Business Reporting Nov 13 Marks Plan

TI Business Reporting Advanced Stage November 2013
MARK PLAN AND EXAMINERS COMMENTARY TI Business Reporting November 2013
This report includes:
A summary of the scenario and requirements for each question.
The technical and skills marks available for each part of the requirement.
A description of how skills should be demonstrated.
Detailed points for a full answer.
Examiners commentary on candidates performance.
The information set out below was that used to mark the questions. Markers were encouraged to use discretion
and to award partial marks where a point was either not explained fully or made by implication.
Question 1 Marusa
Scenario
This question involves adjusting the financial statements for an overseas company that has produced figures
using local GAAP. The issues covered are foreign currency translation of a non-monetary asset and impairment
of a previously revalued asset, financial instrument, provision, deferred tax. Correcting journals, supporting
explanations and revised statement of financial position are required.
Requirements
Technical
marks
a) For each of the key

transactions (Exhibit 2):
Skills
Skills assessed
explain any adjustments

which need to be made to
ensure Marusas compliance
with IFRS; and
prepare the journal entries

needed to adjust the financial
statements to IFRS.
b) Prepare a revised statement of

financial position for the year
ended 30 September 2013
Available marks
Maximum marks
Copyright ICAEW 2013. All rights reserved.
Identify and explain incorrect accounting

treatment.
Explain deferred taxation adjustment for
provision and investment.
Identify no deferred tax adjustment where
tax base and carrying amount are the
same.
Recommend the appropriate treatment
according to IFRS
Identify appropriate recognition of
provision as part of PPE
Recommend appropriate journal entries
to correct and record the transactions.
Assimilate adjustments and prepare in an
appropriate format for presentation to the
finance director
13
21
Page 1 of 24
Journal Entries and explanations:

Machinery purchase
The plant is categorised as a non-monetary asset per IAS21. As such is should be measured at the rate of
exchange at the acquisition date of 1 January 2013. Therefore the plant should originally have been included at
cost of Kr12 million (US$30/2.5) and a liability for that sum recognised too.
Depreciation should be charged over the useful life of the asset, which commences on 1 January, and so only
9 months depreciation is required to 30 September 2013. This gives a depreciation charge of Kr900,000 and a
carrying amount of Kr11.1 million.
An exchange difference arises between 1 January and 31 March, when payment is made. This should be
charged to the income statement instead of directly to equity.
The correct exchange difference is therefore a loss of Kr 500,000 (Kr12.5-Kr12).
The relevant correcting journals are:
DR
Kr million
Dr PPE
Cost KR12m KR10m
Cr Creditor
Being correct recording of cost of the machinery
CR
Kr
million
2
2
Dr Creditor
Cr Profit and loss
Being journal to reverse original exchange difference (Kr12.5 Kr10)
2.5
Dr Profit and loss

Cr Creditor being correct exchange loss taken to profit and loss account
0.5
Dr PPE
Cr Profit and loss
Being correction to depreciation charge (Kr 1 million Kr 0.9 million)
0.1
2.5
0.5
0.1
There are no deferred tax implications as the tax base and the carrying amount are the same.
Impairment
Per IAS36 the impairment of Kr18 million should initially be offset against the revaluation surplus of Kr16.8
million, and the excess of Kr1.2 million charged in the income statement.
The journal is:
Cr Profit or loss Kr16.8 million
Dr Revaluation surplus Kr16.8 million
Again there should be no deferred tax implications as the tax base and the carrying amount are the same
Investments
The investments are classified as held for trading per IFRS because there is an intention to sell them at the end
of the year. Therefore they should be measured at fair value and the gain/loss taken to the income statement.
At 30 September the increase in fair value is Kr4.8 million, and this is credited to the income statement.
Dr Investments Kr 4.8 million
Cr Income statement Kr 4.8 million
A deferred tax liability of Kr 960,000 (20% x Kr 4.8 million) should be created because the recognition of the
increase in fair value represents a temporary taxable timing difference.
Page 2 of 24
Dr Income statement deferred tax Kr 960,000

Cr Deferred tax provision Kr 960,000
Provision
The provision should initially be based on a figure of Kr10 million per IAS37, as this is the most likely outcome
for the clean-up costs.
However the provision should then be discounted using the pre-tax discount rate of 8% over the 20 year period
from 1 October 2012. The initial provision should therefore be Kr 2.145 million.
As the provision relates to the rights, the cost should be added to intangible assets.
The intangible asset should then be amortised in the income statement over the 20 years to when the rights
expire.
The provision should then be unwound over the period to when the clean-up costs are due
Dr Intangible asset
Dr Provision
Cr Profit or loss
DR
Kr million
2.145
12.855
CR
Kr million
15
Dr Profit or loss (Kr10.645 million/20)

Cr Intangible asset
0.532
Dr Profit or loss (finance costs) (Kr2.145million x 8%)

Cr Provision
0.172
0.532
0.172
Because the clean-up costs are tax deductible, a deferred tax asset should be created for the provision at 30
September 2013.
The provision is Kr2.317 million (Kr2.145m + 0.172m) and so the deferred tax asset is Kr 0.463 million
Dr Deferred tax asset

Cr Profit or loss
DR
Kr million
0.463
CR
Kr million
0.463
Page 3 of 24
Statement of financial position at 30 September 2013

Draft
Plant
Impair
Invest
Prov'n
Total
Kr'000
Kr'000
Kr'000
Kr'000
Kr'000
Kr'000
61,600
2,100
Non-current assets
Property, plant & equipment
Intangible assets
8,500
Financial investments
7,700
Deferred tax
63,700
1,613
10,113
4,800
12,500
463
463
77,800
86,776
23,700
23,700
101,500
110,476
Issued R$1 shares
10,000
10,000
Retained earnings
42,600
Revaluation surplus
16,800
Current assets
Total assets
Equity and liabilities
Capital and reserves
2,100
16,800
3,840
14,759
80099
(16,800)
69,400
90,099
Loans
10,000
10,000
Provisions
15,000
Non-current liabilities
Deferred tax
Current liabilities
Total equity & liabilities
(12,683)
2,317
960
960
7,100
7,100
101,500
110,476
Examiners comment on candidates performance

Mostly candidates did very well on this question with a sizeable number scoring full, or nearly full, marks.
However a few candidates obviously knew very little about the issues and there were some very poor attempts
at the foreign currency aspects of the question in particular.
Strong candidates were able to provide both correcting journals and adjust the statement of financial position.
Weaker candidates opted for the originating journals as opposed to journals which corrected the errors made
and even weaker candidates were unable to demonstrate adequate skill in this area producing journals which
made no sense and didnt balance.
There was a wide range of answers from the excellent to the very poor and it was not uncommon for the
requirement to prepare a revised statement of financial position not to be attempted by the weaker candidates
or to be attempted with entries which clearly demonstrated that the candidate did not know how to adjust
financials statements.
Detailed comments
Requirement a) Explanation of financial reporting treatment and the adjusting journals.
Impairment of non-monetary asset
Candidates were able to translate the machinery at the exchange rate at the date of acquisition and to
retranslate the payment, correctly identifying the foreign exchange loss. Depreciation was in most cases
accurately calculated, although a minority of students omitted to prorate for 9 months.
For the impairment many believed that the transfer of excess depreciation following a revaluation is done
automatically but in fact there is a choice. Time was wasted here providing calculations for excess depreciation
that were not needed.
Page 4 of 24
A significant minority of candidates wasted time calculating deferred tax when the question clearly stated that
the tax treatment and the IFRS treatment were the same even to the extent of trying to apply the UK tax rules
with regard to capital allowances.
FVTPL - Financial instrument
Most candidates gave a good answer to this part of the question, demonstrating a sound knowledge of
accounting for financial instruments. The most common error was to classify the investment as available for
sale. Better candidates were able to calculate and explain the deferred tax liability arising on this transaction.
Some candidates, however, claimed that there were no deferred tax implications because the financial
instrument had not been sold by the year end, suggesting that they have no understanding of the basic
principles of deferred tax.
Provision
This part was the least well answered of the four parts of this question. Candidates did not appreciate that the
calculation of the provision should be based on the most likely outcome, with the majority calculating an
expected value. Most candidates were able to discount the provision to present value and unwind the discount
to the income statement, but few appreciated that the provision should be added to the cost of the intangible
asset. A significant number of candidates correctly calculated the deferred tax asset arising on this transaction.
Requirement b) Revised statement of financial position
This part of the question was generally well done. Some candidates lost marks through not showing their
workings as instructed.
Page 5 of 24
Question 2 BukUp Ltd

Scenario
The candidate is in the role of a tax adviser advising on the tax implications of a members voluntary liquidation.
The question involves the candidate in making recommendations of the most effective use of tax losses.
Embedded within the question is the ethical consideration that the candidate must advise the directors that they
are required to consider both the majority and minority shareholders. The directors should be advised to
consider compensating the subsidiary by paying cash in return for the surrendering of tax losses. Other
technical issues related to the insolvency are the tax implications of the sale of a capital asset which has
implications both for corporation tax and VAT, and the tax treatment of the directors redundancy payments.
The issue concerning the proposed sale of Vans House requires the candidate to be sceptical to the possibility
that the building could in fact be sold for more. Also if 15 million is achieved by selling to an outside party, the
implication for SDLT would almost counter balance the benefit from the increased selling price. If the building is
sold intra group, the SDLT exemption would probably apply. The sale of the building would also trigger a VAT
liability. The candidate should identify that there are two elements of VAT owing to HMRC; the VAT which
should have been paid on the change of use and the VAT repayable on sale
The candidate is asked to explain the ethical and legal issues arising from the scenario for the BukUp board,
specifically excluded are the implications for the firm.
Requirements
An explanation of the loss reliefs
available for BukUps tax trading
loss for the year ended 30 June
2013 and for the projected loss for
the 6 months ending 31 December
2013. You should include
appropriate calculations and
recommendations for the most
effective use of the losses
Technical
marks
7
Skills
Skills assessed
Advice on the tax implications and

timing of the proposed sale of Vans
House
A calculation of the taxable

redundancy payment for Greg Mann
Assimilate information from different

parts of the question to formulate
recommendations
Conclude that terminal loss is
marginally more effective because of
higher tax rates in 2012 and 2011.
Recognise the cash effect on BukUp
as terminal loss results in a repayment
of tax whereas the group relief is not
necessarily paid for by the subsidiaries
Apply technical knowledge to
determine no gain no loss treatment if
sold intra group
Apply scepticism to the possibility of
selling the building in the time frame
and for a higher value.
Identify that the payment of SDLT
would arise for an external sale
Explain that the tax implications of an
external sale may negate the benefit of
a higher market price
Appreciate sale before liquidation
enables use of trading losses however
losses are fully utilised therefore timing
not an issue
Assimilate information and apply
technical knowledge to determine VAT
liability on disposal of Vans House
Link technical knowledge of how NIC is
calculated to potential tax evasion
resulting from HRs policy on
redundancy payments.
Apply technical knowledge to
determine the taxable redundancy
payment assimilating information
regarding the overseas service.
Page 6 of 24
An explanation of any ethical and

legal issues for BukUp arising from
the minutes (Exhibit 2) and Gregs
email (Exhibit 3). Include
recommendations as to how we
should advise the BukUp board in
respect of these issues
Available marks
10
Maximum marks
Apply ethical framework to the

scenario. (i.e. need to ascertain facts)
Provide clear recommendation on
disclosure of the VAT error
Advise directors on the need to instruct
HR department regarding the
appropriate treatment of redundancy
payments
Provide clear advice regarding the
directors responsibilities in respect of
minority shareholder.
19
29
Briefing note for the tax partner.

Use of Bukup loss - Members voluntary liquidation
Once the company ceases to trade, trading losses cannot be carried forward. Current year losses may however,
be offset against total profits, including chargeable gains and it may therefore be advantageous to realise
chargeable gains before the cessation of trade (see below). However as losses are fully utilised this is not a
strong point for consideration. Terminal loss relief is available on cessation; the terminal loss in the final 12
months of trading may be carried back up to three years against total profits.
If the trade were to cease on 31 December 2013 as suggested, terminal loss relief would be available as
follows:
Year ended 30 June
2013
2012
2011
'000
'000
'000
Trading income
Nil
80
1,500
NTLR
40
20
175
Rental property profits
25
25
25
65
125
1,700
s37(3) CTA 2010

Current year
Carry back
Terminal loss (see
working 1)
-65
-125
2
-360
-920
Revised taxable profits
Nil
Nil
420
Page 7 of 24
Working 1
Terminal loss relief
'000
1. Loss in 6 months to 31.12.2013; and
920
2. Loss for period 1.1.2013 to 30.6.2013

being the
lower of:
Maximum available
6/12 x 720,000
360
360
and
Amount unrelieved
(Working 2)
530
1280
Utilisation carry back 36 months on LIFO basis

30-Jun-13
Already relieved
Nil
30-Jun-12
Already relieved
2
Nil
(360)
(920)
30-Jun-11
The 360,000 arising in the year ended 30 June 2013 should be dealt with first. This can be carried back 36
months from the beginning of that accounting period i.e. to profits arising from 1 July 2009. In this case the loss
was fully utilised by year ended 30 June 2011 The terminal loss relief claim for the period to 31 December 2013
is then relieved and may be carried back 36 months from the start of that period. ie to profits arising from 1 July
2010.
Working 2
Utilisation of loss
Year ended
30 June 2013
Trading loss in period

Current year 30.6.2013
Carry back to 30.6.2012
000
720
(65)
(125)
530
6 months
ending
31 December
2013
000
920
920
Recommendation
As BukUp is a member of a 75 % trading group, the option to use group relief is available until the date of
commencement of winding up. It may therefore be possible to do a partial group relief claim for the loss
unrelieved under terminal loss of 170,000 (530,000 360,000).
It would appear that under both methods, group relief and terminal loss, the losses in BukUp will be fully utilised.
As all companies are main rate tax payers there is only a slight advantage to a terminal loss relief claim since
corporation tax rates have fallen in recent years, the repayment of tax will be greater marginally than the rate of
relief that would be obtained using a current year group relief claim.
The issue is therefore whether JVM should be asked to compensate BukUp for the surrender of losses under
group relief. Greg Mann as a minority shareholder may justifiably feel disadvantaged as the directors are
effectively giving away an asset of the company. It is usual for the claimant company to pay for group relief and
such payments are ignored for tax purposes. The directors should be advised to consider the minority
shareholder in determining the use of the losses as directors are required to act in the best interest of all the
shareholders and not just the majority shareholder.
Tutorial note: Giving away group relief for no consideration may be considered a distribution and will only be
legal if there are distributable profits.
Page 8 of 24
Tax implications of the proposed sale of Vans House

BukUp remains a member of the chargeable gains group with JVM until dissolution. Therefore Vans House
could be transferred at a no gain no loss basis to another JVM 75% group company both before and after the
appointment of a liquidator without the need for consideration to pass. This would mean that no corporation tax
liability arises on the transfer.
The value proposed for the transfer appears to be less than market price supposedly obtainable. However,
there is no certainty that the price the developer has offered would be the price the liquidator would obtain.
Transferring the property intra group would however result in a saving in terms of stamp duty since the sale to a
group company is exempt from stamp duty land tax (SDLT).
An exemption for SDLT applies between group companies and therefore this exemption would apply to the sale
between BukUp and the JVM subsidiary. Relief can be denied under certain conditions; if arrangements exist for
both companies to leave the group and if the transaction is not for bona fide commercial reasons or if the
transaction forms part of arrangements of which the main purpose is tax avoidance. Although ultimately a sale
of the building outside of the group at a future date would attract SDLT.
If the building is sold to the developer before or after the liquidation, SDLT would be payable by the developer
on the sale of 15 million x 4% = 600,000, which could be a factor in the negotiation of the sale price.
If the building is sold after liquidation, trading losses of BukUp would not be available to set off against the gain
and corporation tax on the gain would be payable. (Although the option to transfer to another JVM subsidiary
with a capital loss would still be possible after the appointment of the liquidator. There is also the potential for a
notional transfer between group companies). Clearly the tax implications of the sale to a third party may negate
the potential (and uncertain) increase in market price, even if the sale could take place at the proposed market
price.
VAT issues
As a VAT registered business, BukUp purchased Vans House as a new commercial building for use in its trade
and therefore input tax of 2 million was initially recoverable. As the building cost more than 250,000 it comes
within the capital goods scheme. The initial recovery of VAT is dependent upon the initial use of the building,
hence as the building was originally used 100% for taxable supplies BukUp was able to claim full recovery of the
input VAT. However the change of use on 1 July 2009 should have resulted in an adjustment being made to
repay part of the initial VAT reclaimed.
Year ended 30 June:
2007
2008
2009
2010
2011
2012
2013
Initial recovery
No adjustment
No adjustment
Adjustment required:
2m/10 (75%-100%)
2m/10 (75%-100%)
Adjustment required
2m/10 (75%-100%)
2m/10 (75%-100%)
000
(2,000)
50
50
50
50
In total 200,000 of input VAT should have been repaid to HMRC for the intervals between 2010 and 2013.
As Vans House is now over three years old when it is sold, it will be treated as an exempt sale. However it is
being sold within the ten intervals of acquisition and it will therefore be subject to a claw back of input tax on the
original purchase price for the remaining intervals. As the building is not being sold as part of a transfer of a
going concern, there are two adjustments required:
1. In the year of sale no interval adjustment is required as the tenant vacated the premises on 1 July
2013 and the building reverted to 100% taxable use.
2. A further adjustment of the complete intervals following the sale assuming a 0% taxable use as the sale
is exempt from VAT. Assuming the sale goes ahead this is likely to be:
2m/10 x (0%-100%) x 2 remaining intervals = 400,000
Page 9 of 24
A calculation of the taxable redundancy payment for Greg Mann

Wages in lieu of notice are taxable if contractual. Statutory redundancy is not taxable but is deducted from the
30,000 exemption for termination. Ex gratia payments are not taxable if they are covered by the 30,000
exemption. Greg will have income tax to pay on the taxable amount as follows:
Termination
payment
Statutory redundancy pay
Taxable as
employment
income
-
Compensation for loss of office
50,000
Terminal bonus payable under

employment contract
Company car (market value
22,000)
22,000
Less tax free amount 30,000

20,000)
Taxable
(10,000)
Exempt portion 6/15 x 62,000
(24,800)
Taxable as employment income
65,000
62,000
37,200
65,000
65,000
Greg has worked for the company for a total of 15 years; six of those years were spent working for BukUp in
Paris. This counts as insubstantial overseas service. Therefore a proportion of the balance (6/15) is exempt
and the remainder is taxable (9/15)
The directors should be made aware of the correct treatment of the termination payment and ensure that the HR
department has the appropriate knowledge to calculate the correct termination payments
For NIC purposes, if the payment is a reward for services it attracts NIC under the normal rules. However if the
payment attracts the 30,000 exemption; the whole payment is exempt from national insurance.
Ethical and legal implications for the directors VAT - failure to notify of change of use and claw back of input tax
The directors should be advised that having knowledge of the VAT irregularity without acting upon it may be
construed as a criminal or civil offence. This represents a case of tax evasion and money laundering.
Before any further consideration of this matter is made, the facts should be confirmed directly with the directors
of BukUp. We should also review our letter of engagement to confirm whether we have authority to disclose the
under-declaration of VAT to HMRC. The directors should be advised to submit an error correction to HMRC.
Default interest may be charged and a penalty may be imposed by HMRC. The penalties for a deliberate and
concealed error are up to 100% of the tax due. However this may be reduced to a minimum of 30% if the error
is unprompted (ie there is no reason to believe that HMRC will discover the error) and full cooperation is given
to HMRC. If error correction declaration is made, the inaccuracy penalty can be reduced or suspended (if
careless). The amount of reduction will depend on how co-operative BukUp are with HMRC. BukUp may also
be liable to a failure to notify penalty as it did not inform HMRC of a change in circumstances giving rise to a tax
liability. For failure to notify (which this would be given there has been a change in the tax position), a penalty
will not be applied if there is reasonable excuse. This situation however, may not fall within that category.
The directors should be advised of the attitude of the HR department to minimising NIC which is indicative of a
lack of regard for tax rules.
Minority shareholder
The directors should also be reminded of their duty to act in the best interests of all the shareholders in their
actions in relation to the liquidation of the company. BukUp is planning to enter into a members voluntary
liquidation. To place a company into liquidation there must be a members meeting at which they must pass a
special resolution for liquidation; and a liquidator will be appointed. A 75% majority is required to pass such a
resolution. Therefore as JVM owns 90% of the shares they have the majority vote in favour and there is nothing
Page 10 of 24
that Greg Mann as the minority shareholder can do to prevent the liquidation. Provided the directors are acting
in the best interests of all the shareholders and are safeguarding the assets of the company, there is little form
of redress by the minority shareholder. Greg should be advised to take separate legal advice.
Many candidates scored well on this question, although there were a few instances where no serious attempt
was made at the question which was normally contributory to the candidate failing to pass the paper.
However many candidates made a serious attempt to produce answers covering all of the issues required by
the question. A good use was made of the exam time, ensuring that all parts of the question were covered
without too much of the time being spent on specific areas. Generally, there were plenty of relevant
calculations.
Requirement a) Use of losses
Very good explanations were given of the loss options available. Attempts at calculations were also included to
show the amount of tax saved, which were given credit.
A common mistake in calculating the terminal loss was not to distinguish between the loss for the penultimate
year and the final year and when this was done, they did not always deal with them in chronological order. This
meant that although the descriptions of the loss reliefs were provided, the calculations were sometimes muddled
and candidates therefore lost marks in this area. The terminal loss was often not calculated correctly for the
extended 12 months.
Recommendations
Weak candidates did not always seem to appreciate that the company would want cash and that carrying back
or asking the group for a payment for the group relief would be beneficial
There was much discussion included on the possibility of marginal rates despite the fact that the question stated
that the companies all paid tax at the main rate. Marks were lost by those who failed to identify and explain the
benefit (although marginal) of carrying back the loss to benefit from the refund of tax at the higher tax rates in
earlier years and credit was given to candidates who discussed whether the company had always been a main
rate payer in earlier years.
Requirement b) Tax implications of Vans House
Many candidates recognised the point that the disposal should take place at a time where the losses could be
allocated against any gain. It was encouraging to see how many candidates recognised the Capital Goods
Scheme applied in this part of the question. Once on the right track, the calculations seemed to flow and some
clear calculations were performed.
The candidates struggled more with the adjustment needed on the disposal of the asset. Although recognising
there would be a further impact under the CGS gained maximum marks for this section.
Many candidates discussed the NGNL but did not state the implication of this and a fair number of candidates
were side-tracked on de-grouping charges. Very little if any scepticism was shown concerning the ability to
achieve the higher price Greg discussed.
Very few discussed SDLT for either the group or for selling outside the group.
Requirement c) Redundancy payment
Most of the answers included a good explanation of the tax treatment together with well laid out calculation of
the elements of the redundancy payment and the chargeability and use of the 30,000 exemption. In most
cases, the maximum number of marks were awarded.
Unfortunately, few candidates recognised the overseas exemption.
Page 11 of 24
Requirement d) Ethical and legal implications

The quality of the comments on the ethical and legal issues varied significantly with many candidates focusing
on the position of the firm although the question clearly stated that those issues would be dealt with separately
Nonetheless there were some very good answers which identified the issues advising on disclosure recognising
the criminal offence and the money laundering effect, and the financial penalties involved.
There were of course some very worrying answers - for example candidates would advise that the firm could not
tell the client to pay the VAT owing as this would constitute tipping off - showing candidates confusion over
money laundering regulations.
Some candidates believed that it was the duty of the accountancy firm to inform the HMRC of the nondisclosure without consulting the engagement letter and without telling the client.
Page 12 of 24
Question 3 FitOut
Scenario
The candidate is the audit senior on the audit of a manufacturer and supplier of office furniture. An assistant
who is out at the audit client has received commentary on monthly fluctuations in gross margin from the client
and has requested help in determining the key issues to be addressed in the audit of inventory, revenue and
cost of sales. The candidate is required to identify and explain the significance of the key financial reporting and
auditing issues and to set out the specific audit procedures required to respond to each issue.
The issues include technical accounting issues such as accounting for share based payments, the valuation of
inventory, prior year adjustments, financing payments and post balance sheet events together with audit issues
such as cut-off and an inexperienced financial controller who may not have made all of the required year end
entries. A successful candidate must show the ability to interpret information, combine information from
different parts of the question and develop an appropriate audit response. Candidates were also given credit for
the style of their answer and whether they have provided a clear explanation for an inexperienced assistant.
Requirement
Technical
marks
Skills
marks
13
For each issue could you:

- Explain any concerns you
have, setting out where
appropriate the correct financial
reporting treatment; and
Identify and explain the specific

audit procedures I should
perform to address each of
your concerns
Total marks
Maximum marks
13
Skills
-
Assimilate information from different parts

of the question to formulate concerns
Identify and explain potential and

alternative financial reporting adjustments
required for the prior year adjustment,
share based payment and loan/discount to
the supplier
Recommend appropriate accounting

treatment.
Determine appropriate audit procedures

relevant to the concerns identified.
14
27
Page 13 of 24
Email to:
From:
Date:
Subject:
Mo Griffin
Georgie Maynard
4 November 2013
Financial reporting treatment and specific audit procedures
Mo
I have set out below the key concerns arising from the information, financial reporting treatment and specific
audit procedures I need you to carry out:
Treatment of purchase price variances
Standard costs are set each year on 1 October and so the standards used to value year-end inventory are a
year old. The commentary (Note 1) makes it clear that the company is experiencing price inflation such that
purchase price variances become adverse as the year progresses. The year-end adjustment to include labour
and overhead in inventory does not include any adjustment for purchase price variances. There is therefore a
concern that the standard costs used to value inventory at 30 September 2013 do not accurately reflect the
actual costs of purchasing the inventory either on a FIFO or average basis. [Approach below assumes that
FIFO basis is likely to be the most appropriate but credit also given if the candidate sampled across the year
and justified an average cost approach].
Specific audit procedures
-
Select a representative sample of materials and, for each sample, obtain purchase invoices for the most
recent pre year end purchase of the item. Ensure that the standard cost and variance were recorded
accurately when the invoice was posted.
Consider the differences between actual and standard cost revealed by the sample testing. Obtain
explanations for any large variances or variances which are out of line with those for other items. Having
excluded or considered separately any one-off items, extrapolate the results of the test to determine the
level of adjustment which may be required to value inventory at a closer approximation to actual cost.
Note if the test reveals that purchase price variances are large and / or do not follow any general
pattern, then it may be necessary to extend the sample or to ask the client to look again at the standard
costs used to value year-end inventory. In addition, need to be careful in the interpretation of the
extrapolated sample test given that there is price inflation and inventory may not all have been acquired at
the most recent price.
Determine the level of purchase price variances over the inventory holding period (4.2 months from
information available (1,190/3,384 *12) but this compares inventory at standard cost to full cost of sales).
Review breakdown and investigate any one off items (such as the one in June relating to the share based
payment for wood), excluding from the total those which should not be inventorised.
Discuss with the client the process for determining the standards to be used from 1 October 2013. If these
are based on most recent actual costs then the total adjustment required to uplift the inventory balance on
1 October 2013 from old standard cost to new standard cost will provide further evidence of the potential
adjustment required to the year-end stock balance.
Compare the results of all 3 tests. If all give similar results then an adjustment based on the figures
determined is likely to result in inventory being valued at actual cost. If the 3 tests give very different
answers then further testing is likely to be required.
As well as purchase price variances there may also be volume variances if amounts of materials used in
production differ from the standard quantities. Would not be normal to inventorise such costs unless they arise
from normal levels of scrap inevitable in some production processes. Need more information to determine
whether any adjustment is required.
60,000 costs in October - tooling
There is a concern over the correct categorization of the costs recognised in October 2012 which include
35,000 of tooling costs. These may well provide benefit over a number of years as the supplier continues to
supply to FitOut parts made using the tooling. Such costs would normally be capitalised rather than written off
as incurred and require further investigation and possibly an audit adjustment (which is further complicated by
the cut-off issue see below).
Page 14 of 24

- Discuss with client the nature of the tooling purchased and the period over which it is expected to be used
to provide parts for FitOut. Consider in particular whether FitOut has a contractual right to control / limit
the use of the tooling and to benefit from it in future.
-
Obtain evidence to corroborate and support the assertions made by the client by reviewing any written
agreements with the supplier for the use of tooling and any invoices supplied to support the cost charged.
If no written agreements exist, consider contacting the supplier for confirmation of the arrangement.
Conclude as to whether the tooling cost of 35,000 should have been capitalised and, if so, the period
over which it should be depreciated. If it was used only to make parts for the urgent order then
capitalization would not be appropriate.
Propose adjustments to capitalise the cost (possibly as a prior year adjustment see below) and to
provide for the depreciation charge for the year.
Perform procedures to determine whether there are similar arrangements with other suppliers (through
discussion with production / procurement personnel and / or circularisation of suppliers.
60,000 costs in October 2012 cut-off

There is clearly a concern over cut off at the beginning of the year. The 60,000 of costs recorded in October
2012 is material and appears to have been recorded in the wrong period as the costs were incurred and
relevant product received in September 2012. This item should therefore be recorded as a prior period
adjustment. However, further audit work is required to determine whether the urgent order was fulfilled in
September 2012, in which case the adjustment would be to record fixed assets of 35,000 and cost of sales of
25,000 in 2011/12. If the order was not dispatched until October 2012, then the 25,000 would be included in
inventory at 30 September 2012.
Cut off issue in prior year also raises a concern over whether similar issues may have occurred at 30
September 2013, especially given the fact that the financial controller was very new and may not have
completed in full all year end procedures. The margin for September 2013 is very high (especially given the
year end adjustment to the obsolescence provision) and this has not been explained by the commentary. It is
therefore possible that costs have again been missed as in the prior year.
-
Determine whether the sale for which the parts were supplied in September 2012 was made in that month
or in October and then finalise the adjustment required to book the prior year adjustment.
Obtain an explanation for the high gross margin in September 2013.
Perform procedures to test cut off at 30 September 2013. These should include specific tests to ensure
that the liability has been recorded for a sample of transactions close to year end; reconciliation of supplier
statements (including those for all key suppliers); and review of post year end invoice postings and cash
payments.
Also consider whether additional work is required to consider revenue cut-off and whether sales have
been recorded both in the correct period and in the same period as the related cost of sales. This will
involve specific tests on large sales in September 2013 and a sample of sales recorded either side of the
year end.
Payment to Forgers
There is concern over the appropriate financial reporting treatment of the discount for Forgers and the
recoverability of the receivable given Forgers cash flow difficulties.
As future benefit is expected from the one off payment to Forgers, it is not appropriate to include the 100,000
within cost of sales for February 2013. The payment is expected to provide future benefit in the form of
discounts on future purchase and can be regarded as a funding loan to a supplier. As such the 100,000
should initially be included in receivables. The receivable should then be reduced by the committed
discounts earned on future purchases.
2 approaches to recognising the future benefit are possible. Both depend on the assertion that full benefit for it
Page 15 of 24
will be earned in due course. Assuming the financial controllers estimate of purchases is correct and the
purchases occur evenly over the year, the total discount receivable over the 2 years to 31 January 2015 will be
120,000 and the element relating to the 8 months to 30 September 2013, 40,000. The additional 20,000
can be regarded as a funding cost and recognised as interest income over the 2 year period. Estimated
interest for the first 8 months on a sum of digits basis will be 164/300*20,000 = 11,000 (Tutorial note: any
reasonable basis for interest calculation is acceptable).
Alternatively, it may also be acceptable simply to recognise the 100,000 on a time basis over the 2 year
anticipated life. This will not be so appropriate if purchases occur irregularly.
If the level of future of purchases were such that full benefit would not be gained from the payment then an
immediate write off of any amounts which will not be realised in genuine additional discounts would be the
correct treatment.
Specific procedures
-
Obtain contractual documentation relating to the 100,000 payment

Confirm that the overall anticipated level of purchases is reasonable based on historic purchases and
budgeted activity and purchases for the next 2 years.
Review invoices from Forgers for the 8 months to 30 September 2013 to obtain support for the level of
purchases from Forgers during that period.
Consider the recoverability of the remaining debtor balance taking into account the risk of Forgers ceasing
to trade (due to cash flow difficulties) and the level of anticipated future purchases.
Consider whether the pre-discount rates for metal supplies since 1 February 2013 are in line with prices
before that date and prevailing market rates, so obtaining further evidence concerning the substance of
the transaction. Also consider the reasonableness of the implicit interest rate.
Advise the client of the adjustment required to record the receivable, discount and finance income.
Identify metal inventories at the year end and confirm that the standard price used to value closing
inventory is appropriate given the 20% discount. Consider the materiality of any adjustment required to
actual costs.
Sales to Toucan plc

The loss on the Toucan contract gives rise to a concern over the valuation of WIP
Assuming that the 2 phases of the contract are not linked, cost of sales in May 2013 appears to have been
recorded correctly, giving rise to a gross loss in the month. However, the memorandum from the inventory
count reveals that included within year-end inventory is 85,000 relating to phase 2 of the Toucan contract.
This should be carried at the lower of cost and net realisable value. It is possible that a similar loss will be
made on the second phase of the contract and that the net realisable value of the inventory will therefore be
below cost, requiring a provision to be made. If the loss on the second phase of the contract is proportional to
that on the first, then the loss for phase 2 will be 30,000 and this should be included as a provision.
If the 2 phases should be linked and regarded as a single contract for supply then the total anticipated profit on
the contract (across both phases) should be recognized over the course of the contract and it is possible that a
profit rather than a loss will arise on phase 1. It is also possible that there will be a larger loss over the entire
contract and therefore that should be recognized immediately, giving the same net effect over the year as the
treatment discussed above.
- Obtain a copy of the contract with Toucan and determine whether there are 2 separate contracts for
supply or whether the contract should be regarded as a single long-term arrangement.
- Consider what additional costs will be incurred in completing and shipping the product to Toucan.
- If you conclude that there is a single 2 phase contractual arrangement then perform calculations of the
overall profit / loss on the contract and and determine what proportion of that should be recognised in the
year based on work done / product delivered.
- If you conclude that is it correct to recognize profit as product is delivered and that the contract is simply
for the supply of goods, compare the NRV calculated with the carrying value of the inventory to determine
whether a provision is required.
- Consider, based on a review of sales orders and discussion with relevant management personnel,
whether there are any other sales contracts which are expected to give rise to a low or negative margin
such that additional provisions may be required.
Page 16 of 24
Transaction with Plank

The transaction with Plank is a share-based payment and should be accounted for as such under IFRS2.
There is again a concern here that cost of sales are understated. As it is a transaction with a third party, rather
than an employee, we need to consider first whether the fair value of the goods and services can be reliably
measured. The controller has indicated that equivalent wood would have cost 45,000 from the old supplier
and there is clearly a market in commodities such as wood, which should enable a fair price to be determined
as there is nothing to indicate the wood supplied is of a specialist or unusual nature. The fair value of the
shares issued will not therefore be relevant as it would be for an employee share based payment.
Recording the transaction at the nominal value of the shares issued is incorrect as it fails to recognise the
share premium element of the transaction and records the cost at too low a value.
The transaction has however been correctly recorded in the period in which the goods were received as
required by IFRS2.
-
Obtain evidence to support the fair value of the wood by looking at invoices from the old supplier / other
suppliers and quotes / price lists issued by Plank or published on its web-site
Obtain evidence to support the fair value of the shares issued. If valuations / other recent transactions
would support a very different price per share then this may be indicative that the transaction is not on
commercial terms and worthy therefore of further investigation to determine if related parties are involved
or there are reciprocal arrangements.
Review the agreement with Plank to ensure that the terms and conditions have all been understood and
taken into account
Propose an adjustment to record the purchase and share capital / share premium at the correct amount
Low margin in December, July and August

Margins in these three months are lower than average and this is not explained in the schedule supplied. This
could be due to the fact that sales in these months are lower and an element of the costs fixed. However
further enquiry is needed.
-
Discuss with client personnel the reasons for the lower margins in these months, obtaining evidence to
corroborate these explanations.
Consider whether any additional information / follow up work is required.
Year-end adjustment to include overhead and labour in inventory

It is not clear from the information provided whether the year-end adjustment to include labour and overhead
costs in inventory has been made (or whether balance is unchanged from previous year end). There is a clear
concern over the valuation of inventory.
It is appropriate to include in inventory an allocation of those costs which have been incurred in bringing the
inventory to its present location and condition. For raw materials and bought in finished goods, such costs are
likely to comprise only the cost of freight. For manufactured finished goods, it is reasonable to bring in a
proportion of normal overheads but exceptional items and the costs of making the sale / delivering to the
customer should be excluded, as should any costs of storage. For WIP the proportion of overhead should
reflect the extent to which production work has been completed to date and the formula as stated fails to take
account of that.
The formula shown in our system notes suggests that overheads such as production labour and production
costs are apportioned to all inventory including raw materials and bought in finished goods which is incorrect.
In addition, no adjustment appears to be made to ensure that only appropriate costs are inventorised. We
therefore need to look carefully at this calculation and ensure that only appropriate costs are inventorised.
-
Ascertain what overhead and labour is included in inventory at present

Review the calculation and supporting schedules for labour and overheads. Agree client schedules to
Page 17 of 24
accounting records to ensure that the figures used reconcile to balances tested within our workpapers.
Ensure the accuracy of the total cost of production at standard cost by selecting a sample, agreeing the
product to sales invoices and the standard costs of that product to the standard cost file. Ensure the
completeness of the cost by selecting a sample of dispatches to customers in the year and ensuring that
they are included.
Consider the level of completion of items in WIP and propose and adjustment to correct the formula for
this.
Consider whether production costs have been incorrectly allocated to raw materials and bought in finished
goods and ask the client to calculate the effect of this error. Given the high proportion of raw material
inventory, this is likely to be a significant amount.
Review an analysis of overheads included within the calculation to ensure that all exceptional items (such
as the prior year costs or tooling) are excluded and that the costs all relate to production and not to
storage or delivery.
Consider whether the factory has been operating throughout the year at a normal level of production or
whether further adjustments are required to ensure that costs arising from inefficiency or low factory use
are not included within inventory.
Finalise any adjustments required.
New financial controller completeness of year end entries

-
The new financial controller joined very close to year end and may therefore lack the experience /
knowledge to make all the appropriate year-end adjustments. We should be alert to this in performing our
work and should consider in particular whether all the year-end adjustments made in the prior year have
been included this year where we consider them to still be appropriate.
Conclusion
The planning materiality is set at 20,000. These adjustments are therefore material in relation to the
materiality level and should be quantified to assess the impact on the financial statements.
Style
Marks available for the style and content of the response. The answer should be clearly presented in an email format, using explanations and language appropriate for an inexperienced assistant and not assuming too
much previous knowledge.

The answers were generally well presented with headings to show the various issues covered, and laid out in
an organised manner that would be expected in practice. Most candidates managed a reasonable response to
this question although some appeared determined to give all information that they had regarding the audit of
inventory rather than focusing on issues arising from the information provided.
Detailed comments
Identifying concerns and financial reporting issues
The downside of some of the answers to this question was the clarity between the issue and the FR treatment.
Many of the issues were actually recognised and candidates were able to give the more correct and appropriate
FR treatment, however there was very often a neglect to the actual concern or impact of the current and often
incorrect treatment which would give rise to a risk for the auditor. The more structured approach of....audit risk,
explanation of this risk and why it is a risk, followed by the correct FR treatment and the procedures when
adopted gave access to more of the available marks.
Other candidates adopted an approach which identified the concern ie audit risks and procedures in detail but
there was very little on financial reporting aspects. Time was wasted providing general audit tests on the
inventory rather than relating it specifically to the points raised in the question. In particular:
Page 18 of 24
On the Forgers contract some simply called the item a loan without stating whether it was an asset or a
liability. Many discussed the spreading but the interest element was missed.
For Toucan many talked of IAS 11 Construction Contracts instead of recognising the issue as a
valuation of WIP and a provision.
Accounting for the share-based payment in respect of the Plank contract was sometimes incorrect Candidates often could identify the debit entry and they knew to credit equity. Some discussed the
value being the value of the shares not the wood and wanted to value the transaction by reference to
the share value rather than the fair value of the goods. Others credited the 36,000 surplus to other
income rather than share premium.
Audit procedures
By contrast the audit procedures were generally well done when kept relevant to the scenario. Candidates
identifying general audit procedures on inventory scored no marks.
Page 19 of 24
Question 4 - PP
Scenario
The scenario in this question is an investment property company (PP) where the owners are trying to sell the
business and are conscious that reported asset values are likely to be a key determinant of future selling price.
PP has elected to measure the properties at fair value in accordance with IAS 40, so the audit of fair values is
an underlying issue throughout the question. The candidate is an audit senior working on the audit of PP with
specific responsibility for dealing with a number of outstanding auditing and financial reporting issues which
have been highlighted by the audit junior; reviewing the management accounts for additional audit issues; and
preparing a schedule of investment properties, including determining carrying amounts.
The issues highlighted by the audit junior comprise: the impact of the failure and replacement of an air
conditioning unit on the fair value of the Manchester property; the acquisition under an operating lease of a
Birmingham property; and the transfer to the bank of an Inverness property and assumption of a new loan, in
return for the bank extinguishing the existing loan on the property.
In the first requirement, candidates are required, for each of the above three issues raised by the audit junior to:
firstly, to set out and explain the appropriate treatment in the financial statements; and secondly, to explain the
related audit procedures.
In the second requirement they are asked to prepare a schedule of investment properties.
Requirements
For each of the issues identified
in Exhibit 2:
-
Set out and explain the

correct treatment in the
financial statements for the
year ended 30 September
2013; and
Highlight the audit

procedures we should carry
out. I do not require a
general list of audit
procedures for investment
properties, so please just
focus on the issues raised
by the audit junior.
Technical
marks
5
Skills
13
Skills assessed
Produce a schedule showing all PPs

investment properties and the
total amount which should be
recognised as investment
properties in PPs statement of
financial position at 30
September 2013
Available marks
Maximum marks
Explain the alternative accounting

treatments for investment properties
held under operating leases
Recommend the use of PVMLP for the
Birmingham retail park to maximise
asset values taking into consideration
shareholders wishes to maximise asset
values.
Identify and explain the impact on net
assets of the choice of accounting
policy
Determine appropriate audit tests
relevant to the recommended financial
reporting treatment.
Assimilate and present information in

a suitable format for the engagement
manager
18
25
Page 20 of 24
Explanation of the correct financial reporting treatment of the issues and audit procedures in Exhibit 2.
1
Manchester Office Block
1.1
Financial reporting issues
The gain or loss on de-recognition of an item of investment property is the difference between the net disposal
proceeds, (which are zero in this case), and the carrying amount of the item. The gain or loss is included in
profit or loss.
Air conditioning carrying amount at disposal
Loss on disposal with zero proceeds
=
=
=
(6.25/10) x 500,000
312,500
312,500
Disclosure note investment properties:

Fair value at 1 October 2012
Addition
Disposal
Fair value movement (residual)
Fair value at 30 September 2013 (W1)
(W1)
Fair value at 30 September 2013
26,800,000 312,500 + 800,000

1.2
28,500,000
800,000
(312,500)
(1,700,000)
27,287,500
27,287,500
Audit procedures
Regarding the valuations that have taken place in the year:
Obtain the valuation report and ascertain whether it is external or internal. Verify the date of valuation;
basis used (eg open market), assumptions made (e.g. full occupancy).
The qualifications, experience and objectivity of the valuer(s) (internal or external). Perhaps consider
using an auditors expert to review assumption and the basis of valuation.
Examine the data provided to the valuers so assess the extent they have relied on information from the
company (eg floor space). Make sure, as a minimum, that these are consistent with prior year
information
Review of previous information for consistency (e.g. financial statements from previous years).
Ascertain how the air conditioning unit has been valued within the overall property valuation in order to
ensure than an appropriate amount is being recognised on a fair value basis.
IAS 40 requires that fair value is the price at which the property could be exchanged between knowledgeable,
willing parties in an arms length transaction (NB IFRS 13 changes definition). Ensure valued on this basis.
Regarding the disposal of the old air conditioning unit:
Enquire the reason for the failure from engineers who installed and/or removed it in order to gather
evidence regarding the useful life of the new unit and make any assessment for impairment of the new
unit in future.
Review original purchase agreement to ascertain whether there is any warranty or insurance cover in
respect of the failure. Enquire of directors and examine and other insurance documentation.
Ascertain what has happen to old unit. Enquire of engineers whether it had any value in order to
ascertain whether disposal proceeds at zero have been understated. Check whether scrapped. Check
with new contract whether engineers installing new equipment had rights over ownership/disposal of old
equipment.
Inspect minutes of meetings (board meeting; facilities department meetings).
Regarding the acquisition of the new air conditioning unit:
Verify the cost of 800,000 to contract agreement and ensure it represents fair value for inclusion in
overall valuation of investment property (potentially use valuers as auditors expert if there is significant
doubt).
Ensure contract and installation completed by year end (inspect contract date; enquire of PP staff).
Page 21 of 24
Ensure unit is functional (physically inspect; enquire if post year end warranty claims repairs).
Consider useful life in light of failure of old unit.
Check cut off as installation was so close to year end (e.g. when was the work signed off as complete?)
and it was not recognised in the management accounts.
2.
Birmingham Retail Park
2.1
IAS 40 para 25, permits (but does not require) investment properties held under operating leases to be
classified as investment properties and measured as for finance leases (ie at the lower of the fair value of the
interest in the property and the present value of the minimum lease payments (PVMLP)) if they meet all other
conditions of being classified as investment properties.
As a consequence, PP is not permitted simply to use the fair value of the property as it has in its management
accounts as the present value of the minimum lease payments is lower than the fair value. Instead, it may either
(i) not recognise the property at all in the statement of financial position; or (ii) recognise it at the PVMLP. The
schedule that I have prepared (see below) has shown the property at PVMLP as the shareholders wish to
maximise the amount at which assets are recognised. It should be noted however that the obligation under the
lease would also need to be recognised as a liability (initially at the PVMLP). Thus although total assets would
increase, net assets would not necessarily be enhanced.
The Birmingham Retail Park investment property should therefore be recognised initially, on 30 June 2013, at its
fair value, which is the PVMLP of 13.4 million. In the statement of financial position at 30 September 2013 the
fair value should be revised downwards by 0.6 million to 12.8 million, which is the PVMLP at that date.
2.2
Audit procedures
Given there is choice of accounting policy available under IAS 40, enquire of management whether they wish to
recognise the operating lease at PVMLP or at zero. Assuming that they wish to recognise at PVMLP then the
following audit procedures are applicable:
Obtain a copy of the lease contract with SpaceLand and review the terms of the lease to:
o Establish rights and obligations of PP under the lease including the contractual cash flows
incorporated in the PVMLP calculation and the right/obligations over the property on termination of
the lease.
o Review for a break clause in lease.
o Verify that it is an operating lease to ensure PP management has a choice of treatment. (As if it is
finance lease then it must be capitalised at the lower of fair value or the PVMLP)
o The PVMLP calculation is more uncertain for an operating lease than for a finance lease as a
greater proportion of the PV is dependent on the uncertain terminal value of the property, rather
than fixed contractual rental payments.
o Review the discount rate used in the PVMLP calculation to ensure it is an appropriate interest rate
ie the rate implicit in the lease or otherwise the cost of borrowing (note the interest rate implicit in
the lease is heavily dependent on the terminal value of the property which as noted already is
uncertain).
Review terms of PPs leases with its lessees to ensure that none of the leases is a finance lease which
would exclude classification as an investment property
Use valuer to evidence the fair values of the properties to ensure that they are higher than the PVMLP.
Capitalisation is at the lower of fair value and PVMLP.
3.
Disposal of Retail Store in Inverness
3.1
The principle with this transaction is the de-recognition of a financial liability in accordance with IAS39.
IAS 39, para 39, requires that a financial liability shall be extinguished from the statement of financial position
when the obligation in the contract is discharged or cancelled or expires. In this case, the bank has agreed to
extinguish the liability in return for PP (i) transferring the Inverness retail store to the bank and (ii) assuming a
new liability.
As the new loan has substantially different terms from the old loan, the old loan should be extinguished and the
new loan recognised as a separate liability (per IAS 39, para 40).
Page 22 of 24
The difference between the carrying amount of the financial liability extinguished and the consideration paid is
recognised in profit or loss (IAS 39, para 41)
The new loan should be recognised at fair value to determine the net consideration for extinguishing the old
loan. This is:
2
1m/(1.05)
=
907,030
The profit on extinguishment of the loan; the assumption of the new loan; and the de-recognition of the property
is therefore:
Loan extinguished
15,900,000
Property transferred at fair value
14,800,000
Liability assumed
907,030
Net consideration
(15,707,030)
Profit recognised
192,970
In the statement of financial position at 30 September 2013 the original loan is derecognised; the investment
property is derecognised and the new loan is recognised at its fair value.
The original loan would be recognised at amortized cost. Accrued interest and any impairment would need to be
recognised on the loan prior to the consideration of the de-recognition transaction.
3.2
Audit procedures
The contract with the bank should be obtained and inspected. The terms of the agreement as stated should be
verified to the contract.
The carrying amount of the existing loan should be agreed to the accounting records in accordance with the
existing accounting policy.
The market interest rate of 5% needs to be agreed to similar loans in financial markets in order to substantiate
the fair value of the new loan.
Verify that the new loan has been recognised in the financial statements at fair value.
Verify that the old loan and the investment property have been derecognised.
Schedule of PPs investment properties at 30 September 2013
Property
Fair value
at 30/9/2013
000
Manchester office building

Birmingham retail park
Inverness retail store
Land in Wales undeveloped (note 1)
Industrial development Yorkshire (note 2)
Total
27,287.5
12,800
3,300
43,387.5
Thus the statement of financial position at 30 September 2013 should show 43,387,500 as the total for
investment properties.
Note 1 - Land in Wales
If a use has not been determined, then IAS 40 permits the land to be treated as an investment property (IAS 40
para 8(b)).
Page 23 of 24
However, more evidence is needed that there has not been a change in use.
Note 2 - Industrial development Yorkshire
There has been a change in intended use of this property hence, in accordance with IAS 40 para 9(a), it is no
longer an investment property but should be transferred to inventories under IAS 2. In this case it should be
measured at cost rather than fair value.
Most candidates earned a fairly good mark for this question, although there was a wide variation between the
quality of the answers. The audit procedures were answered well with most candidates restricting them to
relevant responses although weaker candidates gave generic procedures. As with question three the financial
reporting issues were not as well handled as the audit procedures.
Detailed comments
Manchester property
A common mistake was not to adjust the fair value of the building and identify that a residual balance would go
to the statement of profit or loss.
High marks were often given to the audit procedures and all but a handful of candidates gave many good and
detailed procedures that were relevant to the property.
Retail Park
Many candidates concluded that this was an operating lease and therefore should be derecognised from the
financial statements.. Some talked of it being a finance lease or treated like a finance lease and so the figures
were correct but the description of the accounting principles were wrong. Few candidates were aware that IAS
40 permits investment properties held under operating leases to be classified as investment properties and
measured as for finance leases. Very little reference was made to IAS 40 and plenty to IAS 17.
Inverness property
The problem with this section was that candidates failed to identify that this was a financial instrument issue and
were searching for an answer under IAS 40. The better candidates did however derecognise the loan and
property and mentioned that the new loan would be recognise at the correct figure. Most computed an
adjustment on sale too and went on to identify sensible audit procedures. It was pleasing to see that several
candidates picked up on the point of the requirement for professional scepticism in light of the proposed sale.
Schedule of investment properties
It was good to see that, despite the schedule being the last part of the last question, time was managed well to
be able to complete this part of the question. The schedules were generally very clear and well structured, with
notes in relation to the land and industrial development
Common mistakes were not treating the land in Wales as IAS 40 but believing it to be PPE under IAS 16 and
concluding that the industrial development was held for sale and not inventory. Weaker candidates omitted to
produce the revised schedule of investment properties or wasted time producing a schedule with the same
numbers as the question ie not showing any adjustments for their analysis.
Page 24 of 24

Business Reporting Nov 13 Marks Plan

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Business Reporting Nov 13 Marks Plan

Загружено:

Авторское право:

Доступные форматы

TI Business Reporting Advanced Stage November 2013

MARK PLAN AND EXAMINERS COMMENTARY TI Business Reporting November 2013

This report includes:

A summary of the scenario and requirements for each question.

A description of how skills should be demonstrated.

Detailed points for a full answer.

Examiners commentary on candidates performance.

a) For each of the key

explain any adjustments

prepare the journal entries

b) Prepare a revised statement of

Copyright ICAEW 2013. All rights reserved.

Identify and explain incorrect accounting

TI Business Reporting Advanced Stage November 2013

Journal Entries and explanations:

Dr Profit and loss

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013

Dr Income statement deferred tax Kr 960,000

Dr Profit or loss (Kr10.645 million/20)

Dr Profit or loss (finance costs) (Kr2.145million x 8%)

Dr Deferred tax asset

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013

Statement of financial position at 30 September 2013

Issued R$1 shares

Examiners comment on candidates performance

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013

Question 2 BukUp Ltd

Advice on the tax implications and

A calculation of the taxable

Assimilate information from different

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013

An explanation of any ethical and

Apply ethical framework to the

Briefing note for the tax partner.

Rental property profits

s37(3) CTA 2010

Revised taxable profits

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013

1. Loss in 6 months to 31.12.2013; and

2. Loss for period 1.1.2013 to 30.6.2013

Utilisation carry back 36 months on LIFO basis

Trading loss in period

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013

Tax implications of the proposed sale of Vans House

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013

A calculation of the taxable redundancy payment for Greg Mann

Compensation for loss of office

Terminal bonus payable under

Less tax free amount 30,000

Exempt portion 6/15 x 62,000

Taxable as employment income

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013

Copyright ICAEW 2013. All rights reserved.

TI Business Reporting Advanced Stage November 2013