ACCA P2 (INT) Corporate Reporting - Study text

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Practice questions

 Interestpayableonsums:



 Whollyrepayablewithinfiveyears 5,338

3,108

 Allotherloans 1,732

219

–––––––––––– ––––––––––––

 7,070 3,327

Less:Chargedtoworkinprogress (5,014)

(2,746)

–––––––––––– ––––––––––––



2,056

581

–––––––––––– ––––––––––––

Required

(a) Write a report, with appropriate supporting computations based on the

information available above, to advise the directors of Property Venture on

the practicality of

(i) providing the additional $5,000,000 share capital, and

(ii) their decision to provide the $6,508,000 in 20X4

(b) State what further information you might require to support your comments

and recommendations.

33 Timber Products

You are required to explain the appropriate accounting treatment for the following

transactions and to show the disclosures that would appear in the statement of

comprehensive income and statement of financial position for the financial year to

31 October 20X4.

Note: A compound interest table has been provided below.

(i) Timber Products supplies direct to large industrial and commercial customers

on three month credit terms. On 1 November 20X3 it entered into an

agreement with Ready Support whereby it transferred legal title to trade

receivables to that company. In return, Timber Products received an

immediate payment of 90% of the total net receivables plus rights to future

sums depending on whether and when the debtors paid. Ready Support had

the right of recourse against Timber Products for any additional losses up to

an agreed maximum amount.

By the end of the financial year legal title had been transferred relating to

debtors with an invoice value of $15m. Timber Products was subject under the

agreement to a maximum potential debit of $200,000 to cover losses.

(ii) Timber Products imports wood and keeps it for five years under controlled

conditions prior to manufacturing high quality furniture. In the year to 31

October 20X4 it imported timber at a cost of $40m. It contracted to sell the

whole amount for $40m and then buy it back in five years time for $56.1 m.

(iii) Timber Products manufactures and supplies retailers with furniture on a

consignment basis such that either party can require the return of the furniture

to the manufacturer within a period of six months from delivery. The retailers

are required to pay a monthly charge for the facility to display the furniture.

The manufacturer uses this monthly charge to pay for insurance cover and

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carriage costs. At the end of six months the retailer is required to pay Timber

Products the trade price as at the date of delivery. No retailers have yet sent

any goods back to Timber Products by the end of the six month period.

In the year ended 31 October 20X4, Timber Products had supplied furniture to

retailers at the normal trade price of $10m being cost plus 33 1/3%; received

$50,000 in display charges; incurred insurance costs of (15,000 and carriage

costs of $10,000; and received $6m from retailers.)

(iv) On 1 December 20X3 Timber Products sold a factory that it owned to Inter, a

wholly-owned subsidiary of Offshore Banking, for $10m. The factory had a

book value of $8.5m. Inter was financed by a loan of $10m from Offshore

Banking. Timber Products was paid a fee by Inter to continue to operate the

factory. This fee represented the balance of profit remaining after payment of

interest on its parent company loan, set at a level that represented current

interest rates. If there was an operating loss, then Timber Products would be

charged a fee to cover the operating losses and interest payable.

For the year ended 31 October 20X4 the fee paid to Timber Products amounted

to $3m and the loan interest paid by Inter amounted to $1.5m.

Compoundinteresttable

Interestrate peryear

No.ofyears

5% 6% 7% 8% 9%

1 1.050 1.060 1.070 1.080 1.090

1.102 1.124 1.143 1.166 1.188

1.158 1.191 1.225 1.260 1.295

1.216 1.262 1.311 1.360 1.412

1.276 1.338 1.403 1.469 1.539

1.340 1.419 1.501 1.587 1.677

Paper P2 (INT)

CorporateReporting

Q&A

Answers

Contents

Page

Corporate governance and corporate social

responsibility

1 Environmentalreporting 578

Group financial statements: introductory questions

2 PandQ 579

3 P,SandA 579

4 GroupandNCI 582

5 H,SandT 583

6 Disposal 585

7 Stepacquisitionandpartialdisposal 586

Group financial statements: advanced questions

8 TheEdgeleyGroup 588

9 TheAGroup 590

10 Herbert 592

11 Abbeville 595

Foreign currency

12 Orlando 600

13 MancasterandStockpot  600

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Group statements of cash flows

14 Statementofcashflows 604

15 Bella 606

16 BishopGroup 608

17 GrapeGroup 610

Non-current assets

18 IMPS 613

19 Prima 614

Financial instruments

20 Financialinstruments 617

Substance over form

21 HAM 619

22 Flow 622

Financial reporting for listed companies

23 AZ 624

24 EPS 626

Accounting for retirement benefit costs

25 UniversalSolutions 629

26 IFRS2 631

Revenue, construction contracts and agriculture

27 TheLuckyDairy 633

Taxation

28 Cohort 636

Answers

Reporting performance, post balance sheet events,

provisions, contingencies, related party

disclosures

29 Reportingperformance 638

30 Rowsley 640

31 Engina 642

32 PropertyVenture 644

Performance measurement

33 TimberProducts 645

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1 Environmental reporting

(a) The continuous use of natural resources and pollution of the environment by

business operations result in environmental costs. Some costs are paid for by

the businesses themselves, as a result of environmental laws or government

regulation, but many environmental costs are borne by society as a whole.

In the EU, quoted companies are required to disclose any significant

environmental risks in an annual business review, but there are still very few

rules, legal or otherwise, to ensure that companies disclose information about

environmental issues. Some companies voluntarily produce an environmental

report (also called a social and environmental report or a sustainability

report).

In the absence of specific regulations, the accounting profession has an

opportunity to give a lead to business to develop the financial reporting of

environmental costs.

The following list of suggestions is far from exhaustive:

(1) A note in the business review or environmental report disclosing the

policy of the business towards environmental costs. This note might be

considered part of the mission statement of the organisation.

(2) The amount spent during the accounting period to prevent or remedy

damage to the environment caused by the company's activities. This

expenditure could be analysed between compulsory and voluntary

spending, to show performance against legal and voluntary targets; for

example, reductions in pollution of air, water or land.

(3) Amounts provided for future expenditure, to meet contingent liabilities

as the law changes, or to clean up a site to be vacated in the future.

(4) More detailed disclosures a business review or environmental report

might cover:

(i) The company’s perception of risks to the environment from its

operations and plans to cover the risks, by insurance or by its own

resources. Any shortfall in the insurance cover would alert

shareholders to the risk to which the company is exposed.

(ii) The amount invested each year by the business to prevent

environmental damage, and to protect employees and society in

general from harmful features of the company’s business activities.

(iii) The extent of standby facilities capable of responding to a disaster,

with an estimate of the cost of the full economic consequences of a

possible future major disaster.

It might be difficult to estimate some of the figures suggested above, but the

difficulty should not prevent an entity from attempting to provide an

estimate. Increasingly, companies are using quantifiable performance

measurements and targets to report their environmental performance.

Information provided by an entity about environmental issues should not be

treated as a public relations exercise and nothing else.

Answers

(b) An asset is ‘a right or other access to the future economic benefits controlled

by a business as a result of past transactions’.

The manufacturing site is an asset, and money spent to conform to new laws

will confirm its ability to continue to earn profits. The cost of $8m can be

capitalised as part of the cost of the site and amortised over the economic life

of the anti-pollution items. This additional capital expenditure will increase

the carrying value of the manufacturing site, which must be tested for

impairment to ensure that it is not carried at a figure in excess of its

recoverable amount.

The cost of damages for past emissions must be written off to profit or loss.

These past costs do not qualify to be treated as a prior-year adjustment

because they are not consequent upon a change of accounting policy or a

fundamental error.

2 P and Q

The parent has a loan receivable in its statement of financial position of $600,000.

The joint venture has the same amount ($600,000) as a payable.

Under proportionate consolidation, the parent’s share of the joint venture’s assets

and liabilities are brought in on a line-by-line basis. P owns one-third of the joint

venture.

Correct answer: (b) One third of the amount of the loan is therefore eliminated on

consolidation and the remaining two-thirds ($400,000) appears in the consolidated

statement of financial position as a loan receivable from the venture.

3 P, S and A

Step 1: Calculate the group structure

P owns 75% of the equity of S and 30% of the equity of A. Therefore S is a subsidiary

and A is an associate.

Step 2

Calculate the net assets of S and A at the acquisition date and at the end of the

reporting period.

At this stage, make any fair value adjustments and eliminate the unrealised profit in

inventory.

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

NetassetsofS

Atendofcurrent

reportingperiod

At

acquisition

Post

acquisition

Equityshares 200,000

200,000 ‐

Sharepremium

80,000

80,000 ‐

Accumulatedprofits($140,000–

unrealisedprofitof$10,000(seeworking))

130,000

60,000 70,000

410,000

340,000



NetassetsofA

Atendofcurrent

reportingperiod

At

acquisition

Post

acquisition

Equityshares 100,000

100,000 ‐

Sharepremium

120,000

120,000 ‐

Accumulatedprofits($250,000minus

unrealisedprofitof$4,000(seeworking))

246,000

150,000 96,000

466,000

370,000

Working

Inventory of A: Unrealised profit = $16,000 × 33.33/133.33 = $4,000.

Inventory of P: Unrealised profit = $40,000 × 33.33/133.33 = $10,000.

The adjustments should be made to the post-acquisition profits of S and A. In

addition we need to do the following:

 Reduce the investment in A by $1,200 (30% × $4,000) in the statement of financial

position. (This will be achieved automatically by Step 6 below.)

 For the inventory held by P, reduce the inventory on consolidation by $10,000.

Step 3: Calculate the goodwill

This applies to the subsidiary S only, not to the investment in the associate.

Costoftheacquisition

320,000

Parent’sshareofthesubsidiary’snetassetsatacquisition(75%(Step

1)×340,000(Step2))

(255,000)

Goodwillatacquisition

65,000

Minus:Impairmenttodate (20,000)

Balancecarriedforward

45,000

Answers

Step 4: Calculate the non-controlling interest in S

Non-controlling interest’s share of net assets of the subsidiary at the end of the

reporting period:

= 25% (W1) × $410,000 (W2) = $102,500

Step 5: Calculate the consolidated accumulated profits.

AccumulatedprofitsofP

650,000

P’sshareofpost‐acquisitionprofitsofS(75%(Step1)×$70,000(Step2)) 52,500

P’sshareofpost‐acquisitionprofitsofA(30%(Step1)×$96,000(Step

2))

28,800

731,300

Minus:Impairedgoodwillsinceacquisition(investmentinS)(Step3) (20,000)

Consolidatedaccumulatedprofits

711,300

Step 6: Calculate the investment in associate A

The investment in associate A is calculated as follows:

Investmentatcost

140,000

P’sshareofpost‐acquisitionretainedprofitsofA(Step5) 28,800

168,800

Note: P’s share of the post-acquisition profits of A reflects its share ($1,200) of the

unrealised profit adjustment relating to the inventory of A (Step 2).

A consolidated statement of financial position can now be prepared as follows:

PGroup

Consolidatedstatementoffinancialpositionasat31DecemberYear5

Non‐currentassets

Property,plantandequipment(450,000+240,000)–PandSonly 690,000

Goodwill(Step3)

45,000

Investmentinassociates(Step6)

168,800

903,800

Currentassets

Inventory(70,000+90,000–10,000):seenote1 150,000

Othercurrentassets(20,000+110,000+130,000):seenote2

260,000

Totalassets

1,313,800

PaperP2: Corporate reporting (International)

Equityandliabilities

Equity

P:Equitysharesof$1 100,000

P:Sharepremium

160,000

Consolidatedaccumulatedprofits(Step5)

711,300

Attributabletoequityholdersoftheparent

971,300

Non‐controllinginterestinS(Step4) 102,500

Totalequity

1,073,800

Long‐termliabilities(40,000+20,000):PandSonly 60,000

Currentliabilities(100,000+80,000):PandSonly

180,000

Totalequityandliabilities

1,313,800

Note1:Inventory

InventoryofP

70,000

InventoryofS 90,000

UnrealisedprofitininventoryofP

(10,000)

150,000

Note2:Othercurrentassets

EntityP:currentaccountwithA

20,000

EntityP:othercurrentassets 110,000

EntityS:othercurrentassets

130,000

260,000

4 Group and NCI

OwnershipofS1

DirectholdingofP 80%

Non‐controllinginterestinS1(thebalance) 20%

100%



OwnershipofS2

DirectholdingofP 30%

IndirectholdingofP(80%×45%)

36%

66%

Non‐conrollinginterestinS2(thebalance) 34%

100%

ACCA P2 (INT) Corporate Reporting - Study text - 2010 (Emile Woolf)

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