acca f7 int revision mock - answers j12

ACCA

Paper F7 (INT)

Financial Reporting

June 2012

Revision Mock – Answers

To gain maximum benefit, do not refer to these answers until you have completed the revision mock questions and submitted them for marking.

ACCA F7 (INT): FINANCIAL REPORTING

2 KAPLAN PUBLISHING

© Kaplan Financial Limited, 2012

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All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

REVISION MOCK: ANSWERS

KAPLAN PUBLISHING 3

ANSWER 1

(a) Goodwill of Swann at 1 December 2011

$000 $000Prior’s investment (at fair value): Share exchange 42,500 × 3 / 5 × $3.65 93,075 Deferred consideration 42,500 x $0.75 x 1/1.12 26,343 –––––– 119,418 Non-controlling interest (at fair value): 15% x 50,000 x $2.25 16,875 Less: Fair value of Swann’s net assets at acquisition (W2) (99,812) ––––––– Goodwill at acquisition 36,481 –––––––

(b) Investment in associate at 31 March 2012

$000 $000 Cost of investment: Cash (35% x 50,000 × $1.75) 30,625 Loan note issue (35% x 50,000 / $100 × 100) 17,500 ––––––– 48,125 Parents share of associate post-acquisition profit (35% × $80,000 x 3/12)

7,000

––––––– Carrying value at 31 March 2011 55,125 –––––––


4 KAPLAN PUBLISHING

(c) Consolidated statement of comprehensive income for Prior Group for the year ended 31 March 2012

$000 Revenue (104,645 + (78,468 × 4/12) – 3,000 (intra-co sale – W3))

127,801

Cost of sales (W3) (56,106) ––––––– Gross profit 71,695 Other income (1,200 + 2,500 (change in fair value))

3,700

Distribution costs (10,560 + (11,400 × 4/12))

(14,360)

Administrative expenses (23,800 + (12,600 × 4/12) + 1,500)

(29,500)

Finance costs (W4) (2,828)Share of associate: 35% of Associate profit for year (35% × 80,000 x 3/12)

7,000

––––––– Profit before tax 35,707 Taxation (6,513 + (5,760 × 4/12))

(8,433)

––––––– Profit for the year 27,274 Other comprehensive income: Gain on revaluation of land

4,500

––––––– 31,774 ––––––– Profit for the year attributable to: Owners of the parent (β) 26,864 Non-controlling interests: Subsidiary profit after tax (13,668 × 4/12) 4,556 Fair value depreciation (76) PURP (250) Impairment (1,500) 15% x 2,730 410 ––––––– ––––––– 27,274 ––––––– Total comprehensive income for the year attributable to: Owners of the parent (β) 31,364 Non-controlling interests (as above) 410 ––––––– 31,774 –––––––


KAPLAN PUBLISHING 5

Workings:

(W1) Group structure

(W2) Net assets of Swann at acquisition

At acq $000Share capital 50,000Retained earnings 35,000 + (8/12 x 13,668 ) 44,112 ––––––– 94,112Fair value adjustment: Property 5,700 ––––––– 99,812 –––––––

(W3) Cost of sales

$000Parent 47,200Subsidiary (34,740 × 4/12) 11,580Inter-group purchase (750 x 4 months) (3,000)Fair value depreciation (5,700/25 years × 4/12) 76PURP (1,500 × 20/120) 250 ––––––– 56,106 –––––––

(W4) Finance costs

$000 Parent 1,850 Subsidiary (300 × 4/12) 100 Finance cost on deferred consideration (26,343 x 10% x 4/12) 878 ––––––– 2,828 –––––––

Prior

Swann

01/12/11 4 months ago

Anderson

42.5m ––––– = 85% 50m

17.5m –––––– = 35% 50m

01/01/12 = 3 months ago


6 KAPLAN PUBLISHING

Marking scheme

(a) Goodwill in Swann at acquisition

Share exchange

Deferred consideration

Fair value of NCI

Fair value of net assets:

Retained earnings at acquisition

Fair value adjustment

(b) Investment in Anderson at 31 March 2011

Cash

Loan note issue

Share of profit

(c) Consolidated statement of comprehensive income

Revenue

Cost of sales

Other income

Distribution costs

Administrative expenses

Share of associate

Finance costs

Tax

Non-controlling interests

Total

Marks

1

1

1

1

1

5

1

1

1

3

2

4

1½

½

1½

2

2

½

3

17

–––––

25

–––––

ANSWER 2

Statement of comprehensive income for Hao plc for the year ended 31 March 2012

$000 Revenue (246,500 – 15,000 (W1) + 2,000 (W1) + 50,000 (W5)) 283,500 Cost of sales (W3) (113,500) ––––––– Gross profit 170,000 Operating expenses (29,000) ––––––– Profit from operations 141,000 Finance costs (1,500 + 500 (W4)) (2,000) Gain on fair value of investments 4,000 ––––––– Profit before tax 143,000 Tax (22,000 – 3,750 (W6)) (18,250) ––––––– Profit for the year 124,750 –––––––


KAPLAN PUBLISHING 7

Statement of financial position for Hao plc as at 31 March 2012

Non-current assets $000

Property (343,000 – 6,000 (dep’n (W2)) 337,000

Plant & equipment (120,000 – 15,000 (dep’n (W2)) 105,000

Equity investment (40,000 + 4,000 (gain on fair value)) 44,000

–––––––

486,000

Current assets Inventory 38,500 Trade receivables 48,000 Bank 12,500

Construction contract – amounts due from customer (W5) 25,000 124,000

–––––– ––––––– 610,000 ––––––– Equity Ordinary shares of $1 each 200,000 Retained earnings (See SOCIE) 278,750 ––––––– 478,750 Non-current liabilities 6% Loan note (W4) 50,500 Deferred tax (W6) 13,750 64,250 –––––– Current liabilities Trade payables 45,000 Taxation 22,000 67,000 –––––– ––––––– 610,000 –––––––

Statement of changes in equity for Hao plc for the year ended 31 March 2012

S.C S.C R.E Total $000 $000 $000 $000 Balances at 1 April 2011 150,000 – 127,000 277,000 Share issue (W7) 50,000 35,000 85,000 Dividend paid (8,000) (8,000) Profit for the year (from SCI) 124,750 124,750 ––––––– ––––––– ––––––– ––––––– Balances at 31 March 2012 200,000 35,000 243,750 478,750 ––––––– ––––––– ––––––– –––––––


8 KAPLAN PUBLISHING

Workings:

(W1) Commission sales

Hao plc has treated the sales it made on behalf of Secured Ltd as its own sales. The advice from the auditors is that these are agency sales. When sales are made as an agent, only the commission is recorded. The principal (Secured Ltd) records the total sale and associated costs. This means $15 million should be removed from revenue and the cost of sales of $11 million and the $2 million ‘share’ of profit to Secured Ltd should also be removed from cost of sales. Hao plc should only record the commission of $2 million as income.

$000 Dr Revenue 15,000 Cr Cost of sales (11,000 + 2,000) 13,000 Cr Revenue (commission element) 2,000

(W2) Depreciation

Building:

403,000 – 163,000 = 6,000 Dr Cost of sales

40 years Cr Accumulated depreciation Plant and equipment:

120,000 × 12.5% = 15,000 Dr Cost of sales Cr Accumulated depreciation

(W3) Cost of sales

$000 Per draft accounts 75,500 Agency sale costs (11,000 + 2,000 (W1)) (13,000)Building depreciation (W2) 6,000 Plant depreciation (W2) 15,000 Construction contract costs (W5) 30,000 ––––––– 113,500 –––––––

(W4) Loan note

Tutorial note: The loan has been in issue for 6 months. The total finance charge should be based on the effective interest rate of 8%. This gives a charge of $2 million ($50 million × 8% × 6/12). As the actual interest paid is $1.5 million an accrual (added to the carrying amount of the loan) of $500,000 is required.

Tutorial tip: You may find an amortised cost table useful:

Year b/f Interest 8% (6 months)

Interest paid 6% (6 months)

c/f

$000 $000 $000 $000

1 50,000 2,000 (1,500) 50,500

(finance costs – in income statement)

(non-current liability in sfp)


KAPLAN PUBLISHING 9

(W5) Construction contract

Expected outcome

$000 Contract price 125,000 Total contract costs (75,000) –––––––– Expected profit 50,000 ––––––––

Stage of completion

Cost basis policy: Costs incurred 35,000 – 5,000 ––––––––––– = ––––––––––– Total costs 75,000 = 40%

Statement of comprehensive income entries:

Revenue (= balance)

50,000 Revenue (125,000 × 40%)

50,000

Cost of sales (35,000 – 5,000 (closing inventory))

(30,000) or Cost of sales (75,000 × 40%)

(30,000)

––––––– ––––––– Gross profit 20,000 Gross profit 20,000 ––––––– –––––––

Statement of financial position entries:

Amount due from customer:

$000 Costs incurred to date 35,000 Profit to date 20,000 Progress billings (30,000) ––––––– Amount due from customer 25,000 –––––––

(W6) Deferred tax

B/fwd 17,500

C/fwd (55,000 × 25%) 13,750 –––––– Reduction in def tax 3,750 Dr Def tax Cr Tax expense

(W7) Share issue

Tutorial note: The share issue has been correctly accounted for so no adjustment to the statement of comprehensive income and statement of financial position is required. However, the share issue will need to be disclosed within the statement of changes in equity (above). The shares have a nominal value of $1 each. At the year end there is $200 million of share capital so there must be 200 million shares in issue. The terms of the rights was one new share for every three so the number of shares that were in issue at 1 April 2011 must have been 150 million (200 million / 4 × 3) meaning that the number of shares issued under the rights was 50 million (200 million – 150 million).


10 KAPLAN PUBLISHING

The issue was for $1.70 per share so the cash received would have been $85 million. We are told that the share issue has been correctly accounted for and the double entry that will have taken place and to be recorded in the statement of changes in equity on 1 February 2012 was:

$000Dr Bank 85,000Cr Share capital (50 million shares × $1) 50,000Cr share premium (50 million shares × 75c) 35,000

Marking scheme

Statement of comprehensive income

Revenue (per draft x ½, commission sales adj x ½ each, construction contract x 1)

Cost of sales (per draft and depreciation balances x ½, other adjustments x 1 each)

Operating expenses

Finance costs

Investment income

Tax (22,000 x ½, deferred tax x 1)

Statement of financial position

Property (per draft ½, depreciation charge x ½)

Plant & equipment (per draft ½, depreciation charge x ½)

Equity investment

Inventory

Trade receivables

Bank

Construction contract (each entry = ½)

Loan note (b/fwd balance x ½, effective rate x 1, interest accrual added x ½)

Deferred tax

Trade payables

Taxation

Statement of changes in equity

Balances b/fwd (opening share capital x 1, opening retained earnings x ½)

Dividend paid

Profit for year

Share issue (share capital x 1, share premium x 1)

Total

Marks

2½

3½

½

1

1

1½

–––

10

–––

1

1

1

½

½

½

1 ½

2

1

½

½

–––

10

–––

1 ½

½

1

2

–––

5

–––

25

–––


KAPLAN PUBLISHING 11

ANSWER 3

(a) Statement of cash flows for the year ended 31 March 2012

$000 $000Cash flows from operating activities:

Profit before tax 1,451 Finance costs 800 Investment income (595) Depreciation 625 Amortisation of government grants (430) Profit on sale of assets (3,700) –––––– (1,849) Increase in inventories (3,875 – 2,720) (1,155) Decrease in receivables (5,135 – 5,610) 475 Increase in payables (4,180 – 3,040) 1,140 –––––– Cash generated from operations (1,389) Interest paid (800) Tax paid (W1) (820) –––––– Net cash from operating activities (3,009)Cash from investing activities: Proceeds from sale of assets (1,300 + 3,700) 5,000 Purchase of plant and equipment (W2) (1,250) Purchase of investments (2,000 – 600 – (595 – 45) gain on re-measurement))

(850)

Dividend income received 45 Receipt of government grants (W3) 600 –––––– Net cash from investing activities 3,545 Cash flows from financing activities: Issue of share capital 100 Issue of interest bearing borrowings (9,200 – 8,300) 900 Dividends paid (200) –––––– Net cash from financing activities 800 –––––– Increase in cash and cash equivalents 1,336 Cash and cash equivalents b/f (1,990 – 560) 1,430 –––––– Cash and cash equivalents c/f (2,991 – 225) 2,766 ––––––



Workings

(W1) Tax paid

Dr Cr $000 $000 b/f (325 + 870) 1,195 Income statement charge 400 Cash paid (bal fig) 820 Def tax charge in OCI 300 c/f (545 + 530) 1,075 –––––– –––––– 1,895 1,895 –––––– ––––––

(W2) Cash paid to acquire new non-current assets

Dr Cr $000 $000 b/f 12,600 Revaluation (700 + 300 def. tax)

1,000 Disposal 1,300

Cash paid for new assets (bal fig)

1,250 Depreciation 625

c/f 12,925 –––––– –––––– 14,850 14,850 –––––– ––––––

(W3) Government grants

Dr Cr $000 $000 b/f (955 + 380) 1,335 Amortisation/credit in income statement

430 New grants (bal fig) 600

c/f (1,055 + 450) 1,505 –––––– –––––– 1,935 1,935 –––––– ––––––



(b) Commentary on financial position of Gardening Toolz plc based on their Statement of Cash Flows for the year ended 31 March 2012

At first glance, the cash position of Gardening Toolz plc looks positive, with an overall increase in cash and cash equivalents of $1,336,000 in the year. The company have reduced their overdraft by $335,000 ($560,000 – $225,000) and their cash and cash equivalent assets have increased by slightly over $1,000,000.

Looking at the statement of cash flows in more detail however, much of this improvement is due to the sale of assets generating $5,000,000. The problem with this is that this is a non-recurring cash flow and so next year’s closing cash position is unlikely to look as healthy. The proceeds of the sale have not been reinvested.

There is a significant outflow from operating activities, despite a profit before tax of $1,451,000 being reported in the income statement. Again, the key reason for the profit is the disposal of the assets. If this profit were removed then the company would be showing a loss before tax of $2,249,000 ($1,451,000 – $3,700,000) and therefore the company’s day to day operations are not profitable.

It is not clear why the entity have disposed of the assets in the year and, although they have purchased further plant and equipment in the year, they have not re-invested all of the proceeds. They have also financed $600,000 of their purchases via government grants resulting in only a net spend of $650,000 on new assets. This could indicate a change in nature of the business or perhaps a down-sizing of the operations.

Looking at the movements in working capital, there has been a reduction in receivables and this could be due to an improvement in credit control, contributing to the overall improvement in the cash position. However, it could also be due to a reduction in sales which could again indicate a down-sizing of activities.

There is a significant increase in inventories which could indicate obsolete stock at the year end. On a more positive note, the inventory could have been increased at the year-end in anticipation of post year end demand which could further indicate a change in nature/products.

The significant increase in payables is worrying. Although it improves cash balances it would indicate that the company are struggling to pay their suppliers and this could have a further negative impact in the future as the company may struggle to obtain credit terms with new suppliers.

The entity has invested a further $850,000 in financial assets in the year. Given the gain on re-measurement reported in the income statement it is not surprising as the value of their investments have increased by $550,000. Having said that, financial assets are volatile in nature and therefore the entity should not rely on this too much as a way of increasing profits.

The company have raised $100,000 via an equity share issue during the year and have also raised $900,000 in loan finance. This is likely to increase the gearing ratio and may make it more difficult for the entity to raise further debt finance in the future.

In summary, the increase in cash reflected on the statement of financial position masks a number of worrying issues that the statement of cash flows highlights more clearly. This serves as an illustration of the importance of this statement to the users of financial statements.



Marking scheme

Statement of cash flows

Profit before tax

Adjustments for:

Finance cost

Investment income

Depreciation

Amortisation

Profit on disposal of assets

Changes in working capital

Interest paid

Tax paid

Proceeds from disposal of asset

Purchase of PPE

Purchase of investments

Dividend income

Receipt of government grant

Issue of shares

Issue of interest bearing borrowings

Dividends paid

Reconciliation of cash

General commentary

One mark per relevant comment Max of

Total

Marks

½

½

½

½

½

½

1 ½

½

2

1

2

1½

½

1

1

½

½

1 ––

16

––

9 –––

25 –––

ANSWER 4

(a) The IASB’s Conceptual Framework defines an asset as a “resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity”. The finance assistant’s understanding of non-current assets is substantially incorrect. The term non-current assets will normally include intangible assets and certain investments; the term is not restricted to tangible assets only. The definition of an asset from the IASB’s Conceptual Framework means that it is no longer essential that an asset is owned by an entity to be recognised in the statement of financial position. The definition indicates that it is the ability to ‘control’ assets (including preventing others from having access to them) that is the defining feature. For example: this is an important characteristic in treating a finance lease as an asset of the lessee rather than the lessor. The finance assistant is incorrect in saying that all assets should be depreciated. IAS 16 Property, Plant and Equipment states that land (in most instances) has an unlimited useful economic life and therefore is not depreciated. It is also not appropriate to apply the same depreciation rate to all assets. IAS 16 Property, Plant and Equipment states that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The depreciation method used should reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity (i.e. depreciate in accordance with the useful economic life of the asset).



(b) Statement of comprehensive income 31 March 2012

$ Depreciation (W1) 11,600Profit on disposal of building (W2) 30,000

Statement of financial position 31 March 2012

$ Non-current assets: Property (400,000 – 11,600 (W1)) 388,400Equity: Revaluation reserve (120,000 – 80,000 (W3)) 40,000Retained earnings (increased by 80,000 (W3)) 80,000

Workings:

(W1) Depreciation

$ Heating system ($40,000 / 10 years) 4,000Lifts ($60,000 / 50,000 hours × 3,000 hours) 3,600Building ($200,000 / 50 years) 4,000 ––––––– 11,600 –––––––

Tutorial note: This is an example of a complex asset (one asset that has many component parts). Each component must be depreciated separately in accordance with its useful economic life.

(W2) Profit on disposal of building

$ Carrying value 160,000Disposal proceeds 190,000 –––––––Profit on disposal 30,000 –––––––

Tutorial note: It is not appropriate to calculate a profit on the disposal of a non-current asset by comparing the cost to the disposal proceeds. To determine a profit or loss on disposal, the carrying value of an asset must be compared to the disposal proceeds. If the disposal proceeds are greater than the carrying value then a profit on disposal has occurred. If the proceeds are less than the carrying value of an asset then a loss on disposal has arisen.

(W3) Revaluation transfer

$ Dr Revaluation reserve 80,000Cr Retained earnings 80,000

Tutorial note: When an asset that has previously been revalued is subsequently disposed of, any surplus balance remaining in the revaluation reserve must be transferred to retained earnings (the previously unrealised gain has now become realised on the disposal of the asset).



(c) Investment property

(i) An investment property is property held to earn rentals or for capital appreciation or both. Properties cannot be recognised as investment property if they are used in the production or supply of goods or services or for administrative purposes. Therefore, owner occupied property cannot be investment property.

(ii) Year ended 31 March 2011

Under the fair value model, a gain of $500,000 would be recognised in the profit for the year ended 31 March 2011, being the increase in fair value from $5 million to $5.5 million by the end of the period.

If the investment property were accounted for under the cost model then a depreciation charge of $50,000 ($5 million / 50 years × 6/12) would be made to profit, therefore profit is $550,000 higher in the year ended 31 March 2011 under the fair value model.

Year ended 31 March 2012

The fair value model in this period would result in a lower profit by $600,000. This is the difference between the depreciation charge of $100,000 ($5 million / 50 years) that would be charged under the cost model and the loss of $700,000 ($5.5 million – $4.8 million) that would be charged using the fair value model.

Marking scheme (a) Definition

One mark per valid, well explained point See suggested relevant points in answer above.

(b) SCI extract: Depreciation expense (½ each) Profit on disposal SFP extract: Property (½ cost, ½ accumulated depreciation) Revaluation reserve Retained earnings increase

(c) (i) Definition ½ per valid point

(ii) 2011: Carrying value cost method Carrying value fair value method Difference in profit 2012: Carrying value cost method Carrying value fair value method Difference in profit

Total

Marks 1

Max 4 –––

5 –––

1 ½ 1 ½ 1 ½ ½

––– 5

––– 1

Max 1 –––

2 ½ ½ ½ ½ ½ ½

––– 3

––– 15

–––



ANSWER 5

(a) IAS 10 Events after the reporting date

IAS 10 states that events after the reporting date are ‘those events, favourable and unfavourable, that occur between the reporting date and the date when the financial statements are authorised for issue’.

‘Adjusting events’ are those events that provide additional evidence of conditions that existed at the reporting date’. ‘Non-adjusting events’ are those events that are indicative of conditions that arose after the reporting date.

(b) Inventory

It would appear that inventory was correctly valued at cost at the year-end as evidence in the post-reporting period is that the selling price was greater than the product cost. However 8,000 jars of Balti paste remained in inventory on 16 June 2012 when the announcement by the food standards agency was made.

These jars are now considered to be worthless and will need to be written off in the financial statements (Dr closing inventory – I/S $22,000 Cr closing inventory – SFP $22,000). As the condition existed at the reporting date (the paste was not fit for consumption) this is considered to be an adjusting event per IAS 10 and the March 2012 accounts will need to reflect this.

Shampan must now also consider the legal position following the announcement. There is a potential liability that may occur should customers try to obtain a refund/sue for damages. Should this be the case the recognition criteria per IAS 37 will need to be assessed. It is unlikely that the information about potential refunds/compensation will be available before the financial statements are finalised. Therefore the liability is considered to be only possible and a contingent liability should be disclosed in a note to the financial statements.

Similarly there is the potential for a future asset should Shampan try to obtain a refund from their supplier of the ingredient. Again it is likely that this is only possible (as insufficient information exists) and therefore in accordance with IAS 37 Shampan should do nothing to reflect this in the financial statements.

Finally, Shampan should consider the overall effect that the withdrawn ingredient is going to have on its continuing business and whether the going concern status will be affected.

Fire

The losses that arose from the fire on the company’s premises on 13 April 2012 constitute a ‘non-adjusting’ event. The condition did not exist at the reporting date, but came into existence after that date. No adjustment is required for the event as the conditions did not exist at the reporting date. However, as the event is considered to be material, non-disclosure could influence the economic decisions of users taken on the basis of the financial statements. Therefore the entity should disclose the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, by way of a note to the accounts.



Marking scheme

(a) Events after the reporting date discussion

Definition

Adjusting events definition

Non-adjusting events definition

(b) Inventory

Adjusting event

Inventory write down

Contingent liability

Potential asset

Fire

Non-adjusting event

Disclosure:

Nature of event

Estimate of financial effect

Total

Marks

1

1

1

––

3

––

1

1

1

1

1

1

1

––

7

––

10

––

acca f7 int revision mock - answers j12

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