ICPAS PROFESSIONAL EXAMINATION 13 MAY 2013 FINANCIAL REPORTING AND DISCLOSURE (FRD)

INSTRUCTIONS TO CANDIDATES
1. The time allowed for this examination paper is Three (3) hours. 2. This paper comprises two sections: Section A: comprises Ten (10) multiple choice questions. Section B: comprises Three (3) structured questions. 3. Answer ALL questions. 4. This paper consists of a total of Fifteen (15) pages, including this instruction sheet and appendices. 5. The number of marks allocated is shown at the end of each sub-question or question. The total marks of all questions are 100 marks. 6. All answers must be written on the answer booklet and the designated appendices. Answers written on any other attachments will not be graded. Begin your answer to each question on a separate page of the answer booklet.
7. Question 2(c) and Question 3(a) may be answered using the appendices provided. Attach the appendices to the answer booklet after use.

8. Answers will be graded for content and appropriate presentation. 9. All questions should be answered in accordance with the provisions of the relevant examinable accounting standards or pronouncements. 10. Write legibly in ink.

ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 Section A: Multiple Choice Questions (Compulsory) Instruction: Ten (10) compulsory multiple choice questions of 2 marks each should be answered on the answer booklet provided. No marks will be deducted for wrong answers. 1. Which of the following situation(s) qualifies (qualify) as a change in estimate in accordance with FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors? I. II. III. IV. Change in depreciation method. Decrease in tax provision as a result of change in tax rates. Change in presentation currency. Change in the measurement of the warranty provision from cash to accrual basis. (a) (b) (c) (d) III and IV II only I, III and IV I and II

2. Which of the following statement(s) is (are) inconsistent with FRS 108 Operating Segments? I. FRS 108 does not apply to an entity whose debt or equity instruments are traded in a foreign stock exchange. One of the quantitative thresholds to identify reportable segments is that an operating segments net assets are 10% or more of the combined net assets of all operating segments. One of the quantitative thresholds to identify reportable segments is that an operating segments external sales are 10% or more of the combined revenue of all operating segments. An entitys reportable segments must account for at least 75 per cent of the entitys revenue. (a) (b) (c) (d) IV only II and III I, II and III I and IV

II.

III.

IV.

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 3. Property Management Ltd has four operating segments as shown below (all figures shown are in $ except as otherwise indicated):
Car Park 1,000,000 1,000,000 800,000 100,000 Supplies Maintenance 50,000 320,000 50,000 320,000 10,000 5,000 40,000 (10,000) Services Total 130,000 1,130,000 370,000 130,000 1,500,000 150,000 5,000 1,000,000 100,000

External sales Internal sales Total sales Total assets Net profit (loss)

Which segments qualify as reportable segments if the quantitative thresholds of FRS 108 Operating Segments were applied? (a) (b) (c) (d) Car Park only Car Park and Services Car Park, Maintenance and Services All segments

4. Which of the following statement(s) is (are) inconsistent with the requirements of FRS 1 Presentation of Financial Statements and other relevant standards? I. The issue of mandatorily redeemable preference shares should be reported as an increase in equity in the Statement of Changes in Equity. The effective portion of gains and losses in a fair value hedge is a component of other comprehensive income. The effects of transactions with owners in their capacity as owners should not be shown in the Statement of Profit or Loss and Other Comprehensive Income. The change in fair value of an investment property is not a component of other comprehensive income. (a) (b) (c) (d) I and II I, II and III II and IV III and IV

II.

III.

IV.

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 The following information relates to Question 5 to Question 8 Diamond Ltd has to determine its basic and diluted earnings per share calculation in accordance with FRS 33 Earnings per Share for the year ended 31 December 2012. The following information was extracted from the Statement of Changes in Equity for the year ended 31 December 2012. Net profit after tax Less preference share dividends Profit attributable to ordinary shareholders $2,000,000 (75,000) $1,925,000 Issued ordinary shares 400,000 (120,000) 280,000 300,000 860,000

Date 1 Jan 2012 1 Apr 2012 1 July 2012 1 Oct 2012 31 Dec 2012

Event Balance at start of year Share buy back in cash Bonus issue (1 for 1) Issue of new shares for cash Balance at end of year

Date 1 Apr 2012 31 Dec 2012

Event Issue of convertible preference shares for cash Balance at end of year

Convertible preference shares 2,000,000 2,000,000

Diamond Ltd has an obligation to pay cumulative tax-exempt preference share dividends at 1.25% per share per quarter. No preference shares were converted during 2012. After the bonus issue, each unit of preference share is convertible to 2 ordinary shares. 5. The number of shares to be used in calculating the basic earnings per share of Diamond Ltd for the year ended 31 December 2012 is closest to: (a) (b) (c) (d) 695,000 735,000 860,000 700,000

6. The basic earnings per share of Diamond Ltd for the year ended 31 December 2012 is closest to: (a) (b) (c) (d) $2.62 $2.77 $2.24 $2.88

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 7. The number of shares to be used in calculating the diluted earnings per share of Diamond Ltd for the year ended 31 December 2012 is closest to: (a) (b) (c) (d) 4,700,000 3,735,000 3,695,000 4,735,000

8. The diluted earnings per share of Diamond Ltd for the year ended 31 December 2012 is closest to: (a) (b) (c) (d) $0.41 $0.43 $0.52 $0.54

9. Which of the following statement(s) is least consistent with the hedge accounting requirements of FRS 39 Financial Instruments: Recognition and Measurement? (a) A hedge of the exposure to changes in fair value of an unrecognized firm commitment that is attributable to a particular risk and could affect profit or loss is a fair value hedge. (b) A hedge of the exposure to variability in cash flows that is attributable to a highly probable forecast transaction and could affect profit or loss is a cash flow hedge. (c) The gain or loss on the hedging instrument that is an effective hedge of a net investment in a foreign investment is recognized in the income statement. (d) The hedge of future interest payments on variable rate debt is a cash flow hedge. 10. Which of the following entities are clearly related parties of Company X? I. II. III. IV. Associate of a fellow subsidiary of Company X. Non-controlling investors of Company X. Non-controlling investors of a subsidiary of Company X. Joint venture of the parent of Company X. (a) (b) (c) (d) I, III and IV I and IV II and III III and IV

(TOTAL: 20 marks)
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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 Section B: Structured Questions (Compulsory) Instructions: Three compulsory questions carrying a total of 80 marks should be answered on the answer booklet and the designated appendices provided. Question 1 In an expansionary move, P Co acquired a direct controlling interest in Y Co, an indirect controlling interest in W Co and joint-control over Z Co. All amounts shown are in $ except where otherwise indicated. Details of the acquisition of Y Co and W Co are shown below. Date of acquisition Percentage acquired by P Co Percentage acquired by Y Co Shareholders' equity at date of acquisition Share capital Retained earnings Fair value of non-controlling interests as at acquisition date Y Co------- W Co----- 1 January 2008 1 July 2012 90% 70% 600,000 900,000 1,500,000 300,000 320,000 150,000 470,000 250,000

At acquisition date, the fair and book values of identifiable net assets of Y Co and W Co are as follows: Y Co---------------------------- Book value Fair value Inventory Fixed assets Other net assets 180,000 1,320,000 1,500,000 200,000 1,320,000 1,520,000 W Co--------------------------- Book value Fair value 100,000 150,000 370,000 470,000 370,000 520,000

On 1 January 2012, P Co entered into a contractual agreement with V Co to incorporate Z Co. The principal activity of Z Co was the manufacture and sale of computerized equipment. Each investor contributed $200,000 to the initial operations of Z Co. Under the agreement, both P Co and V Co have joint control over Z Co. P Co applies the equity method to account for its investment in the joint venture entity. The financial statements of P Co, Y Co, Z Co and W Co for the year ending 31 December 2013 are as follows:

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013
Income Statement and partial Statement of Changes in Equity for the year ending 31 December 2013 P Co Y Co Z Co Profit before tax 4,200,000 2,200,000 1,000,000 Tax (840,000) (440,000) (200,000) Profit after tax 3,360,000 1,760,000 800,000 Dividends declared (200,000) (170,000) (50,000) Profit retained 3,160,000 1,590,000 750,000 Retained earnings, 1 Jan 2013 2,456,000 1,000,000 520,000 Retained earnings, 31 Dec 2013 5,616,000 2,590,000 1,270,000

W Co 300,000 (60,000) 240,000 (20,000) 220,000 200,000 420,000

Statement of Financial Position as at 31 December 2013 P Co Y Co Z Co W Co Fixed assets, net book value 5,670,000 2,800,000 2,000,000 1,000,000 Investment in Y Co, at cost 3,000,000 Investment in Z Co, at cost 200,000 Investment in W Co, at cost 680,000 Inventory 720,000 500,000 400,000 280,000 Intercompany receivable 140,000 Accounts receivable 235,000 340,000 320,000 120,000 Cash 100,000 10,000 80,000 5,000 9,925,000 4,470,000 2,800,000 1,405,000 Accounts payable Intercompany payable Share capital Retained earnings 2,169,000 140,000 2,000,000 5,616,000 9,925,000 1,280,000 1,130,000 665,000

600,000 400,000 320,000 2,590,000 1,270,000 420,000 4,470,000 2,800,000 1,405,000

Additional information: 1. The remaining useful life of the under-valued fixed assets of Y Co as at acquisition date was five years. Salvage value was negligible. 2. The under-valued inventory of W Co was sold in December 2012. 3. During November 2012, Y Co sold inventory to P Co for $100,000 when the original cost was $75,000. Subsequently, the inventory was:
Re-sold to third parties in 2012 Re-sold in 2013 Unsold as at 31 December 2013 30% 60% 10%

4. To expand its production facilities, P Co entered into an agreement to purchase computerized equipment from Z Co on 1 July 2012 at an invoiced price of $50,000. The equipment was manufactured by Z Co at a cost of $35,000. The useful life of the equipment was four years at the date of sale. 5. Tax rate was 20% throughout. 6. P Co recognizes non-controlling interests at full fair value at acquisition date.

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 Required (a) Prepare the consolidation and equity accounting entries that have to be passed by P Co for the year ending 31 December 2013. P Co consolidates the direct and indirect subsidiary simultaneously. Show workings where appropriate. (27 marks) Determine the following balances to be reported in the consolidated financial statements for the year ending 31 December 2013: i. Consolidated profit after tax; and ii. Investment in Z Co. (9 marks) (TOTAL: 36 marks) Question 2 Sapphire Co, a publicly listed company, enters into various arrangements to buy or issue financial instruments. Sapphire Co requires your expert advice in determining the appropriate accounting treatment for the financial instruments. (a) Sapphire Co invests in quoted debt securities on 1 January 2013. Based on its holding intent, Sapphire Co may classify the quoted debt securities on an amortized cost basis (as held to maturity) or as available-for-sale securities. The details of the issue are as follows: Period to maturity: 5 years Effective interest: 3.88063% per annum Coupon interest: 5% per annum Principal amount: $3,000,000 Purchase price: $3,150,000 Transaction costs are negligible. Based on expected interest rates, the projected fair values of the quoted debt securities are as follows: 31 December 2013 31 December 2014 Required i. Prepare the bond amortization table for the investment in quoted debt securities from inception date to maturity date. (5 marks) Sapphire Co wishes to assess the potential financial statement effects of alternative classification permitted under FRS 39 Financial Instruments: Recognition and Measurement. Assuming that the projected fair values are reliable and assuming that the securities are liquidated at fair value on 31
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(b)

$3,110,000 $3,200,000

ii.

ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 December 2014, prepare the journal entries for the quoted debt securities for 2013 and 2014 under each of the following classifications: I. II. Amortized cost basis (as held to maturity investment); As available-for-sale securities. (8 marks) iii. Ignore (ii). Assume that Sapphire Cos business model is to solely collect contractual cash flows from its quoted debt securities. Advise Sapphire Co as to how it may classify the debt securities under the future standard, IFRS 9 Financial Instruments. (4 marks)

Ignore tax effects.

(b) Sapphire Co issues financial instruments during 2013 and accounts for them as follows. Employee share option scheme Sapphire Co issues 10,000,000 share option units to its senior management. The options are exercisable at the end of five years of continuous service from grant date. Each share option entitles senior management of Sapphire Co to buy one unit of ordinary share of Sapphire Co at $2 per share. At the date of issue, Sapphire Cos shares were trading at $2 per share. Sapphire Co does not recognize the options on the statement of financial position because the intrinsic value of the options is zero. Mandatorily redeemable preference shares To finance its capital expansion, Sapphire Co issues 300,000,000 mandatorily redeemable preference shares. The shares are mandatorily redeemable on 1 July 2030 at par value. Sapphire Co does not apply the fair value option and recognizes the preference shares as financial liabilities at amortized cost.

Required Is the accounting treatment applied by Sapphire Co in each of the two situations in accordance with the appropriate accounting standards? Explain. Propose appropriate accounting treatment, where applicable. (7 marks)

...... Please turn over

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 (c) On 6 July 2013, Sapphire Co invests S$30 million to acquire an 80% ownership interest in Topaz Co, a U.S. company whose functional currency is the United States dollar. The presentation currency of Sapphire Co is the Singapore dollar. An abridged set of financial statements of Topaz Co for the period from 6 July 2013 to 31 December 2013 is shown below.
Income Statement and partial Statement of Changes in Equity for the period from 6 July 2013 to 31 December 2013 USD Net profit after tax 6,024,000 Dividends declared (100,000) Profit retained 5,924,000 Retained earnings, 6 July 2013 6,900,000 Retained earnings, 31 December 2013 12,824,000 Condensed Statement of Financial Position as at 31 December 2013 USD Net assets 23,524,000 Share capital Retained earnings As at 6 July 2013 Arising from 6 July 2013 to 31 December 2013 Fair value reserves Arising on 31 December 2012 Arising on 6 December 2013 10,000,000 6,900,000 5,924,000 12,824,000 300,000 400,000 700,000 23,524,000

Equity

Exchange rates are as follows: 31 December 2012 6 July 2013 Average rate for period from 6 July 2013 to 31 Dec 2013 30 October 2013: Date of dividend declaration 6 December 2013 31 December 2013 Revenues and expenses arose evenly throughout the period.

SGD to USD1 1.33 1.29 1.26 1.23 1.22 1.20

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 Required i. Using any appropriate approach, determine the foreign currency translation reserve on the book value of equity of Topaz Co as at 31 December 2013 from Sapphire Cos perspective. You may use the designated appendix for this purpose. (6 marks) If the book value of identifiable net assets of Topaz Co is close to its fair value, determine the goodwill on acquisition of Topaz Co in United States dollars. (3 marks) Determine the translation gains or losses on the acquired goodwill of Topaz Co as at 31 December 2013. (2 marks) (TOTAL: 35 marks)

ii.

iii.

..............Please turn over

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 Question 3 Amber Co has to determine its tax expense for the year ending 31 December 2013. A schedule of taxable and deductible temporary difference is shown below. Schedule of taxable and deductible temporary differences
31 Dec 2012 31 Dec 2013

1. Private motor vehicles Carrying amount Tax base ___________________

$92,000

$84,000

The private motor vehicles do not qualify for capital allowance deductions. 2. Intangible asset Carrying amount Tax base ___________________

$45,000

$35,000

The intangible asset was acquired on 1 July 2012. The carrying amount shows the cost of $50,000 less accumulated amortization. Tax deduction of $50,000 was allowed in full during 2012. 3. Provision for warranties Carrying amount Tax base ___________________

$75,000

$55,000

Warranties are deductible for tax purposes during the period when claims were made. Claims of $30,000 and $50,000 were made in 2012 and 2013 respectively. 4. Interest receivable Carrying amount Tax base ___________________ Interest income is tax-exempt.

$16,000

$24,000

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 Additional information: Net profit before tax for 2013 Current tax payable for 2013 $1,000,000 $214,080

There was no under- or over-provision of prior year tax payable. The company has a profitable track record. The following items are permanently disallowed/(tax-exempt or deductible) items during 2013: Depreciation of private cars Motor vehicle expenses Other disallowed items Tax-exempt interest income Special one-time reliefs Tax rates for 2012 and 2013 are as follows: 2012 20% 2013 24% $8,000 $6,000 $23,000 ($75,000) ($60,000)

Tax rate

Required: (a) Complete the schedule of taxable and deductible temporary differences for 2012 and 2013. You may write on the designated appendix. State clearly whether a taxable (TTD) or deductible (DTD) temporary difference best describes the difference for each item, even if the balance is zero. If the temporary difference is not to be recognized under FRS 12 Income Taxes, you should show the temporary difference but state that the amount should not be recognized under FRS 12. (4 marks) (b) Prepare a numerical reconciliation to show why the tax expense in 2013 is not equal to net income multiplied by the statutory tax rate. (5 marks) (TOTAL: 9 marks)

END OF PAPER -

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 Appendix
This worksheet may be used to answer Question 2(c). If you use this worksheet, please indicate your identification number clearly and secure the worksheet with the answer booklet.

Candidates Identification Number: ___________________________________

Income Statement and partial Statement of Changes in Equity for the period from 6 July 2013 to 31 December 2013 USD Rate Net profit after tax 6,024,000 Dividends declared (100,000) Profit retained 5,924,000 Retained earnings, 6 July 2013 6,900,000 Retained earnings, 31 December 2013 12,824,000 Condensed Statement of Financial Position as at 31 December 2013 USD Net assets 23,524,000 Share capital Retained earnings As at 6 July 2013 Arising from 6 July 2013 to 31 December 2013 Fair value reserves Arising on 31 December 2012 Arising on 6 December 2013 10,000,000 6,900,000 5,924,000 12,824,000 300,000 400,000 700,000 23,524,000

SGD

Equity

This space may be used for working

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ICPAS PROFESSIONAL EXAMINATION 2013 Term 1 Financial Reporting and Disclosure 13 May 2013 Appendix
This worksheet may be used to answer Question 3(a). If you use this worksheet, please indicate your identification number clearly and secure the worksheet with the answer booklet.

Candidates Identification Number: ___________________________________

Schedule of taxable and deductible temporary differences

31 Dec 2012 31 Dec 2013

1. Private motor vehicles Carrying amount Tax base _________________

$92,000

$84,000

The private motor vehicles do not qualify for capital allowance deductions. 2. Intangible asset Carrying amount Tax base __________________

$45,000

$35,000

The intangible asset was acquired on 1 July 2012. The carrying amount shows the cost of $50,000 less accumulated amortization. Tax deduction of $50,000 was allowed in full during 2012. 3. Provision for warranties Carrying amount Tax base __________________

$75,000

$55,000

Warranties are deductible for tax purposes during the period when claims were made. Claims of $30,000 and $50,000 were made in 2012 and 2013 respectively. 4. Interest receivable Carrying amount Tax base ___________________ Interest income is tax-exempt.

$16,000

$24,000

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