BSc (Hons) Accounting with Finance

Cohort: BACF13B14A/14B//15A/15B/FT/PT

Examinations for Academic Year 2016 – 2017

Semester II / Academic Year 2017 Semester I

MODULE: ADVANCED FINANCIAL REPORTING

MODULE CODE: ACCF3114
DURATION: 2 HOURS 30 MINUTES

Instructions to Candidates:

1. This paper consists of THREE (3) QUESTIONS.

2. ANSWER ALL QUESTIONS.
3. Always start a new question on a fresh page.
4. ALL WORKINGS MUST BE SHOWN CLEARLY.
5. Total Marks: 100.

This Question Paper contains 3 questions and 10 pages.

This Question Paper is printed on BOTH SIDES.

Page 1 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114
 ANSWER ALL QUESTIONS

QUESTION 1: (40 MARKS)

'The summarised draft statements of financial position of Pog Ltd, Kun Ltd, Suspense
Ltd at 31 December 2017 are given below.
Pog Kun Suspense
$’m $’m $’m
Non-current assets
Property, Plant and 2,458 1,410 870
equipment
Investments in subsidiary
Kun 900
Suspense 27 240
3,385 1,650 870
Current assets
Inventories 450 200 260
Trade receivables 610 365 139
Cash 240 95 116
Total assets 4,685 2,310 1,385

Equity and Liabilities

Ordinary shares of $1 500 200 100
Share premium 250 120 50
Retained earnings: 2,805 1,572 850
Total equity 3,555 1,892 1,000
Non-current Liabilities
8% Loan notes 130 100 -
Current Liabilities
Trade payables 1,000 318 385

Total equity and Liabilities 4,685 2,310 1,385

 On 01 January 2013, Pog Ltd, a public limited company acquired 60% of

Kun Ltd, a public limited company. The purchase consideration comprised
cash of $900m. It should be noted that in the books of Pog Ltd, only the
cash consideration of the investment was recorded. In addition, $1million
of professional costs relating to the investment in Kun Ltd was also
included as part of the cost of the investment.

Page 2 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114
On 30 July 2011, Pog Ltd acquired 10% of Suspense, a public limited company, and on
the same day, Kun Ltd acquired 80% of Suspense.
 The retained earnings of the three companies at the acquisition dates
were as follows:
30-Jul-11 01-Jan-13
$m $m
Pog Ltd 1,610 1,860
Kun Ltd 700 950
Suspense Ltd 40 100
 Included in the Property,plant and equipment of Kun Ltd is a large area of
development land, carried at its cost of $50million. Its fair value at date of
acquisition was $70 million, and by 31 December 2017, this has risen to
$85 million. The group valuation policy for development land is that it
should be carried at FV and not depreciated.

 Also at date of Kun Ltd's acquisition, the plant and equipment included
plant that had a fair value of $40 million in excess of its carrying amount.
This plant had a remaining life of 10 years at that date. The group
calculates depreciation on a straight line basis. The fair value of Kun Ltd's
other net assets approximated to their carrying amount.

 During the year, Kun Ltd sold goods to Suspense Ltd of $260m, including
a mark up of 25%. Half of these goods were still in inventory at the year
end.

 'The balance of the current account of the parent and subsidiary included
in receivables and payables was agreed at $140m on 31 Dec 2017.

 It is the group policy to value the non-controlling interest at fair value at

acquisition. The directors value the non-controlling interests in Kun Ltd at
$536m and Suspense at $210m on 01 Jan 2013.
 Impairment tests conducted at the year end revealed a 20% reduction in
value for Kun Ltd.
Page 3 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114
REQUIRED:
(a) Prepare a consolidated statement of financial position as at 31 December 2017
for the Pog Group in accordance with International Financial Reporting
Standards (IFRS). (30 marks)

(b) Calculate goodwill if the non-controlling interest was calculated on a proportional

basis for Kun Ltd and Suspense Ltd. (5 marks)

(c) The directors of Pog Ltd are involved in takeover talks with another entity. In the
discussions, one of the directors stated that there was no point in an accountant
studying ethics because every accountant already has a set of moral beliefs that
are followed and these are created by simply following generally accepted
accounting practice. He further stated that in adopting a defensive approach to
the takeover, there was no ethical issue in falsely declaring Pog Ltd's profits in
the financial statements used for discussions, because, in this opinion, the
takeover did not benefit the company, its executives or society as a whole.
(5 marks)

Page 4 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114
QUESTION 2: (30 MARKS)

On 01 September 2015, Bravado Co acquired 70% of Ashanti Co for $5,000,000

comprising $1,000,000 cash and 1,500,000 $1 shares.

The Statement of financial position of Ashanti Co at acquisition was as follows:

'$000
Property, plant and equipment 2,700
Inventories 1,600
Trade receivables 600
Cash 400
Trade Payables (300)
Income tax payable (200)
4,800

Page 5 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114
 The Consolidated statement of financial position of Bravado Co as at 31
December 2015 was as follows:

2015 2014
$000 $000
Non-current assets
Property, plant & equipment 35,500 25,000
Goodwill 1,400 -
36,900 25,000

Current assets
Inventories 16,000 10,000
Trade receivables 9,800 7,500
Cash 2,400 1,500
28,200 19,000
65,100 44,000

Equity attributable to owners of the parent

Share capital 12,300 10,000
Share premium 5,800 2,000
Revaluation surplus 350 -
Retained earnings 32,100 21,900
50,550 33,900
Non-controlling interest 1,750 -
52,300 33,900

Current liabilities
Trade payables 7,600 6,100
Income tax payable 5,200 4,000
12,800 10,100
65,100 44,000

Page 6 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114
 The Consolidated statement of profit or loss and other comprehensive income
of Bravado Co for the year ended 31 December 2015 was as follows:
2015
$000
Profit before tax 16,500
Income tax expense (5,200)
Profit for the year 11,300

Other comprehensive income (not reclassified to P/L)

Revaluation surplus 500
Total comprehensive income for the year 11,800

Profit attributable to:

Owner of the parent 11,100
Non-controlling interest 200
11,300
Total comprehensive income for the year
attributable to:
Owner of the parent 11,450
Non-controlling interest 350
11,800

Notes
1. Depreciation charged for the year was $5,800,000. The group made no disposals
of property, plant and equipment.
2. Dividends paid by Bravado Co amounted to $900,000.

It is the group policy to value the non-controlling interest at its proportionate share of
the fair value of the subsidiary's identifiable net assets.

REQUIRED:
(a) Prepare the consolidated statement of cash flows of Bravado Co for the year
ended 31 December 2015 in accordance with IAS 7 Statement of cash flows,
using the indirect method. (25 marks)

(b) Discuss the key issues which the statement of cash flows highlight regarding the
cash flow of the company. Note – Use answers from part (a) for analysis.
(5 marks)

Page 7 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114
 QUESTION 3: (30 MARKS)

Smith, a public limited company, is a leading support services company which

focuses on the building industry. The company would like advice on how to treat
certain items. The company operates the Smith Pension Plan B which commenced
on 1 November 2016 and the Smith Pension Plan A, which was closed to new
entrants from 31 October 2016, but which was open to future service accrual for the
employees already in the scheme. The assets and the schemes are held separately
from those of the company in funds under the control of trustees. The following
information relates to the two schemes.
Smith Pension Plan A
The terms of the plan are as follows:
(i) Employees contribute 6% of their salaries to the plan.
(ii) Smith contributes, currently, the same amount to the plan for the benefit of the
employees.
(iii) On retirement, employees are guaranteed a pension which is based upon the
number of years service with the company and their final salary.
The following details relate to the plan in the year to 31 October 2017.
$m
Present value of obligation at 1 November 2016 200
Present value of obligation at 31 October 2017 240
Fair value of plan assets at 1 November 2016 190
Fair value of plan assets at 31 October 2017 225
Current service cost 20
Pension benefits paid 19
Total contributions paid to the scheme for year to 31 October 2017 17
Remeasurement gains and losses are recognised in accordance with IAS 19.

Page 8 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114
 Smith Pension Plan B
Under the terms of the plan, Smith does not guarantee any return on the
contributions paid into the fund. The company's legal and constructive obligation is
limited to the amount that is contributed to the fund. The following details relate to
the scheme.
$m
Fair value of plan assets at 31 October 2017 21
Contributions paid by company for year to 31 October 2017 10
Contributions paid by employees for year to 31 October 2017 10

The interest rate on high quality bonds for the two plans are:
01-Nov-16 31-Oct-17
5% 6%

The company would like advice on how to treat the two pension plans, for the year
ended 31 October 2017, together with an explanation of the differences between a
defined contribution plan and a defined benefit plan.

Leases
Smith owned a building on which it raised finance. Smith sold the building for $5
million to a finance company on 01 November 2016 when the carrying amount was
$3.5 million. The same building was leased back from the finance company for a
period of twenty years, which was felt to be equivalent to the majority of the asset's
economic life. The lease rentals for the period are $441,000 payable annually in
arrears. The interest rate implicit in the lease is 7%. The present value of the
minimum lease payment if the same as the sales proceeds.

The Company wishes to know how to account for the above transaction for the year
ended 31 October 2017.

Page 9 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114
 REQUIRED:
Draft a suitable report for presentation to the directors of Smith which:

a) (i) Discusses the nature and differences between a defined contribution plan and a
defined benefit plan with specific reference to the company's two schemes.
(9 marks)

(ii) Shows the accounting treatment for the two Smith pension plans for the year
ended 31 October 2017 under IAS 19 Employee benefits. (9 marks)

b) Accounting of the lease transaction for the year ended 31 October 2017.
(9 marks)

c) Appropriateness of the format and presentation of the report and communication

of advice. (3 marks)

***END OF QUESTION PAPER***

Page 10 of 10
SBMFran2017366
ADVANCED FINANCIAL REPORTING- ACCF 3114