AND EXAMINER’S COMMENTARY SUGGESTED ANSWERS

Final exam – Diploma in IFRSs – 25 February 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: 40
Examiner comments
Performance on this question was not very good, and this was the question with the lowest average
percentage mark on the paper, with some candidates struggling to achieve half marks. It was
disappointing that a number of candidates did not pick up the 'easy' marks of transferring the draft figures
to the revised financial statements, before dealing with the adjustments. Candidates that started with
workings for the adjustments rather than the financial statements tended to not do as well and often
appeared to run out of time for posting the adjustments. The question asked explicitly for the financial
statements so they should be presented first followed by workings, backing the figures up where
necessary. All workings should be referenced to facilitate the marking process.
Common errors included incorrect calculation of depreciation and borrowing costs capitalised, revaluing
the non-current assets held for sale upwards and adding the issue costs onto the loan payable rather than
deducting them (or occasionally treating the loan as convertible which it was not). The deferred tax in
particular was not done well. Some candidates adopted a 'timing difference' approach of adjusting the
brought forward figure for deferred tax income or expense during the year. This complicated matters in this
question, especially with the property, plant and equipment, and often led to an incorrect answer as a
result. Use of the IAS 12 'temporary difference' approach starting with the statement of financial position
figures is recommended. Candidates sometimes complicated the calculation of the discontinued loss
unnecessarily, recalculating each line of the discontinued operation figures rather than simply making
adjustments to the overall ($3,740) loss. Again, this often led to an incorrect answer. The cash flow hedge
was often ignored altogether.
(a)
Aranda
Statement of financial position as at 31 December 2012
$'000
ASSETS
Non-current assets
Property, plant and equipment (96,434 – (W3) 15,240)
Development costs (W5)
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Non-current assets held for sale (W3)
EQUITY AND LIABILITIES
Equity
Share capital
Share premium
Retained earnings (W8)
Other components of equity ((W4) – 120 + 36)
Non-current liabilities
Long-term borrowings (W6)
Deferred tax liability (W7)
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81,194
7,682
88,876
32,300
36,100
4,600
73,000
13,600
86,600
175,476
12,400
24,600
51,903
(84)
88,819
24,795
8,408
33,203
Page 1 of 12
Final exam – Diploma in IFRSs – 25 February 2013
Current liabilities
Trade and other payables
Current tax payable (9,720 – (W4) 36)
Financial liability
Provision for redundancy costs
42,200
9,684
120
1,450
53,454
175,476
Statement of profit or loss and other comprehensive income for the year ended 31 December
2012
$'000
Revenue (448,500 – 62,400)
386,100
Cost of sales (W1)
(255,555)
Gross profit
130,545
Distribution costs and administrative expenses (W1)
(86,400)
Finance costs (1,375 – (W5) 57 – (W6) 205)
(1,113)
Profit before tax
43,032
Income tax expense (9,720 + 1,260 + (W7) 1,930)
(12,910)
PROFIT FOR THE YEAR
30,122
Loss from discontinued operations (W2)
(4,645)
PROFIT FOR THE YEAR
25,477
Other comprehensive income:
Cash flow hedge (W4)
(120)
Income tax re components of other comprehensive income (W4)
36
Other comprehensive income, net of tax
(84)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
25,393
Workings
1
Expenses
Cost of sales
Per question
Discontinued operation
Amortisation ((W5) 540 + 840)
Impairment loss (W5)
2
$'000
299,400
(46,600)
1,380
1,375
255,555
Distrib costs and
admin expenses
$'000
107,200
(20,800)
86,400
Loss from discontinued operations
Per question
Depreciation – buildings held for sale (W3)
Depreciation – P&E held for sale (W3)
Impairment (W3)
Deferred tax credit ((W7) 300 + 435)
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$'000
(3,740)
(50)
(365)
(1,225)
735
(4,645)
Page 2 of 12
Final exam – Diploma in IFRSs – 25 February 2013
3
Non-current assets held for sale
Net book value at 1 January 2012
Depreciation charge for 6 months:
Buildings (5,000/50  6/12)
P&E (7,290  10%  6/12)
Net book value at 1 July 2012
Land
Buildings
$'000
3,750
$'000
4,200
Plant and
equipment
$'000
7,290
(50)
3,750
Fair value less costs to sell
(14,000/6,000 x 95%)
Impairment loss (discontinued)
Carrying amount
(365)
6,925
4,150
13,300
Total
$'000
15,240
(50)
(365)
14,825
5,700
-
(1,225)
(1,225)
13,600
The brand is not recognised (IAS 38) as it was not recognised previously in Aranda's financial
statements and therefore seems likely to have been internally generated.
4
Cash flow hedge
Value of contract:
Price at 31 December 2012 (3,000  1,400)
Price at 1 November 2012 (3,000  1,440)
Loss
DR Other comprehensive income
CR Financial liability
$'000
4,200
(4,320)
(120)
120
120
The tax treatment follows the IFRS treatment. However, the current tax credit has not yet
been recorded. This is credited to other comprehensive income rather than profit or loss as
the loss itself on the contract is recognised in other comprehensive income (IAS 12
paragraph 61A):
DR Current tax liability (SOFP) (120  30%)
CR Income tax credit (OCI)
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$'000
36
36
Page 3 of 12
Final exam – Diploma in IFRSs – 25 February 2013
5
Development expenditure
Bioactive
$'000
Cost
5,400
Acc'd depreciation b/d at 1 January 2012 (1,620)
3,780
Borrowing costs (2,400  6/12  4.7292%)
Amortisation charge for year:
Bioactive (5,400/10 years)
(540)
'Stayfresh' (4,200/5 years)
3,240
Impairment loss (see below)
NBV c/d
3,240
Net cash inflow
Discount rate
Discounted cash flows
Value in use
31/12/2013
$’000
800
1.05
762
'Stayfresh' Soya meat
$'000
$'000
4,200
2,400
–
–
4,200
2,400
57
(840)
3,360
(1,375)
1,985
31/12/2014
$’000
600
2
1.05
544
Total
$'000
12,000
(1,620)
10,380
57
(540)
(840)
9,057
(1,375)
7,682
2,457
2,457
31/12/2015
$’000
500
3
1.05
432
30/6/2016
$’000
300
4
1.05
247
$1,985,000
Impairment loss ($3,360,000 - $1,985,000) = $1,375,000.
6
Debenture loans
1 January 2012
Issue costs
Effective interest 2012 (24,750  4.7292%)
Nominal interest paid (25,000  4.5%)
Figure in draft SOFP
$'000
25,000
(250)
24,750
1,170
(1,125)
24,795
Adjustment required to finance costs:
DR Long-term borrowings
CR Finance costs (24,795 – 25,000)
7
$'000
205
205
Deferred tax liability
PPE & NCAHFS (81,194 + (W3) 13,600)
Provision for redundancy costs
Development expenditure incl finance costs (W5)
Accounting
value
$'000
94,794
(1,450)
7,682
101,026
Deferred tax liability  30%
Tax
base
$'000
73,000
0
0
73,000
Temporary
difference
$'000
21,794
(1,450)
7,682
28,026
8,408
Calculation of profit or loss charge:
Net deferred tax liability b/d
Credit re discontinued operation dep'n/amortisation (per question)
Credit re discontinued operation re provision (1,450  30%)
Charge to profit or loss (balancing figure)
Net deferred tax liability c/d (from above)
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$'000
7,213
(300)
(435)
1,930
8,408
Page 4 of 12
Final exam – Diploma in IFRSs – 25 February 2013
8
Retained earnings (proof)
Per draft SOFP
Profit per draft SPLOCI
Profit per revised SPLOCI
Closing balance per SOFP
Total possible marks
Maximum full marks
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$'000
57,231
(30,805)
25,477
51,903
40½
40
Page 5 of 12
Final exam – Diploma in IFRSs – 25 February 2013
Question 2
Total Marks: 22
Examiner comments
Part (a) was answered well in general. However, a minority of candidates simply stated the IAS 24 rules
rather than answering the question set of why related party disclosures are necessary. That approach did
not earn marks.
The difficulty of part (b) seems to have been underestimated by candidates. It was common for candidates
to arrive at the wrong answer to parts (3), (5), (6) and (8), which was surprising given the open book
nature of the exam as these areas could have been looked up quickly. A common misconception was that
a transaction at market price and terms or where influence was not judged not to have been used need
not be disclosed as a related party transaction. Such judgements are made by the reader rather than the
preparer of the financial statements, and can only be made with all the relevant data as required by IAS 24
available. Part (7) was testing the IFRS 10 definition of control, and, as a consequence, the need to
disclose the controlling party in accordance with IAS 24. This was missed by some candidates, not just in
part (7), but in parts (1) and (2) as well.
Despite the misconceptions in part (b), and due to the good performance on part (a), most candidates did
well in this question overall.
(a)
Reasons for disclosing related party transactions include:
 To know who is the controlling party of the company
 To bring attention to the fact that profit or loss and financial position may have been affected by
transactions and outstanding balances with related parties which may not have been on an
arm’s length basis
 To identify transactions that may otherwise have not taken place, eg transactions between
group companies
 So that the shareholders are aware of sensitive transactions with directors
 To identify situations that have benefited related parties at the expense of the company
 To identify additional costs that would be incurred if the related party did not exist, eg if a
subsidiary is sold by its parent which provided management activities at no cost
 To identify factors other than market price in transactions that have been made which benefit the
company or related party
Total possible marks
Maximum full marks
(b)
(1)
7
6
The management service at no fee would need to be disclosed in both Archer's and Collins's
financial statements as it is a transaction between group members, irrespective of how much
is charged.
Disclosure of the related party relationship is also required (IAS 24 para 13) in Collins'
financial statements irrespective of whether any transactions took place, as Collins is a
subsidiary of Archer. Collins must therefore disclose that its parent is Archer (by name).
(2)
The loan to the director of Blanca is a transaction with key management personnel. It is not
outstanding at the year end, but it must be disclosed in Blanca's financial statements as it
occurred during the year.
Disclosure of the related party relationship is also required (IAS 24 para 13) in Blanca's
financial statements irrespective of whether any transactions took place, as Blanca is a
subsidiary of Archer. Blanca must therefore disclose that its parent is Archer (by name).
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Final exam – Diploma in IFRSs – 25 February 2013
(3)
Teresa Myles is a related party of Blanca as she has significant influence. This need not be
disclosed as no transactions have occurred between her and Blanca during the period.
Significant influence over an entity by a person who has significant influence over another is
not considered sufficient influence to be considered a related party relationship, so no
disclosure is required of the transaction with Bespoke Systems.
(4)
Blanca is purchasing parts from a fellow subsidiary. As members of the same group both
parties are related, but disclosure is only required where transactions occur.
Both must disclose the aggregate amount of transactions during the year as well as any
outstanding balances and any bad or doubtful debts.
(5)
Easyclean is an entity in which a director of the reporting entity (Archer) has significant
interest. Easyclean is not considered a related party of Archer as for a related party
relationship to exist the director would need to have control or joint control over Easyclean.
No disclosure is therefore required in Archer's financial statements of the supplies purchased
from Easyclean.
(6)
Martin Sanchez is key management personnel of the parent of Blanca. As such, both he and
his ex wife (as she is considered close family due to the economic dependence on Martin)
are related parties of Blanca.
The cash sales made to Martin's Sanchez's must therefore be disclosed in Blanca's financial
statements. The fact that they were at normal retail prices does not negate the need for
disclosure.
(7)
The fact that the investment fund owns the major shareholding in Archer while the other
shareholders have small holdings which will not be pooled is likely to indicate a sufficiently
dominant voting interest to meet the power criterion in the IFRS 10 definition of control.
IAS 24 requires disclosure of the controlling party of an entity and therefore the investment
fund would be disclosed as the controlling party in Archer's financial statements.
(8)
Pera is an associate of Archer, and Collins is a subsidiary of Archer. As they are not
considered members of the same group for related party purposes.
No disclosure is required of the transaction or the debt (an outstanding balances) in either
Archer's or Collins' financial statements.
Total possible marks
Maximum full marks
Maximum for the question
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16
16
22
Page 7 of 12
Final exam – Diploma in IFRSs – 25 February 2013
Question 3
Total Marks: 28
Examiner comments
This question covered employee benefit accounting, current issues and specialised industry transactions
(an extract from the financial statements of a pension plan). It was the best answered question on the
paper. Indeed, performance on this question often compensated for weaker performance in Question 1.
Candidates are to be congratulated on their up-to-date knowledge of current issues and recent changes to
standards examined in this question.
In part (a), a minority of candidates simply stated the recent changes without explaining why the IASB
made them.
In part (b), many candidates prepared the summary net pension liability note, which was not asked for in
the question. A common error was the incorrect calculation of the net interest cost, ignoring the fact that
contributions and benefits were spread evenly over the year and/or ignoring the fact that the past service
cost increased the obligation on the first day of the accounting period.
Part (c) (the specialised industry part covering pension plan accounting) was done very well, with many
candidates earning full marks.
Suggested solution
(a)
The main changes made by IAS 19 (revised 2011) are:
(1)
Treatment of all service costs in the same way
Both current and past service costs are charged to profit or loss as incurred.
This is because both meet the definition of an expense in the Conceptual Framework for
Financial Reporting, i.e. decreases in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to equity participants', the incurrence of
liabilities here being the increase in the pension obligation.
(2)
Remeasurements
Under IAS 19 revised all remeasurements of assets and obligations are recognised in other
comprehensive income. Deferral methods are not permitted.
Again this is to comply with the definitions of income and expense in the Conceptual
Framework which require immediate recognition.
The result is that actual returns on plan assets rather than expected returns are recognised.
There are no unrecognised amounts. Consequently the pension plan surplus or deficit in the
statement of financial position is not distorted by deferred gains or losses which could turn the
presentation of a surplus into a deficit and vice versa, giving a potentially misleading view.
(3)
Interest
Interest is applied to the net plan obligation (or asset) rather than interest being applied to the
present value of plan obligations and a different expected return being applied to plan assets.
The logic here is that a plan surplus or deficit is a funding decision and interest should
therefore be applied to the net position, representing the financing effect of paying for benefits
in advance or in arrears.
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Final exam – Diploma in IFRSs – 25 February 2013
(4)
Termination benefits
Termination benefits are recognised under IAS 19 revised at the earlier of when the entity:
(a)
(b)
can no longer withdraw the offer of the termination benefits, and
recognises restructuring costs including termination benefits.
They were previously recognised when the entity was 'demonstrably committed' to pay them,
which was open to interpretation. The changes clarify when an obligation to pay termination
benefits arises, and aligns the treatment of termination benefits with other employee benefits
(and with US GAAP).
Total possible marks
Maximum full marks
(b)
8
8
Changes in the present value of the defined benefit obligation
Opening defined benefit obligation at 1 January 2012
Interest on obligation ((1,138 – (36 x 6/12) + 9) x 4.75%)
Current service cost
Past service cost
Benefits paid
Remeasurement (balancing figure)
Closing defined benefit obligation at 31 December 2012
$'millions
1,138
54
14
9
(36)
13
1,192
Changes in the fair value of plan assets
Opening fair value of plan assets at 1 January 2012
Interest on plan assets ((1,018 + ((42 + 12 – 36) x 6/12)) x 4.75%)
Employer contributions
Employee contributions
Benefits paid
Exchange losses (separate disclosure required by IAS 19 para 141(e))
Remeasurement excluding exchange losses (balancing figure)
Closing fair value of plan assets at 31 December 2012
$'millions
1,018
49
42
12
(36)
(20)
45
1,110
Note to the statement of profit or loss and other comprehensive income
Defined benefit expense recognised in profit or loss:
Current service cost
Past service cost
Net interest cost (54 – 49)
$'millions
14
9
5
28
Other comprehensive income (items that will not be reclassified to profit or loss):
Remeasurements of defined benefit plans
$'millions
Actuarial (loss) on defined benefit obligation
(13)
Return on plan assets (excluding amounts in net interest) (45 – 20)
25
12
Total possible marks
Maximum full marks
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14
14
Page 9 of 12
Final exam – Diploma in IFRSs – 25 February 2013
(c)
Changes in net assets available for benefits
Opening net assets available for benefits
Contributions - employer
Contributions - employees
Investment income (11 + 8 + 6)
Benefits paid
Administrative expenses
Other expenses
Taxes on income
Profits less losses on disposal of investments
Changes in value of investments (balancing figure)
Closing net assets available for benefits
Total possible marks
Maximum full marks
Maximum for the question
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$'millions
1,018
42
12
25
(36)
(7)
(2)
(3)
10
51
1,110
6
6
28
Page 10 of 12
Final exam – Diploma in IFRSs – 25 February 2013
Question 4
Total Marks: 10
Examiner comments
Most candidates answered part (a) well, although some referred to the accrual for the fine as a 'provision',
when it was simply an accrual at the reporting date.
Part (b) was not answered well, with many candidates failing to pick up the accounting consequence of a
potential impairment loss. Some gave business advice rather than accounting advice. A common incorrect
answer was stating that a contingent liability should be disclosed, whereas the consequence of the
injunction was lost future revenue (an impairment indicator) rather than a potential outflow of resources
embodying economic benefits.
Most candidates correctly identified the contingent asset in part (c), although a minority stated that it
should be recognised rather than disclosed.
Suggested solution
(a)
Under IAS 37, a liability is defined 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.'
A liability is recognised when:
'(a) it is probable that any future economic benefit associated with the item will flow to or from the
entity; and
(b) the item has a cost or value that can be measured with reliability.'
As Jansen has lost the court case, a legal obligation, exists as at 31 December 2012, which, based
on information at the year end (i.e. that the case has been lost) is probable to be paid.
An accrual should therefore be recognised for the $1 billion compensation and charged to profit or
loss, plus any other associated unpaid costs.
This is a liability rather than a provision as a provision is defined as a 'liability of uncertain timing or
amount'. As the court case has been lost there is no uncertainty.
No contingent asset is disclosed regarding the appeal against the original court case as Jansen's
lawyers have advised that it is not probable that they will win.
(b)
The injunction requested against Jansen's products found to have infringed the patent is an
impairment indicator, given that any reduction in future cash inflows will affect value in use.
As the court case has been lost, it is likely that the injunction will be successful. The accounting
consequence of this is that an impairment test should be performed.
Inventories of the products may also be impaired if they cannot be sold elsewhere.
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Final exam – Diploma in IFRSs – 25 February 2013
(c)
Jensen's lawyers advise that it is likely that Jansen will win the court case against Lemon relating to
the bond and lost revenue of the Xerus, however any asset is contingent on the outcome of the
court case.
IAS 37 requires contingent assets to be disclosed where the inflow of economic benefits is
probable. They can only be recognised if they are virtually certain and not contingent.
Required disclosures are:
 a brief description of the nature of the contingent asset, and
 (where practicable) an estimate of their financial effect, ie an estimate of expected
compensation.
Total possible marks
Maximum full marks
Maximum for the question
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11
10
10
Page 12 of 12