acca p2 int revision mock - questions j12

ACCA REVISION MOCK

Corporate Reporting (INT)

June 2012

Time allowed

Reading time: 15 minutes

Writing time: 3 hours

This paper is divided into two sections

Section A ONE compulsory question

Section B TWO questions ONLY to be attempted

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination hall

Kaplan Publishing/Kaplan Financial

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ACCA P2 ( INT): CORPORATE REPORTING

2 KAPLAN PUBLISHING

© Kaplan Financial Limited, 2012

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.

REVIS ION MOCK: QUESTIONS

KAPLAN PUBLISHING 3

SECTION A

This question is compulsory and MUST be answered

QUESTION 1 – JOBS GROUP

The statements of financial position of Jobs and its two subsidiaries, Zuckerberg and Gates, at 31 May 2012 are given below:

Jobs Zuckerberg Gates $000 $000 $000 $000 $000 $000

Non-current assets Property, Plant & Equipment Investments

117,250173,000

–––––––

290,250 55,125 15,000–––––

70,125

40,000 ––––––

40,000

Current assets 109,750 96,000 56,000 ––––––– ––––––– ––––––– 400,000 166,125 96,000 ––––––– ––––––– –––––––Equity Share capital ($1 shares) Retained earnings

120,000

99,500–––––––219,500

100,000

36,000 ––––––– 136,000

22,00018,000

–––––––40,000

Non-current liabilities Long-term loans Current liabilities

100,00080,500

–––––––400,000–––––––

– 30,125

––––––– 166,125 –––––––

26,00030,000

–––––––96,000

–––––––

Notes to the financial statements

(1) Jobs purchased 60 million shares in Zuckerberg on 1 February 2012, when the retained earnings of Zuckerberg were $23 million, paying cash of $142 million. At that date Zuckerberg had property with a carrying value of $13 million and a fair value of $16 million. The estimated remaining life of the property at 1 February 2012 was 20 years. This valuation has not been incorporated into the financial statements of Zuckerberg. Zuckerberg has a policy of not time apportioning depreciation charges. There were no other material differences between carrying value and fair value of the various net assets at 1 February 2012. It is group accounting policy to account for the non controlling interest at fair value for all subsidiaries. At 1 February 2012, the share price of Zuckerberg shares was $1.95 and this is the basis on which the fair value of the non controlling interest is to be determined.

Zuckerberg is regarded as a separate cash generating unit and, at the annual impairment review of goodwill at 31 May 2012, the unit’s recoverable amount was $226.35 million.


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Zuckerberg's investments partly comprise an investment in Gates and partly other investments. On 1 February 2012 Zuckerberg acquired 5.5 million of Gates’s shares for cash consideration of $12.5 million. Zuckerberg's other investments held at 31 May 2012 are financial assets recently acquired that are classified as Fair Value Through Profit or Loss. They are carried at their cost of $2.5 million and their fair value at the reporting date is now $6 million.

On 31 May 2012, after the year end impairment review, Jobs sold 5 million shares in Zuckerberg for cash proceeds of $16 million. The proceeds have been credited to profit or loss and accounted for as a gain.

(2) On 1 February 2012, Jobs purchased 6.6 million of Gates’s $1 equity shares for a cash consideration of $31 million. A fair-value exercise was carried out, and all of the net identifiable assets of Gates at 1 February 2012 had a fair value that was equal to their carrying values in the statement of financial position. During the year ended 31 May 2012, Gates made a profit after taxation of $3 million and paid no dividends. This profit accrued evenly over the year. The fair value of the non-controlling interest at the date of acquisition in Gates (both direct and indirect) was $31.125 million.

Gates is correctly regarded as a subsidiary of the Jobs group and as separate cash generating unit. Following the annual impairment review at 31 May 2012 an impairment loss of $8 million arose in respect of the goodwill.

Gates supplies a key component to both Zuckerberg and Jobs on a regular basis at a mark up of 20%. $3.9 million remained in their inventory at 31 May 2012, all of which were purchased during the last two months of the accounting period.

(3) Included in the non-current liabilities of Jobs are $20 million 6% four year loan notes that were issued on the first day of the current accounting period. The loan notes were issued at a discount of 10%, and will be redeemed three years after issue at a premium of $1,015,000. The effective rate of interest is 12%. The issue costs were $1 million. The only accounting entry made to date has been to recognise the liability at $20 million, to record the issue costs and discount on issue as losses in income and to charge income with the interest paid.

(4) Six months prior to the year-end, Jobs issued 10 million options to a new member of the board as part of her remuneration package. Under the terms of the options, three years after the date of issue the options will vest and enable the director to subscribe for shares at an exercise price of $5. At the grant date the share price was $5 thus initially the options had no intrinsic value. At the year-end the share price has risen to $7 so it is acknowledged that the options now have an intrinsic value of $2 each. However, as they are personal to the director and will only vest if she remains employed with the company until the vesting date, the options cannot be traded and so have no market value. An actuary has valued the options at $3 each at the grant date and $3.50 each at the year-end. To date no accounting entry has been made in respect of the options. The deferred tax implications can be ignored.

(5) Jobs is risk adverse and has an active treasury department that will enter into derivatives. During the accounting period Jobs identified the need to undertake a major capital expenditure project in two to three years time. The major suppliers of the plant are all located overseas and will invoice in their functional currency of the Dinar. Jobs therefore entered into certain foreign currency derivative contracts to hedge against the risk that the cost of buying Dinars will rise in the intervening period. The auditors have confirmed that the relevant hedge conditions have been met. There were only immaterial transaction costs incurred when the derivatives were entered into, but due to movements in the foreign currency exchange rates at the year-end these derivatives have a positive value of $10 million which represents both an asset and a gain. No entry has been made to date in the financial statements in this regard.


KAPLAN PUBLISHING 5

Required:

(a) Prepare the consolidated statement of financial position for the Jobs group at 31 May 2012. (35 marks)

(b) Discuss the contents of IFRS10 Consolidated Financial statements regarding the concept of control with regard to investments and the preparation of group accounts. (6 marks)

The Jobs group is considering diversifying its activities and establishing a new entity "Berners-Lee" that will be primarily debt financed. Berners-Lee will issue the debt instruments to finance the new project and Jobs will not subscribe to or guarantee these bonds. Jobs has been advised only to issue a minimum amount of equity shares in Berners-Lee and to only subscribe to 10% of the number of shares issued. The shares that Jobs will hold will have weighted voting rights such that Jobs will be able to exercise 25% of the votes of Berners-Lee. In addition Berners-Lee will issue share options to Jobs that will be exercisable at any time over the next three years. In three years time it should be clear whether the project will have been successful. The options are not issued at fair value and the exercise price of these options is a nominal sum. Jobs has been advised that if it exercises the options, it will then hold both a majority of the equity shares and a majority of the voting rights and as such Berners-Lee will become a subsidiary that will require consolidation in the Jobs group accounts. For the first three years, the Jobs group intends for the first three years to carry the equity investment in Berners-Lee as an associate.

(c) Discuss the accounting and ethical issues arising out of the Jobs's proposals for establishing and accounting for Berners-Lee as set out above. (7 marks)

NB there are two professional marks available for the quality of the discussion (2 marks)

(Total: 50 marks)


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SECTION B

TWO questions ONLY to be attempted

QUESTION 2 – MAGNOLIA

Magnolia provides a range of information technology services to domestic and commercial users and is currently preparing annual financial statements for the year ended 30 April 2012. There are several issues outstanding as follows:

(a) On 1 August 2011 Magnolia sold a standard package of services to a number of major customers comprising a standard three-year contract to provide information technology services at a total fixed price of $30 million. At that date a total profit of $12 million was expected to be made on the contracts, with revenue and costs presumed to accrue evenly over the three-year term. Recently, complaints have been received from some of the customers regarding the reliability and quality of the service provision, with the consequence that the end outcome of the contracts is no longer certain. The directors of Magnolia believe that the costs incurred to date can be recovered, but are unsure how to deal with the revenue, costs and profit in the financial statements. (5 marks)

(b) On 1 May 2011, as part of a marketing strategy, Magnolia sold twelve packages comprising hardware plus two-year provision of support services at a total price of $500,000 per package. The normal selling prices of the separate elements of the package are hardware at $360,000 and support services at $240,000. As part of the arrangement, the hardware was delivered immediately. Magnolia is unsure how to treat the revenue and costs associated with these transactions in the financial statements. (6 marks)

(c) Magnolia has been pursuing a strategy of growth and expansion, led principally by entry into new geographical markets. On 1 May 2010 Magnolia purchased a licence from the industry regulator at a cost of $20 million to permit them to provide their services to businesses over a ten-year period commencing 1 May 2010. Due to regulatory and commercial problems which prevented the launch of their services during the year to 30 April 2011, service provision commenced during the year to 30 April 2012, but at a much lower level than initially forecast. At 30 April 2012, revised forecasts for this activity indicate that there will be an annual revenue stream of $3 million for the remaining licence period. On 30 April 2012, Magnolia received an offer from a competitor to buy the licence for $18 million. If the licence is sold, Magnolia will need to pay associated regulatory and transactions costs of $1 million.Magnolia is unsure how to deal with this information for inclusion in the financial statements and considers that a discount rate of 8% is appropriate for any relevant calculations. (8 marks)

Note: 8% annuity factors are as follows:

7 years 5.206 8 years 5.746 9 years 6.246 10 years 6.710


KAPLAN PUBLISHING 7

(d) Magnolia entered into a contract with two other entities, Undercoat and Matt, to set up a separate entity, Gloss, to provide specialist technology support services to the financial services sector. They have agreed to hold an equal shareholding in Gloss and have also agreed that they will work on a cooperative basis together, so that no individual shareholder or pair of shareholders will deliberately exclude any other(s) from key operating and financial policy decisions made in respect of Gloss. The directors of Magnolia are unsure how this arrangement should be accounted for in the financial statements.

(4 marks)

Required:

Advise the Directors of Magnolia how the various issues noted above should be accounted for in the financial statements for the year ended 30 April 2012.

Professional marks for appropriate quality of presentation. (2 marks)

(Total: 25 marks)

QUESTION 3 – RANGERSTAX

Rangerstax is currently preparing annual financial statements for the year ended 31 March 2012. The draft statement of comprehensive income currently identifies profit before tax of $5,000,000. The deferred tax provision brought forward from 31 March 2011 was $535,000 and the rate of income tax is 30%. There are several matters outstanding as follows:

(a) During the year to 31 March 2012, Rangerstax revalued some land which is accounted for in accordance with IAS 16 Property, Plant and Equipment. The land had a carrying value, stated at historical cost, of $800,000 and has been revalued to $1,000,000 on the basis that the land may be used as a site for construction of residential properties. No entries have been made to reflect this revaluation. In addition, at 31 March 2012 Rangerstax had plant and equipment with a carrying value of $5,000,000 and a tax base of $3,600,000. Depreciation for the year on these assets has already been charged in the financial statements. (4 marks)

(b) Rangerstax operates a defined contribution retirement benefit scheme on behalf of its employees. The contributions payable are 6% of the total payroll costs. The company pays a regular monthly contribution of $60,000, and pays any balance due in the first month of the following year. For the year ended 31 March 2012, the total payroll costs were $13,000,000. The opening accrual and monthly payments on account have been accounted for correctly. The tax authorities provide tax relief for pension contributions on a cash basis. (5 marks)

(c) Rangerstax leases certain assets, rather than purchase them outright. One asset subject to a leasing agreement was leased on the 1 April 2011 on a five-year lease. The asset has an estimated useful life of eight years. Under the terms of the lease the first year payment was $30,000; thereafter it will be $10,000 for the remaining years. The company has charged income with $30,000. The tax authorities provide tax relief on such lease agreements on a cash basis. (5 marks)

(d) Rangerstax made a four-year loan to a customer on 1 April 2009 which complied with the requirements to recognise and measure this financial asset at amortised cost in accordance with IFRS 9. The loan was for $20,000 with 8% interest being payable annually in arrears; the effective rate of interest was also 8%. Interest for the year ended 31 March 2012 has been received but Rangerstax now expects to receive only $15,000 in full settlement of all amounts due in one years time. No entries have been made to reflect any impairment. Impairment losses are not allowable for tax purposes in the current year, only upon confirmation of non-receipt of amounts due at the agreed loan maturity date. (4 marks)


8 KAPLAN PUBLISHING

(e) In an attempt to reduce staff turnover and increase employee commitment, Rangerstax introduced a share-option scheme on 1 April 2010. At that date, Rangerstax had 900 employees and the fair value of each option was assessed at $4, with 40 employees expected to leave each year. The share option scheme has a three-year vesting period and each employee was provisionally allocated 50 share options. At the vesting date, those employees still eligible to receive the share options would be able to exercise them at a price of $6.50 each.

Reporting date Fair value of option

Fair value of share

Estimated leavers during

the year

Actual leavers during the year

31 March 2011 $5.00 $7.50 20 17 31 March 2012 $5.50 $9.50 35 32 31 March 2013 $7.00 (estimated) 10

The accounting for the first year of the scheme was correctly done but no accounting entries have been made in respect of the year to 31 March 2012. The tax authorities provide tax relief based upon the intrinsic value of the shares. (5 marks)

Required:

For each of the issues noted above:

(i) calculate and explain any accounting adjustments required, summarising any changes to the draft profit before tax of $5,000,000, and

(ii) calculate and explain the deferred tax provision at 31 March 2012.


(Total: 25 marks)

QUESTION 4 – CURRENT ISSUE

IFRS 13 Fair Value Measurement was issued by the IASB in May 2011. The standard defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements.

Required:

(a) Discuss to what extent the introduction of IFRS 13 Fair Value Measurement will change financial reporting and why the standard was introduced. (6 marks)

(b) Discuss how fair value is to be measured in accordance with IFRS 13 Fair Value Measurement. (7 marks)

An entity purchases an equity investment for cash consideration of $100,000. The asset has a fair value at the date of the transaction of $120,000. This financial asset is classified and will be accounted as fair value through profit and loss.

Required:

(c) Explain the accounting treatment of the transaction and give two examples of circumstances where an entity may be able to acquire financial assets for less than fair value. (4 marks)


KAPLAN PUBLISHING 9

An entity anticipates that it will be able to sell an asset in two years time for $200,000 and wishes to borrow secured against that future cash inflow. The borrowing will be in the form of a $200,000 zero coupon bond issued on the first day of the accounting period at a discount and redeemable at par two years later. Interest rates on such borrowings are normally 8%, but the entity has a poor credit rating and will have a finance cost of 12% on this loan. This financial liability is classified and will be accounted at fair value through profit or loss. One year after the loan was taken out whilst general interest rates remain stable the credit rating of the company has deteriorated such that the entity's borrowing costs on similar secured loans have risen to 15%.

Required:

(d) Explain how the fair value of the loan is measured at initial measurement and at the first reporting date and how the gain or loss arising on the remeasurement is accounted for.

(6 marks)


(Total 25 marks)

Extract from present value tables

Year 1 Year 28% 0.926 0.857 12% 0.893 0.797 15% 0.870 0.756


10 KAPLAN PUBLISHING

acca p2 int revision mock - questions j12

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