September 2021 FAR UK GAAP Student Mark Plan v2

Professional Level – Financial Account and Reporting – September 2021
MARK PLAN AND EXAMINER’S COMMENTARY
The marking plan set out below was that used to mark this question. Markers were encouraged to use discretion
and to award partial marks where a point was either not explained fully or made by implication. More marks were
available than could be awarded for each requirement. This allowed credit to be given for a variety of valid points
which were made by candidates.
Question 1
General comments
Part 1 of this question tested the preparation of a profit and loss account and a balance sheet.
Adjustments included irrecoverable trade debtors, a lease, an impaired asset, depreciation, taxation and
research and development expenditure. Part 2 required an explanation of the accounting treatment of the
held for sale asset under IFRS. Part 3 required an explanation of how the qualitative characteristics are
useful to users.
Guelder Ltd – Balance sheet as at 31 December 2020

£ £
Fixed assets
Tangible assets
(126,175 + 253,750 + 240,000) (W4) 619,925
Intangible assets (W2) 61,600
681,525
Current assets
Stock 37,800
Trade and other debtors (76,300 – 3,800 (W1)) 72,500
Cash at bank and in hand 3,600
113,900
Creditors: amounts falling due within one year

Trade and other payables (81,250)
Finance lease liability (8,593 – 5,894) (W5) (2,699)
Taxation (9,800 + 3,000) (12,800)
(96,749)
Net current assets 17,151
Total assets less current liabilities 698,676
Creditors: amounts falling due after more than one year

Finance lease liability (W5) (5,894)
Net assets 692,782
Capital and reserves

Called up share capital 500,000
Profit and loss account (147,825 + 44,957) 192,782
692,782
Copyright © ICAEW 2021. All rights reserved. Page 1 of 13

Guelder Ltd – Profit and loss account for the year ended 31 December 2020
£
Turnover 1,320,000
Cost of sales (W1) (857,275)
Gross profit 462,725
Administrative expenses (W1) (404,300)
Operating profit 58,425
Interest payable and similar charges (W5) (668)
Profit on ordinary activities before tax 57,757
Tax on profit on ordinary activities (12,800)
Profit for the financial year 44,957
Workings
W1 Expenses
Cost of Admin
sales expenses
£ £
Nominal ledger b/fwd 698,000 404,300
Opening stock 23,600
Closing stock (37,800)
Bad debt 3,800
R&D costs (W2) 90,700
Amortisation (W2) 7,700
Depreciation charges
(11,250 + 2,785 + 55,790) (W4) 69,825
Impairment (W3) 1,450
857,275 404,300
W2 Research and development

£ £
Intangibles per TB 160,000
Less amounts charged to P&L
Research costs (34,000)
Alpha (48,800 x 25%) (12,200)
Beta (38,200)
Staff training (6,300)
(90,700)
69,300
Amortisation ((69,300 / 3yrs) x 4/12) (7,700)
61,600
W3 Impaired asset
£
Original cost 25,000
Acc depreciation on classification as held for sale (18,750)
(25,000 x 15% x 5yrs)
Net book value at 31 December 2020 6,250
Less recoverable amount (sale proceeds less costs to (4,800)
sell (5,000 – 200))
Impairment 1,450

W4 Tangible fixed assets

Plant & equipment Buildings Land
£ £ £
Cost b/fwd 375,150 450,000 240,000
Deduct lease payment (3,215)
371,935
Less: accumulated depreciation (196,875) (185,000)
Add leased asset 11,140
Depreciation for year

(450,000 / 40yrs) (11,250)
371,935 x 15% (55,790)
Leased asset (11,140 / 4yrs) (2,785)
Less: impairment (W3) (1,450)

126,175 253,750 240,000
W5 Finance lease
1 January 2020 Interest (6%) Payment 31 December 2020

£ £ £ £
11,140 668 (3,215) 8,593
8,593 516 (3,215) 5,894
Total possible marks 24

Maximum full marks 23
(1.2) IFRS
Under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations depreciation should cease
and the asset to be reclassified as held for sale. The asset will be removed from non-current assets in
property, plant and equipment and disclosed in the statement of financial position as a separate line under
‘current assets’.
Under IFRS, the machine would be held at the sale proceeds less costs to sell figure of £4,800. The
machine’s net book value of £6,250 would be removed from property, plant and equipment. However, the
decision to sell the asset would have triggered an impairment review and therefore its recoverable amount
would be assessed. Presumably its value in use would be lower than its fair value less costs to sell as the
decision has been made to sell the machine. Therefore, the machine would be held at £4,800 and an
impairment of £1,450 would still be recognised in profit or loss for the period.


(1.3) Enhancing qualitative characteristics
Comparability ensures that users can identify and understand similarities in, and differences among, items.
Users’ decisions involve choosing between alternatives, for example, which company to make an
investment in. Information about a reporting entity is therefore more useful if it can be compared from one
reporting period to the next and with similar information from other entities. Comparability allows this.
Consistency, although not an enhancing qualitative characteristic itself is related to comparability. This
relates to the same methods being used to report the same item, so consistent accounting policies
governed by accounting standards. The disclosure of accounting policies is therefore key to ensure that
users can make a valid comparison between items. Comparability is the ultimate goal for users, but
consistency helps to achieve that goal.
Verifiability helps assure users that information faithfully represents the information provided – it provides
credibility to the financial information. It means that different knowledgeable and independent observers
could reach consensus that a particular depiction is a faithful representation. It may not always be possible
to verify some explanations and forward-looking financial information until a future date, however it can still
be useful to users provided that sufficient information is provided about the underlying assumptions made,
the method of compiling the information etc.
Timeliness is equally important as information becomes less useful the longer the time delay in reporting it.
Timeliness means that information is available to investors, lenders and other creditors in time for it to be
used in their decision making processes.
Finally, the characteristic of understandability means that information that may be difficult to understand is
made more useful by presenting and explaining it as clearly as possible. Whilst financial information should
be presented clearly and in an understandable manner, it is expected that users of the financial statements
have a reasonable level of knowledge and understanding. It would be misleading to exclude information
simply because of its complex nature, as this would lead to incomplete information which would be
misleading to users. Users with a reasonable level of financial knowledge and understanding would be
expected to be able to review and analyse the financial information diligently, although even they may
require expert assistance at times.


Question 2
General comments
Part 1 of this question required candidates to explain the financial reporting treatment of four accounting
matters, given in the scenario. The matters covered component depreciation, redeemable preference
shares, a government grant and a joint venture. Part 2 required a revised calculations for profit, creditors
falling due after more than one year and capital and reserves along with a revised debt/equity ratio. Part 3
asked for an explanation of how the redeemable preference shares would be accounted for in accordance
with FRS 105, The Financial Reporting Standards Applicable to the Micro-entities Regime. Part 4 required
a discussion about the ethical issues surrounding the scenario.
(2.1)
(1) Component depreciation
The new equipment has been correctly recognised at its cost of £50,000 as part of tangible fixed assets on
the date of acquisition. However, where an asset is made up of more than one component part that has
different useful lives these should be recognised as separate assets.
If the asset is made up of a number of components with different useful lives these will need to be
depreciated separately in order for the cost of each to be recognised over its usage.
Hence, only the main part of the equipment, without its lasers should have been depreciated over the 10
years and the lasers should be depreciated over 2 years.
£4,400 (50,000 – 6,000)/10 yrs should have been charged; and

£3,000 (6,000 / 2yrs) for the lasers should have been recognised.
The whole piece of equipment was instead depreciated over 10 years, so depreciation of £5,000 (50,000 /
10years) was charged.
Hence an additional £2,400 depreciation should have been expensed, reducing profit for the period and
tangible fixed assets in the balance sheet. The equipment should have had a net book value of £42,600
(50,000 – 4,400 – 3000) rather than £45,000.
(2) Redeemable preference shares
The redeemable preference shares have been recognised as part of capital and reserves. However, in
substance per FRS 102, Section 22 Liabilities and Equity the financial instrument has the characteristics of
a liability rather than equity. There is a contractual obligation to deliver cash at regular intervals in the form
of preference shares. The shares are then redeemed at a fixed amount at a fixed point in time.
The preference dividend is instead treated as an interest payment and recognised as part of profit or loss.
The £300,000 should not be recognised as part of equity, this should be reversed and instead be
recognised as part of creditors: amounts falling due after more than one year measured at amortised cost
using the effective interest rate of 6.75%.
1 Jan 2020 Interest (6.75%) Cash Payment 31 Dec 2020

(5%)
£ £ £ £
300,000 20,250 (15,000) 305,250
At the year end recognise £305,250 as part of creditors: amounts falling due after more than one year,
remove the £15,000 from capital and reserves and instead recognise £20,250 as part of interest payable
and similar charges as part of profit or loss. There will be a net reduction in the profit and loss account
reserve in capital and reserves of £5,250 as a result of this adjustment.

(3) Government grant
FRS 102, Section 24 Government Grants requires grants to be recognise when there is reasonable
assurance that:
• The entity will comply with the relevant conditions, on receipt of the grant the initial condition has
been met to set up a training scheme and intend to retain at least 25% of trainees; and
• The entity will receive the grant, Wayfaring Ltd is already in receipt of the grant.
Although both of these initial conditions have been met there is a further condition to be met regarding the
training scheme being run for two years. Therefore, although Wayfaring Ltd expects to meet the
conditions the grant should not be recognised in full in the profit and loss account on the date of receipt.
This is an income-related/revenue grant and as Wayfaring Ltd uses the accrual model it should be
recognised in profit or loss on a systematic basis over the period in which the related expenditure is being
incurred. It is against the accrual principle to recognise the grant in profit or loss on a cash receipts basis
as Wayfaring Ltd currently has.
The training period is for 24 months commencing 1 April 2020. It therefore seems reasonable that the
grant should be recognised over two years from 1 April 2020 (or 9 months). As there is no identification of
the costs involved over the two years a straight-line basis has been applied, however if costs vary each
year another basis may be considered more appropriate.
£56,250 (150,000 / 2yrs = £75,000 x 9/12) of income (or netted against the relevant costs) should be
recognised in the year ended 31 December 2020. The remaining £93,750 should be reversed from other
income and recognised as deferred income, as part of creditors. The liability should be split £75,000 as
creditors: amounts falling due within one year and the remaining £18,750 as creditors: amounts falling due
after more than one year.
(4) Joint venture
Wayfaring Ltd should recognise its investment in Sitka Ltd as a joint venture. Wayfaring Ltd and Aspen Ltd
have joint control over Sitka Ltd and there is a contractual agreement in place to share profits equally and
unanimous consent is required for all key operating decisions.
FRS 102, Section 15 Interests in Joint Venture, requires the use of the equity method to account for joint
ventures. The investment of £40,000 has been correctly recognised at cost as a fixed asset investment.
As the shares were subscribed for at par there is no implicit goodwill arising in the investment in Sitka Ltd.
This will then be increased each period by Wayfaring Ltd’s share of the joint venture’s post acquisition
increase in net assets. This is £16,300 (£32,600 x 50%).
The £16,300 will be shown in the consolidated profit and loss account as a single line, called ‘Share of
profit of joint venture’.
As there has been inter-company trading between Wayfaring Ltd and Sitka Ltd and the goods are still held
by Sitka Ltd there is an element of unrealised profit which should be adjusted for. The unrealised profit
element relating to Wayfaring Ltd is £600 (6,000 x 25/125 x 50%). This should reduce Wayfaring Ltd’s
profits for the period (increase cost of sales) and reduce the carrying amount of the investment in Sitka
Ltd. The trade debtor is not removed, if it was unpaid at 31 December 2020 as Sitka Ltd is not
consolidated.
The investment in joint venture in the consolidated balance sheet is shown as a separate line and should
be £55,700 (40,000 + 16,300 – 600) at 31 December 2020.
Total possible marks 37½


(2.2)
Profit for the Creditors: Capital &

period amounts reserves
£ falling due £
after more
than 1 year
£
(1) Component depreciation (2,400) – –
(2) Redeemable preference shares (20,250) 305,250 (300,000)
(2) Reverse dividend payment – – 15,000
(3) Government grant (93,750) 18,750 –
(4) Joint venture 15,700 – –
(100,700) 324,000 (285,000)
Brought forward 315,000 650,000 1,163,000
Profit for the period adjustment – – (100,700)
Total 214,300 974,000 777,300
Debt / equity ratio 974,000 / 777,300 = 1.25

(2.3) FRS 105
Under FRS 105 all financial instruments are treated in accordance with Section 9, Financial Instruments.
Liabilities are initially measured at the transaction price, less transaction costs where these are material.
At the end of the accounting period financial liabilities are measured at initial cost plus interest payable,
less any interest and capital payments made. An effective interest rate is not used.
At 31 December 2020 the carrying amount of the redeemable preference shares under FRS 105 would
be:
£
Transaction price 300,000
Dividend payable (300,000 x 5%) 15,000
Dividend paid (15,000)
At 31 December 2020 300,000


(2.4) Ethical issues
As an ICAEW Chartered Accountant, Willow is expected to demonstrate the highest standards of

professional conduct.
Willow should act with integrity and should not be associated with any reports containing false or
misleading information. At present there are a number of areas that have not been treated correctly in the
draft financial statements, for example, the treatment of the redeemable preference shares being
recognised as equity rather than debt. It is unclear who made these errors whether it was Balsa, the
finance director or Willow’s predecessor, however professional accountants should comply with relevant
laws and financial reporting standards. This is the need to maintain professional behaviour at all times.
Most of the adjustments required negatively impact on profit and also increase the level of debt reported
which will thereby increase the debt/equity ratio. It is unclear whether these were genuine mistakes or they
were recognised this way deliberately to reduce gearing. However, these errors need correcting.
Willow should not allow bias, conflict of interest or undue influence of others to override professional
judgements. There is self-interest threat here for Willow, as they have only just joined the company and
want to make a good impression. Willow may also feel pressured, intimidation threat to not make the
adjustments so that the directors and all employees get their end of year bonus.
The revised debt/equity ratio is above 1 and therefore this will be seen to discourage the new investment
being made.
Willow should take the following action:

• Discuss each of the errors found with Balsa, explaining the correct IFRS accounting
Treatment and ensure the financial statements are corrected.
• Remind Balsa that as an ICAEW Chartered Accountant they should adhere to the fundamental
principles of the Ethical Code.
• Mention to Balsa that if they made the errors that it might be advisable to attend a training course to
update knowledge.
• If Balsa refuses to amend the financial statements seek support from the rest of the board of
directors.
• Keep a detailed record of all discussions and calculations.
• If Willow feels subjected to intimidation threat, then consult the ICAEW Ethics and Technical helpline.


Question 3
General comments
Part 3.1 of this question required a calculation for the revaluation reserve at the end of the reporting
period. An extract from the statement of cash flows was also required, detailing cash flows from investing
activities and cash flows from financing activities. Part 3.2 required revised calculations for profit and EPS.
(3.1)
Land Revaluation Buildings Revaluation

£ reserve £ reserve
£ £
Net book value at 31 Dec 2015 200,000 315,000
Valuation at 31 Dec 2015 320,000 120,000 400,000 85,000
Depreciation to 31 Dec 2020 (50,000)

(400,000 / 40) x 5 years
Net book value at 31 Dec 320,000 350,000

2020
Surplus/(deficit) – bal fig 20,000 20,000 (15,000) (15,000)
Valuation at 31 Dec 2020 340,000 140,000 335,000 70,000
Revaluation reserve at 31 December 2020 (140,000 + 70,000) £210,000

(3.2)
Statement of cash flows for year ended 31 December 2020 (extract)
Cash flows from investing activities

Purchase of tangible fixed assets (W1) (63,100)
Proceeds from sale of tangible fixed assets 15,000
(17,500 – 2,500)
Cash flows from financing activities

Proceeds from issue of ordinary shares
(60,000 (W2) + 15,000 (W3)) 75,000
Dividends paid (W4) (126,000)
Workings
(1) Tangible fixed assets

£ £
B/d 795,200
Disposal 17,500
Revaluation reserve (part (a)) 20,000 Revaluation deficit (part (a)) 15,000
Additions – cash (β) 63,100 Depreciation 23,000
C/d 822,800
878,300 878,300

(2) Share capital

£ £
B/d 300,000
Share issue for cash 60,000
C/d 410,000 Bonus issue (β) 50,000
410,000 410,000
(3) Share premium

£ £
B/d 30,000
Bonus issue 30,000 Share issue for cash (β) 15,000
C/d 15,000
45,000 45,000
(4) Profit and loss account reserve

£ £
Dividends (β) 126,000 B/d 200,600
Bonus issue P&L 235,400
(50,000 (W2) – 30,000 (W3)) 20,000
C/d 290,000
436,000 436,000

(3.3)
Dates No. of shares Bonus factor Weighting Total

in issue
1 Jan – 31 Mar 2020 300,000 7/6 3/12 87,500
Bonus issue (3.1) 50,000
1 Apr – 30 Sept 2020 350,000 6/12 175,000
Issue at MV 60,000
410,000 3/12 102,500
365,000
Earnings per share: 235,400 / 365,000 = 64.5p


Question 4
General comments
Part 1 of this question required an explanation of the accounting treatment for the disposal of a subsidiary
along with supporting calculations. Part 2 required the preparation of a consolidated balance sheet for a
parent and two subsidiaries one of which was acquired in the year and one was disposed of. Consolidation
adjustments included deferred consideration, unrealised profit on inter-company trading, recognition of an
intangible asset on acquisition and a fair value adjustment on acquisition, resulting in additional
depreciation.
4.1 Profit or loss on disposal
The profit from discontinued operations comprises two elements:

• The profit on disposal of the shares in Elder Ltd; and
• The results of Elder Ltd up to the date of disposal on 1 August 2020.
The profit on disposal should be calculated by comparing the sale proceeds with the parent’s share of the
net assets and goodwill at the date of disposal. The net assets at the date of disposal will be those at 31
December 2019 plus the profit earned by Elder Ltd until the 1 August 2020, the date of disposal.
Group profit/loss on disposal of Elder Ltd

£ £ £
Sale proceeds 530,000
Cost of acquisition 385,000

Less: Net assets at acquisition
Share capital 200,000
Profit and loss account reserve 176,000
(376,000)
Group share (376,000 x 75%) (282,000)
Goodwill at date of acquisition 103,000
Less: Cumulative amortisation (38,625)
Less: carrying amount of goodwill at disposal (64,375)

Carrying amount of net assets at disposal
Share capital 200,000
Profit and loss account reserve
(283,500 + £146,400 x 7/12 = 85,400) 368,900
(568,900)
Group share (568,900 x 75%) (426,675)
Profit on disposal 38,950
Profit for the year to disposal 85,400
Profit for the year from discontinued operations 124,350


4.2 Hemlock Ltd
Consolidated balance sheet as at 31 December 2020

£ £
Fixed assets
Tangible assets (485,000 + 316,000) 801,000
Intangibles (120,000 – 30,000) (W1) 90,000
Negative goodwill (42,300)
Investments (W6) 8,000
856,700
Current assets
Stock (70,800 + 46,000 – 2,400) 114,400
Trade and other debtors (84,600 + 18,600 – 12,000 – 2,000 89,200
(24,000/12))
Cash at bank and in hand (12,500 + 3,700 + 2,000) 18,200
221,800
Creditors: amounts fall due within one year

Trade and other creditors (78,400 + 24,600 – 12,000) (91,000)
Taxation (68,000 + 12,300) (80,300)
(171,300)
Net current assets 50,500
Total assets less current liabilities 907,200
Creditors: amounts fall due after one year

Deferred consideration (160,000 + 8,000 (W5)) (168,000)
Net assets 739,200
Capital and reserves

Called up share capital 350,000
Share premium account 175,000
Profit and loss account (W5) 148,950
Attributable to owners of Hemlock Ltd 673,950
Non-controlling interest (W3) 65,250
739,200
Workings
(1) Net assets – Aspen Ltd

Year end Acquisition Post acq
£ £ £
Called up share capital 225,000 225,000
Profit and loss account 122,400 75,000
FV – technology 120,000 120,000
Amortisation (120,000 / 4yrs) (30,000) –
PURP (W4) (2,400) –
435,000 420,000 15,000
(2) Goodwill – Aspen Ltd

£
Cost of investment – cash 150,000
Deferred consideration (176,400 / 1.052) 160,000
310,000
Less: Share of net assets at acquisition (420,000 x 85% (W1)) (357,000)
(47,000)
Amortisation credit (47,000 / 10yrs) 4,700
(42,300)

(3) Non-controlling interest – Aspen Ltd

£
NCI at year end (435,000 x 15% (W2)) 65,250
(4) PURP
% £
Selling price 100 12,000
Cost 80 (9,600)
Gross profit 20 2,400
(5) Profit and loss account reserve

£
Hemlock Ltd 524,500
Aspen Ltd (15,000 (W1) x 85%) 12,750
Unwinding of discount on deferred acquisition
(160,000 x 5%) (8,000)
Goodwill amortisation credit (W2) 4,700
Profit on disposal from Hemlock Ltd adjustment (385,000)
148,950
(6) Investments
£
Per draft 543,000
Less Elder Ltd consideration (part 4.1) (385,000)
Less Aspen Ltd consideration (W5) (150,000)
8,000


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Professional Level – Financial Account and Reporting – September 2021

MARK PLAN AND EXAMINER’S COMMENTARY

Guelder Ltd – Balance sheet as at 31 December 2020

Creditors: amounts falling due within one year

Creditors: amounts falling due after more than one year

Net assets 692,782

Capital and reserves

Copyright © ICAEW 2021. All rights reserved. Page 1 of 13

W2 Research and development

Copyright © ICAEW 2021. All rights reserved. Page 2 of 13

W4 Tangible fixed assets

Add leased asset 11,140

Depreciation for year

Less: impairment (W3) (1,450)

1 January 2020 Interest (6%) Payment 31 December 2020

Total possible marks 24

Total possible marks 6

Copyright © ICAEW 2021. All rights reserved. Page 3 of 13

(1.3) Enhancing qualitative characteristics

Total possible marks 13

Copyright © ICAEW 2021. All rights reserved. Page 4 of 13

(1) Component depreciation

£4,400 (50,000 – 6,000)/10 yrs should have been charged; and

(2) Redeemable preference shares

1 Jan 2020 Interest (6.75%) Cash Payment 31 Dec 2020

Copyright © ICAEW 2021. All rights reserved. Page 5 of 13

(3) Government grant

(4) Joint venture

Total possible marks 37½

Copyright © ICAEW 2021. All rights reserved. Page 6 of 13

Profit for the Creditors: Capital &

Debt / equity ratio 974,000 / 777,300 = 1.25

Total possible marks 5

(2.3) FRS 105

Total possible marks 4

Copyright © ICAEW 2021. All rights reserved. Page 7 of 13

(2.4) Ethical issues

As an ICAEW Chartered Accountant, Willow is expected to demonstrate the highest standards of

Willow should take the following action:

Total possible marks 13

Copyright © ICAEW 2021. All rights reserved. Page 8 of 13

Land Revaluation Buildings Revaluation

Depreciation to 31 Dec 2020 (50,000)

Net book value at 31 Dec 320,000 350,000

Valuation at 31 Dec 2020 340,000 140,000 335,000 70,000

Revaluation reserve at 31 December 2020 (140,000 + 70,000) £210,000

Total possible marks 3½

Statement of cash flows for year ended 31 December 2020 (extract)

Cash flows from investing activities

Cash flows from financing activities

(1) Tangible fixed assets

Copyright © ICAEW 2021. All rights reserved. Page 9 of 13

(2) Share capital

(3) Share premium

(4) Profit and loss account reserve

Total possible marks 7½

Dates No. of shares Bonus factor Weighting Total

Earnings per share: 235,400 / 365,000 = 64.5p

Total possible marks 3½

Copyright © ICAEW 2021. All rights reserved. Page 10 of 13

4.1 Profit or loss on disposal

The profit from discontinued operations comprises two elements:

Group profit/loss on disposal of Elder Ltd

Cost of acquisition 385,000

Less: carrying amount of goodwill at disposal (64,375)

Total possible marks 10