Lili Han Education Manager - PowerPoint Presentation

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Lili HanEducation ManagerACCA China

P2

Corporate

reporting

Debriefing past

exam paper

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Content

Exam formatPast exam papersLearning support resources

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Exam format

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Exam

A/

Question 1  Compulsory 50’

35 marks  numbers (‘Groups’)

15 marks  narrative

B/

Question 2  accounting standards

Question 3  accounting standards

Question 4  current issues

Answer Two out of the three questions!!!

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Q1 Group Consolidation

Q1 Group Consolidation

-- Changes in group structure

-- Complex groups

-- Overseas subsidiary

-- Group SCFs

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©ACCA

Past exam

papers

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(a) Trailer, a public limited company, operates in the manufacturing sector. Trailer has investments in two other companies. The draft statements of financial position at 31 May 2013 are as follows: Trailer Park Caller $m $m $mAssets:Non-current assetsProperty, plant and equipment 1,440 1,100 1,300Investments in subsidiariesPark 1,250Caller 310 1,270Financial assets 320 21 141 3,320 2,391 1,441Current assets 895 681 150Total assets 4,215 3,072 1,591

June 2013 Q1

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Equity and liabilities:Share capital 1,750 1,210 800Retained earnings 1,240 930 350Other components of equity 125 80 95Total equity 3,115 2,220 1,245Non-current liabilities 985 765 150Current liabilities 115 87 196Total liabilities 1,100 852 346Total equity and liabilities 4,215 3,072 1,591

June 2013 Q1

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The following information is relevant to the preparation of the group financial statements:On 1 June 2011, Trailer acquired 14% of the equity interests of Caller for a cash consideration of $260 million and Park acquired 70% of the equity interests of Caller for a cash consideration of $1,270 million. At 1 June 2011, the identifiable net assets of Caller had a fair value of $990 million, retained earnings were $190 million and other components of equity were $52 million. At 1 June 2012, the identifiable net assets of Caller had a fair value of $1,150 million, retained earnings were $240 million and other components of equity were $70 million. The excess in fair value is due to non-depreciable land. The fair value of the 14% holding of Trailer in Caller was $280 million at 31 May 2012 and $310 million at 31 May 2013. The fair value of Park’s interest in Caller had not changed since acquisition.

June 2013 Q1

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On 1 June 2012, Trailer acquired 60% of the equity interests of Park, a public limited company. The purchase consideration comprised cash of $1,250 million. On 1 June 2012, the fair value of the identifiable net assets acquired was $1,950 million and retained earnings of Park were $650 million and other components of equity were $55 million. The excess in fair value is due to non-depreciable land. It is the group’s policy to measure the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary’s net assets.

June 2013 Q1

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Goodwill of Park and Caller was impairment tested at 31 May 2013. There was no impairment relating to Caller. The recoverable amount of the net assets of Park was $2,088 million. There was no impairment of the net assets of Park before this date and any impairment loss has been determined to relate to goodwill and property, plant and equipment.

June 2013 Q1

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Trailer has made a loan of $50 million to a charitable organisation for the building of new sporting facilities. The loan was made on 1 June 2012 and is repayable on maturity in three years’ time. Interest is to be charged one year in arrears at 3%, but Trailer assesses that an unsubsidised rate for such a loan would have been 6%. The only accounting entries which have been made for the year ended 31 May 2013 are the cash entries for the loan and interest received which have resulted in a balance of $48·5 million being shown as a financial asset.

June 2013 Q1

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On 1 June 2011, Trailer acquired office accommodation at a cost of $90 million with a 30-year estimated useful life. During the year, the property market in the area slumped and the fair value of the accommodation fell to $75 million at 31 May 2012 and this was reflected in the financial statements. However, the market recovered unexpectedly quickly due to the announcement of major government investment in the area’s transport infrastructure. On 31 May 2013, the valuer advised Trailer that the offices should now be valued at $105 million. Trailer has charged depreciation for the year but has not taken account of the upward valuation of the offices. Trailer uses the revaluation model and records any valuation change when advised to do so.

June 2013 Q1

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Trailer has announced two major restructuring plans. The first plan is to reduce its capacity by the closure of some of its smaller factories, which have already been identified. This will lead to the redundancy of 500 employees, who have all individually been selected and communicated with. The costs of this plan are $9 million in redundancy costs, $4 million in retraining costs and $5 million in lease termination costs. The second plan is to re-organise the finance and information technology department over a one-year period but it does not commence for two years. The plan results in 20% of finance staff losing their jobs during the restructuring. The costs of this plan are $10 million in redundancy costs, $6 million in retraining costs and $7 million in equipment lease termination costs. No entries have been made in the financial statements for the above plans.

June 2013 Q1

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The following information relates to the group pension plan of Trailer: 1 June 2012 ($m) 31 May 2013 ($m) Fair value of plan assets 28 29 Actuarial value of defined benefit obligation 30 35 The contributions for the period received by the fund were $2 million and the employee benefits paid in the year amounted to $3 million. The discount rate to be used in any calculation is 5%. The current service cost for the period based on actuarial calculations is $1 million. The above figures have not been taken into account for the year ended 31 May 2013 except for the contributions paid which have been entered in cash and the defined benefit obligation.

June 2013 Q1

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Required:Prepare the group consolidated statement of financial position of Trailer as at 31 May 2013. (35 marks)

June 2013 Q1

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Answer

Trailer plc

Consolidated Statement of Financial Position at 31 May 2013

$m

Assets:

Non-current assets:

Property, plant and equipment

(

1440+1100+1300+35(W1)+40(W2)-167(W3)+32.58(W5)

)

3,780·58

Goodwill (W2) 398

Financial assets

(

320+21+141-3.99

(

W4)+2.76(W4)

)

480·77

Current assets 1,726

Total assets 6,385·35

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Answer

$m

Equity and liabilities

Equity attributable to owners of parent

Share capital 1,750

Retained earnings (W8) 1,254·65

Other components of equity (W9) 170·1

3,174·75

Non-controlling interest (W10) 892·6

Total non-current liabilities (

985+765+150+6

(

W7)

) 1,906

Current liabilities (

115+87+196+14

(

W6)

) 412

Total liabilities 2,318

Total equity and liabilities 6,385·35

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Answer

Working 1

Park

$m $m

Fair value of consideration for 60% interest 1,250

Fair value of identifiable net assets acquired:

Share capital 1,210

Retained earnings

650

OCE 55

FV adjustment – land (balance) 35

1,950 × 60% (1,170)

Goodwill 80

NCI at acquisition is 40% x $1,950m, i.e. $780m

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Answer

Working 2

Caller

$m

$

m

Purchase consideration – Trailer

280

Park – 60% of $1,270m

762

Less fair value of identifiable net assets:

Share capital 800

Retained earnings

240

OCE 70

FV adjustment – land 40

1,150 × 56

% (

644)

Goodwill

398

NCI at acquisition is $1,150m x 44%, i.e. $506m

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Working 3Impairment of goodwillPark $m $mGoodwill 80Unrecognised non-controlling interest (40%/60% of $80m) 53·3Identifiable net assetsNet assets 2,220FV adjustment – land 35 2,255Total 2,388·3Recoverable amount (2,088)Impairment 300·3Less notional goodwill on NCI (53·3)Impairment loss to be allocated 247Allocated toGoodwill 80PPE 167Total 247

Answer

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Working 4Financial assets – advance $m – cash flows Discount factor Present valueAdvance 502013 (1·5) 0·94 (1·41)2014 (1·5) 0·89 (1·34)2015 (51·5) 0·84 (43·26) 46·01Dr Financial assets $46·01mCr Cash $50mDr Profit or loss $3·99m

Answer

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Working 4Financial assets – advance Amortised cost Interest Cash Amortised cost at 1 June 2012 credit paid at 31 May 2013 $m $m $m $m 46·01 2·76 (1·5) 47·27The correcting entries should therefore be:Dr Retained earnings $3·99mCr Financial asset $3·99mDr Financial asset $2·76mCr Retained earnings $2·76m

Answer

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Answer

Working 5

In 2012, Trailer would have charged $3m for depreciation ($90m divided by 30). Trailer would then have accounted for the remaining $12m of the $15m fall in value as a revaluation loss and charged this to profit or loss.

In 2013, Trailer should charge depreciation of $2·58m ($75m divided by 29 years – the remaining useful life), reducing the carrying amount of the asset to $72·42m. In order to bring the asset up to its current value of $105m at the end of the year, a revaluation gain of $32·58m needs to be recognised.

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Answer

Working 5

The entries will be:

Dr Property, plant and equipment $32·58m

Cr Profit or loss $11·58m

Cr Revaluation reserve $21m

The credit to profit or loss is made up of a reversal of $12m impairment loss charged in 2012, less $0·42m for the depreciation that would have been charged if the asset had not been devalued ($12m divided by 29). This leaves $21m of the upward valuation to be credited to the revaluation reserve.

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Answer

Working 6

Provision for restructuring

Only those costs that result directly from and are necessarily entailed by the restructuring may be included, such as employee redundancy costs or lease termination costs. Expenses that relate to ongoing activities, such as relocation and retraining are excluded. With regard to the service reduction, a provision should be recognised for the redundancy and lease termination costs of $14 million. The sites and details of the redundancy costs have been identified.

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Answer

Working 6

In contrast, Trailer should not recognise a provision for the finance and IT department’s re-organisation. The re-organisation is not due to start for two years. External parties are unlikely to have a valid expectation that management is committed to the re-organisation as the time frame allows significant opportunities for management to change the details of the plan or even to decide not to proceed with it. Additionally, the degree of identification of the staff to lose their jobs is not sufficiently detailed to support the recognising of a redundancy provision.

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Working7Pension plan $mFair value at 1 June 2012 28Return on plan assets (5% of $28m) 1·4Contributions for period 2Benefits paid (3)Expected fair value at 31 May 2013 28·4Actual fair value 29Remeasurements – gain recognised in OCI 0·6Obligation at 1 June 2012 30Interest cost (5% of $30m) 1·5Current service cost 1Benefits paid (3)Expected obligation 29·5Obligation at 31 May 2013 35Remeasurements – loss recognised in OCI 5·5The liability recognised in the financial statements will be ($35 – $29m), i.e. $6m.

Answer

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Working7 $mNet obligation at 1 June 2012 ($30m – $28m) 2Net interest cost ($1·5m – $1·4m) 0·1Contributions (2)Current service cost 1Remeasurement loss ($5·5m – $0·6m) 4·9Net obligation at 31 May 2013 ($35m – $29m) 6The current service cost and net interest cost will be charged to profit or loss ($1·1m) and the remeasurements to OCI ($4·9m). There will be no adjustment for the contributions, which have already been taken into account. Therefore the obligation will be credited with $6m.

Answer

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Working 8Retained earnings $mTrailer:Balance at 31 May 2013 1,240Reversal of gain on revaluation of investment (30)Impairment loss (W3) (180·2)Interest charge (W4) (3·99)Interest credit (W4) 2·76Reversal of revaluation loss (W5) 11·58Provision for restructuring (W6) (14)Pension plan (W7) (1·1)Post-acquisition reserves: Park (60% of (930 – 650)) 168Caller (56% of (350 – 240)) 61·6 1,254·65

Answer

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Working 9Other components of equity $mBalance at 31 May 2013 – Trailer 125Revaluation gain (W5) 21Pension plan remeasurements (W7) (4·9)Park post acquisition (60% of 80 – 55) 15Caller (56% x (95 – 70)) 14 170·1

Answer

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Working 10Non-controlling interest $mPark (W1) 780Caller (W2) 506Post-acquisition retained earnings – Park (40% of 930 – 650) 112Post-acquisition retained earnings – Caller (44% of 350 – 240) 48·4OCE – post acquisition – Park (40% of 80 – 55) 10OCE – post acquisition – Caller (44% of 95 – 70) 11Less impairment in Park (167x40%) (66·8)Less NCI share of Park’s investment in Caller (40% of $1,270m) (508) 892·6

Answer

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Share-based payments (IFRS2)

Equity settled ‘Share options’Dr P/L XCr Share option reserve X FV at grant date and spread over the vesting period, based on no. of employees expected to exercise the option FV Goods Services (purchases) (employees)  FV of goods  FV, using an option Pricing model (Black Scholes)And, Non-market based (eg. 3 years vesting period)Vesting conditions Market based  IGNORE!!! (e.g. target share/price)  until vesting date!!!

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Cash settled ‘share appreciation rights’ (SARs)Dr P/L XCr Liability XFV and spread over the vesting period based on no. of employees expected to exercise the option. measure the FV @ each reporting date and on settlement.

Share-based payments (IFRS2)

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(c) Margie issued shares during the financial year. Some of those shares were subscribed for by employees who were existing shareholders, and some were issued to an entity, Grief, which owned 5% of Margie’s share capital. Before the shares were issued, Margie offered to buy a building from Grief and agreed that the purchase price would be settled by the issue of shares. Margie wondered whether these transactions should be accounted for under IFRS 2. (4 marks)

MARGIE (DEC 10 Q2)



IFRS 2 Share-based payments

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Required:Discuss, with suitable computations where applicable, how the above transactions would be dealt with in the financial statements of Margie for the year ending 30 November 2010.Professional marks will be awarded in question 2 for the clarity and quality of discussion. (2 marks) (25 marks)

MARGIE (DEC 10 Q2)



IFRS 2 Share-based payments

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MARGIE (DEC 10 Q2)  IFRS 2 Share-based payments

c) Issue of shares

-- Issue of shares to employees is not treated under IFRS2. Not issued their capacity as employees, but in their capacity as shareholders.

 

-- Issue of shares to Grief is in exchange of goods. Therefore, it is treated under IFRS 2. Building and share issues are measured at buildings for fair value.

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(d) Margie granted 100 options to each of its 4,000 employees at a fair value of $10 each on 1 December 2007. The options vest upon the company’s share price reaching $15, provided the employee has remained in the company’s service until that time. The terms and conditions of the options are that the market condition can be met in either year 3, 4 or 5 of the employee’s service.At the grant date, Margie estimated that the expected vesting period would be four years which is consistent with the assumptions used in estimating the fair value of the options granted. The company’s share price reached $15 on 30 November 2010. (6 marks)

MARGIE (DEC 10 Q2)



IFRS 2 Share-based payments

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d) Equity settled transactions-- Share-based payment with employees, including market-based vesting condition. Spread the fair value at grant date over the expected vesting period based on the no. of employees expected to exercise the option.  - 100 options - 4,000 employees - FV @ $ 10 - expected vesting period is 4 years Therefore, recognise an expense in the years ended Nov 08’ and 09’ of $ 1m each year. (SBP = 100 options * 4,000 employees * 10 FV * ¼) -- In the year end Nov’10 the option vested. As the share price has reached $ 15. need to recognise the remaining FV in the year, $ 2 m

MARGIE (DEC 10 Q2)



IFRS 2 Share-based payments

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Margie, a public limited company, has entered into several share related transactions during the period and wishes to obtain advice on how to account for the transactions.(a) Margie has entered into a contract with a producer to purchase 350 tonnes of wheat. The purchase price will be settled in cash at an amount equal to the value of 2,500 of Margie’s shares. Margie may settle the contract at any time by paying the producer an amount equal to the current market value of 2,500 of Margie shares, less the market value of 350 tonnes of wheat. Margie has entered into the contract as part of its hedging strategy and has no intention of taking physical delivery of the wheat. Margie wishes to treat this transaction as a share based payment transaction under IFRS 2 ‘Share-based Payment’. (7 marks)

MARGIE (DEC 10 Q2)



IFRS 2 Share-based payments

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a) Wheat transaction-- Not treated under IFRS 2, as no share is actually issued for the purchase of goods (‘No intent. To take physical delivery’)[It specially says in IFRS 2 that this is type of transaction is outside the scope of IFRS2]. -- How do we treat the transaction???IAS 39  derivative contract contract to exchange cash in the future based on share price/wheat price. settled it in the future no initial payment -- Initial measurement is @ FV (nil)-- Subsequent measurement is FV, gains/losses to profit or loss.-- Not a hedging instrument, as no specific item to protect (No ‘fear’).

MARGIE (DEC 10 Q2)



IFRS 2 Share-based payments

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(b) Margie has acquired 100% of the share capital of Antalya in a business combination on 1 December 2009. Antalya had previously granted a share-based payment to its employees with a four-year vesting period. Its employees have rendered the required service for the award at the acquisition date but have not yet exercised their options. The fair value of the award at 1 December 2009 is $20 million and Margie is obliged to replace the share-based payment awards of Antalya with awards of its own.Margie issues a replacement award that does not require post-combination services. The fair value of the replacement award at the acquisition date is $22 million. Margie does not know how to account for the award on the acquisition of Antalya. (6 marks)

MARGIE (DEC 10 Q2)



IFRS 2 Share-based payments

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MARGIE (DEC 10 Q2)  IFRS 2 Share-based payments

b) Acquisition of a subsidiary

-- Acquisition of 100% gives Margie control of Antalya from 1 Dec 2009.

-- Then consolidate the assets and liabilities of Antalya from acquisition date @ fair value ($ 20m) [IFRS 3]

-- No non-controlling interest

--Equity settled share base payment [IFRS 2] with employees, FV @ grant date and spread over the vesting period.

-- Increase in fair value of $ 2m is taken to profit or loss immediately.

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Learning support

resource

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Learning support resources

ACCA approved tuition and learning materialsStudent Accountant and its APPWebsite – exam specific resourcesACCA-X on Xuetang XBPP language programmeACCA learning communityStudent service wechat

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Exam specific resources

Syllabus and study guide

Examiners’ approach articles Technical articles, study support videos and podcastsExaminers’ reportsSelf-study guide & re-take guideQuestion practice:ACCA approved materialsSpecimen examsPast exam papers

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