Statement of Financial Position as at 31 December 2014

Euan Ltd Mark Ltd

Non-current asset (land) 860,000 260,000
Investments 380,000
Inventories 140,000 40,000
Trade Receivables 8,000 30,000
Dividend receivable from group companies 12,000
Inter-company loans receivable from Mark Ltd 90,000
Inter-company loans receivable from Nathan Ltd 30,000
Cash 130,000 60,000
1,650,000 390,000

Share capital (1 nominal value) 600,000 100,000

Retained profits 260,000 210,000
Revaluation reserve
Trade payables 730,000 30,000
Inter-company loans payable to Euan Ltd 40,000
Dividend payable 60,000 10,000
1,650,000 390,000

Parent P Subsidiary S

Part B
(Pre-IAS28): Euan Group: Statement of Consolidated Financial Position as at 31 December 2014

Non-current asset (land)

Investments
Goodwill
Investment in Associate
Inventories
Trade Receivables
Dividend from Associate (Nathan)
Inter-company loans receivable from Nathan Ltd
Cash
Net Assets

Share capital (1 nominal value)

Profit & Loss reserves
Non-controlling interests (NCI)
Trade payables
Dividend payable
Capital, Reserves & Liabilities

(Current - IAS28): Euan Group: Statement of Consolidated Financial Position as at 31 December 2014

Non-current asset (land)

Investments
Goodwill
Investment in Associate
 Inventories
Trade Receivables
Dividend from Associate (Nathan)
Inter-company loans receivable from Nathan Ltd
Cash
Net Assets

Share capital (1 nominal value)

Profit & Loss reserves
Non-controlling interests (NCI)
Trade payables
Dividend payable
Capital, Reserves & Liabilities

Goodwill
Subsidiary
Associate (Under IAS28, do not separate from Investment in Associate)
Impairment of Subsidiary

Reserves
Profit & Loss 260,000 210,000
Provision for unrealised profit 8,000
Revised Profit & Loss 260,000 202,000
Share capital 600,000 100,000
Revaluation 20,000
Capital & Reserves 860,000 322,000

Retained Profits (Parent's share) Res. At start Res. At end

Parent
Subsidiary 90,000 202,000
Associate 20,000 150,000
Impairment of Subsidiary
Total

Part A
Define subsidiary: company controlled through ownership >50% or operational control
Define associate: own 20-50% and exert significant influence but not control
Subsidiary: fully consolidated (line by line) but remove non-controlling portion
Associate: Equity method (i.e., single line consol) that only consolidate P's share of investment and profits
 Additional notes
Nathan Ltd 1 Jan 2010
Parent acquire 70% Subsidiary for 290,000
300,000 Subsidiary Share Cap & Reserves 190,000
Fair value non-current assets 280,000
50,000 Historic cost non-current assets 260,000
60,000 No change to S/cap & Res

1 Jan 2011
Parent acquire 25% Associate for 70,000
30,000 Associate Share Cap & Reserves 250,000
440,000 Fair value non-current assets 300,000
No change to S/cap & Res
200,000
160,000 Dividend /share
30,000 Parent 0.1
10,000 Subsidiary 0.1
20,000 Associate 0.1
20,000
440,000 Inventory
Sub to Parent 10,000
Associate A Sub CoS 2,000
Assoc to Parent 15,000
Assoc CoS 5,000

Goodwill impairment for 2014 50000

Workings
1,140,000 P+S+Revaluation
20,000 Net investments at arms length remaining
100,500 see calculation below
95,000 P share of A Cap & Reserves
172,000 P+S - Unrealised Profit
38,000 P+S
5,000 P share of A div
30,000 Do not eliminate
240,000 Includes cash in transit for loan repayment from S to P
1,840,500

600,000 P only
320,900 see calculation below
96,600 NCI share of Adj Capital & Reserves
760,000 P+S
63,000 P + share of S div payable
1,840,500

31 December 2014

1,140,000
20,000
93,000
102,500
 172,000
38,000
5,000
30,000
240,000
1,840,500

600,000
320,900
96,600
760,000
63,000
1,840,500

143,000 Price paid - share of fair value net assets

7,500
-50,000
100,500

160,000
10,000
150,000
200,000
30,000
380,000

260,000
78,400
32,500
-50,000
320,900

nvestment and profits

Part B Original cost of capital 10% Revised cost of capital 15%

Ex ante
Time t 1 2 3 4
Net cash flows 20,000 34000 34000 34000
Discount 0.909 0.826 0.751 0.683
DCF 18,182 28,099 25,545 23,222

Ex post
Time t 1 2 3 4
Revised cash flows 20,000 28500 28500 28500
New contract -6,500 3400 3400 3400
Grant (prize) 3,000
Net cash flow 16,500 31,900 31,900 31,900
Revised discount 0.870 0.756 0.658 0.572
DCF 14,348 24,121 20,975 18,239

Workings
d1t1
v1t1
v0t1 15,000
d1t0
v1t0
v0t0

Income ex ante d1t0 + v1t0 - v0t0

or r0*v0t0

Income ex-post 1A d1t1 + v1t1 - v0t0

Income ex-post 1B d1t1 + v1t1 - v0t1

Income ex-post 2A d1t1 + v1t1 - ex ante income/r1

Income ex-post 2B v0t1*r1t1*(1+r0t1) / (1+r1t1)

Part A
Economists see no use for ex post income, only ex ante; but financial reporting relies on transaction based info for
stewardship
Stewardship requirements different from decision-making (forecasting)
No objective income measurement (including historical cost)
Income measurement based on changes in the value of recorded 'net assets' can only give a partial picture of the chan
in the value of the business as a whole
Income measures ex post not useful for management or shareholder's investment decisions, but may have some use fo
management control (but these still are problematic)
 5 6 onwards
34000 34000
0.621
21,111

5 6 onwards
28500 28500

28,500 28,500
0.497
14,170

Answers
16,500
196,750
193,864
20,000
340,000
325,620

34,380
32,562

-112,369
19,386

-15,951
27,815

Subtotal

ies on transaction based info for

only give a partial picture of the changes

decisions, but may have some use for

 Statement of financial performance for the year ended 31 December 2014

Sales revenue 4,050,000
Less: Cost of sales
Opening inventories 225,000
Purchases 2,700,000
Closing inventories -270,000
2,655,000
Gross profit 1,395,000

Expenses 450,000
Depreciation 126,000
Net profit 819,000

Statement of financial position as at 31 December 2014

Non-current assets
Property, Plant & Equipment (PPE) 3,888,000
Inventories 270,000
Other net current assets 1,161,000
Net Assets 5,319,000

Share capital (1 shares) 4,500,000

Retained profits 819,000
Equity 5,319,000

RPI PPE Inventories

1 January 2014 200 200 250
30 June 2014 220 240 270
30 November 2014 230 260 280
31 December 2014 240 300 290

Part B Statement of financial performance for the year ended 31 December 2014
Index
Sales revenue 4,050,000
Less: Cost of sales
Opening inventories 225,000 1.08
Purchases 2,700,000
Closing inventories -270,000 0.96
2,655,000
Gross profit 1,395,000

Expenses 450,000
Depreciation 126,000 1.50
Net profit

Non-current asset: Unrealised

Inventory: Unrealised
Non-current asset: Realised
Inventory: Realised
Retained profit 819,000
 Statement of financial position as at 31 December 2014
Index
Non-current assets
Property, Plant & Equipment (PPE) 3,888,000 1.50
Inventories 270,000 1.04
Other net current assets 1,161,000
Net Assets 5,319,000

Share capital (1 shares) 4,500,000

Retained profits 819,000
Equity 5,319,000

Part C FSCVA CPP

Non-current asset: Real Unrealised 5,832,000 4,665,600
CVA*CPP HCA*CPP

Inventory: Real Unrealised 279,643 281,739

CVA*CPP HCA*CPP

Non-current asset: Real Realised 189,000 151,200

CVA*CPP HCA*CPP
Note: in the above three calculations, CPP=1 for FSCVA as the CVA are all stated at year end values

Inventory: Real Realised - Method A 2,926,519 2,896,364

Note: This method assumes we only a single Cost of Sales total and not individual
constituents (i.e., opening & closing inventory; purchases) making up Cost of Sales

Inventory Real Realised - Method B 2,926,519 2,933,715

Note: We calculate CPP for each constituent figure in the Cost of Sales, and the sum of these
gives the CPP Cost of Sales; We choose this method if we have all the detailed information provided

Inventory Real Realised - Method C 2,926,519 2,920,909

Strictly speaking if the average (30 June RPI) is affected by the removal of closing inventory
we have to use 30June RPI for closing inventory instead of 30Nov RPI

Holding gains (NCA & Inventories, real realised and real unrealised) all in the Statement of Financial Performance

Part A FSCVA Fully Stabilised Current Value Accounting (CVA/CPP in combination) would indicate whether the company's fina
capital (shareholder's funds) is maintained in real terms. The basic approach is to restate CVA accounts into Current
Purchasing Power (CPP).

Advantages
Main advantage is to overcome limitations of CPP (which only deals with general price rises) or
CVA (which only deals with specific price rises). The reality is often that both are occuring at the same time
For example, any holding gains on assets under CVA may be fictitious since, although it may be a money gain, it may
not actually be a real gain in a period of high inflation.

Disadvantages
High complexity - significant uncertainty already exist with either CVA or CPP assumptions, let alone both combined
Individual problems of CVA / Replacement Cost (any of below will do)
Problematic for assets with no liquid markets to assess value
Problems of aggregation
Replacement cost is a 'cost' and not a value
Individual problems of CPP (any of below will do)
Still based on Historic Cost Accounting (HCA) rather than current values
Problems interpreting figures (unit CPP is not the same as )
Companies have to have monetary working capital and thus will always r
purchasing power losses on those
 4,050,000

243,000
2,700,000
-260,357
2,682,643
1,367,357

450,000
189,000
728,357

1,944,000
9,643
63,000
27,643
2,772,643
 5,832,000
279,643
1,161,000
7,272,643

4,500,000
2,772,643
7,272,643

1,166,400

-2,096

37,800

year end values

30,156

-7,196

rmation provided

5,610

ment of Financial Performance

ndicate whether the company's financial

estate CVA accounts into Current

curing at the same time

gh it may be a money gain, it may

ptions, let alone both combined

markets to assess value

g (HCA) rather than current values

PP is not the same as )
orking capital and thus will always report
A Year ended Profit before Capital Depreciation
31 December depreciation allowance
2015 15,000 4,800 960
2016 14,400 960 1,920
2017 13,200 2,340 2,880
2018 12,000 6,720 1,920

Tax rate 0.33

Flow through 2015 2016 2017 2018

Profit 15,000 14,400 13,200 12,000
Capital Allow. 4,800 960 2,340 6,720
Taxable profit 10,200 13,440 10,860 5,280

Tax at 33% 3,366 4,435 3,584 1,742

Deferred tax 0 0 0 0

Full provision 2015 2016 2017 2018

Capital Allow. 4800 960 2340 6720
Depreciation 960 1,920 2,880 1,920
CA less Dep. 3,840 -960 -540 4,800
Deferred tax 1,267 -317 -178 1,584

Tax at 33% 3,366 4,435 3,584 1,742

Def. tax P&L 1,267 -317 -178 1,584
Def. tax B/S 1,267 950 772 2,356

For deferred tax:

Entity is a going concern so will continue to pay tax
Tax is a business expense so treat it like any other cost
Apply accruals/matching concept and make it a provision
It is also prudent to recognise this future liability

Against deferred tax:

Tax is not related to the accounting profit but charged to taxable profit so
matching does not apply
Deferred tax approaches are attempts to equalise income over time, but income is
not smooth over time in reality
Tax is not an expense as such (but is not voluntary either)
Deferred tax is only a liability when it becomes due
The actual tax charge is objective and is the best way of judging management's
success at organising tax affairs

B Date commenced 1 January 2014

Expected completion date 31 December 2017
Final contract price 2,000,000
Costs to 31 December 2014 600,000
Value of work certified to 31 December 2014 620,000
Progress payments invoiced to 31 December 2014 110,000
Estimated costs to completion 500,000
 Expected profit 900,000

Sales 620,000
Cost of Sales 341,000
Attributable profit (% work completed basis) 279,000

Balance Sheet: Long term contracts 259,000

Balance Sheet: Receivables (amounts recoverable on LT contract) 510,000
IAS11 on LT contracts
Stage of completion method
either: proportion of costs incurred for work or
surveys of work performed

C Number of ordinary shares 1,000,000

Nominal value of each share 0.1
Price per share issued 2.5
Bonus Shares issued 0.2

Ordinary share capital (nominal value 10p) 250,000

Ordinary share premium 750,000
Preference share capital 200,000
Retained profits 8,000,000

After issue of New shares

Ordinary share capital (nominal value 10p) 350,000
Ordinary share premium 3,150,000
Preference share capital 200,000
Retained profits 8,000,000

After issue of Bonus shares

Ordinary share capital (nominal value 10p) 420,000
Ordinary share premium 3,080,000
Preference share capital 200,000
Retained profits 8,000,000

D Definition: IAS37 contingent liabilities

A possible obligation arising from past events whose existence will be confirmed only
by the occurrence of one or more uncertain future events not wholly within the
entity's control or

A present obligation that arises from past events but is not recognised because:
i) it is not probably that an outflow of resource embodying economic benefits will be
required to settle the obligation, or
ii) the amount of the obligation cannot be measured with sufficient reliability

Likelihood of outcome Approx Prob Accounting treatment

Virtually certain 95% A provision is recognised. Disclosures
are required for the provision: that is,
Probably 50-95% this is NOT a contingent liability
Possible but not probable 5-50% No provision recognised. Disclosures
are required for the contingent liab.
Remote <5% No provision is recognised and no
disclosure is required

Note some students could also show a decision tree and credit should be given

Lawsuit 1: Disclose but do not create provision

Lawsuit 2: Disclose but do not create provision