Examiners commentaries 2012

1
Examiners commentaries 2012
AC3091 Financial reporting
Important note
This commentary reflects the examination and assessment arrangements
for this course in the academic year 20112012.
From 20122013 the format of the examination paper will change. The
paper will be divided into two sections, Section A and Section B. Section
A will contain four questions, which will combine numerical and written
components, and Section B, which will contain two essay questions.
Candidates will be required to answer four questions with at least one
question from each section. All questions will carry equal marks. The
style of questions will remain unchanged.
Information about the subject guide
Unless otherwise stated, all cross-references will be to the latest version
of the subject guide (2012).
General remarks
Learning outcomes
At the end of this course, and having completed the Essential reading and
activities, you should be able to:
explain and apply a number of theoretical approaches to financial
accounting
record and analyse data
prepare financial statements under alternative accounting conventions
describe a number of regulatory issues relating to financial accounting
critically evaluate theories and practices of, and other matters relating
to, financial accounting.
What are the Examiners looking for?
The combined questions in Section A will require candidates to prepare
calculations on a variety of topics as well as showing a critical grasp of the
theories underlying the techniques. To do well, candidates need to be able
both to explain and evaluate the theories and prepare a range of financial
statements and calculations.
For quantitative parts of questions, Examiners are looking for the accurate
preparation of financial statements that follow generally accepted formats
with clear headings and accurate application of accounting techniques
to specific areas within financial reporting. Workings should always be
clearly provided.
Written components of combined questions require clear and coherent
explanations of theories, techniques and practices. Candidates must
critically evaluate theories and practices.
AC3091 Financial reporting
2
Good answers to essay-based questions in Section B will be structured
coherently and logically. It will include an introduction, a main body and
conclusion, and cover all parts of the essay question.
Typically, an essay-based question will require an explanation of an issue
within financial reporting and a critical analysis of the issue. Explanations
should be clear and include a discussion of key definitions, with examples
if appropriate. The analysis should show critical awareness of both sides
of an argument or the application of a theory or concept to financial
reporting, with an assessment of its appropriateness to financial reporting.
Planning your time in the examination
All questions in the examination paper carry equal marks and equal time
should be devoted to each question. It is important that candidates attempt
four questions and all parts of each question they answer. Marks for each
section are shown and should be used by candidates to guide their work
and time allocation. Where questions are in parts, candidates should avoid
excessively long answers to some parts and missing out other parts.
Key steps to improvement
Candidates can improve their performance by improving the presentation
of their work, providing clear workings, answering the required number
of questions and attempting all sections of a question. Often candidates
seem to focus attention on the preparation of financial statements and the
financial calculations without being able to explain, discuss and evaluate
the theories and practices central to financial reporting.
Question spotting
Many candidates are disappointed to find that their examination
performance is poorer than they expected. This can be due to a number
of different reasons and the Examiners commentaries suggest ways
of addressing common problems and improving your performance.
We want to draw your attention to one particular failing question
spotting, that is, confining your examination preparation to a few
question topics which have come up in past papers for the course. This
can have very serious consequences.
We recognise that candidates may not cover all topics in the syllabus in
the same depth, but you need to be aware that Examiners are free to
set questions on any aspect of the syllabus. This means that you need
to study enough of the syllabus to enable you to answer the required
number of examination questions.
The syllabus can be found in the Course information sheet in the section
of the VLE dedicated to this course. You should read the syllabus very
carefully and ensure that you cover sufficient material in preparation
for the examination.
Examiners will vary the topics and questions from year to year and may
well set questions that have not appeared in past papers every topic on
the syllabus is a legitimate examination target. So although past papers
can be helpful in revision, you cannot assume that topics or specific
questions that have come up in past examinations will occur again.
If you rely on a question spotting strategy, it is likely you
will find yourself in difficulties when you sit the examination
paper. We strongly advise you not to adopt this strategy.
Examiners commentaries 2012
3
Examiners commentaries 2012
AC3091 Financial reporting Zone A
Important note
This commentary reflects the examination and assessment arrangements
for this course in the academic year 20112012.
From 20122013 the format of the examination paper will change. The
paper will be divided into two sections, Section A and Section B. Section
A will contain four questions, which will combine numerical and written
components, and Section B, which will contain two essay questions.
Candidates will be required to answer four questions with at least one
question from each section. All questions will carry equal marks. The
style of questions will remain unchanged.
Information about the subject guide
Unless otherwise stated, all cross-references will be to the latest version
of the subject guide (2012).
Comments on specific questions
Candidates should answer FOUR of the following SEVEN questions. All questions
carry equal marks.
Question 1
The income statements for the year ended 31 December 2011 and the
statements of financial position as at 31 December 2011 for J Plc, L Ltd and R Ltd
are given as follows:
Income statements for the year ended 31 December 2011
J Plc L Ltd R Ltd
000 000 000
Turnover 2,900 2,100 1,200
Cost of sales (600) (900) (800)
Gross profit 2,300 1,200 400
Operating expenses (650) (480) (90)
Dividend receivable 180
Profit before tax 1,830 720 310
Tax (720) (210) (250)
Profit after tax 1,110 510 60
Dividends payable (150) (120) (10)
Net profit for the year 960 390 50
Retained profit brought forward 1,500 900 200
Retained profit carried forward 2,460 1,290 250
[For the full question please refer to the Examination paper]
AC3091 Financial reporting
4
Reading for this question
Subject guide, Chapter 5.
Alexander, D., A. Britton and A. Jorissen International Financial Reporting and
Analysis. (Andover: Cengange Learning EMEA, 2011) fifth edition [ISBN
9781408032282] Chapter 24.
Approaching the question
You are required to prepare a consolidated statement of financial position
and a consolidated income statement. These are presented below with
workings on how to obtain the figures. Please ensure you record your
workings in your answer.
Statement of financial position
Non current assets 3,300,000 Working 1
Investments 1,500,000 Working 2
Goodwill 320,000 Working 3
Share in R (associate) 135,200 Working 4
Inventories 890,000 Working 5
Interco from R 15,000
Mgt fee from R 12,000
Cash 1,075,000 Working 6
7,247,200
Share capital 600,000 H only
Retained earnings 2,593,400 Working 7
NCI 363,800 Working 8
Trade payables 990,000 H+S
Bonds 2700,000 H+S
7,247,200
Income statement
Revenue 4,900,000 Working 9
Cost of sales (1,410,000) Working 10
Gross profit 3,490,000
Investment income/ Div rec 80,000 Working 11
Operating expenses (1,130,000) H+S
Mgt fee from R 12,000
Share in R 119,200 Working 12
impairment (320,000)
Profit before tax 2,251,200
Tax (1,030,000) Working 13
Profit after tax 1,221,200
NCI (97,800) Working 14
Profit after tax and mint 1,123,400
Dividends (150,000) H only
Profit for the year 973,400
Retained profit bfwd 1,620,000 Working 15
Retained profit cfwd 2,593,400
Examiners commentaries 2012
5
Key workings (In 000)
Working 1 non current assets = H + S + revaluation of S = 600 +
2,400 + 300
Working 2 investments = total investments less cost of S less cost of
A = 300 1,200 600
Working 3 Goodwill = cost of investment Hs share of group
companies net assets at fair value at acquisition impairment
Shares in R 1,200 80% * 1,200 = 240
Shares in L 600 40% * 500 = 400
Goodwill = 640 320 = 320
Working 4 share in associate
Either Hs share in As net assets at SFP date at SFP date at fair value =
40% * 338 = 135.2
(reserves table given at end)
Or SFP share in R calculated as cost + share of post acqn reserves
impairment = 600 + 40% * (238 400) 200 = 335.2
Working 5 inventories
H+S provision for unrealised profit
Working 6 cash
H+S+cash in transit = 795 + 270 + 10
Working 7 retained earnings
= H + Hs share of Ss post acquisition reserves + Hs share of Ss post
acquisition reserves impairment =
2,483 + 80% * (1,269 650) + 40% * (238 400) 350 = 2,483 +
495.2 64.8 320 = 2,593.4
Working 8 non controlling interest
= NCI % of Ss net assets at SFP date at fair value
= 20% * 1,819 = 363.8
Reserves table
J L R
P+L 2,460 1,290 250
Purp (10)
Mgt fee payable (21) (12)
Mgt fee rec from s 21
Mgt fee rec from a 12
Revised P+L 2,483 1,269 238
Share cap 600 250 100
Revaln res 300
Revised capital and reserves 3,083 1,819 338
Income statement
Working 9 sales
H + S intercompany sales = 2,900 + 2,100 100
Working 10 cost of sales
H+S-intercompany sales + unrealised profit on inventory between H and
S = 600 + 900 100 + 10
AC3091 Financial reporting
6
Working 11 investment income
Total investment income dividends receivable from S dividends
receivable from A = 180 (0.80 * 120) (0.4 * 10)
Working 12 share in R
Hs share of As profit before tax unrealised profit on inventory between
H and A = 40% * (310 12)
Working 13 tax
H + S + Hs share of A = 720 + 210 + 0.4 * 250
Working 14 Non-controlling interest (NCI)
NCI % of Ss profit after tax less unrealised profit on inventory =
20% * (510 21)
Working 15 retained profit brought forward
= H + Hs share of S post acquisition + Hs share of A post acquisition
impairment to start of period = 1,500 + 80% * (900 650) + 40% *
(200 400) = 1,500 + 200 80
Question 2
On 1 January 2011, Fast Ltd acquired 80% of the ordinary shares of a subsidiary,
Slow Org, which operates in the currency potts, when Slow Org was
incorporated with share capital of 1,840,000 potts. No shares have been issued
by Slow Org since acquisition.
The summary statements of financial position and income statements of Fast Ltd
and Slow Org are as follows:
[For the full question please refer to the Examination paper]
Reading for this question
Subject guide, Chapter 6.
Britton and Jorissen (2011) Chapter 29.
Approaching the question
In part (a) you are required to describe the different foreign exchange
methods and to compare these methods. Both methods should be outlined
and clear comparisons between the two methods identified. These
comparisons should include which rates to use, where FX is included and
the treatment of goodwill.
The calculations for parts (b), (c) and (d) on translating the foreign
exchange subsidiary using the closing rate method and calculating foreign
exchange on net assets and goodwill and the consolidated foreign reserve
and non-controlling interest are given as follows:
Part (b)
SFP Rate Trans slow
Nca 2,380,000 5 476,000
Invest
Interco rec
Other net assets 400,000 5 80,000
Inteco pay (240,000) 5 (48,000)
Net assets 2,540,000 508,000
Examiners commentaries 2012
7
Share cap 1,840,000 2 920,000
Profit for year 700,000 P+L 175,000
FX loss Bal (587,000)
Cap + res 2,540,000 508,000
Income statement
Rate
Sales 4,000,000 4 1,000,000
Cost of sales (2,000,000) 4 (500,000)
2,000,000 500,000
Depn (600,000) 4 (150,000)
Other exp (200,000) 4 (50,000)
pbt 1,200,000 300,000
tax (500, 000) 4 (125,000)
Pat 700,000 175,000
Part (c): Calculation of how the differences arise
Opening net assets
Opening net assets at opening rate 1,840,000/2 920,000
Opening net assets at closing rate 1,840,000/5 368,000
FX loss (552,000)
Profit / income
Pat at average rate 700,000/4 175,000
PAT at closing rate 700,000/5 140,000
FX loss (35,000)
Total FX loss = (587,000)
Part (d)
FX reserve = 80% * (587,000) = 469,600
NCI = 20% * 2,540,000 = 508,000 Potts = 508,000/5 = 101,600
AC3091 Financial reporting
8
Question 3
Construction Plc has entered into a construction contract, contract X and Build
Plc has entered into a construction contract, contract Y. Contracts X and Y started
on 1 January 2011. The position on each contract at 31 December 2011 was as
follows:
X Y

Contract price 48,000 9,000
Value of work certified to date 40,000 4,500
Cost of work to date 30,420 3,600
Estimated additional costs to
completion
8,580 13,200
Payments on account 37,200 4,320
Construction Plc uses the cost method for assessing percentage completion
and Build Plc uses the value of work certified method for assessing percentage
completion.
[For the full question please refer to the Examination paper]
Reading for this question
Subject guide, Chapter 9.
Britton and Jorissen (2011) Chapter 15.
Approaching the question
Part (a)
You are required to give a clear definition of construction contracts.
The concepts of relevance and reliability need to be defined and the
accounting treatment following from each of these concepts needs to be
identified. The impact of the application of the different treatments needs
to be discussed.
Part (b)
Workings for how contract x and contract y should be accounted for are
given below:
Contract X
In the income statement
Profit on contract = 48,000 30,420 8,580 =9,000
% completion = 30,420/39,000 =
Sales = 0.78 * 48,000 = 37,440
Cost of sales = 30,420
Attributable cumulative profit = 7,020
In the statement of financial position
Construction contract balance = costs to date + attributable profit
payments on account = 30,420 + 7,020 37,200 = 240
Contract Y
In the income statement
Loss on contract = 9,000 3,600 13,200 = (7,800)
Foreseeable loss = (7,800)
Sales = 50% * 9,000 = 4,500
Examiners commentaries 2012
9
Cost of sales = 50% * (3,600 +13,200) = 8,400
Provision for F loss = (3,900)
In the statement of financial position
Construction contract balances = costs to date foreseeable loss
payments on account =3,600 7,800 4,320 = (8,520)
Question 4
Foam Ltd started trading on 1 January 2011. The income statement and the
statement of financial position for the first year of trading are given as follows:
Income statement for 2011
Sales 950,000
Cost of sales:
Opening inventory 150,000
Purchases 600,000
Closing inventory (120,000)
(630,000)
Gross profit 320,000
Depreciation (40,000)
Other expenses (180,000)
Net profit 100,000
Statement of financial position at 31 December 2011

Non current assets

Buildings net book value 360,000
Current assets
Inventory 120,000
Cash 200,000
Total assets 680,000
Share capital 500,000
Profit and loss account reserve 100,000
Trade payables 80,000
Capital, reserves and liabilities 680,000
[For the full question please refer to the Examination paper.]
Reading for this question
Subject guide, Chapter 4.
Britton and Jorissen (2011) Chapters 5, 6 and 7.
Ijiri, Y. A Defence for Historical Cost Accounting in R. Sterling (ed.) Asset
Valuation and Income Determination. (Lawrance, KA: Scholars Book Co., 1971)
[ISBN 9780914348115].
Approaching the question
(a) You are required to define historical cost accounting and discuss
both the advantages and limitations of historic cost accounting. A
good discussion is to be found in the subject guide; you may wish to
look at Ijiris chapter on the defence of historical cost accounting as
mentioned in the subject guide too.
(b) You need to clearly define and explain replacement cost, giving
appropriate examples to illustrate your definition and explanation.
AC3091 Financial reporting
10
Both the advantages and limitations of replacement cost need to be
clearly discussed.
(c) You need to present clear explanations of realised and unrealised
holding gains on non-current assets.
(d) The solutions to the replacement cost financial statements with key
adjustment indices are given as follows:
SFP Rate Cv kiwi
Nca 360,000 230/200 414,000
Invent 120,000 250/215 139,535
Cash 200,000 200,000
Net assets 680,000 753,535
Share cap 500,000 500,000
Ret profit 100,000 71,714
T pay 80,000 80,000
Unrealised nca 54,000 RC NCA HC NCA
Realised nca 6,000
RC depreciation
HC depreciation
Real inventory 22,286
RC cost of sales
HC cost of sales
Unrealised inventory 19,535
RC closing
inventory HC
closing inventory
Cap + res 680,000 753,535
Income statement
Cv kiwi
Sales 950,000 950,000
Op invnt 150,000 190/180 158,333
Purch 600,000 600,000
Cl invnet (120,000) 190/215 (106,047)
(630,000) (652,286)
G profit 320,000 297,714
Exp (180,000) (180,000)
Depn (40,000) 230/200 (46,000)
Net profit 100,000 71,714
Examiners commentaries 2012
11
Question 5
(a) On 1 July 2011, Help Ltd issued an additional 1 million ordinary shares with
nominal value of 50p for 12.50 per share. The costs of this share issue
totalled 1% of the total money raised in the share issue. After this share
issue, Help Ltd issued bonus shares, in respect of all its shares, on a 1 for 5
basis. Before the share issue and the bonus issue Help Ltds share capital and
reserves were as follows:

Ordinary share capital 1,250,000

Ordinary share premium 3,750,000
Preference share capital 1,000,000
Profit and loss account reserve 40,000,000
[For the full question please refer to the Examination paper.]
Reading for this question
Subject guide, Chapters 6, 9, 10 and 12.
Britton and Jorissen (2011) Chapters 15, 16, 18, 26, 27 and 29.
Approaching the question
You are required to answer all parts of the questions. Indicative solutions
and workings are given as follows:
(a) after new issue
Ordinary share capital (nominal value 50p) 1,750,000
Ordinary share premium 15,625,000
Preference share capital 1,000,000
Profit and loss account reserve 40,000,000
(b) after bonus issue
Ordinary share capital (nominal value 50p) 2,100,000
Ordinary share premium 15,275,000
Preference share capital 1,000,000
Profit and loss account reserve 40,000,000
Sales 9,880,000
Cost of sales
Mined copper 100,000 * 84 = 8,400,000
Closing inventory = 60,000 * 84 = (5,040,000)
Cost of sales (3,360,000)
6,520,000
Admin (156,000)
Delivery (84,000)
Net profit 6,280,000
Closing inventory = direct cost plus depletion of mine plus
depreciation of equipment = 70 + 1,260,000/100,000 +
140,000/100,000 = 70 + 12.6 + 1.4 = 84 =
(c) Earnings per share, gearing and return on equity need to be defined
briefly and the impact of increasing long-term debt on each of the
ratios needs to be discussed.
AC3091 Financial reporting
12
(d) A definition of post balance sheet events needs to be provided and the
treatment of post balance sheet events needs to be clearly explained.
Answers should also address why the area is important to users.
(e) June 2011
Machine 10,000
payable 10,000
December 2011
Machine 10,000
payable 8,333
P+L 1,667 gain
Question 6
Either
Discuss the reasons for initiating standard setting in the UK in the 1970s and
critically assess the development in accounting standards in the UK since then.
Or
Discuss and critically assess Hicks measures of income and the implications of
these measures of income for financial reporting.
Reading for the Either part of this question
Subject guide, Chapter 1.
Britton and Jorissen (2011) Chapter 1.
Approaching the Either part of this question
You need to discuss the process of standard setting in the UK,
incorporating the definition of an accounting standard. You need to
discuss the key reasons for standard setting in the 1970s and any changes
since then, for example, changes in response to the Dearing review and
introduction of International Financial Reporting Standards (IFRS). It is
particularly important to provide a critical assessment of standard setting
and the key changes. Please read as widely as possible, including the
Further readings for this topic in the subject guide.
Reading for the or part of this question
Subject guide, Chapter 3.
Britton and Jorissen (2011) Chapter 4.
Approaching the or part of this question
You need to discuss the key definitions of Hicks measures of income
and give explanations as well as equations. You might find it helpful to
illustrate this discussion with appropriate examples. It is important that
you also discuss the advantages and limitations of the different measures
in detail and focus particular attention on the implications for financial
reporting and how appropriate the measures are for financial reporting.
Please read as widely as possible, including the Further readings for this
topic in the subject guide.
Examiners commentaries 2012
13
Question 7
Either
Define goodwill and discuss the accounting concepts used to determine the
accounting treatment of goodwill. Compare and contrast SSAP 22 on goodwill
with IAS 38 on intangibles as it relates to goodwill and critically assess these
standards.
Or
Discuss the concept of substance over form, illustrating your answer with
reference to finance and operating leases. Compare and contrast the accounting
for finance and operating leases and discuss the different impact that
accounting for finance and operating leases has on financial statements.
Reading for the Either part of this question
Subject guide, Chapter 8.
Britton and Jorissen (2011) Chapter 13.
Approaching the Either part of this question
You are required to define goodwill and give examples of goodwill.
You also need to define and discuss the key concepts of matching and
prudence in determining the accounting treatment of goodwill. The
discussion should include how these concepts have changed over time and
why. You need to provide outlines (brief summaries) of SSAP 22 and
IAS 38 and compare these two standards. Particularly important is the
critical assessment of advantages and limitations of each of the standards,
which should be clearly discussed. Please read as widely as possible,
including the Further readings for this topic in the subject guide.
Reading for the or part of this question
Subject guide, Chapter 10.
Britton and Jorissen (2011) Chapters 16 and 18.
Approaching the or part of this question
You need to define and discuss and give examples of the concept of
substance over form, for example, leases, quasi subsidiaries, consignment
stock, sale and repurchase agreements, and debt factoring. You should
explain both types of leases and identify how they are accounted for. You
need to discuss the impact of the different accounting treatments on the
financial statements and illustrate this with appropriate examples. You
also need to discuss the impact of the different treatments on financial
statements, perhaps with reference to economic consequences and
accounting ratios. Please read as widely as possible, including the Further
readings for this topic in the subject guide.
AC3091 Financial reporting
14
Present Value Tables
Discount rates (r) %
time / 1 2 3 4 5 6 7 8 9 10
Periods
(n)
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
Discount rates (r) %
time / 11 12 13 14 15 16 17 18 19 20
periods
(n)
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065

Examiners commentaries 2012
15
Examiners commentaries 2012
AC3091 Financial reporting Zone B
Important note
This commentary reflects the examination and assessment arrangements
for this course in the academic year 20112012.
From 20122013 the format of the examination paper will change. The
paper will be divided into two sections, Section A and Section B. Section
A will contain four questions, which will combine numerical and written
components, and Section B, which will contain two essay questions.
Candidates will be required to answer four questions with at least one
question from each section. All questions will carry equal marks. The
style of questions will remain unchanged.
Information about the subject guide
Unless otherwise stated, all cross-references will be to the latest version
of the subject guide (2012).
Comments on specific questions
Candidates should answer FOUR of the following SEVEN questions. All questions
carry equal marks.
Question 1
The income statements for the year ended 31 December 2011 and the
statements of financial position as at 31 December 2011 for Book Plc, Read Ltd
and Buy Ltd are given as follows:
Income statements for the year ended 31 December 2011
Book Plc Read Ltd Buy Ltd
000 000 000
Turnover 8,700 6,300 3,600
Cost of sales (1,800) (2,700) (2,400)
Gross profit 6,900 3,600 1,200
Operating expenses (2,950) (1,440) (270)
Dividend receivable 540
Profit before tax 4,490 2,160 930
Tax (1,160) (630) (750)
Profit after tax 3,330 1,530 180
Dividends payable (450) (360) (30)
Net profit for the year 2,880 1,170 150
Retained profit brought forward 4,500 2,700 600
Retained profit carried forward 7,380 3,870 750
[For the full question please refer to the Examination paper.]

AC3091 Financial reporting
16
Reading for this question
Subject guide, Chapter 5.
Alexander, D., A. Britton and A. Jorissen International Financial Reporting and
Analysis. (Andover: Cengange Learning EMEA, 2011) fifth edition [ISBN
9781408032282] Chapter 24.
Approaching the question
You are required to prepare a consolidated statement of financial position
and a consolidated income statement. These are presented below with
workings on how to obtain the figures. Please ensure you record your
workings in your answer.
Statement of financial position
Non current assets 9,900,000 Working 1
Investments 4,500,000 Working 2
Goodwill 960,000 Working 3
Share in Buy 405,600 Working 4
Inventories 2,670,000 Working 5
Interco from Buy 55,000
Mgt fee a 36.000
Cash 3,225,000 Working 6
21,751,600
Share capital 1,800,000 H only
Retained earnings 7,780,200 Working 7
NCI / Minority interests 1,091,400 Working 8
Trade payables 2,980,000 H+S
Bonds 8,100,000 H+S
21,751,600
Income statement
Revenue 14,700,000 Working 9
Cost of sales (4,230,000) Working 10
Gross profit 10,470,000
Investment income/ Div rec 240,000
Operating expenses (4,390,000) Working 11
Mgt fee from Buy 36,000
Share in Buy 357,600 Working 12
Impairment (960,000)
Profit before tax 5,753,600
Tax (2,090,000) Working 13
Profit after tax 3,663,600
NCI/Minority interest (293,400) Working 14
Profit after tax and mint 3,370,200
Dividends (450,000)
Profit for the year 2,920,200
Retained profit bfwd 4,860,000 Working 15
Retained profit cfwd 7,780,200
Examiners commentaries 2012
17
Key workings (in 000)
Working 1 non current assets = H + S + revaluation in S = 1,800 +
7,200 + 900
Working 2 investments = total investment cost of S cost of A = 9,900
3,600 1,800
Working 3 Goodwill = cost of investment in group company Hs share of
group companies net assets at fair value at acquisition
Shares in Read 3,600 80% * 3,600 = 720
Shares in Buy 1,800 40% * 1,500 = 1,200
Goodwill = 1,920 960 = 960
Alternatively goodwill of A can be included in the share in associate figure
Working 4 share in Buy = Hs share of As net assets at fair value at SFP
date = 40% * 1,014 = 405.6 (from reserves table below) with goodwill
included in goodwill figure.
alternative = SFP share in Buy calculated as cost + share of post acqn
reserves impairment = 1,800 + 40% * (714 1,200) 600 = 1,005.6
Working 5 inventories = H+S-provision for unrealised profit between
inventory between H and S = 900 + 1,800 30
Working 6 cash = H + S + cash in transit = 2,385 + 810 + 30
Working 7 retained earnings = H + Hs share of Ss post acquisition
reserves + Hs share of Ss post acquisition reserves impairment =
7,449 + 80% * (3,807 1,950) + 40% * (714 1,200) 960 = 7,449 +
1,485.6 194.4 960 = 7,780.2
Working 8 non controlling interest = NCI % of Ss net assets at SFP date
at fair value = 20% * 5,457 = 1,091.4
Reserves table
Book Read Buy
P+L 7,380 3,870 750
Purp (30)
Mgt fee payable (63) (36)
Mgt fee rec from s 63
Mgt fee rec from a 36
Revised P+L 7,449 3,807 714
Share cap 1,800 750 300
Revaln res 900
Revised capital and reserves 9,249 5,457 1,014
Income statement
Working 9 sales = H +S intercompany sales = 8,700 + 6,300 300
Working 10 cost of sales = H + S-intercompany sales +unrealised profit
on inventory between H and S = 1,800 + 2,700 300 + 30
Working 11 investment income = Total investment income dividends
receivable from S dividends receivable from A = 540 (0.80 * 360)
(0.4 * 30)
Working 12 share in r
Hs share of As profit before tax unrealised profit on inventory between H
and A = 40% * (930 36)
AC3091 Financial reporting
18
Working 13 tax
H + S + Hs share of A = 1,160 + 630 +0.4 * 750
Working 14 Non controlling interest
NCI % of Ss profit after tax less unrealised profit on inventory = 20% *
(1,530 63)
Working 15 retained profit brought forward
= H + Hs share of S post acquisition + Hs share of A post acquisition
impairment
Question 2
On 1 January 2001, Pear Ltd acquired 80% of the ordinary shares of a subsidiary,
Kiwi Org. Kiwi Org trades in the currency potts. On 1 January 2001 the balance
on the accumulated profits of Kiwi Org was 40,000 potts and the share capital
of Kiwi Org was 300,000 potts.
The summary income statements and statements of financial position of Pear Ltd
and Kiwi Org are given as follows:
Statement of financial position as at 31 December 2011
Kiwi Pear
potts
Non-current assets land 461,000 185,000
Investment in Kiwi 30,000
Inventories 75,000 180,000
Inter-company receivable from Kiwi 8,000
Cash 25,000 22,000
Inter-company payable to Pear (16,000)
Total assets less liabilities 545,000 425,000
Share capital 300,000 180,000
Profit and loss account reserve
brought forward
100,000 120,000
Profit for the year 145,000 125,000
Capital and reserves 545,000 425,000
Income statement Kiwi Kiwi Pear Pear
year ended 31 December 2010 potts potts
Sales 380,000 760,000
Opening inventory 50,000 40,000
Purchases 200,000 500,000
Closing inventory (75,000) (55,000)
Cost of sales (175,000) (485,000)
Gross profit 205,000 275,000
Other expenses (25,000) (80,000)
Profit before tax 180,000 195,000
Tax (35,000) (70,000)
Profit after tax 145,000 125,000
[For the full question please refer to the Examination paper.]
Reading for this question
Subject guide, Chapter 6.
Britton and Jorissen (2011) Chapter 29.
Examiners commentaries 2012
19
Approaching the question
You are required to translate the income statement using the temporal
method, prepare a consolidated income statement using the temporal
method and calculate goodwill. The workings are shown below.
Part (a)
SFP needed to calculate net profit for the year
SFP Rate Trans kiwi
Nca 461,000 10 46,100
Invest
GW
Invent 75,000 3 25,000
cash 25,000 2 12,500
Interco rec
Interco pa (16,000) 2 (8,000)
Net assets 545,000 75,600
Share cap 300,000 10 30,000
P+L bfwd 100,000 Given 20,000
Profit for year 145,000 Bal 25,600
Cap + res 545,000 75,600
Income statement
Rate
Sales 380,000 4 95,000
Op invnt 50,000 4.5 11,111
Purch 200,000 4 50,000
Cl invnet (75,000) 3 (25,000)
(175,000) (36,111)
205,000 58,889
Exp (25,000) 4 (6,250)
FX (18,289)
pbt 180,000 34,350
tax (35,000) 4 (8,750)
Pat 145,000 25,600
Part (b)
Consolidated income statement
kiwi pear cons
Sales 95,000 760,000 855,000
Cost of sales (36,111) (485,000) (521,111)
Gross profit 58,889 275,000 333,889
Exp (6,250) (80,000) (86,250)
FX (18,289) (18,289)
Pbt 34,350 195,000 229,350
Tax (8,750) (70,000) (78,750)
Pat 25,600 125,000 150,600
Nc1 (5,120)
Pat and nci 145,480
AC3091 Financial reporting
20
Part (c)
Goodwill = cost in investment in currency Hs share of net assets of S in
currency at fair value at acquisition date = 30,000 * 10 80% (340,000)
= 28,000
Goodwill in sfp in = 28,000/10 = 2,800
Part (d)
You are required to outline both methods and identify clear comparisons
between the two methods. These comparisons should include which
rates to use, where FX is included and the treatment of goodwill. The
functional currency needs to be defined and the factors which determine
the functional currency need to be discussed.
Question 3
Boat Plc has the following projected information:
Year ended 31 December Profit before depreciation Capital allowances Depreciation
2012 60,000 19,200 3,840
2013 57,600 3,840 15,360
2014 52,800 3,840 11,520
2015 48,000 26,880 7,680
The tax rate for Boat Plc is 35%. There is no deferred tax balance brought
forward as at 1 January 2012.
Required
(a) Discuss the method for calculating tax in the UK and how tax is accounted for
in financial statements. (5 marks)
(b) What is deferred tax and why is it needed? (5 marks)
(c) What are permanent and temporary differences within deferred tax and how
are they treated for deferred tax purposes? (5 marks)
(d) Show the tax and deferred tax in the income statements and the deferred tax
in the statements of financial position for Boat Plc for the years 2012 to 2015
under the flow through and full provision methods. (10 marks)
[For the full question please refer to the Examination paper.]
Reading for this question
Subject guide, Chapter 11.
Britton and Jorissen (2011) Chapter 19.
Approaching the question
Part (a)
You are required to give an outline of the UK tax system and outline how
tax is accounted for in income statements and statements of financial
position. This part did not need any explanation of deferred tax.
Part ( b)
You need to define deferred tax and clearly discuss the different reasons
why deferred tax is needed.
Part (c)
You need to define both permanent and temporary differences, giving
appropriate examples. You also need to explain how these are treated
within deferred tax.
Examiners commentaries 2012
21
Part (d)
The calculations for deferred tax in the years 2012 to 2015 are indicated
below:
Flow through 2012 2013 2014 2015
Profit 60,000 57,600 52,800 48,000
CA (19,200) (3,840) (3,840) (26,880)
Tax profit 40,800 53,760 48,960 21,120
Tax 35% 14,280 18,816 17,136 7,392
D tax 0 0 0 0
Full provision
Tax 14,280 18,816 17,136 7,392
D tax P+L * 5,376 (4,032) (2,688) 6,720
D tax B/s 5,376 1,344 (1,344) 5,376
*CA 19,200 3,840 3,840 26,880
Depn 3,840 15,360 11,520 7,680
CA-dpn 15,360 (11520) (7,680) 19,200
35% d tax 5,376 (4,032) (2,688) 6,720
Question 4
Hat Ltd started trading on 1 January 2011. The income statement and the
statement of financial position for the first year of trading are given as follows:
Income statement for 2011
Sales 1,900,000
Cost of sales
Opening inventory 300,000
Purchases 1,200,000
Closing inventory (240,000)
(1,260,000)
Gross profit 640,000
Depreciation (80,000)
Other expenses (260,000)
Profit before tax 300,000
Tax (100,000)
Profit after tax 200,000
[For the full question please refer to the Examination paper.]
Reading for this question
Subject guide, Chapter 4.
Britton and Jorissen (2011) Chapters 5, 6 and 7.
Approaching the question
Part (a)
You are required to give a clear definition of current purchasing power
financial statements, including definitions of all key terms. You also need to
explain and discuss the need and advantages of current purchasing power
financial statements. In addition, you need to define the net monetary
capital adjustment and discuss why this adjustment is required.
AC3091 Financial reporting
22
Part (b)
You need to clearly explain the concept of financial capital maintenance
and how this is associated with CPP.
Part (c)
The CPP financial statements are presented below.
SFP Rate CPP
Nca 720,000 190/150 912,000
Invent 240,000 190/170 268,235
Cash 600,000 600,000
Net assets 1,560,000 1,780,235
Share cap 1,200,000 190/150 1,520,000
Ret profit 200,000 Bal 100,235
T pay 160,000 160,000
1,560,000 1,780,235
Income statement
Cpp hat
Sales 1,900,000 190/160 2,256,250
Op invnt 300,000 190/150 380,000
Purch 1,200,000 190/160 1,425,000
Cl invnet (240,000) 190/170 (268,235)
(1,260,000) (1,536,765)
G profit 640,000 719,485
Exp (260,000) 190/160 (308,750)
Depn (80,000) 190/150 (101,333)
Loss on nmwc (90,417)
PBT 300,000 218,985
Tax (100,000) 190/160 (118,750)
PAT 200,000 100,235
Working for NMWC adjustment
1/1 100,000 190/150 = 126,667
30/6 340,000 190/160 = 403,750
=> Loss = 26,667 + 63,750 = 90,417
Question 5
(a) Discuss the accounting treatment of internally and externally generated
intangible assets. (5 marks)
(b) On 1 January 2011 Marmalade Ltd revalued to 500,000 a building which
had cost 200,000 when acquired on 1 January 2008. The building was
depreciated using straight line depreciation at a rate of 10% per annum. The
useful economic life of the building remains unchanged.
Examiners commentaries 2012
23
Required
Show how the building will be accounted for in the financial statements of
Marmalade Ltd from 2008 to 2011. (5 marks)
[For the full question please refer to the Examination paper.]
Reading for this question
Subject guide, Chapters 1, 6, 7, 8 and 9.
Britton and Jorissen (2011) Chapters 1, 12, 13, 15 and 29.
Approaching the question
You are required to answer all parts of the questions. Indicative solutions and
workings are given as follows:
(a) General definitions of internally and externally generated intangibles,
illustrated with appropriate examples need to be presented. The
accounting treatment for both types of assets needs to be clearly
explained.
(b) Cost 200,000
Accumulated depreciation (60,000)
Net book value at revaluation 140,000
Revaluation reserve 360, 000
Revalued asset depreciated over 5 years remaining useful economic life
Depreciation = 500,000/7 = 71,429
2008 depn = 20,000 nbv = 180,000
2009 depn = 20,000, nbv = 160,000
2010 depn = 20,000, nbv = 140,000
2011 revaln res = 360,000
depn = 71,429
nbv = 428,571
(c) Machine 2,000
payable 2,000
December 2011
Machine 2,000
Payable 2,500
P+L 500 loss
(d) sales 19,760,000
cost of sales
mined copper 200,000 * 154 = 30,800,000
closing inventory = 120,000 * 154 = (18,480,000)
Cost of sales (12,320,000)
7,440,000
Admin (312,000)
Delivery (168,000)
Net profit 6,960,000
AC3091 Financial reporting
24
closing inventory = direct cost plus depletion of mine plus
depreciation of equipment = 140 + 2,520,000/200,000 +
280,000/200,000 = 140 + 12.6 + 1.4 = 154
(e) The concept of true and fair within accounting needs to be discussed
including discussion of definition, application in the UK, role of
accounting standards and the role of the Courts.
Question 6
Either
Discuss the traditional and economic arguments for and against accounting
regulation.
Or
Discuss the need for conceptual frameworks within financial reporting. Is it
possible for financial statements to comply with all qualitative characteristics
discussed within the conceptual framework?
Reading for the either part of this question
Subject guide Chapter 1.
Britton and Jorissen (2011) Chapter 1.
Beaver, W.H. Financial Reporting: An Accounting Revolution. (Harlow: Prentice-Hall,
1981) [ISBN 9780133161335] Chapter 7.
Approaching the either part of this question
You need to define accounting regulation in relation to financial reporting
in the UK. You need to discuss and critically assess both traditional and
economic arguments (for example, as outlined by Beaver, 1981) for and
against regulation. Please read as widely as possible, including the Further
readings for this topic in the subject guide.
Reading for the or part of this question
Subject guide Chapter 2.
Britton and Jorissen (2011) Chapter 8.
Approaching the or part of this question
You need to define conceptual frameworks and briefly outline the content
of a typical conceptual framework. You need to define and describe the
qualitative characteristics of financial reporting and give examples of
these. Particularly important is a discussion of issues in fulfilling all these
(e.g. relevance and reliability, prudence and matching, prudence and
faithful representation, timeliness and reliability, understandability and
substance over form). Please read as widely as possible, including the
Further readings for this topic in the subject guide.
Question 7
Either
Define research and development and discuss the accounting concepts used to
determine the accounting treatment of research and development. Compare and
contrast SSAP 13 on research and development with IAS 38 on intangibles as it
relates to research and development and critically assess these standards.
Or
Discuss the concept of substance over form, illustrating your answer with
reference to finance and operating leases. Compare and contrast the accounting
for finance and operating leases and discuss the impact that accounting for
finance and operating leases differently has on financial statements.
Examiners commentaries 2012
25
Reading for the either part of this question
Subject guide, Chapter 8.
Britton and Jorissen (2011) Chapter 13.
Approaching the either part of this question
You need to define research and development and give appropriate
examples. You need to define the key accounting concepts of prudence,
matching, relevance and reliability, and discuss the application of these
concepts to accounting for research and development. You need to
outline the key provisions of SSAP 13 and IAS 38 in relation to research
and development and compare these standards. This comparison should
include both the general approach within the standards and the specific
provisions of the standard. It is particularly important to provide a critical
assessment of the standards and the area and you should include the
advantages and limitations of each standard. Please read as widely as
possible, including the Further readings for this topic in the subject guide.
Reading for the or part of this question
Subject guide, Chapter 10.
Britton and Jorissen (2011) Chapters 16 and 18.
Approaching the or part of this question
You need to define and discuss the concept of substance over form
and give examples of substance over form, for example, leases, quasi
subsidiaries, consignment stock, sale and repurchase agreements and
debt factoring. You should explain both types of leases and identify how
they are accounted for. You need to discuss the impact of the different
accounting treatments on the financial statements and illustrate this with
appropriate examples. You also need to discuss the impact of the different
treatments on financial statements, perhaps with reference to economic
consequences and accounting ratios. Please read as widely as possible,
including the Further readings for this topic in the subject guide.
AC3091 Financial reporting
26
Present Value Tables
Discount rates (r) %
time / 1 2 3 4 5 6 7 8 9 10
Periods
(n)
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
Discount rates (r) %
time / 11 12 13 14 15 16 17 18 19 20
periods
(n)
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065