17 October 2011

ASSIGNMENT 1 - DIPLOMA IN IFRSs

This assignment consists of THREE written test questions (100 marks). Attempt all parts of
all three questions.

1. Answer the assignment questions in order. Each answer must begin on a new page
and must be clearly numbered.

2. Files must be prepared in Microsoft Word format (as a single A4 printable Word file)
and submitted via email by midnight GMT on 14 November 2011 to
dipifrsassessments@icaew.com.

3. Ensure that your submission includes the title page, ASSIGNMENT 1 - DIPLOMA IN
IFRSs, and your candidate number (but not your name).

4. Confirm that your submission is your own work by completing and attaching the
Declaration of Ownership which you must email with your assignment (as a separate
PDF file to your answers as it includes your name).

5. Retain the question paper and an electronic copy of your submitted answer for
reference purposes.

6. Ensure you have read the full regulations as published.

7. Answers should be based on IFRSs extant at 1 January 2011 (ie, those in the 2011
IFRS 'red book') and, where required, examinable Exposure Drafts in accordance with
the examinable documents list for this sitting.

8. You should spend approximately 3½ to 5 hours preparing your answers to this

assignment. All workings must be shown and clearly referenced.

Copyright ©The Institute of Chartered Accountants in England and Wales 2011.

ICAEW\DIPLOMA IN IFRSs
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1(a) The following costs were incurred in 2010 in the design and construction of a new office
building over a nine-month period during 2010:

$'000
Feasibility study 8
Architects' fees 100
Site clearance (by external demolition professionals) 80
Construction materials 600
Cost of own inventories used in the construction (net realisable value
if sold outside the company $24,000) 30
Internal construction staff salaries during period of construction 360
External contractor costs 2,400
Income from renting out part of site as storage depot during
early phase of construction (12)
3,566

Requirement

Calculate the amount that should be capitalised as property in the financial statements for the
year ending 31 December 2010. (4 marks)

1(b) An item of plant was purchased for $100,000 on 1 January 2009. At that time its estimated
residual value was $5,000. At 31 December 2009 prices, the residual value was estimated at
$5,200. By 31 December 2010 this had risen to $5,500. In 2009 the asset was initially
depreciated straight line over 40 years. Due to lower performance than expected, at
1 January 2010 the total useful life of the machine was revised to 30 years. No further
revision to the useful life was necessary at 31 December 2010.

The entity uses the cost model for this class of assets. Depreciation adjustments are made
annually as part of the year end process.

Requirement

Determine the carrying amount of the plant at 31 December 2010. (2 marks)

1(c) A company commissioned a valuation of its land and buildings for inclusion in its financial
statements. The valuation document contained the following details:
$m
Reconstruction cost 10
Open market valuation 14
Existing use valuation 12
Expected selling costs 0.2

The company's internal calculations indicate a value in use for the property of $16 million.

Requirement

Determine the value at which the property should be recognised in the financial statements if
the company uses the revaluation model. (1 mark)

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1(d) A property development company's office building had a net carrying amount of $18 million at
the beginning of the financial year 1 January 2010. The property was held under the cost
model. As its residual value was estimated at more than its cost due to a buoyant property
market no depreciation had been charged.

As part of a relocation of the company's business, the property became vacant and was
leased out to a third party on 1 April 2010 (under a six-month short lease). At the time the
property was leased out, its fair value was $22 million.

At the end of the lease, the company decided to transfer the property to its inventories of
properties for sale in the ordinary course of its business. At that date the value of the property
was $21 million. The property was sold in December 2010 for $21.3 million.

The company uses the fair value model for its investment property.

Requirement

Determine the amounts to be recognised in profit or loss and in other comprehensive income
in respect of the property for the year ended 31 December 2010. (3 marks)

1(e) Evaluate the compliance of IAS 20 Accounting for Government Grants and Disclosure of
Government Assistance with the conceptual framework definitions of a liability and income.
(4 marks)

1(f) A company incurred the following borrowing costs during the year:

$'000
Overdraft interest 12
Foreign currency loan interest (correctly translated into $) 84
Foreign currency loan exchange differences on capital 140

In addition a three-year fixed rate $2 million loan was taken out on 1 January 2010 at 6.5%. A
loan set-up fee was charged of $20,000. This increased the effective interest rate on the loan
to 6.88%.

Requirement

Calculate the maximum amount that could potentially be capitalised as borrowing costs
during the period (assuming an asset was being financed using all available finance).
(3 marks)

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1(g) As of 2005, consolidated financial statements of listed companies in the European Union are
required to be prepared in accordance with IFRSs.

Requirement

Complete the following accounting policy note on the use of IFRSs in the financial statements
of a company listed on a stock exchange within the European Union:

"The consolidated financial statements of Company X plc have been prepared in

accordance with International Financial Reporting Standards (IFRSs)
____________________________________. International Financial Reporting Standards
comprise standards and interpretations approved by the International Accounting
Standards Board (IASB)." (1 mark)

1(h) A company incurred the following expenditure during the year:

$'000 $'000
Licence to operate in business sector for 10 years from
January 2010 200

Costs incurred in planning a website for a new product 20

The website will be set up in 2011

Purchase of 300 personal computers on 1 July 2010

(three-year useful life). Total cost:
300 PCs (excluding operating system) 240
Windows operating system for each unit (licence for 300 PCs) 30
Microsoft Office software for each unit (licence for 300 PCs) 24
294

Induction training for new staff 30

The company owns the rights to a popular range of books, which it purchased from another
entity for $90,000 a few years ago. The rights were not amortised as they have been
attributed an indefinite useful life. The books are still very popular so no impairment losses
have been necessary and it was valued by an independent valuer at $140,000 at the year-
ended 31 December 2010.

The company's policy is to use the revaluation model for its intangible assets where a market
valuation is available and permitted.

Requirement

Determine the carrying amount of intangible assets at the end of the year 31 December 2010
(insofar as the information permits). (4 marks)

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1(i) A company is preparing a value in use calculation for a factory building and the equipment
used to make a particular product. It has prepared cash flows for the next five years from the
year-end date (at current prices) as follows:
Year 1 Year 2 Year 3 Year 4 Year 5
$'m $'m $'m $'m $'m
Sales income less costs 200 180 150 110 60
Interest payments (10) (10 (10) (10) (10)
Tax payments (75) (60) (54) (45) (33)
Disposal of asset 80
Proposed restructuring costs (to be approved) (30)

The pre-tax discount rate (adjusted to exclude the effects of inflation) is 10%.
Cash flows are assumed to occur on the last day of each year.

Requirement

Determine the value in use of the building and equipment at the current date (to the nearest
$0.1 million)? (3 marks)

1(j) State whether each of the following are required or are not required to be reported separately
on the face of the IFRS statement of financial position or statement of comprehensive
income:

(1) Share premium reserve

(2) Trade and other payables
(3) After tax loss on disposal of discontinued operations
(4) Profit or loss on the sale on property, plant and equipment
(5) Deferred tax expense
(6) Gross profit
(3 marks)

1(k) A parent has had a controlling interest of 60% in its subsidiary for a number of years.

Below are financial statement extracts of the two companies for the year ended
30 June 2011:
Parent Subsidiary
$’000 $’000
Total comprehensive income 2,364 880
Dividends paid (120) (50)
New share capital issued during the year (nominal value + 500 200
premium on issue)

The share capital issued by the subsidiary was issued in proportion to ownership rights of
existing owners.

Requirement

Show the change in equity reported in the consolidated statement of changes in equity of the
parent (allocated between amounts due to equity holders of the parent and non-controlling
interests). (3 marks)

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1(l) A company purchased 16 million shares (representing an 80% controlling interest) in another
company on 1 July 2010. The terms of the purchase were as follows:

 1 share in the parent for every 4 shares in the subsidiary

 An immediate cash payment of $20.5 million
 A payment of 50% of the company's average annual profit for the first two years to
be settled three years after the acquisition date. On 1 July 2010, the expected
value of this payment (excluding any adjustment for the time value of money) was
$10.2 million

The subsidiary's shares were trading at $5.40 at the date of acquisition. The parent's shares
were trading at $15.20.

As a result of additional information available since the acquisition, the expected value of the
payment based on profit (excluding adjustment for the time value of money) was revised to
$11.4 million at 31 December 2010.

An appropriate annual discount factor for this company to use where necessary is 8%.

Requirement

Determine the consideration transferred figure used in the goodwill calculation for inclusion in
the consolidated financial statements for the year ended 31 December 2010. (3 marks)

1(m) On 1 December 2009, Panther, a public company acquired 70% of the ordinary share capital
of Sabre, a private company. The functional currency of Panther is the $ and the functional
currency of Sabre is the zet.

Panther paid $46 million for its investment in Sabre on 1 December 2009, when the net fair
value of the identifiable assets acquired and liabilities assumed of Sabre were 26,400 million
zets.

Given that Sabre is a private company, Panther decided to measure the non-controlling
interests at acquisition at the proportionate share of the fair value of the identifiable net
assets of Sabre.

An impairment test conducted at group level on the investment in Sabre at

31 December 2010 indicated impairment losses of 600 million zets (gross of non-controlling
interests). No impairment loss adjustments had been necessary at the previous year end.

Relevant exchange rates were:

1 December 2009 $1 = 470 zets

31 December 2009 $1 = 478 zets
31 December 2010 $1 = 490 zets

Requirement

Calculate the goodwill figure to be recognised in the consolidated statement of financial

position of Panther for the year ended 31 December 2010 (to the nearest $0.1 million).
(4 marks)

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1(n) ABC acquired 40% (40 million shares) of DEF on 1 July 2009 for $202 million when the fair
value of DEF's identifiable net assets was $476 million.

On 1 March 2010, ABC acquired an additional 20% holding in DEF for $108 million when the
fair value of DEF's identifiable net assets was $484 million.

The book value of DEF's net assets at that date was $444 million.

ABC decided to measure the non-controlling interests in DEF acquisition at their fair value.
DEF's share price was $5.05 on 1 July 2009 and $5.20 on 1 March 2010.

Requirement

Determine the goodwill relating to DEF to be recognised in ABC Group's financial statements
for the year ended 31 December 2010 under IFRS 3 Business Combinations. (3 marks)

1(o) A company issued $20 million of $100 9% bonds at par on 1 January 2009. The maturity date
of the bonds is 31 December 2012. At that date the bonds are redeemable at par or
convertible to ordinary shares on the basis of 14 ordinary shares for each $100 bond. The
market interest rate for identical bonds with no conversion rights would have been 5.5%
every six months. Coupon interest is paid in two instalments of 4.5% in arrears on 30 June
and 31 December.

Cumulative discount factors (which you should use where appropriate):

4.5% 5.5% 9% 11%

3 periods 2.7490 2.6979 2.5313 2.4437
4 periods 3.5875 3.5052 3.2397 3.1024
7 periods 5.8927 5.6830 5.0330 4.7122
8 periods 6.5959 6.3346 5.5348 5.1461

Requirement

Determine the value of the liability component and the equity component of the bonds at
31 December 2010 (to the nearest $1). (5 marks)

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1(p) On 1 January 2009, a company, Yeti, granted an employee the right to choose between (i)
30,000 Yeti shares or (ii) a cash-payment equivalent to the price of 24,000 Yeti shares on
31 December 2011. Each would be receivable on 31 December 2011, providing the person is
still employed by the company on that date, which was and still is expected to be the case.

A condition of the award is that if the shares are taken, they must be held until at least
31 December 2013 before they can be sold. The market price of a share was $5.82 on
1 January 2009, $5.92 at 31 December 2009 and $6.20 at 31 December 2010. The fair value
of the share alternative has been calculated at $6.14 on 1 January 2009, $6.18 at
31 December 2009 and $6.32 at 31 December 2010.

Requirement

Calculate the amount to be recognised in profit or loss for the year ending 31 December
2010.
(4 marks)
(50 marks)

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2(a) Financial instruments

An entity had the following transactions during the year ended 31 December 2010:

 The entity invested in a convertible bond on its issue date. The bond matures four years
after the issue date and at that date the bond can be converted into ordinary shares of
the investee or repaid at par. The entity's plan for the bond is to hold it until it matures
and collect the cash flows.

 The entity entered into a contractual commitment to make a variable rate loan to a
customer beginning on 1 January 2011 for a fixed period at 1% less than the rate at
which the entity (not the customer) can borrow money.

 The entity sold to a third party the right to receive the interest cash flows on a fixed
maturity debt instrument it holds and will continue to legally own up to the date of
maturity. The debt instrument is quoted in an active stock market. The entity has no
obligation to compensate the third party for any cash flows not received.

Requirement

Advise the directors of the entity of the accounting treatment of the above transactions under
IFRS 9 (insofar as the information permits) for the year ended 31 December 2010.
(10 marks)

2(b) On 1 October 2010, a company issued at par $30 million (par value) of fixed rate 6%
debenture loans to the market at par. Interest on the debenture loans is paid quarterly on the
last day of each calendar quarter (i.e. 1.5% per quarter). The debenture loans will be
redeemed on a future specified date at par.

To comply with the company's risk management policies, it entered into a receive-fixed, pay-
variable interest rate swap agreement at market rates on $30 million to hedge the fair value
of its debt. The terms of the swap are to pay the agreed variable rate established and fixed at
the beginning of each quarter and receive 5.25% per annum fixed rate in return. The swap
has a maturity date the same as that of the debentures.

The variable interest rate applicable to the swap for the 3 months to 31 December 2010
determined on 1 October 2010 was 4.72% per annum.

As a result of a rise in market interest rates, the fair value of the company's debenture loans
fell to $29,762,240 by the company's year end, 31 December 2010.

The net fair value of the swap at the 31 December 2010 was $238,236 (loss).

No transaction costs were incurred on issue of the debentures loans or on entering into the
swap agreement. All necessary documentation to treat the swap as a hedge was set up on
1 October 2010.

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Requirement

Explain the accounting treatment of the above transaction in accordance with IAS 39,
including relevant calculations and journal entries (insofar as the information provided
permits).

Your answer should also include financial statement extracts showing the presentation of the
debentures and swap in the financial statements for the year ended 31 December 2010.
(15 marks)

(25 marks)

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3 Power Group

Power is a listed group reporting under IFRS. The group was established when Power
purchased an 80% of the ordinary share capital of Shuttle, a listed company, on
1 January 2009 for $7.6 million. At that date, Shuttle's financial statements showed retained
earnings of $4.6 million and a revaluation surplus of $570,000.

The fair value of Shuttle's net assets at the date of acquisition was higher than their carrying
amount due to the following items:

$'000
Contractual customer relationships not recognised in Shuttle's financial statements 200
Excess of market value over the carrying amount of inventories 30

The customer relationships were deemed to have an average remaining useful life of five
years at 1 January 2009. The inventories were sold later in that year.

Power opted to measure the non-controlling interests in Shuttle at their fair value at the date
of the acquisition. The share price of Shuttle on that date was $18.00.

During the current year, on 1 April 2010, Power was able to purchase another 10% of the
ordinary share capital of Shuttle from a minority shareholder at a cost of $1.18 million.

The statements of financial position of Power and Shuttle as at 31 December 2010 (correctly
prepared in accordance with IFRSs) are as follows:

Statements of financial position as at 31 December 2010

Power Shuttle
ASSETS $'000 $'000
Non-current assets
Property, plant & equipment 20,240 8,720
Cost of investment in Shuttle 8,780 -
Intangible assets 3,300 780
32,320 9,500
Current assets 4,900 1,280
37,220 10,780

Equity
Share capital ($1 shares) 2,000 500
Retained earnings 25,280 7,680
Revaluation surplus 3,840 840
31,120 9,020
Non-current liabilities 2,000 800
Current liabilities 4,100 960
37,220 10,780

The total comprehensive income of Shuttle for the year ended 31 December 2010 was
$1.8 million of which $0.2 million related to revaluations of property, plant and equipment and
the remainder profit or loss.

The income and expenses of Shuttle accrued evenly since the date of acquisition. No
dividends were paid by Shuttle in 2010.

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Requirements

(a) Prepare the consolidated statement of financial position of the Power Group (as a
consolidation schedule) as at 31 December 2010. (20 marks)

Notes
 Ignore any deferred tax effect of adjustments.
 Work to the nearest $1,000.

(b) Explain and briefly justify the key changes being made to consolidation proposed by ED
10 Consolidated Financial Statements. (5 marks)

(25 marks)

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