You are on page 1of 154

20

17
ex
OpenTuition.com am
Free resources for accountancy students s

F2
Advanced
Management

Financial
Level

Reporting

Please spread the word about OpenTuition, so


that all CIMA students can benefit.

ONLY with your support can the site exist and


continue to provide free study materials!

Visit opentuition.com for the latest updates -


watch the free lectures that accompany these
notes; attempt free tests online;
get free tutor support, and much more.

OpenTuition Lecture Notes can be downloaded FREE from http://opentuition.com


Copyright belongs to OpenTuition.com - please do not support piracy by downloading from other websites.
The best things
in life are free

IMPORTANT!!! PLEASE READ CAREFULLY

To benefit from these notes you must watch the free lectures on the
OpenTuition website in which we explain and expand on the topics covered

In addition question practice is vital!!

You must obtain a current edition of a Revision / Exam Kit - the CIMA
approved publisher is Kaplan. It contains a great number of exam standard
questions (and answers) to practice on.

You should also use the free Online Multiple Choice Tests which you can
find on the OpenTuition website:
http://opentuition.com/cima/
2017 Examinations CIMA F2 1

Contents
A: SOURCES OF LONG-TERM FINANCE 3
1. Financial Markets 3
2. LongTerm Finance 5
OpenTuition.com

3. Weighted Average Cost of Capital (WACC) 9

B: FINANCIAL REPORTING 17
4. Group Statement of Financial Position 17
5. Group Statement of Profit or Loss and Other Comprehensive Income 23
6. Group Statement of Changes in Equity 29
7. Associates 31
8. Joint Arrangements (IFRS 11) 35
9. Disclosure of interests in other entities (IFRS 12) 37
10. Complex Groups 39
11. Changes in Group Structure 45
12. Consolidated Statement of Cash Flows 53
13. Foreign Currency Transactions (IAS 21) 59
14. Taxation (IAS 12) 63
15. Provisions, Contingent Liabilities and Contingent Assets (IAS 37) 67
16. Leases (IAS 17) 71
17. Financial Instruments (IAS 32 and IAS 39) 75
18. Share Based Payments (IFRS 2) 81
19. Related parties (IAS 24) 85
20. Revenue (IAS 18) 87
21. Construction Contracts (IAS 11) 91
22. Ethics 95
23. Earnings per Share (IAS 33) 99

C: ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION 103


24. Accounting ratios 103

Answers to Examples 109

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 2

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 3

A: SOURCES OF LONG-TERM FINANCE

Chapter 1
FINANCIAL MARKETS
OpenTuition.com

1. What are financial markets?


Financial markets are generally where companies can raise finance either in the short-term or long-
term. Short-term financial markets are referred to as the money markets, whilst long-term financial
markets are referred to as the capital markets.
Typical finance sought on the financial markets are treasury bills, commercial paper and certificates of
deposit, all of which have been discussed in CIMA F1.
Typical finance sought on the capital markets are issues of debt, equity and derivatives, which is the
focus of CIMA F2. The main capital markets for UK companies are:
London Stock Exchange (LSE)
Alternative Investment Market (AIM)
Eurobond Market
Capital markets operate through banks and stock exchanges (financial intermediaries) taking surplus
funds from individuals, companies and governments. The banks use these funds to provide finance to
individuals, companies and governments. Direct funding without the requirement of financial
intermediaries is possible but it is more risky for the lending institution.

2. Primary and Secondary markets


The primary market is whereby new finance is sought through new issues. The secondary market is
whereby existing financial instruments (equity shares, debt and derivatives) are traded. Both the LSE
and AIM serve a purpose as both primary and secondary markets.

3. Advisors
In order to seek a listing on the capital markets the following advisors would be required to ensure
compliance with the rules and regulations of the market:

Sponsor Advises the board and coordinates the process


Bookrunner Finds investors and determines pricing
Lawyer Due diligence and draft prospectus
Reporting accountant Financial due diligence and tax advice
Financial PR Communication strategy

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 4

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 5

Chapter 2
LONGTERM FINANCE
Incorporated entities use two primary sources of long-term finance;
OpenTuition.com

Equity - relates to money invested within a business by it shareholders


Debt - relates to a business borrowing money from an investor or financial institution.

1. Equity Finance
1.1. Ordinary equity shares
Owning a share confers part ownership.
High risk investments offering higher returns.

Advantages (to the company) Disadvantages (for the company)


No fixed interest payments An expensive form of raising finance (issue
cost).
No repayment required No tax relief on dividend payments
Shares can be easily disposed of if Dilution of ownership on issue of new
company is listed shares
A high proportion of equity can increase
the overall company cost of capital (see
later)

1.2. Preference shares


Preference shares do not offer ownership or voting rights within a business.
The features of a preference share are as follows:
Fixed dividend (coupon % x par value).
Paid in preference to ordinary share dividends.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 6

1.3. Unlisted companies


Unlisted companies find it more difficult to raise equity finance than a listed company, due to the
following reasons:
Lack of audited information.
Marketability.
Higher risk of unlisted companies.
OpenTuition.com

1.4. Listed companies


An unlisted company will seek to become listed once it has grown enough to meet the requirements
of the local stock exchange. Below are listed possible advantages of becoming listed and possible
disadvantages.

Advantages Disadvantages
Creating a market for the company's shares. Increasing accountability to shareholders and
stakeholders.
Enhanced status and financial standing of the Need to maintain dividend and profit growth
company. trends.
Increasing public awareness and public Strict rules and regulations of governing
interest in the company and its products. bodies.
Access to additional finance in the future (issue Increasing costs of compliance with reporting
of new issues or other securities) requirements.
Increased acquisition opportunities (share Relinquishing some control of the company.
exchange).
Exit route for existing shareholders. Increased media interest.
Opportunity to implement share option Becoming more vulnerable to an unwelcome
schemes for employees. takeover.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 7

1.5. Methods of obtaining a listing


Fixed price offer for sale
An offer to the general public at a fixed price that has the potential to raise the highest possible
price for the company as it is offered to the widest possible market.
If price is perceived to be too high then it may not be attractive to investors which creates a risk
that the issue fails to raise the amount of finance required.
The risk can be mitigated by paying an underwriting fee, where the underwriter commits to
OpenTuition.com

buying unsubscribed shares.

Offer for sale by tender


An offer where investors are able to bid for shares and the shares are issued only to those
investors who have bid at the strike price or above.
Investors are asked to subscribe to shares at one price in a given list.
If there are insufficient bidders at the top price, they are moved into the bracket at the lower
price until either:
A desired amount of capital has been raised, or ;
The maximum possible capital has been raised.

There is more chance of a successful take up of the shares with the flexibility of a sale by tender
which mitigates the risk of having to pay underwriting fees.

Example 1 - ABC
ABC receives the following bids for shares at different possible prices:
Price (cents) Number of bids
400 2,000,000
375 2,800,000
350 3,800,000
325 1,700,000
300 500,000

Calculate the issue price at which ABC will raise $30 million.
Calculate the price at which ABC will maximise proceeds from the public offer.

Private placing
Shares are placed with / sold to institutional investors, keeping the cost of the issue to a
minimum and thus making the share issue slightly cheaper.

Stock exchange introduction


No capital is raised by the company but the shares become listed on the stock exchange. The
companys founders can dispose of those shares more easily and realise capital gain whilst
retaining (should they so choose) a controlling interest in the company.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 8

2. Debt Finance
2.1. There are two main points to consider when issuing debt;
Debt interest it tax deductible, thus can be cheaper than equity finance
Debt interest must be paid prior to dividends and irrespective of profit levels thus there is a risk
of default if interest and principal payments are not met.
OpenTuition.com

Other points to consider when opting for debt finance include the following:
Security
The debt holder will normally require some form of security (fixed or floating) against which the
funds are advanced. This means that in the event of default the lender will be able to take assets
in exchange of the amounts owing.
Covenants
A further means of limiting the risk to the lender is to restrict the actions of the directors
through the means of covenants. These are specific requirements or limitations laid down as a
condition of taking on debt financing. They may include:
Dividend restrictions.
Financial ratios (e.g. gearing or interest cover).
Issue of further debt.

2.2. Types of debt finance


Debt may be raised from two general sources, banks or investors.
Bank finance
For many companies bank borrowings are the primary form of debt finance. These could be the
high street banks or more likely for larger companies the large number of merchant banks
concentrating on securitised lending.

Traded investments
Traded debt instruments are sold by the company, through a broker, to investors.
Typical features may include:
The debt is denominated in units of $100, this is called the nominal or par value.
Interest is paid at a fixed rate (coupon rate) on the nominal or par value.
The debt has a lower risk than ordinary shares and may be protected by the charges and
covenants.

Instruments could be:


Redeemable - the amounts borrowed will need to be repaid at a particular point in the future.
Irredeemable - the amount borrowed never needs to be repaid
Convertible - the investor has the option to convert for cash or shares within the company.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 9

Chapter 3
WEIGHTED AVERAGE COST OF CAPITAL
(WACC)
OpenTuition.com

1. WACC formula
The weighted average cost of capital is the average cost of the companys finance (equity, loan notes,
bank loans, and preference shares) weighted according to the proportion each element bears to the
total pool of funds.
WACC formula

Ve V
WACC= k e + d k d (1T)
Ve +Vd Ve +Vd

Where,
ke - Cost of equity
kd - Cost of debt (to the company)
Ve - Market value of equity in the company
Vd - Market value of debt in the company

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 10

2. Use of WACC as the discount rate in project appraisal


WACC can be used to evaluate the companys investment projects if the following conditions apply:
No change in financial risk
The company will maintain its existing capital structure. Using the existing market value mix of
funds as weights in the calculation assumes that in the long run funds will be raised in this
proportion (i.e. in the long run the capital structure of the company will remain unchanged).
This implies that the current gearing ratio is thought to be optimal.
OpenTuition.com

No change in business risk


The cost of capital is only valid for the existing level of risk in the enterprise. The project must
therefore have the same level of business risk as the company does currently and will cause no
change in this risk.

Small project
The project is small relative to the size of the company thus representing a marginal investment.
This is because the costs of capital calculated refer to the minimum required return of marginal
investors and therefore are only appropriate for the evaluation of marginal changes in the
companys total investment.

Pooled funds
No attempt is made to match a project with a particular source of funds. All funds are regarded
as forming a pool out of which all projects are financed.

Perfect capital markets


Only under conditions of perfect capital markets will the costs of capital calculated represent
the true opportunity cost of funds used.

3. Calculating market values of sources of finance


WACC is calculated based upon market values, therefore it is important to ensure that you convert
book value of all sources of finance as follows:

Ordinary shares Ex-div price per share x number of shares in issue


Preference shares Ex-div price per share x number of shares in issue
Debentures Book value x market value / 100
Bank loans Book value (market value does not exist)

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 11

4. Cost of Equity (ke)


The cost of equity for an incorporated entity can be calculated using the dividend valuation model.
The dividend valuation model states that the current ex-div market value (P0 ex-div) is equal to the
present value of future dividends (D0), discounted at the required rate of return of the equity
shareholder (ke)

D0 (1 + g)
P0 ex-div =
OpenTuition.com

ke g

We can then re-arrange the formula to find the cost of equity (ke) that shareholders must have used to
arrive at the share value.

D0 (1 + g)
ke = +g
P0 ex-div

g = dividend growth rate (assumed constant)

D0 = current dividend

P0 ex-div = current ex-div market value of the share

Example 1 - Banks
Banks Ltd has an ex-div share price of $2.50 and has recently paid out a dividend of 10 cents. Dividends are
expected to grow at an annual rate of 4%.

Calculate the cost of equity.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 12

Note:
ex-div is the share price immediately after a dividend has been paid
cum-div is the price immediately before a dividend is paid
The difference between ex-div and cum-div is the value of the dividend, D0, so that the cum-div
share price can be expressed as follows;

P0 cum-div = P0 ex-div + D0
OpenTuition.com

Example 2 Cohen
Cohen Ltd has a cum-dividend share price of $4.15 and is due to pay out a dividend of 35 cents per share.
Dividends are expected to grow at an annual rate of 5%.

Calculate the cost of equity.

5. Estimating Growth
5.1. Historic growth method

D
g = 0 1
Dn

Where;
D0 = current dividend
Dn = dividend n years ago

Example 3 - Wilson
Wilson paid a dividend of 25 cents per share 5 years ago, and the current dividend is 42 cents.
The current share price is $5.50 ex-div.
Calculate an estimate ofthe dividend growth rate.
Calculate the cost of equity.

Example 4 - Stiles
Stiles paid a dividend of 10 cents per share 5 years ago, and the current dividend is 16 cents.
The current share price is $2.36 cum-div.
Calculate the cost of equity.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 13

5.2. Gordons growth model


g= rxb

Where;
r = Return on reinvested funds
b = Proportion of funds retained
OpenTuition.com

Example 5 - Charlton
The ordinary shares of Charlton are quoted at $4.45 cum div and a dividend of 45 cents is just about to be
paid.
The company has a return on capital employed of 15% and each year pays out 25% of its profits after tax as
dividends.
Calculate the cost of equity.

6. Cost of Preference shares (kp)


Preference shares carry a fixed rate charge to the company in the form of a dividend rather than in
terms of interest.
Preference shares are normally treated as debt rather than equity but they are not tax deductible.
Their cost can be calculated using the dividend valuation model with no growth, giving the following
formula;

D0
kp =
P0 ex-div

Example 6 - Moore
Moores 8% preference shares ($1) are currently trading at $1.10 ex-div.
Calculate the cost of the preference shares.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 14

7. Cost of Debt (kd)


There is only one approach to calculate the cost of debt. We cant call it dividend valuation model
since debt doesnt pay dividends but it follows the same principle of future cash flows related to
current market value.
7.1. Non-tradable debt
Bank loans and other non-traded loans have a cost of debt equal to the coupon rate adjusted for tax.
OpenTuition.com

So we can use the following formula;

kd = Interest rate(%) x (1 T)

Example 7 - Ball
Ball has a loan from the bank at 8% per annum.
Corporation tax is charged at 25%.
Calculate the cost of debt.

7.2. Traded debt


Traded debt is always quoted in $100 nominal units or blocks. Therefore all calculations are done by
reference to $100, regardless of the total amount borrowed.
Interest paid on the debt is stated as a percentage of nominal value ($100 as stated). This is known as
the coupon rate. It is not the same as the cost of debt.

Debt can be:


Irredeemable.
Redeemable (at par or at a premium)
Convertible (investor has the choice of redeeming for cash or a specified number of shares in
place of cash).

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 15

7.3. Irredeemable debt


To calculate the cost of debt we will need to calculate the IRR of the future cash flows, which gives the
following formula:

I (1 T)
kd =
P0 ex-int

Where;
OpenTuition.com

I - Coupon interest rate


T - Tax rate
P0 ex-int - Ex-interest market value of debt

Example 8 - Bobby
Bobby has 10% irredeemable loan notes that are quoted at $120 ex-int.
Corporation tax is payable at 25%.
Calculate the cost of debt.

7.4. Redeemable debt


To calculate the cost of debt we will need to calculate the IRR of the future cash flows, which now
includes the redemption value of the debt in n years time. The relevant cash flows would be:
Time Narrative Cash flow
0 Market value of debt (P0)
1n Annual coupon interest paid (net of tax) I (1 T)
n Redemption value of debt RV

To then calculate the IRR we need to use linear interpolation.

Example 9 - Peters
Peters has 10% loan notes quoted at $95 ex-interest redeemable in 5 years time at par.
Corporation tax is paid at 25%.
Calculate the cost of debt.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 16

7.5. Convertible debt


In this situation the holder of the debt has the option to redeem for cash or for shares.
To calculate the cost of debt using IRR the redemption value is assumed to be the greater of either:
The share value on conversion, or
The cash redemption value if not converted.
OpenTuition.com

Example 10 - Hunt
Hunt has convertible loan notes in issue that may be redeemed at a 10% premium to par value in 4 years.
The coupon is 8% and the current market value is $110.
Alternatively the loan notes may be converted at that date into 25 ordinary shares.
The current value of the shares is $5 and they are expected to appreciate in value by 2% per annum.

The tax rate is 25%.


Calculate the cost of debt for the convertible loan notes.

8. WACC - Calculation

Example 11 - Ramsey
The following information is in the statement of financial position of Ramsey:

$000s
Ordinary shares (25c) 4,000
8% redeemable bonds 6,000
5% bank loan 4,000
The current ex-div share price is $4.00 and a dividend of 25c has just been paid which is 10c higher than the
dividend paid 5 years ago.
The 8% bonds are trading on an ex-interest basis at $94.00 per $100 bond and are redeemable in seven
years time.
Corporation Tax is 25%
Calculate the weighted average cost of capital.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 17

B: FINANCIAL REPORTING

Chapter 4
GROUP STATEMENT OF FINANCIAL
OpenTuition.com

POSITION
IFRS 10 Consolidated Financial Statements defines control and tells us how to consolidate.
Control is defined as the power to direct activities with exposure to variable returns.
Consolidated statement of financial position at [date]

$ $
ASSETS
Non-current assets
Goodwill (W3) X
Property, plant and equipment X
X
Current assets
Inventories X
Receivables X
Bank X
X
X
EQUITYANDLIABILITIES
Equity
Equity shares X
Retained earnings (W5) X
X
Non-controlling interests (W4) X
X
Non-current liabilities
Loan notes X
Current liabilities
Trade payables X
Tax payable X
X
X

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 18

1. Standard workings
(W1) Group structure
P

>50%
OpenTuition.com

(W2) Net assets of subsidiary

@ year-end @ acquisition post-acq.


$ $ $
Share capital X X -
Share premium X X -
Reserves X X X
PUP (X) - (X)
Fair value adj. X X X
X X X

(W3) Goodwill
$
Fair value of consideration X
Add: non-controlling interest @ acquisition X
X
Less: net assets at acquisition (W2) (X)
Goodwill on acquisition X

(W4) Non-controlling interest (NCI)

$
NCI @ acquisition (W3) X
Add: NCI% of post-acquisition (W2) X
X
(W5) Group reserves

$
100% Parents X
Add: Ps% of post-acquisition (W2) X
Less: PUP (X)
X

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 19

2. Adjustments
2.1. Fair Value
A subsidiarys identifiable net assets should be adjusted to fair value in the group financial statements
before goodwill is calculated. The fair values will need to be adjusted through (W2), subsidiarys net
assets, and on the face of the group financial statements as these fair values are not normally reflected
in the individual accounts of the subsidiary.
OpenTuition.com

Common fair value adjustments are for the following items:


Property, plant and equipment adjust for fair values at acquisition and at the reporting date,
as well as any additional depreciation in the post-acquisition period.
Inventory adjust for the fair value at acquisition and at the reporting date, noting any
potential sale of inventory in the post-acquisition period.
Contingent liabilities adjust for the fair value at acquisition and at the reporting date, even
though the contingent liability is not recognised in the individual accounts of the subsidiary.
2.2. Intra-group balances
When goods are sold on credit by one group company to another in the same group a cancellation is
required to remove, in accordance with the single entity concept, the receivable/payable amount on
the group statement of financial position.
Dr Payable (CSFP) X
Cr Receivable (CSFP) X

2.3. Cash in transit


Intra-group balances may be unequal due to cash in transit, i.e. cash that has been paid by one entity
but has not yet been received by the other entity and so the cash is not recorded in the receiving
companys accounts.
The intra-group balances need to be equal before any elimination, so the cash in transit needs to be
recorded in the receiving entitys books.
Dr Bank (CSFP) X
Cr Receivable (CSFP) X

2.4. Provision for unrealised profit (PUP)


If the goods sold between group companies have not been sold outside of the group by the year end
a PUP adjustment is required to remove the unrealised profit on the transaction. The adjustment is
always done in the sellers books.
Dr Retained earnings (of seller) X
Cr Inventory (CSFP) X

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 20

Example 1 Fair value adjustments


Statements of financial position at 31 December 20X5

AB XY
$ $
Non-current assets
OpenTuition.com

PPE 12,000 5,000


Investment in XY 5,000 -

Current assets
Inventory 7,000 3,500
Receivables 6,000 2,000
Bank 4,500 500

34,500 11,000

Equity shares ($1) 15,000 3,000


Reserves 14,000 6,500
Current liabilities 5,500 1,500
34,500 11,000
AB purchased 75% of XY two years ago, when the reserves of XY were $500.
At the date of acquisition, XYs property, plant and equipment had a carrying value of $1,500 and a fair value
of $3,500 and a remaining life of four years.
The group policy is to measure non-controlling interest at fair value at the acquisition date. The fair value of
non-controlling interest in XY at acquisition was $2,600.
An impairment review performed on the 31 December 20X5 indicated that goodwill on the acquisition of XY
had been impaired by 20% of its value.

Property, plant and equipment will be included in the consolidated statements of the AB group at 31
December 20X5 at a value of:
$_________

The goodwill that is recorded in non-current assets of the AB group as at 31 December 20X5 is:
$_________

The retained earnings of XY to be included in the consolidated retained earnings of the AB group at
31 December 20X5 will be:
$_________

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 21

Example 2 Unrealised profit


Statements of financial position as at 31 December 20X5

CD PQ
$000 $000
Non-current assets
OpenTuition.com

PPE 11,000 6,000


Investments 6,000 -
Current assets
Inventory 5,000 1,500
Receivables 4,500 5,500
Bank 1,500 2,000
28,000 15,000

Equity shares ($1) 11,000 5,000


Reserves 13,000 7,000
Current liabilities 4,000 3,000
28,000 15,000
CD acquired 60% of the shares in PQ for $5m four years ago when PQs retained earnings were $1.5m. It is
group policy to value the non-controlling interest at acquisition using the proportionate share of net assets
method.
CD owed PQ $1m in respect of group trading that had occurred during the year. This balance is reflected in
both companies statement of financial positions.
During the year PQ sold $1m goods to CD at a mark-up of 25% on cost. Half of these goods had been sold by
CD by the year end.
Goodwill on acquisition has been impaired by $0.5m since the acquisition date.
Inventory will be included in the consolidated statements of the CD group at 31 December 20X5 at a
value of:
$_________

Receivables will be included in the consolidated statements of the CD group at 31 December 20X5 at
a value of:
$_________

Non-controlling interest in the consolidated statements of the CD group at 31 December 20X5 will be
included at a value of:
$_________

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 22

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 23

Chapter 5
GROUP STATEMENT OF PROFIT OR
LOSS AND OTHER COMPREHENSIVE
INCOME
OpenTuition.com

Consolidated statement of profit or loss and other comprehensive income for the year ended
[date]

$
Revenue X
Cost of sales (X)
Gross profit X
Other income X
Distribution costs (X)
Administrative expenses (X)
Other expenses (X)
Finance costs (X)
Share of profit of associate X
Profit before tax X
Income tax expense (X)
PROFIT FOR THE YEAR X
Other comprehensive income:
Exchange differences on translating foreign operations X
Gains on property revaluation X
Actuarial gains/(losses) on defined benefit pension plans X
Gains/(losses) on fair value through other comprehensive investments X
Share of other comprehensive income of associate X

Other comprehensive income for the year, net of tax X


TOTAL COMPREHENSIVE INCOME FOR THE YEAR X
Profit attributable to:
Owners of the parent () X
Non-controlling interests (NCI% x Ss PFY) X
X
Total comprehensive income attributable to:
Owners of the parent () X
Non-controlling interests (NCI% x Ss TCI) X
X

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 24

1. Adjustments
1.1. Mid-year acquisition
If a subsidiary is acquired mid-year then the results can only be consolidated from the acquisition date
as this is when the parent gained control. The results of the subsidiary will need to be pro-rated before
being included in the consolidated financial statements
OpenTuition.com

1.2. Intra-group sales


The group is treated as a single entity so any sales that have taken place between the parent and the
subsidiary will need to be removed in full.
Dr Revenue (CSPL) X
Cr Cost of sales (CSPL) X

1.3. Provision for unrealised profits (PUP)


Any unrealised profit adjustment needs to be made in the sellers financial statements within cost of
sales as an increase to cost of sales.

1.4. Dividends
Dividends received by the parent from the subsidiary need to be removed from the group accounts to
reflect the single entity concept. Any dividends shown in the group financial statements need to be
those received from outside of the group only.

1.5. Fair value


Any change in the fair value of the assets or liabilities of the subsidiary is accounted for in Ss column
in the consolidation schedule (e.g. extra depreciation or increase/decrease in contingent liability)

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 25

Example 1 - MYA
Statements of profit or loss for year ended 31 December 20X5

Edinburgh Glasgow Aberdeen


$m $m $m
Revenue 200 240 120
OpenTuition.com

Cost of sales (120) (160) (50)


Gross profit 80 80 70
Operating expenses (30) (30) (32)
Operating profit 50 50 38
Income tax expense (10) (10) (8)
Profit for the year 40 40 30

Edinburgh acquired 80% of the equity share capital of Glasgow on 1 July 20X5 and 75% of the equity share
capital of Aberdeen several years ago.
Edinburgh sold goods to Aberdeen invoiced at $10m, including a mark-up of 25%, and all the goods remain
in Aberdeens inventory at the year end.
Glasgow sold goods to Edinburgh invoiced at $5m, including a mark-up of 25%, and all of these sales
occurred after the acquisition and half the goods remain in inventory at the year end.
Produce the consolidated statement of profit or loss for the Edinburgh group for the year ended 31
December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 26

Example 2 Pip
Statements of profit or loss for the year ended 31 December 20X5

Pip Posy
$m $m
Revenue 250 280
OpenTuition.com

Cost of sales (100) (160)


Gross profit 150 120
Admin expenses (40) (30)
Distribution costs (30) (20)
Profit from operations 80 70
Investment income 10 -
Profit before tax 90 70
Income tax expense (30) (20)
Profit for the year 60 50
Pip acquired 80% of Posy on 1 July 20X5 when Posys PPE had a fair value of $2m more than their carrying
value. The PPE had a remaining useful life of 5 years at the acquisition date. Depreciation is charged to cost
of sales.
Following the acquisition Posy sold $10m goods to Pip at a mark-up of 25% on cost, half of these goods are
in inventory at the year end.
Posy paid a dividend of $10m during the year.
The group revenue figure to be included in the Pip group statement of profit or loss for the year to 31
December 20X5 will be:
$_________

The group cost of sales figure to be included in the Pip group statement of profit or loss for the year to
31 December 20X5 will be:
$_________

The group investment income figure to be included in the Pip group statement of profit or loss for the
year to 31 December 20X5 will be:
$_________

The non-controlling interest figure to be included in the Pip group statement of profit or loss for the
year to 30 December 20X5 will be:
$_________

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 27

Example 3 TJ (Group statement of profit or loss and other comprehensive income)


Statements of profit or loss and other comprehensive income for the year ended 31 December 20X5

TJ WM
$000 $000
Revenue 16,500 13,800
Cost of sales (12,800) (9,750)
OpenTuition.com

Gross profit 3,700 4,050


Distribution costs (500) (600)
Administrative expenses (850) (780)
Profit before tax 2,350 2,670
Income tax expense (600) (650)
Profit for the year 1,750 2,020
Other comprehensive income:
Gains from revaluation (net of tax) 120 200
Total comprehensive income (TCI) 1,870 2,220
TJ purchased 80% of the shares in WM on 1 January 20X5. It is group policy to measure the non-controlling
interest using the fair value method.
TJ sold $2m of goods to WM at a mark-up of 25% and a quarter of these remained in inventory at the year
end.
During the year the goodwill on acquisition had been impaired by $0.2m. Impairments are charged in
administrative expenses.
Prepare the consolidated statement of comprehensive income of the TJ group for the year ended 31
December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 28

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 29

Chapter 6
GROUP STATEMENT OF CHANGES IN
EQUITY
OpenTuition.com

Consolidated statement of changes in equity for the year ended [date]


Attributable to equity Non-controlling Total
holders of parent Interest
$000 $000 $000
Balance at start X X X
Total comprehensive income for the period:
Parent X
Non-controlling interest X X
Dividends:
Parent (X)
Non-controlling interest (X) X
Balance at close X X X

Example 1 Group statement of changes in equity


Summarised statements of changes in equity for the year ended 31 December 20X5 for Penny and its only
subsidiary, Sophie, are shown below:

Penny Sophie
$000 $000
Balance at 1 January 20X5 280,250 85,100
Profit for the year 51,200 10,000
Dividends (10,000) (4,000)
Balance at 31 December 20X5 321,450 91,100
Penny acquired 70% of the issued share capital of Sophie on 1 January 20X2, when Sophies total equity was
$48.2 million. The first dividend Sophie has paid since acquisition is the amount of $4 million shown in the
summarised statement above. The profit for the period of $51.2m in Pennys summarised statement of
changes in equity above does not include its share of the dividend paid by Sophie.
It is group policy to value NCI at its proportionate share of net assets at acquisition.
Prepare a summarised consolidated statement of changes in equity for the Penny Group for the year
ended 31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 30

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 31

Chapter 7
ASSOCIATES

1. Definition
OpenTuition.com

If an investor holds, directly or indirectly, between 20 per cent of the voting rights of an entity then it
is normally considered an associated entity and is accounted for in accordance with IAS 28 Investment
in associates.
IAS 28 states that there is a presumption that the investor has significant influence over the entity,
unless it can be clearly demonstrated that this is not the case.
The key concept in the definition is significant influence. IAS 28 explains that significant influence is
the power to participate in the financial and operating policy decisions of the entity but is not control
over those policies.
The existence of significant influence by an investor is usually evidenced in one or more of the
following ways:
representation on the board of directors;
participation in policy-making processes;
material transactions between the investor and the entity;
interchange of managerial personnel;

A shareholding of between 20% and 50% is assumed to give the investing company significant
influence over its investment. This means it is treated as an associate and equity accounting is used.
Using equity accounting results in a one line entry in both the group income statement and in the
group statement of financial position, an associate is NOT CONSOLIDATED as a subsidiary.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 32

2. Statement of Financial Position


An investment in associate is shown in the statement of financial position under non-current assets.
This additional line item is calculated using equity accounting as follows:

Cost of investment X
Add: % x post acquisition reserves (W5) X
Less: impairment of associate to date (X)
OpenTuition.com

X
Statement of Profit or Loss and Other Comprehensive Income
The share of the associates profit for the year is shown immediately before profit before tax and is
calculated as:
Share of profit of associate = group % x As profit for the year
The share of the associates other comprehensive income is shown on one line in other
comprehensive income of the group and is calculated as:
Share of other comprehensive income of associate = % x As other comprehensive income

3. Adjustments
Provision for unrealised profits (PUP)
If there has been trading between the group and the associate, then any profit on inventory sold
between the parties that is still held at the reporting date will need to be removed, however we adjust
for the group share only.

If the parent sells to the associate:


Dr Group retained earnings/Cost of sales
Cr Investment in associate (reduce goods to cost to the group)

If the associate sells to the parent:


Dr Group retained earnings/Share of profit of associate
Cr Group inventory (reduce goods to cost to the group)

Example 1 PUP
LR owns 40% of the equity share capital of GH. During the year to 31 December 20X3 LR purchased goods
with a sales value of $500,000 from GH. One quarter of these goods remained in inventories at the year
ended 31 December 20X3. GH includes a mark-up of 25% on all sales.
Which of the following accounting adjustments would LR process in the preparation of its
consolidated financial statements in relation to these goods?
A Dr Cost of sales $10,000 Cr Inventories $10,000
B Dr Share of profit of associate $25,000 Cr Inventories $25,000
C Dr Share of profit of associate $10,000 Cr Inventories $10,000
D Dr Investment in associate $25,000 Cr Cost of sales $25,000

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 33

Example 2 Equity accounting (SFP)


Statements of financial position at 31 December 20X5 are as follows:
Rey Finn
$m $m
Assets:
Non-current assets
OpenTuition.com

Property, plant and equipment 1,560 1,250


Investments 1,540
3,100 1,250
Current assets:
Inventory 450 580
Receivables 380 390
Cash 190 230
1,020 1,200
Total assets 4,120 2,450

Equity and liabilities:


Share capital 1,700 1,000
Retained earning 1,450 800
Total equity 3,150 1,800

Non-current liabilities 520 350

Current liabilities
Trade payable 450 300

Total liabilities 970 650


Total equity and liabilities 4,120 2,450

The following information is relevant to the preparation of the group financial statements:
1. On 1 January 20X4, Rey acquired 70% of the equity interest of Finn for a cash consideration of $1,340
million. At 1 January 20X4, the identifiable net assets of Finn had a fair value of $1,850 million, and
retained earnings were $450 million. The excess in fair value is due to an item of property, plant and
equipment that has a remaining useful life of 10 years.
2. It is the group policy to measure the non-controlling interest at acquisition at is proportionate share of
the fair value of the subsidiarys net assets.
3. On 1 July 20X5, Rey acquired 25% of the equity interest of Ben for a cash consideration of $200 million.
Bens profits for the year were $80 million, out of which a dividend of $20 million was declared on 31
December 2015. The 25% holding gives Rey the power to participate in the operating and financing
decisions of Ben.
Prepare the group consolidated statement of financial position of Rey as at 31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 34

Example 3 Equity accounting (SPLOCI)


Statements of profit or loss and other comprehensive income for the year ended 31 December 20X5 are as
follows:

Vader Maul
$m $m
Revenue 1,645 1,280
OpenTuition.com

Cost of sales (1,205) (990)


Gross profit 440 290
Distribution costs (100) (70)
Administrative expenses (90) (50)
Profit before interest and tax 250 170
Finance costs (55) (30)
Profit before tax 195 140
Taxation (35) (30)
Profit for the year 160 110
Revaluation gain 100 50
Total comprehensive income 260 160

The following information is relevant in the preparation of the group financial statements:
1. On 1 July 20X5, Vader acquired 80% of the equity shares of Maul.
2. On 1 May 20X5 Vader acquired 25% of the equity shares of Sith and exerted significant influence
through its representation on the board of directors. Siths profits for the year were $200 million.
3. During the year Vader also sold goods to Maul to the value of $80m at a mark-up of 25%. Maul had
sold half of this inventory by the year end.
4. It is the group policy to measure the non-controlling interest at acquisition at fair value.
5. Goodwill has been impairment tested at year-end and found to have fallen in value by $5 million in
Maul and $2 million in Sith. Goodwill impairments are recorded in administrative expenses.
6. Maul revalued its land and buildings at the year-end and recorded a revaluation surplus of $50 million
through other comprehensive income.
7. No dividends were declared by any company during the year.
8. Assume that profits accrue evenly during the year.
Prepare a consolidated statement of profit or loss and other comprehensive income for the Vader
group for the year-ended 31 December 20X5

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 35

Chapter 8
JOINT ARRANGEMENTS (IFRS 11)
IFRS 11 Joint Arrangements looks at entities under joint control. Joint control exists only when
OpenTuition.com

decisions about the relevant activities require the unanimous consent of the parties sharing control.

1. Joint operations (JO)


A joint operation is whereby the parties have rights to the assets and obligations to the liabilities of
the arrangement.
The accounting for the arrangement is done by each party recording their share of the arrangements
assets and liabilities in their own statement of financial position and their share of revenue and costs
in their own statement of profit or loss.

2. Joint Venture (JV)


A joint venture is whereby the parties have rights to the net assets of the arrangement. A separate
entity is created and each of the venturers hold shares in the new entity.
The accounting for the arrangement is done using equity accounting.

Example 1 Joint operation


Lyon has a 40% share of a joint operation, a natural gas station. The following information relates to the joint
arrangement activities:
The natural gas station cost $15 million to construct and was completed on 1 January 20X5. Its useful life is
estimated at 10 years.
In the year, gas with a direct cost of $22 million was sold for $30 million. Additionally, the joint arrangement
incurred operating costs of $1.5 million during the year.
Assets, liabilities, revenue and costs are apportioned on the basis of the shareholding.
Lyon has only contributed and accounted for its share of the construction cost, paying $6 million. The
revenue and costs are receivable and payable by the other joint operator who settles amounts outstanding
with Lyon after the year-end (31 December 20X5)
Show how Lyon would account for the above in its consolidated financial statements for the year
ended 31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 36

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 37

Chapter 9
DISCLOSURE OF INTERESTS IN OTHER
ENTITIES (IFRS 12)
OpenTuition.com

IFRS 12 requires that a parent discloses the significant assumptions and judgement used in determining
whether control exists over an investee.

The parent will therefore list all the entities it has a relationship with and explain the basis of the accounting
treatment.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 38

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 39

Chapter 10
COMPLEX GROUPS

1. Vertical Complex Structure


OpenTuition.com

A vertical complex group exists where a subsidiary company has an investment of its own.

80%

70%

X controls Y and Y controls Z. Effectively X controls both Y and Z.


Y is a subsidiary and Z is a sub-subsidiary.
Y is an 80% subsidiary with a 20% non-controlling interest.
Z is a sub- subsidiary with a 56% effective controlling interest (80% x 70%) and an effective non-
controlling interest of 44%.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 40

2. Importance of Acquisition Date


X

80% Acquired 1 Jan X1


OpenTuition.com

60% Acquired 1 April X0

Y is an 80% subsidiary with a 20% non-controlling interest and an acquisition date of is 1 Jan X1.
Z is a 48% subsidiary (80% x 60%) with an effective non-controlling interest of 52%. The date of
acquisition is also 1 Jan X1 because the two subsidiaries combined together at an earlier date (1 April
X0) therefore that date is ignored because it did not give the parent company control.

3. Consolidated statement of profit or loss


The subsidiary and sub-subsidiary are consolidated as normal but the non-controlling interest needs
to be calculated in the sub-subsidiary based upon the effective non-controlling interest percentage.

Example 1 Matty
Summarised statements of profit or loss for the year to 31 December 20X5.
Matty Luke Ben
$000s $000s $000s
Operating profit 224 136 98
Investment income 20 15 -
Profit before tax 128 144 98
Income tax expense (30) (32) (20)
Profit for the year 98 112 78

Notes:
Matty has owned 80% of Luke and Luke owns 75% of Ben for several years.
Luke and Ben have declared and paid dividends during the year of $25,000 and $20,000 respectively.
Produce the summarised Matty Group statement of profit or loss for the year to 31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 41

4. Consolidated statement of financial position


The standard SFP workings are the same as they are for a simple group but an adjustment needs to be
made for the indirect holding that the parent has in the sub-subsidiary. The adjustment affects the
goodwill calculation of the sub-subsidiary and the non-controlling interest calculation of the
subsidiary.

(W3) Goodwill
OpenTuition.com

Sub. Sub-sub.
$ $
X Fair value of consideration X

X Add: non-controlling interest @ acquisition X

X X

(X) Less: net assets at acquisition (W2) (X)

X Goodwill on acquisition X

(W4) Non-controlling interest (NCI)


Sub. Sub-sub.
$ $
X NCI @ acquisition (W3) X

X NCI% of post-acquisition (W2) X

(X) NCI% of Ss investment in SS -

X X

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 42

Example 2 Vertical group structure


Bravo, a public limited company, operates in the manufacturing sector.
The draft statements of financial position at 31 December 20X5 are as follows:
Bravo Gayle Russell
$000s $000s $000s
OpenTuition.com

Non-current assets 90,000 53,000 70,000


Investment in Gayle 74,000 - -
Investment in Russell - 55,000 -
Current assets 40,000 48,000 33,000

Total assets 204,000 156,000 103,000

Share capital 100,000 50,000 40,000


Retained earning 65,000 75,000 45,000

Non-current liabilities 20,000 15,000 4,000

Current liabilities 19,000 16,000 14,000

Total equity and liabilities 204,000 156,000 103,000

The following information is relevant to the preparation of the group financial statements:
1. On 1 January 20X5, Bravo purchased 80% of the equity share capital of Gayle, a public limited
company, for a cash consideration of $74 million. The fair value of the identifiable net assets acquired
was $90 million and the fair value of the non-controlling interest was $25 million. The fair value of the
net assets at acquisition was not materially different to their book value.
2. On 1 July 20X5, Gayle purchased 70% of the equity share capital of Russell, a public limited company
for a cash consideration of $55 million when the retained earnings were $20 million. The fair value of
the non-controlling interest was $20 million at acquisition. The fair value of the net assets at
acquisition was not materially different to their book value.
3. The group policy is to value the non-controlling interest at acquisition using the fair value method.
Prepare the consolidated statement of financial position for the Bravo Group as at 31 December 20X5

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 43

5. D-shaped Complex Groups


A D-shaped complex group arises when the parent company has both a direct and an indirect holding
in the sub-subsidiary.
X
OpenTuition.com

80%

Y 10%

75%

X controls both Y and Z because it has the power to direct the activities of both companies.
Y is an 80% subsidiary with a 20% non-controling interest.
X has an effective controlling interest in Z of 70% and effective non-controlling interest of 30%,
calculated as:

Direct 10%
Indirect (80% x 75%) 60%
70%
Effective NCI 30%

Note: Care must be taken when calculating the goodwill arising on acquisition of Z (sub-subsidiary) as
the cost of investment will contain both a direct and an indirect part.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 44

Example 3 D-shaped complex group structure


Kallis, a public limited company, operates in the manufacturing sector. The draft statements of financial
position at 31 December 20X5 are as follows:
Kallis Steyn Adams
$000s $000s $000s
OpenTuition.com

Non-current assets 100,000 74,000 60,000


Investment in Steyn 95,000 - -
Investment in Adams 60,000 60,000 -
Current assets 50,000 45,000 28,000

Total assets 305,000 179,000 88,000

Share capital 150,000 40,000 30,000


Retained earning 80,000 90,000 40,000

Non-current liabilities 35,000 30,000 5,000

Current liabilities 40,000 19,000 13,000

Total equity and liabilities 305,000 179,000 88,000

The following information is relevant to the preparation of the group financial statements:
1. On 1 January 20X5, Kallis purchased 60% of the equity share capital of Steyn, a public limited
company, for a cash consideration of $95 million. The fair value of the identifiable net assets acquired
was $90 million and the fair value of the non-controlling interest was $25 million. The fair value of the
net assets at acquisition was not materially different to their book value.
2. On the same date both Kallis and Steyn each acquired a 30% holding in Adams, as part of an attempt
to conceal the true ownership of Adams. The retained earnings of Adams were $30 million and the fair
value of the non-controlling interest was $4 million. The fair value of the net assets at acquisition was
not materially different to their book value.
Prepare the consolidated statement of financial position for the Bravo Group as at 31 December 20X5

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 45

Chapter 11
CHANGES IN GROUP STRUCTURE

1. Acquisitions
OpenTuition.com

At any time an entity can buy additional shares in a business. As more shares are acquired the level of
influence/control may change and so the accounting treatment may also change.

The following main movements are considered:


Investment (<20%) Control (>50%)

Significant Influence (20%-50%) Control (>50%)

Control (>50%) Control (>50%)

The first two are treated in the same way as the acquiring entity now has control of the subsidiary for
the first time but the third is slightly different because the parent already has control.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 46

2. Investment becomes a subsidiary


The previously held investment is re-measured to fair value with any resulting gain recognised
through profit or loss.
Goodwill would be calculated as follows:

$
Cost of additional investment X
OpenTuition.com

Fair value of acquirers existing interest X


X
Non-controlling interest X
Fair value of identifiable net assets at control (X)
X

Example 1 Jeremy (investment to subsidiary)


Jeremy acquired 40% of the equity interest of David for $40 million several year ago. On the 1 January 20X5,
Jeremy acquired an additional 35% for $45 million when the fair value of the identifiable net assets were
$105 million.
The fair value of the non-controlling interest on 1 January 20X5 was $32 million the fair value of the original
40% holding was $52 million.
Calculate the goodwill to appear in the Jeremy group statement of financial position as at 31
December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 47

3. Increased Stake in Subsidiary (control maintained)


If the status does not change from no control to control then no re-measurement to fair value is
required.
There is no gain or loss to be recognised as it is simple a reallocation between parents reserves and
the non-controlling interest.
OpenTuition.com

The group equity is adjusted as follows:


Dr Non-controlling interest
Cr Cash/Shares
Dr/Cr Reserves ()

Example 1 Jeremy (contd.)


Continuing from the previous example.
On 31 December 20X5, Jeremy acquired a further 5% of David for $8 million.
David had made profits since being acquired by Jeremy of $10 million. There has been no impairment of
goodwill.
Prepare the journal entry to record the change in ownership from a 75% holding to an 80% holding.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 48

Example 2 Sample question


JK owned 70% of the equity share capital of GH at 31 December 20X2. JK purchased a further 20% of GHs
equity shares on 31 December 20X3 for $520,000, when the existing non-controlling interest (NCI) in GH was
measured at $759,000.
Place the correct amounts I respect of the additional purchase or use BLANK in order to reflect the impact
on the consolidated statement of changes in equity for the JK Group for the year ended 31 December 20X3.
OpenTuition.com

Extract from the consolidated statement of changes in equity for the JK Group for the year ended 31
December 20X3
Attributable to Non-controlling
equity holders of interest
the parent
$000 $000
Balance at the start of the year 3,350 650
Comprehensive income for the year 1,280 150
Dividends paid (200) (30)
Adjustments to NCI for additional purchase of GH shares
Adjustment to parents equity for additional purchase of GH shares

Values
14 (14)
253 (253)
239 (239)
506 (506)
520 (520)
BLANK

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 49

4. Disposals
During the year the group may dispose of shares in any of its investments and the results could be as
follows;

Subsidiary No investment at all

Subsidiary Subsidiary
OpenTuition.com

(reduced stake)

Subsidiary Associate

Subsidiary Trade investment

Under the revised IFRS3 disposal only really occurs when one entity loses control over another.

Control lost - Group accounts


This will include a full disposal, reducing the investment to an associate or trade investment.
On disposal of a controlling interest, any retained interest (associate or investment) is measured at fair
value on the date control is lost.
The group recognises the proceeds from disposal together with the fair value of any retained interest
in its investment
The group derecognises the net assets of the subsidiary at the date of disposal together with their
related goodwill and NCI at disposal.

The balance is the gain/loss on disposal, calculated as:

$m
Proceeds X
Add: investment still held X
Add: non-controlling interest X
Less: net assets at disposal (X)
Less: goodwill (X)
Group profit or loss on disposal X

Example 3 Socks (control lost)


Socks owned 90% of Mogs before it decided to sell a 50% stake of its investment on 31 December 20X5 for
$120 million. The non-controlling interest at that date was $53 million and the fair value of the remaining
40% is $96 million.
The goodwill on acquisition of the original 90% holding was $38 million and the net assets at the date of
disposal were $201 million.
Calculate the group profit on disposal that will appear in the group financial statements of Socks
group for the year-ended 31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 50

5. Control retained - Group accounts


If after the disposal of shares control is still retained i.e. 80% subsidiary reduced to 60% subsidiary then
the transaction is treated as an adjustment to the parents equity.
In the consolidated statement of profit or loss there is no gain or loss on disposal because the parent
still maintains control over the subsidiary. The subsidiary will therefore be consolidated for the whole
year as normal, however the non-controlling interest will change and will be calculated on a pro rata
basis.
OpenTuition.com

In the consolidated statement of financial position the goodwill remains unchanged as it is a historical
figure that was calculated on initial acquisition of the subsidiary.
The subsidiary will be consolidated as normal but there will be an increased in the non-controlling
interest. The change in non-controlling interest will be shown as an adjustment to the parents equity.
In effect it is a transaction between owners.

Dr Cash/Shares
Cr Non-controlling interest
Dr/Cr Reserves ()

Example 4 Betty (reduction in ownership interest)


Betty owned 90% of the equity shares of Penny before it then sold 20% of the subsidiary on 31 December
20X5 for $90 million.
The net assets at the date of disposal of the shares was $350 million and the goodwill on acquisition of the
original 90% holding was $50 million.
Prepare the journal entry to record the change in ownership from a 90% holding to a 70% holding.

Parents Gain/Loss on Disposal (individual company accounts)

Proceeds X
Less cost of investment (X)
Gain/Loss on disposal X/(X)

Tax on gain/Relief on loss (X)/X


Net gain/loss X/(X)

The tax on the gain/loss must be recorded in the financial statements of the parent as normal;
Gain - Dr Tax charge IS Loss - Dr Tax liability SFP
Cr Tax liability SFP Cr Tax charge IS

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 51

Example 5 Group SFP (step acquisitions/disposals)


Reilly, a public limited company, operates in the manufacturing sector. The draft statements of financial
position at 31 December 20X5 are as follows:
Reilly Hulme Jones
$m $m $m
OpenTuition.com

Non-current assets 180 115 100


Investment in Hulme 90 - -
Investment in Jones 85 - -
Current assets 80 90 60

Total assets 435 205 160

Share capital 250 80 75


Retained earning 110 65 45
Other components of equity 10 - -

Non-current liabilities 15 14 10

Current liabilities 50 46 30

Total equity and liabilities 435 205 160

The following information is relevant in preparing the group financial statements of the Reilly Group.
Reilly acquired a 60% holding in the equity shares of Hulme on 1 January 20X4 for a cash consideration of
$75million, when the retained earnings were $25 million. The fair value of the non-controlling interest was
$40 million.
On the 31 December 20X5, Reilly acquired a further 10% of the equity shares of Hulme for a cash
consideration of $15million.
Reilly acquired a 90% of the equity shares of Jones on 1 January 20X5 for a cash consideration of $120
million when the retained earnings were $35 million. The fair value of the non-controlling interest was $13
million
On 31 December 20X5, Reilly disposed of 20% of the equity shares in Jones for a cash consideration of $35
million.
The group policy is to value the non-controlling interest at acquisition using the fair value method.
Prepare the consolidated statement of financial position of the Reilly Group as at 31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 52

Example 6 Group SPL (step acquisitions/disposals)


Maryland Tansey
$m $m
Revenue 2,468 1,664
Cost of sales (1,808) (1,287)
Gross profit 660 377
OpenTuition.com

Other expenses (285) (156)


Profit before interest and tax 375 221
Finance costs (83) (39)
Profit before tax 292 182
Taxation (53) (36)
Profit for the year 239 146

The following information is relevant in the preparation of the group financial statements:
Maryland acquired 75% of the equity share capital of Tansey on 1 January 20X2. On 1 April 20X5, Maryland
disposed of a 10% holding in Tansey.
Prepare the consolidated statement of profit or loss for the Maryland Group for the year-ended 31
December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 53

Chapter 12
CONSOLIDATED STATEMENT OF CASH
FLOWS
OpenTuition.com

Consolidated statement of cash flows for the year ended [date]


$m $m
Operating Activities
Group Profit Before Tax X
Depreciation X
*Impairment X
Gain/Loss on Disposal of Tangibles (X)/X
*Gain/Loss on Sale of Subsidiary (X)/X
*Share of Associates Profit X
Finance costs X
Inventory (X)/X
Receivables (X)/X
Payables X/(X)
Cash generated from operations X
Interest Paid (X)
Tax Paid (X)
Cash generated from operating activities X
Investing Activities
Sale Proceeds from Tangibles X
Purchase of Tangibles (X)
*Dividend Received from Associate X
*Acquisition/Disposal of Sub (X)/X
Dividends Received X
Cash generated from investing activities X
Financing Activities
Proceeds from Share Issue X
Loan Issue/Repayment X/(X)
*Dividend paid to NCI (X)
Dividend paid to parent shareholders (X)
Cash generated from financing activities X
Change in cash and cash equivalents X/(X)
Opening cash and cash equivalents X
Closing cash and cash equivalents X

* items relate specifically to group statement of cash flows.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 54

1. Dividend paid to the non-controlling interest


Non-controlling interest
B/f X

Dividend paid () X Profit X


OpenTuition.com

Disposal of sub. X Acquisition of sub. X

C/f X

X X

Example 1 - Dividend paid to non-controlling interest


Group statement of profit or loss for the year-ended 31 December 2015 (extract)

$m
Profit before tax 91
Taxation (31)
Profit for the year 60

Attributable to:
Ordinary shareholders of the parent 54
Non-controlling interest 6

Group statement of financial position as at 31 December 2015 (extract)


2015 2014
$m $m
Equity
Non-controlling interests 115 110

Calculate the dividend paid to the non-controlling interests to appear in the group statement of cash
flows for the year-ended 31 December 2015.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 55

2. Dividend received from associate


Associate
B/f X

Profit X Dividend paid () X


OpenTuition.com

C/f X

X X

Example 2 Dividend received from associate


Group statement of profit or loss for the year-ended 31 December 2015 (extract)

$m
Operating profit 83
Finance costs (12)
Share of profit of associate 20
Profit before tax 91
Taxation (31)
Profit for the year 60

Attributable to:
Ordinary shareholders of the parent 54
Non-controlling interest 6

Group statement of financial position as at 31 December 2015 (extract)


2015 2014
$m $m
Assets
Non-current assets
Investment in associate 190 180

Calculate the dividend received from associate to appear in the group statement of cash flows for the
year-ended 31 December 2015.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 56

3. Acquisition/disposal of subsidiary
The acquisition or disposal of a subsidiary during the year is shown as a net cash outflow or inflow
within investing activities to show the net cash paid to acquire the subsidiary or net cash received on
disposal of a subsidiary.
An indirect adjustment is also required to adjust for any other balances (e.g. PPE, inventory,
receivables, and payables) consolidated as part of the acquisition or disposed of as part of the
disposal.
OpenTuition.com

Working capital movement


Inventory Receivables Payables
Opening X X X
Acquisition/(disposal) X/(X) X/(X) X/(X)
Expected X X X
Closing (actual) X X X
Movement or or or

Example 3 Acquisition of a subsidiary


Pablo Group statement of financial position as at 31 December 2015 (extract)
2015 2014
$m $m
Non-current assets
Property, plant and equipment 520 490
Current assets
Inventory 145 195
Receivables 130 109
Cash and cash equivalents 50 75

Current liabilities
Trade payables 85 70

The following information relates to the financial statements of the Pablo Group:
On 1 June 2015, Pablo acquired all of the share capital of Juan for $50 million. The fair value of the
identifiable net assets and liabilities at the date of acquisition that have been reflected in the year-end
balances of the Pablo Group are as follows:
$m
Property, plant and equipment 15
Inventory 8
Receivables 6
Cash and cash equivalents 5
Payables (3)

Show how the above would be dealt with in the consolidated statement of cash flows for the year-
ended 31 December 2015.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 57

Example 4 Group statement of cash flows


The following draft group financial statements relate to Dove, a public limited company.
Dove Group statement of financial position as at 31 December 20X5
20X5 20X4
$m $m
Assets:
OpenTuition.com

Non-current assets
Property, plant and equipment 1,745 1,250
Goodwill 1,184 1,230
Investment in associate 200 190
3,129 2,670
Current assets:
Inventory 530 580
Receivables 456 390
Cash and cash equivalents 190 230
1,176 1,200
Total assets 4,305 3,870

Equity and liabilities:


Share capital 1,700 1,500
Retained earning 1,060 900
2,760 2,400
Non-controlling interest 575 540
3,335 2,940

Non-current liabilities
Long-term borrowings 300 200
Deferred tax 220 190

Current liabilities
Trade payable 300 430
Current tax payable 150 110
450 540
Total liabilities 970 930
Total equity and liabilities 4,305 3,870

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 58

Dove group statement of profit or loss for the year-ended 31 December 20X5
$m
Revenue 1,765
Cost of sales (1,185)
Gross profit 580
Distribution costs (100)
OpenTuition.com

Administrative expenses (90)


Profit before interest and tax 390
Finance costs (55)
Share of profit of associate 40
Profit before tax 375
Taxation (95)
Profit for the year 280

Dove group statement of changes in equity for the year-ended 31 December 20X5

Equity Retained Non- Total


shares earnings controlling
interest
$m $m $m $m
B/f 1,500 900 2,400 540 2,940
Issue of share capital 200 200 200
Dividends (65) (65) (20) (85)
Total comprehensive income for the year 225 225 55 280
Transfer to retained earnings
C/f 1,700 1,060 2,760 575 3,335

The following information relates to the financial statements of the Emilio Group:
1. On 1 June 20X5, Emilio acquired all of the share capital of Fred for $50 million. The fair value of the
identifiable net assets and liabilities at the date of acquisition that have been reflected in the year-end
balances of the Pablo Group are as follows:

$m
Property, plant and equipment 13
Inventory 20
Receivables 15
Cash and cash equivalents 3
Payables (9)
42
2. Dove owns 20% of an associate. The associate made a profit for the year of $200 million and paid a
dividend of $150 million.
3. During the year Dove charged depreciation of $130 million on its property, plant and equipment. It
sold property, plant and equipment with a carrying value of $43million for $50 million
Prepare the consolidated statement of cash flows for the year ended 31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 59

Chapter 13
FOREIGN CURRENCY TRANSACTIONS
(IAS 21)
OpenTuition.com

1. Functional Currency
The functional currency is the currency of the primary economic environment in which the entity
operates.
The primary economic environment in which an entity operates is normally the one in which it
primarily generates and expends cash. An entitys management considers the following factors in
determining its functional currency:
The currency that dominates the determination of the sales prices
The currency that most influences operating costs
The currency in which an entitys finances are denominated is also considered.
IAS 21 Foreign currency translation says that, when an individual company has transactions that are
denominated in a foreign currency, they should translate them at the rate prevailing when the
transactions occurred i.e. the historic rate (HR).
At the year end, the statement of financial position items need to be classified as either monetary or
non-monetary items. The monetary items are then re-translated at the year-end using the closing rate
(CR). Any exchange gains or losses that arise are taken directly to profit or loss.
The non-monetary items are not re-translated at the year-end.
Non-current asset investments, tangible non-current assets and inventory are deemed to be non-
monetary and everything else is monetary.

Example 1 Functional currency


Flower Inc. has its functional currency as the $USD. It trades with several suppliers overseas and bought
goods costing 400,000 Dinar on 1 December 20X5. Flower paid for the goods on 10 January 20X6. Flowers
year-end is 31 December. The exchange rates were as follows:

1 December 20X5 4.1 Dinar : $1USD


31 December 20X5 4.3 Dinar : $1USD
10 January 20X6 4.4 Dinar : $1USD
Show how the transaction would be recorded in Flowers financial statements.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 60

2. Group accounts
If a group has a subsidiary company that is located overseas, that subsidiary will have a different
functional currency to the rest of the group. Before consolidation of the subsidiary its results will need
to be correctly stated in its functional currency. Once this has been done the results can then be
translated into the presentational currency of the group and consolidated.

Group SFP
OpenTuition.com

Translate all the assets and liabilities of the subsidiary @ closing rate (CR)
Net assets working in overseas currency
Goodwill working in overseas currency and translate at the closing rate
Non-controlling interest in overseas currency and translate at the closing rate
Group retained earnings in presentational currency, translate Ss post acquisition profits at
closing rate and calculate the gain/loss on translation of Ps investment in the overseas
subsidiary.

Group P/L and OCI


Translate all the income and expenses of the subsidiary @ average rate (AR)

Example 2 Overseas consolidation


Statements of profit or loss for the year-ended 31 December 20X5
Holly Ivy
$m Dinars m
Revenue 247 1,664
Cost of sales (181) (1,288)
Gross profit 66 376
Expenses (29) (156)
Profit before interest and tax 37 220
Finance costs (8) (40)
Profit before tax 31 180
Taxation (5) (36)
Profit for the year 26 144

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 61

Statements of financial position at 31 December 20X5

Holly Ivy
$m Dinars m
Non-current assets 200 500
Investment in Ivy 200 -
Current assets 90 390
OpenTuition.com

Total assets 490 890

Share capital 250 350


Retained earning 110 280
Non-current liabilities 80 65
Current liabilities 50 195

Total equity and liabilities 490 890


The following information is relevant to the preparation of the consolidated financial statements of Holly.
1. On 1 January 2015, Holly acquired 80% of the equity share capital of Ivy for a consideration of 760
million Dinars when the retained earnings were Dinars 150 million and the fair value of the net assets
at that date were Dinars 600 million. Any difference between the fair value of the net assets and their
book value is due to non-depreciable land.
2. The non-controlling interest is valued using the proportionate share on net assets method.
3. The following exchange rates are relevant to the preparation of the financial statements:

Dinars to $
1 January 2015 3.8
31 December 2015 4.3
Average rate for the year to 31 December 2015 4.0
The goodwill figure to be included in the Holly group statement of financial position for the year to 31
December 20X5 will be:
$_________

The non-controlling interest figure to be included in the Holly group statement of financial position
for the year to 31 December 20X5 will be:
$_________

The group retained earnings figure to be included in the Holly group statement of financial position
for the year to 31 December 20X5 will be:
$_________

The property, plant and equipment figure to be included in the Holly group statement of financial
position for the year to 31 December 20X5 will be:
$_________

The inventory figure to be included in the Holly group statement of financial position for the year to
31 December 20X5 will be:
$_________

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 62

Exchange gains and losses on consolidation of the overseas subsidiary

$
Opening net assets
@ OR X
@ CR X
X
OpenTuition.com

Profit for the year


@ AR X
@ CR X
X
Goodwill
@ OR X
@ CR X
X
X

Example 3 gain or loss on translation of the overseas subsidiary


Continuing from the previous example, calculate the gain or loss on translation of the overseas
subsidiary.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 63

Chapter 14
TAXATION (IAS 12)

1. Deferred tax
OpenTuition.com

Deferred tax arises because;

Accounting profit (PFY) Taxable profit (PCTCT)

The reasons for this can be split into two categories:


Permanent differences
Items that would have been used in calculating accounting profit but would NOT be used in
calculating taxable profit e.g. some entertaining expenses

Temporary differences
Items that would have been used in calculating accounting profit and taxable profit but in
different accounting periods e.g. depreciation/tax allowances.
IAS 12 considers only temporary differences.

Example 1 Tracy (ignoring deferred tax)


Tracy purchased an item of property, plant and equipment on 1 January 20X5 for $5 million. It was
estimated that it had a useful economic life of 5 years but according to the tax authority had a 50% tax
allowance in its first year and 20% reducing balance there after.
Tracy made an accounting profit of $2m for the year, which is expected to continue unchanged for the next
two years.
Income tax rate 20%

Ignoring deferred tax calculate the profits after tax for Tracy for each of the three years ending 31
December 20X5 to 20X7.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 64

2. Calculating deferred tax


1. Calculate the the temporary difference, as being the difference between the carrying vale of the
asset or liability and its tax base.

$000s
Carrying value X
Tax base X
OpenTuition.com

Temporary difference X

2. Calculate the deferred tax position by multiplying the temporary difference by the income tax
rate at which the asset or liability will be settled at.
X% x temporary difference = closing deferred tax provision

3. The closing deferred tax position is either a deferred tax asset or a liability.
A deferred tax liability arises if:
Carrying value > Tax base taxable temporary difference
A deferred tax asset arises if:
Carrying value < Tax base tax deductible temporary difference

4. The movement in the deferred tax position goes through profit or loss.

$000s
Closing position X
Opening position X
Movement X/(X)

Increase in deferred tax


Dr Income tax expense (SPL)
Cr Deferred tax provision

Decrease in deferred tax


Dr Deferred tax
Cr Incoime tax expense (SPL)

Example 2 Tracy (incl. deferred tax)


Tracy purchased an item of property, plant and equipment on 1 January 20X5 for $5 million. It was
estimated that it had a useful economic life of 5 years but according to the tax authority had a 50% tax
allowance in its first year and 20% reducing balance there after.
Tracy made an accounting profit of $2m for the year, which is expected to continue unchanged for the next
two years.
Income tax rate 20%
Calculate the profits after tax for Tracy for each of the three years ending 31 December 20X5 to 20X7.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 65

20X5 20X6 20X7


$000s $000s $000s
Carrying value
Tax base
Temporary difference

Closing deferred tax


OpenTuition.com

Opening deferred tax


Movement

Statement of profit or loss (extracts)

20X5 20X6 20X7


$000s $000s $000s
Profit before tax
Income tax expense
Current tax
Deferred tax movement
Profit for the year

Statements of financial position (extracts)

20X5 20X6 20X7


$000s $000s $000s
Non-current liabilities
Deferred tax

Current liabilities
Tax payable

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 66

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 67

Chapter 15
PROVISIONS, CONTINGENT LIABILITIES
AND CONTINGENT ASSETS (IAS 37)
OpenTuition.com

1. Definitions
Liability - A present obligation arising from past events, the settlement of which is expected to result
in an outflow or economic benefits.
Provision - A liability of uncertain timing and amount.
A provision shall be recognised when:
an entity has a present obligation, legal or constructive, as a result of a past event;
it is probable that an outflow of resources will be required to settle the obligation;
a reliable estimate can be made of the amount of the obligation
1.1. Legal obligation
An obligation that derives from:
a contract
legislation
other operation of law
1.2. Constructive obligation
An obligation that derives from an entitys actions where;
by an established pattern of past practice, published policies or a sufficiently specific current
statement, the entity has indicated to other parties that it will accept certain responsibilities;
and
as a result, the entity has created a valid expectation on the part of those other parties that it
will discharge those responsibilities.
1.3. Measurement
The amount recognised as a provision should be the best estimate of the expenditure required to
settle the present obligation. If the amount to be settled in the future is materially different then the
amount should be discounted to present value.

Example 1 Bebob
During the year Bebob acquired a gold mine at a cost of $5 million. In addition, when all the ore has been
extracted (estimated in 10 years time) the company will face estimated costs for landscaping the area
affected by the mining that have a present value of $2 million. These costs would still have to be incurred
even if no further ore was extracted.
The directors have proposed that an accrual of $200,000 per year for the next ten years should be made for
the landscaping.
Discuss whether you think the directors are right in their chosen treatment.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 68

2. Specific Examples
IAS 37 highlights certain situations and gives guidance on their treatment.
Future operating losses
No provision for future operating losses as there is no obligation for the losses

Onerous contracts
OpenTuition.com

A contract in which the unavoidable costs of meeting the obligations under the contract exceed
the economic benefits expected to be received under it.
The present obligation under the contract should be recognised as a provision.

Restructuring
The restructuring of a business can be the sale or termination of a business, closure or relocation
of a business, changes in management structure or fundamental reorganisations.
A provision should only be recognised if a constructive obligation exists.
A constructive obligation exists if there is:
A detailed formal plan for the restructuring has been identified
and,
A valid expectation has been raised in those affected that it will be carried out by either
implementing the plan or announcing it to those affected

No obligation arises for the sale of an operation until the entity is committed to the sale i.e.
there is a binding sale agreement.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 69

3. Contingent Liabilities
A contingent liability is:
a possible obligation that arises from past events and whose existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within
the control of the entity
a present obligation that arises from past events but is not recognised because;
OpenTuition.com

it is not probable that an outflow of resources will be required to settle the obligation
or,
the amount of the obligation cannot be measures with sufficient reliability

Example 2 Wedding
After a wedding in the summer of 20X8 ten people died as a result of food poisoning from eating food
manufactured by Future. At 31 December 20X8 the company was advised that there was probably no
liability and the matter was disclosed as a contingent liability at that date.
As the result of developments in the case, which is still not settled, the company was advised that it is now
probable, as at 31 March 20X9 that the company will be found liable.
Some directors consider that the matter should remain a contingent liability until the court case decides the
matter, while others consider that provision should be made for it in the financial statements for the year
ended 31 March 20X9.
Discuss the accounting treatment suggested by the directors, justifying your answer with reference
to IAS 37.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 70

Example 3 ER (Sample question)


ER organise music festivals throughout Europe. In September 20X3 there was an accident at a concert and
one of the main performers was injured. This performer is pursuing a lawsuit, claiming that the safety
equipment provided by ER was faulty and that ER was responsible for the accident. The lawsuit was filed in
November 20X3 and at the year-end ERs legal advisors advised that ER was likely to lose the case although
at that time no reliable estimate of the liklely payout could be made.
OpenTuition.com

Which of the following statements is TRUE in respect of this scenario?


A There is a probable outflow of economic benefit but the timing and amount is uncertain and so a
contingent liability should be included in ERs financial statements at 31 December 20X3.

B A probable future outflow of economic benefit will result from this lawsuit and so a provision should
be recorded in ERs statement of financial position at 31 December 20X3

C There is a probable outflow of economic benefit but the timing and amount is uncertain and so no
disclosure is necessary as at 31 December 20X3.

D The lawsuit has not concluded at the reproting date and so no disclosures about the accident are
required to be included in ERs financial statements at 31 December 20X3.

4. Contingent Assets
A contingent asset is a possible asset that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity.
A contingent asset is not recognised in the financial statements but the entity will disclose its nature
and effect in the notes to the accounts.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 71

Chapter 16
LEASES (IAS 17)

1. Definitions
OpenTuition.com

A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of
payments the right to use an asset for an agreed period of time.
1.1. Finance lease
A lease that transfers substantially all of the risk and reward of ownership of the asset to the lessee.
Legal title may or may not eventually transfer.
IAS 17 highlights situations that individually or in combination would normally lead to a lease being
classified as a finance lease. These are;
The lease transfers ownership of the asset to the lessee by the end of the lease term
The lessee has the option to purchase the asset at a price expected to be sufficiently lower than
fair value at the date the option is available and it is likely that the option will be taken up
The lease term is for the major part of the life of the asset even if legal title isnt transferred
At the start of the lease the present value of the minimum lease payments is substantially all of
the fair value of the leased asset
The leased assets are of such a specialised nature that only the lessee can use them without
major modifications
Operating lease
An operating lease is any other lease other than a finance lease.
1.2. Lessee accounting
Operating lease
The substance of the transaction is that the legal title has not transferred and so the asset is treated as
if its being hired and not owned.
Lease payments under an operating lease shall be recognised as an expense on a straight line basis
through profit or loss over the lease term unless another systematic basis is more appropriate for the
way the asset is used.

Example 1 Danny
Danny has taken out an operating lease on its photocopier at the start of the financial year paying a non-
refundable deposit of $2,000. The lease is for two years with annual payments of $3,000 after which the
photocopier goes back to the lessor. The photocopier has a useful economic life of five years.
Show how the photocopier will be accounted for in the statement of financial position and statement
of profit or loss for the first year of the lease.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 72

2. Finance lease
The substance of the transaction it that even though legal title does not initially pass to the lessee, the
asset is treated as if its owned the lessee as they have the significant risk and reward of ownership.
1. The leased asset is initially recognised at its fair value (cash price) or if lower the present value of
the minimum lease payments along with a corresponding lease liability
Dr Non-current assets leased assets
OpenTuition.com

Cr Finance lease liability

2. The asset is then depreciated using a systematic basis. If it is likely that the lessee will obtain
legal title at the end of the lease the useful life of the asset would be used. Otherwise the asset
would be depreciated over the shorter of the lease term and the useful life.
Dr Depreciation expense (SPL)
Cr Accumulated depreciation (SFP)

3. Interest is charged on the outstanding liabilityusing either the sum of digits method or te
actuarial method.
Dr Finance cost (SPL)
Cr Fianance lease liability (SFP)

4. The lease payment is recorded, reducing the value of the outstanding liability
Dr Finance lease liability
Cr Bank

Example 2 Finance lease (1)


Pedro enters into a four year finance lease for a piece of machinery paying $5,000 at the end of each year.
The present value of minimum lease payments is $14,275, which is equivalent to its fair value. The rate of
interest implicit in the lease arrangement is 15% per annum and the machinery has a useful life of five years.
Prepare extracts from the statement of profit or loss and the statement of financial position for the
end of the first year in respect of the fiance lease.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 73

3. Allocating interest
Interest should be allocated to each period during the lease term so as to produce a constant periodic
rate of interest on the remaining balance of the liability. Two methods of allocating the interest are:
Sum of digits
Actuarial mehtod
OpenTuition.com

3.1. Sum of the digits


If an interst rate is not given to allocate the interest then the sum of digits method is used.
Step 1
Use the following formula to initially work out the sum of the digits.

n(n + 1)
2
where n is the number of instalments paid.

Step 2
The total interest needs to be calculated
$
Total payments X
Cash price/fair value (X)
Total interest X

Step 3
The total interest is then systematically allocated using the sum of the digits figure calculated in step 1
and total interest in step 2

3.2. Actuarial method


This method applies an implicit rate of interest, applicable specifically to the lease, to the value of the
outstanding liability.

Example 3 Finance lease (2)


Danny commences a finance lease on 1 January 20X4 acquiring a specialist camera which has a fair value of
$10,000.
The lease requires a deposit of $575 followed by seven annual instalments of $2,000 payable in arrears.
The implicit interest rate in the lease is 11%.
Calculate the total finance lease liability in the statement of financial position as at 31 December 20X4
using both the actuarial method and sum of digits method to allocate the interest.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 74

4. Current/non-current finance lease liability


The total finance lease liability needs to be split into the current liability and non-current liability on
the face of the statement of fionancial position. To split the finance lease liability a finance lease
payable table is required
Finance lease payable table - Payments in arrears

Instalment B/F Interest Paid C/F


OpenTuition.com

1 X X (X) X
2 X X (X) X
3 X X (X) -

Finance lease payable table - Payments in advance

Instalment B/F Paid Capital Interest C/F


1 X (X) X X X
2 X (X) X X X
3 X (X) - - -

Example 4 Current/non-current finance lease liability


A lease rental of $20,000 was paid on 1 April 20X4. It is the first of five annual payments in advance for the
rental of an item of equipment that has a cash purchase price of $80,000.The implicit interest rate in the
lease as 12% per annum. Leased assets should be depreciated on a straight-line basis over the life of the
lease.
Calculate the non-current finance lease liability to be shown on the statement of financial position as
at 31 March 20X5.

Calculate the depreciation expense and finance cost ot be shown in the statement of profit or loss for
the year ended 31 March 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 75

Chapter 17
FINANCIAL INSTRUMENTS (IAS 32 AND
IAS 39)
OpenTuition.com

1. Definitions
A financial instrument is any contract that gives rise to a financial asset in one company and a
financial liability or equity investment in another.

A financial asset is any asset that is:


cash
a contractual right to receive cash or another financial asset from another entity
a contractual right to exchange financial instruments with another entity under conditions that
are potentially favourable;
an equity instrument of another entity.

A financial liability is any liability that is a contractual obligation:


to deliver cash
or
to exchange financial instruments with another entity under conditions that are potentially
unfavourable.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.

2. Recognition and measurement


Financial instruments should be recognised when the contract is initially signed rather than when it
is settled.
Financial assets should be recognised at fair value plus any directly attributable transaction costs
(unless FVTPL).
Financial assets should be derecognised when they are sold or the rights to the cash flow have
expired.
Financial liabilities should be initially measured at fair value (net proceeds)
Financial liabilities should be derecognised when the liability has been discharged.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 76

3. Financial Assets - Classification


In accordance with IAS 39 there are four categories of financial assets.

Category Description Initially Subsequent


Held for Trading Investments intended for short Fair value* Fair value with gains/
term trading and derivatives losses recorded in profit
or loss
OpenTuition.com

Held to Maturity Quoted, fixed payment and fixed Fair value + Amortised cost
maturity date investments held transaction costs
until they mature.
Loans/Receivables Unquoted financial assets e.g. Fair value + Amortised cost
trade receivable. transaction costs
Available for sale Default category. It includes non- Fair value + Fair value with gains/
current asset investments i.e. that transaction costs losses recorded in
you intend to keep. reserves (OCI)**

* Any transaction costs are immediately recognised through profit or loss.


** Any gains/losses are subsequently reclassified to profit or loss on disposal on the financial asset.

Example 1 - PX
During its financial year ended 31 December 20X4, an entity, PX, entered into the transactions below:
In November 20X4, having surplus cash available, PX made an investment in the securities of a listed entity.
The directors intend to realise the investment in March or April 20X5, in order to fund the planned
expansion of PXs principal warehouse.
PX lent one of its customers, DB, $3,000,000 at a variable interest rate pegged to average bank lending rates.
The loan is scheduled for repayment in 20X9, and PX has provided an undertaking to DB that it will not
assign the loan to a third party.
PX added to its portfolio of relatively small investments in the securities of listed entities. PX does not plan to
dispose of these investments in the short term.

In accordance with IAS 39 Financial Instruments: Recognition and Measurement:


(a) Identify the appropriate classification of these three categories of financial asset and briefly
explain the reason for each classification.
(b) Explain how the financial assets should be measured in the financial statements of PX at 31
December 20X4.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 77

Example 2 Held for trading (FVTPL)


Robbie purchased a traded investment for $20m that he intends to sell in the near future. Directly
attributable transaction costs of $0.5m were incurred.
At the year end the asset had a market value of $60m.
Soon after the year end the asset was sold for $120m.
OpenTuition.com

Explain how should this be initially and subsequently accounted for in the financial statements of
Robbie.

Example 3 Available for sale


Jamie purchased a traded investment that he intends to keep for the long term. The investment cost $50m
and he incurred $1m transaction costs.
At the year end the value had increased to $80m.
Soon after the year end Jamie sold the asset for $90m.
Explain how should this be initially and subsequently accounted for in the financial statements of
Jamie.

Example 4 Held to maturity


Steve buys a redeemable 4% $10,000 bond which will mature in 5 years time. The bond cost $9,155 and
Steve intend to keep the bond until its maturity date.
The market rate of interest is 6%.
Explain how should this be initially and subsequently accounted for in the financial statements of
Steve.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 78

3. Financial Liabilities
When an instrument is issued to raise finance it will be classified as either a liability or an equity
instrument according to economic substance.
Equity instrument no obligation to deliver cash.
Financial liability contractual obligation to deliver cash.
OpenTuition.com

IAS 39 states that there are two types of financial liability.


Held for trading not commonly used apart from derivatives.
Held to maturity quoted, fixed maturity date.

Initial measurement
Initial measurement of a financial liability is at net proceeds.

Subsequent measurement
Held for trading Fair value through profit or loss
Held to maturity Amortised cost

Example 5 Financial liabilities


Evans issues two debt instruments with a face value of $10,000.
Debenture 1, has a coupon rate of 0% and is redeemed at a premium of $3,310 in three years time.
Debenture 2, has a coupon rate of 2% and is issued at a discount of $1,000 and redeemed at a premium of
$470 in two years time.
The market rate of interest is 10%
Explain how should this be initially and subsequently accounted for in the financial statements of
Evans.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 79

4. Convertible Instruments
If a convertible instrument is issued, the economic substance is a combination of equity and liability
and is accounted for using split equity accounting.
The liability element is calculated by discounting back the maximum possible amount of cash that
will be repaid assuming that the conversion doesnt take place. The discount rate to be used is that of
the interest rate on similar debt without and conversion option.
The equity element is the difference between the proceeds on issue and the initial liability element.
OpenTuition.com

The liability element is subsequently measured at amortised cost, using the interest rate on similar
debt without the conversion option as the effective rate. The equity element is not subsequently
changed.

Example 6 Peter
Peter issues $100,000 4% convertible loan stock, convertible in three years time.
The market rate of interest on similar debt without the conversion option is 8%.
Prepare extracts from the statement of profit or loss and the statement of financial position at the
end of the first year of issue.

The present value factors are as follows:


4% 8%
Year 1 0.962 0.926
Year 2 0.926 0.857
Year 3 0.889 0.794

Example 7 Sample question


LR issued a $4 million 7% convertible bond on 1 January 20X3 at par value. The bond is redeemable at par
on 31 December 20X7 or can be converted at that date on the basis of two $1 ordinary shares for every $10
of bonds held.

The prevailing market rate at 1 January 20X3 for a similar bond without conversion rights was 9% per
annum.
The value that will be credited to equity on the issue of this instrument is:
$_________ (round to the nearest $000)

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 80

5. Derivatives
A derivative financial instrument must have all three of the following characteristics:
Its value changes in response to the change in a specified interest or exchange rate, or in
response to the change in a price, rating, index or other variable;
It requires no initial net investment;
It is settled at a future date.
OpenTuition.com

IAS 39 requires that derivative financial instruments should be recognised as either an asset
(favourable) or liability (unfavourable).
They should be measured at fair value both upon initial recognition and subsequently, with any gains
or losses through profit or loss.

Example 8 Derivatives
Harry entered into a forward contract on 1 November 20X5, at nil cost, to purchase 100,000 units of tin at
$100 per unit on 1 February 20X6.
At 31 December 20X5, the forward rate for purchasing 100,000 units of tin was $104 per unit.
Harry does not adopt hedge accounting rules.
Explain how this forward contract should be accounted for by Harry in its financial statements for the
year ended 31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 81

Chapter 18
SHARE BASED PAYMENTS (IFRS 2)
The measurement and recognition of share based payments depends on the whether these payments
OpenTuition.com

are equity settled or cash settled share based payments.

1. Equity Settled
If the fair value of goods/services is known then this should be used in order to value the option, if the
fair value of the goods/services is not known then the fair value of the option at the grant date should
be used to value the options.
The fair value should be taken to profit or loss over the vesting period on a straight line basis, based
on the number of options expected to be exercised. The corresponding credit entry will be recorded
in equity reserves.

Example 1 Fair value equity settled (services)


Brie granted 10,000 equity settled share based payments to its 20 directors on 1 January 2015. The options
vest on 31 December 2017. It is anticipated that none of the directors will leave over the three year period.
The fair value of the option is as follows:
$
1 January 2015 12.00
31 December 2015 13.50
31 December 2016 13.80
31 December 2017 14.20

Prepare the extracts to be shown in the statement of profit or loss and the statement of financial
position for each of the three years ended 31 December 2015 to 31 December 2017.

Example 2 Options expected to be exercised


On 1 January 2014, Edam granted 20,000 share options to each of its ten directors. The conditions attached
to the share option scheme is that the directors must remain an employee of Edam for three years. The fair
value of each equity settled share based payment at the grant date was $60.
At 31 December 2014, it was estimated that four directors would leave before the end of the three years.
At 31 December 2015, due to a downturn in the economy, it was estimated that one director would leave
before the end of the three years.
Prepare the extracts to be shown in the statement of profit or loss and the statement of financial
position for the year ended 31 December 2014 and 31 December 2015.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 82

Example 3 Fair value equity settled (goods)


Caerphilly purchased inventory at a cost of $10 million on 1 July 2015. The goods were sold in November
2015 for $14 million.
Caerphilly had cash flow problems during 2015 and negotiated with its supplier to exchange the goods for
options on its shares. The shares had a market value of 11.5 million on 1 July 2015.
Explain how the transaction should be dealt with in the financial statements for the year-ended 31
OpenTuition.com

December 2015.

2. Cash settled
If the fair value of goods/services is known then this should be used in order to value the option, if the
fair value of the goods/services is not known then the fair value of the option should be reassessed at
each reporting date and this value should be used to value the options.

The fair value should be taken to profit or loss over the vesting period based on the number of options
expected to be exercised. However as there will be a cash payment, the credit entry is recorded as a
liability.

Example 4 Fair value cash settled


Gouda granted 10,000 cash settled share based payments to its 20 directors on 1 January 2015. The options
vest on 31 December 2017. It is anticipated that none of the directors will leave over the three year period.
The fair value of the option is as follows:
$
1 January 2015 12.00
31 December 2015 13.50
31 December 2016 13.80
31 December 2017 14.20

Prepare the extracts to be shown in the statement of profit or loss and the statement of financial
position for each of the three years ended 31 December 2015 to 31 December 2017.

Example 5 Options expected to be exercised (cash settled)


On 1 January 2014, Cheddar granted 20,000 share appreciation rights to each of its ten directors. The
conditions attached to the cash settled share based payment scheme is that the directors must remain an
employee of Cheddar for three years. The fair value of each cash settled share based payment at the 31
December 2014 was $80 and at 31 December 2015 was $75.
At 31 December 2014, it was estimated that four directors would leave before the end of the three years.
At 31 December 2015, due to a downturn in the economy, it was estimated that two directors would leave
before the end of the three years.
Prepare the extracts to be shown in the statement of profit or loss and the statement of financial
position for the year ended 31 December 2014 and 31 December 2015.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 83

Example 6 Sample question Share based payments


RT granted 1,000 share options to each of its 400 employees on 1 January 20X3, with the condition that they
continue to work for RT for 4 years from the grant date. The fair value of each option at the grant date was
$5.
25 employees left in the year to 31 December 20X3 and at that date another 60 were expected to leave over
the next three years.
OpenTuition.com

Using the options below, complete the journal entry.


Account reference $
Debit
Credit

Account reference Journal Entry

Profit or loss $393,750

Non-current liabilities $500,000

Share capital $1,575,000

Other components of equity $1,875,000

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 84

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 85

Chapter 19
RELATED PARTIES (IAS 24)

1. Introduction
OpenTuition.com

Related party relationships are a normal part of everyday business. Often groups of companies are
formed based on their trading relationship.
This relationship can have a direct impact on the financial performance of an individual company. This
is mainly due to the special terms and arrangements that could arise between related parties e.g. an
entity sells its products to a subsidiary in the same group at a smaller mark-up than it would to an
entity that wasnt a related party. Obviously this would have a direct impact on profit margins.
When it comes to balances outstanding the same could be true e.g. an entity allows an extended
credit period to its related parties so distorting is debt collection figures.
If the users of the financial statements are aware of these relationships, transactions and balances
then they can take them into account when assessing the performance and position of the entity.

2. Definitions
Related party A party is related to an entity if the party either:
controls, is controlled by, or is under common control with, the entity
has an interest in the entity that gives a significant influence over the entity
has joint control over the entity
is an associate (IAS 28 Investment in Associates)
is a joint venture in which the entity is a venturer (IAS 31 Interests in joint ventures)
is a member of the key management personnel of the entity or its parent
is a close family member of any of the above
is a post-employment benefit plan for the employees of the entity or of any entity that is a
related party of the entity

Related party transaction The transfer of resources, services or obligations between related parties,
regardless of whether a price is charged.
Control Is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
Joint control Is the contractually agreed sharing of control over an economic activity.
Key management personnel Those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly, including any director of that
entity.
Significant influence The power to participate in the financial and operating policy decisions of an
entity but is not control over those policies. Significant influence may be gained by share ownership,
statute or agreement.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 86

Example 1 CXZ (March 2012)


Which one of the following would be regarded as a related party of CXZ?
A The wife of CXZs finance director

B CXZs main supplier, supplying approximately 35% of CXZs purchases


C CXZs biggest customer, providing 60% of CZs annual revenue
D CXZs banker, providing CXZ with and overdraft facility and a short-term loan at
OpenTuition.com

market rates

3. Disclosures
Relationships between parents and subsidiaries shall be disclosed irrespective of whether there have
been transactions between those related parties.
Name of entitys parent and;
If different the ultimate controlling party
Disclosure of key management personnel compensation
Key management personnel compensation in total and for each of the following;
Short-term employee benefits
Post-employment benefits
Other long term benefits
Share based payments
Disclosure of transactions and balances generally
If there have been transactions between related parties, an entity should disclose the nature of the
related party relationships as well as information about the types of transactions and the outstanding
balances necessary for an understanding of the financial statements
Disclosure should be made irrespective of whether a price is charged.
At a minimum the disclosure should include:
The amount of the transactions
The amount of outstanding balances, including terms and conditions, whether they are secured
and the nature of the consideration to be provided
Provisions for doubtful debts based on the amount outstanding
The expense recognised during the period in relation to bad and doubtful debts

The above should be made separately for each of the following


The parent
Entities with joint control or significant influence over the entity
Subsidiaries
Associates
Joint ventures in which the entity is a venture
Key management personnel
Other related parties

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 87

Chapter 20
REVENUE (IAS 18)

1. Definition
OpenTuition.com

Revenue - The gross inflow of economic benefits during the period arising in the course of the
ordinary activities of an entity when those inflows result in increases in equity, other than increases
relating to contributions from shareholders.

2. Measurement
Revenue should be measured at the fair value of the consideration received or receivable.
Revenue could arise from the following;
Sales of goods
Rendering of services
Interest, royalties or dividends

3. Revenue from sale of goods


Revenue from the sale of goods can be recognised when all the following conditions have been met:
Transfer of significant risks and rewards of ownership to the buyer
Sellers no longer retains any managerial involvement or control over the goods
The amount of revenue can be measured reliably
It is probable economic benefits from the transaction will be received
The costs incurred can be measured reliably

Example 1 SFD
SFD sells an item of furniture on 1 October 20X4 for $5,000 with a one-year interest free period. The fair
value of the good sold is $4,762 at todays prices.
What amount of revenue for the sale of goods would be recognised in the statement of profit or loss
for the year-ended 31 December 20X4?

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 88

Example 2 DFG (May 2012)


Extract of trial balance for the year-ended 31 March 20X2:

Dr Cr
$000s $000s
Sales revenue 1,200
OpenTuition.com

Additional information:
The sales revenue for the year to 31 March 2012 includes $15,000 received from a new overseas customer.
The $15,000 was a 10% deposit for an order of $150,000 worth of goods. DFG is still waiting for the results of
the new customers credit reference and at 31 March 2012 has not despatched any goods.
What is the revised sales figure to be included in the statement of comprehensive income for the year
ended 31 March 20X2 based on this additional information?

4. Revenue from services


Revenue from services may be recognised only when certain conditions have been met relating to:
The amount of revenue can be measured reliably
It is probable that economic benefits associated with the transaction will be received
The stage of completion of the transaction at the Statement of Financial Position date can be
measured reliably
The costs incurred can be measured reliably
The revenue from the rendering of services will then be recognised based upon the stage of
completion of the service at the end of the reporting period.
Note: If the outcome cannot be measured reliably then the revenue recognised is equivalent to the
costs incurred that are expected to be recovered.

Example 3 Past exam question CF (September 2012)


CF, a contract cleaning entity, signed a contract to provide 12 months cleaning in an office block. The
contract for $12,000 commenced on 1 June 20X2. The terms of the contract provided for payment six
monthly in advance on 1 June and 1 December 20X2. CF received $6,000 and started work on 1 June 20X2.
How should CF account for the contract in its financial statements for the year ended 30 June 20X2?
A Debit cash $6,000 and credit revenue $6,000

B Debit cash $6,000, credit revenue $1,000 and credit deferred income $5,000
C Debit cash $6,000, debit receivables $6,000 and credit revenue $12,000
D Debit cash $6,000 and credit deferred income $6,000

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 89

Example 4 Revenue from goods and services


Holmes Ltd sold computer software to Who Ltd for $750,000. The price includes a three-year maintenance
contract which, if sold alone, would cost $150,000. The sale took place on 1 May 20X3.
What revenue relating to this transaction should be recognised in the year ended 30 April 20X4?
A $600,000
B $650,000
OpenTuition.com

C $750,000
D $800,000

5. Interest, royalties and dividends


Revenue from interest, royalties and dividends may be recognised when it is probable that the
benefits of the transaction will flow to the entity, and the amount of the revenue can be measured
reliably.
Interest income is recognised and measured using the effective method, in accordance with
IFRS 9.
Royalties are recognised using the accruals method
Dividends are recognised on a declared basis.

6. Disclosure
An enterprise should disclose:
Accounting policies adopted for the recognition of revenue
Amount of each significant category of revenue (sale of goods, rendering of services, interest,
royalties and dividends) recognised during the period
Amount of revenue arising from exchanges of goods or services included in each significant
category of revenue.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 90

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 91

Chapter 21
CONSTRUCTION CONTRACTS (IAS 11)

1. Definitions
OpenTuition.com

Construction contracts - contracts specifically negotiated for the construction of an asset or a


combination of assets that are closely interrelated or interdependent in terms of their design,
technology and function or their ultimate purpose or use.
Fixed price contract - contractor agrees to a fixed contract price, or a fixed rate per unit of output.
Cost plus contract - contractor is reimbursed for allowable or otherwise defined costs, plus a
percentage of these costs or a fixed fee.

2. Accounting treatment
Each construction contract must be accounted for separately.
The accounting treatment of each contract involves calculating the revenue and costs to be
recognised in the statement of profit or loss and an asset to be recognised in the statement of
financial position (amounts due to /from customers).

Statement of profit or loss


Step 1 Calculate the total profit or loss on the contract
Step 2 Determine whether the overall outcome of the contract is reasonably certain or not.
Step 3 If the outcome is reasonably certain then the revenue and costs are recognised based
on a stage of completion of the contract.
Or,
Step 3 If the outcome is not reasonably certain then the revenue recognised is based upon
the amounts of costs incurred that are reasonably expected to be recovered from the
customer.

Statement of financial position

$
Costs incurred to date X
Recognised profits X
Recognised losses (X)
Progress billings to date (X)
Gross amount due from/(to) customers X

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 92

Measurement of the stage of completion


The stage of completion can be measured using several methods but the more commonly used are
based upon a cost based method or work certified method.

Cost based method = Costs to date


Total estimated costs

Work certified method = Work certified to date


OpenTuition.com

Total contract revenue

Example 1 Profitable contracts


Alex commenced a three year construction contract during the year-ended 31 December 20X4 and
continued construction during 20X5. The details of the contract are as follows:

$m
Total contract value 45.0
Costs incurred to date @ 20X5 20.0
Estimated costs to completion 12.0
Work certified as completed in 20X5 15.0
Stage of completion @ 20X5 70%
Profit recognised to date @ 20X4 3.3
Show how this contract would be dealt with in the statement of profit or loss for the year ended 31
December 20X5.

Example 2 Loss making contracts


Evelyn commenced a construction contract in 20X5 that has seen large increases in future costs to complete.
The contract will still be completed on schedule in 20X6. The details from the year ended 31 December 20X5
are as follows:

$m
Total contract value 40.0
Costs incurred to date 25.0
Estimated costs to completion 20.0
Stage of completion 45%

Show how this contract would be accounted for in the statement of profit or loss for the year ended
31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 93

Example 3 Construction contracts


Noah has a three year contract which commenced on 1 January 20X5. At 31 December 20X5 Noah extracted
the following balances from its ledger relating to the contract:

$000 $000
Total contract value 140,000
Cost incurred up to 31 December 20X5:
OpenTuition.com

Attributable to work completed 52,000


Inventory purchased for use in future years 8,000 60,000
Progress billing to date 45,000
Cash received 26,500
Other information:
Expected further costs to completion 48,000

At 31 December 20X5, the contract was certified as 40% complete.

Prepare extracts from the statement of profit or loss and statement of financial position for the year-
ended 31 December 20X5, as required by IAS 11 Construction Contracts.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 94

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 95

Chapter 22
ETHICS

1. Fundamental Principles of the code


OpenTuition.com

A professional accountant is required to comply with the following fundamental principles:


Integrity
Objectivity
Professional competence and due care
Confidentiality

2. Integrity
A professional accountant should be straightforward and honest in all professional and business
relationships.
The principle of integrity imposes an obligation on all professional accountants to be straightforward
and honest in professional and business relationships. Integrity also implies fair dealing and
truthfulness.
A professional accountant should not be associated with reports, returns, communications or other
information where they believe that the information:
Contains a materially false or misleading statement;
Contains statements or information furnished recklessly; or
Omits or obscures information required to be included where such omission or obscurity would
be misleading.

3. Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of others to
override professional or business judgments.
The principle of objectivity imposes an obligation on all professional accountants not to compromise
their professional or business judgment because of bias, conflict of interest or the undue influence of
others.
A professional accountant may be exposed to situations that may impair objectivity. It is Impracticable
to define and prescribe all such situations. Relationships that bias or unduly influence the professional
judgment of the professional accountant should be avoided.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 96

4. Professional Competence and Due Care


A professional accountant has a continuing duty to maintain professional knowledge and skill at the
level required to ensure that a client or employer receives competent professional service based on
current developments in practice, legislation and techniques. A professional accountant should act
diligently and in accordance with applicable technical and professional standards when providing
professional services.
The principle of professional competence and due care imposes the following obligations on
OpenTuition.com

professional accountants:
To maintain professional knowledge and skill at the level required to ensure that clients or Employers
receive competent professional service; and
To act diligently in accordance with applicable technical and professional standards when providing
professional services.

5. Confidentiality
A professional accountant should respect the confidentiality of information acquired as a result of
professional and business relationships and should not disclose any such information to third parties
without proper and specific authority unless there is a legal or professional right or duty to disclose.
The principle of confidentiality imposes an obligation on professional accountants to refrain from:
Disclosing outside the firm or employing organization confidential information acquired as a result of
professional and business relationships without proper and specific authority or unless there is a legal
or professional right or duty to disclose; and
Using confidential information acquired as a result of professional and business relationships to their
personal advantage or the advantage of third parties.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 97

6. Preparation and Reporting of Information


(Section 220 of CIMAs Code of conduct)
Professional accountants in business are often involved in the preparation and reporting of
information that may either be made public or used by others inside or outside the employing
organization. Such information may include financial or management information, for example,
forecasts and budgets, financial statements, management discussion and analysis, and the
management letter of representation provided to the auditors as part of an audit of financial
OpenTuition.com

statements. A professional accountant in business should prepare or present such information fairly,
honestly and in accordance with relevant professional standards so that the information will be
understood in its context.
A professional accountant in business who has responsibility for the preparation or approval of the
general purpose financial statements of an employing organization should ensure that those financial
statements are presented in accordance with the applicable financial reporting standards.
A professional accountant in business should maintain information for which the professional
accountant in business is responsible in a manner that:
Describes clearly the true nature of business transactions, assets or liabilities;
Classifies and records information in a timely and proper manner; and
Represents the facts accurately and completely in all material respects.

Threats to compliance with the fundamental principles, for example self-interest or intimidation
threats to objectivity or professional competence and due care, may be created where a professional
accountant in business may be pressured (either externally or by the possibility of personal gain) to
become associated with misleading information or to become associated with misleading information
through the actions of others.

The significance of such threats will depend on factors such as the source of the pressure and the
degree to which the information is, or may be, misleading. The significance of the threats should be
evaluated and, if they are other than clearly insignificant, safeguards should be considered and
applied as necessary to eliminate them or reduce them to an acceptable level. Such safeguards may
include consultation with superiors within the employing organization, for example, the audit
committee or other body responsible for governance, or with a relevant professional body.

Where it is not possible to reduce the threat to an acceptable level, a professional accountant in
business should refuse to remain associated with information they consider is or may be misleading.
Should the professional accountant in business be aware that the issuance of misleading information
is either significant or persistent, the professional accountant in business should consider informing
appropriate authorities in line with the guidance in section 140 of the code. The professional
accountant in business may also wish to seek legal advice or resign.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 98

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 99

Chapter 23
EARNINGS PER SHARE (IAS 33)
Earnings per share (EPS) is an important ratio as it is one of the component parts of the Price/Earnings
OpenTuition.com

ratio (P/E ratio). The P/E ratio is used by investors to help them identify the relative riskiness of
investments and the potential future performance of a business. This then allows an investor to see if
investments are over-valued or under-valued by the stock market.
EPS is also considered important by investors, analysts and others as a key measurement of
performance and as a basis for making decisions. It is principally for these reasons that some
accounting standard setters, amongst them the IASB, have produced accounting standards regulating
its calculation.

1. Basic earnings per share


profit attributable to the ordinary shareholders of the parent
Basic EPS =
weighted average number of ordinary shares in issue during the year
Profit attributable to owners of the parent = (less irredeemable preference dividends).
The earnings per share figure is disclosed at the bottom of the statement of profit or loss.

1.1. Changes to Share Capital


Issue at Full Market Price
The cash received from the shareholder/investor has an impact on earnings and consequently a
weighted average calculation needs to be done for the number of shares in issue during the year.

Bonus Issue
There is no cash received from the bonues issue so there is no impact on earnings and therefore no
weighted average calculation needs to be done.
Comparatives will need restating.

Rights Issue
The cash received from the shareholder/investor has an impact on earnings and so a weighted
average calculation needs to be done for the number of shares in issue during the year.
However as the shares are issued at below their market value there is a free element to the shares
issued, so an adjustment will need to be made using a rights issue fraction.
Comparatives will need restating.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 100

Example 1 Basic EPS


Ruth makes up its accounts to 31 June each year. On 1 July 20X5 Ruth has 500 million ordinary shares in
issue.
Profits for the year to 31 June 20X6 were $250m. There were no preference shares in issue.
Calculate the basic earnings per share assuming:
1. Share capital has not changed during the year
OpenTuition.com

2. An issue of 50 million new shares at full market price on 1 August 20X5.


3. A 1 for 4 bonus issue occurring on 1 November 20X5.
4. A 1 for 5 rights issue on 1 February 20X6 held at $1.25. The price of a share immediately before the
rights issue was $1.40.

2. Diluted Earnings per Share


This figure takes into account potential future changes to ordinary share capital that may occur as a
result of commitments that exist at the year end.
profit attributable to owners of the parent
Diluted EPS = weighted average number of ordinary shares in issue during the year

IAS 33 requires both the basic and the fully diluted earnings per share figure to be disclosed in the
financial statements, but only if the fully diluted figure is lower.
Future dilutions can occur if a company has issued convertible debt or share options.

Example 2 Diluted EPS


Flanagan makes up his accounts to 31 December each year and has calculated the basic EPS based on actual
shares of 1,000 million and earnings of $500m, for the year ended 31 Dec 20X5.
Convertible debentres
On 31 December 20X6 Flanagan had in issue of $10m of 5% convertible loan stock. The loan stock is
convertible at the following dates with the following terms:
31 Dec 20X6 125 shares for every $100 of loan stock
31 Dec 20X7 120 shares for every $100 of loan stock
The tax rate is 20%
Share options
Flanagan also granted 100m options at the same date. The option price is $2.50 but the average fair value of
a share is $4.00.
Calculate the fully diluted EPS for the year to 31 December 20X5.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 101

3. Limitation of Earnings per Share


Historic - transactions and events those that have already taken place so is of limited use for
predictive purposes although it is used as an indicator of future performance.
Share price - EPS is soon out of date whereas the P/E ratio calculation uses an up to date share
price figure. If the price has been affected significantly by events after the statement of financial
position date, the mixing of a current price with an old earnings figure may be meaningless.
Post-tax earnings earnings are calculated after tax figures and if entities are subject to
OpenTuition.com

significantly differing rates of tax because they are based in different countries, the comparison
is unrealistic.
Accounting standards - choice of accounting treatments. It is quite likely, therefore, that
entities being compared with each other use different policies and/or bases for preparation of
the financial statements. Where such policies and bases impact upon the profit figure, as will
usually be the case, EPS figures are not strictly comparable.
Accounting standards - The problem of comparability is made worse where the entities being
compared are subject to different sets of accounting standards.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 102

OpenTuition.com

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 103

C: ANALYSIS OF FINANCIAL PERFORMANCE


AND POSITION

Chapter 24
OpenTuition.com

ACCOUNTING RATIOS

1. Profitability

Gross profit
Gross margin (%) x 100%
Revenue

Operating profit
Operating profit margin (%) x 100%
Revenue

Profit for the year


Net margin (%) x 100%
Revenue

Revenue
Asset turnover (# times)
Capital employed*

PBIT
Return on capital employed (%) x 100%
Capital employed*

* Capital employed = shareholders funds + interest bearing debt.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 104

2. Liquidity
Current assets
Current ratio (X:1)
Current liabilities

Current assets (excl. inventory)


Quick ratio (X:1)
OpenTuition.com

Current liabilities

3. Efficiency (Working capital)


Inventory
Inventory holding period x 365 days
Cost of sales

Trade receivables
Receivables collection period x 365 days
Credit sales1

1 Total sales may be used instead.

Trade payables
Payables payment period x 365 days
Credit purchases2

2 Total purchases or cost of sales may be used instead.

Example 1 Past exam question May13


SAF has experienced a period of rapid expansion in the last 6 months following the launch of a new product
on 1 July 20X2. The following information is available from the management accounts of SAF:
6 months to 31 6 months to 30
December 20X2 June 20X2
$000 $000
Inventories at period end 1,220 460
Receivables at period end 1,715 790
Cash and cash equivalents at period end - 150
Trade payables at period end 1,190 580
Short-term borrowing at period end 250 -
Revenue for the period 3,100 2,000
Cost of sales for the period 2,420 1,450

Analyse the financial performance and working capital position of SAF, including the calculation of
five relevant ratios.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 105

Example 2 Sample question


The following information is available for two potential acquisition targets. The entities have similar capital
structures and both operate in the retail sector.

AB CD
Revenue $220m $240m
Gross profit margin 12% 21%
OpenTuition.com

Profit for the year/revenue margin 6% 7%

Which of the following statements give realistic conclusions that could be drawn from the above
information?
1. ABs management exercise greater control of the entitys overheads
2. ABs management has sourced cheaper materials for resale
3. CDs management exercises greater control of the entitys overheads
4. CD operates at the luxury end of the market and are able to charge a higher price for its items
5. CDs management has sourced cheaper materials for resale
6. AB has access to cheaper interest rates on its borrowings than CD

4. Solvency/Gearing/Risk
Debt
Gearing ratio = x 100%
Capital employed
Or,
Debt
Gearing ratio = Equity (shareholders funds) x 100%

If questions do not specify, either one of these may be used.


PBIT
Interest cover (# times) Interest payable

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 106

5. Investor Ratios
Profit for the year
Dividend Cover = Dividends (# times)

Dividends
Dividend Yield = Share price (%)
OpenTuition.com

Price per share


Price/earnings ratio = Earnings per share

Note: EPS can also be calculated but that is dealt with in a previous chapter because it is a ratio with
its own accounting standard.

6. Evaluation of ratios

Example 3 DFG (March11)


A friend has approached you looking for some advice. He has been offered the position of Sales Director
within an entity, DFG, which supplies the building trade. He commented that he had reviewed the
information on DFGs website and there were lots of positive messages about the entitys future, including
how it had secured a new supplier relationship in 2010 resulting in a significant improvement in margins.
He has been offered a lucrative remuneration package to implement a new aggressive sales strategy, but
has been with his current employer for six years and wants to ensure his future would be secure. He has
provided you with the finalised financial statements for DFG for the year ended 31 December 2010, with
comparatives.
The financial statements for DFG are provided below:
Statement of comprehensive income for the year ended 31 December
2010 2009
$m $m
Revenue 252 248
Cost of sales (203) (223)
Gross profit 49 25
Distribution costs (18) (13)
Administrative expenses (16) (11)
Share of profit of associate 7 -
Finance Cost (12) (8)
Profit before tax 10 (7)
Tax (3) 2
Profit for the year 7 (5)
Other comprehensive income:
Revaluation gain on PPE 40 -
Total comprehensive income 47 (5)

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 107

Statement of financial position at 31 December

2010 2009
$m $m
Non-current assets
Tangibles 254 198
Investment in associate 24 -
OpenTuition.com

Current assets
Inventory 106 89
Receivables 72 48
Cash/Bank - 6
456 341

Share capital 45 45
Retained earnings 146 139
Revaluation reserve 40 -
Non-current liabilities 91 91
Current liabilities 134 66
456 341

Additional information:
1. Long term borrowings
The long term borrowings are repayable in 2012.
2. Contingent liability
The notes to the financial statements include details of a contingent liability of $30 million. A major
customer, a house builder, is suing DFG, claiming that it supplied faulty goods. The customer had to
rectify some of its building work when investigations discovered that a building material, which had
recently been supplied by DFG, was found to contain a hazardous substance. The initial assessment
from the lawyer is that DFG is likely to lose the case although the amount of potential damages could
not be measured with sufficient reliability at the year-end date.
3. Revaluation
DFG decided on a change of accounting policy in the year and now includes its land and buildings at
their revalued amount. The valuation was performed by an employee of DFG who is a qualified valuer.
4. Current liabilities

2010 2009
$m $m
Trade and other payables 95 66
Short term borrowings 39 -
134 66

Analyse the financial performance of DFG for the year to 31 December 2010 and its financial
position at that date AND briefly discuss DFGs suitability as a secure employer for your friend
(8 marks are available for the calculation of relevant ratios).

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 108

7. Limitations of ratio analysis


Historic financial information has only very limited relevance when
applied to future decisions.
Detail Lack of detailed information - no breakdown of costs.
Non-financial performance largely ignored.
Accounting figures may be subject to manipulation by using creative
OpenTuition.com

accounting techniques and estimation.


Accounting policies two different companys figures may well be distorted by
different accounting practices and policies.
Accounting standards comparisons may be difficult if competitor using different
accounting standards (e.g. US GAAP)

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 109

ANSWERS TO EXAMPLES

A: SOURCES OF LONG-TERM FINANCE


OpenTuition.com

Chapter 1
No examples

Chapter 2
Answer 1 ABC
(a) An issue price of 350 cents would raise $30 million.
(b) An issue price of 325 cents would maximise the proceeds from the offer.
Number of bids Proceeds
Price (cents) x =
(cumulative) ($)
400 2,000,000 8,000,000
375 4,800,000 18,000,000
350 8,600,000 30,100,000
325 10,300,000 33,475,000
300 10,800,000 32,400,000

Chapter 3
Answer 1 Banks
$0.10 (1 + 0.04)
ke = + 0.04
$2.50
ke = 8.16%

Answer 2 Cohen

$0.35 (1 + 0.05)
ke = + 0.05
$4.15 - $0.35
ke = 14.67%

Answer 3 Wilson

42
(a) g =5 1
25
g = 10.93%

$0.42 (1 + 0.1093)
(b) ke = + 0.1093
$5.50
ke = 19.40%

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 110

Answer 4 Stiles
$0.16 (1 + 0.0986)
ke = + 0.0986
$2.36 - $0.16
ke = 17.84%

Where,
16
g =5
OpenTuition.com

1
10
g = 9.86%

Answer 5 Charlton
$0.45 (1 + 0.1125)
ke = + 0.1125
$4.45 - $0.45
ke = 23.77%

Where,

g = 0.15 x (1 0.25)
g = 0.1125 11.25%

Answer 6 Moore

8% x $1
kp =
$1.10
kp= 6.15%

Answer 7 Ball
kd = 8% x (1 0.25)

kd = 6%

Answer 8 Bobby

$10 (1 0.25)
kd =
$120
kd = 5.45%

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 111

Answer 9 Peters
DF DF
T Narrative CF PV PV
(5%) (10%)
0 (MV) (95) 1 (95) 1 (95)
10 x (1 0.25)
15 I (1 T) 4.329 32.5 3.791 28.4
= 7.5
n RV 100 0.784 78.4 0.621 62.1
15.9 (4.5)
OpenTuition.com

15.9
kd = x (0.10 0.05) + 0.05
(15.9 (4.5))
kd = 8.90%

Answer 10 Hunt
DF DF
T Narrative CF PV PV
(10%) (12%)
0 (MV) (110) 1 (110) 1 (110)
I (1 T)
14 6 3.170 19.0 3.037 18.2
= 8 x (1 0.25)
4 RV* 135.30 0.683 92.4 0.636 86.1
1.4 (5.7)
1.4
kd = x (0.12 0.10) + 0.10
(1.4 (5.7))
kd = 10.39%

RV (debt) = (1 + 0.1) x $100 = $110

*RV (shares) = $5 x 25 shares x (1 + 0.02)4 = $135.30 = HIGHER

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 112

Answer 11 Ramsey
k MV
Finance k x MV
(%) ($000s)
Equity 0.177 64,000 11,328
Redeemable bonds 0.0733 5,640 413
Bank loan 0.0375 4,000 150
OpenTuition.com

73,640 11,891
WACC = 11,891/73,640 = 16.1%

Workings
- Equity
MVe ($000s) = (4,000/0.25) x $4.00 = $64,000

$0.25 (1 + 0.1076)
ke = + 0.1076
$4.00
ke = 17.68%

Where,

25
g =5 1
15

g = 10.76%

- Redeemable bonds
MVd ($000s) = (6,000/100) x $94.00 = $5,640
DF DF
T Narrative CF PV PV
(5%) (10%)
0 (MV) (94) 1 (94) 1 (94)
8 x (1 0.25)
17 I (1 T) 5.786 34.7 4.868 29.2
=6
n RV 100 0.711 71.1 0.513 51.3
11.8 (13.5)

11.8
kd = x (0.10 0.05) + 0.05
(11.8 (13.5))
kd = 7.33%

- Bank loan
kd = 5% x (1 0.25) = 3.75%

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 113

B: FINANCIAL REPORTING

Chapter 4
Answer 1 Fair value adjustments
Property, plant and equipment $18,000
(12,000 + 5,000 + 2,000 1,000)
OpenTuition.com

Goodwill $1,680 (W3)

Retained earnings $3,435


(3,750 315) (W5)

Workings

(W2) Net Assets


@ year-end @ acqn Post- acqn
$ $ $
Share Capital 3,000 3,000
Reserves 6,500 500
Fair Value
2,000 2,000
(3,500 1,500)
Depreciation
(1,000)
(2,000 x 2/4 yrs.)
10,500 5,500 4,000
(W3) Goodwill
$
Cost of investment 5,000
FV of NCI at acqn 2,600
7,600
Less net assets @ acqn (W2) (5,500)
2,100
Less impairment @ 20% (420)
1,680
(W5) Group Reserves
$
100% P 14,000
75% x 5,000 (W2) 3,750
Less: 75% x 420 (W3) (315)
17,435

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 114

Answer 2 Unrealised profit


Inventory $6,400,000
(5,000 + 1,500 100 (PUP))

Receivables $9,000,000
(4,500 + 5,500 1,000)

Non-controlling interest (W4) $4,560,000


OpenTuition.com

Workings
(W2) Net Assets
@ year-end @ acquisition post-acq.
$000s $000s $000s
Share capital 5,000 5,000 -
Reserves 7,000 1,500 5,500
PUP
(100) (100)
(1,000 x 25/125 x)
11,900 6,500 5,400

(W4) Non-controlling Interest


$000s
NCI @ acqn (40% x 6,500 (W2)) 2,600
Add: NCI% x post-acqn (40% x 5,400 (W2)) 2,160
Less: NCI% x impt. (40% x 500) (200)
4,560

Chapter 5
Answer 1 MYA
Edinburgh Group Statement of Profit or Loss for year ended 31 December 20X5
Gla
Edi Abe Adj. $m
6/12
Revenue 200 120 120 (10 + 5) 425
Cost of sales (120) (80) (50) 10 + 5 (237.5)
- PUP (2)
- PUP (0.5)
Gross profit 187.5
Operating expenses (30) (15) (32) (77)
Operating profit 110.5
Tax (10) (5) (8) (23)
Profit for the year 19.5 30 87.5
20% 25%
Attributable to:
Group () 76.1
Non-controlling interest 3.9 7.5 11.4

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 115

Workings
Leeds - no PUP as there is no unsold inventory
25
Manchester - 1m x = 0.2m
125

Answer 2 Pip
Revenue $380million
OpenTuition.com

(250 + (280 x 6/12) 10 (i/co sales))

Cost of sales$171.2million
(100 + (160 x 6/12) 10 (i/co sales) + 0.2 (FV depn) + 1 (PUP))

Dividends $3million
(10 (70% x 10)

Non-controlling interest $1.76million


(10 0.2 (FV depn) 1 (PUP)) x 20%

Workings
- PUP
1 25
= $10m x 2 X 125 = $1m
- FV Depn
$2m/5 x 6/12 = 0.2m

Answer 3 TJ (Group statement of profit or loss and other comprehensive income)


Consolidated statement of profit or loss and other comprehensive income
TJ WM Adj $000
Revenue 16,500 13,800 (2,000) 28,300
Cost of sales (12,800) (9,750) 500 (22,650)
- PUP (100)
Gross profit 5,650
Distribution costs (500) (600) (1,100)
Administrative expenses (850) (780) (1,830)
- Impairment (200)
Profit before tax 2,720
Income tax expense (600) (650) (1,250)
Profit for the period 2,020 1,470
Other comprehensive income:
Gain from revaluations 120 200 320
Total comprehensive income 2,220 1,790
Profit attributable to:
Equity holders of the parent () 1,066
Non-controlling interest (20% x 2,020) 404

TCI attributable to:


Equity holders of the parent () 1,346
Non-controlling interest (20% x 2,220) 444

Workings
- PUP Adj
2,000 x 25/125 x 25% = 100

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 116

Chapter 6
Answer 1 Group statement of changes in equity
Penny Group consolidated statement of changes in equity for the year ended 31 December 20X5

Attributable to
Non controlling
equity holders of Total
interest
parent
OpenTuition.com

$000 $000 $000


1 January 20X5 (W1) 306,080 25,530 331,610
Profit for the period: 58,200
Parent (W2)
Non-controlling interest (W3) 3,000 61,200
Dividends:
Parent (10,000)
Non-controlling interest
(1,200) (11,200)
(4,000 x 30%)
31 December 20X5 () 354,280 27,330 381,610

Workings
(W1) Opening reserves
100% P 280,250
Add 80% x Ss post-acqn
(85,100 48,200) x 70% 25,830

Total 306,080

NCI (85,100 x 30%) 25,530


Total 331,610

(W2) Group profit


100% P 51,200
Add (70% x 10,000) 7,000
58,200

(W3) NCI profit


10,000 x 30% 3,000

Total 61,200

Chapter 7
Answer 1 PUP

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 117

Answer 2 Equity accounting (SFP)

Rey
$m
Assets:
Non-current assets
Property, plant and equipment
3,130
(1,560 + 1,250 + (400 80) (W2))
OpenTuition.com

Goodwill (W3) 45
Investment in associate (W6) 205
3,380
Current assets:
Inventory
1,030
(450 + 580)
Receivables
770
(380 + 390)
Cash
420
(190 + 230)
Total assets 5,600

Equity and liabilities:


Share capital 1,700
Retained earnings (W5) 1,644
Non-controlling interest (W4) 636
Total equity 3,980

Non-current liabilities
870
(520 + 350)

Current liabilities
Trade payable 750
(450 + 300)
Total liabilities 1,620
Total equity and liabilities 5,600

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 118

Workings
W1) Group Structure

20-50%
OpenTuition.com

>50%

W2) Net assets of subsidiary


At reporting
At acquisition Post acquisition
date
Equity shares 1,000 1,000
SP
Ret. earnings 800 450
FV PPE 400 400
Depreciation (80) -
2,120 1,850 270
W3) Goodwill
FV of consideration 1,340
NCI at acquisition
555
(30% x 1,850)
FV of net assets at acquisition (W2) (1,850)
Goodwill at acquisition 45
W4) Non-controlling interests
NCI @ acqn (W3) 555
Add: NCI% x Ss post-acqn profits (W2)
81
(30% x 270)
636
W5) Group retained earnings

100% P 1,450
Add: Ps % of Ss post acqn retained earnings (70% x
189
1,270(W2))
Add: Ps % of As post acqn retained earnings (W6) 10
Less: Dividend (W6) (5)
1,644
W6) Investment in associate
Cost 200
Add: P% x As post-acqn profits
10
(25% x 80 x 6/12)
Less: Dividend
(5)
(25% x 20)
205

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 119

Answer 3 Equity accounting (SPLOCI)


6/12
P S Adj. Group
Revenue 1,645 640 (80) 2,205
COS (1,205) (495) 80 (1,628)
- PUP (8)
Gross profit 577
OpenTuition.com

Dist costs (100) (35) (135)


Admin exp. (90) (25) (120)
- Impt (year) (5)
Finance cost (55) (15) (70)
Associate (25% x 200 x 8/12) - 2 38
Profit before tax 290
Taxation (35) (15) (50)
PFY 50 240
Revaluation gain 100 50 150
Total comp. inc. 100 390

Parent () 370
NCI = 20% x 100 20

Workings

PUP Adj

80 x 25/125 x 50% = 8

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 120

Chapter 8
Answer 1 Joint operation
Lyon statement of profit or loss for the year-ended 31 December 20X5
$000
$000
(@40%)
Revenue 30,000 12,000
Costs direct (22,000) (8,800)
OpenTuition.com

Costs operating (1,500) (600)


Depreciation (1,500) (600)
Profit 2,800

Lyon statement of financial position as at 31 December 20X5


$000
PPE (15,000 1,500) 13,500
Receivables 2,800

Chapter 9
No examples

Chapter 10
Answer 1 Matty
Matty Group statement of profit or loss for the year-ended 31 December 20X5
$000s
Operating profit (224 + 136 + 98) 458
Profit before tax 458
Tax (30 + 32 + 20) (82)
Profit for the year 376

Attributable to:
Non-controlling interest (W2) 50.6
Owners of the parent () 325.4

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 121

Workings
(W1) Group Structure
Matty

80%
OpenTuition.com

Luke

75%

Ben

Luke 80% control 20% NCI


Ben (80% x 75%) 60% effective control 40% NCI
(W2)
NCI Luke 20% x (112 15) 19.4
NCI Ben 40% x 78 31.2
50.6

Answer 2 Vertical group structures


Bravo
Group
$000
Non-current assets
213,000
(90,000 + 53,000 + 70,000)
Goodwill (W3) 13,000
Current assets
121,000
(40,000 + 48,000 + 33,000)

Total assets 347,000

Share capital 100,000


Retained earnings (W5) 107,000
Non-controlling interest (W4) 52,000

Non-current liabilities
39,000
(20,000 + 15,000 + 4,000)

Current liabilities
49,000
(19,000 + 16,000 + 14,000)

Total equity and liabilities 347,000

W2) Net assets of Gayle

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 122

At reporting
At acquisition Post acquisition
date
Equity shares 50,000 50,000
Ret. earnings 75,000 40,000 35,000
125,000 90,000 35,000
Net assets of Russell
At reporting
At acquisition Post acquisition
OpenTuition.com

date
Equity shares 40,000 40,000
Ret. earnings 45,000 20,000 25,000
85,000 60,000 25,000
W3) Goodwill
Gayle Russell
44,000
74,000 FV of consideration
(80% x 55,000)

25,000 Add: NCI at acquisition 20,000

(90,000) Less: N.A. at acquisition (60,000)

9,000 Goodwill at acquisition 4,000

W4) Non-controlling interest


Gayle Russell
(20%) (44%)
25,000 NCI at acquisition 20,000

7,000 11,000
Add: NCI% x post-acquisition
(20% x 35,000) (44% x 25,000)

(11,000) Less: 20% x 55,000 -

21,000 NCI at acquisition 31,000

W5) Group retained earnings


100% P 65,000
Add: 80% x 35,000(W2) 28,000
Add: 56% x 25,000(W2) 14,000
107,000

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 123

Answer 3 D-shaped complex group structure


Kallis
$000s
Non-current assets
234,000
(100,000 + 74,000 + 60,000)
Goodwill (W3) 55,000
Current assets
123,000
(50,000 + 45,000 + 28,000)
OpenTuition.com

Total assets 412,000

Share capital 150,000


Retained earnings (W5) 108,800
Non-controlling interest (W4) 11,200

Non-current liabilities
70,000
(35,000 + 30,000 + 5,000)

Current liabilities
72,000
(40,000 + 19,000 + 13,000)

Total equity and liabilities 412,000

W2) Net assets of Steyn


At reporting
At acquisition Post acquisition
date
Equity shares 40,000 40,000
Ret. earnings 90,000 50,000 40,000
130,000 90,000 40,000

Net assets of Adams


At reporting
At acquisition Post acquisition
date
Equity shares 30,000 30,000
Ret. earnings 40,000 30,000 10,000
70,000 60,000 10,000

W3) Goodwill
Steyn Adams
95,000 FV of consideration - direct 60,000
36,000
- indirect
(60% x 60,000)
10,000 Add: NCI at acquisition 4,000

(90,000) Less: N.A. at acquisition (60,000)

15,000 Goodwill at acquisition 40,000

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 124

W4) Non-controlling interest


Gayle Russell
(40%) (52%)
10,000 NCI at acquisition 4,000

16,000 5,200
Add: NCI% x post-acquisition
(40% x 40,000) (52% x 10,000)
OpenTuition.com

(24,000) Less: 40% x 60,000 -

2,000 NCI at year-end 9,200

W5) Group retained earnings

100% P 80,000
Add: 60% x 40,000(W2) 24,000
Add: 48% x 10,000(W2) 4,800
108,800

Chapter 11
Answer 1 - Jeremy
Goodwill
$m
FV consideration 45
FV of existing interest 52
FV NCI @ acquisition 32
FV net assets @ acquisition (105)
Goodwill @ acquisition 24

A gain of $12 million is also recorded in the group retained earnings, being the increase in fair value of the
original investment from $40 million to $52 million.

DR NCI $6.9m
DR Other components of equity () $1.1m
CR Bank $8m

NCI at acquisition 32
NCI% x Ss post acquisition
2.5
(25% x $10m)

Reduction on NCI = 5/25 x 34.5 = $6.9m

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 125

Answer 2 Sample question (JK)


Dr Non-controlling interest $506,000
(20/30 x 759,000)
Dr Reserves () $14,000
Cr Bank $520,000

Extract from the consolidated statement of changes in equity for the JK Group for the year ended 31
December 20X3
Attributable to equity Non-controlling
OpenTuition.com

holders of the parent interest


$000 $000
Balance at the start of the year 3,350 650
Comprehensive income for the year 1,280 150
Dividends paid (200) (30)
Adjustments to NCI for additional purchase of GH shares BLANK (506)
Adjustment to parents equity for additional purchase of GH shares (14) BLANK

Answer 3 Socks (control lost)

$m
Proceeds 120
Add: investment still held 96
Add: non-controlling interest 53
Less: net assets at disposal (201)
Less: goodwill (38)
Group profit on disposal 30

Answer 4 Betty (reduction in ownership interest)


DR Bank $90m
CR Non-controlling interest $80m
CR Other components of equity () $10m

Increase in NCI = 20% x ($350m + $50m) = $80m

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 126

Answer 5 Group SFP (step acquisition/disposals)


Reilly
$m

Non-current assets
395
(180 + 115 + 100)
Goodwill (W3) 33
OpenTuition.com

Current assets
230
(80 + 90 + 60)

Total assets 658

Share capital 250


Retained earnings (W5) 143
Other components of equity (W6) 15.4
Non-controlling interest (W4) 84.6

Non-current liabilities
39
(15 + 14 + 10)

Current liabilities
126
(50 + 46 + 30)

Total equity and liabilities 658

W2) Net assets of Hulme


At reporting
At acquisition Post acquisition
date
Equity shares 80 80
Ret. earnings 65 25 40
145 105 40
Net assets of Jones
At reporting
At acquisition Post acquisition
date
Equity shares 75 75
Ret. earnings 45 35 10
120 110 10
W3) Goodwill
Hulme Jones
75 FV of consideration 120
40 Add: NCI at acquisition 13
(105) Less: N.A. at acquisition (110)
10 Goodwill at acquisition 23

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 127

W4) Non-controlling interest


Hulme Jones
(40%) (10%)
40 NCI at acquisition 13

16 1
Add: NCI% x post-acquisition
(40% x 40 (W2)) (10% x 10 (W2))
56 NCI 14
OpenTuition.com

(14)
28.6
(10/40 x 56)
42 42.6

W5) Group retained earnings


100% P 110
Add: 60% x 40(W2) 24
Add: 90% x 10(W2) 9
143
W6) Group other components of equity
100% P 10
Change in ownership (W4) (1)
Change in ownership (W4) 6.4
15.4

Answer 6 Group SPL (step acquisitions/disposal)


P S Group
Revenue 2,468 1,644 4,112
COS (1,808) (1,287) (3,095)
Gross profit 1,017
Other expenses (285) (156) (441)
Finance cost (83) (39) (122)
Profit before tax 454
Taxation (53) (36) (89)
PFY 162 365
Parent () 312.3
NCI = 25% x 162 x 3/12
+ 62.7
= 35% x 162 x 9/12

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 128

Chapter 12
Answer 1 Dividend paid to the non-controlling interest

Non-controlling interest
B/f 110
OpenTuition.com

Dividend paid () 1 Profit 6

C/f 115

116 116

Answer 2 Dividend received from associate

Associate
B/f 180

Profit 20 Dividend paid () 10

C/f 190

200 200

Answer 3 Acquisition of subsidiary


2015
$m
Operating activities
Increase in inventory (W) 58
Increase in receivables (W) (15)
Increase in payables (W) 20
Investing activities
Acquisition of subsidiary, net of cash
(45)
(50 5)

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 129

Working capital movement

Inventory Receivables Payables


Opening 195 109 67
Acquisition/(disposal) 8 6 3
Expected 203 115 70
Closing (actual) 145 130 90
Movement 58 15 20
OpenTuition.com

Answer 4 Group statement of cash flows


Consolidated statement of cash flows for the year ended [date]
$m $m
Operating Activities
Group Profit Before Tax 375
Finance cost 55
Depreciation 130
Impairment 54
Profit on disposal of PPE (7)
Share of Associates Profit (40)
Inventory 70
Receivables (51)
Payables (139)
Cash generated from operations 447
Interest Paid (55)
Tax Paid (25)
Cash generated from operating activities 367
Investing Activities
Sale Proceeds from Tangibles 50
Purchase of Tangibles (655)
Dividend Received from Associate 30
Acquisition of Sub (50 3) (47)
Cash generated from investing activities (622)
Financing Activities
Proceeds from Share Issue (1,700 1,500) 200
Loan Issue (300 200) 100
Dividend paid to NCI (20)
Dividend paid to parent shareholders (65)
Cash generated from financing activities 215

Change in cash and cash equivalents (40)


Opening cash and cash equivalents 230
Closing cash and cash equivalents 190

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 130

Workings
Working capital movement

Inventory Receivables Payables


Opening 580 390 430
Acquisition 20 15 9
Expected 600 405 439
OpenTuition.com

Closing (actual) 530 456 300


Movement 70 51 139

Taxation
B/f
300
(190 + 110)
Tax paid () 25 SPL - Tax 95
C/f
370
(220 + 150)

395 395

PPE
B/f 1,250
Depreciation 130
Purchase 155
Acquisition 13 Disposal 43
Revaluation 500
C/f 1,745
1,918 1,918

Goodwill on acquisition = 50 -42 = 8

Impairment = 1,230 + 8 = 1,238 -1,184 = 54

Associate
B/f 190
Profit 40 Dividend paid () 30
C/f 200

200 200

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 131

Chapter 13
Answer 1 Functional currency
1 December 20X5

DR Purchases $97,561
CR Payables $97,561
OpenTuition.com

400,000 Dinar
= = $97,561
4.1

31 December 20X5

Retranslate the monetary balance (payable) at the closing rate (4.3 Dinar:$1)

400,000 Dinar
= = $93,023
4.3
Reduction in payables = $97,561 - $93,023 = $4,538

DR Payables $4,538
CR Profit or loss $4,538
Do not retranslate the non-monetary balance (inventory), and leave it at $97,561 at the reporting date.

10 January 20X6

Translate the payment at the exchange rate on the day of the transaction

400,000 Dinar
= = $90,909
4.4
DR Payables $93,023
CR Bank $90,909
CR Profit or loss $2,114

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 132

Answer 2 Overseas consolidation


Holly Ivy Ivy
@4.0 Group
$m Dinars m $m
Revenue 247 1,664 416 663
Cost of sales (181) (1,288) (322) (503)
160
Expenses (29) (156) (39) (68)
OpenTuition.com

92
Finance costs (8) (40) (10) (18)
74
Taxation (5) (36) (9) (14)
Profit for the year 26 146 36 60

Attributable to:
Parent 52.8
NCI (20% x 36) 7.2

Holly
$m

Non-current assets
339.5
(200 + 500/4.3 + 100(W2)/4.3
Goodwill (W3) 65.1
Current assets
180.7
(90 + 390/4.3

Total assets 585

Share capital 250


Retained earnings (W5) 190.7
Non-controlling interest (W4) 34.0

Non-current liabilities
15.1
(80 + 65/4.3)

Current liabilities
95.3
(50 + 195/4.3)

Total equity and liabilities 585

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 133

Workings
W2) Net assets of Ivy (Dinars m)
At reporting
At acquisition Post acquisition
date
Equity shares 350 350
Ret. earnings 280 150 130
FV - land 100 100
730 600 130
OpenTuition.com

W3) Goodwill (Dinars m)


FV of consideration 760
NCI at acquisition (20% x 600) 120
FV of net assets at acquisition (W2) (600)
Goodwill at acquisition 280

W4) NCI (Dinars m)


NCI @ acqn (W3) 120
Add: 20% x 130 (W2) 26
146

W5) Group retained earnings ($ million)


100% P 110
Add: 80% x 130 (W2) 104
Less: exchange loss (W6) (23.3)
190.7

W6) Exchange difference on investment


$ million
Initially Dinars 760 million @ 3.8 = 200
Year-end Dinars 760 million @ 4.1 = 176.7
Loss = 23.3

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 134

Answer 3 gain or loss on translation of overseas subsidiary


$m
Opening net assets = 600 million Dinars
@ OR (3.8) 157.9
@ CR (4.3) 139.5
(18.4)
OpenTuition.com

Profit for the year = 146 million Dinars


@ AR (4.0) 36.5
@ CR (4.3) 34.0
(2.5)
Goodwill = 280 million Dinars
@ OR (3.8) 73.7
@ CR (4.3) 65.1
(8.6)

Translation loss (29.5)


Any gains or losses on translation of the overseas subsidiary are recognised in other comprehensive income.

Chapter 14
Answer 1 Tracy (ignoring deferred tax)
20X5 20X6 20X7
($000s) ($000s) ($000s)
Profit before tax 2,000 2,000 2,000
Income tax expense (100) (500) (520)
Profit after tax 1,900 1,500 1,480

Workings
20X5 20X6 20X7
($000s) ($000s) ($000s)
Profit before tax 2,000 2,000 2,000
Add: depreciation 1,000 1,000 1,000
Less: tax depreciation (2,500) (500) (400)
PCTCT 500 2,500 2,600
Tax @ 20% 100 500 520

$000s
Cost 5,000
Tax allowance X5 (50%) (2,500)
2,500
Tax allowance X6 (20%) (500)
2,000
Tax allowance X7 (20%) (400)
1,600

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 135

Answer 2 Tracy (incl. deferred tax)


20X5 20X6 20X7
($000s) ($000s) ($000s)
Profit before tax 2,000 2,000 2,000
Income tax expense
- current tax (100) (500) (520)
- deferred tax movement (300) 100 120
Profit after tax 1,500 1,600 1,600
OpenTuition.com

20X5 20X6 20X7


($000s) ($000s) ($000s)

Carrying value 4,000 3,000 2,000


Tax base 2,500 2,000 1,600

Temporary difference 1,500 1,000 400

@ 20% 300 200 80


DT liab DT liab DT liab

Closing DT 300 200 80


Opening DT 0 300 200
Movement 300 100 120
increase decrease decrease

Chapter 15
Answer 1 Bebob

The directors are incorrect in their accounting treatment of the landscaping costs.

A provision needs to be recognised for the costs at the present value of $2million because there is a reliable
estimate, along with a legal obligation and probable outflow of economic benefit.

The $2million is also capitalised as part of the cost of the gold mine as it is a directly attributable cost under
the rules of IAS 16 PPE, giving a total cost of 7million on the statement of financial position.

The provision needs to be unwound each year using the discount rate used in calculating the present value.
The provision will be increased annually and the charge taken to finance costs in the statement of profit or
loss.

Answer 2 Wedding
A provision should be recognised for the best estimate of settling the case based on the lawyers advice that
it is now probable the company will be found liable.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 136

Answer 3 Sample Question


The first statement - There is a probable outflow of economic benefit but the timing and amount is
uncertain and so a contingent liability should be included in ERs financial statements at 31 December
20X3. is correct.
A provision cannot be recognised as no reliable estimate can be made of the amounts, however there is a
probable outflow of economic benefit and so contingent liability is disclosed in the notes to the accounts

The disclosure of the contingent liability will involve a description of the nature and potential financial
effects.
OpenTuition.com

Chapter 16
Answer 1 Danny
Year 1
Statement of financial position Statement of profit or loss
$ $
Accrual 1,000 Operating lease expense 4,000

Workings
(2 x $3,000) + $2,000
Annual expense = = $4,000 p.a
2 years

CR Bank $5,000
DR P/L $4,000
DR Accruals $1,000

Answer 2 Finance lease


Statement of financial position Statement of profit or loss
$ $
PPE 10,706 Depreciation 3,569
(14,275 3,569) (14,275/4)
FL payable 10,703 Interest 1,428
(14,275 + 1,428 5,000) (14,275 x 10%)

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 137

Answer 3 Finance lease (2)


- Actuarial method
Statement of financial position Statement of profit or loss
$ $
PPE 8,571 Depreciation 1,429
(10,000 1,429) (10,000/7)
FL payable 8,462 Interest 1,037
OpenTuition.com

((10,000 575) + 1,037 2,000) (9,425 x 11%)

- Sum of digits method


Statement of financial position Statement of profit or loss
$ $
PPE 8,571 Depreciation 1,429
(10,000 1,429) (10,000/7)
FL payable 8,569 Interest (W) 1,144
((10,000 575) + 1,144 2,000)

Step 1 Calculate the sum of digits figure


7 x (7 + 1)
= 28
2

Step 2 Total interest


$
Total payments 14,575
Cash price/fair value (10,000)
Total interest 4,575

Step 3 - Interest

Year 1 = 7/28 x 4,575 = $1,144

Answer 4 Current/non-current finance lease liability


Interest
Year-ended B/F Paid Capital C/F
@12%
y/e March X5 80,000 (20,000) 60,000 7,200 67,200
y/e March X6 67,200 (20,000) 47,200 5,664 52,864

Total = $67,200
Non-current = $47,200
Current = $20,000 ()

Finance cost = $7,200

Depreciation = $16,000 ($80,000/5 years)

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 138

Chapter 17
Answer 1 PX
Securities of a listed entity

This investment has been acquired in order to be sold in the near future so it meets the IAS 39 definition of
an instrument held for trading. Therefore, it should be classified as a financial asset at fair value through
income statement, as required by IAS 39.
OpenTuition.com

Variable interest rate loan

This is a financial asset and PX intends to hold the loan until it is due for payment (it has guaranteed to
assign the loan to a third party). The payments are also fixed and determinable and the repayment date is
fixed. Therefore, the loan should be classified as a held to maturity investment.

Portfolio of investments

These investments are not held for trading because there is no intention to sell them in the near future.
They are not derivatives, nor do they fall into the other categories. Therefore, they must be classified as
available for sale financial assets.

How the financial assets should be measured.

IAS 39 allows an entity to designate a financial asset as at fair value through income statement provided
that this either:
eliminates or significantly reduces an accounting mismatch that would otherwise arise from
measuring it on a different basis; or
it is part of a group of assets and its performance is evaluated on a fair value basis, in accordance with
a documented risk management or investment strategy.
It is unlikely that any of the financial assets above meet either of these criteria and so the following
requirements apply:
The listed securities are at fair value through income statement and therefore are measured at fair
value.
The variable interest rate loan is measured at amortised cost (as held to maturity investment).
The investment portfolio is measured at fair value (as an available for sale financial asset).

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 139

Answer 2 Held for trading (FVTPL)


The asset is recorded initially at cost.
$
Dr Financial Asset 20m
Cr Cash 20m

It is classified as a held for trading financial asset so the $0.5million transaction costs are expensed through
profit or loss.
OpenTuition.com

It is subsequently remeasured at fair value with gains and losses through profit or loss.

So at the statement of financial position date:


$
Dr Financial asset (60 -20) 40m
Cr Gain (SPL) 40m
On disposal the asset is derecognised and any gain or loss on disposal recognised through profit or loss.
$
Dr Bank 120m
Cr Financial asset 60m
Cr Gain on disposal (SPL) 60m

Answer 3 Jamie
The asset is recorded initially at cost plus directly attributable transaction costs, because it is held as
available for sale.
$m
Dr Financial Asset 51
Cr Cash/Bank 51

It is classified as an available for sale and subsequently remeasured at fair value with gains or losses
recognised in other comprehensive income.
$m
Dr Financial asset (80 51) 29
Cr Other comp. income 29

Upon sale the asset is derecognised and the reserve is recycled back to through profit or loss.
$m
DR Bank 90
DR Reserves 29
Cr Asset 80
Cr Profit or loss 39

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 140

Answer 4 Held to maturity


The asset is initially recorded at cost.
$
Dr Financial Asset 9,155
Cr Cash/Bank 9,155

It is classified as a held to maturity financial asset and subsequently remeasured at amortised cost.
OpenTuition.com

b/f Finance income Cash Received c/f


@6%
Yr 1 9,155 550 (400) 9,305
Yr 2 9,305 558 (400) 9,463
Yr 3 9,463 568 (400) 9,631
Yr 4 9,631 578 (400) 9,809
Yr 5 9,809 589 (400) -
(rounding!)

Answer 5 Financial liabilities


The debentures are recorded initially at net proceeds, classified as hald to maturity financial liabilities and
subsequently measured at amortised cost.

The calculation are as follows:

(i) Zero coupon bond

Finance charge at Paid c/f


10%
Yr 1 10,000 1,000 - 11,000
Yr 2 11,000 1,100 - 12,100
Yr 3 12,100 1,210 (13,310) -

(ii) Discounted bond

Finance charge Paid 2% c/f


@ 10%
Yr 1 9,000 900 (200) 9,700
Yr 2 9,700 970 (10,670) -

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 141

Answer 6 Peter
The instrument will be classified as a hybrid. Initial proceeds are $100,000.
$
Dr Cash/Bank 100,000
Cr Liability (W1) 89,604
Cr Equity 10,396
OpenTuition.com

(W1) Assumption that no conversion will occur


Cash Paid
8% $
Yr 1 $4,000 x 0.926 3,704
Yr 2 $4,000 x 0.857 3,428
Yr 3 $104,000 x 0.793 82,472
Liability 89,604
Equity 10,396

End of year 1 the discount is unwound.


$89,604 x 8% = $7,168

Dr Finance costs $7,168


Cr Liability $7,168

SFP
Liability (89,604 + 7,168) $96,772

Answer 7 Sample Question


The value that will be credited to equity on the issue of this instrument is:

$ (round to the nearest $000)


T CF DF PV
15 280 3.890 1,089
5 4,000 0.65 2,600
3,689

Equity = 4,000 3,689 = 311

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 142

Answer 8 Derivates
The forward contract is a derivative because:

Its value changes as the price of tin changes


It has no initial cost
It is settled on 1 February 20X6 (future date)

The forward contract is initially measured at its fair value of nil on 1 November 20X5 as it has a nil cost.
OpenTuition.com

At the reporting date it is remeasured to its fair value with gains/losses through profit or loss:

$
With the contract have to pay
101,000
(100,000 x $101)
Without the contract would have to pay
104,000
(100,000 x $104)
Gain (cheaper with contract) 3,000

Statement of profit or loss (extract) for the year ended 31 December 20X5
20X8
$
Gain on derivative 3,000

Statement of financial position (extract) at 31 December 20X5


20X8
$
Derivative asset 3,000

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 143

Chapter 18
Answer 1 Fair value equity settled (services)
Statement of financial position (extract)

31 Dec15 31 Dec16 31 Dec17


Other components of equity $800,000 $1,600,000 $2,400,000
(W)
OpenTuition.com

Statement of profit or loss (extract)

31 Dec15 31 Dec16 31 Dec17


Expense (= movement) $800,000 $800,000 $800,000

Workings
31 December 2015

1
Obligation = 10,000 options x 20 employees x $12 x = $800,000
3

31 December 2016

2
Obligation = 10,000 options x 20 employees x $12 x = $1,600,000
3

31 December 2017

3
Obligation = 10,000 options x 20 employees x $12 x = $2,400,000
3

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 144

Answer 2 Options to be exercised (equity settled)


Statement of financial position (extract)

31 Dec14 31 Dec15
Other components of equity (W) $2,400,000 $7,200,000

Statement of profit or loss (extract)


OpenTuition.com

31 Dec14 31 Dec15
Expense (= movement) $2,400,000 $4,800,000

Workings
31 December 2014

1
Obligation = 20,000 options x (10 4) employees x $60 x = $2,400,000
3

31 December 2015

2
Obligation = 20,000 options x (10 1) employees x $60 x = $7,200,000
3

Answer 3 Fair value equity settled (goods)


The transaction involves an equity settled share based payment for goods as the supplier has the right to
receive shares in Caerphilly in return for the transfer of goods.

As it is an equity settled share based payment the fair value of the goods at $10 million should be used to
record the transaction.

DR Purchases/inventory $10 million


CR Other components of equity $10 million

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 145

Answer 4 Fair value cash settled


Statement of financial position (extract)
31 Dec15 31 Dec16 31 Dec17
Other components of equity (W) $900,000 $1,840,000 $2,840,000

Statement of profit or loss (extract)


31 Dec15 31 Dec16 31 Dec17
OpenTuition.com

Expense (= movement) $900,000 $940,000 $1,000,000

Workings
31 December 2015
1
Obligation = 10,000 options x 20 employees x $13.50 x = $900,000
3

31 December 2016
2
Obligation = 10,000 options x 20 employees x $13.80 x = $1,840,000
3

31 December 2017
3
Obligation = 10,000 options x 20 employees x $14.20 x = $2,840,000
3

Answer 5 Options to be exercised (cash settled)


Statement of financial position (extract)
31 Dec14 31 Dec15
Liability (W) $3,200,000 $8,000,000

Statement of profit or loss (extract)


31 Dec14 31 Dec15
Expense (= movement) $3,200,000 $4,800,000

Workings
31 December 2014
1
Obligation = 20,000 options x (10 4) employees x $80 x = $3,200,000
3

31 December 2015
2
Obligation = 20,000 options x (10 2) employees x $75 x = $8,000,000
3

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 146

Answer 6 Sample Question


Account reference $
Debit Profit or loss $393,750
Credit Other components of equity $393,750

$5 (FV) x 1,000 (options) x (400 25 60) (# eees)


Obligation = = $393,750
OpenTuition.com

Chapter 19
Answer 1 CXZ
A

Chapter 20
Answer 1 SFD
Sale of goods revenue = $4,762
Interest income revenue = $59.50
((5,000 4,762) x 3/12)
Total revenue = $4,821.50

Answer 2 SFD
SFD can only recognise revenue from the sale of goods once it has transferred substantially all of the risks
and rewards of ownership to its customer. As the goods have not yet been despatched it appears that there
is no transfer of risk and reward so no revenue should be recognized.

Answer 3 CF
B

Answer 4 Holmes
B

Chapter 21
Answer 1 Profitable contracts
$m
Revenue (= work certified in year) 15.0
Cost () (9.2)
Profit (9.1 (W) 3.3) 5.8

Workings
$m
Total revenue 45.0
Total costs (20.0 + 12.0) (32.0)
Profit 13.0
@ 70% 9.1

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 147

Answer 2 Loss making contracts


$m
Revenue (45% x 40) 18.0
Cost () (23.0)
Loss (100%) (5.0)

Workings
OpenTuition.com

$m
Total revenue 40.0
Total costs (25.0 + 20.0) (45.0)
Loss (5.0)

Answer 3 Construction contracts


Statement of profit or loss (extract)
$000
Revenue (40% x 140,000) 56,000
Cost () (43,200)
Profit 12,800

Statement of financial position (extract)

Current assets
$
Costs incurred to date 52,000
Recognised profits 12,800
Recognised losses (-)
Progress billings to date (45,000)
Gross amount due from/(to) customers 19,800

Receivables (45,000 26,500) 18,500

Workings

$000s
Total revenue 140,000
Total costs (60,000 + 48,000)) (108,000)
Profit 32,000
@ 40% 12,800

Chapter 22
No examples

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 148

Chapter 23
Answer 1 Basic EPS
250m
a) Basic EPS = = 50c per share
500m
250m
b) Basic EPS = = 45.8c per share
546m (W)
OpenTuition.com

Weighting Weighted average


Date No. shares in issue
(# months) no. shares
1 July X5 500m 1/12 42m
1 August X5 550m 11/12 504m
WANS = 546m
New number of shares

Original number 500


New issue 50
New number 550

250m
c) Basic EPS = = 40c per share
625m
New number of shares

Original number 500


125
New issue
____
625
New number
____
250m
d) Basic EPS = = 45.8c per share
546m
Date No. shares in issue Weighting (# Fraction Weighted average
months) no. shares
1 July X5 500m 7/12 1.40/1.38 296m
1 Feb X6 600m 5/12 250m
WANS = 546m
New number of shares
500m 1 8 = 63m extra shares
New number of shares = 500m + 63m = 563m

Theoretical ex-rights price

$ $
5 shares at 1.40 7.00
1 share at 1.25 1.25
6 shares 8.25

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 149

TERP = 8.25/6 = $1.375


Therefore rights issue fraction = 1.40 / 1.38

Answer 2 Diluted EPS


i) Convertible loan stock

500m + 400k
Diluted EPS = = 49.4c per share
OpenTuition.com

1,000m + 12.5m

(W1)
Extra earnings = $500,000 x (1 0.2) = $400,000

(W2)
Extra Shares = $10m x 125 shares / $100 = 12.5m

ii) Share options


500m
Diluted EPS = = 48.2c per share
1,000m + 37.5m

No. shares under the option 100m


No. shares at full market value
62.5m
100 x $2.50/$4.00
37.5m
Fully diluted EPS
Earnings Shares
($m) (m)
Basic 500 1,000
Options - 37.5
Convertibles 0.04 12.5
500.04 1,050 47.6c

Both the basic EPS of 50c and the fully diluted EPS of 48.1c are to be disclosed.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 150

C: ANALYSIS OF FINANCIAL PERFORMANCE AND POSITION

Chapter 24
Answer 1 Past exam question May13
The expansion of operations has resulted in more than a 50% increase in revenue, however this has been at
the expense of gross profit margin which has reduced from 27.5% to 21.9%. This is a significant decrease in
OpenTuition.com

the period, however it is likely that this is as a result of a strategic decision to sell a lower margin product as
costs would not be expected to increase that dramatically in a 6 month period. Alternatively, it could be the
result of a strategic decision to sell the new product at a discount in order to boost the volume of sales.

There has been a significant increase in inventories held, increasing from 58 days to 92 days. This is not
surprising in a period of expansion and it is most likely needed in order to meet the increased demand.

More concerning is the position on receivables and payables, as it appears that SAF is overtrading with an
increase in receivable days from 72 to 101 days in the last six months. It could be as a result of more
favourable credit terms being offered to new customers, however since receivables days have increased
beyond payable days the result will be increased pressure on the entitys liquidity.

It could be the case that the credit control department has struggled to cope with the increased level of
activity and could be addressed simply by dedicating additional resources to credit control.

The current ratio has fallen. However the quick ratio is more of a concern as it has decreased from 1.6 to 1.2
and this together with the entity having moved from a positive cash position to having short term
borrowings, makes it clear that the expansion has caused problems with the management of working
capital. The entity should ensure that an overdraft facility is in place until procedures can be imposed to
improve the management of working capital.

Appendix

All Workings in $000s 6 months to 31 December 2012 6 months to 30 June 2012


Inventory days 1,220/2,420 x 182.5 = 92 days 460/1,450 x 182.5 = 58 days
Payable days 1,190/2,420 x 182.5 = 90 days 580/1,450 x 182.5 = 73 days
Receivable days 1,715/3,100 x 182.5 = 101 days 790/2,000 x 182.5 = 72 days
Current ratio 2,935/1,440 = 2.0 1,400/580 = 2.4
Quick ratio 1,715/1,440 = 1.2 940/580 = 1.6
Gross profit margin 680/3,100 x 100 = 21.9% 550/2,000 x 100 = 27.5%

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 151

Answer 2 DFG (March11)


To friend

Report on financial performance and position

The revenue has only marginally increased in the year by 1.6%, however, profit margins have all increased
significantly. In particular the gross profit margin has increased from 10% to 19%, which is likely to be as a
result of reduced purchase prices from the new supplier contract that was secured in the year. Whilst this is a
very positive and important step for DFG (given its low margin in the previous year) it will be important to
OpenTuition.com

establish whether this reduced cost also means a reduced level of quality. If quality is being compromised
then this increase in margin maybe short-lived as customers may be driven away in the longer term.

In addition, the switch in supplier may be responsible for the lawsuit. It is a risky strategy to pursue
aggressive revenue and margin targets at the expense of supplying good quality products. Although a
contingent liability of $30 million is included in the notes, the lawyers assessment is that DFG is likely to lose
the court case and the payout may be more. There is already serious pressure on the entitys finances and
the entity may not survive if the payout is any more or if other customers decide to sue. There is a potential
issue of going concern that would need clarification before you arrive at a final decision concerning
employment.

Both administration and distribution costs have increased significantly when compared to a 1.6% increase in
revenue. Whilst these costs are not that large in relation to revenues, it will be important to establish that
management have good control over expenses for the long term.

The increase in TCI is largely due to the revaluation gain reported within other comprehensive income. The
valuation was performed by an internal member of staff, which is perhaps not as ideal as someone external,
however you noted that these financial statements were finalised and so I assume they have been audited
and that the valuations are fair. One note of caution though is why the directors have chosen this year to
change the policy - could it be an attempt to boost income and reduce gearing to make further borrowing
easier, especially as the long term borrowings will need to be repaid or re-negotiated relatively soon.
However, it maybe shows good commercial sense to ensure that assets that are to be used as security for
finance are at the most up-to-date valuation.

The overall liquidity of DFG is on the low side at 1.3:1 and has fallen significantly from 2009. One
contributing factor to the worsening liquidity is the significant increase in inventories in the year. This could
be as a result of bad publicity about below standard goods and customer orders being cancelled. There is
then an increased risk of obsolete inventories. This is reinforced by the inventories days which have
increased from 146 days to 191 days. Receivables days have also increased from 71 days to 104 days, and
this be could be as a result of disputed invoices. DFG may then have a problem with slow/non-payment of
these debts. Payables days have increased from 108 days to 171 days and this could be resulting from a
deliberate attempt by DFG to improve the cash flow by delaying payment or extended credit terms given by
the new supplier to attract DFGs business.

The cash position of DFG is clearly a concern as the cash has moved from a positive balance to an overdraft
and the long term borrowings are soon to be repaid or re-negotiated. This coupled with the poor working
capital management would indicate that DFG must raise some additional funding if it is to survive. The
gearing ratio shows deterioration on the previous year, despite an increase in equity from the revaluation.
However, it is likely to be the lack of interest cover that would put lenders off. It is unlikely that DFG could
afford to pay interest on any additional funding.

I would recommend investigating DFG in more detail before making your decision. Losing the court case
and having a large settlement to pay could result in the entity collapsing and despite the fact that details of
this are only in the notes, the seriousness of this should not be overlooked. The entity may struggle to
survive anyway as there is a lack of cash and funding options (and it should be noted that DFG did not pay a
dividend in 2010). The increases in profitability are not enough of an indicator of a stable/growing entity
especially an entity involved in the building trade which is known for its sensitivity to the economy around
it.

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums
2017 Examinations CIMA F2 152

Appendix

2010 2009
(Workings in $m)
Gross profit margin 49/252 x 100 = 19.4% 25/248 x 100 = 10.1%
Operating profit margin (49 18 16)/252 x 100 = 6.0% (25 13 11)/248 x 100 = 0.4%
Net profit margin 7/252 x 100 = 2.8% (5)/248 x 100 = (2.0)%
OpenTuition.com

Gearing (91 + 39)/231 x 100 = 56.3% 91/184 x 100 = 49.5%


Current ratio 178/134 = 1.3:1 143/66 = 2.2:1
Quick ratio (178 106)/134 = 0.5:1 (143 89)/66 = 0.8:1
Receivable days 72/252 x 365 = 104 days 48/248 x 365 = 71 days
Payable days 95/203 x 365 = 171 days 66/223 x 365 = 108 days
Inventory days 106/203 x 365 = 191 days 89/223 x 365 = 146 days
Return on capital employed (49 18 16)/(231 + 91) x 100 = 4.7% (25 13 11)/(184 + 91) x 100 = 0.4%
Non-current asset turnover 252/254 = 0.99 times 248/198 = 1.3 times
Interest cover (10 + 12)/12 = 1.8 times ((7) + 8)/8 = 1.0 times

Free CIMA notes Free CIMA lectures Free CIMA tests Free tutor support StudyBuddies CIMA forums