MARCH 2020 Answer

Professional Level – Financial Accounting and Reporting - March 2020
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 1.1 of this question tested the preparation of a statement of profit or loss and a statement of financial
position. Adjustments included deferred revenue, inventory calculation, an impairment and a right of use
asset with lease liability. Part 1.2 of the requirement asked for examples from the question of the IASB’s
Conceptual Framework’s elements and how they each meet the definition.
Bilberry Ltd – Statement of financial position as at 30 September 2019

£ £
ASSETS
Non-current assets
Property, plant and equipment
(159,250 + 392,490 + 230,000) (W5) 781,740
Right-of-use asset (W5) 15,000
796,740
Current assets
Inventories (W1) 59,980
Trade and other receivables 59,700
Cash and cash equivalents 3,700
123,380
Total assets 920,120
Equity
Ordinary share capital 480,000
Share premium account 120,000
Retained earnings (40,240 + 146,100) 186,340
Equity 786,340
Non-current liabilities
Lease liabilities (W6) 12,685
Current liabilities
Trade and other payables 78,300
Deferred income (W2) 3,060
Lease liabilities (15,420 – 12,685) (W6) 2,735
Taxation 37,000
121,095
Total equity and liabilities 920,120
Copyright © ICAEW 2020. All rights reserved. Page 1 of 16

Bilberry Ltd – Statement of profit or loss for the year ended 30 September 2019
£
Revenue (1,264,780 – 3,060) (W2)) 1,261,720
Cost of sales (W1) (633,990)
Gross profit 627,730
Administrative expenses (W1) (249,860)
Operating costs (W1) (193,690)
Operating profit 184,180
Finance costs (W6) (1,080)
Profit before tax 183,100
Income tax (37,000)
Profit for the year 146,100
Workings
W1 Expenses
Cost of Admin Operating
sales expenses costs
£ £ £
Nominal ledger b/fwd 567,300 249,860 197,350
Opening inventories 61,320
Closing inventories (40,900 + 19,080 (W3)) (59,980)
Depreciation charges
(24,500 + 17,850 + 3,000) (W5) 45,350
Impairment (W4) 20,000
Reverse lease payment (W6) (3,660)
633,990 249,860 193,690
W2 Revenue
Discount
applied of 15%
£ £
Sale of goods 30,600 26,010
Normal cost of after sales support 5,400 4,590
36,000
Discount (5,400 / 36,000) 15%
Deferred revenue (4,590 x 8/12) 3,060
W3 Closing inventory
£ £
Per count at 30 September 2019 11,800
Less: delivery 1 October 2019 (1,600)
Add: sales (2,500 / 1.25) 2,000
12,200
£
Variable cost per unit ((16,020 + 4,700) / 2,800) 7.40
Fixed cost per unit (3,600 / 3,000) 1.20
8.60
800 x £8.60 6,880

Inventory at 30 September 2019 19,080
W4 Impairment
Land
£
Land & building – cost 150,000

Recoverable amount 130,000

Impairment 20,000
W5 Property, plant & equipment
Plant & equipment Buildings Land

£ £ £
Buildings
Cost b/fwd 245,000 714,000 250,000
Less: accumulated depreciation (61,250) (303,660)
183,750 410,340
Impairment (W4) (20,000)
Depreciation for year

(714,000 / 40yrs) (17,850)
245,000 / 10yrs (24,500)
159,250 392,490 230,000
Leased machine
Cost 18,000
Depreciation (18,000 / 6yrs) (3,000)
15,000
W6 Lease
1 October 2018 Interest (6%) Payment 30 September 2019

£ £ £ £
18,000 1,080 (3,660) 15,420
15,420 925 (3,660) 12,685
Presentation of the statement of profit or loss and the statement of financial position was generally good,
and certainly better than in some recent sessions. A very small number of candidates are still not following
the instructions to make sure all text is visible and some narrative in columns was partially cut off. These
candidates lost marks as text could not be read in its entirety.
There were some very high marks on this question. Almost all candidates dealt correctly with the tax charge
and liability, the trial balance figures for costs, property, plant and equipment, opening inventories, current
assets and liabilities and the equity figures. A good majority of candidates showed a working for their
closing retained earnings figure, which is not always the case.
Clear workings were usually given in the form of a costs matrix and workings for property, plant and
equipment. However, the audit trail was not always clear from the latter to the figure on the statement of
financial position. As is often the case, directional errors were sometimes made in the costs matrix, most
commonly with the depreciation charges for the year. These usually occur when candidates start with a
negative balance.
Many candidates arrived at the correct figure for closing inventories and workings were usually clear.
However, a number of candidates included a different figure in their costs matrix to the one shown in their
working, or omitted to include the unadjusted figure for closing inventories. The most common errors in the
calculations for the adjustment were:
 for the inventories in the holding area, not dividing the correct costs by the correct production figures
(planned or actual) and/or multiplying the resultant cost per unit by actual production instead of by the
number of units left in inventory at the year end; and
 for the warehouse not counted at the year-end, backing out the cost of the post year-end delivery, but
not adding in the cost of the goods despatched, and/or failing to add in the unadjusted figure.
Many candidates arrived at the correct figure for property, plant and equipment, although they did not
always show the right-of-use asset separately on the face of the statement of financial position. Where
errors were made the most common were:

 Depreciating the right-of-use asset over ten instead of six years.

 Omitting the depreciation on the right-of-use asset from costs.
 Calculating depreciation for plant and equipment on a reducing balance basis instead of on a straight-
line basis.
 Calculating the impairment as cost less recoverable amount (instead of using the higher value in use),
with costs to sell sometimes adjusted for in the wrong direction.
 Including the impairment as an adjustment in retained earnings.
The lease table was often completely correct although some candidates wasted time calculating the present
value of minimum lease payments when it was stated in the question that this equated to the cash price, or
extended the table beyond the necessary two years. A minority treated the payments as in advance instead
of arrears and others failed to split the year-end liability or split it incorrectly. Most candidates took their
correct own figure for interest to the statement of profit or loss but a few showed the annual lease payment
here.
The adjustment for deferred revenue probably caused the most issues, although a good number of
candidates did arrive at the correct figure, and correctly adjusted revenue and showed the figure in current
liabilities. Others arrived at a figure and adjusted revenue but failed to show it also in current liabilities or
quite frequently adjusted trade receivables instead. The most common incorrect figures were £5,400 (the
whole of the after-sales support package) or £3,600 (eight-twelfths of that figure). A number of candidates
failed to show an audit trail for their revenue figure.
Total possible marks 23

Maximum full marks 22
(1.2) Elements of the financial statements

Asset – Bilberry Ltd’s head office building is recognised as an asset. The building is a resource controlled
by Bilberry Ltd as a result of a past event, which was the acquisition of the building. Bilberry Ltd’s expects
the business to generate future economic benefits and hence the head office function (and therefore the
building itself) will contribute to the smooth running of the business.
Liability – The lease is recognised as a liability. There needs to be a present obligation which is Bilberry
Ltd’s obligation to pay annual lease payments over a contracted six years as a result of a past event which
was the entering into the lease contract. The contracted annual lease payments are the future outflow of
resources.
Income – Revenue from sales is a form of income as it brings cash inflows or enhancement of assets in the
form of trade receivables.
Expenses – Depreciation is an expense as it reduces the carrying amount of property, plant

and equipment (ie, depletes an asset).
Equity – Equity is Bilberry Ltd's ordinary share capital and retained earnings. The sum of these are equal to
total assets minus total liabilities/is the residual interest in the assets of the entity after deducting all its
liabilities.

There were some excellent answers to this part, with many candidates scoring maximum marks. Almost all
candidates correctly defined assets and liabilities, although fewer gave an appropriate definition for the
other three elements. Almost all candidates gave a suitable example for all five elements, although
explanations as to how the example met the definition was much better, again, for assets and liabilities.


Question 2
General comments
Part 2.1 of this question required candidates to explain the financial reporting treatment of three
accounting matters, given in the scenario. The matters covered a convertible bond, a government grant
and a provision. Part 2.2 required a revised profit calculation along with an EPS calculation following a
rights issue. Part 2.3 asked for an explanation of the impact on the financial statements of presenting
expenses by nature rather than function. Part 2.4 asked for the UK GAAP differences in relation to
government grants.
(2.1)
(1) Convertible bond

The convertible bonds are compound financial instruments per IAS 32 Financial Instruments:
Presentation. They have both an equity and a liability component which should be presented separately at
the time of issue. IAS 32 requires that the substance of such an instrument should be reflected, focusing
on the economic reality that in effect two financial instruments have been issued, rather than the one
instrument.
The liability component should be measured first at the present value of the capital and interest payments.
The discount rate used should be the effective rate for an instrument with the same terms and conditions
except without the ability to convert it into shares, here the market rate of interest for similar bonds without
the conversion option is 8%.
Cash flow Discount factor Present value

£ @ 8% £
1 October 2019 24,000 1/1.08 22,222
1 October 2020 24,000 1/1.082 20,576
1 October 2021 424,000 1/1.083 336,585
Liability component 379,383
Equity component (bal fig) 20,617
Total 400,000
The liability should initially be measured at £379,383 and the equity component is the residual amount of
£20,617.
Once recognised the equity element remains unchanged. However, the liability element should be shown
at amortised cost at the end of each year.
1 Oct 2018 Interest (8%) Payment (6%) 30 September 2019

£ £ £ £
379,383 30,351 (24,000) 385,734
At the year end an adjustment to reduce non-current liabilities of £14,266 (400,000 – 385,734) should be
made and an additional £6,351 (30,351 – 24,000) recognised as finance costs as part of profit or loss.
(2) Government grant

IAS 20, Accounting for Government Grants and Disclosure of Government Assistance requires grants to
be recognised when there is reasonable assurance that:
 The entity will comply with the relevant conditions, here there are no conditions; and
 The entity will receive the grant, Jonica plc is already in receipt of the grant.
Therefore, Jonica plc complies with both conditions and the grant should be recognised.

Government grants should be recognised in profit and loss over the periods in which the entity recognises
as expenses the costs which the grant are intended to compensate. It is against the accrual principle to
recognise the grant in profit or loss on a cash receipts basis as Jonica plc currently has.
Jonica plc’s accounting policy is to recognise government grants using the netting-off method. Under this
method the grant is deducted from the carrying amount of the related asset. The grant will then be
recognised over the life of the related asset, here by way of a reduced depreciation charge.
Income should be reduced by £150,000 which should instead be credited to non-current assets giving a
revised figure of £175,000. As it is assumed that depreciation has already been charged for the year on
the full asset cost of £325,000 an adjustment will need to be made for this. £24,375 was recognised by the
financial controller, although only £13,125 should have been recognised, being depreciation on £175,000
rather than £325,000. £11,250 (24,375 – 13,125) should be credited to profit for the period and debited to
non-current assets to adjust for this.
At 30 September 2019 the carrying amount of the asset should have been £161,875
(175,000 – 13,125) reducing non-current assets by £138,750 ((325,000 – 24,375) – 161,875).
(£325,000/10 years) x 9/12 = £24,375

(£175,000/10 years) x 9/12 = £13,125
(3) Provision – legal claim
Per IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised
where:
 there is a present obligation, which may be a legal or constructive one, as a result of a past event (the
claim arising from the sale of faulty goods);
 it is probable that an outflow of resources will be required to settle the obligation (payment of the
claim); and
 the amount can be estimated reliably (being the estimate made by the lawyers).
Therefore, a provision should be recognised at 30 September 2019. This is a single obligation so the
provision should be based on the most likely outcome. Therefore, recognise a provision for £21,000. Since
the lawyers have recommended that the claim is settled out of court as soon as possible the provision has
not been discounted. Therefore, a provision of £21,000 should be recognised as part of current liabilities
and debited to profit or loss for the period.
This explain question covered three issues – convertible debt, a government grant to be accounted for
using the netting off method and a provision for the supply of faulty goods. Generally, answers to this part
of the question were good with nearly every candidate addressing all three issues and including both
narrative explanations and revised figures in their answers.
Convertible debt - The majority of candidates correctly identified the financial instrument as a compound
financial instrument and stated that it needed to separated out between its debt and equity elements. It
was common to see the numbers correctly calculated and split between equity and debt. Most candidates
also realised that the finance charge in the statement of profit or loss should be based on the interest rate
of 8%. Generally, candidates also went on to use amortised cost, although calculations were not always
correct. A common mistake was to split the liability between current and non-current. Only a significant
minority of candidates realised that the adjustment needed to the finance cost was the difference between
the figure calculated using the 8% and the actual amount paid. Only a minority of candidates also stated
that the equity figure did not subsequently change.
Government grant – Answers to this issue were a little more mixed with a significant number of
candidates wasting time discussing the deferred income approach when the question clearly stated that
the company’s policy was to use the netting off method. However, most candidates did realise that the
entry to income needed to be reversed out and instead netted off against the cost of the asset. A majority
of candidates attempted to calculate a revised depreciation figure although many forgot to time apportion
it. A minority of candidates calculated numbers using the deferred income approach.
Provision – The majority of candidates applied the IAS 37 criteria to the scenario and correctly concluded
that a provision was necessary. A majority of candidates stated that as a single obligation the most likely
outcome gave the amount to be recognised although a minority incorrectly used an expected value

approach or calculated both figures. Almost all candidates referred to the impact on profit and a
reasonable number stated it should be recognised as a current liability. Only a minority of candidates
linked this to the fact that discounting was not necessary.
Total possible marks 32½

(2.2)
Profit for the
period
£
Brought forward 1,035,000
(1) Convertible bond – finance costs (6,351)
(2) Government grant – income (150,000)
– depreciation 11,250
(3) Provision (21,000)
Revised 868,899
Dates No. of shares Bonus factor Weighting Total

in issue
1 Oct 2018 – 600,000 380 / 365 4/12 208,219
31 Jan 2019
Rights issue 200,000
1 for 3
1 Feb – 30 Sept 2019 800,000 8/12 533,333
741,552
Working
Bonus adjustment factor £
Theoretical ex-rights price:
3 shares @ £3.80 11.40
1 share @ £3.20 3.20
4 shares 14.60
Theoretical ex-rights price per share £14.60 / 4 = £3.65

Bonus fraction 380 / 365
Basic earnings per share £886,899 / 741,552 = £1.17
Most candidates attempted to calculate a revised profit figure but the requirement to calculate basic
earnings per share proved more challenging. The most common mistake in the adjustment to profits was
to simply put the correct accounting adjustment through rather than reversing out what had actually been
recognised first.
Most candidates made errors in the weighted average share capital table and in particular relatively few
managed to arrive at the correct bonus fraction for use in the table. Other common mistakes included:
 Miscounting the number of months before and after the issue of shares.
 Basing the table on the individual share issues rather than using the cumulative total.
 Applying the bonus fraction to all periods in the table.
 Applying the bonus fraction upside down.


(2.3) Presentation of the statement of profit or loss
IAS 1 allows expenses in the statement of profit or loss to be presented in one of two ways – by function
or by nature. It is a freely available choice to companies.
Expense items are accumulated according to the function they serve in the business - under the headings
of cost of sales, distribution costs and administrative expenses, which is the format used by Jonica plc.
Presentation by nature is particularly suitable for a manufacturing organisation and is often used by
smaller entities. It groups expenses under categories such as work capitalised, cost of raw materials,
employee costs and depreciation/amortisation. If this is the presentation used by many of your competitors
it may be that it is considered more appropriate and therefore would allow users of the financial
statements to make better and easier comparisons.
Whichever presentation is adopted there is no overall impact on net profit.
Answers to this part were very mixed although most candidates at least understood the difference
between presenting expenses by function or nature. Most candidates did try to arrive at a conclusion
although fewer considered that a change in format would allow better comparison with competitors.

(2.4) IFRS vs UK GAAP
Jonica plc has used the netting off method to recognise the government grant. It has netted off the
£150,000 government grant against the cost of the asset. IAS 20 allows this treatment but also permits the
government grant to be separately reported as deferred
income.
Under FRS 102 Jonica plc does not have the option to use the netting off method. Instead an entity has
the choice to use the performance model or the accrual model. Under the performance model, as there
are no performance conditions attached to the government grant, the grant would be recognised as
income when it is received.
Under the accrual model the grant would instead be recognised as deferred income of £150,000, hence
showing the government grant as part of liabilities and then releasing it over the ten year useful life of the
asset. The overall impact on profit is the same as under IAS 20, as instead of reduced depreciation a
deferred income release is made of £11,250 (£150,000/10yrs x 9/12). Net assets would also be the same,
however property, plant and
equipment would be higher (initially recorded at £325,000) and there would be a balance on deferred
income instead. This would be £138,750 (150,000 – 11,250) of which £15,000 would be current and
£123,750 non-current.
Answers to this part of the question were a little disappointing and many candidates got no further than
stating that IFRS allowed both the netting off and deferred income approaches while UK GAAP only
allowed the latter. It was rare to see any reference to the performance or accruals model. However, where
candidates did attempt calculations most arrived at the correct figure for the release of deferred income
and recognised that the balance should be split between current and non-current liabilities.


Question 3
General comments
Part 3.1 of this question required the preparation of extracts from the statement of cash flows for investing
and financing activities, as well as calculating a revised figure for “Net cash from operating activities”. Part
3.2 required an explanation of the financial reporting treatment for a joint venture. Part 3.3 required the
preparation of a checklist covering the fundamental principles of the ICAEW’s Code of Ethics.
(3.1)
Cash from operations

£
Draft figure 37,420
Add back sale proceeds of disposal 31,000
Deduct profit on disposal (31,000 – 24,900) (6,100)
Scrapped machine 4,500
Depreciation 63,600
Impairment 3,550
Adjustment to movement of trade and other payables (10,000)
Net cash flow from operations 123,970
Statement of cash flows for year ended 30 September 2019 (extract)
Cash flows from investing activities

Purchase of property, plant and equipment (W1) (72,250)
Proceeds from sale of property, plant and equipment 31,000
Cash flows from financing activities

Proceeds from issue of ordinary shares 58,000
Dividends paid (W3) (108,000)
Workings
(1) Property, plant and equipment
£ £
B/d 512,700
Additions on credit 10,000 Disposal 24,900
Scrapped item 4,500
Additions – cash (β) 72,250 Depreciation 63,600
Impairment (11,800 – 8,250) 3,550
C/d 498,400
594,950 594,950
(2) Share capital and premium

£ £
B/d (200,000 + 50,000) 250,000
Share issue for cash
(40,000 x £1.45) 58,000
C/d (270,000 + 68,000) 338,000 Bonus issue (β) 30,000
338,000 338,000
(3) Retained earnings

£ £
Dividends (β) 108,000 B/d 239,600
Bonus issue (W2) 30,000 Profit or loss 132,100
C/d 233,700
371,700 371,700

Attempts at this part were generally good, with a significant number of candidates achieving maximum
marks.
Some presentation marks were lost due to the use of abbreviations, most commonly “PPE” and for not
heading up each section in full as, for example, “Cash flows from investing activities”. However, it was rare
to see a cash flow in the wrong section, although candidates continue to lose marks due to the use of
incorrect bracket conventions on the face of the extracts – most commonly failing to put brackets around
the outflows from the purchase of property, plant and equipment.
Most candidates did their workings in the form of T-accounts, with a columnar working for the revised
figure for net cash from operating activities. Where columnar workings were used instead of T-accounts,
directional errors were more common. A worrying number of candidates had all the entries on the wrong
sides of their T-accounts for the share accounts and retained earnings.
Most candidates correctly adjusted for the depreciation, the impaired item of plant and the scrapped
machine when calculating a revised figure for net cash from operating activities. Fewer correctly adjusted
for the plant disposed of.
Many candidates arrived at the correct figure for the bonus issue, but few then completed the double entry
by debiting that to retained earnings. The profit for the year was often also omitted from the retained
earnings working, or an incorrect figure was used.

(3.2)
Poitou Ltd should recognise its investment in Chigu Ltd as a joint venture. Four companies have joint
control over Chigu Ltd, as unanimous consent is required by all four parties for all key operating decisions
and there is a contractual arrangement in place to share profits and losses equally. As Chigu Ltd is a
separate legal entity it is classified as a joint venture rather than a joint arrangement.
IFRS 11 Joint Arrangements requires the use of the equity method for joint ventures. The investment should
initially therefore be recognised at cost of £80,000 plus Poitou Ltd’s share of Chigu Ltd's post acquisition
increase in net assets. As Poitou Ltd was acquired part way through the year the share of post-acquisition
profits should be pro-rated by 7 months, £15,750 (£108,000 x 25% x 7/12).
The investment in Chigu Ltd will be shown as a separate line as part of non-current asset in the
consolidated statement of financial position. The share of post-acquisition profit of £15,750 should be added
to non-current assets, giving a carrying amount of £95,750 and the £15,750 recognised in consolidated
profit or loss as a separate line.
Again, there were some very good attempts at this part. The most common error was concluding that this
was an associate, although marks could then still be gained for explaining the accounting treatment. Even
those who concluded that this was a joint venture then went on to describe the separate lines in the
statements as “Investment in associate” and “Income from associate”. A minority hedged their bets and
concluded that it could be either. Not all candidates gained all the marks available by referencing the facts
in the scenario that supported their conclusion. Fewer candidates than might have been expected named
the accounting method used as the “equity method”.
The correct figures for inclusion in the statement of profit or loss and the statement of financial position were
often seen. The most common error was to fail to time-apportion the profit figure so that only the post-
acquisition portion was included.


(3.3)
Five fundamental principles – Ethics checklist
Integrity
Are you honest at all times?
Are you open with your colleagues and clients? Providing access to all the information available and being
cooperative in any decision making.
Are you transparent in your work? Do you invite trust by others showing that you do not have anything to
hide?
Objectivity
Do you have any conflicts of interest? Are you going to derive a personal benefit from your actions / work
that you are undertaking?
Are you unbiased in your approach to work? Do you approach work with a non-prejudiced attitude and
show no preference for one particular solution?
Are you influenced by your colleagues or clients’ opinions before gaining all of the facts?
Professional competence and due care
Are you suitably qualified to undertake the work? Do you have the right level of supervision?
Have you completed relevant continuing professional development? Is your knowledge up to date?
Are you acting in accordance with the requirements of the assignment?
Do you have sufficient time to complete the assignment?
Confidentiality
Have you ever used information gained through work related activities for a personal advantage or for the
benefit of a family member or friend?
Have you ever discussed a client’s confidential activities, financial or internal reporting to someone outside
of the organisation?
Has the correct level of confidential information been disclosed appropriately?
Professional behaviour
Are you acting within the constraints of the law?
Would any of your activities be seen as inappropriate in the work environment?
Would any of your activities discredit the profession?
Have you overexaggerated your experience to clients?
Do you believe that money laundering activities have taken place which have not been appropriately
reported?
Answers to this part were mixed. At one end of the scale were those candidates who explained the meaning
of the five fundamental principles without giving any questions suitable for a checklist.
At the other end of the scale were those who turned their understanding into appropriate questions, and
scored maximum marks. The occasional candidate designed a checklist based around the qualitative
characteristics instead of the fundamental principles and scored zero.
The majority of candidates correctly named the five fundamental principles. Those candidates who failed to
link their questions to the correct fundamental principle were penalised accordingly.
A number of candidates wasted time by rewriting what was essentially the same question in a slightly
different way. Such questions were only awarded marks once.


Question 4
General comments
Part 4.1 of this question required the preparation of a consolidated statement of financial position for a
parent and two subsidiaries one of which was acquired in the year. Consolidation adjustments included
unrealised profit on the transfer of an asset, impairment of goodwill and a fair value adjustment on
acquisition, resulting in additional amortisation. Consideration on the acquisition of one of the subsidiaries
consisted of a deferred cash element. Part 4.2 required the preparation of the journal entries on
consolidation to recognise goodwill. Part 4.3 required the calculation of the profit or loss on disposal of one
of the subsidiary’s one month after the year end.
4.1 Chamba Ltd
Consolidated statement of financial position as at 30 September 2019

£ £
Assets
Non-current assets
Property, plant and equipment
(562,000 + 374,000 + 235,000 – 12,500 (W9)) 1,158,500
Intangibles (40,000 – 6,000) (W4) 34,000
Goodwill (61,440 (W2) + 20,000 (W5)) 81,440
Investments (W10) 25,000
1,298,940
Current assets
Inventories (72,000 + 59,400 + 35,300) 166,700
Trade and other receivables (47,800 + 31,000 + 29,400) 108,200
Cash and cash equivalents (7,100 + 3,200 + 1,800) 12,100
287,000
Total assets 1,585,940
Equity and liabilities

Equity attributable to owners of Chamba Ltd
Ordinary share capital 600,000
Share premium account 200,000
Retained earnings (W8) 281,625
1,081,625
Non-controlling interest (136,395 (W3) + 61,120 (W6)) 197,515
Total equity 1,279,140
Current liabilities
Trade and other payables (93,000 + 40,900 + 31,900) 165,800
Taxation (80,000 + 37,000 + 24,000) 141,000
306,800
Total equity and liabilities 1,585,940
Workings
(1) Net assets – Hejazi Ltd

Year end Acquisition Post acq
£ £ £
Share capital 300,000 300,000
Retained earnings 89,700 42,400
389,700 342,400 47,300

(2) Goodwill – Hejazi Ltd

£
Consideration transferred – cash 190,000
Deferred consideration (105,000 / 1.05) 100,000
290,000
Non-controlling interest at acquisition (342,400 (W1) x 35%) 119,840
409,840
Net assets at acquisition (W1) (342,400)
67,440
Impairments to date (6,000)
61,440
(3) Non-controlling interest – Hejazi Ltd

£
NCI at acquisition date (W2) 119,840
Share of post-acquisition reserves (47,300 (W1) x 35%) 16,555
136,395
(4) Net assets – Surati Ltd

Year end Acquisition Post acq
£ £ £
Share capital 200,000 200,000
Retained earnings 45,600 51,000
Intangibles – brands 40,000 40,000
Amortisation of brands ((40,000 / 5yrs) x 9/12) (6,000) –
279,600 291,000 (11,400)
(5) Goodwill – Surati Ltd

£
Consideration transferred 250,000
Non-controlling interest at acquisition (FV) 64,000
314,000
Net assets at acquisition (W4) (291,000)
23,000
Impairments to date (3,000)
20,000
(6) Non-controlling interest – Surati Ltd

£
NCI at acquisition date – FV (W5) 64,000
Share of post-acquisition reserves ((11,400) (W4) x 20%) (2,280)
61,720
Impairment (3,000 x 20%) (600)
61,120
(8) Retained earnings
£
Chamba Ltd 280,900
Hejazi Ltd (47,300 (W1) x 65%) 30,745
Surati Ltd ((11,400) (W4) x 80%) (9,120)
PPE Unrealised profit (W9) (12,500)
Impairment – Surati Ltd (3,000 x 80%) (W5) (2,400)
Impairment – Hejazi Ltd (W2) (6,000)
281,625

(9) PPE Unrealised profit

£
Asset now in Hejazi Ltd books at 63,000 x 5/6 52,500
Asset now in Chamba Ltd books at 48,000 x 5/6 (40,000)
12,500
(10) Investments
£
Per draft 565,000
Less Hejazi Ltd consideration (W2) (290,000)
Less Surati Ltd consideration (W5) (250,000)
25,000
Answers to this question were excellent with many candidates getting the correct figures for goodwill and the
non-controlling interest. This was particularly pleasing as both methods of calculating goodwill were tested
and there was an impairment that needed to be split between the non-controlling interest and retained
earnings.
Where mistakes were made they commonly included:
 Calculating the PPE unrealised profit incorrectly. Many candidates only calculated the profit on transfer
or the impact on the subsequent depreciation. When both were calculated they were frequently added
together rather than netted off or one element was ignored when making the adjustment to property,
plant and equipment and retained earnings. Candidates who did one calculation by comparing carrying
amounts were most likely to get the adjustment correct.
 Making unnecessary adjustments in the net assets table particularly for Hejazi Ltd eg including the PPE
unrealised profit and / or goodwill impairments.
 Only deducting the parent’s share of the impairment when calculating goodwill.
 Failing to split the impairment between the NCI and retained earnings (when the fair value method was
being used).
 Making unnecessary adjustments to retained earnings for deferred consideration (where the question
stated that this had been accounted for correctly).
 Calculating the NCI using the proportionate method for both subsidiaries.
As is common with this type of question some candidates lost marks for not including an “audit trail” to their
adjustments particularly relating to post acquisition profits.

4.2 Goodwill journal entries
DR: Intangibles – goodwill (23,000 – 3,000) 20,000

DR: Intangibles – brand (40,000 – 6,000) 34,000
DR: Net assets 251,000
DR: Consolidated profit or loss for the period –
amortisation/impairment (3,000 + 6,000) 9,000
CR: Investments 250,000
CR: Non-controlling interest (FV) 64,000
Answers were disappointing with many candidates unable to go further than to show the debit to goodwill or
missing out this requirement completely. Where journal entries were broken down further full marks were still
available.


4.3
£
Sale proceeds 346,000
Less: carrying amount of goodwill at disposal (4.1) (61,440)
Carrying amount of net assets at disposal
Net assets at 30 September 2019 (4.1) 389,700
Profit for the period 18,900
(408,600)
Add back: Attributable to non-controlling interest (408,600 x 35%) 143,010
Profit on disposal 18,970
Answers to this part of the question were very disappointing especially as part 4.1 was so well answered.
Most candidates simply did not appear to know the “formula” for calculating the profit or loss on disposal
and on many scripts the only correct figure was the sale proceeds. Some wasted time re-calculating
figures such as goodwill which they had already calculated in 4.1.


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Professional Level – Financial Accounting and Reporting - March 2020

MARK PLAN AND EXAMINER’S COMMENTARY

Bilberry Ltd – Statement of financial position as at 30 September 2019

Copyright © ICAEW 2020. All rights reserved. Page 1 of 16

Deferred revenue (4,590 x 8/12) 3,060

800 x £8.60 6,880

Copyright © ICAEW 2020. All rights reserved. Page 2 of 16

Recoverable amount 130,000

W5 Property, plant & equipment

Plant & equipment Buildings Land

Depreciation for year

1 October 2018 Interest (6%) Payment 30 September 2019

Copyright © ICAEW 2020. All rights reserved. Page 3 of 16

 Depreciating the right-of-use asset over ten instead of six years.

Total possible marks 23

(1.2) Elements of the financial statements

Expenses – Depreciation is an expense as it reduces the carrying amount of property, plant

Copyright © ICAEW 2020. All rights reserved. Page 4 of 16

Total possible marks 9

Copyright © ICAEW 2020. All rights reserved. Page 5 of 16

(1) Convertible bond

Cash flow Discount factor Present value

1 Oct 2018 Interest (8%) Payment (6%) 30 September 2019

(2) Government grant

Copyright © ICAEW 2020. All rights reserved. Page 6 of 16

(£325,000/10 years) x 9/12 = £24,375

(3) Provision – legal claim

Copyright © ICAEW 2020. All rights reserved. Page 7 of 16

Total possible marks 32½

Dates No. of shares Bonus factor Weighting Total

Theoretical ex-rights price per share £14.60 / 4 = £3.65

Basic earnings per share £886,899 / 741,552 = £1.17

Total possible marks 6½

Copyright © ICAEW 2020. All rights reserved. Page 8 of 16

(2.3) Presentation of the statement of profit or loss

Whichever presentation is adopted there is no overall impact on net profit.

Total possible marks 6

(2.4) IFRS vs UK GAAP

Total possible marks 9½

Copyright © ICAEW 2020. All rights reserved. Page 9 of 16

Cash from operations

Statement of cash flows for year ended 30 September 2019 (extract)

Cash flows from investing activities

Cash flows from financing activities

(2) Share capital and premium

(3) Retained earnings

Copyright © ICAEW 2020. All rights reserved. Page 10 of 16

Total possible marks 11

Total possible marks 9

Copyright © ICAEW 2020. All rights reserved. Page 11 of 16

Five fundamental principles – Ethics checklist

Professional competence and due care

Total possible marks 12½

Copyright © ICAEW 2020. All rights reserved. Page 12 of 16

4.1 Chamba Ltd

Consolidated statement of financial position as at 30 September 2019

Equity and liabilities

(1) Net assets – Hejazi Ltd

Copyright © ICAEW 2020. All rights reserved. Page 13 of 16

(2) Goodwill – Hejazi Ltd

(3) Non-controlling interest – Hejazi Ltd

(4) Net assets – Surati Ltd

(5) Goodwill – Surati Ltd

(6) Non-controlling interest – Surati Ltd