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Answers

Diploma in Financial Reporting

June 2012 Answers


and Marking Scheme
Marks

Consolidated statement of financial position of Alpha at 31 March 2012


ASSETS
Non-current assets:
Property, plant and equipment (267,000 + 250,000 + 4,800 (W1) 20,000 (W1)
5,000 (W10))
Goodwill (W2)
Investment in joint venture (W6)

Current assets:
Inventories (85,000 + 50,000 3,000 (W5))
Trade receivables (75,000 + 45,000 8,000 (intra-group))
Cash and cash equivalents (15,000 + 10,000)

Total assets
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Share capital
Retained earnings (W5)
Non-controlling interest (W4)
Total equity
Non-current liabilities:
Deferred consideration (W7)
Pension liability (W8)
Long-term borrowings (63,049 (W9) + 45,000)
Deferred tax (W11)
Total non-current liabilities
Current liabilities:
Trade and other payables (35,000 + 30,000 8,000 (intra-group))
Short-term borrowings (16,000 + 10,000)
Total current liabilities
Total equity and liabilities

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$000

496,800
77,759
71,000

645,559

++
7 (W2)
1 (W6)

132,000
112,000
25,000

269,000

914,559

+
+

195,000
303,358

498,358
58,812

557,170

19 (W5)

68,181
66,000
108,049
32,159

274,389

+
2 (W10)

57,000
26,000

83,000

914,559

40

2 (W4)

Marks
WORKINGS DO NOT DOUBLE COUNT MARKS
Working 1 Net assets table Beta:
1 April 2010
$000
100,000

Share capital
Retained earnings:
Per accounts of Beta
Plant and equipment adjustment see below
Inventory adjustment
Other components of equity:
Per accounts of Beta
Reversal of post-acquisition revaluation
Deferred tax on fair value adjustments

For W5

45,000
10,000
3,000

100,000
4,800
Nil

35,000

55,000
(20,000)
(960)

238,840

(W9)

(W9)

W2

W5

(2,600)

190,400

Net assets for the consolidation

31 March 2012 For W2


$000
100,000

The post-acquisition increase in net assets is $4844 million ($23884 million $1904 million). All of
this relates to retained earnings

Note re: post-acquisition plant and equipment adjustment:


This is $48 million ($10 million X 3/5 X 80%).
Working 2 Goodwill on consolidation (Beta)
$000
Cost of investment:
Share exchange (75 million X 2/3 X $350)
Deferred consideration (75 million X $1)/(110)3
Fair value of non-controlling interest at date of acquisition (25 million X $200)
Net assets at 1 April 2010 (W1)
Goodwill before impairment
Impairment (W3)
Goodwill after impairment

175,000
56,349
50,000

281,349
(190,400)

90,949
(13,190)

77,759

3 (W1)
2 (W3)

Working 3 impairment of goodwill:


Carrying value of assets in cash generating unit
Allocated goodwill (1/(2 + 1 + 1 + 1)% X $90949 million (W2))
Recoverable amount of assets in cash generating unit
So impairment equals

70,000
18,190

88,190
(75,000)

13,190

W2

Working 4 Non-controlling interest in Beta:


Fair value at date of acquisition (W2)
25% of post-acquisition increase in net assets ($4844 million (W1))
25% of goodwill impairment ($1319 million (W3))

12

50,000
12,110
(3,298)

58,812

Marks
Working 5 Retained earnings
Alpha
Additional finance cost for deferred consideration (W6)
Adjustment for pension liability (W7)
Adjustment for carrying value of loan (W8)
Beta (75% X $4844 million (W1))
Gamma (40% X 100,000)
Unrealised profits on sales to Beta (15,000 X 25/125)
Unrealised profits on sales to Gamma (12,500 X 25/125 X 40%)
75% of goodwill impairment ($1319 million (W3))

$000
281,167
(6,198)
(31,000)
(3,049)
36,330
40,000
(3,000)
(1,000)
(9,892)

303,358

1
5
4
+4

(W7)
(W8)
(W9)
(W1)
1
1
1

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Working 6 investment in Gamma


Cost
Share of post-acquisition profits (W5)
Unrealised profits on sales to Gamma (W5)

32,000
40,000
(1,000)

71,000

At 31 March 2012

Working 7 deferred consideration


At 1 April 2011 TWO years to payment
Finance cost for the current year (10%)

61,983
6,198

68,181

At 31 March 2012

W5

Working 8 net pension liability


At 1 April 2011
Current service cost
Net nterest cost
Contributions paid by Alpha
Benefits paid by plan (cancel out)
Actuarial differences
At 31 March 2012
As per draft financial statements of Alpha ($60 million (brought forward) minus
$25 million (contributions in the period))
So adjustment equals

$000
60,000
28,000
2,000
(25,000)
nil
1,000

66,000
(35,000)

31,000

W5

Working 9 long-term borrowings in foreign currency


Opening carrying amount in 000
Finance cost for the current period (111%)
Interest actually paid

49,000
5,439
(4,000)

50,439

63,049
(60,000)

3,049

So closing carrying amount in s


Translated into $000 at the closing rate ($125 to 1)
As per draft financial statements of Alpha
So closing adjustment equals

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1
1

W5

Marks
Working 10 Deferred tax on temporary differences:
Fair value adjustments:

Plant and equipment adjustment


Inventory adjustment
Net taxable temporary differences
Related deferred tax (20%)

1 April 2010
$000
10,000
3,000

13,000

31 March 2012
$000
4,800
Nil

4,800

2,600

960

W1

Working 11 closing deferred tax


Alpha + Beta
On fair value adjustments (W9)
Reversal of deferred tax on post-acquisition property revaluation of Beta
(55,000 35,000) X 20/80

(a)

$000
36,199
960
(5,000)

32,159

Under the principles of IAS 16 Property, Plant and Equipment costs of $135 million
($10 million + $35 million) will be debited to property, plant and equipment in respect of the cost
of acquiring the extraction facility.

The costs of erecting the extraction facility (excluding the land) will be depreciated over a 10-year
period, giving a charge in the current period of $175,000 ($35 million X 1/10 X 6/12).

From 1 October 2011, an obligation exists to rectify the damage caused by the erection of the
extraction facility and this obligation should be provided for.

The amount provided is the present value of the expected future payment, which is $966,000
($3 million X 0322).

The amount provided is debited to property, plant and equipment and credited to provisions at
1 October 2011.

The debit to property, plant and equipment creates additional depreciation of $48,300 in the current
year ($966,000 X 1/10 X 6/12).

The closing balance in property, plant and equipment is $14,242,700 ($135 million $175,000
+ $966,000 $48,300).

As the date of settlement of the liability draws closer the discount unwinds.

The unwinding of the discount in the current year is $57,960 ($966,000 X 12% X 6/12).
The extraction process itself creates an additional liability based on the damage caused by the
reporting date.
The additional amount provided is $34,100 ($200,000 X 6/12 X 0341).
This additional provision causes an extra charge to the statement of comprehensive income.
The carrying amount of the provision at the year end is $1,058,060 ($966,000 + $57,960 +
$34,100).

(b)

Under the principles of IFRS 2 Share Based Payment this arrangement will be regarded as an
equity settled share based payment.

The fair value of the equity settled share based payment will be credited to equity and debited to
expenses (or occasionally included in the carrying amount of another asset) over the vesting period.

Where the transaction is with employees, fair value is measured as the market value of the equity
instrument at the grant date.

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Marks
The vesting condition relating to the number of executives who remain with Delta is a non-market
condition so it is taken into account when estimating the number of options that will vest.

The vesting condition relating to the share price is a market condition so it is taken into account when
measuring the fair value of an option at grant date.

Therefore the total estimated fair value of the share based payment is $1,545,600 (92 X 20,000 X
$084).

1/3 of this amount ($515,200) is recognised in the year ended 31 March 2012.
$515,200 is credited to equity and debited to expenses (or occasionally included in the carrying
amount of another asset).

(c)

The amount provided should be the amount Delta would rationally pay to settle the obligation at the
reporting date. Ignoring discounting, this is $1 million.

This amount should be credited to liabilities and debited to profit or loss.

Under the principles of IAS 37 the potential amount receivable from the supplier is a contingent
asset.

The event causing the damage to the inventory occurred after the reporting date.
Under the principles of IAS 10 Events After the Reporting Date this is a non-adjusting event as
it does not affect conditions at the reporting date.
Non-adjusting events are not recognised in the financial statements, but are disclosed where their
effect is material.

(a)

Under the principles of IAS 37 Provisions, Contingent Liabilities and Contingent Assets a
provision should be made for the probable damages payable to the customer.

Contingent assets should not be recognised but should be disclosed where there is a probable future
receipt of economic benefits this is the case for the $800,000 potentially receivable from the
supplier.

(d)

(i)

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1

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An entity classifies an asset or disposal group as held for sale if its carrying amount will be
principally recovered through a sale transaction rather than through continuing use.

For this to be the case, the asset must be available for immediate sale in its present condition
and the sale must be highly probable. For the sale to be highly probable, management must
be committed to selling the asset or disposal group and be actively marketing the asset or
disposal group at a reasonable price. In addition, the sale should be expected to qualify for
recognition within one year of the date of classification.

An asset or disposal group that is classified as held for sale should be measured at the lower
of the carrying amount and fair value (arms length sale price) less costs to sell.

When an asset or disposal group is classified as held for sale no further depreciation charges
should be made on the asset or the disposal group.

An entity should present an asset classified as held for sale and the assets of a disposal group
classified as held for sale separately from other assets in the statement of financial position.

The liabilities of a disposal group classified as held for sale should be presented separately from
other liabilities in the statement of financial position. They should not be offset against the
assets of the disposal group.

Costs to sell are the incremental costs of selling the asset or disposal group, excluding finance
costs and income tax expense.

(iii) A discontinued operation is a component of an entity that either has been disposed of in the
period or classified as held for sale and:

(ii)

Represents a separate major line of business or area of operations,

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Marks
Is part of a single co-ordinated plan to dispose of a separate major line of business or area of
operations, or

Is a subsidiary acquired exclusively with a view to resale.

(iv) The minimum disclosure requirements for discontinued operations on the face of the statement
of comprehensive income is a single amount representing the total of:
The post-tax profit or loss of discontinued operations.
The post-tax gain or loss recognised on the measurement to fair value less costs to sell or on
the disposal of the assets or disposal groups constituting the discontinued operation.

(b)

On 1 October 2011, it is necessary to compare the carrying amount of the business component
($40 million) with its fair value less costs to sell ($28 million). Since fair value less costs to sell is
lower, the business component is written down to $28 million, resulting in a loss of $12 million.

This loss of $12 million is regarded as an impairment loss that is treated in accordance with IAS 36
Impairment of Assets.

The impairment loss is first allocated to the goodwill, leaving a nil balance.

The balance of the impairment loss of $2 million ($12 million $10 million) is allocated to property,
plant and equipment, leaving a balance of $23 million ($25 million $2 million).

Because the property, plant and equipment is part of a disposal group that is classified as held for
sale, it is not subjected to further depreciation after 1 October 2011.

By 31 March 2012 the estimated disposal proceeds of the business had increased to $31 million.
This means that part of the impairment loss has reversed.

The reversal of an impairment loss on goodwill is not permitted. Its carrying amount remains at nil.

However, a reversal of $2 million can be recognised on the property, plant and equipment at
31 March 2012, restoring its carrying amount to $25 million.

The business component is a discontinued operation because it is a component of Delta that has
been classified as held for sale by 31 March 2012.

Therefore Delta will disclose a single amount on the face of the statement of comprehensive income.
This amount will comprise the profit after tax of $3 million and the net amount recognised as an
impairment loss of $10 million ($12 million $2 million).

(a)

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Statement of comprehensive income


Operating lease rental
Amortisation of asset leased on finance lease
Finance cost relating to finance leases
Statement of financial position
Property, plant and equipment
Prepaid operating lease rentals:
In non-current assets
In current assets
Lease liability:
In non-current liabilities
In current liabilities

$000
(260)
(225)
(2484)

Below
Below
Below

4,275

Below

1,080
60

Below
Below

(2,5921)
(563)

Below
Below

Explanation and supporting calculations


Separate decisions are made for the land and buildings elements of the lease.

The land lease is an operating lease because land has an indefinite useful economic life and the
lease term is 20 years.

The lease premium and annual rentals are apportioned 40% (3/75) to the land element.

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Marks
Therefore the premium for the land element is $12 million ($3 million X 40%) and the annual
rentals for the land element $200,000 ($500,000 X 40%). This makes the total lease payments
$52 million ($12 million + 20 X $200,000).
The rental expense for the current period is $260,000 ($52 million X 1/20).

The amount paid in the current period re: the land element is $14 million ($12 million +
$200,000). Therefore there is a prepayment of $1,140,000 ($14 million $260,000) at the year
end.

In the next 19 periods, the rental expense will be $260,000 and the rental payment will be
$200,000. Therefore $60,000 of the rental prepayment will reverse in each period. This means that
$60,000 of the prepayment will be a current asset, and the balance a non-current asset.

The buildings element of the lease will be a finance lease because the lease term is for substantially
all of the useful life of the buildings.

The premium apportioned to the buildings element is $18 million ($3 million X 60%) and the
annual rental apportioned to the buildings is $300,000 ($500,000 X 60%).

The initial carrying value of the leased asset in PPE is $45 million ($18 million + $300,000 X 9).

Therefore the annual depreciation charge is $225,000 ($45 million X 1/20) and the closing PPE
($45 million $225,000).

The finance cost in respect of the finance lease and the closing non-current liability is shown in the
working below.

The closing current liability is $56,300 ($2,648,400 $2,592,100).

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Working lease liability profile


Year ended 31 March
2012
2013

Bal b/f
$000
*2,700
2,6484

Interest (92% of bal b/f)


$000
2484
2437

Rental
$000
(300)
(300)

Bal c/f
$000
2,6484
2,5921

* = Net of lease premium of $18 million ($45 million $18 million = $27 million).
(b)

Year ended 31 March 2011


$000
Statement of comprehensive income in other comprehensive income
Gain on revaluation of effective hedging instrument
Statement of financial position
In current assets derivative financial instrument

100

Below

100

Below

(165)

Below

50
(150)

Below

935

Below

Year ended 31 March 2012


Statement of comprehensive income profit and loss
Depreciation of property, plant and equipment
Statement of comprehensive income in other comprehensive income
Gain on revaluation of effective hedging instrument
Reclassification of gain on effective hedging instrument
Statement of financial position
Property, plant and equipment
Explanation and supporting calculations year ended 31 March 2011
The property, plant and equipment is not recognised in the year ended 31 March 2011 because the
contract to purchase is an executory one.

At 31 March 2011 the derivative will be shown on the statement of financial position under current
assets at its fair value of $100,000.

The derivative has a nil cost so a gain in fair value of $100,000 will be reported in the statement
of comprehensive income. Because the derivative is designated as a hedging instrument this will be
taken to other comprehensive income rather than profit or loss.

+1

Explanation and supporting calculations year ended 31 March 2012


Between 1 April 2011 and 30 June 2011 a further gain on revaluation of the derivative of $50,000
($150,000 $100,000) will be recognised in other comprehensive income.

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Marks
On 30 June 2011 the machine will be recognised in property, plant and equipment at cost. The
initial amount recognised will be $1,250,000 (2 million/16).

The financial asset will be removed from the statement of financial position of Omega when the
contract is settled on 30 June.

The gain of $150,000 in other comprehensive income must be recognised in profit and loss as the
cost of purchasing the property, plant and equipment is recognised in profit and loss principle.

This is either done by adjusting the carrying value of the asset at the date of recognition or by
reclassifying the gain gradually as the property, plant and equipment is depreciated principle.

Assuming the former depreciation for the current period is $165,000 (($1,250,000 $150,000)
X 1/5 X 9/12).

Assuming the former the closing balance in property, plant and equipment is $935,000
($1,250,000 $150,000 $165,000).

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