9 PL FAR September 2017 Answer

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 1 of 16 MARK PLAN AND EXAMINER'S COMMENTARY The marking plan set out below was that used to mark this question. Markers were encouraged to use discretion and to award partial marks where a point was either not explained fully or made by implication. More marks were available than could be awarded for each requirement. This allowed credit to be given for a variety of valid points which were made by candidates. Question 1 General comments Part 1.1 of this question tested the preparation of a statement of profit or loss and a statement of financial position from draft financial statements. In addition, a provisions note was required. Adjustments included borrowing costs, a provision for a legal claim, an inventory adjustment and a government grant. Part 1.2 required a description of the differences between IFRS and UK GAAP in respect of borrowing costs and the government grant. ( 1.1) PT Ltd – Statement of financial position as at 31 March 2017 £ £ ASSETS Non-current assets Property, plant and equipment ( 1,074,250 + 281,692) (W2) 1,355,942 Current assets Inventories ( 87,400 + 2,625 (W5)) 90,025 Trade and other receivables ( 76,900 – 3,500) 73,400 Cash and cash equivalents 7,600 171,025 Total assets 1,526,967 Equity Ordinary share capital ( 400,000 + 30,000) 430,000 Share premium account ( 150,000 + 24,000) 174,000 Treasury shares ( 30,000 x £ 1.80) ( 54,000) Retained earnings ( 407,050 – 317,325 + 185,103) 274,828 Equity 824,828 Non-current liabilities Deferred income ( 2,000 x 12) (W4) 24,000 Provision (note) 79,439 Borrowings 475,000 578,439 Current liabilities Trade and other payables 61,700 Deferred income (2,000 x 12) (W4) 24,000 Taxation 38,000 123,700 Total equity and liabilities 1,526,967.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 2 of 16 PT Ltd – Statement of profit or loss for the year ended 31 March 2017 £ Revenue ( 1,555,000 – 3,500 (W5)) 1,551,500 Cost of sales (W1) (845,017) Gross profit 706,483 Administrative expenses (W1) (480,308) Other operating income ( 2,000 x 6) (W4) 12,000 Operating profit 238,175 Finance costs ( 22,875 – 13,000 (W3) + 5,197 (note)) ( 15,072) Profit before tax 223,103 Income tax ( 38,000) Profit for the year 185,103 Provisions and contingencies Legal claim £ At 1 April 2016 – Profit or loss charge (W6) 74,242 Unwinding of discount (W6) 5,197 At 31 March 2017 79,439 Legal claim During the year a claim was made by a customer against PT Ltd for a delivery of defective goods. The incident was one-off in nature and was due to faulty materials being used. The provision has been discounted to a present value using a discount rate of 7%. The legal claim is likely to be settled in April 2018. A counter claim has been made against the supplier of the faulty materials, although at 31 March 2017 it is too early to assess whether this is likely to be successful. Workings W1 Expenses Cost of sales £ Admin expenses £ Draft 823,400 413,400 Closing inventory adjustment (W5) ( 2,625) Depreciation charges (W2) (12,500 + 49,710) 62,210 Equipment disposal proceeds reversed 3,400 Equipment loss on disposal (4,698 – 3,400) 1,298 Provision (note) (74,242 – 50,000) 24,242 845,017 480,308 W2 Property, plant & equipment Land & buildings Plant & equipment £ £ Opening balances – cost 900,000 535,000 Disposal ( 4,698) Accumulated depreciation ( 276,250) ( 198,900) Carrying amount 331,402 Depreciation (( 900,000 – 400,000) / 40yrs) ( 12,500) Depreciation (331,402 OF x 15%) (49,710) Borrowing costs (W3) 13,000 Land – cost 450,000 1,074,250 281,692.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 3 of 16 W3 Borrowing costs £ 150,000 x 6% x 9/12 6,750 250,000 x 5% x 6/12 6,250 13,000 W4 Government grant £ Full grant 60,000 30 months – monthly release (60,000/30) 2,000 W5 Inventory adjustment £ Sale or return items ( 7,000/ 2) 3,500 Cost ( 3,500 x 75%) 2,625 W6 Provision Legal claim: 85,000 / 1.072 = 74,242 Unwinding: 74,242 x 7% = 5,197 Presentation of the statement of profit or loss and statement of financial position was generally good, although there were more incomplete statements of profit or loss than usual. A larger number of candidates than usual omitted totals for total assets and total equity and liabilities on the statement of financial position, which was surprising given the " sum" facility within the computerised system. Careless marks were lost where students omitted to show a clear audit trail for their work. No marks will be awarded for incorrect figures unless supported by workings. Candidates should be reminded that where figures are added together, these need to be written out as the formulas used within a cell are hidden from markers. The majority of candidates gained full marks for revenue and the tax charge on the statement of profit or loss. Many also showed the correct figure for other operating costs, being the correct release of the grant received during the year. However, it was rare to see all three elements of finance costs correctly dealt with: most started with the base figure per the draft statement of profit or loss, but few deducted the interest capitalised (even where this had been correctly added to property, plant and equipment), and added the unwinding of the discount from the provision (even when they had unwound the provision). Others added the interest capitalised instead of deducting it. Many candidates arrived at the correct figures in relation to the goods "sold" on sale or return but there was some confusion over what should be reduced by the selling price (revenue and receivables) and what by the cost ( inventories in cost of sales and on the statement of financial position). The majority of candidates used the recommended " costs matrix" to arrive at cost of sales and administrative expenses. A number of common errors were made with regard to the adjustments in the costs matrix, which included deducting the total figure for closing inventories instead of just the adjustment for the goods which had been "sold" on sale or return and hence should have been included in closing inventories, splitting the increase (or for some an own figure decrease) between the two columns, so showing, say, £( 50,000) in one column and £74,242 in the other and calculating the provisions movement as the difference between the draft figure of £50,000 and the undiscounted £ 85,000, even where their provision calculation arrived at a discounted closing figure. On the statement of financial position completely correct figures were often seen for most of the current assets and liabilities. The most common errors here were adjusting inventories by the incorrect figure re the goods "sold" on sale or return (see above), making the adjustment to inventories and/or trade and other receivables in the wrong direction and adjusting cash and cash equivalents, when no cash adjustments were specified in the question. Candidates generally made a reasonable attempt at splitting the government grant, although it was not always clear how they made their split between current and non-current liabilities and many candidates clearly did not understand the link with the figure recognised as part of profit..

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 4 of 16 A few candidates did arrive at a completely correctly figure for property, plant and equipment. More arrived at the correct figure for interest capitalised, although some used an incorrect number of months and others did some sort of a weighted average calculation. By far the most common errors in arriving at the closing figure for property, plant and equipment were failing to add interest capitalised, even where this had been calculated and failing to take the £ 400,000 for the new distribution centre out of buildings before calculating the depreciation charge for the year. In equity, a significant number of candidates arrived at the correct figure for ordinary share capital and for share premium, although some deducted the adjustments for the issue of the treasury shares, instead of adding them back. Others showed the treasury shares as a positive rather than as a negative figure. In retained earnings, it was rare to see all three components needed: retained earnings per the draft statement of financial position, with the draft profit for the year taken out, and the revised profit for the year added in. A minority of candidates debited the treasury shares to retained earnings. Attempts at the provisions note were, as has been seen in previous sittings, disappointing. It was rare to see a line for the profit and loss account charge, and the provision made this year was usually shown as a brought forward figure. A line labelled " Additions" was also commonly seen. The narrative was more often than not of the correct tone for a note to the financial statements, although some candidates wrote as if this was an "explain" question. Most candidates realised that the counter-claim should not be recognised, and referred to this appropriately in the narrative, although a minority of candidates netted this off their provision figure. Others failed to discount the provision, or discounted by one year instead of two. Workings often did not resemble the figures shown in the provisions note. Total possible marks Maximum full marks 28 25 ( 1.2) UK GAAP differences IAS 20 requires that grants are recognised under the income approach, whereby the grant should be recognised in profit or loss over the period in which the entity recognises as expenses the costs which the grant are intended to compensate. As this is an income related grant it should either be recognised as income or netted-off against the related expenses over the specified period. Under FRS 102 an entity has the choice to use the performance model or the accrual model. As performance conditions apply here, under the performance model the grant should be recognised in income only when the performance-related conditions are met. Under the accrual model the grant would instead be recognised as deferred income of £ 60,000, hence showing the government grant as part of liabilities and then releasing it over the period in which the related costs are recognised (being when the performance conditions apply). The release of deferred income should be recognised as income as part of profit or loss rather than netted against expenses, however the overall impact on profit is the same. Under IAS 23 borrowing costs are required to be capitalised as part of the qualifying asset whereas under FRS 102 entities have a choice to either capitalise or expense such borrowing costs. Total possible marks Maximum full marks 6 3.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 5 of 16 Question 2 General comments Part 2.1 of this question required candidates to explain the financial reporting treatment of four accounting matters, given in the scenario. The matters covered revenue, a sale and leaseback transaction, a revaluation and the capitalisation of costs for property, plant and equipment. Part 2.2 required a revised profit figure to be calculated along with basic earnings per share following a bonus issue. Part 2.3 required an explanation of the accrual concept with reference to the question. Part 2.4 required an explanation of the ethical issues arising from the scenario and the action to be taken. (1) Revenue IAS 18, Revenue sets out that revenue in respect of the sale of services should not be recognised until the amount of revenue and costs, as well as stage of completion, can be measured reliably and it is probable that economic benefits will flow to the entity. The membership fee is similar to the provision of services, being the use of the gym facilities and hence the associated revenue should be spread over the period to which the services are being provided. The one-off joining fee of £35,000 ( £ 50 x 700) should be recognised on receipt as this is a non-returnable fee for which members are required to make to gain access to the sports facilities. The annual membership fee however should be deferred and spread over the twelve month period to which it relates, hence matching the revenue and costs of providing the facilities. The stage of completion should be calculated, assuming that the fee should be spread on a straight-line basis over the twelve months: ( £ 960 x 700) members x 4/12 months = £ 224,000 Hence £ 259,000 (224,000 + 35,000) should be recognised as revenue for the year ended 31 March 2017. The remaining £ 448,000 ( £ 80 x 700 x 8 months) should be recognised as deferred income as part of current liabilities. ( 2) Sale and leaseback This is a sale and finance leaseback arrangement and should therefore be treated as a financing arrangement rather than a sale. The asset should be derecognised. The profit on the sale should not be recognised immediately, instead it should be deferred and then recognised over the lease term. A profit of £ 490,000 was made on the sale part of the transaction and should be removed from profit for the period. £61,250 (490,000 / 8 yrs) of the profit should be released to profit and loss for the year ended 31 March 2017. The remaining £428,750 of profit should be treated as deferred income, split between current liabilities at £ 61,250 and non-current liabilities at £ 367,500 ( 428,750 – 61,250). A non-current asset should be recognised, at the lower of fair value and the present value of the minimum lease payments, which are equivalent here, hence £ 1,500,000 should be recognised with a corresponding liability. 1 April b/f Interest ( 7%) Payment 31 March c/f £ £ £ £ 1,500,000 105,000 ( 251,200) 1,353,800 1,353,800 94,766 (251,200) 1,197,366.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 6 of 16 Depreciation should be recognised over the shorter of the useful life and the lease term, so 8 years. Depreciation of £187,500 ( £1,500,000/8 years) should be recognised and the year-end carrying amount should be £ 1,312,500 ( 1,500,000 – 187,500). The release of the deferred income of £61,250 against the depreciation expense results in a net charge of £ 126,250 (187,500 – 61,250) in profit and loss. This is equivalent to the depreciation (ie £ 1,010,000/8yrs = £126,250) that would have been recognised on the original carrying amount of £1,010,000. For the year ended 31 March 2017 finance interest of £ 105,000 should be recognised in respect of the lease and the lease payment of £ 251,200 should be reversed from other operating costs. The remaining liability of £1,353,800 should be shown as £ 1,197,366 non-current and £ 156,434 as current ( 1,353,800 – 1,197,366). Whitlock plc currently uses the historical cost method for its property, plant and equipment however Whitlock plc wishes to change to the revaluation model. The revaluation model is permissible provided that it is applied to a whole class of assets. Accounting policies should be applied consistently from one period to the next to enhance comparability. However, where a new policy will result in reliable and more relevant information a change is permitted. A change from historical cost to one of valuation will better reflect current values and hence be more relevant, and a valuation carried out by experts will be considered reliable. Although a change in measurement basis is a change in accounting policy and not a change in accounting estimate where an asset is moved from historical cost to revaluation it is specifically excluded from IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Changes in accounting policy are normally applied retrospectively, however in respect of this issue IAS 16 Property, plant and equipment takes priority and hence the change is accounted for prospectively in accordance with this standard. The valuation should be recognised in non-current assets with the revaluation surplus recognised in other comprehensive income rather than as part of profit or loss for the period. The valuation should be carried out by a suitably qualified person and therefore the £700,000 should be recognised as the amount valued by the independent valuer rather than the managing director. At 1 April 2016 the land should be recognised at £ 700,000 as part of non-current assets, instead of £ 1 million and the profit of £ 550,000 ( 1,000,000 – 450,000) should be reversed out of profit for the period. Instead £ 250,000 (700,000 – 450,000) should be recognised as revaluation surplus as part of equity. There is no depreciation recognised at 31 March 2017 as land is considered to have an indefinite life. The land should be revalued with sufficient regularity to ensure that the carrying amount does not differ materially from its fair value. Therefore, assuming the land value hasn't changed materially by the year end it will continue to be held at £700,000.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 7 of 16 ( 4) Property, plant and equipment The new sports centre should initially be recognised at cost. IAS 16 sets out that the elements of cost which should be capitalised comprise the cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner in which it was intended. Capitalisation should cease when the asset is capable of operating in the manner in which it was intended. Costs incurred after this date should be expensed The costs of new sports centre should be recognised as: PPE £ Expensed £ Construction costs 305,000 Assembly and installation of equipment 42,000 Allocated general overheads 39,000 Architect's fees 3,700 Launch event costs 5,600 Advertising 2,100 Testing of equipment 1,800 Employee training 2,300 Relocation costs of staff 3,500 352,500 52,500 The amount which should be capitalised as part of non-current assets is £352,500, with the balance of £52,500 being recognised as part of profit or loss for the period. The £52,500 should be reversed out of non-current assets. Depreciation should commence once the asset is ready for use, this is on 1 October 2016, so six months depreciation should have been charged rather than only five months. Depreciation of £11,750 ( 352,500 / 15yrs x 6/12) should be recognised, hence the carrying amount of £ 340,750 (352,500 – 11,750) should be recognised at 31 March 2017. An adjustment should be made for the incorrect depreciation charge of £ 11,250 ( 405,000 / 15yrs x 5/12), crediting profit or loss and debiting non-current assets. Overall this question was well answered with virtually all candidates covering all issues and providing both explanations and calculations. The first issue related to revenue recognition and most candidates explained the relevant principles such as recognising service revenue by stage of completion. Most correctly distinguished between the treatment of the joining fee and annual membership fee and the correct figures were commonly seen. When errors were made they were normally to spread the joining fee revenue over 12 months and/or to get the split of the membership fee the wrong way round ie recognising the portion that should be deferred as current income. The second issue related to a sale and leaseback arrangement. Although this was generally well answered many candidates wasted time by justifying why it was a finance leaseback, when this was stated in the question. In addition, many candidates calculated the present value of the minimum lease payments when the question stated that this was equal to fair value, again wasting time and gaining no marks. The majority of candidates successfully produced the lease table although occasionally candidates started this with the wrong number and/or treated the payments as if they were in advance rather than in arrears. The third issue covered a change from the historic cost model to revaluation model for land. Again, this was generally well answered with most candidates correctly recognising that the valuation from the independent expert should be used (rather than that given by the director) and that the gain should go to equity rather than profit for the year. A significant number of candidates incorrectly described this as a change in an accounting estimate. When candidates did correctly identify it as a change in an accounting policy hardly any understood that for.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 8 of 16 revaluations IAS 16 should be followed rather than IAS 8 meaning that the change is dealt with prospectively. The final issue dealt with the capitalisation of costs relating to a new sports centre. Nearly all candidates attempted to identify which costs should be capitalised and which expensed. Where errors were made they tended to relate to the treatment of launch costs, testing of equipment, staff relocation costs and employee training. Nearly all candidates correctly recognised that depreciation should start when the asset was ready for use and then attempted to calculate both the incorrect and correct depreciation charges. It was quite common in this question to see all calculations done correctly. A small number of candidates wasted time discussing the criteria relevant for capitalising intangible assets or even those relating to the capitalisation of borrowing costs. Total possible marks Maximum full marks 35½ 22 ( 2.2) Whitlock plc Profit for the period £ Brought forward 1,643,500 (1) membership fees ( 448,000) (2) reverse profit ( 490,000) (2) deferred income release 61,250 (2) finance cost ( 105,000) (2) reverse lease payment 251,200 ( 2) depreciation ( 187,500) ( 3) revaluation reversal ( 550,000) ( 4) Capitalised costs - reversed ( 52,500) (4) Depreciation adjustments ( 11,750 – 11,250) ( 500) Revised 122,450 No. Of shares Period in issue Bonus factor Weighted average 1 April 2016 – 30 June 2016 350,000 3/12 5/4 109,375 Issue at full market price 50,000 1 July 2016 – 31 Dec 2016 400,000 6/12 5/4 250,000 Bonus issue (1 for 4) 100,000 1 Jan 2017 – 31 Mar 2017 500,000 3/12 125,000 484,375 Basic EPS = 122,450 = £ 0.25 484,375 The majority of candidates calculated a revised profit figure using their own calculated figures correctly. The main problem arose where candidates "accumulated" adjustments relating to an issue just showing one final figure as an adjustment to profit often with no clear audit trail. As stated above figures added together need to be clearly set out, rather than simply showing a total. Most candidates made a good attempt at calculating basic earnings per share which involved producing a weighted average share capital working. Answers were almost evenly split between those who produced a completely correct calculation (often then scoring full marks for this part of the question) and those who clearly had very little idea how to produce this working..

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 9 of 16 Common errors included failing to calculate the bonus fraction (or calculating it incorrectly) and/or applying it to the wrong periods of time and time apportioning the movements in share capital rather than the cumulative totals. Total possible marks Maximum full marks 8½ 7 ( 2.3) Concepts – Accrual basis The accrual basis of accounting records transactions in the period in which they occur, rather than when the cash inflow or outflow arises. Under the accrual basis an entity recognises items as assets, liabilities, equity, income and expenses when they satisfy the definition and recognition criteria for those elements in the IASB Conceptual Framework. For example, revenue is recorded when there is an increase in economic benefits during the period and the amount can be measured reliably in accordance with the IASB Conceptual Framework. Applying the accrual basis of accounting means that Whitlock plc should recognise revenue in the period in which the associated work is undertaken and not when the cash is received to provide a faithful representation in accordance with the Conceptual Framework. Therefore, Whitlock plc should recognise the gym joining fee on receipt as there is no outstanding service element. However, the gym membership fees should be recognised on a systematic basis over the period for which the membership fee applies. Another example in Whitlock plc is the charging of depreciation on the new sport's centre, with depreciation charged when the asset is ready for use. The depreciation is charged over the useful life of the asset, so that at the end of its life the asset will be written down to zero. This recognises that Whitlock plc is generating economic benefits from these assets over their useful lives, hence matching the income with the cost of the asset. Most candidates got the basic points, although with only brief comments rather than in-depth explanations which would have gained them more marks. It was common to see comments regarding issues ( 2) and ( 3) even though the requirement specifically said with reference to issues ( 1) and (4). Weaker candidates produced superficial and/or very brief answers, failing to link the conceptual theory to the transactions in question. Total possible marks Maximum full marks 6½ 4.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 10 of 16 ( 2.4) Ethical issues The managing director appears to be exerting undue pressure on Lutalo, the financial controller to report high profits and meet certain targets. Incorrect accounting practices have been followed which appear to over-inflate profit and hence earnings per share. Incentives, in the way of bonuses are being offered to staff, creating self-interest threat but in addition to that it appears that the managing director is saying that without the reported high profits staff may lose their jobs. This is creating intimidation threat as he is putting pressure on Lutalo because of the threat of staff potentially losing their jobs. In addition to this the finance director left under suspicious circumstances, which should be investigated and determined whether the rumours are correct or not. International Financial Reporting Standards are quite clear on the appropriate treatment of these issues. These particular areas of financial reporting offer no choice and very little judgement is needed on any of the matters. Lutalo should not give in to the managing director's wishes or prepare financial statements that are contrary to laws and regulations. Lutalo should make this clear to him. It is uncertain who has prepared the draft financial statements in the finance director's absence, although it is clear that some of the adjustments had already been made by the finance director, and whether they have been prepared by someone who is not aware of the correct accounting treatment. If this is the case they should not be preparing the financial statements. If this is not the case then they may have deliberately prepared them in this way to maximise profits. Draft profit was at £ 1,643,500, would have given an EPS of £ 3.39 compared with an actual figure of 25p per share. The difference is so large that it is difficult to believe that anyone could have made so many fundamental mistakes. It is therefore highly probable that these financial statements were deliberately manipulated to overstate profits. The over-inflated land value being used also increased non-current assets in an effort to provide security for the additional funding. However, if the correct accounting treatment had been followed for the lease the sports club assets would have continued to be reported. Lutalo should apply the ICAEW Code of Ethics. A suggested programme of actions would be to:  Explain the matters to the managing director together with supporting evidence so that the matters can be corroborated.  If resolution cannot be achieved, discuss the matter with other directors to explain the situation and obtain support, although this might not be an option if the managing director has control over other board members. Consider discussing the matter with the external auditors or the audit committee as Whitlock is a plc.  Obtain advice from the ICAEW helpline or local members responsible for ethics. During the resolution process it would be useful to keep a written record of the discussions, who else was involved and the decisions made. This ethics scenario was extremely well answered, with answers being well structured leading to a significant number of candidates achieving a good mark and often full marks. Although this was a relatively standard ethics scenario, it was pleasing to see a significant number of candidates linking in the impact on EPS. Total possible marks Maximum full marks 12 5.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 11 of 16 Question 3 General comments Part 3.1 of this question required candidates to prepare extracts from the consolidated financial statements for non-current assets and profit before tax. Calculations included goodwill on the acquisition of a subsidiary with deferred consideration and an inter-company transfer of an asset. Part 3.2 required extracts from the statement of cash flows. ( 3.1) Consolidated financial statements for the year ended 31 March 2017 (extracts) Non-current assets Property, plant and equipment ( W3) 1,161,570 Intangible assets (( 31,400 + 18,935) (W1) + ( 50,000 x 4/5)) 90,335 Investments ( 332,000 – 180,000 – 145,000) 7,000 Draft consolidated profit before tax £ Draft figure 526,720 Unrealised PPE profit & depreciation adjustment (9,000 – 6,000) (6,000) Intangible – brand amortisation (50,000 / 5yrs) ( 10,000) Deferred consideration – unwinding ( 73,965 x 4%) ( 2,959) Revised figure 507,761 Workings ( 1) Goodwill Consideration transferred: Cash at 1 Sept 2016 £ 180,000 £ Deferred cash ( 80,000 / 1.042) 73,965 Share consideration ( 100,000 x £ 1.85) 185,000 438,965 Non-controlling interest ( 466,700 x 10%) 46,670 485,635 Net assets at acquisition: Share capital 200,000 Retained earnings 216,700 Intangible asset – brand 50,000 (466,700) 18,935 ( 2) Property, plant and equipment – transfer 1 April 2016 £ £ Cost 105,000 Accumulated depreciation (( 105,000 / 7yrs) x 4yrs) ( 60,000) 45,000 Sale to Langridge plc 54,000 Unrealised profit 9,000 Langridge plc depreciation ( 54,000 / 3yrs) 18,000 Marchant Ltd depreciation (105,000 / 7yrs) 15,000 Excess depreciation 3,000 (3) Consolidated PPE £ Langridge plc 725,410 Marchant Ltd 318,900 Wilton Ltd 123,260 PPE PURP (W2) (6,000) 1,161,570 There were some good attempts at this question with a few candidates arriving at all the correct figures. Many candidates arrived at the correct figure for goodwill on the subsidiary purchased during the year..

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 12 of 16 The most common errors made here were discounting the deferred consideration by one year instead of two, not adding the brand at fair value for the subsidiary's net assets, or adding it at its year-end amortised figure and calculating the non-controlling interest figure on just share capital and retained earnings, but then adjusting for ( 100% of) the brand separately. Having calculated this goodwill, a number of candidates failed to add it to the goodwill on the older acquisition (given in the question), to arrive at total goodwill for the consolidated statement of financial position. Many candidates arrived at the correct figure for the unrealised profit on the intra-group sale of the machine, although did not then go on to adjust property, plant and equipment and the consolidated profit before tax by this figure. The final figure for consolidated investments was often correct, although not all candidates adjusted the parent's figure for both subsidiaries. Other common errors included the following:  Including the brand within property, plant and equipment instead of within intangibles.  Showing a single figure for non-current assets, when an extract from the consolidated statement of financial position would show a breakdown of this figure (as shown in the question).  Failing to calculate an adjusted figure for consolidated profit before tax or not including all of the adjustments dealt with elsewhere in their calculations. The most common omission was the unwinding of the deferred consideration. Total possible marks Maximum full marks 10½ 10 ( 3.2) Statement of cash flows for year ended 31 March 2017 (extract) Cash flows from financing activities Payment of finance lease (12,000 – ( 16,430 – 8,800 (W4))) ( 4,370) Proceeds from issue of ordinary shares (12,000 (W1) + 3,600 (W2)) 15,600 Proceeds from issue of loan 120,000 Dividends paid (W3) ( 35,000) Workings ( 1) Share capital £ £ B/d 50,000 Cash issue (β) 12,000 C/d 67,000 Bonus issue (50,000 / 10) 5,000 67,000 67,000 ( 2) Share premium £ £ Bonus issue (W1) 5,000 B/d 10,000 C/d 8,600 Cash issue (β) 3,600 13,600 13,600 ( 3) Retained earnings £ £ Dividends paid (β) 35,000 B/d 64,730 C/d 77,470 PorL 47,740 112,470 112,470.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 13 of 16 ( 4) Interest on bank loan ( 150,000 + (120,000 x 7/12)) x 4% = 8,800 A significant number of candidates failed to attempt this part, which was a pity, when those who did generally scored well. Presentation was usually good, with almost all setting out their individual cash flows under the heading of "Cash flows from financing activities". Many candidates arrived at completely correct figures for proceeds from the issue of shares, dividends paid and proceeds from the issue of the loan. It was much rarer to see the correct figure for the payment of the finance lease. A significant number of candidates simply showed the £ 12,000 lease payment as an outflow, failing to adjust this to deduct the finance cost on the lease to leave only the capital repayment. In order to arrive at this figure, candidates needed to calculate the interest due on the bank loan, take this out of the total finance cost for the year to arrive at the finance cost on the lease, then deduct this figure from the £12,000. Even where the figure for the interest due on the bank loan was correctly calculated only the very best candidates made the correct adjustment to arrive at the capital repayment for the finance lease. Where the figure for the interest due on the bank loan was incorrectly calculated this was usually due to calculating interest on the second loan for only six months instead of for seven. The most common omission from the cash flow extract was the cash inflow of £ 120,000 from the new loan obtained during the year. This figure was straight from the question and involved no calculation - yet very few students included it. The most common error when calculating the proceeds from the issue of shares was to use an incorrect figure for the bonus issue and/or to add this to share capital but fail to deduct this from share premium. A minority of candidates deducted the bonus issue from retained earnings instead of from share premium. Total possible marks Maximum full marks 6 5.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 14 of 16 Question 4 General comments This question required the preparation of a consolidated statement of profit or loss from individual entity financial statements. In addition, the retained earnings column from the consolidated statement of changes in equity was also required. The question featured two subsidiaries, one of which was acquired during the year, and an associate. Consolidation adjustments included unrealised profit on trading and a fair value adjustment on acquisition (of a depreciating asset). Toledo plc (i) Consolidated statement of profit or loss for the year ended 31 March 2017 £ Revenue (W1) 1,676,540 Cost of sales (W1) ( 833,360) Gross profit 843,180 Operating expenses (W1) (250,250) Profit from operations (W1) 592,930 Share of profit of associate (W3) 74,940 Investment income (W1) 6,000 Profit before tax 673,870 Income tax expense (W1) ( 195,900) Profit for the period 477,970 Profit attributable to Owners of Toledo plc (β) 421,729 Non-controlling interest (W2) 56,241 477,970 (ii) Consolidated statement of changes in equity for the year ended 31 March 2017 (extract) Retained earnings £ Balance at 1 April 2016 (W5) 784,377 Total comprehensive income for the year 421,729 Dividends ( 400,000 x 85p) ( 340,000) Balance at 31 March 2017 (β) 866,106 Workings (1) Consolidation schedule 8/12 Toledo plc Rowsell Ltd Gotrel Ltd Adj Consol £ £ £ £ £ Revenue 925,600 521,300 257,640 ( 28,000) 1,676,540 Cost of sales – per Q ( 479,200) ( 263,400) ( 115,400) 28,000 (833,360) – PURP ( 2,800 + 560) (W4) ( 3,360) Op expenses – per Q ( 158,000) ( 52,300) ( 28,200) ( 250,250) – FV deprec ( 22,000/ 8yrs) ( 2,750) – Impairment of goodwill ( 9,000) Investment income 132,000 – Rowsell ( 300,000 x 60p x 70%) ( 126,000) 6,000 Tax ( 104,500) ( 53,400) ( 38,000) (195,900) 149,450 76,040.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 15 of 16 ( 2) Non-controlling interest in year £ Rowsell Ltd ( 30% x 149,450 (W1)) 44,835 Gotrel Ltd ( 15% x 76,040) 11,406 56,241 ( 3) Associate – Phelan Ltd £ Profit for the year ( 228,400 x 35%) 79,940 Less impairment for year ( 5,000) 74,940 ( 4) PURP % £ £ SP 125 28,000 16,000 Cost ( 100) ( 22,400) ( 12,800) GP 25 5,600 3,200 X 1/2 2,800 1,600 Phelan Ltd £1,600 x 35% = £ 560 ( 5) Retained earnings brought forward £ £ Toledo plc ( 619,340 – 315,900) 303,440 Add back dividend ( 400,000 x 85p) 340,000 Rowsell Ltd – post acquisition change in net assets C/ fwd retained earnings 321,460 Less: retained earnings at acquisition ( 113,800) Less: profit for the period ( 152,200) Add back dividend ( 300,000 x 60p) 180,000 Less: FV deprec adjustment (2,750 (W1) x 5yrs) ( 13,750) 221,710 Rowsell Ltd (221,710 x 70%) 155,197 Less: Cumulative impairments (20,000) Phelan Ltd (( 351,700 – 106,900 – 228,400) x 35%) 5,740 784,377 Retained earnings carried forward (for proof only) £ Toledo plc 619,340 Less PURP (W1) ( 3,360) Rowsell Ltd – post acquisition ((321,460 – 113,800 – ( 2,750 x 6yrs)) x 70%) 133,812 Gotrel Ltd – post acquisition ( 76,040 (W1) x 85%) 64,634 Less: impairment – Rowsell Ltd ( 20,000 + 9,000 + 5,000) ( 34,000) Phelan Ltd ((351,700 – 106,900) x 35%) 85,680 866,106.

[Audio] Professional Level – Financial Accounting and Reporting – September 2017 Copyright © ICAEW 2017. All rights reserved. Page 16 of 16 Many students managed to gain good marks on this question, although the marks did range significantly from very low to full marks, with a few students completing the whole question correctly. The area that students struggled the most in was the consolidated statement of changes in equity and the calculation of retained earnings. With regard to the consolidated statement of profit and loss those candidates who used the standard workings, particularly the consolidation schedule, nearly always achieved more marks. Candidates who simply add the numbers across on the face of the final consolidated statement of profit or loss need to be aware that they will lose marks as it is impossible to determine if adjustments are being made to the figures of the correct company. Most candidates did recognise that one subsidiary's results needed to be time apportioned for eight months, although a few candidates used nine months instead. A majority of candidates also attempted to calculate the relevant PURP's, the fair value adjustment, the figure for share of associate's profit and the NCI. However, careless errors were common with figures often included in the wrong column and/or under the wrong expense heading. The most common error was to fail to add the PURP relating to the associate to the parent company's cost of sales. Instead this was often deducted from the associate's share of profit. Other common errors included:  contra'ing out the inter-group trading with the associate  including the prior year impairment and/or the impairment relating to the associate in the consolidation schedule  failing to multiply the PURP with the associate by the relevant percentage holding  deducting a share of the impairment from the associate's profit rather than the full amount  failing to deduct the dividend from the subsidiary from investment income or deducting the wrong amount  adjusting for the cumulative impact of the fair value adjustment rather than just the current year. Some students again were reluctant to state all calculations, particularly, for example the NCI calculation where students needed to state the percentage taken and the amount. For incorrect figures (the own figure rule) it must be clearly set-out which figures are being used to gain the marks. With regard to the consolidated statement of changes in equity this was badly answered and it was clear that many candidates have little idea what this should look like and what it should include. It was disappointing that relatively few candidates could even get the "easy" marks for share of comprehensive figure (often the total was included) and dividends paid by the parent (often the subsidiary's or NCI dividends were included). Workings were disorganised and it was often difficult to tell if candidates were attempting to calculate retained earnings brought forward or carried forward or even if something was meant to be the actual extract to the statement. Another problem was that various random net assets workings were often produced with no link to the actual retained earnings figure for inclusion in the statement. Total possible marks Maximum full marks 20 19.