Revision Question Bank

June 2015 Edition
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REVISION QUESTION BANK
ACCA
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Paper F7 | FINANCIAL REPORTING
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ACCA
PL PAPER F7
FINANCIAL REPORTING
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REVISION QUESTION BANK
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For Examinations to June 2015
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Acknowledgement
Past ACCA examination questions are the copyright of the Association of Chartered Certified
Accountants and have been reproduced by kind permission.
(ii) ©2014 DeVry/Becker Educational Development Corp. All rights reserved.
REVISION QUESTION BANK – FINANCIAL REPORTING (F7)
CONTENTS
Question Page Answer Marks Date worked
MULTIPLE CHOICE QUESTIONS

1 International Financial Reporting Standards 1 1001 14
2 Conceptual Framework 2 1001 18
3 Substance over Form 4 1002 10
4 IAS 1 Presentation of Financial Statements 6 1002 18
5 Accounting Policies 8 1003 12
6 IAS 18 Revenue 10 1003 10
7 Inventory and Biological Assets 11 1003 28
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8 IAS 11 Construction Contracts 15 1004 10
9 IAS 16 Property, Plant and Equipment 17 1006 18
10 IAS 23 Borrowing Costs 19 1007 12
11 Government Grants 21 1007 12
12 IAS 40 Investment Properties 22 1008 10
13 IAS 38 Intangible Assets 23 1008 20
14
15
16
17
18
19
20
21
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Non-current Assets Held for Sale and
Discontinued Operations
IAS 36 Impairment of Assets
IAS 17 Leases
IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
IAS 10 Events after the Reporting Period
IAS 12 Income Taxes
Financial Instruments
Regulatory Framework
26
27
29
31
33
35
37
39
1009
1009
1010
1011
1011
1012
1013
1014
10
10
10
16
12
12
18
10
22 Consolidated Statement of Financial Position 41 1014 10
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23 Consolidation Adjustments 42 1015 18
24 Further Consolidation Adjustments 45 1016 18
25 Consolidated Statement of Comprehensive Income 48 1017 22
26 Investments in Associates 51 1019 12
27 Analysis and Interpretation 53 1019 14
28 IAS 7 Statement of Cash Flows 55 1021 22
29 IAS 33 Earnings per Share 58 1022 22
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Section B of the Examination will include two 15 mark questions and one 30 mark question as shown
in the Specimen Exam reproduced in this Revision Question Bank. Questions with different mark
allocations are not current exam style but provided for additional syllabus coverage.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
1 Standard setting process (ACCA D04 adapted) 63 1025 15
CONCEPTUAL FRAMEWORK
2 Period of inflation 63 1026 15

3 Rebound (ACCA J11) 63 1027 15
SUBSTANCE OVER FORM
4 Wardle (ACCA J10) 65 1029 15
©2014 DeVry/Becker Educational Development Corp. All rights reserved. (iii)
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
5 Dexon (ACCA J08 adapted) 66 1031 15

6 Pricewell (ACCA J09 adapted) 68 1032 30
7 Sandown (ACCA D09 adapted) 70 1036 30
8 Cavern (ACCA D10 adapted) 72 1040 30
9 Highwood (ACCA J11 adapted) 74 1043 30
ACCOUNTING POLICIES
10 Emerald (ACCA D07 adapted) 76 1047 15
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11 Tunshill (ACCA D10) 77 1048 15
IAS 18 REVENUE
12 Derringdo (ACCA J03 adapted) 78 1050 15
13
14 PL
IAS 11 CONSTRUCTION CONTRACTS
Linnet (ACCA J04)

Mocca (ACCA J11)
IAS 16 PROPERTY, PLANT AND EQUIPMENT
15
16
Dearing (ACCA D08)
Flightline(ACCA J09)
79
80
81
81
1052
1054
1055
1056
15
10
10
10
IAS 20 ACCOUNTING FOR GOVERNMENT GRANTS

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17 Baxen (ACCA J12 adapted) 82 1057 15
IAS 23 BORROWING COSTS
18 Apex (ACCA J10 adapted) 83 1059 15
IAS 38 INTANGIBLE ASSETS

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19 Dexterity (ACCA J04 adapted) 84 1060 15

20 Darby (ACCA D09) 85 1062 15
IFRS 5 DISCONTINUED OPERATIONS
21 Manco (ACCA D10) 86 1063 10
IAS 36 IMPAIRMENT OF ASSETS
22 Wilderness (ACCA D05 adapted) 86 1064 15
IAS 17 LEASES
23 Fino (ACCA D07) 87 1066 15
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IAS 37 PROVISIONS
24 Promoil (ACCA D08) 88 1068 15

25 Borough (ACCA D11) 88 1069 15
IAS 10 EVENTS AFTER THE REPORTING PERIOD
26 Waxwork (ACCA J09) 89 1070 15
FINANCIAL INSTRUMENTS
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27 Pingway (ACCA J08 adapted) 90 1071 15
28 Bertrand (ACCA D11) 91 1073 10
GROUP ACCOUNTS
29 Parentis (ACCA J07 adapted) 91 1074 30

30
31
32
33
34
35
36
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Patronic (ACCA J08 adapted)
Pedantic (ACCA D08)
Pacemaker (ACCA J09 adapted)
Pandar (ACCA D09 adapted)
Premier (ACCA D10 adapted)
Prodigal (ACCA J11 adapted)
Paladin (ACCA D11)
ANALYSIS AND INTERPRETATION

93
95
97
99
101
103
104
1077
1079
1082
1085
1087
1091
1093
15
30
30
25
30
20
25
37 Harbin (ACCA D07 adapted) 106 1095 30

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38 Victular (ACCA D08 adapted) 109 1098 20
39 Hardy (ACCA D10) 111 1100 25
IAS 7 STATEMENT OF CASH FLOWS
40 Crosswire (ACCA D09 adapted) 114 1102 15

41 Deltoid (ACCA J10 adapted) 116 1104 15
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IAS 33 EARNINGS PER SHARE
42 Savoir (ACCA J06) 118 1106 15

43 Barstead (ACCA D09) 119 1107 10
COMPOSITE IFRS QUESTIONS
44 Toogood (ACCA J07 adapted) 120 1108 15

45 Errsea I (ACCA J07 adapted) 121 1110 15
46 Errsea II (ACCA J07 adapted) 122 1112 15
©2014 DeVry/Becker Educational Development Corp. All rights reserved. (v)
RECENT EXAMS
June 2012
1 Pyramid (see Specimen Exam)
2 Fresco (adapted) 123 1114 30
3 Tangier (adapted) 125 1118 15
4 Telepath 127 1120 15
December 2012
1 Viagem (adapted) 129 1122 15
2 Quincy (see Specimen Exam)
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3 Quartile (adapted) 130 1123 15
4 Lobden (adapted) 131 1124 15
5 Shawler 133 1126 15
June 2013
1 Paradigm (adapted) 135 1128 15
2
3A
3B
4
5
2
Radar
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Atlas (adapted)
Monty I (adapted)
Monty II (adapted)
Not reproduced
December 2013
1 Polestar (adapted)
Moby (adapted)
136
138
140
142
143
145
1130
1134
1135
1136
1138
1141
30
15
15
15
30
15
3A Kingdom I (adapted) 146 1144 15
3B Kingdom II (adapted) 148 1145 15
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4 Laidlaw (adapted) 150 1148 15
5 Fundo 151 1149 15
SPECIMEN EXAMINATION
Section A Multiple Choice Questions 2 17 40

Section B
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1 Tangier 8 19 15
2 Pyramid 10 20 15
3 Quincy 12 21 30
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REVISION QUESTION BANK MCQ – FINANCIAL REPORTING (F7)
1 INTERNATIONAL FINANCIAL REPORTING STANDARDS
1.1 Which ONE of the following is NOT a function of the IASB?
A Responsibility for all IFRS technical matters

B Publication of IFRSs
C Overall supervisory body of the IFRS organisations
D Final approval of interpretations by the IFRS Interpretations Committee
1.2 Which ONE of the following is NOT part of the process of developing a new
International Financial Reporting Standard?
A Issuing a discussion paper that sets out the possible options for a new standard
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B Publishing clarification of an IFRS where conflicting interpretations have developed
C Drafting an IFRS for public comment
D Analysing the feedback received on a discussion paper
1.3 Whose needs are general purpose financial statements intended to meet?
1.4
A
B
C
D PL Shareholders of incorporated entities
The general public
Users of financial statements
Regulatory authorities
Which body develops International Financial Reporting Standards?
A
B
C
IASB
IFRS Foundation
IFRS IC
D IFRS Advisory Council
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1.5 According to the International Accounting Standards Board, in whose interests are
financial reporting standards issued?
A Company directors
B The public
C Company auditors
D The government
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1.6 The issue of a new IFRS means that:
(1) An existing standard may be partially or completely withdrawn.

(2) Issues that are not in the scope of an existing standard are covered.
(3) Issues raised by users of existing standards are explained and clarified.
(4) Current financial reporting practice is modified.
Which combination of the above will most likely be the result of issuing a new IFRS?
A 1, 2 and 3 only
B 2, 3 and 4 only
C 1, 3 and 4 only
D 1, 2 and 4 only
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1
FINANCIAL REPORTING (F7) – REVISION QUESTION BANK MCQ
1.7 Which ONE of the following is one of the “3Es” in the “value for money” concept?
A Earnings
B Equity
C Evaluation
D Effectiveness
(14 marks)
2 CONCEPTUAL FRAMEWORK
2.1 Which ONE of the following is stated as an underlying assumption according to the
IASB’s Conceptual Framework for Financial Reporting?
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A Neutrality
B Accruals
C Relevance
D Going concern
2.2 The International Accounting Standards Board’s uses the Conceptual Framework for
2.3
A
B
C
D
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Financial Reporting (Framework) to assist in developing new standards.
Which one of the following is NOT covered by the Framework?
The format of financial statements

The objective of financial statements
Concepts of capital maintenance
The elements of financial statements
An item meets the definition of an element in accordance with the Conceptual Framework for
Financial Reporting.
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Which of the following criteria must be met for item to be recognised in the financial
statements?
(1) It is probable that any future economic benefit associated with the item will flow to
or from the entity.
(2) The item has a cost or value that can be measured with reliability.
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(3) The rights or obligations associated with the item are controlled by the reporting
entity.
A 1 only
B 2 only
C 1 and 2 only
D 1, 2 and 3
2 ©2014 DeVry/Becker Educational Development Corp. All rights reserved.
2.4 Which of the following statements about the characteristics of financial information is
correct?
(1) Faithful representation means that the legal form of a transaction must be reflected
in financial statements, regardless of the economic substance.
(2) Under the recognition concept only items capable of being measured in monetary
terms can be recognised in financial statements.
(3) It may sometimes be necessary to exclude information that is relevant and reliable
from financial statements because it is too difficult for some users to understand.
A 1 only
B 2 only
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C 3 only
D None of these statements
2.5 Which of the following statements are correct?
(1) The money measurement concept requires all assets and liabilities to be accounted
(2)
(3)
A
B
C
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Faithful representation means that the economic substance of a transaction should be
reflected in the financial statements, not necessarily its legal form.
The realisation concept means that profits or gains cannot normally be recognised in
the statement of profit or loss until cash has been received.
1 and 2 only
1 and 3 only
2 and 3 only
D All three statements
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2.6 IFRS 13 Fair Value Measurement sets out a fair value hierarchy that categorises inputs into
three levels.
Which of the following inputs would have the highest authority?
A Unobservable inputs
B Directly observable inputs other than quoted prices
Quoted prices in active markets at the measurement date
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C
D Market-corroborated inputs
2.7 The following are possible methods of measuring assets and liabilities other than historical
cost:
(1) Current cost

(2) Realisable value
(3) Present value
(4) Replacement cost
According to the IASB’s Conceptual Framework for Financial Reporting which of the
measurement bases above can be used by an entity for measuring assets and liabilities
shown in its statement of financial position?
A 1 and 2 only
B 1, 2 and 3 only
C 2 and 3 only
D All four
2.8 The IASB’s Conceptual Framework for Financial Reporting identifies qualitative
characteristics of financial statements.
Which TWO of the following characteristics are fundamental qualitative characteristics

according to the IASB’s Framework?
(1) Relevance
(2) Understandability
(3) Faithful representation
(4) Comparability
A 1 and 2 only
B 1 and 3 only
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C 2 and 4 only
D 3 and 4 only
2.9 Which of the following is the underlying assumption in the International Accounting
Standards Board’s Conceptual Framework for Financial Reporting?
3.1
A
B
C
D
PLAccruals
Reliability
Going concern
Relevance
SUBSTANCE OVER FORM
In which of the following accounting treatments is the qualitative characteristic of

faithful representation being applied?
(18 marks)
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A An asset is depreciated on the straight-line basis
B The costs of a patent are capitalised
C An asset acquired through a finance lease is capitalised by the buyer
D An allowance is made for irrecoverable trade receivables
3.2 Which of the following are examples of transactions which could be used to create “off-
balance sheet finance”?
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(1) Sale and repurchase arrangements

(2) Factoring of debts
(3) Warranty provisions
(4) Consignment inventories
A 1, 2 and 3
B 2, 3 and 4
C 1, 3 and 4
D 1, 2 and 4
3.3 Which one of the following descriptions most accurately describes “creative
accounting”?
A Using loop-holes in the requirements of International Financial Reporting Standards

so that the financial statements are biased in a required direction
B Creating fictitious assets in the statement of financial position to show a stronger
financial position
C Not applying the requirements of International Financial Reporting Standards in
order to show a better year-end position
D Deliberately falsifying the financial statements to show a stronger financial position
E
3.4 Soco revalues its properties to market value each year. One of Soco’s warehouses, is valued
at its market value of $1,200,000 in its statements of financial position as at September 20X3..
This building is sold on 29 September 20X4 for $900,000 with an option to repurchase after
four years at $1,093,956 ($900,000 plus compound interest for four years at 5% per annum).
The warehouse’s market value at 29 September 20X4 was $1,380,000.
A
B
C
D
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How should Soco treat this transaction in its financial statements for the year ended 30
September 20X4?
As a sale of the warehouse recording a loss on disposal of $300,000

Leave the warehouse in its statement of financial position at $1,200,000 and record
$900,000 as a loan received
Revalue the warehouse to $1,380,000 and record a loss on disposal of $480,000
Revalue the warehouse to $1,380,000 and record $900,000 as a loan received
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3.5 On 31 December 20X3 Tenby sold $100,000 of trade receivables to a factoring company, for
$90,000. If the factor has not collected the debt by 28 February 20X4 they can return the debt
to Tenby.
In respect of the above transaction what value should be placed on the receivables as at
31 December 20X3?
A Nil
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B $10,000
C $90,000
D $100,000
(10 marks)
4 IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
4.1 XYZ decided to change its reporting date which will result in a 15-month reporting period.
Which of the following two items must be disclosed in accordance with IAS 1
Presentation of Financial Statements?
(1) The reason for the period being longer than 12 months.
(2) A statement that similar entities have also changed their accounting period.
(3) A statement that comparative amounts used in the financial statements are not
entirely comparable.
E
(4) Whether the change is just for the current period or for the foreseeable future.
A 1 and 2 only
B 1 and 3 only
C 2 and 4 only
4.2
D
(2)
(3)
(4)
PL3 and 4 only
Which of the following disclosures are specifically required by IAS 1 Presentation of

Financial Statements?
(1) The name of the reporting entity or other means of identification.

The names of all major shareholders.
The level of rounding used in presenting amounts in the financial statements.
Whether the financial statements cover the individual entity or a group of entities.
A 2, 3and 4 only
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B 1, 3 and 4 only
C 1, 2 and 4 only
D 1, 2 and 3 only
4.3 Which item must be shown as a line item in the statement of financial position?
A Intangible assets
B Work in progress
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C Trade receivables
D Taxation
4.4 Balances under the following headings are extracted from the books of Ego.
(1) Staff costs – wages and salaries

(2) Raw materials and consumables
(3) Own work capitalised
The accountant wishes to use a classification of expenses within profit by nature format.
Which of the above balances may be included without further analysis in the statement
of profit or loss?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D All three
4.5 During the year ended 31 March 20X3 Woolf sold a leasehold building for $1,550,000. The
20-year lease was purchased on 1 July 20W0 for $100,000 but had been revalued to
$1,900,000 on 31 March 20X0. Woolf depreciates leasehold buildings on a straight line basis
over the life of the lease, with a full year’s amortisation in the year of acquisition and none in
the year of disposal.
Woolf revalues another leasehold building to $2,000,000 on 31 March 20X3. Its historical
cost was $1,000,000 and accumulated amortisation on the lease was $350,000.
How are these transactions reflected in other comprehensive income and profit or loss?
Other comprehensive
income Profit or loss
E
A $1,350,000 gain $1,510,000 profit
B $500,000 loss $1,510,000 profit
C $1,350,000 gain $30,000 profit
D $500,000 loss $30,000 profit
4.6 Bell made a profit of $183,000 for the year ended 30 June 20X7 and paid a dividend during
A
B
C
D
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the year of $18,000. During the year the company wrote off development costs of $45,000
directly to retained earnings as a prior period adjustment and revalued a property with a
carrying amount of $60,000 to $135,000.
What was total comprehensive income for period ended 30 June 20X7?
$195,000
$240,000
$258,000
$318,000
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4.7 IAS 1 Presentation of Financial Statements encourages an analysis of expenses to be
presented in the statement of profit or loss. This analysis must use a classification based on
either the nature of expense, or its function, such as:
(1) Raw materials and consumables used

(2) Distribution costs
(3) Employee benefit costs
(4) Cost of sales
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(5) Depreciation and amortisation expense
Which of the above should be disclosed in the statement profit or loss if a manufacturing
entity uses analysis based on function?
A 1, 3 and 4 only
B 2 and 4 only
C 1 and 5 only
D 2, 3 and 5 only
4.8 DT’s final dividend for the year ended 31 October 20X5 of $150,000 was declared on 1
February 20X6 and paid in cash on 1 April 20X6. The financial statements were approved on
31 March 20X6.
Which of the following statements reflect the correct treatment of the dividend in the
financial statements of DT?
(1) The payment settles an accrued liability in the statement of financial position as at
31 October 20X5.
(2) The dividend is shown as a deduction in the statement of profit or loss for the year
ended 31 October 20X6.
(3) The dividend is shown as an accrued liability in the statement of financial position
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as at 31 October 20X6.
(4) The $150,000 dividend was shown in the notes to the financial statements at 31
October 20X5.
(5) The dividend is shown as a deduction in the statement of changes in equity for the
year ended 31 October 20X6.
4.9
A
B
C
D
PL1 and 2 only
1 and 4 only
3 and 5 only
4 and 5 only
Which of the following items are required be disclosed in the notes to the financial
statements?
(1) Useful lives of assets or depreciation rates used.

(2) Increases in asset values as a result of revaluations in the period.
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(3) Depreciation expense for the period.
(4) Reconciliation of carrying amounts of non-current assets at the beginning and end
of period.
A All four
B 1 and 2 only
C 1 and 3 only
D 2, 3 and 4 only
SA
(18 marks)
5 ACCOUNTING POLICIES
5.1 According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,
which ONE of the following is a change in accounting policy that requires retrospective
application?
A The depreciation of the production facility has been reclassified from administration
expenses to cost of sales in the current and future years
B The depreciation method of vehicles was changed from straight line depreciation to
reducing balance
C The provision for warranty claims was changed from 10% of sales revenue to 5%
D Based on information that became available in the current period a provision was
made for an injury compensation claim relating to an incident in a previous year
5.2 Which ONE of the following would require retrospective application in accordance with
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
A An entity changes its method of depreciation of machinery from straight line to

reducing balance
B An entity has started capitalising borrowing costs for assets in accordance with IAS
23 Borrowing Costs. The borrowing costs previously had been charged to profit or
loss
C An entity changes its method of calculating the provision for warranty claims on its
products sold
D An entity disclosed a contingent liability for a legal claim in the previous year’s
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financial statements. In the current year, a provision has been made for the same
legal claim
5.3 During its 20X6 accounting year, DL made the following changes.
Which ONE of these changes would be classified as “a change in accounting policy” as
C
D
PL
determined by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
Increased the allowance for irrecoverable trade receivables for 20X6 from 5% to
10% of outstanding balances
Changed the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation
Changed the valuation method of inventory from FIFO to weighted average
Changed the useful economic life of its motor vehicles from six years to four years
5.4 The draft 20X5 statement of financial position of Vale reported retained earnings of
M
$1,644,900 and net assets of $6,957,300. Following the completion of the draft 20X5
statement of financial position it was discovered that several items of inventory had been
valued at selling price at the 20X4 year end. This meant that the opening inventory value for
20X5 was overstated by $300,000. The closing inventory had been correctly valued in the
draft 20X5 statement of financial position.
If the error is corrected before the 20X5 financial statements are finalised, what figures
will be reported for retained earnings and net assets in the statement of financial
SA
position?
Retained earnings Net assets

A $1,644,900 $6,657,300
B $1,644,900 $6,957,300
C $1,944,900 $6,657,300
D $1,944,900 $6,957,300
5.5 In 20X3 Falkirk identified that a fraud had been perpetrated by an employee who had been
making payments to himself amounting to $6,200,000. $1,400,000 million were payments
made in 20X3, $1,800,000 in 20X2 and $3,000,000 prior to 20X2; the double entry to the
payments had created false assets.
How much of the fraud should be recognised as an expense in 20X3 profit or loss?
A Nil
B $1,400,000
C $3,200,000
D $6,200,000
5.6 IAS 8 Accounting Policies, Changes in Accounting Estimate and Errors specifies the
definition and treatment of a number of different items.
Which of the following is NOT specified by IAS 8?
A The notification that a credit customer has just gone bankrupt owing debts of $250,000
B Identification of fraud relating to the current and prior years
C Moving from FIFO to weighted average valuation model for inventory
D The recognition of a decommissioning provision
(12 marks)
6 IAS 18 REVENUE
E
6.1 IAS 18 Revenue sets out criteria for the recognition of revenue from the sale of goods.
Which ONE of the following is NOT a criterion specified by IAS 18 for recognising
revenue from the sale of goods?
A The seller no longer retains any influence or control over the goods
6.2
B
C
D
PLThe cost to the seller can be measured reliably
The buyer has paid for the goods
The significant risks and rewards of ownership have been transferred to the buyer
OC signed a contract to provide office cleaning services for an entity for a period of one year
from 1 October 20X8 for a fee of $500 per month.
The contract required the entity to make one payment to OC covering all twelve months’
service in advance. The contract cost to OC was estimated at $300 per month for wages,
materials and administration costs.
M
OC received $6,000 on 1 October 20X8.
What profit or loss on the contract should OC recognise in its statement of profit or loss
for the year ended 31 March 20X9?
A $600 loss
B $1,200 profit
SA
C $2,400 profit
D $4,200 profit
6.3 LP received an order to supply 10,000 units of product A every month for two years. The
customer had negotiated a low price of $200 per 1,000 units and agreed to pay $12,000 in
advance every 6 months.
The customer made the first payment on 1 July 20X2 and LP supplied the goods each month
from 1 July 20X2.
LP’s year end is 30 September.
In addition to recording the cash received, how should LP record this order, in its
financial statements for the year ended 30 September 20X2, in accordance with IAS 18
Revenue?
A Include $6,000 in revenue for the year and create a trade receivable for $36,000
B Include $6,000 in revenue for the year and create a current liability for $6,000
C Include $12,000 in revenue for the year and create a trade receivable for $36,000
D Include $12,000 in revenue for the year but do not create a trade receivable or
current liability
6.4 On 31 March, DT received an order from a new customer, XX, for products with a sales value
of $900,000. XX enclosed a deposit with the order of $90,000.
E
On 31 March, DT had not completed credit referencing of XX and had not despatched any
goods. DT is considering the following possible entries for this transaction in its financial
statements for the year ended 31 March:
(1) Include $900,000 as revenue for the year;

(2) Include $90,000 as revenue for the year;
(3)
(4)
(5)
PL Do not include anything as revenue for the year;
Create a trade receivable for $810,000;
Create a trade payable for $90,000.
According to IAS 18 Revenue, how should DT record this transaction in its financial
statements for the year ended 31 March?
A
B
C
1 and 4 only
2 and 5 only
3 and 4 only
D 3 and 5 only
M
6.5 Which of the following statements correctly describes the accounting treatment when
there are goods in transit with free on board shipping?
A If an entity is the buyer, inventory is recognised in its financial statements when it

receives the goods from a common carrier
B If an entity is the buyer, inventory cannot be recognised in its financial statements
SA
C If an entity is the buyer, inventory is recognised in its financial statements upon

shipment
D If an entity is the seller, inventory is recognised in its financial statement until
delivery is completed
(10 marks)
7 INVENTORY AND BIOLOGICAL ASSETS
7.1 At 30 September 20X1 the closing inventory of a company amounted to $386,400. The
following items were included in this total at cost:
(1) 1,000 items which had cost $18 each. These items were all sold in October 20X1
for $15 each, with selling expenses of $800.
(2) Five items which had been purchased for $100 each eight years ago. These items
were sold in October 20X1 for $1,000 each, net of selling expenses.
What figure should appear in the company’s statement of financial position at 30

September 20X1 for inventory?
A $382,600
B $384,200
C $387,100
D $400,600
7.2 The inventory value for the financial statements of Q for the year ended 31 December 20X1
was based on an inventory count on 4 January 20X2, which gave a total inventory value of
$836,200.
Between 31 December and 4 January 20X2, the following transactions took place:
E
$
Purchases of goods 8,600
Sales of goods (profit margin 30% on sales) 14,000
Goods returned by Q to supplier 700
7.3
A
B
C
D
PL
What adjusted figure should be included in the financial statements for inventories at 31
December 20X1?
$818,500
$834,300
$838,100
$853,900
According to IAS 2 Inventories, which of the following costs should be included in

valuing the inventories of a manufacturing company?
M
(1) Carriage inwards
(2) Carriage outwards
(3) Depreciation of factory plant
(4) General administrative overheads
A 1 and 3 only
B 1, 2 and 4 only
C 2 and 3 only
SA
D 2, 3 and 4 only
7.4 IAS 2 Inventories defines the extent to which overheads are included in the cost of inventories
of finished goods.
Which of the following statements about the IAS 2 requirements relating to overheads
are true?
(1) Finished goods inventories may be valued on the basis of labour and materials cost
only, without including overheads.
(2) Factory management costs should be included in fixed overheads allocated to
inventories of finished goods.
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
7.5 Which of the following are correct?
(1) The carrying amount of inventory should be as close as possible to net realisable
value.
(2) The valuation of finished goods inventory must include production overheads.
(3) Production overheads included in valuing inventory should be calculated by
reference to the company’s normal level of production during the period.
(4) In assessing net realisable value, inventory items must be considered separately, or
in groups of similar items, not by taking the inventory value as a whole.
A 1 and 2 only
E
B 1 and 3 only
C 2, 3 and 4
D 3 and 4 only
7.6 The net realisable value of inventory is defined as the actual or estimated selling price less all
costs to be incurred in marketing, selling and distribution.
A
B
C
D
PL
Which of all the following additional items should be deducted in calculating the net
realisable value of inventory?
Trade
discounts
No
Yes
Yes
Yes
Settlement
discounts
Yes
No
Yes
Yes
Costs to
completion
Yes
Yes
No
Yes
M
7.7 Which of the following costing methods for inventory valuation purposes is permissible
under both IAS 2 Inventories?
A Absorption costing
B Direct costing
C Marginal costing
D Variable costing
SA
7.8 IAS 2 Inventories allows a number of methods for determining purchase price or production
of finished goods inventory.
Which of the following valuation methods is also allowed by IAS 2?
A both LIFO and weighted average

B only LIFO
C only weighted average
D neither LIFO nor weighted average
7.9 During the year ended 31 December 20X6 Grasmere purchased the following items for resale.
Date Number of items Cost price per item

March 20 $11
June 20 $13
This was a new product line and by 31 December 20X6 twenty items were left unsold. At
that date they were being sold at $12 an item and it would have cost Grasmere $10 an item to
buy further supplies. Grasmere determines cost of inventory under the FIFO method.
At what amount should finished goods inventory be shown in the statement of financial
position on 31 December 20X6?
E
A $200
B $220
C $240
D $260
7.10 Toulouse makes three different products. The following table shows the inventory valuation
Product I
PL
for each of the products under different bases.
Product II
Product III
First-in-
first-out
——
$
10
13
9
32
Last-in-
first-out
——
$
11
15
5
31
Net realisable
value
——
12
14
33
$
—— —— ——
M
At what value should Toulouse ’s inventory be stated in accordance with IAS 2
Inventories?
A $28
B $30
C $31
D $32
SA
7.11 Which of the following is NOT dealt with by IAS 41 Agriculture?
A Sheep
B Wool
C Wine
D Vines
7.12 XYZ Farm purchased 100 turkeys for $10,000 on 17 November 20X1. At the year end of
XYZ , 31 December 20X1, the estimated sales price of the 100 turkeys was measured at
$10,500. In addition, the following costs are expected to be incurred in respect to the sale of
the turkeys.
$
Transportation cost 700
Finance cost 300
Income taxes related to this sale 1,000
What amount should be recognised for the biological assets in XYZ’s statement of
financial position as at 31 December 20X1?
A $8,500
B $9,800
C $10,000
D $10,500
7.13 IAS 41 Agriculture is applied to all of the following items except one.
Which item does IAS 41 not apply to?
A Biological assets
E
B Land related to agricultural activity
C Agricultural produce at the point of harvest
D Government grants related to agricultural activity
7.14 Which of the following is NOT an example of agricultural activity, as defined in IAS 41
Agriculture?
8.1
A
B
C
D
PL Cultivating orchards
Floriculture
Fish farming
Sale of harvested crops
IAS 11 CONSTRUCTION CONTRACTS

(28 marks)
Digger commenced a construction contract, X47, on 1 July 20X3 and details for the first year
of the contract were as follows:
M
$
Amounts invoiced 2,400
Costs to date of last certificate 1,800
Costs since last certificate 200
Amounts received 2,100
Total contract price 4,200
Estimated costs to complete 1,200
Work certified 2,625
SA
The company invoices the customer immediately it receives a certificate of the value of the
work done.
What should Digger include as cost of sales for the X47 contract for the year ended
30 June 20X4, assuming profit is calculated on a cost basis?. (To the nearest $)
A $1,938,000
B $1,971,000
C $1,875,000
D $2,000,000
8.2 Augustus is involved in a number of construction contracts at 30 September 20X3. The

company calculates profit on a sales basis.
At that date the following information is available with respect to contract ZX45.
$
Contract price 225
Costs incurred to date 115
Estimated further costs to completion 65
Work certified 125
Amounts invoiced 145
What amount should be included in the statement of financial position of Augustus in
E
respect of contract ZX45 as at 30 September 20X3?
A Nil
B $5,000 due to customer
C $5,000 due from customer
D $20,000 due to customer
8.3
PL
B entered into a three-year contract to build a leisure centre for an entity. The contract value
was $6 million. B recognises profit on the basis of certified work completed.
At the end of the first year, the following figures were extracted from B's accounting records:
Certified value of work completed (progress payments billed)

Cost of work certified as complete
Cost of work-in-progress (not included in completed work)
$000
2,000
1,650
550
Estimated cost of remaining work required to complete the contract 2,750
M
Progress payments billed and received from entity 1,600
Cash paid to suppliers for work on the contract 1,300
What values should B record for this contract as “gross amounts due from customers”
and “current liabilities – trade and other payables”?
Gross amounts due from Current liabilities – trade and

customers other payables
SA
A $950,000 $350,000
B $950,000 $900,000
C $1,250,000 $350,000
D $2,550,000 $900,000
8.4 C started work on a four-year contract on 24 October 20X1. C recognises profit on the basis
of the certified percentage of work completed. The contract price is $10 million.
An analysis of C’s records provided the following information for the year to 30 September
20X3:
Percentage of work completed and certified in year 25%

Total cost incurred during the year $1,700,000
Estimated cost of remaining work to complete contract $3,900,000
Total payments made for the cost incurred during the year $2,000,000
In the year ended 30 September 20X2 costs of $2,900,000 had been incurred, the contract was
30% complete and a profit of $330,000 had been recognised.
How much profit should C recognise in its statement of profit or loss for the year ended
30 September 20X3?
A $330,000
B $375,000
C $495,000
D $825,000
8.5 Under what circumstances is it appropriate to immediately recognise a loss on a

construction contract?
A After work has commenced on the contract

B After 50% stage of completion of contract activity
E
C When it is probable that total contract costs will exceed total contract revenues
D All of the above
(10 marks)
9 IAS 16 PROPERTY, PLANT AND EQUIPMENT
9.1
PL
On 1 January 20X1 a company purchased some plant. The invoice showed:
Cost of plant
Delivery to factory
One year warranty covering breakdown during 20X1
$
48,000
400
800
––––––
49,200
———
Modifications to the factory building costing $2,200 were necessary to enable the plant to be
installed.
M
What amount should be capitalised for the plant in the company’s records in
accordance with IAS 16 Property, Plant and Equipment?
A $48,000
B $48,400
C $50,600
D $51,400
SA
9.2 At 31 December 2014 Cutie owned a building that had cost $800,000 on 1 January 2005. It
was being depreciated at 2% per year.
On 31 December 2014 a revaluation to $1,000,000 was recognised. At this date the building
had a remaining useful life of 40 years.
Which of the following pairs of figures correctly reflects the effects of the revaluation?
Depreciation charge for Revaluation surplus

year ending 31 December 2015 as at 31 December 2014
$ $
A 25,000 200,000
B 25,000 360,000
C 20,000 200,000
D 20,000 360,000
9.3 Which of the following statements are correct?

(1) All non-current assets must be depreciated.
(2) If goodwill is revalued, the revaluation surplus appears in the statement of changes
in equity.
(3) If a tangible non-current asset is revalued, all tangible assets of the same class
should be revalued.
(4) In a company’s published statement of financial position, tangible assets and
intangible assets must be shown separately.
A 1 and 2 only
B 1 and 4 only
E
C 2 and 3 only
D 3 and 4 only
9.4 ABC has revalued its property for the first time this year. It is proposing a policy whereby
depreciation based on the original historic cost is charged as an expense to profit or loss and
the depreciation based on the revalued amount is charged directly to revaluation surplus, this
B
C
D
PL
policy is known as split depreciation.
Under IAS 16 Property, Plant and Equipment is this policy of split depreciation
permitted?
A Yes, it is required
Yes, it is allowed but not required
Yes, it is allowed only in prescribed circumstances
No it is not allowed
9.5 Thames depreciates non-current assets at 20% per annum on a reducing balance basis. All
M
non-current assets were purchased on 1 April 20X3. The carrying amount on 31 March 20X6
is $20,000.
What is the accumulated depreciation (to the nearest $000) as at that date?
A $15,000
B $19,000
C $30,000
SA
D $39,000
9.6 The following information relates to the disposal of two machines by Halwell:
Machine 1 Machine 2
$ $
Cost 120,000 100,000
Selling price 90,000 40,000
Profit/(loss) on sale 30,000 (20,000)
What was the total accumulated depreciation on both machines sold?
A $80,000
B $100,000
C $120,000
D $140,000
9.7 Lydd purchased production machinery costing $100,000, having an estimated useful life of
twenty years and a residual value of $2,000. After being in use for six years the remaining
useful life of the machinery is revised and estimated to be twenty-five years, with an
unchanged residual value.
What is the annual depreciation charge on the machinery in year 7?
A $3,226
B $3,161
C $2,824
D $2,744
9.8 Upton makes up its financial statements to 31 December each year. On 1 January 20X0 it
E
bought a machine with a useful life of 10 years for $200,000 and started to depreciate it at
15% per annum on the reducing balance basis. On 31 December 20X3 the accumulated
depreciation was $95,600 and the carrying amount $104,400. During 20X4 the company
changed the basis of depreciation to straight line.
What is the correct accounting treatment to be adopted in the financial statements of
9.9
A
B
C
D
PL
Upton for the year ended 31 December 20X4?
Depreciation charge ($10,440)
Prior period adjustment
Extraordinary item
Which ONE of the following items would CM recognise as subsequent expenditure on a

Nil
Nil
$15,600
$15,600
non-current asset and capitalise it as required by IAS 16 Property, Plant and Equipment?
A When CM purchased a furnace five years ago, the furnace lining was separately
identified in the accounting records. The furnace now requires relining at a cost of
M
$200,000. Once relined the furnace will be usable for a further five years
B CM’s office building has been badly damaged by a fire. CM intends to restore the
building to its original condition at a cost of $250,000
C CM’s delivery vehicle broke down. When it was inspected by the garage it was
found to be in need of a new engine. The engine and associated labour costs are
estimated to be $5,000
SA
D CM closes its factory for two weeks every year. During this time, all plant and
equipment has an annual maintenance check and any necessary repairs are carried
out. The cost of the current year’s maintenance check and repairs was $75,000
(18 marks)
10 IAS 23 BORROWING COSTS
10.1 Under what conditions can an entity capitalise borrowing costs?
A The borrowing costs are incurred for purchases of inventory items

B The borrowing costs are directly attributable to the acquisition, construction, or
production of a qualifying asset
C The borrowing costs are directly attributable to the acquisition, construction, or
production of routinely manufactured assets
D The borrowing costs are incurred for purchases of property, plant and equipment
10.2 Which of the following would qualify as a borrowing cost as defined in IAS 23
Borrowing Costs?
(1) Premium on redemption of preference share capital.

(2) Discount on the issue of convertible debt.
(3) Interest expense calculated using the effective interest rate.
(4) Finance charges related to finance leases.
A 1, 2 and 3 only
B 2, 3 and 4 only
C 1 and 4 only
D All four
E
10.3 Borrowing costs from which category of borrowed funds may be capitalised (to the
extent they are directly attributable to qualifying assets)?
A Funds borrowed specifically to construct a qualifying asset

B Funds borrowed in advance of expenditure on qualifying assets
C General borrowed funds used to finance a qualifying asset
10.4
D
A
B
C
D
PLAll of the above
Which of the following is an example of an asset that would never qualify for
capitalisation of borrowing costs under IAS 23 Borrowing Costs?
Intangible assets
Financial assets
Manufacturing plants
Power generation facilities
10.5 Which qualitative characteristic is applied by IAS 23 Borrowing Costs to the

M
capitalisation of borrowing costs?
A Consistency
B Timeliness
C Materiality
D Understandability
10.6 QI in incurring expenditure on project 275 which meets the definition of a qualifying asset, in
SA
accordance with IAS 23 Borrowing Costs. The company has the following debt components:
(1) 6% $100,000 debt used specifically to finance project 274.

(2) 7% $500,000 preference share capital.
(3) 10% $80,000 short-term loan.
(4) 4% $200,000 convertible debt.
What capitalisation rate would QI apply to expenditure incurred on project 275?

A 7%
B 6.75%
C 6.54%
D 4%
(12 marks)
11 GOVERNMENT GRANTS
11.1 Which of the following accounting policies for grants related to assets is allowed under
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance?
(1) Deduct from the cost of related asset in the statement of financial position.
(2) Include in liabilities in the statement of financial position.
(3) Credit profit and loss immediately with cash received.
A All three
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only
E
11.2 Under IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance, what is the correct term for a loan which the lender undertakes to waive
repayment of under certain conditions?
A A forgivable loan
11.3
B
C
D
PL A non-payable loan
A non-recourse loan
A recourse loan
Under IAS 20 Accounting for Government Grants and Disclosure of Government

Assistance, how are government grants related to depreciable assets treated in the profit
or loss?
A The government grant is recognised over the period and in the proportions in which
depreciation expense on those assets is recognised
M
B The government grant must be recognised in the year in which the depreciable asset
is received and the following year only
C The government grant must be recognised over a period of five years
D The government grant must be recognised over a period of no more than 10 years
11.4 IAS 20 Accounting for Government Grants and Disclosure of Government Assistance defines
government assistance as an action by government designed to provide an economic benefit
SA
specific to an entity qualifying under certain criteria.
Which of the following is an example of government assistance?
A Free technical or marketing advice

B Provision of infrastructure by improvement to the general transportation network
C Supply of improved facilities such as irrigation
D A cash grant to buy a new item of plant
11.5 Which of the following disclosures for government grants is required under IAS 20
Accounting for Government Grants and Disclosure of Government Assistance?
(1) The accounting policy adopted for government grants.

(2) The nature and extent of government grants recognised in the financial statements.
(3) Unfulfilled conditions and other contingencies attached to government assistance
that have been recognised.
A 1 only
B 1 and 2 only
C 1 and 3 only
D 1, 2, and 3
E
11.6 On 1 January 20X1 Emex received a government grant of $100,000 to assist in the purchase
of new machinery costing $1,000,000 with a useful life of five years. The grant is repayable
on a sliding scale if the machine is sold within five year; that is the full amount if sold in the
first year, 80% if sold in the second year and so on. The management of Emex intends to use
the machine for five years.
A
B
PL
The accounting policy is to offset the grant against the cost of the asset.
What will be the depreciation expense for the year ended 31 December 20X2 and what
provision will be required for the repayment of the grant as at 31 December 20X2?
Depreciation charge
$000
180
180
Provision
$000
60
Nil
C 200 60
M
D 200 Nil
(12 marks)
12 IAS 40 INVESTMENT PROPERTIES
12.1 What is the definition of an investment property according to IAS 40 Investment

Property?
SA
A An investment in land and or buildings whether let to third parties or occupied by an

entity within the group
B A property owned and occupied by an entity for its own purposes
C A property which is held to earn rentals or for capital appreciation
D An investment in land and or buildings other than leased property
12.2 IAS 40 Investment Property gives examples of investment properties, which include some of
the following:
(1) Property held for long-term capital appreciation

(2) Property leased to another entity on a finance lease
(3) Property leased out under one or more operating leases
(4) Owner-occupied property
(5) Land held for an undetermined future use
(6) Property occupied by employees
Which of the above are listed by IAS 40 as examples of an investment property?
A 1, 5 and 6 only
B 1, 3 and 5 only
C 2, 3 and 4 only
D 2, 4 and 6 only
12.3 Which of the following qualifies as investment property under IAS 40 Investment
Property?
A A building that is vacant but is held to be leased out under an operating lease
B Property being constructed on behalf of third parties
C Property that is leased to another entity under a finance lease
E
D Owner-occupied property
12.4 Under IAS 40 Investment Property, which of the following transfers would result in a
change from the cost measurement basis before transfer to the fair value measurement
basis after transfer?
12.5
A
B
D
PL A transfer from investment property to owner-occupied property
A transfer from inventories to investment property at the commencement of an
operating lease to another party
A transfer from investment property to inventories, when the property is intended
for sale
None of the above
Under IAS 40 Investment Property, which of the following is correct?
Investment property is property held for administrative purposes

M
A
B Investment property is property held for use in the supply of services
C Investment property is property held for use in the production of goods
D Investment property is property held by owner to earn rental income or for capital
appreciation
(10 marks)
13 IAS 38 INTANGIBLE ASSETS

SA
13.1 Which one of the following could be classified as deferred development expenditure in
M’s statement of financial position as at 31 March 20X1 according to IAS 38 Intangible
Assets?
A $120,000 spent on developing a prototype and testing a new type of propulsion
system for trains. The project needs further work on it as the propulsion system is
currently not viable
B A payment of $50,000 to a local university’s engineering faculty to research new
environmentally friendly building techniques
C $35,000 spent on consumer testing a new type of electric bicycle. The project is
near completion and the product will probably be launched in the next twelve
months. M is not yet certain that there is going to be a viable market for the
finished product
D $65,000 spent on developing a special type of new packaging for a new energy
efficient light bulb. The packaging is expected to be used by M for many years and
is expected to reduce M’s distribution costs by $35,000 a year
13.2 Which ONE of the following would most likely result in the recognition of an asset in
KJH’s statement of financial position at 31 January 20X2?
A KJH spent $50,000 on an advertising campaign in January 20X2. KJH expects the
advertising to generate additional sales of $100,000 over the period February to
April 20X2
B KJH is taking legal action against a contractor for faulty work. Advice from its
legal team is that it is probable that KJH may receive $250,000 in settlement of its
claim within the next 12 months
C KJH purchased the copyright and film rights to the next book to be written by a
famous author for $75,000 on 1 March 20X1. A first manuscript has already been
received and advance orders suggest that the book will be a best seller
E
D KJH has developed a new brand name internally. The directors value the brand
name at $150,000
13.3 IAS 38 Intangible Assets governs the accounting treatment of expenditure on research and
development.
(1)
(2)
(3)
PL
Which of the following statements are correct?
Capitalised development expenditure must be amortised over a period not exceeding

five years.
If all the conditions specified in IAS 38 are met, development expenditure may be
capitalised if the directors decide to do so.
Capitalised development costs are shown in the statement of financial position
under the heading of Intangible Assets.
(4) Amortisation of capitalised development expenditure will appear as an item in a
M
company’s statement of changes in equity.
A 1 and 3 only
B 1 and 4 only
C 2 and 3 only
D 3 only
13.4 Which of the following is NOT an intangible asset?

SA
A Patents
B Development costs
C Short leaseholds
D Licences
13.5 Which of the following may be included in a company’s statement of financial position
as an intangible asset under IAS 38 Intangible Assets?
A Payment on account of patents

B Expenditure on completed research
C Start-up costs
D Internally-generated goodwill
13.6 Henna was incorporated on 1 January 20X6. At 31 December 20X6 the following costs had
been incurred:
$
(1) Legal fees incurred in establishing the entity 80,000
(2) Customer lists purchased from a company that has gone out of business 100,000
(3) Goodwill created by the company 80,000
(4) Patents purchased for valuable consideration 70,000
(5) Costs incurred by the company in developing patents 60,000
What is the total cost of intangible assets to be recognised in the statement of financial
position of Henna at 31 December 20X6 in accordance with IAS 38 Intangible Assets?
E
A $310,000
B $250,000
C $230,000
D $170,000
13.7 Which of the following conditions would preclude any part of the development
13.8
A
B
C
D
PL
expenditure to which it relates from being capitalised?
The development is incomplete

The benefits flowing from the completed development are expected to be greater
than its cost
Funds are unlikely to be available to complete the development
The development is expected to give rise to more than one product
Which of the following types of expenditure must be recognised as an expense when it is

incurred?
M
A Tangible non-current assets acquired in order to provide facilities for research and
development activities
B Legal costs in connection with registration of a patent
C Costs of searching for possible alternative products
D Costs of research work which are to be reimbursed by a customer
SA
13.9 On 1 October 20X1 Hyena paid $500,000 deposit towards the cost of a laboratory for research
and development. On 31 December 20X1, Hyena ’s financial year end, the laboratory had
still not been completed.
Where should the payment of $500,000 appear in Hyena’s statement of financial

position on 31 December 20X1?
A Development costs under intangible assets

B Payments on account under intangible assets
C Payments on account under tangible non-current assets
D Payments on account under current assets
13.10 RD ’s figures for research and development are as follows:

Research $267,000
Development expenditure in the year $215,000
Brought forward deferred development expenditure $305,000
Written off deferred expenditure in the year **
** To be calculated.
At 31 December 20X4 the balance carried forward for development expenditure was
$375,000.
What amount will RD charge to profit or loss for research and development for 20X4?
E
A $267,000
B $412,000
C $482,000
D $787,000
(20 marks)
14
14.1
PL
NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
PQ has ceased operations overseas in the current accounting period. This resulted in the
closure of a number of small retail outlets.
Which one of the following costs would be excluded from the loss on discontinued
operations?
A
B
C
Loss on the disposal of the retail outlets
Redundancy costs for overseas staff
Cost of restructuring head office as a result of closing the overseas operations
D Trading losses of the overseas retail outlets up to the date of closure
M
14.2 BN has an asset that was classified as held for sale at 31 March 20X2. The asset had a
carrying amount of $900 and a fair value of $800. The cost of disposal was estimated to be
$50.
According to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations,
which ONE of the following values should be used for the asset in BN’s statement of
financial position as at 31 March 20X2?
SA
A $750
B $800
C $850
D $900
14.3 During the year to 30 April 20X9 two companies carried out major re-organisations of their
activities. The re-organisations were as follows:
Maynard closed down its manufacturing division on 1 January 20X9. This division
accounted for 30% of Maynard’s revenue, Maynard will now focus all of their efforts on its
retail division.
Grant purchased a group of companies in February 20X9. One of the subsidiaries within the
group, Lytton, did not meet the profile required by Grant and therefore the intention of Grant
is to sell this subsidiary as soon as possible, and no later than 30 September 20X9.
Which of these re-organisations would be classified as discontinued operations for the

year ended 30 April 20X9?
A Maynard
B Lytton
C Both Maynard and Lytton
D Neither Maynard or Lytton
14.4 On 1 January 20X0 Beech purchased an asset for $500,000, the asset had a useful life of eight
years and nil residual value.
On 1 July 20X3 the asset was classified as held for sale in accordance with IFRS 5 Non-
current Assets Held for Sale and Discontinuing Activities. On that date the fair value less cost
E
of disposing of the asset were assessed as $254,000.
What is the total expense should be recognised in respect of this asset in the statement of
profit or loss for 20X3?
A $31,250
14.5
B
C
D
PL $56,650
$58,500
$62,500
In order for an asset to be classified as held for sale in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinuing Activities the sale of the asset must be highly
probable.
Which TWO of the following are indicators that the sale of the asset is highly probable?
(1) The asset has been advertised for sale in a trade journal.
M
(2) A contract with a buyer has been signed.
(3) The market value of similar assets is $50,000 and management hopes to sell the
asset for a profit of $30,000.
(4) Necessary repairs to the asset will be carried out when management has signed a
contract for the sale.
SA
A 1 and 2 only
B 2 and 3 only
C 3 and 4 only
D 1 and 4 only
(10 marks)
15 IAS 36 IMPAIRMENT OF ASSETS
15.1 The following information relates to three assets held by a company:
Asset A B C
$000 $000 $000
Carrying amount 100 50 40
Fair value less costs of disposal 80 60 35
Value in use 90 70 30
What is the total impairment loss?
A $Nil
B $10,000
C $15,000
D $20,000
15.2 Dodgy has a property which is currently stated at a revalued carrying amount of $253,000.
Due to a slump in property prices the value of the property is currently only $180,000.
The historical cost carrying amount of the property is $207,000.
E
How should the above impairment in value be reflected in the financial statements in
accordance with IAS 36 Impairment of Assets?
Profit or loss Other

account Comprehensive
Income
15.3
A
B
C
D PL Dr $73,000
Dr $27,000
Dr $73,000
–
Cr $46,000
Dr $46,000
–
Dr $73,000
Noddy has an item of equipment included in its statement of financial position at a carrying
amount of $2,750. The asset had been revalued several years ago. If the asset had not been
revalued its carrying amount would only have been $1,250.
An impairment review of the asset has been undertaken and it is estimated that the
recoverable amount of the asset is only $1,000.
M
Noddy has not made any annual transfers from the revaluation surplus to retained earnings.
How much of the impairment loss should be charged to other comprehensive income in
accordance with IAS 36 Impairment of Assets?
A $1,750
B $1,500
SA
C $nil
D $250
15.4 In 20X3 Angry revalued at $360,000 a plot of land which had been purchased in 20X1 for
$300,000 and recognised a revaluation gain of $60,000.
In 20X4 Angry revalued to $130,000 a second plot of land which had been purchased for
$100,000 in 20X2 and recognised a further revaluation gain of $30,000.
In 20X5 Angry wishes to write down the value of the first plot of land from $360,000 to
$260,000 because of an impairment in its value due to changes in market prices.
There have been no other movements on the revaluation surplus.
What amounts should be recognised in the financial statements for 20X5 for the
impairment loss?
Profit or loss Other Comprehensive Income

A $100,000 Nil
B $40,000 $60,000
C $10,000 $90,000
D Nil $100,000
15.5 The following measures relate to a non-current asset:
(1) Carrying amount $20,000

(2) Net realisable value $18,000
E
(3) Value in use $22,000
(4) Replacement cost $50,000
What is the recoverable amount of the asset?
A $18,000
16
16.1
B
C
D
PL
IAS 17 LEASES
$20,000
$22,000
$50,000
(10 marks)
On 1 January 20X7 Melon bought a machine by way of a finance lease. The terms of the
contract were as follows:
$
Cash price 18,000
M
Deposit (6,000)
———
12,000
Interest (9% for two years) 2,160
———
Balance 14,160
———
SA
The balance is payable in two annual instalments commencing 31 December 20X7.
The rate of interest implicit in the contract is approximately 12%.
Applying the requirements of IAS 17 Leases what is the finance charge to profit or loss
for the year ended 31 December 20X7?
A $1,080
B $1,440
C $1,620
D $2,160
16.2 IAS 17 Leases requires a lessee to capitalise a finance lease at which of the following
amounts?
A Fair value of the leased asset

B Present value of the minimum lease payments
C Lower of fair value of the leased asset and present value of the minimum lease payments
D Lower of minimum lease payments and fair value of leased asset
16.3 Alpha enters into a lease with Omega of an aircraft which had a fair value of $240,000 at the
inception of the lease. The terms of the lease require Alpha to pay 10 annual rentals of
$36,000 in arrears. Alpha is totally responsible for the maintenance of the aircraft which has
a useful life of approximately fifteen years.
E
The present value of the 10 annual rentals of $36,000 discounted at the interest rate implicit in
the lease is $220,000.
Applying the requirements of IAS 17 Leases to this lease what is the increase in Alpha’s
non-current assets?
16.4
A
B
C
D PLNil
$220,000
$240,000
$360,000
Acor is planning to acquire a new machine, which would cost $1,750,000. The acquisition
will be financed through a finance lease agreement, which has an implicit interest rate of 13%
per annum. The lease is for four years and Acor is required to make four annual payments of
$520,000, with the first payment due on commencement of the lease agreement.
There is uncertainty regarding title of the asset at the end of the lease period.
M
Acor’s usual policy is to depreciate similar machinery over five years on the straight line
basis.
What is the correct total charge to profit or loss for the first year of the lease?
A $509,900
B $577,500
SA
C $597,400
D $665,000
16.5 Z entered into a finance lease agreement on 1 November 20X2. The lease was for five years,
the fair value of the asset acquired was $45,000 and the interest rate implicit in the lease was
7%. The annual payment was $10,975 in arrears.
What is the total amount owing under the lease at 31 October 20X4?
A $27,212
B $28,802
C $29,350
D $40,108
(10 marks)
17 IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
17.1 TY is the main contractor employing sub-contractors to assist it when required.

TY has recently completed a contract replacing a roof on the local school. Despite this, the
roof has been leaking and some sections are now unsafe. The school is suing TY for $20,000
to repair the roof.
TY used a sub-contractor to install the roof and regards the sub-contractor’s work as faulty.
TY has raised a court action against the sub-contractor claiming the cost of the school’s action
plus legal fees, a total of $22,000.
TY has been informed by legal advisers that it will probably lose the case brought against it
by the school and will probably win the case against the sub-contractor.
E
How should these items be treated in TY’s financial statements?
A A provision should be made for the $20,000 liability and the case against the sub-
contractor ignored
B A provision should be made for the $20,000 liability and the probable receipt of
17.2
C
D
PL cash from the case against the sub-contractor disclosed as a note
No provisions should be made but the $20,000 liability should be disclosed as a
note
A provision should be made for the $20,000 liability and the probable receipt of
cash from the case against the sub-contractor recognised as a current asset
MN obtained a government licence to operate a mine from 1 April 20X1. The licence
requires that at the end of the mine’s useful life, all buildings must be removed from the site
and the site landscaped. MN estimates that the cost of this decommissioning work will be
$1,000,000 in 10 years’ time using a discount factor of 8%, a 10 year discount factor at 8% is
0.463.
M
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets how much
should MN include in provisions in its statement of financial position as at 31 March
20X2?
A $100,000
B $463,000
SA
C $500,000
D $1,000,000
17.3 Which of the following statements about provisions, contingencies and events after the
reporting period is correct?
A A company expecting future operating losses should make provision for those
losses as soon as it becomes probable that they will be incurred
B Details of all adjusting events after the reporting period must be disclosed by note in
a company’s financial statements
C A contingent asset must be recognised as an asset in the statement of financial
position if it is probable that it will arise
D Contingent liabilities must be treated as actual liabilities and provided for when it is
probable that they will arise, if they can be measured with reliability
17.4 Which of the following statements about contingent assets and contingent liabilities is
true?
(1) A contingent asset should be disclosed by note if an inflow of economic benefits is probable.
(2) A contingent liability should be disclosed by note if it is probable that a transfer of
economic benefits to settle it will be required, with no provision being made.
(3) No disclosure is required for a contingent liability if it is less than probable that a
transfer of economic benefits to settle it will be required.
A 1 only
B 2 only
C 3 only
E
D None of these statements
17.5 IAS 37 Provisions, Contingent Liabilities and Contingent Assets deals with accounting for
contingencies. An entity has a present obligation that probably requires the outflow of
economic resources and a contingent asset where the inflow of economic benefits is probable.
17.6
A
B
C
D
PL
How should the entity treat the present obligation and contingent asset?
Present obligation
Provided for
Provided for
Disclosed, but not provided for
Disclosed, but not provided for
The following describe potential provisions.

Contingent asset
Disclosed
Not disclosed
Disclosed
Not disclosed
(1) A provision to cover refunds. The company is in the retail sector and has a
reputation for a “no questions asked” policy on refunds.
M
(2) A provision to cover an onerous contract on an operating lease. The lease was on a
building which the company has subsequently vacated. The lease cannot be
terminated and cannot be re-let.
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets in

which of the above situations would a company be allowed to recognise a provision in its
financial statements?
SA
A Neither situation
B Both situations
C Situation 1 only
D Situation 2 only
17.7 Porter is finalising its financial statements for the year ended 30 September 20X3.
A former employee of Porter has initiated legal action for damages against the company after
being summarily dismissed in October 20X3. Porter ’s legal advisors feel that the employee
will probably win the case and have given the company a reasonably accurate estimate of the
damages which would be awarded. Porter has not decided whether to contest the case.
How should this item be classified in the financial statements of Porter for the year
ended 30 September 20X3?
A A non-adjusting event
B An adjusting event
C A contingent liability disclosed by way of note
D A provision
17.8 Which ONE of the following would require a provision to be created by BW at its
reporting date of 31 October 20X5?
A The government introduced new laws on data protection which come into force on 1
January 20X6. BW’s directors have agreed that this will require a large number of
E
staff to be retrained. At 31 October 20X5, the directors were waiting on a report
they had commissioned that would identify the actual training requirements
B At the reporting date, BW is negotiating with its insurance provider about the
amount of an insurance claim that it had filed. On 20 November 20X5, the
insurance provider agreed to pay $200,000
18
C
D PL BW makes refunds to customers for any goods returned within 30 days of sale, and
has done so for many years
A customer is suing BW for damages alleged to have been caused by BW’s product.
BW is contesting the claim and, at 31 October 20X5, the directors have been
advised by BW’s legal advisers it is very unlikely to lose the case
IAS 10 EVENTS AFTER THE REPORTING PERIOD

(16 marks)
WDC’s year end is 30 September 20X1.

M
18.1
Which ONE of the following should be classified by WDC as a non-adjusting event

according to IAS 10 Events After The Reporting Period?
A WDC was notified on 5 November 20X1 that one of its customers was insolvent
and was unlikely to repay any of its debts. The balance outstanding at 30
September 20X1 was $42,000
SA
B On 30 September WDC had an outstanding court action against it. WDC had made
a provision in its financial statements for the year ended 30 September 20X1 for
damages awarded against it of $22,000. On 29 October 20X1 the court awarded
damages of $18,000
C On 5 October 20X1 a serious fire occurred in WDC’s main production centre and
severely damaged the production facility
D The year end inventory balance included $50,000 of goods from a discontinued
product line. On 1 November 20X1 these goods were sold for a net total of $20,000
18.2 IAS 10 Events After the Reporting Period distinguishes between adjusting and non-adjusting
events.
Which ONE of the following gives rise to an adjusting event?
A A dispute with workers caused all production to cease six weeks after the year end
B A month after the year end the directors decided to cease production of one of three
product lines and to close the production facility
C One month after the year end a court awarded damages of $50,000 to one of the
reporting entity’s customers. The entity had expected to lose the case and made a
provision of $30,000 at the year end
D Three weeks after the year end a fire destroyed the reporting entity’s main
E
warehouse facility and most of its inventory
18.3 The draft financial statements of a limited liability company are under consideration. The
accounting treatment of the following material events after the reporting period needs to be
determined:
(1)
(2)
(3)
(4)
PLThe bankruptcy of a major customer, with a substantial debt outstanding at the end
of the reporting period.
A fire destroying some of the company’s inventory (the company’s going concern
status is not affected).
An issue of shares to finance expansion.
Sale for less than cost of some inventory held at the end of the reporting period.
According to IAS 10 Events After the Reporting Period, which of the above events require
an adjustment to the figures in the draft financial statements?
M
A 1 and 4 only
B 1, 2 and 3 only
C 2 and 3 only
D 2 and 4 only
18.4 Which of the following events between the end of the reporting period and the date the
financial statements are authorised for issue must be adjusted in the financial
SA
statements?
(1) Declaration of equity dividends.
(2) Decline in market value of investments.
(3) The announcement of changes in tax rates.
(4) The announcement of a major restructuring.
A 1 and 2 only
B 2 and 4 only
C 3 and 4 only
D None of them
18.5 Which of the following events occurring after the year end is classified as a non-
adjusting event in accordance with IAS 10 Events After the Reporting Period?
A A property valuation which provides evidence of a permanent diminution in value

B The renegotiation of amounts owing by credit customers
C The determination of the amount of bonus payments to be made to employees
D Government announcing a change in tax rates
18.6 The financial statements of an entity for the year ended 31 March 20X4 were approved by the
directors on 31 August 20X4.
Which of the following would be classified as an adjusting event in accordance with IAS
10 Events after the Reporting Period/
A A reorganisation of the entity proposed by a director on 31 January 20X4 was

agreed by the Board on 10 July 20X4
B A strike by the workforce which started on 1 May 20X4 stopped all production for
10 weeks before working terms and conditions were settled
C An insurance claim for damage caused by a fire in a warehouse on 1 January 20X4
for $2.5 million was settled with a receipt of $1.5 million on 1 June 20X4
E
D On 3 September 20X4 the entity sold some inventory for $100,000 which had a
carrying amount at 31 March 20X4 of $122,000
(12 marks)
19 IAS 12 INCOME TAXES
19.1
equipment:
PL
At 1 October 20X1 DX had the following balances in respect of property, plant and
Cost
Tax written down value
Statement of financial position:
Carrying amount
$
$220,000
$82,500
$132,000
DX depreciates all property, plant and equipment over five years using the straight line
method and no residual value. All assets were less than five years old at 1 October 20X1. No
assets were purchased or sold during the year ended 30 September 20X2.
M
The local tax regime allows tax depreciation of 50% on additions to property, plant and
equipment in the accounting period in which they are purchased. In subsequent accounting
periods tax depreciation of 25% per year of the tax written down value is allowed. Income
tax on profits is at a rate of 25%.
What should be the amount for deferred tax in DX’s statement of financial position as at
SA
30 September 20X2 in accordance with IAS 12 Income Taxes?
A $5,843
B $6,531
C $12,375
D $23,375
19.2 DF purchased its only item of plant on 1 October 20X1 for $200,000. DF charges
depreciation on a straight line basis over five years.
Tax depreciation is allowed as follows:
 50% of additions to property, plant and equipment in the accounting period in which
they are recorded;
 25% per year of the written down value in subsequent accounting periods except
that in which the asset is disposed of;
Income tax on profits is at a rate of 25%.
What would be the amount for deferred tax in DM’s statement of financial position as at
30 September 20X3, in accordance with IAS 12 Income Taxes?
A $3,750
B $11,250
C $18,750
D $45,000
19.3 The following information relating to taxation appears in the records of Stapley.
E
Balance on income tax account on 1 January 20X2 187,500
Income tax paid in 20X2 in full settlement for the year
ended 31 December 20X1 194,300
Estimated income tax for the year ended 31 December 20X2 137,600
What will the corporation tax liability be in Stapley’s statement of financial position on
19.4
A
B
C
D
PL
31 December 20X2?
$194,300
$144,400
$137,600
$130,800
DZ recognised a tax liability of $290,000 in its financial statements for the year ended 30
September 20X5. This was subsequently agreed with and paid to the tax authorities as
$280,000 on 1 March 20X6. The directors of DZ estimate that the tax due on the profits for
the year to 30 September 20X6 will be $320,000. DZ has no deferred tax liability.
M
What is DZ’s profit or loss tax charge for the year ended 30 September 20X6?
A $310,000
B $320,000
C $330,000
D $600,000
SA
19.5 At 30 April 20X3 the non-current assets of Shades have a carrying amount of $365,700 and a
tax written down value of $220,000. The balance brought forward on the deferred tax
account at 1 May 20X2 was $33,000. The tax rate is 25%.
What is the balance on the deferred tax account at 30 April 20X3?
A $33,000
B $36,425
C $55,000
D $91,425
19.6 At 30 April 20X6, the carrying amount of the non-current assets of Bahno was $80,000
greater than the tax written down value, and the balance brought forward on the deferred tax
account was $24,800. The company accountant calculated that the corporation tax charge on
the reported profit for the year to 30 April 20X6 would be $53,960, based on the tax rate of
24%.
What is the total charge for taxation in the statement of profit and loss for the year to 30
April 20X6?
A $48,360
B $59,560
C $73,160
D $78,760
(12 marks)
20 FINANCIAL INSTRUMENTS
20.1 TS purchased 100,000 of its own equity shares in the market and classified them as treasury
shares. At the end of the accounting period TS still held the treasury shares.
E
Which ONE of the following is the correct presentation of the treasury shares in TS’s
closing statement of financial position in accordance with IAS 32 Financial Instruments:
Presentation?
A As a current asset investment
20.2
B
C
D
PL As a non-current liability
As a non-current asset
As a deduction from equity
IAS 32 Financial Instruments: Presentation classifies issued shares as either equity

instruments or financial liabilities. An entity has the following categories of funding on its
statement of financial position:
(1)
(2)
A preference share that is redeemable for cash at a 10% premium on 30 May 20X5.
An ordinary share which is not redeemable and has no restrictions on receiving
dividends.
M
(3) A loan note that is redeemable at par in 2020.
(4) An irredeemable loan note that pays interest at 7% a year.
Applying IAS 32, how would each of the above be categorised in the statement of
financial position?
As an equity As a financial
SA
instrument liability
A 1 and 2 only 3 and 4 only
B 2 and 3 only 1 and 4 only
C 2 only 1, 3 and 4 only
D 1, 2 and 3 only 4 only
20.3 How should convertible debt be classified in accordance with IAS 32 Financial
Instruments: Presentation?
A As either a liability or equity based on an evaluation of the substance of the

contractual arrangement
B As separate liability and equity components , basing the liability element on the
present value of future cash flows
C As equity in its entirety, on the presumption that all options to convert the debt into
equity will be exercised in the future
D As a liability in its entirety, until it is converted into equity
20.4 How should the proceeds from issuing a compound instrument be allocated between
liability and equity components in accordance with IAS 32 Financial Instruments:
Presentation?
A The liability component is measured at fair value and the remainder is allocated to
the equity component
B The equity component is measured at fair value and the remainder is allocated to the
liability component
C The fair values of both the components are estimated and the proceeds allocated
proportionately
D The equity component is measured at its intrinsic value and the remainder is
E
allocated to the liability component
20.5 In the current financial year, Natamo has raised a loan for $3m. The loan is repayable in 10
equal half-yearly instalments. The first instalment is due six months after the loan was raised.
How should the loan be reported in Natamo’s next financial statements?
20.6
A
B
C
D
PLAs a current liability
As a non-current liability
As equity
As both a current and a non-current liability
On 1 January 20X2 LMN issued $2,000,000 8% convertible debt at par. The debt is
repayable, or convertible, at a premium of 10% four years after issue. The effective interest
rate for the debt is 14%. The present values $1 receivable at the end of each year, based on
discount rates of 8%, 10% and 14% are:
8% 10% 14%
End of year 1 0.926 0.909 0.877
M
2 0.857 0.826 0.769
3 0.794 0.751 0.675
4 0.735 0.683 0.592
What is the finance charge to LMN’s profit or loss for the year ended 31 December
20X3?
SA
A $160,000
B $248,000
C $260,000
D $274,000
20.7 On 1 March 20X2 PQR purchased a debt instrument from the market for $105,000, the par
value of the instrument was $100,000. At 31 December 20X2 the fair value of the instrument
is $112,000 and the amortised cost has been calculated to be $104,000.
PQR does not hold this type of asset for contractual cash flows.
At what amount should the investment be included in PQR’s statement of financial

position as at 31 December 20X2?
A $100,000
B $104,000
C $105,000
D $112,000
20.8 On 1 January 20X2 XYZ issued $1,000,000 4% convertible loan notes, at a discount of 95.
The loan notes are redeemable in five years at a premium of 10%.
What are the total finance costs that should be charged to profit or loss over the five-
year term of the convertible loan notes?
A $350,000
B $345,000
C $250,000
D $200,000
20.9 In accordance with IFRS 9 Financial Instruments, under what circumstances, can an
entity classify financial assets that meet the amortised cost criteria as at fair value
E
through profit or loss?
A Where the instrument is held to maturity

B If doing so eliminates an accounting mismatch
C Where the financial asset passes the contractual cash flow characteristics test
D Where the business model approach is adopted
21
21.1
PL
REGULATORY FRAMEWORK
Harwich holds 70,000 $1 “B” shares in Sall. These shares carry one vote each.
Felixstowe holds 18,000 $1 “A” shares in Sall. These shares carry 10 votes each.
The share capital of Sall is made up of the following:
(18 marks)
$
100,000 “B” shares of $1 each 100,000
M
20,000 “A” shares of $1 each 20,000
————
120,000
————
Of which of the following reporting entities is Sall a subsidiary undertaking?
A Both Harwich and Felixstowe

SA
B Harwich
C Felixstowe
D Neither Harwich nor Felixstowe
21.2 Sam has a share capital of $10,000 split into 2,000 A ordinary shares of $1 each and 8,000 B
ordinary shares of $1 each. Each A ordinary share has 10 votes and each B ordinary share has
one vote. Both classes of shares have the same rights to dividends and on liquidations. Tom
owns 1,500 A ordinary shares in Sam. Dick owns 6,000 B ordinary shares in Sam.
All three companies conduct similar activities and there is no special relationship between the
companies other than that already stated. The shareholdings in Sam are held as long-term
investments and are the only shareholdings of Tom and Dick.
Which companies must prepare consolidated financial statements?
A Neither Tom nor Dick
B Tom only
C Dick only
D Both Tom and Dick
21.3 During the last three years Harvert had held 400,000 ordinary shares in Jamee. The issued
share capital of Jamee is $500,000 in shares of 50 cents each. The finance director of Harvert
is a director of Jamee.
How should the investment in Jamee be treated in the consolidated financial statements
of Harvert ?
A As a non-current asset investment

B As a current asset investment
C As an associated undertaking
D As a subsidiary
21.4 Which of the following statements regarding consolidated financial statements is
E
correct?
(1) Only the group’s share of the assets of a subsidiary is reflected on the consolidated
statement of financial position.
(2) Only the group’s share of the net assets of an associate is reflected on the
21.5
(3)
A
B
C
D
PLconsolidated statement of financial position.
The value of share capital on a consolidated statement of financial position will
include the share capital of both the investor and the investee.
1 only
2 only
3 only
None of the statements
Which TWO of the following situations would indicate that a parent has control over a
subsidiary?
M
(1) The company has a 50% shareholding with the other 50% owned by another
company. Both owners must be in agreement.
(2) The company owns 100% of preference shares and 10% of the ordinary shares.
(3) The company owns 40% of the ordinary shares and also has an agreement with
another 40% of the owners of ordinary shares that they will always vote with the
company.
SA
(4) The company owns 30% of the ordinary shares and has the ability to control the
board of directors.
A 1 and 2 only
B 2 and 3 only
C 3 and 4 only
D 1 and 4 only
(10 marks)
22 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
22.1 HX acquired 80% of SA’s 100,000 equity shares on 1 July 20X0 for $140,000. On 1 July
20X0 the fair value of SA’s identifiable net assets was $126,000. The fair value of non-
controlling interest on acquisition is based on SA’s share price, which was $1.70.
The trainee accountant has suggested three possible values for goodwill on acquisition as
follows:
(1) $14,000
(2) $39,200
(3) $48,000
E
Which of the above values for goodwill is an acceptable valuation in accordance with
IFRS 3 Business Combinations?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
22.2
D
PL All three
At 1 January 20X1 Barley acquired 100% of the share capital of Corn for $1,400,000. At that
date the share capital of Corn consisted of 600,000 ordinary shares of 50c each and its
retained earnings were $50,000.
On acquisition Corn had some assets whose carrying amount was $230,000 but the fair value
was $250,000.
What was goodwill on acquisition?

M
A $730,000
B $750,000
C $1,030,000
D $1,050,000
22.3 On 1 January 20X1, Jarndyce acquired 80% of the ordinary share capital of Skimpole for
$576,000. The statements of financial position of the two companies at 31 December 20X1
were as follows:
SA
Jarndyce Skimpole
$000 $000
Net assets 468 432
Investment in Skimpole 576 –
––––– ––––
1,044 432
––––– ––––
Issued share capital 720 180
Retained earnings
At 31 December 20X0 144 108
Profit for 20X1 180 144
––––– ––––
1,044 432
––––– ––––
Non-controlling interest is valued at fair value on acquisition, which was $140,000. There
has been no impairment of goodwill since the acquisition took place.
What amount of goodwill should be included in the consolidated statement of financial

position of Jarndyce as at 31 December 20X1?
A $144,000
B $230,400
C $345,600
D $428,000
22.4 Vaynor acquired 80,000 ordinary shares in Weeton some years ago.
Extracts from the statements of financial position of the two companies as at 30 September
20X7 are as follows:
Vaynor Weeton
E
$000 $000
Ordinary shares of $1 each 500 100
Retained earnings 90 40
On acquisition the retained earnings of Weeton showed a deficit of $10,000.
A
B
C
D
PL
Goodwill has been impaired by $15,000 since acquisition.
measured at fair value on acquisition.
$115,000
$118,000
$125,000
Non-controlling interest is
What were the consolidated retained earnings of Vaynor on 30 September 20X7?
$102,000
22.5 Gonzo acquired 80% of the share capital of Bamboo a number of years ago. Bamboo has
M
issued 200,000 $1 shares which had a market price of $3.10 on acquisition. The carrying
amount of Bamboo’s net assets today is $650,000, this is $50,000 higher than it was on
acquisition.
Non-controlling interest was measured at fair value on acquisition.
What amount should be shown for non-controlling interest in Gonzo’s consolidated

statement of financial position today?
SA
A $120,000
B $124,000
C $130,000
D $134,000
(10 marks)
23 CONSOLIDATION ADJUSTMENTS
23.1 HW sold goods to SD, its 100% owned subsidiary on 1 February 20X1. The goods were sold
to SD for $48,000. HW made a profit of 33.33% on the original cost of the goods.
At the year end, 30 June 20X1, 40% of the goods had been sold by SD; the remainder was
still in SD’s inventory and SD had not paid for any of the goods.
Which ONE of the following states the correct adjustments required in the HW group’s
consolidated statement of financial position at 30 June 20X1?
A Reduce inventory and retained earnings by $7,200 and Reduce payables and
receivables by $7,200
B Reduce inventory and retained earnings by $9,600 and Reduce payables and
C Reduce inventory and retained earnings by $7,200 and Reduce payables and
D Reduce inventory and retained earnings by $9,600 and Reduce payables and
E
23.2 Salt owns 100% of Pepper. During the year Salt sold goods to Pepper for a sales price of
$1,044,000, generating a margin of 25%. 40% of these goods had been sold on by Pepper to
external parties at the end of the reporting period.
What adjustment for unrealised profit should be made in Salt’s consolidated financial
23.3
statements?
A
B
C
D
PL $83,520
$104,400
$125,280
$156,600
On 1 April 20X6, Woolwich paid $816,000 for 80% of Malta’s $408,000 share capital.
Malta’s retained earnings at that date were $476,000. At 31 March 20X1 the retained
earnings of the companies are:
$000
Woolwich 1,224
M
Malta 680
Woolwich’s inventory includes goods purchased from Malta for $18,000. Malta makes a
profit at 20% on the cost of all goods sold to Woolwich.
What are the retained earnings in the consolidated statement of financial position of
Woolwich as at 31 March 20X1?
SA
A $1,384,320
B $1,384,800
C $1,387,200
D $1,439,200
23.4 During the year Subway invoiced $200,000 to its parent company for transfers of goods in
inventory. Transfers were made at a 25% mark-up. At the end of the year the parent still held
60% of the goods in inventory.
What adjustment should be made for unrealised profit in the consolidated financial
statements for the year?
A $16,000
B $24,000
C $30,000
D $40,000
23.5 Which of the following statements apply when producing a consolidated statement of
financial position?
(1) All inter-company balances should be eliminated.

(2) Inter-company profit in year-end inventory should be eliminated.
(3) Closing inventory held by subsidiaries needs to be included at fair value.
A 1 only
B 1 and 2 only
C 2 and 3 only
D 3 only
23.6 Milton owns all the share capital of Keynes. The following information is extracted from the
E
individual company statements of financial position as at 31 December 20X1.
Milton Keynes
$ $
Current assets 500,000 200,000
Current liabilities 220,000 90,000
PL
Included in Milton purchase ledger is a balance in respect of Keynes of $20,000. The balance
on Milton account in the sales ledger of Keynes is $22,000. The difference between those
figures is accounted for by cash in transit.
If there are no other intra-group balances, what is the value of the net current assets in
the consolidated statement of financial position of Milton and its subsidiary?
A
B
$368,000
$370,000
C $388,000
M
D $390,000
23.7 A parent company sold goods to its wholly owned subsidiary for $1,800 representing cost
plus 20%. At the year end two-thirds of the goods were still in inventory.
What is the amount of unrealised profit at the year end?
A $360
SA
B $300
C $240
D $200
23.8 Bass acquired its 70% holding in Miller many years ago. At 31 December 20X7 Miller had
inventory with a book value of $15,000 purchased from Bass at cost plus 25%.
What will be the effects on non-controlling interest and retained earnings in the
consolidated statement of financial position after dealing with the consolidation
adjustment required for inventory?
Non-controlling interest Retained earnings

A No effect Reduce by $3,000
B No effect Reduce by $3,750
C Reduce by $900 Reduce by $2,100
D Reduce by $1,125 Reduce by $2,625
23.9 Rugby has a 75% subsidiary, Stafford , and is preparing its consolidated statement of
financial position as on 31 December 20X6. The carrying amount of non-current assets in the
two companies at that date is as follows:
$
Rugby 260,000
Stafford 80,000
On 1 January 20X6 Stafford had transferred an item of equipment to Rugby for $40,000. At
the date of transfer the equipment, which had cost $42,000, had a carrying amount of $30,000
and a remaining useful economic life of five years. The group accounting policy is to
depreciate non-current assets on a straight-line basis down to a nil residual value. It is also
group policy not to revalue non-current assets.
E
What is the figure that will be disclosed as the carrying amount of non-current assets in
the consolidated statement of financial position of Rugby as on 31 December 20X6?
A $340,000
B $332,000
24
24.1
C
D
PL $330,000
$312,000
FURTHER CONSOLIDATION ADJUSTMENTS
Huge acquired 60% of Small’s 500,000 shares on 1 January 20X2. The purchase
consideration consisted of an immediate cash payment of $3.45 per share plus a share
(18 marks)
exchange of three shares in Huge for every two shares in Small. At the acquisition date the
market prices of each share in Huge and each share in small were $6.50 and $4.20,
respectively.
M
What amount should be included in Huge’s statement of financial position in respect of
its investment in Small?
A $3,960,000
B $2,925,000
C $2,335,000
D $1,875,000
SA
24.2 In relation to accounting for positive purchased goodwill, what is the correct accounting
treatment in accordance with IFRS 3 Business Combinations?
A Carry as an asset and amortise goodwill over its useful economic life
B Carry as an asset and test annually for impairment
C Value each year to fair value
D Write off immediately against consolidated retained earnings
24.3 Tom has purchased all the share capital of Jerry during the year.
Which of the following items would Tom take into account when calculating the fair
value of the net assets acquired in accordance with IFRS 3 Business Combinations?
(1) A contingent liability dependent on the outcome of a legal case which has been
provided for in Jerry’s books.
(2) A provision required to cover costs of reorganising Jerry ’s departments to fit in
with Tom’s structure.
(3) A warranty provision in Jerry’s books to cover costs of commitments made to
customers.
E
A 3 only
B 2 and 3 only
C 1 and 3 only
D 1 only
24.4 The books of Tiny contain a provision for reorganisation. The reorganisation is under way
PL
and the provision is to cover costs to be incurred in the next six months to complete the
reorganisation.
Huge is considering acquiring Tiny. If it does so, the reorganisation of Tiny will continue.
In assessing the fair value of net assets the directors of Huge wish to make a provision for
future trading losses, and include the existing provision for reorganisation costs.
In accordance with IFRS 3 Business Combinations which provisions, if any, may be

included?
Provision for trading losses Provision for reorganisation costs
M
A Include Include
B Exclude Include
C Include Exclude
D Exclude Exclude
24.5 Which of the following are required when assessing fair values on acquisition in
accordance with IFRS 3 Business Combinations?
SA
(1) Valuation of non-current assets at market value where this is higher than its carrying
amount.
(2) Discounting trade receivables to present values where debt is not due to be
recovered for two years.
(3) Inclusion of a contingent liability, which is a present obligation, of the acquired
company.
A 1 only
B 2 only
C 1 and 2 only
D 1, 2 and 3
24.6 Leeds acquired the whole of the issued share capital of Cardiff for $12 million in cash. In
arriving at the purchase price Leeds had taken into account in respect of Cardiff future re-
organisation costs of $1 million and anticipated future losses of $2 million. The fair value of
the net assets of Cardiff before taking into account these matters was $7 million.
In accordance with IFRS 3 Business Combinations, what is the amount of goodwill on

the acquisition?
A $8 million
B $7 million
C $6 million
D $5 million
E
24.7 On 1 January 20X2 Harry purchased 75% of the equity shares of Sally. The purchase
consideration consisted of an immediate cash payment of $2 per share plus an additional
payment of $3 per share on 1 January 20X4.
Harry’s cost of capital is 6% and Sally’s equity shares consist of $100,000 50 cent shares.
24.8
A
B
C
D
PL
What is the cost of investment in Harry’s statement of financial position at 31 December
20X2 and how should the deferred consideration be presented?
Cost of investment
$700,000
$724,000
$700,000
$724,000
Presented as
Current liability
Current liability
Non-current liability
Non-current liability
Mungo acquired 80% of the equity share capital of Jerry on 1 January 20X2, paying cash of
$1,200,000. Mungo has agreed to make a further cash payment of $600,000 if Jerry’s share
M
price increases by at least 10% each year for the next three years. The fair value of this
contingent consideration on 1 January 20X2 was measured at $320,000.
At 31 December 20X2 the fair value of the contingent consideration was remeasured to
$345,000, but market expectations for the next 12 months are very poor and the market as a
whole is expected to fall by 15%. If the market reacts as expected then the estimated fair
value of the contingent consideration on 31 December 20X3 would be $180,000.
SA
At what amount will Mungo include the contingent consideration in its statement of
financial position as at 31 December 20X2?
A $600,000
B $345,000
C $320,000
D $180,000
24.9 Debbie incurred $1,000,000 of transaction costs in respect of the recent purchase of a
controlling stake in Harry. These costs consist of $800,000 legal fees associated with the
acquisition and $200,000 of issue costs relating to the equity shares issued by Debbie as part
of the purchase consideration.
How should these transaction costs be accounted for in Debbie’s financial statements?
A Legal fees of $800,000 should be expensed immediately and the share issue costs of
$200,000 should be set off against share premium
B The full amount of $1,000,000 should be expensed immediately
C The full amount of $1,000,000 should be included as part of the cost of investment
in Harry
D Legal fees of $800,000 should be expensed immediately and the share issue costs of
$200,000 should be added to the cost of investment
(18 marks)
E
25 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
25.1 Constable owns 40% of Turner which it treats as an associated undertaking. Constable also
owns 60% of Whistler. Constable has held both of these shareholdings for more than one
year. Revenue of each company for the year ended 30 June 20X2 was as follows:
PL Constable
Turner
Whistler
What figure should be shown as revenue in Constable’s consolidated statement of profit

or loss for the year ended 30 June 20X2?
A
B
$460 million
$500 million
$m
400
200
100
C $580 million
M
D $700 million
25.2 Barley has owned 100% of the issued share capital of Oats for many years. Barley sells
goods to Oats at cost plus 20%. The following information is available for the year.
Revenue
Barley $460,000
Oats $120,000
SA
During the year Barley sold goods to Oats for $60,000, of which $18,000 were still held in
inventory by Oats at the year end.
At what amount should total revenue appear in the consolidated statement of profit or
loss?
A $520,000
B $530,000
C $538,000
D $562,000
25.3 Ufton is the sole subsidiary of Walcot. The cost of sales figures for 20X1 for Walcot and
Ufton were $11 million and $10 million respectively. During 20X1 Walcot sold goods which
had cost $2 million to Ufton for $3 million. Ufton has not yet sold any of these goods.
What is the consolidated cost of sales figure for 20X1?
A $16 million
B $18 million
C $19 million
D $20 million
25.4 Patience has a wholly owned subsidiary, Bunthorne. During 20X1 Bunthorne sold goods to
Patience for $40,000 which was cost plus 25%. At 31 December 20X1 $20,000 of these
E
goods remained unsold.
By what amount will revenue be reduced in the consolidated statement of profit and loss
for the year ended 31 December 20X1?
A $20,000
25.5
B
C
D
PL $30,000
$32,000
$40,000
Patience has a wholly owned subsidiary, Bunthorne. During 20X1 Bunthorne sold goods to
Patience for $40,000 which was cost plus 25%. At 31 December 20X1 $20,000 of these
goods remained unsold.
By what amount will profit be reduced in the consolidated statement of profit or loss for
the year ended 31 December 20X1?
M
A $4,000
B $6,000
C $8,000
D $10,000
25.6 The following figures related to Sanderstead and its subsidiary Croydon for the year ended 31
December 20X9.
Sanderstead Croydon
SA
$ $
Revenue 600,000 300,000
Cost of sales (400,000) (200,000)
Gross profit 200,000 100,000
During the year Sanderstead sold goods to Croydon for $20,000, making a profit of $5,000.
These goods were all sold by Croydon before the year end.
What are the amounts for revenue and gross profit in the consolidated statement of
profit and loss of Sanderstead for the year ended 31 December 20X9?
Revenue Gross profit

A $900,000 $300,000
B $900,000 $295,000
C $880,000 $300,000
D $880,000 $295,000
25.7 Chicken owns 80% of Egg. Egg sells goods to Chicken at cost plus 50%. The total invoiced
sales to Chicken by Egg in the year ended 31 December 20X1 were $900,000 and, of these
sales, goods which had been invoiced at $60,000 were held in inventory by Chicken at 31
December 20X1.
What is the reduction in aggregate group gross profit?
A $20,000
B $24,000
C $30,000
D $40,000
25.8 Fosters in 20X7 invoiced $120,000 of goods to its 75% subsidiary, Stella , at cost plus 30%.
E
Stella had 25% of these in goods in inventory at the year end. At the start of the year Stella
had $15,000 worth of inventory invoiced from Fosters, all of which was sold in 20X7.
What is the amount of unrealised profit adjustment to consolidated gross profit?
A $3,461
25.9
B
C
D
PL$4,500
$6,923
$9,000
Cherry owned 75% of Plum. For the year ended 31 December 20X1 Plum reported a net
profit of $118,000. During 20X1 Plum sold goods to Cherry for $36,000 at cost plus 50%.
At the year end these goods are still held by Cherry.
What is the non-controlling interest in the consolidated statement of profit or loss for
the year ended 31 December 20X1?
M
A $25,000
B $26,500
C $27,250
D $29,500
25.10 Hot owns 80% of the issued share capital of Warm and 40% of the issued share capital of
Cold. In the individual company financial statements the tax charges for the year are:
SA
$
Hot 40,000
Warm 36,000
Cold 20,000
At what amount should be shown for the tax charge in the consolidated statement of
profit or loss?
A $68,800
B $76,000
C $76,800
D $84,000
25.11 Vaynor acquired 100,000 ordinary shares in Weeton and 20,000 ordinary shares in Yarlet
some years ago. The investment in Yarlet gives Vaynor significant influence.
Extracts from the statements of financial position of the three companies as on 30 September
20X7 are as follows:
Vaynor Weeton Yarlet
$000 $000 $000
Ordinary shares of $1 each 500 100 50
Retained earnings 90 40 70
At acquisition the retained earnings of Weeton showed a deficit of $10,000 and of Yarlet a
surplus of $30,000.
E
What were the consolidated retained earnings of Vaynor on 30 September 20X7?
A $136,000
B $156,000
C $200,000
D $210,000
26
26.1
PL
INVESTMENTS IN ASSOCIATES
The HC group acquired 30% of the equity share capital of AF on 1 July 20X0 paying
$25,000.
At 1 April 20X0 the equity of AF comprised:
$
(22 marks)
$1 equity shares 50,000

Share premium 12,500
M
Retained earnings 10,000
AF made a profit for the year to 31 March 20X1 (prior to dividend distribution) of $6,500 and
paid a dividend of $3,500 to its equity shareholders. Profits accrue evenly throughout the
year.
What amount of income from associate will be included in the consolidated statement of
SA
profit or loss for the year ended 31 March 20X1?
A $675
B $900
C $1,462.50
D $1,950
26.2 The HY group acquired 35% of the equity share capital of SX on 1 July 20X0 paying
$70,000. This shareholding enabled HY group to exercise significant influence over SX.
At 1 July 20X0 the equity of SX comprised:

$
$1 equity shares 100,000
SX made a profit for the year ended 30 June 20X1 (prior to dividend distribution) of $130,000
and paid a dividend of $80,000 to its equity shareholders.
What amount should be shown in HY’s consolidated statement of financial position at

30 June 20X1 for the investment in associate?
A $115,500
B $98,000
C $87,500
D $70,000
26.3 Which of the following statements regarding the equity method of accounting is true?
(1) An investment in an associate is always carried at cost.

(2) An investor recognises its share of the associate’s profit or loss in consolidated
profit or loss.
E
A Neither statement
B Statement 1 only
C Statement 2 only
D Both statements
26.4
(2)
(3)
(4)
A
B
C
PL
Which of the following could provide evidence of “significant influence”?
(1) 51% of the voting power of the investee.

interchange of management personnel.
participation in decisions about dividends.
provision of essential technical information.
1, 2 and 3 only
1, 2 and 4 only
1, 3 and 4 only
D 2, 3 and 4 only
M
26.5 Inveresk has equity shareholdings in three other companies, as shown below, and has a seat
on the board of each:
Inveresk Other shareholders

Raby 40% No other holdings larger than 10%
Seal 30% Another company holds 60% of Seal’s equity
SA
Toft 15% Two other companies hold respectively 50% and 35% of Toft’s
equity, and each has a seat on its board. Inveresk exerts
significant influence over Toft
Which of the above shareholdings are associated undertakings of Inversk?
A Raby only
B Raby and Seal
C Raby and Toft
D Raby, Seal and Toft
26.6 Holly has a 30% holding in Johnson which allows Holly to exert significant influence over
Johnson. During the current year Holly sold goods to Johnson for $15,000; Holly applies a
mark-up of 25% on cost. Johnson still held half of these goods in inventory at the year end.
What is the amount of unrealised profit that will be reflected in Holly’s consolidated
financial statements for the current year?
A $450
B $562.5
C $1,500
D $3,000
(12 marks)
E
27 ANALYSIS AND INTERPRETATION
27.1 An entity that fixes prices by adding 50% to cost actually achieved a mark-up of 45%.
Which of the following factors could account for the shortfall?
27.2
A
B
C
D
PL Sales were lower than expected
Opening inventories had been overstated
Closing inventories were higher than opening inventories
Purchases were higher than expected
Which of the following factors could cause a company’s gross profit percentage on sales
to fall below the expected level?
A Overstatement of closing inventories

B The incorrect inclusion in purchases of invoices relating to goods supplied in the
M
following period
C The inclusion in sales of the proceeds of sale of non-current assets
D Trade discounts offered to customers were lower than expected
27.3 Which of the following are true of trend analysis?

SA
(1) It uses changes in monetary amount and percentage terms to identify patterns.
(2) It concentrates on the relative size of current assets.
(3) It examines changes over time.
(4) It examines the relationships of percentage changes to each other.
A 1 and 3 only
B 1 and 4 only
C 2 and 3 only
D 2 and 4 only
27.4 Gormenghast’s current ratio has been calculated as 1.2. However, it has now been discovered
that closing inventory has been understated by $24,000 and opening inventory has been
overstated by $24,000.
How did these misstatements affect the calculations of Gormenghast’s current ratio and
inventory days?
Current ratio Inventory days

A Too high Too high
B Too high Too low
C Too low Too high
D Too low Too low
E
27.5 The following are extracts from the financial statements of Lamas for the year ended
31 December 20X2.
Statement of financial position Statement of profit or loss

$ $
Issued share capital 2,000 Operating profit 795
PL
Retained earnings
12% Loan notes 20X8

1,000
———
3,000
1,000
———
4,000
———
Loan note interest
What is the return on capital employed at the end of the year?

(120)
——
675
——
A 22.5%
M
B 19.9%
C 16.9%
D 16.6%
27.6 Welwyn buys and sells a single product. The following is an extract from its statement of
financial position at 31 December 20X7:
20X7 20X6
$ $
SA
Inventories 50 40
Trade receivables 16 24
Sales and purchases during 20X7 were $200,000 and $120,000 respectively. 20% of sales
were for cash.
What were the average receivables collection period and gross profit percentage for the
year ended 31 December 20X7?
Average receivables collection period Gross profit percentage
A 37 days 35%
B 37 days 45%
C 46 days 35%
D 46 days 45%
27.7 Marple has a current ratio of 2:1.
Which of the following transactions will cause the current ratio to decrease?
A Receives cash in respect of a long-term loan

B Receives cash in respect of a short-term loan
C Pays an existing creditor
D Writes off an existing trade receivable against the allowance for irrecoverable debts
(14 marks)
28 IAS 7 STATEMENT OF CASH FLOWS
E
28.1 IAS 7 Statement of Cash Flows sets out the three main headings to be used in a statement of
cash flows. Items that may appear on a statement of cash flows include:
(1) Tax paid

(2) Purchase of investments
(3) Loss on disposal of machinery
(4)
A
B
C
D
PL Purchase of equipment
Which of the above items would be included under the heading “Cash flows from
operating activities” according to IAS 7?
1 and 2 only
1 and 3 only
2 and 4 only
3 and 4 only
28.2 Which ONE of the following would be shown in a statement of cash flow using the direct
M
method but not in a statement of cash flow using the indirect method of calculating cash
generated from operations?
A Cash payments to employees

B Increase/(decrease) in receivables
C Depreciation
D Finance costs
SA
28.3 An extract from a statement of cash flows prepared by a trainee accountant is shown below:
$m
Profit before taxation 28
Adjustments for:
Depreciation (9)
––
Operating profit before working capital changes 19
Decrease in inventories 3
Increase in receivables (4)
Increase in payables (8)
––
Cash generated from operations 10
E
—
Which of the following criticisms of this extract are correct?
(1) Depreciation charges should have been added, not deducted.

(2) Decrease in inventories should have been deducted, not added.
28.4
(3)
(4)
A
B
C
D
PLIncrease in receivables should have been added, not deducted.
Increase in payables should have been added, not deducted.
1 and 3 only
1 and 4 only
2 and 3 only
2 and 4 only
At 1 January 20X0 Casey had property, plant and equipment with a carrying amount of
$250,000. In the year ended 31 December 20X0 the company disposed of assets with a
carrying amount of $45,000 for $50,000. The company revalued a building from $75,000 to
M
$100,000 and charged depreciation for the year of $20,000. At the end of the year the
carrying amount of property, plant and equipment was $270,000.
How much will be reported in the statement of cash flows for the year ended 31
December 20X0under the heading “cash flows from investing activities”?
A $10,000 outflow
B $10,000 inflow
SA
C $35,000 outflow
D $50,000 inflow
28.5 A company sold a building at a profit.
How should this transaction be treated in the company’s statement of cash flows?
Proceeds of sale Profit on sale

A Cash inflow under Added to profit in calculating cash flow
Financing activities from operating activities
B Cash inflow under Deducted from profit in calculating cash flow
Investing activities from operating activities
C Cash inflow under Added to profit in calculating cash flow from
Investing activities operating activities
D Cash inflow under Deducted from profit in calculating cash flow
Financing activities from operating activities
28.6 The non-current assets of Ealing were as follows:

Start of year End of year
$ $
Cost 180,000 240,000
Aggregate depreciation (120,000) (140,000)
––––––– –––––––
Carrying amount 60,000 100,000
––––––– –––––––
During the year non-current assets which had cost $80,000 and which had a carrying amount
of $30,000 were sold for $20,000.
Profit before tax for the year was $300,000.
E
By how much did Ealing’s cash balances increase during the year as a result of the
above transactions?
A $210,000
B $240,000
28.7
C
D
PL $260,000
$290,000
On comparing the components of net assets of Deep on 31 December 20X2 and 31 December
20X1 the following movements were noted.
(1)
(2)
A decrease in the warranty provision of $12,000 due to a change in estimate.
An increase in tangible non-current assets of $98,000 due to a revaluation in the
year.
Which of the above items should be included in the notes to the cash flow statement of
M
Deep as part of the reconciliation of operating profit to net cash flow from operating
activities?
A Neither 1 nor 2
B 1 only
C 2 only
D Both 1 and 2
SA
28.8 A company incurs expenditure on development during the year which is capitalised.
How would this expenditure be shown in the statement of cash flows?
A As an operating cash flow

B As an investing cash flow
C As an item in the reconciliation of operating profit and net cash inflow from
operating activities
D It will not appear at all
28.9 The following items have been extracted from the statement of cash flows of Gresham for the
year ended 31 December 20X1.
$
Depreciation 30,000
Profit on sale of non-current assets 5,000
Proceeds from sale of non-current assets 20,000
Purchase of non-current assets 25,000
If the carrying amount of non-current assets was $110,000 on 31 December 20X0, what
was it on 31 December 20X1?
A $70,000
B $80,000
E
C $85,000
D $90,000
28.10 Waterloo acquired a building by issuing $400,000 8% loan notes at par. The market rate of
interest at the time of the issue was also 8%.
28.11
A
B
C
D
PL
How should the acquisition be presented in the statement of cash flows for the period?
Investing activities
$(400,000)
$(400,000)
Nil
Nil
Financing activities
$400,000
Nil
$400,000
Nil
At 1 October 20X0, BK had an accrued interest payable balance of $12,000 in its statement of
financial position. During the year ended 30 September 20X1, BK charged interest payable
of $41,000 to its statement of profit or loss. Accrued interest payable at 30 September20X1
M
was $15,000.
Included in the interest charged to profit or loss for the year was an unwinding of the discount
on a decommissioning provision of $5,000 and finance lease interest of $3,000. The finance
lease is paid in cash annually in arrears.
What is the cash flow in respect of interest paid that will appear in BK’s statement of
cash flows for the year ended 30 September 20X1?
SA
A $30,000
B $33,000
C $36,000
D $38,000
(22 marks)
29 IAS 33 EARNINGS PER SHARE
29.1 A listed company makes a rights issue.
Which of the following rankings of prices is most valid? (Note: the symbol “<” below
means “is less than”)
A Ex-rights < Cum-rights < Issue price

B Ex-rights < Issue price < Cum-rights
C Cum-rights < Ex-rights < Issue price
D Issue price < Ex-rights < Cum-rights
29.2 A company currently has 10 million $1 shares in issue with a market value of $3 per share.
The company wishes to raise new funds using a 1-for-4 rights issue. The theoretical ex rights
price per share is $2·80.
How much new finance was raised by the rights issue?
A $2,500,000
B $4,000,000
C $5,000,000
D $7,000,000
29.3 A company makes a 2-for-3 rights issue at an issue price of $2. The cum-rights price is $4.
E
What is the theoretical ex rights price?
A $2·50
B $2·80
C $3·00
D $3·20
29.4
PL
Chartwell has in issue $120,000 Ordinary shares of 50 cents each and 10,000 6% Preference
shares of $3 each.
Extracts from the financial statements for the year to 31 March 20X3 are shown below:
Profit before interest and tax

Interest paid
Preference dividend
$
528,934
6,578
1,800
Taxation 125,860
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Ordinary dividend 10,800
What figure should be reported as basic earnings per share as defined in IAS 33
Earnings per Share?
A 159.9 cents
B 164.4 cents
C 319.9 cents
SA
D 328.9 cents
29.5 In the year to 30 September 20X3, Wexam reported a retained profit of $4·8m after paying
preference dividends of $200,000 and dividends of $800,000 to the holders of the ordinary
shares in issue at the year end. On 1 October 20X2 Wexham had three million shares in issue.
On 1 April 20X3 the company had made a bonus issue of one share for every three held.
What figure should be reported as basic earnings per share as defined in IAS 33
Earnings per Share?
A 120 cents
B 140 cents
C 145 cents
D 160 cents
29.6 In the year to 30 November the retained profit of Dale was $3,640,500. This was after paying
dividends as follows:
Ordinary: 5 cents per share on 1·5 million shares

Preference: 7 cents per share on 600,000 shares
What figure will be reported for basic earnings per share as defined in IAS 33 Earnings
per Share?
A 173·4 cents
B 176·9 cents
C 242·7 cents
D 247·7 cents
E
29.7 Reploy has reported a profit before interest and tax of $728,654 for the last financial year.
The company’s profit or loss statement reports an interest charge of $45,860, a tax charge of
$158,740 whilst the statement of changes in equity shows that an ordinary dividend of
$50,000 was paid. The company’s issued ordinary share capital is $500,000 in $1 shares.
29.8
A
B
C
D
PL
What figure should be reported for earnings per share?
94·8 cents
104·8 cents
136·6 cents
145·7 cents
The financial statements of Epis Group showed that retained earnings had increased in the
year by $689,424. The following items were presented by Epis in either the statement of
profit or loss for the year or in the statement of changes in equity:
M
$
Interest 84,441
Taxation 227,553
Non-controlling interest 47,338
Ordinary dividend (10 cents per share) 65,000
What figure should be reported in the financial statements for basic earnings per share,
to the nearest cent?
SA
A 10 cents
B 113 cents
C 116 cents
D 123 cents
29.9 The most recent income statement of Waylor reported a profit before tax of $125,800 and a
tax expense of $22,400. Half way through the year the company had issued 40,000 bonus
shares which brought the total number of shares in issue to 440,000.
What figure should be reported for earnings per share?
A 23·5 cents
B 24·7 cents
C 28·6 cents
D 29·9 cents
29.10 Jubilee reported profit after tax for the period of $160,000 and it had 1,000,000 ordinary
shares in issue for the whole year.
Jubilee had a number of exercisable share options outstanding at the year end. Holders of the
options were entitled to buy 50,000 new shares for $1.60. The average market price of
Jubilee’s shares for the previous 12 months was $2.
What figure should Jubilee report for its diluted earnings per share?
A 15.2 cents
B 15.4 cents
C 15.8 cents
D 16 cents
E
29.11 Mork has disclosed basic EPS figure for the year of 32 cents, this is based on 500,000
ordinary shares being in issue for the whole year.
Mork also has $100,000 8% convertible debt in issue at the year end. The conversion rights
allow the holders to convert their debt into equity on a basis of 5 shares for every $4 of debt.
A
B
C
D
PL
Mork pays income tax at a rate of 30%.
What figure should Mork report for its diluted earnings per share?
26.5 cents
26.9 cents
28.5 cents
28.9 cents
(22 marks)
M
SA
E
PL
M
SA
Question 1 STANDARD SETTING PROCESS
Historically financial reporting throughout the world has differed widely. The International Accounting
Standards Board (IASB) is committed to developing, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards that require transparent and comparable
information in general purpose financial statements. The various pronouncements of the IASB are
sometimes collectively referred to as “International GAAP”.
Required:
(a) Describe the IASB’s standard setting process including how standards are produced,
enforced and occasionally supplemented. (10 marks)
E
(b) Comment on whether you feel the move to date towards global accounting standards has
been successful. (5 marks)
(15 marks)
Question 2 PERIOD OF INFLATION
(a)
(b)
(c)
(d)
(e)
PL
During a period of inflation many accountants believe that financial reports prepared under the
historical cost convention are subject to the following major limitations:
Inventories are undervalued.

Depreciation is understated.
Gains and losses on net monetary assets are undisclosed.
Asset values are unrealistic.
Meaningful periodic comparisons are difficult to make.
Required:
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Explain briefly the limitations of historical cost accounting in periods of inflation with reference
to each of the items listed above.
(15 marks)
Question 3 REBOUND
(a) Your assistant has been reading the IASB’s Conceptual Framework for Financial Reporting
SA
(“the Framework”) and as part of the qualitative characteristics of financial statements under
the heading of “relevance” he notes that the predictive value of information is considered
important. He is aware that financial statements are prepared historically (i.e. after
transactions have occurred) and offers the view that the predictive value of financial
statements would be enhanced if forward-looking information (e.g. forecasts) were published
rather than backward-looking historical statements.
Required:
By the use of specific examples, provide an explanation to your assistant of how IFRS
presentation and disclosure requirements can assist the predictive role of historically
prepared financial statements. (6 marks)
(b) The following summarised information is available in relation to Rebound, a publicly listed
company:
Statement of profit or loss extracts years ended 31 March
2014 2013
Continuing Discontinued Continuing Discontinued
$000 $000 $000 $000
Profit after tax
Existing operations 2,000 (750) 1,750 600
Operations acquired
on 1 August 2013 450 nil
E
Analysts expect profits from the market sector in which Rebound’s existing operations are
based to increase by 6% in the year to 31 March 2015 and by 8% in the sector of its newly
acquired operations.
On 1 April 2012 Rebound had:


PL
$3 million of 25 cents equity shares in issue.
$5 million 8% convertible loan stock 2019; the terms of conversion are 40 equity
shares in exchange for each $100 of loan stock. Assume an income tax rate of 30%.
On 1 October 2013 the directors of Rebound were granted options to buy 2 million shares in
the company for $1 each. The average market price of Rebound’s shares for the year ending
31 March 2014 was $2·50 each.
Required:
(i) Calculate Rebound’s estimated profit after tax for the year ending 31 March
M
2015 assuming the analysts’ expectations prove correct; (3 marks)
(ii) Calculate the diluted earnings per share (EPS) on the continuing operations of
Rebound for the year ended 31 March 2014 and the comparatives for 2013.
(6 marks)
(15 marks)
SA
Question 4 WARDLE
(a) An important aspect of the International Accounting Standards Board’s Conceptual

Framework for Financial Reporting is that financial information should faithfully represent
economic phenomena in words and numbers.
Required:
Explain why attention needs to be given to underlying substance and describe possible
indications that substance differs from legal form. (5 marks)
(b) Wardle’s activities include the production of maturing products which take a long time before
they are ready to retail. Details of one such product are that on 1 April 2013 it had a cost of
E
$5 million and a fair value of $7 million. The product would not be ready for retail sale until
31 March 2016.
On 1 April 2013 Wardle entered into an agreement to sell the product to Easyfinance for $6
million. The agreement gave Wardle the right to repurchase the product at any time up to 31
March 2016 at a fixed price of $7,986,000, at which date Wardle expected the product to
Year 1
Year 2
Year 3
PL
retail for $10 million. The compound interest Wardle would have to pay on a three-year loan
of $6 million would be:
This interest is equivalent to the return required by Easyfinance.
Required:
$000
600
660
726
M
Assuming the above figures prove to be accurate, prepare extracts from the statement of
profit or loss of Wardle for the three years to 31 March 2016 in respect of the above
transaction:
(i) Reflecting legal form; (2 marks)

(ii) Reflecting underlying substance. (3 marks)
Note: Statement of financial position extracts are NOT required.

SA
(c) Comment on the effect the two treatments have on the statements of profit or loss and
the statements of financial position and how this may affect an assessment of Wardle’s
performance. (5 marks)
(15 marks)
Question 5 DEXON
Below is the summarised draft statement of financial position of Dexon, a publicly listed company, as
at 31 March 2014:
$000 $000 $000
Assets
Non-current assets
Property at valuation
(land $20,000; buildings $165,000 (note (ii)) 185,000
Plant (note (ii)) 180,500
Investments at fair value through profit
or loss at 1 April 2013 (note (iii)) 12,500
E
–––––––
378,000
Current assets
Inventory 84,000
Trade receivables (note (iv)) 52,200
Bank 3,800 140,000
PL
Total assets
Equity and liabilities

Equity
Ordinary shares of $1 each
Share premium
Revaluation reserve
Retained earnings – at 1 April 2013
– for the year ended
12,300
–––––––
40,000
18,000
–––––––
518,000
–––––––
250,000
31 March 2014 96,700 109,000 167,000

M
––––––– ––––––– –––––––
417,000
Non-current liabilities
Deferred tax – at 1 April 2013 (note (v)) 19,200
Current liabilities 81,800
–––––––
Total equity and liabilities 518,000
–––––––
SA
The following information is relevant:
(i) Dexon’s profit or loss includes $8 million of revenue for credit sales made on a
“sale or return” basis. At 31 March 2014, customers who had not paid for the
goods, had the right to return $2·6 million of them. Dexon applied a mark-up on
cost of 30% on all these sales. In the past, Dexon’s customers have sometimes
returned goods under this type of agreement.
(ii) The non-current assets have not been depreciated for the year ended 31 March 2014.
Dexon has a policy of revaluing its land and buildings at the end of each accounting
year. The values in the above statement of financial position are as at 1 April 2013
when the buildings had a remaining life of fifteen years. A qualified surveyor has
valued the land and buildings at 31 March 2014 at $180 million.
Plant is depreciated at 20% on the reducing balance basis.
(iii) The investments at fair value through profit or loss are held in a fund whose value
changes directly in proportion to a specified market index. At 1 April 2013 the
relevant index was 1,200 and at 31 March 2014 it was 1,296.
(iv) In late March 2014 the directors of Dexon discovered a material fraud perpetrated
by the company’s credit controller that had been continuing for some time.
Investigations revealed that a total of $4 million of the trade receivables as shown in
the statement of financial position at 31 March 2014 had in fact been paid and the
money had been stolen by the credit controller. An analysis revealed that $1·5
million had been stolen in the year to 31 March 2013 with the rest being stolen in
the current year. Dexon is not insured for this loss and it cannot be recovered from
the credit controller, nor is it deductible for tax purposes.
E
(v) During the year the company’s taxable temporary differences increased by $10
million of which $6 million related to the revaluation of the property. The deferred
tax relating to the remainder of the increase in the temporary differences should be
taken to the profit or loss. The applicable income tax rate is 20%.
(vi) The above figures do not include the estimated provision for income tax on the
(vii)
(viii)
PL profit for the year ended 31 March 2014. After allowing for any adjustments
required in items (i) to (iv), the directors have estimated the provision at $11·4
million (this is in addition to the deferred tax effects of item (v)).
On 1 September 2013 there was a fully subscribed rights issue of one new share for
every four held at a price of $1·20 each. The proceeds of the issue have been
received and the issue of the shares has been correctly accounted for in the above
In May 2013 a dividend of 4 cents per share was paid. In November 2013 (after the
rights issue in item (vii) above) a further dividend of 3 cents per share was paid.
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Both dividends have been correctly accounted for in the above statement of
financial position.
Required:
Taking into account any adjustments required by items (i) to (viii) above
(a) Prepare a statement showing the recalculation of Dexon’s profit for the year
SA
ended 31 March 2014. (8 marks)
(b) Prepare the statement of changes in equity of Dexon for the year ended 31
March 2014. (7 marks)
Note: Notes to the financial statements are NOT required.

(15 marks)
Question 6 PRICEWELL
The following trial balance relates to Pricewell at 31 March 2014:
$000 $000
Leasehold property – at valuation 31 March 2013 (note (i)) 25,200
Plant and equipment (owned) – at cost (note (i)) 46,800
Plant and equipment (leased) – at cost (note (i)) 20,000
Accumulated depreciation at 31 March 2013
Owned plant and equipment 12,800
Leased plant and equipment 5,000
Finance lease payment (paid on 31 March 2014) (note (i)) 6,000
Obligations under finance lease at 1 April 2013 (note (i)) 15,600
E
Construction contract (note (ii)) 14,300
Inventory at 31 March 2014 28,200
Trade receivables 33,100
Bank 5,500
Trade payables 33,400
Revenue (note (iii)) 310,000
PL
Cost of sales (note (iii))
Distribution costs
Administrative expenses
Preference dividend paid (note (iv))
Equity dividend paid
Equity shares of 50 cents each
6% redeemable preference shares at 31 March 2013 (note (iv))
Retained earnings at 31 March 2013
Current tax (note (v))
234,500
19,500
27,500
2,400
8,000
700
40,000
41,600
4,900
Deferred tax (note (v)) 8,400

––––––– –––––––
M
471,700 471,700
––––––– –––––––
The following notes are relevant:
(i) Non-current assets:
The 15 year leasehold property was acquired on 1 April 2012 at cost $30 million. The
SA
company policy is to revalue the property at market value at each year end. The valuation in
the trial balance of $25·2 million as at 31 March 2013 led to an impairment charge of $2·8
million which was reported in the statement profit or loss of the previous year (i.e. year ended
31 March 2013). At 31 March 2014 the property was valued at $24·9 million.
Owned plant is depreciated at 25% per annum using the reducing balance method.
The leased plant was acquired on 1 April 2012. The rentals are $6 million per annum for four
years payable in arrears on 31 March each year. The interest rate implicit in the lease is 8%
per annum. Leased plant is depreciated at 25% per annum using the straight-line method.
No depreciation has yet been charged on any non-current assets for the year ended 31 March
2014. All depreciation is charged to cost of sales.
(ii) On 1 October 2013 Pricewell entered into a contract to construct a bridge over a river. The
agreed price of the bridge is $50 million and construction was expected to be completed on 30
September 2015. The $14·3 million in the trial balance is:
$000
materials, labour and overheads 12,000
specialist plant acquired 1 October 2013 8,000
payment from customer (5,700)
––––––
14,300
––––––
The sales value of the work done at 31 March 2014 has been agreed at $22 million and the
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estimated cost to complete (excluding plant depreciation) is $10 million. The specialist plant
will have no residual value at the end of the contract and should be depreciated on a monthly
basis. Pricewell recognises profits on uncompleted contracts on the percentage of completion
basis as determined by the agreed work to date compared to the total contract price.
(iii) Pricewell’s revenue includes $8 million for goods it sold acting as an agent for Trilby.
(iv)
(v)
PL
Pricewell earned a commission of 20% on these sales and remitted the difference of $6·4
million (included in cost of sales) to Trilby.
The 6% preference shares were issued on 1 April 2012 at par for $40 million. They have an
effective finance cost of 10% per annum due to a premium payable on their redemption.
The directors have estimated the provision for income tax for the year ended 31 March 2014
at $4·5 million. The required deferred tax provision at 31 March 2014 is $5·6 million; all
adjustments to deferred tax should be taken to profit or loss. The balance of current tax in the
trial balance represents the under/over provision of the income tax liability for the year ended
31 March 2013.
M
Required:
(a) Prepare the statement of profit or loss for the year ended 31 March 2014. (12 marks)
(b) Prepare the statement of financial position as at 31 March 2014. (13 marks)
Note: A statement of changes in equity and notes to the financial statements are not required.
SA
(c) IAS 32 Financial Instruments: Presentation requires financial instruments to be classified

either as a liability or as equity on issue.
Required:
Explain how IAS 32 differentiates between equity instruments and liabilities. Give two
examples of financial liabilities and two examples of equity instruments to support your
answer. (5 marks)
(30 marks)
Question 7 SANDOWN
The following trial balance relates to Sandown at 30 September 2014:
$000 $000
Revenue (note (i)) 380,000
Cost of sales 246,800
Distribution costs 17,400
Administrative expenses (note (ii)) 50,500
Loan interest paid (note (iii)) 1,000
Investment income 1,300
Profit on sale of investments (note (iv)) 2,200
Current tax (note (v)) 2,100
E
Freehold property – at cost 1 October 2004 (note (vi)) 63,000
Plant and equipment – at cost (note (vi)) 42,200
Brand – at cost 1 October 2009 (note (vi)) 30,000
Accumulated depreciation – 1 October 2013 – building 8,000
– plant and equipment 19,700
Accumulated amortisation – 1 October 2013 – brand 9,000
PL
Financial asset investments (note (iv))
Inventory at 30 September 2014
Trade receivables
Bank
Trade payables
Equity shares of 20 cents each
Equity option
Other reserve (note (iv))
5% Convertible loan note 2017 (note (iii))
26,500
38,000
44,500
8,000
42,900
50,000
2,000
5,000
18,440
Retained earnings at 1 October 2013 26,060
Deferred tax (note (v)) 5,400
M
––––––– –––––––
570,000 570,000
––––––– –––––––
(i) Sandown’s revenue includes $16 million for goods sold to Pending on 1 October 2013. The
terms of the sale are that Sandown will incur on-going service and support costs of $1·2
million per annum for three years after the sale. Sandown normally makes a gross profit of
SA
40% on such servicing and support work. Ignore the time value of money.
(ii) Administrative expenses include an equity dividend of 4·8 cents per share paid during the
year.
(iii) The 5% convertible loan note was issued for proceeds of $20 million on 1 October 2012. It
has an effective interest rate of 8% due to the value of its conversion option.
(iv) The financial asset investments included in the trial balance have been classified as “Fair
value through other comprehensive income” by Sandown. During the year Sandown sold an
investment for $11 million. At the date of sale it had a carrying amount of $8·8 million and
had originally cost $7 million. Sandown has recorded the disposal of the investment. The
remaining investments (the $26·5 million in the trial balance) have a fair value of $29 million
at 30 September 2014. The other reserve in the trial balance represents the net increase in the
value of the investments as at 1 October 2013. Ignore deferred tax on these transactions.
(v) The balance on current tax represents the under/over provision of the tax liability for the year
ended 30 September 2013. The directors have estimated the provision for income tax for the
year ended 30 September 2014 at $16·2 million. At 30 September 2014 the carrying amounts
of Sandown’s net assets were $13 million in excess of their tax base. The income tax rate of
Sandown is 30%.
(vi) Non-current assets:
The freehold property has a land element of $13 million. The building element is being
depreciated on a straight-line basis.
Plant and equipment is depreciated at 40% per annum using the reducing balance method.
E
Sandown’s brand in the trial balance relates to a product line that received bad publicity
during the year which led to falling sales revenues. An impairment review was conducted on
1 April 2014 which concluded that, based on estimated future sales, the brand had a value in
use of $12 million and a remaining life of only three years.
However, on the same date as the impairment review, Sandown received an offer to purchase
Required:
(a)
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the brand for $15 million. Prior to the impairment review, it was being depreciated using the
straight-line method over a 10-year life. No depreciation/amortisation has yet been charged
on any non-current asset for the year ended 30 September 2014. Depreciation, amortisation
and impairment charges are all charged to cost of sales.
Prepare the statement of profit or loss and other comprehensive income for Sandown
for the year ended 30 September 2014. (13 marks)
(b) Prepare the statement of financial position of Sandown as at 30 September 2014.

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(12 marks)
(c) The managing director of Sandown is very pleased with this year’s results and is considering
the payment of a second dividend, against the year’s profits, for the first time in 10 years. He
suggests that as the dividend is included in expenses for the period this “will reduce the
amount of income tax on profits”, with the corresponding liability being recognised in current
liabilities.
SA
Required:
Explain how the dividend should be accounted for in the preparation of Sandown’s
financial statements, stating whether the managing director’s suggested treatment is
allowed under IFRS. (5 marks)
Note: Notes to the financial statements are not required.

(30 marks)
Question 8 CAVERN
The following trial balance relates to Cavern as at 30 September 2014:
$000 $000
Equity shares of 20 cents each (note (i)) 50,000
8% Loan note (note (ii)) 30,600
Retained earnings – 30 September 2013 12,100
Other equity reserve 3,000
Revaluation reserve 7,000
Land and buildings at valuation – 30 September 2013:
Land ($7 million) and building ($36 million) (note (iii)) 43,000
E
Plant and equipment at cost (note (iii)) 67,400
Accumulated depreciation plant and equipment
– 30 September 2013 13,400
Fair value through other comprehensive income
investments (note (iv)) 15,800
Inventory at 30 September 2014 19,800
Bank
Revenue
PL
Trade receivables
Deferred tax (note (v))

Trade payables
Cost of sales
Administrative expenses (note (i))
Distribution costs
Loan note interest paid
29,000
128,500
25,000
8,500
2,400
4,600
4,000
21,700
182,500
Bank interest 300

Investment income 700
M
Current tax (note (v)) 900
––––––– –––––––
340,600 340,600
––––––– –––––––
(i) Cavern has accounted for a fully subscribed rights issue of equity shares made on 1 April
2014 of one new share for every four in issue at 42 cents each. The company paid ordinary
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dividends of 3 cents per share on 30 November 2013 and 5 cents per share on 31 May 2014.
The dividend payments are included in administrative expenses in the trial balance.
(ii) The 8% loan note was issued on 1 October 2012 at its nominal (face) value of $30 million.
The loan note will be redeemed on 30 September 2016 at a premium which gives the loan
note an effective finance cost of 10% per annum.
(iii) Non-current assets:
Cavern revalues its land and building at the end of each accounting year. At 30 September
2014 the relevant value to be incorporated into the financial statements is $41·8 million. The
building’s remaining life at the beginning of the current year (1 October 2013) was 18 years.
Cavern does not make an annual transfer from the revaluation reserve to retained earnings in
respect of the realisation of the revaluation surplus. Ignore deferred tax on the revaluation
surplus.
Plant and equipment includes an item of plant bought for $10 million on 1 October 2013 that
will have a 10-year life (using straight-line depreciation with no residual value). Production
using this plant involves toxic chemicals which will cause decontamination costs to be
incurred at the end of its life. The present value of these costs using a discount rate of 10% at
E
1 October 2013 was $4 million. Cavern has not provided any amount for this future
decontamination cost. All other plant and equipment is depreciated at 12·5% per annum
using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 30
September 2014. All depreciation is charged to cost of sales.
(iv)
(v)
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The fair value through other comprehensive income investments held at 30 September 2014
had a fair value of $13·5 million. There were no acquisitions or disposals of these
investments during the year ended 30 September 2014.
A provision for income tax for the year ended 30 September 2014 of $5·6 million is required.
The balance on current tax represents the under/over provision of the tax liability for the year
ended 30 September 2013. At 30 September 2014 the tax base of Cavern’s net assets was $15
million less than their carrying amounts. The movement on deferred tax should be taken to
profit or loss. The income tax rate of Cavern is 25%.
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Required:
(a) Prepare the statement of profit or loss and other comprehensive income for Cavern for
the year ended 30 September 2014. (11 marks)
(b) Prepare the statement of changes in equity for Cavern for the year ended 30 September
2014. (5 marks)
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(c) Prepare the statement of financial position of Cavern as at 30 September 2014. (9 marks)
Note: Notes to the financial statements are not required.
(d) Cavern’s trial balance includes financial assets measured at fair value through other
comprehensive income. This is one of the three classification of financial assets according to
IFRS 9 Financial Instruments.
Required:
State the other two categories of financial assets identified by IFRS 9 and how an entity
decides which financial asset should go into which category. (5 marks)
(30 marks)
Question 9 HIGHWOOD
The following trial balance relates to Highwood at 31 March 2014:

$000 $000
Equity shares of 50 cents each 56,000
Retained earnings (note (i)) 1,400
8% Convertible loan note (note (ii)) 30,000
Freehold property – at cost 1 April 2008
(land element $25 million (note (iii))) 75,000
Plant and equipment – at cost 74,500
Accumulated depreciation at 1 April 2013
– building 10,000
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– plant and equipment 24,500
Current tax (note (iv)) 800
Deferred tax (note (iv)) 2,600
Inventory – 4 April 2014 (note (v)) 36,000
Bank 11,500
Revenue
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Trade payables
Cost of sales
Distribution costs
Administrative expenses (note (vi))
Loan interest paid (note (ii))
207,750
27,500
30,700
2,400
–––––––
500,950
–––––––
24,500
339,650
–––––––
500,950
–––––––

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(i) An equity dividend of 5 cents per share was paid in November 2013 and charged to retained
earnings.
(ii) The 8% $30 million convertible loan note was issued on 1 April 2013 at par. Interest is
payable annually in arrears on 31 March each year. The loan note is redeemable at par on 31
March 2016 or convertible into equity shares at the option of the loan note holders on the
basis of 30 equity shares for each $100 of loan note. Highwood’s finance director has
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calculated that to issue an equivalent loan note without the conversion rights it would have to
pay an interest rate of 10% per annum to attract investors.
The present value of $1 receivable at the end of each year, based on discount rates of 8% and
10% are:
8% 10%
End of year 1 0·93 0·91
2 0·86 0·83
3 0·79 0·75
(iii) Non-current assets:
On 1 April 2013 Highwood decided for the first time to value its freehold property at its
current value. A qualified property valuer reported that the market value of the freehold
property on this date was $80 million, of which $30 million related to the land. At this date
the remaining estimated life of the property was 20 years. Highwood does not make a
transfer to retained earnings in respect of excess depreciation on the revaluation of its assets.
Plant is depreciated at 20% per annum on the reducing balance method.
All depreciation of non-current assets is charged to cost of sales.
(iv) The balance on current tax represents the under/over provision of the tax liability for the year
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ended 31 March 2013. The required provision for income tax for the year ended 31 March
2014 is $19·4 million. The difference between the carrying amounts of the net assets of
Highwood (including the revaluation of the property in note (iii) above) and their (lower) tax
base at 31 March 2014 is $27 million. Highwood’s rate of income tax is 25%.
(v) The inventory of Highwood was not counted until 4 April 2014 due to operational reasons.
(vi)
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At this date its value at cost was $36 million and this figure has been used in the cost of sales
calculation above. Between the year end of 31 March 2014 and 4 April 2014, Highwood
received a delivery of goods at a cost of $2·7 million and made sales of $7·8 million at a
mark-up on cost of 30%. Neither the goods delivered nor the sales made in this period were
included in Highwood’s purchases (as part of cost of sales) or revenue in the above trial
balance.
On 31 March 2014 Highwood factored (sold) trade receivables with a book value of $10
million to Easyfinance. Highwood received an immediate payment of $8·7 million and will
pay Easyfinance 2% per month on any uncollected balances. Any of the factored receivables
outstanding after six months will be refunded to Easyfinance. Highwood has derecognised
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the receivables and charged $1·3 million to administrative expenses.
If Highwood had not factored these receivables it would have made an allowance of $600,000
against them.
Required:
(a) Prepare the statement of profit or loss and other comprehensive income for Highwood
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for the year ended 31 March 2014; (11 marks)
(b) Prepare the statement of changes in equity for Highwood for the year ended 31 March
2014; (4 marks)
(c) Prepare the statement of financial position of Highwood as at 31 March 2014. (10 marks)
Note: your answers and workings should be presented to the nearest $1,000; notes to the financial
statements are not required.
(d) At a recent meeting of the board of directors the marketing director stated that he expected to
see an improvement in Heywood’s profits as “there will no longer be a depreciation expense
we that we are revaluing property”. He also stated that the revaluation would improve this
year’s earnings per share figure because the revaluation will be included in the profit figure
that is used in the calculation.
Required:
Comment on the marketing director’s statements about the effects of the property
revaluation on financial performance. (5 marks)
(30 marks)
Question 10 EMERALD
Product development costs are a material cost for many companies. They are either written off as an
expense or capitalised as an asset.
Required:
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(a) Discuss the conceptual issues involved and the definition of an asset that may be applied
in determining whether development expenditure should be treated as an expense or an
asset. (4 marks)
(b) Emerald has had a policy of writing off development expenditure to profit or loss as it was
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incurred. In preparing its financial statements for the year ended 30 September 2014 it has
become aware that, under IFRS rules, qualifying development expenditure should be treated
as an intangible asset. Below is the qualifying development expenditure for Emerald:
Year ended 30 September 2011

$000
300
240
800
400
All capitalised development expenditure is deemed to have a four year life. Assume
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amortisation commences at the beginning of the accounting period following capitalisation.
Emerald had no development expenditure before that for the year ended 30 September 2011.
Required:
Treating the above as the correction of an error in applying an accounting policy,

calculate the amounts which should appear in the statement of profit or loss and
statement of financial position (including one year’s comparative figures), and statement
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of changes in equity of Emerald in respect of the development expenditure for the year
ended 30 September 2014.
Note: You should ignore taxation. (6 marks)
(c) Speculate owns the following properties at 1 April 2013:
Property A: An office building used by Speculate for administrative purposes with a

depreciated historical cost of $2 million. At 1 April 2013 it had a remaining life of 20 years.
After a reorganisation on 1 October 2013, the property was let to a third party and reclassified
as an investment property applying Speculate’s policy of the fair value model. An
independent valuer assessed the property to have a fair value of $2·3 million at 1 October
2013, which had risen to $2·34 million at 31 March 2014.
Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2013, it

had a fair value of $1·5 million which had risen to $1·65 million at 31 March 2014.
Required:
Prepare extracts from Speculate’s entity statement of profit or loss and other
comprehensive income and statement of financial position for the year ended 31 March
2014 in respect of the above properties. In the case of property B only, state how it
would be classified in Speculate’s consolidated statement of financial position.
(5 marks)
(15 marks)
Question 11 TUNSHILL
(a) IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors contains guidance
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on the use of accounting policies and accounting estimates.
Required:
Explain the basis on which the management of an entity must select its accounting
policies and distinguish, with an example, between changes in accounting policies and
(b)
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changes in accounting estimates.
reported profit may be improved:

(i)
(5 marks)
The directors of Tunshill are disappointed by the draft profit for the year ended 30 September
2014. The company’s assistant accountant has suggested two areas where she believes the
A major item of plant that cost $20 million to purchase and install on 1 October
2011 is being depreciated on a straight-line basis over a five-year period (assuming
no residual value). The plant is wearing well and at the beginning of the current
year (1 October 2013) the production manager believed that the plant was likely to
last eight years in total (i.e. from the date of its purchase). The assistant accountant
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has calculated that, based on an eight-year life (and no residual value) the
accumulated depreciation of the plant at 30 September 2014 would be $7·5 million
($20 million/8 years × 3). In the financial statements for the year ended 30
September 2013, the accumulated depreciation was $8 million ($20 million/5 years
× 2). Therefore, by adopting an eight-year life, Tunshill can avoid a depreciation
charge in the current year and instead credit $0·5 million ($8 million – $7·5 million)
to profit or loss in the current year to improve the reported profit. (5 marks)
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(ii) Most of Tunshill’s competitors value their inventory using the average cost
(AVCO) basis, whereas Tunshill uses the first in first out (FIFO) basis. The value
of Tunshill’s inventory at 30 September 2014 (on the FIFO basis) is $20 million;
however on the AVCO basis it would be valued at $18 million. By adopting the
same method (AVCO) as its competitors, the assistant accountant says the company
would improve its profit for the year ended 30 September 2014 by $2 million.
Tunshill’s inventory at 30 September 2013 was reported as $15 million, however on
the AVCO basis it would have been reported as $13·4 million. (5 marks)
Required:
Comment on the acceptability of the assistant accountant’s suggestions and quantify

how they would affect the financial statements if they were implemented under IFRS.
Ignore taxation.
Note: The mark allocation is shown against each of the two items above.
(15 marks)
Question 12 DERRINGDO
Revenue recognition is the process by which companies decide when and how much income should be
included in the statement of profit or loss. It is a topical area of great debate in the accounting
profession. The IASB looks at revenue recognition from conceptual and substance points of view.
There are occasions where a more traditional approach to revenue recognition does not entirely
conform to the IASB guidance; indeed neither do some International Financial Reporting Standards.
Required:
(a) Explain the implications of the IASB’s Conceptual Framework for Financial Reporting
(Framework) on the recognition of income. Give examples of how this may conflict with
traditional practice and some accounting standards. (5 marks)
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(b) Derringdo sells goods supplied by Gungho. The goods are classed as A grade (perfect
quality) or B grade, having slight faults. Derringdo sells the A grade goods acting as an agent
for Gungho at a fixed price calculated to yield a gross profit margin of 50%. Derringdo
receives a commission of 12·5% of the sales it achieves for these goods. The arrangement for
B grade goods is that they are sold by Gungho to Derringdo and Derringdo sells them at a
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gross profit margin of 25%. The following information has been obtained from Derringdo’s
financial records:
Inventory held on premises 1 April 2013
Goods from Gungho year to 31 March 2014
Inventory held on premises 31 March 2014

– A grade
– B grade
– A grade
– B grade
– A grade
– B grade
$000
2,400
1,000
18,000
8,800
2,000
1,250
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Required:
Prepare the statement of profit or loss extracts for Derringdo for the year to 31 March
2014 reflecting the above information. (5 marks)
(c) Derringdo sells carpets from several retail outlets. In previous years the company has
undertaken responsibility for fitting the carpets in customers’ premises. Customers pay for
the carpets at the time they are ordered. The average length of time from a customer ordering
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a carpet to its fitting is 14 days. In previous years, Derringdo had not recognised a sale in
income until the carpet had been successfully fitted as the rectification costs of any fitting
error would be expensive. From 1 April 2013 Derringdo changed its method of trading by
sub-contracting the fitting to approved contractors. Under this policy the sub-contractors are
paid by Derringdo and they (the subcontractors) are liable for any errors made in the fitting.
Because of this Derringdo is proposing to recognise sales when customers order and pay for
the goods, rather than when they have been fitted. Details of the relevant sales figures are:
$000
Sales made in retail outlets for the year to 31 March 2014 23,000
Sales value of carpets fitted in the 14 days to 14 April 2013 1,200
Sales value of carpets fitted in the 14 days to 14 April 2014 1,600
The sales value of carpets fitted in the 14 days to 14 April 2013 are not included in the annual
sales figure of $23 million, but those for the 14 days to 14 April 2014 are included.
Required:
Discuss whether the above represents a change of accounting policy, and, based on your
discussion, calculate the amount that you would include in sales revenue for carpets in
the year to 31 March 2014. (5 marks)
(15 marks)
Question 13 LINNET
(a) Linnet is a large public listed company involved in the construction industry. Accounting
standards normally require construction contracts to be accounted for using the percentage
(stage) of completion basis. However under certain circumstances they should be accounted
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for using the completed contracts basis.
Required:
Discuss the principles that underlie each of the two methods and describe the
circumstances in which their use is appropriate. (7 marks)
(b)
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Linnet is part way through a contract to build a new football stadium at a contracted price of
$300 million. Details of the progress of this contract at 1 April 2013 are shown below:
Cumulative sales revenue invoiced

Cumulative cost of sales to date
Profit to date
$m
150
112
38
The following information has been extracted from the accounting records at 31 March 2014:
$m
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Total progress payment received
for work certified at 28 February 2014 180
Total costs incurred to date
(excluding rectification costs below) 195
Rectification costs 17
Linnet has received progress payments of 90% of the work certified at 28 February 2014.
Linnet’s surveyor has estimated that the sales value of the further work completed during
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March 2014 was $20 million.
At 31 March 2014 the estimated remaining costs to complete the contract were $45 million.
The rectification costs are the costs incurred in widening access roads to the stadium. This
was the result of an error by Linnet’s architect when he made his initial drawings.
Linnet calculates the percentage of completion of its contracts as the proportion of sales value
earned to date compared to the contract price.
All estimates can be taken as being reliable.
Required:
Prepare extracts of the financial statements for Linnet for the above contract for the
year to 31 March 2014. (8 marks)
(15 marks)
Question 14 MOCCA
On 1 October 2012 Mocca entered into a construction contract that was expected to take 27 months and
therefore be completed on 31 December 2014. Details of the contract are:
$000
Agreed contract price 12,500
Estimated total cost of contract (excluding plant) 5,500
Plant for use on the contract was purchased on 1 January 2013 (three months into the contract as it was
not required at the start) at a cost of $8 million. The plant has a four-year life and after two years, when
the contract is complete, it will be transferred to another contract at its carrying amount. Annual
depreciation is calculated using the straight-line method (assuming a nil residual value) and charged to
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the contract on a monthly basis at 1/12 of the annual charge.
The statement of profit or loss correctly reported the results for the contract for the year ended 31
March 2013 as follows:
$000
Revenue recognised 3,500
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Contract expenses recognised
Profit recognised
Details of the progress of the contract at 31 March 2014 are:
Contract costs incurred to date (excluding depreciation)

Agreed value of work completed and billed to date
Total cash received to date (payments on account)
(2,660)
–––––
840
–––––
$000
4,800
8,125
7,725
The percentage of completion is calculated as the agreed value of work completed as a percentage of
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the agreed contract price.
Required:
Calculate the amounts which would appear in statement of profit or loss and statement of
financial position of Mocca, including the disclosure note of amounts due to/from customers, for
the year ended/as at 31 March 2014 in respect of the above contract.
(10 marks)
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Question 15 DEARING
On 1 October 2011 Dearing acquired a machine under the following terms:

$000
Manufacturer’s base price 1,050
Trade discount (applying to base price only) 20%
Early settlement discount taken
(on the payable amount of the base cost only) 5%
Freight charges 30
Electrical installation cost 28
Staff training in use of machine 40
Pre-production testing 22
Purchase of a three-year maintenance contract 60
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Estimated residual value 20
Hours
Estimated life in machine hours 6,000
Hours used – year ended 30 September 2012 1,200
– year ended 30 September 2013 1,800
– year ended 30 September 2014 (see below) 850
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On 1 October 2013 Dearing decided to upgrade the machine by adding new components at a cost of
$200,000. This upgrade led to a reduction in the production time per unit of the goods being
manufactured using the machine. The upgrade also increased the estimated remaining life of the
machine at 1 October 2013 to 4,500 machine hours and its estimated residual value was revised to
$40,000.
Required:
Prepare extracts from the statement of profit or loss and statement of financial position for the
above machine for each of the three years to 30 September 2014.
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(10 marks)
Question 16 FLIGHTLINE
Flightline is an airline which treats its aircraft as complex non-current assets. The cost and other details
of one of its aircraft are:
$000 estimated life

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Exterior structure – purchase date 1 April 2000 120,000 20 years

Interior cabin fittings – replaced 1 April 2010 25,000 5 years
Engines (2 at $9 million each) – replaced 1 April 2010 18,000 36,000 flying hours
No residual values are attributed to any of the component parts.
At 1 April 2013 the aircraft log showed it had flown 10,800 hours since 1 April 2010. In the year ended
31 March 2014, the aircraft flew for 1,200 hours for the six months to 30 September 2013 and a further
1,000 hours in the six months to 31 March 2014.
On 1 October 2013 the aircraft suffered a “bird strike” accident which damaged one of the engines
beyond repair. This was replaced by a new engine with a life of 36,000 hours at cost of $10·8 million.
The other engine was also damaged, but was repaired at a cost of $3 million; however, its remaining
estimated life was shortened to 15,000 hours. The accident also caused cosmetic damage to the exterior
of the aircraft which required repainting at a cost of $2 million. As the aircraft was out of service for
some weeks due to the accident, Flightline took the opportunity to upgrade its cabin facilities at a cost
of $4·5 million. This did not increase the estimated remaining life of the cabin fittings, but the
improved facilities enabled Flightline to substantially increase the air fares on this aircraft.
Required:
Calculate the charges to statement in respect of the aircraft for the year ended 31 March 2014
and its carrying amount in the statement of financial position as at that date.
Note: You should assume that the post-accident changes were effective from 1 October 2013.
(10 marks)
Question 17 BAXEN
Baxen is a public listed company that currently uses local Accounting Standards for its financial
reporting. The board of directors of Baxen is considering the adoption of International Financial
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Reporting Standards (IFRS) in the near future. The company has ambitious growth plans which
involve extensive trading with many foreign companies and the possibility of acquiring at least one of
its trading partners as a subsidiary in the near future.
Required:
(a)
(b) PL
Identify the advantages that Baxen could gain by adopting IFRS for its financial
reporting purposes. (6 marks)
Baxen acquired an item of plant at a gross cost of $800,000 on 1 October 2013. The plant has
an estimated life of 10 years with a residual value equal to 15% of its gross cost. Baxen uses
straight-line depreciation on a time apportioned basis. The company received a government
grant of 30% of its cost price at the time of its purchase. The terms of the grant are that if the
company retains the asset for four years or more, then no repayment liability will be incurred.
If the plant is sold within four years a repayment on a sliding scale would be applicable. The
repayment is 75% if sold within the first year of purchase and this amount decreases by 25%
per annum. Baxen has no intention to sell the plant within the first four years. Baxen’s
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accounting policy for capital based government grants is to treat them as deferred credits and
release them to income over the life of the asset to which they relate.
Required:
(i) Discuss whether the company’s policy for the treatment of government grants
meets the definition of a liability in the IASB’s Framework; and (3 marks)
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(ii) Prepare extracts of Baxen’s financial statements for the year to 31 March 2014
in respect of the plant and the related grant:
– applying the company’s policy;

– in compliance with the definition of a liability in the Framework.
Your answer should consider whether the sliding scale repayment
should be used in determining the deferred credit for the grant.
(6 marks)
(15 marks)
Question 18 APEX
(a) In general, the consideration paid to acquire control of a business is greater than the fair value
of its tangible net assets. This may reflect intangible assets of the acquired entity that are not
recognised in its statement of financial position.
Required:
Explain whether intangible assets, excluding purchased goodwill, should be recognised

in accordance with IAS 38 Intangible Assets. If so, state how they should be initially
recorded and subsequently amortised when they are:
– purchased separately from other assets;
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– obtained as part of acquiring the whole of a business; and
– developed internally. (5 marks)
(b) Apex is a publicly listed supermarket chain. During the current year it started the building of
a new store. The directors are aware that in accordance with IAS 23 Borrowing Costs certain
borrowing costs have to be capitalised.
(c)
Required:
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Explain the circumstances when, and the amount at which, borrowing costs should be
capitalised in accordance with IAS 23.
Details relating to construction of Apex’s new store:

(5 marks)
Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1
April 2013. The loan is redeemable at a premium which means the loan has an effective
finance cost of 7·5% per annum. The loan was specifically issued to finance the building of
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the new store which meets the definition of a qualifying asset in IAS 23. Construction of the
store commenced on 1 May 2013 and it was completed and ready for use on 28 February
2014, but did not open for trading until 1 April 2014. During the year trading at Apex’s other
stores was below expectations so Apex suspended the construction of the new store for a two-
month period during July and August 2013. The proceeds of the loan were temporarily
invested for the month of April 2013 and earned interest of $40,000.
Required:
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Calculate the net borrowing cost that should be capitalised as part of the cost of the new
store and the finance cost that should be reported in the statement of profit or loss for
the year ended 31 March 2014. (5 marks)
(15 marks)
Question 19 DEXTERITY
Dexterity is a public listed company. It has been considering the accounting treatment of its intangible
assets and has asked for your opinion on how the matters below should be treated in its financial
statements for the year to 31 March 2014.
(a) On 1 October 2013 Dexterity acquired Temerity, a small company that specialises in
pharmaceutical drug research and development. The purchase consideration was by way of a
share exchange and valued at $35 million. The fair value of Temerity’s net assets was $15
million (excluding any items referred to below). Temerity owns a patent for an established
successful drug that has a remaining life of 8 years. A firm of specialist advisors, Leadbrand,
has estimated the current value of this patent to be $10 million; however the company is
awaiting the outcome of clinical trials where the drug has been tested to treat a different
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illness. If the trials are successful, the value of the drug is then estimated to be $15 million.
Also included in the company’s statement of financial position is $2 million for medical
research that has been conducted on behalf of a client. (4 marks)
(b) Dexterity has developed and patented a new drug which has been approved for clinical use.
The costs of developing the drug were $12 million. Based on early assessments of its sales
(c)
(d)
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success, Leadbrand have estimated its market value at $20 million. (3 marks)
Dexterity’s manufacturing facilities have recently received a favourable inspection by
government medical scientists. As a result of this the company has been granted an exclusive
five-year licence to manufacture and distribute a new vaccine. Although the licence had no
direct cost to Dexterity, its directors feel its granting is a reflection of the company’s standing
and have asked Leadbrand to value the licence. Accordingly they have placed a value of $10
million on it. (3 marks)
In the current accounting period, Dexterity has spent $3 million sending its staff on specialist
training courses. Whilst these courses have been expensive, they have led to a marked
improvement in production quality and staff now need less supervision. This in turn has led
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to an increase in revenue and cost reductions. The directors of Dexterity believe these
benefits will continue for at least three years and wish to treat the training costs as an asset.
(2 marks)
(e) In December 2013, Dexterity paid $5 million for a television advertising campaign for its
products that will run for 6 months from 1 January 2014 to 30 June 2014. The directors
believe that increased sales as a result of the publicity will continue for two years from the
start of the advertisements. (3 marks)
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Required:
Explain how the directors of Dexterity should treat the above items in the financial statements for
the year to 31 March 2014.
Note: Your should assume that the measurements given by Leadbrand are reliable. You are not
required to consider depreciation aspects.
(15 marks)
Question 20 DARBY
(a) An assistant of yours has been criticised over a piece of assessed work that he produced for
his study course for giving the definition of a non-current asset as “a physical asset of
substantial cost, owned by the company, which will last longer than one year”.
Required:
Provide an explanation to your assistant of the weaknesses in his definition of non-

current assets when compared to the International Accounting Standards Board’s
(IASB) view of assets. (4 marks)
(b) The same assistant has encountered the following matters during the preparation of the draft
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financial statements of Darby for the year ending 30 September 2014. He has given an
explanation of his treatment of them.
(i) Darby spent $200,000 sending its staff on training courses during the year. This has
already led to an improvement in the company’s efficiency and resulted in cost
savings. The organiser of the course has stated that the benefits from the training
(ii)
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of the training as an intangible asset and charged six months’ amortisation based on
the average date during the year on which the training courses were completed.
(3 marks)
During the year the company started research work with a view to the eventual
development of a new processor chip. By 30 September 2014 it had spent $1·6
million on this project. Darby has a past history of being particularly successful in
bringing similar projects to a profitable conclusion. As a consequence the assistant
has treated the expenditure to date on this project as an asset in the statement of
financial position.
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Darby was also commissioned by a customer to research and, if feasible, produce a
computer system to install in motor vehicles that can automatically stop the vehicle
if it is about to be involved in a collision. At 30 September 2014, Darby had spent
$2·4 million on this project, but at this date it was uncertain as to whether the
project would be successful. As a consequence the assistant has treated the $2·4
million as an expense in the statement of profit or loss. (4 marks)
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(iii) Darby signed a contract (for an initial three years) in August 2014 with a company
called Media Today to install a satellite dish and cabling system to a newly built
group of residential apartments. Media Today will provide telephone and television
services to the residents of the apartments via the satellite system and pay Darby
$50,000 per annum commencing in December 2014. Work on the installation
commenced on 1 September 2014 and the expenditure to 30 September 2014 was
$58,000. The installation is expected to be completed by 31 October 2014.
Previous experience with similar contracts indicates that Darby will make a total
profit of $40,000 over the three years on this initial contract. The assistant correctly
recorded the costs to 30 September 2014 of $58,000 as a non-current asset, but then
wrote this amount down to $40,000 (the expected total profit) because he believed
the asset to be impaired.
The contract is not a finance lease. Ignore discounting. (4 marks)
Answer 1 STANDARD SETTING PROCESS
(a) IASB’s Standard Setting Process
The IASB is ultimately responsible for setting International Financial Reporting Standards
(IFRS). The Board (advised by the Advisory Council) identifies a subject and appoints an
Advisory Committee to advise on the issues relevant to the given topic. Depending on the
complexity and importance of the subject matter the IASB may develop and publish
Discussion Papers for public comment. Following the receipt and review of comments the
IASB then develops and publishes an Exposure Draft for public comment. The usual
comment period for both of these is between 90 and 120 days. Finally, and again after a
review of any further comments, an IFRS is issued. The IASB also publishes a Basis for
Conclusions which explains how it reached its conclusions and gives information to help
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users to apply the Standard in practice. In addition to the above the IASB will sometimes
conduct public hearings where proposed standards are openly discussed and occasionally field
tests are conducted to ensure that proposals are practical and workable around the world.
The authority of IFRS is a rather difficult area. The IASB has no power to enforce IFRS
within those countries/entities that choose to adopt them. This means that enforcement is in
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the hands of the regulatory systems of the individual adopting countries. There is no doubt
the regulatory systems in different parts of the world differ from each other considerably in
their effectiveness. For example in the UK the Financial Reporting Review Panel (FRRP)
was a body that investigated departures from the UK’s regulatory system (which requires the
use of IFRS for listed companies). The FRRP had wide and effective powers of enforcement,
these powers have now been subsumed into other UK bodies. However, not all countries
have equivalent bodies, thus it can be argued that IFRS is not enforced in a consistent manner
throughout the world. Complementary to IFRSs, there also exist International Auditing
Standards (ISAs) and part of the rigour and transparency that the use of IFRSs brings is that
those companies adopting IFRS are also likely to be audited in accordance with ISAs. (This
auditing aspect is part of IOSCO’s requirements for financial statements to be used for cross-
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border listing purposes.)
Where it becomes apparent (often through press reports) that there is widespread
inconsistency in the interpretation of an IFRS, or where it is perceived that a standard is not
clear enough in a particular area, the IFRS Interpretation Committee (IFRS IC) may act to
remedy the issue by issuing an Interpretation. This adds to the body of pronouncements and
will usually (eventually) be incorporated on revision of the relevant IFRS. However, where it
becomes apparent (perhaps through a modified audit report) that a company has departed
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from IFRSs there is little that the IASB can do directly to enforce their application.
All new standards are now reviewed after a two-year period, to ensure that the standard is
fulfilling its stated objective and that there are no undue concerns in the application of the
standard. An annual improvements cycle looks at making minor improvements relating to all
standards.
(b) Success of the process
Any measure of success is really a matter of opinion. There is no doubt that the growing
acceptance of IFRSs through IOSCO’s endorsement, the European Union requirement for
their use by listed companies and the ever increasing number of countries that are either
adopting IFRS outright or basing their domestic standards very closely on IFRSs is a measure
of the success of the IASB. Equally there is widespread recognition that in recent years the
quality of IFRS has improved enormously due to the improvements project and subsequent
continuing improvements.
However the IASB is not without criticism. Some countries that have developed
sophisticated regulatory systems feel that IFRSs are not as rigorous as the local standards and
this may give cross-border listing companies an advantage over domestic companies. Some
requirements of IFRS are regarded as quite controversial (e.g. deferred tax (in IAS 12) and
financial instruments). Many IFRSs are complex and the benefits of applying them to smaller
entities may be outweighed by the costs. The IASB has therefore issued a standard on
financial reporting issues for small and medium sized entities. Also some securities
exchanges that are part of IOSCO require non-domestic companies that are listing by filing
financial statements prepared under IFRSs to produce a reconciliation to local GAAP. This
involves reconciling the IFRS statement of profit or loss and other comprehensive income and
statement of financial position, to what they would be if local GAAP had been used (e.g. in
the US). Critics argue that this requirement negates many of the benefits of being able to use
a single set of financial statements to list on different security exchanges. This is because to
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produce reconciliation to local GAAP is almost as much work and expense as preparing
financial statements in the local GAAP which was usually the previous requirement.
Despite these criticisms there is no doubt that the work of IASB has already led, and in the
future will lead, to further improvement in financial reporting throughout the world.
(a)
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Answer 2 PERIOD OF INFLATION
Inventories undervalued
Inventory is stated at historical cost (or net realisable value if lower). Historical cost is
normally below the current value in times of general inflation.
The major weakness of historical cost is the effect of charging the historical cost of inventory
against sales. Cost of sales will be lower than if current values had been charged, leading to
higher profits and higher dividend payments. There may be insufficient funds to purchase
replacement inventory, the price of which will equate to current value of inventory.
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(b) Depreciation understated
Depreciation is usually based on the historical cost of non-current assets. Replacements will
normally increase in price during a period of inflation. The annual depreciation charge,
therefore, may not reflect the amount needed to be able to replace the assets. Consequently,
the accounting profit will be overstated, and this may mean that too much profit is withdrawn
from the business. The cash resources may then prove insufficient to replace the assets at the
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end of their useful life and the business may not be able to operate at the same level of
activity as it has previously experienced.
(c) Gains and losses on net monetary assets undisclosed
Net monetary assets are monetary assets less monetary liabilities. The term “monetary” refers
to all liabilities of a business repayable in money and those assets which are stated in
historical cost accounts at the amount of money expected to be received (e.g. receivables are
stated at sales value less allowances for irrecoverable debts).
In a time of inflation gains can arise on monetary liabilities and losses on monetary assets.
For example, loans to or from a company are monetary items. A loan made to a company
may produce a gain to the company as, although the amount originally borrowed will be
repaid at its face value, its purchasing power will have been reduced.
The person lending the money to the company will have charged interest to cover:
(i) the risk of making the loan; and
(ii) compensation for the fall in the purchasing power of the investment.
The interest cost will thus be charged against profits of the company, but also there should be
a “gain” recorded in the statement of profit or loss (that of eventually having to repay only the
same monetary amount).
(d) Asset values unrealistic
Values for inventory and non-current assets are stated at historical cost (i.e. below their
current value). Many would argue that a statement of financial position should record not
only the assets in the possession of a company at the end of the reporting period but also their
current worth. To show the amount at which the company originally bought the asset is not
useful information and would never be used for decision-making purposes.
(e) Difficulty of meaningful periodic comparisons
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A meaningful comparison of financial reports prepared under historical cost accounting over
several accounting periods may be misleading.
Many figures disclosed in accounts are not comparable. For example, profits of $100,000 in
2008 are not equivalent to profits of $100,000 in 2013 if there has been inflation between the
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two dates. The worth of the 2013 profits is less than the worth of the 2008 profits. The
comparison is just as meaningless as comparing financial reports prepared in Japanese yen
with reports prepared in euros.
In order to be able to make a meaningful comparison between financial reports prepared in

different time periods, it is desirable therefore to translate them into the same currency (i.e. to
use units of a constant purchasing power). The adjustments are similar in principle to that
used in translating dollars into euros or euros into dollars. Figures are often adjusted for
changes in a price index to achieve a measure of constant purchasing power. In many
countries, government departments issue indices in accordance with which companies must
adjust their financial statements, particularly where there is high inflation.
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Answer 3 REBOUND
(a) Conceptual Framework and Relevance
Two important and inter-related aspects of relevance are its confirmatory and predictive roles.
The Framework specifically states that to have predictive value, information need not be in
the form of an explicit forecast. The serious drawback of forecast information is that it does
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not have (strong) confirmatory value; essentially it will be an educated guess.
IFRS examples of enhancing the predictive value of historical financial statements are:
 The disclosure of continuing and discontinued operations. This allows users to

focus on those areas of an entity’s operations that will generate its future results.
Alternatively it could be thought of as identifying those operations which will not
yield profits or, perhaps more importantly, losses in the future.
 The separate disclosure of non-current assets held for sale. This informs users that
these assets do not form part of an entity’s long-term operating assets.
 The separate disclosure of material items of income or expense (e.g. a gain on the
disposal of a property). These are often “one off” items that may not be repeated in
future periods. They are sometimes called “exceptional” items or described in the
Framework as “unusual, abnormal and infrequent” items.
 The presentation of comparative information (and the requirement for the

consistency of its presentation such as retrospective application of changes in
accounting policies) allows for a degree of trend analysis. Recent trends may help
predict future performance.
 The requirement to disclose diluted earnings per share (EPS) is often described as a
“warning” to shareholders of what EPS would have been if any potential (future)
equity shares such as convertibles and options had already been exercised.
 The Framework’s definitions of assets (resources from which future economic

benefits should flow) and liabilities (obligations which will result in a future
outflow of economic benefits) are based on an entity’s future prospects rather than
its past costs.
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Tutorial note: Other relevant examples would be given credit.
(b) Calculations
(i) Estimated profit after tax for the year ending 31 March 2015
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Existing operations (continuing only) ($2 million × 1·06)
Newly acquired operations ($450,000 × 12/8 months × 1·08)
$000
2,120
729
–––––
2,849
–––––
Tutorial note: The profit from newly acquired operations in 2014 was for only eight months;
in 2015 it will be for a full year.
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(ii) Diluted EPS on continuing operations
2014 Comparative 2013

$2,730,000 (W1)
× 100 18·7 cents
14,600,000 (W2)
$2,030,000 (W1)
× 100 14·5 cents
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14,000,000 (W2)
WORKINGS (figures in brackets are in 000 or $000)
(1) Earnings
2014 Comparative 2013
$000 $000
Continuing operations:
Existing operations 2,000 1,750
Newly acquired operations 450 nil
Convertible loan stock (W3) 280 280
––––– –––––
2,730 2,030
––––– –––––
(2) Weighted average number of shares (000)
At 1 April 2012
(3,000 × 4 (i.e. shares of 25 cents each)) 12,000 12,000
Convertible loan stock (W3) 2,000 2,000
Share options (W4) 600 (six months) nil
–––––– ––––––
14,600 14,000
–––––– ––––––
(3) Convertible loan stock
On an assumed conversion there would be an increase in income of $280,000 ($5,000 × 8% ×
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0·7 after tax).
There would be an increase in the number of shares of 2 million ($5,000/$100 × 40)
These adjustments would apply fully to both years.
(4)
PL Share options
Exercising the options would create proceeds of $2 million (2,000 × $1). At the market price
of $2·50 each this would buy 800,000 shares ($2,000/$2·50) thus the diluting number of
shares is 1·2 million (2,000 – 800).
This would be weighted for 6/12 in 2014 as the grant was half way through the year.
Answer 3 WARDLE
(a) Underlying substance and legal form

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The two fundamental qualitative characteristics of useful information are faithful
representation and relevance. Faithful representation means that financial information
represents the substance of an economic phenomenon rather than merely representing its legal
form. Representing a legal form that differs from the economic substance of the underlying
economic phenomenon could not result in a faithful representation. For example, if an entity
“sold” an asset to a third party, but continued to enjoy the future benefits embodied in that
asset, then this transaction would not be represented faithfully by recording it as a sale (in all
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probability this would be a financing transaction).
Particular attention needs to be given to underlying substance and economic reality and not
merely legal form in assessing whether an item meets the definition of an asset, liability or
equity. Taking the previous example, recognition of a sale would result in failure to
recognised an asset.
Indications that substance and economic reality may differ from legal form:
 control of an asset differs from the ownership of the asset;

 assets are “sold” at prices that are greater or less than their fair values;
 options are provided for under the terms of a contractual agreement;
 a series of transactions are “linked”;
 a “sale” to a financial institution is not a normal transaction for this type of
institution.
Tutorial note: None of these necessarily mean there is a difference.
(b) Profit or loss (Extracts)
(i) Reflecting legal form
Year ended 31 March 31 March 31 March Total

2014 2015 2016
$000 $000 $000 $000
Revenue 6,000 nil 10,000 16,000
Cost of sales (5,000) nil (7,986) (12,986)
––––––– ––––––– ––––––– –––––––
Gross profit 1,000 nil 2,014 3,014
Finance costs nil nil nil nil
––––––– ––––––– ––––––– –––––––
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Profit for the year 1,000 nil 2,014 3,014
––––––– ––––––– ––––––– –––––––
(ii) Reflecting underlying substance
Year ended 31 March 31 March 31 March Total
Revenue
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Cost of sales
Gross profit
Finance costs
Profit for the year

2014
$000
nil
(nil)
–––––––
nil
(600)
–––––––
(600)
–––––––
2015
$000
nil
nil
–––––––
nil
(660)
–––––––
(660)
–––––––
2016
$000
10,000
(5,000)
–––––––
5,000
(726)
–––––––
4,274
–––––––
$000
10,000
(5,000)
–––––––
5,000
(1,986)
–––––––
3,014
–––––––
(c) Effect on financial statements
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It can be seen from the above that the two treatments have no effect on the overall profit for
the year reported in the statements of profit or loss, however, the profit is reported in different
periods and the classification of costs is different. In effect the legal form creates some
element of profit smoothing and completely hides the financing cost. Although not shown,
the effect on the statements of financial position is that recording the legal form of the
transaction does not show the inventory, nor does it show what is, in substance, a loan. Thus
recording the legal form would be an example of off balance sheet (statement of financial
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position) financing. The effect of this on an assessment of Wardle using ratio analysis would
be that interest cover and inventory turnover would be higher and gearing lower. All of
which may be considered as reporting a more favourable performance.
Answer 5 DEXON
(a) Redraft profit or loss for the year
$000 $000
Retained profit for period per question 96,700
Dividends paid (W1) 15,500
–––––––
Draft profit for year ended 31 March 2014 112,200
Discovery of fraud (W2) (2,500)
Goods on sale or return (W3) (600)
Depreciation (W4) – buildings (165,000/15 years) 11,000
– plant (180,500 × 20%) 36,100 (47,100)
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–––––––
Increase in investments ((12,500 × 1,296/1,200) – 12,500) 1,000
Provision for income tax (11,400)
Increase in deferred tax (W5) (800)
–––––––
Recalculated profit for year ended 31 March 2014 50,800
(b)
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Statement of changes in equity for the year ended 31 March 2014
At 1 April 2013
Prior period adjustment (W2)
Ordinary
shares
$000
200,000
Share Revaluation Retained
premium
$000
30,000
reserve
$000
18,000
earnings
$000
12,300
(1,500)
––––––
–––––––
Total
$000
260,300
(1,500)
Restated earnings at 1 April 2013 10,800

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Rights issue (see below) 50,000 10,000 60,000
Total comprehensive income
(from (a) and (W4) 4,800 50,800 55,600
Dividends paid (W1) (15,500) (15,500)
–––––– –––––– –––––– –––––– ––––––
At 31 March 2014 250,000 40,000 22,800 46,100 358,900
–––––– –––––– –––––– –––––– ––––––
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Rights issue: 250 million shares in issue after a rights issue of one for four would mean that
50 million shares were issued (250,000 × 1/5). As the issue price was $1·20, this would create
$50 million of share capital and $10 million of share premium.
WORKINGS (figures in brackets in $000)
(1) Dividends paid
The dividend in May 2013 would be $8 million (200 million shares at 4 cents) and in
November 2013 would be $7·5 million (250 million shares × 3 cents). Total dividends would
therefore have been $15·5 million.
(2) Fraud
The discovery of the fraud means that $4 million should be written off trade receivables. $1·5
million debited to retained earnings as a prior period adjustment (in the statement of changes
in equity) and $2·5 written off in the profit or loss for the year ended 31 March 2014.
(3) Goods on sale or return
The sales over which customers still have the right of return should not be included in
Dexon’s recognised revenue. The reversing effect is to reduce the relevant trade receivables
by $2·6 million, increase inventory by $2 million (the cost of the goods (2,600 × 100/130)) and
reduce the profit for the year by $600,000.
(4) Property
The carrying amount of the property (after the year’s depreciation) is $174 million (185,000 –
11,000). A valuation of $180 million would create a revaluation surplus of $6 million of
which $1·2 million (6,000 × 20%) would be transferred to deferred tax.
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(5) Deferred tax
An increase in the taxable temporary differences of $10 million would create a transfer
(credit) to deferred tax of $2 million (10,000 × 20%). Of this $1·2 million relates to the
revaluation of the property and is debited to the revaluation reserve. The balance, $800,000,
is charged to profit or loss.
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Answer 6 PRICEWELL
(a) Statement of profit or loss for the year ended 31 March 2014
Revenue (310,000 + 22,000 (W1) – 6,400 (W2))

Cost of sales (W3)
Gross profit
$000
325,600
(255,100)
–––––––
70,500
Distribution costs (19,500)
Administrative expenses (27,500)
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Finance costs (4,160 (W5) + 1,248 (W6)) (5,408)
–––––––
Profit before tax 18,092
Income tax expense (4,500 +700 – (8,400 – 5,600 deferred tax) (2,400)
–––––––
Profit for the year 15,692
–––––––
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(b) Statement of financial position as at 31 March 2014

Assets $000 $000
Non-current assets
Property, plant and equipment (24,900 + 41,500 (W4)) 66,400
Current assets
Inventory 28,200
Amount due from customer (W1) 17,100
Bank 5,500 83,900
––––––– –––––––
Total assets 150,300
–––––––
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Equity and liabilities:
Retained earnings (4,900 + 15,692 per (a) – 8,000) 12,592
–––––––
52,592
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Deferred tax
Finance lease obligation (W6)
6% Redeemable preference shares (41,600 + 1,760 (W5))
Current liabilities
Trade payables
Finance lease obligation (10,848 – 5,716) (W6))
Current tax payable
Total equity and liabilities

5,600
5,716
43,360
–––––––
33,400
5,132
4,500
–––––––
54,676
43,032
–––––––
150,300
–––––––
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(1) Construction contract
Selling price 50,000
Estimated cost: To date (12,000)
To complete (10,000)
Plant (8,000)
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––––––
Estimated profit 20,000
––––––
Work done is agreed at $22 million so the contract is 44% complete (22,000/50,000).
Revenue 22,000
Cost of sales (= balance) (13,200)
––––––
Profit to date (44% × 20,000) 8,800
––––––
Cost incurred to date materials and labour 12,000
Plant depreciation (8,000 × 6/24 months) 2,000
Profit to date 8,800
––––––
22,800
Cash received (5,700)
––––––
Amount due from customer 17,100
––––––
(2) Revenue
Pricewell is acting as an agent (not the principal) for the sales on behalf of Trilby. Therefore
profit or loss should only include $1·6 million (20% of the sales of $8 million). Therefore
$6·4 million (8,000 – 1,600) should be deducted from revenue and cost of sales. It would
also be acceptable to show agency sales (of $1·6 million) separately as other income.
(3) Cost of sales
Per question 234,500

Contract (W1) 13,200
Agency cost of sales (W2) (6,400)
Depreciation (W4) – leasehold property 1,800
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– owned plant ((46,800 – 12,800) × 25%) 8,500
– leased plant (20,000 × 25%) 5,000
Surplus on revaluation of leasehold property (W4) (1,500)
–––––––
255,100
–––––––
(4)
PLNon-current assets
Leasehold property
Valuation at 31 March 2013
Depreciation for year (14 year life remaining)
Carrying amount at date of revaluation

Valuation at 31 March 2014
Revaluation surplus (to profit or loss – see below)

25,200
(1,800)
––––––
23,400
(24,900)
––––––
1,500
––––––
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The $1·5 million revaluation surplus is credited to profit or loss this is the partial reversal of
the $2·8 million impairment loss recognised in profit or loss in the previous period (i.e. year
ended 31 March 2013).
Plant and equipment

– owned (46,800 – 12,800 – 8,500) 25,500
– leased (20,000 – 5,000 – 5,000) 10,000
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– contract (8,000 – 2,000 (W1)) 6,000

–––––––
Carrying amount at 31 March 2014 41,500
–––––––
(5) Preference shares
The finance cost of $4,160,000 for the preference shares is based on the effective rate of 10%
applied to $41·6 million balance at 1 April 2013. The accrual of $1,760,000 (4,160 – 2,400
dividend paid) is added to the carrying amount of the preference shares in the statement of
financial position. As these shares are redeemable they are treated as debt and their dividend
is treated as a finance cost.
(6) Finance lease liability
Balance at 31 March 2013 15,600

Interest for year at 8% 1,248
Lease rental paid 31 March 2014 (6,000)
––––––
Total liability at 31 March 2014 10,848
Interest next year at 8% 868
Lease rental due 31 March 2015 (6,000)
––––––
Total liability at 31 March 2015 5,716
––––––
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(c) Financial instruments
IAS 32 Financial Instruments: Presentation defines a financial liability as a liability that is a

contractual obligation:
 to deliver cash or another financial asset to another entity; or


PL to exchange financial assets or liabilities with another entity under conditions that
are potentially unfavourable to the entity.
The essence of a financial liability is that there is a present obligation. The entity is going to
have to settle this either with a cash payment or by delivering a financial asset.
An equity instrument is defined as any contract that evidences a residual interest in the assets
of an entity after deducting all its liabilities.
For an equity instrument there is no obligation to make a payment. The difference between
assets and liabilities (i.e. net assets) is therefore equal to equity as presented in the statement
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of financial position.
Examples of financial liabilities
 Trade payables
 Redeemable preference shares
 Loan notes (also called bonds or debentures)
 Any debt which matures in the future (whether on a specific date or open ended).
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Examples of equity instruments
 Ordinary share capital

 Share options
 Irredeemable preference shares
Tutorial note: Only two examples of each were required.
Answer 7 SANDOWN
(a) Statement of profit or loss and other comprehensive income

for the year ended 30 September 2014
$000
Revenue (380,000 – 4,000 (W1)) 376,000
Cost of sales (W2) (265,300)
–––––––
Gross profit 110,700
Administrative expenses (50,500 – 12,000 (W3)) (38,500)
Investment income 1,300
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Finance costs (W5) (1,475)
–––––––
Income tax expense (16,200 + 2,100 – 1,500 (W6)) (16,800)
–––––––
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Other comprehensive income
Gain on fair value though other comprehensive income investments (W4) 4,700

–––––––
42,525
–––––––
–––––––
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(b) Statement of financial position as at 30 September 2014
Assets $000 $000

Non-current assets
Property, plant and equipment (W7) 67,500
Intangible – brand (15,000 – 2,500 (W2)) 12,500
Financial asset investments (at fair value) 29,000
–––––––
109,000
Current assets
Inventory 38,000
Bank 8,000 90,500
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––––––– –––––––
–––––––
Equity option 2,000
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Other reserve (W9)
Retained earnings (W8)
Deferred tax (W6)
Deferred income (W1)
5% convertible loan note (W5)
3,900
2,000
18,915
–––––––
5,700
55,885
–––––––
113,585
24,815
Current liabilities
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Deferred income (W1) 2,000
Current tax payable 16,200 61,100
––––––– –––––––
–––––––

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(1) Servicing element
IAS 18 Revenue requires that where sales revenue includes an amount for after sales servicing
and support costs then a proportion of the revenue should be deferred. The amount deferred
should cover the cost and a reasonable profit (in this case a gross profit of 40%) on the
services. As the servicing and support is for three years and the date of the sale was 1
October 2013, revenue relating to two years’ servicing and support provision must be
deferred: ($1·2 million × 2/0·6) = $4 million. This is shown as $2 million in both current and
non-current liabilities.
(2) Cost of sales
Per question 246,800

Depreciation – building (50,000 ÷ 50 years – see below) 1,000
– plant and equipment (42,200 – 19,700) × 40%)) 9,000
Amortisation – brand (1,500 + 2,500 – see below) 4,000
Impairment of brand (see below) 4,500
–––––––
265,300
–––––––
The cost of the building of $50 million (63,000 – 13,000 land) has accumulated depreciation
of $8 million at 30 September 2013 which is eight years after its acquisition. Thus the life of
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the building must be 50 years.
The brand is being amortised at $3 million per annum (30,000 ÷ 10 years). The impairment
occurred half way through the year, thus amortisation of $1·5 million should be charged prior
to calculation of the impairment loss. At the date of the impairment review the brand had a
carrying amount of $19·5 million (30,000 – (9,000 + 1,500)). The recoverable amount of the
(3) Dividend
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brand is its fair value of $15 million (as this is higher than its value in use of $12 million)
giving an impairment loss of $4·5 million (19,500 – 15,000). Amortisation of $2·5 million
(15,000 ÷ 3 years × 6/12) is required for the second-half of the year giving total amortisation of
$4 million for the full year.
A dividend of 4·8 cents per share would amount to $12 million (50 million × 5 (i.e. shares are
20 cents each) × 4·8 cents). This is not an administrative expense but a distribution of profits
that should be accounted for through equity.
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(4) Fair value through other comprehensive income financial assets
gain on disposal (11,000 proceeds – 8,800 carrying amount) 2,200

Increase in fair value of remaining investments:
(29,000 – 26,500) 2,500
–––––––
Included in other comprehensive income 4,700
–––––––
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The gain on the investments disposed of $4,000 (11,000 – 7,000) has now been realised and
can be transferred to retained earnings from other equity reserve.
(5) Convertible loan note
The finance cost of the convertible loan note is based on its effective rate of 8% applied to
$18,440,000 carrying amount at 1 October 2013 = $1,475,000 (rounded). The accrual of
$475,000 (1,475 – 1,000 interest paid) is added to the carrying amount of the loan note giving
a figure of $18,915,000 (18,440 + 475) in the statement of financial position at 30 September
2014.
(6) Deferred tax
Credit balance required at 30 September 2014 (13,000 × 30%) 3,900

Balance at 1 October 2013 (5,400)
–––––––
Credit (reduction in balance) to profit or loss 1,500
–––––––
(7) Non-current assets
Freehold property (63,000 – (8,000 + 1,000)) (W2) 54,000

Plant and equipment (42,200 – (19,700 + 9,000)) (W2) 13,500
–––––––
Property, plant and equipment 67,500
–––––––
(8) Retained earnings
At 1 October 2013 26,060

Profit for year 37,825
Transfer from other equity reserve ((W4) 4,000
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Dividend paid (W3) (12,000)
––––––
55,885
––––––
(9) Other reserve (re financial asset investments)
(c)
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At 1 October 2013
Other comprehensive income for year (W4)
Transfer to retained earnings ((W4)
Accounting for dividends

5,000
4,700
(4,000)
––––––
5,700
––––––
IAS 10 Events After the Reporting Period prescribes the accounting for proposed dividends.
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It states that dividends declared after the end of the reporting period cannot be recognised as a
liability in that reporting period.
For the year ended 30 September 2014 Sandown can only disclose the proposed dividend in
the notes to the financial statements.
When the dividend is paid in the following period it cannot be recognised as an expense in
profit or loss as it is a “distribution to equity participants”. The Conceptual Framework for
SA
Financial Reporting specifically excludes incurrences of liabilities relating to such

distributions from its definition of expenses. The dividend is not an expense but an
appropriation of profits that should be deducted from retained earnings in the statement of
changes in equity.
The managing director’s suggested treatment is not allowed under IFRS. He is also incorrect
in his assertion that the income tax expense will be reduced. As dividends are not deductible
for tax purposes it has no effect on the amount of tax payable.
Answer 8 CAVERN

for the year ended 30 September 2014
$000
Revenue 182,500
–––––––
Gross profit 45,100
Administrative expenses (25,000 – 18,500 dividends (W3)) (6,500)
Investment income 700
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Finance costs (300 + 400 (w (ii)) + 3,060 (W4)) (3,760)
––––––
Income tax expense (5,600 + 900 – 250 (W5)) (6,250)
––––––
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Other comprehensive income
Loss on fair value through other comprehensive income investments
(15,800 – 13,500)
Gain on revaluation of land and buildings (W2)
Total other comprehensive losses for the year

––––––
(2,300)
800
––––––
(1,500)
––––––
19,290
––––––
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(b) Statement of changes in equity for the year ended 30 September 2014
Share Share Other Revaluation Retained Total

capital premium equity reserve earnings equity
$000 $000 $000 $000 $000 $000
Balance at 1 October 2013 40,000 nil 3,000 7,000 12,100 62,100
Rights issue (W3) 10,000 11,000 21,000
Dividends (W3) (18,500) (18,500)
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Comprehensive income (2,300) 800 20,790 19,290

–––––– –––––– –––––– –––––– ––––––– ––––––
Balance at 30 September 2014 50,000 11,000 700 7,800 14,390 83,890
–––––– –––––– –––––– –––––– ––––––– ––––––
(c) Statement of financial position as at 30 September 2014
Assets $000 $000

Non-current assets
Property, plant and equipment (41,800 + 51,100 (W2)) 92,900
Fair value through other comprehensive income investments 13,500
–––––––
106,400
Current assets
Inventory 19,800
––––––– 48,800
–––––––
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–––––––
Equity (see (b) above)
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Other equity reserve
Revaluation reserve
Retained earnings
Provision for decontamination costs (4,000 + 400 (W2))
8% loan note (W4)
700
7,800
14,390
–––––––
4,400
31,260
33,890
––––––
83,890
Deferred tax (W5) 3,750

––––––– 39,410
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––––––
Current liabilities
Bank overdraft 4,600
Current tax payable 5,600
––––––– 31,900
–––––––
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–––––––
WORKINGS (monetary figures in brackets in $000)
(1) Cost of sales
Per trial balance 128,500

Depreciation of building (36,000 ÷ 18 years) 2,000
Depreciation of new plant (14,000 ÷ 10 years) 1,400
Depreciation of existing plant and equipment
((67,400 – 10,000 – 13,400) × 12·5%) 5,500
–––––––
137,400
–––––––
(2) Property, plant and equipment
The new plant of $10 million should be grossed up by the provision for the present value of
the estimated future decontamination costs of $4 million to give a gross cost of $14 million.
The “unwinding” of the provision will give rise to a finance cost in the current year of
$400,000 (4,000 × 10%) to give a closing provision of $4·4 million.
The gain on revaluation and carrying amount of the land and building will be:
Valuation – 30 September 2013 43,000

Building depreciation (W1) (2,000)
––––––
Carrying amount before revaluation 41,000
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Revaluation – 30 September 2014 41,800
––––––
Gain on revaluation 800
––––––
The carrying amount of the plant and equipment will be:
New plant (14,000 – 1,400) 12,600
(3)
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Existing plant and equipment (67,400 – 10,000 – 13,400 – 5,500)
Rights issue/dividends paid
Based on 250 million (50 million × 5 – as shares are 20 cents each) shares in issue at 30
September 2014, a rights issue of 1 for 4 on 1 April 2014 would have resulted in the issue of
50 million new shares (250 million – (250 million × 4/5)). This would be recorded as share
38,500
––––––
51,100
––––––
capital of $10 million (50,000 × 20 cents) and share premium of $11 million (50,000 × (42
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cents – 20 cents)).
The dividend of 3 cents per share paid on 30 November 2013 would have been based on 200
million shares and been $6 million. The dividend of 5 cents per share paid on 31 May 2014
would have been based on 250 million shares and been $12·5 million. Therefore the total
dividends paid, incorrectly included in administrative expenses, were $18·5 million.
(4) Loan note

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The finance cost of the loan note, at the effective rate of 10% applied to the carrying amount
of the loan note of $30·6 million, is $3·06 million. The interest actually paid is $2·4 million.
The difference between these amounts of $660,000 (3,060 – 2,400) is added to the carrying
amount of the loan note to give $31·26 million (30,600 + 660) for inclusion as a non-current
liability in the statement of financial position.
(5) Deferred tax
Provision required at 30 September 2014 (15,000 × 25%) 3,750

Provision at 1 October 2013 (4,000)
–––––
Credit (reduction in provision) to profit or loss 250
–––––
(d) Financial assets
IFRS 9 requires that all financial assets be placed into one of three categories:
Fair value through profit or loss

Fair value through other comprehensive income
Amortised cost
Fair value through profit or loss is the default category, with the other two exceptions to the
default. As the title implies the financial asset is measured at fair value at each reporting date,
reference should be made to IFRS 13 Fair Value Measurement to find fair value, with any
change in fair value being recognised as income or expense in the profit or loss.
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For an asset to be classed as fair value through other comprehensive income the whole
instrument must be an equity instrument of another entity, the asset is being held for the long
term and the entity must have designated, documented, the asset at fair value through other
comprehensive income. The asset is again measured at fair value and any change in fair value
is this time taken to other comprehensive income.
PL
For the asset to be classified at amortised cost the asset must be held within a business model
whose objective is to hold assets in order to collect contractual cash flows, in other words it is
a debt asset; and the contractual terms of the asset gives rise to cash flows that are solely
payments of principal and interest on the principal outstanding, it must be “simple” debt.
The amortised cost model takes the initial amount of the asset adds to that the interest income
based on the effective interest rate and then deducts any cash interest received.
Answer 9 HIGHWOOD

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for the year ended 31 March 2014
$000
Revenue 339,650
–––––––
Gross profit 122,700
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Administrative expenses (30,700 – 1,300 + 600 (W4)) (30,000)

Finance costs (W5) (2,848)
–––––––
Income tax expense (19,400 – 800 + 400 (W6)) (19,000)
–––––––
Other comprehensive income:
Gain on revaluation of property (W2) 15,000
Deferred tax on revaluation (W2) (3,750)
–––––––
Total comprehensive income 54,602
–––––––
(b) Statement of changes in equity for the year ended 31 March 2014
Share Equity Revaluation Retained Total

capital option reserve earnings equity
$000 $000 $000 $000 $000
Balance at 1 April 2013 (see below) 56,000 nil nil 7,000 63,000
8% Loan note issue (W5) 1,524 1,524
Dividend paid (W7) (5,600) (5,600)
Comprehensive income 11,250 43,352 54,602
––––––– ––––––– ––––––– ––––––– –––––––
Balance at 31 March 2014 56,000 1,524 11,250 44,752 113,526
––––––– ––––––– ––––––– ––––––– –––––––
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Tutorial note: The retained earnings of $1·4 million in the trial balance is after deducting
the dividend paid of $5·6 million, therefore the retained earnings at 1 April 2013 amounted to
$7 million.
(c) Statement of financial position as at 31 March 2014
Assets
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Non-current assets
Property, plant and equipment (77,500 + 40,000) (W1)
Current assets
Inventory (36,000 – 2,700 + 6,000) (W1)
Trade receivables (47,100 + 10,000 – 600 (W4))
Total assets
$000
39,300
56,500
––––––
$000
117,500
95,800
–––––––
213,300
–––––––
Equity (see (ii))
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Other component of equity – equity option 1,524
Revaluation reserve 11,250
–––––––
113,526
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Deferred tax (W6) 6,750

8% Convertible loan note (28,476 + 448) (W5) 28,924 35,674
––––––
Current liabilities
Liability to Easyfinance (W4) 8,700
Bank overdraft 11,500
Current tax payable 19,400 64,100
–––––– –––––––
–––––––
(1) Cost of sales and non-current assets

$000
Cost of sales (given) 207,750
Depreciation – building (W2) 2,500
– plant and equipment (W2) 10,000
Adjustment/increase to closing inventory (W3) (3,300)
–––––––
216,950
–––––––
(2) Depreciation
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Freehold property
The revaluation of the property will create an initial revaluation reserve of $15 million
(80,000 – (75,000 – 10,000)).
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$3·75 million of this (25%) will be transferred to deferred tax leaving a net revaluation
reserve of $11·25 million. The building valued at $50 million will require a depreciation
charge of $2·5 million (50,000/20 years remaining) for the current year. This will leave a
carrying amount in the statement of financial position of $77·5 million (80,000 – 2,500).
Plant and equipment
1 April 2013
Charge for year ((74,500 – 24,500) × 20%)
Cost
$000
74,500
Accumulated depreciation
$000
24,500
10,000
–––––– ––––––
31 March 2014 74,500 34,500
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–––––– ––––––
The carrying amount in the statement of financial position is $40 million.
(3) Inventory adjustment
Goods delivered (deduct from closing inventory) (2,700)

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Cost of goods sold (7,800 × 100/130) (add to closing inventory) 6,000

–––––
Net increase in closing inventory 3,300
–––––
(4) Factored receivables
As Highwood still bears the risk of the non-payment of the receivables, the substance of this
transaction is a loan. Thus the receivables must remain on Highwood’s statement of financial
position and the proceeds of the “sale” treated as a current liability. The difference between
the factored receivables (10,000) and the loan received (8,700) of $1·3 million, which has
been charged to administrative expenses, should be reversed except for $600,000 which
should be treated as an allowance for uncollectible receivables.
(5) 8% convertible loan note
This is a compound financial instrument having a debt (liability) and an equity component.
These must be quantified and accounted for separately:
Year ended 31 March Outflow 10% Present value

$000 $000
2014 2,400 0·91 2,184
2015 2,400 0·83 1,992
2016 32,400 0·75 24,300
–––––––
Liability component 28,476
Equity component (balance) 1,524
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–––––––
Proceeds of issue 30,000
–––––––
The finance cost for the year will be $2,848,000 (28,476 × 10% rounded). Thus $448,000
(2,848 – 2,400 interest paid) will be added to the carrying amount of the loan note in the
(6)
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The equity component of $1,524 could have been reduced and retained earnings increased by
a transfer of the difference between the interest expense of $2,848 and the interest cash paid
of $2,400.
Deferred tax
Credit balance required at 31 March 2014 (27,000 × 25%)

Revaluation of property (W1)
6,750
(3,750)
Balance at 1 April 2013 (2,600)
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–––––
Charge to profit or loss 400
–––––
(7) Dividend
The dividend paid in November 2013 was $5·6 million. This is based on 112 million shares
in issue (56,000 × 2 – the shares are 50 cents each) times 5 cents.
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(d) Impact of revaluation
The marketing director’s statements are both incorrect.
Depreciation must be charged on all depreciable assets; land is the only non-depreciable asset.
Depreciation is “the systematic allocation of the depreciable amount of an asset over its useful
life”. Depreciable amount is “the cost of an asset, or other amount substituted for cost, less its
residual value”.
So if an asset is revalued this will increase its depreciable amount which, in turn, will increase
the depreciation expense for the year. Revaluation does not negate the requirement to
depreciate depreciable assets and IA8 Property. Plant and Equipment does not allow non-
depreciation in the event of revaluation.
IAS 33 Earnings per Share states that the earnings figure to be used in the calculation is
“profit or loss attributable to ordinary equity holders” (i.e. after tax).
Any revaluation gain is recognised in other comprehensive income which is presented below
profit or loss in the statement of total comprehensive income. A revaluation gain is not part
of the profit for the period and therefore does not inflate profits. Hence EPS will not improve
as a result of the revaluation.
Answer 10 EMERALD
(a) Asset definition
The Framework defines an asset as a resource controlled by an entity as a result of past

transactions or events from which future economic benefits (normally net cash inflows) are
expected to flow to the entity. However assets can only be recognised (on the statement of
financial position) when those expected benefits are probable and can be measured reliably.
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The Framework recognises that there is a close relationship between incurring expenditure
and generating assets, but they do not necessarily coincide. Development expenditure,
perhaps more than any other form of expenditure, is a classic example of the relationship
between expenditure and creating an asset. Clearly entities commit to expenditure on both
research and development in the hope that it will lead to a profitable product, process or
service, but at the time that the expenditure is being incurred, entities cannot be certain (or it
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may not even be probable) that the project will be successful. Relating this to accounting
concepts, if there is doubt that a project will be successful the application of faithful
representation would dictate that the expenditure is charged (expensed) to profit or loss.
At the stage where management becomes confident that the project will be successful, it
meets the definition of an asset and the accruals/matching concept would mean that it should
be capitalised (treated as an asset) and amortised over the period of the expected benefits.
IAS 38 Intangible Assets interprets this as writing off all research expenditure and only
capitalising development costs from the point in time where they meet strict conditions which
effectively mean the expenditure meets the definition of an asset.
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(b) Accounting entries
30 September 2014 30 September 2013
Statement of profit or loss $000 $000
Amortisation of development expenditure 335 (W2) 135 (W1)
Statement of financial position

Development expenditure 1,195 (W4) 1,130 (W3)
SA
Statement of changes in equity

Prior period adjustment (credit required to restate retained earnings at 1 October 2012)
(cumulative carrying amount at 2012 of 300 + 165) 465
WORKINGS (All figures in $000)
Year ended Cumulative Cumulative

2011 2012 2013 2013 2014 2014
Expenditure 300 240 800 1,340 400 1,740
––––– ––––– ––––– ––––– ––––– –––––
Amortisation (25%) nil (75) (75) (150) (75) (225)
nil nil (60) (60) (60) (120)
nil nil nil nil (200) (200)
––––– ––––– ––––– ––––– ––––– –––––
Total amortisation nil (75) (W1) (135) (210) (W2) (335) (545)
––––– ––––– ––––– ––––– ––––– –––––
Carrying amount 300 165 665 (W3) 1,130 65 (W4) 1,195
––––– ––––– ––––– ––––– ––––– –––––
(c) Extracts from financial statements for the year ended 31 March 2014
(Figures in brackets in $000)

$000
Statement of profit or loss and other comprehensive income
Depreciation of office building (A) (2,000 ÷ 20 years × 6/12) (50)

Gain on investment properties: A (2,340 – 2,300) 40
B (1,650 – 1,500) 150
Other comprehensive income (A see below) 350
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Non-current assets
Investment properties (A and B) (2,340 + 1,650) 3,990
Equity
Revaluation reserve (A) (2,300 – (2,000 – 50)) 350
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In Speculate’s consolidated financial statements property B would be accounted for under
IAS 16 Property, Plant and Equipment and classified as owner-occupied. Further
information is required to determine the depreciation charge.
Answer 11 TUNSHILL
(a) Choice of accounting policy
Management’s choices of which accounting policies they may adopt are not as wide as
generally thought. Where an International Financial Reporting Standard, IAS or IFRS (or an
Interpretation) specifically applies to a transaction (or event) the accounting policy used must
be as prescribed in that Standard (taking in to account any Implementation Guidance within
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the Standard). In the absence of a Standard, or where a Standard contains a choice of policies,
management must use its judgement in applying accounting policies that result in information
that is relevant and faithfully represents the circumstances of the transactions and events. In
making such judgements, management should refer to guidance in the Standards related to
similar issues and the definitions, recognition criteria and measurement concepts for assets,
liabilities, income and expenses in the IASB’s Conceptual Framework for Financial
Reporting. Management may also consider pronouncements of other standard-setting bodies
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that use a similar conceptual framework to the IASB.
A change in an accounting policy usually relates to a change of principle, basis or rule being
applied by an entity. Accounting estimates are used to measure the carrying amounts of
assets and liabilities, or related expenses and income. A change in an accounting estimate is a
reassessment of the expected future benefits and obligations associated with an asset or a
liability. Thus, for example, a change from non-depreciation of a building to depreciating it
over its estimated useful life would be a change of accounting policy. To change the estimate
of its useful life would be a change in an accounting estimate.
(b) Transactions
(i) Useful life of non-current asset
The main issue here is the estimate of the useful life of a non-current asset. Such estimates
form an important part of the accounting estimate of the depreciation charge. Like most
estimates, an annual review of their appropriateness is required and it is not unusual, as in this
case, to revise the estimate of the remaining useful life of plant. It appears, from the
information in the question, that the increase in the estimated remaining useful life of the
plant is based on a genuine reassessment by the production manager. This appears to be an
acceptable reason for a revision of the plant’s life, whereas it would be unacceptable to
increase the estimate simply to improve the company’s reported profit. That said, the
assistant accountant’s calculation of the financial effect of the revised life is incorrect. Where
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there is an increase (or decrease) in the estimated remaining life of a non-current asset, its
carrying amount (at the time of the revision) is allocated over the new remaining life (after
allowing for any estimated residual value). The carrying amount at 1 October 2013 is $12
million ($20 million – $8 million accumulated depreciation) and this should be written off
over the estimated remaining life of six years (eight years in total less two already elapsed).
Thus a charge for depreciation of $2 million would be required in the year ended 30
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September 2014 leaving a carrying amount of $10 million ($12 million – $2 million) in the
statement of financial position at that date. A depreciation charge for the current year cannot
be avoided and there will be no credit to profit or loss as suggested by the assistant
accountant. The incremental effect of the revision to the estimated life of the plant would be
to improve the reported profit by $2 million being the difference between the depreciation
based on the old life ($4 million) and the new life ($2 million).
(ii) Inventory valuation
The appropriateness of the proposed change to the method of valuing inventory is more
dubious than the previous example. Whilst both methods (FIFO and AVCO) are acceptable
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methods of valuing inventory under IAS 2 Inventories, changing an accounting policy to be
consistent with that of competitors is not a convincing reason. Generally changes in
accounting policies should be avoided unless a change is required by a new or revised
International Financial Reporting Standard or the new policy provides more reliable and
relevant information regarding the entity’s position. In any event the assistant accountant’s
calculations are again incorrect and would not meet the intention of improving reported profit.
The most obvious error is that changing from FIFO to AVCO will cause a reduction in the
value of the closing inventory at 30 September 2014 effectively reducing, rather than
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increasing, both the valuation of inventory and reported profit. A change in accounting policy
must be accounted for as if the new policy had always been in place (retrospective
application). In this case, for the year ended 30 September 2014, both the opening and
closing inventories would need to be measured at AVCO which would reduce reported profit
by $400,000 (($20 million – $18 million) – ($15 million – $13·4 million) – i.e. the movement
in the values of the opening and closing inventories). The other effect of the change will be
on the retained earnings brought forward at 1 October 2013. These will be restated (reduced)
by the effect of the reduced inventory value at 30 September 2013 i.e. $1·6 million ($15
million – $13·4 million). This adjustment would be shown in the statement of changes in
equity.
Answer 12 DERRINGDO
(a) Income recognition
Under the Framework revenue recognition issues are approached from the definitions of
assets and liabilities. Income and expenses are defined as increases or decreases in net assets
other than those resulting from transactions with owners. The Framework can therefore be
said to take a “balance sheet approach” to income recognition. In effect a recognisable
increase in an asset results in a gain.
The more traditional view, which is largely the basis used in IAS 18 Revenue, is that (net)
revenue recognition is part of a transactions-based accruals or matching process with the
statement of financial position recording any residual assets or liabilities such as receivables
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and payables. The issue of revenue recognition arises out of the need to report company
performance for specific periods.
The Framework identifies three stages in the recognition of assets (and liabilities):
(1) initial recognition, when an item first meets the definition of an asset;
(2)
(3) PLsubsequent measurement, which may involve changing the value (with a
corresponding effect on income) of a recognised item; and
possible derecognition, where an item no longer meets the definition of an asset.
For many simple transactions both the Framework’s approach and the traditional approach
(IAS 18) will result in the same profit (net income). If an item of inventory is bought for
$100 and sold for $150, net assets have increased by $50 and the increase would be reported
as a profit. The same figure would be reported under the traditional transactions based
reporting (sales of $150 less cost of sales of $100). However, in more complex areas the two
approaches can produce different results. An example of this would be deferred income. If a
company received a fee for a 12 month tuition course in advance, IAS 18 would treat this as
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deferred income (on the statement of financial position) and “release” it to income as the
tuition is provided and matched with the cost of providing the tuition. Thus the profit would
be spread (accrued) over the period of the course. If an asset/liability approach were taken,
then the only liability the company would have after the receipt of the fee would be for the
cost of providing the course. If only this liability is recognised in the statement of financial
position, the whole of the profit on the course would be recognised on receipt of the income.
SA
This is not a prudent approach and has led to criticism of the Framework for this very reason.
Arguably the treatment of government grants under IAS 20 (as deferred income) does not
comply with the Framework as deferred income does not meet the definition of a liability.
Other standards that may be in conflict with the Framework are the use of the accretion
approach in IAS 11 Construction Contracts and a deferred tax liability in IAS 12 Income Tax
may not fully meet the Framework’s definition of a liability.
(b) Sale of goods
Sales made by Derringdo of goods from Gungho must be treated under two separate
categories. Sales of the A grade goods are made by Derringdo acting as an agent of Gungho.
For these sales Derringdo must only record in profit or loss the amount of commission
(12·5%) it is entitled to under the sales agreement. There may also be a receivable or payable
for Gungho in the statement of financial position. Sales of the B grade goods are made by
Derringdo acting as a principal, not an agent. Thus they will be included in sales with their
cost included in cost of sales.
$000
Sales revenue (4,600 (W1) + 11,400 (W2)) 16,000
–––––––
Gross profit 7,450
WORKINGS: (all figures in $000)

A grade
(1) Opening inventory 2,400
Transfers/purchases 18,000
–––––––
20,400
Closing inventory (2,000)
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–––––––
Cost of sales 18,400
Selling price (to give 50% gross profit) 36,800
–––––––
Gross profit 18,400
Commission (12·5% × 36,800) 4,600
(2) PL Opening inventory

Transfers/purchases
Closing inventory
Cost of sales
B grade
1,000
8,800
–––––––
9,800
(1,250)
–––––––
8,550
Selling price (8,550 × 4/3 see below) 11,400
–––––––
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A gross profit margin of 25% is equivalent to a mark-up on cost of 1/3. Thus if cost of sale is
multiplied by 4/3 this will give the relevant selling price.
(c) Accounting policies

On first impression, it appears that the company has changed its accounting policy from
recognising carpet sales at the point of fitting to recognising them at the point when they are
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ordered and paid for. If this were the case then the new accounting policy should be applied
as if it had always been in place and the income recognised in the year to 31 March 2014
would be $23 million. Without the change in policy, sales would have been $22·6 million
(23m + 1·2m – 1·6m). Sales made from the retail premises during the current year, but not
yet fitted ($1·6 million) will not be recognised until the following period. A corresponding
adjustment is made recognising the equivalent figure ($1·2 million) from the previous year.
The difference between the $23 million and $22·6 million would be a prior year adjustment
(less the cost of sales relating to this amount). This analysis assumes that the figures are
material.
Despite first impressions, the above is not a change of accounting policy. This is because a
change of accounting policy only occurs where the same circumstances are treated differently.
In this case there are different circumstances. Derringdo has changed its method of trading; it
is no longer responsible for any errors that may occur during the fitting of the carpets. An
accounting policy that is applied to circumstances that differ from previous circumstances is
not a change of accounting policy. Thus the amount to be recognised in income for the year
to 31 March 2014 would be $24·2 million (23m + 1·2m). Whilst this appears to boost the
current year’s income it would be mitigated by the payments to the sub-contractors for the
carpet fitting.
Answer 13 LINNET
(a) Recognition principles
Construction contracts tend to span more than one accounting period. This leads to the
problem of determining how the uncompleted transactions should be dealt with over the life
of the contract. Normal sales are not recognised until the production and sales cycle is
complete. Where the outcome of a construction contract cannot be reasonably foreseen due to
inherent uncertainty, the completed contracts basis should be applied. The effect of this is
that sales revenue earned to date is matched to the cost of sales and no profit is taken nor loss
recognised. This lack of bias (i.e. neutrality) is one of the three characteristics that contributes
to faithful representation.
E
The problem with the above is that for say a three-year contract it can lead to a situation
where no profits are recognised, possibly for two years, and in the year of completion the
whole of the profit is recognised (assuming the contract is profitable). This seems consistent
with the principle that only realised profits should be recognised in the statement of profit or
loss. The problem is that the overriding requirement is for financial statements to show a
faithful representation of the events and transactions occurring in the period and there is an
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implication that financial statements should reflect the economic reality of these events. In
the above case it can be argued that the company has been involved in a profitable contract
for a three-year period, but its financial statements over the three years show a profit in only
one period. This also leads to volatility of profits which many companies feel is undesirable
and not favoured by analysts. An alternative approach is to apply the matching/accruals
concept which underlies the percentage of completion method. This approach requires the
percentage of completion of a contract to be assessed (there are several methods of doing this)
and then recognising in the statement of profit or loss that percentage of the total estimated
profit on the contract. This method has the advantage of more stable profit recognition and
can be argued shows a more faithful representation of the events than the completed contract
method. A contrary view is that this method can be criticised as being a form of profit
smoothing which, in other circumstances, is considered to be an (undesirable) example of
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creative accounting. IAS 11 Construction Contracts requires the use of the percentage of
completion method where the outcome of the contract is reasonably foreseeable. Where a
contract is expected to produce a loss, the whole of the loss must be recognised as soon as it is
anticipated.
(b) Statement of profit or loss (extract) for the year to 31 March 2014
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$m
Sales revenue 70
Cost of sales (64 +17) (81)
–––
Loss for period (11)
–––
Linnet – statement of financial position extracts – as at 31 March 2014
Current assets
Gross amounts due from customers for contract work (W3) 59
WORKINGS
Cumulative Cumulative Amounts
1 April 2013 31 March 2014 for year
$m $m $m
Sales 150 (W1) 220 70
Cost of sales (112) (W2) (176) (64)
Rectification costs nil (17) (17)
–––– –––– ––––
Profit/(loss) 38 (W2) 27 (11)
–––– –––– ––––
(1) Contract sales
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Progress payments received are $180 million. This is 90% of the work certified (at 28
February 2014); therefore the work certified at that date was $200 million. The value of the
further work completed in March 2014 is given as $20 million, giving a total value of contract
sales at 31 March 2014 of $220 million.
(2) Total estimated profit (excluding rectification costs)
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Contract price
Cost to date
Estimated cost to complete
Estimated total profit
The degree of completion (by the method given in the question) is 220/300.
$m
300
(195)
(45)
––––
60
––––
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Costs recognised to date are based on total expected cost of $240 million × 220/300 = $176
million less costs recognised in prior period of $112 million to arrive at costs recognised this
period of $64 million. However, the rectification costs, of $17 million, are an abnormal cost
and they must be charged against profits in the year they are incurred, they cannot be spread
over the term of the contract. Therefore costs to be recognised this period are $81 million (64
+ 17), leading to a loss recognised for this period of $11 million.
(3) Gross amount due from customers

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The gross amounts due from customers is actual costs incurred to date ($195 million + $17
million) plus cumulative profit ($27 million) less progress billings ($180 million) = $59
million. Of this $59 million $20 million (200 – 180) would be recognised as a receivable asset
under IFRS 9 Financial Instruments and the remaining $39 million would be the gross amount
due from customers under IAS 11.
Answer 14 MOCCA
Statement of profit or loss year ended 31 March 2014 (extracts)
$000
Revenue recognised ((65% (W1) × 12,500) – 3,500 in 2013) 4,625
Contract expenses recognised ((65% × 9,500) – 2,660 in 2013) (3,515)
–––––
Profit recognised 1,110
–––––
Statement of financial position as at 31 March 2014 (extracts)
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Non-current assets
Plant (8,000 – 2,500 (W3)) 5,500
Current assets
Receivables (8,125 – 7,725) 400
Amounts due from customers (Note) 1,125
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Disclosure Note – Amounts due from customers
Contract costs incurred (W3)
Recognised profits (840 + 1,110)
Progress billings
Amounts due from customers

7,300
1,950
–––––
9,250
(8,125)
–––––
1,125
–––––
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WORKINGS (in $000)
(1) Percentage complete
Agreed value of work completed at year end 8,125

––––––
Contract price 12,500
Percentage completed (8,125/12,500 × 100) 65%
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(2) Estimated total costs
$000
Other costs 5,500
–––––
Total costs 9,500
–––––
(3) Contract costs incurred

Other costs 4,800
–––––
7,300
–––––
Answer 15 DEARING
Extracts from the financial statements
Year ended 30 September 2012 2013 2014

Statement of profit or loss $000 $000 $000
Depreciation (see workings) 180 270 119
Maintenance (60,000 ÷ 3 years) 20 20 20
Discount received (840,000 × 5%) (42)
Staff training 40
–––– –––– ––––
198 290 139
–––– –––– ––––
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Property, plant and equipment
Cost 920 920 670
Accumulated depreciation (180) (450) (119)
–––– –––– ––––
Carrying amount 740 470 551
WORKINGS
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Manufacturer’s base price
Less: Trade discount (20%)
Base cost
Freight charges
Electrical installation cost
––––
$000
1,050
(210)
––––
840
30
28
–––– ––––
Pre-production testing 22
––––
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Initial capitalised cost 920
––––
The depreciable amount is $900,000 (920,000 – 20,000 residual value) and, based on an
estimated machine life of 6,000 hours, this gives depreciation of $150 per machine hour.
Therefore depreciation for the year ended 30 September 2012 is $180,000 ($150 × 1,200
hours) and for the year ended 30 September 2013 is $270,000 ($150 × 1,800 hours).
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Tutorial note: Early settlement discount, staff training in use of machine and maintenance
are all revenue items and cannot be part of capitalised costs.
$000
Carrying amount at 1 October 2013 470
Subsequent expenditure 200
––––
Revised “cost” 670
––––
The revised depreciable amount is $630,000 (670,000 – 40,000 residual value) and with a
revised remaining life of 4,500 hours, this gives a depreciation charge of $140 per machine
hour. Therefore depreciation for the year ended 30 September 2014 is $119,000 ($140 × 850
hours).
Answer 16 FLIGHTLINE
Statement of profit or loss for the year ended 31 March 2014
$000
Depreciation (W1) 13,800
Loss on write off of engine (W3) 6,000
Repairs – engine 3,000
– exterior painting 2,000
Statement of financial position as at 31 March 2014
Non-current asset – Aircraft Cost Accumulated Carrying
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depreciation amount
$000 $000 $000
Exterior (W1) 120,000 84,000 36,000
Cabin fittings (W2) 29,500 21,500 8,000
Engines (W3) 19,800 3,700 16,100
––––––– ––––––– –––––––
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(1) Depreciation
169,300
–––––––
109,200
–––––––
60,100
–––––––
The exterior of the aircraft is depreciated at $6 million per annum (120,000 ÷ 20 years). The
cabin is depreciated at $5 million per annum (25,000 ÷ 5 years). The engines would be
depreciated by $500 ($18 million/36,000 hours) i.e. $250 each, per flying hour.
Carrying amount of aircraft at 1 April 2013

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Cost Accumulated Carrying
depreciation amount
$000 $000 $000
Exterior (13 years old) 120,000 78,000 42,000
Cabin (3 years old) 25,000 15,000 10,000
Engines (used 10,800 hours) 18,000 5,400 12,600
––––––– ––––––– –––––––
163,000 98,400 64,600
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––––––– ––––––– –––––––

Depreciation for year to 31 March 2014: $000
Exterior (no change) 6,000
Cabin fittings – six months to 30 September 2013(5,000 × 6/12) 2,500
– six months to 31 March 2014(W2) 4,000
Engines – six months to 30 September 2013(500 × 1,200 hours) 600
– six months to 31 March 2014 ((400 + 300) W3) 700
–––––––
13,800
–––––––
(2) Cabin fittings
Cabin fittings – at 1 October 2013 the carrying amount of the cabin fittings is $7·5 million
(10,000 – 2,500). The cost of improving the cabin facilities of $4·5 million should be
capitalised as it led to enhanced future economic benefits in the form of substantially higher
fares. The cabin fittings would then have a carrying amount of $12 million (7,500 + 4,500)
and an unchanged remaining life of 18 months. Thus depreciation for the six months to 31
March 2014 is $4 million (12,000 × 6/18).
(3) Engines
Engines – before the accident the engines (in combination) were being depreciated at a rate of
$500 per flying hour. At the date of the accident each engine had a carrying amount of $6
million ((12,600 – 600)/2). This represents the loss on disposal of the written off engine. The
repaired engine’s remaining life was reduced to 15,000 hours. Thus future depreciation on
the repaired engine will be $400 per flying hour, resulting in a depreciation charge of
$400,000 for the six months to 31 March 2014. The new engine with a cost of $10·8 million
and a life of 36,000 hours will be depreciated by $300 per flying hour, resulting in a
depreciation charge of $300,000 for the six months to 31 March 2014. Summarising both
engines:
Cost Accumulated Carrying
depreciation amount
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$000 $000 $000
Old engine 9,000 3,400 5,600
New engine 10,800 300 10,500
––––––– ––––––– –––––––
19,800 3,700 16,100
––––––– ––––––– –––––––
(a)
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Tutorial note: Marks are awarded for clear calculations rather than for detailed
explanations. Full explanations are given for tutorial purposes.
Answer 17 BAXEN
Advantages of adopting IFRS
There are several aspects of Baxen’s business strategy where adopting IFRS would be
advantageous.
It is unclear how sophisticated or developed the “local” standards which it currently uses are,
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however, it is widely accepted that IFRS are a set of high quality and transparent global
standards that are intended to achieve consistency and comparability across the world. They
have been produced in co-operation with other internationally renowned standard setters, with
the aspiration of achieving consensus and global convergence. Thus if Baxen does adopt
IFRS it is likely that its status and reputation (e.g. an improved credit rating) in the eyes of
other entities would be enhanced.
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Other more specific advantages
 Its own financial statements would be comparable with other companies that use
IFRS. This would help the company to better assess and rank prospective
investments in its foreign trading partners.
 Should Baxen acquire (as a subsidiary) any foreign companies, it would make the
task of consolidation much simpler as there would be no need to reconcile its
foreign subsidiary’s financial statements to the local generally accepted accounting
principles (GAAP) that Baxen currently uses. The use of IFRSs may make the audit
fee less expensive.
 If Baxen needs to raise finance in the future (highly likely because of its ambitions),
it will find it easier to get a listing on any security exchange that is a member of the
International Organisation of Securities Commissions (IOSCO) as they recognise
IFRS for listing purposes. This flexibility to raise funding also means that Baxen’s
financing costs should be lower.
(b) Government grants
(i) Policy
The IASB’s Framework defines liabilities as obligations to transfer economic benefits as a
result of past transactions. Such transfers of economic benefits are to third parties and
normally as cash payments. Traditionally and in compliance with IAS 20 Accounting for
Government Grants and Disclosure of Government Assistance, capital based government
grants are treated as deferred credits and spread over the life of the related assets. This is the
application of the matching concept. A strict interpretation of the Framework would not
normally allow deferred credits to be treated as liabilities as there is usually no obligation to
transfer economic benefits. In this particular example the only liability that may occur in
respect of the grant would be if Baxen were to sell the related asset within four years of its
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purchase. A possible argument would be that the grant should be treated as a reducing
liability (in relation to a potential repayment) over the four-year claw back period. On closer
consideration this would not be appropriate. The repayment would only occur if the asset
were sold, thus it is potentially a contingent liability. As Baxen has no intention to sell the
asset there is no reason to believe that the repayment will occur, thus it is not a reportable
contingent liability. The implication of this is that the company’s policy for the government
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grant does not comply with the definition of a liability in the Framework. Applying the
guidance in the Framework would require the whole of the grant to be included in income as
it is “earned” (i.e. in the year of receipt).
(ii) Accounting treatment – applying the company’s policy

Statement of profit or loss extract year to 31 March 2014
Depreciation – plant
((800,000 – 120,000 estimated residual value)/10 years × 6/12) Dr
Government grant ((800,000 × 30%)/10 years × 6/12) Cr
$
34,000
12,000
Statement of financial position extracts as at 31 March 2014
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Non-current assets:
Plant at cost 800,000
Accumulated depreciation (34,000)
––––––––
766,000
––––––––
Current liabilities:
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Government grant (240,000 ÷ 10 years) 24,000

Non-current liabilities:
Government grant (240,000 – 12,000 – 24,000) 204,000
Accounting treatment – applying the Framework

Statement of profit or loss extract year to 31 March 2014
Depreciation – plant
((800,000 – 120,000 estimated residual value)/10 years × 6/12) Dr 34,000
Government grant (whole amount) Cr 240,000
Statement of financial position extracts as at 31 March 2014

Non-current assets:
Plant at cost 800,000
Accumulated depreciation (34,000)
––––––––
766,000
––––––––
Answer 18 APEX
(a) Intangibles
Where an intangible asset other than goodwill is acquired as a separate transaction, the
treatment is relatively straightforward. It should be capitalised at cost and amortised over its
estimated useful economic life. The fair value of the purchase consideration paid to acquire
an intangible is deemed to be its cost. If the asset has an indefinite useful life then it is not
amortised, but is tested annually for impairment. IAS 38 does allow the subsequent
revaluation of intangible assets as long as there is an active market for that class of
intangibles.
Intangibles purchased as part of the acquisition of a business should be recognised separately
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to goodwill if the fair value of the intangible can be measured reliably. Reliable measurement
does not have to be at market value, techniques such as valuations based on multiples of
turnover or notional royalties are acceptable. This test is not meant to be overly restrictive
and is likely to be met in valuing intangibles such as brands, publishing titles, patents etc.
Any intangible not capable of reliable measurement will be subsumed within goodwill. The
impact of IFRS 3 and the revised IAS 38 has been to recognise far more separate intangibles
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than the previous standard; this has had the effect of reducing the amount of goodwill
identified in the business combination.
Recognition of internally developed intangibles is much more restrictive. IAS 38 states that
internally generated goodwill, brands, mastheads, publishing titles, customer lists and similar
items should not be recognised as intangible assets as these items cannot be distinguished
from the cost of developing the business as a whole. The Standard does require development
costs to be capitalised if they meet detailed recognition criteria. Those criteria being:
 the technical feasibility of completing the intangible asset so that it will be available
for use or sale;
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 its intention to complete the intangible asset and use it or sell it;
 its ability to use or sell the intangible asset;
 how the intangible asset will generate probable future economic benefits;
 the availability of adequate technical, financial and other resources to complete the
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development and to use or sell the intangible asset; and
 its ability to measure the expenditure attributable to the intangible asset during its
development reliability.
(b) Capitalising borrowing costs
Where borrowing costs are directly incurred on a “qualifying asset”, they must be capitalised
as part of the cost of that asset. A qualifying asset may be a tangible or an intangible asset
that takes a substantial period of time to get ready for its intended use or eventual sale.
Property construction would be a typical example, but it can also be applied to intangible
assets during their development period. Borrowing costs include interest based on its
effective rate (which incorporates the amortisation of discounts, premiums and certain
expenses) on overdrafts, loans and (some) other financial instruments and finance charges on
finance leased assets. They may be based on specifically borrowed funds or on the weighted
average cost of a pool of funds. Any income earned from the temporary investment of
specifically borrowed funds would normally be deducted from the amount to be capitalised.
Capitalisation should commence when expenditure is being incurred on the asset, which is not
necessarily from the date funds are borrowed. Capitalisation should cease when the asset is
ready for its intended use, even though the funds may still be incurring borrowing costs. Also
capitalisation should be suspended if there is a suspension of active development of the asset.
Any borrowing costs that are not eligible for capitalisation must be expensed. Borrowing
costs cannot be capitalised for assets measured at fair value.
(c) Calculation of borrowing costs
The finance cost of the loan must be calculated using the effective rate of 7·5%, so the total
finance cost for the year ended 31 March 2014 is $750,000 ($10 million × 7·5%). As the loan
relates to a qualifying asset, the finance cost (or part of it in this case) must be capitalised
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under IAS 23 Borrowing Costs.
The Standard says that capitalisation commences from when expenditure is being incurred (1
May 2013) and must cease when the asset is ready for its intended use (28 February 2014); in
this case a 10-month period. However, interest cannot be capitalised during a period where
development activity is suspended; in this case the two months of July and August 2013.
8
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Thus only eight months of the year’s finance cost can be capitalised = $500,000 ($750,000 ×
/12). The remaining four months’ finance costs of $250,000 must be expensed. IAS 23 also
says that interest earned from the temporary investment of specific loans should be deducted
from the amount of finance costs that can be capitalised. However, in this case, the interest
was earned during a period in which the finance costs were NOT being capitalised, thus the
interest received of $40,000 would be credited to profit or loss and not to the capitalised
finance costs.
In summary
$000
Profit or loss for the year ended 31 March 2014
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Finance cost (debit) (250)
Investment income (credit) 40
Statement of financial position as at 31 March 2014
Property, plant and equipment (finance cost element only) 500
Answer 19 DEXTERITY
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(a) Allocation of purchase consideration

$m
Net tangible assets 15
Work in progress 2
Patent 10
Goodwill 8
–––
35
–––
The difficulty here is the potential value of the patent if the trials are successful. In effect this
is a contingent asset and on an acquisition contingencies have to be valued at their fair value.
There is insufficient information to make a judgment of the fair value of the contingent asset
and in these circumstances it would be prudent to value the patent at $10 million. The
additional $5 million is an example of where an intangible cannot be measured reliably and
thus it should be subsumed within goodwill. The other issue is that although research cannot
normally be treated as an asset, in this case the research is being done for another company
and is in fact work in progress and should be recognised as such.
(b) New drug
This is an example of an internally developed intangible asset and although the circumstances
of its valuation are similar to the patent acquired above it cannot be recognised at Leadbrand’s
valuation. Internally generated intangibles can only be recognised if they meet the definition
of development costs in IAS 38. Internally generated intangibles are permitted to be carried
at a revalued amount (under the revaluation model) but only where there is an active market
of homogeneous assets with prices that are available to the public. By their very nature drug
patents are unique (even for similar types of drugs) therefore they cannot be part of a
homogeneous population. Therefore the drug would be recorded at its development cost of
$12 million, as long as the 6 recognition criteria mentioned in part (a) have been met..
(c) Operating license
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This is an example of a “granted” asset. It is neither an internally developed asset nor a
purchased asset. In one sense it is recognition of the standing of the company that is part of
the company’s goodwill. IAS 38’s general requirement requires intangible assets to be
initially recorded at cost and specifically mentions granted assets. IAS 38 also refers to IAS
20 Accounting for Government Grants and Disclosure of Government Assistance in this
(d)
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situation. This standard says that both the asset and the grant can be recognised at fair value
initially (in this case they would be at the same amount). If fair values are not used for the
asset it should be valued at the amount of any directly attributable expenditure (in this case
this is zero). It is unclear whether IAS 38’s general restrictive requirements on the
revaluation of intangibles are intended to cover granted assets under IAS 20.
Skilled workforce
There is no doubt that a skilled workforce is of great benefit to a company. In this case there
is an enhancement of revenues and a reduction in costs and if resources had been spent on a
tangible non-current asset that resulted in similar benefits they would be eligible for
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capitalisation. However the Standard specifically excludes this type of expenditure from
being recognised as an intangible asset and it describes highly trained staff as “pseudo-
assets”. The main reason is the issue of control (through custody or legal rights).
Part of the definition of any asset is the ability to control it. In the case of employees (or, as
in this case, training costs of employees) the company cannot claim to control them, as it is
quite possible that employees may leave the company and work elsewhere.
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(e) Advertising campaign
The benefits of effective advertising are often given as an example of goodwill (or an
enhancement of it). If this view is accepted then such expenditures are really internally
generated goodwill which cannot be recognised. In this particular case it would be reasonable
to treat the unexpired element of the expenditure as a prepayment (in current assets) this
would amount to 3/6 of $5 million i.e. $2·5 million. This represents the cost of the advertising
that has been paid for, but not yet taken place. In the past some companies have treated
anticipated continued benefits as deferred revenue expenditure, but this is no longer permitted
as it does not meet the Standard’s recognition criteria for an asset.
Answer 20 DARBY
(a) Non-current assets definition
There are four elements to the assistant’s definition of a non-current asset and he is
substantially incorrect in respect of all of them.
The term non-current assets will normally include intangible assets and certain investments;
the use of the term “physical asset” would be specific to tangible assets only.
Whilst it is usually the case that non-current assets are of relatively high value this is not a
defining aspect. A waste paper bin may exhibit the characteristics of a non-current asset, but on
the grounds of materiality it is unlikely to be treated as such. Furthermore the past cost of an
asset may be irrelevant; no matter how much an asset has cost, it is the expectation of future
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economic benefits flowing from a resource (normally in the form of future cash inflows) that
defines an asset according to the IASB’s Conceptual Framework for Financial Reporting.
The concept of ownership is no longer a critical aspect of the definition of an asset. It is
probably the case that most non-current assets in an entity’s statement of financial position are
owned by the entity; however, it is the ability to “control” assets (including preventing others
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from having access to them) that is now a defining feature. For example: this is an important
characteristic in treating a finance lease as an asset of the lessee rather than the lessor.
It is also true that most non-current assets will be used by an entity for more than one year and a
part of the definition of property, plant and equipment in IAS 16 Property, Plant and Equipment
refers to an expectation of use in more than one period, but this is not necessarily always the case.
It may be that a non-current asset is acquired which proves unsuitable for the entity’s intended use
or is damaged in an accident. In these circumstances assets may not have been used for longer
than a year, but nevertheless they were reported as non-current during the time they were in use.
A non-current asset may be within a year of the end of its useful life but (unless a sale agreement
has been reached under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations)
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would still be reported as a non-current asset if it was still giving economic benefits. Another
defining aspect of non-current assets is their intended use (i.e. held for continuing use in the
production, supply of goods or services, for rental to others or for administrative purposes).
(b) Issues
(i) Training course

SA
The expenditure on the training courses may exhibit the characteristics of an asset in that they
have and will continue to bring future economic benefits by way of increased efficiency and
cost savings to Darby. However, the expenditure cannot be recognised as an asset on the
statement of financial position and must be charged as an expense as the cost is incurred. The
main reason for this lies with the issue of “control”; it is Darby’s employees that have the
“skills” provided by the courses, but the employees can leave the company and take their
skills with them or, through accident or injury, may be deprived of those skills. Also the
capitalisation of staff training costs is specifically prohibited under International Financial
Reporting Standards (specifically IAS 38 Intangible Assets).
(ii) Research and development expenditure
The question specifically states that the costs incurred to date on the development of the new
processor chip are research costs. IAS 38 states that research costs must be expensed. This is
mainly because research is the relatively early stage of a new project and any future benefits
are so far in the future that they cannot be considered to meet the definition of an asset
(probable future economic benefits), despite the good record of success in the past with
similar projects.
Although the work on the automatic vehicle braking system is still at the research stage, this
is different in nature from the previous example as the work has been commissioned by a
customer, As such, from the perspective of Darby, it is work in progress (a current asset) and
should not be written off as an expense. A note of caution should be added here in that the
question says that the success of the project is uncertain which presumably means it may not
be completed. This does not mean that Darby will not receive payment for the work it has
carried out, but it should be checked to the contract to ensure that the amount it has spent to
date ($2·4 million) will be recoverable. In the event that say, for example, the contract stated
that only $2 million would be allowed for research costs, this would place a limit on how
much Darby could treat as work in progress. If this were the case then, for this example,
Darby would have to expense $400,000 and treat only $2 million as work in progress.
(iii) Installation contract
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The question suggests the correct treatment for this kind of contract is to treat the costs of the
installation as a non-current asset and (presumably) depreciate it over its expected life of (at
least) three years from when it becomes available for use. In this case the asset will not come
into use until the next financial year/reporting period and no depreciation needs to be
provided at 30 September 2014.
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The capitalised costs to date of $58,000 should only be written down if there is evidence that
the asset has been impaired. This occurs where the recoverable amount of an asset is less than
its carrying amount. The assistant appears to believe that the recoverable amount is the future
profit, whereas (in this case) it is the future (net) cash inflows. Thus any impairment test at 30
September 2014 should compare the carrying amount of $58,000 with the expected net cash
flow from the system of $98,000 ($50,000 per annum for three years less future cash outflows
to completion the installation of $52,000 (see note below)). As the future net cash flows are
in excess of the carrying amount, the asset is not impaired and it should not be written down
but shown as a non-current asset (under construction) at cost of $58,000.
Tutorial note: As the contract is expected to make a profit of $40,000 on income of $150,000,
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the total costs must be $110,000, with costs to date at $58,000 this leaves completion costs of
$52,000.
Answer 21 MANCO
From the information in the question, the closure of the furniture making operation is a restructuring as
defined in IAS 37 Provisions, Contingent Liabilities and Contingent Assets and, due to the timing of the
decision, a provision for the closure costs will be required in the year ended 30 September 2013.
SA
Although the Standard says that a Board of directors’ decision to close an operation is alone not
sufficient to trigger a provision the other actions of the management, informing employees, customers
and a press announcement indicate that this is an irreversible decision and that therefore there is an
obligating event.
(i) Factory and plant
At 30 September 2013 – these assets cannot be classed as “held-for-sale” as they are still in
use (i.e. generating revenue) and therefore are not available for sale. Both assets will
therefore continue to be depreciated.
Despite this, it does appear that the plant is impaired. Based on its carrying amount of $2·8
million, an impairment charge of $2·3 million ($2·8 million – $0·5 million) would be
required (subject to any further depreciation for the three months from July to September
2013). The expected gain on the sale of the factory cannot be recognised or used to offset the
impairment charge on the plant. The impairment charge is not part of the restructuring
provision, but should be reported with the depreciation charge for the year.
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This ACCA Revision Question Bank has been reviewed
by ACCA's examining team and includes:
• The most recent ACCA examinations with suggested answers

• Past examination questions, updated where relevant
•
•
Model answers and suggested solutions
Tutorial notes
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June 2015 Edition

Becker Professional Education has more than 20

For Examinations to June 2015

Copyright ©2014 DeVry/Becker Educational Development Corp. All rights reserved.

Question Page Answer Marks Date worked

MULTIPLE CHOICE QUESTIONS

INTERNATIONAL FINANCIAL REPORTING STANDARDS

1 Standard setting process (ACCA D04 adapted) 63 1025 15

2 Period of inflation 63 1026 15

SUBSTANCE OVER FORM

4 Wardle (ACCA J10) 65 1029 15

Question Page Answer Marks Date worked

IAS 1 PRESENTATION OF FINANCIAL STATEMENTS

5 Dexon (ACCA J08 adapted) 66 1031 15

10 Emerald (ACCA D07 adapted) 76 1047 15

12 Derringdo (ACCA J03 adapted) 78 1050 15

Linnet (ACCA J04)

IAS 16 PROPERTY, PLANT AND EQUIPMENT

IAS 20 ACCOUNTING FOR GOVERNMENT GRANTS

IAS 23 BORROWING COSTS

18 Apex (ACCA J10 adapted) 83 1059 15

IAS 38 INTANGIBLE ASSETS

19 Dexterity (ACCA J04 adapted) 84 1060 15

IFRS 5 DISCONTINUED OPERATIONS

21 Manco (ACCA D10) 86 1063 10

IAS 36 IMPAIRMENT OF ASSETS

22 Wilderness (ACCA D05 adapted) 86 1064 15

23 Fino (ACCA D07) 87 1066 15

Question Page Answer Marks Date worked

24 Promoil (ACCA D08) 88 1068 15

IAS 10 EVENTS AFTER THE REPORTING PERIOD

26 Waxwork (ACCA J09) 89 1070 15

29 Parentis (ACCA J07 adapted) 91 1074 30

ANALYSIS AND INTERPRETATION

37 Harbin (ACCA D07 adapted) 106 1095 30

IAS 7 STATEMENT OF CASH FLOWS

40 Crosswire (ACCA D09 adapted) 114 1102 15

IAS 33 EARNINGS PER SHARE

42 Savoir (ACCA J06) 118 1106 15

COMPOSITE IFRS QUESTIONS

44 Toogood (ACCA J07 adapted) 120 1108 15

Question Page Answer Marks Date worked

Section A Multiple Choice Questions 2 17 40

1 INTERNATIONAL FINANCIAL REPORTING STANDARDS

1.1 Which ONE of the following is NOT a function of the IASB?

A Responsibility for all IFRS technical matters

Which body develops International Financial Reporting Standards?

1.6 The issue of a new IFRS means that:

(1) An existing standard may be partially or completely withdrawn.

Which one of the following is NOT covered by the Framework?

The format of financial statements

2.5 Which of the following statements are correct?

Which of the following inputs would have the highest authority?

(1) Current cost

Which TWO of the following characteristics are fundamental qualitative characteristics

SUBSTANCE OVER FORM

In which of the following accounting treatments is the qualitative characteristic of

(1) Sale and repurchase arrangements

A Using loop-holes in the requirements of International Financial Reporting Standards

The warehouse’s market value at 29 September 20X4 was $1,380,000.

As a sale of the warehouse recording a loss on disposal of $300,000

4 IAS 1 PRESENTATION OF FINANCIAL STATEMENTS

Which of the following disclosures are specifically required by IAS 1 Presentation of

(1) The name of the reporting entity or other means of identification.