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Professional Level โ Essentials Module
Time allowed: 3 hours 15 minutes
This question paper is divided into two sections:
Section A โ This ONE question is compulsory and MUST be attempted
Section B โ TWO questions ONLY to be attempted
Do NOT open this question paper until instructed by the supervisor.
This question paper must not be removed from the examination hall.
Paper P2 (INT)
Corporate Reporting
(International)
September/December 2016 โ Sample Questions
The Association of
Chartered Certified
Accountants
Section A โ THIS ONE question is compulsory and MUST be attempted
1 The following draft financial statements relate to Zippy, a public limited company. Zippy is a manufacturing company but also has a wide portfolio of investment properties. Zippy has investments in Ginny and Boo, both public limited companies. Draft statements of profit or loss and other comprehensive income for the year ended 30 June 2016 Zippy Ginny Boo $m $m $m Revenue 420 132 90 Cost of sales (304) (76) (72) โโโโ โโโโ โโโ Gross profit 116 56 18 Investment income 42 19 5 Administrative costs (22) (12) (18) Other expenses (34) (18) (15) โโโโ โโโโ โโโ Operating profit 102 45 (10) Net finance costs (2) (6) (9) โโโโ โโโโ โโโ Profit before tax 100 39 (19) Income tax expense (30) (7) 3 โโโโ โโโโ โโโ Profit for the year 70 32 (16) โโโโ โโโโ โโโ Other comprehensive income Items that will not be reclassified to profit or loss Gains on property revaluation 14 16 โโโโ โโโโ โโโ Total comprehensive income for year 84 48 (16) โโโโ โโโโ โโโ The following information is relevant to the preparation of the group statement of profit or loss and other comprehensive income:
- On 1 July 2014, Zippy acquired 60% of the equity interests of Ginny, a public limited company. The purchase consideration comprised cash of $90 million and the fair value of the identifiable net assets acquired was $114 million at that date. Zippy uses the โfull goodwillโ method for all acquisitions and the fair value of the non-controlling interest (NCI) in Ginny was $50 million on 1 July 2014. Goodwill had been reviewed annually for impairment and no impairment was deemed necessary.
- Zippy disposed of a 20% equity interest in Ginny on 31 March 2016 for a cash consideration of $44 million. The remaining 40% holding had a fair value of $62 million and Zippy exercised significant influence over Ginny following the disposal. Zippy accounts for investments in subsidiaries at cost and has included a gain in investment income of $14 million within its individual financial statements to reflect the disposal. The net assets of Ginny had a fair value of $118 million at 1 July 2015 and this was reflected in the carrying amounts of the net assets. All gains and losses of Ginny have accrued evenly throughout the year. The disposal is not classified as a separate major line of business or geographical operation.
- Zippy acquired 80% of the equity interests of Boo, a public limited company, on 30 June 2014. The purchase consideration was cash of $60 million. The fair value of the NCI was calculated as $12 million at this date. Due to a tight reporting deadline, the fair value of the identifiable net assets at acquisition had not been finalised by the time the financial statements for the year ended 30 June 2014 were published. Goodwill of $28 million was calculated using the carrying amount of the net assets of Boo. The fair value of the identifiable net assets of Boo was finalised on 31 December 2014 as $54 million. The excess of the fair value of the identifiable net assets at acquisition is due to plant which had a remaining useful life of five years at the acquisition date. Due to the losses of Boo, an impairment review was undertaken at 30 June 2016. It was decided that goodwill had reduced in value by 10%. Goodwill impairments are charged to other expenses.
- Zippy holds properties for investment purposes. At 1 July 2015, Zippy held a 10-floor office block at a fair value of $90 million with a remaining useful life of 15 years. The first floor was occupied by Zippyโs staff and the
(c) On 1 July 2016, there was an amendment to Zippyโs defined benefit scheme whereby the promised pension entitlement was increased from 10% of final salary to 15%. A bonus is paid to the directors each year which is based upon the operating profit margin of Zippy. The directors of Zippy are unhappy that there is inconsistency on the presentation of gains and losses in relation to defined benefit schemes. Additionally, they believe that as the pension scheme is not an integral part of the operating activities of Zippy, it is misleading to include the gains and losses in profit or loss. They therefore propose to change their accounting policy so that all gains and losses on the pension scheme are recognised in other comprehensive income. They believe that this will make the financial statements more consistent, more understandable and can be justified on the grounds of fair presentation.
Required: Discuss the accounting and ethical implications arising from the proposed change of accounting policy on Zippyโs defined benefit scheme. (7 marks)
(50 marks)
This is a blank page. Question 2 begins on page 6.
5 [P.T.O.
Required:
Discuss the advice which should be given to Suntory in each of the above cases with reference to relevant International Financial Reporting Standards.
Note: The mark allocation is shown against each of the three issues above.
Professional marks will be awarded in question 2 for clarity and quality of presentation. (2 marks)
(25 marks)
7 [P.T.O.
3 (a) Evolve is a real estate company, which is listed on the stock exchange and has a year end of 31 August.
On 21 August 2016, Evolve undertook a scrip (bonus) issue where the shareholders of Evolve received certain rights. The shareholders are able to choose between: (i) receiving newly issued shares of Evolve, which could be traded on 30 September 2016; or (ii) transferring their rights back to Evolve by 10 September 2016 for a fixed cash price which would be paid on 20 September 2016. In the financial statements at 31 August 2016, Evolve believed that the criteria for the recognition of a financial liability as regards the second option were not met at 31 August 2016 because it was impossible to reliably determine the full amount to be paid, until 10 September 2016. Evolve felt that the transferring of the rights back to Evolve was a put option on its own equity, which would lead to recording changes in fair value in profit or loss in the next financial year. Evolve disclosed the transaction as a non-adjusting event after the reporting period. (8 marks)
(b) At 31 August 2016, Evolve controlled a wholly owned subsidiary, Resource, whose only assets were land and buildings, which were all measured in accordance with International Financial Reporting Standards. On 1 August 2016, Evolve published a statement stating that a binding offer for the sale of Resource had been made and accepted and, at that date, the sale was expected to be completed by 31 August 2016. The non-current assets of Resource were measured at the lower of their carrying amount or fair value less costs to sell at 31 August 2016, based on the selling price in the binding offer. This measurement was in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. However, Evolve did not classify the non-current assets of Resource as held for sale in the financial statements at 31 August 2016 because there were uncertainties regarding the negotiations with the buyer and a risk that the agreement would not be finalised. There was no disclosure of these uncertainties and the original agreement was finalised on 20 September 2016. (9 marks)
(c) Evolve operates in a jurisdiction with a specific tax regime for listed real estate companies. Upon adoption of this tax regime, the entity has to pay a single tax payment based on the unrealised gains of its investment properties. Evolve purchased Monk whose only asset was an investment property for $10 million. The purchase price of Monk was below the market value of the investment property, which was $14 million, and Evolve chose to account for the investment property under the cost model. However, Evolve considered that the transaction constituted a โbargain purchaseโ under IFRS 3 Business Combinations. As a result, Evolve accounted for the potential gain of $4 million in profit or loss and increased the โcostโ of the investment property to $14 million. At the same time, Evolve opted for the specific tax regime for the newly acquired investment property and agreed to pay the corresponding tax of $1 million. Evolve considered that the tax payment qualifies as an expenditure necessary to bring the property to the condition necessary for its operations, and therefore was directly attributable to the acquisition of the property. Hence, the tax payment was capitalised and the value of the investment property was stated at $15 million. (6 marks)
Required: Advise Evolve on how the above transactions should be correctly dealt with in its financial statements with reference to relevant International Financial Reporting Standards. 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)
