Professional Level –Essentials Module

Paper P2 (INT)
Corporate Reporting
(International)

Timeallowed:3hours15minutes

This question paper is divided into two sections:

Section A–This ONE question is compulsory and MUST be attempted

Section B–TWO questions ONLY to be attempted

Do NOT open this question paper until instructed by the supervisor.

This question paper must not be removed from the examination hall.
 Section A – This question is compulsory and MUST be attempted

Question 1:
KONG, a company, prepares its financial statements in accordance with International Financial Reporting
Standards. It has investments in two other companies, Beats and Benz. The statements of financial
position of all three companies as at 31 December 2016 are presented.

KONG Beats Benz

$m $m $m
Assets
Non-current assets
Property, plant and equipment 80 96 67
Financial asset 45 10
Investment in Benz 119
Investments in beats 110
Total Non-current assets 354 106 67

Current Assets
Inventories 9 36 25
Trade receivables 7 48 33
Cash and cash equivalent 19 35 14
Total assets 389 210 139

Equity and liabilities

Share Capital 21 10 20
Other components of equity 50 15 20
Retained earnings 105 79 60
Total Equity 176 89 100

Noncurrent liabilities 110 91 18

Current liabilities 103 30 21
Total equity and liabilities 389 210 139

1. Kong alimited company acquired 60% shareholding of another entity called Beats at 1 January 2016 by
transferring total consideration of $150 million. The consideration comprise of cash of $110 million and a
transfer of land which had a fair value of 40 million at acquisition date.The carrying value of transferred
land was $30 million. Kong has correctlyaccounted for the cash component of consideration in its
individual financial statements, but transfer of land has not yet been accounted for.The identifiable net
assets of Beats at the date of acquisition had a fair value of $ 125million, any difference between fair
value and carrying value of identifiable net assets belongs to non-depreciable land. At date of acquisition
retainedearnings and other component of equity were $55m and $10 million respectively. It is the entity
policy to measure the non-controlling interest at its fair value. The fair value of non-controlling interest at
1 January 2016 was assessed at $50m.
2. Furthermore, Kong acquired 70% of shareholding in another entity, Benz on 1 July 2015 by paying a
consideration of $119 million when identifiable net asset of Benz had a fair value of $99 million. At the
date of acquisition, retained earnings and other components of equity were $45 million and $18 million
respectively. Any difference in fair value is due to the fair value movement of one of the component of
Plant which has a remaining useful life of 8years at 1 July 2015. Kong policy for Benz is to measure the
non-controlling interest at its proportionate share of fair value of net asset at acquisition date.

3. Kong intends to conduct an impairment test on both of its subsidiaries during the year, the recoverable
value of net assets of Beats at 31 December 2016 $219 million, any impairment loss is related to goodwill
and recoverable value of net assets of Benz ltd is more than its carrying value of net assets.

4. Kong commenced a long term bonus scheme for employees at 1 January 2016. Under the scheme the
employees receive a cumulative bonus on the completion of four years’ service. The bonus is 20% of the
cumulative four years annual salaries of the employees. The total salary of employees for the year to 31
December 2016 is $40 million and a relevant discount rate is 8%. Additionally, at 31 December 2016, it is
assumed that all employees will receive the bonus and that salaries will rise by 5% per year for the next
four years. No adjustment has yet been made in financial statements related to this bonus scheme.

5. Kong also operates a pension plan where contribution to pension plan is guaranteed to employees is 10%
of salary and entity obligation is restricted up to the amounts of promised contribution, Kong’s contribution
is $1 million to the plan for the year ended 31 December 2016 with the balance will be contributed in the
early days of next year. Total salary expense reported in current year profit and loss is $12 million. No
accounting entries have yet been posted for the contribution made.

6. Kong acquired anon-depreciable property in foreign country for 5m dirham at 1 January 2016 when the
exchange rate was 1$=2.5 dirham, Kong has recorded the property in its financial statement at 1 January
2016 as property, plant and equipment. But no further movement has been recorded after 1 January2016;
at 31 December 2016 fair value of property increase by 1 million Dirham which gives a resulting fair value
of 6 million Dirham. The exchange rate at year end 31 December2016 is 1$=2.4dirham.
7. Included in Kong financial asset is an amount invested in debenture of Rita a limited liability company of
$40m @ 8%, the directors of Kong assesses at year end that credit rating of this debenture has not
deteriorated significantly and they estimates the present value of lifetime expected credit loss in relation to
this investment of $12million at 31 December 2016. The probability of default over next twelve months is
estimated at 25%. Kong policy is to follow the three stage approach for impairments of financial assets as
per revised IFRS 9. The $40 million was recorded in financial asset and interest income has also been
recorded in Kong financial statement, but no other accounting entries have yet been made. The twelve
months expected credit loss recognized at 31 December 2015 was $2 million.

Required:
Part A:
Prepare the consolidated statement of financial position of Kong Group for the year ended 31
December 2016. (35 marks)

Part B: Discuss what is meant by corporate social responsibility and in particular the factors
which should encourage companies to disclose social and environmental information.
(10 marks)

Part C: A recent survey has indicated that there has been a vast increase in narrative
reporting by FTSE 350 companies on the subject of corporate responsibility however only a
very small portion of companies identify corporate responsibilities as strategic issues or
provide key performance indicators in this area.
Discuss the ethical issues of narrative reporting without reference to strategy and the lack of key
performance indicators to support the narrative disclosures. (5 marks)
(Total 50 marks)
Section B – Attempt any TWO questions from this section

Question 2:

Kinder is a public limited company with the year ended 31 December 2017, which is involved
in the number of transactions about which the management of the company is not sure that
how they must be dealt in the current year financial statements according to IFRS’s.

Requirement A: IFRS 9 Financial instruments was published in final form in July 2014. The final version
of the standard incorporated the new requirements on impairment of financial assets.

Outline the requirement of IFRS 9 as regards the impairment of financial assets. (8 marks)

Requirement B: Kinder hold investments to collect their contractual cash flow but would sell an
investment in particular circumstances. During the reporting year Kinder has sold some its investments
and directors are unsure how to derecognize these investments in financial statements of Kinder. Advice
the directors about derecognition of financial assets under the international financial reporting standards
and discuss how the below financial assets derecognition will be dealt in financial statements of Kinder.
Kinder sells a financial asset for $10,000. There are no strings attached to the sale, and no other rights or
obligations are retained by Kinder. It sold another investment in shares for $10,000 but retains a call
option to repurchase the shares at any time at a price equal to their current fair value on the repurchase
date. Lastly, a portfolio of short term account receivables for $100,000 and promises to pay up to $3000
to compensate the buyer if and when defaults occur. Expected credit losses are significantly less than
$3000 and there are no other significant risks. (9 marks)

Requirement C: On 1 January 2017, Kinder granted 500 SAR’s to its 300 managers. All of the rights
vested on 31 December 2018 but they can be exercised from 1 January 2018 up to 31 December 2019.
At the grant date the value of each SAR was $10 and it was estimated that 5% of the managers would
leave during the vesting period. The fair value of the SAR is as follow:

Fair Value of SAR

31 December 2017 $9

31 December 2018 $11

31 December 2019 $12

All of the managers who were expected to leave employment did leave the company as expected before
31 December 2018. On 31 December 2019, 60 managers exercised their options when the intrinsic value
of the right was $10.50 and were paid in cash.

Kinder is confused how to account for the SARs under IFRS 2, and would like advice as how the SARs
should have been accounted for from the grant date to 31 December 2018. (8 marks)

(Total 25 marks)
Question 3:
Below are accounting transactions explain as per the requirement
(i) BPSL was recently granted an operating license by the government to operate an ecologically
sound power station on the condition that it is dismantled at the end of its life which is estimated
to be twenty years. BPSL constructed the power station at a cost of $200 billion and commenced
operations on 1st July 20X7 with depreciation being charged straight-line over twenty years. It
was estimated, at 30 June 20X8, that it will cost $30 billion, in terms of present value using a
discount rate of 5%, to restore the site to its original condition.95% of these costs relate to the
removal of the power station and 5% relates to environmental damage caused through
generating energy over a twenty-year period.

Required:
(a) Explain, under IAS 16, the recognition and measurement issues involved in respect of the
newly constructed, ecologically sound power station in (i) above and decommissioning costs
to be incurred in the future.
(7 marks)

(ii) BPSL owns the following properties at 1 July 20X7:

Property A: An office building used by BPSL for administrative purposes with a depreciated
historical cost of $2 million. At 1 July 20X7 it had a remaining life of 20 years. After
reorganization on 1 January 20X8, the property was left to a third party and reclassified as an
investment property applying BPSL policy of the fair value model. An independent valuer
assessed the property to have a fair value of $2·3 million at 1 January 20X8, which had risen to
$2·34 million at 30 June 20X8. Property B: Another office building sub-let to a subsidiary of BPSL.
At 1 July 20X7, it had a fair value of $1·5 million which had risen to $1·65 million at 30 June
20X8

Required:
(b) Prepare extracts from BPSL’s entity statement of profit or loss and other comprehensive
income and statement of financial position for the year ended 30 June 20X8 in respect of the
above properties. In the case of property B only, state how it would be classified in BPSL’s
consolidated statement of financial position.
Note: Ignore deferred tax. (7 marks)
 (c) Seamus O’Brien Ltd has a defined benefit plan for its staff. Staff is eligible for an annual
pension between the date of their retirement and the date of their death equal to:

Annual Pension = Final salary per year/50* years of service

You are given the following data relating to the year ended 30 September 2012:
 Yield on high quality corporate bond 10% pa
 Contribution paid by company is $12million
 Pension paid to former employees is $8million
 Current service cost was $3.75million
 After consulting with the employees, an amendment was agreed to the terms of the plan,
reducing the benefits payable. The amendment takes effect from 30 September 2012 and the
actuary has calculated that the resulting reduction in the pension obligation is $6 million.
 NPV of the pension obligation at:
1st Oct 2011- $45million
30th September 2012- $44million (as given by the actuary, after adjusting for the plan
amendment)

 Fair Value of the plan assets, as valued by the actuary:

1st Oct 2011- $52million
30th September 2012- $64.17million

Required:
Produce the notes to the statement of financial position and statement of profit or loss and
other comprehensive income in accordance with IAS 19. (11 marks)
(Total 25 marks)
Question 4:
Devil Ltd, a public limited company, operates a national chain of supermarkets. The finance director
requires advice on how to account for the transactions below for the year ended 30 September 20X1.

(a) As well as selling food, on 1 April 20X1, Devil Ltd purchased a ten year pharmacy license for $5m and
opened pharmacies in some of its larger stores. As a result, Devil Ltd had to spend $0.5m training and
recruiting pharmacists, $0.3m marketing its new products and $1m fitting out a new dedicated area of
the store for the pharmacy. (5 marks)

(b)Devil Ltd has a policy of upgrading their computers every five years. On 1 October 20X0, Devil Ltd
spent $3m on new hardware, $0.2m on related installation costs, $0.4m on Windows 7 (the hardware did
not include an operating system) and $0.1m on the latest version of Microsoft Office. From 1 October
20X0 to 1 April 20X1, the internal IT department developed a new program to incorporate the new
pharmaceutical products at a total cost of $0.3m. (5 marks)

(c)Devil Ltd has a policy of buying up available land in suitable locations outside town centers for
potential development of future stores. Devil Ltd does not have a policy of revaluing its land and
buildings unless they are investment property. At 30 September 20X1, Devil Ltd held:
 Land which had cost $20m which had not yet been developed
 Land on which construction of a new store had started at a total cost of $30m
 Land which Devil Ltd had purchased but had decided was unsuitable for development of a store
and instead during the year constructed residential property for rental income. This land and
property construction cost $40m in total. Construction was completed on 1 April 20X1. The fair
value of the land and buildings at the yearend was $45m. (5 marks)

(d)Devil Ltd purchased a property for $8 million on 31 March 20X7 to be paid either in cash or in shares.
If the supplier chooses the payment in shares then he will get 1.5 million shares in six months and if he
chooses to receive the payment in cash then he will receive 1.3 million shares equivalent amount in three
months. The share price in three months is estimated to be $7 and in six months to be $8.
(5 marks)
(e) Devil acquired a car taxi business on 1 January 20X1 for $230,000. The values of the assets of the
business at that date based on net selling prices were as follows:

$000
Vehicles (12 vehicles) 120
Intangible assets (taxi license) 30
Trade receivables 10
Cash 50
Trade payables (20)
––––
190
––––
On 1 February 20X1, the taxi entity had three of its vehicles stolen. The net selling value of these vehicles
was $30,000 and because of non‐disclosure of certain risks to the insurance entity, the vehicles were
uninsured. As a result of this event, Devil wishes to recognize an impairment loss of $45,000 (inclusive of
the loss of the stolen vehicles) due to the decline in the value in use of the cash generating unit, i.e. the
taxi business. On 1 March 20X1 a rival taxi entity commenced business in the same area. It is anticipated
that the business revenue of Devil will be reduced by 25% leading to a decline in the present value in use
of the business, which is calculated at $150,000. The net selling value of the taxi license has fallen to
$25,000 as a result of the rival taxi operator. The net selling values of the other assets have remained
the same as at 1 January 20X1 throughout the period. (5 marks)
(Total marks 25)