ACCA P2 Corporate Reporting(INT)

June2014

Final Mock Exam Question+Answer Paper





































Lesco Group Limited, April 2014
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, without the prior written permission of Lesco Group Limited.


Q1 The following financial statements relate to Ashanti, a public limited company.

consolidated statement of profit or loss and other comprehensive income for the
year ended 30 April 2014

The following information is relevant to the preparation of the group statement of
profit or loss and other comprehensive income:

(i) On 1 May 2012, Ashanti acquired 70% of the equity interests of Bochem, a
public limited company. The purchase consideration comprised cash of $150 million
and the fair value of the identifiable net assets was $160 million at that date. The
fair value of the non-controlling interest in Bochem was $54 million on 1 May 2012.
Ashanti wishes to use the full goodwill method for all acquisitions. The share
capital and retained earnings of Bochem were $55 million and $85 million
respectively and other components of equity were $10 million at the date of
acquisition. The excess of the fair value of the identifiable net assets at acquisition
is due to an increase in the value of plant, which is depreciated on the straight-line
method and has a five year remaining life at the date of acquisition. Ashanti
disposed of a 10% equity interest to the non- controlling interests (NCI) of Bochem
on 30 April 2014 for a cash consideration of $34 million. The carrying value of the
net assets of Bochem at 30 April 2014 was $210 million before any adjustments on
consolidation. Goodwill has been impairment tested annually and as at 30 April
2013 had reduced in value by 15% and at 30 April 2014 had lost a further 5% of its
original value before the sale of the equity interest to the NCI. The goodwill
impairment should be allocated between group and NCI on the basis of equity
shareholding.
(ii) Bochem acquired 80% of the equity interests of Ceram, a public limited
company, on 1 May 2012. The purchase consideration was cash of $136 million.
Cerams identifiable net assets were fair valued at $115 million and the NCI of
Ceram attributable to Ashanti had a fair value of $26 million at that date. On 1
November 2013, Bochem disposed of 50% of the equity of Ceram for a
consideration of $90 million.

Cerams identifiable net assets were $160 million and the consolidated value of the
NCI of Ceram attributable to Bochem was $35 million at the date of disposal. The
remaining equity interest of Ceram held by Bochem was fair valued at $45 million.
After the disposal, Bochem can still exert significant influence. Goodwill had been
impairment tested and no impairment had occurred. Cerams profits are deemed to
accrue evenly over the year.

(iii) Ashanti has sold inventory to both Bochem and Ceram in October 2013. The
sale price of the inventory was $10 million and $5 million respectively. Ashanti sells
goods at a gross profit margin of 20% to group companies and third parties. At the
year-end, half of the inventory sold to Bochem remained unsold but the entire
inventory sold to Ceram had been sold to third parties.

(iv) On 1 May 2011, Ashanti purchased a $20 million five-year bond with semi
annual interest of 5% payable on 31 October and 30 April. The purchase price of
the bond was $2162 million. The effective annual interest rate is 8% or 4% on a
semi annual basis. The bond is held at amortised cost. At 1 May 2013 the amortised
cost of the bond was $21.046 million. The issuer of the bond did pay the interest
due on 31 October 2013 and 30 April 2014, but was in financial trouble at 30 April
2014. Ashanti feels that as at 30 April 2014, the bond is impaired and that the best
estimates of total future cash receipts are $234 million on 30 April 2015 and $8
million on 30 April 2016. The current interest rate for discounting cash flows as at
30 April 2014 is 10%. No accounting entries have been made in the financial
statements for the above bond since 30 April 2013. (You should assume the annual
compound rate is 8% for discounting the cash flows.)

(v) Ashanti sold $5 million of goods to a customer who recently made an
announcement that it is restructuring its debts with its suppliers including Ashanti.
It is probable that Ashanti will not recover the amounts outstanding. The goods
were sold after the announcement was made although the order was placed prior to
the announcement. Ashanti wishes to make an additional allowance of $8 million
against the total receivable balance at the year end, of which $5 million relates to
this sale.




(vi) Ashanti owned a piece of property, plant and equipment (PPE) which cost $12
million and was purchased on 1 May 2012. It is being depreciated over 10 years on
the straight-line basis with zero residual value. On 30 April 2013, it was revalued to
$13 million and on 30 April 2014, the PPE was revalued to $8 million. The whole of
the revaluation loss had been posted to other comprehensive income and
depreciation has been charged for the year. It is Ashantis company policy to make
all necessary transfers for excess depreciation following revaluation.

(vii) The salaried employees of Ashanti are entitled to 25 days paid leave each year.
The entitlement accrues evenly over the year and unused leave may be carried
forward for one year. The holiday year is the same as the financial year. At 30 April
2014, Ashanti has 900 salaried employees and the average unused holiday
entitlement is three days per employee. 5% of employees leave without taking their
entitlement and there is no cash payment when an employee leaves in respect of
holiday entitlement. There are 255 working days in the year and the total annual
salary cost is $19 million. No adjustment has been made in the financial statements
for the above and there was no opening accrual required for holiday entitlement.

(viii) As permitted by IFRS 9 Financial instruments all group companies have made
an irrecoverable election to recognise changes in the fair value of investments in
equity instruments in other comprehensive income (items that will not be
reclassified to profit or loss).

(ix) Ignore any taxation effects of the above adjustments and the disclosure
requirements of IFRS 5 Non-current assets held for sale and discontinued
operations.

Required
(a) Prepare a consolidated statement of profit or loss and other comprehensive
income for the year ended 30 April 2014 for the Ashanti Group. (35 marks)

(b) Ashanti Group has three distinct business segments. The management has
calculated the net assets, turnover and profit before common costs, which are to be
allocated to these segments. However, they are unsure as to how they should
allocate certain common costs and whether they can exercise judgement in the
allocation process. They wish to allocate head office management expenses;
pension expense; the cost of managing properties and interest and related interest
bearing assets. They also are uncertain as to whether the allocation of costs has to
be in conformity with the accounting policies used in the financial statements.
Required:
Advise the management of Ashanti Group on the points raised in the above
paragraph. (7 marks)

(c) Segmental information reported externally is more useful if it conforms to information
used by management in making decisions. The information can differ from that reported in
the financial statements. Although reconciliations are required, these can be complex and
difficult to understand. Additionally, there are other standards where subjectivity is involved
and often the profit motive determines which accounting practice to follow. The directors
have a responsibility to shareholders in disclosing information to enhance corporate value
but this may conflict with their corporate social responsibility.
Required:
Discuss how the ethics of corporate social responsibility disclosure are difficult to
reconcile with shareholder expectations. (6 marks)

Professional marks will be awarded in part (c) for clarity and expression of your discussion.
(2 marks)
(50 marks)
Q2
Blackcutt is a local government organisation whose financial statements are prepared using
International Financial Reporting Standards.

(a) Blackcutt wishes to create a credible investment property portfolio with a view to
determining if any property may be considered surplus to the functional objectives and
requirements of the local government organisation. The following portfolio of property is
owned by Blackcutt.

Blackcutt owns several plots of land. Some of the land is owned by Blackcutt for capital
appreciation and this may be sold at any time in the future. Other plots of land have no
current purpose as Blackcutt has not determined whether it will use the land to provide
services such as those provided by national parks or for short-term sale in the ordinary
course of operations.

The local government organisation supplements its income by buying and selling property.
The housing department regularly sells part of its housing inventory in the ordinary course
of its operations as a result of changing demographics. Part of the inventory, which is not
held for sale, is to provide housing to low-income employees at below market rental. The
rent paid by employees covers the cost of maintenance of the property.
(7 marks)

(b) Blackcutt has outsourced its waste collection to a private sector provider called Waste
and Co and pays an annual amount to Waste and Co for its services. Waste and Co
purchases the vehicles and uses them exclusively for Blackcutts waste collection. The
vehicles are painted with the Blackcutt local government organisation name and colours.
Blackcutt can use the vehicles and the vehicles are used for waste collection for nearly all of
the assets life. In the event of Waste and Cos business ceasing, Blackcutt can obtain legal
title to the vehicles and carry on the waste collection service. (6 marks)

(c) Blackcutt owns a warehouse. Chemco has leased the warehouse from Blackcutt and is
using it as a storage facility for chemicals. The national government has announced its
intention to enact environmental legislation requiring property owners to accept liability for
environmental pollution. As a result, Blackcutt has introduced a hazardous chemical policy
and has begun to apply the policy to its properties. Blackcutt has had a report that the
chemicals have contaminated the land surrounding the warehouse. Blackcutt has no
recourse against Chemco or its insurance company for the clean-up costs of the pollution. At
30 November 2012, it is virtually certain that draft legislation requiring a clean up of land
already contaminated will be enacted shortly after the year end. (4 marks)

(d) On 1 December 2006, Blackcutt opened a school at a cost of $5 million. The estimated
useful life of the school was 25 years. On 30 November 2012, the school was closed
because numbers using the school declined unexpectedly due to a population shift caused
by the closure of a major employer in the area. The school is to be converted for use as a
library, and there is no expectation that numbers using the school will increase in the
future and thus the building will not be reopened for use as a school. The current
replacement cost for a library of equivalent size to the school is $21 million. Because of the
nature of the non-current asset, value-in-use and net selling price are unrealistic estimates
of the value of the school. The change in use would have no effect on the estimated life of
the building. (6 marks)


Required:
Discuss how the above events should be accounted for in the financial statements
of Blackcutt.

Note: The mark allocation is shown against each of the four events above.
Professional marks will be awarded in question 3 for the clarity and quality of the
presentation and discussion.
(2 marks)
(25 marks)





















Q3
(a) Janne is a real estate company, which specialises in industrial property.
Investment properties including those held for sale constitute more than 80% of its
total assets.
It is considering leasing land from Maret for a term of 30 years. Janne plans to use
the land for its own office development but may hold the land for capital gain. The
title will remain with Maret at the end of the initial lease term. Janne can lease the
land indefinitely at a small immaterial rent at the end of the lease or may purchase
the land at a 90% discount to the market value after the initial lease term. Janne is
to pay Maret a premium of $3 million at the commencement of the lease, which
equates to 70% of the value of the land. Additionally, an annual rental payment is
to be made, based upon 4% of the market value of the land at the commencement
of the lease, with a market rent review every five years. The rent review sets the
rent at the higher of the current rent or 4% of the current value of the land. Land
values have been rising for many years.
Additionally, Janne is considering a suggestion by Maret to incorporate a clean
break clause in the lease which will provide Janne with an option of terminating the
agreement after 25 years without any further payment and also to include an early
termination clause after 10 years that would require Janne to make a termination
payment which would recover the lessors remaining investment. (12 marks)

(b) Janne measures its industrial investment property using the fair value method,
which is measured using the new-build value less obsolescence. Valuations are
conducted by a member of the board of directors. In order to determine the
obsolescence, the board member takes account of the age of the property and the
nature of its use. According to the board, this method of calculation is complex but
gives a very precise result, which is accepted by the industry. There are sales
values for similar properties in similar locations available as well as market rent
data per square metre for similar industrial buildings. (5 marks)

(c) Janne operates through several subsidiaries and reported a subsidiary as held
for sale in its annual financial statements for both 2012 and 2013. On 1 January
2012, the shareholders had, at a general meeting of the company, authorised
management to sell all of its holding of shares in the subsidiary within the year.
Janne had shown the subsidiary as an asset held for sale and presented it as a
discontinued operation in the financial statements at 31 May 2012. This accounting
treatment had been continued in Jannes 2013 financial
statements.

Janne had made certain organisational changes during the year to 31 May 2013,
which resulted in additional activities being transferred to the subsidiary. Also
during the year to 31 May 2013, there had been draft agreements and some
correspondence with investment bankers, which showed in principle only that the
subsidiary was still for sale. (6 marks)

Required:
Advise Janne on how the above accounting issues should be dealt with in its
financial statements.
Note: The mark allocation is shown against each of the three issues above.
Professional marks will be awarded in question 3 for clarity and quality of
presentation. (2 marks)
(25 marks)













Q4
The publication of IFRS 9, Financial Instruments, represents the completion of the first
stage of a three-part project to replace IAS 39 Financial Instruments: Recognition and
Measurement with a new standard. The new standard purports to enhance the ability of
investors and other users of financial information to understand the accounting of financial
assets and reduces complexity.

Required:
(a)
(i) Discuss the approach taken by IFRS 9 in measuring and classifying financial
assets and the main effect that IFRS 9 will have on accounting for financial assets.
(11 marks)

(ii) Grainger, a public limited company, has decided to adopt IFRS 9 prior to January 2012
and has decided to restate comparative information under IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors. The entity has an investment in a financial
asset which was carried at amortised cost under IAS 39 but will be valued at fair value
through profit and loss (FVTPL) under IFRS 9. The carrying value of the assets was
$105,000 on 30 April 2010 and $110,400 on 30 April 2011. The fair value of the asset was
$106,500 on 30 April 2010 and $111,000 on 30 April 2011. Grainger has determined that
the asset will be valued at FVTPL at 30 April 2011.

Required:
Discuss how the financial asset will be accounted for in the financial statements of
Grainger in the year ended 30 April 2011. (4 marks)

(b) Recently, criticisms have been made against the current IFRS impairment model for
financial assets (the incurred loss model). The issue with the incurred loss model is that
impairment losses (and resulting write-downs in the reported value of financial assets) can
only be recognised when there is evidence that they exist and have been incurred.
Reporting entities are not allowed currently to consider the effects of expected losses. There
is a view that earlier recognition of loan losses could potentially reduce the problems
incurred in a credit crisis.

Grainger has a portfolio of loans of $5 million which was initially recognised on 1 May 2010.
The loans mature in 10 years and carry an interest rate of 16%. Grainger estimates that no
loans will default in the first two years, but from the third year onwards, loans will default at
an annual rate of about 9%. If the loans default as expected, the rate of return from the
portfolio will be approximately 907%. The number of loans are fixed without any new
lending or any other impairment provisions.

Required:
(i) Discuss briefly the issues related to considering the effects of expected losses
in dealing with impairment of financial assets. (4 marks)
(ii) Calculate the impact on the financial statements up to the year ended 30 April
2013 if Grainger anticipated the expected losses on the loan portfolio in year three.
(4 marks)

Professional marks will be awarded in question 4 for clarity and quality of discussion. (2
marks)
(25 marks)















ACCA P2 Corporate Reporting(INT)
June2014

Final Mock Exam Answer Paper





































Lesco Group Limited, April 2014
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or
otherwise, without the prior written permission of Lesco Group Limited.


Q1






















Q2
(a)
Definition
An investment property is a property held for capital appreciation or to earn rental
income.

Classification:
Investment purpose
The company holds the property to each capital appreciation or rental income.

Complete
The property must be substantially complete.

Owned use
This property cant be used by the company in the normal course of business activities.

Subsequent measurement
The subsequent measurement for this is to use fair value model where Blackcutt will
take fair value changes directly to the statement of comprehensive income.

Land
So the land held by Blackcutt should be classified as investment property as this is
considered to enjoy capital appreciation while other plots of land would be considered
to enjoy capital appreciation if theres no other current purpose.

Supplement
Sales of property are in the ordinary course of its operations and are routinely occurring,
then the housing stock held for sale will be classified as inventory per IAS2 inventory.

Low-income employees
The part of the inventory held to provide housing to low-income employees at below
market rental and this is held to provide housing services rather than rentals so cant
be classified as investment property but as property, plant and equipment per IAS16.

















(b)
Finance lease
Finance lease is a lease where it transfer substantial risks and rewards from the lessor
to the lessee.

Operating lease
Operating lease is a lease when the lease its not a finance lease.

Substance over form
The classification of the lease will depend on the substance of the transaction rather
than its legal form.

Blackcutt
Even though Blackcutt owns the legal title of property eventually but because:
1, it has transferred risks and rewards of vehicles to Waster&Co, ie, Waste&Co can use
them to earn money by collecting wastage;
2, Waste&Co can use them for nearly all of the assets life;
3, At the end of the life of vehicle the title will be transferred back to Blacutt.

So this transaction is a finance lease.

Accounting
So blackcutt should derecognize the PP&E in its FS and recognize a corresponding
finance lease obligation but this will depend on the FV of asset at inception.


(c)
A provision should be recognized if:
1, Probable
Blackcutt has no recourse against the entity or
its insurance company and so resulting an economic outflow.

2, Obligation
Theres an obligation for Blackcutt because its virtual certainty of legislation requiring
the clean up as a result of contaminating the land.

3, Reliably estimate
To recognize a provision the amount should be reliably estimated by Blackcutt as well.

Impairment
Because the land has been contaminated and we should consider any impairment of
land as a result of this by performing an impairment test as per IAS36.








(d)
Prudence
According to the prudence principle we cant overstate the asset value in the FS.

indicator
if theres an indicator suggesting the building is impaired then an impairment test would
need to be performed and because in Blackcutt the purpose of using the building has
changed from education to library because of the fall in number of students then this is
an impairment indicator.

Impairment test
Management in blackcutt at the end of each year should perform an impairment test to
see if the carrying value of the asset is greater than its recoverable amount then an
impairment expense should be recognized.

Recoverable amount
The recoverable amount for the building is determined as the higher of value in use and
net realizable value and because they are not both provided then we can use
depreciated replacement cost.

Accounting:
asset Cost | replacement
cost
Accum depreciation CV| replacement cost
School 5000 5,000x6/25 =1200 3,800
Library 2100 2100X6/25=504 (1,596)--RV
2204

So blackcutt would DR I/S 2204 CR PP&E 2204











Q3 answer
(a) [Only 12 points required]
Finance lease
Finance lease is a lease where it transfer substantial risks and rewards from the
lessor to the lessee.

Operating lease
Operating lease is a lease when the lease its not a finance lease.

Substance over form
The classification of the lease will depend on the substance of the transaction rather
than its legal form.

5 scenarios of finance lease:
1, ownership of asset has been transferred from lessor to lessee.
2, lessee has the option to purchase asset at a price which is sufficiently lower than
its FV.
3, lease term is almost the same as the major part of economic life of asset.
4, at the start of the lease, PV of minimum lease payment is close to FV of asset.
5, leased assets are specified nature and can only be used by lessee and they can
be used by others if any significant modification to assets occurs.

Scenarios:
1. Jane can rent the land at small rate at the end of lease or purchase at 90%
discount of the land implies this is a finance lease.

2.Jane is to pay Maret 70% of the land value at the start of the lease which implies
this is a finance lease.
3. the lessor review the rent and this makes sure lessor recovers fair value of asset
and makes return on investment of it and this is an indicator of finance lease.

Premium
This is an operating lease indicator because operating lease requires upfront
payment and if this is the case then the payment should be kept separate from the
lease and expense to the income statement.

Accounting treatment
If this is a finance lease then Janne should capitalize the premium as a PP&E and
recognize a liability (finance lease obligation) and depreciate it.
Also it has to recognize the finance cost relating to the unwinding of liability over
the lease term.

Investment property
But Janne would hold the land for capital gain and hence it may be treated under
IAS40 investment properties and any gains or loss of the asset would be taken into
the income statement.

Clean break clause
It allows lessee to walk away without any penalty payment and hence the lease
term would be from start of the lease up to the earliest point that option is
exercised.

If there is early termination payment then lessor would ensure they would get
return from it and this is a finance lease indicator.



(b)
Investment property
An investment property is a property that entity holds in order to enjoy capital gain
or rental income.

Subsequent measurement
We normally use fair value model because it would better reflect the market
condition, ie, take fair value changes to income statement.

Fair value
There are three levels to determine fair value according to IFRS 13 fair value
measurement:
Level1: quoted price
If there is an active market then the market price from that market on the
measurement date should be used.
Level2: similar quoted price
If level one fails then level two requires that similar market data should be used to
establish the approximated market value.
Level3: unobservable inputs(management best estimate, eg, present value)
If level one and two fails to determine the fair value then you can use level three
where you can use financial model to determine fair value.

Scenario:
* They can use level 2 to determine fair value like using sales/square meter.
* Or they can use level 3 to determine fair value like using cash flow forecast.
* But management has used new-build value minus obsolescence to determine
fair value but this does reflect the above 3 levels required by IFRS13.

Conclusion
So managements calculation of fair value is not correct.

(c) [only 6points required]
Discontinued operation
A discontinued operation is an operation if its closed or sold during the year or held
for sale at the year end.

And its carrying amount will be recovered principally through sale rather than
continuing use.

Non-current assets held for sale
In order to classify the asset into non-current assets held for sale, it needs to fulfill
following criteria:
Selling purposes by management
Available for sale under current condition
Locate a buyer actively
Expected to complete within 12 months from the year end

Scenario:
There is selling purpose by management because this is authorized by sharheolders
for management to sell all of subsidiary shares.

But it may not be available for sale immediately because given changes made
during to 31 May 2013 which resulted in some activities being transaferred to
subsidiary.

And there is some correspondence with investment bankers and this means
directors are actively locating a buyer.

But given the authorization for sale is just within 1 year and maybe the sale would
not be proceeded more than 1 year.

So it doesnt meet the IFRS5 criteria for non-current assets held for sale and so the
current figures should reclassify the sub as continuing and the comparatives require
restatement.


















Q4 answer
(a)

(i)

IFRS9 uses 2 questions to determine financial asset using amortized cost or fair value.

Business model test ie, Hold it till maturity?

Contractual cash flow characteristic(CCC) test ie, does debt contain principle and
interest only?

If there are 2 yes from those questions then the financial assets would be measured
using amortized cost.

If only 1 yes from those questions then financial assets would be measured using fair
value.

The gains or losses would be taken into income statement or other comprehensive
income.

And this is based on intent, ie, intent to hold the assets or sell the assets.

If entity shows strategic long term investment then gains/losses would be taken into
other comprehensive income.

Entity can carry financial assets at fair value when otherwise they would be carried at
amortized cost.

And this occurs when theres an accounting mismatch which is a financial liability carried
at fair value and related financial assets carried at amortized cost.



(ii)
Per IAS 8 if a new standard arises then its adoption is a change in accounting policy.

We should therefore
(i) adjust opening reserves for the change
(ii) adjust comparatives figures from the previous year in the statement of profit or loss
and SFP.

In the year ended 30/4/2011 we will have to change the opening balance for financial
assets so
DR financial assets 1,500(106,500-105,000)
CR retained earnings b/f 1,500

When we prepare the comparative statement of profit or loss for the year ended 30/4/11,
we will use FV .TPL to measure the financial asset at SFP date.

This gives a value of $111,000(from $106,500) so
DR SFP- financial assets 4,500
CR I/S : gain on fair value 4,500
(b)
(i)
Expected losses issues

(i)how are the expected losses to be calculated. It will involve forecasting and judgment.
This will increase the subjectivity in the SFP.

(ii)it will require changes to systems and data collection to allow expected losses to be
calculated.

(iii)it may increase volatility of SFP as economic conditions change from one year to another.

(iv) likely to require extra disclosures in the note to explain how the losses have been
estimated









(ii)
Graingers(9%)
Current position: use interest rate applicable when asset was acquired
Date Asset i/s(16%) Outstanding installment c/f
1.5.10 5,000 800 (800)-16% 5,000
1.5.11 5,000 800 (800)-16% 5,000
1.5.12 5,000 800 So: (728) 4,550

Default of 9%---4,550

Expected loss model

Use expected return of 9.07%

year Asset(op) i/s(9.07%) Outstanding Installment(16%) c/f
1.5.10 5,000 453 (800) 4,653
1.5.11 4,653 422 (800) 4,275
1.5.12 4,275 388 (800) 3,933

Under proposals the value of financial asset will be much lower.