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Paper F7 Financial Reporting (International)

Revision Mock Examination June 2013 Answer Guide
Health Warning! How to pass Attempt the mock examination under exam conditions BEFORE looking at these suggested answers. Then constructively compare your answer, identifying the points you made well and identifying those not so well made. If you got basics wrong then re-revise by rewriting them out until you get them correct. Simply read or audit the answers congratulating yourself that you would have answered the questions as per the suggested answers.

How to fail

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Answer 1 Primrose

Tutorial Help and Key Points

This is quite a searching question. Take great care when dealing with purchase consideration if only the cash payment has been recorded, the share exchange therefore needs to be. Watch the share exchange and dont get it the wrong way round; divide the number of shares acquired by 4 and multiply the result by 2 these shares are in the parent. The deferred consideration needs to be discounted at 7% and by the year end this discount must be unwound. When dealing with the PUP dont forget that it is the unsold items that must be considered so take one third. Also note the 25 cents par value of the ordinary share capital. Watch the seasonal-variation nature of the Associates profits; also the figure given for Impairment of Associate must be taken in full, not group share, as the entire Associate value is being written down, not just its goodwill.

Marking Guide
Marks Statement of financial position: Property plant and equipment Intangible: Software Goodwill: Investment at cost Net assets at acquisition Impairment Valuation of Associate Inventory Receivables Bank Ordinary share capital Share premium Retained earnings NCI Loan notes Payables Taxation Deferred consideration Overdraft Total for question 2 1 3 3 1 1 1 1 1 1 3 3 25

Primrose Group Statement of Financial Position as at 30 November 2012 $000 Non-current assets Property, plant and equipment (960 + 510 + 90 5 [W2]) Intangible: Software (W2) Goodwill (W3) Investment in Associate (W3) 1,555 40 299 19 _____ 1,913 _____

Current assets Inventory (94 + 30 1 [W2]) Receivables (126 + 66 7 4 [W2]) Bank (nil + 6 +7 [W2]) 123 181 13 _____ 317 _____ 2,230 _____

Total assets Equity and liabilities Equity Ordinary share capital (450 + 112.5 [W3]) Share Premium (W3) Retained earnings (W) Non-controlling interest (W) Non-current liabilities 10% loan notes (180 + 30) Current liabilities Payables (195 + 86 4 [W2]) Income taxes payable (68 + 34) Deferred consideration (discount unwound) Overdraft

562.5 292.5 424 _____ 1,279 172 _____ 1,451


277 102 153 37 _____ 569 _____ 2,230 _____

Total equity and liabilities

Primrose Working 1 - Group structure

Primrose 75% 900m ______ 1,200m Sunflower Subsidiary

30% Associate Agapanthus acquired mid-year

Working 2 - Consolidation Adjustments and Net assets Per Q Fair value adjustment for PP+E in S: Fair value adjustment at acquisition Post acquisition depreciation (90/18 yrs x 1 yr) Fair value adjustment at consolidated SFP date Fair value adjustment for Software in S: Fair value adjustment at acquisition (W) Post acquisition amortisation for 1 year (W) Fair value adjustment at consolidated SFP date (W) (W) Software: Sunflower $m Capitalised cost at 1 December 2010 Amortisation to 30 November 2011 (10 yrs/6 yrs) Carrying value at acquisition Amortisation to 30 November 2012 Carrying value at 30 November 2012 60 (6) ___ 54 (6) ___ 48 ___ Group $m 60 (10) ___ 50 (10) ___ 40 ___ Adjustment $m (4) (4) ___ (8) ___ $m 90 (5) ___ 85 ___

(4) (8)


Unrealised profit adjustment:

1/3 of inventory left within the group at the year-end: Transfer price ($12m x 1/3) Cost ($4m x 75%) Unrealised profit Dr Retained earnings - Sunflower (subsidiary is the seller) Cr Group inventory Elimination of current account (intragroup trading): Cash in transit: Dr Bank Cr Receivables (Sunflower) $7m $7m $m 4 (3) __ 1 __ $1m $1m

Elimination of current accounts: Dr Payables (Primrose) Cr Receivables (Sunflower) Net Assets list Sunflower At acq'n At CSFP $m $m Share capital Retained earnings PP+E (FV adj) Post acqn depreciation Software (FV adj) PUP adj 300 180 90 (4) 566 For G/W 300 210 90 (5) (8) (1) 586 $4m $4

Difference of $20m to NCI and Consolidated Reserves

Associate Agapanthus $18 million Profits are seasonal and spread as $12m preacquisition, $6 million post-acquisition. It is the Group share (30%) of the latter portion ($6 million) that must be used in valuing the Associate and increasing Consolidated Reserves.


Working 3 Goodwill, NCI and Consolidated reserves $m 20 1.8 (2.8) ___ 19 ___ $m 180 405

Valuation of Associate Agapanthus: Investment at cost Group share of Associates post-acqn Retained Earnings (30% x 6m) Less: Impairment Investment in Associate A (in CSFP) Investment in Sunflower: Cash consideration Primrose shares (900/4 x 2 x 0.90c) Note: $112.5m share capital / $292.5m share premium Deferred cash (900m x 17c = $153m x 1/1.07)

143 ___ 728 ___ $m 728 177 (566) ___ 339 (40) ___ 299 ___

Goodwill in Sunflower: CI Investment at cost Fair value of NCI at acqn (59c x 300 shares) Less: Fair value of net assets at acqn Goodwill at aquisition Less: goodwill impairment Goodwill at net book value (in CSFP) Non-controlling interest Fair value of NCI at acqn (59c x 300 shares) NCI % post acquisition reserves of sub (25% x 20m) NCI % goodwill impairment (25% x 40) NCI (CSFP) Consolidated reserves Primrose Group share of Ss post acquisition (75% x $20m) As post acquisition (30% x $6m) Less: Group share of goodwill impairment in Sunflower Impairment of Associate Less: Discount unwound ($143m x 7%) Total to CSFP

$m 177 5 (10) ___ 172 ___

$m 450 15 1.8 (30) (2.8) (10) ___ 424 ___

Answer 2 Kasabian

Tutorial Help and Key Points

Learn the formats for published accounts and for the SOCIE. Cost of sales must include carriage inwards, depreciation, etc. The buildings revaluation is a loss and as it was at the year end, depreciation for the year must first be charged. The change in investment property value must be transferred to the income statement proper, and not shown in the other comprehensive income section. Take care with calculating interest charge to income statement as this must be the effective rate of 6%. Master the C.U.D. mnemonic for tax and remember that an over-provision is always a credit; and under-provision being a debit.

Marking Guide
Marks (a) Statement of comprehensive income: Revenue Cost of sales Investment income Administration costs Distribution costs Finance costs Taxation 3 1 1 1 1 1 9

(b) Statement of financial position: Property, plant and equipment Investment property Inventory Receivables Ordinary share capital Share premium Retained earnings Revaluation reserve Debentures Deferred tax Trade payables Current tax Bank 3 1 1 1 1 1 1 1 1 13

(c) Statement in changes in equity: Correct layout and presentation Share issue (split between OSC and SP) Revaluation loss Profit for the year Total for question 1 1 3 25

(a) Kasabian Income Statement for the year ended 31 March 2013 Revenue Cost of sales (W1) Gross Profit Investment income (3,850 + 3,710 [W3]) Distribution costs (W1) Administration expenses (W1) Operating profit Finance costs (W4) Profit before tax Taxation (W5) Profit for the year $000 315,700 (184,800) 130,900 7,560 (21,000) (23,625) 93,835 (4,155) 89,680 (32,000) _______ 57,680 _______


(b) Kasabian Statement of Financial Position as at 31 March 2013 $000 Non-current assets Property, plant and equipment (W2) Investment property (46,375 + 3,710 [W3]) Current assets Inventory Receivables 66,325 61,425 _______ 127,750 _______ 534,135 _______ $000 356,300 50,085 _______ 406,385

Total assets Equity and liabilities Equity Share capital (105,000 + 35,000 [W6]) Share premium (W6) Revaluation reserve (24,500 - 7,000 [W2]) Retained earnings (44,625 + 57,680) Non-current liabilities 2% Debentures (W4) Deferred tax (W5) Current liabilities Payables Current tax (W5) Bank (11,550 + 1,500)

140,000 7,000 17,500 102,305 _______ 266,805 141,255 20,000 _______ 161,255 60,725 32,300 13,050 _______ 106,075 _______ 534,135 _______

Total equity and liabilities (c)

Kasabian Statement of Changes in Equity for the year ended 31 March 2013 Share Capital $000 At 1 April 2012 Revaluation loss (W2) Share issue (W6) Profit for the year At 31 March 2013 105,000 35,000 _______ 140,000 _______ Share Premium $000 7,000 ____ 7,000 ____ ______ 17,500 ______ 57,680 _______ 102,305 _______ Revaluation Reserve $000 24,500 (7,000) Retained Earnings $000 44,625 Total $000 174,125 (7,000) 42,000 57,680 _______ 266,805 _______


Workings W1 - Costs Cost of Sales $000 Per trial balance Opening inventory Carriage inwards Purchases Closing inventory Depreciation (W2) 33,100 125 189,200 (66,325) 3,500 25,200 _______ 184,800 _______ Distribution Costs $000 19,250 Admin Expenses $000 21,875

Buildings Plant

1,750 _______ 21,000 _______

1,750 _______ 23,625 _______

Total to income statement W2 PP+E

Land $000 Valuation/Cost Accumulated depreciation Carrying value at 1 April 2012 Depreciation for the year Buildings (175,000/25 years) Plant (168,000 x 15%) CV prior to year end revaluation Revaluation loss (Bal figure) Carrying value at 31 March 2013 W3 Investment property Fair value per trial balance Gain on change in fair value (46,375 x 8%) Fair value at 31 March 2013 52,500 _______ 52,500

Buildings $000 175,000 _______ 175,000

Plant $000 224,000 (56,000) _______ 168,000

Total $000 451,500 (56,000) _______ 395,500

(7,000) _______ 52,500 _______ 52,500 _______ _______ 168,000 (7,000) _______ 161,000 _______ (25,200) _______ 142,800 _______ 142,800 _______

(7,000) (25,200) _______ 363,300 (7,000) _______ 356,300 _______

$000 46,375 3,710 _______ 50,085 _______

Note: The gain on the increase in FV on investment property is recognised as income in the income statement per IAS 40.


W4 Finance costs The debenture is a financial liability, which is held to maturity, the standard states that issue costs must be deducted from the proceeds when initially measuring the liability. $000 Opening liability (net proceeds) at 1 October 2012 (140,000 - 1,500) Interest (6% x 6/12) Interest paid Closing liability at 31 March 2013 W5 - Taxation $000 Taxation in the income statement: Current Tax Over provision DT movement * 32,300 (700) 400 _______ 32,000 _______ $000 Deferred tax in the statement of financial position: At 1 April 2012 Movement (Bal fig) At 31 March 2013 (80,000 x 25%) W6 Share issue No. of shares eligible for rights issue ($105,000 / 50c = 210,000 / 3 x 1) 70,000 _______ $42,000 $35,000 $7,000 19,600 400 _______ 20,000 _______ 138,500 4,155 (1,400) _______ 141,255 _______ To I/S

Dr Suspense Cr Share capital (70,000 x 50c) Cr Share premium (70,000 x 10c)


Answer 3 Jennie Mae

Tutorial Help and Key Points

This is a long question as is often the case with Question 3 in the exam. To speed up the process you must memorise the format for the statement of cash flow. There are three sections: Depreciation must be added back to profit before tax as must loss and disposal, and interest expense remember you are doing the opposite of what was done in the income statement, ie negating the effect of the earlier treatment in the I/S. Next comes the working capital movements, always imagining that the movement is in cash and each movement being considered in isolation. Finally comes interest paid and tax paid.

Keep time to write the report in part (b) and as this is usually badly done by students, a reasonable attempt will earn you several marks.

Marking Guide
Marks (a) Statement of cash flows Profit before tax Depreciation Loss on disposal Interest expense Working capital movements Interest paid Tax paid Purchase of PP+E Issue of share capital Receipt of loan Dividends paid 1 1 1 1 1 1 1 1 10

(b) Up to 5 marks for ratio calculations 1 mark for each relevant point including one mark for format, up to a max of 5 10 15 25

Total for question


(a) Jennie Mae Statement of Cash Flows for the year ended 30 September 2012 $000 Cash flows from operating activities Profit before tax Adjustments for: Depreciation (W1) Loss on disposal (W1) Interest expense Increase in receivables (250 - 125) Increase in inventory (7,250 - 3,750) Increase in payables (7,750 - 5,375) Cash generated from operations Interest pd Taxation paid (1,125 + 625 - 550) Net cash from operating activities Cash flows from investing activities Purchase of PP+E (W1) Net cash used in investing activities Cash flows from financing activities Issued share capital (12,500 + 2,500 - 7,500) Receipt of loan (7,500 - 2,500) Dividends paid (4,750 + 1,125 - 4,375) Net cash from financing activities Net decrease in cash and cash equivalents Opening cash and cash equivalents Closing cash and cash equivalents Workings W1 - PPE Cost Opening Less: Disposals Opening has become But Closing is Therefore additions = balancing figure 23,750 (7,500) ______ 16,250 42,500 ______ 26,250 ______ 1,750 9,375 3,125 750 ______ 15,000 (125) (3,500) 2,375 ______ 13,750 (750) (1,200) ______ 11,800 $000

(26,250) ______ (26,250)

7,500 5,000 (1,500) ______ 11,000 ______ (3,450) 1,125 ______ (2,325) ______


Accum Depn Opening Less: Disposals (7,500 3,125) Opening has become But Closing is Therefore Depn charged for year = Disposals Cost Less: Accumulated Depn NBV (Scrapped, therefore Loss on Disposal = NBV of 3,125). Or alternative presentation: PPE Cost B/f Additions (Bal fig) 23,750 26,250 50,000 Disposals C/f 7,500 42,500 50,000 7,500 (4,375) ______ 3,125 7,500 (4,375) ______ 3,125 12,500 ______ 9,375 ______

PPE Accumulated dep'n Disposals (7,500 - 3,125) C/f 4,375 12,500 16,875 B/f Depreciation expense (Bal fig) 7,500 9,375 16,875

PPE Disposals Cost 7,500 7,500 Accumulated depreciation Loss on disposal (Bal fig) 4,375 3,125 7,500

(b) Report To: From: Subject: Managing Director of Jennie Mae AA Accountant Analysis of financial performance and position for the two years ending 30 September 2012

Introduction This report investigates the overall financial performance and financial position of Jennie Mae with particular reference to the increase of sales revenue and reduced profitability from the financial period ended September 2011 to September 2012. An analysis of ratios calculated has been given as an appendix at the end of this report.


Financial performance During the year to 30 September 2012 sales revenue had increased by 17%, this shows that the hiring of the supermodel to endorse the womens clothing line has had a positive impact. However, the gross profit margin has decreased from 19.9% in 2011 to 16.3% in 2012. This suggests that although volumes of clothing sold have possibly increased, the margins achieved on those sales may have decreased, suggesting discounts have been given to shift inventory on less popular lines of clothing. Even with discounted prices, the inventory holding period has increased from 35 days to 55 days which is rather worrying because with such a fashionable and seasonal business like clothing, holding on to inventory for too long runs the risk of it becoming obsolete. It must be noted that because of this large increase in the number of days inventory being held, it is expected that large inventory write downs may be necessary in order to sell the inventory in the future. The operating profit margin has decreased from 10.2% in 2011 to 4.3% in 2012 this is because of the operating expenses growing at a much faster rate (44.7%) than the sales revenue. This is extremely worrying as normally expenses are expected to decrease as a percentage of sales as economies of scale come into effect. This suggests poor cost control or some one-off expenses associated with the acquisition and refurbishment of stores. The net profit margin has also fallen from 7.1% to 1.9% this is mainly due to the increase in finance costs, which were attributable to an increase in a long-term loan taken out in 2012 along with the increase in operating expenses, mentioned above. The high level of investment and poor profitability has led to a decline in the return on capital employed from 33.9% to 9.3%. Hopefully this should improve in future years as the return on investment will improve with higher profits. Long-term solvency From looking at the gearing of the company it had increased from 17% to 28%, which is mainly due to the new loan taken out during 2012. This is worrying if looked at with the overall net cash decrease in the year of $3.45 million and the great reduction in interest cover from 25 times to 3.3 times. However, if looked at in comparison to the cash generated from operations the interest is covered more sufficiently at 18.3 times. The loan and issue of new share capital in the year must have been used to fund the acquisition and refurbishment and hence have contributed to this increase in gearing. Looking into the future however, the long-term solvency looks positive due to the high cash generated from operations, which suggests, if the company takes a break from acquisitions and refurbishments in the next year, the overall position will look a lot healthier. Short-term solvency The current ratio has decreased slightly from 0:77:1 to 0:71:1, in most industries such low ratios would give causes for concern. However due to the nature of the company being clothing retail, such low current ratios are expected due to the low levels of current assets and higher level of trade payables. In fact, it is seen as efficient working capital management to have such low levels of inventory and receivables.


This is illustrated in the fact that the companys trade receivables are low in comparison to payables as in the majority of retail companies do not sell goods on credit and as such the only receivables they will have will be through credit card companies which take a few days to process customer payments. The increase in the payables payment period from 50 to 59 days is not a cause for concern as long as it does not rise further next year. A longer payment period may cause bad will between the company and its suppliers. Investor ratios The company has signalled intention to maintain future dividend payments at $1.5million for its shareholders; this is a cause for concern as paying out dividends bigger than profits is unsustainable. By this happening the dividend cover has decreased from 2.33 to 0.75. In terms of attracting future investors this may be difficult, as the EPS has declined from 47 cents to 9 cents due to the decline in profits and increase in the number of shares in issue. This may lead to decreased market confidence in the company, which in turn may lead to a decrease in share price. However this intention to maintain the dividend payments may give investors greater confidence as it can be seen as the companys management having increased confidence in the companys future. Also, in terms of cash availability to pay dividends this is quite sufficient as the cash generated from operations covers the annual dividend payment about 9 times. Conclusion Although the 2012 results are disappointing in terms of performance in relation to the high level of investment there are a lot of positive things to take into the future for the company such as the high level of cash generated from operations which if continued into future periods could greatly reduce the finance costs and debts. Hopefully next year should see the profits improve with this years capital expenditure, without the disruption caused by development. Appendix Gross profit margin Net profit margin Return on capital employed Gearing Interest cover Current ratio Inventory days Payables payment period Increase in sales revenue Operating profit margin Cash interest coverage Receivables days Dividend per share EPS Dividend cover Cash generated from operations to cover dividend 2012 16.3% 1.9% 9.3% 28% 3.3 times 0:71:1 55 days 59 days 17% 4.3% 18.3 times 1.6 days 12c per share 9c per share 0.75 9 times 2011 19.9% 7.1% 33.9% 17% 25 times 0:77:1 35 days

10.2% 0 days 20c per share 47c per share 2.33


Answer 4 IASCF & IASBs conceptual framework

Tutorial Help and Key Points

The examiner has written an article on this area of the syllabus and so it must be considered a possibility for the current exam. Study the functions of the various internal bodies of the IASC Foundation as well as the qualitative characteristics in the IASBs Conceptual Framework.

Marking Guide
Marks (a) 2 marks for each body identified and described with one mark for the advisory committee (b) Three marks each for relevance and reliability and one mark each for comparability and understandability Total for question 8 10 7

(a) IASB (International Accounting Standards Board) The IASB is an independent standard-setting body that reports to the IASCF. Its members are responsible for the development and publication of IFRSs and for approving interpretations of IFRSs as developed by the International Financial Reporting Interpretations Committee (IFRIC). The IASB liaise with national standard-setting bodies to promote convergence of international and national accounting standards. SAC (Standards Advisory Council) The SAC advises the IASB on technical agenda decisions, priorities, and its views on the standard setting projects in terms of the impact of proposed standards. It currently has about 40 members drawn from a diverse range of professional backgrounds from around the globe. It is appointed by the IASCF and advises the IASB and the IASCF. IFRIC (International Financial Reporting Interpretation Committee) The IFRIC is the interpretative body of the IASB. The interpretations committee comprises members appointed by the IASCF and drawn from a variety of countries and professional backgrounds. The role of the IFRIC is to assist the IASB to establish and improve standards. They issue interpretations known as IFRICs,


which provide timely guidance on emerging accounting issues not addressed in full standards. Advisory committees The IASB may appoint a working group for any major agenda projects or specific issues. (b) Relevance Information in financial statements is relevant when it influences the economic decisions of users. It can do that both by having a predictive value to help users evaluate past, present, or future events relating to an entity and by having a confirmatory value giving the users the ability to confirm past and present events. An example of relevance being applied would be when a company chooses to revalue its assets under the revaluation model as allowed per IAS 16 tangible noncurrent assets. By revaluing assets to their fair value it enhances relevance of the financial statements by including current values rather than their historic book values which may differ materially. Materiality is a component of relevance. Information is material if its omission or misstatement could influence the economic decisions of users. Timeliness is another component of relevance. To be useful, information must be provided to users within the time period in which it is most likely to bear on their decisions. Reliability Information in financial statements is reliable if it is free from material error and bias and can be depended upon by users to represent events and transactions faithfully. Reliability is affected by the use of estimates and by uncertainties associated with items recognised and measured in financial statements. These uncertainties are dealt with, in part, by disclosure and, in part, by exercising prudence in preparing financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making the estimates required under conditions of uncertainty, such as making provisions. Prudence does not justify deliberate overstatement of liabilities or expenses or deliberate understatement of assets or income, because the financial statements would not be neutral and, therefore, not have the quality of reliability. This also brings in the issue of substance over form. Transactions should be represented in their commercial substance rather than merely their legal form. Key examples of commercial substance prevailing would be in the treatment of finance leases, redeemable preference shares, sale and lease back transactions and consignment inventory.


Comparability Users must be able to compare the financial statements of an entity over time so that they can identify trends in its financial position and performance. Users must also be able to compare the financial statements of different entities. Disclosure of accounting policies is important for comparability. Accounting policies once adopted must be applied consistently and only changed if it makes the information more relevant/reliable or if it is required by law or a change accounting standard. Revisions to accounting standards have largely eliminated alternative treatments (eg IAS 23 (revised) borrowing costs), which has lead to enhanced comparability. Understandability Information should be presented in a way that is readily understandable by users who have a reasonable knowledge of business and economic activities and accounting and who are willing to study the information with reasonable diligence.


Answer 5 IAS 12 & Rainsbury

Tutorial Help and Key Points

Tax is always examined and the need to be able to write about deferred tax has been emphasised in recent articles in the student magazines. Part (b) requires contrasting the carrying value (NBV) with the tax base (WDV) these temporary differences are then provided for at the tax rate given. This is standard material and should be mastered take great care with the layout (any style is permitted provided it is clear and can be followed by the marker).

Marking Guide
Marks (a) One mark for each point to a maximum of five (b) Taxation in the income statement Deferred taxation in the statement of financial position Total for question 3 2 10 5

(a) IAS 12 defines deferred tax liability as being the amount of income tax payable in future periods in respect of taxable temporary differences. Temporary differences are defined as being differences between the carrying amount of an asset (or liability) and its tax base, which the asset is valued at for tax purposes by the tax authority. Put simply, the temporary differences arise when income or expenditure is recognised in the financial statements in one year, but is charged or allowed for tax in another. A classic example of a situation where deferred tax is required to be provided for is non-current assets. Deferred tax arises due to differences between depreciation charged to the financial statements and the tax depreciation (capital allowances) charged to taxable profits by the tax authorities. The deferred tax usually arises as a result of the company receiving capital allowances that depreciate the asset at a faster rate for tax purposes than the rate of depreciation charged in the financial statements. This results in accounting profits being higher in the early years of the assets life than taxable profits, thus resulting in the actual tax charge being too low in comparison with the accounting profits. However, in the long-term these differences will even out over the life of the asset, so at some point in the future the accounting profits will be lower than the taxable profits therefore resulting in a higher tax charge in the future.


For example, if the profits of a company remain constant over several years, the resulting higher tax charge in future periods will distort the view of the financial statements, as it would appear that performance is deteriorating, when it is not necessarily the case. The company will not want to mislead investors who value companies based on post tax profits, therefore a deferred tax adjustment is necessary. By recognising this future tax charge as a temporary difference, the tax expense will be comparable with the reported performance of the company. The effect of the deferred tax in the statement of comprehensive income would be the movement in the deferred tax liability being added or deducted to the current tax charge for the year. In the statement of financial position a deferred tax liability is created by calculating the difference between the carrying value of the asset and its tax base, this would give the temporary difference which would then have the appropriate tax rate applied to it. (b) Working: Carrying value $ 500,000 (100,000) _______ 400,000 (100,000) _______ 300,000 _______ Tax base (WDV) $ 500,000 (250,000) _______ 250,000 (62,500) _______ 187,500 _______ Depreciation Year to Aug 11 A/C Depn (500,000 x 20%) Tax Depn (500,000 x 50%) Year to Aug 12 A/C Depn (500,000 x 20%) Tax Depn (250,000 x 25%) Temporary difference $ 150,000 112,500 Capital Allowances Tax at 30% $ 45,000 33,750

1 September 10 Cost Depreciation (W) Balance 31/8/11 Depreciation (W) Balance 31/8/12





Income Statement (extract) for the year ended 31 August 2012 Taxation Decrease in deferred tax provision (45,000 33,750) Statement of Financial Position as at 31 August 2012 $ Non-current liabilities Deferred taxation $ (11,250)



The provision for deferred tax in Rainsburys statement of financial position will be the potential tax on the difference between the accounting carrying value of $300,000 and the tax base of $187,500 giving a temporary difference of $112,500. The tax at 30% on the difference makes the provision to be recognised as $33,750. The credit for deferred tax in the income statement is the movement in the provision for deferred tax provision from $45,000 (opening provision) to $33,750 (closing provision) giving a decrease of $11,250, which will be credited to the income statement for the year.