4 PL FAR June 18 Question

[Audio] Copyright © ICAEW 2018. All rights reserved. PROFESSIONAL LEVEL EXAMINATION MONDAY 4 JUNE 2018 (3 HOURS) FINANCIAL ACCOUNTING AND REPORTING - IFRS This exam consists of four questions ( 100 marks). Marks breakdown Question 1 30 marks Question 2 26 marks Question 3 22 marks Question 4 22 marks 1. Please read the instructions on this page carefully before you begin your exam. If you have any questions, raise your hand and speak with the invigilator before you begin. 2. Please alert the invigilator immediately if you encounter any issues during the delivery of the exam. The invigilator cannot advise you on how to use the software. If you believe that your performance has been affected by any issues which occurred, you must request and complete a candidate incident report form at the end of the exam; this form must be submitted as part of any subsequent special consideration application. 3. Click on the Start Exam button to begin the exam. The exam timer will begin to count down. A warning is given five minutes before the exam ends. When the exam timer reaches zero, the exam will end. To end the exam early, press the Finish button. 4. You may use a pen and paper for draft workings. Any information you write on paper will not be read or marked. 5. The examiner will take account of the way in which answers are structured. Respond directly to the exam question requirements. Do not include any content or opinion of a personal nature. A student survey is provided post-exam for feedback purposes. 6. Ensure that all of your responses are visible on screen and are not hidden within cells. Your answers will be presented to the examiner exactly as they appear on screen. Unless otherwise stated, make all calculations to the nearest month and the nearest £. All references to IFRS are to International Financial Reporting Standards and International Accounting Standards..

[Audio] Copyright © ICAEW 2018. All rights reserved. Page 2 of 9 Question 1 The following trial balance has been extracted from the nominal ledger of Calrose Ltd at 31 December 2017. Note(s) £ £ Sales 2,256,800 Purchases 1,405,200 Administrative expenses 306,900 Finance costs (1), ( 2) 14,000 Construction costs (2) 225,600 Borrowings (2) 100,000 Other operating costs (3) 299,100 Land and buildings Carrying amount at 31 December 2016 ( 4) 677,800 Plant and machinery (3), (4) Cost 756,800 Accumulated depreciation at 31 December 2016 400,100 Retained earnings at 31 December 2016 454,100 Ordinary share capital ( £1 shares) 300,000 Share premium account 40,000 Revaluation surplus at 31 December 2016 292,100 Cash at bank 23,500 Inventories at 31 December 2016 117,600 Trade and other receivables 180,700 Trade and other payables 120,300 Income tax ( 5) 3,200 3,986,900 3,986,900 Notes (1) On 1 July 2017 Calrose Ltd entered into a three year lease for a machine with a useful life of eight years and paid rent of £ 10,000 on that date. Further rental payments of £ 5,500 each are due on 1 July 2018 and 1 July 2019. The machine will be returned to the lessor on 30 June 2020. The £10,000 paid on 1 July 2017 was debited to finance costs and credited to cash. (2) Construction costs relate to a machine that Calrose Ltd has been constructing for its own use. The machine is a qualifying asset. Construction started on 1 January 2017 and was still in progress at the year end.To help finance the construction, Calrose Ltd borrowed £ 55,000 on 1 January 2017 at an interest rate of 4.5% pa and £ 45,000 on 1 July 2017 at an interest rate of 4.0% pa. All interest due was paid on 31 December 2017, debited to finance costs and credited to cash. Both loans are repayable on 31 December 2018. ( 3) On 1 July 2017 Calrose Ltd purchased a machine for cash of £ 50,000, which was debited to plant and machinery and credited to cash. On the same date Calrose Ltd received a government grant of £ 25,000 to help finance the acquisition. The grant was debited to cash and credited to other operating costs. Calrose Ltd's accounting policy is.

[Audio] Copyright © ICAEW 2018. All rights reserved Page 3 of 9 to use the netting off method for such grants. There are no performance conditions attached to the grant. ( 4) Calrose Ltd measures land and buildings using the revaluation model and plant and machinery using the cost model. Depreciation on property, plant and equipment for the year ended 31 December 2017 has yet to be charged. Depreciation on buildings is calculated on a straight-line basis over their estimated remaining useful lives and is recognised in administrative expenses. Depreciation on plant and equipment is calculated on a reducing balance basis at 20% pa and is recognised in cost of sales. On 1 January 2017 Calrose Ltd's total land and buildings were valued at £ 1,670,800 (land £ 250,500). The remaining useful life of buildings at 1 January 2017 was estimated as 20 years. There were no movements on property, plant and equipment during the year ended 31 December 2017 other than those referred to above. Calrose Ltd does not make an annual transfer between the revaluation surplus and retained earnings. (5) The income tax balance in the trial balance relates to an underprovision for income tax for the year ended 31 December 2016. The income tax liability at 31 December 2017 has been appropriately estimated at £ 16,000 but has not yet been accrued for. ( 6) Inventories held on 31 December 2017 cost £ 122,400. Requirements 1.1 Prepare, for Calrose Ltd, in a form suitable for publication:  a single statement of profit or loss and other comprehensive income for the year ended 31 December 2017; and  a statement of financial position as at that date. ( 22 marks) 1.2 In relation to the government grant above:  Describe the differences between the IFRS and UK GAAP financial reporting treatment.  Assuming that under UK GAAP Calrose Ltd would have adopted the accrual model, prepare extracts from the financial statements showing how the grant would be reflected under UK GAAP. ( 5 marks) 1.3 If Calrose Ltd's policy had been to make an annual transfer between the revaluation surplus and retained earnings then a cumulative transfer of £ 32,100 would have been made by 31 December 2017. Calculate Calrose Ltd's distributable profits at 31 December 2017. For each component of Calrose Ltd's equity at that date explain why it has been included in or excluded from distributable profits. (3 marks) Total: 30 marks.

[Audio] Copyright © ICAEW 2018. All rights reserved Page 4 of 9 Question 2 Jasmine is an ICAEW Chartered Accountant employed by Bomba Ltd as its financial controller. She reports to Roy, the finance director, who is also an ICAEW Chartered Accountant. Roy was part way through preparing the financial statements for the year ended 31 December 2017 when he was suddenly called away due to a family crisis. All the directors of Bomba Ltd receive a bonus linked to the profit for the year. Before he left the office Roy said to Jasmine that he hoped she would be able to complete the financial statements without him and that he did not expect her to make any major changes as he is relying on this year's bonus. Jasmine is aware that Roy is in personal financial difficulties. The managing director has now instructed Jasmine to complete the financial statements in Roy's absence. Jasmine has discovered the following issues. (1) On 1 November 2017 Bomba Ltd purchased a sports car to be used as Roy's company car. The car cost £ 60,000 and was included in Bomba Ltd's property, plant and equipment. On 31 December 2017 Roy transferred ownership of the car to himself for £ 1,000. He debited the £1,000 to trade receivables and credited it to other operating income, but made no other accounting entries. Bomba Ltd depreciates directors' cars on a reducing balance basis, at a rate of 40% pa. Both the purchase of the car and the transfer of ownership were done on the sole authority of Roy. There is no evidence of any other director approving this sale nor is there any mention of this transaction in the notes to the financial statements. Jasmine queried this with Roy just before he went on leave. Roy said there was no need to disclose the transaction because it is not material to Bomba Ltd. (2) On 1 April 2017 Bomba Ltd issued 500,000 4% £ 1 irredeemable preference shares at par. Roy credited the cash received to revenue. The dividend on the shares is mandatory and if not paid becomes cumulative. No dividend had been paid or accrued for on these shares by 31 December 2017. The full annual dividend was paid on 31 March 2018. ( 3) Bomba Ltd has always calculated the cost of its inventory using the first-in, first-out ( FIFO) method. The directors decided to change the accounting policy to calculate cost using a weighted average cost method with effect from the current year. The directors believe that this change will result in the financial statements providing more reliable and relevant information. Bomba Ltd therefore recognised inventories on 31 December 2017 at their weighted average cost of £ 291,600. Inventories on 1 January 2017 remain at £ 241,800 measured on a FIFO basis. If they had been measured on a weighted average cost basis their cost would have been £ 252,300. Requirements 2.1 Explain the required IFRS financial reporting treatment of Issues (1) to (3) above in the financial statements of Bomba Ltd for the year ended 31 December 2017, preparing all relevant calculations. ( 20 marks) 2.2 Discuss the ethical issues arising for Jasmine and Roy and set out the steps that Jasmine should take to address them. ( 6 marks) Total: 26 marks.

[Audio] Copyright © ICAEW 2018. All rights reserved Page 5 of 9 Question 3 You are the assistant accountant at Japonica Ltd. The financial controller, who is not a qualified accountant, has asked you to assist him with certain tasks relevant to the financial statements for the year ended 31 December 2017. Question 3.1 The financial controller has prepared a draft consolidated statement of cash flows for the year ended 31 December 2017 which is set out below. Japonica Ltd acquired a sole subsidiary, Kalijira Ltd, on 1 January 2017, but the financial controller did not know how to deal with the acquisition of a subsidiary in the consolidated statement of cash flows. As a result the figures in the draft consolidated statement of cash flows do not include:  the cash cost of the acquisition;  any adjustments for the net assets of the subsidiary at acquisition; or  cash movements relating to intangible assets and the non-controlling interest. Consequently, the draft consolidated statement of cash flows does not reconcile to the movement in cash and cash equivalents. The draft statement adds down to a net decrease in cash and cash equivalents of £ 188,700. However, opening and closing cash and cash equivalents were £ 12,200 and £( 264,380) respectively. Consolidated statement of cash flows for the year ended 31 December 2017 (draft) £ £ Cash flows from operating activities Cash generated from operations (Note) 50,600 Income tax paid ( 43,600) Net cash from operating activities 7,000 Cash flows from investing activities Purchase of property, plant and equipment ( 345,700) Net cash used in investing activities (345,700) Cash flows from financing activities Proceeds from issue of ordinary share capital 250,000 Dividends paid ( 100,000) Net cash from financing activities 150,000 Net decrease in cash and cash equivalents (188,700).

[Audio] Copyright © ICAEW 2018. All rights reserved Page 6 of 9 Note: Reconciliation of profit before tax to cash generated from operations ( draft) £ Profit before tax 250,600 Depreciation charge 102,300 Increase in inventories ( 356,200) Increase in trade and other receivables ( 145,900) Increase in trade and other payables 199,800 Cash generated from operations 50,600 The following information will allow you to correct and complete the consolidated statement of cash flows. ( 1) Japonica Ltd paid £ 400,000 in cash for 80% of Kalijira Ltd's ordinary shares. At the date of acquisition Kalijira Ltd's statement of financial position showed the following assets and liabilities: £ Property, plant and equipment 209,200 Cash and cash equivalents 2,400 Inventories 206,300 Trade and other receivables 198,100 Trade and other payables ( 152,700) 463,300 ( 2) The following balances are extracted from Japonica Ltd's consolidated statement of financial position as at 31 December 2017: 2017 2016 £ £ Non-current assets Intangible assets 186,500 57,120 Non-controlling interest 82,600 – ( 3) Goodwill arising on the acquisition of Kalijira Ltd, calculated using the proportionate method, is included in closing intangible assets above. The remainder of the movement in intangibles relates to capitalised development costs and includes amortisation of £ 12,500 which was charged to the consolidated statement of profit or loss. ( 4) The consolidated statement of profit or loss for the year ended 31 December 2017 shows a non-controlling interest of £ 41,100. Requirement Using the information in this part of the question only, prepare a revised consolidated statement of cash flows for Japonica Ltd for the year ended 31 December 2017, including a note reconciling profit before tax to cash generated from operations. A note showing the effects of the acquisition of Kalijira Ltd is not required. ( 10 marks).

[Audio] Copyright © ICAEW 2018. All rights reserved Page 7 of 9 Question 3.2 The following information is relevant to Japonica Ltd's provisions note for the year ended 31 December 2017. ( 1) On 1 January 2017 a customer made a claim in connection with the supply of faulty goods. Japonica Ltd's lawyers have advised that there is an 80% probability that the customer will win the claim if it goes to court. The lawyers are currently negotiating with the customer and estimate that the amount payable to the customer if the claim is successful would be £ 50,000. They believe that the customer will agree to defer any payment until 1 January 2019. ( 2) On 1 July 2017 Japonica Ltd introduced a one-year repair warranty for one of its product lines. If minor repairs were to be required for all sales of that product since 1 July 2017 the cost to Japonica Ltd would be £ 24,000, rising to £ 49,000 if major repairs were needed. The directors estimate that 10% of the goods sold by value will require minor repairs and 4% will require major repairs. No goods had been returned by 31 December 2017. ( 3) In December 2016 Japonica Ltd had been the target of a successful cyberattack and, as a result, lost confidential customer data. The customers affected have taken legal action against Japonica Ltd. At 31 December 2016 Japonica Ltd made a provision for £ 150,000 based on the information available at that date. The case had been expected to be settled quickly but more claimants came forward. The case is due to come to court shortly and Japonica Ltd's lawyers believe that the case will be decided against Japonica Ltd and that the damages payable will be £ 210,000. Requirement Prepare the provisions note for inclusion in the financial statements of Japonica Ltd for the year ended 31 December 2017. You should include both the movements table and narrative disclosures. An appropriate annual discount rate is 5%. A total column is not required. ( 8 marks) Question 3.3 The financial controller has been asked to make a presentation to the board about the inherent limitations of financial statements and has asked you to assist him with this. Requirement Prepare notes for the financial controller which identify and explain the inherent limitations of financial statements that may reduce their usefulness to users. (4 marks) Total: 22 marks.

[Audio] Copyright © ICAEW 2018. All rights reserved Page 8 of 9 Question 4 On 1 January 2017 Arborio plc had two subsidiary companies: Wehani Ltd and Basmati Ltd. All other investments held by Arborio plc are correctly carried at cost. Arborio plc measures all non-controlling interest and goodwill using the proportionate method. The individual statements of profit or loss for the year ended 31 December 2017 for Arborio plc and its two subsidiaries are set out below: Statements of profit or loss for the year ended 31 December 2017 Arborio plc Wehani Ltd Basmati Ltd £ £ £ Revenue 762,500 400,600 285,900 Cost of sales ( 398,700) ( 142,300) ( 123,400) Gross profit 363,800 258,300 162,500 Operating expenses ( 101,200) ( 81,450) ( 48,300) Profit from operations 262,600 176,850 114,200 Investment income 401,300 – – Profit before tax 663,900 176,850 114,200 Income tax ( 132,000) ( 35,000) ( 22,040) Profit for the year 531,900 141,850 92,160 Additional information: (1) On 1 January 2016 Arborio plc acquired 80% of Wehani Ltd's 350,000 £1 ordinary shares. The fair values of all of Wehani Ltd's assets and liabilities at the date of acquisition were the same as their carrying amounts, with the exception of a machine which had a fair value of £ 50,000 in excess of its carrying amount. The machine had a remaining estimated useful life of five years at 1 January 2016. Depreciation on plant and machinery is recognised in operating expenses. On 1 January 2017 Wehani Ltd's retained earnings were £ 592,500. During 2017 Wehani Ltd paid an ordinary dividend of 25p per share. ( 2) On 1 April 2017 Arborio plc sold its investment in Basmati Ltd for £ 310,000. Arborio plc acquired its investment in Basmati Ltd several years ago paying £ 276,000 for 70% of Basmati Ltd's 300,000 £1 ordinary shares. Basmati Ltd's retained earnings were £ 25,400 at acquisition and £ 38,040 at 1 January 2017. The fair values of all of Basmati Ltd's assets and liabilities at the date of acquisition were the same as their carrying amounts. Cumulative impairments of £ 8,000 had been recognised by 31 December 2016 in respect of goodwill arising on the acquisition of Basmati Ltd. Basmati Ltd's profits accrued evenly over 2017. The only accounting entries made by Arborio plc in respect of its disposal of Basmati Ltd were to debit cash and credit investment income with the disposal proceeds..

[Audio] Copyright © ICAEW 2018. All rights reserved Page 9 of 9 ( 3) On 1 April 2017 Arborio plc acquired 40% of the ordinary share capital of Opus Ltd for £ 52,000, which gave Arborio plc significant influence over Opus Ltd. Opus Ltd's retained earnings were £ 41,600 on 1 April 2017 and £ 50,800 on 31 December 2017. ( 4) In December 2017 Arborio plc sold goods to Wehani Ltd and Opus Ltd for £ 24,000 and £ 10,500 respectively at a mark-up of 20%. At 31 December 2017 both Wehani Ltd and Opus Ltd still held these goods in their inventories. (5) Arborio plc has identified that in the current year an impairment of £ 5,000 needs to be recognised in relation to the goodwill arising on the acquisition of Wehani Ltd. Requirement Prepare the consolidated statement of profit or loss for Arborio plc for the year ended 31 December 2017 and the non-controlling interest column from the consolidated statement of changes in equity for the same period. You should assume that the disposal of Basmati Ltd constitutes a discontinued operation in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. Total: 22 marks.