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ACCA Paper P2 (INT/UK)

Corporate Reporting
September and December 2015
Final Assessment
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Notice to Markers
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Reading time:
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Time allowed
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This paper is divided into two sections
This question is compulsory and MUST be answered
Section B
TWO questions ONLY to be answered
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Section A
Do not open this paper until instructed by the supervisor
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This question paper must not be removed from the examination

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Kaplan Publishing/Kaplan Financial
September and December

2015
Paper P2
Corporate Reporting
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ACCA FINAL ASSESSMENT
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(INT/UK)
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Kaplan Financial Limited, 2015
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The text in this material and any others made available by any Kaplan Group company does not
amount to advice on a particular matter and should not be taken as such. No reliance should be
placed on the content as the basis for any investment or other decision or in connection with any
advice given to third parties. Please consult your appropriate professional adviser as necessary.
Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to
any person in respect of any losses or other claims, whether direct, indirect, incidental,
consequential or otherwise arising in relation to the use of such materials.
All rights reserved. No part of this examination may be reproduced or transmitted in any form or
by any means, electronic or mechanical, including photocopying, recording, or by any information
storage and retrieval system, without prior permission from Kaplan Publishing.
KA PL AN P U BLI SH IN G
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AC C A P 2 ( IN T/ U K) : C OR POR A TE RE P OR T IN G

FIN AL AS SE SS ME N T QUE S TIO N S
SECTION A
This question is compulsory and MUST be answered
Gross profit
Distribution costs
Administrative expenses
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Operating profit
Investment income
Finance costs
Profit before taxation
Taxation
Profit for the period
Hardwood
$m
166
(84)
82
(12)
(30)
40
4
(8)
36
(10)
26
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Revenue
Cost of sales
Carpet
$m
128
(62)
66
(16)
(22)
28
1
(5)
24
(6)
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The following notes are relevant to the preparation of the consolidated financial
statements:
Tiles purchased 80% of the ordinary shares of Carpet on 1 May 20X3 for $96 million.
The fair value of the identifiable net assets acquired was $90 million. At the
acquisition date, the share capital and retained earnings of Carpet were $10 million
and $57 million respectively and other components of equity were $8 million. The
excess of the fair value of the identifiable net assets over their carrying amounts at
the acquisition date was due to a broadcasting licence which, at 1 May 20X3, had a
remaining useful life of 5 years. Amortisation is presented in administrative expenses.
The non-controlling interest in Carpet at the acquisition date was calculated as its
proportionate share of the fair value of the subsidiarys identifiable net assets.
Tiles purchased 80% of the ordinary shares in Hardwood four years ago for
$130 million. The fair value of Hardwoods net assets at the acquisition date was
$100 million and the non-controlling interest at the acquisition date was measured at
its fair value of $23 million. On 1 February 20X5, Tiles sold 70% of the ordinary shares
of Hardwood for $170 million. Hardwoods identifiable net assets were $140 million
at the disposal date. Goodwill arising on the acquisition of Hardwood had not been
impaired. Tiles remaining 10% holding in the shares of Hardwood had a fair value of
$11 million on 1 February 20X5 and was designated to be measured at fair value
through other comprehensive income. The fair value of the 10% holding at 30 April
20X5 was $11.5 million. In the current year, Tiles has posted no accounting entries in
respect of Hardwood in its individual financial statements. Hardwood does not meet
the criteria to be presented as a discontinued operation.
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Tiles
$m
216
(89)
127
(15)
(18)
94
3
(10)
87
(17)
70
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Tiles is a public limited company which has investments in a number of other companies.
These companies prepare their financial statements in accordance with International
Financial Reporting Standards. The draft statements of profit or loss for Tiles and its
investments for the year ended 30 April 20X5 are presented below:
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During the year, Tiles sold goods to Carpet for $14 million. All of the goods had been
sold to third parties by 30 April 20X5.
On 1 May 20X4, Tiles purchased an item of property, plant and equipment for
$30 million and attributed it a 30 year useful life. The depreciation charge for the
year has been accounted for. On 30 April 20X5, a surveyor valued the asset at
$32 million. Tiles has not yet accounted for this revaluation or for any deferred tax
relating to the asset. The assets cost is written down for tax purposes at a rate of
10% per annum. The applicable tax rate is 20%.
On 1 March 20X5, Tiles sold goods to a customer located overseas for CU25 million.
The sale was correctly recorded by Tiles but no other accounting entries have been
posted in respect of this transaction. By 30 April 20X5, the invoice had not been
settled. The following exchange rates are relevant:
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On 30 April 20X5, goodwill impairment testing was performed in relation to Carpet.

The recoverable amount of the net assets of Carpet was $113 million. On that date,
Carpet had share capital of $10 million, retained earnings of $80 million and other
components of equity of $9 million. The broadcasting licence (note 1) has not been
sold. There have been no prior goodwill impairments.
CU: $1
5.0
4.7
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1 March 20X5
30 April 20X5
Foreign exchange gains and losses are presented in administrative expenses.

On 1 May 20X4, Tiles made a loan of $20 million to a key supplier. The loan is due to
be repaid at par on 30 April 20X7. Interest is charged in arrears at 2% per annum.
Market rates of interest are currently 8%. Tiles recorded a financial asset at
$20 million and recognised the interest received during the year in profit or loss. Any
adjustments required to profit in respect of this transaction should be presented in
investment income.
Ignore the taxation effects of adjustments unless specified. Assume that any loss
allowances required in respect of financial assets have already been correctly
accounted for.
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Required:
Prepare the consolidated statement of profit or loss and other comprehensive

income for the Tiles Group for the year ended 30 April 20X5.
(35 marks)
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(a)
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Saffron, an entity unrelated to the Tiles group, operates in a country whose currency is the
Franc (FR). Saffron makes 70% of its sales in Francs and 30% of its sales in dollars ($). Any
dollar receipts are immediately converted into Francs. Saffrons ordinary shares are 90%
owned by another entity called Cumin. Cumins functional currency is the dollar. Saffrons
line of business is different from the rest of the Cumin group, and it operates with
considerable autonomy. Saffron relies on finance in the form of local-currency bank loans,
rather than intra-group finance.
Required:
(b)
Apply the rules in IAS 21 The Effects of Changes in Foreign Exchange Rates to
determine the functional currency of Saffron.
(9 marks)
(c)
Discuss the importance of ethical behaviour when producing consolidated financial

statements.
(6 marks)
(Total: 50 marks)

SECTION B
TWO questions ONLY to be answered
(a)
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Brick is a company that manufactures and sells mobile phones and mobile phone contracts.
It prepares its financial statements under International Financial Reporting Standards and
has a year end of 30 April 20X4.
Brick launched a promotion during the year to attract new customers to its network.
Under this promotion, customers sign a non-cancellable contract to subscribe to the
Brick network for twelve months. The cost is $30 per month, payable at the end of
each month. This price includes a new handset and network access. The normal retail
price of these elements is as follows:
Handset
Network access (per month)
On 1 May 20X3, Brick bid $100m for a license to use the radio spectrum for the next
generation of mobile phone services. These services will be offered to customers
from 20X5.
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(b)
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In total, 100,000 new customers signed up for this promotion. The contracts all
began on 1 March 20X4.
(7 marks)
Brick must pay a fee of 400,000 Dinar (DN) on 31 December 20X4. The directors of
Brick have become increasingly concerned about exchange rate fluctuations and
therefore, on 1 February 20X4, entered into a futures contract to buy DN400,000 for
$200,000 on 31 December 20X4. This contract was designated as a cash flow hedge,
all necessary documentation was completed, and all hedge effectiveness criteria
were met.
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Some investment analysts have argued in the press that Brick may have over-paid for
this license. Market research has shown that most customers are extremely satisfied
with current network speeds. It is therefore widely believed that this next
generation of mobile phone services will not gain mainstream popularity until 20X6
at the earliest. Under the terms of purchase, Brick is prohibited from selling the
license to other mobile phone operators.
(5 marks)
Brick needed to raise finance during the period and therefore entered into a sale and
finance leaseback transaction. On 1 May 20X3, it sold property, plant and equipment
with a carrying amount of $4.5m to the bank for proceeds of $6 million. This was
then leased back on a 15 year term, with payments of $650,000 due annually in
arrears. The rate of interest implicit in the lease is 7.1%.
(6 marks)
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(d)
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Based on published exchange rates, DN400,000 would cost $228,000 on 30 April

20X4. The fair value of the futures contract at 30 April 20X4 had risen to $30,000.
(5 marks)
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Required:
Discuss how the above events should be accounted for in the financial statements of
Brick for the year ended 30 April 20X4.
Note: the mark allocation is shown against each of the four events above.
Professional marks will be awarded in question 2 for the clarity and quality of the
presentation and discussion.
(2 marks)
(Total: 25 marks)
$
250
15
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Golden Gate is a newly formed public limited company involved in property development.
Their financial statements are prepared in accordance with International Financial
Reporting Standards (IFRS). The following accounting issues have arisen in the year ended
30 June 20X4 and need to be resolved.
(b)
During the year ended 30 June 20X4, a decision was made to relocate Golden Gates
key business functions in an attempt to reduce operating costs. The decision to
relocate was communicated to those affected in June 20X4. Relocation expenses will
not be paid until August 20X4 and are estimated at $3m. The directors of Golden
Gate do not believe that the cost of $3m should be shown in the financial statements
for the year ended 30 June 20X4 because no expenditure has been incurred.
(5 marks)
(c)
Golden Gate has a defined contribution pension scheme that all employees are
enrolled into. However, in the year ended 30 June 20X4, it set up an additional fund
(Fund) as a way of enhancing post-retirement benefits. The terms of the Fund are as
follows:
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Golden Gate owns investment properties, which are measured at fair value. The
investment properties are held to earn rental income in the long term. Although the
sales prices of similar properties are available, the directors believe that a fair value
measurement based on their estimates of future rental income would more faithfully
represent the value of the properties to Golden Gate. The directors are unsure as to
whether this complies with the requirements of IFRS.
(5 marks)
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Employees with more than two years service will be automatically enrolled
into the Fund.
Golden Gates contributions into the Fund are voluntary. In the year ended
30 April 2015, its contributions were equivalent to 1% of wages and salaries.
Whilst the fund is in existence members will, upon retirement, receive an
annual lump sum based on their number of years of service.
Golden Gate can cancel the Fund at any point. If cancelled, no further benefits
or compensation will be paid to members.
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Previously, the national press have been critical of Golden Gate because of its low
levels of employee remuneration, which have generally increased below the level of
inflation. As a result, some believe that the announcement of the Fund is simply a
public relations exercise, and many employees remain sceptical about Golden Gates
commitment to it.
On 1 February 20X4, Golden Gate purchased a property located overseas for CU2m.
This property is to be sold in the ordinary course of business. On 30 June 20X4, it had
an estimated net sales price of CU2.5m. This valuation was confirmed post year-end.
There have been significant fluctuations in the currency markets. The following
exchange rates are relevant:
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(d)
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The directors wish to know how they should have accounted for the Fund. (8 marks)
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Date
1 February 20X4
30 June 20X4
CU:$1
2.1
3.0
(5 marks)
(a)
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Required:
Discuss how the above events should be accounted for in the financial statements of
Golden Gate for the year ended 30 June 20X4.
Note: the mark allocation is shown against each of the four events above.
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(2 marks)
(Total: 25 marks)
(a)
Required:
(ii)
Explain what is meant by equity accounting.
(4 marks)
(iii)
Outline potential criticisms of equity accounting.
(5 marks)
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Within the context of IAS 28, explain what is meant by significant influence.
Provide examples to illustrate your answer.
(5 marks)
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(b)
(i)
On 1 January 20X4, Bolo purchased 45% of the ordinary shares of Kata. Consideration
paid was $3 million. The carrying amounts of the net assets of Kata at that date were
$2.4 million and approximated their fair values. The statement of financial position
for Kata as at 31 December 20X4 was as follows:
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Property, plant & equipment

Inventories
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Total assets
cc
Share capital
Retained earnings
Loans
Equity and liabilities
$m
14
1
15
1
2
12
15
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ea
The directors of Bolo are unsure whether to treat Kata as an associate or a subsidiary
in the consolidated financial statements. They believe that this decision will have a
minimal impact on the consolidated financial statements and is therefore
unimportant.
When relevant, Bolo measures non-controlling interests using the proportion of net
assets method.
A revised version of IAS 28 Investments in Associates and Joint Ventures was issued in
May 2011. The standard defines an associate as an entity over which an investor has
significant influence. IAS 28 states that associates should be accounted for using the
equity method in the consolidated financial statements. However, equity accounting,
and its purpose, have been increasingly criticised in recent years.
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Required:
Discuss and compare the impact on the consolidated financial statements of Bolo if
the investment in Kata is accounted for as:
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a subsidiary, or
an associate.
(9 marks)
(2 marks)
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8
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(Total: 25 marks)
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ACCA
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Paper P2 (INT/UK)
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Corporate Reporting
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September and December 2015
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Final Assessment Answers

To gain maximum benefit, do not refer to these answers
until you have completed the final assessment questions
and submitted them for marking.
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Kaplan Financial Limited, 2015
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The text in this material and any others made available by any Kaplan Group company does not
amount to advice on a particular matter and should not be taken as such. No reliance should be
placed on the content as the basis for any investment or other decision or in connection with any
advice given to third parties. Please consult your appropriate professional adviser as necessary.
Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to
any person in respect of any losses or other claims, whether direct, indirect, incidental, and
consequential or otherwise arising in relation to the use of such materials.
All rights reserved. No part of this examination may be reproduced or transmitted in any form or
by any means, electronic or mechanical, including photocopying, recording, or by any information
storage and retrieval system, without prior permission from Kaplan Publishing.
K APL AN P UB LI SHIN G
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FIN AL AS SE SS ME N T AN S WE R S
TILES
Key answer tips
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Consolidated statement of profit or loss and other comprehensive income for the
year ended 30 April 20X5
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(a)
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Revenue ($216 + $128 + (9/12 $166) $14 (W6))

Cost of sales ($89 + $62 + (9/12 $84) $14 (W6))
Gross profit
Distribution costs ($15 + $16 + (9/12 $12))
Administrative expenses (W11)
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Profit from operations

Profit on disposal (W5)
Investment income
($3 + $1 + (9/12 $4) $3.1 (W9) + $1.0 (W9))
Finance costs ($10 + $5 + (9/12 $8))
cc
Profit before taxation

Taxation ($17 + $6 + (9/12 $10) + $0.4 (W7))
Profit for the period
$m
Marks
454.5
(200.0)
254.5
(40.0)
(85.2)
129.3
19.0
4.9
1.0 (W6)
1.0 (W6)
(21.0)
132.2
(30.9)
101.3
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Other comprehensive income

Items that will not be reclassified to profit or loss in future
periods
Gain on financial asset (W5)
Revaluation of property, plant and equipment (W7)
Income tax relating to items that will not be reclassified to
profit or loss (W7)
Total comprehensive income for the period
0.5
3.0
(0.6)
3.0 (W11)
4.0 (W5)
2.0
1.0
1.0
1.0
1.0
104.2
Part (a) of this question is a group accounting question. Tiles lost control of Hardwood
during the year. Hardwood is therefore consolidated until the disposal date and a profit or
loss on disposal must be calculated. Part (b) of the question requires knowledge and
application of the rules governing functional currency. Remember to start your answer by
stating relevant definitions and rules per the accounting standard (IAS 21), and then apply
these to the scenario. Part (c) covers ethics, and this is something which should be expected
within the compulsory question. Make sure that your answer is specific to the question.

0.5 (bal.)
2.0 (W10)
97.3
6.9
104.2
0.5 (bal.)
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Total comprehensive income attributable to:

Equity holders of Tiles (bal. fig.)
Non-controlling interest (W10)
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Presentation of profit/TCI split (even if left blank)

Labelling OCI as items that will not be reclassified to P/L
Pro-rating of Hardwoods results
Calculation of excess amortisation (W2)
Calculation of group impairment loss (W3)
Calculation of Carpets goodwill (W4)
Calculation of revaluation gain (W7)
Calculation of deferred tax (W7)
Calculation of forex gain (W8)
Calculation of financial asset fair value (W9)
Calculation of financial asset impairment (W9)
Calculation of financial asset interest adjustment (W9)
Maximum marks
as
Workings
1.0
1.0
1.0
1.0
4.0
1.0
1.0
2.0
1.0
2.0
1.0
1.0
35.0
(W1) Group structure
cc
Tiles
Carpet
80% for 9/12 year

Hardwood
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80% for full year
94.4
6.9
101.3
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Profit attributable to:

Equity holders of Tiles (bal. fig.)
Non-controlling interest (W10)

(W2) Carpets net assets
90
Rep. date
$m
10
9
80
15
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Share capital
Other components
Retained earnings
Licence (bal. fig)
Excess amortization (2 years $3m
(see note below))
Acqn
$m
10
8
57
15
(6)
108
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Rep. date net assets (W2)
Recoverable amount
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Impairment
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Goodwill (W4)
Notional NCI ($24m (20/80))
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(W3) Carpet impairment review
$m
108.0
Marks
2 (W2)
24.0
6.0
138.0
(113.0)
25.0
(W4)
1
3 max
The impairment loss is allocated to the group based on shareholding. The

impairment loss attributable to the group is therefore $20 million ($25m
80%).
(1 mark)
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The goodwill attributable to the NCI is not recognised under the share of net
assets method. Therefore the NCI share of the impairment is not recognised.
cc
(W4) Goodwill of Carpet
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Consideration
NCI at acquisition
(20% $90m (W2))
FV of net assets at acquisition (W2)
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Goodwill pre-impairment
$m
96.0
18.0
Marks
0.5
0.5
(90.0)
24.0
0.5
1 max
The excess amortisation on the licence is $3m per year ($15m/5 years). This is
recorded in administrative expenses (W11).
(1 mark)

(W5) Profit on disposal

Proceeds from disposal
Fair value of interest retained
$m
170
11
$m
Marks
0.5
0.5
Goodwill disposed:
Consideration
NCI at acquisition
Net assets at acquisition
130
23
(100)
0.5
0.5
0.5
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(53)
(140)
NCI at disposal:
NCI at acquisition
NCI % of post-acquisition net assets
(20% ($140 $100))
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Net assets at disposal:
0.5
0.5
0.5
23
8
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Profit on disposal
31
19
4 max
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The interest retained is initially recognised at $11 million and must be revalued
to its fair value of $11.5 million at the reporting date. Since the shares have
been designated to be measured at fair value through other comprehensive
income, a gain of $0.5 million ($11.5m $11.0m) will be recorded in other
comprehensive income.
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(W6) Intra-group trading
The intragroup trading of $14 million must be removed from revenue and cost
of sales.
$14m
Cr Cost of sales
$14m
cc
Dr Revenue
ea
(W7) Revaluation
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Before the revaluation, the asset had a carrying amount of $29m (29/30
$30m). The revaluation gain that needs to be recorded in other comprehensive
income is therefore $3m ($32m $29m).
Dr PPE
$3m
Cr OCI
$3m
(1 mark for calc. of reval. gain)
The deferred tax balance is calculated based on the difference between the
assets carrying amount of $32m and its tax base of $27m ($30m 90%). As
such, the deferred tax liability required is $1m (($32m $27m) 20%).
(1 mark for deferred tax liability)
Goodwill at disposal
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181

The deferred tax relating to the $3m revaluation gain is recorded in OCI. The
remainder of the deferred tax is recorded in profit or loss.
Dr OCI ($3m 20%)
$0.6m
Dr Tax expense in P/L
$0.4m
(1 mark for profit/OCI split)
Cr Deferred tax liability $1.0m
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(W8) Foreign exchange
The transaction would initially be recorded at the historic rate of exchange.

This means that revenue and a corresponding receivable would have been
recorded at $5m (CU25m/5). The receivable is a monetary asset and so is
retranslated at the reporting date using the closing rate of exchange. This gives
a year end receivable of $5.3m (CU25/4.7).
Cr Profit or loss
$0.3m
(W9) Financial asset
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$0.3m
(1 mark for calc. of forex gain)
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Dr Receivables
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a
The loan to the supplier is a financial asset and so should initially be recorded
at its fair value. However, the interest rate on the loan is not at a market rate.
Therefore, the fair value must be calculated by discounting the future cash
receipts to present value using the market rate of interest.
as
30/4/X5
30/4/X6
30/4/X7
Cash flow
$m
0.4
0.4
20.4
Disc. rate
Present value
Marks
$m
1/1.08
0.37
1/1.082
0.34
1/1.083
16.19
Fair value
16.9
2
(1 mark for cash flows, 1 mark for discount rates)
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Date
cc
The asset should have been written down on initial recognition from
$20 million to $16.9 million, giving a loss of $3.1 million in profit or loss.
Dr Profit or loss
$3.1m
Cr Financial asset
$3.1m
(1 mark for calc. of impairment loss)
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ea
Investment income should be recognised using the effective rate of interest of

8%. Therefore the investment income that should have been recorded is
$1.4 million ($16.9m 8%). Currently, Tiles has only $0.4 million ($20m 2%),
meaning that investment income must be increased by $1.0 million.
Dr Financial asset
$1.0m
Cr Profit or loss
$1.0m
(1 mark for calc. of interest adjustment)
The foreign exchange gain of $0.3m ($5.3m $5.0m) is recorded in the

statement of profit or loss.

(W10) Profit attributable to the non-controlling interest

Marks
20%
$m
0.5
0.5
1 max
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m
$m
18.0
(3.0)
15.0
Profit of Carpet
Excess amortisation (W2)
3.0
Profit attributable to NCI
Marks
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20%
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19.5
$m
3.9
Profit attributable to NCI
0.5
0.5
1 max
(W11) Administrative expenses
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The total profit attributable to the NCI is $6.9 million ($3.0m + $3.9m).
1.0
1.0
1.0
The functional currency is the currency of the primary economic environment where
an entity operates.
(1 mark)
cc
(b)
as
tud
Tiles
Carpet
Hardwood (9/12 $30)
Excess amortisation (W2)
Goodwill impairment (W3)
Foreign exchange (W8)
Marks
$m
18.0
22.0
22.5
3.0
20.0
(0.3)
85.2
An entity should consider the following when determining its functional currency:
the currency that mainly influences sales prices for goods and services
ea
the currency of the country whose competitive forces and regulations mainly
determine the sales price of goods and services
fre
the currency that mainly influences labour, materials and other costs of
providing goods and services.
(Primary indicators: 2 marks max)
The following factors should also be considered:
the currency in which funds from financing activities are generated
the currency in which receipts from operating activities are retained.

(Secondary indicators: 2 marks max)
$m
19.5
Profit of Hardwood
(9/12 $26m)

When determining the functional currency of a foreign subsidiary, the following

should be considered to determine if its functional currency is the same as its parent:
whether the activities of the foreign operation are carried out as an extension
of the reporting entity, rather than being carried out with a significant degree
of autonomy
whether transactions with the reporting entity are a high or a low proportion
of the foreign operations activities.
.co
m
(Group indicators: 2 marks max)

(IAS 21 knowledge: 5 marks max)
Saffron makes most of its sales in Francs, suggesting that Francs are the functional
currency.
(1 mark)
ial
ter
Saffron takes out finance in its local currency, suggesting that Francs are the
functional currency.
(1 mark)
Saffron is relatively autonomous from the rest of the Cumin group, suggesting that its
functional currency is not the dollar.
(1 mark)
(IAS 21 application: 4 marks max)

(Part b: 9 marks max)
Financial statements are important to a range of user groups, such as shareholders,

banks, employees and suppliers. These groups rely on the directors to faithfully
represent the performance and position of the company.
(1 mark)
tud
(c)
ym
a
All things considered, it would seem that the functionary currency of Saffron is the
Franc.
(1 mark)
A faithful representation is often presumed to have been provided if accounting

standards have been complied with. Therefore, it is essential that the directors
adhere to the requirements of IFRS 3 and IFRS 10.
(1 mark)
cc
Whether a relationship of control or significant influence exists.

Identifying the acquiring company.
Identifying the acquisition date.
Establishing the fair value of the consideration paid for a subsidiary.
Establishing the fair value of the identifiable net assets a subsidiary.
Establishing the fair value of the NCI at acquisition.
ea
as
The production of consolidated financial statements requires judgement in a number

of areas, such as:
fre
(1 mark per example of judgement: 2 marks max)

These decisions will impact on the users perception of the performance and position
of the group:
If an investee has significant debt then management may have a motivation to
exclude it from consolidation by arguing that no control is exercised. The financial
position of the group will therefore look stronger due to the absence of this debt.
Any operating receipts in dollars are immediately converted to Francs, suggesting

that Francs are the functional currency.
(1 mark)

By under-stating the fair value of contingent payments required to acquire a

subsidiary, liabilities and goodwill in the consolidated statements will be understated.
This would improve gearing and would also improve asset turnover ratios.
(1 mark per reasonable example of F/S impact of judgement: 2 marks max)
.co
m
Professional ethics is a vital part of the accountancy profession and ACCA members
are bound by its Code of Ethics and Conduct. This sets out the importance of the
fundamental principles of confidentiality, objectivity, professional behaviour,
integrity, and professional competence and due care.
(1 mark)
Integrity is defined as being honest and straight-forward. Attempting to disguise
control relationships or to account using incorrect fair values shows a lack of
integrity.
(1 mark)
ial
(a)
(b)
(c)
Group statement P or L and OCI

Functional currency
Ethical issues
Marks
35
9
6
50
fre
ea
cc
as
tud
Total
ym
a
Marking scheme
ter
(Part c: 6 marks max)
10
If such a decision has been motivated by a desire to achieve bonus targets, satisfy the
goals of shareholders or to meet bank covenants, then this demonstrates a lack of
objectivity.
(1 mark)

BRICK
Key answer tips
.co
m
This question covers a number of standards that have proved popular with the
P2 examiner. A thorough understanding of these topics is therefore essential.
Part (a) tests revenue recognition. Ensure that you get the easy marks available for stating
the relevant rules from IFRS 15 Revenue from Contracts with Customers before trying to
apply them to the scenario.
ial
ter
Part (c) tests cash flow hedge accounting. The accounting treatment of a hedge is actually
relatively simple, but many students are confused by the terminology in the questions.
Make sure that you read the question very carefully.
(a)
ym
a
Part (d) covers the accounting treatment of a sale and finance leaseback. The key rule to
remember is that any profit made on the sale itself is deferred and released to profit or loss
over the lease term.
IFRS 15 says that the separate performance obligations within a contract must be
identified.
(1 mark)
The contract price should be allocated to the separate performance obligations
based on stand-alone selling prices.
(1 mark)
tud
Revenue should be recognised when (or as) a performance obligation is satisfied.

(1 mark)
as
The handset and the other services have been sold together at a discount to the
normal individual retail price. Revenue could therefore be allocated based on the
stand-alone selling price of each component.
(1 mark)
(Knowledge of IFRS 15: 3 marks max)
cc
The total contact price is $360 ($30 12 months). The total recommended retail
price of the individual elements is $430 ($250 + ($15 12 months)). The contract
therefore means that customers pay 83.7% of the normal recommended retail price.
(1 mark)
ea
The revenue related to the sale of the handsets is $20.9m ($250 83.7% 100,000)
and this should be recognised on 1 March 20X4 when control of the good passes.
(1 mark)
fre
Revenue from the network access should be recognised over time because the
service is simultaneously received and consumed by the customer.
(1 mark)
The revenue relating to the network access is $15.1m ($15 12 months 83.7%
100,000). Two months worth of service have been provided to the customers, so
only $2.5m ($15.1m 2/12) should be recognised as revenue in the year ended
30 April 20X4.
(1 mark)
11
Part (b) requires knowledge of both IAS 38 Intangible Assets and IAS 36 Impairment of
Assets. In the exam, watch out for assets that were over-paid for or which are not
performing as well as expected they require an impairment review.

Brick has received $6m ($30 2 months 100,000) but has recognised revenue of
$23.4m ($20.9m + $2.5m). Therefore the difference of $17.4m ($23.4m $6m)
should be recognised as a receivable on the statement of financial position. (1 mark)
(Application of IFRS 15: 4 marks max)
(Part a: 7 marks max)
Purchased intangible assets are initially recognised at cost. Therefore, the license
should be recognised at $100m.
(1 mark)
.co
m
(b)
Intangible assets should be amortised over their useful economic life when the asset
is ready for use. Therefore, no amortisation will be charged until 20X5.
(1 mark)
(Basic IAS 38 knowledge: 1 mark max)
ial
All assets with indications of impairment should be tested for impairment.
(1 mark)
ter
An impairment review involves comparing the assets carrying value to its

recoverable amount. The recoverable amount is the higher of the fair value less costs
to sell and the value in use.
(1 mark)
ym
a
The value in use will be determined by estimating the future cash flows that will be
derived from the asset and discounting them to present value.
(1 mark)
The discount rate used should be a pre-tax rate that reflects market assessments of
the time value of money and the risks specific to the asset.
(1 mark)
Any impairment loss would be recognised in the statement of profit or loss. (1 mark)
(Knowledge of IAS 36: 1 mark max)
tud
The press reports would suggest that Brick has overpaid for the license and therefore
that the carrying amount is too high.
(1 mark)
The licence cannot be sold. This means that its fair value less costs to sell is $nil.
(1 mark)
as
Since a license does not generate cash inflows and outflows by itself, it may have to
be tested for impairment as part of a larger cash generating unit (CGU).
(1 mark)
If this was the case, any impairment would firstly be set off against goodwill within
the CGU and then allocated to the other assets on a pro-rata basis.
(1 mark)
(Application of IAS 36: 3 marks max)

A cash flow hedge is the hedge of the exposure to variability in cash flows that are
attributable to a particular risk associated with a recognised asset or liability or a
highly probable forecast transaction and that could affect profit or loss.
(1 mark)
fre
(c)
ea
cc
The fact that significant cash inflows are not expected until 20X6 will mean that
impairment is more likely. This is because cash flows arising further in the future will
be discounted more heavily, thus reducing the value-in-use.
(1 mark)
If a cash flow hedge meets all required conditions then the portion of the gain or loss
on the instrument that is determined to be an effective hedge shall be recognised in
other comprehensive income and the ineffective portion should be recognised in
profit or loss.
(1 mark)
(Knowledge of IFRS 9: 2 marks max)
12
Intangible assets that are not yet ready for use are tested for impairment annually.
(1 mark)

Assuming that there is no purchase price, there will be no accounting entries when
the futures contract is entered into.
(1 mark)
.co
m
At 30 April 20X4, Brick is expecting to have to pay $28,000 more ($228,000

$200,000) to acquire DN 400,000 than they were at the inception of the hedge
(1 February 20X4). The fair value of the hedging instrument has, however, increased
by $28,000 over the same period.
(1 mark)
At 30 April 20X4, the futures contract will be recognised as a financial asset at its fair
value of $30,000.
A gain of $28,000 will be recognised in other comprehensive income and the
remaining gain of $2,000 will be recorded in profit or loss.
(1 mark)
(Application of IFRS 9: 3 max)
ial
(d)
Under a sale and finance leaseback, any profit on disposal should be deferred and
recognised over the lease term.
(1 mark)
ter
(IAS 17 knowledge: 1 mark)
ym
a
The gain on disposal of $1.5m ($6m $4.5m) is deferred and released to profit or
loss over the lease term. Therefore, $0.1m ($1.5m/15 years) will be released to profit
or loss in the current period, leaving deferred profit on the statement of financial
position of $1.4m ($1.5m $0.1m).
(1 mark)
An asset and corresponding finance lease liability should be recognised at the fair
value of $6 million.
(1 mark)
tud
The depreciation expense recognised in the statement of profit or loss will be $0.4m
($6m/15 years) and the asset will be held on the statement of financial position at a
carrying value of $5.6m ($6m $0.4m).
(1 mark)
The lease liability will be increased by the rate of interest implicit in the lease. This
will give rise to a finance cost of $0.426m ($6m 7.1%) in the statement of profit or
loss.
(1 mark)
(IAS 17 application: 5 marks)

(Part d: 6 marks max)
ACCA Marking scheme
Revenue
Intangibles and impairment
Cash flow hedge
Sale and leaseback
Professional marks
fre
(a)
(b)
(c)
(d)
ea
cc
as
The liability will be reduced by the cash repayment of $0.65m. The liability will
therefore be held on the statement of financial position at $5.776m ($6m + $0.426m
$0.65m).
(1 mark)
Total
Marks
7
5
5
6
2
25
13
(Part c: 5 marks max)

GOLDEN GATE
Key answer tips
.co
m
In Section B questions, make sure that you demonstrate your knowledge of the relevant
rules from the accounting standards before applying them to the scenario. For instance,
there are easy marks to obtain for stating how a fair value should be measured (part a) and
when a provision should be recognised (part b).
Remember to attempt all parts of the question. If you miss out a part then you will lose
professional marks.
ial
IFRS 13 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date.
(1 mark)
ym
a
ter
When determining a fair value, the standard emphasises the use of level one inputs
wherever possible. These are unadjusted quoted prices on an active market. This
means that there must be a market which is trading with sufficient frequency and
volume for identical assets or liabilities to achieve a reliable estimate of fair value.
(1 mark)
Level 2 inputs are inputs other than quoted prices in level one which are observable
for the asset or liability to be measured.
(1 mark)
tud
Level 3 inputs are unobservable inputs. These should be kept to a minimum and used
only when insufficient data can be obtained from level 1 and 2 inputs.
(1 mark)
(IFRS 13 knowledge: 3 marks max)
Forecasts of future rental income are a level 3 input and must not be used to
determine a fair value if level 1 or 2 inputs can be obtained.
(1 mark)
as
Golden Gate has access to selling price for similar properties. Although adjustments
would be required for differences such as size, location and age to determine the fair
value of their properties, this is likely to constitute a level 2 input.
(1 mark)
(IFRS 13 application: 2 marks max)

(Part (a): 5 marks max)
To recognise a provision as per IAS 37, the following criteria must be satisfied:
There must be a present obligation from a past event
There must be a probable outflow of economic benefit
The costs to settle the obligation must be capable of being estimated reliably.
fre
ea
(b)
cc
As such, the sales price of similar properties should be used to determine the fair
value of the investment properties.
(1 mark)
(2 marks if given in full)
To recognise a restructuring provision, a constructive obligation must exist at the

reporting date.
(1 mark)
A restructuring provision should not include costs associated with the ongoing
activities of the business.
(1 mark)
(Knowledge of IAS 37: 3 marks max)
14
(a)

A constructive obligation does exist at the reporting date because the restructuring
has been communicated to those affected.
(1 mark)
However, relocation costs relate to the future conduct of the business and therefore
no provision is required.
(1 mark)
.co
m
The directors are correct in their assertion that no provision is allowed (although
their reasoning is incorrect).
(1 mark)
(Application of IAS 37: 2 marks max)
ter
A constructive obligation is where past practice or published policies have created a

valid expectation that the entity will discharge certain responsibilities.
(1 mark)
Under defined contribution plans, actuarial risk (that benefits will be less than
expected) falls, in substance, on employees.
(1 mark)
ym
a
Under defined contribution plans, investment risk (that assets invested will be
insufficient to meet expected benefits) falls, in substance, on employees.
(1 mark)
Defined benefit plans are post-employment plans that are not defined contribution
plans.
(1 mark)
(IAS 19 knowledge: 3 marks max)
tud
It is possible that the money in the Fund will not be sufficient to pay employees the
retirement benefits stated in the plan.
(1 mark)
Therefore it could be argued that Golden Gate does bear some actuarial and
investment risk because, if it continues with the Fund, it would need to make up for
this shortfall.
(1 mark)
as
However, of greater importance is the fact that Golden Gate has no obligation to pay
benefits to Fund members.
(1 mark)
cc
The scheme can be cancelled at any point and therefore no legal obligation exists.
(1 mark)
ea
It would also seem to be no constructive obligation to pay benefits because the Fund
is new and therefore there is no past practice of paying benefits to retired members.
(1 mark)
fre
Moreover, Golden Gate has historically paid low levels remuneration to employees.
The employees are therefore unlikely to have a valid expectation that Golden Gate
would continue with the Fund, particularly if its cost is higher than expected.
(1 mark)
As a result of Golden Gates lack of a legal or constructive obligation to pay further
contributions if the level of assets is insufficient, the Fund should be accounted for as
a defined contribution scheme.
(1 mark)
This means that the contributions payable in the period should be recognised as an
expense in profit or loss.
(1 mark)
15
Defined contribution plans are post-employment benefit plans under which an entity
pays fixed contributions into a separate entity and will have no legal or constructive
obligation to pay further contributions if the fund does not hold sufficient assets to
pay all employee benefits relating to employee service in the current and prior
periods.
(1 mark)
ial
(c)

Tutorial note
.co
m
You may have concluded that the Fund should be treated as a defined benefit pension
plan. You would still score 1 mark per point, as long as your argument is clear and you
have applied IAS 19 to the scenario.
(IAS 19 application: 5 marks max)
(Part b total: 8 marks)
(d)
(1 mark)
Items to be sold in the ordinary course of business are inventory.
ial
Per IAS 21, a foreign currency transaction should be initially recorded by applying the
spot rate on the date of the transaction.
(1 mark)
(1 mark)
ter
As a non-monetary asset, the cost of the inventory is not re-translated.
Per IAS 21, NRV should be translated at the exchange rate ruling on the date when it
was determined.
(1 mark)
ym
a
(Knowledge of IAS 2 and IAS 21: 2 marks max)
The inventory should initially be recorded at $0.95m (CU2m/2.1).
(1 mark)
The NRV of the inventory is $0.83m (CU2.5m/3.0).
(1 mark)
tud
The inventory must therefore be written down from its cost of $0.95m to its NRV of
$0.83m. This will give rise to an expense of $0.12m ($0.95m $0.83m) in the
statement of profit or loss.
(1 mark)
(Application of IAS 2 and IAS 21: 3 marks max)
(Part d: 5 marks max)
fre
ea
Total
Marks
5
5
8
5
2
25
Fair values
Provisions
Pensions
Inventory and exchange rates
Professional marks
cc
(a)
(b)
(c)
(d)
as
ACCA Marking scheme
16
Inventory is initially recorded at cost. At the reporting date, inventory must be valued
at the lower of cost and net realisable value (NRV).
(1 mark)

EQUITY ACCOUNTING
Key answer tips
.co
m
Question 4 is always an essay-style question requirement, which can include a small

computational or applied element. It may focus upon current issues in financial reporting,
or upon a theoretical or conceptual issue.
Equity accounting is an issue that has been the focus of recent articles in Accounting and
Business magazine. It is therefore a current issue that the examiner may expect you to be
familiar with.
Significant influence is the power to participate in the financial and operating
policy decisions of the investee but is not control or joint control of those
policies.
(1 mark)
ial
(i)
ter
Significant influence is assumed when the investor holds at least 20 per cent of
the voting power of the investee, unless it can be clearly demonstrated that
this is not the case.
(1 mark)
ym
a
It is assumed that an investor does not have significant influence over an

investee if they hold less than twenty per cent of the voting power, unless it
can be demonstrated that this is not the case.
(1 mark)
A majority ownership by another company does not preclude the investor
from having significant influence.
(1 mark)
Significant influence is usually evidenced in one of the following ways:
tud
(1 mark each)
(Part a (i): 5 marks max)
Under the equity method, the investment is initially recognised at cost.

(1 mark)
cc
(ii)
Representation on the board of directors

Participation in policy making processes
Material transactions between the entity and its investee
Interchange of management personnel
Provision of essential technical information.
as
ea
The carrying amount of the investment is adjusted to recognise the investors

share of the profit (or loss) and other comprehensive income of the investee
after the date of acquisition.
(1 mark)
fre
Distributions received from an investee reduce the carrying amount of the

investment.
(1 mark)
The investors share of the profit (or loss) and other comprehensive income of
the investee in the reporting period is recognised in the statement of profit or
loss and other comprehensive income.
(1 mark)
17
(a)

Transactions and balances (such as sales and purchases, and receivables and
payables) between the group and an associate are no eliminated.
(1 mark)
However, the investor can only recognise gains from transactions with the
investee to the extent of the unrelated investors interests in the investee (i.e.
the investors share of the gains must not be recognised).
(1 mark)
(iii)
.co
m
(Part a (ii): 4 marks max)

Purpose and nature
There is confusion about the purpose of equity accounting. For instance, is it a

type of one-line consolidation or a way of valuing a financial instrument?
(1 mark)
This leads to diversity in how equity accounting is applied.
(1 mark)
ial
ter
Cost
IAS 28 does not specify how to calculate the cost of an associate.
(1 mark)
Other net asset changes
ym
a
Transactions costs are often added onto the carrying amount of financial
instruments, but they are expensed when purchasing a subsidiary. Therefore,
the treatment adopted by different companies may be inconsistent. (1 mark)
IAS 28 does not specify how to treat changes in the net assets of an associate,
other than those recorded in profit or loss or other comprehensive income.
(1 mark)
tud
Examples of these net asset changes include:
as
Issues of share capital to parties other than the investor

Buybacks of equity instruments from shareholders other than the
investor
Equity-settled share-based payments.

(1 mark each)
Elimination
cc
There is no specific guidance on how the investors share of gains from

transactions with the investee should be eliminated.
(1 mark)
ea
It could be argued that it is contradictory to eliminate the groups share of

unrealised profits from transactions with an associate, but that there is no
elimination of sales and purchases.
(1 mark)
Judgement
fre
Distinguishing between significant influence and control is judgemental and in

some cases can be difficult. However, this decision can have a hugely material
impact on the financial statements.
(1 mark)
18
(Part a (iii): 5 marks max)
Proposed amendments to IAS 28 have been criticised as short-term measures

that do not address the need to establish a clear conceptual basis for equity
accounting.
(1 mark)

(b)
Subsidiary
If accounted for as a subsidiary:
The assets, liabilities, incomes and expenses of Kata would be consolidated in

full.
Goodwill of $1.92 million (W1) would be recognised.
The group would recognise its share of Katas post-acquisition retained
earnings. This amounts to $0.27 million (45% ($2m ($2.4m $1.0m)).
The group would recognise a non-controlling interest in respect of Kata of
$1.65 million (W2).
.co
m
(1 mark per point)
(Subsidiary: 3 marks max)
ial
The investment in Kata at the year-end would be carried at $3.27 million (W3).
(1 mark)
ter
In the statement of profit or loss, the group would show its share of Katas profit of
$0.27 million (W3).
(1 mark)
Comparison of impact
Assets
ym
a
(Associate: 1 marks max)
Consolidating Kata would lead to a higher non-current asset position than if equity
accounting was used (PPE of $14 million and goodwill of $1.92 million compared with
an investment in the associate of $3.27 million).
(1 mark)
tud
This will make the group look more asset rich, which may help it to raise finance in
the future.
(1 mark)
Liabilities
as
However, consolidating Katas large PPE balance may have a detrimental impact on
the groups non-current asset turnover, thus making the group look less efficient at
generating profits.
(1 mark)
cc
Consolidating the loans of Kata may have a negative impact on the groups gearing
ratio.
(1 mark)
This may have the effect of making the group look riskier than if equity accounting
was used.
(1 mark)
ea
A higher gearing ratio may make it harder for the group to raise finance in the future.
(1 mark)
Profit or loss
fre
Consolidating the incomes and expenses of Kata line by line will impact key profit or
loss figures, such as revenue, gross profit and profit from operations.
(1 mark)
Increased revenues will make the groups market share look more impressive.
(1 mark)
19
Associate

Kata is profitable so consolidating its results will improve the groups profit from
operations. This may have a positive impact on investor perception.
(1 mark)
If Kata was accounted for using the equity method, the group would simply shows its
share of Katas profits as a single line below profit from operations. This would
therefore have no impact (positive or negative) on the groups operating profit.
.co
m
(1 mark)
(Impact: 5 marks max)
Workings
(W1) Goodwill
(W2) Non-controlling interest
tud
(W3) Investment in associate
ial
ym
a
NCI at acquisition
NCI % of post-acqn net assets
55% ($3m $2.4m)
ter
Goodwill
cc
as
Cost
Group % of post-acqn P/L
45% ($2m ($2.4m $1.0m))
$m
1.32
0.33
1.65
$m
3.0
0.27
3.27
fre
ea
Note: the same answer could be obtained by taking the groups share of the
post-acquisition movement in the associates net assets (equivalent to
the movement in its share capital and retained earnings).
(a)
(b)
Total
20

Marking scheme
(i)
Significant influence
(ii)
Equity accounting
(iii) Criticisms
Impact on F/S
Professional marks
Marks
5
4
5
9
2
25
Consideration
NCI at acquisition (55% $2.4m)
Fair value of net assets at acquisition
$m
3.0
1.32
(2.40)
1.92
ial
ter
ym
a
as
tud
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fre
ea
cc
fb.com/freeaccastudymaterial
.co
m

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Kaplan Financial Limited, 2015

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On 30 April 20X5, goodwill impairment testing was performed in relation to Carpet.

Foreign exchange gains and losses are presented in administrative expenses.

Prepare the consolidated statement of profit or loss and other comprehensive

Discuss the importance of ethical behaviour when producing consolidated financial

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Based on published exchange rates, DN400,000 would cost $228,000 on 30 April

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Explain what is meant by equity accounting.

Outline potential criticisms of equity accounting.

Property, plant & equipment

Equity and liabilities

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