WARRBURT (DEC 08 ADAPTED) & Walk in the footsteps of a top tutor The following draft group financial statements relate to Warrburt, a public limited company: Warrburt Group: Statement of financial position as at 30 November 2008 30 Nov 2008 30 Nov 2007 $m $m Non-current assets Property, plant and equipment 350 360 Goodwill 80 100 Other intangible assets 28 240 Investment in associate 100 - Financial assets at FV through OCI 142 150 900 850 Current assets Inventories 135, 198 Trade receivables 92 163 Cash and cash equivalents 312 323 Total assets 1,439 1,534 Equity and Liabilities Equity attributable to owners of the parent Share capital 650 595 Retained earnings 391 454 Other components of equity 25 20 1,066 1,069 Non-controlling interest 70 53 Total equity 1,136 1,122 Non-current liabilities: Long-term borrowings 20 64 Deferred tax 28 26 100 96 Long-term provisions Scanned with CamScannerCurrent liabilit Trade payables Current tax payable Short-term provisions Total equity and liabilities 30 Nov 2008 $m 15 35 5 1,439 30 Nov 2007 $m 180 a2 4 1,534 Warrburt Group: Statement of profit or loss and other comprehensive income for the year ended 30 November 2008 Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Finance costs Share of profit of associate Loss before tax Income tax expense Loss for the year from continuing operations Loss for the year Other comprehensive income for the year (after tax) which will not be reclas or loss in future year Financial assets at FV through OCI Gains on property revaluation Remeasurement component losses on defined benefit plan Other comprehensive income for the year (after tax) Total comprehensive income for the year $m 910 (886) profit (a) 25, (27) Scanned with CamScannerPAPER P2 (INT AND UK) : CORPORATE KEruniinw sm Profit/loss attributable to: ‘Owners of the parent (74) ‘Non-controlling interest 22 (52) ‘Total comprehensive income attributable to: $m ‘Owners of the parent (49) Non-controlling interest 22 (27) Warrburt Group: Statement of changes in equity for the year ended 20 November 2008 Financial Non- Shore Retained —assetsat Revaluation controling capital eamings —‘FVTOC!_ ~— Surplus. ‘Total ~—_—interest sm sm $m sm sm $m Balat 1 Dec 2007 595 454 16 4 1,069 33 Share capitalissued 5S 5s Dividends 0) (9) (5) ‘Telfor the year (73) 7 2 (49) 2 ‘Transfer toretained earnings 2 (24) Bal 30 Nov 2008 650 301 19 6 1,066 70 Note to Statement of changes in equity: sm Profit/Loss attributable to owners of parent (74) Remeasurement component losses on defined benefit plan 3) (78) ‘Total comprehensive income for the year — retained earnings ‘The following information relates to the financial statements of Warrburt: Jestments in equity instruments. These financial assets ()— Warrburt holds Tota? equity sm 4122 55 aa) (27) 1,136 are measured at fair value through other comprehensive income (FVTOCI). The following schedule relates to those assets. sm Balance 1 December 2007 150 Less sales of financial assets at FVTOCI at carrying value (38) ‘Add gain on revaluation of financial assets 142 Scanned with CamScai nneri (ii) The sale proceeds of the financial assets at FVTOCI were $45 million. Profit on the sale of these financial assets is included within ‘other income’ in the financial statements. Deferred tax of $3 million arising on the revaluation gain above has been taken into account in ‘other comprehensive income’ for the year. The profit held in equity on the financial assets at FVTOCI that were sold, amounting to $24 million, has been transferred to retained earnings. The retirement benefit liability is shown as a long-term provision in the statement of financial position and comprises the following: $m Uability at 1 December 2007 96 Expense for period 10 Contributions to scheme (paid) (10) Remeasurement component losses 4 Usability at 30 November 2008 100 ‘The benefits paid in the period by the trustees of the scheme were $3 million. There is no tax impact with regards to the retirement benefit liability. The property, plant and equipment (PPE) in the statement of financial position comprises the following: $m Carrying value at 1 December 2007 360 Additions at cost B Gains on property revaluation 4 Disposals (56) Depreciation (36) Carrying amount at 30 November 2008 350 Plant and machinery with a carrying amount of $1 million had been destroyed by fire in the year. The asset was replaced by the insurance company with plant and ‘machinery which was valued at $3 million. The machines were acquired directly from the insurance company and no cash payment was made to Warrburt. The company included the net gain on this transaction in ‘additions at cost’ and ‘other income’. The disposal proceeds were $63 million. The gain on disposal is included in administrative expenses. Deferred tax of $2 million has been deducted in arriving at the ‘gains on property revaluation’ figure in ‘other comprehensive income’. The remaining additions of PPE comprised imported plant and equipment from an ‘overseas supplier on 30 June 2008. The cost of the PPE was 380 million dinars with 280 million dinars being paid on 31 October 2008, and the balance was paid on 31 December 2008. The rates of exchange were as follows: Dinars to$1 30 June 2008 5 31 October 2008 49 30 November 2008 48 Exchange gains and losses are included in administrative expenses. Scanned with CamScannerPAPER P2 (INT AND UK) : CORPORATE REPORTING (iv) w (wi) Warrburt purchased a 25% interest in an associate for cash on 1 December 2007. The net assets of the associate at the date of acquisition were $300 million. The associate ‘made a profit after tax of $24 million and paid a dividend of $8 million out of these Profits in the year ended 30 November 2008. Assume a tax rate of 25%. An impairment test had been carried out at 30 November 2008, on goodwill and other intangible assets. The result showed that goodwill was impaired by $20 million and other intangible assets by $12 million, ‘The short term provisions relate to finance costs which are payable within six months Warrburt’s directors are concerned about the results for the year in the statement of ‘comprehensive income and the subsequent effect on the cash flow statement. They have suggested that the proceeds of the sale of property, plant and equipment and the sale of financial assets at FVTOCI should be included in ‘cash generated from operations’. The directors are afraid of an adverse market reaction to their results and of the importance of ‘meeting targets in order to ensure job security, and feel that the adjustments for the proceeds would enhance the ‘cash health’ of the business. Required: (3) Prepare a group statement of cash flows for Warrburt for the year ended 30 November 2008 In accordance with IAS 7 Statement of Cash Flows using the Indirect method. (35 marks) {b) Discuss, the key Issues which the statement of cash flows highlights regarding the ash flow of the company. (10 marks) ©) Discuss the ethical responsibility of the company accountant in ensuring that ‘manipulation of the statement of cash flows, such as that suggested by the directors, does not occur. (Smarks) (Total: 50 marks) Scanned with CamScanner20 weston IBY workin ne foorstens of top tutor Weston has apolnted a new fnarll conte, Weston cleus ‘ash generated from operations using te indet method. The nancial controler has never wsed the direct method before and reuies assistance. The flowing Information relies to the franca Statements ofthe Weston Group: ‘strats from Westen Grovp: Statement of nancial postion a at 3 January 206 205 Sm ‘Sm Non-currentosets Property, plant nd equipment 38 43 ead 4 9 Investment in asocate aor - 2 TAPIAN PUBLISHING VACTICE QUESTIONS: StcTION 1 2 205 sm ‘m Currant sets Inventories 108 165 ‘rate andthe ecehables 108 108 Cash and cas equivalents 8 a Non-urrent abies Retiemeat benef bity © n Net eterred ae aby 1 1s Current ables Trae and other payables 2 a Current tax payate ” a Entracts from statement of profit o lots and other comprehensive income for the year fended 33 Jnuary20x8 sm Share of proft of asseciate 6 Prof before tax 183 Income tax expense (@) Profit forthe year rom continuing operations 10 Discontinued operations Last forthe year rom continued eperatins see noe) 5) ‘ota pote forthe year 28 ther comprehen ineame forthe yer ater tax] which wt nat be recast to profit rosin future years Remeszurement gion defined benefit plan 2 Total comprehensive income forthe year m2 Notes: (9 0n34 jy 20%, Weston dspoed of thei nie 0% equity hosing in Northern for fash. The sates had been acqured on 31 Jaly 2081 for a consiseraton of ‘152 alion wen the fair vale ofthe et assets was $128 millon. This included 8 Tai wale upto $6 rilonin elation to plat with a emsning use ie of eght years. Deferred tox at 25% onthe fa value asustment was ako correcty provided Torin the group accounts and since within hear value af tases. The ar value of the noncentoling interest at aequston was $26 mlion. Good “Bleed under the fl or valse method wa teste annual fr impairment Scanned with CamScanner‘8 21 January 2085, goodwilreatig to Northern hud Been inpaied by 75K. A fnacwil mosrment charge hasbeen incuded whim aminstaton expenses for ‘he camingsmauts nthe ndivil accounts of Norther at pol ae Sted blow: Thea vale astment and subsequent deere tn were no incarporated Int te dua counts of Meters. sm Propet, lar ane equipment @ Trade and ater payables 00) Detereatontstisy o ako @ (©) Te oe forte pad tom acantinnd operon inthe coneaidned aateant ‘of prot or lors oa her comprenesve Ince rites to Northam be Be ised as aows so ota lore oe © Income axemsense a tosson aspen 9) os) (a weston prense a 40 terest ina aso fresh on 3 Febuary 2035. The racatepnd iden of 10 millon nthe yar ended 31 amy 2098. (Te ceemeet Roel ibity relates to Weston a ther comsanies in he pouP operate ened entiation hemes The tes atari vations foes fe Netoblaston a1 ebrny 2085 2 Serie cst component ” Contuion to ere tas) emsanrerent gant a Net bigstion 3 Janey 2086 @ ‘The Benes gid in the period by the utes f the scheme were $7 mtn. Weston apertes m2 coumry which ony atows tre when cortibtions are Bald ito the stare. The tae bate wat therefore ra 331 larry 0X8 and 5 anary 206 The tx ate pd by Weston 254. The serie cst components incaded thin sninitratine pens (0) There were no cepasa of ropeny, lint nd equipment dung the year sce on {hesale a Norte. Dereon far the ear was S20 allo an sneha onto sles Regu (3) tnacordance wih as7 Stetement of Cas ews, pepe: + catnows om operating atts ung the nrc metho) + cath om loveingstiies, (amas) (01 Using your answer to pat (2 (expla tothe hana enter how to ‘alesatecah genre rom operon ung tendvct method. (mats) (0) weston isconiesing purchasing equity shares nario akport called Man. ‘woul be ene af tveesarhcaes The moj taefoe would hd ED of ‘ting sates fe second sareolser wou ol 28 of voting stares and Weon ‘woul old 199% of the voting shares The Board of directory cori of ten embers. The moj shareholder willbe represented bya he Bore members, ‘le weston an the othe shareholder wl be represented by a member seh [avarhaiet remnant wl te ht cram based and saree eautns requre eter nanimoss oF mojnity decison. There so ication Dat the Ialorty saretoaer andthe oer sharers wil at ogeter in common way. ‘estn wil poise Mana wih raenarce and tech serves a wl en ‘war maragerent experts to give bsines 2bace he Board of Mona estn des at propos o account or is eset Mana as an soca, ‘Weston teeves thatthe monty owner of Morar wil seis oance 35 the ‘iscsi Weson's proposed accountng Ueatent fos Investment in Manas ‘watordace wth nterational fnandal ReperngStandars. —(Bmats] (rot sma) Scanned with CamScannerBackground The following are extracts from the consolidated financial statements of the Moyes group. Group statement of profit or loss for the year ended 30 September 20X8: $m Revenue 612 Cost of sales, (a7) Gross profit 265 Operating expenses 23) Share of proft of associate 67 Profit before tax 209 Extracts from the group statement of financial position: 30 September 20X8 30 September 20X7 $m $m Inventories, 126 165 Trade receivables 156 149 Trade payables 215 197 The following information is also relevant to the year ended 30 September 20%8: Pension scheme Moyes operates a defined benefit scheme. A service cost component of $24 million has been included within operating ‘expenses. The remeasurement component for the year was a gain of $3 million. Benefits paid out of the scheme were $31 million. Contributions into the scheme by Moyes were $15 million. Goodwill Goodwill was reviewed for impairments at the reporting date. Impairments arose of $10 milion in the current year. Property, plant and equipment Property, plant and equipment (PPE) at 30 September 20X8 included cash additions of $134 million. Depreciation charged during the year was $99 million and an impairment loss of $43 million was recognised. Prior to the impairment, the group had a balance on the revaluation surplus of $50 million of which $20 million related to PPE impaired in the current year. Inventory Goods were purchased for Dinar 80 milion cash when the exchange rate was $1:Dinar 5. Moyes had not managed to sell the goods at 30 September 20X8 and the net realisable value was estimated to be Dinar 60 million at 30 September 20X8. The exchange rate at this date was $1:Dinar 6. The inventory has been cotrectly valued at 30 September 20X8 with both the exchange difference and impairment correctly included within cost of sales. Changes to group structure During the year ended 30 September 20X8, Moyes acquired a 60% subsidiary, Davenport, and also sold all ofits equity interests in Barham for cash. The consideration for Davenport consisted of a share for share exchange together with some cash payable in two years. 80% of the equity shares of Barham had been acquired several years ago but Moyes had decided to sell as the performance of Barham had been poor for a number of years. Consequently, Barham, had a substantial overdratt at the disposal date. Barham was unable to pay any dividends during the financial year but Davenport did pay an interim dividend on 30 September 20X8. Discontinued operations The directors of Moyes wish advice as to whether the disposal of Barham should be treated as a discontinued operation and separately disclosed within the consolidated statement of profit or loss. There are several other subsidiaries which all produce similar products to Barham and operate in a similar geographical area. Additionally, Moyes holds @ 52% Scanned with CamScannerequity interest in Watson. Watson has previously issued share options to other entities which are exercisable in the year ending 30 September 20X9, It is highly likely that these options would be exercised which would reduce Moyes’ interest to 35%. The directors of Moyes require advice as to whether this loss of control would require Watson to be classified as held for sale and reclassified as discontinued, Required: (0) Draft an explanatory note to the directors of Moyes which should include: (i) _acalculation of cash generated from operations using the indirect method; and (Wan explanation of the specific adjustments required to the group profit before tax to calculate the cash generated from operations. Note: Any workings can either be shown in the main body of the explanatory note or in an appendix to the explanatory note. (12 marks) (b) Explain how the changes to the group structure and dividend would impact upon the consolidated statement of cash flows at 30 September 20X8 for the Moyes group. You should not attempt to alter your answer to part (a). (6 mars) (©) Advise the directors as to whether Watson should be classified as held for sale and whether both it and Barham should be classified as discontinued operations. (6 marks) {d) The 2010 version of the Conceptual Framework for Financial Reporting (the Conceptual Framework) of the International Accounting Standards Board (the Board) specifies that it must be probable that any future economic benefit associated with an asset or liability will flow ta or from an entity in order for the asset or liability to qualify {or recognition. Current accounting standards have been criticised for not necessarily applying the probability criterion relating to future economic benefits on a consistent basis. The Board issued Exposure Draft ED/2015/3 Conceptual Framework For Financial Reporting in which new recognition criteria were proposed to address this issue. Required: Explain how the probability criterion has not been applied consistently across accounting standards. Illustrate your answer with reference to how there may be inconsistencies with the measurement of assets held forsale, provisions and contingent consideration. Your answer should also discuss how the Board’s proposed changes to the recognition criteria address the issue. (6 marks) (30 marks) Scanned with CamScanner