CORPORATE REPORTING

PROFESSIONAL 1 EXAMINATION - APRIL 2012

NOTES:

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
(If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)
Note: Students have optional use of the Extended Trial
Balance, which if used, must be included in the answer booklet.
PRO-FORMA STATEMENT OF COMPREHENSIVE INCOME BY NATURE,
STATEMENT OF COMPREHENSIVE INCOME BY FUNCTION
AND STATEMENT OF FINANCIAL POSITION ARE PROVIDED.

TIME ALLOWED:

3.5 hours, plus 10 minutes to read the paper.

INSTRUCTIONS:

During the reading time you may write notes on the examination paper but you may not commence
writing in your answer book. Please read each Question carefully.
Marks for each question are shown. The pass mark required is 50% in total over the whole paper.
Start your answer to each question on a new page.

You are reminded to pay particular attention to your communication skills and care must be taken
regarding the format and literacy of the solutions. The marking system will take into account the content
of your answers and the extent to which answers are supported with relevant legislation, case law or
examples where appropriate.
List on the cover of each answer booklet, in the space provided, the number of each question(s)
attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

CORPORATE REPORTING

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION APRIL 2012

Time allowed 3.5 hours, plus 10 minutes to read the paper.

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5.
(If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the
answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

You are required to answer Questions 1, 2 and 3.

1.

The following Statements of Comprehensive Income relate to Rednut Plc (Rednut) and its investee companies,
Blutec Plc (Blutec) and Minton Plc (Minton).
Statements of Comprehensive Income for year ended 31 December 2011
Rednut Plc
Blutec Plc
Minton Plc
million
million
million
Revenue
1,230
680
425
Cost of Sales
(465)
(240)
(189)
Gross profit
765
440
236
Operating expenses
(310)
(230)
(145)
Finance costs
(50)
(30)
(20)
Other income
9
Investment income
36
Profit before taxation
450
180
71
Taxation
(75)
(30)
(15)
Profit for the year
375
150
56
Other comprehensive income (net of tax)
63
20
18
Total comprehensive income for the year
438
170
74
The following additional information is provided:

(i)

Rednut bought a 60% holding in the equity of Blutec on 1 January 2010. On that date the fair value of certain plant
& equipment of Blutec was 72 million in excess of its book value. This plant & equipment had a useful economic
life of 4 years from the date of acquisition. The revised values were not incorporated into the books of Blutec.

(ii)

Goodwill on the acquisition of Blutec was reviewed for impairment on 31 December 2011 and an impairment loss
of 7 million was found to be necessary. No previous impairment losses had been recognised on goodwill. Noncontrolling interests in Blutec had been measured at their proportionate share of the fair values of the identifiable
net assets of Blutec at the acquisition date, and this figure had been incorporated into the goodwill calculation.

(iii)

During 2011, Rednut sold goods to Blutec for 15 million. These goods were sold by Rednut at a mark-up on cost
of 25%. One third of the goods remained in the inventory of Blutec at 31 December 2011. At 31 December 2010
there were goods to the value of 2 million in the inventory of Blutec which had been supplied by Rednut during
2010 on the same terms.

(iv)

Blutec declared a dividend of 60 million during the year. Rednut has recognised its share of this dividend within
investment income.

(v)

Since acquisition, Rednut has managed the administration of the entire group. Rednut invoiced Blutec 3 million
for its share of these costs. Rednut recorded this transaction within other income, and Blutec within operating
expenses.

(vi)

On 1 July 2011, Rednut purchased a 30% holding in Minton. Rednut exercises significant influence over Minton
as a result of this acquisition.

(vii)

On 1 July 2011, immediately following the purchase of shares in Minton, Rednut sold some land to Minton for 20
million, recording a profit of 6 million. This profit is included within other income in the books of Rednut.
Page 1

REQUIREMENT:
(a)
Prepare the Consolidated Statement of Comprehensive Income for the Rednut Group for year ended 31
December 2011, in accordance with IFRS.
(19 marks)
Presentation (1 mark)

(b)

(c)

Write a brief memo to the Board of Directors explaining your treatment of the transactions described at notes (iv)
and (v) above.
(4 marks)
Note: The following information should have no impact on your answer to (a) and (b) above.
Assume Rednuts entire holding in Blutec was sold on 1 January 2012 for an agreed price of 1,700 million.
Expenses of sale were 40 million. At the date of sale the net assets of Blutec had a carrying value of 1,950
million in its books. This excludes the fair value adjustment recognised at acquisition and described at note (i)
above. Goodwill had a carrying value of 133 million. The non-controlling interest had a carrying value (based on
fair value at acquisition plus share of post-acquisition results) of 365 million. Show the journal entry to record
this transaction from the perspective of the group accounts.
(6 marks)
[Total: 30 MARKS]

2.

The following trial balance was extracted from the books of Thirdgear Plc on 31 December 2011.
Note
Dr
million
Revenue
Cost of sales
195
Distribution costs
65
Administration expenses
42
Investment properties
(i)
300
Equity investments at cost
(ii)
42
Interim dividends
66
Land and buildings at cost
(iii)
400
Plant and equipment at cost
(iii)
650
Accumulated depreciation 1 January 2011 land & buildings
(iii)
Accumulated depreciation 1 January 2011 - plant and equipment (iii)
Development expenditure
(iv)
80
Suspense account
(v)
13
Trade receivables
70
Inventory at 31 December 2011
66
Cash and bank
99
Trade payables
Share premium account
Ordinary shares of 10c each
(vii)
8% Debenture (issued on 1 February 2011)
(viii)
Retained earnings reserve at 1 January 2011
2,088

Cr
million
460

120
310

46
150
500
120
382
2,088

The following notes are relevant to your answer:

(i)
Investment properties are accounted for under the fair value model of IAS 40 - Investment Property. The
figure included in the trial balance above represents the fair value of these properties at 1 January 2011.
The fair value of these properties at 31 December 2011 was 265 million.
(ii)

The figure for investments represents the cost of equities purchased during the year. As permitted by IFRS
9 - Financial Instruments: Classification and Measurement, an election was made at the date of purchase
to account for any fair value gains and losses on these equity investments through other comprehensive
income. The fair value of the equity investments at 31 December 2011 was 47.5 million.

Page 2

(iii)

Land and buildings are carried under the cost model as permitted by IAS 16 - Property, Plant & Equipment.
The land cost included in the trial balance figure for land & buildings is 100 million. The buildings were
originally deemed to have had a useful economic life of 30 years, of which 12 had passed by 1 January
2011. During the year a decision was taken to change the accounting policy to apply the revaluation model
from 31 December 2011. The revalued amounts at that date were certified by a qualified valuer to be 65
million for the land and 200 million for the buildings.
Plant & equipment is being depreciated at 25% per annum reducing balance.
All depreciation is charged to cost of sales.

(iv)

The development expenditure relates to amounts incurred on various projects undertaken by the company
during the year. It is estimated that the composition of this figure is as follows:
Research costs:
Development costs (relating to projects meeting the
IAS 38 - Intangible Assets criteria for capitalisation):
Development costs (relating to projects not meeting the
IAS 38 - Intangible Assets criteria for capitalisation):

15 million
37.5 million
27.5 million

(v)

The suspense account relates to a contingent asset recognised during the year ended 31 December 2011,
as it was considered virtually certain to be recovered. However, developments during 2011 led to the
conclusion that the likelihood of recovering this amount had fallen somewhat. It is now considered 65%
likely to be recovered. The bookeeper was unsure what to do about this item.

(vi)

Corporation tax for the year was estimated at 1.3 million.

(vii)

The directors proposed a final ordinary dividend of 1.2c per share. The proposal was approved prior to the
reporting date. No account has been taken of this proposal.

(viii)

The debentures were issued during the year. Interest is payable annually in arrears. No interest has been
provided for or paid as at 31 December 2011.

REQUIREMENT:
(a)

As far as the above information permits, prepare the following financial statements for Thirdgear Plc in accordance
with current international accounting standards:
(i)
(ii)

The Statement of Comprehensive Income for the year ended 31 December 2011; and
The Statement of Financial Position as at 31 December 2011.

Notes to the financial statements are not required.

(b)

(23 marks)
Presentation (2 marks)

Discuss briefly the circumstances under which it may be appropriate to change accounting policy in accordance
with the guidance given in IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors, and state
with reasons whether the changes described in notes (iii) and (v) above should be considered changes in
accounting policies.
(5 marks)
[Total: 30 MARKS]

Page 3

3.

The following multiple choice question contains eight sections, each of which is followed by a choice of
answers. Only one of each set of answers is strictly correct. Each question carries equal marks.

REQUIREMENT:
Record your answer to each section in the answer sheet provided.

1.

[Total: 20 MARKS]

Redstone Ltd. commenced a two-year fixed price contract for 4.0 million to construct a bridge on 1 January
2011. The following figures are available on 31 December 2011:
Material cost incurred to date:
Other contract costs incurred to date:
Costs remaining to complete (estimated):
The engineers report confirms the contract is 60% complete at 31 December 2011.

2 million
1 million
2 million

How much profit or loss should Redstone Ltd. recognise in its financial statements for year ended 31 December
2011?
(a)
(b)
(c)
(d)
2.

During 2011, Freedom Plc constructed a new office building for its own use. Construction was carried out from 1
July to 31 December 2011. 10 million was borrowed on 1 July 2011 at 10% per annum specifically to finance
the construction. 5 million of this was spent on 1 July, 3 million on 30 September, and 2 million on completion
on 31 December. Unused funds were deposited at a 5% annual interest rate until needed. How should the interest
income and expense be recorded under IAS 23?
(a)
(b)
(c)
(d)

3.

Loss of 0.5 million.

Loss of 1 million.
No profit or loss.
Loss of 0.6 million.

500,000
500,000
412,500
412,500

may be capitalised as part of the cost of construction.

must be capitalised as part of the cost of construction.
may be capitalised as part of the cost of construction.
must be capitalised as part of the cost of construction.

Under the IASBs revised conceptual framework, issued in 2010, qualitative characteristics of financial information
are divided into those considered fundamental and enhancing. The following is a list of some qualitative
characteristics the framework identifies:
(i)
(ii)
(iii)
(iv)
(v)
(vi)

Relevance.
Comparability.
Understandability.
Timeliness.
Faithful representation.
Verifiability.

Which of the above are identified by the conceptual framework as fundamental?

(a)
(b)
(c)
(d)

(ii) and (iv).

All of the above.
(i) and (vi).
(i) and (v).

Page 4

4.

Readytags Plc is an Irish company whose functional currency is the Euro. On 31 July 2011, it sold goods to a
Swiss customer for CHF 30,000. At the reporting date 31 January 2012, the amount remained receivable. The
relevant exchange rates were as follows:
31 July 2011:
31 January 2012:

1 = CHF 1.13
1 = CHF 1.21

Ignoring the time value of money, the amounts which would appear in the financial statements of Readytags Plc
for year ended 31 January 2012 are:

(a)
(b)
(c)
(d)
5.

Revenue
26,549
24,793
26,549
24,793

Receivables
26,549
24,793
24,793
26,549

Tullygrow Plc issued an 8% 15 million bond on 1 March 2011 at a 10% discount to par value. Expenses of issue
were 200,000. The bond is due for redemption on 28 February 2021 at par. The effective annual interest rate to
maturity can be assumed to be 9.8%.
How much should be charged to finance costs in the Statement of Comprehensive Income for the year ended 29
February 2012?
(a)
(b)
(c)
(d)

6.

1,200,000.
1,470,000.
1,064,000.
1,303,400.

Rory Ltd. has its reporting date on 31 January each year. It has traditionally reported under Irish GAAP. The
Directors wish to present the annual report for year ended 31 January 2012 under IFRS as permitted by Irish
regulations.
What is Rory Ltds transition date to IFRS under IFRS 1 - First Time Adoption of IFRS?
(a)
(b)
(c)
(d)

7.

Which one of the following would not be considered a biological asset under IAS 41 - Agriculture?
(a)
(b)
(c)
(d)

8.

31 January 2012.
1 February 2011.
31 January 2011.
1 February 2010.

Land on which a crop of wheat is growing.

Timber growing in a forestry plantation.
Cattle being fattened in a feedlot.
Purebred bovine calves being reared for milk production purposes.

On 1 April 2011, Hare Plc purchased an 80% holding in Brush Plc for a cash payment of 100 million. On that
date the net assets of Brush Plc had a fair value of 110 million. Consolidated goodwill was calculated at 14
million using the full fair value method permitted by IFRS 3 - Business Combinations.
What was the fair value of the non-controlling interest at the date of acquisition?
(a)
(b)
(c)
(d)

10
14
22
24

million.
million.
million.
million.

Page 5

Answer either Question 4 or Question 5

4.

IFRS 9 - Financial Instruments: Classification & Measurement was issued in November 2009, with an expanded
and amended version appearing in October 2010. IFRS 9 simplifies the previous requirements of IAS 39 Financial Instruments: Recognition & Measurement for recognising and measuring financial instruments. The
IASB intends that IFRS 9 will ultimately replace IAS 39 in its entirety. However, it is being issued in stages in
response to users requests that accounting for financial instruments be improved quickly.

REQUIREMENT:
(a)

Discuss the methods of accounting for financial instruments amortised cost and fair value required by IFRS 9.
Your answer should incorporate the accounting implications of each method and describe the types of financial
(8 marks)
instrument to which each method is applied.

(b)

Justdec Plc controls the following financial assets at its reporting date of 31 January 2012:
(i)

An investment in the equity shares of another Plc purchased during April 2011 for 3.6 million. The fair
value of this investment at 31 January 2012 was 3.8 million. An election was made at the date of purchase
to recognise any fair value gains and losses through other comprehensive income.

(ii)

An investment in a bond issued by another Plc on 1 February 2011. This bond cost 10 million (equal to
its par value) and entitles Justdec Plc to 8% interest per annum on the anniversary of the bonds issue. The
principal is to be returned on 31 January 2016. It is the intention of Justdec Plc to retain the bond in order
to collect the contracted cash flows on the due dates.

(iii)

An investment in a bond (par value 10 million) issued by another Plc purchased in the secondary market
at a discounted price of 7.6 million. The discount was due to the deteriorating financial health of the
issuing company. The bond carries a 7% interest rate on its par value, and will mature in 2018. It is the
intention of Justdec Plc to sell this bond in the future as soon as its price recovers. The fair value of the
bond on 31 January 2012 is 7.2 million.

REQUIREMENT:
Explain, showing relevant journal entries, how the above financial assets should be accounted for at 31 January 2012
in accordance with the requirements of IFRS 9.
(12 marks)
[Total: 20 MARKS]

Page 6

OR
5.

IAS 18 - Revenue describes the principles of recognising income from business transactions. It seeks to provide
guidance regarding the implementation of the conceptual frameworks definition of income. In particular, it
considers when the entity should recognise revenue from the supply of goods and the rendering of services to
other entities.

REQUIREMENT:
(a)

Discuss the guidance provided by IAS 18 for recognising revenue from the supply of goods to a third party.
(5 marks)

(b)

Grunge Plc is an electrical goods supply company. It has entered into the following transactions during the year
ended 31 March 2012.
(i)

Grunge Plc sells home theatre systems, together with a promise to install the systems free of charge. At
31 March 2012, it had 15 systems sold awaiting installation. The price paid by the customer was 400 per
unit, and the customers have taken the units home. Grunge Plc pays an outside contractor a fee of 30 to
install each system, and it is expected that this will happen in early April 2012. It is unsure how to account
for these 15 systems.
(5 marks)

(ii)

Grunge Plc supplies retailers in areas not serviced by its own retail outlets. For certain goods, it supplies
these retailers on a sale or return basis. On 31 March 2012, Grunge had supplied the retailers with
20,000 worth of goods on which it earns 20% margin. The company is unsure as to how to account for
these goods.
(5 marks)

(iii)

Grunge Plc publishes a trade magazine for sale to interested parties. It takes 12-month subscriptions in
advance. Each magazine is sold for 3 (36 per 12-month subscription). On 31 March 2012, Grunge Plc
had taken payment of 33,000 for magazines yet to be supplied and is unsure how to account for this cash.
(5 marks)

REQUIREMENT:
For each of the above transactions, identify the correct accounting treatment in accordance with IAS 18. Discuss if this
treatment is consistent with the principles of the conceptual framework and provide appropriate journal entries for each
transaction.
[Total: 20 MARKS]

END OF PAPER

Page 7

SUGGESTED SOLUTIONS

CORPORATE REPORTING

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

PROFESSIONAL 1 EXAMINATION APRIL 2012

SOLUTION 1:
Marking scheme:
Statement
(a)
Basic consolidation plan (100% R + 100% B)
Depreciation on FVA (calculation and inclusion in expenses)
Goodwill impairment (inclusion in expenses)
Intra-group revenue and purchases (exclusion)
Unrealised profit (calculation and elimination)
Intragroup dividend (exclusion)
Administration cost (exclusion)
Recognition of share of PFY and OCI of associate (time apportion, 30%)
Elimination of share of profit on sale of land to associate
Calculation and attribution of results to NCI and owners of parent
Presentation
Subtotal
(c)
Memo
Each transaction explained X 2 marks each
Subtotal
(b)
Journal entry
Calculation of net assets including FVA
Other figures in journal (4 X 1 mark)
Subtotal
Overall total

4
1
1
1
2
1
1
4
1
3
1
20
4
4
2
4
6
30

Suggested solution
(a)

Rednut plc: Consolidated statement of comprehensive income for year ended 31 December 2011
(100% Rednut + 100% Blutec)
Revenue
(1,230 + 680 15(iii))
Cost of Sales
(465 + 240 + 18(i) -15(iii) + 0.6(iii))
Gross Profit
Operating expenses
(310 + 230 + 7(ii) 3(v))
Finance costs
(50 + 30)
Other income
(9 3(v))
Investment income
(36 36(iv))
Share of profit for year of associate
(8.4(vi) 1.8(vii))
Profit before taxation
Taxation
(75 + 30)
Profit for the year
Other comprehensive income (net of tax)
(63 + 20)
Share of other comprehensive income of associate (2.7(vi))
Total comprehensive income for the year
Profit for the year attributable to:
Owners of the parent (balancing figure 470 52.8)
Non-controlling interest (viii)
Total comprehensive income attributable to:
Owners of the parent (balancing figure 555.7 60.8)
Non-controlling interest (viii)

Page 8

million
1,895
(708.6)
1,186.4
(544)
(80)
6
6.6
575
(105)
470
83
2.7
555.7

417.2
52.8
470.0
494.9
60.8
555.7

Group structure:
Rednut plc Parent
Blutec plc subsidiary for entire year therefore include 100% of results
Minton 30% associate, include for 6 months as mid-year acquisition
Working (i)
Additional depreciation from fair value adjustment 72m / 4 years = 18m
Current years amount only included as cost of sales expense this year.
NCI is affected as it is Blutecs asset that is being adjusted.
Working (ii)
Impairment loss on consolidated goodwill 7m included as operating expense in year of recognition.
Working (iii)
Eliminate intra-group sales and purchases (15m) in full from group revenue and group cost of sales.
Closing unrealised profit provision required = 15m * 25/125 * 1/3 = 1m
Opening unrealised profit provision = 2m * 25/125 = 0.4m
Increase required = 1m 0.4m = 0.6m [Dr Cost of sales, Cr Inventory in SOFP]
NCI is not affected as the parent as the internal selling company recorded the gain.
Working (iv)
Eliminate intragroup dividend from investment income 60m * 60% = 36m
Working (v)
Eliminate intragroup income and expenses 3m from other income and operating expenses.
Working (vi)
Share of associates profit for year (time apportioned due to mid-year acquisition) 56m * 6/12 * 30% = 8.4m
Share of associates OCI 18m * 6/12 * 30% = 2.7m
Working (vii)
Eliminate 30% of Rednuts gain on disposal of land to associate 6 * 30% = 1.8m (reduce share of results of
associate)
Working (viii)
non-controlling interest
Blutec per SOCI
Less adjustment for depreciation on FVA (i)
Adjusted figures
NCI percentage
NCI amount
(b)

(c)

Profit m
150
(18)
132
40%
52.8

Journal entry for disposal

Dr Cash (1,700 40)
Cr net assets derecognised (1,950 + (72 18 18))
Cr Goodwill derecognised
Dr Non-controlling interest derecognised
Cr Profit or loss (gain on disposal balancing figure)

m
1,660

TCI m
170
(18)
152
40%
60.8
m
1,986
133

365
94

Memorandum:
To:
Directors of Rednut plc
From: Accountant
Re: Explanation of treatment of certain transactions
Date: 1st May 2012
Both these transactions are examples of intra-group revenue or expenses.
In the case of the dividend, Blutec is transferring profits to Rednut by way of a dividend. This is reflected as a
reduction in Blutecs retained earnings, and an increase to Rednuts. However the profit of Blutec is already being
consolidated into group reserves, hence to recognise the dividend as group income is double counting the same
profits.
In the case of the intra-group management charge, from the individual entitys perspective the expense and gain
is valid. However when we consolidate we are viewing the group as a single entity. Clearly a transfer from one part
of the (group) entity to another is neither a gain nor an expense to that entity. Hence we do not recognise this item
as a group gain or a group expense.
Page 9

SOLUTION 2:
Marking scheme:
(a)
Statement of comprehensive income
Transfer of figures from trial balance to appropriate headings
Depreciation on PPE (calculation and inclusion in expenses)
Finance cost (calculation and inclusion in expenses)
Loss on investment property (calculation and inclusion in P/L)
Revaluation loss on land & buildings (calculation and inclusion in P/L)
Development costs (w/o to P/L)
Contingent asset (w/o to P/L)
Tax (recognition in P/L)
Gain on investments (calculation and recognition in OCI)
Presentation
Subtotal
(b)
Statement of financial position
Transfer of figures from trial balance to appropriate headings
Depreciation & revaluation of PPE (calculation)
Finance cost (calculation and inclusion in liabilities)
Loss on investment property (calculation and inclusion in NCA)
Development costs (balance to NCA)
Dividends (calculation and reduction to retained earnings & liabilities)
Tax (recognition as liability)
Gain on equity investments (calculation and recognition in NCA)
Presentation
Subtotal
(c) Memo
Discussion of when to change accounting policy
Each transaction explained X 1.5 marks each
Subtotal
Overall total

4
1
1
1
2
1
0.5
0.5
1
1
13
4
2
1
0.5
1
1.5
0.5
0.5
1
12
2
3
5
30

SUGGESTED SOLUTION
(a)

Thirdgear plc: Statement of comprehensive income for year ended 31 December 2011
Revenue
Cost of Sales
Gross profit
Distribution costs
Administration expenses
Finance costs
Loss on revaluation of investment property
Loss on revaluation of land & buildings
Research & development
Contingent asset written off
Profit before tax
Tax
Profit for the year

million
460
(290)
170
(65)
(42)
(8.8)
(35)
(5)
(42.5)
(13)
(41.3)
(1.3)
(42.6)

(195 + 10(iii) + 85 (iii))

(viii)
(i)
(iii)
(iv)
(v)
(vi)

Other comprehensive income:

Gain on revaluation of investments (ii)
Total comprehensive income for the year
Thirdgear plc Statement of financial position as at 31 December 2011

Page 10

5.5
(37.1)

 million
Non-current assets:
Investment property
Equity investments
Land & buildings,
Plant & equipment
Development expenditure

(300 - 35(i))
(42 + 5.5 (ii))
(400 120 -10 5)
(650 310 85)
(80 42.5 (iv))

Current assets:
Inventory
Trade receivables
Cash & bank

66
70
99
235
1,105

Total assets:
Equity:
Equity share capital
Share premium
Retained earnings

(382 66 60(vii) -37.1)

Non-current liabilities:
8% debenture
Current liabilities:
Trade payables
Corporation tax due
Final dividend due
Interest accrued

265
47.5
265
255
37.5
870

500
150
218.9
868.9
120

(vi)
(vii)
(viii)

Total equity & liabilities

46
1.3
60
8.8
116.1
1,105

Working (i)
All movements on investment properties held under the fair value model of IAS 40 are taken to profit or loss.
Working (ii)
Equity investments are normally accounted for at fair value (with gains and losses taken) through profit or loss.
However under IFRS 9, an irrevocable election can be made at acquisition of equity investments only. Under this
election gains and losses are taken to other comprehensive income, and not recycled to profit or loss on disposal.
Working (iii)
Land & buildings:
As the revaluation takes place at the very end of the year, depreciation must be charged for the year based on the
old values. The revised net book value is then used to calculate revaluation gain or loss.
Land
Buildings
Cost
100
300
Accumulated depreciation to 1/1/2011
(120)
Depreciation for 2011 (300 * 1/30) to COS
(10)
NBV 31/12/2011 before revaluation
100
170
Revaluation gain (loss) (balancing figure)
(35)
30
Revised NBV per question note (iii)
65
200
Net loss on land & buildings is taken to profit or loss as there is no previous revaluation surplus on the same asset.
Plant & equipment:
depreciation (650 310) * 25% = 85
Charge to COS, reduce P&E net book value
Working (iv)
Only development costs meeting the IAS 38 criteria for capitalization are capitalised. All other development costs,
and all research costs are written off to profit or loss. Here, 42.5m (27.5 + 15) is taken to P/L, and 37.5 to
intangible assets.
Page 11

Working (v)
A contingent asset needs to be virtually certain to be received in order to recognise it in the books according to IAS
37. As this is only 65% likely to be recovered, it is not virtually certain. Therefore the amount previously recognised
is taken to profit or loss as an expense.
Working (vi)
Corporation tax due is charged to P/L and recognised as a liability. There is no existing balance to be updated.
Working (vii)
Final ordinary dividend of 1.2c is declared on each share of the issued share capital of 5,000 shares (5,000 * 10c
= 500), giving a total amount of 60m. The declaration was made prior to the reporting date, so it is a liability at
the reporting date. This is a final dividend so it is in addition to the interim dividend already paid. The amount is
deducted from retained earnings and recognised as a liability.
Working (viii)
The debentures were issued on 1 February. Therefore 11 months interest should be accrued. 120m * 8% * 11/12
= 8.8m. This is charged to P/L and recognised as a liability.
(b)

Change of accounting policy

Under IAS 8 it is appropriate to change accounting policy in two situations.
(1)
(2)

If a new standard or interpretation requires a change form an existing policy, and

If a different policy would produce financial statements that are more relevant than the existing policy. In
other words, the proposed policy would result in financial statements that reflect the financial position and
performance of the entity more fairly.

The change of policy implemented as a result of note (iii) is generally accepted to result in more relevant financial
statements, provided reliable measures of fair values are available. While normally a change of accounting policy
requires retrospective application, IAS 16 specifically exempts an entity from the requirement to apply retrospectively
a decision to implement a policy of revaluation for the first time.
The change required as a result of note (v) is not a change of accounting policy. What happened here is that
circumstances changed. This resulted in a different accounting treatment for this item becoming necessary under
the existing accounting policy. This is a change of estimate, and it applied prospectively from the date of the change.

Page 12

SOLUTION 3:
Marking scheme: 2.5 marks per correct answer Total 20 marks
Suggested solution (plus tutorial notes)
1.

Answer (b)
Under IAS 11 a contract loss must be recognised in full as soon as it is foreseeable. Here, Redstone anticipates a
loss of 1 million on the contract as a whole, therefore it must be recognised in full immediately.

2.

Answer (d)
IAS 23 requires capitalisation of interest specifically incurred for the construction of a new piece of PPE. If funds
borrowed are temporarily invested pending application to the asset, then any investment income earned is deducted
from the amount to be capitalised.
Interest cost incurred:
Interest earned:
Net cost incurred:

3.

Answer (d)

4.

Answer (c)

10 million * 10% * 6/12 = 500,000

5 million * 5% * 3/12 PLUS 2 million * 5% * 3/12 = 87,500
500,000 87.500 = 412,500

Under IAS 21 the monetary item (here, the amount receivable) is restated at the reporting date. The sales revenue
is translated at the rate ruling on the transaction date.
5.

Answer (d)
This is a financial liability and should be accounted for under the amortised cost method. The finance cost is based
on the carrying value times the effective rate. For year 1, the initial carrying amount is 15m less 10% discount,
less issue costs, or 13.3 million. Finance cost is therefore 9.8% of 13.3 million = 1,303,400.

6.

Answer (d) Under IFRS 1 the transition date is the opening date of the comparative period presented.

7.

Answer (a) Biological assets are those that increase in value as time passes due to natural growth. Land is not a
biological asset, merely the produce that grows on it.

8.

Answer (d)
Cost of investment
+FV of NCI (bal fig)
-FV of net assets at acquisition
=Goodwill

m
100
24
(110)
14

Page 13

SOLUTION 4:
Marking scheme:
(a)
Explanation:
Fair value method
Amortised cost method
Subtotal
(b)

4
4
8

Accounting treatment:
Discussion (3 X 2 marks)
Journal entry (3 X 2 marks)
Subtotal

6
6
12

Total

20

SUGGESTED SOLUTION
(a)

Fair Value:
This means that at each reporting date, the fair value of the asset or liability is assessed. Any differences between
carrying value and fair value are normally taken to profit or loss, hence the title fair value through profit or loss.
The only exception to this is in the case of an investment in another entitys equity instruments when a clear
declaration is made at the time of purchase that the entity wishes all fair value gains and losses to be recognised
within other comprehensive income. This declaration must be in writing and is irrevocable. Any gains or losses so
recognised through OCI may not be recycled to P/L on disposal. Any gain or loss on disposal is taken to profit or
loss, and is calculated as the proceeds less carrying amount at the date of disposal.
Amortised cost:
The amortised cost method should be applied to financial assets when the cash flows to be derived from the assets
consist solely of interest and principal payments, and the entity intends to hold the asset to its maturity. The
amortised cost method is applied to most liabilities unless there is significant uncertainty surrounding the amount
or timing of cash flows due.
The method involves allocating the finance cost or income over the life of the asset or liability on a constant
percentage of the outstanding amount each period. It is similar to the actuarial method used to account for finance
leases under IAS 17. Any such amounts recognised are taken to profit or loss.

(b)
(i)

The investment is revalued to fair value at the reporting date. A gain of 200,000 results. This is recognised in
other comprehensive income, as the entity made an election to do so at the date of purchase.
31 Jan 2012

(ii)

200,000

As the cash flows due to Justdec under the terms of the bond consist solely of interest and principal, the amortised
cost method should be applied. Interest earned during the year ended 31 January 2012 is 800,000 (8% of 10m).
As this is not payable until the anniversary of the bonds issue (1 February 2012), an accrual must be made for this
amount. The fair value of the bond at 31 January 2012 is therefore irrelevant.
31 Jan 2012

(iii)

Dr Financial assets
200,000
Cr Other comprehensive income / reserves
(fair value gain on investment in shares of another entity)

Dr Interest receivable (current asset)

800,000
Cr Profit or loss
(interest accrued to Justdec plc on bond investment)

800,000

In this case, the cash flows deriving from the bond are not solely interest and principal. The entity hopes to profit
from improving financial health of the issuing company, and therefore increased market value. Hence, amortised
cost is not appropriate. Justdec plc must use the fair value method to account for this bond. As it is not an investment
in another entitys equity instruments, an election to take gains and losses to OCI cannot be made. Therefore the
loss of 400,000 must be recognised in profit or loss.
31 Jan 2012

Dr profit or loss
Cr Financial investmetns
(reduction in fair value of bond investment)

Page 14

400,000
400,000

SOLUTION 5:
Marking scheme:
(a)
Revenue from sale of goods:
conditions which must be satisfied and discussion of same
(b)

Calculations 3 scenarios at 5 marks each

Total

15
20

Suggested solution
(a)
IAS 18 requires that revenue from the sale of goods shall be recognised when all the following conditions have been
met:
(i)
the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
(ii)
the entity retains neither continuing managerial involvement to the degree usually associated with ownership
nor effective control over the goods sold;
(iii)
the amount of revenue can be measured reliably;
(iv) it is probable that the economic benefits associated with the transaction will flow to the entity; and
(v)
the costs incurred or to be incurred in respect of the transaction can be measured reliably.
The practical effect of this guidance is that revenue is recognised in most cases when custody of the goods has
been transferred to the new owner. From this point, the risks associated with owning goods are the responsibility
of the new owner. Also, the new owner is entitled to benefit from the goods from that point.
(b)

IAS 18 has come in for some criticism for being very vague and lacking in robust application guidance. It is possible
for very different accounting treatments for similar transactions to be in compliance with IAS 18. Also, it is possible
to identify points where IAS 18 seems to conflict with the frameworks guidance. It is one of the key standards
identified by the US / IASB convergence project for updating and improvement.
In particular, there is a lack of guidance surrounding transactions with multiple deliverables. For example under
IAS 18, revenue from the sale of goods with a warranty attaching is recognised in full. Other standard setters have
recommended deferring a portion of the revenue until the warranty has expired.
Another issue of criticism has been the treatment of deferred income. Under IAS 18 cash received in advance of
revenue recognition is carried as a liability pending recognition as revenue. However this does not always meet the
frameworks definition of a liability. For example there may be no obligation to return the money (if a non-refundable
deposit) or the obligation to provide goods / services may cost less that the amount of revenue deferred.

(c)
(i)

evenue from goods may be recognised when the entity has transferred the risks and rewards associated with the
goods to the new owner. Grunge has supplied the goods are it has been paid to do, However it has not yet provided
the installation service. Therefore it has not completed the contract. The revenue should be split, and the portion
relating to the goods recognised, and the portion relating to the installation deferred. A reasonable split would be
370 for the goods and 30 for the installation service. Hence:
Dr Cash (400 * 15)
Cr Revenue (370 * 15)
Cr deferred revenue (liability) (30 * 15)

6,000
5,550
450

This treatment seems to comply with the framework. In particular, the revenue does result from an increase to
equity, and the liability recognised does represent an obligation to transfer economic benefits, at the expected cost
of 30 per unit.
(ii)

Where goods are supplied on a sale or return basis, the significant risks and rewards have not been transferred to
the new owner. Therefore revenue should not be recognised on these goods. The items should be included in
closing inventory by Grunge at cost price. Hence:
Dr Inventory (20,000 (20% * 20,000))
Cr Cost of sales

16,000
16,000

This treatment also complies with the framework. Firstly, revenue is not recognised, which is appropriate as Grunge
plc retains significant risks relating to the goods. The recognition of inventory is also consistent with the frameworks
definition of an asset, as a resource controlled by the entity, as a result of past events, from which future economic
benefits are expected to accrue to the entity.
Page 15

(iii)

Revenue for the supply of goods may only be recognised when the risks and rewards of the goods have been
passed on to the new owner. This has not yet happened in respect of the undelivered magazines. Hence the revenue
should be deferred until the magazines are delivered..
Dr Cash
Cr Deferred revenue (liability)

33,000
33,000

This is less compliant with the framework, as the liability does not represent the expected cost of satisfying the
obligation (to supply the remaining magazines). The liability recognised under IAS 18 is the fair value of the
magazines to be supplied. However, the frameworks guidance on measurement is still quite weak, and needs to
be developed further.

END OF PAPER

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