Consolidated statement of comprehensive income for the year ended 31 March 2011 $000 886,000 (482,145)
403,855 (35,000) (35,000) 2,800 (139,132) (7,000)
190,523 (74,000)
116,523 5,900
122,423
Revenue (W1) Cost of sales (balancing figure) Gross profit (W2) Distribution costs (18,000 + 17,000) Administrative expenses (19,000 + 16,000) Investment income (W6) Finance cost (W7) Share of losses of associate (W9) Profit before tax Income tax expense (41,000 + 33,000) Net profit for the year Other comprehensive income (W10) Comprehensive income for the year Net profit attributable to Non-controlling interest (W11) Controlling interest Net profit for the year Comprehensive income attributable to Non-controlling interest Controlling interest Comprehensive income for the year
(b)
1 (W1)
16 (W2)
1 (W6) 4 (W7) 2 (W9)
2 (W10)
17,464 99,059
116,523
2 (W11)
17,464 104,959
122,423
33
Consolidated statement of changes in equity for the year ended 31 March 2011
Balance at 1 April 2010 (W12 & W13)
Comprehensive income for the year Equity component of convertible bonds (W14) Dividends Balance at 31 March 2011
Controlling interest $000 602,981
Non-controlling interest $000 100,994
104,959 35,850 (52,000)
691,790
17,464 (10,000)
108,458
Total $000 703,975 122,423 35,850 (62,000)
800,248
2 (W12) + 1 (W13) 1 1 (W14) 1
$000 904,000 (18,000)
886,000
$000 430,000 (5,000)
(375) (270) (11,000)
1 1 1 (W3)
(6,000) (3,500)
403,855
1 9 (W4)
16
WORKINGS Working 1 revenue Alpha + Beta Sales from Alpha Beta (see tutorial note 1)
Working 2 gross profit
Alpha + Beta Environmental provision (3,000 + 2,000) Unrealised profit adjustments: Beta: (1/4 (3,600 2,100)) Gamma: (1/4 x 2,700 x 40%) Extra depreciation (W3) Change in the fair value of contingent consideration ($64 million $58 million see tutorial note 2) Impairment of goodwill (W4)
13
Marks Tutorial Note 1 (marks allocated in workings 1 & 2) IAS 28 Investments in associates requires partial elimination of unrealised profits on transactions between associates and group entities. Profits can only be included to the extent that they relate to the non-group share. This means that the group share of such profits is eliminated and an adjustment of $270,000 is required to profit in this case (see working 2 above). The IAS does not specify exactly how such an adjustment should be reported in the consolidated statement of comprehensive income. The approach taken here is to make no adjustment to revenue whatever. Given the required adjustment to gross profit of $270,000, this would alter cost of sales by an equal and opposite amount. An alternative approach would be to reduce consolidated revenue by the group share of the revenue that relates to the inventory that is unsold by Gamma at the year-end. Given the required adjustment to gross profit of $210,000, the adjustment to cost of sales follows as the balancing figure. Either approach would earn full marks. Tutorial note 2 The change in fair value of the contingent consideration could have been shown in other sections of the statement of comprehensive income for example as an administration cost. If the correct figure is shown in another reasonable part of the statement then full marks will be awarded. Working 3 extra depreciation and amortisation $000 10,000 1,000
11,000
Depreciation of PPE x ($280 million $240 million)
Amortisation of brand 1/30 x $30 million
1 (W2)
Working 4 impairment of goodwill on acquisition of Beta
$000 Carrying value of Beta in the consolidated financial statements at 31 March 2011: Per own financial statements Fair value adjustments: PPE ($280 million $240 million) x (25/4) Brand $30 million x (285/30) Goodwill (W5) Recoverable amount So impairment equals
435,000 25,000 28,500 65,000
553,500 (550,000)
3,500
1 1 6 (W5)
9 (W2)
Working 5 goodwill on acquisition of Beta
$000 Fair value of consideration given: Share exchange 75,000 x 2/3 x $6 Contingent Acquisition costs
$000
300,000 55,000 Nil
Fair value of non-controlling interest 25,000 x $320
Fair value of net assets of Beta at 1 October 2009: Per own financial statements Fair value adjustment PPE ($280 million $240 million) Fair value adjustment brand
1 1 1 355,000 80,000
300,000 40,000 30,000
(370,000)
65,000
So goodwill equals
6 W4
Working 6 investment income
Alpha + Beta Dividend received from Beta (75% x 40,000) Profit on disposal recorded to be treated in accordance with IFRS 9 (AppB para 5.12) In consolidated statement of comprehensive income
14
$000 37,300 (30,000) (4,500)
2,800
Marks Working 7 finance costs Alpha + Beta Finance cost of convertible loan notes incorrectly recorded by Alpha Correct finance cost of convertible loan notes (W8) In consolidated statement of comprehensive income
$000 133,000 (15,000) 21,132
139,132
3 (W8)
Working 8 finance costs of convertible loan notes
$000 Liability element of compound financial instrument at 1 April 2010: (15,000 x $399) + (300,000 x $0681) So finance cost at 8% (264,150 x 008)
264,150
21,132
3 W7
Working 9 share of losses of associate
Loss after tax of Gamma (26,000) x 40% x 6/12 equals Impairment of investment
$000 (26,000)
(5,200) (1,800)
(7,000)
$000 1,400 4,500
5,900
1 1
Working 10 other comprehensive income
Gain on revaluation of investment in Epsilon Profit on disposal recorded to be treated in accordance with IFRS 9 (AppB para 5.12)
Working 11 non-controlling interest in Beta
$000 85,000 (645) (11,000) (3,500)
69,855
Net profit of Beta
Unrealised profit on intercompany sales (375 + 270) (W2) Extra depreciation and amortisation (W3) Impairment of goodwill of Beta (W4)
Non-controlling interest (25%)
17,464
540,000
62,981
602,981
80,000
Working 12 consolidated equity at 1 April 2010
Alpha Beta post acquisition per own records (390,000 300,000) Extra depreciation and amortisation (11,000 (W3) x 05) Unrealised profit on opening inventory (1/4 x 2,100)
90,000 (5,500) (525)
83,975
Group share (75%)
Working 13 non-controlling interest in opening equity of Beta
Fair value of non-controlling interest at date of acquisition (W5) Consolidated post-acquisition increase in equity from date of acquisition to start of the period (W12) Non-controlling interest (25%)
83,975
20,994
100,994
15
Marks Working 14 equity element of convertible bonds $000 300,000 (264,150)
35,850
Total issue proceeds
Liability component (W8) So equity component equals
Transaction one 1.
Statement of financial position
31 March 2011 $000 58 Nil
Current assets inventory of fuel
Current liabilities financial instrument 2.
1 1
Statement of comprehensive income
Year ended 31 March 2011 2010 $000 $000 (642) Nil
Cost of sales cost of fuel used
Other comprehensive income: Losses arising on cash flow hedges Reclassification adjustment 3.
31 March 2010 $000 Nil (20)
(5) 25
(20) Nil
1 1 1
Explanation The signing of the contract to purchase fuel on 31 January 2010 does not create a liability as it is an executory contract
The contract to buy 500,000 euros is a derivative financial instrument that needs to be recognised from 31 January 2010 at fair value, initially zero
Since the contract to buy 500,000 euros is designated as a cash flow hedge of the commitment to buy fuel, any gains or losses (in this case losses) on re-measurement are initially recognised as other comprehensive income
When the fuel is recognised in the financial statements, the cumulative loss arising on the derivative is added to the carrying value of the inventory or reclassified from other comprehensive income into profit and loss as the inventory is used (see tutorial note below)
The initial carrying value of the inventory is $700,000 (500,000 x 135 + 25,000) or $675,000 (see tutorial note below)
10
Tutorial note As an alternative to taking the loss of $25,000 on the derivative as a basis adjustment to the carrying value of inventory at 30 April 2010, IAS 39 allows the inventory to be measured using the spot rate at that date. This would mean that the carrying value was $675,000 (500,000 x $135) at 30 April 2010 and $56,000 (675,000 x 1/12) at 31 March 2011. The cost of sales would be $619,000 (675,000 x 11/12) under this approach. A further consequence is that the reclassification adjustment is made as the inventory is recognised as an expense, i.e. when the inventory is sold. In such circumstances the reclassification adjustment for the year ended 31 March 2011 is $23,000 (25,000 x 11/12). The combination of the cost of sales ($619,000) and the reclassification adjustment ($23,000) gives a charge to profit and loss of $642,000, which is the same as the cost of sales under the basis adjustment method. Either approach is acceptable under IAS 39 and either approach would attract full marks. The relative impact of the two approaches on the statement of comprehensive income for the year ended 31 March 2011 is as shown in the table below (there would be no difference between the two approaches for the year ended 31 March 2010):
16
Marks
Cost of sales cost of fuel used
Reclassification adjustment Net effect on profit for the year Other comprehensive income: Losses arising on cash flow hedges Reclassification adjustment
Adopted approach $000 (642) Nil
(642)
Alternative approach $000 (619) (23)
(642)
(5) 25
(622)
(5) 23
(624)
Net effect on total comprehensive income for the year
The difference of $2,000 (622,000 624,000) between the overall amounts recognised in comprehensive income is equal to the different carrying values of closing inventory under the two approaches of $2,000 (58,000 56,000) under the two approaches. Transaction 2 1.
Statement of financial position
Non-current assets property, plant and equipment
Current liabilities operating lease rentals Non-current liabilities: Operating lease rentals Provision for restoration costs 2.
31 March 2011 $000 3,508 (100)
31 March 2010 $000 3,703 Nil
(1,700) (873)
(1,400) (824)
See 3 below
Statement of comprehensive income
Year ended 31 March 2011 2010 $000 $000 Operating costs: Operating lease rentals Depreciation of leasehold improvements Finance costs unwinding of discount
3.
(400) (195) (49)
(400) (97) (24)
See 3 below (for 2010 figure) See 3 below
Explanation The total operating lease rentals are $8 million ((36 x 250,000) 1 million). Therefore the annual charge is $400,000 (8 million/20)
The total lease liability at 31 March 2010 is $1,400,000 (1 million reverse premium plus 400,000 rental). This increases to $1,800,000 by 31 March 2011 (1,400,000 brought forward plus 400,000 rental). The liability is reduced by $100,000 (2 x 250,000 400,000) over the next 18 years
The costs of altering the office block are capitalised and depreciated over their useful economic life 19 years from 1 October 2009
The obligation to restore the block needs to be recognised as a provision because the completion of the alterations constitutes an obligating event from 1 October 2009
The initial amount of the provision is $800,000 (25 million x 032)
The debit entry for the provision is to PPE since it provides access to future economic benefits
The initial carrying value of the PPE is $3,800,000 (3 million + 800,000) and the annual depreciation is $195,000 (38 million/195)
The unwinding for the six months to 31 March 2010 is $24,000 (800,000 x 006 x 6/12) and the closing provision $824,000 (800,000 + 24,000)
The unwinding for the 12 months to 31 March 2011 is $49,000 (824,000 x 006) and the closing provision $873,000 (824,000 + 49,000)
17
10
Marks 3
(a)
An intangible asset is an identifiable non-monetary asset without physical substance. Four key factors need to be in place before recognition is appropriate: 1.
The asset needs to be identifiable
An asset is identifiable either if it is separable (can be sold without disposing of the business as a whole) or if it arises from contractual or other legal rights, irrespective of separability.
2.
The entity needs control over the economic benefits derivable from the asset Control involves the power to obtain the future economic benefits flowing from the asset and to restrict the access of others to those benefits. The capacity of an entity to control the future economic benefits would normally, but not necessarily, stem from legal rights that are enforceable in a court of law.
3.
A clear probable source of future economic benefits needs to be identified
These benefits may include revenue from the sale of products or services, but could also include cost savings or other benefits arising from the use of the asset by the entity.
4.
The asset needs to have a cost that can be measured reliably
Cost will often be the cost of purchasing or developing the asset. In the case of an asset acquired in a business combination, cost will be the fair value of the asset at the date of acquisition, assuming this fair value can be reliably measured.
Following recognition intangible items can be measured using either the cost model or the revaluation model. However, the revaluation model can only be used if the intangible asset has a readily ascertainable market value. For this to be the case the intangible asset has to be capable of being readily traded in an active market of substantially similar items. Since intangible assets often tend, by their nature, to be fairly unique the revaluation model is rarely used. Intangible assets with a finite useful economic life are amortised over that useful life. Where the useful economic life is estimated to be indefinite no amortisation is charged but the asset is reviewed for impairment on an annual basis. (b)
Details Development project
Brand name Workforce
Production licence
Revaluation policy relating to all assets
Amount $000 2,925
9,000 Nil
180
Explanation Only costs incurred after the conditions have been satisfied can be capitalised (3 million in this case) (1 mark). All previous costs must be expensed, even those arising earlier in the same accounting period (1/2 mark). Amortisation of the capitalised costs begins when the process is commercially exploited (1/2 mark) and a full years charge would be 300,000 (3 million/10). The charge in the year ended 31 March 2011 is 75,000 (300,000 x 3/12) (1 mark). Brand name capitalised at fair value and amortised over useful economic life. Per IAS 38 an assembled workforce fails the control test as they could leave and take their expertise elsewhere. Their value is effectively included in the goodwill on acquisition of Omicron. Separately purchased intangibles are recognised at cost, and amortised over their useful economic lives (15 marks). Although the assets net selling price is only $175,000, the value in use is $185,000 so the recoverable amount of the asset is above $185,000 and no impairment has occurred (15 marks). There is no question of revaluing the items recognised as intangible assets as no active market exists (1 mark).
18
3 2
11
Marks 4
(a)
Transaction One 1.
Statement of financial position
As at 31 March 2011 $000 912
In equity 2.
Year ending 31 March
2011 2010 $000 $000 608 304
Explanation The total expected cost at 31 March 2010 = $912,000 (19 x 10,000 x $48)
1/3 is recognised in equity as this is an equity settled share based payment
The total expected cost at 31 March 2011 = $1,368,000 (19 x 15,000 x $48)
2/3 is recognised in equity at 31 March 2011. Amounts can be shown as a separate component of equity or credited to retained earnings
The vesting condition relating to share price is ignored in the estimation of the total expected cost as it is one of the factors that is used to compute the fair value of the share option at the grant date i.e. it is a market related vesting condition
The cost recognised in 2010 is the cost to date since this is the first year of the vesting period The cost recognised in 2011 is the difference between cumulative costs carried and brought forward
(b)
Statement of comprehensive income
In operating expenses 3.
2010 $000 304
Transaction Two 1.
Statement of comprehensive income
Year ended 31 March 2011 2010 $000 $000 15,000 15,000
Depreciation operating expenses
2.
Statement of changes in equity year ended 31 March 2011
$000 (3,000)
Adjustment to retained earnings brought forward
3.
Explanation IAS 16 Property, plant and equipment recognises that certain assets need a major inspection or overhaul in order to continue to be used. The cost of the overhaul is capitalised separately from the rest of the asset and depreciated over the period to the next overhaul.
Therefore, the asset of $120 million should be split into two parts for depreciation purposes. $30 million of the total cost should be depreciated over five years and the remaining balance of $90 million (120m 30m) depreciated over 10 years.
Last year Omega should have applied component depreciation to this asset and charged depreciation of $15 million (30m x 1/5 + 90m x 1/10). They only charged $12 million and so undercharged depreciation by $3 million. The impact of this error will not affect the statement of comprehensive income for the year ended 31 March 2011. It will instead be included in the statement of changes in equity as a retrospective adjustment to opening retained earnings. The depreciation charge in the statement of comprehensive income for the year ended 31 March 2011 will be $15 million.
19
Marks (c)
Transaction three 1.
Statement of financial position as at 31 March 2011
$000 750 500
Non-current liabilities deferred service revenue
Current liabilities deferred service revenue 2.
Statement of comprehensive income year ended 31 March 2011
$000 6,000 250 (4,000) (200)
2,050
Revenue from sale of machine
Service revenue Cost of sale of the machine Cost of service element
3.
Explanation The total revenue arising on the contract is split into a sales element and a service element. The expected total costs of the service element are $1,200,000 (200,000 x 2 x 3). Therefore if a normal gross margin on servicing contracts is 20%, the revenue that is allocated to the servicing element is $1,500,000 (1,200,000 x 100/80). This revenue of $1,500,000 is recognised evenly over the three-year servicing period, with the balance shown as deferred income. $250,000 (500 x 6/36) of the service revenue is recognised in the six months to 31 March 2011. Of the deferred income of $1,250,000 (1,500,000 250,000), $500,000 (1,500,000 x 12/36) is shown in current liabilities and $750,000 (1,250,000 500,000) in non-current liabilities.
20
Diploma in Financial Reporting
June 2011 Marking Scheme
As indicated on model answer
Marks 40
As indicated on model answer
20
(a)
General definition ( each)
Discussion of identifiability Discussion of control Discussion of future economic benefits Discussion of cost measurement Subsequent measurement cost or revaluation model Amortisation/impairment issues
