Study Question Bank Becker F7 DipIFR

For Examinations to June 2017
STUDY QUESTION BANK

ACCA
DIPLOMA IN INTERNATIONAL
FINANCIAL REPORTING
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ACCA
Diploma in International
Financial Reporting
Study Question Bank

For Examination to June 2017
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INTERNATIONAL FINANCIAL REPORTING
Contents
Question Page Answer Marks
INTRODUCTION TO IFRS
1 IASB 1 1001 10
CONCEPTUAL FRAMEWORK
2 Faithful representation 1 1002 25

3 Forest 2 1004 25
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
4 Meld 3 1006 10
5 Fresno Group 4 1007 8
IAS 8 ACCOUNTING POLICIES
6 Leonard 5 1008 12
7 Key changes 6 1009 22
IFRS REVENUE FROM CONTRACTS WITH CUSTOMERS
8 Telecast Industries 6 1011 14

9 Meson 7 1012 13
10 William 7 1014 12
11 Big 8 1015 15
IAS 2 INVENTORIES
12 Retail inventory 9 1016 12

13 Measurement of inventories 9 1017 12
IAS 16 PROPERTY, PLANT AND EQUIPMENT
14 Fam 10 1018 14
15 Porsche 11 1019 14
16 Dawes (I) 11 1022 6
IAS 20 GOVERNMENT GRANTS AND ASSISTANCE
17 Sponger 12 1023 12
IAS 23 BORROWING COSTS
18 Dawes (II) 13 1025 6

19 Kipling 13 1026 15
IAS 17 ACCOUNTING FOR LEASES
20 Dawes (III) 14 1027 7

21 XYZ 15 1028 10
22 Snow 15 1029 15
©2016 DeVry/Becker Educational Development Corp. All rights reserved. (iii)
Contents
IAS 38 INTANGIBLE ASSETS
23 Research and development 16 1032 20

24 Defer 16 1033 10
IAS 41 AGRICULTURE
25 Sigma (DipIFR J04) 17 1034 25
IAS 36 IMPAIRMENT OF ASSETS
26 Justin 18 1036 8
IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND

CONTINGENT ASSETS
27 Genpower 18 1037 25
IAS 19 EMPLOYEE BENEFITS
28 Klondike (DipIFR J02) 20 1040 15
IFRS 2 SHARE-BASED PAYMENT
29 Vident 20 1043 15
IAS 12 INCOME TAXES
30 Shep I 21 1044 10
31 Shep II 22 1045 10
32 Shep III 23 1047 12
33 Shep IV 24 1048 6
FINANCIAL INSTRUMENTS
34 Ambush 25 1050 17
GROUP ACCOUNTING
35 Consolidations 25 1052 19
36 Hut 27 1055 15
37 Holding 28 1057 25
38 Haley 30 1060 10
39 Hamish 30 1061 10
40 Water 32 1063 16
41 Corfu 33 1065 10
42 Kane (DipIFR D10) 34 1067 25
©2016 DeVry/Becker Educational Development Corp. All rights reserved. (iv)
Contents
IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
43 Bertie 36 1069 8
IAS 33 EARNINGS PER SHARE
44 EPS 36 1070 14
IFRS 8 OPERATING SEGMENTS
45 AZ 38 1073 25
46 TAB 39 1075 17
IFRS 5 DISCONTINUED OPERATIONS
47 Dawes (IV) 40 1077 6
IAS 10 EVENTS AFTER THE REPORTING PERIOD
48 Eternity 40 1078 12
IAS 24 RELATED PARTY DISCLOSURE
49 RP Group 41 1079 25
IAS 34 INTERIM FINANCIAL REPORTING and

IFRS 1 FIRST-TIME ADOPTION OF IFRS
50 Eptilon (DipIFR J04) 42 1081 19
©2016 DeVry/Becker Educational Development Corp. All rights reserved. (v)
©2016 DeVry/Becker Educational Development Corp. All rights reserved. (vi)
Question 1 IASB
(a) State the objectives of the International Accounting Standards Board (IASB). (3 marks)
(b) Compare and contrast a “Discussion Paper” and an “Exposure Draft” of an

International Financial Reporting Standard (IFRS). (4 marks)
(c) Outline THREE steps taken by the IASB to ensure consistent interpretation of IFRSs.
(3 marks)
(10 marks)
Question 2 FAITHFUL REPRESENTATION
The IASB’s Conceptual Framework for Financial Reporting requires an entity’s financial statements to
faithfully represent the events and transactions that have occurred. One aspect of faithful representation
is that transactions and events should be accounted for according to their substance if this differs from
their legal form. This requirement sought to respond to concerns about arrangements made by
companies which resulted in the omission of assets and liabilities from the statement of financial
position.
Required:
(a) Explain the reasons why companies may wish to omit assets and liabilities from their
statements of financial position. (5 marks)
(b) Explain why accounting for “substance over form” is necessary. (5 marks)
(c) Discuss the proposed treatment of the following items in the financial statements:
(i) Bill, a listed entity, sells land to a property investment company, Tail, a listed entity.
The sale price is $20 million and the current market value is $30 million. Bill can
buy the land back at any time in the next five years for the original selling price plus
an annual commission of 1% above the current bank base rate. Tail cannot require
Bill to buy the land back at any time.
The accountant of Bill proposes to treat this transaction as a sale in the financial
statements. (7 marks)
(ii) A car manufacturer, Gray, a listed entity, supplies cars to a car dealer, Sprake on the
following terms. Sprake has to pay a monthly fee of $100 per car for the privilege
of displaying it in its showroom and also is responsible for insuring the cars. When
a car is sold to a customer, Sprake has to pay Gray the factory price of the car when
it was first supplied. Sprake can only return the cars to Gray on the payment of a
fixed penalty charge of 10% of the cost of the car. Sprake has to pay the factory
price for the cars if they remain unsold within a four-month period. Gray cannot
demand the return on the cars from Sprake.
The accountant of Sprake proposes to treat the cars unsold for less than four months
as the property of Gray and not show them as inventory in the financial statements.
(8 marks)
(25 marks)
©2016 DeVry/Becker Educational Development Corp. All rights reserved. 1
Question 3 FOREST
The overriding requirement of a company’s financial statements is that they should represent faithfully
the underlying transactions and other events that have occurred. To achieve this transactions have to be
accounted for in terms of their “substance” or economic reality rather than their legal form. This
principle is included in the Conceptual Framework for Financial Reporting, and is also used in many
standards, such as IAS 17 Leases.
Required:
(a) Describe why it is important that substance rather than legal form is used to account for
transactions, and describe how financial statements can be adversely affected if the
substance of transactions is not recorded. (5 marks)
(b) Describe, using an example, how the following features may indicate that the substance
of a transaction is different from its legal form:
(i) separation of ownership from beneficial use;

(ii) the linking of transactions including the use of option clauses;
(iii) when an asset is sold at a price that differs to its fair value. (9 marks)
(c) On 1 April 2014 Forest had an inventory of cut seasoning timber which had cost $12 million
two years ago. Due to shortages of this quality of timber its value at 1 April 2014 had risen to
$20 million. It will be a further three years before this timber is sold to a manufacturer of
high-class furniture. On 1 April 2014 Forest entered into an arrangement to sell Barret Bank
the timber for $15 million. Forest has an option to buy back the timber at any time within the
next three years at a cost of $15 million plus accumulated interest at 2% per annum above the
base rate. This will be charged from the date of the original sale. The base rate for the period
of the transactions is expected to be 8%. Forest intends to buy back the timber on 31 March
2017 and sell it the same day for an expected price of $25 million.
Note: Ignore any storage costs and capitalisation of interest that may relate to inventories.
Required:
Assuming the above transactions take place as expected, prepare extracts to reflect the
transactions in profit or loss for the years to 31 March 2015, 2016 and 2017 and the
statement of financial position (ignore cash) at those year ends:
(i) if Forest treated the transactions in their legal form; and

(ii) if the substance of the transactions is recorded.
Comment briefly on your answer to (c) above. (11 marks)
(25 marks)
Question 4 MELD
Draft financial statements for Meld, a listed entity, for the year ended 30 April 2017 include the
following amounts:
$
Revenue 472,800
Cost of sales and expenses (including interest payable of $15,000) (376,800)
_______
Profit before tax 96,000
Tax (28,800)
_______
Profit after tax 67,200
_______
Dividends (21,600)
_______
Additional information
(1) Meld acquired an unincorporated business during the year for $12,000. The fair value of
separable net assets acquired was $9,120 and goodwill to the extent of $576 has been
impaired during the period. Revenue and operating expenses (included in the figures above)
for this business since acquisition were $4,800 and $3,600 respectively.
(2) Meld had previously capitalised all development expenditure but their auditors have stated
that this was an error as the capitalisation criteria of IAS 38 Intangible Assets had not been
met. At present, development costs are included in the draft figures as follows:
Cost Amortisation
$ $
At 1 May 2016 34,560 20,160
Costs incurred 3,100 –
Amortisation charged – 4,800
______ ______
At 30 April 2017 37,660 24,960
______ ______
(3) In May 2016, non-current assets which had originally cost $19,200 were revalued to $28,800.
Accumulated depreciation at the date of revaluation was $7,200. At the date of revaluation,
the remaining useful economic life of these assets was five years and depreciation has been
charged on the revalued amount for the year.
(4) At 1 May 2016, capital and reserves comprised
$
Equity share capital 240,000
Revaluation surplus (relating to land) 48,000
Retained earnings 168,000
_______
456,000
_______
Required:
Prepare the following for the year ended 30 April 2017, insofar as the information given permits,
as required by IAS 1 “Presentation of Financial Statements”:
(a) statement of profit or loss and other comprehensive income; and (5 marks)
(b) a statement of changes in equity. (5 marks)
(10 marks)
Question 5 FRESNO GROUP
Fresno Group is preparing its financial statements for the year ended 31 January 2017. However the
financial accountant of Fresno Group had difficulty in preparing the full statements and approached you
for help. The financial accountant has furnished you with the following information:
(i) Profit or loss extract for the year ended 31 January 2017
$m
Operating profit – continuing operations 290
Profit on sale of property in continuing operations 10
____
Profit before taxation 300
Tax (90)
____
Profit after taxation 210
____
Dividends for the year amounted to $15 million.
The financial accountant has not yet made any necessary provision for discontinued
operations. (However, you may assume that the taxation provision incorporated the effects of
any provision for discontinued operations.)
(ii) The shareholders’ funds at the beginning of the financial year were as follows:
$m
Share capital ($1 equity shares) 350
Share premium 55
Revaluation surplus 215
Retained earnings 775
_____
1,395
_____
(iii) Fresno Group regularly revalues its non-current assets and at 31 January 2017, a revaluation
surplus of $375 million had been credited to revaluation surplus. During the financial year, a
property had been sold on which a revaluation surplus of $54 million had been credited to
reserves. Further, if the company had charged depreciation on a historical cost basis rather
than the revalued amounts, the depreciation charge for non-current assets in profit or loss
would have been $7 million. The current year’s charge for depreciation was $16 million.
(iv) To facilitate the purchase of subsidiaries, the company had issued $1 equity shares of nominal
value $150 million and share premium of $450 million. The premium had been taken to the
statutory reserve. All subsidiaries are currently 100% owned by the group.
(v) During the financial year to 31 January 2017, the company had discontinued the operations of
a wholly-owned subsidiary, Reno. It had also made a decision to close down the operations
of another wholly-owned subsidiary, Dodge, in the next financial period. The company has
estimated the costs of the two closures as $68 million. $45 million was for Reno and $23
million for Dodge. The directors had drawn up detailed formal plans for the closure of Dodge
by the year end but had not made this information available to the public.
Required:
Prepare a statement of changes in equity for the Fresno Group for the year ended 31 January
2017 in accordance with IAS 1 “Presentation of Financial Statements”.
(8 marks)
Question 6 LEONARD
Leonard, a listed entity, incurs considerable research and development expenditure. It had previously
been capitalising its development expenditure but this treatment has now been identified as an error as
the capitalisation criteria of IAS 38 Intangible Assets had not been met. The final accounts for the year
ended 30 June 2016 and the 2017 draft accounts reflect this capitalisation policy and show the
following:
2017 2016
$000 $000
Revenue 101,260 97,250
Cost of sales (56,010) (60,530)
——— ———
Gross profit 45,250 36,720
Administrative expenses (37,397) (31,260)
——— ———
Profit before taxation 7,853 5,460
Tax on profit (3,141) (2,260)
——— ———
Profit for the financial year 4,712 3,200
——— ———
Statement of changes in equity (extract)
Retained profit for the financial year 4,712 3,200

Retained earnings brought forward 23,950 22,500
Dividends (2,500) (1,750)
——— ———
Retained earnings carried forward 26,162 23,950
——— ———
The carrying amount of development costs included in intangible non-current assets has been as
follows:
$000
At 30 June 2015 400
At 30 June 2016 450
At 30 June 2017 180
——
Amortisation of development costs (charged to cost of sales) and expenditure on development has been.
Amortisation Expenditure
$000 $000
Year ended 30 June 2016 450 500
Year ended 30 June 2017 870 600
Required:
Show how the error will be reflected in the financial statements for the year ended 30 June 2017.
(12 marks)
Question 7 KEY CHANGES
(a) Explain how the profit or loss on disposal of an asset is calculated and why this method
is used. (5 marks)
(b) Explain the criteria which determine:
(i) whether an item is recognised in the financial statements;

(ii) whether an item once recognised, appears in profit or loss or other
comprehensive income. (8 marks)
(c) On 1 January 2012 a company acquired a non-current asset for $25,000. It is to be

depreciated at 20% on the reducing balance method. The company’s policy is to revalue its
assets every two years. On 31 December 2013 the asset was revalued to $18,000, its
remaining useful life was determined to be six years and the depreciation method was
changed to the straight line method.
On 31 December 2015 the asset was revalued to $8,000, but the useful life and depreciation
method were not changed. On 1 April 2016 the asset was sold for $8,500. Depreciation is not
charged in the year of sale of an asset. The company draws up its financial statements to 31
December.
Required:
Show the annual effect (if any) of the above transactions for the period 1 January 2012
to 31 December 2016 on:
(i) profit or loss and other comprehensive income; and

(ii) the revaluation surplus. (9 marks)
Note: You should assume that the company wishes to maximise its distributable profit for the
period.
(22 marks)
Question 8 TELECAST INDUSTRIES
(a) Discuss the criteria used in the “Framework” to determine when income or expenses
arise, and how they should be reported. (5 marks)
(b) Telecast Industries, a public listed company, is preparing its accounts for the year ended 30
September 2016. In May 2016 it bought the rights to a film called “Wind of Change”. It paid
a fixed fee and will not incur any further significant costs or commissions. It has entered into
the following contracts with:
(i) Warmer Cinemas
This is a large company with a chain of cinemas throughout the world. Warmer Cinemas has
negotiated the right to screen the film during the period from 1 July 2016 to 31 December
2016 in as many of its cinemas and as frequently as it chooses. Telecast Industries will be
paid 15% of gross box office receipts.
(ii) Big Screen
This is a small company operating a single cinema. Under the terms of the contract it may
screen the film twice a day for the same period as the above contract. It has paid a fixed fee
of $10,000.
(iii) Global Satellite
This is a satellite television company that broadcasts to South East Asia. The contract states
that Global Satellite will pay $500,000 every six months for the next three years. This will
give Global Satellite the right to screen the film 10 times at intervals of not less than one
month apart during 2017.
Required:
Applying the requirements of IFRS 15 “Revenue from Contracts with Customers”,

describe how Telecast Industries should treat the income from each of the above
contracts in the accounting year ended 30 September 2016. (9 marks)
Note: You are not required to discuss how the cost of the film should be expensed.
(14 marks)
Question 9 MESON
Meson is a recently incorporated company. Its business is the development of standard computer
software packages, the sale or “licensing to use” of standard or customised standard software packages
and the design, development and maintenance of bespoke software to order. Payment by customers is
usually in stages over the term of the design-development work. More recently, Meson has commenced
the retailing of computer hardware.
Meson has also developed a prototype “retail shop” which will aim to sell computer time (on PCs) –
customers will be able to visit the “shop” and use either their own or Meson’s software to process data,
etc. It is Meson’s aim to establish a nation-wide chain of such shops by licensing interested
entrepreneurs to use the concept and benefit from Meson’s nation-wide advertising campaign. Meson
will supply, in addition to know how and advertising, administrative back up, software and hardware.
Meson is considering alternative methods of charging the independent proprietors of shops, including:
(i) an up-front license fee followed by regular fees based on turnover of the shops;
(ii) no advance payment but regular fees based on a larger percentage of turnover of the shops.
Software and hardware supplied by Meson will be charged on delivery at normal selling prices.
Required:
Advise the directors of Meson on the matters they should consider in determining the policies for
accounting for revenue from:
(a) the design and sale of software and the retailing of hardware; and (8 marks)
(b) the proposed retail shop licensing operation. (5 marks)
(13 marks)
Question 10 WILLIAM
William, a limited liability company that designs and builds racecourses, commenced a four-year
contract early in 2013. The price was initially agreed at $12,000,000.
Revenue is recognised over the term of the contract as the performance obligation is satisfied over time.
William recognises revenue based on the percentage of costs incurred to date compared to total
expected costs.
Relevant figures are as follows:

2013 2014 2015 2016
$000 $000 $000 $000
Costs incurred in year 2,750 3,000 4,200 1,150
Anticipated future costs 7,750 7,750 1,550 –
Work certified and cash received to date 3,000 5,000 11,000 12,500
Required:
Show how the above would be disclosed in the financial statements of William for each of the four
years ended 31 December 2016.
Note: Work to the nearest $000. (12 marks)
Question 11 BIG
Big commenced work on three long-term contracts during the financial year to 31 March 2017. The
first contract with Nose commenced on 1 July 2016 and had a total sales value of $3.6 million. It was
envisaged that the contract would run for two years and that the total expected costs would be $3
million. On 31 March 2017 Big revised its estimate of the total expected costs to $3.1 million on the
basis of the additional rectification costs of $100,000 incurred on the contract during the current
financial year. An independent surveyor has estimated at 31 March 2017 that the contract is 40%
complete. Big has incurred costs up to 31 March 2017 of $1.5 million and has received payments on
account of $1.2 million.
The second contract with Head commenced on 1 October 2016 and was for a two year period. This
contract was relatively small and had a total sales value of $60,000. The total expected costs were
$48,000. A valuation has not been carried out by an independent surveyor, as it was not required under
the terms of the contract. The directors of the company estimated at 31 March 2017 that the contract
was 30% complete. The costs incurred to date were $19,000 and the payments on account received
were $21,000. A non-current asset which had cost $8,000 and had been purchased specifically for the
project was considered to be obsolete as at 31 March 2017. The non-current asset was being
depreciated on the straight-line basis over the two-year period of the contract assuming no residual
value. The cost of depreciation to date was included in the amount of the costs incurred.
The third contract with Horn commenced on 1 November 2016 and was for 1½ years. The total sales
value of the contract was $2.4 million and the total expected costs were $2 million. Payments on
account already received were $1 million and total costs incurred to date were $700,000. Big had
insisted on a large deposit from Horn because the companies had not traded together prior to the
contract. The independent surveyor estimated that at 31 March 2017 the contract was 25% complete.
The three contracts meet the requirements of IFRS 15 Revenue from Contracts with Customers to
recognise revenue over time as the performance obligations are satisfied over time.
The company also has several short-term contracts of between six and nine months in duration. Some
of these contracts fall into two accounting periods and were not completed as at 31 March 2017. The
directors have decided to accrue profit earned to date on these contracts in the financial statements.
Required:
(a) Draft financial statement extracts for Big in respect of the three construction contracts
for the year ending 31 March 2017. (11 marks)
(b) Discuss the acceptability of the accounting treatment by the directors of the contracts
which run for between six months and nine months. (4 marks)
(15 marks)
Question 12 RETAIL INVENTORY
A retailer has the following purchases and sales of a particular product line:
Units Purchase Units Selling

purchased price per unit sold price per unit
$ $
2 December 100 500 60 530
16 December 60 503 80 528
30 December 70 506 50 526
14 January 50 509 70 524
28 January 80 512 50 522
11 February 40 515 40 520
At 31 December the physical inventory was 150 units. The cost of inventories is determined on a FIFO
basis. Selling and distribution costs amount to 5% of selling price and general administration expenses
amount to 7% of selling price.
Required:
(a) State three reasons why the net realisable value of inventory may be less than cost.
(3 marks)
(b) Calculate to the nearest $ the value of inventory at 31 December:
(i) at cost;
(ii) at net realisable value;
(iii) at the amount to be included in the financial statements in accordance with
IAS 2 “Inventories”. (9 marks)
(12 marks)
Question 13 MEASUREMENT OF INVENTORIES
IAS 2 Inventories prescribes the accounting treatment for inventories under the historical cost system.
Required:
(a) Briefly explain how IAS 2 requires the following to be dealt with:
(i) fixed production overheads;

(ii) the determination of the lower of cost and net realisable value;
(iii) the identification of costs when there are large numbers of items which are
ordinarily interchangeable. (8 marks)
(b) State FOUR disclosure requirements of IAS 2 in respect of inventories. (4 marks)
(12 marks)
Question 14 FAM
Fam had the following tangible non-current assets at 31 December 2015:
Cost Depreciation Carrying

amount
$000 $000 $000
Land 500 – 500
Buildings 400 80 320
Plant and machinery 1,613 458 1,155
Fixtures and fittings 390 140 250
Assets under construction 91 – 91
_____ _____ _____
2,994 678 2,316
_____ _____ _____
In the year ended 31 December 2016 the following transactions occur:
(1) Further costs of $53,000 are incurred on buildings being constructed by the company.
A building costing $100,000 is completed during the year.
(2) A deposit of $20,000 is paid for a new computer system which is undelivered at the year end.
(3) Additions to plant are $154,000.
(4) Additions to fixtures, excluding the deposit on the new computer system, are $40,000.
(5) The following assets are sold:

Cost Depreciation Proceeds
brought forward
$000 $000 $000
Plant 277 195 86
Fixtures 41 31 2
(6) Land and buildings were revalued at 1 January 2016 to $1,500,000, of which land is worth
$900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on
the basis of their fair value.
(7) The useful life of the buildings is unchanged. The buildings were purchased ten years before
the revaluation.
(8) Depreciation is provided on all assets in use at the year-end at the following rates:
Buildings 2% per annum straight line

Plant 20% per annum straight line
Fixtures 25% per annum reducing balance
Required:
Show the disclosure under IAS 16 “Property, Plant and Equipment” that is required in the notes
to Fam’s published accounts for the year ended 31 December 2016.
(14 marks)
Question 15 PORSCHE
Porsche, a listed entity, has the following non-current assets at 1 January 2016:
Cost Depreciation Carrying

amount
$000 $000 $000
Factory 1,440 144 1,296
Plant and equipment 1,968 257 1,711
Motor vehicles 449 194 255
Office equipment and fixtures 888 583 305
——– ——– ——–
4,745 1,178 3,567
——– ——– ——–
You are given the following information for the year ended 31 December 2016:
(1) The factory was acquired in March 2011 and is being depreciated over 50 years.
(2) Depreciation is provided on cost on a straight line basis. The rates used are 20% for
fixtures and fittings, 25% for cars and 10% for machines.
(3) Early in the year the factory was revalued to a market value of $2.2 million and an
extension was built costing $500,000.
(4) The directors decided to change the method of depreciating motor vehicles to 30%
reducing balance to give a fairer presentation of the results and of the financial position.
(5) Two cars costing $17,500 each were bought in February. Plant and fittings for the factory
extension cost $75,000 and $22,000 respectively.
(6) When reviewing the expected lives of its non-current assets, the directors felt that it was
necessary to reduce the remaining life of a two year old grinding machine to four years
when it will be sold for $8,000 as scrap. The machine originally cost $298,000 and at
1 January 2016 had related accumulated depreciation of $58,000.
(7) It is the company’s policy to charge a full year’s depreciation in the year of acquisition.
Required:
Prepare the disclosure notes for non-current assets for the year ended 31 December 2016
required under IAS 16 “Property, Plant and Equipment”.
(14 marks)
Question 16 DAWES (I)
The following problem and issues have arisen during the preparation of the draft financial statements of
Dawes, a listed entity, for the year to 30 September 2016:
On 1 October 2010 Dawes purchased a 25-year lease on a new industrial storage building for $4million.
Prior to the current year this property was being amortised over its useful life. The directors are now
questioning the necessity for this as a 20-year lease, on an almost identical building was sold on 1
October 2015, by the builders, for $6 million. With effect from the same date (1 October 2015) the
directors wish to value the lease at $6 million and cease depreciating it.
Note: the regulatory requirements applicable to Dawes permit revaluation of non-monetary assets in
accordance with the revaluation model in IAS 16 Property, Plant and Equipment.
Required:
Critically comment on the directors’ views in relation to revaluation and depreciation of the
leased property, and show calculations of the amounts to be included in the financial statements
for the year ended 30 September 2016 assuming:
(i) there is no revaluation of the property;

(ii) the property is revalued to $6 million at 1 October 2015.
(6 marks)
Question 17 SPONGER
Sponger, a listed entity, has been having financial difficulties recently due to the economic climate in
its industry sector. However, its financial director Mr Philip Tislid has discovered that there are a
number of schemes by which he can obtain government financial assistance. Details of the assistance
obtained are as follows:
(a) Sponger has received three grants of $10,000 each in the current year relating to on-going
research and development projects. One grant relates to the Cuckoo project which involves
research into the effect of various chemicals on the pitch of the human voice. No constructive
conclusions have been reached yet.
The second relates to the development of a new type of hairspray which is expected to be
extremely popular. Commercial production will commence in 2018 and large profits are
foreseen. The third relates to the purchase of high powered microscopes.
(b) In 2015 Sponger’s premises were entirely isolated from the outside world for four months due
to the renovation of roads by the local council. All production was lost in that period. Mr
Tislid has been assured by the council’s officers that a $25,000 compensation grant will be
paid on submission of the relevant triplicate form. Mr Tislid had not yet filled in the form by
31 December 2016.
(c) Sponger entered into an agreement with the government that, in exchange for a grant of
$60,000, it will provide “vocational experience” tours around its factory, for twelve young
criminals per month over a five year period starting on 1 January 2016. The grant was to be
paid on the date Sponger purchased a minibus (useful life three years) to take the inmates to
the factory and back. The bus was bought and the grant received on 1 January 2016.
The grant becomes repayable on a pro rata basis for every monthly visit not fulfilled. During
2016 five visits did not take place due to the pressure of work and this pattern is expected to
be repeated over the next four years.
No repayments have yet been made.
Mr Tislid is totally confused as to how to account for these grants.
Required:
Explain how Mr Tislid should account for the above grants in the accounts for the year ended 31
December 2016.
(12 marks)
Question 18 DAWES (II)
Dawes capitalises borrowing costs in respect of qualifying assets, in accordance with IAS 23Borrowing
Costs. Details relating to two such assets and their financing are:
Manufacturing plant
On October 1 2015 Dawes commenced construction of a manufacturing plant that is expected to take
four years to complete. It is being financed entirely by a four-year term loan of $5 million (taken out at
the start of the construction). The loan carries fixed interest at 14% per annum and issue costs of 2%
(of the loan value) were incurred on the loan. During the year $72,000 had been earned from the
temporary investment of these borrowings.
Note: you may use the straight-line method to amortise issue costs.
Investment property
Due to the poor state of the property letting market, construction of this property was halted for the first
three months of the year. On 30 June 2016, after a prolonged construction period, the company
completed the property. Despite attempts to let the property it remained empty at the year end. The
average carrying amount of property before inclusion of the current year’s borrowing cost is $12
million. The investment property has been financed out of funds borrowed generally for the purpose of
financing qualifying assets. The company’s weighted average cost of capital is 11% including all
borrowings, and 10% if the $5 million referred to above is excluded.
Required:
Calculate, with explanations, the amount of borrowing costs that should be capitalised in respect
of each qualifying asset.
(6 marks)
Question 19 KIPLING
Kipling manufactures and operates a fleet of small aircraft. It draws up its financial statements to 31
March each year.
The company has recently finished manufacturing a fleet of five aircraft to a new design. These aircraft
are intended for use in its own fleet for domestic carriage purposes.
The company commenced construction of the assets on 1 April 2012 and wishes to recognise them as
non-current tangible assets as at 31 March 2014.
Kipling had taken out a three year loan of $20 million to finance the aircraft on 1 April 2012. Interest is
payable at 10% per annum but is to be rolled over and paid at the end of the three year period together
with the capital outstanding. Kipling capitalises interest on manufactured assets in accordance with the
rules in IAS 23 Borrowing Costs.
The aircraft were completed on 1 January 2014 but their exterior painting was delayed until 31 March
2014. The costs (excluding finance costs) of manufacturing the aircraft were $28 million.
During the construction of the aircraft, certain computerised components used in the manufacture fell
dramatically in price.
The company estimated that at 31 March 2014 the recoverable amount of the aircraft was $30 million.
The engines used in the aircraft have a three year life and the body parts have an eight year life; Kipling
has decided to depreciate the engines and the body parts over their different useful lives on the straight
line basis. The engine costs represent 30% of the total cost of manufacture. The engines will be
replaced on 31 March 2017 at an estimated cost of $15 million.
The company has decided to revalue the aircraft annually on the basis of their market value.
On 31 March 2015, the aircraft have a market value of $21 million.
On 31 March 2016, the aircraft have a market value of $19·6 million.
Revaluation surpluses or deficits are apportioned between the engines and the body parts on the basis of
their year-end book values before the revaluation.
Required:
Show the accounting treatment of the aircraft fleet in the financial statements on the basis of the
above scenario for the financial years ending:
(a) 31 March 2014;

(b) 31 March 2015, 2016;
(c) 31 March 2017 before revaluation.
(15 marks)
Question 20 DAWES (III)
The following schedule of the movement of plant has been drafted:

Cost Depreciation
$m $m
At 1 October 2015
(including leased assets) 81.20 32.50
Additions at cost excluding
Leased assets (see (i) and (ii) below) 23.00 –
Depreciation charge for the year – 19.84
Disposal (see (iii) below) (5.00) –
_____ _____
Balance 30 September 2016 99.20 52.34
_____ _____
(i) The addition to plant is made up of: $m

Basic cost from supplier 20.00
Recoverable sales tax (see (iv) below) 3.50
Installation costs 1.00
Pre-production testing 0.50
Annual insurance and maintenance contract 1.00
Less government grant (see (v) below) (3.00)
_____
23.00
_____
(ii) During the year some assets were acquired under finance leases. The fair value of
these assets is represented by the movement on finance leases liabilities. These
increased from $21.4 million at 1 October 2015 to $29 million at 30 September
2016 after capital repayments of lease liabilities during the year of $8.4 million. All
finance leases for plant are for five years and none are more than three years old.
(iii) The disposal figure of $5 million is the proceeds from the sale of an item of plant
during the year which had cost $15 million on 1 October 2015 and had been
correctly depreciated prior to disposal. Dawes charges depreciation of 20% per
annum on the cost of plant held at the year end.
(iv) The recoverable sales tax paid on the acquisition of assets is recoverable from the
taxing authorities.
(v) The company policy for government grants is to treat them as deferred income in
the statement of financial position.
Required:
Prepare a corrected schedule of the cost and depreciation of plant, including leased assets.
(7 marks)
Question 21 XYZ
A lessor, ABC, leases an asset, which it purchased for $4,400, to XYZ. under a finance lease. It
estimates that its residual value after five years will be $400 and after seven years will be zero.
The lease is for five years at a rental of $600 per half year in advance, with an option of two more years
at nominal rental. The lease commences on 1 January 2016. The directors of XYZ, a listed entity,
consider that the asset has a useful life of seven years. The finance charge is to be allocated using the
actuarial method, assuming that the interest rate implicit in the lease is 7.68%. Title to the asset will
pass to XYZ at the end of seven years if the option is exercised. It is likely that it will be.
Required:
Show the relevant extracts from the financial statements of XYZ for the year ended 31 December
2016.
(10 marks)
Question 22 SNOW
On 1 January 2016, Snow, a listed entity, entered into the following finance lease agreements:
(a) Snowplough
To lease a snowplough for three years from Ice. The machine had cost Ice $35,000.
A deposit of $2,000 was payable on 1 January 2016 followed by six half-yearly instalments of
$6,500 payable in arrears, commencing on 30 June 2016. Finance charges are to be allocated
using the actuarial method, assuming that the interest rate implicit in the lease is 5%.
(b) Snow machine
To lease a snow machine for five years from Slush. The snow machine cost Slush $150,000
and is estimated to have a useful life of five years.
Snow has agreed to make five annual instalments of $35,000, payable in advance,
commencing on 1 January 2016.
The interest rate implicit in the lease is 8.36%.
Required:
Show the relevant extracts from the accounts of Snow for year ended 31 December 2016.
(15 marks)
Question 23 RESEARCH AND DEVELOPMENT
“Expenditure on research costs is to be recognised as an expense when it is incurred … An intangible

asset arising from development expenditure will be recognised if, and only, if, an entity can
demonstrate all of the following …”
IAS 38 Intangible Assets
Required:
(a) Explain why expenditure on research is treated differently from expenditure on

development. (4 marks)
(b) State the criteria to be demonstrated for expenditure on development to be recognised

as an intangible asset. (6 marks)
(c) An entity has incurred the following costs prior to commercial production of a new pollution
filter for use on commercial vehicles:
marketing awareness campaign $50,000

patent royalty payable to inventor of filter $12,000
salaries of staff testing filter prototypes $38,500
State, with reasons, which costs should be included in internally-generated intangible

asset. (4 marks)
(d) Describe how and when development expenditure should be amortised. (6 marks)
(20 marks)
Question 24 DEFER
Your client, a limited liability company, wishes to defer expenditure on development activities where
possible and for as long as possible. The finance director has asked for your advice on what procedures
to set up in order to identify relevant expenditure and comply with best accounting practice.
Required:
Draft a reply that responds to the finance director’s request.

(10 marks)
Question 25 SIGMA
Sigma prepares financial statements to 30 September each year. On 1 October 2015 Sigma carried out
the following transactions:
 Purchased a large piece of land for $20 million.

 Purchased 10,000 dairy cows (average age at 1 October 2015 two years) for $1 million.
 Received a grant of $400,000 towards the acquisition of the cows. This grant is not repayable.
During the year ending 30 September 2016 Sigma incurred the following costs:
 $500,000 to maintain the condition of the animals (food and protection);

 $300,000 in breeding fees to a local farmer.
On 1 April 2016 5,000 calves were born. There were no other changes in the number of animals during
the year ended 30 September 2016. At 30 September 2015 Sigma had 10,000 litres of unsold milk in
inventory. The milk was sold shortly after the year end at market prices.
Information regarding fair values is as follows:
Item Fair value less costs to sell

1 October 2015 1 April 2016 30 September 2016
$ $ $
Land 20 million 22 million 24 million
New born calves (per calf) 20 21 22
Six month old calves (per calf) 23 24 25
Two year old cows (per cow) 90 92 94
Three year old cows (per cow) 93 95 97
Milk (per litre) 0·6 0·55 0·55
Required:
(a) Discuss how the requirements of IAS 41 “Agriculture” regarding the recognition and
measurement of biological assets and agricultural produce are consistent with the
IASB’s “Conceptual Framework for Financial Reporting”. (8 marks)
(b) Prepare extracts from the statement of profit or loss and the statement of financial
position that show how the transactions entered into by Sigma in respect of the purchase
and maintenance of the dairy herd would be reflected in the financial statements of the
entity for the year ended 30 September 2016.
Note: A reconciliation of changes in the carrying amount of biological assets is NOT

required. (17 marks)
(25 marks)
Question 26 JUSTIN
On 1 July 2016 Justin acquired Steamdays, a company that operates a scenic railway along the coast of
a popular tourist area. The summarised statement of financial position at fair values of Steamdays on 1
July 2016, reflecting the terms of the acquisition was:
$000
Goodwill 200
Operating licence 1,200
Property – train stations and land 300
Rail track and coaches 300
Steam engines (2) 1,000
_____
Purchase consideration 3,000
_____
The operating licence is for ten years. It has recently been renewed by the transport authority and is
stated at the cost of its renewal. The carrying amounts of the property and rail track and coaches are
based on their estimated replacement cost. The engines are valued at their fair values, less costs to sell.
On 1 August 2016 the boiler of one of the steam engines exploded, completely destroying the whole
engine. Fortunately no one was injured, but the engine was damaged beyond repair. Due to its age a
replacement could not be obtained. Because of the reduced passenger capacity the estimated value in
use of the business after the accident was assessed at $2 million.
Passenger numbers after the accident were below expectations even after allowing for the reduced
capacity. A market research report concluded that tourists were not using the railway because of the
fear of a similar accident occurring to the remaining engine. In the light of this the value in use of the
business was re-assessed on 30 September 2016 at $1·8 million. On this date Justin received an offer of
$900,000 in respect of the operating licence (it is transferable).
Required:
Briefly describe the basis in IAS 36 “Impairment of Assets” for allocating impairment losses; and
show how each of the assets of Steamdays would be valued at 1 August 2016 and 30 September
2016 after recognising the impairment losses.
Note: Ignore depreciation of assets.

(8 marks)
Question 27 GENPOWER
IAS 37 Provisions, Contingent Liabilities and Contingent Assets considers the recognition,
measurement, presentation and disclosure requirements for provisions, contingent liabilities and
contingent assets.
Required:
(a) (i) Explain the need for an accounting standard in respect of provisions. (5 marks)
(ii) Describe the principles in IAS 37 of accounting for provisions. Your answer
should refer to definitions and recognition and measurement criteria. (7 marks)
(b) Genpower is engaged in the electricity generating industry. It operates some nuclear power
stations for which environmental clean-up costs can be a large item of expenditure. The
company operates in some countries where environmental costs have to be incurred as they
are written into the licensing agreement, and in other countries where they are not a legal
requirement. The details of a recent contract Genpower entered into are as follows:
A new nuclear power station has been built at a cost of $200 million and was brought into
commission on 1 October 2015. The licence to produce electricity at this station is for 10
years. This is also the estimated economic life of the power station. The terms of the licence
require the power station to be demolished at the end of the licence. It also requires that the
spent nuclear fuel rods (a waste product) be buried deep in the ground and the area “sealed” to
avoid contamination. Genpower will also have to pay clean-up costs for any contamination
leaks from the water cooling system that surrounds the fuel rods when they are in use.
Genpower estimates that the cost of the demolition of the power station and the fuel rod
“sealing” operation will be$180 million in 10 years’ time. The present value of these costs at
an appropriate discount rate is $120 million. From past experience there is a 30% chance of a
contaminating water leak occurring in any 12 month period. The cost of cleaning up a leak
varies between $20 million and $40 million depending on the severity of the contamination.
Relevant extracts from the company’s draft financial statements to 30 September 2016 after
applying the company’s normal accounting policy for this type of power station are:
Profit or loss: $m
Non-current asset depreciation (power station)
10% × $200 million 20
Provision for demolition and “sealing” costs
10% × $180 million 18
Provision for cleaning up contamination due to water leak
(30% × an average of $30 million) 9
___
47
___
Statement of financial position:
Tangible Non-current assets:
Power station at cost 200
Depreciation (20)
___
180
___
Non-current liabilities:
Provision for environmental costs ($18 + $9 million) 27
Note: No contamination from water leakage occurred in the year to 30 September 2016.
Genpower is concerned that its current policy does not comply with IAS 37 Provisions,
Contingent Liabilities and Contingent Assets and has asked for your advice.
Required:
(i) Comment on the acceptability of Genpower’s current accounting policy and

redraft the extracts of the financial statements in line with the regulations of
IAS 37. (8 marks)
Note: your answer should ignore the “unwinding” of the discount to present value.
(ii) Assuming Genpower was operating the nuclear power station in a country that does
not legislate in respect of the above types of environmental costs.
Explain the effect this would have on your answer to (i) above. (5 marks)
Note: your answer should include a consideration of what Genpower’s

environmental policy might be.
(25 marks)
Question 28 KLONDIKE
IAS 19 Employee Benefits deals with the treatment of post-employment benefits such as pensions and
other retirement benefits. Post-employment benefits are classified as either defined contribution or
defined benefit plans.
Required:
(a) Describe the relevant features and required accounting treatment of defined
contribution and defined benefit plans under IAS 19. (7 marks)
(b) Klondike operates a defined benefit post-retirement plan for its employees. The plan is
reviewed annually. Klondike’s actuaries have provided the following information:
31 March 2016 31 March 2017
$000 $000
Present value obligation 1,500 1,750
Fair value of plan assets 1,280 1,650
Current service cost – year to 31 March 2017 160
Contributions paid – year to 31 March 2017 85
Benefits paid to employees – year to 31 March 2017 125
Discount rate for plan liabilities at 1 April 2016 10%
Required:
Prepare extracts of Klondike’s financial statements for the year to 31 March 2017 in
compliance with IAS 19 insofar as the information permits. (8 marks)
(15 marks)
Question 29 VIDENT
The directors of Vident, a listed entity, are reviewing the impact of IFRS 2 “Share-based Payment” on
the company’s financial statements for the year ended 31 May 2017. However, the directors of Vident
are unhappy about the standard and have put forward the following arguments why they should not
recognise an expense for share-based payments:
(i) share options have no cost to the company and, therefore, there should be no expense charged
in the statement of profit or loss;
(ii) the expense arising from share options under IFRS 2 does not, in their opinion, meet the
definition of an expense under the “Framework” document;
(iii) the dual impact of the IFRS on earnings per share is worrying as an expense would be shown
in the statement of profit or loss and the share options would be recognised in the diluted
earnings per share calculation;
The following share option schemes were in existence at 31 May 2017:

Director’s name J Van Heflin R Ashworth
Grant date 1 June 2015 1 June 2016
Options granted 20,000 50,000
Fair value of options at grant date $5 $6
Exercise price $4·50 $6
Performance conditions A B
Vesting date 1 June 2017 1 June 2019
Exercise date 1 June 2018 1 June 2020
The price of Vident’s shares at 31 May 2017 is $12 per share and at 31 May 2016 was $12·50 per
share.
The performance conditions which apply to the exercise of executive share options are as follows:
Performance Condition A
The share options do not vest if the growth in the company’s earnings per share (EPS) for the year is
less than 4%. The rate of growth of EPS was 4·5% (2015), 4·1% (2016), 4·2% (2017). The directors
must still work for the company on the vesting date.
Performance Condition B
The share options do not vest until the share price has increased from its value of $12·50 at the grant
date (1 June 2016) to above $13·50. The director must still work for the company on the vesting date.
No directors have left the company since the issue of the share options and none are expected to leave
before June 2017. The shares vest and can be exercised on the first day of the due month.
Required:
(a) Explain why share-based payment should be recognised in financial statements and why
the directors’ arguments are unacceptable. (9 marks)
(b) Discuss, with supporting calculations, how the directors’ share options should be
accounted for in the financial statements for the year ended 31 May 2017 including the
adjustment to opening balances. (6 marks)
(15 marks)
Questions 30 – 33
Assume the following tax rules in respect of questions Shep (I) – (IV):
 Transactions are only deductible for tax purposes when they are “booked” (i.e. double-entry is
made in the statutory accounting records). This means that there is often little difference
between accounting profit under local GAAP and the taxable profit. However, it is common
practice for large companies to maintain a parallel set of records and accounts for reporting
according to IFRS rules. These are notably different to the rules in the domestic tax code and
as a result the accounting profit under IFRS can be very different from the taxable profit.
 The tax code allows for the general application of the accounting principles of prudence and
accruals, but it does state the following:
 Tax allowable depreciation is computed according to rules set out in the tax code.
 Interest is taxable/allowable on a cash basis.
 Development expenditure is allowable for tax in the period in which it is incurred.
Question 30 SHEP (I)
Shep was incorporated on 1 January 2015. In the year ended 31 December 2015 the company made a
profit before taxation of $121,000.
This figure was after a depreciation charge of $11,000.
During the period Shep made the following capital additions.
$
Plant 48,000
Motor vehicles 12,000
Tax allowances for 2015 are $15,000.
Corporate tax is chargeable at the rate of 30%.
Required:
(a) Calculate the corporate income tax liability for the year ended 31 December 2015.
(b) Calculate the deferred tax balance that is required in the statement of financial position
as at 31 December 2015.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate
the deferred tax charge for the year ended 31 December 2015.
(d) Prepare the note which analyses the tax expense for the year ended 31 December 2015.
(e) Prepare a note which reconciles accounting profit multiplied by the applicable tax rate
and the tax expense.
(f) Prepare a note to the statement of financial position showing the movement on deferred
tax in respect of each type of temporary difference.
(10 marks)
Question 31 SHEP (II)
Continuing from the previous year. The following information is relevant for the year ended 31
December 2016.
(1) Capital transactions

$
Depreciation charged 14,000
Tax allowances 16,000
(2) Interest payable

On 1 April 2016 the company issued $25,000 of 8% loan notes. Interest is paid in arrears on
30 September and 30 March.
(3) Interest receivable

On 1 April Shep purchased loan notes having a nominal value of $4,000. Interest at 15% per
annum is receivable on 30 September and 30 March. The investment is regarded as a
financial asset and is measured at amortised cost.
(4) Provision for warranty

In preparing the financial statements for the year to 31 December 2016, Shep has recognised a
provision for warranty payments in the amount of $1,200. This has been correctly recognised
in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the
amount has been expensed. Shep operates in a tax regime where warranty expense is
deductible only when paid.
(5) Fine
During the period Shep has paid a fine of $6,000. The fine is not tax deductible.
(6) Further information

The accounting profit before tax for the year was $125,000.
Required:
(10 marks)
Question 32 SHEP (III)
Continuing from the previous year. The following information is relevant for the year ended 31
December 2017.
(1) Interest payable/Interest receivable
Shep still has $25,000 of 8% convertible loan notes in issue and still retains its holding in the
loan notes purchased in 2016.
(2) Provision for warranty
During the year Shep had paid out $500 in warranty claims and provided for a further $2,000.
(3) Development costs
During 2017 Shep has capitalised development expenditure of $17,800 in accordance with the
provisions of IAS 38 Intangible Assets.
(4) Further information
$
Profit before taxation 175,000
Depreciation charged 18,500
Tax allowable depreciation 24,700
(5) Entertainment
Shep paid for a large office party during 2017 to celebrate a successful first two years of the
business. This cost $20,000. This expenditure is not tax deductible.
Required:
(12 marks)
Question 33 SHEP (IV)
Use the information provided in Shep III and assume that the government changed the rate of tax to
28% during 2017.
Required:
(6 marks)
Question 34 AMBUSH
The directors of Ambush, a listed entity, are assessing the impact of implementing IFRS 9 Financial
Instruments on the company’s financial statements. The directors realise that significant changes may
occur in their accounting treatment of financial instruments and they understand that on initial
recognition financial assets and financial liabilities must be classified into certain categories.
Required:
(a) Explain how financial assets and liabilities are measured and classified, briefly setting
out the accounting method used for each category. (Ignore hedging relationships.)
(8 marks)
(b) Ambush made a loan of $200,000 to Bromwich on 1 December 2014. The effective and
stated interest rate for this loan was 8%. Interest is payable by Bromwich at the end of each
year and the loan is repayable on 30 November 2018. At 30 November 2016, the directors of
Ambush have heard that Bromwich is in financial difficulties and is undergoing a financial
reorganisation. The directors feel that it is likely that they will only receive $100,000 on 30
November 2018 and no future interest payment. Interest for the year ended 30 November
2016 had been received. The financial year end of Ambush is 30 November 2016.
Required:
(i) Outline the requirements of IFRS 9 regarding the impairment of financial

assets. (5 marks)
(ii) Explain the accounting treatment under IFRS 9 of the loan to Bromwich in the
financial statements of Ambush for the year ended 30 November 2016.
(4 marks)
(17 marks)
Question 35 CONSOLIDATIONS
(a) Statements of financial position at 31 December 2016
Pink Sink
$ $
Investment in Sink 65,000 –
Sundry net assets 115,000 55,000
———– ———
180,000 55,000
———– ———
Equity share capital ($1 shares) 140,000 30,000

Retained earnings 40,000 25,000
———– ———
180,000 55,000
———– ———
Pink acquired the whole of the issued share capital of Sink for $65,000 on 31 December
2016.
Required:
Prepare the consolidated statement of financial position at 31 December 2016. (3 marks)
(b) Statements of financial position at 31 December 2016
Pink Sink
$ $
———– ———
194,000 62,000
———– ———

———– ———
194,000 62,000
———– ———
Pink acquired the whole of the issued share capital of Sink for $65,000 on 31 December
2014, when the retained earnings of Sink were $25,000.
Goodwill has been impaired by $4,000 since acquisition.
Required:
(c) Facts are as in part (a) above except that 80% of share capital of Sink was acquired for
$52,000.
Pink Sink
$ $
———– ———
167,000 55,000
———– ———

———– ———
167,000 55,000
———– ———
Pink has chosen to value non-controlling interest based on its share of the identifiable net
assets in Sink.
Required:
(d) Statements of financial position at 31 December 2016

Pink Sink
$ $
———– ———
181,000 62,000
———– ———

———– ———
181,000 62,000
———– ———
Pink acquired 80% of the share capital of Sink two years ago when the retained earnings of
Sink were $25,000. Pink has chosen to value non-controlling interest based on its share of the
identifiable net assets in Sink.
Required:
(i) Prepare the consolidated statement of financial position at 31 December 2016

assuming that goodwill has been impaired by $3,200 since acquisition. (4 marks)
(ii) Re-calculate consolidated retained earnings, goodwill and non-controlling

interest if Pink had chosen to value non-controlling interest on acquisition at
fair value. The market price of a share in Sink on the date of acquisition was
$2.15. (4 marks)
(19 marks)
Question 36 HUT
On 1 July 2015 Hut acquired 128,000 $1 equity shares of Shed. The following statements of financial
position have been prepared as at 31 December 2016:
Hut Shed
$ $
Land at cost 80,000 72,000
Plant at cost 72,000 57,600
Cost of shares in Shed 203,000 –
Inventory at cost 112,000 74,400
Receivables 104,000 84,000
Bank balance 41,000 8,000
———– ———–
612,000 296,000
———– ———–
Hut Shed
$ $
Payables 52,000 24,000
———– ———–
612,000 296,000
———– ———–
The following information is available.
(1) At 1 July 2015 Shed had a debit balance of $11,000 on retained earnings.
(2) In fixing the bid price for the shares of Shed, Hut valued the land at $90,000. All Shed’s
plant was acquired since 1 July 2015.
(3) The inventory of Shed includes goods purchased from Hut for $16,000. Hut invoiced those
goods at cost plus 25%.
(4) The fair value of non-controlling interest on acquisition was $50,750. On 31 December 2016
goodwill is valued at $52,050.
Required:
Prepare the consolidated statement of financial position of Hut as at 31 December 2016.
(15 marks)
Question 37 HOLDING
Holding acquired 18 million of Subside’s equity shares on 1 January 2016 at a cost of $10 per share.
Holding’s accounting year end is 30 September; the year-end of Subside prior to its acquisition had
been 30 June. In order to facilitate the consolidation process Subside has changed its year end to 30
September and prepared its financial statements for the 15 months period to 30 September 2016. The
following are the statements of profit or loss of both companies:
Holding Subside
12 months to 15 months to
30 September 30 September
2016 2016
$m $m
Revenue 350 280
Cost of sales (200) (170)
Gross profit 150 110
Operating expenses (72) (35)
Interest payable (10) (5)
Dividend from Subside 15 –
Profit before tax 83 70
Income tax expense (22) (10)
_____ _____
Profit after tax 61 60
_____ _____
Dividends – final payable (25)
– final paid (15 September 2016) (20)
_____ _____
The share capital and reserves of Subside at 30 June 2015 were:
$m $m
Share capital ($1 shares) 24
Reserves:
Retained earnings 64
Revaluation surplus 20 84
_____ _____
108
_____
The following information is relevant:
(i) In the post-acquisition period Holding sold goods to Subside at a price of $30 million.
Holding had marked up the cost of these goods by 25%. One third of these goods were still
held in inventory by Subside at 30 September 2016.
(ii) The revaluation surplus of Subside relates to land carried at its fair value. It was last revalued
on 30 June 2015. At the date of acquisition the value of the land had increased by a further $4
million.
(iii) The only other fair value adjustment that is required in respect of the acquisition is in relation
to the plant and equipment of Subside. The details of this are:
30 June 2015
$m
Cost on 1 July 2013 100
Depreciation (2 years) (40)
___
Carrying amount 60
___
The plant is being depreciated over a 5-year life using the straight-line method. This is in line
with group policy. The cost of sales expense of Subside contains an amount of $25 million in
respect of depreciation on the plant for the 15 months to 30 September 2016. The
replacement cost of the type of plant used by Subside has increased dramatically since it was
acquired and Holding estimated that the fair value of Subside’s plant at the date of acquisition
was $90 million. The estimate of its remaining life was unaltered.
(iv) Subside’s business activities are not seasonal in nature and therefore it can be assumed that
profits, and related dividends, accrued evenly throughout the 15 month period to 30
September 2016. Dividends paid out of pre-acquisition profits are to be treated as income and
should not be deducted from the cost of acquiring the shares in the subsidiary.
(v) Non-controlling interest is valued at the proportionate share of the subsidiary’s identifiable
net assets. The value of goodwill was $42 million at 30 September 2016. Any impairment
should be treated as an operating expense.
Required:
(a) Calculate the consolidated goodwill in respect of the acquisition of Subside. (8 marks)
(b) Prepare the consolidated statement of profit or loss of Holding for the year to 30
September 2016. (17 marks)
(25 marks)
Question 38 HALEY
The draft statements of financial position as at 31 December 2016 of three companies are set out below:
Haley Socrates Aristotle
$000 $000 $000
Assets
Non-current assets
Tangible assets 300 100 160
Investments at cost 18,000 shares in Socrates 75 – –
18,000 shares in Aristotle 30 – –
Current assets 345 160 80

—— —— ——
750 260 240
—— —— ——
Equity and liabilities
Share capital ($1 shares) 250 30 60
Retained earnings 400 180 100
Non-current loans 100 50 80
—— —— ——
750 260 240
—— —— ——
The reserves of Socrates and Aristotle when the investments were acquired were $70,000 and $30,000
respectively. Goodwill in respect of the acquisition of Socrates has been fully impaired and a write
down in the investment in Aristotle of $3,000 is required.
Required:
Prepare the consolidated statement of financial position as at 31 December 2016.

(10 marks)
Question 39 HAMISH
Hamish holds 80% of the share capital of Shug (acquired on 1 February 2017) and 30% of the share
capital of Angus (acquired on 1 July 2016).
A director of Hamish has been appointed to the board of Angus to take an active part in the
management of that company.
Hamish had no other investments, and none of the companies has any preferred capital.
The draft statements of profit or loss for the year ended 30 June 2017 are set out below:
Hamish Shug Angus

$000 $000 $000
Revenue 12,614 6,160 8,640
Operating expenses (11,318) (5,524) (7,614)
——— ——– ——–
Operating profit 1,296 636 1,026
Dividends received 171 – –
——— ——– ——–
1,467 636 1,026
Income tax (621) (275) (432)
——— ——– ——–
Profit after taxation 846 361 594
——— ——– ——–
Statement of changes in equity (extract)
Dividends paid 500 120 250
Included in the inventory of Shug at 30 June 2017 was $50,000 for goods purchased from Hamish in
May 2017 which the latter company had invoiced at cost plus 25%. These were the only goods sold by
Hamish to Shug but it did make sales of $180,000 to Angus during the year. None of these goods
remained in Angus’s inventory at the year end.
Required:
Prepare a consolidated statement of profit or loss for Hamish for the year ended 30 June 2017.
There was no impairment of goodwill, or write down of the investment in associate, during the
year.
(10 marks)
Question 40 WATER
The draft statements of financial position of three companies as at 30 September 2016 are as follows:
Water Hydrogen Oxygen

$ $ $ $ $ $
Assets
Non-current assets
Tangible assets 697,210 648,010 349,400
Investments:
160,000 shares in Hydrogen 562,000 – –
80,000 shares in Oxygen 184,000 – –
———— ———— ———–
1,443,210 648,010 349,400
Current assets
Cash at bank and in hand 101,274 95,010 80,331
Trade receivables 385,717 320,540 251,065
Inventory 495,165 388,619 286,925
———— ———— ———–
982,156 804,169 618,321
———— ———— ———–
2,425,366 1,452,179 967,721
———— ———— ———–
Shareholder’s equity
Share capital ($1 shares) 600,000 200,000 200,000
Retained earnings 1,050,000 850,000 478,000
———— 1,650,000 ———— 1,050,000 ———– 678,000
Long-term liabilities
Loan notes 400,000 150,000 100,000
Current liabilities
Trade payables 375,366 252,179 189,721
———— ———— ———–

2,425,366 1,452,179 967,721
———— ———— ———–
You are given the following additional information.
(1) Water purchased the shares in Hydrogen on 13 October 2011 when the balance on retained
earnings was $500,000.
(2) The shares in Oxygen were acquired on 11 May 2011 when retained earnings stood at
$242,000.
(3) The following dividends have been declared but not accounted for before the year end.
$000
Water 65
Hydrogen 30
Oxygen 15
(4) Included in the inventory figure for Oxygen is inventory valued at $20,000 which had been
purchased from Water at cost plus 25%.
(5) Goodwill in respect the acquisition of Hydrogen has been fully impaired at 30 September
2015. The recoverable amount of the investment in Oxygen exceeds its carrying value at 30
September 2016. Non-controlling interest is valued at the proportionate share of the
identifiable net assets.
(6) On 30 September 2016 Hydrogen made a bonus issue of one equity share for every share
held. This had not been reflected in the statement of financial position.
(7) Included in the current liabilities figure of Water is $18,000 payable to Oxygen, the amount
receivable being recorded in the receivables figure of Oxygen.
Required:
Prepare the consolidated statement of financial position and notes for Water as at 30 September
2016.
(16 marks)
Question 41 CORFU
Corfu holds 80% of the equity share capital of Zante (acquired on 1 February 2017) and 30% of the
equity share capital of Paxos (acquired on 1 July 2016).
A director of Corfu has been appointed to the board of Paxos to take an active part in the management
of that company.
Corfu had no other investments, and none of the companies has any preferred capital.
The draft statements of profit or loss for the year ended 30 June 2017 are set out below:
Corfu Zante Paxos
$000 $000 $000
Revenue 12,614 6,160 8,640
Operating expenses (11,318) (5,524) (7,614)
——— ——– ——–
Operating profit 1,296 636 1,026
Dividends received 171 – –
——— ——– ——–
1,467 636 1,026
Income tax (621) (275) (432)
——— ——– ——–
Profit after taxation 846 361 594
——— ——– ——–
Dividends paid (500) (120) (250)

——— ——– ——–
Included in the inventory of Zante at 30 June 2017 was $50,000 for goods purchased from Corfu in
May 2017 which the latter company had invoiced at cost plus 25%. These were the only goods sold by
Corfu to Zante but it did make sales of $180,000 to Paxos during the year. None of these goods
remained in Paxos’s inventory at the year end.
Required:
Prepare a consolidated profit or loss statement for Corfu for the year ended 30 June 2017.
(Ignore goodwill.).
(10 marks)
Question 42 KANE
Kane holds investments in two other entities, Vardy and Rooney. The statements of financial position
of the three entities at 31 March 2017 were as follows:
Kane Vardy Rooney

$000 $000 $000
ASSETS
Non-current assets:
Property, plant and equipment (Note 1) 135,000 100,000 110,000
Investments (Notes 1 and 2) 139,000 15,000 Nil
––––––– ––––––– –––––––
274,000 115,000 110,000
––––––– ––––––– –––––––
Current assets:
Inventories (Note 4) 45,000 32,000 27,000
Trade receivables (Note 5) 50,000 34,000 35,000
Cash and cash equivalents 10,000 4,000 8,000
––––––– ––––––– –––––––
105,000 70,000 70,000
––––––– ––––––– –––––––
Total assets 379,000 185,000 180,000
––––––– ––––––– –––––––
EQUITY AND LIABILITIES
Equity
Share capital ($1 shares) 120,000 80,000 60,000
Retained earnings 163,000 44,000 55,000
––––––– ––––––– –––––––
Total equity 283,000 124,000 115,000
––––––– ––––––– –––––––
Long-term borrowings 40,000 25,000 30,000
Deferred tax 20,000 8,000 10,000
––––––– ––––––– –––––––
Total non-current liabilities 60,000 33,000 40,000
––––––– ––––––– –––––––
Current liabilities:
Trade and other payables 30,000 22,000 20,000
Short-term borrowings 6,000 6,000 5,000
––––––– ––––––– –––––––
Total current liabilities 36,000 28,000 25,000
––––––– ––––––– –––––––
Total equity and liabilities 379,000 185,000 180,000
––––––– ––––––– –––––––
Note 1 – Kane’s investment in Vardy
On 1 April 2016 Kane purchased 60 million shares in Vardy for an immediate cash payment of $100
million. The retained earnings of Vardy at 1 April 2016 were $35 million.
It is the group policy to value the non-controlling interest in subsidiaries at the date of acquisition at fair
value. The fair value of an equity share in Vardy at 1 April 2016 was estimated at $1·70. This fair
value is considered by the directors of Kane to be an appropriate basis for measuring the non-
controlling interest in Vardy on 1 April 2016.
The terms of the business combination provide for the payment of an additional $15 million to the
former shareholders of Vardy on 31 March 2018. On 1 April 2016 Kane’s credit rating was such that it
could have borrowed funds at an annual finance cost of 8%. The statement of financial position of
Kane includes this investment at its original cost of $100 million.
The directors of Kane carried out a fair value exercise to measure the identifiable assets and liabilities
of Vardy at 1 April 2016. The following matters emerged:
 A property having a carrying value of $40 million (depreciable amount $24 million) had a fair
value of $60 million (depreciable amount $36 million). The estimated future economic life of
the depreciable amount of the property at 1 April 2016 was 30 years.
 Plant and equipment having a carrying value of $51 million had a fair value of $54 million.
The estimated future economic life of the plant at 1 April 2016 was three years.
The fair value adjustments have not been reflected in the individual financial statements of Vardy. In
the consolidated financial statements the fair value adjustments will be regarded as temporary
differences for the purposes of computing deferred tax. The rate of tax to apply to temporary
differences is 30%.
The goodwill arising on acquisition of Vardy has not suffered any impairment since 1 April 2016.
Note 2 – Kane’s investment in Rooney

On 1 October 2016 Kane paid $39 million for 30% of the equity shares of Rooney. This investment
gave Kane significant influence over Rooney. The retained earnings of Rooney on 1 October 2016
were $60 million. You can ignore any deferred taxation implications of the investment by Kane in
Rooney. The investment in Rooney has not suffered any impairment since 1 October 2016.
Note 3 – Vardy’s investment

Vardy’s investment is a strategic equity investment in Sigma – key supplier. This investment does not
give Vardy control or significant influence over Sigma. Sigma is not a joint venture for Vardy. The
investment in Sigma is classified as a financial asset at fair value through other comprehensive income
and on 1 April 2016 was included in the financial statements of Vardy at its fair value of $15 million.
The fair value of the investment in Sigma on 31 March 2017 was $17 million. In the tax jurisdiction in
which Vardy is located unrealised profits on the revaluation of equity investments are not subject to
current tax. Any such profits are taxed only when the investment is sold.
Note 4 – Intra-group sale of inventories

The inventories of Vardy and Rooney at 31 March 2017 included components purchased from Kane
during the year at a cost of $10 million to Vardy and $12 million to Rooney. Kane generated a gross
profit margin of 25% on the supply of these components. You can ignore any deferred tax implications
of the information in this note.
Note 5 – Trade receivables and payables

The trade receivables of Kane included $5 million receivable from Vardy and $4 million receivable
from Rooney in respect of the purchase of components (see Note 4). The trade payables of Vardy and
Rooney do not include any amounts payable to Kane. This is because on 29 March 2017 Vardy and
Rooney paid $5 million and $4 million respectively to Kane to eliminate the balances. Kane received
and recorded these payments on 2 April 2017.
Required:
Prepare the consolidated statement of financial position of Kane at 31 March 2017.

(25 marks)
Question 43 BERTIE
The following transactions took place at Bertie, a company reporting in dollars, in the year ended 31
December 2016:
(a) Sale of goods on credit on 1 October 2016 for £50,000. The customer paid on 3 December.
(b) Purchases of goods on credit for £60,000. The goods were received by Bertie on 15
December 2016 and the account had not been settled by the year end.
(c) An asset with a useful life of five years was purchased on 1 January 2016 for £200,000 cash.
(d) A long term loan of £800,000 was taken out with a bank on 3 December 2016 for the purpose
of improving the company’s working capital.
Relevant 2016 exchange rates are: $1 =

1 January £1.70
1 October £1.65
3 December £1.50
15 December £1.40
31 December £1.35
Required:
Show how each of the above transactions would be represented in the financial statements of
Bertie in the year ended 31 December 2016.
(8 marks)
Question 44 EPS
(a) Consolidated profit or loss for the year

2015 2016
$ $
Profit before tax
Consolidated 80,500 85,400
Taxation (28,000) (31,600)
Share of profit of associate 6,500 8,900
——— ———
59,000 62,700
——— ———
Attributable to:
Equity holders of the parent 55,500 58,800
Non-controlling interest (3,500) (3,900)
——— ———
59,000 62,700
——— ———
Capital structure
$
Equity shares (50 cent shares) 100,000
————
100,000
————
Required:
Calculate earnings per share for the year ended 31 December 2016 (with comparative).
(2 marks)
(b) Bonus issues

The consolidated profit or loss is as in part (a). Capital structure as in part (a), except that a
bonus issue was made on 1 February 2016 of one new bonus share for every four shares
already held, this issue is not reflected in the capital structure of part (a).
Required:
(2 marks)
(c) New shares to new shareholders
Equity capital at 30 September 2016: $100,000 (50 cent shares)
On 1 October 2016 the company issued 200,000 equity shares in order to acquire 90% of the
issued equity share capital of S.
Year 2016 Year 2015
Company S Company
Profit after tax $63,000 $20,000 $50,000
Required:
(2 marks)
(d) Rights issue
Profit after tax:
Year ended 31 December 2015 $40,000
Equity shares (before rights issue) 200,000 (50 cent shares)
On 1 October 2016 a rights issue was made of one share for every four held, at $3 per share.
The price quoted on the last day cum rights was $3.60.
Required:
(3 marks)
(e) Convertible loan notes
Equity shares in issue throughout the year: $100,000 (25 cent shares)
The company issued (in 2014) $100,000 8% loan notes convertible into equity shares on the
following alternative bases:
31 December 2019 $100 loan note for 140 shares
31 December 2020 $100 loan note for 120 shares
Profit after loan interest and tax:
Convertible loan interest expense:

Assume a marginal rate of tax of 33%.
Required:
Calculate basic and diluted earnings per share for the year ended 31 December 2016
(with comparatives). (3 marks)
(f) Options
Equity shares in issue: $100,000 (25 cent shares)
Options have been granted to directors and certain senior executives. These give the right to
subscribe for equity shares between 2019 and 2021 at 80 cents per share. Options were
available in respect of 50,000 shares during the year ended 31 December 2016.
The average fair value of one share during the year was $1.00 per share.
Profit after tax for 2016 was $50,000.
Required:
Calculate basic and diluted earnings per share for the year ended 31 December 2016.
(2 marks)
(14 marks)
Question 45 AZ
For entities that are engaged in different businesses with differing risks and opportunities, the
usefulness of financial information concerning these entities is greatly enhanced if it is supplemented
by information on individual business segments. It is recognised that there are two main approaches to
segment reporting. In the “risk and returns” approach segments are identified on the basis of different
risks and returns arising from different lines of business and geographical areas. In the “managerial”
approach segments are identified corresponding to the entity’s internal organisation structure.
Required:
(a) Explain why the information content of financial statements is improved by the
inclusion of segmental data on individual business segments. (5 marks)
(b) Discuss the advantages and disadvantages of analysing segmental data using:
(i) the “risk and return” approach; (4 marks)
(ii) the “managerial” approach. (3 marks)
(c) AZ, a listed entity, operates in the global marketplace.

(i) The major revenue-earning asset is a fleet of aircraft which are registered locally
and its other main source of revenue comes from the sale of holidays. The directors
are unsure how to identify business segments. (3 marks)
(ii) The company also owns a small aircraft manufacturing plant which supplies aircraft
to its domestic airline and to third parties. The preferred method for determining
transfer prices for these aircraft between the group companies is market price, but
where the aircraft is of a specialised nature with no equivalent market price the
companies negotiate a price for the aircraft. (2 marks)
(iii) The company has incurred an exceptional loss on the sale of several aircraft to a
foreign government. This loss occurred due to a fixed price contract signed several
years ago for the sale of second hand aircraft and resulted through the fluctuation of
the exchange rates between the two countries. (3 marks)
(iv) During the year the company decided to discontinue its holiday business due to
competition in the sector. This plan had been approved by the board of directors
and announced in the press. (3 marks)
(v) The company owns 40% of the equity shares of Eurocat, an unlisted company
which specialises in the manufacture of aircraft engines and has operations in China
and Russia. The investment is accounted for by the equity method and it is
proposed to exclude the company’s results from segment assets and revenue.
(2 marks)
Required:
Discuss the implications of each of the above points for the determination of the
segmental information required to be prepared and disclosed under relevant
International Financial Reporting Standards.
Note: The mark allocation is shown against each point.

(25 marks)
Question 46 TAB
TAB, a UK company, has recently acquired four large overseas subsidiaries. These subsidiaries
manufacture products which are totally different from those of the parent company. The parent
company manufactures paper and related products whereas the subsidiaries manufacture the following:
Product Location
Subsidiary 1 Car products Spain
Subsidiary 2 Textiles Korea
Subsidiary 3 Kitchen utensils France
Subsidiary 4 Fashion garments Thailand
The directors have purchased these subsidiaries in order to diversify their product base but do not have
any knowledge on the information which is required in the financial statements, regarding these
subsidiaries, other than the statutory requirements. The directors of the company realise that there is a
need to disclose segment information but do not understand what the term means or what the
implications are for the published financial statements.
Required:
(a) Explain to the directors the purpose of segment reporting of financial information.
(4 marks)
(b) Explain the criteria which should be used to identify the separate reportable segments.
You should illustrate your answer by reference to the above information. (6 marks)
(c) State which information should be disclosed in financial statements for each segment.
(7 marks)
(17 marks)
Question 47 DAWES (IV)
On 20 September 2016 Dawes sold its loss-making engineering operation to Manulite. Dawes accounts
for its operations on a divisional basis, but they are not separate legal entities. The sale was completed
at an agreed value of $30 million. Associated disposal costs were $2 million. The book values of the
division’s net assets at the date of sale were $46 million. The revenues and post-tax losses for the
period 1 October 2016 to the date of sale were $22 million and $4.5 million respectively.
The engineering division is currently being sued for damages relating to a faulty product. Independent
engineering consultants have prepared a report which confirms that the product was faulty, but this was
partly due to a component that was manufactured by Holroyd as a sub-assembly. The damages and
costs are estimated at $5 million and the level of contributory negligence of Holroyd is considered to be
40%. The directors of Dawes believe that, as the division has been sold, there is no need to provide for
the claim damages. Dawes operates in a country where a limited liability company and its shareholders
are separate legal persons.
The above amounts are material in the context of the financial statements of Dawes.
Required:
Advise the directors on the correct treatment of the disposal of the engineering division and the
claim for damages. Your answer should be supported by appropriate calculations.
(6 marks)
Question 48 ETERNITY
Eternity is finalising its accounts for the year ended 31 December 2016. The following events have
arisen since the year and the financial director has asked you to comment on the final accounts:
(1) At 31 December 2016 trade receivables included a figure of $250,000 in respect of Wico. On
8 March 2017, when the debt was $200,000, Wico went into receivership. Correspondence
with the receiver indicates that no dividend will be paid to unsecured creditors.
(2) On 15 March 2017 Eternity sold its former head office building for $2.7 million. At the year
end the building was unoccupied and carried at a value of $3.1 million.
(3) Inventories at the end of the year included $650,000 of a new electric tricycle. In January
2017 the EU declared the tricycle to be unsafe and prohibited it from sale. An alternative
market is being investigated, although the current price is expected to be cost less 30%.
(4) Future, an overseas subsidiary was nationalised in February 2017. The overseas authorities
have refused to pay any compensation. Future’s net assets are valued at $200,000 at the year
end.
(5) Freak floods caused $150,000 damage to a branch of Eternity in January 2017. The branch
was fully insured.
(6) On 1 April 2017 Eternity announced a one-for-one rights issue aiming to raise $15 million.
Required:
Comment on the accounting treatment of the matters described above.

(12 marks)
Question 49 RP GROUP
Related party relationships and transactions are a normal feature of business. Entities often carry on
their business activities through subsidiaries and associates and it is inevitable that transactions will
occur between group companies. Until relatively recently the disclosure of related party relationships
and transactions has been regarded as an area which has a relatively low priority. However financial
scandals have emphasised the importance of an accounting standard in this area.
Required:
(a) Explain why the disclosure of related party relationships and transactions is an
important issue. (6 marks)
(b) Discuss the view that small companies should be exempt from the disclosure of related
party relationships and transactions on the grounds of their size. (4 marks)
(c) The RP Group, merchant bankers, has a number of subsidiaries, associates and joint ventures
in its group structure. During the financial year to 31 October 2016, the following events
occurred:
(i) The company agreed to finance a management buyout of a group company, AB. In
addition to providing loan finance, the company has retained a 25% equity holding
in the company and has a main board director on the board of AB. RP received
management fees, interest payments and dividends from AB. (6 marks)
(ii) On 1 July 2016, RP sold a wholly owned subsidiary, X, to Z, a listed entity. During
the year RP supplied X with second hand office equipment and X leased its factory
from RP. The transactions were all contracted for at market rates. (4 marks)
(iii) The retirement benefit scheme of the group is managed by another merchant bank.
An investment manager of the group retirement benefit scheme is also a non-
executive director of the RP Group and received an annual fee for his services of
$25,000 which is not material in the group context. The company pays $16 million
per annum into the scheme and occasionally transfers assets into the scheme. In
2016, non-current tangible assets of $10 million were transferred into the scheme
and a recharge of administrative costs of $3 million was made. (5 marks)
Required:
Discuss whether each of these events should be disclosed in the financial statements of
the RP Group under IAS 24 “Related Party Disclosures”. (15 marks)
(25 marks)
Question 50 EPTILON
Eptilon is listed in a jurisdiction that allows entities to file financial statements that are prepared under
either local accounting standards or International Financial Reporting Standards (IFRSs). The stock
exchange on which Eptilon is listed does not require any interim financial statements and Eptilon does
not currently produce such statements. Eptilon is seeking a listing on another stock exchange that also
allows financial statements to be filed that are prepared under IFRSs but would not accept financial
statements that are prepared under the local accounting standards that are relevant to Eptilon. Eptilon
wishes to adopt IFRSs for the first time in its financial statements for the year ending 31 December
2016. The Chief Executive Officer has two questions regarding the adoption of IFRSs in 2016:
(1) I am aware that the adoption of IFRSs will require us to make a number of changes to our
existing accounting practices and that the IASB has issued IFRS 1 to detail the procedures
that need to be undertaken when adopting IFRSs for the first time. I know very little about
this standard and need a summary of what IFRS 1 requires us to do together with an
indication of any practical difficulties this will give us. Please provide me with this
information addressing issues concerning the annual financial statements. (12 marks)
(2) One of the most sensitive aspects of the change we are making is the future need to disclose
transactions with certain related parties. Please outline the disclosures that are needed and the
parties that the disclosures apply to. (7 marks)
Required:
Draft a reply that answers the questions raised by the Chief Executive Officer. Your answer
should refer to specific International Financial Reporting Standards where relevant.
(19 marks)
Answer 1 IASB
(a) Objectives of IASB
 To develop, in the public interest, a single set of high quality, understandable and
enforceable global accounting standards that require high quality, transparent and 2
comparable information in financial statements to help users make economic
decisions.
 To promote the use and rigorous application of those standards. 1
 To take account of the needs of a range of sizes and types of entity in diverse 1
economic settings.
 To promote and facilitate adoption of International Financial Reporting 1

Standards (IFRSs), through the convergence of national accounting standards and
IFRSs.
(b) Discussion Paper (DP) v Exposure Draft (ED)
 The DP is an optional stage in the IASB’s due process, although the IASB will 2
normally adopt a DP as the first stage in a new project, before the ED stage. Due
process in the development of an IFRS requires the publication of an ED in
accordance with IASB’s Constitution.
 The DP concentrates on the issues to be addressed by a proposed IFRS whereas 2

the ED includes the proposed IFRS and transitional provisions. The ED
summarises the Board’s considerations in a separate “Basis for Conclusions”.
 Both documents are issued for public comment for a period which is normally 1½
four months.
 The issue of a DP requires only a simple majority of the Board Members present 2
at a meeting attended by 60% or more of the Board Members. An ED requires a
“super majority” of members to vote in favour of the document. (A super ————
majority is 10 of the 16 members or 9 members if there are15 or fewer members.) max 4
————
(c) Steps taken by IASB
To ensure consistent interpretation of IFRSs
 On-going comparability and improvements projects – resulting in the revision of

International Financial Reporting Standards that had “alternative accounting
treatments”. These alternatives have now been eliminated and disclosure
requirements reviewed in the context of “The Framework”.
 Publication of Discussion Papers – to make IASB’s intentions clear. 1 each,

max 3
 Issue of a newsletter “IASB update” – providing a staff summary of the tentative ————
decisions reached at IASB meetings.
 Issue of interpretations by the International Financial Reporting Standards

Interpretations Committee (IFRS IC). ————
10
————
Answer 2 FAITHFUL REPRESENTATION
(a) Possible reasons for omitting assets and liabilities from a statement of financial position
 Companies are concerned to maintain low gearing ratios. The reasons for this are
that it is felt that brokers and analysts favour companies with relatively low levels of
gearing. “Off balance sheet finance” schemes have been designed to conceal
information about the amount of debt finance raised by a company.
Such schemes can increase the borrowing capacity of a company either by avoiding
debt covenants or by misleading investors about the true level of gearing.
 Accounting ratios such as return on capital employed can be improved if certain

assets in their development stage can be kept off the statement of financial position
until they produce a higher level of profit. Once the development stage is complete,
the assets and related borrowing can then be brought into the statement of financial
position.
 It has been argued that stock market perceptions of the likelihood of a rights issue
can be affected by the level of borrowing of a company. If a listed company has
high levels of borrowing, then the likelihood of finance being raised by a rights
issue is perceived to be higher and this is said to adversely affect the share price.
“Off balance sheet” transactions can lower the stated level of borrowing and the
expectations of a rights issue.
 Companies have sometimes used “special purpose entities” (SPEs) whereby assets
and liabilities are acquired in an entity that is in effect controlled by the reporting
company but does not meet the legal definition of a subsidiary. A reason why a
company may choose to do this is because the subsidiary is loss making and these
losses would probably have to be reported as post-acquisition losses in the group
accounts.
 Many “off balance sheet finance” schemes are entered into for genuine commercial
reasons. For example it may be a means of sharing the risk in a joint venture
between a merchant bank and a company. The merchant bank may bear most of the
financing risk and the company may bear most of the operating risk. Financial
markets now allow companies to protect themselves from certain risks, and such
transactions are not undertaken to mislead users of financial statements but because
they are judged to be in the best interests of the company.
(b) Need for substance over form
Since the 1980s, many complex arrangements have been developed by companies in various
countries which if they were to account for in accordance with their legal form, would result
in financial statements that did not reflect the commercial effect of the arrangement. Rapid
innovation in the financial markets and new arrangements for financing assets has led to
accounting practices that conceal the true nature of the transactions.
These developments raised questions about the nature of assets and liabilities and when they
should be included in the statement of financial position. The concept of substance over form
is fundamental to addressing the serious concerns raised about “creative accounting”
practices:
 Such practices conflict with the fundamental aims and objectives of financial
statements. Users of financial statements must be able to appreciate the full effect
of such transactions on the financial affairs of the company but cannot if there is
insufficient information about them.
 Significant (“bad”) press comment about the use of such arrangements brings into
question the credibility of standard setters.
 Such schemes raise doubts about the comparability, consistency and truth and
fairness of financial statements. If financial statements and related notes do not
allow proper assessment of a company’s results, then a significant problem exists.
(c) Transactions
(i) Sale and leaseback
Bill has the option of buying the land back at any time in the next five years but is not
compelled to do so, and therefore is protected from any collapse in the value of the land
below $20 million. This risk has therefore been transferred to Tail in return for the
commission of 1% above the current bank base rate. However, Bill has retained the benefits
of ownership and can also benefit from any increase in the value of the land by exercising its
option. At the time of the agreement, both parties must have anticipated that the option would
be exercised. Bill would presumably not sell the land at below the current market price. Tail
must have anticipated that any profit from the contract would be derived from the receipt of
the “commission” payment from Bill. It is unlikely that the land value would fall below one
third of its present value and therefore the degree of risk transferred to Tail is quite minimal.
The essence of the contract is effectively a loan of $20 million secured on the land held by
Bill. Accounting practice would dictate that the commercial substance of the transaction
reflected a financing deal rather than the legal form of a sale.
IFRS 15 Revenue from Contracts with Customers backs up this view by stating that if an
entity has a right or obligation (a forward or call option) to repurchase an asset then the
customer (buyer) does not obtain control of the asset as the customer is limited in its ability to
direct the use of the asset.
(ii) Consignment inventory
The main problem surrounding this example is the determination of the substance of the
agreement. The accountant has to determine whether Sprake has bought the cars or whether
they are on loan from Grey.
There are certain factors which point towards the treatment of the cars as inventory of Sprake.
Sprake has to pay a monthly rental fee of $100 per car and after four months has to pay for the
cars if they are unsold. This could be regarded as a financing agreement as Sprake is
effectively being charged interest by Grey which is varying with the length of time for which
Sprake holds the inventory. Sprake is also bearing any risk of slow movement of the cars.
The purchase price of the car is fixed at the price when the car was first supplied. Thus any
price increases in the product are avoided by Sprake which would indicate that there is a
contract for the sale of goods. Sprake has to insure the cars and is partially suffering some of
the risks of ownership of the vehicles.
Grey cannot require Sprake to return the inventory to them and further, Sprake is effectively
bearing the obsolescence risk as a penalty is charged if Sprake returns the inventory to Grey.
In conclusion, the above factors indicate that the inventory of cars is an asset of Sprake at the
time of their delivery and should be accounted for accordingly.
Again, IFRS 15 requires the evaluation of a contract to identify which party has control of an
asset at a particular point in time.
Answer 3 FOREST
(a) Importance
In order to be useful, information contained in financial statements must be relevant and

faithfully represent the events and transactions that have occurred in the period. This can only
be achieved if the substance of transactions is recorded. If this did not happen the financial
statements would not represent faithfully the transactions and other events that had occurred.
Although there are many instances where there are genuine commercial reasons for contracts
and transactions adopting the legal form that they do (e.g. to create a secure legal title to
assets), equally the legal form is often used to achieve less desirable purposes. In general
these amount to manipulating the financial statements to create a favourable impression. The
typical outcomes of such manipulation are:
– the omission of assets, and particularly liabilities, from the statement of financial
position;
– improved profits and profit smoothing;
– improvements in other performance measures such as earnings per share, liquidity
ratios, profitability ratios and gearing.
Clearly such effects are not helpful to users of financial statements and thus it is important
that the substance of a transaction should be recorded in order to avoid the above distortions.
(b) Transactions
The following important features are often found in transactions or arrangements where the
substance may be different to the legal form. These features need to be fully understood and
investigated in order to determine the substance of a transaction:
(i) Separation of ownership and beneficial use
The separation of legal title from the benefits and risks related to an asset has been used to
avoid assets, and often their related financing, from being recognised in the statement of
financial position. Where an asset is “sold” but the selling company still substantially enjoys
the risks and rewards of ownership, then it should remain an asset of the company. This is the
principle used in IAS 17 Leases to record finance leases. Often when the substance of an
agreement is applied to transactions it will have a very different effect on the statement of
financial position than if the legal form is recorded. For example an asset that is “sold” and
leased back for the remainder of its useful life is in substance a financing arrangement and not
a “sale” at all. The asset should remain in the statement of financial position and the
“proceeds” should be treated as a loan.
(ii) Linking of transactions
A common arrangement is to link a series of transactions. It is not always obvious when

transactions are linked, but it would be difficult to appreciate the commercial effect without
considering such transactions as a “whole”. Inventories may be “sold” to a third party. A
condition of the sale is that there is an option giving the selling company the right to buy back
the inventory at a future date. This is often at a predetermined value which is designed to
give the purchasing company what is in substance a lenders return. When all of the “linked”
transactions are considered together it becomes apparent that this is again a financing
arrangement and should be recorded as such. This type of transaction is commonly referred
to as a “sale and repurchase”, with each party to the transaction having either an option to
repurchase or resell. The contract would be worded in such a way that one of the parties
would invoke their option and the goods would legally return to the original seller.
The “seller” would not recognise a sale from the transaction nor would they derecognise the
asset but would be required to recognise a liability to the other party, emphasising that in
substance this is a financing transaction.
(iii) Sale price at other than fair value
Where assets are sold at prices below or above their fair values there is likely to be related (or
linked) transactions that will explain the reason for it. A selling price above fair value is
almost certain to be a form of loan which will be linked to future transactions that will affect
its repayment. A selling price below fair value is likely to be a way of deferring the profit on
sale. This may be affected by reducing a future item of expense. For example a company
could “sell” some plant to a third party below its fair value. The “sale” is linked to an
agreement to lease the plant back in future years at a rental below commercial rates. In effect
the profit forgone on the sale is being used to reduce future rental payments, thus the profit on
the sale is being spread over several accounting periods rather than being reported in the year
of sale (a form of profit smoothing).
(c) Sale of timber
(i) Legal form
Forest – Profit or loss year to 31 March
2015 2016 2017 Total

$000 $000 $000 $000
Revenues 15,000 nil 25,000 40,000
Cost of sales (12,000) nil (19,965) (31,965)
______ ______ ______ ______
Gross profit 3,000 nil 5,035 8,035
______ ______ ______ ______
The cost of sales in the year 2017 is the original selling price of $15 million plus compound
interest at 10% for the previous three years (see below).
Forest – Statement of financial position as at 31 March
2015 2016 2017

$000 $000 $000
Inventory nil nil nil
Loan nil nil nil
(ii) Substance
Forest – Profit or loss year to 31 March
2015 2016 2017 Total

$000 $000 $000 $000
Revenues nil nil 25,000 25,000
Cost of sales nil nil (12,000) (12,000)
______ ______ ______ ______
Gross profit nil nil 13,000 13,000
Interest
(accrued @ 10%) (1,500) (1,650) (1,815) (4,965)
______ ______ ______ ______
Profit/(loss) (1,500) (1,650) 11,185 8,035
______ ______ ______ ______
Forest – Statement of financial position as at 31 March
2015 2016 2017

$000 $000 $000
Inventory 12,000 12,000 nil
Loan 15,000 15,000 15,000
plus accrued interest 1,500 3,150 4,965
______ ______ ______
19,965
Repaid 31 March 2017 (19,965)
______
nil
______
As can be seen from the figures in (i) if the legal form of the transaction is applied it results in
a spreading of the profit, some in the year to 31 March 2015 the rest in 2017. The
arrangement could have been made such that some of the “sale” to the bank was made in
2016 thus reporting a profit in all three years. Also no inventory or loans appear in the
statement of financial position; this improves many ratios, particularly gearing.
In contrast (ii) applies the substance of the transaction and (ignoring Forest’s other
transactions) this results in “losses” in 2015 and 2016 and a large profit in 2017; there is no
profit “smoothing”. It also shows an interest charge, which in (i) is “lost” in the cost of sales
figure. In addition both the inventory and the loan (including accrued interest) appear in the
statement of financial position. Note both methods eventually report the same profit.
Answer 4 MELD
(a) Statement of profit or loss and other comprehensive income
$
Revenue 472,800
Cost of sales and expenses (W) (360,676)
–––––––
Operating profit 112,124
Interest payable and similar charges (15,000)
–––––––
Profit before tax 97,124
Tax (28,800)
–––––––
Profit for the year 68,324
Other comprehensive incomes

Gain on revaluation (28,800 – (19,200 – 7,200)) 16,800
–––––––
Total comprehensive income for the year 85,124
–––––––
(b) Statement of changes in equity
Share Revaluation Retained Total

capital surplus earnings
$ $ $ $
At 1 May 2016
As previously stated 240,000 48,000 168,000 456,000
Prior year adjustment (14,400) (14,400)
––––––– ––––––– ––––––– –––––––
240,000 48,000 153,600 441,600
Total comprehensive
income for year – 16,800 68,324 85,124
Dividends (21,600) (21,600)
Transfer retained earnings – (3,360) 3,360 –
––––––– ––––––– ––––––– –––––––
At 30 April 2017 240,000 61,440 203,684 505,124
––––––– ––––––– ––––––– –––––––
WORKING
Cost of sales and expenses
$
Per question 376,800
Less Interest (15,000)
Goodwill impairment 576
Error re development costs
Amortisation (4,800)
Expenditure incurred 3,100
———–
360,676
———–
Answer 5 FRESNO GROUP
Statement of changes in equity for the year ended 31 January 2017
Share Share Revaluation Retained

capital premium surplus earnings Total
$m $m $m $m $m
Brought forward 350 55 215 775 1,395
Total comprehensive 375 165 540
income for the period (W)
Dividend (15) (15)
Issue of share capital 150 450 600
Transfers
On asset sold in the period (54) 54 –
Depreciating assets (9) 9 –
––– ––– ––– ––– –––––
Carried forward 500 505 527 988 2,520
––– ––– ––– ––– –––––
WORKING – Statement of total comprehensive income

$m
Profit before taxation – continuing operations 300
Provision for loss on discontinued operation (45)
____
Profit before taxation 255
Taxation (90)
____
Profit for the year 165
Revaluation surplus 375
____
Total comprehensive income 540
____
Answer 6 LEONARD
Profit or loss for the year ended 30 June 2017

2017 2016
As restated
$000 $000
Sales 101,260 97,250
Cost of sales (W1) (55,740) (60,580)
——— ———
Gross profit 45,520 36,670
Administrative expenses (37,397) (31,260)
——— ———
Profit on before taxation 8,123 5,410
Tax on profit (3,141) (2,260)
——— ———
Profit for the year 4,982 3,150
——— ———
Statement of changes in equity – extract

Retained earnings
At 30 June 2016 $000
As previously stated 23,950
Prior year adjustment (W2) (450)
———
As restated 23,500
Retained profit for the year 4,982
Dividend (2,500)
———
At 30 June 2017 (26,162 – 180 (W3)) 25,982
———
WORKINGS
(1) Cost of sales 2017 2016
$000 $000
As previously 56,010 60,530
Less Amortisation (870) (450)
Add Expenditure in year 600 500
——— ———
As restated 55,740 60,580
——— ———
(2) Prior year adjustment (in statement of financial position at 30 June 2016)
Adjustment is the elimination of the $450,000 asset. This gives the figure for the prior year
adjustment in the statement of changes in equity (i.e. adjustment in opening balances for
current year).
(3) Statement of financial position at 30 June 2017
Adjustment is $180,000 asset to be eliminated.
Answer 7 KEY CHANGES
(a) Calculation of profit or loss on disposal
The profit or loss on the disposal of an asset is calculated as the difference between the net
sale proceeds and the carrying amount, whether carried at historical cost (less any write
downs) or at valuation. The reason for this approach to determining the profit or loss on the
disposal of an asset lies in the “balance sheet approach” to the recognition of gains and losses
set out in the IASB’s “Framework”. Recognition of income and expenses (including gains
and losses) results in increases and decreases in equity (other than dividends and new share
issues). Consequently once an asset has been revalued in the statement of financial position,
any subsequent transactions must be based on this value.
(b) Criteria
(i) Recognition
For an item to be recognised in the financial statements it must:
 meet the definition of an element of the financial statements;

 be probable that any future economic benefit associated with the item will flow to or
from the entity;
 be measured reliably.
Thus, before an item can appear in profit or loss it must meet the definition of an “income” or
an “expense”. Also a transaction or event must have occurred which has resulted in a gain or
loss, and this transaction must be capable of measurement. Where a change in assets is not
offset by an equal change in liabilities a gain or loss will result (unless the change relates to
the owners of the entity).
(ii) Profit or loss or other comprehensive income
All gains and losses must be recognised in the statement of profit or loss and other
comprehensive income. Gains that are earned and realised are recognised in profit or loss;
those earned but not realised are recognised in other comprehensive income. The same gains
and losses cannot be recognised twice. A revaluation gain on a non-current asset should not
be recognised a second time when the asset is sold. This latter point explains the logic of the
above definition.
For a gain to be earned there must be no material event to be performed. For example, the
performance under a contract must have been completed. For a gain to be realised, a
transaction which is measurable must have occurred, or a “capital” item (e.g. non-current
asset or loan) must have been sold/redeemed resulting in cash or cash equivalents, or a
liability must have ceased to exist. Thus other comprehensive income recognises those items
which do not meet the above “realisation” criteria.
Some items that have initially been recognised in other comprehensive income are later
reclassified to profit or loss when the relevant asset or liability is de-recognised. Items that
are reclassified include:
 gains/losses on cash flow hedges; and

 cumulative exchange differences in respect of foreign subsidiaries.
Other items that have initially been recognised in other comprehensive income cannot be
reclassified at a later date. Items that are not reclassified include:
 revaluation surplus; and

 fair value differences in respect of financial assets classified as fair value through
other comprehensive income.
IFRS deals with reclassification (or not) on an item by item basis, there is no one specific rule
stating what will or will not be reclassified.
(c) Annual effects

Statement of Profit Other Revaluation
financial or loss comprehensive surplus
Year ended position income
31 December 2012
Cost 25,000
Depreciation (5,000) (5,000)
_____
Carrying amount 20,000
_____
31 December 2013
Cost 25,000
_____
Revaluation surplus 2,000 2,000 2,000
_____
_____
31 December 2014
Valuation 18,000
Depreciation (3,000) (3,000) (333)
_____ _____
(Note 1)
Carrying amount 15,000 1,667
_____
31 December 2015
Valuation 18,000
_____
Revaluation loss (4,000) (2,333) (1,667)
_____
(Note 2)
–
_____ _____
_____
31 December 2016
Valuation 8,000
Sale proceeds 8,500
_____
Profit on sale 500 500
_____
Notes:
(1) As the company wishes to maximise distributable profit a transfer from the revaluation
surplus to retained earnings of the difference in depreciation charge based on original
historical cost (16,000 ÷ 6 years = $2,667) and revalued amount (18,000 ÷ 6 years = $3,000)
will be made. If this amount were transferred to profit or loss it would contravene the rule
that amounts previously reported in other comprehensive income should not pass through
profit or loss.
(2) As there remains a revaluation surplus of $1,667 it is highly likely that this will be utilised
first in the fall in value of the asset with the remaining loss of $2,333 being charged against
profit or loss.
Answer 8 TELECAST INDUSTRIES
(a) Framework criteria
The Framework approaches income and expense recognition from a “balance sheet
perspective”. The definition of income encompasses both revenue and other gains, whilst that
of expense includes losses. Recognition of gains and losses takes place when there is an
increase or decrease in equity other than from contributions to, or withdrawals from, capital.
Thus increases in economic benefits in the form of inflows or enhancements of assets or
decreases in liabilities result in income or gains; and decreases in assets or increases in
liabilities results in expenses or losses.
Although the definitions identify the essential features of assets and liabilities they do not
specify the criteria that need to be met before they are recognised. Recognition is the process
of incorporating in the financial statements an item that meets the definition of an element
(e.g. an asset or a gain). It involves both a description in words and an assignment of a
monetary amount. An item meeting the definition is recognised if:
 it is probable that any future economic benefit associated with the item will flow to
or from the entity; and
 the item has a cost or value that can be measured (in monetary terms) with reliability.
The above are generally regarded as tests of realisation or of being earned. Failure to
recognise such items in the financial statements is not rectified by disclosures in the notes or
explanatory material. However such treatment may be appropriate for elements meeting the
definitions of an item, but not its recognition criteria (e.g. a contingency).
(b) Telecast Industries (TI)
(i) Warmer Cinemas
TI has given the licence to show the film to Warmer cinemas for a period of six months. The
performance obligation is the granting of the licence to show the film. The licence in effect
gives TI the right to sales (usage) based royalties once the ticket sales occur.
TI will recognise revenue at a point in time which is based on the ticket sales achieved by
Warmer Cinemas. Therefore TI should accrue for 15% of Warmer Cinemas box office
revenues from this film for the period 1 July 2016 to the year end of 30 September 2016. The
only problems here would be prompt access to the relevant information from Warmer
Cinemas and the possibility, which is probably remote, of a bad debt.
(ii) Big Screen
TI identifies that the performance obligation is the granting of the licence to show the film as
many times as the customer wishes in the six month period. As TI will not be making any
amendments to the recording the granting of the licence is static and so TI concludes that the
nature of the promise is the transfer of the licence giving the customer the rights to show the
film from the point in time that the licence was granted. Therefore, the promise to grant the
licence is a performance obligation satisfied at a point in time. TI will therefore recognise the
revenue on the granting of the licence in full and include the $10,000 fee as revenue in year
ended 30 September 2016.
(iii) Global satellite
The contract with Global Satellite is very similar to the one with Big Screen. The
performance obligation is the granting of the licence to Global Satellite. TI has performed
that obligation and has no intention to change the film, so revenue will be recognised at a
single point in time. As the obligation has been performed in the year ended 30 September
2016, revenue will be recognised in this period. However, although Global Satellite will be
paying a total of $3 million that payment will be over a three-year period and therefore the
contract includes a financing element. The revenue recognised will be the discounted amount
of the $3 million cash flow with the difference being recognised over the three-year period as
interest income.
Answer 9 MESON
General considerations for revenue recognition
IFRS 15 Revenue from Contracts with Customers prescribes the principles to be considered when
identifying when and how much revenue should be recognised. The basic principle of IFRS 15 is that
revenue should only be recognised once the selling entity has performed its obligation regarding the
sale of goods or services. Only when this obligation has been performed can revenue be recognised;
the obligation may be performed at a point in time or over a period of time; clearly this can affect the
timing of revenue recognition (i.e. in which reporting period). Meson has a number of different types
of contract, each having its own performance obligation, which must be considered separately.
Having identified individual contracts, the performance obligations and the value of each component,
the transaction price will be allocated to components (when there is more than one obligation) and
revenue recognised when each obligation has been performed. Meson’s transactions relate to the sale
and licensing of software packages, software developments to customer order, maintenance and
franchise arrangements; the related cash flows will have no bearing on when and how much revenue is
recognised.
(a) Design and sale of software and the retailing of hardware
There are three distinct transactions that Meson needs to consider in the revenue recognition
process, bespoke software to order, “off-the-shelf” packages and computer hardware.
(1) Bespoke software to order
It is likely that Meson will take a period of time to ensure that the software is to the
customer’s specification, as it is being made to order. Presumably a contract exists and the
performance obligation is to construct and deliver the software to the customer. It is likely
that Meson will have priced each contract which appears to be stand-alone; so the main issue
is at what point in time should revenue be recognised or should it be recognised over a period
of time.
IFRS 15 states that revenue is to be recognised over a period of time if one of the following
criteria is met:
 The customer receives and consumes the benefits as the obligation is performed;
 The entity’s performance creates or enhances an asset that the customer controls; or
 The performance does not create an asset with an alternative use and the entity has
an enforceable right to payment for performance completed to date.
For bespoke software it is unlikely that the customer will receive the asset until it is complete.
The customer will not take control of the software until it is completed and Meson will
probably not have a right to payment until the software has been tested to the customer’s
specifications. As none of the three criteria are met Meson must recognise revenue at a single
point of time.
That point in time will be when the customer obtains control of the software. Until then
Meson will recognise the costs incurred as an inventory asset. Although the customer makes
stage payments this does not alter when revenue should be recognised. If the software could
be broken down into a number of separate elements and the customer takes control of each
element as it is completed then this would be relevant (and revenue may be recognised over a
period of time in this instance).
If the contract also includes a maintenance element then this is likely to be a separate
performance obligation and therefore distinct from the sale of the developed software. The
price will need to be allocated against the two performance obligations, based on the stand-
alone selling prices of the customised software and the maintenance contract.
The terms of the maintenance contract (e.g. if it is for monthly maintenance or only when
problems arise) will be relevant to the timing of the revenue recognition for the maintenance
element. The same three criteria, as above, must be considered. For a monthly contract it is
likely that revenue will be recognised over a period of time; but for ad hoc maintenance it is
more likely that revenue will be recognised at a point in time.
(2) Off-the-shelf
The timing of revenue recognition for off-the-shelf software packages should be relatively
straightforward. By the nature of retail trade there will be no contract until the customer’s
offer to purchase the software has been accepted by Meson. Revenue will therefore be
recognised once the software has been handed over to the customer when the customer pays
for it. If there is a requirement for Meson to install the software in the customer’s
environment then this will be considered as a separate performance obligation and the price of
the contract will need to be separated into these two components. If installation is a lengthy
process this could defer recognition of revenue until the process has been completed and the
customer has control of the complete package.
(3) Retailing of hardware
If the contract for the sale of computer hardware is straight forward (i.e. the customer takes it
and installs it themselves) revenue will be recognised at the point in time when the customer
takes delivery. Again, if Meson carries out the installation the contract will have two
components which must be considered separate performance obligations and may defer the
recognition of revenue.
(b) Retail shop licensing operation
The franchise agreement includes several performance obligations; the sale of software and
hardware and the supply of know-how, advertising and administrative back-up. The sale of
software and hardware will follow the same considerations as a normal retail sale as described
above.
The remainder could be considered collectively as “intellectual property”. It appears that

Meson is providing a service over the period of the franchise agreement. If the customer
simultaneously receives and consumes benefit from the service provided by Meson or
Meson’s performance enhances the asset then revenue will be recognised over a period of
time.
If the software and hardware are not paid for separately then the price of the franchise
agreement will need to be allocated to the distinct performance obligations. An up-front fee
may include the software and hardware and the regular fees just the intellectual property
whereas regular larger payments (with no up-front fee) would reflect all components of the
contract. If the latter, the allocation of the fee will need to consider the stand-alone selling
prices of the software and hardware.
In both cases the fees paid will be based on turnover of the shops; this turnover would
therefore give the basis for revenue recognition, it is an output method.
Answer 10 WILLIAM
(a) Statement of profit or loss (extracts)

For the year ended 31 December
2013 2014 2015 2016
$000 $000 $000 $000
Revenue (W) 3,143 1,968 5,272 2,117
Cost of sales (2,750) (3,000) (4,200) (1,150)
——– ——– ——– ——–
Gross profit/(loss) 393 (1,032) 1,072 967
——– ——– ——– ——–
(b) Statement of financial position (extracts)

As at 31 December
2013 2014 2015 2016
$000 $000 $000 $000
Actual costs 2,750 5,750 9,950 11,100
Profit or loss 393 (639) 433 1400
Cash received (3,000) (5,000) (11,000) (1,2500)
——– ——– ——– ——–
Asset/(liability) 143 111 (617) nil
——– ——– ——– ——–
WORKING
Allocation of revenue on a costs basis
2013 2014 2015 2016
$000 $000 $000 $000
Costs to date 2,750 5,750 9,950 11,100
Total costs (2,750 + 7,750) (5,750 + 7,750) (9,950 + 1,550) 11,100
= 10,500 = 13,500 = 11,500
% complete 26.19% 42.59% 86.52% 100%

× tender value × 12,000 × 12,000 × 12,000 × Actual (12,500)
Revenue to date 3,143 5,111 10,383 12,500

Less taken in
in prior periods – (3,143) (5,111) (10,383)
——– ——– ——– ——–
Revenue in year 3,143 1,968 5,272 2,117
——– ——– ——– ——–
Answer 11 BIG
(a) Profit or loss for the year ended 31 March 2017 (extract)
$000
Revenue 2,058
Cost of sales (1,820)
_____
Gross profit on construction contracts 238
_____
Statement of financial position as at 31 March 2017 (extract)

$000
Current assets
Contract assets 442
Current liabilities
Contract liabilities 200
___
WORKINGS
(1) Profit or loss for year ended 31 March 2017
$000 $000 $000 $000
Nose Head Horn Total
Revenue
40% of $3.6m 1,440 (30% 18 (25% 600 2,058
_____ __ ___ _____
of 60) of 2.4m)
Cost of sales
40% of $3m 1,200 (30% 12 (25% 500 1,712
of 40) of 2m)
Additional costs 100 Non-current 8 108
_____ __ ___ _____
asset
(1,300) (20) (500) (1,820)
_____ __ ___ _____
Profit/(loss) on
construction contracts 140 (2) 100 238
(2) Statement of financial position as at 31 March 2017
Nose Head Horn Total

$000
Costs incurred 1,500 (19 + 6) = 25 700 2,225
Profit/(loss) 140 (2) 100 238
_______ _______ _______ _______
1,640 23 800 2463

Billings (1,200) (21) (1,000) (2,221)
_______ _______ _______ _______
(To)/from customers 440 2 (200) 242

_______ _______ _______ _______
(b) Acceptability of treatment
IFRS 15 Revenue from Contracts with Customers states that revenue should be recognised
once a performance obligation has been satisfied. If certain criteria are met then IFRS 15
states that the performance obligation is satisfied over time. A performance obligation is
satisfied over time if one of the following criteria is met:
 The customer receives and consumes the benefits of the entity’s performance as the
entity performs (e.g. service contracts, such as a cleaning service or a monthly
payroll processing service).
 The entity’s performance creates or enhances an asset that the customer controls as
the asset is created or enhanced (e.g. a work-in-process asset).
 The entity’s performance does not create an asset with an alternate use to the entity
and the entity has an enforceable right to payment for performance completed to date.
It would appear that the proposed accounting treatment by the directors is acceptable under
IFRS 15. It is acceptable to apply the same accounting policy to both long and short
contracts. However it is important that the accounting policy is applied on a consistent basis.
The company should not adopt the completed contract method when it is expedient to do so.
Criteria must be established for determining which contracts are to be accounted for under
IFRS 15 as contracts where performance obligation is satisfied over time and appropriate
policies must be established and applied consistently.
Answer 12 RETAIL INVENTORY
(a) Reasons why net realisable value may be less than cost
 Damage 1 each
 Obsolescence (wholly or in part) max 3
 Declining selling prices ————
 Increasing cost of completion/costs of making sale.
(b) (i) Cost on a FIFO basis
Date purchased Units Per unit Cost

$ $
30 December 70 506 35,420 1
16 December 60 503 30,180 1
2 December 20 500 10,000 1½
_________

75,600 3½
———
(ii) Net realisable value (NRV)
NRV = selling price less selling and distribution costs = selling price  95%
Date sold Units Per unit NRV

$ $
14 January 70 497.80 34,846 1½
28 January 50 495.90 24,795 1½
11 February 30 494.00 14,820 1½
_________

74,461 4½
———
(iii) Amount to be include in financial statements
Lower of cost and net realisable value $74,461 1

————
9
————
12
Answer 13 MEASUREMENT OF INVENTORIES ————
(a) IAS 2 requirements
Overheads
The Standard requires inventories to be measured at the lower of cost and net realisable
value. The term “cost” includes “cost of conversion” (where appropriate). “Cost of
conversion” includes “the systematic allocation of fixed and variable production
overheads”. Fixed production overheads are indirect costs of production that remain max 3
relatively constant regardless of the volume of production (e.g. Depreciation and maintenance
of factory buildings and equipment, and the cost of factory management and administration).
Lower of cost and net realisable value
Inventories are usually written down to net realisable value on an item by item basis. In max 2
some circumstances it may be appropriate to group similar or related items.
Identification of costs
Specific identification of costs is inappropriate where there are large numbers of items
which are ordinarily interchangeable. The cost of such inventories should be assigned by
using the first-in, first-out (FIFO) or weighted average cost formulas. The last-in, first-out max 3
————
(LIFO) is not permitted under IFRS. 8
————
(b) Disclosure requirements of IAS 2
 Accounting policies used in measuring inventories including the cost formula used.
 The total carrying amount and the carrying amount in appropriate classifications. 1 each
 The carrying amount of inventories carried at net realisable value.
 The carrying amount of inventories pledged as security for liabilities. ————
4
————
12
————
Answer 14 FAM
Accounting policies
(a) Property, plant and equipment is stated at historical cost less depreciation, or at valuation.
(b) Depreciation is provided on all assets, except land, and is calculated to write down the cost or
valuation over the estimated useful life of the asset.
The principal rates are as follows:
Buildings 2% per annum straight line

Plant and machinery 20% per annum straight line
Fixtures and fittings 25% per annum reducing balance
Non-current asset movements Land Plant Fixtures, Payments on

and and fittings, account and
buildings machinery tools and assets in the Total
equipment course of
construction
Cost/valuation $000 $000 $000 $000 $000
Cost at 1 January 2016 900 1,613 390 91 2,994
Revaluation adjustment 600 – – – 600
Additions – 154 40 73 (W1) 267
Reclassifications 100 – – (100) –
Disposals – (277) (41) – (318)
——— ——— —— —— ———
Cost at 31 December 2016 100 1,490 389 64 2,043
2016 valuation 1,500 1,500
——— ——— —— —— ———
1,600 1,490 389 64 3,543
——— ——— —— —— ———
Depreciation
At 1 January 2016 80 458 140 – 678
Revaluation adjustment (80) – – – (80)
Provisions for year (W2) 17 298 70 – 385
Disposals – (195) (31) – (226)
—— —— —— —— ——
At 31 December 2016 17 561 179 – 757
—— —— —— —— ——
Carrying amount
At 31 December 2016 1,583 929 210 64 2,786
——— ——— —— —— ———
At 31 December 2015 820 1,155 250 91 2,316

——— ——— —— —— ———
Land and buildings have been revalued during the year by Messrs Jackson & Co on the basis of their
fair values.
The corresponding historical cost information is as follows:

Land and buildings
$000
Cost
Brought forward 900
Reclassification 100
——
Carried forward 1,000
——
Depreciation
Brought forward 80
Provided in year 10
——
Carried forward 90
——
Carrying amount 910
——
WORKINGS (in $000)
(1) Additions to assets under construction 53
Deposit on computer 20
——
73
——
600
(2) Depreciation on buildings + (100  2%) 17
40
2% straight line depreciation is equivalent to a 50 year life.
Buildings are 10 years old at valuation, therefore 40 years remaining.
Depreciation on plant (1,613 + 154 – 277)  20% 298

Depreciation on fixtures (390 + 40 – 41 – 140 + 31)  25% 70
Answer 15 PORSCHE
Notes to the financial statements for the year ended 31 December 2016 (extracts)
(1) Accounting policies
Tangible non-current assets
Interests in buildings are stated at a valuation. Other tangible non-current assets are stated
at cost, together with any incidental expenses of acquisition.
Depreciation is calculated so as to write off the deprecibale amount of tangible non-current

assets over their expected useful lives. A full year’s charge is provided in the year of
acquisition. The annual rates and bases used are as follows:
Asset % Basis
Buildings 2% Straight line
Plant and equipment 10% Straight line
Fixtures, fittings, tools and equipment 20% Straight line
Motor vehicles 30% Reducing balance
(2) Operating profit is stated after charging

$
Depreciation of tangible non-current assets 562,000
————
(3) Property, plant and equipment
Land Plant and Motor Fixtures, Total
and machinery vehicles fittings,
buildings etc
Cost or valuation $000 $000 $000 $000 $000
At 1 January 2016 1,440 1,968 449 888 4,745
Additions 500 75 35 22 632
Revaluations (W1) 760 – – – 760
——— ——— —— —— ———
At 31 December 2016 2,700 2,043 484 910 6,137
——— ——— —— —— ———
Depreciation
At 1 January 2016 144 257 194 583 1,178
Revaluation adjustment (W1) (144) – – – (144)
Charge for year 60 (W2) 233 (W5) 87 (W3) 182 (W4) 562
——— ——— —— —— ———
At 31 December 2016 60 490 281 765 1,596
——— ——— —— —— ———
Carrying amount
At 31 December 2016 2,640 1,553 203 145 4,541
——— ——— —— —— ———
At 1 January 2016 1,296 1,711 255 305 3,567
——— ——— —— —— ———
(a) Buildings were valued for the purposes of the 2016 accounts at their market
value. This valuation was made by a firm of independent chartered surveyors.
The historical cost of the factory is $1,940,000 (W6) and the related
depreciation is $183,000(W6).
(b) The company’s depreciation policy on motor vehicles has been changed from a
rate of 25% per annum on cost to 30% per annum on reducing balance in order
to give a fairer presentation of the results and of the financial position. The
effect of this change is to reduce the depreciation charge for the year by
$34,000 (W7).
WORKINGS
(1) Factory revaluation

$000 $000
Dr Factory 760
Dr Accumulated depreciation 144
Cr Revaluation surplus 904
(2) Factory depreciation charge

$000
Valuation at 31 December 2016 2,700
———
Remaining useful life 45 years
 2,700,000 
Annual depreciation charge =   $60,000
 45 years 
———
(3) Motor vehicles depreciation charge

$000
Carrying amount at 1 January 2016 255
Additions 35
——
290
——
Depreciation – reducing balance method @ 30% 87

——
(4) Fixtures and fittings depreciation charge

$000
Cost at 31 December 2016 910
——
Depreciation – straight line method @ 20% 182

——
(5) Machinery depreciation charge

$000
Cost at 1 January 2016 1,968
Less Grinding machine (298)
Add Purchases for factory extension 75
——–
1,745
——–
Depreciation – straight line method @ 10% 175

——–
Grinding machine – cost less residual value (298 – 8) 290

Accumulated depreciation at 1 January 2016 (58)
——
Carrying amount 232
——
Must be written off over the remaining useful life of four years:
$
232,000
Depreciation charge 58,000
4 years
———
Total depreciation charge for plant $000
Grinding machine 58
Other plant 175
——
233
——
(6) Historical cost depreciation on factory

$000
Cost at 1 January 2016 1,440
Addition – extension 500
——–
Cost at 31 December 2016 1,940
——–
Accumulated depreciation at 1 January 2016 144
Depreciation charge 1,940 ÷ 45 years 43
——–
Accumulated depreciation at 31 December 2016 187
——–
(7) Effect of change in depreciation method

$000
Cost of cars at 31 December 2016 484
——
Depreciation under straight line method @ 25% 121
Depreciation under reducing balance method (W3) 87
——
Reduction in depreciation charge 34
——
Answer 16 DAWES (I)
Non-depreciation
Depreciation is the process of allocating the cost (or revalued amount) less the estimated residual value
of a non-current asset over the periods that are expected to benefit. It is an example of the use of the
accruals and matching concept. It is not meant to be a process of valuing assets.
The directors of Dawes are confusing the two issues. Even though the value of an asset may have
increased, it does not mean depreciation is unnecessary. Each year a portion (1/25) of the value of the
leased property is consumed, and the depreciation charge reflects this cost. The carrying amount of the
leased property is a different issue.
Dawes is based in a country where the regulatory requirements permit the directors to choose to value
the property on the historical cost basis or at a “current value” (i.e. current replacement cost). This is
permitted under IAS 16 Property, Plant and Equipment. Regardless of which valuation method is
selected, depreciation must still be charged based on the chosen value. Some regulatory requirements
take the view that where a company can demonstrate that the life of an asset (which is of a type whose
life is normally considered to be finite) can be considered to be infinite, perhaps due to exceptionally
high standards of maintenance, then no depreciation may be necessary. In effect the maintenance costs
become a substitute for the depreciation. Hotel properties have sometimes been treated this way. This
argument would not be applied to this leased property.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors says the initial adoption of a
policy to carry property at a revalued amount is a change in accounting policy, but should be treated as
a revaluation in accordance with IAS 16.
If the directors do decide to revalue the property then all of Dawes’s properties (within the same class)
must be simultaneously revalued; and these valuations kept up to date. In this case the alternatives are:
Statement of financial position Historical Current value

cost (revaluation)
Non-current assets – property, plant and equipment $000 $000
Cost/Valuation 4,000 6,000
Accumulated depreciation (960) (300)
_____ _____
Carrying amount 3,040 5,700
_____ _____
Reserves:
Revaluation surplus (see below) – 2,660
Profit or loss
Depreciation of leased property:
– 4,000 × 1/25 160
– 6,000 × 1/20 300
WORKING: Revaluation surplus

Carrying amount 1 October 2015 ($4,000 – ($4,000 × 5/25)) 3,200
Revalued amount (6,000)
_____
Revaluation surplus 1 October 2015 2,800
Transferred to realised profits (1/20) (140)
_____
Revaluation surplus 30 September 2016 2,660
_____
Answer 17 SPONGER
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance requires that no
grant should be recognised until there is reasonable assurance that the entity will comply with the
conditions attaching to them and that the grants will actually be received. The Standard also covers the
treatment of forgivable loans and non-monetary grants.
(a) Research and development grants
The general principle of IAS 20 is that grants should be matched in profit or loss with the
expenditure to which they are intended to contribute. They should not be credited directly to
shareholders interests.
Cuckoo project
The expenditure on the Cuckoo project is research and therefore is written off as incurred
under IAS 38 Intangible Assets. Accordingly the grant of $10,000 should be recognised in
profit or loss in the years in which the expenditure to which it relates is incurred.
Hairspray project
The Hairspray project appears to satisfy the criteria of IAS 38 for deferral of development
expenditure, and thus may be carried forward as an intangible non-current asset until
commercial production commences (2018). It will then be amortised to profit or loss over the
period of successful production. Technological and economic obsolescence create
uncertainties that restrict the time period over which development costs should be amortised,
and so the amortisation model should be reviewed annually.
The grant of $10,000 relating to it will therefore also be carried forward as deferred income,
and will be released to profit or loss in line with the amortisation of the development
expenditure. The balance of $10,000 will appear in the statement of financial position at 31
December 2016 under current and non-current liabilities as appropriate.
Grants relating to assets can either be:
 set up as deferred income and recognised in profit or loss over the useful life of the
asset (to match the depreciation charge); or
 deducted from the carrying amount of the asset in the statement of financial position
(i.e. being recognised over the useful life of the asset by means of a reduced
depreciation charge).
(b) Compensation grant
IAS 20 states that grants receivable as compensation for expenses or losses already incurred
should be recognised as income when they become receivable. They cannot be taken back to
prior periods, as their receipt does not constitute correction of an error or a change in
accounting policy
However, in order to apply the prudence concept, the standard requires grants not to be
recognised until conditions for receipt have been satisfied and receipt is reasonably assured.
In this situation the conditions for receipt, namely filling out the triplicate form, have not been
fully satisfied and therefore the grant should not be recognised in the accounts at 31
December 2016.
(c) “Vocational experience” grant
General accounting
This grant relates not to specific expenditure but to a non-financial objective.
The terms of the grant suggest that it is effectively earned at a rate of $1,000 per visit, and
therefore it should be credited to income at that rate. In the year to 31 December 2016 the
credit will be $7,000. Amounts to be recognised in future periods will be carried forward as
deferred income.
The grant is not spread over the life of the bus as it does not specifically contribute to its cost.
Repayments
A repayment of $5,000 is due relating to unfulfilled visits in the current year and should be
provided for. However, as this is expected to recur in each of the next four years, provision
also needs to be made in total for repayments relating to 20 further unfulfilled visits.
A contingent liability should be disclosed relating to the potential repayment of the grant
relevant to the visits in future periods which are expected to take place.
Amounts for the financial statements
Profit or loss
$
Grants received (7  $1,000) 7,000
Statement of financial position

$
Current liabilities (1  7  $1,000) 7,000
Non-current liabilities (3  7  $1,000) 21,000
Provision for grant repayment (5  5  $1,000) 25,000
Note to the financial statements
There is a contingent liability in respect of potentially repayable government grants of

$28,000.
Answer 18 DAWES (II)
Borrowing costs
Manufacturing plant
Where assets are financed by specific borrowings IAS 23 Borrowing Costs requires that the specific
borrowing costs related to the financing (in this case interest and amortisation of issue costs) are those
that should be capitalised. Interest from the temporary investment of any surplus funds relating to the
specific finance are treated as a reduction of the borrowing costs.
$
Interest on $5 million at 14% 700,000
Amortisation of issue costs using
straight-line apportionment (¼ × 100,000) 25,000
Less interest earned on temporary investment
of surplus funds (72,000)
_______
Amount of borrowings to be capitalised 653,000
_______
Investment property
Borrowing costs are not capitalised during periods when no construction or development takes place.
Capitalisation ceases at the point in time when the asset is ready for use, notwithstanding that it may
take time to market the asset, or, in this case, find a tenant. Thus during the current year the above rules
exclude capitalisation of interest for the first and the last three months of the accounting year. Where
general, rather than specific, borrowings are used to finance qualifying assets then a weighted average
cost of capital excluding specific borrowings is applied to the average investment in the asset. In this
case the appropriate cost of capital is 10% per annum.
$
Amount capitalised is $12 million × 10% × 6/12 600,000
Answer 19 KIPLING
(a) At 31 March 2014

$000
Cost of manufacture 28,000
Interest capitalised
($20m × 10% + ($20m × 110% × 10%) × ¾) 3,650
______
31,650
______
Capitalisation of finance costs ceases when the non-current assets are substantially complete
IAS 23. Hence only 1¾ years finance costs are capitalised.
Initial recognition of the assets will be at cost. However if the amount recognised when a
non-current tangible asset is constructed exceeds its recoverable amount then it should be
written down to its recoverable amount. Thus the fleet of aircraft will be recognised in the
statement of financial position at $30 million.
Tutorial note: This is covered in detail by IAS 36 “Impairment of Assets”.
(b) 31 March 2015

Carrying Depreciation Carrying
amount amount
1 April 2014 31 March 2015
$000 $000 $000
Engines 9,000 3,000 6,000
Body 21,000 2,625 18,375
______ ______ ______
30,000 5,625 24,375
______ ______
Revaluation loss to profit or loss (3,375)
______
Closing carrying amount (market value) 21,000
______
31 March 2016
amount amount
1 April 2015 31 March 2016
$000 $000 $000
Engines 5,169 2,585 2,584
Body 15,831 2,262 13,569
______ ______ ______
21,000 4,847 16,153
______ ______
To profit or loss 3,375
To other comprehensive income 72
______
______
IAS 16 states that where an asset’s carrying amount is increased as a result of a revaluation,
then the increase should be credited to equity. However, if this reverses a revaluation
decrease of the same asset then part should be recognized in income to the extent of the
previous revaluation loss.
(c) 31 March 2017

amount amount
1 April 2016 31 March 2017
$000 $000 $000
Engines 3,135 3,135 –
Body 16,465 2,744 13,721
______ ______ ______
19,600 5,879 13,721
______ ______
Addition 15,000
______
______
Answer 20 DAWES (III)
Schedule of cost and accumulated depreciation
Corrected schedule of the movements on plant:

$m $m
Cost Depreciation
At 1 October 2015 81.20 32.50
Addition at cost (see below) 21.50
Leased additions (see below) 16.00
Disposals (see below) (15.00) (9.00)
Depreciation charge for year 20.74
____ ____
Balance 30 September 2016 103.70 44.24
____ ____
WORKINGS $m
Additions – basic cost 20.00

– installation 1.00
– testing 0.50
____
21.50
____
Tutorial note: The sales tax on the plant can be reclaimed by Dawes and therefore does not
form part of its cost. The company policy for government grants does not allow them to be
offset against the cost of the asset. Insurance and maintenance are revenue items.
Leased additions $m
Liability b/fwd 21.4

Repayments (8.4)
Liability c/fwd (29.0)
____
Difference – new leases 16.0
____
Disposal: The accumulated depreciation on the plant disposed of would be 20% of $15
million for three years = $9 million.
The depreciation charge for year is 20% of the corrected cost of plant at the year-end (i.e.
20% × $103.7 million = $20.74 million).
Answer 21 XYZ
Extracts from the financial statements of XYZ at 31 December 2016
(i) Tangible non-current assets held under finance leases
Plant and machinery

$
Cost
At 1 January 2016 x
Additions 4,400
———
At 31 December 2016 4,400
———
Accumulated depreciation
At 1 January 2016 x
Charge for the year 629
———
At 31 December 2016 629
———
Carrying amount
At 31 December 2016 3,771
———
At 1 January 2016 x
———
(ii) Finance lease payables

$
Non-current
Capital outstanding at 31 December 2017 (W1) 2,803
Current
Capital to be paid in 2017 (1,200 – (268 + 243) 689
Interest element of payment due 1 January 2017 268
Note to financial statements:
Amount due within one to five years (($600  8) – $268) 4,532
Less: Future finance charges (1,600 (W2) – (292 + 268) (1,040)
———
3,492
———
Statement of profit or loss

$
Finance charges (292 + 268) 560
Depreciation ($4,400 ÷ 7) 629
WORKINGS
(1) Table of lease payments
Period ended Amount Repaid Capital due 7.68% Amount due

borrowed for period interest at period end
$ $ $ $ $
30 June 2016 4,400 (600) 3,800 292 4,092
31 December 2016 4,092 (600) 3,492 268 3,760
30 June 2017 3,760 (600) 3,160 243 3,403
31 December 2017 3,403 (600) 2,803 215 3,018
30 June 2018 3,018 (600) 2,418 186 2,604
31 December 2018 2,604 (600) 2,004 154 2,158
30 June 2019 2,158 (600) 1,558 119 1,677
31 December 2019 1,677 (600) 1,077 83 1,160
30 June 2020 1,160 (600) 560 40 600
31 December 2020 600 (600) – – –
(2) Calculation of finance charge

$
Minimum lease payments (5  $600  2) 6,000
Fair value of asset (4,400)
———
Finance charge 1,600
———
$3,760
Interest
Capital $268
$3,492
During 2017 End 2017

 $689 $2,803
Answer 22 SNOW
Extracts from the financial statements of Snow for year ended 31 December 2016
Profit is stated after charging:

$
Finance charges $(1,650 + 1,408((W2) + $9,614) (W3) 12,672
Depreciation 41,667
Tangible non-current assets held under finance leases – Plant and machinery
Cost $
At 1 January 2016 –
Additions $(35,000 + 150,000) 185,000
———
At 31 December 2016 185,000
———
Accumulated depreciation
 35,000 150,000 
Charge for year $    41,667
 3 5 
———
At 31 December 2016 41,667
———
Carrying amount
At 31 December 2016 143,333
———
———
Finance lease payables
Non-current
Capital outstanding at 31 December 2017 (12,097 (W2) + 89,614 (W3)) 101,711
Current
Capital to be paid in 2017 ((13,000 – (1,153 + 886) + (35,000 – 9,614)) 36,347
Interest element of payment due 1 January 2017 9,614
Note to the financial statements $

Amount due within one to five years ($6,500  4 + $35,000  4) 166,000
Less: Future finance charges ($6,000 – ($1,650 + $1,408) + $15,386*) (18,328)
———
147,672
———
* $35,000  5 – $150,000 – $9,614 = $15,386
WORKINGS
(1) Snowplough finance charge

$
Deposit 2,000
Minimum lease payments (6  $6,500) 39,000
Fair value of asset (35,000)
———
Finance charge 6,000
———
(2) Snowplough allocation of finance charge
Period Capital Interest Amount Repayment Capital

ended at start 5% at end at end
$ $ $ $ $
30 Jun 2016 33,000 1,650 34,650 (6,500) 28,150
31 Dec 2016 28,150 1,408 29,558 (6,500) 23,058
30 Jun 2017 23,058 1,153 24,211 (6,500) 17,711
31 Dec 2017 17,711 886 18,597 (6,500) 12,097
30 Jun 2018 12,097 605 12,702 (6,500) 6,202
31 Dec 2018 6,202 298 6,500 (6,500)
Tutorial note: There is no necessity to prepare the allocation table for 2018, it has been
presented for completion. The interest in the final period of $298 is a rounding figure as the
interest rate is not exactly 5%.
$23,058
Capital Interest
$23,058 –
During year Year end

 $10,961 $12,097
(3) Snow machine allocation of finance charge
Period Amount Repayment Capital Interest Amount

ended at start at start at 8.36% at end
$ $ $ $ $
31 Dec 2016 150,000 (35,000) 115,000 9,614 124,614
31 Dec 2017 124,614 (35,000) 89,614 7,492 97,106
$124,614
Capital Interest
$115,000 $9,614
During year Year end

 $25,386 $89,614
Answer 23 RESEARCH AND DEVELOPMENT
(a) Why different treatment
 For research (or the research phase of an internal project) it is not possible to
demonstrate that an intangible asset exists that will generate probable future 1
economic benefits. Therefore expenditure is always recognised as an expense
when it is incurred. 1
 For development (or the development phase of an internal project), in some

instances, it can be demonstrated that an intangible asset exists that will generate 1
probable future economic benefits. This is because development is further 1
advanced than research.
 Development costs are therefore recognised as an intangible asset from the point
in time when they meet certain criteria that indicate that future economic benefits 1
are probable.
 If research cannot be distinguished from development, expenditure is treated as

research. 1
————
max 4
————
(b) Criteria for asset recognition
All of the following must be demonstrated: 1
 Technical feasibility of completing the intangible asset. 1

 Intention to complete the intangible asset and use or sell it. 1
 Ability to use or sell it. 1
 The existence of a market for the output of the intangible asset. 1
 Availability of adequate technical, financial and other resources to complete the
development and use or sell the intangible asset. 1
 Ability to measure reliably the attributable expenditure during development. 1

————
max 6
(c) Development costs ————
Marketing awareness campaign
Exclude – selling costs cannot be directly attributed or allocated on a reasonable basis to ½+1
development activities.
Patent royalty payable to inventor of filter

Include – expenditure represents a direct cost of a service consumed in development ½+1
activities.
Salaries of staff testing filter prototypes

Include – expenditure on testing pre-production prototypes is a typical development ½+1
activity. ————
max 4
————
(d) Amortisation
How
 The depreciable amount (e.g. cost) should be allocated on a systematic basis over
the best estimate of useful life. 1
 The method used should reflect the pattern in which the related economic 1
benefits are consumed. If that pattern cannot be determined reliably, the straight-
line method should be used. 1
 The determination of useful life will depend on such factors as:

 typical produce life cycles for the asset; and 1
 technological obsolescence.
When
 Amortisation commences when the asset is available for use. If the asset is not 1
yet ready for use then it will be tested for impairment on an annual basis.
 If the asset is deemed to have an indefinite life, then it is not amortised but will 1
be tested annually for impairment.
 Amortisation (period and method) should be reviewed at least at each financial 1

year end, and changed if useful life or the pattern of consumption of economic
benefits is significantly changed. 1
————
max 6
————
Answer 24 DEFER 20
————
Deferred development expenditure
IAS 38 Intangible Assets requires that development expenditure be recognised as an asset if, and only
if, certain criteria are demonstrated. Research costs, and development costs which do not meet all the
criteria should be recognised as an expense when they are incurred. Accordingly my recommendations
are as follows:
Guidelines to distinguish research based activities from development activities
IAS 38 defines development as the application of research findings (or other knowledge) to a plan or
design to produce new or substantially improved materials, products, processes, etc. Whereas research
is work undertaken to gain new scientific or technical knowledge and understanding.
IAS 38 criteria for asset recognition are satisfied for identified development costs
These criteria, which must be demonstrated, are set out in the Standard. For example, there must be an
intention to complete and use or sell the intangible asset. If any of the criteria are not satisfied the
expenditure must be written off.
If, however, all the criteria are demonstrated, then the expenditure must be deferred (i.e. capitalised).
Amortisation period and method for development expenditure recognised as an asset
IAS 38 requires that an intangible asset should be amortised on a systematic basis over the best estimate
of useful life. In determining useful life, reference is made to such factors as expected usage of the
asset, typical product life cycles, technical obsolescence and expected competition. Where there are
rapid changes in technology (e.g. Computer software) useful life is likely to be very short. If the asset
is not yet ready for use or it has an indefinite life then it is not amortised but is tested annually for
impairment.
The straight-line method should be used unless another method better reflects the pattern in which the
asset’s economic benefits are consumed.
IAS 38 disclosure requirements
 Useful lives or amortisation rates and amortisation methods.
 Gross carrying amount and accumulated amortisation at beginning and end of period.
 A reconciliation of the carrying amount at the beginning and end of the period showing
additions, etc.
 The aggregate amount of research and development expenditure recognised as an expense

during the period.
Answer 25 SIGMA
(a) IAS 41 “Agriculture” – recognition and measurement requirements
An entity should recognise a biological asset or agricultural produce when:
 it controls the asset as a result of past events;

 it is probable that future economic benefits associated with it will flow to the entity;
 the fair value or cost of the asset can be measured reliably.
These criteria are consistent with the IASB Framework, which states that an element should
be recognised if:
 it is probable that any future economic benefit associated with the element will flow
to the entity;
 the element has a cost or value that can be determined reliably.
IAS 41 further states that biological assets or agricultural produce should normally be
measured at fair value less costs to sell. The standard assumes that the fair value of a
biological asset or agricultural produce can be measured reliably. This presumption can only
be rebutted for a biological asset or agricultural produce for which quoted market prices are
not available and for which alternative measurements of fair value are “clearly unreliable”.
Even then this rebuttal must be made on initial recognition of the asset.
The measurement basis selected by IAS 41 is one that is envisaged in the IASB Framework.
However the Framework states that the most common measurement basis used is historical
cost. For this to be a basis to produce relevant and reliable financial information the cost of
the asset needs to be determinable. For many biological assets (e.g. newly born calves) the
concept of “cost” is not an easy one to apply and so fair value seems to be more appropriate.
(b) Financial statements extracts
$000 $000
Income
Change in fair value of purchased herd (W2) (30)
Government grant (W3) 400
Change in fair value of newly born calves (W4) 125
Fair value of milk (W5) 5·5
––––
Total income 500·5
Expense
Maintenance costs (W2) 500
Breeding fees (W2) 300
––––
Total expense (800)
–––––––
Net income (299·5)
–––––––
Property, plant and equipment:

Land (W1) 20,000
Mature herd (W2) 970
Calves (W4) 125
–––––
21,095
––––––
Inventory: Milk (W5) 5·5
––––
WORKINGS
(1) Land
The purchase of the land is not covered by IAS 41. The relevant standard to apply to this
transaction is IAS 16 Property, Plant and Equipment. Under this standard the land would
initially be recorded at cost and depreciated over its useful economic life. This would usually
be considered to be infinite in the case of land and so no depreciation would be appropriate.
Under the cost model of IAS 16 no recognition would be made of post-acquisition changes in
the value of the land. The revaluation model would permit the land to be revalued to market
value, with the surplus shown in other comprehensive income.
(2) Cows
Under the “fair value model” laid down in IAS 41 the mature cows would be recognised in
the statement of financial position at 30 September 2016 at their fair value of 10,000 × $97 =
$970,000. The difference between the fair value of the mature herd and its cost ($970,000 –
$1 million – a loss of $30,000) would be charged to profit or loss, along with the maintenance
costs of $500,000.
(3) Grant
Grants relating to biological assets measured at fair value are not subject to the normal
requirement of IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance. Under IAS 41 such grants are credited to profit or loss as soon as they are
unconditionally receivable rather than being recognised over the useful economic life of the
herd. Therefore $400,000 would be credited to profits by Sigma.
(4) Calves
They are a biological asset and the fair value model is applied. The breeding fees are charged
to profit or loss and an asset of 5,000 × $25 = $125,000 recognised in the statement of
financial position and credited to profit or loss.
(5) Milk
This is agricultural produce and is initially recognised on the same basis as biological assets.
Thus the milk would be valued at 10,000 × $0·55 = $5,500. This is regarded as “cost” for the
future application of IAS 2 Inventories to the unsold milk.
Answer 26 JUSTIN
IAS 36 Impairment of Assets says that an impairment loss for a cash-generating unit is recognised if its
recoverable amount is less than its carrying amount. An impairment loss for a cash-generating unit is
allocated in the following order:
 to the goodwill of the unit; then

 to other asset on a pro rata basis, based on their carrying amounts.
In allocating an impairment loss as above, the carrying amount of an individual asset must not be
reduced to less than the highest of:
 its fair value less costs of disposal;

 its value in use (if separately determinable); and
 zero.
The IASB has concluded that there is no practical way to estimate the recoverable amount of each
individual asset (other than goodwill) as they all work together as a single unit. Nor do they believe
that the value of an intangible asset is necessarily more subjective than a tangible asset.
Assets First Revised assets Second Revised assets

1 July provision 1 August provision 30 September
$000 $000 $000 $000 $000
Goodwill 200 (200) – –
Operating licence 1,200 (200) 1,000 (100) 900
Property – train stations
and land 300 (50) 250 (50) 200
Rail track and coaches 300 (50) 250 (50) 200
Steam engines 1,000 (500) 500 500
_____ _____ _____ _____ _____
3,000 (1,000) 2,000 (200) 1,800
_____ _____ _____ _____ _____
Tutorial notes:
The first impairment loss of $1 million:
– $500,000 is written off the engines as one of them no longer exists and is no longer part of the
cash-generating unit
– the goodwill of $200,000 is eliminated; and
– the balance of $300,000 is allocated pro rata to the remaining net assets other than the
engine which must not be reduced to less than its net selling price of $500,000.
The second impairment loss of $200,000:
 the first $100,000 is applied to the licence to write it down to its net selling price
 the balance is applied pro rata to assets carried at other than their net selling prices (i.e.
$50,000 to both the property and the rail track and coaches).
Answer 27 GENPOWER
(a) Provisions
(i) Need for a standard
The use of provisions can have a significant effect on a company’s financial statements. They
arise in many areas of business and often relate to controversial areas such as restructuring
costs, environmental and decommissioning liabilities, and guarantees and warranties.
Provisions have often been based on management’s intentions rather than on the existence of
a relevant liability.
In the recent past there has been much criticism of the use and abuse of provisions. The main
area of abuse has been that of “profit smoothing” or creating artificial growth. In essence this
amounts to creating a provision, usually for some future intended expenditure, when a
company’s profits are healthy, and subsequently releasing the provision through profit or loss
to offset the expenditure when it is incurred. This has the effect of reducing the profit in the
years in which provisions are made and increasing profits in the years in which they are
released.
A common abuse was that provisions created for a specific purpose (or type of expenditure)
were aggregated with other provisions and subsequently used to offset expenditures of future
years that had not (and should not have) been provided for. Such provisions were often very
large (hence the term “big bath” provisions) and treated as extraordinary or exceptional items
(terms which are also not permitted under IFRS). This treatment may have caused some users
to disregard the expense in the belief that it was a non-recurring item thus minimising the
adverse impact of the provision. Extreme cases occurred where provisions were deliberately
over provided with the intention that their release in future years would boost profits.
In some cases provisioning was used to “create” profits rather than just smooth them. This
occurs if a provision is created without it being charged to profit or loss before its subsequent
release. The most common examples of this were provisions for restructuring costs as a
consequence of an acquisition. The effect of such provisions was that they added to the
goodwill rather than being expensed to profit or loss. This practice created the ironic situation
that (given an agreed purchase price) the more restructuring a company needed and the larger
its anticipated losses were, the greater was the reported value of the acquired company’s
goodwill. Many commentators, including the IASB, thought this perverse and IFRS 3
Business Combinations has now eliminated this practice completely.
Some of the above practices are often referred to as “big bath” provisioning.
(ii) Accounting principles
IAS 37 Provisions, Contingent Liabilities and Contingent Assets is intended to establish

appropriate recognition and measurement criteria for provisions and contingent assets and
liabilities. It also requires much more detailed disclosure of provisions. Although not
specifically referred to in the IAS, it does not apply to the “traditional” type of provision that
is used to write down the value of an asset (e.g. “provisions” for bad debts and depreciation of
non-current assets) – that is because these are not provisions (as they do not meet the
definition of a liability). Also, IAS 37 does not apply to executory contracts or provisions
required by other accounting standards (e.g. deferred tax provisions). The main thrust of IAS
37’s definition of a provision is that it represents a liability of uncertain timing or amount.
This is further expanded upon in that a liability is an obligation (which may be legal or
constructive) which will probably require an entity to transfer economic benefits that result
from a past transaction or event.
This definition relies heavily on the IASB’s “Framework”. The distinction between a
provision and a liability (or accrual) is the degree of uncertainty in the timing or amount of
the liability. A contingent liability is (i) a possible obligation which will be confirmed only
by the occurrence of uncertain future events that are not wholly within the entity’s control, or
(ii) where there is a present obligation but it is not possible to measure it with sufficient
reliability. In essence, if an obligation is probable it is a liability, if it is only possible
(presumably less than a 50% chance) then it is a contingent liability. The definition of a
contingent asset is a “mirror” of that of a liability.
An event is an obligating one if there is no realistic possibility of it being avoided. This is

obviously the case if it is enforceable by law, but IAS 37 adds to this the concept of a
constructive obligation. A constructive obligation derives from an established pattern of past
practice or some form of public commitment to accept certain responsibilities that creates a
valid expectation on the part of other parties that the entity will discharge them. Although the
concept of a constructive obligation does introduce an element of subjectivity, the new
definition is intended to prevent provisions being made as a result of future intentions by
management.
The last element of the definition is that of reliable measurement. This is taken to be the best
estimate of the expenditure required to settle the obligation at the end of the reporting period.
The estimate may be based on a range of possible outcomes and it should take into account
any surrounding risk and uncertainty and the time value of money if it is material (i.e.
settlement may be some years ahead). Also where there are a number of similar obligations
(e.g. product warranties) the estimate should be based (often statistically) on the class as a
whole. The IAS considers that the circumstances in which a reliable estimate cannot be made
will be extremely rare, but if they do exist the liability should be treated as a contingent
liability and given appropriate disclosures in the notes to the financial statements.
(b) Transactions
(i) Acceptability of accounting policy
Genpower’s current policy of providing for environmental costs relating to the demolition of
the power station and “sealing” the fuel rods on an annual basis is no longer acceptable under
IFRS. IAS 37 requires that where an entity has a present obligation that will (probably)
require the transfer of economic benefits as a result of a past event, then a provision is
required for the best estimate of the full amount of the liability. If the liability is measured in
expected future prices this should be discounted at a nominal rate. Applying these principles
means that Genpower should provide for $120 million (not $180 million) for environmental
costs on 1 October 2015 as this is the date the obligation arose. An interesting aspect of the
provision is the accounting entries to record it. The credit entry is shown in the statement of
financial position under “non-current liabilities” as would be expected, but the debit is
included as part of the cost of the asset (i.e. the power station). The effect of this is to “gross
up” the statement of financial position (initially) by the amount of the liability and create an
asset of equivalent value. Understandably, some commentators believe that non-current
assets that have been increased by the cost of a future liability will confuse many users of
accounts and calls into question the nature of an asset. The effect on profit or loss of IAS 37’s
requirements is not too different from the company’s current treatment (ignoring the error of
using $180 million). As the carrying amount of the power station (which now includes the
amount of the provision as well as the cost of the asset) is depreciated over its 10 year life, the
provision is effectively charged to profit or loss over the life of the asset. This has the same
effect on profit as the previous policy.
The treatment of the provision for contamination leaks needs careful consideration. It could
be argued that the obligating event relating to such a cost is the occurrence of a leak. As this
has not happened there is no liability and therefore a provision should not be made. An
alternative view is that it is the generation of electricity that creates the possibility of a
leakage and, as this has occurred, a liability should be recognised. The difference between a
liability and a contingent liability is one of probability. If it is probable (presumably more
than a 50% chance) then it is a liability that should be provided for, conversely if it is not
probable, it is a contingent liability which should be disclosed by way of a note to the
financial statements. In any 12 month period there is only a 30% chance of a contamination
occurring. It could be argued that the liability is therefore not probable, as turned out to be
the case in the current year.
Again there is an alternative view. Over the expected period of electricity generation (of 10
years), statistically there will be three leakages causing contamination that will cost a total of
$90 million. As the company has produced a tenth of the electricity, it should provide for a
tenth of the expected contamination costs. On balance and applying prudence it would be
acceptable to provide $9 million for contamination costs each year.
Applying the above would give the following revised extracts:
Charge to profit or loss $m

Non-current asset depreciation
10% × ($200 million + $120 million) 32
Provision for clean-up of contamination leaks
10% × $90 million (or 30% × $30 million) 9
___
41
___

Tangible non-current assets
Power station at “cost” ($200 million + $120 million) 320
Depreciation (32)
___
288
___
Non-current liabilities
Provision for environmental costs ($120 million + $9million) 129
(ii) Impact of environmental legislation
In part (i) the environmental legislation in relation to this industry created an obligation which
led to a provision for the consequent liability. In the absence of environmental legislation
there would be no legal or enforceable obligation. However, IAS 37 refers to a “constructive”
obligation. This occurs where there is a valid expectation by other parties that an entity will
discharge its responsibilities. A constructive obligation usually derives from a company’s
actions. These may be in the form of an established pattern of past practice, a published
policy statement or by indications to other parties that it will accept certain responsibilities.
Thus if it can be established that Genpower has a publicly known policy of environmental
cleaning up, or has a past record of doing so when it is not legally required to, then this could
be taken as giving rise to a constructive obligation and the treatment of the environmental
costs would be the same as in part (i). If there is no legal requirement to incur the various
environmental costs, and Genpower has not created an expectation that it will be responsible
for such costs, then there is no obligation and no provision should be made. The power
station would be recorded at a cost of $200 million and depreciated at $20 million per annum.
Answer 28 KLONDIKE
(a) Relevant features
Defined contribution plans
These are relatively straightforward plans that do not present any real problems. Normally
under such plans employers and employees contribute specified amounts (often based on a
percentage of salaries) to a fund. The fund is often managed by a third party. The amount of
benefits an employee will eventually receive will depend on the investment performance of
the fund’s assets. Thus in such plans the actuarial and investment risks rest with the
employee. The accounting treatment of such plans is also straightforward. The cost of the
plan to the employer is charged to profit or loss on an annual basis and (normally) there is no
further on-going liability. This treatment applies the accruals concept in that the cost of the
post-retirement benefits is charged to the period in which the employer received the benefits
from its employee. Post-retirement benefits are effectively a form of deferred remuneration.
Defined benefit plans
These are sometimes referred to as final salary schemes because the benefits that an employee
will receive from such plans are related to his salary at the date they retire. For example,
employees may receive a pension of 1/60 of their final year’s salary for each year they have
worked for the company. The majority of defined benefit plans are funded (i.e. the employer
makes cash contributions to a separate fund). The principles of defined benefits plans are
simple, the employer has an obligation to pay contracted retirement benefits when an
employee eventually retires. This represents a liability.
In order to meet this liability the employer makes contributions to a fund to build up assets
that will be sufficient to meet the contracted liability. The problems lie in the uncertainty of
the future, no one knows what the eventual liability will be, or how well the fund’s
investments will perform. To help with these estimates employers make use of actuaries who
advise the employers on the cash contribution required to the fund. Ideally the intention is
that the fund and the value of the retirement liabilities should be matched, however, the
estimates required are complex and based on many variable estimates (e.g. the future level of
salaries and investment gains and losses of the fund). Because of these problems regular
actuarial estimates are required and these may reveal fund deficits (where the value of the
assets is less than the post-retirement liability) or surpluses.
Experience surpluses or deficits will give rise to a revision of the planned future funding.
This may be in the form of requiring additional contributions or a reduction or suspension
(contribution holiday) of contributions. Under such plans the actuarial risk (that benefits will
cost more than expected) and the investment risk (that the assets invested will be insufficient
to meet the expected benefits) fall on the company. Also the liability may be negative, in
effect an asset.
Accounting treatment
The objective of the standard is that the financial statements should reflect and adequately
disclose the fair value of the assets and liabilities arising from a company’s post-retirement
plan and that the cost of providing retirement benefits is charged to the accounting periods in
which the benefits are earned by the employees.
In the statement of financial position
An amount is recognised as a defined benefit liability where the present value of the defined
benefit obligation is in excess of the fair value of the plan’s assets (in an unfunded scheme
there would be no plan assets) and a defined benefit asset is recognised in the reverse
situation. The amount of asset to be recognised is limited to the “asset ceiling”, which is the
present value of any economic benefits available in the form of refunds from the plan or
reductions in future contributions to the plan.
In the statement of total comprehensive income
The following items should be recognised in profit or loss:
 service cost, including both current and past; and

 net interest on the net defined benefit liability or asset.
The following items should be recognised in other comprehensive income:
 remeasurements of the net defined benefit liability.
Remeasurements comprise:
 actuarial gains and losses on the defined benefit obligation; and
 the return on the plan assets excluding any amounts that have been included in the
net interest on the net defined liability, which has been included in profit or loss as
part of the net interest figure.
(b) Financial statement extracts
Profit or loss
$000
Current service cost 160
Net interest on opening net liability (10% × (1,500 – 1,280)) 22
_____
Post-retirement cost in profit or loss 182
_____
Other comprehensive income
$000
Remeasurements
Actuarial loss on liability (W1) (65)
Actual gain on asset (W1) 282
_____
Post-retirement cost in other comprehensive income 217
_____

$000
Present value of obligation 1,750
Fair value of plan’s assets (1,650)
_____
100
_____
WORKINGS
(1)
Plan assets Plan liabilities
$000 $000
Balance 1 April 2016 1,280 1,500
Current service cost 160
Interest 150
Contributions paid 85
Benefits paid to employees (125) (125)
Actual return (balance) 410
Actuarial loss (balance) 65
_____ _____
Balance 31 March 2017 1,650 1,750
_____ _____
The actual return on the asset of $410 is reduced by the net interest that has been included in
profit or loss.
Net interest on opening asset included in profit or loss is $1,280 × 10% = $128
Amount of actual return included in remeasurement is $282 (410 – 128)
Tutorial note: Journal entry not required but provided for information:
Dr Cr
Profit or loss $182
Liability ((1,500 – 1,280) – (1,750 – 1,650)) $120
Cash contribution $85

Other comprehensive income $217
Answer 29 VIDENT
(a) Why share-based payment should be recognised
IFRS 2 applies to all share option schemes (that were not vested at the effective date of IFRS
2). The arguments put forward by the directors for not recognising the remuneration expense
have been made by many opponents of the IFRS.
The argument that the share options do not have a cost to the company and, therefore, should
not be recognised, is not one which is consistent with the way that other share issues are dealt
with. An accounting entry is required to recognise the resources received as consideration for
the shares issued, just as occurs when shares are issued in a business acquisition. The
expense recognised represents the consumption of the resources received, just as depreciation
will be charged on the non-current assets acquired in a business acquisition. The
consumption of the resources in the case of share options is immediate and may be spread
over a period of time.
The question as to whether the expense arising from share options meets the definition of an
expense as set out in the “Framework” document is problematic. The “Framework” requires
an outflow of assets or a liability to be incurred before an expense is created. Services do not
normally meet the definition of an asset and, therefore, consumption of those services does
not represent an outflow of assets. However, share options are issued for “valuable
consideration”, that is the employee services and the benefits of the asset received results in
an expense. The main reason why the creation of the expense is questioned is that the receipt
of the asset and its consumption in the form of employee services occur at virtually the same
time. The conclusion must, therefore, be that the recognition of the expense arising from
share-based payment transactions is consistent with the “Framework”.
The argument that any cost from share-based payment is already recognised in the dilution of
earnings per share (EPS) is not appropriate as the impact of EPS reflects the two economic
events that have occurred. The company has issued share options with the subsequent effect
on the diluted EPS and it has consumed the resources that it received for awarding those
options, thereby decreasing earnings. These two different effects on EPS are each taken
account of only once.
(b) Accounting in the financial statements for the year ended 31 May 2017
IFRS 2 requires an expense to be recognised for the share options granted to the directors with
a corresponding amount shown in equity. Where options do not vest immediately but only
after a period of service, then there is a presumption that the services will be rendered over the
“vesting period”. The fair value of the services rendered will be measured by reference to the
fair value of the equity instruments at the date that the equity instruments were granted. Fair
value should be based on market prices. The treatment of vesting conditions depends on
whether or not the conditions relate to the market price of the instruments. Market conditions
are effectively taken into account in determining the fair value of the instruments and
therefore can be ignored for the purposes of estimating the number of equity instruments that
will vest. For other conditions such as remaining in the employment of the company, the
calculations are carried out based on the best estimate of the number of instruments that will
vest. The estimate is revised when subsequent information is available.
Remuneration expense
Prior to 1 June 2016 Year ended 31 May 2017
$000 $000
J Van Heflin (20,000 × $5 × ½) 50 50
R Ashworth (50,000 × $6 × ⅓) 100
––– –––
50 150
––– –––
The conditions set out in performance condition A and the service condition by the director
have been met. The expense is spread over two years up to the vesting date of 1 June 2017.
The increase in the share price to above $13·50 in condition B has not been met but IFRS 2
says that the services received should be recognised irrespective of whether the market
condition is satisfied. Additionally the director has to work for the company for three years
for the options to vest and, therefore, the expense is spread over three years.
The opening balance of retained earnings at 1 June 2016 would be reduced by $50,000 and
equity (separate component) increased by $50,000.
The statement of profit or loss for the year ended 31 May 2017 would be charged with
directors’ remuneration relating to share options of $150,000 and equity (separate component)
increased by the same amount.
Answer 30 SHEP I
(a) Corporate income tax liability – year ended 31 December 2015

$
Profit per accounts 121,000
Add: Depreciation 11,000
———
132,000
Less: Tax allowance (25% of ($48,000 + 12,000) (15,000)
———
Taxable profits 117,000
———
Tax payable @ 30% 35,100
———
(b) Deferred tax liability
$
Tax base 45,000
Carrying amount (60,000 – 11,000) 49,000
———
Temporary difference (4,000)
———
Deferred tax provision required @ 30% (1,200)
———
(c) Movement on the deferred tax liability
$
Balance b/fwd 
Profit or loss (balancing figure) 1,200
———
Balance c/fwd 1,200
———
(d) Analysis of tax expense
$
Current tax expense 35,100
Deferred tax expense 1,200
———
Tax expense 36,300
———
(e) Reconciliation of accounting profit multiplied by applicable tax rate to tax expense
$
Accounting profit 121,000
———
Tax @ 30 % 36,300
Tax expense 36,300

———
(f) Movement on deferred tax by each category of temporary difference
B/fwd Movement C/fwd

$ $ $
Tangible assets – 1,200 1,200
——— ——— ———
 1,200 1,200
——— ——— ———
Answer 31 SHEP II
$
Add: Depreciation 14,000
Interest payable 500
Provision 1,200
Fine 6,000
———
146,700
Less: Tax allowance (given) (16,000)
Interest receivable (150)
———
———

———

Carrying Tax Temporary
amount base difference
$ $ $
Tangible assets
Carrying amount (49 b/fwd – 14) 35,000
Tax base (45 b/fwd – 16) 29,000 6,000
Interest payable (25,000 × 8% × 3/12) (500)  (500)
Interest receivable (4,000 × 15% × 3/12) 150  150
Provision (1,200)  (1,200)
——— ——— ———
33,450 29,000 4,450
——— ——— ———
Deferred tax @30% 1,335
———

$
Balance b/fwd 1,200
Profit or loss (balancing figure) 135
———
Balance c/fwd 1,335
———

$
Deferred tax expense 135
———
Tax expense 39,300
———
$
———
Tax @ 30 % 37,500
Tax effect on non-deductible expenses (6,000 × 30%) 1,800
———
Tax expense 39,300
———

$ $ $
Tangible assets 1,200 600 1,800
Interest payable – (150) (150)
Interest receivable – 45 45
Provision – (360) (360)
——— —— ———
1,200 135 1,335
——— —— ———
Answer 32 SHEP III

$
Add Depreciation 18,500
Interest payable (note) 
Provision 1,500
Entertainment 20,000
————
215,000
Less: Tax allowance (given) (24,700)
Interest receivable (note) 
Development costs (17,800)
————
————

————

Carrying Tax Temporary
amount base difference
$ $ $
Tangible assets
Carrying amount (35,000 b/fwd – 18,500) 16,500
Tax base (29,000 b/fwd – 24,700) 4,300 12,200
Interest payable (500)  (500)
Interest receivable 150  150
Provision (2,700)  (2,700)
Development expenditure 17,800  17,800
——— ——— ———
31,250 4,300 26,950
——— ——— ———
———
$
Balance b/fwd 1,335
———
Balance c/fwd 8,085
———
$
Deferred tax expense 6,750
———
Tax expense 58,500
———
$
———
Tax @ 30 % 52,500
———
Tax expense 58,500
———

$ $ $
Tangible assets 1,800 1,860 3,660
Interest payable (150) – (150)
Interest receivable 45 – 45
Provision (360) (450) (810)
Deferred development costs – 5,340 5,340
——— ——— ———
1,335 6,750 8,085
——— ——— ———
Tutorial note:
There is no adjustment to profit for the interest paid and the interest receivable.
Consider the interest payable. The tax authority will disallow the closing accrual but will
allow last year’s accrual (that has been paid in this year) as a deduction. These amounts are
equal so there is no net effect.
Similar comments can be made about the interest receivable.
Answer 33 SHEP IV
$
Taxable profits (as before) 172,500
——–—
——–—
$
Temporary difference (as before) 26,950
———
———
$
Balance b/fwd 1,335
Adjustment due to change in rate (89)
———
Opening balance restated to 28% (1,335 × 28/30) 1,246
———
Balance c/fwd 7,546
———
$
Adjustment to restate the opening deferred tax balance (89)
Deferred tax on temporary differences originating in the period 6,300
———
Tax expense 54,511
———
$
——–—
Tax @ 28 % 49,000
Rate adjustment (89)
——–—
Tax expense 54,511
——–—
B/fwd Rate Originating C/fwd

adjustment
$ $ $ $
Tangible assets 1,800 (120) 1,736 3,416
Interest payable (150) 10 – (140)
Interest receivable 45 (3) – 42
Provision (360) 24 (420) (756)
Deferred development costs – – 4,984 4,984
—–— ——— ——— ———
1,335 (89) 6,300 7,546
—–— ——— ——— ———
Answer 34 AMBUSH
(a) IFRS 9
Classification and initial measurement
Financial assets and liabilities are initially measured at fair value which will normally be the
fair value of the consideration given or received. Transaction costs are included in the initial
carrying amount of the instrument unless it is carried at “fair value through profit or loss”
when these costs are recognised in profit or loss.
Financial assets should be classified into one of three categories:
(1) financial assets at fair value through profit or loss;

(2) financial assets at fair value through other comprehensive income;
(3) amortised cost.
A financial asset is measured at amortised cost only if the following conditions are met:
 the asset is held in a business model whose objective is to hold assets in order to
collect their contractual cash flows; and
 the contractual terms of the asset give rise to cash flows that are solely payments of
principal and interest on the principal.
A financial asset is measured at fair value through other comprehensive income if the
following conditions are met:
 the asset is held in a business model whose objective is by both collecting

contractual cash flows and selling financial assets; and
 the contractual terms of the asset give rise to cash flows that are solely payments of
principal and interest on the principal.
The above two classifications relate to loan assets; the entity’s business model will determine
which category the asset will fall into (an entity cannot choose).
On initial recognition an asset may be designated at fair value through profit or loss if it will
eliminate or significantly reduce an accounting mismatch.
Any gain or loss on derecognition, impairment or reclassification is recognised in profit or

loss along with any investment income generated by the asset. The cumulative fair value gain
or loss on debt assets classified as fair value through other comprehensive income will be
reclassified through profit or loss on derecognition of the asset.
All other financial assets are subsequently measured at fair value.
Any changes in fair value are recognised in profit or loss as well as any profit or loss on
derecognition.
On initial recognition of an investment in equity instruments of another entity that is not held
for trading an entity may elect to present changes in fair value through other comprehensive
income. This election is permanent and cannot be changed at a later date.
All changes in fair value are recognised in other comprehensive income. On disposal of the
asset any cumulative gain or loss is not reclassified through profit or loss.
Any dividends received from the equity investment are included in profit or loss.
Most financial liabilities are subsequently measured at amortised cost using the effective
interest rate method.
Groups of financial liabilities that are not measured at amortised cost include:
 those at fair value through profit or loss (including derivatives) – measured at fair
value; and
 commitments to provide a loan at a below-market interest rate. These are measured

at the higher of the amount determined under IAS 37 and the initial amount
recognised less any cumulative amortisation.
(b) (i) Impairment of financial assets
IFRS 9 applies an “incurred loss” approach to the recognition of impairment losses on

financial assets classified at amortised cost and those classified at fair value through other
comprehensive income due to the entity’s business model. This captures debt-based assets
and trade receivables. Equity instruments are measured at fair value which takes account of
any fall in value.
The incurred loss approach means that an entity must recognise any impairment losses at the
earliest opportunity.
IFRS 9 requires an entity to create a loss allowance based on the likely incurrence of credit
losses on relevant financial assets. If the credit risk relating to a financial asset has not
increased significantly since its initial recognition the loss allowance is measured as the 12-
month expected credit losses. If the credit risk has increased significantly the loss allowance
is based on lifetime expected credit losses.
The standard allows a simplified approach to expected loss allowance on trade receivables. A
provision matrix based on past empirical evidence, adjusted for any subsequent changes, may
be applied to receivable based on the number of days amounts have been outstanding.
(ii) Loan to Bromwich
An impairment loss on the loan has arisen because of the financial difficulties and
reorganisation of Bromwich. It will be calculated by discounting the estimated future cash
flows. The future cash flows will be $100,000 on 30 November 2018. This will be
discounted at an effective interest rate of 8% to give a present value of $85,733. The loan
will, therefore, be impaired by $114,267 ($200,000 – $85,733).
Tutorial note: IFRS 9 requires accrual of interest on impaired loans at the original effective
interest rate. In the year to 30 November 2017 interest of $6,859 (8%  $85,733) would be
accrued.
Answer 35 CONSOLIDATIONS
(a) Consolidated statement of financial position at 31 December 2016
$
Goodwill 10,000
Sundry net assets (115,000 + 55,000) 170,000
————
180,000
————
Equity capital 140,000
————
180,000
————
(1) Net assets of Sink
End of the Acquisition Post-

reporting period acquisition
$ $ $
Share capital 30,000 30,000 –
Retained earnings 25,000 25,000 -
——— ———
55,000 55,000
——— ———
(2) Goodwill
$
Cost of shares 65,000
Net assets acquired
Sink (100%  55,000) (W1) (55,000)
———
10,000
———
(b) Consolidated statement of financial position at 31 December 2016
$
Goodwill (10,000 – 4,000) 6,000
————
197,000
————
————
197,000
————
$ $ $
——— ———
62,000 55,000
——— ———
(2) Goodwill
$
Net assets acquired Sink (100%  55,000) (W1) (55,000)
———
10,000
———
(3) Retained earnings $
Pink 54,000
S (100%  7,000 (W2)) 7,000
Goodwill impaired (4,000)
———
57,000
———
(c) Consolidated statement of financial position at 31 December 2016

$
Goodwill 8,000
————
178,000
————

————
167,000
Non-controlling interest 11,000
————
178,000
————

$ $ $
Retained earnings 25,000 25,000 –
——— ———
55,000 55,000
——— ———
(2) Goodwill
$
Net assets acquired
Sink (80%  55,000) (W1) (44,000)
———
8,000
———
(3) Non-controlling interest $

Sink (20%  55,000 (W1)) 11,000
(d) Consolidated statement of financial position at 31 December 2016
(i) Non-controlling interest valued at proportionate share of identifiable net assets
$
Goodwill (8,000 – 3,200) 4,800
————
195,800
————
————
183,400
————
195,800
————

$ $ $
——— ———
62,000 55,000
——— ———
(2) Goodwill
$
Net assets acquired
Sink (80%  55,000) (W1) (44,000)
———
8,000
———
(3) Non-controlling interest $

Sink (20%  62,000 (W1)) 12,400
———
(4) Retained earnings $

Pink 54,000
Sink (80%  7,000 (W2)) 5,600
Goodwill impaired (3,200)
———
56,400
———
(ii) Non-controlling interest valued at fair value

(1) Goodwill
$
Fair value of non-controlling interest (6,000  $2.15) 12,900
Net assets acquired (100%) (55,000)
———
9,900
———
(2) Non-controlling interest
Fair value on acquisition 12,900
Share of post-acquisition profits (7,000  20%) 1,400
Share of goodwill impairment (3,200  20%) (640)
———
13,660
———
(4) Retained earnings
Pink 54,000
Sink (80%  7,000 (W2)) 5,600
Goodwill impaired (3,200  80%) (2,560)
———
57,040
———
Answer 36 HUT
Consolidated statement of financial position as at 31 December 2016

Assets $ $
Non-current assets
Tangible
Land (80,000 + 72,000 + 18,000 (W2)) 170,000
Plant at cost (72,000 + 57,600) 129,600
Goodwill 52,050
———–
351,650
Current assets
Inventory (112,000 + 74,400 – 3,200 (W6)) 183,200
Receivables (104,000 + 84,000) 188,000
Bank (41,000 + 8,000) 49,000
———–
420,200
———–
771,850
———–
Share capital 400,000
———–
627,440
Non-controlling interest (W4) 68,410
———–
695,850
Current liabilities (52,000 + 24,000) 76,000
———–
771,850
———–
WORKINGS
(1) Group structure
Hut
128
160
= 80% ords
Shed
(2) Net assets of Shed

Date of Acquisition Post
consolidation acquisition
$ $ $
Share capital 160,000 160,000 –
Fair value adjustment on land (90,000 – 72,000) 18,000 18,000 –
Retained earnings 112,000 (11,000) 123,000
———– ———–
290,000 167,000
———– ———–
(3) Goodwill
$
Fair value of non-controlling interest 50,750
Less Net assets acquired (W2)) (167,000)
———–
86,750
Value at 31 December 2016 (52,050)
———–
Impairment loss 34,700
———–
Allocated to:
Shareholders of Hut (Dr Retained earnings) (34,700  80%) 27,760
Non-controlling interest (Dr Non-controlling interest) (34,700  20%) 6,940
———–
34,700
———–
$
Fair value on acquisition 50,750
Share of post-acquisition profits (123,000  20%) 24,600
Share of impairment loss since acquisition (W3) (6,940)
———
68,410
———

$
Hut 160,000
Less Goodwill impaired (W3) (27,760)
Provision for unrealised profit (W6) (3,200)
Shed (80%  123,000 (W2)) 98,400
———–
227,440
———–
(6) Provision for unrealised profit
% $
Selling price 125 16,000
Cost (100) (12,800)
—— ———
Gross profit 25 3,200
—— ———
(7) Land
$72,000 + $18,000 $90,000
Answer 37 HOLDING
(a) Goodwill
Holding has acquired 18 million of Subside’s 24 million equity shares which represents 75%
ownership. The consolidated goodwill is calculated as follows:
$
Cost of shares (18 m × $10) 180
Less Net assets on acquisition
Share capital 24
Fair value difference (W1) 64
Pre-acquisition profits (W2) 88
___
176 × 75% = (132)
––––
Goodwill 48
––––
Holding has included in its profit or loss $15 million ($20m × 75%) which is the whole of its
share of Subside’s dividend. This dividend is deemed to accrue evenly during the reporting
period of 15 months. Therefore 6/15 of this amount = $6 million is a dividend payable out of
pre-acquisition profits.
Consolidated goodwill at the date of acquisition is $48 million.
(b) Consolidated profit or loss of Holding for the Year to 30 September 2016
$m
Revenue (W3) 488
Cost of sales (W4) (286)
____
Gross profit 202
Operating expenses (W5) (99)
Interest payable (10 + 60% × 5) (13)
____
Profit before tax 90
Income tax expense (22 + 60% × 10) (28)
____
Profit after tax 62
____
Attributable to:
Owners of Holding 56
Non-controlling interest (W6) 6
____
62
____
WORKINGS
(1) Fair value difference

$m
Investment property
– at 30 June 2015 20
– increase up to 1 January 2016 4
____
24
____
Plant:
Carrying amount at 30 June 2015 60
Depreciation 6 months to date of acquisition (20 × 6/12) (10)
____
Carrying amount at date of acquisition 50
Fair value at date of acquisition (90)
____
Fair value increase 40
____
Total fair value gains (24 + 40) 64
____
(2) Pre-acquisition profits
$m
Retained earnings at 30 June 2015 64
Retained profit for period $60 million
of which 6/15 is earned to 1 January 2016 24
____
Total pre-acquisition profits 88
____
(3) Most of the figures in the consolidated profit or loss are based on the whole of the parent’s
figures plus the post-acquisition figures of the subsidiary. The results of the subsidiary are for
a 15 month period, of which nine months is post acquisition. Thus the post-acquisition results
would be 9/15 or 60% of Subside’s relevant figures.
$m
Revenue:
Holding 350
Subside (60% × 280) 168
Intra-group sales (30)
____
488
____
(4) Cost of sales
$m
Holding 200
Subside (60% × 170) 102
Intra-group sales (30)
Unrealised profit in inventory (see below) 2
Additional depreciation (see below) 12
____
286
____
Unrealised profit:
A mark-up of 25% on cost is equivalent to 20% of the selling price. Holding has $10 million
($30 m × 1/3) of inventories at the transfer price, thus the unrealised profit is ($10 m × 20%)
$2 million.
Additional depreciation (plant of Subside):
At the date of the acquisition (1 January 2016) the plant is 2½ years old and has a remaining
life also of 2½ years. Therefore the revaluation gain of $40 million will be amortised at $16
million per annum ($40 m ÷ 2½). The post-acquisition period is 9 months and would thus
require additional depreciation of $12 million (9/12 × $16)
(5) Operating expenses

$m
Holding 72
Subside (60% × 35) 21
Goodwill amortisation ($48 – $42) 6
____
99
____
The profit after tax of Subside is $60 million of which $36 million (9/15) is post acquisition.
The depreciation adjustment of $12 million (see (3) above) is deducted from this to give an
adjusted figure of $24 million. The non-controlling interest has a 25% interest in this profit =
$6 million.
Answer 38 HALEY
Consolidated statement of financial position as at 31 December 2016
$000 $000
Assets
Non-current assets
Tangible assets 400
Interest in associated undertaking (W6) 48
—— 448
Current assets 505
——
Total assets 953
——
Share capital ($1 shares) 250
Retained earnings (W5) 469
——
719
——
803
Non-current liabilities 150

——
Total equity and liabilities 953
——
WORKINGS
(1) Group structure
Haley
30%
60%
Aristotle
Socrates
(2) Net assets – Socrates

Reporting Post-
date Acquisition acquisition
$000 $000 $000
Share capital 30 30 –
Retained earnings 180 70 110
—— ——
210 100
—— ——
(3) Goodwill
Socrates
$000
Cost of investment 75
Share of net assets acquired (60%  100 (W2)) (60)
——
15
——
All fully written off to retained earnings.

$000
Socrates (40%  210) 84
——
$000
Haley 400
Socrates (60%  110 (W2)) 66
Aristotle (30%  70 (W2)) 21
Goodwill (15)
Impairment of Aristotle (3)
——
469
——
(6) Investment in associate
$000
Cost of investment 30
Aristotle (30%  70 (W2)) 21
Impairment write down (3)
——
48
——
Answer 39 HAMISH
Consolidated statement of profit or loss for the year ended 30 June 2017
$000
Revenue 15,131
Cost of sales and expenses (13,580)
———
Operating profit before tax 1,551
Share of income from associated company 178
Tax (736)
———
Profit after tax 993
———
Attributable to:
Owners of the parent 963
———
———
WORKINGS
(1) Group structure
Hamish
30%
80%
Angus
Shug
(2) Consolidation schedule
Hamish Shug Angus AdjustmentConsolidated

5
30%
12
$000 $000 $000 $000 $000
Sales revenue 12,614 2,567 (50) 15,131
Cost of sales – per Q (11,318) (2,302) 50
– unrealised profit
25
(50  ) (10) (13,580)
125
Income from associate (594  30%) 178
Tax – group (621) (115) (736)
——
150
——
$000
Shug (20%  150,000) 30
——
Answer 40 WATER
Consolidated statement of financial position as at 30 September 2016
$ $
Assets
Non-current assets
Tangible assets (697,210 + 648,010) 1,345,220
Interest in associated undertaking (W6) 270,800
————–
1,616,020
Current assets
Inventory (495,165 + 388,619) 883,784
Receivables (385,717 + 320,540 + 6,000) 712,257
Cash at bank and in hand (101,274 + 95,010) 196,284
————–
1,792,325
————–
Total assets 3,408,345
————–

Share capital 600,000
Retained earnings (note 2) 1,355,800
————–
1,955,800
————–
2,159,800
Non-current liabilities
Loan notes (400,000 + 150,000) 550,000
Current liabilities
Trade payables (375,366 + 252,179) (note 1) 627,545
Dividends payable – parent company 65,000
– non-controlling interest 6,000
————–
698,545
————–
Total equity and liabilities 3,408,345
————–
Notes to the accounts
(1) Payables
$
Trade payables 609,545
Amounts owed to associated undertaking 18,000
———–
627,545
———–
Of the $1,355,800, $86,800 has been retained by the associated undertaking.
WORKINGS
(1) Group structure
Water
80% 40%
Hydrogen
Oxygen
(2) Net assets
Hydrogen
End of the Post-
reporting period Acquisition acquisition
$ $ $ $ $
Original share capital 200,000 200,000
Bonus issue 200,000 200,000
———– ———–
400,000 400,000 –

Bonus issue (200,000) (200,000)
Dividends payable (30,000)
———–
620,000 320,000
–———– ———– ———–
1,020,000 700,000 320,000
–———– ———– ———–
Oxygen
End of the Post
reporting period Acquisition acquisition
$ $ $ $
Share capital 200,000 200,000 –
Less Dividends payable (15,000)
Unrealised profit on inventory (4,000)
————
459,000 242,000 217,000
–——— –——— –———
659,000 442,000 217,000
–——— –——— –———
(3) Goodwill
Hydrogen
$
Share of net assets acquired (80%  700,000) (W2) (560,000)
———–
2,000
———–
All written off to retained earnings as value impaired.
As the recoverable amount exceeds the carrying amount of the investment there will be no
impairment of the investment in associate Oxygen.
Share of net assets (20%  1,020,000) (W2) 204,000

———–

$ $
Water 1,050,000
Add Dividends receivable – Hydrogen (80%  30,000) 24,000
– Oxygen (40%  15,000) 6,000
———
30,000
Hydrogen post-acquisition (80%  320,000 (W2)) 256,000
Oxygen post-acquisition (40%  217,000 (W2)) 86,800
Less Dividends payable (65,000)
Goodwill written off – Hydrogen (2,000)
————–
1,355,800
————–
(6) Interest in associated undertaking

$
Cost of investment 184,000
Oxygen post acquisition (40%  217,000 (W2)) 86,800
———–
270,800
———–
Answer 41 CORFU
Consolidated profit or loss for the year ended 30 June 2017

$000
Revenue 15,131
Cost of sales and expenses (13,580)
———
Operating profit 1,551
Share of income from associated company 178
Tax (736)
———
Profit after tax 993
———
Attributable to:
Owners of the parent 963
Non-controlling interest (W3) (30)
———
———
Dividends (extracted from SOCIE) (500)

———
WORKINGS (amounts in $000)
(1) Group structure
Corfu
30%
80%
Paxos
Zante
(2) Consolidation schedule

Corfu Zante Paxos Adjust- Consol-
ment idated
5
/12 30%
Revenue 12,614 2,567 (50) 15,131
Cost of sales
– per question (11,318) (2,302) 50
– unrealised profit provision (50  25/125) (10) (13,580)
Tax – group (621) (115) (736)
——
150
——
Income from associate (594  30%) 178
Zante (20%  150,000) 30

——
Answer 42 KANE
(a) Consolidated statement of financial position at 31 March 2017

(all figures in $000 unless otherwise stated)
ASSETS
Non-current assets:
Property, plant and equipment
(135,000 + 100,000 + 19,600 + 2,000 (W1)) 256,600 ½+½
Goodwill (W2) 15,760 4 (W2)
Investment in associate (W6) 36,600 1½ (W6)
Financial asset at fair value through other comprehensive income 17,000 ½
–––––––
325,960
–––––––
Current assets:
Inventories (45,000 + 32,000 – 2,500 (W4)) 74,500 ½+½
Trade receivables (50,000 + 34,000 – 5,000 (intra-group)) 79,000 ½+1
Cash and cash equivalents (10,000 + 4,000 + 5,000 (cash in transit)) 19,000 ½+½
–––––––
172,500
–––––––
Total assets 498,460
–––––––
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Share capital 120,000 ½
Retained earnings (W4) 163,086 8½ (W4)
Other components of equity (W5) 1,050 ½ (W5)
–––––––
284,136
Non-controlling interest (W3) 36,355 1 (W3)
–––––––
Total equity 320,491
–––––––
Long-term borrowings (40,000 + 25,000) 65,000 ½
Deferred tax (20,000 + 8,000 + 600 (W1) + 6,480 (W7)) 35,080 ½+½+½
–––––––
Total non-current liabilities 100,080
–––––––
Current liabilities:
Trade and other payables (30,000 + 22,000) 52,000 ½
Deferred consideration (12,860 (W2) + 1,029 (W4)) 13,889 ½+½
Short-term borrowings (6,000 + 6,000) 12,000 ½
––––––– ————
Total current liabilities 77,889 25
––––––– ————
Total equity and liabilities 498,460
–––––––
WORKINGS – unless stated all figures in $000 – do not double count marks
(1) Net assets table – Vardy
1 April 2016 31 March 2017 For (W2) For (W4)

Share capital 80,000 80,000
Retained earnings:
Per accounts of Vardy 35,000 44,000 ½ ½
Property adjustment – see below 20,000 19,600 ½ ½
Plant and equipment adjustment – see below 3,000 2,000 ½ ½
Deferred tax on fair value adjustments (W7) (6,900) (6,480) ½ ½
FVTOCI investment (see below) 1,400 ½
––––––– –––––––
Net assets for the consolidation 131,100 140,520
––––––– –––––––
The post-acquisition profits are 9,420 (140,520 – 131,100).

Of this amount 1,400 is taken to other components of equity 1
and 8,020 (9,420 – 1,400) to retained earnings ——— ———
2 3½
——— ———
Post-acquisition depreciation adjustments
For the property this is 400 ((36,000 – 24,000) × 1/30). This makes the closing adjustment
19,600 (20,000 – 400).
For the plant and equipment this is 1,000 ((54,000 – 51,000) × 1/3). This makes the closing
adjustment 2,000 (3,000 – 1,000).
Fair value of the investment
The carrying value should be 17,000 – an increase of 2,000 from the 15,000 shown in the
draft accounts of Vardy. The related deferred tax is 600 (2,000 × 30%) so the net adjustment
is 1,400 (2,000 – 600).
(2) Goodwill on consolidation (Vardy)
Cost of investment:
Cash 100,000 ½
Deferred consideration (15,000 ÷ (1·08)2) 12,860 1
Fair value of non-controlling interest at date of acquisition
(20,000 × $1·70) 34,000 ½
–––––––
146,860
Net assets at 1 April 2016 (W1) (131,100) 2 (W1)
––––––– ————
So goodwill equals 15,760 4
––––––– ————
(3) Non-controlling interest in Vardy
Fair value at date of acquisition (W2) 34,000 ½

Share of post-acquisition profits (25% × 9,420 (W1)) 2,355 ½
––––––– ————
36,355 1
––––––– ————
Kane 163,000 ½
Interest on deferred consideration (12,860 (W2) × 8%) (1,029) 1
Vardy (75% × 8,020 (W1)) 6,015 ½ + 3½ (W1)
Rooney (30% × (55,000 – 60,000)) (1,500) 1
Unrealised profits on sales to Vardy (10,000 × 25%) (2,500) 1
Unrealised profits on sales to Rooney (12,000 × 25% × 30%)) (900) 1
––––––– ————
163,086 8½
––––––– ————
(5) Other components of equity
Change in FV of FVTOCI investment 75% × 1,400 (W1) 1,050 ½

––––––– ————
(6) Investment in Rooney
Cost 39,000 ½
Share of post-acquisition losses (W4) (1,500) ½
Unrealised profits (W4) (900) ½
––––––– ————
36,600 1½
––––––– ————
(7) Deferred tax on temporary differences
Fair value adjustments:

1 April 2016 31 March 2017
Property adjustment 20,000 19,600
Plant and equipment adjustment 3,000 2,000
––––––– –––––––
Net taxable temporary differences 23,000 21,600 ½
––––––– –––––––
Related deferred tax (30%) 6,900 6,480 ½
––––––– ––––––– ————
1
————
Answer 43 BERTIE  W1
Profit or loss Statement of financial position

(a) Revenue (W1) $30,303
Exchange differences (W1) $3,030
(b) Purchases (W2) $42,857 Trade payables (W2) $44,444
Exchange differences (W2) $1,587
(c) Depreciation $23,529 Tangible asset $
 $117,647   £200,000 
  Cost   117,647
 5   1.70 
Depreciation (23,529)
———
———
(d) Interest payable charges (W3) $59,260 Loan (W3) $592,593
WORKINGS
(1) Customer
£ $ £ $
1 Oct Sales 50,000 30,303 3 Dec Cash 50,000 33,333
31 Dec P or L 3,030
——— ——— ——— ———
50,000 33,333 50,000 33,333
——— ——— ——— ———
(2) Supplier
£ $ £ $
15 Dec Purchases 60,000 42,857
31 Dec C/fwd 60,000 44,444 31 Dec P or L 1,587
——— ——— ——— ———
60,000 44,444 60,000 44,444
——— ——— ——— ———
1 Jan B/fwd 60,000 44,444
(3) Loan
£ $ £ $
3 Dec Cash 800,000 533,333
31 Dec C/fwd 800,000 592,593 31 Dec P or L 59,260
———— ———— ———— ————
800,000 592,593 800,000 592,593
———— ———— ———— ————
1 Jan B/fwd 800,000 592,593
Answer 44 EPS
(a) Basic EPS

2015 2016
$ $
Earnings: Profit available for dividends 55,500 58,800
——— ———
$100,000
Number of shares 200,000 200,000
$0.50
——— ———
EPS 27.75c 29.4c
——— ———
(b) Bonus issue
Comparative EPS – original (as above) 27.75c

200,000
Restated 27.75c  22.2c
250,000
Current EPS
Earnings (as above) 58,800
–———
Nunber of shares 250,000
–———
EPS 23.4c
–———
(c) Takeover
2015 2016
$ $
Earnings 50,000 63,000
S – post-acquisition only 3/12  $20,000 – 5,000
–——— –———
50,000 68,000
Less Non-controlling interest 10%  $5,000 – (500)
–——— –———
50,000 67,500
–——— –———
Number of shares 200,000
–———
Weighted average (200,000  9/12) + (400,000  3/12) 250,000
–———
EPS 25c 27c
—— ——
(d) Rights issue

Cents
(i) Compute theoretical ex-rights price
4 shares quoted cum rights at 360c 1,440
1 share at rights price 300
— ———
5 1,740
— ———
1,740c
Theoretical ex-rights price = 348c
5
(ii) EPS
Comparative
$40,000
Original 20.0c
200,000
348c
Restated 20c  19.3c
360c
Current
Earnings $50,000
Date Number Time Rights Weighted

average
1 January 200,000  9/12 × 360/348 = 155,172
1 October 50,000
————
250,000  3/12 = 62,500
————
217,672
————
$50,000
EPS 23.0c
217,672
———
(e) Diluted – Convertible loan notes

2015 2016
$ $
Earnings
Basic 40,000 50,000
Add Interest on loan notes 10,000 10,400
Less Tax at 33% (10,000  33%) (10,400  33%) (3,300) (3,432)
——— ———
Fully diluted 46,700 56,968
——— ———
Number of shares
Basic 400,000 400,000
Convertible loan notes – 31 December 2016 ($100,000  140) 140,000 140,000
———– –———
540,000 540,000
———– –———
EPS
Basic 10.0c 12.5c
——— ———
Diluted 8.6c 10.5c
——— ———
(f) Diluted – Options

2016
$
Earnings
Basic and diluted 50,000
———
EPS
Basic (50,000 ÷ 400,000) 12.5c
———
Diluted (50,000 ÷ 410,000) 12.19c

———
$
Number of shares under option 50,000
(50,000  80c)
Number of shares that would have been issued at fair value (40,000)
100c
————
Bonus element 10,000
Number of shares outstanding 400,000
————
410,000
————
Answer 45 AZ
(a) Why segmental data improves information
Many companies and groups of companies conduct their business in several industrial sectors
and in a number of different countries. Such companies also may manufacture in one country
and supply goods to customers in another country. These different parts of the business will
be subject to different risks determined by the business environment in which they are
operating. Additionally each segment may have a different growth potential because of the
region of the world in which it is trading and may have different regional problems to deal
with. For example, there may be high inflation in that part of the world, or currency
problems. There is greater awareness of cultural and environmental differences between
countries by investors and therefore geographical knowledge of business operations is
increasingly important.
The provision of segmental information will enable users to better understand the company’s
past performance and to make more informed judgements about the company as a whole. If
users are to be able to assess the performance of a company and attempt to predict likely
future results, then disaggregation of the data in the financial statements is necessary. It is
important that users are aware of the impact that changes in significant components of the
business may have on the business as a whole. Several companies are currently demerging
their activities and as a result of this, the provision of segmental information becomes
increasingly important. The computation of key accounting ratios for the different segments
is important information for potential investors in the demerged activities.
(b) Advantages and disadvantages of different approaches
“Risk and returns” approach
Segment reporting on the risks and returns basis produces information which is more
consistent over time and comparable between companies, although the use of the directors’
judgement in segmental analysis affects comparability. The greater consistency of this
method arises because the managerial method is subject to fluctuations due to the changing
allocation of managers to the task of producing segmental information. This method assists in
the assessment of profitability, and returns and the risks of the component parts of the entity.
The determination of business segments under this method had been somewhat subjective and
it is thought segments based on an existing internal structure should be somewhat less
subjective. In any event knowledge of the internal structure of a company is valuable
information in itself and may enhance a user’s ability to predict the actions of the
management.
“Managerial” approach
This approach should be more cost effective as the incremental cost of providing segmental
information will be lower. If segmental information is reported on the same basis as for
internal decision making, then this will reflect the classifications used by managers to discuss
the progress of the business. However, the information produced by this form of
classification is more likely to be sensitive because of the strategic way in which business is
organised. Also segments with different risks and returns will be combined thus affecting the
quality of the financial information produced. If the managerial approach is adopted, the
definition of a segment will be determined solely by management which means that the nature
of the information disclosed will be highly variable. This is the approach that is now used by
IFRS 8 Operating Segments.
(c) Transactions
(i) Fleet of aircraft
IFRS 8 requires disclosure of information relating to operating segments, those segments are
based on components of an entity that report directly to the Chief Operating Decision Maker
in the company. This position has the responsibility for managing and allocating resources to
the segment. The previous standard required segments to be identified based on segments of a
business, either by product or geographical, having different risk and returns.
If the two business’s report separately to management for internal purposes and management
view the business’s as two separate components then it is highly likely that they will be
classed as operating segments under IFRS 8.
Information would need to be presented to users of accounts relating to the revenue, profit,
assets and liabilities of the segments. The information provided is based on that given to the
Chief Operating Decision Maker, which may be measured in a manner different to that
required for the full IFRS financial statements. Where there is a difference in the method of
measurement then IFRS 8 requires reconciliation between that disclosed under IFRS 8 and the
figures presented in the full financials.
IFRS 8 not only concerns itself with the quantitative disclosures but also requires a number of
qualitative disclosures to be made to users, giving the users the information that is available to
the internal management of the business.
(ii) Manufacturing plant
IFRS 8 requires that in measuring and reporting segment revenue from transactions with other
segments, inter-segment transfers should be measured on the basis that the entity actually
used to price the transfers. The basis of pricing inter-segment transfers and any change is
disclosed in the financial statements. Thus the fact that market prices are used to price intra-
group transfers except where such a price is not available, will give important information to
users of financial statements.
(iii) Material items
A segment expense is one which results from the operating activities of a segment that is
directly attributable to that segment or the relevant portion of an expense that can be allocated
on a reasonable basis to that segment. Any material items relating to a specific segment
should be disclosed as part of the disclosure requirements of IFRS 8.
IAS 1 Presentation and Preparation of Financial Statements requires an entity to disclose
information of a material nature, either due to the size or nature of the transaction. IFRS 8 is
carrying this principle forward into the disclosure requirements for individual operating
segments, allowing users to make their own decisions about the events that have affected that
segment of the business.
(iv) Holiday business
IFRS 8 does not deal specifically with the segmental disclosure of a discontinued operation.
IFRS 5 Non-current Assets Held for Disposal and Discontinued Operations requires NCA or
groups of assets that are held for disposal to be presented separately in the financial
statements. Assets are to be classed as held for disposal if the economic benefits from that
asset will primarily be generated through its disposal.
It would seem the disposal or discontinuance of the holiday business may well meet the
definition of held for disposal, requiring the assets to be presented separately in the statement
of financial position and to be valued at the lower of the current carrying amount and fair
value less costs to sell.
(v) Unquoted investment
IFRS 8 requires that an entity should disclose for each reportable segment the aggregate of the
entity’s share of the profit or loss of associates accounted for using the equity method.
The entity should also disclose the amount of any investment in associates accounted for
using the equity method that is reported in the operating segment.
Answer 46 TAB
(a) Explanation of the purpose
The purpose of segmental information is to provide users of financial statements with

sufficient details for them to be able to appreciate the different rates of profitability, different
opportunities for growth and different degrees of risk that apply to an entity’s classes of
business and various geographical locations. The segmental information should enable users to:
(i) appreciate more thoroughly the results and financial position of the entity by
permitting a better understanding of an entity’s past performance and thus a better
assessment of its future prospects;
(ii) be aware of the impact that changes in significant components of a business may
have on the business as a whole.
(b) Criteria
IFRS 8 requires that an entity should look to its internal organisational structure and internal
reporting system for the purpose of identifying a reportable segment. In identifying separate
reportable segments, the directors should have regard to how components of a business are
managed in terms of the reporting structure and the allocation of resources.
Separate information must be reported for an operating segment that meets any of the
following quantitative thresholds:
 reported revenue (including both external and inter-segmental) is 10% or more of
the combined revenue (internal and external) of all operating segments;
 profit or loss is 10% or more, in absolute amount, of the greater of:
(i) the combined profit of all operating segments that did not report a loss; and
(ii) the combined loss of all operating segments that reported a loss;
 assets are 10% or more of the combined assets of all operating segments.
At least 75% of the entity’s revenue must be included in reportable segments. Thus operating
segments that fall below the quantitative thresholds may need to be identified as reportable.
Information about other business activities and operating segments that are not reportable are
combined and disclosed in an “all other segments” category.
When an operating segment is first identified as a reportable segment according to the

quantitative thresholds, comparative data should be presented, unless the necessary
information is not available and the cost to develop it would be excessive.
It is highly likely that each subsidiary that TAB acquires would be reporting directly to some
function in the entity, and therefore be classed as an operating segment in accordance with
IFRS 8. This would require segmental information to be disclosed to users of financial
statements irrespective of whether the subsidiaries had different risk or return profiles.
(c) Required information
The following must be reported for each reportable segment:
 a measure of profit or loss and total assets.

 a measure of liabilities if such an amount is regularly provided to the chief operating
decision maker.
The following must also be disclosed if the specified amounts are regularly provided to the
chief operating decision maker (even if not included in the measure of segment profit or loss):
 revenues from external customers;
 inter-segment revenues;
 interest revenue;
 interest expense;
 depreciation and amortisation;
 other material items of income and expense required by IAS 1 Presentation of

Financial Statements (i.e. write-downs, restructurings, disposals, discontinued
operations, litigation settlements and reversals of provisions);
 entity’s interest in the profit or loss of associates and joint ventures accounted for by
the equity method;
 income tax expense or income; and
 material non-cash items other than depreciation and amortisation.
The following must also be disclosed if the specified amounts are regularly provided to the
chief operating decision maker (even if not included in the measure of segment assets):
 the investment in associates and joint ventures accounted for using the equity
method; and
 additions to non-current assets (other than financial instruments, deferred tax assets
and post-employment benefit assets).
Answer 47 DAWES (IV)
Discontinued operation
The engineering division appears to be a major and separate line of business that is clearly
distinguishable from other business activities of Dawes. As such its sale requires separate disclosure,
usually in the notes to the financial statements, as a discontinued activity. The following disclosures
are required by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations:
 in profit or loss a single amount made up of:

 the post-tax loss on discontinued operations ($4.5m);
 the post-tax loss on disposal of discontinued operations ($18m (($30m – $2m) –
$46m)).
 an analysis of the amount above into:

 revenue ($22m), expenses and pre-tax profit or loss on discontinued operations;
 related income tax of above;
 gain or loss on disposal of discontinued operations;
 related income tax of above.
(This analysis can either been shown in profit or loss or in the notes to the accounts.)
 net cash flow attributable to operating, investing and financing activities of discontinued
operations.
Comparative figures should be restated so that comparisons can be made.
The directors appear to be mistaken in their views of the damages claim. If the engineering division
had been a separate legal entity, say a subsidiary, it may be that its liabilities would be sold with it. In
this instance Dawes is selling some of its net assets to Manulite and the liability for the claim will
remain with Dawes. Pending legal actions are examples of contingencies, however the wording of the
question implies that the liability is probable, if not almost certain. In these circumstances the provision
of $5 million must be accrued by Dawes in the current year’s accounts to comply with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
The contributory negligence of Holroyd relating to the failure of the sub-assembly complicates the
issue. In respect of Dawes this is a contingent asset and its treatment is not necessarily a “mirror
image” of the liability. An assessment of the likelihood of the success of the counter-claim must be
made. The most appropriate treatment in such circumstances would probably be to disclose it as a note
in the financial statements giving details of the circumstances. A separate contingent asset should not
be accrued unless it is virtually certain to arise.
Answer 48 ETERNITY
(1) This event requires adjustment under IAS 10 Events After the Reporting Period as it clarifies
the situation of the trade receivable at the year end. Consequently $200,000 should be written
off as an irrecoverable debt.
(2) Although accounts would not normally be amended to reflect disposals of non-current assets
after the reporting period , the event should be disclosed in the notes. However, in this case
the sale price may be evidence of an impairment in the value of the building at the year end
and, unless it can be shown that the impairment arose from circumstances arising after the end
of the reporting period, the financial statements should be adjusted to reflect the impairment.
(3) This event provides further evidence as to the net realisable value of the electric tricycles at
the year end, and should be adjusted for. The remaining unsold year end inventories should
be written down to net realisable value, which should include provision for all anticipated
costs of transporting the tricycles to the alternative market. Prudence may dictate a write
down to scrap value if the alternative appears unlikely to arise.
(4) Government actions, such as a nationalisation, after the end of the reporting period should not
be adjusted for but disclosed in the notes to the financial statements. Full provision for the
loss arising from the nationalisation would only be made in the 31 December 2017 accounts if
the going concern assumption was not appropriate.
(5) The flood could be disclosed in the notes. However, as the branch is fully insured, it is
unlikely that a material loss will arise. Therefore, as non-disclosure may not affect the users
of financial statements, disclosure of the flood may be considered unnecessary.
(6) Under IAS 10 the share issue should not be adjusted for but disclosed in the notes to the
financial statements. Non-disclosure would clearly affect the ability of users to make proper
evaluations and decisions, since, for example, the rights issue affects earnings per share (and
market value).
Answer 49 RP GROUP
(a) Importance of related party relationships and transactions
Related party relationships are part of the normal business process. Entities operate the
separate parts of their business through subsidiaries and associates and acquire interests in
other entities for investment or commercial reasons. Thus control or significant influence can
be exercised over the investee by the investing company. These relationships can have a
significant effect on the financial position and operating results of the company and lead to
transactions which would not normally be undertaken. For example, a company may sell a
large proportion of its production to its parent company because it cannot and could not find a
market elsewhere. Additionally the transactions may be effected at prices which would not be
acceptable to unrelated parties.
Even if there are no transactions between the related parties it is still possible for the operating
results and financial position of an entity to be affected by the relationship. A recently
acquired subsidiary can be forced to finish a relationship with a company in order to benefit
group companies. Transactions may be entered into on terms different from those applicable
to an unrelated party. For example, a parent company may lease equipment to a subsidiary on
terms unrelated to market rates for equivalent leases.
In the absence of contrary information, it is assumed that the financial statements of an entity
reflect transactions carried out on an arm’s length basis and that the entity has independent
discretionary power over its actions and pursues its activities independently. If these
assumptions are not justified because of related party transactions, then disclosure of this fact
should be made. Even if transactions are at arm’s length, the disclosure of related party
transactions is useful because it is likely that future transactions may be affected by such
relationships. The main issues in determining such disclosures are the identification of related
parties, the types of transactions and arrangements and the information to be disclosed.
(b) Exemption for small companies
The disclosure of related party information is as important to the user of the accounts of small
companies as it is to the user of larger entities. If the transaction involves individuals who
have an interest in the small company then it may have greater significance because of the
disproportionate influence that this individual may have. The directors may also be the
shareholders and this degree of control may affect the nature of certain transactions with the
company. It is argued that the confidential nature of such disclosures would affect a small
company but these disclosures are likely to be excluded from abbreviated accounts made
available to the public. In any event if these disclosures are so significant then it can be
argued that they ought to be disclosed.
It is possible that the costs of providing the information to be disclosed could outweigh the
benefits of reporting it. However, this point of view is difficult to evaluate but the value of
appropriate related party disclosures is particularly important and relevant information in
small company accounts since transactions with related parties are more likely to be material.
It may be claimed that company legislation in many countries in this area is sufficient to
ensure adequate disclosure. However, although companies’ legislation may require disclosure
of directors’ and other officers’ transactions, information is limited. Therefore IAS 24
Related Party Disclosures extends these requirements and helps produce a more
comprehensive set of regulations in the area.
In other countries, where there is no legislation in this area, the disclosure of related party
transactions is a sensitive issue. IAS 24 attempts to ensure that some degree of uniformity
exists in the disclosure of such transactions.
The IASB has now issued “IFRS for SMEs” in which the disclosure requirements for related
party transactions are virtually the same for small and medium-sized entities as under IAS 24.
Clearly then, the IASB believes that such disclosures are important for all entities, not just the
larger ones.
(c) Transactions
(i) Management buy-out
IAS 24 does not require disclosure of the relationship and transactions between the reporting
entity and providers of finance in the normal course of their business even though they may
influence decisions. Thus as RP is a merchant bank there are no requirements to disclose
transactions between RP and AB because of this relationship. However, RP has a 25% equity
interest in AB. IAS 24 states that an associate is a related party. Thus under IAS 28
Investments in Associates and Joint Ventures if RP has 20% or more of the voting power it is
presumed that significant influence exists and that AB is an associate. However if it can be
demonstrated that significant influence does not exist, then it is not an associate. Thus the
equity holding in AB may not necessarily mean that AB is an associate especially as the
remaining seventy-five per cent of the shares are held by the management of AB who are
likely to control decisions on strategic issues. Also merchant banks often do not regard
companies in which they have invested as associates but as an investment. Often if the
business of the investor is to provide capital to the entity accompanied by advice and
guidance then the holding should be accounted for as an investment rather than an associate.
However, IAS 28 presumes that a person owning or able to exercise control over 20% or
more of the voting rights of the reporting entity is a related party. An investor with a 25%
equity holding and a director on the board would be expected to have influence over the
financial and operating policies in such a way as to inhibit the pursuit of their separate
interests. If it can be shown that such influence does not exist, then there is no related party
relationship. The two entities are not necessarily related parties simply because they have a
main board director on the board of AB, although IAS 28 does state that significant influence
may be evidenced by representation on the board. Thus the determination of a related party
relationship requires consideration of several issues.
If, however, it is deemed that they are related parties then all material transactions will require
disclosure including the management fees, interest, dividends and the terms of the loan.
(ii) Second hand office equipment
No disclosure under IAS 24 is required in consolidated accounts of intra-group transactions

and balances eliminated on consolidation. IAS 24 does not address the situation where an
undertaking becomes or ceases to be a subsidiary during the year. However international
practice would seem to indicate that the transactions between related parties will be disclosed
to the extent that they were undertaken when X was not part of the group. Disclosure should
be made of transactions between related parties if they were related at any time during the
financial period. Thus any transactions between RP and X during the period 1 July 2015 to
31 October 2016 will be disclosed but transactions prior to 1 July 2016 would have been
eliminated on consolidation. There is no related party relationship between RP and Z, as it is
simply a business transaction unless there has been a subordinating of interests when entering
into the transaction due to influence or control.
However, IAS 24 requires the disclosure in the separate financial statements of RP of the
amount of any transactions, including intra-group transactions that are eliminated on
consolidation. (These disclosures also include the amount of intra-group balances, if any.)
(iii) Retirement benefit schemes
Retirement benefit schemes for the benefit of employees of the reporting entity are related
parties of the entity. The rendering or receipt of services is an example given in the Standard
of a situation which could lead to disclosure and also the payment of contributions involves
the transfer of resources which has a degree of flexibility attached to it even though IAS 19
Employee Benefits attempts to regulate the accounting for retirement benefit contributions.
Contributions paid to the scheme may have to be disclosed under IAS 24 depending on the
nature of the plan and whether or not the reporting entity controlled the plan, but it is the other
transactions with RP which must be disclosed. Thus the transfers of non-current assets
($10m) and the recharge of administrative costs ($3m) must be disclosed. The pension
scheme’s investment managers would not normally be considered a related party of the
reporting sponsoring company and it does not follow that related parties of the pension
scheme are also the company’s related parties. There would however be a related party
relationship if it can be demonstrated that the investment manager can exercise significant
influence over the financial and operating decisions of RP through his position as non-
executive director of that company. Directors under IAS 24 are deemed to be related parties.
The fact that the investment manager is paid $25,000 as a fee and this is not material to the
group does not mean that it should not be disclosed. Materiality is looked at in the context of
its significance to the other related party which in this instance is the investment manager. It
is possible that the fee will be material in this respect.
In addition to the above RP must disclose key management personnel compensation in total
and by category. Amounts relating to post-employment benefits would be included in this
disclosure.
Answer 50 EPTILON
(1) IFRS 1
The International Accounting Standards Board (IASB) addressed this issue in International
Financial Reporting Standard (IFRS) 1 First Time Adoption of International Financial
Reporting Standards. IFRS 1 states that the starting point for the adoption of IFRSs for the
year ended 31 December 2016 is to prepare an opening IFRS statement of financial position
at 1 January 2015 (the beginning of the earliest comparative period). The general rule is that
this statement of financial position will need to comply with each IFRS effective at 31
December 2016 (the reporting date). This means that the opening IFRS statement of financial
position should:
 Recognise all assets and liabilities whose recognition is required by IFRSs.

 Not recognise items as assets or liabilities if IFRSs do not permit such recognition.
 Apply IFRSs in the measurement of all recognised assets and liabilities.
This requirement causes a number of practical difficulties:
 At the effective date of transition to IFRSs (1 January 2015) it is not totally clear
which IFRSs will be in force two years later so the originally prepared statement of
financial position may well need to be amended several times prior to the
publication of the first IFRS financial statements.
 The costs of retrospectively applying the recognition and measurement principles of

IFRSs might well be considerable. As far as this issue is concerned IFRS 1 grants a
limited number of exemptions from the general requirements where the cost of
complying with them would be likely to exceed the benefits to users.
For example:
 There is no need to retrospectively apply IFRS 3 Business Combinations

to combinations that occurred before the date of transition to IFRSs.
 An entity can elect to measure and item of Property, Plant and Equipment
at the date of transition at its fair value and use that fair value as its
deemed cost going forward. This is not a revaluation and any difference
between the carrying amount under previous GAAP and the carrying
amount for IFRS will be taken to retained earnings.
The 2015 financial statements will need to be prepared under two different sets of accounting
standards and resources (both human and capital) must be available to complete this task.
(2) IAS 24
IAS 24 Related Party Disclosures deals, as its name suggests, with the disclosure of matters
concerning related parties. Broadly the disclosures fall into two parts:
(i) It is always necessary to disclose related party relationships when control exists
even if there have been no transactions between the parties.
(ii) In other circumstances disclosure is only required where there have been related
party transactions. A related party transaction is the transfer of resources or
obligations between related parties, regardless of whether a price is charged. Where
such transactions have occurred entities should disclose the nature of the related
party relationship as well as the types of transactions and the elements of the
transaction necessary for an understanding of the financial statements. This would
normally include:
 the monetary amounts of the transactions;

 the monetary amounts of any outstanding items;
 any irrecoverable debts expense associated with the transactions.
Parties are considered to be related if one party has the ability to control or exercise
significant influence over the other party in making financial and operating decisions. A
related party may be another entity or an individual. An entity is usually a related party to its
key management personnel and also to fellow members of the same group.
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This ACCA Study Question Bank has been reviewed by
ACCA's examining team and includes:
• Question practice for every topic
• Model answers and suggested solutions
• Tutorial notes
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Study Question Bank Becker F7 DipIFR

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Study Question Bank Becker F7 DipIFR

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For Examinations to June 2017

STUDY QUESTION BANK

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Becker Professional Education's DipIFR Study Materials

Study Question Bank

2 Faithful representation 1 1002 25

IAS 1 PRESENTATION OF FINANCIAL STATEMENTS

IAS 8 ACCOUNTING POLICIES

IFRS REVENUE FROM CONTRACTS WITH CUSTOMERS

8 Telecast Industries 6 1011 14

12 Retail inventory 9 1016 12

IAS 16 PROPERTY, PLANT AND EQUIPMENT

IAS 20 GOVERNMENT GRANTS AND ASSISTANCE

IAS 23 BORROWING COSTS

18 Dawes (II) 13 1025 6

IAS 17 ACCOUNTING FOR LEASES

20 Dawes (III) 14 1027 7

IAS 38 INTANGIBLE ASSETS

23 Research and development 16 1032 20

25 Sigma (DipIFR J04) 17 1034 25

IAS 36 IMPAIRMENT OF ASSETS

IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND

IAS 19 EMPLOYEE BENEFITS

28 Klondike (DipIFR J02) 20 1040 15

IFRS 2 SHARE-BASED PAYMENT

IAS 12 INCOME TAXES

IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

IAS 33 EARNINGS PER SHARE

IFRS 8 OPERATING SEGMENTS

IFRS 5 DISCONTINUED OPERATIONS

47 Dawes (IV) 40 1077 6

IAS 10 EVENTS AFTER THE REPORTING PERIOD

IAS 24 RELATED PARTY DISCLOSURE

IAS 34 INTERIM FINANCIAL REPORTING and

50 Eptilon (DipIFR J04) 42 1081 19

(b) Compare and contrast a “Discussion Paper” and an “Exposure Draft” of an

Question 2 FAITHFUL REPRESENTATION

(i) separation of ownership from beneficial use;

(i) if Forest treated the transactions in their legal form; and

Comment briefly on your answer to (c) above. (11 marks)

Question 5 FRESNO GROUP

Dividends for the year amounted to $15 million.

Retained profit for the financial year 4,712 3,200

Question 7 KEY CHANGES

(b) Explain the criteria which determine:

(i) whether an item is recognised in the financial statements;

(c) On 1 January 2012 a company acquired a non-current asset for $25,000. It is to be

(i) profit or loss and other comprehensive income; and

Question 8 TELECAST INDUSTRIES

(i) Warmer Cinemas

(ii) Big Screen

(iii) Global Satellite

Applying the requirements of IFRS 15 “Revenue from Contracts with Customers”,

Relevant figures are as follows:

Note: Work to the nearest $000. (12 marks)

Question 12 RETAIL INVENTORY

Units Purchase Units Selling

Question 13 MEASUREMENT OF INVENTORIES

(i) fixed production overheads;

(b) State FOUR disclosure requirements of IAS 2 in respect of inventories. (4 marks)

Fam had the following tangible non-current assets at 31 December 2015:

Cost Depreciation Carrying