Further question practice and sobtions Mook eee 1 Conceptual Framework {o] Explain the main purposes of the International Accounting Standards Board's Conceptual Framework for Financial Reporting, (b) Identity any four user groups of financial statements and explain what information they are likely to want from them. 2 Fundamental principles Fundamental principles require that a member of a professional accountancy body should behave with integrity in ll professional, business and financial relationships and should strive for objectivity in all professional and business judgements. Objectivity can only be assured if the member is and is seen to be independent. Conflicts of interest have an important bearing on independence and hence also on the public's perception of the integrity, objectivity ond independence of the accounting profession. The following scenario is an example of press reports in recent years which deal with issues of objectivity and independence within a multinational firm of accountants: "A pariner in the firm was told by the regulatory body that he must resign because he was in breach of the regulatory body's independence rules, as his brotherin-law was financial controller of an audit client, He was told that the alternative was that he could move his home and place of work ot least 400 miles from the offices of the client, even though he was not the reporting partner. This made his job untenable. The regulatory body was seen as ‘taking its rules to absurd lengths’ by the accounting firm. Shorly alter this comment, the multinational firm announced proposals to split the firm into three areas between audit, tax and business advisory services; management consultancy; and investment advisory service: Required Discuss the impact that the above events may have on the public perception of the integ objectivity and independence of the multinational firm of accountants 3 Ace On 1 April 20X1, Ace Co owned 75% of the equity share capital of Deuce Co and 80% of the equity share capital of Trey Co. On 1 April 20X2, Ace Co purchased the remaining 25% of the ‘equity shares of Deuce Co. In the two years ended 31 March 20X3, the following transactions occurred between the three companies: On 30 June 20X1 Ace Co manufactured a machine for use by Deuce Co. The cost of manufacture was $20,000. The machine was delivered to Deuce Co for an invoiced price of $25,000. Deuce Co paid the invoice on 31 August 20X1. Deuce Co depreciated the machine ‘over its anticipated useful life of five years, charging a full year's depreciation in the year of purchase. {b] On 30 September 20X2, Deuce Co sold some goods to Trey Co at an invoiced price of $15,000. Trey Co paid the invoice on 30 November 20X2. The goods had cost Deuce Co $12,000 to manufacture. By 31 March 20X3, Trey Co had sold oll the goods outside the group. [c)__ For each of the two years ended 31 March 20X3, Ace Co provided management services to Deuce Co and Trey Co. Ace Co did not charge for these services in the year ended 31 March 20K2 but in the year ended 31 March 20X3 decided to impose a charge of $10,000 per ‘annum to Trey Co. The amount of $10,000 is due to be paid by Trey Co on 31 May 20X3. BPP 9 789Required Summarise the related party disclosures which will be required in respect of transactions (a} to (<) above for both of the years ended 31 March 20X2 and 31 March 20X3 in the financial statements of Ace Co, Deuce Co and Trey Co, Note. You may assume that Ace Co presents consolidated financial statements for both of the years dealt with in the question. 4 Camel Telecom 49 mins ‘Camel Telecom (Camel) operates in the telecommunications industry under the name Mobistar which it developed itself. Camel has entered into a number of kransactions relating to non-current assels on which it would like accounting advice, ( (d) Camel won a government tender to be awarded a licence 10 operate 5G mobile phone services. Only four such licences were available in the country. Under the terms of the nt, Camel con operate 5G services for @ period of 10 years from the commencement ofthe lence wich wer 1 July 20X7. During that period Camel can, if it chooses, sell the licence to another operator meeting certain government criteria, sharing any profits made equally with the government. Camel paid $344m for the licence on | July 20X7. its market value was estimated at $370 million at that date. Due to lower take up than expected of 5G services, the fair value of the licence was valued at $335 million at the company's year end 30 June 20X8, by Valyou, a professional services fem, (6 marks) In September 20X7, Camel purchased a plot of land on which it intends to build its new head office and service cent in 2 years! time. In the meantime the land is rented out to a local farm, The land cost $10.4 million, it has been valued at the year end by Valyou and has @ value of $10.6 milion ox farmland and $14.3 million as land for development, Planning permission is in process at the year end, but Camel's lawyer expects it to be granted by mid 20K. (4 marks) Camel purchased « number of hilltop sites a number of years ago on which (after receiving planning permission), it erects mobile phone transmitter masts. Because of the prime location ofthe sites, their market value has increased substantially since the original purchase. Camel is also able to lease part of the sites to other mobile communication companies. (4 marks) During the year, Camel did o deal with o mobile operator in anather country whereby Camel sold its fixed line ADSL business to another company, Purple, for an agreed market value of $320 million ond in return acquired Purple's mobile phone business in the other county. Camel paid $980 million to Purple in addition to the legal transfer of its fixed line ADSL business. Purple did not make any payment other than the transfer of its mobile business Under the terms of the agreement, the mobile phone business will remain under the name Purple for up to one year, after which Camel fime intends fo rebrand the business under its ‘own national and international mobile brand Mobistor (5 marks) ”@Further question proctice ond solutions fe) An embarrassing incident occurred in February 20X8 where a laptop containing details of all of Camel's national customers and the expiry date of their contracts war stolen. The details subsequently fell into the hands of competitors who have been contacting Camel's clients when their Mobistar contracts are up for renewal. As a result of this Camel has realised that the value of the client details is significant and proposes to recognise a valve determined by Valyou in its financial statements. This valuation of $44 million tokes into account business expected to be lost as a result of the incident (4 marks) Required Discuss, with suitable computations, how the above transactions should be accounted for in the Financial statements of the Camel Telecom Group under IFRSs for the year ended 30 June 20X8. All amounts are considered material to the group financial statements. Professional marks for clarity and expression (2 marks) (Total = 25 marks) 5 Acquirer 49 mins Acquirer is an entity that regularly purchases new subsidiaries. On 30 June 20XO, the entity cequired all the equity shares of Prospects for a cash payment of $260 million. The net assets of Prospects on 30 June 20X0 were $180 million and no fair value adjustments were necessary upon consolidation of Prospects forthe first fime On 31 December 20X0, Acquirer carried out a review of the goodwill on consolidation of Prospects for evidence of impairment. The review was carried out despite the fact that there were no obvious indicotions of adverse trading conditions for Prospects. The review involved allocating the net asset of Prospects into three cashgenerating units and computing the value in use of each unit. The carrying values of the individval units before any impairment adjustments are given below. Unit A Unit B Unit C $m $m $m Patents 5 Property, plant and equipment $0 30 40 Net current assets 20 25 20 85 55 60 Vole in use of unit 2 60 65 lt was not possible to meaningfully allocate the goodwill on consolidation to the individual cash- generating units, but all other net assets of Prospects are allocated in the table shown above. The patents of Prospects have no ascertainable morket value but oll the current assels have a market value that is above carrying valve, The valve in use of Prospects as a single cash-generating unit ot 31 December 20X1 is £205 million. meant by a cash-generating unit (5 marks) (0) Explain why it was necessary to review the goodwill on consolidation of Prospects for impairment ot 31 December 20X0. (3 marks) (<) Explain briefly the purpose of an impairment review ond why the net assets of Prospects were allocated into cashgenerating units as part of the review of goodwill for impairment (5 marks) (d) Demonstrate how the impairment loss in unit A will affect the carrying volue of the net assets of unit A in the consolidated financial statements of Acquirer. (5 marks) a 70s(e) Explain and calculate the effect of the impairment review on the carrying value of the goodwill on consolidation of Prospects at 31 December 20X0. (7 marks) (Total = 25 marks) 6 Radost 23 mins Radost, public limited company, has a defined benefit pension plan for its staff. Sta are eligible for on annual pension between the date of their retirement and the date of their death equal to: Final salary per year Annual pension = —————— x years’ service. 50 You are given the following data relating to the year ended 31 December 20X3: (2) Yield on high quality corporate bonds: 10% pa. (b) Contributions paid by Radost to pension plan: $12 million (1 Pensions poid to former employees: $8 million {d) Currant service cost: $3.75 million (e) After consultation with employees, an amendment was agreed to the terms of the plan, reducing the benefits payable. The amendment takes effect from 31 December 20X3 and the actuary has calculated that the resulting reduction in the pension obligation is $6 million (NPV the pension obligation at: 1.1.43 - $45 milion 31.12.X3 ~ $444 milion (as given by the actuary, after adjusting for the plan amendment) (g}_ Fair value of the plan assets, as valued by the actuary: 1.1.43 - $52 milion 31.12.X3 ~ $64.17 million Required (a) Produce the notes to the statement of financial position and statement of profit or loss and ‘other comprehensive income in accordance with IAS 19. (8 marks) (b} Explain why the pension plan assets are recognised in the financial statements of Radost, though they are held in « seporate legal trust for Rados!'s employees. (4 ma Notes 1 Work to the nearest $1,000 throughout 2 You should assume contributions and benefits were paid on the last day of the year. (Total = 12 marks) 7 Cleanex 49 mins Cleanex prepares its financial statements in accordance with IFRS. On 25 June 20X0, Cleanex made «@ public announcement of its decision to reduce the level of emissions of harmful chemicals from its factories, The average useful lives of the Factories on 30 June 20K0 was 20 years. The depreciation of the factories is computed on a siraighHline basis ond charged to cost of sales. The directors formulated the proposals for emission reduction following agreement in principle earlier in the year. The directors prepared detailed estimates of the costs of their proposals and these showed that the following expenditure would be required 706 “"@Further question practice and sobtions Mook eee 1 Conceptual Framework {o] Explain the main purposes of the International Accounting Standards Board's Conceptual Framework for Financial Reporting, (b) Identity any four user groups of financial statements and explain what information they are likely to want from them. 2 Fundamental principles Fundamental principles require that a member of a professional accountancy body should behave with integrity in ll professional, business and financial relationships and should strive for objectivity in all professional and business judgements. Objectivity can only be assured if the member is and is seen to be independent. Conflicts of interest have an important bearing on independence and hence also on the public's perception of the integrity, objectivity ond independence of the accounting profession. The following scenario is an example of press reports in recent years which deal with issues of objectivity and independence within a multinational firm of accountants: "A pariner in the firm was told by the regulatory body that he must resign because he was in breach of the regulatory body's independence rules, as his brotherin-law was financial controller of an audit client, He was told that the alternative was that he could move his home and place of work ot least 400 miles from the offices of the client, even though he was not the reporting partner. This made his job untenable. The regulatory body was seen as ‘taking its rules to absurd lengths’ by the accounting firm. Shorly alter this comment, the multinational firm announced proposals to split the firm into three areas between audit, tax and business advisory services; management consultancy; and investment advisory service: Required Discuss the impact that the above events may have on the public perception of the integ objectivity and independence of the multinational firm of accountants 3 Ace On 1 April 20X1, Ace Co owned 75% of the equity share capital of Deuce Co and 80% of the equity share capital of Trey Co. On 1 April 20X2, Ace Co purchased the remaining 25% of the ‘equity shares of Deuce Co. In the two years ended 31 March 20X3, the following transactions occurred between the three companies: On 30 June 20X1 Ace Co manufactured a machine for use by Deuce Co. The cost of manufacture was $20,000. The machine was delivered to Deuce Co for an invoiced price of $25,000. Deuce Co paid the invoice on 31 August 20X1. Deuce Co depreciated the machine ‘over its anticipated useful life of five years, charging a full year's depreciation in the year of purchase. {b] On 30 September 20X2, Deuce Co sold some goods to Trey Co at an invoiced price of $15,000. Trey Co paid the invoice on 30 November 20X2. The goods had cost Deuce Co $12,000 to manufacture. By 31 March 20X3, Trey Co had sold oll the goods outside the group. [c)__ For each of the two years ended 31 March 20X3, Ace Co provided management services to Deuce Co and Trey Co. Ace Co did not charge for these services in the year ended 31 March 20K2 but in the year ended 31 March 20X3 decided to impose a charge of $10,000 per ‘annum to Trey Co. The amount of $10,000 is due to be paid by Trey Co on 31 May 20X3. BPP 9 789Required Summarise the related party disclosures which will be required in respect of transactions (a} to (<) above for both of the years ended 31 March 20X2 and 31 March 20X3 in the financial statements of Ace Co, Deuce Co and Trey Co, Note. You may assume that Ace Co presents consolidated financial statements for both of the years dealt with in the question. 4 Camel Telecom 49 mins ‘Camel Telecom (Camel) operates in the telecommunications industry under the name Mobistar which it developed itself. Camel has entered into a number of kransactions relating to non-current assels on which it would like accounting advice, ( (d) Camel won a government tender to be awarded a licence 10 operate 5G mobile phone services. Only four such licences were available in the country. Under the terms of the nt, Camel con operate 5G services for @ period of 10 years from the commencement ofthe lence wich wer 1 July 20X7. During that period Camel can, if it chooses, sell the licence to another operator meeting certain government criteria, sharing any profits made equally with the government. Camel paid $344m for the licence on | July 20X7. its market value was estimated at $370 million at that date. Due to lower take up than expected of 5G services, the fair value of the licence was valued at $335 million at the company's year end 30 June 20X8, by Valyou, a professional services fem, (6 marks) In September 20X7, Camel purchased a plot of land on which it intends to build its new head office and service cent in 2 years! time. In the meantime the land is rented out to a local farm, The land cost $10.4 million, it has been valued at the year end by Valyou and has @ value of $10.6 milion ox farmland and $14.3 million as land for development, Planning permission is in process at the year end, but Camel's lawyer expects it to be granted by mid 20K. (4 marks) Camel purchased « number of hilltop sites a number of years ago on which (after receiving planning permission), it erects mobile phone transmitter masts. Because of the prime location ofthe sites, their market value has increased substantially since the original purchase. Camel is also able to lease part of the sites to other mobile communication companies. (4 marks) During the year, Camel did o deal with o mobile operator in anather country whereby Camel sold its fixed line ADSL business to another company, Purple, for an agreed market value of $320 million ond in return acquired Purple's mobile phone business in the other county. Camel paid $980 million to Purple in addition to the legal transfer of its fixed line ADSL business. Purple did not make any payment other than the transfer of its mobile business Under the terms of the agreement, the mobile phone business will remain under the name Purple for up to one year, after which Camel fime intends fo rebrand the business under its ‘own national and international mobile brand Mobistor (5 marks) ”@Further question proctice ond solutions fe) An embarrassing incident occurred in February 20X8 where a laptop containing details of all of Camel's national customers and the expiry date of their contracts war stolen. The details subsequently fell into the hands of competitors who have been contacting Camel's clients when their Mobistar contracts are up for renewal. As a result of this Camel has realised that the value of the client details is significant and proposes to recognise a valve determined by Valyou in its financial statements. This valuation of $44 million tokes into account business expected to be lost as a result of the incident (4 marks) Required Discuss, with suitable computations, how the above transactions should be accounted for in the Financial statements of the Camel Telecom Group under IFRSs for the year ended 30 June 20X8. All amounts are considered material to the group financial statements. Professional marks for clarity and expression (2 marks) (Total = 25 marks) 5 Acquirer 49 mins Acquirer is an entity that regularly purchases new subsidiaries. On 30 June 20XO, the entity cequired all the equity shares of Prospects for a cash payment of $260 million. The net assets of Prospects on 30 June 20X0 were $180 million and no fair value adjustments were necessary upon consolidation of Prospects forthe first fime On 31 December 20X0, Acquirer carried out a review of the goodwill on consolidation of Prospects for evidence of impairment. The review was carried out despite the fact that there were no obvious indicotions of adverse trading conditions for Prospects. The review involved allocating the net asset of Prospects into three cashgenerating units and computing the value in use of each unit. The carrying values of the individval units before any impairment adjustments are given below. Unit A Unit B Unit C $m $m $m Patents 5 Property, plant and equipment $0 30 40 Net current assets 20 25 20 85 55 60 Vole in use of unit 2 60 65 lt was not possible to meaningfully allocate the goodwill on consolidation to the individual cash- generating units, but all other net assets of Prospects are allocated in the table shown above. The patents of Prospects have no ascertainable morket value but oll the current assels have a market value that is above carrying valve, The valve in use of Prospects as a single cash-generating unit ot 31 December 20X1 is £205 million. meant by a cash-generating unit (5 marks) (0) Explain why it was necessary to review the goodwill on consolidation of Prospects for impairment ot 31 December 20X0. (3 marks) (<) Explain briefly the purpose of an impairment review ond why the net assets of Prospects were allocated into cashgenerating units as part of the review of goodwill for impairment (5 marks) (d) Demonstrate how the impairment loss in unit A will affect the carrying volue of the net assets of unit A in the consolidated financial statements of Acquirer. (5 marks) a 70s(e) Explain and calculate the effect of the impairment review on the carrying value of the goodwill on consolidation of Prospects at 31 December 20X0. (7 marks) (Total = 25 marks) 6 Radost 23 mins Radost, public limited company, has a defined benefit pension plan for its staff. Sta are eligible for on annual pension between the date of their retirement and the date of their death equal to: Final salary per year Annual pension = —————— x years’ service. 50 You are given the following data relating to the year ended 31 December 20X3: (2) Yield on high quality corporate bonds: 10% pa. (b) Contributions paid by Radost to pension plan: $12 million (1 Pensions poid to former employees: $8 million {d) Currant service cost: $3.75 million (e) After consultation with employees, an amendment was agreed to the terms of the plan, reducing the benefits payable. The amendment takes effect from 31 December 20X3 and the actuary has calculated that the resulting reduction in the pension obligation is $6 million (NPV the pension obligation at: 1.1.43 - $45 milion 31.12.X3 ~ $444 milion (as given by the actuary, after adjusting for the plan amendment) (g}_ Fair value of the plan assets, as valued by the actuary: 1.1.43 - $52 milion 31.12.X3 ~ $64.17 million Required (a) Produce the notes to the statement of financial position and statement of profit or loss and ‘other comprehensive income in accordance with IAS 19. (8 marks) (b} Explain why the pension plan assets are recognised in the financial statements of Radost, though they are held in « seporate legal trust for Rados!'s employees. (4 ma Notes 1 Work to the nearest $1,000 throughout 2 You should assume contributions and benefits were paid on the last day of the year. (Total = 12 marks) 7 Cleanex 49 mins Cleanex prepares its financial statements in accordance with IFRS. On 25 June 20X0, Cleanex made «@ public announcement of its decision to reduce the level of emissions of harmful chemicals from its factories, The average useful lives of the Factories on 30 June 20K0 was 20 years. The depreciation of the factories is computed on a siraighHline basis ond charged to cost of sales. The directors formulated the proposals for emission reduction following agreement in principle earlier in the year. The directors prepared detailed estimates of the costs of their proposals and these showed that the following expenditure would be required 706 “"@