AND EXAMINER’S COMMENTARY SUGGESTED ANSWERS

Assignment 2 – Diploma in IFRSs – 16 December 2013
SUGGESTED ANSWERS AND EXAMINER’S COMMENTARY
The suggested answers set out below were those used to mark this question. Markers were encouraged to
use discretion and to award partial marks where a point was either not explained fully or made by
implication. More marks were available than could be awarded for each requirement. This allowed credit to
be given for a variety of valid points or alternative calculations (based on valid assumptions) which were
made by candidates.
Short Answer Questions
Question 1
Total Marks: 26
Examiner comments
Parts (a) and (c) were well answered, although some candidates ignored the deferred tax effect in part (a).
In part (b), a common issue was ignoring the borrowing costs exemption available, or incorrectly
accounting for the effect of the court case.
Answers to part (d) lacked analysis in many cases, and many candidates did not identify the potential
issue of double counting 3 months results.
Part (e) was generally well done. Some candidates added the share-based payment to earnings rather
than deducting it, and a few candidates added the new shares earned for the whole period rather than
recognising the fact that they were earned over the last 9 months of the year. Full marks were awarded
where it was assumed that the services accrued at the end of each of the 9 months rather than evenly
over the 9 months, which gave a slightly different weighted average figure.
(a)
This arrangement is correctly classified as an operating lease in accordance with IAS 17 Leases as
the risks and rewards incident to ownership remain with the lessor (Valor Renting SA).
A full 12 months of expense will be recognised in the financial statements of $4,507 ($313 x 12 =
$3,756 + ($3,756 x 20% = $751 sales tax)) as sales tax on cars is not recoverable in Catana's tax
regime.
The deduction of $4,132 ($3,756 + sales tax of $751 x 50%) will be taken into account when
calculating the current tax charge for the year.
The additional kilometres for the year (if apportioned straight line) is 4,000 kilometres (20,000 –
(80,000/60 months x 12 months)). If it is expected that the additional 4,000 excess kilometres will
not be covered by the minimum 64,000 kilometres remaining on the contract, an additional accrual
should be made of for 4,000 kilometres, ie $1,127 ($313 x 60 months/80,000 x 4,000 = $939 x
120%), and a liability recognised for this amount.
A deferred tax asset will need to be recognised as the payment will not be tax deductible until paid,
ie for ($939 + ($939 x 20% x 50%)) x 30% = $310.
Total possible marks
Maximum full marks
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5
5
Page 1 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
(b)
The date of transition is 1 October 2011 (30 September 2011 closing figures).
Total adjustment to opening equity at that date is:
Property, plant and equipment (fair value as deemed cost) (44,000 – 40,200)
Capitalised staff development costs
Borrowing costs incurred for asset under construction (exemption available)
Provision for court case – reverse liability
$'000
3,800
(2,000)
0
240
2,040
Total possible marks
Maximum full marks
(c)
4
4
(1)
Fairfox plc is a related party of Central Ltd as it has significant influence over Central Ltd.
(2)
Blackcurrant plc is a related party of Central Ltd as it is jointly controlled by the same party
(Fairfox plc) that has significant influence over Central Ltd.
(3)
Alex is key management personnel of Central Ltd and therefore a related party.
(4)
Vivian is a close family member of Alex (whether married or not) who is key management
personnel of Central Ltd and is therefore also a related party.
(5)
The twins are also related parties of Central Ltd as they are also close family of key
management personnel, even though they are minors.
(6)
Components Ltd is not a related party of Central Ltd as Central does not have any influence
over it, despite the fact that it is also a key customer.
(7)
Sam is also a related party of Central Ltd as a dependant of close family of key management
personnel of Central.
(8)
CupCakes Ltd is not a related party of Central Ltd. If Sam had significant influence over it, it
would be considered a related party.
Total possible marks
Maximum full marks
(d)
8
8
IFRS 10 permits a parent to consolidate a subsidiary's figures for a different year end, providing the
difference is no more than 3 months and preparation of the financial statements to the group
reporting date is impracticable.
This is no longer the case and therefore the 31 March year end annual figures must be used in the
31 March 2013 financial statements.
This leaves 3 months of figures from 1 January to 31 March 2012 which were apparently not
included in last year's financial statements.
There are alternative possible valid approaches that could be followed in the consolidated financial
statements in this scenario:
(1)
Yago could prepare a 15 month accounting period to 31 March 2013 and this would then be
consolidated in full in Bryson's group financial statements.
The comparative figures for the group would be for the 12 months to 31 December 2011 (as
previously reported). As this is not comparable, there would need to be separate disclosure
of the impact of the 3 months to 31 March 2013 on the consolidated results for the year
ended 31 March 2013.
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Page 2 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
As the subsidiary is material, Bryson should consider whether it might be misleading to label
the consolidated results as being for a 12 month period, without additional explanation.
(2)
Bryson could include the results of Yago for the 12 month period ending 31 March 2013, with
separate disclosure of Yago's results for the 3 months from 1 January 2012 to 31 March
2012.
Total possible marks
Maximum full marks
5
4
(e)
Weighted average number of shares:
1/11/2012
1/2-31/10
b/d
Services (48,000 x 9/12 = 36,000 earned x ½ average
x 9/12 for the 9 month period the shares are included in
the weighted average)
3,600,000
13,500
3,613,500
Basic earnings per share = ($10,200,000 – ($600,000 x 9/12)) / 3,613,500 = $2.70.
Total possible marks
Maximum full marks
Maximum for the question
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5
26
Page 3 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
Question 2
Total Marks: 10
Examiner comments
Parts (2) and (3) were well answered, however a number of candidates ignored the need to consider
disclosures for non-adjusting events.
Answers that argued both for adjusting and non-adjusting events, and failed to come to a conclusion, were
not awarded full marks.
A number of candidates incorrectly considered the effect of the fraud in part (1) to be an adjusting event
after the reporting period, not recognising that the fraud affected the investee's, rather than the investor's,
financial statements and that the share price of the investee at the year end in the investor's financial
statements considered all market data publicly available at the time in accordance with the IFRS 13
measurement basis.
(1)
The fall in value relates to conditions that arose after the end of the reporting period. Therefore, the
fall in value is a non-adjusting event after the reporting period.
Whilst the effect of the fraud may be an adjusting event in Norvac’s own financial statements, it is
not an adjusting event for the value of the company's shares on the stock market as that market
value was based on all information available at that time (for example investors who purchased
shares on 31 December at the market price on that date would not be able to make a claim against
the previous owner when the fraud was discovered).
In accordance with IAS 10, which requires disclosure of material non-adjusting events after the
reporting period, disclosure will be made of:


(2)
the nature of the event
the amount of the financial effect, ie fall in value.
The announcement of plans to restructure creates a constructive obligation to do a restructuring. As
a result, a restructuring provision will be recognised from that date, providing the IAS 37 criteria are
met.
However, no legal or constructive obligation existed to restructure at the 31 October 2013 year end
and this is therefore a non-adjusting event after the reporting period.
In accordance with IAS 10, which requires disclosure of material non-adjusting events after the
reporting period, disclosure will be made of:


(3)
The nature of the event
The amount of the financial effect, ie the expected restructuring costs.
The change in tax rates will affect the tax payments accrued as deferred tax. However IAS 12 only
permits the use of tax rates that have been enacted or substantively enacted by the end of the
reporting period.
This is not the case at 31 October 2013, therefore the event is a non-adjusting event after the
reporting period.
In accordance with IAS 10, which requires disclosure of material non-adjusting events after the
reporting period, disclosure will be made of:


the nature of the event, ie the change in rate
the amount of the financial effect, ie the increase tax payments beyond those included the
deferred tax liability in the financial statements.
Total possible marks
Maximum full marks
Maximum for the question
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10
10
10
Page 4 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
Question 3
Total Marks: 28
Examiner comments
Part (a) was generally well answered, although the percentage completed at 30 June 2013 was incorrectly
calculated by some candidates.
Part (b) was done very well with many candidates earning full marks. However, some candidates did not
seem to be aware of the changes made to the previous ED/2010/6 proposals in ED/2011/6, the effects of
which would allow revenue for many construction contracts to be recognised in a similar way to the current
IAS 11 basis.
(a)
Financial statement extracts for the year ended 30 June 2013
Profit or loss
$'000
131,000
(111,000)
20,000
Revenue (211,000 – 80,000)
Cost of sales (350,000 x (W3) 50%) – (320,000 x (W3) 20%)
Gross profit
Statement of financial position as at 30 June 2013
$'000
Non-current assets
Boring machine (28,000 – (W1) 11,200)
16,800
Current assets
Inventories
Gross amounts due from customers
Trade receivables
2,200
49,900
18,000
Workings
1
Contract costs incurred
30/6/2012
$'000
Depreciation of boring machine
(28,000 x 80%)/3.5 years (x 9/12) (x 12/12)
Hired in plant and equipment
Disposal of excavated material
Detailed design costs
Direct construction labour
Pablock's staff supervision costs
Construction materials
Opening inventories of materials
Closing inventories of materials
Insurance
Allocation of senior management time
Over-run costs (claimable)
2
4,800
14,400
4,100
4,800
23,400
2,400
28,400
(6,100)
1,200
77,400
30/6/2013
$'000
Cumulative
$'000
6,400
18,200
10,300
32,200
3,200
22,300
6,100
(2,200)
1,600
16,000
114,100
11,200
32,600
14,400
4,800
55,600
5,600
50,700
(2,200)
2,800
16,000
191,500
Contract revenue
Fixed price
Claims (IAS 11 para 14)
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30/6//2012
$'000
400,000
400,000
422,000
30/6/2013
$'000
400,000
(20,000 x 110%) 22,000
Page 5 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
3
Stage of completion
30/6//2012
$'000
30/6/2013
$'000
Work certified/contract revenue
80,000/400,000
211,000/(400,000 + (W2) 22,000)
4
20%
Gross amount due from customers
Contract costs incurred
Recognised profit (211,000 – (350,000 x (W3) 50%))
Less progress billings (70,000 + 90,000 + (16,000 x 110%)
5
50%
30/6/2013
$'000
191,500
36,000
227,500
(177,600)
49,900
Trade receivables
Less progress billings (W4)
Cash received (70,000 + (90,000 x 80%) + (16,000 x 110%)
Total possible marks
Maximum full marks
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30/6/2013
$'000
177,600
(159,600)
18,000
22½
22
Page 6 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
(b)
The IASB is proposing to replace IAS 11 and IAS 18 with a new IFRS based on a statement of
financial position driven approach to revenue recognition.
Under ED/2011/6 Revenue from Contracts with Customers revenue would be recognised when a
performance obligation is satisfied. A performance obligation is defined as 'a promise to transfer a
good or service to a customer'.
The performance obligation is satisfied when an entity 'transfers' the good or service to the
customer. This is defined as when the customer obtains control of that good or service.
The initial reaction to an earlier version of the Exposure Draft (ED/2010/6) was that this would mean
that revenue on many construction contracts could not be recognised until contract completion,
adding volatility to financial statements of construction companies.
However in the revised version of the standard (ED/2011/6), the IASB added the following criteria
for a performance obligation to be satisfied (and therefore for revenue to be recognised) over a
period of time:
'An entity transfers control of a good or service over time and, hence, satisfies a performance
obligation and recognises revenue over time if at least one of the following two criteria is met:
(a) the entity's performance creates or enhances an asset (e.g. work in progress) that the
customer controls as the asset is created or enhanced; or
(b) the entity's performance does not create an asset with an alternative use to the entity and at
least one of the following criteria is met:
(i)
the customer simultaneously receives and consumes the benefits of the entity's
performance as the entity performs,
(ii)
another entity would not need to substantially re-perform the work the entity has
completed to date if that other entity were to fulfil the remaining obligation to the
customer,
(iii) The entity has a right to payment for performance completed to date and it expects to fulfil
the contract as promised.'
Consequently, if a customer controls an asset as the asset is created (e.g. wings of a hospital being
constructed), revenue can be recognised in stages over time, much as the existing accounting
treatment.
If this is not the case, (b) applies, and in the case of a constructed asset ((b)(i) is more relevant to
service contracts), revenue can be recognised over time if either the work does not need to reperformed or the entity has a right to payment for performance completed and expects to fulfil the
contract. This is the likely situation with the tunnel in this example.
Total possible marks
Maximum full marks
Maximum for the question
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6
6
28
Page 7 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
Question 4
Total Marks: 36
Examiner comments
This question was not as well answered as the other questions and performance here was the weakest
overall on the paper. Indeed a number of candidates submitted statements of financial position which did
not balance.
A few candidates left the financial statements incomplete without dealing with all adjustments. Others left
balances relating to the property revaluation and investments in equity instruments in other
comprehensive income (and the associated reserves) and development expenditure in the statement of
financial position, despite not being permitted by the IFRS for SMEs.
The effect of the different accounting treatment of goodwill on the impairment test and the non-controlling
interest effects of certain adjustments were also not recognised by a number of candidates. Some
candidates recognised deferred tax on the pension plan which was not required following the tax rules set
out in the question.
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Page 8 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
Quantex: Consolidated statement of financial position as at 31 December 2012
$'000
$'000
$'000
(W1)
(W2)
ASSETS
Current assets
Cash and cash equivalents
5,200
Trade and other receivables
26,600
Inventories
24,000
55,800
Non-current assets
Investments in equity instruments
12,400
Property, plant and equipment
71,400
(9,050)
(1,800)
Goodwill
2,600
Other intangible assets
13,300
99,700
155,500
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables
18,400
Non-current liabilities
Deferred tax liability
Long-term borrowings
Net defined benefit liability
Equity attributable to owners of the parent
Share capital ($1 shares)
Retained earnings
Revaluation surplus
11,800
20,000
4,400
36,200
10,000
73,340
7,520
(2,715)
$'000
(W3)
$'000
(W3)
Non-controlling interests
(520)
(13,300)
$'000
(W6)
$'000
12,400
60,550
2,080
0
75,030
130,830
18,400
(450)
(3,990)
4,645
20,000
4,400
29,045
10,000
150
(45)
(9,200)
2,760
(100)
(1,200)
(12,000)
390
3,600
1,200
(350)
(30)
1,020
(120)
(280)
65,575
0
(1,800)
450
270
(1,200)
350
30
(1,020)
0
75,575
(270)
(400)
280
100,900
155,500
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$'000
(W5)
5,200
26,600
24,000
55,800
Investments in equity instruments
1,840
92,700
8,200
$'000
(W4)
Page 9 of 13
7,810
83,385
130,830
Assignment 2 – Diploma in IFRSs – 16 December 2013
Quantex
Consolidated statement of comprehensive income for the year ended 31 December 2012
$'000
Revenue
Cost of sales
Gross profit
Expenses
Finance costs
Remeasurement of pension plan
Investment income
Profit before tax
Income tax expense
PROFIT FOR THE YEAR
Other comprehensive income:
Items that will not be reclassified to profit or
loss:
Gains on property revaluation
Investments in equity instruments
Remeasurement of defined benefit pension plan
Income tax relating to items that will not be
reclassified
Other comprehensive income, net of tax
TOTAL COMPREHENSIVE INCOME FOR THE
YEAR
Profit attributable to:
Owners of the parent (balance)
Non-controlling interests
Total comprehensive income attributable to:
Owners of the parent (balance)
Non-controlling interests
160,400
(98,600)
61,800
(40,400)
(1,000)
$'000
(W1)
$'000
(W2)
150
$'000
(W3)
$'000
(W3)
$'000
(W5)
600
1,800
1,200
5,000
(800)
7,200
(45)
390
5,000
(350)
(1,800)
(1,200)
(5,000)
450
350
$'000
160,400
(99,650)
60,750
(39,800)
(1,100)
(100)
1,200
20,400
(5,800)
14,600
$'000
(W6)
(1,200)
6,200
26,050
(5,805)
20,245
0
0
0
0
0
21,800
20,245
13,720
880
14,600
30
280
(30)
30
280
20,620
19,055
1,190
20,245
19,055
(270)
1,180
21,800
Zero lines and total comprehensive income need not
be shown, but are shown here for clarity
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$'000
(W4)
Page 10 of 13
1,190
20,245
Assignment 2 – Diploma in IFRSs – 16 December 2013
Workings
1
Land and buildings of Quantex
Land
$'000
Buildings
$'000
Total
$'000
30,000
(1,200)
28,800
7,200
36,000
(750)
35,250
10,000
10,000
2,000
12,000
12,000
38,800
9,200
48,000
(750)
47,250
30,000
(1,800)
28,200
10,000
10,000
38,200
Carrying amount (IFRSs):
1 January 2010
Dep'n 2010-2011 (30,000/ 50 x 2)
31 December 2011 (before revaluation)
Revaluation (balance)
31 December 2011
Dep'n (36,000/48 years)
31 December 2012
Carrying amount (IFRS for SMEs):
1 January 2010
Dep'n 2010-2012 (30,000/ 50 x 3)
31 December 2012
DR Revaluation surplus
9,200
CR Property, plant and equipment
9,050
CR Cost of sales (additional dep'n in year) (750 – 600) (& R/E) 150
(Cost model used as question asked for 'full retrospective application' so transitional exemptions
were not relevant).
Reversal of deferred tax effect:
DR Income tax expense (150 x 30%) (&R/E)
DR Deferred tax liability
CR Revaluation surplus (9,200 x 30%)
2
45
2,715
2,760
Land and buildings of Swan
$'000
Reversal of revaluation on 31 December 2012:
DR OCI (& revaluation surplus)
CR Property, plant and equipment
1,800
1,800
Reversal of deferred tax on the revaluation:
DR Deferred tax liability
CR OCI (& revaluation surplus) (1,800 x 25%)
450
450
Non-controlling interest effect:
DR Non-controlling interests (SOFP) ((1,800 – 450) x 20%)
CR Non-controlling interests (OCI) (& Rev'n surplus)
3
270
270
Development expenditure
Summary of amount capitalised:
2010-2011 (5,000 + 7,000 – 300)
2012 (2,000 – 100)
Interest - 2010-2011
Interest - 2012
Amortisation (14,000/ 10 years x 6/12)
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$'000
11,700
1,900
300
100
14,000
(700)
13,30
Page 11 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
All amounts are expensed under the IFRS for SMEs. The correcting double entry is:
DR Finance costs 2012 (P/L) (& R/E)
DR Cost sales 2012 (2,000 – 100 – 700) (& R/E)
DR Retained earnings (balance 2010-2011)
CR Development expenditure
100
1,200
12,000
13,300
Reversal of deferred tax effect:
DR Deferred tax liability ((13,300 – 0 tax base) x 30%)
CR Income tax expense ((2,000 – 700) x 30%) (& R/E)
CR Retained earnings (deferred tax 2010-2011) (12,000 x 30%)
4
3,990
390
3,600
Investment in equity instruments
The investments in equity instruments are measured at fair value through profit or loss (as their fair
value has been measured reliably under IFRSs).
The change in fair value (and associated deferred tax and non-controlling interests) is moved from
other comprehensive income to profit or loss.
The fair value gains in 2011 and 2012 were:
Cost
Fair value gain 2011 (OCI)
Fair value at 31 December 2011
Fair value gain 2012 (OCI)
Fair value at 31 December 2012
Quantex
$'000
7,800
1,200
9,000
1,000
10,000
Swan
$'000
1,900
300
2,200
200
2,400
Total
$'000
9,700
1,500
11,200
1,200
12,400
Gains in 2012 need to be transferred from other comprehensive income to profit or loss:
DR Other comprehensive income (gain) (& reserve)
CR Profit or loss (& R/E)
DR Income tax expense (& R/E)
CR Other comprehensive income (tax) (& reserve)
(1,000 x 30% = 300) + (200 x 25% = 50)
1,200
1,200
350
350
The non-controlling interest effect is transferred from non-controlling interests in other
comprehensive income to non-controlling interests in profit or loss:
DR Non-controlling interests (P/L) ((200 x 75%) x 20%) (&R/E)
CR Non-controlling interests (OCI) (& reserve)
$'000
30
30
The amounts in the investments in equity instruments reserve brought forward (net of deferred tax
and non-controlling interests) also need to transferred to retained earnings:
$'000
DR Investment in equity instruments reserve
(1,200 x 70%) + ((300 x 75%) x 80%)
CR Retained earnings
1,020
1,020
There is no change to the non-controlling interest figure itself in the statement of financial position in
respect of the investments in equity instruments.
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Page 12 of 13
Assignment 2 – Diploma in IFRSs – 16 December 2013
5
Impairment loss
Impairment loss under IFRSs
$'000
Goodwill:
Consideration transferred
Non-controlling interests (at fair value)
Fair value of net assets at acquisition
16,400
3,600
(16,000)
4,000
22,400
26,400
(1,400)
25,000
Net assets at 31 December 2012
Impairment loss (balance)
Recoverable amount
Goodwill (4,000 – 1,400)
2,600
All of the impairment loss would be recognised at the non-controlling interests are measured at fair
value.
Impairment loss under IFRS for SMEs
$'000
Goodwill:
Consideration transferred
Non-controlling interests (16,000 x 20%)
Fair value of net assets at acquisition
16,400
3,200
(16,000)
3,600
(1,080)
2,520
Amortisation (3,600/10 x 3 years)
Gross up for impairment test (2,520 x 100%/80%)
Net assets at 31 December 2012
3,150
22,400
25,550
(550)
25,000
Impairment loss (balance)
Recoverable amount
Impairment loss recognised (550 x 80%)
440
Goodwill (2,520 – 440)
2,080
The adjusting double entries required are:
DR Non-controlling interests (SOFP before test) (3,600 – 3,200)
DR Retained earnings (360 x 2)
CR Expenses (1,040 – 360 – 440) (& retained earnings)
CR Goodwill (2,600 – 2,080)
400
720
600
520
Reversal of non-controlling interest impact of IFRS impairment loss:
DR Non-controlling interests (P/L) & retained earnings
CR Non-controlling interests (SOFP) (1,400 x 20%)
6
280
280
Remeasurement of pension plan
The Remeasurement simply needs to be moved to profit or loss:
DR Other comprehensive income (& pension reserve)
CR Profit or loss (& retained earnings)
Total possible marks
Maximum full marks
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$'000
5,000
5,000
37
36
Page 13 of 13