IFR - ISM - Ed 4

Instructor’s Manual
International Financial
Reporting:
A Practical Guide
Fourth edition
Alan Melville
FCA, BSc, Cert. Ed
For further instructor material

please visit:
www.pearsoned.co.uk/melville
ISBN: 978-0-273-78600-9
© Pearson Education Limited 2014

Lecturers adopting the main text are permitted to download and photocopy the manual as required.
i
Melville: International Financial Reporting, Instructor’s Manual, 4th edition
Pearson Education Limited

Edinburgh Gate
Harlow
Essex CM20 2JE
England
Tel: +44 (0) 1279 623623
Web: www.pearson.com/uk
This edition published 2014 (electronic)
The right of Alan Melville to be identified as author of this Work has been asserted by him in accordance with
the Copyright, Designs and Patents Act 1988.
ISBN: 978-0-273-78600-9
All rights reserved. This ePublication is protected by copyright. Permission is hereby given for the material in
this publication to be reproduced for OHP transparencies and student handouts, without express permission of
the Publishers, for educational purposes only. In all other cases, this ePublication must not be copied, reproduced,
transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted
in writing by the publishers (or, where applicable, a licence permitting restricted copying in the United Kingdom
should be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6-10 Kirby Street, London EC1N
8TS) as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable
copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the author’s and the
publisher’s rights and those responsible may be liable in law accordingly.
All trademarks used herein are the property of their respective owners. The use of any trademark in this text does
not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such
trademarks imply any affiliation with or endorsement of this book by such owners.
Pearson Education is not responsible for the content of third-party internet sites.
ii
Melville: International Financial Reporting, Instructor's Manual, 4th edition
Contents
Preface v
Chapter 1 The regulatory framework
Solutions 1.8 and 1.9 1
Chapter 2 The IASB conceptual framework
Chapter 3 Presentation of financial statements
Solution 3.7 5
Chapter 4 Accounting policies, accounting estimates and errors
Solution 4.7 8
Chapter 5 Property, plant and equipment
Chapter 6 Intangible assets
Chapter 7 Impairment of assets
Chapter 8 Non-current assets held for sale and discontinued operations
Solution 8.7 15
Chapter 9 Leases
Chapter 10 Inventories and construction contracts
Chapter 11 Financial instruments
Solution 11.6 20
Chapter 12 Provisions and events after the reporting period
Solution 12.8 22
Chapter 13 Revenue
Solution 13.7 23
Chapter 14 Employee benefits
Solution 14.6 24
Chapter 15 Taxation in financial statements
Solution 15.7 26
Chapter 16 Statement of cash flows
Chapter 17 Financial reporting in hyperinflationary economies
Solution 17.5 30
Chapter 18 Groups of companies (1)
iii
Chapter 19 Groups of companies (2)

Solution 19.5 36
Chapter 20 Associates and joint arrangements
Solution 20.5 39
Chapter 21 Related parties and changes in foreign exchange rates
Solution 21.4 41
Chapter 22 Ratio analysis
Chapter 23 Earnings per share
Chapter 24 Segmental analysis
Solution 24.6 46
iv
Preface
As indicated in the preface to International Financial Reporting, the main book does not
contain solutions for those exercises which are marked with an asterisk. This provides lecturers
who have adopted the textbook with a source of problems which may be used for tutorial work
and revision. The purpose of this Instructor's Manual is to supply suggested solutions to those
exercises and questions.
I should like to remind the reader that, whilst some of the exercises are drawn from the past
examination papers of the professional accounting bodies, the answers provided here to those
questions are entirely my own responsibility.
Alan Melville
April 2013
v
Acknowledgements
I would like to thank the International Financial Reporting Standards Foundation for permission
to use extracts from various IASB standards (Copyright © IFRS Foundation. All rights
reserved. Reproduced by Pearson Education Limited with the permission of the IFRS
Foundation ®. No permission granted to third parties to reproduce or distribute). The IASB, the
IFRS Foundation, the authors and the publishers do not accept responsibility for any loss caused
by acting or refraining from acting in reliance on the material in this publication, whether such
loss is caused by negligence or otherwise.
Alan Melville
April 2013
vi
Chapter 1
The regulatory framework
1.8
(a) The objectives of the IASB are:
(i) to develop, in the public interest, a single set of high-quality, understandable, enforceable and
globally accepted financial reporting standards based upon clearly articulated principles; these
standards should require high quality, transparent and comparable information in financial
statements and other financial reporting to help investors, participants in the world's capital
markets and other users of financial information to make economic decisions;
(ii) to promote the use and rigorous application of those standards;
(iii) in fulfilling objectives (i) and (ii), to take appropriate account of the needs of a range of sizes
and types of entities in diverse economic settings;
(iv) to bring about convergence of national accounting standards and international standards.
(b) The Preface states that IFRSs and IASs are designed to apply to the general purpose financial
statements and other financial reporting of profit-oriented entities, whether these are organised in
corporate form or in other forms.
(c) The main stages in the IASB due process are:
– identification and review of all the issues associated with the topic concerned
– consideration of the way in which the IASB's conceptual framework applies to these issues
– a study of national accounting requirements in relation to the topic and an exchange of views
with national standard-setters
– consultation with the Trustees and the Advisory Council about the advisability of adding this
topic to the IASB's agenda
– publication of a discussion document for public comment
– consideration of comments received within the stated comment period
– publication of an exposure draft for public comment
– consideration of comments received within the stated comment period
– publication of the standard.
1
1.9
(a) The objective of IFRS1 is to ensure that an entity's first financial statements that comply with inter-
national standards should contain high-quality information that:
– is transparent for users and comparable for all periods presented
– provides a suitable starting point for accounting under international standards
– can be generated at a cost that does not exceed the benefits to users.
(b) An entity's "first IFRS reporting period" is the reporting period covered by the first IFRS financial
statements. The first IFRS financial statements are the first financial statements in which the entity
adopts international standards and makes an explicit and unreserved statement of compliance with
those standards.
The "date of transition to IFRS" is the date at the beginning of the earliest period for which an entity
presents comparative information in its first IFRS financial statements.
(c) The company's first IFRS reporting period is the year to 31 October 2014. The earliest period for
which comparative figures are presented in the first IFRS financial statements is the year to 31
October 2009. Therefore the date of transition is 1 November 2008. The company must:
(i) prepare an IFRS statement of financial position as at the start of business on 1 November 2008
(i.e. as at the close of business on 31 October 2008)
(ii) use identical accounting policies in this "opening" IFRS statement of financial position and in
the financial statements for the year to 31 October 2014 and in the comparative figures
provided for the previous five years; these accounting policies must comply with international
standards in force for periods ending on 31 October 2014
(iii) provide a reconciliation of equity as reported under previous GAAP with equity reported
under IFRS, for 31 October 2008 and 31 October 2013
(iv) provide a reconciliation of total comprehensive income as reported under previous GAAP with
total comprehensive income as it would have been reported under IFRS, for the year to 31
October 2013.
2
Chapter 2
The IASB conceptual framework
2.8
(a) £1 invested at 7% per annum will become £1 × 1.07 × 1.07 × 1.07 after three years. So the present
value on 1 January 2014 of an amount to be received on 1 January 2017 (assuming a discount rate
of 7%) is equal to that amount divided by (1.07)3. This is the same as multiplying the amount by a
discounting factor (to three decimal places) of 0.816 (1/1.073).
So the present value of £50,000 to be received on 1 January 2017 is £40,800 (£50,000 × 0.816).
(b) Similarly, the discounting factor over a five-year period is 0.713 (1/1.075) and so the present value
of £100,000 to be received on 1 January 2019 is £71,300 (£100,000 × 0.713).
(c) With a discount rate of 7%, discounting factors for one, two, three and four years are 0.935, 0.873,
0.816 and 0.763 respectively (the calculation of these factors is left to the reader). So the present
value of £10,000 to be received on 1 January each year from 2015 to 2018 inclusive is £33,870
(£9,350 + £8,730 + £8,160 + £7,630).
3
2.9
(a) The Conceptual Framework sets out the concepts that underlie the preparation and presentation of
general purpose financial statements prepared for the benefit of external users. The main purposes
of the Conceptual Framework are:
– to assist in the development of future international standards and review of existing standards
– to provide a basis for reducing the number of alternative accounting treatments permitted by
international standards
– to assist national standard-setters in developing national standards
– to assist preparers of financial statements in applying international standards and in dealing with
topics which are not yet covered by international standards
– to assist auditors in forming an opinion as to whether financial statements conform with
international standards
– to assist the users of financial statements in interpreting the information contained in financial
statements prepared in accordance with international standards
– to provide information about the IASB approach to the formulation of international standards.
(b) The Conceptual Framework states that the objective of general purpose financial reporting is to
provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to the entity.
(c) The primary users of general purpose financial reports are existing and potential investors, lenders
and other creditors. Further user groups include employees, customers, governments (and their
agencies) and the public. Examples of the types of information that each user group would be
seeking from financial reports are given in Chapter 2 of the textbook.
(d) Financial statements are normally prepared on the "going concern" basis. It is assumed that the
reporting entity will continue to operate for the foreseeable future and has neither the intention nor
the need either to close down or materially reduce the scale of its operations. But if an entity is not a
going concern, the financial statements will have to be prepared on a different basis and that basis
should be disclosed.
(e) The fundamental qualitative characteristics are relevance and faithful representation. The enhancing
characteristics are comparability, verifiability, timeliness and understandability. A full explanation
of each characteristic is given in Chapter 2 of the textbook.
(f) Reporting financial information imposes costs and these costs should be justified by the benefits
which users obtain from this information. This means that there is a cost constraint on the extent to
which financial statements can attain all of the qualitative characteristics that are listed in the
Conceptual Framework.
4
Chapter 3
Presentation of financial statements
3.7
(a)
Chilwell Ltd
Statement of comprehensive income for the year to 31 October 2013
£
Sales revenue (£1,025,420 - £27,110) 998,310
Cost of sales (W1) 465,900
———-
Gross profit 532,410
Distribution costs (W2) 173,610
Administrative expenses (W3) 259,250 432,860
———- ———-
99,550
Other income 10,270
———-
109,820
Finance costs (£6,220 + £3,600) 9,820
———-
Profit before taxation 100,000
Taxation (£20,000 + £8,400) 28,400
———-
Profit for the year 71,600
Other comprehensive income for the year:
Items that will not be reclassified to profit or loss:
Gain on revaluation of land 30,000
———-
Total comprehensive income for the year 101,600
———-
(b)
Chilwell Ltd
Statement of changes in equity for the year to 31 October 2013
Share Revaluation Retained Total
capital reserve earnings equity
£ £ £ £
Balance at 31 October 2012 80,000 75,000 247,060 402,060
Total comprehensive income 30,000 71,600 101,600
Dividend paid (35,000) (35,000)
Bonus issue 40,000 (40,000)
———- ———- ———- ———-
Balance at 31 October 2013 120,000 105,000 243,660 468,660
———- ———- ———- ———-
5
(c)
Chilwell Ltd
Statement of financial position as at 31 October 2013
£ £
Assets
Non-current assets
Property, plant and equipment (W4) 565,550
Current assets
Inventories 92,280
Trade receivables (£69,500 × 98%) 68,110 160,390
———- ———-
Total assets 725,940
———-
Equity
Share capital 120,000
Other reserves 105,000
Retained earnings 243,660 468,660
———-
Liabilities
Non-current liabilities
Long-term borrowings 120,000
Current liabilities
Trade and other payables (£103,290 + £3,600) 106,890
Bank overdraft 10,390
Current tax payable 20,000 137,280
———- ———-
Total equity and liabilities 725,940
———-
6
Workings
W1 Cost of sales £
Opening inventory 87,520
Purchases 483,230
Returns outwards (12,570)
Closing inventory (92,280)
———-
465,900
———-
W2 Distribution costs £
Per trial balance 107,050
Wages and salaries (50%) 51,200
Buildings depreciation (W4) (30%) 2,400
Equip't depreciation (W4) (60%) 10,710
Loss on disposal (W4) 2,250
———-
173,610
———-
W3 Administrative expenses £
Per trial balance 143,440
Directors' fees 50,000
Wages and salaries (50%) 51,200
Buildings depreciation (W4) (70%) 5,600
Equip't depreciation (W4) (40%) 7,140
Bad debts 2,000
Reduction in allowance for receivables:
(2% × £69,500) - £1,520 (130)
———-
259,250
———-
W4 Property, plant and equipment £ £ £
Land at valuation 280,000
Buildings at cost 300,000
Depreciation to 31/10/2012 60,000
Depreciation for year (£240,000 ÷ 30) 8,000 68,000 232,000
———- ———-
Equipment at cost (£197,400 - £64,000) 133,400
Depreciation to 31/10/2012 (£105,750 - £43,750) 62,000
Depreciation for year (25% × £71,400) 17,850 79,850 53,550
———- ———- ———-
565,550
———-
Notes re sold vehicle:
(i) WDV of sold vehicle was £64,000 × 75% × 75% × 75% × 75% = £20,250.
(ii) Accumulated depreciation was £43,750 (£64,000 - £20,250).
(iii) The loss on disposal was £2,250 (£20,250 - £18,000).
7
Chapter 4
Accounting policies, accounting estimates and errors
4.7
(a) IAS8 permits a change of accounting policy only if the change is required by an international
standard (or interpretation) or if the change results in reliable and more relevant information being
provided to the users of the financial statements.
A change in accounting policy which arises from the initial application of an international standard
or interpretation should be accounted for in accordance with the transitional provisions of that
standard or interpretation.
A change in accounting policy which has been made voluntarily so as to improve the relevance of
the financial statements should be accounted for retrospectively. Comparative figures for the
previous period(s) must be adjusted and presented as if the new policy had always been applied.
(b)
2014 2013
£000 £000
Revenue 5,200 5,400
Operating expenses 4,100 3,900
––––– –––––
Profit before taxation 1,100 1,500
Taxation 275 375
––––– –––––
Profit after taxation 825 1,125
––––– –––––
(c)
£000
Retained earnings at 31 March 2012, as previously reported 925
Change in accounting policy relating to revenue recognition:
Additional profit after tax = £300,000 × 75% 225
–––––
Restated retained earnings at 31 March 2012 1,150
Restated profit for the year to 31 March 2013 1,125
–––––
Restated retained earnings at 31 March 2013 2,275
Profit for the year to 31 March 2014 825
–––––
Retained earnings at 31 March 2014 3,100
–––––
(d) The draft statement of comprehensive income suggests that revenue and profits both increased in
the year to 31 March 2014. The revised statement improves comparability between 2013 and 2014
and makes it clear that revenue and profits actually fell in the year to 31 March 2014. The provision
of more comparable information is the main aim of IAS8 in relation to changes in accounting policy
and is, of course, one of the qualitative characteristics identified by the Conceptual Framework.
8
Chapter 5
Property, plant and equipment
5.7
(a) Non-current assets
Broadly, a non-current asset is an asset which is acquired for long-term use within a business. Such
an asset is not acquired for sale to a customer (though it may be sold at the end of its useful life) but
for use in the business over a number of accounting periods.
Strictly speaking, a non-current asset is any asset which does not qualify as a current asset. The full
definition of a current asset is given below.
Typical examples of non-current assets are property, plant and equipment, intangible assets (such as
patents and trademarks) and long-term investments.
Current assets
Broadly, current assets comprise short-term assets which continually flow through the business and
are constantly being realised. IAS1 defines a current asset as an asset which satisfies any of the
following criteria:
(i) it is expected to be realised, or is intended for sale or consumption, within the entity's normal
operating cycle
(ii) it is held primarily for the purpose of being traded
(iii) it is expected to be realised within twelve months after the reporting period
(iv) it is cash or a cash equivalent as defined by international standard IAS7, unless it is restricted
from being exchanged or from being used to settle a liability for at least twelve months after
the reporting period.
Typical examples of current assets are inventories, trade receivables and cash.
(b) Capital expenditure is expenditure which results in the acquisition of a non-current asset or in an
improvement to the earning capacity of an existing non-current asset. For example, expenditure on
acquiring business premises (or building an extension to existing premises) would be classed as
capital expenditure.
Revenue expenditure is expenditure which results in the acquisition of a current asset (e.g.
inventory) or expenditure on items such as selling and distribution expenses, administrative
expenses and finance charges. The cost of repairs or maintenance to a non-current asset (but not the
cost of improvements) would be classed as revenue expenditure.
(c) In general, capital expenditure is shown initially in the statement of financial position and is then
transferred to the statement of comprehensive income over a period of years by means of
depreciation charges. In contrast, revenue expenditure is wholly written off to the statement of
comprehensive income in the year to which it relates.
Therefore, if an item of capital expenditure is incorrectly classified as revenue expenditure, this will
reduce the reported profit of the company for the year in which the expenditure is incurred and will
also reduce the non-current assets figure shown in the statement of financial position. However,
assuming that the asset is depreciable, the absence of depreciation charges in future years will
increase the reported profit of those years so that the company's total profits over the entire useful
life of the asset will in fact be unaffected by the error.
9
(d) The cost of the machine (and therefore the amount which should be treated as capital expenditure)
is £378,400 (£342,000 + £6,800 + £29,600).
One-half of the maintenance charge (£13,500) should be recognised as an expense in the company's
statement of comprehensive income for the year to 31 December 2013. The other half should be
treated as a prepayment and should be shown as a current asset in the statement of financial position
at 31 December 2013. This £13,500 will then be recognised as an expense in the company's
statement of comprehensive income for the year to 31 December 2014.
The cost of the small spare parts (£14,600) should be treated as the acquisition of a current asset
(inventory) and should be shown as such in the statement of financial position. As the spares are
used, their cost should be removed from inventory and recognised as an expense in the statement of
comprehensive income.
(e)
£000 £000
Freehold land 100
Revaluation reserve 100
Allowance for depreciation of buildings 125
Freehold buildings 50
Revaluation reserve 75
Depreciation of buildings for the year to 31 December 2013 is £15,000 (£450,000 ÷ 30).
10
5.8
(a) Investment property consists of land or buildings held to earn rentals or held for capital appreciation
(or both) rather than held:
(i) for use in the production or supply of goods or services, or
(ii) for administrative purposes, or
(iii) for sale in the ordinary course of business.
The purpose of depreciation is to spread the cost of an asset over its useful life as it is consumed in
an entity's operations. But property which is acquired as an investment rather than for use is not
consumed in this way and does not have a useful life. In consequence, the charging of depreciation
is not generally appropriate for investment property.
(b) Properties that should be classified as investment properties include:
(i) land held for long-term capital appreciation
(ii) land held for a currently undetermined future use
(iii) a building that is leased out under one or more operating leases
(iv) a building that is vacant but is held to be leased out under operating leases
(v) property that is being constructed or developed for future use as investment property.
(c) If the fair value model is adopted by an entity for the measurement of investment property, it must
normally be applied to all of the entity's investment property. This model requires that investment
property should be measured at its fair value, which is defined 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".
Gains or losses arising from changes in the fair value of investment property must be recognised
in the calculation of profit or loss for the period in which they arise. Such gains or losses are not
recognised in "other comprehensive income".
(d) If the property's fair value has increased by 10%, the gain of £2.3m should be recognised as income
in the calculation of the company's profit or loss for the year to 31 December 2014. Similarly, if the
property's fair value has decreased by 10%, the loss of £2.3m should be recognised as an expense in
the calculation of the company's profit or loss for the year to 31 December 2014.
11
Chapter 6
Intangible assets
6.8
If the revaluation model is adopted, intangible assets are carried at a revalued amount. This consists of
the asset's fair value at the date of revaluation, less any subsequent amortisation and less any subsequent
impairment losses. The circumstances in which this model may be used are as follows:
(i) The revaluation model cannot be applied to an intangible asset unless its fair value can be measured
reliably, by reference to an active market in that type of asset.
(ii) If the revaluation model is applied to an intangible asset, then it must be applied to the entire class
to which the asset belongs.
(iii) Revaluations should be made with sufficient regularity to ensure that the carrying amount of an
intangible asset does not differ materially from fair value. All of the items within a class of
intangible assets should be revalued simultaneously.
The intangible assets of Companies W, X and Y should be dealt with as follows:
(a) Company W. In 2013, the revaluation loss of £25,000 should be recognised as an expense when
calculating the company's profit or loss for the year. In 2014, £25,000 of the revaluation gain should
be recognised as income when calculating the company's profit or loss. The remaining £20,000 of
the gain should be credited to a revaluation reserve and recognised as other comprehensive income.
(b) Company X. In 2014, £60,000 may be transferred (in the statement of changes in equity) from
revaluation reserve to retained earnings. The profit on disposal of £35,000 should be recognised as
income when calculating the company's profit or loss for the year.
(c) Company Y. In 2013, the revaluation gain of £10,000 should be credited to a revaluation reserve
and recognised as other comprehensive income. In 2014, £10,000 should be debited to revaluation
reserve and recognised (as a negative figure) in other comprehensive income. The remaining
£15,000 of the revaluation loss should be recognised as an expense when calculating the company's
profit or loss for the year.
12
6.9
(a) Goodwill is defined by IFRS3 as "an asset representing the future economic benefits arising from ...
assets acquired in a business combination that are not individually identified and separately
recognised". This definition refers only to goodwill acquired in a business combination (i.e. when
an entity acquires control of a business). A broader definition might state that goodwill is an asset
that arises from factors such as an entity's good reputation and may be generated internally as well
as being acquired in a business combination.
IAS38 does not allow internally generated goodwill to be recognised as an asset. This is because the
cost and value of such goodwill cannot be determined reliably and therefore one of the recognition
criteria specified in the IASB Conceptual Framework is not satisfied.
(b) In general, goodwill acquired in a business combination is initially measured as the excess of:
(i) the price paid by the acquirer in the business combination, over
(ii) the acquirer's interest in the net fair value of the acquiree's identifiable assets and liabilities at
the acquisition date.
Goodwill acquired in a business combination should be tested for impairment in each subsequent
accounting period and should be measured at the amount initially recognised less any accumulated
impairment losses.
(c) If goodwill acquired in a business combination appears to have a negative value, IFRS3 requires
that the fair value of the price paid by the acquirer (the "consideration") and the fair values of the
identifiable assets and liabilities acquired should be reassessed. Any negative goodwill which still
remains after this reassessment has been performed should be treated as income from a bargain
purchase and should be included in the acquirer's profit or loss.
(d) See Chapter 6 of the textbook for a list of the main disclosure requirements of IFRS3 in relation to
goodwill.
13
Chapter 7
Impairment of assets
7.7
(a)
Inflows Outflows Net cash Discount Present
flows factors value
£000 £000 £000 £000
2014 45 5 40 0.926 37
2015 35 5 30 0.857 26
2016 60 5 55 0.794 44
––––
Value in use 107
––––
Note:
The discount factor for 2014 is 1/1.08 = 0.926. The discount factor for 2015 is 1/(1.08)2 and so forth. The
calculation of present value for each year has been performed to the nearest £000.
(b) Fair value less costs of disposal is £104,000 (£110,000 – £6,000). Therefore recoverable amount is
£107,000, which is the higher of £104,000 and £107,000.
(c) Depreciation in 2012 and 2013 is (£200,000 – £40,000)/5 = £32,000 in each year. The accumulated
depreciation at 31 December 2013 is £64,000 and so the asset's carrying amount at that date is
£136,000 (£200,000 – £64,000). Since recoverable amount is only £107,000, there is an impairment
loss of £29,000.
The impairment loss should be recognised as an expense when calculating the company's profit or
loss for the year to 31 December 2013. This is in addition to the depreciation charge of £32,000 for
the year. The asset's carrying amount in the statement of financial position at 31 December 2013 is
£107,000.
(d) The asset's depreciable amount is now £67,000 (£107,000 – £40,000). Therefore the depreciation
charges in 2014, 2015 and 2016 should each be equal to one-third of £67,000 i.e. approximately
£22,333 per annum.
7.8
(i) Depreciation for the year to 30 November 2014 is £2,400,000, so the asset's carrying amount at that
date is £21,600,000 (£24,000,000 – £2,400,000).
(ii) Value in use is £20,500,000. Fair value less costs of disposal is £14,000,000. Recoverable amount
is the higher of these two figures i.e. £20,500,000.
(iii) There is an impairment loss of £1,100,000 (£21,600,000 – £20,500,000). This should be recognised
as an expense when calculating the company's profit or loss for the year to 30 November 2014.
(iv) The asset's carrying amount at 30 November 2014 is reduced to £20,500,000. Assuming that the
previous estimates of useful life and residual value remain unchanged, this amount should be
written off in the form of depreciation charges over the following nine years. However, the asset is
clearly being used in an area of manufacturing which is subject to rapid technological change and
the company should be alert to the possibility of further impairment losses in the future.
14
Chapter 8
Non-current assets held for sale and discontinued operations
8.7
(a) A disposal group is a group of assets (possibly with some directly associated liabilities) which is to
be disposed of in a single transaction. A disposal group may consist of a number of cash-generating
units, a single cash-generating unit or part of a cash-generating unit. In general, a disposal group
should be classified as held for sale if its carrying amount will be recovered principally through a
sale transaction rather than through continuing use. For this to be the case, the disposal group must
be available for immediate sale in its present condition (subject only to terms that are usual and
customary) and the sale must be highly probable. A sale is regarded as "highly probable" if:
(i) management is committed to a plan to sell the disposal group and an active programme has
been initiated to locate a buyer and complete the plan; and
(ii) the disposal group is being actively marketed at a sale price that is reasonable in relation to its
current fair value; and
(iii) a completed sale is expected within one year from the date of classification (although this
period may be extended if delay is caused by circumstances beyond the entity's control); and
(iv) it is unlikely that there will be any significant changes to the plan or that the plan will be
withdrawn.
Assuming that these conditions are all satisfied, the cash-generating unit which Bakerwell Ltd has
classified as held for sale qualifies as a disposal group.
(b) A discontinued operation is a component of an entity that either has been disposed of or is classified
as held for sale. For this purpose, a component consists of operations and cash flows that can be
clearly distinguished from the rest of the entity and usually comprises a single cash-generating unit
or a group of cash-generating units. The operation which Bakerwell Ltd has closed down satisfies
this definition and so qualifies as a discontinued operation.
(c) On 1 August 2013, the carrying amount of the disposal group is £3m and fair value less costs to sell
is £2.6m. So there is an impairment loss of £0.4m. On 31 December 2013, fair value less costs to
sell has fallen to £2.35m and so there is a further impairment loss of £0.25m. The total impairment
losses of £0.65m should be recognised as an expense when calculating the company's profit or loss
for the year to 31 December 2013.
The revenue and expenses of the discontinued operation should be shown separately from the
company's other revenue and expenses in the statement of comprehensive income for the year to 31
December 2013. This statement should include a single amount of £770,000 (expense) in relation to
discontinued operations, comprising impairment losses of £650,000 and a trading loss of £120,000
(£520,000 – £400,000). The single amount of £770,000 should be analysed, either in the statement
of comprehensive income or in the notes to the financial statements.
In the statement of financial position at 31 December 2013, the assets of the disposal group should
be presented separately from the company's other assets (under a heading such as "Non-current
assets held for sale") and should be measured at £2.35m.
15
Chapter 9
Leases
9.7
(a) IAS17 defines a lease as "an agreement whereby the lessor conveys to the lessee in return for a
payment or series of payments the right to use an asset for an agreed period of time".
A finance lease is defined as "a lease that transfers substantially all the risks and rewards incidental
to ownership of an asset".
An operating lease is defined as "a lease other than a finance lease".
(b) The IASB Conceptual Framework states that financial information cannot faithfully represent
transactions and other events unless it represents their underlying economic substance rather than
just their legal form. Accordingly, IAS17 takes a "substance over form" approach when prescribing
the required accounting treatment of leases.
As the definitions indicate, the underlying substance of a finance lease is that the lessee does (in
effect) acquire the leased item and that this acquisition is financed by means of a loan from the
lessor. But this is not the case for an operating lease. Since a finance lease differs in substance from
an operating lease, the prescribed accounting treatment of each type of lease also differs.
(c) In the case of an operating lease, the lessee has not taken on the risks and rewards of ownership and
so the leased item is not shown as an asset in the lessee's financial statements. The lease payments
are simply recognised as an expense in the lessee's statement of comprehensive income.
The lessor has retained the risks and rewards of ownership, so the leased item is shown as an asset
in the lessor's financial statements. The lease payments are recognised as income in the lessor's
statement of comprehensive income.
In the case of a finance lease, the lessee has acquired the risks and rewards of ownership and so the
leased item is shown as an asset in the lessee's statement of financial position, along with a
corresponding liability to the lessor. Each lease payment is split between the finance charge element
(which is recognised as an expense in the lessee's statement of comprehensive income) and the
remainder, which reduces the outstanding liability to the lessor.
The lessor has relinquished the risks and rewards of ownership, so the leased item is removed from
the lessor's statement of financial position and replaced by a receivable which represents the amount
owed by the lessee. The finance income element of each lease payment made by the lessee is
recognised as income in the lessor's statement of comprehensive income. The remainder of each
lease payment is subtracted from the amount owed by the lessee.
(d) See Chapter 9 of the textbook for a list of the main disclosure requirements of IAS17.
16
9.8
The rate of interest implicit in the lease is stated in the question to be 15.65% so the actuarial method can
be used to calculate the finance charge for each year. The position for the year to 30 November 2014 is
as follows:
£
Fair value of leased asset 2,997,000
Less: Payment on 1 December 2013 785,000
––––––––
2,212,000
Add: Finance charge for the year at 15.65% 346,178
––––––––
Liability c/f at 30 November 2014 2,558,178
––––––––
A finance charge of £346,178 should be recognised in the statement of comprehensive income for the
year to 30 November 2014 and a depreciation charge of £599,400 (one-fifth of £2,997,000) should also
be recognised.
The statement of financial position at 30 November 2014 should show a non-current asset of £2,397,600
(£2,997,000 – £599,400) and a liability of £2,558,178 (of which £785,000 is a current liability). The
differences that the appropriate treatment would make are as follows:
(i) Profit before tax. The rental payment of £785,000 should not have been shown as an operating
expense. Removing this and correctly recording the finance charge and depreciation would reduce
pre-tax profit by £160,578 (£346,178 + £599,400 – £785,000).
(ii) Total assets. Total assets would increase by £2,397,600.
(iii) Current liabilities. Current liabilities would increase by £785,000.
(iv) Non-current liabilities. Non-current liabilities would increase by £1,773,178. This is equal to the
total liability of £2,558,178 less the current liability of £785,000.
The statement of financial position would (of course) still balance after these adjustments are made.
Assets rise by £2,397,600, liabilities rise by £2,558,178 and retained earnings fall by £160,578.
17
Chapter 10
Inventories and construction contracts
10.9
(a) Broadly, inventories are stocks of goods. More precisely, IAS2 defines inventories as assets that are
held for sale in the ordinary course of business, or assets that are in the process of production for
such sale, or assets that are in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
(b) The cost of inventories includes costs of purchase, costs of conversion and any other costs incurred
in bringing the inventories to their present location and condition. See Chapter 10 of the textbook
for a more detailed explanation of how the cost of inventories should be determined.
(c) Net realisable value (NRV) is defined by IAS2 as estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs necessary to make the sale.
(d) IAS2 states that inventories should be measured at the lower of cost and NRV. The costs and NRV
of inventories are normally compared item by item, but it is sometimes appropriate to group similar
or related items together and to compare the total cost of the group with total NRV.
(e) The cost per unit of Product X is £8. NRV per unit is £6 (£15 – £7 – £2). The lower of cost and
NRV is £6 per unit. The 6,400 units of this product should be measured at £38,400 (6,400 × £6).
The cost per unit of Product Y is £12. NRV per unit is £18 (£30 – £8 – £4). The lower of cost and
NRV is £12 per unit. The 3,800 units of this product should be measured at £45,600 (3,800 × £12).
18
10.10
The estimated total profit or loss on each contract (and the percentage of completion) is as follows:
Contract 1 Contract 2
£000 £000
Contract price 5,500 1,200
Estimated total costs at 31 March 2014 4,000 1,250
––––– –––––
Estimated total profit/(loss) 1,500 (50)
––––– –––––
Percentage complete 3,300/5,500 840/1,200
= 60% = 70%
The profit to date on Contract 1 is £900,000 (60% of £1.5m). The whole of the £50,000 loss expected to
be incurred on Contract 2 must be recognised immediately. The amounts which should appear in the
financial statements for the year to 31 March 2014 are as follows:
Statement of comprehensive income
£000 £000
Contract revenue recognised 3,300 840
Contract costs recognised (balancing figures) 2,400 890
––––– –––––
Recognised profit/(loss) 900 (50)
––––– –––––
Statement of financial position
£000 £000
Costs to date 3,900 920
Recognised profit/(loss) 900 (50)
Progress billings (3,000) (880)
–––––
Due from customers for contract work 1,800
––––– –––––
Due to customers for contract work (10)
–––––
Tutorial note:
In the case of Contract 2, costs incurred for the work performed to date are £875,000 (70% × £1.25m)
but costs of £890,000 are recognised so as to ensure that the loss of £50,000 is accounted for in full. The
provision for additional costs is £15,000 (£890,000 – £875,0000). Therefore the amounts owing to/from
customers for contract work may be calculated as follows:
£000 £000
Inventory (£3.9m – £2.4m) 1,500
Inventory (£0.92m – £0.875m) 45
Provision for extra costs (15)
Unbilled at year end (£3.3m – £3.0m) 300
Overbilled at year end (£0.88m – £0.84m) (40)
–––––
Due from customers for contract work 1,800
––––– –––––
Due to customers for contract work (10)
–––––
19
Chapter 11
Financial instruments
11.6
(a) Broadly, a financial instrument is a means of raising finance and will usually consist of a share
issue or a loan. More precisely, IAS32 defines a financial instrument as any contract that gives rise
to a financial asset of one entity and a financial liability or equity instrument of another entity.
The acquisition of the loan stock by Querk plc establishes a contract between the company and the
issuer of the stock. By virtue of this contract, Querk plc acquires a financial asset (a contractual
right to receive cash from another entity). The issuer of the loan stock incurs a financial liability (a
contractual obligation to deliver cash to another entity). Therefore the issue of the loan stock falls
within the IAS32 definition of a financial instrument.
(b) A financial asset is any asset that consists of either cash, an equity instrument of another entity (e.g.
ordinary shares) or a contractual right to receive cash or another financial asset from another entity.
A financial liability is any liability that consists of a contractual obligation to deliver cash or
another financial asset to another entity.
As explained in (a) above, the loan stock is a financial asset for Querk plc but a financial liability
for the issuer of the stock (i.e. the borrower).
(c) IAS39 classifies the loan stock as a held-to-maturity investment. IFRS9 classifies it as a financial
asset measured at amortised cost. In either case, the investment should be measured initially at fair
value (which is normally equal to the price paid) and should be measured subsequently at amortised
cost, using the effective interest method.
The amortised cost of an asset is equal to the amount at which it was initially recognised, plus the
interest earned to date, minus any repayments received to date. The effective interest method takes
into account not only interest receivable, but also items such as premiums and discounts.
(d)
Year b/f Interest Received c/f
at 9%
£ £ £ £
2013 490,420 44,138 (30,000) 504,558
2014 504,558 45,410 (30,000) 519,968
2015 519,968 46,797 (30,000) 536,765
2016 536,765 48,309 (30,000) 555,074
2017 555,074 49,926 (605,000) 0
–––––––
234,580
–––––––
The amount received in each of the first four years is equal to 6% of £500,000. The amount that is
received in 2017 comprises interest of £30,000, loan stock repayment of £500,000 and a premium
of £75,000 (15% of £500,000).
The total interest over the five years (£234,580) comprises interest at 6% on the nominal value of
the stock for five years (£150,000) plus the premium of £75,000 and the acquisition discount of
£9,580 (£500,000 – £490,420).
Note that interest calculated at 9% in 2017 is actually £49,957. This has been adjusted to £49,926 to
ensure that the balance at the end of the loan term is zero. It is apparent that the effective rate of
interest is in fact very slightly less than 9% per annum.
20
The interest income that should be shown in the company's statement of comprehensive income for
each year is shown in the column headed "Interest at 9%". The figures that should appear in the
statement of financial position are shown in the rightmost column.
(e) As stated above, the effective interest method takes into account not only interest receivable, but
also items such as premiums and discounts. Querk plc benefits from a discount when the loan stock
is acquired and a premium when it is repaid. These amounts are each received in a single year but
are in fact earned over the term of the loan. The effective interest method spreads them fairly over
the term of the loan and so gives a fair measure of the income for each year.
21
Chapter 12
Provisions and events after the reporting period
12.8
(a) At 30 April 2013, it was not thought probable that Sparkling Pictures plc would be found liable for
damages. Therefore a provision would not have been recognised. The matter would have been dealt
with as a contingent liability and disclosed as such in the notes to the financial statements (unless
the possibility of being found liable was thought to be remote, in which case no disclosure would
have been required).
At 30 April 2014, it now appears that the company has a present obligation arising from a past
event and will probably have to pay damages. Therefore a provision should be recognised in the
statement of financial position. The amount of the provision will be an expense for the year to 30
April 2014. This amount should be the best estimate of the amount required to settle the obligation.
(b) IAS37 states that a provision should be recognised if and only if:
(i) the entity has a present obligation (legal or constructive) as a result of a past event
(ii) it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation
(iii) a reliable estimate can be made of the amount of the obligation.
Employee claim
The conditions for recognising a provision are satisfied. Stenberg plc should make a provision of
£15,000 in its financial statements for the year to 30 November 2014.
Claim against contractor
There is no question of a provision in this case, since a provision is a type of liability and the claim
against the contractor is a contingent asset. Contingent assets are not recognised in the financial
statements. However, since an inflow of economic benefits is thought probable, this contingent
asset should be disclosed in the notes.
22
Chapter 13
Revenue
13.7
This is a sale and repurchase agreement. Although the legal form of the agreement is that a sale has
occurred, the substance of the transaction seems to be a secured loan. It is unlikely that a finance
company would wish to buy this inventory and it seems much more likely that the finance company is
expecting Triangle to repurchase the inventory in due course. Logically, Triangle will do this if the sales
value of the inventory at the time of repurchase is greater than £5m plus compound interest at 10% per
annum (from 1 April 2013) plus accumulated storage costs.
Assuming that this analysis is correct, the £5m should be removed from sales revenue and recognised as
a non-current liability. Also, £3m should be added to closing inventory and removed from cost of sales.
A further £300,000 should be added to closing inventory and removed from trade receivables.
Interest of £500,000 should be shown as an expense in the statement of comprehensive income and
should be added to the carrying amount of the loan.
23
Chapter 14
Employee benefits
14.6
(a) A defined benefit pension plan is one where the employer is obliged to provide an agreed level of
pension benefits. The employer's contributions are not limited to any fixed amount and these
contributions may need to be increased if the pension fund has insufficient assets to pay the agreed
level of benefits.
A defined contribution pension plan is one where the employer pays fixed contributions into the
pension fund each year and is not obliged to make any further contributions, even if the pension
fund's assets are insufficient to pay the expected level of pension benefits.
(b) In relation to a defined benefit pension plan, the "defined benefit obligation" is the amount of the
accumulated benefits which past and present employees have earned in return for their services to
date and which will be payable to them in the future. The "current service cost" is the extra amount
of such benefits that employees have earned in return for their services during the current period.
These amounts can only be estimated since they involve the making of assumptions with regard to
such matters as employee mortality rates and future salary increases.
(c) "Interest cost" is equal to the increase during the current accounting period of the present value of
the defined benefit obligation which was calculated at the end of the previous period. This increase
arises because the accumulated benefits which employees had earned at the end of the previous
period are now one period closer to being paid.
"Actuarial gains and losses" consist of adjustments arising either because there are differences
between actuarial assumptions and actual events or because actuarial assumptions are revised.
(d) In summary, the defined benefit obligation and the plan assets are as follows:
£m
Present value of DB obligation at 31 March 2013 140.0
Interest cost 9.8
Present value of current service cost for the year 19.2
Benefits paid during the year (19.6)
––––
149.4
Actuarial loss (balancing figure) 8.6
––––
Present value of DB obligation at 31 March 2014 158.0
––––
£m
Fair value of plan assets at 31 March 2013 147.0
Interest income 10.3
Return on plan assets (after deducting interest income) (4.4)
Employer contributions 18.4
Employee contributions 7.3
Benefits paid during the year (19.6)
––––
Fair value of plan assets at 31 March 2014 159.0
––––
24
The defined benefit expense which should be shown in the statement of comprehensive income for
the year to 31 March 2014 is calculated as follows:
£m
Present value of current service cost for the year 19.2
Less: employee contributions (7.3)
––––
11.9
Interest cost 9.8
Interest income (10.3)
––––
Expense recognised in profit or loss 11.4
––––
Return on plan assets 4.4
Actuarial losses 8.6
––––
Expense recognised in other comprehensive income 13.0
––––
Total defined benefit expense 24.4
––––
This expense is not equal to the £18.4m contributed by the employer because the pension scheme is
a defined benefit scheme, not a defined contribution scheme, and the employer must bear the full
cost of providing the agreed level of benefits. This cost for the year to 31 March 2014 is actually
£6m more than the amount contributed by the employer (see below).
(e) At the end of the year, there is a defined benefit asset of £1m (£159m – £158m). At the start of the
year, this asset was £7m (£147m – £140m). The drop of £6m is caused by the fact that the company
has contributed only £18.4m during the year, which is £6m less than the actual defined benefit
expense for the year.
25
Chapter 15
Taxation in financial statements
15.7
(a) Annual depreciation is £51,200, so the company's profit before depreciation is £551,200 in each
year. Taxable profits and the differences between taxable profits and profits before tax for
accounting purposes are as follows:
Year Profit Profit Dep'n Taxable Difference
before tax before dep'n allowed profit
£ £ £ £ £
2010 500,000 551,200 102,400 448,800 51,200
2011 500,000 551,200 38,400 512,800 (12,800)
2012 500,000 551,200 28,800 522,400 (22,400)
2013 500,000 551,200 21,600 529,600 (29,600)
2014 500,000 551,200 16,200 535,000 (35,000)
The total of the column of differences is £48,600. This is because the asset's tax written down value
at the end of 2014 is £48,600 and this amount will be deductible from profits for tax purposes in
2015 onwards. Therefore there is a deferred tax asset of £9,720 (20% of £48,600) at the end of
2014. The tax expense for each year is as follows:
2010 2011 2012 2013 2014
£ £ £
Taxable profit 448,800 512,800 522,400 529,600 535,000
––––––- ––––––- ––––––- ––––––- ––––––-
Profit before tax 500,000 500,000 500,000 500,000 500,000
––––––- ––––––- ––––––- ––––––- ––––––-
Current tax @ 20% 89,760 102,560 104,480 105,920 107,000
Deferred tax 10,240 (2,560) (4,480) (5,920) (7,000)
––––––- ––––––- ––––––- ––––––- ––––––-
Total tax expense 100,000 100,000 100,000 100,000 100,000
––––––- ––––––- ––––––- ––––––- ––––––-
The transfers to and from the deferred tax account are each equal to 20% of the difference between
accounting profit before tax and taxable profit. As expected, there is a debit balance of £9,720 on
the deferred tax account at the end of 2014. This is a form of prepayment and will be written off as
part of the tax expense for years 2015 onwards as tax relief is given on the remaining £48,600 of the
tax written down value of the asset.
(b) A comparison of the carrying amount and tax base of the asset at the end of each year is as follows:
Year Carrying Tax Taxable Deductible Deferred tax
amount base temp. diffce. temp. diffce. a/c balance
£ £ £ £ £
2010 204,800 153,600 51,200 10,240
2011 153,600 115,200 38,400 7,680
2012 102,400 86,400 16,000 3,200
2013 51,200 64,800 13,600 (2,720)
2014 0 48,600 48,600 (9,720)
The balance on the deferred tax account at the end of each year is 20% of the temporary difference
outstanding at the end of that year. This balance is a liability apart from at the end of 2013 and
2014, when it becomes an asset. The transfers between the deferred tax account and the statement
of comprehensive income in each year are equal to the movement on the deferred tax account
during the year.
26
Chapter 16
Statement of cash flows
16.7
Statement of cash flows for the year to 30 November 2014
£000 £000
Cash flows from operating activities
Loss before taxation (480 + 20 – 800) (300)
Depreciation (850 – 630 + 80) 300
Loss on disposal of plant and equipment (40 – 30) 10
Profit on disposal of investments (20)
Interest payable 70
Increase in inventories (740 – 510) (230)
Increase in trade receivables (1,010 – 640) (370)
Increase in trade payables (660 – 530) 130
––––
Cash generated from operations (410)
Interest paid (70)
Taxation paid (130) (200)
–––– ––––
Net cash outflow from operating activities (610)
Cash flows from investing activities

Acquisition of plant and equipment
(2,470 – 1,790 + 120 – 250) (550)
Disposal of plant and equipment 30
Disposal of investments 70
––––
Net cash outflow from investing activities (450)
Cash flows from financing activities

Proceeds of share issue 140
Increase in long-term loans 400
––––
Net cash inflow from financing activities 540
––––
Net decrease in cash and cash equivalents (520)
Cash and cash equivalents at 1 December 2013 330
––––
Cash and cash equivalents at 30 November 2014 (190)
––––
27
16.8
Statement of cash flows for the year ended 31 May 2014
Cash flows from operating activities £ £
Cash receipts from customers 43,290,156
Cash paid to suppliers and employees (36,529,992)
–––––––––
Cash generated from operations 6,760,164
Interest paid (812,500)
Income taxes paid (261,440)
–––––––––
Net cash inflow from operating activities 5,686,224
Cash flows from investing activities

Purchase of non-current assets (23,913,660)
Proceeds from sales of plant and machinery 45,000
–––––––––
Net cash outflow from investing activities (23,868,660)
Cash flows from financing activities

Proceeds from issue of share capital 19,000,000
Issue of long-term borrowings 2,500,000
Dividends paid (680,000)
–––––––––
Net cash inflow from financing activities 20,820,000
–––––––––
Net increase in cash and cash equivalents 2,637,564
Cash and cash equivalents at 1 June 2013 64,640
–––––––––
Cash and cash equivalents at 31 May 2014 2,702,204
–––––––––
Note:
Although the question asks only for the direct method, the cash generated from operations could also be
calculated by the indirect method. The calculation is as follows:
£
Profit before tax 1,683,963
Depreciation 4,266,651
Loss on disposal of non-current assets 10,940
Increase in inventories (£412,350 – £389,500) (22,850)
Increase in trade receivables (£558,400 – £467,800) (90,600)
Increase in prepayments (£2,560 – £1,540) (1,020)
Increase in trade payables (£409,800 – £309,800) 100,000
Increase in accruals (£5,140 – £4,560) 580
Interest payable 812,500
–––––––––
Cash generated from operations 6,760,164
–––––––––
Workings
W1 Cash received from customers £
Opening trade receivables 467,800
Sales 43,380,756
Closing trade receivables (558,400)
–––––––––
Cash received from customers 43,290,156
–––––––––
28
W2 Calculation of purchases £
Cost of sales 25,050,812
Closing inventory 412,350
Opening inventory (389,500)
–––––––––
Purchases 25,073,662
–––––––––
W3 Cash payments to suppliers £
Opening trade payables 309,800
Purchases 25,073,662
Closing trade payables (409,800)
–––––––––
Cash paid to suppliers 24,973,662
–––––––––
W4 Calculation of depreciation £
Increase in accumulated depreciation 3,990,491
Withdrawn on disposals 276,160
–––––––––
Depreciation charge for the year 4,266,651
–––––––––
W5 Profit or loss on disposal of non-current assets £
Carrying amount 55,940
Proceeds 45,000
–––––––––
Loss on disposal (10,940)
–––––––––
W6 Purchases of non current assets £
Increase in cost or valuation 23,781,560
Withdrawn on disposal 332,100
Revaluation surplus (200,000)
–––––––––
Purchases of non-current assets 23,913,660
–––––––––
W7 Cash paid to suppliers and employees £
Cash payments to suppliers 24,973,662
Operating expenses 15,833,481
–––––––––
40,807,143
Accrued at start of year 4,560
Accrued at the end of the year (5,140)
Prepaid at the start of the year (1,540)
Prepaid at the end of the year 2,560
–––––––––
40,807,583
Exclude depreciation (4,266,651)
Exclude loss on disposal of non current assets (10,940)
–––––––––
Cash paid to suppliers and employees 36,529,992
–––––––––
W8 Taxation paid £
Liability at start of year 389,740
Taxation charge for the year 278,793
Transferred to deferred taxation (70,300)
Liability at end of year (336,793)
–––––––––
Paid during the year 261,440
–––––––––
29
Chapter 17
Financial reporting in hyperinflationary economies
17.5
(a) IAS29 does not establish an absolute rate of inflation at which hyperinflation is deemed to occur,
but suggests that hyperinflation is characterised by a number of indicators. One of these is that the
cumulative inflation rate over three years is approaching or exceeds 100%. The other indicators
identified by IAS29 are listed in Chapter 17 of the textbook.
(b) In a hyperinflationary economy, money loses value at such a rapid rate that comparisons of amounts
relating to events occurring at different times are misleading. For this reason, the reporting of
financial performance and financial position in the local currency without restatement is not useful.
(c) (i) Monetary items in the statement of financial position are not restated, as they are already
expressed in current purchasing power terms.
(ii) Non-monetary items which are carried at historical cost less accumulated depreciation are
restated in accordance with the change in the general price index since the date on which the
item was acquired.
(iii) Non-monetary items carried at a valuation are restated in accordance with the change in the
general price index since the date of the valuation.
(iv) Items of income and expense are restated by applying the change in the general price index
since the dates on which the items were first recorded in the financial statements.
30
Chapter 18
Groups of companies (1)
18.6
Group statement of financial position as at 31 December 2013
£000 £000
Assets
Non-current assets
Property and equipment (4,761 + 521 + 411 + 30) 5,723
Goodwill (W1) 90
–––––
5,813
Current assets
Inventories (1,532 + 222 + 187 – 3) 1,938
Trade receivables (1,947 + 258 + 202 – 48) 2,359
Cash at bank (239 + 30 + 13) 282 4,579
––––– –––––
10,392
–––––
Equity
Ordinary share capital 5,000
Revaluation reserve (W3) 2,536
Retained earnings (W2) 518
–––––
8,054
Non-controlling interest (W4) 405
–––––
8,459
Liabilities
Current liabilities
Trade payables (1,607 + 211 + 163 – 48) 1,933
–––––
10,392
–––––
Notes:
(i) The goods invoiced to DD Ltd for £8,000 must have cost CC Ltd £5,000 (£8,000 × 100/160). So the
unrealised profit is £3,000.
(ii) A total of £48,000 of intra-group debts (£15,000 + £25,000 + £8,000) must be subtracted from trade
receivables and from trade payables.
(iii) Workings W1 to W4 are given below.
31
W1. Goodwill
£000 £000
DD Ltd
Price paid by parent 600
Subsidiary's share capital at 1 January 2012 500
Subsidiary's retained earnings at 1 January 2012 280
Fair value adjustment 30
–––
60% × 810 486
––– –––
Goodwill at 1 January 2012 114
Less: Impairment (50%) 57
–––
Goodwill at 31 December 2013 57
–––
EE Ltd
Subsidiary's share capital at 1 January 2013 300
Subsidiary's retained earnings at 1 January 2013 230
Subsidiary's revaluation reserve at 1 January 2013 60
–––
90% × 590 531
––– –––
Goodwill at 1 January 2013 44
–––
Goodwill at 31 December 2013 33
–––
Total goodwill at 31 December 2013 (57 + 33) 90
–––
W2. Group retained earnings
£000 £000
Parent's retained earnings at 31 December 2013 547
DD Ltd
Subsidiary's retained earnings at 31 December 2013 320
Less: Subsidiary's retained earnings at 1 January 2012 280
–––
60% × 40 24
–––
EE Ltd
Less: Subsidiary's retained earnings at 1 January 2013 230
–––
90% × 20 18
–––
Less: Goodwill impairment (57 + 11) (68)
Less: Unrealised profit on inventories (3)
–––
Group retained earnings at 31 December 2013 518
–––
32
W3. Group revaluation reserve

£000 £000
Parent's revaluation reserve at 31 December 2013 2,500
EE Ltd revaluation reserve at 31 December 2013 100
Less: EE Ltd revaluation reserve at 1 January 2013 60
–––
90% × 40 36
––– –––––
Group revaluation reserve at 31 December 2013 2,536
–––––
W4. Non-controlling interest
£000 £000
DD Ltd
Subsidiary's share capital at 31 December 2013 500
–––
40% × 850 340
–––
EE Ltd
Subsidiary's share capital at 31 December 2013 300
Subsidiary's revaluation reserve at 31 December 2013 100
–––
10% × 650 65
––– –––
Non-controlling interest at 31 December 2013 405
–––
33
18.7
Group statement of financial position as at 31 October 2014
£m £m
Assets
Non-current assets
Property and equipment (425 + 288) 713
Goodwill (W1) 9
Investments (147 – 120 + 13) 40
––––
762
Current assets
Inventories (88 + 73 – 2) 159
Trade receivables (147 + 106 – 18) 235
Other current assets (37 + 22) 59
Cash and cash equivalents (36 + 15) 51 504
–––– ––––
1,266
––––
Equity
Ordinary share capital 300
Retained earnings (W2) 188
––––
488
Non-controlling interest (W3) 141
––––
629
Liabilities
Non-current liabilities (150 + 82) 232
Current liabilities
Trade payables (184 + 56 – 18) 222
Current tax payable (89 + 69) 158
Bank overdraft 25 405
–––– ––––
1,266
––––
Notes:
(i) Tuli's ordinary share capital consists of 150m shares and Multa owns 90m of these shares. This is a
60% holding.
(ii) The price of the goods sold by Multa to Tuli included a profit of £10m (40% × £25m). 20% of these
goods have not yet been sold so the unrealised profit is £2m (20% × £10m).
(iii) Intra-group debts of £18m must be subtracted from trade receivables and from trade payables.
(iv) Workings W1 to W3 are given below.
34
W1. Goodwill
£m £m
Subsidiary's ordinary share capital at 1 November 2012 150
Subsidiary's retained earnings at 1 November 2012 30
–––
60% × 180 108
––– –––
Goodwill at 1 November 2012 12
Less: Impairment 3
–––
Goodwill at 31 October 2014 9
–––
£m £m
Parent's retained earnings at 31 October 2014 157
Subsidiary's retained earnings at 31 October 2014 90
Less: Subsidiary's retained earnings at 1 November 2012 30
–––
60% × 60 36
–––
Less: Goodwill impairment (3)
–––
Group retained earnings at 31 October 2014 188
–––
£m £m
Subsidiary's ordinary share capital at 31 October 2014 150
Subsidiary's retained earnings at 31 October 2014 90
–––
40% × 240 96
–––
Subsidiary's preference share capital at 31 October 2014 45
–––
Non-controlling interest at 31 October 2014 141
–––
35
Chapter 19
Groups of companies (2)
19.5
(a) Group statement of comprehensive income for the year to 30 June 2014
£000
Sales revenue (21,545 + 5,328 – 2,400) 24,473
Cost of sales (13,335 + 3,552 – 2,400 + 192) 14,679
––––––
Gross profit 9,794
Operating expenses (4,087 + 410 + 26) 4,523
––––––
Profit before tax 5,271
Taxation (1,500 + 450) 1,950
––––––
Profit for the year 3,321
Attributable to the non-controlling interest 242
––––––
Attributable to the group 3,079
––––––
Notes:
(i) Intragroup sales of £2,400,000 must be subtracted from group sales and from group cost of
sales. There is unrealised profit of £192,000 (£512,000 × 60/160) which must be eliminated
from inventories and added to cost of sales.
(ii) Goodwill arising at acquisition was £260,000 (see Working 1). Impairment in the year to 30
June 2014 is £26,000 (10% × £260,000). This has been included in operating expenses.
(iii) Dividends received by JJ Ltd from KK Ltd have been cancelled out. These consist of ordinary
dividends of £375,000 (75% × £500,000) and preference dividends of £2,000 (10% × £20,000)
giving a total of £377,000. The remaining £143,000 (£520,000 – £377,000) of dividends paid
by KK Ltd were paid to the non-controlling interest.
(iv) The profit of KK Ltd for the year to 30 June 2014 is £916,000 of which £20,000 belongs to the
preference shareholders and £896,000 belongs to the ordinary shareholders. So the profit
attributable to the non-controlling interest is £242,000 ((90% × £20,000) + (25% × £896,000)).
(b) Group statement of changes in equity for the year to 30 June 2014
Share Retained Total Non- Total

capital earnings controlling equity
interest
£000 £000 £000 £000 £000
Balance b/f 7,800 307 8,107 1,163 9,270
Profit for the year 3,079 3,079 242 3,321
Dividends paid (1,880) (1,880) (143) (2,023)
–––– –––– –––– –––– ––––
Balance c/f 7,800 1,506 9,306 1,262 10,568
–––– –––– –––– –––– ––––
Note:
The opening and closing figures for group retained earnings and the non-controlling interest are
derived in the workings below.
36
(c) Group statement of financial position as at 30 June 2014

£000 £000
Assets
Non-current assets
Property, plant and equipment (5,961 + 2,667 + 600) 9,228
Goodwill (W1) 156
––––––
9,384
Current assets
Inventories (2,215 + 1,052 – 192) 3,075
Trade receivables (1,823 + 829 – 216) 2,436
Cash at bank (101 + 5) 106 5,617
––––– ––––––
15,001
––––––
Equity
Preference share capital 800
Retained earnings (W2) 1,506
––––––
9,306
Non-controlling interest (W3) 1,262
––––––
10,568
Liabilities
Current liabilities
Trade payables (2,004 + 695 – 216) 2,483
Taxation (1,500 + 450) 1,950 4,433
––––– ––––––
15,001
––––––
Workings:
W1. Goodwill
£000 £000
Price paid by parent 3,153
Subsidiary's ordinary share capital at 1 July 2010 2,500
Subsidiary's retained earnings at 1 July 2010 704
––––
75% × 3,804 (2,853)
––––
Parent's 10% stake in subsidiary's preference shares (40)
––––
Goodwill at 1 July 2010 260
––––
Goodwill at 30 June 2014 156
––––
37

£000 £000
Parent's retained earnings at 30 June 2014 1,949
Subsidiary's retained earnings at 30 June 2014 508
Less: Subsidiary's retained earnings at 1 July 2010 704
––––
75% × (196) (147)
––––
––––
Group retained earnings at 30 June 2014 1,506
––––
Group retained earnings at 30 June 2013 were £829,000 + (75% × (£112,000 – £704,000)) –
impairment £78,000 = £307,000.

£000 £000
Subsidiary's ordinary share capital at 30 June 2014 2,500
Subsidiary's retained earnings at 30 June 2014 508
––––
25% × 3,608 902
––––
NCI's 90% stake in subsidiary's preference shares 360
––––
Non-controlling interest at 30 June 2014 1,262
––––
Non-controlling interest at 30 June 2013 was (25% × (£2,500,000 + £112,000 + £600,000)) +
£360,000 = £1,163,000.
(d) If the intra-group sales were from KK Ltd to JJ Ltd, 25% of the unrealised profit would be deducted
from the non-controlling interest. The profit attributable to the non-controlling interest shown in the
group statement of comprehensive income would fall by £48,000 (25% × £192,000) to £194,000
and the profit attributable to the group would increase by £48,000 to £3,127,000.
These amendments would be reflected in the group statement of changes in equity and in the group
statement of financial position. Group retained earnings would rise by £48,000 to £1,554,000 and
the non-controlling interest would fall by £48,000 to £1,214,000.
38
Chapter 20
Associates and joint arrangements
20.5
(a)
Pumice has 80% of Silverton's ordinary shares. This gives Pumice control over Silverton and so there is
a parent-subsidiary relationship. Group accounts must be prepared in which the results of Silverton as
from 1 October 2013 are consolidated with those of Pumice for the year to 31 March 2014. The
investment in the loan notes of Silverton is an intra-group loan which is cancelled out on consolidation.
Pumice has 40% of Amok's ordinary shares. Presumably this gives Pumice significant influence over
Amok and so Amok is an associate of Pumice. The investment in Amok must be included in the
consolidated financial statements using the equity method.
(b)
The consolidated statement of financial position at 31 March 2014 is as follows:
£000
Assets
Non-current assets
Property, plant and equipment (20,000 + 8,500 + 400 + 1,600 – dep'n 200) 30,300
Investments:
Investment in associate (10,000 + (40% × (6/12 × 8,000)) – 200) 11,400
Other investments (26,000 – 13,600 – 1,000 – 10,000) 1,400
Goodwill (W1) 3,600
–––––
46,700
Current assets (15,000 + 8,000 – intragroup debt 1,500 – unrealised profit 1,000) 20,500
–––––
67,200
–––––
Equity
Retained earnings (W2) 37,640
–––––
47,640
Non-controlling interest (W3) 2,560
–––––
50,200
Liabilities
Non-current liabilities
8% loan notes 4,000
10% loan notes 1,000
Current liabilities (10,000 + 3,500 – intragroup debt 1,500) 12,000
–––––
67,200
–––––
Notes:
(i) Amok's retained earnings have increased by £4m since 1 October 2013, so these must have been
£16m on that date. The company's equity on 1 October 2013 was £20m (£4m + £16m) so the price
paid by Pumice for goodwill was £2m (£10m – (40% × £20m)). This is not negative and so it is not
recognised separately.
(ii) Workings W1 to W3 are given below.
39
W1. Goodwill
£000 £000
Price paid by parent 13,600
Subsidiary's ordinary share capital at 1 October 2013 3,000
Subsidiary's retained earnings at 1 October 2013 (8,000 – 6/12 × 2,000) 7,000
Fair value adjustment (400 + 1,600) 2,000
–––––
80% × 12,000 9,600
––––– –––––
Goodwill at 1 October 2013 4,000
Less: Impairment 400
–––––
Goodwill at 31 March 2014 3,600
–––––

£000 £000
Parent's retained earnings at 31 March 2014 37,000
Subsidiary's retained earnings at 31 March 2014 8,000
Less: Subsidiary's retained earnings at 1 October 2013 7,000
–––––
1,000
Additional depreciation (6/12 × 1/4 × 1,600) (200)
–––––
80% × 800 640
–––––
Less: Unrealised profit on inventories (1,000)
–––––
36,240
Retained earnings of associate (40% × (6/12 × 8,000)) 1,600
Less: Impairment of investment in associate (200)
–––––
Group retained earnings at 31 March 2014 37,640
–––––

£000 £0000
Subsidiary's ordinary share capital at 31 March 2014 3,000
Subsidiary's retained earnings at 31 March 2014 8,000
Fair value adjustment (400 + 1,600) 2,000
Additional depreciation (6/12 × 1/4 × 1,600) (200)
–––––
20% × 12,800 2,560
–––––
–––––
Non-controlling interest at 31 March 2014 2,560
–––––
40
Chapter 21
Related parties and changes in foreign exchange rates
21.4
(a) Person P (or a close family member of P) is related to a reporting entity (R) if P has control, joint
control or significant influence over R or if P is a member of the key management personnel of R
(or of a parent of R). Entity E is related to R if:
(i) E and R are members of the same group.
(ii) E is an associate or joint venture of R (or vice versa).
(iii) E and R are both joint ventures of the same third party.
(iv) E is an associate of entity X and R is a joint venture of X (or vice versa).
(v) E is a pension scheme for the benefit of the employees of R or for the benefit of the employees
of any entity which is related to R.
(vi) E is controlled or jointly controlled by a person who is related to R.
(vii) A person who has control, joint control or significant influence over R (or who is a close
family member of such a person) has significant influence over E or is a member of the key
management personnel of either E or a parent of E.
(b) Related party disclosures are important since a reporting entity's financial performance and position
may be affected by transactions with related parties. For example, a transaction with a related party
might involve the supply of goods at prices which are above or below their market value. Such a
transaction would affect the financial performance/position of the reporting entity.
Even if there are no transactions with a related party, the mere existence of the relationship
might affect a reporting entity's financial performance and position. For example, a subsidiary
company may obtain increased custom simply because it is a member of a well-known group.
(c) Hideaway controls Benedict and Depret and therefore these two companies are under common
control. All three companies are related parties to each other.
Assuming that the goods mentioned could indeed have been sold outside the group for £20m, the
main effect of the transactions described in the question is to move £5m of profits from Depret to
Benedict. This is of benefit to Benedict but has an adverse effect on Depret. In particular:
(i) Benedict's cost of sales will be lower than if the transaction had occurred at full market price
and its profits will be increased. By contrast, Depret's sale revenue will be reduced, as will its
profits. The financial statements of the two companies will suggest that Benedict is performing
well and that Depret is under-performing.
(ii) Since Depret is only 55% owned by Hideaway, the minority shareholders of Depret (the non-
controlling interest) will bear 45% of the lost revenue and profits of Depret. It may be that this
constitutes "oppression of the minority", which is illegal in some jurisdictions.
(iii) If the financial statements are taken at face value, the Depret minority shareholders might be
inclined to sell their shares at a lower price than they would otherwise have done. Similarly,
the value of Benedict's shares might rise. This may suit Hideaway if it intends to dispose of its
shares in Benedict in the near future.
(iv) The directors of Benedict will enjoy a greater profit share than if the transactions had occurred
at full market price. The profit shares of the Depret directors will be reduced.
(v) There may be tax implications if the purpose of the transactions has been to reduce Depret's
profits so as to avoid taxation (e.g. if Depret pays tax at a higher rate than Benedict does).
41
Chapter 22
Ratio analysis
22.5
(a)
X Ltd Y Ltd
Profitability ratios
ROCE 1,120/5,320 × 100% = 21.1% 990/6,530 × 100% = 15.2%
Gross profit margin 1,880/5,720 × 100% = 32.9% 2,070/6,310 × 100% = 32.8%
Net profit margin either 1,120/5,720 × 100% = 19.6% 990/6,310 × 100% = 15.7%
or 1,070/5,720 × 100% = 18.7% 640/6,310 × 100% = 10.1%
or 750/5,720 × 100% = 13.1% 430/6,310 × 100% = 6.8%
Liquidity ratios
Current ratio 1,520/770 = 1.97 1,980/1,780 = 1.1
Quick assets ratio 1,010/770 = 1.31 1,090/1,780 = 0.6
Efficiency ratios
Inv. holding period 510/3,840 × 365 = 48 days 890/4,240 × 365 = 77 days
TR collection period 670/5,720 × 365 = 43 days 1,090/6,310 × 365 = 63 days
TP payment period 450/3,840 × 365 = 43 days 1,130/4,240 × 365 = 97 days
Gearing ratio
Capital gearing ratio 500/5,320 × 100% = 9.4% 3,500/6,530 × 100% = 53.6%
Note that the trade payables payment period has been calculated with reference to cost of sales, since the
figures for purchases are not available.
(b) The main points to make are as follows:

Profitability
(i) X is making a better return on capital.
(ii) Both companies have a similar gross profit margin, perhaps indicating that similar prices are
charged to customers.
(iii) X has a better net profit margin (whichever method of calculation is used). This suggests that X has
better control over its overheads.
Liquidity
(i) X has better liquidity (as measured by both liquidity ratios).
(ii) Y's quick assets ratio is especially worrying.
(iii) Y has no cash and high borrowings. X has cash in the bank and comparatively low borrowings.
Efficiency
(i) X takes a total of 91 days to turn inventories into cash.
(ii) Y takes much longer to turn inventories into cash (140 days) and so is less efficient. However, the
company might be deliberately holding larger stocks and offering longer credit so as to attract
customers. This is beneficial to Western, so long as it is sustainable in the long term.
(iii) Y pays its suppliers much later than X. This may be a sign of efficiency but may also be a sign that
Y is struggling to pay its debts and could find it difficult to obtain credit in future.
42
Gearing
(i) X is very low-geared.
(ii) Y is comparatively high-geared and may find it difficult to service its high level of debt and/or to
obtain further long-term finance.
Conclusion
X is the sounder company. Y might offer larger stocks and more generous credit terms but X would
seem to be the better choice if Western is seeking a long-term, reliable source of supply.
(c) Further information required includes:

(i) financial statements for several previous years (to detect trends)
(ii) year-average figures for items shown in the statements of financial position
(iii) a statement of accounting policies for each company
(iv) industry-average accounting ratios
(v) projections for the future.
43
22.6
(a)
Baker plc Grant plc
ROCE 2,280/13,380 × 100% = 17.0% 1,960/9,940 × 100% = 19.7%
Earnings per share 1,320/6,000 × 100p = 22p 1,440/6,000 × 100p = 24p
Price earnings ratio 165p/22p = 7.5 240p/24p = 10
Current ratio 3,300/3,040 = 1.09 2,900/1,440 = 2.01
Quick ratio (acid test) 1,720/3,040 = 0.57 1,640/1,440 = 1.14
TP payment period 1,920/10,720 × 365 = 65 days 960/8,680 × 365 = 40 days
Capital gearing ratio 3,500/13,380 × 100% = 26.2% 500/9,940 × 100% = 5.0%
Dividend yield 3p/165p × 100% = 1.8% 10p/240p = 4.2%
(b) The main points to make are as follows:

– Grant’s ROCE and EPS are both better than Baker’s and these ratios have improved since last year,
whilst Baker’s have declined. Grant seems to be the more profitable company.
– Grant’s PE ratio has risen since last year and is higher than Baker’s (which has declined). This may
indicate greater investor confidence in Grant’s future prospects than Baker’s.
– Grant’s liquidity ratios are roughly the same as in the previous year and appear to be much better
than Baker’s (which have declined). Coupled with Baker’s lack of cash, high borrowings and
lengthening trade payables payment period, this suggests that Baker may be experiencing liquidity
problems.
– On the other hand, it is possible that Baker’s liquidity problems are caused by a large and recent
investment in non-current assets (which are substantially higher than Grant’s). If this is the case, the
use of these assets may feed through to greater prosperity in future years.
– Neither company is high-geared, but Baker has a substantially higher gearing ratio than Grant and
this ratio has more than doubled since last year. This indicates that Baker has borrowed during the
year. This may have been done as a means of investing in non-current assets, but further substantial
borrowing could turn Baker into a high-geared company and prejudice shareholders' interests.
– Grant’s dividend yield has been maintained since last year and is higher than Baker’s (which has
declined). This could be further evidence of Baker’s liquidity problems and could indicate that
Baker’s shares may not be a wise choice for an investor seeking dividend income.
– On the whole, the ratio analysis suggests that Grant plc is more profitable than Baker plc, has better
liquidity and is lower-geared. This may indicate that an investment in the shares of Grant plc should
be recommended, but further information should be obtained before a final decision is made (see
below).
(c) Further information required includes:

(i) more recent financial information (half-year results? is it worth waiting until the September 2015
accounts are available?)
(ii) forecasts for the future performance of each company (if possible)
(iii) accounts for the last five years, including statements of cash flows
(iv) industry average ratios
(v) statement of accounting policies for each company.
44
Chapter 23
Earnings per share
23.6
(a) Just before the rights issue, the total market value of the company's shares (and so the worth of the
company) was £9m. The rights issue was for 2,250,000 shares and raised £1,125,000 (2,250,000 ×
50p). Therefore the number of issued shares rose to 11,250,000 and the company's worth increased
to £10.125m. This gives a theoretical market price after the rights issue of 90p per share.
If the share price had fallen to 90p as the result of a bonus issue, the number of shares outstanding
after this issue would have been 10m (since 10m × 90p = £9m). So the size of bonus issue that
would have caused a fall in market price to 90p is an issue of 1,000,000 shares. Therefore the rights
issue is treated as a bonus issue of 1,000,000 shares plus an issue of 1,250,000 shares at full price.
The weighted average number of shares outstanding during the year 2013 is (10,000,000 × 3/12) +
(11,250,000 × 9/12) = 10,937,500. Basic EPS is £2,475,000/10,937,500 × 100p = 22.63p.
(b) Restated basic EPS for 2012 is £1,800,000/10,000,000 × 100p = 18p.
23.7
(a) The preference dividend is £180,000, so profit attributable to the ordinary shares in the year to 30
September 2012 is £2,220,000. Basic EPS is £2,220,000/5,000,000 × 100p = 44.4p.
Maximum dilution would result in the issue of an extra 880,000 shares. Since the loan stock was
issued on 1 January 2012, the weighted average number of ordinary shares outstanding during the
year would become (5,000,000 × 3/12) + (5,880,000 × 9/12) = 5,660,000. Interest saved would be
£140,000 × 9/12 = £105,000 and profits after tax would rise by 80% of this, which is £84,000. This
would increase profit attributable to the ordinary shares to £2,304,000. Therefore diluted EPS is
£2,304,000/5,660,000 × 100p = 40.71p.
(b) Profit attributable to the ordinary shares in the year to 30 September 2013 is £2,020,000. The
weighted average number of shares outstanding during the year is (5,000,000 × 6/12) + (5,500,000
× 6/12) = 5,250,000. Basic EPS is £2,020,000/5,250,000 × 100p = 38.48p.
The issue of an extra 880,000 shares would increase the weighted average number of shares
outstanding during the year to 5,250,000 + 880,000 = 6,130,000. Profits after tax would rise by 80%
of £140,000 (£112,000). So profit attributable to the ordinary shares would become £2,020,000 +
£112,000 = £2,132,000. Diluted EPS is £2,132,000/6,130,000 × 100p = 34.78p.
45
Chapter 24
Segmental analysis
24.6
(a)
Floothair plc
Segment report for the year to 31 May 2014
Int'l Domestic Non- Un- Total
airline airline airline allocated
£m £m £m £m £m
Segment external revenue 8,104 388 260 8,752
Unallocated external revenue 22 22
––-–– –––– –––– –––– –––-–
Total external revenue 8,104 388 260 22 8,774
Inter-segment sales 103 14 7 - 124
––-–– –––– –––– –––– –––-–
Segment revenue 8,207 402 267 22 8,898
––-–– –––– –––– –––– –––-–
Segment profit/(loss) 803 (30) 16 789
Profit on sale of assets 32 4 36
Unallocated income 22 22
––-–– –––– –––– –––– –––-–
Profit/(loss) before tax and finance costs 803 (30) 48 26 847
––-–– –––– –––– ––––
Net finance costs (149)
Income tax expense (170)
–––-–
Net profit for the year 528
–––-–
Segment assets 12,050 240 140 12,430
––-–– –––– –––– –––-–
Segment liabilities 4,566 84 350 5,000
Unallocated liabilities 5,420 5,420
––-–– –––– –––– –––– –––-–
4,566 84 350 5,420 10,420
––-–– –––– –––– –––– –––-–
(b) Valid points include:
(i) Over 90% of the company's revenue comes from the international airline segment.
(ii) The domestic airline segment has made a loss.
(iii) Although it has the smallest revenue, the non-airline segment has made the greatest return on
segment assets.
(iv) Liabilities exceed assets in the non-airline segment.
46

IFR - ISM - Ed 4

Загружено:

Сведения о документе

Оригинальное название

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

IFR - ISM - Ed 4

Загружено:

Авторское право:

Доступные форматы

Instructor’s Manual

For further instructor material

© Pearson Education Limited 2014

Pearson Education Limited

This edition published 2014 (electronic)

© Pearson Education Limited 2014

Chapter 19 Groups of companies (2)

Cash flows from investing activities

Cash flows from financing activities

Cash flows from investing activities

Cash flows from financing activities

W3. Group revaluation reserve

Share Retained Total Non- Total

(c) Group statement of financial position as at 30 June 2014

W2. Group retained earnings

W3. Non-controlling interest

W2. Group retained earnings

W3. Non-controlling interest

(b) The main points to make are as follows:

(c) Further information required includes:

(b) The main points to make are as follows:

(c) Further information required includes:

Вам также может понравиться