Beruflich Dokumente
Kultur Dokumente
BUSINESS REPORTING
This paper consists of FOUR questions (100 marks).
1.
Ensure your candidate details are on the front of your answer booklet.
2.
3.
Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.
4.
The examiner will take account of the way in which material is presented.
The questions in this paper have been prepared on the assumption that candidates do
not have a detailed knowledge of the types of organisations to which they relate. No
additional credit will be given to candidates displaying such knowledge.
IMPORTANT
Question papers contain confidential
information and must NOT be removed
from the examination hall.
183214
QUESTION 1
Franglais plc is a company offering business services to UK companies trading throughout
Europe. You are Nigella Fosby, an ICAEW Chartered Accountant, and you are working on a
short-term assignment at Franglais whilst the finance director, Leon Borossa, is on paternity
leave. You receive the following email from the chief executive, Aasha Panesar:
From: AashaP@franglais.com
To:
NigellaF@franglais.com
Date: 21 July 2014
Subject: Franglais financial statements for year ended 30 June 2014
There are some outstanding issues in relation to the Franglais draft financial statements. No
adjustments have been made to the draft financial statements in respect of these issues.
Leon left a note about Franglaiss new voice-activated translation application for smartphones
(Exhibit 1) and its defined benefit pension scheme (Exhibit 2).
On 1 July 2013 Franglais established a specialist division Parlez Parlez (PP) employing staff
to work on the new smartphone application in Madrid.
Franglais wants to retain and motivate the PP staff as they have language skills essential for
this business. Therefore a bonus scheme was introduced on 1 July 2013.
Leon left me details of this bonus scheme (Exhibit 3).
Please draft a memorandum that explains and quantifies the financial reporting treatment of
each of the above issues (Exhibits 1 to 3) in the Franglais financial statements for the year
ended 30 June 2014.
Ignore any tax and deferred tax consequences.
Requirement
Prepare the memorandum requested by Aasha Panesar.
(23 marks)
Exhibit 1 Smartphone application
Franglais commenced a major development of a smartphone application on 1 July 2013. All
of the work was undertaken in the Franglais Madrid office. The development costs were
500,000 each month for the period to 31 March 2014. During July and August 2013 we were
uncertain about whether there would be a market for the application. However, we made a
technical breakthrough on 1 September 2013 and since then the application has attracted a
significant number of firm orders, achieving a good margin.
We estimate that the smartphone application will give us a competitive advantage for four
years from 1 May 2014, which is the date on which sales commenced. All the development
costs incurred have been expensed in the draft statement of profit or loss using the exchange
rate at 31 March 2014.
ICAEW\J14
Page 2 of 14
To fund the development of the application, Franglais issued a 5 million, zero-coupon bond
at a discount on par of 10% on 1 July 2013 and recognised a liability equal to the cash
proceeds. The bond is repayable at a premium on par of 30% on 30 June 2016.
Franglais received interest of 120,000 on unused funds from the bond issue during the year
ended 30 June 2014. This interest received has been credited to the draft statement of profit
or loss.
Relevant exchange rates were:
Date/Period
/ rate
1 = 1.20
1 = 1.12
1 = 1.15
ICAEW\J14
Page 3 of 14
QUESTION 2
You are Kai Merton, a tax adviser working at Olong and Bruch (OB), ICAEW Chartered
Accountants. Your manager gives you the following briefing:
TeeStore Ltd and Georg Shrivandi are new tax clients of our firm. Georg owns 100% of the
shares in TeeStore and is also one of TeeStores directors. Client acceptance procedures
have been completed. OB will be assisting in finalising the corporation tax return for TeeStore
for the year ended 31 March 2014 and will be responsible for preparing Georgs 2013-14 tax
return. OB will also be dealing with any outstanding matters relating to earlier tax years.
TeeStores former tax advisers recently provided professional clearance and sent
information concerning the tax affairs of TeeStore to OB on 15 July 2014. I have left this
information for you to read (Exhibit 1).
Georg has sent an email to OB with the information needed to complete his tax return for the
tax year 2013-14 (Exhibit 2).
I have a meeting arranged with Georg next week. I want you to prepare some pre-meeting
notes in which you:
Explain the tax implications of TeeStores investment in Brue Inc (Exhibit 1) and its
effect on the corporation tax liability for the year ended 31 March 2014 and also for
future accounting periods.
Set out and explain potential adjustments to TeeStores taxable profit and corporation
tax liability for the year ended 31 March 2014. Identify any further information required
from the client.
Calculate Georgs UK tax liabilities for the tax year 2013-14. Include an evaluation of
the possible claims and elections and your recommendations for Georg in order to
minimise his UK tax liabilities.
Requirement
Prepare the pre-meeting notes requested by your manager.
(27 marks)
ICAEW\J14
Page 4 of 14
China tea
Revenue
Cost of sales
Gross profit
20
(16)
4
30
(21)
9
Gross profit %
20%
30%
Other
products
m
10
(7)
3
Total
m
60
(44)
16
30%
We have requested an explanation from the client for the different gross profit margins.
ICAEW\J14
Page 5 of 14
Thank you for agreeing to complete my tax return. I have previously prepared and submitted
my own tax return as my tax affairs have been relatively straightforward. In 2012-13 I had
only a small amount of overseas income and no overseas chargeable gains. I have been taxresident in the UK since 2001.
On 1 September 2013 I set up a partnership with my brother in an export business in
Navanda. Therefore my tax affairs in 2013-14 are now more complicated.
Our export business in Navanda has proved very profitable and my taxable partnership
trading income from this business is 200,000 for the period 1 September 2013 to 5 April
2014 (see below). I have paid 20,000 tax on this income in Navanda.
As the business needs working capital to grow, I remitted only 52,000 to the UK on
25 March 2014; this represented my cash drawings from the partnership. I needed the money
to repay some of my directors loan account with TeeStore. I understand that my former tax
advisers have given you details of this (Exhibit 1). I expect that the TeeStore board of
directors will agree to the balance of the loan being waived in the near future.
I have travelled frequently to Navanda for short visits in the tax year 2013-14 in order to set
up the export business. I have also visited Teestores suppliers in China. In total I have spent
170 days in the UK in 2013-14. I was divorced in June 2013 and still have an apartment in
London which I now regard as my permanent home and where I live when working at
TeeStores head office.
I have summarised below my income and chargeable gains:
Income for the tax year 2013-14
Dividend received from TeeStore credited to UK bank account
Salary from TeeStore
Partnership trading income in Navanda
Interest on bank account in Navanda (after 18% Navandan tax)
54,000
50,000
200,000
5,535
Chargeable gains
I have made chargeable gains on the following assets sold in the tax year 2013-14:
Chargeable gain on sale of:
25,000
30,000
I understand that chargeable gains are exempt from tax in Navanda. Please advise me on
how the new business in Navanda will affect my UK tax position.
ICAEW\J14
Page 6 of 14
BLANK PAGE
ICAEW\J14
Page 7 of 14
QUESTION 3
You are Max Filson, an audit senior working for Chekitt & Co, a firm of ICAEW Chartered
Accountants. You receive the following message from your audit manager, Sam Knowles:
I need you to help me to plan the audit of the Wecare Group for the year ending
31 July 2014. Wecare Holdings Ltd is the parent company and it has two subsidiaries. I
realise that you havent previously worked at this client so I have left some background
information on your desk (Exhibit 1).
I received an email from Wecares finance director, Liz Lewis (Exhibit 2), which sets out two
issues on which she requires advice and I need you to prepare some notes so I can respond
to this email. I have provided you with summary management accounts for the 10 months
ended 31 May 2014 (Exhibit 3), which I need you to review carefully.
As well as auditing the Wecare Group consolidated financial statements, we also provide
separate audit opinions on Wecare Holdings and its subsidiary companies, Twilight Ltd and
Gull Ltd. What I need you to do is:
(i)
For each of the two issues described in Lizs email (Exhibit 2):
(ii)
Identify and explain other significant audit issues which you have noted from your
review of the management accounts (Exhibit 3) and the other information provided.
For each audit issue, set out the key audit procedures we should perform.
Requirement
Prepare a response to Sams requests.
(27 marks)
ICAEW\J14
Page 8 of 14
Twilight owns and manages three freehold buildings in different locations. Each building is
divided into luxury retirement apartments. Rental income is received quarterly in advance.
Gull owns and operates a residential care home, providing medium-term and long-term care
for which residents pay monthly in advance. Gull was incorporated by Wecare Holdings on
1 August 2010.
Exhibit 2 Email from Liz Lewis, finance director of Wecare
To:
From:
Date:
Subject:
ICAEW\J14
Page 9 of 14
Exhibit 3 Wecare Group summary management accounts for the 10 months ended
31 May 2014
Statements of profit or loss
Wecare
Holdings
000
Twilight
000
Gull
Consolidation
adjustments
000
000
Group
000
(225)
280
55
(133)
1,792
(540)
(235)
1,017
(324)
995
(737)
(45)
213
(21)
(78)
(78)
693
693
192
192
50
2,510
2,560
6,618
6,618
1,020
1,020
280
365
645
17
592
609
217
10
227
3,205
7,227
1,247
21
277
109
407
41
62
195
472
105
214
341
748
2,142
5,062
800
8,004
Share capital
Retained earnings
100
901
1,001
1,000
693
1,693
10
223
233
(1,010)
100
1,817
1,917
3,205
7,227
1,247
(1,010)
10,669
Revenue
Operating costs
Intercompany recharges
Net operating profit
Finance costs
(Loss)/profit before
taxation
Income tax expense
(Loss)/profit for the period
2,787
(1,502)
1,285
(478)
807
807
500
(2,510)
1,000
8,188
1,000
9,188
Current assets
Trade and other receivables
Cash at bank and in hand
Total assets
Current liabilities
Trade and other payables
Accruals and deferred
income
Non-current liabilities
Loans NOTE 2
ICAEW\J14
Page 10 of 14
514
967
1,481
(1,010)
10,669
NOTES
1.
During the 10 months ended 31 May 2014, the only major capital expenditure was on
improvement and renovation works to Gulls freehold property at a cost of 250,000.
2.
The group has a number of bank loans, details of which are as follows:
Wecare
Holdings
Twilight
Gull
Original loan
2 million on
1 August 2013.
6 million on
1 April 2012.
800,000 on
1 October 2010.
Capital
repayments
Equal annual
instalments of
400,000
commencing on
31 July 2014.
Equal annual
instalments of
500,000
payable on
31 March.
First payment
made on
31 March 2013.
Equal annual
instalments of
160,000
commencing on
30 September 2014.
Interest
payments
Payable at 8.5%
per annum
annually in
arrears
commencing on
31 July 2014.
Payable at 7.5%
per annum
annually in
arrears on
31 March.
First payment
made on
31 March 2013.
Interest at a rate of
8.0% per annum
payable monthly on the
first day of the following
month.
Separate cash payments are made for: (i) capital repayments; and (ii) interest payments.
Loan balances in the statement of financial position include any accrued interest.
ICAEW\J14
Page 11 of 14
QUESTION 4
Kemsler Kessinger Ltd (KK) is a manufacturer of industrial cutting equipment.
You are a senior who has recently been assigned to the audit of KK. You work for Wight and
Jones LLP (WJ), a firm of ICAEW Chartered Accountants. WJ has recently been appointed
as auditor for the KK consolidated financial statements for the year ended 30 June 2014. WJ
is also the auditor of all KK group companies and associates. The engagement partner,
Emma Happ, invited you to a meeting with her to plan some aspects of the KK audit.
Emma opened the meeting: KK is a new client of WJ and we are still trying to understand
fully its management processes and corporate governance. My particular concern is that the
interim audit discovered transactions with directors and other related parties during the year
which I suspect may not be at arms length.
We need to make sure that the financial reporting treatment is appropriate in the KK
consolidated financial statements for the year ended 30 June 2014 and that all necessary
disclosures are made in each of the individual company financial statements.
I have met with the KK chief executive, Mike Coppel. As a result of this discussion, I have
prepared some background information (Exhibit 1). In addition, the audit senior on the KK
interim audit, Russell Reed (who no longer works for WJ), raised some matters of concern
(Exhibit 2).
One further issue is that Mike is unhappy with the due diligence work which was performed
by the accountants Trebant & Edsel LLP (TE) for KKs purchase of the shares in Crag Ltd
(Exhibit 1). Mike is considering asking WJ to review their work so the KK board can decide
whether to undertake litigation against TE. However, Mike emphasised that, while he is
happy with the work of WJ so far, he would like the audit for the year ended 30 June 2014 to
be completed to his satisfaction before he would consider awarding this new review work to
WJ, or indeed reappointing WJ for the audit engagement next year.
Please prepare notes for me as follows.
(1) For each of the issues in Exhibit 2:
(2) Explain the ethical implications for WJ of Mikes suggestion that WJ carry out review work
in respect of the due diligence assignment performed by TE.
"Please ignore tax and deferred tax for now.
Requirement
Respond to the instructions of Emma Happ, the engagement partner.
ICAEW\J14
Page 12 of 14
(23 marks)
Chief executive
Finance director
Production director
Non-executive director
(appointed by DVC)
Non-executive director
(appointed by Yissan plc)
Shareholding in KK
15%
5%
10%
40%
30%
-
No directors joined or left the KK board during the year ended 30 June 2014. Mike and Janet
Coppel are married to each other.
Group structure, other investments and transactions
Most of the component parts used by KK in its manufacturing process are imported. One
supplier, Yissan, supplies 32% of KKs components. Yissan acquired its 30% shareholding in
KK in 2001 and actively exercises its votes. Yissan has the right to appoint a director to the
board.
KK owns 40% of the ordinary shares in Seal Ltd and exercises significant influence.
KK owns 35% of the ordinary shares in Moose Ltd and appoints two of its five board members.
The remaining 65% shareholding is owned by Finkle Inc, a US registered company. KK owns
30% of the ordinary shares in Finkle Inc. The remaining 70% of the shares are held by a single
unrelated individual.
On 1 August 2013, KK acquired 45% of the ordinary shares in Crag Ltd, a competitor
company. The remaining 55% of the ordinary shares continue to be held by Woodland plc.
Crag had previously been a wholly-owned subsidiary of Woodland which was an unrelated
company. Under the terms of the share purchase, KK has an option, valid for three years
from the date of the share purchase, which allows it to buy an additional 15% holding of Crag
ordinary shares from Woodland at an exercise price per share which is 10% higher than the
actual price per share paid to purchase the 45% shareholding. KK has been exercising its
votes as a shareholder of Crag. Since 1 August 2013, the fair value per ordinary share of
Crag is estimated to have risen by 13%. Crags marketing director, who was appointed by
KK, has implemented a new successful marketing strategy which has been a key factor in
increasing the fair value per share.
The ordinary shares of all companies are voting shares. All companies have a 30 June
accounting year end.
Exhibit 2 continued overleaf
ICAEW\J14
Page 13 of 14
Seal sold 12 million of goods to Crag, spread evenly over the year ended 30 June
2014. I am not clear how this should be treated and whether there should be separate
disclosure of these transactions and, if so, what needs to be disclosed.
(2)
On 6 June 2014, Seal sold goods to Moose at a price of 2 million. At 30 June 2014,
none of these goods remained in inventories held by Moose. There were no other
transactions between Seal and Moose during the year ended 30 June 2014.
(3)
(4)
On 2 October 2013, KK repaid a 9 million interest-free loan from Yissan. The loan
was originally raised on 12 March 2010.
ICAEW\J14
Page 14 of 14