AND EXAMINER’S COMMENTARY SUGGESTED ANSWERS

Assignment 1 – Diploma in IFRSs – 14 October 2013
SUGGESTED ANSWERS AND EXAMINER’S COMMENTARY
The suggested answers set out below were 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. In
some questions, more marks were available than could be awarded for each requirement. This allowed
credit to be given for a variety of valid points or alternative calculations (based on valid assumptions) which
were made by candidates.
Question 1
Total Marks: 38
Examiner comments
This question was generally very well done. Many candidates scored full marks in parts (a), (d) and (g).
In part (a) a few candidates identified valid weaknesses in the IFRS definition of income, but did not go on
to say how the definition could be improved.
Answers to part (c) were disappointing given the basic nature of the topic. A number of candidates did not
calculate depreciation and allocate the impairment losses correctly.
In part (f) the question asked for an explanation of the accounting treatment, whereas a number of
candidates simply did the calculations. Another issue was that the question asked for the accounting
treatment for the year ended 30 June, which required a remeasurement of the liability element at 30 June.
This was excluded from some candidate answers.
Many answers were unnecessarily long. These suggested answers are indicative of the length of answers
expected.
(a)
Income is defined in the Conceptual Framework for Financial Reporting as 'increases in economic
benefits during the accounting period in the form of inflows or enhancements of assets or
decreases of liabilities that result in increases in equity, other than those relating to contribution
from equity participants.'
The definition focuses on changes in assets and liabilities rather than defining income directly.
While this works well for some areas, it does not work so well for more standard items such as
sales revenue, and some consider that it adds an unnecessary complication. For example, in the
Revenue Exposure Draft ED/2011/6, revenue is recognised when a performance obligation is
satisfied, however those performance obligations are not liabilities recognised in the financial
statements.
Income encompasses both revenue and gains (Conceptual Framework para 4.29), and revenue
includes different types of income such as sales, interest, royalties and dividends. However, in the
statement of profit or loss and other comprehensive income, income is divided into two categories.
A conceptual foundation for determining which types of income are reported in profit or loss and
other comprehensive income categories would improve the classification.
For income to be recognised, it must also meet the recognition criteria, ie there must be a probable
inflow of economic benefits which can be reliably measured. This means that the income is either
recognised or not, rather than taking into account the probability in the amount recognised. Other
valid methods of determining income may be appropriate such as expected amount receivable,
which is more akin to fair value which is used in some standards.
The definition of income does not distinguish between realised and unrealised income. A new
definition could allow these to be classified and analysed separately
Total possible marks
Maximum full marks
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4½
4
Page 1 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
(b)
Purchase of production line equipment
Sales tax on production line – not recoverable IAS 16 para 16(a)
Advertising of new products expensed IAS 38 para 69(c)
Training of staff to operate the production line – expensed IAS 38 para 69(b)
Cost of materials used to test the production line (20 – 30)
– shown net of selling proceeds but capped at zero cost, IAS 16 para 17(c)
Cost of reinforcing the factory floor – site preparation IAS 16 para 17(b)
Dismantling and discarding old factory equipment
– site preparation IAS 16 para 17(b)
Relocation of staff to work on the new production line – IAS 16 20(c)
Factory rent (2 months) during period of installation when factory idle
– not a directly attributable cost as incurred anyway (IAS 16 para 16(b)
$'000
4,200
840
0
78
15
5,133
Total possible marks
Maximum full marks
5
5
(c)
Land
$'000
1 January 2010
Dep'n 2010 (25,000/50)
Dep’n 2011 (25,000/50)
Rev'n (balance)
31 December 2011
Dep'n 2012 (26,400/48)
Transfer (2,400/48)
Rev'n (balance)
31 December 2012
Buildings
$'000
15,000
15,000
1,600
16,600
16,600
(2,600)
14,000
2011
2012
Total possible marks
Maximum full marks
(d)
25,000
(500)
(500)
24,000
2,400
26,400
(550)
25,850
(4,850)
21,000
Rev'n surplus
$'000
OCI
$'000
P/L
$'000
(500)
(500)
4,000
4,000
(550)
(50)
3,950
(3,950)
-
(3,950)
(3,500)
4,000
(3,950)
(500)
(4,050)
6
6
The proposed changes to IFRS 9 bring in a new objective-based approach to effectiveness testing.
The effectiveness test would be met where:
(i)
there is an economic relationship between the hedged item and the hedging instrument, ie
the hedging instrument and the hedged item have values that generally move in the opposite
direction because of the same risk, which is the hedged risk
(ii)
the effect of credit risk does not dominate the value changes that result from that economic
relationship, and
(iii)
the hedge ratio of the hedging relationship is the same as that resulting from the quantity of
the hedged item that the entity actually hedges and the quantity of the hedging instrument
that the entity actually uses to hedge that quantity of hedged item.
A criticism of the IAS 39 approach to hedging is that some instruments that businesses entered into
for hedging purposes could not be accounted for as such under the IAS 39 numerical effective test
rules.
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Page 2 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
A further change is that hedging of investments in equity instruments held at fair value through other
comprehensive income is planned, permitting gains and losses on fair value hedges to be
recognised in other comprehensive income in such circumstances.
Previously, hedge accounting could not be applied to investments in equity instruments held at fair
value through other comprehensive income.
Disclosures relating to hedging will be required to be shown in a single note (or separate section of
the financial statements).
The aim of this is that the effects of all of the entity's hedging activities can be seen together in one
place.
Marking note: other valid comments were also accepted, such as that IFRS 9 permits any financial
asset or liability measured at fair value through profit or loss to be designated as a hedging
instrument or that only prospective hedge effectiveness testing is required.
Total possible marks
Maximum full marks
(e)
7
7
The 'true and fair over-ride' is the name commonly given to a requirement of paragraph 19 of IAS 1
Presentation of Financial Statements which states 'In the extremely rare circumstances in which
management concludes that compliance with a requirement in an IFRS would be so misleading that
it would conflict with the objective of financial statements set out in the Framework, the entity shall
depart from that requirement in the manner set out in paragraph 20 if the relevant regulatory
framework requires, or otherwise does not prohibit, such a departure.
This requirement, although not intended to be used frequently, is intended to cover the unusual
situation where compliance with of IFRSs would not give a true and fair view and allows entities to
adapt their accounting policies for such areas as necessary (with full disclosure). Practically such
situations may also arise where there is a conflict between the accounting treatment of an area
where there is an overlap between standards, or standards where one has been updated, but
another not (eg hedging of investments in equity instruments held at fair value through other
comprehensive income).
It can also arise where IFRSs do not cover a particular area. Where companies applying IFRSs are
also required to comply with national company accounting law (or elements of it), and that law
requires an accounting treatment not permitted by IFRSs, an issue can also arise.
An example of a true and fair over-ride is Go-Ahead Group plc, a public transport operator in the
UK. As part of its franchise arrangements as a rail operator, it participates in the UK Railways
Pension Scheme. The Group is required to fund the relevant sections of the scheme for the period
for which the franchise is held. A true and fair over-ride of IAS 19 is applied because the full liability
is recognised in the statement of financial position and this is reduced by a ‘franchise adjustment’;
to reflect the Group’s constructive rather than legal obligation to fund the scheme only during the
period of the franchise, based on the Group’s experience that all obligations cease on expiry of the
franchise despite legal obligations not being limited.
Another example is French bank Société Générale. In its 2007 IFRS financial statements it
recognised a €6.4 billion loss actually incurred in 2008 as a result of positions taken by a 'rogue
trader' in late 2007 and early 2008 closed out by the bank in 2008. The bank over-rode IAS 10 and
IAS 37 to recognise the loss and a provision for the loss in its 2007 rather than 2008. The company
argued that due to its size it should be recognised as early as possible as otherwise the company
would have reported a €1.5 billion pre-tax profit in 2007 with a €6.4 billion loss disclosed as an
event after the reporting period. The bank felt that doing so would be misleading and conflict with
the Conceptual Framework objective of financial statements. However, it has been argued that this
was not a valid use of the true and fair over-ride.
Total possible marks
Maximum full marks
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7
5
Page 3 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
(f)
This arrangement is a share-based payment with a choice of settlement. As the counterparty (the
supplier) has the choice of settlement terms, a compound instrument has been issued and needs to
be split into liability and equity components at the grant date.
The equity component is calculated as a residual after measuring the liability component at the
grant date:
$m
DR Plant (12 x 90%)
10.8
CR Liability (500,000 x $19.80)
9.9
CR Equity (balancing figure)
0.9
The liability component is subsequently revalued to fair value at the year end:
Fair value of liability at year end (500,000 x $20.40) = $10.2m
DR Profit or loss (10.2 – 9.9)
CR Liability
$m
0.3
0.3
Total possible marks
Maximum full marks
(g)
6
6
ABC Ltd need not prepare consolidated financial statements because its parent ABC Holdings
prepares consolidated IFRS financial statements.
ABC France SA is a quoted company and as such is not exempt from preparing consolidated IFRS
financial statements.
ABC Malta Ltd need not prepare consolidated financial statements because its parent ABC
Holdings prepares them. However, ABC Malta must obtain agreement from all of its other
shareholders.
ABC Americas is a US company and as such must prepare its consolidated financial statements in
accordance with US GAAP. It can additionally prepare consolidated IFRS financial statements if it
chooses to.
ABC Slovakia s.r.o. is owned by the US company. However as its ultimate parent ABC Holdings plc
prepares consolidated IFRS financial statements it need not prepare consolidated IFRS financial
statements, providing agreement is obtained from its other 40% owners.
Total possible marks
Maximum full marks
Maximum for the question
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5
5
38
Page 4 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
Question 2
Total Marks: 24
Examiner comments
Part (a) asked for an explanation of the financial reporting treatment of the three different forms of financial
assistance in the question. However a number of candidates only did the calculations and did not explain
the financial reporting treatment.
Part (a)(1) stated that the grant was treated as a reduction in the carrying amount of the asset.
Nevertheless a number of candidates treated it as deferred income.
Part (a)(2) was well answered. In part (a)(3) most candidates correctly calculated the grant element, but
some did not apply the unwinding of the discount to it.
Part (b) was in general very well answered and there was some excellent analysis of the issues.
Suggested solution
(a)
(1)
The grant was recognised in the financial statements on 1 February 2011 as deferred
income on that date.
It is credited to the asset's value on 1 April 2011, the date of the asset's initial recognition.
The carrying amount of the asset is calculated as follows:
Asset value on initial recognition (1 April 2011)
Grant ($12m x 40%) – credited to asset on 1 April 2011
Depreciation 2011 ($7.2m/10 years x 9/12)
31 December 2011
Depreciation 2012 ($7.2m/10 years)
Grant repayment ($4.8m x 10%)
Additional depreciation (480,000 x 1¾/10 years)
31 December 2012
$
12,000,000
(4,800,000)
7,200,000
(540,000)
6,660,000
(720,000)
5,940,000
480,000
(84,000)
6,336,000
The double entry is:
DR Asset (480,000 – 84,000)
DR Profit or loss
CR Grant repayable liability
Total possible marks
Maximum full marks
(a)
(2)
$
396,000
84,000
480,000
7
7
The definition of a government grant is 'assistance by government in the form of transfers of
resources to an entity in return for past or future compliance with certain conditions relating to
the operating activities of the entity'.
The contribution of $200,000 by the regional government is not dependent on any particular
activities of the entity. However SIC-10 Government Assistance – No Specific Relation to
Operating Activities clarifies that such payments are in the scope of IAS 20 and should be
accounted for by applying IAS 20.
The $200,000 should be credited directly to profit or loss as it does not compensate specific
expenses.
Total possible marks
Maximum full marks
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3
3
Page 5 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
(a)
(3)
The loan must be recognised initially at its fair value in accordance with IFRS 9 Financial
Instruments, discounted at the market rate if interest:
$400,000 x 4.32948 = $1,731,791.
The remainder is treated as government grant:
DR Cash
CR Loan
CR Grant (deferred income or reduce cost of roof)
$m
2,000,000
1,731,791
268,209
Interest is applied to the loan up to the 31 December 2012 year end and recognised as a
finance cost in profit or loss:
½
($1,731,791 x 1.05 ) = $1,774,557 - $1,731,791 = $42,767.
The grant element is compensating this interest cost and so should be amortised to profit or
loss. The most sensible approach would be to recognise the credit on the same basis, ie
recognise $42,767 in 2012 rather than on a straight line basis to ensure the interest cost and
grant credit compensate each other correctly.
Total possible marks
Maximum full marks
(b)
6
6
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance requires
government grants to be recognised in profit or loss on a systematic basis over the periods in which
the entity recognises as expenses the related costs compensated.
Before recognition in profit or loss, the grants are recognised as deferred income until the income
arises or asset financed is depreciated, and presented as a liability in the statement of financial
position. The alternative treatment of grants relating to assets is to net them off against the asset
being financed, reducing future depreciation.
The Conceptual Framework of Financial Reporting defines a liability as 'a present obligation of the
entity arising from past events, the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits'.
It can be argued that this definition is not met for grants that are not potentially repayable and that
all grants should be recognised as income.
This is because the Conceptual Framework defines income as 'increases in economic benefits
during the accounting period in the form of inflows or enhancements of assets or decreases of
liabilities that result in increases in equity, other than those relating to contributions from equity
participants.'
The treatment of netting grants against the carrying amount of an asset does also not sit well with
treated grants receivable as income.
Grants are recognised in the financial statements when there is 'reasonable assurance that the
entity will comply with the conditions attaching to them and the grants will be received'.
This is different to the Conceptual Framework recognition criteria (probable inflow of economic
benefits which can be measured reliably). Practically however, it is unlikely that it will make a big
difference to when recognition occurs.
Total possible marks
Maximum full marks
Maximum for the question
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8
8
24
Page 6 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
Question 3
Total Marks: 16
Examiner comments
Again, a number of candidates did not follow the rubric of the question and only did the calculations and
therefore did not earn the 5 (of 16) marks available for commentary.
The calculation part of the question tended to either be done very well or badly. A number of candidates
failed to recognise that this was a standard mortgage-type loan. Others complicated it more than
necessary by recalculating the variable interest rate (with the result that the capital outstanding on the loan
would not be reduced to zero at the end of the loan using the figures calculated).
Suggested solution
The loan is a financial liability from Cofrid's point of view and therefore must be accounted for in
accordance with IFRS 9 Financial Instruments.
As it is not held for trading purposes, it is held at amortised cost.
IAS 39 (which still contains definitions not yet transferred to IFRS 9) defines transaction costs as
'incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or
financial liability. An incremental cost is one that would not have been incurred if the entity had not
acquired, issued or disposed of the financial instrument.'
IAS 39 paragraph AG 13 states, 'transaction costs include fees and commissions paid to agents (including
employees acting as selling agents), advisers, brokers and dealers, levies by regulatory agencies and
securities exchanges, and transfer taxes and duties.
Transaction costs do not include debt premiums or discounts, financing costs or internal administrative
or holding costs.'
The in-house legal costs are therefore not deducted from the loan as they are not incremental external
costs.
The loan is initially recorded at its fair value of $2.5million.
Interest is then applied which is reduced by the fixed monthly payments:
1 May 2012
May
1 June 2012
Cash received
Interest (2,500,000 x (1.499% + 1%)/12
Instalment paid
June
1 July 2012
Interest (2,481,639.91 x (1.499% + 1%)/12
Instalment paid
July
1 August 2012
Interest (2,463,241.59 x (1.499% + 1%)/12
Instalment paid
August
1 September 2012
Interest (2,444,804.95 x (1.499% + 1%)/12
Instalment paid
September
1 October 2012
Interest (2,426,329.92 x (1.499% + 1%)/12
Instalment paid
October
1 November 2012
Interest (2,407,816.41 x (1.499% + 1%)/12
Instalment paid
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$
2,500,000
5,206.25
(23,566.34)
2,481,639.91
5,168.02
(23,566.34)
2,463,241.59
5,129.70
(23,566.34)
2,444,804.95
5,091.31
(23,566.34)
2,426,329.92
5,052.83
(23,566.34)
2,407,816.41
5,014.28
(23,566.34)
2,389,264.35
Page 7 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
November
1 December 2012
Interest (2,389,264.35 x (0.74% + 1%)/12
Instalment paid
December
Interest (2,369,975.25 x (0.74% + 1%)/12
31 December 2012
3,464.43
(22,753.53)
2,369,975.25
3,436.46
2,373,411.71
Total interest of $37,563.28 is recognised as a finance cost.
Transaction costs of $5,000 are recognised in profit or loss.
The loan liability is $2,373,411.71 at the year end.
Total possible marks
Maximum full marks
Maximum for the question
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17
16
16
Page 8 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
Question 4
Total Marks: 22
Examiner comments
The question was generally very well done. The main issue in some answers was the incorrect calculation of
the retained earnings and revaluation surplus figures pre and post the change in holding.
Candidates need to take care when presenting their answers as a printed spreadsheet that the calculation of
each element making up a figure (e.g. non-controlling interests) is shown.
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Page 9 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
Punto Group
Consolidated statement of financial position as at 31 December 2012
Parent
$'000
Non-current assets
Property, plant & equipment
Investment in Sub - Cost
- Disposal
Goodwill
Other intangible assets
Current assets
Equity attributable to owners
of the parent
Share capital
Share premium
Ret'd earnings – Parent
– Sub
Revaluation surplus – Parent
– Sub
Other components of equity
Fair value adjustments
340,500
54,400
(20,000)
Sub
FV adj
(W2)
$'000
$'000
$'000
FV
changes
(W2)
$'000
Post-acq'n
(W4)
(80:20)
$'000
Change
in NCI
(W5)
$'000
Post-acq'n
(W4)
(60:40)
$'000
70,300
30,400
12,500
4,200
(2,100)
110,200
24,400
1,200
(1,200)
40,000
90,400
172,700
10,000
(10,000)
52,700
(36,900)
14,300
(5,700)
(3,300)
72,000
8,000
45,000
463,800
134,600
598,400
8,208
(10,260)
5,840
(7,300)
1,344
(2,240)
780
(1,300)
4,888
5,400
(5,400)
11,600
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$'000
20,000
8,000
140,400
Consol
410,800
–
(54,400)
Non-controlling interests
Liabilities
Goodwill
(W3)
2,052
1,460
30,200
Page 10 of 12
15,112
836
520
40,000
90,400
182,252
–
78,620
–
4,888
–
396,160
31,640
–
427,800
170,600
598,400
Assignment 1 – Diploma in IFRSs – 14 October 2013
Workings
1
Group structure
Punto
Cost
Ret'd earnings
Rev'n surplus
1.7.2010
80%
$'000
54,400
36,900
5,700
1.10.2012
– 20% = 60%
$'000
50,250
13,000
(52,700 – (9,800 x 3/12))
(14,300 – (5,200 x 3/12))
Saxon
2
Fair value adjustments
Brands
Inventories
At acquisition
1/7/2010
$’000
4,200
1,200
5,400
Movement
$’000
(2,100) *
(1,200)
(3,300)
Year end
31/12/2012
$’000
2,100
–
2,100
* 4,200/5 x 2½ years
3
Goodwill
$’000
Consideration transferred
Non-controlling interests (58,000 x 20%)
Fair value of identifiable assets acq’d &
liabilities assumed at acq’n:
Share capital
Retained earnings
Revaluation surplus
Fair value adjustments (W2)
$’000
54,400
11,600
10,000
36,900
5,700
5,400
(58,000)
8,000
4
Saxon’s reserves pre and post 30 September 2012
Retained earnings
Retained earnings at 31 December 2012 (W1)
Retained earnings 1 Oct to 31 Dec (9,800 x 3/12)
Fair value movement to 31 December 2012 (W2)
Fair value movement 1 Oct to 31 Dec (4,200/5 x ¼ year)
Retained earnings at acquisition (W1)
Pre
$’000
52,700
(2,450)
(3,300)
210
(36,900)
10,260
Post
$000
2,450
(210)
2,240
Revaluation surplus
Revaluation surplus at 31 December 2012 (W1)
Revaluation surplus 1 Oct to 31 Dec (5,200 x 3/12)
Revaluation surplus at acquisition (W1)
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$’000
14,300
(1,300)
(5,700)
7,300
$'000
1,300
1,300
Page 11 of 12
Assignment 1 – Diploma in IFRSs – 14 October 2013
5
Disposal of 20% of Saxon
DR Cost of investment (as cash received was credited there)
CR Non-controlling interests (W6) – additional 20%
CR Other components of equity (balance)
6
$’000
20,000
15,112
4,888
Non-controlling interests at 30 September 2012 (20%)
Non-controlling interests at acquisition (W3)
NCI share of post-acq'n ret'd earnings & FV ((W4) 10,260 x 20%)
NCI share of post acq'n rev'n surplus (W4) 7,300 x 20%)
Total possible marks
Maximum full marks
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$’000
11,600
2,052
1,460
15,112
22
22
Page 12 of 12