110.

309 Exam Marking Guide – 2021

SECTION A: FOREIGN CURRENCY

QUESTION 1

Any criterion is awarded 1 mark with a maximum of 4.

NZ IAS paragraphs 9-12.

The primary economic environment in which an entity operates is normally the one in which
it primarily generates and expends cash.
An entity considers the following factors in determining its functional currency:
(a) the currency:
(i) that mainly influences sales prices for goods and services (this will often be the
currency in which sales prices for its goods and services are denominated and
settled); and
(ii) of the country whose competitive forces and regulations mainly determine the
sales prices of its goods and services.
(b) the currency that mainly influences labour, material and other costs of providing goods
or services (this will often be the currency in which such costs are denominated and settled).
- The following factors may also provide evidence of an entity’s functional currency:
(a) the currency in which funds from financing activities (ie issuing debt and equity
instruments) are generated.
(b) the currency in which receipts from operating activities are usually retained.
- The following additional factors are considered in determining the functional currency of a
foreign operation, and whether its functional currency is the same as that of the reporting
entity (the reporting entity, in this context, being the entity that has the foreign operation as
its subsidiary, branch, associate or joint arrangement):
(a) whether the activities of the foreign operation are carried out as an extension of
the reporting entity, rather than being carried out with a significant degree of
autonomy. An example of the former is when the foreign operation only sells goods
imported from the reporting entity and remits the proceeds to it. An example of the
latter is when the operation accumulates cash and other monetary items, incurs
expenses, generates income and arranges borrowings, all substantially in its local
currency.

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 (b) whether transactions with the reporting entity are a high or a low proportion of
the foreign operation’s activities.
(c) whether cash flows from the activities of the foreign operation directly affect the
cash flows of the reporting entity and are readily available for remittance to it.
(d) whether cash flows from the activities of the foreign operation are sufficient to
service existing and normally expected debt obligations without funds being made
available by the reporting entity.
- When the above indicators are mixed and the functional currency is not obvious,
management uses its judgement to determine the functional currency that most faithfully
represents the economic effects of the underlying transactions, events and conditions.

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QUESTION 2

1. NZ dollar is the Functional 2. British £ is the Functional

Local Currency
Currency Currency
Exchange Exchange
Income statement for 2020 £ $NZ $NZ
rate rate
Sales revenue 2,500,000 1.6 4,000,000 0.5 1.6 4,000,000 0.5
Opening Inventory 100,000 2 200,000 2 200,000
Purchases 700,000 1.6 1,120,000 1.6 1,120,000
Ending inventory -150,000 1.5 -225,000 1.5 -225,000
Cost of Goods Sold 650,000 -1,095,000 1 -1,095,000 1
Gross Profit 1,850,000 2,905,000 2,905,000
Depreciation- plant assets -190,000 2 -380,000 0.5 1.6 -304,000 0.5
Depreciation- additional plant assets -25,000 1.8 -45,000 0.5 1.6 -40,000 0.5
Other expenses -200,000 1.6 -320,000 0.5 1.6 -320,000 0.5
Tax -100,000 1.6 -160,000 1.6 -160,000
-/+ foreign exchange gain/loss (if applicable) -330,000 1
Net Profit 1,335,000 1,670,000 2,081,000
Retained Earnings 1/1/20 200,000 2 400,000 0.5 2 400,000 0.5
Dividends -300,000 1.7 -510,000 0.5 1.7 -510,000 0.5
Retained Earnings 31/12/20 1,235,000 1,560,000 1,971,000

Balance Sheet as at 31 Dcember 2020

Contributed Capital 2,000,000 2 4,000,000 0.5 2 4,000,000 0.5
Additional contributed capital 400,000 1.9 760,000 0.5 1.9 760,000 0.5
Retained Earnings 1,235,000 1,560,000 0.5 1,971,000 0.5
Foreign Curr Translation Reserve (if applicable) -1,642,000 1
Accounts Payable 1,400,000 1.4 1,960,000 0.5 1.4 1,960,000 0.5
Total Liabilities and Equity 5,035,000 8,280,000 7,049,000
Plant Assets (net) 1,710,000 2 3,420,000 0.5 1.4 2,394,000 0.5
Additional Plant Assets (net) 475,000 1.8 855,000 0.5 1.4 665,000 0.5
Inventory 150,000 1.5 225,000 1.4 210,000
Cash and accounts receivable 2,700,000 1.4 3,780,000 1.4 3,780,000
Total Assets 5,035,000 8,280,000 7,049,000
Total 8 Total 8

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• Relevant exchange rates were as follows:
1 January 2020: £1.00 = NZ$2.0
1 February 2020: £1.00 = NZ$1.9
1 July 2020: £1.00 = NZ$1.8
13 July 2020: £1.00 = NZ$1.7
1 December 2020: £1.00 = NZ$1.5
31 December 2020: £1.00 = NZ$1.4
Average 2020 financial year £1.00 = NZ$1.6

Exchange gains and losses £ $NZ

Net Monetary position 1.1.2020 200,000 2 400,000
Sales 2,500,000 1.6 4,000,000
Expenses -200,000 1.6 -320,000
Purchases -700,000 1.6 -1,120,000
Additional capital 400,000 1.9 760,000
Purchase of additional plant -500,000 1.8 -900,000
Tax -100,000 1.6 -160,000
Dividends -300,000 1.7 -510,000
2,150,000
Net monetary position 31.12.2020 1,300,000 1.4 1,820,000
FC loss -330,000

Foreign currency translation reserve £ $NZ

Net asset position 1.1.2020 2200000 2 4400000
Net profit 1,335,000 2081000
Additional capital 400000 1.9 760000
Dividends -300,000 1.7 -510000
6731000
Net asset position 31.12.2020 3635000 1.4 5089000
FC translation reserve -1642000

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SECTION B: FINANCIAL INSTRUMENTS

QUESTION 3
Description/calculations Amount ($)
Present value of principal to be received in 5 years discounted at 5% 7,835,000
($10,000,000 x 0.7835)
Present value of interest stream discounted at 5% ($300,000 x 4.3295) 1,298,850
Total present value 9,133,850
Equity component 866,150
10,000,000
(1 mark each for highlighted values/ workings = 5 marks)

QUESTION 4
Date Payment Interest Increase in bond Bond liability
expense liability
1/7/2020 9,133,850
30/6/2021 300,000 456,693 156,693 9,290,543
30/6/2022 300,000 464,527 164,527 9,455,070
30/6/2023 300,000 472,754 172,754 9,627,824
30/6/2024 300,000 481,391 181,391 9,809,215
30/6/2025 300,000 490,461 190,461 9,999,675*
* difference is due to rounding error
(1 mark per each yellow highlight = 5 marks)

QUESTION 5
Date Description Dr Amount Cr Amount
1 July 2020 Cash at bank 10,000,000
Convertible bonds (liability) 9,133,850
Convertible bonds (equity component) 866,150

30 June 2024 Interest expense 481,391

Cash at bank 300,000
Convertible bonds (liability) 181,391

Convertible bonds (liability) 9,809,215

Convertible bonds (equity component) 866,150
Share capital 10,675,365
(1 mark for each correct journal entry but 2 marks for share capital = 10 marks)

[TOTAL = 20 MARKS]
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SECTION C: ACCOUNTING AND CULTURE/DIVERSITY

QUESTION 6

This is a very broad question and students could draw on a number of areas to earn the marks
allocated including, but not limited to:

1. It is the IASB (formed in 2001) not its predecessor, the IASC which has driven adoption of
IFRS;
2. IFRS adoption has been driven by the IASB’s strategy of convergence (adoption of one global
set of standards), rather than the IASC’s strategy of harmonisation (reducing diversity, but
allowing countries to have different sets of standards).
3. It is highly unlikely that diversity of accounting practices can be eliminated. Students could
support this point by drawing on any of the following themes*:
a. Evidence of diversity;
b. Environmental or Institutional influences/factors*
c. Cultural influences/ factors
d. Religion and how it affects accounting practice
* = See over for some guidance as to what students can reasonably include in their
discussions on 3a-d above.

(Up to 2 marks for each of the above points and sub-points, depending on quality of answers, up to
a maximum of 10 marks)

3a Evidence of diversity

3b Environmental or Institutional influences/factors

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Taxation system, sources of finance, the political system, the stage of economic growth and
development, the stage of development of a capital market, the legal system, the existence of an
accounting profession and the nature of accounting regulation

3c Cultural influences/ factors

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3d Religion and how it affects accounting practice

[TOTAL = 10 MARKS]

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SECTION D: GROUP/CONSOLIDATIONS
Question 7

Question 7
Napier Ltd Palmy Ltd (90%)
($) ($)
Contributed capital 1,200,000 1,080,000
Retained earnings 540,000 486,000
FV adjustment (300,000 x 0.72) 216,000 194,400
1,956,000 1,760,400
Cost of investment 1,800,000
Goodwill on acquisition 39,600

3 marks - 1 mark per yellow highlighted line. ½ each for green highlighted line

Question 8

Revalue land to fair value

Dr Land 300,000
Cr Revaluation surplus recognised on consolidation 300,000

Tax effect: revalue land to fair value

Dr Revaluation surplus recognised on consolidation 84,000
Cr Deferred tax liability [300,000 × 0.28] 84,000

OR
Revalue land to fair value
Dr Land 300,000
Cr Revaluation surplus recognised on consolidation 216,000
Cr Deferred tax liability [300,000 × 0.28] 84,000

1 mark

Eliminate investment in Napier Ltd

Dr Contributed capital 1,080,000
Dr Retained earnings 486,000
Dr Revaluation surplus recognised on consolidation 194,400
Dr Goodwill 39,600
Cr Investment in Napier Ltd 1,800,000

3 marks

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Question 9

Item (1)
Dr Other revenue 81,000
Cr Dividend paid 81,000

1 mark

Item (2)
Elimination of inter entity sales
Dr Sales revenue 660,000
Cr Cost of goods sold 660,000

Elimination of unrealised profit in closing inventory

Dr Cost of goods sold [(660,000 – 480,000) × 0.50] 90,000
Cr Inventory (B/S) 90,000

OR
Dr Sales revenue 660,000
Cr Cost of goods sold (purchases) 570,000
Cr Inventory (B/S) 90,000

2 marks

Tax effect: elimination of unrealised profit in closing inventory

Dr Deferred tax asset [90,000 × 0.28] 25,200
Cr Income tax expense 25,200

1 mark

Item (3)
Dr Retained earnings (opening) [(1,320,000 – 1,020,000) x 0.25] 75,000
Cr Cost of goods sold 75,000

Dr Income tax expense [75,000 x 0.28] 21,000

Cr Retained earnings (opening) 21,000

OR

Dr Retained earnings (opening) 54,000

Dr Income tax expense 21,000
Cr Cost of goods sold 75,000

2 marks

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Question 10

Napier Ltd 10% NCI

Total FV of net assets 1,956,000 195,600
Retained earnings since acquisition (930,000 – 540,000) 390,000 39,000

Profit for the year 390,000

less Unrealised profits (90,000)
Tax effect on unrealized profit 25,200
Profit contributed by Napier Ltd 325,200 32,520
Dividend paid by Napier (90,000) (9,000)
NCI value at 31 March 2020 258,120

4 marks - 1 mark per yellow highlighted line. ½ each for green highlighted line

Question 11
The three alternative concepts are:
The entity concept,
The proprietary concept and
The parent entity concept.
The difference between these concepts is in how non-controlling interest is treated – the
entity concept treats it as part of equity, the proprietary concept does not recognise it in
consolidated statements and the parent concept treats non-controlling interest as liability.
The entity concept is what NZIFRS 10 required as the concept to apply on consolidation.
3 marks – ½ mark for each concept, 1 mark for stating the treatment of non-controlling
interest under each concept and ½ mark for stating the entity concept under NZIFRS 10.

[TOTAL = 20 MARKS]

SECTION E: FINANCIAL ANALYSIS AND BEYOND/ACCOUNTING THEORIES

Question 12
Role of ‘TCFD’ (Task force on Climate-related Financial Disclosures):
To identify what climate-related financial information would be useful to investors to appropriately
assess and price climate-related opportunities and risks (and hence to lead to better allocation of
capital to transition to a more sustainable, low carbon economy).
(With reference to pg i – iii of Final Report on Recommendations of the TCFD) (June 2017). Note this
link is supplied within the Study Guide reading no.2 for Week 2) (1 mark)

Question 13
The four main areas of the TCFD recommendations are:

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 • governance
• strategy
• risk management
• metrics and targets
(Any two of the above 4 @ 1 mark each) (2 marks)

Question 14
No, I do not agree, because
• the IASB has issued guidance explaining that climate change may have material implications
for entities and their financial information.
• Where this is the case, recognition or disclosure is required by existing standards even
though ‘climate change’ is not specifically mentioned e.g., asset impairment, change in
useful life of assets, change in fair values etc.
(1 for ‘not agree’; 2 for explanation depending on quality, use of examples etc) (3 marks)

Question 15
Examples of EER, other than TCFD disclosures:
• integrated reporting
• sustainability reporting
• non-financial reporting
• pre-financial reporting
• management discussion and analysis
• management commentary
• ESG reporting (environmental, social and governance)
• corporate responsibility reporting
• community and environmental reporting...and more.
(accept any one of the above or more specific examples like GRI standards; SDGs etc) (1 marks)

Question 16
Positive Accounting Theory, and (1.5)
Bonus Hypothesis (1.5)

(3 marks)

[TOTAL = 10 MARKS]

SECTION F: SEGMENT REPORTING AND RELATED PARTY DISCLOSURE

QUESTION 17
In order to identify Moretti’s reportable geographical segments, it is necessary to check
whether any one of the following quantitative thresholds is met:
• The operating segment’s reported revenue, including both sales to external
customers and inter-segment sales or transfers, is 10% or more of the combined
revenue, internal and external, of all operating segments

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 • The absolute amount of its reported profit or loss is 10% or more of the greater, in
absolute amount, of (i) the combined reported profit of all operating segments that
do not report a loss; and (ii) the combined reported loss of all operating segments
that report a loss.
• Its assets are 10% or more of the combined assets of all operating segments.
• The combined external revenue of the identified reportable segments is more than
75% of consolidated revenue of the company.

Therefore, the reportable segments are:

• UK, as its profit of €4.9m represents 44% of the combined reported profit of the UK
and Other Europe (€11.2m). UK also qualifies based on the Assets and Revenue
criteria. (1)
• Other Europe, as its profit of €6.3m represents 56% of the combined reported profit
of the UK and Other Europe (€11.2m). Also, Other Europe qualifies based on the
Assets and Revenue criteria. (1)
• Africa, as its assets are 10% of the combined assets of all operating segments
(€76m). (1)
• Middle East is not a reportable segment as it does not meet any of the quantitative
thresholds indicated above. (1)
• The external revenue of the three reportable segments are: (54,600+72,200+15,600=
€142,400). This meets the 75% external revenue requirement for reportable
segments based on 142,400/154,800 = 91.99%. (2)
(6 marks)

QUESTION 18

Mitchell is a subsidiary of Apex, so they are related parties. (1.5)

Mitchell is an associate of Brown, so they are related parties. (1.5)
Apex and Brown are related parties of Mitchell but not necessarily related parties of each
other. Consequently, unless there is some other relationship between Apex and Brown (other
than the fact that both are investees of Mitchell), they are not related parties. (1)
(If, for example Apex and Brown were both fellow subsidiaries of another entity they would
be related parties of each other, but for a different reason than their investment in Mitchell).
(4 marks)

[TOTAL = 10 MARKS]

SECTION G: ACCOUNTING FOR AGRICULTURE

QUESTION 19

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NZ IAS 41- Agriculture defines a biological asset as a ‘living animal or plant’. Biological assets
would include*:
• Trees held as part of a forestry operation
• Animals held as part of a livestock operation
• Orchards and vineyards
• Aquaculture and fishery holdings.

[2 marks for the correct definition and up to 2 marks for at least two examples of
biological assets – max 4 marks]

* = See fuller list extracted from para 4 of NZ IAS 41

(4 marks)

QUESTION 20
Some of the unique characteristics of biological assets include:
• Unlike most assets, biological assets have a natural capacity to grow and/or procreate
that directly affects the value of the asset.
• A great deal of the increase in value of the resource may be due to the input of free
goods, such as sun, air and water.
• Frequently, a great deal of the costs are incurred earlier in the life of the asset (for
example, the establishment of a forest), yet the economic benefits are not derived until
many years later.
• The production (growing cycle) of the assets may be particularly long (for example,
some forests may take in excess of 30 years to generate millable timber), with resultant
issues as to when the revenue should be recognised. In relation to a forest, should we
wait until the ultimate harvest before we recognise revenue?
• There is not necessarily any relationship between expenditure on the asset and the
ultimate returns, perhaps due to such things as droughts, flooding, variations in qualities
of soils, and so on

[1 mark for each point – max 2 marks]

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QUESTION 21

NZ IAS 41 requires that agricultural produce be measured at the point of harvest at its fair
value less costs to sell. However, NZ IAS 41 does not apply to products that result from
processing after harvest. As such these products (for example wine) are measured at the
lower of cost and net realisable value based on NZ IAS 2.

[4 marks for clearly highlighting the difference in measurement requirements]

[TOTAL: 10 MARKS]

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