12/08, amended Note: This question has been amended in accordance with issues raised with the examiner.
The following draft group financial statements relate to Warrburt, a public limited company:
WARRBURT GROUP: STATEMENT OF FINANCIAL POSITION AS AT 30 NOVEMBER 20X8
30 Nov 20X8 30 Nov 20X7
Investment in equity instruments 142 150
900 850
Equity attributable to owners of the parent: to last million
Share capital 650 595
Retained earnings 367 454
Other components of equity 49 20
1,066 1,069
Non-controlling interest 46 53
30 Nov 20X8 30 Nov 20X7
$m $m
Non-current liabilities
Long-term borrowing 20 64
Deferred tax 28 26
Long-tem provisions 100 96
Total non-current liabilities 148 186
Current liabilities:
Trade payables 115 180
Current tax payable 35 42
Short-term provisions 5 4
Total current liabilities 155 226
Total liabilities 303 412
Total equity and liabilities 1,415 1,534
WARRBURT GROUP: STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 NOVEMBER 20X8
$m
Revenue 910
Cost of sales (886)
Gross profit 24
Other income 7
Distribution costs (40)
Administrative expenses (35)
Finance costs (9)
Share of profit of associate 6
Loss before tax (47)
Income tax expense (29)
Loss for the year from continuing operations (76)
Loss for the year (76)
Other comprehensive income for the year (after tax, not reclassified to P/L)
Investment in equity instruments (IEI) 27
Gains on property revaluation 2
Actuarial losses on defined benefit plan (4)
Other comprehensive income for the year (after tax) 25
Total comprehensive income for the year (51)
Profit/loss attributable to:
Owners of the parent (74)
Non-controlling interest (2)
(76) Total comprehensive income attributable to:
Owners of the parent (49)
Non-controlling interest (2)
(51)
WARRBURT GROUP: STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 NOVEMBER 20X8 Non-
Share Retained Revaluation controlling Total capital earnings IEI surplus Total interest equity
$m $m $m $m $m $m $m
NOTE TO STATEMENT OF CHANGES IN EQUITY:
$m
Profit/loss attributable to owners of parent (74)
Actuarial losses on defined benefit plan (4)
Total comprehensive income for year – retained earnings (78)
The following information relates to the financial statements of Warrburt.
(i) Warrburt holds investments in equity instruments (IEI) which are owned by the parent company. At 1 December 20X7, the total carrying amount of those investments was $150m. In respect of $112m of this
$150m, Warrburt had made an irrevocable election under IFRS 9 for changes in fair value to go through other comprehensive income (items that will not be reclassified to profit or loss). The remaining $38m related to an investment in the shares of Alburt, in respect of which changes in fair value had been taken to profit or loss for the year. During the year, the investment in Alburt was sold for $45m, with the fair value gain shown in 'other income' in the financial statements. The following schedule summarises the changes:
Alburt Other Total
Deferred tax of $3 million arising on the $30m revaluation gain above has been taken into account in 'other comprehensive income' for the year.
(ii) The retirement benefit liability is shown as a long-term provision in the statement of financial position and comprises the following:
$m
Liability at 1 December 20X7 96
Expense for period 10
Contributions to scheme (paid) (10)
Actuarial losses 4
Liability at 30 November 20X8 100
Warrburt recognises remeasurement gains and losses in other comprehensive income in the period in which they occur, in accordance with IAS 19 (revised 2011). The benefits paid in the period by the trustees of the scheme were $3 million. There is no tax impact with regards to the retirement benefit liability.
(iii) The property, plant and equipment (PPE) in the statement of financial position comprises the following:
$m
Carrying value at 1 December 20X7 360
Additions at cost 78
Gains on property revaluation 4
Disposals (56)
Depreciation (36)
Plant and machinery with a carrying value of $1 million had been destroyed by fire in the year. The asset was replaced by the insurance company with new plant and machinery which was valued at $3 million. The machines were acquired directly by the insurance company and no cash payment was made to Warrburt.
The company included the net gain on this transaction in 'additions at cost' and as a deduction from administrative expenses.
The disposal proceeds were $63 million. The gain on disposal is included in administrative expenses.
Deferred tax of $2 million has been deducted in arriving at the 'gains on property revaluation' figure in 'other comprehensive income (items that will not be reclassified to profit or loss)'.
The remaining additions of PPE comprised imported plant and equipment from an overseas supplier on 30 June 20X8. The cost of the PPE was 380 million dinars with 280 million dinars being paid on 31 October 20X8 and the balance to be paid on 31 December 20X8.
The rates of exchange were as follows:
Dinars to $1
30 June 20X8 5
31 October 20X8 4.9
30 November 20X8 4.8
Exchange gains and losses are included in administrative expenses.
(iv) Warrburt purchased a 25% interest in an associate for cash on 1 December 20X7. The net assets of the associate at the date of acquisition were $300 million. The associate made a profit after tax of $24 million and paid a dividend of $8 million out of these profits in the year ended 30 November 20X8.
(v) An impairment test had been carried out at 30 November 20X8, on goodwill and other intangible assets. The result showed that goodwill was impaired by $20 million and other intangible assets by $12 million.
(vi) The short term provisions relate to finance costs which are payable within six months.
Warrburt's directors are concerned about the results for the year in the statement of profit or loss and other comprehensive income and the subsequent effect on the statement of cash flows. They have suggested that the proceeds of the sale of property, plant and equipment and the sale of investments in equity instruments should be included in 'cash generated from operations'. The directors are afraid of an adverse market reaction to their results and of the importance of meeting targets in order to ensure job security, and feel that the adjustments for the proceeds would enhance the 'cash health' of the business.
Required
(a) Prepare a group statement of cash flows for Warrburt for the year ended 30 November 20X8 in accordance with IAS 7 Statement of cash flows, using the indirect method. (35 marks) (b) Discuss the key issues which the statement of cash flows highlights regarding the cash flow of the
company. (10 marks)
(c) Discuss the ethical responsibility of the company accountant in ensuring that manipulation of the statement of cash flows, such as that suggested by the directors, does not occur. (5 marks) (Total = 50 marks)
PERFORMANCE REPORTING
Questions 55 to 73 cover Performance Reporting, the subject of Part D of the BPP Study Text for Paper P2.
55 Alexandra 45 mins
6/11 Alexandra, a public limited company, designs and manages business solutions and infrastructures.
(a) In November 20X0, Alexandra defaulted on an interest payment on an issued bond loan of $100 million repayable in 20X5. The loan agreement stipulates that such default leads to an obligation to repay the whole of the loan immediately, including accrued interest and expenses. The bondholders, however, issued a waiver postponing the interest payment until 31 May 20X1. On 17 May 20X1, Alexandra felt that a further waiver was required, so requested a meeting of the bondholders and agreed a further waiver of the interest payment to 5 July 20X1, when Alexandra was confident it could make the payments. Alexandra classified the loan as long-term debt in its statement of financial position at 30 April 20X1 on the basis that the loan was not in default at the end of the reporting period as the bondholders had issued waivers and had not sought
redemption. (6 marks)
(b) Alexandra enters into contracts with both customers and suppliers. The supplier solves system problems and provides new releases and updates for software. Alexandra provides maintenance services for its customers. In previous years, Alexandra recognised revenue and related costs on software maintenance contracts when the customer was invoiced, which was at the beginning of the contract period. Contracts typically run for two years.
During 20X0, Alexandra had acquired Xavier Co, which recognised revenue, derived from a similar type of maintenance contract as Alexandra, on a straight-line basis over the term of the contract. Alexandra considered both its own and the policy of Xavier Co to comply with the requirements of IAS 18 Revenue but it decided to adopt the practice of Xavier Co for itself and the group. Alexandra concluded that the two recognition methods did not, in substance, represent two different accounting policies and did not, therefore, consider adoption of the new practice to be a change in policy.
In the year to 30 April 20X1, Alexandra recognised revenue (and the related costs) on a straight-line basis over the contract term, treating this as a change in an accounting estimate. As a result, revenue and cost of sales were adjusted, reducing the year's profits by some $6 million. (5 marks) (c) Alexandra has a two-tier board structure consisting of a management and a supervisory board. Alexandra
remunerates its board members as follows:
– Annual base salary
– Variable annual compensation (bonus) – Share options
In the group financial statements, within the related parties note under IAS 24 Related party disclosures, Alexandra disclosed the total remuneration paid to directors and non-executive directors and a total for each of these boards. No further breakdown of the remuneration was provided.
The management board comprises both the executive and non-executive directors. The remuneration of the non-executive directors, however, was not included in the key management disclosures. Some members of the supervisory and management boards are of a particular nationality. Alexandra was of the opinion that in that jurisdiction, it is not acceptable to provide information about remuneration that could be traced back to individuals. Consequently, Alexandra explained that it had provided the related party information in the annual accounts in an ambiguous way to prevent users of the financial statements from tracing
remuneration information back to specific individuals. (5 marks)
(d) Alexandra's pension plan was accounted for as a defined benefit plan in 20X0. In the year ended 30 April 20X1, Alexandra changed the accounting method used for the scheme and accounted for it as a defined contribution plan, restating the comparative 20X0 financial information. The effect of the restatement was
underlying the retirement benefit plan had been subject to detailed review. Since the pension liabilities are fully insured and indexation of future liabilities can be limited up to and including the funds available in a special trust account set up for the plan, which is not at the disposal of Alexandra, the plan qualifies as a defined contribution plan under IAS 19 Employee benefits rather than a defined benefit plan. Furthermore, the trust account is built up by the insurance company from the surplus yield on investments. The pension plan is an average pay plan in respect of which the entity pays insurance premiums to a third party insurance company to fund the plan. Every year 1% of the pension fund is built up and employees pay a contribution of 4% of their salary, with the employer paying the balance of the contribution. If an employee leaves Alexandra and transfers the pension to another fund, Alexandra is liable for, or is refunded the difference between the benefits the employee is entitled to and the insurance premiums paid. (7 marks) Professional marks will be awarded in this question for clarity and quality of discussion. (2 marks) Required
Discuss how the above transactions should be dealt with in the financial statements of Alexandra for the year ended
30 April 20X1. (Total = 25 marks)
56 Carpart 29 mins
6/09, amended Carpart, a public limited company, is a vehicle part manufacturer, and sells vehicles purchased from the
manufacturer. Carpart has entered into supply arrangements for the supply of car seats to two local companies, Vehiclex and Autoseat.
(a) Vehiclex
This contract will last for five years and Carpart will manufacture seats to a certain specification which will require the construction of machinery for the purpose. The price of each car seat has been agreed so that it includes an amount to cover the cost of constructing the machinery but there is no commitment to a minimum order of seats to guarantee the recovery of the costs of constructing the machinery. Carpart retains the ownership of the machinery and wishes to recognise part of the revenue from the contract in its current financial statements to cover the cost of the machinery which will be constructed over the next year.
(4 marks) (b) Vehicle sales
Carpart sells vehicles on a contract for their market price (approximately $20,000 each) at a mark-up of 25%
on cost. The expected life of each vehicle is five years. After four years, the car is repurchased by Carpart at 20% of its original selling price. This price is expected to be significantly less than its fair value. The car must be maintained and serviced by the customer in accordance with certain guidelines and must be in good condition if Carpart is to repurchase the vehicle.
The same vehicles are also sold with an option that can be exercised by the buyer two years after sale. Under this option, the customer has the right to ask Carpart to repurchase the vehicle for 70% of its original purchase price. It is thought that the buyers will exercise the option. At the end of two years, the fair value of the vehicle is expected to be 55% of the original purchase price. If the option is not exercised, then the buyer keeps the vehicle.
Carpart also uses some of its vehicles for demonstration purposes. These vehicles are normally used for this purpose for an eighteen-month period. After this period, the vehicles are sold at a reduced price based upon
their condition and mileage. (10 marks)
Professional marks will be awarded for clarity and quality of discussion. (2 marks) Required
Discuss how the above transactions would be accounted for under International Financial Reporting Standards in the financial statements of Carpart.
Note. The mark allocation is shown against both of the arrangements above. (Total = 16 marks)