Beruflich Dokumente
Kultur Dokumente
MARKING SCHEME
QUESTION ONE
Consolidated balance sheet of Pochetino as at 30 September 2015:
GHCm GHCm
Non-current assets
Property, plant and equipment (358 + 240 + 12 + 20 + 5 +15 (w (iv))) 650
Goodwill (w (i))) 80
Investment in associate (w (v)) 220
Other investments 45
––––––
995
Current Assets
Inventories (130 + 80) 210
Trade receivables (142 + 97) 239
Cash and bank 4 453
–––– ––––––
Total assets 1,448
––––––
Equity and liabilities
Equity attributable to the parent
Ordinary share capital (400 + 80 (w (v))) 480
Reserves: Share premium (40 + 120 (w viii) 160
Revaluation (15 + 12 + (5 x 60%) (w ix)) 30
Retained earnings (w (ii)) 261 451
––––– –––––
931
Non Controlling interest (w (iii)) 112
––––––
1,043
Non-current liabilities
Deferred tax (45 – 10) 35
Current liabilities
Bank overdraft 12
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Trade payables (118 + 141) 259
Deferred consideration (w (i)) 49
Current tax payable 50 370
––––– –––––
Total equity and liabilities 1,448
––––––
(ii)Retained earnings
Pochetino 240
Share of post acquisition profit – Silva (60% x 35) 21
Share of post acquisition profit –Acquilani (40% x 50) 20
Goodwill Impairment (20)
261
The increase in the fair value of the land at the date of acquisition is accounted for as a fair value
adjustment. The increase of a further GHC5 million in the year ended 30 September 2015 is a
revaluation increase (accounted for as 60% to the group revaluation reserve and 40% to minority
interest).The fair value adjustment of GHC20 million to plant will be realised evenly over the
next four years in the form of additional depreciation at GHC5 million per annum. In the year
ended 30 September 2015 the effect on the consolidated financial statements is that GHC5
million will be charged to Silva’s profit (as additional depreciation); and a net GHC15 million
added to the carrying value of the plant.
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(v) Investment in associate:
––––
220
––––
The purchase consideration by way of a share exchange (80 million in Pochetino for 40 million
in Acquilani) would be recorded as an increase in share capital of GHC80 million (GHC1
nominal value) and an increase in share premium of GHC120 million (80 xGHC1·50).
Pochetino 40
160
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(ix) Revaluation Reserve
Balance bld 15
Silva (60% x 5) 3
30
QUESTION TWO
(a) Option 1 – Net grants off related expenditure
GHC
Non-current assets
Current liabilities
Notes to the financial statements for the year ended 30 June,2012 (extracts) Property, plant and
equipment
GHC
––––––––
––––––––
GHC
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Training costs (70,000 – 40,000) 30,000
GHC
Non-current assets
Current liabilities
Notes to the financial statements for the year ended 30 June,2012 (extracts)
GHC
Cost 350,000
––––––––
––––––––
––––––––
186,667
––––––––
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Included in income statement for the year ended 30 June,2012
GHC
Tutorial note
The GHC100,000 grant in (3) has conditions attached to it. In such a situation, IAS20 states that
grants should not be recognised until there is reasonable assurance that the entity will comply
with any conditions attaching to the grant. Since Kante is struggling to recruit, and there is only
one month left for recruitment to meet these conditions, then it does not seem that there is
‘reasonable assurance’. Hence the grant should not be recognised as such, but should be held in
current liabilities, pending repayment.
(b) The finance cost of the loan must be calculated using the effective rate of 7·5%, so the total
finance cost for the year ended 31 March 2010 is GHC750,000 (GHC10 million x 7·5%). As the
loan relates to a qualifying asset, the finance cost (or part of it in this case) can be capitalised
under IAS 23.
The Standard says that capitalisation commences from when expenditure is being incurred (1
May 2009) and must cease when the asset is ready for its intended use (28 February 2010); in
this case a 10-month period. However, interest cannot be capitalised during a period where
development activity is suspended; in this case the two months of July and August 2009. Thus
only eight months of the year’s finance cost can be capitalised = GHC500,000 (GHC750,000 x
8/12). The remaining four-months finance costs of GHC250,000 must be expensed. IAS 23 also
says that interest earned from the temporary investment of specific loans should be deducted
from the amount of finance costs that can be capitalised. However, in this case, the interest was
earned during a period in which the finance costs were NOT being capitalised, thus the interest
received of GHC40,000 would be credited to the income statement and not to the capitalised
finance costs.
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In summary:
GHC
GHC
(c) As this is a convertible loan, it must be apportioned between debt and equity. Per IFRS 7 and
IFRS 9 this is calculated as follows:
GHC'000
Present value of the principal to be repaid: GHC5 million × 0.75 3,750
Present value of interest: GHC0.4 million × 2.49 (0.91 + 0.83 + 0.75) 996
Debt element 4,746
Equity element(Difference) 254
Proceeds of issue 5,000
The income statement and statement of financial position amounts will be as follows:
GHC000 GHC000
Debt element of loan 4,746
Interest at 10% (income statement) 475
Interest paid (400)
Balance due 75
Balance of loan at 31 March 2016
(statement of financial position) 4,821
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Probable is defined as ‘more likely than not’. The legal advisors have confirmed that it is
likely that the claim will succeed. „
A reliable estimate of GHC500,000 has been made.
Therefore a provision of GHC500,000 should be made.
Counter-claim
IAS37 requires that such a reimbursement should only be recognised where receipt is ‘virtually
certain’. Since the legal advisors are unsure whether this claim will succeed no asset should be
recognised in respect of this claim.
(iii) Returns
Applying the IAS37 conditions in (1) to the facts given:
Although there is no legal obligation, a constructive obligation arises from Georgina’s
past actions. Georgina has created an expectation in its customers that such refunds will
be given.
As at the year end, based on past experience, an outflow of economic benefits is
probable.
A reliable estimate can be made. This could be 1% × 400,000 but since the returns are
now all in the actual figure of GHC3,500 can be used. Therefore a provision of
GHC3,500 should be made.
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(e) (i) New drug
Under IAS 38 the GHC12m costs of developing this new drug are capitalised and then amortised
over its commercial life. (The costs of researching a new drug are never capitalised.)
IAS 38 Para 69 states that advertising and promotional costs should be recognised as an expense
when incurred. This is because the expected future economic benefits are uncertain and they are
beyond the control of the entity.
However, because the year-end is half way through the campaign there is a GHC2.5m
prepayment to be recognised as a current asset.
(f) IAS 24 Related Party Disclosures requires an entity’s financial statements to contain the
disclosures necessary to draw attention to the possibility that its financial position and profit or
loss may have been affected by the existence of related parties and by transactions and
outstanding balances with such parties.A person or a close member of that person’s family is
related to a reporting entity if that person:
(i) has control or joint control over the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the
reporting entity.
With regards to Sunderland, the finance director is a related party, as he owns more than half of
the voting power (60%). In the absence of evidence to the contrary, he controls Sunderland and
is a member of the key management personnel. The sales director is also a related party of
Sunderland as she is a member of the key management personnel and is a close member (spouse)
of the family of the finance director. Their son is a related party of Sunderland as he is a close
member (son) of their family.
The operations director is also a related party as he owns more than 20% of the voting power in
Sunderland. In the absence of evidence to the contrary, the operations director has significant
influence over Sunderland and is a member of the key management personnel. An entity is
related to a reporting entity if the entity is controlled or jointly controlled by a person identified
as a related party.Hence, Benfica is a related party of Sunderland.
Benfica is controlled by related parties, the finance and sales directors, for the benefit of a close
member of their family, i.e. their son.In the absence of evidence to the contrary, the third owner
of the shares is not a related party.
The person is a passive investor who does not appear to exert significant influence over
Sunderland. The loan from the bank, which has been guaranteed by the finance director, will be
disclosed as such in the financial statements. Disclosure of personal guarantees given by
directors in respect of borrowings by the reporting entity should be disclosed in the notes to the
financial statements.
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QUESTION THREE
Mauricio
Restated income statement – Year to 31 March 2015
GHC000
Sales revenues (13,700 – 300 plant sale proceeds) 13,400
Cost of sales (w (i)) (8,910)
–––––––
Gross profit 4,490
Operating expenses (2,400)
Investment income (1,320 – 1,200) 120
Loan interest (25 + 25) (50)
––––––
Profit before tax 2,160
Income tax expense (55 + 260 + (350 – 280) deferred tax) (385)
––––––
Profit for the period 1,775
––––––
(b)
Statement of Changes in Equity – Year to 31 March 2015
Retained Revaluation Ordinary Share Total
profits reserve shares premium
GHC000 GHC000 GHC000 GHC000 GHC000
At 1 April 2014 2,990 nil 1,600 40 4,630
Rights issue (see below) 400 560 960
Profit for period (see (a)) 1,775 1,775
Revaluation of property (w (ii)) 1,800 1,800
Transfer to realised profit 80 (80) nil
Ordinary dividends paid (500) (500)
–––––– –––––– –––––– –––––– ––––––
At 31 March 2015 4,345 1,720 2,000 600 8,665
–––––– –––––– –––––– –––––– ––––––
The number of 25p ordinary shares at the year end is 8 million (GHC2 million x 4). This is after
a rights issue of 1 for 4. Thus the number of shares prior to the issue would be 6·4 million (8
million x 4/5) and the rights issue would have been for 1·6 million shares. The rights issue price
is 60p each which would be recorded as an increase in share capital of GHC400,000
(1·6 million x 25p) and an increase in share premium of GHC560,000 (1·6 million x 35p).
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(c)
Balance Sheet as at 31 March 2015
Non-current assets GHC000 GHC000
Property, plant and equipment (6,710 + 1,350 (w (ii))) 8,060
Investments (1,200 x 110%) 1,320
–––––––
9,380
Current assets
Inventory 1,750
Trade receivables 2,450
Bank 350 4,550
–––––– –––––––
Total assets 13,930
–––––––
Equity and liabilities:
Ordinary shares of 25p each 2,000
Reserves (see (b)):
Share premium 600
Revaluation reserve (w (ii)) 1,720
Retained earnings (from (b)) 4,345 6,665
–––––– –––––––
8,665
Non-current liabilities
10% loan note (issued 2012) 500
Deferred tax (1,400 x 25%) 350 850
––––––
Current liabilities
Trade payables 4,130
Accrued loan interest ((500 x 10%) – 25 paid) 25
Current tax payable 260 4,415
–––––– –––––––
Total equity and liabilities 13,930
–––––––
Workings (all figures in GHC000):
(i) Cost of sales:
per question 9,200
profit on sale of plant ((900 – 630) – 300) (30)
depreciation – plant (w (iii)) 450
– buildings (w (ii)) 290
capitalised expenses net of error (w (ii)) (1,000)
––––––
8,910
––––––
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(ii) Land and buildings:
cost/revaluation depreciation
Self constructed (see below) 1,000 50 (20 year life)
Revalued 6,000 240 (see below)
–––––– –––––
7,000 290
–––––– –––––
The carrying value of the land and buildings at 31 March 2015 is GHC6,710,000 (7,000 – 290).
Depreciation on the building element will be GHC240 (4,800/20 years). The revaluation of the
land and buildings will create a revaluation reserve initially of GHC1,800 (6,000 – (1,000 +
(4,000 – 800)), however a transfer of GHC80 (1,600/20 building element of the revaluation) to
realised profit is required.
(iii) Plant
Cost depreciation carrying value
31 March 2014
per balance sheet 5,200 3,130
disposal (900) (630)
–––––– ––––––
4,300 2,500 1,800
Depreciation for the current year will be GHC450,000 (25% reducing balance), giving a net book
value at 31 March 2015 of GHC1,350,000.
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QUESTION FOUR
(a) Note: Figures in the calculations of the ratios are in GHCmillion
Return on (year-end) capital employed 12·0% 18/(175 – 25) 13·0% (18 – 5)/(150 – 50) 10·5%
Net asset turnover 1·0 times 150/150 1·2 times (150 – 30)/100 1·16 times
Gross profit margin 22·0% 33/150 20·0% (33 – 9)/(150 – 30) 22·0%
Profit before loan interest and tax margin 12·0% 18/150 10·8% (18 – 5)/(150 – 30) 9·1%
(b) Analysis of the comparative financial performance and position of Fiorentino for the
year ended 31 March 2014
Note: References to 2014 and 2013 should be taken as the years ended 31 March 2014 and 2013
respectively.
Introduction
When comparing a company’s current performance and position with the previous year (or
years), using trend analysis, it is necessary to take into account the effect of any circumstances
which may create an inconsistency in the comparison. In the case of Fiorentino, the purchase of
Hazard is an example of such an inconsistency. 2014’s figures include, for a three-month period,
the operating results of Hazard, and Fiorentino’s statement of financial position includes all of
Hazard’s net assets (including goodwill) together with the additional 10% loan notes used to
finance the purchase of Hazard. None of these items were included in the 2013 financial
statements. The net assets of Hazard when purchased were GHC50 million, which represents one
third of Fiorentino’s net assets (capital employed) as at 31 March 2014; thus it represents a major
investment for Fiorentino and any analysis necessitates careful consideration of its impact.
Profitability
ROCE is considered by many analysts to be the most important profitability ratio. A ROCE of
12·0% in 2014, compared to 10·5% in 2013, represents a creditable 14·3% (12·0 – 10·5)/10·5)
improvement in profitability. When ROCE is calculated excluding the contribution from Hazard,
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at 13·0%, it shows an even more favourable performance. Although this comparison (13·0%
from 10·5%) is valid, it would seem to imply that the purchase of Hazard has had a detrimental
effect on Fiorentino’s ROCE. However, caution is needed when interpreting this information as
ROCE compares the return (profit for a period) to the capital employed (equivalent to net assets
at a single point in time). In the case of Fiorentino, the statement of profit or loss only includes
three months’ results from Hazard whereas the statement of financial position includes all of
Hazard’s net assets; this is a form of inconsistency. It would be fair to speculate that in future
years, when a full year’s results from Hazard are reported, the ROCE effect of Hazard will be
favourable. Indeed, assuming a continuation of Hazard’s current level of performance, profit in a
full year could be GHC20 million. On an investment of GHC50 million, this represents a ROCE
of 40% (based on the initial capital employed) which is much higher than Fiorentino’s pre-
existing business.
Summarising, this means that the purchase of Hazard has improved Fiorentino’s overall profit
margins, but caused a fall in asset turnover. Again, as with the ROCE, this is misleading because
the calculation of asset turnover only includes three months’ revenue from Hazard, but all of its
net assets; when a full year of Hazard’s results are reported, asset turnover will be much
improved (assuming its three-months performance is continued).
Liquidity
The company’s liquidity position, as measured by the current ratio, has fallen considerably in
2014 and is a cause for concern. At 1·67:1 in 2013, it was within the acceptable range (normally
between 1·5:1 and 2·0:1); however, the 2014 ratio of 1·08:1 is very low, indeed it is more like
what would be expected for the quick ratio (acid test). Without needing to calculate the
component ratios of the current ratio (for inventory, receivables and payables), it can be seen
from the statements of financial position that the main causes of the deterioration in the liquidity
position are the reduction in the cash (bank) position and the dramatic increase in trade payables.
The bank balance has fallen by GHC4·5 million (5,000 – 500) and the trade payables have
increased by GHC8 million.
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An analysis of the movement in the retained earnings shows that Fiorentino paid a dividend of
GHC5·5 million (10,000 + 10,500 – 15,000) or 6·88 pesewas per share. It could be argued that
during a period of expansion, with demands on cash flow, dividends could be suspended or
heavily curtailed. Had no dividend been paid, the 2014 bank balance would be GHC6·0 million
and the current ratio would have been 1·3:1 ((27,000 + 5,500):25,000). This would be still on the
low side, but much more reassuring to credit suppliers than the reported ratio of 1·08:1.
Gearing
The company has gone from a position of very modest gearing at 5·3% in 2013 to 36·7% in
2014. This has largely been caused by the issue of the additional 10% loan notes to finance the
purchase of Hazard. Arguably, it might have been better if some of the finance had been raised
from a share issue, but the level of gearing is still acceptable and the financing cost of 10%
should be more than covered by the prospect of future high returns from Hazard, thus benefiting
shareholders overall.
Conclusion
The overall operating performance of Fiorentino has improved during the period (although the
gross profit margin on sales other than those made by Hazard has fallen) and this should be even
more marked next year when a full year’s results from Hazard will be reported (assuming that
Hazard can maintain its current performance). The changes in the financial position, particularly
liquidity, are less favourable and call into question the current dividend policy. Gearing has
increased substantially, due to the financing of the purchase of Hazard; however, it is still
acceptable and has benefited shareholders. It is interesting to note that of the GHC50 million
purchase price, GHC30 million of this is represented by goodwill. Although this may seem high,
Hazard is certainly delivering in terms of generating revenue with good profit margins.
QUESTION FIVE
(a) The carrying amount of the right of use asset after these entries is GHC942,600
(GHC917,600 + GHC25,000) and consequently the annual depreciation charge will be
GHC47,130 (GHC942,600 x 1/20).
The lease liability will be measured using amortised cost principles. In order to help us with the
example in the following section, we will measure the lease liability up to and including the end
of year two. This is done in the following table:
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At the end of year one, the carrying amount of the right of use asset will be GHC895,470
(GHC942,600 less GHC47,130 depreciation).
The interest cost of GHC55,056 will be taken to the statement of profit or loss as a finance cost.
The total lease liability at the end of year one will be GHC892,656. As the lease is being paid off
over 20 years, some of this liability will be paid off within a year and should therefore be classed
as a current liability.
To find this figure, we look at the remaining balance following the payment in year two. Here,
we can see that the remaining balance is GHC866,215. This will represent the non-current
liability, being the amount of the GHC892,656 which will still be outstanding in over a year. The
current liability element is therefore GHC26,441. This represents the GHC80,000 paid in year
two less year two’s finance costs of GHC53,559 (or GHC892,656-GHC866,215).
(b) IAS 36 Impairment of Assets requires that assets be carried at no more than their carrying
amount. Therefore entities should test all assets within the scope of the standard if there is
potential impairment when indicators of impairment exist. If fair value less costs of disposal or
value in use is more than carrying amount, the asset is not impaired. It further says that in
measuring value in use, the discount rate used should be the pre-tax rate which reflects current
market assessments of the time value of money and the risks specific to the asset. The discount
rate should not reflect risks for which future cash flows have been adjusted and should equal the
rate of return which investors would require if they were to choose an investment which would
generate cash flows equivalent to those expected from the asset.
Therefore pre-tax cash flows and pre-tax discount rates should be used to calculate value in use.
Discounting post-tax cash flows with a post-tax discount rate could give the same result in an
entity were it not for any temporary differences and/or tax losses which might exist.
(GHCm) (GHCm) at 8%
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––––––
Total 28·44
––––––
The CGU is impaired by the amount by which the carrying amount of the cash-generating unit
exceeds its recoverable amount which is the higher of an asset’s fair value less costs of disposal
and its value in use. The fair value less costs to sell (GHC26·6 million) is lower than the value in
use (GHC28·44 million). The recoverable amount is therefore GHC28·44 million. The carrying
amount is GHC32 million and therefore the impairment is GHC3·56 million.
Cantona will allocate the impairment loss first to the goodwill and then to other assets of the unit
pro rata on the basis of the carrying amount of each asset in the cash-generating unit.
Consequently, the entity will allocate GHC3 million to goodwill and then allocate GHC0·56
million on a pro rata basis to PPE (0·56 x 10/29 = GHC0·19 million) and other assets (0·56 x
19/29 =GHC0·37 million). This would mean that the carrying amounts would be GHC9·81
million and GHC18·63 million respectively.
However, when allocating the impairment loss, the carrying amount of an asset cannot be
reduced below its fair value less costs to sell. The fair value less costs to sell of the CGU’s assets
is GHC9·9 million (PPE) and GHC16·7 million (other assets).Therefore the carrying amounts of
the assets of the CGU after impairment will be PPE GHC9·9 million and other assets GHC18·54
million as the excess impairment of GHC0·09 million on PPE will be allocated to other assets.
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