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REPORTING – IFRS how to use the software.

This exam consists of four questions (100 Preparing your answers

marks).
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Marks breakdown requirements. Do not include any content of
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Question 1 28 marks any other identifying content.
Question 2 32 marks
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 affected by any issues which occurred during
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Page 2 of 15
Question 1

The following trial balance has been extracted from Firecrest Ltd’s cloud-based accounting
system as at 31 December 2020.

Note £ £
Revenue (1) 2,400,400
Production costs 1,022,400
Administrative expenses (4) 678,250
Distribution costs 305,850
Inventories at 31 December 2019 207,200
Trade receivables (1) 485,950
Land and buildings (2), (3)
Cost (land £99,800) 678,800
Accumulated depreciation at 31 December 2019 434,100
Plant and equipment (2)
Cost 606,800
Accumulated depreciation at 31 December 2020 275,650
Retained earnings at 31 December 2019 92,770
Ordinary share capital (£1 shares) 200,000
3% Redeemable preference share capital (£1 shares)
at 31 December 2019 (4) 242,400
Trade payables 375,260
Bank account 30,580
Income tax (5) 4,750
4,020,580 4,020,580

Notes:

(1) In March 2020, after the 2019 financial statements had been approved and published,
the financial controller realised that when posting sales invoices to the cloud in December
2019, one invoice, for £45,200, had been posted twice in error. She dealt with this error in
March 2020, before the customer settled his account, by debiting revenue and crediting trade
receivables with £45,200.

(2) Depreciation on plant and equipment has been correctly calculated and posted for the
year ended 31 December 2020. However, the financial controller has not yet calculated the
depreciation charge for the year on buildings. Buildings have historically been depreciated on
a straight-line basis over a 40-year useful life and the depreciation charge recognised in cost
of sales.

(3) The directors decided to move from the cost model to the revaluation model for the
company’s freehold land and buildings, with effect from 1 January 2020. The remaining
useful life was also reviewed and revised at this date.

On that date an independent surveyor valued the land at £200,000 and the buildings at
£780,000. It was estimated that the buildings had a remaining useful life at 1 January 2020 of
30 years.

Copyright @ ICAEW 2021. All rights reserved. Page 3 of 11

The revaluation is not reflected in the trial balance above. There were no additions or
disposals of land and buildings during the year ended 31 December 2020. Firecrest Ltd
wishes to make an annual transfer between the revaluation surplus and retained earnings.

(4) Firecrest Ltd issued 240,000 £1 3% preference shares on 1 January 2019, which are
redeemable at a premium in several years’ time. The balance at 31 December 2019 included
in the trial balance above was correctly calculated in accordance with IFRS, using an
effective interest rate of 4%. The dividend on these shares for the year ended 31 December
2020 was paid on 31 December 2020.

On 20 June 2020 Firecrest Ltd declared an ordinary dividend of 10p per share in respect of
the year ended 31 December 2019. This was paid on 20 July 2020.

Both these credits to cash in respect of dividends were correctly imported from the direct feed
from the bank. However, the debits were incorrectly posted to administrative expenses.

(5) The income tax figure in the trial balance relates to an underprovision for the year
ended 31 December 2019. The income tax liability at 31 December 2020 has been
appropriately estimated at £73,100.

(6) Firecrest Ltd manufactures virtual reality headsets. The physical inventory count on
31 December 2020 showed that there were 3,400 finished headsets in the warehouse.
30,000 units were completed during the year, although planned production was 45,000. This
was because of a temporary forced factory closure due to the global pandemic.

Production costs in the trial balance above can be analysed as follows. No adjustment is
required to these figures for the purposes of calculating year-end inventories.

£
Direct costs 559,800
Variable production overheads 192,600
Fixed production overheads 270,000
1,022,400

The physical inventory count finished at 4pm on 31 December 2020 and recorded raw
materials on site, which were subsequently valued at £32,100. However, one consignment of
raw materials was delivered at 5pm on the day of the count. The invoice for these materials,
for £1,780, was not received until January 2021. The financial controller did not make any
adjustment for these inventories or the related invoice.

Requirements

1. Prepare the following for Firecrest Ltd, in a form suitable for publication in its financial
statements for the year ended 31 December 2020:

a. a statement of profit or loss;

b. a statement of financial position; and
c. an extract from the statement of changes in equity, showing the retained earnings
and revaluation surplus columns only. (24 marks)

2. The IASB’s Conceptual Framework sets out certain conditions which need to be met for
assets and liabilities to be recognised in the statement of financial position. Explain

Copyright @ ICAEW 2021. All rights reserved. Page 4 of 11

 these conditions and illustrate them by reference to the treatment of the land and
buildings and the goods received not invoiced in the statement of financial position of
Firecrest Ltd as at 31 December 2020. (4 marks)
Total: 28 marks

Copyright @ ICAEW 2021. All rights reserved. Page 5 of 11

Question 2

Linnet Ltd is a company operating in the IT sector. The following describes issues affecting
the draft financial statements of Linnet Ltd for the year ended 31 December 2020.

In Linnet Ltd’s own (single entity) financial statements:

(1) During the year ended 31 December 2020, Linnet Ltd started selling a package of
bookkeeping products for sole traders such as plumbers and electricians. The package
consists of a laptop, a printer, a 12-month software licence and 12 months of helpdesk
support. The selling price of each package is £1,080. The hardware (laptop and printer) on its
own normally retails for £700, the software licence for £300 and the helpdesk support for
£200. Linnet Ltd sold 100 of these packages in the year ended 31 December 2020, with the
average date of sale being 30 September 2020. The company credited the total sales value
of the packages of £108,000 to revenue.

(2) Linnet Ltd has historically purchased all the components used to manufacture the
hardware from within the UK. On 1 November 2020 Linnet Ltd took delivery of components
costing €569,600 from a supplier based in mainland Europe. One half of these components
remained in Linnet Ltd’s inventories.

Because Linnet Ltd’s accounts department are unsure how to deal with foreign currency
transactions, this purchase has not been recorded in Linnet Ltd’s draft financial statements
for the year ended 31 December 2020. This includes not reflecting the goods still held at 31
December 2020 in closing inventories.

Spot exchange rates were:

1 November 2020 €1:£0.80

31 December 2020 €1:£0.70

(3) On 1 January 2020 Linnet Ltd issued 2,000 6% £100 convertible bonds. It debited cash
and credited liabilities with the £200,000 received. Each bond is redeemable on
31 December 2022 at par or can be converted into 100 £1 ordinary shares. Interest is paid
annually in arrears. The market rate of interest for similar bonds without the conversion
option is 8% pa. The 6% interest due was paid on 31 December 2020 and debited to finance
costs.

In Linnet Ltd’s consolidated financial statements:

(4) On 1 July 2020 Linnet Ltd purchased 30% of Woodlark Ltd’s ordinary shares for cash of
£97,800, which gave Linnet Ltd significant influence over Woodlark Ltd. At the date of
acquisition by Linnet Ltd, Woodlark Ltd owned a building with a fair value £90,000 in excess
of its carrying amount. The building had an estimated remaining useful life at that date of 40
years. Woodlark Ltd made a loss for the year ended 31 December 2020 of £653,750, which
arose evenly over the year, and paid no dividends.

In the draft consolidated financial statements the investment in Woodlark Ltd is shown at its
cost of £97,800.

Linnet Ltd’s draft consolidated financial statements for the year ended 31 December 2020
showed profit before tax of £501,740 and total liabilities of £216,700.

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Requirements

1. Explain the required IFRS financial reporting treatment of Issues (1) to (4) above in
Linnet Ltd’s single entity or consolidated financial statements for the year ended 31
December 2020 as appropriate. You should prepare all relevant calculations. (27
marks)

2. Calculate the following revised figures for Linnet Ltd’s consolidated financial statements
for the year ended 31 December 2020.

• Profit before tax

• Total liabilities (5 marks)

Total: 32 marks

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Question 3

Question 3.1

The following draft statement of cash flows has been prepared for Sparrow Ltd for the year
ended 31 December 2020.

Draft statement of cash flows for the year ended 31 December 2020
£ £
Cash flows from operating activities
Cash generated from operations 132,700
Interest paid (12,500)
Income tax paid (53,800)
Net cash from operating activities 66,400
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 116,600
Purchase of intangibles (82,300)
Net cash from investing activities 34,300
Cash flows from financing activities
Increase in ordinary share capital and premium 200,000
Increase in retained earnings 125,800
Profit for the year (173,850)
Net cash from financing activities 151,950
Net increase in cash and cash equivalents 252,650
Cash and cash equivalents at 1 January 2020 56,800
Cash and cash equivalents at 31 December 2020 309,450

However, the above statement does not reflect a number of issues. The following information
is relevant.

(1) The movement on trade and other payables in the reconciliation of profit before tax to
cash generated from operations included an increase in income tax payable of £8,600.
Income tax paid in the draft statement of cash flows is the income tax expense from the
statement of profit or loss.

(2) The figure for proceeds from sale of property, plant and equipment is the net of sale
proceeds of £325,600 and cash spent on property, plant and equipment of £209,000.

(3) The figure for purchase of intangibles is the increase from the opening balance to the
closing balance on intangibles from the statement of financial position. The draft statement of
cash flows and the note reconciling profit before tax to cash generated from operations do
not reflect an amortisation charge of £15,700 charged to the statement of profit or loss.

(4) The figures for “Increase in ordinary share capital and premium” and “Increase in
retained earnings” listed under cash flows from financing activities are the increase of the
balances from the statement of financial position. The “profit for the year” of £173,850 is from
the statement of profit or loss.

During the year ended 31 December 2020 Sparrow Ltd issued shares for cash of £180,000,
made a bonus issue out of retained earnings and paid an ordinary dividend.

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Requirement

Prepare a revised statement of cash flows for Sparrow Ltd for the year ended 31 December
2020. (10 marks)

Question 3.2

Perry, a trainee ICAEW Chartered Accountant, is an accounts assistant at Garganey Ltd, a

company which retails mobile phones. His line manager is Ruby, who is the financial
controller. Ruby is an ICAEW Chartered Accountant. Ruby has sent Perry the following
email:

Hi Perry

Please value year-end inventories, using the combined quantities from the physical
inventory counts and the cost figures from purchase invoices. I know that some of our
selling prices are lower than these costs, but don’t worry about that – the managing director
is more concerned that we show a good profit this year than he is about following financial
reporting standards…...and the higher the profit the better our bonus will be!

Regards

Ruby

Perry forwarded the email to his friend, Jay, to ask his advice about what he should do. Jay is
also a trainee accountant and works for a similar company.

Requirement

Discuss the ethical issues arising from the scenario for Perry and Ruby, and set out any
actions that Perry should take. (6 marks)

Question 3.3

Requirement

Describe three differences between IFRS and UK GAAP accounting treatments which could
impact on the carrying amount of property, plant and equipment. (3 marks)
Total: 19 marks

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Question 4

On 1 January 2020 Bittern plc owned 90% of the ordinary shares in Chaffinch Ltd, which it
had acquired on 1 January 2018 when the retained earnings of Chaffinch Ltd were £235,600.
On 1 October 2020 Bittern plc acquired 80% of the ordinary shares in Dunnock Ltd. Bittern
plc owns a number of other insignificant investments.

Extracts from the draft individual financial statements for Bittern plc and its two subsidiaries
for the year ended 31 December 2020 are shown below. Revenue and costs accrued evenly
over the year.

Statements of profit or loss for the year ended 31 December 2020

Bittern plc Chaffinch Dunnock

Ltd Ltd
£ £ £
Revenue 3,521,600 1,150,600 850,600
Cost of sales (2,015,700) (745,900) (498,700)
Gross profit 1,505,900 404,700 351,900
Operating expenses (861,350) (216,200) (130,200)
Profit from operations 644,550 188,500 221,700
Investment income 300,000 – –
Profit before tax 944,550 188,500 221,700
Income tax expense (254,500) (55,000) (41,000)
Profit for the year 690,050 133,500 180,700

Statements of financial position as at 31 December 2020 (extracts)

£ £ £
Equity
Ordinary share capital (£1 shares) 2,000,000 1,000,000 800,000
Retained earnings 4,456,800 401,900 378,200

Additional information:

(1) The fair values of the assets and liabilities of Chaffinch Ltd at the date of acquisition
were the same as their carrying amounts, with the exception of an intangible asset. This
asset was estimated to have a fair value of £20,000 in excess of its carrying amount. The
asset was estimated to have a remaining useful life of five years at 1 January 2018.
Amortisation of intangibles is presented in operating expenses.

(2) On 1 January 2020 Bittern plc sold a machine to Chaffinch Ltd for £105,000. At this date
the machine had a carrying amount in Bittern plc’s books of £78,000. The estimated
remaining useful life of the machine was reassessed on the date of sale at six years.
Depreciation on this machine is presented in cost of sales.

(3) In November 2020 Dunnock Ltd sold goods to Chaffinch Ltd for £52,000. This
represented a mark-up of 30% on cost. Half of these goods remained in Chaffinch Ltd’s
inventories at 31 December 2020.

(4) The following dividends were paid in October 2020:

Copyright @ ICAEW 2021. All rights reserved. Page 10 of 11

 £
Bittern plc 200,000
Chaffinch Ltd 160,000

(5) Bittern plc has carried out its annual impairment review of goodwill and has identified
that an impairment of £17,000 needs to be recognised for the year ended 31 December 2020
in respect of goodwill arising on the acquisition of Chaffinch Ltd.

(6) Bittern plc uses the proportionate method to calculate goodwill and the non-controlling
interest for all of its subsidiaries.

Requirement

Prepare for Bittern plc:

a. a consolidated statement of profit or loss for the year ended 31 December 2020; and

b. an extract from the consolidated statement of financial position at the same date,
showing all figures that would appear as part of equity, including the non-controlling
interest.
Total: 21 marks

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