This Paper Is Not To Be Removed From The Examination Halls

~~AC3091 ZA d0
This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON AC3091 ZA
BSc degrees and Diplomas for Graduates in Economics, Management, Finance

and the Social Sciences, the Diplomas in Economics and Social Sciences and
Access Route
Financial Reporting
Monday, 12 May 2014 : 14:30 to 17:45
Candidates should answer FOUR of the following SIX questions: at least one from
section A and one from section B.
All questions carry equal marks.
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must
be detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply
in all respects with the specification given with your Admission Notice. The make and
type of machine must be clearly stated on the front cover of the answer book.
PLEASE TURN OVER
© University of London 2014

UL14/0005 Page 1 of 1 D1
SECTION A
Answer at least one question from this section.
Question 1
The income statements for Dance Ltd, Ballet Ltd and Tap Ltd for the year ended 31 December 2013
are given as follows:
Dance Ltd Ballet Ltd Tap Ltd
£ £ £
Sales 3,000,000 1,700,000 1,200,000
Cost of sales (1,180,000) (590,000) (460,000)
Gross profit 1,820,000 1,110,000 740,000
Investment income-dividends receivable 76,000 - -
Administration costs (186,000) (140,000) (70,000)
Distribution costs (104,000) (226,000) (85,000)
Interest receivable 10,000 5,000
Interest payable (2,000) (1,000)
Profit before tax 1,614,000 748,000 585,000
Tax (100,000) (70,000) (20,000)
Profit after tax 1,514,000 678,000 565,000
Dividends payable (90,000) (50,000) -
Profit for the year 1,424,000 628,000 565,000
Retained profit brought forward 1,600,000 600,000 400,000
Retained profit carried forward 3,024,000 1,228,000 965,000
Dance Ltd acquired 80 % of Ballet Ltd on 1 January 2003 for £150,000 when Ballet Ltd's retained
profits were £80,000. The share capital of Ballet Ltd totals £25,000. Dance Ltd also acquired 20%
of the debentures of Ballet Ltd. No goodwill arose on the acquisition of debentures.
Dance Ltd acquired 25% of Tap Ltd for £200,000 when Tap Ltd’s share capital and reserves were
£100,000 on 1 January 2005. The share capital of Tap Ltd is 10,000 50p shares.
During the year Ballet Ltd sold goods to Dance Ltd for £75,000. These goods had cost Ballet Ltd
£65,000. 20% of this inventory is included in Dance Ltd’s inventory at the year end.
During the year Tap Ltd sold goods to Dance Ltd for £80,000. These goods had cost Tap Ltd
£60,000. 50% of this inventory is still in Dance Ltd’s inventory at the year end.
Goodwill is capitalised. Impairment of 50% of the value of the goodwill of Ballet Ltd was seen in 2008
and impairment of 50% of the value of the goodwill in Tap Ltd is seen in 2013.
Dance Ltd charges a management fee of 5% of turnover to Ballet Ltd and Tap Ltd. None of the
companies have recorded this management fee.
Required:
(a) Outline the circumstances under international accounting standards where consolidation is not
required for subsidiary companies. (4 marks)
(b) Prepare the consolidated income statement for Dance Ltd, showing the profit attributable to the
holding company and the profit attributable to the non-controlling interest. Calculate the retained
profit brought forward figure and the dividends figure either as part of the income statement or
as part of the retained profit section of the statement of equity. (21 marks)

UL14/0005 Page 2 of 2 D1
Question 2
Puppet Ltd started trading on 1 January 2013. The income statement and the statement of
financial position for the first year of trading are given as follows:
Income statement £ £
Revenue / sales 3,800,000
Cost of sales
Opening inventory 600,000
Purchases 2,400,000
Closing inventory (480,000)
(2,520,000)
Gross profit 1,280,000
Expenses (720,000)
Depreciation (160,000)
Net profit for the year 400,000
Statement of financial position

£ £ £
Non current assets Cost Accum depn Net book value
Buildings 1,600,000 (160,000) 1,440,000
Current assets
Inventory 480,000
Cash 800,000
Total assets 2,720,000
Share capital 2,000,000

Retained profits 400,000
Trade payables 320,000
Capital, reserves and liabilities 2,720,000

UL14/0005 Page 3 of 3 D1
The price change indices for the year were identified as follows:
RPI Non- current Inventory

assets
1 January 2013 150 200 180
Average 2013 160 210 190
30 November 2013 170 220 215
31 December 2013 190 230 250
All non-current assets and opening inventory were acquired on the first day of trading.
Closing inventory was acquired on 30 November 2013.
Sales and purchases accrue evenly throughout the year.
Required:
(a) Compare and contrast current value accounting with current purchasing power accounting
and discuss the advantages and limitations of both types of accounting. (12 marks)
(b) Prepare the current value income statement for the year ended 31 December 2013 and the
current value statement of financial position as at 31 December 2013 for Puppet Ltd using
the physical capital maintenance concept. (13 marks)

UL14/0005 Page 4 of 4 D1
Question 3
On 1 January 2013 Antler Ltd entered into the following lease agreements with Lease Ltd:
(1) An asset, asset A, which could be purchased outright for £639,540, is instead leased for
three years. The useful economic life of the asset is three years and at the end of this
time, the asset will have no residual value. Antler Ltd is responsible for all maintenance
and repairs and for all insurance costs for asset A. The lease for asset A provides for
half-yearly payments in advance of £120,000, the first payment being made on 1
January 2013.
(2) An asset, asset B, which could be purchased outright for £720,000, is leased for three
years for annual payments of £180,000 per annum payable in advance. The useful
economic life of asset B is eight years. At the end of the three years, Antler Ltd intends
to return the asset. Antler Ltd is not responsible for maintaining and insuring asset B.
Required:
(a) Discuss the concepts of off balance sheet finance and substance over form. Illustrate your
answer with reference to finance and operating leases and one other example. (11 marks)
(b) Show how the above leases will be reflected in the income statements and statements of
financial position for 2013 and 2014 in accordance with international accounting standards.
(14 marks)
Question 4
Answer all parts of the question.
(a) What is the difference between a provision and a contingent liability and how are these
accounted for in financial statements? (5 marks)
(b) What is goodwill? Discuss three considerations that have to be addressed if goodwill is to be
recognised as an asset. (5 marks)

UL14/0005 Page 5 of 5 D1
(c) The overseas subsidiary of a UK company operates in the currency “potts”. The opening net
assets on 1 January 2013 of the overseas subsidiary are 400,000 “potts” and its net profit for
the year ended 31 December 2013 is 16,000 “potts”. The exchange rates, expressed as
“potts” per £, are given as follows:
Date Exchange rate

1 Jan 2013 10
Average 2013 2
31 December 2013 5
Required:
Briefly outline when the closing rate method should be used to translate the financial
statements of an overseas company. Calculate the foreign exchange difference for the
overseas subsidiary for the year ended 2013 under the closing rate method. (7 marks)
(d) You are given the following information in relation to company x and company y:
Company x Company y
Sales £3,250,000 £4,500,000
Gross profit margin 10% 15%
General expenses £75,000 £425,000
Tax £225,000 £150,000
Number of shares issued at start of the period 50,000 50,000
Number of shares issued at full market price

for cash, half way through the period 30,000 20,000
Share price £50.00 £25.00
Required:
Define and calculate the earnings per share and the price earnings ratio for company x and
company y. Discuss possible reasons for the difference in the price earnings ratio of the two
companies. (8 marks)

UL14/0005 Page 6 of 6 D1
SECTION B
Question 5
Either
Compare and contrast the accountants’ and economists’ approach to income and asset
measurement. Discuss the implications of Hick’s’ definition of ‘well-offness’ and measures of
income for economists and accountants.
Or
Discuss the traditional and economic arguments for and against accounting regulation.
Question 6
Either
What is research and development? Discuss the main provisions of IAS 38 as it relates to
research and development. Discuss the application of accounting concepts to the treatment
of research and development and discuss the impact this has on financial statements.
Or
Define and discuss the accounting treatment under international accounting standards of
inventories and construction contracts. Discuss the application of accounting concepts to
these areas and discuss the difficulties in accounting for these areas.

UL14/0005 Page 7 of 7 D1
Table 1: Present value factors
To determine the present value of a single payment of 1 received ‘n’ periods from the present at a
constant discount rate of x% per period
discount rate % 1 2 3 4 5 6 7 8 9 10
period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
discount rate % 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

UL14/0005 Page 8 of 8 D1
Table 2: Cumulative present value factors (‘annuity factors’)
The table gives the present value of ‘n’ annual payments of 1 received for the next ‘n’ years with a
constant discount rate of x% per year. For example, with a discount rate of 8% and with six annual
payments of £1 the present value is £4.6229
discount rate % 1 2 3 4 5 6 7 8 9 10
period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514
discount rate 11 12 13 14 15 16 17 18 19 20
%
period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
END OF PAPER

UL14/0005 Page 9 of 9 D1
~~AC3091 ZB d0
This paper is not to be removed from the Examination Halls
UNIVERSITY OF LONDON AC3091 ZB
BSc degrees and Diplomas for Graduates in Economics, Management, Finance

and the Social Sciences, the Diplomas in Economics and Social Sciences and
Access Route
Financial Reporting
Monday, 12 May 2014 : 14:30 to 17:45
Candidates should answer FOUR of the following SIX questions: at least one from
section A and one from section B
Workings should be submitted for all questions requiring calculations. Any necessary
assumptions introduced in answering a question are to be stated.
Extracts from compound interest tables are given after the final question on this paper.
8-column accounting paper is provided at the end of this question paper. If used, it must
be detached and fastened securely inside the answer book.
A calculator may be used when answering questions on this paper and it must comply
in all respects with the specification given with your Admission Notice. The make and
type of machine must be clearly stated on the front cover of the answer book.
PLEASE TURN OVER

UL14/0006 Page 1 of 1 D3
Section A
Answer at least one question from this section
Question 1
The statements of financial position for Avocado Plc, Plum Ltd and Mango Ltd as at 31 December
2013 are given below:
Avocado Plum Mango
£ £ £
Non current assets (land) 580,000 1,910,000 1,400,000
Investments 1,920,000 - -
Inventory 200,000 400,000 1,000,000
Trade receivables 380,000 700,000 400,000
Cash 140,000 140,000 180,000
Inter-company receivable from Plum 80,000 - -
Inter-company receivable from 160,000 - -
Mango
Total assets 3,460,000 3,150,000 2,980,000
Share capital 2,000,000 600,000 400,000

Retained profits 1,380,000 1,740,000 2,000,000
Bonds (10%) 20,000 80,000 -
Inter-company payable to Avocado - 80,000 160,000
Trade payables 60,000 650,000 420,000
Capital, reserves and liabilities 3,460,000 3,150,000 2,980,000
Avocado Plc acquired 60% of Plum Ltd on 1 January 2008 for £920,000 when Plum Ltd's share
capital and reserves were £640,000. The fair value of Plum Ltd’s non current assets (land) on 1
January 2008 was £2,000,000 and this revaluation has not been incorporated into Plum Ltd’s
accounts.
Avocado Plc also acquired 70% of the bonds in Plum Ltd for £120,000 on 1 January 2008.
Avocado Plc acquired 25% of Mango Ltd on 1 January 2009 for £800,000 when Mango Ltd’s share
capital and reserves were £600,000. The fair value of Mango Ltd’s non current assets on 1 January
2009 was £1,600,000 and this revaluation has not been incorporated into Mango Ltd’s accounts.
Avocado Plc’s policy is to capitalise goodwill on shares. Impairment of 20% of the goodwill on the
shares in Plum Ltd and impairment of 20% of the goodwill on the shares of Mango Ltd arises in 2013.
No goodwill impairment arises on bonds.
In 2013, Avocado Plc acquired inventory from Plum Ltd for £100,000 which had cost Plum Ltd
£60,000 and inventory from Mango Ltd for £200,000 which had cost Mango Ltd £100,000. This
inventory remains unsold at the statement of financial position date.
Bond interest of 10% per annum has not been paid by Avocado Ltd and Plum Ltd at the year end.
Neither company has accounted for this interest.
Required:
(a) Define non-controlling interest? Compare and contrast the two different methods of accounting
for non-controlling interest as identified in IFRS 3. (5 marks)
(b) Prepare the consolidated statement of financial position for Avocado Plc as at 31 December
2013. (20 marks)
UL14/0006 Page 2 of 2 D3
Question 2
On 1 January 2009, Lion Ltd acquired 80% of the ordinary shares of a subsidiary, Tiger Org. Tiger
Org issued share capital and started trading on 1 January 2009. Tiger Org trades in the currency
“potts”.
The summary income statements and statements of financial position of Lion Ltd and Tiger Org
are given as follows:
Statement of financial position as at 31 December 2013

Tiger Lion
“potts” £
Non current assets – land 980,000 270,000
Investments in Tiger 160,000
Inventories 80,000 80,000
Inter-company receivable from Tiger 50,000

Cash 860,000 340,000
Inter-company payable to Lion (100,000)
Total assets less liabilities 1,820,000 900,000
Share capital 720,000 100,000

Retained profits brought forward 800,000 248,000
Profit for the year 300,000 552,000
Capital and reserves 1,820,000 900,000
Income statement for the year ended 31 December 2013

Tiger Tiger Lion Lion
“potts” “potts” £ £
Sales 760,000 1,140,000
Opening inventory 120,000 60,000
Purchases 300,000 350,000
Closing inventory (80,000) (80,000)
(340,000) (330,000)
Gross profit 420,000 810,000
Other expenses (50,000) (118,000)
Profit before tax 370,000 692,000
Tax (70,000) (140,000)
Profit after tax 300,000 552,000

UL14/0006 Page 3 of 3 D3
The following information is also available:
1 Non-current assets were acquired on 1 January 2009.
2 Opening inventories were acquired on 12 November 2012 and closing inventories were
acquired on 15 December 2013.
3 Exchange rates 1 January 2009 £1 = 10 “potts”

12 November 2012 £1 = 6 “potts”
1 January 2013 £1 = 4 “potts”
average for 2013 £1 = 5 “potts”
15 December 2013 £1 = 4 “potts”
31 December 2013 £1 = 2 “potts”
4 An impairment charge of 80,000 “potts” was written off goodwill in the current year and
an impairment charge of 50,000 “potts” was written off goodwill in 2011.
5 Method 1 is used to calculate non controlling interest.
6 The translated retained profits brought forward for Tiger Org is £151,000.
7 The functional currency of Tiger Org is the £.
Required:
(a) Translate the income statement for the year ended 31 December 2013 and the statement of
financial position of Tiger Org as at 31 December 2013. (8 marks)
(b) Prepare the consolidated income statement for the year ended 31 December 2013, showing
profit attributable to the holding company and the non-controlling interest. Show the retained
profit brought forward and retained profit carried forward, either on the face of the
consolidated income statement or in the retained profit section of the statement of equity.
(7 marks)
(c) Compare and contrast the temporal method with the closing rate method. (10 marks)

UL14/0006 Page 4 of 4 D3
Question 3
On 1 January 2013 Salt Ltd entered into the following lease agreements with Lease Ltd:
(1) An asset, asset A, which could be purchased outright for £959,310, is instead leased for
three years. The useful economic life of the asset is three years and at the end of this
time, the asset will have no residual value. Salt Ltd is responsible for all maintenance
and repairs and for all insurance costs for asset A. The lease for asset A provides for
half-yearly payments in advance of £180,000, the first payment being made on 1
January 2013.
(2) An asset, asset B, which could be purchased outright for £1,080,000, is leased for three
years for annual payments of £270, 000 per annum payable in advance. The useful
economic life of asset B is eight years. At the end of the three years, Salt Ltd intends to
return the asset. Salt Ltd is not responsible for maintaining and insuring asset B.
Required:
(a) Discuss the concepts of off balance sheet finance and substance over form. Illustrate your
answer with reference to finance and operating leases and one other example.
(11 marks)
(b) Show how the above leases will be reflected in the income statements and statements of
financial position for 2013 and 2014 in accordance with international accounting standards.
(14 marks)
Question 4
Answer all parts of this question.
(a) What is the difference between a provision and a contingent liability and how are these
accounted for in financial statements? (5 marks)
(b) What is goodwill? Discuss three considerations that have to be addressed if goodwill is to be
recognised as an asset. (5 marks)

UL14/0006 Page 5 of 5 D3
(c) You are given the following information in relation to company x and company y:
Company x Company y
Sales £6,500,000 £9,000,000
Gross profit margin 10% 15%
General expenses £150,000 £850,000
Tax £475,000 £400,000
Number of shares issued at start of 50,000 50,000
period
Number of shares issued at full market 30,000 20,000
price for cash half way through the year.
Share price £50.00 £25.00
Required:
Define and calculate the earnings per share and the price earnings ratio for company x and
company y. Discuss possible reasons for the difference in the price earnings ratio of the two
companies. (8 marks)
(d) The profit before tax and dividends for the year ended 31 December 2013 for Cup Plc is
£2,000,000. Included in the profit before tax figure are the following expenses:
£
Wages 200,000
Depreciation 150,000
Entertaining 40,000
General provision for doubtful debt 50,000
Specific bad debts written off 70,000
Legal costs on purchasing a new freehold property 100,000
The capital allowances for the year are calculated to be £300,000. The tax rate for the year
is 20%. Tax for the year ended 31 December 2012 had initially been calculated at £500,000
but was finally agreed at £580,000.
Required:
What are capital allowances? Calculate the income statement tax charge for Cup Plc for the
year ended 31 December 2013, split into its current and deferred components. (7 marks)

UL14/0006 Page 6 of 6 D3
Section B
Question 5
Either
What is historic cost accounting and what are its advantages and limitations? Discuss and
critically assess the following alternatives to historic cost accounts:
i. current purchasing power accounting.

ii. current value accounting.
iii. fully stabilized current value accounting. (25 marks)
Or
Discuss Hicks’ definition of ‘well-offness’ and measures of income. Assess the value of these
concepts for financial reporting. (25 marks)
Question 6
Either
Define and discuss the accounting treatment of investment properties and construction
contracts in accordance with international accounting standards. Discuss the application of
accounting concepts to these areas and discuss the difficulties in accounting for these areas.
(25 marks)
Or
Define intangible assets and discuss how they should be accounted for in accordance with
international accounting standards. Discuss the accounting treatment of two intangible assets
of your choice and the impact that accounting for these intangibles has on financial
statements. Discuss the areas of difficulty in accounting for intangible assets. (25 marks)

UL14/0006 Page 7 of 7 D3
To determine the present value of a single payment of 1 received ‘n’ periods from the present at a
constant discount rate of x% per period
discount rate % 1 2 3 4 5 6 7 8 9 10
period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
discount rate % 11 12 13 14 15 16 17 18 19 20
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

UL14/0006 Page 8 of 8 D3
The table gives the present value of ‘n’ annual payments of 1 received for the next ‘n’ years with a
constant discount rate of x% per year. For example, with a discount rate of 8% and with six annual
payments of £1 the present value is £4.6229
discount rate % 1 2 3 4 5 6 7 8 9 10
period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514
discount rate 11 12 13 14 15 16 17 18 19 20
%
period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
END OF PAPER

UL14/0006 Page 9 of 9 D3
Examiners’ commentaries 2014

AC3091 Financial reporting
Important note
This commentary reflects the examination and assessment arrangements
for this course in the academic year 2013–14. The format and structure of
the examination may change in future years, and any such changes will
be publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading

references
Unless otherwise stated, all cross-references will be to the latest version
of the subject guide (2012). You should always attempt to use the most
recent edition of any Essential reading textbook, even if the commentary
and/or online reading list and/or subject guide refers to an earlier
edition. If different editions of Essential reading are listed, please check
the VLE for reading supplements – if none are available, please use the
contents list and index of the new edition to find the relevant section.
General remarks
Learning outcomes
At the end of this course, and having completed the Essential reading and
activities, you should be able to:
• explain and apply a number of theoretical approaches to financial
accounting
• record and analyse data
• prepare financial statements under alternative accounting conventions
• describe a number of regulatory issues relating to financial accounting
• critically evaluate theories and practices of, and other matters relating
to, financial accounting.
What are the Examiners looking for?

The combined questions in Section A will require you to prepare
calculations on a variety of topics as well as show a critical grasp of the
theories underlying the techniques. To do well, you need to be able both
to explain and evaluate the theories and prepare a range of financial
statements and calculations.
For quantitative parts of questions, Examiners are looking for the accurate
preparation of financial statements that follow generally accepted formats
with clear headings and accurate application of accounting techniques to
specific areas within financial reporting. Workings should always be clearly
provided.
Written components of combined questions require clear and coherent
explanations of theories, techniques and practices. You must critically
evaluate theories and practices.
1
Good answers to essay-based questions in Section B will be structured

coherently and logically. They should include an introduction, a main body
and conclusion, and cover all parts of the question.
Typically, an essay-based question will require an explanation of an issue
within financial reporting and a critical analysis of the issue. Explanations
should be clear and include a discussion of key definitions, with examples
if appropriate. The analysis should show critical awareness of both sides
of an argument or the application of a theory or concept to financial
reporting, with an assessment of its appropriateness to financial reporting.
Planning your time in the examination

All questions in the examination paper carry equal marks and equal time
should be devoted to each question. It is important that you attempt four
questions and all parts of each question you answer. Marks for each section
are shown and should be used to guide your work and time management.
Where questions are in parts, you should avoid excessively long answers to
some parts and missing out other parts.
Key steps to improvement

You can enhance your performance by improving the presentation of
your work, providing clear workings, answering the required number
of questions and attempting all sections of a question. Often candidates
seem to focus attention on the preparation of financial statements and the
financial calculations without being able to explain, discuss and evaluate
the theories and practices central to financial reporting.
2
Question spotting
Many candidates are disappointed to find that their examination
performance is poorer than they expected. This can be due to a number
of different reasons and the Examiners’ commentaries suggest ways
of addressing common problems and improving your performance.
We want to draw your attention to one particular failing – ‘question
spotting’, that is, confining your examination preparation to a few
question topics which have come up in past papers for the course. This
can have very serious consequences.
We recognise that candidates may not cover all topics in the syllabus in
the same depth, but you need to be aware that Examiners are free to
set questions on any aspect of the syllabus. This means that you need
to study enough of the syllabus to enable you to answer the required
number of examination questions.
The syllabus can be found in the Course information sheet in the
section of the VLE dedicated to this course. You should read the
syllabus very carefully and ensure that you cover sufficient material in
preparation for the examination.
Examiners will vary the topics and questions from year to year and
may well set questions that have not appeared in past papers – every
topic on the syllabus is a legitimate examination target. So although
past papers can be helpful in revision, you cannot assume that topics
or specific questions that have come up in past examinations will occur
again.
If you rely on a question spotting strategy, it is likely
you will find yourself in difficulties when you sit the
examination paper. We strongly advise you not to adopt
this strategy.
3

AC3091 Financial reporting – Zone A
Important note

references
Comments on specific questions

Candidates should answer FOUR of the following SIX questions: at least
one from Section A and one from Section B.
Section A
Question 1
The income statements for Dance Ltd, Ballet Ltd and Tap Ltd for the year ended
31 December 2013 are given as follows:
[For the full version of this question, please refer to the examination paper.]
Reading for this question
Subject guide, Chapter 5.
Alexander, D., A. Britton and A. Jorissen International Financial Reporting and
Analysis. (Andover: Centage Learning EMEA, 2011) fifth edition [ISBN
9781408032282] Chapters 25–28.
Approaching the question
(a)
You need to outline the circumstances where consolidation is not required
for subsidiaries:
• Parent is itself a subsidiary (wholly or partially owned) and parents do
not object
• Parents’ debt or equity not traded in public market
• Parent did not file, and ultimate or intermediate parent produces
consolidated financial statements
4
• Control temporary.
A good answer would include all the different situations. A weak answer
would focus on just one situation or be unable to discuss any of the
situations.
(b)
The consolidated income statement is shown below. You must provide
workings for each item. A good answer would present the consolidated
income statement clearly and be able to deal with the adjustments
appropriately, showing detailed workings to support the answer. A weak
answer would present some of the consolidated income statement, but
with incorrect treatment of many of the figures.
Sales (3,000 + 1,700 – 75) 4,625,000
Cost of sales (1,180 + 590 – 75 + 2) (1,697,000)
Gross profit 2,928,000
Investment income (76 – 0.8 * 50) 36,000
Administration costs (186 + 140) (326,000)
Distribution costs (104 + 226) (330,000)
Interest receivable (10 + 5 – .2 * 1) 14,800
Interest payable (2 + 1 – .2 * 1) (2,800)
Management fee from associate 60,000
Share of associate’s earnings 0.25 * (585 – 10 – 60) 128,750
Goodwill impairment (87,500)
Profit before tax 2,421,125
Tax (100 + 70 + 0.25 * 20) (175,000)
Profit after tax 2,246,250
Non-controlling interest 20% (678 – 2 – 85) (118,200)
Profit attributable to H 2,128,050
Dividends (90,000)
Retained earnings for year 2,038,050
Retained earnings bfwd 2,059,250
Retained earnings cfwd 4,097,300
Workings
Goodwill
Goodwill of subsidiary = 150 – 0.8 * (80 + 25) = 66
Impairment = 33,000 against P+L bfwd
Goodwill of associate = 200 – 0.25 * (100) = 175
Impairment = 87.5 in income statement
Ret profit brought forward=1,600 + 80%(600 – 80) + 25%(400 – 95) –
33 = 1,600 + 416 + 76.25 – 33 = 2,059.250
Students may end the income statement with profit attributable to H and
NCI and give dividends and retained earnings in statement of equity as
follows:
Retained earnings bfwd 2,059,250
Earnings for year attributable to H 2,128,050
Dividends (90,000)
Retained earnings cfwd 4,097,300
5
Question 2
Puppet Ltd started trading on 1 January 2013. The income statement and the
statement of financial position for the first year of trading are given as follows:
Subject guide, Chapter 4
International Financial Reporting and Analysis. (2011) Chapters 5–7.
(a)
You need to outline current value and current purchasing power
accounting. For each method, you need to discuss the technique and
identify the concepts and key adjustments included within each method.
You also need to discuss the advantages and disadvantages of each of
the techniques, including in relation to the types of adjustments made,
ease of calculation, consistency of unit of measurement, economic value,
subjectivity, complexity, the use of indexes and how appropriate they are
and which problems with historic cost are addressed and which are not.
You may also discuss other issues with the alternatives. A good answer
would explain each alternative clearly with appropriate examples and
illustrations. Each method would be critically assessed, clearly discussing
both advantages and disadvantages. A weak answer would not be able to
explain the methods clearly and would not be able to discuss a range of
advantages and disadvantages.
(b)
The current value financial statements are given below. You must provide
workings for each item. A good answer would present the current value
financial statements clearly and be able to deal with the adjustments
appropriately, showing detailed workings to support the answer. A weak
answer would present some of the current value financial statements but
with incorrect treatment of many of the figures.
Statement of Current
£ Adjustment
financial position value
Non-current asset 1440,000 230/200 1,656,000

Inventory 480,000 250/215 558,140
Cash 800,000 800,000
Total assets 2,720,000 3,014,140
Share capital 2,000,000 2,000,000

Profit and loss
400,000 From IS 286,853
account
Trade payables 320,000 320,000
6
Capital
maintenance
reserves
Non-current
216,000
assets
Inventory 78,140
Cost of sales 89,147
Depreciation 24,000
2,720,000 3,014,140
Income statement £ £ Adjustment Current value

Sales 3,800,000 3,800,000
Opening inventory 600,000 190/180 633,333
Purchases 2,400,000 2,400,000
Closing inventory (480,000) 190/215 (424,186)
(2,520,000) (2,609,147)
1,280,000 1,190,853
Expenses (720,000) (720,000)
Depreciation (160,000) 230/200 (184,000)
Net profit 400,000 286,853
Question 3
On 1 January 2013 Antler Ltd entered into the following lease agreements with
Lease Ltd:
1. An asset, asset A, which could be purchased outright for £639,540, is instead
leased for three years. The useful economic life of the asset is three years
and at the end of this time, the asset will have no residual value. Antler Ltd
is responsible for all maintenance and repairs and for all insurance costs for
asset A. The lease for asset A provides for half-yearly payments in advance of
£120,000, the first payment being made on 1 January 2013.
2. An asset, asset B, which could be purchased outright for £720,000, is leased
for three years for annual payments of £180,000 per annum payable in
advance. The useful economic life of asset B is eight years. At the end of
the three years, Antler Ltd intends to return the asset. Antler Ltd is not
responsible for maintaining and insuring asset B.
International Financial Reporting and Analysis. (2011) Chapter 15.
7

(a)
You should answer this question with as much detail as you can, discussing
the concepts and giving examples as appropriate. A good answer would
discuss the concepts of off balance sheet finance and substance over form,
illustrating these concepts with operating and finance leases and one other
example, which might include quasi subsidiaries, consignment stock, sale
and lease back transactions, debt factoring or any other suitable example.
A weak answer would outline leases but with little reference to the
concepts of off balance sheet finance and substance over form.
(b)
The accounting treatment of both leases is shown below. A good answer
would identify each lease correctly and show in detail how they should be
accounted for. A weak answer would either not identify the leases correctly
or, having identified the leases correctly, be unable to account for the leases
correctly.
Recognition that it is finance lease with reason
Asset a = finance lease with reason
To calculate Rate implicit in the lease
639,540 = 120,000 + 120,000 a5]?
a5]? =519,540/120,000
a5]? = 4.3295 which gives a rate of 5% from tables
Rental payments
Date Rental Finance Reduction in Balance of
payment charge obligation obligation under
finance lease
1.1.2013 639,540
1.1.2013 120,000 x 120,000 519,540

1.7.2013 120,000 25,978 94,022 425,518
1.1.2014 120,000 21,276 98,724 326,794
1.7.2014 120,000 16,340 103,660 223,134
1.1.2015 120,000 11,158 108,842 114,292
1.7.2015 120,000 5,714 114,286 6 Rounding difference
Income statement
2013 finance charge = 25,978 + accrual of 21,276 which relates to prior
period
2014 finance charges = 16,340 + accrual of 11,158

Asset – non-current asset at 639,540 – with annual depreciation of 213,180
2013 net book value = 426,360
8
Liability
2013
Accrual of finance charge = 21,276
Lease obligation = 425,518 current = 202,384 non current = 223,134
2014
Lease obligation = 223,134 – all current
Asset b
Operating lease
Lease payments in income statement. Identify disclosures.
Question 4
Answer all parts of the question.
(a)
You should clearly discuss the difference between provisions and
contingent liabilities and identify the correct accounting treatment for
each. A good answer would discuss the differences between provisions and
contingent liabilities clearly and be able to correctly identify the correct
accounting treatment, including the different accounting treatment of
contingent liabilities depending on the probability of occurrence. A weak
answer would outline one of the two items and not be able to identify the
correct accounting treatments.
(b)
You should present a precise definition of goodwill. You may wish to
discuss different types of goodwill, for example, purchased and internally
generated. You should discuss at least three considerations when
accounting for goodwill and these may include the following:
• uncertainty and subjectivity
• whether goodwill can be realised separately from business
• conflicting accounting concepts in relation to goodwill
• useful economic life
• impairment
• fluctuation in value.
9
(c)
Subject guide, Chapter 6,
You should identify when the closing rate is used for translating the
financial statements of an overseas company, explaining the functional
currency and type of subsidiary. The foreign exchange is calculated as
follows:
Opening net assets at closing rate 400,000 / 5 80,000

Opening net assets at opening rate 400,000 / 10 40,000
Gain = 40,000
Profit at closing rate 16,000 / 5 3,200
Profit at average rate 16,000 / 2 8,000
Loss (4,800)
Total fx = gain 35,200
(d)
International Financial Reporting and Analysis. (2011) Chapters 30 and 31.
You should provide precise definitions of earnings per share and price
earnings ratio. The calculations for these ratios are given below. A good
answer would be able to present the calculations correctly and discuss
possible reasons for the ratios calculated. A weak answer would not
be able to calculate the ratios and would be unable to discuss possible
reasons.
company x
gross profit = 10% * 3,250,000 = £325,000
pat =325,000 – 75,000 – 225,000 = 25,000
e/s = 25,000 / (50,000/2 + 80,000/2) = £0.38 per share
p/e = 50/0.38 = 131.6
company y
gross profit = 15% * £4,500,000 = £675,000
pat = 675,000 – 425,000 – 150,000 = £100,000
e/s = 100,000/(50,000/2 + 70,000/2) = £1.67
p/e = 25/1.67 = 14.9
10
Section B
Question 5
Either
Compare and contrast the accountants’ and economists’ approach to income and
asset measurement. Discuss the implications of Hick’s’ definition of ‘well-offness’
and measures of income for economists and accountants.
Or
Discuss the traditional and economic arguments for and against accounting
regulation.
Reading for the ‘either’ question
International Financial Reporting and Analysis. (2011) Chapter 4
You should discuss the different approaches used for income and asset
measurement used by accountants and economists. For accountants, you
will need to discuss asset and income measurement, the income statement,
statement of financial position and the key concepts used in these financial
statements. For the economists’ view, you will need to discuss Hicks’
definitions of being well off and measures of income, explaining each
measure clearly and giving examples. You should discuss the implications
of Hicks’ measures for accountant, including the following:
• whether this is an objective income measure
• income measurement based on changes in assets is only a partial
picture of changes in value; the use of ex post measures for decision
making
• income measures are not uniquely defined
• the use of measures based on future expectations and revisions of
future expectations
• ex ante and ex post measures
• subjectivity and budgetary control.
You may also discuss other issues.
A good answer would clearly discuss both the income statement and
statement of financial position (as used by accountants) and Hicks’
concepts and measures. It would address a range of issues relating to these
measures and concepts for accountants. A weak answer would just provide
the formula for different measures with little discussion and explanation
and with little discussion of the implications for accountants.
Reading for the ‘or’ question
Beaver, W.H. Financial reporting: An accounting revolution. (Harlow: Prentice Hall,
1981) [ISBN 9780133161335] Chapter 7.
You need to discuss both traditional and economic arguments for and
against accounting regulation. Traditional arguments would include issues
of stewardship, legal requirement, comparability, information asymmetry,
fraud, public interest, capture and equity issues. Economic arguments
11
include the questioning of whether any regulation is needed, contracting

arguments, the complexity of financial information, private sector
solutions, public good arguments and efficiency issues
A good answer would define accounting regulation and may briefly outline
different types of regulation. A good discussion of both traditional and
economic arguments would be presented, with a wide range of arguments
on both sides included. A weak answer would focus just on traditional
arguments and would not be able to discuss a wide range of issues.
Question 6
Either
What is research and development? Discuss the main provisions of IAS 38 as
it relates to research and development. Discuss the application of accounting
concepts to the treatment of research and development and discuss the impact
this has on financial statements.
Or
Define and discuss the accounting treatment under international accounting
standards of inventories and construction contracts. Discuss the application of
accounting concepts to these areas and discuss the difficulties in accounting for
these areas.
You should provide a definition and explanation of research and
development, possibly linked to the definitions of intangible assets. You
need to discuss the main provisions of IAS 38 that relate to research and
development. You need to discuss the application of accounting concepts
to, and the accounting treatment of, research and development. You need
to discuss the impact on financial statements and key accounting ratios
of the treatment of research and development. You may also wish to
discuss the wider economic consequences of different accounting choices.
You may wish to include discussion of some of the following: definitions,
identification of cost, uncertainty, relevance/matching versus reliability/
prudence, amortisation/impairment issues and subjectivity.
A good answer would clearly define research and development, giving
appropriate examples to illustrate the definition. The answer would
summarise the key provisions of IAS 38 that relate to research and
development and discuss the accounting treatment and impact on financial
statements. A weak answer would focus on the definition of research and
development without discussing the provisions of IAS 38 or discussing the
impact on financial statements.
You should define both inventories and construction contracts and outline
how they should be accounted for, including examples as appropriate. The
accounting concepts applicable to each area should be identified and the
application of the concepts to each of the areas should be explained. You
should discuss the areas of difficulty, both theoretically and in practical
12
application, for each area. These may include issues with definitions,
different types of assets consideration of which methods should be
applied, issues of fair value, relevance and reliability, profit recognition,
identification of completion of project and how to deal with foreseeable
losses. You may also discuss other issues.
A good answer should define both inventories and construction contracts
and discuss the accounting treatment of each. A weak answer would not
cover both inventories and construction contracts, not address accounting
concepts and accounting treatments and would not discuss areas of
difficulty in any depth.
13

To determine the present value of a single payment of 1 received ‘n’
periods from the present at a constant discount rate of x% per period
Discount
1 2 3 4 5 6 7 8 9 10
rate %
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
Discount
11 12 13 14 15 16 17 18 19 20
rate %
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
14

The tables give the present value of ‘n’ annual payments of 1 received
for the next ‘n’ years with a constant discount rate of x% per year. For
example, with a discount rate of 8% and with six annual payments of £1
the present value is £4.6229.
Discount
1 2 3 4 5 6 7 8 9 10
rate %
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514
Discount
11 12 13 14 15 16 17 18 19 20
rate %
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
15

AC3091 Financial reporting – Zone B
Important note

references
Comments on specific questions

Candidates should answer FOUR of the following SIX questions: at least
one from Section A and one from Section B.
Section A
Question 1
The statements of financial position for Avocado Plc, Plum Ltd and Mango Ltd as
at 31 December 2013 are given below:
9781408032282], Chapter 25–28.
(a)
You need to provide a good definition of non-controlling interest and
discuss the difference between non-controlling interests under the two
different methods as identified in IFRS 3. A good answer would give a
precise definition of non-controlling interest and discuss the differences in
the two methods in relation to the treatment of goodwill. A weak answer
would provide a basic definition of non-controlling interest but not discuss
the difference in the two methods.
16
(b)
Solutions for the consolidated statement of financial position are given below.
You must provide workings for each item. A good answer would present the
statement of consolidated financial position clearly and be able to deal with
the adjustments appropriately, showing detailed workings to support the
answer. A weak answer would present some of the consolidated statement of
financial position, but with incorrect treatment of many of the figures.
Non-current assets-land 2,580,000 580 + 1910 + 90
Investments 80,000 1920 – 920 – 120 – 800
Goodwill 449,600
Share in associate 1,105,000
Inventories 560,000 200 + 400 – 40
Trade receivables 1,080,000
Interco receivables from associate 160,000
Cash 280,000
6,294,600
Share capital 2,000,000

P+L reserves 2,583,400
Non-controlling interest 952,800
Trade payables 710,000
Bond interest payable 4,400
Bonds 44,000 20 + .3 * 80
6,294,600
Goodwill
Shares in subsidiary = 920 – 60% (640 + 90) = 482,000. Impair = 96,400
Shares in associate = 800 – 25% (600 + 200) = 600,000. Impair = 120,000
Bonds in subsidiary = 120 – 70% * (80) = 64,000
Goodwill = goodwill of subsidiary = 482 + 64 – 96.4 = 449,600
h S A
£’000 £’000 £’000
Profit and loss account 1,380 1,740 2,000
Unrealised profit on inventory (40) (100)
Bond interest receivable 5.6
Bond interest payable (2) (8)
1,383.6 1,692 1,900
Share capital 2,000 600 400

Revaluation 90 200
3,383.6 2,382 2,500
P + L account = 1,383.6 + 60% (1,692 – 40) + 25% (1,900 – 200 ) –

96.4 – 120 = 1,383.6 + 991.2 + 425 – 96.4 – 120 = 2,583.4
Non-controlling interest = 40% * 2,382 =952.8
Share in associate = 800 + 25% (1,900 – 200) – 120 = 1,105
17
Question 2
On 1 January 2009, Lion Ltd acquired 80% of the ordinary shares of a subsidiary,
Tiger Org. Tiger Org issued share capital and started trading on 1 January 2009.
Tiger Org trades in the currency “potts”.
(a)
The translated income statement and statement of financial position
are shown below. A good answer would clearly show both statements.
Translate each item using the correct exchange rate and correctly calculate
and present the foreign exchange difference. A weak answer would
present some of the statements but not use the correct exchange rates or
deal with the foreign exchange rate appropriately
Statement of financial
Tiger potts Rate Tiger £
position
Non-current asset 980,000 10 98,000
Inventory 80,000 4 20,000

Cash 860,000 2 430,000
Interco receivable
Interco payable (100,000) 2 (50,000)
1,820,000 498,000
Share capital 720,000 10 72,000

P+L bfwd 800,000 Given 151,000
Balancing
Profit for year 300,000 275,000
figure
Capital and reserves 1,820,000 498,000
Income statement Tiger potts Rate Tiger £
Sales 760,000 5 152,000

Opening inventory 120,000 6 20,000
Purchases 300,000 5 60,000
Closing inventory (80,000) 4 (20,000)
(340,000) (60,000)
Gross profit 420,000 92,000
Expenses (50,000) 5 (10,000)
Balancing
figure or
Foreign exchange 207,000
calculated
separately
Profit before tax 370,000 289,000

Tax (70,000) 5 (14,000)
Profit after tax 300,000 From SFP 275,000
18
(b)
The consolidated income statement in given below. A good answer would
clearly show the consolidated income statement with correct consolidated
figures, including goodwill impairment, non-controlling interest and the
profit and loss account brought forward and the profit and loss account
carried forward. A weak answer would present some of the consolidated
income statement, but would not correctly show the consolidated figures,
goodwill impairment, non-controlling interest and profit and loss account
brought forward.
Consolidated income statement Tiger £ Lion Consolidated
Sales 152,000 1,140,000 1,292,000
Cost of sales (60,000) (330,000) (390,000)
92,000 810,000 902,000
Expenses (10,000) (118,000) (128,000)

Foreign exchange 207,000 207,000
Impairment (8,000)
Profit before tax 289,000 692,000 973,000
Tax (14,000) (140,000) (154,000)
Profit after tax 275,000 552,000 819,000
Non controlling interest (55,000)
Profit attributable to holding company 764,000

Profit and loss account brought forward 363,800
Profit and loss account carried forward 1,127,800
Ret profit bfwd = 248,000 + 80% * (151,000 – 0) – 5,000 = 363,800

(c)
You should compare different aspects of the temporal and closing rate
method, including some of the following
• Which exchange rates are used?
• Where is the foreign exchange included?
• How is goodwill calculated?
• When should the methods be used?
• What is the Functional Currency?
A good answer would include discussion of several of the differences
suggested above. A weak answer would just focus on which exchange rates
are used in the two methods.
Question 3
On 1 January 2013 Salt Ltd entered into the following lease agreements with
Lease Ltd:
1. An asset, asset A, which could be purchased outright for £959,310, is instead
leased for three years. The useful economic life of the asset is three years
and at the end of this time, the asset will have no residual value. Salt Ltd is
responsible for all maintenance and repairs and for all insurance costs for
asset A. The lease for asset A provides for half-yearly payments in advance of
£180,000, the first payment being made on 1 January 2013.
2. An asset, asset B, which could be purchased outright for £1,080,000, is leased
for three years for annual payments of £270, 000 per annum payable in
advance. The useful economic life of asset B is eight years. At the end of the
19
three years, Salt Ltd intends to return the asset. Salt Ltd is not responsible for
maintaining and insuring asset B.
(a)
You should answer this question with as much detail as you can, discussing
the concepts and giving examples as appropriate. A good answer would
discuss the concepts of off balance sheet finance and substance over form,
illustrating these concepts with operating and finance leases and one other
example which might include quasi subsidiaries, consignment stock, sale
and lease back transactions, debt factoring or any other suitable example.
A weak answer would outline leases but with little reference to the
concepts of off balance sheet finance and substance over form.
(b)
The accounting treatment of both leases are shown below. A good answer
would identify each lease correctly and show in detail how they should
be accounted for. A weak answer would either not identify the leases
correctly or, having identified the leases correctly, be unable to account for
the leases correctly.
Asset a
Recognition that it is finance lease with reason
To calculate rate implicit in the lease
959,310 = 180,000 +180,000 a5]?
a5]? = 779,310/180,000
a5]? = 4.3295 which gives a rate of 5% from tables
Rental payments
Rental Finance Reduction in Balance of obligation
Date
payment charge obligation under finance lease
1.1.2013 959,310
1.1.2013 180,000 x 180,000 779,310

1.7.2013 180,000 38,967 141,033 638,277
1.1.2014 180,000 31,914 148,086 490,191
1.7.2014 180,000 24,510 155,490 334,701
1.1.2015 180,000 16,737 163,263 171,438
Rounding
1.7.2015 180,000 8,571 171,429 9
difference
20
Income statement
2013 finance charge =38,967 + accrual of 31,914 which relates to prior
period
2014 finance charges = 24,510 + accrual of 16,737

Asset – non-current asset at 959,310 – with annual depreciation of
319,770
2014 net book value =319,770
Liability
2013
Lease obligation = 638,277 current = 303,576; non-current = 334,701
2014
Accrual of finance charge =16,737
Lease obligation = 334,701 – all current
Asset b = operating lease
Lease payments in income statement. Identify disclosures required.
Question 4
Answer all parts of this question.
(a)
You should clearly discuss the difference between provisions and contingent
liabilities and identify the correct accounting treatment for each. A good
answer would discuss the differences between provisions and contingent
liabilities clearly and be able to correctly identify the correct accounting
treatment, including the different accounting treatment of contingent
liabilities depending on the probability of occurrence. A weak answer
would outline one of the two items and not be able to identify the correct
accounting treatments.
(b)
9781408032282] Chapter 13
You should present a precise definition of goodwill. You may wish to
discuss different types of goodwill, for example, purchased and internally
generated. You should discuss at least three considerations when
accounting for goodwill and these may include the following:
21
• uncertainty and subjectivity

• whether goodwill can be realised separately from business
• conflicting accounting concepts in relation to goodwill
• useful economic life
• impairment
• fluctuation in value.
(c)
9781408032282] Chapters 30 and 31.
You should provide precise definitions of earnings per share and price
earnings ratio. The calculations for these ratios are given below. A good
answer would be able to present the calculations correctly and discuss
possible reasons for the ratios calculated. A weak answer would not be able
to calculate the ratios and would be unable to discuss possible reasons.
company x
gross profit = 10% * 6,500,000 = £650,000
pat = 650,000 -150,000 -475,000 = 25,000
e/s = 25,000 / (50,000/2 + 80,000/2) = £ 0.38 per share
p/e = 50/0.38 = 131.6
company y
gross profit = 15% * £9,000,000 = £1,350,000
pat = 1,350,000 – 850,000 – 400,000 = £100,000
e/s = 100,000/(50,000/2 + 70,000/2) = £1.67
p/e = 25/1.67 = 14.9
(d)
You should provide a precise definition of capital allowances and then
calculate the income statement tax charge. The calculations are shown
below. A good answer would provide a good definition of capital
allowances, be able to calculate the current tax, the deferred tax and the
income statement tax charge. A weak answer would not be able to define
capital allowance and would not present any calculations or would present
incorrect calculations.
22
Profit before tax 2,000,000
Add:
Depreciation 150,000
Entertaining 40,000
General debt provision 50,000
Legal costs 100,000
Deduct capital allowances (300,000)
Taxable profits 2,040,000
Tax at 20% 408,000
Income statement
Tax charge
Current tax £488,000
Deferred tax £20,000
Total £508,000
Current tax charge

Tax for year £408,000
Under provision £80,000
Deferred tax charge
Excess of capital allowance – general provision = 150,000 – 50,000 =
100,000
Deferred tax = 20% * 100,000 = 20,000
23
Section B
Question 5
Either
What is historic cost accounting and what are its advantages and limitations?
Discuss and critically assess the following alternatives to historic cost accounts:
i. current purchasing power accounting.
ii. current value accounting.
iii. fully stabilized current value accounting.
Or
Discuss Hicks’ definition of ‘well-offness’ and measures of income. Assess the
value of these concepts for financial reporting.
You should discuss historic cost accounting and possibly illustrate with
examples. You may recognise that, in practice, financial accounts do not
completely follow historic cost accounting. Both the advantages and
limitations of historic cost accounting should be discussed, for example,
discussion of relative objectivity, relevance, comparability, holding gains,
additivity, time lag, changing prices and incomplete data. You may refer
to other issues too. For each of the alternatives, you need to discuss the
method, identify the concepts and key adjustments included within each
method. You also need to discuss the advantages and disadvantages
of each of the techniques, including discussing the advantages and
disadvantages of the types of adjustments made, ease of calculation,
consistency of unit of measurement, economic value, subjectivity,
complexity, the use of indexes and how appropriate they are, and which
problems with historic cost are addressed and which are not. You may also
discuss other issues with the alternatives. A good answer would explain
each alternative clearly with appropriate examples and illustrations. Each
method would be critically assessed, clearly discussing both advantages
and disadvantages. Historic cost and the alternatives would all be covered
in detail. A weak answer would focus on historic cost or one or two of the
alternatives only, would not be able to explain the methods clearly and
would not be able to discuss a range of advantages and disadvantages.
You should discuss the different definitions of being well off and measures
of income, explaining each measure clearly and giving examples. You
should discuss the value of the measures for financial reporting, including
whether this is an objective income measure. Income measurement based
on changes in assets is only a partial picture of changes in value. You
should consider the use of ex-post measures for decision making, income
not uniquely defined, the use of measures based on future expectations
and revisions of future expectations, ex ante and ex-post measures,
subjectivity and budgetary control. You may also discuss other issues.
24
A good answer would clearly discuss the Hicks’ concepts and measures
and address a range of issues of these measures and concepts with regard
to financial reporting. A weak answer would just provide the formula for
different measures with little discussion and explanation and with little
discussion of the value of the concepts for financial reporting.
Question 6
Either
Define and discuss the accounting treatment of investment properties and
construction contracts in accordance with international accounting standards.
Discuss the application of accounting concepts to these areas and discuss the
difficulties in accounting for these areas.
Or
Define intangible assets and discuss how they should be accounted for in
accordance with international accounting standards. Discuss the accounting
treatment of two intangible assets of your choice and the impact that
accounting for these intangibles has on financial statements. Discuss the areas
of difficulty in accounting for intangible assets.
Subject guide, Chapters 7 and 9
International Financial Reporting and Analysis. (2011) Chapters 12 and 16
You should define both investment properties and construction contracts
and outline how they should be accounted for, including examples as
appropriate. The accounting concepts applicable to each area should be
identified and the application of the concepts to each of the areas should
be explained. You should discuss the areas of difficulty, both theoretically
and in practical application, for each area. These may include issues with
definitions, consideration of which methods should be applied, issues
of fair value, revenue and reliability, profit recognition, identification of
completion of project and how to deal with foreseeable losses. You may
also discuss other issues.
A good answer should define both investment properties and construction
contracts and discuss the accounting treatment of each. A weak answer
would not cover both investment properties and construction contracts,
not address accounting concepts and accounting treatments and not
discuss areas of difficulty in any depth.
You should provide a general definition of an intangible asset and
outline the general principles in determining the accounting treatment
of intangibles. You may wish to refer to IAS 38. Two intangibles of your
choice should be defined and the accounting treatment outlined. You
may choose any two intangibles, for example, goodwill, research and
development, and brands. You need to discuss the impact on financial
statements and key accounting ratios. You may also wish to discuss the
wider economic consequences of different accounting choices. Areas of
difficulty in each of the intangibles chosen need to be fully discussed
and may include issues in relation to definitions, identification of cost,
25
uncertainty, relevance/matching versus reliability/prudence, amortisation/

impairment issues, subjectivity and internally generated versus purchased.
A good answer would provide a good discussion of intangible, in general,
discussing how these should be treated. Two examples of intangibles
would be clearly discussed covering accounting treatment, impact on
financial statements and areas of difficulty for both examples. A weak
answer would focus on one intangible, providing a description of that
intangible and its accounting treatment, but not address its impact on
financial statements or difficulties.
26

To determine the present value of a single payment of 1 received ‘n’
periods from the present at a constant discount rate of x% per period.
Discount
1 2 3 4 5 6 7 8 9 10
rate %
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
Discount
11 12 13 14 15 16 17 18 19 20
rate %
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
27

The table gives the present value of ‘n’ annual payments of 1 received
for the next ‘n’ years with a constant discount rate of x% per year. For
example, with a discount rate of 8% and with six annual payments of £1
the present value is £4.6229.
Discount
1 2 3 4 5 6 7 8 9 10
rate %
Period
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
Discount
11 12 13 14 15 16 17 18 19 20
rate %
Period
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
28

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~~AC3091 ZA d0

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON AC3091 ZA

BSc degrees and Diplomas for Graduates in Economics, Management, Finance

Monday, 12 May 2014 : 14:30 to 17:45

All questions carry equal marks.

PLEASE TURN OVER

© University of London 2014

Answer at least one question from this section.

© University of London 2014

Revenue / sales 3,800,000

Statement of financial position

Buildings 1,600,000 (160,000) 1,440,000

Share capital 2,000,000

© University of London 2014

RPI Non- current Inventory

Closing inventory was acquired on 30 November 2013.

Sales and purchases accrue evenly throughout the year.

© University of London 2014

Answer all parts of the question.

© University of London 2014

Date Exchange rate

Sales £3,250,000 £4,500,000

Gross profit margin 10% 15%

General expenses £75,000 £425,000

Tax £225,000 £150,000

Number of shares issued at start of the period 50,000 50,000

Number of shares issued at full market price

Share price £50.00 £25.00

© University of London 2014

Answer at least one question from this section.

© University of London 2014

© University of London 2014

© University of London 2014

This paper is not to be removed from the Examination Halls

UNIVERSITY OF LONDON AC3091 ZB

BSc degrees and Diplomas for Graduates in Economics, Management, Finance

Monday, 12 May 2014 : 14:30 to 17:45

All questions carry equal marks.

PLEASE TURN OVER

© University of London 2014

Share capital 2,000,000 600,000 400,000

Statement of financial position as at 31 December 2013

Inventories 80,000 80,000

Inter-company receivable from Tiger 50,000

Share capital 720,000 100,000

Income statement for the year ended 31 December 2013

© University of London 2014

1 Non-current assets were acquired on 1 January 2009.

3 Exchange rates 1 January 2009 £1 = 10 “potts”

5 Method 1 is used to calculate non controlling interest.

7 The functional currency of Tiger Org is the £.

© University of London 2014

Answer all parts of this question.

© University of London 2014

© University of London 2014

i. current purchasing power accounting.

© University of London 2014

© University of London 2014

© University of London 2014

Examiners’ commentaries 2014

Information about the subject guide and the Essential reading

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