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ADVANCED LEVEL I
SUBJECT: FR342. ADVANCED FINANCIAL REPORTING
Model Solution
Solution of the Question No. 1
(b)
(1)
Teresaisatpresentamemberoftheassuranceteamandamemberofherimmediatefamilyownsadirectfin
ancialinterestintheauditclient.Thisisunacceptable.Inordertomitigatetherisktoindependencethatthisp
osesontheaudit,StewartBriceneedstoapplyoneoftwosafeguards:
Ensure that the connected persondivests the shares
RemoveTeresafromtheengagementteam
Teresashouldbeappraisedthatthesearetheoptionsandremovedfromtheteamwhileadecisionistakenw
hethertodivesttheshares.Teresa'shusbandappearstowanttokeeptheshares,inwhichcaseTeresa
should be removed from the team immediately.
The firmshouldappraise theauditcommitteeof Recreate of what has happened and theactions it
has taken. The partners should consider whether it is necessary to bring in anindependent partner
to review audit work. However, given that Teresa's involvement is subject to the review of the
existing engagement partnerandshe wasnotconnected with the shares while she was carrying out
the work, a second partner review is likely to beunnecessaryinthiscase.
(2)
The audit firm has an indirect interest in the parent company of a company it has
beeninvitedtotenderforbyvirtueofitspensionschemehavinginvestedinTadpoleGroup.Thisisnobarriert
otheauditfirmtenderingfortheauditofKermitCo.Shouldtheauditfirmwinthetenderandbecomethe
auditors of Kermit Co it should consider whether it is necessary to apply safeguards to mitigate
against the risk to independence on the audit as are sultoftheindirectfinancialinterest. The
factorsthatthepartnerswillneedtoconsiderarethematerialityoftheinteresttoeitherpartyandthedegreeof
controlthatthefirmactuallyhasoverthefinancialinterest.
In this case, the audit firm has no control over the financial interest. An independentpension
scheme administrator is in control of the financial interest. In addition, the in terestis unlikely to be
substantial and is therefore immaterial to both parties. It is likely that
thisriskisalreadysufficientlyminimalastonotrequiresafeguards.However,iftheauditfirmfeltthatitwasne
cessarytoapplysafeguards,itcouldconsiderthefollowing:
Notifyingtheauditcommitteeoftheinterest
RequiringFriendsBenevolenttodisposeofthesharesinTadpoleGroup
(3)
In this case, Stewart Brice has a direct financial interest in the audit client, which
istechnicallyforbiddenbyethicalguidance.However,itisarequirementofanyfirmauditingthecompanyth
atthesharebeownedbytheauditors.
The interest is not material. The audit firm should safeguard against the risk by not
votingonitsownre-electionasauditor.Thefirmshouldalsostronglyrecommendtothecompanythat it
removes this requirement from its constitution, as it is at odds with ethical requirements for auditor.
(c)
CU
Sale proceeds 250,000
Less: Share of net assets at disposal (100,000 * 60%) (60,000)
Carrying amount of goodwill (50,000 * 50%) (25,000)
165,000
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Solution of the Question No. 2
(a)
Under IAS 19 Employee Benefits, Zaim is required to recognize a net pension liability or asset and
to determine the pension expense to be recognized in the statement of profit or loss. The net
pension liability recognized by Zaim as of June 2023was $18 million, excluding the unrecognised
actuarial gain of $15 million. However, due to the revision of the scheme, Zaim needs to update its
calculations and determine the appropriate accounting treatment.
The revised scheme resulted in benefits being enhanced for some members of the plan and
closing the part of the scheme without any redundancy of employees. As a result, Zaim needs to
recognise the additional cost resulting from the enhancement of benefits and any curtailment gain
or loss resulting from the closure of the scheme.
To account for the increased cost resulting from the enhanced benefits, Zaim should recognise the
actuarial loss immediately in the statement of profit or loss, as it is not possible to spread this cost
over the remaining working lives of the employees. The actuarial loss can be calculated as the
difference between the present value of the revised benefits and the present value of the original
benefits.
To account for the curtailment gain or loss resulting from the closure of the scheme, Zaim should
determine the present value of the defined benefit obligation (DBO) and compare it with the fair
value of the plan assets. If the fair value of the plan assets is less than the present value of the
DBO, Zaim has a curtailment loss, which should be recognized immediately in the statement of
profit or loss. If the fair value of the plan assets is greater than the present value of the DBO, Zaim
has a curtailment gain, which should also be recognized immediately in the statement of profit or
loss.
(b)
The bond investment made by AD PLC should be classified as financial asset measured at fair
value through Other Comprehensive Income as it's intention to hold to maturity and obtain a
contractual cash flow from the investment.
Debit Credit
Bond investment 10,000
(1) Cash/Bank 10,000
[To recognize the initial investment in bond]
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Note:
While derecognizing bond investment, any interest income recognized previously at
OCL to recallify in Profit & Loss account.
Workings:
The below table shows the bond return calculation over time:
(c) Doubts regarding the going concern status of a customer would normally be
regarded as prima facie evidence that any trade receivable had suffered impairment.
In such circumstances an impairment allowance equal to the expected losses would
normally be appropriate. However, IFRS 9 Financial Instruments requires the
impairment assessment to be made at the reporting date. At the reporting date, the
going concern status of Z was not in doubt, so in this case no allowance is
necessary.
However, the information about the decline in the going concern status of Z after the
reporting date is a non-adjusting event after the reporting date. Therefore whilst no
impairment allowance is necessary, it will be necessary to disclose details of the 20
April event at Z’s business premises and its impact on the collectability of Delta’s
trade receivable.
B and M
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 20X6
TK’m
Non-current assets
Property, plant & equipment (2,848 + 354) 3,202
Patents 45
Goodwill (W2) 43
3,290
Current assets
Inventories (895 + 225) 1,120
Trade and other receivables (1,348 + 251) 1,599
Cash and cash equivalents (212 + 34) 246
2,965
6,255
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Equity attributable to owners of the parent
Share capital 920
General reserve (W4) 796
Retained earnings (W3) 2,243
3959
Non-controlling interest (490 x 40%) 196
4,155
Non-current liabilities
Long-term borrowings (558 + 168) 726
Current liabilities
Trade and other payables (1,168 + 183) 1,351
Workings Current portion of long-term borrowings 23
1,374
6,255
1 Group structure
B
60% (30.6.X2)
M
2 Goodwill
TK m TK m
Consideration transferred (250m x 50% x 1.06) 159
Net assets at acquisition:
Share capital 50
General reserve 11
Retained earnings 104
165
Group share 60% (99)
Goodwill at acquisition 60
Impairment losses to date (17)
Goodwill at end of reporting period 43
3 Retained earnings
B M
TK m TK m
Per question 2,086 394
Pre-acquisition – (104)
2,086 290
Madrid – share of post acquisition earnings
(290 x60%) 174
Less: goodwill impairment losses to date (17)
2,243
4 General reserve
B M
TK m TK m
Per question 775 46
Pre-acquisition – (11)
775 35
Madrid – share of post acquisition general
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reserve
(35 x 60%) 21
796
*$4,850,000 – $4,100,000
Journal Entries—2015
Pension Expense ............................................................. 400,000
Pension Asset/Liability .................................................. 1,250,000
Other Comprehensive Income (G/L) 875,000
Cash ................................................................................... 775,000
*6,000,000 ÷ 10
1,200,000 – 240,000a, b
=
600,000 + 15,000c
960,000
=
615,000
a
Preference shares are not assumed converted since conversion would be antidilutive. That is,
conversion of the preference shares increases the numerator 240,000 (4,000,000 X .06) and
the denominator 120,000 shares [(4,000,000 ÷ 100) X 3]
b
The convertible bonds are not assumed converted since conversion would be antidilutive.
That is, conversion of the bonds increases the numerator 972,000 (1,800,000 X .90X .60)
and the denominator 60,000 shares [(2,000,000 ÷ 1,000) X 30 shares/bond]
c
Market price – Option price
X Number of options = incremental shares
Market price
25 – 20 X 75,000 = 15,000
= THE END =
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