p1 - corporate reporting april 09(1)

8/6/2019 P1 - Corporate Reporting April 09(1)

1/21

CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION - APRIL 2009

NOTES:You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.(If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through theanswer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

Note: Students have optional use of the Extended Trial Balance, which if used,must be included in the answer booklet.

PRO-FORMA INCOME STATEMENT BY NATURE, INCOME STATEMENT BY FUNCTIONAND BALANCE SHEET ARE PROVIDED

TIME ALLOWED:3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:During the reading time you may write notes on the examination paper but you may not commence

writing in your answer book. Please read each Question carefully.

Marks for each question are shown. The pass mark required is 50% in total over the whole paper.

Start your answer to each question on a new page.

You are reminded that candidates are expected to pay particular attention to their communication skills

and care must be taken regarding the format and literacy of the solutions. The marking system will take

into account the content of the candidates' answers and the extent to which answers are supported with

relevant legislation, case law or examples where appropriate.

List on the cover of each answer booklet, in the space provided, the number of each question(s)

attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.


2/21

Page 1

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTINGPROFESSIONAL 1 EXAMINATION APRIL 2009

Time allowed 3.5 hours, plus 10 minutes to read the paper.You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.

(If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through theanswer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

You are required to answer Questions 1, 2 and 3.

1. Green PLC prepares its financial statements to 31 December each year. Green PLC has investments in twocompanies, Blue Ltd and Red Ltd.

Extracts from the draft financial statements of the three companies for the year ended 31 December 2008 areshown below:

Draft Income Statements

Green PLC Blue Ltd Red Ltd000 000 000

Revenue 25,900 14,400 6,800Cost of sales (19,500) (10,256) (3,400)Gross profit 6,400 4,144 3,400Operating expenses (2,995) (1,036) (1,260)Operating profit 3,405 3,108 2,140Interest payable and similar charges (120) (30) (20)Investment income 350 - -

Profit on ordinary activities before tax 3,635 3,078 2,120Income tax expense (890) (770) (530)Profit on ordinary activities after tax 2,745 2,308 1,590

Extract from Draft Statement of Changes in Equity (retained earnings)

Green PLC Blue Ltd Red Ltd000 000 000

Net profit for period 2,745 2,308 1,590Dividends on ordinary shares (1,200) (300) -

1,545 2,008 1,590Balance brought forward 2,000 2,000 3,800Balance carried forward 3,545 4,008 5,390

Additional Information:

1. Green PLC acquired 75% of the 1 ordinary shares in Blue Ltd on 1 January 2005. At that date the balance onBlue Ltds retained earnings was 1 million credit and its share capital was 2million. On 1 January 2008, GreenPLC acquired 60% of the ordinary 1 shares in Red Ltd for 9m. At that date the balance on retained earningsof Red Ltd were 3.8 miilion credit and its issue shared capital was 3 million.

2. Green PLC charges Blue Ltd an annual fee of 15,000 for management services. This has been recognised byGreen PLC in investment income.

3. Green PLC has recognised its dividend received from Blue Ltd in investment income.

4. Green PLC disposed of its entire share holding of Red Ltd for

8 million on 3o June 2008. No entries have beenmade in the accounts of Green PLC for this disposal. Profits in Red Ltd have accrued evenly throughout the year.


3/21

Page 2

5. Details of intra-group trading are as follows:

Sales by Green PLC to Blue Ltd 2,590,000Costs to Blue Ltd of inventory items purchased from Green PLC

At 31 December 2007 288,000At 31 December 2008 576,000

Green PLC has a standard mark-up on cost of 20% for sales to Blue Ltd.

6. During the acquisition process, the management of Green PLC identified a number of intangibles which were notrecognised in the financial statements of Blue Ltd. The fair value of these was measured reliably at 200,000.The useful life of these intangible assets was estimated at 20 years. In addition, the fair value of equipment ofBlue Ltd was 400,000 in excess of its carrying value at the date of acquisition. The remaining useful life of theequipment was assessed at five years from that date. No other fair value adjustments were identified.

7. Blue Ltd has two contracts in progress at 31 December 2008 and the entries for 2008 have not yet been includedin the draft income statement. Blue Ltd has a policy of recognising profit on contracts once the contracts havereached a minimum of 25% completion. Contract XY commenced during 2007 and at 31 December 2007 was50% complete with appropriate revenue and profits included in 2007. Contract WT commenced on 1 January2008. Contract details are as follows:

Contract XY WT000 000

Total contract value 40,000 60,000Costs incurred to date 22,000 10,000Estimated cost to completion 8,000 28,000Completion 75% 15%Progress payment received 18,000 7,000(Assume no change in taxation)

REQUIREMENTS:

(a) Prepare the consolidated income statement of Green Group PLC for the year ended 31 December 2008 in a form

suitable for publication.

Note: You should assume that the disposal of Red Ltd constitutes a discontinued operation in accordance withIFRS 5 Non-current Assets Held for Sale and Discontinued Operations.

(20 Marks)Presentation (1 Mark)

(b) Explain the purpose of group financial statements and the concepts underlying their preparation. (6 Marks)

(c) Outline the implications for Green PLC under IFRS 3, assuming that on the acquisition of Blue Ltd, it pays lessthan the fair value of the net assets.

(3 Marks)

[TOTAL : 30 MARKS]


4/21

Page 3

2. The trial balance of Pulsar Ltd as at 30 November 2008 is as follows:000 000

Revenue 1,520Purchases 850Returns outwards 31Debenture interest paid 1Royalties earned 15Administrative salaries 149Operating lease rentals 5

General administrative expenses 19Selling and marketing costs 10Advertising 60Development expenditure capitalised 60Freehold Land and buildings at cost ( land 250,000) 450Land and buildings accumulated depreciation 01.12.07 8010% Preference share capital (redeemable 2012)- 1 nominal value 30Trade receivables 380Trade payables 242Wages of factory staff 49Retained earnings 90Inventories 49

Dividend received from Ask Ltd 8General reserve as at 30.11.08 10Income tax 8Plant and machinery at cost 80Plant and machinery accumulated depreciation on 01.12.07 24Share premium 10Bank 7Allowance for doubtful debts 4Government grant 510% Loan note 20Cash 122007 ordinary dividends paid 14Ordinary share capital 50c nominal value 100

2,196 2,196

The following information has also been provided:

1. Inventories held at 30 November 2008 are valued at cost of 61,000. Included in this amount are 500 units offinished goods valued at 25 each. These units are now expected to sell at a price of 20 each and incur 50pselling costs per unit.

2. During the year the Directors transferred 5,000 to the general reserve.

3. Land and buildings were revalued for the first time on 1 December 2007. The valuer estimated an alternative usevaluation of 650,000 (including 350,000 for the land) and an existing use valuation of 550,000 (including

300,000 for the land). Buildings are to continue to be depreciated on a straight line basis at a rate of 4% butPulsar Ltd makes no transfer between the revaluation reserve and retained earnings in respect of this.

4. Plant and machinery includes an item purchased during the year at a cost of 20,000. A government grant of5,000 was received in respect of this purchase. Plant and machinery is depreciated on a straight line basis atthe rate of 20% per annum.

5. The development expenditure relates to a new product developed during the year. Development of the newproduct will be completed in 2009. The Directors of Pulsar Ltd believe there is a reasonable expectation of futurebenefits but have been unable to demonstrate this.

6. One of Pulsar Ltds customers was declared bankrupt on 22 December 2008. The customer owed Pulsar Ltd

16,000 at 30 November 2008. The allowance for doubtful debts is to be adjusted to 4% of trade receivables.

7. The Directors of Pulsar Ltd wish to propose a final ordinary dividend of 14,000 which will be paid on 26 February2009. The 2008 preference dividends have been declared but not yet paid.


5/21

8. The balance on the income tax account is an under-provision brought forward from the year ended 30 November2007. The Directors have estimated that tax for the year ended 30 November 2008 will amount to 11,500.

9. During 2008, one of Pulsar Ltds customers initiated a legal claim for damages against Pulsar Ltd. At the year endthe matter remains unresolved. Pulsar Ltds legal advisors have advised that there is a 40% chance that the claimcan be defended at no cost. Otherwise, damages are estimated at 45,000.

10. In May 2008, Pulsar Ltd paid 60,000 for a television advertising campaign for its products that will run for sixmonths from 1 September 2008 to 28 February 2009. The Directors are adamant that increased sales as a result

of the publicity will continue for two years from the start of the advertising campaign.

REQUIREMENTS:

(a) Prepare the Income Statement of Pulsar Ltd for the year ended 30 November 2008 together with a Balance Sheetat that date. Your answer should be presented in accordance with International Financial Reporting Standards.

(20 Marks)Presentation (1 Mark)

(b) Prepare the Statement of Changes in Equity for the year ended 30 November 2008. (5 Marks)

(c) Write a brief memo to the Financial Controller of Pulsar Ltd, explaining the required accounting treatment of item4 above. Your memo should also include a non-current asset note.

(4 Marks)

[TOTAL: 30 MARKS]

3. The following multiple choice questions contains eight sections, each of which are followed by a choiceof answers. Only one of each set of answers is strictly correct.

REQUIREMENTS:

Give your answer to each section in the answer sheet provided. [TOTAL: 20 MARKS]

1. Carmichael PLC, a large widget manufacturer acquired a multi-storey car park in Limerick for 6m in 2007. Anindependent valuation at 31 December 2008 placed a fair value of 5.2m on the car park. The valuer estimatesthe car park to have a useful life of 14 years with a residual value of 1.2m.

What figure should be included in the income statement for the year ended 31 December 2008, if the Directorsdecided to treat the multi-storey car park using the fair value model under IAS 40 Investment Properties?

(a) nil(b) 800,000 loss(c) 400,000 gain

(d) 1,200,000 loss

2. During the year ended 31 December 2008, Noel Ltd revalued its buildings by 150,000, giving rise to an increasein the annual depreciation charge of 5,000.

In accordance with IAS16 Property, Plant and Equipmentwhich of the following statements on the disclosure ofthese items is true?

(a) The statement of changes in equity will show an increase in the revaluation reserve of 150,000 and areserves transfer of 5,000.

(b) The revaluation reserve in the statement of changes in equity will only disclose 150,000 in respect of the

revaluation.(c) The income statement will only disclose an amount of 150,000 in respect of the revaluation.(d) The income statement will disclose an amount of 150,000 in respect of the revaluation and an additional

depreciation expense of 5,000.

Page 4


6/21

Page 5

3. Meadows Ltd had the following balances on its accounts at 30 November 2008 and 30 November 2007.

30 Nov 2008 30 Nov 2007

Cash in hand 2,000 2,200Bank overdraft nil 52,142Cash at bank 41,804 nilLong term bank loan 85,000 55,000

In accordance with IAS 7 Statement of Cash Flows, what amount should be shown under net change in cash andcash equivalents in the companys cash flow statement for the year 30 November 2008?

(a) 10,138(b) 93,746(c) 10,338(d) 40,138

4. The financial statements of Y PLC were approved by the Board of Directors on 1 March 2009. According to IAS10 Events after the Balance Sheet date, which of the following would be a non-adjusting item in the financialstatements at 31 December 2008?

(i) A debtor owing 52,000 at the year end was declared bankrupt in January 2009.(ii) Stock realising 110,000 in February, was disclosed at a cost of 125,000 on 31 December 2008.(iii) On 1 February 2009, a fraud carried out by the Trade Receivables Clerk was discovered. The Trade

Receivables were overstated by 30,000 at 31 December 2008.(iv) A fall in market value of investments after the year end.

(a) All of the above(b) (i) and (iv) only(c) (iii) and (iv) only(d) (iv) only

5. According to IAS 1 Presentation of Financial Statements, which of the following statements are correct?

(i) The accounting policies adopted by a company must be disclosed in the notes to the financial statements.(ii) Inappropriate accounting policies can be rectified by disclosure of the policies used or by the inclusion of

explanatory material.(iii) Companies may choose to prepare their financial statements (except for the cash flow statement) on either

the accruals or the cash basis.

(a) All of the above(b) (i) and (ii)(c) (ii) and (iii)(d) (i) only

6. At 30 November 2007 Butler PLC had 4m 50 cent ordinary shares in issue and 1m 8% preference shares at1 each. On 1 September 2008 the company made a 1 for 4 bonus issue. The profit after tax for the year ended30 November 2008 was 750,000, and for the year ended 30 November 2007 it was 650,000.

Calculate the EPS at 30 November 2008 and 2007:

2008 2007

(a) 6.7 cents 7.1 cents(b) 7.5 cents 5.7 cents(c) 6.7 cents 5.7 cents(d) 9.4 cents 8.2 cents


7/21

Page 6

7. Sean and Marie are in partnership sharing profits equally. On January 1 2008 Deirdre is admitted to thepartnership and profits will be shared 2:2:1 (Sean : Marie : Deirdre) under the new partnership. Deirdre is tointroduce capital of 45,000. Goodwill, which is not to be disclosed in the books, is valued at 15,000.

The capital at 31 December 2007 for Sean and Marie was 100,000 and 50,000 respectively.

Show the closing capital account balances after Deirdre was admitted:

Sean Marie Deirdre

(a) 100,000 50,000 45,000(b) 107,500 57,500 30,000(c) 101,500 51,500 42,000(d) 100,000 50,000 30,000

8. Which of these considerations would not be relevant in determining an entitys functional currency?

(a) The currency that influences the costs of the entity.(b) The currency in which finance is generated.(c) The currency in which receipts from operating activities are retained.(d) The currency that is most internationally acceptable for trading.

ANSWER EITHER QUESTION 4 OR 5.4. IAS 17 Leases sets out the accounting treatment and the disclosure requirements for leases.

REQUIREMENTS:

(a) Distinguish between the characteristics of a finance and an operating lease. (5 Marks)

(b) Patrick PLC prepares its financial statements for the year ended 31 October 2008. On 1st November 2005, theyentered into a lease agreement for an item of plant on the following terms:

Term of lease 5 yearsRental The rental is 4,000 per annum payable at the start of the year.Original cost price of plant 14,800

The interest rate implicit in the agreement is 18% per annum. Patrick PLC has the option to acquire the plant for5 at the end of the contract. Patrick PLC is responsible for all the repairs and maintenance of the plant. Theuseful economic life of the plant is expected to be six years with a nil residual value and the present value of theminimum lease payments is 15,000.

i. Show the entries that should be made in the income statement and the Balance Sheet for the year ended31 October 2008 using the actuarial method.

(7 Marks)

ii. Show the relevant notes to the financial statements for the year ended 31 October 2008 (5 Marks)

(c) Mile PLC is a manufacturing company and has entered a lease agreement on 1 January 2008 under the followingterms:

Term of lease 3 yearsEstimated useful life of machine 9 yearsAge of machine at start of lease 2 yearsPurchase price of new machine 86,000Annual payments 8,000

How would the above lease be accounted for and disclosed in the financial statements for the year ending 31

December 2008?(3 Marks)

[TOTAL: 20 MARKS]


8/21

Page 7

5. IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out the principles for accounting forprovisions and contingences.

REQUIREMENTS:

(a) Explain the objectives of IAS 37 Provisions, Contingent Liabilities and Contingent Assets concerning the

recognition of provisions and outline the recognition criteria.

(5 Marks)

(b) Set out the circumstances in which a company would recognise a contingent liability. (2 Marks)

(c) Albertstones PLC, a manufacturer of moulding products, prepares its financial statements to 31 December

2008. The Board of Directors are finalising the financial statements and need assistance on the treatment

of the following issues:

(i) The company manufactures and sells Product X with a one year repair warranty. It is estimated that

70% of the goods sold in 2008 will have no defects, 22% will have minor defects and 8% will have

major defects.

It is estimated that it would cost the company 150,000 if all the goods sold had minor defects. This

figure would rise to a 1m if all the goods had major defects. The warranty provision at 1 January

2008 was 102,000 with a claim of 96,000 settled during the year.

(4 marks)

(ii) Smith PLC purchased and used a batch of Product Y in its production in August 2008, which Smith

PLC is claiming caused major damage to its production equipment. Albertstones PLC is being sued

for damages. Lawyers have advised that there is a 40% change of successfully defending the claim.

If the claim is successful, damages are estimated at 2m with a present value of 1.8m. The

investigative team of accident consultants have concluded that part of the reason for the defective

product produced by Albertstones was the supply of faulty parts by a supply company, Glen Ltd. The

legal team estimate Glen Ltds contributory negligence amounts to 10% of the damages and they

believe a claim against Glen Ltd is likely to succeed.

(4 marks)

(iii) The Directors decided in October 2008 to restructure the production division to reduce costs and

improve efficiencies. This plan was initiated in November 2008 with full staff consultation.

At 31 December 2008 the anticipated costs are:

Redundancy costs 400,000

Lease cancellations 75,000

Retraining 60,000

Investment in new systems 25,000

Prepare a memorandum to the Board of Directors of Albertstones PLC stating how the above issues should

be reflected in the companys published financial statements for the year ended 31 December 2008.

Assume all items are material and ignore taxation. (4 Marks)

Memo, Layout & Structure (1 Mark)

[TOTAL: 20 MARKS]

END OF PAPER


9/21

Page 9

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTINGPROFESSIONAL 1 EXAMINATION APRIL 2009

SOLUTION 1

(a) Consolidated income statement for the year ended 31 December 2008

000

Continuing operations

Revenue (W2) 37,729

Cost of sales(W2) (27,321)

Gross profit 10,408Operating expenses(W2) (4,016)

Interest payable and similar charges (150)

Investment income(W2) 110

Profit before tax 6,352

Income tax expense (W2) (1,660)

Profit for period from continuing operations 4,692

Discontinued operations

Loss for period from discontinued operations (795 -1,477)W7 & W9 (682)

Profit for period 4,010

Attributable to equity holders of Green plc 3,137

Minority interest(W3) 873

4,010

Workings

W1 Group structure

SUGGESTED SOLUTIONS

Green plc

60% Disposal of 30 June 2008

Red LtdBlue Ltd

75%


10/21


11/21

W7. Profit for Red Ltd for period until disposal.

PAT 1,590,000 X 6/12 = 795,000

W8. Goodwill Red Ltd

000 000

Cost of investment 9,000

Less: Share of fair value of net assets acquiredShare capital 3,000

Retained earnings 3,800

6,800 X 60% (4,080)

Goodwill at date of disposal 4,920

W9. Group loss on disposal of Red Ltd

Sale proceeds

8,000

Less: Share of net assets at date of disposal

Share capital 3,000

Earnings (3,800 + 795(W7)) 4,595

7,595 X60% (4,557)

Less Carrying value of goodwill (4,920)

Loss on disposal (1,477)

W10 XY WT TotalRevenues recognised to date

75% * 40m 30

15% * 60m 9

Revenues previously recognised

50% * 40m 20

Revenue recognised in this period 10 9

Contract profits and losses

Total contract value 40 60

Total contract costs 30 38

Expected contract profits 10 22

Profits recognised to date 7.5 -

75% * 10

Amount previously recognised

50% * 10 5 -

Profit in this period 2.5 -

Revenue 10 9 19

Cost of sales (balance) 7.5 9 16.5

Contract profits 2.5 nil 2.5

Contract WT is less than 25% complete, so no profit is recognised.

Page 11


12/21

(b) Purpose of group financial statements:

Provide information to investors on a company which uses resources to invest in other companies.

Group financial statements give information to users on abilities of management to provide evidence

of an acceptable return on capital employed.

Managers held accountable for their performance after acquisition and not on profits bought in.

Concepts underlying their preparation:

The two key concepts underlying the preparation of group financial statements are:

o The single entity concept;

o The principle of substance over form.

Group financial statements are presented as a single economic unit.

All resources at groups disposal and return on those resources can be seen in a single set of financial

statements.

Presentation of group financial statements underlines the concept of substance over form which is

fundamental in preparation of financial statements.

Single entity concept means that all effects of intra-group trading are eliminated, so only the results

of trading with entities outside the group are shown; this provides a more meaningful basis forassessing managements performance.

Other relevant comments.

(c) A discount on acquisition arises if the share of the fair value of the net assets acquired exceeds the cost of

the acquisition i.e. there is negative goodwill.

IFRS 3 is based on the assumption that this usually arises because of errors in measurement of the

acquirees net assets and/or of the cost of the combination. First action is always to reassess the

identification and measurement of the net assets and the measurement of the cost of combination.

If the discount still remains once these reassessments have been made, then it is attributable to a bargainpurchase. This discount does not meet the IASBs Framework definition of a liability, so it must be

recognised in a profit or loss in the same accounting period as the acquisition is made.

Page 12


13/21

SOLUTION 2

Pulsar Income Statement for the year ended 30 November 2008

Workings

Revenue 1,520

Cost of sales W1 (874)

Gross profit 646

Other operating income 15

Distribution costs W1 (127)

Administrative expenses W1 (230)

Profit from operations 304

Finance cost (3+2) (5)

Investment income 8

Profit before tax 307

Income tax W3 (19.5)

Profit for period 287.5

Net profit for period 287.5

Dividends paid (14)

Retained profit for year 273.5

Page 13


14/21

Pulsar Ltd Balance Sheet as at 30 November 2008

ASSETS 000 000

Non-current assets

Property, plant and equipment* 678

Intangibles -

678

Current assets

Inventories 58

Trade receivables (380 - 16 -15) 349

Prepayment 30

Cash 12

449

Total assets 1,127

EQUITY and LIABILITES

Capital and reserves

Ordinary share capital (0.50p shares) 100

Share premium account 10

General reserve 10

Revaluation reserve 280

Retained earnings 363.5

763.5

Non-current liabilities

Preference share capital 30

Loan notes 20

Deferred income 3*

53

Provisions 45

Current liabilities

Trade payables (242 +3) 245

Taxation W3 11.5

Accrual Interest ** 1

Deferred income 1

Bank 7

265.5

Total equity and liabilities 1,127

* Above based on treating grant as deferred credit.

** Some candidates may have treated the debenture interest as an additional charge

Page 14


15/21

W1 Allocation of costs

C of S Admin Dist

000 000 000

Opening inventory 49

Purchases returns (850-31) 819

Administrative salaries 149

Operating lease rentals 5

General administrative expenses 19

Selling and marketing costs 10

Closing inventories (61.000- (500X 5.50) (58)

Legal claim- damages 45

Advertising 60 -30 30

Bad debt 16

Increase in provision for doubtful debts 11

Government grant (1)

Depreciation plant (20% X 80) 16

Depreciation Buildings 12

Wages factory staff 49

Development expenditure written off 60

874 230 127

W2 Freehold Land and buildings

000

Cost b/f 450

Revaluation 200 Alternative Use

650

Accum Depn b/f 80

Revaluation (80)

Charge (300 X 4%) 12

NBV b/f 638

Note: Under IAS16 the market value would take account of the possibility of redevelopment, almost

certainly leading to a higher value. IAS 16s fair value will take account of possible alternative values.

W3 Income statement

Under provision 8

Tax for year 11.5

19.5

Balance sheet 11.5

Page 15


16/21

(b) S.O.C.E.

Ordinary Share Revaluation General Retained Total

share capital prem reserve earnings

000 000 000 000 000 000

Transfer

between reserves - - 5 (5) -

Revaluation 280 280

Profit for period - - - - 287.5 287.5- - 280 5 282.5 567.5

2007* ordinary

dividends (14) (14)

280 5 268.5 553.5

Balance b/f 100 10 - 5 95 210

Balance c/f 100 10 280 10 363.5 763.5

* 2008 dividend not yet approved therefore not provided for.

(c)

Memorandum

To

From

Date

Subject

i.) Government grants

IAS20 Accounting for Government Grants and Disclosure of Government Assistance covers this area. The

general principle is that a government grant should be recognised as income in the periods in which the

costs that it is intended to compensate are recognised. There are two permitted treatments. Where the

grant has been received towards the cost for a piece of machinery, the grant should be recognised as

income when depreciation is charged in respect of the asset. The purpose of this treatment is to provide a

matching effect.

Non-current asset note

Plant/Equipment

000

Cost b/f 60

Additions 20

Revaluation -80

Accum depn 24

Revaluation -

Charge for year 16

40

NBV 30/11/08 40

* Based on treating the grant as a deferred credit..

Page 16


17/21

SOLUTION 3

1 b (6m 5.2m)

2 a The revaluation gain is taken direct to reserves. The additional deprecation is transferred from

retained earnings to the revaluation reserve.

3. b

Decrease in cash in hand = (200)

Increase in cash in bank = 93,946

93,746

4 d

5 d

6 c

Profit after tax 750,000

less preference dividend 80,000

670,000

670,000

10 million shares = 6.7 cents

Comparatives

650,000 80,000 = 5.7 cents

10 million shares

7 c.

Old ratio New ratio Adjustment Op cap Cl. cap

Sean 7,500 cr 6,000 dr 1,500 cr 100,000 101,500

Marie 7,500 cr 6,000 dr 1,500 cr 50,000 51,500

Deirdre 3,000 dr 3,000 dr 45,000 42,000

8. d

Page 17


18/21

SOLUTION 4

a. A finance lease

Substantially transfers all the risks and rewards to the lessee.

Substance of the transaction is paramount.

Payment by the lessee for the assets, at full cost plus an interest charge.

Lease transfers ownership to lessee at end of lease.

Lessee has the option to purchase asset.

Lease term forms the major part of the asset life.

PV of the minimum lease payments amount to the majority of the assets.

An operating lease

Lessor retains the majority of the risks and rewards of the assets.

The PV of the minimum payments does not equal the bulk of the fair value of the asset.

The life of the lease will be a small part of the life of the asset.

Lessee pays a rental for the use of the asset.

NB IAS 17 provides list situations indicating existence of Finance lease.

b. Workings

Year Opening Payment Capital Accrued int Closing

31 Oct Balance charge 18% bal

2006 14,800 (4,000) 10,800 1,944 12,744

2007 12,744 (4,000) 8,744 1,574 10,318

2008 10,318 (4,000) 6,318 1,137 7,455

2009 7,455 (4,000) 3,455 622 4.077

2010 - -

Income statement (extract) 2008

Finance charge 1,137

Depreciation charge 2,467 *

Total charge 3,604

Balance sheet (extract) 31 October 2008

Non-current assets

Leasehold plant 7,400 *

Non current liabilities

Net obligation under finance lease 3,455

Current liabilities

Net obligation under finance lease 4,000

* 14,800 (3 X 2,467)

* The longer period of the economic life of the asset is taken as it is reasonably

certain that he asset will be acquired by the lessee.

Page 18


19/21

ii: Accounting Policy note- statement of accounting treatment.

Notes to the Income statement

The profit from operations is stated after charging depreciation on leased assets of 2,467 and finance

charge of 1,137.

Notes to the Balance Sheet as at 31 October 2008

Property, Plant and equipment

Plant

Cost 1 Nov 2007 14,800

Additions -

Disposals -

14,800

Accumulated depreciation

1 Nov 2007 4,933

Charge for the year 2,467

7,400

Carrying amount

At 31 Oct 2008 7,400

At 31 Oct 2007 9,867

Analysis of finance lease liabilities

Amount due within

One year 4,000

Two to five years 3,455

c. This is an operating lease as the lease does not represent substantially all of the fair value.

The income statement will show an annual rental charge of 8,000.

The minimum lease payments under non-cancellable operating lease are as follows:

Within one year 8,000

Within two to five years 8,000

Page 19


20/21

SOLUTION 5

a) IAS 37 has greatly restricted the instances in which provisions should be recognised in the balance sheet.

This is to prevent the misuse of provisions; where in the past companies may have created big bath

provisions and provisions against future costs which could realistically be avoided.

A provision is a provision for an event, the timing of which is uncertain and the exact amount is not known.

Recognition criteria:

Obligation

The company must have done something in the past which means it has no realistic alternative to paying

out cash. e.g. If it has announced publicly its commitment (a constructive obligation) or if it has a legal

contractual obligation.

Probability

There is more than 50% chance that the obligation resulting in a cash payout (more likely than not).

Measurement

The cost can be measured (or estimated) reliably.

b. A contingent liability is

1. a possible obligation arising from past events, its realisation is dependent on the occurrence or non

occurrence of one or more future events not wholly within the control of the organisation

or

2. a present obligation arising from past event but is not recognised as it is not probable that a transfer

of economic benefit will occur or the amount cannot be determined with sufficient certainty.

c.

i) ( 70% * 0) + (22% * 150,000) + (8% * 1,000,000) = 113,000

The expected costs are repairs of 113,000.

A provision is required as this represents a probable cost which can be quantified.

Balance sheet under Provision of Liability and Charges: 113,000

Income statement Provision for warranty: 107,000

Note to the financial statement as at 31 December 2008

Provision:

This provision is in respect of expected costs of repairs under warranties on product X sold in 2008. It

represents an amount based on previous claims.

At 1 Jan 102,000

Utilised in the year (96,000)

IS charge 107,000

At 31 December 113,000

Page 20


21/21

ii) A provision of 1,800,000 is required as there is 60% change of the damages being awarded.

Balance sheet under Provision of Liability and Charges: 1.8m

Income statement: 1.8m

Note:

The compensation claim provision is in respect of a claim made by a customer for damages allegedly

caused in its production line caused by using product Y. It represents the present value of the amount the

legal team estimate as the likely settlement.

Contingent asset (disclose)

A counter claim in respect of the compensation claim provided for above has been made against the supplier

of parts used in product Y.

Legal advice indicates a high chance of success with an expected settlement of 180,000.

iii) A provision is only required for those costs which directly relate to the restructuring activity and not incurred

with ongoing activities.

A discussion (including numbers) of whether retraining and new system can be avoided and the fact that

leases are contractual etc.

Note:

During the year the company announced and commenced a restructuring of the production division, with full

communication to those affected. The cost of restructuring is estimated at 475,000 which must be provided

for.

p1 - corporate reporting april 09(1)

Documents