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Notes: the unrealised profit on the sale of the plant was initially $400,000, of this 10% i.e. $40,000 has been realised via
Stopples depreciation charge, giving a net adjustment of $360,000 to both Hanfords profits and the carrying value of the
plant.
Stopples dividends for the year are $1,200,000 ($400,000 interim plus $800,000 final). The post acquisition amount
of these attributable to Hanford is $450,000 (1,200,000 x 75% x 6/12); therefore of the $600,000 ($800,000 x 75%)
of Stopples proposed dividend that Hanford will receive, $150,000 should be treated as pre-acquisition.
(iv) Minority interest
Balance c/f 5,950 Ordinary shares (8,000 x 25%) 2,000
Share premium (2,000 x 25%) 500
Accumulated profits (w (iii)) 3,450
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5,950 5,950
(b) The reasons why a parent company may not wish to consolidate a subsidiary can be broken down into two broad groups: (i) to
improve the reported position of the group financial statements; and (ii) for the reasons, and in compliance with, IAS 27
Consolidated Financial Statements and Accounting for Investments in Subsidiaries.
Improvement of the financial position:
The financial statements of a subsidiary could show any of the following:
substantial operating losses;
a poor liquidity position; or
high levels of borrowing (high gearing).
If a parent were to consolidate such a subsidiary, it would proportionately worsen the group position in the above areas. Thus a
parent may prefer not to consolidate poorly performing subsidiaries.
IAS 27s requirements:
Subsidiaries should be excluded from a parents consolidated financial statements for the following reasons:
the subsidiary operates under severe long-term restrictions. In effect the parent does not have full control (particularly over
the ability to transfer funds to the parent) over the subsidiary.
control is intended to be temporary because the investment is held exclusively with a view to its subsequent resale.
Exclusion on these grounds is only permitted where a subsidiary has never been consolidated in the past.
It is apparent that the first group of reasons for non-consolidation is not permitted by International Accounting Standards,
whereas the latter group is.
IAS 27 also makes reference to subsidiaries sometimes being excluded on the basis of differing activities. Companies that have
adopted this approach argue that to add together the assets and liabilities of companies whose activities differ greatly could lead
to consolidated financial statements that give a misleading impression (or not show a true and fair view). IAS 27 does not permit
exclusion on these grounds because it feels that differing activity problems are overcome by the provision of segmental
information.
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117,940
Current Assets
Inventory (w (iv))) 16,680
Trade accounts receivable (35,700 + 12,000) (w (iii)) 47,700 64,380
182,320
Equity and Liabilities
Capital and Reserves:
Ordinary shares of $1 each (20,000 + 4,000 + 6,000) (w (vi)) 30,000
8% Preference shares 12,000
42,000
Reserves:
Revaluation (3,400 1,000 deferred tax) 2,400
Share premium (4,000 + 12,000) (w (vi)) 16,000
Accumulated profits (w (vi)) 46,694 65,094
107,094
Current liabilities
Trade and other payables (w (v)) 18,070
Loan from Kwikfinance ((9,600 + 96) w (iii)) 9,696
Provision for income tax 23,400
Proposed dividends (w (v)) 4,980
Overdraft 1,680 57,826
Non-current liabilities
6% Loan note 10,000
Deferred tax (5,200 + 1,200 + 1,000) 7,400 17,400
Total equity and liabilities 182,320
Workings (all figures in $000)
(i) Cost of sales:
Opening inventory 12,400
Purchases 147,200
Depreciation (w (ii)) 12,250
171,850
Closing inventory (w (iv)) (16,680)
155,170
Administration:
Per question 34,440
Incorrect factoring charge (w (iii)) (2,400)
Depreciation of computer system (w (ii)) 10,160
42,200
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There would also be loan note interest of $600,000 charged for the year ($300,000 paid + $300,000 accrued).
(iv) Closing inventory:
As this was not counted at the year-end, the actual count needs to be adjusted for movements in the period between
the year-end and the date of the count;
Balance on 4 October 2001 16,000
Add goods sold at cost: normal sales (1,400/140 x 100) 1,000
sale or return (650/130 X 100) 500
Less goods received at cost (820)
Adjusted value 16,680
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(b) Telenorth Earnings per Share (EPS) for the year to 30 September 2001 000s
Number of shares at 1 October b/f 20,000
Exercise of options on this date 4,000
24,000
Rights issue of 1 for 4 on 1 July 2001(24,000/4) 6,000
Number in issue at year end 30,000
$000
Profit for the period 39,994
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3 (a) (i) Although the broad principles of accounting for non-current assets are well understood by the accounting profession,
applying these principles to practical situations has resulted in complications and inconsistency. For the most part, IAS 16
codifies existing good practice, but it does include specific rules which are intended to achieve improved consistency and
more transparency.
Cost
The cost of an item of property, plant and equipment comprises its purchase price and any other costs directly attributable
to bringing the asset into a working condition for its intended use. This is expanded upon as follows:
purchase price is after the deduction of any trade discounts or rebates (but not early settlement discounts), but it does
include any transport and handling costs (delivery, packing and insurance), non-refundable taxes (e.g. sale taxes
such as VAT/GST, stamp duty, import duty). If the payment is deferred beyond normal credit terms this should be
taken into account either by the use of discounting or substituting a cash equivalent price;
directly attributable costs are the incremental costs that would have been avoided had the assets not been acquired.
For self constructed assets this includes labour costs of own employees. Abnormal costs such as wastage and errors
are excluded;
installation costs and site preparation costs; and
professional fees (e.g. legal fees, architects fees)
In addition to the traditional costs above two further groups of cost may be capitalised:
IAS 23 Borrowing Costs allows (under the allowed alternative method), directly attributable borrowing costs to be
capitalised. Directly attributable borrowing costs are those that would have been avoided had there been no
expenditure on the asset.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets says that if the estimated costs of removing and
dismantling an asset and restoring its site qualify as a liability, they should be provided for and added to the cost of the
relevant asset.
Finally the carrying amount of an asset may be reduced by any applicable government grants under IAS 20 Accounting for
Government Grants and Disclosure of Government Assistance.
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represents a modification that enhances the economic benefits of an asset (in excess of its previously assessed
standard of performance). This could be an increase in its life or production capacity;
upgrades an asset with the effect of improving the quality of output; or
is on a new production process that reduces operating costs.
In addition to the above the Standard says it is important to take into account the circumstances of the expenditure. For
example normal servicing and overhaul of plant is a revenue cost, but if the expenditure represents a major overhaul of an
asset that restores its previous life, and the consumption of the previous economic benefits has been reflected by past
depreciation charges, then the expenditure should be capitalised (subject to not exceeding its recoverable amount). A
further example of where subsequent expenditure should be capitalised is where a major component of an asset that has
been treated separately (for depreciation purposes) is replaced or restored (e.g. new engines for an aircraft).
(b) Revaluation (particularly of properties) has been an area of great flexibility and inconsistency, often leading to misleading
financial statements and accusations of creative accounting. Under IAS 16 revaluations are permitted under its allowed
alternative treatment rules for the measurement of assets subsequent to their initial recognition. The Standard attempts to bring
some order and consistency to the practice of revaluations.
Where an entity chooses to revalue a tangible non-current asset, it must also revalue the entire class of assets to which it
belongs. Further, sufficiently regular revaluations should be made such that the carrying amounts of revalued assets should not
differ materially to their fair values at the balance sheet date. The Standard stops short of requiring annual valuations, but it does
contain detailed rules on the basis and frequency of valuation. It should be noted that where an asset has been written down to
its recoverable amount due to impairment, this is not classed as being a policy of revaluation. The effect of the above is that it
prevents selective or favourable valuations being reported whilst ignoring adverse movements, and where a company has
chosen to revalue its assets (or class thereof), the values must be kept up-to-date.
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(c) (i) The initial measurement of the cost at which the plant would be capitalised is calculated as follows:
$ $
basic list price of plant 240,000
less trade discount of 12·5% on list price (30,000)
210,000
shipping handling and installation costs 2,750
estimated pre-production testing 12,500
site preparation costs
electrical cable installation (14,000 6,000) 8,000
concrete reinforcement 4,500
own labour costs 7,500 20,000
dismantling and restoration costs (15,000 + 3,000) 18,000
Initial cost of plant 263,250
Note: the early settlement discount is a revenue item (probably deducted from administration costs). The maintenance
cost is also a revenue item, although a proportion of it would be a prepayment at the end of the year of acquisition (the
amount would be dependent on the date on acquisition). The cost of the specification error must be charged to the income
statement.
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Workings:
Cost 1 October 1999 240,000
Amortisation to 30 September 2000 (240,000/12 years) (20,000)
220,000
Revaluation gain 11,000
Carrying value 30 September 2000 231,000
Amortisation to 30 September 2001 (231,000/11 years) (21,000)
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210,000
Revaluation loss directly to revaluation reserve (10,000)
Remaining loss to income statement (25,000)
Carrying value 30 September 2001 175,000
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Workings $000
(i) Non-current assets:
Land and buildings cost/valuation
Balance b/f 1,800
Revaluation surplus 150
Balance c/f (2,000)
Difference cash purchase (50)
Plant cost
Balance b/f 1,220
Disposal (500)
Balance c/f (1,568)
Difference cash purchase (848)
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non-current (200)
Amortisation credited to cost of sales 125
Balances c/f current 100
non-current 275
Difference cash receipt 175
The 10% convertible loan stock had a carrying value of $400,000 at the date of conversion to equity shares. This would be
taken as the consideration for the shares issued which would be 100,000 $1 shares (i.e. 400,000/100 x 25). This would
increase issued share capital by $100,000 and share premium by $300,000.
(iv) Income tax: $000
Tax provision b/f (367)
Deferred tax b/f (400)
Income statement tax charge (520)
Tax provision c/f 480
Deferred tax c/f 439
Difference cash paid (368)
5 (a) (i) The fundamental accounting concept of consistency dictates that similar items should be treated in a consistent manner in
each accounting period and over time. Where a company changes its accounting policy it impairs the consistency and
comparability of financial statements. Therefore a change should only occur if a new policy is preferable to the old policy
in that it gives a more appropriate presentation of events or transactions. This normally occurs where there is a change in
an accounting statute or an accounting standard. It sometimes occurs on the acquisition of a subsidiary, where the
subsidiarys policy differs to that of the group. The adoption of an accounting policy for the first time, or when a company
applies a policy to transactions that differ substantially from any of its previous transactions, does not constitute a change
of accounting policy.
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Workings: $000
Amortisation as at 30 September 2000 eligible re 1999 300 x 25% x 2 years 150
eligible re 2000 360 x 25% x 1 year 90
240
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(b) (i) It is argued that the principal reasons for holding investment properties are that the owner expects to receive rental income
from them and benefit from capital appreciation. They are not held for consumption in the normal course of business i.e.
they are not used as part of a companys operations in the production or supply of goods and services or administrative
purposes. As they are held as an investment for (eventual) disposal, it is often considered that it is the current values of the
investments and the changes in them that are more important than their original costs. IAS 40 Investment Properties
takes this into account by permitting a choice of either a cost model or a fair value model on which the accounting
treatment of investment properties must be based.
Cost method
This is the benchmark treatment in IAS 16 Property, Plant and Equipment which requires investment properties to be
measured at depreciated historic cost (less any impairments). In effect this treats investment properties in a similar manner
to owner-occupied properties. Where the cost model is adopted, the fair values of investment properties must be disclosed.
Fair value model
This requires investment properties to be measured at their fair values on the balance sheet with changes in fair values
being recognised in income. This differs from a revaluation model that requires (with certain exceptions) revaluation
surpluses to be recognised as changes in equity (reserve movements), not as income. In the introduction to the Standard
the IASC makes it clear that they consider the fair value model to be desirable, although they point out that it is an
evolutionary step forward and therefore stop short, at this stage, of making it a requirement.
(ii) Consolidated balance sheet extracts as at 30 September 2001
Non-current Assets cost/valuation accumulated depreciation carrying value
$000 $000 $000
Property, plant and equipment A 150 6 (2 years) 144
Investment properties B 145 nil 145
C 150 nil 150
Consolidated income statement extracts year to 30 September 2001:
Depreciation:
Property A 3 (150/50 years)
Deficit in fair value of investment property B (180 145) (35)
Surplus in fair value of investment property C (140 150) 10
Note: property A is let to a subsidiary of Myriad, therefore in Myriads consolidated financial statements it would be treated
as an owner-occupied property (benchmark treatment in IAS 16). By contrast, when preparing the entity financial
statements of Myriad, it would be treated as an investment property. The fair value of property A of $200,000 would be
disclosed in the financial statements.
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(c) This is a complex situation. The selling prices of some items of inventory after the balance sheet date appear to be below their
cost and this indicates that part of the closing inventory (at 30 September 2001) may require writing down to net realisable
value with the resultant loss recognised in the current year. This is an adjusting post balance sheet event if the losses are due to
circumstances that occurred before the year-end. However, if the losses are due to circumstances that developed in the post
balance sheet period, they should be included in the following years financial statements (to 30 September 2002). If these
losses (in 2002) are material they should be brought to the attention of shareholders in the notes to the financial statements for
the year to 30 September 2001 as a non-adjusting event. Applying the above to the circumstances of the question would give
the following analysis:
$
Cost 48
Net realisable value (NRV) 41
Apparent loss 7 per pack
The NRV of $41 is the reduced selling price for A4 paper of $45 less the cost of getting the goods into a saleable condition of
$4.
From the question it would appear that this loss is partly attributable to the remedial cost of the water leak. This is an adjusting
event requiring a write down of $2 per pack of the relevant items. The net realisable value at the year-end would have been $46
(original selling price of $50 less $4 remedial costs), which is $2 below the cost of $48. The remainder of the loss, $5 ($50
$45), is caused by the price reduction in response to competitive pressure in the post balance period. This is a non-adjusting
event requiring appropriate disclosure if material.
The above ignores the effect of the information concerning the sale to Securiprint. If the marks are due to the water leak or other
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flaw in manufacture, Myriad will probably be liable to pay compensation to Securiprint. This would be an actual liability
requiring a provision to be made in the current year unless the amount cannot be determined reliably (the IASC says this should
be rare). The provision would be for a refund of the cost of the goods sold and compensation for consequential losses caused by
the faulty goods. If the marks were not due to the actions of Myriad then there would be no liability. It may be that at this early
stage there is insufficient information to come to a conclusion as to who is at fault, but this represents at least a contingent
liability on the part of Myriad and should be disclosed appropriately in the notes to the financial statements. The information
may also indicate that other customers could have similar claims against Myriad.
A final point to consider is that if the above fault is not due to Securiprint, it may mean that all of the inventory affected by the
water leak is still damaged (despite the remedial work). If so, this would be evidence that the value of the inventory is impaired
and a further provision would be required to write down the inventory (probably to nil) in the current year. Clearly no more of this
inventory should be sold until the problem is resolved.
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This marking scheme is given as a guide in the context of the suggested answers. Scope is given to markers to award marks for alternative
approaches to a question, including relevant comment, and where well-reasoned conclusions are provided. This is particularly the case for
written answers where there may be more than one definitive solution.
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Marks
2 (a) (i) Income statement
cost of sales 3
sales revenue and distribution 1
administration 2
finance costs 2
investment income 1
taxation 2
available 11
maximum 8
(ii) Balance sheet
non-current assets 3
inventory 1
accounts receivable/payable from question 1
treatment of factored accounts receivable 2
tax provision 1
loan note 1
deferred tax 1
proposed dividends 1
ordinary shares 1
revaluation reserve 1
share premium 1
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accumulated profits 1
dividends 1
available 16
maximum 12
(b) earnings attributable to ordinary shares 1
calculation of theoretical ex-rights price 1
weighting exercise 2
calculation of earnings per share (in cents) 1
maximum 5
Maximum for question 25
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Marks
4 net profit before interest and tax 1
depreciation adjustments 2
loss on sale of plant 1
amortisation of government grants 1
negligence adjustment 1
working capital 1 per item 3
interest paid 2
tax 2
dividends 2
purchase of land and buildings 2
plant 2
investments 1
treasury bills 1
sale of plant 1
receipt of government grant 1
investment income 1
share issue 3
movement in cash and cash equivalents 1
available 28
Maximum for question 25
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