CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION - APRIL 2012

NOTES: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 theanswer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

Note: Students have optional use of the Extended TrialBalance, which if used, must be included in the answer booklet.

PRO-FORMA STATEMENT OF COMPREHENSIVE INCOME BY NATURE,STATEMENT OF COMPREHENSIVE INCOME BY FUNCTIONAND STATEMENT OF FINANCIAL POSITION ARE PROVIDED.

TIME ALLOWED:3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:During the reading time you may write notes on the examination paper but you may not commencewriting 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 to pay particular attention to your communication skills and care must be takenregarding the format and literacy of the solutions. The marking system will take into account the contentof your answers and the extent to which answers are supported with relevant legislation, case law orexamples 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 REPORTINGPROFESSIONAL 1 EXAMINATION – APRIL 2012

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 theanswer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

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

1. The following Statements of Comprehensive Income relate to Rednut Plc (Rednut) and its investee companies,Blutec Plc (Blutec) and Minton Plc (Minton).

Statements of Comprehensive Income for year ended 31 December 2011Rednut Plc Blutec Plc Minton Plc

€ million € million € millionRevenue 1,230 680 425Cost of Sales (465) (240) (189)Gross profit 765 440 236Operating expenses (310) (230) (145)Finance costs (50) (30) (20)Other income 9Investment income 36 - -Profit before taxation 450 180 71Taxation (75) (30) (15)Profit for the year 375 150 56Other comprehensive income (net of tax) 63 20 18Total comprehensive income for the year 438 170 74

The following additional information is provided:

(i) Rednut bought a 60% holding in the equity of Blutec on 1 January 2010. On that date the fair value of certain plant& equipment of Blutec was €72 million in excess of its book value. This plant & equipment had a useful economiclife of 4 years from the date of acquisition. The revised values were not incorporated into the books of Blutec.

(ii) Goodwill on the acquisition of Blutec was reviewed for impairment on 31 December 2011 and an impairment lossof €7 million was found to be necessary. No previous impairment losses had been recognised on goodwill. Non-controlling interests in Blutec had been measured at their proportionate share of the fair values of the identifiablenet assets of Blutec at the acquisition date, and this figure had been incorporated into the goodwill calculation.

(iii) During 2011, Rednut sold goods to Blutec for €15 million.These goods were sold by Rednut at a mark-up on costof 25%. One third of the goods remained in the inventory of Blutec at 31 December 2011. At 31 December 2010there were goods to the value of €2 million in the inventory of Blutec which had been supplied by Rednut during2010 on the same terms.

(iv) Blutec declared a dividend of €60 million during the year. Rednut has recognised its share of this dividend within“investment income”.

(v) Since acquisition, Rednut has managed the administration of the entire group. Rednut invoiced Blutec €3 millionfor its share of these costs. Rednut recorded this transaction within “other income”, and Blutec within “operatingexpenses”.

(vi) On 1 July 2011, Rednut purchased a 30% holding in Minton. Rednut exercises significant influence over Mintonas a result of this acquisition.

(vii) On 1 July 2011, immediately following the purchase of shares in Minton, Rednut sold some land to Minton for €20million, recording a profit of €6 million. This profit is included within “other income” in the books of Rednut.

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REQUIREMENT:(a) Prepare the Consolidated Statement of Comprehensive Income for the Rednut Group for year ended 31

December 2011, in accordance with IFRS.(19 marks)

Presentation (1 mark)

(b) Write a brief memo to the Board of Directors explaining your treatment of the transactions described at notes (iv)and (v) above.

(4 marks)(c) Note: The following information should have no impact on your answer to (a) and (b) above.

Assume Rednut’s entire holding in Blutec was sold on 1 January 2012 for an agreed price of €1,700 million.Expenses of sale were €40 million. At the date of sale the net assets of Blutec had a carrying value of €1,950million in its books. This excludes the fair value adjustment recognised at acquisition and described at note (i)above. Goodwill had a carrying value of €133 million. The non-controlling interest had a carrying value (based onfair value at acquisition plus share of post-acquisition results) of €365 million. Show the journal entry to recordthis transaction from the perspective of the group accounts.

(6 marks)

[Total: 30 MARKS]

2. The following trial balance was extracted from the books of Thirdgear Plc on 31 December 2011.Note Dr Cr

€ million € millionRevenue 460Cost of sales 195Distribution costs 65Administration expenses 42Investment properties (i) 300Equity investments at cost (ii) 42Interim dividends 66Land and buildings at cost (iii) 400Plant and equipment at cost (iii) 650Accumulated depreciation 1 January 2011 – land & buildings (iii) 120Accumulated depreciation 1 January 2011 - plant and equipment (iii) 310Development expenditure (iv) 80Suspense account (v) 13Trade receivables 70Inventory at 31 December 2011 66Cash and bank 99Trade payables 46Share premium account 150Ordinary shares of 10c each (vii) 5008% Debenture (issued on 1 February 2011) (viii) 120Retained earnings reserve at 1 January 2011 382

2,088 2,088

The following notes are relevant to your answer:(i) Investment properties are accounted for under the fair value model of IAS 40 - Investment Property. The

figure included in the trial balance above represents the fair value of these properties at 1 January 2011.The fair value of these properties at 31 December 2011 was €265 million.

(ii) The figure for investments represents the cost of equities purchased during the year. As permitted by IFRS9 - Financial Instruments: Classification and Measurement, an election was made at the date of purchaseto account for any fair value gains and losses on these equity investments through “other comprehensiveincome”. The fair value of the equity investments at 31 December 2011 was €47.5 million.

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(iii) Land and buildings are carried under the cost model as permitted by IAS 16 - Property, Plant & Equipment.The land cost included in the trial balance figure for land & buildings is €100 million. The buildings wereoriginally deemed to have had a useful economic life of 30 years, of which 12 had passed by 1 January2011. During the year a decision was taken to change the accounting policy to apply the revaluation modelfrom 31 December 2011. The revalued amounts at that date were certified by a qualified valuer to be €65million for the land and €200 million for the buildings.

Plant & equipment is being depreciated at 25% per annum reducing balance.

All depreciation is charged to cost of sales.

(iv) The development expenditure relates to amounts incurred on various projects undertaken by the companyduring the year. It is estimated that the composition of this figure is as follows:

Research costs: €15 millionDevelopment costs (relating to projects meeting theIAS 38 - Intangible Assets criteria for capitalisation): €37.5 millionDevelopment costs (relating to projects not meeting theIAS 38 - Intangible Assets criteria for capitalisation): €27.5 million

(v) The suspense account relates to a contingent asset recognised during the year ended 31 December 2011,as it was considered virtually certain to be recovered. However, developments during 2011 led to theconclusion that the likelihood of recovering this amount had fallen somewhat. It is now considered 65%likely to be recovered. The bookeeper was unsure what to do about this item.

(vi) Corporation tax for the year was estimated at €1.3 million.

(vii) The directors proposed a final ordinary dividend of 1.2c per share. The proposal was approved prior to thereporting date. No account has been taken of this proposal.

(viii) The debentures were issued during the year. Interest is payable annually in arrears. No interest has beenprovided for or paid as at 31 December 2011.

REQUIREMENT:

(a) As far as the above information permits, prepare the following financial statements for Thirdgear Plc in accordancewith current international accounting standards:

(i) The Statement of Comprehensive Income for the year ended 31 December 2011; and(ii) The Statement of Financial Position as at 31 December 2011.

Notes to the financial statements are not required. (23 marks)Presentation (2 marks)

(b) Discuss briefly the circumstances under which it may be appropriate to change accounting policy in accordancewith the guidance given in IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors, and statewith reasons whether the changes described in notes (iii) and (v) above should be considered changes inaccounting policies.

(5 marks)

[Total: 30 MARKS]

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3. The following multiple choice question contains eight sections, each of which is followed by a choice ofanswers. Only one of each set of answers is strictly correct. Each question carries equal marks.

REQUIREMENT:Record your answer to each section in the answer sheet provided. [Total: 20 MARKS]

1. Redstone Ltd. commenced a two-year fixed price contract for €4.0 million to construct a bridge on 1 January2011. The following figures are available on 31 December 2011:

Material cost incurred to date: €2 millionOther contract costs incurred to date: €1 millionCosts remaining to complete (estimated): €2 millionThe engineer’s report confirms the contract is 60% complete at 31 December 2011.

How much profit or loss should Redstone Ltd. recognise in its financial statements for year ended 31 December2011?

(a) Loss of €0.5 million.(b) Loss of €1 million.(c) No profit or loss.(d) Loss of €0.6 million.

2. During 2011, Freedom Plc constructed a new office building for its own use. Construction was carried out from 1July to 31 December 2011. €10 million was borrowed on 1 July 2011 at 10% per annum specifically to financethe construction.€5 million of this was spent on 1 July, €3 million on 30 September, and €2 million on completionon 31 December. Unused funds were deposited at a 5% annual interest rate until needed. How should the interestincome and expense be recorded under IAS 23?

(a) €500,000 may be capitalised as part of the cost of construction.(b) €500,000 must be capitalised as part of the cost of construction.(c) €412,500 may be capitalised as part of the cost of construction.(d) €412,500 must be capitalised as part of the cost of construction.

3. Under the IASB’s revised conceptual framework, issued in 2010, qualitative characteristics of financial informationare divided into those considered “fundamental” and “enhancing”. The following is a list of some qualitativecharacteristics the framework identifies:

(i) Relevance.(ii) Comparability.(iii) Understandability.(iv) Timeliness.(v) Faithful representation.(vi) Verifiability.

Which of the above are identified by the conceptual framework as “fundamental”?

(a) (ii) and (iv).(b) All of the above.(c) (i) and (vi).(d) (i) and (v).

4. Readytags Plc is an Irish company whose functional currency is the € Euro. On 31 July 2011, it sold goods to aSwiss customer for CHF 30,000. At the reporting date 31 January 2012, the amount remained receivable. Therelevant exchange rates were as follows:

31 July 2011: €1 = CHF 1.1331 January 2012: €1 = CHF 1.21

Ignoring the time value of money, the amounts which would appear in the financial statements of Readytags Plcfor year ended 31 January 2012 are:

Revenue Receivables(a) €26,549 €26,549(b) €24,793 €24,793(c) €26,549 €24,793(d) €24,793 €26,549

5. Tullygrow Plc issued an 8% €15 million bond on 1 March 2011 at a 10% discount to par value. Expenses of issuewere €200,000. The bond is due for redemption on 28 February 2021 at par. The effective annual interest rate tomaturity can be assumed to be 9.8%.

How much should be charged to finance costs in the Statement of Comprehensive Income for the year ended 29February 2012?

(a) €1,200,000.(b) €1,470,000.(c) €1,064,000.(d) €1,303,400.

6. Rory Ltd. has its reporting date on 31 January each year. It has traditionally reported under Irish GAAP. TheDirectors wish to present the annual report for year ended 31 January 2012 under IFRS as permitted by Irishregulations.

What is Rory Ltd’s “transition date” to IFRS under IFRS 1 - First Time Adoption of IFRS?

(a) 31 January 2012.(b) 1 February 2011.(c) 31 January 2011.(d) 1 February 2010.

7. Which one of the following would not be considered a biological asset under IAS 41 - Agriculture?

(a) Land on which a crop of wheat is growing.(b) Timber growing in a forestry plantation.(c) Cattle being fattened in a feedlot.(d) Purebred bovine calves being reared for milk production purposes.

8. On 1 April 2011, Hare Plc purchased an 80% holding in Brush Plc for a cash payment of €100 million. On thatdate the net assets of Brush Plc had a fair value of €110 million. Consolidated goodwill was calculated at €14million using the full “fair value” method permitted by IFRS 3 - Business Combinations.

What was the fair value of the non-controlling interest at the date of acquisition?

(a) €10 million.(b) €14 million.(c) €22 million.(d) €24 million.

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Answer either Question 4 or Question 5

4. IFRS 9 - Financial Instruments: Classification & Measurement was issued in November 2009, with an expandedand amended version appearing in October 2010. IFRS 9 simplifies the previous requirements of IAS 39 -Financial Instruments: Recognition & Measurement for recognising and measuring financial instruments. TheIASB intends that IFRS 9 will ultimately replace IAS 39 in its entirety. However, it is being issued in stages inresponse to users’ requests that accounting for financial instruments be improved quickly.

REQUIREMENT:

(a) Discuss the methods of accounting for financial instruments “amortised cost” and “fair value” required by IFRS 9.Your answer should incorporate the accounting implications of each method and describe the types of financialinstrument to which each method is applied. (8 marks)

(b) Justdec Plc controls the following financial assets at its reporting date of 31 January 2012:

(i) An investment in the equity shares of another Plc purchased during April 2011 for €3.6 million. The fairvalue of this investment at 31 January 2012 was €3.8 million. An election was made at the date of purchaseto recognise any fair value gains and losses through other comprehensive income.

(ii) An investment in a bond issued by another Plc on 1 February 2011. This bond cost €10 million (equal toits par value) and entitles Justdec Plc to 8% interest per annum on the anniversary of the bond’s issue. Theprincipal is to be returned on 31 January 2016. It is the intention of Justdec Plc to retain the bond in orderto collect the contracted cash flows on the due dates.

(iii) An investment in a bond (par value €10 million) issued by another Plc purchased in the secondary marketat a discounted price of €7.6 million. The discount was due to the deteriorating financial health of theissuing company. The bond carries a 7% interest rate on its par value, and will mature in 2018. It is theintention of Justdec Plc to sell this bond in the future as soon as its price recovers. The fair value of thebond on 31 January 2012 is €7.2 million.

REQUIREMENT:Explain, showing relevant journal entries, how the above financial assets should be accounted for at 31 January 2012in accordance with the requirements of IFRS 9.

(12 marks)

[Total: 20 MARKS]

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OR5. IAS 18 - Revenue describes the principles of recognising income from business transactions. It seeks to provide

guidance regarding the implementation of the conceptual framework’s definition of “income”. In particular, itconsiders when the entity should recognise revenue from the supply of goods and the rendering of services toother entities.

REQUIREMENT:

(a) Discuss the guidance provided by IAS 18 for recognising revenue from the supply of goods to a third party.(5 marks)

(b) Grunge Plc is an electrical goods supply company. It has entered into the following transactions during the yearended 31 March 2012.

(i) Grunge Plc sells home theatre systems, together with a promise to install the systems free of charge. At31 March 2012, it had 15 systems sold awaiting installation. The price paid by the customer was €400 perunit, and the customers have taken the units home. Grunge Plc pays an outside contractor a fee of €30 toinstall each system, and it is expected that this will happen in early April 2012. It is unsure how to accountfor these 15 systems.

(5 marks)

(ii) Grunge Plc supplies retailers in areas not serviced by its own retail outlets. For certain goods, it suppliesthese retailers on a ‘sale or return’ basis. On 31 March 2012, Grunge had supplied the retailers with€20,000 worth of goods on which it earns 20% margin. The company is unsure as to how to account forthese goods.

(5 marks)

(iii) Grunge Plc publishes a trade magazine for sale to interested parties. It takes 12-month subscriptions inadvance. Each magazine is sold for €3 (€36 per 12-month subscription). On 31 March 2012, Grunge Plchad taken payment of €33,000 for magazines yet to be supplied and is unsure how to account for this cash.

(5 marks)

REQUIREMENT:For each of the above transactions, identify the correct accounting treatment in accordance with IAS 18. Discuss if thistreatment is consistent with the principles of the conceptual framework and provide appropriate journal entries for eachtransaction.

[Total: 20 MARKS]

END OF PAPER

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTINGPROFESSIONAL 1 EXAMINATION – APRIL 2012

SOLUTION 1:Marking scheme:(a) Statement

Basic consolidation plan (100% R + 100% B) 4Depreciation on FVA (calculation and inclusion in expenses) 1Goodwill impairment (inclusion in expenses) 1Intra-group revenue and purchases (exclusion) 1Unrealised profit (calculation and elimination) 2Intragroup dividend (exclusion) 1Administration cost (exclusion) 1Recognition of share of PFY and OCI of associate (time apportion, 30%) 4Elimination of share of profit on sale of land to associate 1Calculation and attribution of results to NCI and owners of parent 3Presentation 1Subtotal 20

(c) MemoEach transaction explained X 2 marks each 4Subtotal 4

(b) Journal entryCalculation of net assets including FVA 2Other figures in journal (4 X 1 mark) 4Subtotal 6Overall total 30

Suggested solution

(a) Rednut plc: Consolidated statement of comprehensive income for year ended 31 December 2011(100% Rednut + 100% Blutec) € million

Revenue (1,230 + 680 – 15(iii)) 1,895Cost of Sales (465 + 240 + 18(i) -15(iii) + 0.6(iii)) (708.6)Gross Profit 1,186.4Operating expenses (310 + 230 + 7(ii) – 3(v)) (544)Finance costs (50 + 30) (80)Other income (9 – 3(v)) 6Investment income (36 – 36(iv)) -Share of profit for year of associate (8.4(vi) – 1.8(vii)) 6.6Profit before taxation 575Taxation (75 + 30) (105)Profit for the year 470Other comprehensive income (net of tax) (63 + 20) 83Share of other comprehensive income of associate (2.7(vi)) 2.7Total comprehensive income for the year 555.7

Profit for the year attributable to:Owners of the parent (balancing figure 470 – 52.8) 417.2Non-controlling interest (viii) 52.8

470.0Total comprehensive income attributable to:Owners of the parent (balancing figure 555.7 – 60.8) 494.9Non-controlling interest (viii) 60.8

555.7

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SUGGESTED SOLUTIONS

Group structure:Rednut plc – ParentBlutec plc – subsidiary for entire year therefore include 100% of resultsMinton – 30% associate, include for 6 months as mid-year acquisition

Working (i)Additional depreciation from fair value adjustment 72m / 4 years = €18mCurrent year’s amount only included as cost of sales expense this year.NCI is affected as it is Blutec’s asset that is being adjusted.

Working (ii)Impairment loss on consolidated goodwill €7m included as operating expense in year of recognition.

Working (iii)Eliminate intra-group sales and purchases (€15m) in full from group revenue and group cost of sales.

Closing unrealised profit provision required = 15m * 25/125 * 1/3 = €1mOpening unrealised profit provision = 2m * 25/125 = €0.4mIncrease required = 1m – 0.4m = 0.6m [Dr Cost of sales, Cr Inventory in SOFP]NCI is not affected as the parent as the internal selling company recorded the gain.

Working (iv)Eliminate intragroup dividend from investment income 60m * 60% = €36m

Working (v)Eliminate intragroup income and expenses €3m from other income and operating expenses.

Working (vi)Share of associate’s profit for year (time apportioned due to mid-year acquisition) 56m * 6/12 * 30% = €8.4mShare of associate’s OCI 18m * 6/12 * 30% = €2.7m

Working (vii)Eliminate 30% of Rednut’s gain on disposal of land to associate 6 * 30% = €1.8m (reduce share of results ofassociate)

Working (viii)non-controlling interest Profit €m TCI €m

Blutec per SOCI 150 170Less adjustment for depreciation on FVA (i) (18) (18)Adjusted figures 132 152NCI percentage 40% 40%NCI amount 52.8 60.8

(b) Journal entry for disposal €m €mDr Cash (1,700 – 40) 1,660Cr net assets derecognised (1,950 + (72 – 18 – 18)) 1,986Cr Goodwill derecognised 133Dr Non-controlling interest derecognised 365Cr Profit or loss (gain on disposal – balancing figure) 94

(c) Memorandum:To: Directors of Rednut plcFrom: AccountantRe: Explanation of treatment of certain transactionsDate: 1st May 2012

Both these transactions are examples of intra-group revenue or expenses.

In the case of the dividend, Blutec is transferring profits to Rednut by way of a dividend. This is reflected as areduction in Blutec’s retained earnings, and an increase to Rednut’s. However the profit of Blutec is already beingconsolidated into group reserves, hence to recognise the dividend as group income is double counting the sameprofits.

In the case of the intra-group management charge, from the individual entity’s perspective the expense and gainis valid. However when we consolidate we are viewing the group as a single entity. Clearly a transfer from one partof the (group) entity to another is neither a gain nor an expense to that entity. Hence we do not recognise this itemas a group gain or a group expense.

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SOLUTION 2:

Marking scheme:(a) Statement of comprehensive income

Transfer of figures from trial balance to appropriate headings 4Depreciation on PPE (calculation and inclusion in expenses) 1Finance cost (calculation and inclusion in expenses) 1Loss on investment property (calculation and inclusion in P/L) 1Revaluation loss on land & buildings (calculation and inclusion in P/L) 2Development costs (w/o to P/L) 1Contingent asset (w/o to P/L) 0.5Tax (recognition in P/L) 0.5Gain on investments (calculation and recognition in OCI) 1Presentation 1Subtotal 13

(b) Statement of financial positionTransfer of figures from trial balance to appropriate headings 4Depreciation & revaluation of PPE (calculation) 2Finance cost (calculation and inclusion in liabilities) 1Loss on investment property (calculation and inclusion in NCA) 0.5Development costs (balance to NCA) 1Dividends (calculation and reduction to retained earnings & liabilities) 1.5Tax (recognition as liability) 0.5Gain on equity investments (calculation and recognition in NCA) 0.5Presentation 1Subtotal 12

(c) MemoDiscussion of when to change accounting policy 2Each transaction explained X 1.5 marks each 3Subtotal 5Overall total 30

SUGGESTED SOLUTION

(a) Thirdgear plc: Statement of comprehensive income for year ended 31 December 2011€ million

Revenue 460Cost of Sales (195 + 10(iii) + 85 (iii)) (290)Gross profit 170Distribution costs (65)Administration expenses (42)Finance costs (viii) (8.8)Loss on revaluation of investment property (i) (35)Loss on revaluation of land & buildings (iii) (5)Research & development (iv) (42.5)Contingent asset written off (v) (13)Profit before tax (41.3)Tax (vi) (1.3)Profit for the year (42.6)

Other comprehensive income:Gain on revaluation of investments (ii) 5.5Total comprehensive income for the year (37.1)Thirdgear plc Statement of financial position as at 31 December 2011

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€ millionNon-current assets:Investment property (300 - 35(i)) 265Equity investments (42 + 5.5 (ii)) 47.5Land & buildings, (400 – 120 -10 – 5) 265Plant & equipment (650 – 310 – 85) 255Development expenditure (80 – 42.5 (iv)) 37.5

870Current assets:Inventory 66Trade receivables 70Cash & bank 99

235Total assets: 1,105

Equity:Equity share capital 500Share premium 150Retained earnings (382 – 66 – 60(vii) -37.1) 218.9

868.9Non-current liabilities:8% debenture 120

Current liabilities:Trade payables 46Corporation tax due (vi) 1.3Final dividend due (vii) 60Interest accrued (viii) 8.8

116.1

Total equity & liabilities 1,105

Working (i)All movements on investment properties held under the fair value model of IAS 40 are taken to profit or loss.

Working (ii)Equity investments are normally accounted for at fair value (with gains and losses taken) through profit or loss.However under IFRS 9, an irrevocable election can be made at acquisition of equity investments only. Under thiselection gains and losses are taken to other comprehensive income, and not recycled to profit or loss on disposal.

Working (iii)Land & buildings:As the revaluation takes place at the very end of the year, depreciation must be charged for the year based on theold values. The revised net book value is then used to calculate revaluation gain or loss.

Land BuildingsCost 100 300Accumulated depreciation to 1/1/2011 (120)Depreciation for 2011 (300 * 1/30) to COS (10)NBV 31/12/2011 before revaluation 100 170Revaluation gain (loss) (balancing figure) (35) 30Revised NBV per question note (iii) 65 200

Net loss on land & buildings is taken to profit or loss as there is no previous revaluation surplus on the same asset.

Plant & equipment:depreciation (650 – 310) * 25% = 85Charge to COS, reduce P&E net book value

Working (iv)Only development costs meeting the IAS 38 criteria for capitalization are capitalised. All other development costs,and all research costs are written off to profit or loss. Here, €42.5m (27.5 + 15) is taken to P/L, and €37.5 tointangible assets.

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Working (v)A contingent asset needs to be virtually certain to be received in order to recognise it in the books according to IAS37. As this is only 65% likely to be recovered, it is not virtually certain.Therefore the amount previously recognisedis taken to profit or loss as an expense.

Working (vi)Corporation tax due is charged to P/L and recognised as a liability. There is no existing balance to be updated.

Working (vii)Final ordinary dividend of 1.2c is declared on each share of the issued share capital of 5,000 shares (5,000 * 10c= 500), giving a total amount of €60m. The declaration was made prior to the reporting date, so it is a liability atthe reporting date. This is a final dividend so it is in addition to the interim dividend already paid. The amount isdeducted from retained earnings and recognised as a liability.

Working (viii)The debentures were issued on 1 February.Therefore 11 months interest should be accrued.€120m * 8% * 11/12= €8.8m. This is charged to P/L and recognised as a liability.

(b) Change of accounting policyUnder IAS 8 it is appropriate to change accounting policy in two situations.

(1) If a new standard or interpretation requires a change form an existing policy, and(2) If a different policy would produce financial statements that are more relevant than the existing policy. In

other words, the proposed policy would result in financial statements that reflect the financial position andperformance of the entity more fairly.

The change of policy implemented as a result of note (iii) is generally accepted to result in more relevant financialstatements, provided reliable measures of fair values are available.While normally a change of accounting policyrequires retrospective application, IAS 16 specifically exempts an entity from the requirement to apply retrospectivelya decision to implement a policy of revaluation for the first time.

The change required as a result of note (v) is not a change of accounting policy. What happened here is thatcircumstances changed. This resulted in a different accounting treatment for this item becoming necessary underthe existing accounting policy.This is a change of estimate, and it applied prospectively from the date of the change.

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SOLUTION 3:

Marking scheme: 2.5 marks per correct answer – Total 20 marks

Suggested solution (plus tutorial notes)

1. Answer (b)

Under IAS 11 a contract loss must be recognised in full as soon as it is foreseeable. Here, Redstone anticipates aloss of €1 million on the contract as a whole, therefore it must be recognised in full immediately.

2. Answer (d)

IAS 23 requires capitalisation of interest specifically incurred for the construction of a new piece of PPE. If fundsborrowed are temporarily invested pending application to the asset, then any investment income earned is deductedfrom the amount to be capitalised.

Interest cost incurred: €10 million * 10% * 6/12 = 500,000Interest earned: €5 million * 5% * 3/12 PLUS €2 million * 5% * 3/12 = 87,500Net cost incurred: 500,000 – 87.500 = 412,500

3. Answer (d)

4. Answer (c)

Under IAS 21 the monetary item (here, the amount receivable) is restated at the reporting date.The sales revenueis translated at the rate ruling on the transaction date.

5. Answer (d)

This is a financial liability and should be accounted for under the amortised cost method.The finance cost is basedon the carrying value times the effective rate. For year 1, the initial carrying amount is €15m less 10% discount,less issue costs, or €13.3 million. Finance cost is therefore 9.8% of €13.3 million = €1,303,400.

6. Answer (d) Under IFRS 1 the transition date is the opening date of the comparative period presented.

7. Answer (a) Biological assets are those that increase in value as time passes due to natural growth. Land is not abiological asset, merely the produce that grows on it.

8. Answer (d)€m

Cost of investment 100+FV of NCI (bal fig) 24-FV of net assets at acquisition (110)=Goodwill 14

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SOLUTION 4:

Marking scheme:(a) Explanation:

Fair value method 4Amortised cost method 4Subtotal 8

(b) Accounting treatment:Discussion (3 X 2 marks) 6Journal entry (3 X 2 marks) 6Subtotal 12

Total 20

SUGGESTED SOLUTION

(a) Fair Value:This means that at each reporting date, the fair value of the asset or liability is assessed. Any differences betweencarrying value and fair value are normally taken to profit or loss, hence the title “fair value through profit or loss”.The only exception to this is in the case of an investment in another entity’s equity instruments when a cleardeclaration is made at the time of purchase that the entity wishes all fair value gains and losses to be recognisedwithin other comprehensive income. This declaration must be in writing and is irrevocable. Any gains or losses sorecognised through OCI may not be recycled to P/L on disposal. Any gain or loss on disposal is taken to profit orloss, and is calculated as the proceeds less carrying amount at the date of disposal.

Amortised cost:The amortised cost method should be applied to financial assets when the cash flows to be derived from the assetsconsist solely of interest and principal payments, and the entity intends to hold the asset to its maturity. Theamortised cost method is applied to most liabilities unless there is significant uncertainty surrounding the amountor timing of cash flows due.

The method involves allocating the finance cost or income over the life of the asset or liability on a constantpercentage of the outstanding amount each period. It is similar to the actuarial method used to account for financeleases under IAS 17. Any such amounts recognised are taken to profit or loss.

(b)(i) The investment is revalued to fair value at the reporting date. A gain of €200,000 results. This is recognised in

other comprehensive income, as the entity made an election to do so at the date of purchase.

31 Jan 2012 Dr Financial assets €200,000Cr Other comprehensive income / reserves €200,000(fair value gain on investment in shares of another entity)

(ii) As the cash flows due to Justdec under the terms of the bond consist solely of interest and principal, the amortisedcost method should be applied. Interest earned during the year ended 31 January 2012 is €800,000 (8% of €10m).As this is not payable until the anniversary of the bond’s issue (1 February 2012), an accrual must be made for thisamount. The fair value of the bond at 31 January 2012 is therefore irrelevant.

31 Jan 2012 Dr Interest receivable (current asset) €800,000Cr Profit or loss €800,000(interest accrued to Justdec plc on bond investment)

(iii) In this case, the cash flows deriving from the bond are not solely interest and principal. The entity hopes to profitfrom improving financial health of the issuing company, and therefore increased market value. Hence, amortisedcost is not appropriate. Justdec plc must use the fair value method to account for this bond. As it is not an investmentin another entity’s equity instruments, an election to take gains and losses to OCI cannot be made. Therefore theloss of €400,000 must be recognised in profit or loss.

31 Jan 2012 Dr profit or loss €400,000Cr Financial investmetns €400,000(reduction in fair value of bond investment)

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SOLUTION 5:

Marking scheme:(a) Revenue from sale of goods:

conditions which must be satisfied and discussion of same 5

(b) Calculations 3 scenarios at 5 marks each 15Total 20

Suggested solution(a) IAS 18 requires that revenue from the sale of goods shall be recognised when all the following conditions have been

met:(i) the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;(ii) the entity retains neither continuing managerial involvement to the degree usually associated with ownership

nor effective control over the goods sold;(iii) the amount of revenue can be measured reliably;(iv) it is probable that the economic benefits associated with the transaction will flow to the entity; and(v) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

The practical effect of this guidance is that revenue is recognised in most cases when custody of the goods hasbeen transferred to the new owner. From this point, the risks associated with owning goods are the responsibilityof the new owner. Also, the new owner is entitled to benefit from the goods from that point.

(b) IAS 18 has come in for some criticism for being very vague and lacking in robust application guidance. It is possiblefor very different accounting treatments for similar transactions to be in compliance with IAS 18. Also, it is possibleto identify points where IAS 18 seems to conflict with the framework’s guidance. It is one of the key standardsidentified by the US / IASB convergence project for updating and improvement.

In particular, there is a lack of guidance surrounding transactions with multiple deliverables. For example underIAS 18, revenue from the sale of goods with a warranty attaching is recognised in full. Other standard setters haverecommended deferring a portion of the revenue until the warranty has expired.

Another issue of criticism has been the treatment of deferred income. Under IAS 18 cash received in advance ofrevenue recognition is carried as a liability pending recognition as revenue. However this does not always meet theframework’s definition of a liability. For example there may be no obligation to return the money (if a non-refundabledeposit) or the obligation to provide goods / services may cost less that the amount of revenue deferred.

(c)(i) evenue from goods may be recognised when the entity has transferred the risks and rewards associated with the

goods to the new owner. Grunge has supplied the goods are it has been paid to do, However it has not yet providedthe installation service. Therefore it has not completed the contract. The revenue should be split, and the portionrelating to the goods recognised, and the portion relating to the installation deferred. A reasonable split would be€370 for the goods and €30 for the installation service. Hence:

Dr Cash (400 * 15) 6,000Cr Revenue (370 * 15) 5,550Cr deferred revenue (liability) (30 * 15) 450

This treatment seems to comply with the framework. In particular, the revenue does result from an increase toequity, and the liability recognised does represent an obligation to transfer economic benefits, at the expected costof €30 per unit.

(ii) Where goods are supplied on a sale or return basis, the significant risks and rewards have not been transferred tothe new owner. Therefore revenue should not be recognised on these goods. The items should be included inclosing inventory by Grunge at cost price. Hence:

Dr Inventory (20,000 – (20% * 20,000)) 16,000Cr Cost of sales 16,000

This treatment also complies with the framework. Firstly, revenue is not recognised, which is appropriate as Grungeplc retains significant risks relating to the goods.The recognition of inventory is also consistent with the framework’sdefinition of an asset, as a resource controlled by the entity, as a result of past events, from which future economicbenefits are expected to accrue to the entity.

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(iii) Revenue for the supply of goods may only be recognised when the risks and rewards of the goods have beenpassed on to the new owner.This has not yet happened in respect of the undelivered magazines.Hence the revenueshould be deferred until the magazines are delivered..

Dr Cash 33,000Cr Deferred revenue (liability) 33,000

This is less compliant with the framework, as the liability does not represent the expected cost of satisfying theobligation (to supply the remaining magazines). The liability recognised under IAS 18 is the fair value of themagazines to be supplied. However, the framework’s guidance on measurement is still quite weak, and needs tobe developed further.

END OF PAPER

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