Page 1 of 5 ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXAMINATION – MARCH/APRIL 2019 B.COM (INT A/C & FIN) – IV SEMESTER
C4 15 MC401: ADVANCED FINANCIAL REPORTING
Duration: 3 Hours Max. Marks: 70 SECTION - A
I) Answer any TEN questions. Each carries 1 mark. (10x1=10) 1. What are the two types of hedges as per IFRS 9 Financial Instruments?
2. What are the two methods of goodwill calculation?
3. Name the different types of Share Based Payments.
4. Give any two examples of Related Parties.
5. The IASB’s existing Conceptual Framework has been criticized for being incomplete. As a result an Exposure Draft (ED/2015/3) was issued, proposing some changes. Explain any one change proposed in the Exposure Draft.
6. In which section of Statement of Profit or Loss and Other Comprehensive Income is Fair Value gain on Investment Property recognised?
7. ACCA's Code of Ethics and Conduct identifies a number of threats to its fundamental ethical principles. Jake has been put under significant pressure by his manager to change the conclusion of a report he has written which reflects badly on the manager's performance. Which ethical threat is Jake facing and which fundamental principle is being threatened?
8. What do you mean by Alternative Performance Measures (APM)?
9. IFRS 9 uses the expected loss model of impairment for financial assets. What losses are recognised at Stage 1 and Stage 2?
10. At 1 January 20X8 Artichoke had 5 million $1 equity shares in issue. On 1 June 20X8 it made a 1 for 5 rights issue at a price of $1.50. The market price of the shares on the last day of quotation with rights was $1.80. Total earnings for the year ended 31 December 20X8 was $7.6 million. What was EPS for the year?
11. How is inventory recorded as per IAS 2?
12. Give example of any one item of other comprehensive income which is not subsequently reclassified to profit or loss.
SECTION - B
II) Answer any THREE questions. Each carries 6 marks. (3x6=18) 13. On 1 June 20X0, Will granted 500 share appreciation rights (SARs) to each of
its 20 managers. All of the rights vests after two years’ service and they can be exercised during the following two years up to 31 May 20X4. The fair value of the right at the grant date was $20. It was thought that three managers would leave over the initial two year period and they did so. The fair value of each right was as follows: 31 May 20X1 - $ 23; 31 May 20X2 - $
REG NO:
Page 2 of 5 14; 31 May 20X3 - $ 24. On 31 May 20X3, seven managers exercised their rights when the intrinsic value of the right was $21. Required: Discuss how the above event should be accounted for and what the liability and expense will be at 31 May 20X3.
14. Trump enters into a contract with a Putin to sell a machine such that the control will be transferred to Putin in two years’ time. The contract has the following payment options: $ 1,200,000 to be paid at the time of signing the contract; or $ 1,500,000 to be paid when the control of the machine is transferred. The implicit rate of interest in the contract is 11.80% to adjust the delay in payment. However, Trump can raise debt from the market at a rate of 7%. Putin chooses the first payment option on 1 December, 20X7 when the contract was signed. Required: Discuss how the above contract should be accounted for up to 30 November 20X9.
15. Yanong owns several farms and also owns a division which sells agricultural vehicles. It is considering selling this agricultural retail division and wishes to measure the fair value of the inventory of vehicles for the purpose of the sale.
Three markets currently exist for the vehicles. Yanong has transacted regularly in all three markets. At 30 April 20X5, Yanong wishes to find the fair value of 150 new vehicles, which are identical. The current volume and prices in the three markets are as follows:
Market Sale Price
per Vehicle
Historical Sale Volume
– Sales by Yanong
Total Market
Sales Volume
Transaction cost per
vehicle
Transport cost per
vehicle
Europe 40,000 6,000 150,000 500 400
Asia 38,000 2,500 750,000 400 700
Africa 34,000 1,500 100,000 300 600
Yanong wishes to value the vehicles at $39,100 per vehicle as these are the highest net proceeds per vehicle, and Europe is the largest market for Yanong's product. Required: Yanong would like advice as to what is the valuation as per IFRS 13 Fair Value Measurement.
16. Columbus plans to update its production process and the directors feel that technology-led production is the only feasible way in which the company can remain competitive. On 1 May 20X3, Columbus entered into a lease for a property and the leasing arrangement was established in order to maximise taxation benefits. However, the financial statements have not shown a lease asset or liability to date.
A new financial controller joined Columbus shortly before the financial year end of 30 April 20X4 and is presently reviewing the financial statements to prepare for the upcoming audit and to begin making a loan application to finance the new technology. The financial controller feels that the lease relating to both the property should be recognised in the statement of financial position, but the managing director, who did a brief accountancy course ten years ago, strongly disagrees. The managing director wishes to charge the rental payments to profit or loss. The managing director feels that the arrangement does not meet the criteria for recognition in the statement of financial position, and has made it clear that showing the lease in the
Page 3 of 5 statement of financial position could jeopardise both the company's upcoming loan application and the financial controller's future prospects at Columbus. Required: Discuss the ethical issues and accounting issues which face the financial controller in the above situation advising on the appropriate accounting treatment for the lease.
17. (a) Reliance Petroleum, extracts oil from the Indian Ocean. As per the environmental legislations it is required to dismantle any platform it sets up in and around the region at the end of its useful life, which is currently 10 years. Reliance intends to carry out the dismantling work itself and estimates that it will cost $150 million in ten years’ time. The risk adjusted discount rate for Reliance Petroleum is 3.60%. Required: Discuss with reference to relevant IAS/IFRS, how the above event should be accounted for. (3 Marks) (b) The directors of Reliance Petroleum are aware of the requirements of relevant IAS/IFRS, however as prudence is not specifically referred to in the Conceptual Framework, they propose that the costs to dismantle the oil platform described above, be expensed to profit or loss as incurred, at the end of the platform’s life, with no entries or disclosures being made in the latest financial statements. Required: Discuss whether the directors are acting ethically and if not what the proposed course of action should be. (3 Marks)
SECTION - C
III) Answer any TWO questions. Each carries 15 marks. (2x15=30) 18. On 1 May 20X2, Marchant acquired 60% of the equity interests of Nathan, a
public limited company, for cash of $80 million. The fair value of the identifiable net assets acquired was $110 million at that date. The fair value of the non-controlling interest (NCI) in Nathan was $45 million on 1 May 20X2.
Marchant uses the 'full goodwill' method for all acquisitions. The share capital and retained earnings of Nathan were $25 million and $65 million respectively and other components of equity were $6 million at the date of acquisition. The excess of the fair value of the identifiable net assets at acquisition was due to non-depreciable land. Goodwill has been tested for impairment annually and as at 30 April 20X3 had reduced in value by 20%.
However, at 30 April 20X4, the impairment of goodwill had reversed and goodwill was valued at $2 million above its original value. This upward change in value has already been included in the draft financial statements of Marchant prior to the preparation of the group accounts.
Marchant acquired 60% of the equity interests of Option, a public limited company, on 30 April 20X2 for cash of $70 million. Option's identifiable net assets had a fair value of $86 million and the NCI had a fair value of $28 million at the date of acquisition. On 1 November 20X3, Marchant disposed of a 40% equity interest in Option for a cash consideration of $50 million.
Option's identifiable net assets were $90 million and the value of the NCI was
$34 million at the date of disposal. The remaining equity interest had a fair value of $40 million. After the disposal, Marchant exerts significant influence over Option. Any increase in net assets since acquisition has been reported in profit or loss and the carrying value of the investment in Option had not changed since acquisition. Goodwill has not been impaired. No entries have been made in the financial statements of Marchant for this transaction other
Page 4 of 5 than to record the cash received.
Marchant sold inventory to Nathan at its fair value of $12 million. Marchant made a loss on the transaction of $2 million and Nathan still holds $8 million in inventory at the year end.
Required: (a) Explain, including relevant calculations, how goodwill should have been calculated on the acquisition of Nathan and Option and subsequently treated in the consolidated financial statements of Marchant.
(10 Marks) (b) Explain, with supporting workings, the adjustments needed to the consolidated financial statements to correctly reflect intergroup trading.
(5 Marks) 19. (a) Hood, a public limited company whose functional currency is the dollar
($) has recently purchased a foreign subsidiary, Robin. The functional currency of Robin is the crown. Hood purchased 80% of the ordinary share capital of Robin on 1 September 20X5 for 86 million crowns. The carrying amount of the net assets of Robin at that date was 90 million crowns (share capital: 5m crowns, share premium: 12m crowns, other reserves: 73m crowns). The fair value of the net assets at that date was 100m crowns. At the year end of 31 December 20X5, the goodwill was tested for impairment and this review indicated that it had been impaired by 1.8 million crowns.
The exchange rates were as follows: (Crowns to $) 1 September 20X5 - 2.5 Cr/$
31 December 20X5 - 2.0 Cr/$
Average rate for 20X5 - 2.25 Cr/$
Hood elected to measure the non-controlling interests in Robin at fair value at the date of acquisition. The fair value of the non-controlling interests in Robin on 1 September 20X5 was 20 million crowns. The management of Hood is unsure how to account for the goodwill so has measured it at the exchange rate at 1 September 20X5 in the consolidated financial statements.
No adjustment has been made since that date. Required: Explain the correct accounting treatment of the goodwill, showing any relevant calculations and any adjustments necessary to correct the consolidated financial statements.
(10 Marks) (b) Alternative Performance Measures are Non-IFRS Measures used by companies. Explain the drawbacks/limitations of APMs. (5 Marks) 20. SD acquired 60% of the 1 million $1 ordinary shares of KL on 1 July 20X0 for
$3,250,000 when KL's retained earnings were $2,760,000. The group policy is to measure non-controlling interests at fair value at the date of acquisition.
The fair value of non-controlling interests at 1 July 20X0 was $1,960,000.
There has been no impairment of goodwill since the date of acquisition.
SD acquired a further 20% of KL's share capital on 1 March 20X1 for
$1,000,000. The retained earnings reported in the financial statements of SD and KL as at 30 June 20X1 are $9,400,000 and $3,400,000 respectively.
KL sold goods for resale to SD with a sales value of $750,000 during the period from 1 March 20X1 to 30 June 20X1. 40% of these goods remain in SD's
Page 5 of 5 inventories at the year-end. KL applies a mark-up of 25% on all goods sold.
Profits of both entities can be assumed to accrue evenly throughout the year.
Required: (a) Explain the impact of the additional 20% purchase of KL's ordinary share capital by SD on the consolidated financial statements of the SD Group for the year ended 30 June 20X1. (5 Marks) (b) Calculate the amounts that will appear in the consolidated statement of financial position of the SD Group as at 30 June 20X1 for (i) Goodwill; (ii) Consolidated retained earnings; and (iii) Non-controlling interests.
(10 Marks) 21. (a) William owned a building on which it raised finance. William sold the
building for $6 million, its fair value, to a finance company on 1 June 20X2 when the carrying amount was $3.6 million. The same building was leased back from the finance company for a period of 20 years. The remaining useful life of the building is 25 years. The lease rentals for the period are $441,000 payable annually in arrears. The interest rate implicit in the lease is 7%. The present value of lease payments is $5 million. The transaction constitutes a sale as per IFRS 15. Required: William wishes to know how to account for and present the above transactions for the year ended 31 May 20X3.
(8 Marks) (b) Lewis operates a defined benefit plan. The PV of future benefit obligations is $1,120 million as at 01 January 20X7 and the FV of Plan Asset is $1,040 million. Further data concerning year ended 31 December 20X7 is as follows ($ m):
Year Ended 31 December 20X7 $ m
Current Service Costs 76
Benefits paid to former employees 88
Contributions paid to the plan 94
PV of benefit obligation 1,222
FV of plan asset 1,132
Interest cost (gross yield on blue chip corporate
bonds) 5%
On 1 January 20X7 the plan was amended to provide additional benefits with effect from that date. The PV of the additional benefits at 01 January was calculated as $40 million. Required: Prepare the required notes to the statement of profit or loss and other comprehensive income and statement of financial position for the year ended 31 December 20X7. (7 Marks)
SECTION - D
IV) Case Study – Compulsory question. (1x12=12) 22. Explain the appropriate accounting treatment for the following standards:
(i) IAS 16 Property, Plant and Equipment (5 Marks) (ii) IAS 2 Inventories (2 Marks) (iii) IAS 40 Investment Property (5 Marks)
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