Answers

Diploma in Financial Reporting June 2012 Answersand Marking Scheme

Marks1 Consolidated statement of financial position of Alpha at 31 March 2012

ASSETS $000Non-current assets:Property, plant and equipment (267,000 + 250,000 + 4,800 (W1) 20,000 (W1) 5,000 (W10)) 496,800 + + Goodwill (W2) 77,759 7 (W2)Investment in joint venture (W6) 71,000 1 (W6)

645,559

Current assets:Inventories (85,000 + 50,000 3,000 (W5)) 132,000 + Trade receivables (75,000 + 45,000 8,000 (intra-group)) 112,000 + Cash and cash equivalents (15,000 + 10,000) 25,000

269,000

Total assets 914,559

EQUITY AND LIABILITIESEquity attributable to equity holders of the parentShare capital 195,000 Retained earnings (W5) 303,358 19 (W5)

498,358

Non-controlling interest (W4) 58,812 2 (W4)

Total equity 557,170

Non-current liabilities:Deferred consideration (W7) 68,181 Pension liability (W8) 66,000 Long-term borrowings (63,049 (W9) + 45,000) 108,049 + Deferred tax (W11) 32,159 2 (W10)

Total non-current liabilities 274,389

Current liabilities:Trade and other payables (35,000 + 30,000 8,000 (intra-group)) 57,000 + Short-term borrowings (16,000 + 10,000) 26,000

Total current liabilities 83,000 40

Total equity and liabilities 914,559

11

MarksWORKINGS DO NOT DOUBLE COUNT MARKS

Working 1 Net assets table Beta:

1 April 2010 31 March 2012 For W2 For W5$000 $000

Share capital 100,000 100,000 Retained earnings:Per accounts of Beta 45,000 100,000 Plant and equipment adjustment see below 10,000 4,800 Inventory adjustment 3,000 Nil Other components of equity:Per accounts of Beta 35,000 55,000 Reversal of post-acquisition revaluation (20,000) Deferred tax on fair value adjustments (2,600) (960) (W9) (W9)

Net assets for the consolidation 190,400 238,840

The post-acquisition increase in net assets is $4844 million ($23884 million $1904 million). All of this relates to retained earnings 1

3 4

W2 W5

Note re: post-acquisition plant and equipment adjustment:This is $48 million ($10 million X 3/5 X 80%).

Working 2 Goodwill on consolidation (Beta)

$000Cost of investment:Share exchange (75 million X 2/3 X $350) 175,000 Deferred consideration (75 million X $1)/(110)3 56,349 1Fair value of non-controlling interest at date of acquisition (25 million X $200) 50,000

281,349

Net assets at 1 April 2010 (W1) (190,400) 3 (W1)

Goodwill before impairment 90,949Impairment (W3) (13,190) 2 (W3)

Goodwill after impairment 77,759 7

Working 3 impairment of goodwill:

Carrying value of assets in cash generating unit 70,000 Allocated goodwill (1/(2 + 1 + 1 + 1)% X $90949 million (W2)) 18,190 1

88,190

Recoverable amount of assets in cash generating unit (75,000)

So impairment equals 13,190 2

W2

Working 4 Non-controlling interest in Beta:

Fair value at date of acquisition (W2) 50,000 25% of post-acquisition increase in net assets ($4844 million (W1)) 12,110 125% of goodwill impairment ($1319 million (W3)) (3,298)

58,812 2

12

MarksWorking 5 Retained earnings

$000Alpha 281,167 Additional finance cost for deferred consideration (W6) (6,198) 1 (W7)Adjustment for pension liability (W7) (31,000) 5 (W8)Adjustment for carrying value of loan (W8) (3,049) 4 (W9)Beta (75% X $4844 million (W1)) 36,330 + 4 (W1)Gamma (40% X 100,000) 40,000 1Unrealised profits on sales to Beta (15,000 X 25/125) (3,000) 1Unrealised profits on sales to Gamma (12,500 X 25/125 X 40%) (1,000) 175% of goodwill impairment ($1319 million (W3)) (9,892)

303,358 19

Working 6 investment in Gamma

Cost 32,000 Share of post-acquisition profits (W5) 40,000 Unrealised profits on sales to Gamma (W5) (1,000)

At 31 March 2012 71,000 1

Working 7 deferred consideration

At 1 April 2011 TWO years to payment 61,983 1Finance cost for the current year (10%) 6,198

At 31 March 2012 68,181 1

W5

Working 8 net pension liability

$000At 1 April 2011 60,000 Current service cost 28,000 Net nterest cost 2,000 Contributions paid by Alpha (25,000) Benefits paid by plan (cancel out) nil Actuarial differences 1,000 1

At 31 March 2012 66,000 As per draft financial statements of Alpha ($60 million (brought forward) minus $25 million (contributions in the period)) (35,000) 1

So adjustment equals 31,000

5

W5

Working 9 long-term borrowings in foreign currency

Opening carrying amount in 000 49,000 1Finance cost for the current period (111%) 5,439 1Interest actually paid (4,000)

So closing carrying amount in s 50,439

Translated into $000 at the closing rate ($125 to 1) 63,049 1As per draft financial statements of Alpha (60,000)

So closing adjustment equals 3,049

4

W5

13

MarksWorking 10 Deferred tax on temporary differences:

Fair value adjustments:

1 April 2010 31 March 2012$000 $000

Plant and equipment adjustment 10,000 4,800Inventory adjustment 3,000 Nil

Net taxable temporary differences 13,000 4,800

Related deferred tax (20%) 2,600 960

1

W1

Working 11 closing deferred tax

$000Alpha + Beta 36,199 On fair value adjustments (W9) 960 Reversal of deferred tax on post-acquisition property revaluation of Beta (55,000 35,000) X 20/80 (5,000) 1

32,159 2

2 (a) Under the principles of IAS 16 Property, Plant and Equipment costs of $135 million ($10 million + $35 million) will be debited to property, plant and equipment in respect of the cost of acquiring the extraction facility.

The costs of erecting the extraction facility (excluding the land) will be depreciated over a 10-year period, giving a charge in the current period of $175,000 ($35 million X 1/10 X 6/12). 1

From 1 October 2011, an obligation exists to rectify the damage caused by the erection of the extraction facility and this obligation should be provided for.

The amount provided is the present value of the expected future payment, which is $966,000 ($3 million X 0322). 1

The amount provided is debited to property, plant and equipment and credited to provisions at 1 October 2011.

The debit to property, plant and equipment creates additional depreciation of $48,300 in the current year ($966,000 X 1/10 X 6/12). 1

The closing balance in property, plant and equipment is $14,242,700 ($135 million $175,000 + $966,000 $48,300).

As the date of settlement of the liability draws closer the discount unwinds.

The unwinding of the discount in the current year is $57,960 ($966,000 X 12% X 6/12). 1

The extraction process itself creates an additional liability based on the damage caused by thereporting date.

The additional amount provided is $34,100 ($200,000 X 6/12 X 0341). 1

This additional provision causes an extra charge to the statement of comprehensive income.

The carrying amount of the provision at the year end is $1,058,060 ($966,000 + $57,960 + $34,100).

9

(b) Under the principles of IFRS 2 Share Based Payment this arrangement will be regarded as an equity settled share based payment.

The fair value of the equity settled share based payment will be credited to equity and debited to expenses (or occasionally included in the carrying amount of another asset) over the vesting period. 1

Where the transaction is with employees, fair value is measured as the market value of the equity instrument at the grant date.

14

MarksThe vesting condition relating to the number of executives who remain with Delta is a non-market condition so it is taken into account when estimating the number of options that will vest.

The vesting condition relating to the share price is a market condition so it is taken into account when measuring the fair value of an option at grant date.

Therefore the total estimated fair value of the share based payment is $1,545,600 (92 X 20,000 X $084). 1

1/3 of this amount ($515,200) is recognised in the year ended 31 March 2012.

$515,200 is credited to equity and debited to expenses (or occasionally included in the carryingamount of another asset).

5

(c) Under the principles of IAS 37 Provisions, Contingent Liabilities and Contingent Assets a provision should be made for the probable damages payable to the customer.

The amount provided should be the amount Delta would rationally pay to settle the obligation at the reporting date. Ignoring discounting, this is $1 million.

This amount should be credited to liabilities and debited to profit or loss.

Under the principles of IAS 37 the potential amount receivable from the supplier is a contingent asset.

Contingent assets should not be recognised but should be disclosed where there is a probable futurereceipt of economic benefits this is the case for the $800,000 potentially receivable from the supplier. 1

3

(d) The event causing the damage to the inventory occurred after the reporting date.

Under the principles of IAS 10 Events After the Reporting Date this is a non-adjusting event as it does not affect conditions at the reporting date. 1

Non-adjusting events are not recognised in the financial statements, but are disclosed where their effect is material. 1

3

20

3 (a) (i) An entity classifies an asset or disposal group as held for sale if its carrying amount will be principally recovered through a sale transaction rather than through continuing use. 1

For this to be the case, the asset must be available for immediate sale in its present conditionand the sale must be highly probable. For the sale to be highly probable, management mustbe committed to selling the asset or disposal group and be actively marketing the asset ordisposal group at a reasonable price. In addition, the sale should be expected to qualify for recognition within one year of the date of classification. 1

(ii) An asset or disposal group that is classified as held for sale should be measured at the lower of the carrying amount and fair value (arms length sale price) less costs to sell. 1

When an asset or disposal group is classified as held for sale no further depreciation charges should be made on the asset or the disposal group.

An entity should present an asset classified as held for sale and the assets of a disposal group classified as held for sale separately from other assets in the statement of financial position. 1

The liabilities of a disposal group classified as held for sale should be presented separately fromother liabilities in the statement of financial position. They should not be offset against the assets of the disposal group.

Costs to sell are the incremental costs of selling the asset or disposal group, excluding finance costs and income tax expense. 1

(iii) A discontinued operation is a component of an entity that either has been disposed of in the period or classified as held for sale and: 1

Represents a separate major line of business or area of operations,

15

MarksIs part of a single co-ordinated plan to dispose of a separate major line of business or area of operations, or

Is a subsidiary acquired exclusively with a view to resale.

(iv) The minimum disclosure requirements for discontinued operations on the face of the statementof comprehensive income is a single amount representing the total of:

The post-tax profit or loss of discontinued operations.

The post-tax gain or loss recognised on the measurement to fair value less costs to sell or onthe disposal of the assets or disposal groups constituting the discontinued operation. 1

10

(b) On 1 October 2011, it is necessary to compare the carrying amount of the business component ($40 million) with its fair value less costs to sell ($28 million). Since fair value less costs to sell is lower, the business component is written down to $28 million, resulting in a loss of $12 million. 1

This loss of $12 million is regarded as an impairment loss that is treated in accordance with IAS 36 Impairment of Assets.

The impairment loss is first allocated to the goodwill, leaving a nil balance. 1

The balance of the impairment loss of $2 million ($12 million $10 million) is allocated to property, plant and equipment, leaving a balance of $23 million ($25 million $2 million). 1

Because the property, plant and equipment is part of a disposal group that is classified as held for sale, it is not subjected to further depreciation after 1 October 2011. 1

By 31 March 2012 the estimated disposal proceeds of the business had increased to $31 million. This means that part of the impairment loss has reversed.

The reversal of an impairment loss on goodwill is not permitted. Its carrying amount remains at nil. 1

However, a reversal of $2 million can be recognised on the property, plant and equipment at 31 March 2012, restoring its carrying amount to $25 million. 1

The business component is a discontinued operation because it is a component of Delta that has been classified as held for sale by 31 March 2012. 1

Therefore Delta will disclose a single amount on the face of the statement of comprehensive income.

This amount will comprise the profit after tax of $3 million and the net amount recognised as an impairment loss of $10 million ($12 million $2 million). 1

10

20

4 (a) Statement of comprehensive income

$000Operating lease rental (260) BelowAmortisation of asset leased on finance lease (225) BelowFinance cost relating to finance leases (2484) Below

Statement of financial positionProperty, plant and equipment 4,275 BelowPrepaid operating lease rentals:In non-current assets 1,080 BelowIn current assets 60 BelowLease liability:In non-current liabilities (2,5921) BelowIn current liabilities (563) Below

Explanation and supporting calculations

Separate decisions are made for the land and buildings elements of the lease.

The land lease is an operating lease because land has an indefinite useful economic life and the lease term is 20 years.

The lease premium and annual rentals are apportioned 40% (3/75) to the land element.

16

MarksTherefore the premium for the land element is $12 million ($3 million X 40%) and the annualrentals for the land element $200,000 ($500,000 X 40%). This makes the total lease payments $52 million ($12 million + 20 X $200,000). 1

The rental expense for the current period is $260,000 ($52 million X 1/20).

The amount paid in the current period re: the land element is $14 million ($12 million +$200,000). Therefore there is a prepayment of $1,140,000 ($14 million $260,000) at the year end. 1

In the next 19 periods, the rental expense will be $260,000 and the rental payment will be$200,000. Therefore $60,000 of the rental prepayment will reverse in each period. This means that $60,000 of the prepayment will be a current asset, and the balance a non-current asset. 1

The buildings element of the lease will be a finance lease because the lease term is for substantially all of the useful life of the buildings.

The premium apportioned to the buildings element is $18 million ($3 million X 60%) and the annual rental apportioned to the buildings is $300,000 ($500,000 X 60%).

The initial carrying value of the leased asset in PPE is $45 million ($18 million + $300,000 X 9). 1

Therefore the annual depreciation charge is $225,000 ($45 million X 1/20) and the closing PPE ($45 million $225,000). 1

The finance cost in respect of the finance lease and the closing non-current liability is shown in the working below. 2

The closing current liability is $56,300 ($2,648,400 $2,592,100). 1

11

Working lease liability profile

Year ended 31 March Bal b/f Interest (92% of bal b/f) Rental Bal c/f$000 $000 $000 $000

2012 *2,700 2484 (300) 2,64842013 2,6484 2437 (300) 2,5921

* = Net of lease premium of $18 million ($45 million $18 million = $27 million).

(b) Year ended 31 March 2011

$000Statement of comprehensive income in other comprehensive incomeGain on revaluation of effective hedging instrument 100 BelowStatement of financial positionIn current assets derivative financial instrument 100 Below

Year ended 31 March 2012

Statement of comprehensive income profit and lossDepreciation of property, plant and equipment (165) BelowStatement of comprehensive income in other comprehensive incomeGain on revaluation of effective hedging instrument 50 BelowReclassification of gain on effective hedging instrument (150)Statement of financial positionProperty, plant and equipment 935 Below

Explanation and supporting calculations year ended 31 March 2011

The property, plant and equipment is not recognised in the year ended 31 March 2011 because the contract to purchase is an executory one. 1

At 31 March 2011 the derivative will be shown on the statement of financial position under current assets at its fair value of $100,000. 1

The derivative has a nil cost so a gain in fair value of $100,000 will be reported in the statementof comprehensive income. Because the derivative is designated as a hedging instrument this will be taken to other comprehensive income rather than profit or loss. + 1

Explanation and supporting calculations year ended 31 March 2012

Between 1 April 2011 and 30 June 2011 a further gain on revaluation of the derivative of $50,000 ($150,000 $100,000) will be recognised in other comprehensive income. 1

17

MarksOn 30 June 2011 the machine will be recognised in property, plant and equipment at cost. The initial amount recognised will be $1,250,000 (2 million/16). 1

The financial asset will be removed from the statement of financial position of Omega when the contract is settled on 30 June.

The gain of $150,000 in other comprehensive income must be recognised in profit and loss as the cost of purchasing the property, plant and equipment is recognised in profit and loss principle. 1

This is either done by adjusting the carrying value of the asset at the date of recognition or by reclassifying the gain gradually as the property, plant and equipment is depreciated principle.

Assuming the former depreciation for the current period is $165,000 (($1,250,000 $150,000) X 1/5 X 9/12). 1

Assuming the former the closing balance in property, plant and equipment is $935,000 ($1,250,000 $150,000 $165,000).

9

20

18