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Answers

Diploma in Financial Reporting

June 2011 Answers


Marks

(a)

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

1
1
1
1
1
1
1

(b)

As indicated on model answer

11

20

Total

20

As indicated on model answer

21

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