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Professional Examination – Paper 2.5(INT) Financial Reporting (International) 1 (a) Hanford Consolidated Balance Sheet at 30 September 2001 Non-current assets: Goodwill (6,250 – 625 (w (ii))) Property, plant and equipment (w (i)) Current Assets Inventory (7,450 + 4,310) Accounts receivable (12,960 + 4,330 – 820 (w (vi))) Insurance claim (w (ii)) Bank Total assets Equity and Liabilities Capital and reserves: Ordinary shares of $1 each (20,000 + 10,000 (w (v))) Reserves: Share premium (10,000 + 10,000 (w (v))) Accumulated profits (w (iii)) $000

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Answers $000 5,625 108,360 113,985 11,760 16,470 600 520

29,350 143,335

30,000 20,000 65,575 85,575

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Minority interests Non-current liabilities 8% Loan notes 2004 Current liabilities Trade accounts payable (5,920 + 4,160 – 620 (w (vi))) Bank overdraft Other accounts payable – dividend payable to minority Provision for taxation (1,870 + 1,380) Proposed final dividend Total equity and liabilities Workings: (all figures in $000) (i) Property, plant and equipment: Amount from question – Hanford – Stopple Fair value adjustment (group share only) $4,000 x 75% Unrealised profit in transfer of plant (w (iii)) 9,460 1,700 200 3,250 1,200

6,000

15,810 143,335

78,540 27,180 3,000 (360) 108,360

(ii)

Investments at cost Pre-acquisition dividend (w (iii)) Adjusted cost of investment

Cost of control 25,000 Ordinary shares (8,000 x 75%) (150) Share premium (2,000 x 75%) 24,850 Pre acq profit Fair value adjustments (see below) Goodwill

6,000 1,500 7,500 3,600 6,250 24,850

24,850

Fair value adjustments The benchmark treatment requires that only Hanford’s share of the excess value of the land has to be recognised as a fair value adjustment (i.e. $4 million x 75% = $3 million). Although the insurance claim is a contingent asset and cannot be recognised by Stopple, IAS 22 requires Hanford to make an assessment of all assets and liabilities of Stopple at the date of acquisition. The best estimate of the claim would be full settlement of $800,000, however the benchmark treatment requires that only Hanford’s share of this would be recognised in the consolidated financial statements i.e. $600,000. Total fair value adjustments are therefore $3·6 million. Goodwill depreciation will be $6·25 million/5 years x 6/12 = $625,000

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115,575 5,950

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(iii)

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Hanford B/f 63,260 Post acq profit 2,850 Post acq dividend from Stopple 450 Stopple 14,000

Consolidated reserves Hanford Stopple Unrealised profit in plant sold 360 Central admin costs 200 Minority interest ((14,000 – 200) x 25%) 3,450 Pre acq profit ((6,000 + (8,000 x 6/12)) x 75%) 7,500 Post acq profit ((4,000 – 200) x 75%)) 2,850 Goodwill amortisation 625 Balance c/f 65,575 66,560 14,000

66,560

14,000

Notes: the unrealised profit on the sale of the plant was initially $400,000, of this 10% i.e. $40,000 has been realised via Stopple’s depreciation charge, giving a net adjustment of $360,000 to both Hanford’s profits and the carrying value of the plant. Stopple’s dividends for the year are $1,200,000 ($400,000 interim plus $800,000 final). The post acquisition amount of these attributable to Hanford is $450,000 (1,200,000 x 75% x 6/12); therefore of the $600,000 ($800,000 x 75%) of Stopple’s proposed dividend that Hanford will receive, $150,000 should be treated as pre-acquisition. (iv) Balance c/f 5,950 Minority interest Ordinary shares (8,000 x 25%) Share premium (2,000 x 25%) Accumulated profits (w (iii)) 2,000 500 3,450 5,950

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5,950 (v)

Share exchange: Hanford acquired six million shares in Stopple. On the basis of an exchange of five for three, Hanford would issue 10 million new shares. The total value of the consideration is $25 million of which $5 million was for cash, therefore the value of the 10 million shares would be $20 million, or $2 each i.e. they were issued at a premium of $1 each.

(vi) Elimination of current accounts: The difference on the current accounts is due to the invoice for central administration of $200,000. A summary of the intra-group adjustment/cancellation is: Dr Cr Hanford’s overdraft 200 Accounts payable 620 Accounts receivable 820 820 (b) 820

The reasons why a parent company may not wish to consolidate a subsidiary can be broken down into two broad groups: (i) to improve the reported position of the group financial statements; and (ii) for the reasons, and in compliance with, IAS 27 ‘Consolidated Financial Statements and Accounting for Investments in Subsidiaries’. Improvement of the financial position: The financial statements of a subsidiary could show any of the following: – – – substantial operating losses; a poor liquidity position; or high levels of borrowing (high gearing).

If a parent were to consolidate such a subsidiary, it would proportionately worsen the group position in the above areas. Thus a parent may prefer not to consolidate poorly performing subsidiaries. IAS 27’s requirements: Subsidiaries should be excluded from a parent’s consolidated financial statements for the following reasons: – – the subsidiary operates under severe long-term restrictions. In effect the parent does not have full control (particularly over the ability to transfer funds to the parent) over the subsidiary. control is intended to be temporary because the investment is held exclusively with a view to its subsequent resale. Exclusion on these grounds is only permitted where a subsidiary has never been consolidated in the past.

It is apparent that the first group of reasons for non-consolidation is not permitted by International Accounting Standards, whereas the latter group is. IAS 27 also makes reference to subsidiaries sometimes being excluded on the basis of differing activities. Companies that have adopted this approach argue that to add together the assets and liabilities of companies whose activities differ greatly could lead to consolidated financial statements that give a misleading impression (or not show a true and fair view). IAS 27 does not permit exclusion on these grounds because it feels that ‘differing activity’ problems are overcome by the provision of segmental information.

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2 (a) (i) Telenorth Income Statement – Year to 30 September 2001 $000 Sales revenue Cost of sales (w (i)) Gross profit Distribution expenses Administration expenses Operating profit Profit from operations Financing cost (96 + 600 (w (iii))) Investment income Profit before tax Income tax (23,400 + 1,200) Net profit for the period (ii) Telenorth – Balance Sheet as at 30 September 2001 Assets Tangible Non-current assets Property, plant and equipment Investments Current Assets Inventory (w (iv))) Trade accounts receivable (35,700 + 12,000) (w (iii))

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$000 283,460 (155,170) 128,290 (64,500) 63,790 (696) 1,500 804 64,594 (24,600) 39,994

(22,300) (42,200)

$000

$000 83,440 34,500

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16,680 47,700

64,380 182,320

Equity and Liabilities Capital and Reserves: Ordinary shares of $1 each (20,000 + 4,000 + 6,000) (w (vi)) 8% Preference shares Reserves: Revaluation (3,400 – 1,000 deferred tax) Share premium (4,000 + 12,000) (w (vi)) Accumulated profits (w (vi)) Current liabilities Trade and other payables (w (v)) Loan from Kwikfinance ((9,600 + 96) w (iii)) Provision for income tax Proposed dividends (w (v)) Overdraft Non-current liabilities 6% Loan note Deferred tax (5,200 + 1,200 + 1,000) Total equity and liabilities Workings (all figures in $000) (i) Cost of sales: Opening inventory Purchases Depreciation (w (ii)) Closing inventory (w (iv)) Administration: Per question Incorrect factoring charge (w (iii)) Depreciation of computer system (w (ii))

30,000 12,000 42,000

2,400 16,000 46,694

65,094 107,094

18,070 9,696 23,400 4,980 1,680 10,000 7,400

57,826

17,400 182,320

12,400 147,200 12,250 171,850 (16,680) 155,170 34,440 (2,400) 10,160 42,200

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117,940

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(ii) Property, plant and equipment: Leasehold Plant and equipment Computer system cost 56,250 55,000 35,000

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depreciation 20,250 (18,000 + 2,250) 22,800 (12,800 + 10,000) 19,760 (9,600 + 10,160) carrying value 36,000 32,200 15,240 83,440

Depreciation for year: Leasehold (56,250/25 years) Plant (55,000 – 5,000)/ 5 year life) Charged to cost of sales Computer system charged to administration ((35,000 – 9,600) x 40%)

2,250 10,000 12,250 10,160

(iii) Accounts receivable/factoring: As Telenorth still bears the risk of slow payment and bad debts, the substance of the factoring is that of a loan on which finance charges will be made. The amount receivable from the customer should not have been derecognised (removed from the balance sheet) nor should all of the difference between the amount due from the customer and the amount received from the factor have been treated as an administration cost. The required adjustments can be summarised as follows: Accounts receivable Loan from factor Administration (12,000 – 9,600) Finance costs: accrued interest ($9·6 million x 1·0%) Accruals Dr 12,000 96 12,096 Cr 9,600 2,400 96 12,096

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There would also be loan note interest of $600,000 charged for the year ($300,000 paid + $300,000 accrued). (iv) Closing inventory: As this was not counted at the year-end, the actual count needs to be adjusted for movements in the period between the year-end and the date of the count; Balance on 4 October 2001 16,000 Add goods sold at cost: normal sales (1,400/140 x 100) 1,000 sale or return (650/130 X 100) 500 Less goods received at cost (820) Adjusted value (v) Current liabilities Trade and other payables: Accounts payable from question Accrued loan note interest (w (iii)) Proposed dividends (480 preference + 4,500 ordinary (at 15 cents on 30 million shares)) (vi) Share capital/accumulated profits/suspense account: The elimination of the suspense account is as follows: Suspense account (per trial balance) Director’s options: share capital (4 million at $1) share premium (4 million at $1) Rights issue: share capital ((20 million + 4 million)/4) share premium (6 million at $2) Accumulated profit: Balance 1 October 2000 Net profit for the period Dividends – Preferences (8% x 12,000) – Ordinary (2,000 + 4,500 interim + final) Balance 30 September 2001 Dr 26,000 16,680

17,770 300 18,070 4,980 Cr 4,000 4,000 6,000 12,000 26,000 14,160 39,994 (7,460) 46,694

26,000

960 6,500

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(b)

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000’s 20,000 4,000 24,000 6,000 30,000 $ 4·00 each 3·00 each 3·80 each (balance) $ 16 3 19 000’s 18,947 7,500 26,447

Telenorth – Earnings per Share (EPS) for the year to 30 September 2001 Number of shares at 1 October b/f Exercise of options on this date Rights issue of 1 for 4 on 1 July 2001(24,000/4) Number in issue at year end Theoretical ex-rights price: Holding 4 shares worth 1 new share 5 shares Weighted average number of shares in issue: 24,000 x 9/12 x 4·00/3·80 = 30,000 x 3/12 =

Therefore $3·80 would be the theoretical ex-rights price

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Earnings attributable to ordinary shares Therefore EPS is 39,034/26,447 x 100c 3 (a) (i)

39,034 148c

Although the broad principles of accounting for non-current assets are well understood by the accounting profession, applying these principles to practical situations has resulted in complications and inconsistency. For the most part, IAS 16 codifies existing good practice, but it does include specific rules which are intended to achieve improved consistency and more transparency. Cost The cost of an item of property, plant and equipment comprises its purchase price and any other costs directly attributable to bringing the asset into a working condition for its intended use. This is expanded upon as follows: – purchase price is after the deduction of any trade discounts or rebates (but not early settlement discounts), but it does include any transport and handling costs (delivery, packing and insurance), non-refundable taxes (e.g. sale taxes such as VAT/GST, stamp duty, import duty). If the payment is deferred beyond normal credit terms this should be taken into account either by the use of discounting or substituting a cash equivalent price; directly attributable costs are the incremental costs that would have been avoided had the assets not been acquired. For self constructed assets this includes labour costs of own employees. Abnormal costs such as wastage and errors are excluded; installation costs and site preparation costs; and professional fees (e.g. legal fees, architects fees) IAS 23 ‘Borrowing Costs’ allows (under the allowed alternative method), directly attributable borrowing costs to be capitalised. Directly attributable borrowing costs are those that would have been avoided had there been no expenditure on the asset. IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ says that if the estimated costs of removing and dismantling an asset and restoring its site qualify as a liability, they should be provided for and added to the cost of the relevant asset.

– – – – –

In addition to the ‘traditional’ costs above two further groups of cost may be capitalised:

Finally the carrying amount of an asset may be reduced by any applicable government grants under IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’. (ii) Subsequent expenditure: Traditionally the appropriate accounting treatment of subsequent expenditure on non-current assets revolved around whether it represented a revenue expense, in effect maintenance or a repair, or whether it represented an improvement that should be capitalised. IAS 16 bases the question of capitalisation of subsequent expenditure on whether it results in a probable future economic benefit in excess of the amount originally assessed for the asset. All other subsequent expenditure should be recognised in the income statement as it is incurred. Examples of circumstances where subsequent expenditure should be capitalised are where it:

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Profit for the period Deduct preference dividends

$000 39,994 (960)

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– – –

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represents a modification that enhances the economic benefits of an asset (in excess of its previously assessed standard of performance). This could be an increase in its life or production capacity; upgrades an asset with the effect of improving the quality of output; or is on a new production process that reduces operating costs.

In addition to the above the Standard says it is important to take into account the circumstances of the expenditure. For example normal servicing and overhaul of plant is a revenue cost, but if the expenditure represents a major overhaul of an asset that restores its previous life, and the consumption of the previous economic benefits has been reflected by past depreciation charges, then the expenditure should be capitalised (subject to not exceeding its recoverable amount). A further example of where subsequent expenditure should be capitalised is where a major component of an asset that has been treated separately (for depreciation purposes) is replaced or restored (e.g. new engines for an aircraft). (b) Revaluation (particularly of properties) has been an area of great flexibility and inconsistency, often leading to misleading financial statements and accusations of ‘creative accounting’. Under IAS 16 revaluations are permitted under its allowed alternative treatment rules for the measurement of assets subsequent to their initial recognition. The Standard attempts to bring some order and consistency to the practice of revaluations. Where an entity chooses to revalue a tangible non-current asset, it must also revalue the entire class of assets to which it belongs. Further, sufficiently regular revaluations should be made such that the carrying amounts of revalued assets should not differ materially to their fair values at the balance sheet date. The Standard stops short of requiring annual valuations, but it does contain detailed rules on the basis and frequency of valuation. It should be noted that where an asset has been written down to its recoverable amount due to impairment, this is not classed as being a policy of revaluation. The effect of the above is that it prevents selective or favourable valuations being reported whilst ignoring adverse movements, and where a company has chosen to revalue its assets (or class thereof), the values must be kept up-to-date. Surpluses and deficits: These are measured as the difference between the revalued amounts and the book (carrying) values at the date of the valuation. Increases (gains) are taken to equity under the heading of revaluation surplus (this may be via a Statement of Total Recognised Gains and Losses (STRGL)), unless, and to the extent that, they reverse a previous loss (on the same asset) that has been charged to the income statement. In which case they should be recognised as income. Decreases in valuations (revaluation losses) should normally be charged to the income statement. However, where they relate to an asset that has previously been revalued upwards, then to the extent that the losses do not exceed the amount standing to the credit of the asset in the revaluation reserve, they should be charged directly to that reserve (again this may pass through a STRGL). Any impairment loss on revalued property, plant and equipment, recognisable under IAS 36 ‘Impairment of Assets’, is treated as a revaluation loss under IAS 16. Gains and losses on disposal: The gain or loss on disposal is measured as the difference between the net sale proceeds and the carrying value of the asset at the date of sale. In the past some companies reverted to historic cost values to calculate a gain on disposal thus inflating the gain (assuming assets had increased in value). All gains and losses should be recognised in the income statement in the period of the disposal. Any revaluation surplus standing to the credit of a disposed asset should be transferred to accumulated realised profits (as a movement on reserves). (c) (i) The initial measurement of the cost at which the plant would be capitalised is calculated as follows: $ $ basic list price of plant 240,000 less trade discount of 12·5% on list price (30,000) shipping handling and installation costs estimated pre-production testing site preparation costs electrical cable installation (14,000 – 6,000) concrete reinforcement own labour costs dismantling and restoration costs (15,000 + 3,000) Initial cost of plant 210,000 2,750 12,500 8,000 4,500 7,500

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20,000 18,000 263,250

Note: the early settlement discount is a revenue item (probably deducted from administration costs). The maintenance cost is also a revenue item, although a proportion of it would be a prepayment at the end of the year of acquisition (the amount would be dependent on the date on acquisition). The cost of the specification error must be charged to the income statement.

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(ii) Broadoak Income statement extract Amortisation Revaluation loss Balance sheet Leasehold Revaluation reserve Balance 1 October 1999 Revaluation gain (see below) Balance 30 September 2000 Transfer to accumulated profits (11,000 x 1/11) Proportion of revaluation loss (see below) Balance 30 September 2001 Workings: Cost 1 October 1999 Amortisation to 30 September 2000 (240,000/12 years) Revaluation gain Carrying value 30 September 2000 Amortisation to 30 September 2001 (231,000/11 years)

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30 September 2000 30 September 2001 $ $ (20,000) (21,000) (25,000) 231,000 50,000 11,000 61,000 (1,000) (10,000) 50,000 240,000 (20,000) 220,000 11,000 231,000 (21,000) 210,000 (10,000) (25,000) 175,000 175,000

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Revaluation loss directly to revaluation reserve Remaining loss to income statement Carrying value 30 September 2001

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Charmer Cash Flow Statement for the year to 30 September 2001: Reconciliation of operating profit to net cash inflow from operating activities Note: figures in brackets are in $000 Net profit before interest and tax (3,198 – 1,479) Adjustments for: depreciation – buildings (w (i)) – plant (w (i)) loss on disposal of plant (w (i)) amortisation of government grants (w (ii)) negligence claim previously provided Operating profit before working capital changes increase in inventories (1,046 – 785) increase in accounts receivable (935 – 824) decrease in accounts payable (760 – 644) Cash generated from operations interest paid (260 + 25 – 40) income tax paid (w (iv)) dividends paid (30 + 150 interim) Net cash inflow from operating activities Cash flows from investing activities Purchase of land and buildings (w (i)) Purchase of plant (w (i)) Purchase of non-current investments Purchase of treasury bills (120 – 50) Proceeds of sale of plant (w (i)) Receipt of government grant (w (ii)) Investment income Cash flows from financing activities Issue of ordinary shares (w (iii)) Net decrease in cash and cash equivalents Cash and cash equivalents b/f Cash and cash equivalents at the end of the period (50) (848) (690) (70) 170 175 120 (1,193) 300 (258) 122 (136) $000 80 276 86 $000 1,719

442 (125) (120) 1,916 (261) (111) (116) 1,428 (245) (368) (180) 635

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Workings (i) Non-current assets: Land and buildings – cost/valuation Balance b/f Revaluation surplus Balance c/f Difference cash purchase Plant – cost Balance b/f Disposal Balance c/f Difference cash purchase Depreciation of non-current assets: Building (760 – 680) Plant (464 – (432 – 244))

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$000 1,800 150 (2,000) (50) 1,220 (500) (1,568) (848) 80 276

The plant had a carrying value of $256,000 at the date of its disposal (500 cost – 244 depreciation). As there was a loss on sale of $86,000 (given in question), the sale proceeds must have been $170,000 (i.e. 256 – 86). (ii) Government grant: Balances b/f – current – non-current Amortisation credited to cost of sales Balances c/f – current – non-current Difference cash receipt (125) (200) 125 100 275 175

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(iii) Share capital and convertible loan stock: A reconciliation of share capital, share premium and the revaluation reserve shows the shares issued for cash: share capital share premium revaluation reserve $000 $000 $000 opening balance (1,000) (60) (40) revaluation of land (150) bonus issue 1 for 10 (100) 100 conversion of loan stock (see below) (100) (300) closing balance 1,400 460 90 difference issued for cash 200 100 nil

The 10% convertible loan stock had a carrying value of $400,000 at the date of conversion to equity shares. This would be taken as the consideration for the shares issued which would be 100,000 $1 shares (i.e. 400,000/100 x 25). This would increase issued share capital by $100,000 and share premium by $300,000. (iv) Income tax: Tax provision b/f Deferred tax b/f Income statement tax charge Tax provision c/f Deferred tax c/f Difference cash paid $000 (367) (400) (520) 480 439 (368)

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(a)

(i)

The fundamental accounting concept of consistency dictates that similar items should be treated in a consistent manner in each accounting period and over time. Where a company changes its accounting policy it impairs the consistency and comparability of financial statements. Therefore a change should only occur if a new policy is preferable to the old policy in that it gives a more appropriate presentation of events or transactions. This normally occurs where there is a change in an accounting statute or an accounting standard. It sometimes occurs on the acquisition of a subsidiary, where the subsidiary’s policy differs to that of the group. The adoption of an accounting policy for the first time, or when a company applies a policy to transactions that differ substantially from any of its previous transactions, does not constitute a change of accounting policy.

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(ii) Income statement year to: Amortisation

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30 September 2001 (1,060 x 25%) $000 265 30 September 2000 (restated) $000 ((1,060 – 400) x 25%) 165

Balance sheet Intangible non-current assets Development expenditure – cost – amortisation (see below) – net book value Accumulated profit 1 October 2000 Prior period adjustment (see below) Accumulated profit at 1 October 2000 as restated

1,230 (505) 725 1,000 345 1,345

(1,230 – 560)

670 (240) 430

Workings: Amortisation as at 30 September 2000 – eligible re 1999 – eligible re 2000

300 x 25% x 2 years 360 x 25% x 1 year

$000 150 90 240

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505 Prior period adjustment The amount of the prior period adjustment would be the net book value of the development expenditure of $345,000 (420,000 – 75,000) that would have been included in the balance sheet at 30 September 1999. The $420,000 is the recognised amount of development costs, and the $75,000 is one year’s amortisation of the qualifying amount i.e. $300,000 x 25%. (b) (i) It is argued that the principal reasons for holding investment properties are that the owner expects to receive rental income from them and benefit from capital appreciation. They are not held for ‘consumption’ in the normal course of business i.e. they are not used as part of a company’s operations in the production or supply of goods and services or administrative purposes. As they are held as an investment for (eventual) disposal, it is often considered that it is the current values of the investments and the changes in them that are more important than their original costs. IAS 40 ‘Investment Properties’ takes this into account by permitting a choice of either a ‘cost’ model or a ‘fair value’ model on which the accounting treatment of investment properties must be based. Cost method This is the benchmark treatment in IAS 16 ‘Property, Plant and Equipment’ which requires investment properties to be measured at depreciated historic cost (less any impairments). In effect this treats investment properties in a similar manner to owner-occupied properties. Where the cost model is adopted, the fair values of investment properties must be disclosed. Fair value model This requires investment properties to be measured at their fair values on the balance sheet with changes in fair values being recognised in income. This differs from a revaluation model that requires (with certain exceptions) revaluation surpluses to be recognised as changes in equity (reserve movements), not as income. In the introduction to the Standard the IASC makes it clear that they consider the fair value model to be desirable, although they point out that it is an evolutionary step forward and therefore stop short, at this stage, of making it a requirement. (ii) Consolidated balance sheet extracts as at 30 September 2001 Non-current Assets cost/valuation $000 Property, plant and equipment – A 150 Investment properties –B –C 145 150 accumulated depreciation carrying value $000 $000 6 (2 years) 144 nil nil 145 150

Consolidated income statement extracts year to 30 September 2001: Depreciation: Property A Deficit in fair value of investment property B (180 – 145) Surplus in fair value of investment property C (140 – 150)

3 (150/50 years) (35) 10

Note: property A is let to a subsidiary of Myriad, therefore in Myriad’s consolidated financial statements it would be treated as an owner-occupied property (benchmark treatment in IAS 16). By contrast, when preparing the entity financial statements of Myriad, it would be treated as an investment property. The fair value of property A of $200,000 would be disclosed in the financial statements.

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Amortisation as at 30 September 2001 – eligible re 1999 – eligible re 2000 – eligible re 2001

300 x 25% x 3 years 360 x 25% x 2 years 400 x 25% x 1 year

225 180 100

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(c)

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This is a complex situation. The selling prices of some items of inventory after the balance sheet date appear to be below their cost and this indicates that part of the closing inventory (at 30 September 2001) may require writing down to net realisable value with the resultant loss recognised in the current year. This is an adjusting post balance sheet event if the losses are due to circumstances that occurred before the year-end. However, if the losses are due to circumstances that developed in the post balance sheet period, they should be included in the following year’s financial statements (to 30 September 2002). If these losses (in 2002) are material they should be brought to the attention of shareholders in the notes to the financial statements for the year to 30 September 2001 as a non-adjusting event. Applying the above to the circumstances of the question would give the following analysis: $ Cost 48 Net realisable value (NRV) 41 Apparent loss 7 per pack

The NRV of $41 is the reduced selling price for A4 paper of $45 less the cost of getting the goods into a saleable condition of $4. From the question it would appear that this loss is partly attributable to the remedial cost of the water leak. This is an adjusting event requiring a write down of $2 per pack of the relevant items. The net realisable value at the year-end would have been $46 (original selling price of $50 less $4 remedial costs), which is $2 below the cost of $48. The remainder of the loss, $5 ($50 – $45), is caused by the price reduction in response to competitive pressure in the post balance period. This is a non-adjusting event requiring appropriate disclosure if material.

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A final point to consider is that if the above fault is not due to Securiprint, it may mean that all of the inventory affected by the water leak is still damaged (despite the remedial work). If so, this would be evidence that the value of the inventory is impaired and a further provision would be required to write down the inventory (probably to nil) in the current year. Clearly no more of this inventory should be sold until the problem is resolved.

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The above ignores the effect of the information concerning the sale to Securiprint. If the ‘marks’ are due to the water leak or other flaw in manufacture, Myriad will probably be liable to pay compensation to Securiprint. This would be an actual liability requiring a provision to be made in the current year unless the amount cannot be determined reliably (the IASC says this should be rare). The provision would be for a refund of the cost of the goods sold and compensation for consequential losses caused by the faulty goods. If the marks were not due to the actions of Myriad then there would be no liability. It may be that at this early stage there is insufficient information to come to a conclusion as to who is at fault, but this represents at least a contingent liability on the part of Myriad and should be disclosed appropriately in the notes to the financial statements. The information may also indicate that other customers could have similar claims against Myriad.

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Professional Examination – Paper 2.5(INT) Financial Reporting (International)

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Marking Scheme

This marking scheme is given as a guide in the context of the suggested answers. Scope is given to markers to award marks for alternative approaches to a question, including relevant comment, and where well-reasoned conclusions are provided. This is particularly the case for written answers where there may be more than one definitive solution. 1 (a) Balance sheet: goodwill – calculation – depreciation property, plant and equipment inventory accounts receivable insurance claim bank/overdraft accounts payable dividend to minority tax and dividend minority interest 8% loan note share capital share premium Consolidated reserves – treatment of admin charge – post acq profit – post acq dividend Marks 3 1 4 1 2 1 1 2 1 1 2 1 1 1 1 1 1 25 20 1 1 1 1 1 1 6 5 25

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available maximum

(b)

For reasons of – poor profitability – poor liquidity/gearing – long-term restrictions – subsequent resale – differing activities First two prohibited, last three permitted

available maximum Maximum for question

25

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2 (a) (i) Income statement cost of sales sales revenue and distribution administration finance costs investment income taxation

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Marks 3 1 2 2 1 2 11 8 3 1 1 2 1 1 1 1 1 1 1 1 1 16 12 1 1 2 1 5 25 1 1 1 1 1 5 4 3 1 1 2 2 1 1 1 9 8 1 1 2 1 1 6 5 2 1 2 2 7 5 25

available maximum

(ii)

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available maximum

(b)

earnings attributable to ordinary shares calculation of theoretical ex-rights price weighting exercise calculation of earnings per share (in cents)

maximum Maximum for question

3

(a)

(i)

cost – purchase price net of trade discount – incidentals, transport etc – installation – borrowing costs – site restoration etc

available maximum maximum

(ii) (b)

subsequent expenditure – 1 mark per circumstance

must revalue whole class of assets must keep values up-to-date treatment of revaluation – surpluses – deficits impairment loss treated as a revaluation loss gain/loss on disposal – basis of calculation – treatment of previous surplus

available maximum

(c)

(i)

deduction of trade discount inclusion of – shipping and preparation costs – testing and installation – dismantling etc exclusion of error, maintenance and early settlement discount available maximum amortisation charges revaluation loss to income statement movements on revaluation reserve carrying value of leasehold at year ends

(ii)

available maximum Maximum for question

26

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Balance sheet non-current assets inventory accounts receivable/payable from question treatment of factored accounts receivable tax provision loan note deferred tax proposed dividends ordinary shares revaluation reserve share premium accumulated profits dividends

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4 net profit before interest and tax depreciation adjustments loss on sale of plant amortisation of government grants negligence adjustment working capital 1 per item interest paid tax dividends purchase of – land and buildings – plant – investments – treasury bills sale of plant receipt of government grant investment income share issue movement in cash and cash equivalents

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Marks 1 2 1 1 1 3 2 2 2 2 2 1 1 1 1 1 3 1 28 25 1 1 1 1 4 2 2 2 1 7 6 2 2 4 3 3 1 7 5 1 1 1 1 1 1 1 7 6 25

available Maximum for question

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5

(a)

(i)

principle of consistency/comparability to give a fairer presentation or more useful information usually because of new standard or statute initial implementation for new circumstances not a change Income statement: depreciation Balance Sheet: Development expenditure – cost – amortisation Prior period adjustment

maximum

(ii)

available maximum

(b)

(i)

reasons for different accounting treatment measurement models non-current asset figure – 1 mark for each property income statement items disclosure of fair value

maximum

(ii)

available maximum

(c)

total loss per pack is $7 $2 is an adjusting event $5 is non-adjusting, perhaps requiring disclosure if ‘marks’ due to water damage, provision required if not enough information, treat as a contingency possibility of similar claims from other customers may be that remaining inventory should be written down

available maximum Maximum for question

27

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