ACCA

Paper P2 (International)
Corporate Reporting
Revision Mock Examination
December 2016
Answer Guide

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Answer 1 Squirrel

Tutorial help and key points

If you like cfs then you probably found this question rewarding. If you do not
like cfs then you really need to practice them until you do. I am sure you know
that there are many students who find cfs relatively easy and you need to be
one of them.

Marking scheme
Marking guide for (a)
Roughly half a mark per number.
Marking guide for (b), (c), and (d)
Apply the usual 1 mark per point.
Total maximum marks = 50

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Cash flow statement (IAS7)
Profit before tax 1,015
Interest 85
Associate (100)
___
Operating profit 1,000
Inventory (1,060 1,110 + 190) 140
Receivables (1,160 1,560 + 120) (280)
Payables (1,700 2,000 + 290) 10
Depreciation 29
Disposal -
Goodwill impairment 193
Pension charge 21
____
Cash generated from operations 1,113
Interest paid (4 5 + 85) (84)
Tax paid (95)
___
Operating cash flow 934
Investing
Compensation payment (130)
Sub acquisition (300)
Pension payment (31)
Tangible non current assets (218)
Associate 122
_____
(557)
Financing
Share issue (30+130) 160
Dividend paid (830)
Loan 195
NCI dividend paid (92)
____
(567)
_____
Cash flow (190)
Opening 480
___
Closing 290
___

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Workings
Intangible
Opening 65
Closing (180)
Acq (350+30%(60)-60) 308
__
Impairment 193
__
Tangible
Opening 2,110
Closing (2,430)
Reversal (286-192) (94)
Acquisition 170
Finance addition 55
Depreciation (29)
_____
Purchase payment (218)
_____
Associate
Opening 250
Closing (235)
I/S 100
I/S (17)
Forex 24
___
Dividend received 122
___
Retirement
Opening 60
Closing (70)
Pension charge (21)
___
Cash flow (31)
___
NCI
Opening 222
Closing (240)
I/S 92
Acquisition (30%)(60) 18
___
Dividend 92
___
Tax
Opening CT 626
Closing CT (565)
Opening DT 161
Closing DT (310)
I/S (200-17) 183
___
Tax paid 95
___

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(b) Calculation
Full partial
Consideration 350 350
Nci 100 18 (30%)(60)
Na (60) (60)
___ ___
Goodwill 390 308 (as above)
___ ___

Difference
As can be seen above the difference is in the method of valuation of the nci. The
partial goodwill is purely mathematical whereas the full goodwill tries to genuinely
value the nci.

Goodwill split
The above is better shown by splitting goodwill:
Full partial
Ci (350-70%(60)) 308 308
Nci (100-30%(60)) 82 nil
___ ___
Goodwill 390 308
___ ___

Partial goodwill
As you can see, this makes the odd assumption that the nci have no ownership of
goodwill. To many this makes no sense because obviously the nci do have
ownership of the ppe, the stock and the bank. They obviously own 30% of those.

Full goodwill
This is generally considered to be the more logical assumption as it values goodwill
consistently with other assets.

Policy
Strictly the group does not need a policy as crazy IFRS3 says that goodwill can be
valued using full or partial on a transaction by transaction basis. The examiner
ignores this element of IFRS and does use a policy in his questions. I believe the
examiners viewpoint is reasonable.

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(c) Presentation
There is substantial guidance on presentation in IAS1, but the IAS does give much
leeway, so the following are mostly recommendations.

Goodwill
Strictly goodwill should be called goodwill, to distinguish it from other intangibles
like brands.

Equity
Strictly equity should be called equity and not capital and reserves which is very old
fashioned.

NCI
The nci must be moved into equity. IFRS3 in particular makes it very clear that nci
is equity.

Deferred tax
It is more usual to slot the DT in with the other non-current liabilities rather than
making a special class for DT on the face.

Associate
Strictly the associate should be on one line and none of the tax should be
wandering into the tax line.

(d) Non-executive director

Perhaps the first thing to say is that it is good that the ned is questioning the main
board decision to pay a massive dividend. Neds are there to challenge the
executives when they feel their decisions are questionable.

Proposed
Another thing to note is that in most countries dividends are proposed then paid. If
the shareholders thought the dividend was too much they could have rejected the
proposal.

Law
In most countries there is law on the maximum dividend payable. Distributable
profits usually essentially means the profit reserve.

Legal
On this basis it does appear that the dividend is legal, as it still leaves a positive
profits reserve.

Forex
This is complicated by the fact that the profits reserve seems to include forex on
subs and associates which is usually considered undistributable. But as the
remaining reserve is still huge, it is unlikely any of the sub/ass forex has been
distributed.

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Cash
But the main thing is cash. Clearly as there is still a large positive balance in the
bank, Squirrel can afford this massive cash outflow.

Unsustainable
It doesnt really matter if the dividend is unsustainable. It is perfectly ok to pay a
big dividend one year and nothing the next.

Expectations
But there the NED may have a point about expectations. If the dividend wont be
as big next year, then this must be made very clear.

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Answer 2 Lao

Tutorial help and key points

This question is based on the classic two subject focus question Norman from
2008. The key is not to be too technical. To know everything in financial
reporting is impossible. But to have an idea in every area is plausible. Just use
the knowledge that segmental reporting is about clear communication and
revenue is about risks and rewards and take it from there.
Most students are happier with the revenue in part (b). If this applies to you,
then do it first.

Marking scheme
The marking is based upon the usual 1 mark per idea.
Total maximum marks = 25

(a)

Principle
The principal of segmental reporting is disclosure. The purpose is to give users a
flavour of how the individual parts of the business have performed.

Consolidation
Segmental reporting is almost consolidation in reverse. First and foremost,
shareholders want to know how the whole group has performed. That is where
consolidation comes in. But once shareholders have a handle on groups
performance, they then want to know about the relative performances of the
business units. This is where segmental reporting comes in.

Disclosure
You can see from the above that the segmental information is secondary to the
primary fs. This is why there is a minimum requirement of only four figures;
revenue, profit, assets and liabilities for each segment.

Lao disclosure
Lao has used these four headings across the top. So this part of the note is
satisfactory.

Lao segments
It is in the area of division into segments where Lao has problems. Lao appears to
have little idea how to do this.

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Operating segments
The newish IFRS uses a difficult idea called the managerial philosophy to define
operating segments. The IFRS argues that the people best able to divide a
business down into its component parts are the directors. It argues that a remote
body such as the IASB would have no way of knowing the best way to divide the
business up.

Chief operating decision maker

To express this idea, the IFRS uses the above phrase. It means the main board of
directors, but because different words are used in different countries for the main
board, the IFRS could not simply use the phrase main board.

Main board
So what the IFRS says essentially is that the segmental divisions that the main
board use in their board meetings are the operating segments and these are the
divisions that should be communicated to the shareholders.

Aggregation
Sometimes that is the end of the story and the performance and position of the
operating segments is disclosed. But often this would result information overload.
So aggregation is necessary.

Lao application
In the context of Lao, this might mean the following were operating segments:-
Liverpool
Manchester
Leeds
Etc going around the whole globe city by city.
Clearly this will result in information overload for Lao shareholders.

Reportable segments
So this brings us to the concept of the reportable segment. This is done by
gathering any small operating segments together to make a useful report.

Guidance
There is some detailed guidance in IFRS8 as to how this is done. But the detailed
guidance is only guidance and common sense works just as well. But one rule that
may be worth a mention is that other cannot be bigger than 10%.

Other regions
Very obviously the Lao note is useless. Where is this place called Other? This
huge unknown accounts for half the revenue. This is completely unacceptable.

Recommendation
Lao has started well. Words like China and South East Asia work well. Lao
should use other similar words like North America, South America and Africa
to divide Other properly. Personally I can see no need for the word Other at all.

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Management
But there is something else. Even though I do not know, I feel convinced that Lao
directors also talk about performance using business divisions. Maybe they look at
performance in city hotels then resort hotels then budget hotels. If this is true,
then directors must do business segmental report.

Further recommendation
So I further recommend that Lao do two segmental reports. One based on
geographic distribution and the other based on the business divisions identified by
the board.

(b)(i)

Hotel complex sale

A sale occurs at the point control is transferred (IFRS 15). But this transaction
looks suspicious, maybe control did not transfer. The point of transfer of control is
indicated by the transfer of risks and rewards (IFRS 15).

Risks and rewards

The most obvious risk is the risk of profits falling below expectations. The most
obvious reward is the reward of profits rising above expectations. Lao retains most
of this even after the transaction.

Loan
So there is no sale of the hotel complex. The $200m cash inflow is in substance a
secured loan.

Interest
So the annual payment of a minimum $15m is interest.

(b)(ii)

Voucher sales
This difficult accounting technique is a specific application of the concept of
unbundling. When Lao sell a room and a voucher for a sale price of say $100, they
sell two things; a room and a voucher. This marketing technique of selling two
things at one price is called bundling.

Unbundling
Unbundling is what we accountants do. We must split the $100 between the two.
Example
You can only see this with an example. Even then it is tricky. If you pay me $100
for a room tonight purporting to be a $100 room and a voucher representing a free
room in two weeks purporting to be another $100 room, then something has to
give. The $100 cash has to be worth $100. So the two $100 rooms cannot be both
each individually worth $100. They must be both together worth $100. So $50
and $50 each.

Next year
Back to the numbers in the Lao scenario. Approximately one in five vouchers are
redeemed. This gives us $4m at the year end ($20m/5).

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Current revenue
So some of the $300m received this year relates to the delivery of room value next
year. We have received $300m. That is a fact. It purports to be related to $300m
room value this year and $4m room value next year. So the split is:-
Current revenue = $300m(300/300+4)) = $296.053m
Deferred revenue = $300m(4/(300+4)) = $3.947m

(b)(iii)

Grant income
Grant income must be recognised to match against the cost for which it was
granted.

Lao grant
The Lao scenario tells us that the grant income was for hotels.

Conclusion
So the grant income must be deferred under deferred income in liabilities and
released to the income statement over the life of the related hotel.

Unemployment
The creation of jobs and unemployment issues are irrelevant for accounting
purposes. The grant is for hotels and that is it. However, if the grant had been
directly for labour costs, then it would be recognised in line with those labour costs.

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Answer 3 Handrew

Tutorial help and key points

This is a past exam question. The trick is to realise must of the technical
knowledge is either given or hinted at in the scenario.

Marking scheme
1 mark per point as usual.
Total maximum marks = 25

Report
To: directors
From: me
Date: today

Subject: first time adoption

(a) First time adoption

There are three components to the process of first time adoption.

Current international figures

Firstly, the group must adopt IFRS policies and apply those to the current year to
generate current international fs for publication.

Comparative international figures

Then the group must go back to last years figures and restate them using the
policies mentioned above in order to generate comparative international fs for
publication.

Current local figures

But the group must produce current fs using the old GAAP. This will in turn
produce key figures like current local PBT for publication of a reconciliation of local
PBT to international PBT in the fs notes.

(b) Leasing
Leasing is of course based on substance pretty much regardless of the jurisdiction.
So when the risks and rewards lie with the user, there is a finance lease.

Difference
However, the difference lies in the interpretation of the above. As the scenario tells
us, local GAAP bundles the land and buildings together. But as the scenario hints,
IFRS split the two.

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Land
So the land would be accounted for as an operating lease under both systems.

Buildings
But the buildings are operating lease under the local system, but will be a finance
lease under the IFRS system. This is because we have the entire life of the
building.

Effect
So instead of a simple operating cost of $10m the following would be recorded:
Nca
Cost 86
Depreciation (20years) (4.3)
___
81.7
___
Liability
Opening interest instalment closing
86 5.2 (10) 81.2
81.2 4.9 (10) 76.1
Therefore:-
CL (balance) 5.1
NCL(above) 76.1
__
Liability (above) 81.2
__
(5 marks)

Plant and equipment

Both systems have essentially the same view of depreciation:
Depreciation = remaining carrying value less residual value/ life

Local GAAP
The scenario tells us that our local system ignores current information on residual
value.

IFRS
As you may guess, IFRS require that you use the most current information for all
the figures.

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Local GAAP figures
So we have currently, a story like this:-
Cost 20
Depreciation (20-4)/8 (2)
___
Opening 18
Current Depreciation (18-4)/7 (2)
___
Closing 16
___
Note how we are using and re-using the $4m residual value even though we know
it is out of date.

IFRS figures
But under the IFRS, the figures would look completely different:-
Cost 20
Depreciation (20-11)/8 (1.1)
___
Opening 18.9
Current depreciation (18.9-8)/7 (1.6)
___
Closing 17.3
___
Note how under the IFRS system we are much more honest about the residual
value. At the fist year end, we thought it was $11m, so we used that figure. At the
current year end, we think it is $8m, so now we use that figure.
(5 marks)

Investment properties
Again both systems are similar. Both carry investment properties at fair value. Its
the way they interpret fair value and where the gain goes that differs.

Local GAAP
Local GAAP uses existing use value and slots the gain in equity.

Local GAAP figures

A gain of $5m has been recognised in equity. So the property must have cost
$35m.

IFRS
IFRS simply interpret fair value as what you could get by selling and the gain goes
in the income statement.

IFRS figures
So a gain of $15m would go into the income statement.

Deferred tax
However, as the scenario hints; DT at 30% is required on the gain, also going
through the i/s into equity.

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(c) ROCE
So the details are as follows:-

Leasing effect on PBIT

The operating charge comes out and the depreciation goes in to PBIT.

Leasing effect on debt and equity

The ncl goes into debt and the depreciation and interest are charged to equity
whilst the operating rental comes out.

Plant and equipment effect on PBIT

This is an almost irrelevant difference of $0.4m between the depreciation under the
two systems.

Plant and equipment effect on equity

This is the difference of $1.3m between the two cumulative depreciations.

Investment property effect on PBIT

This is the massive $15m that now goes through the i/s under IFRS.

Investment property effect on equity

This is the extra $10m gain less the DT of 30% (15m).

Conclusion
So the appendix reveals that the ROCE goes up too; so directors should not fear a
negative impact of IFRS.

Appendix
Original lease P&E Investment Total
PBIT 130 10 0.4 15 151.1
(4.3)

Debt & equity 520 76.1 1.3 10 603.4

10 (4.5)
(4.3)
(5.2)

ROCE (151.1/603.4) 25%

(7 marks)

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Answer 4 Alumanu

Tutorial help and key points

Use the usual heading sentence style.

Marking scheme
1 mark per point as usual.
Total maximum marks = 25

REPORT
To: Directors
From: Advisor
Date: Today
Subject: Management commentary
__________________________________________________________________

INTRODUCTION
The following report contains advice on management commentary in the context of
performance position and citizenship.

REPORTING BUSINESS PERFORMANCE

Ratios
My first piece of advice is calculating ratios for shareholders. To save the
shareholders the bother, calculate and explain:
EPS
Liquidity ratios
ROCE
Gearing
OPM

Growth
I would advise directors to tell shareholders about the expected growth but I would
advise prudence (10%).

Business efficiencies
I would advise directors to explain their plans regarding business efficiencies but
advise that they are careful not to put the fear of redundancies into the workforce.

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New products
I would advise directors to be very careful about disclosures of information related
to new products. After all competitors will be reading management commentary as
well.

Aluminium
I would advise directors to explain all about their products and market position. In
fact I would advise directors put this information first before all the above.

Acquisition
I would suggest directors dedicate a whole page to the acquisition, explaining the
strategy, the price, the performance since acquisition.

Substitution
The substitution of aluminium for heavier metals is very interesting and should be
explained to shareholders.

Targets
Keeping my advice simple, I would simply advise that directors avoid reference to
the targets. I think this internal information could create problems if more public.

Pricing strategy
I recommend that directors are very up front about minerals pricing strategy. No
need to worry about competition as they certainly know we are undercutting them.

Cartel
I advise directors are really careful what they say about the car manufacturing
cartel. Any accusation could result in litigation.

ANALYSIS OF FINANCIAL POSITION

Research expenditure
I recommend that directors disclose the figure of $40m to show minerals
commitment to development.
But I recommend no disclosure about individual projects.

Enlarging production
I recommend directors enlarge on enlarging production capabilities including details
on which plants are due for expansion.

New aluminium body

Since I know about this project and I am an outside advisor, it seems this project is
public knowledge. On this basis I advise directors explain this strategic move.

Share cancellation
This financial strategy shows directors confidence in their own company but
shareholders may not know this so we should tell them.

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Convertibles
The sub-convertible loan may convert into equity and Mineral may lose ownership.
So directors should explain whether we may lose control.

Customer credit
The culture of customer credit and the part usually played by the banks is very
unusual business practice and should be explained to shareholders.

CORPORATE CITIZENSHIP

Financial risk
The directors attitude to financial risk is part of its corporate citizenship. Its use of
hedging should be explained.

Sensitivity analysis
But the sensitivity analysis sounds very technical, so I advise directors to put this in
the website with a link from the management commentary.

Reputation
I recommend directors talk about the positive reputation for responsible behaviour.
They should be proud of this reputation.

Workforce
Directors should also explain that it is part of their vision to see the workforce as a
key factor in profitable growth.

Eco-productivity index
This is new and complicated so I suggest no mention is made of the above this
year.

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