Diploma in International Financial ReportingThursday 9 December
2010
Time allowed Reading and planning: Writing:
15 minutes 3 hours
This paper is divided into two sections: Section A This ONE
question is compulsory and MUST be attempted Section B THREE
questions ONLY to be attempted Do NOT open this paper until
instructed by the supervisor. During reading and planning time only
the question paper may be annotated. You must NOT write in your
answer booklet until instructed by the supervisor. This question
paper must not be removed from the examination hall.
The Association of Chartered Certied Accountants
Dip IFR
3
Epsilon is a listed entity. You are the nancial controller of
the entity and its consolidated nancial statements for the year
ended 30 September 2010 are being prepared. Your assistant, who has
prepared the rst draft of the statements, is unsure about the
correct treatment of a number of transactions and has asked for
your advice. Details of the transactions are given below:
Transaction (a) On 1 October 2009 Epsilon issued 5 million loan
notes that had a value of $1 per note. The issue costs were 3 cents
per note. Each note holder will receive interest of 5 cents per
note on 30 September of each year starting on 30 September 2010.
The loan notes are repayable on 30 September 2019 at $120 per note.
As an alternative to repayment the loan note holders can elect to
exchange their notes for shares in Epsilon. On 1 October 2009 the
credit rating of Epsilon was such that it would have had to offer
investors in non-convertible loan notes a rate of return of 9% per
annum on any investment. The impact of issue costs would increase
the effective interest rate on such loan notes to 945%. The
following information regarding discount rates may be relevant:
Discount rate 5% 9% Present value of $1 receivable at the end of
year 10 61 cents 42 cents Cumulative present value of $1 receivable
at the end of years 110 $772 $642 (6 marks) Transaction (b) On 1
October 2009 Epsilon began to lease a property which it intended to
use as ofce space. The lease was for a 10-year period at the end of
which the property had to be returned to the lessor in its original
condition. The lease rentals were set at $800,000 per annum,
payable in arrears on 30 September each year. However, as an
inducement to persuade Epsilon to sign the leasing contract the
lessor paid Epsilon $1 million on 1 October 2009. Shortly after
beginning to use the property Epsilon began work in altering the
internal design of the property to more adequately suit its
purposes. This work was completed on 31 March 2010 at a total cost
of $12 million. It is estimated that it will cost Epsilon $600,000
to restore the property to its original condition on 30 September
2019. An appropriate risk adjusted discount rate is 10% per annum.
The present value of $1 payable in 9 years time at an annual
discount rate of 10% is approximately 404 cents. (11 marks)
Transaction (c) On 1 October 2003 Epsilon had purchased an equity
investment in a listed entity. Epsilon purchased 1 million shares
at the then quoted price of $2 per share. This shareholding does
not allow Epsilon to exercise control or signicant inuence over the
listed entity. Epsilon intended to keep the shares for their growth
potential rather than treat them as part of a trading portfolio.
All the shares were still held by Epsilon on 30 September 2009 and
at that date their quoted price was $320 per share. On 30 June 2010
Epsilon sold 600,000 of the shares for $360 per share. On 30
September 2010 the quoted price of the shares was $350 per share.
(8 marks) Required: For each transaction prepare extracts from the
nancial statements for the year ended 30 September 2010. Your
extracts should be supported by appropriate explanations. Note: The
mark allocation is shown against each of the three transactions
above. (25 marks)
6
This is a blank page. Question 4 begins on page 8.
7
[P.T.O.
4
(a) IAS 33 Earnings per share requires certain entities to
disclose information about earnings per share (EPS) in their
nancial statements. Required: Describe: (i) (ii) (iii) (iv) Those
entities to which IAS 33 applies; The way in which EPS (both basic
and diluted) should be computed in outline ONLY; The numerical
disclosure requirements regarding EPS for entities that have no
discontinued operations; The additional numerical disclosure
requirements regarding EPS for entities that report discontinued
operations. (7 marks)
(b) Kappa is a listed entity that made a prot after tax of $35
million for the year ended 30 September 2010. There were no
discontinued operations. At 1 October 2009 Kappa had 70 million
ordinary shares and 30 million preferred shares in issue. The
preferred shares were correctly presented in equity within the
statement of nancial position. In the year ended 30 September 2010
Kappa declared and paid a dividend of 12 cents per share to the
ordinary shareholders and 6 cents per share to the preferred
shareholders. On 31 December 2009 Kappa made a fully subscribed
rights issue of two ordinary shares for every seven held at $135
per share. The fair value of an ordinary share at 31 December 2009
was $180. Throughout the nancial year Kappa had 20 million
convertible loan notes on which interest of 5 cents per note was
payable annually in arrears. The carrying value of the liability
element of the loan note at 1 October 2009 was $23 million and the
effective rate of interest was 7%. The rate of income tax in the
jurisdiction in which Kappa operates is 20% and the nance cost that
is charged in the statement of comprehensive income is subject to
income tax at that rate. The notes are convertible into ordinary
shares from 1 October 2011 at the option of the note-holder. The
conversion terms are one ordinary share for every loan note held.
Required: Compute the basic and diluted EPS of Kappa for the year
ended 30 September 2010. (8 marks)
(c) In recent years it has become increasingly common for
entities to issue equity instruments in exchange for goods and
services. Such transactions are collectively referred to as equity
settled share based payments. Required: Explain: (i) When equity
settled share based payments should be recognised in nancial
statements; (ii) How equity settled share based payments should be
measured (distinguishing between payments to employees and payments
to other parties); (iii) Where in the statement of comprehensive
income and statement of nancial position equity settled share based
payments should be reported. (5 marks)
8
(d) On 1 October 2008 Kappa granted share options to 500 sales
staff. The entitlement of each member of staff depended on the
achievement of overall sales targets in the three-year period to 30
September 2011. Details are as follows: Cumulative sales less than
$100 million: 100 options each. Cumulative sales between $100
million and $150 million: 150 options each. Cumulative sales more
than $150 million: 200 options each.
The options had a fair value of $120 per option on 1 October
2008. This had increased to $130 per option by 30 September 2009
and by 30 September 2010 the fair value of an option was $135 per
option. When the options were granted and at 30 September 2009
management estimated that total sales in the three-year period
would be $130 million. However, following a very good year in the
year to 30 September 2010 that estimate was revised to $160
million. Required: Compute the charge to the statement of
comprehensive income for the year ended 30 September 2010 in
respect of the above arrangement and the amount included in the
statement of nancial position at 30 September 2010. (5 marks) (25
marks)
9
[P.T.O.
5
(a) Omega is an entity with a number of subsidiaries. The year
end of the entity is 30 September. On 1 January 2008 Omega acquired
an 80% interest in Friendly. Details of the acquisition were as
follows: Omega acquired 800,000 shares in Friendly by issuing two
equity shares for every ve acquired. The fair value of an Omega
share on 1 January 2008 was $4 and the fair value of a Friendly
share $140. The costs of issue were 5 cents per share. Omega
incurred further legal and professional costs of $100,000 that
directly related to the acquisition. The fair values of the
identiable net assets of Friendly at 1 January 2008 were measured
at $13 million.
Omega initially measured the non-controlling interest in
Friendly at fair value. They used the market value of a Friendly
share for this purpose. No impairment of goodwill arising on the
acquisition of Friendly was required at 30 September 2008 or 2009.
Friendly comprises three cash generating units A, B and C. When
Friendly was acquired the directors of Omega estimated that the
goodwill arising on acquisition could reasonably be allocated to
units A:B:C on a 2:2:1 basis. The carrying values of the assets in
these cash generating units and their recoverable amounts are as
follows: Unit Carrying value (before goodwill allocation) $000 600
550 450 Recoverable amount $000 740 650 400
A B C Required: (i)
Compute the carrying value of the goodwill arising on
acquisition of Friendly in the consolidated statement of nancial
position of Omega at 30 September 2010 following the impairment
review.
(ii) Compute the total impairment loss arising as a result of
the impairment review, identifying how much of this loss would be
allocated to the non-controlling interests in Friendly. (11 marks)
(b) During the year ended 30 September 2010 Omega acquired a
subsidiary, Newsub, that was located in a jurisdiction that allows
individual entities to use either local accounting standards or
international nancial reporting standards (IFRS). In previous
periods Newsub has prepared nancial statements under local
accounting standards. Having become part of the Omega group the
directors of Newsub have decided to prepare the individual nancial
statements of that company using IFRS for the year ended 30
September 2010. The directors of Newsub are aware that there is a
set procedure under IFRS for entities that adopt IFRS having
previously used local accounting standards but they are unaware of
the details. Required: Explain the procedure that will need to be
adopted by Newsub in preparing its nancial statements under IFRS
for the year ended 30 September 2010 given that previous nancial
statements were prepared under local accounting standards. You do
NOT need to describe any exceptions to the normal procedure in
detail but referring to them in general terms will gain you credit.
(6 marks) (c) On 1 October 2009 Omega sold a property it owned for
$90 million and leased it back on a 10-year operating lease for
rentals of $8 million per annum, payable on 30 September in
arrears. The carrying value of the property in the nancial
statements of Omega at 1 October was $55 million and its market
value on that date was $70 million. Required: Compute the amounts
that will be shown in the statement of comprehensive income for the
year ended 30 September 2010 and in the statement of nancial
position at 30 September 2010 in respect of the sale and leaseback.
(5 marks)
10
(d) During the year ended 30 September 2010 Omega sold a machine
to a customer that proved to have a design fault. The customer has
returned the machine to Omega and demanded repayment of the
purchase price of $5 million plus compensation for lost sales of
$500,000. It is highly likely that Omega will make this payment in
January 2011. The directors of Omega consider it probable that the
$48 million of the above amount can be recovered from the original
manufacturer of the machine and this amount could reasonably be
expected to be received in March 2011. Required: Explain how both
the claim and the counter-claim will be treated in the nancial
statements of Omega for the year ended 30 September 2010. (3 marks)
(25 marks)
End of Question Paper
11
Answers
Explanation and calculations The lease of the property would be
regarded as an operating lease because a 10-year lease would not be
long enough to transfer the risks and rewards of ownership to
Epsilon. Therefore the lease rentals will be charged as an expense
in the income statement over the lease term, normally on a
straight-line basis. Under the principles of SIC 15 Operating
leases incentives the inducement will be recognised over the lease
term, effectively as a reduced rental. Therefore the annual rental
expense will be 700 (1/10(800 x 10 1,000)). This will be charged in
the statement of comprehensive income in arriving at the prot for
the period. Epsilon has received net cash of 200 (1,000 800) from
the lessor during the year and so there will be a closing payable
of 900 (700 + 200) at the year end. This will be reduced by 100
(800 700) per annum over the remaining nine year term of the lease.
Therefore 100 of this payable will be a current liability and 800
(900 100) will be non-current. Tutorial note Alternatively the 900
closing payable could be taken to be 9/10 of the inducement of
1,000 that, under the principles of IAS 17, needs to be recognised
over the lease term. The costs of altering the property give
Epsilon access to economic benets over the remaining 9 years of the
lease and should be capitalised as property, plant and equipment.
Additionally, under the principles of IAS 37 Provisions, contingent
liabilities and contingent assets Epsilon has an obligation to
restore the property that needs to be recognised as a provision.
Given the signing of the lease agreement the obligating event is
the completion of the alterations. This provision should be
appropriately discounted to 242 (600 x $0404) to reect the time
value of money. Because the provision has been measured on a
discounted basis unwinding of the discount needs to be accounted
for by debiting nance costs in the statement of comprehensive
income and crediting the provision in the statement of nancial
position. The relevant amount for the current year is 12 (242 x 10%
x 6/12). Therefore the closing provision will be 254 (242 +12). The
debit entry for initial recognition of the provision is to
property, plant and equipment because it represents a further cost
of access to the economic benets available from the property.
Therefore the total amount that will be taken to property, plant
and equipment is 1,442 (1,200 + 242). This amount will be
depreciated over the useful economic life of 9 years to give a
charge to the income statement (as an operating cost) in the
current year of 76 (1,442 x /9). The closing balance on PPE will
therefore be 1,366 (1,442 76). Transaction (c) Extract from nancial
statements Statement of comprehensive income Gain on sale of shares
of 960 in prot and loss section. Unrealised gain of 120 on
re-measurement of shares held at the year end in other
comprehensive income. The previously unrealised gain of 720
realised on the sale of shares reclassied out of other
comprehensive income as part of the gain on sale of shares of 960
(see above). Statement of nancial position Financial asset
(probably non-current) of 1,400. Valuation surplus relating to the
remaining investment of 600 as a component of equity. Explanation
and calculations The shares would be regarded as nancial assets
under the principles of IAS 39 Financial instruments: recognition
and measurement. They would be classied as available for sale
nancial assets as they are not part of a trading portfolio.
Available for sale nancial assets are measured at fair value, with
gains or losses on re-measurement recognised as other comprehensive
income until the shares are sold. Therefore a gain of 1,200 (1,000
x ($320 $200) will have been recognised in other comprehensive
income in prior periods. In the current period 720 (1,200 x
600/1,000) of this gain becomes realised when the shares are sold.
IAS 39 requires that in such circumstances the realised gain is
reclassied as part of the prot on sale of the shares, which will be
960 (600 ($360 $320) + 720). The unsold shares will remain in the
statement of nancial position as nancial assets (probably
non-current) at their fair value of 1,400 (400 x $350). A gain on
re-measurement of 120 (400 x ($350 $320) will be recognised as
other comprehensive income in the statement of comprehensive income
for the year. The closing balance in other components of equity
relating to the investment will be 600 (400 x ($350 $200)).
4
(a)
IAS 33 applies to entities whose ordinary shares or potential
ordinary shares are traded in a public market (a potential ordinary
share is a nancial instrument that gives the holder a right to
acquire ordinary shares). Other entities who voluntarily disclose
earnings per share (EPS) information must do so in accordance with
the requirements of IAS 33. For entities that have no discontinued
operations IAS 33 requires disclosure of basic and diluted EPS on
the face of the statements of comprehensive income or (where
separately presented) the income statement. The basic EPS of an
entity is the prot attributable to the ordinary shareholders (or,
in the case of a group, the ordinary shareholders of the parent)
divided by the weighted average number of ordinary shares in issue
in the period. The diluted EPS is a hypothetical measure of EPS
that adjusts the basic EPS measure for the potential effects on
earnings and number of shares for the effects of all dilutive
potential ordinary shares.
20
For entities that have discontinued operations IAS 33 requires
disclosure of the EPS for total prots, and for prots on continuing
operations, on the face of the statement of comprehensive income
(or income statement, if separately presented). The EPS for
discontinued operations also needs to be disclosed, but entities
are permitted to make this disclosure in the notes to the nancial
statements if they wish. (b) 1. 2. 3. 4. 5. 6. 7. Computation of
earnings for EPS purposes 35,000 (30,000 x 6%) = 33,200.
Computation of theoretical ex-rights fair value and adjustment
factor (7 x $180 + 2 x $135) x 1/9 = $170. So adjustment factor is
180/170 Computation of weighted average number of shares in issue
(70,000 x 3/12 x 180/170) + (90,000 x 9/12) = 86,029 Compute basic
EPS 33,200/86,029 = 386 cents Compute earnings for diluted EPS
33,200 + ((23,000 x 7%) x 80%) = 34,488 Compute number for diluted
EPS 86,029 + 20,000 = 106,029 Compute diluted EPS 34,488/106,029 =
325 cents
(c)
Equity settled share based payments should be recognised from
the grant date. This is the date when the entity confers on the
other party the right to equity instruments, dependent in some
cases on vesting conditions. If there are no vesting conditions,
the whole amount should be recognised immediately. If there are
vesting conditions, the amount should be recognised on a systematic
basis over the vesting period. The payments should be measured at
fair value. In this context fair value means the fair value of the
equity instruments granted in the case of transactions with
employees. In the case of transactions with other parties fair
value means the fair value of the goods and services received. The
amount recognised in each period should be debited to the statement
of comprehensive income as an operating cost (unless it qualies for
inclusion in the cost of another asset, e.g. inventory). The credit
entry is to equity. IFRS does not specify which component.
(d)
The cumulative amount recognised at 30 September 2010 is 500 x
200 x $120 x 2/3 = $80,000. This is shown in the statement of
nancial position as part of equity. The cumulative amount
recognised at 30 September 2009 is 500 x 150 x $120 x 1/3 =
$30,000. So the amount recognised in the statement of comprehensive
income for the year is $50,000 ($80,000 $30,000).
Marks 5 (a) 1. Computation of goodwill on acquisition Cost of
investment (800,000 x 2/5 x $4) Fair value of non-controlling
interest (200,000 x $14) Fair value of identiable net assets at
date of acquisition So goodwill equals 1,280 280 (1,300) 260 1
1
NB: Acquisition costs are not included as part of the fair value
of the consideration given under IFRS 3 2. Calculation of
impairment loss Unit Before allocation 600 550 400* Carrying value
Allocation 104 104 52 After allocation 704 654 452 Recoverable
amount Impairment loss
1
A B C
740 650 400
Nil 4 52
1 1 1
* After writing down assets in the individual CGU to recoverable
amount
21
Marks 3. Calculation of closing goodwill Goodwill arising on
acquisition (W1) Impairment loss (W2) So closing goodwill equals 4.
Calculation of overall impairment loss Arising on goodwill (W3)
Arising on assets in unit C (450 400) So total loss equals 260 (56)
204 56 50 106
212 (20%) of the above is allocated to the NCI with the balance
allocated to the shareholders of Omega
1 11
(b)
The nancial statements of Newsub for the year ended 30 September
2010 need to be prepared under international nancial reporting
standards (IFRS) that are effective at the reporting date 30
September 2010. This applies to the nancial statements for the
current period as well as the comparative information. The
comparative information will have been presented under local
accounting standards in previous years and so it will need to be
restated. Given the need to present a comparative statement of
changes in equity Newsub will need to compute the equity under IFRS
at 1 October 2008. Therefore Newsub will need a statement of
nancial position under IFRS at that date. This is referred to in
IFRS 1 First time adoption of IFRS as the opening IFRS statement of
nancial position. The opening IFRS statement of nancial position
will need to be prepared under IFRS that are in force on 30
September 2010, the reporting date. Subject to certain specic
exemptions that are given for practical reasons, this principle
needs to be applied fully retrospectively to assets and liabilities
of Newsub at 1 October 2008. In the rst IFRS nancial statements
IFRS 1 requires a reconciliation of amounts that were presented
under local accounting standards in previous periods to the amounts
presented as comparatives under IFRS in the current period. This
means that there will need to be a reconciliation of: The
comprehensive income for the year ended 30 September 2009. The
equity at 1 October 2008 and 30 September 2009.
(c)
Since the lease is an operating lease the property will be
removed from the nancial statements. A prot on sale of $15 million
($70 million $55 million) will be shown as other income in the
statement of comprehensive income. The rental expense of $8 million
will be shown as an operating cost in the statement of
comprehensive income. The difference of $20 million between the
disposal proceeds ($90 million) and the market value of the asset
($70 million) will be shown as deferred income and released to the
statement of comprehensive income over the lease term of 10 years.
Therefore $2 million ($20 million x 1/10) will be credited to the
statement of comprehensive income in the year ended 30 September
2010, probably as a reduction in operating costs. The remaining
deferred income balance of $18 million ($20 million $2 million)
will be included as a liability in the statement of nancial
position. $2 million of this will be a current liability and $16
million ($18 million $2 million) will be non-current.
(d)
The international nancial reporting standard that is relevant to
this issue is IAS 37 Provisions, contingent liabilities and
contingent assets. The amount payable to the customer of $55
million should be recognised as a provision in the statement of
nancial position. The obligating event is the sale of goods under
the warranty. There is a probable outow of economic benets that can
be reliably estimated. The amount potentially recoverable from the
manufacturer is a contingent asset which should not be recognised
in the nancial statements unless the recovery is virtually certain.
Where (as in this case) the recovery is probable the contingent
asset should be disclosed in the notes to the nancial
statements.
22
Diploma in International Financial Reporting
December 2010 Marking Scheme Marks 25
1
Marks as annotated on model answer NB if proportional
consolidation NOT used for Gamma only give a maximum of 2 of the 3
marks highlighted in bold on the answer
2
Marks as annotated on model answer
25
3
(a)
Principle liability/equity split Calculate split Correct
treatment of issue costs up to Compute nance cost and say where
shown Compute closing liability and say where shown Compute closing
equity balance and say where shown Total
1 1 1 1 1 6 1 1 1 1 1 1 1 1 1 11 1 1 1 1 1 1 1 1 8
(b)
Correctly conclude operating lease Principle rental expense in
SCI Principle of correct treatment of inducement Calculate rental
expense for year Calculate accrued rental expense and split
Principle capitalise costs of $1.2m Principle make provision (with
explanation) Calculate unwinding of discount Unwinding of discount
is nance cost and provision is non-current liability Principle
capitalise future restoration costs Compute depreciation Compute
closing PPE value and state non-current asset Total
(c)
Principle shares a nancial asset Correct classication as AFS
Explain measurement implications including reclassication on sale
Compute unrealised gain arising in prior periods Compute total gain
on sale and state where shown Identify reclassied gain and describe
treatment in OCI Compute additional gain on remaining shares and
describe treatment Compute and describe carrying value of shares in
SFP Total
23
4
(a)
Comment on scope up to Describe calculation of basic EPS up to
Describe calculation of diluted EPS up to Disclosures for entities
without discontinued operations Additional disclosures for entities
with discontinued operations up to Total
Marks 1 1 1 1 1 7 1 3 1 1 8 2 1 1 5 1 2 1 5
(b)
Compute earnings for basic EPS up to Compute number for basic
EPS up to So compute basic EPS in cents Compute earnings for
diluted EPS Compute number for diluted EPS So compute diluted EPS
in cents Total
(c)
Recognition criteria up to Measurement basis up to Reporting
requirements up to Total
(d)
Principle charge in SCI is difference between closing and
opening amounts in SFP Compute closing amount ( per element)
Compute opening amount ( for $120, for 150, for 1/3) Calculate
amount in SCI Total
5
(a) (b)
Marks as annotated on model answer All amounts need to be
measured using IFRS in force at reporting date Principle of opening
IFRS SFP with identied date up to Appreciate application fully
retrospectively with principle of exceptions Explain
reconciliations needed Total
11 1 2 1 1 6 1 1 1 1 5 1 1 3
(c)
Principle de-recognise property Compute correct prot on sale and
discuss treatment $8 million shown as rental expense Principle $20
million is deferred income in SFP Split into current and
non-current amounts Total
(d)
Explanation of provision Explanation of contingent asset
Total
24
Diploma in International Financial ReportingThursday 10 June
2010
Time allowed Reading and planning: Writing:
15 minutes 3 hours
This paper is divided into two sections: Section A This ONE
question is compulsory and MUST be attempted Section B THREE
questions ONLY to be attempted Do NOT open this paper until
instructed by the supervisor. During reading and planning time only
the question paper may be annotated. You must NOT write in your
answer booklet until instructed by the supervisor. This question
paper must not be removed from the examination hall.
The Association of Chartered Certied Accountants
Dip IFR
3
Epsilon is a listed entity preparing nancial statements to 31
March each year. Details of the following complex transactions that
have occurred in recent periods appear below: (a) On 1 April 2007
Lambda, another entity, issued 200,000 bonds that had a nominal
value of $100 per bond. The bonds were issued at $90 per bond and
were redeemable at nominal value on 31 March 2012. Epsilon
purchased all 200,000 of these bonds and intended to hold them to
their maturity date. Annual interest payments of $6 per bond were
due on 31 March in arrears. The effective annual rate of interest
inherent in the bonds was 85%. Lambda paid the interest due on 31
March 2008 and 31 March 2009 in full. On 31 March 2009 it became
apparent that Lambda was in nancial difculty and would be unable to
make all the repayments due on the loan. An agreement was reached
whereby Lambda would make reduced interest payments of $2 per bond
on 31 March 2010, 2011 and 2012 and would then redeem the bonds at
nominal value on 31 March 2012. On 31 March 2009 Epsilon would have
required an annual effective return of 75% on new investments of
this nature. The reduced interest of $2 per bond was received by
Epsilon on 31 March 2010. On 31 March 2010 there was every
expectation that the revised future repayment terms would be
adhered to by Lambda. Epsilon does not wish to measure nancial
instruments at fair value unless this is required by International
Financial Reporting Standards. Relevant discount factors are as
follows: Present value of $1 receivable in: 1 year 2 years 3 years
Required: Produce relevant extracts that show how the bond
investment would be reported in the statement of nancial position
of Epsilon at 31 March 2008, 2009 and 2010 and in the statement of
comprehensive income for the years ended 31 March 2008, 2009 and
2010. Provide any explanations you consider relevant. (12 marks)
(b) On 1 April 2009 Epsilon began to lease an ofce building on a
10-year operating lease. For the rst ve years of the lease the
annual lease rentals were set at $400,000, payable in advance. For
the second ve years this annual rental is to increase to $450,000,
payable in advance. On 1 April 2009 Epsilon carried out some
alterations to the property involving the erection of temporary
partitions to create suitable ofce space. The total cost of the
alterations was $600,000. Under the terms of the lease the building
had to be returned to the owner in its original condition. The
estimated cost of removing the partitions at the end of the lease
term is $300,000. A relevant risk adjusted discount rate is 5% per
annum. The present value of $1 payable in 10 years at a discount
rate of 5% is 614 cents. Required: Produce relevant extracts that
show how this transaction would be reported in the statement of
nancial position of Epsilon at 31 March 2010 and in the statement
of comprehensive income for the year ended 31 March 2010. Provide
any explanations you consider relevant. (9 marks) 75% 930 cents 865
cents 805 cents 85% 922 cents 849 cents 783 cents
6
(c) On 1 October 2009 Epsilon ordered a quantity of inventory
from a customer whose functional currency was the Euro. The agreed
purchase price was 200,000 Euros. The inventory was delivered on 1
December 2009 and paid for on 31 January 2010. Half the inventory
was sold prior to 31 March 2010. Relevant exchange rates are as
follows ($s to 1 Euro): 1 October 2009 120 1 December 2009 125 31
January 2010 130 31 March 2010 135. Epsilon made no attempt to
hedge the exchange risk arising out of the purchase of inventory
denominated in Euros. Required: Produce relevant extracts that show
how this transaction would be reported in the statement of nancial
position of Epsilon at 31 March 2010 and in the statement of
comprehensive income for the year ended 31 March 2010. Provide any
explanations you consider relevant. (4 marks) (25 marks)
7
[P.T.O.
4
(a) Revenue is usually one of the largest numbers that appears
in the nancial statements of an entity. Therefore it is important
to ensure that revenue is recognised and measured appropriately.
IAS 18 Revenue was issued in order to provide standard accounting
practice in this area. Required: (i) Describe the meaning of
revenue and the basis on which it should be measured under the
principles of IAS 18; (3 marks)
(ii) Outline the criteria that need to be satised before revenue
can be recognised under the principles of IAS 18. You should
consider revenue from the sale of goods and from the rendering of
services separately. (5 marks) (b) Kappa is an entity that prepares
nancial statements to 31 March each year. During the year ended 31
March 2010 the following transactions occurred: (i) On 29 March
2010 Kappa delivered two machines to a customer. Details relating
to the machines are as follows: Machine A B Construction cost $
190,000 200,000 Invoiced price $ 250,000 300,000
Machine A was unpacked and connected to the power supply
necessary to operate the machine on 2 April 2010. As soon as this
was done, the machine was able to operate immediately. Machine B
needed to be installed by an expert tter before it was capable of
operating in the intended manner. The installation process was
complete, and the machine passed ready for use, on 4 April 2010.
The customer paid for both machines on 30 April 2010. (5 marks)
(ii) On 15 March 2010 Kappa transferred goods to a third party,
Omicron, on a consignment basis. Omicron undertook to sell the
goods on behalf of Kappa and remit the proceeds, less a commission
of 10%, when the nal purchaser paid Omicron for them. The invoiced
value of these goods (the price payable by the nal purchaser was
$400,000). The goods cost Kappa $320,000 to manufacture. By 31
March 2010 Omicron had sold goods at an invoiced price of $240,000
and received payments of $160,000. No payment had been made to
Kappa by Omicron by 31 March 2010. Since 31 March 2010 Omicron has
sold the remaining goods, received all the proceeds, and remitted
$360,000 ($400,000 x 90%) to Kappa. (5 marks) (iii) On 1 April 2009
Kappa sold a property it owned to a bank for $3,000,000. The
carrying value of the property at 1 April 2009 was $2,000,000, of
which $1,200,000 was depreciable. The remaining useful economic
life of the depreciable element was 30 years from 1 April 2009.
Kappa continued to occupy the property and be responsible for its
security and maintenance. The market value of the property on 1
April 2009 was $5,000,000 and it is considered unlikely that this
will fall signicantly in the foreseeable future. Kappa measures all
its property, plant and equipment under the cost model. The terms
of the sale allowed Kappa the option to repurchase the property as
follows: On 31 March 2010 for $3,300,000. On 31 March 2011 for
$3,630,000. On 31 March 2012 for $3,993,000.
(7 marks)
8
Required: For each of the above transactions: Explain and
compute, by applying the principles of IAS 18, how much revenue
should be recognised in the statement of comprehensive income for
the year ended 31 March 2010. Identify and compute any other
amounts relating to each transaction that will be included in the
statement of comprehensive income for the year ended 31 March 2010
and the statement of nancial position at 31 March 2010. (25
marks)
9
[P.T.O.
5
Omega prepares nancial statements under International Financial
Reporting Standards (IFRS). In the two-year period ended 31 March
2010 the following events occurred: (a) On 1 October 2008 Omega
began the construction of a new factory. Costs relating to the
factory were as follows: Details Purchase of land on which to build
the factory Cost of levelling the land prior to beginning
construction Cost of materials needed to construct the factory
(Note 1) Monthly employment costs of the construction staff (Note
1) Monthly amount of other overheads directly related to the
construction (Note 1) Payments to external advisors relating to the
construction Income from temporary use of part of the site as a car
park during the construction period. Costs of relocating staff to
work in the new factory Costs relating to the public opening of the
factory (Note 2) Amount $000 20,000 850 8,000 500 200 500 (250) 400
200
Note 1 In December 2008 a re destroyed materials costing
$500,000. The cost of these materials is included in the material
gure that is given above. Construction work was suspended for two
weeks because of the re. The construction workers continued to be
paid during this two-week period and other additional overheads of
$40,000 were incurred in this period. These related to keeping the
construction site secure during the temporary cessation of
construction. Note 2 Construction of the factory was completed on
28 February 2009 and the construction workers transferred to other
projects from that date. The factory was not available for use
until 31 March 2009, when the factory was inspected by local
government ofcials (as required by local legal regulations) and
certied as safe for use. The factory was not actually brought into
use until 31 May 2009, following a public opening ceremony. Note 3
The costs of construction were mainly nanced by a loan of $30
million that was arranged during September 2008. The effective
annual interest rate on the loan was 8%. The proceeds were invested
prior to being needed to nance the construction cost and in the
period ended 31 March 2009 the temporary investment produced income
of $300,000. Note 4 The depreciable element of the factory
comprises the building costs. The majority of these costs have an
estimated useful economic life of 40 years. However, the factory
roof will need to be replaced after 20 years. The estimated cost of
replacing the roof at current prices is $24 million. Note 5 Omega
computes its depreciation charge on a monthly basis and measures
property, plant and equipment using the cost model. Note 6 No
impairment of the factory had occurred by 31 March 2010. Required:
Compute the carrying value of the factory in the statement of
nancial position of Omega at 31 March 2010. You should support your
computations with appropriate explanations of the amount you have
included for the cost of the factory and for its subsequent
depreciation. (17 marks)
10
(b) On 31 December 2009 the directors of Omega decided to
dispose of two properties in different locations. Both properties
were actively marketed by the directors from 1 January 2010 and
sales are expected before the end of July 2010. Summary details of
the two properties are as follows: Property Carrying amount at 31
March 2009 $000 25,000 22,000 Depreciable amount at 31 March 2009
$000 15,000 16,000 Estimated future economic life at 31 March 2009
$000 30 years 40 years Estimated fair value less costs to sell at
31 December 2009 $000 28,000 18,000
A B
Property A was available for sale without modications from 1
January 2010 onwards. On 31 March 2010 the directors of Omega were
reasonably condent that a sale could be secured for $28 million.
However, after the year-end property prices in the area in which
property A is located started to decline. This was due to an
unexpected adverse local economic event in April 2010. Following
this event the directors of Omega estimated that property A would
now be sold for $22 million less selling costs and they are very
condent that this lower price can be achieved. Property B needed
repair work carried out on it before a sale could be completed.
This repair work was carried out in the two-week period beginning
10 April 2010. The costs of this repair work are reected in the
estimated fair value less costs to sell gure for property B of $18
million (see above). This estimate remains valid. Required:
Compute: The carrying values of both properties in the statement of
nancial position of Omega at 31 March 2010. The amounts charged to
the statement of comprehensive income in respect of both properties
for the year ended 31 March 2010.
You should support your computations with appropriate
explanations of the treatments you have adopted. (8 marks) (25
marks)
End of Question Paper
11
Answers
Transaction (b) Summary (all in 000s) Statement of comprehensive
income year ended 31 March 2010 Lease rental 425 Depreciation 78
(60 + 18) Finance cost 9 Statement of nancial position at 31 March
2010 Non-current assets 706 (540 + 166) Non-current liabilities 218
(25 + 193) Explanations The lease is an operating lease so the
rentals are charged as an expense in the statement of comprehensive
income. IAS 17 Leases states that this charge should be on a
straight-line basis unless another pattern is clearly more
appropriate. The total lease rentals are 4,250 (400 x 5 + 450 x 5).
Therefore the charge to the income statement each year will be 425
(4,250 x 1/10). Since the rental actually paid in the year to 31
March 2010 is 400 there will be an accrual of 25 (425 400) in the
statement of nancial position as at 31 March 2010. Even though the
lease is operating the lease improvements are capitalised as a
non-current asset with a useful economic life of 10 years. This
means that depreciation of 60 (600 x 1/10) will be required and the
closing non-current assets balance relating to the improvements at
31 March 2010 will be 540 (600 60). Under the principles of IAS 37
Provisions, contingent liabilities and contingent assets the
carrying out of alterations to the leased asset creates an
obligating event to restore the asset at the end of the lease and
so a provision must be recognised. The amount of the provision is
the present value of the expected future payments, which is 184
(300 x 0614). This expenditure provides access to future economic
benets so it is capitalised along with the alterations themselves.
This creates additional depreciation of 18 (184 x 1/10) and an
addition to non-current assets at 31 March 2010 of 166 (184 18). As
the date for restoration approaches the discount unwinds and this
is reected by a nance cost in the statement of comprehensive
income. For the year ended 31 March 2010 this cost is 9 (184 x 5%).
The closing provision will be 193 (184 + 9). Transaction (c)
Summary Statement of comprehensive income year ended 31 March 2010
Cost of sales $125,000 ($250,000 x 50%) Exchange loss on settlement
of trade payable $10,000. Statement of nancial position at 31 March
2010 Inventory $125,000. Explanations A liability to pay for the
goods arises on 1 December 2009 when they are delivered. On this
date $250,000 (200,000 x 125) is debited to inventory and credited
to trade payables. When the liability was settled 200,000 Euros
cost $260,000 (200,000 x 130) so an exchange loss of $10,000
($260,000 $250,000) is recognised in the statement of comprehensive
income. The inventory is a non-monetary asset and so is measured
using the rate of exchange in force when purchased. No exchange
difference arises.
4
(a)
(i)
IAS 18 denes revenue as the gross inow of economic benets in a
period arising in the course of the ordinary activities of an
entity when those inows result in an increase in equity, other than
increases relating to contributions from equity participants.
Revenue does not include amounts collected on behalf of third
parties, such as sales taxes. Revenue should be measured at the
fair value of the consideration received or receivable.
(ii)
Revenue from the sale of goods should be recognised when: (i)
(ii) (iii) (iv) (v) The entity has transferred to the buyer the
signicant risks and rewards of ownership of the goods. The entity
retains neither managerial involvement in, nor effective control
over, the goods sold. The amount of revenue can be measured
reliably. It is probable that the economic benets associated with
the transaction will ow to the entity. The costs incurred or to be
incurred in respect of the transaction can be measured
reliably.
Revenue from the rendering of services should be recognised
when: (i) (ii) (iii) (iv) The amount of revenue can be measured
reliably. It is probable that the economic benets associated with
the transaction will ow to the entity. The stage of completion of
the transaction at the end of the reporting period can be measured
reliably The costs incurred or to be incurred in respect of the
transaction can be measured reliably.
20
(b)
(i)
Where goods are subject to installation and inspection, revenue
is normally recognised only when installation and inspection are
complete. However, where the installation process is simple in
nature revenue is recognised immediately upon the buyer accepting
the goods. This means that revenue of $250,000 from the sale of
Machine A can be recognised in the year to March 2010, with
$250,000 being debited to trade receivables. The cost of
construction of the machine of $190,000 will be included in cost of
sales. However, revenue from the sale of Machine B cannot be
recognised until April 2010, when the installation process is
complete. Therefore, this machine will be included in inventory at
its construction cost of $200,000.
(ii)
Where goods are sold on consignment then the appendix to IAS 18
indicates that revenue should be recognised when the recipient
(Omicron in this case) sells the goods to a third party. The only
way this could be accelerated under the general principles of the
standard would be where the terms of the consignment clearly
transfer the risks and rewards of ownership of the consigned
inventory to Omicron on delivery, which is not the case here.
Therefore, only those goods sold by Omicron to the ultimate
purchaser prior to 31 March should be recognised as revenue. The
amount of revenue that should be recognised is the fair value of
the consideration payable by the nal purchaser, which in this case
is $240,000. The manufactured cost of the goods treated as sold
should be taken to cost of sales. This amount is $192,000 ($320,000
x ($240,000/$400,000)). The commission payable of $24,000 ($240,000
x 10%) should also be treated as part of cost of sales. $216,000
($240,000 $24,000) should be debited to trade receivables. The cost
of goods unsold by Omicron at 31 March 2010 of $128,000 ($320,000
$192,000) should be included in the inventory of Kappa at 31 March
2010.
(iii) For sale transactions with an option or commitment to
repurchase IAS 18 requires an analysis of the transaction to
ascertain whether, in substance, the seller has transferred the
risks and rewards of ownership to the buyer. If this transfer has
not occurred, the transaction is treated as a nancing arrangement
that does not give rise to revenue. In this case the terms of the
sale leave Kappa occupying the property, with responsibility for
its maintenance. Also it is highly likely that the option to
repurchase will be exercised either on 31 March 2011 or 2012.
Therefore, no revenue would be recognised and the sales proceeds
would be treated as a borrowing. This means that the asset would
remain an asset of Kappa and be subject to depreciation of $40,000
($1,200,000 x 1/30). The closing carrying value of the asset would
be $1,960,000 ($2,000,000 $40,000). The longer Kappa takes to
repurchase the property the higher the repurchase price. It can be
seen that this repurchase is increasing at 10% per annum compound
e.g. $3,300,000/$3,000,000 = 110. Therefore the borrowing is
treated as a nancial liability measured at amortised cost with an
effective annual interest rate of 10%. The nance cost for the year
ended 31 March 2010 would be $300,000 ($3,000,000 x 10%) and the
closing borrowing $3,300,000 ($3,000,000 + $300,000). This would be
shown as a liability.
21
Marks 5 (a) Computation of cost (all numbers in $000s) Details
Purchase of land Levelling of land Purchase of materials Costs of
construction workers Other construction overheads Consultants fees
Income from car park Relocation costs Costs of opening factory
Capitalised nance costs Total cost Amount 20,000 850 7,500 2,250
900 500 Nil Nil Nil 32,000 800 32,800 1 1 1 Explanation Direct cost
of construction Direct cost of construction Not including cost of
materials lost in re Construction period ve months, less idle two
weeks Construction period as above. Ignore overheads incurred after
construction complete Direct cost of construction Income from
operations incidental to the construction taken to the statement of
comprehensive income Not a direct cost of construction Not a direct
cost of construction Five and a half months interest on $30 million
at 8%, less temporary investment of surplus funds 2 1 1 11/2 11/2
11/2 1 11/2 1 1
Computation of depreciation charged to 31 March 2010 Depreciate
from 1 April 2009 (the date available for use) The depreciable
amount is 12,300 (32,000 20,000 + 800 x 12/32) The depreciation for
the year is 368 (2,400 x 1/20 + (12,300 2,400) x 1/40) Computation
of carrying value at 31 March 2010 Cost Depreciation Carrying value
Tutorial Note The need to replace the roof in 20 years time is
recognised through component depreciation rather than by
recognising a provision (b) (all numbers in $000s) Summary of
accounting treatments Statement of nancial position at 31 March
2010. Non-current assets 18,000 Current assets (or non-current
assets held for sale) 24,625. Statement of comprehensive income for
the year ended 31 March 2010 Depreciation 775 (375 + 400)
Impairment 3,600 (21,600 18,000) From 1 January 2010 property A
would be regarded as held for sale under the principles of IFRS 5
Non-current assets held for sale and discontinued operations. The
property is available for immediate sale in its present condition
and is being actively marketed at a reasonable price. On the other
hand property B would not, since it cannot be sold until necessary
repairs are carried out. Property A would be depreciated up to the
date of classication as held for sale but not thereafter.
Therefore, depreciation of 375 (15,000 x 1/30 x 9/12) would be
necessary in the year to 31 March 2010. The property would be
removed from non-current assets and shown in current assets or in a
separate section of the assets side of the statement of nancial
position. It would be measured at the lower of its carrying value
of the date of classication of 24,625 (25,000 375) and its fair
value less costs to sell of 28,000 24,625 in this case. The decline
in property prices affecting this property relates to an economic
event occurring after the reporting date. Therefore, it would be
regarded as a non-adjusting event after the reporting date. The
event would be disclosed as a note to the nancial statements but
the decline in value would not be recognised. Property B would be
depreciated for the whole period and would remain in non-current
assets. The depreciation required for the year ended 31 March 2010
would be 400 (16,000 x 1/40). The fact that its fair value less
costs to sell is estimated at $18 million whilst the carrying value
prior to any write down is 21,600 (22,000 400) is prima-facie
evidence of impairment. Given that the property is to be sold even
though it cannot be classied as held for sale at 31 March 2010 this
is the best indicator of the recoverable amount of the property.
32,800 (368) 32,432 1/ 1/ 2
2 17
22
Diploma in International Financial Reporting
June 2010 Marking Scheme Marks 25
1
Marks as indicated on answers
2
Marks as indicated on answers
25
3
(a)
Identify correct measurement basis Measure nancial asset and
related income up to 31 March 2009 pre-impairment Identify
impairment issue Principle measure PV of newly expected cash ows
Principle use 85% discount rate Marks for discounting calculations
Identify impairment loss and new carrying value Principle of 2010
measurement at amortised cost of 85% Marks for 2010 calculations
Total for part 3(a)
1 2 1 1 1 21/2 11/2 1 1 12 1 1 1 1 1 1 1 2 9 1 1 1 1 4
(b)
Principle rental expense in statement of comprehensive income
Compute charge for year Identify accrual as non-current liability
(only 1/2 if this not stated) Principle capitalise improvements and
depreciate Calculations re: above Principle recognise provision and
debit non-current assets Calculation of amount to capitalise
Compute depreciation and nance cost Total for part 3(b)
(c)
Principle account for transaction from 1 December 2009 Compute
opening carrying value of inventory and trade payables Compute
exchange loss on settlement of trade payable Compute closing
inventory balance and charge to cost of sales re: sold goods Total
for part 3(c)
23
4
(a)
(i)
Denition of revenue (gross, normal course of business, not
equity contributions) Identify measurement base as fair value (only
1/2 if they say invoiced price) Total for part (a)(i)
Marks 2 1 3 21/2 21/2 5 2 2 1 5 2 3 5 2 1 1 1 1 1 7
(ii)
Timing of recognition re: goods 1/2 each up to Timing of
recognition re: services 1/2 each up to Total for part (ii)
(b)
(i)
General principle of when revenue recognised Application to sale
of machine A Application to sale of machine B Total for part
(b)(i)
(ii)
General principle of when revenue recognised Application to sale
and computation of amount of revenue, cost of sales, trade
receivables and inventory Total for part (ii)
(iii) General principle of when revenue recognised Conclude no
revenue here Treatment of PPE Conclude proceeds of borrowing
Compute nance cost State closing liability Total for part (iii)
5
(a) (b)
Marks as indicated on answers Conclusions about classication as
held for sale 1 each Depreciation of property A Measurement and
disclosure of property A is statement of nancial position
Depreciation of property B Identify and discuss impairment issue
with property B Disclosure of property B in statement of nancial
position Total for event 2
17 2 1 2 1 1 1 8
24
Diploma in International Financial ReportingThursday 9 June
2011
Time allowed Reading and planning: Writing:
15 minutes 3 hours
ALL FOUR questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.
During reading and planning time only the question paper may be
annotated. You must NOT write in your answer booklet until
instructed by the supervisor. This question paper must not be
removed from the examination hall.
The Association of Chartered Certified Accountants
Dip IFR
This is a blank page. The question paper begins on page 3.
2
ALL FOUR questions are compulsory and MUST be attempted 1 The
income statements and summarised statements of changes in equity of
Alpha, Beta and Gamma for the year ended 31 March 2011 are given
below: Income Statements Alpha $000 470,000 (256,000) 214,000
(18,000) (19,000) 37,300 (68,000) 146,300 (41,000) 105,300 540,000
105,300 (52,000) 593,300 Beta $000 434,000 (218,000) 216,000
(17,000) (16,000) Nil (65,000) 118,000 (33,000) 85,000 390,000
85,000 (40,000) 435,000 Gamma $000 226,000 (176,000) 50,000
(15,000) (17,000) Nil (44,000) (26,000) Nil (26,000) 192,000
(26,000) Nil 166,000
Revenue Cost of sales Gross profit Distribution costs
Administrative expenses Investment income (Note 5) Finance cost
(Note 6) Profit/(loss) before tax Income tax expense Profit/(loss)
for the year Summarised Statements of Changes in Equity Balance at
1 April 2010 Comprehensive income for the year Dividends paid on 31
December 2010 Balance at 31 March 2011 Note 1 purchase of shares in
Beta
On 1 October 2009 Alpha purchased 75 million of the 100 million
equity shares in Beta. Details of the share purchase were as
follows: Alpha issued two new equity shares for every three shares
acquired in Beta. On 1 October 2009 the market value of an Alpha
share was $6 and the market value of a Beta share was $320. Alpha
agreed to make an additional cash payment of $1 for every share
acquired in Beta to be paid on 30 September 2011. This payment is
contingent on the profits of Beta exceeding a cumulative target in
the two-year period ending 30 September 2011. The fair value of
this contingent payment was $55 million on 1 October 2009. The fair
value had risen to $58 million by 31 March 2010 and to $64 million
by 31 March 2011. The directors of Alpha correctly accounted for
this contingent consideration in its financial statements for the
year ended 31 March 2010 but no changes have been made to the
carrying value of the contingent consideration since 31 March 2010.
Alpha incurred legal and professional costs of $5 million connected
with the acquisition; $24 million of these costs related to the
cost of issuing shares. Alpha correctly accounted for these
acquisition costs in its financial statements for the year ended 31
March 2010.
Alpha decided to value the non-controlling interest in Beta at
the date of acquisition at fair value in its consolidated financial
statements. The market value of a Beta share at that date was used
to calculate the fair value of the noncontrolling interest. The
equity of Beta as shown in its own financial statements at 1
October 2009 was $300 million. At that date the property, plant and
equipment (PPE) of Beta had a carrying value of $240 million and a
fair value of $280 million. The estimated future useful economic
life of the PPE of Beta was four years from 1 October 2009. No
disposals of PPE occurred between 1 October 2009 and 31 March 2011.
On 1 October 2009 the directors estimated that the internally
generated brand name of Beta had a fair value of $30 million and a
future useful economic life of 30 years. All depreciation and
amortisation is charged on a monthly basis and presented in cost of
sales.
3
[P.T.O.
Note 2 impairment review On 31 March 2010 and 31 March 2011 the
goodwill on consolidation of Beta was reviewed for impairment. No
impairment of the goodwill was necessary as a result of the review
on 31 March 2010. Beta is regarded as a single cash generating unit
for impairment purposes and at 31 March 2011 its recoverable amount
was estimated as $550 million. Any impairment of goodwill is
charged to cost of sales. Note 3 purchase of shares in Gamma On 1
October 2010 Alpha purchased 40% of the equity shares of Gamma for
$75 million in cash. This purchase allowed Alpha to exercise a
significant influence over Gamma. No material differences between
the market value and the book value of the net assets of Gamma were
apparent at the date of the share purchase. On 31 March 2011 an
impairment review was conducted resulting in an impairment required
of $18 million. Note 4 inter-company sales Beta supplies products
to Alpha and Gamma. Sales of the products to Alpha and Gamma during
the year ended 31 March 2011 were as follows (all sales were made
at a mark-up of 331/3% on cost): Sales to Alpha $18 million. Sales
to Gamma $12 million.
At 31 March 2011 and 31 March 2010 the inventories of Alpha and
Gamma included the following amounts in respect of goods purchased
from Beta. Amount in inventory at 31 March 2011 31 March 2010 $000
$000 3,600 2,100 2,700 Nil
Alpha Gamma Note 5 Equity investments
At 1 April 2010 Alpha had two equity investments that it
designated as fair value through other comprehensive income in
accordance with IFRS 9 Financial Instruments. At the date of
acquisition: Name Original cost $000 12,000 11,000 Fair value at 31
March 2010 2011 $000 $000 15,000 n/a 14,000 15,400
Delta Epsilon
On 31 January 2011 Alpha disposed of its investment in Delta for
$195 million and showed a profit on sale of $45 million ($195
million $15 million) as part of investment income. Apart from
recording the receipt of dividend income no other entries have been
made in the financial statements for the year ended 31 March 2011
regarding the investment in Epsilon. Both investments had been
correctly treated in the financial statements for the year ended 31
March 2010. Note 6 Convertible notes On 1 April 2010 Alpha issued
300 million loan notes of $1 per note at par. The loan notes
entitled the holders to an interest payment of 5 cents per note,
payable annually in arrears. The loan notes are repayable at par on
31 March 2015. As an alternative to repayment the holders can elect
to convert the notes into equity shares in Alpha. On 1 April 2010
investors in non-convertible notes would expect an annual return of
8%. You are given the following discount factors: Discount rate 5%
8% Present value of $1 payable At the end of year 5 Cumulatively at
the end of years 15 784 cents $433 681 cents $399
On 1 April 2010 the directors of Alpha recorded a loan liability
of $300 million and in the year ended 31 March 2011 a finance cost
of $15 million (300 million x 5 cents) in respect of these
notes.
4
Note 7 Environmental damage During the year ended 31 March 2011
Alpha began production at three newly acquired factories. The
normal production process at each factory results in environmental
damage. Alpha has a policy of only rectifying such damage when
legally required to do so. Details of the damage caused at the
three sites up to and including 31 March 2011 are as follows:
Factory A B C Damage caused by 31 March 2011 $000 3,000 1,000 2,000
Clean-up legislation in place at 31 March 2011? Yes No No but
legislation passed since year end with retrospective effect
No provision for environmental damage has been made in the
financial statements. Any appropriate provision should be reported
as part of cost of sales. Required: (a) Prepare the consolidated
statement of comprehensive income for Alpha for the year ended 31
March 2011; (33 marks) (b) Prepare the summarised consolidated
statement of changes in equity for Alpha for the year ended 31
March 2011. Your summarised statement should include a column for
the non-controlling interest. (7 marks) Ignore deferred tax. (40
marks)
5
[P.T.O.
2
Kappa is a listed entity that prepares financial statements to
31 March each year. Below are details of two transactions of the
entity: Transaction one On 31 January 2010 Kappa signed a contract
with a fuel company to purchase a large quantity of fuel for its
own use. The fuel was delivered and paid for on 30 April 2010. The
suppliers functional currency is the Euro and the contracted price
was 500,000 euros. Kappas functional currency is the dollar. In
order to protect Kappa from exchange fluctuations, on 31 January
2010 the directors entered into a forward contract to purchase
500,000 euros for 700,000 dollars on 30 April 2010. The dollar
strengthened against the euro between 31 January 2010 and 31 March
2010 and on 31 March 2010 the contract to purchase 500,000 euros
for 700,000 dollars had a value of 20,000 dollars (financial
liability). The dollar strengthened further during April 2010 and
on 30 April 2010, when the spot exchange rate was 135 dollars = 1
euro, Kappa made a payment of 25,000 dollars to settle the forward
contract. The fuel was delivered in accordance with the terms of
the contract and used evenly in the 12 month period from 1 May 2010
to 30 April 2011. The directors wish to use cashflow hedge
accounting where this is permitted by International Financial
Reporting Standards. You can assume that the contract to purchase
the euros was a perfectly effective hedge of the potential exchange
fluctuations arising out of the contract to purchase the fuel. (10
marks) Transaction two On 1 April 2009 Kappa began to lease an
office block on a 20-year lease. The useful economic life of the
office buildings was estimated at 40 years on 1 April 2009. The
supply of leasehold properties exceeded the demand on 1 April 2009
so as an incentive the lessor paid Kappa $1 million on 1 April 2009
and allowed Kappa a rent-free period for the first two years of the
lease, followed by 36 payments of $250,000, the first being due on
1 April 2011. Between 1 April 2009 and 30 September 2009 Kappa
carried out alterations to the office block at a total cost of $3
million. The terms of the lease require Kappa to vacate the office
block on 31 March 2029 and leave it in exactly the same condition
as it was at the start of the lease. The directors of Kappa have
consistently estimated that the cost of restoring the office block
to its original condition on 31 March 2029 will be $25 million at
31 March 2029 prices. An appropriately risk-adjusted discount rate
for use in any discounting calculations is 6% per annum. The
present value of $1 payable in 19 years at an annual discount rate
of 6% is 32 cents. (10 marks) Required: Prepare extracts from the
financial statements for both transactions that show their impact
on: (a) The statements of financial position at 31 March 2010 and
2011; (b) The statements of comprehensive income for the years
ended 31 March 2010 and 2011. In both cases your extracts should be
supported by appropriate explanations and computations. Note: The
mark allocation is shown against each of the two issues above. (20
marks)
6
3
(a) IAS 38 Intangible assets deals with the recognition and
subsequent measurement of intangible assets. Required: Explain the
following: (i) The meaning of the term intangible asset and those
intangible assets that are within the scope of IAS 38; (ii) The
criteria that need to be satisfied before expenditure can be
recognised as an intangible asset under IAS 38; (iii) How
recognised intangible assets should be subsequently measured. (9
marks) (b) Lambda is a listed entity that prepares consolidated
financial statements. Lambda measures assets using the revaluation
model wherever this is possible under International Financial
Reporting Standards. During its financial year ended 31 March 2011
Lambda entered into the following transactions: (i) On 1 October
2009 Lambda began a project to investigate a more efficient
production process. Expenses relating to the project of $2 million
were charged in the statement of comprehensive income in the year
ended 31 March 2010. Further costs of $15 million were incurred in
the three-month period to 30 June 2010. On that date it became
apparent that the project was technically feasible and commercially
viable. Further expenditure of $3 million was incurred in the
six-month period from 1 July 2010 to 31 December 2010. The new
process, which began on 1 January 2011, was expected to generate
cost savings of at least $600,000 per annum over the 10-year period
commencing 1 January 2011.
(ii) On 1 April 2010 Lambda acquired a new subsidiary, Omicron.
The directors of Lambda carried out a fair value exercise as
required by IFRS 3 Business Combinations and concluded that the
brand name of Omicron had a fair value of $10 million and would be
likely to generate economic benefits for a ten-year period from 1
April 2010. They further concluded that the expertise of the
employees of Omicron contributed $5 million to the overall value of
Omicron. The estimated average remaining service lives of the
Omicron employees was eight years from 1 April 2010. (iii) On 1
October 2010 Lambda renewed its licence to extract minerals that
are needed as part of its production process. The cost of renewal
of the licence was $200,000 and the licence is for a five-year
period starting on 1 October 2010. There is no active market for
this type of licence. However, the directors of Lambda estimated
that at 31 March 2011 the fair value less costs to sell of the
licence was $175,000. They further estimated that over the
remaining 54 months of its duration the licence would generate net
cash flows for Lambda that had a present value at 31 March 2011 of
$185,000. Requirements: Assuming the Lambda group has no intangible
assets other than those mentioned above, compute the carrying value
of intangible assets in the consolidated statement of financial
position of Lambda as at 31 March 2011. You should provide relevant
explanations to support your figures. You are NOT required to
compute the goodwill arising on acquisition of Omicron. (11 marks)
(20 marks)
7
[P.T.O.
4
You are given details of three transactions affecting the
financial statements of Omega: Transaction One On 1 April 2009
Omega granted share options to 20 senior executives. The options
are due to vest on 31 March 2012 provided the senior executives
remain with the company for that period. The number of options
vesting to each director depends on the cumulative profits over the
three-year period from 1 April 2009 to 31 March 2012: 10,000
options per director if the cumulative profits are between $5
million and $10 million. 15,000 options per director if the
cumulative profits are more than $10 million.
On 1 April 2009 and 31 March 2010 the best estimate of the
cumulative profits for the three-year period ending on 31 March
2012 was $8 million. However, following very successful results in
the year ended 31 March 2011, the latest estimate of the cumulative
profits in the relevant three-year period is $14 million. On 1
April 2009 it was estimated that all 20 senior executives would
remain with Omega for the three-year period, but on 31 December
2009 one senior executive left unexpectedly. None of the other
executives have since left and none are expected to leave before 31
March 2012. A further condition for vesting of the options is that
the share price of Omega should be at least $12 on 31 March 2012.
The share price of Omega over the last two years has changed as
follows: $10 on 1 April 2009. $1175 on 31 March 2010. $1125 on 31
March 2011.
On 1 April 2009 the fair value of the share options granted by
Omega was $480 per option. This had increased to $550 by 31 March
2010 and $650 by 31 March 2011. Required: (a) Produce extracts,
with supporting explanations, from the statements of financial
position at 31 March 2010 and 2011 and from the statements of
comprehensive income for the years ended 31 March 2010 and 2011
that show how transaction one will be reflected in the financial
statements of Omega. Note: Ignore deferred tax. Transaction Two On
1 April 2009 Omega purchased ten new machines for $12 million each.
Each machine had an overall estimated useful economic life of 10
years. The estimated residual value of each machine was zero. Each
machine will require a substantial overhaul after five years in
order to maintain its operating capacity and the cost of such an
overhaul at 1 April 2009 prices was $3 million per machine. In the
year ended 31 March 2010 Omega charged total depreciation of $12
million on the machines but the directors have subsequently
realised that this may have been an error that could have a
material impact on the financial statements. Required: (b) Produce
extracts, with supporting explanations, from the statements of
comprehensive income for the years ended 31 March 2010 and 2011 and
from the statement of changes in equity for the year ended 31 March
2011 that show how transaction two will be reflected in the
financial statements of Omega. Note: Ignore deferred tax. (5 marks)
(8 marks)
8
Transaction Three On 1 June 2010 Omega signed a contract to
construct a machine for one of its customers and to subsequently
provide servicing facilities relating to the machine. Omega
commenced construction on 1 July 2010 and the construction took two
months to complete. Omega incurred the following costs of
construction: Materials $1 million. Other direct costs $2 million.
Allocated fixed production overheads $1 million. This allocation
was made using Omegas normal overhead allocation model.
On 1 October 2010 the machine was delivered to the customer. The
customer paid the full contract price of $75 million on 30 November
2010. The servicing and warranty facilities are for a three-year
period from 1 October 2010. This is not considered to be an onerous
contract at 31 March 2011. In the six-month period from 1 October
2010 to 31 March 2011 Omega incurred costs of $200,000 relating to
the servicing and this rate of expenditure is estimated to continue
over the remainder of the three-year period. Omega would normally
expect to earn a profit margin of 20% on the provision of servicing
facilities of this nature. Required: (c) Produce extracts, with
supporting explanations, from the statement of financial position
at 31 March 2011 and from the statement of comprehensive income for
the year ended 31 March 2011 that show how transaction three will
be reflected in the financial statements of Omega. Note: Ignore
deferred tax. (7 marks) (20 marks)
End of Question Paper
9
Answers
Diploma in Financial Reporting
June 2011 Answers Marks
1
(a)
Consolidated statement of comprehensive income for the year
ended 31 March 2011 Revenue (W1) Cost of sales (balancing figure)
Gross profit (W2) Distribution costs (18,000 + 17,000)
Administrative expenses (19,000 + 16,000) Investment income (W6)
Finance cost (W7) Share of losses of associate (W9) Profit before
tax Income tax expense (41,000 + 33,000) Net profit for the year
Other comprehensive income (W10) Comprehensive income for the year
Net profit attributable to Non-controlling interest (W11)
Controlling interest Net profit for the year Comprehensive income
attributable to Non-controlling interest Controlling interest
Comprehensive income for the year $000 886,000 (482,145) 403,855
(35,000) (35,000) 2,800 (139,132) (7,000) 190,523 (74,000) 116,523
5,900 122,423 17,464 99,059 116,523 17,464 104,959 122,423 1 (W1)
16 (W2) 1 (W6) 4 (W7) 2 (W9) 2 (W10)
2 (W11)
33
(b)
Consolidated statement of changes in equity for the year ended
31 March 2011 Controlling interest $000 602,850 104,959 35,850
(52,000) 691,659 Non-controlling interest $000 101,125 17,464
(10,000) 108,589 Total $000 703,975 122,423 35,850 (62,000)
800,248
Balance at 1 April 2010 (W12 & W13) Comprehensive income for
the year Equity component of convertible bonds (W14) Dividends
Balance at 31 March 2011 WORKINGS Working 1 revenue Alpha + Beta
Sales from Alpha Beta (see tutorial note 1)
2 (W12) + 1 (W13) 1 1 (W14) 1 7
$000 904,000 (18,000) 886,000 $000 430,000 (5,000) (375) (270)
(11,000) (6,000) (3,500) 403,855
1 1
Working 2 gross profit Alpha + Beta Environmental provision
(3,000 + 2,000) Unrealised profit adjustments: Beta: (1/4 (3,600
2,100)) Gamma: (1/4 x 2,700 x 40%) Extra depreciation (W3) Change
in the fair value of contingent consideration ($64 million $58
million see tutorial note 2) Impairment of goodwill (W4) 1 1 1 1
(W3) 1 9 (W4) 16
13
Marks Tutorial Note 1 (marks allocated in workings 1 & 2)
IAS 28 Investments in associates requires partial elimination of
unrealised profits on transactions between associates and group
entities. Profits can only be included to the extent that they
relate to the non-group share. This means that the group share of
such profits is eliminated and an adjustment of $270,000 is
required to profit in this case (see working 2 above). The IAS does
not specify exactly how such an adjustment should be reported in
the consolidated statement of comprehensive income. The approach
taken here is to make no adjustment to revenue whatever. Given the
required adjustment to gross profit of $270,000, this would alter
cost of sales by an equal and opposite amount. An alternative
approach would be to reduce consolidated revenue by the group share
of the revenue that relates to the inventory that is unsold by
Gamma at the year-end. Given the required adjustment to gross
profit of $210,000, the adjustment to cost of sales follows as the
balancing figure. Either approach would earn full marks. Tutorial
note 2 The change in fair value of the contingent consideration
could have been shown in other sections of the statement of
comprehensive income for example as an administration cost. If the
correct figure is shown in another reasonable part of the statement
then full marks will be awarded. Working 3 extra depreciation and
amortisation Depreciation of PPE x ($280 million $240 million)
Amortisation of brand 1/30 x $30 million $000 10,000 1,000 11,000
$000 Carrying value of Beta in the consolidated financial
statements at 31 March 2011: Per own financial statements Fair
value adjustments: PPE ($280 million $240 million) x (25/4) Brand
$30 million x (285/30) Goodwill (W5) Recoverable amount So
impairment equals 435,000 25,000 28,500 65,000 553,500 (550,000)
3,500 1 1 6 (W5) 9 (W2) 1 1 (W2)
Working 4 impairment of goodwill on acquisition of Beta
Working 5 goodwill on acquisition of Beta $000 Fair value of
consideration given: Share exchange 75,000 x 2/3 x $6 Contingent
Acquisition costs Fair value of non-controlling interest 25,000 x
$320 Fair value of net assets of Beta at 1 October 2009: Per own
financial statements Fair value adjustment PPE ($280 million $240
million) Fair value adjustment brand 300,000 55,000 Nil 355,000
80,000 300,000 40,000 30,000 (370,000) 65,000 $000 37,300 (30,000)
(4,500) 2,800 $000 1 1 1 1 6 W4
So goodwill equals Working 6 investment income Alpha + Beta
Dividend received from Beta (75% x 40,000) Profit on disposal
recorded to be treated in accordance with IFRS 9 (AppB para 5.12)
In consolidated statement of comprehensive income
1
14
Marks Working 7 finance costs Alpha + Beta Finance cost of
convertible loan notes incorrectly recorded by Alpha Correct
finance cost of convertible loan notes (W8) In consolidated
statement of comprehensive income Working 8 finance costs of
convertible loan notes $000 Liability element of compound financial
instrument at 1 April 2010: (15,000 x $399) + (300,000 x $0681) So
finance cost at 8% (264,150 x 008) 264,150 21,132 2 1 3 W7 $000
133,000 (15,000) 21,132 139,132 3 (W8) 4
Working 9 share of losses of associate Loss after tax of Gamma
(26,000) x 40% x 6/12 equals Impairment of investment $000 (26,000)
(5,200) (1,800) (7,000) $000 1,400 4,500 5,900 $000 85,000 (645)
(11,000) (3,500) 69,855 17,464 1 2
Working 10 other comprehensive income Gain on revaluation of
investment in Epsilon Profit on disposal recorded to be treated in
accordance with IFRS 9 (AppB para 5.12) 1 1 2
Working 11 non-controlling interest in Beta Net profit of Beta
Unrealised profit on intercompany sales (375 + 270) (W2) Extra
depreciation and amortisation (W3) Impairment of goodwill of Beta
(W4)
Non-controlling interest (25%)
2
Working 12 consolidated equity at 1 April 2010 Alpha Beta post
acquisition per own records (390,000 300,000) Extra depreciation
and amortisation (11,000 (W3) x 05) 540,000 90,000 (5,500) 84,500
63,375 (525) 602,850 80,000 84,500 21,125 101,125
Group share (75%) Unrealised profit on opening inventory (1/4 x
2,100)
2 1
Working 13 non-controlling interest in opening equity of Beta
Fair value of non-controlling interest at date of acquisition (W5)
Consolidated post-acquisition increase in equity from date of
acquisition to start of the period (W12) Non-controlling interest
(25%)
15
Marks Working 14 equity element of convertible bonds Total issue
proceeds Liability component (W8) So equity component equals $000
300,000 (264,150) 35,850 1
2
Transaction one 1. Statement of financial position 31 March 2011
$000 58 Nil 31 March 2010 $000 Nil (20)
Current assets inventory of fuel Current liabilities financial
instrument 2. Statement of comprehensive income
1 1
Cost of sales cost of fuel used Other comprehensive income:
Losses arising on cash flow hedges Reclassification adjustment
3.
Year ended 31 March 2011 2010 $000 $000 (642) Nil (5) 25 (20)
Nil
1 1 1
Explanation The signing of the contract to purchase fuel on 31
January 2010 does not create a liability as it is an executory
contract The contract to buy 500,000 euros is a derivative
financial instrument that needs to be recognised from 31 January
2010 at fair value, initially zero Since the contract to buy
500,000 euros is designated as a cash flow hedge of the commitment
to buy fuel, any gains or losses (in this case losses) on
re-measurement are initially recognised as other comprehensive
income When the fuel is recognised in the financial statements, the
cumulative loss arising on the derivative is added to the carrying
value of the inventory or reclassified from other comprehensive
income into profit and loss as the inventory is used (see tutorial
note below) The initial carrying value of the inventory is $700,000
(500,000 x 135 + 25,000) or $675,000 (see tutorial note below)
1 1
1
1 1 10
Tutorial note As an alternative to taking the loss of $25,000 on
the derivative as a basis adjustment to the carrying value of
inventory at 30 April 2010, IAS 39 allows the inventory to be
measured using the spot rate at that date. This would mean that the
carrying value was $675,000 (500,000 x $135) at 30 April 2010 and
$56,000 (675,000 x 1/12) at 31 March 2011. The cost of sales would
be $619,000 (675,000 x 11/12) under this approach. A further
consequence is that the reclassification adjustment is made as the
inventory is recognised as an expense, i.e. when the inventory is
sold. In such circumstances the reclassification adjustment for the
year ended 31 March 2011 is $23,000 (25,000 x 11/12). The
combination of the cost of sales ($619,000) and the
reclassification adjustment ($23,000) gives a charge to profit and
loss of $642,000, which is the same as the cost of sales under the
basis adjustment method. Either approach is acceptable under IAS 39
and either approach would attract full marks. The relative impact
of the two approaches on the statement of comprehensive income for
the year ended 31 March 2011 is as shown in the table below (there
would be no difference between the two approaches for the year
ended 31 March 2010):
16
Marks Adopted approach $000 (642) Nil (642) (5) 25 (622)
Alternative approach $000 (619) (23) (642) (5) 23 (624)
Cost of sales cost of fuel used Reclassification adjustment Net
effect on profit for the year Other comprehensive income: Losses
arising on cash flow hedges Reclassification adjustment Net effect
on total comprehensive income for the year
The difference of $2,000 (622,000 624,000) between the overall
amounts recognised in comprehensive income is equal to the
different carrying values of closing inventory under the two
approaches of $2,000 (58,000 56,000) under the two approaches.
Transaction 2 1. Statement of financial position 31 March 2011 $000
3,508 (100) (1,700) (873) 31 March 2010 $000 3,703 Nil (1,400)
(824)
Non-current assets property, plant and equipment Current
liabilities operating lease rentals Non-current liabilities:
Operating lease rentals Provision for restoration costs 2.
Statement of comprehensive income
1 See 3 below
Year ended 31 March 2011 2010 $000 $000 Operating costs:
Operating lease rentals Depreciation of leasehold improvements
Finance costs unwinding of discount 3. (400) (195) (49) (400) (97)
(24) See 3 below (for 2010 figure) See 3 below
Explanation The total operating lease rentals are $8 million
((36 x 250,000) 1 million). Therefore the annual charge is $400,000
(8 million/20) The total lease liability at 31 March 2010 is
$1,400,000 (1 million reverse premium plus 400,000 rental). This
increases to $1,800,000 by 31 March 2011 (1,400,000 brought forward
plus 400,000 rental). The liability is reduced by $100,000 (2 x
250,000 400,000) over the next 18 years The costs of altering the
office block are capitalised and depreciated over their useful
economic life 19 years from 1 October 2009 The obligation to
restore the block needs to be recognised as a provision because the
completion of the alterations constitutes an obligating event from
1 October 2009 The initial amount of the provision is $800,000 (25
million x 032) The debit entry for the provision is to PPE since it
provides access to future economic benefits The initial carrying
value of the PPE is $3,800,000 (3 million + 800,000) and the annual
depreciation is $195,000 (38 million/195) The unwinding for the six
months to 31 March 2010 is $24,000 (800,000 x 006 x 6/12) and the
closing provision $824,000 (800,000 + 24,000) The unwinding for the
12 months to 31 March 2011 is $49,000 (824,000 x 006) and the
closing provision $873,000 (824,000 + 49,000)
1
1 1 1 1 10
17
Marks 3 (a) An intangible asset is an identifiable non-monetary
asset without physical substance. Four key factors need to be in
place before recognition is appropriate: 1. The asset needs to be
identifiable An asset is identifiable either if it is separable
(can be sold without disposing of the business as a whole) or if it
arises from contractual or other legal rights, irrespective of
separability. The entity needs control over the economic benefits
derivable from the asset Control involves the power to obtain the
future economic benefits flowing from the asset and to restrict the
access of others to those benefits. The capacity of an entity to
control the future economic benefits would normally, but not
necessarily, stem from legal rights that are enforceable in a court
of law. A clear probable source of future economic benefits needs
to be identified These benefits may include revenue from the sale
of products or services, but could also include cost savings or
other benefits arising from the use of the asset by the entity. The
asset needs to have a cost that can be measured reliably Cost will
often be the cost of purchasing or developing the asset. In the
case of an asset acquired in a business combination, cost will be
the fair value of the asset at the date of acquisition, assuming
this fair value can be reliably measured.
2.
3.
4.
Following recognition intangible items can be measured using
either the cost model or the revaluation model. However, the
revaluation model can only be used if the intangible asset has a
readily ascertainable market value. For this to be the case the
intangible asset has to be capable of being readily traded in an
active market of substantially similar items. Since intangible
assets often tend, by their nature, to be fairly unique the
revaluation model is rarely used. Intangible assets with a finite
useful economic life are amortised over that useful life. Where the
useful economic life is estimated to be indefinite no amortisation
is charged but the asset is reviewed for impairment on an annual
basis. (b) Details Development project Amount $000 2,925
Explanation Only costs incurred after the conditions have been
satisfied can be capitalised (3 million in this case) (1 mark). All
previous costs must be expensed, even those arising earlier in the
same accounting period (1/2 mark). Amortisation of the capitalised
costs begins when the process is commercially exploited (1/2 mark)
and a full years charge would be 300,000 (3 million/10). The charge
in the year ended 31 March 2011 is 75,000 (300,000 x 3/12) (1
mark). Brand name capitalised at fair value and amortised over
useful economic life. Per IAS 38 an assembled workforce fails the
control test as they could leave and take their expertise
elsewhere. Their value is effectively included in the goodwill on
acquisition of Omicron. Separately purchased intangibles are
recognised at cost, and amortised over their useful economic lives
(15 marks). Although the assets net selling price is only $175,000,
the value in use is $185,000 so the recoverable amount of the asset
is above $185,000 and no impairment has occurred (15 marks). There
is no question of revaluing the items recognised as intangible
assets as no active market exists (1 mark).
3 2
Brand name Workforce
9,000 Nil
2
Production licence
180
3
Revaluation policy relating to all assets
1 11
18
Marks 4 (a) Transaction One 1. Statement of financial position
As at 31 March 2011 $000 912 2010 $000 304
In equity 2. Statement of comprehensive income
In operating expenses 3.
Year ending 31 March 2011 2010 $000 $000 608 304
Explanation The total expected cost at 31 March 2010 = $912,000
(19 x 10,000 x $48) 1/3 is recognised in equity as this is an
equity settled share based payment The total expected cost at 31
March 2011 = $1,368,000 (19 x 15,000 x $48) 2/3 is recognised in
equity at 31 March 2011. Amounts can be shown as a separate
component of equity or credited to retained earnings The vesting
condition relating to share price is ignored in the estimation of
the total expected cost as it is one of the factors that is used to
compute the fair value of the share option at the grant date i.e.
it is a market related vesting condition The cost recognised in
2010 is the cost to date since this is the first year of the
vesting period The cost recognised in 2011 is the difference
between cumulative costs carried and brought forward
1 1 1 1
1 1 8
(b)
Transaction Two 1. Statement of comprehensive income Year ended
31 March 2011 2010 $000 $000 15,000 15,000
Depreciation operating expenses 2.
1
Statement of changes in equity year ended 31 March 2011 A