1、 Answers Fundamentals Level Skills Module, Paper F7Financial ReportingDecember 2014 AnswersSection A1AA change of classification in presentation in financial statements is a change of accounting policy (CAP) under IAS 8.23CBHistorical cost annual depreciation = $90,000 (500,000 x 90%)/5 years).After

2、 two years carrying amount would be $320,000 (500,000 (2 x 90,000).Current cost annual depreciation = $108,000 (600,000 x 90%)/5 years).After two years carrying amount would be $384,000 (600,000 (2 x 108,000).4CAlthough the invoiced amount is $180,000, $30,000 of this has not yet been earned and mus

3、t be deferred until the servicingwork has been completed.56C(i) is an onerous contract and (iii) the provision is still required if there is no intention to sellBThe total profit on the contract is expected to be $1 million (5,000 (1,600 + 2,400).At 30 September 2014 the profit recognised would be $

4、360,000 (1,000 x 1,800/5,000).Therefore the amount due from the customer would be:$000Cost to dateProfit recognisedProgress billings1,600360(1,800)Amount due from the customer16078DAs the receivable is sold with recourse it must remain as an asset on the statement of financial position; it is not de

5、recognised.DThe normal selling price of damaged inventory is $300,000 (210/70%).This will now sell for $240,000 (300,000 x 80%), and have a NRV of $180,000 (240 (240 x 25%). The expected loss onthe inventory is $30,000 (210 cost 180 NRV) and therefore the inventory should be valued at $970,000 (1,00

6、0 30).9ACash flow is (in $ million):234 144 b/f + 25 dep + 3 disposal 2 revaluation 4 non-cash acquisition = 8510DThe investment no longer meets the definition of a subsidiary (ability to control) and therefore would not be consolidated.17 11AYear ended30 SeptemberCash flowDiscount rateDiscountedcas

7、h flows$000465430$000500500at 8%09308607920142015201610,5008,295Value of debt component9,190Difference value of equity option component810Proceeds10,00012AGoodwill should be written off in full and the remaining loss is allocated pro rata to property plant and equipment and the productpatent.B/f$Los

8、s$Post loss$Property, plant and equipmentGoodwillProduct patent200,00050,00020,000(45,455)(50,000)(4,545)154,545nil15,455Net current assets (at NRV)30,000nil30,000300,000(100,000)200,0001314BCorrect for the reason given in the question.CAt 30 September 2014:Carrying amount = $375 million (45,000 6,0

9、00 b/f 1,500 for 6 months; no further depreciation when classified as held forsale).Recoverable amount = $368 million (42,000 x 90%) 1,000).Therefore included at $368 million (lower of carrying amount and fair value less cost to sell).151617AA not-for-profit entity is not likely to have shareholders

10、 or earnings.AIs the correct treatment for a bargain purchase (negative goodwill).BExtraction provision at 30 September 2014 is $25 million (250 x 10).Dismantling provision at 1 October 2013 is $204 million (30,000 x 068).This will increase by an 8% finance cost by 30 September 2014 = $22,032,000.To

11、tal provision is $24,532,000.18DAlthough the estimated NRV is lower than it was (due to fire damage), the entity will still make a profit on the inventory and thusit is not an indicator of impairment.18 1920CRental of excavation equipment $13,500 (18 x 9/12)Depreciation of finance leased plant $68,0

12、00 (340/5 years)Finance cost $25,000 (340 90) x 10%)Total $106,500DAs it is a new type of transaction, comparability with existing treatments is not relevant.Section B(a)1For comparisonHydanadjusted217%175 times286%Hydanas reported471%236 times357%Sector average220%167 times300%Return on equity (ROE

13、)Net asset turnoverGross profit marginNet profit margin93%200%120%Hydans adjusted ratios:On the assumption that after the purchase of Hydan, the favourable effects of the transactions with other companies ownedby the family would not occur, the following adjustments to the statement of profit or los

14、s should be made:$000Cost of sales (45,000/09)Directors remunerationLoan interest (10% x 10,000)50,0002,5001,000These adjustments would give a revised statement of profit or loss:Revenue70,000Cost of sales(50,000)Gross profit20,000(7,000)(2,500)Operating costsDirectors remunerationLoan interest(1,00

15、0)Profit before tax9,500Income tax expense(3,000)Profit for the year6,500In the statement of financial position:Equity would be the purchase price of Hydan (per question)30,00010,000The commercial loan (replacing the directors loan) would now be debtFrom these figures the adjusted ratios above are c

16、alculated as:Return on equityNet asset turnoverGross profit marginNet profit margin(6,500 /30,000) x 100)217%175 times286%(70,000/(30,000 + 10,000)(20,000)/70,000) x 100)(6,500/70,000) x 100)930%(b)An analysis of Hydans ratios based on the financial statements provided reveals a strong position, par

17、ticularly in relation toprofitability when compared to other businesses in this retail sector. Hydan has a very high ROE which is a product ofhigher-than-average profit margins (at both the gross and net profit level) and a significantly higher net asset turnover. Thus,on the face of it, Hydan is ma

18、naging to achieve higher prices (or reduced cost of sales), has better control of overheads andis using its net assets more efficiently in terms of generating revenue.However, when adjustments are made for the effects of its favourable transactions with other companies owned by the family,the positi

19、on changes somewhat. The effect of purchasing its inventory from another family owned supplier at favourablemarket prices means that its reported gross profit percentage of 357% is flattered; had these purchases been made at marketprices, it would fall to 286% which is below the sector average of 30

20、0%. The effects of the favourable inventory purchasescarry through to net profit. Based on Xpands estimate of future directors remuneration, it would seem the existing directorsof Hydan are not charging commercial rates for their remuneration. When Xpand replaces the board of Hydan, it will have toi

21、ncrease directors remuneration by $15 million. Additionally, when the interest free directors loans are replaced with acommercial loan, with interest at 10% per annum, this would reduce net profit by a further $1 million. The accumulation ofthese adjustments means that the ROE which Xpand should exp

22、ect would be 217% (rather than the reported 471%) whichis almost exactly in line with the sector average of 220%.19 In a similar vein, when the asset turnover is calculated based on the equity purchase price and the commercial loan (equatingto net assets), it falls from 236 times to 175 times which

23、is above, but much closer to, the sector average of 167 times.In summary, Hydans adjusted results would still be slightly ahead of the sector averages in most areas and may well justifythe anticipated purchase price of $30 million; however, Hydan will be nowhere near the excellently performing compa

24、nysuggested by the reported figures and Xpand needs to exercise a degree of caution in its negotiations.2(a)Kandy Schedule of retained earnings of Kandy as at 30 September 2014$000Retained earnings per trial balanceAdjustments re:17,500Note (i)Add back issue costs of loan note (w (i)Loan finance cos

25、ts (29,000 x 9% (w (i)Note (ii)1,000(2,610)Depreciation of buildings (w (ii)Depreciation of plant and equipment (w (ii)Note (iii)(2,600)(3,000)Income tax expense (w (iii)(800)Adjusted retained earnings9,490(b)Kandy Statement of financial position as at 30 September 2014Assets$000$000Non-current asse

26、tsProperty, plant and equipment (44,400 + 21,000 (w (ii)Current assets (per trial balance)65,40068,700Total assets134,100Equity and liabilitiesEquityEquity shares of $1 eachRevaluation surplus (12,000 2,400 (w (ii) and (iii)Retained earnings (from (a)40,0009,6009,49019,09059,090Non-current liabiliti

27、esDeferred tax (w (iii)6% loan note (w (i)4,40029,81034,210Current liabilitiesPer trial balanceCurrent tax payable38,4002,40040,800Total equity and liabilities134,100Workings (monetary figures in brackets in $000)(i)Loan noteThe issue costs should be deducted from the proceeds of the loan note and n

28、ot charged as an expense. The finance costof the loan note, at the effective rate of 9% applied to the carrying amount of the loan note of $29 million(30,000 1,000), is $2,610,000. The interest actually paid is $18 million. The difference between these amounts of$810,000 (2,610 1,800) is added to th

29、e carrying amount of the loan note to give $29,810,000 (29,000 + 810)for inclusion as a non-current liability in the statement of financial position.(ii)Non-current assetsLand and buildingsThe gain on revaluation and carrying amount of the land and buildings will be:$000Carrying amount at 1 October

30、2013 (55,000 20,000)Revaluation at that date (8,000 + 39,000)35,00047,000Gain on revaluation12,000Buildings depreciation for the year ended 30 September 2014 (39,000/15 years)Carrying amount at 30 September 2014 (47,000 2,600)(2,600)44,40020 $000Plant and equipmentCarrying amount at 1 October 2013 (

31、58,500 34,500)Depreciation for year ended 30 September 2014 (12% reducing balance)24,000(3,000)Carrying amount at 30 September 201421,000(iii) TaxationIncome tax expenseProvision for year ended 30 September 2014Less over-provision in previous yearDeferred tax (see below)2,400(1,100)(500)800Deferred

32、taxProvision required at 30 September 2014 (10,000 + 12,000) x 20%)Provision at 1 October 20134,400(2,500)Movement in provision1,900Charge to revaluation of land and buildings (12,000 x 20%)(2,400)Balance credit to profit or loss(500)3(a)PlastikConsolidated statement of profit or loss and other comp

33、rehensive income for the year ended 30 September 2014$000Revenue (62,600 + (30,000 x 9/12) (300 x 9 months intra-group sales)Cost of sales (w (i)82,400(61,320)Gross profit21,080(2,900)(5,350)Distribution costs (2,000 + (1,200 x 9/12)Administrative expenses (3,500 + (1,800 x 9/12) + 500 goodwill impa

34、irment)Finance costs (200 + 135 (w (v)(335)Profit before tax12,495Income tax expense (3,100 + (1,000 x 9/12)(3,850)Profit for the year8,645Other comprehensive incomeGain on revaluation of property (1,500 + 600)2,100Total comprehensive income10,745Profit for year attributable to:Equity holders of the

35、 parent (balance)Non-controlling interest (w (ii)8,4651808,645Total comprehensive income attributable to:Equity holders of the parent (balance)10,445Non-controlling interest (180 above + (600 x 20%)30010,74521 (b)Plastik Consolidated statement of financial position as at 30 September 2014$000AssetsN

36、on-current assetsProperty, plant and equipment (w (iii)Intangible asset: goodwill (w (iv)37,1005,20042,300Current assetsInventory (4,300 + 1,200 120 URP (w (i)Trade receivables (4,700 + 2,500 1,200 intra-group)Bank5,3806,00030011,680Total assets53,980Equity and liabilitiesEquity attributable to owne

37、rs of the parentEquity shares of $1 each (10, 000 + 4,800) w (iv)Other component of equity (share premium) (w (iv)Revaluation surplus (2,000 + (600 x 80%)Retained earnings (w (v)14,8009,6002,4806,76533,645Non-controlling interest (w (vi)Total equity4,80038,445Non-current liabilities10% loan notes (2

38、,500 + 1,000 1,000 intra-group)2,500Current liabilitiesTrade payables (3,400 + 3,600 800 intra-group)Current tax payable (2,800 + 800)Deferred consideration (1,800 + 135 w (v)Bank (1,700 400 cash in transit)6,2003,6001,9351,30013,035Total equity and liabilities53,980(c)IFRS 3 Business Combinations a

39、ddresses the recognition of separable intangibles assets. Both of the items which the directorsof Plastik have identified in the acquisition of Dilemma should be recognised as separate intangible assets on the acquisitionof Dilemma. Both IFRS 3 Business Combinations and IAS 38 Intangible Assets requ

40、ire in-process research in a businesscombination to be separately recognised at its fair value provided this can be reliably measured ($12 million in this case).The recognition of customer list as an intangible asset is a specific illustrative example given in IFRS 3 (IE 24) and shouldalso be recogn

41、ised at its fair value of $3 million.Workings (note figure in brackets are in $000)$000$000(i)Cost of salesPlastik45,80018,000(2,700)120Subtrak (24,000 x 9/12)Intra-group purchases (300 x 9 months)URP in inventory (600 x 25/125)Additional depreciation on property10061,320(ii)Non-controlling interest

42、s in Subtraks profit or lossSubtraks profit as reported2,0009/12 post-acquisition =Deduct: Additional depreciation on propertyGoodwill impairment1,500(100)(500)Adjusted post-acquisition profitx 20% non-controlling interest90018022 $000$000(iii) Non-current assetsPlastikSubtrakFair value increase at

43、acquisitionAdditional depreciation on propertyFair value increase since acquisition18,70013,9004,000(100)60037,100(iv) Goodwill in SubtrakInvestment at costShares (9,000 x 80% x 2/3 x $3)Deferred consideration (9,000 x 80% x 275 cents x 1/11)Non-controlling interest (9,000 x 20% x $250)14,4001,8004,

44、50020,700Net assets (equity) of Subtrak at 30 September 2014Less post-acquisition profits (2,000 x 9/12)Fair value adjustment: property(12,500)1,500(4,000)Net assets at date of acquisition(15,000)5,700Goodwill on consolidationImpairment as at 30 September 2014(500)5,200Note: The 48 million (9,000 x

45、80% x 2/3) shares issued by Plastik at $3 each would be recorded as share capital of$48 million (4,800 x $1) and share premium of $96 million (4,800 x $2).(v)Retained earningsPlastik6,300720(135)Subtraks post-acquisition adjusted profit (900 (w (ii) x 80%)Finance costs on deferred consideration (1,8

46、00 x 10% x 9/12)Unrealised profit in inventory (w (i)(120)6,765Alternative calculationPlastiks retained earnings at 30 September 2014Less Plastiks profit for the year6,300(8,000)Consolidated profit for the year from part (a)8,4656,765(vi) Non-controlling interest in statement of financial positionAt date of acquisition (w (iv)4,500Post-acquisition from statement of profit or loss and other comprehensive income3004,80023 Fundamentals Level Skills Module, Paper F7Financial ReportingDecember 2014 Marking SchemeThis marking scheme is given as a guide in the context of the