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F7 ACCA June 2013 Exam: BPP Answers

Question 1
Paradigm
Text references. Chapter 9 Top tips. Always pay attention to words in a question which are highlighted in bold. In this case, they drew your attention to two important issues in this question Strata showed a pre-acquisition loss and had a negative fair value adjustment. The question was otherwise straightforward. Easy marks. Five marks are allocated for the goodwill calculation. To obtain all of them would have required dealing correctly with the issues noted above. But even leaving those aside, several marks would have been available just for standard goodwill issues. Part (b) is worth 5 marks and it is important to leave time for this. Examiners comments. Part (a) included a fair value adjustment for plant which was below its carrying amount which many candidates treated as a surplus. Most candidates correctly calculated and accounted for the value of the share exchange and the NCI but there were some errors in calculating the number of loan notes issued. Some candidates incorrectly calculated post-acquisition profit as $6 million. Many candidates failed to grasp the important points to be made in part (b) that consolidated financial statements are not useful for assessing the performance of a single company and that, even when single entity financial statements are available, they can be distorted by related party issues.

Marking scheme
Marks

(a)

Statement of financial position Property, plant and equipment Goodwill Equity investments Inventory Receivables Bank Equity shares Share premium Retained earnings Non-controlling interest 10% loan notes Trade payables Bank overdraft 1 mark per valid point

1 5 1 1 1 1 1 3 1 1 1 20 5 25

(b)

F7 ACCA June 2013 Exam: BPP Answers

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2013 $000 ASSETS Non-current assets Property, plant and equipment (47,400 + 25,500 2,500 (W6)) Goodwill (W1) Financial asset: equity investments (7,100 + 3,900) Current assets Inventory (20,400 + 8,400 600 (W2)) Receivables (14,800 + 9,000 900 (W3) 2,800 intragroup) Cash (2,100 + 900 (W3)) Total assets EQUITY AND LIABILITIES Equity attributable to owners of Paradigm Share capital (40,000 + 6,000 (W1)) Share premium (W1) Retained earnings (W4) Non-controlling interest (W5) Non-current liabilities 10% loan notes (8,000 + 1,500 (W1)) Current liabilities Trade payables (17,600 + 13,000 2,800 intragroup) Overdraft Total equity and liabilities Workings 1 Goodwill Consideration transferred: Shares (20m 2/5 75% $2) Loan notes (15m 100/1,000) Non -controlling interest (25% 20m $1.2) Net assets at acquisition: Share capital Retained losses (4,000 + 2,000) Fair value adjustment (W5) Goodwill 2 PURP Intragroup sales in inventory $4.6m PURP = $4.6m 15/115 = $600,000 3 Intragroup cash in transit DEBIT CREDIT Cash Receivables $000 900 $000 900 $000 $000 12,000 1,500 13,500 6,000 19,500 20,000 (6,000) (3,000) (11,000) 8,500 $000

70,400 8,500 11,000 89,900 28,200 20,100 3,000 51,300 141,200

46,000 6,000 34,000 86,000 8,800 94,800 9,500

27,800 9,100 36,900 141,200

F7 ACCA June 2013 Exam: BPP Answers

Retained earnings Per draft Add back pre-acquisition loss (W1) PURP (W2) Gain (loss) on equity investments (W7) Movement on fair value adjustment (W6) Group share of Strata 75% 11,200 Group retained earnings

Paradigm $000 26,600

Strata $000 4,000 6,000 10,000 700 500 11,200

(600) (400)

8,400 34,000 $000 6,000 2,800 8,800 Movement $000 500 * At year end $000 (2,500)

Non-controlling interest Fair value at acquisition (W1) Share of post acquisition retained earnings (11,200 (W4) 25%)

Movement on fair value adjustment FVA on plant (W1) * Depreciation: (3,000 6/12) / 3 years

At acquisition $000 (3,000)

Movement on equity investments Paradigm Strata (7,100 7,500) (3,900 3,200) $000 (400) 700

(b)

Strata was acquired by Paradigm on 1 October 2012, halfway through the current year. At that point it became a related party of Paradigm and any user of its financial statements needs to be aware that its financial position and profit or loss may have been affected by this relationship. As Paradigm is hoping to sell Strata in the near future, it wants to present Stratas results as favourably as possible. One way in which the appearance of results can be improved is through transfer pricing. We know that intragroup trading has taken place and that Paradigm has been selling to Strata at below its normal trading price, effectively transferring profit from the parent to the subsidiary. The goods bought from Paradigm, marked up by 15% on cost, have cost Strata $4.6m per month. At the normal mark-up of 40% on cost, Strata would have been paying $5.6m per month. In this way, Paradigm has transferred $6m profits to Strata. Without this intervention, Stratas retained earnings for the year ended 31 March 2013 would have been down to $2m and the overdraft consequently increased. There is also the matter of the 3m fair value loss on Stratas plant. This means that assets in Stratas individual statement of financial position are overvalued by 3m and the adjustment to deal with this is lost in the consolidated financial statements. An investor looking over the financial statements of Strata for the year ended 31 March 2013 may be tempted to see an impressive turnaround in profitability attributable to the expertise of Paradigms management. They should dig a bit deeper, beginning with the financial statements for the prior year, before the acquisition by Paradigm.

F7 ACCA June 2013 Exam: BPP Answers

Question 2
Atlas
Text references. Chapters 3, 4, 15, 17 Top tips. This is a standard question 2 preparation of financial statements from a trial balance. The issues to work out were a sale and repurchase agreement, plant held for sale, a revaluation, a deferred tax adjustment and EPS following a rights issue. There are basics that have to be remembered that when a sale and repurchase agreement is in substance a loan, the goods in question must be brought back into inventory (think of the entries that formed part of the original sales transaction and reverse all of them), that an asset held for sale is depreciated up to the date of reclassification and the method of arriving at a theoretical ex-rights price. Note that the shares are 50c face value. Easy marks. While there were a few difficult bits, some marks were available for items which just needed to be brought across from the trial balance and dealing correctly with PPE and tax would have brought in five marks. Examiners comments. Most candidates correctly deducted the substance loan from revenue, but then did not adjust cost of sales or inventory and did not deal correctly with the finance cost. There were some errors in the tax charge and, while the statement of changes in equity was generally well prepared, a common error was not realising that the share capital and premium were stated after accounting for the rights issue. It was therefore necessary to work backwards to get the opening balances. Many candidates did not even attempt the EPS calculation and those that did struggled with it.

Marking scheme
Marks

(a)

(i)

Statement of profit or loss and OCI Revenue Cost of sales Distribution costs Administrative expenses Finance costs Income tax Other comprehensive income Statement of changes in equity Balances b/f Rights issue Total comprehensive income Dividend paid Statement of financial position Property, plant and equipment Inventory Trade receivables Plant held for sale In substance loan Deferred tax Trade payables Current tax Directors bonus Bank overdraft

1 3 1 1 1 1 9

(ii)

1 1 1 1 4

(iii)

2 1 1 1 1 9

F7 ACCA June 2013 Exam: BPP Answers

Marking scheme
Marks

(b)

Basic earnings per share Earnings per statement of comprehensive income Theoretical ex-rights value Calculation of weighted average number of shares Total

1 1 3 25

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH 2013 Revenue (550,000 10,000 (W2)) Cost of sales (W1) Gross profit Distribution costs Administrative expenses (W1) Finance costs (700 + 500 (W2)) Profit before tax Income tax expense (27,200 1,200 + (9,400 6,200)) Profit for the year Other comprehensive income: Gain on revaluation of property (W3) Total comprehensive income for the year STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2013 Share capital $,000 40,000 10,000 50,000 Share premium $000 6,000 14,000 20,000 Revaluation surplus $000 7,000 7,000 Retained earnings $000 11,200 (20,000) 31,200 22,400

$000 540,000 (420,600) 119,400 (21,500) (36,300) (1,200) 60,400 (29,200) 31,200 7,000 38,200

At 31 March 2012 Share issue: 1 for 4 Dividend paid Total comprehensive income At 31 March 2013

Total $000 57,200 24,000 (20,000) 38,200 99,400

STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2013 ASSETS Non-current assets Property, plant and equipment (W3) Current assets Inventory (43,700 + 7,000 (W2)) Trade receivables Non-current asset held for sale (W4) Total assets

$000

$000

97,300

50,700 42,200 92,900 3,600 193,800

F7 ACCA June 2013 Exam: BPP Answers

EQUITY AND LIABILITIES Equity Share capital Share premium Revaluation surplus Retained earnings Non-current liabilities Deferred tax Loan (W2) Current liabilities Trade payables Provision for directors bonus (W1) Tax payable Interest payable (W2) Overdraft

50,000 20,000 7,000 22,400 99,400 9,400 10,000 19,400 35,100 5,400 27,200 500 6,800 75,000 193,800

Workings 1 Expenses Cost of sales $000 411,500 (7,000) 15,700 400 420,600 Distribution costs $000 21,500 21,500 Administrative expenses $000 30,900 5,400 36,300

Per TB Maturing inventory (W2) Depreciation (W3) Depreciation HFS asset (W4) Directors bonus (540,000 1%) 2 Maturing inventory

The substance of the transaction is a loan secured on the inventory, so the sale transaction is reversed: Dr $000 7,000 10,000 10,000 Cr $000 7,000

Inventory Cost of sales Revenue Loan Interest on the loan for 6 months will be (10,000 10% 6/12) = 500 3 Property, plant and equipment Cost Accumulated depreciation Balance 1 April 2013 Revaluation surplus Revalued amount Asset held for sale Depreciation (35/14) (66 20%) Land $000 10,000 10,000 2,000 12,000 Buildings $000 50,000 (20,000) 30,000 5,000 35,000

Plant $000 94,500 (24,500) 70,000

Total $000

110,000 7,000 (4,000) (15,700) 97,300

12,000

(2,500) 32,500

(4,000) 66,000 (13,200) 52,800

F7 ACCA June 2013 Exam: BPP Answers

Asset held for sale Carrying amount 1 October 2012 (9m 5m) Depreciation (4,000 20% 6/12) Carrying amount 31 March 2013

$000 4,000 (400) 3,600

The carrying amount is lower than the fair value less costs to sell of $4.2m, so the plant will be carried at $3.6m. 5 Rights issue Existing share capital Rights issue 1 for 4 Pre-rights issue *20,000 ($1.2 50c) (b) Earnings per share Shares 1 April 30 June 2012 1 July 2012 31 March 2013 EPS = 31,200 / 96,740 = 32.3c Working Theoretical ex-rights price: 4 shares @ $2 1 share @ 1.2 $ 8.0 1.2 9.2 /5 = 1.84 80m 2/1.84 (W) 3/12 100m 9/12 000 21,740 75,000 96,740 Share capital $000 50,000 (10,000) 40,000 Share premium $000 20,000 (14,000)* 6,000 Shares 000 100,000 (20,000) 80,000

F7 ACCA June 2013 Exam: BPP Answers

Question 3
Monty
Text reference. Chapter 21 Top tips. This is what we expect for question 3 a statement of cash flows followed by some interpretation. Its important to be able to set down the format for the statement without any trouble. Finance leases are a frequent component of statements of cash flow and should be a familiar adjustment and always remember to check the retained earnings balances to see whether a dividend has been paid. In (b) you were told which ratios to calculate no marks would have been available for calculating any others. What the examiner wanted to see was some sensible interpretation not simply stating that something has gone up or down. Easy marks. There plenty of easy marks available in the statement of cash flows the working capital items, the finance lease payments, the dividend, the loan notes. Four marks were available for correctly calculating the four ratios and another six for valid analysis points. Examiners comments. The statement of cash flows was generally well answered. The deferred tax on the revaluation caused a few problems, as did the amortisation of the development expenditure. Some candidates omitted to include the new finance leases when calculating amounts paid under leases. Most scored well on the ratios, but the same cannot be said for interpretation. Some answers simply reiterated what the ratios calculations say and showed no understanding of what could have caused changes in the ratios.

Marking scheme
Marks

(a)

Profit before tax Depreciation/amortisation Finance costs added back Working capital items ( mark each) Finance cost paid (outflow) Income tax paid Purchase of property, plant and equipment Deferred development expenditure Repayment of 8% loan notes Repayment of finance lease obligations Equity dividend paid Cash b/f Cash c/f One mark per valid point (up to 4 marks for ratios)

1 1 2 2 1 1 2 1 15 10 25

(b)

F7 ACCA June 2013 Exam: BPP Answers

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2013 Cash flows from operating activities Profit before tax Depreciation Amortisation Interest payable Decrease in inventory Increase in trade receivables Increase in trade payables Cash generated from operations Interest paid Income tax paid (W1) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (W2) Development expenditure (1,000 + 200 amortisation) Net cash used in investing activities Cash flows from financing activities Redemption of loan notes (3,125 1,400) Payments under finance leases (W3) Dividend paid (W4) Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Workings 1 Tax paid TAX PAYABLE C/f Income tax Deferred tax Tax paid () 2 Purchase of PPE PPE CARRYING AMOUNT B/f Acquired under finance lease Revaluation Acquired for cash () $000 10,700 1,500 2,000 700 14,900 $000 1,250 1,500 425 3,175

$000 3,000 900 200 400 500 (750) 550 4,800 (400) (425)

$000

3,975

(700) (1,200) (1,900)

(1,725) (1,050) (550) (3,325) (1,250) 1,300 50

B/f Income tax Deferred tax Income tax charge for year Deferred tax on revaluation

$000 725 800 1,000 650 3,175

$000

Depreciation C/f

900 14,000 14,900

F7 ACCA June 2013 Exam: BPP Answers

Payments under finance leases FINANCE LEASE LIABILITY C/f current liability - non-current liability Paid () $000 750 1,200 1,050 3,000 B/f current liability - non-current liability Additions $000 600 900 1,500 3,000

Dividend paid RETAINED EARNINGS Dividend paid () C/f $000 550 3,200 3,750 B/f Profit for the year $000 1,750 2,000 3,750

(b)

Comment on performance of Monty Montys 2013 financial performance shows a substantial improvement on 2012. ROCE has increased from 16.79% to 21.4% and this represents increases in both profit margin and asset turnover. The property revaluation has reduced ROCE by adding $1.35 million to capital employed and giving rise to additional depreciation, which we do not have enough information to quantify. Without the revaluation surplus, ROCE would have been 23.3%. Both gross and operating profit margins have improved. The improvement in the gross profit margin could be due to more efficient operation following the investment in non-current assets and the development expenditure which has now been brought into use. The gross profit margin shows a 16% improvement over 2012 (29.7%/25.6%) and this this holds up well in respect of the operating profit margin which shows a 14.5% improvement (11%/9.6%). This indicates that expenses have been held well in check, despite the additional depreciation and the amortisation of the development expenditure. The healthy turnover has contributed to an increase in asset utilisation from 1.74 to 1.95, again despite the revaluation and the additional finance lease capital. Repayment of $1.725 million in loan notes has also boosted asset turnover. Gearing has fallen impressively from 47.4% to 26.7%. This has been achieved mainly by means of the revaluation and the loan repayment. As Montys cash reserves have been significantly depleted during the year, it may find itself needing to borrow in the near future, so it will have been important to reduce gearing as far as possible. Appendix: ratios 2013 ROCE (3,000 + 150 + 250) / (12,550 + 1,400 + 1,950*) (2,050 + 250 + 100) / (9,750 + 3,125 + 1,500) Gross profit % 9,200 / 31,000 6,400 / 25,000 Operating profit% 3,400 / 31,000 2,400 / 25,000 Asset turnover 31,000 / (12,550 + 1,400 + 1,950) 25,000 / (9,750 + 3,125 + 1,500) Gearing (1,400 + 1,950) / 12,550 (3,125 + 1,500) / 9,750 * Finance lease obligations 26.7% 47.4% 1.95 1.74 11% 9.6% 29.7% 25.6% 21.4% 16.7% 2012

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F7 ACCA June 2013 Exam: BPP Answers

Question 4
Pulsar
Text reference. Chapter 7 Top tips. If you were able to give a full definition of a discontinued operation in part (a), this helped to deal with part (b). You were told that part (c) was not a discontinued operation but a careful reading of the question should have told you that it was a restructuring. You then had to decide whether a provision was justified and what amounts should be included. Easy marks. There were nine marks allocated to part (a) which was simply definition and discussion points. If you had revised discontinued operations these were easy marks. Examiners comments. Most candidates had a fair understanding of the definition of a discontinued operation, but few identified the aspects of a separate line of business or geographical area and answers to why it should be disclosed were mixed. Most answers to part (c) were very vague, just listing the cost and revenue items without saying what should be done with them which gains no marks.

Marking scheme
Marks

(a) (b)

1 mark per valid point Operation in country A is a discontinued operation Discussion of issue for country B Information points to constructive obligation Provide for redundancy But not for retraining Impairment of plant (not offset against gain on property) Onerous contract Provide for penalty 2 2

4 (c) 1 1 1 1 1 1 6 15

(a)

A discontinued operation as defined by IFRS 5 Non-current assets held for sale and discontinued operations is a component of an entity that has been disposed of or is held for sale and represents a major line of business or geographical area of operations, plus is either a planned disposal or a subsidiary acquired with a view to resale. This is an important disclosure to users because the results of the discontinued operation will not be there in the future. Separate disclosure of the results of discontinued and continuing operations enables users to more accurately predict future results.

(b)

The disposal of all the hotels in country A would be classified as a discontinued operation because this is a component that has been disposed of and the disposal represents a complete withdrawal from a geographical area of operation. The change of target market in country B is unlikely to be considered a discontinued operation. Radar is still operating in the same geographical area and still running the same hotels.

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F7 ACCA June 2013 Exam: BPP Answers

(c)

The decision to close the factory qualifies to be treated as a restructuring from 1 January 2013 in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. On that date, customers, suppliers and employees were informed of the closure of the factory. This raised a valid expectation in those affected that the restructuring would go ahead, giving rise to a constructive obligation on the part of Pulsar. The restructuring provision will be calculated as follows: Redundancy costs (5,000 200) Impairment loss on plant (2,200 450) Operating lease terminations Penalty payments re supply contracts $000 1,000 1,750 850 200 3,800

$3.8 million will be charged to profit or loss for the year ended 31 March 2013 and a provision will be set up for the same amount. The property and plant will be shown as non-current assets held for sale at the lower of carrying amount and fair value less costs of disposal. In the case of the factory this will be its current carrying amount of $2.2 million, in the case of the plant it will be $450,000. The cost of retraining the staff that are not leaving of $125,000 will not be included in the provision as this cost relates to continuing operations.

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F7 ACCA June 2013 Exam: BPP Answers

Question 5
Speculate
Top tips. There were some important points to remember here. A fair value adjustment arising on reclassification to investment property is treated as a revaluation surplus under IAS 16; any gains after that will be taken to profit or loss. A property is depreciated up to the point when it is reclassified as investment property. A property occupied by a group company is treated as owner-occupied for the purposes of the consolidated financial statements. Easy marks. Half of the marks in this question were for the discussion parts. If you understood what an investment property was, and could explain how it is treated differently from an owner-occupied property, these were easy marks. Examiners comments. Most candidates were quite good on the definition of investment property, but less so on why the accounting treatment was different (such as investment property generating cash flows independent of other assets). Part (b) was quite well answered, but a surprising number of candidates treated the fair-value gains as revaluation gains, despite having described the correct treatment in part (a).

Marking scheme
Marks

(a)

(i) (ii)

1 mark per valid point 1 mark per valid point Depreciation of property a for 6 months Gain on investment properties A and B Carrying amounts at 31 March 2013 Revaluation reserve at 31 March 2013 Property B owner-occupied in consolidated FSs

3 2 5 1 1 1 1 1 5 10

(b)

(a)

(i)

IAS 40 defines an investment property as property held (either owned or under a finance lease) to earn rentals or for capital appreciation or both rather than for: (a) (b) Use in the production or supply of goods or services or for administrative purposes; or Sale in the ordinary course of business

(ii)

Owner-occupied property is held for use in the production or supply of goods or services or for administrative purposes. Both investment property and owner-occupied property have the option to be held under either the cost model or at a revalued amount the revaluation model under IAS 16 for owner-occupied property or the fair value model under IAS 40 for investment property. There are two main differences between the revaluation and fair value models. Property held under the IAS 16 revaluation model continues to be depreciated after revaluation and any surplus on revaluation is recognised in other comprehensive income and credited to the revaluation surplus. Any loss on revaluation is recognised in other comprehensive income to the degree that it reverses a previous gain, and beyond that to profit or loss. Property held under the IAS 40 fair value model is not depreciated and any gain or loss on revaluation is recognised in profit or loss.

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F7 ACCA June 2013 Exam: BPP Answers

(b) $000 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Profit or loss: Depreciation (W) Other income gain on investment properties (40 (W) + 150(W)) Other comprehensive income: Gain on revaluation of property (W) STATEMENT OF FINANCIAL POSITION Non-current assets Investment properties (2,340 + 1,650) Equity Revaluation surplus (W) Working Property A Carrying amount at 1 April 2012 Depreciation to 1 October 2012 (2,000/20 6/12) Carrying amount 1 October 2012 Assessed fair value Gain to other comprehensive income Fair value at 1 October 2012 Fair value at 31 March 2013 Gain to profit or loss Property B Fair value at 31 March 2013 Fair value at 1 April 2012 Gain to profit or loss $000 2,000 (50) 1,950 2,300 350 2,300 2,340 40

50 190 350

3,990 350

$000 1,650 (1,500) 150

In Speculates consolidated statement of financial position Property B would be classified as owneroccupied because it is occupied by a group company. It would be accounted for under IAS 16.

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F7 ACCA June 2013 Exam: BPP Answers

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F7 ACCA June 2013 Exam: BPP Answers

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