Mock 1

Corporate
Reporting
(International)

P2CR-MK1-X09-Q

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

Section A: This question is compulsory and MUST
be attempted

Section B: Attempt TWO questions ONLY

During reading and planning time only the question paper may
be annotated.

You must NOT write in your answer booklet until instructed by
the supervisor.

Do NOT open this paper until instructed by the supervisor.



Accountancy Tuition Centre Ltd

ATC
INTERNATIONAL

Accountancy Tuition Centre (International Holdings) Ltd 2009 2
Section A This ONE question is compulsory and MUST be attempted
1 Kelly Inc acquired 80% of the shares in Gillan Inc on 1 April 2006 for $2,800,000 when the
retained earnings of Gillan were $500,000. No shares have been issued by either company
since that date. The fair value of the net assets at the date of acquisition were equivalent to
their book values. Kelly sold a 50% holding in Gillan, leaving Kelly with a 30%
shareholding in Gillan, on 1 October 2008 for $1,800,000 which has been credited to deferred
income as the accountant has never accounted for a disposal of a subsidiary before. Despite
the disposal Kelly is still able to exert significant influence over Gillan. The fair value of the
remaining 30% shareholding on 1 October 2008 was $1,131,000.
On 1 January 2009 Kelly acquired 60% of Pitcairn at a cost of $2,082,000. An item of plant
had a fair value which was $120,000 higher than its book value on 1 January 2009. The plant
had a remaining useful life of five years on the 1 January 2009.
The draft financial statements for the year ended 31 March 2009 were as follows:
Statements of comprehensive income as at 31 March 2009
Kelly Inc Gillan Inc Pitcairn Inc
$000 $000 $000
Revenue 2,860 1,580 1,284
Cost of sales (1,310)

(840)

(684)

Gross profit 1,550 740 600
Distribution costs (370) (200) (124)
Administrative expenses (410)

(220)

(172)

Operating profit 770 320 304
Interest expense (130)

(50)

(24)

Profit before tax 640 270 280
Tax (190)

(90)

(80)

Profit after tax 450

180

200



Statements of movement on retained earnings for the year ended 31 March 2009
Kelly Inc Gillan Inc Pitcairn Inc
$000 $000 $000
At 1 April 2008 6,472 1,080 1,600
Profit for the period 450 180 200
Dividends paid (200)

0

At 31 March 2009 6,722

1,260

1,800





Accountancy Tuition Centre (International Holdings) Ltd 2009 3
Statements of financial position as at 31 March 2009
Kelly Inc Gillan Inc Pitcairn Inc
$000 $000 $000
Non current assets
Tangible assets 3,514 2,764 1,984
Investment in Gillan 2,800
Investment in Pitcairn 2,082
Trade investments 278

Current assets
Inventory 1,675 1,275 1,322
Receivables 1,823 1,196 1,093
Cash 1,880 250 128

TOTAL ASSETS 14,052 5,485 4,527

Share capital 2,500 1,250 1,000
Share premium 250 750 500
Retained earnings 6,722

1,260

1,800

9,472 3,260 3,300

Deferred income 1,800

Payables 2,580 2,143 1,147
Income taxes payable 200 82 80

TOTAL EQUITY AND LIABILITIES 14,052 5,485 4,527

Additional information
(i) Non-controlling interest in Gillan was valued at their proportionate share of the
identifiable net assets, they were not credited with their share of goodwill. Non-
controlling interest in Pitcairn is valued at fair value, the market price of a Pitcairn
share on 1 January 2009 was $3.47.
At 31 March 2008 the value of goodwill in respect the acquisition of Gillan had
fallen by 40%. There was no impairment of this goodwill during the year ended 31
March 2009 and the recoverable amount of the investment in Gillan at 31 March
2009 exceeds its carrying value.
The value of goodwill in respect the acquisition of Pitcairn has fallen by 5% since
the acquisition occurred.
(ii) During the year Gillan sold goods to Kelly with a sales value of $90,000. These
sales were made as follows: $10,000 in the first six months and $80,000 in the
second six months. Unrealised profit of $10,000 was included in the year end
inventory of Kelly.
(iii) During the last three months of the year Pitcairn sold goods to Kelly with a selling
price of $20,000. Unrealised profit of $4,000 was included in the year end
inventory of Kelly.

Accountancy Tuition Centre (International Holdings) Ltd 2009 4
Required:
(a) Prepare the consolidated statement of comprehensive income for the year
ended 31 March 2009 and the statement of financial position of Kelly Inc as at
31 March 2009. (34 marks)

The directors of Kelly, a public limited company, had discussed the study by the Institute of
Environmental Management which indicated that over 35% of the worlds 250 largest
corporations are voluntarily releasing green reports to the public to promote corporate
environmental performance and to attract customers and investors. They have heard that their
main competitors are applying the Global Reporting Initiative(GRI) in an effort to develop
a worldwide format for corporate environmental reporting. However, the directors are unsure
as to what this initiative actually means. Additionally they require advice as to the nature of
any legislation or standards relating to environmental reporting as they are worried that any
environmental report produced by the company may not be of sufficient quality and may
detract and not enhance their image if the report does not comply with recognised standards.
Kelly has a reputation for ensuring the preservation of the environment in its business
activities.
Required:
(b) Prepare a report suitable for presentation to the directors of Kelly in which
you discuss the current reporting requirements and guidelines relating to
environmental reporting; (9 marks)
Historically financial reporting throughout the world has differed widely. The International
Accounting Standards Committee Foundation (IASCF) is committed to developing, in the
public interest, a single set of high quality, understandable and enforceable global accounting
standards that require transparent and comparable information in general purpose financial
statements. The various pronouncements of the IASCF are sometimes collectively referred to
as International Financial Reporting Standards (IFRS) GAAP.
Required:
(c) Comment on whether you feel the move to date towards global accounting
standards has been successful. (7 marks)
(50 marks)

Accountancy Tuition Centre (International Holdings) Ltd 2009 5
Section B TWO questions ONLY to be attempted
2 On 1 April 2008, the chief executive of Low Paints, Mr Low, retired from the company. The
ordinary share capital of $1 at the time of his retirement was $6 million. Mr Low owns fifty-
two per cent of the ordinary shares of Low Paints and the remainder is owned by employees.
As an incentive to the new management, Mr Low agreed to a new executive compensation
plan which commenced after his retirement. The plan provides cash bonuses to the board of
directors when the companys earnings per share exceeds the normal earnings per share
which has been agreed at $050 per share.
The cash bonuses are calculated as being twenty per cent of the profit generated in excess of
that required to give an earnings per share figure of $050. The new board of directors has
reported that the compensation to be paid is $360,000 based on earnings per share of $080
for the year ended 31 March 2009. However, Mr Low is surprised at the size of the
compensation as other companies in the same industry were either breaking even or making
losses in the period. He was anticipating that no bonus would be paid during the year as he
felt that the company would not be able to earn the equivalent of the normal earnings per
share figure of $050.
Mr Low, who had taken no active part in management decisions, decided to take advantage of
his role as non-executive director and demanded an explanation of how the earnings per share
figure of $080 had been calculated. His investigations revealed the following information:
(i) The company received a grant from the government of $5 million towards the cost
of purchasing a non-current asset of $15 million. The grant had been credited to the
statement of comprehensive income in total and the non-current asset had been
recognised at $15 million in the statement of financial position and depreciated at a
rate of 10% per annum on the straight line basis. The directors explained that
current thinking by the International Accounting Standards Board was that the
accounting standard on government grants was conceptually wrong because it
misstates the assets and liabilities of the company and hence they were following
the approach which they felt more accurately portrayed the transaction.
(ii) Shortly after Mr Low had retired from the company, Low Paints made an initial
public offering of its shares. The sponsor of the issue charged a fee of $300,000.
The fee on 1 June 2008 was paid by issuing one hundred thousand $1 shares at a
market value of $120,000 and by cash of $180,000. The directors had charged the
cash paid as an expense in the statement of comprehensive income. Further they had
credited the value of the shares issued to the sponsor in the statement of
comprehensive income as they felt that the shares were issued for no consideration
and that, therefore, they should offset the cash paid by the company. The public
offering was made on 1 June 2008 and involved vesting four million ordinary
(exclusive of the sponsors shares) shares of $1 at a market price of $120. Mr Low
and other current shareholders decided to sell three million of their shares as part of
the offer leaving one million new shares to be issued. The costs of issuing shares are
to be regarded as an element of the net consideration received.
(iii) The directors sold on 1 April 2008 a property under a twenty year lease to a
company, Highball, which the bank had set up to act as a vehicle for investments
and special projects. The consideration for the lease is $45 million. Low Paints has
signed an unconditional agreement to repurchase the lease of the property after four
years for a fixed amount of $55 million. The property has been taken off the
statement of financial position and the profit on the transaction, which has been
included in the statement of comprehensive income, is $500,000. The profit has
been calculated by comparing the carrying value of the property with the
consideration received.

Accountancy Tuition Centre (International Holdings) Ltd 2009 6
Depreciation on the property is charged at 5% per annum on the carrying value of
the asset.
(iv) Low Paints had made a 1 for 4 rights issue on 30 April 2009. The cost of the shares
was $160 per share and the market price was $200 per share before the rights
issue. The directors had ignored this transaction because it occurred after the end of
the reporting period but they intend to capitalise accumulated profit to reflect the
bonus element of the rights issue in the financial statements for the year ending 31
March 2010. The financial statements are not yet approved for the current year.
(v) The directors had calculated earnings per share for the year ended 31 March 2009 as
follows:
Net profit $48 million
Ordinary shares of $1 6,000,000
Earnings per share $080

Mr Low was concerned over the way that earnings per share had been calculated by the
directors and also he felt that some of the above accounting practices were at best unethical
and at worst fraudulent. He, therefore, had asked your technical and ethical advice on the
practices of the directors.
Required:
(a) Advise Mr Low as to whether earnings per share has been accurately
calculated by the directors showing a revised calculation of earnings per share.
(20 marks)
(b) Discuss whether the directors may have acted in an unethical manner in the
way they have calculated earnings per share. (5 marks)
(25 marks)


Accountancy Tuition Centre (International Holdings) Ltd 2009 7
3 Cohort is a private limited company and has two 100% owned subsidiaries, Legion and Air,
both themselves private limited companies. Cohort acquired Air on 1 January 2009 for $5
million when the fair value of the net assets was $4 million, and the tax base of the net assets
was $35 million. The acquisition of Air and Legion was part of a business strategy whereby
Cohort would build up the value of the group over a three year period and then list its
existing share capital on the Stock Exchange.
(a) The following details relate to the acquisition of Air, which manufactures electronic
goods:
(i) Part of the purchase price has been allocated to intangible assets because it
relates to the acquisition of a database of key customers from Air. The
recognition and measurement criteria for an intangible asset under IFRS 3
Business Combinations/IAS 38 Intangible Assets do not appear to
have been met but the directors feel that the intangible asset of $05
million will be allowed for tax purposes and have computed the tax
provision accordingly. However, the tax authorities could possibly
challenge this opinion.
(ii) Air has sold goods worth $3 million to Cohort since acquisition and made
a profit of $1 million on the transaction. The inventory of these goods
recorded in Cohorts statement of financial position at the year end of 31
May 2009 was $18 million.
(iii) The retained earnings of Air at acquisition was $2 million. The directors
of Cohort have decided that, during the three years to the date that they
intend to list the shares of the company, they will realise earnings through
future dividend payments from the subsidiary amounting to $500,000 per
year. Tax is payable on any remittance or dividends and no dividends
have been declared for the current year. (13 marks)
(b) Legion was acquired on 1 June 2008 and is a company which undertakes various
projects ranging from debt factoring to investing in property and commodities. The
following details relate to Legion for the year ending 31 May 2009:
(i) Legion has a portfolio of readily marketable government securities which
are held as current assets. These investments are stated at market value in
the statement of financial position with any gain or loss taken to profit or
loss. These gains and losses are taxed when the investments are sold.
Currently the accumulated unrealised gains are $4 million.
(ii) Legion has calculated that it requires a general provision of $2 million
against its total loan portfolio. Tax relief is available when the specific
loan is written off. Management feel that this part of the business will
expand and thus the amount of the general provision will increase.
(iii) When Cohort acquired Legion it had unused tax losses brought forward.
At 1 June 2008, it appeared that Legion would have sufficient taxable
profit to realise the deferred tax asset created by these losses but
subsequent events have proven that the future taxable profit will not be
sufficient to realise all of the unused tax loss. (12 marks)
Any impairment of goodwill is not allowed as a deduction in determining taxable
profit. The current tax rate for Cohort is 30% and for public companies is 35%.

Accountancy Tuition Centre (International Holdings) Ltd 2009 8
Required:
Write a note suitable for presentation to the partner of an accounting firm setting out
the deferred tax implications of the above information for the Cohort Group of
companies.
(25 marks)
4 Mineral, a public limited company, has prepared its financial statements for the year ended 31
October 2008. The following information relates to those financial statements:
2008 2007
$m $m
Group revenue 250 201
Gross profit 45 35
Profit from operations 10 9
Profit before taxation 12 8
Net profit for the period 5 4
___ ___
Non-current assets 42 36
Current assets 55 43
Current liabilities 25 24
Non-current liabilities long-term loans 13 9
Capital and reserves 59 46
___ ___

The company expects to achieve growth in retained earnings of about 20% in the year to 31
October 2009. Thereafter retained earnings are expected to accelerate to produce growth of
between 20% and 25%. The growth will be generated by the introduction of new products and
business efficiencies in manufacturing and in the companys infrastructure.
Mineral manufactures products from aluminium and other metals and is one of the largest
producers in the world. Production for 2008 increased by 18% through the acquisition of a
competitor company, increased production at three of its plants and through the regeneration
of old plants. There has been a recent growth in the consumption of its products because of
the substitution of aluminium for heavier metals in motor vehicle manufacture. Cost
reductions continued as a business focus in 2008 and Mineral has implemented a cost
reduction programme to be achieved by 2011. Targets for each operation have been set.
Minerals directors feel that its pricing strategy will help it compensate for increased
competition in the sector. The company recently reduced the price of its products to the motor
vehicle industry. This strategy is expected to increase demand and the usage of aluminium in
the industry. However, in spite of the environmental benefits, certain car manufacturers have
formed a cartel to prevent the increased usage of aluminium in car production.
In the period 2008 to 2011, Mineral expects to spend around $40 million on research and
development and investment in non-current assets. The focus of the investments will be on
enlarging the production capabilities. An important research and development project will be
the joint project with a global car manufacturer to develop a new aluminium alloy car body.

Accountancy Tuition Centre (International Holdings) Ltd 2009 9
In January 2008, Mineral commenced a programme of acquisition of its own ordinary shares
for cancellation. At 31 October 2008, Mineral had purchased and cancelled five million
ordinary shares of $1. In addition a subsidiary of Mineral had $4 million of convertible
redeemable loan notes outstanding. The loan notes mature on 15 June 2011 and are
convertible into ordinary shares at the option of the holder. The competitive environment
requires Mineral to provide medium and long term financing to its customers in connection
with the sale of its products. Generally the financing is placed with third party lenders but due
to the higher risks associated with such financing, the amount of the financing expected to be
provided by Mineral itself is likely to increase.
The directors of Mineral have attempted to minimise the financial risk to which the group is
exposed. The company operates in the global market place with the inherent financial risk that
this entails. The management have performed a sensitivity analysis assuming a 10% adverse
movement in foreign exchange rates and interest rates applied to hedging contracts and other
exposures. The analysis indicated that such market movement would not have a material
effect on the companys financial position.
Mineral has a reputation for responsible corporate behaviour and sees the work force as the
key factor in the profitable growth of the business. During the year the company made
progress towards the aim of linking environmental performance with financial performance
by reporting the relationship between the eco-productivity index for basic production, and
water and energy costs used in basic production. A feature of this index is that it can be
segregated at site and divisional level and can be used in the internal management decision-
making process.
The directors of Mineral are increasingly seeing their shareholder base widen with the result
that investors are more demanding and sophisticated. As a result, the directors are uncertain
as to the nature of the information which would provide clear and credible explanations of
corporate activity. They wish their annual report to meet market expectations and not just the
basic requirements of company law. They have heard that many companies deal with three
key elements of corporate activity, namely reporting business performance, the analysis of the
financial position, and the nature of corporate citizenship, and have asked your firms advice
in drawing up the annual report.
Required:
Draft a report to the Directors of Mineral setting out the nature of information which
could be disclosed in annual reports in order that there might be better assessment of
the performance of the company.
Candidates should use the information in the question and produce their report under
the headings:
(i) Reporting business performance; (10 marks)
(ii) Analysis of financial position; (6 marks)
(iii) The nature of corporate citizenship. (5 marks)
Marks will be awarded for the presentation and style of the report (4 marks)
(25 marks)
End of Question Paper