PROFESSIONAL 1 EXAMINATION - APRIL 2010

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.) PRO-FORMA STATEMENT OF COMPREHENSIVE INCOME BY NATURE, STATEMENT OF COMPREHENSIVE INCOME BY FUNCTION AND STATEMENT OF FINANCIAL POSITION ARE PROVIDED.

CORPORATE REPORTING

NOTES:

TIME ALLOWED: INSTRUCTIONS:

3.5 hours, plus 10 minutes to read the paper. During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Please read each Question carefully. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page.

You are reminded that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates' answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION APRIL 2010

Time allowed 3.5 hours, plus 10 minutes to read the paper. You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

1.

(A)

You are required to answer Questions 1, 2 and 3.

Glenview PLC acquired 80% of Valleylave Ltds ordinary shares for 168m cash on 1st January 2009. The draft statements of financial position of the two companies at 31 December 2009 are shown below: Non-current assets Property, plant and equipment Development costs (note 3) Investments Glenview PLC m 610 240 850 165 1,015 500 222 722 205 Valleylave Ltd m m 152 28 10 190 45 30 8 83 273 60 126 186

Equity and Liabilities Equity Ordinary shares of 1 each Retained earnings Non- current liabilities 12% loan note

Current assets Inventory Trade receivables Bank Total assets

105 60 -

Current liabilities Trade payables Taxation Bank overdraft Total Equity and Liabilities The following information is relevant: 1.

60

60 21 7

88 1,015

18 9 -

27 273

2. 3.

4.

Valleylave Ltd sold goods to Glenview PLC during the year at a profit of 9m. One third of these goods are still in the inventory of Glenview PLC at 31 December 2009.
Page 1

Valleylave Ltds development project was completed on 31 December 2008 at a cost of 35m. 7m of this has been amortised in 2009. Glenview PLCs Directors do not agree with the capitalisation policy adopted by Valleylave Ltd and are of the opinion that 12m of the remaining development costs, at 31 December 2009, do not meet the criteria of IAS 38 Intangible Assets for recognition as an asset.

Glenview PLC has a policy of revaluing land and buildings. At the date of acquisition, Valleylave Ltds land and buildings had a fair value of 20m higher than their carrying value.

Valleylave Ltds retained earnings at 1st January 2009 amounted to 94m. The share capital at that date was 60m.

5. 6. 7. 8.

During November 2009, Glenview PLC loaned 10m (interest free) to Valleylave Ltd which is due to be repaid in March 2010. The amounts are included in the trade receivables and trade payables of the respective companies. A cheque for 8m from Glenview PLC sent to Valleylave Ltd before the end of the financial year was not received until January 2010. Glenview PLCs draft financial statements at 31 December 2009 included a note explaining a contingent asset of 300,000. The sum was received on 31 January 2010 and should now be accounted for as an adjusting event after the reporting period.

REQUIREMENTS: (a)

In calculating goodwill, Glenview PLCs policy is to value the non-controlling interest using fair value at the date of acquisition. On this date, the fair value of the non-controlling interest was 42 million. Prepare the consolidated statement of financial position for Glenview PLC as at 31 December 2009. (18 marks) (Presentation: 1 mark)

(b)

Explain why the fair value of an entitys assets is used in the preparation of consolidated financial statements. (4 marks)

(B)

The Purchasing Manager of Eco Ltd buys goods from a company based in Botoland, whose currency is the Boto. The value of the purchases on 31 May 2009 amounted to 600,000 Botos. The transaction was not settled until 30 June, Eco Ltds year end. Rate of Exchange 31 May 2009 30 June 2009 1 = 1.5 Botos 1 = 1.9 Botos

REQUIREMENTS: (a)

(b)

Illustrate how this transaction will be reported in the financial statements of Eco Ltd for the year ended 30 June 2009. (4 marks) Assume Eco Ltd has a foreign subsidiary which operates as an independent entity. Explain what method of translation would be used for the purposes of preparing consolidated financial statements for the group. (3 marks) [TOTAL: 30 MARKS]

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2.

After the closing of the ledger accounts for the year ended 31 December 2009, the following balances were extracted from the nominal ledger of Logan Ltd. Dr Cr 000 000 Land (note 1) Buildings at cost (note 2) Equipment at cost (note 3) Accumulated depreciation 1 January 2009: Buildings Equipment Inventory 1 January 2009 Intangible asset (note 10) Amortisation Investment property valuation at 1 January 2009 (note 4) Trade receivables Trade payables Amounts receivable from supplier (note 5) Income tax (note 6) Deferred taxation 10% loan stock (redeemable 2014) Revenue Purchases Wages and salaries Administrative expenses Selling and distribution expenses Operating expenses Allowance for doubtful debts Bank Interest paid (note 7) Investment income Preference share capital-5% irredeemable 1 shares Ordinary dividends paid Ordinary share capital Revaluation reserve Retained earnings 1 January 2009 The following notes are relevant: 1. 2. 3. 4. 200 240 190 95 38 2 100 90

60 110

70 6

105 12 130 1,500

796 102 127 116 50

10 6.50 18

11.50 12 20

2,256.50

55 25 216 2,256.50

Land is to be revalued at 220,000.

Buildings are depreciated over 40 years. Depreciation is to be charged 50% to administration costs and 50% to cost of sales.

Details of the investment property are: Value 1 January 2009 Value 31 December 2009

Equipment is depreciated at 25% on the reducing balance basis. Depreciation is to be charged in full to cost of sales.

100,000 95,000

5.

Logan Ltd has lodged a claim for 70,000 against one of its suppliers for faulty goods supplied. The supplier has contested the validity of this claim, and at 31 December 2009 the legal costs incurred by Logan Ltd amounted to 40,000 to date. The companys solicitors have advised the Directors of Logan Ltd that, although the outcome is unclear, they have a good case. The ledger accounts above, show a receivable for 70,000 due from the supplier with the corresponding credit being included within purchases. No adjustment has been made for the legal costs which have not yet been paid at the year end. On 31 January 2010, Logan Ltds solicitors have advised that it is now probable that the claim will be settled in full.
Page 3

6. 7. 8. 9. 10.

The income tax balance in the ledger accounts represents an under provision of the previous years estimate. The estimated income tax liability for the year ended 31 December 2009 is 20,000. The loan stock was issued on 1 January 2009 and accrued interest at 31 December 2009 has not yet been accounted for.

Inventories held at 31 December 2009 are valued at a cost of 110,000. This includes 31,000 of slow moving goods. Logan Ltd is trying to sell these slow moving items to another company, but has not been successful in obtaining a reasonable offer. The best price that it has been offered to date is 19,000.

Logan Ltd is to make an allowance for doubtful debts amounting to 4% of year-end receivables. On 5 January 2010 the company received notification that one of its customers had gone into receivership. This customer owed Logan Ltd 30,000 at 31 December 2009. Whilst preparing the ledger accounts, the accountant discovered an error in the previous years financial statements. Expenditure amounting to 40,000 in relation to a brand had been capitalised as an intangible asset whereas in fact this was in contravention of IAS38 Intangible Assets. This expenditure has been subject to an amortisation charge of 5% which has been included in the ledger accounts above. Provision has not yet been made for the preference dividend.

11. (a)

REQUIREMENTS:

(b)

Prepare Logan Ltds statement of comprehensive income for the year ended 31 December 2009 and a statement of financial position as at that date. Your answer should be presented in accordance with IAS1 (revised) Presentation of Financial Statements. (Notes to the financial statements are not required but you should show any workings). (21 marks) (1 mark presentation) (i) Prepare a memorandum for the Financial Accountant of Logan Ltd which: (ii) Explains your accounting treatment of the items referred to in notes 5, 8 and 10 above. (6 marks)

Describes the purpose of a statement of changes in equity. (You are not required to prepare the SOCE). (2 marks) [TOTAL: 30 MARKS]

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3.

The following multiple choice questions contains eight sections, each of which are followed by a choice of answers. Only one of each set of answers is strictly correct. REQUIREMENTS: Give your answer to each section in the answer sheet provided. [TOTAL: 20 MARKS]

1.

The proposed final dividend for CAT Ltd for the year ended 30 September 2008 was 40,000. This was paid in October 2008. The final dividend for the year ended 30 September 2009 was 60,000, which was declared on the 25 September 2009. An interim dividend for the year ended 30 September 2009 of 22,000 was paid.

In accordance with IAS 7 Statement of Cash Flows what is the figure for dividends paid which will appear in the statement of cash flows for CAT Ltd for the year ended 30 September 2009? (a) (b) (c) (d) 62,000 82,000 100,000 60,000

2.

Peter Ltd has the following products in inventory at the end of 2009: Bentub (completed) Jontub (part complete)

Each product normally sells at 34 per unit. Due to the difficult trading conditions Peter Ltd intends to offer a discount of 15% per unit and expects to incur 4 per unit in selling costs. 10 per unit is expected to be incurred to complete each unit of Jontub.

8,400 2,800

Units

Cost per unit 22 16

In accordance with IAS 2 Inventories, at what amount should inventory be stated in the financial statements of Peter Ltd at 31 December 2009? (a) (b) (c) (d) 257,600 278,900 254,520 281,820

3.

The financial statements of Pot PLC were approved by the Board of Directors on 1 February 2010. As per IAS 10 Events after the Reporting Period, which of the following would be a non-adjusting item in the financial statements at 31 December 2009? (i) (ii) (iii) (iv) (a) (b) (c) (d) Identification of a material error in the valuation of inventory. An increase in the market value of investments. The disposal of equipment, which was surplus to the businesss requirements. Receipt of notification of bankruptcy of a customer with a balance outstanding at year end. (ii) and (iii) (i) and (iii) (i) and (iv) All of the above.

4.

Which of the following is not a condition that must be met in order to record revenue from the rendering of services? (a) (b) (c) (d) The amount can be measured reliably. Stage of completion of the work can be measured reliably. Costs incurred for the transaction can be measured reliably. The seller has passed on effective control of the service being performed.
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5.

On 1 May 2009, Batman PLC entered into a finance lease agreement. Batman PLC paid a deposit of 11,000 on that date. The cash price of the leased asset at 1 May 2009 was 35,000. Batman PLC pays interest of 7% on its borrowings. The rate of interest implied in the lease was approximately 10%. Under IAS17 Leases, what is the finance charge in Batman PLCs statement of comprehensive income for the year ended 30 April 2010? (a) (b) (c) (d) 3,500 2,300 2,450 2,400

6.

At a board meeting held on 1 November 2009, Marcus PLC made the decision to sell a major division. The actual closure took place on 10 February 2010. In the year ended 31 December 2009 the division reported a loss of 150,000. Costs of redundancies relating to the division to be incurred in 2010 are expected to amount to 40,000. In accordance with IFRS5 Non-current Assets Held for Sale and Discontinued Operations, what will be reported in Marcus PLCs statement of comprehensive income for the year ended 31 December 2009 in respect of the division? (a) 150,000 loss from continuing operations (b) 190,000 loss from continuing operations (c) 150,000 loss from discontinued operations (d) 190,000 loss from discontinued operations

7.

The IASBs Framework for the Preparation and Presentation of Financial Statement includes the four qualitative characteristics of financial information. Which one of the following statements includes the four qualitative characteristics of financial information? (a) (b) (c) (d) Materiality, reliability, understandable and going concern. Relevance, reliability, comparable and understandable. Prudence, comparable, understandable and accuracy. Relevance, materiality, accuracy and going concern.

8.

The following is an extract from the financial statements of Honey Ltd as at 31 December 2009 and 2008: Revenue Cost of sales 2009 000 3,400 1,800 820 650 2008 000 2,900 1,500 760 510

Inventory Trade receivables

Calculate the inventory turnover and the average collection period for trade receivables. (a) (b) (c) (d) Inventory Turnover 2009 2008 166 days 185 days 70 days 64 days 89 days 96 days 180 days 172 days

Average collection period for trade receivables 2009 2008 70 days 64 days 166 days 180 days 132 days 124 days 70 days 64 days

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4.

IAS 38 Intangible Assets sets out the principles for accounting for intangible assets. REQUIREMENTS: (a) Identify the criteria that must be satisfied before an intangible asset can be recognised in the financial statements. (5 marks)

(b) (c)

What criteria must be satisfied before expenditure on internally generated research and development can be capitalised? (3 marks)

Smith PLC, a developer and manufacturer of household and commercial cleaning products, prepares its financial statements to 31 December 2009. The Board of Directors are finalising the financial statements and need assistance on the treatment of the following issues: (i) On 1 January 2008, Smith PLC acquired a six year patent to manufacture and distribute a product called Clean Line Fluid. The fluid is for use in restaurants and public houses. The patent cost 12m and it is to be amortised on a straight line basis. In January 2010 a review of the sales of Clean Line Fluid indicated a very disappointing level of sales. The decision was taken that production would cease at 31 December 2010 despite the product delivering a net profit.

(ii)

Research and Development expenditure in the year to 31 December 2009 totalled 4m. Half of this was incurred on research costs and the remaining amounts were incurred on the development costs of the following three products: Products: Wash and Go Wipe Clear Soft and Clean 1,000,000 400,000 600,000

(iii)

The Wash and Go product is expected to generate high levels of sales and matching profits over the next 4 years, after which it will be replaced. The Wipe Clear product is experiencing difficulties in the final stage of product testing and there is uncertainty within the product development team of the length of time or costs needed to complete the product prior to its launch. Smith PLC registered a 6 year patent for the Soft and Clean product effective from 1 January 2009.

During the year ended 31 December 2009, a staff training programme was carried out at a cost of 200,000. The external training provider has demonstrated to the Directors of Smith PLC that the training should result in additional profits of 380,000. Advise the Directors of Smith PLC on the treatment of the above issues in the financial statements for the year ended 31 December 2009. (9 marks) [TOTAL: 20 MARKS] (3 marks)

(d)

What information needs to be disclosed for each class or type of intangible asset?

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5.

IAS11 Construction Contracts defines a construction contract and provides guidance on how it should be recognised and measured in the financial statements.

Ashridge Ltd has three contracts in progress to build new bridges in Dublin, Cork and Drogheda. The companys first accounting period ended on 30 September 2008 and during that period the company tendered for and won a contract to build a large bridge in Dublin. During the year ended 30 September 2009, Ashridge secured two other contracts in Cork and Drogheda. The following information as at 30 September 2009 is available for each of the three contracts: Contract Dublin m 32.00 12.00 7.50 19.50 Cork m 20.00 Drogheda m 25.50 11.50 11.50

Payments received: To 30 September 2008 Year to 30 September 2009 To date Costs incurred: To 30 September 2008 Year to 30 September 2009 To date

Value of work invoiced: To 30 September 2008 Year to 30 September 2009 To date

Contract value Certified value of work completed: To 30 September 2008 Year to 30 September 2009 To date

1.50 1.50

11.00 6.40 17.40 10.50 3.84 14.34 14.08 7.68 21.76 12.00 3.20

1.20 1.20 3.10 3.10 10.50

11.40 11.40 8.20 8.20 24.68 24.68 4.40

Estimated future costs to complete: As at 30 September 2008 As at 30 September 2009 (i) Additional information: (ii)

(iii)

(a) (b) (c)

REQUIREMENTS:

The Drogheda contract has experienced some difficulties. These have not affected costs, but the customer has agreed to increase the value of the contract by 1.0m by way of compensation. There have been some labour problems at the Dublin site in 2009 but Ashridge Ltd believes these have now been resolved and the contract is expected to continue profitably. Ashridge Ltd accounts for its contracts in accordance with IAS11 Construction Contracts using the value of work certified (as a percentage of contract value) to estimate the percentage completion of each contract.

Discuss the issue of profit recognition in relation to construction contracts.

List three main disclosures required by IAS11.

For each of the three contracts, calculate the amounts which would appear in the financial statements of Ashridge Limited for the year ended 30 September 2009. (13 marks) (4 marks)

(3 marks)

END OF PAPER
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[TOTAL: 20 MARKS]

SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION APRIL 2010 m

SOLUTION 1 Consolidated statement of financial position of Glenview Group as at 31 December 2009 Assets Non- current assets Tangible assets (610+152+20) Development costs (28-12) Investments (72+10) Goodwill (w3) m 782 16 82 36 916

Current Assets Inventory (105+45-3) Accounts Receivables (60+30-8-10) Other receivables Bank (8+8) Equity and Liabilities Ordinary share capital Retained earnings (w5)

147 72 .3 16

Current Liabilities Accounts payabless (60+18-10) Taxation (21+9) Bank overdraft

Non-current liabilities 12% Loan stock (205+60)

Non controlling interest (w4)

500.00 235.90 735.90 45.40 781.3 265

235.3 1151.3

68 30 7

105 1,151.3

W1

Group structure Glenview 1 January 2009 80%

Valleylave

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W2

Net Assets at fair value Share capital Retained earnings

Fair value adjustment Land and buildings Research and development Unrealised profit on inventory W3 Goodwill

At acquisition m 60 94 154

174 168 42 210 174 36 42.00 34.80 7.20

20 -

At reporting period end m 60 126 186 20 (12)

(3) 191

Fair value non controlling interest at Date of acquisition @ 3.50 Fair value of Assets 174 * 20% Goodwill attributable to NCI
Other methods of calculation acceptable

Fair value of subsidiary net assets Goodwill

Consideration paid Non controlling interest

W4

Non controlling interest at reporting period end 20% of 191m Goodwill

W5

Alternative calculation: 126-94=32-3-12=17*80%

Glenview plc Contingent asset Subsidiary {(191 174 }* 80%

Retained earnings

38.20 7.20 45.40 222m 0.3m

13.6m 235.90 13.6m

(18 marks) Presentation (1 mark)

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(b)

In order to account for an acquisition, the acquiring company must measure the cost of what it is accounting for, which will normally represent:

Fair value defined by IFRS3 is the amount for which the asset could be exchanged or a liability settled between knowledgeable, willing parties in an arms length transaction Identifiable assets and liabilities are included in consolidated accounts at their fair values because:

The cost of the investment in its own statement of financial position, and Amount allocated between the identifiable net assets of the subsidiary, the non-controlling interest and goodwill in the consolidated financial statements.

(c) (i)

Purchased goodwill (per IFRS3 revised) is the difference between the value of acquired entity and aggregate of the fair values of that entitys identifiable assets and liabilities. If the fair value is not used then the goodwill will be meaningless. (4 marks)

Consolidated accounts are from the perspective of the group, rather than the perspectives of the individual companies. The cost to the group is their fair value at date of acquisition.

Dr Purchases Cr Trade payables At year end

At date of transaction 400,000 400,000

Dr Trade payables Cr SCI (ii)

Trade payables must be translated at closing rate (1.90) = 315,789 84,211 84,211 (4 marks)

Any exchange differences arising are shown as separate components of equity.

Revenues and expenses are translated using the average rate for the period.

Need to use the closing rate method of translation for consolidation purposes. Under this approach, assets and liabilities are translated at the rate ruling at the statement of financial position date the closing rate. (3 marks)

[Tota:l 30 marks]

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SOLUTION 2

Statement of Financial Position for the year ended 31 December 2009 2009 000 000 ASSETS Non-current assets Property, plant and equipment 220 + (240-66) +60 454 Investment property 95 Intangibles 549 Current assets Inventories 98 Trade and other receivables (90-30-2.4) 57.60 Bank 10 165.6 Total assets 714.6 EQUITY AND LIABILITIES Equity Ordinary share capital 55 Preference share capital (irredeemable) 20 Revaluation surplus (25+20) 45 Retained earnings (w7) 280.1 400.10 Non-current liabilities 10% loan stock 130 Deferred tax 12 Current liabilities Trade and other payables (105 + 4.3 +40) 151.50 Preference dividend payable 1 Taxation 20 172.50 Total equity and liabilities 714.60

Statement of Comprehensive Income for the year ended 31 December 2009 000 Revenue 1,500 Cost of sales (w1) (988) Gross profit 512 Operating expenses (50) Distribution costs (w1) (136.9) Administrative expenses (w1) (170) Profit from operations 155.1 Finance costs (13) Investment income 12 Loss on fair value of investments (5) Profit before taxation 149.10 Income tax expense (w4) (26) Profit for the year 123.10 Other Comprehensive Income Gains on revaluation 20 143.10

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W1 - Allocation of costs

Workings

Cost of sales 000 95 796 102 3 20

Admin 000 127

Admin/Selling Opening inventory Purchases Wages and salaries Bad and doubtful debts (30 -9.10) Depreciation: Buildings W2 Equipment (25% x (190 110) Legal costs re litigation against supplier Contingent asset (write off) Closing inventory (110 -12) *11.5 ((90 -30) x 4%) = 9.1 (decrease) W2 - Depreciation on buildings 240,000/40=6,000 pa

Selling & Distribution 000 116 20.9

70 (98) 988

40 170

136.9

W3 - Investment property Changes in valuation go directly to SCI (5,000) W4 - SCI taxation Income tax Under-provision 20,000 6,000 26,000

W5 - Interest accrual 6,500 paid but should have paid 10% x 13,000 = 13,00 Therefore accrue 6,500 at 31 December 2009. W6 Write off 40,000 against retained earnings brought forward. 000 216 (40) (18) (1) 123.10 280.10

W7 - Retained earnings

Brought forward Prior error (38 + 2) Dividend paid Preference dividend Profit for the year At 31 December 2009

(21 Marks) Presentation 1 mark

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(b)

1.

Subject:

To: Financial Controller From: A. N. Accountant Date: XX/XX/XX

Memorandum

2.

Logan Ltd should not be accruing for a contingent asset of 70,000. IAS37 is specific in stating that contingent assets must not be recognised. Only when the realisation of the related economic benefits is virtually certain should recognition take place. This is an application of the prudence concept. Where inflow of economic benefits is probable, the contingent asset should be disclosed. Legal costs should be accrued for as it is very probable case will be successful.. Inventories must be valued at lower of cost or net realisable value as per IAS2. To include inventory at higher value of 31,000 would be to overstate profits in the current accounting year (by decreasing cost of sales). Most realistic price is 19,000- therefore write down the difference for slow moving inventory.

Legal claim against the supplier

Accounting Issues

3.

4.

The main purpose of a SOCE statement is to show how each component of equity has changed during an accounting period. In the case of a company, these components are share capital and each of the companys reserves. Total comprehensive income and effects of any retrospective application of accounting policies/restatement of items should be shown. (2 marks) [Total: 30 marks]

IAS38 outlines strict criteria for capitalisation of intangible assets. Brand would appear to have been generated internally and would not meet IAS38 criteria. Need to add back the amortisation charge of 2,000 (via retained earnings) and adjust the retained earnings (brought forward) for prior year error of 38,000. i.e. adjust for 40,000 in total. (6 marks) Purpose of Statement of Changes in Equity Statement (SOCE)

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SOLUTION 3 1. (a) Balance b/f Interim dividend Final dividend 40,000 22,000 60,000 122,000 60,000 62,000 No. 8,400 2,800 Cost 22 26 NRV 34*.85=28.9-4=24.9 34*.85=28.9-4=24.9 184,800 69,720 254,520

2.

(c)

Less dividend o/s Dividend paid Bentub Jontub

3.

4. 5.

(a)

(d) (d)

(ii) and (iii)

6 7 8

(d) (b) (a)

@ 10%

Cash price Less deposit

35,000 11,000 24,000

2,400

Inventory Turnover 2009 820 *365=166days 1,800

2008 760*365=185days 1,500

Average collection period for trade receivable 2009 2008 650*365=70days 510*365=64 days 3,400 2,900

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SOLUTION 4 (a)

(b)

(c) (i)

Technically feasible Intent and ability to complete Can be used or sold Will generate probable future economic benefits Resources available to complete Ability to measure

Intangible assets are Identifiable non-monetary asset without a physical presence. Examples include: legal (copyrights, patents) Competitive (knowledge, human capital) must be identifiable must have control over the asset there must exist future economic benefit to the business the cost of the asset is identifiable (5 marks)

(3 marks)

The fair value of the patent at 31 December 2009 should be revalued to 2m as the life of the asset has been reduced to one year. The amount of the asset needs to be written off by 8m with a written down value of 2m at the reporting year end. The change needs to be disclosed in the notes to the accounts. Balance at 1 January 2008 (12m 1/6) Write off Balance at 31 December 2009 (1 year remaining) Wash and go: Wipe clear: Soft and clean: 10m 8m 2m

(ii) (d)

Student could make reference to:

Training costs are not allowed as staff are not under control of Smith plc, and when staff leave the benefits of the training, whatever they maybe, may also leave. Therefore write off 200,000 in full. (9 marks) Useful life Split between internally generated and other Amortisation rates Gross and accumulated amortisation amount Amortisation charge Reconciliation of balances from the start to the year end Other

Write off over the life of the patent. Capitalise 600,000 amortise 100,000 pa (need to review)

write off full development cost of 400,000 as outcome and future costs are unknown and it is uncertain if is it technically or financially viable?

capitalise 1m Write off over 4 years (250,000 pa)

[Total: 20 marks]

(3 marks)

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SOLUTION 5 (a) Working 1 Contract

Profit or loss for 2009 Full loss provided Cork work not sufficiently advanced To date (60% x 7.04) Less 2008 (38% x 7.04) Cost of sales (balancing figure)

Turnover to date (30 Sept 2009) Less turnover recognised in 2008 Turnover for 2009

Estimated total costs to complete Overall profit/(loss)

2009 Original contract value Revision

Estimated costs to complete Estimated total profit

2008 Contract value

Dublin m 32.00 24.96 7.04 32.00 24.96 7.04

Cork m

Drogheda m

20.00 13.6 6.4

19.5 (12.00) 7.5

1.5 1.5 -

25.50 1.0 26.50 29.08 (2.58) 11.5 11.5

4.22 (2.68) 1.61 5.89

(2.58)

1.5

14.08

Cork project considered at too early a stage for including profit. Alternative approach could be adopted if there was more certainty. Statement of Comprehensive Income Revenue Cost of sales Profit/Loss Statement of financial Position Cost to date Recognised profit/losses Progress billings Due from customers for contract work 7.5 5.89 1.61 21.76 4.29 (17.40) 8.65 17.40 14.34 3.06 1.5 1.5 Nil 3.10 (1.20) 1.9 11.5 14.08 (2.58) 24.68 (2.58) (11.40) 10.7

Note: Assuming the above outcomes have been estimated reliably, we can estimate the percentage completion of each contracts contract activity; using the value of work certified on a cumulative basis. 2008 Work certified to date/contract value 38% (12/32) 2009 Work certified/contract value 61% 7.5% N/A(losses) (19.5/32) (1.5/20) (13 marks)
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Progress billings Amounts received Trade receivables

1.2 1.2

11.4 8.20 3.2

(b)

(c)

Timing of profit is an important aspect of a statement of comprehensive income showing a faithful representation. Only realised profits should be disclosed as part of profits for the year. With construction contracts, the process of completing the project takes a relatively long time and, in particular, will spread across at least one accounting period-end. It would not be reasonable to wait until the project is finished before taking profit. IAS11 recognises profit on uncompleted contracts in proportion to some measure of the percentage of completion applied to the estimated total contract profit. This reflects the accruals concept as opposed to the prudence concept. However, if it is not possible to make a reliable estimate of the contract outcome, IAS11 does not permit any profit to be recognised. However, sufficient contract revenue may be recognised to cover the costs to date, so long as it is thought that these costs will be recovered. (4 marks)

Disclosures include

Amount of contract revenue recognised during the accounting period Methods used to determine contract revenue for the period Methods used to determine stage of completion of contracts in progress

(3 marks)

[Total: 20 marks]

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