FACULTY OF BUSINESS AND LAW

ACADEMIC YEAR 2020/21

Assessment Date: 20 AUGUST 2021

Assessment Brief

Module Leader : Dr ISMAIL UFUK MISIRLIOGLU

Module Code : UMACTT-15-M
Module Title : ADVANCED CORPORATE REPORTING
Assessment Component: A (weighted 70%)
Examination Duration : 2 HOURS PLUS 1 HOUR (TOTAL 3 HOURS)
Start Time : 09:30 (BST)
End Time : 12:30 (BST)
Assessment accessible at: In the “ONLINE EXAM” folder of this module on Blackboard
Submission to be made by: Using a normal Blackboard submission portal in the
“ONLINE EXAM” folder of this module on Blackboard.
N.B. all times are 24-hour clock, British Summer Time (BST)

Please note you must complete the submission process before the end time
stated above.
Time limited ONLINE EXAM

Instructions to Students:
• Candidates must answer THREE questions out of five.
• Each question carries 40 marks.
• Candidates are required to show all their workings to numerical calculations.
• The maximum word count is 200 for discursive questions except those that are
specified in the relevant exam questions.
• As is usual for an exam, for this assessment you are not expected to include full
referencing, but are encouraged, where relevant, to cite the sources of key theories,
models, case studies, statutes etc.
• This is an individual assessment: do not copy and paste work from any other source
(including lecture slides) or work with any other person during this exam. Text-
matching software will be used on all submissions and assessment offences
detected will be pursued through University procedures.
• There is no +/- 10% on word count and anything after the maximum word count
will not be marked, in line with UWE’s Word Count Policy.

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Assessment Offences
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You must submit your assessment before the stated deadline by electronic submission
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accepted. Please save your work frequently.

UMACTT-15-M Page 2 of 9
• It is your responsibility to submit assessment in a format stipulated
above. Your marks will be affected if your tutor cannot open or properly view your
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issues, you may send your submission by email to your module leader provided
this is received before the end of the exam duration.

Submissions after the deadline in whatever form, will not be marked. There
is no late submission permitted on this timed assessment.

UMACTT-15-M Page 3 of 9
 Question 1

The following are individual statements of financial position as at 31 March 2021 of

Tennis plc and its subsidiary Courts plc:

Tennis plc Courts plc

£’000 £’000 £’000 £’000
Assets
Non-current assets
Property, plant and equipment 718,750 350,000
Investment in Courts 310,000 -
1,028,750 350,000
Current assets
Inventories 84,000 52,360
Trade receivables 56,250 38,500
Current account with Courts 22,400 -
Cash and cash equivalents 11,800 9,940
174,450 100,800
Total assets 1,203,200 450,800
Equity and Liabilities
Equity
Ordinary shares £1 each 625,000 280,000
Retained earnings 114,000 71,400
739,000 351,400
Long-term liabilities 192,500 11,200
Current liabilities
Trade payables 64,300 49,280
Current account with Tennis - 22,400
Other current liabilities 207,400 16,520
271,700 88,200
Total equity and liabilities 1,203,200 450,800

The following information is relevant:

a) Tennis plc acquired 196,000,000 ordinary shares in Courts plc for £310,000,000 on
1 April 2019. The shareholders’ equity of Courts plc consisted of the following
accounts on 1 April 2019:
Ordinary shares £1 each £280,000,000
Retained earnings £31,500,000
£311,500,000

b) The fair value of the net assets in Courts plc was reviewed at the date of acquisition.
The fair value of the property, plant and equipment was considered to be
£35,000,000 greater than their book value on 1 April 2019. The increase in value is
related to a depreciable building. Courts plc has not adjusted the accounts to reflect
the fair value exercise. On 1 April 2019, the expected useful life of the building was
10 years. The group policy is to charge straight-line depreciation on buildings with
no residual value.

UMACTT-15-M Page 4 of 9
c) Courts plc sold goods to Tennis plc for £22,500,000 with 20% mark-up on cost
during the year ended 31 March 2021. Tennis plc held 80% of these goods in
inventory at the year end.

d) Tennis plc conducted its annual impairment review and concluded that the goodwill
on the acquisition of Courts plc was impaired by £6,600,000 on 31 March 2021.

e) It is group policy to value the non-controlling interest at fair value at the date of
acquisition.

f) The non-controlling interest in Courts plc was measured at its fair value of
£116,000,000 at the acquisition date.

Required:
Prepare the consolidated statement of financial position for the Tennis group as at 31
March 2021.
(Total 40 marks)

Question 2

Olympics is preparing its financial statements as at 31 March 2021. The following issues
are unresolved:

a) Olympics plc entered into a ten-year lease contract with a supplier for the right to
use a stadium, which had a remaining useful life of 20 years on 31 March 2019. The
annual payments of £1,500,000 need to be made in arrears on 31 March each year.
The first lease instalment was paid on 31 March 2020. The present value at start of
the lease discounted at 6% per annum was £11,040,130, which was very similar to
its market price at inception. According to the lease terms, the ownership of the
stadium is transferred to Olympics plc at the end of the lease term, and Olympics
plc is responsible for the maintenance and repairs. Olympics plc charges a straight-
line depreciation over the useful life of the stadium with a residual value of
£1,540,130 and needs to follow IFRS 16 Leases.
(10 marks)

b) Olympics plc decided to issue a long-term fixed coupon bond to finance an

investment project. The bond was issued by Olympics plc with a nominal value of
£725,000 and £14,500 of issue costs were incurred on 1 April 2019. The coupon rate
of the bond is 5% and payable on 31 March each year. The bond will be paid at a
premium of £28,853 on 31 March 2022. The effective rate was 7% at issue date.
Olympics plc needs to follow IFRS 9 Financial Instruments.
(10 marks)

c) Olympics plc operates a defined benefit pension plan for its employees. The fair
value of the pension plan assets was £2,950,000, and the present value of the
pension plan liabilities was £2,650,000 on 1 April 2020. The actuary estimated that
the current service cost for the year ended 31 March 2021 was £485,000. During
the year ended 31 March 2021, the pension plan paid £115,000 benefits to retired
employees. Olympics plc made £140,000 contributions to the pension plan on 31
March 2021. The defined benefit pension plan was valued and estimated the pension
assets to be worth £2,850,000 and the liabilities of the pension plan to be £3,100,000
UMACTT-15-M Page 5 of 9
 on 31 March 2021. The annual discount rate of 7% was determined by the actuary.
There were no actuarial gains or losses carried forward to the year 1 April 2020. The
company follows IAS 19 Employee Benefits.
(10 marks)

d) Olympics plc granted 800 share appreciation rights (SAR) to each of its 90 employees
on the condition that they remain in the firm for two years on 1 April 2019. At the
end of these two years, the benefits vest and the employees may exercise the
options in two consecutive years. The benefits will be paid out in cash and the cash
amount will be determined by the intrinsic value at the date of exercise. The fair
value of each SAR was £60 on 31 March 2020 and £68 on 31 March 2021. The
intrinsic value of each SAR was £35 on 31 March 2021 and £40 on 31 March 2022.
7 employees left the company on 31 March 2020. It was estimated on 31 March
2020 that 5 more employees would leave for the year ended 31 March 2021. 12
employees left Olympics plc on 31 March 2021. 15 employees exercised their rights
(SAR) immediately when their benefits vested on 31 March 2021. Olympics plc needs
to follow IFRS 2 Share-based Payment.
(10 marks)

Required:
Show how the four issues above should be shown in the financial statements of
Olympics plc as at 31 March 2021 in compliance with IFRS.
(Total: 40 marks)

Question 3

a) Flower plc is a manufacturing company and selling a variety of furniture products.

The company prepares its financial statements in accordance with IFRS, and entered
into the following transactions during the year ended 31 March 2021:

i. On 31 March 2021, Flower plc carried out an impairment test for one of its cash-
generating units in compliance with IAS 36 Impairment of Assets. The cash-
generating unit contains goodwill. It was determined that the cash generating
unit had a value in use of £965,000 and a fair value less costs of disposal of
£910,000 on 31 March 2021. The cash generating unit has the following carrying
amounts of the assets on 31 March 2021 as follows:

Carrying amount (£)

Goodwill 35,000
Patent 250,000
Plant and equipment 750,000
Current assets 150,000
Total net assets 1,185,000

ii. On 1 April 2020, Flower plc issued and sold a £540,000 convertible bond at par.
The bond must be redeemed after four years. The interest of 6% of nominal
value is payable annually in arrears commencing 31 March 2021. The holders of
bond are entitled to convert the bond into equity shares at rate of one-third at
the option of the bond holder. The effective interest rate on similar debt
instruments without conversion option was 9% at issue date. The present value
of the convertible bond discounted at 9% at issue date was calculated to be
UMACTT-15-M Page 6 of 9
 £487,517. Flower plc is uncertain how the convertible bond should be accounted
for.

Required:
Write a draft memorandum to the Finance Director of Flower plc that includes an
explanation of the required IFRS accounting treatment of the above two issues in
the financial statements of Flower plc on 31 March 2021. Show relevant calculations
and the relevant accounts in financial statements where appropriate.
(20 marks – allocated equally)

b) Text plc purchased 78,000 shares in Cotton plc for £21 per share and 110,000 shares
in Fabric plc at a price of £14 per share on 1 April 2021. There were transaction
costs of £15,400 for Fabric plc’s shares. The purchased shares represent less than
2% of the equity shares of each company. Cotton plc’s shares were trading at £16
per share and the market price of Fabric plc’s shares increased to £17 per share on
31 March 2021. The intention of the management of Text plc is to sell Cotton plc’s
shares in the short-term, and to hold Fabric plc’s shares for the long-term. The long-
term shares have been designated as fair value through other comprehensive
income irrevocably. Assume there was no transaction cost for Cotton plc shares.

Required:
Show how the above transactions should be shown in the financial statements of
Text plc at 31 March 2021 in compliance with IFRS 9 Financial Instruments.
(10 marks)

c) Butterfly plc is an electric guitar manufacturer. The management of Butterfly plc

decided to sell one of its factories and needed to assess the fair value of electric
guitars in the inventory of the factory for sale. Each guitar is sold for £4,500 in
Europe and £4,800 in Asia. These markets currently exist and accessible for the
products. There is a transaction cost of 1.20% in these markets. On the basis of the
level of activity in previous years, the volume of the products sold in Europe was
significantly greater than Asia. Transportation costs for each market would be
1.80%.

Required:
Discuss how Butterfly plc should fair value each of the electric guitar in the inventory
in accordance with IFRS 13 Fair Value Measurement. In your discussion, you should
include an explanation of how fair value is defined and determined, and how the fair
value of each product would be valued in the absence of the principal market.
(10 marks)
(Total: 40 marks)
Question 4

a) According to prior research, opinions on the use of fair value accounting is mixed.
Drawing on the journal articles listed below, discuss the benefits and limitations of
fair value accounting. You should include in your discussion the impact fair value
accounting on analyst forecast accuracy. (The maximum word count for this question
is 350.)

UMACTT-15-M Page 7 of 9
 Barth, M.E. (2007). Standard-setting measurement issues and the relevance of
research. Accounting and Business Research, International Accounting Policy
Forum. 7-15.
Magnan, M., Menini, A., and Parbonetti, A. (2015). Fair value accounting:
information or confusion for financial markets? Review of Accounting Studies. 20,
559 - 591.
Marra A. (2016). The Pros and Cons of Fair Value Accounting in a Globalized
Economy: A Never Ending Debate. Journal of Accounting, Auditing & Finance. 31
(4), 582-591.
Penman, S.H. (2007). Financial reporting quality: is fair value a plus or a
minus? Accounting and Business Research, International Accounting Policy
Forum. 33-44.
(20 marks)

b) Power plc is a UK-based operating a power station and trades in pound sterling. On
7 March 2021, the management of Power plc signed an agreement with a Japanese
company to buy two generators in three months’ time for JPY142,500,000 payable
on delivery. The spot rate was £1:JPY150 on 7 March 2021. The management of
Power plc believes that the cost of buying JPY (Japanese Yen) will rise, which would
make the generators more expensive. Thus, on 7 March 2021 Power plc entered
into a forward contract to buy JPY142,500,000 in three months’ time for the fixed
sum of £950,000. The management of Power plc designated the hedging instrument
as a cash flow hedge at initial date. Power plc’s financial reporting date is 31 March
2021. At reporting date, the forward rate £1:JPY125 and spot rate was £1:JPY120.

Required:
Briefly explain how Power plc should assess hedge effectiveness, and show how
Power plc should measure and recognise the above transactions in its financial
statements at 31 March 2021 in compliance with IFRS 9 Financial Instruments.
(10 marks)

c) Assume that you are a financial analyst and made the following earnings and
dividend forecasts for Bath plc at on 31 December 2020. The book value of Bath
plc was reported as £20 book value per (common) share on 31 December 2020.
Bath plc has a required return of 9% per year.

2021E 2022E

Earnings Per Share (EPS) £2.60 £2.99

Dividend Per Share (DPS) £1.25 £1.25
Required:
Forecast return on equity (ROE) and residual income for each year, 2021 – 2022,
and with your justification briefly explain whether Bath plc is worth more or less than
book value based on your forecast.
(10 marks)
(Total: 40 marks)
Question 5

a) Research shows that financial statements are highly important to the capital
providers such as equity investors and debt providers. Drawing on the report
UMACTT-15-M Page 8 of 9
 (academic literature review) shown below, discuss how financial statements are
used by debt providers in comparison to equity investors. (The maximum word count
for this question is 350.)

Cascino, S., Clatworthy, M., García Osma, B., Gassen, J., Imam, S., and Jeanjean,
T. (2013). The use of information by capital providers, Academic literature review,
www.efrag.org.
(20 marks)

b) Road Holding plc acquired 35% of the ordinary shares in Bridge plc for £2,350,000,
when the retained earnings of Bridge plc were £878,000 on 1 August 2020. The
issued ordinary shares of Bridge plc amounted to 5,000,000 ordinary £1 shares and
the fair value of all assets and liabilities of Bridge plc were carried at fair value at
the date of acquisition. During the year to 31 March 2021, Road Holding plc made a
profit after tax of £2,340,000 and paid ordinary dividends of £750,000 on 31 March
2021. Dividends were reflected in both companies’ accounts as at 31 March 2021.
Bridge plc sold some goods to Road Holding plc for £650,000 on 10 March 2021.
The cost of these goods to Bridge plc was £520,000. 85% of these goods remained
in Road Holding plc’s inventory on 31 March 2021. Assume that all revenue and
expenses accrued evenly throughout the year. Road Holding plc has significant
influence over Bridge plc since the date of acquisition and needs to determine the
values of investment in Bridge plc, inventory, and profit sharing from Bridge plc in
accordance with IAS 28 Investments in Associates and Joint Ventures .

Required:
Show the values of investment in Bridge plc, inventory and profit sharing from Bridge
plc that are reported on the consolidated financial statements of Road Holding plc
for the year ended 31 March 2021 in accordance with IAS 28 Investments in
Associates and Joint Ventures.
(10 marks)

c) You are a chartered accountant and have been invited to advise on the following
topics in a Board of Directors meeting at a holding company that is listed on the
FTSE 350 and follows International Financial Reporting Standards (IFRS):

i. The 2018 IASB Conceptual Framework categorises measurement bases as

historical cost and current value containing fair value, value in use and current
cost. Briefly distinguish between historical cost and value in use.
(5 marks)

ii. Assume that at the reporting date the company’s management is committed to
sell a factory building and the sale of this building is highly probable. However,
the management is uncertain how the factory building should be accounted for.
Briefly advise the company on how to recognise and measure the factory building
in accordance with IFRS 5 Non-current assets held for sale and discontinued
operations at the reporting date.
(5 marks)
Required: Write a short report for the above issues in (i) and (ii).

(Total: 40 marks)
END OF QUESTION PAPER
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