2015 Commentary

~~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
Wednesday, 20 May 2015 : 10:00 to 13:15
Candidates should answer FOUR of the following SIX questions: ONE from Section A,
ONE from Section B and TWO further questions from either section. 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 2015

UL15/0175 Page 1 of 9 D1
SECTION A
Answer one question and no more than two further questions from this section.
1. The statements of financial position as at 31 December 2014 and the statements of

comprehensive income for the year ended 31 December 2014 for Tea Plc, Coffee Ltd and Juice
Ltd are given as follows:
Statements of financial position as at 31 December 2014
Tea Plc Coffee Ltd Juice Ltd

£’000 £’000 £’000
Non-current assets (land) 200 800 700

Investments 1,100 - -
Inventory 100 200 300
Cash 265 90 30
Inter-company receivable from Coffee Ltd 10 - -
Inter-company receivable from Juice Ltd 5 - -
Total assets 1,680 1,090 1,030
Share capital 200 80 40

Retained earnings 820 430 670
Trade payables 660 570 315
Inter-company payable to Tea Plc - 10 5
Equity and liabilities 1,680 1,090 1,030
Statements of comprehensive Income for the year ended 31 December 2014
Tea Plc Coffee Ltd Juice Ltd

£’000 £’000 £’000
Revenue 900 700 400

Cost of sales (200) (300) (50)
Gross profit 700 400 350
Operating expenses (90) (160) (60)
Profit before tax 610 240 290
Tax (240) (70) (20)
Profit after tax 370 170 270
Question continues on next page.

UL15/0175 Page 2 of 9 D1
Notes
Tea Plc acquired 80% of Coffee Ltd on 1 January 2003 for £400,000 when the share capital
and reserves of Coffee Ltd were £150,000.
At the date of acquisition, the fair value of Coffee Ltd’s non-current assets (land) was
£900,000. The cost of the non-current assets (land) was £800,000 on the date of acquisition
and Coffee Ltd has not accounted for this revaluation.
Tea Plc acquired 25% of Juice Ltd on 1 January 2005 for £300,000 when the share capital
and reserves of Juice Ltd were £200,000. Tea Plc has significant influence over Juice Ltd.
Goodwill for all acquisitions is capitalised. Impairment of 20% of the total goodwill is seen in
2014. No impairment has arisen in prior years.
In 2014, Coffee Ltd sold Tea Plc inventory which cost £60,000 for £100,000 and Juice Ltd
sold inventory to Tea Plc for £80,000. This had cost Juice Ltd £60,000. There were no other
inter-group sales. Half of the inventory sold by both Coffee Ltd and Juice Ltd to Tea Plc
remains unsold.
A management fee of 10% of revenue is charged by Tea Plc to both Coffee Ltd and Juice Ltd
for 2014. The management fee has not been received or paid as at 31 December 2014.
None of the companies has accounted for this management fee.
The retained earnings brought forward for Tea Plc are £450,000, the retained earnings
brought forward for Coffee Ltd are £260,000 and the retained earnings brought forward for
Juice Ltd are £400,000.
Required:
Prepare the consolidated statement of comprehensive income for the year ended 31 December
2014, showing the non-controlling interest, profit attributable to the holding company and
retained profit brought forward, either on the face of the consolidated statement of
comprehensive income or in a separate calculation.
Prepare the consolidated statement of financial position as at 31 December 2014.

UL15/0175 Page 3 of 9 D1
2. Answer all parts of the question.
(a) Lid Plc is considering whether to (i) issue share capital of £600,000 (£1 nominal value
shares) or (ii) issue £300,000 (£1 nominal value shares) and raise £300,000 from a long
term loan with an interest rate of 5% per annum. The future is uncertain and if Lid Plc
has a good year, profit before interest and tax will be £200,000 but if it has a poor year,
profit before interest and tax will be £40,000.
Required:
Calculate profit after tax and earnings per share in both scenarios and comment on
your results. Assume the tax rate is 35%. (8 marks)
(b) Define ordinary shares, preference shares, share premium and debentures. Discuss
the permissible uses for the share premium account. (5 marks)
(c) Define LIFO (last in first out) and FIFO (first in and first out) in relation to inventory
valuations. Discuss the impact on cost of sales and closing inventory if a company
used the LIFO method for valuing inventory instead of the FIFO method in times of
decreasing prices. (5 marks)
(d) Company D issued 400,000 ordinary shares with a nominal value of 50p for £3.00 each
and then issued bonus shares, in respect of all its ordinary shares, on a 4 for 1 basis.
Before the share issue and the bonus issue Company D’s share capital and reserves
were as follows:
£
Ordinary share capital (nominal value 50p) 3,000,000
Ordinary share premium 9,000,000
Preference share capital 4,400,000
Retained profits 96,000,000
Total capital and reserves 112,400,000
Required:
i. What are bonus issues and rights issues? (2 marks)
ii. Show the capital and reserves of Company D after the share issues. (5 marks)

UL15/0175 Page 4 of 9 D1
3. Cal Ltd has decided in future to account for assets on a current value basis, using deprival
value of the assets as the definition of current value. The table and notes below give
management estimates relating to three of the non-current assets owned by the company:
Non-current Non-current Non-current

asset 1 asset 2 asset 3
£ £ £
Net book value 100,000 350,000 420,000
Net realisable value in market 120,000 360,000 510,000
Current purchase price of an 180,000 375,000 555,000
asset in similar condition
Notes
(i) Non-current asset 1 is rarely used but is kept as a standby. If it were not available it is
estimated that £34,000 per annum would have to be spent on hire of a machine from
another company. The annual expenditure on keeping this asset ready for use is set at
£20,000. This asset will continue to be required as long as can be foreseen.
(ii) Non-current asset 2, if retained, would have in its best use an expected life of 10 years at
the end of which its selling price would be £150,000. Its annual net contribution to the
cashflow during the ten years of use would be £60,000. The net contribution to cashflow
each year is received at the year end.
(iii) Non-current asset 3 is expected to have a life of 5 years, after which it would be sold for
£150,000. Its net cash contribution during its five year life would be £90,000 per annum.
The net cash contribution each year is received at the year end.
The company expects to earn 10% per annum on capital invested.
Required:
(a) Define deprival value. Discuss the advantages and disadvantages of recording non-
current assets at deprival value for users of financial statements. (12 marks)
(b) Calculate the deprival value for non-current assets 1, 2 and 3. (13 marks)

UL15/0175 Page 5 of 9 D1
4. (i) Pat Plc bought a non-current asset denominated in the currency “imps”. The non-
current asset cost 30,000 imps on 1 August 2013 and on this date the exchange rate
was £1:4 imps. Pat Plc has a December year end and the exchange rate on 31
December 2013 was £1:6 imps. Pat Plc paid for the asset on 31 January 2014 when
the exchange rate was £1:2 imps.
(ii) Pat Plc raised a 3 year loan of 1,000,000 “rolls” on 1 January 2013. “Rolls” are a
foreign currency. The exchange rates were £1 : 5 “rolls” on 1 January 2013 £1 : 6
“rolls” on 31 December 2013 and £1 : 4 “rolls” on 31 December 2014.
Required:
(a) Discuss when the closing rate and temporal methods should be used for translating the
financial statements of overseas subsidiaries and explain what is meant by the
functional currency. Compare and contrast the closing rate and temporal methods for
translating the financial statements of overseas subsidiaries and critically assess both
methods. (12 marks)
(b) Show how the transaction in (i) above would be accounted for by Pat Plc on 1 August
2013, 31 December 2013 and 31 January 2014.
Show how the transaction in (ii) above would be accounted for on 1 January 2013,
31 December 2013 and 31 December 2014. (13 marks)

UL15/0175 Page 6 of 9 D1
SECTION B
5. Either:
Discuss the need for, and critically assess, conceptual frameworks for financial reporting.
Or:
Compare and contrast current purchasing power accounting and current value accounting.
Critically assess these two methods and discuss the impact of the different methods on
financial statements.
6. Either:
Discuss the concepts of substance over form, off balance sheet finance and the impact of
these concepts on financial statements. Illustrate your answers with three examples.
Or:
Define goodwill and discuss how goodwill should be accounted for. Discuss the main issues
that arise when accounting for goodwill.
END OF PAPER

UL15/0175 Page 7 of 9 D1
Compound interest factors over n periods at rate i per period
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.
Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696
2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972 0.7831 0.7561
3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118 0.6931 0.6575
4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355 0.6133 0.5718
5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674 0.5428 0.4972
6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066 0.4803 0.4323
7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523 0.4251 0.3759
8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039 0.3762 0.3269
9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606 0.3329 0.2843
10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220 0.2946 0.2472
11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875 0.2607 0.2149
12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567 0.2307 0.1869
13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292 0.2042 0.1625
14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046 0.1807 0.1413
15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827 0.1599 0.1229
16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631 0.1415 0.1069
17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456 0.1252 0.0929
18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300 0.1108 0.0808
19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161 0.0981 0.0703
20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037 0.0868 0.0611

UL15/0175 Page 8 of 9 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
Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696
2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6681 1.6257
3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.3612 2.2832
4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.9745 2.8550
5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.5172 3.3522
6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.9975 3.7845
7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.4226 4.1604
8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.7988 4.4873
9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 5.1317 4.7716
10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.4262 5.0188
11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.6869 5.2337
12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.9176 5.4206
13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 6.1218 5.5831
14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.3025 5.7245
15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 6.4624 5.8474
16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740 6.6039 5.9542
17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196 6.7291 6.0472
18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497 6.8399 6.1280
19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658 6.9380 6.1982
20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694 7.0248 6.2593

UL15/0175 Page 9 of 9 D1
~~AC3091 ZA 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
Wednesday, 20 May 2015 : 10:00 to 13:15
Candidates should answer FOUR of the following SIX questions: ONE from Section A,
ONE from Section B and TWO further questions from either section. 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

UL15/0176 Page 1 of 9 D1
SECTION A
1. The statements of financial position as at 31 December 2014 and the statements of

comprehensive income for the year ended 31 December 2014 for Brown Plc, Red Ltd and
White Ltd are given as follows:
Statements of financial position as at 31 December 2014
Brown Red Ltd White Ltd

Plc
£’000 £’000 £’000
Non-current assets (land) 800 3,200 2,800

Investments 4,400 - -
Inventory 400 800 1,200
Cash 1,060 360 120
Inter-company receivable from Red Ltd 40 - -
Inter-company receivable from White Ltd 20 - -
Total assets 6,720 4,360 4,120

Retained earnings 3,280 1,720 2,680
Trade payables 2,640 2,280 1,260
Inter-company payable to Brown Plc - 40 20
Equity and liabilities 6,720 4,360 4,120
Statements of comprehensive Income for the year ended 31 December 2014
Brown Plc Red Ltd White Ltd

£’000 £’000 £’000
Revenue 3,600 2,800 1,600

Cost of sales (800) (1,200) (200)
Gross profit 2,800 1,600 1,400
Operating expenses (360) (640) (240)
Profit before tax 2,440 960 1,160
Tax (960) (280) (80)
Profit after tax 1,480 680 1,080
Question continues on next page.

UL15/0176 Page 2 of 9 D1
Notes
Brown Plc acquired 90% of Red Ltd on 1 January 2003 for £1,600,000 when the share
capital and reserves of Red Ltd were £600,000.
At the date of acquisition, the fair value of Red Ltd’s non-current assets (land) was
£3,600,000. The cost of the non-current assets (land) was £3,200,000 on the date of
acquisition and Red Ltd has not accounted for this revaluation.
Brown Plc acquired 30% of White Ltd on 1 January 2005 for £1,200,000 when the share
capital and reserves of White Ltd were £800,000. Brown Plc has significant influence over
White Ltd.
Goodwill for all acquisitions is capitalised. Impairment of 20% of the total goodwill is seen in
2014. No impairment has arisen in prior years.
In 2014, Red Ltd sold Brown Plc inventory which cost £240,000 for £400,000 and White Ltd
sold inventory to Brown Plc for £160,000. This had cost White Ltd £80,000. There were no
other inter-group sales. Half of the inventory sold by both Red Ltd and White Ltd to Brown
Plc remains unsold.
A management fee of 10% of revenue is charged by Brown Plc to both Red Ltd and White
Ltd for 2014. The management fee has not been received or paid as at 31 December 2014.
None of the companies has accounted for this management fee.
The retained earnings brought forward for Brown Plc are £1,800,000, the retained earnings
brought forward for Red Ltd are £1,040,000 and the retained earnings brought forward for
White Ltd are £1,600,000.
Required:
Prepare the consolidated statement of comprehensive income for the year ended 31 December
2014, showing non-controlling interest, profit attributable to the holding company and retained
profit brought forward, either on the face of the consolidated statement of comprehensive
income or in a separate calculation.
Prepare the consolidated statement of financial position as at 31 December 2014.

UL15/0176 Page 3 of 9 D1
2. Sign Ltd has decided in future to account for assets on a current value basis, using deprival
value of the assets as the definition of current value. The table and notes below give
management estimates relating to three of the non-current assets owned by the company:
Non-current Non-current Non-current

asset 1 asset 2 asset 3
£ £ £
Net book value 400,000 1,400,000 1,680,000
Net realisable value in market 480,000 1,440,000 2,040,000
Current purchase price of an asset 720,000 1,500,000 2,220,000
In similar condition
Notes
(i) Non-current asset 1 is rarely used but is kept as a standby. If it were not available it is
estimated that £136,000 per annum would have to be spent on hire of a machine from
another company. The annual expenditure on keeping this asset ready for use is set at
£80,000. This asset will continue to be required as long as can be foreseen.
(ii) Non-current asset 2, if retained, would have in its best use an expected life of 10 years at
the end of which its selling price would be £600,000. Its annual net contribution to the
cashflow during the ten years of use would be £240,000. The net contribution to cashflow
each year is received at the year end.
(iii) Non-current asset 3 is expected to have a life of 5 years, after which it would be sold for
£600,000. Its net cash contribution during its five year life would be £360,000 per annum.
The net cash contribution each year is received at the year end.
The company expects to earn 10% per annum on capital invested.
Required:
(a) Define deprival value. Discuss the advantages and disadvantages of recording non-
current assets at deprival value for users of financial statements. (12 marks)
(b) Calculate the deprival value for non-current assets 1, 2 and 3. (13 marks)

UL15/0176 Page 4 of 9 D1
3. Answer all parts of the question.
(a) Outline the main differences between the merger (pooling of interest) and acquisition
accounting methods and discuss the reasons why merger accounting has been
discontinued. (5 marks)
(b) Discuss the treatment of events after the statement of financial position date under
IAS 10 (FRS 21). (5 marks)
(c) You are given the following information:

2014 2013
Gross profit percentage 20% 25%

Cost of sales £750,000 £1,200,000
Administration and £75,000 £300,000
distribution expenses
Ordinary share capital £600,000 £400,000

Preference share capital £450,000 £225,000
Long term loans £150,000 £100,000
Retained earnings £900,000 £700,000
Required:
Calculate the net profit margin and the gearing ratio for 2014 and 2013. Discuss two
possible reasons for the changes seen in the net profit margin and discuss the
problems associated with increasing levels of debt within companies. (8 marks)
(d) Mint Ltd acquired a building on 1 January 2011 for £400,000.

The depreciation policy for Mint Ltd for buildings is the straight line method with a rate
of 10% per annum.
The useful economic life of the building remains unchanged as at the end of 2014.
The valuations of the building are given as follows:
Date Valuation
31 December 2011 £500,000

31 December 2012 £650,000
31 December 2013 £1,000,000
31 December 2014 £1,000,000
Required:
Show how the building would have been accounted for using the fair value method in
the financial statements of Mint from 2011 to 2014. Mint revalues its assets every year.
Show how the building would have been accounted for in the financial statements of
Mint Ltd from 2011 to 2014 using the cost method and with Mint choosing to revalue the
building on 1 January 2014 for the first time. (7 marks)

UL15/0176 Page 5 of 9 D1
4. Bob Plc has the following construction contract, contract Y, under way. The position on the
contract as at 31 December 2013 and 2014 is given as follows:
Contract Y 2013 2014

£’000 £’000
Contract price 6,000 6,000

Cost of work to date 800 6,160
Estimated additional costs to completion 3,600 5,040
Progress billings 2,880
Payments on account 3,600
The outcome of contract Y could not be estimated reliably in 2013.
At the end of 2013, the company expected contract Y to be profitable.
Bob Plc uses the costs to date method to assess percentage completion for this project.
Required:
(a) Define construction contracts. Discuss revenue recognition in relation to construction

contracts, referring to accounting concepts as appropriate. (12 marks)
(b) Show how Contract Y will be reflected in the statement of comprehensive income for
the years ended 31 December 2013 and 31 December 2014 and the statement of
financial position of Bob Plc as at 31 December 2013 and 31 December 2014 in
accordance with IAS 11 on construction contracts. (13 mark)

UL15/0176 Page 6 of 9 D1
SECTION B
5. Either:
Discuss, and critically assess, the accountants’ and economists’ approach to income and
capital. What are the implications of Hicks’s concepts for financial reporting?
Or
Discuss the need for standard setting in the 1970’s in the UK and critically assess the
standard setting system set up in the 1970’s. Critically assess how standard setting has
developed over time.
6. Either
Compare, contrast and critically assess the closing rate and temporal methods for accounting
for overseas entities. What impact do the different methods make on financial reports?
Or
What are intangible assets? Discuss, and critically assess, IAS 38 in relation to intangible
assets. Illustrate your answer with two examples.
END OF PAPER

UL15/0176 Page 7 of 9 D1
Compound interest factors over n periods at rate i per period
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.
Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696
2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972 0.7831 0.7561
3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118 0.6931 0.6575
4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355 0.6133 0.5718
5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674 0.5428 0.4972
6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066 0.4803 0.4323
7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523 0.4251 0.3759
8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039 0.3762 0.3269
9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606 0.3329 0.2843
10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220 0.2946 0.2472
11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875 0.2607 0.2149
12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567 0.2307 0.1869
13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292 0.2042 0.1625
14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046 0.1807 0.1413
15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827 0.1599 0.1229
16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631 0.1415 0.1069
17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456 0.1252 0.0929
18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300 0.1108 0.0808
19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161 0.0981 0.0703
20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037 0.0868 0.0611

UL15/0176 Page 8 of 9 D1
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
Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696
2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6681 1.6257
3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.3612 2.2832
4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.9745 2.8550
5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.5172 3.3522
6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.9975 3.7845
7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.4226 4.1604
8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.7988 4.4873
9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 5.1317 4.7716
10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.4262 5.0188
11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.6869 5.2337
12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.9176 5.4206
13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 6.1218 5.5831
14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.3025 5.7245
15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 6.4624 5.8474
16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740 6.6039 5.9542
17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196 6.7291 6.0472
18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497 6.8399 6.1280
19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658 6.9380 6.1982
20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694 7.0248 6.2593

UL15/0176 Page 9 of 9 D1
Examiners’ commentaries 2015

AC3091 Financial reporting
Important note
This commentary reflects the examination and assessment arrangements

for this course in the academic year 2014–15. 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
Examination revision strategy
Many candidates are disappointed to find that their examination

performance is poorer than they expected. This may be due to a
number of reasons. The Examiners’ commentaries suggest ways of
addressing common problems and improving your performance. One
particular failing is ‘question spotting’, that is, confining your
examination preparation to a few questions and/or topics which
have come up in past papers for the course. This can have 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 each course. You should read the
syllabus 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. Examination papers may legitimately include
questions on any topic in the syllabus. So, although past papers can be
helpful during your 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. 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 questions: ONE from Section A,
ONE from Section B and TWO further questions from either section.
All questions carry equal marks.
Section A
Answer one question and no more than two further questions from this
section.
Question 1
The statements of financial position as at 31 December 2014 and the statements
of comprehensive income for the year ended 31 December 2014 for Tea Plc,
Coffee Ltd and Juice Ltd 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.
International financial reporting and analysis, 5th edition, Chapters 25–28.
Approaching the question
You need to prepare the statement of financial position and statement of
comprehensive income as follows giving full workings. Please note that
there is some choice in the presentation of the statement of comprehensive
income for profit attributable to H and retained profits brought forward
and carried forward.
4
Statement of financial position

Workings £’000
Non current assets 1,100,000 200 + 900
Investments 400,000 1,100 – 400 – 300
Goodwill 160,000
Share in A 365,000
Inventories 280,000 100 + 200 – 20
Inter-company from A 5,000
Management fee 40,000
Cash 355,000
Total assets 2,705,000
Share capital 200,000

Retained earnings 1,171,000
NCI 104,000
Trade payables 1,230,000
Capital, reserves and liabilities 2,705,000
Statement of comprehensive income

Workings £’000
Revenue 1,500,000 900 + 700 – 100
Cost of sales (420,000) 200 + 300 – 00 + 20
Gross profit 1,080,000
Operating expenses (250,000) 90 + 160
Share in A 10,000 25% * (290 – 10 – 40) – 50
Management fee from A 40,000
Impairment (40,000)
Profit before tax 840,000
Tax (315,000) 240 + 70 + 0.25 * 20
Profit after tax 525,000
Profit attributable to shareholders 509,000

NCI 16,000 20% * (170 – 20 – 70)
Profit after tax 525,000
Statement of changes in equity
Retained profit bfwd 662,000 450 + 80% * (260 – 70) +
25% * (400 – 160)
Profit attributable to shareholders 509,000
Retained profit cfwd 1,171,000

Alternative presentations for figures such as goodwill and share in A are
acceptable.
Key workings (£’000)

Goodwill
Shares in S 400 – 80% * 250 = 200
Shares in A 300 – 25% * 200 = 250
Goodwill of S – impairment = 200,000 – 40,000 = 160,000 5
Reserves table (£’000)

H S A
Retained earnings 820 430 670
Provision for unrealised profit (20) (10)
Management fee 110 (70) (40)
Revised retained earnings 930 340 620
Revaluation reserves 100
Revised equity 1,130 520 660
Retained earnings= 930 + 80% * (340 – 70) + 25% * (620 – 160) – 90
= 930 + 216 + 115 – 90
= 1,171
Non-controlling interest = 20% * 520 = 104
share in A = 300 + 25% * (620 – 160) – 50 = 365
Question 2
Answer all parts of the question.
a. Lid Plc is considering whether to (i) issue share capital of £600,000 (£1
nominal value shares) or (ii) issue £300,000 (£1 nominal value shares) and
raise £300,000 from a long term loan with an interest rate of 5% per annum.
The future is uncertain and if Lid Plc has a good year, profit before interest
and tax will be £200,000 but if it has a poor year, profit before interest and
tax will be £40,000.
Required:
Calculate profit after tax and earnings per share in both scenarios and
comment on your results. Assume the tax rate is 35%. (8 marks)
Share capital Good Bad
Profit before interest 200,000 40,000
Tax (70,000) (14,000)
Profit after tax 130,000 26,000
Earnings per share 0.22 0.04
Share capital + debentures

Profit before interest and tax 200,000 40,000
Interest (15,000) (15,000)
Profit before tax 185,000 25,000
Tax (64,750) (8,750)
Profit after tax 120,250 16,250
Earnings per share 0.40 0.05
Comments should relate to the figures you have calculated and discuss the
impact of introducing debt into the company on the ratios.
6
b. Define ordinary shares, preference shares, share premium and debentures.

Discuss the permissible uses for the share premium account. (5 marks)
Your answer should clearly define the terms and identify appropriate uses
of the share premium account.
c. Define LIFO (last in first out) and FIFO (first in and first out) in relation
to inventory valuations. Discuss the impact on cost of sales and closing
inventory if a company used the LIFO method for valuing inventory instead of
the FIFO method in times of decreasing prices. (5 marks)
International financial reporting and analysis, 5th edition, Chapters 15.
You should clearly outline LIFO and FIFO and discuss how the cost of sales
and closing inventory would be affected by using the different methods
for inventory valuation. You may wish to illustrate your discussion with an
example.
d. Company D issued 400,000 ordinary shares with a nominal value of 50p for
£3.00 each and then issued bonus shares, in respect of all its ordinary shares,
on a 4 for 1 basis. Before the share issue and the bonus issue Company D’s
share capital and reserves were as follows:
£
Ordinary share capital (nominal value 50p) 3,000,000
Ordinary share premium 9,000,000
Preference share capital 4,400,000
Retained profits 96,000,000
Total capital and reserves 112,400,000
Required:
i. What are bonus issues and rights issues? (2 marks)
ii. Show the capital and reserves of Company D after the share issues. (5 marks)
You must clearly define bonus and rights issues.
The revised reserves after the transactions entered into by the company
are as follows:
7
Initial reserves After share issue After bonus issue

Ordinary shares 3,000,000 3,200,000 16,000,000
Share premium 9,000,000 10,000,000 0
Preference share capital 4,400,000 4,400,000 4,400,000
Retained profits 96,000,000 96,000,000 93,200,000
112,400,000 113,600,000 113,600,000
Question 3
Cal Ltd has decided in future to account for assets on a current value basis, using
deprival value of the assets as the definition of current value. The table and
notes below give management estimates relating to three of the non-current
assets owned by the company:
Subject guide, Chapters 3 and 4.
International financial reporting and analysis, 5th edition, Chapters 4, 5, 6
and 7.
a. You should provide a brief definition of deprival value, perhaps
illustrating this with an appropriate example. You must discuss both
advantages and disadvantages of the concept for users of financial
statements, covering both in detail. You need to discuss a range of
advantages and disadvantages and not just focus on one or two. You
should avoid preparing brief lists in your answer as essay style is
required.
b.
Asset 1
Present value (PV)
Rent saved = 34,000
Less maintenance (20,000)
14,000
Present value at perpetuity at 10% per annum = 14,000/.1 = 140,000
Replacement cost (RC) = 180,000
Net realisable value (NRV) = 120,000
Net present value (NPV) = 140,000
• retain asset since worth more in use than in selling
• deprival value = net present value = 140,000 – since net present
value is lower than replacement cost
Asset 2
Present value
Annual contribution in service = 60,000
Present value of 10 year annuity at 10% = 60,000 * 6.1446 368,676
Terminal realisation value = 150,000
Present value of terminal value = 150,000 * 0.3855 57,825
Present value of future contribution in use = 368,676 + 57,825 426,501
Replacement cost = 375,000
8
Net realisable value = 360,000

Present value = 426,501
Present value > Net realisable value, therefore keep asset
Present value >Replacement cost, therefore deprival value =
RC = 375,000
Asset 3
Present value = 90,000 * 3.7908 341,172
Terminal value 150,000
Present value of terminal value = 150,000 * 0.6209 93,135
Present value of future contribution = 341,172 + 93,135 434,307
Replacement cost = 555,000
Net realisable value = 510,000
Net present value= 434,307
=>deprival value = net realisable value = 510,000
Therefore, sell asset since net realisable higher than net present value
and net realisable value lower than RC.
Question 4
i. Pat Plc bought a non-current asset denominated in the currency ‘imps’.
The non-current asset cost 30,000 imps on 1 August 2013 and on this date
the exchange rate was £1:4 imps. Pat Plc has a December year end and the
exchange rate on 31 December 2013 was £1:6 imps. Pat Plc paid for the asset
on 31 January 2014 when the exchange rate was £1:2 imps.
ii. Pat Plc raised a 3 year loan of 1,000,000 ‘rolls’ on 1 January 2013. ‘Rolls’ are a
foreign currency. The exchange rates were £1:5 ‘rolls’ on 1 January 2013 £1:6
‘rolls’ on 31 December 2013 and £1:4 ‘rolls’ on 31 December 2014.
International financial reporting and analysis, 5th edition, Chapter 29.
a. You should discuss when the two different methods should be used
with reference to the functional currency and type of subsidiary. Your
answer should include a discussion of the definition of functional
currency, identifying the different factors that can determine the
functional currency.
You need to provide a clear comparison of the two methods,
identifying the differences in a range of areas including the exchange
rates used, when the methods should be used, the treatment of the
foreign exchange reserve and the calculation and translation of
goodwill in the consolidated financial statements.
You also need to discuss the advantages and disadvantages of each of
the methods.
You should avoid brief lists and comments, instead use an essay style
in this part of the question.
9
b (i)
1 August 2013
non current asset = 30,000/4 = £7,500
creditor = 30,000/4 = £7,500
31st December 2013
non current asset = £ 7,500
creditor = 30,000/6 = £5,000
profit in income statement = £2,500
31st January 2014 in accounts for 31st December 2014
non current asset = £7,500
creditor repaid = 30,000/2 = £15,000
loss in income statement = £(10,000)
c (ii)
1 January 2013
loan = 1,000,000/5 = £200,000
year end 31st December 2013
loan – 1,000,000 / 6 = £166,666
gain of £33,334 to income statement
year end 31st December 2014
loan = 1,000,000/4 = £250,000
loss of £83,334 to income statement
Section B
section.
Question 5
Either:
Discuss the need for, and critically assess, conceptual frameworks for financial
reporting.
For this question you need to briefly define a conceptual framework and
summarise the main contents of a conceptual framework. You may want to
illustrate this with reference to a conceptual framework of your choice; for
example, the IASB conceptual framework, the UK statement of principles
or the FASB conceptual framework.
You need to discuss the reasons why a conceptual framework was required
in the 1970’s and this discussion should include issues in relation to: the
accounting regulatory environment in the 1970’s; the accounting choice
available; the credibility of the profession; and the potential role of the
Government. A good answer will cover as many points as possible.
You should also discuss a range of advantages and disadvantages of
conceptual frameworks, and not just focus on one or two points.
10
Your essay should include an introduction, main body and conclusion and
you need to link the issues you discuss. You should avoid just briefly listing
points. Your answer should address all parts of the question and not just
focus on one element of the question.
Or:
Compare and contrast current purchasing power accounting and current value
accounting. Critically assess these two methods and discuss the impact of the
different methods on financial statements.
International financial reporting and analysis, 5th edition, Chapters 5, 6 and 7.
In your answer you should provide an explanation of both CPP and
CCA, perhaps illustrating each of the methods with an example. Both
methods should be compared and areas of comparison may include
asset valuations, capital maintenance concepts, which indices to use, net
monetary working capital adjustment in CPP and realised/unrealised
reserves in CCA.
Your answer should include a detailed critical assessment of both methods,
including a range of advantages and disadvantages for each method.
Finally, you need to discuss the impact of each method on the financial
statement; for example, in relation to impact on profits, asset valuations,
inventory valuations and capital, tax implications and the ability to
continue operations.
A good answer will cover a wide range of issues.
The essay should include an introduction, main body and conclusion and
Question 6
Either:
Discuss the concepts of substance over form, off balance sheet finance and the
impact of these concepts on financial statements. Illustrate your answers with
three examples.
You need to discuss the concepts of substance over form and off balance
sheet finance. You need to give three examples illustrating these concepts
and these may include leases, quasi-subsidiaries, sale, consignment stock,
debt factoring, derivatives and securitisation. Other examples are also
acceptable.
For each example you need to outline the transaction and give full and
clear explanations of the application of off balance sheet finance and
substance over form.
For all three examples you also need to discuss the impact on the financial
statements, debt and risk and on key ratios.
11
Or:
Define goodwill and discuss how goodwill should be accounted for. Discuss the
main issues that arise when accounting for goodwill.
You need to provide a clear discussion and definition of goodwill including
purchased and internally generated goodwill and positive and negative
goodwill. You also need to discuss the different accounting treatments for
goodwill including capitalisation and impairment review, capitalising and
amortising over useful economic life, writing off to the income statement,
writing off to reserves and the dangling debt method.
You need to discuss a range of issues that lead to goodwill being a
complicated asset to account for and these issues may include:
• the characteristics and nature of goodwill
• the assumptions behind accounting for goodwill
• how to determine current value in goodwill calculations
• the different accounting concepts that may be applied such as
relevance, reliability, prudence and matching
• the different accounting treatments that have been proposed and used
for accounting for goodwill
• what the nature of the goodwill asset is
• who controls the right to benefit from goodwill
• what the cost of acquiring asset is
• does goodwill have a finite useful economic life
• how should asset be amortised, if at all
• should goodwill be recorded at current value.
You may also discuss the impact of goodwill and its different accounting
treatments on financial statements and key ratios and discuss different
accounting standards in this area.
12
Compound interest factors over n periods at rate i per

period
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.
Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696
2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972 0.7831 0.7561
3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118 0.6931 0.6575
4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355 0.6133 0.5718
5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674 0.5428 0.4972
6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066 0.4803 0.4323
7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523 0.4251 0.3759
8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039 0.3762 0.3269
9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606 0.3329 0.2843
10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220 0.2946 0.2472
11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875 0.2607 0.2149
12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567 0.2307 0.1869
13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292 0.2042 0.1625
14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046 0.1807 0.1413
15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827 0.1599 0.1229
16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631 0.1415 0.1069
17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456 0.1252 0.0929
18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300 0.1108 0.0808
19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161 0.0981 0.0703
20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037 0.0868 0.0611
13

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
Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696
2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6681 1.6257
3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.3612 2.2832
4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.9745 2.8550
5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.5172 3.3522
6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.9975 3.7845
7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.4226 4.1604
8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.7988 4.4873
9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 5.1317 4.7716
10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.4262 5.0188
11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.6869 5.2337
12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.9176 5.4206
13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 6.1218 5.5831
14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.3025 5.7245
15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 6.4624 5.8474
16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740 6.6039 5.9542
17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196 6.7291 6.0472
18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497 6.8399 6.1280
19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658 6.9380 6.1982
20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694 7.0248 6.2593
14

AC3091 Financial reporting – Zone B
Important note


references
Comments on specific questions

Candidates should answer FOUR of the following questions: ONE from Section A,
ONE from Section B and TWO further questions from either section.
All questions carry equal marks.
Section A
section.
Question 1
The statements of financial position as at 31 December 2014 and the statements
of comprehensive income for the year ended 31 December 2014 for Brown Plc,
Red Ltd and White Ltd are given as follows:
You need to prepare the statement of financial position and statement of
comprehensive income as follows giving full workings. Please note that
there is some choice in the presentation of the statement of comprehensive
income for profit attributable to H and retained profits brought forward
and carried forward.
15
Statement of financial position

Workings £’000
Non current assets 4,400,000 800 + 3,600

Investments 1,600,000 4,400 – 1,600 – 1,200
Goodwill 560,000
Share in A 1,560,000
Inventories 1,120,000 400 + 800 – 80
Inter-company from A 20,000
Management fee 160,000
Cash 1,420,000
10,840,000
Share capital 800,000

Retained earnings 4,912,000
NCI 208,000
Trade payables 4,920,000
10,840,000
Statement of comprehensive income

Revenue 6,000,000 3,600 + 2,800 – 400
Cost of sales (1,680,000) 800 + 1,200 – 400 + 80
Gross profit 4,320,000
Operating expenses (1,000,000) 360 + 640
Share in A 96,000 30% * (1,160 – 40 – 160) – 192
Management fee from A 160,000
Impairment (140,000)
Profit before tax 3,436,000
Tax (1,264,000) 960 + 280 + 0.30 * 80
Profit after tax 2,172,000
Profit attributable to shareholders 2,140,000

NCI 32,000 10% * (680 – 80 – 280)
Profit after tax 2,172,000
Statement of changes in equity
Retained profit bfwd 2,772,000 1,800 + 90% * (1,040 – 280)
+ 30% * (1,600– 640)
Profit attributable to shareholders 2,140,000
Retained profit cfwd 4,912,000
Presentation mark 1
Note alternative calculations and presentations are acceptable for
goodwill, share in A, profit attributable to H and retained profit carried
forward.
16
Key workings
Goodwill
Shares in S 1,600,000 – 90% * 1,000,000 = 700,000
Shares in A 1,200,000 – 30% * 800,000 = 960,000
Goodwill – impairment for S = 700,000 – 140,000 = 560,000

Impairment for A = 20% * 960,000 = 192,000
Reserves table workings £’000
H S A
Retained earnings 3,280 1,720 2,680
Provision for unrealised profits (80) (40)
Management fee 440 (280) (160)
3,720 1,360 2,480
Revised retained earnings
Revaluation reserve 400
Revised equity 4,520 2,080 2.640
Retained earnings = 3,720 + 90% * (1,360 – 280) + 30% * (2,480 – 640)
– 332
= 3,720 + 972 + 552 – 332
= 4,912
Sfp NCI = 10% * 2,080 = 208
Sfp share in A = 1,200 + 30% * (2,480 – 640) – 192 = 1,560
Question 2
Sign Ltd has decided in future to account for assets on a current value basis,
using deprival value of the assets as the definition of current value. The table
and notes below give management estimates relating to three of the non-
current assets owned by the company:
Subject guide, Chapters 3 and 4.
International financial reporting and analysis, 5th edition, Chapters 4, 5, 6 and 7.
a. You should provide a brief definition of deprival value, perhaps
illustrating this with an appropriate example. You must discuss both
advantages and disadvantages of the concept for users of financial
statements, covering both in detail. You need to discuss a range of
advantages and disadvantages and not just focus on one or two. You
should avoid preparing brief lists in your answer as an essay style is
required.
b. Asset 1
Present value (PV)
Rent saved = 136,000
Less maintenance (80,000)
56,000
17
Present value at perpetuity at 10% per annum = 56,000/.1 = 560,000

Replacement cost (RC) = 720,000
Net realisable value (NRV)= 480,000
Net present value (NPV)= 560,000
• retain asset since worth more in use than in selling
• deprival value = net present value = 560,000 – since net present
value is lower than replacement cost
Asset 2
Present value
Present value of 10 year annuity at 10% = 240,000 * 6.1446 1,474,704
Terminal realisation value = 600,000
Present value of terminal value = 600000*0.3855 231,300
Present value of future contribution in use = 1,706,004
1,474,704 + 231,300=
Replacement cost = 1,500,000,
Net realisable value = 1,440,000,
Present value = 1,706,004
Present value > net realisable value, therefore keep asset
Present value > replacement cost, therefore deprival value =
RC = 1,500,000
Asset 3
Present value = 360000 * 3.7908 1,364,688
Terminal value 600,000
Present value of terminal value = 600000 * 0.6209 372,540
Present value of future contribution = 1,364,688 + 372,540 1,737,228
Replacement cost = 2,220,000,
Net realisable value = 2,040,000
Net present value= 1,737,228
=>deprival value = net realisable value
Therefore, sell asset since net realisable higher than net present value
and net realisable value lower than RC.
Question 3
Answer all parts of the question.
a. Outline the main differences between the merger (pooling of interest)
and acquisition accounting methods and discuss the reasons why merger
accounting has been discontinued. (5 marks)
You need to identify the main differences between the techniques and
these may include differences in the treatment of net assets, goodwill,
merger reserve, profits and valuation of shares. You also need to provide
18
a brief outline of why merger (pooling of interest) accounting has been

discontinued.
b. Discuss the treatment of events after the statement of financial position date
under IAS 10 (FRS 21). (5 marks)
You need to clearly define post balance sheet events, perhaps illustrating
your definition with an appropriate example. You need to discuss the
different types of post balance sheet events and how these would be
treated in the financial statements.
c. You are given the following information:
2014 2013
Gross profit percentage 20% 25%
Cost of sales £750,000 £1,200,000
Administration and distribution expenses £75,000 £300,000
Ordinary share capital £600,000 £400,000

Preference share capital £450,000 £225,000
Long term loans £150,000 £100,000
Retained earnings £900,000 £700,000
Required:
Calculate the net profit margin and the gearing ratio for 2014 and 2013. Discuss
two possible reasons for the changes seen in the net profit margin and discuss
the problems associated with increasing levels of debt within companies.
(8 marks)
You need to define the ratios.
The calculations are given as follows:
Sales = 750,000/0.8 = 937,500
Net profit = 937,500 – 750,000 – 75,000 = 112,500
Net profit % = 112.5/937.5 * 100 =12%
Gearing = 600/1500 = 40%
2013
Sales = 1,200,000/0.75 =1,600,000
Net profit = 1,600,000 – 1200,000 – 300,000 = 100,000
Net profit % = 100/1600 * 100 = 6.25
Gearing = 325/1100 = 29.5%
Alternative calculations of gearing are acceptable.
You need to present possible reasons for the changes seen in both ratios.
19
d. Mint Ltd acquired a building on 1 January 2011 for £400,000.

The depreciation policy for Mint Ltd for buildings is the straight line method
with a rate of 10% per annum.
The useful economic life of the building remains unchanged as at the end of
2014.
The valuations of the building are given as follows:
The non current asset would be accounted for as follows under the
different scenarios:
Fair value model

Each year at Fair value with revaluations in income statement
2011 revaluation = 100,000, sfp = 500,000
2012 revaluation = 150,000, SFP = 650,000
2013 = revaluation = 350,000 sfp = 1,000,000
2014 revaluation = 0, sfp = 1,000,000
Cost model with revaluation in 2014

Cost £400,000
Accumulated depreciation (£120,000)
Net book value at revaluation £280,000
Revaluation reserve £720, 000
Revalued asset depreciated over remaining useful economic life
Depreciation = 1,000,000/7 = £142,857
2011 depreciation = 40,000 net book value = 360,000
2012 depreciation = 40,000 net book value = 320,000
2013 depreciation = 40,000, net book value = 280,000
2014 revaluation reserve = 720,000
depreciation = 142,857
net book value = 857,143
Question 4
Bob Plc has the following construction contract, contract Y, under way. The
position on the contract as at 31 December 2013 and 2014 is given as follows:
a. You need to define construction contracts, perhaps illustrating your
definition with an appropriate example.
You need to define the key accounting concepts of reliability,
relevance, prudence and matching and discuss how these concepts are
20
applied to the accounting of construction concepts.

This part of the question needs to be answered in essay style, avoiding lists
and bullet points.
b. Contract Y
Is project profitable?
2013 2014
£’000 £’000
Contract price 6,000 6,000
Costs to date (800) (6,160)
Future costs (3,600) (5,040)
Expected profit/loss on contract 1,600 (5,200)

Not reliable in 2013
2013
Costs = 800,000
Sales = 800,000 to give 0 profit/loss on contract since not reliable
2014
Cost method to estimate completion = costs to date/total costs of
project = 6,160/11,200 = 55% complete
Foreseeable loss needs to be provided
Cumulative sales = 0.55 * 6,000,000 = £3,300,000
Cumulative cost of sales = 0.55 * 11,200,000 = £6,160,000
Provision for foreseeable loss = £2,340,000
Income statement 2013 2014 Cumulative
£’000 £’000 £’000
Sales 800 2,500 3,300
Cost of sales (800) (5,360) (6,160)
Provision for foreseeable loss (2,340) (2,340)
Loss in income statement 0 (5,200) (5,200)
SFP
WIP
Costs to date (WIP) 800 6,160
Recognised loss 0 (5,200)
Progress billings 0 (2,880)
Gross amounts due to/from customer 800 (1,920)
Construction payables = progress (720)

billings – payments on account in
2014 = 2,880 – 3,600
21
Section B
section.
Question 5
Either:
Discuss, and critically assess, the accountants’ and economists’ approach to
income and capital. What are the implications of Hicks’s concepts for financial
reporting?
You must discuss both the accountant’s and the economist’s approach to
income and capital.
For the accountant’s approach, you must explain how they measure
income and capital, illustrating your explanation with reference to
financial statements.
For the economist’s approach, you must discuss the key definitions of
Hicks’s measures of income and capital, giving explanations and examples
of these as well as referring to the equations. You must avoid stating the
equations without clear explanations and examples.
You must also discuss a wide range of advantages and limitations of both
the accountant’s approach and the different Hicks’s measures of income
and capital under the economist’s approach.
Finally, you must discuss the impact of Hicks’s concepts for financial
reporting, both positive and negative.
Or
Discuss the need for standard setting in the 1970’s in the UK and critically assess
the standard setting system set up in the 1970’s. Critically assess how standard
setting has developed over time.
You must identify the reasons for standard setting in the 1970’s in the UK
together with an assessment of its advantages and disadvantages. These
may include financial scandals, choice available in financial reporting,
the regulatory environment, the credibility of the accounting profession,
improvement in accounting, the potential involvement of government,
enforcement issues, quality of standards and the process for the issuing of
standards. Other issues too may be discussed.
Your essay should also address the changes to the standard setting system
over time and discuss the current standard setting system based on IFRS’s.
Your answer should include a discussion of some of the advantages and
limitations of this latest standard setting system.
22
The essay should include an introduction, main body and conclusion and you
need to link the issues you discuss. You should avoid just briefly listing points.
Your answer should address all parts of the question and not just focus on one
element of the question.
Question 6
Either
Compare, contrast and critically assess the closing rate and temporal methods for
accounting for overseas entities. What impact do the different methods make on
financial reports?
You must explain both the closing rate method and the temporal method,
possibly illustrating your explanation with appropriate examples. The
methods should be compared including when the methods should be used,
the differences in functional currency, where the foreign exchange reserves
are presented, how the foreign exchange differences arise and the calculation
and translation of goodwill in the consolidated financial statements. The
advantages and disadvantages of both methods must also be discussed.
Finally the impact on the financial statements and on key ratios of each of the
methods needs to be addressed.
Or
What are intangible assets? Discuss, and critically assess, IAS 38 in relation to
intangible assets. Illustrate your answer with two examples.
You must define intangible assets in general and discuss the general treatment
of such assets, according to IAS 38. You must provide a summary of the main
provisions of IAS 38 and discuss the advantages and disadvantages of IAS 38.
Your answer should discuss two intangibles in detail; including defining
these assets; a discussion of their accounting treatment under IAS 38; and
any issues or inconsistencies arising in the accounting of the intangible assets
you have chosen; as well as the impact the accounting treatment has on the
financial statements. Intangible assets that you may choose include goodwill,
research and development, and brands. Other examples are also acceptable.
The critical assessment of IAS 38 should include a general critique of the
standard and a critique of the standard as applied to the two intangibles you
have chosen to discuss.
23
Compound interest factors over n periods at rate i per

period
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.
Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696
2 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972 0.7831 0.7561
3 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118 0.6931 0.6575
4 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355 0.6133 0.5718
5 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674 0.5428 0.4972
6 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066 0.4803 0.4323
7 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523 0.4251 0.3759
8 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039 0.3762 0.3269
9 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606 0.3329 0.2843
10 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220 0.2946 0.2472
11 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875 0.2607 0.2149
12 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567 0.2307 0.1869
13 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292 0.2042 0.1625
14 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046 0.1807 0.1413
15 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827 0.1599 0.1229
16 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631 0.1415 0.1069
17 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456 0.1252 0.0929
18 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300 0.1108 0.0808
19 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161 0.0981 0.0703
20 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037 0.0868 0.0611
24

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
Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

1 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8850 0.8696
2 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.6901 1.6681 1.6257
3 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4018 2.3612 2.2832
4 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.0373 2.9745 2.8550
5 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6048 3.5172 3.3522
6 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.1114 3.9975 3.7845
7 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.5638 4.4226 4.1604
8 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 4.9676 4.7988 4.4873
9 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.3282 5.1317 4.7716
10 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.6502 5.4262 5.0188
11 8.3064 7.8869 7.4987 7.1390 6.8052 6.4951 5.9377 5.6869 5.2337
12 8.8633 8.3838 7.9427 7.5361 7.1607 6.8137 6.1944 5.9176 5.4206
13 9.3936 8.8527 8.3577 7.9038 7.4869 7.1034 6.4235 6.1218 5.5831
14 9.8986 9.2950 8.7455 8.2442 7.7862 7.3667 6.6282 6.3025 5.7245
15 10.3797 9.7122 9.1079 8.5595 8.0607 7.6061 6.8109 6.4624 5.8474
16 10.8378 10.1059 9.4466 8.8514 8.3126 7.8237 6.9740 6.6039 5.9542
17 11.2741 10.4773 9.7632 9.1216 8.5436 8.0216 7.1196 6.7291 6.0472
18 11.6896 10.8276 10.0591 9.3719 8.7556 8.2014 7.2497 6.8399 6.1280
19 12.0853 11.1581 10.3356 9.6036 8.9501 8.3649 7.3658 6.9380 6.1982
20 12.4622 11.4699 10.5940 9.8181 9.1285 8.5136 7.4694 7.0248 6.2593
25

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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

Wednesday, 20 May 2015 : 10:00 to 13:15

PLEASE TURN OVER

© University of London 2015

1. The statements of financial position as at 31 December 2014 and the statements of

Statements of financial position as at 31 December 2014

Tea Plc Coffee Ltd Juice Ltd

Non-current assets (land) 200 800 700

Share capital 200 80 40

Statements of comprehensive Income for the year ended 31 December 2014

Tea Plc Coffee Ltd Juice Ltd

Revenue 900 700 400

Question continues on next page.

© University of London 2015

Prepare the consolidated statement of financial position as at 31 December 2014.

© University of London 2015

© University of London 2015

Non-current Non-current Non-current

The company expects to earn 10% per annum on capital invested.

© University of London 2015

© University of London 2015

© University of London 2015

Table 1: Present value factors

Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

© University of London 2015

Periods 5% 6% 7% 8% 9% 10% 12% 13% 15%

© University of London 2015

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

Wednesday, 20 May 2015 : 10:00 to 13:15

PLEASE TURN OVER

© University of London 2015

1. The statements of financial position as at 31 December 2014 and the statements of

Statements of financial position as at 31 December 2014

Brown Red Ltd White Ltd

Non-current assets (land) 800 3,200 2,800

Share capital 800 320 160

Statements of comprehensive Income for the year ended 31 December 2014

Brown Plc Red Ltd White Ltd

Revenue 3,600 2,800 1,600

Question continues on next page.

© University of London 2015

Prepare the consolidated statement of financial position as at 31 December 2014.

© University of London 2015

Non-current Non-current Non-current

The company expects to earn 10% per annum on capital invested.

© University of London 2015

(c) You are given the following information:

Gross profit percentage 20% 25%

Ordinary share capital £600,000 £400,000

(d) Mint Ltd acquired a building on 1 January 2011 for £400,000.

31 December 2011 £500,000

© University of London 2015

Contract Y 2013 2014

Contract price 6,000 6,000

The outcome of contract Y could not be estimated reliably in 2013.

At the end of 2013, the company expected contract Y to be profitable.

(a) Define construction contracts. Discuss revenue recognition in relation to construction

© University of London 2015

© University of London 2015