(i) ACCA PAPER P2 CORPORATE REPORTING

54 Pages·2015·0.45 MB·English

ACCA

PAPER P2
CORPORATE REPORTING
(INTERNATIONAL)

REVISION QUESTION (cid:51)(cid:53)(cid:36)(cid:38)(cid:55)(cid:44)(cid:38)(cid:40)

(cid:3)(cid:3)(cid:3)(cid:3)For Examinations to June 201(cid:26)

®
©2015 DeVry/Becker Educational Development Corp.  All rights reserved. (i)
No responsibility for loss occasioned to any person acting or refraining from action as a result of any
material in this publication can be accepted by the author, editor or publisher.
This training material has been prepared and published by Becker Professional Development
International Limited: (cid:90)(cid:90)(cid:90)(cid:17)(cid:69)(cid:72)(cid:70)(cid:78)(cid:72)(cid:85)(cid:17)(cid:70)(cid:82)(cid:80)(cid:18)(cid:68)(cid:70)(cid:70)(cid:68)
(cid:3)
(cid:3)

Copyright ©2015 DeVry/Becker Educational Development Corp. All rights reserved.
The trademarks used herein are owned by DeVry/Becker Educational Development Corp. or their
respective owners and may not be used without permission from the owner.
No part of this training material may be translated, reprinted or reproduced or utilised in any form either
in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented,
including photocopying and recording, or in any information storage and retrieval system without
express written permission. Request for permission or further information should be addressed to the
Permissions Department, DeVry/Becker Educational Development Corp.

Acknowledgement
Past ACCA examination questions are the copyright of the Association of Chartered Certified
Accountants and have been reproduced by kind permission.
(ii) ©2015 DeVry/Becker Educational Development Corp.  All rights reserved.
REVISION QUESTION BANK – CORPORATE REPORTING (P2)
Question 1 TIMBER PRODUCTS
Required:
(a) Explain briefly the concept of faithful representation. (3 marks)
(b) Explain the appropriate accounting treatment for the following transactions and the
entries that would appear in the statement of comprehensive income for the year ended
31 October 2015 and statement of financial position as at 31 October 2015 for
transactions (i) and (ii).
(i) Timber Products imports unseasoned hardwood and keeps it for five years under
controlled conditions prior to manufacturing high quality furniture. In the year
ended 31 October 2015 it imported unseasoned timber at a cost of $40 million. It
contracted to sell the whole amount for $40 million and to buy it back in five years’
time for $56.10 million.
(ii) Timber Products manufactures and supplies retailers with furniture on a
consignment basis such that either party can require the return of the furniture to the
manufacturer within a period of six months from delivery. The retailers are
required to pay a monthly charge for the facility to display the furniture. The
manufacturer uses this monthly charge to pay for insurance cover and carriage costs.
At the end of six months the retailer is required to pay Timber Products the trade
price as at the date of delivery. No retailers have yet sent any goods back to Timber
Products at the end of the six month period.
In the year ended 31 October 2015, Timber Products had supplied furniture to
retailers at the normal trade price of $10 million being cost plus 331/ % and received
3
$6 million from retailers. (7 marks)
(10 marks)
©2015 DeVry/Becker Educational Development Corp.  All rights reserved. 1
CORPORATE REPORTING (P2) – REVISION QUESTION BANK
Question 16 KEY
(a) Key, a public limited company, is concerned about the reduction in the general availability of
credit and the sudden tightening of the conditions required obtaining a loan from banks.
There has been a reduction in credit availability and a rise in interest rates. It seems as though
there has ceased to be a clear relationship between interest rates and credit availability, and
lenders and investors are seeking less risky investments. The directors are trying to determine
the practical implications for the financial statements particularly because of large write
downs of assets in the banking sector, tightening of credit conditions, and falling sales and
asset prices. They are particularly concerned about the impairment of assets and the market
inputs to be used in impairment testing. They are afraid that they may experience significant
impairment charges in the coming financial year. They are unsure as to how they should test
for impairment and any considerations which should be taken into account.
Required:
Discuss the main considerations that the company should take into account when
impairment testing non-current assets in the above economic climate. (8 marks)
Professional marks for clarity and expression. (2 marks)
(b) There are specific assets on which the company wishes to seek advice. The company holds
certain non-current assets, which are in a development area and carried at cost less
depreciation. These assets cost $3 million on 1 June 2014 and are depreciated on the straight-
line basis over their useful life of five years. An impairment review was carried out on 31
May 2015 and the projected cash flows relating to these assets were as follows:
Year to 31 May 2016 2017 2018 2019
Cash flows ($000) 280 450 500 550

The company used a discount rate of 5%. At 30 November 2015, the directors used the same
cash flow projections and noticed that the resultant value in use was above the carrying
amount of the assets and wished to reverse any impairment loss calculated at 31 May 2015.
The government has indicated that it may compensate the company for any loss in value of
the assets up to 20% of the impairment loss.
Key holds a non-current asset, which was purchased for $10 million on 1 December 2012
with an expected useful life of 10 years. On 1 December 2014, it was revalued to $8·8
million. At 30 November 2015, the asset was reviewed for impairment and written down to
its recoverable amount of $5·5 million.
Key committed itself at the beginning of the financial year to selling a property that is being
under-utilised following the economic downturn. As a result of the economic downturn, the
property was not sold by the end of the year. The asset was actively marketed but there were
no reasonable offers to purchase the asset. Key is hoping that the economic downturn will
change in the future and therefore has not reduced the price of the asset.
Required:
Discuss with suitable computations, how to account for any potential impairment of the
above non-current assets in the financial statements for the year ended 30 November
2015. (15 marks)
16 ©2015 DeVry/Becker Educational Development Corp.  All rights reserved.
REVISION QUESTION BANK – CORPORATE REPORTING (P2)
Note: The following discount factors may be relevant:
Year 1 0·9524
Year 2 0·9070
Year 3 0·8638
Year 4 0·8227
(25 marks)
©2015 DeVry/Becker Educational Development Corp.  All rights reserved. 17
CORPORATE REPORTING (P2) – REVISION QUESTION BANK
A
Question 18 BRAMSHAW
The definition of a financial instrument captures a wide variety of assets and liabilities including cash,
evidence of an ownership interest in an entity, or a contractual right to receive, or deliver cash or
another financial instrument.
Preparers, auditors and users of financial statements have found the requirements for reporting financial
assets and liabilities to be very complex, problematical and sometimes subjective. The result is that
there is a need to develop new standards of reporting for financial instruments that are principle-based
and significantly less complex than current requirements. It is important that a standard in this area
should allow users to understand the economic substance of the transaction and preparers to properly
apply generally accepted accounting principles.
Required:
(a) (i) Discuss how the measurement of financial instruments under International
Financial Reporting Standards can create confusion and complexity for
preparers and users of financial statements. (9 marks)
18 ©2015 DeVry/Becker Educational Development Corp.  All rights reserved.
REVISION QUESTION BANK – CORPORATE REPORTING (P2)
(ii) Set out the reasons why using fair value to measure all financial instruments
may result in less complexity in the application of IFRS 9 “Financial
Instruments” but may lead to uncertainty in financial statements. (9 marks)
Professional marks will be awarded for clarity and expression. (2 marks)
(b) Bramshaw borrowed $47 million on 1 December 2014 when the market and effective interest
rate was 5%. On 30 November 2015, the company borrowed an additional $45 million when
the current market and effective interest rate was 7·4%. Both financial liabilities are
repayable on 30 November 2019 and are single payment notes, whereby interest and capital
are repaid on that date.
Required:
Discuss the accounting for the above financial liabilities under current financial
reporting standards using amortised cost, and additionally using fair value as at 30
November 2015. (5 marks)
(25 marks)
Question 19 SEEJOY
Seejoy is a famous football club but has significant cash flow problems. The directors and shareholders
wish to take steps to improve the club’s financial position. The following proposals had been drafted in
an attempt to improve the cash flow of the club. However, the directors need advice on their
implications.
(a) Sale and leaseback of football stadium (excluding the land element)
The football stadium is currently accounted for using the cost model in IAS 16 Property,
Plant, and Equipment. The carrying value of the stadium will be $12 million at 31 December
2015. The stadium will have a remaining life of 20 years at 31 December 2015, and the club
uses straight line depreciation. It is proposed to sell the stadium to a third party institution on
1 January 2016 and lease it back under a 20 year finance lease. The sale price and fair value
are $15 million which is the present value of the minimum lease payments. The agreement
transfers the title of the stadium back to the football club at the end of the lease at nil cost.
The rental is $1·2 million per annum in advance commencing on 1 January 2016. The
directors do not wish to treat this transaction as the raising of a secured loan. The implicit
interest rate on the finance in the lease is 5·6%. (9 marks)
(b) Player registrations
The club capitalises the unconditional amounts (transfer fees) paid to acquire players.
The club proposes to amortise the cost of the transfer fees over 10 years instead of the current
practice which is to amortise the cost over the duration of the player’s contract. The club has
sold most of its valuable players during the current financial year but still has two valuable
players under contract.
Transfer fee Amortisation to Contract Contract
Player capitalised 31 December 2015 commenced expires
$m $m
A. Steel 20 4 1 January 2015 31 December 2019
R. Aldo 15 10 1 January 2014 31 December 2016

If Seejoy win the national football league, then a further $5 million will be payable to the two
players’ former clubs. Seejoy are currently performing very poorly in the league. (5 marks)
©2015 DeVry/Becker Educational Development Corp.  All rights reserved. 19
CORPORATE REPORTING (P2) – REVISION QUESTION BANK
(c) Issue of bond
The club proposes to issue a 7% bond with a face value of $50 million on 1 January 2016 at a
discount of 5% that will be secured on income from future ticket sales and corporate
hospitality receipts, which are approximately $20 million per annum. Under the agreement
the club cannot use the first $6 million received from corporate hospitality sales and reserved
tickets (season tickets) as this will be used to repay the bond. The money from the bond will
be used to pay for ground improvements and to pay the wages of players.
The bond will be repayable, both capital and interest, over 15 years with the first payment of
$6 million due on 31 December 2016. It has an effective interest rate of 7·7%. There will be
no active market for the bond and the company does not wish to use valuation models to
value the bond. (6 marks)
(d) Player trading
Another proposal is for the club to sell its two valuable players, Aldo and Steel. It is thought
that it will receive a total of $16 million for both players. The players are to be offered for
sale at the end of the current football season on 1 May 2016. (5 marks)
Required:
Discuss how the above proposals would be dealt with in the financial statements of Seejoy for the
year ending 31 December 2016, setting out their accounting treatment and appropriateness in
helping the football club’s cash flow problems.
(Candidates do not need knowledge of the football finance sector to answer this question.)
(25 marks)
20 ©2015 DeVry/Becker Educational Development Corp.  All rights reserved.
REVISION QUESTION BANK – CORPORATE REPORTING (P2)
Question 30 MINNY GROUP
Minny is a company which operates in the service sector. Minny has business relationships with Bower
and Heeny. All three entities are public limited companies. The draft statements of financial position
of these entities are as follows at 30 November 2015:
Minny Bower Heeny
$m $m $m
Assets:
Non-current assets
Property, plant and equipment 920 300 310
Investments in subsidiaries
Bower 730
Heeny 320
Investment in Puttin 48
Intangible assets 198 30 35
–––––– –––––– ––––––
1,896 650 345
–––––– –––––– ––––––
Current assets 895 480 250
–––––– –––––– ––––––
Total assets 2,791 1,130 595
–––––– –––––– ––––––
Equity and liabilities:
Share capital 920 400 200
Other components of equity 73 37 25
Retained earnings 895 442 139
–––––– –––––– ––––––
Total equity 1,888 879 364
–––––– –––––– ––––––
Non-current liabilities 495 123 93
–––––– –––––– ––––––
Current liabilities 408 128 138
–––––– –––––– ––––––
Total liabilities 903 251 231
–––––– –––––– ––––––
Total equity and liabilities 2,791 1,130 595
–––––– –––––– ––––––

The following information is relevant to the preparation of the group financial statements:
1. On 1 December 2013, Minny acquired 70% of the equity interests of Bower. The purchase
consideration comprised cash of $730 million. At acquisition, the fair value of the non-
controlling interest in Bower was $295 million. On 1 December 2013, the fair value of the
identifiable net assets acquired was $835 million and retained earnings of Bower were $319
million and other components of equity were $27 million. The excess in fair value is due to
non-depreciable land.
2. On 1 December 2014, Bower acquired 80% of the equity interests of Heeny for a cash
consideration of $320 million. The fair value of a 20% holding of the non-controlling interest
was $72 million; a 30% holding was $108 million and a 44% holding was $161 million. At
the date of acquisition, the identifiable net assets of Heeny had a fair value of $362 million,
retained earnings were $106 million and other components of equity were $20 million. The
excess in fair value is due to non-depreciable land.
©2015 DeVry/Becker Educational Development Corp.  All rights reserved. 33
CORPORATE REPORTING (P2) – REVISION QUESTION BANK
It is the group’s policy to measure the non-controlling interest at fair value at the date of
acquisition.
3. Both Bower and Heeny were impairment tested at 30 November 2015. The recoverable
amounts of both cash generating units as stated in the individual financial statements at 30
November 2015 were Bower, $1,425 million, and Heeny, $604 million, respectively. The
directors of Minny felt that any impairment of assets was due to the poor performance of the
intangible assets. The recoverable amount has been determined without consideration of
liabilities which all relate to the financing of operations.
4. Minny acquired a 14% interest in Puttin, a public limited company, on 1 December 2013 for a
cash consideration of $18 million. The investment was accounted for under IFRS 9 Financial
Instruments and was designated as at fair value through other comprehensive income. On 1
June 2015, Minny acquired an additional 16% interest in Puttin for a cash consideration of
$27 million and achieved significant influence. The value of the original 14% investment on
1 June 2015 was $21 million. Puttin made profits after tax of $20 million and $30 million for
the years to 30 November 2014 and 30 November 2015 respectively. On 30 November 2015,
Minny received a dividend from Puttin of $2 million, which has been credited to other
components of equity.
5. Minny purchased patents of $10 million to use in a project to develop new products on 1
December 2014. Minny has completed the investigative phase of the project, incurring an
additional cost of $7 million and has determined that the product can be developed profitably.
An effective and working prototype was created at a cost of $4 million and in order to put the
product into a condition for sale, a further $3 million was spent. Finally, marketing costs of
$2 million were incurred. All of the above costs are included in the intangible assets of
Minny.
6. Minny intends to dispose of a major line of the parent’s business operations. At the date the
held for sale criteria were met, the carrying amount of the assets and liabilities comprising the
line of business were:
$m
Property, plant and equipment (PPE) 49
Inventory 18
Current liabilities 3

It is anticipated that Minny will realise $30 million for the business. No adjustments have
been made in the financial statements in relation to the above decision.
Required:
(a) Prepare the consolidated statement of financial position for the Minny Group as at 30
November 2015. (35 marks)
(b) Minny intends to dispose of a major line of business in the above scenario and the entity has
stated that the held for sale criteria were met under IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations. The criteria in IFRS 5 are very strict and regulators have been
known to question entities on the application of the standard. The two criteria which must be
met before an asset or disposal group will be defined as recovered principally through sale
are: that it must be available for immediate sale in its present condition and the sale must be
highly probable.
34 ©2015 DeVry/Becker Educational Development Corp.  All rights reserved.