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Financial Accounting and Reporting March 2015

MARK PLAN AND EXAMINERS COMMENTARY


The mark plan set out below was that used to mark these questions. Markers are encouraged to use
discretion and to award partial marks where a point was either not explained fully or made by
implication. More marks are available than could be awarded for each requirement, where indicated.
This allows credit to be given for a variety of valid points, which are made by candidates.

Question 1
Total marks: 30
Overall marks for this question can be analysed as follows:
General comments
This question presented a draft set of financial statements with some adjustments. Candidates were required
to prepare the amended statement of profit or loss and statement of financial position. A number of
adjustments were required to be made, including depreciation, revenue adjustments, provisions, treasury
shares, a lease incentive and a prior year inventory adjustment.
Part b) required candidates to explain the concepts of accruals basis of accounting and going concern, with
reference to the scenario.
Part c) required a discussion on the ethical issues arising from the scenario.
Coghlan Ltd Statement of financial position as at 30 September 2014

ASSETS
Non-current assets
Property, plant and equipment (600,000 + 138,260) (W3)
Current assets
Inventories
Trade and other receivables
Tax asset
Cash and cash equivalents

738,260

98,000
125,400
65,000
1,200
289,600
1,027,860

Total assets
Equity
Ordinary share capital (294,500 + 85,500)
Share premium
Treasury shares (45,000 x 1.90)
Retained earnings (W4)
Equity

380,000
94,000
(85,500)
52,910
441,410

Non-current liabilities
Lease incentive
Current liabilities
Trade and other payables
Deferred income (36,000 x 3/12)
Provision (W2)

Total equity and liabilities

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7,200

31,900
9,000
538,350
579,250
1,027,860

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Financial Accounting and Reporting March 2015

Coghlan Ltd Statement of profit or loss for the year ended 30 September 2014

3,350,200
(2,744,950)
605,250
(1,418,965)
(813,715)
97,800
(715,915)

Revenue (3,359,200 (36,000 x 3/12))


Cost of sales (W1)
Gross profit
Administrative expenses (W1)
Loss before tax
Income taxation (65,000 + 32,800)
Net profit for the period
W1 Expenses

Administrative
expenses

Cost of sales

Brought forward
Opening inventories adj (114,550 79,000)
Closing inventories adj (142,100 98,000)
Provision (W2)
Lease incentive (1,200 x 6)
Impairment (W3)
Depreciation charge (43,750 + 34,565) (W3)

2,198,050
(35,550)
44,100
538,350

1,039,700

7,200
293,750
78,315
2,744,950

1,418,965

W2 Provision
Brought forward
Lawsuits (50 x 350)
Warranties ((65,000 x 20%) + (157,000 x 5%))
At 30 September 2014

500,000
17,500
20,850
38,350
538,350

W3 Plant and equipment

Carrying amount at 1 Oct 2013 (1,125,000


187,500) / (236,000 63,175)
Depreciation charge for the year
(1,125,000 250,000) x 5%
172,825 x 20%
Carrying amount at 30 Sept 2014
Recoverable amount
Impairment

Land
and
buildings

937,500

Fixtures
and
fittings

172,825

(43,750)
893,750
600,000
293,750

(34,565)
138,260
170,000

W4 Retained earnings
Per draft
Add: draft loss
Less: revised profit and loss
Dividend paid (380,000 x 10p)
Prior year adjustment inventories

425,825
416,550
(715,915)
(38,000)
(35,550)
52,910

Presentation of the statement of profit or loss and statement of financial position was generally good. As
indicated as acceptable at the tutor conference, most candidates omitted sub-totals on the statement of
financial position, but were penalised if they omitted totals for total assets and total equity and liabilities. A
minority missed out sub-totals on the statement of profit or loss this is not considered acceptable and marks
were lost for this. However, there were a number of very messy statements, usually the statement of profit or
loss, where costs workings were shown on the face of the statement instead of in a recommended costs
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Financial Accounting and Reporting March 2015


matrix in the workings. Whereas in most recent sittings almost all candidates have used a costs matrix, this
was not the case at this sitting.
Performance on this question was good, with some high marks achieved. A significant number of candidates
arrived at completely correct figures in respect of revenue, cost of sales, closing inventories and the provision.
Most candidates also arrived at the correct figures for the two depreciation charges for the year, and correctly
presented them in administrative expenses. However, a few candidates calculated depreciation based on the
year end recoverable amounts instead of on the opening figures. It was also common to see the fixtures and
fittings, which were not impaired, revalued, when no indication was given that the company wished to move to
the revaluation model. Pleasingly, most candidates did provide relatively clear workings for their property,
plant and equipment figure.
The tax refund probably caused the most difficulties, with only a few candidates treating both this and the
over-provision from the previous year correctly. A number of candidates showed only the tax refund in the
statement of profit or loss, others reduced the tax refund by the over-provision from the previous year, instead
of adding it. Many were so confused by the income tax position that they showed no figure for income tax at
all in the statement of profit or loss. On the statement of financial position it was common to see the overprovision from the previous year reducing the tax asset. And whatever figure was arrived at this was
presented more often as a negative current liability than (correctly) as a current asset.
Other common errors included the following:

Errors in adjusting cost of sales for the incorrect inventory valuations most commonly getting the net
adjustment in the wrong direction against the cost of sales figure from the draft financial statements, or
making careless errors in the calculations.
Calculating the dividend paid during the year on a figure other than the one shown in their own
statement of financial position.

Total possible marks


Maximum full marks

20
19

(b)
Accrual basis
The accrual basis of accounting records transactions in the period in which they occur, rather than when the
cash inflow or outflow arises. Under the accrual basis an entity recognises items as assets, liabilities, equity,
income and expenses when they satisfy the definition and recognition criteria for those elements in the
Framework
An example of this is the treatment of the revenue generated from the magazine subscriptions. These were
incorrectly recorded in revenue as the cash had been received, however part of the service delivery, ie the
magazines being despatched, arose after the year end and therefore part of the revenue should have been
deferred.
The recognition of the provisions are another example of the accrual basis, as these are present obligations
arising from past events and hence have been recognised as liabilities in the current period, although the
cash will be paid out in future periods.
Other examples include the charging of depreciation on the property, plant and equipment recognising that
the entity is generating economic benefits from these assets over their useful lives and the charging of
operating lease rental over the total period of the lease.
Going concern basis
The going concern basis of accounting assumes that the entity will continue operating in the foreseeable
future as a going concern. To operate for the foreseeable future there must be no intention by management,
or the need, to liquidate the entity by selling its assets and paying its liabilities.
The going concern basis affects the valuation of the companys assets. It is assumed that non-current assets,
for example, will be used in the operation of the entity and therefore the use of historical cost is considered
appropriate. However, if the entity ceases in operation then the historical cost basis would no longer be
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Financial Accounting and Reporting March 2015


appropriate and instead the assets would be valued based on their recoverable amount at that point in time,
this valuation basis is known as the break-up basis. The concept of being non-current also would no longer
be appropriate as all assets and liabilities would be current in nature as the entity would no longer be
trading.
Coghlan Ltds financial statements have been prepared using the going concern basis of accounting. If the
break-up basis were appropriate due to the company no longer being a going concern, as a result of the
adverse publicity, caused by the unsafe products, assets and liabilities might be different. For example,
Coghlan Ltd has five years left on the office lease, if Coghlan Ltd ceased to trade the lease would become an
onerous obligation and the full amount would need to be recognised.
Coghlan Ltd traded at a large loss during the year, if this performance continues it is unlikely that the
company would be a viable trading entity for long. In addition a dividend was paid, presumably to ensure
shareholders remained happy, however as a result of this retained earnings and hence distributable profits
are virtually zero, so no further dividends could be paid in the future without substantial profits being made. It
is therefore questionable whether Coghlan Ltd will remain a going concern for much longer.

This part of the question was reasonably well answered although few candidates scored high marks. Most
candidates could give a basic definition of the accruals concept, but the quality of explanation using the
subscription revenue and the operating lease varied.
Again, most candidates could give a basic definition of the going concern concept, and cite the break-up
basis as an alternative, but less candidates went beyond this to explain how going concern financial
statements differ from those prepared on a break-up basis. However, a majority of candidates made the point
that Coghlan Ltd appeared to be in financial difficulties and that therefore the going concern basis may not be
appropriate.
Total possible marks
Maximum full marks

11
6

(c)
Professional accountants are expected to follow the guidance contained in the fundamental principles in all of
their professional and business activities. The Code of Ethics has five fundamental principles.
The financial statements should be prepared fairly, honestly and in accordance with relevant professional
standards.
Objectivity is one of the five fundamental principles in the ICAEWs ethical Code, which means that I should
not allow bias, conflict of interest or undue influence of others to override professional or business
judgements. I should not let the managing director pressure me into completing the financial statements
quickly and not making a satisfactory and thorough job. Intimidation threat exists.
Professional behaviour is another principle and hence I should ensure that the relevant laws and regulations
are complied with. I should ensure that I act with both professional competence and due care and therefore
not be influenced by the pressure that management are putting on me. The financial statements should be
prepared by someone who has the relevant expertise and that is unlikely to be someone who is undertaking
work experience. I should not allow bias in any way, conflict of interest or undue influence of others override
my professional judgement. It is unfair for the managing director to mention my performance appraisal and
therefore I need to ensure that this does not affect any decisions I make as a self-interest threat exists.
I should explain that the financial statements need additional work to the managing director and explain that
they may take longer than he would have ideally liked to ensure that they provide a fair assessment of the
facts. If he is unwilling to allow additional time then I should discuss the matter with the other directors and
explain that I am being pressured by the managing director. I should keep a record of all discussions and I
could discuss the matter confidentially with the ICAEW helpline for advice and support.

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Financial Accounting and Reporting March 2015

The answers to the ethics part were mixed, with a significant number of candidates putting themselves in
the position of being the external auditor, as opposed to the financial controller, as specified in the question.
Most candidates identified self-interest and possible intimidation threats, that the financial controller should
uphold the values of professional competence and due care and professional behaviour, and refer continuing
difficulties with the managing director to the other directors and then to the ICAEW ethics helpline. Weaker
candidates missed the point that all discussions should be documented and spent some time discussing the
ethics of the managing director, when we were not told whether he was an ICAEW Chartered Accountant or
not.
Total possible marks
Maximum Marks

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8
5

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Financial Accounting and Reporting March 2015

Question 2
Total marks: 36
Overall marks for this question can be analysed as follows:

General comments
Part (a) of this question required candidates to explain the financial reporting treatment of four accounting
issues, given in the scenario. The four issues covered borrowing costs, a compound financial instrument,
an intangible asset and a joint venture. Journal entries were also required.
Part (b) required candidates to recalculate consolidated profit for the year for the adjustments needed as a
result of their answer to Part (a).
Part (c) required a calculation of basic earnings per share following a rights issue and explanation of the
accounting treatment was also required.
Porcaro plc
(a) (i) IFRS accounting treatment
(1) Borrowing cost
Under IAS 23 Borrowing costs, certain borrowing costs form part of the cost of the qualifying asset, and
should therefore be capitalised. A qualifying asset is an asset which takes a substantial period of time to
get ready for its intended use, or sale. The office block is therefore a qualifying asset as it is not ready for
use.
Borrowing costs are defined as interest and other costs that an entity incurs in connection with the
borrowing of funds. Only borrowing costs that are directly attributable to the acquisition, construction or
production of the qualifying asset should be capitalised. These are the borrowing costs which would have
been avoided if the expenditure on the qualifying asset had not been incurred.
As the loan was specifically taken out for the purpose of funding the construction of the office block use
the actual interest rate of 6%.
Capitalisation of borrowing costs should commence when the entity meets all three of the following
conditions:
(1)
(2)
(3)

It incurs expenditure on the asset (the payment to acquire the land was made on
1 October 2013);
It incurs borrowing costs (the loan was taken out on 1 October 2013, from which date interest will
start to accrue);
It undertakes activities that are necessary to prepare the asset for its intended use (the land was
acquired on 1 October 2013 with planning permission which was needed for construction to take
place).

Borrowing costs of 36,000 (600,000 x 6%) should therefore be capitalised from 1 October 2013.
Where the borrowed funds are not required immediately, so instead are put on deposit, the borrowing
costs capitalised should be reduced by the investment income received on the invested funds.
Investment income: (600,000 200,000 = 400,000)
(1 Oct 2013 28 Feb 2014)
400,000 x 3% x 5/12 =
(1 Mar 31 Aug 2014)
300,000 x 3% x 6/12 =
(1 Sept 30 Sept 2014)
100,000 x 3% x 1/12 =

5,000
4,500
250
9,750

Total borrowing costs which should be capitalised are 26,250 (36,000 9,750). No depreciation should
be recognised on the office block as its not ready for use.

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Financial Accounting and Reporting March 2015


The journal entries required are:
DR: Property, plant and equipment (SOFP)
CR: Net interest (PorL)

26,250

26,250

(2) Convertible bonds


The convertible bonds are compound financial instruments per IAS 32 Financial Instruments: Presentation.
They have both an equity and a liability component which should be presented separately at the time of
issue. IAS 32 requires that the substance of such an instrument be reflected, focusing on the economic
reality that in effect two financial instruments have been issued.
The liability component should be measured first at the present value of the capital and interest payments.
The discount rate used should be the effective rate for an instrument with the same terms and conditions
except without the ability to convert it into shares.

1 October 2014
1 October 2015
1 October 2016
1 October 2017 (redemption)
Liability component
Equity component (bal fig)
Total

Cash flow

30,000
30,000
30,000
630,000

Discount factor
@ 7%
1/1.07
2
1/1.07
3
1/1.07
4
1/1.07

Present value

28,037
26,203
24,489
480,624
559,353
40,647
600,000

The liability should initially be measured at 559,353 and the equity component is the residual at 40,647.
Once recognised the equity element remains unchanged. However, the liability element should be shown at
amortised cost at the end of each year:
1 Oct 2013

559,353

Interest (7%)

39,155

Payment (5%)

(30,000)

30 Sept 2014

568,508

At the year an adjustment should be made to non-current liabilities of 31,492 (600,000 568,508), and an
additional 9,155 recognised as finance costs as part of profit or loss.
The journal entries required are:
DR: Non-current liabilities (SOFP)
DR: Finance costs (PorL)
CR: Equity (SOFP)

31,492
9,155

40,647

(3) Intangible asset licence


The licence should be recognised as an intangible asset as it is an identifiable non-monetary asset without
physical substance. The licence is identifiable as it arises from contractual or legal rights to use the
microchip technology.
The licence should initially be recognised at its cost of 72,000. Amortisation of 6,000 ((72,000 / 6yrs) x
6/12) should be recognised as part of profit or loss. The carrying amount of the licence at 30 September
2014 under historical cost accounting is 66,000 (72,000 6,000).
The licence can continue to be held at cost or may be revalued if the directors can show that an active
market exists for it. Although a competitor has offered to buy the licence which suggests that an active
market exists, part of the definition also requires the items traded to be homogenous. As it states that the
licence is unique it is unlikely that it will meet this definition and therefore should be held at historical cost.
The revaluation gain of 18,000 (90,000 - 72,000) at 30 September 2014 should be reversed.

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Financial Accounting and Reporting March 2015


The journal entries required are:
DR: Equity Revaluation surplus (SOFP)
DR: Amortisation (PorL)
CR: Non-current assets (SOFP) (18,000 + 6,000)

18,000
6,000

24,000

(4) Joint venture


Porcaro plc should recognise its investment in Barbarossa Ltd as a joint venture. Four companies have joint
control over Barbarossa Ltd and there is a contractual arrangement in place to share profits and losses
equally.
IFRS 11 Joint Arrangements requires the use of the equity method for joint ventures. The investment should
therefore be recognised at cost of 25,000 plus the share of the joint ventures post acquisition increase in
net assets, 32,500 (130,000 x 25%).
The investment in Barbarossa Ltd will be shown as a non-current asset, rather than a current asset in the
consolidated statement of financial position, so the 25,000 will need to be reclassified. The share of postacquisition profit of 32,500 should be added to non-current assets, giving a carrying amount of 57,500
and the 32,500 recognised in consolidated profit or loss.
The journal entries required are:
DR: Non-current assets (SOFP)
CR: Current assets (SOFP)
CR: Share of joint venture profit (PorL)

57,500

25,000
32,500

Most candidates produced reasonably detailed narrative explanations, melded together with calculations
although less went on to produce journal entries. Only the very weakest candidates restricted their answers
to predominantly calculations, with little explanation. Answers to Issues (1), (2) and (4) were all reasonably
well attempted, with Issue (3) causing some difficulties.
Borrowing costs
Most candidates set out the appropriate terminology, such as directly attributable and qualifying asset,
and correctly concluded that the office block was a qualifying asset and that interest on the loan should be
capitalised. However, a significant number of candidates were careless in their choice of words and stated
that borrowing costs could be capitalised implying a choice in the matter (even when in Part (d) they
went on to clearly state that under IFRS borrowing costs must be capitalised). Most then listed the IAS 23
criteria for the commencement of capitalisation, but few applied these criteria to this scenario. Of those that
did, many concluded, in error, that capitalisation could not commence until 31 December 2013, and hence
only capitalised nine months of the annual interest.
Almost all candidates stated that the borrowing costs should be reduced by the investment income on
surplus funds. Calculations for the investment income often contained errors generally around the number
of months. The 6% actual interest rate was used, although only a very small minority explained why this was
appropriate. Almost all candidates then set out the correct journal entry for their net figure.
Convertible bonds
The majority of candidates explained that this was a compound financial instrument and that split
accounting was appropriate, with fewer mentioning substance over form. Most of these candidates then
produced correct calculations for the split of debt and equity and for the amortised cost of the debt, although
less referred to amortised cost in their explanation. Journal entries were largely correct, although some
candidates took a rather convoluted approach to arriving at the correct net journal.
Intangible asset licence
This issue caused the most problems. Most candidates gave some basic definitions and calculated the
initial carrying amount of the intangible at cost (although some used the incorrect number of months for the
amortisation charge). Answers were then mixed, depending on whether candidates realised that the
information in the scenario did not support the existence of an active market. Those that saw this quickly
concluded their answer by reversing out the revaluation. The ones that did not then wasted time calculating

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Financial Accounting and Reporting March 2015


additional amortisation charges, and sometimes also transfers between the revaluation surplus and retained
earnings. Others hedged their bets and set out both accounting treatments without a conclusion, which was
time consuming.
Joint venture
There was a lot of confusion to this issue and candidates seem to struggle between the concept of an
associate and a joint venture, with many candidates simply believing they are the same instrument.
Although the majority of candidates identified that equity accounting should be applied and recognised the
cost correctly, candidates often described the investment as an associate. Journal entries were usually
correct, with the most common error being to credit cash instead of current assets. The only real error seen
in the calculations was taking the appropriate share of only a fraction of the profit after tax, instead of the
appropriate share of the whole figure, which was stated to be the profit for that period.
Total possible marks
Maximum full marks

36
27

(b)
Porcaro plc Group figures
Profit for
the year

As stated
Issue (1)
Issue (2)
Issue (3)
Issue (4)
Profit adjustment

483,150

26,250
(9,155)
(6,000)
32,500
43,595
526,745

Most candidates appeared to adopt the recommended approach of setting up a schedule as the first page of
their answer starting with the draft profit from the question, and adjusted this as they wrote their explanation
for each issue. Many candidates did therefore score the full two marks for this part, based sometimes on
completely correct and sometimes on their own figures. Only the very weakest candidates failed to attempt
this part of the question. Where marks were lost it was generally where candidates failed to replicate in this
part the journal entries set out in their answers to Part (a).
Total possible marks
Maximum full marks

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2
2

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Financial Accounting and Reporting March 2015


(c)
Porcaro plc

1 Oct 2013 31 Jan 2014


Rights issue 1 for 3
1 Feb 30 Sept 2014
Theoretical ex-rights price:
3 shares @ 2.10
1 share @ 1.70

No. Of
shares
270,000
90,000
360,000

Period in
issue
4/12
8/12

Bonus
factor
210/200

Weighted
average
94,500
240,000
334,500

6.30
1.70
8.00

Theoretical ex-rights price per share 8.00 / 4 = 2.00


Bonus fraction: 210 / 200
Basic EPS = 526,745 = 1.57
334,500
A rights issue is an issue of shares to current shareholders in proportion to their existing holdings at a
discount to market price. Because the share issue is below market price, a rights issue is in effect a
combination of an issue at full market value and a bonus issue. An adjustment therefore needs to be made
to the earnings per share for the bonus element. This is calculated by comparing the pre-rights market
value with the theoretical ex-rights price. The theoretical price is the price at which the shares would have
traded after the rights issue in theory.

A good number of candidates arrived at the correct weighted average number of shares, and produced an
EPS based on that and their own figure for revised profit for the year. However calculations often contained
errors in the theoretical ex-rights price per share. Only the very best candidates could explain clearly why
the rights issue had been scaled up by a bonus fraction, and many of these candidates achieved full marks
for this part of the question. Weaker candidates merely described in words what they had done in their
calculation. A minority of candidates described the accounting entries for the rights issue which gained no
marks.
Total possible marks
Maximum full marks

7
6

(d) UK GAAP differences


Borrowing costs
Under UK GAAP Porcaro plc has the choice whether to capitalise borrowing costs. If a policy of
capitalisation is chosen then this policy should be applied to the class of qualifying assets.
Under IFRS borrowing costs which meet the definition of being directly attributable to the acquisition,
construction or production of a qualifying asset must be capitalised.

Most candidates achieved the full one mark for this part, clearly stating that capitalisation is mandatory
under IFRS, but optional under UK GAAP. Only the weakest candidates got this the wrong way round, or
failed to give both the IFRS and UK GAAP treatments.
Total possible marks
Maximum full marks

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1
1

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Financial Accounting and Reporting March 2015

Question 3
Total marks: 11
Overall marks for this question can be analysed as follows:

General comments
This question was a mixed topic question, covering the completion of extracts from the statement of cash
flows for adjustments to investing and financing activities. Part b) required the preparation of an extract from
the consolidated statement of financial position, showing non-current and current assets.
Henrit plc
(a)
Consolidated statement of cash flows (extract)
Cash flows from investing activities
Purchase of property, plant and equipment (W2)
Proceeds from sale of property, plant and equipment (124,000 + 9,500)
Cash flows from financing activities
Payment of finance lease (15,000 7,375) (W3)
Proceeds from issue of loan (450,000 290,000)

(365,450)
133,500

(7,625)
160,000

Workings
(1) Interest

7,250
11,250
18,500

290,000 x 5% x 6/12
450,000 x 5% x 6/12
(2) PPE
B/d
Additions finance lease (W3)
Additions cash ()

729,400
105,350
365,450
1,200,200

Disposals
Depreciation
C/d

124,000
113,000
963,200
1,200,200

(3) Finance lease


Cash
C/d

15,000
97,725
112,725

B/d
PPE addition ()
Interest (25,875 18,500 (W1))

105,350
7,375
112,725

Answers to this requirement were quite mixed, with a significant number of candidates achieving full marks.
Most candidates successfully calculated the proceeds from the disposal of equipment and also attempted to
produce a T-account for property, plant and equipment to identify the cost of additions. Within this working
nearly all candidates correctly credited the depreciation charge for the year and the carrying amount of the
equipment that had been sold. The majority of candidates also realised that they needed to debit the
account with plant acquired under a finance lease but very few candidates calculated this figure correctly.
Most simply used the closing balance on the finance lease account given in the question.
It was clear that the majority of candidates either do not understand that payments under finance leases
need to be split between interest and capital or cannot calculate the split. Many candidates merged the
finance lease liability and the bank loan and as a result lost the easy mark available for showing the inflow
of cash relating to the bank loan. Some candidates used the information given in the question to calculate
the interest relating to the bank loan but then made no use of this information.
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Financial Accounting and Reporting March 2015

With regards to presentation nearly all candidates did produce extracts as required and also entered figures
under the appropriate headings, although totals were often not seen. As is always the case with questions
on the statement of cash flows a significant number of candidates lost marks for failing to put brackets
around outflows of cash.
Total possible marks
Maximum full marks

8
6

(b)
Statement of financial position at 30 September 2014 (extract)
Non-current assets
Property, plant and equipment (963,200 + 469,400 + 623,150 4,400 (W2))
Goodwill (73,400 + 17,750 (W1))
Current assets
Inventory (46,980 + 18,900 + 31,300 1,500 (W3))

2,051,350
91,150

95,680

Workings
(1) Goodwill Crago Ltd

371,750
261,000
(615,000)
17,750

Consideration transferred (230,000 + (45,000 x 3.15))


Non-controlling interest at acquisition at fair value
Less: Net assets at acquisition

(2) Inter-company machine transfer

38,000
(42,400)
4,400

Original carrying amount (95,000 (95,000 x 3/5))


Consideration less depreciation (53,000 (53,000 x 6/30))
Unrealised profit
(3) PURP
SP
Cost
GP

%
115
(100)
15

11,500
(10,000)
1,500

Generally this was well answered with many candidates achieving full marks. A majority of candidates
correctly calculated goodwill and the PURP relating to inventory and made the relevant adjustments to the
figures given in the question. A minority of candidates used the nominal rather than the market value of the
shares to calculate the consideration for the acquisition of the subsidiary and a similar number calculated
the PURP using gross margin rather than a mark-up on cost.
However only a small minority of candidates correctly calculated the PURP relating to the sale of the
machine. Common errors were to calculate the profit on disposal or the difference in the subsequent
depreciation and therefore only adjust for part of the difference.
As with part (a) nearly all candidates produced extracts but again a number failed to add numbers across so
could not be given full credit for presentation.
Total possible marks
Maximum full marks

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6
5

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Financial Accounting and Reporting March 2015

Question 4
Total marks: 23
Overall marks for this question can be analysed as follows:
This question required the preparation of a consolidated statement of profit or loss and extracts from the
consolidated statement of changes in equity (for retained earnings). The group had two subsidiaries, one of
which was disposed of during the year. A fair value adjustment was required on acquisition of one of the
companies. Inter-company trading took place during the year between one of the subsidiarys and the parent.
Part (b) required candidates to describe the UK GAAP differences for the acquisition and disposal of a
subsidiary.
Mantia plc
(i) Consolidated statement of profit or loss for the year ended 30 September 2014

Continuing operations
Revenue (W1)
Cost of sales (W1)
Gross profit
Operating expenses (W1)
Profit from operations (W1)
Investment income (W1)
Profit before tax
Income tax expense (W1)
Profit for the year from continuing operations
Discontinued operations
Profit for the year from discontinued operations (300,100 (W2) 32,715 (W4))
Profit for the period
Profit attributable to
Owners of Mantia plc ()
Non-controlling interest (W2)

3,722,000
(1,658,500)
2,063,500
(536,055)
1,527,445
17,000
1,544,445
(327,000)
1,217,445
267,385
1,484,830

1,327,451
157,379
1,484,830

(ii) Consolidated statement of changes in equity for the year ended 30 September 2014 (extract)
Retained
earnings

Balance at 1 October 2013 (W6)


Total comprehensive income for the year
Dividends (W6)
Balance at 30 September 2014 ()

Copyright ICAEW 2015. All rights reserved

227,249
1,327,451
(600,000)
954,700

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Financial Accounting and Reporting March 2015


Workings
(1) Consolidation schedule

Revenue
Cost of sales per Q
PURP (W5)
Op expenses per Q
FV deprec (70,000/10yrs)
Impairment of goodwill

Mantia plc

2,986,000

Appice Ltd

768,000

Adj

(32,000)

Consol

3,722,000

(1,343,700)

(345,600)
(1,200)

32,000

(1,658,500)

(419,575)

(84,480)
(7,000)

(25,000)

Investment income
Appice (80,000 x 40p x 80%)
Tax

(536,055)

42,600
(25,600)
(259,000)

(68,000)
261,720

17,000
(327,000)

(2) Non-controlling interest in year

52,344
105,035
157,379

Appice Ltd (20% x 261,720 (W1))


Starkey Ltd (35% x 300,100 (600,200 x 6/12))
(3) Goodwill Starkey Ltd

230,000
105,700
335,700

Consideration transferred
Non-controlling interest at acquisition (302,000 x 35%)
Less: Net assets at acquisition
Share capital (91,000 / 65%)
Retained earnings

140,000
162,000
(302,000)
33,700
(18,000)
15,700

Goodwill
Impairment brought forward
Goodwill at date of disposal
(4) Group profit/loss on disposal of Starkey Ltd

427,000
(15,700)

Sale proceeds
Less: carrying amount of goodwill at disposal (W3)
Carrying amount of net assets at disposal
Share capital
Retained earnings (243,000 + (600,200 x 6/12))

140,000
543,100
(683,100)
239,085
(32,715)

Add back: Attributable to non-controlling interest (683,100 x 35%)


Loss on disposal
(5) PURP
SP
Cost
GP
1
X /4

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%
100
(85)
15

32,000
(27,200)
4,800
1,200

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Financial Accounting and Reporting March 2015


(6) Retained earnings brought forward

Mantia plc (596,300 1,006,325)


Add back dividend (500,000 x 1.20)
Appice Ltd post acquisition change in net assets
C/fwd retained earnings
Less: retained earnings at acquisition
Less: profit for the period
Add back dividend (80,000 x 40p)
Less: FV adjustment (70,000 / 10yrs)
Appice Ltd 3,280 x 80%
Starkey Ltd post acquisition ((243,000 162,000) x 65%)
Less: impairment Starkey Ltd

(410,025)
600,000

384,200
(136,000)
(269,920)
32,000
(7,000)
3,280
2,624
52,650
(18,000)
227,249

Retained earnings carried forward (for proof only)


Mantia plc
Appice Ltd post acquisition (384,200 136,000 14,000 1,200) x 80%
Less: impairment Appice Ltd
Profit on disposal of investment in Starkey Ltd (427,000 230,000)

596,300
186,400
(25,000)
197,000
954,700

Most candidates made a good attempt at preparing the consolidation schedule and correctly excluded the
subsidiary held for sale. Many dealt with the relevant adjustments correctly obtaining all the available marks
for this part of the question. Where candidates did make errors it was normally for the following:

deducting the inventory PURP from revenue rather than adding it to cost of sales or adding it to the
cost of sales of the purchasing rather than the selling company.
calculating the cumulative adjustment to depreciation arising from the fair value adjustment rather than
just the current year adjustment and/or entering this into the parent company rather than the
subsidiarys column.
adjusting the subsidiarys profits for the goodwill impairment.
deducting 100% of the subsidiarys dividend from investment income rather than just the parent
companys share of the dividend.

Virtually all candidates attempted to calculate the profit on disposal and a reasonable number arrived at the
correct figure. One common error was using the incorrect share capital figure (the shares bought by the
parent company rather than total share capital) or ignoring share capital altogether when calculating net
assets. Other errors included:

failing to deduct the impairment from goodwill (many candidates deducted this from the profit on
disposal instead).
failing to add 6/12 of current year profit to brought forward retained earnings or deducting it rather than
adding it.
using retained earnings at acquisition rather than at the date of disposal when calculating net assets at
disposal.

A number of candidates produced very disorganised workings for their retained earnings calculation and it
was often difficult to understand where numbers had come from and whether they were increasing or
decreasing the profit on disposal. Candidates are strongly advised to use the standard pro-forma given in the
Learning Material to calculate this figure and label workings appropriately.
Most candidates did prepare a consolidated statement of profit or loss and showed a separate figure for the
profit from discontinued operations. However this figure often ignored the profit up to disposal or just took the
parent companys share of that profit. Candidates should note that if they only produce the consolidation
schedule they will not get the presentation marks available for this statement.
As expected the extract to the consolidated statement of changes in equity was not as well dealt with. Most
candidates who attempted this statement did insert the easy figures ie the profit for the period and the
dividends paid. However errors were frequently made even with these figures by taking total profit for the
period rather than just the profit attributable to the owners of the parent company and/or also including the
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Page 15 of 16

Financial Accounting and Reporting March 2015


subsidiarys dividend as a deduction from retained earnings. Some candidates also showed dividends as an
addition rather than a deduction to retained earnings. Relatively few candidates attempted to calculate
retained earnings b/fwd or c/fwd. Where they did, workings were again often confused and difficult to follow.
Few candidates appear to understand that they should take the same approach to calculate consolidated
retained earnings as they do to calculate the consolidated retained earnings figure for consolidated statement
of financial position questions.
Total possible marks
Maximum full marks

21
20

(b) UK GAAP differences


Acquisition of Starkey Ltd
The calculation for goodwill is the same under UK GAAP as per IFRS, however under IFRS the parent entity
has a choice whether to measure the non-controlling interest at fair value or at the proportion of net assets.
Under UK GAAP only the proportion of net assets method is permitted.
UK GAAP requires goodwill to be amortised over its useful life and there is a rebuttable presumption that this
should not exceed five years. Under IFRS amortisation is not permitted and instead annual impairment
reviews take place.
Disposal of Starkey Ltd
UK GAAP requires that a detailed analysis of discontinued operations should be shown on the face of the
profit and loss account. However, IFRS only requires a single line to be shown on the face of the statement of
profit or loss.

The majority of candidates made a good attempt at this part of the question with many achieving full marks.
However a significant number of candidates wasted time by including differences that were not relevant to the
scenario such as the treatment of a discount on acquisition. A common misunderstanding is that under UK
GAAP goodwill must be amortised over five years rather than it being a maximum useful life.
Total possible marks
Maximum full marks

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3
3

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Financial Accounting and Reporting Professional Level June 2015

MARK PLAN AND EXAMINERS COMMENTARY


The marking plan set out below was that used to mark this question. Markers were encouraged to use
discretion and to award partial marks where a point was either not explained fully or made by implication.
More marks were available than could be awarded for each requirement. This allowed credit to be given for a
variety of valid points which were made by candidates.

Question 1
Total Marks: 33
General comments
Part (a) of this question tested the preparation of a statement of profit or loss and a statement of financial
position from a trial balance plus a number of adjustments. Adjustments included an asset held for sale
which had previously been revalued, a finance lease, the receipt of a government grant, an adjusting
event after the reporting period and an income tax refund. Part (b) tested the difference between the IFRS
treatment of the government grant and that under UK GAAP. Part (c) tested the definitions of the elements
of financial statements with application to the financial statements prepared in Part (a).
Antigua plc
(a) Financial statements
Statement of profit or loss for the year ended 31 December 2014

8,417,010
(4,799,960)
3,617,050
(2,044,050)
1,573,000
(1,750)
1,571,250
(370,500)
1,200,750

Revenue
Cost of sales (W1)
Gross profit
Operating expenses (W1)
Profit from operations
Finance cost (W7)
Profit before tax
Income tax expense (497,500 127,000)
Profit for the year
Statement of financial position as at 31 December 2014

Assets
Non-current assets
Property, plant and equipment (1,271,600 + 283,090)
(W2)
Current assets
Inventories (W6)
Trade and other receivables
Non-current asset held for sale (58,000 5,000)
Total assets

Copyright ICAEW 2015. All rights reserved

1,554,690

733,400
578,700
1,312,100
53,000
1,365,100
2,919,790

Page 1 of 16

Financial Accounting and Reporting Professional Level June 2015


Equity and liabilities
Equity
Ordinary share capital
Revaluation surplus (W5)
Retained earnings (W4)

50,000
717,400
1,185,740
1,953,140

Non-current liabilities
Finance lease liabilities (W7)
Current liabilities
Finance lease liabilities (W7)
Trade and other payables
Borrowings
Taxation

33,500

9,250
325,100
101,300
497,500
933,150
2,919,790

Total equity and liabilities


Workings
(1) Allocation of expenses

Per TB
Opening inventories
Closing inventories (W6)
Costs to sell held for sale asset
Loss on held for sale asset (W3)
Depreciation charge on buildings
Depreciation charges on plant and equipment (5,175 + 8,375
+ 48,660 (W2))
Add back government grant (103,500 x 50%)
Lease payment wrongly included

Cost of
sales

4,741,400
678,000
(733,400)

Operating
expenses

2,017,500

5,000
800
30,000
62,210
51,750
4,799,960

(9,250)
2,044,050

(2) PPE

B/f Valuation/Cost
B/f Accumulated depreciation
Less: Held for sale asset (W3)
Depreciation on buildings ((1,490,000 140,000) 45)
Less government grant (W1)
Depreciation on equipment subject to grant (51,750 x 20% x
6/12)
Leased asset
Depreciation on leased asset (50,250 6)
Depreciation on other plant and equipment ((346,800
103,500) x 20%)

Land and
buildings

1,490,000
(90,000)
1,400,000
(98,400)
(30,000)

(51,750)
(5,175)
50,250
(8,375)
(48,660)
1,271,600

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Plant and
equipment

578,000
(231,200)
346,800

283,090

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Financial Accounting and Reporting Professional Level June 2015

(3) Asset held for sale

Asset

Cost on 1 January 2006


Depreciation to 31 December 2010 (76,000/50 x 5)
Carrying amount at 31 December 2010
Revaluation on 1 January 2011
Depreciation to 31 December 2014 (108,000/45 x 4)
Carrying amount at 31 December 2014
Fair value
Charge to profit/revaluation surplus

76,000
(7,600)
68,400
108,000
(9,600)
98,400
(58,000)
40,400
800

Revaluation
surplus

39,600

39,600
(39,600)

(4) Retained earnings

(15,010)
1,200,750
1,185,740

At 31 December 2013
Profit for the year
At 31 December 2014
(5) Revaluation surplus

757,000
(39,600)
717,400

At 31 December 2013
Loss on held for sale asset (W3)
At 31 December 2014
(6) Closing inventories

752,000
(18,600)
733,400

At cost
Less Write down to NRV ((142,000 x 70%) 118,000)

(7) Finance lease

31 December 2014
31 December 2015

B/f

50,250
42,750

Payment

(9,250)
(9,250)

Capital

41,000
33,500

Interest

(5/15 x 5,250) 1,750

C/f

42,750

SOTD = (5 x 6)/2 = 15
Interest = (9,250 x 6) 50,250 = 5,250

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Page 3 of 16

Financial Accounting and Reporting Professional Level June 2015


Generally candidates made a good attempt at this part of the question. However, presentation of the
financial statements was often poor, and many scripts were messy and disorganised. It was noticeable
that far less well-presented scripts than usual were seen. In particular it was often not possible to agree
the figure taken to the statement of financial position for the carrying amount of property, plant and
equipment to a single figure in the workings. Candidates should be aware that if such a figure cannot be
seen in the workings then they will not gain the mark available for this figure on the face of the statement
of financial position. In general, property, plant and equipment workings were often untidy and indicated
that the approach to working out this figure was not methodical. The recommended approach is for
candidates to use a property, plant and equipment table with supporting workings as needed.
Generally, candidates arrived at the correct figures for closing inventories, the income tax charge in the
statement of profit and loss and the figure for non-current assets held for sale on the statement of financial
position (with many candidates gaining the additional marks available for putting this in the correct place at
the bottom of current assets). Many candidates made a good attempt at the workings in relation to the
impairment on the asset held for sale, the most common errors being:
a failure to revalue the asset to fair value first and therefore deal with the costs to sell separately
errors in depreciation calculations (usually charging depreciation for an incorrect number of years)
charging the whole of the impairment to the revaluation surplus, without first checking what the
balance on the revaluation surplus in relation to the asset was
charging the impairment to the revaluation surplus and the same figure as an expense in the
statement of profit and loss
having arrived at a figure for the carrying amount of the asset held for sale, failing to deduct this
figure from property, plant and equipment, or deducting the fair value instead.
Surprisingly, the aspect of the question that caused the most problems was the finance lease. Usually, the
majority of candidates would get the figures in relation to this completely correct, but, on this occasion, that
was rare. Almost all candidates calculated a sum of the digits but this was often based on payments in
arrears, rather than in advance, even where the candidates lease table clearly showed payments in
advance. Furthermore, a worrying number of candidates were unable to calculate the correct figure for
total finance costs. Having calculated their own sum of the digits, some candidates then went on to use
this as an interest rate in their leasing table. Finally, only a small number of candidates were able to
correctly split the year-end liability, per their own table, into current and non-current, with few appreciating
that for a lease where payments are in advance, the current liability will always be the payment for the
next year.
Most candidates did use the recommended costs matrix when allocating costs for the statement of profit
or loss, and entered the adjustments into the correct columns. Occasionally errors were made in terms of
whether the adjustment was increasing or decreasing costs particularly with regard to the grant incorrectly
credited to purchases. Candidates whose convention was to use figures in brackets for costs were
generally the ones who got themselves into a muddle with the direction of their adjustments, as if they had
reverted to the opposite convention part way through. A number of candidates failed to include all of their
depreciation charges (on the leased asset, the asset subject to a grant, on the remaining plant and
equipment, and on the building) in this matrix, even when they had calculated all of these elements in their
property, plant and equipment workings. Once again, this indicated a disorganised approach.
Other common errors included the following:
Showing the bank account (which was a credit balance in the trial balance) as a current asset,
rather than as an overdraft in current liabilities.
Adding the retained earnings brought forward (which was a debit balance in the trial balance) to
their profit for the year, instead of deducting it.
Reducing the income tax liability by the income tax refund when that refund had already been
received (or showing the refund as a separate tax asset).
Adding the grant to property, plant and equipment rather than deducting it.
Charging a full years depreciation on the asset subject to the grant, instead of six months.
Using a useful life of seven years for the leased asset instead of the (shorter) lease term of six
years.

Total possible marks


Maximum full marks

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27
25

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Financial Accounting and Reporting Professional Level June 2015


(b) Differences between IFRS and UK GAAP re government grant
UK GAAP
Grants are recognised under the performance model
or the accrual model. This policy choice is to be
made on a class-by-class basis.

IFRS
No such requirement exists in IAS 20.

Under the performance model, where no specific


performance-related conditions are imposed on the
recipient (as here) then the grant is recognised in
income when the grant proceeds are received or
receivable. Hence, if the performance model had
been chosen, then Antigua Ltd would have credited
the whole 51,750 to income during the year.

This would not be possible under IFRS, where,


under the chosen netting-off method, the grant is
credited against the cost of the asset and so
effectively released to profit or loss over the life of
that asset, in line with the depreciation policy on
that asset.

Under the accrual model grants relating to assets are


recognised in income on a systematic basis over the
expected useful life of the asset. However, this
cannot be done by deducting the grant from the
carrying amount of the asset, but by recognising
deferred income.
Most candidates made a reasonable attempt at this part of the question, with almost all stating that IFRS
allows a choice of treatment, but that UK GAAP only allows the deferred income method. Most went on to
clearly describe the mechanics of the two methods, although some wasted time providing calculations for
the deferred income method, which were not required. Very few candidates gained full marks, and almost
all candidates seemed unaware of the two models (performance and accrual) allowed by UK GAAP.
Total possible marks
Maximum full marks

6
3

(c) Elements of the financial statements


Asset The finance lease is recognised as an asset because the machine is controlled by Antigua plc
(has the risks and rewards), the control came about via the signing of the lease, which happened during
the year, and the machine will be used in the business to generate future revenue.
Liability The overdraft is recognised as a liability because it existed at the year end and will lead to future
outflows in the form of repayment and interest payments.
Income Revenue is a form of income as it brings cash inflows or enhancement of assets in the form of
trade receivables.
Expenses Depreciation is an expense as it reduces the carrying amount of property, plant and
equipment (ie depletes an asset).
Equity this equals Antigua plcs ordinary share capital, retained earnings and revaluation surplus as the
sum of these is equal to total assets minus total liabilities/is the residual interest in the assets of the entity
after deducting all its liabilities.
There were some very good attempts at this part of the question, with all five elements clearly stated, an
appropriate example given for each, and a clear explanation of why the given example met the definition.
At the other end of the scale were answers which, although they gave the five elements and appropriate
examples, merely copied out the definitions of the elements from the open book text, without any attempt
to relate those definitions to their examples, and therefore scored very little for their explanations. A
significant minority of candidates confused elements with the fundamental and enhancing qualitative
characteristics, thereby scoring no marks.
Total possible marks
Maximum full marks

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8
5

Page 5 of 16

Financial Accounting and Reporting Professional Level June 2015

Question 2
Total Marks: 28
General comments
Part (a) of this question required candidates to explain the IFRS financial reporting treatment of the four
issues given in the scenario. The issues covered a financial asset, the disposal of a subsidiary, a foreign
exchange transaction and a related party transaction. Part (b) required a discussion of the ethical issues
arising from the scenario and the action to be taken. Part (c) required candidates to describe any
differences between IFRS and UK GAAP in respect of the financial reporting treatment of Issue (2).
Cuba Ltd
(a) IFRS financial reporting treatment
(1) Financial asset
The bond is a financial asset as defined by IAS 32, Financial Instruments: Presentation, because it
represents a contractual right to receive cash from another entity.
Per IAS 39, Financial Instruments: Recognition and Measurement, financial assets should be recognised
when the contract is entered into and initially measured at its fair value, including transaction costs. Fair
value is defined by IFRS 13, Fair Value Measurement, but is normally the transaction price.
Hence Philippe was correct to recognise the asset on 1 January 2014, but should have recognised it at
97,000 (94,500 + 2,500), not 110,000. As this is a held-to-maturity financial asset, the asset should
subsequently be measured at amortised cost using the effective interest method.
At 31 December 2014 interest of 6,295 (97,000 x 6.49%) should be recognised as income in profit or loss
so the income recognised of 15,500 will need to be reduced by 9,205 (15,500 6,295). The bond
should be stated at 103,295 (97,000 + 6,295). Because the bond is redeemable on 31 December 2015,
ie within one year, it should be presented in investments within current assets.
(2) Disposal of subsidiary
In Cuba Ltds consolidated financial statements the profit on disposal of Honduras Ltd should be
calculated by comparing the net assets at the date of disposal and non-controlling interest (NCI), less
goodwill on consolidation not already written off, to the sale proceeds. The net assets at the date of
disposal will be the net assets brought forwards on 1 January 2014, less the loss earned by Honduras Ltd
to the date of disposal/(six months pro-rated).

Sale proceeds
Less: Carrying amount of goodwill at date of disposal:
Consideration transferred at date of acquisition
Fair value of NCI at date of acquisition
Net assets as date of acquisition
Goodwill at date of acquisition and disposal
Carrying amount of goodwill at date of disposal:
Net assets on 31 December 2013
Loss for current year to date of disposal (16,600 2)
Carrying amount of net assets at date of disposal
Add:
NCI in net assets at date of disposal (40,100 +
(292,700 157,500) x 20%))
Profit on disposal

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256,600

147,800
40,100
187,900
(157,500)
(30,400)
301,000
(8,300)
(292,700)
67,140
640

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Financial Accounting and Reporting Professional Level June 2015


This figure should be recognised in the consolidated statement of profit or loss as discontinued operations.
In the consolidated statement of profit or loss, Cuba Ltd should include the results of Honduras Ltd up to
the date of disposal. At the year end of 31 December 2014 the Cuba Ltd group no longer controls any of
the assets or liabilities of Honduras Ltd and so the consolidated statement of financial position should not
recognise any of Honduras Ltds assets or liabilities.
The non-controlling interest figure will similarly include their share (20%) of six-twelfths of Honduras Ltds
loss for the year, being 1,660 (16,600 x 20% x 6/12). In the statement of changes of equity for the year
the 67,140 above will be shown as a deduction in the non-controlling interest column.
Because the investment in Honduras Ltd represented a separate major line of business of the Cuba Ltd
group, in the consolidated statement of profit or loss, the results of Honduras Ltd for the year ended 31
December 2014 should be presented separately in accordance with IFRS 5, Non-current Assets Held for
Sale and Discontinued Operations. A single net figure of a loss of 7,660 for the discontinued operation
should be disclosed on the face of the consolidated statement of profit or loss, being the profit on disposal
of 640, less the loss for the period to disposal of 8,300. A disclosure note should show the breakdown of
this figure into revenue, costs and the profit on disposal. Honduras Ltds prior period results should be
reclassified as discontinued in order to ensure comparability.

(3) Foreign exchange transaction


IAS 21, The Effects of Changes in Foreign Exchange rates, states that a foreign currency transaction
should be recorded, on initial recognition in the functional currency, by applying the exchange rate
between the reporting currency and the foreign currency at the date of the transaction/historic rate. When
the goods were received on 23 November 2014, Philippe was correct to record them in purchases and
trade payables at the spot rate of 1:0.85, ie at an amount of 134,300 (158,000 x 0.85).
However, at the year end, IAS 21 requires that any foreign currency monetary items are retranslated using
the closing rate. Monetary items are defined as units of currency held and assets and liabilities to be
received or paid in fixed or determinable number of units of currency. The trade payable in respect of this
purchase meets the definition of a monetary item and should have been retranslated at the closing rate.
This would have given a trade payable of 142,200 (158,000 x 0.90). This exchange loss of 7,900
(142,200 134,300) should have been included in the consolidated statement of profit or loss for the year
ended 31 December 2014.
Furthermore, because inventory does not meet the definition of a monetary item, it should have been left
as originally recorded, and not been restated. Closing inventory therefore should be reduced by the same
amount (7,900), further reducing the profit for the year.

(4) Related party transaction


This appears to be a related party transaction per IAS 24, Related Party Disclosures. Grenada Ltd is a
related party of Cuba Ltd because Grenada Ltd is owned by a close family member of Cuba Ltds key
management personnel (ie it is owned by the wife of Cuba Ltds finance director).
The following disclosures are therefore required, even if the purchases were indeed made on an arms
length basis:

The nature of the related party relationship (ie that purchases have been made from a company
owned by the finance directors wife).
The amount of the transactions (550,000).
The amount of any balances outstanding at the year-end (75,000).

Disclosure may be made of the fact that the transactions were made on an arms length basis if this can
be substantiated.

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Page 7 of 16

Financial Accounting and Reporting Professional Level June 2015

This question was not answered as well as the numeric parts of the paper, and indeed the other written
parts. Candidates need to be aware that they can only score well on this type of question if they make a
reasonable attempt to provide explanations, in addition to calculations.
Issue (1): This was generally very poorly answered with many candidates assuming this was a liability.
Given that the bond was purchased as opposed to being issued it was clearly a financial asset, not a
financial liability. Others thought it was a compound financial instrument, with equity and liability
components. Some hedged their bets altogether by stating it was both an asset and a liability. A few
thought it was an intangible asset. Others provided figures (some sort of amortised cost table) without ever
stating what the transaction represented. Those candidates who did correctly identify the transaction as a
financial asset generally said that it needed to be recognised at an initial 97,000 (ie including the
transaction costs) and then amortised that figure at its effective interest rate, giving a closing carrying
amount, although the answer did not always describe that method in words.
Issue (2): Much better attempts were made at this part of the question. Almost all candidates recognised
this as a discontinued operation, although they didnt always explicitly state this, and correctly stated that it
needed to be recognised as a single line in the statement of profit or loss. They then correctly combined
their own figure for profit or loss on disposal with the subsidiarys loss for the year up to disposal. Most
recognised that the loss for the year was for six months only, but a significant number of candidates, as
usual, took only the group share of this figure. However, although almost all candidates attempted the
relevant calculations, many, once again, failed to also describe what needed to be done in words. Few
considered the impact of the disposal on the statement of financial position (ie the subsidiary would not be
consolidated as control had been lost). By far the most common error in the calculation of the profit or loss
on disposal was in respect of the non-controlling interest at disposal with very few calculating this using
the chosen fair value policy most candidates calculated this using the proportionate method and
therefore simply took 20% of the net assets at disposal. Others made errors in the calculation of the latter
figure, most commonly adding, rather than deducting, the loss for the year from the opening net assets.
Issue (3): Once again, many candidates produced the correct relevant calculations (this time often
accompanied by journal entries, which were not required) without explaining why it was that the payable
needed to be restated but that the inventory should not have been (ie making reference to the treatment of
monetary, as opposed to non-monetary items). A minority of candidates said that the inventory had
correctly been restated and that the payables correctly left at the historic rate. A significant number of
candidates, whilst producing the three correct figures, seemed to be completely unclear as to which
figures should be shown at which amount, ie at the historic or closing rate.
Issue (4): Most candidates recognised that this was a related party transaction and were able to explain
why. However, most said that this was because Phillippes wife was a related party, as opposed to Cuba
Ltd being a related party. Almost all candidates listed the necessary disclosure requirements but fewer
illustrated how these requirements would be fulfilled by reference to the information in the scenario. Most
knew that the fact that the transaction had been made on an arms length basis did not negate the need
for disclosure.
Total possible marks
Maximum full marks

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Financial Accounting and Reporting Professional Level June 2015


(b) Ethical issues
Philippe appears to have a self-interest threat, as he is due a bonus based on the profit for the year. The
errors which Jos has discovered in the draft financial statements could be genuine mistakes due to a
lack of knowledge, or could be a deliberate attempt by Philippe to overstate the profit for the year in order
to increase his bonus. It may be that had it not been for his illness that these errors would not have been
discovered.
As an ICAEW Chartered Accountant Philippe has a duty of professional behaviour and due care and
should be aware of the correct IFRS financial reporting treatment for all of these issues, none of which are
at all controversial. His imminent retirement is no excuse.
Although the transaction with Grenada Ltd may all be above board, it does perhaps throw into doubt the
integrity of Philippe if there is any question over whether the transactions were conducted on an arms
length basis. In any case, even if they were, as an ICAEW Chartered Accountant Philippe should not only
act with integrity but he should appear to act with integrity. The fact that he is suggesting that this
transaction does not need to be disclosed also paints him in a poor light.
Given Phillippes attitude about not amending the figures, Jos is subject to an intimidation threat. He
should apply the ICAEW Code of Ethics, with the following programme of actions:

Explain to Philippe how each of these matters should be accounted for.


If Philippe refuses to correct the errors, discuss the matters with the other directors to explain the
situation and obtain support. Consider also discussing the issues with the external auditors.
Obtain advice from the ICAEW helpline or local members responsible for ethics.
Keep a written record of all discussions, who else was involved and the decisions made.

This part of the question was well answered. Most candidates correctly identified that there was a selfinterest threat for Phillippe (because of his profit-related bonus) and that there was an intimidation threat
for Jos (due to Phillippes attitude in the telephone call). They also recognised that all of the errors had
increased the profit for the year. Many then went on the discuss the actions that Jos should take, being
the standard response of discussion with Phillippe, discussion with the other/managing director(s), seeking
help from the ICAEW helpline, and documenting all discussions. As ever, many candidates were overly
keen to resign and a number put themselves in an audit context, by suggesting that they should seek help
from the ethics partner.
Total possible marks
Maximum full marks

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Financial Accounting and Reporting Professional Level June 2015


(c) IFRS v UK GAAP differences re disposal of subsidiary
IFRS

UK GAAP

IFRS 5 requires the results of a discontinued


operation to be shown as a single figure on
the face of the statement of profit or loss.

FRS 102 shows the results of a discontinued


operation as a separate column on the face
of the income statement.

Under IFRS 3 non-controlling interest may be


measured at fair value or on the
proportionate basis.

FRS 102 only permits the proportionate


(share of ownership) basis.

IFRS 3 goodwill is not amortised but is


subject to annual impairment reviews.

FRS 102 requires goodwill to be amortised


over its useful life. There is a rebuttable
presumption that the useful life should not
exceed five years.

Almost all candidates scored at least one mark in this part, with the most common answer being to
describe the differences between the presentation of discontinued activities in the statement of profit or
loss/income statement, which was understandable as this was the main focus of Issue (2). However, Issue
(2) also covered the calculation of goodwill and candidates should have been guided by the fact that the
requirement was for two marks and that therefore they needed to think more widely and look at the
calculation itself. Some candidates did go on to do this and achieve a second mark by describing which
methods of calculating goodwill and the non-controlling interest are available under IFRS and UK GAAP. It
was less common to see the differences with reference to the impairment and amortisation of goodwill,
although this was not needed to achieve full marks.
Total possible marks
Maximum full marks

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Page 10 of 16

Financial Accounting and Reporting Professional Level June 2015

Question 3
Total Marks: 19
General comments
This was a mixed topic question requiring the preparation of extracts from the financial statements. The
question featured various transactions in property, plant and equipment, including a self-constructed
asset, in addition to share issues during the year and dividends. In Part (a) candidates were required to
explain their treatment of the self-constructed asset, which meant they could then use their calculated
figures in Part (b).
Columbia plc
(a) IFRS financial reporting treatment of the manufacturing facility
Per IAS 16, Property, Plant and Equipment, the cost of an item of property, plant and equipment (PPE)
comprises:
Purchase price
Costs directly attributable to bringing the asset to its intended location and condition.
The site preparation costs, materials and labour costs, professional fees, construction overheads and
costs of the initial safety inspection are directly attributable costs and therefore can be capitalised, a total
of 500,300 (100,000 + 358,300 + 10,000 + 21,000 + 11,000).
The relocation costs of 45,600 and the general overhead costs of 32,500 cannot be capitalised/should
be expensed because they are not directly attributable. So the total amount written off to profit or loss
should be 78,100 (45,600 + 32,500).
Capitalisation should cease when the asset becomes capable of operating in the manner intended /so on
30 November 2014.
Each significant part of an item of PPE should be depreciated separately so the calculation of the annual
depreciation charge for the year will be:

Safety inspection (21,000 3)


Other ((500,300 21,000) 20)

7,000
23,965
30,965

Since the asset was available for use only from 30 November 2014, then only one month of this annual
charge should be recognised in profit or loss for the year ended 31 December 2014, ie 2,580 (30,965
12).
The carrying amount of the facility on 31 December 2014 is therefore 497,720.
Answers to this part were mixed, although a reasonable number of candidates did obtain the maximum
marks and, generally, the quality of explanations in this part was better than those in Part (a) of Question
2. However, a significant number of candidates wasted time by discussing irrelevant accounting
standards, in particular IAS 38, Intangible Assets and IAS 23, Borrowing Costs. Most candidates made an
attempt at justifying which costs should and shouldnt be capitalised and virtually all candidates did
conclude that a months worth of depreciation should be charged and attempted to calculate this figure.
The most common errors were:

failing to justify the appropriate treatment for the costs by reference to IAS 16, Property, Plant and
Equipment
treating the professional fees and/or the construction overheads and/or the initial safety inspection
costs incorrectly
not separating out the initial safety inspection costs so that they could be depreciated over the
shorter life of three years.

Total possible marks


Maximum full marks

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Financial Accounting and Reporting Professional Level June 2015


(b) (i) Revised profit for the year ended 31 December 2014

52,600
(78,100)
(2,580)
(1,000)
(29,080)

Draft profit for the year


Costs re self-constructed asset (a)
Depreciation on self-constructed asset (a)
Finance costs (50,000 x 4% x )

(ii) Extracts from the financial statements for the year ended 31 December 2014
Statement of cash flows for the year ended 31 December 2014

Investing activities
Purchase of property, plant and equipment (W1)
Proceeds from sale of property, plant and equipment (125,700
14,300)
Financing activities
Issue of ordinary share capital (75,000 x 1.50)
Issue of irredeemable preference share capital
Ordinary dividends paid (W2))

(932,800)
111,400

112,500
50,000
(56,250)

Statement of financial position as at 31 December 2014

Non-current assets
Property, plant and equipment (W1)

2,025,620

Equity
Ordinary share capital (W3)
Retained earnings (W2)

468,750
39,220

Non-current liabilities
Irredeemable preference share capital

50,000

Current liabilities
Preference dividend/finance costs payable

1,000

Workings
(1) PPE
B/d
Additions (432,500 + 500,300 (a))

1,456,700
932,800

Disposal
Depreciation (235,600 + 2,580 (a))
C/d ()

2,389,500

125,700
238,180
2,025,620
2,389,500

(2) Retained earnings


Loss for the year (i)
Bonus issue (93,750 72,500) (W3)
Ordinary dividend (15p x 375,000)
C/d ()

Copyright ICAEW 2015. All rights reserved

29,080
21,250
56,250
39,220
145,800

B/d

145,800

145,800

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Financial Accounting and Reporting Professional Level June 2015


(3) Ordinary share capital and share premium

At 31 December 2013
Issue on 1 February 2014
Bonus issue on 1 November 2014 ( 4)
At 31 December 2014

Share
capital

300,000
75,000
375,000
93,750
468,750

Share
premium

35,000
37,500
72,500
(72,500)
-

Generally answers to this part were good with most candidates calculating an adjusted profit figure and
preparing extracts to both the statement of financial position and statement of cash flows. The quality of
extracts produced was reasonable, but a minority of candidates produced a jumble of notes and workings.
Many candidates correctly calculated the closing balance on the share capital account and showed in their
workings that the share premium account would be reduced to zero. The figures for proceeds from
disposals of property, plant and equipment, issue of shares and dividends paid were also dealt with well
and nearly always shown under the correct heading in the statement of cash flows. However, as always
with the statement of cash flows, many candidates lost marks for failing to show outflows of cash in
brackets. This is an issue that has been flagged up repeatedly. Also, many candidates wasted time by
duplicating workings; often doing a bracketed working for property, plant and equipment to calculate the
figure for the statement of financial position then also producing a T-account working (which often included
different numbers). Another common error with property, plant and equipment was to include the costs of
the new manufacturing facility in the working but not in the figure on the face of the statement of cash
flows. Other candidates wasted time by preparing a combined share capital and share premium T-account
then had to repeat the working, showing these accounts separately, to allow for the preparation of
statement of financial position extracts. A worrying minority of candidates calculated a weighted average
number of ordinary shares, as would be needed for an earnings per share calculation.
Other common errors included:

including a full year for the dividend on the irredeemable preference shares (rather than six
months) and also treating it as a dividend paid on the statement of cash flows, or omitting this
dividend entirely
making unnecessary adjustments to both profit and property, plant and equipment (when the
question clearly stated that the depreciation on existing assets and the loss on the disposal had
already been recognised)
deducting all of the bonus issue from retained earnings when as much of it as possible should
have been taken to share premium (another reason why it was necessary to produce separate
share capital and share premium workings)
calculating the ordinary dividend by reference to closing share capital (when the bonus issue had
not been made until after the interim dividend was paid)
combining the liabilities for the preference dividend payable with the preference share capital in
the statement of financial position, rather than showing these individually as current and noncurrent liabilities respectively.

Total possible marks


Maximum full marks

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Financial Accounting and Reporting Professional Level June 2015

Question 4
Total Marks: 20
General comments
This question required the preparation of a consolidated statement of financial position from a draft version
of the same, where figures for a subsidiary had been incompletely incorporated and figures for an
associate not included at all. Fair value adjustments were required on acquisition for both companies as
well as dealing with contingent consideration for the subsidiary. Intra-group trading and the transfer of a
non-current asset had occurred during the year and also needed to be adjusted for.
Dominica plc
Consolidated statement of financial position as at 31 December 2014

Assets
Non-current assets
Property, plant and equipment (3,780,400 20,000
(W7))
Investment in associate (W4)
Goodwill (W2)
Current assets
Inventories (400,800 + 8,500 (W1) + 17,700 (W1))
Trade and other receivables
Cash and cash equivalents

3,760,400
160,060
108,830
4,029,290
427,000
182,400
53,400
662,800
4,692,090

Total assets
Equity and liabilities
Equity
Ordinary share capital (1,400,000 160,000)
Share premium (890,000 80,000)
Revaluation surplus (1,061,600 240,000 + (100,000 (W1) x 85%))
Retained earnings (W5)
Attributable to the equity holders of Dominica plc
Non-controlling interest (W3)
Current liabilities
Trade and other payables (320,000 200,000)
Contingent consideration
Taxation

1,240,000
810,000
906,600
1,228,835
4,185,435
103,155
4,288,590

120,000
150,000
133,500
403,500
4,692,090

Total equity and liabilities


Workings
(1) Net assets Tobago Ltd

Ordinary share capital


Share premium
Revaluation surplus
Retained earnings
FV adj inventories ((124,000 107,000)/2)
Inventory sale or return (23,600 x 75%)

Copyright ICAEW 2015. All rights reserved

Year end

160,000
80,000
240,000
181,500
8,500
17,700
687,700

Acquisition

160,000
80,000
140,000
63,200
17,000
460,200

Post acq

100,000

127,500
227,500

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Financial Accounting and Reporting Professional Level June 2015


(2) Goodwill Tobago Ltd

Consideration transferred:
Cash
Contingent consideration

400,000
100,000
500,000
(460,200)
69,030
108,830

Net assets at acquisition (W1)


Non-controlling interest at acquisition (460,200 (W1) x 15%)
(3) Non-controlling interest Tobago Ltd

69,030
34,125
103,155

Share of net assets at acquisition (460,200 (W1) x 15%)


Share of post-acquisition profits (227,500 (W1) x 15%)
(4) Investment in associate Anguilla Ltd

156,000
22,260
(17,500)
(700)
160,060

Cost
Add: Share of post-acquisition profits ((168,100 104,500) x 35%)
Less: FV depreciation (100,000/20 years) x 35% x 10 years)
Less: PURP (W6)

(5) Retained earnings

1,186,400
(50,000)
108,375
22,260
(17,500)
(700)
(20,000)
1,228,835

Draft consolidated (1,367,900 181,500)


Additional contingent consideration
Tobago Ltd (127,500 (W1) x 85%)
Anguilla Ltd (W4)
Less: FV depreciation (W4)
Less: PURP (W6)
Less: PPE PURP (W7)

(6) PURP

SP
Cost
GP
X 1/3
Anguilla Ltd x 35%

%
100
(70)
30

Anguilla Ltd

20,000
14,000
6,000
2,000
700

(7) PPE PURP


Asset now in Tobago Ltds books at 180,000 x 5/6 years
Asset would have been in Dominica plcs books at 156,000 x 5/6 years

Copyright ICAEW 2015. All rights reserved

150,000
(130,000)
20,000

Page 15 of 16

Financial Accounting and Reporting Professional Level June 2015


Answers to this question were generally good, with virtually all candidates recognising that the associate
should not be consolidated and that the equity balances needed to be adjusted to remove the figures of the
subsidiary that had been incorrectly added in. Most candidates produced the standard workings used in the
learning materials which meant it was relatively straightforward to follow the workings and give credit where
appropriate. The correct figure for the unrealised profit relating to the associate was frequently calculated
correctly although, as always, some candidates failed to use only the parents share of this. Many
candidates also seemed confused about what should be included in the associate working, often adding in
fair value adjustments and not understanding that adjustments to the cost of the associate should also be
included in retained earnings. A number of candidates calculated different figures for these two workings
thereby wasting time and losing marks.
The two adjustments that caused the most problems were the unrealised profit relating to the sale of a
machine and the adjustment to inventory for goods sold on a sale or return basis. With regard to the former
those candidates who calculated the adjustment by comparing the two different carrying amounts did well.
However, those who calculated separate figures for profit on disposal and the adjustment to the
subsequent depreciation charge rarely netted these off to come to the correct adjustment. Some
candidates calculated the relevant figure but then failed to adjust property, plant and equipment for this.
Few candidates calculated the correct adjustment for the goods on sale and return often adjusting for the
profit element (which had not been recognised) rather than calculating the cost of the goods and adding it
to net assets and inventories. The contingent consideration was also poorly dealt with. Many candidates
used the wrong figure in the goodwill calculation and few made the appropriate corresponding adjustment
to liabilities or dealt with the change in the value of the contingent consideration in retained earnings.
As always, many candidates lost marks by failing to show an audit trail so figures appeared in workings
without any evidence of how they had been calculated. It is not sufficient to say, for example, 85% x NA at
acq. The actual figure for net assets at acquisition (as calculated in the candidates own net assets table)
must also clearly be shown alongside the percentage for the marks to be awarded.
Other common errors included the following:

Deducting, rather than adding, the fair value increase relating to inventory and/or failing to
recognise that half the inventory had been sold by the year end.
Adopting an inconsistent treatment in the net asset working and the adjustment to inventories in
respect of the above (eg adding the figure to net assets but deducting it from inventories).
Not separating out the movement in net assets relating to the revaluation surplus and therefore
including this in retained earnings.
Not adjusting the revaluation surplus to take into account only the parents share of the
subsidiarys post-acquisition movement on its revaluation surplus many candidates added in
100% of this figure, others did not adjust for it at all.
Not knowing how to calculate and/or account for the post-acquisition depreciation on the fair value
uplift in the associate. A significant number of candidates who were able to calculate the
depreciation adjustment then only proceeded to account for one years worth of the adjustment
instead of the required ten years worth.
Using 80% when calculating figures for the subsidiary, instead of the 85% given in the question.

Total possible marks


Maximum full marks

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22
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Page 16 of 16

Financial Accounting and Reporting - Professional Level September 2015

MARK PLAN AND EXAMINERS COMMENTARY


The marking plan set out below was that used to mark this question. Markers were encouraged to use
discretion and to award partial marks where a point was either not explained fully or made by implication.
More marks were available than could be awarded for each requirement. This allowed credit to be given for a
variety of valid points which were made by candidates.

Question 1
Total Marks:
General comments
Part (a) of this question tested the preparation of a statement of profit or loss, a statement of financial
position and a provisions note from a draft set of financial statements with a number of adjustments
required. Adjustments included deferred revenue, foreign exchange difference, a provision with
discounting and a convertible bond as well as adjustments to property, plant and equipment.
Part (b) tested the difference between the presentation of financial statements prepared using IFRS and
UK GAAP. Part (c) asked for explanations of the concepts of substance over form, present fairly and true
and fair view with illustration to the financial statements prepared in Part (a).
(i) Gamow Ltd Statement of financial position as at 31 March 2015

ASSETS
Non-current assets
Property, plant and equipment (W4)
Intangibles
Current assets
Inventories
Trade and other receivables (121,240 880 (W3))
Cash and cash equivalents

1,207,020
160,000
1,367,020
47,300
120,360
3,800
171,460
1,538,480

Total assets
Equity
Ordinary share capital
Other share reserve (share options / warrants) (W7)
Retained earnings (541,720 779,890 + 336,900)
Equity
Non-current liabilities
Bond (W6)
Provisions (note)
Deferred income (250,000 x 3/24) (W2)

580,000
22,782
98,730
701,512

284,168
112,150
31,250
427,568

Current liabilities
Trade and other payables (92,400 + 18,000 (W7))
Deferred income (100,000 + (156,250 (W2) 31,250))
Taxation
Total equity and liabilities

Copyright ICAEW 2015. All rights reserved

110,400
225,000
74,000
409,400
1,538,480

Page 1 of 16

Financial Accounting and Reporting - Professional Level September 2015

(ii) Gamow Ltd Statement of profit or loss for the year ended 31 March 2015

Revenue (1,896,200 156,250 (W2) 100,000 (W2))


Cost of sales (W1)
Gross profit
Administrative expenses
Other operating costs
Operating profit
Finance costs (1,560 + 7,337 (W6) + 24,950 (W7))
Profit before tax
Income tax
Profit for the year

1,639,950
(683,310)
956,640
(337,360)
(174,533)
444,747
(33,847)
410,900
(74,000)
336,900

(iii) Provisions note

104,813
7,337
112,150

At 1 April 2014
Profit or loss charge (W6)
Unwinding of discount
At 31 March 2015

This provision is in relation to a legal claim which arose on 1 April 2015 due to the delivery of faulty goods
to a customer. The incident was one-off in nature due to a fault with one of the machines. The provision has
been discounted to a present value of 7%. The legal claim is likely to be settled in April 2016.

Workings
W1 Expenses

Draft
Exchange loss (W3)
Provision adjustment (120,000
104,813)
Research & development costs (W5)
Depreciation charge (W4)
Loss in disposal (W4)

Cost of
sales

Admin
expenses

567,430
880

283,600

Other
operating
costs

189,720
(15,187)

115,000

683,310

51,360
2,400
337,360

174,533

W2 Revenue
Loyalty cards (200 x 1,250) = 250,000
250,000 x 9/24 months = 93,750 revenue
Deferred income (250,000 93,750) 156,250
Mendel pre-orders (2,000 x 50) = 100,000
W3 Foreign exchange
Translation at 1 January 2015 (22,000 x 0.83)
Translation at 31 March 2015 (22,000 x 0.79)
Exchange loss

Copyright ICAEW 2015. All rights reserved

18,260
(17,380)
880

Page 2 of 16

Financial Accounting and Reporting - Professional Level September 2015


W4 Property, plant & equipment
Land &
buildings

1,080,000

Cost
Less: disposal (cost)
Depreciation charge for the year
1,080,000 / 40yrs
365,400 / 15yrs

Plant &
machinery

384,900
(19,500)
365,400

(27,000)
(24,360)

Disposal carrying amount


(19,500 (19,500 / 15yrs) x 6yrs) = 11,700
PPE carrying amount at 31 March 2015
At 1 April 2014
Less: depreciation (27,000 + 24,360)
Less: disposal adj (11,700 9,300)
At 31 March 2015

1,260,780
(51,360)
(2,400)
1,207,020

W5 R&D Project Mendel


Intangible
asset

Background investigation work


Initial development work
Second phase development work
Product launch costs
Staff training

Expense

25,000
42,800

160,000

160,000

31,600
15,600
115,000

W6 Provision
2

120,000 / 1.07 = 104,813


Unwinding of discount: 104,813 x 7% = 7,337
W7 Convertible bond
Cash flow

31 March 2015
31 March 2016
31 March 2017 (redemption)
Liability component
Equity component (bal fig)
Total

1 April 2014

277,218

Interest (9%)

24,950

18,000
18,000
318,000

Payment (6%)

(18,000)

Discount factor
@ 9%
1/1.09
2
1/1.09
3
1/1.09

Present
value

16,514
15,150
245,554
277,218
22,782
300,000

31 Mar 2015

284,168

Presentation of the statement of profit or loss and statement of financial position varied. Although as
indicated as acceptable at the tutor conference, most candidates omitted sub-totals on the statement of
financial position, many also omitted totals for total assets and total equity and liabilities on this statement
and/or sub-totals on the statement of profit or loss and were penalised accordingly. However, there were
few very messy statements in terms of workings shown on the face of the statements. Most candidates did
use the recommended costs matrix in their workings and fewer than usual lost marks by mixing up bracket
conventions. However, a worrying number of candidates were let down by difficult to read handwriting.

Copyright ICAEW 2015. All rights reserved

Page 3 of 16

Financial Accounting and Reporting - Professional Level September 2015


Presentation of the provisions note was poor. Many candidates seemed to have little idea what this note
should look like, with many notes looking more like a property, plant and equipment note, featuring
additions for the year. In addition, a number of candidates gave an explanation for how they had arrived at
the closing balance (rather like an answer to an explain type question), rather than the narrative that
should accompany such a note. Although most candidates arrived at the correct closing balance of
112,150, this was mainly achieved by discounting the gross provision of 120,000 by 7% for one year, to
the current year end. Even those who correctly discounted by two years, usually failed to show this correctly
in the movement note. Others mixed up the unwinding charge with the correction of the error (from
120,000 to 104,813) with different figures shown either in the costs matrix and/or as a finance charge.
However, many candidates did achieve high marks on this question with many arriving at completely
correct figures in respect of revenue and the associated deferred income, the foreign exchange adjustment,
the depreciation charges, and the loss on sale. A good number also arrived at the correct split for the
convertible bond between equity and debt, and correctly amortised the latter. Where mistakes were made
over the convertible bond they included failing to accrue for the 18,000 interest, taking the net of the true
interest and the nominal interest to finance charges, adding the equity element to ordinary share capital
when it should have been shown separately and failing to amortise the debt from its base figure.
Fewer candidates than might have been anticipated arrived at the correct split between research and
development costs to be capitalised and those to be expensed. The most common error was to capitalise
the product launch costs instead of expensing them.
Other common errors included arriving at an incorrect foreign exchange adjustment by using the rate at
settlement, as opposed to the year-end rate, deducting the foreign exchange adjustment from revenue
instead of adding it to costs, when calculating closing retained earnings adding the revised profit for the
year but failing to take out the draft profit for the year and reducing the plant and machinery by the carrying
amount of the disposed of asset instead of by the cost (the cash proceeds had already been credited
there), before calculating the depreciation charge for the year. Candidates also need to be reminded that
unless they show their workings then they will lose calculation marks unless the resultant figure is
completely correct, this was particularly prevalent in the calculation of the depreciation charge on plant and
machinery (ie what figure had been divided by how many years).

Total possible marks


Maximum full marks

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30
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Financial Accounting and Reporting - Professional Level September 2015


(b) UK GAAP Presentation of financial statements
Under UK GAAP the presentation of financial statements is primarily dealt with by the Companies Act
2006 and FRS 102. The Companies Act sets out the balance sheet and profit and loss account formats, in
general the requirements are similar to those of IAS 1.
However, it should be noted that the formats in IAS 1 are only contained in the Guidance on
Implementation whereas the Companies Act formats are enshrined in law.
Under UK GAAP the profit and loss account format requires less detail to be included than in IAS 1,
although IAS 1 allows some of the additional detail to be presented in the notes rather than on the face of
the statement.
The Companies Act balance sheet format is less flexible than the equivalent IAS 1 statement of financial
position. A UK balance sheet is usually prepared on a net assets basis.
Different terminology is used, as already described above the Companies Act uses a balance sheet and a
profit and loss account as opposed to a statement of financial position and a statement of profit or loss. In
addition, other terms are different for example, inventories are called stock, receivables are called debtors,
property, plant and equipment is called tangible fixed assets.
Different presentation is used between UK GAAP and IFRS. For example, for discontinued operations, UK
GAAP requires a separate column to be presented on the face of the profit and loss account. However
under IFRS a single line is required for profit or loss from such activities. Another relevant example is the
presentation of held for sale assets as these will simply be included as part of tangible fixed assets under
UK GAAP. However, a separate line is presented below current assets for such assets under IFRS.
This part of the question was poorly answered with many candidates setting out seemingly random
differences between IFRS and UK GAAP accounting treatments, when the requirement asked for
differences in presentation. Very few candidates referred to the fact that IFRS presentation is guided by
IAS 1 and UK GAAP presentation dictated by the Companies Act 2006. The most common answer
referred to differences in the names of the statements and gave a few examples of differences in
terminology (eg inventories as opposed to stock). The better answers then set out the differences in
presentation for held for sale assets and discontinued operations, both of which were relevant points.

Total possible marks


Maximum full marks

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Financial Accounting and Reporting - Professional Level September 2015


(c)(i) Substance over form
Substance over form is the principle that transactions and other events are accounted for and presented in
accordance with their broader substance and economic reality and not their legal form. Substance over
form should be applied to all accounting areas in accordance with the IASB Conceptual Framework.
The main example of substance over form included in Gamow Ltds financial statements above is the
treatment of the convertible debt.
Gamow Ltd has a convertible bond which is a hybrid financial instrument containing both a liability
component and an equity component. The substance of the financial instrument is the same as issuing
separately a non-convertible bond and an option to purchase shares. The substance of the instrument is
followed and therefore separate liability and equity components are accounted for, rather than following its
legal form of a financial liability.
Another example could be argued to include the process of recording deferred income rather than
recognising the cash proceeds immediately, although this is more akin to the accruals concept. The
capitalisation of development costs is another example with the link between their nature being that of an
expense however in substance they may meet the definition of an asset, per the Conceptual Framework
and hence capitalised.
(ii) Fair presentation and true and fair
IAS 1 Presentation of financial statements requires financial statements to present fairly the financial
performance and position of an entity. This means that the effects of transactions should be faithfully
represented. This is generally achieved by presenting the financial information in accordance with
International Accounting Standards.
In the UK, the Companies Act 2006 requires that financial statements present a true and fair view of the
companys financial position and of its profit or loss for the period. True and fair is usually defined in terms
of generally accepted accounting practice, which in the UK means compliance with accounting standards
and adherence to the Companies Act requirements. True is generally interpreted as reflecting factual
accuracy and fairness as indicating that the view is unbiased (neutral) and objective.

Answers to this part of the question were varied and generally disappointing. Many candidates could only
state that substance over form means accounting for an items substance instead of its form! Very few
candidates referred to economic or commercial reality compared to legal form. Most candidates cited the
convertible bonds as an example, but some then went on to say that their legal form was equity, and the
substance a liability, even where they had treated the bonds as a compound financial instrument in their
answer to Part (a). Other examples, such as leasing, which did not feature in Part (a) earned no marks.
The concepts of present fairly and true and fair view were also poorly explained by the majority of
candidates, with only a minority referring to such matters as faithful representation, accuracy and a lack of
bias. A number of candidates believed that present fairly is concerned with the fair value of assets.
Others couched their explanation of a true and fair view in the context of an audit report. It was very rare
to see the basic fact that present fairly is an IFRS concept, and true and fair view the equivalent in UK
GAAP, and even if this fact was presented few then went onto to say that these concepts could be
achieved by compliance with accounting standards.

Total possible marks


Maximum full marks

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Financial Accounting and Reporting - Professional Level September 2015

Question 2
Total Marks:
General comments
Part (a) of this question required candidates to explain the IFRS financial reporting treatment of the four
issues given in the scenario. The issues covered a government grant, a sale and leaseback, two possible
held for sale assets with impairment issues and the purchase of own shares.
Part (b) required the calculation of revised figures for profit before tax and equity.
(a)
(1) Government grant
This is an income related grant and should therefore be recognised over the period to which the related
expenditure is being incurred. For Meitner plc it is expected to employ local employees over a three year
period, therefore it would be reasonable to assume that the grant should be recognised over the three
years also.
The grant should not be recognised unless there is reasonable assurance that the entity will comply with
any conditions attached to the grant and the grant will be received. Meitner plc has already received the
grant and has currently met the condition that the local workforce makes up a third of the total employees
as it has 35% local employees and this is expected to rise. So both conditions have been met. However,
the grant should not be recognised in the statement of profit or loss in full upon receipt regardless of
whether it is assessed as being not likely to be repaid.
125,000 (375,000 / 3yrs) of income should be recognised for the year ended 31 March 2015. The
remaining 250,000 should be reversed from other income and recognised as deferred income, as part of
liabilities. The liability should be split equally between current and non-current.
(2) Sale and operating leaseback
Sale and leaseback transactions can result in either a finance or an operating lease. The length of the
lease of five years in comparison to the life of the property of 30 years, so this is a sale and operating
leaseback.
The substance of the transaction arising from the sale and immediate leaseback on a short-term lease of
five years is that of a sale. The risks and rewards of ownership are not substantially reacquired when the
leaseback is an operating lease and have passed instead to the lessor. Therefore, a profit or loss on
disposal should be recognised. Meitner plc has correctly recognised the transaction as a disposal.
The amount of profit to be recognised will depend on the amount of the sale proceeds in comparison with
the propertys fair value. Here the sale proceeds are above the fair value of 7.3 million, and therefore the
excess of 700,000 (8m 7.3m) should be deferred and amortised over the period which the asset is
expected to be used (ie the length of the lease of 5 years).
Profit on disposal is made up of two elements:
Proceeds
Fair value
Deferred profit
Fair value
Carrying amount
Profit to be recognised immediately
Total profit

Copyright ICAEW 2015. All rights reserved

8,000,000
(7,300,000)

700,000
7,300,000
(6,500,000)
800,000
1,500,000

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Financial Accounting and Reporting - Professional Level September 2015


700,000 of profit should therefore be removed from other income and instead recognised as deferred
income as part of liabilities and recognised evenly over five years. At 31 March 2015, 9 months of deferred
income should also be recognised as part of profit or loss, being 105,000 (700,000 x 9/60). Deferred
income at 31 March 2015 will be 595,000 (700,000 105,000).
(3) Held for sale assets
IFRS 5 Non-current assets held for sale and discontinued operations requires that a non-current asset
should be classified as held for sale when the entity intends to recover its carrying amount principally
through sale rather than continuing use.
In order for the properties to be classified as held for sale they must be available for immediate sale, both
of which are and the sale must be highly probable. Highly probable is defined as:

Management must be committed to a plan to sell the properties, which they are at both locations
by fulfilling the requirements below;
There must be an active programme to locate a buyer, which is the case as the properties are
being advertised in the relevant trade press;
The assets must be marketed for sale at a price that is fair, in both cases a professional valuation
was obtained;
The sale should be expected to take place within one year from the date of classification. The
property at Ostwald is expected to be sold within this time frame however, the property at Dirac
wont be sold until the road restructure is finalised which is expected to take longer than a year, so
it is unlikely to be sold within the year;
It is unlikely that significant changes to the plan will be made, or the decision reversed. This is
unlikely to be the case as the operations have moved to the new central location.

It therefore seems reasonable to conclude that the property at Dirac should continue to be held as part of
non-current assets and depreciated. It is possible that the Dirac property did meet the held for sale criteria
at 1 December, however at some point prior to the year end it was decided that the property should not be
sold until the uncertainty regarding the planning permission was resolved. As no specific information was
provided regarding the date of this decision it seems reasonable to assume that the asset should not be
treated as held for sale. Its treatment is therefore correct.
However, the current valuation suggests that an impairment has taken place as the carrying amount
exceeds its recoverable amount. Recoverable amount is higher of value in use and fair value less costs to
sell. A value in use figure has not been provided, however it would be unlikely that this would be higher as
the operations have been moved from the Dirac property.
At 1 December 2014 an impairment of 164,997 (1,323,000 (1,169,700 x 99%)) should be recognised.
The property should then be depreciated based on its revised value of 1,158,003 over the propertys
remaining life at 1 December 2014 of 21 years. Therefore reverse the excess depreciation charge of
2,619 (21,000 18,381):
Based on cost: ((1,890,000 / 30yrs) x 4/12) = 21,000
Based on impaired amount: ((1,158,003 / 21yrs) x 4/12) = 18,381
However, the property at Ostwald does meet all of the conditions and should therefore be separately
disclosed as a held for sale asset. The property should no longer be depreciated from the date it meets
the held for sale criteria, being 1 December 2014. So the depreciation from 1 December 2014 to 31 March
2015 needs to be reversed. So depreciation of 15,250 ((1,372,500 / 30yrs) x 4/12) needs to be removed
from profit or loss and added back to non-current assets.

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Financial Accounting and Reporting - Professional Level September 2015


The property should be recognised at the lower of its carrying amount of 976,000 and its fair value less
costs to sell of 1,280,500 (1,300,000 x 98.5%), so at 976,000. As the property will continue to be held at
its current carrying amount there is no impairment to be recognised. The potential gain on the sale of the
property should be recognised at the point of sale, when it is realised.
(4) Purchase of own shares
When an entity purchases its own shares, the shares should be recognised as treasury shares as a
negative reserve within equity. The amount recognised is the amount that Meitner plc paid to reacquire the
shares, being 210,000 (150,000 x 1.40). No gain or loss should be recognised on their repurchase or
subsequent resale. The original share capital, and share premium if relevant, recognised when the shares
were originally issued should remain unchanged.
210,000 should be removed from investments and instead recognised as part of equity.
This question was reasonably well answered with nearly all candidates attempting all four of the issues. As
always some candidates lost easy marks by focusing on the calculations without sufficient accompanying
explanations.
(1) Government grant: This was generally well answered with nearly all candidates identifying that the
recognition criteria for the grant had been met and that it should be spread over three years. Most
candidates also correctly calculated the amount of the grant to be recognised in the current year and that
the balance should be included as deferred income split equally between a current and non-current
liability. Fewer candidates specifically stated that it was a grant related to income and in fact a significant
number of candidates wasted time by discussing the alternative treatments available for grants relating to
assets which was simply not relevant in this scenario. Other candidates wasted time by discussing what
might happen in future years (particularly if the grant became repayable) when the requirement only asks
for the accounting treatment in the current year. The most common error was to release the grant over two
years rather than three.
(2) Sale and operating leaseback: Answers to this were more mixed although a good majority of
candidates did identify this as an operating leaseback and justified their decision using the information
given in the scenario. Again most candidates realised that the fact that selling price was above fair value
should have an impact on the amount and timing of the profit to be recognised. A pleasing number of
candidates calculated the figures for the release of the deferred profit correctly reflecting the fact that the
transaction took place three months into the year. However a number of candidates either suggested
deferring the entire profit on disposal or mixed up the amount to be recognised immediately with the
amount to be deferred.
A minority of candidates decided that the transaction was a finance leaseback/secured loan despite the
fact that they often also referred to the short period of the leaseback. Other candidates discussed the risks
and rewards of ownership but made a conclusion the wrong way round.
(3) Held for sale assets: This was probably the issue that was answered the least well by candidates with
answers being quite mixed although pleasingly most candidates did identify the key issue here noncurrent assets held for sale with a significant number also realising that only one of the assets met the
relevant criteria. Again most candidates did refer to the criteria but to gain full marks candidates needed to
apply the criteria to the scenario rather than just list them out. Having correctly identified the asset held for
sale most candidates recognised that depreciation should have stopped and many calculated the correct
adjustment to the depreciation charge for the year (although some failed to pro rate it for the correct
number of months). Although most candidates realised that the asset needed to be transferred to non current assets held for sale a significant number did this at the higher (rather than lower) of fair value less
costs to sell and carrying amount. Many candidates seemed confused as to the different approaches for
assets carried at cost (as was the case here) and those carried at revalued amount and therefore
incorrectly recognised a revaluation surplus.
With regard to the asset that did not meet the criteria answers were disappointing with relatively few
candidates recognising that a normal IAS 36 impairment test was required comparing carrying amount to
recoverable amount. Even where this was discussed relatively few candidates managed to calculate the
impairment correctly. Even fewer then realised that the write down to recoverable amount should have
reduced the subsequent depreciation charge and it was very unusual to see this amount calculated
correctly.

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Financial Accounting and Reporting - Professional Level September 2015


A number of candidates wasted time by not reading the question carefully and in particular not recognising
that the carrying amounts given were as at the time of the decision to close the manufacturing operations.
Therefore they produced lengthy calculations to arrive at the carrying amount already given. Other
candidates also seemed unsure as to whether depreciation for the year had already been charged
although this was clearly stated in the question. A significant minority of candidates also treated the two
separate operations as needing to be treated as one, so because Dirac did not meet the criteria neither
could be.
(4) Treasury shares: Generally this was reasonably well answered with nearly all candidates correctly
recognising that these shares were treasury shares and that they should have been debited to equity
rather than investments. Most candidates also calculated the correct amount. A minority of candidates
calculated the amount using the nominal value of the shares only and/or seemed to think that the correct
double entry was to debit share capital/share premium rather than a separate reserve. A significant
number of answers were quite brief and therefore candidates lost some easy marks from saying for
example, that there was no impact on share capital and premium.

Total possible marks


Maximum full marks

34
23

(b)

Draft
(1) Deferred income
(2) Deferred profit
(2) Release of profit in year
(3) Reversal of depreciation - Ostwald
(3) Impairment Dirac
(3) Reversal of excess depreciation Dirac
(4) Treasury shares

Profit before tax

1,460,000
(250,000)
(700,000)
105,000
15,250
(164,997)
2,619

(992,128)
467,872

Equity

2,600,180

(210,000)
(992,128)
1,398,052

Answers to part (b) were very mixed and a significant minority of candidates did not attempt this part of the
question at all. For those who did, it was normally relatively easy to follow the adjustments relating to
issues (1) and (4) but often difficult to see an audit trail for adjustments relating to issues (2) and (3).
Candidates frequently put the adjustments in the wrong way round (ie added rather than subtracted and
vice versa) and relatively few reflected the impact on equity for the cumulative adjustments made to profit.
A small minority thought that the requirement was to calculate earnings per shares!

Total possible marks


Maximum full marks

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Financial Accounting and Reporting - Professional Level September 2015

Question 3
Total Marks:
General comments
This was a mixed topic question with three distinct elements. Part (a) covered the preparation of extracts
from a consolidated statement of cash flows. Part (b) required a revised extract for consolidated gross
profit and part (c) required a discussion of the ethical issues arising from a request to prepare a paper on
financing opportunities.
(a)
Consolidated statement of cash flows for year ended 31 March 2015 (extract)
Cash flows from investing activities
Acquisition of subsidiary (135,000 3,150)
Dividend received from associate (W1)

(131,850)
20,080

Net cash used in investing activities

(111,770)

Cash flows from financing activities


Proceeds from issue of ordinary shares (W2)
Dividends paid to non-controlling interest (W3)

87,750
(41,065)

Net cash used in financing activities

46,685

Workings
Draft cash flows from operating activities
Per question
Decrease in trade receivables ((112,400 61,400) 83,100)
Increase in trade payables ((96,700 36,700) 53,840)

386,480
32,100
6,160

Revised cash flows from operating activities

424,740

(1) Associate
B/d
Share of profit

176,300
83,200
259,500

Dividend received ()
C/d

20,080
239,420
259,500

(2) Share capital and premium

C/d (575,000 + 425,750)

1,000,750
1,000,750

B/d (460,000 + 320,000)


Non-cash issue
(70,000 x 1.90)
Cash received ()

780,000
133,000
87,750
1,000,750

(3) Non-controlling interest


Cash ()

C/d

41,065

471,400
512,465

B/d
Acquisition (420,550 x
30%)
CPorL

246,700
126,165
139,600
512,465

Generally candidates made a good attempt at this part of the question with many achieving full marks.
Candidates generally made some attempt at presenting reasonable extracts from the consolidated
statement of cash flows, although only a minority went as far as including sub-totals. Most candidates
calculated proceeds from the share issue, although the number of candidates who adjusted the opening
and closing balances for the non-cash issue were significantly lower.

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Financial Accounting and Reporting - Professional Level September 2015


The dividend received from the associate was generally calculated correctly although candidates often
showed this in the incorrect place in the statement. The calculation of the cash outflow from the acquisition
of the subsidiary was disappointing with candidates preparing an extensive calculation when the cash
consideration was simply given in the question. A number of candidates correctly calculated the dividend
paid to the non-controlling interest although it was common for it to be shown as an inflow, under investing
activities or no adjustment made for the acquisition during the year.
A significant number of candidates correctly calculated the cash flows from operating activities, although
the most common error was to add the newly acquired subsidiarys amounts rather than deducting them.

Total possible marks


Maximum full marks

8
7

(b)
Consolidated statement of profit or loss for year ended 31 March 2015

2,879,950
(1,578,850)
1,301,100

Revenue
Cost of sales
Gross profit
Workings
(1) Consolidation schedule

Revenue

Fermi Group

2,345,800

Cost of sales per Q


PURP Sub (W2)
PURP Associate (W2)

(1,290,200)
(2,300)
(700)

7/12
Seyle Ltd

561,750

Adj

(27,600)

Consol

2,879,950

(313,250)

27,600

(1,578,850)

(2) PURP
%
120
(100)
20

SP
Cost
GP
1
X /2
Boas Ltd

27,600
(23,000)
4,600
2,300

24,000
(20,000)
4,000
2,000

2,000 x 35% = 700

Again many candidates achieved full marks for this part of the question, with candidates generally even
completing the revised extract with full narrative and a total, which gained presentation marks. Most
candidates managed to calculate the unrealised profits figures, although not all went on to apportion by
35% for the inter-company sale to the associate. However, how the unrealised profits were then adjusted
was more mixed, with a significant number of candidates adjusting revenue as well as other candidates
subtracting from the cost of sales figure rather increasing it.
Other common errors included not adjusting the subsidiary by seven months, or pro-rating it by the
incorrect number of months and failing to adjust for intra-group sales and purchases when calculating
consolidated totals.

Total possible marks


Maximum full marks

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(c) Ethical issues
Relevant key fundamental principles:
Professional competence and due care Elion should consider whether he has the necessary skills
and experience to prepare such a proposal and deliver it to the board. If Elion concludes he does not
possess such skills and experience he could request to attend a training course to gain such expertise.
Even if he attends such a course will he still be able to gain the experience in time? It may be possible for
Elion to instead assist another member of staff who does have the relevant experience. This would allow
Elion to enhance his own skills and level of technical competence.
Professional behaviour How should Elion proceed so as not to discredit himself in any way?
Producing a paper without the relevant knowledge could lead to the board relying on such information and
making an inappropriate investment decision.
Objectivity Elion should remain objective at all times and not allow a possible self-interest threat to
affect his professional judgement. Elion may want to impress the finance director and therefore may be
tempted to try and prepare the paper.
Integrity the integrity of the finance director should be questioned as he would be expected to have
some idea as to the level of experience that Elion has had and therefore youd expect him to make the
judgement that he doesnt have the right level of expertise at this point in time.
Elion could take the following actions:

He should speak to you as his senior in the first instance and see if you can come to an
arrangement which will deliver the paper to the required standard.
If Elion is not happy with your advice then he should speak directly with the finance director and
discuss the different options available and the suggested courses of action, for example assisting
another more experienced member of staff.
If he still feels uncomfortable with the level of work he is being asked to prepare then speak to
another director or human resources.
Finally, if Elion is still unable to resolve the situation to his satisfaction then he should contact the
ICAEW Ethical Helpline for advice.
Elion should keep a detailed record of all discussions and the outcomes at each stage.

Most candidates prepared a reasonable answer with enough content to score at least half marks. The
better candidates dissected the answer looking at different key elements of the ethical code, such as
professional competence and due care, and professional behaviour. Weaker candidates produced generic
answers that encompassed a broad range of relevant and non-relevant comments in relation to the
scenario.

Total possible marks


Maximum full marks

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Financial Accounting and Reporting - Professional Level September 2015

Question 4
Total Marks:
General comments
This question involved the preparation of a consolidated statement of financial position from individual
company financial statements. The question included the acquisition of a subsidiary in the period, with a
fair value adjustment and deferred consideration, along with an investment in a newly formed joint venture.
Part (b) included an explanation and calculation of distributable profits for the parent entity.
(a) Huygens plc
(a) Consolidated statement of financial position as at 31 March 2015

Assets
Non-current assets
Property, plant and equipment (911,700 + 89,400 + 15,000 750)
Intangibles (W2)
Investments (116,250 85,000 (W2) 25,000 + 3,750 (W4))
Investment in joint venture (W6)
Current assets
Inventories (43,700 + 32,000 1,440 (W5)
Trade and other receivables (71,000 + 17,900 12,800)
Cash and cash equivalents (5,600 + 3,100 + 6,400)

1,015,350
47,000
10,000
28,810
1,101,160
74,260
76,100
15,100
165,460
1,266,620

Total assets
Equity and liabilities
Equity attributable to owners of Huygens plc
Ordinary share capital
Share premium account
Retained earnings (W4)
Non-controlling interest (W3)
Total equity
Current liabilities
Trade and other payables (98,600 + 21,400 6,400)
Deferred consideration (40,000 + 1,000) (W4)
Taxation (65,000 + 13,800)
Total equity and liabilities

Copyright ICAEW 2015. All rights reserved

300,000
105,000
599,018
1,004,018
29,202
1,033,220
113,600
41,000
78,800
233,400
1,266,620

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Financial Accounting and Reporting - Professional Level September 2015


Workings
(1) Net assets Planck Ltd

Share capital
Retained earnings
Per Question
Less: PURP (W5)
Fair value adjustment
Depreciation thereon ((15,000 / 10) x 6/12)

Year end

50,000
57,200
(1,440)
15,000
(750)
120,010

Acquisition

50,000
39,000

15,000

104,000

Post acq

16,010

(2) Goodwill Planck Ltd

125,000
26,000
(104,000)
47,000

Consideration transferred (85,000 + (42,000/1.05))


Non-controlling interest at acquisition FV
Net assets at acquisition (W1)
(3) Non-controlling interest Planck Ltd

26,000
3,202
29,202

NCI at acquisition date (W2)


Share of post-acquisition reserves (16,010 (W2) x 20%)

(4) Retained earnings

579,650
(1,000)
12,808
3,810
3,750
599,018

Huygens plc
Deferred consideration unwinding (40,000 x 5% x 6/12)
Planck Ltd (16,010 (W1) x 80%)
Quimby Ltd (W6)
Quimby Ltds dividend (15,000 x 25%)

(5) Inventory PURP


SP
Cost
GP

%
100
(85)
15

9,600
(8,160)
1,440

(6) Investments in Joint Venture Quimby Ltd


Cost
Add: Share of post acquisition profits (15,240 x 25%)

25,000
3,810
28,810

Candidates made a reasonable attempt at this question with almost all candidates producing a relatively
well laid out consolidated statement of financial position. As mentioned earlier in the examination
commentary candidates did lose marks where there was no audit trail as to how a figure on the face of the
statement had been arrived at. Where there are no workings candidates gain no marks unless the correct
figure is arrived at. Most candidates gained all the marks for adding the parent and subsidiarys figures
together, although a small minority pro-rated the subsidiarys figures to reflect that it was acquired during
the year.

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Financial Accounting and Reporting - Professional Level September 2015


Share capital and premium were almost always correct and the separately presented non-controlling
interest was almost always present, although candidates do not seem to understand the significance of
the sub-total before and after this figure. A significant number of candidates showed a deferred
consideration figure although not always the correct figure was shown, the most common error again was
to not pro-rate this figure. Pleasingly a number of candidates also then adjusted retained earnings for the
unwinding of this deferred amount.
It was pleasing to see that most candidates prepared a net assets table for Planck Ltd and that this was
often completely correct. The most common error was to miscalculate the depreciation on the fair value
adjustment, forgetting that it needed to be time apportioned. A significant number of candidates correctly
calculated goodwill and the inventory PURP figure. The calculations for non-controlling interest and
retained earnings were more mixed, although almost all candidates picked up some marks on these
calculations.
Adjustments to the figures on the face of the consolidated statement of financial position were generally
mixed, although completely correct figures were prepared by a number of candidates. The most common
errors were to only deduct half of the inter-company invoice from trade receivables and not to adjust the
cash figure for the cash in transit. Consolidated retained earnings were only completely correct in a
minority of cases with candidates generally confused over the treatment of the PURP and dividend.
The figure which caused a problem to a majority of candidates was the calculation of the investment
figure. A variety of calculations were presented, for example adding rather than subtracting the cost of
investments and adding in the total dividend paid by Quimby Ltd rather than only Huygens plcs share.
Total possible marks
Maximum full marks

19
18

(b) Distributable profits


For entities within a group, distributable profits must be made for each individual entity, rather than the
consolidated group. Therefore, Huygens plcs distributable profits are those profits distributable by the
parent company only.
The basic rule is that distributable profits are measured as accumulated realised profits less accumulated
realised losses, this is usually retained earnings of the individual company.
In the case of listed companies, here it is not clear whether Huygens plc is listed or not, the amount of
distributable profits is further reduced by any excess of unrealised losses over unrealised profits. No such
information is available in this question to determine this.
Huygens plcs distributable profits are therefore calculated as:

The share of profits in the joint venture only affects the consolidated retained earnings, but
Huygens plcs own financial statements would include the dividend from Quimby Ltd of 3,750.
This should have been recognised in the Huygens plcs own statement of profit or loss, however
was incorrectly deducted from Investments, thereby increasing retained earnings by 3,750.

The finance cost arising on the deferred consideration will be recognised by Huygens plc and
therefore reduces retained earnings by 1,000.

Huygens plcs distributable reserves are therefore 579,650 + 3,750 1,000 = 582,400.
This requirement was quite poorly answered by a majority of candidates. Most candidates didnt go
beyond mentioning the basic rule, that distributable profits are calculated on an individual company basis
and that it is often simply retained earnings. However, a small minority of candidates did go on to make an
adjustment for the joint venture dividend and the unwinding of the deferred consideration.
Total possible marks
Maximum full marks

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Financial Accounting and Reporting - Professional Level December 2015

MARK PLAN AND EXAMINERS COMMENTARY


The marking plan set out below was that used to mark this question. Markers were encouraged to use
discretion and to award partial marks where a point was either not explained fully or made by implication.
More marks were available than could be awarded for each requirement. This allowed credit to be given for a
variety of valid points which were made by candidates.

Question 1
Total Marks: 31
General comments
Part (a) of this question tested the preparation of a statement of profit or loss and a statement of financial
position from a trial balance plus a number of adjustments. Adjustments included property, plant and
equipment depreciation, revaluation and impairment, borrowing costs, redeemable preference shares and
dividends thereon, and the correction of a prior period error. Part (b) required an explanation of the
treatment of the prior period error. Part (c) tested the four measurement bases set out in the IASB
Conceptual Framework, with reference to figures provided in the question.
Darwin plc
(a) Financial statements
Statement of profit or loss for the year ended 30 June 2015

6,558,550
(5,160,050)
1,398,500
(1,018,300)
(262,800)
117,400
(20,550)
96,850
(20,100)
76,750

Revenue
Cost of sales (W1)
Gross profit
Administrative expenses (W1)
Distribution costs (W1)
Profit from operations
Finance cost (15,250 1,825 (W4) + 7,125 (W7))
Profit before tax
Income tax expense (18,600 + 1,500)
Profit for the year
Statement of financial position as at 30 June 2015

Assets
Non-current assets
Property, plant and equipment (W2)
Current assets
Inventories
Trade and other receivables
Total assets

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915,050
175,400
403,375
578,775
1,493,825

Page 1 of 18

Financial Accounting and Reporting - Professional Level December 2015

Equity and liabilities


Equity (W3)
Ordinary share capital
Revaluation surplus (W6)
Retained earnings (W3)

500,000
354,750
(13,900)
840,850

Non-current liabilities
Preference share capital (4% redeemable) (W7)
Current liabilities
Trade and other payables
Borrowings (100,000 + 40,500)
Taxation

151,125

342,750
140,500
18,600
501,850
1,493,825

Total equity and liabilities


Workings
(1) Costs matrix

Per TB
Opening inventories (266,175 100,000)
Closing inventories
Depreciation/impairment charges (8,900 +
3,950 + 50,325) (W2)

Cost of
sales

5,106,100
166,175
(175,400)
63,175

Admin
expenses

1,008,300

5,160,050

1,018,300

Distrib
costs

262,800

10,000
262,800

(2) PPE
Land and
buildings

Carrying amount b/f (382,000 159,100)


Valuation
Depreciation/impairment charges
Buildings (400,000/40)
Impairment of machine (W5)
Depreciation on impaired machine (2,700 (W5) +
(10,000 x 25% x 6/12))
Depreciation on other machines ((222,900 21,600
(OF)) x 25%)
Construction costs
Borrowing costs (W4)

600,000
(10,000)
(8,900)
(3,950)
(50,325)

590,000
Total PPE

Plant and
machinery

222,900

163,500
1,825
325,050
915,050

(3) Retained earnings


Per TB
Less: Issue of redeemable prefs
Prior period adjustment
Add: Interest paid on redeemable prefs (W7)
Profit for the year
Transfer from revaluation surplus (W6)

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148,100
(150,000)
(100,000)
6,000
76,750
5,250
(13,900)

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Financial Accounting and Reporting - Professional Level December 2015

(4) Borrowing costs


Cost of loan = (30,000 x 5% x 9/12) + (70,000 x 4% x 3/12) = 1,825
(5) Impairment of machine

21,600
(2,700)
18,900
(10,000)
8,900

CA at 30 June 2014 (38,400 x 0.75 )


Less: Depreciation to 31 December 2014 (21,600 x 25% x 6/12)
CA at 31 December 2014
Less: Value in use

(6) Revaluation surplus

Valuation
CA per TB (400,000 160,000)
Depreciation charge on revalued amount (W2)
Depreciation charge on historic cost ((240,000 50,000)/40)
Transfer to retained earnings

(7) Redeemable preference shares


Opening
balance
Year
30 June 2015

150,000

Interest
expense
(4.75%)

7,125

600,000
(240,000)
360,000

10,000
(4,750)
(5,250)
354,750

Interest
paid (4%)

(6,000)

Closing
balance

151,125

Most candidates obtained all of the easier marks to gain a solid pass. Better candidates attempted the
more challenging adjustments which increased their mark to a very good pass. A significant minority of
candidates approached the question in a clear and structured fashion and scored all or almost all of the
marks.
Most candidates presented a well laid out statement of profit or loss and included the correct revenue
figure. The adjustment to finance costs was often correct, the most common mistake being to add the
interest actually paid on the preference shares rather than the interest expense (with a few candidates
adjusting for both these figures). Others added the interest capitalised on the borrowing costs rather than
deducting it. The majority of candidates also arrived at the correct income tax expense but a good number
then went on to also use this figure in the statement of financial position.
Almost all candidates produced a costs matrix working and included the correct figures from the trial
balance. Candidates generally included the correct closing inventory and a majority also correctly adjusted
opening inventory for the prior period error. Where candidates lost marks here was by using the incorrect
bracket convention, for example adding closing inventory rather than deducting it. Most candidates
charged depreciation in the costs matrix although a significant number omitted to include the charge for
the impairment which they had calculated. A minority of candidates charged depreciation or impairment to
the incorrect cost heading even though the question was explicit as to where these costs should be
charged, and they lost marks as a result of this.
Presentation of the statement of financial position was not quite as good as the statement of profit or loss.
Generally candidates included the correct figures from the trial balance although where these were
presented varied. For example, the bank loan repayable on 31 December 2015 was often included in noncurrent liabilities instead of in current liabilities, and the bank overdraft was often shown within current
assets (sometimes as a positive, and sometimes as a negative figure) instead of in current liabilities. A few
candidates incorrectly adjusted the inventories figure here for the prior period error.

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Page 3 of 18

Financial Accounting and Reporting - Professional Level December 2015


The preference shares caused problems for many candidates. Most prepared a correct working for the
closing balance but included the nominal figure of 150,000 on the face of the statement of financial
position. Others presented the preference shares as part of equity. A significant minority of candidates
prepared two years of calculations in their working table rather than one, and then included the balance at
the end of next year instead of at the end of the current year in their statement of financial position.
A majority of candidates made an attempt at the machine impairment calculation with the correct figure
being seen more often than not. As mentioned above, although most candidates prepared this calculation
many then failed to make the double entry adjustment for it by including it both in expenses and in their
property, plant and equipment working. The most common errors were to calculate accumulated
depreciation at the point of classification incorrectly, or to use the wrong figure for the recoverable
amount, generally using the lower of the fair value less costs to sell as opposed to the higher figure as
required by IAS 36.
A significant number of candidates tried to do a weighted average working for the borrowing costs rather
than a simple pro-rata calculation for the actual interest costs incurred on the specific loan. Almost all
candidates did do some kind of calculation and made some adjustment to finance costs, although less
then went on to include this figure as part of property, plant and equipment. The best candidates made the
correct adjustment for both construction costs and the interest on the borrowings in their property, plant
and equipment calculation.
Most candidates prepared a retained earnings working although this was often squashed on the face of
the statement of financial position which made it difficult to read. Candidates are encouraged to prepare a
separate working where there are more than, say, three adjustments to a figure. The most common error
here was to confuse the direction of the adjustments.
A good number of candidates arrived at the correct figure for the initial revaluation surplus although the
adjustment then made for the additional depreciation transfer was often incorrect. The most common error
was to use the original cost of the property for the historic depreciation. Because the useful life of the
property had been reassessed the carrying amount at that date should have been used instead. A minority
of candidates transferred the whole of the balance on the revaluation surplus to retained earnings.
Occasionally candidates wasted time by writing out an explanation of the accounting treatment followed,
although this was seen less often than in many previous sittings. Where explanation is not explicitly asked
for in the requirement there are no marks available for such explanations.
Total possible marks
Maximum full marks

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Financial Accounting and Reporting - Professional Level December 2015

(b) Financial reporting treatment of prior period error


Provided that the relevant information was available when the financial statements for the year ended
30 June 2014 were authorised for issue, this should be treated as a prior period error.
Per IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, a material prior period error
should be corrected retrospectively.
Retrospective misstatement means correcting the recognition, measurement and disclosure of amounts as
if the error had never occurred. For Darwin plc this means that the comparative amounts for the prior
periods need to be restated.
In the statement of profit or loss for the year ended 30 June 2015 the correct opening inventory figure of
166,175 should be recognised/opening inventory is overstated by 100,000. Therefore cost of sales for
the current year is overstated/profit understated by 100,000.
The corresponding debit to opening retained earnings will be shown as an in the statement of changes in
equity for the year ended 30 June 2015.
A minority of candidates did not attempt this part of the question, and answers overall were disappointing.
Although most candidates dealt correctly with this prior period error in Part (a) few were able to explain the
accounting treatment here.
A worrying number of candidates thought this was an event after the reporting period (when it fell way
outside the definition of such an event per IAS 10), and a minority discussed how inventory should be
valued at the lower of cost and net realisable value.
Others were confused as to whether this was an error or simply an adjustment to an accounting policy. Of
those candidates who did identify this as a prior period error there was a split as to those who believed it
should be adjusted for retrospectively and those who chose prospective adjustment (with some hedging
their bets by referring to both).
Total possible marks
Maximum full marks

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Financial Accounting and Reporting - Professional Level December 2015

(c) The four measurement bases


Historical cost
Assets are recorded at the amount of cash or cash equivalents paid (/amount paid/cost) or the fair value of
the consideration given to acquire them at the time of their acquisition.
At historical cost the machine was recorded at its price of 38,400.
Current cost
Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an
equivalent asset at a similar age and level of use was acquired at the current date.
If the machine was to be measured at its current cost it would have been restated to 23,625 (56,000
depreciated for 3 years) on 31 December 2014 representing an aged version of the (56,000) current
cost.
Realisable (settlement) value
Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling
the asset in an orderly disposal, ie at 9,500 (11,000 1,500).
Present value
Assets are measured at the current estimate of the present discounted value of the future cash flows in
the normal course of business.
Under this basis the machine would be measured at 10,000.
Most candidates made a good attempt at this conceptual part. A minority of candidates were clearly
confused as to what the measurement bases were and discussed anything from the revaluation to the
accrual and the cash bases, or even the qualitative characteristics.
However, the vast majority of candidates did correctly identify the four measurement bases and provided
reasonable explanations. A few candidates then went on to waste time by discussing which one was used
in the question when calculating the impairment, or was the best to use generally. There were no marks
available for these discussions.
The most common omission from answers, which meant that only a small minority gained full marks on
the question, was that current cost should be adjusted for the current age and condition of the asset rather
than being simply the current price of a new machine.
The most common error was to state that the realisable (settlement) value would be 11,000, rather than
that figure less selling costs. A few candidates gave examples of the four bases other than by reference to
the figures in Note (3) (as was specified in the requirement) and therefore gained no marks for these
examples.
Total possible marks
Maximum full marks

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5
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Financial Accounting and Reporting - Professional Level December 2015

Question 2
Total Marks: 31
General comments
Part (a) of this question required candidates to explain the financial reporting treatment of four accounting
issues, given in the scenario. The issues covered goodwill arising on a business combination, share
issues (treasury shares and a subsequent bonus issue), a related party transaction and the sale of a
package of goods and services. Part (b) required the calculation of revised figures for profit for the year
and number of ordinary shares and of earnings per share (plus comparative figure). Part (c) required an
explanation of the ethical issues arising from the scenario and the action to be taken.
Girton plc
(a) IFRS accounting treatment
(1) Goodwill arising on a business combination
Per IFRS 3, Business Combinations, goodwill should be calculated as the excess of the fair value of the
consideration transferred plus any non-controlling interest less the fair value of the net assets acquired.
When calculating goodwill Alan should therefore have included all three elements of the consideration not
just the cash element.
The fair value of any quoted equity investments (ie Girton plcs ordinary shares) should have been taken
as the market price at the acquisition date. The deferred consideration should have been accounted for as
a liability at the present value of the amount payable.
Consideration is therefore:

Cash
Ordinary shares (100,000 x 1.20)
Deferred consideration (147,000/1.05)

375,000
120,000
140,000
635,000

The ordinary shares should be credited to ordinary share capital (100,000) and share premium
(20,000).
The discount on the deferred consideration should be unwound for the period 1 January 2015 to 30 June
2015. This would give a finance cost of 3,500 ((147,000 140,000) x 6/12). At 30 June 2015 the deferred
consideration would be shown as a current liability of 143,500 (140,000 + 3,500).
Per IFRS 3, the calculation of the fair value of net assets acquired should have included recognition of
Downing Ltds contingent liability, in spite of the fact that this will not have been recognised in Downing
Ltds statement of financial position. The liability existed at 1 January 2015 as the proceedings
commenced on 15 December 2014. Once recognised, the contingent liability should be carried at the
higher of the amount under IAS 37 (here Nil) and the fair value at the acquisition date of 75,000,
therefore 75,000 should be used.
Fair value of net assets acquired is therefore:

Share capital and retained earnings at 30 June 2015 (200,000 + 356,700)


Less: Profit 1 January 2015 to 30 June 2015 (6/12 x 245,600)
Contingent liability

556,700
(122,800)
(75,000)
358,900

When calculating goodwill, Alan should have used the fair value method to value the non-controlling
interest, as agreed by the board. Goodwill should therefore be calculated as:

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Financial Accounting and Reporting - Professional Level December 2015


Fair value of consideration
Fair value of non-controlling interest
Fair value of net assets acquired

635,000
115,000
(358,900)
391,100

Intangible assets in the consolidated statement of financial positon as at 30 June 2015 will therefore
increase by 341,525 (391,100 49,575). An impairment review in accordance with IAS 38, Intangible
Assets, should be carried out on this goodwill at every year end.
Non-controlling interest at 30 June 2015 will be stated at 145,700 (115,000 + (122,800 x 25%).
(2) Share issues
Equity instruments reacquired by the entity which issued them are known as treasury shares. Treasury
shares should be deducted from equity, and shown as a separate (ie negative) reserve. The original share
capital and share premium amounts remain unchanged. No gain or loss should be recognised on the
issue, sale, purchase or cancellation of treasury shares.
The bonus issue was based on the correct number of shares (ie 750,000 see (b)) so 150,000 shares
were issued, and ordinary share capital should be credited with this amount. Assuming that Girton plc
wishes to maximise distributable profits, the premium should firstly be charged to the share premium
account, with the balance going to retained earnings. Therefore 110,000 (90,000 + 20,000 (1)) of this
should be debited to share premium and the remaining 40,000 to retained earnings.
(3) Related party transaction
Selwyn Ltd is wholly-owned by one of the close family members of a member of Girton plcs key
management personnel, so Selwyn Ltd is a related party of Girton plc. Alan and his son are also related
parties of Girton plc. This transaction with Selwyn Ltd is therefore a related party transaction.
Disclosure is required of all related parties and related party transactions, even if the transactions took
place on an arms length basis. The fact that the transactions took place on an arms length basis may be
disclosed, but only if such terms can be substantiated.
Disclosure should be made of:
- The nature of the relationship (a company owned by the son of a director of Girton plc)
- The amount of the transactions (216,700)
- The amount of any balances outstanding at the year end (54,400)
- Any provision against outstanding balances and the expense recognised for bad or doubtful debts
due from related parties (20,000).
There is no requirement to identify related parties by name.
Since Selwyn Ltd is in financial difficulties, consideration should be given to making an allowance for the
remainder of the debt, ie for an additional 34,400 (54,000 20,000).
(4) Revenue recognition
Per IAS 18, Revenue, where a package of goods and services is sold then the components of the
package should be identified, measured and recognised as if sold separately.
If the total of the fair values exceed the overall price of the contract the same discount percentage should
be applied to each separate component, unless specific discount rates are known.
In this case a package with a usual retail price of 225,000, has been sold for 191,250, ie at a discount of
15%. The two components of the package should be split out and accounted for as follows:
Equipment: Revenue of 148,750 (175,000 x 85%) should be recognised in the year ended 30 June 2015
because the equipment was sold in the year and therefore the risks and rewards of ownership were
transferred.

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Financial Accounting and Reporting - Professional Level December 2015


Support services: Revenue of 42,500 (50,000 x 85%) should be accounted for based on the stage of
completion. In the absence of other information, on a straight-line basis over the period of the contract (12
months). In the year ended 30 June 2015 only 3/12 of the 42,500 should be recognised as revenue, ie
10,625.
Alan has therefore overstated revenue (and profit for the year) by 31,875 (191,250 148,750 10,625)
and understated liabilities (deferred income) by the same amount.
This part of the question was generally well answered with nearly all candidates discussing all four of the
issues. As always weaker answers tended to focus on the figures without giving appropriate supporting
explanations.
Issue (1)
This focused on goodwill and many candidates calculated the correct figure. Nearly all recognised that
there were three components to the consideration, that shares should be included at their market price
and that deferred cash consideration needed to be discounted to its present value. Relatively few
candidates discussed the implications of discounting the consideration ie that this would have to be
unwound between the acquisition and payment dates. Where candidates did address this they often
included a full year, rather than six months, of finance cost.
More errors were made with the calculation of net assets at acquisition with a number of candidates
omitting share capital. Many struggled to back out six months of current year profit from the year-end
retained earnings figure to determine retained earnings at acquisition. Although most candidates did
realise that an adjustment was needed for the contingent liability this was sometimes added to net assets
or deducted from the goodwill figure calculated. There was often no explanation provided as to why this
adjustment needed to be made.
Nearly all candidates included the non-controlling interest at fair value as required in the scenario, but few
explained why they were using that figure. Where a reason was given it was often stated as being
because that method usually leads to a higher value of non-controlling interest.
Few candidates discussed the need to carry out an impairment review of goodwill and even fewer
attempted to calculate a closing figure for the non-controlling interest
Issue (2)
Answers to this part were mixed with some candidates appearing unable to cope with the two different
share transactions and often mixing them up. Many errors were made because candidates did not focus
on the specific information given in the question in particular the timing of the two issues and how, if at
all, they had been accounted for.
Most candidates did eventually suggest that the bonus issue should be debited to the share premium
account then retained earnings and credited to share capital. However, the figures used were often wrong
as many candidates failed to take into account the shares which had been issued on acquisition of the
subsidiary.
Most candidates identified that the second transaction related to treasury shares. Most then stated that
treasury shares should appear as a debit balance in equity, although fewer suggested that the debit to
share capital needed to be reversed out in full. Some candidates appeared to treat the treasury shares as
a normal issue of shares. Others credited treasury shares, and split the debit between share capital and
share premium.
A minority of candidates wasted time explaining why the company might have chosen to make these
share issues.
Issue (3)
Virtually all candidates correctly identified this as a related party transaction. Most attempted to justify their
conclusion using the facts from the question and went on to set out the disclosure requirements, using the
information from the scenario. A small minority concluded the transaction did not need to be disclosed as
the sales had been made at an arms length price.

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Financial Accounting and Reporting - Professional Level December 2015


Many candidates lost marks by simply repeating definitions and a list of disclosure requirements straight
from IAS 24, rather than using the specific information given in the question. Some candidates did discuss
the potential need to write down receivables but those that did nearly always overlooked the fact that
some of the outstanding balance was already covered by the closing allowance for doubtful debts.
Issue (4)
This was generally well answered and many candidates calculated all the relevant figures correctly. Nearly
all candidates recognised that the sale needed to be split into separate components for the sale of goods
and the provision of a service.
Almost all candidates recognised that there was a discount to be allocated to both elements and that some
of the revenue relating to the helpdesk support needed to be deferred until the following year. Even those
candidates who did not realise there was a discount did usually defer the relevant proportion of the service
revenue.
Total possible marks
Maximum full marks

31
22

(b) Revised figures and EPS


Weighted average number of ordinary shares
Date

Per extracts
Add back Treasury shares debited in error
B/f
1 January 2015 on acq of Downing Ltd
1 February 2015 bonus issue
(750,000/5)

Number
of shares
450,000
200,000
650,000
100,000
750,000
150,000
900,000

Per question
(1) Unwinding of discount
(4) Package of products

Number
of
months

Bonus
fraction

6/12

6/5

390,000

1/12

6/5

75,000

5/12

Weighted
average

375,000
840,000
Profit
attributable to
shareholders
of Girton plc

574,500
(3,500)
(31,875)
539,125

2015 EPS = 539,125/840,000 = 64.2p


2014 (comparative) EPS = 118.6p x 5/6 = 98.8p
Answers to this part of the question were disappointing as candidates have historically performed well
when asked to calculate EPS.
Although most candidates correctly adjusted the draft profit for the adjustment relating to the deferred
revenue far fewer adjusted for the unwinding of the discount arising from Issue (1) (even where they had
covered this in their answer to Part (a)).
A number of candidates made unnecessary adjustments (such as relating to the contingent liability and
change in value of goodwill from Issue (1) or adjusting for the receivable already provided for in Issue (2)).
This indicates that such candidates lack an understanding of the double entry relating to these issues.

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Financial Accounting and Reporting - Professional Level December 2015


Most candidates (although by no means all) made an attempt at a weighted average share capital working
although the timings of the share issues and subsequently the relevant number of months were usually
incorrect. Most of these candidates took into account the impact of the bonus issue and correctly
calculated and used the bonus fraction.
Although most candidates did eventually calculate a current year EPS figure fewer correctly restated the
prior year figure to reflect the bonus issue made in the current year.
Total possible marks
Maximum full marks

6
4

(c) Ethical issues


Alans financial accounting knowledge seems lacking, given that he failed to take the contingent liability
and the deferred consideration into account when calculating goodwill. As an ICAEW Chartered
Accountant Alan is obliged to comply with the ICAEW code of ethics, including the principle of professional
competence and due care, and should keep his knowledge up to date.
He makes other errors, all of which have the effect of either understating the number of ordinary shares
in issue, or overstating the profit for the year, with the result that EPS for the current year, to which Alans
bonus is linked, is massively overstated. There is a clear self-interest threat here for Alan as the directors
bonuses are linked to profit. In accordance with the code of ethics, Alan should have ignored this selfinterest threat and prepared the figures accurately, in accordance with the principles of objectivity,
independence and professional behaviour.
The fact that Alan has failed to disclose the related party relationship/transaction with his sons company
also points to a possible lack of integrity. More so, if Alan engineered the sale and knew that his sons
company was in financial difficulties.
You should take the following action:
-

Discuss each of the errors found with Alan, explaining the correct IFRS accounting treatment to him.
If Alan appears genuinely to be out of date tactfully suggest that he goes on an update course.
Ensure the financial statements are corrected.
If Alan refuses to amend the financial statements seek support from the managing director.
Document all discussions.
If you find yourself in a difficult situation, eg, caught between the FD and the MD, or subject to any
sort of intimidation threat, then consult the ICAEW helpline.

This part, covering ethics, was generally well answered with candidates reacting well to the clues
provided in the scenario.
Almost all candidates recognised the potential impact of the directors bonus being linked to EPS and
there were some excellent answers discussing the impact of the errors from Part (a) of the question and
questioning the integrity of the finance director.
Most candidates also correctly identified a potential intimidation threat to the financial controller. As ever,
weaker candidates placed themselves in an audit context and suggested a review of Alans work and
referral to the ethics partner.
Total possible marks
Maximum full marks

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Financial Accounting and Reporting - Professional Level December 2015

Question 3
Total Marks: 17
General comments
This was a mixed topic question. Part (a) required candidates to calculate the correct closing inventory
figure, after a valuation error had been made. Part (b) required the preparation of extracts from the
statement of profit or loss and statement of financial position for a finance lease taken out during the year.
Part (c) required candidates to redraft a single entity statement of cash flows, correcting for the above
matters and other errors.
Peterhouse Ltd
(a) Calculation of closing inventories

Original figure
Adjustments re Perro
WIP at NRV (2,000 x ((25 x 70%) 1 3))
Less: WIP at cost (2,000 x 15)
FG at NRV (1,000 x ((25 x 70%) 1)
Less: FG at cost (1,000 x 18)
Total decrease to closing inventories

135,800

27,000
(30,000)
16,500
(18,000)
(4,500)
131,300

Most candidates made some attempt at this part of the question, however answers were mixed.
Most candidates were able to calculate the correct cost figures for both finished goods and work in
progress but many struggled with the net realisable value calculations. Candidates often made a
reasonable attempt at the net realisable value for finished goods but failed to perform any calculation for
the net realisable value of the work in progress.
Some candidates carried out various (sometimes seemingly random) calculations, but it was unclear how
they impacted on the draft inventory figure. A worrying number of candidates actually arrived at a higher
figure than the original one. Nonetheless, a good number of candidates did achieve full marks.
Total possible marks
Maximum full marks

4
3

(b) Finance lease extracts


Statement of profit or loss for the year ended 30 June 2015 (extracts)
Cost of sales ((29,786 (W1) 3) (8,000 x 2))
Finance costs (W2)

6,071
(1,089)

Statement of financial position as at 30 June 2015 (extracts)

Non-current assets
Property, plant and equipment (29,786 (W1) 9,929)

19,857

Non-current liabilities
Finance lease liabilities

7,619

Current liabilities
Finance lease liabilities (14,875 7,619) (W2)

7,256

Copyright ICAEW 2016. All rights reserved

Page 12 of 18

Financial Accounting and Reporting - Professional Level December 2015


Workings
(1) Present value of minimum lease payments
Date of payment
1 July 2014
30 June 2015
30 June 2016
30 June 2017

PV calculation
8,000
8,000 / 1.05
2
8,000 / 1.05
3
8,000 / 1.05

8,000
7,619
7,256
6,911
29,786

(2) Lease table


Year ended
30 June 2015
30 June 2015

B/f
(29,786 8,000)

21,786
14,875

Interest @ 5%

1,089
744

Payment

(8,000)
(8,000)

C/f

14,875
7,619

Almost all candidates who attempted this part of the question prepared a finance lease table working.
Occasionally candidates failed to deduct the initial deposit from the opening balance or prepared the table
based on payments in advance rather than in arrears.
A smaller number of candidates were able to correctly transfer figures from their table into their financial
statement extracts. Some presented figures the wrong way round between current and non-current, or
showed the lease payment as a current liability rather than using the figure from their table. Others failed
to use the same figure to calculate the carrying amount of property, plant and equipment as they had used
in their table. However, it was pleasing to see that the majority of candidates had made a reasonable
attempt at the financial statement extracts.
The two most disappointing aspects of answers were that most candidates:
simply used the fair value of the asset as the opening balance in their finance lease table rather
than calculating the present value of the minimum lease payments; and
depreciated the asset over four, rather than three, years.
However, most candidates still achieved a good mark for this part of the question and a significant number
of candidates achieved full marks.
Total possible marks
Maximum full marks
(c) Revised statement of cash flows for the year ended 30 June 2015

Cash flows from operating activities


Cash generated from operations (W)
991,600
Interest paid (2,100 + 1,089 1,500)
(1,689)
Income tax paid
(195,500)
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment (1,041,200
(1,056,800)
+ 15,600)
Proceeds from sales of property, plant and equipment
17,200
Net cash from investing activities
Cash flows from financing activities
Proceeds from issue of ordinary share capital (150,000
225,000
x 1.50)
Payment of finance lease liabilities (16,000 1,089 (b))
(14,911)
Ordinary dividend paid (23,900 + (150,000 x 50p))
(98,900)
Net cash from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 July 2014
Cash and cash equivalents at 30 June 2015 (150 85,000)

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7
6

794,411

(1,039,600)

111,189
(134,000)
49,150
(84,850)

Page 13 of 18

Financial Accounting and Reporting - Professional Level December 2015


Working
Cash generated from operations
Per draft
Decrease in cost of sales re lease (8,000 x 2) (b)
Less profit on sale of PPE (17,200 15,600)
Adjustment to movement in trade and other payables for accrued interest

978,700
16,000
(1,600)
(1,500)
991,600

Answers were disappointing and a minority of candidates failed to attempt this part. Although some
candidates did achieve good marks it was unusual to see full marks.
Adjustments to cash generated from operations were frequently rather random with even those candidates
who had the correct figures often making their adjustments in the wrong direction. A significant number of
candidates hedged their bets (in this working or on the statement of cash flows) by including only one side
of a bracket around figures, so it was unclear whether they intended it to be added or subtracted.
The most common correct adjustment seen was the negative 1,500 in respect of the opening and closing
interest accrual. The next was the removal of the profit on sale of property, plant and equipment. An
adjustment for the lease payments wrongly debited to cost of sales was rarely seen. Many candidates
adjusted for the change in inventory valuation from Part (a) failing to appreciate that this had no impact as
it affected both operating profit and the movement in inventories for the year.
Most candidates included the correct income tax paid figure, although a few did not show this in brackets
(or included only one bracket). The calculations for interest paid were mixed although the most common
figure seen was 600, which ignored the interest on the finance lease calculated in Part (b). Proceeds
from the sale of property, plant and equipment was often included, and where they were, it was usually
both the correct figure and shown as a positive.
The most common error for the purchase of property, plant and equipment was to deduct the cash
proceeds rather than add them. If a figure was included for the finance lease then it was generally only
the payments made rather than that figure net of the interest. A figure for the proceeds from the share
issue was usually given, although this was often the nominal figure rather than the total cash received. Taccount workings were at best rather random and usually had figures on the wrong side or were
incomplete.
Candidates often failed to complete their statement of cash flows by not showing sub-totals or not
completing the total for cash and cash equivalents at the end of the year. A significant number of
candidates left the adjustment for the increase in the overdraft as part of financing activities rather than
appreciating that this should have been shown as part of cash and cash equivalents at the end of the
period.
Total possible marks
Maximum full marks

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10
8

Page 14 of 18

Financial Accounting and Reporting - Professional Level December 2015

Question 4
Total Marks: 21
General comments
This was a consolidated statement of profit or loss question, featuring two subsidiaries (one acquired
during the year) and one associate. The associate had made losses since acquisition, such that the share
of the loss taken for the current year had to be restricted. Other adjustments included a fair value
adjustment on acquisition, a gain on bargain purchase of the subsidiary acquired during the year, an intragroup sale of a non-current asset (with subsequent impact on the annual consolidated statement of profit
or loss) and intra-group management charges. The non-controlling interest column from the consolidated
statement of changes in equity was also required. Part (b) required a description of the differences
between IFRS and UK GAAP in respect of the preparation of consolidated financial statements.
Pembroke Ltd
Consolidated statement of profit or loss for the year ended 30 June 2015
Revenue (W1)
Cost of sales (W1)
Gross profit
Operating expenses (W1)
Profit from operations
Share of loss of associate (W3)
Profit before tax
Income tax expense (W1)
Profit for the period
Profit attributable to
Owners of Pembroke Ltd ()
Non-controlling interest (W4)

2,146,000
(1,447,100)
698,900
(257,300)
441,600
(3,000)
438,600
(94,300)
344,300

309,340
34,960
344,300

Consolidated statement of changes in equity for the year ended 30 June 2015 (extract)
Noncontrolling
interest

Balance at 1 July 2014 (W4)


184,440
Total comprehensive income for the year
34,960
Added on acquisition of subsidiary ((400,000 + 175,000) x
172,500
30%)
Balance at 30 June 2015 ()
391,900

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Page 15 of 18

Financial Accounting and Reporting - Professional Level December 2015

Workings
(1) Consolidation schedule

Revenue
Cost of sales per Q
PPE PURP (W5)
Op expenses per Q
((122,550 12,000) x 8/12)
FV deprec (120,000/25
yrs)
Gain on bargain
purchase* (W6)
Tax

Pembroke
Ltd

Newnham
Ltd

945,200
(583,700)

754,800
(573,600)

(128,900)

(116,400)

Trinity
Adj
Ltd
(8/12)

470,000 (24,000)
(279,000)
(10,800)
(73,700) 24,000

Consol

2,146,000
(1,447,100)

(4,800)
42,500
(60,000)

(257,300)
(13,000)
47,000

(21,300)
85,200

(94,300)

*Or show on face of consolidated statement of profit or loss


(2) Share of loss of associate (Wolfson Ltd)

Original cost
Share of post-acquisition change in NAs ((181,900 + (120,600 14,500)) x 40%)
Carrying amount of associate at 30 June 2014

118,200
(115,200)
3,000

Share of loss in year = 14,500 x 40% = 5,800 restricted to 3,000


(3) Non-controlling interest in year
Newnham Ltd (20% x 47,000 (W1))
Trinity Ltd (30% x 85,200 (W1))

9,400
25,560
34,960

(4) Non-controlling interest brought forward (Newnham Ltd)


At acquisition (20% x (500,000 + 301,000 + 120,000))
Share of post-acquisition profits (20% x (363,600 51,800 301,000 (4,800
(W1) x 2)))

184,200
240
184,440

(5) PPE PURP (Trinity Ltd)


Asset now in Pembroke Ltds books at 51,000 x 4/5
Asset would have been in Trinity Ltds books at 39,000 x 4/5

45,900
(35,100)
10,800

(6) Gain on bargain purchase (Trinity Ltd)

Consideration transferred
Net assets at acquisition (400,000 + 175,000)
Non-controlling interest at acquisition (575,000 x 30%)

Copyright ICAEW 2016. All rights reserved

360,000
(575,000)
172,500
(42,500)

Page 16 of 18

Financial Accounting and Reporting - Professional Level December 2015

(7) Non-controlling interest carried forward (for proof only)


Newnham Ltd
At acquisition (W4)
Share of post-acquisition profits (20% x (363,600 301,000
(4,800 (W1) x 3))

184,200
9,640
193,840

Trinity Ltd
At acquisition (SCE)
Share of post-acquisition profits (W3)

172,500
25,560
198,060
391,900

Answers were very disappointing. The majority of candidates did produce a consolidated statement of
profit or loss with a supporting consolidation schedule. However, a minority chose to merge the
consolidation schedule working into the consolidated statement of profit or loss, and as a result did not
earn presentation marks.
The majority of candidates did time apportion the new subsidiarys results for the correct number of
months. A minority consolidated for the full year or used an incorrect number of months.
Common errors in the consolidation schedule included:

entering the contra for the management charges in the wrong column and/or to cost of sales
rather than to operating expenses
adjusting for the proceeds from the intra-group sale of a machine as if those proceeds would have
been treated as revenue
splitting the provision for unrealised profit on the intra-group sale of the machine between the
parent and subsidiary columns (such that 12,000 appeared in one column and 1,200 in another,
rather than the correct net 10,800 being shown in the subsidiarys column)
incorrectly calculating the provision for unrealised profit on the machine or not realising that the
profit on disposal should be reduced rather than increased by the subsequent difference in
depreciation
including the cumulative increase to depreciation arising from the fair value adjustment rather than
just adjusting for the current years depreciation
including a prior year impairment rather than the gain on bargain purchase on the current year
acquisition
failing to deal correctly with the consultancy fees (which did not arise evenly over the year).

Having arrived at the consolidated profit for the period, almost all candidates allocated the profit between
the parent and the non-controlling interest. A minority of candidates used the figures from the question to
perform this calculation instead of the adjusted figures from their consolidation schedule. Others failed to
show what figure they had multiplied by what percentage to arrive at their non-controlling interest figure.
Answers to the non-controlling interest column from the consolidated statement of changes in equity were
even more disappointing. Frequently this was not attempted at all and where it was attempted
presentation was poor. The most the majority of candidates managed to do was to enter the noncontrolling interest share of the profit for the year.
Some did attempt to calculate the non-controlling interest arising on the subsidiary acquired in the year but
frequently made this much more complicated than the simple calculation required and often ended up with
an incorrect figure. A minority attempted to calculate the non-controlling interest brought forward, but
workings were often disorganised and difficult to follow.
Many candidates wasted time preparing completely unnecessary workings and often failed to realise that
this figure would not include anything for the subsidiary acquired in the year. However, a significant
number of the better-prepared candidates did correctly calculate both this figure and that for the noncontrolling interest arising on the subsidiary acquired in the year.

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Page 17 of 18

Financial Accounting and Reporting - Professional Level December 2015


Although almost all candidates calculated a figure for the share of the associates losses this was
frequently treated as a profit rather than a loss and some candidates seemed to be including some form of
investment in the associate in their profit or loss account figure. Hardly any candidates understood the
impact of a loss-making associate and the requirement to cap losses to prevent a negative investment
in associate figure.
Total possible marks
Maximum full marks

19
17

(b) IFRS v UK GAAP differences re preparation of consolidated financial statements


UK GAAP
- Requires goodwill to be amortised over its useful
life, with rebuttable presumption that this should not
exceed five years

IFRS
- Goodwill is subject to annual impairment review

- Impairment losses cannot be reversed


- Impairment losses re goodwill may be reversed
- Acquisition related costs added to cost of
acquisition

- Acquisition related costs are expensed

- Negative goodwill presented on the statement of


financial position directly under positive goodwill, as
a negative asset

- Negative goodwill recognised in profit or


loss/retained earnings

- Non-controlling interest must be measured using


the proportionate method

- Can use the proportionate method or the fair value


method

- A subsidiary should be excluded from


consolidation where severe long-term restrictions
apply or where the interest is held exclusively for
resale

- No allowed exclusions from consolidation

- Where a subsidiary is disposed of and meets the


definition of a discontinued operation its results are
shown in a separate column in the consolidated
income statement

- The results of the subsidiary are shown as a


single amount on the face of the consolidated
statement of profit or loss

- Recognises implicit goodwill on the acquisition of


an associate or joint venture and requires it to be
amortised

- No separate goodwill recognised

As usual for parts of questions testing UK GAAP differences answers were mixed. Many candidates
wasted time and gained no marks by just listing out random differences on a variety of topics rather than
focusing, as required, on differences relating to consolidated financial statements.
Those that did focus on differences relating to consolidated financial statements usually gained at least
half of the available marks for the more obvious points on the different methods of calculating goodwill and
amortisation versus annual impairment reviews. Well-prepared candidates achieved full marks on this
part.
Total possible marks
Maximum full marks

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10
4

Page 18 of 18

Financial Accounting and Reporting - Professional Level March 2016

MARK PLAN AND EXAMINERS COMMENTARY


The marking plan set out below was that used to mark this question. Markers were encouraged to use
discretion and to award partial marks where a point was either not explained fully or made by implication.
More marks were available than could be awarded for each requirement. This allowed credit to be given for a
variety of valid points which were made by candidates.

Question 1
Total Marks:
General comments
Part 1.1 required the preparation of a statement of profit or loss and a statement of financial position from
a trial balance plus a number of adjustments. Adjustments included property, plant and equipment
depreciation, revenue adjustment, an asset partly funded by a government grant, an intangible asset
which had been incorrectly revalued, a lease incentive, a rights issue and an inventory adjustment. Part
1.2 required a calculation of basic earnings per share. Part 1.3 required the preparation of a UK GAAP
extract in relation to the government grant asset. Part 1.4 required an explanation of how the inherent
limitations of financial statements reduce their usefulness to users and part 1.5 required an explanation of
the ethical issues arising from the scenario.
1.1 Laderas plc Statement of financial position as at 30 September 2015

ASSETS
Non-current assets
Property, plant and equipment (W3)
Intangibles (W4)
Current assets
Inventories (42,600 + 6,600 (W2))
Trade and other receivables
Cash and cash equivalents

913,060
66,625
979,685
49,200
47,800
15,600
112,600
1,092,285

Total assets
Equity
Ordinary share capital ((520,000 / 4) x 5)
Share premium account (307,500 130,000)
Retained earnings (70,690 + 107,295)
Equity
Current liabilities
Trade and other payables
Lease accrual (12,000 / 3yrs)
Taxation

650,000
177,500
177,985
1,005,485

61,200
4,000
21,600
86,800
1,092,285

Total equity and liabilities

Laderas plc Statement of profit or loss for the year ended 30 September 2015
Revenue (1,323,700 75,000)
Cost of sales (W1)
Gross profit
Administrative expenses (W1)
Other operating costs (W1)
Profit before tax
Income tax
Profit for the year

Copyright ICAEW 2016. All rights reserved

1,248,700
(758,030)
490,670
(237,400)
(124,375)
128,895
(21,600)
107,295

Page 1 of 16

Financial Accounting and Reporting - Professional Level March 2016


Workings
W1 Expenses

Draft
Opening inventory
Closing inventory
Depreciation charge (W3)
Amortisation
Lease liability (12,000 4,000)

Cost of
sales

Admin
expenses

721,400
52,690
(49,200)
41,140

237,400

Other
operating
costs

113,000

11,375
(8,000)
758,030

237,400

124,375

W2 Inventory
Variable costs per unit ((14,800 + 4,200) / 3,800)
Fixed costs per unit (2,000 / 4,000)

5.00
0.50
5.50

Eros: 1,200 x 5.50

6,600

W3 Property, plant & equipment

Cost
Less: government grant asset
Less: Land
Less: New building

Depreciation charge for the year


342,600 / 40yrs
(350,000 / 40yrs) x 6/12
165,600 / 8yrs
((125,000 75,000) / 5yrs) x 9/12

Land &
buildings

992,600

(300,000)
(350,000)
342,600

(8,565)
(4,375)

12,940
PPE carrying amount at 30 September 2015
Cost (290,600 + 992,600)
Less: acc depreciation b/fwd (176,000 + 78,000)
Less: government grant
Less: depreciation (12,940 + 28,200)
At 30 September 2015

Plant &
machinery

290,600
(125,000)
165,600

(20,700)
(7,500)
28,200

1,283,200
(254,000)
(75,000)
(41,140)
913,060

W4 Intangibles brands
Capitalised in TB
Arafo internal brand valuation
Boca amortisation (78,000 / 4yrs) x 7/12

133,000
(55,000)
78,000
(11,375)
66,625

Presentation of the statement of profit or loss and statement of financial position was better than usual.
However there were few very messy statements in terms of workings shown on the face of the statements.
Many candidates achieved very high marks on this part of the question with a good number achieving
maximum marks. Almost all candidates gained the marks for the adjusted revenue and for the tax figure
on the statement of profit or loss although a number failed to also show the tax as a liability on the
statement of financial position.

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Page 2 of 16

Financial Accounting and Reporting - Professional Level March 2016


On the statement of financial position completely correct figures were often seen for the intangible assets,
share capital and share premium. Most candidates correctly showed no revaluation surplus, having
removed this balance via their adjustment to the intangible asset, although candidates occasionally also
showed the amount as an expense. It was also, on the high marking scripts, not unusual to see the correct
figure for total property, plant and equipment. The most common errors on the face of the statement of
financial position included the following:

Omitting the income tax liability.


Including an inventories figure which did not match the working for closing inventories.
Including an incorrect figure for the accrual in respect of the operating lease although the correct
figure was seen on many scripts, weaker candidates showed a wide variation of figures on the
statement of financial position in respect of this lease.
Showing the correct figure for share capital, but the incorrect figure for share premium ie failing
to complete the double entry correctly between these two accounts.
Leaving the internally generated brand within the intangible asset figure and/or charging
amortisation for the incorrect number of months.

Perhaps the most disappointing mistake was in the calculation of closing inventory. Although occasional
errors were made in the valuation of this inventory, for example, allocating the variable costs over the
planned production, rather than over the actual production, by far the most common error was to value this
inventory at its selling price, often without even checking whether cost was lower. It was also not unusual
to see one inventory figure on the statement of financial position and a different figure taken to the
statement of profit or loss.
Most candidates did use the recommended costs matrix in their workings, and generally the costs were
allocated to the correct category. Where figures were deducted instead of added, or vice versa, this
tended to be when the candidate had started their matrix with the base figures in brackets. There were
some very neat property, plant and equipment tables which acted as a working for the final figure, in
contrast to some candidates who produced a series of seemingly unrelated and unreferenced workings.
What was seen far more often than usual at this session, however, was a large number of depreciation
figures with no supporting workings. This meant that partial marks could not be awarded to these figures if
they were not correct. Where workings were provided for these figures, the most common errors seen
were to mix up useful lives and fractions of years between the different categories of property, plant and
equipment.

Total possible marks


Maximum full marks

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19

Page 3 of 16

Financial Accounting and Reporting - Professional Level March 2016

1.2
Laderas plc
No. Of
shares
520,000
130,000
650,000

1 Oct 30 June
Rights issue 1 for 4 (520,000 / 4
1 July 30 Sept
Theoretical ex-rights price:
4 shares @ 1.85
1 share @ 1.20

Period in
issue
9/12
3/12

Bonus
factor
1.85/1.72

Weighted
average
419,477
162,500
581,977

7.40
1.20
8.60

Theoretical ex-rights price per share: 8.60 / 5 = 1.72


Bonus fraction: 1.85 / 1.72
Basic EPS = 107,295= 0.18
581,977

A large number of candidates arrived at the correct figure for weighted average share capital, even though
this necessitated making an adjustment for a bonus factor. Weaker candidates failed to calculate a bonus
factor, or calculated it incorrectly. Others calculated the correct theoretical ex-rights price, but then failed to
use this in their calculations.
Other errors included the following:

Using the incorrect fractions for the two parts of the year, eg treating the bonus issue as though it
had happened half way through the year instead of after nine months.
Applying the fraction for the second part of the year (ie that after the bonus issue had taken place)
to the bonus issue itself instead of to the cumulative number of shares in issue.
Using different numbers of shares in this calculation than they had shown in their answer to Part
1.1
Inverting the bonus fraction so that it reduced the number of shares instead of increasing them.

Total possible marks


Maximum full marks

5
4

1.3 UK GAAP Government grants


Fixed assets
Tangible fixed assets (125,000 18,750)

106,250

Creditors falling due within one year


Deferred income (75,000 / 5yrs)

15,000

Creditors falling due after one year


Deferred income (75,000 11,250 15,000)

48,750

Workings:
Depreciation: 125,000/5yrs x 9/12 = 18,750
Deferred income release: (75,000 / 5yrs) x 9/12 = 11,250

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Page 4 of 16

Financial Accounting and Reporting - Professional Level March 2016


Most candidates appeared to know that UK GAAP/FRS 102 specifies the deferral method with a
significant number of candidates calculating the correct carrying amount for the machine and the correct
current liability for the deferred income figure.
However, what was most disappointing about these answers was that almost every single candidate
presented these UK GAAP extracts using IFRS terminology. A few candidates wasted time writing about
the differences between the UK GAAP and the IFRS treatment of government grants, which was not
required.

Total possible marks


Maximum full marks

5
3

1.4 Limitations of financial statements


Financial statements have a number of limitations as set out below:

Financial statements are prepared to a specific date. The information when published is therefore
historic and backward looking. Although historic information is useful in assessing how a company
has been performing it provides limited predicted value.

Financial statements are prepared in a standardised manner with much of the information
aggregated. While this means that it is easier to compare information between companies because
it is presented in a similar manner it also means that the content of standardised and aggregated
information may be difficult to identify.

Financial statements only contain a limited amount of narrative information about the business
which can provide valuable insight into the companys future, for example, how it is operating, what
the companys plans are for the future, the risks facing the company, such as number of
competitors in the market and the management structure.

Financial statements are based on estimates and judgements and hence figures are not an exact
number. Management in different organisations may make slightly different assumptions and
judgements and hence include slightly different figures.

Companies use different accounting policies which means that exact comparisons cannot always
be made. However, disclosure of accounting policies means that users can identify differences.

Answers to this part of the question were varied. Those attempting the question could usually say that the
financial statements were historic or backward looking and/or prepared at a point in time such that
they may not be useful in predicting future performance. A few then went further and discussed the impact
of different accounting policies in reducing comparability and considered the use of estimated
figures/judgements, the aggregation of figures and the lack of narrative disclosures on matters that might
be of use to a potential investor. A worrying number of candidates appeared to think that the financial
statements included no narrative disclosures at all, presumably not realising that the notes are an integral
part of the financial statements.
Weaker candidates discussed the fact that the financial statements may contain errors, or be biased,
which are not inherent limitations. Others went further down this road, discussing how an audit could never
provide absolute assurance. A few candidates instead wrote about the enhancing qualitative
characteristics.

Total possible marks


Maximum full marks

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4

Page 5 of 16

Financial Accounting and Reporting - Professional Level March 2016


1.5 Ethical issues
Professional competence and due care As a professional accountant Parry has an obligation to
maintain his professional knowledge and skills at the level required to ensure that his current employer
receives competent professional services based on current developments in financial reporting and
legislation.
Does Parry have the necessary skills and experience to prepare the financial statements of Laderas plc
following his career break? Should Parry instead have looked to refresh his professional knowledge
following his career break and then have taken a less demanding, technically, role than that of covering a
financial controller?
The fact that Parry is an ICAEW Chartered Accountant means that he has met the first phase of attaining
professional competence, however he now needs to maintain his professional competence.
Professional behaviour A profession accountant should comply with relevant laws and financial
reporting standards. Parry has made a number of mistakes over the accounting treatment for items over
the year, for example, the rights issue was incorrectly accounted for. This suggests that perhaps Parry is
not acting as professionally as he should be, be it in error or deliberately.
In addition to these two fundamental principles being questionable there is also a threat towards these
being breached. The threat is that of self-interest for Parry. The finance director has suggested that the
board are looking for a high reported profit this year and a strong financial position to secure additional
funding for the future of the company. Parry may feel pressured, intimidation threat, to overstate profits as
a result. Parry has over-stated profits by recognising the whole of the government grant in the current year
even though some should have been deferred and the internally generated brand was revalued to a
market valuation increasing the companys financial position incorrectly. These may have been innocent
mistakes as Parry may not be up to date due to his career break, but he may have incorrectly accounted
for things to make the companys results appear stronger than they were so that the board would believe
that he was good at his job and offer him a full-time position.
The assistant accountant should take the following action:

Discuss each of the errors found with Parry, explaining the correct IFRS accounting treatment to
him.
Suggest that Parry attends an update course to ensure that he maintains appropriate continuing
professional development as an ICAEW Chartered Accountant.
Ensure the financial statements are corrected.
If Parry refuses to amend the financial statements seek support from a director.
Keep a detailed record of all discussions and calculations.
If you find yourself in a difficult situation, or subject to intimidation threat, then consult the ICAEW
helpline.

There were some excellent answers to this part of the question. Most candidates correctly recognised the
self-interest and intimidation threats arising from the scenario, and the threat to professional competence
and due care arising from Parrys lengthy career break. However, only the very best candidates linked the
latter back to the scenario to discuss the type of errors that had been made and whether they were likely
to have been deliberate and/or might indicate a lack of professional competence.
Most candidates produced the usual list of steps which needed to be taken: discussion with Parry,
escalation to the other directors/audit committee, seeking help from the ICAEW, and documenting all
discussions. As ever, a number placed themselves in an audit context and wished to consult more senior
members of the team or the ethics partner.

Total possible marks


Maximum full marks

Copyright ICAEW 2016. All rights reserved

12
5

Page 6 of 16

Financial Accounting and Reporting - Professional Level March 2016

Question 2
Total Marks:
General comments
This question required candidates to explain the financial reporting treatment of four accounting issues,
given in the scenario. The issues covered the construction of an asset, obligations and events after the
reporting period, a provision and an impairment review for a revalued asset. Journal entries were also
required.

(1) Construction of an asset


The cost of an item of property, plant and equipment is initially recognised at cost. In the case of a
specialised piece of plant which has been specifically constructed for the entity, cost will include its
purchase cost and all directly attributable costs to bring the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management.
Directly attributable costs include:

Employee benefits arising directly from the construction of the machine; and
Site preparation, delivery, installation and assembly costs, costs of testing and professional fees.

There are certain costs which should not be capitalised as they are not considered to be directly
attributable to the item, for example the cost of introducing new products and administration and general
overheads.
Any proceeds from selling products generated during testing of new property, plant and equipment should
be deducted from the cost capitalised.
The following costs should therefore be capitalised as part of property, plant and equipment:

Materials cost (including cutters)


Internal allocated labour costs
Sale of by-products produced as part of testing
process
Staff training
Consultancy fees re installation and assembly
Professional fees
Safety inspection
Overheads allocated

PPE

124,000
31,500
(450)

Expense

10,000

1,800
1,150
1,300
1,500
7,100
166,100

7,100
18,900

Capitalisation ceases when the item is capable of operating in the manner intended, this was on 1 July
2015 and this is the date on which depreciation should commence.
Each significant part of an item of property, plant and equipment must be depreciated separately, although
if component parts have the same useful lives and depreciation methods are the same they may be
grouped together for practical purposes. Here the cutters should be recognised as a separate component
as they have a useful life of five years compared with 15 years for the rest of the asset. Total depreciation
of 3,235 (700 + 2,535) should be recognised as part of profit or loss for the period and the carrying
amount of the plant at 30 September 2015 is 162,865 (166,100 3,235).
Cutters:
Remainder:

(14,000 / 5yrs) x 3/12 = 700


((166,100 14,000) / 15yrs) x 3/12 = 2,535

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Page 7 of 16

Financial Accounting and Reporting - Professional Level March 2016


The journal entries required are:
DR: Expense (PorL) (18,900 + 3,235)
CR: Property, plant and equipment (SOFP)

22,135

22,135

(2) Obligations and events after the reporting date


A liability arises when there is a present obligation arising from past events, the settlement of which is
expected to lead to the outflow from the entity of resources embodying economic benefits. An obligation
implies that the entity is not free to avoid the outflow of resources. A management decision does not in
itself create an obligation because it can be reversed.
The obligation arises instead at the date of delivery, as cancellation is possible up to this date. Therefore,
Equipment A and C should be accrued for at 30 September 2015 based on cost. Cost of Equipment A is
34,000, however the cost of Equipment C was finalised after the end of the reporting period. This is an
adjusting event as it provides evidence of conditions that existed at the end of the reporting period, ie the
subsequent determination of the purchase price purchased before 30 September 2015. Equipment C
should therefore be accrued for at 38,000 rather than 40,000.
As Equipment B was delivered after the year end, the cost should not have been accrued for at the year
end as there was no firm commitment at that date and the order can be cancelled at any time for no cost.
The new equipment will be depreciated once it is ready and available for use. As no useful life is provided
no depreciation has been recognised, although even if a useful life was provided it is likely that the amount
would be immaterial as the equipment was owned for less than a week. It is also highly likely that the
equipment will take a day or two to be made available for use.
The journal entries required are:
DR: Accruals current liabilities (27,000 + 2,000)
CR: PPE (SOFP)

29,000

29,000

(3) Provision
As stated above, a liability exists when there is a present obligation arising from past events, the
settlement of which is expected to lead to the outflow from the entity of resources embodying economic
benefits. A present obligation exists here as a result of a past event which is independent of Chayofa Ltds
future actions. The past event is the acquisition of the land and the obligation is the restoration of the
recycling centre. Therefore, it was correct to recognise a provision at 30 September 2015.
Where the obligation is in respect of an asset, the amount provided for at 30 September 2015 should have
been recognised as part of property, plant and equipment rather than recognised as part of profit or loss
for the period.
The amount of the provision should not be reduced by the expected cost reduction from new technology
as at the date of the obligation the new technology does not exist. In addition the provision should not be
recognised at the full 450,000 and should instead be discounted as the time value of money is material.
Hence the provision should be recognised at the present value f the expenditure required to settle the
obligation.
The provision should therefore have been recognised as follows:
15

1 Oct 2014 (450,000 / 1.06 )

Copyright ICAEW 2016. All rights reserved

187,769

Page 8 of 16

Financial Accounting and Reporting - Professional Level March 2016


At 1 October 2014 an asset should be recognised as part of property, plant and equipment for 187,769
and this should be depreciated over 15 years. A depreciation charge of 12,518 (187,769 / 15yrs) should
be recognised as part of profit or loss for the period and the carrying amount of 175,251 (187,769
12,518) should be recognised at 30 September 2015.
A finance cost of 11,266 (187,769 x 6%) should be recognised as part of profit or loss for the period and
a provision for 199,035 (187,769 + 11,266) should be recognised at 30 September 2015.

DR: PPE (SOFP)


DR: Depreciation expense (PorL)
DR: Finance costs (PorL)
DR: Provision (SOFP) (450,000 199,035)
CR: Expenses (PorL)

175,251
12,518
11,266
250,965

450,000

(4) Impairment
The maintenance work may indicate that the machine has suffered an impairment and therefore an
impairment review should be carried out.
Assets should be carried at no more than their recoverable amount. Recoverable amount is the higher of
value in use and fair value less costs to sell.
Carrying amount at 30 September 2012:
Cost (1 Oct 2009)
Less: acc dep (60,000 / 8yrs) x 3yrs
Revalued amount
Revaluation surplus

60,000
(22,500)
37,500
42,000
4,500

Carrying amount at 30 September 2015:


Revalued amount (1 Oct 2012)
Less: acc dep (42,000 / 5yrs) x 3yrs
FV less costs to sell (10,500 500)
Value in use

42,000
(25,200)
16,800
10,000
11,000

Recoverable amount is therefore 11,000, which is lower than the current carrying amount and therefore
the machine has suffered an impairment of 5,800 (16,800 - 11,000).
As the machine has been revalued, the loss should be treated as a revaluation decrease and charged to
the revaluation surplus up to the amount held in the revaluation surplus in respect of that asset (4,500).
Any remaining balance should be recognised in profit or loss for the period, ie 1,300 (5,800 4,500).
The journal entries required are:
DR: Impairment expense (PorL)
DR: Revaluation surplus
CR: PPE (SOFP)

1,300
4,500

5,800

Virtually all candidates attempted all parts of the question producing both narrative explanations and
supporting calculations and nearly all also attempted to include the relevant journals. Unfortunately, a
significant number of candidates did not read the question carefully enough to determine what double
entries had already been made and therefore struggled to arrive at the right correcting journals.
Issue 1: This was well answered with most candidates starting their answer by mentioning general
recognition criteria for non-current assets and then focusing on the specific costs given in the question.

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Page 9 of 16

Financial Accounting and Reporting - Professional Level March 2016


Most costs were dealt with correctly but by far the most common error was to treat the sales of byproducts as sundry revenue rather than deducting the proceeds from cost. Nearly all candidates realised
that component parts with different useful lives should be depreciated separately and a majority also time
apportioned the depreciation to start from the date the asset was ready for use.
Issue 2: This was the issue that caused the most problems and many answers were brief. Candidates
could have approached the question in two ways either focusing on the criteria for recognition of assets
(the approach most candidates took) or on the criteria for recognition of liabilities. Full credit was given for
either approach. While many candidates did arrive at the correct decision as to which assets/liabilities
should be recognised they often failed to justify why this was the case although a significant number did
realise this was to do with the date of delivery. Fewer discussed the impact of IAS 10 and the fact that the
subsequent determination of cost was an adjusting event, a significant minority of candidates thought that
this meant that there was an unreliable estimate and that the cost should not be accrued.
Issue 3: This was well answered with candidates discussing why the provision should be made and
virtually all candidates successfully calculating the discounted balance. Most also discussed the
subsequent recognition of a finance cost (although sometimes this was calculated on the gross liability
rather than the discounted figure). Again the majority of candidates also recognised that the provision
should be added to the asset and attempted to calculate the impact on depreciation (although here some
candidates clearly hadnt read the question carefully enough and assumed that the gross provision had
been added to cost rather than expensed). Journals were often difficult to follow as they were spread
throughout the answer with considerable repetition.
Issue 4: This was well answered but many candidates wasted time by giving lengthy explanations and
journals relating to what had occurred in previous years (rather than simply calculating the relevant
numbers to determine the correct treatment in the current year) and/or discussing and calculating the
transfers between reserves, which the question specifically stated were not made. Nearly all candidates
discussed the need for an impairment review in the current year although relatively few explained why it
was needed, linking it to the maintenance work. A majority of candidates calculated the correct impairment
figure, with many understanding that it should be split between the revaluation surplus and as an expense
in the statement of profit and loss. A significant minority of candidates described recoverable amount as
being the lower of fair value less cost to sell and value in use and a common error was to recognise the
excess impairment above the balance on the revaluation surplus to retained earnings rather than profit for
the period.

Total possible marks


Maximum full marks

Copyright ICAEW 2016. All rights reserved

43
28

Page 10 of 16

Financial Accounting and Reporting - Professional Level March 2016

Question 3
Total Marks:
General comments
Part 3.1(a) required candidates to calculate the profit or loss from discontinued operations, with part (b)
asking for the UK GAAP differences. Part 3.2 required extracts from the consolidated financial statements
for an investment in an associate. Part 3.3 required an explanation of accounting treatment for a sale and
repurchase and finally part 3.4 required extracts from the consolidated statement of cash flows.
3.1(a)
Group profit on disposal of Isora Ltd

Sale proceeds
Less carrying amount at goodwill at disposal:
Consideration transferred
NCI at acquisition (609,800 x 25%)
Less net assets at acquisition
Less impairments to date

765,000

495,000
152,450
(609,800)
37,650
(35,000)
(2,650)

Less carrying amount of net assets at disposal:


Net assets at 30 September 2014
Profit for 9 months to 30 June 2015 (108,000 x 9/12)
Add back attributable to NCI (979,700 x 25%)
Profit on disposal
Profit for 9 months to 30 June 2015
Profit for the year from discontinued operations

898,700
81,000
(979,700)
244,925
27,575
81,000
108,575

A good number of candidates achieved the maximum marks on this question, by producing a completely
correct calculation. By far the most common error made was not adding the profit for the year up to
disposal to the profit on disposal to arrive at the required profit or loss from discontinued activities (or
adding only the group share of that profit).
Other common errors included the following:

Not reducing the goodwill at acquisition by the cumulative impairment losses.


Deducting the profit for the year up to disposal from the net assets at the beginning of the year in
order to arrive at the net assets at disposal, instead of adding it.
Calculating net assets at disposal from various figures in the question (and making errors in doing
so) instead of simply adding the profit for the year up to disposal to the figure given in the question
for the net assets at the beginning of the year.

Total possible marks


Maximum full marks

4
4

(b)
Under IFRS 5 the results of discontinued operations are presented as a one-line item in the statement of
profit or loss. This amount comprises the post-tax profit or loss of the discontinued operation and the posttax profit or loss on disposal.
Under FRS 102 the results of discontinued operations are presented in full in a separate column of the
income statement and comparatives restated.

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Page 11 of 16

Financial Accounting and Reporting - Professional Level March 2016


Most candidates could state that IFRS showed a single line for the discontinued operations figure, and
that UK GAAP showed this as a separate column but few candidates added any detail to this. Others
wasted time by setting out other differences between IFRS and UK GAAP which they thought might be
relevant (but which were not required).

Total possible marks


Maximum full marks

2
2

3.2
Associate Amparo Ltd
Extract from consolidated statement of profit or loss for year ending 30 Sept 2015

Share of profit of associate

6,045

Extract from consolidated statement of financial position at 30 September 2015

Non-current assets
Investment in associate
269,045
Working
Investment in associate
Cost
Add: post acquisition profits (51,300 x 6/12)
Less: FV depreciation
((450,000 285,000) / 15yrs) x 6/12)
X 30%

263,000
25,650
(5,500)
20,150
6,045
269,045

A majority of candidates made some errors in these calculations. Presentation was varied, with only some
candidates showing their investment in associate figure as part of non-current assets. A minority of
candidates produced only calculations, with no extracts from the financial statements.
Common errors included the following:

Taking 30% of the profit figure, or 30% of the depreciation adjustment, but not 30% of both.
Reducing the asset figure by the depreciation adjustment, but not also the figure for the statement
of profit or loss.
Adding the fair value adjustment to the investment in the associate.
Adjusting by a whole years worth of depreciation, instead of only by six months.

Total possible marks


Maximum full marks

4
4

3.3
In substance this is a secured loan rather than revenue and the 150,000 profit should be reversed.
Hiedras plc has the continuing right to have access to the site it has retained the risks and rewards of
ownership and should therefore continue to recognise the land as part of property, plant and equipment.
As the sale proceeds and repurchase price are considerably lower than the lands fair value this is further
evidence that this is in substance a two-year loan. The difference between the sale and repurchase values
of 75,000 is interest.

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Page 12 of 16

Financial Accounting and Reporting - Professional Level March 2016

At 1 October 2014 the land should be recognised as part of property, plant and equipment at its original
carrying amounting amount of 350,000. The proceeds of 500,000 should be recognised as a liability, as
it is assumed that the land will be repurchased on 30 September 2016. Finance costs of 36,250 (500,000
x 7.25%) should be recognised as part of profit or loss for the period and added to the loan giving a
closing current liability of 536,250.

Answers to this part of the question were varied, with a number of non-attempts and zero marks. Almost
all candidates thought that this was some sort of a financing arrangement but a significant majority went
on to say that it was a finance (or occasionally an operating) leaseback, as opposed to a loan. Those who
correctly identified that this should be treated as a loan usually went on to gain additional marks for
explaining why this was and for their calculation of finance costs.

Total possible marks


Maximum full marks

7
5

3.4
Consolidated statement of cash flows for year ended 30 September 2015 (extract)
Cash flows from financing activities
Proceeds from issue of ordinary shares (W1)
Dividends paid (W2)

310,000
(127,500)

Net cash used in financing activities

182,500

Workings
(1) Share capital and premium

C/d (570,000 + 275,000)

845,000
845,000

B/d (320,000 + 120,000)


Cash issue
(155,000 x 2.00)
Non-cash issue ()

440,000
310,000
95,000
845,000

(2) Retained earnings


Dividends paid ()
Non-cash issue (W1)
C/d

127,500
95,000
594,200
816,700

B/d
CPorL

375,600
441,100
816,700

A significant number of candidates achieved full marks on this part of the question. Where the odd half
mark was lost, it was most commonly from not including brackets on the face of the statement for the
dividend paid.
The most common error in the T-account workings was to omit the bonus issue from the debit of the
retained earnings T-account, even where this had been calculated. However, on a number of occasions
marks were lost in the T-account workings by failing to copy down numbers accurately from the question.

Total possible marks


Maximum full marks

Copyright ICAEW 2016. All rights reserved

3
3

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Financial Accounting and Reporting - Professional Level March 2016

Question 4
Total Marks:
General comments
This was a consolidation question, requiring the preparation of a consolidated statement of financial
position, featuring two subsidiaries, one of which was acquired during the year. A draft consolidated
statement of financial position was provided along with the new subsidiarys separate figures. Adjustments
included a fair value adjustment on acquisition, a gain on bargain purchase, intra-group sales of a noncurrent asset and inventories.
Gordo plc
Consolidated statement of financial position as at 30 September 2015

Assets
Non-current assets
Property, plant and equipment
(936,400 + 389,500 + 145,500 (W1) 6,000 (W9))
Goodwill (W2)
Investments (667,800 442,000 (W2) 220,000)
Current assets
Inventories (46,170 + 21,500 1,400 (W8))
Trade and other receivables (53,900 + 36,950 14,000)
Cash and cash equivalents (4,700 + 1,400)

1,465,400
29,350
5,800
1,500,550
66,270
76,850
6,100
149,220
1,649,770

Total assets
Equity and liabilities
Equity attributable to owners of Gordo plc
Ordinary share capital
Share premium account
Retained earnings (W7)
Non-controlling interest (85,250 (W6) + 59,950 (W3))
Total equity
Current liabilities
Trade and other payables (67,400 + 37,800 14,000)
Taxation (112,300 + 39,400)

400,000
200,000
661,670
1,261,670
145,200
1,406,870
91,200
151,700
242,900
1,649,770

Total equity and liabilities

Workings
(1) Net assets Orotava Ltd

Share capital
Share premium account
Retained earnings
Per Question
Fair value adjustment
Depreciation thereon ((150,000 / 25) x 9/12)

Copyright ICAEW 2016. All rights reserved

Year end

150,000
75,000

Acquisition

150,000
75,000

147,150
150,000
(4,500)
517,650

89,650
150,000

464,650

Post acq

53,000

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Financial Accounting and Reporting - Professional Level March 2016


(2) Goodwill Orotava Ltd

442,000
52,000
494,000
(464,650)
29,350

Consideration transferred (340,000 + (85,000 x 1.20))


Non-controlling interest at acquisition FV
Net assets at acquisition (W1)
(3) Non-controlling interest Orotava Ltd

52,000
7,950
59,950

NCI at acquisition date (FV)


Share of post-acquisition reserves (53,000 (W2) x 15%)
(4) Net assets Tixera Ltd

Share capital
Share premium account
Retained earnings
Per Question
Less: PURP (W8)
Less: PPE PURP (W9)

Year end

200,000
50,000

Acquisition

200,000
50,000

98,400
(1,400)
(6,000)
341,000

61,200

311,200

Post acq

29,800

(5) Goodwill Tixera Ltd

220,000
77,800
297,800
(311,200)
(13,400)

Consideration transferred
Non-controlling interest at acquisition (311,200 x 25%)
Net assets at acquisition (W4)
Gain on bargain purchase
(6) Non-controlling interest Tixera Ltd

77,800
7,450
85,250

NCI at acquisition date (W5)


Share of post-acquisition reserves (29,800 (W4) x 25%)
(7) Retained earnings

580,870
45,050
22,350
13,400
661,670

Gordo plc
Orotava Ltd (53,000 (W1) x 85%)
Tixia Ltd (29,800 (W4) x 75%)
Gain on bargain purchase (W5)

(8) Inventory PURP


SP
Cost
GP
x

%
125
(100)
25

14,000
(11,200)
2,800
1,400

(9) PPE PURP Tixera Ltd


Asset in Gordo plcs books at 30 Sept 2015 (45,000 x 4/5)
Asset would have been in Tixera Ltds books at 30 Sept 2015 (60,000 x 4/8)

Copyright ICAEW 2016. All rights reserved

36,000
30,000
6,000

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Financial Accounting and Reporting - Professional Level March 2016


This question was extremely well answered and candidates had obviously practiced this style of question
at length. Virtually all candidates recognised that the draft consolidated statement of financial position
excluded the new subsidiary which therefore had to be added in to their answer. Again nearly all produced
the expected standard workings although sometimes there was no audit trail for the final figures on the
face of the statement of financial position or for the shares of net assets/post acquisition profits included in
the workings.
By far the most common error (as always) related to the calculation of the PURP relating to the noncurrent asset transfer. Those candidates who calculated it by comparing the two carrying amounts more
commonly arrived at the correct figure. Those who calculated separately the profit on disposal and impact
on subsequent depreciation often then ignored the latter element (or added rather than subtracting it) to
arrive at the net adjustment.
Other relatively common errors included:

Failing to time apportion the additional depreciation relating to the fair value adjustment.
Calculating the goodwill and non-controlling interest figures using the same method (when one
subsidiary used the proportionate method and one the fair value method).
Adjusting retained earnings for PURPs that related to the subsidiaries.
Netting off the positive goodwill and gain on bargain purchase.
Deducting rather than adding the gain on bargain purchase, or ignoring it altogether, in retained
earnings.
Failing to deduct the cost of the subsidiaries from the investments figure on the face of the
consolidated statement of financial position.

Total possible marks


Maximum full marks

Copyright ICAEW 2016. All rights reserved

20
19

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