strategic business reporting...strategic business reporting working 4 - nci working 5 - accumulated...

Strategic Business Reporting


Workbook - Questions

�1


Group Accounts

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Illustration 1

Additional Information

Almeria today acquired all the shares in Murcia for $300m.

The Fair Value of the NCI at acquisition was 0.

Required

Prepare the consolidated statement of financial position for the Almeria group

Almeria Murcia

Non Current Assets

Tangible 100 100

Investment in Murcia 300

Current Assets

Inventory 40 200

Receivables 60 100

Cash 200 200

700 600

Ordinary Shares 160 100

Accumulated Profits 240 200

Equity 400 300

Non Current Liabilities 100 200

Current Liabilities 200 100

700 600

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Pro-Forma

Working 1 - Group Structure

Working 2 - Equity Table

Working 3 - Goodwill

Almeria

Murcia

Date Acquired

Parent Share

NCI

At Acquisition At Year End

Share Capital

Accumulated Profits

Cost of Parent Investment

Fair Value of NCI at acquisition

Less net assets at acquisition (W2)

Goodwill

�4


Working 4 - NCI

Working 5 - Accumulated Profits

$


NCI% of Sub Post-Acq Profits

Value of NCI at Year End

$

Parent’s Accumulated Profits

Add: Parent % of the subsidiary’s post acquisition profits

�5


SFP for Almeria Group

Almeria Murcia Group

Non Current Assets

Goodwill

Tangible 100 100

Investment in Murcia 300

Current Assets

Inventory 40 200

Receivables 60 100

Cash 200 200

700 600



Non Controlling Interest

Equity 400 300



700 600

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Illustration 2


Ant today acquired 160m of the 200m shares in Dec.

The Fair Value of the NCI was 50.

Required

Prepare the consolidated statement of financial position for the Ant group

Ant Dec

Assets 500 500

Investment in Dec 350

850 500



Equity 350 300

Liabilities 500 200

850 500

�7


Illustration 2 Pro-Forma

Working 1- Group Structure

Working 2- Equity Table


↓

Date Acquired

Parent Share

NCI


Share Capital

Accumulated Profits




Goodwill

�8


Working 4 - NCI


$




$



�9


Statement of Financial Position for Ant Group

Ant Dec Group

Goodwill

Assets 500 500

Investment in Dec

350

850 500

Ordinary Shares

100 200

Accumulated Profits

250 100

NCI

Equity 350 300

Liabilities 500 200

850 500

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Illustration 3


Evan acquired 150m shares in Dando one year ago when the reserves of Dando were $40m. The Fair Value of the NCI on the date of acquisition was $100m.

Required

Prepare the consolidated statement of financial position for the Evan group.

Evan Dando

Assets 200 350

Investment in Dando 500

Current Assets 200 300

900 650

Ordinary Shares ($1) 200 200


Equity 450 300


Liabilities 170 150

900 650

�11


Solution

Working 1- Group Structure

Working 2 - Equity Table


↓

Date Acquired

Parent Share

NCI


Share Capital

Accumulated Profits




Goodwill

�12


Working 4 - NCI


$




$



�13


Statement of Financial Position for Evan Group

Evan Dando Group

Goodwill

Assets 200 350

Investment in Dando

500


900 650

Ordinary Shares ($1)

200 200

Accumulated Profits

250 100

NCI

Equity 450 300

Non Current Liabilities

280 200

Liabilities 170 150

900 650

�14


Illustration 4


Virtual acquired 60m shares in Insanity one year ago when the reserves of Insanity were $60m. The Fair Value of the NCI at that date was $120m.

Required

Prepare the consolidated statement of financial position for the Virtual group

Virtual Insanity

Assets 1000 800

Investment in Insanity 600


2000 1000



Equity 1550 500


Liabilities 200 200

2000 1000

�15


Illustration 5

Jabba acquired 100% of the shares in Hutt two years ago.

The consideration was as follows:

1. Cash of $36,000.2. 2000 Shares in Jabba (the share price is currently $3).3. $30,000 to be paid four years after the date of acquisition. The relevant

discount rate is 12%4. If the group meets certain targets there will be a further payment with fair

value of $60,000 at a later date.

Required:

(i) Calculate the fair value of the consideration which Jabba has given in purchasing the investment in Hutt.

(ii)Show the value of the liability in the Statement of Financial Position for the deferred consideration at the end of the current year.

(iii)What is the charge to the Statement of Profit or Loss in the current period related to the deferred consideration?

Illustration 6

On 1 October 2012, Paradigm acquired 75% of Strata’s 20,000 equity shares by means of a share exchange of two new shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to the shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. The share price of Paradigm on the date of acquisition was $2.

Calculate the consideration paid for Strata.

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Illustration 7

Jimmy acquired 80% of Gent 1 year ago. The following information relates to Gent at the date of acquisition.

An item of plant was valued at $200 in the Gent’s Financial Statements but had a Fair Value of $300, the plant had a remaining life of 5 yrs at the date of acquisition. Goodwill is to be calculated gross.

Accumulated profits at

acquisition

Cost of investment Fair Value of NCI at acquisition

$ $ $

150 800 160

Jimmy Gent

Investment in Gent 800

Assets 700 700

1500 700



Equity 1200 600

Liabilities 300 100

1500 700

�17


Illustration 8

Devil acquired 90% of Detail 2 years ago. The following information relates to Gent at the date of acquisition.

An item of plant was valued at $300 in the Gent’s Financial Statements but had a Fair Value of $200.

The plant subject to the fair value adjustment had a remaining life of 4 yrs at the date of acquisition. Goodwill is to be calculated Gross.

Accumulated profits at

acquisitionCost of

investmentFair Value of NCI

at acquisition

$ $ $

250 1000 55

Devil Detail

Investment in Detail 1000

Assets 600 800

1600 800



Equity 900 600

Liabilities 700 200

1500 700

�18


Illustration 9

Evaro Co. Acquired 80% of Stando Co. one year ago and the following detail is relevant:

At the date of acquisition the following was relevant:

i) An item of plant was valued at $100m in the Gent’s Financial Statements but had a Fair Value of $50m, the plant had a remaining life of 10 yrs at the date of acquisition.

ii)Stando Co. owns an internally generated brand worth $20m on the date of acquisition that has a useful economic life of 20 years.

iii)At the date of acquisition a court case against Stando Co. is in process which has resulted in a contingent liability of $25m being disclosed in their financial statements. By the year end Stando Co. had won the court case resulting with no payment as a result.

Required

Compete the Equity Table (W2) based on the above information for Stando. Co.

At Acquisition$m

At Year End$m

Share Capital 100 100


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Illustration 10

Brad acquires 80% of Angelina’s share capital in a share for share exchange. Brad gives Angelina 2 shares for every one in Angelina. Angelina has 100 shares in issue with a nominal value of $1 Angelina’s share price is $8. Brad’s share price is $5. At the date of acquisition the net assets of Angelina are $600.

Calculate the gross goodwill and the NCI.

Illustration 11

Brad acquires 80% of Angelina’s share capital in a share for share exchange. Brad gives Angelina 2 shares for every one in Angelina. Angelina has 100 shares in issue with a nominal value of $1. Brad’s share price is $5. At the date of acquisition the net assets of Angelina are $600 and by the year end they are $800.

Calculate the goodwill arising using the proportionate method and the NCI.

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Illustration 12

(i)Archie acquires 60% of Mitchell’s share capital with consideration of $900. Mitchell has 200 shares in issue with a share price is $5. At the date of acquisition the net assets of Mitchell were $800 and are $950 at the year end. At the year end the retained earnings of Archie were $1,000.

An impairment review has been carried out on the goodwill at the year end which has found it to be impaired by $40.

Calculate the gross goodwill, the retained earnings and the NCI at the year end.

Illustration 12 (ii)

French acquired 75% of Shambles several years ago.

If French has $1500 of retained earnings at the year end, calculate the gross goodwill, retained earnings for the group and the NCI at the year end.

Cost of Investment

Fair Value of NCI at

acquisition

Net assets at acquisition

Net assets at year end

Goodwill Impairment at

Y/E

$ $ $ $ $

1,000 300 800 3,000 200

�21


Illustration 12 (iii)

Pinky acquired 80% of Brain 4 years ago. The following information is relevant:

Goodwill is calculated gross and is subject to an annual impairment review.

Net Assets at year end

Net Assets at acquisition

Cost of investment

Fair Value of NCI at

acquisition

Recoverable amount at year end

$ $ $ $ $

150 100 175 25 230

Pinky Brain

Investment in Pinky 175

Assets 100 100

Inventory 140 200

Receivables 160 100

Bank 125 200

700 600



Equity 400 150

Non current liabilities 100 250

Liabilities 300 100

700 600

�22


Illustration 13 (i)

George owns 80% of the subsidiary Bungle. During the impairment review it was found that the carrying value of Bungle’s net assets were $250 and the goodwill $300. The recoverable amount of the subsidiary is $500 and goodwill is calculated on a proportionate basis.

What amount of goodwill will appear on the group SFP?

Illustration 13 (ii)

Event owns 90% of the subsidiary Horizon. During the impairment review it was found that the carrying value of Horizons net assets were $5,000 and the goodwill $2,337. The recoverable amount of the subsidiary is $6,000 and goodwill is calculated on a proportionate basis.

What amount of goodwill will appear on the group SFP?

�23


Illustration 14A Parent company has recorded an asset of $300 goods receivable with a subsidiary.

The subsidiary had recorded this as an initial liability payable of $300 but has just recorded and sent a cheque payment to the parent of $50 leaving the payable balance of $250.

How should this be adjusted for on consolidation?

Illustration 15Parent has been selling goods to subsidiary. The parent has recorded an asset of $500 receivable from the subsidiary.

The $500 includes goods worth $100 sent prior to the year end to the subsidiary who has not received them. As a result the subsidiary has a balance of $400 recorded as a liability in payables.

How should this be treated on consolidation?

�24


Illustration 16Arctic is the parent of a subsidiary Monkeys. Extracts of their SFPs are below

The trade payables of Monkeys includes $35m due to Arctic. This was after the deduction of $10m in respect of cash sent by Monkeys but not yet received by Arctic.

The receivables of Arctic at the year end include $70m due from Monkeys. $25m of these goods had been dispatched by Arctic, but were not yet received by Monkeys.

Show the treatment on consolidation.

Arctic Monkeys

Current Assets

Inventory 300 100

Receivables 200 250

Bank 100 50

600 400


�25


Illustration 17Sea is the parent of a subsidiary Lion. Extracts of their SFPs are below

The trade payables of Lion includes $20m due to Arctic. This was after the deduction of $15m in respect of cash sent by Lion but not yet received by Sea.

The receivables of Sea at the year end include $50m due from Lion. $15m of these goods had been dispatched by Sea, but were not yet received by Lion.

Show the treatment on consolidation.

Illustration 18Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun.

I. Calculate the PURP.

II. Show the accounting treatment if the parent company is the seller.

III. Show the accounting treatment if the subsidiary company is the seller.

IV. Do parts I - III if the goods had been sold at a margin of 30%.

Sea Lion

Current Assets

Inventory 400 250

Receivables 100 100

Bank 150 100

650 450


�26


Illustration 19Argentina owns an 80% share of Messi which it purchased one year ago.

The information below relates to Messi at the date of acquisition.

The income statements for both are:

Other information

I. Argentina sold goods to Messi during the year at a margin of 40% and worth $100m. Half of these goods have been sold on by Messi by the year end.

II. The fair value of Messi’s net assets were equal to their book value at the date of acquisition, with the exception of some machinery which had a useful life of 5 years.

III. Calculate goodwill using the fair value of the NCI at the date of acquisition. At the year end an impairment review has found that the goodwill has been impaired by 10%.

Produce a consolidated Income Statement for the Argentina group.

Ordinary Share Capital

Reserves Fair Value of the net assets

Fair value of the NCI

Cost of the investment

$m $m $m $m $m

200 400 800 200 1900

Argentina Messi

Revenue 8000 3000

Cost of Sales -4000 -1000

Gross Profit 4000 2000

Operating Costs -1500 -1500

Finance Costs -1000 -200

Profit Before Tax 1500 300

Tax -700 -100

Profit for the year 800 200

�27


Statement of Changes in Equity Pro-forma

Share Capital

Share Premium

Revaluation Reserve

Accumulated Profits

NCI Total

O’Balance X X X X X X

Share Issues X X X

Revaluation Gains

X X X

Profit for period

X X X

Less Dividends

(X) (X) (X)

Cl’Balance X X X X X X

�28


Illustration 20Nadal is a 90% subsidiary of Federer. It was acquired one year ago for $4000m. At that time the accumulated profits were $800m.

Income Statements

Statements of Financial Position

Federer Nadal

Revenue 20000 4000

Cost of Sales -12000 -2000

Gross Profit 8000 2000

Distribution Costs -2100 -300

Admin Expenses -1400 -500

Operating Profit 1500 1200

Exceptional Gain Nil 580

Investment Income 90 Nil

Finance Costs -600 -150

Profit Before Tax 3990 1630

Tax -700 -130

Profit for the year 3290 1500

Federer Nadal

Investment in Nadal 4000

Assets 20000 5000

24000 5000

Share Capital 5000 1000


Equity 20690 3200

Liabilities 3310 1800

24000 5000

�29


Federer Statement of changes in Equity

Nadal Statement of changes in Equity

Other Information:

In the year Federer sold goods to Nadal at a margin of 20%. The total amount sold was $100m, of which a quarter remain in inventory at the year end.

Also during the year Nadal sold $180m of goods to Federer. These goods were sold at a mark up of 50%. Half of the goods remain in inventory at the year end.

At the date of acquisition the fair values of Nadal’s net assets were equal to their book value with the exception of an item of plant that had a fair value of $200m in excess of its carrying value and a remaining useful life of 4 years. Goodwill is to be calculated on a proportionate basis.

Federer paid a dividend during the year of $200m while Nadal paid a dividend of $100m. Federer has recognised the dividend received from Nadal as investment income.

Required

Prepare the consolidated Income Statement, consolidated Statement of Changes in Equity and the consolidated Statement of Financial Position for the Federer group.

Share Capital Accumulated Profits

Total Equity

Opening Balance 5000 12600 17600

Profits for the year 3290 3290

Less Dividends -200 -200

Closing Balance 5000 15690 20690

Share Capital Accumulated Profits

Total Equity

Opening Balance 1000 800 1800

Profits for the year 1500 1500

Less Dividends -100 -100

Closing Balance 1000 2200 3200

�30


Associates(IAS 28)

�31


Illustration 1

3 years ago Star Ltd. bought 25% of the share capital of Wars Ltd. for consideration of $400,000. Since that time Wars Ltd.has had the following results:

Due to poor trading results and customer service issues, Star Ltd feel that in the current year the investment in Wars Ltd. has been impaired by $20,000.

Show the treatment of War Ltd. in the statement of financial position of Star Group and in the Income statement for the 3 years of the investment.

Illustration 2

Inter company sales of $1,300 have occurred in Attila group at a mark up on cost of 30%. At the year end 1/2 of these goods had been sold on. Attila has an 30% interest in Hun.

I. Calculate the PURP.

II. Show the accounting treatment if the parent company is the seller.

III. Show the accounting treatment if the Associate company is the seller.

Year Profit Dividend Paid By Associate

1 $200,000 0

2 $160,000 $150,000

3 $30,000 0

�32


Illustration 3

On 1 April 2009 Picant acquired 75% of Sander’s equity shares in a share exchange of three shares in Picant for every two shares in Sander. The market prices of Picant’s and Sander’s shares at the date of acquisition were $3·20 and $4·50 respectively.

In addition to this Picant agreed to pay a further amount on 1 April 2010 that was contingent upon the post-acquisition performance of Sander. At the date of acquisition Picant assessed the fair value of this contingent consideration at $4·2 million, but by 31 March 2010 it was clear that the actual amount to be paid would be only $2·7 million (ignore discounting). Picant has recorded the share exchange and provided for the initial estimate of $4·2 million for the contingent consideration.

On 1 October 2009 Picant also acquired 40% of the equity shares of Adler paying $4 in cash per acquired share and issuing at par one $100 7% loan note for every 50 shares acquired in Adler. This consideration has also been recorded by Picant.

Picant has no other investments. The summarised statements of financial position of the three companies at 31 March 2010 are:

Picant Sander Alder

Property, plant & equipment 37,500 24,500 21,000

Investments 45,000

82,500 24,500 21,000

Inventory 10,000 9,000 5,000

Receivables 6,500 1,500 3,000

Total Assets 99,000 35,000 29,000

Ordinary Shares 25,000 8,000 5,000

Share Premium 19,800 0 0

Ret. Earnings B/F 16,200 16,500 15,000

For year to 31/3/10 11,000 1,000 6,000

72,000 25500 26000

7% Loan Notes 14,500 2,000 0

Contingent Consideration 4,200 0 0

Current Liabilities 8,300 7,500 3,000

Total Equity & Liabilities 99,000 35000 29000

�33


(i) At the date of acquisition the fair values of Sander’s property, plant and equipment was equal to its carrying amount with the exception of Sander’s factory which had a fair value of $2 million above its carrying amount. Sander has not adjusted the carrying amount of the factory as a result of the fair value exercise. This requires additional annual depreciation of $100,000 in the consolidated financial statements in the post-acquisition period.

(ii)Also at the date of acquisition, Sander had an intangible asset of $500,000 for software in its statement of financial position. Picant’s directors believed the software to have no recoverable value at the date of acquisition and Sander wrote it off shortly after its acquisition.

(iii)At 31 March 2010 Picant’s current account with Sander was $3·4 million (debit). This did not agree with the equivalent balance in Sander’s books due to some goods-in-transit invoiced at $1·8 million that were sent by Picant on 28 March 2010, but had not been received by Sander until after the year end. Picant sold all these goods at cost plus 50%.

(iv)Picant’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose Sander’s share price at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(v)Impairment tests were carried out on 31 March 2010 which concluded that the value of the investment in Adler was not impaired but, due to poor trading performance, consolidated goodwill was impaired by $3·8 million.

(vi)Assume all profits accrue evenly through the year.

�34


Increasing/Decreasing Holding

�35


Illustration 1Vic purchased 10% of the shares in Bob several years ago. The investment cost $17,000 and Vic currently carries the investment at cost in the accounts. Vic has subsequently purchased 45% of the shares in Bob for $120,000. The net assets of Bob have a fair value of $60,000 and the fair value of the original investment is $45,000. The fair value of the NCI is $90,000.

Calculate the gain or loss arising on the subsequent acquisition of shares

Illustration 2Vic purchased 10% of the shares in Bob several years ago. The investment cost $17,000 and Vic currently carries the investment at cost in the accounts. Vic has subsequently purchased 45% of the shares in Bob for $120,000. The net assets of Bob have a fair value of $60,000 and the fair value of the original investment is $45,000. The fair value of the NCI is $90,000.

Calculate the gross goodwill arising on the acquisition of Bob.

Illustration 3Aldo purchased 15% of the shares in Giro several years ago. The investment cost $85,000 and they currently carry it at cost in the accounts. Aldo has subsequently purchased 75% of the shares in Giro for $700,000. The net assets of Giro have a fair value of $750,000 and the fair value of the original investment is now $145,000. The fair value of the NCI on acquisition was $180,000.

Calculate the gross goodwill arising on the acquisition of Giro.

Illustration 4A parent has owned 70% of a subsidiary for a long period of time. The NCI in the subsidiary is currently measured at $500,000. If the parent buys another 10% what will the value of the NCI fall to?

�36


Illustration 5A parent has owned 90% of a subsidiary for a long period of time. The NCI in the subsidiary is currently measured at $300,000.

I. The parent acquires all of the remaining shares for consideration of $250,000.

II. The parent acquires 3% of the shares for $200,000 reducing the NCI to 7%.

What is the difference taken to equity in both situations?

Illustration 6Inter purchased 70% of the shares in Milan several years ago. At that time goodwill of $80,000 arose. The net assets of Milan are currently $100,000 and the NCI is $18,000.

I. Calculate the gain arising on disposal if Inter sells it’s entire holding for $350,000.

II. Calculate the gain arising on disposal if Inter sells 30% for $250,000 and the fair value of the residual value is $30,000

Illustration 7For several years Jeremy has owned 70% of Richard. The net assets of Richard at this time are $250,000. The NCI is $68,000 and the gross goodwill is $200,000.

Jeremy has just sold 15% to take the holding to 55% for consideration of $150,000. Calculate the difference arising that will be taken to equity.

�37


IAS 21 Foreign Currency

�38


Illustration 1Which of the following statements relating to IAS 21 The effects of changes in foreign exchange rates is correct?

A. The functional currency of a foreign subsidiary is the currency that the group financial statements are presented in.

B. A foreign subsidiary must present it’s financial statements in the presentational currency of the parent.

C. Consideration will be given to the currency of the costs and sales of the entity when determining it’s functional currency.

D. The more autonomous a subsidiary, the more likely it’s functional currency is that of the parent entity.

Illustration 2Bulldog Ltd has a year end of 31 January.

On 13th October Bulldog Ltd buys goods from Eagle Inc. a US supplier for $250,000.

On 24th November Bulldog settles the transaction in full.

Exchange rates

13th October £1 : $1.45

24th November £1 : $1.55

Show the accounting entries for these transactions.

�39


Illustration 3Jeff Ltd. purchases an item of plant on 1st June from a foreign supplier on one month’s credit for €100,000. Jeff is a US company.

Exchange rates

1st June $ = €1.50

21st June $ = €1.40

How will this transaction be dealt with in the accounts for the year to 21st June?

�40


Illustration 4

Big Ltd. acquired 80% of Cahoona Inc. on 1st July 20X1.Cahoona Inc are based in Burgerland where the functional currency is Francs (Fr). The financial statements for the year to 30 June 20X2 are below.

There was no other comprehensive income for either entity in the period.

Other information:

I. The fair value of the net assets of Cahoona was Fr6,000 on the date of acquisition with any increase being attributable to land held at historic cost.

II. Big sold goods to Cahoona during the year for $1,000 cash.

III.The NCI is valued using the Fair Value method at FR 2000 at acquisition.

SFP Big$

CahoonaFr

Investment in Cahoona 5000

Non Current Assets 10,000 3,000

Current Assets 5,000 2,000

20000 5,000

Share Capital 6,000 1,500

Retained Earnings 4,000 2,500

Liabilities 10,000 1,000

20,000 5,000

Income Statement Big$

CahoonaFr

Revenue 25,000 35,000

Operating Costs -15,000 -26,250

Profit Before Tax 10,000 8,750

Tax -5,000 -7,450

Profit for the Year 5,000 1,300

�41


IV. The Goodwill in Cahoona was impairment tested at the year end and was impaired by FR200. The impairment was deemed to have accrued evenly over the year so the average rate should be used to treat it.

Exchange rates to $1:

Fr1 July 2001 1.5Average rate 1.751 June 1.930 June 2

Prepare the group statement of financial position and statement of other comprehensive income.

�42


Ethics

�43


Illustration 1December 2010 Q1 (Small section)

Jocatt operates in the energy industry and undertakes complex natural gas trading arrangements, which involve exchanges in resources with other companies in the industry. Jocatt is entering into a long-term contract for the supply of gas and is raising a loan on the strength of this contract. The proceeds of the loan are to be received over the year to 30 November 2011 and are to be repaid over four years to 30 November 2015. Jocatt wishes to report the proceeds as operating cash flow because it is related to a long-term purchase contract. The directors of Jocatt receive extra income if the operating cash flow exceeds a predetermined target for the year and feel that the indirect method is more useful and informative to users of financial statements than the direct method.

(i) Comment on the directors’ view that the indirect method of preparing statements of cash flow is more useful and informative to users than the direct method. (7 marks)

(ii) Discuss the reasons why the directors may wish to report the loan proceeds as an operating cash flow rather than a financing cash flow and whether there are any ethical implications of adopting this treatment. (6 marks)

Professional marks will be awarded in part (b) for the clarity and quality of discussion. (2 marks)

�44


IFRS 8 & IAS 33Operating Segments & EPS

�45


Illustration 1 (June 2008 Q2 (a))Norman, a public limited company, has three business segments which are currently reported in its financial statements. Norman is an international hotel group which reports to management on the basis of region. It does not currently report segmental information under IFRS8 ‘Operating Segments’. The results of the regional segments for the year ended 31 May 2008 are as follows:

There were no significant inter company balances in the segment assets and liabilities. The hotels are located in capital cities in the various regions, and the company sets individual performance indicators for each hotel based on its city location.

Required:

Discuss the principles in IFRS8 ‘Operating Segments’ for the determination of a company’s reportable operating segments and how these principles would be applied for Norman plc using the information given above.

RegionRevenue Segmental

Profit/LossSegmental

AssetsSegmentalLiabilitiesExternal Internal

$m $m $m $m $m

European 200 3 -10 300 200

South East Asia 300 2 60 800 300

Other 500 5 105 2,000 1,400

�46


Illustration 2An entity issued 300,000 shares at full market price on 1st July 2009. The year end of the entity is 31st December.

There were 900,000 shares in issue on 1st Jan 2009 and the profit for the year to 31st December 2009 was $1,000,000.

Calculate the EPS at 31st December 2009.

Illustration 3ABC Ltd. makes a bonus issue of 1 for 6 on 1st July 2009. The year end of the entity is 31st December.


Calculate the EPS at 31st December 2009.

Illustration 4ABC Ltd. makes a rights issue of 1 for 3 on 1st July 2009. The current share price is $4 and the rights issue is at a price of $3 The year end of the entity is 31st December.


Last year’s earnings were $900,000

Calculate the EPS at 31st December 2009 and the new EPS for 2008.

�47


IAS 19 - Pensions

�48


Illustration 1A company maintains a defined benefit pension scheme for it’s employees. The following information is relevant:

The pension assets brought forward in 20X0 $1,000 with a closing balance of $2,000.

The Discount Rate is 11%.

Calculate the expected return on Pension Assets.

Illustration 2

A company maintains a defined benefit pension scheme for it’s employees. The following information is relevant:

The liabilities of the scheme were $1,400 at the start of the period and $2,600 at the end.

The discount rate is 12%.

Calculate the Interest Cost for the period.

Illustration 3 The following details refer to Company A’s pension scheme.

Calculate the return on assets and the interest cost.

B/F C/F

Pension Assets 1,000 2,000

Pension Liabilities 1,400 2,600

The discount rate is 11%

�49


Illustration 4A company maintains a defined benefit pension scheme for it’s employees. The following information is relevant:

The pension assets brought forward in 20X0 $1,800 with a closing balance of $2,700.

The company contributes $90 per year into the scheme.

Benefits paid out in the period were $100.

The liabilities of the scheme were $1,600 at the start of the period and $2,100 at the end.

The discount rate is 12%.

The terms of the scheme have changed meaning that past service costs have arisen of $35 and the current service costs for the period are $70.

Required:

Show the treatment for the pension scheme in the financial statements of the company.

�50


IFRS 2Share Based Payments

�51


Illustration 1

An entity grants 1 share option to each of its 100 employees on 1 January Year 1. Each grant is conditional upon the employee working for the entity over the next three years.

The fair value of each share option as at 1 January Year 1 is $8

At the end of each year the number of employees expected to take up the options are:

Year 1: 95Year 2: 97

When the rights are taken up in year 3, 98 employees actually receive the options.

Show the treatment for the employee benefits over the three years.

Illustration 2An entity grants 1 share option to each of its 500 employees on 1 January Year 1. Each grant is conditional upon the employee working for the entity over the next three years.

The fair value of each share option as at 1 January Year 1 is $10

On the basis of a weighted average probability, the entity estimates on 1 January that 100 employees will leave during the three-year period and therefore forfeit their rights to share options.

The following actually occurs:

– 20 employees leave during Year 1 and the estimate of total employee departures over the three-year period is revised to 70 employees

– 25 employees leave during Year 2 and the estimate of total employee departures over the three-year period is revised to 60 employees

– 10 employees leave during Year 3

�52


Illustration 3

Same question with additional information of share option price at the end of each year:

Year 1 10 Year 2 12 Year 3 14

Illustration 4At the beginning of year 1, an entity grants 1 share options to each of its 500 employees over a vesting period of 3 years at a fair value of $15

Year 140 leave, further 70 expected to leave;

Share options now repriced (as market value of shares has fallen) as the Fair Value of the options had fallen to $5. After the repricing they are now worth $8. The modification has therefore increased the Fair Value from $5 to $8.

Year 235 leave, further 30 expected to leave

Year 328 leave

Hint!

The repricing has increased the Fair Value of the Option by $3.

This amount is recognised over the remaining two years of the vesting period, along with remuneration expense based on the original option value of $15

�53


IAS 16 & 36Non Current Assets and

Impairment

�54


Illustration 1A company purchases a crane with a useful economic life of 15 years for $200m with an obligation to decommission at a cost of $50m. The applicable discount rate is 8%.

Show the recognition of the asset in the financial statements and the treatment over the first accounting period.

Illustration 2Ashanti owned a piece of property, plant and equipment (PPE) which cost $12 million and was purchased on 1 May 2008. It is being depreciated over 10 years on the straight-line basis with zero residual value. On 30 April 2009, it was revalued to $13 million and on 30 April 2010, the PPE was revalued to $8 million. The whole of the revaluation loss had been posted to the statement of comprehensive income and depreciation has been charged for the year. It is Ashanti’s company policy to make all necessary transfers for excess depreciation following revaluation.

Illustration 3

Property, plant & equipment with a total cost of $1m has components of a structure valued at $700,000 with a useful economic life of 20 years and plant worth $300,000 with a useful economic life of 10 years.

Show the depreciation charges in the financial statements in year 1.

Illustration 4

The carrying value of an item of plant in the financial statements is $400,000. By operating the plant the business expects to earn discounted cash-flows of $350,000 over the rest of it’s useful life. The could sell the plant now for $300,000 with costs to sell of $25,000.

What is the recoverable amount?

�55


Illustration 5

A company has an asset for which the following information is relevant:

Carry out the impairment review for the asset.

Illustration 6

A cash generating unit has the assets outlined below. It’s recoverable amount has been assessed as $1,000. Show the treatment for any impairment.

$‘000

Carrying amount 400

Fair Value 350

Cost to sell 25

Cash flows expected in each of the next 5 years 90

Discount rate 10%

Annuity rate for 10% over 5 years 3.791

Assets Carrying Value

Goodwill 100

PPE 800

Intangible 400

1300

�56


IFRS 5 - Assets Held For Sale and Discontinued Operations

�57


Illustration 1 Archie Co. committed itself at the beginning of the financial year to selling a property that is being under-utilised following the economic downturn. As a result of the economic downturn, the property was not sold by the end of the year. The asset was actively marketed but there were no reasonable offers to purchase the asset. Archie is hoping that the economic downturn will change in the future and therefore has not reduced the price of the asset.

Can Archie Co. classify the property as available for sale under IFRS 5?

Illustration 2 A company has a machine that cost $300,000 to buy two years ago. At the time of purchase the machine had a useful economic life of 30 years and they apply the revaluation model under IAS 16 (Revaluation less depreciation).

The company has decided to sell the machine and it’s fair value at this time is $290,000 with additional costs to sell being estimated at $5,000. The value in use of the machine has been determined as $300,000.

Although the machine has not been sold at the year end as the decision was taken that day the company is confident that it will be sold quickly and is committed to selling it having begun to market the machine to potential purchasers.

How should the machine be treated at the year end in the financial statements and at what value will it be included?

�58


Illustration 3A company has two divisions each of which form a major line of business, Division A and Division B.

Mid way through the current period Division A was shut down with losses of $50,000 on the sale of the fixed assets of the business and redundancy costs of $100,000.

Division B was restructured incurring losses of $85,000.

Results in the period included the following information:

Prepare a note to the accounts showing the analysis of the discontinued operation and draft the income statement for the company for the period.

Div A Div B

$‘000 $‘000

Revenue 1,000 2,000

Cost of Sales 750 1,250

Distribution 250 300

Administration 100 50

Finance costs for the business were $40,000 in the period and the tax charge was $32,000.

�59


IAS 40 - Investment Property

�60


Illustration 1Which of the following are Investment Property?

• Building used as accommodation for staff.• Land purchased as an investment. No planning consent yet.• New office building purchased for capital appreciation.

Illustration 2A company has purchased a building for investment purposes on 1st Jan 20X0. The building cost a total of $1.5m with the land element being estimated at $500,000.

The building has a useful life of 30 years. At the 31st December 20X0 the fair value of the building (including the land) was $2m.

Show the treatment of the property for the two methods possible under IAS 40.

�61


IAS 38 - Intangible Assets

�62


Illustration 1Which of the following should be classified as development?

1. Lion Ltd has spent $200,000 investigating whether a particular substance, drefite, found in the Arctic Circle is resistant to heat.

2. Hoey Ltd has incurred $250,000 expenses in the course of making new material for ski-equipment which will be more durable.

3. Ryan Ltd has found that a chemical compound, mallerite, is harmful to the human body.4. Lion Ltd has incurred a further $300,000 using drefite in creating prototypes of a new

heat-resistant body-suit for humans.

Illustration 2

Coddy Ltd is developing a new product, the fold-up bicycle. Forecasts are as follows:

Show how the development costs should be treated if:

1. the costs do not qualify for capitalisation2. the costs do qualify for capitalisation.

Expense Costs

20X5 20X6 20X7 20X8

$ $ $ $

Revenue from other activities 500 700 800 800

Revenue from Fold-up Bicycle 500 700 900

Development costs -600

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Illustration 3A company has 3 projects in development:Project A is in development and testing of the product has proved successful. Production has begun and some sales have been made to date. The costs have been measured accurately and the project looks likely to be profitable. All costs incurred so far meet the criteria to be capitalised under IAS 38.

Project B is also in development and testing of the product has proved successful. The costs have been measured accurately and the company expects to begin production and sales next year. All costs incurred so far meet the criteria to be capitalised under IAS 38.

Project C was begun in the current period and to date there has been a feasibility study carried out which was inconclusive.

Other Information:

Show how the above will be treated in the current period accounts discussing each project individually.

A B C

Total Costs to the start of the year 600 500

Costs incurred in the period 200 100 150

Total Anticipated Revenues 20,000 30,000 Unknown

Revenue in Period 5,000 0 0

�64


IAS 20 - Government Grants

�65


Illustration 1A company purchases an item of plant on which it receives a government grant of 30% of the purchase price. The plant cost $2m and has no residual value.

The plant is to be depreciated on a straight line basis over it’s 10 year life.

Show the possible accounting treatments for the government grant in the first year.

�66


IAS 23 - Borrowing Costs

�67


Illustration 1

A company is building a qualifying asset worth $2.5m and has issued a bond of the same value to do so with an effective interest rate of 6%.

The asset will take 9 months to build and for the first 3 months the company invests the proceeds of the bond and earns interest at 3%.

What borrowing costs should be capitalised?

Illustration 2A company has a £1m 6% loan and a £2m 8% loan. It builds a building costing £600,000 and it takes 8 months.

What borrowing costs should be capitalised?

Illustration 3Company buys land on 1/12, a planning application is prepared during December and January. Permission is obtained at the end of January. Payment for the land is made on 1/2. On this date a loan is taken out to pay for the land and building constructionAdverse weather conditions meant a delay in the commencement of work until 15/3.When should interest be capitalised from?

Illustration 4

Davos is building an office block and issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 April 20X9. The loan is redeemable at a premium which means the loan has an effective finance cost of 7·5% per annum.

The loan was specifically issued to finance the building of the new block which meets the definition of a qualifying asset in IAS 23. Construction of the block commenced on 1 May 20X9 and it was completed and ready for use on 28 February 2010, but did not open for trading until 1 April 20X0.

During the year trading at Davos’ was below expectations so they suspended the construction of the new block for a two-month period during July and August 20X9. The proceeds of the loan were temporarily invested for the month of May 20X9 and earned interest of $40,000.

Calculate the borrowing costs that can be capitalised under IAS 23

�68


IAS 12Deferred Tax

�69


Illustration 1An entity has the following assets & liabilities recorded in it’s balance sheet at 31 December 2008:

The entity had made a provision for inventory obsolescence of $4m that is not allowable for tax purposes until the inventory is sold and an impairment charge against trade receivables of $2m that will not be allowed in the current year for tax purposes but will be in the future. Income tax paid is at 30%.

Required:Calculate the deferred tax provision at 31 December 20X8.

Carrying Value$m

Tax Base$m

Property 20 14

Plant & Equipment 10 8

Inventory 8 12

Trade Receivables 6 8

Trade Payables 12 12

Cash 4 4

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Illustration 2Show the accounting treatment in the following situations:

(i) A company treats royalties as income when receivable in accordance with IFRS. The tax regime taxes royalties when they are received. The Income Statement of the company shows $1m of royalties in the period of which $500,000 have been received.

(ii)In accordance with IFRS a company has deferred $2m of income on a long term contract. The tax rules state that the income should be recognised immediately.

(iii)Depreciation on Plant & Equipment in the period under IFRS is $4m where the tax allowable depreciation is $2m.

(iv)Depreciation on Buildings in the period under IFRS is $3m where the tax allowable depreciation is $4m.

The tax rate is 30%

Illustration 3An entity granted 1,000 share options to an employee vesting 3 years later. The fair value of at the grant date was $3

Tax law allows a tax deduction of the intrinsic value at the end of the vesting period.

The intrinsic value is $1.20 at the end of year 1 and $3.40 at the end of year 2

Assume a tax rate of 30%.

�71


IAS 37Provisions

�72


Illustration 1Greenie, a public limited company, builds, develops and operates airports. During the financial year to 30 November 2010, a section of an airport collapsed and as a result several people were hurt. The accident resulted in the closure of the terminal and legal action against Greenie. When the financial statements for the year ended 30 November 2010 were being prepared, the investigation into the accident and the reconstruction of the section of the airport damaged were still in progress and no legal action had yet been brought in connection with the accident. The expert report that was to be presented to the civil courts in order to determine the cause of the accident and to assess the respective responsibilities of the various parties involved, was expected in 2011.

Financial damages arising related to the additional costs and operating losses relating to the unavailability of the building. The nature and extent of the damages, and the details of any compensation payments had yet to be established. The directors of Greenie felt that at present, there was no requirement to record the impact of the accident in the financial statements.

Compensation agreements had been arranged with the victims, and these claims were all covered by Greenie’s insurance policy. In each case, compensation paid by the insurance company was subject to a waiver of any judicial proceedings against Greenie and its insurers. If any compensation is eventually payable to third parties, this is expected to be covered by the insurance policies.

The directors of Greenie felt that the conditions for recognising a provision or disclosing a contingent liability had not been met. Therefore, Greenie did not recognise a provision in respect of the accident nor did it disclose any related contingent liability or a note setting out the nature of the accident and potential claims in its financial statements for the year ended 30 November 2010.

(6 marks)

Illustration 2Grange has prepared a plan for reorganising the parent company’s own operations. The board of directors has discussed the plan but further work has to be carried out before they can approve it. However, Grange has made a public announcement as regards the reorganisation and wishes to make a reorganisation provision at 30 November 2009 of $30 million. The plan will generate cost savings. The directors have calculated the value in use of the net assets (total equity) of the parent company as being $870 million if the reorganisation takes place and $830 million if the reorganisation does not take place. Grange is concerned that the parent company’s property, plant and equipment have lost value during the period because of a decline in property prices in the region and feel that any impairment charge would relate to these assets. There is no reserve within other equity relating to prior revaluation of these non-current assets.

�73


IAS 10 - Subsequent Events

�74


Illustration 1

Which of the following are adjusting events for Fishcakes Ltd? The year end is 30 June 20X1 and the accounts are approved on 20 August 20X1.

1. Sales of year-end inventory on 4 July 2011 at less than cost2. Issue of new ordinary shares on 10 July 2011.3. A fire in the warehouse occurred on 16 July 2011. All stock was destroyed.4. A major credit customer was declared bankrupt on 20 July 2011.5. All of the share capital of a rival, Haggis Ltd was acquired on 22 July 2011.6. On 4 August, $700,000 was received in respect of an insurance claim dated 13

February 2011.

Which of the following are adjusting events for Fishcakes Ltd?

�75


Interim Reporting (IAS 34) & First Time Adoption (IFRS 1)

�76


Illustration 1In the IFRS opening statement of financial position at 1 May 2009, Lockfine elected to measure its fishing fleet at fair value and use that fair value as deemed cost in accordance with IFRS 1 First Time Adoption of International Financial Reporting Standards. The fair value was an estimate based on valuations provided by two independent selling agents, both of whom provided a range of values within which the valuation might be considered acceptable. Lockfine calculated fair value at the average of the highest amounts in the two ranges provided. One of the agents’ valuations was not supported by any description of the method adopted or the assumptions underlying the calculation. Valuations were principally based on discussions with various potential buyers. Lockfine wished to know the principles behind the use of deemed cost and whether agents’ estimates were a reliable form of evidence on which to base the fair value calculation of tangible assets to be then adopted as deemed cost.

Lockfine was unsure as to whether it could elect to apply IFRS 3 Business Combinations retrospectively to past business combinations on a selective basis, because there was no purchase price allocation available for certain business combinations in its opening IFRS statement of financial position.

�77


Financial Instruments I

�78


Illustration 1Aron held 3% holding of the shares in Smart, a public limited company. The investment was classified as available-for-sale and at 31 May 2009 was fair valued at $5 million. The cumulative gain recognised in equity relating to the available-for-sale investment was $400,000.

On the same day, the whole of the share capital of Smart was acquired by Given, a public limited company, and as a result, Aron received shares in Given with a fair value of $5·5 million in exchange for its holding in Smart.

Show the treatment for the transaction in the accounts to the 31 May 2009:

i) Under IAS 39ii)If the asset was classified as FVOCI under IFRS 9

Illustration 2The publication of IFRS 9, Financial Instruments, represents the completion of the first stage of a three-part project to replace IAS 39 Financial Instruments: Recognition and Measurement with a new standard. The new standard purports to enhance the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity.

Required:

Discuss the approach taken by IFRS 9 in measuring and classifying financial assets and the main effect that IFRS 9 will have on accounting for financial assets. (11 marks)

�79


Financial Instruments II

�80


Illustration 1

A company invests $100,000 in a 3 year redeemable 12% bond.

The bond consists of interest payments and principle only and the company intends to hold it until it is redeemed.

Show the treatment for the bond over the 3 year period.

Illustration 2A company invests $10,000 in a 3 year redeemable 10% bond which is redeemable at a premium of $675.

The bond consists of interest payments and principle only and the company intends to hold it until it is redeemed.

The effective interest rate on the bond is 12%.


Illustration 3A company issues a $30,000 3 year 7% redeemable bond at a discount of 10% with issue costs of $1,000.

The bond is redeemable at a premium of $1,297.

The effective interest rate is 14%.


�81


Illustration 4VB acquired 40,000 shares in another entity, JK, in March 2012 for $2.68 per share. The investment was held for trading purposes on initial recognition. The shares were trading at $2.96 per share on 31 July 2012.

Show the treatment to record the initial recognition of this financial asset and its subsequent measurement at 31 July 2012

Illustration 5QWE issued 10 million 5% convertible $1 bonds 2015 on 1 January 2010. The proceeds of $10 million were credited to non-current liabilities and debited to bank. The 5% interest paid has been charged to finance costs in the year to 31 December 2010.

The market rate of interest for a similar bond with a five year term but no conversion terms is 7%. (The annuity rate for 5 years at 7% is 4.100 with the discount rate in year 5 being 0.713).

Show the split of the compound instrument between debt and equity and the treatment of the debt portion in the first year.

Illustration 6Aron issued one million convertible bonds on 1 June 2006. The bonds had a term of three years and were issued with a total fair value of $100 million which is also the par value. Interest is paid annually in arrears at a rate of 6% per annum and bonds, without the conversion option, attracted an interest rate of 9% per annum on 1 June 2006. The company incurred issue costs of $1 million. If the investor did not convert to shares they would have been redeemed at par. At maturity all of the bonds were converted into 25 million ordinary shares of $1 of Aron. No bonds could be converted before that date. The directors are uncertain how the bonds should have been accounted for up to the date of the conversion on 31 May 2009 and have been told that the impact of the issue costs is to increase the effective interest rate to 9·38%.

�82


Hedge Accounting

�83


Illustration 1

In June 20X5 ABC Co. (a jewellery manufacturer) is worried about the price of gold increasing. ABC intends to buy 1,000 ounces of gold on 31st Dec 20X5 so enters into a futures contract to buy 1,000 ounces of gold at $1,235 per ounce on 31 June 20X5.

The year end of ABC Co. is 31 October 20X5 and on that date the futures price for delivery on 31 Dec 20X5 is $1,300 per ounce.

Show the accounting entries to record the futures contract in the financial statements at the year end 31 October 20X5.

Illustration 2

NMN is a UK based company and is receiving $400,000 from a US customer in 6 months. NMN takes out a forward contract at a rate of £1:$1.40 and by it’s year end in 3 months the spot rate is £1:$1.45.

At what value should the contract be included in the financial statements at the year end?

�84


Illustration 3

A company purchases a $2 million bond that has a fixed interest rate of 6% per year . The instrument is classed as a FVPL financial asset. The fair value is $2 million.

The company enters into an interest rate swap (fair value zero) to offset the risk of a decline in fair value. If the derivative hedging instrument is effective, any decline in the fair value of the bond should be offset by opposite increases in the fair value of the derivative instrument. The swap is expected to be 100% effective.

The company designates and documents the swap as a hedging instrument.

Market interest rates increase to 7% and the fair value of the bond decreases to $1,920,000.

Show the double entry to record the hedge in the financial statements

Illustration 4

ABC intends to buy 1,000 ounces of gold on 31st Jan 20X6 at the prevailing market price on that date. The current price of gold is $1,200.

ABC is concerned that the price of gold may rise, so enters into a futures contract to buy 1,000 ounces of gold at $1,300 per ounce on 31 March 20X5.

The company designates and documents the futures contract as a hedging instrument.

The year end of ABC Co. is 31 October 20X5 and on that date the futures price for delivery on 31 March 20X6 is $1,400 per ounce. The market price of gold on that date is $1,325.

On 31 Jan 20X6 the futures contract is settled at $1,450 and the contract for the gold purchase is completed at a price of $1,350.

Show the impact of this cash flow hedge on the financial statements of ABC Co. at:

(i) 31 Oct 20X5(ii) 31 Jan 20X6

�85


Illustration 5

P intends to buy 1000 barrels of oil, the current price is $95 per barrel. They hedge the risk of a rise in prices by taking out a futures contract to secure the price at $100 per barrel. By the year end the oil price is $150 per barrel and the futures price is $160.

How should the hedge be treated in the financial statements?

�86


Financial Instrument Disclosures

No Illustrations, Just Objective Test Questions

�87


1. IFRS 7 splits financial instrument disclosures into 2 categories. Which of the following is a category of disclosure under IFRS 7?

A. Information about strategies.B. Information about significance.C. Information about hedging.D. Information about risks.E. Information about reclassification.

2. Which of the following is not a required disclosure under the ‘Information about risks’ category of IFRS 7?

A. Qualitative disclosuresB. Quantitative disclosuresC. Market Risk disclosuresD. Cash flow disclosures

�88


Financial Asset Impairment

�89


Illustration 1

On 01 January 20X4 Satchel purchased a $10m 5 year 8% bond which is redeemable at a premium of $1.22m. The effective interest rate on the bond is 10%.

It is estimated on initial recognition of the asset that there is a 0.25% risk of default in the next 12 months and that if this does occur there would be no more further payments of interest and only 60% of the capital would be repaid.

How should the bond be treated in the financial statements of Satchel?

Illustration 2

On 01 January 20X4 Satchel purchased a $10m 5 year 8% bond which is redeemable at a premium. The effective interest rate on the bond is 10%.


On 31 December 20X4 the interest for the year has been paid but it is estimated that there has been a significant increase in the risk of default on the bond. There is now a 10% likelihood that default will occur over the life of the bond and if so no further interest will be received and only 30% of the capital would be repaid.


�90


Illustration 3

On 01 January 20X4 Satchel purchased a $10m 5 year 8% bond which is redeemable at a premium. The effective interest rate on the bond is 10%.


On 31 December 20X4 the interest for the year was been paid but it was estimated that there has been a significant increase in the risk of default on the bond. There is now a 10% likelihood that default will occur over the life of the bond and if so no further interest will be received and only 30% of the capital would be repaid.

On 31 December 20X5 only interest of $400,000 was received due to financial difficulties suffered by the bond issuer. Satchel do not expect to recover any further interest but do expect to recover 50% of the capital expected at the end of the 5 years.


Illustration 4

On 01 January 20X4 Navel purchased a $2m 5 year 10% bond. The effective interest rate on the bond is also 10%. The bond is designated as FVOCI.

On 31 December 20X4 the interest for the year was been paid and it was estimated that there has not been a significant increase in the risk of default on the bond. The fair value of the bond on that date was $1.9m.

Therefore only a 12 month expected credit loss allowance should be made which has been determined as $40,000.

How should the bond be treated in the financial statements of Navel?

�91


IFRS 16 - Leases I(Lessee)

�92


Illustration 1An asset is leased by a company on the 01/01/X0 over a 3 year period. They pay 3 annual payments of $25,000, the first of which is payable on 31/12/X0. In addition they have an option to extend the lease which they are reasonably certain to do for 1 additional year at a cost of $2,0000.

Direct costs of $2000 were incurred in obtaining the lease and $500 of these were reimbursed by the lessor.

The interest rate implicit in the lease is 12%

Show the treatment in the lessees financial statements over the life of the asset.

Illustration 2A company takes out a 5 year lease on a ship on 01/01/X0 the useful life of the ship is 20 years. $5.5m is to be paid in arrears each year. The lessor has agreed to maintain the ship for the duration of the contract

The interest rate is 6% and the standalone price of the lease on the ship is $25m of the $27.5m total payments.

Explain the treatment in the income statement and the statement of financial position for the lease contract.

�93


Illustration 3An asset is leased by a company on the 01/01/X0 over a 3 year period. They pay $50,000 up front then 3 annual payments of $100,000, the first of which is payable on 31/12/X0.

The lease payments are indexed to the Consumer Price Index (CPI) for the previous 12 months.

At the start of the lease the CPI is 110 and by the beginning of the second year it is 120.

The interest rate implicit in the lease is 5%

Show the treatment in the lessees financial statements over the first 2 years of the lease.

�94


IFRS 16 - Leases II(Lessor)

�95


Illustration 1ABC Co. leases an asset to CD Co. for a term of 4 years from 1/1/2010. Annual instalments are payable in arrears of $2m. At the end of the term CD Co. can lease the asset for a secondary term of 10 years at a rent of $50,000 per year.

The expected residual value at end of the initial lease is $1m .

Interest rate implicit in the lease 6%.

Show the treatment for the lease in the financial statements of the lessor.

Illustration 2A company hires out plant to other businesses on long term operating leases.

On 01/04/X0 it hires out an item of plant on a 6 year lease with an amount payable on that date of $200,000 followed by 5 payments of $100,000 on 01/04/X1 - 01/04/X5.

The plant will be returned to the company on 31/03/X6.

The cost of the plant to the company was $1,100,000 and it has a 30 year useful economic life with no residual value.

i. What is the annual rental income recognised by the company?

ii.Show the treatment in the income statement and the statement of financial position for the years 20X0 and 20X1.

�96


Illustration 3A company enters into a sale and finance agreement on 1/1/X1 when the Carrying Value of the asset was $70,000. The sale proceeds were $120,000, which was the fair value of the asset, with the remaining useful economic life of the asset being 5 years.

The lease was for 5 annual rentals of $20,000 in arrears. Implicit interest rate of 8% (5 year annuity 3.99).

How should the lease be recognised in the financial statements of each party. Assume the lease is an operating lease from the perspective of the lessor.

Illustration 4A company enters into a sale and finance agreement on 1/1/X1 when the Carrying Value of the asset was $8m. The sale proceeds were $10m and the fair value of the asset was $9.7m.

The lease was for 5 annual rentals of $1.5m in arrears. Implicit interest rate of 4%.

How should the lease be recognised in the financial statements of each party. Assume the lease is an operating lease from the perspective of the lessor.

�97


IFRS 15 - Revenue I

�98


Illustration 1

Fresco sells an IT system to Dining on the first day of a new accounting period.

The package includes hardware delivered immediately and a contract for support over the next 3 years with that support worth $50,000 p/a.

The total cost of the contract is paid up front and is $300,000.

How much should Fresco recognise as revenue from the transaction in the current year?

Illustration 2

Jumbo has agreed to sell a piece of complex machinery with two years free servicing to Jet for $441,000. The machine usually sells for $420,000.

The servicing will cost Jumbo $50,000 to provide and they generally include a mark-up of 40% when setting the price to charge customers for servicing.

The two year servicing contract is not available as a stand-alone product.

How should the transaction price be allocated to the machine and servicing?

Illustration 3

Jumbo has agreed to sell a piece of complex machinery with two years free servicing to Jet for $700,000. The machine usually sells for $600,000 although a 5% discount is often applied to machines of this specification.

The servicing will cost Jumbo $100,000 to provide and they generally include a mark-up of 30% when setting the price to charge customers for servicing.

The two year servicing contract is not available as a stand-alone product but Jumbo has a policy of not offering discounts on servicing contracts.

How should the transaction price be allocated to the machine and servicing?

�99


Illustration 4

Placo obtained a contract to sell Davo $3m worth of services over a 3 year period. Specific costs that would not have been incurred otherwise amounted to $120,000.

How should the revenue and costs be recognised?

�100


IFRS 15 - Revenue II

�101


Illustration 1

Badger Co. manufactures smart phones and sells them through a contractual relationship with Bodger Co. Badger provides Bodger with the phones for a price of $150 payable once the phone is sold on to a customer.

Bodger has also agreed to a clause in the contract of sale that they cannot sell the phone for less than $200.

How should the goods and revenue be treated in the financial statements of Badger and Bodger?

Illustration 2

Johnston enters into a contract to sell a piece of plant to Paints on 01 Jan 20X6 and delivers the plant on that date for Paints to begin to use. The price agreed in the contract is $400,000 to be paid on 01 Jan 20X8.

The market rate of interest available to this customer is 10%.

How should this transaction be accounted for in the accounts of Johnston?

Illustration 3

Gerry has just completed a contract to supply Roses with 200 pineapple trees over the next 2 years for a set price of $40,000.

As part of the contract Gerry agreed to pay $2,000 to increase the height of the doors at Roses in order to get the trees into the store.

How much revenue should be recognised in year 1 of the contract?

Illustration 4

Avon has sold goods to 1000 customers at a price of $400 each. The goods are delivered and control passed to the customer immediately and they are paid for up front. Each good is currently in inventory at a value of $200.

The customers have the option to return the goods to Avon if they are not sold in the next 60 days for a full refund at which stage Avon will be able to sell them on at a profit.

Based on prior experience Avon estimates that 95% of the goods will not be returned.�102


Construction Contracts Under IFRS 15

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Illustration 1

ABC Co. is building a football stadium under a construction contract.

The estimated costs to complete the stadium are $400,000.

The costs to date have been $350,000.

The total estimated revenue is $1,000,000.

It is estimated that the contract is 50% complete.

(i) What amounts of revenue, costs and profit will be recognised in the income statement?

(ii) If the expected revenue from the contract was $500,000 show the amounts of revenue, costs and profit that would be recognised in the income statement?

Illustration 2

ABC Co. is building a football stadium under a construction contract.

The estimated costs to complete the stadium are $400,000.

The costs to date have been $350,000.

It is estimated that the contract is 50% complete.

The company is not able to reliably estimate the outcome of the contract but believes it will recover all costs from the customer.

What amounts of revenue, costs and profit will be recognised in the income statement?

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Illustration 3A construction company has the following contracts in progress:

Profit is accrued on the contracts as a percentage of completion derived by comparing work certified to the total sales value.

Contracts X and Z have been in progress for several years and the following amounts have been recognised to date:

Calculate the figures to be included in the financial statements in relation to the above contracts.

X Y Z

Costs Incurred to Date 350 200 600

Costs to complete 50 800 900

Work Certified to date 400 300 1000

Contract Price 500 600 2000

Cash Received on Contract 300 200 1200

X Z

Revenue 100 300

Costs 80 250

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Illustration 4On 1 October 20X9 Mocca entered into a construction contract that was expected to take 27 months and therefore be completed on 31 December 20X1.

Details of the contract are:$’000

Agreed contract price 12,500 Estimated total cost of contract (excluding plant) 5,500

Plant for use on the contract was purchased on 1 January 20X0 (three months into the contract as it was not required at the start) at a cost of $8 million. The plant has a four-year life and after two years, when the contract is complete, it will be transferred to another contract at its carrying amount. Annual depreciation is calculated using the straight-line method (assuming a nil residual value) and charged to the contract on a monthly basis at 1/12 of the annual charge.

The correctly reported income statement results for the contract for the year ended 31 March 20X0 were:

$‘000Revenue recognised 3,500Contract expenses recognised (2,660)Profit recognised 840

Details of the progress of the contract at 31 March 20X1 are:$’000

Contract costs incurred to date (excluding depreciation) 4,800Agreed value of work completed and billed to date 8,125Total cash received to date (payments on account) 7,725

The percentage of completion is calculated as the agreed value of work completed as a percentage of the agreed contract price.

Required:

Calculate the amounts which would appear in the income statement and statement of financial position of Mocca for the year ended/as at 31 March 20X1 in respect of the above contract.

(10 marks)

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Entity Reconstructions

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Illustration 1

Dividends cannot be paid while accumulated losses exist.

Equity of $600,000 is only backed by assets of $500,000.

Loan finance cannot be raised due to the current financial position.

Required

Apply a capital reduction and restate the statement of financial position.

$‘000

Assets 500

500

Equity & Liabilities

Issued Equity Shares @ $1 each 600

Share Premium 100

Retained Earnings -300

Liabilities 100

500

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Illustration 2

A reconstruction scheme is to take place under the following conditions:

(i) The equity shares of $1 nominal currently in issue will be written off and will be replaced on a one-for-one basis by new equity shares with nominal value of $0.25.

(ii)The debenture loan will be replaced by the issue of new equity shares - four new shares with nominal value of $0.25 each for every $1 debenture loan converted.

(iii)New shares with a nominal value of $0.25 will be offered to the existing equity holders in the ratio of three new shares for every one currently held. All current equity holders are expected to take this up.

(iv)Share premium account to be eliminated.(v)Brand to be written off as it is impaired.(vi)Deficit on the retained earnings to be eliminated.

Prepare the revised SFP and show any workings undertaken to achieve this.

$‘000

Intangible Asset (Brand) 50,000

Non Current Assets 220,000

270,000

Inventory 20,000

Receivables 30,000

320,000

Equity & Liabilities

Issued Equity Shares @ $1 each 100,000

Share Premium 75,000

Retained Earnings -100,000

75,000

Debenture Loan 125,000

Overdraft 20,000

Payables 100,000

320,000

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Agriculture (IAS 41)

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Illustration 1A farmer purchased a flock of 50 5 year old sheep on 1 February 20X4 and on 31 July 20X4 purchased another flock of 20 5.5 year old sheep.

The following fair values less estimated ‘point of sale’ costs were applicable:

- 5 year old sheep at 1 February 20X4 $70.- 5.5 year old sheep at 31 July 20X4 $77.- 6 year old sheep at 31 January 20X5 $80.

Required:

Calculate the amount that will be taken to the statement of profit or loss for the year ended 31 January 20X5.

Illustration 2Jimmy owns a farm with a herd of 300 goats worth $40 each on 1 January 20X4. At 31 December 20X4 the goats have reproduced and he has 345 goats worth $42 each. At the local market the goats are sold with a commission of 3% on each sale. In addition Jimmy sold 3000 litres of goats milk at an average selling price of $1.20 per litre.

Required:

Calculate the amounts that will be taken to the statement of profit or loss for the year ended 31 December 20X4 and extracts from the Statement of Financial position.

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IAS 7Cash Flow Statements

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Illustration 1The group financial statements for Nasser Ltd. show the following information:

What was the dividend paid to the NCI in the year X1?

Illustration 2Indigo Ltd, took up a 40% holding in Violet Ltg. for consideration of $120 in 20X1. Tthe group financial statements for Indigo Ltd. show the following information:

What amounts will be included in the group cash flow statement in the year X1?

X1 X0

NCI on Statement of Financial Position 820 700

NCI share of Profit after Tax 220 130

X1 X0

Post tax Income from Associate (Income Statement) 50 0

Investment in Associate (SFP) 150 0

Loan to Associate 20 0

�113


Illustration 3Extracts from the group SFP of Express Ltd are outlined below:

During the period Express Ltd purchased 75% of Delivery Ltd. At the date of acquisition the fair value of the following assets and liabilities were determined:

Show the movements in cash for the 4 items outlined above.

Illustration 4Using the information in illustration 3 show the movements in cash if Express Ltd. Had already owned the subsidiary and sold it during the period.

X1 X0

Property Plant & Equipment 50,600 44,050

Inventory 33,500 28,700

Receivables 27,130 26,300

Trade Payables 33,340 32,810

Property Plant & Equipment 4,200

Inventory 1,650

Receivables 1,300

Payables 1,950

�114


Illustration 5

Consolidated Financial Statements for Group.

Group Income Statement $m

Revenue 4,000

COS -2,200

Gross Profit 1,800

Other Expenses -789

Profit from operations 1011

Gain on sale of sub (Note i) 50

Finance cost (Note ii) -200

PBT 861

Tax -180

Profit after tax 681

Foreign Currency Translations 62

Total Comprehensive Income 743

Attributable to Parent 600

Attributable to NCI 143

Group Statement of Changes in Equity $m

Balance B/F 3,307

Profit Attributable to Parent 600

Dividends Paid -240

Issue of Shares 1000

Balance C/F 4667

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(i) On 1 April 20X2 the parent disposed of a 75% subsidiary for $250m in cash which had the following net assets at the time:

$mProperty Plant & Equipment 200Inventory 100

20X2 20X1

Goodwill 52 72

Property Plant & Equipment 5,900 4,100

Inventories 950 800

Receivables 1,000 900

Cash 80 98

7982 5970

Share Capital 3,500 2,500

Retained Earnings 1,167 807

NCI 543 500

Non-Current Liabilities

Obligations under Finance Leases 225 140

Long term borrowings 1,554 1,200

Deferred Tax 278 218

Current Liabilities

Trade Payables 450 400

Accrued Interest 25 20

Income Tax 130 120

Obligations under Finance Leases 45 25

Overdraft 65 40

7982 5970

�116


Receivables 110Cash 10Payables (80)Income Tax (25)Interest bearing borrowings (75)

240

The subsidiary had been purchased several years ago for a cash payment of $110m when it’s net assets had been $120m.

(ii) Goodwill is measured using the proportionate method

(iii)The following currency differences occurred

The exchange losses on borrowings relate to foreign loans taken out to finance investments in subsidiaries. The accounts assistant has offset these against the retranslation of the net investments in the subsidiaries. The exchange gain on retranslation of the income statement (from average rate for the year to the closing rate) relates to operating profit excluding depreciation.

(iv) Depreciation for the year was $320m and the group disposed of PPE with a net book value of $190m for cash of $198m. the profit on this disposal has been credited to ‘Other operating expenses’.

The group entered into a significant number of new finance leases in the period of which $250m related to additions to property, plant & equipment.

Prepare the consolidated cash flow statement for the period.

Total $m

Parent Share $m

On retranslation of net assets:

Property Plant & Equipment 25 20

Inventories 20 15

Receivables 20 16

Payables -9 -6

56 45

Retranslation of Profit for period 16 12

Offset exchange losses on borrowings (see below)

-10 -10

62 47

�117

strategic business reporting...strategic business reporting working 4 - nci working 5 - accumulated...

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