ACCA P2 (INT) Corporate Reporting - Study text - 2010 (Emile Woolf)
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Practice questions
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(2) Financecosts $000
$000
Loaninterest 120
80
Financechargeonfinanceleases 205
132
Exchangeratelossesonlong‐termloans 25
18
350
230
(3) Taxationonprofitsonordinaryactivities $000
$000
Taxonincomeat30% 600
90
Deferredtax 150
35
Underprovisioninrespectofpreviousyears 50
‐
800
125
(4) Foreignexchangedifferences $000
$000
Gainsarisingonre‐translation 700
400
Theexchangerategainrelatestothetranslationofan80%ownedoverseas
subsidiary,Louise,undertheclosingratemethod.Thegaincomprises:
$000
Noncurrentassets 424
Inventories 117
Receivables 339
Cash 53
Tradepayables (58)
875
AttributabletoNCI (175)
Attributabletoownersofparentcompany 700
(5)
Duringtheyearnoncurrentassetsadditionsof$700,000wereacquired
underfinanceleases.Paymentsonfinanceleasesaremadeinarrears.The
netbookvalueofnoncurrentassetsdisposedofwas$720,000,withsale
proceedsof$810,000.
Required
(a) Prepare the group statement of cash flows of Bishop in accordance with IAS 7
together with any required notes for the year ended 31 December Year 2.
(b) Explain why external users of financial statements benefit from receiving a
statement of cash flows.
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17 The Grape Group
The draft statements of financial position and income statements of the Grape
Group at 31 March Year 4 and 31
March Year 3 are as follows:
Notes Year4
Year3
$000
$000
Non‐currentassets
Intangibleassets
24
‐
Property,plantandequipment
(1) 13,515
12,990
Investments–associatedundertakings
1,966
1,920
15,505
14,910
Currentassets
Inventory
11,657
10,530
Receivables
7,209
6,936
Cashatbankandinhand
5,190
1,728
24,056
19,194
39,561
34,104
Capitalandreserves
Sharecapital
8,100
7,425
Sharepremium
1,989
1,470
Accumulatedprofits
13,200
8,700
23,289
17,595
Non‐currentliabilities (2) 6,900
7,890
Currentliabilities
(3) 9,372
8,619
39,561
34,104
Incomestatement:Yearto31March
Year4
Year3
$000
$000
Salesrevenue 74,100
59,400
Costofsales
(54,138)
(42,240)
Grossprofit
19,962
17,160
Distributioncosts (5,889)
(4,869)
Administrativeexpenses
(4,092)
(3,384)
Operatingprofit
9,981
8,907
Incomefrominterestsinassociates 139
144
Lossonsaleoftangiblenon‐currentassets
(18)
‐
Interestexpense
(552)
(651)
Profitbeforetax
9,550
8,400
Incometaxexpense (2,950)
(2,400)
Profitaftertax
6,600
6,000
Practice questions
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Notes
(1) Property, plant and equipment
Year4
Year3
$000
$000
Cost
At1April
20,598
19,416
Additions
1,875
2,022
Disposals (429)
(840)
At31March
22,044
20,598
Depreciation
At1April 7,608
6,984
Chargeforyear
1,176
936
Disposals
(255)
(312)
At31March
8,529
7,608
Netbookvalue
13,515
12,990
(2) Non-current liabilities
Year4
Year3
$000
$000
8%Loannotes 6,900
6,900
10%Unsecuredloannotes
‐
990
6,900
7,890
(3) Current liabilities
Year4
Year3
$000
$000
Accountspayable 6,422
6,219
Incometax
2,950
2,400
9,372
8,619
You are provided with the following additional information:
Interest on the 8% loan note is payable half-yearly on 30 September and 31
March.
Income tax is payable nine months after the year-end.
Dividends of $2.1m and $2.4m were proposed for Year 3 and Year 4
respectively.
During the year, the Grape Group acquired 100% of the ordinary share
capital of Pip. The purchase was financed by $346,000 in cash and the issue
of 54,000 ordinary shares of $1 each. The ordinary shares had a market
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value of $152,000. The following figures related to Pip at the date of
acquisition:
$000
Property,plantandequipment
315
Inventory 139
Receivables
85
Cashatbankandinhand
3
Payables
(68)
474
Sharecapital 180
Reserves 294
474
(4) The share capital consists of $1 ordinary shares.
Required
Prepare a statement of cash flows and related notes for the Grape Group for the
year ended 31 March Year 4.
18 IMPS
A division of IMPS has the following non-current assets, which are stated at their
carrying values at 31
December Year 4:
$m
$m
Goodwill
70
Property,plantandequipment:
Landandbuildings 320
Plantandmachinery 110
430
500
Because these assets are used to produce a specific product, it is possible to identify
the cash flows arising from their use. The management of IMPS believes that the
value of these assets may have become impaired, because a major competitor has
developed a superior version of the same product and, as a result, sales are expected
to fall.
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The following additional information is relevant:
Forecast cash inflows arising from the use of the assets are as follows:
Yearended31
December:
$m
Year5 185
Year6
160
Year7
130
(i) The directors are of the opinion that the market would expect a pre-tax return
of 12% on an investment in an entity that manufactures a product of this type.
(ii) The land and buildings are carried at valuation. The surplus relating to the
revaluation of the land and buildings that remains in the revaluation reserve
at 31 December Year 4 is $65 million. All other non-current assets are carried
at historical cost.
(iii) The goodwill does not have a market value. It is estimated that the land and
buildings could be sold for $270 million and the plant and machinery could be
sold for $50 million, net of direct selling costs.
Required
(a) Calculate the impairment loss that will be recognised in the accounts of IMPS.
(b) Explain how this loss will be treated in the financial statements for the year
ended 31 December Year 4.
19 Prima
Prima is a listed company with a year end of 31 December. It operates two
businesses, the first is the rental of luxury yachts and the second is a chain of luxury
holiday villas in Europe. The directors have requested your advice on the following
matters.
Holiday villas
Prima’s policy is to carry the holiday villas at their re-valued amount, which, based
on the most recent valuation in 20X0, was $20m (historical cost was $10m). Prima is
unsure how frequently a revaluation of such properties is required and so has
instructed a surveyor to provide an up-to-date valuation as at 31 December Year 4.
This valuation has provided the following information:
$million
Replacementcost
17
Valueinuse 28
Openmarketvalue
25
One of the villas has received very few bookings over the past two years and so a
decision was reached to exclude it from the Year 5 brochure. It is currently up for
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sale. The villa has a carrying value of $1.25m. Its value in use is only $0.85m and its
expected market value is $1m, before expected agents and solicitor’s fees of $50,000.
The directors are unsure as to the accounting treatment of this villa. A number of
potential buyers have expressed an interest in the property, and it is hoped that a
deal will be negotiated in the first few months of Year 5.
Prima’s accounting policy is to not charge depreciation on the villas. Its justification
is that the villas are maintained to a high standard and have useful lives of at least
50 years.
Head Office
Over the past two years, Prima has built its own head office. Construction began on
1 October Year 2 and finished on 1 June Year 4, although minor modifications meant
that the company did not relocate until 1 September Year 4.
The site cost $1m and the costs of construction were a further $8m. Prima took out a
two year loan of $5m on 1 October Year 2, at an interest rate of 9% per annum, to
help fund the work. In order to encourage businesses to operate in areas of high
unemployment, the government offered a $1.5m grant towards the cost of
construction. The terms of settlement were that payment would only be made upon
completion of the building once a government inspection had taken place. This
inspection had not taken place by the year end, but Prima is confident that the grant
will be received shortly after the year end.
The company intends to use the head office for the next 50 years and, as for the
villas, does not intend to depreciate the land or buildings.
Yachts
Prima has spent the past year designing a new range of luxury yachts. Work was
completed on 1 April Year 4 at a cost of $20m. During the construction, the economy
took a downturn and the company now believes that the market value of the yachts
is only $17m, although the value in use is estimated to be $18m. The engines of the
yachts have a three year life, the interior has a two year life, and the remainder
should have a life of 15 years. The engine cost is believed to represent 15% of the
total cost of manufacture and the interior approximately 25%.
Required
Explain the accounting issues relating to the villas, head office and yachts, referring
to relevant IAS guidance. Where possible, numerical information relating to the 31
December Year 4 financial statements should be provided.
20 Financial instruments
IAS32, IAS39 and IFRS7 together provide guidance on the recognition,
measurement and disclosure of financial instruments.
Practice questions
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Required
(a) Explain the three measurement methods referred to in IAS 39 and when each
model should be used.
(b) A company holds the following financial instruments. Explain how they
should be accounted for in accordance with IAS 32 and IAS 39 in the financial
statements to 31 December Year 3.
(i) A 3% bond was purchased on 1 January Year 3 for $250,000. The
nominal value is $300,000 and redemption will be at par on 31 December
Year 6. The coupon is received annually in arrears. The effective interest
rate on the bond is 9.7%. The company has classified the bond as “held
to maturity”. The market value of the bond at 31 December Year 3 is
$275,000.
(ii) An investment was made in the equity shares of XYZ. 3,000 shares were
purchased (a 1% stake) at a cost of $10 per share on 1 April Year 1. A
transaction fee of $300 was charged on the purchase. The entity intended
to sell the shares within three months and so classed the investment as
“fair value through profit and loss”. The market value of the investment
continued to rise and so the company decided not to sell in the near
term. The market value of the shares over the three years has been as
follows:
$000
31DecemberYear1
32
31DecemberYear2 34
31DecemberYear3
35
(iii) The company issued a convertible bond at par on 31 December Year 3,
raising $500,000. The coupon on the bond is 4%. The rate on an
equivalent redeemable bond is 7%. The bond can be redeemed at par on
31
December Year 6 or converted into equity shares at a rate of five
shares per $100. The bond has not been classed as fair value through
profit and loss.
21 HAM
HAM, whose year end is 31
December, has acquired two items of machinery on
leases, the terms of which indicate that they should be treated as finance leases. In
particular, the length of the leases can be extended for any period of time on
payment of a nominal sum. Details of the two leases are as follows:
Item A: Ten annual instalments of $10,000 each, the first payable on 31 December
Year 4. The machine was completely installed and first operated on 1
January Year 4, and its purchase price on that date was $80,000. The
machine has an estimated life of ten years, at the end of which it will be of
no value.
Item B: Ten annual instalments of $15,000 each, the first payable on 1 January
Year 6. The machine was completely installed and first operated on 1
January Year 6, and its purchase price on that date was $117,000. This
machine has an estimated useful life of twelve years, at the end of which
it will be of no value.
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The finance charges should be allocated over the period of the lease using the sum
of the digits method.
The basic calculations for this are shown below:
Item A
Sum the years: 1 + 2 + 3 + 4 +………. + 10 = 55
or n(n+1) ÷ 2 where n= no of periods of borrowing = 10(11)/2 = 55
Allocate finance charge $20,000 (being $100,000 - $80,000) to each of the ten years.
Year
Finance
charge
Total
payment
Outstandin
gliability
$
$ $
4 10/55 ×20,000= 3,636
10,000 73,636
5
9/55 ×20,000= 3,273
10,000 66,909
6
8/55 ×20,000= 2,909
10,000 59,818
7
7/55 ×20,000= 2,545
10,000 52,363
8
6/55 ×20,000= 2,182
10,000 44,545
9
5/55 ×20,000= 1,818
10,000 36,363
10
4/55 ×20,000= 1,454
10,000 27,817
11
3/55 ×20,000= 1,091
10,000 18,909
12
2/55 ×20,000= 727
10,000 9,635
13
1/55 ×20,000= 365
10,000 0
20,000
100,000
Item B
Sum the years: 9(10)/2 = 45
(Note: n = 9 as payments are made in advance so the liability is paid off in nine
years not ten years)
Allocate finance charges $33,000 (being $150,000 - $117,000) to each year.
Year
Finance
charge
Total
payment
Outstanding
liability
$
$ $
6 9/45 ×33,000 6,600
15,000 108,600
7
8/45 ×33,000 5,867
15,000 99,467
8
7/45 ×33,000 5,133
15,000 89,600
9
6/45 ×33,000 4,400
15,000 79,000
10
5/45 ×33,000 3,667
15,000 67,667
Practice questions
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Year
Finance
charge
Total
payment
Outstanding
liability
$
$ $
11 4/45 ×33,000 2,933
15,000 55,600
12
3/45 ×33,000 2,200
15,000 42,800
13
2/45 ×33,000 1,467
15,000 29,267
14
1/45 ×33,000 733
15,000 15,000
15
0 ×33,000 0
15,000 0
33,000
150,000
Required
(a) Calculate the charge to profit or loss for Year 7 and Year 8 if these leases are to
be treated as operating leases.
(b) Calculate the charge to profit or loss for Year 7 and Year 8 if these leases are
treated as finance leases with the finance charges being allocated using the
sum-of-the-digits method.
(c) Show how items A and B would be incorporated in the statement of financial
position and notes at 31 December Year 8, if treated as finance leases.
(d) Discuss the suggestion that all leases should be accounted for as finance
leases.
Ignore taxation.
22 Flow
Flow prepares financial statements to 31 March each year. On 1 April Year 4, Flow
sold a freehold property to another company, River, for $850,000 and then leased it
back under a ten year operating arrangement. Flow had purchased the property
exactly ten years previously for $500,000 and had charged total depreciation of
$60,000 on the property up to the date of disposal.
Details of the sale and leaseback arrangement are as follows:
Proceeds from sale $850,000
Fair value at date of disposal $550,000
Operating lease rentals (payable in arrears) $100,000
Normal market rental $50,000
Required
(a) Explain and illustrate how Flow should reflect in its financial statements:
(1) The sale of the property to River on 1 April Year 4
(2) The payment of the first rental to River on 31March Year 5.
(b) Discuss how the treatment would differ if the leaseback arrangement was a
finance lease.
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23 AZ
(a) For enterprises that are engaged in different businesses with differing risks
and opportunities, the usefulness of financial information concerning these
enterprises is greatly enhanced if it is supplemented by information on
individual business segments.
Required
(i) Explain why the information content of financial statements is improved
by the inclusion of segmental data on individual business segments.
(ii) Discuss how IFRS 8 requires that segments be analysed.
(b) AZ, a public limited company, operates in the global marketplace.
(i) The major revenue-earning asset is a fleet of aircraft which are registered
locally and its other main source of revenue comes from the sale of
holidays. The directors are unsure as to how to identify business
segments.
(ii) The company also owns a small aircraft manufacturing plant which
supplies aircraft to its domestic airline and to third parties. The
preferred method for determining transfer prices for these aircraft
between the group companies is market price, but where the aircraft is
of a specialised nature with no equivalent market price, the companies
negotiate a price for the aircraft.
(iii) The company has incurred an exceptional loss on the sale of several
aircraft to a foreign government. This loss occurred on a fixed price
contract signed several years ago for the sale of second hand aircraft and
resulted from the fluctuation of exchange rates between the two
countries.
(iv) During the year, the company decided to discontinue its holiday
business as a result of competition in the sector. This plan had been
approved by the board of directors and announced in the press.
(v) The company owns 40% of the ordinary shares of Eurocat, an unquoted
company which specialises in the manufacture of aircraft engines and
has operations in China and Russia. The investment is accounted for by
the equity method and it is proposed to exclude the company’s results
from segment assets and revenue.
Required
Discuss the implications of each of the above points for the determination of
the segmental information required to be prepared and disclosed under IFRS 8
Operating Segments and other relevant International Accounting Standards.
24 EPS
IAS 33 outlines the principle that the order in which potential ordinary shares are
considered can affect the dilution of basic earnings per share. Any financial
instrument which dilutes earnings per share should be taken into account.