Part 2 Examination – Paper 2.5(INT) Financial Reporting (International Stream) 1 Consolidated balance sheet of Hedra as at 30 September 2005: $m Non-current assets Property, plant and equipment (358 + 240 + 12 + 20 + 5 +15 (w (iv))) Goodwill (100 – 20 (w (i))) Investment in associate (w (v)) Other investments Current Assets Inventories (130 + 80) Trade receivables (142 + 97) Cash and bank Total assets Equity and liabilities Equity attributable to the parent Ordinary share capital (400 + 80 (w (v))) Reserves: Share premium (40 + 120 (w (v))) Revaluation (15 + 12 + (5 x 60%) (w (iv))) Retained earnings (w (ii)) Minority interest (w (iii)) Non-current liabilities Deferred tax (45 – 10) Current liabilities Bank overdraft Trade payables (118 + 141) Deferred consideration (w (i)) Current tax payable Total equity and liabilities 12 259 49 50 –––– $m 650 80 220 45 –––––– 995

December 2005 Answers

210 239 4 ––––

453 –––––– 1,448 ––––––

480 160 30 261 ––––

451 –––––– 931 112 –––––– 1,043 35

370 –––––– 1,448 ––––––

Workings – Note: all working figures in $million. The investment in Salvador represents 60% (72/120) of its equity and is likely to give Hedra control thus Salvador should be consolidated as a subsidiary. The investment in Aragon represents 40% (40/100) of its equity. Normally this would give Hedra significant influence and Aragon would be classed as an associate that should be equity accounted. (i) Investment at cost – immediate – deferred 195 49 Cost of control Ordinary shares Share premium (50 x 60%) Pre acq profit (w (ii)) Fair value adjustments (w (iv)) Goodwill 72 30 12 30 100 –––– 244 ––––

–––– 244 –––– (ii) Additional depreciation (w (iv)) Minority interest ((60 – 5) x 40%) Pre-acq profit (20 x 60%) Post acq profit ((55 – 20) x 60%) Impairment of goodwill Balance c/f Retained earnings Hedra Salvador 5 22 12 21 20 261 –––– ––– 281 60 –––– –––

The deferred contingent consideration has now become payable and has to be accounted for. Hedra 240 21 20 –––– 281 –––– ––– 60 ––– Salvador 60

Per balance sheet Post acq profit Share of Aragon’s profit ((300 – 200) x 6/12 x 40%)



Minority interest Ordinary shares (120 x 40%) Share premium (50 x 40%) Retained earnings (w (ii)) Fair value adjustments (w (iv)) Post acq revaluation (5 x 40% (w (iv))) 48 20 22 20 2 –––– 112 ––––

Balance c/f

112 –––– 112 –––– 20 20 10 ––– 50 ––– 30 20

(iv) Fair value adjustments/revaluation Land and buildings Plant Deferred tax asset (40 x 25%)

Group share (60%) Minority share (40%)

The increase in the fair value of the land at the date of acquisition is accounted for as a fair value adjustment. The increase of a further $5 million in the year ended 30 September 2005 is a revaluation increase (accounted for as 60% to the group revaluation reserve and 40% to minority interest). The fair value adjustment of $20 million to plant will be realised evenly over the next four years in the form of additional depreciation at $5 million per annum. In the year ended 30 September 2005 the effect on the consolidated financial statements is that $5 million will be charged to Salvador’s profit (as additional depreciation); and a net $15 million added to the carrying value of the plant. (v) Investment in associate: Investment at cost (100 x 40% x 2 x $2·50) Share of post acquisition profit (100 x 6/12 x 40%) 200 20 –––– 220 ––––

The purchase consideration by way of a share exchange (80 million in Hedra for 40 million in Aragon) would be recorded as an increase in share capital of $80 million ($1 nominal value) and an increase in share premium of $120 million (80 x $1·50).



Petra – Income statement for the year ended 30 September 2005 Revenue (197,800 – 12,000 (w (i))) Cost of sales (w (ii)) Gross profit Other income – commission received (w (i)) Distribution costs Administration expenses Interest expense (1,500 + 1,500) Profit before tax Income tax expense (4,000 +1,000 + (17,600 – 15,000)) Profit for the period $’000 185,800 (128,100) –––––––– 57,700 1,000 –––––––– 58,700 (17,000) (18,000) (3,000) –––––––– 20,700 (7,600) –––––––– 13,100 ––––––––



Petra – Balance sheet as at 30 September 2005 Non-current assets (w (iii)) Property, plant and equipment Development costs cost $’000 150,000 40,000 –––––––– 190,000 –––––––– acc depn $’000 44,000 22,000 ––––––– 66,000 ––––––– 21,300 24,000 11,000 6,900 –––––––– carrying amount $’000 106,000 18,000 –––––––– 124,000

Current assets Inventories Trade receivables Bank Held for sale assets – plant (w (iii)) Total assets Equity and liabilities: Ordinary shares of 25c each Reserves: Share premium Retained earnings (34,000+ 13,100) Non-current liabilities 6% loan note Deferred tax Current liabilities Trade payables Accrued interest Current tax payable Total equity and liabilities (c)

63,200 –––––––– 187,200 –––––––– 40,000

12,000 47,100 –––––––

59,100 –––––––– 99,100

50,000 17,600 ––––––– 15,000 1,500 4,000 –––––––


20,500 –––––––– 187,200 ––––––––

Basic EPS: A nominal value of 25c per share would mean that the $40 million share capital represented 160 million shares. The basic EPS would thus be 8·2 cents ($13·1 million /160 million shares) Diluted EPS: The existence of the directors’ share options requires the disclosure of a diluted EPS. The dilution effect of the options is: Proceeds from options when exercised $7·2 million. This is equivalent to buying 8 million shares at full market value (7·2 million/90c). Thus the dilutive number of shares is 16 million (24 million – 8 million). Diluted EPS is 7·4 cents ($13·1 million /(160 + 16 million shares)) Workings (figures in brackets are $’000) (i) Agency sales: Petra has treated the sales it made on behalf of Sharma as its own sales. The advice from the auditors is that these are agency sales. Thus $12 million should be removed from revenue and the cost of the sales of $8 million and the $3 million ‘share’ of profit to Sharma should also be removed from cost of sales. Petra should only recognise the commission of $1 million as income. The answer has included this as other income, but it would also be acceptable to include the commission in revenue. (ii) Cost of sales: Cost of sales (114,000 – (8,000 – 3,000) (w (i))) Depreciation (w (iii)) – buildings – plant Amortisation (w (iii)) – development expenditure Impairment of development expenditure (w (iii)) Impairment of plant held for sale (w (iii)) $’000 103,000 2,000 6,000 8,000 6,000 3,100 –––––––– 128,100 ––––––––


(iii) Non-current assets/depreciation: The buildings will have a depreciation charge of $2 million (100,000 – 40,000)/30 years) giving accumulated depreciation at 30 September 2005 of $18 million (16,000 + 2,000). IFRS 5 Non-current assets held for sale and discontinued operations requires plant whose carrying amount will be recovered principally through sale (rather than use) to be classified as ‘held for sale’. It must be shown separately in the balance sheet and carried at the lower of its carrying amount (when classified as for continuing use) and its fair value less estimated costs to sell. Assets classified as held for sale should not be depreciated. Applying this: cost depn at 1 Oct 2004 carrying value $’000 $’000 $’000 Plant and equipment per trial balance 66,000 26,000 40,000 Plant held for sale (16,000) (6,000) (10,000) –––––––– ––––––– –––––––– Plant held for continuing use 50,000 20,000 30,000 Land and buildings 100,000 16,000 84,000 –––––––– ––––––– –––––––– Property, plant and equipment 150,000 36,000 114,000 –––––––– ––––––– –––––––– The continuing use plant will have a depreciation charge of $6 million ((50,000 – 20,000) x 20%) giving accumulated depreciation at 30 September 2005 of $26 million. The total accumulated depreciation for property, plant and equipment at 30 September 2005 will be $44 million (18,000 + 26,000). Plant held for sale must be valued at $6·9 million (7,500 selling price less commission of 600 (7,500 x 8%)) as this is lower than its carrying amount of $10 million. Thus an impairment charge of $3·1 million is required for the plant held for sale. Development expenditure: This has suffered an impairment as a result of disappointing sales. The impairment loss should be calculated after charging amortisation of $8 million (40,000/5 years) for the current year. Thus the impairment charge will be $6 million ((40,000 – 16,000) – 18,000). The carrying amount of $18 million will then be written off over the next two years.




An impairment loss arises where the carrying amount of an asset is higher than its recoverable amount. The recoverable amount of an asset is defined in IAS 36 Impairment of assets as the higher of its fair value less costs to sell and its value in use (fair value less cost to sell was previously referred to as net selling price). Thus an impairment loss is simply the difference between the carrying amount of an asset and the higher of its fair value less costs to sell and its value in use. Fair value: The fair value could be based on the amount of a binding sale agreement or the market price where there is an active market. However many (used) assets do not have active markets and in these circumstances the fair value is based on a ‘best estimate’ approach to an arm’s length transaction. It would not normally be based on the value of a forced sale. In each case the costs to sell would be the incremental costs directly attributable to the disposal of the asset. Value in use: The value in use of an asset is the estimated future net cash flows expected to be derived from the asset discounted to a present value. The estimates should allow for variations in the amount, timing and inherent risk of the cash flows. A major problem with this approach in practice is that most assets do not produce independent cash flows i.e. cash flows are usually produced in conjunction with other assets. For this reason IAS 36 introduces the concept of a cashgenerating unit (CGU) which is the smallest identifiable group of assets, which may include goodwill, that generates (largely) independent cash flows. Frequency of testing for impairment: Goodwill and any intangible asset that is deemed to have an indefinite useful life should be tested for impairment at least annually, as too should any intangible asset that has not yet been brought into use. In addition, at each balance sheet date an entity must consider if there has been any indication that other assets may have become impaired and, if so, an impairment test should be done. If there are no indications of impairment, testing is not required.


Once an impairment loss for an individual asset has been identified and calculated it is applied to reduce the carrying amount of the asset, which will then be the base for future depreciation charges. The impairment loss should be charged to income immediately. However, if the asset has previously been revalued upwards, the impairment loss should first be charged to the revaluation surplus. The application of impairment losses to a CGU is more complex. They should first be applied to eliminate any goodwill and then to the other assets on a pro rata basis to their carrying amounts. However, an entity should not reduce the carrying amount of an asset (other than goodwill) to below the higher of its fair value less costs to sell and its value in use if these are determinable. The plant had a carrying amount of $240,000 on 1 October 2004. The accident that may have caused an impairment occurred on 1 April 2005 and an impairment test would be done at this date. The depreciation on the plant from 1 October 2004 to 1 April 2005 would be $40,000 (640,000 x 121/2% x 6/12) giving a carrying amount of $200,000 at the date of impairment. An impairment test requires the plant’s carrying amount to be compared with its recoverable amount. The recoverable amount of the plant is the higher of its value in use of $150,000 or its fair value less costs to sell. If Wilderness trades in the plant it would receive $180,000 by way of a part exchange, but this is conditional on buying new plant which Wilderness is reluctant to do. A more realistic amount of the fair value of the plant is its current




disposal value of only $20,000. Thus the recoverable amount would be its value in use of $150,000 giving an impairment loss of $50,000 ($200,000 – $150,000). The remaining effect on income would be that a depreciation charge for the last six months of the year would be required. As the damage has reduced the remaining life to only two years (from the date of the impairment) the remaining depreciation would be $37,500 ($150,000/ 2 years x 6/12).Thus extracts from the financial statements for the year ended 30 September 2005 would be: Balance sheet Non-current assets Plant (150,000 – 37,500) Income statement Plant depreciation (40,000 + 37,500) Plant impairment loss (ii) $ 112,500 77,500 50,000

There are a number of issues relating to the carrying amount of the assets of Mossel that have to be considered. It appears the value of the brand is based on the original purchase of the ‘Quencher’ brand. The company no longer uses this brand name; it has been renamed ‘Phoenix’. Thus it would appear the purchased brand of ‘Quencher’ is now worthless. Mossel cannot transfer the value of the old brand to the new brand, because this would be the recognition of an internally developed intangible asset and the brand of ‘Phoenix’ does not appear to meet the recognition criteria in IAS 38. Thus prior to the allocation of the impairment loss the value of the brand should be written off as it no longer exists. The inventories are valued at cost and contain $2 million worth of old bottled water (Quencher) that can be sold, but will have to be relabelled at a cost of $250,000. However, as the expected selling price of these bottles will be $3 million ($2 million x 150%), their net realisable value is $2,750,000. Thus it is correct to carry them at cost i.e. they are not impaired. The future expenditure on the plant is a matter for the following year’s financial statements. Applying this, the revised carrying amount of the net assets of Mossel’s cash-generating unit (CGU) would be $25 million ($32 million – $7 million re the brand). The CGU has a recoverable amount of $20 million, thus there is an impairment loss of $5 million. This would be applied first to goodwill (of which there is none) then to the remaining assets pro rata. However under IAS2 the inventories should not be reduced as their net realisable value is in excess of their cost. This would give revised carrying amounts at 30 September 2005 of: Brand Land containing spa (12,000 – (12,000/20,000 x 5,000)) Purifying and bottling plant (8,000 – (8,000/20,000 x 5,000)) Inventories $’000 nil 9,000 6,000 5,000 ––––––– 20,000 –––––––




Cash flow statement of Tabba for the year ended 30 September 2005: Cash flows from operating activities Profit before tax Adjustments for: Depreciation (w (i)) Amortisation of government grant (w (iii)) Profit on sale of factory (w (i)) Increase in insurance claim provision (1,500 – 1,200) Interest receivable Interest expense Working capital adjustments: Increase in inventories (2,550 – 1,850) Increase in trade receivables (3,100 – 2,600) Increase in trade payables (4,050 – 2,950) Cash outflow from operations Interest paid Income taxes paid (w (iv)) Net cash outflow from operating activities Cash flows from investing activities Sale of factory Purchase of non-current assets (w (i)) Receipt of government grant (from question) Interest received Net cash from investing activities Cash flows from financing activities Issue of 6% loan notes Redemption of 10% loan notes Repayment of finance leases (w (ii)) Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 800 (4,000) (1,100) –––––– (4,300) ––––––– 1,400 (550) ––––––– 850 ––––––– 12,000 (2,900) 950 40 –––––– 10,090 $’000 50 2,200 (250) (4,600) (300) (40) 260 –––––– (2,680) (700) (500) 1,100 –––––– (2,780) (260) (1,350) –––––– (4,390) $’000

Note: interest paid may also be presented as a financing activity and interest received as an operating cash flow. Workings ($’000) (i) Non-current assets: Cost/valuation b/f New finance leases (from question) Disposals Acquisitions – balancing figure Cost/valuation c/f Depreciation b/f Disposal Depreciation c/f Charge for year – balancing figure Sale of factory: Net book value Proceeds (from question) Profit on sale (ii) Finance lease obligations Balance b/f – current – over 1 year New leases (from question) Balance c/f – current – over 1 year Cash repayments – balancing figure

20,200 1,500 (8,600) 2,900 ––––––– 16,000 ––––––– 4,400 (1,200) (5,400) ––––––– (2,200) ––––––– 7,400 (12,000) ––––––– (4,600) ––––––– 800 1,700 1,500 (900) (2,000) –––––– 1,100 ––––––


(iii) Government grant: Balance b/f – current – over 1 year Grants received in year (from question) Balance c/f – current – over 1 year Difference – amortisation credited to income statement (iv) Taxation: Current provision b/f Deferred tax b/f Tax credit in income statement Current provision c/f Deferred tax c/f Tax paid – balancing figure (v) Reconciliation of retained earnings Balance b/f Transfer from revaluation reserve Profit for period Balance c/f (b)

400 900 950 (600) (1,400) –––––– 250 –––––– 1,200 500 (50) (100) (200) –––––– 1,350 –––––– 850 1,600 100 –––––– 2,550 ––––––

Consideration of the cash flow statement reveals some important information in assessing the change in the financial position of Tabba in the year ended 30 September 2005. There is a huge net cash outflow from operating activities of $4,390,000 despite Tabba reporting a modest operating profit of $270,000. More detailed analysis of this difference reveals some worrying concerns for the future. Many companies experience higher operating cash flows than the underlying operating profit mainly due to depreciation charges being added back to profits to arrive at the cash flows. This is certainly true in Tabba’s case, where operating profits have been ‘improved’ by $2·2 million during the year in terms of the underlying cash flows. However, the major reconciling difference is the profit on the sale of Tabba’s factory of $4·6 million. This amount has been credited in the income statement and has dramatically distorted the operating profit. If the sale and lease back of the factory had not taken place, Tabba’s operating profits would be in a sorry state showing losses of $4·33 million (ignoring any possible tax effects). When Tabba publishes its financial statements this profit will almost certainly require separate disclosure which should make the effects of the transaction more transparent to the users of the financial statements. A further indication of poor operating profits is that they have been boosted by $300,000 due to an increase in the insurance claim provision (again this is not a cash flow) and $250,000 amortisation of government grants. Many commentators believe that the net cash flow from operating activities is the most important figure in the cash flow statement. This is because it is a measure of expected or maintainable future cash flows. In Tabba’s case this highlights a very important point; although Tabba has increased its cash position during the year by $1·4 million, $12 million has come from the sale of its factory. Clearly this is a one off transaction that cannot be repeated in future years. If the drain on the operating cash flows continues at the current rates, the company will not survive for very long. The tax position is worthy of comment. There is a small tax credit in the income statement, perhaps due to current year trading losses, whereas the cash flow statement shows that tax of $1·35 million has been paid during the year. This payment of tax is on what must have been a substantial profit for the previous year. This seems to confirm the deteriorating position of the company. Another relevant point is that there has been a very small increase in working capital of $100,000. However, underlying this is the fact that both inventories and trade receivables are showing substantial increases (despite the profit deterioration), which may indicate the presence of bad debts or obsolete inventories, and trade payables have also increased substantially (by $1·1 million) which may be a symptom of liquidity problems prior to the sale of the factory. On the positive side there has been substantial investment in non-current assets (after allowing for the sale of the factory), but even this is partly due to leasing assets of $1·5 million (companies often lease assets when they do not have the resources to purchase them outright) and finance from a government grant of $950,000. The company appears to have taken advantage of the proceeds from the sale of the factory to redeem the expensive 10% $4 million loan note (this has partly been replaced by a less expensive 6% $800,000 loan note). In conclusion the cash flow statement reveals some interesting and worrying issues that may indicate a bleak future for Tabba and serves as an illustration of the importance of a cash flow statement to the users of financial statements.




The cruise ship is an example of what can be called a complex asset. This is a single asset that should be treated as if it was a collection of separate assets, each of which may require a different depreciation method/life. In this case the question identifies three components to the cruise ship. The carrying amount of the asset at 30 September 2004 (eight years after acquisition) would be: component cost depreciation carrying value $m $m $m ship’s fabric 300 96 (300/25 x 8) 204 cabins and entertainment area fittings 150 100 (150/12 x 8) 50 propulsion system 100 75 (100/40,000 x 30,000) 25 –––– –––– –––– 550 271 279 –––– –––– –––– Ship’s fabric This is the most straightforward component. It is being depreciated over a 25 year life and depreciation of $12 million (300/25 years) would be required in the year ended 30 September 2005. The repainting of the ship’s fabric does not meet the recognition criteria of an asset and should be treated as repairs and maintenance. Cabins and entertainment area and fittings During the year these have had a limited upgrade at a cost of $60 million. This has extended the remaining useful life from four to five years. The costs of the upgrade meet the criteria for recognition as an asset. The original fittings have not been replaced thus the additional $60 million would be added to the cost of the fittings and the new carrying amount of $110 million will be depreciated over the remaining life of five years to give a charge for the year of $22 million. Propulsion system This has been replaced by a new system so the carrying value of the system ($25 million) must be written off and depreciation of the new system for the year ended 30 September 2005 (based on use) would be $14 million (140 million/50,000 x 5,000). Elite Leisure – income statement extract – year ended 30 September 2005: $m Depreciation – ship’s fabric 12 – cabin and entertainment fittings 22 – propulsion system 14 Disposal loss – propulsion system 25 Repainting ship’s fabric 20 ––– 93 ––– Elite Leisure – balance sheet extract – as at 30 September 2005 Non-current assets Cruise ship (see working) 406 Workings (in $ million): component ship’s fabric cabins and entertainment area fittings propulsion system cost $m 300 210 140 –––– 650 –––– depreciation $m 108 (300/25 x 9) 122 (110/5 + 100) 14 (140/50,000 x 5,000) –––– 244 –––– carrying value $m 192 88 126 –––– 406 ––––



IAS 24 Related party disclosures says that a party is related to an entity if: – the party, directly or indirectly, controls, is controlled by or is under common control with the entity (e.g. parent/subsidiary or subsidiaries of the same group) – one party has an interest in another entity that gives it significant influence over the entity (e.g. an associate) or has joint control over the entity (e.g. joint venturers are related parties) In addition members of key management and close family members of related parties are also themselves related parties. In the absence of related party disclosures, users of financial statements would assume that an entity has acted independently and in its own best interests. Principally within this assumption is that all transactions have been entered into willingly and at arm’s length (i.e. on normal commercial terms at fair value). Where related party relationships and transactions exist, this assumption may not be justified. These relationships and transactions lead to the danger that financial statements may have been distorted or manipulated, both favourably and unfavourably. The most obvious example of this type of transaction would be the sale of goods or rendering of services from one party to another on noncommercial terms (this may relate to the price charged or the credit terms given). Other examples of disclosable transactions are agency, licensing and leasing arrangements, transfer of research and development and the provision of finance, guarantees and collateral. Collectively this would mean there is hardly an area of financial reporting that could not be affected by related party transactions. It is a common misapprehension that related party transactions need only be disclosed if they are not at arm’s length. This is not the case. For example, a parent may instruct all members of its group to buy certain products or services (on



commercial terms) from one of its subsidiaries. In the absence of the related party relationships, these transactions may not have occurred. If the parent were to sell the subsidiary, it would be important for the prospective buyer to be aware that the related party transactions would probably not occur in the future. Indeed even where there are no related party transactions, the disclosure of the related party relationship is still important as a subsidiary may obtain custom, receive favourable credit ratings, and benefit from a superior management team simply by being a part of a well respected group. (iii) The subsidiaries of Hideaway are related parties to each other and to Hideaway itself as they are under common control. One of the important aspects of related party relationships is that one of the parties may have its interests subordinated i.e. it may not be able to act in its own best interest. This appears to be the case in this situation. Depret (or at least one of its directors) believes that the price it is charging Benedict is less than it could have achieved by selling the goods to non-connected parties. In effect these sales have not been made at an arm’s length fair value. The obvious implication of this is that the transactions have moved profits from Depret to Benedict. If the director’s figures are accurate Depret would have made a profit on these transactions of $6 million (20 – 14) rather than the $1 million it has actually made. The transactions will also affect reported revenue and cost of sales and working capital in the individual financial statements of Benedict and Depret. Some might argue that as the profit remains within the group, there is no real overall effect as, in the consolidated financial statements, intra-group transactions are eliminated. This is not entirely true. The implications of these related party sales are serious: – Depret has a minority interest of 45% and they have been deprived of their share of the $5 million transferred profit. This could be construed as oppression of the minority and is probably illegal. – there is a similar effect on the profit share that the directors of Depret might be entitled to under the group profit sharing scheme as Depret’s profits are effectively $5 million lower than they should be. – shareholders, independent analysts or even the (independent) managers of Depret would find it difficult to appraise the true performance of Depret. The related party transaction gives the impression that Depret is under-performing. This may lead to the minority selling their shares for a low price (because of poor returns) or calls for the company’s closure or some form of rationalisation which may not be necessary. – the tax authorities may wish to investigate the transactions under transfer pricing rules. The profit may have been moved to Benedict’s financial statements to avoid paying tax in Depret’s tax jurisdiction which may have high levels of taxation. – in the same way as Depret’s results appear poorer due to the effect of the related party transactions, Benedict’s results would look better. This may have been done deliberately. Hideaway may intend to dispose of Benedict in the near future and thus its more favourable results may allow Hideaway to obtain a higher sale price for Benedict.


Part 2 Examination – Paper 2.5(INT) Financial Reporting (International Stream)

December 2005 Marking Scheme

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 acceptable solution. Marks 5 1 3 3 1 1 1 1 2 3 4 1 1 1 1 1 30 25


goodwill goodwill impairment property, plant and equipment investment in associate other investments inventories and trade receivables cash and bank share capital and premium revaluation reserve retained earnings minority interest deferred consideration deferred tax elimination of 8% loan note trade payables and tax overdraft available Maximum for question



income statement revenue cost of sales 1 mark per each item commission distribution and administration interest expense income tax


available maximum (b) balance sheet development costs property, plant and equipment (held for continuing use) plant held for sale (1 mark for separate presentation) inventories trade receivables and cash and bank ordinary shares and share premium retained earnings 6% loan note deferred tax trade payables current tax available maximum (c) basic eps diluted eps maximum Maximum for question

1 6 1 1 1 2 12 10

1 2 2 1 1 1 1 1 1 1 1 13 10 2 3 5 25





impaired where carrying amounts higher than recoverable amounts discussion of fair value discussion of value in use discussion of CGU goodwill/intangibles with indefinite life tested annually review for indicators of impairment each balance sheet date only test if there is an indication of impairment available maximum impairment loss – individual asset: impairment loss applied to carrying value of asset and charged to any previous revaluation surplus then income CGU: Applied to goodwill then pro rata to other assets other assets not reduced below fair value/value in use available maximum depreciation/carrying value 1 April 2004 fair value less costs to sell is disposal value of $20,000, not trade-in value recoverable is therefore $150,000 impairment loss is $50,000 depreciation six months to 30 September 2004 carrying value $112,500 available maximum old brand written off, cannot recognise new brand inventories correct at cost improvement to plant not relevant impairment loss is $5 million land reduced to $9 million plant reduced to $6 million available maximum Maximum for question

Marks 1 2 2 1 1 1 1 9 6 1 2 1 1 1 6 5 2 2 1 1 1 1 8 7 2 2 1 1 1 1 8 7 25








profit before tax depreciation amortisation of government grant profit on sale of factory increase in insurance claim working capital items 1 mark each adjustment for interest receivable/payable interest paid income tax paid sale of factory purchase of non-current assets receipt of government grant interest received redemption of 10% loan issue of 6% loan repayment of finance lease cash b/f and c/f available maximum

Marks 1/ 2 1 1 1 1 3 1/ 2 1 2 1 1 1 1 1 1 2 1 20 17 8 25


1 mark per relevant point to a

maximum Maximum for question



principle that each component is treated separately explanation of treatment of each component 1 mark each charges to income statement, 1 each carrying value at 30 September 2005 ship’s fabric cabins etc propulsion system available maximum

1 3 5 1 2 2 14 12 4 3 1 1 1 1 4 8 6 25


(i) (ii)

1 mark per relevant point to a 1 mark per relevant point to a

maximum maximum

(iii) effect of related party transaction is to subordinate Depret’s interest profit of $5 million has moved from Depret to Benedict also effect sales/cost of sales working capital in consolidated financial statements most transactions eliminated implication for users, 1 mark per point up to available maximum Maximum for question


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