F7 UK supplement questions Questions 1 and 2 are additions to the questions in the 2012 F7 Practice and Revision kit.

1. Question 9 Pricewell Regarding the contract in note (ii), calculate the following according to UK GAAP: (a) WIP; and (b) Amount due from customer

2. Question 26 Partway According to UK GAAP: (a) State the definition of a discontinued operation. (b) Discuss whether the directors wish to show the travel agencies results as a discontinued operation is justifiable.

The following questions are stand-alone 3. Highveldt

Highveldt, a private company, acquired 75% of Samsons ordinary shares on 1 April 20X4. Highveldt paid an immediate 350 per share in cash and agreed to pay a further amount of 108 million on 1 April 20X5. Highveldts cost of capital is 8% per annum. Highveldt has only recorded the cash consideration of 350 per share. costs amounted to 12million. below: Transaction

The summarised balance sheets of the two companies at 31 March 20X5 are shown

Highveldt
million Tangible fixed assets Investments Development costs Current assets Creditors: amounts falling due within one year Net current assets Creditors: amounts falling due after more than one year Net assets Share capital and reserves: Reserves: Ordinary shares of 1 each Share premium Revaluation reserve Profit and loss account at 1 April 20X4 Profit for year to 31 March 20X5 160 190 350 745 The following information is relevant: (i) (ii) Fair value adjustments required at consolidation amounted to $42m. Goodwill is amortised over a four year life. 10% inter company loan (note (ii)) nil 745 270 80 45 134 76 133 (108) 25 million 420 300 nil 720 91

Samson
million million 320 20 40 380 (81) 10

(60) 330 80 40 nil

210 330

Required
(a) Calculate the following figures as they would appear using UK GAAP in the consolidated balance sheet of Highveldt at 31 March 20X5: (i) (ii) (b) goodwill; minority interest;

Explain briefly how the goodwill calculation would differ if IFRS was being applied.

4. A company has a fixed asset with a carrying value of 1.7m. asset is revalued to 2m. (a) The tax rate is 30%. At the year end the

What amount will be credited to the revaluation reserve assuming: (i) it has entered into a contract to sell the asset for the revalued amount (ii) it is not intending to sell the asset

(b)

What amount will be credited to the revaluation surplus under IFRS in these two situations?

5. List and explain some of the differences between UK GAAP and IFRS that could impact upon an entitys reported ROCE.

6. How might presentational differences between a Statement of Cash Flows prepared under UK GAAP and one prepared under IFRS affect user understanding?

Answers 1.
Contract price Materials to date Plant Further costs to complete Profit on contract Profit to date = 20 x 22/50 (44%) = 8,800 000 50,000 (12,000) (8,000) (10,000) 20,000 '000

Turnover Cost of sales (30 x 44%) Profit WIP: (14,000 13,200) Amount due from customer: Costs to date (12,000 + (8,000 (plant) 6/24)) Less WIP Profit to date

22,000 (13,200) 8,800 800 14,000

Progress billings

16,300

(5,700)

8,800

(800)

2.
FRS 3: (a) A discontinued operation must meet all of the following conditions specified in (1) The sale or termination must have been completed before the earlier of 3 months after the year end or the date the financial statements are approved. (2) (3) The former activity must have ceased permanently. The sale or termination has a material effect on the nature and focus of the entity's operations and represents a material reduction in its operating facilities resulting either from: (4) Its withdrawal from a particular market; or from

A material reduction in turnover in its continuing markets

The assets, liabilities, results of operations and activities are clearly distinguishable, physically, operationally and for financial reporting purposes.

This very precise definition is needed to ensure that only operations which can properly be regarded as discontinued are classified as such. Users of accounts, particularly financial analysts, will be more interested in the results of continuing operations as a guide to the company's future profitability and it is not unacceptable for discontinued operations to show a loss. Companies of discontinued operations, hence the rigorous requirement under (d) that the elements of the discontinued operation must be clearly distinguishable from could therefore be tempted to hide loss-making activities under the umbrella

those of continuing operations. It is also conceivable that a company could seek to include the results of a profitable operation which has been sold under continuing operations.

The separation of the results of continuing and discontinued operations and

acquisitions on the face of the profit and loss account makes possible more meaningful year on year comparison. The inclusion of prior year information for discontinued operations means that it can be seen exactly how the continuing operations have performed, and to forecast more accurately how they can be expected to perform in the future with the addition of acquired operations. (b) This may be able to be classified as a discontinued operation providing certain criteria are met. The termination was decided on before the accounts were approved and within 2 weeks of the year end date. The

interested parties were notified at that time and an announcement was made in the press, making the decision irrevocable. The travel agency business counter market, which will entail a material reduction in its operating has ceased permanently and represents a withdrawal from the over-the-

facilities. The results of the travel agency business are clearly distinguished. before the earlier of 3 months after the year and the date the financial ultimately completed before the 31 January, classification as a discontinued operation would be correct. statements were authorised for issue. Assuming the termination was

Additionally, to meet the FRS 3 criteria the termination must be complete

3.

a)

(i)

Goodwill in Samson
Cost of business combination 80m shares 75% 3.50 Transaction costs Deferred consideration; 108m / 1.08
1

m 210 100 322 12

Share of the net assets acquired at fair value Carrying value of net assets at 1 April 20X4: Ordinary shares Share premium Profit and loss reserve Fair value adjustments Fair value of the net assets at acquisition 75% Group share Cost of Goodwill Amortisation over four years; one years charge Net book value at 31 March 20X5 (ii) 80 40 134 254 42 296 (222) 100 (25) 75

Minority interest in Samsons net assets

Samsons net assets from the question Fair value adjustments

m 330 42 372

Minority interest 25%

93

b) The major difference that would arise if the goodwill calculation was being done under IFRS is that the minority interest (which would be referred to as non-controlling interest) would probably be stated at fair value. interest of 70m. If the fair value was based on the

share price at date of acquisition, this would give a fair value for the non-controlling

This fair value would then be added to the consideration and 100% of the fair value of the subsidiarys net assets would be deducted to arrive at the goodwill. The effect of this is to take into account the goodwill attributable to the non-controlling interest. included in the goodwill calculation, so this would increase goodwill by 12m. impairment review.

Under IFRS the transaction costs would be expensed to profit or loss rather than being The goodwill would not be amortised under IFRS but would have been subject to an

4.
(a) (i) If the company has entered into a binding contract to sell the asset, a provision must be made for deferred tax on the revaluation: 000 Revaluation surplus (2m 1.7m) Credit to revaluation reserve (ii) If there is no intention to sell the asset, no deferred tax provision is needed. credit to the revaluation reserve will be 300,000. (b) Under IFRS a revaluation will normally give rise to a temporary difference between the carrying amount of the asset and its tax base. 300,000, so 90,000 will be credited to deferred tax. In this case the difference will be This adjustment will be made The Deferred tax 30% (90) 210 300

regardless of whether there is any intention to sell the asset.

5.
Revaluations Under IFRS a revaluation will normally give rise to a deferred tax adjustment, reducing the revaluation surplus. Under

UK GAAP this will not apply unless the

asset is to be sold, so the credit to the

revaluation can be higher under UK GAAP. This will mean that ROCE will be lower under UK GAAP. Borrowing costs

Under UK GAAP these may be written off to profit and loss as incurred. This will decrease profits in the year the costs are incurred, and as a result be lower. profitability ratios and ROCE are likely to However, once the asset is in use and depreciation is being charged, the depreciation charges will be lower as no carrying value of the asset.

borrowing costs are capitalised within the Development expenditure If a company reporting under UK GAAP chooses to write off to profit and loss amounts of development expenditure that meet the SSAP 13 criteria for deferral (and so would have been capitalised under IFRS), the effect will be similar to that of borrowing costs above. Amortisation of goodwill This would lead to an annual expense

relating to goodwill, lowering profits each causing an impairment. This could again lead to reporting lower profits and the related effects on ROCE. Under IFRS

year, even when there has been no event

there will be no amortisation, but a one-off impairment loss can lead to a significant lowering of ROCE for that year. Acquisition accounting costs of acquisition These are treated as part of the cost of acquisition under UK GAAP so a higher

profit, and therefore ROCE, would be would be the case under IFRS.

reflected in the year of an acquisition than

6.

UK GAAP and IFRS statements of cash flows will arrive at the same figure for cash, but under IFRS this amount will be combined with cash equivalents. amount is purely cash it will still be described as cash and cash equivalents. amount of cash available. Even if the So

users will not be able to see from a statement of cash flows under IAS 7 the exact Net cash flows from operating activities will give a different total under UK and IFRS. finance and tax paid follows under a separate heading.

Under UK GAAP, interest paid is shown under Returns on investment and servicing of and tax paid appear as cash outflows from operating activities. Therefore the total of

Under IAS 7 both interest paid

Net cash from operating activities will be shown at a lower amount in a statement of cash flows prepared under IAS 7 than in a statement prepared under UK GAAP. means that a statement prepared under UK GAAP will, at first glance, give a more favourable impression of how well the entity is managing its working capital than a statement prepared under IFRS.

This