2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
TRANSCRIPT
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 1/32
http://freeaccastudymaterial.com
fb.com/freeaccastudymaterial
To download more visit http://freeaccastudymaterial.com
join us on facebook @ fb.com/freeaccastudymaterial
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 2/32
Date sent to marker
Date received from marker
Date returned to student
Student's overall mark
FINAL ASSESSMENT SCRIPT SUBMISSION FORM
Script marking is only available to Classroom, Live Online and Distance Learning students enrolled on appropriate Kaplan courses.
Name: …………….…………………………………………..………………..…..……….….…
Address: …………………………………………………………………………………..….......
………………………………………………………..……………………………………..….........
………………………………………………………............……………………..................
Kaplan Student Number: …………………………………………………………….....…
Your email address:
ACCA – Paper P2 (INT/UK)
Corporate Reporting
September and December 2015
Final Assessment
Instructions
• Please complete your personal details above.
• All scripts should ideally be submitted to your Kaplan centre for marking via email to help speed up the marking
process.
Please scan this form and your answer script in a single PDF and email it to your Kaplan centre.
• Alternatively you may post your script to us. If so, please use the correct Royal Mail tariff (large letter).
• Classroom students may submit scripts to their local centre in person.
You will be provided with the dated receipt below which you should retain as proof of submission.
Note: If you are a sponsored student, your result will form part of the report to your employer.
Office use
Centre
Date received
Marker’s initials
Recei pt – only issued if script submitted by classroom student in person to Kaplan centre:
----------------------------------------------------------------------------------------------------------------------------- ---------
Name: ....................................................................... Received by: ............................................................
Script: ....................................................................... Date: ......................................................................
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 3/32
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 4/32
ACCA FINAL ASSESSMENT
Corporate Reporting
September and December2015
Time allowed
Reading time: 15 minutes
Writing time: 3 hours
This paper is divided into two sections
Section A This question is compulsory and MUST be answered
Section B TWO questions ONLY to be answered
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination
hall
Kaplan Publishing/Kaplan Financial
P a p e r
P 2 ( I N T / U
K )
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 5/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
© Kaplan Financial Limited, 2015
The text in this material and any others made available by any Kaplan Group company does no t
amount to advice on a particular matter and should not be taken as such. No reliance should be
placed on the content as the basis for any investment or other decision or in connection with any
advice given to third parties. Please consult your appropriate professional adviser as necessary.
Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to
any person in respect of any losses or other claims, whether direct, indirect, incidental,
consequential or otherwise arising in relation to the use of such materials.
All rights reserved. No part of this examination may be reproduced or transmitted in any form or
by any means, electronic or mechanical, including photocopying, recording, or by any informationstorage and retrieval system, without prior permission from Kaplan Publishing.
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 6/32
FINAL ASSESSMENT QUESTIONS
SECTION A
This question is compulsory and MUST be answered
1 Tiles is a public limited company which has investments in a number of other companies.
These companies prepare their financial statements in accordance with InternationalFinancial Reporting Standards. The draft statements of profit or loss for Tiles and its
investments for the year ended 30 April 20X5 are presented below:
Tiles Carpet Hardwood
$m $m $m
Revenue 216 128 166
Cost of sales (89) (62) (84)
––––– ––––– –––––
Gross profit 127 66 82
Distribution costs (15) (16) (12)
Administrative expenses (18) (22) (30) ––––– ––––– –––––
Operating profit 94 28 40
Investment income 3 1 4
Finance costs (10) (5) (8)
––––– ––––– –––––
Profit before taxation 87 24 36
Taxation (17) (6) (10)
––––– ––––– –––––
Profit for the period 70 18 26
––––– ––––– –––––
The following notes are relevant to the preparation of the consolidated financial
statements:
1 Tiles purchased 80% of the ordinary shares of Carpet on 1 May 20X3 for $96 million.
The fair value of the identifiable net assets acquired was $90 million. At the
acquisition date, the share capital and retained earnings of Carpet were $10 mil lion
and $57 million respectively and other components of equity were $8 million. The
excess of the fair value of the identifiable net assets over their carrying amounts at
the acquisition date was due to a broadcasting licence which, at 1 May 20X3, had a
remaining useful life of 5 years. Amortisation is presented in administrative expenses.
The non-controlling interest in Carpet at the acquisition date was calculated as its
proportionate share of the fair value of the subsidiary’s identifiable net assets.
2 Tiles purchased 80% of the ordinary shares in Hardwood four years ago for
$130 million. The fair value of Hardwood’s net assets at the acquisition date was
$100 million and the non-controlling interest at the acquisition date was measured at
its fair value of $23 million. On 1 February 20X5, Tiles sold 70% of the ordinary shares
of Hardwood for $170 million. Hardwood’s identifiable net assets were $140 million
at the disposal date. Goodwill arising on the acquisition of Hardwood had not b een
impaired. Tiles’ remaining 10% holding in the shares of Hardwood had a fair value of
$11 million on 1 February 20X5 and was designated to be measured at fair va lue
through other comprehensive income. The fair value of the 10% holding at 30 April
20X5 was $11.5 million. In the current year, Tiles has posted no accounting entries in
respect of Hardwood in its individual financial statements. Hardwood does not meet
the criteria to be presented as a discontinued operation.
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 7/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
3 On 30 April 20X5, goodwill impairment testing was performed in relation to Carpet.
The recoverable amount of the net assets of Carpet was $113 million. On that date,
Carpet had share capital of $10 million, retained earnings of $80 million and other
components of equity of $9 million. The broadcasting licence (note 1) has not been
sold. There have been no prior goodwill impairments.
4 During the year, Tiles sold goods to Carpet for $14 million. All of the goods had been sold to third parties by 30 April 20X5.
5 On 1 May 20X4, Tiles purchased an item of property, plant and equipment for
$30 million and attributed it a 30 year useful life. The depreciation charge for the
year has been accounted for. On 30 April 20X5, a surveyor valued the asset at
$32 million. Tiles has not yet accounted for this revaluation or for any deferred tax
relating to the asset. The asset’s cost is written down for tax purposes at a rate of
10% per annum. The applicable tax rate is 20%.
6 On 1 March 20X5, Tiles sold goods to a customer located overseas for CU25 million.
The sale was correctly recorded by Tiles but no other accounting entries have been
posted in respect of this transaction. By 30 April 20X5, the invoice had not been
settled. The following exchange rates are relevant:
CU: $1
1 March 20X5 5.0
30 April 20X5 4.7
Foreign exchange gains and losses are presented in administrative expenses.
7 On 1 May 20X4, Tiles made a loan of $20 million to a key supplier. The loan is due to
be repaid at par on 30 April 20X7. Interest is charged in arrears at 2% per annum.
Market rates of interest are currently 8%. Tiles recorded a financial asset at
$20 million and recognised the interest received during the year in profit or loss. Any
adjustments required to profit in respect of this transaction should be presented in investment income.
8 Ignore the taxation effects of adjustments unless specified. Assume that any loss
allowances required in respect of financial assets have already been correctly
accounted for.
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive
income for the Tiles Group for the year ended 30 April 20X5. (35 marks)
Saffron, an entity unrelated to the Tiles group, operates in a country whose currency is the
Franc (FR). Saffron makes 70% of its sales in Francs and 30% of its sales in dollars ($). Any dollar receipts are immediately converted into Francs. Saffron’s ordinary shares are 90%
owned by another entity called Cumin. Cumin’s functional currency is the dollar. Saffron’s
line of business is different from the rest of the Cumin group, and it operates with
considerable autonomy. Saffron relies on finance in the form of local-currency bank loans,
rather than intra-group finance.
Required:
(b) Apply the rules in IAS 21 The Effects of Changes in Foreign Exchange Rates to
determine the functional currency of Saffron. (9 marks)
(c) Discuss the importance of ethical behaviour when producing consolidated financialstatements. (6 marks)
(Total: 50 marks)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 8/32
FINAL ASSESSMENT QUESTIONS
SECTION B
TWO questions ONLY to be answered
2 Brick is a company that manufactures and sells mobile phones and mobile phone contracts.
It prepares its financial statements under International Financial Reporting Standards andhas a year end of 30 April 20X4.
(a) Brick launched a promotion during the year to attract new customers to its network.
Under this promotion, customers sign a non-cancellable contract to subscribe to the
Brick network for twelve months. The cost is $30 per month, payable at the end of
each month. This price includes a new handset and network access. The normal retail
price of these elements is as follows:
$
Handset 250
Network access (per month) 15
In total, 100,000 new customers signed up for this promotion. The contracts allbegan on 1 March 20X4. (7 marks)
(b) On 1 May 20X3, Brick bid $100m for a license to use the radio spectrum for the next
generation of mobile phone services. These services will be offered to customers
from 20X5.
Some investment analysts have argued in the press that Brick may have over-paid for
this license. Market research has shown that most customers are extremely satisfied
with current network speeds. It is therefore widely believed that this ‘next
generation’ of mobile phone services will not gain mainstream popularity until 20X6
at the earliest. Under the terms of purchase, Brick is prohibited from selling the
license to other mobile phone operators. (5 marks) (c) Brick must pay a fee of 400,000 Dinar (DN) on 31 December 20X4. The directors of
Brick have become increasingly concerned about exchange rate fluctuations and
therefore, on 1 February 20X4, entered into a futures contract to buy DN400,000 for
$200,000 on 31 December 20X4. This contract was designated as a cash flow hedge,
all necessary documentation was completed, and all hedge effectiveness criteria
were met.
Based on published exchange rates, DN400,000 would cost $228,000 on 30 April
20X4. The fair value of the futures contract at 30 April 20X4 had risen to $30,000.
(5 marks)
(d) Brick needed to raise finance during the period and therefore entered into a sale andfinance leaseback transaction. On 1 May 20X3, it sold property, plant and equipment
with a carrying amount of $4.5m to the bank for proceeds of $6 million. This was
then leased back on a 15 year term, with payments of $650,000 due annually in
arrears. The rate of interest implicit in the lease is 7.1%. (6 marks)
Required:
Discuss how the above events should be accounted for in the financial statements of
Brick for the year ended 30 April 20X4.
Note: the mark allocation is shown against each of the four events above.
Professional marks will be awarded in question 2 for the clarity and quality of thepresentation and discussion. (2 marks)
(T l 25 k )
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 9/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
3 Golden Gate is a newly formed public limited company involved in property development.
Their financial statements are prepared in accordance with International Financial
Reporting Standards (IFRS). The following accounting issues have arisen in the year ended
30 June 20X4 and need to be resolved.
(a) Golden Gate owns investment properties, which are measured at fair value. The
investment properties are held to earn rental income in the long term. Although the sales prices of similar properties are available, the directors believe that a fair value
measurement based on their estimates of future rental income would more faithfully
represent the value of the properties to Golden Gate. The directors are unsure as to
whether this complies with the requirements of IFRS. (5 marks)
(b) During the year ended 30 June 20X4, a decision was made to relocate Golden Gate’s
key business functions in an attempt to reduce operating costs. The decision to
relocate was communicated to those affected in June 20X4. Relocation expenses will
not be paid until August 20X4 and are estimated at $3m. The directors of Golden
Gate do not believe that the cost of $3m should be shown in the financial statements
for the year ended 30 June 20X4 because no expenditure has been incurred.
(5 marks)
(c) Golden Gate has a defined contribution pension scheme that all employees are
enrolled into. However, in the year ended 30 June 20X4, it set up an additional fund
(Fund) as a way of enhancing post-retirement benefits. The terms of the Fund are as
follows:
• Employees with more than two years’ service will be automatically enrolled
into the Fund.
• Golden Gate’s contributions into the Fund are voluntary. In the year ended
30 April 2015, its contributions were equivalent to 1% of wages and salaries.
• Whilst the fund is in existence members will, upon retirement, receive an
annual lump sum based on their number of years of service.
• Golden Gate can cancel the Fund at any point. If cancelled, no further benefits
or compensation will be paid to members.
Previously, the national press have been critical of Golden Gate because of its low
levels of employee remuneration, which have generally increased below the level of
inflation. As a result, some believe that the announcement of the Fund is simply a
public relations exercise, and many employees remain sceptical about Golden Gate’s
commitment to it.
The directors wish to know how they should have accounted for the Fund. (8 marks)
(d) On 1 February 20X4, Golden Gate purchased a property located overseas for CU2m.This property is to be sold in the ordinary course of business. On 30 June 20X4, it had
an estimated net sales price of CU2.5m. This valuation was confirmed post year-end.
There have been significant fluctuations in the currency markets. The following
exchange rates are relevant:
Date CU:$1
1 February 20X4 2.1
30 June 20X4 3.0
(5 marks)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 10/32
FINAL ASSESSMENT QUESTIONS
Required:
Discuss how the above events should be accounted for in the financial statements of
Golden Gate for the year ended 30 June 20X4.
Note: the mark allocation is shown against each of the four events above.
Professional marks will be awarded in question 3 for the clarity and quality of thepresentation and discussion. (2 marks)
(Total: 25 marks)
4 (a) A revised version of IAS 28 Investments in Associates and Joint Ventures was issued in
May 2011. The standard defines an associate as an entity over which an investor has
‘significant influence’. IAS 28 states that associates should be accounted for using the
equity method in the consolidated financial statements. However, equity accounting,
and its purpose, have been increasingly criticised in recent years.
Required:
(i) Within the context of IAS 28, explain what is meant by ‘significant influence’.
Provide examples to illustrate your answer. (5 marks)
(ii) Explain what is meant by ‘equity accounting’. (4 marks)
(iii) Outline potential criticisms of equity accounting. (5 marks)
(b) On 1 January 20X4, Bolo purchased 45% of the ordinary shares of Kata. Consideration
paid was $3 million. The carrying amounts of the net assets of Kata at that date were
$2.4 million and approximated their fair values. The statement of financial posi tion
for Kata as at 31 December 20X4 was as follows:
$m
Property, plant & equipment 14
Inventories 1
––––
Total assets 15
––––
Share capital 1
Retained earnings 2
Loans 12
––––
Equity and liabilities 15
––––
The directors of Bolo are unsure whether to treat Kata as an associate or a subsidiary
in the consolidated financial statements. They believe that this decision will have a
minimal impact on the consolidated financial statements and is theref ore
unimportant.
When relevant, Bolo measures non-controlling interests using the proportion of net
assets method.
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 11/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
Required:
Discuss and compare the impact on the consolidated financial statements of Bolo if
the investment in Kata is accounted for as:
• a subsidiary, or
• an associate. (9 marks)
Professional marks will be awarded in question 4 for the clarity and quality of the
presentation and discussion. (2 marks)
(Total: 25 marks)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 12/32
ACCA
Paper P2 (INT/UK)
Corporate Reporting
September and December 2015
Final Assessment – Answers
To gain maximum benefit, do not refer to these answers
until you have completed the final assessment questions
and submitted them for marking.
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 13/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
© Kaplan Financial Limited, 2015
The text in this material and any others made available by any Kaplan Group company does no t
amount to advice on a particular matter and should not be taken as such. No reliance should be
placed on the content as the basis for any investment or other decision or in connection with any
advice given to third parties. Please consult your appropriate professional adviser as necessary.
Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to
any person in respect of any losses or other claims, whether direct, indirect, incidental, and
consequential or otherwise arising in relation to the use of such materials.
All rights reserved. No part of this examination may be reproduced or transmitted in any form or
by any means, electronic or mechanical, including photocopying, recording, or by any information
storage and retrieval system, without prior permission from Kaplan Publishing.
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 14/32
FINAL ASSESSMENT ANSWERS
1 TILES
Key answer tipsPart (a) of this question is a group accounting question. Tiles lost control of Hardwood
during the year. Hardwood is therefore consolidated until the disposal date and a profi t or
loss on disposal must be calculated. Part (b) of the question requires knowledge and
application of the rules governing functional currency. Remember to start your answer by
stating relevant definitions and rules per the accounting standard (IAS 21), and then apply
these to the scenario. Part (c) covers ethics, and this is something which should be expected
within the compulsory question. Make sure that your answer is specific to the question.
(a) Consolidated statement of profit or loss and other comprehensive income for the
year ended 30 April 20X5
$m Marks
Revenue ($216 + $128 + (9/12 × $166) – $14 (W6)) 454.5 1.0 (W6)
Cost of sales ($89 + $62 + (9/12 × $84) – $14 (W6)) (200.0) 1.0 (W6)
––––––
Gross profit 254.5
Distribution costs ($15 + $16 + (9/12 × $12)) (40.0)
Administrative expenses (W11) (85.2) 3.0 (W11)
––––––
Profit from operations 129.3
Profit on disposal (W5) 19.0 4.0 (W5)
Investment income
($3 + $1 + (9/12 × $4) – $3.1 (W9) + $1.0 (W9))
4.9 2.0
Finance costs ($10 + $5 + (9/12 × $8)) (21.0)
––––––
Profit before taxation 132.2
Taxation ($17 + $6 + (9/12 × $10) + $0.4 (W7)) (30.9) 1.0
––––––
Profit for the period 101.3
Other comprehensive income
Items that will not be reclassified to profit or loss in future
periods
Gain on financial asset (W5) 0.5 1.0
Revaluation of property, plant and equipment (W7) 3.0 1.0
Income tax relating to items that will not be reclassified to
profit or loss (W7)
(0.6) 1.0
––––––
Total comprehensive income for the period 104.2 ––––––
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 15/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
Profit attributable to:
Equity holders of Tiles (bal. fig.) 94.4 0.5 (bal.)
Non-controlling interest (W10) 6.9 2.0 (W10)
––––––
101.3
––––––
Total comprehensive income attributable to:
Equity holders of Tiles (bal. fig.) 97.3 0.5 (bal.)
Non-controlling interest (W10) 6.9
––––––
104.2
––––––
Presentation of profit/TCI split (even if left blank) 1.0
Labelling OCI as items that will not be reclassified to P/L 1.0
Pro-rating of Hardwood’s results 1.0
Calculation of excess amortisation (W2) 1.0
Calculation of group impairment loss (W3) 4.0
Calculation of Carpet’s goodwill (W4) 1.0
Calculation of revaluation gain (W7) 1.0
Calculation of deferred tax (W7) 2.0
Calculation of forex gain (W8) 1.0
Calculation of financial asset fair value (W9) 2.0
Calculation of financial asset impairment (W9) 1.0
Calculation of financial asset interest adjustment (W9) 1.0 –––– ––
Maximum marks 35.0
–––– ––
Workings
(W1) Group structure
Tiles
80% for full year 80% for 9/12 year
Carpet Hardwood
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 16/32
FINAL ASSESSMENT ANSWERS
(W2) Carpet’s net assets
Acq’n Rep. date
$m $m
Share capital 10 10
Other components 8 9
Retained earnings 57 80Licence (bal. fig) 15 15
Excess amortization (2 years × $3m
(see note below)) (6)
–––– ––––
90 108
–––– ––––
The excess amortisation on the licence is $3m per year ($15m/5 years). This is
recorded in administrative expenses (W11). (1 mark)
(W3) Carpet impairment review
$m MarksRep. date net assets (W2) 108.0 2 (W2)
Goodwill (W4) 24.0 (W4)
Notional NCI ($24m × (20/80)) 6.0 1
––––––
138.0
Recoverable amount (113.0) 1
–––––– ––––– –
Impairment 25.0 3 max
–––––– ––––– –
The impairment loss is allocated to the group based on shareholding. The
impairment loss attributable to the group is therefore $20 million ($25m ×
80%). (1 mark)
The goodwill attributable to the NCI is not recognised under the share of net
assets method. Therefore the NCI share of the impairment is not recognised.
(W4) Goodwill of Carpet
$m Marks
Consideration 96.0 0.5
NCI at acquisition(20% × $90m (W2))
18.0 0.5
FV of net assets at acquisition (W2) (90.0) 0.5
––––– –––– –
Goodwill pre-impairment 24.0 1 max
––––– –––– –
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 17/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
(W5) Profit on disposal
$m $m Marks
Proceeds from disposal 170 0.5
Fair value of interest retained 11 0.5
––––
181
Goodwill disposed:
Consideration 130 0.5
NCI at acquisition 23 0.5
Net assets at acquisition (100) 0.5
–––––
Goodwill at disposal (53)
Net assets at disposal: (140) 0.5
NCI at disposal:
NCI at acquisition 23 0.5
NCI % of post-acquisition net assets
(20% × ($140 – $100))
8 0.5
––––
31
–––– ––––––
Profit on disposal 19 4 max
–––– ––––––
The interest retained is initially recognised at $11 million and must be revalued to its fair value of $11.5 million at the reporting date. Since the shares have
been designated to be measured at fair value through other comprehensive
income, a gain of $0.5 million ($11.5m – $11.0m) will be recorded in other
comprehensive income.
(W6) Intra-group trading
The intragroup trading of $14 million must be removed from revenue and cost
of sales.
Dr Revenue $14m
Cr Cost of sales $14m(W7) Revaluation
Before the revaluation, the asset had a carrying amount of $29m (29/30 ×
$30m). The revaluation gain that needs to be recorded in other comprehensive
income is therefore $3m ($32m – $29m).
Dr PPE $3m
Cr OCI $3m (1 mark for calc. of reval. gain)
The deferred tax balance is calculated based on the difference between the
asset’s carrying amount of $32m and its tax base of $27m ($30m × 90%). As
such, the deferred tax liability required is $1m (($32m – $27m) × 20%).(1 mark for deferred tax liability)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 18/32
FINAL ASSESSMENT ANSWERS
The deferred tax relating to the $3m revaluation gain is recorded in OCI. The
remainder of the deferred tax is recorded in profit or loss.
Dr OCI ($3m × 20%) $0.6m
Dr Tax expense in P/L $0.4m
Cr Deferred tax liability $1.0m (1 mark for profit/OCI split) (W8) Foreign exchange
The transaction would initially be recorded at the historic rate of exchange.
This means that revenue and a corresponding receivable would have been
recorded at $5m (CU25m/5). The receivable is a monetary asset and so is
retranslated at the reporting date using the closing rate of exchange. This gives
a year end receivable of $5.3m (CU25/4.7).
The foreign exchange gain of $0.3m ($5.3m – $5.0m) is recorded in the
statement of profit or loss.
Dr Receivables $0.3m
Cr Profit or loss $0.3m (1 mark for calc. of forex gain)
(W9) Financial asset
The loan to the supplier is a financial asset and so should initially be recorded
at its fair value. However, the interest rate on the loan is not at a market r ate.
Therefore, the fair value must be calculated by discounting the future cash
receipts to present value using the market rate of interest.
Date Cash flow Disc. rate Present value Marks
$m $m
30/4/X5 0.4 1/1.08 0.37
30/4/X6 0.4 1/1.082 0.34
30/4/X7 20.4 1/1.083 16.19
––––– –––––
Fair value 16.9 2
–––––
(1 mark for cash flows, 1 mark for discount rates)
The asset should have been written down on initial recognition f rom
$20 million to $16.9 million, giving a loss of $3.1 million in profit or loss.
Dr Profit or loss $3.1m
Cr Financial asset $3.1m (1 mark for calc. of impairment loss)
Investment income should be recognised using the effective rate of interest of
8%. Therefore the investment income that should have been recorded is
$1.4 million ($16.9m × 8%). Currently, Tiles has only $0.4 million ($20m × 2 %),
meaning that investment income must be increased by $1.0 million.
Dr Financial asset $1.0m
Cr Profit or loss $1.0m (1 mark for calc. of interest adjustment)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 19/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
(W10) Profit attributable to the non-controlling interest
Marks
$m $m
Profit of Carpet 18.0
Excess amortisation (W2) (3.0) 0.5
–––––× 20% 15.0 0.5
––––– –––––
Profit attributable to NCI 3.0 1 max
––––– –––––
Marks
$m $m
Profit of Hardwood
(9/12 × $26m)
19.5 0.5
–––––
× 20% 19.5 0.5
––––– –––––
Profit attributable to NCI 3.9 1 max
––––– –––––
The total profit attributable to the NCI is $6.9 million ($3.0m + $3.9m).
(W11) Administrative expenses
$m Marks
Tiles 18.0
Carpet 22.0
Hardwood (9/12 × $30) 22.5
Excess amortisation (W2) 3.0 1.0
Goodwill impairment (W3) 20.0 1.0
Foreign exchange (W8) (0.3) 1.0
–––––
85.2
–––––
(b) The functional currency is the currency of the primary economic environment where
an entity operates. (1 mark)
An entity should consider the following when determining its functional currency:
• the currency that mainly influences sales prices for goods and services
• the currency of the country whose competitive forces and regulations mainly
determine the sales price of goods and services
• the currency that mainly influences labour, materials and other costs of
providing goods and services.
(Primary indicators: 2 marks max)
The following factors should also be considered:
• the currency in which funds from financing activities are generated
• the currency in which receipts from operating activities are retained.
(S d i di 2 k )
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 20/32
FINAL ASSESSMENT ANSWERS
When determining the functional currency of a foreign subsidiary, the following
should be considered to determine if its functional currency is the same as its parent:
• 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
•
whether transactions with the reporting entity are a high or a low proportion
of the foreign operation’s activities.
(Group indicators: 2 marks max)
(IAS 21 knowledge: 5 marks max)
Saffron makes most of its sales in Francs, suggesting that Francs are the functional
currency. (1 mark)
Any operating receipts in dollars are immediately converted to Francs, suggesting
that Francs are the functional currency. (1 mark)
Saffron takes out finance in its local currency, suggesting that Francs are the
functional currency. (1 mark)
Saffron is relatively autonomous from the rest of the Cumin group, suggesting that its
functional currency is not the dollar. (1 mark)
All things considered, it would seem that the functionary currency of Saffron is the
Franc. (1 mark)
(IAS 21 application: 4 marks max)
(Part b: 9 marks max)
(c) Financial statements are important to a range of user groups, such as shareholders,
banks, employees and suppliers. These groups rely on the directors to faithf ullyrepresent the performance and position of the company. (1 mark)
A faithful representation is often presumed to have been provided if accounting
standards have been complied with. Therefore, it is essential that the directors
adhere to the requirements of IFRS 3 and IFRS 10. (1 mark)
The production of consolidated financial statements requires judgement in a number
of areas, such as:
• Whether a relationship of control or significant influence exists.
• Identifying the acquiring company.
• Identifying the acquisition date.
•
Establishing the fair value of the consideration paid for a subsidiary.
• Establishing the fair value of the identifiable net assets a subsidiary.
• Establishing the fair value of the NCI at acquisition.
(1 mark per example of judgement: 2 marks max)
These decisions will impact on the users’ perception of the performance and position
of the group:
If an investee has significant debt then management may have a motivation to
exclude it from consolidation by arguing that no control is exercised. The financial
position of the group will therefore look stronger due to the absence of this debt.
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 21/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
By under-stating the fair value of contingent payments required to acquire a
subsidiary, liabilities and goodwill in the consolidated statements will be understated.
This would improve gearing and would also improve asset turnover ratios.
(1 mark per reasonable example of F/S impact of judgement: 2 marks max)
Professional ethics is a vital part of the accountancy profession and ACCA members
are bound by its Code of Ethics and Conduct. This sets out the importance of the fundamental principles of confidentiality, objectivity, professional behaviour,
integrity, and professional competence and due care. (1 mark)
Integrity is defined as being honest and straight-forward. Attempting to disguise
control relationships or to account using incorrect fair values shows a lack of
integrity. (1 mark)
If such a decision has been motivated by a desire to achieve bonus targets, satisfy the
goals of shareholders or to meet bank covenants, then this demonstrates a lack o f
objectivity. (1 mark)
(Part c: 6 marks max)
Marking scheme
Marks
(a) Group statement P or L and OCI 35
(b) Functional currency 9
(c) Ethical issues 6
–––
Total 50
–––
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 22/32
FINAL ASSESSMENT ANSWERS
2 BRICK
Key answer tipsThis question covers a number of standards that have proved popular with the
P2 examiner. A thorough understanding of these topics is therefore essential.
Part (a) tests revenue recognition. Ensure that you get the easy marks available for stating
the relevant rules from IFRS 15 Revenue from Contracts with Customers before trying to
apply them to the scenario.
Part (b) requires knowledge of both IAS 38 Intangible Assets and IAS 36 Impairment of
Assets. In the exam, watch out for assets that were over-paid for or which are not
performing as well as expected – they require an impairment review.
Part (c) tests cash flow hedge accounting. The accounting treatment of a hedge is actually
relatively simple, but many students are confused by the terminology in the questi ons.
Make sure that you read the question very carefully.
Part (d) covers the accounting treatment of a sale and finance leaseback. The key rul e to
remember is that any profit made on the sale itself is deferred and released to profit or loss
over the lease term.
(a) IFRS 15 says that the separate performance obligations within a contract must be
identified. (1 mark)
The contract price should be allocated to the separate performance obligations
based on stand-alone selling prices. (1 mark)
Revenue should be recognised when (or as) a performance obligation is satisfied.
(1 mark)
The handset and the other services have been sold together at a discount to the
normal individual retail price. Revenue could therefore be allocated based on the
stand-alone selling price of each component. (1 mark)
(Knowledge of IFRS 15: 3 marks max)
The total contact price is $360 ($30 × 12 months). The total recommended retail
price of the individual elements is $430 ($250 + ($15 × 12 months)). The contract
therefore means that customers pay 83.7% of the normal recommended retail price.
(1 mark)
The revenue related to the sale of the handsets is $20.9m ($250 × 83.7% × 100,000)
and this should be recognised on 1 March 20X4 when control of the good passes.
(1 mark)
Revenue from the network access should be recognised over time because the
service is simultaneously received and consumed by the customer. (1 mark)
The revenue relating to the network access is $15.1m ($15 × 12 months × 83.7 % ×
100,000). Two months’ worth of service have been provided to the customers, so
only $2.5m ($15.1m × 2/12) should be recognised as revenue in the year ended
30 April 20X4. (1 mark)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 23/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
Brick has received $6m ($30 × 2 months × 100,000) but has recognised revenue of
$23.4m ($20.9m + $2.5m). Therefore the difference of $17.4m ($23.4m – $6m)
should be recognised as a receivable on the statement of financial position. (1 mark)
(Application of IFRS 15: 4 marks max)
(Part a: 7 marks max)
(b) Purchased intangible assets are initially recognised at cost. Therefore, the license
should be recognised at $100m. (1 mark)
Intangible assets should be amortised over their useful economic life when the asse t
is ready for use. Therefore, no amortisation will be charged until 20X5. (1 mark)
(Basic IAS 38 knowledge: 1 mark max)
Intangible assets that are not yet ready for use are tested for impairment annually.
(1 mark)
All assets with indications of impairment should be tested for impairment. (1 mark)
An impairment review involves comparing the asset’s carrying value to itsrecoverable amount. The recoverable amount is the higher of the fair value less costs
to sell and the value in use. (1 mark)
The value in use will be determined by estimating the future cash flows that will be
derived from the asset and discounting them to present value. (1 mark)
The discount rate used should be a pre-tax rate that reflects market assessments of
the time value of money and the risks specific to the asset. (1 mark)
Any impairment loss would be recognised in the statement of profit or loss. (1 mark)
(Knowledge of IAS 36: 1 mark max)
The press reports would suggest that Brick has overpaid for the license and therefore
that the carrying amount is too high. (1 mark)
The licence cannot be sold. This means that its fair value less costs to sell is $nil.
(1 mark)
Since a license does not generate cash inflows and outflows by itself, it may have to
be tested for impairment as part of a larger cash generating unit (CGU). (1 mark)
If this was the case, any impairment would firstly be set off against goodwill within
the CGU and then allocated to the other assets on a pro-rata basis. (1 mark)
The fact that significant cash inflows are not expected until 20X6 will mean tha t
impairment is more likely. This is because cash flows arising further in the future will
be discounted more heavily, thus reducing the value-in-use. (1 mark)
(Application of IAS 36: 3 marks max)
(Part b: 5 marks max)
(c) A cash flow hedge is the hedge of the exposure to variability in cash flows that are
attributable to a particular risk associated with a recognised asset or liability or a
highly probable forecast transaction and that could affect profit or loss. (1 mark)
If a cash flow hedge meets all required conditions then the portion of the gain or loss
on the instrument that is determined to be an effective hedge shall be recognised in
other comprehensive income and the ineffective portion should be recognised in
profit or loss. (1 mark)
(Knowledge of IFRS 9: 2 marks max)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 24/32
FINAL ASSESSMENT ANSWERS
Assuming that there is no purchase price, there will be no accounting entries when
the futures contract is entered into. (1 mark)
At 30 April 20X4, Brick is expecting to have to pay $28,000 more ($228,000 –
$200,000) to acquire DN 400,000 than they were at the inception of the hedge
(1 February 20X4). The fair value of the hedging instrument has, however, increased
by $28,000 over the same period. (1 mark) At 30 April 20X4, the futures contract will be recognised as a financial asset at its fair
value of $30,000.
A gain of $28,000 will be recognised in other comprehensive income and the
remaining gain of $2,000 will be recorded in profit or loss. (1 mark)
(Application of IFRS 9: 3 max)
(Part c: 5 marks max)
(d) Under a sale and finance leaseback, any profit on disposal should be deferred and
recognised over the lease term. (1 mark)
(IAS 17 knowledge: 1 mark)
The gain on disposal of $1.5m ($6m – $4.5m) is deferred and released to profi t or
loss over the lease term. Therefore, $0.1m ($1.5m/15 years) will be released to profit
or loss in the current period, leaving deferred profit on the statement of finan cial
position of $1.4m ($1.5m – $0.1m). (1 mark)
An asset and corresponding finance lease liability should be recognised at the fair
value of $6 million. (1 mark)
The depreciation expense recognised in the statement of profit or loss will be $0.4m
($6m/15 years) and the asset will be held on the statement of financial position at a
carrying value of $5.6m ($6m – $0.4m). (1 mark) The lease liability will be increased by the rate of interest implicit in the lease. This
will give rise to a finance cost of $0.426m ($6m × 7.1%) in the statement of profi t or
loss. (1 mark)
The liability will be reduced by the cash repayment of $0.65m. The liability will
therefore be held on the statement of financial position at $5.776m ($6m + $0.426m
– $0.65m). (1 mark)
(IAS 17 application: 5 marks)
(Part d: 6 marks max)
ACCA Marking schemeMarks
(a) Revenue 7
(b) Intangibles and impairment 5
(c) Cash flow hedge 5
(d) Sale and leaseback 6
Professional marks 2
–––
Total 25
–––
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 25/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
3 GOLDEN GATE
Key answer tipsIn Section B questions, make sure that you demonstrate your knowledge of the relevant
rules from the accounting standards before applying them to the scenario. For instance ,
there are easy marks to obtain for stating how a fair value should be measured (part a) and
when a provision should be recognised (part b).
Remember to attempt all parts of the question. If you miss out a part then you will lose
professional marks.
(a) IFRS 13 defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the
measurement date. (1 mark)
When determining a fair value, the standard emphasises the use of level one inputs
wherever possible. These are unadjusted quoted prices on an active market. This
means that there must be a market which is trading with sufficient frequency and
volume for identical assets or liabilities to achieve a reliable estimate of fair value.
(1 mark)
Level 2 inputs are inputs other than quoted prices in level one which are observable
for the asset or liability to be measured. (1 mark)
Level 3 inputs are unobservable inputs. These should be kept to a minimum and used
only when insufficient data can be obtained from level 1 and 2 inputs. (1 mark)
(IFRS 13 knowledge: 3 marks max)
Forecasts of future rental income are a level 3 input and must not be used to
determine a fair value if level 1 or 2 inputs can be obtained. (1 mark)
Golden Gate has access to selling price for similar properties. Although adjustments
would be required for differences such as size, location and age to determine the fair
value of their properties, this is likely to constitute a level 2 input. (1 mark)
As such, the sales price of similar properties should be used to determine the fair
value of the investment properties. (1 mark)
(IFRS 13 application: 2 marks max)
(Part (a): 5 marks max)
(b) To recognise a provision as per IAS 37, the following criteria must be satisfied:
• There must be a present obligation from a past event
• There must be a probable outflow of economic benefit
• The costs to settle the obligation must be capable of being estimated reliably.
(2 marks if given in full)
To recognise a restructuring provision, a constructive obligation must exist at the
reporting date. (1 mark)
A restructuring provision should not include costs associated with the ongoingactivities of the business. (1 mark)
(Knowledge of IAS 37: 3 marks max)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 26/32
FINAL ASSESSMENT ANSWERS
A constructive obligation does exist at the reporting date because the restructuring
has been communicated to those affected. (1 mark)
However, relocation costs relate to the future conduct of the business and therefore
no provision is required. (1 mark)
The directors are correct in their assertion that no provision is allowed (although
their reasoning is incorrect). (1 mark)
(Application of IAS 37: 2 marks max)
(Part b: 5 marks max)
(c) Defined contribution plans are post-employment benefit plans under which an entity
pays fixed contributions into a separate entity and will have no legal or constructive
obligation to pay further contributions if the fund does not hold sufficient asset s to
pay all employee benefits relating to employee service in the current and prior
periods. (1 mark)
A constructive obligation is where past practice or published policies have created a
valid expectation that the entity will discharge certain responsibilities. (1 mark)
Under defined contribution plans, actuarial risk (that benefits will be less t han
expected) falls, in substance, on employees. (1 mark)
Under defined contribution plans, investment risk (that assets invested will be
insufficient to meet expected benefits) falls, in substance, on employees. (1 mark)
Defined benefit plans are post-employment plans that are not defined contribution
plans. (1 mark)
(IAS 19 knowledge: 3 marks max)
It is possible that the money in the Fund will not be sufficient to pay employees the
retirement benefits stated in the plan. (1 mark)
Therefore it could be argued that Golden Gate does bear some actuarial and
investment risk because, if it continues with the Fund, it would need to make up for
this shortfall. (1 mark)
However, of greater importance is the fact that Golden Gate has no obligation to pay
benefits to Fund members. (1 mark)
The scheme can be cancelled at any point and therefore no legal obligation exists.
(1 mark)
It would also seem to be no constructive obligation to pay benefits because the Fund
is new and therefore there is no past practice of paying benefits to retired members.(1 mark)
Moreover, Golden Gate has historically paid low levels remuneration to employees.
The employees are therefore unlikely to have a valid expectation that Golden Gate
would continue with the Fund, particularly if its cost is higher than expected.
(1 mark)
As a result of Golden Gate’s lack of a legal or constructive obligation to pay further
contributions if the level of assets is insufficient, the Fund should be accounted for as
a defined contribution scheme. (1 mark)
This means that the contributions payable in the period should be recognised as an
expense in profit or loss. (1 mark)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 27/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
Tutorial note
You may have concluded that the Fund should be treated as a defined benefit pension
plan. You would still score 1 mark per point, as long as your argument is clear and you have applied IAS 19 to the scenario.
(IAS 19 application: 5 marks max)
(Part b total: 8 marks)
(d) Items to be sold in the ordinary course of business are inventory. (1 mark)
Inventory is initially recorded at cost. At the reporting date, inventory must be valued
at the lower of cost and net realisable value (NRV). (1 mark)
Per IAS 21, a foreign currency transaction should be initially recorded by applying the
spot rate on the date of the transaction. (1 mark)
As a non-monetary asset, the cost of the inventory is not re-translated. (1 mark)
Per IAS 21, NRV should be translated at the exchange rate ruling on the date when i t
was determined. (1 mark)
(Knowledge of IAS 2 and IAS 21: 2 marks max)
The inventory should initially be recorded at $0.95m (CU2m/2.1). (1 mark)
The NRV of the inventory is $0.83m (CU2.5m/3.0). (1 mark)
The inventory must therefore be written down from its cost of $0.95m to its NRV of
$0.83m. This will give rise to an expense of $0.12m ($0.95m – $0.83m) in the
statement of profit or loss. (1 mark)
(Application of IAS 2 and IAS 21: 3 marks max)
(Part d: 5 marks max)
ACCA Marking schemeMarks
(a) Fair values 5
(b) Provisions 5
(c) Pensions 8
(d) Inventory and exchange rates 5
Professional marks 2
–––Total 25
–––
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 28/32
FINAL ASSESSMENT ANSWERS
4 EQUITY ACCOUNTING
Key answer tipsQuestion 4 is always an essay-style question requirement, which can include a small
computational or applied element. It may focus upon current issues in financial report ing,
or upon a theoretical or conceptual issue.
Equity accounting is an issue that has been the focus of recent articles in Accounting and
Business magazine. It is therefore a current issue that the examiner may expect you to be
familiar with.
(a) (i) Significant influence is the power to participate in the financial and operating
policy decisions of the investee but is not control or joint control of th ose
policies. (1 mark)
Significant influence is assumed when the investor holds at least 20 per cent of
the voting power of the investee, unless it can be clearly demonstrated that
this is not the case. (1 mark)
It is assumed that an investor does not have significant influence over an
investee if they hold less than twenty per cent of the voting power, unless it
can be demonstrated that this is not the case. (1 mark)
A majority ownership by another company does not preclude the investor
from having significant influence. (1 mark)
Significant influence is usually evidenced in one of the following ways:
• Representation on the board of directors
• Participation in policy making processes
• Material transactions between the entity and its investee
• Interchange of management personnel
• Provision of essential technical information.
(1 mark each)
(Part a (i): 5 marks max)
(ii) Under the equity method, the investment is initially recognised at cost.
(1 mark)
The carrying amount of the investment is adjusted to recognise the investor’sshare of the profit (or loss) and other comprehensive income of the investee
after the date of acquisition. (1 mark)
Distributions received from an investee reduce the carrying amount of the
investment. (1 mark)
The investor’s share of the profit (or loss) and other comprehensive income of
the investee in the reporting period is recognised in the statement of profi t or
loss and other comprehensive income. (1 mark)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 29/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
Transactions and balances (such as sales and purchases, and receivables and
payables) between the group and an associate are no eliminated. (1 mark)
However, the investor can only recognise gains from transactions with the
investee to the extent of the unrelated investors’ interests in the investee (i.e.
the investor’s share of the gains must not be recognised). (1 mark)
(Part a (ii): 4 marks max)
(iii) Purpose and nature
There is confusion about the purpose of equity accounting. For instance, is it a
type of one-line consolidation or a way of valuing a financial instrument?
(1 mark)
This leads to diversity in how equity accounting is applied. (1 mark)
Proposed amendments to IAS 28 have been criticised as short-term measures
that do not address the need to establish a clear conceptual basis for equity
accounting. (1 mark)
Cost
IAS 28 does not specify how to calculate the cost of an associate. (1 mark)
Transactions costs are often added onto the carrying amount of financial
instruments, but they are expensed when purchasing a subsidiary. Therefore,
the treatment adopted by different companies may be inconsistent. (1 mark)
Other net asset changes
IAS 28 does not specify how to treat changes in the net assets of an associate,
other than those recorded in profit or loss or other comprehensive income.
(1 mark)
Examples of these net asset changes include:
• Issues of share capital to parties other than the investor
• Buybacks of equity instruments from shareholders other than the
investor
• Equity-settled share-based payments.
(1 mark each)
Elimination
There is no specific guidance on how the investor’s share of gains from
transactions with the investee should be eliminated. (1 mark)
It could be argued that it is contradictory to eliminate the group’s share of
unrealised profits from transactions with an associate, but that there is no
elimination of sales and purchases. (1 mark)
Judgement
Distinguishing between significant influence and control is judgemental and in
some cases can be difficult. However, this decision can have a hugely material
impact on the financial statements. (1 mark)
(Part a (iii): 5 marks max)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 30/32
FINAL ASSESSMENT ANSWERS
(b) Subsidiary
If accounted for as a subsidiary:
• The assets, liabilities, incomes and expenses of Kata would be consolidated in
full.
• Goodwill of $1.92 million (W1) would be recognised.
• The group would recognise its share of Kata’s post-acquisition retained
earnings. This amounts to $0.27 million (45% × ($2m – ($2.4m – $1.0m)).
• The group would recognise a non-controlling interest in respect of Kata of
$1.65 million (W2).
(1 mark per point)
(Subsidiary: 3 marks max)
Associate
The investment in Kata at the year-end would be carried at $3.27 million (W3).
(1 mark)
In the statement of profit or loss, the group would show its share of Kata’s profit of
$0.27 million (W3). (1 mark)
(Associate: 1 marks max)
Comparison of impact
Assets
Consolidating Kata would lead to a higher non-current asset position than if equity
accounting was used (PPE of $14 million and goodwill of $1.92 million compared with
an investment in the associate of $3.27 million). (1 mark)
This will make the group look more asset rich, which may help it to raise finance inthe future. (1 mark)
However, consolidating Kata’s large PPE balance may have a detrimental impact on
the group’s non-current asset turnover, thus making the group look less efficient at
generating profits. (1 mark)
Liabilities
Consolidating the loans of Kata may have a negative impact on the group’s gearing
ratio. (1 mark)
This may have the effect of making the group look riskier than if equity accounting
was used. (1 mark) A higher gearing ratio may make it harder for the group to raise finance in the future.
(1 mark)
Profit or loss
Consolidating the incomes and expenses of Kata line by line will impact key profit or
loss figures, such as revenue, gross profit and profit from operations. (1 mark)
Increased revenues will make the group’s market share look more impressive.
(1 mark)
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 31/32
ACCA P2 ( INT/UK) : CORPORATE REPORTING
Kata is profitable so consolidating its results will improve the group’s profit from
operations. This may have a positive impact on investor perception. (1 mark)
If Kata was accounted for using the equity method, the group would simply shows its
share of Kata’s profits as a single line below profit from operations. This would
therefore have no impact (positive or negative) on the group’s operating profit.
(1 mark)
(Impact: 5 marks max)
Workings
(W1) Goodwill
$m
Consideration 3.0
NCI at acquisition (55% × $2.4m) 1.32
Fair value of net assets at acquisition (2.40)
–––––
Goodwill 1.92 –––––
(W2) Non-controlling interest
$m
NCI at acquisition 1.32
NCI % of post-acq’n net assets
55% × ($3m – $2.4m) 0.33
–––––
1.65
–––––
(W3) Investment in associate
$m
Cost 3.0
Group % of post-acq’n P/L
45% × ($2m – ($2.4m – $1.0m)) 0.27
–––––
3.27
–––––
Note: the same answer could be obtained by taking the group’s share of the
post-acquisition movement in the associate’s net assets (equivalent to
the movement in its share capital and retained earnings).
(Part b: 9 marks max)
Marking scheme
Marks
(a) (i) Significant influence 5
(ii) Equity accounting 4
(iii) Criticisms 5
(b) Impact on F/S 9
Professional marks 2
–––
Total 25
–––
To download more visit http://freeaccastudymaterial.com
7/21/2019 2p kap kcom 5102-6102 (freeaccastudymaterial.com) (1).pdf
http://slidepdf.com/reader/full/2p-kap-kcom-5102-6102-freeaccastudymaterialcom-1pdf 32/32
http://freeaccastudymaterial.com
fb.com/freeaccastudymaterial
To download more visit http://freeaccastudymaterial.com