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ACCA Paper P2 (INT) Corporate Reporting June 2011

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.

PAPER P2 (INT) : CORPORATE REPORTING

Kaplan Financial Limited, 2011 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. 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.

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KAPLAN PUBLISHING

REVISION MOCK : QUESTIONS

ANSWER 1 LAHORE GROUP(a) Consolidated statement of financial position at 31 May 2011 $000 Non-current assets Tangible assets (117,250 + 55,125 + 40,000 + 3,000 150(FVA) Investments (173 + 15 142 12.5, 31 + 3.5(FV re fin assets) Intangible assets - Goodwill (84,000 + 22,625)(W3) $000 215,225 6,000 106,625 327,850 Current assets Inventories (65,342 + 51,136+ 31,000 650 (W7)) Receivables (33,297 + 39,288+ 23,000 20,000) (W8) Cash and cash equivalents (10,361 + 5,576 + 2,000 + 1,000(W8)) 146,828 75,585 18,937 241,350 569,200 Equity attributable to equity holders of the parent Share capital (W10 ) (120,000 20,000) Other Components of Equity (W11) Retained earnings (W5) 100,000 (5,000) 103,448 198,448 102,177 300,625 149,000 700 2 1 1 1 5 2 1 1 Marks 2 1 4

Non-controlling interest (W4) Total equity of the group Non-current liabilities Long-term loans (100,000 + 26,000) + 20,000 (W10) + 3,000 (W11) Deferred tax (20% 3,500) Current liabilities Trade payables (25,100+ 18,100+ 13,000 19,000 (W8) 2,000 (W9)) Taxation (9,150 + 5,025 + 3,000) Bank overdraft (45,500 + 7,000 + 14,000)

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35,200 17,175 66,500 118,875 569,200

2 1 1

30 5 35

Net assets marks per workings

KAPLAN PUBLISHING

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PAPER P2 (INT) : CORPORATE REPORTING

Workings (W1) Group structureLahore 60,000 100,000 60% 1/2/11 Barcelona 5,500 22,000 25% 1/2/11 Kunming

6,600 22,000 30% 1/2/11

Lahore's effective group interest in Kunming's profits Direct 30% Indirect (60% 25%) 15% 45% Kunming: effective NCI (bal fig) 55% (W2) Net assets workings Barcelona Equity capital Retained earnings FVA property FVA Depn (1/20) Financial assets at FV (6.0 2.5) Deferred tax (20% 3,500) At acquisition $000 100,000 23,000 3,000

sub from 1.2.11

126,000

At rep date $000 100,000 36,000 3,000 (150) 3,500 (700) 141,650

Marks

0.5 0.5 1 1

The post acquisition profit of Barcelona is ($141,650 $126,000) = $15,650 Kunming At rep date $000 Equity capital 22,000 Retained earnings (W6) 18,000 Inventory URP (W7) (650) 39,000 39,350 The post acquisition profit of Kunming is ($39,350 $39,000) = $350 At acquisition $000 22,000 17,000 Marks

1 1

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KAPLAN PUBLISHING

REVISION MOCK : QUESTIONS

(W3) Goodwill Barcelona Cost of investment FV of NCI at acquisition $000 142,000 78,000 220,000 (126,000) 94,000 (10,000) 84,000 $000 12,500 (5,000) 31,000 31,125 69,625 (39,000) 30,625 (8,000) 22,625 Marks 0.5 0.5

Less: FV of NA at acquisition (W2) Goodwill at acquisition Less impairment loss To the S of FP

0.5

Kunming (part of Lahore group from 01/02/10) Indirect investment incurred by Barcelona Less the indirect holding adjustment (40% 12,500) to NCI Cost incurred directly by Lahore FV of NCI (direct and indirect)

Marks 1 0.5 0.5

Less: FV of NA at acquisition (W2) Goodwill at acquisition Less impairment loss To the S of FP (W4) Non-controlling interest Barcelona: FV of NCI at acquisition Plus NCI % of the post acq profits 40% (15,650) less NCI % of the impairment loss (40% 10,000) Kunming: FV of NCI at acquisition Plus NCI % of the post acq profits 55% (39,350 39,000) less NCI % of the impairment loss (55% 8,000) Less NCI % indirect holding adjustment regarding the cost of investment by Barcelona in Kunming (40% 12,500)

0.5

$000 78,000 6,260 (4,000) 31,125 192 (4,400) (5,000) 102,177

Marks 0.5 1 0.5 0.5 1 0.5 1 5

KAPLAN PUBLISHING

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PAPER P2 (INT) : CORPORATE REPORTING

(W5) Retained earnings Lahore Plus correction pension (W11) Disallowed provision added back (W9) Barcelona (60% 15,650) (W2) Less impairment loss (60% 10,000) Kunming (45% 350) (W2) Less impairment loss (45% 8,000) $000 99,500 2,000 2,000 9,390 (6,000) 158 (3,600) 103,448 $000 17,000 1,000 18,000 Marks 0.5 1 1 1

1 0.5 ----5

(W6) Retained earnings of Kunming at 1 February 2011 Retained earnings at 1 Feb 2011 (balance) Post acquisition profit (4/12 3,000) Retained earnings at 31 May 2011 (W7) Unrealised profit in inventory Kunming is the seller and is a subsidiary so the adjustment is made against Kunming's post acquisition profits in w2 at year end to ensure that the adjustment will impact the NCI. $000 $3,900 20/120 = 650 An alternative presentation that achieves the same overall result would be instead to exclude this amount from the net assets working of Kunming and split the purp between the retained earnings and the NCI on a 45% & 55% basis and include those amounts in (W5) and (W4) respectively. (W8) Intercompany balances Dr Trade payables (11,000 + 8,000) Cr Trade receivables (11,000 + 9,000) Cr Bank (balance) (W9) Disallowed provision $000 19,000 20,000 1,000

There is no indication that there is either a legal or constructive obligation for Lahore to undertake the rationalisation of the group. Whilst this may be a business or commercial priority, there is no legal or constructive obligation at the reporting date to incur these costs. Consequently, IAS 37 forbids such a provision. Trade payables and retained earnings are therefore adjusted by $2 million. (W10) Redeemable shares The shares held by the directors are redeemable shares. As such they do not meet the criteria of being classified as equity. Redeemable shares should be classifies as debt. Equity share capital and Non-current liabilities are therefore adjusted by $20 million.

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KAPLAN PUBLISHING

REVISION MOCK : QUESTIONS

(W11) Defined Benefit Pension scheme. The $11 million paid is not the expense rather it creates a pension fund asset, The expense to be charged to profit and hence retained earnings is the current service cost of $9 million, thus a net adjustment of $2 million being added back to retained earnings is appropriate. The deficit under the pension scheme represents a non current liability that had not being previously recognised. There is no actuarial gain or loss in respect of the pension fund assets but as the scheme has a deficit of $3 million when one expected a surplus of $2 million ($11 million less $9 million) then a actuarial loss has arisen of $ 5 million. This creates the negative other components of equity. Dr Other components of equity actuarial loss Cr Retained earnings correction Cr Noncurrent liabilities deficit (b) $5 million $2 million $3 million

Whilst each of the three transactions may be considered to be not material, based upon the limited information available, all three transactions have an impact upon the reported performance and position of the group at 31 May 2011. IAS 21 requires that unsettled monetary items are retranslated at the reporting date using the exchange rate at that date. This will result in an exchange gain or loss on retranslations which is taken to income for the year ended 31 May 2011 as follows: At initial recognition of the Euro-denominated payable, it would be stated at (Euro 3,000 / 1.6) $1,875. At the reporting date, using the exchange rate at that date, the payable would be restated to (Euro 3,000 / 1.5) $2,000. There is an exchange loss of $125 as the dollar value of the payable is greater than initially recorded and this loss should be taken to income for the year. The subsequent settlement of the liability after the reporting date is not relevant for the financial statements for the year ended 31 May 2011; it is a non-adjusting event per IAS 10. The dollar cost of (Euro 3,000/1.7) of $1,765, giving rise to an exchange gain of $235 on settlement is accounted for in the financial statements to 31 May 2012. IAS 23 requires that borrowing costs are capitalised if they are incurred during the construction or purchase of a non-current asset. If they have been written off as finance costs during the year, the consequence is that the profit or loss for the year is understated by $10,000, and that the carrying value of non-current assets is understated by the same amount. There is also likely to be incorrect analysis within the statement of cash flows as the finance costs paid should be classified as interest paid, rather than as additions to non-current assets. The treatment of lease payments inappropriately gives rise to several misstatements as follows: Operating lease rental charges are overstated, leading to a reduction in the reported profit of the year. Finance lease assets have been omitted from the statement of financial position, which will understate the carrying value of assets. There will also be omission of dep

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