ICAEW Past Questions Answers March 2008 To June 2017 Summary of Financial Accounting-Application Level

Professional Stage – Financial Accounting – March 2008
PROFESSIONAL STAGE (APPLICATION) - FINANCIAL ACCOUNTING

OT EXAMINER’S COMMENTS
The following table summarises how well candidates answered each syllabus content area.
How well* candidates answered each syllabus area
Syllabus area Number of questions Well answered Poorly answered
LO1 3 3 0
LO2 9 9 0
LO3 3 2 1
Total 15 14 1
*If 50% or more of the candidates gave the correct answer, then the question was classified as ‘well answered’.
Item 1
This item tested simple elimination of inter-company trading, the resulting unrealised profit figure in inventory at
the period end and goods in transit. This is an area of the syllabus that is tested frequently but is consistent with
candidates’ performance in the written test questions in the examination in this area.
© The Institute of Chartered Accountants in England and Wales 2008, Page 1 of 15

MARK PLAN AND EXAMINER’S COMMENTARY
The mark plan set out below was that used to mark these questions. Markers are encouraged to use discretion
and to award partial marks where a point was either not explained fully or made by implication. More marks are
available than could be awarded for each requirement, where indicated. This allows credit to be given for a
variety of valid points, which are made by candidates.
Question 1
General comments: this is a trial balance question with the requirement to prepare a balance sheet and
income statement. Adjustments are required for the disposal of an item of plant, the recognition of a
provision and a related asset and the revaluation of property, as well as other minor adjustments.
(a)
Ginger Ltd - Balance Sheet as at 31 December 2007

£ £
ASSETS
Non-current assets
Property, plant and equipment
((4,135,000 -1,696,750) + 4,835,000 + 7,766,850
(857,000 – 363,400)) (W3)
Current assets
Inventories (168,000 – 8,500) 159,500
Trade receivables 516,500
Other receivables (200,000 + 800,000 (W5)) 1,000,000
Cash and cash equivalents 22,600
1,698,600
Total assets 9,465,450
EQUITY AND LIABILITIES

Capital and reserves
Ordinary share capital 6,000,000
Revaluation reserve (470,000 – 6,750(W2)) 463,250
Retained earnings (W6) 700,900
Equity 7,164,150
Non-current liabilities
Bank loan 700,000
Current liabilities
Trade and other payables (461,300 + 140,000) 601,300
Provisions (W5) 1,000,000
1,601,300
Total equity and liabilities 9,465,450

Ginger Ltd – Income Statement for year ended 31 December 2007

£
Revenue 6,800,000
Cost of sales (W4) (3,286,900)
Gross profit 3,513,100
Administrative expenses (W4) (1,656,750)

Other operating costs
(450,000 – 15,000 (W1)+ 200,000 (W5)) (635,000)
Other income 31,800
1,253,150
Finance cost (680,000)

Profit before tax 573,150
Income tax expense (140,000)
Profit for the period 433,150
Note: Marks will be awarded if items are included in a different line item in the income statement
provided that the heading used is appropriate.
W1 Disposal of piece of machinery
Machinery – cost £200,000
Accumulated depreciation £200,000 x 20% x 3 years = £120,000
Carrying amount at disposal £200,000 - £120,000 = £80,000
£
Proceeds 95,000
Less: CA (80,000)
Profit on disposal 15,000
W2 Revaluation reserve
Property Land Total

£ £ £
Retail units 400,000 400,000 800,000
Accumulated depreciation (200,000) -
Carrying amount 200,000 400,000
Valuation at 1 Jan 2007 535,000 535,000

Revaluation reserve 335,000 135,000 470,000
Depreciation on cost 400,000 x 5% years = 20,000 pa
Depreciation on revalued amount 535,000 x 5% = 26,750 pa
Transfer between reserves for additional depreciation 26,750 – 20,000 = 6,750

W3 Property, plant and equipment
Freehold land and buildings
Property Land
£ £
Cost (4,000,000 – 400,000 (W2)) 3,600,000
(4,700,000 – 400,000 (W2)) 4,300,000
Valuation 535,000 535,000
At 31 December 2007 4,135,000 4,835,000
Accumulated depreciation 1,690,000

Less revalued depreciation (W2) (200,000)
Depreciation in year (5%) 206,750
At 31 December 2007 1,696,750
Plant and equipment
Cost 962,000
Add back disposal proceeds 95,000
Less disposal cost (200,000)
At 31 December 2007 857,000
Accumulated depreciation 312,000

Less disposal (W1) (120,000)
Depreciation in year (20%) 171,400
At 31 December 2007 363,400
W4 Expenses
Cost of sales Administrative

expenses
Trial balance 1,450,000
Purchases 2,600,000
Opening inventory 675,000
Depreciation (W3)
Land & buildings 206,750
Plant & machinery 171,400
Write down (9,000 – 500) 8,500
Closing inventory (168,000)
3,286,900 1,656,750
W5 Provision
Legal claim £1,000,000 – most likely outcome

Counter claim £1,000,000 x 80% = £800,000 – receivable
Income statement effect: £1,000,000 - £800,000 = £200,000

W6 Retained earnings
£
Trial balance 261,000
Transfer from revaluation reserve (W2) 6,750
267,750
Add: Profit for period 433,150
700,900
Almost all candidates produced a well laid out income statement and balance sheet in appropriate
formats, although some candidates lost marks by not adding across numbers in brackets or transferring
numbers from workings. Presentation marks were lost by failing to complete the totals on the statements.
Most candidates were able to take items from the trial balance and insert them in the correct place in the
formats, with most candidates using an efficient matrix style costs working.
Marks were awarded where presentation differed to the marking guide but resulted in a reasonable
alternative. For example, trade receivables were often combined with other receivables and the £450,000
of operating costs was included in administrative expenses.
Candidates generally dealt correctly with the inventory adjustments and completed the double entry for
the taxation figure.
The effect of the legal claim caused candidates a number of problems, such as, calculating the closing
provision on a weighted average basis, as opposed to at its most likely outcome, describing the provision
as a contingent liability, but still including it in the balance sheet and failing to recognise that the income
statement should show the net effect of the provision and the counter claim of £200,000 (£1,000,000 less
£800,000).
Other common errors included charging depreciation on the land balance as well as the buildings,
calculating the revaluation uplift based on cost as opposed to on carrying amounts and forgetting to
include any revaluation uplift in the revaluation reserve on the balance sheet.
Total possible marks 24½

Maximum full marks 22

Question 2
General comments: this question focuses on the differences between cash accounting and the accrual basis of
accounting. The question develops by considering these concepts in relation to a number of revenue
transactions, with extracts from the financial statements required. The question is completed by looking at the
differences between a cash flow statement under IFRS and UK GAAP.
(a)(i)
Cash and accruals accounting
Cash accounting only considers the cash impact of a transaction. For example, sales are recorded in the
period when the buyer pays for the goods. This may not be the same period in which the buyer takes
delivery of the goods if delayed payment terms are provided.
The accrual basis of accounting instead records transactions in the period in which they occur, not when
the related cash flow arises. Sales are instead recorded when the risks and rewards of ownership pass
from the seller to the buyer, not when the buyer pays for the goods or services.
(a)(ii)
Revenue is recorded when there is an increase in economic benefits during the period. However, revenue
can only be recognised when an entity is sufficiently certain that it will be paid for the goods or services and
that payment is for a known amount.
The accrual basis of accounting is followed with revenue being recognised in the period in which the
associated work is undertaken rather than when cash is received.
In making the assessment of the timing of the economic benefits an entity should consider when the
following conditions have been met:
• The entity has transferred the significant risks and rewards of ownership of the goods to the buyer.
• The seller no longer has management involvement or effective control over the goods.
• The amount of revenue and costs can be measured reliably.
• It is probable that the economic benefits associated with the transaction will flow to the entity.
When an entity has met all the above conditions it recognises the revenue even though payment may still
be outstanding.
The answers to this part of the question were disappointing with a significant number of candidates failing to
appreciate the difference between cash and accrual accounting.
The majority of candidates were able to describe the basic features of cash and accruals accounting. A
significant minority were able to back their answers up by providing a well thought out example.
In (a)(ii) most candidates gained the marks for when revenue can be recognised per IAS 18 but few were
able to link this to the Framework principles for the recognition of income. This was mainly due to
candidates copying straight from the open book text without relating the information to the question
requirements.


(b) Extracts from the financial statements for the year ended 31 December 2007
(1) Sale of products on delayed payment terms
(i) Cash accounting
Nothing will be recorded under the cash accounting basis as no cash has been received at the year
end.
(ii) Accrual basis
Extract from income statement

£
Revenue 14,100
Investment income (900 x 6/12) 450
Extract from balance sheet

£
Trade and other receivables (14,100 + 450) 14,550
(2) Gardening services
(i) Cash accounting

£
Revenue 3,000

£
Cash 3,000
(ii) Accrual basis

£
Revenue (3,000 x 2/3) 2,000

£
Current liabilities
Deferred income (3,000 – 2,000) 1,000
(3) Garden design
(i) Cash accounting
At 31 December 2007, although some work has been undertaken on the garden design, the customer
has not paid anything. Therefore no revenue would be recognised under cash accounting.
£
Cost of sales 4,000

(ii) Accrual basis

£
Revenue (11,000 x 50%) 5,500
Cost of sales ((4,000 + 4,000) x 50%) (4,000)

£
Trade and other receivables 5,500
This part of the question asked for the preparation of extracts from the financial statements in relation
to three sales arrangements under both cash accounting and IAS 18. It was often impossible to
distinguish between which part of the answer was supposed to be cash accounting and which was
IAS 18.
Candidates obviously struggled with the concept of both cash and accrual accounting when related to
a scenario. Answers were poor in this area and often incomplete.
Common errors included failing to complete the double entry with the chosen revenue figure, to show
the appropriate receivable figure (under accrual accounting), including deferred income as an asset as
opposed to a liability, including a full year’s worth of interest of £900 rather than 6 months and
recognising all of the revenue of £11,000 rather than only half which represented how much work had
been completed.

(c) Marks
Cash flow statement – differences between IFRS and UK GAAP
Under UK GAAP a cash flow statement is based on the movement in cash rather than
cash and cash equivalents. Cash equivalents are instead treated as part of management
of liquid resources under UK GAAP.
Under UK GAAP a cash flow statement has eight headings rather than the three used
under IFRS.
UK GAAP includes an exemption for the preparation of a cash flow statement for small
entities and also in certain situations where you have a group of companies and
consolidated financial statements have been prepared which include a group cash flow
statement. No such exemptions are included under IFRS.
Total possible marks 3

The identification of the differences between UK GAAP and IFRS in relation to the cash flow
statements was answered well. The majority of candidates were able to identify that there were a
different number of headings under the two accounting regimes although some candidates wasted
time by writing out the headings in details, which was not required. The majority of candidates also
stated that UK GAAP uses pure cash rather than cash and cash equivalents.


Question 3
General comments: this question considers three specific areas of accounting. The first is the acquisition of a
subsidiary, with fair value adjustments required, specifically in relation to intangible assets. The second area
considers the accounting required for an associate and the effect of an impairment and the final area is the
development of a non-current asset. The question is completed by the preparation of a statement of changes in
equity.
(a)
(i) Goodwill – Hop Ltd
Fair value of net assets:

Net assets (FV)
£
Per question (500+18+250) 768,000
Staff retraining costs (15,000)
Start up costs (85,000)
Contingent liability (75,000)
Adjusted FV 593,000
Goodwill calculation
£
Fair value of consideration 400,000
Share of net assets acquired:
75% x 593,000 444,750
Discount on acquisition 44,750
(ii) Associate
Year end carrying amount £

Cost 200,000
Share of post-acq change in net assets
25% x (300,000) (75,000)
125,000
Impairment in year (bal fig) (45,000)
Recoverable amount 80,000
Investment in associate at 31 Dec 2007 is £80,000
(iii) Property, plant and equipment
Land cost (£1,200,000 + £20,000) £1,220,000
Building cost (£1,600,000 – 72,000 + 56,000) £1,584,000
Depreciation: (1,584,000 / 30 x (6/12)) £26,400

Head Office
£
Cost
At 1 January 2007 1,220,000
Additions 1,584,000
At 31 December 2007 2,804,000
Depreciation
At 1 January 2007 -
Charge for the year 26,400
At 31 December 2007 26,400
Carrying amount
At 31 December 2006 1,220,000
At 31 December 2007 2,777,600


(b)
Consolidated statement of changes in equity
Attributable to equity holders of

Lovage plc
Share
Minority
Share premiu Retained Total
interest
capital m earnings Total
Net profit for the
year (W2&W3) - - 208,600 208,600 33,750 242,350
Added on
acquisition of 148,250 148,250
subsidiary (W3) - - - -
Dividend declared
(W4) - - (63,000) (63,000) (63,000)
Share issue (W1) 160,000 240,000 - 400,000 - 400,000
1,615,00 2,515,00 - 2,515,00

Brought forward 900,000 - 0 0 0
3,060,60
Carried forward 1,060,000 240,000 1,760,600 0 182,000 3,242,600
Workings
W1 Share issue
160,000 shares issued:

£
Share capital (160,000 x £1) 160,000
Share premium (160,000 x £1.50) 240,000
400,000
W2 Net profit
Net profit for period:

£
Draft profit 425,000
Discount on acquisition (from a(i)) 44,750
Share of associate’s loss (from a(ii)) (75,000)
Impairment – associate (from a(ii)) (45,000)
Overheads (72,000 – 56,000) (from a(iii)) (16,000)
Depreciation (from a(iii)) (26,400)
Relocation costs (200,000)
Hop Ltd’s profit share (75% x £135,000 (W)) 101,250
Profit for period 208,600
(W) Hop Ltd’s post-acquisition profit
£
Per question 150,000
Computer software amortisation (15,000)
135,000
Computer software £90,000 / 3 x 6/12months = £15,000

W3 Minority interest
Minority interest profit in year £135,000 x 25% = £33,750

Minority share of b/fwd reserves £593,000 (part a(i)) x 25% = £148,250
W4 Dividend
Dividend 7p x 900,000 = £63,000
The majority of candidates prepared the necessary proforma for the consolidated statement of changes in
equity but were often then unable to populate it. A common omission from the proforma was the total
column immediately before the minority interest column.
An average candidate correctly inserted the brought forward figures, calculated the share issue split
between share capital and premium and inserted a dividend figure, although this was often an incorrect
figure. The profit for the period was usually inserted, although unadjusted, and the minority interest
figures, including that added on acquisition.
Common errors included not making any adjustments to the parent’s draft profit for the year, if
adjustments to the parent’s draft profit for the year were made these were often shown on the face of
the SOCIE rather than in a working, failing to adjust the subsidiary’s post-acquisition profits for the
amortisation of the computer software and failing to add the group’s share of the subsidiary’s post-
acquisition profits to the parents draft profit for the year.


Question 4
General comments: this is a consolidation question. A consolidated income statement is required along with
the movement on retained earnings. The parent company has an investment in a subsidiary and an
associate. Adjustments are required for FV changes from the acquired subsidiary, a write down of inventory
and inter-company trading between the associate and parent company.
(a)
Hyssop plc
Consolidated income statement for the year ended 31 December 2007
£’000
Revenue (W2) 38,000
Cost of sales (W2) (24,075)
Gross profit 13,925

Operating expenses (W2) (7,300)
Profit from operations 6,625

Investment income (W2) 530
Share of profits of associate (W7) 960

Income tax expense (W2) (2,400)
Attributable to:
Equity holders of Hyssop plc (Bal) 5,540
Minority interest (W6) 175
5,715
(b) Consolidated movement on retained earnings
Retained
earnings
£’000
Balance at 31 Dec 2006 1,242
Dividends (1,200)
Balance at 31 Dec 2007 5,582
Workings (All figures in £’000)
W1 Group Structure
Hyssop
30% 80%
Arnica Sorrel

W2 Consolidation schedule
Hyssop Sorrel Adjustments Total
Revenue 28,500 9,500 38,000
Cost of sales
Per question (16,800) (7,200) (24,075)
Impairment – inventory (W4) (50)
Fair value adj (W3) (25)
Operating expenses
Per question (6,460) (820) (7,300)
Impairment loss (20)
Investment income 1,150 20 *(640) 530
Tax (1,800) (600) (2,400)
PAT 875
* Elimination of intragroup dividend (80% x 200) + (30% x 1,600)
W3 Fair value adjustment

£
Fair value 700,000
Carrying amount 525,000
Difference 175,000
Additional annual depreciation £175,000 / 7 years = £25,000
W4 Inventory adjustment
Net realisable value - £2.50 – 50p = £2.00

Carrying amount - £2.20
Inventory write down – (£2.20 - £2.00) x 250,000 = £50,000
W5 Unrealised profit - associate
£250,000 125%
(£200,000) 100%
£50,000 25%
H’s share - £50,000 x 30% = £15,000
W6 Minority interest
Sorrel Ltd (20% x 875 (W2)) = 175
W7 Associate
£
Profit for the year 3,250
Less: Intragroup trading (50)
3,200
Hyssop’s share x 30% 960
Less: impairment for year -
Share of associate’s profit 960

W8 Consolidated retained earnings brought forward
Hyssop plc – per question 1,070

Sorrel Ltd (80% x (1,580 – 1,350 – (2 x 25))) 144
Impairment - Sorrel (50)
Arnica ((30% x (750 – 240)) – 75(imp)) 78
1,242
W9 Consolidated retained earnings carried forward
Hyssop plc – per question 4,460

Inventory write off (50)
Sorrel Ltd (80% x (2,280 – 1,350 – (3 x 25))) 684
Impairment (50 + 20) (70)
Arnica ((30% x (2,400 – 240 - 50)) – 75(imp)) 558
5,582
Note – this working is for tutorial purposes and is not required to obtain full marks.
A common failing on this question was time wasting by candidates who prepared standard balance
sheet workings which were simply not required.
In part a) almost all candidates produced an income statement in the correct format, with a split between
the group and the minority interest. However, many could not deal with the more complex adjustments
such as the trading between the parent entity and its associate.
Candidates answers were strong in preparing the inventory adjustment and the basic consolidation
schedule.
Common errors in answers included adjusting for the goodwill impairment against the subsidiary’s
column in the consolidation schedule rather than against the parent’s column, treating the mark-up on
the inter-company sales as a margin and adjusting for the whole unrealised profit rather than only the
associate’s share.
Other common errors included adjusting for three year’s worth of depreciation, i.e the accumulated
depreciation, instead of just one year, and then including the adjustment in the parent’s column instead
of the subsidiary’s column and not eliminating the subsidiary’s and associate’s dividends.
Part b) required the movement on retained earnings to be shown. This illustrated that many candidates
did not appreciate the link between the income statement and the balance sheet. Candidates often
wasted time by including a column for the minority interest which was not required.
A common mistake was to calculate the brought forward figures using the carried forward figures and to
include the group’s share of the subsidiary’s and / or associate’s dividends in the dividends shown as a
reduction to retained earnings.


Financial Accounting Professional Stage (New Syllabus)- June 2008
PROFESSIONAL STAGE FINANCIAL ACCOUNTING – OT EXAMINER’S COMMENTS
The performance of candidates in the June 2008 objective test section of the Professional Stage
Financial Accounting paper was good. Candidates performed well across all syllabus areas, although
slightly less well at this session on the preparation of consolidated financial statements than on the
other two syllabus areas.
Care should always be taken to ensure that the principles underlying any particular item are
understood rather than the answer learned from previous experience. In particular, candidates should
ensure that they read all items very carefully.
The following table summarises how well* candidates answered each syllabus content area.
LO1 4 4 0
LO2 5 4 1
LO3 6 4 2
Total 15 12 3
*If 50% or more of the candidates gave the correct answer, then the question was classified as ‘well
answered’.
Both of the items which were answered poorly on the preparation of consolidated financial statements
(LO3) tested the preparation of consolidated cash flow statements.
Item 1
This item tested what amount would be shown in respect of the acquisition of an associate during the
year in a consolidated cash flow statement. Most candidates incorrectly concluded that the amount
shown would be the net of the cash paid for the associate and the cash and cash equivalents held by
the associate at the date of acquisition. It may be that candidates misread the question as asking
about the impact of the acquisition of a subsidiary during the year, not an associate.
Item 2
This item tested what amount would be shown in respect of dividends paid to minority interest in a
consolidated cash flow statement. The information given included opening and closing balances on
the minority interest “account”, the profit attributable to the minority interest for the year and details of
a new subsidiary acquired during the year. The most commonly selected incorrect answer indicated
that candidates ignored the impact of the subsidiary acquired during the year on the minority interest
account.
© The Institute of Chartered Accountants in England and Wales 2008 Page 1 of 17

The marking plan set out below was that used to mark this question. Markers were encouraged to use discretion
and to award partial marks where a point was either not explained fully or made by implication. More marks
were available than could be awarded for each requirement. This allowed credit to be given for a variety of valid
points which were made by candidates.
Question 1 Total marks 27
General comments
Part (a) tested the preparation of financial statements (in this case an income statement and balance
sheet) from a trial balance plus a number of adjustments. Adjustments included write-downs to trade
receivables and inventories, a lease of land and buildings, and movements on non-current assets,
including an asset held for sale. Part (b) tested differences between the financial statements prepared
under IFRS in Part (a) and those which would have been prepared under UK GAAP, including marks for
recognising that the lease of land and buildings would be treated differently under the two bases.
Thirsk Ltd
(a) Income statement for the year ended 31 March 2008
£
Revenue (1,403,000 – 5,000) 1,398,000
Gross profit 717,100
Distribution costs (W1) (286,100)
Administrative expenses (W1) (323,100)
Finance cost (W3) (3,000)

Balance sheet as at 31 March 2008
£ £
Assets
Non-current assets
Property, plant and equipment (W2) 1,299,300
Current assets
Inventories (W1) 529,000
Trade and other receivables (419,200 – 30,000 – 5,000) 384,200
929,100
Non-current asset held for sale (W6) 9,500
938,600
Equity and liabilities

Ordinary share capital 500,000
Preference share capital (irredeemable) 100,000
Retained earnings (W4) 1,052,000
Equity 1,652,000
Finance lease liabilities (W3) 195,500
Current liabilities
Trade and other payables 348,900
Taxation 26,500
Dividends payable (W4) 5,000
390,400

Workings
(1) Allocation of expenses

Cost of sales Administrative Distribution
expenses costs
£ £ £
Per Q 675,400 316,600 286,100
Movement on bad debt provision (36,000 – (6,000)
30,000)
Opening inventories 415,000
Adj re lease (20,000 x ½) (10,000)
Closing inventories (525,000 + 4,000) (529,000)
Depreciation/impairment charges (W5) 119,500 22,500
680,900 323,100 286,100
(2) Property, plant and equipment

Land and Plant and Total
buildings equipment
£ £ £
Cost b/f 1,300,000 545,000
Leased building (W3) 212,500 -
Machine held for sale (31 December 2007) - (50,000)
Acc dep b/f (280,000) (326,700)
Eliminated on machine held for sale (W6) - 40,500
Depreciation/impairment charges for year (22,500) (119,500)
(W5)
1,210,000 89,300 1,299,300
(3) Lease of buildings
SOD = (24 x 25)/2 = 300

£
Total payments (20,000 x ½ x 25) 250,000
Fair value (425,000 x ½) (212,500)
Finance charge 37,500
Year ended 31 B/f Payment Capital Interest C/f

March
£ £ £ £ £
2008 212,500 (10,000) 202,500 (24/300 x 205,500
37,500) 3,000
2009 205,500 (10,000) 195,500 (23/300 x 198,375
37,500) 2,875

(4) Retained earnings

£
At 1 April 2007 978,600

Preference dividend (100,000 x 5%) (5,000)
At 30 September 2007 1,052,000
(5) Depreciation and impairment charges

£
Existing buildings ((1,300,000 – 600,000) ÷ 50) 14,000
Leased building (212,500 ÷ 25) 8,500
22,500
Plant held throughout year ((545,000 – 50,000) x 20%) 99,000

On plant held for sale (13,000 + 7,500) (W6) 20,500
119,500
(6) Plant held for sale

£
Cost 50,000
Acc dep to 31 March 2007 (50,000 x 20% x 2) (20,000)
Dep for year (50,000 x 20% x 9/12) (7,500)
Carrying amount at classification as held for sale 22,500
Fair value less costs to sell (10,000 – 500) (9,500)
Impairment 13,000

As in previous sittings, candidates were clearly well-prepared for this type of question. Almost all
candidates produced a well-laid out income statement and balance sheet in appropriate formats, although
some lost presentation marks by not adding across numbers in brackets or transferring numbers from
workings. Others lost presentation marks by failing to complete the sub-totals and/or totals on their
statements or by having incomplete or abbreviated narrative or no heading. Candidates should remember
that this type of question requires financial statements to be in a form suitable for publication.
Although many workings, in particular the cost matrix, were clearly laid out some candidates’ workings
were disorganised, untidy and therefore hard to follow, making it difficult to establish candidates’
approaches where they had not calculated the correct figure.
Most candidates were able to deal with the more straightforward adjustments such as the increase in the
bad debt provision, the inventory write-down, the income tax charge/liability and the basic annual
depreciation charges. Most correctly classified the irredeemable preference shares as equity but not all
treated the dividends as such, instead including them as a finance cost.
Errors in dealing with the other adjustments included the following:

• Failing to split the lease into a finance lease for the building and an operating lease for the land.
• Depreciating the leased buildings over 50 years (the useful life for other buildings) instead of 25
years (the lease term) or not depreciating them at all.
• Arriving at the incorrect sum of the digits figure.
• Although candidates often correctly calculated the impairment on the plant held for sale few
followed this through fully by charging it to the income statement, including it in the
depreciation/impairment charge for the year in the property, plant and equipment working and
taking it out of that working when adjusting for the asset held for sale.
• Failing to disclose the asset held for sale correctly on the balance sheet (within current assets after
a separate sub-total for all other current assets).
• Treating the debit cash balance as an overdraft.
• Showing the impairment amount as a liability rather than as a deduction from receivables.
• Failing to properly account for the returned goods by reducing the revenue figure but not making
the corresponding entry to receivables. However, most candidates correctly adjusted closing
inventory for the cost of these goods.

(b) Differences between IFRS and UK GAAP
Under UK GAAP, where formats are laid down by the Companies Act, the terminology in the balance
sheet would differ. For example, non-current assets would be referred to as “fixed assets”, trade and other
receivables would become “trade and other debtors”.
Under UK GAAP, the balance sheet would also usually be prepared on a net assets basis whereby the
“top half” of the balance sheet would show all assets and liabilities and the “bottom half” would show just
equity (capital and reserves) although other formats are in fact permissible.
Under UK GAAP, the income statement would be referred to as a “profit and loss account” and a
sub-total for operating profit would be required (FRS 3). Although this is not prohibited by IAS 1 it is
not explicitly required.
Specifically with regard to Thirsk Ltd, a difference between an IFRS and a UK GAAP balance sheet
might arise with regard to the treatment of the lease of land and buildings. Under IFRS (IAS 17) there
is a specific requirement to split leases of land and buildings at inception into a separate lease of
land and a separate lease of buildings. These should be classified appropriately, although, usually,
the lease of land will be an operating lease, and the lease of buildings, a finance lease.
Under UK GAAP (SSAP 21) the lease of land and buildings is considered as one lease and is usually
treated as an operating lease. Under UK GAAP therefore the whole of the £20,000 would have been
correctly taken to administrative expenses as operating lease rentals.

Answers to Part (b) were mixed. Almost all candidates were able to state that the terminology would differ
and to give an example of this, but many answers did not go beyond this. Common failings included the
following:
• Stating that the UK’s version of the income statement is called a “profit and loss” as opposed to a
“profit and loss account”.
• Stating that a UK balance sheet is prepared on a “net assets” basis but being unable to explain
this.
• Giving differences between a UK cash flow statement and a cash flow statement prepared in
accordance with IAS 7 when the question was clearly restricted to differences between IAS 1 and
UK GAAP.
• Giving differences between IFRS and UK GAAP in respect of the preparation of consolidated
financial statements when the question was clearly restricted to single entity financial statements.
• A number of candidates referred to the UK having a statement of total recognised gains and
losses instead of a statement of changes in equity (although many referred to this as a “STRGL”
with no indication that they knew what this stood for) but very few mentioned the reconciliation of
movements in shareholders’ funds.
• Failing to spot that the treatment of the lease of land and buildings would differ under UK GAAP.
Of those who did spot this, a number got the treatment the wrong way round.


General comments
This question tested the preparation of a single company cash flow statement and supporting note.
Missing figures to be calculated included interest paid, tax paid, dividends paid, property, plant and
equipment acquired and proceeds from the issue of share capital. A bonus issue of shares and a
revaluation of property, plant and equipment during the year also featured.
Wetherby plc
Cash flow statement for the year ended 31 March 2008

£ £
Cash flows from operating activities
Cash generated from operations (Note) 6,341,500
Interest paid (W1) (30,600)
Income tax paid (W2) (1,789,000)
Net cash from operating activities 4,521,900
Cash flows from investing activities
Purchase of property, plant and equipment (W3) (7,052,100)
Proceeds from sales of property, plant and equipment 1,556,500
(1,356,000 + 200,500)
Net cash used in investing activities (5,495,600)
Cash flows from financing activities
Proceeds from issue of ordinary share capital (500,000 2,150,000
(W4) + 1,650,000 (W5))
Proceeds from issue of borrowings 50,000
Dividends paid (W7) (898,200)
Net cash from financing activities 1,301,800
Net increase in cash and cash equivalents 328,100
Cash and cash equivalents at beginning of period 352,500
Cash and cash equivalents at end of period 680,600
Note: Reconciliation of profit before tax to cash generated from operations

£
Profit before tax 3,355,500
Finance cost 31,600
Depreciation charge 3,560,000
Profit on disposal of property, plant and equipment (200,500)
Increase in inventories (1,567,800 – 1,479,600) (88,200)
Increase in trade and other receivables (540,000 – 356,000) (184,000)
Decrease in trade and other payables ((1,678,500 – 4,000) – (1,546,600 – (132,900)
5,000))
Cash generated from operations 6,341,500

Workings
(1) Interest paid
£ £
Cash (β) 30,600 B/d 4,000
C/d 5,000 IS 31,600
35,600 35,600
(2) Tax paid
£ £
Cash (β) 1,789,000 B/d 1,670,000
C/d 1,450,000 IS 1,569,000
3,239,000 3,239,000
(3) PPE
£ £
B/d 15,299,900 Disposal 1,356,000
Revaluation reserve (1,560,000 + 1,830,000 Depreciation 3,560,000
270,000)
Additions (β) 7,052,100 C/d 19,266,000
24,182,000 24,182,000
(4) Share capital
£ £
B/d 5,000,000
Share premium (bonus 500,000
issue)
C/d 6,000,000 Cash (β) 500,000
6,000,000 6,000,000
(5) Share premium
£ £
Share capital (bonus issue) (W4) 500,000 B/d 600,000
C/d 1,750,000 Cash (β) 1,650,000
2,250,000 2,250,000
Note: The bonus issue could be taken out of retained earnings since the reserve to be used is not
specified by the question.
£ £
Dividends in SCE (β) 748,200 B/d 7,689,500
Revaluation reserve 270,000
C/d 8,997,800 IS 1,786,500
9,746,000 9,746,000

(7) Dividends paid
£ £
Cash (β) 898,200 B/d 400,000
C/d 250,000 SCE (W6) 748,200
1,148,200 1,148,200
This was the first time this topic had been set and candidates were clearly very well prepared for it. Many
scored high marks on the reconciliation note, and on the figures for tax paid, interest paid, proceeds from
the issue of borrowings, proceeds from the sale of property, plant and equipment and the opening and
closing figures for cash and cash equivalents. Presentation was generally good. Most candidates
produced workings in the form of T accounts and very few made the mistake of putting opening and
closing balances on the wrong side of those T accounts. Generally, candidates showed a good grasp of
basic double entry principles, which underpin the preparation of a cash flow statement, whether single
company or consolidated.
Where errors were made they included the following:

• Failing to adjust the trade payables figure for the opening and closing accrued interest.
• Adding the profit on disposal of property, plant and equipment in the reconciliation note instead of
deducting it.
• Treating the £50,000 proceeds from the issue of borrowings as a cash outflow rather than as a
cash inflow.
• Failing to account for the bonus issue (or putting through the credit entry but no debit entry –
particularly common where candidates combined the share capital and share premium accounts).
• Accounting for the reserve transfer in the retained earnings T account but omitting the other side
of the entry from the property, plant and equipment T account (or via a revaluation reserve T
account).
• Failing to adjust dividends for the year as calculated in a retained earnings T account for opening
and closing dividends payable in order to arrive at dividends paid.


General comments
Part (a) required the preparation of a statement of changes in equity for a single company, featuring an
adjustment for interest on redeemable preference shares, a revaluation during the year and a share issue.
In Part (b) the resultant profit figure had to be combined with figures for a subsidiary acquired during the
year and an associate to generate the consolidated profit figure, split between the group and the minority.
In arriving at this figure there was also an adjustment to be made for the unrealised profit on the sale of an
item of plant within the group.
Doncaster plc
(a) Statement of changes in equity for the year ended 31 March 2008
Ordinary Share Revaluation Retained

share premium reserve earnings
capital
£ £ £ £
Recognised directly in equity
Revaluation of non-current – – 409,500 –
assets (650,000 – (456,000 –
215,500))
Transfer between reserves – – (22,200) 22,200
(67,800 – 45,600)
Profit for the period (526,700 – – – – 476,700
(1,000,000 x 5%))
Total recognised income and – – 387,300 498,900
expense for the period
Issue of share capital 250,000 300,000 – –
250,000 300,000 387,300 498,900
Balance brought forward 1,000,000 – – 2,365,500
Balance carried forward 1,250,000 300,000 387,300 2,864,400
This part of the question was very well-answered. Statements of changes in equity were well laid out with,
as instructed, no total column, although very few candidates drew a sub-total of “total recognised income
and expense for the period”. Where errors were made they included the following:
• Failing to adjust the profit for the year by the finance cost on the redeemable preference shares.
Some showed this as dividends in the statement, others showed it separately as a finance cost,
when it would not appear separately in the statement.
• Calculating the revaluation gain arising in the year incorrectly, based on the cost of the asset
being revalued as opposed to its carrying amount.
• Making an incorrect adjustment for the transfer in respect of the additional depreciation on the
revalued asset, when the relevant figures were given in the question.


(b) Profit attributable for the year ended 31 March 2008
Doncaster plc Redcar Ltd

£ £
Net profit per own accounts (a) (457,000 x 6/12) 476,700 228,500
Share of associate’s profits (103,400 x 45%) 46,530 –
Non-current asset PURP (40,000 – (30,000 x 4/5)) – (16,000)
Additional depreciation on non-current asset (((40,000 ÷ – 2,000
4) – (30,000 ÷ 5)) x ½)
Impairments (50,000 + 10,000) (60,000) –
463,230 214,500
Profit attributable to the minority interest (214,500 x – (53,625)
25%)
Profit attributable to the equity holders of Doncaster plc 463,230 160,875
= 624,105
Candidates continue to struggle with extracts type questions. Layouts were disorganised and difficult to
follow which at times made it difficult to award credit.
In spite of the fact that the status of the investments (as subsidiary or associate) and the percentage
shareholdings were given in the question, the vast majority of candidates wasted time drawing up a group
structure diagram for which no marks were available. This indicates candidates’ over-reliance on learnt
techniques.
Common errors included the following:

• Failing to adjust the profit of the subsidiary to allow for the fact that it was acquired half way through
the year.
• Taking minority interest at the wrong point (for example, correctly calculating the subsidiary’s profit
for the year as half of the figure for the whole year but then failing to apply the minority percentage
to the net figure).
• Although a number of candidates correctly calculated the net adjustment in respect of the plant sold
within the group, far less correctly made this adjustment against the subsidiary. Of those who did,
less still then calculated the minority interest (see above) on this net figure.
• When calculating the additional depreciation on the plant sold within the group a number of
candidates failed to base this adjustment on a half year’s charge (as the subsidiary was acquired
half way through the year and the transfer made on this date).
• A disappointing number of candidates omitted to add the parent’s share of the associate’s profit
into the profit attributable to the equity shareholders of the parent. Others omitted to add in the
parent’s own profit figure.
• A significant minority of candidates calculated a minority interest for the associate as well as for the
subsidiary.
• Reducing the subsidiary’s and the associate’s profits by the given impairments instead of reducing
the parent’s profits. Where candidates did this they often dealt correctly with similar impairments in
question four, illustrating yet again that candidates cope less well with topics tested in a less
familiar way.


General comments
Part (a) was a consolidated balance sheet question, featuring one subsidiary and one associate.
Adjustments were typical of this type of question and included a fair value adjustment on acquisition, intra-
group balances and transactions and impairment write-downs. Part (b) tested an understanding of the
concepts underlying the preparation of consolidated financial statements: namely the single entity concept
and control versus ownership.
York plc
(a) Consolidated balance sheet as at 31 March 2008
£ £
Assets
Non-current assets
Property, plant and equipment (3,963,900 + 1,686,900) 5,650,800
Intangibles (W3) 192,000
Investments in associates (W7) 261,920
6,104,720
Current assets
Inventories (860,000 + 650,000 – 35,000 (W6) – 1,463,000
30,000 x 40% (W6))
Trade and other receivables (730,000 + 540,000 – 1,060,000
210,000 (W6))
Cash and cash equivalents (29,600 + 15,500) 45,100
2,568,100

Share premium account 1,000,000
Attributable to the equity holders of York plc 6,424,060
Minority interest (W4) 414,160
Equity 6,838,220
Current liabilities
Trade and other payables (878,000 + 546,600 – 1,214,600
210,000 (W6))
Taxation (380,000 + 240,000) 620,000
1,834,600

Workings
(1) Group structure
200
York plc = 40%
500
800
= 80%
1,000
Ripon Ltd
Beverley Ltd
(2) Net assets – Ripon Ltd
Balance Acquisition Post acq

sheet date
£ £ £
Share capital 1,000,000 1,000,000 -
Share premium 500,000 500,000 -
Retained earnings
Per Q 625,800 (215,000)
PURP (W6) (35,000) -
Amortisation adj – intangible 30,000 - 835,800
FV adj – intangible (50,000) (50,000) -
2,070,800 1,235,000 835,800
(3) Goodwill – Ripon Ltd
£
Cost of investment ((1,000,000 x £1.20) + 400,000) 1,600,000
Less Share of FV of net assets acquired (1,235,000 (W2) x 80%) (988,000)
612,000
Impairments to date (400,000 + 20,000) (420,000)
192,000

(4) Minority interest – Ripon Ltd

£
Share of net assets (2,070,800 (W2) x 20%) 414,160
York plc 3,175,500

Ripon Ltd (835,800 (W2) x 80%) 668,640
Beverley Ltd ((210,800 – 56,000 – 30,000 (W6)) x 40%)) 49,920
Less Impairments to date (420,000 (W3) + 50,000) (470,000)
3,424,060
(6) PURP
Ripon Ltd Beverley Ltd

% £ £
SP (210,000/180,000 x ½) 150 105,000 90,000

Cost (140,000/120,000 x ½) (100) (70,000) (60,000)
GP 50 35,000 30,000
(7) Investments in associates – Beverley Ltd

£
Cost (200,000 x £1.25) 250,000
Add: Share of post acquisition increase in net assets ((210,800 – 56,000)) x 61,920
40%))
Less: Impairment to date (50,000)
261,920
Note: Candidates who correctly calculated a discount on acquisition of the
associate of £12,400 and dealt with it appropriately were also given credit.

Candidates were clearly very well prepared for this question and generally scored highly. Almost all
candidates demonstrated a sound technique and most dealt easily with the required adjustments. Errors
included the following:
• Failing to adjust both receivables and payables for the invoice value of the sale of goods from the
subsidiary to the parent, with a number of candidates making the adjustment at cost.
• Calculating unrealised profit based on the full invoice value, as opposed to only half of that value,
when the question clearly stated that only half of the goods remained in year-end inventory.
• Taking the cost figures given in the question for the intra-group sale as being the selling price of
the goods and hence calculating an incorrect provision for unrealised profit.
• Treating the pre-acquisition loss of the subsidiary as a pre-acquisition profit.
• Failing to include the share premium account correctly in the net assets table for the subsidiary.
• Not adjusting for the accumulated impairments in the group retained earnings working, instead
adjusting only for the impairments which had arisen during the current year.
• Pleasingly, many candidates correctly adjusted for the group share of the provision for unrealised
profit arising on goods sold by the associate to the parent against retained earnings and inventory,
but many also made an adjustment against the carrying amount of the associate. Others
calculated an initial post-acquisition profit figure for the associate less a 40% share of the
provision for unrealised profit but then adjusted that total by 40%, consequently scaling down the
provision for unrealised profit twice.
• Only a minority of candidates correctly dealt with the goodwill in the subsidiary’s own books.
Others took £20,000 out of the subsidiary’s net assets at both acquisition and at the balance sheet
date (instead of £50,000 out at acquisition and £20,000 at the balance sheet date) and some were
clearly confused between this goodwill and that arising on consolidation.
• When calculating the cost of investment in the subsidiary a significant number of candidates failed
to allow for an issue price of £1.20 per share, as given in the question, and instead assumed that
the shares were issued at par.
A number of candidates failed to provide workings for assets and liabilities on the face of the consolidated
balance sheet. Where these balance sheet figures were incorrect no partial marks could then be awarded.
Candidates must show their workings in all cases so that partial credit can be given.
A number of candidates also failed to complete the consolidated balance sheet, but rather abbreviated line
items and/or included partial workings, which were not totalled, although this had improved since a similar
question was last set. As the question required the preparation of a consolidated balance sheet,
candidates are expected to complete all additions and present a complete balance sheet. Very few
candidates gained the presentation marks which were available for clearly disclosing the minority interest
as a separate component of equity.


(b) Concepts underlying preparation of consolidated financial statements
Group accounts are prepared on the basis that the group is a single entity (single entity concept). This
reflects the substance of the group arrangement.
For example, in the consolidation of the York plc group, all assets and liabilities are added together, as if the
group were a single entity (so, for example, trade receivables of £730,000 and £540,000 are added).
However, the single entity concept also means that any intra-group transactions and balances need to be
eliminated, as otherwise items would be double counted in the context of the group as a single entity.
Hence, because Ripon Ltd has sold goods for £210,000 to York plc, that amount needs to be
subtracted from York plc’s cost of sales and from Ripon plc’s revenue as if the group were a single
entity that transaction would not have occurred. That adjustment cannot be seen in the context of the
preparation of a consolidated balance sheet, though it would be seen in the preparation of a
consolidated income statement.
In the context of the consolidated balance sheet any related intra-group balances need to be
eliminated. This amount is included in York plc’s trade payables and Ripon Ltd’s trade receivables as
this amount is unpaid at the year end. It needs to be eliminated from both.
Any profit made between parent and subsidiary companies also needs to be eliminated where that profit has
not yet been realised outside the group. So, for the £210,000 intra-group sale, because half of these goods
have not yet been sold outside the group, inventory needs to be reduced by the profit on half that amount,
otherwise inventory will be overstated from the point of view of the group as a whole. The adjustment
effectively brings inventory back down to what it would have been stated at if the intra-group sale has never
taken place.
The other principle underlying the preparation of consolidated financial statements is the distinction between
control and ownership. Control is reflected by including all of the subsidiary’s assets, liabilities, income and
expenses in the consolidated financial statements, even where the parent does not own 100% of that
subsidiary. So, for York plc, 100% of Ripon Ltd’s inventories of £650,000 are added in even though, in
effect, York plc only owns 80% of those inventories.
Ownership is then reflected by showing that part of the subsidiary’s net assets and results included in the
consolidation, which is not owned by the parent, as a minority interest. York plc’s consolidated balance
sheet shows a minority interest of £414,160, representing that part of Ripon Ltd not owned by York plc.
Where an investor (York plc) does not have control but does have significant influence over an investee
(Beverley Ltd), line-by-line consolidation is not appropriate, because York plc cannot determine Beverley
Ltd’s assets and liabilities. But because York plc has this influence, it should be accountable for the total
investment in Beverley Ltd, ie cost plus share of post-acquisition retained earnings (the latter are added to
group earnings).
As with previous papers, the quality of written answers was disappointing. In common with the other written
part of this paper, some candidates made no attempt at this part.
Whilst most candidates were able to pick up marks for referring to the single entity concept and substance
over form few got beyond this. Almost no candidates scored 5 or even 4 marks on this part of the question,
in spite of the number of marks available. Many wasted time discussing the techniques used for
consolidating financial statements and/or the factors which might indicate control or significant influence. A
number thought the question was about the qualitative characteristics of financial information and based
their answer around those or discussed the advantages of consolidated financial statements. Although
some of these approaches enabled candidates to pick up the odd extra mark scores were generally low.
Very few candidates related their answer to York plc as specified in the requirement.

Professional Stage – Financial Accounting – September 2008
PROFESSIONAL STAGE FINANCIAL ACCOUNTING – OT EXAMINERS’ COMMENTS
The performance of candidates in the September 2008 objective test questions section for the
Application Stage Financial Accounting paper was good. Candidates performed well across all
syllabus areas.
However, care should always be taken to ensure that the principles underlying any particular item
are understood rather than the answer learned from previous experience. In particular, candidates
should ensure that they read all items very carefully.
LO1 4 3 1
LO2 5 3 2
LO3 6 5 1
Total 15 11 4
*If 50% or more of the candidates gave the correct answer, then the question was classified as
‘well answered’.
The poorly answered questions covered a range of different syllabus areas. Comments on two
items of particular note are:
Item 1
This item tested the impact that a restoration obligation has on the asset and provisions. There
appeared to be a lack of knowledge in this area with candidates either not realising that the
provision is added to the cost of the asset or believing that a provision is built up over time.
Item 2
This item required a calculation of the minority interest dividend in relation to a consolidated cash
flow statement. A subsidiary, with a minority interest, had been acquired during the period;
however candidates failed to adjust for this in their workings.

The mark plan set out below was that used to mark these questions. Markers are encouraged to use
discretion and to award partial marks where a point was either not explained fully or made by implication.
More marks are available than could be awarded for each requirement, where indicated. This allows credit to
be given for a variety of valid points, which are made by candidates.
Question 1 - Total marks 19
General comments: This wqs a typical question testing the preparation of an income statement and
statement of changes in equity from a trial balance plus a number of adjustments. Adjustments included a
held for sale asset, the correction of an error, a reorganisation and a share issue.
Agate Ltd – Income Statement for year ended 30 June 2008

£
Revenue (W1) 1,907,500

Net operating costs (6,700 – 30,400) (23,700)
13,800
Finance costs (19,300 + (30,000 x 5%)) (20,800)

Profit before tax (7,000)
Taxation (5,000 + 2,000) (7,000)
Net loss for the period (14,000)
Statement of changes in equity for the year ended 30 June 2008
Ordinary Share Retained Reval. Total

share premium earnings reserve
capital
Loss for the period - - (14,000) - (14,000)
Final dividend ((31,000 + - - (7,420) - (7,420)
75,000) x 7p))
Issue of shares 75,000 97,500 - - 172,500
(75,000 x £1 / £1.30)
Revaluation of non-
current assets - - - 171,000 171,000
(900,000 – 729,000)
75,000 97,500 (21,420) 171,000 322,080

Balance b/fwd
As previously stated 31,000 15,000 22,500 - 68,500
Correction of error - - (7,350) - (7,350)
Balance c/fwd 106,000 112,500 (6,270) 171,000 383,230

W1 Revenue

Advertising adjustment
(30,000 x 14/24 months) (17,500)
1,907,500
W2 Allocation of expenses

expenses costs
Per question: 230,000 145,000

Purchases 367,000
Manufacturing costs 291,300
Impairment (W4) 7,500
Depreciation (W3) 24,950
Less: closing inventory (19,500)
Relocation expenses (1,500,000 – 700,000) 800,000
Patent amortisation (45,000 / 5yrs x 9/12) 6,750
688,250 1,036,750 145,000
W3 Plant and equipment
Depreciation charge for the year 28,700

Less: IFRS 5 – classified as held for sale (3,750)
(75,000 x 10% x 6/12)
As at 30 June 2008 24,950
W4 Held for sale asset
Fair value 39,000

Less: costs (1,500)
37,500
Impairment (45,000 – 37,500) 7,500
Consistent with previous sittings candidates were well-prepared for this type of question and generally
answered it well. This question was slightly different in its requirements compared with previous papers
as the preparation of a balance sheet was replaced by the statement of changes in equity. As a result of
this change candidates found this more challenging compared with previous sittings.
Almost all candidates produced a well laid out income statement. The format of the statement of
changes in equity was slightly more varied and often had no total column. A common omission was the
date for one or both of the statements. A significant minority of candidates prepared a balance sheet as
they clearly had not read the requirement. Candidates should be reminded that question requirements
may vary from paper to paper.
formats, with most candidates using an efficient matrix style costs working. Marks were awarded where
presentation differed to the marking guide but resulted in a reasonable alternative. For example, the
patent amortisation being included in costs of sales rather than administrative expenses.

Candidates generally dealt with the share issue and the dividend correctly in the statement of changes
in equity, although the dividend payment was occasionally also incorrectly shown in the income
statement.
Common errors included a wrong adjustment to revenue, not appreciating that the amortisation of the
patent should have been for less than a year, failing to deal with the prior period error, missing that the
coupon on the redeemable preference shares should have been included as part of finance costs and
incorrectly calculating the relocation expenses.


Question 2 – Total marks 28
General comments: This question represented a combination of preparing extracts from the financial
statements (in this case from both the income statement and balance sheet) together with a written
conceptual part (b) and part (c) on the differences between IFRS and UK GAAP.
(a)
Extract from income statement for year ended 30 June 2008
£
Operating expenses to include:
Depreciation (W7) 91,200
Management expenses 72,000
Loss on disposal (W3) 4,500
Finance charge (W6) 3,500
Extract from balance sheet as at 30 June 2008
£
Non-current assets
Current liabilities
W1 New building
£
Architects fees 23,000
Legal costs 7,000
Project management fees 30,000
Building costs 375,000
435,000
Less: lift cost (15,000)
As at 1 May 2008 420,000
W2 Plant and machinery

Cost Dep. Acc. Dep.
charge
£ £ £
B/fwd 160,000 48,000
Less: scrapped machine (18,000) X 15% x 5 yrs (13,500)
Additions - leased plant (W6) 60,000
202,000 X 15% 30,300
Lift (W1) 15,000 / 10yrs x 2/12 250
Scrapped machine (W3) 18,000 x 15% x 6/12 1,350

Dep. charge in year 31,900 31,900
C/fwd 217,000 66,400

Carrying amount at 30 June 2008 (217,000 – 66,400) = £150,600
W3 Scrapped machine
£
Cost 18,000
Accumulated depreciation (W2) (13,500)
Carrying amount at disposal / loss on disposal 4,500
W4 Fixtures and fittings

Cost Dep. Acc. dep
charge
£ £ £
B/fwd 75,000 36,000
Less: accumulated depreciation (36,000)
Carrying amount 39,000 X 25% 9,750
B/fwd - cost 75,000

Additions:
1 Oct 2007 20,000 X 25% x 9/12 3,750
13,500 13,500
C/fwd 95,000 49,500
Carrying amount at 30 June 2008 (95,000 – 49,500) = £45,500
W5 Land and buildings

Cost Dep. charge Accumulated
depreciation
£ £ £
Land
Cost 650,000
Buildings
B/fwd 1,075,000 172,000
Depreciation (1,075,000 x 4%) 43,000

Additions (dep 420,000 x 4% x 2/12) 420,000 2,800
Dep. charge in year 45,800 45,800

C/fwd 2,145,000 217,800
Carrying amount at 30 June 2008 (2,145,000 – 217,800) = £1,927,200
W6 Leased asset
£
Deposit 25,000
Instalments (7,000 x 7) 49,000
74,000
Fair value of asset (60,000)
Finance charges 14,000

SOTD = (7 x 8) = 28
2
B/fwd (60,000 – 25,000 = 35,000)
Year end B/fwd Interest Payment C/fwd

£ £ £ £
30 June 2008 35,000 3,500 (7,000) 31,500
30 June 2009 31,500 3,000 (7,000) 27,500
31,500
> 1yr < 1yr
27,500 4,000 (31,500 – 27,500)
Tutorial note: Fixed asset carrying amounts & depreciation charge
Depreciation Carrying amounts

charge
£ £
Plant & machinery 31,900 150,600
Fixtures & fittings 13,500 45,500
Land & buildings 45,800 1,927,200
91,200 2,123,300
The answers to this question were quite varied. Most candidates made a good attempt at part a) and
there had clearly been an improvement in candidates’ ability since December 2007 when a similar
question had been set. There was a clear improvement in the calculation of individual balances,
however, poor layouts often meant that it was hard to see what exactly had been included in a total and
what hadn’t. Often candidates seemed to prepare what looked like a random set of workings with no
linkage. Workings must be referenced clearly.
Most candidates coped well with the calculations in relation to the leased asset, the elements of the new
building, cost calculations and depreciation on the assets held for a complete year. Assets that had
been held for less than a full year often saw an incorrect calculation of the number of months that the
asset should have been depreciated for.
The majority of candidates scored well in the lease calculation, although there were a number of
common errors, such as, showing the current lease liability as £7,000 rather than deducting the interest
from this amount. Another common mistake was to include the lease payment of £7,000 in the income
statement along with the finance charge. These errors show that there is clearly a lack in understanding
for accounting for a finance lease. Candidates appear to have simply learnt how to construct the leasing
table.
A minority of candidates produced a detailed PPE note along with additional notes in relation to the
leased asset even though these were not required by the question and therefore wasted time that could
have otherwise been spent productively.
Other common errors included correctly removing the £72,000 management cost from the cost of the
building but then failing to charge this amount in the income statement, including £60,000 as the brought
forward figure in the leasing table, an incorrect calculation of the sum-of-the-digits and failing to notice
that the fixtures and fittings should have been depreciated on a reducing balance basis.


(b) Elements of financial statements

Assets/liabilities
A non-current asset acquired under a finance lease meets the definition of an asset, even though the
asset is not legally owned by them, as it is:
• Controlled by the lessee, as they have physical possession of the asset
• Results from a past event, the lease was signed at a particular date
• Gives rise to future economic benefits, the lessee uses the asset to generate revenue for the
company.
The lease payments are a liability as the company has an obligation arising from a past event to transfer
economic benefits. The economic benefits that the lessee is obliged to transfer are the lease payments.
Generally, the lessee will have some kind of legal obligation to make the lease payments.
Recognition
The asset should be recognised if:
• It is probable that future economic benefits will flow to the company; and
• Those benefits can be measured reliably.
Conversely, the liability should be recognised if:
• It is probable that future economic benefits will be made by the company; and
• Those benefits can be measured reliably.
The inflows and outflows will be probable as a lease contract agreement has been signed and the benefits
can be reliably measured as the lease contract will set out the present value of the minimum lease
payments.
The answers to part b) were often disappointing with a significant number of candidates explaining the
accounting treatment for a finance lease with no reference to the IASB Framework, this approach gained
no marks. Candidates often copied text straight from the open book text without explaining further how it
related to a finance lease. Many candidates recognised that the signing of the lease was the past event
which created the lease obligation but few managed to explain how economic benefits would be obtained.

(c) Key differences between IFRS and UK GAAP

IAS 17 lists a number of factors that would indicate that the risks and rewards of ownership have been
transferred to the lessee in order for the lease to be classified as a finance lease. Such as, the lease term
is for a major part of the asset’s life and the lessee is responsible for repairs and maintenance.
However, under UK GAAP, SSAP 21, there is a rebuttable presumption that if, at the inception of the
lease, the present value of the minimum lease payments is at least 90% of the asset’s fair value then
there is a finance lease.
IAS 17 specifically requires a lease which covers both land and building to be split at inception into two
leases, one for the land and one for the buildings. A lease for land will normally be an operating lease
since land will normally have an indefinite life.
Under UK GAAP there is no requirement to split a lease which covers both land and buildings. Such a
lease will therefore normally be recognised as an operating lease.

The answers to part c) were mixed. Most candidates wrote something regarding the minimum lease
payment being 90% of the fair value of the asset under a finance lease under UK GAAP. This was
commonly referred to as the “90% rule” without further explanation as to what exactly this was. A typical
answer included some explanation about land and buildings and whether they should be separated or not
under IFRS and UK GAAP. However, a number of candidates were clearly confused about which regime
separates leases of land and buildings and which does not. The majority of candidates also stated that
land would always be an operating lease, with only the very best candidates appreciating that while this
might normally be the case it was possible for land to be held under a finance lease.


General comments: This question was split into two distinct parts. Part (a) asked for the preparation of a
consolidated income statement and related information following the acquisition of a subsidiary and
associate. Part (b) asked for calculations of inventory.
(a)(i)
Consolidated income statement for the year ended 30 June 2008
£’000
Revenue 40,000
Cost of sales (35,975)
Gross profit 4,025

Operating costs (3,010)
Share of profit of associate (W2) 456

Taxation (375)
Profit after tax 1,096
Attributable to:
Equity holders of Spinal plc (1,096 – 85) 1,011
Minority interest (W4) 85
1,096
a)(ii) Goodwill calculation:
£
Consideration 850,000
Less: share of net assets acquired (681,000)
(908,000 x 75%)
Goodwill 169,000
W1 – Consolidation schedule
Spinal plc Carnelian Adj Consolidated

Ltd
£’000 £’000 £’000 £’000
(x 3/12)
Revenue 36,340 3,800 (140) 40,000

Cost of sales (33,920) (2,175) 140 (35,975)
PURP (W3) (20)
Gross profit 1,605 4,025

Operating costs (1,980) (1,090) (3,010)
Management fee 60
Investment income 60 (60) -

Profit before tax 515 1,015
Tax (200) (175) (375)
Profit after tax 340

W2 – Associate profit
£
Share of profit after tax (1,670,000 x 30%) 501,000
Less: Current year impairment (45,000)
456,000
W3 – PURP
(140,000 x (0.40 / 1.40)) x ½ = 20,000
W4 - Minority interest
Profits attributable to the minority interest in year (340 (W1) x 25%) = £85,000
Almost all candidates made a good attempt at part a), with many obtaining full marks on this part of the
question. The most common errors were to not apportion the income statement figures for the subsidiary
acquired during the year and to miss the impairment of the associate.
A significant number of candidates included drawing a group structure even though the percentages were
given in the question. In such circumstances no marks are allocated for such a diagram. Other common
errors included failing to account for the intra-group sales or adjusting it in the wrong place and producing
balance sheet extracts, including attempting to calculate a balance sheet figure for the associate, when
these were not required.

(b)
Raw materials
Raw metal in closing inventory = (£1,050 x 50 tonnes) + (£950 x 10 tonnes) = £62,000
Work-in-progress & finished goods
Total output 5,000 + (80% x 500) = 5,400 units
Cost per
unit
£ £
Raw material 195,000
Direct labour 253,200
448,200 448,200 / 5,400 83.00
Admin costs 107,000

Factory overheads 155,800
262,800 262,800 / 6,000 43.80
126.80
WIP Inventory = 500 x 80% x £126.80 = £50,720
Finished goods inventory = 350 x £126.80 = £44,380

Attempts at part b) were generally disappointing. This was the most commonly missed part of the paper
overall, with candidates simply not attempting it. There were also a significant number of candidates who
stopped their calculations at raw materials. This highlighted that a worrying number of candidates simply
do not have a broad level of knowledge across the syllabus. This part of the question was straight
forward in nature and required simple application of inventory accounting.
The most common errors included:

• not including administrative costs, but including unplanned maintenance costs, in the calculation
of a cost per unit;
• not basing one or both of administrative costs and factory overheads on budgeted production as
opposed to actual production;
• basing actual production on the complete number of units produced rather than adding the 500
units that were only 80% complete;
• valuing finished goods at NRV even when this was higher than the calculated cost per unit; and
• ignoring that the work in progress was only 80% complete.


General comments: This question was a consolidated cash flow statement question with the disposal of a
subsidiary.
(a)
Consolidated cash flow statement for the year ended 30 June 2008
£ £
Note: Cash flow from operating activities
Cash generated from operations (note) 161,610
Interest paid (14,400)
Tax paid (W2) (57,060)
90,150
Cash flow from investing activities
Purchase of property, plant and equipment (200,000)
Proceeds from disposal of subsidiary (W3) 66,000
(134,000)
Proceeds from issue of ordinary share capital (W4) 27,510
Borrowings advanced 25,000
Dividends paid (7,560)
44,950

Cash and cash equivalents at beginning of period 400
Cash and cash equivalents at end of the period 1,500
Reconciliation of profit before tax to cash generated from operations
£
Profit before tax (118,320 + 15,800) 134,120
Depreciation charge (W1) 67,100
Amortisation charge (95,600 – 86,000) 9,600
Increase in inventories (107,730 – 97,200 + 13,000) (23,530)
Increase in trade and other receivables (56,340 – 53,250 + 9,500) (12,590)
Decrease in trade and other payables (303,000 – 342,190 + 11,700) (27,490)
Cash generated from operations 161,610

Workings
B/fwd 948,800 Depreciation (bal fig) 67,100

Additions 200,000 Disposal of sub 52,000
C/fwd 1,029,700
1,148,800 1,148,800
(2) Income tax
Cash (bal fig) 57,060 B/fwd 31,800

C/fwd 30,700 IS 51,460
Disposal of sub 4,500
87,760 87,760

W3 Disposal of subsidiary
£
Cash proceeds on disposal 68,000
Less: cash (2,000)
Cash flow on disposal 66,000
W4 Share issue
£
Share capital (129,000 – 125,000) 4,000
Share premium (372,210 – 348,700 ) 23,510
27,510
There was a wide range of marks obtained on this question showing that some candidates were clearly
well prepared for the inclusion of such a question, whilst others were not. However, weaker candidates
were still able to pick up marks for items which would appear in a single company cash flow statement.
There were a notable number of arithmetic errors in the answers to this question. Figures in the final cash
flow statement were sometimes incorrect, but figures in the T-account workings were correct, with an error
being made in calculating the balancing figure. A number of candidates also seemed to be confused as to
whether items were an inflow (ie a positive figure) or an outflow (ie a negative figure and therefore shown
in brackets).
The most common error seen on this question was in relation to the group aspect of the question and
included not adjusting for the disposal in the reconciliation, both in the profit before tax figure and the
movements on working capital. Instead, candidates often added back the profit on disposal of the
subsidiary when it was not included in the profit figure in the first instance.
Other common errors included subtracting the disposal figures from the working capital calculations rather
than adding the figures, not adjusting for the disposal in T-account workings, such as depreciation, setting
out a retained earnings T-account to find dividends paid, when this figure was provided in the question,
showing the dividends paid as an inflow rather than an outflow and showing the movement in borrowings
as an outflow when it was an inflow.


Financial Accounting Professional Stage – December 2008
The performance of candidates in the December 2008 objective test questions section for the Professional
Stage Financial Accounting paper was good. Candidates performed well across LOs 1 and 2 but less well,
on this occasion, on LO3.
However, care should always be taken to ensure that the principles underlying any particular item are
understood rather than the answer learned from previous experience. In particular, candidates should ensure
that they read all items very carefully.
LO1 4 4 0
LO2 6 4 1
LO3 5 2 3
Total 15 11 4
answered’.
Three out of the four poorly answered questions were on LO3 (the preparation of consolidated financial
statements) although the worst answered question was that from LO2 (the preparation of single company
financial statements). Comments on the LO2 item and one other of particular note are:
Item 1
This item tested which of four material events should be accounted for as a prior period error in accordance
with IAS 8. Although most candidates recognised that misstated opening inventory and misstated opening
receivables (due respectively to a computational error and fraud) should be corrected in this way many also
thought that the HMRC challenging items in the last period’s tax return (which led to an additional liability)
should also be dealt with as a prior period adjustment. The latter, as the normal revision of an accounting
estimate, should be dealt with in the income statement for the period.
Item 2
This item required a calculation of the amount to be shown in a consolidated cash flow statement in respect
of the acquisition of a subsidiary. The subsidiary had a net overdraft and therefore this needed to be added
to the cash paid for the subsidiary. Many candidates deducted this net figure instead of adding it.
© The Institute of Chartered Accountants in England and Wales Page 1 of 16

PROFESSIONAL STAGE FINANCIAL ACCOUNTING
The marking plan set out below was that used to mark this question. Markers were encouraged to use
More marks were available than could be awarded for each requirement. This allowed credit to be given for a
variety of valid points which were made by candidates.
Question 1
Total marks 24
General comments
This is a typical question testing the preparation of full financial statements (in this case an income
statement and balance sheet) from a trial balance plus a number of adjustments. The requirement
included a specific instruction to analyse expenses by their nature, as opposed to the more usual analysis
by function. Adjustments included a write-down to inventories based on an adjusting post balance sheet
event, adjusting revenue to reflect the provisions of IAS 18, adjusting the warranty provision and providing
for an interim dividend.
Grasmere Ltd
Income statement for the year ended 30 September 2008
£
Revenue (W2) 5,545,700
Changes in inventories of finished goods and work in progress (W1) 6,600
Raw materials and consumables used (W1) (1,157,900)
Employee benefits expense (2,570,000)
Depreciation and amortisation expense (W3) (87,700)
Other expenses (W1) (568,000)
Profit from operations 1,168,700
Finance cost (1,500 + 10,000 (W1)) (11,500)
Balance sheet as at 30 September 2008
£ £
Assets
Non-current assets
Current assets
Trade and other receivables (265,500 + 15,000 – (15,000 + 21,500) 244,000
Cash and cash equivalents 570
276,170

£ £
Revaluation reserve (W5) 616,000
1,519,370
Preference share capital (redeemable) 200,000
Deferred income (105,000 (W2) x 9/21) 45,000
245,000
Current liabilities
Deferred income (105,000 (W2) x 12/21) 60,000
Taxation 450,000
Provisions (W6) 26,000
Dividends payable (W4) 40,000
Borrowings 2,500
742,600
Workings

Changes in Raw Other
inventories materials and expenses
consumables
£ £ £
Per Q 25,000 1,140,500 567,500
Prepayments and accruals 17,400 (15,000)
Bad debts 21,500
Closing inventories (32,000 – (20 x £20)) (31,600)
Adj re redeemable pref dividend (200,000 x 5%) (10,000)
Increase in warranty provision (W6) 4,000
(6,600) 1,157,900 568,000
(2) Revenue
£
Per Q 5,650,700
Less After-sales support relating to future years (100,000 x 120% x 21/24) (105,000)
5,545,700

(3) PPE
£ £
Property – valuation 2,000,000
Plant – cost 676,000
– acc dep b/f (357,500)
Depreciation for year – property (1,056,000 ÷ 44) 24,000
– plant ((676,000 – 357,500) x 20%) 63,700
(87,700)
2,230,800

£
At 30 September 2007 132,170
Ordinary dividend (100,000 ÷ 50p x 20p) (40,000)
Transfer from revaluation reserve (W5) 4,000
At 30 September 2008 803,370
(5) Revaluation reserve

£ £
Valuation 2,000,000
Carrying amount at 1 October 2007 (1,500,000 – 120,000) (1,380,000)
620,000
Transfer to retained earnings
Depreciation charge based on revalued amount (W3) 24,000
Depreciation charge based on HC (1,000,000 ÷ 50) 20,000
(4,000)
616,000
(6) Warranty provision

£
At 1 October 2007 22,000
Income statement charge 4,000
At 30 September 2008 (1,300,000 x 2%) 26,000

As in previous sittings candidates were well-prepared for this type of question and generally answered it
well. The majority of candidates produced a well laid out income statement and balance sheet in
appropriate formats, although some lost presentation marks by not adding across numbers in brackets or
transferring numbers from workings. Others lost presentation marks by failing to complete the sub-totals
and/or totals on their statements or by having incomplete or abbreviated narrative or no heading.
Candidates should remember that this type of question requires financial statements to be in a form
suitable for publication.
A significant minority of candidates either ignored or were unable to deal with the requirement to analyse
expenses by their nature in the income statement and lost presentation marks as a result. Candidates
must ensure they are familiar with both income statement formats and should be aware that they are
clearly illustrated in the open book text.
Although many workings, in particular the cost matrix, were clearly laid out some candidates’ workings
were disorganised, untidy and therefore hard to follow, making it difficult to establish candidates’
approaches where they had not calculated the correct figure.
Most candidates were able to accurately process given figures but struggled with even some of the more
straightforward adjustments to the income statement such as the increase in the bad debt allowance and
the inventory write-down. Most dealt accurately with the income tax charge/liability, the annual depreciation
charges and the revaluations, with many candidates arriving at the correct figure for property, plant and
equipment in the balance sheet and some at the correct figure for the revaluation reserve. Most correctly
classified the redeemable preference shares as debt but not all treated the dividends as a finance cost.
Other common errors included the following:

• Failing to take the (given) increase in the bad debt allowance to the income statement and instead
treating this figure as if it were the closing allowance.
• Incorrectly calculating the write-down to inventory and/or calculating that there was an overall
decrease in inventory over the period instead of an increase.
• Although many candidates correctly calculated the closing warranty provision, many were unable
to correctly process the movement on this provision (or failed to spot that an opening provision
was given) and a significant minority of candidates adjusted revenue by this figure.
• The adjustment to revenue for the after-sales support was correctly calculated by only a few
candidates, although a good number made a reasonable attempt at this adjustment. However, the
corresponding deferred income (balance sheet) adjustment was only attempted by a few
candidates, and was generally incorrect when an attempt was made.
• Failing to process the transfer between the revaluation reserve and retained earnings even though
a number of candidates correctly calculated this adjustment. The adjustment was often made to
the revaluation reserve or retained earnings, but not to both.
• Incorrectly calculating the ordinary dividend – although most did remember to adjust retained
earnings by the calculated figure.
Total possible marks 26.5


Question 2
Total marks 19
General comments
This question tested the preparation of a single company cash flow statement and supporting note. Missing
figures to be calculated included interest received, tax paid, dividends paid, payment of finance lease liabilities,
property, plant and equipment acquired and proceeds from the issue of share capital. A bonus issue of shares
and a revaluation of property, plant and equipment during the year also featured.
Coniston plc
Cash flow statement for the year ended 30 September 2008

£ £
Cash generated from operations (Note) 991,930
Income tax paid (W2) (226,000)
Net cash from operating activities 644,930
Proceeds from sales of property, plant and equipment (576,700 – 551,100
25,600)
Interest received (W1) 23,000
Net cash used in investing activities (577,300)
Proceeds from issue of ordinary share capital (170,000 (W4) + 200,000 370,000
(W5))
Payment of finance lease liabilities (190,300 – 121,000) (W7) (69,300)
Dividends paid (270,000)
Net cash from financing activities 30,700

£
Investment income (24,500)
Finance costs 121,000
Depreciation charge 665,600
Loss on disposal of property, plant and equipment 25,600
Decrease in trade and other receivables ((556,700 – 6,000) – (543,600 – 7,500)) 14,600
Increase in trade and other payables (444,100 – 430,950) 13,150
Increase in warranty provision (420,000 – 385,000) 35,000

Workings
(1) Interest received
£ £
B/d 6,000 Cash (β) 23,000
IS 24,500 C/d 7,500
30,500 30,500
(2) Tax paid
£ £
Cash (β) 226,000 B/d 246,000
C/d 275,000 IS 255,000
501,000 501,000
(3) PPE
£ £
B/d 3,299,400 Disposal 576,700
Revaluation reserve (W6) 133,000 Depreciation 665,600
Finance leases 225,000
Additions (β) 1,151,400 C/d 3,566,500
4,808,800 4,808,800
(4) Share capital
£ £
B/d 1,000,000
Bonus issue 40,000
C/d 1,210,000 Cash (β) 170,000
1,210,000 1,210,000
(5) Share premium
£ £
B/d 540,000
C/d 740,000 Cash (β) 200,000
740,000 740,000
(6) Revaluation reserve
£ £
SCE 56,000 B/d 435,000
C/d 512,000 PPE (β) 133,000
568,000 568,000
(7) Finance lease liabilities
£ £
Cash (β) 190,300 B/d (500,000 + 67,800) 567,800
Interest 121,000
C/d (600,000 + 123,500) 723,500 PPE 225,000
913,800 913,800

This was the second time this topic had been set and some candidates were clearly very well prepared for it.
Others did not have a sufficient grasp of the double-entry techniques which underpin the preparation of such a
statement to score as well as might have been expected on a question of this type. However, the majority of candidates
scored high marks on the reconciliation note, and on the figures for tax paid, proceeds from the sale of
property, plant and equipment and the opening and closing figures for cash and cash equivalents.
Presentation was generally good and most candidates produced workings in the form of T accounts. However,
a significant number made the mistake of putting opening and closing balances on the wrong side of those T
accounts. There were also a minority of candidates that produced no workings for the cash flow statement.
This is a risky approach to take as if figures are calculated incorrectly it is not possible to award any partial
marks.
Candidates generally made a good attempt at the property, plant and equipment T account, with the figures
given in the question for depreciation and for the disposal both being correctly used. However, the finance
lease adjustment was only included by a minority of candidates. An adjustment for the revaluation during the
year was generally made, although the most common figure used was £77,000 being the difference between
the opening and closing figures on the revaluation reserve, ie not adjusted for the transfer made during the
year shown in the question in the statement of changes in equity.
Candidates were clearly confused by interest received and the amounts for the finance lease liabilities, and
these amounts were often included in one T account. A calculation of proceeds from the issue of shares was
attempted by almost all candidates although it was fairly common to see the bonus issue either missed or
included in the wrong T account.

• In the reconciliation note, failing to adjust for the increase to the warranty provision, finance costs and
investment income or making the adjustment(s) in the wrong direction.
• Failing to adjust the trade receivables figure for the opening and closing accrued interest.
• Attempting to calculate dividends paid in the year by constructing a retained earnings T account, even
though the T account was effectively given in the question as an extract from the statement of
changes in equity, and included the dividend figure (this was very common).
• In the interest received T account, putting the amounts for opening and closing interest accrued on
the wrong side of the T account or posting these to an interest paid T account.
• Omission of the figure for interest paid in the cash flow statement – a figure that should simply have
been taken from the income statement in the question.


Question 3
Total marks 14
General comments
This question mixed two discrete topics and contained a conceptual Part (c). Part (a) required extracts
from a consolidated cash flow statement and consolidated balance sheet in respect of an associate
acquired at the start of the year. Part (b) required the calculation of income statement figures in respect of
a machine classified as held for sale during the year. The conceptual Part (c) tested an understanding of
the four measurement bases from the IASB’s Framework.
Thirlmere plc
(a) Investment in associate – Wastwater Ltd
Consolidated cash flow statement for the year ended 30 September 2008 (extracts)
£
Purchase of associate, Wastwater Ltd (52,000)
Consolidated balance sheet as at 30 September 2008 (extracts)
Non-current assets £
Investments in associates (W) 1,325,100
Working
Investment in associate
£ £
Cost ((1,000,000 x £1.20) + 52,000) 1,252,000
Share of post acquisition change in net assets
Share of post acquisition profits ((210,000 x 40%) 84,000
Share of additional depreciation based on fair value (((250,000 – (900)
160,000) ÷ 40) x 40%)
83,100
Less Impairment losses to date (10,000)
1,325,100
This part of the question was very poorly answered, with a large number of candidates failing to recognise
that the acquired entity was an associate, not a subsidiary. Even those who recognised it as an associate
seemed unsure as to how to calculate the investment in associate figure for the consolidated balance
sheet with many using the old UK GAAP method (which, although it could give the correct answer was a
more complex calculation). Some attempted some sort of hybrid calculation falling between the latter
method and that used in the learning materials.
Even those who were able to calculate the carrying amount for the consolidated balance sheet failed to
show this amount as an extract as specified in the requirement (producing only a working) and lost marks
because of this. Very few candidates identified the need to adjust the post acquisition retained earnings of
the associate for the extra depreciation arising from the fair value adjustment.
Few candidates knew that the acquisition of an associate is shown in the consolidated cash flow
statement as the amount of cash paid to acquire the shares, not the amount of cash paid less cash and
cash equivalents acquired, as for a subsidiary – although most knew that this would be presented under
investing activities.

Those candidates who decided that the acquired entity was a subsidiary wasted significant time by
attempting to do unnecessary consolidations/disclosure notes.
Few candidates knew that the acquisition of an associate is shown in the consolidated cash flow
statement as the amount of cash paid to acquire the shares, not the amount of cash paid less cash and
cash equivalents acquired, as for a subsidiary – although most knew that this would be presented under
investing activities.
Those candidates who decided that the acquired entity was a subsidiary wasted significant time by
attempting to do unnecessary consolidations/disclosure notes.

(b) Asset held for sale
Income statement charges for the year ended 30 September 2008

£
Depreciation (150,000 x 20% x 10/12) 25,000
£
Cost on 1 April 2005 150,000
Depreciation to 30 September 2007 (150,000 x 20% x 2.5) (75,000)
Depreciation for year ended 30 September 2008 (25,000)
Carrying amount at 1 August 2008 50,000
Fair value less costs to sell (45,000 – 1,000) (44,000)
Impairment loss on classification as held for sale 6,000
Answers to this part were better than those to Part (a) but were still disappointing.
The majority of candidates miscalculated both the total number of months the asset had been owned and
the number of months in the current year (in order to calculate the current year depreciation charge).
Although most candidates recognised that an impairment loss on classification as held for sale would be
taken to the income statement for the year relatively few also showed the depreciation expense for the
year.
In contrast to Part (a) where extracts were not produced when they were required, in this part where
extracts were not required, only the calculations (although candidates did need to identify in their answer
the two distinct charges being taken to the income statement for the year) many candidates also produced
extracts.
(c) The four measurement bases
Historical cost
Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration
given to acquire them at the time of their acquisition.
At historical cost, the machine was recorded at its total price of £150,000.
Current cost
Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an
equivalent asset was acquired currently.

If the machine had not been held for sale in the current period and was to be measured at its current cost
it would have been restated in the balance sheet to £175,000 x 1½ years/5 years = £52,500 –
representing an “aged” version of the £175,000 current cost.
Realisable (settlement) value
Assets are measured at the amount of cash or cash equivalents that could currently be obtained by selling
an asset in an orderly disposal.
This is effectively the measurement basis that has been adopted for the machine held for sale at the year
end – ie measured at £44,000 (or £45,000).
Present value
Assets are measured at the current estimate of the present discounted value of the future cash flows in
the normal course of business.
Under this basis, the machine, if retained, would be measured at £40,000, being the present value of
future cash flows generated within the business.
Many candidates either knew this material or extracted it from their open book text. However, some then
lost marks because they failed to explain each of the four bases, as required, with reference to the figures
in the question. Others wasted time setting out how the measurement bases relate to liabilities although
the question clearly asked the concepts to be explained by reference to the machine in the question (an
asset).
Other candidates scored poorly as instead of the four measurement bases they wrote about things such
as qualitative characteristics or concepts such as accruals/going concern – a worrying indication that they
are not as familiar as they should be with the content of the IASB Framework (and their open book text).


Question 4
Total marks 23
General comments
Part (a) was a consolidated income statement question, featuring two subsidiaries (one fully disposed of
within the year) and one associate. Adjustments were typical of this type of question and included a fair
value adjustment on acquisition with subsequent impact on the annual consolidated income statement,
intra-group trading and unrealised profits and impairment write-downs. The minority interest column from
the consolidated statement of changes in equity was also required. Part (b) tested the differences between
IFRS and UK GAAP in respect of the preparation of group financial statements, with the treatment of
goodwill arising on acquisition specifically excluded.
Windermere plc
(a) Consolidated income statement for the year ended 30 September 2008
£’000
Revenue (W2) 59,480
Gross profit 17,990
Share of profit of associates ((1,150 x 30%) – 10) 335
Profit for the period from continuing operations 5,345
Profit for the period from discontinued operations (1,240 – 120 (W4)) 1,120
Attributable to
Equity holders of Windermere plc (β) 5,381
Minority interest (W5) 1,084
6,465
Consolidated statement of changes in equity for the year ended 30 September 2008 (extracts)
Minority
interest
£’000
Eliminated on disposal of subsidiary (W7) (1,220)
(136)
Balance at 30 September 2007 (W6) 3,352
Balance at 30 September 2008 (β) 3,216

Workings
(1) Group structure
Windermere plc
0.6
= 30%
2
3.2 2.1
= 80% = 60%
4 for 6/12 3.5 Buttermere Ltd
Rydal Ltd
Derwent Ltd
(2) Consolidation schedule
Windermere Derwent Ltd Adj (W3) Consol

plc
£’000 £’000 £’000 £’000
Revenue 38,700 21,500 (720) 59,480
Cost of sales – per Q (26,400) (15,750) 720
– PURP (W3) (60) (41,490)
Op expenses – per Q (7,450) (2,200)
– GW impairment (30) (9,680)
Tax (1,900) (1,400) (3,300)
2,090
(3) Intra-group sale and PURP
% £’000
SP 120 720
Cost (100) (600)
GP 20 120
X½ 60

(4) Group loss on disposal of Rydal Ltd

£’000 £’000
Sale proceeds 7,500
Less: Share of net assets at disposal
Net assets at 30 September 2008 7,340
Less: Profit since 1 April 2008 (2,480 x 6/12) (1,240)
6,100
x 80% (4,880)
Less: Carrying amount of goodwill
Cost of investment (3,200 x £2.30) 7,360
Less: Share of net assets at acquisition ((4,000 (4,520)
+ 1,650) x 80%)
Less: Impairments to date (100)
(2,740)
(120)
(5) Minority interest in year

£’000
Rydal Ltd (20% x 1,240 (W4)) 248
Derwent Ltd (40% x 2,090 (W2) 836
1,084
(6) Minority interest brought forward

£’000
Rydal Ltd (20% x (7,340 – 2,480)) 972
Derwent Ltd (40% x (8,100 – 2,150)) 2,380
3,352
(7) Minority interest eliminated on disposal of Rydal Ltd £’000
B/f (W6) 972

Current year 248
1,220
(8) Minority interest carried forward (for proof only)
£’000
Derwent Ltd (40% x (8,100 – 2,150 + 2,090 (W2)) 3,216
The majority of candidates showed that they could construct a consolidated income statement and
demonstrated that they understood the underlying principles. However, candidates were less clear on the
movement on the minority interest account as demonstrated by the minority interest column from the
consolidated statement of changes in equity – although some of the more able candidates scored full marks
on this part demonstrating that they understood the link between the minority interest figure in the
consolidated income statement and that in the consolidated balance sheet.
The most worrying aspect of the workings to the consolidated income statement was the number of
candidates who included a column for the subsidiary disposed of during the year in their consolidation
schedule (Working 2). This was not necessary, as, per the learning materials, a separate calculation should
have been performed to add together the group profit on the disposal of the subsidiary and the subsidiary’s
profit for the period. This should then have been presented on the face of the consolidated income statement
as the profit for the period from discontinued operations. Those candidates who included a column for the
subsidiary disposed of might have been going on to present discontinued operations line-by-line on the face
of the consolidated income statement – but none of them did this. Indeed many candidates seemed to be
very confused about how to deal with the IFRS 5 disclosures in respect of discontinued operations. Even
those who did arrive at a correct figure for discontinued operations often failed to take out the minority interest
on this figure at the bottom of the income statement.

Another common error was to make no attempt to calculate a group profit on the disposal of the subsidiary
but to take the parent company profit as given in the question and add this to the subsidiary’s profit for the
period to arrive at a figure for profit for the period from discontinued operations. However, the more able
candidates did calculate the correct figure and its minority interest.

• Incorrectly calculating the subsidiary’s net assets at disposal and/or acquisition in the calculation of
group profit on the disposal.
• Writing off the impairment on the associate against the parent company instead of against the group
share of the associate’s profits.
• Reducing the associate’s profits by the impairment before taking the group share of those profits.
• Writing off the impairment on the subsidiary against the subsidiary itself instead of against the parent
company (or as a consolidation adjustment).
• Taking the figure of £600,000 in respect of the intra-group sale as the selling price, when it was
clearly stated as being the cost.
• Adjusting for the provision for unrealised profits against the parent company instead of against the
subsidiary (which was the selling company).
• Including a line for dividends in the consolidated statement of changes in equity when the question
stated that there were no dividends declared or paid during the period and/or failing to include a line
in respect of the disposal of the subsidiary.
• When calculating the minority interest brought forward, failing to exclude the profit for the year from
the figure for year-end retained earnings given in the question.
A worrying minority of candidates completely omitted any figures in respect of the associate and/or made no
attempt at the minority interest reconciliation.


(b) Differences between IFRS and UK GAAP re preparation of group financial statements
Merger accounting is required by UK GAAP (FRS 6) where certain criteria are met. IFRS 3 requires all
business combinations to be accounted for using the purchase method.
UK GAAP gives specific guidance on fair value measurement in FRS 7. IFRS 3 provides less detailed
guidance.
Under FRS 7only separable intangible assets are required to be measured at fair value. Under IFRS 3
more intangibles can be recognised as intangible assets recognised under a business combination include
separable assets and those arising from contractual or legal rights (regardless of whether those rights are
transferable or separable).
UK GAAP (FRS 2) includes an exclusion of a subsidiary from consolidation on the grounds of severe long-
term restrictions. No such exemption exists under IAS 27 (although control may be lost as a result of the
restriction such that the entity will no longer be classified as a subsidiary).
UK GAAP (FRS 2) requires the minority interest to be presented separately from shareholders’ funds. IAS
27 requires it to be shown as a separate component of equity.
Under UK GAAP no consideration of the existence of potential voting rights is required in the assessment
of control. IAS 27 requires the existence of potential voting rights to be considered.
In a consolidated cash flow statement presentation under UK GAAP (FRS 1) is different to that under IAS
7, as follows.
Item FRS 1 classification IAS 7 classification

Dividends from associates Disclosed as a separate caption Included under investing cash flows
Dividends paid to minority Included under “return on Included under financing cash flows
interest investments and servicing of
finance”
Acquisitions and disposals of Disclosed as a separate caption Included under investing cash flows
subsidiaries/associates
Under UK GAAP (FRS 9) the group share of an associate’s operating profit and the group share of the
associate’s interest and tax are brought into the consolidated income statement separately. IAS 1
suggests a single line presentation.
UK GAAP (FRS 9) requires the parent company to recognise its share of an associate’s net liabilities. IAS
28 only requires this where there is a legal or constructive obligation to make good those losses.
Although the requirement asked for candidates to set out the differences between IFRS and UK GAAP in
respect of the preparation of group financial statements, the majority of candidates set out differences
which applied to the preparation of single company financial statements. As a result, many candidates
scored few marks on this part of the question which should have been an opportunity to score a good
number of marks.
Those who did address group differences generally scored highly, although a few included differences in
respect of the treatment of goodwill, which were specifically excluded from the requirement. Others listed
some very worrying incorrect differences – such as the fact that associates are not consolidated in the UK
and that in the UK no fair value adjustments are made.
This is an important area of the syllabus and candidates should ensure that they know these differences
(which are clearly set out in both the learning materials and at the back of the syllabus document) and can
apply them to given scenarios.


discretion and to award partial marks where a point was either not explained fully or made by implication. More
marks are available than could be awarded for each requirement, where indicated. This allows credit to be
given for a variety of valid points, which are made by candidates.
Question 1 Total marks: 22
General comments
This is a trial balance question with the preparation of a statement of financial position and a statement of
changes in equity required. Adjustments are required for depreciation, the recognition of a provision and
related asset, development expenditure, an operating lease as well as other minor adjustments.
(a)
Adeje Ltd – Statement of financial position as at 30 June 2009
£ £
ASSETS
Non-current assets
Intangible assets (120,000 – 40,000 – 25,000) 55,000
2,230,050
Current assets
Inventories (42,000 + 2,500) 44,500
Trade & other receivables (32,000 + 10,000) 42,000
86,500

Equity
Share premium account 200,000
6% Irredeemable preference shares 60,000
Retained earnings 874,050
2,184,050
Current liabilities
Trade and other payables (58,000 + 250 (W3)) 58,250
Bank overdraft 18,250
Taxation 41,000
Provisions 15,000
132,500

Statement of changes in equity for the year ended 30 June 2009
Ordinary Share Irredeem. Retained Total

share premium pref earnings
capital shares
Total comprehensive – – – (84,900) (84,900)
loss for the period (W3)
Interim – ordinary – – – (21,250) (21,250)
dividend
Issue of shares – – 60,000 – 60,000
Irredeemable dividend – – – (1,800) (1,800)
(60,000 x 6% x 6/12)
– – 60,000 (107,950) (47,950)

Balance b/fwd 1,050,000 200,000 – 982,000 2,232,000
Balance c/fwd 1,050,000 200,000 60,000 874,050 2,184,050
W1 Depreciation
Depreciation on buildings (2,500,000 – 700,000) x 3% = 54,000 pa
Depreciation on plant & equipment (351,000 – 1,000 (lease) – 97,000) x 15% = 37,950 pa

Land & Plant & Total
buildings equipment
£ £ £
Cost b/fwd 2,500,000 351,000
Adjustment (1,000)
350,000
Acc. deprec. b/fwd 486,000 97,000

Charge for year (W1) 54,000 37,950
Acc. deprec. b/fwd 540,000 134,950
Carrying amount 1,960,000 215,050 2,175,050
W3 Operating lease
£
Deposit 1,000
4 instalments of £1,000 4,000
Total lease payments 5,000
Straight line over two years = £5,000 / 2 years = £2,500
6 months charge in the period = £2,500 x 6/12 months = £1,250
Accrual: 1,250 – 1,000 (paid) = 250

W4 Total comprehensive profit/loss for the period
£ £
Trial balance – profit before tax 115,000
Adjustments:
Irredeemable preference dividend 1,800
Provision (15,000)
Reimbursement 10,000
Inventory 2,500
Research & development exp (40,000 + 25,000) (65,000)
Depreciation charge (54,000 + 37,950) (91,950)
Lease charge (W2) (1,250)
(158,900)
Taxation (41,000)
Loss for the period (84,900)
Candidates performance on this question was good and fairly consistent with previous sittings although the
preparation of the statement of changes in equity rather than the income statement continues to cause
weaker candidates problems. Almost all candidates attempted this question highlighting just how
comfortable candidates are with this style of question, which continues to be fundamental to the Financial
Accounting syllabus. A good majority of candidates attempted this question first.
Almost all candidates produced a well laid out statement of financial position, however the preparation of the
statement of changes in equity was often a little haphazard. Candidates seem extremely comfortable when
they are asked to prepare the statement of financial position and income statement, but less so when the
statement of changes in equity is asked for. Candidates should be reminded that it is likely that any two of
these three statements could be, and frequently are, asked for.
Candidates generally spent time totalling each line item in their statement of financial position, although sub-
totals were often missing. Candidates should continue to be reminded that presentation marks are available
in this type of question as the requirement asked for statements that are suitable for publication. Workings
were generally clearer than in the past with most candidates producing well laid out workings for the property,
plant and equipment calculations instead of adding or subtracting figures on the face of the statement which
has been a criticism in the past.
statement of financial position. Marks were awarded where presentation differed to the marking guide but
resulted in a reasonable alternative.
A number of candidates produced a working for retained earnings carried forward, seeming not to realise that
this simply duplicated the information from one column of their statement of changes in equity – which itself
acted as a working for the figure in the statement of financial position. A good number of candidates missed
the column for preference shares in the statement of changes in equity and consequently incorrectly showed
the share issue as ordinary shares.
Most candidates coped well with the goods omitted from the inventory count, the calculation of the
appropriate provision, the annual depreciation charges, the issue of irredeemable preference shares and the
tax charge for the year. Pleasingly, only a minority of candidates misclassified the irredeemable preference
shares as debt, rather than equity.
Strong candidates coped well with adjusting the profit before tax figure in the question for each adjustment
made. Weaker candidates made the adjustments to statement of financial position figures but failed to make
the corresponding adjustment to profit in order to arrive at the correct figure for “total comprehensive income”
in the statement of changes in equity.

The worse attempted adjustment was that of the lease, with only a minority of candidates arriving at the
correct adjustment to profit and the correct closing accrual. Common errors were to treat the operating lease
as a finance lease, in spite of the fact that the question specified that this was an operating lease. Some
candidates simply treated the £1,000 as an expense, others treated half of it as a prepayment, while others
set up the future payments as lease liabilities. A number of candidates failed to deal with this adjustment at
all.
Other common errors included netting off the £10,000 expected refund against the £15,000 provision and
thereby showing only a net £5,000 provision in the statement of financial position, failing to reduce the
amount capitalised for research and development expenditure by one of the two amounts that were not
allowable under IAS 38, although candidates generally completed their double entry adjustment correctly,
calculating the preference dividend based on a whole year rather than six months and reducing trade
receivables by £10,000 in respect of the returned goods.


General comments
This question requires the preparation of a statement of cash flows along with the note reconciling profit
before tax to cash generated from operation using the indirect method. A number of adjustments are
required, including the disposal of an item of plant with a deferred receipt, two share issues, one for cash and
one as part of an acquisition and deferred credit terms on the acquisition of new equipment.
Caleta plc
Statement cash flows for the year ended 30 June 2009

£ £
Purchase of intangible assets (100,000)
Proceeds from sales of property, plant and equipment
(35,000 – 11,000) / 2 12,000
Proceeds from issue of ordinary share capital
(80,000 (W5) + 10,000 (W6)) 90,000
Repayment of loan (600,000 – 350,000) (250,000)
Net cash from financing activities (194,000)

£
Amortisation charge (W4) 281,700
Loss on disposal of property, plant and equipment 11,000
Increase in inventories (123,100 – 106,000) (17,100)
Increase in trade and other receivables ((229,800 – 12,000) – 216,500) (1,300)
Decrease in trade and other payables (61,600)
((334,800 – 6,300 – 39,000) – (358,600 – 7,500))

Workings
(1) Interest paid
£ £
Cash (β) 165,200 B/d 7,500
C/d 6,300 IS 164,000
171,500 171,500
(2) Tax paid
£ £
Cash (β) 20,780 B/d 22,000
C/d 32,000 IS 30,780
52,780 52,780
(3) PPE
£ £
B/d 366,500 Disposal 35,000
Depreciation (β) 36,600
Additions 89,000 C/d 383,900
455,500 455,500
(4) Intangibles
£ £
B/d 1,245,000 Amortisation (β) 281,700
Additions 200,000 C/d 1,163,300
1,445,000 1,445,000
(5) Share capital
£ £
B/d 550,000
Non-cash issue 50,000
C/d 680,000 Cash (β) 80,000
680,000 680,000
(6) Share premium
£ £
B/d 110,000
Non-cash issue 50,000
C/d 170,000 Cash (β) 10,000
170,000 170,000
£ £
Dividends in SCE (β) 34,000 B/d 352,700
C/d 421,300 IS 102,600
455,300 455,300

Candidates are clearly very comfortable with the preparation of a statement of cash flows. This question was
generally completed early on showing that candidates continue to favour this topic.
Presentation was generally good and most candidates produced workings in T-accounts. A significant
minority of candidates produced T-accounts with the brought forward and carried forward figures the wrong
way round and got in-flows and out-flows back to front on the face of the statement of cash flows.
The vast majority of candidates arrived at the correct figures for interest paid, tax paid, purchase of property,
plant and equipment and intangibles, repayment of loan and dividends paid in the statement of cash flows
itself. In the reconciliation most arrived at correct figures (or used their incorrectly calculated adjustments
correctly) for all but the changes in working capital, where there were a number of more unusual adjustments
to be made.
Where errors were made they included adjusting the closing interest accrual by the £1,700, not taking the
issue of shares for non-cash consideration into account when calculating the cash proceeds from issue of
ordinary share capital, not adjusting the movement on trade payables for the £39,000 due in respect of
property, plant and equipment and adjusting the property, plant and equipment T-account by the accumulated
depreciation on the asset sold instead of by the carrying amount.


General comments
This is a mixed topic question covering both revenue recognition and the treatment of an associate acquired
during the period in the consolidated statement of financial position. The question also contains a separate
element on the different users of financial statements and their information needs.
(a)
Income statement for year ended 30 June 2009

£
Revenue
Fixed price contract (120,000 x 50%) 60,000
Interest-free credit 23,500
Commission sales (1,300,000 x 15%) 195,000
High technology fittings
(85,000 – (4,000 x 2 yrs)) 77,000
Maintenance income (4,000 x 3/12) 1,000
Cost of sales (45,000 + 35,000) x 50% 40,000
Finance income (25,000 – 23,500) x 6/12 months 750
Statement of financial position as at 30 June 2009

£
Trade and other receivables
Fixed price contract (60,000 – 40,000) 20,000
Interest-free credit (23,500 + 750) 24,250
Deferred income (4,000 x (21 – 12)/12 months) 3,000
Current liabilities
Deferred income 4,000
(It was not necessary to split the deferred income between non-current and current liabilities to gain the
marks.)
Candidates seem to struggle with extract style questions whether they are single or mixed topic.
Candidates are not able to simply follow a process with this style of question and as a result they appear to
forget their basic accounting knowledge. This question was often left to the end suggesting that candidates
are not comfortable with this style of question.
Answers to this question were mixed with the question proving to be a good discriminator between strong
and weak candidates.
In Part (a) although the majority of candidates arrived at some correct figures, the weaker candidates failed
to properly complete their double entry, so whilst they might arrive at, say, a correct figure for revenue they
failed to give the correct figure for receivables, or deferred income. A significant number of candidates
wasted time providing extracts from the financial statements when all that was required was clearly labelled
calculations. A significant number of candidates also made, what appeared to be, correct calculations but
there were no clues as to what these figures represented, for example, revenue, cost of sales, receivables
etc and therefore lost marks.
Comments on specific parts of Part (a) are as follows:

• Fixed price contract: Most candidates correctly arrived at revenue of £60,000 but then calculated cost of
sales as being £45,000, being the cost incurred to date (instead of adding the costs incurred to date and
estimated future costs and then taking 50% of the total as reflecting the stage of completion). Few
calculated a closing receivables figure and others described this as deferred income. A minority used
the costs basis to calculate cost of sales when a completion basis was specified in the question.
• Interest free credit: Many arrived correctly at revenue of £23,500 but gave receivables as £25,000 (or

vice versa). A number of candidates calculated finance income based on one year instead of six months
and others described this figure as finance cost, as opposed to finance income. Of those who calculated
these two income figures few then gave the corresponding total receivable.
• Commission sales: the revenue figure was correctly calculated by the majority of candidates.
• High technology fittings: attempts at calculating a revenue figure varied with most candidates reducing
the £85,000 fee by only one year’s worth of maintenance charges, rather than two. Only the better
candidates arrived at the correct figure for revenue and the corresponding figure for deferred income.

(b)
Extract from consolidated statement of financial position

ASSETS
Non-current assets
Investment in associate (W1) 129,100
Current assets
Dividend from Alcala Ltd (W2) 14,000
(W1) Associate
Year end carrying amount £
Cost 175,000
Share of post-acq change in net assets
35% x (576,000 – 650,000) (25,900)
149,100
Impairment in year (20,000)
Investment in associate 129,100
(W2) Dividend
(400,000 / 0.50) x 5p x 35% = £14,000
In Part (b), which did require extracts, a significant number of candidates provided calculations only.
Candidates must learn to distinguish between requirements asking for extracts (where marks will be given
for presentation and own figure marks from workings) and those requiring calculations only.
There was a split between candidates who attempted to calculate a figure for dividend receivable from the
associate and those who ignored this totally. Many arrived at an incorrect figure, either missing the fact that
these were 50p shares, or that a 35% share was needed. Once calculated, the most common mistake was
for this figure to be used to adjust the retained earnings of the associate, with few candidates realising that
retained earnings given in the question would already have been reduced by this figure. Disappointingly, it
was very rare to see a consolidated statement of financial position extract for the dividend receivable.
Most candidates made a reasonable attempt at calculating the carrying amount for the investment in the
associate and correctly deducted the impairment of £20,000. Common errors included failing to recognise
that the associate had made a post-acquisition loss, as opposed to a post-acquisition profit, consequently
adding £25,900 to the cost of the associate rather than deducting it.
A worrying minority of candidates treated the associate as a subsidiary and attempted to calculate figures
such as goodwill. Even though the (given) 35% shareholding should in itself have indicated an associate, as
opposed to a subsidiary, the question also clearly stated that the investment should be treated as an
associate.


(c)(i)
Investors – Investors need to decide whether to buy or sell their shares. They analyse information from the
financial statements, such as the company’s past dividend policy, the level of profits that the company is
making and how the company uses its resources.
Employees – financial statement information is needed to assess their employer’s stability and profitability
and their ongoing ability to offer further remuneration and career progression. Does the company have plans
to expand in the future, is competition fierce or does the company have a niche market? Does the company
have share plans for its employees?
Lenders - financial statement information is needed to assess whether the company will have sufficient funds
available to pay the finance costs and repayments when they fall due. Working capital and cash flow will be
of particular interest.
Suppliers - financial statement information is needed to assess the company’s ability to pay their debts when
they fall due. Working capital and cash flow will be of particular interest.
Customers - financial statement information is needed to assess a company’s ability to continue trading,
providing continuity of supply for customers. What are the company’s plans for the future, is it planning to
expand, diversify or reorganise its business?
Government agencies - financial statement information is needed to assess the allocation of resources and
therefore the activities of the company. Various different financial and non-financial information will be used
by the Government in its collection of national statistics, such as number of employees, level of revenue,
geographical locations etc.
The general public - financial statement information is needed to assess trends and recent developments in
the company’s activities and future trading potential. Expansion plans for the future will be of particular
interest as they may provide additional local employment opportunities and are likely to encourage other
businesses into the local area. The financial performance of the company may provide some insight into
whether the company is likely to remain in the local area.
[Note: information presented on the first two user groups only will be marked.]

(c)(ii)
The financial statements have a number of limitations as set out below:
Financial statements are prepared to a specific date, the information, when published is therefore
historic and backward looking. Although, historic information is useful in assessing how a company
has been performing it is limited in the amount of information that it can provide about a company’s
future performance.
Financial statements are prepared in a standardised manner with much of the information
aggregated. While this means that it is easier to compare information between companies because it
is presented in a similar manner it also means that the content of standardised and aggregated
information may be difficult to identify.
Financial statements only contain a limited amount of narrative information about the business which
can provide valuable insight into the company’s future, for example, how it is operating, what the
company’s plans are for the future, the risks facing the company, such as the number of competitors
in the market and how the company is managed.
(Markers were encouraged to use their judgement and award marks where candidates had provided
alternative limitations.)


Answers to Part (c) continued the trend of candidates struggling with the written part of questions although
there were some good answers from some of the stronger candidates. However, it was pleasing that almost
all candidates attempted this part of the question, which was an improvement on previous sittings where
weaker candidates often miss out the written elements.
Common misconceptions included identifying management/directors and/or auditors as users of the

financial statements, stating that banks looking to lend to companies will rely on historic financial
statements (as opposed to requiring cash flow forecasts), that financial statements include no narrative
information and that immaterial errors matter to users (indicating a lack of understanding of the concept of
materiality).
Some candidates wasted time discussing the qualitative characteristics of financial information, cost versus
benefit, materiality in general and the inherent limitations of an audit.


General comments
This is a consolidation question. A consolidated income statement is required along with an extract from the
consolidated statement of financial position showing equity. A subsidiary has been acquired during the
period and the consolidation includes an associate. Adjustments are required for differences between the
fair value and carrying amount of the subsidiary acquired and inter-company trading has taken place
between the parent and both a subsidiary and the associate companies.
(a)
Galletas plc
Consolidated income statement for the year ended 30 June 2009
£
Revenue (W2) 2,291,300


Share of profits of associate (W6) 51,383

Attributable to:
Equity holders of Galletas plc (Bal) 517,579
Non-controlling interest (W5) 82,314
599,893
Consolidated statement of financial position (extract)
£
Share capital 4,000,000
5,879,116
Non-controlling interest (W8) 2,070,600
Total equity 7,949,716

Workings (All figures in £’000)
W1 Group Structure
Galletas
900 / 3,000 = 30%
Arico
2.1 / 3.5 =
60%
85%
1 Apr 09
(3/12 months)
Vilaflor
Masca
W2 Consolidation schedule
Galletas Vilaflor Masca Adjustments Total
3/12
Revenue 1,410,500 870,300 160,000 (149,500) 2,291,300
Cost of sales
Per question (850,000) (470,300) (54,875) 149,500 (1,238,125)
PURP (W4) (9,750)
PURP (W4) (2,700)
Operating expenses
Per question (103,200) (136,000) (23,780) (263,980)
Fair value adj (dep) (W3) (1,000)
Tax (137,100) (79,200) (24,385) (240,685)
PAT 184,800 55,960
W3 Fair value adjustment

Additional fair value £320,000
Buildings £320,000 x 50% = £160,000
Additional depreciation charge in year £160,000 / 40 years x 3/12 months = £1,000
W4 Unrealised profit
Arico Vilaflor
207,000 149,500 115%

180,000 130,000 100%
27,000 19,500 15%
Vilaflor - £19,500 x ½ = £9,750
Arico - £27,000 x 1/3 = £9,000

Galletas share of Arico PURP - £9,000 x 30% = £2,700
W5 Non-controlling interest
Vilaflor Ltd (40% x £184,800 (W2)) = £73,920
Masca Ltd (15% x £55,960 (W2)) = £8,394
Non-controlling interest = £73,920 + £8,394 = £82,314

W6 Associate
£
Galletas’ share x 30% 61,383

Less: impairment for year (10,000)
Share of associate’s profit 51,383
W7 Consolidated retained earnings

£
Galletas plc – c/fwd 1,560,000
Less: PURP with Vilaflor (W4) (9,750)
Less: PURP with Arico (W4) (2,700)
Vilaflor Ltd (60% x (580 – 195)) 231,000
Masca Ltd (85% x 55,960) (W2) 47,566
Arico Ltd ((30% x (340 – 130)) – 10(imp)) 53,000
1,879,116
W8 Non-controlling interest - SFP

£
Vilaflor Ltd (£4,080,000 x 40%) 1,632,000
Masca Ltd
Net assets per question 2,605,000
Fair value adjustment (increase) 320,000
Less: extra depreciation on FV adj (1,000)
2,924,000
NCI – 2,924,000 x 15% 438,600
2,070,600
The average mark on this question was pleasing with candidates’ performance much improved since the
last time a consolidated income statement was set. Almost all candidates made a good attempt at the
consolidated income statement itself – although attempts at the extracts from the consolidated statement of
financial position varied, showing once again that weaker candidates struggle when required to move away
from a pure “learnt technique” style of requirement.
The consolidated income statement showed a well-honed exam technique, with candidates clearly
understanding the principles of consolidation, adding together the results for the subsidiaries line by line
and only including Masca’s results for the three months since acquisition. Presentation was generally good
with the majority of candidates showing the two “attributable to” figures although very few struck a sub-total
for operating profit before adding the share of the associate’s profits.
Several common errors were in respect of the associate, including failing to take 30% of the PURP in
respect of sales to the associate, setting the PURP in respect of sales to the associate against the share of
the associate’s profits instead of against the parent’s profits, adjusting sales and cost of sales for sales
between the associate and the parent and setting the impairment in respect of the associate against the
parent’s profits instead of against the parent’s share of the associate’s profits.
Other common errors included calculating the additional depreciation on the fair value adjustment based on
a whole year instead of just three months, setting the additional depreciation against the parent instead of
against the subsidiary and classifying the additional depreciation as a cost of sale instead of as an
operating expense (as it related to the company’s head office).
Errors on the consolidated statement of financial position extract were more common, with a few candidates
making little or no attempt at this. A small minority of candidates produced a consolidated statement of

changes in equity instead of an extract from the consolidated statement of financial position. Many
candidates produced lengthy (and largely unnecessary) net assets workings in the way they would have
practised for a question requiring a complete consolidated statement of financial position.
Errors on this part included when calculating consolidated retained earnings, producing a new working to
arrive at post acquisition retained earnings for the subsidiary acquired during the year when the figure had
already been calculated in the consolidation schedule, omitting to reduce consolidated retained earnings by
the PURPs and when calculating non-controlling interest, failing to adjust the net assets of the subsidiary
acquired during the year by the fair value adjustment and additional depreciation thereon. Even if those
adjustments had been made in a separate net assets working, many candidates failed to use the figure
from that working and took the non-controlling interest share of just the net assets at the year end.


The performance of candidates in the December 2009 objective test questions section for the Professional
Stage Financial Accounting paper was good. Candidates performed well across all syllabus areas.
When practising OT items, care should always be taken to ensure that the principles underlying any particular
item are understood rather than the answer learned from previous experience. In particular, candidates should
ensure that they read all items very carefully.
LO1 4 4 0
LO2 3 3 0
LO3 8 7 1
Total 15 14 1
The only poorly answered question was on LO3 (the preparation of consolidated financial statements).
Comments on this item are:
Item 1
This item tested what amount would be shown in respect of dividends paid to the non-controlling interest in a
consolidated statement of cash flows. The information given included opening and closing balances on the non-
controlling interest “account”, the profit attributable to the non-controlling interest for the year and details of a
new subsidiary acquired during the year. The most commonly selected incorrect answer indicated that
candidates ignored the impact of the subsidiary acquired during the year on the non-controlling interest account.

were available than could be awarded for most requirements. This allowed credit to be given for a variety of
valid points which were made by candidates.
Question 1 Total Marks: 19
General comments
This question tested the preparation of single entity financial statements (in this case an income statement
and a statement of financial position) from a trial balance plus a number of adjustments. Adjustments
included prepayments and accruals, the correction of a suspense account, an adjustment for inventories
held by third parties, two provisions and an asset held for sale.
Moreton Ltd
£
Revenue (2,885,500 – 30,000) 2,855,500
Finance cost (200,000 x 5%) (10,000)
Statement of financial position as at 30 September 2009
Assets £
Current assets
30,000)
Other receivables (W2) 45,000
Cash and cash equivalents 820
1,226,220

Equity and liabilities £

Equity
313,500
Borrowings 200,000
Current liabilities
Trade and other payables (578,620 + 75,000 + (10,000 656,120
– 7,500))
Taxation 4,000
Borrowings 13,600
733,720
Tutorial note
Equal credit was given if candidates assumed that the £7,500 interest paid in the trial balance related to
the overdraft and therefore accrued the whole £10,000 interest on the loan.
Marks were also awarded if the impairment of £9,000 and/or the provision expense of £15,000 were shown
separately on the face of the income statement (instead of within cost of sales and cost of sales or
administrative expenses respectively) on the grounds that either of these amounts would have a significant
impact on the profit for the period.
Workings

expenses costs
£ £ £
Per Q 1,345,600 456,700 234,600
Rent (70:30) 552,300 236,700
Prepayments and accruals (56,000) 75,000
Closing inventories (156,000 + 20,000) (176,000)
Movement on provision (W2) 15,000
Movement on provision (W2) (2,000)
Amortisation/impairment charges (2,000 + 11,000
9,000) (W4)
1,879,900 637,400 309,600
(2) Provision for legal claims

£
At 1 October 2008 27,000
Settled at (25,000)
Released to IS 2,000
New provision at 30 September 2009 (most likely outcome) 60,000

Counter claim @ 75% (45,000)
Charge to IS 15,000

£
At 1 October 2008 178,900
At 30 September 2009 193,500

(4) Patent held for sale

£
Cost 40,000
Accumulated amortisation to 30 September 2008 (8,000)
Amortisation to date of classification as held for sale ((40,000 ÷ 10) x 6/12) (2,000)
Carrying amount at classification as held for sale 30,000
Fair value less costs to sell (22,000 – 1,000) (21,000)
Impairment 9,000
As in previous sittings, candidates were clearly very well-prepared for this type of question. Almost all
candidates produced a well-laid out income statement and statement of financial position with all narrative
and sub-totals completed. Although some candidates lost presentation marks for the statement of financial
position by not adding across numbers in brackets or failing to complete sub-totals and/or totals on their
statements or by having incomplete or abbreviated narrative, presentation for this statement was much
improved from previous sittings. Others lost presentation marks for failing to include a sub-total for profit
from operations on their income statement. As ever, candidates should remember that this type of question
requires financial statements to be in a form suitable for publication.
Although many workings, in particular the cost matrix and impairment working, were clearly laid out, a few
candidates’ workings were disorganised, untidy and therefore hard to follow, making it difficult to establish
candidates’ approaches where they had not calculated the correct figure. It is particularly difficult to follow
workings which use little or no narrative, or costs workings done on the face of the income statement.
Most candidates were able to deal with the more straightforward adjustments such as the prepayments
and accruals, adjusting the closing inventories for goods held by a customer on sale or return, the
settlement of the opening provision and the creation of a new provision at the year end and the income tax
charge/liability. However, a number of candidates failed to complete the double entry on their adjustments,
for example:
• adding prepayments to expenses (a debit) and showing them as a current asset (another debit) on
the statement of financial position
• correctly adjusting trade and other receivables by £30,000 for the goods held by a customer on
sale or return but failing to make the corresponding adjustment to revenue
• correctly recognising that a provision for £60,000 should be set up and charging the £60,000 to the
income statement, but failing to recognise the provision itself within current liabilities
• recognising an amount for accrued finance costs in the income statement, but failing to recognise
the same amount on the statement of financial position.
The majority of candidates arrived at the correct figure for the impairment on the asset classified as held
for sale although a few calculated accumulated amortisation incorrectly. However, not all candidates who
arrived at an impairment loss then charged this loss to the income statement. Others took the impairment
loss to the income statement but failed to take the amortisation charge for the year to the income
statement or classified one under cost of sales, the other as an administrative expense.
The most disappointing area in candidates’ answers related to the two provisions, with a number of
candidates clearly confused about the appropriate double entry. Errors included:
• Not releasing the £2,000 over-provision brought forward to the income statement (with a number
of candidates instead adding it to the closing provision).
• Calculating the closing provision on a weighted average basis rather than taking the most likely
outcome (as this was a single obligation).
• Not recognising the contingent asset even though it was “virtually certain” to be recovered.
• Netting the provision and the contingent asset off on the face of the statement of financial position
instead of presenting them separately.
• Recognising the provision and contingent asset on the statement of financial position, but ignoring
the impact on the income statement.

Errors in dealing with the other adjustments included the following:

• Failing to disclose the asset held for sale correctly on the statement of financial position (within
current assets after a separate sub-total for all other current assets).
• Offsetting the cash in hand against the overdraft, sometimes even showing a net positive cash
balance.
• Failing to make the correct (or any) adjustment for the goods held by a customer on sale or return,
with a number of candidates deducting these goods from closing inventories rather than adding
them.
• Adding prepayments to expenses and deducting accruals or adjusting for both in the same
direction.
• Reflecting the income tax charge for the year in the income statement but not showing the
corresponding liability.


General comments
This question covered various aspects of property, plant and equipment. Part (a) required the preparation
of a property, plant and equipment “table”, with the movements on property, plant and equipment during
the year including additions, disposals, a self-constructed asset, an impairment and a revaluation. Part (b)
required the calculation of the closing balance on the revaluation surplus. Part (c) tested the differences
between IAS 16 and UK GAAP. Part (d) covered the information needs of users in the context of property,
plant and equipment.
Bushley plc
(a) Note showing movements on PPE for the year ended 30 September 2009
Land and Plant and Under Total

buildings machinery construction
£ £ £ £
Cost or valuation
At 1 October 2008 1,300,000 870,000 - 2,170,000
Revaluation (1,800,000 + 700,000 – 1,200,000 - - 1,200,000
1,300,000)
Additions (56,000 + 24,000) - 120,000 80,000 200,000
Disposals - (56,000) - (56,000)
At 30 September 2009 2,500,000 934,000 80,000 3,514,000
Depreciation
At 1 October 2008 180,000 423,000 - 603,000
Revaluation (180,000) - - (180,000)
Disposals (W3) - (33,600) - (33,600)
Impairment losses (W1) - 11,200 11,200
Charge for year (W2) 17,500 183,200 - 200,700
At 30 September 2009 17,500 583,800 - 601,300
Carrying amount
At 30 September 2009 2,482,500 350,200 80,000 2,912,700
At 1 October 2008 1,120,000 447,000 - 1,567,000
Workings
(1) Impaired machine
£
Cost on 1 October 2006 78,000
Depreciation to 30 September 2009 (78,000 x 20% x 3) (46,800)
Carrying amount at 30 September 2009 31,200
Recoverable amount (20,000)
Impairment 11,200

(2) Depreciation charges for year
On plant and equipment

£
On new machine (120,000 x 20% x 6/12) 12,000
On machine disposed of (56,000 x 20% x 9/12) 8,400
On machines held for the whole year ((870,000 – 56,000) x 20%) 162,800
183,200
On buildings
£
(700,000 ÷ 40) 17,500
(3) Accumulated depreciation on machine disposed of

£
To 30 September 2008 (56,000 x 20% x 3) 33,600
The majority of candidates produced a well-laid out property, plant and equipment “table” showing that
they knew what this note would look like in a set of published financial statements, although a number did
not finish the note completely. The most common presentation errors were:
• Not having a separate total column.
• Not showing carrying amounts brought forward and carried forward (or using UK GAAP
terminology of “net book value”).
• Not having a separate column (or line) for assets under construction.
Most candidates dealt correctly with the adjustments to cost, including the revaluation uplift, additions and
disposals. Errors were more common in respect of the adjustments to accumulated depreciation, although
most candidates arrived at the correct figure for the impairment loss on the plant and the depreciation
charge for the year on the revalued buildings.

• Not including the purchases and wages spent on the self-constructed asset within additions, and if
it was included, not separately disclosing that amount as a self-constructed asset.
• Omitting to back out the opening accumulated depreciation on the land and buildings revalued
during the year. Some candidates added the net surplus of £1,380,000 to cost rather than
adjusting both cost and accumulated depreciation.
• Using the incorrect fraction (ie number of months) when calculating depreciation charges on the
plant purchased and disposed of during the year.
• Including the construction costs when calculating the current year depreciation charge.
• Omitting to back out the accumulated depreciation on the plant sold during the year.


(b) Balance on the revaluation surplus at 30 September 2009
£ £
Valuation on 1 October 2008 (1,800,000 + 700,000) 2,500,000
Carrying amount of land and buildings at 1 October 2008 (1,120,000)
1,380,000
Less: Transfer to retained earnings
Depreciation based on revalued amount 17,500
Depreciation based on historic cost ((300,000 – (3,000)
180,000) ÷ 40)
(14,500)
1,365,500
There were very few completely correct answers to this part, although most candidates recognised that a
transfer between the revaluation surplus and retained earnings needed to be made, even if they calculated
this incorrectly. The most common errors included the following:
• Calculating the surplus on initial revaluation as just the cost uplift of £1.2 million, rather than the
net uplift of £1,380,000 (sometimes in direct contravention of entries made in Part (a)).
• Including only the revaluation surplus on the land and not the building (or vice versa).
• Calculating depreciation on historic cost as £6,000, ie as it would have been originally calculated
(300,000 divided by the original useful life of 50 years), failing to appreciate that the buildings’
remaining estimated useful life had been reassessed at 40 years.

(c) Differences between IAS 16 and UK GAAP
When assets are revalued IAS 16 requires the use of fair values, which will take account of alternative
uses. UK GAAP (FRS 15) bases valuations on existing use values.
UK GAAP specifies a maximum period of five years between full valuations and an interim valuation every
three years. IAS 16 does not specify a maximum period and the timing of revaluations depend on changes
in market values.
UK GAAP requires impairment losses to be debited first against any revaluation surplus in respect of that
asset unless it reflects a consumption of economic benefits. IAS 16 does not include such a limitation.
Under UK GAAP when residual values are reassessed they are based on prices prevailing at the date of
acquisition. Under IAS 16 reassessment is based on current prices.
UK GAAP requires annual impairment reviews for assets which are not depreciated or are depreciated
over more than 50 years. IAS 16 does not include such a requirement.
There were some good answers to this part, showing that many candidates had spent time learning the
differences between IFRS and UK GAAP. Most answers included the difference in relation to the basis of
revaluations, although a minority of candidates got this the wrong way round. Candidates who included a
discussion about residual values generally missed the point about the differences in prices on which
reassessed residual vales are based. Most candidates knew that there was a difference in treatment in
relation to impairments but often got confused with whether this was dependent on the impairment being
as a result of a consumption of economic benefits or not. Again, some candidates got this difference the
wrong way round.

(d) How information re PPE meets the needs of users
Financial position
The financial position of an entity is affected by the economic resources it controls, its financial structure,
its liquidity and solvency and its capacity to adapt to changes in the environment in which it operates.
Information about the total carrying amount of property, plant and equipment (PPE) as given on the face of
an entity’s statement of financial position gives the user an indication of the resources the entity has at its
disposal in terms of tangible assets held for long-term use in the business. Revaluation figures are more
relevant than cost.
That figure will be broken down in the note to the financial statements as produced in (a) above. This
indicates the type of PPE held by the entity which may add further to an understanding of resource. This
note also shows the changes in financial position in the year
For example, land and buildings might be held for its investment potential, as well as being used for
office/factory space. Plant will be used to generate future revenues. Equipment could be used for the
generation of future revenues or for the entity’s own use, perhaps for administrative purposes.
The fact that the amount of leased assets forming part of the total PPE figure is disclosed, shows that
these assets have a future cost in terms of lease payments – affecting the liquidity and solvency of the
entity.
The “capital commitments” note showing the future purchases of PPE to which the entity is committed,
indicates a requirement for future finance.
The accounting policy note shows the valuation model used and depreciation methods, which allow
comparison to other entities.
Financial performance
Information about financial performance, in particular profitability, is needed in order to assess potential
changes in the economic resources that it is likely to control in the future.
Disclosure of the annual depreciation charge shows the “cost” of using the assets..
Disclosure of gains/losses on disposal could indicate problems with the depreciation method or where
value is greater than carrying amount.
Impairment losses may indicate underlying issues, such as underprovision of depreciation, or a downturn
in a particular market sector (which might affect future performance).
Changes in financial position
Changes in financial position are shown in a statement of cash flows. This allows users to assess the
ability of the entity to generate cash and its need to use what is generated.
Users will be able to see, via the statement of cash flows, PPE purchased during the year and cash
inflows from PPE disposed of. If little PPE is purchased and much disposed of the user may be concerned
about the future of the entity.

Answers to Part (d) were the most disappointing and sometimes non-existent. A number of candidates
appeared to have rote learnt various information about the Framework (and in particular the qualitative
characteristics) and wasted time simply producing a page of irrelevant comments, which gained no marks.
Candidates need to be reminded to answer the question set, not the question they wished had been set.
A number of candidates focused on what information users might need in respect of property, plant and
equipment as proposed to what information is actually provided.
Those candidates who demonstrated knowledge of the various disclosures in relation to property, plant
and equipment and where they appear in a set of published financial statements, and gave some thought
as to how such information might assist users, scored well. As can be seen from the mark plan there were
a significant number of marks available, although those for just copying out of the open book text were
limited.


General comments
This was a question mixing three topics. Part (a) required the calculation of the profit from discontinued
operations in respect of a subsidiary disposed of during the year. Part (b) required extracts from single
entity financial statements in respect of debt and equity issued during the year and the correction of a prior
period error.
Bredon Ltd
(a) Profit from discontinued operations for the year ended 30 September 2009
£ £
Profit on disposal:
Sale proceeds 700,000
Less: Share of net assets at date of disposal (80% x (100,000 + (666,400)
717,000 + 16,000))
Less: Carrying amount of goodwill at date of disposal
Arising on acquisition 22,800
Impairments to date (5,000)
(17,800)
15,800
Profit for the period (32,000 x 6/12) 16,000
Profit on discontinued operations 31,800
This part of the question was generally well-answered, with many candidates arriving at the correct
answer. Where mistakes were made they included the following:
• Not including share capital in the net assets at disposal.
• Not including the correct proportion of the profit for the period in the net assets at disposal (or not
including it at all).
• Failing to also add the above figure to the profit on sale of the shares to arrive at the final profit on
discontinued operations.
A minority of candidates seemed to have little idea of how to calculate this figure, producing apparently
random calculations involving taking 80% of various figures, and scored poorly. A significant number of
candidates wasted time drawing a group structure diagram when the percentage holding was clearly given
in the question.


(b) (i) Statement of changes in equity for the year ended 30 September 2009
Ordinary Preference share Share Retained Total

share capital premium earnings
capital (irredeemable)
£ £ £ £ £
At 1 October 2008 500,000 - - 2,560,000 3,060,000
Correction of prior period error - - - (50,000) (50,000)

(45,000 + 5,000)
Restated balance 500,000 - - 2,510,000 3,010,000
Issue of ordinary shares (200,000 200,000 100,000 - 300,000
x 0.50)
Issue of irredeemable preference 50,000 5,000 55,000
shares (50,000 x 0.10)
Dividends (700,000 x 10p) - - - (70,500) (70,500)
(50,000 x 4% x 3/12)
Total comprehensive income for - - - 563,500 563,500
the year (W)
At 30 September 2009 700,000 50,000 105,000 3,003,000 3,858,000
Working
£
TCI per Q 560,000
Finance cost (100,000 x 3% x 6/12) (1,500)
Amortisation added back 5,000
563,500

(b) (ii) Extracts from the financial statements for the year ended 30 September 2009

£
Finance cost 1,500
Statement of financial position as at 30 September 2009

£
Equity
Retained earnings 3,003,000
Preference share capital (redeemable) 100,000
Current liabilities
Dividends payable 70,000
Statement of cash flows for the year ended 30 September 2009

£

Proceeds from issue of share capital 355,000
Proceeds from issue of long-term borrowings 100,000
Dividends paid (500)

In Part (i) most candidates produced some kind of table for their statement of changes in equity, although it
was rare to see a complete table with all four columns, plus a total column and all amounts carried forward.
However, it was surprising how many combined figures for ordinary and irredeemable preference shares in
a single column, although most arrived at the correct figures for the shares issued during the year, including
the amounts to be posted to the share premium account. Pleasingly, few candidates included the
redeemable preference shares in equity.
Most candidates remembered to label the profit for the period in the table as “total comprehensive income”
but fewer adjusted the original figure of £560,000 given in the question for the unadjusted items of the
finance cost on the redeemable preference shares and the backing out of the amortisation for the year on
the incorrectly capitalised intangible asset.

• Using the incorrect fraction (ie number of months) when calculating the dividends on the preference
shares.
• Omitting to deal with the prior period error, or deducting £45,000 instead of £50,000.
• Failing to show a sub-total for the restated balance after the prior period adjustment.
In Part (ii) there were some well laid out extracts, with a number of candidates using the correct sub-
headings in both the statement of financial position (ie equity, current and non-current liabilities) and the
statement of cash flows (ie distinguishing between operating and financing cash flows). In fact the majority
of those who attempted this part scored well, as a good proportion of the marks were available for simply
taking own figures from Part (i) into well-presented extracts. These were therefore relatively easy marks but
were missed by a number of candidates.

• Failing to distinguish between the dividends payable (in the statement of financial position) and the
dividends paid (in the statement of cash flows).
• Using the incorrect bracket convention in the statement of cash flows.
A minority of candidates wasted significant time by trying to incorporate the impact of the disposal in
transaction (1) into this part of the question when the requirement referred only to the transactions set out in
(2) and (3).


General comments
This was a typical consolidated statement of financial position question, featuring one subsidiary and one
associate (acquired during the year). Adjustments were typical of this type of question and included a fair
value adjustment on acquisition, intra-group balances and transactions and impairment write-downs.
Stow plc
Consolidated statement of financial position as at 30 September 2009
£ £
Assets
Non-current assets
Property, plant and equipment (4,175,500 + 2,678,500 7,854,000
+ 1,000,000)
Investments in associates (W7) 909,240
9,133,240
Current assets
Inventories (1,237,000 + 1,050,000 – 90,000 (W6) – 2,172,000
(62,500 x 40%) (W6))
540,000) (W6))
3,369,500

Equity attributable to owners of Stow plc
Share premium account 1,000,000
10,296,500
Current liabilities
Trade and other payables (766,000 + 637,800 – 863,800
540,000) (W6))
Taxation (280,000 + 140,000) 420,000
1,283,800

Workings
(1) Group structure
400
Stow plc = 40%
1,000
1,600
= 80%
2,000
Bourton Ltd
Naunton Ltd
(2) Net assets – Bourton Ltd
Year end Acquisition Post acq

£ £ £
Share capital 2,000,000 2,000,000 -
Share premium 500,000 500,000 -
Retained earnings
Per Q 1,202,200 1,575,000
PURP (W6) (90,000) -
FV adj – land 1,000,000 1,000,000 -
4,612,200 5,075,000 (462,800)
(3) Goodwill – Bourton Ltd
£
Consideration transferred 4,500,000
Non-controlling interest at acquisition (5,075,000 (W2) x 20%) 1,015,000
Net assets at acquisition (W2) (5,075,000)
440,000
Impairments to date (50,000 + 20,000) (70,000)
370,000

(4) Non-controlling interest – Bourton Ltd

£
Share of net assets (4,612,200 (W2) x 20%) 922,440
Stow plc 6,602,500

Bourton Ltd ((462,800) (W2) x 80%) (370,240)
Naunton Ltd ((1,298,100 – 875,000 – 62,500) (W6)) x 40%)) 144,240
Less Impairments to date (70,000 (W3) + 10,000 (W7)) (80,000)
6,296,500
(6) PURP
Bourton Naunton
Ltd Ltd
% £ £
SP 150 540,000 375,000

Cost (100) (360,000) (250,000)
GP 50 180,000 125,000
X½ 90,000 62,500
(7) Investments in associates – Naunton Ltd

£
Cost 750,000
Add: Share of post acquisition increase in net assets ((1,298,100 – 875,000)) x 169,240
40%))
909,240

Candidates were clearly very well prepared for this question and generally scored highly. Almost all
candidates demonstrated a sound technique, following that set out in the learning materials. The most
common errors were in relation to the associate, in either the retained earnings working and/or the investment
in associate working itself or in relation to the calculation of the provisions for unrealised profit.
• In the net assets table for the subsidiary, only including the fair value adjustment in the year-end
column and/or deducting the fair value adjustment instead of adding it.
• Including the fair value adjustment in the net assets table but failing to uplift the value of property,
plant and equipment in the consolidated statement of financial position by the same amount.
• Failing to include the share premium account in the net assets table for the subsidiary.
• Failing to adjust both receivables and payables (or in some cases, either) for the invoice value of the
sale of goods from the subsidiary to the parent, with a number of candidates making the adjustment at
cost.
• Arriving at provisions for unrealised profits in respect of the subsidiary and the associate on different
bases when the same cost structure was specified in the question.
• Failing to calculate any provision for unrealised profit in respect of the goods sold by the associate to
the parent.
• Calculating unrealised profit based on the full invoice value, as opposed to only half of that value,
when the question clearly stated that only half of the goods remained in year-end inventory.
• Taking the cost figures given in the question for the intra-group sales as being the selling price of the
goods and hence calculating incorrect provisions for unrealised profit.
• Pleasingly, many candidates correctly adjusted for the group share of the provision for unrealised
profit arising on goods sold by the associate to the parent against retained earnings and inventory, but
many also made an adjustment against the carrying amount of the associate. Others calculated an
initial post-acquisition profit figure for the associate less a 40% share of the provision for unrealised
profit but then adjusted that total by 40%, consequently scaling down the provision for unrealised profit
twice. This error occurred most often when candidates produced a(n) (unnecessary) net assets table
for the associate.
• Taking only six-twelfths of the movement on the associate’s profit to retained earnings and the
investment in associate working, failing to recognise that although the acquisition of the associate did
indeed occur half way through the year the figure given for retained earnings was at the date of
acquisition, such that there was no need to time-apportion any of the figures given.
• Not adjusting for the accumulated impairments in the group retained earnings working, instead
adjusting only for the impairments which had arisen during the current year.
• Having correctly arrived at a post-acquisition loss for the subsidiary in a net assets table, turning this
into a post-acquisition profit when taking 80% of this figure to group retained earnings.
A number of candidates failed to provide workings for assets and liabilities on the face of the consolidated
statement of financial position. Where these figures were incorrect no partial marks could then be awarded.
Candidates must show their workings in all cases so that partial credit can be given.
Presentation of the consolidated statement of financial position was generally good, although very few
candidates gained the presentation mark which was available for clearly disclosing the non-controlling interest
as a separate component of equity.


Financial Accounting – Professional Stage – March 2010
The performance of candidates in the March 2010 objective test questions section for the Professional Stage
Financial Accounting paper was good. Candidates performed well across all syllabus areas.
When practising OT items, care should always be taken to ensure that the principles underlying any
particular item are understood rather than rote learning the answer. In particular, candidates should ensure
that they read all items very carefully.
LO1 2 1 1
LO2 7 6 1
LO3 6 6 0
Total 15 13 2
answered’.
Brief comments on the two poorly answered questions, which covered LO1 (accounting and reporting
concepts) and LO2 (preparation of single company financial statements), are below (this paper was marked
under the new electronic marking system and no further information regarding responses was available):
Item 1
This item asked which roles are undertaken by the International Accounting Standards Committee
Foundation (IASCF). Candidates clearly do not understand the structure that surrounds and supports the
International Accounting Standards Board.
Item 2
This item, required candidates to identify which adjustments should be recognised as a prior period error.
Four short scenarios were provided which included a settled legal claim, a computational error, a fraud and a
revised tax liability.

The mark plan set out below was used to mark these questions. Markers are encouraged to use discretion
are available than could be awarded for each requirement, where indicated. This allows credit to be given for
a variety of valid points, which are made by candidates.
Question 1
Overall marks for this question can be analysed as follows: Total: 18
General comments
This question is a typical question testing the preparation of an income statement and statement of financial
position from a trial balance. A number of adjustments were required, including the reversal of a provision,
an inventory valuation issue, an adjustment for the over provision of tax and deferred revenue.
(a)
Karonga plc – Statement of financial position as at 31 December 2009
£ £
ASSETS
Non-current assets
Property, plant and equipment (W5) 943,435
Current assets
Inventories (W3) 1,161,000
Trade receivables (1,075,000 – 60,750 (W4)) 1,014,250
2,364,750

Equity
Retained earnings (28,090 + 227,895) 255,985
1,580,985
Bank loan 1,025,300
Current liabilities
Trade and other payables (583,700 + 12,500(W1)) 596,200
Taxation (W5) 105,700
701,900

Karonga plc – Income Statement for year ended 31 December 2009

£
Revenue (W1) 6,196,400

Operating profit 374,465

Finance costs (49,170)
Income tax expense (105,700 – 8,300) (97,400)
Net profit for the period 227,895
W1 Revenue adjustment
£
Trial balance – revenue 6,208,900
Fitness machine deposits (250 x £50) (12,500)
6,196,400
W2 Expenses
Admin Cost of
expenses sales
£ £
Trial balance 2,324,000 3,553,100
Opening inventory 1,093,800
Less: closing inventory (W3) (1,161,000)
Bad debt reversal (W4) (1,650)
Depreciation charge – buildings (12,710 (40% / 60%) 5,084 7,626
Depreciation charge – plant & equipment 12,975
Provision reversal (12,000)
2,315,434 3,506,501
W3 Inventory adjustment
£
Closing inventory 1,163,500
Net realisable value write down (£20 - £15) x 500 items (2,500)
1,161,000
W4 Bad debt
£
Opening allowance 62,400
Movement in year (balancing figure) (1,650)
Closing allowance (53,750 + 7,000) 60,750

Cost Acc dep

£ £
Trial balance – L&B 985,500 88,970
Trial balance – P&E 103,800 31,210
Depreciation charge for year (103,800 / 8yrs) 12,975

Depreciation charge for year ((985,500 – 12,710
350,000) / 50yrs)
At 31 December 2009 1,089,300 145,865 943,435
candidates produced a well-laid out income statement and statement of financial position with all narrative
and sub-totals completed. Some candidates lost presentation marks for the statement of financial position
by not adding across numbers in brackets, failing to complete sub-totals or by having incomplete or
abbreviated narrative. On the income statement the most common presentational failing was to not
include a sub-total for profit from operations. However, overall presentation is improving with each sitting.
As ever, candidates should remember that this type of question requires financial statements to be in a
form suitable for publication.
Workings generally were set out clearly, with the standard cost matrix generally being produced.
Candidates must remember that if they do not provide clear workings for calculations and their final
answer is incorrect they risk gaining no marks for a working that may be worth 2 or 3 marks. Clear
workings, even if only bracketed will score partial marks for incorrect answers.
Most candidates were able to deal with the more straightforward adjustments such as the depreciation
charges, closing inventory and adjusting revenue for the payments made in advance, although the
corresponding entry in current liabilities was not always included.
Common errors included the treatment of the tax figures which seemed to cause some confusion as to
how to deal with the over provision from the previous year. Candidates commonly put the same figure in
the income statement and statement of financial position, although this was split between whether it was
the income tax charge or the liability.
Candidates often used the correct brought forward and carried forward figures for the specific bad debt
allowance but missed the additional allowance that needed making of £7,000. Other candidates correctly
calculated the carried forward figure and hence calculated that an adjustment of £1,650 was needed but
then either didn’t recognise this in the income statement or added it to expenses rather than deducting it.
Only a few candidates carried the double entry through completely by deducting the full closing allowance
from trade receivables, £7,000 was a more common deduction.
The treatment of the legal provision also caused a few problems. Very few candidates realised that the
provision needed reversing. A mix of treatments were seen with candidates either including the provision
in the statement of financial position or providing for it in the current year even though it was a brought
forward balance.


Question 2
General comments
This question tested the preparation of a consolidated statement of cash flows and supporting note. A
subsidiary was disposed of during the year. Missing figures to be calculated included dividends paid (to the
group and to the non-controlling interest), interest paid, tax paid, depreciation and amortisation charge for the
year and proceeds from the issue of share capital following a bonus issue during the year.
Chitipa plc
Consolidated statement of cash flows for the year ended 31 December 2009
£ £
Disposal of Thyolo Ltd net of cash disposed of (200,000 192,100
– 7,900)
Net cash from investing activities (167,900)
Repayment of borrowings (736,300 – 561,700) (174,600)
Proceeds from share issue (W4 & W5) 175,000
Dividends paid to non-controlling interest (W7) (11,850)
Net cash used in financing activities (38,950)
Net increase in cash and cash equivalents (24,000)

£
Finance cost 71,000
Impairment loss on goodwill (373,700 – 364,200) 9,500
Increase in trade and other receivables (496,300 – 475,200 + 25,400) (46,500)
Increase in trade and other payables ((21,700 – 5,000) – (11,700 – 7,000) + 48,100
36,100)

Workings
(1) Interest paid
£ £
Cash (β) 73,000 B/d 7,000
C/d 5,000 CIS 71,000
78,000 78,000
(2) Income tax paid
£ £
Cash (β) 76,050 B/d 36,300
C/d 33,900 CIS (69,900 + 3,750) 73,650
109,950 109,950
(3) PPE
£ £
B/d 695,000 Disposal of sub 308,900
Additions 360,000 Deprecation charge (β) 22,700
C/d 723,400
1,055,000 1,055,000
(4) Share capital
£ £
B/d 400,000
Bonus issue 100,000
C/d 550,000 Cash received (β) 50,000
550,000 550,000
(5) Share premium
£ £
B/d 140,000
Bonus issue 50,000 Cash received (β) 125,000
C/d 215,000
265,000 265,000
£ £
Bonus issue 50,000
C/d 303,140 CIS 85,540
380,640 380,640
(7) Non-controlling interest
£ £
Cash (β) 11,850 B/d 490,800
Disposal (306,100 x 20%) 61,220
C/d 448,260 CIS 30,530
521,330 521,330

Candidates generally performed well on this question, adopting a good exam technique that allowed them to
gain a good pass in this question but miss out some of the more tricky areas. Presentation of the statement
of cash flows was good, although candidates often missed sub-totalling each section and the date for the
period for which the cash flow was prepared was missed by a significant minority of candidates.
Candidates generally calculated the repayment of borrowings correctly and the purchase of property, plant
and equipment, although a minority of candidates showed the latter as an inflow of cash rather than outflow.
Interest paid was also generally shown correctly. A common mistake was in relation to the income tax
expense where a significant number of candidates missed the tax expense in respect of the discontinued
operation.
The calculation of the proceeds from the share issue were mixed with candidates gaining the marks for the
brought forward and carried forward figures but often getting the entries for the bonus issue back to front. The
calculation for the cash flows from the disposal of the subsidiary was one of the most disappointing areas
with candidates showing all kinds of long and complicated net assets workings, when a, simple netting off of
two figures was required.
Candidates seemed happy with the T-account for dividends paid, although the treatment of the bonus issue
was not always correctly dealt with, sometimes it was shown on the wrong side of the T-account or missed
entirely. However, the calculation of the dividend paid to the non-controlling interest was disappointing with a
good majority of candidates simply electing to ignore the calculation entirely. Candidates who did show a
working for this generally were unable to calculate the disposal value or simply missed it out.
A good attempt at producing the reconciliation of profit before tax to cash generated from operations was
made by almost all candidates. Common errors however included not including the profit before tax for the
discontinued operation, adding back the loss on disposal even though it was not included in the parent’s
profit before tax figure, ignoring the impact of the goodwill impairment and deducting the individual assets
and liabilities at disposal in the movements calculations, rather than adding them, or ignoring them
completely.


Question 3
General comments
This question required the preparation of a consolidated statement of financial position. The group has an
associate, with the acquisition of a subsidiary during the year. A fair value adjustment in relation to a piece of
equipment, with depreciation adjustment, was required. Inter-company trading had taken place during the
year between the parent and associate company and a suspense account needed eliminating, which was
created on the acquisition of property, plant and equipment on deferred payment terms.
Rumphi plc
(a) Consolidated statement of financial position as at 31 December 2009

£’000 £’000
Assets
Non-current assets
Intangibles 36,000
Goodwill 143,723
1,776,658
Current assets
Inventories 52,960
Trade and other receivables (120,840 + 945,600) 1,066,440
1,381,500

Equity attributable to Rumphi plc shareholders
Attributable to the equity holders of Rumphi plc 1,732,840
2,081,788
Deferred payment (W8) 40,000
Current liabilities
Taxation (172,000 + 157,660) 329,660
1,036,370
Workings
(1) Group structure
Rumphi
245,000 / 350,000 = 70%

Luwa Ltd 14,175 / 56,700 = 25%
Dedza Ltd

(2) Net assets – Luwa Ltd

31 Dec 2009 Acquisition Post acq
£ £ £
Share capital 350,000 350,000 –
Share premium account 125,000 125,000 –
Retained earnings 748,260 600,710 147,550
Goodwill on business (71,600) (71,600) –
PPE FV uplift 12,000 12,000 –
FV depreciation adjustment (12,000 / 8yrs x 4/12) (500) – (500)
1,163,160 1,016,110 147,050
(3) Goodwill – Luwa Ltd

£
Consideration transferred 900,000
Net assets at acquisition (W2) (1,016,110)
Non-controlling interest at acquisition (1,016,110 (W2) x 30%) 304,833
188,723
Less: Impairment (45,000)
143,723
(4) Non-controlling interest – Luwa Ltd
Share of net assets (1,163,160 (W2) x 30%) £348,948

£
Rumphi plc 751,320
Less:PURP (6,800 x 25%) (1,700)
Luwa Ltd (147,050 (W2) x 70%) 102,935
Dedza Ltd ((145,695 – 92,555) x 25%)) 13,285
Less: Impairments to date (10,000)
Machine depreciation adjustment (W8) (8,000)
802,840
(6) PURP
Dedza Ltd
% £
Sale price 100 34,000
Cost (60) (20,400)
Gross profit 40 13,600
13,600 x ½ = 6,800
(7) Investment in associate – Dedza Ltd

£
Original cost 107,000
Add: Share of post acquisition increase in retained earnings 13,285
Less: Share of PURP (1,700)
108,585

£
Rumphi plc 800,300
Luwa Ltd 644,550
Fair value adjustment 12,000
FV depreciation adjustment (W2) (500)
New machine (80,000 – 40,000) 40,000
Depreciation adj on new machine (40,000 / 5 yrs) (8,000)
1,488,350

The majority of candidate answers to this question were very good. Most notably candidates coped far
better with the provision for unrealised profit on sales made by the parent to the associate than they have
at previous sittings. Where errors were made in respect of the provision for unrealised profit it was by
deducting the full amount of the unrealised earnings from retained earnings and investment in associate
rather than the parent’s share. A significant minority of candidates made the adjustment to consolidated
inventory instead of to the investment in associate.
Presentation was very good, although candidates still seem to not complete statements in some way,
most typically by not showing the sub total before the non-controlling interest line and therefore they
inevitably lose marks.
Workings were generally well laid out, although the property, plant and equipment workings were often
squashed on the face of the statement of financial position which made it quite difficult to read. This was
compounded by the fact that these scripts were scanned for electronic marking and therefore squashed
workings became even harder to read. Candidates should be made aware of this, to try and avoid such an
approach in the future.
The majority of candidates made a good attempt at the net assets working. However, a number of
common errors were made in this area including not deducting the goodwill recognised by the subsidiary,
instead candidates included this as part of consolidated intangible assets, and forgetting that the fair value
uplift on the equipment meant that additional depreciation needed to be calculated. For candidates that
did appreciate that additional depreciation should be recognised they often missed that it was only four
months worth, rather than a full year. Another common error was not including the subsidiary’s share
premium in the net assets working but instead showing it on the face of the consolidated statement of
financial position.
One surprising error was that whilst almost all candidates correctly calculated the percentages of the
subsidiary and the associate held by the parent, a significant minority of candidates subsequently mixed
up the associate percentage (25%) with the non-controlling interest percentage (30%).
Other common errors included correctly adding the £40,000 due on the new machine to consolidated
property, plant and equipment but either showing the corresponding liability as current or not showing a
corresponding liability at all, or simply adding £80,000 to property, plant and equipment rather than only
£40,000.
A worrying few consolidated either only four-twelfths or 70% of the subsidiary’s assets and liabilities.


Question 4
General comments
The first part of this question is a single topic question focusing on non-current assets, including aspects on
leasing. Candidates were required to prepare a finance lease calculation, assess a research and development
project and also carry out an impairment review. Parts b) and c) covered concepts issues, with a discussion on
substance over form and how the four qualitative characteristics related to lease transactions.
Blantyre Ltd
(a) Summary of costs included in income statement for the year ended 31 December 2009
£
Administrative expenses:
Depreciation (85,000 / 5yrs) 17,000
Amortisation (192,000 / 4yrs x 6/12 months) 24,000
Impairment of know-how (W3) 11,000
Research costs 70,000
Promotional advertising costs 15,000
Staff training costs 13,000
Finance costs (W1) 6,400
Statement of financial position as at 31 December 2009 (extracts)

£
Non-current assets
Property, plant and equipment (85,000 – 17,000) 68,000
Intangible assets (120,000 – 15,000 + 157,000) 262,000
Current liabilities
Finance lease liabilities (62,400 – 43,200) (W1) 19,200
(1) Finance lease £

Deposit 5,000
Instalments (4 x 24,000) 96,000
Fair value of asset (85,000)
SOTD = (4 x 5) ÷ 2 = 10
B/fwd (85,000 – 5,000) = 80,000
Year ended B/f Interest Payment C/f

£ £ £ £
31 December 2009 80,000 (16,000 x 4/10) 6,400 (24,000) 62,400
31 December 2010 62,400 (16,000 x 3/10) 4,800 (24,000) 43,200
(2) Technical Know-how

£
Legal costs 4,000
Manufacturing supervisors time 3,200
Testing costs 4,800
192,000
(3) Impairment £
Carrying amount at 31 Dec 2009 (192,000 – 24,000) 168,000
Impairment 11,000

In part (a) most candidates picked up a considerable number of marks for correct calculations, however many
lost marks for their statement of financial position extracts, as these were not properly presented.
The majority of candidates made a good attempt at the leasing table. The most common error was to not
deduct the deposit of £5,000 paid upfront. Candidates however often made a mistake in allocating the lease
liability between current and non-current, with a significant minority of candidates allocating the full £24,000
payment as current thereby not understanding that it should only be the capital element of this.
Common errors included calculating an incorrect sum-of-digits figure, taking the fair value of £152,000 as the
recoverable amount of the technical know-how rather than the estimated future cash flows of £157,000, not
excluding £13,000 staff training costs from the amount originally recognised for the technical know-how and
failing to compare the amortised carrying amount of the technical know-how to the recoverable amount.

(b)
Substance over form is an accounting concept that should be applied to all accounting areas in accordance
with the IASB Framework. Leasing is an example of the application of this concept.
To recognise the substance of a transaction, its economic reality should be reflected rather than merely its
legal form.
IAS 17, Leases looks at the economic reality of a lease through the assessment of which party carries the risks
and rewards of ownership, rather than looking at legal ownership. If the effect of the lease transaction is such
that in commercial effect it is similar to borrowing the money and buying the asset outright, both IAS 17 and the
IASB Framework require the asset and in effect a related loan to be recognised.
Conversely, if the risks and rewards of ownership remain with the lessor, as they do in an operating lease, then
in effect the substance of the transaction is the same as its legal form and no asset or corresponding liability
should be recognised.
Answers to part (b) were adequate, with most candidates quoting a reasonable definition of substance over
form, recognising that the way finance leases are accounted for is an example of this concept and discussing
the transfer of risks and rewards. However, most candidates focused on the recognition of the asset with no
mention of a corresponding liability. Whilst some candidates discussed the fact that assets held under
operating leases are not capitalised because the risks and rewards are not transferred, it was rare to see the
point that for operating leases substance is the same as legal form.

(c)
Qualitative characteristics and IAS 17.
Relevance
Information is relevant if it can influence the economic decisions of users. By showing the true substance of a
finance lease, a company is made to show the debt that it has in its financial statements. This may influence
potential lenders in the future. The commitments note in relation to operating leases and the liability note in
relation to finance leases will also provide potential lenders essential information on what the company’s
commitments and obligations already are.
Reliability
Information is reliable if it is free from error or bias, complete and portrays events in a way that reflects their
reality.

To be reliable information must faithfully represent a transaction. IAS 17 does this by following the overriding
criteria of substance over form.
Comparability
Users must be able to compare information with that of previous periods or with that of another entity.
Comparability is achieved through consistency and disclosure.
IAS 17 does require some subjectivity when a company assesses the risks and rewards of ownership.
However, detailed disclosure requirements, including setting out the company’s accounting policies will help
with comparability.
In addition, IAS 17 ensures that financial statements are comparable between a company that has taken out a
loan to acquire an asset or one that has entered into a finance lease.
Understandability
Information must be readily understandable to users so that they can perceive its significance. It is dependent
on how information is presented.
There may be some confusion in looking at the non-current assets owned by a company, as these will include
those assets that are held under finance leases. However, the accounting policies will explain this and it is
assumed that users have a reasonable level of knowledge.
Answers to part (c) were often poor. Most marks were scored from brief general points about the four
qualitative characteristics. Reliability was probably the characteristic that was dealt with the best although
some candidates strayed into IAS 16 and discussed whether it was more reliable to record an asset at its
historic cost or its fair value. Points were often repeated and often placed under the wrong characteristic. With
regards to understandability, many cited very complex notes as an example of the application of this concept.


Financial Accounting - Professional Stage – June 2010
The performance of candidates in the June 2010 objective test questions section for the Professional Stage
Financial Accounting paper was in line with the average performance on this section of the paper over all
sittings to date. Candidates performed well across all syllabus areas.
item are understood rather than rote learning the answer. In particular, candidates should ensure that they read
all items very carefully.
LO1 5 5 0
LO2 5 4 1
LO3 5 4 1
Total 15 13 2
Comments on the two poorly answered questions, which covered LO2 (preparation of single company financial
statements) and LO3 (preparation of consolidated financial statements), are below:
Item 1
This item required candidates to calculate closing inventories for a manufacturing company, consisting of raw
materials, work in progress and finished goods. The finished goods needed to be valued at net realisable value
(a discounted selling price less selling costs). The work in progress also needed to be valued at net realisable
value (as for the finished goods less estimated costs to completion). The most common errors made were to:
 value the work in progress at its cost to date, failing to recognise that the information about selling price
and selling costs for finished goods was also relevant to this calculation, or
 to ignore the selling costs in the valuation of both finished goods and work in progress.
Item 2
This item required candidates to calculate the amount to be shown as trade payables in a consolidated
statement of financial position. To arrive at the correct figure candidates needed to adjust for cash-in-transit in
the book of the receiving company, and then cancel the intra-group balances. A significant number of
candidates failed to recognise that the balance in the paying company’s books would already reflect the cash-in-
transit.

More marks were available than could be awarded for some requirements. This allowed credit to be given for
a variety of valid points which were made by candidates.
General comments
This question tested the preparation of an income statement, a statement of comprehensive income and a
statement of financial position from a trial balance plus a number of adjustments. Adjustments included a
bad debt write off based on an adjusting event after the reporting period, a write-down to inventories, a
finance lease taken out during the year, a revaluation during the year and a transfer between the
revaluation surplus and retained earnings based on a previous revaluation.
Dashwood Ltd
Income statement for the year ended 31 March 2010
£
Revenue 945,700
Distribution costs (97,400)
Finance cost (1,230 + 5,000 (OF) (W6) + 500) (6,730)
Statement of comprehensive income for the year ended 31 March 2010

£
Other comprehensive income:
Gain on property revaluation 250,000
Total comprehensive income for the year 313,470
Statement of financial position as at 31 March 2009
£ £
Assets
Non-current assets
Intangibles (75,000 x 4/8) 37,500
2,657,600
Current assets
Trade and other receivables (140,950 – 5,500 (OF) (W1)) 135,450
176,450

Equity and liabilities £ £

Equity
Revaluation surplus (W4) 835,000
2,409,650
Finance lease liability (W6) 138,000
Current liabilities
Finance lease liability (182,000 – 138,000) (W6) 44,000
Taxation 10,000
Borrowings (50,700 + 500) 51,200
286,400
Workings

Cost of sales Distribution Administrative
costs expenses
£ £ £
Per Q 392,800 97,400 123,600
Bad debts (11,000 x ½) 5,500
Research costs (75,000 x 4/8) 37,500
Closing inventories (41,000)
Depreciation charges (W2) 179,100 35,000
604,000 97,400 164,100
(2) PPE
Plant and Land and
machinery buildings
£ £
B/f Cost/valuation 670,500 2,150,000
Finance lease 225,000
895,500
Revaluation (1,000,000 – 750,000) 250,000
B/f Accumulated depreciation (356,300) (105,000)
Depreciation – buildings (1,400,000 ÷ 40) (35,000)
Depreciation – plant (895,500 ÷ 5) (179,100)
360,100 2,260,000
Total PPE 2,620,100


£
At 31 March 2009 1,249,930
Transfer from revaluation surplus (W5) 16,250
At 31 March 2010 1,329,650
(4) Revaluation surplus

£ £
At 31 March 2009 601,250
Valuation in the year (W2) 250,000
Transfer to retained earnings
Depreciation charge based on revalued amount (W2) 35,000
Depreciation charge based on HC (750,000 ÷ 40) (18,750)
(16,250)
835,000
(5) Finance lease

£
Instalments (4 x 60,000) 240,000
Cash price of machine (225,000)
SOTD = (5 x 6) ÷ 2 = 15
Year ended B/f Interest Payment C/f

£ £ £ £
31 March 2010 225,000 (15,000 x 5/15) (48,000) 182,000
5,000
31 March 2011 182,000 (15,000 x 4/15) (48,000) 138,000
4,000

candidates produced a well-laid out income statement and statement of financial position and the standard
of presentation was the highest seen to date. Only a small minority of candidates lost presentation marks
for the statement of financial position by not adding across numbers in brackets or failing to complete sub-
totals and/or totals on their statements or by having incomplete or abbreviated narrative. Others lost
presentation marks for failing to include a sub-total for profit from operations on their income statement. As
ever, candidates should remember that this type of question requires financial statements to be in a form
suitable for publication. Presentation of the statement of comprehensive income was also excellent, with
the majority of candidates showing this, as required by the question (and as shown in the learning
materials) as a separate statement. This was the first time this statement had been examined and the
majority of candidates clearly demonstrated an understanding of the relationship between that statement,
retained earnings and the revaluation surplus.
Although many workings, in particular the cost matrix and the property, plant and equipment working, were
clearly laid out, a few candidates’ workings were disorganised, untidy and therefore hard to follow, making
it difficult to establish candidates’ approaches where they had not calculated the correct figure. It is
particularly difficult to follow workings which use little or no narrative, or costs workings done on the face of
the income statement. In particular, it was sometimes difficult to identify the final number for property, plant
and equipment on the face of the statement of financial position in the workings. The most sensible layout
for a property, plant and equipment working is a table with columns for the different categories which
clearly shows brought forward balances and movements in the year (effectively a simplified version of the
disclosure note).
Most candidates were able to deal with the more straightforward adjustments such as the bad debt write-
off, the write-down of closing inventory from cost to net realisable value and the income tax charge for the
year. However, what was pleasing was that many candidates also coped with the more difficult aspects of
the question such as the depreciation transfer between reserves.
By far the most common error was the failure identify that the bank account balance at the year end was a
credit balance with many candidates including this figure in current assets instead of as an overdraft in
current liabilities. As always, there was also some failure to complete double entry such as:
 including the outstanding bank interest from the bank reconciliation as a finance cost but not
adjusting the balance at bank (or vice versa)
 using a different figure for depreciation in the property, plant and equipment working and the costs
matrix
 capitalising some of the research and development costs but not including the balance in
expenses.
Errors dealing with other adjustments included the following:

 Failing to include the leased asset in property, plant and equipment (but then sometimes including
depreciation on that asset in expenses).
 Treating the finance lease as if payments were in advance rather than in arrears.
 Splitting the closing finance lease liability incorrectly between current and non-current.
 Including the lease payment in finance costs (sometimes in addition to the interest on the lease).
 Not identifying that half of the research and development costs should be capitalised (with a
number of candidates either capitalising all the costs or expensing all of the costs).
 Allocating expenses to the incorrect income statement category (for example, including the
depreciation charge on the leased asset in administrative costs even though it related to plant and
machinery).
 Treating the revaluation in the year as if it related to buildings rather than to land.
 Failing to adjust for the outstanding item in the bank reconciliation.
 Deducting the reserves transfer from the revaluation surplus from retained earnings rather than
adding it to retained earnings.
 Adding total comprehensive income for the year (instead of profit for the year) to opening retained
earnings.
 In the statement of comprehensive income, showing the net movement on the revaluation surplus
for the year, as opposed to the revaluation which took place in the year.


General comments
This question tested the preparation of a single company statement of cash flows and supporting note. Missing
figures to be calculated included interest paid, tax paid, dividends paid, property, plant and equipment acquired
and proceeds from the issue of share capital. A bonus issue of shares and the sale of revalued property during
the year also featured.
Middleton plc
Statement of cash flows for the year ended 31 March 2010
£ £
Proceeds from sales of property, plant and equipment 2,800,000
Net cash used in investing activities (2,778,100)
Proceeds from issue of ordinary share capital (320,000 (W4) + 400,000 720,000
(W5))
Proceeds from issue of borrowings 500,000
Net decrease in cash and cash equivalents (16,900)

£
Depreciation charge 1,679,000
Amortisation charge (500,000 – 450,000) 50,000
Profit on disposal of property, plant and equipment (2,800,000 – 2,567,000) (233,000)
Decrease in trade and other receivables (656,800 – 547,500) 109,300
Decrease in trade and other payables ((657,900 – 5,000) – (567,300 – 6,500)) (92,100)
Decrease in provision (500,000 – 200,000) (300,000)

Workings
(1) Interest paid

£ £
Cash (β) 22,200 B/d 5,000
C/d 6,500 IS 23,700
28,700 28,700
(2) Tax paid
£ £
Cash (β) 295,000 B/d 300,000
C/d 270,000 IS 265,000
565,000 565,000
(3) PPE
£ £
B/d 6,345,400 Disposals 2,567,000
Depreciation 1,679,000
Additions (β) 5,578,100 C/d 7,677,500
11,923,500 11,923,500
(4) Ordinary share capital
£ £
B/d 1,400,000
Bonus issue (1,400,000 ÷ 5) 280,000
C/d 2,000,000 Cash (β) 320,000
2,000,000 2,000,000
(5) Share premium
£ £
B/d 200,000
C/d 600,000 Cash (β) 400,000
600,000 600,000
£ £
Dividends paid (β) 599,400 B/d 3,524,800
Bonus issue (W4) 280,000 Revaluation surplus 1,550,000
C/d 5,252,300 IS 1,056,900
6,131,700 6,131,700

Candidates were clearly very well prepared for this question. Presentation was generally good and the vast
majority of candidates showed a strong grasp of the double-entry techniques which underpin the preparation
of a statement of cash flows, although some are still losing marks for failing to show outflows of cash in
brackets on the face of the statement.
Most candidates produced workings in the form of T accounts with far fewer than usual completing these T
accounts with the debits and credits the wrong way round. However, some candidates produced tabular
workings or working in brackets on the face of the statement of cash flows. This can make it more difficult to
see evidence of correct double entry and to award marks where the final figure is incorrect (or uses the
incorrect bracket convention). Pleasingly, very few candidates produced no workings at all – an even riskier
approach as if figures are calculated incorrectly it is not possible to award any partial marks.
The majority of candidates scored very high marks on the reconciliation note, and on the figures for tax paid,
interest paid and the opening and closing figures for cash and cash equivalents. In the reconciliation note most
candidates dealt correctly with the opening and closing interest accrual which was included in trade and other
payables, an area which has caused problems in the past.
Candidates generally made a good attempt at the property, plant and equipment T account, with the figures
given in the question for depreciation and for the disposals both being correctly used. Where mistakes were
made, the most common error was to include the release of the revaluation surplus during the year on the
credit side of this T account instead of on the credit side of the retained earnings T account.
The other common mistake which affected the retained earnings T account was to deduct the bonus issue
from the share premium account instead of from retained earnings, as specified in the question. Where either
the bonus issue or the release of the revaluation surplus was omitted from the retained earnings working,
candidates then arrived at a balancing credit balance. Many thought that this indicated dividends received –
demonstrating a lack of understanding of how dividends received would be properly accounted for in a set of
financial statements.

 In the reconciliation note, failing to adjust for the decrease in the warranty provision, or making the
adjustment in the wrong direction.
 Again in the reconciliation note, failing to adjust for the profit on disposal of property, plant and
equipment.
 Miscalculating the number of shares in the bonus issue.
 Failing to adjust the property, plant and equipment working for the disposals.
 Failing to deal with or miscalculating the amortisation charge for the year.


General comments
This question mixed two discrete topics. Part (a) required the calculation of specified figures from a
consolidated statement of financial position in respect of a subsidiary and an associate, both of which
were acquired during the year. A fair value adjustment (with subsequent additional depreciation) had to be
made to the subsidiary. Part (b) required the preparation of a provisions note showing both the numerical
“table” and the relevant narrative disclosures.
Norland Ltd
(a) Figures for the consolidated statement of financial position as at 31 March 2010
(i) Goodwill
£
Fair value of consideration
Cash 200,000
Deferred cash 385,500
Shares (750,000 x £1.20) 900,000
1,485,500
Non-controlling interest at acquisition (921,600 (W) x 25%) 230,400
Less: Fair value of net assets at acquisition (921,600)
794,300
(ii) Non-controlling interest (1,086,000 (W) x 25%) £271,500
(iii) Investment in associate

£
Cost 500,000
Share of post acquisition change in net assets
Share of post acquisition profits (123,600 x 9/12 x 30%) 27,810
527,810
Working
Net assets – Delaford Ltd

At year end Acquisition
£ £
Share capital 100,000 100,000
Retained earnings
Per Q (741,600 + (9/12 x 235,200)) 918,000 741,600
Fair value adjustment (300,000 – 80,000 80,000
220,000)
Additional depreciation based on fair (12,000)
value ((80,000 (OF) ÷ 5) x 9/12)
1,086,000 921,600

Candidates generally made a very good attempt at Part (a), with a significant number gaining full marks.
This was very encouraging as candidates have historically performed less well when asked to produce
extracts from the consolidated financial statements, as opposed to a single consolidated statement.
In the calculation of goodwill, almost all candidates correctly calculated the total consideration. A few
omitted the shares issued from this calculation or used the £1 nominal value to value this part of the
consideration rather than the fair value. A number of candidates wasted time calculating goodwill arising
on the acquisition of the associate, when this would not appear as “Goodwill” in the consolidated
statement of financial position, but would effectively be subsumed within the “Investment in the associate”
figure, which was separately required.
The calculation of the investment in the associate was again very pleasing. A significant number of
candidates again calculated this correctly, even where they had made mistakes elsewhere in the question.
The most common error was to omit to time-apportion the profit for the year to allocate only nine months of
the twelve to post acquisition profits. Occasionally, candidates confused the associate percentage holding
with the non-controlling interest holding in the subsidiary, an error that was noted at the last sitting –
candidates must be careful to use the correct percentages as this loses easy marks. A minority of
candidates confused the working by trying to calculate the share of net assets held but adding it to the
cost of the associate.
The net assets working for the subsidiary was the least well answered part of Part (a) although, again,
there were plenty of correct answers. One of the most common errors was to omit share capital from this
working. The majority of candidates did adjust net assets at both acquisition and at the year end for the
fair value adjustment of £80,000. Pleasingly, most candidates then went on to correctly calculate the
additional depreciation arising from this adjustment, although some omitted to pro-rate this for the nine
month post-acquisition period and others incorrectly also adjusted net assets at acquisition for this .
The most common error in calculating the figure for non-controlling interest, apart from errors in the net
assets table, was to calculate the non-controlling interest at acquisition instead of at the year end, or to
calculate the non-controlling interest figure for the consolidated income statement instead of for the
consolidated statement of financial position.


(b) Notes to the financial statements for the year ended 31 March 2010
Provisions
Faulty goods Restructuring Provision for Total

provision provision fines
£ £ £ £
At 1 April 2009 10,000 - 60,000 70,000
Utilised in the year (8,500) - - (8,500)
Income statement 20,900 350,000 (20,000) 350,900
charge/(credit) (β)
At 31 March 2010 (W) 22,400 350,000 40,000 412,400
Faulty goods provision
The provision in respect of faulty goods relates to the supply of faulty hair straighteners during the year
ended 31 March 2010. The provision is based on the cost to the company of repairing or replacing the
faulty hair straighteners. All such expenditure is expected to be incurred in the year ended 31 March 2011.
Restructuring provision
During the year the company publicly announced and then commenced a restructuring of its domestic
appliances division. The provision is based on the anticipated further costs of the restructuring, all of which
are expected to be incurred in the year to 31 March 2011.
Provision for fines
The company has not yet fitted smoke filters in its factories as required by legislation which came into
force on 1 January 2009. Although the company plans to start the installation in May 2010, companies in
similar situations have been fined for such non-compliance. The year-end provision is based on lawyers’
best estimate of the likely amount of such a fine.
Working
Faulty goods: 800 x 80% = 640 Provide (640 x 50% x £20) + (640 x 50% x £50) = £22,400
Restructuring: Provide for direct expenditure only = 300,000 + 50,000 = £350,000
Fines: Do not provide for costs of fitting smoke filters (no obligating event) but provide for best estimate of
fines which are more likely than not (ie 75%) to be imposed

Candidates’ answers to Part (b) were mixed. However, there was a marked improvement from candidates’
performance when this topic was set in a previous examination. The majority of candidates clearly
understood what the provision table showed and that the year-end position represented the provision
required at that date rather than the movement in the year. The faulty goods and restructuring provisions
were generally dealt with correctly, although the provision for fines caused more problems.
The faulty goods provision using the expected cost was generally calculated correctly. The most common
error was not adjusting for the 20% of claims that were not valid and therefore using the whole 800 claims.
For the restructuring provision, the majority of candidates recognised that the staff retraining and relocation
cost should not be included in the closing provision, with only a few candidates including this. The provision
for fines caused the most problems as candidates struggled to distinguish between the fines and the
provision for the work. A typical answer included both of these, highlighting that candidates did not
appreciate the difference between when an obligation exists and when it does not.
A significant number of candidates confused the utilisation of a provision and the movement on the
provision in the period. Very few candidates picked up the available presentation mark as they omitted a
total column from their provisions “table”. A minority produced a series of tables as opposed to one table
and a few produced a series of T accounts.
However, the most disappointing aspect to this part of the question was the quality of the narrative
disclosures. Candidates still do not appreciate the difference between an explanation of why a provision
has been made (which is not required in the Financial Accounting paper) and the information contained in a
disclosure note. Good clear narrative disclosures in an appropriate style was only seen in a minority of
scripts.


General comments
Part (a) was a consolidated income statement question, featuring two subsidiaries (one fully disposed of
within the year) and one associate. Adjustments included intra-group trading and unrealised profits and
impairment write-downs. Part (b) required the calculation of opening consolidated retained earnings. Part (c)
tested an understanding of the concepts underlying the preparation of consolidated financial statements:
namely the single entity concept and control versus ownership.
Jennings plc
(a) Consolidated income statement for the year ended 31 March 2010
£’000
Revenue (W2) 106,500
Gross profit 44,350
Investment income 1,500
Share of profit of associates ((6,400 x 40%) – 100) 2,460
Profit for the year from continuing operations 16,010
Profit for the year from discontinued operations (3,900 + 660 ) (W4)) 4,560
Attributable to
Equity holders of Jennings plc (β) 17,825
20,570
Workings
(1) Group structure
Jennings plc
1.6
= 40%
4
6.4 4.2
= 80% = 70%
8 for 6/12 6
Palmer Ltd
Ferrars Ltd
Brandon Ltd

Jennings plc Brandon Ltd Adj (W3) Consol

£’000 £’000 £’000 £’000
Revenue 67,600 42,500 (3,600) 106,500
Cost of sales – per Q (43,700) (21,750) 3,600
– PURP (W3) (300) (62,150)
Op expenses – per Q (12,700) (13,200)
– GW impairment (700) (26,600)
Investment income (W5) 500 1,000 1,500
Tax (4,000) (1,700) (5,700)
6,550
(3) Intra-group sale and PURP
% £’000
SP 120 3,600
Cost (100) (3,000)
GP 20 600
X½ 300
(4) Group profit on disposal of Ferrars Ltd

£’000 £’000
Carrying amount of net assets at disposal
Net assets at 31 March 2009 (8,000 + 2,700) 10,700
Profit six months to 30 September 2009 (7,800 3,900
x 6/12)
14,600
Carrying amount of goodwill at disposal
Cost of investment 10,000
Non-controlling interest at acquisition ((8,000 + 550) x 1,710
20%
Less: Net assets at acquisition (8,000 + 550) (8,550)
3,160
Less: Impairments to date (500)
2,660
Total assets disposed of 17,260
Less: Attributable to non-controlling interest (14,600 x 20%) (2,920)
Total assets attributable to parent now disposed of 14,340
Sale proceeds (15,000)
Profit on disposal 660
(5) Investment income in Jennings plc

£’000
Total per IS 7,300
Less: Profit on disposal of Ferrars Ltd (15,000 – 10,000) (5,000)
Share of Brandon Ltd’s ordinary dividend (2,000 x 70%) (1,400)
Share of Palmer Ltd’s ordinary dividend (1,000 x 40%) (400)
Other investment income 500
(6) Non-controlling interest in year

£’000
Ferrars Ltd (20% x 3,900 (W4)) 780
Brandon Ltd (30% x 6,550 (W2) 1,965
2,745

Historically, candidates have performed less well on a consolidated income statement than on a consolidated
statement of financial position, but there were some excellent attempts at Part (a) of this question. A good
number of candidates calculated the correct profit on disposal of the subsidiary and took this, together with
the subsidiary’s pre-disposal profit for the year, to the face of the consolidated income statement. Most
candidates also dealt correctly with the impairment in the carrying amount of the associate, whereas this has
not been dealt with well in the past.
Almost all candidates correctly calculated the percentage holdings for the subsidiaries and the associate.
Presentation of the consolidated income statement was also generally good with most candidates gaining
some of the available presentation marks. However, those candidates who combined their consolidation
schedule with a consolidated income statement were not awarded any presentation marks.
Candidates generally made a reasonable attempt at a consolidation schedule, although it was common to
see the disposed of subsidiary’s results incorrectly included. This may indicate that some candidates are
confused over the difference in treatment between an acquisition and disposal. Candidates generally made
an adjustment for the provision for unrealised profit (usually in the correct column) and the related adjustment
in revenue and cost of sales, although this was often the incorrect figure of £3 million, with candidates not
adjusting for the mark-up on sale.
Candidates generally calculated the provision for unrealised profit correctly, with only a minority incorrectly
using a gross profit margin instead of a mark-up or forgetting to adjust for only half of the inventories being
held at the year end. The two non-controlling interests were generally calculated correctly although a
significant minority missed the one for the disposed of subsidiary, not appreciating that this company’s results
were included for part of the year. The non-controlling interest was generally separated out on the face of the
consolidated income statement, although many abbreviated this to “NCI” which is not acceptable on the face
of such a statement.
The investment income caused a problem for many candidates although a few did arrive at the correct figure.
Candidates often made adjustments for the share of the dividends from the subsidiary and the associate
correctly and realised that some kind of adjustment was required for the profit on disposal but generally used
the consolidated profit on disposal figure rather than that shown in the parent company financial statements.
Although, as discussed above, a good number of candidates calculated the group profit on disposal of the
subsidiary completely correctly, other candidates were clearly confused. Most candidates made some
attempt at the working, although it was missed out completely by a minority of candidates. Most candidates
made a fair attempt at calculating the carrying amount of the goodwill at disposal, although some candidates
adjusted for the impairment prior to taking 80% of the net assets at acquisition (or 100% and then adjusting
for the non-controlling interest’s 20%). The carrying amount of the net assets at disposal was less well
calculated, with the majority of candidates making some miscalculation. Those candidates who attempted to
work “backwards” from the year-end net assets to the net assets at disposal generally fared less well than
those who worked “forwards” from the opening net assets. A frequent error was to use the number of shares
held (6.4 million) as opposed to the issued share capital (10 million).
Candidates generally included a figure for the share of the associate’s profits although the figure was
sometimes not adjusted for the impairment of £100,000. The profit from discontinued operations on the face
of the consolidated income statement was shown by most candidates although it often only included the profit
on disposal or the subsidiary’s profit for part (sometimes incorrectly all) of the year rather than a combination
of both. Some took only the group share of the subsidiary’s profit into the profit from discontinued operations,
instead of taking 100% at this stage and then taking out 20% of this later as part of the non-controlling
interest figure. A minority of candidates were clearly confused about where the discontinued operation should
be shown and thought that it was instead an “exceptional” type item in the main body of the income
statement.


(b) Consolidated retained earnings brought forward at 1 April 2009
£’000
Jennings plc 23,800
Ferrars Ltd (80% x (2,700 – 550)) 1,720
Palmer Ltd (40% x (4,550 – 600)) 1,580
Goodwill impairments to date (500)
26,600
The correct figure for opening consolidated retained earnings was correctly calculated by a significant
number of candidates. Where mistakes were made they included the following:
 Adjusting for the impairment losses which arose in the year in addition to the cumulative impairment
losses at the start of the year.
 Not including any figure(s) for the associate and/or the disposed of subsidiary (both of which had
been acquired several years ago).
 Including a figure for the subsidiary acquired on the first day of the current year (and which should
not therefore have been included in the retained earnings brought forward on that date (from the
last day of the previous year)).
 Failing to exclude pre-acquisition profits from the share of retained earnings for the subsidiary and
the associate.
 Failing to take only the group share of the subsidiary’s and the associate’s retained earnings.


(c) Concepts underlying the preparation of consolidated financial statements
Group accounts reflect the results and net assets of group members to present the group to the parent’s
shareholders as a economic single entity (single entity concept). This reflects the substance of the group
arrangement as opposed to its legal form, where each group member is a separate legal person.
For example, in the consolidation of the Jennings plc group, all revenue and costs are added together, as if
the group were a single entity (so, for example, Jennings Ltd’s revenue of £67.6 million and Brandon’s
revenue of £42.5 million are added). However, the single entity concept also means that any intra-group
transactions need to be eliminated, as otherwise items would be double counted in the context of the group
as a single entity.
Hence, because Brandon Ltd sold goods for £3.6 million to Jennings plc in the current year, that
amount needs to be subtracted from Brandon Ltd’s revenue and from Jennings plc’s cost of sales as if
the group were a single entity that transaction would not have occurred.
Any profit made between parent and its subsidiary companies also needs to be eliminated where that profit
has not yet been realised outside the group. So, for the £3.6 million intra-group sale, because half of these
goods have not yet been sold outside the group, closing inventory needs to be reduced (cost of sales
increased) by the profit on half that amount (£300,000), otherwise inventory will be overstated from the point
of view of the group as a whole. The adjustment effectively brings inventory back down to what it would
have been stated at if the intra-group sale had never taken place.
The other principle underlying the preparation of consolidated financial statements is the distinction between
control and ownership. Control is reflected by including all of the subsidiary’s income and expenses in the
consolidated income statement, even where the parent does not own 100% of that subsidiary. So, for
Jennings plc, 100% of Brandon Ltd’s income and expenses are added in even though, in effect, Jennings
plc only “owns” 70% of those income and expenses.
Ownership is then reflected by showing that part of the subsidiary’s results, which is not “owned” by the
parent, as a non-controlling interest. Jennings plc’s consolidated income statement shows a non-controlling
interest of £2,745,000, representing that part of Brandon Ltd not owned by Jennings plc.
Where an investor (Jennings plc) does not have control but does have significant influence over an investee
(Palmer Ltd), line-by-line consolidation is not appropriate. But because Jennings has this influence, it is
reflected in the consolidated income statement as a single line item – being its share of the associate’s profit
for the period.
Answers to Part (c) were the most disappointing and sometimes non-existent. Where an answer was
attempted most referred to the single entity concept and to substance over form but did not expand on these
concepts with examples from the consolidated income statement. Some gave examples from the
consolidated statement of financial position, which was not what was required by the question. The
distinction between ownership and control was often not mentioned, or if it was, was poorly explained, with
the focus often being on how control could be achieved. Comments about the consolidation process were
often vague and did not clearly show that candidates understood that 100% of a subsidiary’s figures were
added in (control), and then the non-controlling interest share (ownership) taken out later – even if they had
just demonstrated this in their answer to Part (a).
Many referred to the fact that an associate is “not consolidated” but failed to explain that this is because
there is not control, but significant influence, or to explain how the associate is dealt with in the consolidated
income statement (again, even if they had just demonstrated this in Part(a)).
A few candidates wrote at length about the concepts of accruals and going concern or about the qualitative
characteristics and scored few, if any, marks.

Financial Accounting – Professional Stage – September 2010
The performance of candidates in the September 2010 objective test questions section for the Professional
Stage Financial Accounting paper was in line with the average performance on this section of the paper over all
sittings to date. Candidates performed well across all syllabus areas.
LO1 2 1 1
LO2 7 6 1
LO3 6 6 0
Total 15 13 2
If 50% or more of the candidates gave the correct answer, then the question was classified as ‘well answered’.
Comments on the two poorly answered questions, which covered LO1 (accounting and reporting concepts) and
LO2 (preparation of single company financial statements), are below:
Item 1
This item was a knowledge based question covering the capital maintenance concept and historical cost
accounting.
Item 2
This item required candidates to calculate the carrying amount of an asset following an impairment review. A
simple comparison between the current carrying amount and recoverable amount was required. The most
common error was believing that the asset could simply be restated to an amount higher than its current
carrying amount.

Question 1
General comments
This question was a typical question testing the preparation of an income statement and statement of
financial position from a trial balance. A number of adjustments were required to be made, including a
calculation of a provision, interest and dividends payable, a prior period error, capitalisation of development
expenditure and an adjustment to PPE for incorrect capitalisation.
(a)
£ £
ASSETS
Non-current assets
Intangible assets (237,600 – 39,600 (W1)) 198,000
515,560
Current assets
Inventories 375,600
Trade receivables 51,000
448,100
Total assets 963,660

Equity
Irredeemable preference shares 180,000
Equity 513,260
Bank loan 150,000
Current liabilities
Taxation 35,700
Provisions (310,000 x 10%) 31,000
Dividend payable (W3) 9,000
Interest payable 6,000
300,400
Total equity and liabilities 963,660

Eyam plc – Income Statement for year ended 30 June 2010

£
Revenue (3,973,000 – 31,000) 3,942,000


Finance costs (150,000 x 4%) (6,000)
Taxation (35,700)
W1 Expenses
Cost of Admin
sales expenses
£ £
Trial balance 1,560,000 930,000
Less: closing inventory (375,600)
Operating lease rentals ((1,045,000 + 95,000) / 2) 570,000 570,000
Depreciation charge – fixtures & fittings 56,040
Development exp amortisation
((357,600 – 120,000) / 2 yrs x 4/12months) 39,600
2,260,500 1,556,040
W2 Fixtures & fittings adjustment

£ £
Cost 646,000
Less: repairs (incorrect capitalisation) (25,000)
Accumulated depreciation (251,150)
Depreciation adjustment re repairs (25,000 x 15%) 3,750
(247,400)
373,600
Depreciation charge for year (373,600 x 15%) (56,040)
Carrying amount at 30 June 2010 317,560
£
B/fwd at 1 July 2009 127,750
Error re repairs capitalisation (25,000 – 3,750 (W2)) (21,250)
B/fwd restated 106,500

Profit in year 83,760
Preference share dividend (180,000 x 5%) (9,000)
C/fwd at 30 June 2010 181,260

As in previous sittings, candidates were clearly very well-prepared for this type of question, which remains
fundamental to the Financial Accounting syllabus. Almost all candidates produced a well-laid out income
statement and statement of financial position, with a significant number of candidates sub-totalling
amounts. The most common missed sub-totals include “operating profit” on the income statement and
non-current assets in the statement of financial position. Presentation marks were lost for incorrectly
combining some of the amounts presented in current liabilities, for example including taxation and
provisions as part of “trade and other payables”.
The cost matrix was generally clearly laid out, although a number of candidates were careless as to which
column they allocated expenses even where this had been expressly set out in the question text. A few
candidates’ workings, however, were disorganised, untidy and therefore hard to follow, making it difficult
to establish candidates’ approaches where they had not calculated the correct figure. This was noticeable
for the fixtures and fittings working which was often a muddle of figures sometimes resulting in candidates
putting the incorrect carrying amount on the face of the statement of financial position even though they
had correctly calculated this amount in their workings.
Candidates often left out narrative for amounts in their cost matrix, which meant that marking the figures
was frequently a challenge!
It was pleasing to see that most candidates were able to deal with the majority of adjustments, most of
which they would have seen on papers in the past. However, the treatment of returned goods caused a
number of problems with candidates not appreciating that this would impact on revenue. Instead
candidates recognised the debit side of the provision as an expense (as might be done for, say, a
warranty provision). The other adjustment that caused a problem was the incorrect capitalisation of
repairs in fixtures and fittings which occurred in the prior period and therefore required an adjustment to
brought forward retained earnings. The majority of candidates made the adjustment through current year
expenses, or not at all, although most did make the correct adjustment to property, plant and equipment.
The most disappointing incorrect treatment was the inclusion of the preference dividend as a finance cost
in the Income Statement even where it had already been correctly shown as a deduction in equity.
Other common errors included debiting the income tax charge for the period of £35,700 to the income
statement, but making no credit entry (as tax payable on the statement of financial position), correctly
splitting the accrued rent of £95,000 between administrative expenses and cost of sales, but failing to split
the original £1,045,000 and splitting the bank loan between non-current and current liabilities when it was
all non-current. A number of common errors were made in relation to non-current assets and these
included using an incorrect number of months when calculating the amortisation for the year on the
development expenditure, deducting the amortisation from the carrying amount of the intangible asset but
failing to show it as an expense and charging depreciation on cost instead of on carrying amount.


Question 2
General comments The first part of this question was a single topic question focusing on non-current
assets. Issues included adjustments for revaluations and the impact on depreciation, what is included in
the cost of an asset, component depreciation and the treatment of decommissioning costs.
Part b) covered concept issues, with a discussion on the four measurement bases with reference to the
measurement of an asset and an explanation of the advantages and limitation of using the historical cost
basis.
Litton plc
(a)
Statement of financial position as at 30 June 2010 (extracts)
£
Non-current assets
Non-current assets held for sale 90,000
Provision for decommissioning 1,000,000
Equity & liabilities

Revaluation surplus (420,000 + 1,292,000) 1,712,000
Summary of amounts included in income statement for the year ended 30 June 2010
£
Administrative expenses:
Depreciation ((115,800 – 37,500) + 960,000 + 268,000 + 130,000) 1,436,300
Impairment of held for sale asset 22,500
Allocation of general overheads 36,000
Other income 45,000
W1 PPE – Carrying amounts

£
Land (W2) 7,290,000
Plant and machinery (W3) 351,200
Hydro-electric plants (W4) 15,040,000
Solar power plants (W5) 4,824,000
Wind turbines (W6) 1,870,000
29,375,200
W2 Cost of land
£ £
Cost b/fwd 2,000,000
Purchase price 5,000,000
Professional fees 150,000
Site clearance costs 125,000
Planning application 15,000
5,290,000
Carrying amount c/fwd 7,290,000
W3 Plant and machinery – Held for sale asset

£
Cost 300,000
Less: depreciation (300,000 / 8 yrs) x 5yrs (187,500)
Carrying amount at 30 June 2009 112,500
FV less costs to sell (90,000)
Impairment 22,500

£ £
Cost b/fwd 950,000
Less: held for sale asset (300,000)
Cost c/fwd 650,000
Accumulated depreciation b/fwd 408,000

Depreciation charge for year 115,800
Depreciation charged in error (re HFS asset) (37,500)
(300,000 / 8 yrs)
Acc dep re HFS asset (187,500)
(298,800)
W4 Hydro-electric plant
£ £
Cost b/fwd 7,000,000
Cost 10,000,000
Testing - capitalised 100,000
Decommissioning 1,000,000
Acquisition in year 11,100,000
Cost c/fwd 18,100,000
Accumulated depreciation b/fwd 2,100,000

Depreciation charge for year (466,667 + 960,000
493,333)
(3,060,000)
Carrying amount at y/e 15,040,000
Depreciation on acquisition – 11,100,000 / 15yrs x 8/12 months = 493,333
W5 Solar power plant

£ £
Cost / valuation b/fwd 4,200,000
Less: acc dep (400,000)
3,800,000
Revaluation (5,092,000 – 3,800,000) 1,292,000
Cost / valuation c/fwd 5,092,000
Depreciation in yr: 5,092,000 / 19 yrs (268,000)

Useful life
25 yrs – 6 yrs (1 July 2003 – 30 June 2009) = 19 yrs
W6 Wind turbines
Split components: 2,000,000 – 200,000 = 1,800,000

£ £
Cost 2,000,000
Depreciation:
1,800,000 / 20 yrs 90,000
200,000 / 5 yrs 40,000
(130,000)

There were some good attempts at this question, although workings were often difficult to follow with a
haphazard array of numbers with no commentary accompanying them. There has been a marked
improvement with candidate responses to property, plant and equipment questions since it was first set
in December 2007. The majority of candidates tackled each of the five items of property, plant and
equipment separately thereby not confusing the issues. This was the best way to maximise marks.
Many candidates produced a property, plant and equipment “table” as a working, which was a
reasonable approach to take and clear to mark, although to complete it in its entirety wasted valuable
time when the table was not actually required by the question. Others took each type of asset in the
question separately and calculated a revised carrying amount and revised depreciation charge, which
was another sensible approach. However, other candidates produced a long string of plus and minus
numbers, with no narrative, which was almost impossible to mark.
The question asked for extracts from the statement of financial position and there were a number of
straight forward marks available here based on candidates own figures. However, a number of
candidates misinterpreted this as meaning the property, plant and equipment table although the
requirement clearly set out that notes to the financial statements were not required. Others produced
extracts but lost marks because those extracts were not properly presented (for example, the
revaluation surplus was not shown under “Equity”, or “Property, plant and equipment” was abbreviated
to “PPE”). Although the income statement impact did not have to be shown as an extract candidates
sometimes scattered these amounts throughout their answers, instead of presenting them in a
summary.
The majority of candidates correctly calculated the impairment for the held for sale asset and made a
good attempt at the plant and machinery calculations. One of the most common errors involved the
component depreciation calculation, with candidates’ correctly calculating depreciation on the battery
storage systems over five years but then adding this cost to the total rather than deducting it to get the
cost of the wind turbines themselves. Candidates also often missed the wind turbines out when adding
together all the items of property, plant and equipment for the extracts to the statement of financial
position.
Other common errors for each non-current asset item included:
• Land: deducting the rental income from cost and/or capitalising the general overheads.
• Hydro-electric power plants: netting the £1 million restoration costs off the cost of £10 million,
instead of adding it. A significant number of candidates showed the provision for restoration costs
as an expense rather than capitalising it, or included it as a current, instead of a non-current liability.
A significant number of candidates also used the incorrect number of months when calculating the
current year depreciation.
• Solar power plants: including the £68,000 “additional” depreciation on the surplus in the annual
depreciation charge, but not adding in the original £200,000 charge based on cost. Other
candidates included the whole £268,000 but also the original £200,000. A few candidates wasted
time making a transfer from the revaluation surplus for the additional depreciation, when the
question specifically stated that this was not the company’s policy.
• Held for sale asset: calculating accumulated depreciation brought forward based on an incorrect
number of years.


(b)(i)
Historical cost – assets are recorded at the cash or fair value of the consideration paid.
Current cost – assets are recorded at the amount that it would currently cost to acquire the asset today.
Realisable value – the amount that would be received if the asset was sold today in its current condition.
Present value – a current estimate of the present discounted value of the future net cash flows in the normal
course of business.
(ii)
Usefulness of historic cost
• Historical cost is a known amount, it is a reliable measurement – there is no subjectivity involved unlike
the revaluation model where a great deal of judgement is involved.
• There is no cost involved in valuing historical cost as it is the amount that was paid. Measuring fair value
can be extremely costly depending on the nature of the asset.
• Other measurement bases can be subject to manipulation, as valuation techniques need to be applied.
Limitations of historical cost
• By its very definition it is an historical amount and therefore does not reflect the true value that the asset
may be worth unlike revalued amounts which are current at the time of the valuation. For example,
property prices generally increase over time, so a property acquired a number of years ago will be
shown in the financial statements at a value significantly less than its true value to the business.
• Historical cost also ignores the effects of inflation.
Responses to part b) were generally disappointing, although there were some very good answers to this part.
Most candidates made some attempt at the first part.
In (i), most candidates knew where to find an explanation of the four measurement bases in the open book
text and used the book to good effect, although a few provided unnecessarily long explanations. Others,
however, explained the mechanics of the cost model as opposed to the revaluation model, with much detail
given about when and how to revalue. Others confused the four measurement bases with capital
maintenance concepts.
Answers to the second element were often not thought out with candidates instead writing everything they
knew about historical cost and the revaluation model. A significant number of candidates discussed how the
cost model suffered from the problems of estimating an accurate useful economic life, seemingly unaware
that such a judgement is also needed when using the revaluation model (except for land). Others believed
that impairments only needed to be accounted for under the cost model. Although the concepts of relevance
and reliability were relevant, these needed to be explained, by reference to the factual nature of historic costs
and the subjective nature of revaluations. Those who wrote generally about relevance and reliability scored
poorly. A worrying few thought that revaluation made figures more reliable.


Question 3
General comments
This was a mixed topic question covering revenue recognition, inventory valuation and investment in
associates. Part a) covered revenue recognition issues which included subscriptions, a service contract,
advertising revenues and sale and returns. Part b) required a straight forward calculation of closing
inventories based on units of production. Part c) required the calculation of the investment in associate line in
the consolidated statement of financial position following a PURP adjustment and the impact of the associate
on retained earnings.
(a) Calculation of revenue
Draft revenue 2,176,900

Magazine subscriptions adjustment (W1) (203,000)
Promotional advertising (17,500 / 2) 8,750
Returns (1,500 x £2) (3,000)
News service (W2) 7,500
Revised revenue 1,987,150
WORKINGS
W1 Magazine subscriptions
Receipt date Subscription period Adjustment Total

£
March 2010 Apr – June 129,000 x 0 –
April 2010 May – July 84,000 x 1/3 28,000
May 2010 June – Aug 96,000 x 2/3 64,000
June 2010 Jul – Sept 111,000 111,000
203,000
W2 Service contract
£
Revenue: (30,000 x 9/12 months) 22,500
Cash received (1 Oct 2009) (15,000)
Additional revenue to recognise 7,500
Candidates generally made some attempt at this part of the question with the majority of candidates gaining
at least half marks in it and many scoring full marks.
A common mistake was to calculate total revenue from the items given, as opposed to adjusting the given
(total) revenue figure for the extra revenue that needed to be added or deducted. These candidates
therefore lost marks for not showing what had been brought in on a cash basis.
The most common errors included making adjustments in the wrong direction, taking out the wrong fraction
of subscriptions received in April and May and only adjusting for subscriptions received in June.


(b)
Closing inventories
(£1.20 x (25,500 – 2,000)) + (£1 x 2,000) = £30,200
WORKINGS
£
Material cost 360,000
Variable overheads 240,000
600,000
Unit cost
600,000 / 800,000 0.75
450,000 / 1,000,000 0.45
£1.20
Answers to this part of the question were the most disappointing on the paper as a whole. The question
highlighted a lack of understanding in a very straight-forward part of the syllabus. The most common failing
was to include the administrative expenses as part of the inventory unit cost, then spread it either over the
800,000 items produced or over the 1 million budgeted production. Most candidates did, however,
recognise that the 450,000 fixed production costs should be spread over the 1 million.
Other common errors included calculating a unit cost but then applying it to the whole 25,500 items in year-
end inventory, not just the 23,500 which needed to be valued at cost, applying the calculated unit cost to
23,500 items, but failing to add in the other 2,000 items, spreading all costs (with or without the
administrative costs) over the 1 million budgeted production and calculating a unit cost but then valuing all
inventory at selling price.
In addition, a number of candidates failed to calculate a unit cost at all, simply valuing all inventory at selling
price (all at £2.50 or 23,500 at £2.50 with the 2,000 correctly valued at £1) or added all costs together (with
or without the administrative costs) and valued inventory at that figure, with no attempt to spread that total
cost over the number of units produced or budgeted for.

(c)(i)
£
Share of post-acq retained earnings
((295,000 + 40,000) – 250,000) x 40% 34,000
(ii)
£
Bretby plc 1,670,000
Alport - share of post-acq retained earnings
(34,000 – 14,000) 20,000
Consolidated retained earnings 1,685,000

W1 Unrealised profit –associate
200,000 100%
(130,000) 65%
70,000 35%
£70,000 x 40% x ½ = £14,000
Answers to this part were quite mixed, with most candidates picking up at least a few marks for stating the
cost of the investment and correctly showing the consolidated retained earnings figures without the
associate. Candidates clearly are not comfortable with consolidation workings involving an associate, which
was a direct contrast to a very good performance on Question 4, which featured two subsidiaries. There
were a number of correct answers, but the most common errors were over the treatment of the PURP
(which many adjusted for in both calculations, instead of just in retained earnings) or in a lack of
consistency between the share of profits taken to the investment in the associate and that taken to retained
earnings. Another common error was to adjust for the whole of the £35,000 PURP, as opposed to only 40%
of that figure.


Question 4
This question required the preparation of a consolidated statement of financial position. The group had two
subsidiaries, one of which was acquired during the year. The treatment of a gain on bargain purchase was
covered and a fair value adjustment in relation to inventories was required. Inter-company trading had taken
place during the year.
Pinxton plc
(a) Consolidated statement of financial position as at 30 June 2010
£ £
Assets
Non-current assets
Property, plant and equipment (670,000 + 140,000 + 240,000) 1,050,000
Intangibles (265,000 + 20,000) 285,000
Goodwill (W5) 53,760
1,388,760
Current assets
Inventories (135,000 + 60,000 + 65,000 + 3,750 (W3) – 2,000 (W2)) 261,750
Trade and other receivables (96,400 + 63,000 + 86,400 – 30,000) 215,800
Cash and cash equivalents (18,900 + 14,000 + 7,950) 40,850
518,400

Equity
Attributable to the equity holders of Pinxton plc 1,570,550
Equity 1,654,460
Current liabilities
Trade and other payables (89,600 + 51,000 + 88,300 – 30,000) 198,900
Taxation (33,200 + 6,700 + 13,900) 53,800
252,700
Workings
(1) Group structure
Pinxton plc
153 / 170 = 90%

Hayfield Ltd
192 / 240 = 80%
Smisby Ltd

(2) Net assets – Hayfield Ltd

30 June 2010 Acquisition Post acq
£ £ £
Share capital 170,000 170,000 –
Retained earnings 69,300 72,000 (2,700)
PURP (2,000) – (2,000)
237,300 242,000 (4,700)
(3) Net assets – Smisby Ltd

30 June 2010 Acquisition Post acq
£ £ £
Share capital 240,000 240,000 –
Share premium account 30,000 30,000 –
Retained earnings 27,150 10,300 16,850
FV inventory adj (90,000 – 75,000) x 25% 3,750 15,000 (11,250)
300,900 295,300 5,600
(4) Goodwill – Hayfield Ltd

£
Net assets at acquisition (W2) (242,000)
Non-controlling interest at acquisition (242,000 (W2) x 10%) 24,200
Gain on bargain purchase (27,800)
(5) Goodwill – Smisby Ltd

£
63,760
53,760

£
Hayfield Ltd – share of net assets (237,300 (W2) x 10%) 23,730
Smisby Ltd – share of net assets (300,900 (W3) x 20%) 60,180
83,910

£
Pinxton plc 292,500
Hayfield Ltd ((4,700) (W2) x 90%) (4,230)
Smisby Ltd (5,600 x 80%)) 4,480
Gain on bargain purchase (W4) 27,800
310,550
(8) PURP
Hayfield Ltd
% £
SP (30,000 x 1/3) 125 10,000
Cost (30,000 / 125% x 1/3) (100) (8,000)
GP 25 2,000

Answers to this question were very good, showing that candidates are very comfortable with the consolidation
of subsidiaries. Presentation was on the whole good, although some candidates did lose presentation marks,
often for failing to show the split of total equity between the parent and the non controlling interest. A few
candidates lost marks because they failed to show bracketed workings for incorrect lines on their consolidated
statement of financial position.
It was pleasing to see that a good number of candidates understood that the gain on bargain purchase should
be recognised in retained earnings (although a number of candidates then deducted it, instead of adding it)
rather than being netted off against the positive goodwill shown in the consolidated statement of financial
position. Candidates generally made a good attempt at the two net asset tables, although a common error was
to use a positive figure for the movement in post-acquisition retained earnings even though they had calculated
one of the subsidiaries to be negative.
Workings for this question were generally clearly set out with the standard set of pro-forma workings being
used. This makes responses easier to mark with marks being awarded for partially correct answers. One of the
most common mistakes on this question in respect of presentation was to try and calculate the goodwill figures
in a combined calculation. In this question there was positive and negative (gain on bargain purchase) goodwill
and the two amounts should not be netted off (as discussed above).
Where errors were made they included the following, not including the share premium account in the
calculation of Smisby’s net assets, or including it either at acquisition or at the year end but not at both dates,
failing to account for the intangible assets held by Pinxton and Hayfield and treating the information in relation
to the fair value adjustment for inventories at acquisition as leading to a reduction to net assets as opposed to
a fair value uplift. If this amount was correctly recognised in the net assets table candidates often did not go on
to make a corresponding adjustment to inventories on the consolidated statement of financial position.
Other common errors included failing to eliminate the £30,000 intra-group balance and using the non-
controlling interest percentages to calculate the share of Hayfield’s and Smisby’s post-acquisition profits to be
taken to consolidated retained earnings.
Interestingly, after their consolidation, some candidates were left with a figure for “Investments” on their
consolidated statement of financial position. Sometimes this was the whole £490,000, sometimes just a part of
that figure. It was also interesting to note that a number of candidates made the correct fair value and PURP
adjustments in the net assets working but then took the wrong post acquisition figures to retained earnings, for
example, just taking the movement on reserves and ignoring the impact of the adjustments they had just
made.


The performance of candidates in the June 2013 objective test questions section for the Professional Stage
Financial Accounting paper was good. Candidates performed better on LO3 (preparation of consolidated
financial statements) than they did on the other two syllabus areas.
LO1 4 3 1
LO2 6 4 2
LO3 5 5 0
Total 15 12 3
Comments on the two most poorly answered questions, both in LO2 (preparation of single company financial
statements) are given below:
Item 1
This item required candidates to calculate closing inventory in accordance with IAS 2, Inventories. The question
featured raw materials, work in progress and finished goods. Almost all candidates calculated a net realisable
value for work in progress and finished goods which was lower than cost and used that figure in their
calculation. However, although most candidates correctly allowed for a discounted selling price and for costs still
to be incurred to complete the work in progress, a majority did not reduce the discounted selling price by the
selling costs to be incurred to arrive at the correct figure for net realisable value.
Item 2
This item tested the calculation of the amount of an intangible asset to be capitalised in accordance with IAS 38,
Intangible Assets. Most candidates recognised that initial research costs and the cost of evaluating research
findings should not be capitalised and that development costs and patent registration costs should be
capitalised. However, a majority of candidates failed to recognise that the depreciation charged in the period on
specialised equipment needed for the development process should also have been capitalised.
Copyright © ICAEW 2013. All rights reserved. Page 1 of 14

PROFESSIONAL STAGE FINANCIAL ACCOUNTING
Question 1
General comments
Part (a) of this question tested the preparation of an income statement (which needed to be split between
continuing and discontinued operations) and a statement of financial position from a list of balances plus a
number of adjustments. Adjustments included a warranty provision, calculation of the annual depreciation
charge, a finance lease taken out during the year, and an adjustment to revenue to reflect IAS 18,
Revenue. Part (b) required a discussion of the objective of general purpose financial statements and the
purpose of accounting standards, illustrated by reference to the financial statements prepared in Part (a).
Falcon Ltd
(a) Income statement for the year ended 31 December 2012
£
Continuing operations
Revenue (W5) 1,264,600
Finance cost (12,600 + 1,000 (W6)) (13,600)
Discontinued operations
Loss for the year from discontinued operations (W2) (164,600)
Statement of financial position as at 31 December 2012
£ £
Assets
Non-current assets
Current assets
Inventories 35,600
68,400
Non-current asset held for sale 80,000
148,400


Equity
340,550
Deferred income (60,000 x 1/3) 20,000
123,500
Current liabilities
Taxation 35,000
Provisions 55,000
Borrowings 34,600
228,100
Workings

Cost of sales Distribution Administrative
costs expenses
£ £ £
Per Q 744,300 43,500 235,600
Adj re discontinued operations (160,900) (5,300) (17,400)
Adj re lease payment (5,000)
631,750 38,200 223,200
(2) Loss on discontinued operations

£
Revenue 114,000
Costs included in TB (160,900 + 17,400 + 5,300) (183,600)
Loss on held for sale asset/depreciation (120,000 – (85,000 – (40,000)
5,000))
Other discontinued operations costs (55,000)
(164,600)
(3) PPE
Plant and Land and
equipment buildings
£ £
B/f Cost 570,600 375,000
Classified as held for sale (120,000)
Leased building (W6) 112,500
215,000
Depreciation – plant @ 25% (53,750)
Depreciation – buildings ((275,000 x 2%) Ab + (112,500 ÷ 25) (OF)) (10,000)
161,250 382,500
Total PPE 543,750


£
At 1 January 2012 (19,700)
At 31 December 2012 140,550
(5) Revenue
£
Per TB 1,418,600
Less: After sales support re future years (60,000 x 2/3) (40,000)
Discontinued operations (114,000)
1,264,600
(6) Lease of land and buildings
SOD = (24 x 25)/2 = 300

£
Total payments (5,000 x 25) 125,000
Fair value (112,500)
Year ended 31 B/f Payment Capital Interest C/f

December
£ £ £ £ £
2012 112,500 (5,000) 107,500 24/300 x 108,500
12,500)
1,000
2013 108,500 (5,000) 103,500
Tutorial note
Credit was also given if candidates depreciated the held for sale asset to the date of classification as held
for sale, and then calculated a (smaller) impairment loss. The shortcut taken above recognised the fact
that only a single figure for PPE was required for the statement of financial position.

Most candidates made a reasonable attempt at this question with the vast majority preparing a complete
statement of financial position and income statement. Presentation was reasonable, although a significant
number of candidates lost marks by failing to include appropriate sub-totals on their statement of financial
position. The majority of candidates did not appear to have been unnerved by the inclusion of a
discontinued operation in this question and, pleasingly, almost all included a figure for loss from
discontinued operations on the face of the income statement, although hardly any candidates showed
headings for “Continuing operations” and “Discontinued operations” (which was surprising as these were
included in Question 2 on the paper).
The adjustments to revenue, opening and closing inventory, the finance lease calculations, the asset held
for sale and allocation of costs to the correct expense category were all well dealt with, although very many
candidates calculated a second year interest charge for the finance lease when this was not needed. By
far the most common errors were the failure to correctly split the finance lease liability between current and
non-current, the inclusion of the wrong amount on the statement of financial position for income tax
payable (including the charge for the year, as opposed to the liability for the year), and an incomplete
calculation of the loss from discontinued operations. With regards to the latter, almost all candidates
calculated this as the sales of the Scottish operations less its costs, but far less increased this loss by the
estimated future costs and/or by the depreciation and/or impairment on the held for sale asset, with many
candidates either ignoring these figures or including them in continuing operations. A minority of
candidates time-apportioned the figures for the Scottish operations, clearly not understanding how IFRS 5
should be applied.
Other common errors included the following.

- Failing to deduct the prior year tax overestimate from the current year tax estimate to arrive at the
correct current year income statement charge and/or showing the wrong figure in current liabilities.
- Not correcting administrative expenses to remove the lease payment incorrectly posted to this
account.
- Incorrectly calculating the sum-of-the-digits for the finance lease.
- Treating the resultant deferred income as a current or non-current asset rather than as a liability or
failing to split the liability between current and non-current.
- Showing the asset held for sale in non-current as opposed to current assets.
- Taking the depreciation on the leased asset to cost of sales instead of administrative expenses.
- Adding the opening retained loss to the profit for the year, instead of deducting it.
- Failing to include a sub-total for operating profit on the income statement.
- Calculating, usually correctly, a carrying amount for the leased asset but then failing to add that
figure in to the property, plant and equipment figure for the statement of financial position.
- Calculating depreciation and/or impairment on the held for sale asset but failing to remove the cost
of the held for sale asset from property, plant and equipment.
- Depreciating the leased asset by 2% when it had a shorter useful life of 25 years.
Almost all candidates did use the recommended “costs matrix” when allocating costs between the three
expense categories. It was very noticeable that those candidates who did not use this format tended to
produce disorganised workings (often split between the face of the income statement and /or a number of
separate workings) which were difficult to follow and therefore might have lost marks. Far fewer candidates
seem capable of producing a clear working for property, plant and equipment which resulted in them
repeating calculations and often losing the “connection” between the depreciation expense to go into the
costs matrix and the depreciation expense to be added to accumulated depreciation brought forward. It
was often impossible to see any “audit trail” to support the final figure for property, plant and equipment on
the face of the statement of financial position and many candidates lost potential marks because of this.
This is an issue which has been flagged up repeatedly.

(b) The objective of general purpose financial reporting
The IASB Conceptual Framework states that the objective of general purpose financial reporting is to
provide financial information about the reporting entity that is useful to existing and potential investors,
lenders and other creditors in making decisions about providing resources to the entity. These decisions
involve buying, selling or holding equity and debt instruments and providing or settling loans and other forms
of credit.
For example, the lessor of the land and buildings may have looked at Falcon Ltd’s previous financial
statements in deciding whether or not to extend credit. They would have considered whether Falcon Ltd
would be likely to be able to meet the lease repayment terms.
Investors would be particularly interested in the information concerning continuing versus discontinued
operations – particularly as the continuing operations have made a profit of £324,850, but the discontinued
operations have made a loss of £164,600. Without this split it may have seemed that Falcon Ltd was only
able to generate profits of £160,250, less than half of its actual continuing profits.
Falcon Ltd’s suppliers may look at the financial statements in deciding whether or not to grant credit – they
may be concerned that the fact that Falcon Ltd’s current liabilities are way in excess of its current assets
may mean that the company could struggle to pay its debts as they fall due.
The purpose of accounting standards
The purpose of accounting standards is to identify proper accounting practices for the preparation of
financial statements. Accounting standards create a common understanding between users and
preparers on how particular items are treated.
For example, it will be clear from Falcon Ltd’s financial statements that it carries its property, plant and
equipment under the cost model. Users will need to then take care if comparing Falcon Ltd’s financial
statements with those which use the valuation model.
It is IAS 17, Leases, which dictates the correct treatment of finance versus operating leases. Hence the
lease of the building was treated as a finance lease. This will be common practice across all entities
following IFRS and will make their financial statements comparable with those of other companies.
IAS 18, Revenue, dictates that Falcon Ltd only account for revenue on services provided to date. Hence an
adjustment was made in Part (a) to remove the revenue relating to after-sales support not yet provided.
Again, this will be common practice across all entities following IFRS
Attempts at the written part of the paper were, as usual, disappointing, with very few candidates scoring
more than one or two marks. Many failed to gain the marks for those parts of the answer that could be taken
from the open book text, and only a minority were able to provide examples from Falcon Ltd’s financial
statements which were relevant to either the objective of general purpose financial reporting or to the
purpose of accounting standards. Whilst most candidates recognised that accounting standards helped to
achieve consistency or comparability very few made the point that accounting standards inform the
preparers of accounts how to deal with key accounting issues in the financial statements. Many candidates
thought that the main purpose of accounting standards is to ensure that financial statements are prepared
on the basis of “substance over form” and then proceeded to give examples of accounting for substance
over form. Others discussed the qualitative characteristics of financial statements at length and gave
examples of how various accounting standards met these qualitative characteristics.

Question 2
General comments
This question tested the preparation of a consolidated statement of cash flows and supporting note, where a
subsidiary had been disposed of during the year. Missing figures to be calculated included dividends paid
(to the group and to the non-controlling interest), dividends received, tax paid, additions to property, plant
and equipment, and proceeds from the issue of share capital.
Eagle plc
£ £
Purchase of property, plant and equipment (W3) (460,200)
Proceeds from sale of property, plant and equipment 60,000
Dividends received from associate (W4) 50,600
Disposal of Owl Ltd net of cash disposed of ((194,450 x
80%) + 10,500) – 1,500) 164,560
Proceeds from share issues (220,000 + 50,000) – 140,000 110,000
+ 20,000))
Repayment of long-term loan (150,000 – 125,000) (25,000)

£
Share of profits of associate (56,700)
Finance cost 22,000
Profit on disposal of property, plant and equipment (60,000 – 56,000) (4,000)
Increase in trade and other receivables ((75,700 + 13,900) – 88,900) (700)
Decrease in trade and other payables ((52,800 – 3,000) – (40,500 + 8,450 – 5,000)) (5,850)

Workings
(1) Interest paid
£ £
Cash (β) 20,000 B/d 3,000
C/d 5,000 CIS 22,000
25,000 25,000
(2) Income tax
£ £
Cash (β) 81,200 B/d 78,000
C/d 68,000 CIS (64,800 + 6,400) 71,200
149,200 149,200
£ £
B/d 983,500 Disposal of sub 187,500
Other disposals 56,000
Additions (β) 460,200 Depreciation charge 175,600
C/d 1,024,600
1,443,700 1,443,700
(4) Investment in associate
£ £
B/d 179,800 Cash received (β) 50,600
CIS 56,700 C/d 185,900
236,500 236,500
£ £
C/d 663,000 CIS 254,100
929,200 929,200
£ £
Cash (β) 22,410 B/d 150,800
Disposal (194,450 x 20%) 38,890
C/d 140,200 CIS 50,700
201,500 201,500

Most candidates produced a well-presented statement of cash flows with all the relevant headings, although
the headings that continue to let candidates down are “property, plant and equipment” which was all too often
shortened to “PPE” and Dividends paid to non-controlling interest” abbreviated to use “NCI”. Such
abbreviations, in one of the main financial statements, will cause candidates to lose presentation marks. As
usual, many candidates lost marks for use of the incorrect bracket convention and/or including cash flows
under the wrong headings. Typically for a question featuring a consolidated statement of cash flows,
candidates lost most marks on the groups aspect of the question, in particular failing to adjust accurately for
the disposal of the subsidiary and miscalculating the figure for the actual disposal as it should appear in the
statement.
In the main, workings took the form of T accounts, with very few candidates completing some of their T
accounts with all the entries the wrong way round. However, some candidates still insist on producing tabular
workings or workings on the face of the statement of cash flows. This can make it more difficult to see
evidence of correct double entry and to award marks where the final figure is incorrect (or uses the incorrect
bracket convention). Pleasingly, hardly any candidates produced no workings at all – an even riskier approach
as if figures are calculated incorrectly it is not possible to award any partial marks.
The reconciliation note was generally well done with candidates making a good attempt at the adjustments.
However, most candidates failed to add the disposed of subsidiary’s profit before tax to the continuing profit
before tax, to form the first figure of the reconciliation note. Most candidates correctly made the adjustments for
the associate, the finance costs and the depreciation charge. The profit on disposal of property, plant and
equipment was often ignored or added instead of being deducted. It was less common to see the correct
adjustments for the movements in trade receivables and payables, with most errors being made over the
adjustment for the disposed of subsidiary’s figures.
Figures for income tax paid, interest paid, repayment of the long-term loan and purchase of property, plant and
equipment were those most commonly calculated correctly and shown correctly on the face of the statement
although in a minority of cases a positive figure was shown. However, a significant number of candidates failed
to adjust, or adjusted incorrectly for, the tax on the discontinued operations in the income tax T-account.
Others omitted to include all three necessary credit entries in the property, plant and equipment T-account.
Many candidates also correctly calculated the figure for dividends received from the associate and dividends
paid to the parent, although a number misclassified the former as a financing cash flow and others included
total profit for the year in retained earnings instead of including only the group share. It was less common to
see the correct figure for dividends paid to the non-controlling interest as, once again, many candidates failed
to adjust or adjusted incorrectly for the subsidiary disposed of during the period. It was also rare to see the
correct figure for the disposal of the subsidiary, with many miscalculating the sale proceeds (showing a lack of
understanding as to how the profit on disposal is calculated), although most clearly knew to deduct the cash
disposed of from their figure (although a minority deducted this from the closing cash and cash equivalents
figure in the statement of cash flows).
Only a minority of candidates correctly calculated the proceeds from the share issues, as many failed to
appreciate that the bonus issue (which was made out of the share premium account) was effectively a contra
entry between the share capital and share premium accounts. Hence all that was needed was a comparison of
the opening and closing figures in a combined T-account to arrive at the cash proceeds.

Question 3
General comments
This question featured a group of companies, comprising parent, two subsidiaries (one acquired during the
year) and one associate. Part (a) required the calculation of the goodwill arising on acquisition of the new
subsidiary, with fair value adjustments to be made. Part (b) required the preparation of the consolidated
income statement. Adjustments included intra-group transactions of both inventory and property, plant and
equipment, and impairment write-downs.
Kite plc
(a) Goodwill arising in the business combination with Vulture Ltd

£ £
Consideration
Cash 15,000
Shares at market value (300,000 x £1.30) 390,000
405,000
Net assets at acquisition
Share capital 100,000
Retained earnings at 1 January 2012 567,000
Profit to 31 March 2012 (49,200 x 3/12) 12,300
Less: Dividends paid (120,000)
Fair value adjustments:
Re building (W) 44,000
Goodwill to be written off (33,000 – (3,600 x 3/12)) (32,100)
(551,200)
Non-controlling interest at acquisition x 30% 165,360
19,160
Working – fair value adjustment re building
£
Fair value at 1 April 2012 154,000
Carrying amount at 1 April 2012 (250,000 – ((250,000 ÷ 25) x 14)) (110,000)
44,000
Almost all candidates used the correct methodology for calculating goodwill, although some lost marks for
not showing the % used to calculate the non-controlling interest share of the net assets at acquisition. It is
not sufficient to put “x NCI%”.
In calculating the consideration almost all candidates included the cash of £15,000 and the shares at market
value. However, many then also included the professional fees that should have been written off to
expenses. Others deducted this figure, failing to appreciate that whilst the company had incorrectly included
this figure in the cost of investment (which was not given in the question), they themselves had not, having
correctly added the cash and the shares. It was therefore rare to see this amount written off to operating
expenses in Part (b).
In calculating the net assets at acquisition, almost all candidates added share capital, retained earnings
brought forwards and three months of the profit for the year. Fewer deducted the dividends paid and fewer
still made the correct adjustment for goodwill (although a good number adjusted by the gross figure of
£33,000). Where an adjustment was made for the contingent liability, most did use the correct figure of
£20,000.
A good number of candidates correctly calculated the fair value adjustment in respect of the building,
although a significant minority calculated this in Part (b) and did not adjust for it in Part (a). Some credit was
given for this.

(b) Consolidated income statement for the year ended 31 December 2012
£
Revenue (W1) 2,818,550
Share of profit of associate ((30,600 x 40%) – 3,000 – 2,160 (W2)) 7,080
Profit attributable to
Owners of Kite plc (β) 275,500
314,980
Workings
Kite plc Harrier Vulture Adj Consol

Ltd Ltd
9/12
£ £ £ £ £
Revenue 1,579,500 879,500 491,550 (132,000) 2,818,550

Cost of sales – per Q (1,050,600) (598,700) (328,125) 132,000
– PURP (W2) (13,200)
– PPE PURP ((275,000 – 8,100 (1,850,525)
234,500) ÷ 5)
Op expenses – per Q (345,600) (103,800) (117,300)
– prof fees re acquisition (5,000)
– additional deprec on (3,000)
building ((44,000 (OF from a)
÷ 11) x 9/12)
– adj re GW w/o on acq 2,700
(3,600 x 9/12)
– GW impairment (12,000) (584,000)
Tax (37,500) (29,400) (9,225) (76,125)
142,500 36,600
(2) PURPs
Harrier Ltd Buzzard Ltd
% £ £
Sales 100 132,000 54,000
Cost of sales (80) (105,600) (43,200)
GP 20 26,400 10,800
x½ 13,200 5,400
X 40% 2,160

£
Harrier Ltd (20% x 142,500 (W1)) 28,500
Vulture Ltd (30% x 36,600 (W1)) 10,980
39,480

The consolidation schedule was generally prepared correctly with almost all candidates appreciating that
only nine-twelfths of the acquired subsidiary’s results should be included. Candidates who produced a
consolidation schedule gained the majority of the more straightforward marks available and then usually
went on to prepare a reasonable consolidated income statement which gained a good number of the
presentation marks available. The most common loss of presentation marks was for abbreviating non-
controlling interest to “NCI”. Very few candidates did their consolidation workings on the face of the group
income statement, which was pleasing.
Most candidates correctly reduced group revenue and cost of sales by the sales made between the parent
and the subsidiary, but some also made the same adjustment with the sales between the parent and the
associate.
The majority of candidates correctly calculated the two provisions for unrealised profit on intra-group sales,
although some then forgot to reduce the group share of the associate’s profit by only the group share of the
associate’s provision for unrealised profit. The non-controlling interest was correctly calculated by the
majority of candidates although a small number used the group percentage holding rather than the non-
controlling interest percentage. Others omitted to state what percentage they were using in this calculation
(or what figure they were multiplying this percentage by) and so lost marks.
Most candidates made a reasonable attempt at the associate calculation, with the most common error being
a failure to adjust for the unrealised profit (or forgetting to adjust it for the associate percentage). A few
candidates omitted to reduce the group share of the associate’s profit by the impairment loss in respect of
the associate, with some charging this instead against the parent’s profits.
The most common mistakes were made in the calculation of the adjustments in the consolidation schedule.
The provision for unrealised profit in respect of the subsidiary’s sales was generally included correctly along
with the goodwill impairment, although a significant number of candidates also deducted the impairment
loss in respect of the associate. A minority of candidates included the goodwill impairment in the
subsidiary’s column instead of in the parent’s. The intra-group sale of a machine was less well dealt with,
with only a minority of candidates getting this completely correct. A significant number of candidates
calculated the correct unrealised profit figure but then went on to add it to cost of sales rather than
deducting it. It was also common to see this figure in the parent’s column rather than the subsidiary’s (ie
seller’s) column. A significant number of candidates failed to appreciate that this transfer had taken place in
the previous year and so there was no need to make an adjustment for the original profit on transfer, but just
for the difference in subsequent depreciation.
The additional depreciation on the fair value adjustment calculated in Part (a) also produced a number of
different answers with only a minority of candidates gaining all the marks for the calculation and for dealing
with the adjustment correctly. Common mistakes were to either not take nine-twelfths of the of one year’s
worth of the adjustment or to use the incorrect adjustment in the first place. The most common error for the
write-off of the goodwill on the unincorporated business was to not adjust by nine-twelfths and/or to add the
resultant figure to operating expenses rather than deducting it.

Question 4
General comments
This question required the preparation of a statement of changes in equity for a single entity. Opening
balances were provided together with a series of events which occurred during the current year. Matters to
be dealt with included the issue of ordinary shares, the payment of ordinary and redeemable preference
dividends, a prior period error, a change from the cost model to the revaluation model (with resultant
reserve transfer) and a change of depreciation method. Some of the matters also impacted on the draft
profit for the period.
Hawk Ltd
Statement of changes in equity for the year ended 31 December 2012
Ordinary Share premium Retained earnings Revaluation

share surplus
capital
£ £ £ £
At 1 January 2012 500,000 125,000 489,700 –
Correction of error – – (100,000) –

Restated balance 500,000 125,000 389,700 –
Issue of ordinary shares 100,000 50,000 – –

Total comprehensive income – – 79,300 400,000
for the year (Ws 1 and 2)
Dividend on ordinary shares – – (120,000) –
(600,000 x 0.20)
Transfer to retained earnings – – 20,000 (20,000)
(W2)
At 31 December 2012 600,000 175,000 369,000 380,000
Workings
(1) Revised profit for the year

£
Draft profit 137,800
Less: Dividend on redeemable preference shares (200,000 x 3%) (6,000)
Depreciation on property (3,000,000 ÷ 20) (150,000)
Adj to depreciation re special plant (W3) (2,500)
Add: Error re opening inventory 100,000
79,300

(2) Revaluation and depreciation transfer

£
Valuation on 1 January 2012 3,000,000
Carrying amount of property on 1 January 2012 (3,370,000 – 770,000) 2,600,000
400,000
Annual transfer ÷ 20 20,000
(3) Depreciation adjustment re special plant

£
Depreciation charged in 2012 (30,000 x 25%) 7,500
Depreciation on new basis (30,000 ÷ 3) 10,000
Additional charge needed 2,500
Most candidates made some kind of attempt at this question although full presentation marks were only
gained by a minority of candidates. The majority of candidates correctly included the brought forward figures
for ordinary share capital and share premium. The brought forward figure for retained earnings was
sometimes adjusted by the correction of the error rather than showing this adjustment as a separate line on
the statement of changes in equity itself. Where the correction of the error was made on the statement it was
often added rather than deducted. Only a few candidates showed a restated balance after this adjustment
had been made.
The majority of candidates showed the correct entries for the share issue in the period, and for the dividend
payment made. Candidates generally included the profit figure in the statement although only a minority
correctly identified this as being part of “total comprehensive income”. The adjustments to profit were not
generally well dealt with, with probably only around half of candidates making some of the adjustments. Of
those candidates that did attempt to make adjustments to profit the most common errors were to make the
adjustments in the wrong direction (ie added rather than deducted or vice versa). Some candidates made
their adjustments on the face of the statement of changes in equity, instead of in a separate working. Only a
small minority of candidates included the redeemable preference shares in the statement of changes in
equity.
The revaluation surplus arising in the year was generally calculated correctly, although this was almost
always presented on a separate line to “total comprehensive income” usually being described as a
revaluation, highlighting a lack of understanding in this area. Most candidates who arrived at the correct
revaluation figure also arrived at the correct transfer between the revaluation surplus and retained earnings,
reflecting the “excess” depreciation for the year.
Only a minority of candidates correctly calculated the depreciation adjustment for the special plant and went
on to adjust profit correctly for it. A number of candidates calculated one or other of the old and new
depreciation figures but then often failed to make the resultant adjustment in the correct direction.

Financial Accounting and Reporting – Professional Level – September 2013
Question 1
General comments
This question was a question testing the preparation of an income statement and statement of financial
position from a trial balance. A number of adjustments were required to be made, including a downward
revaluation, share issues, research and development expenditure, foreign exchange, the incorrect treatment of
a lease and the clearing of a suspense account.
Part b) asked for the UK GAAP differences in relation to the treatment of the revaluation model.
Part c) featured the concepts requirement which asked about the two fundamental qualitative characteristics
and how they are applied to intangible assets.
Temera Ltd – Statement of financial position as at 31 March 2013

£ £
ASSETS
Non-current assets
Property, plant and equipment (350,000 + 384,000 (W6)) 734,000
Intangible assets (63,250 + 6,540)(W3 & W4) 69,790
803,790
Current assets
65,100
Equity
Ordinary share capital (W2) 400,000
Revaluation surplus (100,000 – 50,000 (W6)) 50,000
Equity 771,140
Current liabilities
Trade and other payables (30,450 – 200 (W7)) 30,250
Taxation (56,000 + 11,500) 67,500
97,750
Copyright © ICAEW 2013. All rights reserved Page 1 of 21

Temera Ltd – Income statement for the year ended 31 March 2013
£
Revenue 912,500

Other operating costs (W1) (92,310)
Property impairment (W6) (57,500)

Income tax (67,500)
W1 Expenses
Cost of Admin Other
sales expenses operating
costs
£ £ £
Trial balance 381,250 181,300 34,500
Closing inventories (36,200 + 4,200(W7)) (40,400)
R&D expenditure (W3) 46,000
R&D amortisation (W3) 5,750
Patent amortisation (W4) 2,760
Profit on sale of patent (6,500)
Depreciation charge – property (W6) 16,000
Exchange difference adj (W7) (200)
Building lease 10,000
372,550 197,300 92,310

W2 Share capital & premium Share Share

capital premium
£ £
Trial balance 323,000 67,500
Share issue adjustment (10,000 x 30p) (3,000) 3,000
320,000 70,500
Bonus issue (320,000 / 4) 80,000 (70,500)
At 31 March 2013 400,000 –
W3 Research & development expenditure

£ £
Less amounts charged to profit & loss
Prior to 1 July 2012 28,000
Staff training 8,000
Promotional spend 10,000
(46,000)
Intangible asset at 30 November 2012 69,000
Amortisation (69,000 / 4yrs x 4/12) (5,750)
63,250
W4 Patents
£ £
Cost – b/fwd 15,000
Disposed in year (2,400)
12,600
Accumulated amortisation b/fwd (4,500)
Amortisation charge for year

On patents held all year (12,600 / 5yrs) 2,520
On patent disposed of (2,400 / 5yrs x 6/12) 240
(2,760)
Acc. amortisation on patent disposed of
(2,400 / 5yrs x 30/12) 1,200
Carrying amount at 31 March 2013 6,540
W5 Suspense account
£
Disposed of patent (6,500 + (2,400 – 1,200)) 7,700
Reverse lease liability (70,250)
Reverse lease finance charge 5,250
Reverse lease payment (10,000)
At 31 March 2013 –
W6 Property, plant and equipment Buildings

£
Land & buildings
b/fwd 630,000
Accumulated depreciation b/fwd (122,500)
507,500
Valuation at 1 April 2012 400,000
Revaluation (107,500)
Balance on revaluation surplus re buildings (100,000 / 2) 50,000
Excess to profit or loss 57,500
–

£
Valuation at 1 April 2012 400,000
Depreciation charge for year (400,000 / 25yrs) (16,000)
384,000
W7 Foreign exchange £
Translation at 1 January 2013 (5,000 x 0.84) 4,200
Translation at 31 March 2013 (5,000 x 0.80) (4,000)
200
£
Bonus issue (80,000 – 70,500) (W2) (9,500)
321,140
Most candidates made a reasonable attempt at this part of the question, with the vast majority preparing a
complete statement of financial position and income statement. Presentation was reasonable, although a
significant number of candidates lost marks by failing to include appropriate sub-totals on their statement of
financial position, which is a common omission in the Financial Accounting paper also.
Depreciation on the revalued building was generally correctly calculated by most candidates as was the
adjustment to closing inventory, although this wasn’t always correctly carried through to both the income
statement and statement of financial position.
The allocation of costs spent on research and development was generally attempted by most candidates,
although a common error was to assume that the staff training could be capitalised. The number of months
that amortisation on the capitalised development expenditure should have been charged seemed to cause a
significant number of candidates a problem.
Almost all candidates did use the recommended “costs matrix” when allocating costs between the three
expense categories and, on the whole, it was possible to match figures on the face of the financial statements
to workings. It was very noticeable that those candidates who did not use this format tended to produce
disorganised workings (often split between the face of the income statement and /or a number of separate
workings) which were difficult to follow and therefore might have lost marks. Far fewer candidates seemed
capable of producing a clear working for intangible assets which resulted in them repeating calculations. A
significant number of candidates would produce a working but then do nothing with the figures, or only carry
them through to one side of the double entry, for example show in the cost matrix, but not include them in the
asset carrying amount.
Very many candidates dealt correctly with the share issues during the year. The most common error made
was to credit share premium and debit share capital with the nominal value of the cash issue of shares, as
opposed to the premium. Most candidates then reduced their share premium account to zero and charged
the remainder of their (own figure) bonus issue to retained earnings and provided a clear working for retained
earnings carried forward, tying in to their statement of financial position figure.
Most candidates correctly calculated that the buildings had suffered a downwards revaluation of £107,500
(although a few omitted to take into account opening accumulated depreciation in their calculations). Many
then correctly charged only £50,000 of that to the revaluation surplus (recognising that the other £50,000 in
the revaluation surplus related to land), but others used the whole revaluation surplus. Almost all candidates
then charged the balance to the income statement.
 Incorrect calculation of the carrying amount of the patent by failing to calculate correctly, or omitting
completely, the accumulated amortisation of the disposed asset for the 2.5 years held.
 Failing to calculate the profit on sale of the patent, or when it was calculated either forgetting to include
it in the statement of comprehensive income or including it in the wrong place (for example as part of
retained earnings).

 Failing to include the additional £11,500 tax charge within the statement of comprehensive income.
 Continuing to treat the lease as a finance lease, instead of as an operating lease (even though in
Question 3 almost all candidates recognised that where the length of the lease is significantly less than
the useful life of an asset the lease will be an operating lease). It was therefore very common to see a
finance charge of £5,250 on the face of the income statement and a lease liability on the statement of
financial position.
 Correctly calculating a foreign exchange gain of £200, but valuing closing inventory in relation to this at
closing rate instead of at historic rate.
Despite the specific requirement to provide a working showing how the suspense account had been cleared,
this appeared only rarely, with many candidates providing journal entries relating to this scattered throughout
their answer, which were not asked for.
(b)
UK GAAP values PPE based on a current value model (existing use model), under IFRS fair value includes
current market value which is often higher than EUV as it considers alternative uses.
FRS 15 under UK GAAP specifies that the maximum period between valuations should be five years and
interim valuations should be three year. IFRS does not specify a maximum period.
UK GAAP requires any consumptions of economic benefit to be recognised straight in the income statement
rather than against a previous revaluation surplus. It is not clear from the scenario whether the downward
valuation of Temera Ltd’s land and buildings are caused by a consumption of economic benefits. However, if
this is the conclusion then the full £107,500 would be recognised in profit or loss for the period. IFRS has no
such restriction.
This was a very straightforward requirement but very few candidates gained a reasonable mark in it.
Answers to this were disappointing, indicating that many candidates had not committed these differences to
memory. Those who had learnt these differences scored well easily picking up two or even the maximum of
three marks.
Worryingly, some candidates thought that impairments were never charged to the revaluation surplus under
UK GAAP and a number of candidates had very confused ideas about when reserve transfers are
allowed/required for revalued assets. Others thought that assets are not reviewed for impairment under UK
GAAP. Some candidates also wasted time by discussing differences that did not specifically relate to
revalued assets.

(c) Qualitative characteristics

The choice of the revaluation model as a measurement model in IAS 38 Intangible Assets provides relevant
information by showing up to date values. This will assist users understanding of what the entity’s underlying
assets are actually worth.
However, to assist with comparability if the revaluation model is applied, all valuations must take place at the
same time for a class of intangible assets. However, as not all intangible assets can be revalued because
there is no active market for the asset it is not always possible to apply the revaluation model to the entire
class of assets and therefore comparability may be compromised.
Although the revaluation model provides more relevant information to users this information is generally seen
as less faithful than the cost model. The cost model is based on historical costs which are not the most
relevant costs on which to base future decisions. However, historic cost is based on fact and is therefore a
faithful representation.
The strict recognition criteria in IAS 38 sets out what can be included as part of the cost of an intangible asset
and this aids verifiability of the final figure.
IAS 38 contains rigid and robust rules for the capitalisation of intangible assets which means that financial
statements of different companies can be compared as they are prepared on the same basis.
IAS 38 also facilitates comparability between companies by requiring disclosure of accounting policies in
respect of, for example, amortisation policy and measurement bases. It also requires the disclosure of both
brought forward and carried forward figures aiding comparability between consecutive years.
IAS 38 allows comparability between the cost and revaluation model, to ensure that companies financial
information can be compared no matter which measurement basis is applied. This comparability is achieved
by requiring equivalent cost information to be disclosed under the revaluation model.
To improve understandability IAS 38 requires disclosures to be provided by each class of intangible asset.
This provides information on what types of intangible assets have been purchased or sold during the year.
The table format which is required by IAS 38 also assists users’ understandability by showing movements
during the year.
This part of the question was particularly badly answered by almost all candidates. Too many candidates
simply wrote out what they knew, or had looked up in the Open Book text, about relevance and faithful
representation without any link to the treatment of intangible assets. Others just wrote about how to account
for intangible assets, with no link provided between that and the qualitative characteristics.
The majority of candidates struggled to set out more than one or two relevant points and therefore very few
candidates even gained half marks in this part of the question.

Question 2
General comments
This question required the preparation of a statement of cash flows from a draft statement. Movements in
relation to property, plant and equipment involving a non-cash asset and impairment, both a share and bonus
issue had been made, along with a dividend payment.
(a) Radazul plc
Statement of cash flows for the year ended 31 March 2013

£ £
Net cash from operating activities (11,935)
Proceeds from disposal of property, plant and equipment 46,000
Proceeds from issue of ordinary share capital (165,000 x 2) 330,000
Cash and cash equivalents at beginning of period (24,700)
Cash and cash equivalents at end of period (34,000)
Workings
(1) Cash from operations

£
Draft cash generated from operations (42,235)
Equipment impairment (9,200 – 4,700) 4,500
Adjust proceeds on disposal of machinery by carrying amount (to give profit) 38,700
Adjustment for trade and other payables ( – 4,900 – 8,000) (12,900)
Cash generated from operations (11,935)
Deduct ½ for any incorrect bracket convention

(2) PPE
£ £
B/d 621,500 Disposal 38,700
Additions – non-cash 8,000 Impairment 4,500
Additions (β) 333,615 Depreciation 111,475
C/d 808,440
963,115 963,115
(3) Share capital and premium
£ £
B/d 120,000
Non-cash issue (β) 57,000
C/d (342,000 + 165,000) 507,000 Cash issue (165,000 x £2) 330,000
507,000 507,000
£ £
Dividends paid (β) 39,750 Net movement 96,750
Non-cash issue (W3) 57,000
96,750 96,750
There were some very good attempts at this question, with a significant number of candidates using the
correct figures for proceeds from disposals of property, plant and equipment and proceeds from share issue,
and correctly calculating cash paid for the purchase of property, plant and equipment and dividends paid
(usually via T-accounts). Where marks were lost on the better scripts they were generally lost on presentation
(with some candidates producing only extracts, not a full statement of cash flows) or on the calculation of net
cash from operating activities. A few candidates made no attempt to calculate a correct figure for dividends
paid and left the original figure in their statement of cash flows.
The area that most candidates struggled with was the adjustments needed to cash from operations where,
although most candidates did adjust for the impairment, far fewer dealt correctly with the disposal and the
adjustments relating to the closing interest accrual (which many dealt with by showing interest paid on the face
of the statement of cash flows). Many either ignored the adjustment relating to the plant purchased on credit or
made the adjustment the wrong way around.
A number of candidates lost easy marks by using abbreviations on the face of the statement of cash flows
(most commonly PPE and NCI) and by using the wrong bracket convention particularly when dealing with
outflows of cash. Some also showed the right figure for the shares issued for cash in their working but then
failed to include this figure on the face of the statement. A number of candidates failed to use brackets for
opening and closing cash and cash equivalents.

(b)
UK GAAP (FRS 1) has a narrower definition of “cash” compared with the IFRS term of “cash and cash
equivalents”. Instead UK GAAP deals with “cash equivalents” as part of “management of liquid resources”.
UK GAAP requires the statement of cash flows to be prepared under nine headings compared with the
three under IFRS.
UK GAAP is more restrictive on where certain items should be reported as compared with IFRS. For
example, interest paid should be reported under “returns on investments and servicing of finance”. IFRS
permits interest paid to be reported under any of the three main headings.
Answers to this question on UK GAAP differences were much better than those to Part (b) of Question 1,
indicating that candidates had learnt these differences. Most candidates knew that an IFRS statement of
cash flows used only three headings, with UK GAAP having nine, and that there is more flexibility under
IFRS. Hence many candidates scored a maximum of two marks. A worrying minority of candidates thought
that “cash” and “cash equivalents” were simply different terms for the same thing – not that “cash” is a
narrower definition.

Question 3
General comments
Part (a) of this question required candidates to explain the financial reporting treatment of four accounting
issues, given in the scenario. The four issues covered a convertible bond, a jointly controlled entity, a
lease incentive and a held for sale asset.
Part (b) required candidates to revise two figures extracted from the draft consolidated financial
statements for the adjustments needed as a result of their answer to Part (a).
Part (c) required an explanation of any ethical issues arising from the scenario.
Centellas plc
(a) IFRS accounting treatment
(1) Convertible bonds
The convertible bonds are a compound financial instruments per IAS 32, Financial Instruments:
Presentation and have both an equity and a liability component which should be presented separately at
the time of issue. IAS 32 requires that the substance of the transaction be reflected, focusing on the
economic reality that in effect two financial instruments have been issued.
The liability component should be measured first at the present value of the capital and interest payments.
The discount rate used should be the effective rate for an instrument with the same terms and conditions
except for the ability to convert to shares.
31 March Cash flow DF PV

£ @ 9% £
2013 180,000 1/1.09 165,137
2014 180,000 1/1.09² 151,502
2015 3,180,000 1/1.09³ 2,455,543
Liability component 2,772,182
Equity component (Bal fig) 227,818
Total 3,000,000
The liability should be measured at £2,772,182 and the equity component should be calculated as the
residual amount and measured at £227,818.
The equity element will remain unchanged.
The interest expense should be calculated at 9% of the liability component.
1 Apr 2012 Interest (9%) Payment (6%) 31 Mar 2013

£ £ £ £
2,772,182 249,496 (180,000) 2,841,678
An adjustment is required to increase the finance costs by £69,496 (249,496 – 180,000).

(2) Jointly controlled entity
Centellas plc and Bermeja Ltd each own 50% of the share capital of Vidrio Ltd which indicates that the
investment should be recognised as a jointly controlled entity and not as a subsidiary as Centellas plc
does not have control. Both companies hold an equal number of shares and there is contractual
agreement in place that they will make all the major operating and financial decisions concerning Vidrio
Ltd jointly.
IAS 31, Interest in Joint Ventures offers a choice of recognising the share in Vidrio Ltd using equity
accounting or proportionate consolidation, however Centellas plc’s accounting policy choice is to apply the
equity method.
Under equity accounting Centellas plc will initially show its investment in Vidrio Ltd at cost of £100,000.
This will then be adjusted each period by Centellas plc’s share of Vidrio Ltd’s retained earnings and
reduced by any impairments.
The investment in Vidrio Ltd is shown as a single line in both the consolidated statement of financial
position and the consolidated income statement.
As Vidrio Ltd was newly incorporated the cost of the investment was equal to the fair value and therefore
no goodwill arises at acquisition.
The investment in Vidrio Ltd should be shown at £220,000 ((200,000 + 240,000) x 50%) in the
consolidated statement of financial position and income from joint venture should be £120,000 (240,000 x
50%). As it has currently been treated as a subsidiary 100% of profits will have been included so
consolidated profit should be reduced by £120,000.
(3) Lease incentive
The new lease agreement runs for five years out of the building’s estimated 25-year life. Therefore, it can
be assumed that this is an operating, rather than a finance lease.
The initial rent-free period appears to constitute an incentive to enter into the agreement and therefore it
should be accounted for under SIC 15, Operating Leases – Incentives.
The required treatment of the rent-free period by Centellas plc, the lessee, is to recognise the aggregate
benefit of the incentives as a reduction of rental expense over the lease term, on a straight-line basis.
The total amount payable under the lease agreement of £57,000 ((£1,000 x 12 x 5yrs) – (£1,000 x 3))
should be spread evenly over the 5-year period: a charge of (£57,000/60 months) = £950 per month
should be recognised.
Therefore, 9 months x £950 = £8,550 should be recognised as an expense in the year ended 31 March
2013.
The amount actually paid in the year was £6,000 (ie six payments of £1,000). Therefore, a payable for the
difference, £2,550, should be recognised in Centellas plc’s current liabilities at
31 March 2013 and profit should be reduced by £2,550.

(4) Held for sale asset
When the carrying amount of a non-current asset will be recovered principally through sale, rather than its
continuing use, the asset must be classified as held for sale in accordance with IFRS 5, Non-Current
Assets Held for Sale and Discontinued Operations. This reclassification generally occurs at the time the
decision has been made to sell the asset.
For an asset to be classified as held for sale it must meet detailed criteria:
 The asset must be available for immediate sale in its current condition; and
 The sale must be highly probable that it’ll take place.
For a sale to be highly probable:
 Management must be committed to a plan to sell the asset, management are advertising the sale
and therefore it can be assumed that it is planning to sell the asset.
 There must be an active programme to find a buyer, here management are actively marketing the
asset by advertising in national trade magazines.
 The asset must be marketed at a price that is reasonable based on its current fair value, here the
advertised price is £62,500 which is reasonable since its fair value is £62,000.
 The sale should be expected to take place within one year of the date of classification.
 It is unlikely that there will be significant changes to the plan or that the plan will be withdrawn.
As Centellas plc appears to meet the above criteria, it would appear that the machine does meet the held
for sale classification criteria.
The machine should therefore be measured at the lower of its carrying amount, being £64,750 (W) and its
fair value less costs to sell of £60,500 (£62,000 – £1,500). However, as the machine is measured under
the valuation model it should be revalued at fair value under IAS 16, Property, Plant and Equipment
immediately before its classification to held for sale. Hence, £2,750 (W) should be recognised against the
revaluation surplus.
Once classified as held for sale the costs to sell should then be recognised as part of profit or loss for the
period, ie £1,500.
Once the asset is held for sale it is no longer depreciated and should be shown separately in the
Working
Cost/valuation Revaluation
£ surplus £
Carrying amount at 31 Mar 2010 72,000
Revalued amount 31 Mar 2010 84,000 12,000
Acc dep (84,000/12yrs x 2yrs) (14,000)

31 March 2012 70,000
Dep in yr (84,000/12yrs x 9/12) (5,250)

64,750
Fair value (62,000) (2,750)
9,250
The answers to this part of the question were of a good standard with virtually all candidates including
narrative explanations as well as the relevant calculations.
Most candidates correctly identified the four underlying issues as a compound financial instrument, a
jointly controlled entity, an operating lease and a held for sale asset, and were able to explain how they
should be accounted for. Some marks (though not many) were lost on errors in the calculations but more
were lost where candidates, after an initial explanation, then reduced their answer to a series of journal
entries. Although there were specific marks allocated to key calculations and to the adjustments using
those figures in Part (b), there were no marks for journal entries in lieu of narrative explanations. Marks
are only ever awarded for journal entries where these are specifically required by the question.

The calculations for the convertible bonds, joint venture and operating lease were generally correct. With
regard to the asset held for sale most candidates calculated the carrying amount correctly but very few
realised that as the asset was carried at value a final revaluation should have been made prior to
calculating the impairment. Almost all candidates calculated a single impairment down to fair value less
costs to sell and charged that to the revaluation surplus.
Other errors made included the following:
 Miscalculating the present value of the liability component of the convertible bond (a minority of
candidates only).
 Not recognising that there are two possible methods for accounting for a jointly controlled entity.
 Not recognising the rent-free period on the operating lease as an incentive per SIC 15.
 Miscalculating the amount already recognised as an expense on the operating lease as nine
months at £1,000 per month, as opposed to six months at that amount (even where their answer
referred earlier to the three month rent-free period).
 Charging depreciation on the held for sale asset for the wrong number of months.
 Not stating the net effect of any corrections to be made – so, for example, on the convertible bond,
many calculated that a total finance charge of £249,496 was needed but failed to state that
therefore an adjustment of £69,496 was required as £180,000 had already been recognised.
(b)
Centellas plc
Profit before tax Equity

(before NCI)
£ £ £
As stated 690,000 1,260,400
(1) Equity element – 227,818
(1) Finance cost adjustment (69,496)
(2) Share in JV – (120,000)
(3) Lease incentive (2,550)
(4) Depreciation (5,250)
(4) Costs to sell (1,500)
(4) Revaluation surplus – (2,750)
(78,796) (78,796)
TOTAL 491,204 1,406,672
Most candidates did attempt to make the relevant adjustments although a minority just calculated a
revised figure for profit and ignored equity. It appeared that most candidates had built up their answer to
this part alongside their answers to Part (a), which is by far the most efficient approach. A number of
errors were made because candidates failed to read the question to identify what entries had already been
made to the draft financial statements.

(c) Ethical issues

The finance director, Anton Caro, qualified over 40 year ago, however as an ICAEW chartered accountant
he is still bound by the ICAEW Code of Ethics. ICAEW chartered accountants must always abide by the
spirit of the five fundamental ethical principles. One of these is professional competence and due care.
Anton is obliged to maintain his professional knowledge and skills at an appropriate level; as the finance
director of a listed company the appropriate level would be an in-depth knowledge of current financial
reporting standards. The fact that Anton is due to retire next year is not an excuse not to maintain his
professional knowledge and not act in accordance with the Code of Ethics – that fact is irrelevant and
appropriate action should be taken by Anton to improve his level of technical knowledge. He should also
improve his knowledge of his obligations in respect of the ethical standards.
There are a number of errors in the draft financial statements, all of which reduce profit. This may be a
coincidence but it seems unlikely that this is the case and instead Anton is under pressure to deliver a
healthy profit, and has instead acted without integrity, as well as having a self-interest threat since his
bonus is linked to the reported profit.
You face a number of ethical issues, not least the question of whether the mistakes were deliberate or a
lack of knowledge on Anton’s part. There is also a potential self-interest threat as the post of finance
director has been mentioned if the right results are delivered.
You should ignore the possibility of self-interest and discuss the adjustments with Anton and remind him of
his professional responsibilities to ensure that accounting standards are correctly followed.
Amendments must be made to the consolidated financial statements and if Anton refuses to make them,
you should discuss the matter with the other board members.
If Anton continues to try to dominate and exert influence on you to misstate the consolidated financial
statements then it would be appropriate for you to consult the ICAEW ethical handbook and discuss the
matter with the ICAEW confidential helpline.
Most candidates picked up a good number of the available marks for this part, recognising the self-interest
threat to Anton and to themselves (in the role of newly qualified ICAEW Chartered Accountant), the
possible intimidation threat to themselves from Anton, and Anton’s possible lack of professional
competence and due care. However, a number of candidates failed to recognise that they were acting
within a company, as the financial accountant, and not as part of an audit team. It was therefore
inappropriate to suggest referring the matter to the ethics partner or to discuss approaching the audit with
increased professional scepticism. Most candidates did recognise the possible need to contact the
ICAEW confidential helpline if they were unable to resolve the issues via discussion with Anton or with the
other directors, but there was a tendency to be very quick to suggest that their own resignation might be
the best solution. A worrying small minority of candidates thought the issue was one of money laundering.

Question 4
General comments
This question mixed several discrete topics. Revised extracts from the consolidated financial statements
were required to be prepared following adjustments for the acquisition of a subsidiary, with contingent
consideration, an associate and revenue recognition issues. The associate included trading with the
parent company. Revenue adjustments were required for contract revenue and a sale and repurchase
agreement.
Part b) required candidates to distinguish between the single entity concept and the parent’s relationship
with an associated company.
(a) Gumar Ltd

(i)
Consolidated statement of financial position at 31 March 2013 (extract)
Non-current assets
Property, plant and equipment (987,500 + 210,000 + 350,000) 1,547,500
Goodwill (27,800 + 54,500(W1)) 82,300
Current assets
Inventories (62,900 – 510 (W5)) 62,390
Trade and other receivables (161,300 + 28,200 + 20,000) 209,500
Borrowings (200,000 + 500,000) 700,000
Contingent consideration (85,000 x 1.04) 88,400
Contingent liability 32,000
Current liabilities
Trade and other payable (75,000 + 12,200) 87,200
Workings
(1) Goodwill
£ £
Consideration:
Cash 100,000
Contingent consideration at fair value 85,000
185,000
Non-controlling interest at fair value 35,000
220,000
Less: Fair value of net assets (W2) (165,500)
Goodwill 54,500

(2) Net assets of Abrigo Ltd

31 March 2013 At Post
acquisition acquisition
£ £ £
Retained earnings 96,000 72,500
Goodwill adjustment (35,000) (40,000)
Contingent liability (32,000) (32,000)
194,000 165,500 28,500
(3) Investment in associate – Caleta Ltd

£
Share of post acquisition retained earnings ((63,400 – 25,600) x 30%) 11,340
Less: impairments to date (2,000)
114,340
(4) Share of profit of associate – Caleta Ltd

£
Share of profit for the year (45,200 x 30%) 13,560
Less: PURP (W5) (510)
Less: impairment in year (2,000)
11,050
(5) PURP
% £
SP 100 17,000
Cost (80) (13,600)
GP 20 3,400
1
X /2 1,700
Caleta Ltd – 1,700 x 30% = £510
(a) (ii) Revised figure for consolidated profit

£
Draft profit before tax 589,200
Abrigo Ltd (W2) 28,500
Unwinding of discount – contingent consideration (88,400 – 85,000) (3,400)
Share of associate (W4) 11,050
Reverse profit (150,000)
Contract revenue 20,000
495,350
Most candidates dealt well with the groups aspect of this question, at least as far as the “standard” workings
were needed. Almost all candidates produced net assets and goodwill workings for the subsidiary acquired
during the year and an investment in associate working (calculating the figure for the consolidated
statement of financial position) for the associate. However, many then also felt the need to produce
workings for retained earnings and for non-controlling interest when these were not needed. Conversely,
many failed to calculate the share of profit of the associate for the consolidated income statement – a figure
that was needed in order to revise consolidated profit.
Common errors in these calculations included the following:
 Discounting the contingent consideration further even though it was stated at fair value in the
question.
 Calculating the non-controlling interest at share of net assets at acquisition, instead of at fair value
per the group’s stated accounting policy.
 Dealing incorrectly with the subsidiary’s own acquired goodwill in the net assets table (often getting
the year end and acquisition figures the wrong way round), or failing to adjust for this at all.
 Reducing the investment in associate figure by the provision for unrealised profit.
 Not taking only the group share of the unrealised profit with the associate to the share of profit of the
associate (or directly to the adjusted consolidated profit calculation).

Most candidates therefore included in their corrected extracts from the consolidated statement of financial
position figures for goodwill (with most correctly excluding goodwill from the subsidiary’s own statement of
financial position) and investment in associate. However, a significant number failed to add in the figures for
property, plant and equipment, trade and other receivables and trade and other payables for the subsidiary
acquired during the year, not appreciating that these figures had not been included in the draft consolidated
statement of financial position. Some who did add these in failed to show their workings for this, so if
calculation errors were made it was not possible to give credit for doing this. Others failed to reduce group
inventories by the group share of the unrealised profit with the associate, even when this had been
calculated. Others reduced inventories by 100% of this adjustment, as opposed to the group share. It was
also rare to see a figure for contingent consideration taken to the consolidated statement of financial
position, even where this had been included at fair value in the goodwill calculation.
With regard to the other adjustments (Items (3) and (4)) most candidates wrote how they would account for
these issues (as if this had been an “explain” type of question), but few actually put these adjustments
through to their consolidated statement of financial position, although a few more did revise consolidated
profit before tax for these. Where the requirement is to “prepare” or to “calculate” candidates need to be
aware that no marks are available for narrative explanations.
Most candidates attempted to revise consolidated profit before tax but approaches to this were sometimes
haphazard. The most efficient approach was to complete this part of the question (Part (ii)) alongside Part
(i). The most common “error” therefore was to fail to make a corresponding adjustment in Part (ii) for every
item dealt with in Part (i). In particular, many candidates failed to adjust consolidated profit before tax for the
subsidiary’s profit for the year, even though almost all candidates had calculated this in a net assets table.
(b)
An associated company is not part of a group, therefore the single entity concept that applies between a
parent and its subsidiaries does not extend to associated companies. This is because the parent entity only
has significant influence over an associated company rather than control.
Transactions between group companies and an associated company are not cancelled on consolidation as
an associated company is not part of the group. However any unrealised profit on these transactions
should be eliminated.
Answers to this part were very poor, with almost all candidates answering the question in relation to a
parent entity and its subsidiary, instead of in relation to a parent entity and its associate. Such answers
almost always scored zero marks. Others described how to account for an associate rather than dealing
specifically with how to treat trading between a parent and its associate.

Question 5
General Comments
This question required the preparation of a consolidated income statement and extracts from the
consolidated statement of changes in equity (for retained earnings and the non-controlling interest). The
group had two subsidiaries, one of which was disposed of during the year. Fair value adjustments were
required on acquisition of one of the companies. Inter-company trading took place during the year between
the parent and subsidiary.
Gaviota plc
Consolidated income statement for the year ended 31 March 2013

£
Revenue (W1) 1,663,170
Profit from operations (W1) 819,370
Profit for the period from continuing operations 599,150
Profit for the period from discontinued operations (W2) 165,310
Owners of Gaviota plc (β) 681,600
764,460
Consolidated statement of changes in equity for the year ended 31 March 2013 (extract)
Non-
controlling
interest
£
Balance at 1 April 2012 (W5) 428,675
Eliminated on disposal of subsidiary (W2) (214,160)
Dividends (350,000 x 60p x 25%) (52,500)
Balance at 31 March 2013 (β) 244,875

Workings

Gaviota plc Socorro Ltd Adj Consol
£ £ £ £
Revenue 1,265,600 482,570 (85,000) 1,663,170
Cost of sales – per Q (538,900) (136,700) 85,000 (594,850)

– PURP (W6) (4,250)
Op expenses – per Q (168,500) (76,450) (248,950)

– FV deprec (160,000/40yrs) (4,000)
Investment income 197,500 40,000

– Socorro Ltd (350,000 x 60p x 75%) (157,500)
Tax (192,800) (67,420) (260,220)

198,000
(2) Profit from discontinued operations (Ramblo Ltd)

£ £
Goodwill at acquisition 66,850

(46,850)
Less: Carrying amount of net assets at disposal
Net assets at 31 March 2013 563,200
Less: Profit since 1 Jan 2013 (111,200 x 3/12) (27,800)
(535,400)
Add back: Attributable to non-controlling interest (535,400 x 40%) 214,160
Add: Profit for the year (111,200 x 9/12) 83,400
165,310

£
Socorro Ltd (25% x 198,000 (W1)) 49,500
Ramblo Ltd (40% x 83,400 (W2)) 33,360
82,860
(4) Socorro Ltd – Net assets

(Proof only)
31 Mar 2013 1 Apr 2012 At acq
£ £ £
Share capital 350,000 350,000 350,000
Retained earnings (W) 489,500 497,500 152,400
FV adjustment 160,000 160,000 160,000
FV – depreciation (4,000 x 4yrs) (20,000) (16,000) –
Total 979,500 991,500 662,400
W (489,500 – 202,000) + (350,000 x 60p) = 497,500

(5) Non-controlling interest brought forward
Socorro Ltd £ £
NCI at acquisition (662,400 (W4) x 25%) 165,600
Post acquisition ((991,500 (W4) – 662,400) x 25%) 82,275
247,875
Ramblo Ltd
NCI at acquisition ((300,000 + 59,000) x 40%) 143,600
Post acquisition ((263,200 – 111,200 – 59,000) x 40%) 37,200
180,800
428,675
(6) PURP
% £
SP 125 85,000
Cost (100) (68,000)
GP 25 17,000
1
X /4 4,250
(7) Non-controlling interest carried forward (for proof only)
Socorro Ltd
NCI at acquisition 165,600
Post acquisition ((979,500 (W4) – 662,400) x 25%) 79,275
244,875

Most candidates made a good attempt at preparing the consolidation schedule and correctly excluded the
subsidiary sold during the year. Candidates who produced this schedule generally gained most of the
straightforward marks for adjustments such as the inter group trading and the related PURP, with many
candidates producing a completely correct consolidation schedule.
Virtually all candidates also prepared a reasonable consolidated income statement gaining the relevant
presentation marks. The most common loss of presentation marks was for abbreviating the non-controlling
interest to “NCI” and/or including the profit from discontinued operations before tax or after the non-controlling
interest. Very few candidates did their consolidation workings on the face of the income statement which was
pleasing.
As mentioned most candidates correctly calculated the PURP although occasionally this was deducted from
revenue rather than added to cost of sales and sometimes it was included in the wrong column. A pleasing
number of candidates also calculated the adjustment to depreciation correctly although slightly fewer made
the correct adjustment to remove inter group dividends.
Virtually all candidates attempted to calculate the profit on disposal although few managed to arrive at the
correct figure. The most common errors here were deducting the total goodwill rather than the unimpaired
goodwill, failing to adjust closing net assets for the profit made after the disposal (candidates frequently used
the wrong number of months and/or added the profit rather than deducting it) and multiplying the profit up to
disposal by the parent company’s percentage holding.
As expected the extract to the consolidated statement of changes in equity was not as well dealt with and few
candidates gained the relevant presentation mark. However most candidates did attempt to include at least
some of the relevant figures for the disposal adjustment, the non-controlling interest’s share of profit and the
dividend. However a number of candidates lost easy markings for lack of consistency ie by not taking the
figures already calculated in the consolidated income statement and the disposal calculation.
Only a minority of candidates calculated the brought forward non-controlling interest figure correctly and few
produced clear, structured workings to support this figure. However, most candidates made some attempt to
calculate either non-controlling interest brought forward or carried forward and earned some marks for this.
Unfortunately, candidates too often produced messy and unstructured workings with little or no audit trail,
which made awarding marks almost impossible. Few candidates seemed to realise that the easiest way to
arrive at this figure was by calculating the net assets of the two subsidiaries at the start of the year. Even
candidates who did attempt this rarely made the right adjustments to back out current year profit and
dividends and recognise the fair value uplift and related impact on accumulated depreciation.

Financial Accounting and Reporting - Professional Level – December 2013
Question 1
General comments
Part (a) of this question required candidates to revise a draft income statement and statement of financial
position for a number of adjustments. The amendments were in relation to the receipt of a government grant, a
held for sale asset, the recoverability of receivables, irredeemable preference shares and dividend thereon, an
adjusting subsequent event, an overprovision of income tax from the previous year, a provision for warranty
costs and an accrual. Part (b) required an explanation of any ethical issues arising from the scenario and the
action to be taken. Part (c) required candidates to identify and describe the elements of the financial
statements which are relevant to the statement of financial position, with reference to the treatment of the
irredeemable preference shares and the provision.
Dedlock Ltd
(a) Revised financial statements
£ £
ASSETS
Non-current assets
Property, plant and equipment (567,800 – (20,000 – 8,500)) 556,300
Current assets
Inventories 278,500
Trade and other receivables (105,200 – 55,700 – 990 (W2)) 48,510
342,810
Non-current asset held for sale 7,550
350,360
Equity
Share premium 75,000
Equity 669,506
Deferred income (W3) 6,400
106,400
Current liabilities
Taxation 26,000
130,754

Income statement for the year ended 30 June 2013

£
Revenue (2,876,500 – 10,000 – 3,175) 2,863,325


Finance costs (200,000 x 50p x 5% x 6/12) (2,500)
Income tax (26,000 – 3,175) (22,825)
Workings
£
Per draft 484,100
Less Draft profit for the year (105,100)
Add Revised profit for the year 13,006
Add back finance costs from SCE (already taken off as 2,500
dividend)
394,506
(2) Expenses
Cost of Other Admin
sales operating expenses
costs
£ £ £
Per draft 1,980,900 185,300 579,200
Government grant (W3) (2,000)
Loss on held for sale asset (11,500 – (8,000 – 3,950
450))
Bad debt written off 55,700
Bad debt allowance ((105,200 – 55,700) x 2%) 990
Warranty provision (W4) 15,654
Accrual 5,300
1,998,504 241,990 584,500
Note: Marks were awarded if items were included in different line items in the income
statement provided that the heading used was appropriate.
(3) Government grant

£
Grant as received 10,000
Taken to cost of sales y/e 30 June 2013 x 20% = (2,000)
At 30 June 2013 8,000
Within one year x 20% = (1,600)
After one year (β) 6,400
(4) Warranty provision

Number to repair or replace = 1,000 x 5% x ½ = 25
£
Repaired (25 x £190)/1.07 4,439
Replaced (600,000/1,000 = £600 x 25 x 80%)/1.07 11,215
15,654

Tutorial note
Credit was also given if candidates stated that general provisions are not allowed in respect of receivables
(IAS 39).
Candidates generally performed well on this part of the question. Presentation of the two statements was
generally of a sufficient standard to collect the presentation marks. Candidates should ensure they transfer
their figures into final totals for individual line items in the financial statements.
The majority of candidates identified that there was a non-current asset held for sale and that it should be
separately analysed, although a small minority thought that it should still be considered to be a non-current
asset. Of those candidates who correctly identified that it should be presented as part of current assets, only
a minority presented it separately from current assets generally. A good number of candidates correctly
calculated the relevant figure in both statements.
The two adjustments to trade receivables for bad and doubtful debts were generally dealt with correctly, with
almost all candidates correctly deducting the amount for the customer who had gone into liquidation before
calculating the closing allowance. However, a worrying number of candidates presented the closing
allowance as a liability in the statement of financial position, as opposed to netting it off trade and other
receivables. Property, plant and equipment was stated correctly by a much smaller number of candidates,
with various different adjustments being made to the draft figure.
The classification and valuation of the preference shares proved a particular challenge. A number of
candidates treated this as equity or as a hybrid financial instrument, split between non-current liabilities and
equity. Some even treated this as equity but then went on in Part (b) of the question to state that it should be
treated as a liability. The related finance costs also caused a significant number of candidates an issue, with
only a minority getting the correct figure in the income statement and even less going on to add this figure
back to the profit figure. Where the adjustment was made to retained profits it was more often than deducted,
instead of being added.
Deferred income in respect of grants of £8,000 was correctly calculated by the majority of candidates,
although the split between current and non-current liabilities was often incorrect and sometimes the
adjustment in the income statement was omitted or incorrectly added to expenses, instead of being deducted.
The most common error was to reduce revenue by only the deferred part of the grant, instead of recognising
that the whole grant needed to be removed from revenue and dealt with either as other income or offset to
cost of sales. Weaker candidates tried to apply the netting off method to the grant and make depreciation
adjustments for the asset.
Although the income statement figure for taxation was usually correct, some candidates also showed this
figure as the closing liability, ignoring the overprovision from the previous year.
The warranty provision caused most candidates a problem. Where candidates did attempt a calculation the
figure for the repaired element was usually correct. However, the figure for the replaced element was only
calculated correctly by a minority of candidates (the most common error being not taking into account the
profit margin on the goods under warranty when they were expected to be replaced). Even fewer candidates
then went on to discount the total. A significant number of candidates went on to deduct their calculated
warranty provision from revenue rather than showing it (separately) as a current liability.


(b) Ethical issues
Richard has omitted to adjust for a number of issues, all of which could be said to have a negative effect on
Dedlock Ltd’s financial statements for the year. The correct treatment of the overprovision of last year’s
income tax charge reduces revenue, the reclassification of the irredeemable preference shares increases
debt and all of the other adjustments reduce the profit for the year. Profit for the year before the adjustments
was £105,100. However, after adjustments it has fallen by 80%, to £13,006.
Richard is the finance director of the company, and these are all matters of which he was, or should have
been, generally aware. This calls into question whether Richard has failed to make these adjustments as he
is influenced by the fact that he may get a better price for his shares if the company’s profit is higher, and its
debt lower. This is a self-interest threat and calls Richard’s integrity into question.
Alternatively, if it is that Richard does not understand how to make these adjustments, or that these
adjustments were necessary, then that calls his professional competence into question. ICAEW Chartered
accountants have an obligation to maintain their continuing professional development and they should ensure
that their technical knowledge and professional skills are kept up to date.
Clara faces a number of ethical issues, not least the question of whether the mistakes were deliberate or a
lack of knowledge on Richard’s part. Clara also faces a self-interest threat as she may be offered a
permanent position at Dedlock Ltd if she “turns a blind eye” to Richard’s failings.
Clara should ignore the possibility of self-interest and discuss the adjustments with Richard and remind him of
his professional responsibilities to ensure that accounting standards are correctly followed.
Amendments must be made to the financial statements and if Richard refuses to make them, Clara must
discuss the matter with the managing director.
If Richard continues to try to dominate and exert influence on Clara then it would be appropriate for Clara to
consult the ICAEW ethical handbook and discuss the matter with the ICAEW confidential helpline.
Almost all candidates made a reasonable attempt at this part of the question, with a good number obtaining
full marks. Candidates should remember that to gain the most marks their answer should be tailored to the
question scenario. Most candidates correctly identified that there was a self-interest threat for both Richard
and Clara, explained how these threats arose and suggested appropriate courses of action. A minority of
candidates answered as if Clara was an external auditor, as opposed to an independent consultant. A few felt
there were money laundering issues at play.

(c) Elements of financial statements, irredeemable preference shares and warranty provision
The three elements of financial statements relevant to the statement of financial position are assets, liabilities
and equity.
Irredeemable preference shares
IAS 32 classifies financial instruments as financial assets, financial liabilities or equity.
The irredeemable preference shares are an example of a (financial) liability. Although the irredeemable
preference shares take the legal form of equity they are liabilities in substance as they include contractual
obligations to transfer economic benefits to the holder (fixed preference (ie preferential) dividends). They
arise from a past event (the issue of the shares
Warranty provision
A provision is a liability of uncertain timing or amount and should be recognised if there is a present obligation
from a past event, it is probable that an outflow of economic benefits will be needed to settle the obligation
and that a reliable estimate can be made of that amount.
If one or more of these requirements are not met then a provision should not be recognised as it is not a
liability.
Probable means that it is more likely than not to occur or >50%. If it is not probable that an outflow of
economic benefits will be needed to settle the obligation or the amount of the settlement cannot be measured
reliably then it does not meet the definition of a liability and instead the amount may need to be disclosed as a
contingent liability.
In conclusion, Dedlock Ltd has a present obligation (its contractual obligation to repair or replace any faulty
products under a two year warranty), as a result of past events (the sale of the goods). There is a probable
outflow and a reliable estimate can be made (based on the number and amount of past claims under
warranties). The estimation of the amount of the liability is made using expected values. Richard should
therefore have recognised a provision as a liability exists.
Answers to this part of the question were very mixed, with only a minority of candidates showing a good
understanding of the elements of financial statements. Far too many candidates reproduced text from the
open book, which was not required. A significant number of candidates instead discussed the qualitative
characteristics of financial information, which gained no marks. Others did write about the elements of
financial statements, but failed to relate these to the preference shares and warranty provision.

Question 2
General comments
This question tested the preparation of a consolidated statement of cash flows and supporting reconciliation
note, where a subsidiary had been disposed of during the year. Missing figures to be calculated included
dividends paid (to the group and to the non-controlling interest), dividends received, tax paid, additions to
property, plant and equipment, and proceeds from the issue of share capital.
Chuzzlewit plc
£ £
Dividends received from associate (W5) 104,700
Disposal of Gradgrind Ltd net of cash disposed of (W1) 335,050

Proceeds from share issues (W6) 200,000
Repayment of long-term loan (300,000 – 250,000) (50,000)

£
Share of profits of associate (102,800)
Finance cost 45,500
Profit on disposal of property, plant and equipment (117,000 – 102,000) (15,000)
Impairment of goodwill (W7) 40,500
Increase in inventories ((292,900 + 56,400) – 198,100) (151,200)
Increase in trade and other receivables (177,800 – (151,800 + 26,800)) (800)
Decrease in trade and other payables ((105,800 – 3,100) – (82,500 + 12,200 – (10,200)
2,200))
Workings
(1) Net cash inflow on disposal of Gradgrind Ltd
£
Net assets disposed of (388,500 x 70%) 271,950
Add: Unimpaired goodwill (56,000 – 10,000) 46,000
Less: Cash and cash equivalents at disposal (3,500)
335,050

(2) Interest paid

£ £
Cash (β) 46,400 B/d 3,100
C/d 2,200 CIS 45,500
48,600 48,600
(3) Income tax
£ £
Cash (β) 157,400 B/d 160,000
C/d 135,000 CIS (128,000 + 4,400) 132,400
292,400 292,400
£ £
B/d 1,549,000 Disposal of sub 314,000
Other disposals 102,000
Additions (β) 965,200 Depreciation charge 351,600
C/d 1,746,600
2,514,200 2,514,200
(5) Investment in associate
£ £
B/d 287,800 Cash received (β) 104,700
CIS 102,800 C/d 285,900
390,600 390,600
£ £
B/d (300,000 + 40,000) 340,000
Cash received (β) 200,000
C/d (450,000 + 90,000) 540,000
540,000 540,000
(7) Intangibles
£ £
B/d 289,500 Impairments (β) 40,500
Disposal of sub (56,000 – 46,000
10,000)
C/d 203,000
289,500 289,500
£ £
C/d 1,435,000 CIS 510,300
1,836,400 1,836,400
£
Cash (β) 1,950 B/d 301,800
Disposal (388,500 x 30%) 116,550
C/d 279,200 CIS 95,900
397,700 397,700

Most candidates made some attempt at this question, although performance overall was disappointing on what
should have been a welcomed straightforward “processing” style question. The presentation of the statement
was generally good with most candidates gaining the full presentation mark. Most candidates dealt reasonably
well with those aspects of the statement of cash flows which would appear in a single entity statement; it was
the consolidation issues which caused the most problems. For example, only a minority of candidates correctly
added both the continuing and discontinued profit before tax figures in the reconciliation and correctly made
the adjustments for the discontinued operation to the movement in inventories, trade receivable and trade
payables.
A good majority of candidates correctly calculated both the purchase cost and disposal proceeds for property,
plant and equipment. Dividends received from the associate was also a figure which was commonly seen as
both calculated correctly and presented in the correct place within the statement. The repayment of the loan
was also commonly seen as correct, although significantly less candidates managed to correctly calculate the
proceeds from the share issue, with the most common error being the omission of the movement on share
premium.
Most candidates made some adjustments to profit before taxation in the reconciliation. The most common
errors were using the incorrect bracket convention (ie deducting instead of adding or vice versa), omitting the
profit on disposal of property, plant and equipment or the impairment figure. Some candidates also made
incorrect adjustments in the reconciliation by including items that were not required such as revaluations and
the profit on disposal of the subsidiary.
The dividend paid to the non-controlling interest was fairly well attempted although candidates occasionally
included it in the incorrect section of the statement of cash flows or forgot about the adjustment required for the
discontinued operation. The disposal proceeds for the discontinued operation was often missed from the
statement, although where candidates did include it a reasonable attempt was made at the calculation, the
most common error being to use the whole of the subsidiary’s net assets in the calculation instead of just the
group share. Where a calculation was provided almost all candidates correctly deducted the cash balance on
the discontinued operation.
17½
Total possible marks
17
Maximum full marks

Question 3
General comments
issues, given in the scenario. These covered a finance lease, borrowing costs in respect of a self-
constructed asset, a foreign exchange transaction and revaluations of property, plant and equipment (both
upwards and downwards). Part (b) required an explanation of any UK GAAP differences in respect of the
financial reporting treatment of the four issues.
Nickleby plc
(1) Finance lease
Under IAS 17, Leases, the machine will be classified as a finance lease as Nickleby plc is leasing the
machine for the whole of its useful life and is responsible for the maintenance and insurance of the
machine during that period. The machine is also specialised in nature which increases the likelihood of
it being a finance lease. Therefore, per IAS 17, the risks and rewards of ownership are deemed to have
passed to the lessee. On the basis of substance over form an asset will be recognised with a
corresponding liability.
The finance lease should have been capitalised at the lower of the fair value of £17,500 and the
present value of the minimum lease payments and the lease liability set up. The present value of the
minimum lease payments is:
Present value calculation £

1 July 2012 4,000 4,000
30 June 2013 4,000 / 1.15 3,478
2
30 June 2014 4,000 / 1.15 3,025
3
30 June 2015 4,000 / 1.15 2,630
4
30 June 2016 4,000 / 1.15 2,287
Present value of the minimum lease payments 15,420
The present value of the minimum lease payments is the lower figure, so the journal entry should be:
Dr: Non-current assets – cost £15,420

Cr: Lease liability £15,420
The asset should then be depreciated over the shorter of its useful life and the lease term, ie its four
year useful life giving a depreciation charge of £3,855 (15,420 ÷ 4), and a resultant carrying amount of
£11,565.
Dr: Income statement: Depreciation charge £3,855

Cr: Non-current assets – £3,855
accumulated depreciation
The lease liability should then have been reduced by payments made and increased by interest –
spreading the total finance charge of £4,580 (20,000 – 15,420) over the period of the lease using the
interest rate implicit in the lease of 15%. The table below illustrates the entries which should have been
made.
Year ended B/f Interest @15% Payment C/f

£ £ £ £
30 June 2013
(15,420 – 4,000) 11,420 1,713 (4,000) 9,133
30 June 2014 9,133 1,370 (4,000) 6,503

The lease liability at 30 June 2013 is therefore £6,503 non-current and £2,630 current (9,133 – 6,503).
However, the £8,000 which should have been used to reduce the lease liability for 2013 has already
been debited to the income statement. Only interest of £1,713 should have been charged. The
correcting journal entry is:
£ £
Dr: Lease liability (8,000 – 1,713) 6,287
Dr: Income statement: Finance costs 1,713
Cr: Income statement: Cost of sales 8,000
(2) Borrowing costs
IAS 23, Borrowing Costs, requires that borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of that asset.
A qualifying asset is one that takes a substantial period of time to get ready for its intended use. The
construction of the building is expected to take 12 months so would be a qualifying asset.
Because the funds have been borrowed specifically for the construction then the borrowing costs are
directly attributable.
If surplus funds are invested the borrowing costs capitalised are to be reduced by the investment
income received on the excess funds.
Capitalisation commences when the entity incurs expenditure on the asset, is incurring borrowing costs
and is undertaking activities to prepare the asset for use. All of these conditions are met.
Borrowing costs can only be capitalised for the period of construction, of which six months fall into the
current year. Therefore in the current year £7,100 ((£500,000 x 5% x 6/12) – 5,400) should be
capitalised. To correct the entries made by the financial controller:
£ £
Dr: Property, plant and equipment (asset in course of 7,100
construction) – cost
Dr: Income statement: Other income 5,400
Cr: Income statement: Finance costs 12,500
As part of the cost of the asset, the borrowing costs will ultimately be depreciated over the asset’s
estimated useful life, once depreciation commences.
(3) Foreign exchange transaction
IAS 21, The Effects of Changes in Foreign Exchange Rates, requires a foreign currency transaction to
be recorded on initial recognition in the “functional currency” (ie that of the primary economic
environment in which the entity operates – so here £) using the exchange rate at the date of the
transaction.
The financial controller should therefore have recorded the transaction at the delivery date of 10 June
2013, using a rate of €1: £0.82, as that is when the risks and rewards of ownership pass.
Dr: Income statement: Purchases (€101,000 x 0.82) £82,820

Cr: Trade payables £82,820
At the year end IAS 21 requires monetary items (units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency) to be retranslated at the closing
exchange rate. So, at the year end, the liability (ie trade payable) in respect of this transaction should
be restated using the closing rate – ie to £75,750 (€101,000 x 0.75). A retranslation gain of £7,070
(82,820 – 75,750) has been made and should be recognised in profit or loss. The journal entry should
be:
Dr: Trade payables £7,070

Cr: Income statement £7,070

(4) Revaluations
Nickleby plc uses the revaluation model per IAS 16, Property, Plant and Equipment, so the valuation on
1 July 2012 needs to be recognised. The increase in the revaluation surplus will be disclosed in other
comprehensive income. Both the land and buildings increase in value from their previous carrying
amounts (W) so journal entries are:
£ £
Dr: Property, plant and equipment – land (1,000,000 – 800,000) 200,000
Dr: Property, plant and equipment – buildings* (2,500,000 – 1,906,000) 594,000
Cr: Revaluation surplus 794,000
The plant falls in value from a carrying amount on 1 July 2012 of £815,700 (W) to a valuation of
£450,000 – a fall in value of £365,700. £150,400 of this decrease reverses a previous revaluation so
that amount is charged to the revaluation surplus and disclosed in other comprehensive income. The
remaining £215,300 (365,700 – 150,400) is recognised as an expense in profit or loss. The journal
entry is:
£ £
Dr: Revaluation surplus 150,400
Dr: Income statement: cost of sales 215,300
Cr: Property, plant and equipment – plant and machinery 365,700
Nickleby plc also needs to recognise the depreciation charges for the year, based on the new
valuations (see W). The journal entry is:
£ £
Dr: Income statement: administrative expenses 62,500
Dr: Income statement: cost of sales 112,500
Cr: Property, plant and equipment – buildings 62,500
Cr: Property, plant and equipment – plant and machinery 112,500
Final carrying amounts are £1,000,000 for the land, £2,437,500 for the buildings and £337,500 for plant
and machinery (W).
Nickleby plc has a policy of making an annual transfer between the revaluation surplus and retained
earnings, so that needs to be made. The transfer is the difference between depreciation charges based
on historic cost and those based on carrying amounts. However, this will only be in respect of the
buildings as there is no longer any balance in the revaluation surplus in respect of plant and machinery.
The journal entry is:
Dr: Revaluation surplus (62,500 (W) – 21,500) £41,000

Cr: Retained earnings £41,000
Working
Valuation on Depreciation Carrying
1 July 2012 charge for amount
£ year £
£
Land 1,000,000 - 1,000,000
Buildings 2,500,000 (÷ 40) 62,500 2,437,500
Plant 450,000 (÷ 4) 112,500 337,500
*Tutorial note
This would be Dr to Valuation and Cr to Accumulated depreciation but the split of the
carrying amount was not given so this detail could not be provided. The opposite applies to
plant and machinery.

Generally this part of the question was well answered with the majority of candidates responding to all four
issues and providing both explanations and calculations, although a minority of candidates failed to set out
the numerical adjustments in the form of journals.
Others gave a stream of journal entries with little narrative by way of explanation, and therefore limited the
number of marks they could obtain. Journals were set out in a number of different ways, with some
candidates setting out several simple journals, and others combining several transactions into a single
journal. All of these were given credit where appropriate, but it is important to realise that if many
transactions are combined an “audit trail” must be provided. In issue (4) a number of candidates combined
all of the parts of the scenario into one journal, with only a single (net) credit to the revaluation surplus
and/or to property, plant and equipment, with no supporting workings, which meant that partial marks
could not always be awarded. Other candidates wasted time by setting out in journal entry form the entries
which had already been made.
Issue (1): Virtually all candidates identified this issue as a finance lease but very few calculated the
present value of the minimum lease payments to determine the amount at which the initial asset and
liability should have been recognised. Another extremely common error was a lack of consistency
between the amount recognised as a liability and the amount initially recognised in the finance lease table
(although most students did deduct the deposit from whatever figure they used in the leasing table). A
further common inconsistency was making a statement that the amount capitalised should be the lower of
the asset’s fair value and the present value of the minimum lease payments and then proceeding to
capitalise the higher figure.
Issue (2): The capitalisation of borrowing costs was also dealt with well with the majority of candidates
recognising that interest earned needed to be deducted from the interest paid to arrive at the correct figure
for capitalisation. Most candidates also identified the correct period for capitalisation as being six months
only.
Issue (3): The foreign exchange transaction was not as well dealt with. A surprising number of candidates
stated that the liability should be recognised when the goods were ordered rather than when received (ie
when the risks and rewards of ownership transferred) although most did re-translate the liability using the
year-end rate. As commented on above, a significant number of candidates failed to deal separately with
the initial recognition of the liability and its retranslation at the year end, producing a combined journal
entry and thereby losing marks.
Issue (4): The final issue relating to revaluations was also well dealt with, with most candidates clearly
understanding the correct double entry for revaluations and the impact on subsequent depreciation.
However, few candidates made the point that the valuations needed to be incorporated into the financial
statements because the company had adopted the revaluation model. A pleasing number also showed the
correct double entry for the reserves transfer even if the figure was not always correctly calculated. Most
candidates also identified that the downwards revaluation for the plant and machinery needed to be split
between the revaluation surplus and income statement.
Other common errors not referred to above included the following:
 Failing to adjust cost of sales for the full £8,000 incorrectly charged re the finance lease.
 Drawing up the finance lease table in the wrong “order” ie treating the lease as if payments were
in advance rather than in arrears.
 Discounting the deposit paid.
 Failing to explain what a qualifying asset is and therefore not relating the definition to the
information given in the question ie that the building was expected to take 12 months to complete.
 Dividing rather than multiplying when translating euros into sterling.
 Failing to explain where the foreign currency should be recognised ie in the income statement.
 Calculating the revaluation gain on the building incorrectly by reducing the opening carrying
amount by current year depreciation.
 Making the initial debit on recognition of the liability for the foreign exchange transaction to
inventories instead of to purchases.
 Calculating the reserves transfer incorrectly by dividing the revaluation surplus by remaining life
(which does not work here as some of the surplus related to the land).
 Suggesting a reserves transfer for the plant and machinery even though the balance in the
revaluation surplus had been eliminated by the downwards revaluation.
 Making comments which were relevant to the next financial year, rather than to this one (eg
calculating a further foreign exchange loss/gain when the invoice was received after the year end).

(b) UK GAAP differences
(1) Finance lease
IAS 17 lists a number of factors which would indicate that the risks and rewards of ownership have been
transferred to the lessee – indicating that the lease should be classified as a finance lease.
However, under UK GAAP there is a rebuttable presumption that if, at the inception of the lease, the
present value of the minimum lease payments is at least 90% of the asset’s fair value then there is a
finance lease.
(2) Borrowing costs
IAS 23 requires attributable borrowing costs to be capitalised. UK GAAP (FRS 15) gives entities the
choice of whether to capitalise borrowing costs or to expense them as incurred.
Capitalisation under UK GAAP is limited to the finance costs incurred on the expenditure incurred. IAS 23
limits the amount capitalised to the borrowing costs on the total related funds less the investment income
from any temporary investment of those funds.
(4) Revaluations
Where assets have been revalued UK GAAP (FRS 15) requires the use of existing use value rather than
fair value
UK GAAP requires impairment losses to be debited first against any revaluation surplus in respect of the
asset unless it reflects a consumption of economic benefits. IAS 16 does not include such a limitation. So,
under UK GAAP, the whole downwards revaluation would have been debited to the profit and loss
account.
Under UK GAAP a maximum period of five years between full valuations and interim valuations every
three years is prescribed. No maximum period is specified by IAS 16 – the timing depends on changes in
market values.
Most candidates made a reasonable attempt at identifying the differences between IFRS and UK GAAP,
showing that candidates realise that these differences will always be tested and that these are relatively
easy marks to gain. A number of candidates wasted time by discussing differences that were not relevant
to the scenario given. A minority of candidates appeared to simply “invent” differences.
The two most common errors were believing that UK GAAP does not permit reserves transfers for
revalued assets and that the “90% test” is a comparison between the length of the lease and the useful life
of the asset. Candidates also need to be very careful to be precise with their wording in their answers to
this type of question. For example, with regards to differences in the capitalisation of borrowing costs a
number of candidates stated that under UK GAAP income on surplus funds “does not need to be netted
off”, which is not the same as stating that it is not netted off.

Question 4
General comments
Part (a) required the redrafting of a consolidated statement of financial position, where one subsidiary and
one associate (both acquired during the year) had simply been added into the parent company’s figures,
and no consolidation adjustments made. Adjustments included fair value adjustments on acquisition, intra-
group sales (with inventory still held at the year end), intra-group balances which did not agree and
impairment write-downs. In Part (b) candidates were required to explain and justify the fair value method
and the proportionate method of calculating non-controlling interest, using calculations where appropriate.
Cratchit plc
(a) Consolidated statement of financial position as at 30 June 2013
£ £
Assets
Non-current assets
Property, plant and equipment (1,697,700 – 377,500) 1,320,200
1,697,400
Current assets
Inventories (770,900 – 246,400 – 4,000 (W6)) 520,500
Trade and other receivables (293,000 – 99,300 – 168,100
25,600)
Cash and cash equivalents (23,800 – 800 + 6,900) 29,900
718,500

Equity attributable to owners of Cratchit plc
Ordinary share capital (1,000,000 – 300,000 – 200,000) 500,000
Shares not yet issued (W3) 240,000
Revaluation surplus (400,000 – 150,000) 250,000
1,907,820
Current liabilities
Trade and other payables (315,200 – 97,400 – 18,700) 199,100
Contingent liability 20,000
Taxation (229,000 – 61,000) 168,000
387,100

Workings
(1) Group structure

80 = 40%
Arusha
200
plc
240
= 80%
300
Java Ltd Mocha Ltd
(2) Net assets – Drummle Ltd

£ £ £
Revaluation surplus 150,000 150,000
Retained earnings
Per Q 224,900 108,000
Goodwill re sole trader (50,000) (60,000)
Contingent liability (20,000) (20,000)
604,900 478,000 126,900
(3) Goodwill – Drummle Ltd

£
Consideration transferred (400,000 + (200,000 x 1.20)) 640,000
257,600
Impairments to date (20,000)
237,600
(4) Non-controlling interest – Drummle Ltd

£
NCI at acquisition date (478,000 (W2) x 20%) 95,600
Share of post-acquisition reserves (126,900 (W2) x 20%) 25,380
120,980

£
Cratchit plc (1,441,200 – 224,900 – 365,600) 850,700
Drummle Ltd (126,900 (W2) x 80%) 101,520
Gargery Ltd (W7) (10,400)
Less: PURP (W7) (4,000)
917,820
(6) Inventory PURP – Drummle Ltd

% £
SP 120 60,000
Cost (100) (50,000)
GP 20 10,000
x 40% 4,000

(7) Investments in associates – Gargery Ltd

£ £
Cost 150,000
Less Share of post acquisition decrease in net assets
Share of post acquisition losses (22,500 x 40%) 9,000
Add: Share of additional depreciation based on FV (35,000 ÷ 5 1,400
x 6/12 x 40%) (10,400)
139,600
This part of the question was reasonably well answered with most candidates producing an adequately
presented consolidated statement of financial position (although a lack of sub-totals and the use of
abbreviations were common). The vast majority of candidates did correctly identify the group structure and
realised that the assets and liabilities incorrectly included for the associate needed to be “backed out” and the
share capital corrected to be that of the parent company only. Where a draft consolidated statement is
provided in the question it is extremely important that candidates read the information provided carefully to
ascertain exactly on what basis the “consolidation” has been done.
Most candidates calculated the consideration for the subsidiary acquired during the year correctly (using the
correct share price) although hardly any then included the shares not yet issued in equity in their consolidated
statement of financial position (hence failing to complete the double entry). Even those who did realise that
this needed to be recognised in the statement of financial position often included it in liabilities. The other
most common error was failing to show the contingent liability recognised as a fair value adjustment in
liabilities.
Other common errors included the following :

 Failing to adjust for the cash in transit correctly by deducting the same figure from payables and
receivables and/or deducting the amount (rather than adding it) to cash.
 Not adjusting the net assets working for the goodwill held by the subsidiary (or only adjusting for the
£10,000 change in value).
 Not adjusting the net assets working for the contingent liability (or adding rather than deducting it).
 Failing to multiply the PURP by the % of shares held in the associate.
 Deducting the above PURP from the investment in the associate rather than from inventories.
 Including the fair value excess in the investment in associate working.
 Failing to multiply the increase in depreciation by the % held in the associate in the above working.
 Not recognising that the same figures re post acquisition adjustments in the investment in associate
should also be shown in consolidated retained earnings.
 Calculating the non-controlling interest as a % of post-acquisition profits rather than as a % of closing
net assets.
 Deducting a share of the goodwill impairment in the NCI working even though the proportionate
method was being used.
As always some candidates lost marks by failing to show an “audit trail” for the basic consolidation on the
face of the statement of financial position and/or for the calculation of the non-controlling interest and % of
post- acquisition profits.


(b) The two methods of calculating goodwill and non-controlling interest
IFRS 3 allows two methods of measuring the non-controlling interest (NCI) at the acquisition date:
(i) At its fair value (the “fair value method”)
(ii) At the NCI’s share of the acquiree’s net assets (the treatment used in (a), ie the “proportionate
method”).
Method (ii) results in goodwill being, in effect, the difference between the cost of the parent’s investment
and its share of the net assets acquired. The rationale behind this is that this market transaction has only
provided evidence of the amount of the parent entity’s goodwill – there has been no evidence of the
amount of the goodwill attributable to the NCI.
However, this method means that only the parent’s share (here 80%) of the goodwill of the subsidiary will
be recognised – when for every other line item on a consolidated statement of financial position the parent
brings in 100% of the subsidiary’s figures, to reflect the fact that the parent has control over that subsidiary.
Method (i), the fair value method, is consistent with the rest of IFRS 3 since IFRS 3 requires both the
consideration transferred and the net assets acquired to be measured at fair value. It works on the basis
that the goodwill attributable to the NCI can be calculated from the estimate of the fair value of the NCI
itself.
The fair method usually results in a higher amount for the NCI/goodwill – the difference between this
amount and the amount as traditionally measured is effectively added to the goodwill acquired in the
business combination and is the goodwill attributable to the NCI at the acquisition date.
If NCI had been measured in Part (a) using the fair value method it would have been calculated as follows,
resulting in an NCI higher than that under the proportionate method:
£
FV of NCI at acquisition 100,000
125,380
Less: Impairment to date (20,000 x 20%) (4,000)
121,380
As shown above, where NCI has been measured at fair value and there is a subsequent impairment to
goodwill, part of that impairment will be charged to the NCI at the end of the reporting period, based on the
NCI%.
If goodwill had been measured in Part (a) using the fair value method it would have been calculated as
follows:
£
Consideration transferred (a) 640,000
FV of NCI at acquisition 100,000
Net assets at acquisition (a) (478,000)
262,000
242,000
This part of the question was poorly answered with a significant minority of candidates making no attempt to
produce an answer. Those candidates who did attempt this part of the question focused on calculations, with
very few showing any understanding of the conceptual issues relating to the two methods. Those who did
attempt some narrative tended to describe the underlying mechanics of the calculations as opposed to the
principles underlying them. Many candidates wasted time by copying out entire workings for goodwill and the
non-controlling interest produced in Part (a) of their answer (for which there were no further marks available)
rather than just referring back to the relevant figures and calculating the alternatives using the fair value
method. A significant number of candidates clearly did not understand the full double entry for an impairment
when using the fair value method and it was common to see just the parent company’s share of the
impairment deducted from the carrying value of the goodwill.

Professional Level - Financial Accounting and Reporting – March 2014
Question 1
Overall marks for this question can be analysed as follows : Total: 30
General comments
This question presented a draft set of financial statements with some adjustments. Candidates were required
to prepare the amended statement of profit or loss, statement of financial position and the intangible assets
table. A number of adjustments were required to be made, including depreciation, research and development
expenditure, revenue adjustments, treasury shares and redeemable preference shares.
Part b) required candidates to explain the purpose and objectives of IFRS 7 Financial Instruments;
Disclosures.
Part c) featured the concepts requirement which asked about the enhancing qualitative characteristics.
Alloa Ltd – Statement of financial position as at 30 September 2013

£ £
ASSETS
Non-current assets
Intangible assets (95,700 + 17,025)(note) 112,725
176,285
Current assets
Inventories 25,500
Trade and other receivables
(215,000 + 7,200) 222,200
261,400
Equity
Ordinary share capital (185,000 + 15,000) 200,000
Share premium (88,750 + (15,000 x 0.75)) 100,000
Treasury shares (15,000 x £1.75) (26,250)
Equity 339,485
Redeemable preference shares 50,400
Current liabilities
Taxation 17,000
47,800

Alloa Ltd – Statement of profit or loss for the year ended 30 September 2013
£
Revenue (W2) 890,000

Operating expenses (312,000)
Operating loss (32,605)

Investment income (71,200 + (48,000 x 15%) + 9,524 (W2)) 87,924
Finance charges (W6) (2,400)
Income taxation (3,000 – 17,000) (14,000)
Notes to the financial statements as at 30 September 2013

Intangible asset
Development Patents
costs
Cost £ £
At 1 October 2012 – 59,000
Additions 127,600
Disposals – (3,000)
At 30 September 2013 127,600 56,000
Amortisation
At 1 October 2012 – 11,600
Charge for year (W3 & W4) 31,900 28,875
Disposals – (1,500)
At 30 September 2013 31,900 38,975
Carrying amount
At 30 September 2012 – 47,400
At 30 September 2013 95,700 17,025
W1 Expenses
Cost of sales

R&D expenditure (W3) 100,400
R&D amortisation (W3) 31,900
Patent amortisation (W4) 28,875
Disposed of patent (3,000 – (3,000 / 2yrs)) 1,500
Depreciation charge – plant & machinery (W5) 27,240
610,605
W2 Revenue
£
Interest free credit (200,000 – (200,000/1.05)) (9,524)
At 30 September 2013 890,000

W3 Research & development expenditure

£ £
Less amounts charged to profit & loss
Development of the Brora 68,500
(100,400)
Intangible asset at 30 September 2013 127,600
Amortisation (127,600 / 2yrs x 6/12) (31,900)
95,700
W4 Patents
£ £
Amortisation charge for year
(59,000 – 3,000) / 2yrs 28,000
Disposed of paten (3,000 / 2yrs x 7/12) 875
(28,875)

£
Carrying amount at 1 Oct 2012 90,800
Depreciation charge for the year (90,800 x 30%) (27,240)
63,560
W6 Redeemable preferences shares

Opening Interest exp Interest Closing
balance (4.8%) paid (4%) balance
£ £ £ £
30 Sept 2013 50,000 2,400 (2,000) 50,400
£
Per draft 263,950
Less: draft profit and loss (239,134)
Add: revised profit and loss 38,919
Add back preference dividend (50,000 x 4%) 2,000
65,735
Presentation was generally good, although the presentation of the statement of profit or loss was almost
always better than that of the statement of financial position where sub-totals were, as usual, often missing
for one or more categories. Most candidates correctly showed the treasury shares as a “negative” balance
under equity.
Presentation of the intangible asset note was more varied with candidates often merging the patents and
development costs into one column and/or netting off cost and amortisation. Only a very small minority of
candidates failed to make any attempt at the note.
The vast majority of candidates used a “costs matrix” to calculate the figure for cost of sales and, on the
whole, it was possible to match figures on the face of the financial statements to workings. Almost all
candidates correctly calculated the depreciation charge on property, plant and equipment and included this
figure in cost of sales, and the carrying amount on the statement of financial position. Weaker candidates
put the carrying amount both on the statement of financial position and added it to cost of sales.
The adjustments for opening and closing inventories were generally dealt with correctly and pleasingly
many candidates also calculated the tax charge correctly (although not all then went on to include the
correct figure in current liabilities). Disappointingly very few candidates managed to calculate the discount
on the deferred revenue correctly and even those who did very rarely then recognised the related financing
income (even though this issue was almost identical to worked examples in the study manual). Most
candidates included the correct figure for royalty income in the statement of profit or loss, but few completed
the double entry by also adding this to trade and other receivables.

Surprisingly many candidates also struggled with the redeemable preference shares. Even those who wrote
out the “table” working showing the correct interest expense and cash paid often then went on to put the
wrong figures in the statement of profit or loss and/or the statement of financial position. However most did
recognise that the transaction should be treated as a liability rather than equity. Strangely a number of
candidates treated the shares as convertible debt and wasted significant time discounting the future
payments to arrive at separate debt and equity elements.
Rather disappointingly relatively few candidates calculated the correct figures for development costs and
patents. Candidates were often “inconsistent” such as by including some costs twice (ie both capitalising
and expensing them) or by calculating amortisation on a different figure to the one capitalised.
Common errors in other areas included the following:
 Deducting the treasury shares elements from share capital and premium, instead of adding them
and/or showing the treasury shares themselves as a credit balance, instead of a debit.
 Failing to reduce retained earnings by the draft profit for the year, having increased it by the profit for
the year calculated in the revised statement of profit or loss.
 Failing to capitalise the correct elements of the research and development expenditure.
 Basing amortisation for the year on the capitalised development costs on one year instead of six
months.
 Incorrectly calculating accumulated amortisation on the patent disposed of during the year (or failing
to charge amortisation on that patent up to the point of disposal).
 Failing to adjust cost of sales for the proceeds on disposal of the patent or making the adjustment in
the wrong direction.
 In the costs of sales matrix including either the amortisation on the patent or on the capitalised
development costs, but not both.
 Capitalising the Brora development costs, even though the project had not yet met the IAS 38 criteria.

(b)
IFRS 7 Financial Instruments: Disclosure, was published because the IASB felt that existing
standards that covered financial instruments needed to be improved. Improvements were
needed to ensure that the disclosure of information on financial instruments provided greater
transparency of information so that users could better assess the risks that an entity was
exposed to.
The objective of IFRS 7 is to require entities to provide disclosures in their financial statements
which enable users to evaluate both the significance of financial instruments for the entity’s
financial position and performance, and the nature and extent of the risks arising from the
financial instruments and how the entity manages those risks.
Most candidates who made an effort with this requirement made a reasonable attempt by reciting the
objectives of IFRS 7 from their open book text. Few candidates went beyond this.


(c) Enhancing qualitative characteristics
Usefulness
There are four enhancing qualitative characteristics which enhance the usefulness of information that is
relevant and faithfully represented. These are: comparability, verifiability, timeliness and understandability.
Comparability ensures that users can identify and understand similarities in, and differences among, items.
Information about a reporting entity is more useful if it can be compared from one reporting period to the
next and with similar information from other entities. Comparability allows this.
Consistency, although not an enhancing qualitative characteristic itself is related to comparability. This
relates to the same methods being used to report the same item, so consistent accounting policies
governed by accounting standards. The disclosure of accounting policies is therefore key to ensure that
users can make a valid comparison between items.
Verifiability helps assure users that information faithfully represents the information provided – it provides
credibility to the financial information. It means that different knowledgeable and independent observers
could reach consensus that a particular depiction is a faithful representation.
Timeliness is equally important as information becomes less useful the longer the time delay in reporting it.
Timeliness means that information is available to investors, lenders and other creditors in time for it to be
used in their decision making processes.
Finally, the characteristic of understandability means that information that may be difficult to understand is
made more useful by presenting and explaining it as clearly as possible. Whilst financial information should
be presented clearly and in an understandable manner, it is expected that users of t he financial statements
have a reasonable level of knowledge and understanding. It would be misleading to exclude information
simply because of its complex nature, as this would lead to incomplete information which would be
misleading to users.
There is a balance between timeliness and the provision of reliable information. For example, a provision
has uncertainty involved in it, if an entity waits to report this information then it may have been settled and
therefore the uncertainty over its amount will disappear. This information is therefore more reliable the
longer an entity waits to report it. However, if such information is not reported until say six months after the
year end then the information is less useful to users.
As with Part (b), most candidates picked up some marks by using their open book text, correctly identifying
the four enhancing qualitative characteristics and making a brief point about each. The depth of explanation
was variable. Others wasted time by also discussing the primary qualitative characteristics or other
concepts.


Question 2
General comments
This question required extracts from a consolidated statement of cash flows where a subsidiary had been
disposed of during the year. Candidates were required to calculate the cost of additions to revalued
property, plant and equipment, dividend payments by the parent and a subsidiary company and the
proceeds from the issue of shares (following a bonus issue).
Limerigg plc
Statement of cash flows for the year ended 30 September 2013

£ £

Disposal of subsidiary (62,000 – 2,300) 59,700

Proceeds from issue of ordinary share capital
(130,000 + 78,000) (W2 & W3) 208,000
Non-controlling interest dividend (W5) (43,300)
Working
£
Draft cash generated from operations (continuing & discontinued) 396,675
Depreciation 101,000
Property revaluation
£
Carrying amount at 1 October 2012
(300,000 – ((300,000 / 30yrs) x 5yrs)) 250,000
Revalued amount 325,000
Revaluation surplus 75,000

Workings
(1) PPE
£ £
B/d 506,950 Disposal of subsidiary 76,900
Revaluation (W) 75,000 Depreciation 101,000
Additions (β) 457,355 C/d 861,405
1,039,305 1,039,305
(2) Share capital
£ £
B/d 350,000
Bonus issue (350,000 / 5) 70,000
C/d 550,000 Cash issue (β) 130,000
550,000 550,000
(3) Share premium
£ £
Bonus issue 35,000 B/d 35,000
C/d 78,000 Cash issue (β) 78,000
113,000 113,000
£ £
Dividends paid (β) 135,200 B/d 96,430
Bonus issue (70,000 – 35,000) 35,000 Revaluation surplus – 3,000
transfer
(75,000 – 72,000)
C/d 132,130 Profit or loss 202,900
302,330 302,330
£ £
Disposal (77,850 x 30%) 23,355
C/d 73,845 Profit or loss 42,900
140,500 140,500
A number of candidates achieved full marks on this question and a pleasing number calculated the correct
figures for the cash inflow from the disposal of the subsidiary, purchase of property, plant and equipment
and for the dividend paid to the non-controlling interest. Most correctly adjusted cash generated from
operations for the depreciation charge although many often also made other unnecessary adjustments.
A significant number of candidates lost marks by failing to show brackets round figures which represent an
outflow of cash. Candidates should be aware that this convention is just as important in a question which
requires extracts from a statement of cash flows as it is for a complete statement of cash flows. Marks were
also lost where items were shown under the incorrect headings – the most common error being to show
dividends paid to the non-controlling interest as an investing activity instead of as a financing activity, and
this was often also shown as a cash inflow instead of as an outflow. Some also prepared the T account
workings correctly but then failed to transfer the final figure to the face of the statement of cash flows.
 Omitting one or more of the entries from the property, plant and equipment T-account, most
commonly the revaluation figure.
 Failing to adjust for the transfer between the revaluation surplus and retained earnings in the latter T-
account.
 Omitting the statement of profit or loss figure from the retained earnings and/ or non-controlling
interest T-accounts.
 Debiting the whole bonus issue to the share premium account, when this should have been restricted
to the opening balance on the share premium account, which was lower.
 Omitting the residual bonus issue from the retained earnings T-account.
 Failing to adjust the non-controlling interest figure for the disposal of the subsidiary.


Question 3
General comments
issues, given in the scenario. The four issues covered a government grant, an acquisition of a subsidiary,
an asset impairment and a related party transaction.
Part (b) required candidates to recalculate consolidated profit for the year for the adjustments needed as a
result of their answer to Part (a).
Part (c) required a calculation of basic earnings per share following a s hare issue for cash and a bonus
issue.
Part (d) required candidates to identify any UK GAAP differences for the issues set out in Part a).
Melloch plc
This is an income related grant and in this case it should be recognised over the two year period to match
the expenditure for which it has been received to compensate. Even though the directors believe that the
grant will not be repayable this is not a reason to recognise it fully upon receipt. As at 30 September 2013
Melloch plc has not satisfied all of the recognition criteria.
£225,000 (£540,000 x 10/24) of the grant should be recognised as income in the current period. The
remaining grant of £315,000 (£540,000 – £225,000) should be removed from profit or loss and recognised
as a liability.
The liability should be split between current £270,000 (540,000 x 12/24) and non-current £45,000
(£315,000 – £270,000).
The grant should not be recognised as revenue. It could either be shown as “other income” in the
statement of profit or loss or it could be netted off against the expenditure to which it relates (probably as
part of “operating costs”).
(2) Acquisition of Sheardale Ltd
Sheardale Ltd should be recognised as a subsidiary of Melloch plc at 1 April 2013, as a controlling interest
of 80% has been acquired. Sheardale Ltd should be consolidated in the group financial statements from
this date.
The consideration should be measured at its fair value of £480,000.
The costs of £8,000 should not form part of the consideration but should instead be recognised directly in
profit or loss.
Intangible assets should be recognised if they are separable or they arise from legal or other contractual
rights. These contractual rights should therefore have been recognised and form part of Sheardale Ltd’s
net assets.
The contractual rights should be recognised separately to the goodwill and amortised over their useful life
of three years. The carrying amount of the contractual rights at 30 September 2013 is therefore £62,500
(£75,000 – £12,500) and £12,500 ((£75,000/3yrs) x 6/12) should be recognised in profit or loss as
amortisation. As the intangible asset is held by Sheardale Ltd, the amortisation will affect the profit
attributable to the non-controlling interest. It will therefore be split £10,000 and £2,500 between the profit
attributable to the shareholders of Melloch plc and the non-controlling interest respectively.
The non-controlling interest can be measured at fair value or proportion of net assets at the date of
acquisition, however here the proportionate method should be used.

Goodwill should be measured at:

£
Non-controlling interest – (650,000 x 20%) 130,000
610,000
Net assets acquired (575,000 + 75,000) (650,000)
Goodwill – gain on bargain purchase (40,000)
As a gain on bargain purchase has arisen Melloch plc will need to reassess the identification and
measurement of the net assets and the measurement of the consideration, however in this case this is
purely cash paid at the date of acquisition. Assuming these calculations are correct the gain of bargain
purchase should be recognised as part of profit or loss for the period.
Sheardale Ltd’s loss attributable to Melloch plc’s shareholders since acquisition should be recognised in
the consolidated statement of profit or loss at £72,000 (£180,000 x 6/12 x 80%) and the non-controlling
interest in the statement of profit or loss should be decreased by £18,000 (£90,000 x 20%).
Consolidated net assets at 30 September 2013 will also decrease.
(3) Impairment of research facility
It appears that the research facility has suffered an impairment and therefore its carrying amount may be
overstated. Assets should not be carried at more than their recoverable amount. Recoverable amount is
the higher of value in use and fair value less costs to sell.
The value in use at 30 September 2013 is £1,100,000 and fair value less costs to sell is £1, 245,000
(£1,250,000 – £5,000). The recoverable amount is therefore £1,245,000 and an impairment of £155,000
(£1,400,000 – £1,245,000) should be recognised.
£100,000 should therefore be recognised against the balance of the revaluation surplus, to reduce this
amount to zero. The remaining £55,000 should be recognised as part of profit and loss for the period.
(4) Related party
Melloch plc will need to establish whether or not the sale of the vehicle to the marketing director is a
related party transaction under IAS 24 Related Party Disclosure.
The marketing director is a member of the key management personnel of Melloch plc and therefore he is a
related party under IAS 24. Therefore, the sale of the vehicle to the marketing director is a related party
transaction. Even though the sale was at full fair value, it should be disclosed.
Disclosure should include the nature of the related party relationship, ie one of the directors, and whether
there are any outstanding balances at the year end, ie £17,500. If there are any special terms and
conditions attached to the balance this should also be disclosed.
A statement that the transaction took place on an arm’s length basis could only be made if it can be
substantiated. Presumably here an external vehicle guide would show the fair value of the vehicle and
assuming it to be in line with the price agreed such a statement could be made.
Answers to this part of the question were good. Most candidates correctly identified three out of the four
underlying issues as a revenue grant, the acquisition of a subsidiary and the impairment of an item of
property, plant and equipment. The related party transaction was less well dealt with, a significant number
of candidates completely missing that this was a related party transaction at all.

Some marks (though not many) were lost on errors in the calculations but more were lost where
candidates, after an initial explanation, then reduced their answer to a series of journal entries. Although
there were specific marks allocated to key calculations and to the adjustments using those figures in Part
(b), there were no marks for journal entries in lieu of narrative explanations. Marks are only ever awarded
for journal entries where these are specifically required by the question.
Most candidates correctly described the conditions under which a grant can be fully recognised as
revenue but then went on to correctly describe how the income should be deferred. The majority of
candidates correctly calculated the amount which could be recognised in income in the current year (with
only a minority using the wrong number of months) and correctly split the balance between non-current
and current liabilities.
(2) Acquisition of subsidiary
Almost all candidates correctly recognised this as the acquisition of a subsidiary and that it should
therefore be consolidated. Candidates then correctly went on to calculate goodwill, although not all arrived
at a gain on bargain purchase (in which case marks were given for describing the correct accounting
treatment of goodwill, both in this part and in Part (d)). The most common two errors in this calculation
were including the associated costs of acquisition in the fair value of the consideration and/or failing to
increase the net assets figure by the fair value of the contractual rights.
A good number of candidates then arrived at the correct amortisation charge for the year on these rights,
but less went on to split this charge between the parent and the non-controlling interest. Similarly, most
recognised that the subsidiary’s loss for the year should be recognised in the consolidated statement of
profit or loss, a few less correctly stated that only six -twelfths of this figure should be recognised, with
fewer still splitting the resultant figure between the parent and the non-controlling interest.
It was rare for candidates to make the point that the non-controlling interest could be measured using the
fair value method or the proportionate method, and that the latter was the chosen method. Only a very
small minority of candidates made the point, where a gain on bargain purchase had been calculated, that
this should be reassessed. A significant number of candidates stated that the gain on bargain purchase
should be immediately recognised in retained earnings, rather than making it clear that it should be
immediately recognised in the consolidated statement of profit or loss.
(3) Impairment of research facility
There were some very good answers to this part. Almost all candidates correctly stated the “rules” for
calculating the amount of an impairment and calculated the correct figures, setting the impairment firstly
against the revaluation surplus for this asset. The most common error was to calculate the impairment as
the difference between the carrying amount and the value in use, instead of the fair value less costs to sell
(which was higher). A significant minority of candidates discussed the scenario as one of an asset held for
sale (and then possibly dealt with the legal costs separately).
(4) Related party transaction
Answers to this issue were very disappointing with very many candidates not even recognising that the
key issue here was the disclosure of a related party transaction. Of those who did identify that it was a
related party transaction only a few explained why the director was considered to be a related party and
what details needed to be disclosed. Fewer still made the point that, provided t hat fact could be
substantiated, the arm’s length nature of the transaction could be disclosed.
Frighteningly a very significant number of candidates appeared to believe that transactions should not be
recognised until the cash had been received and therefore felt that the sale needed to be derecognised,
so it was very common to see an adjustment for the profit on sale of £2,500 in Part (b).


(b)
Melloch plc
Profit attributable to Melloch plc’s shareholders
£
As stated 978,400
(1) Government grant (315,000)
(2) Acquisition of Sheardale Ltd:
- acquisition costs (8,000)
- intangible amortisation (10,000)
- gain on bargain purchase 40,000
- Share of Sheardale Ltd’s loss (72,000)
(3) Impairment (55,000)
Restated 558,400
It appeared that most candidates had built up their answer to this part alongside their answers to Part (a),
which is by far the most efficient approach, with most candidates including all of the relevant adjustments
that they had discussed in Part (a). The most common errors were to include the gain on bargain
purchase as an expense and the (share) of the subsidiary’s loss as a profit or not at all.

(c)
Melloch plc
No. Of Period in Bonus Weighted

shares issue factor average
1 Oct – 30 Nov 280,000 2/12 6/5 56,000
1 Dec – issue at MV 70,000
1 Dec – 31 Mar 350,000 4/12 6/5 140,000
Bonus issue – 1 April
(350,000 / 5) 70,000
1 Apr – 30 Sept 420,000 6/12 – 210,000
406,000
Basic EPS = 558,400 = £1.38

406,000
Many candidates scored full marks on this part. Those that made a poor attempt at this calculation clearly
did not understand the impact of the bonus issue. Where errors were made they included the following:
 Using the wrong fractions for the parts of the year, or for the bonus issue, or both.
 Applying those fractions the 70,000 increments, instead of to the cumulative number of shares to
date.


(d) UK GAAP differences
Acquisition of subsidiary
The contractual rights are treated differently under UK GAAP as they would not be recognised as these
are not separable. Hence the intangible asset would be subsumed as part of the goodwill, rather than
separately recognised as per IFRS.
The £8,000 acquisition costs associated with the acquisition would be recognised as part of the
consideration rather than expensed to profit and loss as per IFRS.
There is no option to use fair value to measure the non-controlling interest as per IFRS, instead it would
be measured as a proportion of net assets.
Negative goodwill (a gain or bargain purchase) is recognised as a separate item within goodwill rather
than recognised in profit or loss for the period as per IFRS. The negative goodwill should be split between
the fair value of the non-monetary assets and that which is in excess of the fair value of these assets. This
determines the period over which the negative goodwill should be recognised in profit and loss.
Impairment
Under UK GAAP an impairment on a revalued asset would normally be recognised against the balance on
the revaluation surplus unless the impairment was as a result of a consumption of economic benefits. It is
unlikely that the impairment of the research facility is a result of a consumption of economic benefits and
therefore there would be no difference in treatment. Under IFRS there is no such requirement.
Related parties
Under UK GAAP FRS 8 requires the consideration of materiality to both sides of a related party
transaction. IFRS requires no such consideration of materiality.
Under FRS 8, the names of the related parties would need to be disclosed, there is no such requirement
under IFRS.
Most candidates adopted the columnar approach recommended by the examining team at the recent tutor
conference, giving both the IFRS and the UK GAAP treatments and giving only differences which were
relevant to the issues in Part (a). It was also clear that more candidates had committed these differences
to memory. Those who had learnt these differences scored well easily picking up three or more of the
available five marks.
The most common mistake was to state that under UK GAAP impairments can never be taken to the


Question 4
General comments
This question was a mixed topic question, covering inventory valuation and a sale and operating
leaseback.
Part b) required a discussion around the ethical issues.
Bainsford plc
(i)
Statement of financial position at 30 September 2013 (extract)
Current assets (275,850 + 9,600(W1) – 3,000(W2)) 282,450
Current liabilities (141,700 + 93,750 (W3)) 235,450
(ii)
Statement of profit or loss
£
Draft profit after tax 497,300
Increase in raw materials 9,600
Decrease in finished goods (3,000)
Sale and leaseback adjustment ((375,000 – 93,750) – 250,000) 31,250
Impairment loss (125,000)
410,150
Workings
(1) Raw materials

£
Weighted average
(5,000 x £74) + (6,000 x £65) + (4,000 x £80) x 1,200 (86,400)
(5,000 + 6,000 + 4,000))
FIFO £80 x 1,200 96,000
9,600
(2) Finished goods
Absorption rate (1.50 – 0.25 – 0.15) = £1.10 £

Adjustment
(£1.50 – £1.10) x 7,500 3,000
(3) Sale and operating leaseback

£
Less: fair value (775,000)
Impairment loss 125,000
Proceeds 1,150,000
Less: fair value (775,000)
Profit 375,000

Answers to this were quite mixed although most candidates calculated, as required, the three revised
figures, and, on the whole, carefully followed their supporting calculations through to these figures. A good
number arrived at the correct adjustment to both raw materials and finished goods, although typically
whilst the adjustment relating to the raw materials was calculated correctly far fewer candidates could
correctly identify which costs should be included in the value of finished goods . The most common errors
were mistakes in calculating the weighted average cost of raw materials and failing to exclude the storage
costs when calculating the absorption rate for finished goods.
Attempts at adjusting for the sale and operating leaseback were very mixed, with many candidates writing
at length about the appropriate accounting treatment, when only the calculations were required (no use of
the word “explain” in the requirement). Although most candidates who made a reasonable attempt at these
calculations did realise that the profit on disposal should be recognised over the lease term rather than
recognised immediately few calculated it correctly by failing to account for the impairment first. Often the
same figure was used to adjust liabilities and profit rather than recognising that the deferred amount
should be added to liabilities and the proportion recognised up until the year-end added to profit.

(b)
Nia’s concerns about the use of creative accounting may be justified as after the adjustments she made to
the draft consolidated profit for the year, profit has fallen by 17.5%. While some of the adjustments may be
attributable to Nia’s assistant’s lack of knowledge of accounting standards, the fact that the finance
director was on hand to help may call into question the finance directors behaviour and whether the
figures have been deliberately inflated.
Nia should make the appropriate adjustments to the financial statements and explain to the finance
director why profit has fallen. If her adjustments are challenged, she may need to seek advice on how to
proceed. In the first instance Nia should speak to the other directors or the audit committee. Much will
depend upon the finance director’s attitude and whether Nia is challenged in her adjustments. If Nia is still
concerned about the issues not being dealt with correctly she may wish to contact the ICAEW advisory
helpline.
Nia’s other ethical problem relates, in part, to confidentiality. Confidentiality is one of the five fundamental
principles set out in the ICAEW’s ethical Code. Nia is expressly required to respect the confidentiality of
information required as a result of professional and business relationships. The information about the
competitor, of which she is now aware because of a personal contact, could possibly be of benefit to
Bainsford plc, and so Nia might be tempted to discuss this information with her employer as it may impact
on their business and the opportunity to gain additional funding. Passing on such information may balance
out any ill-feelings as a result of making the adjustments to reduce profit and would show her loyalty to her
employer. However, professional accountants should be guided not only by the terms but also by the spirit
of the ethical Code. Taking this approach, confidentiality should be maintained.
Another of the five fundamental principles is professional behaviour. Professional accountants should
avoid any action that discredits the profession. If Nia were to use the information for the benefit of her
employers, and if this were subsequently to be made public, it is likely that this would appear discreditable
to the profession.

As in previous sittings, many candidates framed their answer as if they were part of an audit team, not
employed within industry. It was therefore inappropriate to suggest referring the matter to the ethics
partner or to discuss approaching the audit with increased professional scepticism.
With regard to the information from Sam, most candidates recognised the need to refer to the fundamental
principle of confidentiality and knew that Nia should not repeat this information. Others thought that she
should repeat it if it could be substantiated. Few referred to the fundamental principle of professional
behaviour, which was also relevant.
Almost all candidates did recognise the possible need to contact the ICAEW confidential helpline if they
were unable to resolve the issues via discussion with the finance director, or with the other directors or the
audit committee, but there was a tendency to be very quick to suggest that their own resignati on might be
the best solution.


Question 5
General comments
This question required the preparation of a consolidated statement of profit or loss and extracts from the
consolidated statement of changes in equity (for retained earnings and the non-controlling interest). The
group had two subsidiaries, one of which was acquired during the year and a joint venture. Fair value
adjustments were required on acquisition of one of the companies. Inter-company trading took place
during the year between one of the subsidiary’s and the parent and the other subsidiary.
Cambus plc
(i) Consolidated statement of profit or loss for the year ended 30 September 2013
£
Revenue (W1) 2,017,550
Share of profit of jointly controlled entity (W4) 12,850
Owners of Cambus plc (β) 613,050
670,000
(ii) Consolidated statement of changes in equity for the year ended 30 September 2013
(extract)
Retained Non-
earnings controlling
£ interest
£
Balance at 1 October 2012 (W6 & W5) 266,515 215,180
Total comprehensive income for the year 613,050 56,950
Added on acquisition of subsidiary (82,500 + 280,000) x 20% – 72,500
Dividends (500,000 x 50p) / (300,000 x 25p x 35%) (250,000) (26,250)
Balance at 30 September 2013 (β) 629,565 318,380

Workings

Cambus Kennet Ltd
plc Ochill Ltd (6/12) Adj Consol
£ £ £ £ £
Revenue 1,285,300 579,000 216,250 (63,000) 2,017,550
Cost of sales – per Q (418,200) (236,200) (82,650) 63,000 (677,050)

– PURP (W7) (3,000)
Op expenses – per Q (267,500) (172,000) (61,200) (504,700)

– FV deprec
(100,000/25yrs) (4,000)

– Ochill (300,000 x (48,750) –
65% x 25p)
Tax (130,000) (34,200) (14,450) (178,650)

129,600 57,950

£
Ochill Ltd (35% x 129,600 (W1)) 45,360
Kennet Ltd (20% x 57,950 (W1)) 11,590
56,950
(3) Ochill Ltd – Net assets

(Proof only) At
30 Sept 2013 1 Oct 2012 acquisition
£ £ £
Share capital 300,000 300,000 300,000
Retained earnings (W) 296,400 234,800 153,700
PURP adj (W6) (3,000)
FV adjustment 100,000 100,000 100,000
FV – depreciation (4,000 x 6 / 5yrs) (24,000) (20,000) –
Total 669,400 614,800 553,700
W (296,400 – 136,600 + (300,000 x 25p) = 234,800
(4) Jointly controlled entity – Izat Ltd

£
Share of profit for the year (44,625 x 40%) 17,850
12,850
(5) Non-controlling interest brought forward – Ochill Ltd

£
At acquisition (553,700 (W3) x 35%) 193,795
Share of post-acquisition profits ((614,800 – 553,700) x 35%) 21,385
215,180
(6) Retained earnings brought forward
£
Cambus plc (461,200 – 518,350) (57,150)
Add back dividend (500,000 x 50p) 250,000
Izat Ltd – post acquisition ((225,500 – 44,625 – 96,000) x 40%) 33,950
Ochill Ltd – post acquisition ((614,800 – 553,700) x 65%) (W3) 39,715
266,515

(7) PURP
% £
SP 120 36,000
Cost (100) (30,000)
GP 20 6,000
1
X /2 3,000
Ochil Ltd
At acquisition ((300,000 + 153,700 + 100,000) x 35%) 193,795
Share of post-acquisition profits ((669,400 – 553,700) x 35%) 40,495
234,290
Kennet Ltd
At acquisition ((280,000 + 82,500) x 20%) 72,500
Share of post-acquisition profits
((140,450 – 82,500) x 20%) 11,590
84,090
318,380
(9) Retained earnings carried forward (for proof only)

£
Cambus plc 461,200
Izat Ltd – post acquisition (225,500 – 96,000) x 40% 51,800
Less: impairment – Izat Ltd (5,000)
Ochill Ltd - post acquisition ((669,400 – 553,700) x 65%) (W3) 75,205
Kennet Ltd – post acquisition (140,450 – 82,500) x 80%) (W4) 46,360
629,565
Most candidates produced a well laid out consolidated statement of profit or loss, and showed the split
between the profit attributable to the parent and to the non-controlling interest. This was backed up, on the
whole, by a well laid out consolidation schedule. Attempts at the consolidated statement of changes in equity
were generally less good, both in presentation and in content.
Many candidates produced a completely correct consolidation schedule, with figures for the provision for
unrealised profit and the additional depreciation, in the appropriate columns. The vast majority of candidates
correctly took only six-twelfths of the subsidiary’s figures to their consolidation schedule. The most common
omission was not to calculate the parent’s share of the dividend from the subsidiary held throughout the year
and realise that it made up the whole of the parent’s investment income and that therefore the two figures
should be cancelled out. Other common errors were to include a provision for unrealised profit even where
the goods had been sold on to third parties and adjusting the parent’s costs (rather than the subsidiary’s) for
the additional depreciation arising from the fair value adjustment.
The figure for share of profit of jointly controlled entity was more often than not correctly calculated, with the
most common error being to omit the impairment. A minority of candidates attempted to calculate some sort
of statement of financial position figure, which they then reduced by the impairment or describe the figure as
“share of associate” on the face of the consolidated statement of profit or loss.
Unfortunately answers to the second part of the question relating to the consolidated statement of changes in
equity extract were far weaker. Although most candidates did enter the relevant figures from the consolidated
statement of profit or loss many went no further than this. A significant number of candidates correctly
calculated the dividend paid by the subsidiary acquired during the year to the non-controlling interest, with the
figure omitted more often than errors were made.

A figure for the non-controlling interest added on acquisition of the subsidiary was not seen very often, but
where it was included it was more often than not the correct figure. Only some candidates made some
attempt to calculate either non-controlling interest and retained earnings brought forward or carried forward
and earned some marks for this, but these figures were rarely completely correct, although candidates did
pick up some marks, most commonly for an attempt at a net assets table which they used to arrive at pos t
acquisition earnings.
No marks were given for a group structure diagram, since the percentage holdings were given in the
question, although many candidates did produce such a diagram. Some candidates were, however, careless
in their use of these percentages, the most common error being to use the parent’s percentages in
calculating the non-controlling interest.


Financial Accounting and Reporting – Professional Level – June 2014
Question 1
Total Marks: 31
General comments
Part (a) of this question tested the preparation of a statement of profit or loss, a statement of financial
position and a statement of changes in equity from a trial balance plus a number of adjustments.
Adjustments included the revaluation of property, plant and equipment (with a transfer between the
revaluation surplus and retained earnings), the receipt of a government grant, share issues and dividends,
a foreign exchange transaction and a prior period adjustment. Part (b) required an explanation and
quantification of the alternative treatment of the government grant. Part (c) tested the information needs of
users in the context of property, plant and equipment.
Tipperary plc
(a) Financial statements
Statement of profit or loss for the year ended 31 December 2013

£
Revenue (5,709,600 – 18,000 – 9,200 (SCE)) 5,682,400
Finance cost (100,000 x 5%) (5,000)

£ £
Assets
Non-current assets
Property, plant and equipment (535,000 (W2) – 21,250 – 17,500 (W1)) 496,250
Current assets
Inventories 192,300
556,050


Equity
Share premium 9,200
638,150
Preference share capital (5% redeemable) 100,000
Deferred income (13,500 – 4,500) (W3) 9,000
109,000
Current liabilities
Bank overdraft 57,850
Trade and other payables (233,050 + 5,000 – 5,750 (W4)) 232,300
Taxation 10,500
305,150
Statement of changes in equity for the year ended 31 December 2013
Ordinary Share Revaluation Retained

share premium surplus earnings
capital
£ £ £ £
At 1 January 2013 184,000 - 209,000 256,450
Prior period error - - - (100,000)
Restated balance 184,000 - 209,000 156,450
Rights issue (230,000 ÷ 5) (x 20p) 46,000 9,200 - -
Total comprehensive income for the - - 21,000 30,900
year (30,000 – 9,000 (W2))
Transfer to retained earnings - - (7,500) 7,500
(17,500 (W1) – 10,000)
Ordinary dividend (184,000 x 10p) - - - (18,400)
At 31 December 2013 230,000 9,200 222,500 176,450
Workings
(1) Costs matrix Cost of Distrib Admin

sales costs expenses
£ £ £
Per TB 3,968,600 562,700 1,097,900
Downwards revaluation (W2) 11,000
Depreciation (85,000/4) ((450,000 – 100,000)/20) 21,250 17,500
Opening inventories (278,000 – 100,000) 178,000
Ordinary dividend (18,400)
Release of government grant (W3) (4,500)
Exchange gain (W4) (5,750)
3,976,300 562,700 1,097,000
Note: Marks were awarded if items were included in different line items than the above
provided that the heading used was appropriate.

(2) PPE and revaluation reserve

Land and Plant and
buildings equipment
£ £ £
Carrying amount at 1 January 2013 420,000 105,000
Valuation on 1 January 2013 450,000 85,000 535,000
Revaluation upwards/(downwards) 30,000 (20,000)
Revaluation surplus at 1 January 2013 9,000 209,000
To statement of profit or loss (11,000)
Grant received 18,000

Less: Released in year (18,000/4) (4,500)
Deferred income 13,500
(4) Forex transaction
Translation on 15 November 2013 (€115,000 x 0.90) 103,500

Translation on 31 December 2013 (€115,000 x 0.85) 97,750
Exchange gain 5,750
Candidates generally performed well on this part of the question. Presentation of the three statements was
usually of a sufficient standard to collect the available presentation marks with the presentation and indeed
completion of the statement of changes in equity (which candidates often find more challenging) of a
pleasing standard. Many candidates, however, failed to take their closing balances from this statement to
the equity section of their statement of financial position, thereby letting the statement of changes in equity
act as a working for those figures, and instead wasted time by producing other workings for these figures.
On occasion, the figures in these additional workings and those in the statement of changes in equity were
different. Only a minority of candidates failed to produce a statement of changes in equity.
The statement of profit or loss was generally well prepared and completed by the majority of candidates. It
was pleasing to see that the majority of candidates also prepared a cost matrix working. By preparing this
standard working candidates maximise the number of marks they will be awarded. Haphazard cost
workings, or brackets on the face of the statement of profit or loss (which were used by a minority of
candidates) often lost marks through missing narrative and no audit trail.
The majority of candidates correctly reduced opening inventory for the overvaluation in the cost matrix
however a minority instead adjusted closing inventory, which whilst having the same effect in the cost
matrix meant that closing inventory in the statement of financial position was incorrect. The overvaluation
was reflected in the statement of changes in equity by a significant number of candidates although
considerably less showed it in the correct place and then showed a sub-total with a restated balance.
Others made the adjustment in the statement of changes in equity but then failed to reduce opening
inventories in the cost matrix.
The government grant was generally dealt with correctly by the majority of candidates in the statement of
financial position, although less showed the correct figure as an adjustment to revenue and/or the release
of the grant in the year as a deduction from expenses (or as operating income). Similarly the exchange
gain was correctly calculated by almost all candidates and a significant number correctly reduced trade
and other payables, but again less went on to reflect the adjustment correctly in the statement of profit or
loss.
The property, plant and equipment working caused problems for a number of candidates, who omitted to
revise the balances in the trial balance for the revaluation. Many candidates, though not all, realised that
the downwards revaluation on the plant and equipment needed to be split between the statement of profit
or loss and the revaluation surplus (although having recognised this not all of these candidates then
followed this through to their cost matrix and the statement of changes in equity). Fewer still realised that,
since the latter transfer had wiped out that part of the revaluation surplus which related to plant and
equipment, the only transfer that could be made for the additional depreciation was that arising from the
revaluation of the buildings.


 Showing the bank balance (which was an overdraft as shown by its inclusion on the credit side of
the trial balance in the question) in current assets instead of in current liabilities.
 Not showing the net revaluation in the year and the profit for the year on a single line in the
statement of changes in equity, described as “total comprehensive income”.
 Showing £230,000 as the opening balance on ordinary share capital in the statement of changes
in equity, as opposed to the closing balance (and then working backwards from that to adjust for
the rights issue).
 Failing to split the deferred grant between current and non-current liabilities.
 Being careless with the bracket convention in the cost matrix, for example showing closing
inventory or the foreign currency gain as increases rather than decreases in costs.
 Depreciating the land as well as the buildings.

(b) Alternative treatment of the government grant
The alternative method per IAS 20, Accounting for Government Grants is the netting-off approach. The
netting-off approach requires the grant to be deducted in arriving at the carrying amount of the asset.
Under the netting-off approach the grant of £18,000 would have been credited to the cost of plant and
machinery, giving an initial carrying amount of £12,000 (30,000 – 18,000), compared to an initial carrying
amount in Part (a) of £30,000.
Depreciation would then have been charged on that net amount, giving a charge for the year of £3,000
(12,000/4) compared to a figure in Part (a) of £7,500 (30,000/4).
The final carrying amount would then be £9,000 (12,000 – 3,000) compared to £22,500 (30,000 – 7,500).
This decrease of £4,500 in the depreciation charge reflects the fact that under the netting-off method the
grant is recognised in profit and loss over the life of the depreciable asset – “replacing” the credit of £4,500
in Part (a) where the grant is released directly into cost of sales.
The reduction of £13,500 in the final carrying amount “replaces” the total deferred income on the
statement of financial position in Part (a) of £13,500.
The net effect on profit of the two methods is in fact the same as the different “treatments” are really a
difference of presentation.
Almost all candidates knew that the alternative treatment of the government grant was the “netting off
method” and correctly calculated the figures (cost, depreciation charge and carrying amount) on that
basis. Fewer candidates compared these figures to those they had calculated in Part (a). Most stated that
the figures “had the same net effect” but few described why this is in any detail.

(c) How information re PPE meets needs of users

Financial position
The financial position of an entity is affected by the economic resources it controls, its financial structure,
its liquidity and solvency and its capacity to adapt to changes in the environment in which it operates.
Information about the total carrying amount of property, plant and equipment (PPE) as given on the face of
an entity’s statement of financial position gives the user an indication of the resources the entity has
available to it in terms of tangible assets held for long-term use in the business. Revalued figures are more
relevant than cost.
That figure will then be broken down further in the notes to the financial statements.
This indicates the type of PPE held which may add further to an understanding of resource. This note also
shows the changes in financial position in the year.
For example, land and buildings might be held for investment potential as well as being used for
office/factory space. Plant will be used to generate future revenues. Equipment could be used for the
generation of future revenues or for the entity’s own use, perhaps for administrative purposes.
The fact that the amount of leased assets forming part of the PPE figure is disclosed shows that these
assets have a future cost in terms of lease payments – affecting the liquidity and solvency of the entity.
The “capital commitments” note showing the future purchases of PPE to which the entity is committed
indicates a requirement for future finance.
The accounting policy note shows the valuation model used and depreciation methods, which allow
comparison to other entities.
Financial performance
Information about financial performance, in particular profitability, is needed in order to assess potential
changes in the economic resources that the entity is likely to control in the future.
Disclosure of the annual depreciation charge shows the “cost” of using the assets.
Disclosure of significant gains/losses on disposal could indicate problems with the depreciation method or
where value is greater than carrying amount.
Impairment losses may indicate underlying issues, such as underprovision of depreciation, or a downturn
in a particular market sector (which might affect future performance).
Changes in financial position
Changes in financial position are shown in the statement of cash flows. This allows users to assess the
ability of the entity to generate cash and its need to use what is generated.
Users will be able to see, via the statement of cash flows, PPE purchased during the year and cash
inflows from PPE disposed of. If little PPE is purchased and much disposed of then the user may be
concerned about the future of the entity.
This part was dealt with much less well. The majority of candidates clearly struggled with this requirement,
with a significant number gaining either one or zero marks (in spite of the fact that there is a very similar
question in the revision question bank). A significant number of candidates simply discussed the
qualitative characteristics in respect of property, plant and equipment, which was not asked for and gained
no marks. Others made a series of “random” comments, with no attempt to link these to “financial
position”, “financial performance”, “or “changes in financial position” as represented, per the Conceptual
Framework, by the statement of financial position, the statement of profit or loss and the statement of cash
flows.
Candidates must read requirements carefully and be mindful that unless the requirement is addressed
they are wasting their time writing about something that they think might be relevant. It was not uncommon
to see a whole page of writing gaining zero marks. Those candidates who scored the highest number of
marks set up three headings (ie “financial position”, “financial performance” and “changes in financial
position”) and made pertinent comments under each. There was, however, a common misconception,
even amongst these candidates, that changes in financial position are shown by the statement of changes
in equity. Another common error was to say that the statement of financial position showed cost less
accumulated depreciation thereby showing what property, plant and equipment “is worth”. Others referred
to the performance of the asset, as opposed to the financial performance of the reporting entity.

Question 2
Total Marks: 29
General comments
issues, given in the scenario. The issues covered a lease of land and buildings, decommissioning costs,
sale and repurchase and an event after the reporting period. Part (b) required the calculation of revised
earnings and basic EPS, having adjusted for errors made by the company as discussed in Part (a), plus
an explanation of why the managing director’s calculation was incorrect. Part (c) required an explanation
of the ethical issues arising from the scenario and the action to be taken.
Limerick plc
(1) Lease of land and buildings
IAS 17, Leases, requires that the land and buildings elements of a single lease are considered separately
in order to classify as a finance or an operating lease. A lease is classified as a finance lease if it transfers
substantially all the risks and rewards incidental to the ownership of an asset.
The managing director (MD) is correct that land has an indefinite economic life. However, given the fact
that ownership does pass, this lease is relatively long, and in the case of the buildings is for almost all of
the asset’s useful life, and in both cases the present value of the minimum lease payments amount to
“substantially all” of the fair value of the asset, the whole lease should be treated as a finance lease.
As the MD has treated this as an operating lease then the payment of £120,000 made on 1 January 2013
will have been debited to expenses. This entry will need to be reversed. Per IAS 17, the finance lease
should be capitalised at the lower of the fair value of £1.3 million and the present value of the minimum
lease payments of £1,290,835 (1,183,265 + 107,570). The table below illustrates the entries which should
have been made.
Year ended B/f Payment Capital Interest at C/f

10% pa
£ £ £ £ £
31 Dec 2013 1,290,835 (120,000) 1,170,835 117,084 1,287,919
31 Dec 2014 1,287,919 (120,000) 1,167,919
A finance cost of £117,084 should be charged in the statement of profit or loss.
The lease liability at 31 December 2013 is therefore £1,167,919 non-current and £120,000 current.
Because legal title will pass, the building should be depreciated over its useful life of 42 years, giving a
depreciation charge for 2013 of £28,173 (1,183,265 ÷ 42). The land is not depreciated. The carrying
amount of the land and buildings in the statements of financial position at as 31 December 2013 will
therefore be £1,262,662 (1,290,835 – 28,173).
(2) Decommissioning costs
Per IAS 37, Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised
where:
 there is a present obligation as a result of a past event
 an outflow of resources is probable, and
 the amount can be estimated reliably.
The decommissioning costs meet these recognition criteria as:

 there is an obligation to decommission (it was a condition of the sale),
 it arose from a past event (the purchase of the plant), and
 there is a reliably estimated outflow of resources (the £50,000 that will be paid out).

When the plant was purchased on 1 January 2013, a provision should therefore have been made for the
5
discounted costs of decommissioning the plant in five years’ time, measured as £50,000 x 1/(1.07) =
£35,649, adding this amount to the cost of the asset. This would also have had the effect of increasing the
depreciation charge for 2013 on the asset by £7,130 (35,649 ÷ 5).
A finance cost of £2,495 (35,649 x 7%) should be charged in the year ended 31 December 2013 to reflect
the unwinding of the discount and the provision should be increased by the same amount. In the
statement of financial position as at 31 December 2013 the provision will be shown as a non-current
liability of £38,144 (35,649 + 2,495).
(3) Sale and repurchase
This is a sale and repurchase agreement. Per IAS 18, Revenue, the terms and conditions of the sale need
to be considered to determine whether or not there is a sale in substance. Where legal title has been
transferred, but the risks and rewards of ownership (here the right to build on the land and potential gains
and losses in market values) have been retained by the “seller” the transaction is treated as a financing
arrangement. The fact that Limerick plc is likely to repurchase the land and at a price which is below the
current market price adds weight to this conclusion.
The profit on the “sale” of the land of £250,000 (750,000 – 500,000) should therefore be derecognised. A
loan of £750,000 and accrued finance cost of £52,500 (750,000 x 7%) should be recognised.
(4) Event after the reporting period

Per IAS 10, Events After the Reporting Period, the determination of the court case is an adjusting event as
it provides evidence of conditions that existed at the end of the reporting period (ie of the court case that
was already in progress). The financial statements should therefore be adjusted to include an accrual for
the total due of £125,000 and the note re the contingent liability removed. There is no specific requirement
to disclose the adjusting event.
Candidates generally performed well overall on this part of the question, although some issues were dealt
with better than others. The majority of candidates responded to all four issues and provided both
explanations and supporting calculations.
Issue (1): Most candidates made a good attempt at the lease of land and buildings, although there was
clearly some confusion on this topic. Candidates generally understood that to assess which lease is
present for land and buildings they needed to make the assessment separately. However, many
candidates incorrectly identified the land as being an operating lease, even where they had noted that
legal title passed. Where candidates did realise that both elements were finance leases they often split
them out and produced two lease tables, which was unnecessary. However, this sometimes followed on
from a statement that the two leases were to be “treated” separately, as opposed to “considered”
separately when classifying them and this may have been where the confusion arose.
Many answers lacked consistency. For example, the land would be identified as being an operating lease
but then the full lease payment was added back and used in the finance lease table. Land was identified
as having an indefinite life but then the total, including land, was used for the depreciation working. The
finance lease table itself was generally correctly done, although the opening figure was often incorrect and
a minority of candidates treated the payments as made in arrears rather than in advance. The majority of
candidates incorrectly identified that the depreciation on the building should have been over 40 years
rather than 42 years, even where they had identified that ownership passed. Almost all candidates stated
that the closing liability needed to be split into current and non-current but a significant number gave an
incorrect split of the total figure.
Issue (2): Most candidates correctly identified that the decommissioning costs should have been added to
the asset’s carrying amount, but fewer identified that a provision should be set up to complete the double
entry. Of those that did, only a minority set out the IAS 37 conditions for the recognition of a provision and
fewer still applied these conditions to the scenario. The majority of candidates correctly identified that the
amount should be discounted although a minority used the incorrect discount rate. It was pleasing to see
that the majority of candidates also correctly depreciated the revised carrying amount of the asset and
realised that they needed to do some unwinding of the provision (even where they hadn’t identified that a
provision should be recognised). The main concern with this issue was a lack of supporting narrative with
many answers containing little more than a series of numbers.
Issue (3): The answers for the sale and repurchase were mixed with the majority of candidates concluding
that this was a sale and leaseback rather than a sale and repurchase. However, a number of marks were
still available for a good discussion centred around the principles of substance over form and the non-
transference of risks and rewards.

Many calculated an accrued finance cost based on the repurchase price less the sale price, failing to
recognise that the repurchase was in two years’ time, not one.
Issue (4): The final issue concerned an adjusting event after the reporting period, with most candidates
correctly concluding that a provision needed to be made. However, around half of the candidates simply
seemed to miss that this should have been a discussion about events after the reporting date and new
information concerning a condition that existed at that date, rather than a simple assessment of a
provision. Therefore a number of easy marks were lost through lack of narrative.
(b) Revised earnings and basic EPS
£
Earnings per draft financial statements 500,500
Add back: Operating lease rental (1) 120,000
Less: Finance cost re leased asset (1) (117,084)
Depreciation on leased asset (1) (28,173)
Depreciation on decommissioning costs (2) (7,130)
Finance cost re decommissioning costs (2) (2,495)
Profit on “sale” of land (3) (250,000)
Finance cost re land “sold” (3) (52,500)
Damages/costs in court case (125,000)
Revised earnings figure 38,118
Weighted average number of ordinary shares:
Number of shares Weighted average
1 January 2013 100,000 x 6/12 x 5/4 62,500
Bonus issue (1 for 4) 25,000
1 October 2013 125,000 x 3/12 31,250
Issue at full market price 80,000 93,750
31 December 2013 205,000 x 3/12 51,250
145,000
EPS (38,118 ÷ 145,000) 26.3p
Per IAS 33, Earnings per Share, the calculation of basic earnings per share should be based on the
weighted average number of ordinary shares outstanding during the period. So where there have been
share issues during the period, as here, it is incorrect to use the opening (or indeed the closing) number of
shares. Where shares have been issued at market price, those shares should only be included in the
shares in issue for part of the period – ie the period in which the proceeds from that share issue have
generated earnings. Conversely, because bonus shares have not generated any cash/earnings they are
dealt with in the calculation by IAS 33 by assuming that the shares have always been in issue.
The majority of candidates made a good attempt at adjusting the “earnings” given in the question by their
figures calculated in Part (a). It was common to see this as the first page of the answer to Question 2,
showing that candidates had heeded advice from the examining team about building up this part of an
answer as they went along. A few candidates, however, disadvantaged themselves by combining various
figures from Part (a) into a “net” adjustment for each issue – all well and good if an audit trail was
provided, but if not marks could well have been lost.
The calculation of the weighted average number of shares was, however, disappointing, compared to
when an EPS calculation was set in a previous paper. A significant number of candidates were unable to
correctly calculate this figure. The most common errors were to use the wrong number of months or to
incorrectly adjust for the bonus issue.
The final element of this part of the question was to explain why the managing director was incorrect in
basing his EPS calculation on the opening number of ordinary shares. It was disappointing that few
candidates went beyond saying that this was wrong and that the managing director should have used a
weighted average number of shares. Very few made any link between the issue of shares and the
earnings those shares might or might not generate depending on whether the issue was for cash or not.

(c) Ethical issues
The MD has given plausible reasons for the accounting treatment of the issues identified. Each issue is
technical in nature and the treatments may appear reasonable to a business manager with a general
appreciation of accounting principles but not a detailed awareness of current reporting standards.
However, the MD appears to be applying pressure to have his treatments confirmed by offering incentives
for compliance with his wishes (intimidation threat). I should not be swayed by the thought of being made
the new FD (self-interest threat). Furthermore, all the treatments adopted by him have the effect of
increasing the EPS figure to above that of the previous year, which is said to be a key criteria for the
board. Once the correct treatments are adopted basic EPS in fact falls back to below the level of the
previous year to 26.3p compared to 70.3p. Even if last year’s EPS is restated for the bonus issue to 56.2p
(70.3p x 4/5) this is still a fall in EPS – not the “significant improvement” that the board is looking for.
The finance director (FD) left under suspicious circumstances, which need to be confirmed. It may be that
he too was put under pressure to adopt incorrect accounting treatments and found the situation untenable.
IFRS is quite clear on the appropriate treatment of these four issues. There is little, if any, choice or
judgement on any of the matters. I should not give in to the MD’s wishes or prepare financial statements
that are contrary to IFRS.
I should apply the ICAEW Code of Ethics, with the following programme of actions:
 Explain matters to the MD with supporting evidence so that the matters can be corroborated.
 If resolution cannot be achieved, discuss the matters with the other directors to explain the
situation and obtain support. Consider also discussing the issues with the external auditors/audit
committee.
 Obtain advice from the ICAEW helpline or local members responsible for ethics.
During the resolution process it would be useful to keep a written record of all discussions, who else was
involved and the decisions made.
Almost all candidates made a reasonable attempt at this part of the question, with a good number
obtaining three or four marks, although five marks was rare. Candidates should remember that to gain the
most marks their answer should be tailored to the question scenario. Most candidates correctly identified
that the departure of the finance director was suspicious and that there was a self-interest threat and an
intimidation threat for the financial controller. They then went on to explain how these threats arose and to
suggest appropriate courses of action. A minority of candidates answered as if this was a problem facing
an external auditor, not an accountant in a company. Others were concerned about the managing
director’s lack of technical competence and adherence to the Code of Ethics when he was not a qualified
accountant. As ever, a few felt there were money laundering issues at play.

Question 3
Total Marks: 19
General comments
This question required the preparation of a consolidated statement of financial position. The group had two
subsidiaries, one of which was acquired at the start of the year. The question featured contingent
consideration, both goodwill and a gain on bargain purchase, fair value adjustments on acquisition, and
inter-company trading between the two subsidiaries, with adjustments needed to reconcile the intra-group
balances and deal with goods in transit.
Laois plc
Consolidated statement of financial position as at 31 December 2013
Assets £ £
Non-current assets
Property, plant and equipment (2,687,000 + 2,196,000 + 5,634,800
591,800 + (200,000 – 40,000 (W1))
5,802,800
Current assets
Inventories (193,200 + 53,700 + 159,000 – 5,000 (W7) 412,900
+ 12,000 (W7))
Trade and other receivables (288,000 + 92,300 + 522,300
207,000 – 50,000 – 15,000 (W7))
964,500
Equity
Attributable to the equity holders of Laois plc 4,742,480
5,392,000
Current liabilities
Trade and other payables (398,600 + 220,800 + 1,005,800
436,400 – 50,000)
Deferred consideration 104,000
Taxation (150,000 + 105,000 + 10,500) 265,500
1,375,300
Workings
(1) Net assets – Carlow Ltd

£ £ £
Share premium 300,000 300,000
Retained earnings 1,078,600 592,000
FV adj 200,000 200,000
Deprec on FV adj (200,000/25 years x 5) (40,000) –
PURP (5,000 + 3,000) (W7) (8,000) –
2,180,600 1,742,000 438,600

(2) Net assets – Kerry Ltd

£ £ £
Goodwill adj (24,000) (30,000)
512,000 570,000 (58,000)
(3) Goodwill – Carlow Ltd
£
Consideration transferred 1,560,000
Non-controlling interest at acquisition at fair value 350,000
Less: Net assets at acquisition (W1) (1,742,000)
168,000
(4) Gain on bargain purchase – Kerry Ltd
£
Consideration transferred
Cash 200,000
Deferred consideration at present value (104,000/1.04) 100,000
Less: Net assets at acquisition (W2) (570,000)
(35,000)
£ £
Carlow Ltd
Fair value at acquisition 350,000
Kerry Ltd 437,720
Share of post-acquisition reserves ((58,000) (W2) x 40%) (23,200)
211,800
649,520
£
Laois plc 1,645,400
Less: Unwinding of discount (104,000 – 100,000 (4,000)
Carlow Ltd (80% x 438,600 (W1)) 350,880
Kerry Ltd (60% x (58,000) (W2)) (34,800)
1,992,480
(7) PURP Sales in year Goods in

transit
% £ £
SP 125 50,000 15,000
Cost (100) (40,000) (12,000)
GP 25 10,000 3,000
x½ 5,000
Generally candidates performed well on this question with a reasonable number achieving full marks.
Nearly all candidates produced the expected standard workings (which are to be strongly encouraged)
and a significant number arrived at the correct figures for the goodwill and gain on bargain purchase. Most
then correctly took the gain to retained earnings although a minority netted it off against the goodwill
figure. The fair value adjustment to property was well dealt with (although a number used the incorrect
number of years when calculating the depreciation adjustment) as was the calculation of the unrealised
profit on the goods held at the year end. Most candidates also correctly followed these adjustments
through to property, plant and equipment and inventory respectively.
However, the adjustments for the goods in transit were not well dealt with and few candidates dealt
correctly with all aspects of this (although many did at least calculate the adjustment for unrealised profit).
A good number of candidates failed to increase inventories by the cost of the goods in transit between the
two subsidiaries at the year end. Others failed to reduce trade and other receivables by the selling price of
these goods, to reflect the fact that the receivable for the goods in transit had already been accounted for
in the selling subsidiary’s own financial statements.

The goodwill held within the subsidiary also caused problems and a considerable number of students
completely ignored it in the net assets working, with a minority adding rather than deducting it. Many also
did not understand the impact of the impairment that had been recognised within the subsidiary in relation
to this goodwill and went on to make incorrect adjustments to the discount on acquisition calculated for
this subsidiary and/or to retained earnings.
The aspect of the question that was least well dealt with was the deferred consideration. Although virtually
all candidates used the correct figure to add to consideration very few then charged the unwinding of the
discount to retained earnings. Even fewer showed anything in liabilities and even when they did it was
often the wrong number.

 Making adjustments for unrealised profits in the wrong place (ie against the net assets of the
subsidiary buying the inventory or in retained earnings or in both).
 Omitting the balance on the share premium account from the net assets table.
 Entering figures such as the fair value adjustment in one column of the net assets table rather
than in both.
 Attempting to calculate the non-controlling interest by taking a percentage of closing net assets
(which would work for the proportionate method) when this is clearly wrong if the fair value method
is being used.
 Adjusting trade receivables for the cost of the inventory in transit rather than for the sales price.
 Adjusting trade payables for goods in transit when no liability had been recognised.
 Adding (rather than deducting) post-acquisition losses to the non-controlling interest and retained
earnings workings.
It is disappointing that a good number of candidates still lose marks for failing to show an “audit trail”,
particularly for the share of post- acquisition profit or loss to be taken to the non-controlling interest and
retained earnings workings. To ensure they get the relevant marks candidates must show the figure (to
check that the correct movement in the net assets working has been picked up) multiplied by the
appropriate percentage. Many candidates actually waste time by writing out, for example, “NCI share of
post- acquisition profit” when it would be faster and clearer to show, for example, “£58,000 x 20%”.


Question 4
Total Marks: 21
General comments
This question required the redrafting of extracts from the consolidated financial statements. Matters to be
adjusted for were the disposal of a subsidiary, the setting up of a joint venture and a development project.
Part (b) required an explanation of the differences between IFRS and UK GAAP in respect of these
issues. Part (c) required a calculation of distributable profits and explanation thereof.
Kildare plc
(a) Extracts from the consolidated financial statements for the year ended 31 December 2013
£
Consolidated statement of profit or loss (extracts)
Owners of Kildare plc (W5) 899,590
Non-controlling interest (256,700 + (37,500 (W5) x 30%)) 267,950
Consolidated statement of financial position (extracts)

Non-current assets
Property, plant and equipment (2,752,100 + 90,000 – 15,000 (W4)) 2,827,100
Intangibles (356,000 + 115,000 + 15,000* (W4)) 486,000
Investment in joint venture (W2) 110,480
Consolidated statement of cash flows (extract)
Net cash from investing activities (– 50,600 + (300,000 – 1,500)) – (115,000 + 52,900
90,000) (W4) + 10,000)
*Note: Credit was also given if the depreciation on the equipment (W4) was expensed, rather
than being recapitalised.
Workings
(1) Profit on disposal of subsidiary

£ £
Less: Carrying amount of goodwill at date of disposal
NCI at acquisition (214,900 x 30%) 64,470
Less: Net assets at acquisition (50,000 + 158,900 + (214,900)
(35,000 – 29,000))
(34,570)
Less: Carrying amount of net assets at date of disposal (287,500)
(50,000 + (275,000 – (75,000 x 6/12)))
Add back: NCI at date of disposal (287,500 x 30%) 86,250
(2) Investment in joint venture

£
Share of post-acquisition increase in net assets ((48,400 + 52,800) x 40%) 40,480
Less: Dividend received (10,000)
110,480

(3) Share of profits of joint venture

£
Share of JV’s PAT (40% x 48,400) 19,360
Less: Share of PURP (40% x (120,000 x 25% x ½)) (6,000)
13,360
(4) R&D expenditure
£
Per Suspense account 275,000
Less: Carried forward as Intangibles:
Qualifying development costs 110,000
Patent registration costs 5,000
(115,000)
160,000
Carried forward as PPE (90,000)
Written off (initial research costs + evaluation of research findings) (β) 70,000
Depreciation on equipment (90,000/3 x 6/12) 15,000
(5) Profit attributable to owners

£
Per draft 865,800
Profit on disposal of subsidiary (W1) 64,180
Share of profit of subsidiary (75,000 x 6/12 = 37,500 x 70%) 26,250
Share of profit of JV 13,360
Research costs etc (W4) (70,000)
899,590
Answers to this part were generally disappointing. Although it was the most challenging question on the
paper there were many easy marks available for basic consolidation workings (such as the disposal of the
subsidiary) and for adjustments to property, plant and equipment and intangible assets. Answers were
generally difficult to follow often with lengthy and unnecessary workings.
Fewer candidates than normal managed to calculate the profit on disposal correctly although it was more
common to see the correct figure for goodwill. Many candidates produced one combined and somewhat
“muddled” working here which often resulted in the impairment to goodwill decreasing rather than
increasing the profit on disposal. Furthermore, many candidates clearly did not understand that the whole
of the profit on disposal should have been allocated to the owners, but that the profit of the subsidiary for
the year up to disposal should have been split between the owners and the non-controlling interest.
It was extremely disappointing to see how few candidates realised that equipment used for research and
development should be included within property, plant and equipment rather than in intangible assets.
Candidates also struggled to decide how much of the research and development costs should be
capitalised and how much should be expensed. These were very simple decisions that should have been
quickly made and the appropriate adjustments taken directly to the extracts. Nearly all candidates
calculated an amortisation charge for the capitalised development costs even though the new product was
still in the development stage.
The joint venture also caused problems, in particular the calculation and treatment of the provision for
unrealised profits. Those candidates who did attempt to calculate the latter often failed to multiply it by the
relevant percentage.
Many candidates did adjust the cash used in investing activities for the proceeds of the disposal (net of the
cash held by the subsidiary) and for the dividend received from the associate. However, some also used
the former (net) figure when calculating the profit on disposal of the subsidiary. It was, however, rare to
see the cash used in investing activities adjusted for the amounts spent on intangibles and property, plant
and equipment.

Other specific errors not noted above included the following:

 Omitting to time apportion the current year depreciation charge.
 Omitting to time apportion the post-acquisition profits to be added to the non-controlling interest
and owner’s share of profits (and/or failing to multiply them by the relevant percentage).
 Assuming the shares had a nominal value of £1 rather than the 50p given in the question.
 Ignoring the fair value adjustment for inventory or including it in net assets at the year end (as well
as or instead of at acquisition), even though it had been sold.
 Attempting to adjust the year end figure for intangibles by the cumulative impairment losses of
£40,000 in respect of the disposed of subsidiary, despite the fact that it had been disposed of by
this stage (and it was stated in any case in the question that no amounts in respect of this
subsidiary had been consolidated).
 Treating the joint venture as if it had been bought on the first day of the current year rather than of
the previous year.
 Taking the wrong figure for the cost of the joint venture (the most common error being to take the
whole of the joint venture’s share capital rather than the 40% which the parent company had
purchased).
 Taking the total post-acquisition profits of the joint venture to investment in joint venture rather
than the appropriate percentage (and/or only taking one year’s profits).
 Not showing the investment in the joint venture within the non-current assets section of the
extracts.

(b) IFRS v UK GAAP differences
Under IAS 38, Intangibles, development expenditure must be capitalised where the relevant criteria are
met. Under UK GAAP (SSAP 13) the capitalisation of development expenditure which meets certain
criteria is optional.
The development expenditure recognition criteria of SSAP 13 include a requirement to have or a

reasonable expectation of future benefits. IAS 38 is more stringent as the requirement is to demonstrate
future benefits.
UK GAAP (FRS 10) would have required the goodwill arising in the business combination with Sligo Ltd to
be amortised over its finite useful life. Under IAS 38 goodwill is tested annually for impairment.
Under UK GAAP (FRS 6) minority interest (the non-controlling interest) is always measured at its share of
net assets. IFRS 3 allows non-controlling interest to be measured at fair value (the fair value method) or at
its share of net assets (the proportionate method as used here).
UK GAAP (FRS 9) requires the use of the gross equity method for joint ventures. IAS 28, Investments in
Associates and Joint Ventures, requires the use of the equity method.
The gross equity method is the same as the equity method except that disclosure is required of the
following figure:
 in the profit and loss account – the investor’s share of the turnover of its joint venture
 in the balance sheet – the investor’s share of the gross assets and liabilities underlying the net
equity amount.
Answers to this part were mixed but most candidates did manage to pick up at least a couple of marks
although very few gained full marks. As in previous sittings the main problem is that candidates include
differences that are not relevant to the actual issues given, such as discussing the treatment of “negative”
goodwill when there was no negative goodwill in this scenario.


(c) Distributable profits and explanation
For entities within a group, the calculation of distributable profits must be made for each entity separately,
not for the consolidated group. Therefore Kildare plc’s distributable profits are those distributable by the
parent company only.
The basic rule is that distributable profits are measured as accumulated realised profits less accumulated
realised losses. In the case of listed companies, the amount of distributable profits is further reduced by
any excess of unrealised losses over unrealised profits. In the case of Kildare plc, insufficient information
is available in the scenario to identify any such excess. Assuming that no such excess exist, then
distributable profits are calculated as below:
 The disposal of the shares in Sligo Ltd affect Kildare plc’s parent company figures by the (as yet
unrecorded) parent company profit. This profit is the difference between the cost of the shares
(£225,000) and the sale proceeds (£300,000), increasing Kildare plc’s single entity retained
earnings by £75,000.
 The share of profits in the joint venture only affects the consolidated retained earnings, but Kildare
plc’s own financial statements would include the dividend from Mayo Ltd of £10,000. Since this
has been credited to a suspense account, Kildare plc’s single entity retained earnings need
increasing by £10,000.
 The research and development costs were spent by Kildare plc and therefore any adjustments in
respect of this affect its individual financial statements and hence distributable profits. Kildare plc’s
single entity retained earnings need reducing by £70,000 (W4).
As there is no further information on the reserve balances which form part of equity, the distributable
profits of Kildare plc are therefore:
109,700 + 75,000 + 10,000 – 70,000 = £124,700
Note: Credit was also given, where the depreciation on the equipment in Part (a) had been expensed, for
discussing the impact of this on distributable profits.
It was clear that very few candidates had spent any time on understanding distributable profits. A
significant number of candidates did not attempt this part of the question and even when they did make
some attempt, often achieved no marks at all. Very few candidates knew even the most basic points (such
as realised profits less realised losses) or that distributable profits are based on the individual company’s
Many candidates who did attempt this part of the question wasted time by simply copying out adjustments
made in Part (a) of the question that related to the consolidated financial statements


Professional Level – Financial Accounting and Reporting – September 2014
Question 1
General comments
This question required the preparation of the statement of profit or loss and statement of financial position.
A number of adjustments were required to be made, including depreciation, borrowing costs, an inventory
write down, a bonus issue and a finance lease.
Barchetta Ltd – Statement of financial position as at 31 March 2014
£ £
ASSETS
Non-current assets
Property, plant and equipment (2,087,050 (W4) + 41,570 (W5)) 2,128,620
Current assets
124,050
Equity
Ordinary share capital (400,000 x 6/5) 480,000
Equity 961,909
Bank loan 1,100,000
Finance lease (W6) 10,872
1,110,872
Current liabilities
Finance lease (13,161 – 10,872) 2,289
Taxation 84,500
179,889

Barchetta Ltd – Statement of profit or loss for the year ended 31 March 2014
£
Revenue 4,521,000

Administrative expenses (804,700)

Finance charges (83,060 – 27,600 (W3) + 1,071 (W6)) (56,531)
Income taxation (84,500)
W1 Expenses
Cost of sales
Closing inventories (W2) (31,850)
Depreciation charge – building (W4) 25,600
Depreciation charge – plant & machinery (W5) 12,450
Reverse lease payment (3,210)
3,409,730
W2 Inventory
£
Closing inventory 35,850
Inventory write down (200 x (315 – (320 – 25)) (4,000)
At 31 March 2014 31,850
W3 Borrowing costs
Weighted average cost of loans = (600,000 x 6.4%) + (500,000 x 7.5%) = 6.9%

1,100,000
Borrowing costs to be capitalised = (300,000 + (400,000 x 3/12)) x 6.9% = 27,600
W4 PPE – Building
£ £
Cost b/f 2,230,000
Depreciation charge for year
((2,230,0000 – 250,000 – 700,000)/ 50 yrs) (25,600)
Borrowing costs (W3) 27,600
Carrying amount at 31 March 2014 2,087,050
W5 PPE – Plant and equipment

£ £
Cost b/f 60,500
Depreciation charge for the year
(60,500 – 22,000) / 5yrs) (7,700)
Plant – different useful life
((22,000 x 4/5) / 8yrs) (2,200)
Leased equipment (15,300 / 6yrs) (2,550)
(12,450)
Accumulated depreciation b/f (21,780)
Leased equipment 15,300

W6 Finance lease
Opening Interest Lease Closing

balance @ 7% payment balance
£ £ £ £
31 March 2014 15,300 1,071 (3,210) 13,161
31 March 2015 13,161 921 (3,210) 10,872
£
Per draft 321,370
Add: profit and loss in year 165,539
Bonus issue (75,000 – (400,000 / 5)) (5,000)
481,909
Presentation of the statement of profit or loss and statement of financial position was generally very good with
most candidates achieving the maximum presentation marks available.
A significant majority of candidates arrived at completely correct figures in respect of closing inventories, the
finance lease, and the bonus issue. It was rare to see a completely correct figure for property, plant and
equipment, although this was usually due to errors on land and buildings as opposed to plant and machinery.
It was less common to see the correct figure for capitalised interest, although almost all candidates made a
good attempt at this calculation, with nearly all candidates arriving at the correct effective interest rate.
However, most candidates went on to apply that rate to the whole £1,100,000 borrowed or to the whole
£700,000 paid to the contractor, instead of taking into account that £400,000 of that amount had only been
paid four months before the year end.
Most candidates provided relatively clear workings for their property, plant and equipment figure. The most
common error was to not remove the amounts paid to the contractor before calculating the depreciation on
buildings.
The vast majority of candidates used a “costs matrix” to calculate the figure for cost of sales, and many
correctly allocated all of the costs to this category. The most common errors were to fail to deduct the finance
lease payment incorrectly included (even where the candidate had “used” this figure in their finance lease
working) and/or not to include all of the depreciation figures to cost of sales. This is despite the question itself
specifying that depreciation should be presented under this expense heading. Weaker candidates often got
themselves in a muddle in this working, mixing up their bracket convention.


Question 2
General comments
Part (a) of this question required candidates to explain the financial reporting treatment of five accounting
issues, given in the scenario. The five issues covered the irredeemable preference shares, research and
development, an onerous contract, revenue recognition and a related party transaction.
Part (b) required candidates to recalculate profit before tax, equity and liabilities for the adjustments
needed as a result of their answer to Part (a).
Part (c) required candidates to discuss and compare the accrual basis of accounting with cash accounting
with reference to revenue recognition and the Framework’s recognition criteria.
Impreza plc
(1) Irredeemable preference shares
The irredeemable preference shares provide the investor with the right to receive a fixed (5% pa) amount
of annual dividend out of Impreza plc’s profit for the period on a mandatory basis. If the annual dividend is
not paid then it is rolled up into the following year’s payment as the dividends are cumulative in nature.
Under IAS 32 Financial Instruments: Presentation, these shares should be classified as financial liabilities
as there is a contractual obligation to deliver cash. The preference shares should therefore be accounted
for at amortised cost using the effective interest rate which is equivalent to the annual dividend rate of 5%
as they are not redeemable. This reflects the substance of the share issue.
£450,000 should therefore be recognised as part of non-current liabilities and removed from equity and the
dividend payment of £18,750 (450,000 x 5% x 10/12) should be accrued for at 31 March 2014 and
included within finance costs in the statement of profit or loss.
(2) Research and development
As per IAS 38, Intangible Assets, distinction needs to be made between research and development
expenditure as expenditure incurred during the research phase should be recognised as an expense in
profit or loss when it occurs. During the research phase there is insufficient evidence that the expenditure
will generate future economic benefits.
The first £350,000 of expenditure was incurred during investigation work and is therefore classed as
research expenditure and should have been recognised as an expense in the statement of profit or loss.
Although expenditure incurred after this initial work is all development work, in order for it to be capitalised
as an intangible asset Impreza plc needs to meet strict criteria including:
 The technical feasibility of completing the asset

 The intention to complete the asset
 The ability to use the asset
 Demonstrate the commercial viability of the asset
 The availability of adequate resources
 Reliable measurement of expenditure

Therefore all of the development expenditure incurred up to 31 July 2013, ie £700,000, should be
recognised as an expense as part of profit or loss because the asset was not commercially viable until that
date.
On 1 August 2013 the asset met all the capitalisation criteria and therefore qualifying expenditure should
be capitalised from this date. The £200,000 incurred on launch activities is not qualifying expenditure
because it does not involve design, construction or testing and this should be expensed when incurred.
The remaining balance of £2,320,000 (3,570,000 – 350,000 – 700,000 – 200,000) should be capitalised.
Amortisation should commence when the asset is available for use. Although the control system was
promoted from 1 February 2014 it was not ready for use until 1 April 2014. Therefore at 31 March 2014, no
amortisation should be recognised. However, an impairment review should be carried out to ensure that its
recoverable cost is not less than the carrying amount.
The £320,000 cash received before the year end for pre-orders is effectively deposits, and at this date the
risks and rewards have not transferred to the customers as the control system technology has not been
delivered to them. These amounts should therefore not be recognised as part of revenue, but instead
should be held as deferred income as part of current liabilities.
(3) Onerous contract
The contract with Murano Ltd constitutes an onerous contract at 1 March 2014. IAS 37 Provisions,
Contingent Liabilities and Contingent Assets, defines an onerous contract as one in which the unavoidable
costs of meeting the obligation under the contract exceeds the economic benefits expected to be received
under it. The standard requires that where an onerous contract exists, the present obligation under the
contract should be recognised and measured as a provision.
Imprezo plc has made the decision to terminate the contract with Murano Ltd before the year end and the
unavoidable costs of meeting the obligation is the termination payment of £20,000. No benefit is expected
under the contract and therefore a provision should be made at 31 March 2014 of £20,000, with the
corresponding amount recognised in profit or loss.
(4) Related party
Imprezo plc will need to establish whether or not the sale of goods to Samuri Ltd is a related party
transaction under IAS 24, Related Party Disclosures.
Samuri Ltd is controlled by one of the close members (ie his daughter) of the family of a member of
Imprezo plc’s key management personnel, so Samuri Ltd is a related party of Imprezo plc under IAS 24.
Therefore, the sale of goods is a related party transaction.
Disclosure should include the nature of the related party relationship, ie one of the directors daughter’s
owns a majority share in Samuri Ltd, the amount of the transaction, ie £50,000, and whether there are any
outstanding balances at the year end, ie £30,000 is outstanding.
The rate of the discount and the names of the related parties do not need to be disclosed under IAS 24.
(5) Revenue recognition
Where a combined package of goods and services is sold, the separate components need to be identified,
then measured and recognised separately.
Where the total of the individual fair values exceed the combined package price then the discount needs
to be applied to each component in an appropriate manner. Where there is no evidence of how the
discount should be applied then the same discount should be applied to each component.

The total package price is £440,000 whereas to acquire the components separately it would have cost
£550,000 (£1,000 x 110% x 500 units), so a discount of 20% was given. The two components should
therefore be measured at:
 Software module – £1,000 x 500 x 80% = £400,000

 Technical support – (£1,000 x 10%) x 500 x 80% = £40,000 (or £400,000 x 10%)
The revenue for the software module should be recognised immediately as the goods have been
transferred. However, the technical support is for 24 months and therefore should be recognised on a
straight-line basis, assuming no other basis is more appropriate, over the 24 months. Therefore, revenue
of £10,000 (£40,000 x 6/24) should be recognised in the year ended 31 March 2014 in relation to the
technical support, with the remaining £30,000 being recognised as deferred income.
The deferred income should be split between current of £20,000 (£40,000 x 12/24) and non-current of
£10,000.
Virtually all candidates addressed all five issues and included narrative explanations as well as relevant
calculations. However, explanations were often superficial and/or didn’t use all of the information given in
the scenarios and hence candidates missed out on available marks as a result. A minority of candidates
incorrectly assumed that giving journal entries is a valid alternative to narrative explanations.
Most candidates correctly identified the underlying issues. It was particularly pleasing that nearly all
candidates identified the related party transaction as an issue as this was overlooked entirely by many
candidates in a previous sitting.
The calculations for the development costs to be capitalised and the splitting of revenue for the combined
sales package were frequently correct. Most candidates also correctly identified that the irredeemable
preference shares should be treated as debt in the scenario due to mandatory, cumulative dividends, that
the deposits received in advance should not be recognised in revenue, that the onerous contract should
be provided for and that related party disclosures were needed.
The most common errors were not time apportioning the preference share dividend, allowing the
capitalisation of development costs before the relevant criteria were met and incorrectly apportioning the
revenue on the combined package being sold (normally by misunderstanding how to deal with the
discount given).

(b)
Imprezo plc
Profit before tax Equity Liabilities

£ £ £ £
As stated 5,349,000 6,547,000 2,986,000
(1) Irredeemable preference shares – (450,000) 450,000
(1) Interest - prefs (18,750) – 18,750
(2) R&D (350,000+700,000) (1,050,000) – –
(2) R&D – launch activities (200,000) – –
(2) Customer deposits (320,000) – 320,000
(3) Onerous contract (20,000) – 20,000
(5) Revenue (440,000 – 410,000) (30,000) – 30,000
(1,638,750) (1,638,750) –
TOTAL 3,710,250 4,458,250 3,824,750

The majority of candidates made a good attempt at making the relevant adjustments to profit, equity and
liabilities. A significant number of candidates achieved at least five and often all six marks available. It
should be remembered that this part of the question has an own figure rule and therefore candidates can
gain full marks on this part of the question regardless of whether their answers to part (a) were totally
correct. The most worrying and common error was failing to adjust equity for the net impact of the
adjustments to profit, highlighting that candidates continue not to think through or understand properly the
link between the various elements of the financial statements.

(c) IAS 18 Revenue, accruals accounting and the Framework
Revenue is recorded when there is an increase in economic benefits during the period and the amount
can be measured reliably in accordance with the IASB Conceptual Framework. The Framework states that
an entity should assess the degree of certainty that economic benefits will flow to the entity. Hence
revenue can only be recognised when an entity is sufficiently certain that it will be paid for the goods or
services and that payment is for a known amount.
The accrual basis of accounting is followed with revenue being recognised in the period in which the
associated work is undertaken rather than when cash is received to provide a faithful representation in
accordance with the Framework.
IAS 18 provides additional guidance to assess the timing of when the economic benefits will flow to the
entity:
 Has the entity transferred the significant risks and rewards of ownership of the goods to the
buyer?
 Does the seller still have management involvement or effective control over the goods?
 Can the amount of revenue and costs be measured reliably? Has a price been agreed?
 Is it probable that the economic benefits associated with the transaction will flow to the entity? Has
a payment date been agreed, is the customer likely to pay on time?
When an entity has met all the above conditions it recognises the revenue even though payment may still
be outstanding.
Consistent with previous sittings answers to the “conceptual” requirement were rather disappointing and
were often too brief. However, most candidates attempted to answer this and normally gained at least a
couple of marks by discussing the recognition criteria in IAS 18 and/or the key recognition criteria from the
Conceptual Framework.


Question 3
General comments
This question was a mixed topic question, with part (a) covering property, plant and equipment and part
(b) covering the revised preparation of a consolidated statement of profit or loss, along with an explain
element in relation to inter-company trading.
Vitara plc
(i)
Consolidated statement of financial position as at 31 March 2014 (extracts)
Total assets (1,673,500 + 16,500 – 27,500 (W4)) 1,662,500
Consolidated statement of cash flows for the year ended 31 March 2014 (extract)
Net cash from investing activities (316,700 + 280,000 – 184,000 (W5)) 412,700
(ii)
Profit after tax

£
Draft profit after tax 496,500
Held for sale asset – impairment (W1) (3,500)
Scrapped plant – write-off (3,375)
Depreciation (8,375 – 6000) 2,375
Impairment loss (6,500)
485,500
Depreciation charge
£
Depreciation 127,200
Impaired equipment (W3) 6,000
Held for sale asset – reverse depreciation (56,000 / 7yrs) (8,000)
Scrapped plant – reverse depreciation (15,000 x 10% x 0.25) (375)
(8,375)
Workings
(1) Held for sale asset

£
Carrying amount at 1 April 2013 20,000
Fair value less costs to sell (17,000 – 500) (16,500)
Impairment 3,500
(2) Obsolete plant
Cost 15,000
Acc depreciation (15,000 x 10% x 7.75 years) (11,625)
3,375

(3) Impaired equipment

£
Impairment 6,500
Depreciation in year (18,000 / 3yrs) 6,000
B/fwd 1,156,300
(1) Held for sale asset (20,000 – 8,000) (12,000)
(2) Obsolete plant (3,375 – 375) (3,000)
(3) Impaired equipment (6,500)
- depreciation (6,000)
(27,500)
1,128,800
(5) PPE – cash movement

£ £
B/fwd (1,156,300 – 280,000) 876,300

Acquisition of subsidiary 151,200 Depreciation 127,200
Plant on credit terms 72,000
Additions (β) 184,000 C/fwd 1,156,300
1,283,500 1,283,500
Most candidates appeared to produce a random set of quite messy and unreferenced workings, rather
than a methodical approach which would have gained the most marks. This rather scattergun approach to
this part of the question meant that candidates often omitted figures in workings.
The impairment for the held for sale asset was calculated correctly by many candidates as was the
carrying amount for the obsolete plant. The impairment of the equipment and depreciation were again
calculated reasonably well by the majority of candidates. The most common error here was to use fair
value less costs to sell as the recoverable amount even though value in use was higher.
Most candidates made a reasonable attempt at calculating the depreciation charge, with the most
common error being to add rather than subtract the depreciation.
In most cases candidates made some attempt at the various calculations but then transferring these
calculated figures to the correct totals in the financial statements was less well done.
The adjustments which seemed to cause candidates the biggest problem were the adjustments to the
statement of cash flows. Only a minority of candidates completed this calculation correctly. It was
concerning that so many candidates appeared unfamiliar with double entry principles in respect of this
issue.
A number of candidates also wasted time explaining the treatment alongside each of their workings.
Candidates are reminded to read the requirement carefully and if the “explain” verb is not used, then no
such explanation is required or will have marks allocated to it.


(b) (i)
Extract from consolidated statement of profit or loss for year ended 31 March 2014
£
Revenue 1,527,600
Cost of sales (846,950)
Workings
(1) Consolidation schedule 6/12
Vitara plc Tredia Ltd Adj Consol
£ £ £ £
Revenue 1,395,600 178,000 (46,000) 1,527,600
Cost of sales – per Q (793,200) (96,750) 46,000 (846,950)

– PURP (W6) (3,000)
(2) PURP
% £
SP 115 46,000
Cost (100) (40,000)
GP 15 6,000
1
X /2 3,000
(ii) Intra-group balances IFRS financial reporting treatment
When one company in a group sells goods to another group member an identical amount is added to the
revenue of the first company and to the cost of sales of the second. Yet as far as the entity’s dealings with
third parties are concerned no sale has taken place. Consolidated financial statements are based on the
concept of substance over form which means that although Vitara plc and Tredia Ltd are two separate
entities they are instead accounted for as a single entity. Substance over form is implied in faithful
representation.
The consolidated figures for sales revenue and cost of sales should represent sales to and purchases
from third parties. An adjustment is therefore necessary to reduce the sales revenue and cost of sales
figure by the value of intra-group sales made during the year.
An adjustment is therefore required to deduct the intra-group sales from both consolidated revenue and
cost of sales.
If any of the inventory remains within a group company at the year end its value must be adjusted to the
lower of cost and net realisable value to the group, applying the single entity concept. This is because
these items have not been sold outside the group and therefore contain unrealised profit, so this element
is removed from closing inventory (ie cost of sales).
The most common errors were to either not pro-rata Tredia Ltd’s figures for only six months of ownership
or to subtract the PURP figures from cost of sales rather than adding it.
The explanation of the treatment of inter-company trading between a parent and subsidiary was
disappointing. Almost all candidates understood that inter-company trading should be removed from the
consolidated financial statements although far fewer candidates were able to explain why this was the
case. This suggests a rote learning approach to their studies with insufficient time allocated to
understanding the principles that lie behind the treatment of transactions.


Question 4
Part (a) of this question required the preparation of a revised consolidated statement of financial position
from draft information. The group had two subsidiaries, one of which was acquired during the year, and an
associate. Fair value adjustments were required on acquisition of the associate and one of the
subsidiaries. Impairments in all three companies had taken place during the period. Inter-company trading
took place during the year between the parent and the associate.
Part (b) required a comparison between IFRS and UK GAAP in respect of the calculation of goodwill for
the subsidiary acquired using the fair value method for calculating goodwill and NCI, including calculations
under UK GAAP.
Part (c) required a discussion of the ethical issues arising from the scenario.
Altima plc
Consolidated statement of financial position as at 31 March 2014
Assets £ £
Non-current assets
Property, plant and equipment (2,140,050 + 496,000) 2,636,050
Intangible (150,000 – 120,000) 30,000
Goodwill (31,640 + 32,450) (W3 & W4) 64,090
2,994,660
Current assets
Inventories (191,300 + 49,700) 241,000
Trade and other receivables (86,600 + 56,600) 143,200
444,650
Equity
Attributable to the equity holders of Altima plc 2,493,810
2,829,110
Total liabilities (556,050 + 54,150) 610,200
Workings
(1) Net assets – Fuego Ltd Year end Acquisition Post acq
£ £ £
Brands – intangible asset 150,000 150,000
Amortisation (150,000/5 yrs x 4) (120,000) –
981,750 966,700 15,050
(2) Net assets – Tacoma Ltd
£ £ £
553,600 576,800 (23,200)

(3) Goodwill – Fuego Ltd

£
Non-controlling interest at acquisition (966,700 x 20%) 193,340
46,640
Impairment (15,000)
31,640
(4) Goodwill – Tacoma Ltd
£
53,450
Impairment (21,000)
32,450
(5) Investment in associate – Previa Ltd
£
Share of post acquisition increase in net assets
((96,900 – 67,000) x 40%) 11,960
Share of additional depreciation on FV uplift
((30,000 / 6yrs x 2.75 yrs) x 40%) (5,500)
PURP (W7) (1,440)
264,520
£ £
Tacoma Ltd
At acquisition 150,000
Impairment (21,000 x 25%) (5,250)
Fuego Ltd 138,950
At acquisition 193,340
196,350
335,300
(7) PURP Sales in year
% £
Selling price 100 24,000
Cost (85) (20,400)
Gross profit 15 3,600
Previa Ltd - £3,600 x 40% = £1,440

£
Altima plc 548,900
Tacoma Ltd (75% x (23,200) (W2)) (17,400)
Fuego Ltd (80% x (15,050 (W1)) 12,040
Previa Ltd (W5) 11,960
PURP – Previa Ltd (W7) (1,440)
FV depreciation – Previa Ltd (W5) (5,500)
Impairment – Previa Ltd (W5) (24,000)
Impairment – Tacoma Ltd (21,000 x 75%) (15,750)
Impairment – Fuego Ltd (15,000)
493,810

Candidates’ performance on this question was again, excellent, and they were clearly well-prepared.
Almost all produced the “standard” workings for net assets, goodwill, non-controlling interest, investment in
associate and retained earnings. Presentation of the consolidated statement of financial position was
generally good, although there were some messy attempts. Almost all candidates included a figure for
non-controlling interest, for which they were rewarded. The most common omission from the more
straightforward figures was the figure for total liabilities. Of the other figures, many who adjusted for the
brand in the net assets working for Fuego Ltd failed to include the closing balance of that brand in
intangibles on the consolidated statement of financial position. Most candidates included a figure for
goodwill, but some lost marks where there was no audit trail showing clearly that this was the sum of their
two goodwill calculations for the two subsidiaries.
In the two sets of net assets workings, almost all candidates dealt correctly with share capital, share
premium and retained earnings. This meant that the figures for Tacoma Ltd were generally correct, and
most candidates then went on to calculate goodwill for this subsidiary correctly, dealing correctly with non-
controlling interest on the fair value basis. Some, however, then fell down in the retained earnings working,
failing to show the downwards movement on post-acquisition profits as a debit, as opposed to a credit
(with the same error made in the non-controlling interest working).
In the net assets working for Fuego Ltd, a good number of candidates dealt correctly with the fair value
adjustment in respect of the brand. Where mistakes were made on this they were generally making the
adjustment(s) in the wrong direction, adjusting only for the fair value of the brand at acquisition, but not for
the subsequent amortisation, or miscalculating the subsequent amortisation. Most candidates then went
on from this to produce correct (own) figures for goodwill and retained earnings.
Although most candidates were able to deal with calculating gross goodwill on both a fair value and a
proportionate basis, a few allocated only the group share of the impairment on the fair value basis.
Most candidates arrived at the correct total provision for unrealised profit, but many then failed to account
for only the group share (40%) of that figure. Others credited their figure to inventories instead of to the
investment in associate figure. The depreciation adjustment seemed to cause the most problems with few
candidates arriving at the correct figure and many adjusting for the increase in fair value on the plant itself
instead of just for the additional depreciation. Of those who attempted this figure, the most common errors
were to adjust for only one year of depreciation, instead of two years and nine months, and/or to account
for the whole figure instead of only the group share.

(b) UK GAAP treatment
UK GAAP is more restrictive than IFRS in respect of the calculation of goodwill and does not permit a
choice to be made. Under UK GAAP, the non-controlling interest, which is known as the minority interest,
is always calculated using the share of net assets (ie the proportionate basis).
Goodwill calculated using the proportionate basis is usually lower than that under the fair value method.
Goodwill – Tacoma Ltd

£
Minority interest at acquisition (576,800 x 25%) 144,200
47,650
Impairment (21,000)
26,650

Under UK GAAP there would be a decrease in consolidated non-current assets, representing goodwill, of
£5,800 (£32,450 – £26,650).
Goodwill should be amortised over its estimated useful economic life under UK GAAP and there is a
rebuttable presumption that this is not more than 20 years. Although annual impairment reviews are not
required under UK GAAP if an impairment was identified this would be recognised as above.
As the proportionate method is applied under UK GAAP none of the impairment is allocated to the non-
controlling interest (minority interest). Hence, reporting under UK GAAP will also affect the non-controlling
interest and the retained earnings as reported in the consolidated financial statements of Altima plc.
£ £
Tacoma Ltd
At acquisition (576,800 x 25%) 144,200
138,400
Fuego Ltd 196,350
Minority interest 334,750
Retained earnings (per part (a)) 493,810

Additional impairment re Tacoma Ltd (21,000 x 25%) (5,250)
488,560
Nearly all candidates stated that only the proportionate method is available under UK GAAP and most also
attempted to recalculate the goodwill figure. The majority also identified that goodwill would be amortised
although a significant number of candidates appear to believe that this should always be over twenty
years. Only the stronger candidates understood that impairment reviews might still be needed and could
clearly explain the impact of this on retained earnings/ NCI when the proportionate rather than fair value
method is used.
Many candidates wasted time by writing out other differences that were not relevant in this particular
scenario, such as the treatment of any “negative” goodwill arising and of acquisition costs.

(c)
Chartered accountants must always abide by the spirit of the five fundamental ethical principles. One of
these is professional competence and due care.
The professional competence of the interim manager should be questioned. He has a responsibility to
maintain his continuing professional development to the appropriate level required for his current position.
For the interim manager this will include keeping his technical knowledge and skills completely up to date
as he is accepting contracts which require him to perform the preparation of consolidated financial
statements and therefore his skills in this area should be exemplary.
If the interim manager’s technical knowledge and skills are lacking in the area of financial statement
preparation it is likely that his general accounting ability should be questioned. This would include whether
or not he is capable of carrying out an impairment review in a competent manner.

However, assuming that there is doubt over the carrying amounts of the three investments, Ciera should
carry out her own impairment review to confirm or otherwise the valuations. As an ICAEW Chartered
Accountant Ciera needs to ensure that she acts with integrity, demonstrating high standards of both
professional behaviour and conduct. There is a self-interest threat here as Ciera’s position in Altima plc
may be under threat because impairments appear to have arisen on acquisitions in which she was
involved. However, her judgement should not be influenced by the fact that her competence may be
questioned if large impairments arise from investment decisions she was involved in, remembering that
another of the five fundamental principles is professional behaviour.
As in previous sittings, many candidates produced a “stock” answer rather than referring specifically to the
scenario. Candidates must look at who they are and what their position is. In this question there was no
management pressure and therefore discussions with the ICAEW Ethics Helpline was not seen as
appropriate.
However, most candidates made a reasonable attempt at this part of the question, with a good number
obtaining half marks.


Financial Accounting and Reporting – Professional Level – December 2014
Question 1
Total Marks: 27
General comments
Part (a) of this question tested the preparation of a statement of profit or loss and a statement of financial
position from a set of draft financial statements plus a number of adjustments. Adjustments included
borrowing costs and depreciation on property, plant and equipment, a bonus issue of ordinary shares, the
issue of redeemable preference shares and dividends on both types of shares. Part (b) required an
explanation of the treatment of redeemable preference shares. Part (c) tested the differences between
IFRS and UK GAAP in respect of the treatment of borrowing costs.
Trakehner Ltd
Statement of profit or loss for the year ended 30 June 2014

£
Revenue 3,879,600
Income tax expense (120,000 – (143,000 – 120,000)) (97,000)

£ £
Assets
Non-current assets
Current assets
Inventories 453,700
Trade and other receivables (241,200 + 10,500) 251,700
720,200

Equity (W3)
1,677,575
Preference share capital (5% redeemable) (211,200 (W4) 201,200
– 10,000)
Borrowings 250,000
451,200

Current liabilities
Loan interest (W2) 7,500
Preference dividend (200,000 x 5%) 10,000
Taxation 120,000
452,700
Workings
(1) Costs matrix

Cost of sales Admin Distribution
expenses costs
£ £ £
Per draft 2,015,300 987,600 398,400
Depreciation (W2) 106,725 19,000
Ordinary dividend (1,000,000 (W3) x 10p) (100,000)
Accrual and prepayment 12,600 (10,500)
2,122,025 919,200 387,900
(2) PPE
£
Carrying amount per draft 1,982,500
Loan interest ((250,000 x 4% x 9/12) – 3,000) 4,500
Depreciation on other property (950,000/50) (19,000)
Depreciation on plant and equipment (426,900 x 25%) (106,725)
1,861,275
(3) Equity
Ordinary Share Retained
share capital premium earnings
£ £ £
Per draft 800,000 125,000 871,600
Bonus issue (800,000 ÷ 4) 200,000 (125,000) (75,000)
Ordinary dividend (W1) – – (100,000)
Decrease in profit for the year – – (19,025)
(361,300 – 342,275)
1,000,000 – 677,575
(4) Redeemable preference shares

Opening Interest Interest paid Closing
balance expense (5%) balance
(5.6%)
Year £ £ £ £
30 June 2014 200,000 11,200 Nil 211,200

Generally candidates made a good attempt at this part of the question and nearly all produced complete
statements of financial position and profit or loss with many gaining the full marks available for
presentation. The bonus issue, calculation of current year depreciation charges and adjustments for
prepayments and accruals were almost always dealt with correctly. Most candidates also recognised that
the redeemable preference shares should be treated as a liability rather than equity.
The capitalisation of interest appeared to cause the most problems. Although most candidates recognised
that interest on a qualifying asset should be capitalised many struggled with the calculation. The most
common mistakes were basing the amount on the costs incurred rather than the amount borrowed, using
the wrong number of months in the calculation, and not netting off the interest received. A number of
candidates also depreciated the new asset even though it had not yet been completed. It was also
worrying to see a lack of understanding regarding the double entry treatment of interest with a significant
number of candidates both capitalising and expensing the figure calculated. As always with property, plant
and equipment it was often difficult to find an “audit trail” supporting the final figure taken to the statement
of financial position.
In contrast, most candidates did use the recommended “costs matrix” when allocating costs for the
statement of profit or loss, and entered the adjustments into the correct columns. Occasionally errors were
made in terms of whether the adjustment was increasing or decreasing costs particularly with regard to the
dividend incorrectly posted to administrative expenses and a minority of candidates posted the accrual
and/or prepayment in the wrong (sometimes the same) direction(s).

 Adding, rather than deducting, the prior year over provision of income tax to the current year
charge (or making no adjustment for it at all).
 Using the same income tax figure in both the statement of profit or loss and the statement of
financial position (thereby omitting to complete the correct double entry).
 Treating the redeemable preference shares as a compound financial instrument (and wasting
significant time by discounting future cash flows to calculate the “liability” element).
 Failing to realise that the interest on the redeemable preference shares was unpaid at the year
end.
 Splitting the loan into current and non-current components.
 Adding the revised profit for the year to retained earnings but failing to deduct the original profit
already included.


(b) Financial reporting treatment of redeemable preference shares
Preference shares give the holder the right to receive an annual dividend (ie mandatory) (usually at a fixed
rate), which may be also be cumulative, out of the profits of a company, together with a fixed amount on
the ultimate liquidation of the company or at an earlier date if the shares are redeemable.
Legally, preference shares are equity. However, IAS 32 treats most preference shares as liabilities. This is
because they are, in substance, loans and meet the definition of a liability as there is a present obligation,
in the form of both preference dividends and redemption payments, which will lead to a future outflow.
The liability is measured at amortised cost using the effective interest rate, so that the premium on
redemption is effectively treated as part of the interest expense.
The interest is treated as a finance cost in the statement of profit or loss, rather than as a distribution out
of retained earnings.
Again, this was well answered with most candidates discussing substance over form and explaining why
redeemable preference shares should be treated as a liability. Almost all candidates also followed this
through by explaining that the resulting “dividend” should be treated as a finance cost. Fewer candidates
discussed the use of amortised cost and effective interest rate.

(c) UK GAAP differences re borrowing costs
Under UK GAAP (FRS 15) there is a choice as to whether to capitalise borrowing costs or to recognise
them as an expense when incurred. Under IFRS (IAS 23) capitalisation is mandatory.
Under UK GAAP the amount capitalised is limited to the finance costs on the expenditure incurred. Under
IFRS the amount capitalised is limited to the borrowing costs on the total related funds less the investment
income from any temporary investment of those funds.
This part was also well answered with a significant number of candidates achieving full marks and nearly
all candidates as a minimum flagging up the difference in respect of optional versus mandatory
capitalisation of interest costs. However, a few candidates lost marks by being imprecise in their wording –
for example saying that under IFRS companies “can” as opposed to “should” capitalise interest, thereby
losing half a mark. Other answers failed to make it clear that it is surplus investment income on these
particular borrowings which should be offset under IFRS, as opposed to any investment income.


Question 2
Total Marks: 30
General comments
issues, given in the scenario. The issues covered a change in depreciation method of equipment, a
government grant, a lease and a potential held for sale asset. Part (b) required the calculation of revised
figures for profit before tax, total assets and total liabilities. Part (c) required an explanation of the ethical
issues arising from the scenario and the action to be taken.
Holstein Ltd
(1) Change of depreciation method
IAS 16, Property, Plant and Equipment, requires companies to reassess the accounting estimates used to
calculate depreciation each year. If the reducing balance method is a better reflection of the pattern of
consumption of economic benefits then it is correct to change to this method.
Ryan is correct that a change of accounting policy is dealt with by making a retrospective adjustment to
opening figures. However, per IAS 16, a change to the depreciation method is a change in an accounting
estimate, not a change of accounting policy.
Changes in accounting estimates are dealt with, per IAS 8 prospectively, not retrospectively, by
depreciating the carrying amount of the asset at the date of the change under the new method. Therefore
the adjustment of £352,100 must be reversed out, reducing the opening balances of both property, plant
and equipment and retained earnings.
Ryan must have charged depreciation of 25% on this wrongly inflated carrying amount. Hence,
depreciation for the year ended 30 June 2014 is overstated by £88,025 (352,100 x 25%). Property, plant
and equipment is therefore understated by the same amount. Overall there is a net overstatement of
property, plant and equipment of £264,075 ((352,100 – 88,025) or (352,100 x 75%)).
Per IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, grants should
be recognised when there is reasonable assurance that:
 the entity will comply with the relevant conditions, and

 the entity will receive the grant.
Ryan does not expect to have to repay the grant and the grant has been received. Both of these
conditions therefore appear to have been met so it is appropriate to recognise the grant.
IAS 20 requires grants to be recognised in profit or loss over the periods in which the entity recognises the
expenses which the grants are intended to compensate. It is against the accruals principle to recognise a
grant on a cash receipts basis, which is what has been done here.
Holsten Ltd’s stated accounting policy for government grants is to use the netting-off method. Under this
method the grant is deducted from the carrying amount of the related asset. The grant will then be
recognised over the life of the related asset by way of a reduced depreciation charge.
The cost of the asset will therefore be stated at £200,000 (or for saying Cr £200,000 to PPE) (400,000 –
200,000), with accumulated depreciation of £37,500 (200,000 x 9/48). The carrying amount of the asset at
30 June 2104 is therefore £162,500 (200,000 – 37,500).
Because Ryan has already charged depreciation of £75,000 (400,000 x 9/48) and credited the statement
of profit or loss with income of £200,000 ie a net credit of £125,000, profit before tax needs to be reduced
(Dr) by £162,500 (125,000 + 37,500). The corresponding Cr will reduce total assets in the statement of
financial position.

(3) Operating lease
Per IAS 17, Leases, this is an operating lease because the risk and rewards of ownership have not
passed to the lessee (eg maintenance/insurance, use of the asset over the majority of its useful life,
present value of minimum lease payments below fair value of £350,000)
The lease payments of £180,000 (3 x £60,000) should be charged on a straight-line basis over the four
year lease term, even if the payments are not made on such a basis. This is in accordance with the
accruals principle. Hence, £45,000 (£180,000 x 25%) should be charged to the statement of profit or loss
in the year ended 30 June 2014. An accrual of £45,000 will be included within current liabilities.
(4) Asset held for sale
IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, states that an asset should be
classified as held for sale when there is intention to recover the carrying amount through resale. However,
there are strict criteria which must be satisfied before the IFRS rules can be applied.
Although the decision by the board shows intent, the asset was not immediately available for resale as
the reconditioning work could not be carried out until August.
Also the fact that the machine was advertised at a price significantly above the final sale price means that
the sale was not “highly probable”.
Therefore the held for sale criteria were not met at the year end and the asset should be removed from
this classification. The increase in value of (300,000 – 155,000) £145,000 should be removed from total
assets and the revaluation surplus, taking the carrying amount back to £155,000, which correctly includes
depreciation to 30 June 2014 (or continue to depreciate).
However, as the plant is “surplus to requirements” this is an indication that an impairment review is
required under IAS 36, Impairment of Assets. The carrying amount of £155,000 is then compared with the
recoverable amount, being the higher of fair value less costs to sell and value in use. As the asset has
now been sold/is surplus to requirements its value in use, ignoring discounting, will equal fair value less
costs to sell so this figure should be used. This is £94,900 (170,000 – 11,600 – 63,500). Therefore an
impairment of £60,100 (155,000 – 94,900) should be recognised in the statement of profit or loss.
Even if the held for sale criteria had been met, as Holstein Ltd uses the cost model and not the
revaluation model, the asset would not be revalued to fair value immediately before the classification – it
would be left at its carrying amount, or written down to fair value less costs to sell, if lower.
Answers to Part (a) of this question were very disappointing, although the majority of candidates did
attempt all four issues and provide both explanations and supporting calculations. The majority of
candidates did not achieve a pass mark on this question.
Issue (1): This was probably the worst answered part of the question with many candidates believing that
the change in the basis of calculating depreciation constituted a change in accounting policy. As a result
they thought the current accounting treatment correct then wasted time writing out at length when
accounting policies can be changed and what the disclosure requirements are. Other candidates seemed
to think that the company was moving to a revaluation basis. Even those candidates who did recognise
this was a change in an accounting estimate could rarely say more than that it should be applied
prospectively.
However, even those candidates who incorrectly believed this was a change in policy often managed to
pick some marks up by stating that the adjustment to opening balances should be reversed out and often
managed to calculate the correct adjustment to depreciation.
Issue (2): This was better dealt with and many candidates correctly calculated the adjustments required
with regard to the government grant (although it was common to see depreciation calculated for an
incorrect number of months). However, a significant number of candidates wasted time by discussing at
length the two different methods allowed for the treatment of capital grants even though the question
clearly stated that the netting off method was to be used. Some then went on to produce the figures under
both methods. Almost all candidates recognised that the grant should be reversed out of other income
(although some seemed to think that if the deferred income approach had been used it would have been
acceptable to recognise the grant in full immediately).

Issue (3): This was the best answered part of this question. Virtually all candidates referred to the relevant
information in the question that indicated this was an operating lease. Most also understood that the total
cost needed to be spread over the life of the lease although some referred to this but then went on to state
that the current year cost should simply be the payment to be made next year. Whilst almost all
candidates specifically stated that this was a cost to be recognised in the statement of profit or loss fewer
discussed the credit side of the entry and the need for an accrual.
A significant minority of candidates again showed a worrying lack of understanding of double entry by
recognising the correct expense but then showing as a liability the total outstanding payments. Others also
incorrectly described the expense as a finance cost. Only a very small minority believed the lease to be a
finance lease.
Issue (4): This was also badly answered. Many candidates wasted time by listing out all the criteria to
determine if an asset should be treated as held for sale, rather than using the information in the question
to demonstrate which of the criteria had not been met. Many candidates did not see the relevance of the
reconditioning expenses incurred after the year end to the decision as to whether the asset should be
classified as held for sale and as a result concluded that the asset had correctly been classified as held for
sale. As a result they did not gain the total marks available for discussing the need for an impairment
review on the grounds that the asset had become surplus to requirements, as opposed to on the grounds
of it being a held for sale asset. However, even these candidates usually recognised that the revaluation
was inappropriate and that the entry in the revaluation surplus needed to be reversed out (although fewer
justified why this was).

(b) Revised figures
Profit/(loss) Total Total

before tax assets liabilities
£ £ £
Per draft 135,400 1,456,000 874,300
(1) Change of depreciation method
– reverse prior period adjustment (352,100)
– adj to annual deprec charge 88,025 88,025
(2) Government grant (162,500) (162,500)
(3) Operating lease (45,000) 45,000
(4) Asset held for sale – reverse revaluation (145,000)
– impairment (60,100) (60,100)
(44,175) 824,325 919,300
Again, answers to this part were not as good as usual and there was less evidence of candidates setting
up the adjustment working up front and entering the figures as they worked through Part (a) of the
question. It was often difficult to follow figures from Part (a) to Part (b) and/or adjustments referred to in
Part (a) were simply not transferred to the adjustments table. It was also clear that many candidates
struggled to understand which adjustments would impact on, for example, both profit and total assets or
just profit.


(c) Ethical issues
Ryan has given reasons for the accounting treatment he has adopted for some of the issues identified.
However, although some of these explanations may appear reasonable to a non-accountant, they are
incorrect and Ryan, as an ACA, should be aware of this.
It therefore seems that either Ryan has not been keeping himself technically up-to-date (which is a
requirement of his membership of ICAEW) or he has deliberately misstated these items, possibly so that
Holstein Ltd still appears to meet the conditions of its loan, and/or as Ryan holds a significant percentage
of shares in the company, so has a vested (ie self-interest) in Holstein Ltd’s profitability.
Prior to the adjustments which are needed, assets were 166% of liabilities, so above the required 150%.
After the adjustments assets are only 90% of liabilities, which would mean that the bank is likely to call in
its loan. This adds weight to the possibility that Ryan has deliberately not followed the correct IFRS
financial reporting treatment so as to keep assets above the 150%.
IFRS is quite clear on the appropriate treatment of these four issues. Other than the presentational choice
with regard to the government grant, there is no choice or judgement on any of the matters. I should not
allow myself to be associated with financial statements that are contrary to IFRS. There may also be an
intimidation threat since Ryan is my superior and a significant shareholder in the company.
I should apply the ICAEW Code of Ethics, with the following programme of actions:
 Explain matters to Ryan, with supporting evidence so that the matters can be corroborated.
 If resolution cannot be achieved, discuss the matters with the other directors to explain the
situation and obtain support.
During the resolution process it would be useful to keep a written record of all discussions, who else was
involved and the decisions made.
Most candidates picked up a good number of the available marks for this part recognising the self- interest
threat to Ryan arising from his significant shareholding in the company and the loan covenant (with a
pleasing number attempting to illustrate the impact of the errors made on the requirement to maintain total
assets at a minimum of 150% of total liabilities). Fewer picked up on the intimidation threat to the financial
controller. Virtually all candidates suggested discussing the issues with Ryan, other directors and the
ICAEW helpline. Sometimes suggestions were a little inappropriate such as demanding that Ryan go on a
professional update course. As always there were a small minority of candidates who answered the
question from the perspective of the external auditors and/or who thought that money laundering was the
main issue.


Question 3
Total Marks: 21
General comments
Part (a) of this question required the calculation of the profit on disposal of a subsidiary. Part (b) tested the
preparation of a consolidated statement of cash flows and supporting note, including the subsidiary
disposed of during the year. Missing figures to be calculated included the profit before tax of the
subsidiary, dividends paid (to the group and to the non-controlling interest), finance lease liabilities paid,
income tax paid, additions to property, plant and equipment, and proceeds from the issue of share capital.
Part (c) required consideration of the different users of the financial statements and the type of decisions
they make.
Appaloosa plc
(a) Profit on disposal of Connemara Ltd
£ £
Selling price 590,000
Less: Carrying amount of good will at date of disposal
NCI at acquisition ((100,000 + 226,000) x 30%) 97,800
Less: Net assets at acquisition (100,000 + 226,000)) (326,000)
(71,800)
Less: Carrying amount of net assets at date of disposal (734,200)
Add back: NCI in net assets at date of disposal (734,200 x 30%) 220,260
4,260
A significant number of candidates calculated this figure correctly. Others arrived at the correct figure for
goodwill, but made errors in the remainder of the calculation. The most common errors were using
incorrect figures for the net assets disposed of and/or acquired.


(b) Consolidated statement of cash flows for the year ended 30 June 2014
£ £
Net cash from operating activities
Cash flows from investing activities 1,121,340
Disposal of Connemara Ltd net of cash disposed of 576,200
(590,000 – 13,800)
Repayment of finance lease liabilities (W2) (467,800)

£
Profit before tax (1,538,300 + 92,840 (W1)) 1,631,140
Finance cost 51,300
Increase in trade and other receivables ((725,200 + 57,900) – 699,800) (83,300)
Increase in trade and other payables ((582,500 + 42,700) – 489,800) 135,400
Workings
(1) Profit before tax of subsidiary

£
Profit from discontinued operations per Q 77,500
Add back: Income tax expense 19,600
Less: Profit on disposal (a) (4,260)
92,840


£ £
Cash (β) 467,800 B/d (270,000 +148,200) 418,200
C/d (350,200 +150,200) 500,400 PPE 550,000
968,200 968,200
(3) Income tax
£ £
Cash (β) 362,600 B/d 378,000
C/d 420,000 CP&L (385,000 + 19,600) 404,600
782,600 782,600
(4) Non-current assets
£ £
B/d 2,478,000 Disposal of sub – PPE 705,200
Revaluation (W5) 356,500 Depreciation charge 561,500
Finance leases 550,000 Disposal of sub – GW (W1) 71,800
Additions (β) 1,168,500 C/d 3,214,500
4,553,000 4,553,000
£ £
B/d 423,000
C/d 779,500 PPE (β) 356,500
779,500 779,500
£ £
B/d (400,000 + 40,000) 440,000
C/d (500,000 + 100,000) 600,000 Cash received (β) 160,000
600,000 600,000
£ £
C/d 2,279,800 CP&L 1,015,300
2,380,100 2,380,100
£
Cash (β) 72,940 B/d 742,600
Disposal (734,200 x 30%) 220,260
C/d 664,900 CP&L 215,500
958,100 958,100

Candidates performed slightly better than they did last time the preparation of a consolidated statement of
cash flows was examined (also featuring the disposal of a subsidiary). Although the disposal element of the
question would be expected to cause some problems, at this sitting candidates seemed to struggle with
even the basics such as arriving at figures for tax paid and interest paid, calculations which are tested at
Certificate Level. Many candidates displayed a poor grasp of the fundamentals of double-entry bookkeeping
when calculating individual cash flow figures. Those candidates who did not use a T-account approach
tended to produce confusing and less structured workings, which had a detrimental impact on the marks
earned.
Most candidates set out the statement in a reasonably clear way and therefore gained presentation marks.
However, a number of candidates lost marks for not providing sub-totals for the different categories of cash
flows.
Most candidates made a good attempt at the reconciliation of profit before tax to cash generated from
operations. The majority of candidates gained over half marks on this with the most common error being not
to add in the profit before tax for the discontinued operation. Other common errors were to not make
adjustments for the discontinued operation in the movement in trade receivables and payables.
Treatment of the disposal of the subsidiary was mixed, with weaker candidates either omitting the impact of
the disposal or adjusting for it in the incorrect direction. Only the very best candidates calculated the profit
before tax of the subsidiary then used this figure in their reconciliation note, although some others adjusted
for the profits for discontinued operations per the question and/or their profit on disposal from Part (a).
The proceeds from the share issue and the net cash impact of the disposal were almost always correctly
calculated and a significant majority also correctly calculated the dividend paid by Appaloosa plc. Generally,
candidates made a reasonable attempt at the property, plant and equipment T-account and the dividend
paid to the non-controlling interest There was no specific recurring error in the property, plant and
equipment T-account; it was more that candidates missed one (or more) of the figures. In the non-
controlling interest T-account candidates generally missed the disposal figure. The finance lease liability
calculation seemed to cause candidates the most problems (other than adjusting for the disposal of the
subsidiary).


(c) User groups and the decisions they need to make
Present and potential investors
- Likely risk and return of investment/potential investment

- Ability of entity to pay dividends
Employees
- Employer’s stability and profitability

- Ability of employer to provide remuneration/employment opportunities/retirement and other benefits
Lenders
- Whether loans and interest can be repaid when due
Suppliers and other trade payables
- Likelihood of being paid when due
Customers
- Whether the entity will continue in existence
Governments and trade agencies
- How to allocate central resources

- How best to regulate activities
- Taxation due
- Basis for national statistics
The public
- Trends and recent developments in prosperity/activities

- Likely impact on local economy
Whilst most candidates came up with five user groups, some of them were too similar to warrant separate
marks (for example, existing and potential investors were marked as one user group, as were directors
and management) and the information given re the decisions these groups might make were too often
extremely brief, consisting of two or three words. Other candidates cited decisions which were not likely to
be made from the published financial statements (for example, lending banks would be unlikely to be
interested in historic, as opposed to prospective, cash flows). Frequently, candidates could have chosen
better user groups, in order to allow them to write more about the decisions of those groups. For example,
whilst management could be considered a user group it is difficult to see what information they would
usefully gain from the financial statements to make decisions when they have full access to management
accounts which are already tailored to their needs. Nonetheless the mark plan was flexible, and if sensible
comments were made, marks were awarded.


Question 4
Total Marks: 22
General comments
Part (a) of this question required the calculation of a revised gain on bargain purchase where errors had
been made in the original calculation. Part (b) required the preparation of a consolidated statement of
profit or loss. The group had two subsidiaries, one of which was acquired during the year, and an
associate. The question featured fair value adjustments, including some to be made to the gain on bargain
purchase, inter-company trading and impairment of goodwill. Part (c) tested the differences between IFRS
and UK GAAP with respect to the financial reporting treatment followed in Parts (a) and (b).
Oldenburg plc
(a) Revised gain on bargain purchase
£
Gain on bargain purchase per Q 35,000
Add: Professional fees wrongly included in consideration 8,000
FV adjustment to building (W1) 22,000
Less: Contingent liability (36,500)
(6,500)
Less: Adj to NCI (W2) (6,250)
22,250
Workings
(1) Fair value adjustment to building

£
Fair value on 1 October 2013 154,000
Carrying amount at 1 October 2013 (300,000 – ((300,000) ÷ 25) x (132,000)
14)
22,000
(2) Adjustment to NCI
£
Original NCI on proportionate basis (500,000 + 35,000) x 20/80)) 133,750
NCI at FV (140,000)
(6,250)
This part of the question caused a significant amount of confusion. However, a number of candidates
presented clear answers to this part and gained full marks.
Candidates seemed to struggle with the concept that they had to unpick the accounting that had taken
place. They often presented a random set of calculations which mirrored their thought processes but never
arrived at a final figure. For example, candidates often knew that they had to adjust for the professional
fees but didn’t know whether they should add or subtract those fees. The calculation could have been
attempted in two ways; either by adjusting the calculated figure or starting again, and both approaches
were marked in a consistent manner. However, a significant number of candidates used a combination of
both approaches and therefore often double counted their adjustments.
Candidates generally adjusted for the contingent liability and the fair value adjustment although where
these adjustments were made was less clear. The adjustment to the non-controlling interest was often
simply not calculated. Many correctly calculated the fair value adjustment to the building but then failed to
use that figure. Others also calculated the related depreciation adjustment in this part but then failed to
use it in Part (b). Where this was the case later credit was given for that calculation.


(b) Consolidated statement of profit or loss for the year ended 30 June 2014
£
Revenue (W1) 5,434,000
Operating expenses (W1) (1,135,350)
Share of profit of associate (W4) 9,804
Owners of Oldenburg plc (β) 407,664
446,404
Workings

Oldenburg Zangersheide Westphalian Adj Consol
plc Ltd Ltd
9/12
£ £ £ £ £
Revenue 2,978,500 1,759,500 982,800 (286,800) 5,434,000
Cost of sales – per Q (2,100,600) (1,198,500) (655,950) 286,800
– PURP (W2) (23,900)
– PPE PURP ((567,000 – 20,300 (3,671,850)
465,500) x 20%)
Op expenses – per Q (701,600) (203,500) (225,000)
– prof fees re acquisition (8,000)
– additional deprec on (1,500)
building ((22,000 ÷ 11) x
9/12)
– GW impairment (18,000)
– Gain on BP (a) 22,250 (1,135,350)
Tax (53,000) (107,200) (30,000) (190,200)
246,700 70,350
(2) PURPs
Zangersheide Hanoverian
Ltd Ltd
% £ £
Sales 120 286,800 101,040
Cost of sales (100) (239,000) (84,200)
GP 20 47,800 16,840
x½ 23,900 8,420
x 30% 2,526

£
Zangersheide Ltd (10% x 246,700 (W1)) 24,670
Westphalian Ltd (20% x 70,350 (W1)) 14,070
38,740
(4) Share of profit of associate

£
Share of PAT (61,100 x 30%) 18,330
PURP (W2) (2,526)
9,804

Candidates generally made a good attempt at the preparation of the consolidated statement of profit or
loss. Most statements were reasonably presented with most candidates gaining some marks for
presentation. Candidates usually produced a consolidation schedule as part of their workings and those
that did tended to gain the most marks as workings and figures were clear.
The two inventory PURP figures were usually correctly calculated, although some candidates forgot that
one of these needed adjusting to reflect only the associate share or that it should have been set against
the share of profit of associate figure rather than against the consolidated cost of sales figure. The
property, plant and equipment PURP was often correctly calculated, but then either not used or adjusted
for in the wrong direction or wrong column in the consolidation schedule.
It was disappointing to see just how many candidates made the very basic error of using the parent’s
percentage rather than the non-controlling interest percentage when calculating the figure for non-
controlling interest in the year. However, most did use the figures from the subsidiaries’ columns in their
consolidation schedule in their calculation of this figure, although some used the figures from the question
without adjustment or with adjustments which failed to mirror what they had done elsewhere in their
answer, thereby failing to gain the marks for this calculation.
Candidates generally made a reasonable attempt at the share of profit in the associate, with mnay
calculating the correct figure. Where errors were made the most common were not adjusting for the
PURP, as highlighted above, or multiplying all figures by the 30% interest (including the impairment and
often the PURP figure twice).
The three most common errors were to omit the revised gain on bargain purchase, the adjustment for the
professional fees and/or the additional depreciation on the building, even where these figures had been
calculated in Part (a).

(c) IFRS v UK GAAP differences
Under UK GAAP (FRS 7) acquisition-related costs are added to the cost of the investment in the
subsidiary and therefore affect the calculation of goodwill arising on consolidation. IFRS 3 recognises
acquisition-related costs as an expense in profit or loss as incurred.
UK GAAP (FRS 10) recognises negative goodwill as a separate item within goodwill. This is subsequently
recognised in the profit and loss account in the periods in which the non-monetary assets are recovered,
whether through depreciation or sale. IFRS 3 requires immediate recognition of negative goodwill (“gain
on bargain purchase”) as a gain in profit or loss.
Under UK GAAP (FRS 10) goodwill is amortised over its estimated useful economic life, with a rebuttable
presumption that this is not more than 20 years. Under IFRS 3 goodwill is subject to annual impairment
reviews.
UK GAAP (FRS 9) requires the investor’s share of the associate’s operating results, exceptional items,
interest, profit before tax and tax to be separately disclosed. IAS 28, Investments in Associates and Joint
Ventures, merely requires the investor’s share of the profit or loss of an associate to be disclosed.
Under UK GAAP (FRS 6) the non-controlling interest is always measured using the proportionate (share of
net assets) method. IFRS3 allows the proportionate method or the fair value method.
Answers to this part of the question were very varied, with many candidates gaining full marks and others
failing to attempt this requirement at all. Answers on UK GAAP differences continue to be quite varied.
Candidates need to be very careful in these requirements as many simply write something without
identifying whether it is the treatment under UK GAAP or IFRS, or explain one treatment and then say this
isn’t allowed under the other basis without explaining what the alternative treatment is. A minority of
candidates included differences that were of no relevance to the earlier parts of the question.

Financial Accounting and Reporting – March 2015
discretion and to award partial marks where a point was either not explained fully or made by
implication. More marks are available than could be awarded for each requirement, where indicated.
This allows credit to be given for a variety of valid points, which are made by candidates.
Question 1
Total marks: 30
Overall marks for this question can be analysed as follows:
General comments
This question presented a draft set of financial statements with some adjustments. Candidates were required
to prepare the amended statement of profit or loss and statement of financial position. A number of
adjustments were required to be made, including depreciation, revenue adjustments, provisions, treasury
shares, a lease incentive and a prior year inventory adjustment.
Part b) required candidates to explain the concepts of accruals basis of accounting and going concern, with
reference to the scenario.
Part c) required a discussion on the ethical issues arising from the scenario.
Coghlan Ltd – Statement of financial position as at 30 September 2014
£ £
ASSETS
Non-current assets
Property, plant and equipment (600,000 + 138,260) (W3) 738,260
Current assets
Inventories 98,000
Tax asset 65,000
289,600
Equity
Ordinary share capital (294,500 + 85,500) 380,000
Share premium 94,000
Treasury shares (45,000 x £1.90) (85,500)
Equity 441,410
Lease incentive 7,200
Current liabilities
Provision (W2) 538,350
579,250

Coghlan Ltd – Statement of profit or loss for the year ended 30 September 2014
£
Revenue (3,359,200 – (36,000 x 3/12)) 3,350,200
Loss before tax (813,715)
Income taxation (65,000 + 32,800) 97,800
Net profit for the period (715,915)
W1 Expenses
Administrative
Cost of sales expenses
£ £
Brought forward 2,198,050 1,039,700

Opening inventories adj (114,550 – 79,000) (35,550)
Closing inventories adj (142,100 – 98,000) 44,100
Provision (W2) 538,350
Lease incentive (1,200 x 6) 7,200
Impairment (W3) 293,750
Depreciation charge (43,750 + 34,565) (W3) 78,315
2,744,950 1,418,965
W2 Provision
£ £
Brought forward 500,000
Lawsuits (50 x 350) 17,500
Warranties ((65,000 x 20%) + (157,000 x 5%)) 20,850
At 30 September 2014 38,350
538,350
Land Fixtures
and and
buildings fittings
£ £
Carrying amount at 1 Oct 2013 (1,125,000 – 937,500 172,825
187,500) / (236,000 – 63,175)
(1,125,000 – 250,000) x 5% (43,750)
172,825 x 20% (34,565)
Carrying amount at 30 Sept 2014 893,750 138,260
Recoverable amount 600,000 170,000
Impairment 293,750 –
£
Per draft 425,825
Add: draft loss 416,550
Less: revised profit and loss (715,915)
Dividend paid (380,000 x 10p) (38,000)
Prior year adjustment – inventories (35,550)
52,910
Presentation of the statement of profit or loss and statement of financial position was generally good. As
indicated as acceptable at the tutor conference, most candidates omitted sub-totals on the statement of
financial position, but were penalised if they omitted totals for total assets and total equity and liabilities. A
minority missed out sub-totals on the statement of profit or loss – this is not considered acceptable and marks
were lost for this. However, there were a number of very messy statements, usually the statement of profit or
loss, where costs workings were shown on the face of the statement instead of in a recommended “costs

matrix” in the workings. Whereas in most recent sittings almost all candidates have used a costs matrix, this
was not the case at this sitting.
Performance on this question was good, with some high marks achieved. A significant number of candidates
arrived at completely correct figures in respect of revenue, cost of sales, closing inventories and the provision.
Most candidates also arrived at the correct figures for the two depreciation charges for the year, and correctly
presented them in administrative expenses. However, a few candidates calculated depreciation based on the
year end recoverable amounts instead of on the opening figures. It was also common to see the fixtures and
fittings, which were not impaired, revalued, when no indication was given that the company wished to move to
the revaluation model. Pleasingly, most candidates did provide relatively clear workings for their property,
plant and equipment figure.
The tax refund probably caused the most difficulties, with only a few candidates treating both this and the
over-provision from the previous year correctly. A number of candidates showed only the tax refund in the
statement of profit or loss, others reduced the tax refund by the over-provision from the previous year, instead
of adding it. Many were so confused by the income tax position that they showed no figure for income tax at
all in the statement of profit or loss. On the statement of financial position it was common to see the over-
provision from the previous year reducing the tax asset. And whatever figure was arrived at this was
presented more often as a “negative” current liability than (correctly) as a current asset.
 Errors in adjusting cost of sales for the incorrect inventory valuations – most commonly getting the net
adjustment in the wrong direction against the cost of sales figure from the draft financial statements, or
making careless errors in the calculations.
 Calculating the dividend paid during the year on a figure other than the one shown in their own

(b)
Accrual basis
The accrual basis of accounting records transactions in the period in which they occur, rather than when the
cash inflow or outflow arises. Under the accrual basis an entity recognises items as assets, liabilities, equity,
income and expenses when they satisfy the definition and recognition criteria for those elements in the
Framework
An example of this is the treatment of the revenue generated from the magazine subscriptions. These were
incorrectly recorded in revenue as the cash had been received, however part of the service delivery, ie the
magazines being despatched, arose after the year end and therefore part of the revenue should have been
deferred.
The recognition of the provisions are another example of the accrual basis, as these are present obligations
arising from past events and hence have been recognised as liabilities in the current period, although the
cash will be paid out in future periods.
Other examples include the charging of depreciation on the property, plant and equipment recognising that
the entity is generating economic benefits from these assets over their useful lives and the charging of
operating lease rental over the total period of the lease.
Going concern basis
The going concern basis of accounting assumes that the entity will continue operating in the foreseeable
future as a going concern. To operate for the foreseeable future there must be no intention by management,
or the need, to liquidate the entity by selling its assets and paying its liabilities.
The going concern basis affects the valuation of the company’s assets. It is assumed that non-current assets,
for example, will be used in the operation of the entity and therefore the use of historical cost is considered
appropriate. However, if the entity ceases in operation then the historical cost basis would no longer be

appropriate and instead the assets would be valued based on their recoverable amount at that point in time,
this valuation basis is known as the break-up basis. The concept of being “non-current” also would no longer
be appropriate as all assets and liabilities would be “current” in nature as the entity would no longer be
trading.
Coghlan Ltd’s financial statements have been prepared using the going concern basis of accounting. If the
break-up basis were appropriate due to the company no longer being a going concern, as a result of the
adverse publicity, caused by the unsafe products, assets and liabilities might be different. For example,
Coghlan Ltd has five years left on the office lease, if Coghlan Ltd ceased to trade the lease would become an
onerous obligation and the full amount would need to be recognised.
Coghlan Ltd traded at a large loss during the year, if this performance continues it is unlikely that the
company would be a viable trading entity for long. In addition a dividend was paid, presumably to ensure
shareholders remained happy, however as a result of this retained earnings and hence distributable profits
are virtually zero, so no further dividends could be paid in the future without substantial profits being made. It
is therefore questionable whether Coghlan Ltd will remain a going concern for much longer.
This part of the question was reasonably well answered although few candidates scored high marks. Most
candidates could give a basic definition of the accruals concept, but the quality of explanation using the
subscription revenue and the operating lease varied.
Again, most candidates could give a basic definition of the going concern concept, and cite the break-up
basis as an alternative, but less candidates went beyond this to explain how going concern financial
statements differ from those prepared on a break-up basis. However, a majority of candidates made the point
that Coghlan Ltd appeared to be in financial difficulties and that therefore the going concern basis may not be
appropriate.

(c)
Professional accountants are expected to follow the guidance contained in the fundamental principles in all of
their professional and business activities. The Code of Ethics has five fundamental principles.
The financial statements should be prepared fairly, honestly and in accordance with relevant professional
standards.
Objectivity is one of the five fundamental principles in the ICAEW’s ethical Code, which means that I should
not allow bias, conflict of interest or undue influence of others to override professional or business
judgements. I should not let the managing director pressure me into completing the financial statements
quickly and not making a satisfactory and thorough job. Intimidation threat exists.
Professional behaviour is another principle and hence I should ensure that the relevant laws and regulations
are complied with. I should ensure that I act with both professional competence and due care and therefore
not be influenced by the pressure that management are putting on me. The financial statements should be
prepared by someone who has the relevant expertise and that is unlikely to be someone who is undertaking
work experience. I should not allow bias in any way, conflict of interest or undue influence of others override
my professional judgement. It is unfair for the managing director to mention my performance appraisal and
therefore I need to ensure that this does not affect any decisions I make as a self-interest threat exists.
I should explain that the financial statements need additional work to the managing director and explain that
they may take longer than he would have ideally liked to ensure that they provide a fair assessment of the
facts. If he is unwilling to allow additional time then I should discuss the matter with the other directors and
explain that I am being pressured by the managing director. I should keep a record of all discussions and I
could discuss the matter confidentially with the ICAEW helpline for advice and support.

The answers to the “ethics” part were mixed, with a significant number of candidates putting themselves in
the position of being the external auditor, as opposed to the financial controller, as specified in the question.
Most candidates identified self-interest and possible intimidation threats, that the financial controller should
uphold the values of professional competence and due care and professional behaviour, and refer continuing
difficulties with the managing director to the other directors and then to the ICAEW ethics helpline. Weaker
candidates missed the point that all discussions should be documented and spent some time discussing the
ethics of the managing director, when we were not told whether he was an ICAEW Chartered Accountant or
not.

Maximum Marks 5

Question 2
Total marks: 36
General comments
issues, given in the scenario. The four issues covered borrowing costs, a compound financial instrument,
an intangible asset and a joint venture. Journal entries were also required.
Part (b) required candidates to recalculate consolidated profit for the year for the adjustments needed as a
result of their answer to Part (a).
Part (c) required a calculation of basic earnings per share following a rights issue and explanation of the
accounting treatment was also required.
Porcaro plc
(a) (i) IFRS accounting treatment
(1) Borrowing cost
Under IAS 23 Borrowing costs, certain borrowing costs form part of the cost of the qualifying asset, and
should therefore be capitalised. A qualifying asset is an asset which takes a substantial period of time to
get ready for its intended use, or sale. The office block is therefore a qualifying asset as it is not ready for
use.
Borrowing costs are defined as interest and other costs that an entity incurs in connection with the
borrowing of funds. Only borrowing costs that are directly attributable to the acquisition, construction or
production of the qualifying asset should be capitalised. These are the borrowing costs which would have
been avoided if the expenditure on the qualifying asset had not been incurred.
As the loan was specifically taken out for the purpose of funding the construction of the office block use
the actual interest rate of 6%.
Capitalisation of borrowing costs should commence when the entity meets all three of the following
conditions:
(1) It incurs expenditure on the asset (the payment to acquire the land was made on
1 October 2013);
(2) It incurs borrowing costs (the loan was taken out on 1 October 2013, from which date interest will
start to accrue);
(3) It undertakes activities that are necessary to prepare the asset for its intended use (the land was
acquired on 1 October 2013 with planning permission which was needed for construction to take
place).
Borrowing costs of £36,000 (600,000 x 6%) should therefore be capitalised from 1 October 2013.
Where the borrowed funds are not required immediately, so instead are put on deposit, the borrowing
costs capitalised should be reduced by the investment income received on the invested funds.
Investment income: (600,000 – 200,000 = 400,000)

(1 Oct 2013 – 28 Feb 2014) 400,000 x 3% x 5/12 = £5,000
(1 Mar – 31 Aug 2014) 300,000 x 3% x 6/12 = £4,500
(1 Sept – 30 Sept 2014) 100,000 x 3% x 1/12 = £250
£9,750
Total borrowing costs which should be capitalised are £26,250 (36,000 – 9,750). No depreciation should
be recognised on the office block as it’s not ready for use.

The journal entries required are:

£ £
DR: Property, plant and equipment (SOFP) 26,250
CR: Net interest (PorL) 26,250
(2) Convertible bonds
The convertible bonds are compound financial instruments per IAS 32 Financial Instruments: Presentation.
They have both an equity and a liability component which should be presented separately at the time of
issue. IAS 32 requires that the substance of such an instrument be reflected, focusing on the economic
reality that in effect two financial instruments have been issued.
The liability component should be measured first at the present value of the capital and interest payments.
The discount rate used should be the effective rate for an instrument with the same terms and conditions
except without the ability to convert it into shares.
Cash flow Discount factor Present value

£ @ 7% £
1 October 2014 30,000 1/1.07 28,037
2
1 October 2015 30,000 1/1.07 26,203
3
1 October 2016 30,000 1/1.07 24,489
4
1 October 2017 (redemption) 630,000 1/1.07 480,624
Liability component 559,353
Equity component (bal fig) 40,647
Total 600,000
The liability should initially be measured at £559,353 and the equity component is the residual at £40,647.
Once recognised the equity element remains unchanged. However, the liability element should be shown at
amortised cost at the end of each year:
1 Oct 2013 Interest (7%) Payment (5%) 30 Sept 2014

£ £ £ £
559,353 39,155 (30,000) 568,508
At the year an adjustment should be made to non-current liabilities of £31,492 (600,000 – 568,508), and an
additional £9,155 recognised as finance costs as part of profit or loss.

£ £
DR: Non-current liabilities (SOFP) 31,492
DR: Finance costs (PorL) 9,155
CR: Equity (SOFP) 40,647
(3) Intangible asset – licence
The licence should be recognised as an intangible asset as it is an identifiable non-monetary asset without
physical substance. The licence is identifiable as it arises from contractual or legal rights to use the
microchip technology.
The licence should initially be recognised at its cost of £72,000. Amortisation of £6,000 ((72,000 / 6yrs) x
6/12) should be recognised as part of profit or loss. The carrying amount of the licence at 30 September
2014 under historical cost accounting is £66,000 (72,000 – £6,000).
The licence can continue to be held at cost or may be revalued if the directors can show that an active
market exists for it. Although a competitor has offered to buy the licence which suggests that an active
market exists, part of the definition also requires the items traded to be homogenous. As it states that the
licence is unique it is unlikely that it will meet this definition and therefore should be held at historical cost.
The revaluation gain of £18,000 (£90,000 - £72,000) at 30 September 2014 should be reversed.


£ £
DR: Equity – Revaluation surplus (SOFP) 18,000
DR: Amortisation (PorL) 6,000
CR: Non-current assets (SOFP) (18,000 + 6,000) 24,000
(4) Joint venture
Porcaro plc should recognise its investment in Barbarossa Ltd as a joint venture. Four companies have joint
control over Barbarossa Ltd and there is a contractual arrangement in place to share profits and losses
equally.
IFRS 11 Joint Arrangements requires the use of the equity method for joint ventures. The investment should
therefore be recognised at cost of £25,000 plus the share of the joint venture’s post acquisition increase in
net assets, £32,500 (£130,000 x 25%).
The investment in Barbarossa Ltd will be shown as a non-current asset, rather than a current asset in the
consolidated statement of financial position, so the £25,000 will need to be reclassified. The share of post-
acquisition profit of £32,500 should be added to non-current assets, giving a carrying amount of £57,500
and the £32,500 recognised in consolidated profit or loss.

£ £
DR: Non-current assets (SOFP) 57,500
CR: Current assets (SOFP) 25,000
CR: Share of joint venture profit (PorL) 32,500
Most candidates produced reasonably detailed narrative explanations, melded together with calculations
although less went on to produce journal entries. Only the very weakest candidates restricted their answers
to predominantly calculations, with little explanation. Answers to Issues (1), (2) and (4) were all reasonably
well attempted, with Issue (3) causing some difficulties.
Borrowing costs
Most candidates set out the appropriate terminology, such as “directly attributable” and “qualifying asset”,
and correctly concluded that the office block was a qualifying asset and that interest on the loan should be
capitalised. However, a significant number of candidates were careless in their choice of words and stated
that borrowing costs “could” be capitalised – implying a choice in the matter (even when in Part (d) they
went on to clearly state that under IFRS borrowing costs must be capitalised). Most then listed the IAS 23
criteria for the commencement of capitalisation, but few applied these criteria to this scenario. Of those that
did, many concluded, in error, that capitalisation could not commence until 31 December 2013, and hence
only capitalised nine months of the annual interest.
Almost all candidates stated that the borrowing costs should be reduced by the investment income on
surplus funds. Calculations for the investment income often contained errors generally around the number
of months. The 6% actual interest rate was used, although only a very small minority explained why this was
appropriate. Almost all candidates then set out the correct journal entry for their net figure.
Convertible bonds
The majority of candidates explained that this was a compound financial instrument and that split
accounting was appropriate, with fewer mentioning substance over form. Most of these candidates then
produced correct calculations for the split of debt and equity and for the amortised cost of the debt, although
less referred to “amortised cost” in their explanation. Journal entries were largely correct, although some
candidates took a rather convoluted approach to arriving at the correct net journal.
Intangible asset – licence

This issue caused the most problems. Most candidates gave some basic definitions and calculated the
initial carrying amount of the intangible at cost (although some used the incorrect number of months for the
amortisation charge). Answers were then mixed, depending on whether candidates realised that the
information in the scenario did not support the existence of an “active market”. Those that saw this quickly
concluded their answer by reversing out the revaluation. The ones that did not then wasted time calculating

additional amortisation charges, and sometimes also transfers between the revaluation surplus and retained
earnings. Others hedged their bets and set out both accounting treatments without a conclusion, which was
time consuming.
Joint venture
There was a lot of confusion to this issue and candidates seem to struggle between the concept of an
associate and a joint venture, with many candidates simply believing they are the same instrument.
Although the majority of candidates identified that equity accounting should be applied and recognised the
cost correctly, candidates often described the investment as an associate. Journal entries were usually
correct, with the most common error being to credit cash instead of current assets. The only real error seen
in the calculations was taking the appropriate share of only a fraction of the profit after tax, instead of the
appropriate share of the whole figure, which was stated to be the profit for that period.

(b)
Porcaro plc – Group figures
Profit for
the year
£ £
As stated 483,150
Issue (1) 26,250
Issue (2) (9,155)
Issue (3) (6,000)
Issue (4) 32,500
Profit adjustment 43,595
526,745
Most candidates appeared to adopt the recommended approach of setting up a schedule as the first page of
their answer starting with the draft profit from the question, and adjusted this as they wrote their explanation
for each issue. Many candidates did therefore score the full two marks for this part, based sometimes on
completely correct and sometimes on their “own” figures. Only the very weakest candidates failed to attempt
this part of the question. Where marks were lost it was generally where candidates failed to replicate in this
part the journal entries set out in their answers to Part (a).


(c)
Porcaro plc
1 Oct 2013 – 31 Jan 2014 270,000 4/12 210/200 94,500
Rights issue 1 for 3 90,000
1 Feb – 30 Sept 2014 360,000 8/12 240,000
334,500
Theoretical ex-rights price: £
3 shares @ £2.10 6.30
1 share @ £1.70 1.70
8.00
Theoretical ex-rights price per share £8.00 / 4 = £2.00

Bonus fraction: 210 / 200
Basic EPS = 526,745 = £1.57

334,500
A rights issue is an issue of shares to current shareholders in proportion to their existing holdings at a
discount to market price. Because the share issue is below market price, a rights issue is in effect a
combination of an issue at full market value and a bonus issue. An adjustment therefore needs to be made
to the earnings per share for the bonus element. This is calculated by comparing the pre-rights market
value with the theoretical ex-rights price. The theoretical price is the price at which the shares would have
traded after the rights issue in theory.
A good number of candidates arrived at the correct weighted average number of shares, and produced an
EPS based on that and their own figure for revised profit for the year. However calculations often contained
errors in the theoretical ex-rights price per share. Only the very best candidates could explain clearly why
the rights issue had been scaled up by a bonus fraction, and many of these candidates achieved full marks
for this part of the question. Weaker candidates merely described in words what they had done in their
calculation. A minority of candidates described the accounting entries for the rights issue which gained no
marks.

(d) UK GAAP differences
Borrowing costs
Under UK GAAP Porcaro plc has the choice whether to capitalise borrowing costs. If a policy of
capitalisation is chosen then this policy should be applied to the class of qualifying assets.
Under IFRS borrowing costs which meet the definition of being directly attributable to the acquisition,
construction or production of a qualifying asset must be capitalised.
Most candidates achieved the full one mark for this part, clearly stating that capitalisation is mandatory
under IFRS, but optional under UK GAAP. Only the weakest candidates got this the wrong way round, or
failed to give both the IFRS and UK GAAP treatments.


Question 3
Total marks: 11
General comments
This question was a mixed topic question, covering the completion of extracts from the statement of cash
flows for adjustments to investing and financing activities. Part b) required the preparation of an extract from
the consolidated statement of financial position, showing non-current and current assets.
Henrit plc
(a)
Consolidated statement of cash flows (extract)
Cash flows from investing activities £

Proceeds from sale of property, plant and equipment (124,000 + 9,500) 133,500

Payment of finance lease (15,000 – 7,375) (W3) (7,625)
Proceeds from issue of loan (450,000 – 290,000) 160,000
Workings
(1) Interest
£
290,000 x 5% x 6/12 7,250
450,000 x 5% x 6/12 11,250
18,500
(2) PPE
£ £
B/d 729,400 Disposals 124,000
Additions – finance lease (W3) 105,350 Depreciation 113,000
Additions – cash (β) 365,450 C/d 963,200
1,200,200 1,200,200
(3) Finance lease

£ £
Cash 15,000 B/d –
PPE addition (β) 105,350
C/d 97,725 Interest (25,875 – 18,500 (W1)) 7,375
112,725 112,725
Answers to this requirement were quite mixed, with a significant number of candidates achieving full marks.
Most candidates successfully calculated the proceeds from the disposal of equipment and also attempted to
produce a T-account for property, plant and equipment to identify the cost of additions. Within this working
nearly all candidates correctly credited the depreciation charge for the year and the carrying amount of the
equipment that had been sold. The majority of candidates also realised that they needed to debit the
account with plant acquired under a finance lease but very few candidates calculated this figure correctly.
Most simply used the closing balance on the finance lease account given in the question.
It was clear that the majority of candidates either do not understand that payments under finance leases
need to be split between interest and capital or cannot calculate the split. Many candidates merged the
finance lease liability and the bank loan and as a result lost the easy mark available for showing the inflow
of cash relating to the bank loan. Some candidates used the information given in the question to calculate
the interest relating to the bank loan but then made no use of this information.

With regards to presentation nearly all candidates did produce extracts as required and also entered figures
under the appropriate headings, although totals were often not seen. As is always the case with questions
on the statement of cash flows a significant number of candidates lost marks for failing to put brackets
around outflows of cash.

(b)
Statement of financial position at 30 September 2014 (extract)
Non-current assets
Property, plant and equipment (963,200 + 469,400 + 623,150 – 4,400 (W2)) 2,051,350
Goodwill (73,400 + 17,750 (W1)) 91,150
Current assets
Inventory (46,980 + 18,900 + 31,300 – 1,500 (W3)) 95,680
Workings
(1) Goodwill – Crago Ltd

£
Less: Net assets at acquisition (615,000)
17,750
(2) Inter-company machine transfer

£
Original carrying amount (95,000 – (95,000 x 3/5)) 38,000
Consideration less depreciation (53,000 – (53,000 x 6/30)) (42,400)
Unrealised profit 4,400
(3) PURP
% £
SP 115 11,500
Cost (100) (10,000)
GP 15 1,500
Generally this was well answered with many candidates achieving full marks. A majority of candidates
correctly calculated goodwill and the PURP relating to inventory and made the relevant adjustments to the
figures given in the question. A minority of candidates used the nominal rather than the market value of the
shares to calculate the consideration for the acquisition of the subsidiary and a similar number calculated
the PURP using gross margin rather than a mark-up on cost.
However only a small minority of candidates correctly calculated the PURP relating to the sale of the
machine. Common errors were to calculate the profit on disposal or the difference in the subsequent
depreciation and therefore only adjust for part of the difference.
As with part (a) nearly all candidates produced extracts but again a number failed to add numbers across so
could not be given full credit for presentation.


Question 4
Total marks: 23
This question required the preparation of a consolidated statement of profit or loss and extracts from the
consolidated statement of changes in equity (for retained earnings). The group had two subsidiaries, one of
which was disposed of during the year. A fair value adjustment was required on acquisition of one of the
companies. Inter-company trading took place during the year between one of the subsidiary’s and the parent.
Part (b) required candidates to describe the UK GAAP differences for the acquisition and disposal of a
subsidiary.
Mantia plc
(i) Consolidated statement of profit or loss for the year ended 30 September 2014
£
Continuing operations
Revenue (W1) 3,722,000
Profit from operations (W1) 1,527,445
Investment income (W1) 17,000
Profit for the year from continuing operations 1,217,445
Profit for the year from discontinued operations (300,100 (W2) – 32,715 (W4)) 267,385
Profit for the period 1,484,830
Owners of Mantia plc (β) 1,327,451
1,484,830
(ii) Consolidated statement of changes in equity for the year ended 30 September 2014 (extract)
Retained
earnings
£
Balance at 1 October 2013 (W6) 227,249

Total comprehensive income for the year 1,327,451
Dividends (W6) (600,000)
Balance at 30 September 2014 (β) 954,700

Workings

Mantia plc Appice Ltd Adj Consol
£ £ £ £
Revenue 2,986,000 768,000 (32,000) 3,722,000
Cost of sales – per Q (1,343,700) (345,600) 32,000 (1,658,500)

– PURP (W5) (1,200)
Op expenses – per Q (419,575) (84,480) (536,055)

– FV deprec (70,000/10yrs) (7,000)
– Impairment of goodwill (25,000)

– Appice (80,000 x 40p x 80%) (25,600) 17,000
Tax (259,000) (68,000) (327,000)

261,720

£
Appice Ltd (20% x 261,720 (W1)) 52,344
Starkey Ltd (35% x 300,100 (600,200 x 6/12)) 105,035
157,379
(3) Goodwill – Starkey Ltd

£
335,700
Less: Net assets at acquisition
Share capital (91,000 / 65%) 140,000
(302,000)
Goodwill 33,700
Impairment brought forward (18,000)
Goodwill at date of disposal 15,700
(4) Group profit/loss on disposal of Starkey Ltd

£
Less: carrying amount of goodwill at disposal (W3) (15,700)
Retained earnings (243,000 + (600,200 x 6/12)) 543,100
(683,100)
Loss on disposal (32,715)
(5) PURP
% £
SP 100 32,000
Cost (85) (27,200)
GP 15 4,800
1
X /4 1,200

(6) Retained earnings brought forward

£ £
Mantia plc (596,300 – 1,006,325) (410,025)
Add back dividend (500,000 x £1.20) 600,000
Appice Ltd – post acquisition change in net assets
C/fwd retained earnings 384,200
Less: retained earnings at acquisition (136,000)
Less: profit for the period (269,920)
Add back dividend (80,000 x 40p) 32,000
Less: FV adjustment (70,000 / 10yrs) (7,000)
3,280
Appice Ltd – 3,280 x 80% 2,624
Starkey Ltd – post acquisition ((243,000 – 162,000) x 65%) 52,650
Less: impairment – Starkey Ltd (18,000)
227,249
Retained earnings carried forward (for proof only)
£
Mantia plc 596,300
Appice Ltd – post acquisition (384,200 – 136,000 – 14,000 – 1,200) x 80% 186,400
Less: impairment – Appice Ltd (25,000)
Profit on disposal of investment in Starkey Ltd (427,000 – 230,000) 197,000
954,700
Most candidates made a good attempt at preparing the consolidation schedule and correctly excluded the
subsidiary held for sale. Many dealt with the relevant adjustments correctly obtaining all the available marks
for this part of the question. Where candidates did make errors it was normally for the following:
 deducting the inventory PURP from revenue rather than adding it to cost of sales or adding it to the
cost of sales of the purchasing rather than the selling company.
 calculating the cumulative adjustment to depreciation arising from the fair value adjustment rather than
just the current year adjustment and/or entering this into the parent company rather than the
subsidiary’s column.
 adjusting the subsidiary’s profits for the goodwill impairment.
 deducting 100% of the subsidiary’s dividend from investment income rather than just the parent
company’s share of the dividend.
Virtually all candidates attempted to calculate the profit on disposal and a reasonable number arrived at the
correct figure. One common error was using the incorrect share capital figure (the shares bought by the
parent company rather than total share capital) or ignoring share capital altogether when calculating net
assets. Other errors included:
 failing to deduct the impairment from goodwill (many candidates deducted this from the profit on
disposal instead).
 failing to add 6/12 of current year profit to brought forward retained earnings or deducting it rather than
adding it.
 using retained earnings at acquisition rather than at the date of disposal when calculating net assets at
disposal.
A number of candidates produced very disorganised workings for their retained earnings calculation and it
was often difficult to understand where numbers had come from and whether they were increasing or
decreasing the profit on disposal. Candidates are strongly advised to use the standard pro-forma given in the
Learning Material to calculate this figure and label workings appropriately.
Most candidates did prepare a consolidated statement of profit or loss and showed a separate figure for the
profit from discontinued operations. However this figure often ignored the profit up to disposal or just took the
parent company’s share of that profit. Candidates should note that if they only produce the consolidation
schedule they will not get the presentation marks available for this statement.
As expected the extract to the consolidated statement of changes in equity was not as well dealt with. Most
candidates who attempted this statement did insert the “easy” figures ie the profit for the period and the
dividends paid. However errors were frequently made even with these figures by taking total profit for the
period rather than just the profit attributable to the owners of the parent company and/or also including the

subsidiary’s dividend as a deduction from retained earnings. Some candidates also showed dividends as an
addition rather than a deduction to retained earnings. Relatively few candidates attempted to calculate
retained earnings b/fwd or c/fwd. Where they did, workings were again often confused and difficult to follow.
Few candidates appear to understand that they should take the same approach to calculate consolidated
retained earnings as they do to calculate the consolidated retained earnings figure for consolidated statement
of financial position questions.

(b) UK GAAP differences
Acquisition of Starkey Ltd

The calculation for goodwill is the same under UK GAAP as per IFRS, however under IFRS the parent entity
has a choice whether to measure the non-controlling interest at fair value or at the proportion of net assets.
Under UK GAAP only the proportion of net assets method is permitted.
UK GAAP requires goodwill to be amortised over its useful life and there is a rebuttable presumption that this
should not exceed five years. Under IFRS amortisation is not permitted and instead annual impairment
reviews take place.
Disposal of Starkey Ltd

UK GAAP requires that a detailed analysis of discontinued operations should be shown on the face of the
profit and loss account. However, IFRS only requires a single line to be shown on the face of the statement of
profit or loss.
The majority of candidates made a good attempt at this part of the question with many achieving full marks.
However a significant number of candidates wasted time by including differences that were not relevant to the
scenario such as the treatment of a discount on acquisition. A common misunderstanding is that under UK
GAAP goodwill must be amortised over five years rather than it being a maximum useful life.


Question 1
Total Marks: 33
General comments
position from a trial balance plus a number of adjustments. Adjustments included an asset held for sale
which had previously been revalued, a finance lease, the receipt of a government grant, an adjusting
event after the reporting period and an income tax refund. Part (b) tested the difference between the IFRS
treatment of the government grant and that under UK GAAP. Part (c) tested the definitions of the elements
of financial statements with application to the financial statements prepared in Part (a).
Antigua plc
Statement of profit or loss for the year ended 31 December 2014

£
Revenue 8,417,010
Operating expenses (W1) (2,044,050)
Profit from operations 1,573,000
Profit for the year 1,200,750

£ £
Assets
Non-current assets
Property, plant and equipment (1,271,600 + 283,090) 1,554,690
(W2)
Current assets
1,312,100
Non-current asset held for sale (58,000 – 5,000) 53,000
1,365,100


Equity
1,953,140
Current liabilities
Borrowings 101,300
Taxation 497,500
933,150
Workings

Cost of Operating
sales expenses
£ £
Per TB 4,741,400 2,017,500
Closing inventories (W6) (733,400)
Costs to sell held for sale asset 5,000
Loss on held for sale asset (W3) 800
Depreciation charge on buildings 30,000
Depreciation charges on plant and equipment (5,175 + 8,375 62,210
+ 48,660 (W2))
Add back government grant (103,500 x 50%) 51,750
Lease payment wrongly included (9,250)
4,799,960 2,044,050
(2) PPE
Land and Plant and
buildings equipment
£ £
B/f Valuation/Cost 1,490,000 578,000
1,400,000 346,800
Less: Held for sale asset (W3) (98,400)
Depreciation on buildings ((1,490,000 – 140,000) ÷ 45) (30,000)
Less government grant (W1) (51,750)
Depreciation on equipment subject to grant (51,750 x 20% x (5,175)
6/12)
Leased asset 50,250
Depreciation on leased asset (50,250 ÷ 6) (8,375)
Depreciation on other plant and equipment ((346,800 – (48,660)
103,500) x 20%)
1,271,600 283,090

(3) Asset held for sale Asset Revaluation

surplus
£ £
Cost on 1 January 2006 76,000
Depreciation to 31 December 2010 (76,000/50 x 5) (7,600)
Carrying amount at 31 December 2010 68,400
Revaluation on 1 January 2011 108,000 39,600
Depreciation to 31 December 2014 (108,000/45 x 4) (9,600)
Carrying amount at 31 December 2014 98,400
Fair value (58,000)
40,400 39,600
Charge to profit/revaluation surplus 800 (39,600)

£
At 31 December 2013 (15,010)
Profit for the year 1,200,750
At 31 December 2014 1,185,740

£
At 31 December 2013 757,000
Loss on held for sale asset (W3) (39,600)
At 31 December 2014 717,400
(6) Closing inventories

£
At cost 752,000
Less Write down to NRV ((142,000 x 70%) – 118,000) (18,600)
733,400
(7) Finance lease

B/f Payment Capital Interest C/f
£ £ £ £ £
31 December 2014 50,250 (9,250) 41,000 (5/15 x 5,250) 1,750 42,750
31 December 2015 42,750 (9,250) 33,500
SOTD = (5 x 6)/2 = 15
Interest = (9,250 x 6) – 50,250 = 5,250

Generally candidates made a good attempt at this part of the question. However, presentation of the
financial statements was often poor, and many scripts were messy and disorganised. It was noticeable
that far less well-presented scripts than usual were seen. In particular it was often not possible to agree
the figure taken to the statement of financial position for the carrying amount of property, plant and
equipment to a single figure in the workings. Candidates should be aware that if such a figure cannot be
seen in the workings then they will not gain the mark available for this figure on the face of the statement
of financial position. In general, property, plant and equipment workings were often untidy and indicated
that the approach to working out this figure was not methodical. The recommended approach is for
candidates to use a property, plant and equipment “table” with supporting workings as needed.
Generally, candidates arrived at the correct figures for closing inventories, the income tax charge in the
statement of profit and loss and the figure for non-current assets held for sale on the statement of financial
position (with many candidates gaining the additional marks available for putting this in the correct place at
the bottom of current assets). Many candidates made a good attempt at the workings in relation to the
impairment on the asset held for sale, the most common errors being:
 a failure to revalue the asset to fair value first and therefore deal with the costs to sell separately
 errors in depreciation calculations (usually charging depreciation for an incorrect number of years)
 charging the whole of the impairment to the revaluation surplus, without first checking what the
balance on the revaluation surplus in relation to the asset was
 charging the impairment to the revaluation surplus and the same figure as an expense in the
statement of profit and loss
 having arrived at a figure for the carrying amount of the asset held for sale, failing to deduct this
figure from property, plant and equipment, or deducting the fair value instead.
Surprisingly, the aspect of the question that caused the most problems was the finance lease. Usually, the
majority of candidates would get the figures in relation to this completely correct, but, on this occasion, that
was rare. Almost all candidates calculated a “sum of the digits” but this was often based on payments in
arrears, rather than in advance, even where the candidate’s lease “table” clearly showed payments in
advance. Furthermore, a worrying number of candidates were unable to calculate the correct figure for
total finance costs. Having calculated their own sum of the digits, some candidates then went on to use
this as an interest rate in their leasing table. Finally, only a small number of candidates were able to
correctly split the year-end liability, per their own table, into current and non-current, with few appreciating
that for a lease where payments are in advance, the current liability will always be the payment for the
next year.
Most candidates did use the recommended “costs matrix” when allocating costs for the statement of profit
or loss, and entered the adjustments into the correct columns. Occasionally errors were made in terms of
whether the adjustment was increasing or decreasing costs particularly with regard to the grant incorrectly
credited to purchases. Candidates whose convention was to use figures in brackets for costs were
generally the ones who got themselves into a muddle with the direction of their adjustments, as if they had
reverted to the opposite convention part way through. A number of candidates failed to include all of their
depreciation charges (on the leased asset, the asset subject to a grant, on the remaining plant and
equipment, and on the building) in this matrix, even when they had calculated all of these elements in their
property, plant and equipment workings. Once again, this indicated a disorganised approach.

 Showing the bank account (which was a credit balance in the trial balance) as a current asset,
rather than as an overdraft in current liabilities.
 Adding the retained earnings brought forward (which was a debit balance in the trial balance) to
their profit for the year, instead of deducting it.
 Reducing the income tax liability by the income tax refund when that refund had already been
received (or showing the refund as a separate tax asset).
 Adding the grant to property, plant and equipment rather than deducting it.
 Charging a full year’s depreciation on the asset subject to the grant, instead of six months.
 Using a useful life of seven years for the leased asset instead of the (shorter) lease term of six
years.


(b) Differences between IFRS and UK GAAP re government grant
UK GAAP IFRS
Grants are recognised under the performance model No such requirement exists in IAS 20.
or the accrual model. This policy choice is to be
made on a class-by-class basis.
Under the performance model, where no specific This would not be possible under IFRS, where,
performance-related conditions are imposed on the under the chosen netting-off method, the grant is
recipient (as here) then the grant is recognised in credited against the cost of the asset and so
income when the grant proceeds are received or effectively released to profit or loss over the life of
receivable. Hence, if the performance model had that asset, in line with the depreciation policy on
been chosen, then Antigua Ltd would have credited that asset.
the whole £51,750 to income during the year.
Under the accrual model grants relating to assets are

recognised in income on a systematic basis over the
expected useful life of the asset. However, this
cannot be done by deducting the grant from the
carrying amount of the asset, but by recognising
deferred income.
Most candidates made a reasonable attempt at this part of the question, with almost all stating that IFRS
allows a choice of treatment, but that UK GAAP only allows the deferred income method. Most went on to
clearly describe the mechanics of the two methods, although some wasted time providing calculations for
the deferred income method, which were not required. Very few candidates gained full marks, and almost
all candidates seemed unaware of the two models (performance and accrual) allowed by UK GAAP.

(c) Elements of the financial statements
Asset – The finance lease is recognised as an asset because the machine is controlled by Antigua plc
(has the risks and rewards), the control came about via the signing of the lease, which happened during
the year, and the machine will be used in the business to generate future revenue.
Liability – The overdraft is recognised as a liability because it existed at the year end and will lead to future
outflows in the form of repayment and interest payments.
Income – Revenue is a form of income as it brings cash inflows or enhancement of assets in the form of
trade receivables.
Expenses – Depreciation is an expense as it reduces the carrying amount of property, plant and
equipment (ie depletes an asset).
Equity – this equals Antigua plc’s ordinary share capital, retained earnings and revaluation surplus as the
sum of these is equal to total assets minus total liabilities/is the residual interest in the assets of the entity
after deducting all its liabilities.
There were some very good attempts at this part of the question, with all five elements clearly stated, an
appropriate example given for each, and a clear explanation of why the given example met the definition.
At the other end of the scale were answers which, although they gave the five elements and appropriate
examples, merely copied out the definitions of the elements from the open book text, without any attempt
to relate those definitions to their examples, and therefore scored very little for their explanations. A
significant minority of candidates confused “elements” with the fundamental and enhancing qualitative
characteristics, thereby scoring no marks.


Question 2
Total Marks: 28
General comments
Part (a) of this question required candidates to explain the IFRS financial reporting treatment of the four
issues given in the scenario. The issues covered a financial asset, the disposal of a subsidiary, a foreign
exchange transaction and a related party transaction. Part (b) required a discussion of the ethical issues
arising from the scenario and the action to be taken. Part (c) required candidates to describe any
differences between IFRS and UK GAAP in respect of the financial reporting treatment of Issue (2).
Cuba Ltd
(a) IFRS financial reporting treatment
(1) Financial asset
The bond is a financial asset as defined by IAS 32, Financial Instruments: Presentation, because it
represents a contractual right to receive cash from another entity.
Per IAS 39, Financial Instruments: Recognition and Measurement, financial assets should be recognised
when the contract is entered into and initially measured at its fair value, including transaction costs. Fair
value is defined by IFRS 13, Fair Value Measurement, but is normally the transaction price.
Hence Philippe was correct to recognise the asset on 1 January 2014, but should have recognised it at
£97,000 (94,500 + 2,500), not £110,000. As this is a held-to-maturity financial asset, the asset should
subsequently be measured at amortised cost using the effective interest method.
At 31 December 2014 interest of £6,295 (97,000 x 6.49%) should be recognised as income in profit or loss
so the income recognised of £15,500 will need to be reduced by £9,205 (15,500 – 6,295). The bond
should be stated at £103,295 (97,000 + 6,295). Because the bond is redeemable on 31 December 2015,
ie within one year, it should be presented in investments within current assets.
(2) Disposal of subsidiary
In Cuba Ltd’s consolidated financial statements the profit on disposal of Honduras Ltd should be
calculated by comparing the net assets at the date of disposal and non-controlling interest (NCI), less
goodwill on consolidation not already written off, to the sale proceeds. The net assets at the date of
disposal will be the net assets brought forwards on 1 January 2014, less the loss earned by Honduras Ltd
to the date of disposal/(six months pro-rated).
£ £
Less: Carrying amount of goodwill at date of disposal:
Consideration transferred at date of acquisition 147,800
Fair value of NCI at date of acquisition 40,100
187,900
Net assets as date of acquisition (157,500)
Goodwill at date of acquisition and disposal (30,400)
Carrying amount of goodwill at date of disposal:
Net assets on 31 December 2013 301,000
Loss for current year to date of disposal (16,600 ÷ 2) (8,300)
Carrying amount of net assets at date of disposal (292,700)
Add: NCI in net assets at date of disposal (40,100 + 67,140
(292,700 – 157,500) x 20%))
Profit on disposal 640

This figure should be recognised in the consolidated statement of profit or loss as discontinued operations.
In the consolidated statement of profit or loss, Cuba Ltd should include the results of Honduras Ltd up to
the date of disposal. At the year end of 31 December 2014 the Cuba Ltd group no longer controls any of
the assets or liabilities of Honduras Ltd and so the consolidated statement of financial position should not
recognise any of Honduras Ltd’s assets or liabilities.
The non-controlling interest figure will similarly include their share (20%) of six-twelfths of Honduras Ltd’s
loss for the year, being £1,660 (16,600 x 20% x 6/12). In the statement of changes of equity for the year
the £67,140 above will be shown as a deduction in the non-controlling interest column.
Because the investment in Honduras Ltd represented a separate major line of business of the Cuba Ltd
group, in the consolidated statement of profit or loss, the results of Honduras Ltd for the year ended 31
December 2014 should be presented separately in accordance with IFRS 5, Non-current Assets Held for
Sale and Discontinued Operations. A single net figure of a loss of £7,660 for the discontinued operation
should be disclosed on the face of the consolidated statement of profit or loss, being the profit on disposal
of £640, less the loss for the period to disposal of £8,300. A disclosure note should show the breakdown of
this figure into revenue, costs and the profit on disposal. Honduras Ltd’s prior period results should be
reclassified as discontinued in order to ensure comparability.
(3) Foreign exchange transaction
IAS 21, The Effects of Changes in Foreign Exchange rates, states that a foreign currency transaction
should be recorded, on initial recognition in the functional currency, by applying the exchange rate
between the reporting currency and the foreign currency at the date of the transaction/historic rate. When
the goods were received on 23 November 2014, Philippe was correct to record them in purchases and
trade payables at the spot rate of €1:£0.85, ie at an amount of £134,300 (158,000 x 0.85).
However, at the year end, IAS 21 requires that any foreign currency monetary items are retranslated using
the closing rate. Monetary items are defined as “units of currency held and assets and liabilities to be
received or paid in fixed or determinable number of units of currency”. The trade payable in respect of this
purchase meets the definition of a monetary item and should have been retranslated at the closing rate.
This would have given a trade payable of £142,200 (158,000 x 0.90). This exchange loss of £7,900
(142,200 – 134,300) should have been included in the consolidated statement of profit or loss for the year
ended 31 December 2014.
Furthermore, because inventory does not meet the definition of a monetary item, it should have been left
as originally recorded, and not been restated. Closing inventory therefore should be reduced by the same
amount (£7,900), further reducing the profit for the year.
This appears to be a related party transaction per IAS 24, Related Party Disclosures. Grenada Ltd is a
related party of Cuba Ltd because Grenada Ltd is owned by a close family member of Cuba Ltd’s key
management personnel (ie it is owned by the wife of Cuba Ltd’s finance director).
The following disclosures are therefore required, even if the purchases were indeed made on an arm’s
length basis:
 The nature of the related party relationship (ie that purchases have been made from a company
owned by the finance director’s wife).
 The amount of the transactions (£550,000).
 The amount of any balances outstanding at the year-end (£75,000).
Disclosure may be made of the fact that the transactions were made on an arm’s length basis if this can
be substantiated.

This question was not answered as well as the numeric parts of the paper, and indeed the other written
parts. Candidates need to be aware that they can only score well on this type of question if they make a
reasonable attempt to provide explanations, in addition to calculations.
Issue (1): This was generally very poorly answered with many candidates assuming this was a liability.
Given that the bond was “purchased” as opposed to being “issued” it was clearly a financial asset, not a
financial liability. Others thought it was a compound financial instrument, with equity and liability
components. Some hedged their bets altogether by stating it was both an asset and a liability. A few
thought it was an intangible asset. Others provided figures (some sort of amortised cost table) without ever
stating what the transaction represented. Those candidates who did correctly identify the transaction as a
financial asset generally said that it needed to be recognised at an initial £97,000 (ie including the
transaction costs) and then amortised that figure at its effective interest rate, giving a closing carrying
amount, although the answer did not always describe that method in words.
Issue (2): Much better attempts were made at this part of the question. Almost all candidates recognised
this as a discontinued operation, although they didn’t always explicitly state this, and correctly stated that it
needed to be recognised as a single line in the statement of profit or loss. They then correctly combined
their own figure for profit or loss on disposal with the subsidiary’s loss for the year up to disposal. Most
recognised that the loss for the year was for six months only, but a significant number of candidates, as
usual, took only the group share of this figure. However, although almost all candidates attempted the
relevant calculations, many, once again, failed to also describe what needed to be done in words. Few
considered the impact of the disposal on the statement of financial position (ie the subsidiary would not be
consolidated as control had been lost). By far the most common error in the calculation of the profit or loss
on disposal was in respect of the non-controlling interest at disposal with very few calculating this using
the chosen fair value policy – most candidates calculated this using the proportionate method and
therefore simply took 20% of the net assets at disposal. Others made errors in the calculation of the latter
figure, most commonly adding, rather than deducting, the loss for the year from the opening net assets.
Issue (3): Once again, many candidates produced the correct relevant calculations (this time often
accompanied by journal entries, which were not required) without explaining why it was that the payable
needed to be restated but that the inventory should not have been (ie making reference to the treatment of
monetary, as opposed to non-monetary items). A minority of candidates said that the inventory had
correctly been restated and that the payables correctly left at the historic rate. A significant number of
candidates, whilst producing the three correct figures, seemed to be completely unclear as to which
figures should be shown at which amount, ie at the historic or closing rate.
Issue (4): Most candidates recognised that this was a related party transaction and were able to explain
why. However, most said that this was because Phillippe’s wife was a related party, as opposed to Cuba
Ltd being a related party. Almost all candidates listed the necessary disclosure requirements but fewer
illustrated how these requirements would be fulfilled by reference to the information in the scenario. Most
knew that the fact that the transaction had been made on an arm’s length basis did not negate the need
for disclosure.


(b) Ethical issues
Philippe appears to have a self-interest threat, as he is due a bonus based on the profit for the year. The
“errors” which José has discovered in the draft financial statements could be genuine mistakes due to a
lack of knowledge, or could be a deliberate attempt by Philippe to overstate the profit for the year in order
to increase his bonus. It may be that had it not been for his illness that these “errors” would not have been
discovered.
As an ICAEW Chartered Accountant Philippe has a duty of professional behaviour and due care and
should be aware of the correct IFRS financial reporting treatment for all of these issues, none of which are
at all controversial. His imminent retirement is no excuse.
Although the transaction with Grenada Ltd may all be above board, it does perhaps throw into doubt the
integrity of Philippe if there is any question over whether the transactions were conducted on an arm’s
length basis. In any case, even if they were, as an ICAEW Chartered Accountant Philippe should not only
act with integrity but he should appear to act with integrity. The fact that he is suggesting that this
transaction does not need to be disclosed also paints him in a poor light.
Given Phillippe’s attitude about not amending the figures, José is subject to an intimidation threat. He
should apply the ICAEW Code of Ethics, with the following programme of actions:
 Explain to Philippe how each of these matters should be accounted for.

 If Philippe refuses to correct the errors, discuss the matters with the other directors to explain the
situation and obtain support. Consider also discussing the issues with the external auditors.
 Keep a written record of all discussions, who else was involved and the decisions made.
This part of the question was well answered. Most candidates correctly identified that there was a self-
interest threat for Phillippe (because of his profit-related bonus) and that there was an intimidation threat
for José (due to Phillippe’s attitude in the telephone call). They also recognised that all of the “errors” had
increased the profit for the year. Many then went on the discuss the actions that José should take, being
the standard response of discussion with Phillippe, discussion with the other/managing director(s), seeking
help from the ICAEW helpline, and documenting all discussions. As ever, many candidates were overly
keen to resign and a number put themselves in an audit context, by suggesting that they should seek help
from the ethics partner.


(c) IFRS v UK GAAP differences re disposal of subsidiary
IFRS UK GAAP
IFRS 5 requires the results of a discontinued FRS 102 shows the results of a discontinued
operation to be shown as a single figure on operation as a separate column on the face
the face of the statement of profit or loss. of the income statement.
Under IFRS 3 non-controlling interest may be FRS 102 only permits the proportionate
measured at fair value or on the (share of ownership) basis.
proportionate basis.
IFRS 3 goodwill is not amortised but is FRS 102 requires goodwill to be amortised
subject to annual impairment reviews. over its useful life. There is a rebuttable
presumption that the useful life should not
exceed five years.
Almost all candidates scored at least one mark in this part, with the most common answer being to
describe the differences between the presentation of discontinued activities in the statement of profit or
loss/income statement, which was understandable as this was the main focus of Issue (2). However, Issue
(2) also covered the calculation of goodwill and candidates should have been guided by the fact that the
requirement was for two marks and that therefore they needed to think more widely and look at the
calculation itself. Some candidates did go on to do this and achieve a second mark by describing which
methods of calculating goodwill and the non-controlling interest are available under IFRS and UK GAAP. It
was less common to see the differences with reference to the impairment and amortisation of goodwill,
although this was not needed to achieve full marks.


Question 3
Total Marks: 19
General comments
This was a mixed topic question requiring the preparation of extracts from the financial statements. The
question featured various transactions in property, plant and equipment, including a self-constructed
asset, in addition to share issues during the year and dividends. In Part (a) candidates were required to
explain their treatment of the self-constructed asset, which meant they could then use their calculated
figures in Part (b).
Columbia plc
(a) IFRS financial reporting treatment of the manufacturing facility
Per IAS 16, Property, Plant and Equipment, the cost of an item of property, plant and equipment (PPE)
comprises:
 Purchase price
 Costs directly attributable to bringing the asset to its intended location and condition.
The site preparation costs, materials and labour costs, professional fees, construction overheads and
costs of the initial safety inspection are directly attributable costs and therefore can be capitalised, a total
of £500,300 (100,000 + 358,300 + 10,000 + 21,000 + 11,000).
The relocation costs of £45,600 and the general overhead costs of £32,500 cannot be capitalised/should
be expensed because they are not directly attributable. So the total amount written off to profit or loss
should be £78,100 (45,600 + 32,500).
Capitalisation should cease when the asset becomes capable of operating in the manner intended /so on
30 November 2014.
Each significant part of an item of PPE should be depreciated separately so the calculation of the annual
depreciation charge for the year will be:
£
Safety inspection (21,000 ÷ 3) 7,000
Other ((500,300 – 21,000) ÷ 20) 23,965
30,965
Since the asset was available for use only from 30 November 2014, then only one month of this annual
charge should be recognised in profit or loss for the year ended 31 December 2014, ie £2,580 (30,965 ÷
12).
The carrying amount of the facility on 31 December 2014 is therefore £497,720.
Answers to this part were mixed, although a reasonable number of candidates did obtain the maximum
marks and, generally, the quality of explanations in this part was better than those in Part (a) of Question
2. However, a significant number of candidates wasted time by discussing irrelevant accounting
standards, in particular IAS 38, Intangible Assets and IAS 23, Borrowing Costs. Most candidates made an
attempt at justifying which costs should and shouldn’t be capitalised and virtually all candidates did
conclude that a month’s worth of depreciation should be charged and attempted to calculate this figure.
The most common errors were:
 failing to justify the appropriate treatment for the costs by reference to IAS 16, Property, Plant and
Equipment
 treating the professional fees and/or the construction overheads and/or the initial safety inspection
costs incorrectly
 not separating out the initial safety inspection costs so that they could be depreciated over the
shorter life of three years.


(b) (i) Revised profit for the year ended 31 December 2014
£
Draft profit for the year 52,600
Costs re self-constructed asset (a) (78,100)
Depreciation on self-constructed asset (a) (2,580)
Finance costs (50,000 x 4% x ½) (1,000)
(29,080)
(ii) Extracts from the financial statements for the year ended 31 December 2014
Statement of cash flows for the year ended 31 December 2014

£
Investing activities
Proceeds from sale of property, plant and equipment (125,700 – 111,400
14,300)
Financing activities
Issue of ordinary share capital (75,000 x 1.50) 112,500
Issue of irredeemable preference share capital 50,000
Ordinary dividends paid (W2)) (56,250)

£
Non-current assets
Equity
Ordinary share capital (W3) 468,750
Irredeemable preference share capital 50,000
Current liabilities
Preference dividend/finance costs payable 1,000
Workings
(1) PPE
£ £
B/d 1,456,700 Disposal 125,700
Additions (432,500 + 500,300 (a)) 932,800 Depreciation (235,600 + 2,580 (a)) 238,180
C/d (β) 2,025,620
2,389,500 2,389,500

£ £
Loss for the year (i) 29,080 B/d 145,800
Bonus issue (93,750 – 72,500) (W3) 21,250
Ordinary dividend (15p x 375,000) 56,250
C/d (β) 39,220
145,800 145,800

(3) Ordinary share capital and share premium

Share Share
capital premium
£ £
At 31 December 2013 300,000 35,000
Issue on 1 February 2014 75,000 37,500
375,000 72,500
Bonus issue on 1 November 2014 (÷ 4) 93,750 (72,500)
At 31 December 2014 468,750 -
Generally answers to this part were good with most candidates calculating an adjusted profit figure and
preparing extracts to both the statement of financial position and statement of cash flows. The quality of
extracts produced was reasonable, but a minority of candidates produced a jumble of notes and workings.
Many candidates correctly calculated the closing balance on the share capital account and showed in their
workings that the share premium account would be reduced to zero. The figures for proceeds from
disposals of property, plant and equipment, issue of shares and dividends paid were also dealt with well
and nearly always shown under the correct heading in the statement of cash flows. However, as always
with the statement of cash flows, many candidates lost marks for failing to show outflows of cash in
brackets. This is an issue that has been flagged up repeatedly. Also, many candidates wasted time by
duplicating workings; often doing a bracketed working for property, plant and equipment to calculate the
figure for the statement of financial position then also producing a T-account working (which often included
different numbers). Another common error with property, plant and equipment was to include the costs of
the new manufacturing facility in the working but not in the figure on the face of the statement of cash
flows. Other candidates wasted time by preparing a combined share capital and share premium T-account
then had to repeat the working, showing these accounts separately, to allow for the preparation of
statement of financial position extracts. A worrying minority of candidates calculated a weighted average
number of ordinary shares, as would be needed for an earnings per share calculation.
Other common errors included:
 including a full year for the dividend on the irredeemable preference shares (rather than six
months) and also treating it as a dividend paid on the statement of cash flows, or omitting this
dividend entirely
 making unnecessary adjustments to both profit and property, plant and equipment (when the
question clearly stated that the depreciation on existing assets and the loss on the disposal had
already been recognised)
 deducting all of the bonus issue from retained earnings when as much of it as possible should
have been taken to share premium (another reason why it was necessary to produce separate
share capital and share premium workings)
 calculating the ordinary dividend by reference to closing share capital (when the bonus issue had
not been made until after the interim dividend was paid)
 combining the liabilities for the preference dividend payable with the preference share capital in
the statement of financial position, rather than showing these individually as current and non-
current liabilities respectively.


Question 4
Total Marks: 20
General comments
This question required the preparation of a consolidated statement of financial position from a draft version
of the same, where figures for a subsidiary had been incompletely incorporated and figures for an
associate not included at all. Fair value adjustments were required on acquisition for both companies as
well as dealing with contingent consideration for the subsidiary. Intra-group trading and the transfer of a
non-current asset had occurred during the year and also needed to be adjusted for.
Dominica plc
Consolidated statement of financial position as at 31 December 2014
£ £
Assets
Non-current assets
Property, plant and equipment (3,780,400 – 20,000 3,760,400
(W7))
4,029,290
Current assets
Inventories (400,800 + 8,500 (W1) + 17,700 (W1)) 427,000
662,800

Equity
Ordinary share capital (1,400,000 – 160,000) 1,240,000
Share premium (890,000 – 80,000) 810,000
Revaluation surplus (1,061,600 – 240,000 + (100,000 (W1) x 85%)) 906,600
Attributable to the equity holders of Dominica plc 4,185,435
4,288,590
Current liabilities
Trade and other payables (320,000 – 200,000) 120,000
Contingent consideration 150,000
Taxation 133,500
403,500
Workings
(1) Net assets – Tobago Ltd

£ £ £
Ordinary share capital 160,000 160,000 -
Share premium 80,000 80,000 -
Revaluation surplus 240,000 140,000 100,000
FV adj – inventories ((124,000 – 107,000)/2) 8,500 17,000
Inventory – sale or return (23,600 x 75%) 17,700 - 127,500
687,700 460,200 227,500

(2) Goodwill – Tobago Ltd

£
Consideration transferred:
Cash 400,000
500,000
108,830
(3) Non-controlling interest – Tobago Ltd

£
Share of net assets at acquisition (460,200 (W1) x 15%) 69,030
Share of post-acquisition profits (227,500 (W1) x 15%) 34,125
103,155
(4) Investment in associate – Anguilla Ltd

£
Cost 156,000
Add: Share of post-acquisition profits ((168,100 – 104,500) x 35%) 22,260
Less: FV depreciation (100,000/20 years) x 35% x 10 years) (17,500)
160,060

£
Draft consolidated (1,367,900 – 181,500) 1,186,400
Additional contingent consideration (50,000)
Tobago Ltd (127,500 (W1) x 85%) 108,375
Anguilla Ltd (W4) 22,260
Less: FV depreciation (W4) (17,500)
Less: PPE PURP (W7) (20,000)
1,228,835
(6) PURP
Anguilla Ltd
% £
SP 100 20,000
Cost (70) 14,000
GP 30 6,000
X 1/3 2,000
Anguilla Ltd x 35% 700
(7) PPE PURP

£
Asset now in Tobago Ltd’s books at 180,000 x 5/6 years 150,000
Asset would have been in Dominica plc’s books at 156,000 x 5/6 years (130,000)
20,000

Answers to this question were generally good, with virtually all candidates recognising that the associate
should not be consolidated and that the equity balances needed to be adjusted to remove the figures of the
subsidiary that had been incorrectly added in. Most candidates produced the standard workings used in the
learning materials which meant it was relatively straightforward to follow the workings and give credit where
appropriate. The correct figure for the unrealised profit relating to the associate was frequently calculated
correctly although, as always, some candidates failed to use only the parent’s share of this. Many
candidates also seemed confused about what should be included in the associate working, often adding in
fair value adjustments and not understanding that adjustments to the cost of the associate should also be
included in retained earnings. A number of candidates calculated different figures for these two workings
thereby wasting time and losing marks.
The two adjustments that caused the most problems were the unrealised profit relating to the sale of a
machine and the adjustment to inventory for goods sold on a sale or return basis. With regard to the former
those candidates who calculated the adjustment by comparing the two different carrying amounts did well.
However, those who calculated separate figures for profit on disposal and the adjustment to the
subsequent depreciation charge rarely netted these off to come to the correct adjustment. Some
candidates calculated the relevant figure but then failed to adjust property, plant and equipment for this.
Few candidates calculated the correct adjustment for the goods on sale and return often adjusting for the
profit element (which had not been recognised) rather than calculating the cost of the goods and adding it
to net assets and inventories. The contingent consideration was also poorly dealt with. Many candidates
used the wrong figure in the goodwill calculation and few made the appropriate corresponding adjustment
to liabilities or dealt with the change in the value of the contingent consideration in retained earnings.
As always, many candidates lost marks by failing to show an “audit trail” so figures appeared in workings
without any evidence of how they had been calculated. It is not sufficient to say, for example, “85% x NA at
acq”. The actual figure for net assets at acquisition (as calculated in the candidate’s own net assets table)
must also clearly be shown alongside the percentage for the marks to be awarded.
 Deducting, rather than adding, the fair value increase relating to inventory and/or failing to
recognise that half the inventory had been sold by the year end.
 Adopting an inconsistent treatment in the net asset working and the adjustment to inventories in
respect of the above (eg adding the figure to net assets but deducting it from inventories).
 Not separating out the movement in net assets relating to the revaluation surplus and therefore
including this in retained earnings.
 Not adjusting the revaluation surplus to take into account only the parent’s share of the
subsidiary’s post-acquisition movement on its revaluation surplus – many candidates added in
100% of this figure, others did not adjust for it at all.
 Not knowing how to calculate and/or account for the post-acquisition depreciation on the fair value
uplift in the associate. A significant number of candidates who were able to calculate the
depreciation adjustment then only proceeded to account for one year’s worth of the adjustment
instead of the required ten years’ worth.
 Using 80% when calculating figures for the subsidiary, instead of the 85% given in the question.


Financial Accounting and Reporting - Professional Level – September 2015
Question 1
Total Marks:
General comments
Part (a) of this question tested the preparation of a statement of profit or loss, a statement of financial
position and a provisions note from a draft set of financial statements with a number of adjustments
required. Adjustments included deferred revenue, foreign exchange difference, a provision with
discounting and a convertible bond as well as adjustments to property, plant and equipment.
Part (b) tested the difference between the presentation of financial statements prepared using IFRS and
UK GAAP. Part (c) asked for explanations of the concepts of substance over form, present fairly and true
and fair view with illustration to the financial statements prepared in Part (a).
(i) Gamow Ltd – Statement of financial position as at 31 March 2015
£ £
ASSETS
Non-current assets
Intangibles 160,000
1,367,020
Current assets
Inventories 47,300
Trade and other receivables (121,240 – 880 (W3)) 120,360
171,460
Equity
Other share reserve (share options / warrants) (W7) 22,782
Retained earnings (541,720 – 779,890 + 336,900) 98,730
Equity 701,512
Bond (W6) 284,168
Provisions (note) 112,150
Deferred income (250,000 x 3/24) (W2) 31,250
427,568
Current liabilities
Trade and other payables (92,400 + 18,000 (W7)) 110,400
Deferred income (100,000 + (156,250 (W2) – 31,250)) 225,000
Taxation 74,000
409,400

(ii) Gamow Ltd – Statement of profit or loss for the year ended 31 March 2015
£
Revenue (1,896,200 – 156,250 (W2) – 100,000 (W2)) 1,639,950
Other operating costs (174,533)
Finance costs (1,560 + 7,337 (W6) + 24,950 (W7)) (33,847)
Income tax (74,000)
(iii) Provisions note
£
At 1 April 2014 –
Profit or loss charge (W6) 104,813
Unwinding of discount 7,337
At 31 March 2015 112,150
This provision is in relation to a legal claim which arose on 1 April 2015 due to the delivery of faulty goods
to a customer. The incident was one-off in nature due to a fault with one of the machines. The provision has
been discounted to a present value of 7%. The legal claim is likely to be settled in April 2016.
Workings
W1 Expenses
Cost of Admin Other
costs
£ £ £
Draft 567,430 283,600 189,720
Exchange loss (W3) 880
Provision adjustment (120,000 – (15,187)
104,813)
Research & development costs (W5) 115,000
Loss in disposal (W4) 2,400
683,310 337,360 174,533
W2 Revenue
Loyalty cards (200 x £1,250) = £250,000
£250,000 x 9/24 months = £93,750 revenue
Deferred income (250,000 – 93,750) £156,250
Mendel pre-orders (2,000 x £50) = £100,000
Translation at 1 January 2015 (22,000 x 0.83) 18,260
Translation at 31 March 2015 (22,000 x 0.79) (17,380)
Exchange loss 880

W4 Property, plant & equipment

Land & Plant &
buildings machinery
£ £
Cost 1,080,000 384,900
Less: disposal (cost) (19,500)
365,400
1,080,000 / 40yrs (27,000)
365,400 / 15yrs (24,360)
Disposal – carrying amount

(19,500 – (19,500 / 15yrs) x 6yrs) = 11,700
PPE – carrying amount at 31 March 2015 £

At 1 April 2014 1,260,780
Less: depreciation (27,000 + 24,360) (51,360)
Less: disposal adj (11,700 – 9,300) (2,400)
At 31 March 2015 1,207,020
W5 R&D Project – Mendel

Intangible
asset Expense
£ £
Background investigation work 25,000
Initial development work 42,800
Second phase development work 160,000
Product launch costs 31,600
160,000 115,000
W6 Provision
2
120,000 / 1.07 = 104,813
Unwinding of discount: 104,813 x 7% = 7,337
W7 Convertible bond
Cash flow Discount factor Present
@ 9% value
£ £
31 March 2015 18,000 1/1.09 16,514
2
31 March 2016 18,000 1/1.09 15,150
3
31 March 2017 (redemption) 318,000 1/1.09 245,554
Liability component 277,218
Equity component (bal fig) 22,782
Total 300,000
1 April 2014 Interest (9%) Payment (6%) 31 Mar 2015

£ £ £ £
277,218 24,950 (18,000) 284,168
Presentation of the statement of profit or loss and statement of financial position varied. Although as
indicated as acceptable at the tutor conference, most candidates omitted sub-totals on the statement of
financial position, many also omitted totals for total assets and total equity and liabilities on this statement
and/or sub-totals on the statement of profit or loss and were penalised accordingly. However, there were
few very messy statements in terms of workings shown on the face of the statements. Most candidates did
use the recommended “costs matrix” in their workings and fewer than usual lost marks by mixing up bracket
conventions. However, a worrying number of candidates were let down by difficult to read handwriting.

Presentation of the provisions note was poor. Many candidates seemed to have little idea what this note
should look like, with many notes looking more like a property, plant and equipment note, featuring
“additions” for the year. In addition, a number of candidates gave an explanation for how they had arrived at
the closing balance (rather like an answer to an “explain” type question), rather than the narrative that
should accompany such a note. Although most candidates arrived at the correct closing balance of
£112,150, this was mainly achieved by discounting the gross provision of £120,000 by 7% for one year, to
the current year end. Even those who correctly discounted by two years, usually failed to show this correctly
in the movement note. Others mixed up the unwinding charge with the correction of the error (from
£120,000 to £104,813) with different figures shown either in the costs matrix and/or as a finance charge.
However, many candidates did achieve high marks on this question with many arriving at completely
correct figures in respect of revenue and the associated deferred income, the foreign exchange adjustment,
the depreciation charges, and the loss on sale. A good number also arrived at the correct split for the
convertible bond between equity and debt, and correctly amortised the latter. Where mistakes were made
over the convertible bond they included failing to accrue for the £18,000 interest, taking the net of the true
interest and the nominal interest to finance charges, adding the equity element to ordinary share capital
when it should have been shown separately and failing to amortise the debt from its base figure.
Fewer candidates than might have been anticipated arrived at the correct split between research and
development costs to be capitalised and those to be expensed. The most common error was to capitalise
the product launch costs instead of expensing them.
Other common errors included arriving at an incorrect foreign exchange adjustment by using the rate at
settlement, as opposed to the year-end rate, deducting the foreign exchange adjustment from revenue
instead of adding it to costs, when calculating closing retained earnings adding the revised profit for the
year but failing to take out the draft profit for the year and reducing the plant and machinery by the carrying
amount of the disposed of asset instead of by the cost (the cash proceeds had already been credited
there), before calculating the depreciation charge for the year. Candidates also need to be reminded that
unless they show their workings then they will lose calculation marks unless the resultant figure is
completely correct, this was particularly prevalent in the calculation of the depreciation charge on plant and
machinery (ie what figure had been divided by how many years).


(b) UK GAAP – Presentation of financial statements
Under UK GAAP the presentation of financial statements is primarily dealt with by the Companies Act
2006 and FRS 102. The Companies Act sets out the balance sheet and profit and loss account formats, in
general the requirements are similar to those of IAS 1.
However, it should be noted that the formats in IAS 1 are only contained in the ‘Guidance on
Implementation’ whereas the Companies Act formats are enshrined in law.
Under UK GAAP the profit and loss account format requires less detail to be included than in IAS 1,
although IAS 1 allows some of the additional detail to be presented in the notes rather than on the face of
the statement.
The Companies Act balance sheet format is less flexible than the equivalent IAS 1 statement of financial
position. A UK balance sheet is usually prepared on a net assets basis.
Different terminology is used, as already described above the Companies Act uses a balance sheet and a
profit and loss account as opposed to a statement of financial position and a statement of profit or loss. In
addition, other terms are different for example, inventories are called stock, receivables are called debtors,
property, plant and equipment is called tangible fixed assets.
Different presentation is used between UK GAAP and IFRS. For example, for discontinued operations, UK
GAAP requires a separate column to be presented on the face of the profit and loss account. However
under IFRS a single line is required for profit or loss from such activities. Another relevant example is the
presentation of held for sale assets as these will simply be included as part of tangible fixed assets under
UK GAAP. However, a separate line is presented below current assets for such assets under IFRS.
This part of the question was poorly answered with many candidates setting out seemingly “random”
differences between IFRS and UK GAAP accounting treatments, when the requirement asked for
differences in presentation. Very few candidates referred to the fact that IFRS presentation is guided by
IAS 1 and UK GAAP presentation dictated by the Companies Act 2006. The most common answer
referred to differences in the names of the statements and gave a few examples of differences in
terminology (eg inventories as opposed to stock). The better answers then set out the differences in
presentation for held for sale assets and discontinued operations, both of which were relevant points.


(c)(i) Substance over form
Substance over form is the principle that transactions and other events are accounted for and presented in
accordance with their broader substance and economic reality and not their legal form. Substance over
form should be applied to all accounting areas in accordance with the IASB Conceptual Framework.
The main example of substance over form included in Gamow Ltd’s financial statements above is the
treatment of the convertible debt.
Gamow Ltd has a convertible bond which is a hybrid financial instrument containing both a liability
component and an equity component. The substance of the financial instrument is the same as issuing
separately a non-convertible bond and an option to purchase shares. The substance of the instrument is
followed and therefore separate liability and equity components are accounted for, rather than following its
legal form of a financial liability.
Another example could be argued to include the process of recording deferred income rather than
recognising the cash proceeds immediately, although this is more akin to the accruals concept. The
capitalisation of development costs is another example with the link between their nature being that of an
expense however in substance they may meet the definition of an asset, per the Conceptual Framework
and hence capitalised.
(ii) Fair presentation and true and fair
IAS 1 Presentation of financial statements requires financial statements to ‘present fairly’ the financial
performance and position of an entity. This means that the effects of transactions should be faithfully
represented. This is generally achieved by presenting the financial information in accordance with
International Accounting Standards.
In the UK, the Companies Act 2006 requires that financial statements present a ‘true and fair view’ of the
company’s financial position and of its profit or loss for the period. True and fair is usually defined in terms
of generally accepted accounting practice, which in the UK means compliance with accounting standards
and adherence to the Companies Act requirements. ‘True’ is generally interpreted as reflecting factual
accuracy and ‘fairness’ as indicating that the view is unbiased (neutral) and objective.
Answers to this part of the question were varied and generally disappointing. Many candidates could only
state that substance over form means “accounting for an item’s substance instead of its form”! Very few
candidates referred to economic or commercial reality compared to legal form. Most candidates cited the
convertible bonds as an example, but some then went on to say that their legal form was equity, and the
substance a liability, even where they had treated the bonds as a compound financial instrument in their
answer to Part (a). Other examples, such as leasing, which did not feature in Part (a) earned no marks.
The concepts of “present fairly” and “true and fair view” were also poorly explained by the majority of
candidates, with only a minority referring to such matters as faithful representation, accuracy and a lack of
bias. A number of candidates believed that “present fairly” is concerned with the fair value of assets.
Others couched their explanation of a “true and fair view” in the context of an audit report. It was very rare
to see the basic fact that “present fairly” is an IFRS concept, and “true and fair view” the equivalent in UK
GAAP, and even if this fact was presented few then went onto to say that these concepts could be
achieved by compliance with accounting standards.


Question 2
Total Marks:
General comments
Part (a) of this question required candidates to explain the IFRS financial reporting treatment of the four
issues given in the scenario. The issues covered a government grant, a sale and leaseback, two possible
held for sale assets with impairment issues and the purchase of own shares.
Part (b) required the calculation of revised figures for profit before tax and equity.
(a)
This is an income related grant and should therefore be recognised over the period to which the related
expenditure is being incurred. For Meitner plc it is expected to employ local employees over a three year
period, therefore it would be reasonable to assume that the grant should be recognised over the three
years also.
The grant should not be recognised unless there is reasonable assurance that the entity will comply with
any conditions attached to the grant and the grant will be received. Meitner plc has already received the
grant and has currently met the condition that the local workforce makes up a third of the total employees
as it has 35% local employees and this is expected to rise. So both conditions have been met. However,
the grant should not be recognised in the statement of profit or loss in full upon receipt regardless of
whether it is assessed as being not likely to be repaid.
£125,000 (£375,000 / 3yrs) of income should be recognised for the year ended 31 March 2015. The
remaining £250,000 should be reversed from other income and recognised as deferred income, as part of
liabilities. The liability should be split equally between current and non-current.
(2) Sale and operating leaseback
Sale and leaseback transactions can result in either a finance or an operating lease. The length of the
lease of five years in comparison to the life of the property of 30 years, so this is a sale and operating
leaseback.
The substance of the transaction arising from the sale and immediate leaseback on a short-term lease of
five years is that of a sale. The risks and rewards of ownership are not substantially reacquired when the
leaseback is an operating lease and have passed instead to the lessor. Therefore, a profit or loss on
disposal should be recognised. Meitner plc has correctly recognised the transaction as a disposal.
The amount of profit to be recognised will depend on the amount of the sale proceeds in comparison with
the property’s fair value. Here the sale proceeds are above the fair value of £7.3 million, and therefore the
excess of £700,000 (£8m – 7.3m) should be deferred and amortised over the period which the asset is
expected to be used (ie the length of the lease of 5 years).
Profit on disposal is made up of two elements:

£ £
Proceeds 8,000,000
Fair value (7,300,000)
Deferred profit 700,000
Fair value 7,300,000

Carrying amount (6,500,000)
Profit to be recognised immediately 800,000
Total profit 1,500,000

£700,000 of profit should therefore be removed from other income and instead recognised as deferred
income as part of liabilities and recognised evenly over five years. At 31 March 2015, 9 months of deferred
income should also be recognised as part of profit or loss, being £105,000 (£700,000 x 9/60). Deferred
income at 31 March 2015 will be £595,000 (700,000 – 105,000).
(3) Held for sale assets
IFRS 5 Non-current assets held for sale and discontinued operations requires that a non-current asset
should be classified as held for sale when the entity intends to recover its carrying amount principally
through sale rather than continuing use.
In order for the properties to be classified as held for sale they must be available for immediate sale, both
of which are and the sale must be highly probable. Highly probable is defined as:
 Management must be committed to a plan to sell the properties, which they are at both locations
by fulfilling the requirements below;
 There must be an active programme to locate a buyer, which is the case as the properties are
being advertised in the relevant trade press;
 The assets must be marketed for sale at a price that is fair, in both cases a professional valuation
was obtained;
 The sale should be expected to take place within one year from the date of classification. The
property at Ostwald is expected to be sold within this time frame however, the property at Dirac
won’t be sold until the road restructure is finalised which is expected to take longer than a year, so
it is unlikely to be sold within the year;
 It is unlikely that significant changes to the plan will be made, or the decision reversed. This is
unlikely to be the case as the operations have moved to the new central location.
It therefore seems reasonable to conclude that the property at Dirac should continue to be held as part of
non-current assets and depreciated. It is possible that the Dirac property did meet the held for sale criteria
at 1 December, however at some point prior to the year end it was decided that the property should not be
sold until the uncertainty regarding the planning permission was resolved. As no specific information was
provided regarding the date of this decision it seems reasonable to assume that the asset should not be
treated as held for sale. Its’ treatment is therefore correct.
However, the current valuation suggests that an impairment has taken place as the carrying amount
exceeds its recoverable amount. Recoverable amount is higher of value in use and fair value less costs to
sell. A value in use figure has not been provided, however it would be unlikely that this would be higher as
the operations have been moved from the Dirac property.
At 1 December 2014 an impairment of £164,997 (1,323,000 – (1,169,700 x 99%)) should be recognised.

The property should then be depreciated based on its revised value of £1,158,003 over the property’s
remaining life at 1 December 2014 of 21 years. Therefore reverse the excess depreciation charge of
£2,619 (21,000 – 18,381):
Based on cost: ((1,890,000 / 30yrs) x 4/12) = £21,000

Based on impaired amount: ((1,158,003 / 21yrs) x 4/12) = £18,381
However, the property at Ostwald does meet all of the conditions and should therefore be separately
disclosed as a ‘held for sale’ asset. The property should no longer be depreciated from the date it meets
the held for sale criteria, being 1 December 2014. So the depreciation from 1 December 2014 to 31 March
2015 needs to be reversed. So depreciation of £15,250 ((1,372,500 / 30yrs) x 4/12) needs to be removed
from profit or loss and added back to non-current assets.

The property should be recognised at the lower of its carrying amount of £976,000 and its fair value less
costs to sell of £1,280,500 (1,300,000 x 98.5%), so at £976,000. As the property will continue to be held at
its current carrying amount there is no impairment to be recognised. The potential gain on the sale of the
property should be recognised at the point of sale, when it is realised.
(4) Purchase of own shares
When an entity purchases its own shares, the shares should be recognised as treasury shares as a
negative reserve within equity. The amount recognised is the amount that Meitner plc paid to reacquire the
shares, being £210,000 (150,000 x £1.40). No gain or loss should be recognised on their repurchase or
subsequent resale. The original share capital, and share premium if relevant, recognised when the shares
were originally issued should remain unchanged.
£210,000 should be removed from investments and instead recognised as part of equity.
This question was reasonably well answered with nearly all candidates attempting all four of the issues. As
always some candidates lost easy marks by focusing on the calculations without sufficient accompanying
explanations.
(1) Government grant: This was generally well answered with nearly all candidates identifying that the
recognition criteria for the grant had been met and that it should be spread over three years. Most
candidates also correctly calculated the amount of the grant to be recognised in the current year and that
the balance should be included as deferred income split equally between a current and non-current
liability. Fewer candidates specifically stated that it was a grant related to income and in fact a significant
number of candidates wasted time by discussing the alternative treatments available for grants relating to
assets which was simply not relevant in this scenario. Other candidates wasted time by discussing what
might happen in future years (particularly if the grant became repayable) when the requirement only asks
for the accounting treatment in the current year. The most common error was to release the grant over two
years rather than three.
(2) Sale and operating leaseback: Answers to this were more mixed although a good majority of
candidates did identify this as an operating leaseback and justified their decision using the information
given in the scenario. Again most candidates realised that the fact that selling price was above fair value
should have an impact on the amount and timing of the profit to be recognised. A pleasing number of
candidates calculated the figures for the release of the deferred profit correctly reflecting the fact that the
transaction took place three months into the year. However a number of candidates either suggested
deferring the entire profit on disposal or mixed up the amount to be recognised immediately with the
amount to be deferred.
A minority of candidates decided that the transaction was a finance leaseback/secured loan despite the
fact that they often also referred to the short period of the leaseback. Other candidates discussed the risks
and rewards of ownership but made a conclusion the wrong way round.
(3) Held for sale assets: This was probably the issue that was answered the least well by candidates with
answers being quite mixed although pleasingly most candidates did identify the key issue – here non-
current assets held for sale with a significant number also realising that only one of the assets met the
relevant criteria. Again most candidates did refer to the criteria but to gain full marks candidates needed to
apply the criteria to the scenario rather than just list them out. Having correctly identified the asset held for
sale most candidates recognised that depreciation should have stopped and many calculated the correct
adjustment to the depreciation charge for the year (although some failed to pro rate it for the correct
number of months). Although most candidates realised that the asset needed to be transferred to non -
current assets held for sale a significant number did this at the higher (rather than lower) of fair value less
costs to sell and carrying amount. Many candidates seemed confused as to the different approaches for
assets carried at cost (as was the case here) and those carried at revalued amount and therefore
incorrectly recognised a revaluation surplus.
With regard to the asset that did not meet the criteria answers were disappointing with relatively few
candidates recognising that a “normal” IAS 36 impairment test was required comparing carrying amount to
recoverable amount. Even where this was discussed relatively few candidates managed to calculate the
impairment correctly. Even fewer then realised that the write down to recoverable amount should have
reduced the subsequent depreciation charge and it was very unusual to see this amount calculated
correctly.

A number of candidates wasted time by not reading the question carefully and in particular not recognising
that the carrying amounts given were as at the time of the decision to close the manufacturing operations.
Therefore they produced lengthy calculations to arrive at the carrying amount already given. Other
candidates also seemed unsure as to whether depreciation for the year had already been charged
although this was clearly stated in the question. A significant minority of candidates also treated the two
separate operations as needing to be treated as one, so because Dirac did not meet the criteria neither
could be.
(4) Treasury shares: Generally this was reasonably well answered with nearly all candidates correctly
recognising that these shares were treasury shares and that they should have been debited to equity
rather than investments. Most candidates also calculated the correct amount. A minority of candidates
calculated the amount using the nominal value of the shares only and/or seemed to think that the correct
double entry was to debit share capital/share premium rather than a separate reserve. A significant
number of answers were quite brief and therefore candidates lost some easy marks from saying for
example, that there was no impact on share capital and premium.

(b)
Profit before tax Equity

£ £ £
Draft 1,460,000 2,600,180
(1) Deferred income (250,000)
(2) Deferred profit (700,000)
(2) Release of profit in year 105,000
(3) Reversal of depreciation - Ostwald 15,250
(3) Impairment – Dirac (164,997)
(3) Reversal of excess depreciation – Dirac 2,619
(4) Treasury shares – (210,000)
(992,128) (992,128)
467,872 1,398,052
Answers to part (b) were very mixed and a significant minority of candidates did not attempt this part of the
question at all. For those who did, it was normally relatively easy to follow the adjustments relating to
issues (1) and (4) but often difficult to see an audit trail for adjustments relating to issues (2) and (3).
Candidates frequently put the adjustments in the wrong way round (ie added rather than subtracted and
vice versa) and relatively few reflected the impact on equity for the cumulative adjustments made to profit.
A small minority thought that the requirement was to calculate earnings per shares!


Question 3
Total Marks:
General comments
This was a mixed topic question with three distinct elements. Part (a) covered the preparation of extracts
from a consolidated statement of cash flows. Part (b) required a revised extract for consolidated gross
profit and part (c) required a discussion of the ethical issues arising from a request to prepare a paper on
financing opportunities.
(a)
Consolidated statement of cash flows for year ended 31 March 2015 (extract)

Acquisition of subsidiary (135,000 – 3,150) (131,850)
Dividend received from associate (W1) 20,080

Proceeds from issue of ordinary shares (W2) 87,750
Net cash used in financing activities 46,685
Workings
Draft cash flows from operating activities £ £
Decrease in trade receivables ((112,400 – 61,400) – 83,100) 32,100
Increase in trade payables ((96,700 – 36,700) – 53,840) 6,160
Revised cash flows from operating activities 424,740
(1) Associate
£ £
B/d 176,300 Dividend received (β) 20,080
Share of profit 83,200 C/d 239,420
259,500 259,500

£ £
B/d (460,000 + 320,000) 780,000
Non-cash issue
(70,000 x £1.90) 133,000
C/d (575,000 + 425,750) 1,000,750 Cash received (β) 87,750
1,000,750 1,000,750
£ £
Cash (β) 41,065 B/d 246,700
Acquisition (420,550 x 126,165
30%)
C/d 471,400 CPorL 139,600
512,465 512,465
Generally candidates made a good attempt at this part of the question with many achieving full marks.
Candidates generally made some attempt at presenting reasonable extracts from the consolidated
statement of cash flows, although only a minority went as far as including sub-totals. Most candidates
calculated proceeds from the share issue, although the number of candidates who adjusted the opening
and closing balances for the non-cash issue were significantly lower.

The dividend received from the associate was generally calculated correctly although candidates often
showed this in the incorrect place in the statement. The calculation of the cash outflow from the acquisition
of the subsidiary was disappointing with candidates preparing an extensive calculation when the cash
consideration was simply given in the question. A number of candidates correctly calculated the dividend
paid to the non-controlling interest although it was common for it to be shown as an inflow, under investing
activities or no adjustment made for the acquisition during the year.
A significant number of candidates correctly calculated the cash flows from operating activities, although
the most common error was to add the newly acquired subsidiary’s amounts rather than deducting them.

(b)
Consolidated statement of profit or loss for year ended 31 March 2015
£
Revenue 2,879,950
Cost of sales (1,578,850)
Workings
7/12
Fermi Group Seyle Ltd Adj Consol
£ £ £ £
Revenue 2,345,800 561,750 (27,600) 2,879,950
Cost of sales – per Q (1,290,200) (313,250) 27,600 (1,578,850)

– PURP – Sub (W2) (2,300)
– PURP – Associate (W2) (700)
(2) PURP
% £ £
SP 120 27,600 24,000
Cost (100) (23,000) (20,000)
GP 20 4,600 4,000
1
X /2 2,300 2,000
Boas Ltd £2,000 x 35% = £700
Again many candidates achieved full marks for this part of the question, with candidates generally even
completing the revised extract with full narrative and a total, which gained presentation marks. Most
candidates managed to calculate the unrealised profits figures, although not all went on to apportion by
35% for the inter-company sale to the associate. However, how the unrealised profits were then adjusted
was more mixed, with a significant number of candidates adjusting revenue as well as other candidates
subtracting from the cost of sales figure rather increasing it.
Other common errors included not adjusting the subsidiary by seven months, or pro-rating it by the
incorrect number of months and failing to adjust for intra-group sales and purchases when calculating
consolidated totals.


(c) Ethical issues
Relevant key fundamental principles:
Professional competence and due care – Elion should consider whether he has the necessary skills
and experience to prepare such a proposal and deliver it to the board. If Elion concludes he does not
possess such skills and experience he could request to attend a training course to gain such expertise.
Even if he attends such a course will he still be able to gain the experience in time? It may be possible for
Elion to instead assist another member of staff who does have the relevant experience. This would allow
Elion to enhance his own skills and level of technical competence.
Professional behaviour – How should Elion proceed so as not to discredit himself in any way?
Producing a paper without the relevant knowledge could lead to the board relying on such information and
making an inappropriate investment decision.
Objectivity – Elion should remain objective at all times and not allow a possible self-interest threat to
affect his professional judgement. Elion may want to impress the finance director and therefore may be
tempted to try and prepare the paper.
Integrity – the integrity of the finance director should be questioned as he would be expected to have
some idea as to the level of experience that Elion has had and therefore you’d expect him to make the
judgement that he doesn’t have the right level of expertise at this point in time.
Elion could take the following actions:
 He should speak to you as his senior in the first instance and see if you can come to an
arrangement which will deliver the paper to the required standard.
 If Elion is not happy with your advice then he should speak directly with the finance director and
discuss the different options available and the suggested courses of action, for example assisting
another more experienced member of staff.
 If he still feels uncomfortable with the level of work he is being asked to prepare then speak to
another director or human resources.
 Finally, if Elion is still unable to resolve the situation to his satisfaction then he should contact the
ICAEW Ethical Helpline for advice.
 Elion should keep a detailed record of all discussions and the outcomes at each stage.
Most candidates prepared a reasonable answer with enough content to score at least half marks. The
better candidates dissected the answer looking at different key elements of the ethical code, such as
professional competence and due care, and professional behaviour. Weaker candidates produced generic
answers that encompassed a broad range of relevant and non-relevant comments in relation to the
scenario.


Question 4
Total Marks:
General comments
This question involved the preparation of a consolidated statement of financial position from individual
company financial statements. The question included the acquisition of a subsidiary in the period, with a
fair value adjustment and deferred consideration, along with an investment in a newly formed joint venture.
Part (b) included an explanation and calculation of distributable profits for the parent entity.
(a) Huygens plc
(a) Consolidated statement of financial position as at 31 March 2015
£ £
Assets
Non-current assets
Property, plant and equipment (911,700 + 89,400 + 15,000 – 750) 1,015,350
Investments (116,250 – 85,000 (W2) – 25,000 + 3,750 (W4)) 10,000
1,101,160
Current assets
Inventories (43,700 + 32,000 – 1,440 (W5) 74,260
Trade and other receivables (71,000 + 17,900 – 12,800) 76,100
165,460

Equity attributable to owners of Huygens plc
1,004,018
Current liabilities
Trade and other payables (98,600 + 21,400 – 6,400) 113,600
Deferred consideration (40,000 + 1,000) (W4) 41,000
Taxation (65,000 + 13,800) 78,800
233,400

Workings
(1) Net assets – Planck Ltd

£ £ £
Retained earnings
Per Question 57,200 39,000
Less: PURP (W5) (1,440) –
Fair value adjustment 15,000 15,000
Depreciation thereon ((15,000 / 10) x 6/12) (750) –
120,010 104,000 16,010
(2) Goodwill – Planck Ltd

£
Consideration transferred (85,000 + (42,000/1.05)) 125,000
Non-controlling interest at acquisition – FV 26,000
47,000
(3) Non-controlling interest – Planck Ltd
£
NCI at acquisition date (W2) 26,000
29,202

£
Huygens plc 579,650
Deferred consideration – unwinding (40,000 x 5% x 6/12) (1,000)
Planck Ltd (16,010 (W1) x 80%) 12,808
Quimby Ltd (W6) 3,810
Quimby Ltd’s dividend (15,000 x 25%) 3,750
599,018
(5) Inventory PURP

% £
SP 100 9,600
Cost (85) (8,160)
GP 15 1,440
(6) Investments in Joint Venture – Quimby Ltd

£
Cost 25,000
Add: Share of post acquisition profits (15,240 x 25%) 3,810
28,810
Candidates made a reasonable attempt at this question with almost all candidates producing a relatively
well laid out consolidated statement of financial position. As mentioned earlier in the examination
commentary candidates did lose marks where there was no audit trail as to how a figure on the face of the
statement had been arrived at. Where there are no workings candidates gain no marks unless the correct
figure is arrived at. Most candidates gained all the marks for adding the parent and subsidiary’s figures
together, although a small minority pro-rated the subsidiary’s figures to reflect that it was acquired during
the year.

Share capital and premium were almost always correct and the separately presented non-controlling
interest was almost always present, although candidates do not seem to understand the significance of
the sub-total before and after this figure. A significant number of candidates showed a deferred
consideration figure although not always the correct figure was shown, the most common error again was
to not pro-rate this figure. Pleasingly a number of candidates also then adjusted retained earnings for the
unwinding of this deferred amount.
It was pleasing to see that most candidates prepared a net assets table for Planck Ltd and that this was
often completely correct. The most common error was to miscalculate the depreciation on the fair value
adjustment, forgetting that it needed to be time apportioned. A significant number of candidates correctly
calculated goodwill and the inventory PURP figure. The calculations for non-controlling interest and
retained earnings were more mixed, although almost all candidates picked up some marks on these
calculations.
Adjustments to the figures on the face of the consolidated statement of financial position were generally
mixed, although completely correct figures were prepared by a number of candidates. The most common
errors were to only deduct half of the inter-company invoice from trade receivables and not to adjust the
cash figure for the cash in transit. Consolidated retained earnings were only completely correct in a
minority of cases with candidates generally confused over the treatment of the PURP and dividend.
The figure which caused a problem to a majority of candidates was the calculation of the investment
figure. A variety of calculations were presented, for example adding rather than subtracting the cost of
investments and adding in the total dividend paid by Quimby Ltd rather than only Huygens plc’s share.

(b) Distributable profits
For entities within a group, distributable profits must be made for each individual entity, rather than the
consolidated group. Therefore, Huygens plc’s distributable profits are those profits distributable by the
parent company only.
The basic rule is that distributable profits are measured as accumulated realised profits less accumulated
realised losses, this is usually retained earnings of the individual company.
In the case of listed companies, here it is not clear whether Huygens plc is listed or not, the amount of
distributable profits is further reduced by any excess of unrealised losses over unrealised profits. No such
information is available in this question to determine this.
Huygens plc’s distributable profits are therefore calculated as:
 The share of profits in the joint venture only affects the consolidated retained earnings, but
Huygens plc’s own financial statements would include the dividend from Quimby Ltd of £3,750.
This should have been recognised in the Huygens plc’s own statement of profit or loss, however
was incorrectly deducted from Investments, thereby increasing retained earnings by £3,750.
 The finance cost arising on the deferred consideration will be recognised by Huygens plc and
therefore reduces retained earnings by £1,000.
Huygens plc’s distributable reserves are therefore £579,650 + 3,750 – 1,000 = £582,400.
This requirement was quite poorly answered by a majority of candidates. Most candidates didn’t go
beyond mentioning the basic rule, that distributable profits are calculated on an individual company basis
and that it is often simply retained earnings. However, a small minority of candidates did go on to make an
adjustment for the joint venture dividend and the unwinding of the deferred consideration.


Question 1
Total Marks: 31
General comments
position from a trial balance plus a number of adjustments. Adjustments included property, plant and
equipment depreciation, revaluation and impairment, borrowing costs, redeemable preference shares and
dividends thereon, and the correction of a prior period error. Part (b) required an explanation of the
treatment of the prior period error. Part (c) tested the four measurement bases set out in the IASB
Conceptual Framework, with reference to figures provided in the question.
Darwin plc

£
Revenue 6,558,550
Finance cost (15,250 – 1,825 (W4) + 7,125 (W7)) (20,550)
Income tax expense (18,600 + 1,500) (20,100)

£ £
Assets
Non-current assets
Current assets
Inventories 175,400
578,775

£ £
Equity (W3)
Retained earnings (W3) (13,900)
840,850
Preference share capital (4% redeemable) (W7) 151,125
Current liabilities
Borrowings (100,000 + 40,500) 140,500
Taxation 18,600
501,850
Workings
(1) Costs matrix

Cost of Admin Distrib
sales expenses costs
£ £ £
Per TB 5,106,100 1,008,300 262,800
Opening inventories (266,175 – 100,000) 166,175
Depreciation/impairment charges (8,900 + 63,175 10,000
3,950 + 50,325) (W2)
5,160,050 1,018,300 262,800
(2) PPE
Land and Plant and
buildings machinery
£ £
Carrying amount b/f (382,000 – 159,100) 222,900
Valuation 600,000
Depreciation/impairment charges
Buildings (400,000/40) (10,000)
Impairment of machine (W5) (8,900)
Depreciation on impaired machine (2,700 (W5) + (3,950)
(10,000 x 25% x 6/12))
Depreciation on other machines ((222,900 – 21,600 (50,325)
(OF)) x 25%)
Construction costs 163,500
Borrowing costs (W4) 1,825
590,000 325,050
Total PPE 915,050

£
Per TB 148,100
Less: Issue of redeemable prefs (150,000)
Prior period adjustment (100,000)
Add: Interest paid on redeemable prefs (W7) 6,000
(13,900)

(4) Borrowing costs
Cost of loan = (30,000 x 5% x 9/12) + (70,000 x 4% x 3/12) = 1,825
(5) Impairment of machine

£
2
CA at 30 June 2014 (38,400 x 0.75 ) 21,600
Less: Depreciation to 31 December 2014 (21,600 x 25% x 6/12) (2,700)
CA at 31 December 2014 18,900
Less: Value in use (10,000)
8,900

£ £
Valuation 600,000
CA per TB (400,000 – 160,000) (240,000)
360,000
Depreciation charge on revalued amount (W2) 10,000
Depreciation charge on historic cost ((240,000 – 50,000)/40) (4,750)
Transfer to retained earnings (5,250)
354,750

Opening Interest Interest Closing
balance expense paid (4%) balance
(4.75%)
Year £ £ £ £
30 June 2015 150,000 7,125 (6,000) 151,125
Most candidates obtained all of the easier marks to gain a solid pass. Better candidates attempted the
more challenging adjustments which increased their mark to a very good pass. A significant minority of
candidates approached the question in a clear and structured fashion and scored all or almost all of the
marks.
Most candidates presented a well laid out statement of profit or loss and included the correct revenue
figure. The adjustment to finance costs was often correct, the most common mistake being to add the
interest actually paid on the preference shares rather than the interest expense (with a few candidates
adjusting for both these figures). Others added the interest capitalised on the borrowing costs rather than
deducting it. The majority of candidates also arrived at the correct income tax expense but a good number
then went on to also use this figure in the statement of financial position.
Almost all candidates produced a costs matrix working and included the correct figures from the trial
balance. Candidates generally included the correct closing inventory and a majority also correctly adjusted
opening inventory for the prior period error. Where candidates lost marks here was by using the incorrect
bracket convention, for example adding closing inventory rather than deducting it. Most candidates
charged depreciation in the costs matrix although a significant number omitted to include the charge for
the impairment which they had calculated. A minority of candidates charged depreciation or impairment to
the incorrect cost heading even though the question was explicit as to where these costs should be
charged, and they lost marks as a result of this.
Presentation of the statement of financial position was not quite as good as the statement of profit or loss.
Generally candidates included the correct figures from the trial balance although where these were
presented varied. For example, the bank loan repayable on 31 December 2015 was often included in non-
current liabilities instead of in current liabilities, and the bank overdraft was often shown within current
assets (sometimes as a positive, and sometimes as a negative figure) instead of in current liabilities. A few
candidates incorrectly adjusted the inventories figure here for the prior period error.

The preference shares caused problems for many candidates. Most prepared a correct working for the
closing balance but included the nominal figure of £150,000 on the face of the statement of financial
position. Others presented the preference shares as part of equity. A significant minority of candidates
prepared two years of calculations in their working table rather than one, and then included the balance at
the end of next year instead of at the end of the current year in their statement of financial position.
A majority of candidates made an attempt at the machine impairment calculation with the correct figure
being seen more often than not. As mentioned above, although most candidates prepared this calculation
many then failed to make the double entry adjustment for it by including it both in expenses and in their
property, plant and equipment working. The most common errors were to calculate accumulated
depreciation at the point of classification incorrectly, or to use the wrong figure for the “recoverable
amount”, generally using the lower of the fair value less costs to sell as opposed to the higher figure as
required by IAS 36.
A significant number of candidates tried to do a weighted average working for the borrowing costs rather
than a simple pro-rata calculation for the actual interest costs incurred on the specific loan. Almost all
candidates did do some kind of calculation and made some adjustment to finance costs, although less
then went on to include this figure as part of property, plant and equipment. The best candidates made the
correct adjustment for both construction costs and the interest on the borrowings in their property, plant
and equipment calculation.
Most candidates prepared a retained earnings working although this was often squashed on the face of
the statement of financial position which made it difficult to read. Candidates are encouraged to prepare a
separate working where there are more than, say, three adjustments to a figure. The most common error
here was to confuse the direction of the adjustments.
A good number of candidates arrived at the correct figure for the initial revaluation surplus although the
adjustment then made for the additional depreciation transfer was often incorrect. The most common error
was to use the original cost of the property for the historic depreciation. Because the useful life of the
property had been reassessed the carrying amount at that date should have been used instead. A minority
of candidates transferred the whole of the balance on the revaluation surplus to retained earnings.
Occasionally candidates wasted time by writing out an explanation of the accounting treatment followed,
although this was seen less often than in many previous sittings. Where explanation is not explicitly asked
for in the requirement there are no marks available for such explanations.


(b) Financial reporting treatment of prior period error
Provided that the relevant information was available when the financial statements for the year ended
30 June 2014 were authorised for issue, this should be treated as a prior period error.
Per IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, a material prior period error
should be corrected retrospectively.
Retrospective misstatement means correcting the recognition, measurement and disclosure of amounts as
if the error had never occurred. For Darwin plc this means that the comparative amounts for the prior
periods need to be restated.
In the statement of profit or loss for the year ended 30 June 2015 the correct opening inventory figure of
£166,175 should be recognised/opening inventory is overstated by £100,000. Therefore cost of sales for
the current year is overstated/profit understated by £100,000.
The corresponding debit to opening retained earnings will be shown as an in the statement of changes in
equity for the year ended 30 June 2015.
A minority of candidates did not attempt this part of the question, and answers overall were disappointing.
Although most candidates dealt correctly with this prior period error in Part (a) few were able to explain the
accounting treatment here.
A worrying number of candidates thought this was an event after the reporting period (when it fell way
outside the definition of such an event per IAS 10), and a minority discussed how inventory should be
valued at the lower of cost and net realisable value.
Others were confused as to whether this was an error or simply an adjustment to an accounting policy. Of
those candidates who did identify this as a prior period error there was a split as to those who believed it
should be adjusted for retrospectively and those who chose prospective adjustment (with some hedging
their bets by referring to both).


(c) The four measurement bases
Historical cost
Assets are recorded at the amount of cash or cash equivalents paid (/amount paid/cost) or the fair value of
the consideration given to acquire them at the time of their acquisition.
At historical cost the machine was recorded at its price of £38,400.
Current cost
Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an
equivalent asset at a similar age and level of use was acquired at the current date.
If the machine was to be measured at its current cost it would have been restated to £23,625 (£56,000
depreciated for 3 years) on 31 December 2014 – representing an “aged” version of the (£56,000) current
cost.
Realisable (settlement) value
Assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling
the asset in an orderly disposal, ie at £9,500 (11,000 – 1,500).
Present value
Assets are measured at the current estimate of the present discounted value of the future cash flows in
the normal course of business.
Under this basis the machine would be measured at £10,000.
Most candidates made a good attempt at this conceptual part. A minority of candidates were clearly
confused as to what the measurement bases were and discussed anything from the revaluation to the
accrual and the cash bases, or even the qualitative characteristics.
However, the vast majority of candidates did correctly identify the four measurement bases and provided
reasonable explanations. A few candidates then went on to waste time by discussing which one was used
in the question when calculating the impairment, or was the best to use generally. There were no marks
available for these discussions.
The most common omission from answers, which meant that only a small minority gained full marks on
the question, was that current cost should be adjusted for the current age and condition of the asset rather
than being simply the current price of a new machine.
The most common error was to state that the realisable (settlement) value would be £11,000, rather than
that figure less selling costs. A few candidates gave examples of the four bases other than by reference to
the figures in Note (3) (as was specified in the requirement) and therefore gained no marks for these
examples.


Question 2
Total Marks: 31
General comments
issues, given in the scenario. The issues covered goodwill arising on a business combination, share
issues (treasury shares and a subsequent bonus issue), a related party transaction and the sale of a
package of goods and services. Part (b) required the calculation of revised figures for profit for the year
and number of ordinary shares and of earnings per share (plus comparative figure). Part (c) required an
explanation of the ethical issues arising from the scenario and the action to be taken.
Girton plc
(1) Goodwill arising on a business combination
Per IFRS 3, Business Combinations, goodwill should be calculated as the excess of the fair value of the
consideration transferred plus any non-controlling interest less the fair value of the net assets acquired.
When calculating goodwill Alan should therefore have included all three elements of the consideration not
just the cash element.
The fair value of any quoted equity investments (ie Girton plc’s ordinary shares) should have been taken
as the market price at the acquisition date. The deferred consideration should have been accounted for as
a liability at the present value of the amount payable.
Consideration is therefore:
£
Cash 375,000
Ordinary shares (100,000 x £1.20) 120,000
Deferred consideration (147,000/1.05) 140,000
635,000
The ordinary shares should be credited to ordinary share capital (£100,000) and share premium
(£20,000).
The discount on the deferred consideration should be unwound for the period 1 January 2015 to 30 June
2015. This would give a finance cost of £3,500 ((147,000 – 140,000) x 6/12). At 30 June 2015 the deferred
consideration would be shown as a current liability of £143,500 (140,000 + 3,500).
Per IFRS 3, the calculation of the fair value of net assets acquired should have included recognition of
Downing Ltd’s contingent liability, in spite of the fact that this will not have been recognised in Downing
Ltd’s statement of financial position. The liability existed at 1 January 2015 as the proceedings
commenced on 15 December 2014. Once recognised, the contingent liability should be carried at the
higher of the amount under IAS 37 (here £Nil) and the fair value at the acquisition date of £75,000,
therefore £75,000 should be used.
Fair value of net assets acquired is therefore:
£
Share capital and retained earnings at 30 June 2015 (200,000 + 356,700) 556,700
Less: Profit 1 January 2015 to 30 June 2015 (6/12 x 245,600) (122,800)
358,900
When calculating goodwill, Alan should have used the fair value method to value the non-controlling
interest, as agreed by the board. Goodwill should therefore be calculated as:

£
Fair value of non-controlling interest 115,000
Fair value of net assets acquired (358,900)
391,100
Intangible assets in the consolidated statement of financial positon as at 30 June 2015 will therefore
increase by £341,525 (391,100 – 49,575). An impairment review in accordance with IAS 38, Intangible
Assets, should be carried out on this goodwill at every year end.
Non-controlling interest at 30 June 2015 will be stated at £145,700 (115,000 + (122,800 x 25%).
(2) Share issues
Equity instruments reacquired by the entity which issued them are known as treasury shares. Treasury
shares should be deducted from equity, and shown as a separate (ie negative) reserve. The original share
capital and share premium amounts remain unchanged. No gain or loss should be recognised on the
issue, sale, purchase or cancellation of treasury shares.
The bonus issue was based on the correct number of shares (ie 750,000 – see (b)) so 150,000 shares
were issued, and ordinary share capital should be credited with this amount. Assuming that Girton plc
wishes to maximise distributable profits, the premium should firstly be charged to the share premium
account, with the balance going to retained earnings. Therefore £110,000 (90,000 + 20,000 (1)) of this
should be debited to share premium and the remaining £40,000 to retained earnings.
Selwyn Ltd is wholly-owned by one of the close family members of a member of Girton plc’s key
management personnel, so Selwyn Ltd is a related party of Girton plc. Alan and his son are also related
parties of Girton plc. This transaction with Selwyn Ltd is therefore a related party transaction.
Disclosure is required of all related parties and related party transactions, even if the transactions took
place on an arm’s length basis. The fact that the transactions took place on an arm’s length basis may be
disclosed, but only if such terms can be substantiated.
Disclosure should be made of:

- The nature of the relationship (a company owned by the son of a director of Girton plc)
- The amount of the transactions (£216,700)
- The amount of any balances outstanding at the year end (£54,400)
- Any provision against outstanding balances and the expense recognised for bad or doubtful debts
due from related parties (£20,000).
There is no requirement to identify related parties by name.
Since Selwyn Ltd is in financial difficulties, consideration should be given to making an allowance for the
remainder of the debt, ie for an additional £34,400 (54,000 – 20,000).
(4) Revenue recognition
Per IAS 18, Revenue, where a package of goods and services is sold then the components of the
package should be identified, measured and recognised as if sold separately.
If the total of the fair values exceed the overall price of the contract the same discount percentage should
be applied to each separate component, unless specific discount rates are known.
In this case a package with a usual retail price of £225,000, has been sold for £191,250, ie at a discount of
15%. The two components of the package should be split out and accounted for as follows:
Equipment: Revenue of £148,750 (175,000 x 85%) should be recognised in the year ended 30 June 2015
because the equipment was sold in the year and therefore the risks and rewards of ownership were
transferred.

Support services: Revenue of £42,500 (50,000 x 85%) should be accounted for based on the stage of
completion. In the absence of other information, on a straight-line basis over the period of the contract (12
months). In the year ended 30 June 2015 only 3/12 of the £42,500 should be recognised as revenue, ie
£10,625.
Alan has therefore overstated revenue (and profit for the year) by £31,875 (191,250 – 148,750 – 10,625)
and understated liabilities (deferred income) by the same amount.
This part of the question was generally well answered with nearly all candidates discussing all four of the
issues. As always weaker answers tended to focus on the figures without giving appropriate supporting
explanations.
Issue (1)
This focused on goodwill and many candidates calculated the correct figure. Nearly all recognised that
there were three components to the consideration, that shares should be included at their market price
and that deferred cash consideration needed to be discounted to its present value. Relatively few
candidates discussed the implications of discounting the consideration ie that this would have to be
“unwound” between the acquisition and payment dates. Where candidates did address this they often
included a full year, rather than six months, of finance cost.
More errors were made with the calculation of net assets at acquisition with a number of candidates
omitting share capital. Many struggled to back out six months of current year profit from the year-end
retained earnings figure to determine retained earnings at acquisition. Although most candidates did
realise that an adjustment was needed for the contingent liability this was sometimes added to net assets
or deducted from the goodwill figure calculated. There was often no explanation provided as to why this
adjustment needed to be made.
Nearly all candidates included the non-controlling interest at fair value as required in the scenario, but few
explained why they were using that figure. Where a reason was given it was often stated as being
because “that method usually leads to a higher value of non-controlling interest”.
Few candidates discussed the need to carry out an impairment review of goodwill and even fewer
attempted to calculate a closing figure for the non-controlling interest
Issue (2)
Answers to this part were mixed with some candidates appearing unable to cope with the two different
share transactions and often mixing them up. Many errors were made because candidates did not focus
on the specific information given in the question – in particular the timing of the two issues and how, if at
all, they had been accounted for.
Most candidates did eventually suggest that the bonus issue should be debited to the share premium
account then retained earnings and credited to share capital. However, the figures used were often wrong
as many candidates failed to take into account the shares which had been issued on acquisition of the
subsidiary.
Most candidates identified that the second transaction related to treasury shares. Most then stated that
treasury shares should appear as a debit balance in equity, although fewer suggested that the debit to
share capital needed to be reversed out in full. Some candidates appeared to treat the treasury shares as
a normal issue of shares. Others credited treasury shares, and split the debit between share capital and
share premium.
A minority of candidates wasted time explaining why the company might have chosen to make these
share issues.
Issue (3)
Virtually all candidates correctly identified this as a related party transaction. Most attempted to justify their
conclusion using the facts from the question and went on to set out the disclosure requirements, using the
information from the scenario. A small minority concluded the transaction did not need to be disclosed as
the sales had been made at an arm’s length price.

Many candidates lost marks by simply repeating definitions and a list of disclosure requirements straight
from IAS 24, rather than using the specific information given in the question. Some candidates did discuss
the potential need to write down receivables but those that did nearly always overlooked the fact that
some of the outstanding balance was already covered by the closing allowance for doubtful debts.
Issue (4)
This was generally well answered and many candidates calculated all the relevant figures correctly. Nearly
all candidates recognised that the sale needed to be split into separate components for the sale of goods
and the provision of a service.
Almost all candidates recognised that there was a discount to be allocated to both elements and that some
of the revenue relating to the helpdesk support needed to be deferred until the following year. Even those
candidates who did not realise there was a discount did usually defer the relevant proportion of the service
revenue.

(b) Revised figures and EPS
Weighted average number of ordinary shares
Date Number Number Bonus Weighted

of shares of fraction average
months
Per extracts 450,000
Add back Treasury shares debited in error 200,000
B/f 650,000 6/12 6/5 390,000
1 January 2015 – on acq of Downing Ltd 100,000
750,000 1/12 6/5 75,000
1 February 2015 – bonus issue 150,000
(750,000/5)
900,000 5/12 375,000
840,000
Profit
attributable to
shareholders
of Girton plc
£
(1) Unwinding of discount (3,500)
(4) Package of products (31,875)
539,125
2015 EPS = 539,125/840,000 = 64.2p
2014 (comparative) EPS = 118.6p x 5/6 = 98.8p
Answers to this part of the question were disappointing as candidates have historically performed well
when asked to calculate EPS.
Although most candidates correctly adjusted the draft profit for the adjustment relating to the deferred
revenue far fewer adjusted for the “unwinding” of the discount arising from Issue (1) (even where they had
covered this in their answer to Part (a)).
A number of candidates made unnecessary adjustments (such as relating to the contingent liability and
change in value of goodwill from Issue (1) or adjusting for the receivable already provided for in Issue (2)).
This indicates that such candidates lack an understanding of the double entry relating to these issues.

Most candidates (although by no means all) made an attempt at a weighted average share capital working
although the timings of the share issues and subsequently the relevant number of months were usually
incorrect. Most of these candidates took into account the impact of the bonus issue and correctly
calculated and used the bonus fraction.
Although most candidates did eventually calculate a current year EPS figure fewer correctly restated the
prior year figure to reflect the bonus issue made in the current year.

(c) Ethical issues
Alan’s financial accounting knowledge seems lacking, given that he failed to take the contingent liability
and the deferred consideration into account when calculating goodwill. As an ICAEW Chartered
Accountant Alan is obliged to comply with the ICAEW code of ethics, including the principle of professional
competence and due care, and should keep his knowledge up to date.
He makes other “errors”, all of which have the effect of either understating the number of ordinary shares
in issue, or overstating the profit for the year, with the result that EPS for the current year, to which Alan’s
bonus is linked, is massively overstated. There is a clear self-interest threat here for Alan as the directors’
bonuses are linked to profit. In accordance with the code of ethics, Alan should have ignored this self-
interest threat and prepared the figures accurately, in accordance with the principles of objectivity,
independence and professional behaviour.
The fact that Alan has failed to disclose the related party relationship/transaction with his son’s company
also points to a possible lack of integrity. More so, if Alan engineered the sale and knew that his son’s
company was in financial difficulties.
You should take the following action:
- Discuss each of the errors found with Alan, explaining the correct IFRS accounting treatment to him.
- If Alan appears genuinely to be out of date tactfully suggest that he goes on an update course.
- Ensure the financial statements are corrected.
- If Alan refuses to amend the financial statements seek support from the managing director.
- Document all discussions.
- If you find yourself in a difficult situation, eg, caught between the FD and the MD, or subject to any
sort of intimidation threat, then consult the ICAEW helpline.
This part, covering ethics, was generally well answered with candidates reacting well to the “clues”
provided in the scenario.
Almost all candidates recognised the potential impact of the directors’ bonus being linked to EPS and
there were some excellent answers discussing the impact of the errors from Part (a) of the question and
questioning the integrity of the finance director.
Most candidates also correctly identified a potential intimidation threat to the financial controller. As ever,
weaker candidates placed themselves in an audit context and suggested a review of Alan’s work and
referral to the ethics partner.


Question 3
Total Marks: 17
General comments
This was a mixed topic question. Part (a) required candidates to calculate the correct closing inventory
figure, after a valuation error had been made. Part (b) required the preparation of extracts from the
statement of profit or loss and statement of financial position for a finance lease taken out during the year.
Part (c) required candidates to redraft a single entity statement of cash flows, correcting for the above
matters and other errors.
Peterhouse Ltd
(a) Calculation of closing inventories
£ £
Original figure 135,800
Adjustments re Perro
WIP at NRV (2,000 x ((25 x 70%) – 1 – 3)) 27,000
Less: WIP at cost (2,000 x £15) (30,000)
FG at NRV (1,000 x ((25 x 70%) – 1) 16,500
Less: FG at cost (1,000 x £18) (18,000)
Total decrease to closing inventories (4,500)
131,300
Most candidates made some attempt at this part of the question, however answers were mixed.
Most candidates were able to calculate the correct cost figures for both finished goods and work in
progress but many struggled with the net realisable value calculations. Candidates often made a
reasonable attempt at the net realisable value for finished goods but failed to perform any calculation for
the net realisable value of the work in progress.
Some candidates carried out various (sometimes seemingly random) calculations, but it was unclear how
they impacted on the draft inventory figure. A worrying number of candidates actually arrived at a higher
figure than the original one. Nonetheless, a good number of candidates did achieve full marks.

(b) Finance lease extracts
Statement of profit or loss for the year ended 30 June 2015 (extracts)
£
Cost of sales ((29,786 (W1) ÷ 3) – (8,000 x 2)) 6,071
Finance costs (W2) (1,089)
Statement of financial position as at 30 June 2015 (extracts)
£
Non-current assets
Property, plant and equipment (29,786 (W1) – 9,929) 19,857
Finance lease liabilities 7,619
Current liabilities
Finance lease liabilities (14,875 – 7,619) (W2) 7,256

Workings
(1) Present value of minimum lease payments
Date of payment PV calculation £

1 July 2014 8,000 8,000
30 June 2015 8,000 / 1.05 7,619
2
30 June 2016 8,000 / 1.05 7,256
3
30 June 2017 8,000 / 1.05 6,911
29,786
(2) Lease table
Year ended B/f Interest @ 5% Payment C/f

£ £ £ £
30 June 2015 (29,786 – 8,000) 21,786 1,089 (8,000) 14,875
30 June 2015 14,875 744 (8,000) 7,619
Almost all candidates who attempted this part of the question prepared a finance lease table working.
Occasionally candidates failed to deduct the initial deposit from the opening balance or prepared the table
based on payments in advance rather than in arrears.
A smaller number of candidates were able to correctly transfer figures from their table into their financial
statement extracts. Some presented figures the wrong way round between current and non-current, or
showed the lease payment as a current liability rather than using the figure from their table. Others failed
to use the same figure to calculate the carrying amount of property, plant and equipment as they had used
in their table. However, it was pleasing to see that the majority of candidates had made a reasonable
attempt at the financial statement extracts.
The two most disappointing aspects of answers were that most candidates:
 simply used the fair value of the asset as the opening balance in their finance lease table rather
than calculating the present value of the minimum lease payments; and
 depreciated the asset over four, rather than three, years.
However, most candidates still achieved a good mark for this part of the question and a significant number
of candidates achieved full marks.

(c) Revised statement of cash flows for the year ended 30 June 2015
£ £
Cash generated from operations (W) 991,600
Interest paid (2,100 + 1,089 – 1,500) (1,689)
Income tax paid (195,500)
Purchase of property, plant and equipment (1,041,200 (1,056,800)
+ 15,600)
Proceeds from sales of property, plant and equipment 17,200
Net cash from investing activities (1,039,600)
Proceeds from issue of ordinary share capital (150,000 225,000
x £1.50)
Payment of finance lease liabilities (16,000 – 1,089 (b)) (14,911)
Ordinary dividend paid (23,900 + (150,000 x 50p)) (98,900)
Cash and cash equivalents at 1 July 2014 49,150
Cash and cash equivalents at 30 June 2015 (150 – 85,000) (84,850)

Working
Cash generated from operations

£
Per draft 978,700
Decrease in cost of sales re lease (8,000 x 2) (b) 16,000
Less profit on sale of PPE (17,200 – 15,600) (1,600)
Adjustment to movement in trade and other payables for accrued interest (1,500)
991,600
Answers were disappointing and a minority of candidates failed to attempt this part. Although some
candidates did achieve good marks it was unusual to see full marks.
Adjustments to cash generated from operations were frequently rather random with even those candidates
who had the correct figures often making their adjustments in the wrong direction. A significant number of
candidates hedged their bets (in this working or on the statement of cash flows) by including only one side
of a bracket around figures, so it was unclear whether they intended it to be added or subtracted.
The most common correct adjustment seen was the negative £1,500 in respect of the opening and closing
interest accrual. The next was the removal of the profit on sale of property, plant and equipment. An
adjustment for the lease payments wrongly debited to cost of sales was rarely seen. Many candidates
adjusted for the change in inventory valuation from Part (a) failing to appreciate that this had no impact as
it affected both operating profit and the movement in inventories for the year.
Most candidates included the correct income tax paid figure, although a few did not show this in brackets
(or included only one bracket). The calculations for interest paid were mixed although the most common
figure seen was £600, which ignored the interest on the finance lease calculated in Part (b). Proceeds
from the sale of property, plant and equipment was often included, and where they were, it was usually
both the correct figure and shown as a positive.
The most common error for the purchase of property, plant and equipment was to deduct the cash
proceeds rather than add them. If a figure was included for the finance lease then it was generally only
the payments made rather than that figure net of the interest. A figure for the proceeds from the share
issue was usually given, although this was often the nominal figure rather than the total cash received. T-
account workings were at best rather random and usually had figures on the wrong side or were
incomplete.
Candidates often failed to complete their statement of cash flows by not showing sub-totals or not
completing the total for cash and cash equivalents at the end of the year. A significant number of
candidates left the adjustment for the increase in the overdraft as part of financing activities rather than
appreciating that this should have been shown as part of cash and cash equivalents at the end of the
period.


Question 4
Total Marks: 21
General comments
This was a consolidated statement of profit or loss question, featuring two subsidiaries (one acquired
during the year) and one associate. The associate had made losses since acquisition, such that the share
of the loss taken for the current year had to be restricted. Other adjustments included a fair value
adjustment on acquisition, a gain on bargain purchase of the subsidiary acquired during the year, an intra-
group sale of a non-current asset (with subsequent impact on the annual consolidated statement of profit
or loss) and intra-group management charges. The non-controlling interest column from the consolidated
statement of changes in equity was also required. Part (b) required a description of the differences
between IFRS and UK GAAP in respect of the preparation of consolidated financial statements.
Pembroke Ltd
Consolidated statement of profit or loss for the year ended 30 June 2015
£
Revenue (W1) 2,146,000
Share of loss of associate (W3) (3,000)
Owners of Pembroke Ltd (β) 309,340
344,300
Consolidated statement of changes in equity for the year ended 30 June 2015 (extract)
Non-
controlling
interest
£
Balance at 1 July 2014 (W4) 184,440
Added on acquisition of subsidiary ((400,000 + 175,000) x 172,500
30%)
Balance at 30 June 2015 (β) 391,900

Workings
Pembroke Newnham Trinity Adj Consol

Ltd Ltd Ltd
(8/12)
£ £ £ £ £
Revenue 945,200 754,800 470,000 (24,000) 2,146,000
Cost of sales – per Q (583,700) (573,600) (279,000)
– PPE PURP (W5) (10,800) (1,447,100)
Op expenses – per Q (128,900) (116,400) (73,700) 24,000
((122,550 – 12,000) x 8/12)
– FV deprec (120,000/25 (4,800)
yrs)
– Gain on bargain 42,500 (257,300)
purchase* (W6)
Tax (60,000) (13,000) (21,300) (94,300)
47,000 85,200
*Or show on face of consolidated statement of profit or loss
(2) Share of loss of associate (Wolfson Ltd)
£
Share of post-acquisition change in NAs ((181,900 + (120,600 – 14,500)) x 40%) (115,200)
Carrying amount of associate at 30 June 2014 3,000
Share of loss in year = 14,500 x 40% = 5,800 – restricted to £3,000

£
Newnham Ltd (20% x 47,000 (W1)) 9,400
Trinity Ltd (30% x 85,200 (W1)) 25,560
34,960
(4) Non-controlling interest brought forward (Newnham Ltd)

£
At acquisition (20% x (500,000 + 301,000 + 120,000)) 184,200
Share of post-acquisition profits (20% x (363,600 – 51,800 – 301,000 – (4,800 240
(W1) x 2)))
184,440
(5) PPE PURP (Trinity Ltd)

£
Asset now in Pembroke Ltd’s books at £51,000 x 4½/5 45,900
Asset would have been in Trinity Ltd’s books at £39,000 x 4½/5 (35,100)
10,800
(6) Gain on bargain purchase (Trinity Ltd)
£
Net assets at acquisition (400,000 + 175,000) (575,000)
(42,500)

Newnham Ltd
£
At acquisition (W4) 184,200
Share of post-acquisition profits (20% x (363,600 – 301,000 – 9,640
(4,800 (W1) x 3))
193,840
Trinity Ltd
At acquisition (SCE) 172,500
Share of post-acquisition profits (W3) 25,560
198,060
391,900
Answers were very disappointing. The majority of candidates did produce a consolidated statement of
profit or loss with a supporting consolidation schedule. However, a minority chose to merge the
consolidation schedule working into the consolidated statement of profit or loss, and as a result did not
earn presentation marks.
The majority of candidates did time apportion the new subsidiary’s results for the correct number of
months. A minority consolidated for the full year or used an incorrect number of months.
Common errors in the consolidation schedule included:
 entering the contra for the management charges in the wrong column and/or to cost of sales
rather than to operating expenses
 adjusting for the proceeds from the intra-group sale of a machine as if those proceeds would have
been treated as revenue
 splitting the provision for unrealised profit on the intra-group sale of the machine between the
parent and subsidiary columns (such that £12,000 appeared in one column and £1,200 in another,
rather than the correct net £10,800 being shown in the subsidiary’s column)
 incorrectly calculating the provision for unrealised profit on the machine or not realising that the
profit on disposal should be reduced rather than increased by the subsequent difference in
depreciation
 including the cumulative increase to depreciation arising from the fair value adjustment rather than
just adjusting for the current year’s depreciation
 including a prior year impairment rather than the gain on bargain purchase on the current year
acquisition
 failing to deal correctly with the consultancy fees (which did not arise evenly over the year).
Having arrived at the consolidated profit for the period, almost all candidates allocated the profit between
the parent and the non-controlling interest. A minority of candidates used the figures from the question to
perform this calculation instead of the adjusted figures from their consolidation schedule. Others failed to
show what figure they had multiplied by what percentage to arrive at their non-controlling interest figure.
Answers to the non-controlling interest column from the consolidated statement of changes in equity were
even more disappointing. Frequently this was not attempted at all and where it was attempted
presentation was poor. The most the majority of candidates managed to do was to enter the non-
controlling interest share of the profit for the year.
Some did attempt to calculate the non-controlling interest arising on the subsidiary acquired in the year but
frequently made this much more complicated than the simple calculation required and often ended up with
an incorrect figure. A minority attempted to calculate the non-controlling interest brought forward, but
workings were often disorganised and difficult to follow.
Many candidates wasted time preparing completely unnecessary workings and often failed to realise that
this figure would not include anything for the subsidiary acquired in the year. However, a significant
number of the better-prepared candidates did correctly calculate both this figure and that for the non-
controlling interest arising on the subsidiary acquired in the year.

Although almost all candidates calculated a figure for the share of the associate’s losses this was
frequently treated as a profit rather than a loss and some candidates seemed to be including some form of
investment in the associate in their profit or loss account figure. Hardly any candidates understood the
impact of a loss-making associate and the requirement to “cap” losses to prevent a “negative” investment
in associate figure.

(b) IFRS v UK GAAP differences re preparation of consolidated financial statements
UK GAAP IFRS
- Requires goodwill to be amortised over its useful - Goodwill is subject to annual impairment review
life, with rebuttable presumption that this should not
exceed five years
- Impairment losses cannot be reversed
- Impairment losses re goodwill may be reversed
- Acquisition related costs added to cost of - Acquisition related costs are expensed
acquisition
- Negative goodwill presented on the statement of - Negative goodwill recognised in profit or

financial position directly under positive goodwill, as loss/retained earnings
a negative asset
- Non-controlling interest must be measured using - Can use the proportionate method or the fair value
the proportionate method method
- A subsidiary should be excluded from - No allowed exclusions from consolidation

consolidation where severe long-term restrictions
apply or where the interest is held exclusively for
resale
- Where a subsidiary is disposed of and meets the - The results of the subsidiary are shown as a
definition of a discontinued operation its results are single amount on the face of the consolidated
shown in a separate column in the consolidated statement of profit or loss
income statement
- Recognises implicit goodwill on the acquisition of - No separate goodwill recognised

an associate or joint venture and requires it to be
amortised
As usual for parts of questions testing UK GAAP differences answers were mixed. Many candidates
wasted time and gained no marks by just listing out random differences on a variety of topics rather than
focusing, as required, on differences relating to consolidated financial statements.
Those that did focus on differences relating to consolidated financial statements usually gained at least
half of the available marks for the more obvious points on the different methods of calculating goodwill and
amortisation versus annual impairment reviews. Well-prepared candidates achieved full marks on this
part.


Financial Accounting and Reporting - Professional Level – March 2016
Question 1
Total Marks:
General comments
Part 1.1 required the preparation of a statement of profit or loss and a statement of financial position from
a trial balance plus a number of adjustments. Adjustments included property, plant and equipment
depreciation, revenue adjustment, an asset partly funded by a government grant, an intangible asset
which had been incorrectly revalued, a lease incentive, a rights issue and an inventory adjustment. Part
1.2 required a calculation of basic earnings per share. Part 1.3 required the preparation of a UK GAAP
extract in relation to the government grant asset. Part 1.4 required an explanation of how the inherent
limitations of financial statements reduce their usefulness to users and part 1.5 required an explanation of
the ethical issues arising from the scenario.
1.1 Laderas plc – Statement of financial position as at 30 September 2015

£ £
ASSETS
Non-current assets
979,685
Current assets
Inventories (42,600 + 6,600 (W2)) 49,200
112,600
Equity
Ordinary share capital ((520,000 / 4) x 5) 650,000
Share premium account (307,500 – 130,000) 177,500
Retained earnings (70,690 + 107,295) 177,985
Equity 1,005,485
Current liabilities
Lease accrual (12,000 / 3yrs) 4,000
Taxation 21,600
86,800
Laderas plc – Statement of profit or loss for the year ended 30 September 2015
£
Revenue (1,323,700 – 75,000) 1,248,700
Income tax (21,600)

Workings
W1 Expenses Cost of Admin Other

costs
£ £ £
Draft 721,400 237,400 113,000
Closing inventory (49,200)
Amortisation 11,375
Lease liability (12,000 – 4,000) (8,000)
758,030 237,400 124,375
W2 Inventory
£
Variable costs per unit ((14,800 + 4,200) / 3,800) 5.00
Fixed costs per unit (2,000 / 4,000) 0.50
5.50
Eros: 1,200 x £5.50 6,600

Land & Plant &
buildings machinery
£ £
Cost 992,600 290,600
Less: government grant asset (125,000)
165,600
Less: Land (300,000)
Less: New building (350,000)
342,600

342,600 / 40yrs (8,565)
(350,000 / 40yrs) x 6/12 (4,375)
165,600 / 8yrs (20,700)
((125,000 – 75,000) / 5yrs) x 9/12 (7,500)
12,940 28,200
PPE – carrying amount at 30 September 2015 £

Cost (290,600 + 992,600) 1,283,200
Less: acc depreciation b/fwd (176,000 + 78,000) (254,000)
Less: government grant (75,000)
Less: depreciation (12,940 + 28,200) (41,140)
At 30 September 2015 913,060
W4 Intangibles – brands
£
Capitalised in TB 133,000
Arafo – internal brand – valuation (55,000)
78,000
Boca – amortisation (78,000 / 4yrs) x 7/12 (11,375)
66,625
Presentation of the statement of profit or loss and statement of financial position was better than usual.
However there were few very messy statements in terms of workings shown on the face of the statements.
Many candidates achieved very high marks on this part of the question with a good number achieving
maximum marks. Almost all candidates gained the marks for the adjusted revenue and for the tax figure
on the statement of profit or loss although a number failed to also show the tax as a liability on the

On the statement of financial position completely correct figures were often seen for the intangible assets,
share capital and share premium. Most candidates correctly showed no revaluation surplus, having
removed this balance via their adjustment to the intangible asset, although candidates occasionally also
showed the amount as an expense. It was also, on the high marking scripts, not unusual to see the correct
figure for total property, plant and equipment. The most common errors on the face of the statement of
financial position included the following:
 Omitting the income tax liability.

 Including an inventories figure which did not match the working for closing inventories.
 Including an incorrect figure for the accrual in respect of the operating lease – although the correct
figure was seen on many scripts, weaker candidates showed a wide variation of figures on the
statement of financial position in respect of this lease.
 Showing the correct figure for share capital, but the incorrect figure for share premium – ie failing
to complete the double entry correctly between these two accounts.
 Leaving the internally generated brand within the intangible asset figure and/or charging
amortisation for the incorrect number of months.
Perhaps the most disappointing mistake was in the calculation of closing inventory. Although occasional
errors were made in the valuation of this inventory, for example, allocating the variable costs over the
planned production, rather than over the actual production, by far the most common error was to value this
inventory at its selling price, often without even checking whether cost was lower. It was also not unusual
to see one inventory figure on the statement of financial position and a different figure taken to the
statement of profit or loss.
Most candidates did use the recommended “costs matrix” in their workings, and generally the costs were
allocated to the correct category. Where figures were deducted instead of added, or vice versa, this
tended to be when the candidate had started their matrix with the base figures in brackets. There were
some very neat property, plant and equipment “tables” which acted as a working for the final figure, in
contrast to some candidates who produced a series of seemingly unrelated and unreferenced workings.
What was seen far more often than usual at this session, however, was a large number of depreciation
figures with no supporting workings. This meant that partial marks could not be awarded to these figures if
they were not correct. Where workings were provided for these figures, the most common errors seen
were to mix up useful lives and fractions of years between the different categories of property, plant and
equipment.


1.2
Laderas plc

1 Oct – 30 June 520,000 9/12 1.85/1.72 419,477
Rights issue 1 for 4 (520,000 / 4 130,000
1 July – 30 Sept 650,000 3/12 – 162,500
581,977
4 shares @ £1.85 7.40
1 share @ £1.20 1.20
8.60
Theoretical ex-rights price per share: 8.60 / 5 = £1.72

Bonus fraction: 1.85 / 1.72
Basic EPS = 107,295= £0.18

581,977
A large number of candidates arrived at the correct figure for weighted average share capital, even though
this necessitated making an adjustment for a bonus factor. Weaker candidates failed to calculate a bonus
factor, or calculated it incorrectly. Others calculated the correct theoretical ex-rights price, but then failed to
use this in their calculations.
Other errors included the following:
 Using the incorrect fractions for the two parts of the year, eg treating the bonus issue as though it
had happened half way through the year instead of after nine months.
 Applying the fraction for the second part of the year (ie that after the bonus issue had taken place)
to the bonus issue itself instead of to the cumulative number of shares in issue.
 Using different numbers of shares in this calculation than they had shown in their answer to Part
1.1
 Inverting the bonus fraction so that it reduced the number of shares instead of increasing them.

1.3 UK GAAP – Government grants
Fixed assets £
Tangible fixed assets (125,000 – 18,750) 106,250
Creditors falling due within one year

Deferred income (75,000 / 5yrs) 15,000
Creditors falling due after one year

Deferred income (75,000 – 11,250 – 15,000) 48,750
Workings:
Depreciation: 125,000/5yrs x 9/12 = £18,750
Deferred income release: (75,000 / 5yrs) x 9/12 = £11,250

Most candidates appeared to know that UK GAAP/FRS 102 specifies the deferral method with a
significant number of candidates calculating the correct carrying amount for the machine and the correct
current liability for the deferred income figure.
However, what was most disappointing about these answers was that almost every single candidate
presented these UK GAAP extracts using IFRS terminology. A few candidates wasted time writing about
the differences between the UK GAAP and the IFRS treatment of government grants, which was not
required.

1.4 Limitations of financial statements
Financial statements have a number of limitations as set out below:

 Financial statements are prepared to a specific date. The information when published is therefore
historic and backward looking. Although historic information is useful in assessing how a company
has been performing it provides limited predicted value.
 Financial statements are prepared in a standardised manner with much of the information
aggregated. While this means that it is easier to compare information between companies because
it is presented in a similar manner it also means that the content of standardised and aggregated
information may be difficult to identify.
 Financial statements only contain a limited amount of narrative information about the business
which can provide valuable insight into the company’s future, for example, how it is operating, what
the company’s plans are for the future, the risks facing the company, such as number of
competitors in the market and the management structure.
 Financial statements are based on estimates and judgements and hence figures are not an exact
number. Management in different organisations may make slightly different assumptions and
judgements and hence include slightly different figures.
 Companies use different accounting policies which means that exact comparisons cannot always
be made. However, disclosure of accounting policies means that users can identify differences.
Answers to this part of the question were varied. Those attempting the question could usually say that the
financial statements were “historic” or “backward looking” and/or “prepared at a point in time” such that
they may not be useful in predicting future performance. A few then went further and discussed the impact
of different accounting policies in reducing comparability and considered the use of estimated
figures/judgements, the aggregation of figures and the lack of narrative disclosures on matters that might
be of use to a potential investor. A worrying number of candidates appeared to think that the financial
statements included no narrative disclosures at all, presumably not realising that the notes are an integral
part of the financial statements.
Weaker candidates discussed the fact that the financial statements may contain errors, or be biased,
which are not inherent limitations. Others went further down this road, discussing how an audit could never
provide absolute assurance. A few candidates instead wrote about the enhancing qualitative
characteristics.


1.5 Ethical issues
Professional competence and due care – As a professional accountant Parry has an obligation to
maintain his professional knowledge and skills at the level required to ensure that his current employer
receives competent professional services based on current developments in financial reporting and
legislation.
Does Parry have the necessary skills and experience to prepare the financial statements of Laderas plc
following his career break? Should Parry instead have looked to refresh his professional knowledge
following his career break and then have taken a less demanding, technically, role than that of covering a
financial controller?
The fact that Parry is an ICAEW Chartered Accountant means that he has met the first phase of attaining
professional competence, however he now needs to maintain his professional competence.
Professional behaviour – A profession accountant should comply with relevant laws and financial
reporting standards. Parry has made a number of mistakes over the accounting treatment for items over
the year, for example, the rights issue was incorrectly accounted for. This suggests that perhaps Parry is
not acting as professionally as he should be, be it in error or deliberately.
In addition to these two fundamental principles being questionable there is also a threat towards these
being breached. The threat is that of self-interest for Parry. The finance director has suggested that the
board are looking for a high reported profit this year and a strong financial position to secure additional
funding for the future of the company. Parry may feel pressured, intimidation threat, to overstate profits as
a result. Parry has over-stated profits by recognising the whole of the government grant in the current year
even though some should have been deferred and the internally generated brand was revalued to a
market valuation increasing the company’s financial position incorrectly. These may have been innocent
mistakes as Parry may not be up to date due to his career break, but he may have incorrectly accounted
for things to make the company’s results appear stronger than they were so that the board would believe
that he was good at his job and offer him a full-time position.
The assistant accountant should take the following action:
 Discuss each of the errors found with Parry, explaining the correct IFRS accounting treatment to
him.
 Suggest that Parry attends an update course to ensure that he maintains appropriate continuing
professional development as an ICAEW Chartered Accountant.
 Ensure the financial statements are corrected.
 If Parry refuses to amend the financial statements seek support from a director.
 Keep a detailed record of all discussions and calculations.
 If you find yourself in a difficult situation, or subject to intimidation threat, then consult the ICAEW
helpline.
There were some excellent answers to this part of the question. Most candidates correctly recognised the
self-interest and intimidation threats arising from the scenario, and the threat to professional competence
and due care arising from Parry’s lengthy career break. However, only the very best candidates linked the
latter back to the scenario to discuss the type of errors that had been made and whether they were likely
to have been deliberate and/or might indicate a lack of professional competence.
Most candidates produced the usual list of steps which needed to be taken: discussion with Parry,
escalation to the other directors/audit committee, seeking help from the ICAEW, and documenting all
discussions. As ever, a number placed themselves in an audit context and wished to consult “more senior
members of the team” or “the ethics partner”.


Question 2
Total Marks:
General comments
This question required candidates to explain the financial reporting treatment of four accounting issues,
given in the scenario. The issues covered the construction of an asset, obligations and events after the
reporting period, a provision and an impairment review for a revalued asset. Journal entries were also
required.
(1) Construction of an asset
The cost of an item of property, plant and equipment is initially recognised at cost. In the case of a
specialised piece of plant which has been specifically constructed for the entity, cost will include its
purchase cost and all directly attributable costs to bring the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management.
Directly attributable costs include:
 Employee benefits arising directly from the construction of the machine; and
 Site preparation, delivery, installation and assembly costs, costs of testing and professional fees.
There are certain costs which should not be capitalised as they are not considered to be directly
attributable to the item, for example the cost of introducing new products and administration and general
overheads.
Any proceeds from selling products generated during testing of new property, plant and equipment should
be deducted from the cost capitalised.
The following costs should therefore be capitalised as part of property, plant and equipment:
PPE Expense
£ £
Materials cost (including cutters) 124,000
Internal allocated labour costs 31,500 10,000
Sale of by-products produced as part of testing (450)
process
Consultancy fees re installation and assembly 1,150
Professional fees 1,300
Safety inspection 1,500
Overheads allocated 7,100 7,100
166,100 18,900
Capitalisation ceases when the item is capable of operating in the manner intended, this was on 1 July
2015 and this is the date on which depreciation should commence.
Each significant part of an item of property, plant and equipment must be depreciated separately, although
if component parts have the same useful lives and depreciation methods are the same they may be
grouped together for practical purposes. Here the cutters should be recognised as a separate component
as they have a useful life of five years compared with 15 years for the rest of the asset. Total depreciation
of £3,235 (£700 + £2,535) should be recognised as part of profit or loss for the period and the carrying
amount of the plant at 30 September 2015 is £162,865 (166,100 – 3,235).
Cutters: (14,000 / 5yrs) x 3/12 = £700

Remainder: ((166,100 – 14,000) / 15yrs) x 3/12 = £2,535


£ £
DR: Expense (PorL) (18,900 + 3,235) 22,135
CR: Property, plant and equipment (SOFP) 22,135
(2) Obligations and events after the reporting date
A liability arises when there is a present obligation arising from past events, the settlement of which is
expected to lead to the outflow from the entity of resources embodying economic benefits. An obligation
implies that the entity is not free to avoid the outflow of resources. A management decision does not in
itself create an obligation because it can be reversed.
The obligation arises instead at the date of delivery, as cancellation is possible up to this date. Therefore,
Equipment A and C should be accrued for at 30 September 2015 based on cost. Cost of Equipment A is
£34,000, however the cost of Equipment C was finalised after the end of the reporting period. This is an
adjusting event as it provides evidence of conditions that existed at the end of the reporting period, ie the
subsequent determination of the purchase price purchased before 30 September 2015. Equipment C
should therefore be accrued for at £38,000 rather than £40,000.
As Equipment B was delivered after the year end, the cost should not have been accrued for at the year
end as there was no firm commitment at that date and the order can be cancelled at any time for no cost.
The new equipment will be depreciated once it is ready and available for use. As no useful life is provided
no depreciation has been recognised, although even if a useful life was provided it is likely that the amount
would be immaterial as the equipment was owned for less than a week. It is also highly likely that the
equipment will take a day or two to be made available for use.

£ £
DR: Accruals – current liabilities (27,000 + 2,000) 29,000
CR: PPE (SOFP) 29,000
(3) Provision
As stated above, a liability exists when there is a present obligation arising from past events, the
settlement of which is expected to lead to the outflow from the entity of resources embodying economic
benefits. A present obligation exists here as a result of a past event which is independent of Chayofa Ltd’s
future actions. The past event is the acquisition of the land and the obligation is the restoration of the
recycling centre. Therefore, it was correct to recognise a provision at 30 September 2015.
Where the obligation is in respect of an asset, the amount provided for at 30 September 2015 should have
been recognised as part of property, plant and equipment rather than recognised as part of profit or loss
for the period.
The amount of the provision should not be reduced by the expected cost reduction from new technology
as at the date of the obligation the new technology does not exist. In addition the provision should not be
recognised at the full £450,000 and should instead be discounted as the time value of money is material.
Hence the provision should be recognised at the present value f the expenditure required to settle the
obligation.
The provision should therefore have been recognised as follows:
£
15
1 Oct 2014 (450,000 / 1.06 ) 187,769

At 1 October 2014 an asset should be recognised as part of property, plant and equipment for £187,769
and this should be depreciated over 15 years. A depreciation charge of £12,518 (187,769 / 15yrs) should
be recognised as part of profit or loss for the period and the carrying amount of £175,251 (187,769 –
12,518) should be recognised at 30 September 2015.
A finance cost of £11,266 (187,769 x 6%) should be recognised as part of profit or loss for the period and
a provision for £199,035 (187,769 + 11,266) should be recognised at 30 September 2015.
£ £
DR: PPE (SOFP) 175,251
DR: Depreciation expense (PorL) 12,518
DR: Finance costs (PorL) 11,266
DR: Provision (SOFP) (450,000 – 199,035) 250,965
CR: Expenses (PorL) 450,000
(4) Impairment
The maintenance work may indicate that the machine has suffered an impairment and therefore an
impairment review should be carried out.
Assets should be carried at no more than their recoverable amount. Recoverable amount is the higher of
value in use and fair value less costs to sell.
Carrying amount at 30 September 2012:

£
Cost (1 Oct 2009) 60,000
Less: acc dep (60,000 / 8yrs) x 3yrs (22,500)
37,500
Revalued amount 42,000
Carrying amount at 30 September 2015:

£
Revalued amount (1 Oct 2012) 42,000
Less: acc dep (42,000 / 5yrs) x 3yrs (25,200)
16,800
FV less costs to sell (£10,500 – £500) £10,000

Value in use £11,000
Recoverable amount is therefore £11,000, which is lower than the current carrying amount and therefore
the machine has suffered an impairment of £5,800 (£16,800 - £11,000).
As the machine has been revalued, the loss should be treated as a revaluation decrease and charged to
the revaluation surplus up to the amount held in the revaluation surplus in respect of that asset (£4,500).
Any remaining balance should be recognised in profit or loss for the period, ie £1,300 (5,800 – 4,500).

£ £
DR: Impairment expense (PorL) 1,300
DR: Revaluation surplus 4,500
CR: PPE (SOFP) 5,800
Virtually all candidates attempted all parts of the question producing both narrative explanations and
supporting calculations and nearly all also attempted to include the relevant journals. Unfortunately, a
significant number of candidates did not read the question carefully enough to determine what double
entries had already been made and therefore struggled to arrive at the right correcting journals.
Issue 1: This was well answered with most candidates starting their answer by mentioning general
recognition criteria for non-current assets and then focusing on the specific costs given in the question.

Most costs were dealt with correctly but by far the most common error was to treat the sales of by-
products as sundry revenue rather than deducting the proceeds from cost. Nearly all candidates realised
that component parts with different useful lives should be depreciated separately and a majority also time
apportioned the depreciation to start from the date the asset was ready for use.
Issue 2: This was the issue that caused the most problems and many answers were brief. Candidates
could have approached the question in two ways – either focusing on the criteria for recognition of assets
(the approach most candidates took) or on the criteria for recognition of liabilities. Full credit was given for
either approach. While many candidates did arrive at the correct decision as to which assets/liabilities
should be recognised they often failed to justify why this was the case although a significant number did
realise this was to do with the date of delivery. Fewer discussed the impact of IAS 10 and the fact that the
subsequent determination of cost was an adjusting event, a significant minority of candidates thought that
this meant that there was an unreliable estimate and that the cost should not be accrued.
Issue 3: This was well answered with candidates discussing why the provision should be made and
virtually all candidates successfully calculating the discounted balance. Most also discussed the
subsequent recognition of a finance cost (although sometimes this was calculated on the “gross” liability
rather than the discounted figure). Again the majority of candidates also recognised that the provision
should be added to the asset and attempted to calculate the impact on depreciation (although here some
candidates clearly hadn’t read the question carefully enough and assumed that the “gross” provision had
been added to cost rather than expensed). Journals were often difficult to follow as they were spread
throughout the answer with considerable repetition.
Issue 4: This was well answered but many candidates wasted time by giving lengthy explanations and
journals relating to what had occurred in previous years (rather than simply calculating the relevant
numbers to determine the correct treatment in the current year) and/or discussing and calculating the
transfers between reserves, which the question specifically stated were not made. Nearly all candidates
discussed the need for an impairment review in the current year although relatively few explained why it
was needed, linking it to the maintenance work. A majority of candidates calculated the correct impairment
figure, with many understanding that it should be split between the revaluation surplus and as an expense
in the statement of profit and loss. A significant minority of candidates described recoverable amount as
being the lower of fair value less cost to sell and value in use and a common error was to recognise the
excess impairment above the balance on the revaluation surplus to retained earnings rather than profit for
the period.


Question 3
Total Marks:
General comments
Part 3.1(a) required candidates to calculate the profit or loss from discontinued operations, with part (b)
asking for the UK GAAP differences. Part 3.2 required extracts from the consolidated financial statements
for an investment in an associate. Part 3.3 required an explanation of accounting treatment for a sale and
repurchase and finally part 3.4 required extracts from the consolidated statement of cash flows.
3.1(a)
Group profit on disposal of Isora Ltd

£ £
Less carrying amount at goodwill at disposal:
NCI at acquisition (609,800 x 25%) 152,450
Less net assets at acquisition (609,800)
37,650
Less impairments to date (35,000)
(2,650)
Less carrying amount of net assets at disposal:
Net assets at 30 September 2014 898,700
Profit for 9 months to 30 June 2015 (108,000 x 9/12) 81,000
(979,700)
Add back attributable to NCI (979,700 x 25%) 244,925

Profit for 9 months to 30 June 2015 81,000
Profit for the year from discontinued operations 108,575
A good number of candidates achieved the maximum marks on this question, by producing a completely
correct calculation. By far the most common error made was not adding the profit for the year up to
disposal to the profit on disposal to arrive at the required profit or loss from discontinued activities (or
adding only the group share of that profit).
 Not reducing the goodwill at acquisition by the cumulative impairment losses.

 Deducting the profit for the year up to disposal from the net assets at the beginning of the year in
order to arrive at the net assets at disposal, instead of adding it.
 Calculating net assets at disposal from various figures in the question (and making errors in doing
so) instead of simply adding the profit for the year up to disposal to the figure given in the question
for the net assets at the beginning of the year.

(b)
Under IFRS 5 the results of discontinued operations are presented as a one-line item in the statement of
profit or loss. This amount comprises the post-tax profit or loss of the discontinued operation and the post-
tax profit or loss on disposal.
Under FRS 102 the results of discontinued operations are presented in full in a separate column of the
income statement and comparatives restated.

Most candidates could state that IFRS showed a “single line” for the discontinued operations figure, and
that UK GAAP showed this as a “separate column” but few candidates added any detail to this. Others
wasted time by setting out other differences between IFRS and UK GAAP which they thought might be
relevant (but which were not required).

3.2
Associate – Amparo Ltd
Extract from consolidated statement of profit or loss for year ending 30 Sept 2015
£
Share of profit of associate 6,045
Extract from consolidated statement of financial position at 30 September 2015

Non-current assets £
Working
Investment in associate
Cost 263,000
Add: post acquisition profits (51,300 x 6/12) 25,650
Less: FV depreciation
((450,000 – 285,000) / 15yrs) x 6/12) (5,500)
20,150
X 30% 6,045
269,045
A majority of candidates made some errors in these calculations. Presentation was varied, with only some
candidates showing their investment in associate figure as part of non-current assets. A minority of
candidates produced only calculations, with no extracts from the financial statements.
 Taking 30% of the profit figure, or 30% of the depreciation adjustment, but not 30% of both.
 Reducing the asset figure by the depreciation adjustment, but not also the figure for the statement
of profit or loss.
 Adding the fair value adjustment to the investment in the associate.
 Adjusting by a whole year’s worth of depreciation, instead of only by six months.

3.3
In substance this is a secured loan rather than revenue and the £150,000 profit should be reversed.
Hiedras plc has the continuing right to have access to the site it has retained the risks and rewards of
ownership and should therefore continue to recognise the land as part of property, plant and equipment.
As the sale proceeds and repurchase price are considerably lower than the lands fair value this is further
evidence that this is in substance a two-year loan. The difference between the sale and repurchase values
of £75,000 is interest.

At 1 October 2014 the land should be recognised as part of property, plant and equipment at its original
carrying amounting amount of £350,000. The proceeds of £500,000 should be recognised as a liability, as
it is assumed that the land will be repurchased on 30 September 2016. Finance costs of £36,250 (500,000
x 7.25%) should be recognised as part of profit or loss for the period and added to the loan giving a
closing current liability of £536,250.
Answers to this part of the question were varied, with a number of non-attempts and zero marks. Almost
all candidates thought that this was some sort of a “financing arrangement” but a significant majority went
on to say that it was a finance (or occasionally an operating) leaseback, as opposed to a loan. Those who
correctly identified that this should be treated as a loan usually went on to gain additional marks for
explaining why this was and for their calculation of finance costs.

3.4
Consolidated statement of cash flows for year ended 30 September 2015 (extract)

Proceeds from issue of ordinary shares (W1) 310,000
Net cash used in financing activities 182,500
Workings

£ £
B/d (320,000 + 120,000) 440,000
Cash issue
(155,000 x £2.00) 310,000
C/d (570,000 + 275,000) 845,000 Non-cash issue (β) 95,000
845,000 845,000

£ £
Non-cash issue (W1) 95,000
C/d 594,200 CPorL 441,100
816,700 816,700
A significant number of candidates achieved full marks on this part of the question. Where the odd half
mark was lost, it was most commonly from not including brackets on the face of the statement for the
dividend paid.
The most common error in the T-account workings was to omit the bonus issue from the debit of the
retained earnings T-account, even where this had been calculated. However, on a number of occasions
marks were lost in the T-account workings by failing to copy down numbers accurately from the question.


Question 4
Total Marks:
General comments
This was a consolidation question, requiring the preparation of a consolidated statement of financial
position, featuring two subsidiaries, one of which was acquired during the year. A draft consolidated
statement of financial position was provided along with the new subsidiary’s separate figures. Adjustments
included a fair value adjustment on acquisition, a gain on bargain purchase, intra-group sales of a non-
current asset and inventories.
Gordo plc
Consolidated statement of financial position as at 30 September 2015
£ £
Assets
Non-current assets
(936,400 + 389,500 + 145,500 (W1) – 6,000 (W9)) 1,465,400
Investments (667,800 – 442,000 (W2) – 220,000) 5,800
1,500,550
Current assets
Inventories (46,170 + 21,500 – 1,400 (W8)) 66,270
Trade and other receivables (53,900 + 36,950 – 14,000) 76,850
149,220

Equity attributable to owners of Gordo plc
1,261,670
Non-controlling interest (85,250 (W6) + 59,950 (W3)) 145,200
Current liabilities
Trade and other payables (67,400 + 37,800 – 14,000) 91,200
Taxation (112,300 + 39,400) 151,700
242,900
Workings
(1) Net assets – Orotava Ltd

£ £ £
Share premium account 75,000 75,000
Retained earnings
Fair value adjustment 150,000 150,000
Depreciation thereon ((150,000 / 25) x 9/12) (4,500) –
517,650 464,650 53,000

(2) Goodwill – Orotava Ltd

£
Non-controlling interest at acquisition – FV 52,000
494,000
29,350
(3) Non-controlling interest – Orotava Ltd

£
NCI at acquisition date (FV) 52,000
59,950
(4) Net assets – Tixera Ltd

£ £ £
Share premium account 50,000 50,000
Retained earnings
Less: PURP (W8) (1,400) –
Less: PPE PURP (W9) (6,000) –
341,000 311,200 29,800
(5) Goodwill –Tixera Ltd

£
297,800
(6) Non-controlling interest – Tixera Ltd

£
NCI at acquisition date (W5) 77,800
85,250
£
Gordo plc 580,870
Orotava Ltd (53,000 (W1) x 85%) 45,050
Tixia Ltd (29,800 (W4) x 75%) 22,350
661,670
(8) Inventory PURP

% £
SP 125 14,000
Cost (100) (11,200)
GP 25 2,800
x½ 1,400
(9) PPE PURP – Tixera Ltd

£
Asset in Gordo plc’s books at 30 Sept 2015 (45,000 x 4/5) 36,000
Asset would have been in Tixera Ltd’s books at 30 Sept 2015 (60,000 x 4/8) 30,000
6,000

This question was extremely well answered and candidates had obviously practiced this style of question
at length. Virtually all candidates recognised that the draft consolidated statement of financial position
excluded the new subsidiary which therefore had to be added in to their answer. Again nearly all produced
the expected standard workings although sometimes there was no “audit trail” for the final figures on the
face of the statement of financial position or for the shares of net assets/post acquisition profits included in
the workings.
By far the most common error (as always) related to the calculation of the PURP relating to the non-
current asset transfer. Those candidates who calculated it by comparing the two carrying amounts more
commonly arrived at the correct figure. Those who calculated separately the profit on disposal and impact
on subsequent depreciation often then ignored the latter element (or added rather than subtracting it) to
arrive at the net adjustment.
Other relatively common errors included:
 Failing to time apportion the additional depreciation relating to the fair value adjustment.
 Calculating the goodwill and non-controlling interest figures using the same method (when one
subsidiary used the proportionate method and one the fair value method).
 Adjusting retained earnings for PURP’s that related to the subsidiaries.
 Netting off the positive goodwill and gain on bargain purchase.
 Deducting rather than adding the gain on bargain purchase, or ignoring it altogether, in retained
earnings.
 Failing to deduct the cost of the subsidiaries from the investments figure on the face of the


Financial Accounting and Reporting - Professional Level – June 2016
Question 1
Total Marks: 30
General comments
Part 1.1 of this question tested the preparation of a statement of profit or loss, a statement of financial
position and a property, plant and equipment movement note from a set of draft financial statements.
Adjustments included several transactions in respect of property, plant and equipment (a revaluation in the
year, purchase of an asset in a foreign currency, depreciation charges for the year and an asset held for
sale), a financial instrument and an income tax refund. Part 1.2 tested the two fundamental qualitative
characteristics, and the trade-off between them, illustrated with reference to the financial statements
prepared in Part 1.1.
Pisa Ltd
1.1 Financial statements
(a) Statement of profit or loss for the year ended 31 December 2015
£
Revenue 2,521,200
(b) Statement of financial position as at 31 December 2015

£ £
Assets
Non-current assets
Property, plant and equipment (2,257,500 + 613,093 (c)) 2,870,593
Current assets
Inventories 849,300
1,341,130
Non-current asset held for sale (9,000 – 600) 8,400
1,349,530

£ £
Equity
3,208,423
Current liabilities
Trade and other payables (392,500 – 5,300 (W3)) 387,200
Taxation 123,000
510,200
(c) Property, plant and equipment note

Land and Plant and
buildings equipment
£ £
Valuation/Cost
At 1 January 2015 1,847,500 789,600
Revaluation (2,300,000 – 1,847,500) 452,500
Additions (247,450 + 5,300 (W3)) 252,750
2,300,000 1,022,350
Accumulated depreciation
At 1 January 2015 53,900 315,840
Charge for the year ((2,300,000 – 600,000)/40) (W4) 42,500 103,177
Classified as held for sale ((20,000 – 10,240) + 1,840) (W2) (11,600)
Impairment loss (W2) 1,840
42,500 409,257
Carrying amount
At 31 December 2015 2,257,500 613,093
At 31 December 2014 1,793,600 473,760
Workings

Cost of Admin Other
costs
£ £ £
Per draft 1,057,300 587,600 245,500
Income tax refund 5,500
Preference dividend paid (30,000)
Loss on held for sale asset (W2) 1,840
Depreciation charges (c) 103,177 42,500
Forex difference (W3) (5,300) (5,300)
1,157,017 594,800 251,000

(2) Impairment loss on asset held for sale

£
Carrying amount on classification as held for sale (20,000 x 10,240
80% x 80% x 80%)
Sale proceeds less costs to sell (9,000 – 600) (8,400)
1,840
(3) Forex difference

£
Euro purchase should have been included at 106,000 x 0.85 90,100
Euro purchase included at 106,000 x 0.80 (84,800)
5,300
(4) Depreciation charge on plant and equipment

£
On additions (252,750 (c) x 20% x 2/12) 8,425
On b/f (473,760 x 20%) 94,752
103,177

£
Per draft 1,327,840
Change in profit for the year (507,800 – 369,383) (138,417)
At 31 December 2015 1,213,173

£
Per draft 512,600
Revaluation in year (2,300,000 – 1,793,600) 506,400
Depreciation charge on buildings for current year (c) 42,500
Depreciation charge on buildings based on HC (750,000/40) (18,750)
(23,750)
At 31 December 2015 995,250
B/f Interest expense Interest paid C/f

(6.3%) (6%)
£ £ £ £
31 December 2015 500,000 31,500 (30,000) 501,500
There were some excellent, beautifully presented answers to this question, but there were also some
incomplete, very messy ones. Almost all candidates produced a statement of profit or loss and a
statement of financial position although, as always, some presentation marks were lost for not putting in
totals and/or using abbreviations. With regard to the statement of profit or loss a number of candidates did
not include a sub-total for profit before tax and/or included the finance cost in the wrong place. In the
statement of financial position the non-current asset held for sale was sometimes seen at the top or in the
middle of current assets or included within non-current assets. A number of candidates also showed non-
current liabilities after current liabilities.
However, the standard of the property, plant and equipment movement note was generally very poor.
Many candidates wasted time producing detailed workings and then effectively reproducing the same
information in the disclosure note. It was clear that the majority of candidates did not understand what the
note should look like and sometimes it was hard to distinguish between what was a working and what was
meant to be the note. Many lost marks by not showing the figures for the depreciation charge and
additions to plant and equipment as single figures. It was also clear that very few candidates knew how to
deal with the transfer of the non-current asset held for sale out of non-current assets and many also
struggled with the revaluation with relatively few showing the necessary adjustments to both cost and
accumulated depreciation. As always it was often hard to see an “audit trail” for the total depreciation
figures used in this note and in the costs working and often the figure for additions in the note was different
to that used to calculate the depreciation charge on those additions.

Fewer candidates than usual adopted the recommended “costs matrix” approach, and instead produced
linear workings or bracketed workings on the face of their statement of profit or loss. As ever, a number of
candidates (most commonly those who started a costs matrix showing the draft cost figures in brackets)
lost marks for incorrect signage/direction of their adjustments. The most common error was to adjust cost
of sales and administrative expenses in the same direction for the foreign currency gain – as if this was a
reallocation of the gain. Given that the vast majority of candidates debited property, plant and equipment
and trade and other payables then two credits were needed here to complete the double entries.
With regard to calculations, nearly all candidates correctly calculated the depreciation charge for buildings,
the foreign currency gain and the carrying amount of the non-current asset held for sale. Many candidates
also arrived at the correct figures for the impairment, the tax charge and tax liability and for the preference
shares, with most then correctly including the preference shares as a non-current liability. However, a
minority of candidates wasted time producing complicated workings for the preference shares, attempting
to discount the future payments ie treating the preference shares as a compound financial instrument.
Others arrived at the correct figure in a working but then took the par value of £500,000 or the balance as
at the following year end to non-current liabilities. Sometimes attempts were made to split one of these
figures between current and non-current liabilities. Others showed finance costs as the dividend paid on
the preference shares instead of as the true interest expense, even where the latter figure had been
calculated to arrive at the correct carrying amount for the preference shares.
An encouraging number of candidates also arrived at the correct figure for the reserves transfer, although
a worrying few transferred the whole of the revaluation gain made during the current year from the
revaluation surplus to retained earnings. Others incorrectly calculated the depreciation charge based on
historic cost.

 Making the adjustment for the income tax refund in the wrong direction in the costs working. Other
candidates set this off against the balance of cash and cash equivalents (or adjusted cash and cash
equivalents by some other inappropriate figure).
 Miscalculating the depreciation charge for plant and equipment by using the wrong number of
months for the additions.
 Failing to adjust the additions to plant and machinery for the translation error made, even where the
foreign currency gain had been correctly calculated.
 Using the wrong number of years when calculating the carrying amount of the machine on
classification as held for sale.
 Not adjusting the trade and other payables figure to reflect the foreign currency gain.
 Failing to back out the draft profit figure from retained earnings.
 In addition to backing out the dividend paid on the preference shares from administrative expenses,
also adding in the true interest expense. Others deducted the amount paid from retained earnings.


1.2 Relevance and faithful representation
Relevant financial information is that which is capable of making a difference to the decisions made by
users. The figure for the valuation of land and buildings for Pisa Ltd is relevant to the users as it gives
them additional information about what the assets of the company are actually worth.
Financial information is capable of making a difference to the decisions made by users if it has predictive
value, confirmatory value, or both. For example, the revenue figure for Pisa Ltd can be used by users to
predict future revenues, but can also be used to confirm predictions they made in previous years.
The relevance of financial information is also affected by its nature/and its materiality. Information is
material if omitting it or misstating it could influence users’ decisions. The asset held for sale, although a
relatively small amount, may be an important figure for the users of Pisa Ltd as it tells them that the
company is divesting itself of assets.
To be useful financial information must faithfully represent the phenomena that it purports to represent. A
perfectly faithful representation should be complete, neutral and free from error. The cost of plant and
equipment in Pisa Ltd, measured using the cost model is likely to be a faithful representation as it is based
on transactions that took place at a point in time. In contrast, the accumulated depreciation figure may not
be, as useful lives and depreciation rates are based on judgement.
Substance over form is also implied in faithful representation because faithful representation of a
transaction is only possible if it is accounted for according to its substance and economic reality. Hence,
the redeemable preference shares which Pisa Ltd issued should have been accounted for in accordance
with their substance, as a long-term loan, as opposed to their legal form of equity.
The conflict between relevance and faithful representation can best be illustrated by considering the
figures for Pisa Ltd’s property, plant and equipment. Although the valuation figure for land and buildings is
likely to be high in relevance it is low in faithful representation, as all valuations are subject to judgement.
Conversely, the historic cost figure for plant and equipment is high in faithful representation (based as it is
on fact) but is low in relevance, as it is largely an out-of-date figure.
As usual, the answers to the concepts question were disappointing. Most candidates gained some marks
by picking up the key phrases from the open book text to explain the two concepts but many went no
further than this. Others, seemingly unaware of the information in the open book text, wrote only that
“faithful representation” meant that information was “faithfully represented” and that “relevance” meant that
information was “relevant”.
Those that went further frequently used the revaluation and the preference shares as their examples from
the information in the question. However, a worrying number of candidates suggested that the use of a
valuation figure illustrated “faithful representation” and that the use of historical cost illustrated “relevance”,
instead of the other way round. Many presented long, circular arguments in trying to explain the conflict
between the two concepts, without ever really getting anywhere. Many wrote at length on the merits of the
property, plant and equipment movement note, without picking up many, if any, marks.

Maximum full marks (max 3½ for OBT refs) 5

Question 2
Total Marks: 34
General Comments
Part 2.1 of this question required candidates to explain the IFRS financial reporting treatment of three
issues given in the scenario. The issues covered borrowing costs, research and development expenditure
and a change in an accounting policy. All relevant calculations were required, as well as journal entries.
Part 2.2 required a calculation of distributable profits, with an explanation as to where the finance director
had made errors in his own calculation of this figure. Part 2.3 required a discussion of the ethical issues
arising from the scenario and the action to be taken. Part 2.4 required candidates to describe any
differences between IFRS and UK GAAP in respect of borrowing costs and development costs.
Naples plc
2.1 IFRS financial reporting treatment
(1) Borrowing costs
In accordance with IAS 23, Borrowing Costs, directly attributable borrowing costs relating to qualifying
assets should be capitalised during the qualifying period. If the construction is financed out of general
borrowings the amount to be capitalised should be calculated by reference to the weighted average cost of
the general borrowings. In this case the weighted average cost of the loans is
5.2% (((£500,000 x 6%) + (£800,000 x 4.7%))/1,300,000).
Capitalisation should commence when the entity incurs expenditure for the asset (1 February 2015),
incurs borrowing costs (1 January 2015) and undertakes activities that are necessary to prepare the asset
for its intended use (1 January 2015) so from 1 February 2015. Capitalisation should cease when the
asset is ready for use, so borrowings should only have been capitalised for nine months.
Luigi capitalised borrowing costs of £67,600 ((£500,000 x 6%) + (£800,000 x 4.7%)). This figure needs to
be deducted from the 650,000 before the borrowing costs to be capitalised are calculated. Therefore only
£22,714 ((650,000 – 67,600)) x 5.2% x 9/12) of the borrowing costs should have been capitalised The
remaining interest of £44,886 (67,600 – 22,714) should be included in the statement of profit or loss as a
finance cost.
To correct this the journal entries should be:
£ £
Dr Finance costs 44,886
Cr Property, plant and equipment – cost 44,886
Depreciation should have been charged from when the building was ready for use ie from 31 October
2015. The charge for the year should therefore have been £2,017 (650,000 – 44,886)/50 x 2/12). The
journal entries should have been:
£ £
Dr Depreciation charge 2,017
Cr Property, plant and equipment – accumulated 2,017
depreciation
The carrying amount of property, plant and equipment at 31 December 2015 will therefore reduce by
£46,903 (44,886 + 2,017)/the asset in the course of construction will be
£603,097 (650,000 – 44,886 – 2,017).
(2) Research and development expenditure
In accordance with IAS 38, Intangible Assets, all expenditure that arises in the research phase should be
recognised as an expense when incurred because there is insufficient certainty that the expenditure will
generate future economic benefit. Development costs must be capitalised only once the IAS 38 criteria are
met.

Therefore the costs of £55,500 incurred before the project was assessed as being commercially viable
should not have been capitalised. The marketing costs should not have been capitalised because they
cannot be directly attributed to producing or preparing the asset for its intended use. The cost of the
intangible asset should therefore be reduced by £165,500 (390,500 – 225,000), leaving a carrying amount
of £225,000.

£ £
Dr Profit or loss account 165,500
Cr Intangible assets – cost 165,500
An intangible asset with a finite useful life, as here, should be amortised over its expected
useful life. Luigi should therefore have charged amortisation for four months of the current
year, over an expected three-year useful life, a charge of £25,000 (225,000 x 4/36). The
£ £
Dr Amortisation charge 25,000
Cr Intangible assets – accumulated amortisation 25,000
The carrying amount of intangible assets at 31 December 2015 will therefore reduce by
£190,500 (165,500 + 25,000)/will be £200,000 (225,000 – 25,000).
(3) Change of accounting policy
IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, only allows a change in an
accounting policy if:
 it is required by an IFRS; or
 it will result in the financial statements providing reliable and more relevant information.
This scenario would appear to meet the latter condition by “better matching purchases made to sales”. It is
essentially a change in a recognition policy.
However, a change in an accounting policy should be applied retrospectively, ie as if the new policy had
always applied. This means that Luigi should also have recognised the stores as inventory at
31 December 2014 and all previous years.
Where it is impracticable to determine the cumulative effect, as at the beginning of the current accounting
period, of applying a new accounting policy to all prior periods, an entity should adjust the comparative
information to apply the new policy from the earliest practical date. Therefore Luigi should have adjusted
the 2014 comparatives to include closing inventories of consumable stores of £31,200. The impact of this
on the 2015 financial statements will be to include opening inventories of consumable stores of £31,200,
with a corresponding adjustment to retained earnings brought forwards (which will be shown in the
statement of changes in equity).
The journal entries to achieve this are:
£ £
Dr Cost of sales 31,200
Cr Retained earnings 31,200
This will have the effect of reducing profit for the year by £31,200, with a corresponding
increase to the profit for the previous year.
Candidates generally made a reasonable attempt at this question scoring all of the easier marks to gain a
solid pass. Most answers were a good mixture of explanations and calculations, as opposed to answers to
this question type in some earlier sessions, which focused on calculations at the expense of explanations.
Almost all candidates attempted all three of the issues in this part, with the occasional missing answer to
Issue (3). A minority of candidates failed to provide the required journal entries.
Issue (1): Most candidates made a good attempt at answering this issue, correctly identifying that the
loans were not taken out specifically for this project and that a weighted average cost of general
borrowings should be calculated. The majority of candidates who correctly identified that a weighted

average calculation was necessary also correctly calculated the percentage to be used. However,
candidates did not always state that it was directly attributable borrowing costs which should be capitalised
and a significant number of candidates discussed whether the asset was a qualifying asset even though
this had been stated in the question. A very significant number of candidates said that Naples plc “can” or
“may” capitalise borrowing costs, rather than saying that they “should” or “must” (even where they then
went on in 2.4 to say that under IFRS borrowing costs should be capitalised).
Almost all candidates correctly identified the date from which the borrowing costs should be capitalised
and almost as many correctly identified the appropriate date on which capitalisation should cease, along
with the correct explanation. Most candidates correctly calculated the figure which had incorrectly been
capitalised during the year, although less went on to back this out of the cost of the building before
calculating the amount of interest which should have been capitalised. The other common error here was
to base the interest on the two loan values rather than on the expenditure incurred. A minority of
candidates either didn’t pro-rate the interest or did so by an incorrect number of months.
The majority of candidates identified that depreciation needed to be recognised, even where they had
incorrectly stated that borrowing costs should not be capitalised (usually on the grounds of these being
general loans). The most common errors here were not adjusting the cost of the building by the
appropriate (own figure) interest adjustments, based on the earlier part of their answer, or calculating
depreciation for the incorrect number of months. A majority of candidates went on to provide a carrying
amount for the office building at the year end, although often there was no working to accompany this
(own) figure which meant that it gained no marks.
As stated above, a number of candidates failed to provide journal entries. Of those candidates who did,
the journal for the depreciation adjustment was generally correct, but the journal for the borrowing costs
was often confused. Candidates would write out what the journals should have been and then what was
done, but their final journal setting out the correction was sometimes not clearly linked to the previous two
steps. The most common error was, once again, not showing an “audit trail” for the net adjustment that
needed to be made, which again led to a loss of marks.
Issue (2): This issue was also dealt with quite well although candidates did generally lose some marks
here for a lack of explanation. Most candidates correctly identified that both the research and marketing
costs should be expensed, although as stated above this was not always explained. A general discussion
on when development costs should be identified was provided by most candidates although it often lacked
any conclusion relating back to the scenario. Most candidates went on to calculate amortisation although
less went on to finalise with a carrying amount for the intangible asset. Where journal entries were given,
they were almost always correct. However, some candidates combined two sets of journals (the first
writing off the expenditure which was not to be capitalised and the second putting through the amortisation
charge) without showing how any net figures had been calculated.
Issue (3): This issue was less well answered. A few candidates missed the point entirely and simply
discussed IAS 2, Inventories, and how inventory should be valued. However, a pleasing number of
candidates did identify that this was a change in accounting policy, and that it should therefore be adjusted
for retrospectively. Only a minority thought that it was a change in accounting estimate. It was good to see
that a significant number of candidates correctly discussed the issue about whether the new policy
presented reliable and more relevant information.
Adjustments which were then explained were generally quite confusing to read with candidates mixing the
current and previous years up on a regular basis. Again, it was pleasing to see that a significant number of
candidates identified and discussed the “impracticality” issue, although a few candidates simply stated that
the prospective approach should be adopted as a result. Where journal entries were presented there was
a mix between candidates either debiting or crediting retained earnings, although this was probably led by
the confusion over which year they were adjusting.


2.2 Distributable profits
Distributable profits are defined as accumulated realised profits less accumulated realised losses.
However, there is an additional restriction for public companies, that they may not make a distribution if
this reduces their net assets below the total of called-up share capital and undistributable reserves.
Both the share premium account and the revaluation surplus are unrealised reserves and may not be
distributed.
The only reserve of Naples plc that could have been distributed is retained earnings.
Distributable profits should therefore have been calculated as:

£
Original retained earnings 101,300
Less: Finance costs (1) (44,886)
Depreciation (1) (2,017)
R&D expenditure (2) (165,500)
Amortisation (2) (25,000)
Retained loss (136,103)
Therefore Naples plc cannot pay a dividend for the year ended 31 December 2015 and could
potentially be trading illegally.
Generally, candidates made a reasonable attempt at this part. This was encouraging as historically
candidates have not performed well on this topic. Almost all candidates identified that the revaluation
surplus and the share premium account should not have been included in the calculation of distributable
profits, although a significant minority believed that the share premium account could be distributed.
Most candidates also made correct (own figure) adjustments for the issues from 2.1, although almost all
candidates also adjusted for the retrospective adjustment for the change in accounting policy, failing to
recognise that this had a zero impact on total retained earnings. A few candidates lost marks by netting off
some of their adjustments made in 2.1 without providing supporting workings for these figures. Once
again, without an appropriate “audit trail” marks will be lost.
Almost all candidates correctly concluded that a dividend should not have been paid as there were
negative retained earnings. A significant number of candidates gained full marks on this part.


2.3 Ethical issues
Luigi appears to have a self-interest threat, as he is due a bonus based on the profit for the year. He also
is due a dividend through his holding of ordinary shares, and the higher the profit for the year, the higher
that dividend is likely to be. The “errors” which Roberto has discovered in the draft financial statements
could be genuine mistakes due to a lack of knowledge, or could be a deliberate attempt by Luigi to
overstate the profit for the year in order to increase his bonus and dividend. It may be that had it not been
for Luigi’s illness these “errors” would not have been discovered. The basic “errors” made by Luigi in his
calculation of distributable profits also add weight to the theory that the errors may have been deliberate.
There are potential intimidation and self-interest threats for Roberto from Luigi or the other directors, as he
may be under pressure to not make the adjustments to keep the profits high for the directors’ bonus, and
may be afraid he might lose his job.
As an ICAEW Chartered Accountant Luigi has a duty of professional competence and due care and
at all controversial.
Roberto should apply the ICAEW Code of Ethics, with the following programme of actions:
 Explain to Luigi how each of these matters should be accounted for.

 If they appear to be genuine errors suggest that Luigi goes on an update course.
 If Luigi refuses to correct the errors, discuss the matters with the other directors to explain the
situation and obtain support. Consider also discussing the issues with the external
auditors/internal auditors/audit committee.
There were some very high marks on this part and some excellent answers. Almost all candidates
correctly identified the self-interest threat from the directors’ bonus and a majority also identified the
shares purchased by Luigi as a further self-interest threat. Most candidates recognised that the errors
made in the draft financial statements were not those that an ICAEW Chartered Accountant should be
making and hence, if these errors were indeed errors (as opposed to the deliberate manipulation of the
financial statements), represented a breach of Luigi’s duty of professional competence and due care.
A smaller number of candidates identified possible intimidation and/or self-interest threats for Roberto, in
correcting financial statements prepared by his superior. However, some felt that the intimidation threat
came from the managing director, which was unlikely given that he had “become increasingly concerned
about Luigi’s treatment of certain matters”. Candidates need to take care to read the scenario carefully
and not read into it factors that are not present. Most candidates made a very good attempt at listing the
steps that Roberto should take to address the issues, picking up a good number of marks.
Fewer candidates than usual put their answer in an audit context, such as referring to reporting Luigi to the
ethics partner or reviewing his work. However, a good number of candidates wasted time suggesting that
Luigi should be made to sell his shares and/or suggesting alternative structures for a bonus scheme which
avoided a link to profits.


2.4 Differences between IFRS and UK GAAP: borrowing costs and development costs
UK GAAP IFRS
Borrowing costs
Under FRS 102 entities are allowed the choice of IAS 23 gives no such choice. Capitalisation is
whether to capitalise borrowing costs or to required.
recognise them as an expense when incurred.
The borrowing costs calculation is based on the

average carrying amount of the expenditure.
Development costs
Under FRS 102 an entity can chose whether or IAS 38 requires all eligible development costs to be
not to capitalise development costs. capitalised.
All intangible assets should be amortised, with the Intangible assets need not be amortised and should
rebuttable presumption that the useful life this be reviewed for impairment.
should not exceed five years.
A few candidates did not attempt this part of the question. Those who did generally correctly identified the
basic treatment for both borrowing and development costs under both IFRS and UK GAAP, although a
minority said that development costs could not be capitalised under UK GAAP. A few candidates mixed up
the treatment even where they had used the correct IFRS treatment in 2.1. A significant number of
candidates who had said that borrowing costs “can” be capitalised in 2.1 correctly identified here that such
costs “must” or “should” be capitalised. Some candidates went on to achieve full marks by discussing the
amortisation of development costs.


Question 3
Total Marks: 18
General comments
Part 3.1 of this question tested the calculation of profit from discontinued operations, requiring an
explanation of the calculation as well as the calculation itself. Part 3.2 required the preparation of a
consolidated statement of cash flows and supporting note, incorporating the subsidiary disposed of during
the year, in respect of which the calculation in Part 3.1 had been required. Missing figures to be
calculated included dividends paid (to the group and to the non-controlling interest), finance lease liabilities
paid, tax paid, additions to property, plant and equipment, and proceeds from the issue of share capital.
Genoa plc
3.1 Profit from discontinued operations
The profit from discontinued operations is comprised of two elements:

 the profit on disposal of the shares in Venice Ltd, and
 the results of Venice Ltd up to the date of disposal (ie for three months).
The profit on disposal should be calculated by comparing the sale proceeds to the net assets and goodwill
at the date of disposal net of the non-controlling interest (NCI). The net assets at the date of disposal will
be the net assets brought forward/on 1 January 2015, plus the profit earned by Venice Ltd to the date of
disposal/three months pro-rated/1 April 2015.
£ £
Sale proceeds 1,200,000
Net assets at date of acquisition (100,000 + 271,000) (371,000)
NCI at date of acquisition (371,000 x 30%) 111,300
Goodwill at date of acquisition 560,300
Goodwill at date of disposal (490,300)
Net assets on 1 April 2015 (881,000)

Add: NCI in net assets at date of disposal (881,000 x 30%) 264,300
Profit for the period (3/12 x (110,000 – 20,000)) 22,500
Profit from discontinued operations 115,500
As this was a relatively straightforward calculation of a profit on discontinued operations it was

disappointing not to see the correct figure more frequently. Most candidates made a reasonable attempt at
calculating goodwill at disposal, although common errors were not including share capital in net assets
and/or failing to deduct the impairment. Those who dealt with the impairment as a separate line rather
than as part of the goodwill calculation often adjusted for it in the wrong direction. Surprisingly, a number
of candidates used the wrong figure for net assets at disposal even though this was given in the question.
By far the most common error related to the profit for the year up to disposal with most candidates taking
only the parent’s share and/or failing to deduct tax.
Some candidates made no attempt to explain how the figure should be calculated and those that did often
discussed how it should be presented rather than calculated. This omission limited the number of marks
which could be achieved on this part.


3.2 Consolidated statement of cash flows for the year ended 31 December 2015
£ £
Disposal of Venice Ltd net of cash disposed of 1,183,500
(1,200,000 – 16,500)

£
Profit before tax (1,938,900 – 93,000 (3.1)) 1,845,900
Finance cost 61,600
Workings
£ £
Cash (β) 501,400 B/d (324,000 + 177,800) 501,800
C/d (420,200 + 180,200) 600,400 Non-current assets 600,000
1,101,800 1,101,800
(2) Income tax
£ £
Cash (β) 411,600 B/d 453,600
C/d 504,000 CPL 462,000
915,600 915,600
£ £
Finance leases 600,000 Disposal of sub – GW (3.1) 490,300
Additions (β) 1,894,100 C/d 3,457,400
5,467,700 5,467,700


£ £
B/d (480,000 + 48,000) 528,000
720,000 720,000
£ £
Cash (β) 92,500 B/d 2,145,400
C/d 3,271,200 CPL 1,218,300
3,636,700 3,363,700
£ £
Cash (β) 87,500 B/d 891,100
Disposal of sub (3.1) 264,300
C/d 797,900 CPL 258,600
1,149,700 1,149,700
Answers to this part were very mixed with a minority of candidates barely attempting this part. Most
candidates who made a decent attempt at this question did produce a reconciliation note although very
few deducted the profit on disposal from Part 3.1 from the opening figure of profit before tax. Others simply
deducted the £110,000 profit given in the question rather than the adjusted figure calculated in 3.1 or
included the profit for the period as well as the profit on disposal. Most did add back the finance cost and
depreciation charge and attempted to calculate the relevant adjustments to working capital, although a
number failed to adjust these figures correctly (or at all) for the impact of the disposal.
On the face of the actual statement of cash flows it was surprisingly rare to see the correct figures for tax
and interest paid – both relatively straightforward calculations. However, nearly all candidates arrived at
the correct figure for the net cash relating to the disposal of the subsidiary and many also calculated the
correct figures for the proceeds of the share issue and the dividend paid by the parent. It was much rarer
to see correct figures for the purchase of property, plant and equipment, the repayment of the finance
lease and the dividends paid to the non-controlling interest.
As always, some candidates lost marks for not showing outflows of cash in brackets and/or including
figures under the wrong heading. A number of candidates also included tax and interest paid in the
reconciliation note rather than on the face of the cash flow statement. Some candidates also appear to
believe that dividends are received from the non-controlling interest (clearly describing them as dividends
received) as opposed to being paid to them.
A significant minority of candidates continue to produce columnar or linear workings, rather than using the
T-account approach recommended in the learning materials. Presentation of the statement of cash flows
was mixed, with a good number of candidates failing to provide a sub-total for each type of cash flow.

 Failing to include the assets acquired under finance leases and/or the goodwill disposed of with
the subsidiary in 3.1 in the property, plant and equipment working.
 Failing to include the disposal of the subsidiary in the non-controlling interest working.
 Mixing up the finance cost and finance lease workings.
 Including the tax charge relating to the subsidiary in the tax working.
 Failing to include both the non-current and current liability balances in the finance lease working.
 Not showing the correct figures for opening and closing cash and cash equivalents (or missing
these out altogether). The most common error here was adjusting one of these figures for the
cash disposed of with the subsidiary.


Question 4
Total Marks: 18
General comments
Part 4.1 of this question required the preparation of a consolidated statement of financial position for
a group with one subsidiary, and a joint venture which was set up during the current year. The
question also featured inter-company transactions and balances and fair value adjustments on
acquisition. Part 4.2 tested the differences between IFRS and UK GAAP in respect of the financial
reporting treatment and disclosures of joint ventures.
Rome plc
4.1 Consolidated statement of financial position as at 31 December 2015
£ £
Assets
Non-current assets
6,279,500
Current assets
Inventories (879,300 + 453,700 – 10,000 (W8)) 1,323,000
Trade and other receivables (641,500 + 392,300 – 933,800
100,000)
Cash and cash equivalents (21,800 + 17,600 + 64,400
25,000)
2,321,200

Equity
Attributable to the equity holders of Rome plc 6,639,140
7,322,700
Current liabilities
75,000)
Taxation (250,000 + 175,000) 425,000
1,278,000
Workings
(1) Net assets – Turin Ltd

Year end Acq Post acq
£ £ £
Less: PURP (W8) (10,000)
Fair value adjs
Goodwill (40,000) (50,000)
Property 300,000 300,000
Deprec on property (300,000/25 years x 4) (48,000)
3,424,300 1,906,500 1,517,800

(2) Goodwill – Turin Ltd

£
Consideration 1,600,000
73,500
(3) Non-controlling interest – Turin Ltd

£
Share of post-acquisition reserves (1,517,800 (W1) x 20%) 303,560
683,560
(4) Investment in joint venture – Florence Ltd

£
Cost (100,000 x £1) 100,000
Share of post-acquisition retained earnings (125,600 x 25%) 31,400
131,400

£
Rome plc 2,403,900
Turin Ltd (1,517,800 (W1) x 80%) 1,214,240
Florence Ltd (W4) 31,400
3,639,140

£
Rome plc 2,958,500
Turin Ltd 2,874,500
Fair value adjustment (300,000 – 48,000) (W1) 252,000
6,074,600
(7) PPE PURP

£
Asset now in Turin Ltd’s books at 35,000 x 4/5 years 28,000
Asset would have been in Rome plc’s books at 22,000 x 4/5 (17,600)
years
10,400
(8) PURP
% £
Cost (100) (80,000)
GP 25 20,000
X½ 10,000
Almost all candidates made a good attempt at this part, with presentation of the statement of financial
position often being better than on Question 1. Candidates had obviously practised this question style
at length and as a result gained a significant number of marks; it was not uncommon for candidates to
gain full marks. However, once again, a number of candidates lost marks where they failed to provide
an “audit trail” through their answer.
The most common areas where no audit trail was shown were for figures on the face of the
consolidated statement of financial position, eg inventories, trade and other receivables, cash and
cash equivalents etc and also for the calculation of the non-controlling interest and retained earnings
for the percentage of the subsidiary’s figure for post-acquisition profits. It is not sufficient to show the

percentage and then reference to another (the net assets) working; unless both a percentage and a
figure from another working are shown, no marks will be awarded if the calculation contains an error.
However, candidates’ answers were well laid out and generally candidates did make adjustments to
figures on the face of the consolidated statement of financial position. The most common errors
centred on the cash in transit. Many included no adjustment for trade and other payables (or
incorrectly used £25,000) and/or no adjustment for trade and other receivables (or incorrectly used
£75,000). Cash and cash equivalents was more often adjusted, and usually by the correct figure.
Most candidates presented a net assets table in the format used in the learning materials, and went
on to complete the standard workings. This approach maximises the marks candidates can achieve
and that was seen in this particular question.
In the net assets table candidates often used the wrong number of years for the depreciation
adjustment and also it was also fairly common for candidates to add rather than deduct the
adjustment in respect of the goodwill which had arisen on the acquisition of a sole trader. Only a
minority of candidates missed that they should use fair value method for the non-controlling interest in
the goodwill and non-controlling interest calculations. Most candidates correctly calculated the
inventory provision for unrealised profit, although slightly less managed to correctly calculate the
property, plant and equipment provision for unrealised profit. The most common error in the joint
venture calculation was to pro-rate the profit figure, even though it clearly stated in the question that
this was for the nine month period.

4.2 Differences between IFRS and UK GAAP: joint ventures
UK GAAP IFRS
FRS 102 recognises implicit goodwill on Under IAS 28, goodwill is subsumed within the
acquisition of a joint venture and requires it to investment in joint venture figure.
be amortised.
FRS 102 does not require such detailed IFRS 12 specifies disclosure requirements for
information about the investee or about risks interests in joint ventures.
associated with the investment.
Candidates clearly struggled with the UK GAAP differences in relation to joint ventures. This was the
most poorly answered part of the whole paper, with candidates who did attempt this part consistently
scoring no marks. The majority of candidates included reference to one or more differences in the
preparation of group financial statements, which had no relevance to the differences in relation to joint
ventures. Answers included discussions around the use of the equity method for IFRS only and the
presentation of a separate column for UK GAAP (as opposed to a separate line for IFRS). Others
said that a joint venture under UK GAAP was treated as an intangible asset. Only a small minority of
candidates identified any relevant points here, although full marks were still seen by a very small
number of candidates.


Professional Level – Financial Accounting and Reporting - September 2016
Question 1
General comments
Part 1.1 required the preparation of a statement of profit or loss and a statement of financial position from
a trial balance plus a number of adjustments. Adjustments included property, plant and equipment
depreciation, revenue adjustment, a sale and finance leaseback and irredeemable preference shares.
Part 1.2 covered concepts looking at enhancing characteristics from the IASB’s Conceptual Framework in
relation to property plant and equipment. Part 1.3 required the preparation of a summarised statement of
financial position / balance sheet under UK GAAP.
(1.1) Chedington Ltd – Statement of financial position as at 31 March 2016
£ £
ASSETS
Non-current assets
Current assets
Inventories 23,250
Trade and other receivables (47,000 – 3,200) 43,800
108,350
Equity
5% irredeemable preference share capital 70,000
Retained earnings (70,140 – 3,500 (W6) + 347,750) 414,390
Equity 714,390
Deferred income (25,000 – 2,500 – 2,500) 20,000
Lease liability (W5) 220,218
240,218
Current liabilities
Trade and other payables (56,900 + (12,800 – 3,000)) 66,700
Deferred income (8,000 (W4) + 2,500) 10,500
Lease liability (240,735 – 220,218) (W5) 20,517
Taxation 67,600
165,317

Chedington Ltd – Statement of profit or loss for the year ended 31 March 2016
£
Revenue (W4) 2,196,000
Income tax (61,400 + 6,200) (67,600)
Workings
W1 Expenses
Cost of Admin
sales expenses
£ £
Draft 948,000 702,665
Closing inventory (26,700 – (230 x (100 – 85))) (23,250)
Electricity invoice (12,800 – 3,000) 9,800
Bad debt 3,200
Sale & leaseback – deferred income (W3) (2,500)
1,049,950 712,465

Land & Plant &
buildings machinery Total
£ £ £
Cost 980,000 543,000 1,523,000
Sale and leaseback (300,000 – 260,000) (40,000) (40,000)
Less: Land (280,000)
700,000
Accumulated depreciation (352,800) (113,125) (465,925)

Sale and leaseback (300,000 – 235,000) 65,000 65,000

700,000 / 50yrs (14,000)
(543,000 – 300,000 – 120,000) / 6yrs (20,500)
(120,000 / 6yrs) x 6/12 (10,000)
(260,000 / 10yrs) (26,000)
14,000 56,500 (70,500)
Carrying amount at 31 March 2016 1,011,575
W3 Deferred income
Sale and leaseback (260,000 – 235,000) = 25,000

25,000 / 10yrs = 2,500

W4 Revenue
£
Draft 2,464,000
Evershot orders – deferred income (80 x £100) (8,000)
Sale & leaseback – reverse proceeds (260,000)
2,196,000
W5 Finance lease
1 April b/f Interest (6.5%) Payment 31 March c/f

£ £ £ £
260,000 16,900 (36,165) 240,735
240,735 15,648 (36,165) 220,218
W6 Finance costs
£
Per nominal ledger 41,000
Less: lease payment (36,165)
Less: irredeemable preference share dividend (70,000 x 5%) (3,500)
Add: lease interest (W5) 16,900
18,235
Presentation of the statement of profit or loss and statement of financial position was generally either very
good, or very messy. Although, as has been previously indicated as acceptable, most candidates omitted
sub-totals on the statement of financial position, many also omitted totals for total assets and total equity
and liabilities on this statement and/or sub-totals on the statement of profit or loss and were penalised
accordingly. An ever-increasing number of candidates were let down by difficult to read handwriting.
Many candidates correctly recognised the revenue, finance costs and tax charge on the statement of profit
or loss. The vast majority of candidates used the recommended “costs matrix” when calculating expense
totals. Errors in this were few, with almost all candidates splitting expenses correctly between cost of sales
and administrative expenses, as indicated by the information in the question. The most common error was
not to adjust cost of sales by the annual deferred income on the sale and leaseback. The next was
adjusting for the incorrect electricity accrual.
The treatment of the finance lease resulting from the sale and leaseback was dealt with well, with a
majority of candidates preparing a completely correct finance lease “table” and correctly splitting the
closing lability between current and non-current. However, the deferred income part was less well dealt
with. Although a significant number of candidates correctly calculated total deferred income of £25,000,
and some then went on to calculate the annual element of this as £2,500, many then did nothing with
either of these figures. Others adjusted revenue by one or both of these figures. Some did arrive at the
correct total figure for deferred income at the year-end of £22,500 but failed to split it in their statement of
financial position into current and non-current. A significant number of candidates added the finance
charge on the leased asset to finance costs, but failing to deduct the payment which had been incorrectly
debited to finance costs.
On the statement of financial position most candidates provided correct figures for inventories, trade and
other receivables (although a few showed the bad debt allowance as a provision in liabilities), cash and
cash equivalents (although a few adjusted this figure), ordinary share capital and irredeemable share
capital. A few candidates incorrectly included the irredeemable share capital as a liability, sometimes with
a discounted figure. It was, however, relatively common to see the incorrect tax liability on the statement of
financial position, even where the tax charge had been correct.
Even on the high marking scripts, it was unusual to see the correct figure for total property, plant and
equipment, although, pleasingly, the audit trail to this figure was usually complete. The most common
errors in the working for property, plant and equipment included the following:
 Not adjusting cost and/or accumulated depreciation for the effect of the asset sold and leased
back.
 Adding the new plant to the cost of property, plant and equipment, when it was already included.

 Not deducting the cost of the new plant when calculating the depreciation charge on property,
plant and equipment held for the whole year, even where the depreciation charge on the new plant
had been correctly calculated elsewhere (for six months only).
 Not deducting the cost of the plant subject to the sale and leaseback when calculating the
depreciation charge on property, plant and equipment held for the whole year, even where the
depreciation charge on the leased asset had been correctly calculated elsewhere (over ten years,
not six).

(1.2) Enhancing characteristics

Comparability enables users to identify and understand similarities in, and differences between, items. The
note for PPE includes a reconciliation between the opening and closing carrying amounts. This information
allows users to make a clear comparison from one period to the next about how the company is investing
in its PPE. This information, along with the accounting policy note, allows users to make comparisons with
different entities to see how other companies structure and utilise their PPE in different ways. Consistency
of accounting policies from one period to the next also aids comparability in an entity. As IAS 16 is a very
structured standard there is little flexibility in the accounting treatment which will again ensure a fair
comparison can be made between different entities.
Verifiability helps assure users that information faithfully represents the economic phenomena it purports
to represent. For PPE which is reported using a historic cost method, the initial cost on acquisition is
known and hence verifiable, however this is then affected by the company’s depreciation policy.
Disclosure of the accounting policy will ensure that users can verify these amounts.
If a company uses a revaluation model this information may be seen to be more relevant, being one of the
fundamental qualitative characteristics, however it is more subjective and therefore it is even more
important that users can be confident that this information can be verified ie valuations were carried out by
suitably qualified professionals.
Timeliness – there is a balance between relevant information and timeliness of reporting. If an entity uses
the historical cost method, this information is known and will ensure that the financial statements are
completed in a timely manner. The revaluation model may be seen as more relevant however gaining
information regarding the latest valuation will take time and may hinder the timely completion of the
Understandability – The clear reconciliation provided for PPE with opening and closing carrying amounts
with movements during the year presents information in a straight forward manner which should be easily
understandable by all users. The statement of cash flow information also shows clearly the cash
movements in relation to PPE. The accounting policy note provides clear information about the PPE
figures and will assist a user’s understanding.
Candidates did not perform as well as usual on this concepts issue. Many candidates defined each of the
enhancing characteristics, which was not required. Most then made some attempt to link each
characteristic in turn to the provisions of IAS 16. Weaker candidates strayed into the realms of other
accounting standards which earned them no marks.
For comparability, the better candidates used the examples of disclosure of the valuation model used, the
depreciation polices, equivalent historical cost figures where the revaluation model was used, the detail
within the property, plant and equipment “table” – which allows comparison between companies using the
same policies. Weaker candidates missed the point that the policies needed to be comparable, or thought
that comparative additions and disposals for each year are given.
For verifiability, stronger candidates cited the use of historical cost figures as being more reliable than
valuations. Others made the point that users can verify the closing carrying amount by performing some
sort of “proof in total”, using the opening costs/carrying amounts and the disclosed depreciation policies.
Weaker candidates discussed how an auditor could verify the figures.
Timeliness was probably the least well-answered part with most candidates missing the point entirely that
timeliness is about the speed of reporting.

For understandability almost all candidates cited the provision of the property, plant and equipment “table”
as well as a number of IAS 16’s other disclosure requirements.

(1.3) UK GAAP
Chedington Ltd – Balance Sheet (Statement of financial position) as at 31 March 2016
£ £
Fixed assets 1,011,575
Current assets 108,350
Creditors: amounts falling due within one year (165,317)
Net current liabilities (56,967)

Total assets less current liabilities 954,608
Creditors: amounts falling due after more than one year (240,218)
Net assets 714,390
Capital and reserves 714,390
Answers to this part were very poor, with a high number of non-attempts and zero scores. This suggests
the vast majority of candidates are unfamiliar with the UK Companies Act formats.
Where marks were achieved, the most common heading given was “Current assets” (being the same
caption under IFRS). A few managed “Net assets” and some “Fixed assets”. When “Fixed assets” was
given, then often “Current assets” was not, with terms such as “Non-fixed assets”, “Variable assets” or
“Immovable assets” seen in its place. A handful of candidates managed the correct creditors headings, but
almost none had “Capital and reserves”.
Sadly, a good number of candidates wasted a lot of time simply writing out a summarised version of their
IFRS statement of financial position, with perhaps one correct heading. Others showed headings, but no
figures which no marks.


Question 2
General comments
given in the scenario. The issues covered the inventory valuation, a revaluation of property, plant and
equipment, a zero coupon bond and inter-company trading. Adjustments to four figures from the draft
consolidated financial statements were required along with a calculation of basic earnings per share. Part
2.3 required a discussion of the ethical issues arising from the scenario.
2.1
(1) Inventory
Per IAS 2, Inventories, inventories should be measured at the lower of cost and net realisable value
(NRV), although only cost information is provided for Folke plc. Cost comprises all costs of purchase, cost
of conversion and other costs incurred in bringing the inventories to their present location and condition.
NRV is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
To value the finished goods correctly, the costs of conversion need to be taken into account. The costs of
conversion consist of two main parts:
 Costs directly related to the units of production eg direct materials and labour
 Fixed production overheads that are incurred in converting materials into finished goods, allocated
on the basis of normal production capacity.
IAS 2 emphasises that fixed production overheads must be allocated to items of inventory on the basis of
normal capacity of the production facilities. Normal capacity is the expected achievable production based
on the average over several periods/seasons, under normal circumstances.
The allocation of variable overheads to each unit should be based on the actual use of the production
facilities.
Finished goods should therefore be valued at:
£
Materials cost 136,000
Direct labour 109,000
Variable overheads 65,000
310,000
Actual production: 2,500 £

Variable cost per unit: £310,000 / 2,500 124
Normal capacity: 3,000

Fixed cost per unit: £60,000 / 3,000 20
144
Finished goods (£144 x 180) 25,920
This will decrease cost of sales and hence there will be an increase to profit of £25,920 and inventories in
the consolidated statement of financial position will increase by £25,920.

(2) PPE Revaluation
Folke plc uses the revaluation model per IAS 16, Property, Plant and Equipment, so the valuation at
1 April 2015 should be recognised in the financial statements.
Land has increased in value, so at 1 April 2015 the carrying amount for land should be recognised at
£450,000 and the revaluation surplus should be £210,000 (£110,000 + (£450,000 – £350,000)), an
increase of £100,000. As land has an indefinite useful life there is no depreciation so these are the
balances at 31 March 2016 also.
Buildings have however decreased in value. A decrease in valuation should be recognised as an expense
unless the decrease reverses an earlier revaluation increase on the same asset that was recognised in
other comprehensive income and is held in the revaluation surplus. In such circumstances, the deficit
should be recognised in other comprehensive income to the extent of the previous increase.
The decrease in value of the buildings is £65,000 (£640,000 – £575,000). As no additional information is
provided it is assumed to be the same asset that was previously revalued upwards. Therefore as the
decrease is less than the previous increases in value recognised in other comprehensive income the full
amount will decrease the revaluation surplus and not be recognised as an expense as part of profit or loss
for the period.
At 1 April 2015 the carrying amount of buildings should be the revalued amount of £575,000 and the
revaluation surplus should be £95,000 (£160,000 – £65,000).
At 31 March 2016 depreciation should be recognised of £14,375 (575,000 / 40) as part of profit or loss for
the period and the buildings carrying amount should be £560,625 (£575,000 – £14,375).
(3) Zero coupon bond
The zero coupon bond is a financial asset and should be recognised when Folke plc enters into a
contractual provision of the financial instrument, which we assume to be 1 April 2015.
The bond should initially be measured at its fair value. Fair value is the price you would receive to sell the
financial asset in an orderly transaction between market participants at the measurement date. Fair value
is assumed to be the price paid for the bond as it is quoted in an active market, being £32,400.
Transaction costs, such as brokers’ and professional fees, should be included in the bonds initial carrying
amount. Hence the bond should initially be recognised at £33,293 (£32,400 + £893).
After initial recognition at fair value the financial asset should be measured at amortised cost
using the effective interest method.
Amortised cost is:

 The initial amount recognised for the financial asset, being £33,293
 Less any repayments of the principal sum, which there aren’t any as the bond is zero
coupon
 Plus any amortisation, using the effective interest rate of 4%.
£
Initial fair value 33,293
Add: amortisation (33,293 x 4%) 1,332
Therefore the expense of £893 and income of £2,600 should be reversed and income of £1,332 should be
recognised in the period. This income will also increase the value of the financial asset at the year end and
the £34,625 should be recognised as part of non-current assets.

(4) Inter-company trading

Group financial statements reflect the results and net assets of group members to present the group to the
parent’s shareholders as if it was a single economic entity. This reflects the substance of the group
arrangement as opposed to its legal form, where each group member is a separate legal person.
In the consolidated statement of financial position of Folke plc all of the assets and liabilities of the group
companies are added together and shown as if one. However, the single entity concept also means that
any inter-group transactions need to be eliminated, as otherwise such transactions would be double
counted in the context of the group as a single entity.
There are several elements to the inter-company trading.

£
Revenue (100%) 15,000
Cost of sales (85%) (12,750)
Gross profit (15%) 2,250
Revenue and costs of sales should be adjusted by the gross £15,000, as this was effectively a sale with
itself under the single entity concept. Closing inventories in cost of sales and current assets should be
adjusted (reduced) by the unrealised profit element of £2,250 as the goods have not been sold outside of
the group.
The unrealised profit element will also affect the group’s retained earnings, since there is no non-
controlling interest.
As the invoice for £15,000 is also unpaid at 31 March 2016, this amount will need to be eliminated from
both ‘Trade and other receivables’ and ‘Trade and other payables’.
Candidates made a reasonable attempt at this part of the question with most addressing all four issues
and including both calculations and narrative explanations. However a minority of candidates still lost
marks by focusing only on numbers and this was particularly noticeable in issues (1) and (3). Where
candidates did miss out an issue it was normally the zero coupon bond.
Issue 1: Pleasingly the majority of candidates arrived at the correct figure for closing inventory and noted
that the impact would increase closing inventory and decrease cost of sales (although a minority thought it
would increase cost of sales) and increase profit. Where errors were made it was generally due to a lack
of understanding as to the distinction between fixed and variable costs and/or the level of output that each
category of costs needed to be divided by. A significant minority of candidates tried to do some sort of
weighted average calculation and ended up with a confused calculation. Few candidates gained the full
marks available for discussing which costs should be included in inventory although nearly all commented
that inventories should be valued at the lower of cost and new realisable value.
Issue 2: Again this was answered well and nearly all candidates corrected calculated the relevant
revaluation gains and losses and the subsequent depreciation charge. Most candidates also clearly
understood the correct treatment of downward revaluations and when they should impact on equity or
profit or loss for the period. However many candidates wasted time by giving lengthy descriptions of the
general accounting rules for revaluations (even though it was clear that this company had carried out
revaluations in earlier years) and/or discussing the potential reserves transfer re depreciation although the
question stated that such reserves transfers were not carried out by this company.
Issue 3: This issue was poorly answered by most candidates. As always when a bond/loan is examined
many candidates assume it is a liability or fail to state clearly whether it is an asset or liability. Relatively
few candidates gained the simple marks for stating the financial instrument should be initially recognised
at fair value and what fair value meant or for referring to the subsequent treatment ie carried at amortised
cost using the effective interest rate. Many stated that the transaction costs should be expensed and
assumed that interest would be received in the year even though it was a zero coupon bond. Another
common error was to classify the financial instrument as part of equity/liabilities instead of an asset.
Issue 4: This was generally well answered with most candidates understanding why inter group
transactions and balances need eliminating on consolidation and why unrealised profits need to be
removed. However, a significant number of candidates did not do so well as they only focused on one
aspect of the transaction – normally the impact of the unrealised profit. A number of candidates were
confused about the adjustments to be made eg adding inter group sales to cost of sales (rather than
deducting it) and/or adjusting revenue for the PURP.

(2.2)
Folke plc
Total Total Profit for
assets liabilities Equity the period
£ £ £ £
Inventory 25,920 25,920
Revaluation (100,000 – 65,000) 35,000 35,000
Depreciation (14,375) (14,375)
Financial asset (35,000 – 34,625) (375) (375)
/ ((1,332 + 893) – 2,600)
Inter-co trading (15,000) (15,000)
PURP (2,250) (2,250)
Profit for the period adjustment 8,920 8,920
28,920 (15,000) 43,920
Draft 2,140,000 236,400 1,903,600 313,880
Revised 2,168,920 221,400 1,947,520 322,800
No. of shares Period in Weighted

issue average
500,000 3/12 125,000
(120,000)
380,000 9/12 285,000
410,000
Basic EPS = 322,800 = £0.79
410,000
Answers to this were very mixed. Many candidates did not appear to understand the dual impact of most
adjustments ie that if they impacted on profit they nearly always also impacted on assets. Some
candidates adjusted in the wrong direction eg reducing profit by the increase in closing inventories but
increasing assets by the same figure. A significant minority of candidates also just focused on the impact
on profit. There is still a common problem in that some students do not realise that an issue that causes
profit to be changed will have a similar impact upon equity,
With regard to the calculation of EPS many candidates struggled with calculating the weighted average
share capital. The most common error was to take the closing share capital and treat it as opening share
capital.
(2.3) Ethical issues

There are a number of issues which you should consider. The finance director is exerting undue pressure
on you and should not expect you to complete the draft financial statements in such a short period of time.
This could be considered to be an intimidation threat especially as Mary seems to be frightened of him.
Mary’s offer of the use of the company flat has led to a self-interest threat as you will personally gain from
completing the work in a hurried manner. As an ICAEW Chartered Accountant you are expected to follow
guidance in the fundamental principles set out in the ICAEW’s Ethical Code. These principles include
behaving in a professional manner at all times and with due care. Rushing to complete the financial
statements for personal gain would not be in accordance with the fundamental principles.
You should carefully assess the risks related to any inducement, being the use of the company flat for a
weekend.
Another ethical issue is in relation to the information about the forthcoming merger. You are expected to
maintain confidentiality at all times. Confidentiality is another of the fundamental principles and you are
required to respect confidentiality of information gained as an employee. You should not use this
information to gain personally (insider trading) and as a professional accountant you should be guided by
not only the Ethical Code itself but the spirit of it.
As a professional accountant you should also remain objective at all times and not be persuaded by undue
influence from others. It is important to note that Mary is not an ICAEW Chartered Accountant and
therefore is not bound by the same professional ethics as you.

Although you might feel sorry for Mary that the incomplete work may reflect badly on her you should carry
out your assignment to the best of your ability in the time available and calmly explain to the finance
director if there is an unrealistic timeframe being imposed on you. Hopefully, you will be able to explain the
issue and explain that Mary is not trained to complete the work more fully, so that it doesn’t reflect badly
on her. If you explain the issue immediately then the finance director might have time to discuss a possible
delay with the auditors arriving or a sensible solution such as concentrating on one area of the financial
statements. If the finance director is aggressive or abusive then you should consider discussing the issue
with another director.
You should also discuss with Mary that it is unfair and unrealistic for her to have been expected to prepare
all the information needed to prepare the draft financial statements and this should also be explained to
the finance director. You should decline the offer of use of the company flat.
If you are unable to come to an agreeable solution you should consult the ICAEW ethical handbook and
discuss the matter with the ICAEW confidential helpline. It is advisable to keep a record of all discussions
undertaken in regard to this matter.
There were some excellent answers to this part of the question with many candidates achieving full or
near full marks. Most candidates broke their answers down into different areas of ethics that were
impacted by the scenario, and backed these issues up with appropriate responses to the ethical
challenges. A small minority seemed incorrectly focused on Mary who was not an ICAEW Chartered
Accountant and as always with ethics some assumed they were in practice rather than working at the
company.

Question 3
General comments
This was a consolidation question. The first requirement asked for the goodwill calculation on the
acquisition of a subsidiary during the year. The main requirement was for the preparation of a consolidated
statement of profit or loss, along with an extract from the consolidated statement of financial position,
featuring two subsidiaries, one of which was acquired during the year. A draft consolidated statement of
profit or loss was provided along with the new subsidiary’s separate figures. Adjustments included a fair
value adjustment on acquisition, contingent consideration, group management charges and intra-group
sales of inventories.
(3.1) Goodwill – Crendell Ltd
£
Consideration transferred – cash 250,000
Shares (50,000 x £1.45) 72,500
407,500
470,800
Retained earnings
Per Question 147,000
Fair value adjustment 50,000
(422,000)
Goodwill 48,800
This was extremely well answered with most candidates arriving at the correct figure. Where mistakes
were made the most common ones were:
 Using the wrong figure for the contingent consideration, £100,000 was often seen.
 Failing to add the fair value adjustment to net assets (or occasionally even deducting it).
 Deducting impairments from the goodwill figure even though the requirement was to calculate the
goodwill arising on acquisition.
(3.2) Pentridge plc
Consolidated statement of profit or loss for the year ended 31 March 2016
£
Revenue (W1) 2,997,000
Profit from operations (W1) 1,302,100
Profit for the period 1,129,300
Owners of Pentridge plc (β) 1,107,735
1,129,300

Extract from consolidated statement of financial position as at 31 March 2016
£
Total assets (W2) 1,834,550
Total liabilities (W3) 385,970

Workings

Pentridge Crendell Ltd Adj Consol
plc
£ £ £ £
Revenue 2,643,000 432,000 2,997,000
– Inter-co trade (18,000+24,000) (42,000)
– Management fee (36,000)
Cost of sales – per Q (1,130,500) (196,400) (1,288,400)

– Inter-co trading 42,000
– PURP (2,000 + 1,500) (W6) (3,500)
Op expenses – per Q (327,800) (83,700) (406,500)

– FV deprec (W2) (10,000)
– Management fee 36,000
– Add contingent consideration (15,000)

– Lillington 142,500
(200,000 x 65p x 75%) (97,500)
Tax (285,000) (30,300) (315,300)

108,100
(2) Total assets

£
Pentridge plc 1,460,300
Lillington Ltd 367,800
Crendell Ltd 525,400
2,353,500
Remove investments at cost (part (3.1) 407,500 + 250,000 (W5)) (657,500)
Goodwill (part (3.1) 48,800 + 56,250 (W5)) 105,050
PURP (2,000 + 1,500) (W6) (3,500)
FV adj – PPE 50,000
FV – PPE deprec (50,000 / 5yrs) (10,000)
Management fee unpaid invoice (3,000)
1,834,550
(3) Total liabilities
£
Pentridge plc 269,100
Lillington Ltd 73,070
Crendell Ltd 31,800
373,970
Management fee unpaid invoice (3,000)
Additional contingent consideration (100,000 – 85,000) 15,000
385,970


£
Lillington Ltd (25% x 21,400) 5,350
Crendell Ltd (15% x 108,100 (W1)) 16,215
21,565
(5) Goodwill – Lillington Ltd

£
Goodwill 72,250
Non-controlling interest at acquisition (237,000 x 25%) (59,250)

237,000
Goodwill 72,250
Impairment (10,000 ½ + 6,000 ½) (16,000)
Goodwill at year end 56,250
(6) PURP
Pentridge Lillington
% £ £
SP 120 24,000 18,000
Cost (100) (20,000) (15,000)
GP 20 4,000 3,000
X 1/2 2,000 1,500
Answers to this part of the question were mixed. Most candidates did produce a “neat” consolidated
statement of profit or loss with a supporting consolidation schedule. However a minority of candidates did
not set out a consolidation schedule and simply added the numbers across on the face of the profit and
loss account. Unfortunately this meant that full marks could not be awarded for the adjustments (such as
the PURP) as it was impossible to tell which company’s figures were being adjusted. It is strongly
recommended that candidates use the standard workings as set out in the Learning Material. Although
most candidates did attempt to make some of the necessary consolidation adjustments few managed to
get them all correct. The most successfully attempted were the PURP and the elimination of the inter
group dividend. Very few candidates adjusted for the impact of the increase in the fair value of the
contingent consideration. Other common errors included:
 Incorrectly calculating the PURP and/or including it in the wrong column and/or adjusting it through
revenue rather than cost of sales.
 Adjusting the subsidiary’s column for the inter group sales and/or only adjusting for some of the
inter group sales.
 Adjusting for management charges through cost of sales rather than operating expenses.
 Omitting the extra depreciation resulting from the fair value adjustment and/or adjusting cost of
sales rather than operating expenses and/or adjusting it in the wrong column.
 Omitting the current year impairment and/or including cumulative impairments and/or adjusting
investment income rather than operating expenses.
 Making unnecessary adjustments to the profit of the subsidiary already consolidated before
calculating the NCI.
With regard to the calculation of total assets and liabilities by far the most common error was failing to
deduct the cost of the subsidiaries with only a small minority of candidates attempting this. A minority of
candidates also wasted time by calculating unnecessary figures (such as the NCI or retained earnings
relevant to the statement of financial position) and a few even attempted to produce a complete statement
of financial position. However most candidates did make many of the relevant adjustments such as for the
fair value changes, the PURP and the outstanding inter group balances. However presentation was often
disappointing with just a long list of numbers and no attempt to produce an “extract”.

Question 4
General comments
Part 4.1 required candidates to present extracts from the statement of cash flows for ‘cash flows from
financing activities’ and the balance on the share premium account. Part 4.2 required candidates to
explain the two different methods of analysing expenses in the statement of profit or loss and also how a
prior year adjustment should be accounted for.
(4.1)
Consolidated statement of cash flows for year ended 31 March 2016 (extract)

Proceeds from issue of ordinary shares (50,000 x £1.20) 60,000
Proceeds from issue of borrowings (160,000 – 90,000) 70,000
At 31 March 2016
Share premium account (W2) 10,000
Workings
(1) Share capital

£ £
B/d 500,000
Cash issue 50,000
C/d 650,000 Non-cash issue (β) 100,000
650,000 650,000
(2) Share premium

£ £
B/d 75,000
Non-cash issue (restricted) 75,000 Cash issue
(50,000 x 20p) 10,000
C/d (β) 10,000
85,000 85,000

£ £
Non-cash issue
(100,000(W1) – 75,000(W2)) 25,000
C/d 247,100 PorL 283,900
447,100 447,100
A good number of candidates achieved the maximum marks on this question. They generally did this by
producing T-account workings, as they would in a complete statement of cash flows question.
Presentation was usually good, with (for once) incorrect bracket conventions being rare. Even where full
marks were not achieved, the figures for proceeds from the issue of ordinary shares, and from the issue of
borrowings were almost always correct.

 Not debiting retained earnings with that part of the bonus issue which could not be absorbed by the
share premium account.
 Omitting the premium on the cash issue from the share premium account and thereby coming up
with a closing balance of zero.
 Not taking care over the order in which the share issues were made, and so posting the full price
issue to the share premium account before the bonus issue (such that it was possible then take an
increased amount of the bonus issue from share premium), again leading to a closing balance of
zero.
(4.2) (a) Analysis of expenses
Per IAS1, Presentation of Financial Statements, an analysis of expenses must be presented using either
the nature of expenses or their function.
Expenses classified by function

Expenses are classified according to their function as part of cost of sales, distribution or administrative
activities.
Expenses classified by their nature

Expenses are not reallocated amongst various functions within the entity, but are aggregated in the
statement of profit or loss according to their nature, eg purchases of materials, depreciation and employee
benefits.
This part of the question was usually well-answered. Most candidates knew that the two different methods
are to analyse by “nature” or by “function” and could give an example of a line from the relevant formats
under each by way of explanation. A number of candidates wrote out the whole of each format, which was
not necessary. Others went beyond the requirement by discussing which method might be the best.
A small minority of candidates discussed the difference between the accrual basis and the cash basis.
Discussions of the different measurement bases were also seen.
(b) Prior period error
Errors may be identified during the current period which relate to a prior period. An immaterial error may
be corrected through net profit or loss for the current period. However, where an error is material this
treatment would not be appropriate and instead they should be corrected retrospectively.
A prior period error is an omission from, or misstatement in, the entity’s financial statements for one or
more prior periods arising from failing to use, or misuse of, reliable information that:
 Was available when the financial statements for those periods were authorised for issue.
 Could reasonably be expected to have been obtained and taken into account in the preparation and
presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies,
oversights or misinterpretations of facts and fraud.
The error in the opening balance of trade receivables is a transposition error. As the error relates to the
closing balance of the prior year and is described as material, it should be adjusted for retrospectively.
Retrospective restatement includes correcting the recognition, measurement and disclosure of amounts of
elements of financial statements as if the prior period error had never occurred. This will involve restating
the comparative amounts for the prior period, ie 31 March 2015. ‘Trade and other receivables’ as part of
‘Current assets’ will decrease by £9,000 (£21,400 – £12,400) and decrease ‘Revenue’ by the same
amount. In the current period this will have the effect of decreasing ‘Retained earnings’ by £9,000, this
adjustment is shown as a separate line in the statement of changes in equity.

Answer to this part of the question were generally poor. A worryingly large number of candidates said that
this was an example of an adjusting event. Even where candidates said this was a prior period error, and
said that the financial statements needed to be corrected retrospectively, it was unclear from their answers
that they knew what this meant.
Some seemed to think this meant going back and adjusting the previous year’s financial statements.
There was some reference to correcting opening balances, but on the whole it was unclear that this would
be done via a restatement of the comparative figures, although many recognised that there would be an
adjustment to opening retained earnings in the statement of changes in equity. It was also common to see
that the adjustment should be recognised prospectively but the candidate then went on to explain
retrospective adjustment.


Professional Level – Financial Accounting and Reporting – December 2016
Question 1
Total Marks: 26
General comments
Part 1.1 tested the preparation of a statement of profit or loss and a statement of financial position from a
set of draft financial statements. Adjustments included borrowing costs, a government grant, an over-
provision for income tax in the previous year, an asset held for sale and an issue of redeemable
preference shares. Part 1.2 required a description of the differences between IFRS and UK GAAP in
respect of the financial reporting treatment of borrowing costs, government grants and assets held for
sale.
Kwano Ltd

£
Revenue 3,891,200

£ £
Assets
Non-current assets
Property, plant and equipment (2,123,500 + 1,143,140 (W3)) 3,266,640
Current assets
Inventories 1,250,500
1,831,060
1,878,960

£ £
Equity
Revaluation surplus (W6) 1,780,375
4,077,280
Borrowings 150,000
451,800
Current liabilities
Trade and other payables (498,520 + (150,000 x 6% 501,520
x 4/12) or (7,500 (W3) – 4,500 (W4)))
Taxation 115,000
616,520
Workings

Cost of Admin Other
costs
£ £ £
Per draft 2,108,300 605,200 301,800
Government grant (W3) 50,000
2,400,960 764,800 301,800

£
Carrying amount on classification as held for sale 301,500
Sale proceeds less costs to sell (55,400 – 7,500) (47,900)
253,600
Charge to revaluation surplus (301,500 – 170,000) (131,500)
Charge to SPL 122,100
(3) PPE
Land and Plant and
buildings equipment
£ £
Per draft 2,462,500 1,428,300
Borrowing costs (150,000 x 6% x 10/12) 7,500
Government grant (50,000)
Held for sale asset (301,500)
2,161,000 1,385,800
Depreciation charges:
Buildings (1,500,000 ÷ 40) (37,500)
Plant and equipment ((1,428,300 – 215,000) x 20%) (242,660)
2,123,500 1,143,140

(4) Finance costs

£
Per draft 11,750
Less: Borrowing costs included to be capitalised (150,000 x 6% x 6/12) (4,500)
Add: Dividend on redeemable preference shares (W7) 16,800
24,050
£
Per draft 724,740
Dividend on redeemable preference shares (W7) 15,000
At 30 June 2016 296,905

£ £
Per draft 1,925,000
Held for sale asset (W2) (131,500)
Depreciation charge on revalued amount (W3) 37,500
Depreciation charge on historic cost (975,000 ÷ 40) (24,375)
Transfer to retained earnings (13,125)
At 30 June 2016 1,780,375
Opening Interest expense Interest paid Closing

balance (5.6%) (5%) balance
Year ended 30 June £ £ £ £
2016 300,000 16,800 (15,000) 301,800
This was generally very well answered with nearly all candidates producing both the statement of profit
and loss and statement of financial position. However, some candidates lost marks for poor presentation,
by not adding numbers across or down or using abbreviations, which have no place is a set of published
On the statement of financial position the non-current asset held for sale was almost always seen in the
correct place below other current assets. Most candidates correctly calculated the depreciation charge for
buildings but it was far less common to see the correct calculation for plant and machinery, with the most
common error being to also charge for depreciation for the year on the asset under construction, when this
was not completed until the day after the year end. As ever, workings for property, plant and equipment
were often difficult to follow with no clear “audit trail” leading to the final figure appearing on the face of the
Most candidates did adopt the recommended “cost matrix” approach and entered the figures for
depreciation and the correction in respect of the government grant in the correct columns. However, it was
quite common to see the impairment of the land in cost of sales or other operating costs. Many candidates
dealt well with the income tax issues and it was quite common to see the correct figure for the revaluation
surplus.
Most candidates recognised that the redeemable preference shares were in substance a liability and went
on to produce the correct “table” to arrive at the closing liability. However, as has been noted in previous
reports where this topic has been set, many candidates then carried the table on for another year and
incorrectly split the liability into current and non-current amounts. A small number of candidates effectively
treated this transaction as convertible debt and wasted time carrying out lengthy discounting calculations.
Relatively few candidates managed to correctly adjust for all aspects of the loan taken out to fund the
construction of the machine (ie the adjustment to finance costs, the amount to be capitalised and the year-
end accrual).

Other common errors included:

 Adding construction costs to plant and machinery even though the question stated that the costs
had already been debited to property, plant and equipment.
 Calculating the impairment incorrectly by not deducting selling costs from the estimated sales
price.
 Not calculating or incorrectly calculating the amount of the impairment to be taken to the
 Making incorrect or one sided adjustments in respect of the annual transfer between the
revaluation reserve and retained earnings.
 Adding the revised profit for the year to retained earnings but not deducting the draft profit.
 Making unnecessary adjustments to the cash and cash equivalents figure.
 Deducting rather than adding the grant received to cost of sales.


1.2 Differences between IFRS and UK GAAP
UK GAAP IFRS
Borrowing costs
Under FRS 102 entities are allowed the choice of IAS 23 gives no choice. Capitalisation of borrowing
whether to capitalise borrowing costs or to costs in relation to qualifying assets is mandatory .
Government grants
Under FRS 102 grants are recognised using the IAS 20 allows either the deferred income method or
performance model or the accrual model. The the netting off method (where the grant is deducted
decision is made on a class-by-class basis. from the cost of the asset).
Under the performance model where no specific

future performance-related conditions are imposed
on the recipient, the grant is recognised in income
when the grant proceeds are received or
receivable. Where future performance-related
conditions are imposed the grant is recognised in
income only when those conditions are met.
Under the accrual model grants relating to assets

are recognised in income on a systematic basis
over the expected useful life of the asset. However,
this cannot be done by deducting the grant from the
carrying amount of the asset, but by recognising
deferred income.
FRS 102 provides no guidance on how to account Under IAS 20 a grant which becomes repayable is
for the repayment of a grant. accounted for as a change in an accounting
estimate.
Held for sale assets
Under FRS 102 there is no such category as a Under IFRS 5 held for sale assets are shown as a
“held for sale” asset. Such assets remain within separate category below other current assets.
fixed assets and are continued to be depreciated up Depreciation ceases when the asset is categorised
to the date of disposal. as held for sale.
This question was much better attempted than is often the case for “UK GAAP differences” questions.
Almost all candidates attempted this part and many achieved full marks. However, it was rare to see much
detail relating to the treatment of government grants with most candidates just focusing on the deferred
income/netting off issue. Weaker candidates confused the treatment of held for sale assets with that of
discontinued operations, stating that they would be presented in their own column.


Question 2
Total Marks: 34
General comments
Part 2.1 of this question required candidates to explain the financial reporting treatment of five accounting
issues, given in the scenario. The issues covered a loss-making associate acquired during the year, an
adjusting event after the reporting period, a provision for a legal claim and an onerous contract and a
related party transaction. Part 2.2 required the preparation of the provisions note to the financial
statements. Part 2.3 required an explanation of the ethical issues arising from the scenario and the action
to be taken.
Barbadine Ltd
2.1 IFRS accounting treatment
(1) Acquisition of loss-making associate
Per IAS 28, Investments in Associates and Joint Ventures, because this acquisition has given Barbadine
Ltd significant influence over Duku Ltd, Duku Ltd should be treated as an associate in the consolidated
financial statements, using the equity method.
In the consolidated statement of profit or loss the group’s share of the associate’s profit after tax should be
presented as a single line. If the associate is acquired mid-year then its results should be time
apportioned.
In the consolidated statement of financial position the interest in the associate should be presented as
“Investment in associate”/a single line under non-current assets. The associate should initially be
recognised at cost and subsequently adjusted in each period for the parent’s share of the post-acquisition
change in net assets (retained earnings). This figure should be reviewed for impairment at each year end.
Group retained earnings should include the group’s share of the associate’s post-acquisition retained
earnings.
Where an associate makes a loss, as here, the same principles apply, except that once the carrying
amount of the investment in the associate has been reduced to zero no further losses should be
recognised by the group, unless the group has a contractual obligation to make good the losses.
The figure for the investment in the associate in the consolidated statement of financial position is
therefore:
£
Share of post-acquisition change in net assets (6/12 x 137,600 x 40% =
27,520, restricted to 25,000) (25,000)
Nil
The figure for the share of loss in associate in the consolidated statement of profit or loss will be a loss of
£25,000, thus reducing Barbadine Ltd’s group profit by the same amount.

(2) Event after the reporting period
The discovery of the competitor’s cheaper prices is an event after the reporting period in accordance with
IAS 10, Events after the Reporting Period, being an event which occurred between the year end and the
date when the financial statements were authorised for issue. Furthermore it is an adjusting event,
because it provided evidence of conditions that existed at the end of the reporting period, ie evidence that
the net realisable value of these inventories was lower than their cost.
In accordance with IAS 2, Inventories, this product line should be valued at the lower of cost and net
realisable value (NRV). Cost is £75,000 (5,000 x £15). NRV is defined by IAS 2 as the estimated selling
price less the estimated costs of completion and the estimated costs necessary to make the sale. The
NRV of each unit is therefore £11.40 (12 – 0.50 – 0.10) giving a total NRV of £57,000 (5,000 x £11.40).
The carrying amount of inventories should therefore be reduced by £18,000

(75,000 – 57,000)/to £238,700 (256,700 – 18,000) in the draft consolidated financial statements, thereby
reducing group profit by £18,000.
(3) Provision for legal claim
Per IAS 37, Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised
where:
- there is a present obligation as a result of a past event (the past event is the claim)
- an outflow of resources (payment of the claim) is probable (ie more likely than not, as here, where
there is only a 10% chance of no damages being payable)
- the amount can be estimated reliably (as it has been by the lawyers).
Therefore a provision should still be made at 30 June 2016. This is a single obligation so the provision
should be based on the most likely outcome, ie a provision of £55,000. Since the claim is expected to be
paid in less than a year’s time the time value of money is unlikely to be material, so the provision has not
been discounted. The provision should be included in current liabilities.
Increasing the provision from £40,000 to £55,000 will reduce group profit by £15,000.
(4) Onerous contract
This is an onerous contract because the unavoidable costs of meeting the obligations under the contract
exceed the economic benefit expected to be received under it – ie Barbadine Ltd will have to pay out costs
of £20,000 each year for the next three years and will receive no benefit from the lease, as it cannot sub-
let the property.
Per IAS 37, if an entity has an onerous contract the present obligation under the contract should be
recognised and measured as a provision. Because the lease still has three years to run months the time
value of money is likely to be material, so the provision should be discounted.
The provision as at 30 June 2016 should be calculated as:
Year ended Rental (£) Discount factor £

30 June 2017 20,000 1/1.07 18,692
30 June 2018 20,000 1/1.072 17,469
30 June 2019 20,000 1/1.073 16,326
52,487
£18,692 will be shown as a current liability and (52,487 – 18,692) £33,795 as a non-current liability.
Creating a provision for the above amount will reduce group profit by the same amount/£52,487.

Calabash Ltd is wholly-owned by a member of Barbadine Ltd’s key management personnel, so Calabash
Ltd is a related party of Barbadine Ltd. The purchase of goods by Barbadine Ltd from Calabash Ltd is
therefore a related party transaction.
Disclosure is required of all related parties and related party transactions, even if the transactions took
place on an arm’s length basis. It seems unlikely from the facts that the transactions took place on an
arm’s length basis, as Paula approved the contract and she is a friend of John’s who got her job through
John (ie there is an indication that awarding this contract to John’s company may be some sort of payback
for this). Even if the transactions did take place on an arm’s length basis that fact may only be disclosed if
such terms can be substantiated.
Disclosure should be made of:

- The nature of the relationship (a company owned by a director of Barbadine Ltd)
- The amount of the transactions (£532,500)
- The amount of any balances outstanding at the year end (£101,600)
There is no requirement to identify related parties by name.
Candidates generally made a reasonable attempt at this part of the question with almost all candidates
attempting all five issues.
Issue (1): Almost all candidates correctly identified the acquisition as an associate although a small
minority thought that it was a subsidiary. Easy marks were available for saying that this was because there
was “significant influence” and that “equity accounting” should be used, but these points were not always
included in candidates’ answers. Most candidates did go on to explain how equity accounting is applied
and correctly calculated the share of the associate’s losses for the year. However, a number of errors
were made in this calculation; either by omitting to time apportion the loss for the six months of ownership
or by omitting to take only 40%, being the parent’s share.
Only a small minority of candidates went on to explain that the whole loss could not be set against the cost
of the investment, ie that the investment should be written down only to zero unless the group had a
contractual obligation to make good the losses. It was fairly common to see that the whole loss recognised
against the cost of investment, bringing the investment in associate figure to a negative, often with the
comment added that this would be shown as a liability.
Issue (2): The issue regarding the inventory valuation was generally correctly identified. However, mention
of the issue being as a result of an event after the reporting period was seen less frequently. Candidates
generally identified that an assessment of net realisable value (NRV) against cost needed to be made, but
there were often errors made in the calculations. The most common error was not taking into account the
additional packaging costs in the calculation of NRV. Others adjusted the cost figure when they should
have adjusted NRV. There was some confusion as to what impact a reduced closing inventories figure
had on cost of sales and hence profit for the year.
Issue (3): A number of candidates appeared to confused over the distinction between a contingent liability
and a provision. It was common to see a discussion centred around a contingent liability but then with an
adjustment made in liabilities. Most candidates did provide for the additional amount, even if they
described it as a contingent liability, although a large number of candidates thought that a weighted
average approach was needed to arrive at the best estimate, missing the point that this was a single
obligation. A significant minority of candidates did correctly identify the provision as being for a single
obligation and therefore provide for the £55,000. It was also common to see this amount being discounted,
even though the case was due to come to court shortly after the AGM.
Issue (4): An onerous contract which was correctly identified by the majority of candidates. However, a
significant minority simply discussed the accounting treatment of an operating lease. For those candidates
who did correctly identify the issue as being an onerous contract most did go on to apply discounting to
arrive at the correct figure for the provision. Common errors included applying the three year discount
factor to the full amount rather than to only one year’s payment, using four years of payments and
incorrectly splitting the liability into current and non-current.

Issue (5): The majority of candidates correctly identified this as a related party transaction; although a
minority thought that it was an inter-company transaction which needed eliminating. Most candidates did
discuss the main elements of the relationship and transaction and correctly concluded that disclosure was
required, although a small minority after discussing the issue then concluded that disclosure was not
required. A significant number of candidates made general comments about related party transactions
without ever relating their comments to the scenario which generally gained no or very few marks.

2.2 Provisions note
Legal claim Onerous lease Total

£ £ £
1 July 2015 40,000 - 40,000
Profit or loss charge (β) 15,000 52,487 67,487
30 June 2016 55,000 52,487 107,487
The provision for the legal claim arose in the previous year in relation to an isolated claim for wrongful
dismissal. The claim is likely to be settled in the year ended 30 June 2017.
The provision for the onerous lease arose on 30 June 2016 when the company moved out of leased
premises. The lease runs until 30 June 2019 and the terms of the lease do not allow the property to be
sublet. The provision has been discounted to a present value using a discount rate of 7%.
Candidates generally made some attempt at this part although answers were very mixed. Typically, no
total column was included and from the appearance of their note, a good number of candidates seemed
never to have seen such a disclosure note. The two different provisions were often combined into one
column with elaborate descriptions to the left of the figures explaining what the adjustments were for,
rather than the brought forward, charge for the year and carried forward figures required in such a note. A
number of candidates wasted time by also giving operating lease disclosures. Others simply explained the
required accounting treatment (in a summarised version of their answer to this previous part) rather than
providing the narrative required by the disclosure note.


2.3 Ethical issues
John’s financial accounting knowledge seems lacking, given that he failed to equity account for the
associate in the group financial statements and did not make the necessary provision for the onerous
contract. As an ICAEW Chartered Accountant John is obliged to comply with the ICAEW code of ethics,
including the principle of professional competence and due care, and should keep his knowledge up to
date.
Alternatively, it is possible that the incorrect accounting treatments were followed deliberately by John. All
the “errors” made by John have the effect of overstating the group profit for the year. The fact that John’s
future pension is linked to the group profits, including those of this year, gives a clear self-interest threat
for John. John should have ignored this self-interest threat and prepared the figures accurately, in
accordance with the principles of objectivity, independence and professional behaviour.
The fact that John has failed to disclose the related party relationship/transaction with his own company
also points to a possible lack of integrity. More so, if John engineered the purchases via his influence over
Paula and knew that the price his company was charging was not in Barbadine Ltd’s best interests.
There is a possible intimidation threat to yourself from John as your superior and his offer to recommend
you as his successor if you leave the financial statements as he drafted them creates a self-interest threat
for yourself. The fact that John has made this offer also adds to the theory that John lacks integrity.
You should mitigate the self-interest threat by taking the following action:
- Discuss each of the errors found with John, explaining the correct IFRS accounting treatment to
him.
- If John appears genuinely to be out of date tactfully suggest that he goes on an update course.
- Ensure the financial statements are corrected.
- If John refuses to amend the financial statements seek support from the managing director.
- Document all discussions.
- If you find yourself in a difficult situation, eg, caught between John and the MD, or subject to any
sort of intimidation threat, then consult the ICAEW helpline.
This ethics part was, as usual, generally well answered by candidates with almost all candidates making
some attempt at this part and a good number achieving full marks. Candidates correctly identified the
self-interest threat from John’s pension being linked to profits and for themselves being recommended as
the next finance director. Most spotted that the issue surrounding the related party transaction and the
unwillingness to change the financial statements to correct errors (most of which increased profits, thereby
increasing John’s pension) indicated that John lacks of integrity.
As ever, a minority of candidates referred to asking the ethics partner for advice, failing to put themselves
in the situation described in the scenario. A few suggested consulting the audit committee, when this was
not a public company. The most worrying aspect of answers, which was seen time and time again, was
that candidates said that since they were newly-qualified, they would lack professional competence and
due care.


Question 3
Total Marks: 17
General comments
Part 3.1 of this question required candidates to prepare extracts from a consolidated statement of cash
flows for a group which had acquired a subsidiary during the year. Other transactions included an issue of
ordinary shares and purchases and sales of property, plant and equipment, including a purchase under a
finance lease. Part 3.2 required an explanation of how to treat a purchase of goods transacted in Euros,
and the resulting year-end inventory and trade payable.
Pitaya plc
3.1 Consolidated statement of cash flows for the year ended 30 June 2016 (extracts)
£ £
Acquisition of subsidiary, Yantok Ltd, net of cash acquired (73,400)
(75,000 – 1,600)
(251,600 (W3) – 45,600)
Purchase of intangible assets (W1) (102,420)
Proceeds from issue of ordinary share capital (W4) 1,110,000
Payment of finance lease liabilities (100,000 – 34,500) (65,500)
Dividends paid to the non-controlling interest (W5) (238,180)
Workings
(1) Intangibles
£ £
B/d 375,800 P/L (amortisation) 112,000
Acq of sub (W2) 14,980
Cash (β) 102,420 C/d 381,200
493,200 493,200
(2) Goodwill on acquisition of subsidiary (Yantok Ltd)

£
Consideration – cash 75,000
– shares (200,000 x £1.20) 240,000
315,000
Net assets at acquisition (428,600)
14,980

£ £
B/d 4,438,100 P/L Depreciation 560,400
Acq of sub 302,500 Disposals (β) 251,600
Finance leases 520,300
Cash 701,300 C/d 5,150,200
5,962,200 5,962,200


£ £
B/d (800,000 + 150,000) 950,000
Acq of sub (W2) 240,000
Cash (β) 1,110,000
C/d (2,000,000 + 300,000) 2,300,000
2,300,000 2,300,000

£ £
Cash (β) 238,180 B/d 750,300
P/L 159,400
C/d 800,100 Acq of sub (W2) 128,580
1,038,280 1,038,280

£ £
Cash (β) 781,100 B/d 3,874,600
C/d 4,250,300 P/L 1,156,800
5,031,400 5,031,400
Answers to this part were polarised. A significant number of candidates clearly understood the statement
of cash flows and achieved full marks.
However, weaker candidates struggled, with many producing very incomplete extracts with what numbers
there were often shown under the wrong headings. This group of candidates often lost further marks by
failing to use brackets on the face of the statement of cash flows to show outflows of cash, or by failing to
take some of their final figures from their workings to the face of the statement of cash flows.
These candidates often ignored the intangible asset altogether and clearly did not realise that goodwill had
to be calculated and posted to the intangible asset working/account. Another very common error was to
treat the dividends paid to the non-controlling interest as dividend income under investing activities.

 When calculating the figure for the acquisition of subsidiary failing to deduct the cash held by the
subsidiary at acquisition from the consideration paid and/or including the share issue in the
consideration as well as the cash consideration.
 Making unnecessary adjustments to the figure for cash purchases of plant and equipment (which
was given in the question).
 Showing total payments under payment of finance lease liabilities, not just the capital element.
 Not including the non-controlling interest relating to the acquisition in the non-controlling interest
working.
 Treating the loss on disposal as if it were the disposal proceeds and/or crediting it to the property,
plant and equipment working.
 Not entering the share issue used to acquire the subsidiary into the share capital/share premium
workings or just accounting for the nominal value or the premium.
 Calculating the goodwill incorrectly by using the nominal value of the shares or just the premium
on issue as the consideration.
 Calculating goodwill but not including it in the intangible asset working.


3.2 Forex transaction
Per IAS 21, The Effects of Changes in Foreign Exchange Rates, a foreign currency transaction should be
recorded, on initial recognition, in the functional currency, by applying the exchange rate between the
reporting currency and the foreign currency at the date of the transaction/historic rate.
When the goods were received on 21 May 2016, they should have been recorded in purchases and trade
payables at the spot rate of €1:£0.90, ie at an amount of £194,400 (216,000 x 0.90).
However, at the year end, IAS 21 requires that any foreign currency monetary items are retranslated using
the closing rate. Monetary items are defined as “units of currency held and assets and liabilities to be
received or paid in fixed or determinable number of units of currency”.
The trade payable in respect of this purchase meets the definition of a monetary item and should be
retranslated at the closing rate. This would give a trade payable of £183,600 (216,000 x 0.85). This
exchange gain of £10,800 (194,400 – 183,600) should be included in the statement of profit or loss for the
year ended 30 June 2016.
Because inventory does not meet the definition of a monetary item, it should be left as originally
recorded/not restated.
This part was generally much better attempted than when this topic had been set previously as an
“explain” question. Nearly all candidates gained the basic marks for calculating the relevant figures and for
making some basic explanations, but few gave sufficient explanations to gain full marks.
In particular, relatively few candidates managed to clearly explain that payables are monetary items,
inventories are non-monetary items and which should be retranslated at the year-end. A surprisingly large
number of candidates suggested that the transaction should be accounted for when the order was placed
rather than when the goods were received.


Question 4
Total Marks: 23
General comments
4.1 required the preparation of a consolidated statement of financial position. The question featured two
subsidiaries, one of which gave rise to a gain on bargain purchase. Consolidation adjustments included
intra-subsidiary balances, unrealised profit on trading and a fair value adjustment on acquisition (of a
depreciating asset). 4.2 required an explanation of the single entity concept and the distinction between
control and ownership by reference to the consolidated statement of financial position prepared in 4.1.
Cloudberry plc
4.1 Consolidated statement of financial position as at 30 June 2016
£ £
Assets
Non-current assets
Goodwill (W3) 7,650
1,666,350
Current assets
Inventories (447,600 + 332,000 + 75,400 – 5,200) 849,800
Trade and other receivables (289,100 + 196,900 + 80,300 543,800
– 22,500)
Cash and cash equivalents (15,200 + 4,100 + 150) 19,450
1,413,050

Equity attributable to owners of Cloudberry plc
2,155,935
Non-controlling interest 303,565
Current liabilities
Trade and other payables (205,600 + 111,200 + 74,600 – 368,900
22,500)
Taxation (155,000 + 96,000) 251,000
619,900
Workings
(1) Net assets – Guava Ltd

£ £ £
Retained earnings
Per Q 428,200 102,600
FV adj 40,000 40,000
Deprec thereon ((30,000 ÷ 40) x 6) (4,500)
1,113,700 792,600 321,100

(2) Net assets – Mandarin Ltd

£ £ £
Retained earnings
Per Q (23,650) (18,600)
PURP (22,500 – 17,300) (5,200)
271,150 281,400 (10,250)
(3) Goodwill – Guava Ltd

£
Non-controlling interest at acquisition (FV) 160,000
17,650
7,650
(4) Goodwill – Mandarin Ltd

£

£ £
Guava Ltd
NCI at acquisition (FV) 160,000
Share of post-acq reserves (321,100 (W1) x 20%) 64,220
Less: Impairment (20% x 10,000) (2,000)
222,220
Mandarin Ltd
NCI at acquisition (W4) 84,420
Share of post-acq reserves (–10,250 (W2) x 30%) (3,075)
81,345
303,565
£
Per individual SFPs (675,700 + 752,400 + 195,100) 1,623,200
FV adj (W1) 40,000
Deprec thereon (W1) (4,500)
1,658,700
£
Cloudberry plc 532,250
Guava Ltd (321,100 (W1) x 80%) 256,880
Mandarin Ltd (- 10,250 (W2) x 70%) (7,175)
Less: Impairment (80% x 10,000) (8,000)
955,935

Almost all candidates made a reasonable attempt at this question and answers were generally well laid
out. Presentation of the consolidated statement of financial position was usually good with most
candidates gaining the available presentation marks. Candidates had obviously practised this question
style at length and as a result gained a significant number of marks, with some candidates achieving full
marks.
As stated in many previous reports, a number of candidates lost marks because of a lack of workings. For
example, when calculating the parent’s share of a subsidiary’s post-acquisition profits for retained
earnings it is not sufficient to show the percentage and then a reference to another working – candidates
must show the actual percentage and the actual figure being used. Unless a clear working is shown, no
marks will be awarded if the calculation includes an error.
The most common errors included the following.

 Failing to add the fair value adjustments for Guava’s property, plant and equipment to the
consolidated total for property, plant and equipment, even where these figures had been included
in the net assets working.
 Incorrectly calculating the cumulative depreciation on the fair value adjustment.
 Not adjusting for the impairment in goodwill in one or more of the relevant calculations (the most
common errors being not to give the non-controlling interest their “share“ of the impairment, and/or
reducing goodwill only by the parent’s share.
 Adjusting the non-controlling interest figures by the wrong total figure from the net asset tables.
 Calculating the non-controlling interest using the proportionate basis for both of the subsidiaries,
when one of them used the fair value method.
 Deducting the gain on bargain purchase from consolidated retained earnings rather than adding it.
 Netting off the gain on bargain purchase and the (positive) goodwill on the face of the
 Failing to adjust for the provision for unrealised profit on inventories in the net assets table, even
where inventories had been adjusted by this figure.
 Allocating the provision for unrealised profit solely to the parent.


4.2 The single entity concept and the distinction between control and ownership
The singles entity concept is an application of substance over form, in that the economic nature of the
relationship (Cloudberry plc can dictate the operating and financial decisions of Guava Ltd and Mandarin
Ltd and control their assets and liabilities) is applied in the consolidated financial statements rather than
the legal relationship of Cloudberry plc owning shares in the subsidiaries.
In accordance with the single entity concept the assets and liabilities of the parent and subsidiaries are
added together, as if the group were a single entity. So, for example, the trade receivables of Guava Ltd
and Mandarin Ltd are added to those of Cloudberry plc.
The single entity concept also means that any intra-group balances need to be eliminated, as otherwise
items would be double counted/the group as a single entity cannot trade with itself. So, for example, the
intra-group balance of £22,500 between Guava Ltd and Mandarin Ltd is removed from trade receivables
and from trade payables.
Any profit made within the group also needs to be eliminated, where that profit has not yet been realised
outside the group. For example, Mandarin Ltd sold goods worth £22,500 to Guava Ltd, making a profit of
£5,200. Because those goods remain in Guava Ltd’s inventories at the year end that profit has not yet
been realised outside the group – it is therefore removed from both the seller’s inventories and retained
earnings.
The distinction between control and ownership is reflected by including all/100% of the subsidiaries’ assets
and liabilities in the consolidated statement of financial position even where the parent does not own 100%
of that subsidiary. So, for Cloudberry plc’s consolidated statement of financial position, 100% of Guava
Ltd’s inventories are added in, even though, in effect, Cloudberry plc only owns 80% of those inventories.
This is because Cloudberry plc controls those inventories by virtue of its control of Guava Ltd.
Ownership is then reflected by showing that part of each subsidiary’s net assets included in the
consolidation which is not owned by the parent, as a non-controlling interest. Cloudberry plc’s
consolidated statement of financial position therefore includes total non-controlling interest of £305,565,
representing that part of the subsidiaries not owned by Cloudberry plc.
This was the most poorly answered part of a question on the whole paper, even though there was a very
similar question in the revision question bank. Candidates seemed to have lots to say but it was often not
relevant, with many writing at length on how control could be achieved. Others discussed the difference
between control and significant influence. There was often much discussion around the single entity
concept but yet the simplest point that assets and liabilities are added together was missed. Many
candidates did correctly state that inter-company balances should be eliminated and included a discussion
around ownership and the non-controlling interest, although many said that a non-controlling interest
figure is shown without any explanation as to what this represents.


Question 1
General comments
Part 1.1 required the preparation of a statement of profit or loss and other comprehensive income and a
statement of financial position from a trial balance plus a number of adjustments. Adjustments included a
revaluation of property, plant and equipment, inventory, foreign exchange and irredeemable preference
shares. Part 1.2 required the preparation of journal entries for the revaluation and an explanation of its
impact on distributable profits. Part 1.3 required the calculation of earnings per share and part 1.4 required
an explanation of the accounting treatment of the irredeemable preference shares.
(1.1) Ashgill plc – Statement of financial position as at 30 September 2016
£ £
ASSETS
Non-current assets
(497,250 + 270,000 + 209,780) (W2) 977,030
Current assets
Trade and other receivables (65,320 – 1,200 (W3)) 64,120
145,880
Equity
Ordinary share capital (450,000 + (450,000/5)) 540,000
Share premium account (132,500 – 90,000) 42,500
Equity 945,170
6% irredeemable preference share capital 100,000
Current liabilities
Taxation 36,400
77,740

Ashgill plc – Statement of profit or loss and other comprehensive income for the
year ended 30 September 2016
£
Revenue 1,186,400
Other operating costs (142,000)
Finance costs (100,000 x 6%) (6,000)
Income tax (29,400 + 7,000) (36,400)
Other comprehensive income

Gain on property revaluation (34,000 – 20,000)(W2) 14,000
Workings
W1 Expenses
Other
Cost of Admin operating
sales exp costs
£ £ £
Draft 496,700 278,400 126,000
Closing inventory (W4) (65,900)
Depreciation charge (W2) (37,020 + 12,750) 49,770
Impairment/revaluation (50,000 – 20,000) 30,000
Plant disposal proceeds reversed 16,000
Plant profit on disposal (16,000 – 14,450)(W2) (1,550)
Exchange loss (W3) 1,200
577,820 278,400 142,000

Land Reval. Buildings Reval.
Surplus Surplus
£ £ £ £
Valuation (819,800 – 320,000) 320,000 499,800
Carrying amount at 30 Sept 2015 320,000 20,000 476,000 156,000
Revaluation surplus (50,000) (20,000) 34,000 34,000
Valuation at 1 Oct 2015 270,000 – 510,000 190,000
Depreciation (510,000 / 40yrs) (12,750)
Reval surplus transfer
(12,750 – 8,000) (4,750)
497,250 185,250
Depreciation on cost: 400,000 / 50yrs = 8,000
Plant &
machinery
£
Cost 380,000
Less: accumulated depreciation (118,750)
Less: disposal (20,000 x 0.85 x 0.85) (14,450)
246,800
246,800 x 15% (37,020)
Carrying amount at 30 Sept 2016 209,780

Translation at 1 July 2016 (40,000 x 0.79) 31,600
Translation at 30 September 2016 (40,000 x 0.76) (30,400)
Exchange loss 1,200
W4 Inventory £
Per count at 30 September 2016 56,800
Add: additional inventory at 2 October 2016 8,400
Less: delivery 1 October 2016 (2,300)
Add: sales (3,600 / 1.2) 3,000
65,900
W5 Retained earnings £
Per nominal ledger 20,890
Add back irredeemable finance charge 6,000
Revaluation surplus reserve transfer (W2) 4,750
177,420
Presentation of the statement of profit or loss and other comprehensive income and statement of financial
position was generally good. Although, as has been previously indicated as acceptable, most candidates
omitted sub-totals on the statement of financial position, only a few also omitted totals for total assets and
total equity and liabilities on this statement and/or sub-totals on the statement of profit or loss. These
candidates were penalised accordingly.
A significant number of candidates produced a statement of profit or loss (ie stopping at profit for the year)
instead of a statement of profit or loss and other comprehensive income. Others wasted time by producing
a separate statement of comprehensive income. It was also common to see, in addition to a gain or loss in
respect of the revaluations during the year, other figures, most commonly the foreign exchange loss or the
profit on disposal of the plant. Others took the whole of the year-end revaluation surplus balance to other
comprehensive income or showed the reserve transfer here.
The vast majority of candidates used the recommended “costs matrix”. Common errors in this included:
 deducting the £16,000 plant disposal proceeds from other operating costs instead of adding them
back
 failing to include the £1,550 profit on the disposal of plant, even where this had been calculated in a
working. Others included this in the wrong column or in the wrong direction.
For the statement of financial position completely correct figures were often seen for most of the current
assets and liabilities. Most candidates also correctly dealt with the rights issue in share capital and share
premium. In retained earnings, a number of candidates deducted the £6,000 finance cost/dividend wrongly
posted there, instead of adding it back, and/or took the wrong figure from the statement of profit or loss
and other comprehensive income (ie the total comprehensive income for the year instead of the profit for
the year). The tax liability was usually correct, but some failed to include the additional £7,000 due in this,
even where they had included it in the tax charge for the year. Although the inventory figure was usually
correct, a number of candidates added the delivery made on 1 October 2017, instead of deducting it.
Others added the cost of the despatch on 1 October 2017, instead of deducting it, or calculated cost
incorrectly (using the mark-up given).
It was common to see the correct figure for total property, plant and equipment, or a figure that was correct
apart from the depreciation charge on the buildings. By far the most common errors were:
 calculating the depreciation charge on the plant without first taking into account the impact (or full
impact) of the disposal during the year
 calculating the depreciation charge on the buildings over 50 instead of 40 years.
Other common errors in the answers included the following:
 Showing the irredeemable preference shares in equity instead of in non-current liabilities.
 Deducting the foreign exchange loss from revenue.


(1.2)
Journal entries – Land and buildings
Revaluation – land £ £
DR: Revaluation surplus (SFP) 20,000
DR: Expense (PorL) 30,000
CR: PPE – land (SFP) 50,000
Revaluation – buildings
DR: PPE – buildings (SFP) 34,000
CR: Revaluation surplus (SFP) 34,000
Depreciation charge
DR: Depreciation expense (PorL) 12,750
CR: PPE – accumulated depreciation (SFP) 12,750
Revaluation transfer
DR: Revaluation surplus (SFP) 4,750
CR: Retained earnings (SFP) 4,750
The revaluation of the buildings is an upward revaluation and therefore leads to a surplus. Revaluation
gains are unrealised unless they reverse a loss previously treated as realised. Therefore there is no
impact on distributable profits from the revaluation gain.
The revaluation of land is a downward revaluation and leads to a loss. £20,000 of the loss reverses a
previous revaluation surplus and is therefore unrealised and has no impact on distributable profits.
However, the remaining £30,000 loss is recognised in profit or loss for the period and as such is realised
and therefore directly reduces the available distributable profits in the period.
The additional depreciation on an upward revaluation of a depreciable asset reduces profit but the
additional depreciation can be added back when calculating distributable profits and therefore the impact
will be neutral on distributable profits. This can be reflected via a reserves transfer between retained
earnings and the revaluation surplus.
Candidates generally made a good attempt at the journal entries. However, some candidates made the
marking more difficult by netting off the various entries to produce one combined journal, instead of
dealing with each element of the revaluations separately. Unless an audit trail was provided for these net
figures, marks were lost.
Attempts to explain the impact of the revaluation on distributable profits were poor. Many candidates gave
the “rules” for distributable profits, including those for a public company, without linking these rules to the
revaluation during the year.


(1.3)
Ashgill plc

1 Oct – 28 Feb 450,000 5/12 1.95/1.85 197,635
Rights issue 1 for 5 (450,000/5) 90,000
1 July – 30 Sept 540,000 7/12 – 315,000
512,635
5 shares @ £1.95 9.75
1 share @ £1.35 1.35
11.10
Theoretical ex-rights price per share: 11.10 / 6 = £1.85

Bonus fraction: 1.95 / 1.85
Basic EPS = 145,780 = £0.28

512,635
Answers to this part were on the whole good, with many candidates achieving maximum marks. However,
it was disappointing to see how many candidates could not calculate the correct theoretical ex-rights price
and often then went on to use the inverse of the correct fraction. Others split the year into two periods of
six months, rather than five before the rights issue, and seven after.

(1.4) Irredeemable preference shares
The irredeemable preference shares issued in the year provide the holder with the right to receive a
predetermined amount of annual dividend on a mandatory basis. If the dividend is unpaid at the year-end
it will be accrued for and paid in the following period as it is cumulative in nature.
Whilst the legal form of the irredeemable preference shares is equity, the shares are in substance debt,
with the fixed level of dividend being interest.
Under IAS 32 Financial instruments: Presentation these instruments should be classified as financial
liabilities because there is a contractual obligation to deliver cash. The preference shares should be
accounted for at amortised cost using the effective interest rate which is equivalent to the annual dividend
rate of 6% pa as the shares are not redeemable.
Most candidates were able to say that the irredeemable shares were a liability because the dividend was
mandatory and cumulative. However, not all made the point that although their legal form was equity, their
substance was debt. Most stated that the dividend should be treated as a finance cost. A very small
minority of candidates said that the shares should be treated as equity, but that the dividends should be
treated as finance costs.


Question 2
General comments
given in the scenario. The issues covered the recognition of revenue where goods have been supplied on
interest-free credit, a finance lease, a joint venture and a government grant. Adjustments to profit and non-
current assets were also required. Part 2.3 required a description of the UK GAAP differences in relation
to government grants. Part 2.4 covered concepts looking at the elements and how these are applied to
finance leases.
(1) Revenue
Brisco plc has supplied goods on interest-free credit. The sale can be recognised as the significant risks
and rewards of ownership have passed to the customer. The amount of the sale can be measured reliably
and it is assumed that the customer will pay for the goods, so economic benefits are expected to flow to
Brisco plc.
As the sale was on interest-free credit there are two elements to the sale, the first is the sale of the
machine and the second is the providing of finance arrangements to the customer. These two elements
should be considered and measured separately.
The initial deposit of £20,000 should be recognised as revenue immediately. The remainder of the sale
should be recognised at 1 October 2015 at a discounted amount of £52,406 (W) to take account of the
financing element. A receivable for the same amount should be recognised. Total revenue recognised
immediately is therefore £72,406 (52,406 + 20,000). Therefore, £7,594 (80,000 – 72,406) should be
reversed from revenue and receivables.
(£80,000 – £20,000)/1.072 = 52,406
At 30 September 2016 one year of finance income, as part of profit or loss for the period, should be
recognised of £3,668 (52,406 x 7%) and the receivable increased to £56,074.
(2) Finance lease
Under IAS 17 Leases the piece of machinery will be classified as a finance lease as Brisco plc is leasing
the asset for the whole of its useful life and is responsible for its insurance and general maintenance
during this period of use. Substantially all risks and rewards of ownership have been transferred. An
additional test is whether the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset.
PV calculation £
1 Oct 2015 6,000 6,000
30 Sept 2016 11,600 / 1.078 10,761
30 Sept 2017 11,600 / 1.0782 9,982
30 Sept 2018 11,600 / 1.0783 9,260
Present value of minimum lease payments 36,003
As the PVMLP is essentially the same as the fair value of the machine this again shows that this is a
finance lease.
On 1 October 2015 the finance lease should be recognised at the lower of fair value and the PVMLP,
hence at £36,000. A non-current asset should be recognised for the same amount.
The machine should be depreciated over the shorter of the useful life and the lease term, which are both
three years, hence £12,000 (£36,000 / 3yrs). The asset’s carrying amount at
30 September 2016 should be £24,000 (£36,000 - £12,000).

The lease liability should be increased by the annual interest payment, for year ended
30 September 2016 the finance cost is £2,340 and decreased by the annual lease payment of £11,600. At
30 September 2016 the lease liability should be recognised as £10,758 in non-current liabilities and
£9,982 (20,740 – 10,758) in current liabilities. Finally, the lease payments of £17,600 (6,000 + 11,600)
should be reversed from other operating costs.
1 Oct b/f Interest (7.8%) Payment 30 Sept c/f

£ £ £ £
(36,000 – 6,000) 2,340 (11,600) 20,740
20,740 1,618 (11,600) 10,758
(3) Joint venture
Brisco plc should recognise its investment in Cardew Ltd as a joint venture. The three entities have joint
control over Cardew Ltd and there is a contractual agreement in place to share profits and losses equally
with unanimous consent required.
IFRS 11 Joint Arrangements requires the use of the equity method for accounting for joint ventures. The
investment should initially be recognised at its cost, £40,000 in the consolidated statement of financial
position as part of non-current assets. At the end of each reporting period it should be adjusted for the
investor’s share of the post-acquisition change in net assets. Essentially this is the change in retained
earnings, the profit for the period less any dividends paid, so £18,000 ((72,000 – (120,000 x 15p)) / 3).
The investment should therefore be reclassified from current to non-current assets and the additional
£18,000 should be included to show a carrying amount of £58,000
(£40,000 + £18,000).
The dividend of £6,000 (40,000 x 15p) should not be recognised in the consolidated financial statements
of Brisco plc as equity accounting is used, hence reverse dividend income of £6,000 from the consolidated
profit or loss for the period. This should instead be replaced with share of profit after tax of £72,000 x 1/3 =
£24,000 resulting in an increase to consolidated profit of £18,000. The adjustment is required to avoid
double counting.
Per IAS 20 Accounting for Government Grants and Disclosure of Government Assistance,
grants should be recognised when there is reasonable assurance that:
 The entity will comply with the relevant conditions, here no such conditions apply; and
 The entity will receive the grant, Brisco plc is already in receipt of the grant.
As both of the requirements have been met the government grant should be recognised. However, IAS 20
requires government grants to be recognised in profit or loss over the periods in which the entity
recognises the expenses which the grant is intended to compensate. It is not appropriate to recognise the
grant on a cash receipt basis as accounted for by the financial controller.
Brisco plc’s stated accounted policy is to recognise a government grant using the netting-off method.
Under this method the grant is deducted from the carrying amount of the related asset. The grant will then
be recognised over the life of the related asset, ie the factory, by way of a reduced depreciation charge.
As no conditions were attached to the grant it would seem appropriate to net the full £100,000 off the
factory cost and depreciate the remaining net figure of £200,000 over the factory’s useful life. Land is
assumed to have an indefinite life and therefore the grant would not be released to profit and loss if any of
it was apportioned to the land value.

Other income should be reduced by £100,000 and instead credited to non-current assets. As depreciation
has already been charged for the year on the full factory cost of £300,000 an adjustment will need to be
made for this. 9,000 was recognised by the financial controller, although only £6,000 should have been
recognised, £3,000 should be credited to profit for the period and debited to non-current assets to adjust
for this.
At 30 September 2016 the carrying amount of the factory should have been £314,000
(120,000 + 200,000 – 6,000).
(£300,000 / 25 years) x 9/12 = £9,000

(£200,000 / 25 years) x 9/12 = £6,000
Generally candidates made a fair attempt at this question, with the majority of candidates at least having
an attempt at all four issues.
Issue 1: The first issue related to revenue recognition and caused candidates the most problems.
Although most candidates did explain the basic criteria setting out when revenue should be recognised
only a small minority explained the two elements to the sale – the sale of a machine and provision of
finance.
The majority of candidates did correctly identify that the deposit should be recognised as revenue although
then generally went on to describe the outstanding amount as deferred income and set up a liability
(despite the amount having been received and contradicting their own statement that the risks and
rewards of ownership had been transferred). Fortunately despite this most candidates gained some marks
for discussing the need to discount the future cash and the subsequent unwinding of the discount
(although following on from their earlier error many described this as interest payable rather than
receivable).
Issue 2: The second issue related to a finance lease was very well answered. Virtually all candidates
correctly described it as a finance lease and justified this decision using the information given in the
question. Slightly fewer actually calculated the present value of the lease payments but again nearly all
went on to produce the lease table, split the liability between current and non-current and identify the
finance charge. Where errors were made in this table it was mainly due to starting with the wrong opening
balance and occasionally treating the payments as if they were made in advance. Most candidates also
considered the asset side of the transaction and the need to recognise a non-current asset and depreciate
it. Some candidates lost marks by not specifying that initial recognition should be at the lower of FV and
PV of MLP’s and that depreciation should be at the shorter of useful life and lease term. Many, but not all,
candidates also recognised that the payments made should be reversed out of operating profit although
the deposit paid was often omitted from the amount.
Issue 3: The third issue related to a joint venture was reasonably well answered although answers were
often too brief or just repeated lengthy definitions from the standard. Most candidates recognised it was a
joint venture (although a significant minority described it as an associate). However, less then went on to
specify that the equity method of accounting should be used. The issue that caused the most problems
was the treatment of the dividend received from the joint venture which was often ignored when
calculating the carrying amount or added to it.
Issue 4: The final issue related to a government grant relating to the cost of a factory. Despite the fact that
the question specified that the company’s policy was to use the netting off method many candidates
wasted time describing the alternative methods available at length. There were no marks available for this
discussion. The other main errors related to calculating the appropriate depreciation charge (where often
the wrong number of months was used) and/or not recognising that depreciation had already been
charged based on the full cost.


(2.2)
Brisco plc
Non-current Profit for the
assets period
£ £
Brought forward 984,500 786,200
(1) discounted amount (7,594)
(1) unwinding of discount 3,668
(2) reverse lease payments 17,600
(2) finance cost (2,340)
(2) asset recognition & deprec 24,000 (12,000)
(3) JV income (24,000 – 6,000) 18,000
(3) JV investment 58,000
(4) Government grant (100,000) (100,000)
(4) Depreciation adjustments 3,000 3,000
Revised 969,500 706,534
The majority of candidates made a reasonable attempt at the adjustments to profit and non-current assets.
However due to a lack of narrative description and/or a poor ”audit trail” it was sometimes difficult to
understand what the recommended adjustments related to and hence candidates lost marks. The profit
adjustments were often more accurate than those for non-current assets.

(2.3) UK GAAP treatment
Brisco plc has used the netting off method to recognise the government grant. It has netted off the
£100,000 government grant against the cost of the factory. IAS 20 allows this treatment but also permits
the government grant to be separately reported as deferred income.
Under FRS 102 Brisco plc would not have the option to use the netting off method. Instead an entity has
the choice to use the performance model or the accrual model. Under the performance model as there are
no performance conditions attached to the government grant the grant would be recognised as income
when it is received.
Under the accrual model the grant would instead be recognised as deferred income of £100,000, hence
showing the government grant as part of liabilities and then releasing it over the useful life of the factory.
The overall impact on profit is the same as under IAS 20 as instead of reduced depreciation a deferred
income release is made of £3,000
(£100,000 / 25yrs x 9/12). Net assets would also be the same however property, plant and equipment
would be higher and there would be a balance on deferred income instead. This would be £97,000 of
which £4,000 would be current and £93,000 non-current.
Candidate responses for this requirement were consistent with past performance on UK GAAP issues.
Candidates generally made some attempt at it, although answers generally lacked any substance. It was
very unusual to see any reference to the performance/accrual models but most candidates got at least a
mark for identifying that while IFRS gives a choice of the netting off or deferred income methods UK GAAP
prohibits the former.


(2.4) Concepts – IAS 17 Leases
The three elements relevant to the statement of financial position are assets, liabilities and equity.
Assets and liabilities are most relevant in the recognition of a finance lease per IAS 17 Leases.
A non-current asset acquired under a finance lease meets the definition of an asset, even
though the asset is not legally owned by the entity. This is because:
 The asset is controlled by the lessee, as they have physical possession of the asset
and have assumed its risks and rewards.
 It results from a past event, ie the signing of the lease.
 The asset gives rise to future economic benefits, the lessee uses the asset to
generate revenue for the company.
The lease payments are a liability as the lessee has an obligation arising from a past event, as above, the
past event is the signing of the lease agreement, to transfer economic benefits, ie the lease payments.
Equity is defined as the residual amount found by deducting all of the entity’s liabilities from all of the
entity’s assets. This will therefore be the net contribution for the finance lease, ie the non-current asset
less the current and non-current liabilities.
This concepts element was poorly answered by almost all candidates. Rather than answering the
requirement given candidates generally explained how finance leases should be accounted for. Many also
wasted time discussing operating leases.


Question 3
General comments
This was a consolidation question. The question required the preparation of a consolidated statement of
profit or loss, along with an extract from the consolidated statement of financial position. A subsidiary had
been disposed of during the year and an associate was held. Adjustments included a fair value adjustment
on historic acquisition and intra-group sales of inventories. Part 3.2 required an explanation of the UK GAAP
differences in relation to the disposal of the subsidiary.
(3.1) Greystoke plc
Consolidated statement of profit or loss for the year ended 30 September 2016
Continuing operations £
Revenue (W1) 1,109,700
Share of profit of associate (W5) 2,070
Profit for the year from discontinued operations
(9,380 + 41,000) (W8) 50,380
Owners of Greystoke plc (β) 384,515
408,790
Extract from consolidated statement of financial position as at 30 September 2016
£
Non-current assets (W2) 831,290
Current assets (W3) 98,500

Workings

Greystoke plc Hincaster Ltd Adj Consol
£ £ £ £
Revenue 764,200 361,500 1,109,700
– Inter-co trading (16,000)
Cost of sales – per Q (312,700) (138,650) (439,060)

– Inter-co trading 16,000
– PURP (3,200 + 510) (W6) (3,710)
Op expenses – per Q (96,000) (74,350) (179,350)

– FV deprec (40,000 / 8yrs) (5,000)
Investment income 356,300 7,050

– Nateby disposal proceeds (260,000)
– Hincaster
(300,000 x 35p x 85%) (89,250)
Tax (92,000) (50,000) (142,000)

93,500

£
Greystoke plc 976,430
Hincaster Ltd 347,200
1,323,630
Remove investments at cost (310,000 + 215,000 + 45,000) (570,000)
Goodwill – Hincaster Ltd (25,100 – 4,000) 21,100
FV adj – PPE – Hincaster Ltd 40,000
FV – PPE deprec (40,000 / 8yrs) x 6yrs (30,000)
831,290
(3) Current assets
£
Greystoke plc 74,100
Hincaster Ltd 43,600
117,700
Less: PURP re Hincaster Ltd (W6) (3,200)
Less inter-company unpaid invoice (16,000)
98,500

£
Hincaster Ltd (93,500 (W1) x 15%) 14,025
Nateby Ltd (41,000 (W8) x 25%) 10,250
24,275
(5) Investment in associate (Shap Ltd)
£
Share of post-acquisition retained earnings ((39,300 – 32,400) x 30%) 2,070
46,560

(6) PURP
Hincaster Shap
% £ £
SP 125 16,000 8,500
Cost (100) (12,800) (6,800)
GP 25 3,200 1,700
1,700 x 30% 510 1½
(7) Goodwill – Nateby Ltd

£
282,060
(268,240)
Goodwill 13,820
Impairment brought forward (5,000)
Goodwill at date of disposal 8,820 2½
(8) Group profit/loss on disposal of Nateby Ltd

£
Less: carrying amount of goodwill at disposal (W7) (8,820)
Retained earnings (113,400 – (82,000 x 6/12 = 41,000)) 72,400
(322,400)
Profit on disposal 9,380 3
Candidate performance on this question was generally good, however only a few candidates achieved the
maximum marks on this part, largely because of missing figures from the calculation of consolidated non-
current and current assets.
Most candidates produced a complete consolidated statement of profit or loss. The most common errors on
the face of the statement were:
 taking the incorrect figure for “share of profit of associate”, often reducing this by the PURP in relation
to the associate, or taking the statement of financial position figure
 in the profit for the year from discontinued operations, not adding in the subsidiary’s profit for the year
up to disposal, or taking only the group share of this.
Common errors in the supporting workings included the following:
 Failing to reduce those profits by the share of the PURP relating to the associate.
 Not reducing the investment income by the disposal proceeds posted there in error.
 Increasing cost of sales only by the PURP in relation to the subsidiary, and not in relation to the
associate.
 Showing the impairment of goodwill in the subsidiary’s column of the consolidation schedule, instead
of in the parent’s.
 Allocating the cumulative depreciation adjustment on the fair value adjustment to operating
expenses, instead of the adjustment just for one year.
 Wasting time by showing six-twelfths of all of the figures from the subsidiary disposed of during the
year in the consolidation schedule.

The majority of candidates provided some kind of extract from the consolidated statement of financial
position for non-current and current assets, although a few gave only workings for these figures. By far the
most common error was not deducting the cost of the three investments from the non-current assets for the
parent. Pleasingly, few candidates added in the non-current and current assets of the associate. Other
common errors included:
 Deducting the PURP in relation to the associate from current assets, instead of just that relating to
the subsidiary.
 Deducting the intra-group balance with the associate from current assets, instead of just the intra-
group balance with the subsidiary.

(3.2) UK GAAP differences
Under IFRS 5 results of discontinued operations are presented as a one-line item in the statement of profit
or loss. This amount comprises the post-tax profit or loss of the discontinued operation and the post-tax
profit or loss on disposal.
Under FRS 102, UK GAAP, the results of the discontinued operations are presented in full in a separate
column of the income statement and restated for comparatives. The profit on disposal of the discontinued
operation is shown separately as part of operating profit of the continuing operations.
Almost all candidates made the point that under IFRS the results of discontinued operations are shown on
one line, and that under UK GAAP they are shown in a separate column. Very few went on to say what that
single line figure under IFRS is comprised of (even if they had calculated this figure correctly in 3.1). The
point about comparatives being restated under UK GAAP was also rarely made.
A significant number of candidates wasted time giving other IFRS and UK GAAP differences – usually those
relating to the calculation and/or treatment of goodwill arising on consolidation.


Question 4
General comments
Part 4.1 required candidates to present extracts from the statement of cash flows for cash flows from
investing and financing activities. Part 4.2 required a discussion of how the five fundamental principles set
out in the ICAEW’s Code of Ethics relates to the secondment in the scenario.
(4.1)
Statement of cash flows for year ended 30 September 2016 (extract)

Proceeds from sale of property, plant and equipment
(21,700 + 2,300) 24,000

Proceeds from issue of ordinary shares (60,000 x £1.35) 81,000
Workings
(1) PPE
£ £
B/d 674,300 Depreciation 72,300
Additions (β) 51,300 Disposal 21,700
C/d 631,600
725,600 725,600
(2) Share capital

£ £
B/d 400,000
Cash issue 60,000
C/d (531,000 – (60,000 x 35p)) 510,000 Bonus issue (β) 50,000
510,000 510,000
(3) Share premium

£ £
B/d 40,000
Bonus issue (restricted) 40,000 Cash issue (60,000 x 35p) 21,000
C/d (β) 21,000
61,000 61,000
Note: This T-a/c has been included for completeness although only the restricted bonus
issue working is required
£
Bonus issue (50,000 – 40,000) 10,000
C/d (153,600 + 40,000 (W3)) 193,600 CPorL 121,500

316,100 316,100
Pleasingly many candidates got the correct figures for the proceeds from selling the machine, the cost of
new equipment and the proceeds from issuing new shares in the period. However only a minority of
candidates managed to come up with the correct figure for the interim dividend. The fact that errors had
been made in recording the two share issues seemed to cause problems for most candidates. The
dividend paid could be calculated either by correcting the errors made when writing up the T-account (as
shown above) or writing up the T-accounts inclusive of the errors made. Most candidates produced a
mixture of the two.

As always with a statement of cash flows some candidates lost marks by not taking figures from workings
to the face of the statement or using the incorrect bracket convention on the face of the statement. The
one sided bracket convention was also used by a number of candidates, this approach gains no marks.

(4.2) Fundamental principles of the Code of Ethics
1) Integrity
A professional accountant should be straightforward and honest in all professional and business
relationships.
Fletch will need to carry out work in order to help prepare the financial statements for Tebay Ltd. He will
need to carry out this work to the best of his ability.
2) Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of others to override
professional or business judgement.
For example, if Fletch was offered a financial incentive, or permanent position to improve the results of
Tebay Ltd, he should decline the offer immediately and if appropriate report the person who offered the
incentive.
3) Professional competence and due care
A professional accountant has an obligation to maintain his or her professional knowledge and skills to an
appropriate level and to act diligently and in accordance with applicable technical and professional
standards.
Tebay Ltd will expect Fletch to have the right level of skills to help to complete the entity’s financial
statements. The practice that Fletch is on secondment from will have also assessed Fletch’s skills before
his secondment to Tebay Ltd. Although Fletch’s normal employer will no doubt have sent Fletch on update
courses as part of his continuing training it is up to Fletch as an ICAEW Chartered Accountant to ensure
that he completes the right level of Continuing Professional Development.
4) Confidentiality
A professional accountant should respect the confidentiality of information, ie not disclose it to others, as a
result of professional and business relationships.
Whilst Fletch is working on secondment he may discover information that he was not previously aware of
about Tebay Ltd. Even after Fletch returns to his normal place of work he will be expected to keep
information confidential that he was aware of.
5) Professional behaviour
A professional accountant should comply with relevant laws and regulations and should avoid any action
that discredits the profession.
Fletch should ensure that the financial statements comply with the Companies Act and in compliance with
IFRS. He should also ensure that he reports any illegal activities that he may have become aware of, such
as Money Laundering.
This was a slightly unusual ethical scenario as it asked candidates to focus on how the fundamental
ethical principles could be affected by a secondment to a client. Most candidates did little more than
identify and define the principles (and not always the right ones or all five) and made no attempt to relate
them to the scenario.


Question 1
Total Marks: 30
General comments
Part 1.1 of this question tested the preparation of a statement of profit or loss, a statement of financial
position and a property, plant and equipment movement note from a set of draft financial statements.
Adjustments included several transactions in respect of property, plant and equipment (a revaluation in the
year, purchase of an asset in a foreign currency, depreciation charges for the year and an asset held for
sale), a financial instrument and an income tax refund. Part 1.2 tested the two fundamental qualitative
characteristics, and the trade-off between them, illustrated with reference to the financial statements
prepared in Part 1.1.
Pisa Ltd
(a) Statement of profit or loss for the year ended 31 December 2015
£
Revenue 2,521,200
(b) Statement of financial position as at 31 December 2015

£ £
Assets
Non-current assets
Property, plant and equipment (2,257,500 + 613,093 (c)) 2,870,593
Current assets
Inventories 849,300
1,341,130
Non-current asset held for sale (9,000 – 600) 8,400
1,349,530

£ £
Equity
3,208,423
Current liabilities
Trade and other payables (392,500 – 5,300 (W3)) 387,200
Taxation 123,000
510,200
(c) Property, plant and equipment note

Land and Plant and
buildings equipment
£ £
Valuation/Cost
At 1 January 2015 1,847,500 789,600
Revaluation (2,300,000 – 1,847,500) 452,500
Additions (247,450 + 5,300 (W3)) 252,750
2,300,000 1,022,350
Accumulated depreciation
At 1 January 2015 53,900 315,840
Charge for the year ((2,300,000 – 600,000)/40) (W4) 42,500 103,177
Classified as held for sale ((20,000 – 10,240) + 1,840) (W2) (11,600)
Impairment loss (W2) 1,840
42,500 409,257
Carrying amount
At 31 December 2015 2,257,500 613,093
At 31 December 2014 1,793,600 473,760
Workings

Cost of Admin Other
costs
£ £ £
Per draft 1,057,300 587,600 245,500
Income tax refund 5,500
Preference dividend paid (30,000)
Depreciation charges (c) 103,177 42,500
Forex difference (W3) (5,300) (5,300)
1,157,017 594,800 251,000


£
Carrying amount on classification as held for sale (20,000 x 10,240
80% x 80% x 80%)
Sale proceeds less costs to sell (9,000 – 600) (8,400)
1,840
(3) Forex difference

£
Euro purchase should have been included at 106,000 x 0.85 90,100
Euro purchase included at 106,000 x 0.80 (84,800)
5,300
(4) Depreciation charge on plant and equipment

£
On additions (252,750 (c) x 20% x 2/12) 8,425
On b/f (473,760 x 20%) 94,752
103,177

£
Per draft 1,327,840
At 31 December 2015 1,213,173

£
Per draft 512,600
Revaluation in year (2,300,000 – 1,793,600) 506,400
Depreciation charge on buildings for current year (c) 42,500
Depreciation charge on buildings based on HC (750,000/40) (18,750)
(23,750)
At 31 December 2015 995,250
B/f Interest expense Interest paid C/f

(6.3%) (6%)
£ £ £ £
31 December 2015 500,000 31,500 (30,000) 501,500
There were some excellent, beautifully presented answers to this question, but there were also some
incomplete, very messy ones. Almost all candidates produced a statement of profit or loss and a
statement of financial position although, as always, some presentation marks were lost for not putting in
totals and/or using abbreviations. With regard to the statement of profit or loss a number of candidates did
not include a sub-total for profit before tax and/or included the finance cost in the wrong place. In the
statement of financial position the non-current asset held for sale was sometimes seen at the top or in the
middle of current assets or included within non-current assets. A number of candidates also showed non-
current liabilities after current liabilities.
However, the standard of the property, plant and equipment movement note was generally very poor.
Many candidates wasted time producing detailed workings and then effectively reproducing the same
information in the disclosure note. It was clear that the majority of candidates did not understand what the
note should look like and sometimes it was hard to distinguish between what was a working and what was
meant to be the note. Many lost marks by not showing the figures for the depreciation charge and
additions to plant and equipment as single figures. It was also clear that very few candidates knew how to
deal with the transfer of the non-current asset held for sale out of non-current assets and many also
struggled with the revaluation with relatively few showing the necessary adjustments to both cost and
accumulated depreciation. As always it was often hard to see an “audit trail” for the total depreciation
figures used in this note and in the costs working and often the figure for additions in the note was different
to that used to calculate the depreciation charge on those additions.

Fewer candidates than usual adopted the recommended “costs matrix” approach, and instead produced
linear workings or bracketed workings on the face of their statement of profit or loss. As ever, a number of
candidates (most commonly those who started a costs matrix showing the draft cost figures in brackets)
lost marks for incorrect signage/direction of their adjustments. The most common error was to adjust cost
of sales and administrative expenses in the same direction for the foreign currency gain – as if this was a
reallocation of the gain. Given that the vast majority of candidates debited property, plant and equipment
and trade and other payables then two credits were needed here to complete the double entries.
With regard to calculations, nearly all candidates correctly calculated the depreciation charge for buildings,
the foreign currency gain and the carrying amount of the non-current asset held for sale. Many candidates
also arrived at the correct figures for the impairment, the tax charge and tax liability and for the preference
shares, with most then correctly including the preference shares as a non-current liability. However, a
minority of candidates wasted time producing complicated workings for the preference shares, attempting
to discount the future payments ie treating the preference shares as a compound financial instrument.
Others arrived at the correct figure in a working but then took the par value of £500,000 or the balance as
at the following year end to non-current liabilities. Sometimes attempts were made to split one of these
figures between current and non-current liabilities. Others showed finance costs as the dividend paid on
the preference shares instead of as the true interest expense, even where the latter figure had been
calculated to arrive at the correct carrying amount for the preference shares.
An encouraging number of candidates also arrived at the correct figure for the reserves transfer, although
a worrying few transferred the whole of the revaluation gain made during the current year from the
revaluation surplus to retained earnings. Others incorrectly calculated the depreciation charge based on
historic cost.

 Making the adjustment for the income tax refund in the wrong direction in the costs working. Other
candidates set this off against the balance of cash and cash equivalents (or adjusted cash and cash
equivalents by some other inappropriate figure).
 Miscalculating the depreciation charge for plant and equipment by using the wrong number of
months for the additions.
 Failing to adjust the additions to plant and machinery for the translation error made, even where the
foreign currency gain had been correctly calculated.
 Using the wrong number of years when calculating the carrying amount of the machine on
classification as held for sale.
 Not adjusting the trade and other payables figure to reflect the foreign currency gain.
 Failing to back out the draft profit figure from retained earnings.
 In addition to backing out the dividend paid on the preference shares from administrative expenses,
also adding in the true interest expense. Others deducted the amount paid from retained earnings.


1.2 Relevance and faithful representation
Relevant financial information is that which is capable of making a difference to the decisions made by
users. The figure for the valuation of land and buildings for Pisa Ltd is relevant to the users as it gives
them additional information about what the assets of the company are actually worth.
Financial information is capable of making a difference to the decisions made by users if it has predictive
value, confirmatory value, or both. For example, the revenue figure for Pisa Ltd can be used by users to
predict future revenues, but can also be used to confirm predictions they made in previous years.
The relevance of financial information is also affected by its nature/and its materiality. Information is
material if omitting it or misstating it could influence users’ decisions. The asset held for sale, although a
relatively small amount, may be an important figure for the users of Pisa Ltd as it tells them that the
company is divesting itself of assets.
To be useful financial information must faithfully represent the phenomena that it purports to represent. A
perfectly faithful representation should be complete, neutral and free from error. The cost of plant and
equipment in Pisa Ltd, measured using the cost model is likely to be a faithful representation as it is based
on transactions that took place at a point in time. In contrast, the accumulated depreciation figure may not
be, as useful lives and depreciation rates are based on judgement.
Substance over form is also implied in faithful representation because faithful representation of a
transaction is only possible if it is accounted for according to its substance and economic reality. Hence,
the redeemable preference shares which Pisa Ltd issued should have been accounted for in accordance
with their substance, as a long-term loan, as opposed to their legal form of equity.
The conflict between relevance and faithful representation can best be illustrated by considering the
figures for Pisa Ltd’s property, plant and equipment. Although the valuation figure for land and buildings is
likely to be high in relevance it is low in faithful representation, as all valuations are subject to judgement.
Conversely, the historic cost figure for plant and equipment is high in faithful representation (based as it is
on fact) but is low in relevance, as it is largely an out-of-date figure.
As usual, the answers to the concepts question were disappointing. Most candidates gained some marks
by picking up the key phrases from the open book text to explain the two concepts but many went no
further than this. Others, seemingly unaware of the information in the open book text, wrote only that
“faithful representation” meant that information was “faithfully represented” and that “relevance” meant that
information was “relevant”.
Those that went further frequently used the revaluation and the preference shares as their examples from
the information in the question. However, a worrying number of candidates suggested that the use of a
valuation figure illustrated “faithful representation” and that the use of historical cost illustrated “relevance”,
instead of the other way round. Many presented long, circular arguments in trying to explain the conflict
between the two concepts, without ever really getting anywhere. Many wrote at length on the merits of the
property, plant and equipment movement note, without picking up many, if any, marks.

Maximum full marks (max 3½ for OBT refs) 5

Question 2
Total Marks: 34
General Comments
Part 2.1 of this question required candidates to explain the IFRS financial reporting treatment of three
issues given in the scenario. The issues covered borrowing costs, research and development expenditure
and a change in an accounting policy. All relevant calculations were required, as well as journal entries.
Part 2.2 required a calculation of distributable profits, with an explanation as to where the finance director
had made errors in his own calculation of this figure. Part 2.3 required a discussion of the ethical issues
arising from the scenario and the action to be taken. Part 2.4 required candidates to describe any
differences between IFRS and UK GAAP in respect of borrowing costs and development costs.
Naples plc
2.1 IFRS financial reporting treatment
(1) Borrowing costs
In accordance with IAS 23, Borrowing Costs, directly attributable borrowing costs relating to qualifying
assets should be capitalised during the qualifying period. If the construction is financed out of general
borrowings the amount to be capitalised should be calculated by reference to the weighted average cost of
the general borrowings. In this case the weighted average cost of the loans is
5.2% (((£500,000 x 6%) + (£800,000 x 4.7%))/1,300,000).
Capitalisation should commence when the entity incurs expenditure for the asset (1 February 2015),
incurs borrowing costs (1 January 2015) and undertakes activities that are necessary to prepare the asset
for its intended use (1 January 2015) so from 1 February 2015. Capitalisation should cease when the
asset is ready for use, so borrowings should only have been capitalised for nine months.
Luigi capitalised borrowing costs of £67,600 ((£500,000 x 6%) + (£800,000 x 4.7%)). This figure needs to
be deducted from the 650,000 before the borrowing costs to be capitalised are calculated. Therefore only
£22,714 ((650,000 – 67,600)) x 5.2% x 9/12) of the borrowing costs should have been capitalised The
remaining interest of £44,886 (67,600 – 22,714) should be included in the statement of profit or loss as a
finance cost.
£ £
Dr Finance costs 44,886
Cr Property, plant and equipment – cost 44,886
Depreciation should have been charged from when the building was ready for use ie from 31 October
2015. The charge for the year should therefore have been £2,017 (650,000 – 44,886)/50 x 2/12). The
£ £
Dr Depreciation charge 2,017
Cr Property, plant and equipment – accumulated 2,017
depreciation
The carrying amount of property, plant and equipment at 31 December 2015 will therefore reduce by
£46,903 (44,886 + 2,017)/the asset in the course of construction will be
£603,097 (650,000 – 44,886 – 2,017).
(2) Research and development expenditure
In accordance with IAS 38, Intangible Assets, all expenditure that arises in the research phase should be
recognised as an expense when incurred because there is insufficient certainty that the expenditure will
generate future economic benefit. Development costs must be capitalised only once the IAS 38 criteria are
met.

Therefore the costs of £55,500 incurred before the project was assessed as being commercially viable
should not have been capitalised. The marketing costs should not have been capitalised because they
cannot be directly attributed to producing or preparing the asset for its intended use. The cost of the
intangible asset should therefore be reduced by £165,500 (390,500 – 225,000), leaving a carrying amount
of £225,000.

£ £
Dr Profit or loss account 165,500
Cr Intangible assets – cost 165,500
An intangible asset with a finite useful life, as here, should be amortised over its expected
useful life. Luigi should therefore have charged amortisation for four months of the current
year, over an expected three-year useful life, a charge of £25,000 (225,000 x 4/36). The
£ £
Dr Amortisation charge 25,000
Cr Intangible assets – accumulated amortisation 25,000
The carrying amount of intangible assets at 31 December 2015 will therefore reduce by
£190,500 (165,500 + 25,000)/will be £200,000 (225,000 – 25,000).
(3) Change of accounting policy
IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, only allows a change in an
accounting policy if:
 it is required by an IFRS; or
 it will result in the financial statements providing reliable and more relevant information.
This scenario would appear to meet the latter condition by “better matching purchases made to sales”. It is
essentially a change in a recognition policy.
However, a change in an accounting policy should be applied retrospectively, ie as if the new policy had
always applied. This means that Luigi should also have recognised the stores as inventory at
31 December 2014 and all previous years.
Where it is impracticable to determine the cumulative effect, as at the beginning of the current accounting
period, of applying a new accounting policy to all prior periods, an entity should adjust the comparative
information to apply the new policy from the earliest practical date. Therefore Luigi should have adjusted
the 2014 comparatives to include closing inventories of consumable stores of £31,200. The impact of this
on the 2015 financial statements will be to include opening inventories of consumable stores of £31,200,
with a corresponding adjustment to retained earnings brought forwards (which will be shown in the
statement of changes in equity).
The journal entries to achieve this are:
£ £
Dr Cost of sales 31,200
Cr Retained earnings 31,200
This will have the effect of reducing profit for the year by £31,200, with a corresponding
increase to the profit for the previous year.
Candidates generally made a reasonable attempt at this question scoring all of the easier marks to gain a
solid pass. Most answers were a good mixture of explanations and calculations, as opposed to answers to
this question type in some earlier sessions, which focused on calculations at the expense of explanations.
Almost all candidates attempted all three of the issues in this part, with the occasional missing answer to
Issue (3). A minority of candidates failed to provide the required journal entries.
Issue (1): Most candidates made a good attempt at answering this issue, correctly identifying that the
loans were not taken out specifically for this project and that a weighted average cost of general
borrowings should be calculated. The majority of candidates who correctly identified that a weighted

average calculation was necessary also correctly calculated the percentage to be used. However,
candidates did not always state that it was directly attributable borrowing costs which should be capitalised
and a significant number of candidates discussed whether the asset was a qualifying asset even though
this had been stated in the question. A very significant number of candidates said that Naples plc “can” or
“may” capitalise borrowing costs, rather than saying that they “should” or “must” (even where they then
went on in 2.4 to say that under IFRS borrowing costs should be capitalised).
Almost all candidates correctly identified the date from which the borrowing costs should be capitalised
and almost as many correctly identified the appropriate date on which capitalisation should cease, along
with the correct explanation. Most candidates correctly calculated the figure which had incorrectly been
capitalised during the year, although less went on to back this out of the cost of the building before
calculating the amount of interest which should have been capitalised. The other common error here was
to base the interest on the two loan values rather than on the expenditure incurred. A minority of
candidates either didn’t pro-rate the interest or did so by an incorrect number of months.
The majority of candidates identified that depreciation needed to be recognised, even where they had
incorrectly stated that borrowing costs should not be capitalised (usually on the grounds of these being
general loans). The most common errors here were not adjusting the cost of the building by the
appropriate (own figure) interest adjustments, based on the earlier part of their answer, or calculating
depreciation for the incorrect number of months. A majority of candidates went on to provide a carrying
amount for the office building at the year end, although often there was no working to accompany this
(own) figure which meant that it gained no marks.
As stated above, a number of candidates failed to provide journal entries. Of those candidates who did,
the journal for the depreciation adjustment was generally correct, but the journal for the borrowing costs
was often confused. Candidates would write out what the journals should have been and then what was
done, but their final journal setting out the correction was sometimes not clearly linked to the previous two
steps. The most common error was, once again, not showing an “audit trail” for the net adjustment that
needed to be made, which again led to a loss of marks.
Issue (2): This issue was also dealt with quite well although candidates did generally lose some marks
here for a lack of explanation. Most candidates correctly identified that both the research and marketing
costs should be expensed, although as stated above this was not always explained. A general discussion
on when development costs should be identified was provided by most candidates although it often lacked
any conclusion relating back to the scenario. Most candidates went on to calculate amortisation although
less went on to finalise with a carrying amount for the intangible asset. Where journal entries were given,
they were almost always correct. However, some candidates combined two sets of journals (the first
writing off the expenditure which was not to be capitalised and the second putting through the amortisation
charge) without showing how any net figures had been calculated.
Issue (3): This issue was less well answered. A few candidates missed the point entirely and simply
discussed IAS 2, Inventories, and how inventory should be valued. However, a pleasing number of
candidates did identify that this was a change in accounting policy, and that it should therefore be adjusted
for retrospectively. Only a minority thought that it was a change in accounting estimate. It was good to see
that a significant number of candidates correctly discussed the issue about whether the new policy
presented reliable and more relevant information.
Adjustments which were then explained were generally quite confusing to read with candidates mixing the
current and previous years up on a regular basis. Again, it was pleasing to see that a significant number of
candidates identified and discussed the “impracticality” issue, although a few candidates simply stated that
the prospective approach should be adopted as a result. Where journal entries were presented there was
a mix between candidates either debiting or crediting retained earnings, although this was probably led by
the confusion over which year they were adjusting.


2.2 Distributable profits
Distributable profits are defined as accumulated realised profits less accumulated realised losses.
However, there is an additional restriction for public companies, that they may not make a distribution if
this reduces their net assets below the total of called-up share capital and undistributable reserves.
Both the share premium account and the revaluation surplus are unrealised reserves and may not be
distributed.
The only reserve of Naples plc that could have been distributed is retained earnings.
Distributable profits should therefore have been calculated as:

£
Original retained earnings 101,300
Less: Finance costs (1) (44,886)
Depreciation (1) (2,017)
R&D expenditure (2) (165,500)
Amortisation (2) (25,000)
Retained loss (136,103)
Therefore Naples plc cannot pay a dividend for the year ended 31 December 2015 and could
potentially be trading illegally.
Generally, candidates made a reasonable attempt at this part. This was encouraging as historically
candidates have not performed well on this topic. Almost all candidates identified that the revaluation
surplus and the share premium account should not have been included in the calculation of distributable
profits, although a significant minority believed that the share premium account could be distributed.
Most candidates also made correct (own figure) adjustments for the issues from 2.1, although almost all
candidates also adjusted for the retrospective adjustment for the change in accounting policy, failing to
recognise that this had a zero impact on total retained earnings. A few candidates lost marks by netting off
some of their adjustments made in 2.1 without providing supporting workings for these figures. Once
again, without an appropriate “audit trail” marks will be lost.
Almost all candidates correctly concluded that a dividend should not have been paid as there were
negative retained earnings. A significant number of candidates gained full marks on this part.


2.3 Ethical issues
Luigi appears to have a self-interest threat, as he is due a bonus based on the profit for the year. He also
is due a dividend through his holding of ordinary shares, and the higher the profit for the year, the higher
that dividend is likely to be. The “errors” which Roberto has discovered in the draft financial statements
could be genuine mistakes due to a lack of knowledge, or could be a deliberate attempt by Luigi to
overstate the profit for the year in order to increase his bonus and dividend. It may be that had it not been
for Luigi’s illness these “errors” would not have been discovered. The basic “errors” made by Luigi in his
calculation of distributable profits also add weight to the theory that the errors may have been deliberate.
There are potential intimidation and self-interest threats for Roberto from Luigi or the other directors, as he
may be under pressure to not make the adjustments to keep the profits high for the directors’ bonus, and
may be afraid he might lose his job.
As an ICAEW Chartered Accountant Luigi has a duty of professional competence and due care and
at all controversial.
Roberto should apply the ICAEW Code of Ethics, with the following programme of actions:
 Explain to Luigi how each of these matters should be accounted for.

 If they appear to be genuine errors suggest that Luigi goes on an update course.
 If Luigi refuses to correct the errors, discuss the matters with the other directors to explain the
situation and obtain support. Consider also discussing the issues with the external
auditors/internal auditors/audit committee.
There were some very high marks on this part and some excellent answers. Almost all candidates
correctly identified the self-interest threat from the directors’ bonus and a majority also identified the
shares purchased by Luigi as a further self-interest threat. Most candidates recognised that the errors
made in the draft financial statements were not those that an ICAEW Chartered Accountant should be
making and hence, if these errors were indeed errors (as opposed to the deliberate manipulation of the
financial statements), represented a breach of Luigi’s duty of professional competence and due care.
A smaller number of candidates identified possible intimidation and/or self-interest threats for Roberto, in
correcting financial statements prepared by his superior. However, some felt that the intimidation threat
came from the managing director, which was unlikely given that he had “become increasingly concerned
about Luigi’s treatment of certain matters”. Candidates need to take care to read the scenario carefully
and not read into it factors that are not present. Most candidates made a very good attempt at listing the
steps that Roberto should take to address the issues, picking up a good number of marks.
Fewer candidates than usual put their answer in an audit context, such as referring to reporting Luigi to the
ethics partner or reviewing his work. However, a good number of candidates wasted time suggesting that
Luigi should be made to sell his shares and/or suggesting alternative structures for a bonus scheme which
avoided a link to profits.


2.4 Differences between IFRS and UK GAAP: borrowing costs and development costs
UK GAAP IFRS
Borrowing costs
Under FRS 102 entities are allowed the choice of IAS 23 gives no such choice. Capitalisation is
whether to capitalise borrowing costs or to required.
The borrowing costs calculation is based on the

average carrying amount of the expenditure.
Development costs
Under FRS 102 an entity can chose whether or IAS 38 requires all eligible development costs to be
not to capitalise development costs. capitalised.
All intangible assets should be amortised, with the Intangible assets need not be amortised and should
rebuttable presumption that the useful life this be reviewed for impairment.
should not exceed five years.
A few candidates did not attempt this part of the question. Those who did generally correctly identified the
basic treatment for both borrowing and development costs under both IFRS and UK GAAP, although a
minority said that development costs could not be capitalised under UK GAAP. A few candidates mixed up
the treatment even where they had used the correct IFRS treatment in 2.1. A significant number of
candidates who had said that borrowing costs “can” be capitalised in 2.1 correctly identified here that such
costs “must” or “should” be capitalised. Some candidates went on to achieve full marks by discussing the
amortisation of development costs.


Question 3
Total Marks: 18
General comments
Part 3.1 of this question tested the calculation of profit from discontinued operations, requiring an
explanation of the calculation as well as the calculation itself. Part 3.2 required the preparation of a
consolidated statement of cash flows and supporting note, incorporating the subsidiary disposed of during
the year, in respect of which the calculation in Part 3.1 had been required. Missing figures to be
calculated included dividends paid (to the group and to the non-controlling interest), finance lease liabilities
paid, tax paid, additions to property, plant and equipment, and proceeds from the issue of share capital.
Genoa plc
3.1 Profit from discontinued operations
The profit from discontinued operations is comprised of two elements:

 the profit on disposal of the shares in Venice Ltd, and
 the results of Venice Ltd up to the date of disposal (ie for three months).
The profit on disposal should be calculated by comparing the sale proceeds to the net assets and goodwill
at the date of disposal net of the non-controlling interest (NCI). The net assets at the date of disposal will
be the net assets brought forward/on 1 January 2015, plus the profit earned by Venice Ltd to the date of
disposal/three months pro-rated/1 April 2015.
£ £
Sale proceeds 1,200,000
Net assets at date of acquisition (100,000 + 271,000) (371,000)
NCI at date of acquisition (371,000 x 30%) 111,300
Goodwill at date of acquisition 560,300
Goodwill at date of disposal (490,300)
Net assets on 1 April 2015 (881,000)

Add: NCI in net assets at date of disposal (881,000 x 30%) 264,300
Profit for the period (3/12 x (110,000 – 20,000)) 22,500
Profit from discontinued operations 115,500
As this was a relatively straightforward calculation of a profit on discontinued operations it was

disappointing not to see the correct figure more frequently. Most candidates made a reasonable attempt at
calculating goodwill at disposal, although common errors were not including share capital in net assets
and/or failing to deduct the impairment. Those who dealt with the impairment as a separate line rather
than as part of the goodwill calculation often adjusted for it in the wrong direction. Surprisingly, a number
of candidates used the wrong figure for net assets at disposal even though this was given in the question.
By far the most common error related to the profit for the year up to disposal with most candidates taking
only the parent’s share and/or failing to deduct tax.
Some candidates made no attempt to explain how the figure should be calculated and those that did often
discussed how it should be presented rather than calculated. This omission limited the number of marks
which could be achieved on this part.


3.2 Consolidated statement of cash flows for the year ended 31 December 2015
£ £
Disposal of Venice Ltd net of cash disposed of 1,183,500
(1,200,000 – 16,500)

£
Profit before tax (1,938,900 – 93,000 (3.1)) 1,845,900
Finance cost 61,600
Workings
£ £
Cash (β) 501,400 B/d (324,000 + 177,800) 501,800
C/d (420,200 + 180,200) 600,400 Non-current assets 600,000
1,101,800 1,101,800
(2) Income tax
£ £
Cash (β) 411,600 B/d 453,600
C/d 504,000 CPL 462,000
915,600 915,600
£ £
Finance leases 600,000 Disposal of sub – GW (3.1) 490,300
Additions (β) 1,894,100 C/d 3,457,400
5,467,700 5,467,700


£ £
B/d (480,000 + 48,000) 528,000
720,000 720,000
£ £
Cash (β) 92,500 B/d 2,145,400
C/d 3,271,200 CPL 1,218,300
3,636,700 3,363,700
£ £
Cash (β) 87,500 B/d 891,100
Disposal of sub (3.1) 264,300
C/d 797,900 CPL 258,600
1,149,700 1,149,700
Answers to this part were very mixed with a minority of candidates barely attempting this part. Most
candidates who made a decent attempt at this question did produce a reconciliation note although very
few deducted the profit on disposal from Part 3.1 from the opening figure of profit before tax. Others simply
deducted the £110,000 profit given in the question rather than the adjusted figure calculated in 3.1 or
included the profit for the period as well as the profit on disposal. Most did add back the finance cost and
depreciation charge and attempted to calculate the relevant adjustments to working capital, although a
number failed to adjust these figures correctly (or at all) for the impact of the disposal.
On the face of the actual statement of cash flows it was surprisingly rare to see the correct figures for tax
and interest paid – both relatively straightforward calculations. However, nearly all candidates arrived at
the correct figure for the net cash relating to the disposal of the subsidiary and many also calculated the
correct figures for the proceeds of the share issue and the dividend paid by the parent. It was much rarer
to see correct figures for the purchase of property, plant and equipment, the repayment of the finance
lease and the dividends paid to the non-controlling interest.
As always, some candidates lost marks for not showing outflows of cash in brackets and/or including
figures under the wrong heading. A number of candidates also included tax and interest paid in the
reconciliation note rather than on the face of the cash flow statement. Some candidates also appear to
believe that dividends are received from the non-controlling interest (clearly describing them as dividends
received) as opposed to being paid to them.
A significant minority of candidates continue to produce columnar or linear workings, rather than using the
T-account approach recommended in the learning materials. Presentation of the statement of cash flows
was mixed, with a good number of candidates failing to provide a sub-total for each type of cash flow.

 Failing to include the assets acquired under finance leases and/or the goodwill disposed of with
the subsidiary in 3.1 in the property, plant and equipment working.
 Failing to include the disposal of the subsidiary in the non-controlling interest working.
 Mixing up the finance cost and finance lease workings.
 Including the tax charge relating to the subsidiary in the tax working.
 Failing to include both the non-current and current liability balances in the finance lease working.
 Not showing the correct figures for opening and closing cash and cash equivalents (or missing
these out altogether). The most common error here was adjusting one of these figures for the
cash disposed of with the subsidiary.


Question 4
Total Marks: 18
General comments
Part 4.1 of this question required the preparation of a consolidated statement of financial position for
a group with one subsidiary, and a joint venture which was set up during the current year. The
question also featured inter-company transactions and balances and fair value adjustments on
acquisition. Part 4.2 tested the differences between IFRS and UK GAAP in respect of the financial
reporting treatment and disclosures of joint ventures.
Rome plc
4.1 Consolidated statement of financial position as at 31 December 2015
£ £
Assets
Non-current assets
6,279,500
Current assets
Inventories (879,300 + 453,700 – 10,000 (W8)) 1,323,000
Trade and other receivables (641,500 + 392,300 – 933,800
100,000)
Cash and cash equivalents (21,800 + 17,600 + 64,400
25,000)
2,321,200

Equity
Attributable to the equity holders of Rome plc 6,639,140
7,322,700
Current liabilities
75,000)
Taxation (250,000 + 175,000) 425,000
1,278,000
Workings
(1) Net assets – Turin Ltd

£ £ £
Less: PURP (W8) (10,000)
Fair value adjs
Goodwill (40,000) (50,000)
Property 300,000 300,000
Deprec on property (300,000/25 years x 4) (48,000)
3,424,300 1,906,500 1,517,800

(2) Goodwill – Turin Ltd

£
Consideration 1,600,000
73,500
(3) Non-controlling interest – Turin Ltd

£
Share of post-acquisition reserves (1,517,800 (W1) x 20%) 303,560
683,560
(4) Investment in joint venture – Florence Ltd

£
Cost (100,000 x £1) 100,000
Share of post-acquisition retained earnings (125,600 x 25%) 31,400
131,400

£
Rome plc 2,403,900
Turin Ltd (1,517,800 (W1) x 80%) 1,214,240
Florence Ltd (W4) 31,400
3,639,140

£
Rome plc 2,958,500
Turin Ltd 2,874,500
Fair value adjustment (300,000 – 48,000) (W1) 252,000
6,074,600
(7) PPE PURP

£
Asset now in Turin Ltd’s books at 35,000 x 4/5 years 28,000
Asset would have been in Rome plc’s books at 22,000 x 4/5 (17,600)
years
10,400
(8) PURP
% £
Cost (100) (80,000)
GP 25 20,000
X½ 10,000
Almost all candidates made a good attempt at this part, with presentation of the statement of financial
position often being better than on Question 1. Candidates had obviously practised this question style
at length and as a result gained a significant number of marks; it was not uncommon for candidates to
gain full marks. However, once again, a number of candidates lost marks where they failed to provide
an “audit trail” through their answer.
The most common areas where no audit trail was shown were for figures on the face of the
consolidated statement of financial position, eg inventories, trade and other receivables, cash and
cash equivalents etc and also for the calculation of the non-controlling interest and retained earnings
for the percentage of the subsidiary’s figure for post-acquisition profits. It is not sufficient to show the

percentage and then reference to another (the net assets) working; unless both a percentage and a
figure from another working are shown, no marks will be awarded if the calculation contains an error.
However, candidates’ answers were well laid out and generally candidates did make adjustments to
figures on the face of the consolidated statement of financial position. The most common errors
centred on the cash in transit. Many included no adjustment for trade and other payables (or
incorrectly used £25,000) and/or no adjustment for trade and other receivables (or incorrectly used
£75,000). Cash and cash equivalents was more often adjusted, and usually by the correct figure.
Most candidates presented a net assets table in the format used in the learning materials, and went
on to complete the standard workings. This approach maximises the marks candidates can achieve
and that was seen in this particular question.
In the net assets table candidates often used the wrong number of years for the depreciation
adjustment and also it was also fairly common for candidates to add rather than deduct the
adjustment in respect of the goodwill which had arisen on the acquisition of a sole trader. Only a
minority of candidates missed that they should use fair value method for the non-controlling interest in
the goodwill and non-controlling interest calculations. Most candidates correctly calculated the
inventory provision for unrealised profit, although slightly less managed to correctly calculate the
property, plant and equipment provision for unrealised profit. The most common error in the joint
venture calculation was to pro-rate the profit figure, even though it clearly stated in the question that
this was for the nine month period.

4.2 Differences between IFRS and UK GAAP: joint ventures
UK GAAP IFRS
FRS 102 recognises implicit goodwill on Under IAS 28, goodwill is subsumed within the
acquisition of a joint venture and requires it to investment in joint venture figure.
be amortised.
FRS 102 does not require such detailed IFRS 12 specifies disclosure requirements for
information about the investee or about risks interests in joint ventures.
associated with the investment.
Candidates clearly struggled with the UK GAAP differences in relation to joint ventures. This was the
most poorly answered part of the whole paper, with candidates who did attempt this part consistently
scoring no marks. The majority of candidates included reference to one or more differences in the
preparation of group financial statements, which had no relevance to the differences in relation to joint
ventures. Answers included discussions around the use of the equity method for IFRS only and the
presentation of a separate column for UK GAAP (as opposed to a separate line for IFRS). Others
said that a joint venture under UK GAAP was treated as an intangible asset. Only a small minority of
candidates identified any relevant points here, although full marks were still seen by a very small
number of candidates.


ICAEW Past Questions Answers March 2008 To June 2017 Summary of Financial Accounting-Application Level

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

ICAEW Past Questions Answers March 2008 To June 2017 Summary of Financial Accounting-Application Level

Uploaded by

Copyright:

Available Formats

Professional Stage – Financial Accounting – March 2008

PROFESSIONAL STAGE (APPLICATION) - FINANCIAL ACCOUNTING

How well* candidates answered each syllabus area

Syllabus area Number of questions Well answered Poorly answered

© The Institute of Chartered Accountants in England and Wales 2008, Page 1 of 15

MARK PLAN AND EXAMINER’S COMMENTARY

Ginger Ltd - Balance Sheet as at 31 December 2007

Total assets 9,465,450

EQUITY AND LIABILITIES

Total equity and liabilities 9,465,450

© The Institute of Chartered Accountants in England and Wales 2008, Page 2 of 15

Ginger Ltd – Income Statement for year ended 31 December 2007

Gross profit 3,513,100

Administrative expenses (W4) (1,656,750)

Finance cost (680,000)

Profit for the period 433,150

W1 Disposal of piece of machinery

Machinery – cost £200,000

Accumulated depreciation £200,000 x 20% x 3 years = £120,000

Carrying amount at disposal £200,000 - £120,000 = £80,000

Property Land Total

Valuation at 1 Jan 2007 535,000 535,000

Depreciation on cost 400,000 x 5% years = 20,000 pa

Depreciation on revalued amount 535,000 x 5% = 26,750 pa

Transfer between reserves for additional depreciation 26,750 – 20,000 = 6,750

© The Institute of Chartered Accountants in England and Wales 2008, Page 3 of 15

W3 Property, plant and equipment

Freehold land and buildings

At 31 December 2007 4,135,000 4,835,000

Accumulated depreciation 1,690,000

At 31 December 2007 1,696,750

Plant and equipment

At 31 December 2007 857,000

Accumulated depreciation 312,000

At 31 December 2007 363,400

Cost of sales Administrative

Legal claim £1,000,000 – most likely outcome

Income statement effect: £1,000,000 - £800,000 = £200,000

© The Institute of Chartered Accountants in England and Wales 2008, Page 4 of 15

Total possible marks 24½

© The Institute of Chartered Accountants in England and Wales 2008, Page 5 of 15

Cash and accruals accounting

Total possible marks 6½

© The Institute of Chartered Accountants in England and Wales 2008, Page 6 of 15

(1) Sale of products on delayed payment terms

(i) Cash accounting

(ii) Accrual basis

Extract from income statement

Investment income (900 x 6/12) 450

Extract from balance sheet

(2) Gardening services

(i) Cash accounting

Extract from income statement

Extract from balance sheet

(ii) Accrual basis

Extract from income statement

Extract from balance sheet

(3) Garden design

(i) Cash accounting

Extract from income statement

© The Institute of Chartered Accountants in England and Wales 2008, Page 7 of 15

(ii) Accrual basis

Extract from income statement