. This had not been recognised
in the financial statements of Petal. The patent had a remaining term of four years
to run at that date and is not renewable. The retained earnings of Petal were $49
million and other components of equity were $3 million at the date of acquisition.
The remaining excess of the fair value of the net assets is due to an increase in the
value of land.
Rose wishes to use the full goodwill method. The fair value of the non-controlling
interest in Petal was $46 million on 1 May 2010. There have been no issues of
ordinary shares since acquisition and goodwill on acquisition is not impaired.
Rose acquired a further 10% interest from the non-controlling interest in Petal on
30 April 2011 for a cash consideration of $19 million.
2 Rose acquired 52% of the ordinary shares of Stem on 1 May 2010 when Stems
retained earnings were 220 million dinars. The fair value of the identifiable net
assets of Stem on 1 May 2010 was 495 million dinars.
The excess of the fair value over the net assets of Stem is due to an increase in the
value of land. The fair value of the non-controlling interest in Stem at 1 May 2010
was 250 million dinars.
Stem is located in a foreign country and operates a mine. The income of Stem is
denominated and settled in dinars. The output of the mine is routinely traded in
dinars and its price is determined initially by local supply and demand. Stem pays
40% of its costs and expenses in dollars with the remainder being incurred locally
and settled in dinars. Stems management has a considerable degree of authority
and autonomy in carrying out the operations of Stem and is not dependent upon
group companies for finance.
Rose wishes to use the full goodwill method to consolidate the financial statements
of Stem. There have been no issues of ordinary shares and no impairment of
goodwill since acquisition.
The following exchange rates are relevant to the preparation of the group financial
statements:
Dinars to $
1 May 2013 6
30 April 2011 5
Average for year to 30 April 2011 5.8
3 Rose has a property located in the same country as Stem. The property was
acquired on 1 May 2010 and is carried at a cost of 30 million dinars. The property is
depreciated over 20 years on the straight-line method. At 30 April 2011, the
property was revalued to 35 million dinars. Depreciation has been charged for the
year but the revaluation has not been taken into account in the preparation of the
financial statements as at 30 April 2011.
4 Rose commenced a long-term bonus scheme for employees at 1 May 2010. Under
the scheme employees receive a cumulative bonus on the completion of five years
service. The bonus is 2% of the total of the annual salary of the employees. The
total salary of employees for the year to 30 April 2011 was $40 million and a
discount rate of 8% is assumed. Additionally at 30 April 2011, it is assumed that all
employees will receive the bonus and that salaries will rise by 5% per year.
5 Rose purchased plant for $20 million on 1 May 2007 with an estimated useful life
of six years. Its estimated residual value at that date was $14 million. At 1 May
2010, the estimated residual value changed to $26 million. The change in the
residual value has not been taken into account when preparing the financial
statements as at 30 April 2011.
Required:
(a) (ii) Prepare a consolidated statement of financial position of the Rose
Group at 30 April 2011, in accordance with International Financial
Reporting Standards (IFRS), showing the exchange difference arising on
the translation of Stems net assets. Ignore deferred taxation. (35 marks)

DEC2011 Q1 Traveller (Basic Group Consolidation SFP)[full]
Traveler, a public limited company, operates in the manufacturing sector. The draft
statements of financial position are as follows at 30 November 2011:

statements:
1
On 1 December 2010, Traveler acquired 60% of the equity interests of Data, a
public limited company. The purchase consideration comprised cash of $600 million.
At acquisition, the fair value of the non-controlling interest in Data was $395 million.
Traveler wishes to use the full goodwill method. On 1 December 2010, the fair
value of the identifiable net assets acquired was $935 million and retained earnings
of Data were $299 million and other components of equity were $26 million. The
excess in fair value is due to non-depreciable land.

On 30 November 2011, Traveler acquired a further 20% interest in Data for a cash
consideration of $220 million.

2
On 1 December 2010, Traveler acquired 80% of the equity interests of Captive for a
consideration of $541 million. The consideration comprised cash of $477 million and
the transfer of non-depreciable land with a fair value of $64 million. The carrying
amount of the land at the acquisition date was $56 million. At the year end, this
asset was still included in the non-current assets of Traveler and the sale proceeds
had been credited to profit or loss.

At the date of acquisition, the identifiable net assets of Captive had a fair value of
$526 million, retained earnings were $90 million and other components of equity
were $24 million. The excess in fair value is due to non-depreciable land. This
acquisition was accounted for using the partial goodwill method in accordance with
IFRS 3 (Revised) Business Combinations.

3
Goodwill was impairment tested after the additional acquisition in Data on 30
November 2011. The recoverable amount of Data was $1,099 million and that of
Captive was $700 million.

4
Included in the financial assets of Traveler is a ten-year 7% loan. At 30 November
2011, the borrower was in financial difficulties and its credit rating had been
downgraded. Traveler has adopted IFRS 9 Financial Instruments and the loan asset
is currently held at amortised cost of $29 million. Traveler now wishes to value the
loan at fair value using current market interest rates. Traveler has agreed for the
loan to be restructured; there will only be three more annual payments of $8 million
starting in one years time. Current market interest rates are 8%, the original
effective interest rate is 67% and the effective interest rate under the revised
payment schedule is 63%.

5
Traveler acquired a new factory on 1 December 2010. The cost of the factory was
$50 million and it has a residual value of $2 million. The factory has a flat roof,
which needs replacing every five years. The cost of the roof was $5 million. The
useful economic life of the factory is 25 years. No depreciation has been charged for
the year. Traveler wishes to account for the factory and roof as a single asset and
depreciate the whole factory over its economic life. Traveler uses straight-line
depreciation.

6
The actuarial value of Travelers pension plan showed a surplus at 1 December 2010 of
$72 million. Lossesof $25 million on remeasurement of the net defined benefit asset are
to be recognised in othercomprehensive income in accordance with IAS 19 (revised 201
1). The aggregate of the current service costand the net interest cost amounted to a cost o
f $55 million for the year. After consulting with the actuaries,the company decided to re
duce its contributions for the year to $45 million. The contributions were paid on7 Dece
mber 2011. No entries had been made in the financial statements for the above amounts.
The presentvalue of available future refunds and reductions in future contributions was $
18 million. After consulting with the actuaries, the company decided to reduce its
contributions for the year to $45 million.

Required:
(a) Prepare a consolidated statement of financial position for the Traveler
Group for the year ended 30 November 2011. (35 marks)

(b) Traveler has three distinct business segments. The management has calculated
the net assets, turnover and profit before common costs, which are to be allocated
to these segments. However, they are unsure as to how they should allocate certain
common costs and whether they can exercise judgement in the allocation process.
They wish to allocate head office management expenses; pension expense; the cost
of managing properties and interest and related interest bearing assets. They also
are uncertain as to whether the allocation of costs has to be in conformity with the
accounting policies used in the financial statements.
Required:
Advise the management of Traveler on the points raised in the above
paragraph. (7 marks)

(c) Segmental information reported externally is more useful if it conforms to
information used by management in making decisions. The information can differ
from that reported in the financial statements. Although reconciliations are required,
these can be complex and difficult to understand. Additionally, there are other
standards where subjectivity is involved and often the profit motive determines
which accounting practice to follow. The directors have a responsibility to
shareholders in disclosing information to enhance corporate value but this may
conflict with their corporate social responsibility.
Required:
Discuss how the ethics of corporate social responsibility disclosure are
difficult to reconcile with shareholder expectations. (6 marks)

Professional marks will be awarded in part (c) for clarity and expression of your
discussion. (2 marks)
(50 marks)
DEC2012 Q1 Minny-complex group
Minny is a company which operates in the service sector. Minny has business
relationships with Bower and Heeny.

All three entities are public limited companies. The draft statements of financial
position of these entities are as follows at 30 November 2012:

statements:
1. On 1 December 2010, Minny acquired 70% of the equity interests of Bower. The
purchase consideration comprised cash of $730 million. At acquisition, the fair value
of the non-controlling interest in Bower was $295 million. On 1 December 2010, the
fair value of the identifiable net assets acquired was $835 million and retained
earnings of Bower were $319 million and other components of equity were $27
million. The excess in fair value is due to non-depreciable land.

2. On 1 December 2011, Bower acquired 80% of the equity interests of Heeny for a
cash consideration of $320 million. The fair value of a 20% holding of the non-
controlling interest was $72 million; a 30% holding was $108 million and a 44%
holding was $161 million. At the date of acquisition, the identifiable net assets of
Heeny had a fair value of $362 million, retained earnings were $106 million and
other components of equity were $20 million. The excess in fair value is due to non-
depreciable land.

It is the groups policy to measure the non-controlling interest at fair value at the
date of acquisition.

3. Both Bower and Heeny were impairment tested at 30 November 2012. The
recoverable amounts of both cash generating units as stated in the individual
financial statements at 30 November 2012 were Bower, $1,425 million, and Heeny,
$604 million, respectively. The directors of Minny felt that any impairment of assets
was due to the poor performance of the intangible assets. The recoverable amount
has been determined without consideration of liabilities which all relate to the
financing of operations.

4. Minny acquired a 14% interest in Puttin, a public limited company, on 1
December 2010 for a cash consideration of $18 million. The investment was
accounted for under IFRS 9 Financial Instruments and was designated as at fair
value through other comprehensive income. On 1 June 2012, Minny acquired an
additional 16% interest in Puttin for a cash consideration of $27 million and
achieved significant influence. The value of the original 14% investment on 1 June
2012 was $21 million. Puttin made profits after tax of $20 million and
$30 million for the years to 30 November 2011 and 30 November 2012 respectively.
On 30 November 2012, Minny received a dividend from Puttin of $2 million, which
has been credited to other components of equity.

5. Minny purchased patents of $10 million to use in a project to develop new
products on 1 December 2011. Minny has completed the investigative phase of the
project, incurring an additional cost of $7 million and has determined that the
product can be developed profitably. An effective and working prototype was
created at a cost of $4 million and in order to put the product into a condition for
sale, a further $3 million was spent. Finally, marketing costs of $2 million were
incurred. All of the above costs are included in the intangible assets of Minny.

6. Minny intends to dispose of a major line of the parents business operations. At
the date the held for sale criteria were met, the carrying amount of the assets and
liabilities comprising the line of business were:
$m
PP&E 49
Inventory 18
Current liabilities 3

It is anticipated that Minny will realise $30 million for the business. No adjustments
have been made in the financial statements in relation to the above decision.

Required:
(a) Prepare the consolidated statement of financial position for the Minny
Group as at 30 November 2012.
(35 marks)

(b) Minny intends to dispose of a major line of business in the above scenario and
the entity has stated that the held for sale criteria were met under IFRS 5 Non-
current Assets Held for Sale and Discontinued Operations. The criteria in IFRS 5 are
very strict and regulators have been known to question entities on the application of
the standard. The two criteria which must be met before an asset or disposal group
will be defined as recovered principally through sale are: that it must be available
for immediate sale in its present condition and the sale must be highly probable.

Required:
Discuss what is meant in IFRS 5 by available for immediate sale in its
present condition and the sale must be highly probable, setting out
briefly why regulators may question entities on the application of the
standard. (7 marks)

(c) Bower has a property which has a carrying value of $2 million at 30 November
2012. This property had been revalued at the year end and a revaluation surplus of
$400,000 had been recorded in other components of equity. The directors were
intending to sell the property to Minny for $1 million shortly after the year end.
Bower previously used the historical cost basis for valuing property.

Required:
Without adjusting your answer to part (a), discuss the ethical and
accounting implications of the above intended sale of assets to Minny by
Bower. (8 marks)
(50 marks)

June2013 Q1 Trailer-complex group[full]
(a) Trailer, a public limited company, operates in the manufacturing sector. Trailer
has investments in two other companies. The draft statements of financial position
at 31 May 2013 are as follows:

statements:
1. On 1 June 2011, Trailer acquired 14% of the equity interests of Caller for a cash
consideration of $260 million and Park acquired 70% of the equity interests of Caller
for a cash consideration of $1,270 million. At 1 June 2011, the identifiable net
assets of Caller had a fair value of $990 million, retained earnings were $190 million
and other components of equity were $52 million. At 1 June 2012, the identifiable
net assets of Caller had a fair value of $1,150 million, retained earnings were $240
million and other components of equity were $70 million. The excess in fair value is
due to non-depreciable land.

The fair value of the 14% holding of Trailer in Caller was $280 million at 31 May
2012 and $310 million at 31 May 2013. The fair value of Parks interest in Caller
had not changed since acquisition.

2. On 1 June 2012, Trailer acquired 60% of the equity interests of Park, a public
limited company. The purchase consideration comprised cash of $1,250 million. On
1 June 2012, the fair value of the identifiable net assets acquired was $1,950
million and retained earnings of Park were $650 million and other components of
equity were $55 million. The excess in fair value is due to non-depreciable land.

It is the groups policy to measure the non-controlling interest at acquisition at its
proportionate share of the fair value of the subsidiarys net assets.

3. Goodwill of Park and Caller was impairment tested at 31 May 2013. There was no
impairment relating to Caller. The recoverable amount of the net assets of Park was
$2,088 million. There was no impairment of the net assets of Park before this date
and any impairment loss has been determined to relate to goodwill and property,
plant and equipment.

4. Trailer has made a loan of $50 million to a charitable organisation for the building
of new sporting facilities.
The loan was made on 1 June 2012 and is repayable on maturity in three years
time. Interest is to be charged one year in arrears at 3%, but Trailer assesses that
an unsubsidised rate for such a loan would have been 6%. The only accounting
entries which have been made for the year ended 31 May 2013 are the cash entries
for the loan and interest received which have resulted in a balance of $485 million
being shown as
a financial asset.

5. On 1 June 2011, Trailer acquired office accommodation at a cost of $90 million
with a 30-year estimated useful life. During the year, the property market in the
area slumped and the fair value of the accommodation fell to $75 million at 31 May
2012 and this was reflected in the financial statements. However, the market
recovered unexpectedly quickly due to the announcement of major government
investment in the areas transport infrastructure. On 31 May 2013, the valuer
advised Trailer that the offices should now be valued at $105 million. Trailer has
charged depreciation for the year but has not taken account of the upward valuation
of the offices. Trailer uses the revaluation model and records any valuation change
when advised to do so.

6. Trailer has announced two major restructuring plans. The first plan is to reduce
its capacity by the closure of some of its smaller factories, which have already been
identified. This will lead to the redundancy of 500 employees, who have all
individually been selected and communicated with. The costs of this plan are $9
million in redundancy costs, $4 million in retraining costs and $5 million in lease
termination costs. The second plan is to re-organise the finance and information
technology department over a one-year period but
it does not commence for two years. The plan results in 20% of finance staff losing
their jobs during the restructuring. The costs of this plan are $10 million in
redundancy costs, $6 million in retraining costs and $7 million in equipment lease
termination costs. No entries have been made in the financial statements for the
above plans.

7. The following information relates to the group pension plan of Trailer:
1 June 2012 ($m) 31 May 2013 ($m)
Fair value of plan assets 28 29
Actuarial value of defined
benefit obligation
30 35

The contributions for the period received by the fund were $2 million and the
employee benefits paid in the year amounted to $3 million. The discount rate to be
used in any calculation is 5%. The current service cost for the period based on
actuarial calculations is $1 million. The above figures have not been taken into
account for the year ended 31 May 2013 except for the contributions paid which
have been entered in cash and the defined benefit obligation.

Required:
Prepare the group consolidated statement of financial position of Trailer as
at 31 May 2013. (35 marks)

(b) It is the Trailer groups policy to measure the non-controlling interest (NCI) at
acquisition at its proportionate share of the fair value of the subsidiarys net assets.
The directors of Trailer have used this policy for several years and do not know the
implications, if any, of changing the policy to that of accounting for the NCI at fair
value. The
fair value of the NCI of Park at 1 June 2012 was $800 million. The fair value of the
NCI of Caller, based upon the effective shareholdings, was $500 million at 1 June
2011 and $530 million at 1 June 2012.

Required:
Explain to the directors, with suitable calculations, the impact on the
financial statements if goodwill was calculated using the fair value of the
NCI. (9 marks)

(c) The directors of Trailer are involved in takeover talks with another entity. In the
discussions, one of the directors stated that there was no point in an accountant
studying ethics because every accountant already has a set of moral beliefs that are
followed and these are created by simply following generally accepted accounting
practice.

He further stated that in adopting a defensive approach to the takeover, there was
no ethical issue in falsely declaring Trailers profits in the financial statements used
for the discussions because, in his opinion, the takeover did not benefit the
company, its executives or society as a whole.

Required:
Discuss the above views of the director regarding the fact that there is no
point in an accountant studying ethics and that there was no ethical issue
in the false disclosure of accounting profits. (6 marks)
(50 marks)

Q2+Q3 revision plan:
DEC2011 Q3
June2012 Q2
June2012 Q3
DEC2012 Q2
DEC2012 Q3
June2013 Q2
June2013 Q3

This question comes from Q2 of you P2 pilot paper. Note this version has been updated to
reflect the latest version of accounting standards.

The following statement of financial position relates to Kesare Group, a public
limited company, at 30 June 2006.
$000
Assets

Non current assets:

Property, plant and equipment
10,000
Goodwill
6,000
Other intangible assets
5,000
Financial assets (cost)
9,000

30,000
Current assets

Trade receivables
7,000
Other receivables
4,600
Cash and cash equivalents
6,700

18,300
Total assets
48,300

Equity and liabilities

Equity

Share capital
9,000
Other reserves
4,500
Retained earnings
9,130
Total equity
22,630

Non-current liabilities

Long term borrowings
10,000
Deferred tax liability
3,600
Employee benefit liability
4,000
Total non-current liabilities
17,600
Current liabilities

Current tax liability
3,070
Trade and other payables
5,000
Total current liabilities
8,070
Total liabilities
25,670
Total equity and liabilities
48,300

The following information is relevant to the above statement of financial position:
(i) The financial assets are classified as 'investments in equity instruments' but are
shown in the above statement of financial position at their cost on 1 July 2005. The
market value of the assets is $10.5 million on 30 June 2006. Taxation is payable on
the sale of the assets. As allowed by IFRS 9, an irrevocable election was made for
changes in fair value to go through other comprehensive income (not reclassified to
profit or loss).

(ii) The stated interest rate for the long term borrowing is 8 per cent. The loan of
$10 million represents a convertible bond which has a liability component of $9.6
million and an equity component of $0.4 million.

The bond was issued on 30 June 2006.

(iii) The defined benefit plan had a rule change on 1 July 2005, giving rise to past
service costs of $520,000. The past service costs have not been accounted for.

(iv) The tax bases of the assets and liabilities are the same as their carrying
amounts in the draft statement of financial position above as at 30 June 2006
except for the following:
(1)
$000
Property, plant and equipment
2,400
Trade receivables
7,500
Other receivables
5,000
Employee benefits
5,000

(2) Other intangible assets were development costs which were all allowed for tax
purposes when the cost was incurred in 2005.
(3) Trade and other payables includes an accrual for compensation to be paid to
employees. This amounts to $1 million and is allowed for taxation when paid.

(v) Goodwill is not allowable for tax purposes in this jurisdiction.

(vi) other adjustments
(1)Kesare buys a sub just after year end. The sub has inventory as at cost of
$60,000
but fair value of $65,000. All the inventory is still in inventory a few days later at
the year end.

(2)Kesare bought a foreign sub for $500,000, measured in the parental home
currency in the second year. The subsidiary has grown to $570,000 because of net
profits of $70,000 that the sub has retained. The withholding tax rate is 60%. Show
the deferred tax implication at 30June2007.

(3)The company had granted 20million options in the scheme and they are all
expected to vest at the end of the forth year. The fair value of the options at the
grant date was $10 and the current intrinsic value of each is $8. Show the deferred
tax implication at 30June2007.
(4) Kesare is leasing plant under a finance lease over a five year period. The asset
was recorded at the present value of the minimum lease payments of $12 million at
the inception of the lease which was 31 May 2005. The asset is depreciated on a
straight line basis over the five years and has no residual value. The annual lease
payments are $3 million payable in arrears on 1 June and the effective interest rate
is 8% per annum. The directors have not leased an asset under a finance lease
before and are unsure as to its treatment for deferred taxation. The company can
claim a tax deduction for the annual rental payment as the finance lease does not
qualify for tax relief.
(vii) Assume taxation is payable at 30%.
Required
(a) Discuss the conceptual basis for the recognition of deferred taxation using the
temporary difference approach to deferred taxation. (5 marks including)

(b) Calculate the deferred tax liability at 30 June 2006 after any necessary
adjustments to the financial statements showing how the deferred tax liability would
be dealt with in the financial statements. (Assume that any adjustments do not
affect current tax. Candidates should briefly discuss the adjustments required to
calculate deferred tax liability.) (30 marks)
(Total = 35 marks)

The directors of Aron, a public limited company, are worried about the challenging
market conditions which the company is facing. The markets are volatile and illiquid.
The central government is injecting liquidity into the economy. The directors are
concerned about the significant shift towards the use of fair values in financial
statements. IFRS 9 Financial instruments in conjunction with IFRS 13 Fair value
measurement defines fair value and requires the initial measurement of financial
instruments to be at fair value. The directors are uncertain of the relevance of fair
value measurements in these current market conditions.
Required
(a) Briefly discuss how the fair value of financial instruments is measured,
commenting on the relevance of fair value measurements for financial instruments
where markets are volatile and illiquid. (4 marks)
(b) Further they would like advice on accounting for the following transactions
within the financial statements for the year ended 31 May 20X8.
(i) Aron issued one million convertible bonds on 1 June 20X5. The bonds had a term
of three years and were issued with a total fair value of $100 million which is also
the par value. Interest is paid annually in arrears at a rate of 6% per annum and
bonds, without the conversion option, attracted an interest rate of 9% per annum
on 1 June 20X5. The company incurred issue costs of $1 million. If the investor did
not convert to shares they would have been redeemed at par. At maturity all of the
bonds were converted into 25 million ordinary shares of $1 of Aron. No bonds could
be converted before that date. The directors are uncertain how the bonds should
have been accounted for up to the date of the conversion on 31 May 20X8 and have
been told that the impact of the issue costs is to increase the effective interest rate
to 9.38%. (6 marks)

(ii) Aron held a 3% holding of the shares in Smart, a public limited company, The
investment was classified as an investment in equity instruments and at 31 May
20X8 had a carrying value of $5 million (brought forward from the previous period).
As permitted by IFRS 9 Financial instruments, Aron had made an irrevocable
election to recognise all changes in fair value in other comprehensive income (items
that will not be reclassified to profit or loss). The cumulative gain to 31 May 20X7
recognised in other comprehensive income relating to the investment was $400,000.
On 31 May 20X8, the whole of the share capital of Smart was acquired by Given, a
public limited company, and as a result, Aron received shares in Given with a fair
value of $5.5 million in exchange for its holding in Smart. The company wishes to
know how the exchange of shares in Smart for the shares in Given should be
accounted for in its financial records. (4 marks)

(iii) The functional and presentation currency of Aron is the dollar ($). Aron has a
wholly owned foreign subsidiary, Gao, whose functional currency is the zloti. Gao
owns a debt instrument which is held for trading. In Gaos financial statements for
the year ended 31 May 20X7, the debt instrument was carried at its fair value of 10
million zloti.
At 31 May 20X8, the fair value of the debt instrument had increased to 12 million
zloty. The exchange rates were:
Zloti to $1
31 May 20X7 3
31 May 20X8 2
Average rate for year to 31 May 20X8 2.5
The company wishes to know how to account for this instrument in Gaos entity
financial statements and the consolidated financial statements of the group. (5
marks)

(iv) Aron granted interest free loans to its employees on 1 June 20X7 of $10 million.
The loans will be paid back on 31 May 20X9 as a single payment by the employees.
The market rate of interest for a two year loan on both of the above dates is 6% per
annum. The company is unsure how to account for the loan but wishes to hold the
loans at amortised cost under IFRS 9 Financial instruments
(4 marks)

Required
Discuss, with relevant computations, how the above financial instruments should be
accounted for in the financial statements for the year ended 31 May 20X8.
Note 1. The mark allocation is shown against each of the transactions above.
Note 2. The following discount and annuity factors may be of use.

Discount
factors
Annuity
factors

6% 9% 9.38% 6% 9% 9.38%
1 year 0.9434 0.9174 0.9142 0.9434 0.9174 0.9174
2 years 0.8900 0.8417 0.8358 1.8334 1.7591 1.7500
3 years 0.8396 0.7722 0.7642 2.6730 2.5313 2.5142
Professional marks will be awarded for clarity and quality of discussion. (2 marks)
(Total = 25 marks)
2
(a) Cate is an entity in the software industry. Cate had incurred substantial losses
in the financial years 31 May 2004 to 31 May 2009. In the financial year to 31 May
2010 Cate made a small profit before tax. This included signify cant non-operating
gains. In 2009, Cate recognised a material deferred tax asset in respect of carried
forward losses, which will expire during 2012. Cate again recognised the deferred
tax asset in 2010 on the basis of anticipated performance in the years from 2010 to
2012, based on budgets prepared in 2010.

The budgets included high growth rates in profi tability. Cate argued that the
budgets were realistic as there were positive indications from customers about
future orders. Cate also had plans to expand sales to new markets and to sell new
products whose development would be completed soon. Cate was taking measures
to increase sales, implementing new programs to improve both productivity and
profi tability. Deferred tax assets less deferred tax liabilities represent 25% of
shareholders equity at 31 May 2010. There are no tax planning opportunities
available to Cate that would create taxable profi t in the near future. (5 marks)

(b) At 31 May 2010 Cate held an investment in and had a signifi cant infl uence
over Bates, a public limited company.

Cate had carried out an impairment test in respect of its investment in accordance
with the procedures prescribed in IAS 36, Impairment of assets. Cate argued that
fair value was the only measure applicable in this case as value-in-use was not
determinable as cash fl ow estimates had not been produced. Cate stated that there
were no plans to dispose of the shareholding and hence there was no binding sale
agreement. Cate also stated that the quoted share price was not an appropriate
measure when considering the fair value of Cates significant influence on Bates.
Therefore, Cate estimated the fair value of its interest in Bates through application
of two measurement techniques; one based on earnings multiples and the other
based on an optionpricing model. Neither of these methods supported the
existence of an impairment loss as of 31 May 2010. (5 marks)

(c) At 1 April 2009 Cate had a direct holding of shares giving 70% of the voting
rights in Date. In May 2010, Date issued new shares, which were wholly subscribed
for by a new investor. After the increase in capital, Cate retained an interest of 35%
of the voting rights in its former subsidiary Date. At the same time, the
shareholders of Date signed an agreement providing new governance rules for Date.
Based on this new agreement, Cate was no longer to be represented on Dates
board or participate in its management. As a consequence Cate considered that its
decision not to subscribe to the issue of new shares was equivalent to a decision to
disinvest in Date. Cate argued that the decision not to invest clearly showed its new
intention not to recover the investment in Date principally through continuing use of
the asset and was considering selling the investment. Due to the fact that Date is a
separate line of business (with separate cash fl ows, management and customers),
Cate considered that the results of Date for the period to 31 May 2010 should be
presented based on principles provided by IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations. (8 marks)

(d) In its 2010 financial statements, Cate disclosed the existence of a voluntary
fund established in order to provide a post-retirement benefit plan (Plan) to
employees. Cate considers its contributions to the Plan to be voluntary, and has not
recorded any related liability in its consolidated financial statements. Cate has a
history of paying benefits to its former employees, even increasing them to keep
pace with inflation since the commencement of the Plan.

The main characteristics of the Plan are as follows:
(i) the Plan is totally funded by Cate;
(ii) the contributions for the Plan are made periodically;
(iii) the post retirement benefit is calculated based on a percentage of the fi nal
salaries of Plan participants dependent on the years of service;
(iv) the annual contributions to the Plan are determined as a function of the fair
value of the assets less the liability arising from past services.

Cate argues that it should not have to recognise the Plan because, according to the
underlying contract, it can terminate its contributions to the Plan, if and when it
wishes. The termination clauses of the contract establish that Cate must
immediately purchase lifetime annuities from an insurance company for all the
retired employees who are already receiving benefit when the termination of the
contribution is communicated. (5 marks)

Required:
Discuss whether the accounting treatments proposed by the company are
acceptable under International Financial Reporting Standards.

Professional marks will be awarded in this question for clarity and quality of
The mark allocation is shown against each of the four parts above.
(25 marks)

Alexandra (June2011 Q3) (mix)
Alexandra, a public limited company, designs and manages business solutions and
IT infrastructures.
(a) In November 2010, Alexandra defaulted on an interest payment on an issued
bond loan of $100 million repayable in 2015. The loan agreement stipulates that
such default leads to an obligation to repay the whole of the loan immediately,
including accrued interest and expenses. The bondholders, however, issued a
waiver postponing the interest payment until 31 May 2011. On 17 May 2011,
Alexandra felt that a further waiver was required, so requested a meeting of the
bondholders and agreed a further waiver of the interest payment to 5 July 2011,
when Alexandra was confident it could make the payments. Alexandra classified the
loan as long-term debt in its statement of financial position at 30 April 2011 on the
basis that the loan was not in default at the end of the reporting period as the
bondholders had issued waivers and had not sought redemption.
(6 marks)
(b) Alexandra enters into contracts with both customers and suppliers. The supplier
solves system problems and provides new releases and updates for software.
Alexandra provides maintenance services for its customers. In previous years,
Alexandra recognised revenue and related costs on software maintenance contracts
when the customer was invoiced, which was at the beginning of the contract period.
Contracts typically run for two years.
During 2010, Alexandra had acquired Xavier Co, which recognised revenue, derived
from a similar type of maintenance contract as Alexandra, on a straight-line basis
over the term of the contract. Alexandra considered both its own and the policy of
Xavier Co to comply with the requirements of IAS 18 Revenue but it decided to
adopt the practice of Xavier Co for itself and the group. Alexandra concluded that
the two recognition methods did not, in substance, represent two different
accounting policies and did not, therefore, consider adoption of the new practice to
be a change in policy.
In the year to 30 April 2011, Alexandra recognised revenue (and the related costs)
on a straight-line basis over the contract term, treating this as a change in an
accounting estimate. As a result, revenue and cost of sales were adjusted, reducing
the years profits by some $6 million. (5 marks)
(c) Alexandra has a two-tier board structure consisting of a management and a
supervisory board. Alexandra
remunerates its board members as follows:
Annual base salary
Variable annual compensation (bonus)
Share options

In the group financial statements, within the related parties note under IAS 24
Related Party Disclosures, Alexandra disclosed the total remuneration paid to
directors and non-executive directors and a total for each of these boards. No
further breakdown of the remuneration was provided.
The management board comprises both the executive and non-executive directors.
The remuneration of the non-executive directors, however, was not included in the
key management disclosures. Some members of the supervisory and management
boards are of a particular nationality. Alexandra was of the opinion that in that
jurisdiction, it is not acceptable to provide information about remuneration that
could be traced back to individuals. Consequently, Alexandra explained that it had
provided the related party information in the annual accounts in an ambiguous way
to prevent users of the financial statements from tracing remuneration information
back to specific individuals. (5 marks)
(d) Alexandras pension plan was accounted for as a defined benefit plan in 2010.
In the year ended 30 April 2011, Alexandra changed the accounting method used
for the scheme and accounted for it as a defined contribution plan, restating the
comparative 2010 financial information. The effect of the restatement was
significant. In the 2011 financial statements, Alexandra explained that, during the
year, the arrangements underlying the retirement benefit plan had been subject to
detailed review. Since the pension liabilities are fully insured and indexation of
future liabilities can be limited up to and including the funds available in a special
trust account set up for the plan, which is not at the disposal of Alexandra, the plan
qualifies as a defined contribution plan under IAS 19 Employee Benefits rather than
a defined benefit plan. Furthermore, the trust account is built up by the insurance
company from the surplus yield on investments. The pension plan is an average pay
plan in respect of which the entity pays insurance premiums to a third party
insurance company to fund the plan. Every year 1% of the pension fund is built up
and employees pay a contribution of 4% of their salary, with the employer paying
the balance of the contribution. If an employee leaves Alexandra and transfers the
pension to another fund, Alexandra is liable for, or is refunded the difference
between the benefits the employee is entitled to and the insurance premiums paid.
(7 marks)

Professional marks will be awarded in question 3 for clarity and quality of discussion.
(2 marks)

Required:
Discuss how the above transactions should be dealt with in the financial
statements of Alexandra for the year ended 30 April 2011.
(25 marks)

DEC2011 Q3 Scramble
3 Scramble, a public limited company, is a developer of online computer games.
(a) At 30 November 2011, 65% of Scrambles total assets were mainly represented
by internally developed intangible assets comprising the capitalised costs of the
development and production of online computer games.
These games generate all of Scrambles revenue. The costs incurred in relation to
maintaining the games at the same standard of performance are expensed to the
statement of comprehensive income. The accounting policy note states that
intangible assets are valued at historical cost. Scramble considers the games to
have an indefinite useful life, which is reconsidered annually when the intangible
assets are tested for impairment. Scramble determines value in use using the
estimated future cash flows which include maintenance expenses, capital expenses
incurred in developing different versions of the games and the expected increase in
turnover resulting from the above mentioned cash outflows. Scramble does not
conduct an analysis or investigation of differences between expected and actual
cash flows. Tax effects were also taken into account. (7 marks)
(b) Scramble has two cash generating units (CGU) which hold 90% of the internally
developed intangible assets. Scramble reported a consolidated net loss for the
period and an impairment charge in respect of the two CGUs representing 63% of
the consolidated profit before tax and 29% of the total costs in the period. The
recoverable amount of the CGUs is defined, in this case, as value in use. Specific
discount rates are not directly available from the market, and Scramble estimates
the discount rates, using its weighted average cost of capital. In calculating the cost
of debt as an input to the determination of the discount rate, Scramble used the
risk-free rate adjusted by the company specific average credit spread of its
outstanding debt, which had been raised two years previously. As Scramble did not
have any need for additional financing and did not need to repay any of the existing
loans before 2014, Scramble did not see any reason for using a different discount
rate. Scramble did not disclose either the events and circumstances that led to the
recognition of the impairment loss or the amount of the loss recognised in respect
of each cash-generating unit. Scramble felt that the events and circumstances that
led to the recognition of a loss in respect of the first CGU were common knowledge
in the market and the events and the circumstances that led to the recognition loss
of the second CGU were not needed to be disclosed.
(7 marks)
(c) Scramble wished to diversify its operations and purchased a professional football
club, Rashing. In Rashings financial statements for the year ended 30 November
2011, it was proposed to include significant intangible assets which related to
acquired players registration rights comprising registration and agents fees. The
agents fees were paid by the club to players agents either when a player is
transferred to the club or when the contract of a player is extended. Scramble
believes that the registration rights of the players are intangible assets but that the
agents fees do not meet the criteria to be recognised as intangible assets as they
are not directly attributable to the costs of players contracts. Additionally, Rashing
has purchased the rights to 25% of the revenue from ticket
sales generated by another football club, Santash, in a different league. Rashing
does not sell these tickets nor has any discretion over the pricing of the tickets.
Rashing wishes to show these rights as intangible assets in its financial statements.
(9 marks)

Required:
Discuss the validity of the accounting treatments proposed by Scramble in its
financial statements for the year ended 30 November 2011.
The mark allocation is shown against each of the three accounting treatments above.
Professional marks will be awarded for clarity and expression of your discussion. (2
marks)
(25 marks)

June2012 Q2 William
2 William is a public limited company and would like advice in relation to the
following transactions.
(a) William owned a building on which it raised finance. William sold the building for
$5 million to a finance company on 1 June 2011 when the carrying amount was
$35 million. The same building was leased back from the finance company for a
period of 20 years, which was felt to be equivalent to the majority of the assets
economic life. The lease rentals for the period are $441,000 payable annually in
arrears. The interest rate implicit in the lease is 7%. The present value of the
minimum lease payments is the same as the sale proceeds.
William wishes to know how to account for the above transaction for the year ended
31 May 2012. (7 marks)
(b) William operates a defined benefit scheme for its employees. At June 2011, the
net pension liability recognized in the statement of financial position was $18 million,
excluding an unrecognised actuarial gain of $15 million which William wishes to
spread over the remaining working lives of the employees. The scheme was revised
on 1 June 2011. This resulted in the benefits being enhanced for some members of
the plan and because benefits do not vest for these members for five years, William
wishes to spread the increased cost over that period. However, part of the scheme
was to be closed, without any redundancy of employees.
William requires advice on how to account for the above scheme under IAS 19
Employee Benefits including the presentation and measurement of the pension
expense. (7 marks)
(c) On 1 June 2009, William granted 500 share appreciation rights to each of its 20
managers. All of the rights vest after two years service and they can be exercised
during the following two years up to 31 May 2013. The fair value of the right at the
grant date was $20. It was thought that three managers would leave over the initial
two-year period and they did so. The fair value of each right was as follows:
Year Fair value at year end $
31 May 2010 23
31 may 2011 14
31 may 2012 24

On 31 May 2012, seven managers exercised their rights when the intrinsic value of
the right was $21. William wishes to know what the liability and expense will be at
31 May 2012. (5 marks)

(d) William acquired another entity, Chrissy, on 1 May 2012. At the time of the
acquisition, Chrissy was being sued as there is an alleged mis-selling case
potentially implicating the entity. The claimants are suing for damages of $10
million. William estimates that the fair value of any contingent liability is $4 million
and feels that it is more
likely than not that no outflow of funds will occur.
William wishes to know how to account for this potential liability in Chrissys entity
financial statements and whether the treatment would be the same in the
consolidated financial statements. (4 marks)
Required:
Discuss, with suitable computations, the advice that should be given to William in
accounting for the above events.
Note: The mark allocation is shown against each of the four events above.
Professional marks will be awarded in question 2 for the quality of the discussion. (2
marks)
(25 marks)

June2012 Q3[important]
3 Ethan, a public limited company, develops, operates and sells investment
properties.
(a) Ethan focuses mainly on acquiring properties where it foresees growth potential,
through rental income as well as value appreciation. The acquisition of an
investment property is usually realised through the acquisition of the entity, which
holds the property.

In Ethans consolidated financial statements, investment properties acquired
through business combinations are recognised at fair value, using a discounted cash
flow model as approximation to fair value. There is currently an active market for
this type of property. The difference between the fair value of the investment
property as determined under the accounting policy, and the value of the
investment property for tax purposes results in a deferred tax liability.

Goodwill arising on business combinations is determined using the measurement
principles for the investment properties as outlined above. Goodwill is only
considered impaired if and when the deferred tax liability is reduced below the
amount at which it was first recognised. This reduction can be caused both by a
reduction in the value of the real estate or a change in local tax regulations. As long
as the deferred tax liability is equal to, or larger than, the prior year, no impairment
is charged to goodwill. Ethan explained its accounting treatment by confirming that
almost all of its goodwill is due to the deferred tax liability and that it is normal in
the industry to account for goodwill in this way.

Since 2008, Ethan has incurred substantial annual losses except for the year ended
31 May 2011, when it made a small profit before tax. In year ended 31 May 2011,
most of the profit consisted of income recognised on revaluation of investment
properties. Ethan had announced early in its financial year ended 31 May 2012 that
it anticipated substantial growth and profit. Later in the year, however, Ethan
announced that the expected profit would not be achieved and that, instead, a
substantial loss would be incurred. Ethan had a history of reporting considerable
negative variances from its budgeted results.

Ethans recognised deferred tax assets have been increasing year-on-year despite
the deferred tax liabilities recognised on business combinations. Ethans deferred
tax assets consist primarily of unused tax losses that can be carried forward which
are unlikely to be offset against anticipated future taxable profits. (11 marks)

(b) Ethan wishes to apply the fair value option rules of IFRS 9 Financial
Instruments to debt issued to finance its investment properties. Ethans argument
for applying the fair value option is based upon the fact that the recognition of gains
and losses on its investment properties and the related debt would otherwise be
inconsistent. Ethan argued that there is a specific financial correlation between the
factors, such as interest rates, that form the basis for determining the fair value of
both Ethans investment properties and the related debt. (7 marks)

(c) Ethan has an operating subsidiary, which has in issue A and B shares, both of
which have voting rights. Ethan holds 70% of the A and B shares and the remainder
are held by shareholders external to the group. The subsidiary is obliged to pay an
annual dividend of 5% on the B shares. The dividend payment is cumulative even if
the subsidiary does not have sufficient legally distributable profit at the time the
payment is due.

In Ethans consolidated statement of financial position, the B shares of the
subsidiary were accounted for in the same way as equity instruments would be,
with the B shares owned by external parties reported as a non-controlling interest.
(5 marks)
Required:
Discuss how the above transactions and events should be recorded in the
consolidated financial statements of Ethan.
Note: The mark allocation is shown against each of the three transactions above.
Professional marks will be awarded in question 3 for the quality of the discussion. (2
marks)
(25 marks)

DEC2012 Q2 Coate
2 (a) Coate, a public limited company, is a producer of ecologically friendly
electrical power (green electricity). Coates revenue comprises mainly the sale of
electricity and green certificates. Coate obtains green certificates under a national
government scheme. Green certificates represent the environmental value of green
electricity. The national government requires suppliers who do not produce green
electricity to purchase a certain number of green certificates. Suppliers who do not
produce green electricity can buy green certificates either on the market on which
they are traded or directly from a producer such as Coate. The national government
wishes to give incentives to producers such as Coate by allowing them to gain extra
income in this way.

Coate obtains the certificates from the national government on satisfactory
completion of an audit by an independent organisation, which confirms the origin of
production. Coate then receives a certain number of green certificates from the
national government depending on the volume of green electricity generated. The
green certificates are allocated to Coate on a quarterly basis by the national
government and Coate can trade the green certificates.

Coate is uncertain as to the accounting treatment of the green certificates in its
financial statements for the period ended 30 November 2012 and how to treat the
green certificates which were not sold at the end of the reporting period. (7 marks)

(b) During the year ended 30 November 2012, Coate acquired an overseas
subsidiary whose financial statements are prepared in a different currency to Coate.
The amounts reported in the consolidated statement of cash flows included the
effect of changes in foreign exchange rates arising on the retranslation of its
overseas operations.

Additionally, the groups consolidated statement of cash flows reported as a loss the
effect of foreign exchange rate changes on cash and cash equivalents as Coate held
some foreign currency of its own denominated in cash.
(5 marks)

(c) Coate also sold 50% of a previously wholly owned subsidiary, Patten, to a third
party, Manis. Manis is in the same industry as Coate. Coate has continued to
account for the investment in Patten as a subsidiary in its consolidated financial
statements. The main reason for this accounting treatment was the agreement that
had been made with Manis, under which Coate would exercise general control over
Pattens operating and financial policies. Coate has appointed three out of four
directors to the board. The agreement also stated that certain decisions required
consensus by the two shareholders.

Under the shareholder agreement, consensus is required with respect to:
significant changes in the companys activities;
plans or budgets that deviate from the business plan;
accounting policies; acquisition of assets above a certain value; employment or
dismissal of senior employees; distribution of dividends or establishment of loan
facilities Coate feels that the consensus required above does not constitute a
hindrance to the power to control Patten, as it is customary within the industry to
require shareholder consensus for decisions of the types listed in the shareholders
agreement. (6 marks)

(d) In the notes to Coates financial statements for the year ended 30 November
2012, the tax expense included an amount in respect of Adjustments to current tax
in respect of prior years and this expense had been treated as a prior year
adjustment. These items related to adjustments arising from tax audits by the
authorities in relation to previous reporting periods.

The issues that resulted in the tax audit adjustment were not a breach of tax law
but related predominantly to transfer pricing issues, for which there was a range of
possible outcomes that were negotiated during 2012 with the taxation authorities.
Further at 30 November 2011, Coate had accounted for all known issues arising
from the audits to that date and the tax adjustment could not have been foreseen
as at 30 November 2011, as the audit authorities changed the scope of the audit.
No penalties were expected to be applied by the taxation authorities. (5 marks)

Required:

Discuss how the above events should be accounted for in the individual or,
as appropriate, the consolidated financial statements of Coate.

Professional marks will be awarded in question 2 for the clarity and quality of the
presentation and discussion.
(2 marks)
(25 marks)

DEC2012 Q3 Blackcutt
3 Blackcutt is a local government organisation whose financial statements are
prepared using International Financial Reporting Standards.

(a) Blackcutt wishes to create a credible investment property portfolio with a view
to determining if any property may be considered surplus to the functional
objectives and requirements of the local government organisation. The following
portfolio of property is owned by Blackcutt.

Blackcutt owns several plots of land. Some of the land is owned by Blackcutt for
capital appreciation and this may be sold at any time in the future. Other plots of
land have no current purpose as Blackcutt has not determined whether it will use
the land to provide services such as those provided by national parks or for short-
term sale in the ordinary course of operations.

The local government organisation supplements its income by buying and selling
property. The housing department regularly sells part of its housing inventory in the
ordinary course of its operations as a result of changing demographics. Part of the
inventory, which is not held for sale, is to provide housing to low-income employees
at below market rental. The rent paid by employees covers the cost of maintenance
of the property.
(7 marks)

(b) Blackcutt has outsourced its waste collection to a private sector provider called
Waste and Co and pays an annual amount to Waste and Co for its services. Waste
and Co purchases the vehicles and uses them exclusively for Blackcutts waste
collection. The vehicles are painted with the Blackcutt local government
organisation name and colours. Blackcutt can use the vehicles and the vehicles are
used for waste collection for nearly all of the assets life. In the event of Waste and
Cos business ceasing, Blackcutt can obtain legal title to the vehicles and carry on
the waste collection service. (6 marks)

(c) Blackcutt owns a warehouse. Chemco has leased the warehouse from Blackcutt
and is using it as a storage facility for chemicals. The national government has
announced its intention to enact environmental legislation requiring property
owners to accept liability for environmental pollution. As a result, Blackcutt has
introduced a hazardous chemical policy and has begun to apply the policy to its
properties. Blackcutt has had a report that the chemicals have contaminated the
land surrounding the warehouse. Blackcutt has no recourse against Chemco or its
insurance company for the clean-up costs of the pollution. At 30 November 2012, it
is virtually certain that draft legislation requiring a clean up of land already
contaminated will be enacted shortly after the year end. (4 marks)

(d) On 1 December 2006, Blackcutt opened a school at a cost of $5 million. The
estimated useful life of the school was 25 years. On 30 November 2012, the school
was closed because numbers using the school declined unexpectedly due to a
population shift caused by the closure of a major employer in the area. The school
is to be converted for use as a library, and there is no expectation that numbers
using the school will increase in the
future and thus the building will not be reopened for use as a school. The current
replacement cost for a library of equivalent size to the school is $21 million.
Because of the nature of the non-current asset, value-in-use and net selling price
are unrealistic estimates of the value of the school. The change in use would have
no effect on the estimated life of the building. (6 marks)

Required:
Discuss how the above events should be accounted for in the financial
statements of Blackcutt.

Professional marks will be awarded in question 3 for the clarity and quality of the
presentation and discussion.
(2 marks)
(25 marks)

June2013 Q2
2 (a) In its annual financial statements for the year ended 31 March 2013,
Verge, a public limited company, had identified the following operating
segments:
(i) Segment 1 local train operations
(ii) Segment 2 inter-city train operations
(iii) Segment 3 railway constructions
The company disclosed two reportable segments. Segments 1 and 2 were
aggregated into a single reportable operating segment. Operating segments
1 and 2 have been aggregated on the basis of their similar business
characteristics, and the nature of their products and services. In the local
train market, it is the local transport authority which awards the contract
and pays Verge for its services. In the local train market, contracts are
awarded following a competitive tender process, and the ticket prices paid
by passengers are set by and paid to the transport authority. In the inter-
city train market, ticket prices are set by Verge and the passengers pay
Verge for the service provided. (5 marks)
(b) Verge entered into a contract with a government body on 1 April 2011 to
undertake maintenance services on a new railway line. The total revenue
from the contract is $5 million over a three-year period. The contract states
that $1 million will be paid at the commencement of the contract but
although invoices will be subsequently sent at the end of each year, the
government authority will only settle the subsequent amounts owing when
the contract is completed. The invoices sent by Verge to date (including $1
million above) were as follows:
Year ended 31 March 2012 $28 million
Year ended 31 March 2013 $12 million
The balance will be invoiced on 31 March 2014. Verge has only accounted
for the initial payment in the financial statements to 31 March 2012 as no
subsequent amounts are to be paid until 31 March 2014. The amounts of
the invoices reflect the work undertaken in the period. Verge wishes to know
how to account for the revenue on the contract in the financial statements
to date.
Market interest rates are currently at 6%. (6 marks)
(c) In February 2012, an inter-city train did what appeared to be superficial
damage to a storage facility of a local company. The directors of the
company expressed an intention to sue Verge but in the absence of legal
proceedings, Verge had not recognised a provision in its financial statements
to 31 March 2012. In July 2012,
Verge received notification for damages of $12m, which was based upon
the estimated cost to repair the building. The local company claimed the
building was much more than a storage facility as it was a valuable piece of
architecture which had been damaged to a greater extent than was
originally thought. The head of legal services advised Verge that the
company was clearly negligent but the view obtained from an expert was
that the value of the building was $800,000. Verge had an insurance policy
that would cover the first $200,000 of such claims. After the financial
statements for the year ended 31 March 2013 were authorised, the case
came to court and the judge determined that the storage facility actually
was a valuable piece of architecture. The court ruled that Verge was
negligent and awarded $300,000 for the damage to the fabric of the facility.
(6 marks)
(d) Verge was given a building by a private individual in February 2012. The
benefactor included a condition that it must be brought into use as a train
museum in the interests of the local community or the asset (or a sum
equivalent to the fair value of the asset) must be returned. The fair value of
the asset was $15 million in February 2012. Verge took possession of the
building in May 2012. However, it could not utilise the building in
accordance with the condition until February 2013 as the building needed
some refurbishment and adaptation and in order to fulfil the condition.
Verge spent $1 million on refurbishment and adaptation.
On 1 July 2012, Verge obtained a cash grant of $250,000 from the
government. Part of the grant related to the creation of 20 jobs at the train
museum by providing a subsidy of $5,000 per job created. The remainder of
the grant related to capital expenditure on the project. At 31 March 2013,
all of the new jobs had been created.
(6 marks)

Required:
Advise Verge on how the above accounting issues should be dealt with in its
financial statements for the years ending 31 March 2012 (where applicable)
and 31 March 2013.
Note: The mark allocation is shown against each of the four issues above.
Professional marks will be awarded in question 2 for clarity and quality of
presentation. (2 marks)
(25 marks)

June2013 Q3
3 (a) Janne is a real estate company, which specialises in industrial property.
Investment properties including those held for sale constitute more than 80%
of its total assets.
It is considering leasing land from Maret for a term of 30 years. Janne plans
to use the land for its own office development but may hold the land for
capital gain. The title will remain with Maret at the end of the initial lease
term. Janne can lease the land indefinitely at a small immaterial rent at the
end of the lease or may purchase the land at a 90% discount to the market
value after the initial lease term. Janne is to pay Maret a premium of $3
million at the commencement of the lease, which equates to 70% of the
value of the land. Additionally, an annual rental payment is to be made,
based upon 4% of the market value of the land at the commencement of
the lease, with a market rent review every five years. The rent review sets
the rent at the higher of the current rent or 4% of the current value of the
land. Land values have been rising for many years.
Additionally, Janne is considering a suggestion by Maret to incorporate a
clean break clause in the lease which will provide Janne with an option of
terminating the agreement after 25 years without any further payment and
also to include an early termination clause after 10 years that would require
Janne to make a termination payment which would recover the lessors
remaining investment. (12 marks)

(b) Janne measures its industrial investment property using the fair value
method, which is measured using the new-build value less obsolescence.
Valuations are conducted by a member of the board of directors. In order to
determine the obsolescence, the board member takes account of the age of
the property and the nature of its use. According to the board, this method
of calculation is complex but gives a very precise result, which is accepted
by the industry. There are sales values for similar properties in similar
locations available as well as market rent data per square metre for similar
industrial buildings. (5 marks)

(c) Janne operates through several subsidiaries and reported a subsidiary as
held for sale in its annual financial statements for both 2012 and 2013. On 1
January 2012, the shareholders had, at a general meeting of the company,
authorised management to sell all of its holding of shares in the subsidiary
within the year. Janne had shown the subsidiary as an asset held for sale
and presented it as a discontinued operation in the financial statements at
31 May 2012. This accounting treatment had been continued in Jannes
2013 financial
statements.

Janne had made certain organisational changes during the year to 31 May
2013, which resulted in additional activities being transferred to the
subsidiary. Also during the year to 31 May 2013, there had been draft
agreements and some correspondence with investment bankers, which
showed in principle only that the subsidiary was still for sale. (6 marks)

Required:
Advise Janne on how the above accounting issues should be dealt with in its
financial statements.
Note: The mark allocation is shown against each of the three issues above.
Professional marks will be awarded in question 3 for clarity and quality of
presentation. (2 marks)
(25 marks)

Q4 revision
DEC2010 Q4 SMEs
Articles from ACCA global website
Article1: HEDGE ACCOUNTING
Article2: IMPAIRMENT OF FINANCIAL ASSETS
Article3: WHEN DOES DEBT SEEM TO BE EQUITY?
Article4: REVENUE RECOGNITION
Article5: LEASE - OPERATING OR FINANCE?

(a) Leasing is important to Holcombe, a public limited company as a method of
financing the business. The Directors feel that it is important that they provide
users of financial statements with a complete and understandable picture of the
entitys leasing activities. They believe that the current accounting model is
inadequate and does not meet the needs of users of financial statements.
Holcombe has leased plant for a fixed term of six years and the useful life of the
plant is 12 years. The lease is non-cancellable, and there are no rights to extend the
lease term or purchase the machine at the end of the term. There are no
guarantees of its value at that point. The lessor does not have the right of access to
the plant until the end of the contract or unless permission is granted by Holcombe.
Fixed lease payments are due annually over the lease term after delivery of the
plant, which is maintained by Holcombe. Holcombe accounts for the lease as an
operating lease but the directors are unsure as to whether the accounting treatment
of an operating lease is conceptually correct.
Required
(i) Discuss the reasons why the current lease accounting standards may fail to meet
the needs of users and could be said to be conceptually flawed. (7 marks)

(ii) Discuss whether the plant operating lease in the financial statements of
Holcombe meets the definition of an asset and liability as set out in Conceptual
Framework for Financial Reporting.
(7 marks)
Professional marks will be awarded in part (a) (i) and (ii) for clarity and quality of

(b) Holcombe also owns an office building with a remaining useful life of 30 years.
The carrying amount of the building is $120 million and its fair value is $150 million.
On 1 May 20X4, Holcombe sells the building to Brook, a public limited company, for
its fair value and leases it back for five years at an annual rental payable in arrears
of $16 million on the last day of the financial year (30 April). This is a fair market
rental.
Holcombes incremental borrowing rate is 8%.
On 1 May 20X4, Holcombe has also entered into a short operating lease agreement
to lease another building. The lease will last for three years and is currently $5
million per annum. However an inflation adjustment will be made at the conclusion
of leasing years 1 and 2. Currently inflation is 4% per annum.

The following discount factors are relevant (8%).
Single cash flow Annuity
Year 1 0926 0926
Year 2 0857 1783
Year 3 0794 2577
Year 4 0735 3312
Year 5 0681 3993

Required
(i) Show the accounting entries in the year of the sale and lease back assuming that
the operating lease is recognised as an asset in the statement of financial
position of Holcombe. (6 marks)
(ii) State how the inflation adjustment on the short term operating lease should be
dealt with in the financial statements of Holcombe. (3 marks)
(Total = 25 marks)

Extra leasing exercise:

Holcombe signs a ten year lease for a property on 1 January 2013. The lease rental
is $400,000 per annum, but the first two years are rent free. The property has a
useful life of 25 years at 1 January 2013.

4 The publication of IFRS 9, Financial Instruments, represents the completion of the
first stage of a three-part project to replace IAS 39 Financial Instruments:
Recognition and Measurement with a new standard. The new standard purports to
enhance the ability of investors and other users of financial information to
understand the accounting of financial assets and reduces complexity.

Required:
(a)
(i) Discuss the approach taken by IFRS 9 in measuring and classifying
financial assets and the main effect that IFRS 9 will have on accounting for
financial assets. (11 marks)

(ii) Grainger, a public limited company, has decided to adopt IFRS 9 prior to
January 2012 and has decided to restate comparative information under IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors. The entity has an
investment in a financial asset which was carried at amortised cost under IAS 39
but will be valued at fair value through profit and loss (FVTPL) under IFRS 9. The
carrying value of the assets was $105,000 on 30 April 2010 and $110,400 on 30
April 2011. The fair value of the asset was $106,500 on 30 April 2010 and $111,000
on 30 April 2011. Grainger has determined that the asset will be valued at FVTPL at
30 April 2011.

Required:
Discuss how the financial asset will be accounted for in the financial
statements of Grainger in the year ended 30 April 2011. (4 marks)

(b) Recently, criticisms have been made against the current IFRS impairment
model for financial assets (the incurred loss model). The issue with the incurred loss
model is that impairment losses (and resulting write-downs in the reported value of
financial assets) can only be recognised when there is evidence that they exist and
have been incurred. Reporting entities are not allowed currently to consider the
effects of expected losses. There is a view that earlier recognition of loan losses
could potentially reduce the problems incurred in a credit crisis.

Grainger has a portfolio of loans of $5 million which was initially recognised on 1
May 2010. The loans mature in 10 years and carry an interest rate of 16%.
Grainger estimates that no loans will default in the first two years, but from the
third year onwards, loans will default at an annual rate of about 9%. If the loans
default as expected, the rate of return from the portfolio will be approximately
907%. The number of loans are fixed without any new lending or any other
impairment provisions.
Required:
(i) Discuss briefly the issues related to considering the effects of expected
losses in dealing with impairment of financial assets. (4 marks)
(ii) Calculate the impact on the financial statements up to the year ended
30 April 2013 if Grainger anticipated the expected losses on the loan
portfolio in year three. (4 marks)

Professional marks will be awarded in question 4 for clarity and quality of discussion.
(2 marks)
(25 marks)

Wallet is considering partnering with two other businesses, Danny and Louis.
Wallet is a high tech business and a large multinational group. Danny is a
large manufacturer. Louis is a small manufacturer in Ireland. The proposal is
to build high tech manufacturing factory in Ireland to produce large volumes
of pad components for worldwide sales. Wallet will bring machines and
knowledge. Danny will build the factory. Louis will bring local knowledge, eg,
cultures and relationship with local government. There are four proposals
being considered. But in all cases each of the partners will have the right to
one third of the profits in the new business. The four proposals are:-
Proposal one
The new entity will be incorporated.
Each partner will hold one third of the shares.
But only Wallet shares will have voting rights. The Danny and Louis shares
will have equal ownership to the Wallet shares but will have no voting power.
(5 marks)
Proposal two
All shares will have equal voting rights and equal ownership but all decisions
must be made by unanimous vote.
(5 marks)
Proposal three
All shares will have equal voting rights and equal ownership and all
decisions must be made by majority vote.
(5 marks)

Proposal four
The new entity will not be incorporated.
Each partner will have the right to one third of the profit.
Assets are still belonging to each parity.
All the partners will have equal voting rights and equal ownership but all
decisions must be made by unanimous vote.
(5 marks)
Disclosures
The directors of Wallet would also like to know how the above would be
disclosed regarding the above 4 proposals.
(4 marks)
Theres 1 mark for the quality of your answer.

Required
Discuss the proposals, disclosure above and explain how each
proposal would be dealt with by Wallet group.
(25 marks)

Investment
Also Wallet holds a 60% ownership and voting interest in a Didichip
manufacturer called Didi. Wallet sees its investment as speculative venture
capital. Wallet gives minimal direction to Didi and plans to sell the equity in
three years time. Wallet is aware that the International Accounting
Standards Board (IASB) is developing a standard on Investment Entities and
so wish to avoid the consolidation of Didi.
(3marks)
Required:
(a) discuss the investment entity concept

Liabilities and equity
Wallet also owns 90% of the voting share capital of another entity called Chacha.
The voting share capital has the right to the residual in the event that Chacha is
liquidated and the right to dividends in equal proportion to one another. However,
the company need only pay a dividend to voting shares in the event that there is
sufficient cash. Further Wallet also owns 80% of the preference share capital in
Chacha. These preference shareholders have the right to 8% of nominal value as a
dividend throughout their lifetime and the right to the repayment of the nominal
value from Chacha in five years from now. But Wallet is also considering instructing
Chacha to issue Special share capital. This Special share capital will have voting
rights similar to the existing voting share capital but will attract a guaranteed
dividend of 2% of nominal value and have rights to a share of the dividend paid to
voting share capital and have rights to the residual in the event of liquidation.
The directors of Wallet are aware that the International Financial Reporting
Standards are unclear about the distinction between liabilities and equity and are
seeking advice on how to recognise the above three classes of financial instrument
both in the entity financial statements of Chacha and the group financial statements
of Wallet.

Required
(b) Discuss the reporting of liabilities and equity application. (6marks)

DEC2010 Q4 SMEs

(a) The principal aim when developing accounting standards for small to medium-
sized enterprises (SMEs) is to provide a framework that generates relevant, reliable,
and useful information which should provide a high quality and understandable set
of accounting standards suitable for SMEs. There is no universally agreed definition
of an SME and it is difficult for a single definition to capture all the dimensions of a
small or medium-sized business.

The main argument for separate SME accounting standards is the undue cost
burden of reporting, which is proportionately heavier for smaller firms.

Required:
(i) Comment on the different approaches which could have been taken by
the International Accounting Standards Board (IASB) in developing the
IFRS for Small and Medium-sized Entities (IFRS for SMEs), explaining
the approach finally taken by the IASB. (6 marks)

(ii) Discuss the main differences and modifications to IFRS which the IASB
made to reduce the burden of reporting for SMEs, giving specific
examples where possible and include in your discussion how the Board
has dealt with the problem of defining an SME. (8 marks)
Professional marks will be awarded in part (a) for clarity and quality of discussion.
(2 marks)
(b) Whitebirk has met the definition of a SME in its jurisdiction and wishes to
comply with the IFRS for Small and Medium-sized Entities. The entity wishes to
seek advice on how it will deal with the following accounting issues in its financial
statements for the year ended 30 November 2010.The entity already prepares its
financial statements under full IFRS.
(i) Defined benefit obligation
30 NOV
2009($m) 2010($m)
Present value of defined benefit obligation 1.5 2.0
Fair value of plan assets 1.2 1.65
Unrecognized actuarial losses 0.19 0.21
Average working lives of employees 12years

The entity currently uses the corridor approach to recognise actuarial gains and
losses.
(ii) Whitebirk purchased 90% of Close, a SME, on 1 December 2009. The purchase
consideration was $57 million and the value of Closes identifiable assets was $6
million. The value of the non-controlling interest at 1 December 2009 was estimated
at $07 million. Whitebirk has used the full goodwill method to account for business
combinations and the estimated life of goodwill cannot be estimated with any
accuracy. Whitebirk wishes to know how to account for goodwill under the IFRS for
SMEs.

(iii) Whitebirk has incurred $1 million of research expenditure to develop a new
product in the year to 30 November 2010. Additionally, it incurred $500,000 of
development expenditure to bring another product to a stage where it is ready to be
marketed and sold.

Required:
Discuss how the above transactions should be dealt with in the financial
statements of Whitebirk, with reference to the IFRS for Small and Medium-
sized Entities. (9 marks)
(25 marks)

Articles (current issues) [From ACCA global website]

IFRS FOR SMESIFRS for SMEs

Here is an article by Graham Holt. For more articles by the examiner go to the
ACCA CPD webpage and scroll down picking out the corporate reporting articles.
Here is the link:-

http://www.accaglobal.com/gb/en/member/accounting-business/ab-cpd.html

The principal aim when developing accounting standards for small- to medium-
sized enterprises (SMEs) is to provide a framework that generates relevant,
reliable and useful information, which should provide a high-quality and
understandable set of accounting standards suitable for SMEs. In July, the
International Accounting Standards Board (IASB) issued IFRS for Small and
Medium-Sized Entities (IFRS for SMEs). This standard provides an alternative
framework that can be applied by eligible entities in place of the full set of
International Financial Reporting Standards (IFRS).

IFRS for SMEs is a self-contained standard, incorporating accounting principles
based on existing IFRS, which have been simplified to suit the entities that fall
within its scope. There are a number of accounting practices and disclosures that
may not provide useful information for the users of SME financial statements. As a
result, the standard does not address the following topics:

Earnings per share

Interim financial reporting

Segment reporting

Insurance (because entities that issue insurance contracts are not eligible to use
the standard)

Assets held for sale.

In addition, there are certain accounting treatments that are not allowable under
the standard. Examples are the revaluation model for property, plant and
equipment and intangible assets, and proportionate consolidation for investments
in jointly controlled entities. Generally, there are simpler methods of accounting
available to SMEs than the disallowed accounting practices. The standard also
eliminates the 'available-for-sale' and 'held-to maturity' classifications of IAS 39,
Financial Instruments: Recognition and Measurement.

All financial instruments are measured at amortised cost using the effective
interest method, except that investments in non-convertible and non-puttable
ordinary and preference shares that are publicly traded, or whose fair value can
otherwise be measured reliably, are measured at fair value through profit or loss.
All amortised cost instruments must be tested for impairment. At the same time,
the standard simplifies the hedge accounting and derecognition requirements.
However, SMEs can also choose to apply IAS 39 in full.
The standard also contains a section on transition, which allows all of the
exemptions in IFRS 1, First-Time Adoption of International Financial Reporting
Standards. It also contains 'impracticability' exemptions for comparative
information and the restatement of the opening statement of financial position.
As a result of the above, IFRS require SMEs to comply with less than 10% of the
volume of accounting requirements applicable to listed companies.

What is an SME?

There is no universally agreed definition of an SME. No single definition can
capture all the dimensions of a small- or medium-sized enterprise, nor can it be
expected to reflect the differences between firms, sectors, or countries at
different levels of development. Most definitions based on size use measures such
as number of employees, balance sheet total, or annual turnover. However, none
of these measures apply well across national borders. IFRS for SMEs is intended
for use by entities that have no public accountability (ie, their debt or equity
instruments are not publicly traded).

Ultimately, the decision regarding which entities should use IFRS for SMEs stays
with national regulatory authorities and standard-setters. These bodies will often
specify more detailed eligibility criteria. If an entity opts to use IFRS for SMEs, it
must follow the standard in its entirety it cannot cherry pick between the
requirements of IFRS for SMEs and the full set.

The IASB makes it clear that the prime users of IFRS are the capital markets.
This means that IFRS are primarily designed for quoted companies and not SMEs.
The vast majority of the world's companies are small and privately owned, and it
could be argued that full International Financial Reporting Standards are not
relevant to their needs or to their users. It is often thought that small business
managers perceive the cost of compliance with accounting standards to be
greater than their benefit. Because of this, the IFRS for SMEs makes numerous
simplifications to the recognition, measurement and disclosure requirements in
full IFRS. Examples of these simplifications are:

Goodwill and other indefinite-life intangibles are amortised over their useful lives,
but if useful life cannot be reliably estimated, then 10 years.

A simplified calculation is allowed if measurement of defined benefit pension plan
obligations (under the projected unit credit method) involve undue cost or effort.

The cost model is permitted for investments in associates and joint ventures.

The main argument for separate SME accounting standards is the undue cost
burden of reporting, which is proportionately heavier for smaller firms. The cost
of applying the full set of IFRS may simply not be justified on the basis of user
needs. Further, much of the current reporting framework is based on the needs of
large business, so SMEs perceive that the full statutory financial statements are
less relevant to the users of SME accounts. SMEs also use financial statements for a
narrower range of decisions, as they have less complex transactions and therefore
less need for a sophisticated analysis of financial statements. Therefore, the
disclosure requirements in the IFRS for SMEs are also substantially reduced.
Differing approaches

Those who argue against different reporting requirements for SMEs say the system
could lead to a two-tier system of reporting. Entities should not be subject to
different rules, which could give rise to different 'true and fair views'.

There were a number of approaches that could have been taken to developing
standards for SMEs. An alternative could have been for generally accepted
accounting principles for SMEs to have been developed on a national basis, with
IFRS focusing on accounting for listed company activities. However, the main issue
here would be that the practices developed for SMEs may not have been
consistent and may have lacked comparability across national boundaries. Also, if
an SME wished to later list its shares on a capital market, the transition to IFRS
could be harder.

Under another approach, the exemptions given to smaller entities would have
been prescribed in the mainstream accounting standard. For example, an appendix
could have been included within the standard, detailing those exemptions given to
smaller enterprises. Yet another approach would have been to introduce a
separate standard comprising all the issues addressed in IFRS that were relevant
to SMEs.

As it stands

IFRS for SMEs is a self-contained set of accounting principles, based on full IFRS,
but simplified so that they are suitable for SMEs. The standard has been
organised by topic with the intention that the standard is user-friendlier for
preparers and users of SME financial statements. IFRS for SMEs and full IFRS are
separate and distinct frameworks.

Therefore, the standard for SMEs is by nature not an independently developed set
of standards. It is based on recognised concepts and pervasive principles and it
allows easier transition to full IFRS if the SME later becomes a public listed entity.
In deciding on the modifications to make to IFRS, the needs of the users have
been taken into account, as well as the costs and other burdens imposed upon
SMEs by the IFRS.

Relaxation of some of the measurement and recognition criteria in IFRS had to be
made in order to achieve the reduction in these costs and burdens. Some
disclosure requirements are intended to meet the needs of listed entities, or to
assist users in making forecasts of the future. Users of financial statements of
SMEs often do not make these kinds of forecasts.

Small companies pursue different strategies, and their goals are more likely to be
survival and stability rather than growth and profit maximisation. The
stewardship function is often absent in small companies, with the accounts
playing an agency role between the owner-manager and the bank.

Where financial statements are prepared using the standard, the basis of
presentation note and the auditor's report will refer to compliance with IFRS for
SMEs. This reference may improve SME's access to capital. The standard also
contains simplified language and explanations of the standards.
The IASB has not set an effective date for the standard because the decision as
to whether to adopt IFRS for SMEs is a matter for each jurisdiction.

In the absence of specific guidance on a particular subject, an SME may, but is
not required to, consider the requirements and guidance in full IFRS dealing with
similar issues. The IASB has produced full implementation guidance for SMEs.

IFRS for SMEs is a response to international demand from developed and
emerging economies for a rigorous and common set of accounting standards for
smaller and medium-sized enterprises that is much easier to use than the full set
of IFRS.

It should provide improved comparability for users of accounts while enhancing
the overall confidence in the accounts of SMEs, and reduce the significant costs
involved in maintaining standards on a national basis.
REALIGNING THE FRAMEWORK

By Graham Holt

Graham Holt examines the discussion paper on the conceptual framework for
financial reporting issued by the IASB in July

In July 2013 the International Accounting Standards Board (IASB) issued a
discussion paper on a new version of its conceptual framework, which provides
the fundamental basis for development of International Financial Reporting
Standards (IFRS).

The discussion paper gives users and preparers of financial statements an
opportunity to offer input into the direction of financial reporting standards. The
paper sets out the fundamental principles of accounting necessary to develop
robust and consistent standards. While it lacks the immediacy of other IASB
proposals, it will nevertheless be a significant long-term influence on the direction
that accounting standards will take.

The paper introduces revised thinking on the reporting of financial performance,
the measurement of assets and liabilities, and presentation and disclosure. The
paper proposes that the primary purpose of the framework - which underpins the
accounting standards - is to identify consistent principles that the IASB can use in
developing and revising those standards. The framework may also help in
understanding and interpreting the standards.

The IASB framework was originally published in the late 1980s. In 2010 two
chapters of a new framework were issued: Chapter 1, The Objective of General
Purpose Financial Reporting, and Chapter 3, Qualitative Characteristics of Useful
Financial Information. There are no plans for a fundamental reconsideration of
these chapters. The concept of a reporting entity is not considered in the
discussion paper because the exposure draft of 2010 is to be used, with related
feedback, in developing guidance in this area.

The discussion paper proposes to redefine assets and liabilities as:

An asset is a present economic resource controlled by the entity because of past
events.

A liability is a present obligation of the entity to transfer an economic resource
because of past events.

An 'economic resource', it should be noted, is a right, or other source of value,
that is capable of producing economic benefits.

Currently the definitions of assets and liabilities require a probable expectation of
future economic benefits or resource outflow. The IASB's initial view is that the
definitions of assets and liabilities should not require an expected or probable
inflow or outflow as it should be sufficient that a resource or obligation can
produce or result in a transfer of economic benefits. Thus, a guarantee could
qualify as a liability even though the obligation to transfer resources is
conditional. However, the measurement of an asset or liability will be affected by
the potential outcome. The IASB still believes that a liability should not be defined
as limited to obligations that are enforceable against the entity.
Under the discussion paper, constructive obligations would qualify as liabilities.
Liabilities would not arise where there is an economic necessity to transfer an
economic resource unless there is an obligation to do so. Thus a group
reconstruction would not necessarily create a liability.

However, the IASB believes that certain avoidable obligations could qualify as a
liability - for example, directors' bonuses depending on employment conditions. No
decision has been made on whether the definition of a liability should be limited to
obligations that the entity has no practical ability to avoid or should include
conditional obligations resulting from past events.

The discussion paper sets out that the framework's definition of control should be
in line with its definition of an asset. An entity controls an economic resource if it
has the present ability to direct the resource's use so as to obtain economic
benefits from it. The exposure draft on revenue recognition uses the phrase
'substantially all' when referring to benefits from the asset but the IASB feels this
phrase in this context would be confusing as an entity would recognise only the
rights which it controls. For example, if an entity has the right to use machinery
on one working day per week, then it should recognise 20% of the economic
benefits (assuming a five-day working week) as it does not have all or
substantially all of the economic benefits of the machinery.

The discussion paper proposes that equity remain defined as being equal to
assets less liabilities. However, the paper does propose that an entity be required
to present a detailed statement of changes in equity that provides more
information regarding different classes of equity, and the transfers between these
different classes.

The distinction between equity and liabilities focuses on the definition of a
liability. The current guidance on the difference between equity and liability is
complicated. The paper identifies two types of approach: narrow equity and strict
obligation.

The narrow equity approach treats equity as being only the residual class issued,
with changes in the measurement of other equity claims recognised in profit or
loss.

Under the strict obligation approach, all equity claims are classified as equity with
obligations to deliver cash or assets being classified as liabilities. Any changes in
the measurement of equity claims would be shown in the statement of changes in
equity.

If the latter approach were adopted, certain transactions (eg the issuance of a
variable number of equity shares worth a fixed monetary amount) currently
classed as liabilities would not be so designated because they do not involve an
obligation to transfer cash or assets.

The IASB has come to the view that the objective of measurement is to
contribute to the faithful representation of relevant information about the
resources of the entity, claims against the entity and changes in resources and
claims, and about how efficiently and effectively the entity's management and
governing board have discharged their responsibilities to use the entity's
resources. The IASB believes that a single measurement basis may not provide
the most relevant information for users.
When selecting the measurement basis, the information that measurement will
produce in both the statement of financial position and the statement of profit or
loss and other comprehensive income (OCI) should be considered. Further, the
selection of a measurement of a particular asset or a particular liability should
depend on how that asset contributes to the entity's future cashflows and how
the entity will settle or fulfil that liability.

NARROW AND BROAD

The current framework does not contain principles to determine the items to be
recognised in profit or loss, and in OCI and whether, and when, items can be
recycled from OCI to profit or loss. In terms of what items would be included in
OCI, the paper proposes two approaches: 'narrow' and 'broad'.

Under the narrow approach, OCI would include bridging items and mismatched
remeasurements. OCI would be used to bridge a measurement difference
between the statement of financial position and the statement of profit or loss.
This would include, for example, investments in financial instruments with profit
or losses reported through OCI. Mismatched remeasurements occur when the
item of income or expense represents the effects of part of a linked set of assets,
liabilities or past or planned transactions. It represents their effect so
incompletely that, in the opinion of the IASB, the item provides little relevant
information about the return the entity has made on its economic resources in
the period.

An example is a cashflow hedge where fair value gains and losses are deferred in
OCI until the hedged transaction affects profit or loss. The paper suggests that
under the narrow OCI approach, an entity should subsequently have to recycle
amounts from OCI to profit or loss; and under the mismatched remeasurements
approach the amount should be recycled when the item can be presented with
the matched item.

The issue that arises here is that, under the narrow approach, the treatment of
certain items would be inconsistent with current IFRS - eg revaluation gains and
losses for property, plant and equipment.

The paper also sets out a third category - 'transitory remeasurements'. These are
remeasurements of long-term assets and liabilities that are likely to reverse or
significantly change over time. These items would be shown in OCI - for example,
the remeasurement of a net defined pension benefit liability or asset. The IASB
would decide in each IFRS whether a transitory remeasurement should be
subsequently recycled. However, the IASB has not yet determined which
approach it will use.
RECOGNITION

Recognition and derecognition deals with the principles and criteria for assets and
liabilities to be included or removed from an entity's financial statements. The
paper sets out to bring this into line with the principles used in IASB's current
projects. It proposes that assets and liabilities should be recognised by an entity,
unless that results in irrelevant information, the costs outweigh the benefits, or
the measure of information does not represent the transaction faithfully enough.

Derecognition is not currently addressed in the framework and the paper
proposes derecognition should occur when the recognition criteria are no longer
met. The question for the IASB is whether to replace the current concept based
on the loss of the economic risks and benefits of the asset with the concept based
on the loss of control over the legal rights comprised in the asset. A concept
based on control over the legal rights could result in several items going off
balance sheet.

Proposed revisions to the disclosure framework include the objective of the
primary financial statements, the objective of the notes to the financial statements,
materiality and communication principles. The IASB has also identified both short-
term and long-term steps for addressing disclosure requirements in existing IFRS.

These proposals are an attempt to make the conceptual framework a blueprint for
developing consistent, high-quality, principles-based accounting standards. It is
important that there is dialogue about the whole of IFRS and for the IASB to
achieve buy-in to its core principles by enabling constituents to help shape the
future of IFRS.
INTEGRATED REPORTING

Here is another article by Graham Holt

The International Integrated Reporting Council (IIRC) has recently released a
framework for integrated reporting. This follows a three-month global
consultation and trials in 25 countries. The framework establishes principles and
concepts that govern the overall content of an integrated report.

An integrated report sets out how the organisation's strategy, governance,
performance and prospects lead to the creation of value. There is no
benchmarking for the above matters and the report is aimed primarily at the
private sector, but it could be adapted for public sector and not-for-profit
organisations.

The primary purpose of an integrated report is to explain to providers of financial
capital how an organisation creates value over time. An integrated report benefits
all stakeholders interested in a company's ability to create value, including
employees, customers, suppliers, business partners, local communities, legislators,
regulators and policymakers, although it is not directly aimed at all stakeholders.
Providers of financial capital can have a significant effect on the capital
allocation and attempting to aim the report at all stakeholders would be an
impossible task and would reduce the focus and increase the length of the report.
This would be contrary to the objectives of the report, which is value creation.

Historical financial statements are essential in corporate reporting, particularly for
compliance purposes, but do not provide meaningful information regarding
business value. Users need a more forward-looking focus without the necessity of
companies providing their own forecasts.

Companies have recognised the benefits of showing a fuller picture of company
value and a more holistic view of the organisation. The International Integrated
Reporting Framework will encourage the preparation of a report that shows their
performance against strategy, explains the various capitals used and affected,
and gives a longer-term view of the organisation. The integrated report is
creating the next generation of the annual report as it enables stakeholders to
make a more informed assessment of the organisation and its prospects.

CULTURE CHANGE

The IIRC has set out a principle-based framework rather than specifying a
detailed disclosure and measurement standard. This enables each company to set
out its own report rather than adopt a checklist approach. The culture change
should enable companies to communicate their value creation better than the
often boilerplate disclosures under International Financial Reporting Standards
(IFRS).

The report acts as a platform to explain what creates the underlying value in a
business and how management protects this value. This gives the report more
business relevance than the compliance-led approach currently used. Integrated
reporting will not replace other forms of reporting, but the vision is that preparers
will pull together relevant information already produced to explain the key drivers
of their business's value.
Information will only be included in the report where it is material to the
stakeholder's assessment of the business. There were concerns that the term
'materiality' had a certain legal connotation, with the result that some entities
may feel they should include regulatory information in the integrated report.
However, the IIRC concluded that the term should continue to be used in this
context as it is well understood.

The integrated report aims to provide an insight into the company's resources
and relationships which are known as the capitals and how the company interacts
with the external environment and the capitals to create value. These capitals can
be financial, manufactured, intellectual, human, social and relationship, and
natural capital, but companies need not adopt these classifications. The purpose
of this framework is to establish principles and content that governs the report,
and to explain the fundamental concepts that underpin them. The report should
be concise, reliable and complete, including all material matters, both positive
and negative, and presented in a balanced way without material error.

KEY COMPONENTS

Integrated reporting is built around the following key components:
Organisational overview and the external environment under which it operates.
Governance structure and how this supports its ability to create value.
Business model.

Risks and opportunities and how they are dealing with them and how they affect
the company's ability to create value.

Strategy and resource allocation.

Performance and achievement of strategic objectives for the period and
outcomes.

Outlook and challenges facing the company and their implications.

The basis of presentation needs to be determined, including what matters are to
be included in the integrated report and how the elements are quantified or
evaluated.

The framework does not require discrete sections to be compiled in the report,
but there should be a high-level review to ensure that all relevant aspects are
included. The linkage across the above content can create a key storyline and can
determine the major elements of the report, such that the information relevant to
each company would be different.

An integrated report should provide insight into the nature and quality of the
organisation's relationships with its key stakeholders, including how and to what
extent the organisation understands, takes into account and responds to their
needs and interests. Furthermore, the report should be consistent over time to
enable comparison with other entities.

An integrated report may be prepared in response to existing compliance
requirements; for example, a management commentary. Where that report is
also prepared according to the framework or even beyond the framework, it can
be considered an integrated report. An integrated report may be either a
standalone report or be included as a distinguishable part of another report or
communication. For example, it can be included in the company's financial
statements.
NATURE OF VALUE

The IIRC considered the nature of value and value creation. These terms can
include the total of all the capitals, the benefit captured by the company, the
market value or cashflows of the organisation, and the successful achievement of
the company's objectives. However, the conclusion reached was that the
framework should not define value from any one particular perspective, because
value depends upon the individual company's own perspective. It can be shown
through movement of capital and can be defined as value created for the
company or for others. An integrated report should not attempt to quantify value,
as assessments of value are left to those using the report.

Many respondents felt that there should be a requirement for a statement from
those 'charged with governance' acknowledging their responsibility for the
integrated report in order to ensure the reliability and credibility of the integrated
report. Additionally it would increase the accountability for the content of the
report.

The IIRC feels that the inclusion of such a statement may result in additional
liability concerns, such as inconsistency with regulatory requirements in certain
jurisdictions and could lead to a higher level of legal liability. The IIRC also felt
that the above issues might result in a slower take-up of the report and decided
that those 'charged with governance' should, in time, be required to acknowledge
their responsibility for the integrated report, while at the same time recognising
that reports in which they were not involved would lack credibility.

There has been discussion about whether the framework constitutes suitable
criteria for report preparation and for assurance. The questions asked concerned
measurement standards to be used for the information reported and how a
preparer can ascertain the completeness of the report.

FUTURE DISCLOSURES

There were concerns over the ability to assess future disclosures, and
recommendations were made that specific criteria should be used for
measurement, the range of outcomes and the need for any confidence intervals
to be disclosed. The preparation of an integrated report requires judgment, but
there is a requirement for the report to describe its basis of preparation and
presentation, including the significant frameworks and methods used to quantify
or evaluate material matters. Also included is the disclosure of a summary of how
the company determined the materiality limits and a description of the reporting
boundaries.

The IIRC has stated that the prescription of specific key KPIs (key performance
indicators) and measurement methods is beyond the scope of a principles-based
framework. The framework contains information on the principle-based approach
and indicates that there is a need to include quantitative indicators whenever
practicable and possible. Additionally, consistency of measurement methods across
different reports is of paramount importance. There is outline guidance on the
selection of suitable quantitative indicators.
A company should consider how to describe the disclosures without causing a
significant loss of competitive advantage. The entity will consider what advantage a
competitor could actually gain from information in the integrated report, and will
balance this against the need for disclosure.

Companies struggle to communicate value through traditional reporting. The
framework can prove an effective tool for businesses looking to shift their
reporting focus from annual financial performance to long-term shareholder value
creation. The framework will be attractive to companies who wish to develop their
narrative reporting around the business model to explain how the business has
been developed.
TRANSPARENT AND CONSISTENT

By Graham Holt

Transparency and the consistent application of IFRS in financial reporting are key
to making financial markets work smoothly

The European Securities and Markets Authority (ESMA) has recently published its
annual statement defining the European common enforcement priorities for 2013
financial statements. The aim is to try to foster transparency and the consistent
application of IFRS (International Financial Reporting Standards) to help the
financial markets function.

With the help of European national enforcers, ESMA has identified several
financial reporting topics that should be considered in the preparation of the
financial statements of listed companies for the year ending 31 December 2013.
Those topics are:

impairment of non-financial assets

measurement and disclosure of post-employment benefit obligations
fair value measurement and disclosure
disclosures related to significant accounting policies, judgments and estimates

measurement of financial instruments and disclosure of related risk with
relevance to financial institutions.

Not surprisingly, ESMA says that national regulators may also focus on additional
relevant topics. It issued a similar statement a year ago and post-employment
benefit obligations appears on both listings. ESMA builds on its 2012 statement
by emphasising the need for transparency and the importance of appropriate and
consistent application of recognition, measurement and disclosure principles. ESMA
and the European national enforcers will monitor and assess the application of IFRS
requirements relating to the items in this statement.

These European common enforcement priorities will be incorporated into the
reviews performed by national enforcers. The guidelines are not statutory, but
ESMA hopes that awareness campaigns will lead national regulators to take
account of the new priorities. The watchdog will also monitor national regulators'
application of the priorities and will publish progress reviews to encourage
national regulators to comply.

Users of financial statement have expressed concerns over the use of 'boilerplate'
disclosures for transactions that are not relevant or are immaterial to the entity.
The view is that entities should disclose only applicable accounting policies and
focus on entity-specific information rather than quoting extensively from IFRS.

IMPAIRMENT OF NON-FINANCIAL ASSETS

Continued slow economic growth in Europe could indicate that non-financial
assets will continue to generate lower than expected cashflows especially in those
industries experiencing a downturn in fortunes. In 2012, ESMA suggested paying
particular attention to the valuation of goodwill and intangible assets with
indefinite life spans.
This year, it has again included the impairment of non-financial assets in the
common enforcement priorities with a focus on certain specific areas. These areas
are cashflow projections, disclosure of key assumptions and judgments, and
appropriate disclosure of sensitivity analysis for material goodwill and intangible
assets with indefinite useful lives.

In measuring value-in-use, cashflow projections should be based on reasonable
and supportable assumptions that represent the best estimate of the range of
future economic conditions. IAS 36, Impairment of Assets, points out that greater
weight should be given to external evidence when determining the best estimate
of cashflow projections. IAS 36 says entities should assess the reasonableness of
the assumptions on which cashflow projections are based. Each key assumption
should be consistent with external sources of information, or how these
assumptions differ from experience or external sources of information should be
disclosed.

ESMA considers that disclosures made by entities are often uninformative
because they are only provided at an aggregate level and not at the level of the
cash-generating unit. Financial statements generally are not providing disclosures
that are entity-specific or appropriately disaggregated.

ESMA has reviewed 2012 financial statements, and the disclosures relating to the
sensitivity analysis of goodwill or other intangible assets with indefinite useful
lives are poor. IAS 36 requires disclosures on the sensitivity of the key
assumptions to change when determining the recoverable amount.

Entities have regularly used the assertion that 'no reasonable possible change in a
key assumption would result in an impairment loss'. ESMA believes that this
disclosure does not give users sufficient detail to allow them to assess sensitivity
properly.

MEASUREMENT OF POST-EMPLOYMENT BENEFIT OBLIGATIONS

IAS 19, Employee Benefits, requires the discount rate applied to post- employment
benefit obligations to be determined using market yields based on high-quality
corporate bonds. 'High quality' reflects absolute credit quality and not that of a
given collection of corporate bonds.

The policy for determining the discount rate should be applied consistently over
time and a reduction in the number of high-quality corporate bonds should not
normally result in a change to this policy.

The International Accounting Standards Board (IASB) has tentatively decided to
amend IAS 19 to clarify that the depth of the bond market should be assessed
and this should be at the currency level and not at the country level.

In jurisdictions where there is no deep market in these bonds, the standard
requires that market yields on government bonds should be used. ESMA expects
issuers to use an approach consistent with this amendment.

There is an additional reminder by ESMA regarding the importance of disclosing
the significant actuarial assumptions used in determining the present value of the
defined benefit obligation and the related sensitivity analysis. The discount rate is a
significant actuarial assumption, the details of which should be disclosed together
with any disaggregation information on plans and the fair value of the plan assets
where the level of risk of those plans is different.
FAIR VALUE

ESMA has indicated that entities should assess the impact of the requirements of
IFRS 13, Fair Value Measurement. In particular, the effect of non-performance
risk should be reflected in the value of a liability. As an example, the fair value of a
derivative liability should incorporate the entity's own credit risk. ESMA
emphasises the need for proper recognition of counterparty credit risk when
determining the fair value of financial instruments and providing relevant
disclosure.

IFRS 13 requires all valuation techniques to maximise the use of relevant
observable inputs, which should be consistent with the asset or liability's
characteristics. In some cases, a premium or discount to the market value may
be applied but it should be consistent with the nature of the asset or liability.

ESMA stresses the need to provide disclosures related to fair value, particularly
when the measurement is based on significant unobservable inputs (level 3). The
more unobservable the data, the more important that uncertainties are clearly
identified. Further, IFRS 13 (and ESMA) requires entities to categorise
measurements into each level of the fair value hierarchy.

SIGNIFICANT ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

ESMA expects issuers to focus on the quality and completeness of disclosures
relevant to the entity's financial statements. These should be entity-specific and
not boilerplate. ESMA believes that disclosures could be improved in the following
areas: significant accounting policies, judgments made by management, sources
of estimation uncertainty, going concern, sensitivities, and new standards issued
but not yet effective.

Significant accounting policies and management judgments could be included in
the financial statements in order of materiality and significance. IAS 1,
Presentation of Financial Statements, requires disclosure of estimation
uncertainties with a significant risk of being adjusted in the next year.

ESMA reiterates that disclosure of new standards that have been issued but are
not yet effective (IAS 8, Accounting Policies, Changes in Accounting Estimates
and Errors) is relevant where the new standard could have a material impact on
the financial statements.
TOPICS RELATED TO FINANCIAL INSTRUMENTS

Transparency and comparability of financial reporting of financial institutions is in
the interest of market participants. ESMA states that issuers should ensure that
they meet the requirements of IFRS 7, Financial Instruments: Disclosures, for
qualitative and quantitative disclosures and assess whether there is objective
evidence of impairment while disclosing sufficient detail to provide a
comprehensive picture of the liquidity risk and funding needs of the entity.

Disclosures should enable users to evaluate the nature and extent of risks, and the
elements related to the valuation of financial instruments, the latter reflecting
economic reality.

Experience during the financial crisis showed diverging accounting treatments in
relation to forbearance practices. Forbaearance occurs where the terms of the
loan are modified due to the borrower's financial difficulties. ESMA expects
issuers to provide quantitative information on the effects of forbearance, enabling
investors to assess the level of impairment of financial assets.

ESMA also expects disclosure of the accounting policies applied to financial assets
that have been assessed individually for impairment but for which no objective
evidence of impairment was available. The purpose of this disclosure is to allow
users to assess credit risk.

Entities should also disclose the time bands in the maturity analysis and include
maturity analysis of financial assets held for managing liquidity risk.

ESMA is attempting to foster consistent application of accounting standards while
ensuring the transparency and accuracy of financial information. As noted above,
ESMA and the national regulators will monitor the application of the IFRS
requirements outlined in the priorities, with national regulators incorporating
them into their reviews and taking corrective actions where appropriate. Auditors
and issuers ignore the guidance at their peril.
EQUITY ACCOUNTING

Here is another article by Graham Holt

With IAS 28 now in force, its a good time to consider how it affects you. But be
prepared not everything in the standard is as cut and dried as might be hoped,
says Graham Holt

In May 2011, the International Accounting Standards Board (IASB) issued a new
version of IAS 28, Investments in Associates and Joint Ventures, that requires
both joint ventures and associates to be equity-accounted. The standard is
effective from 1 January 2013 and entities need to be aware of its implications,
although the EU has endorsed IAS 28 from 1 January 2014.

An associate is an entity in which the investor has significant influence, but which
is neither a subsidiary nor a joint venture of the investor. 'Significant influence' is
the power to participate in the financial and operating policy decisions of the
investee, but not to control those policy decisions. It is presumed to exist when
the investor holds at least 20% of the investee's voting power. If the holding is
less than 20%, the entity will be presumed not to have significant influence
unless such influence can be clearly demonstrated. A substantial or majority
ownership by another investor does not preclude an entity from having significant
influence.

Loss of influence

An entity loses significant influence over an investee when it loses the power to
participate in the financial and operating policy decisions of that investee. The
loss of significant influence can occur with or without a change in absolute or
relative ownership levels.

A joint venture is defined as a joint arrangement where the parties in joint control
have rights to the net assets of the joint arrangement. Associates and joint
ventures are accounted for using the equity method unless they meet the criteria
to be classified as 'held for sale' under IFRS 5, Non-current Assets Held for Sale
and Discontinued Operations.

On initial recognition, the investment in an associate or a joint venture is
recognised at cost, and the carrying amount is increased or decreased to
recognise the investor's share of the profit or loss of the investee after the date of
acquisition.

IFRS 9, Financial Instruments, does not apply to interests in associates and joint
ventures that are accounted for using the equity method.

Instruments containing potential voting rights in an associate or a joint venture
are accounted for in accordance with IFRS 9 unless they currently give access to
the returns associated with an ownership interest in an associate or a joint
venture. An entity's interest in an associate or a joint venture is determined
solely on the basis of existing ownership interests and, generally, does not reflect
the possible exercise or conversion of potential voting rights.
Investments in associates or joint ventures are classified as non-current assets
inclusive of goodwill on acquisition and presented as one-line items in the
statement of financial position. The investment is tested for impairment in
accordance with IAS 36, Impairment of Assets, as single assets, if there are
impairment indicators under IAS 39, Financial Instruments: Recognition and
Measurement.

The entire carrying amount of the investment is tested for impairment as a single
asset - that is, goodwill is not tested separately. The recoverable amount of an
investment in an associate is assessed for each individual associate or joint
venture, unless the associate or joint venture does not generate cashflows
independently.

IFRS 5 applies to associates and joint ventures that meet the classification criteria.
Any portion of the investment that has not been classified as held for sale is still
equity-accounted until the disposal. After disposal, if the retained interest
continues to be an associate or joint venture, it is equity-accounted.

Under the previous version of the standard, the cessation of significant interest or
joint control triggered remeasurement of any retained investment even where
significant influence was succeeded by joint control. IAS 28 now requires that any
retained interest is not remeasured. If an entity's interest in an associate or joint
venture is reduced but the equity method continues to be applied, then the entity
reclassifies to profit or loss the proportion of the gain or loss previously
recognised in other comprehensive income relative to that reduction in ownership
interest.

Consolidation parallels

The IASB states that many of the procedures appropriate for equity accounting
are similar to those for consolidation of entities and the concepts used in
accounting for the acquisition of a subsidiary are also applicable to the acquisition
of an associate or joint venture.

However, it is not always appropriate to apply IFRS 10, Consolidated Financial
Statements, or IFRS 3, Business Combinations. There is disagreement over
whether equity accounting is a one-line consolidation or a valuation approach.
When an associate is impairment-tested, it is treated as a single asset and not as a
collection of assets as would be the case under acquisition accounting.

Additionally as associates and joint ventures are not part of the group, not all of
the consolidation principles will apply in the context of equity accounting.

There is no definition of the cost of an associate or joint venture in IAS 28. There
is debate over whether costs should be defined as including the purchase price
and other costs directly attributable to the acquisition such as professional fees
and other transaction costs. It might be appropriate to include transaction costs
in the initial cost of an equity-accounted investment, but IFRS 3 would require
these to be expensed if they relate to the acquisition of businesses. IFRS 9
includes directly attributable transaction costs in the initial value of the investment.
IAS 28 states that profits and losses resulting from 'upstream' and 'downstream'
transactions between an investor (including its consolidated subsidiaries) and an
associate or joint venture are recognised only to the extent of the unrelated
investors' interests in the associate or joint venture. Upstream transactions are
sales of assets from an associate to the investor and downstream transactions
are sales of assets by the investor to the associate.

Elimination

There is no specific guidance on how the elimination should be carried out but
generally in the case of downstream transactions any unrealised gains should be
eliminated against the carrying value of the associate. In the case of upstream
transactions any unrealised gains could be eliminated either against the carrying
value of the associate or against the asset transferred.

The standards are currently unclear on whether this elimination also applies to
unrealised gains and losses arising on transfer of subsidiaries, joint ventures and
associates. An example would be where an investor sells its subsidiary to its
associate and the question would be whether part of the gain on the transaction
should be eliminated.

There is an inconsistency between guidance dealing with the loss of control of a
subsidiary and the restrictions on recognising gains and losses arising from sales
of non-monetary assets to an associate or a joint venture. IFRS 10 requires
recognition of both the realised gain on disposal and the unrealised holding gain
on the retained interest. In contrast, IAS 28 requires gains or losses on the sale
of a non-monetary asset to an associate or a joint venture to be recognised only
to the extent of the other party's interest.

The IASB accordingly issued an exposure draft in December 2012 stating that any
gain or loss resulting from the sale of an asset that does not constitute a business
between an investor and its associate or joint venture should be partially
recognised. However, any gain or loss arising from the sale of an asset that does
constitute a business between an investor and its associate or joint venture
should be fully recognised.

IFRS 3 defines a business as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing a return
directly to investors or other owners, members or participants.

Under the equity method, the investment is initially recognised at cost and
adjusted to recognise the investor's share of the profit or loss and other
comprehensive income (OCI) of the investee. Additionally, the investment is
reduced by distributions received from the invest.

However, IAS 28 is silent on how to treat other changes in the net assets of the
investee in the investor's accounts, which might include:

issues of additional share capital to parties other than the investor;

buybacks of equity instruments from shareholders other than the investor;

writing of a put option over the investee's own equity instruments to other
shareholders;

purchase or sale of non-controlling interests in the investee's subsidiaries'

equity-settled share-based payments.
84
ACCA P2 Final live revision [Only for June2014 Exams] [Accounting Practise Center(A.P.C)]

Inconsistent

The IASB proposed in an exposure draft issued in November 2012 that an investor's share
of certain net asset changes in the investee should be recognised in the investor's equity.
The draft contains an alternative view by one board member who believes the amendment
to be inconsistent with the concepts of IAS
1 and IFRS 10, and would cause serious conceptual confusion. This board member
believes this short-term solution would not improve financial reporting and would
undermine a basic concept of consolidated financial statements.

The draft notes that an investor may discontinue the use of the equity method for various
reasons including where the investment in the investee becomes a subsidiary or a financial
asset. The draft proposes that an investor should reclassify to profit or loss the cumulative
amount of other net asset changes previously recognised in the investor's equity when an
investor discontinues the use of the equity method for any reason.

85

ACCA P2 Corporate Reporting

June 2014[Answer]

86

P2 revision answer
DEC2008 Q1
87

88

89

90

91

92

93

94

95

96

97

June2010 Q1 (a)
98

99

100

101

102

103

104

105

106

107

108

DEC2010 Q1(a)
109

110

111

112

113

114

115

116

June2011 Q1 (a)(ii) Rose Foreign Sub (similar to June2008 Q1 Ribby(video))
117

118

119

120

121

122

123

124

125

DEC2011 Q1 Traveler- group statement of financial position
126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

DEC2012 Q1
141

142

143

144

145

146

147

148

149

(b) [Only 7 points]
* Available for immediate sale in its present condition means can asset be sold
immediately without further work needed.
* Company would normally misclassify the non-current assets into non-current
asset held for sale in order to window dress the financial statements, ie, window
dress the current ratio.

The sale must be highly probable means the following criteria needs to be met:
1. management would have intention to sell the asset.

Ie, asset is not performing well and shareholders authorize the management to sell
this asset.

2. the asset is available for sale.
Ie, there is no further need to refurbish this asset in order to sell it.

3. management is locating a buyer actively.
Ie, management is advertising the assets and actively looking for a buyer.

4. the sale would be completed within 1 year after the year end.
Ie, if the asset cant be sold within 1 year, whether shareholders have authorized
the sale must be complete even after 1 year?
150

(c)
Accounting
IAS24
This is clearly a related party transaction because Minny controls Bower.

Disclosure
So this transaction needs to be disclosed in the note of the financial statement
including nature, date, amount and parties involved in the transaction.

IFRS5
If this asset meets the definition of IFRS5 then it should be reclassified into non-
current asset held for sale, ie, under current assets.

IAS16
And if this is the case, then IAS16 property, plant and equipment should not be
applied.

Substance
The substance of this transaction, ie, selling PPE at a very low price would indicate
that this may be a dividend paid by Bower to Minny and if this is not legal then this
needs to be repaid.

151

Ethical

Faithful transactions
If there are reasons which are valid as to why Bower sell this asset then this
transaction can be acceptable.

Integrity
Accountant should not lie to shareholders and should not window dress the financial
statements.

Objectivity
Accountant ant should only focus on the accounting standards when preparing
financial statements rather than other issues, such as personal benefit or pressure
from management etc.

152

June2013 Q1
153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

Q2+Q3 revision
Kesare
(a)
Definition:
Deferred tax is the future tax consequences of the current and previous
events in Financial statements.

Calculation:
Deferred tax is the tax on a temporary difference.
A temporary difference is created through timing differences between
accounting for items in FS and tax computation.

Per Framework:
(i)faithful representation
Deferred tax liabilities do represent faithful representation because they
relate to future tax payments that are probable.

Therefore we have greater:
*completeness- future tax consequences of a past event.
*prudence-we have considered future tax consequences into todays FS.

(ii) relevance
Relevance criteria is also met because historic transactions impact on future
cash flows. Because we are valuing a company based on future cash flows,
ie , future incomes.

(iii) Accruals
Ie, Because the asset in the SOFP represents the future economic benefits
that company can get which should be taxed. So according to accruals
concept that these benefit should be matched against the future tax expense
paid by company.

Criticism:
174

The main criticism of deferred tax is that it does not necessarily satisfy the
definition of a liability per framework.

This is because the payment of tax only arises if future tax legislation exists.

(b)(copy from tutor)

175

176

177

178

179

180

181

182

June2009 Q2
183

184

185

186

187

188

189

190

191

192

193

June2010 Q2 Cate

(a)

Deferred tax(DT)

DT is based on the following equation:
DT=temporary difference (TD) X tax rate

TD
Temporary difference =carrying value- tax base

Activities
Profit generated by Cate is not from ordinary business activity.

And the losses it generated seems to be from ordinary business activities.

Possible
Estimates future sales are based on future customer interest rather than actual order and
this is not objective.

Conclusion
Cate should not recognise deferred tax assets as there is insufficient evidence that future
taxable profits can be generated against which to offset the losses.

(b)

Impairment
Impairment occurs when recoverable amount is below carrying value.

Recoverable amount
This is determined by using the higher of value in use and net realizable value (fair value-
costs to sell).

Fair value
According to IFRS13 there are 3 levels to determine the fair value:

Level1: quoted price: if theres a market for the asset or liability then the price quoted from
that market must be used as fair value.
Level2: transaction price: if there is no market for the asset or liability then the equivalent
transaction prices must be used.
194

Level3: unobservable price: if the above prices are not available then appropriate financial
models should be used.

Measures
The two existing measures used by Cate are based on ranings multiples and option procing
model and these are level 3 stated above to determine fair value and Cate should consider
to use level 1 or 2, eg, quoted price for Bate is available.

Value in use
This is determined by calculating discounted future cash flows and this can be done by Cate
using its significant influence over Bate to produce a future discounted cash flow.

(c)

Control(IFRS10)
Power instrument: to determine control then parent should have power instrument like
voting rights and Cate has 70%of Date and this fulfills the 1
st
criteria.

Relevant activities: it seems before disposal Cate would participate Dates management so
2
nd
criteria fulfilled.

Return: by having control Cate would have positive or negative return from Date.

So overall Cate would have control over Date.

Disposal
The share issue results in Cate ownership and voting dropping to 35% which is insufficient
for control and so this is a sub disposal before the year end.

Influence
Influence is the power to participate in management policy and gives rise to an associate.

Agreement
But based on the new agreement Cate doesn't participate in Date management and so the
remaining 35% is not an associate.

Simple investment
So it appears the remaining 35% is a simple equity investment

Classification
If the investment only contains principal and interest and held by entity till maturity then
amortized cost should be used. But clearly theres no principal and interest relating to equity
so fair value should be used.

If this is for speculative purpose then fair value through profit or loss should be chosen
while this is for strategic purpose then fair value through OCI should be chosen.

195

Discontinued
Its correct that Dates operation is discontinued because its a separate major line of
business and disposed of during the year.

(d)
Defined contribution plan

The company doesn't guarantee the final payment to employees.
Company and employee will put the money into the scheme run by the trustee each
year and when employees retire then they get the money which is not fixed(defined).

Defined benefit plan

The company will guarantee the amount of money paid to employees when they retire
and this will be based on number of years that employee has worked for company and
the their final salary as well.

The company will put money into the pension scheme each year to create pension
asset(eg, buying shares etc) to be paid off to employees(settle pension liability) when
employees get retired.

Scenario
This is a defined benefit plan because:

1, the benefit is calculated based on a percentage of the final salary of employee and this is
defined benefit.

2, if theres insufficient assets then Cate has a legal obligation to make good deficit.

3, when its terminated then theres obligation for Cate to purchase lifetime annuities from an
insurance company

PPA
So a prior period adjustment is required to restate comparatives.

196


(a)
Current liabilities are liabilities falling due for payment within 12 months from the year
end.
Non-Current liabilities are liabilities falling due for payment more than 12 months from
the year end.
The waiver was given before the year end, but only for the loan to be repaid a month
after the year end so this is within 12months and should be classified as current
liabilities.
So Alexandra is not correct to classify this into non-current liabilities.
The fact that Alexandra has defaulted on interest payment may cast doubt on its going
concern status and according to IAS1 presentation of financial statements going concern
uncertainty should be disclosed in the note of the FS.
If Alexandra is not a going concern entity any more then it should prepare its financial
statement under a break-up basis.

(b)
Revenue has two models under IAS18:-
At = revenue at a point in time is recognised at the point in time that risks and
rewards transfer (goods)
Over = revenue over a period is recognised over that periodService

197

So when Alexandra recognized revenue in full at the start of contract and this is not
correct but instead it should recognize the revenue and related costs over a period.

The new treatment, and the one used to date by Xavier Co, is the correct accounting
treatment under IAS 18

According to IAS 8 changes in an accounting estimate result from changes in
circumstances, new information or more experience, this was not the case here.

This is a prior period error, which must be corrected retrospectively. This involves
restating the opening balances for that period so that the financial statements are
presented as if the error had never occurred.

(c)
Parties are related if one party has control or significant influence over the other
party.

The general disclosure per IAS24 would be:
Transaction: purchase/sale of goods?
Parties: X Company; Y Company.
Relationship: eg, parent and subsidiary
Value: $
Date

According to IAS24 there should be disclosure about breakdown of directors
remuneration and remuneration of non-executive directors but Alexandra seems
incorrect in this way.

IAS 24 Related party disclosures requires that entities should disclose key management
personnel compensation not only in total but also for each of the following categories:
Short-term employee benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payment

key management personnel means those persons having authority to control companys
activity.

So the remuneration of the non-executive directors, who are key management
personnel, should have been disclosed along with that of the executive directors.

(d)

Defined contribution plan
198

The company doesn't guarantee the final payment to employees.
Company and employee will put the money into the scheme run by the trustee each
year and when employees retire then they get the money which is not fixed(defined).

If the trustee did a bad job, eg, invest money into shares and suffered a loss then
company didn't have enough money to pay off to the employee then company will have
no further obligation for those money.

Risk is not born by the company but by the employee.

Defined benefit plan

The company will guarantee the amount of money paid to employees when they retire
and this will be based on number of years that employee has worked for company and
the their final salary as well.

The company will put money into the pension scheme each year to create pension
asset(eg, buying shares etc) to be paid off to employees(settle pension liability) when
employees get retired.

Scenario
It seems that this is defined benefit plan.

The reason being:
Alexander bears the risk is the provision that if an employee leaves company and transfers
the pension to another fund then it has a legal or constructive obligation to make good the
shortfall if the insurance company does not pay all future employee benefits relating to
employee service in the current and prior periods.

Dec2011 Q3 Scramble
(a)
Development
Scramble has done the capitalization of the development costs correctly because
without further information it seems to fulfill the criteria, eg, can be used or sold.

Expense
Scramble has expensed maintenance cost correctly because this cost doesn't enhance
the asset over its original benefit.

Cost model
199

Intangible asset can be carried at cost model as suggested by Scramble or fair value
model and this is a choice for Scramble and its right.

Life
An intangible asset would have a finite or indefinite life and if its indefinite life then
Scramble should perform an annual impairment test by comparing its carrying value
and its recoverable amount annually and where theres indicators suggesting that its
impaired.

Prudence
This is according to the principle of prudence which doesn't allow value of asset to be
carried at more than its recoverable amount.

Value in use
When determining the future cash flow used in value in use then it shouldn't include the
future expenses leading to future cash flow but instead Scramble should only consider
the current condition of the asset and its related cash flow arising from it as well so
Scramble shouldn't include future cash flow from future maintenance and capital
expenses.

Cash flow reasonableness
When determining the future cash flow used in value in use then Scramble should
examine the difference between the expected cash flow and actual cash flow from the
past to verify its reasonableness.

tax
Future tax receipt or tax payment should be excluded from the future cash flow used in
value in use. (future cash flow from financing activities should be excluded as well.)

(b)
Materiality
The statistics 90%, 63% and 29% tells us that the problems in the CGUs are material
and need calculating and disclosing correctly.

impairment
An impairment occurs if carrying value is greater than recoverable amount which is
determined by the higher of value in use and net realizable value.

Value in use
Scramble uses value in use as recoverable amount which uses discounted future cash
flow.

Discount rate
Scramble should use an industry specific discount rate calculated by eg, CAPM model to
discount future cash flow rather than simply using the WACC.
200

Cost of debt
Scramble should use the credit spread reflecting the current market assessment of the
credit spread at the time of impairment testing.

Disclosures
Scramble should disclose
1, The amount of the impairment loss
2, The events and circumstances that led to the loss
3, A description of the impairment loss by class of asset

IAS1
It is IAS1 requirement that if its material then disclosures should be made and in this
case the percentage implied above seems to be material to the Financial statement.

(c)
Intangible assets recognition
According to IAS38 an intangible asset can be recognized if its identifiable which
means its purchased or arise from contractual and legal rights.
It also needs to meet the definition of asset which is a resource controlled by the
entity arising from past event and future economic benefit will flow into the entity.
The cost can be reliably measured as well.

Registration rights
This complies with the criteria:
(i) The registration rights are contractual.
(ii) Scramble has control, because it may transfer or extend the rights.
(iii) Economic benefits will flow to Scramble in the form of income it can earn when fans
come to see the player play

Cost
the initial cost of intangible asset should be all the direct costs in bringing the asset into
use.

Agent fees
Scramble is wrong in believing that the agents fees paid on extension of players
contracts do not meet the criteria to be recognised as intangible assets. The fees are
incurred to service the player registration rights, and should therefore be treated as
intangible assets.

Right to revenue
201

The right to get 25% of revenue from ticket sales from other club should not be
capitalized as an intangible asset because Scramble doesn't have control over these
revenue.

IFRS9
Because this is a right to Scramble to get cash arising from the contract which is the
right so Scramble should recognize a financial asset in its financial statement per IFRS9.

Classification
The financial asset can be carried at amortized cost if :
(a) Aim to collect cash flow.
(b) Cash flow would be interest plus principal.

May be Scramble would sell the right in the future and also cash flow wouldn't just be
interest and principal but the revenue received would be based on match attendance so
it would be better to classify this financial asset carried at fair value with gains/losses
gone into profit or loss

202

June2012 Q2

(a)
Finance lease
Finance lease is a lease where it transfer substantial risks and rewards from the lessor
to the lessee.

Operating lease
Operating lease is a lease when the lease its not a finance lease.

Substance over form
The classification of the lease will depend on the substance of the transaction rather
than its legal form, eg, we cant classify the lease into operating lease even though legal
title hasn't transferred but the lease term is almost the same as the economic useful life
of asset.

William
This is a sale and finance lease back because:
1, lease back of the building is for the major part of the buildings economic life
2, the present value of the minimum lease payments amounts to all of the fair
value of the leased asset

Risks and rewards
So the risks and rewards remain in William again because this is a sale and finance
leaseback transaction.

Accounting:
1, sale of building:
DR cash $5m
CR PP&E $3.5m
CR deferred income $1.5m(balancing figure) (release over lease term)

2, lease it back:
DR PP&E(FV same as cash) $5m
CR finance lease obligation $5m

3, liability movement
Opening Interest(7%) Outstanding Installment closing
$5m 350,000 5,350,000 (441,000) 490,900

203

DR I/S (interest) $350,000
CR finance lease obligation $350,000

DR finance lease obligation $441,000
CR cash $441,000
4, deferred income release to income statement:
DR deferred income ($1.5m/20years) $75,000
CR I/S $75,000

5, depreciation of asset:
DR I/S (depreciation)($5m/20years) $250,000
CR PP&E $250,000

(b)
Actuarial gains and losses
The actuarial gains and losses should be immediately taken into other comprehensive
income(OCI):
DR pension asset $15m
CR OCI $15m

William cant spread these $15m over the remaining lives of the workers as well.

Past service cost
Past-service costs are recognised in the period of a plan amendment.

Because William enhanced the plan on 1 june2011 so any increased costs as a result of
this would be past service cost and this should be immediately recognized and the
unvested benefit cannot be spread over 5 years from that date.

Curtailment
A curtailment occurs only when an entity reduces significantly the number of employees
and its gains/losses are accounted for as past-service costs.

Because theres no redundancy for William so William shouldn't consider this.

Presentation
The scheme assets and liabilities should be separated with one line figure including
return on asset, unwinding expenses and service cost on the face of the income
statement.

204

(c)
Cash settled
Share appreciation right is one form of the share based payment settled in cash so they
company would need to recognize a liability for this and William would need to spread
these over the vesting period, ie, 2years.

Liability
The total amount of liability needs to be recognized by the company would depend on
the future share price relating to equity granted.

Remeasurement
The liability would need to be remeasured using the fair value at the end of each
reporting date.

SBP expense computation
SBP expense= no of rights expected to vest X FV X timing ratio
1.6.2009 =0
31.5.2010 500X17 X23 X1/2 =$97,750
31.5.2011 500x17 X14 X2/2 =$119,000
31.5.2012 500X(17-7) X24 =$120,000

Exercised at 31.5 2012: 500X7 X21 =$73,500

So total expense for year ended 31.5 2012 is $120,000-$119,000+$73,500=$74,500.

(d)
Individual financial statement
Contingent liabilities need to be disclosed in the note of Chrissys own Financial
statement.

There are two types of contingent liabilities:
1, A possible obligation that arises from past events and existence will only be
confirmed by the occurrence or non-occurrence of one or more uncertain future events
not wholly within the control of the entity.

2, A present obligation that arises from past events but cash outflow is probable and
the amount of payment is not reliably measured.

Consolidated financial statement
The first type of contingent liability is not measured in the group financial statement.

The second type of contingent liability would be measured in the group financial
statement and it becomes the actual liability for William if its reliably measured of $4m
although its not a probable cash outflow.

205

June2012 Q3
(a) [only 11points required]
Investment properties
Properties qualify as investment properties when they fulfil three criteria (IAS40):-
I Investment: the property must be held for rent or capital gain or both.
C Complete: the property must be finished (otherwise it is construction).
E Empty: the property must be empty of the group (otherwise PPE).

Ethan properties
It appears Ethan properties fulfil all of the above and therefore should be recognised as
investment properties.

Fair value model
So Ethan properties should be carried at fair value and gains and losses should be reported
in the income statement as speculating gains and losses.

Fair value measurement (FVM)
According to IFRS13 there are 3 levels to determine the fair value:

Level1: quoted price: if theres a market for the asset or liability then the price quoted from
that market must be used as fair value.
Level2: transaction price: if there is no market for the asset or liability then the equivalent
transaction prices must be used.
Level3: unobservable price: if the above prices are not available then appropriate financial
models should be used.

206

Active market
Ethan has misused the term active market. In FVM active market means a market with
lots of transaction in identical assets. Investment properties are all different and hence level
1 cant be used to determined fair value.

Ethan fair value
Ethan has used level 3 when level 2 was available. Level 2 must be used. Level 1 is not
available because there is no active market. But active market shows there might be other
similar investment properties which would determine the fair value of Ethans properties.

Fake goodwill
Goodwill can only be recognised in the event of a business combination (IFRS3). It sounds
like most of the target companies are empty shell companies that hold the target
investment property. It sounds like most of the target companies are not businesses. So
goodwill would not be recognised and the cost of buying the new company would simply be
the opening fair value of the investment property.

Real goodwill
But some target subs may be real businesses and these would result in goodwill as follows:-
Fair value of consideration x
Fair value of NCI x
Fair value of net asset (x)
___
Goodwill xx

Impairment testing
An impairment in goodwill occurs when the related cash generating unit(CGUs) recoverable
value falls below the carrying value. Recoverable value is the higher of value in use (VIU)
and net realizable value(NRV).

Ethan impairment testing
Ethan is using deferred tax in its impairment test. Deferred tax has nothing to do with
impairment testing. Impairment testing requires the calculation of VIU and NRV using
discounting cash flow and then comparing the higher to the CV. Ethan should reperform its
impairment tests.

Industry
It is acceptable accounting practice to look at industry competitors whilst devising
accounting policies. An example is the fair value model. IAS40 allows the fair value model or
the cost model for investment properties. But fair value is used widely across the
investment property industry and that is why Ethan should use the fair value model.

Wrong accounting
207

But Ethan cannot use the fact that someone else is doing impairment testing wrong as an
excuse for doing impairment testing wrong. Ethan should do the impairment testing
according to IFRS.

Deferred tax
Deferred tax occurs when there are temporary differences. Temporary differences are the
differences between carrying values in Fs and tax base in tax accounting.

Losses
Carried forward tax losses are temporary differences and do give rise to deferred tax assets.
But these assets can only be recognised if they can show that they can have future
economic benefit.

Recoverability
This means Deferred tax assets must be recoverable by the tax losses being set off against
future tax profits. But Ethan past performance has been so poor that it seems unlikely that
future performance will be better.

Derecognition
So the Deferred tax asset is not recoverable and should be derecognised.

(b)
Financial instruments
A Financial instrument is any contract that gives an asset in one entity and a liability in
another.

Amortised cost
How to account for financial liability(FL) is based on intention. If the intention of FL is held
for trading then fair value applies. If not then amortised cost applies.

Ethan debt
There is no mention of trading in the scenario. So it is reasonable to assume that the Ethan
issue debt is currently carried at amortised cost.

Fair value option (FVO)
208

The fair value option can be applied to both financial assets and financial liabilities. If there
is a FA carried at FV and a related FL carried at amortised cost then this is accounting
mismatch. Under these circumstances the entity can opt to carry the FL at FV.

Investment property
But Ethan has a financial liability at amortised cost mismatched against an investment
property. An investment property is not a financial instrument. An investment property is
just a property.

IASB
The IASB concludes that accounting mismatches may occur in different circumstances and
as long as those mismatches are solved then it can result in more relevant information then
this is acceptable.

Conclusion
So it would appear that the FVO is available and the financial liability can be carried at fair
value.

(c) [5 points required]
Assets and liabilities
To paraphrase the conceptual framework an asset/liability is a present right/obligation to a
future economic inflow/outflow.

Equity
Equity is defined in the conceptual framework as the residual. In other words, equity is the
assets minus liabilities.

Application
The method is to see if the shares are liabilities and then if not they must be equity. So we
look for obligations.
Obliged
The phrase obliged to pay 5% dividend would be an indication of liability.

Liability
The sub should present the B shares as liabilities and the parent should consolidate this
liability.

Intra group transaction
The dividend paid by sub to parent should be eliminated in the consolidated account
because this is an intra group transaction.

209

DEC2012

210

Q2 answer:
(a)
Recognition
As Coate obtains certificate from government and this would be seen as assistance
by government and Coate can only recognize this grant if it becomes certain that
Coate can comply with conditions attached to the grant.
Disclosures:
There should be disclosure of which accounting policy that Coate has chosen, ie,
separate method or net off method.
The disclosure about details of the grant should be available regarding the nature of
the grant and conditions attached to the grant as well.
Treatment:
Initial measurement
DR inventory
CR deferred income

On sale of certificate
DR deferred income
CR cost of sales(become inventory)

Then
DR cash/receivable
CR inventory
DR/CR I/S (balancing figure)
211

Revenue recognition
Coate can recognise revenue if the risks and rewards of certificate have been
transferred from seller to buyer, there are no managerial involvements over the
certificate by Coate, related expenses can be reliably measured as well.

(b)
Closing rate
Coate should retranslate assets and liabilities at closing rate.

Average rate
Coate should retranslate retranslate income and expense at average rate.

Difference
The difference as a result of retranslation of the above should be taken into other
component of equity in statement of financial position and other comprehensive
income in statement of profit or loss and other comprehensive income.

Unrealized gains/losses
The unrealized gains or loss as a result of retranslation are not cash flows so that
they should not be recognized in the statement of cash flow.

Adjustment
And hence adjustment needs to be made to reconcile cash and cash equivalent at
start and at the end of the year.
212

(c)
Control
According to IFRS10 consolidated financial statements, control needs to fulfill:
Power instrument
Direct relevant activities
Gets returns from another entity either positive or negative.

Power instrument
Eg, voting rights and potential voting rights; power to appoint directors on the
board.

Consensus
Control doesnt require consense made between 2 sharholders.

Agreement
The agreement between Coate and Manis would contain so many restrictions
suggesting Coate cannot control over Pattern.

Joint venture
213

It seems that Coate and Manis both control Patten because they have to agree with
each other before doing anything.

Accounting
So Coate should derecognize Patten as a subsidiary and use equity accounting to
account for it, ie, take the growth of business goes into the income statement and
SOFP where its added to the cost.

(d)
Accounting estimate
The estimate for tax expense is just an accounting estimate and so Coate should
use prospective adjusting method.
Tax adjustment
Since Coate did not make a mistake to make tax adjustment and so this seems that
it would be a change in estimate.
Transfer pricing
Because there are lots of outcomes that were negotiated during 2012 with the
taxation authorities. This indicates that these adjustments were effectively a
change in an accounting estimate.
Prior period adjustment
So prior period adjustment for the tax expense estimate is not corretc and hence
Coate should correct this mistake.
IAS 12
Separate disclosure for current tax, deferred tax should be made in the note of the
financial statement.
214

DEC2012 Q3
(a)
Definition
An investment property is a property held for capital appreciation or to earn rental
income.

Classification:
Investment purpose
The company holds the property to each capital appreciation or rental income.

Complete
The property must be substantially complete.

Owned use
This property cant be used by the company in the normal course of business activities.

Subsequent measurement
The subsequent measurement for this is to use fair value model where Blackcutt will
take fair value changes directly to the statement of comprehensive income.

Land
215

So the land held by Blackcutt should be classified as investment property as this is
considered to enjoy capital appreciation while other plots of land would be considered
to enjoy capital appreciation if theres no other current purpose.

Supplement
Sales of property are in the ordinary course of its operations and are routinely occurring,
then the housing stock held for sale will be classified as inventory per IAS2 inventory.

Low-income employees
The part of the inventory held to provide housing to low-income employees at below
market rental and this is held to provide housing services rather than rentals so cant
be classified as investment property but as property, plant and equipment per IAS16.

(b)
Finance lease
Finance lease is a lease where it transfer substantial risks and rewards from the lessor
to the lessee.

Operating lease

Substance over form
than its legal form.

Blackcutt
Even though Blackcutt owns the legal title of property eventually but because:
1, it has transferred risks and rewards of vehicles to Waster&Co, ie, Waste&Co can use
them to earn money by collecting wastage;
216

2, Waste&Co can use them for nearly all of the assets life;
3, At the end of the life of vehicle the title will be transferred back to Blacutt.

So this transaction is a finance lease.

Accounting
So blackcutt should derecognize the PP&E in its FS and recognize a corresponding
finance lease obligation but this will depend on the FV of asset at inception.

(c)
A provision should be recognized if:
1, Probable
Blackcutt has no recourse against the entity or
its insurance company and so resulting an economic outflow.

2, Obligation
Theres an obligation for Blackcutt because its virtual certainty of legislation requiring
the clean up as a result of contaminating the land.

3, Reliably estimate
To recognize a provision the amount should be reliably estimated by Blackcutt as well.

Impairment
Because the land has been contaminated and we should consider any impairment of
land as a result of this by performing an impairment test as per IAS36.

(d)
Prudence
According to the prudence principle we cant overstate the asset value in the FS.

indicator
if theres an indicator suggesting the building is impaired then an impairment test would
need to be performed and because in Blackcutt the purpose of using the building has
changed from education to library because of the fall in number of students then this is
an impairment indicator.

Impairment test
217

Management in blackcutt at the end of each year should perform an impairment test to
see if the carrying value of the asset is greater than its recoverable amount then an
impairment expense should be recognized.

Recoverable amount
The recoverable amount for the building is determined as the higher of value in use and
net realizable value and because they are not both provided then we can use
depreciated replacement cost.

Accounting:
asset Cost | replacement
cost
Accum depreciation CV| replacement cost
School 5000 5,000x6/25 =1200 3,800
Library 2100 2100X6/25=504 (1,596)--RV
2204

So blackcutt would DR I/S 2204 CR PP&E 2204

June2013 Q2
(a)

218

Reportable segment
An operating segment would be reportable if:
Its more than 10%of revenue, profits or assets of all segments;
If theres a loss then we need to decide whether the loss is higher than the higher of
total profits and loss and if no then it doesn't fulfill this criteria.
Only one of the criteria needs to be fulfilled.

Aggregation:
Aggregation of one or more operating segments into a single reportable segment is
permitted if it meets certain conditions.

Conditions:
Aggregated operating segment should have:
Similar products or services;
Similar business processes;
Similar types of customers.

Scenario:
Segment 1 and 2 customers are different because contract is awarded by local
transport authority in segment1 whilst contract is awarded in the tender process in
segment2 and also they would have different risks so their business processes are
not similar.

Conclusion:
So sgement1 and 2 cant be aggregated into 1.

219

(b)
Recognition
Recognition of revenue should meet the following criteria:
Economic inflow would probably flow into the entity.
The amount can be reliably measured.

Measurement
The measurement of revenue to be recognized should meet with the following
criteria:
* Revenue should be measured based on stage of completion, ie, relating to period
to provide service.
* There is no managerial involvement over the goods or service by seller;
* Risks and rewards of goods or services have been transferred from seller to buyer;
* The amount can be reliably measured.

Construction contract
The contract could be interpreted as a construction contract especially given
segment 3 is called railway construction. A construction contract is a contract
specifically negotiated for construction. So if directors interpret the maintenance
contract as construction then construction accounting would apply.

Fair value
IAS18 refers to fair value but IAS11 does not.

220

Treatment
Years CF DF @6% PV
2011-2012 1 + 1.8 1/1.06^2 2.6
2012-2013 1.2 1/1.06^1 1.13
Unwinding2011-2012
So int income(2012-2013)
1.6X6%(we should
have had 1.8 income
but only recognize 1.6
so unwind it.)
0.96

Current issue
The above is a fantastic illustration of why the IASB have a development project on
revenue. It is exactly this kind of inconsistency of revenue recognition dependent
upon interpretation that has motivated the IASB to try to develop a comprehensive
revenue standard.

221

(c)
Recognition:
Provision is recognized if:
P: probable that resources will be transferred to settle the liability(asset/other
resources);
O: present obligation whether its legal (law) or constructive (published information)
from past event;
R: reliable estimate of the amount of payment can be made.

Events after reporting period
According to IAS10 events after reporting period there would be adjusting events,
ie, events providing evidence existing as at the year end or non adjusting events, ie,
events not providing evidence existing as at the year end.

Non-adjusting events
For non-adjusting events, it should be disclosed in the note.

Provision in 2012:
It seems that this is not an adjusting event because the notification for damage is
available in July 2012 which is after the financial statements year end.
222

Provision in 2013:
Because only $800,000 is a reliable estimate of the expense and hence company
should:
DR I/S $800,000
CR provision $800,000

Insurance
Because this is virtually certain company can get $200,000 from insurance
company covered by its policy and hence:
DR receivable $200,000
CR I/S $200,000

(d) [Only 6points required.]
IAS 16
A PPE can be recognized if cash inflow from using it by entity is probable and the
amount can be reliably measured.

Control
Because Verge would take possession of the building after the year end, ie, in May
2012 and hence in 2012 there should be no PP&E being recognized.

Capital expenditure
223

The refurbishment and adaptation is needed to fulfill the condition of owning the
assets and this is capital expenditure which should be capitalized.

Treatment
So company should
DR PP&E 2.5 (1.5+1)
CR cash 1 (on refurbishment)
CR I/S 1.5

Depreciation
Company should depreciate the asset based on PP&E of $2.5m subsequently.

Government grant
A government grant is recognized if:
1. there is reasonable assurance that company would meet the conditions;
2. the grant would be received.

Types
There would be revenue grant and capital grant.

Revenue grant
It should be firstly deferred and released over the period to match with the costs.

224

Accounting
So company should:
DR cash $100,000 (20jobsX$5,000)
CR deferred income $100,000

And released to I/S as each job is created.

Capital grant
It has two ways to present, ie, deferred or net off with the original asset costs.

Accounting
DR cash $150,000 (total $250,000-$100,000revneue grant)
CR deferred income $150,000

And released based on the life of the building into I/S.
Presentation
The deferred income of $150,000 should be split between current and non-current
liabilities.

225

June2013 Q3
(a) [Only 12 points required]
Finance lease
Finance lease is a lease where it transfer substantial risks and rewards from the
lessor to the lessee.

226

Operating lease

Substance over form
than its legal form.

5 scenarios of finance lease:
1, ownership of asset has been transferred from lessor to lessee.
2, lessee has the option to purchase asset at a price which is sufficiently lower than
its FV.
3, lease term is almost the same as the major part of economic life of asset.
4, at the start of the lease, PV of minimum lease payment is close to FV of asset.
5, leased assets are specified nature and can only be used by lessee and they can
be used by others if any significant modification to assets occurs.

Scenarios:
1. Jane can rent the land at small rate at the end of lease or purchase at 90%
discount of the land implies this is a finance lease.

2.Jane is to pay Maret 70% of the land value at the start of the lease which implies
this is a finance lease.
3. the lessor review the rent and this makes sure lessor recovers fair value of asset
and makes return on investment of it and this is an indicator of finance lease.

227

Premium
This is an operating lease indicator because operating lease requires upfront
payment and if this is the case then the payment should be kept separate from the
lease and expense to the income statement.

Accounting treatment
If this is a finance lease then Janne should capitalize the premium as a PP&E and
recognize a liability (finance lease obligation) and depreciate it.
Also it has to recognize the finance cost relating to the unwinding of liability over
the lease term.

Investment property
But Janne would hold the land for capital gain and hence it may be treated under
IAS40 investment properties and any gains or loss of the asset would be taken into
the income statement.

Clean break clause
It allows lessee to walk away without any penalty payment and hence the lease
term would be from start of the lease up to the earliest point that option is
exercised.

If there is early termination payment then lessor would ensure they would get
return from it and this is a finance lease indicator.

228

(b)
Investment property
An investment property is a property that entity holds in order to enjoy capital gain
or rental income.

Subsequent measurement
We normally use fair value model because it would better reflect the market
condition, ie, take fair value changes to income statement.

Fair value
There are three levels to determine fair value according to IFRS 13 fair value
measurement:
Level1: quoted price
If there is an active market then the market price from that market on the
measurement date should be used.
Level2: similar quoted price
If level one fails then level two requires that similar market data should be used to
establish the approximated market value.
Level3: unobservable inputs(management best estimate, eg, present value)
If level one and two fails to determine the fair value then you can use level three
where you can use financial model to determine fair value.

Scenario:
* They can use level 2 to determine fair value like using sales/square meter.
* Or they can use level 3 to determine fair value like using cash flow forecast.
229

* But management has used new-build value minus obsolescence to determine
fair value but this does reflect the above 3 levels required by IFRS13.

Conclusion
So managements calculation of fair value is not correct.

(c) [only 6points required]
Discontinued operation
A discontinued operation is an operation if its closed or sold during the year or held
for sale at the year end.

And its carrying amount will be recovered principally through sale rather than
continuing use.

Non-current assets held for sale
In order to classify the asset into non-current assets held for sale, it needs to fulfill
following criteria:
Selling purposes by management
Available for sale under current condition
Locate a buyer actively
Expected to complete within 12 months from the year end

Scenario:
There is selling purpose by management because this is authorized by sharheolders
for management to sell all of subsidiary shares.
230

But it may not be available for sale immediately because given changes made
during to 31 May 2013 which resulted in some activities being transaferred to
subsidiary.

And there is some correspondence with investment bankers and this means
directors are actively locating a buyer.

But given the authorization for sale is just within 1 year and maybe the sale would
not be proceeded more than 1 year.

So it doesnt meet the IFRS5 criteria for non-current assets held for sale and so the
current figures should reclassify the sub as continuing and the comparatives require
restatement.

231

JUNE2011 Q4 GRAINGER
(a)

(i)

IFRS9 uses 2 questions to determine financial asset using amortized cost or fair value.

Business model test ie, Hold it till maturity?

Contractual cash flow characteristic(CCC) test ie, does debt contain principle and
interest only?

If there are 2 yes from those questions then the financial assets would be measured
using amortized cost.

If only 1 yes from those questions then financial assets would be measured using fair
value.

The gains or losses would be taken into income statement or other comprehensive
income.

And this is based on intent, ie, intent to hold the assets or sell the assets.

If entity shows strategic long term investment then gains/losses would be taken into
other comprehensive income.

Entity can carry financial assets at fair value when otherwise they would be carried at
amortized cost.

And this occurs when theres an accounting mismatch which is a financial liability carried
at fair value and related financial assets carried at amortized cost.

232

(ii)
Per IAS 8 if a new standard arises then its adoption is a change in accounting policy.

We should therefore
(i) adjust opening reserves for the change
(ii) adjust comparatives figures from the previous year in the statement of profit or loss
and SFP.

In the year ended 30/4/2011 we will have to change the opening balance for financial
assets so
DR financial assets 1,500(106,500-105,000)
CR retained earnings b/f 1,500

When we prepare the comparative statement of profit or loss for the year ended 30/4/11,
we will use FV .TPL to measure the financial asset at SFP date.

This gives a value of $111,000(from $106,500) so
DR SFP- financial assets 4,500
CR I/S : gain on fair value 4,500
(b)
(i)
Expected losses issues

(i)how are the expected losses to be calculated. It will involve forecasting and judgment.
This will increase the subjectivity in the SFP.

(ii)it will require changes to systems and data collection to allow expected losses to be
calculated.

(iii)it may increase volatility of SFP as economic conditions change from one year to another.

(iv) likely to require extra disclosures in the note to explain how the losses have been
estimated

(ii)
Graingers(9%)
Current position: use interest rate applicable when asset was acquired
Date Asset i/s(16%) Outstanding installment c/f
233

1.5.10 5,000 800 (800)-16% 5,000
1.5.11 5,000 800 (800)-16% 5,000
1.5.12 5,000 800 So: (728) 4,550

Default of 9%---4,550

Expected loss model

Use expected return of 9.07%

year Asset(op) i/s(9.07%) Outstanding Installment(16%) c/f
1.5.10 5,000 453 (800) 4,653
1.5.11 4,653 422 (800) 4,275
1.5.12 4,275 388 (800) 3,933

Under proposals the value of financial asset will be much lower.

Wallet (IFRS10,11,12)
Answer:
Proposal 1:
Per IFRS 10 we would need to determine control via a 3 steps process:
1, Whether company may have power to direct business activities such as using
voting rights. Because only Wallet has voting right so it has power instrument.

2, Whether the party may direct its relevant activities fulfilling the purpose of the
entity.

3, By directing the relevant activities of the company then the party may get
variable return from it, ie, if the company does a good job then it can have a higher
amount of dividend from the company and this is the case in Wallet.

So Wallet would have control if proposal 1 is selected and so would recognize a
subsidiary.

This means acquisition accounting and so consolidation with a 67% NCI.

Proposal 2:
234

Joint arrangements prevents one party to control over the entity through unanimous
consent.

So in proposal 2 it's clearly a joint arrangement.

There are two types of joint arrangements including joint venture and joint
operations.

In proposal 2 this is a joint venture because the entity is incorporated and assets
are put into the entity by each party which then belongs to the entity rather than
belong to them.

Joint ventures are accounted for using equity accounting meaning that growth goes
through I/S and into the statement of financial position where it's added to the cost.

Proposal 3:
In this proposal there is a majority voting which means Wallet can use its 33%
voting power to participate into the financing and operating policy making process.

This means it has significant influence over the entity(ie, more than 20%)

If the investor goes for proposal3 then Wallet would recognize an associate.

This means it will use equity accounting meaning that growth goes through I/S and
into the statement of financial position where its added to the cost.

The accounting for joint ventures in proposal 3 would be the same as in proposal 2
accounting for the joint venture.

Proposal4:
Joint arrangements prevents one party to control over the entity through unanimous
consent.

So in proposal 4 it's clearly a joint arrangement.

There are two types of joint arrangements including joint venture and joint
operations.

In proposal 4 its a joint operation because the entity is not incorporated and the
assets still belong to each party rather than to the entity.

235

So the assets and liabilities would still remain in each party FS.

Each party may get a 1/3 of profit/revenue/expense resulting from the operation.

Disclosure:

This is a new IFRS on disclosure of group relationships that requires the ultimate
parent to disclose all its relationship with other entities.

The parent company is required by IRS12 to list:
All of its subsidiaries and state the reason why it has control not significant influence.
All of its associates and state the reasons why it has significant influence not control.
All of its joint arrangements and state the reasons why it has joint controls.

Investment and asset/equity:
Answer:
(a)Investment entities proposal
The IASB propose that investment entities would be able to account for investment
over which they have control as investments. Investment entities are entities that make
all their money from share speculation.

Current financial reporting
Under current financial reporting Didi would simply be consolidated as a subsidiary
because Wallet has control via the 60% voting shares.

Proposed financial reporting
Once the proposals come through then Didi will still be consolidated as a subsidiary
because Wallet is not an investment entity. Wallet is into high tech and food stuffs.

(b)
Liabilities and equity
The problem currently is that it can be very hard to distinguish between these two. This
is because equity is only defined as the residual in this equation: equity=assets-
liabilities

Equity
But the effect of the above is that equity is undefined. So currently to identify equity we
test for liability and look for a negative.

236

Liability
A liability is a present obligation arising from a past event and the settlement of which
would result in a future economic outflow from the entity.
(must, have to, obliged, others have a right so you have liability)

Voting share capital
There is no obligation for chacha to pay a dividend to these shareholders. So the voting
share capital is equity in chacha financial statement.

Preference share capital
The shareholders have real rights to dividends and repayment so company has
corresponding obligation. The preference share capital is a liability in chacha financial
statement.

Special share capital
There is a guarantee dividend of 2%. This is an obligation. So there is certainly a
liability. But there may also be an element of equity. This would be revealed by
discounted cash flow.

DEC2010 Q4 SME Whitebirk
(i)

There are three approaches:

National GAAP for SMEs and IFRS for listed companies
237

For listed companies they use IFRS and for smaller entities to have their own national
GAAP.
The disadvantage is the inconsistency within countries between IFRS and national GAAP.
This would make comparability difficult and onerous when company goes listed.

Exemptions for SMEs within existing standards
SME are exempted from some requirements in the IFRS.
Its not convenient for financial statements preparers because they have to look through
IFRS to determine whether they need to do so.

Separate standards
This will be a separate set of standards comprising all the issues addressed in IFRS
which are relevant to SMEs.

IFRS for SMEs is based on full IFRSs, which have been simplified so that they are
suitable for SMEs.

(ii)
Simplification
There are lots of simplification in measuring assets, liabilities, income and expense.

Eg,
Goodwill and intangibles are always amortized over their estimated useful life

Research and development costs must be expensed.

Only partial goodwill method would be allowed.

Easier option
IFRS for SMEs allows only the easier option eg, revaluation model would not be allowed in
the IFRS for SMEs.

Omission
Eg, earnings per share which is not related to SMEs are omitted.

Disclosure
There are fewer disclosures needs to be made compared with IFRS.

Clear
The IFRS for SMEs is written in clear language compared to IFRS.

Cherry pick
Users cant cherry pick IFRS for SMEs if they decide to adopt IFRS for SMEs, ie, they need
to adopt that in full.
238

(b)
(ii) business combination

Only partial goodwill approach is allowed.
Goodwill is not subject to impairment but amortized it over its life but if the life cant be
estimated then assume 10 years would be use.
Calculation:

FV of consideration 5.7
NCI% X net assets(10%X6m) 0.6
FV of business 6.3
FV of net assets (6)
Goodwill at acquisition 0.3
Amortization=0.3/10years=0.03 p.a.

(iii)

Research and expenses should be written off to the statement of profit or loss.

Research expense:
DR I/S 1m
CR cash 1m

Development cost:
DR I/S $0.5m
CR cash $0.5m

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ACCA P2 Corporate Reporting

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