PROFESSIONAL 1 EXAMINATION - APRIL 2009

You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.) Note: Students have optional use of the Extended Trial Balance, which if used, must be included in the answer booklet.

CORPORATE REPORTING

NOTES:

PRO-FORMA INCOME STATEMENT BY NATURE, INCOME STATEMENT BY FUNCTION AND BALANCE SHEET ARE PROVIDED

TIME ALLOWED: INSTRUCTIONS:

3.5 hours, plus 10 minutes to read the paper. During the reading time you may write notes on the examination paper but you may not commence writing in your answer book. Please read each Question carefully. Marks for each question are shown. The pass mark required is 50% in total over the whole paper. Start your answer to each question on a new page.

You are reminded that candidates are expected to pay particular attention to their communication skills and care must be taken regarding the format and literacy of the solutions. The marking system will take into account the content of the candidates' answers and the extent to which answers are supported with relevant legislation, case law or examples where appropriate. List on the cover of each answer booklet, in the space provided, the number of each question(s) attempted.

The Institute of Certified Public Accountants in Ireland, 17 Harcourt Street, Dublin 2.

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION APRIL 2009

Time allowed 3.5 hours, plus 10 minutes to read the paper. You are required to answer Questions 1, 2 and 3. You are also required to answer either Question 4 or 5. (If you provide answers to both Questions 4 and 5, you must draw a clearly distinguishable line through the answer not to be marked. Otherwise, only the first answer to hand for Questions 4 or 5 will be marked.)

1.

You are required to answer Questions 1, 2 and 3. Green PLC prepares its financial statements to 31 December each year. Green PLC has investments in two companies, Blue Ltd and Red Ltd.
Extracts from the draft financial statements of the three companies for the year ended 31 December 2008 are shown below: Draft Income Statements Green PLC 000 25,900 (19,500) 6,400 (2,995) 3,405 (120) 350 3,635 (890) 2,745 Blue Ltd 000 14,400 (10,256) 4,144 (1,036) 3,108 (30) 3,078 (770) 2,308 Red Ltd 000 6,800 (3,400) 3,400 (1,260) 2,140 (20) 2,120 (530) 1,590

Revenue Cost of sales Gross profit Operating expenses Operating profit Interest payable and similar charges Investment income

Profit on ordinary activities before tax Income tax expense Profit on ordinary activities after tax

Extract from Draft Statement of Changes in Equity (retained earnings) Green PLC 000 2,745 (1,200) 1,545 2,000 3,545 Blue Ltd 000 2,308 (300) 2,008 2,000 4,008

Net profit for period Dividends on ordinary shares Balance brought forward Balance carried forward

Red Ltd 000 1,590 1,590 3,800 5,390

Additional Information: 1.

2. 3. 4.

Green PLC disposed of its entire share holding of Red Ltd for 8 million on 3o June 2008. No entries have been made in the accounts of Green PLC for this disposal. Profits in Red Ltd have accrued evenly throughout the year.
Page 1

Green PLC has recognised its dividend received from Blue Ltd in investment income.

Green PLC charges Blue Ltd an annual fee of 15,000 for management services. This has been recognised by Green PLC in investment income.

Green PLC acquired 75% of the 1 ordinary shares in Blue Ltd on 1 January 2005. At that date the balance on Blue Ltds retained earnings was 1 million credit and its share capital was 2million. On 1 January 2008, Green PLC acquired 60% of the ordinary 1 shares in Red Ltd for 9m. At that date the balance on retained earnings of Red Ltd were 3.8 miilion credit and its issue shared capital was 3 million.

5.

Details of intra-group trading are as follows: Sales by Green PLC to Blue Ltd Costs to Blue Ltd of inventory items purchased from Green PLC At 31 December 2007 At 31 December 2008 2,590,000 288,000 576,000

6.

Green PLC has a standard mark-up on cost of 20% for sales to Blue Ltd.

7.

During the acquisition process, the management of Green PLC identified a number of intangibles which were not recognised in the financial statements of Blue Ltd. The fair value of these was measured reliably at 200,000. The useful life of these intangible assets was estimated at 20 years. In addition, the fair value of equipment of Blue Ltd was 400,000 in excess of its carrying value at the date of acquisition. The remaining useful life of the equipment was assessed at five years from that date. No other fair value adjustments were identified. Blue Ltd has two contracts in progress at 31 December 2008 and the entries for 2008 have not yet been included in the draft income statement. Blue Ltd has a policy of recognising profit on contracts once the contracts have reached a minimum of 25% completion. Contract XY commenced during 2007 and at 31 December 2007 was 50% complete with appropriate revenue and profits included in 2007. Contract WT commenced on 1 January 2008. Contract details are as follows: Contract Total contract value Costs incurred to date Estimated cost to completion Completion Progress payment received (Assume no change in taxation) XY 000 40,000 22,000 8,000 75% 18,000 WT 000 60,000 10,000 28,000 15% 7,000

REQUIREMENTS: (a) Prepare the consolidated income statement of Green Group PLC for the year ended 31 December 2008 in a form suitable for publication. Note: You should assume that the disposal of Red Ltd constitutes a discontinued operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. (20 Marks) Presentation (1 Mark) (6 Marks)

(b) (c)

Explain the purpose of group financial statements and the concepts underlying their preparation.

Outline the implications for Green PLC under IFRS 3, assuming that on the acquisition of Blue Ltd, it pays less than the fair value of the net assets. (3 Marks) [TOTAL : 30 MARKS]

Page 2

2.

The trial balance of Pulsar Ltd as at 30 November 2008 is as follows: Revenue Purchases Returns outwards Debenture interest paid Royalties earned Administrative salaries Operating lease rentals General administrative expenses Selling and marketing costs Advertising Development expenditure capitalised Freehold Land and buildings at cost ( land 250,000) Land and buildings accumulated depreciation 01.12.07 10% Preference share capital (redeemable 2012)- 1 nominal value Trade receivables Trade payables Wages of factory staff Retained earnings Inventories Dividend received from Ask Ltd General reserve as at 30.11.08 Income tax Plant and machinery at cost Plant and machinery accumulated depreciation on 01.12.07 Share premium Bank Allowance for doubtful debts Government grant 10% Loan note Cash 2007 ordinary dividends paid Ordinary share capital 50c nominal value

000 850

000 1,520 31 15

149 5 19 10 60 60 450 380

49

49

242

80 30 90

8 80

8 10 24 10 7 4 5 20 100 2,196

The following information has also been provided: 1.

2,196

12 14

2.

Inventories held at 30 November 2008 are valued at cost of 61,000. Included in this amount are 500 units of finished goods valued at 25 each. These units are now expected to sell at a price of 20 each and incur 50p selling costs per unit. During the year the Directors transferred 5,000 to the general reserve. Land and buildings were revalued for the first time on 1 December 2007. The valuer estimated an alternative use valuation of 650,000 (including 350,000 for the land) and an existing use valuation of 550,000 (including 300,000 for the land). Buildings are to continue to be depreciated on a straight line basis at a rate of 4% but Pulsar Ltd makes no transfer between the revaluation reserve and retained earnings in respect of this.

3.

4. 5. 6. 7.

The Directors of Pulsar Ltd wish to propose a final ordinary dividend of 14,000 which will be paid on 26 February 2009. The 2008 preference dividends have been declared but not yet paid.
Page 3

One of Pulsar Ltds customers was declared bankrupt on 22 December 2008. The customer owed Pulsar Ltd 16,000 at 30 November 2008. The allowance for doubtful debts is to be adjusted to 4% of trade receivables.

The development expenditure relates to a new product developed during the year. Development of the new product will be completed in 2009. The Directors of Pulsar Ltd believe there is a reasonable expectation of future benefits but have been unable to demonstrate this.

Plant and machinery includes an item purchased during the year at a cost of 20,000. A government grant of 5,000 was received in respect of this purchase. Plant and machinery is depreciated on a straight line basis at the rate of 20% per annum.

8. 9. 10.

The balance on the income tax account is an under-provision brought forward from the year ended 30 November 2007. The Directors have estimated that tax for the year ended 30 November 2008 will amount to 11,500.

During 2008, one of Pulsar Ltds customers initiated a legal claim for damages against Pulsar Ltd. At the year end the matter remains unresolved. Pulsar Ltds legal advisors have advised that there is a 40% chance that the claim can be defended at no cost. Otherwise, damages are estimated at 45,000.

In May 2008, Pulsar Ltd paid 60,000 for a television advertising campaign for its products that will run for six months from 1 September 2008 to 28 February 2009. The Directors are adamant that increased sales as a result of the publicity will continue for two years from the start of the advertising campaign.

REQUIREMENTS: (a)

Prepare the Income Statement of Pulsar Ltd for the year ended 30 November 2008 together with a Balance Sheet at that date. Your answer should be presented in accordance with International Financial Reporting Standards. Presentation (20 Marks) (1 Mark) (5 Marks)

(b) (c)

Prepare the Statement of Changes in Equity for the year ended 30 November 2008.

Write a brief memo to the Financial Controller of Pulsar Ltd, explaining the required accounting treatment of item 4 above. Your memo should also include a non-current asset note. (4 Marks) [TOTAL: 30 MARKS]

3.

Give your answer to each section in the answer sheet provided. 1.

REQUIREMENTS:

The following multiple choice questions contains eight sections, each of which are followed by a choice of answers. Only one of each set of answers is strictly correct. [TOTAL: 20 MARKS]

Carmichael PLC, a large widget manufacturer acquired a multi-storey car park in Limerick for 6m in 2007. An independent valuation at 31 December 2008 placed a fair value of 5.2m on the car park. The valuer estimates the car park to have a useful life of 14 years with a residual value of 1.2m. What figure should be included in the income statement for the year ended 31 December 2008, if the Directors decided to treat the multi-storey car park using the fair value model under IAS 40 Investment Properties? (a) (b) (c) (d) nil 800,000 loss 400,000 gain 1,200,000 loss

2.

In accordance with IAS16 Property, Plant and Equipment which of the following statements on the disclosure of these items is true? (a) (b) The statement of changes in equity will show an increase in the revaluation reserve of 150,000 and a reserves transfer of 5,000. The revaluation reserve in the statement of changes in equity will only disclose 150,000 in respect of the revaluation. The income statement will only disclose an amount of 150,000 in respect of the revaluation. The income statement will disclose an amount of 150,000 in respect of the revaluation and an additional depreciation expense of 5,000.
Page 4

During the year ended 31 December 2008, Noel Ltd revalued its buildings by 150,000, giving rise to an increase in the annual depreciation charge of 5,000.

(c) (d)

3.

Meadows Ltd had the following balances on its accounts at 30 November 2008 and 30 November 2007. Cash in hand Bank overdraft Cash at bank Long term bank loan 30 Nov 2008 2,000 nil 41,804 85,000

In accordance with IAS 7 Statement of Cash Flows, what amount should be shown under net change in cash and cash equivalents in the companys cash flow statement for the year 30 November 2008? (a) (b) (c) (d) 10,138 93,746 10,338 40,138

30 Nov 2007 2,200 52,142 nil 55,000

4.

The financial statements of Y PLC were approved by the Board of Directors on 1 March 2009. According to IAS 10 Events after the Balance Sheet date, which of the following would be a non-adjusting item in the financial statements at 31 December 2008? (i) (ii) (iii) (a) (b) (c) (d) A debtor owing 52,000 at the year end was declared bankrupt in January 2009. Stock realising 110,000 in February, was disclosed at a cost of 125,000 on 31 December 2008. On 1 February 2009, a fraud carried out by the Trade Receivables Clerk was discovered. The Trade Receivables were overstated by 30,000 at 31 December 2008. A fall in market value of investments after the year end. All of the above (i) and (iv) only (iii) and (iv) only (iv) only

(iv)

5.

According to IAS 1 Presentation of Financial Statements, which of the following statements are correct? (i) (ii)

(iii) (a) (b) (c) (d)

The accounting policies adopted by a company must be disclosed in the notes to the financial statements. Inappropriate accounting policies can be rectified by disclosure of the policies used or by the inclusion of explanatory material. Companies may choose to prepare their financial statements (except for the cash flow statement) on either the accruals or the cash basis. All of the above (i) and (ii) (ii) and (iii) (i) only

6.

Calculate the EPS at 30 November 2008 and 2007: (a) (b) (c) (d) 6.7 7.5 6.7 9.4 2008 cents cents cents cents 7.1 5.7 5.7 8.2 2007 cents cents cents cents

At 30 November 2007 Butler PLC had 4m 50 cent ordinary shares in issue and 1m 8% preference shares at 1 each. On 1 September 2008 the company made a 1 for 4 bonus issue. The profit after tax for the year ended 30 November 2008 was 750,000, and for the year ended 30 November 2007 it was 650,000.

Page 5

7.

Sean and Marie are in partnership sharing profits equally. On January 1 2008 Deirdre is admitted to the partnership and profits will be shared 2:2:1 (Sean : Marie : Deirdre) under the new partnership. Deirdre is to introduce capital of 45,000. Goodwill, which is not to be disclosed in the books, is valued at 15,000. The capital at 31 December 2007 for Sean and Marie was 100,000 and 50,000 respectively. Show the closing capital account balances after Deirdre was admitted: (a) (b) (c) (d) Sean 100,000 107,500 101,500 100,000 Marie 50,000 57,500 51,500 50,000 Deirdre 45,000 30,000 42,000 30,000

8.

Which of these considerations would not be relevant in determining an entitys functional currency? (a) (b) (c) (d) The The The The currency currency currency currency that influences the costs of the entity. in which finance is generated. in which receipts from operating activities are retained. that is most internationally acceptable for trading.

4.

(a)

REQUIREMENTS: (b)

IAS 17 Leases sets out the accounting treatment and the disclosure requirements for leases. Distinguish between the characteristics of a finance and an operating lease. (5 Marks)

ANSWER EITHER QUESTION 4 OR 5.

Patrick PLC prepares its financial statements for the year ended 31 October 2008. On 1st November 2005, they entered into a lease agreement for an item of plant on the following terms: Term of lease Rental Original cost price of plant 5 years The rental is 4,000 per annum payable at the start of the year. 14,800

The interest rate implicit in the agreement is 18% per annum. Patrick PLC has the option to acquire the plant for 5 at the end of the contract. Patrick PLC is responsible for all the repairs and maintenance of the plant. The useful economic life of the plant is expected to be six years with a nil residual value and the present value of the minimum lease payments is 15,000. i. Show the entries that should be made in the income statement and the Balance Sheet for the year ended 31 October 2008 using the actuarial method. (7 Marks) Show the relevant notes to the financial statements for the year ended 31 October 2008 (5 Marks)

(c)

Mile PLC is a manufacturing company and has entered a lease agreement on 1 January 2008 under the following terms: Term of lease Estimated useful life of machine Age of machine at start of lease Purchase price of new machine Annual payments 3 years 9 years 2 years 86,000 8,000

ii.

How would the above lease be accounted for and disclosed in the financial statements for the year ending 31 December 2008? (3 Marks)
Page 6

[TOTAL: 20 MARKS]

5.
(a) (b)

REQUIREMENTS:

IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out the principles for accounting for provisions and contingences.

Explain the objectives of IAS 37 Provisions, Contingent Liabilities and Contingent Assets concerning the recognition of provisions and outline the recognition criteria. (5 Marks) Set out the circumstances in which a company would recognise a contingent liability. (2 Marks)

(c)

(i)

Albertstones PLC, a manufacturer of moulding products, prepares its financial statements to 31 December 2008. The Board of Directors are finalising the financial statements and need assistance on the treatment of the following issues:

(ii)

(iii)

The Directors decided in October 2008 to restructure the production division to reduce costs and improve efficiencies. This plan was initiated in November 2008 with full staff consultation. Redundancy costs Lease cancellations Retraining Investment in new systems At 31 December 2008 the anticipated costs are: 400,000 75,000 60,000 25,000

Smith PLC purchased and used a batch of Product Y in its production in August 2008, which Smith PLC is claiming caused major damage to its production equipment. Albertstones PLC is being sued for damages. Lawyers have advised that there is a 40% change of successfully defending the claim. If the claim is successful, damages are estimated at 2m with a present value of 1.8m. The investigative team of accident consultants have concluded that part of the reason for the defective product produced by Albertstones was the supply of faulty parts by a supply company, Glen Ltd. The legal team estimate Glen Ltds contributory negligence amounts to 10% of the damages and they believe a claim against Glen Ltd is likely to succeed. (4 marks)

The company manufactures and sells Product X with a one year repair warranty. It is estimated that 70% of the goods sold in 2008 will have no defects, 22% will have minor defects and 8% will have major defects. It is estimated that it would cost the company 150,000 if all the goods sold had minor defects. This figure would rise to a 1m if all the goods had major defects. The warranty provision at 1 January 2008 was 102,000 with a claim of 96,000 settled during the year. (4 marks)

Prepare a memorandum to the Board of Directors of Albertstones PLC stating how the above issues should be reflected in the companys published financial statements for the year ended 31 December 2008. Assume all items are material and ignore taxation. Memo, Layout & Structure (1 Mark) (4 Marks)

END OF PAPER

[TOTAL: 20 MARKS]

Page 7

SUGGESTED SOLUTIONS

THE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS IN IRELAND

CORPORATE REPORTING
PROFESSIONAL 1 EXAMINATION APRIL 2009

SOLUTION 1 (a)

Consolidated income statement for the year ended 31 December 2008 000 37,729 (27,321) 10,408 (4,016) (150) 110 6,352 (1,660) 4,692 (682) 4,010

Attributable to equity holders of Green plc Minority interest(W3)

Continuing operations Revenue (W2) Cost of sales(W2) Gross profit Operating expenses(W2) Interest payable and similar charges Investment income(W2) Profit before tax Income tax expense (W2) Profit for period from continuing operations Discontinued operations Loss for period from discontinued operations (795 -1,477)W7 & W9 Profit for period

3,137 873 4,010

W1

Workings

Group structure

Green plc

75%

60% Disposal of 30 June 2008

Blue Ltd
Page 9

Red Ltd

W2. Consolidated schedule for continuing operations Revenue (W10) Cost of sales Per question Contract (W10)

Green plc 000 25,900 (19,500)

Blue Ltd 000 14,419 (10,256) (16.5) (10) (80) (1,036) (30)

Adjs 000 (2,590) 2,590

Consol 000 37,729

Inventory(W4) Amortisation of intangibles Dep Adj(W6) Operating expenses Interest payable and similar charges Investment income Per question(350 75% x 300) Tax PAT

(48) (2,995) (120) 125

15 (15)

(27,321) (4,016) (150) 110

(890)

(770) 2,200.5

(1,660)

W3

Minority Interest

Blue Ltd 25% X 2,200.5 Red Ltd 40% X 795(W7) Unrealised profit in inventories SP Cost GP

= =

555.12 318 873.12

W4

% 120 (100) 20

Opening 288,000 (240,000) 48,000

Closing 576,000 (480,000) 96,000

Movement 48,000

W5

Intangible FV adjustment Amortisation b/f (200,000 X 3/20)

Intangible amortisation

Amortisation in the current year (200,000 x 1/20)

200,000 (30,000) 170,000 (10,000) 160,000

W6. Depreciation adjustment The fair value adjustment needs to be depreciated. The uplift is 400,000 so the depreciation charge is 80,000 per annum. At start of year accumulated depreciation is 240,000 and it will be 320,000 at end of the year.

Page 10

W7. Profit for Red Ltd for period until disposal. W8. Goodwill Red Ltd PAT 1,590,000 X 6/12 = 795,000

Cost of investment Share of fair value of net assets acquired Less: Share capital 3,000 Retained earnings 3,800 6,800 X 60% Goodwill at date of disposal W9. Group loss on disposal of Red Ltd Sale proceeds

000

000 9,000

(4,080) 4,920

Less:

Less Carrying value of goodwill Loss on disposal W10

Share of net assets at date of disposal Share capital Earnings (3,800 + 795(W7))

8,000 3,000 4,595 7,595 X60%

(4,557) (4,920) (1,477) WT 9 9 60 38 22 Total

Profits recognised to date 75% * 10 Amount previously recognised 50% * 10 Profit in this period Revenue Cost of sales (balance)

Contract profits and losses Total contract value Total contract costs Expected contract profits

Revenues recognised to date 75% * 40m 15% * 60m Revenues previously recognised 50% * 40m Revenue recognised in this period

XY 30

20 10 40 30 10

7.5

5 2.5

Contract profits

10 7.5

Contract WT is less than 25% complete, so no profit is recognised.

Page 11

2.5

nil

9 9

19 16.5

2.5

(b)

Purpose of group financial statements:

Concepts underlying their preparation: o o

Provide information to investors on a company which uses resources to invest in other companies. Group financial statements give information to users on abilities of management to provide evidence of an acceptable return on capital employed. Managers held accountable for their performance after acquisition and not on profits bought in. The two key concepts underlying the preparation of group financial statements are: The single entity concept; The principle of substance over form.

(c)

IFRS 3 is based on the assumption that this usually arises because of errors in measurement of the acquirees net assets and/or of the cost of the combination. First action is always to reassess the identification and measurement of the net assets and the measurement of the cost of combination. If the discount still remains once these reassessments have been made, then it is attributable to a bargain purchase. This discount does not meet the IASBs Framework definition of a liability, so it must be recognised in a profit or loss in the same accounting period as the acquisition is made.

A discount on acquisition arises if the share of the fair value of the net assets acquired exceeds the cost of the acquisition i.e. there is negative goodwill.

Group financial statements are presented as a single economic unit. All resources at groups disposal and return on those resources can be seen in a single set of financial statements. Presentation of group financial statements underlines the concept of substance over form which is fundamental in preparation of financial statements. Single entity concept means that all effects of intra-group trading are eliminated, so only the results of trading with entities outside the group are shown; this provides a more meaningful basis for assessing managements performance. Other relevant comments.

Page 12

SOLUTION 2

Pulsar Income Statement for the year ended 30 November 2008 Workings W1 1,520 (874) 646 15 (127) (230) 304 (5) 8 307 (19.5) 287.5 287.5 (14) 273.5

Revenue Cost of sales Gross profit Other operating income Distribution costs Administrative expenses Profit from operations Finance cost (3+2) Investment income Profit before tax Income tax Profit for period Net profit for period Dividends paid Retained profit for year

W1 W1

W3

Page 13

ASSETS Non-current assets Property, plant and equipment* Intangibles

Pulsar Ltd Balance Sheet as at 30 November 2008 000 000 678 678 58 349 30 12

Current assets Inventories Trade receivables (380 - 16 -15) Prepayment Cash Total assets EQUITY and LIABILITES Capital and reserves Ordinary share capital (0.50p shares) Share premium account General reserve Revaluation reserve Retained earnings

449 1,127 100 10 10 280 363.5 763.5

Non-current liabilities Preference share capital Loan notes Deferred income Provisions

30 20 3*

Total equity and liabilities

* **

Current liabilities Trade payables (242 +3) Taxation W3 Accrual Interest ** Deferred income Bank

45 245 11.5 1 1 7

53

265.5 1,127

Above based on treating grant as deferred credit. Some candidates may have treated the debenture interest as an additional charge

Page 14

W1

Opening inventory Purchases returns (850-31) Administrative salaries Operating lease rentals General administrative expenses Selling and marketing costs Closing inventories (61.000- (500X 5.50) Legal claim- damages Advertising 60 -30 Bad debt Increase in provision for doubtful debts Government grant Depreciation plant (20% X 80) Depreciation Buildings Wages factory staff Development expenditure written off W2 Cost b/f Revaluation Accum Depn b/f Revaluation Charge (300 X 4%)

Allocation of costs C of S 000 49 819

Admin 000 149 5 19 45

Dist 000

(58)

10 30 16 11

(1) 16 49

12 230

874

60 127

Freehold Land and buildings

000 450 200 Alternative Use 650

Note: Under IAS16 the market value would take account of the possibility of redevelopment, almost certainly leading to a higher value. IAS 16s fair value will take account of possible alternative values. W3 Income statement

NBV b/f

80 (80) 12 638

Under provision Tax for year Balance sheet

8 11.5 19.5 11.5

Page 15

(b)

Balance b/f Balance c/f

2007* ordinary dividends

Transfer between reserves Revaluation Profit for period

Ordinary share capital 000 -

Share prem 000 -

S.O.C.E.

Revaluation 000 280 280 280 280

General reserve 000 5

Retained earnings 000 (5)

Total 000 280 287.5 567.5

100 100

10 10

5 5 10

(14) 268.5 95 363.5

287.5 282.5

(14) 553.5 210 763.5

* 2008 dividend not yet approved therefore not provided for.

Memorandum To From Date Subject i.)

(c)

IAS20 Accounting for Government Grants and Disclosure of Government Assistance covers this area. The general principle is that a government grant should be recognised as income in the periods in which the costs that it is intended to compensate are recognised. There are two permitted treatments. Where the grant has been received towards the cost for a piece of machinery, the grant should be recognised as income when depreciation is charged in respect of the asset. The purpose of this treatment is to provide a matching effect. Non-current asset note Plant/Equipment 000 60 20 80 24 16 40 40

Government grants

Cost b/f Additions Revaluation

Accum depn Revaluation Charge for year NBV 30/11/08

* Based on treating the grant as a deferred credit..

Page 16

SOLUTION 3 1 2 b a

The revaluation gain is taken direct to reserves. The additional deprecation is transferred from retained earnings to the revaluation reserve. Decrease in cash in hand Increase in cash in bank = = (200) 93,946 93,746

(6m 5.2m)

3. 4 5 6

b d d c

Profit after tax less preference dividend 670,000 10 million shares

750,000 80,000 670,000 = 6.7 cents = 5.7 cents New ratio 6,000 dr 6,000 dr 3,000 dr Adjustment 1,500 cr 1,500 cr 3,000 dr Op cap 100,000 50,000 45,000 Cl. cap 101,500 51,500 42,000

c.

Comparatives 650,000 80,000 10 million shares Old ratio 7,500 cr 7,500 cr

8.

Sean Marie Deirdre

Page 17

SOLUTION 4 a. A finance lease Substantially transfers all the risks and rewards to the lessee. Substance of the transaction is paramount. Payment by the lessee for the assets, at full cost plus an interest charge. Lease transfers ownership to lessee at end of lease. Lessee has the option to purchase asset. Lease term forms the major part of the asset life. PV of the minimum lease payments amount to the majority of the assets.

NB IAS 17 provides list situations indicating existence of Finance lease. b. Workings Year 31 Oct

An operating lease Lessor retains the majority of the risks and rewards of the assets. The PV of the minimum payments does not equal the bulk of the fair value of the asset. The life of the lease will be a small part of the life of the asset. Lessee pays a rental for the use of the asset.

Balance sheet (extract) 31 October 2008 Non-current assets Leasehold plant Non current liabilities Net obligation under finance lease

Finance charge Depreciation charge Total charge

Income statement (extract) 2008

2006 2007 2008 2009 2010

Opening Balance 14,800 12,744 10,318 7,455 -

Payment (4,000) (4,000) (4,000) (4,000) -

Capital 10,800 8,744 6,318 3,455

Accrued int charge 18% 1,944 1,574 1,137 622

Closing bal 12,744 10,318 7,455 4.077

1,137 2,467 * 3,604 7,400 * 3,455 4,000

* 14,800 (3 X 2,467) * The longer period of the economic life of the asset is taken as it is reasonably certain that he asset will be acquired by the lessee.

Current liabilities Net obligation under finance lease

Page 18

ii:

Accounting Policy note- statement of accounting treatment. Notes to the Income statement The profit from operations is stated after charging depreciation on leased assets of 2,467 and finance charge of 1,137.

Notes to the Balance Sheet as at 31 October 2008 Property, Plant and equipment Cost 1 Nov 2007 Additions Disposals

Accumulated depreciation 1 Nov 2007 Charge for the year Carrying amount At 31 Oct 2008 At 31 Oct 2007

Plant 14,800 14,800 4,933 2,467 7,400

Analysis of finance lease liabilities Amount due within One year Two to five years

7,400 9,867 4,000 3,455

c.

The minimum lease payments under non-cancellable operating lease are as follows: Within one year Within two to five years 8,000 8,000

The income statement will show an annual rental charge of 8,000.

This is an operating lease as the lease does not represent substantially all of the fair value.

Page 19

SOLUTION 5 a)

IAS 37 has greatly restricted the instances in which provisions should be recognised in the balance sheet. This is to prevent the misuse of provisions; where in the past companies may have created big bath provisions and provisions against future costs which could realistically be avoided. Recognition criteria:

A provision is a provision for an event, the timing of which is uncertain and the exact amount is not known.

b.

Obligation The company must have done something in the past which means it has no realistic alternative to paying out cash. e.g. If it has announced publicly its commitment (a constructive obligation) or if it has a legal contractual obligation. Probability There is more than 50% chance that the obligation resulting in a cash payout (more likely than not). Measurement The cost can be measured (or estimated) reliably. A contingent liability is 1. a possible obligation arising from past events, its realisation is dependent on the occurrence or non occurrence of one or more future events not wholly within the control of the organisation or a present obligation arising from past event but is not recognised as it is not probable that a transfer of economic benefit will occur or the amount cannot be determined with sufficient certainty.

2.

c. i)

( 70% * 0) + (22% * 150,000) + (8% * 1,000,000) = 113,000

Balance sheet under Provision of Liability and Charges: Income statement Provision for warranty:

The expected costs are repairs of 113,000. A provision is required as this represents a probable cost which can be quantified. 113,000 107,000

Note to the financial statement as at 31 December 2008 Provision: This provision is in respect of expected costs of repairs under warranties on product X sold in 2008. It represents an amount based on previous claims. At 1 Jan Utilised in the year IS charge At 31 December 102,000 (96,000) 107,000 113,000

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ii)

Balance sheet under Provision of Liability and Charges: Income statement:

A provision of 1,800,000 is required as there is 60% change of the damages being awarded. 1.8m 1.8m

Note: The compensation claim provision is in respect of a claim made by a customer for damages allegedly caused in its production line caused by using product Y. It represents the present value of the amount the legal team estimate as the likely settlement. Contingent asset (disclose) A counter claim in respect of the compensation claim provided for above has been made against the supplier of parts used in product Y. Legal advice indicates a high chance of success with an expected settlement of 180,000.

iii)

A provision is only required for those costs which directly relate to the restructuring activity and not incurred with ongoing activities.

A discussion (including numbers) of whether retraining and new system can be avoided and the fact that leases are contractual etc. Note: During the year the company announced and commenced a restructuring of the production division, with full communication to those affected. The cost of restructuring is estimated at 475,000 which must be provided for.

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