ACCA P2 (INT) Corporate Reporting - Study text

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Answers

Disclosures relevant to Engina

The following outlines the related party disclosure requirements for the three

transactions you have specifically requested comment on. It is your responsibility to

bring any further related party transactions to our attention in order that they can

also be incorporated into your financial statement disclosures.

(a) Sale of goods to directors

The sale of goods and a company car to Mr Satay both constitute related party

transactions, due to Mr Satay’s position as a director of Engina. IAS 24

requires disclosure of all related party transactions with key management

personnel. However, accounting standards only apply to material

transactions. An item is considered material where knowledge of that

transaction might influence the decisions of a user of the financial statements.

Materiality is not just a matter of size, as small transactions with a director

may still be of relevance to an investor if the transaction is material to the

director, despite not being material to the entity.

In the situation described, the transactions amount to $600,000 of sales and the

sale of a company car for $45,000 (market value $80,000). In terms of value

these transactions appear not to be material to Engina and neither do they

appear to be material in value to Mr Satay. However, given the sensitive

nature of transactions with directors, and especially senior directors like Mr

Satay, the transactions should be disclosed in the financial statements in

accordance with good corporate governance practice.

Significant contracts with directors, such as these with Mr Satay, may also

require disclosure by the local Stock Exchange.

(b)

Hotel property

The sale of the hotel to the brother of Mr Soy, constitutes a related party

transaction because of Mr Soy’s status as Managing Director. The property

seems to have been sold at below market price and IAS 24 requires disclosure

of any information surrounding a transaction which will allow the reader to

understand its impact on the financial statements.

The hotel had a carrying value of $5m, but given the fall in market values it

should have been written down to its recoverable amount in accordance with

IAS 36

Impairment. Recoverable amount is measured at the higher of value in

use ($3.6m) and fair value minus costs of sale ($4.3 - 0.2m). Hence the property

should have been recorded in the statement of financial position at $4.1m.

As the property was sold at $100,000 less than this impaired value, disclosure

of this fact should be made, together with any other information relevant to

the reader, such as the reason for the sale in light of the expected decline in

prices in the future.

(c)

Mr Satay

Mr Satay has investments in 100% of the equity of Car and 80% of the equity

of Wheel. In turn, Wheel owns 100% of Engina. Engina and Wheel are related

because of their parent-subsidiary relationship. In addition, because all three

entities are under the common control of Mr Satay, IAS 24 also considers

Engina and Car to be related. Therefore, the transactions between Engina and

both Wheel and Car are related party transactions.

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The transactions will need to be disclosed in the individual financial

statements of all three entities. In the group accounts, all intra-group

transactions are cancelled on consolidation, and so disclosure need not be

made at this level.

Further disclosure requirements of director’s interests in the equity of Engina

may be necessary under local Companies Acts requirements and Stock

Exchange rules.

32 Property Venture

(a) Report

To: The Directors of Property Venture

From: AN Advisor

Subject:

Additional $5,000,000 investment in Exceptional Properties (EP)

EP has undergone significant growth and change in recent years. Using the

group statements of cash flows for 20X3 and 20X4, together with the group

statements of comprehensive income for these periods, there would appear to

be cause for concern about the viability of the proposed additional investment.

The statements appear to show that a considerable amount of expansion has

taken place over the past two years with insufficient effort being made to raise

the appropriate funds to finance this expansion. This situation has been

referred to as ‘over-trading ‘

It also appears that working capital control has been weak in this period of

change.

Analysing the difference between pre-tax profits and net cash outflow from

operating activities shows:

20X4 20X3

$000 $000

Profitbeforetax 2,311 3,733

Itemsincludedinprofitbutdisclosedseparatelyin

statementofcashflows



Associates

412 (47)

Interestreceivable

(335) (383)

Interestpayable

2,056 581



––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––

Operatingprofit 4,444 3,884

Depreciation

1,013 539

Profit/lossonnon‐currentassets

173 (64)

Increaseinworkinprogress

(4,575) (22,226)

(Increase)/Decreaseinother



elementsofworkingcapital(balancingfigure)

(14,860) 10,672



Netcashoutflowfromoperatingactivities (13,805) (7,195)



Answers

20X3 saw a large increase in WIP and own work capitalised and 20X4 saw a

large increase in other elements of working capital. Part of this increase arose

from the entity’s accounting policy of capitalising interest payable to WIP.

Together with interest payments, these summaries clearly show that the

operations of the company are not going to produce a surplus from which the

$5,000,000 can be repaid. However, the asset revaluation surplus in 20X4

indicates that there might be assets on which a loan could be secured and this

option should be considered if the finance is to be provided.

The $6,508,000 provided in 20X4 appears to have been used (together with the

sale of fixed assets) to finance the very large increase in working capital. You

should ensure that this was the reason given for raising the finance and

consider this when making your decision on the future $5,000,000 share

capital.

The size of the finance being discussed appears to be dwarfed by the size of

operations now undertaken by the group and there is obviously a problem

with operations being self-financing. Expansion on this scale and in this form

will probably lead to a very serious liquidity problem for the group. A review

of the way operations are financed on a continuing basis is clearly essential

before any decision on the increase in share capital can be taken.

(b) The report above could be extended and improved if the following

information were available:

(i) Detailed group statements of financial position, with itemised analysis

of the assets and liabilities.

(ii) Capital structure of EP

(iii) Forecast financial statements for EP

(iv) Business plans over the past periods and for the future years

(v) Actual to budget comparison over the past two years

(vi) Analysis of the spend of the $6,508,000 in 20X4

(vii) Segmental (diversified) details of revenue and profitability, especially

for risky overseas operations.

(viii) Planned use of the $5,000,000 share capital proceeds

(ix) A list of payables, showing an analysis by age

(x) Revisions to accounting policies over the past year.

33 Timber Products

(i) Factoring

The transaction represents a factoring arrangement in that the receivables of

Timber Products have been sold to release cash for the company. In

determining the accounting treatment, it is necessary to apply the rules of IAS

39 to establish whether the receivable should be derecognised.

Timber Products has transferred the contractual rights to receive cash flows

from the receivables, hence IAS 39 requires an evaluation as to the extent to

which it has retained the risks and rewards of ownership. The factoring

arrangement does not allow Timber Products the right to re-acquire the asset,

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nor is it obliged to effectively provide a lender’s return to Ready Support.

Therefore, the receivable should be derecognised in the books of Timber

Products and replaced with the cash proceeds and a financial asset for the

remaining proceeds potentially receivable from the debts in the future. If there

are doubts about whether this receivable is collectable, Timber Products

would need to make an impairment write-down of the financial asset.

The guarantee of $200,000 offered by Timber Products should be reflected as a

financial liability in the year end statement of financial position.

Extractfromstatementoffinancial

position

Financialasset(10%×$15m)

1.5

Cash(90%×$15m) 13.5

Financialliabilities

(0.2)



Extractfromstatementof

comprehensiveincome(profitorloss)



Lossonderecognition(seeworking)

0.2

Working:



Proceeds(cash+financialasset)

15

Derecognitionofreceivable

(15)

Recourseguarantee

(0.2)

Loss

(0.2)

(ii)

Re-sale of imported timber

For a sale and repurchase transaction, IAS 18 Revenue requires that the terms

of the transaction be considered to see whether, in substance, the seller has

transferred the risks and rewards of ownership of the inventory to the buyer.

As Timber Products has contracted to buy back the timber, it would appear

that the company has retained the risks and rewards, even though legal title

has transferred. Therefore, the transaction must be viewed as a financing

agreement, secured on the inventory.

The sale will therefore not be recorded and the inventory will remain in the

statement of financial position. The proceeds from the sale will be reflected as

a financial liability within non-current liabilities. The $16.1m finance cost will

be spread over the 5 year financing period using the effective rate of interest.

In accordance with IAS 39

Financial Instruments the financial liability will be

recognised at amortised cost. Therefore, each year there will be an interest

element of charged to the expenses and added to the liability.

$m

Extractfromstatementoffinancialposition



Inventory 40.0

Non‐currentliabilities($40m+$2.8minterest)

42.8

Answers

Notes:Non‐currentliabilities



Theloanissecuredbyin ventoryof$40matcost



Chargeinprofitorloss



Interestpayable(7%of$40m–seeworking)

2.8m

Workings

Interest represents 40% (16.1÷ 40) of the nominal value over the five years.

Using compound interest tables, this equates to 7% per annum.

(iii)

Consignment inventory

The issue to be determined is whether the sale should be recognised on

delivery or later and hence whether the inventory should be recognised in the

statement of financial position of Timber Products at the end of the reporting

period.

IAS 18

Revenue requires that the sale of goods be recognised when:

 the risks and rewards have been transferred

 the entity retains no managerial involvement associated with ownership

 the amount of revenue can be measured reliably;

 it is probable that benefits will flow to the entity, and

 the associated costs can be measured reliably.

The main condition is therefore whether, at the point of delivery, Timber

Products has transferred the significant risks and rewards. The terms suggest

that if this is the case, the retailer only pays the trade price at the date of

delivery, rather than a price adjusted for market movements over the time to

acceptance. The payment by the retailer for insurance and carriage costs also

supports that the risks have been transferred. On the other hand, the retailer

can return the goods in the six months after delivery, which returns the risk of

obsolescence to Timber Products. However, this right has not been exercised.

On balance, it appears that the risks and rewards transferred on delivery and

therefore the sale should be recorded on this date and the inventory should be

derecognised and excluded from the statement of financial position of Timber

Products.

A provision should be recognised for returns based on past experience.

$m

Extractfromstatementoffinancialposition



Receivables 4.0

Extractfromstatementofcomprehensiveincome(profitorloss)

Salesrevenue

10

Servicesrevenue

0.05

Costofsales($7.5m+$0.015m+$0.01m)

(7.525)

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(iv) Factory

Legally, Inter is a wholly-owned subsidiary of Offshore Banking. However,

the commercial effect of the factory sale to Inter shows that the operations of

Inter appear to be controlled by Timber Products. Timber Products

participates in the surplus profits of Inter after the payment of a fixed return

to its legal owner. Offshore Banking has no other beneficial interest in the

operations of Inter and is simply a capital provider.

Under SIC 12, Inter appears to be a special purpose entity and as a result, the

factory held by Inter will appear as an asset in the consolidated accounts of

Timber Products. The factory will be valued at its cost to the group of $8.5m

being the cost to the group, and the profit on disposal will be cancelled out.

The fee paid by Inter to Timber Products to continue to operate the factory

will also be cancelled as an intra group transaction.

The loan interest payable to Offshore Banking is an external transaction to the

Timber Group and so will appear at $1.5m in the profit or loss section of the

consolidated statement of comprehensive income. The loan of $10m owed by

Inter to Offshore Banking will appear as a payable in the consolidated

statement of financial position.

Paper P2 (INT)

Corporate Reporting



Index

About the IFRS for SMEs 488

ACCA Code of conduct 55

Accountants in practice 54

Accounting concepts 40

Accounting estimates 49

Accounting for a finance lease 323

Accounting policies 38

Accounting standards 13

Accruals basis 26

Acid test ratio 509

Acquisition of a subsidiary in the

statement of cash flows 235

Actuarial difference 368, 371

Adjusting events 442

Agricultural activities 480

Agriculture 480

Amortisation of intangible assets 267

Amortised cost 287, 289

Amounts recoverable on contracts 475

Artistic-related intangible assets 100

Asset 31, 318

Assets held for sale 259

Associates 118

Associates and the group statement of cash

flows 232

Available-for-sale financial assets 287

Bargain purchases 101

Basic earnings per share 343

Basic earnings per share and a bonus

issue of shares 345

Basic earnings per share and a rights issue 346

Benefits and costs 49

Biological asset 480

Biological transformation 480

Borrowing costs 248

Business review 63, 68, 499

Call option 282

Cash and cash equivalents 224

Cash cycle 505

Cash flow hedge 299

Cash flows 212

from financing activities 222

from investing activities 219

from operating activities 213

Cash generating units 274

Cash in transit 110

Cash-settled share based payments 387

Chairman’s statement 499

Changes in accounting policies 39

Changes in equity 72

Changes in financial position 25

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Closing rate 189

Codes of conduct 55

Company law 13

Comparability 29, 49

Completeness 29

Complex group structures 132

Compliance with accounting standards 56

Components of equity 417

Compound financial instruments 279

Compound instruments 305

Comprehensive income 414

Conceptual framework 20

Conceptual framework exposure draft 47

Confidentiality 56

Confirmatory role 26

Consideration 102

Consignment inventory 320

Consistency 29

Consistency of presentation 40

Consolidated accounts 74

Consolidated income statement 91

Consolidated statement of comprehensive

income 91

Consolidated statement of financial position 77

Consolidated statements of cash flows 226

Consolidation stage 199

Construction contract 472

Constructive obligation 449

Contingent asset 461

Contingent consideration 102

Contingent liabilities 96, 460

Contingently-issuable shares 352

Contract costs 473

Contract revenue 473

Contract-related intangible assets 100

Control 74

Convergence project 19

Convertible instruments and EPS 350

Corporate social responsibility 62

Corridor approach 374

Cost bases 44

Cost model 252, 261, 266

Cost of a non-current asset: subsequent

expenditure 251

Cost of an acquisition 102

Costs of acquisition: transaction costs 77

Creative accounting 21, 447, 499

Credit risk 312

CSR reporting 64

Current ratio 509

Current service cost 366

Current tax 392

Current value 36, 44

Customer loyalty programmes 465

Customer-related intangible assets 100

Date of acquisition 139

Days sales outstanding 507

Decommissioning costs 457, 463

Defaults and breaches 310

Deferred consideration 102

Deferred tax 393

assets 404

business combinations 408

expense 398

individual company 404

liability 394

principles 395

relating to revaluation 405

Defined benefit pension schemes 364

Defined contribution pension schemes 363

Demerger 179

Depreciation 255

Depreciation after revaluation 254

Depreciation and components of

non-current assets 256

Derecognition of an asset or liability 319

Derecognition of financial instruments 294

Derivatives 279

Development costs 265

Development costs and deferred tax 400

Diluted earnings per share 349

Direct method 213

Directors’ report 499

Discontinued operations 419

Discounting of provisions 453

Dismantling costs 247, 457

Disposal group 420, 421

Disposal of a foreign subsidiary 207

Disposal of a re-valued asset 257

Disposal of a subsidiary in the statement of

cash flows 242

Disposal of non-current assets 256

Disposals of shares in a subsidiary 162

Index

Disposals of shares in subsidiaries and

loss of control 165

Disposals of shares in subsidiaries

without loss of control 162

Dividend cover 514

Dividend yield 513

Dividends and IAS10 445

Dividends received from an associate 233

Divisionalisation within a group 177

DP 2009/1: Leases 334

DP 2009/2: Credit risk in liability

measurement 50

DP: Revenue recognition in contracts with

customers 438

Earnings per share (EPS) 343, 513

Economy, effectiveness and efficiency 491

ED 2009/2: Income tax 412

ED 2009/3: Derecognition 296

ED 2009/5: Fair value measurements 50

ED 2009/7: Management commentary 69

ED 2009/8 Rate regulated activities 493

ED: Simplifying Earnings per Share 355

Effective rate 289

Efficiency ratios 505

Embedded derivatives 282

Employee benefits 362

Employee share option 381

Enhancing qualitative characteristics 48

Environmental clean-up costs 463

Environmental provisions 455

Environmental rehabilitation fund 464

Environmental Report 64

Equity 32

Equity instrument 304

Equity method 129

Equity method of accounting 121

Equity transactions 73

Equity-settled share-based payment

transactions 382

Events after the reporting period 442

Exchange difference 189, 197

Exchange differences in other

comprehensive income 204

Exchange rate differences

(statement of cash flows) 229

Expenses 33

Fair presentation 41, 42

Fair value 44, 45, 96, 288

Fair value adjustments 104

Fair value adjustments and deferred tax 400

Fair value adjustments in profit and loss 106

Fair value hedge 299

Fair value method of accounting for NCI 84

Fair value minus costs to sell 271

Fair value model 261

Fair value through profit or loss 286, 287

Fair values at acquisition 95

Faithful representation 28, 48

FASB 19

Finance lease 323

Financial asset 286

Financial gearing 511

Financial instruments 278

Financial liability 287, 304

Financial performance 25

Financial position 25

Financial ratios 502

First-time adoption 527

Flow through method 403

Foreign currency 186, 187

Foreign operation 189

Foreign operation: accounting rules 196

Forward arrangements 281

Forward contracts 281

Full disposal of shares in a subsidiary 167

Full fair value method 79

Full goodwill method 79, 84

Full provision method 396

Functional currency 187

Fundamental qualitative characteristics 48

Future operating losses and provisions 454

Futures 281

G3 guidelines 65

GAAP 20

Gain or loss arising on translation 192

Paper P2: Corporate reporting (International)

Gain or loss on translation 197

Gearing 510

Gearing ratio 511

Global Reporting Initiative 65

Going concern assumption 445

Going concern basis 26

Goods in transit 110

Goodwill 78

Government grants 249

Government grants and agriculture 482

Gross profit percentage 504

Group reorganisations 172

Harmonisation 525

Hedge accounting 298

Hedges of a net investment in a foreign

operation 302

Hedgesof a net investment in a foreign

operation 297

Hedging 297

Hedging with derivatives 280

Held for sale 259

Held to maturity investments 286

Historical cost 36

Holding company 74

Hyperinflation 209

IAS 1: Presentation of financial statements 414

IAS 1 (revised) and group accounts 72

IAS 2: Inventories 470

IAS 7: Statements of cash flows 212

IAS 8: Accounting policies, changes in

accounting estimates and errors 38, 42

IAS 10: Events after the reporting period 442

IAS 11: Construction contracts 472

IAS 12: Income taxes 392

IAS 16: Property, plant and equipment 246

IAS 17: Leases 317, 322

IAS 18: Revenue 432

IAS 19: Employee benefits 362

IAS 20: Accounting for government grants and

disclosure of government assistance 249

IAS 21: The effects of changes in foreign

exchange rates 186

IAS 23: Borrowing costs 248

IAS 24: Related party disclosures 427

IAS 27: Consolidated and separate financial

statements 74, 75, 77, 94, 316

IAS 27 (revised) 159

IAS 28 Investments in associates 118

IAS 29: Hyperinflation 209

IAS 31: Interests in joint ventures 119

IAS 32: Financial instruments:

Presentation 279, 304

IAS 33: Earnings per share 343

IAS 34: Interim financial reporting 357

IAS 36: Impairment of assets 269

IAS 37: Provisions, contingent liabilities

and contingent assets 447

IAS 38: Intangible assets 262

IAS 39 and hedge accounting 297

IAS 39: Financial instruments: Recognition

and measurement 279, 285

IAS 40: Investment property 260

IAS 41: Agriculture 480

IASB 16

IASB Framework 21, 23, 38, 318

IASC Foundation 15

IFRIC 17

IFRIC 1 463

IFRIC 4 333, 334

IFRIC 5 464

IFRIC 7 210

IFRIC 8 390

IFRIC 9:

Reassessment of embedded derivatives 284

IFRIC 10 359

IFRIC 11 389

IFRIC 12 478

IFRIC 13 465

IFRIC16 302

IFRS 1: First-time adoption of International

Reporting Standards 527

IFRS 2: Share-based payment 380

IFRS 3: Business combinations 95, 156

IFRS 5: Non-current assets held for sale and

discontinued operations 259, 419

IFRS 7: Financial instruments: Disclosure 279, 309

IFRS 8: Operating segments 338

IFRS3 Business combinations 79

IFRSs and measurement 44

Impairment loss on a disposal group 422

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

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