SECTION A
SECTION A CONSISTS OF QUESTION 1. YOU MUST ANSWER THIS QUESTION
QUESTION 1
ANSWER ALL PARTS OF THIS QUESTION
Extracts from the draft individual statement of profit or loss for Hastings Ltd and its one subsidiary, Clifton Ltd, for the year ended 31 December 2021 are shown below:
Statements of profit or loss for the year ended 31 December 2021
The following information is also relevant:
(1) On 1 January 2021, Hastings Ltd gained control over Clifton Ltd by acquiring 8,000,000 ordinary shares with a nominal value of 25 pence per share. Hastings Ltd paid £3 million cash and issued 4 million ordinary shares at a market value of 35 pence per share.
Hastings Ltd agreed to pay £1.2 million cash in two years time. An appropriate discount rate is 6% per annum. Hastings Ltd has recorded the interest on the deferred consideration for the year ended 31 December 2021 as a debit to cost of sales and a credit to non-current liabilities. At 1 January 2021, the fair values of the net assets of Clifton Ltd were the same as their carrying amounts.
During the year Hastings Ltd sold goods to Clifton Ltd at a selling price of £300,000. Hastings Ltd sells goods at a margin of 50% and £72,000 of goods remained in inventory at the year end. Hastings Ltd measures the non-controlling interest using the proportionate share of net assets. Goodwill on acquisition has become impaired by £20,000.
(2) On 1 July 2021, Clifton Ltd sold a van to Hastings Ltd for £15,000.
The van was originally bought by Clifton Ltd for £14,000 on 1 July 2019 and had an estimated useful life of seven years. At the date of transfer, the van was deemed to have a remaining useful life of five years. Depreciation on the van has been recorded within distribution costs. Profit on sale of the machine has been recorded within other income.
(3) On 1 April 2021, Hastings Ltd acquired 30% of the 200,000 £1 ordinary shares of Woodville Ltd for £322,000, an investment which provides Hastings Ltd with significant influence. Woodville Ltd made a profit for the year ended 31 December 2021 of £86,000.
At 1 April 2021, the fair values of the net assets of Woodville Ltd were the same as their carrying amounts with the exception of an item of machinery. The machine was acquired three years ago for £100,000 and had a useful life at that date of six years.
At 1 April 2021, the machine had a fair value of £90,000 with a remaining useful life of four years. In November 2021, Woodville Ltd sold goods to Hastings Ltd for £28,000 and 40% of the goods remain in inventory at the year end. The goods originally cost Woodville Ltd £21,000 The investment in Woodville Ltd has become impaired by £19,000.
(4) Hastings Ltd has recorded dividends received from investments in its single entity financial statements by posting a debit to bank in the statement of financial position and a credit to other income in the statement of profit or loss.
(5) Hastings Ltd has a small number of other investments, none of which require adjustments in the financial statements.
(6) Profits, revenues and costs in all companies accrue evenly throughout the year.
REQUIRED:
(a) There is no maximum word count for this requirement. Prepare the consolidated statement of profit or loss for Hastings Ltd for the year ended 31 December 2021. [30 marks]
(b) There is no maximum word count for this requirement. Prepare an extract from the consolidated statement of changes in equity for Hastings Ltd for the year ended 31 December 2021. You should prepare separate columns for:
➢ Share capital
➢ Share premium
➢ Retained earnings
➢ Non-controlling interest [6 marks]
(c) The maximum word count for this requirement is 160 words. Briefly discuss why an intra-group sale of a non-current asset needs to be adjusted for within the consolidated statement of profit or loss. You should refer to (2) above as part of your answer. [4 marks]
(d) The maximum word count for this requirement is 400 words. Evaluate the extent to which the equity method of accounting for associates provides information that is useful to the users of financial statements. As part of your answer you should consider the characteristics of financial information according to the conceptual framework. You should refer to (3) and (4) above as part of your answer. [10 marks]
SECTION B
SECTION B CONSISTS OF QUESTIONS 2 AND 3. ANSWER ONLY ONE QUESTION FROM
You are the financial controller for Commonside Ltd. You are assisting with the preparation of the financial statements for the year ended 31 December 2021. The board of directors will receive a bonus if, for the year ended 31 December 2021, earnings per share exceeds 75 pence per share. The following matters have been dealt with by the financial accountant who was acting upon the instruction of the finance director to maximise profits.
(1) On 4 October 2021, Commonside Ltd sold goods on credit to an American customer for $408,000. The invoice was correctly translated and accounted for. On 21 December 2021, Commonside Ltd received payment for half the goods.
The finance director asked the financial accountant to use the average exchange rate for the year to translate and account for the receipt. The finance director requested that no further entries be made in respect of this sale.
(2) At 31 December 2021, Commonside Ltd disclosed a contingent liability of £13,000 for a regulatory fine from the industry regulator. The fine of £13,000 was paid in January 2022.
(3) On 1 January 2021, Commonside Ltd entered into a lease arrangement to lease a piece of machinery for four years. The annual payment is £10,000 in advance. The implicit interest rate in the lease arrangement is 5% resulting in a present value of lease payments of £37,232. Company policy is to recognise depreciation of similar non-current assets on a straight line basis within administration expenses.
The finance director requested that the first payment of £10,000 on 1 January 2021 be credited to bank and debited directly to retained earnings. No transaction has been posted to the statement of profit or loss for the year ended 31 December 2021. The following financial information is also available:
➢ Draft profit for the year is £838,200.
➢ There were 800,000 shares in issue on 1 January 2021.
➢ On 1 April 2021 a further 400,000 shares were issued at market value.
REQUIRED:
(a) The maximum word count for this requirement is 600 words. In respect of items (1) – (3):
• Set out and explain the correct IFRS financial reporting treatment in the financial statements of Commonside Ltd for the year ended 31 December 2021, preparing all relevant calculations. As part of your answer you need to make reference to the relevant definitions and treatments required by the accounting standards.
• Explain why you think that the finance director has requested the original accounting treatment. [15 marks]
(b) There is no maximum word count for this requirement. Calculate the earnings per share using the draft profit for the year of £838,200 before any adjustments arising from items (1) – (3). [2 marks]
(c) There is no maximum word count for this requirement. Calculate a revised profit and revised earnings per share including any adjustments for the accounting treatment for items (1) – (3). [4 marks]
PART B
The maximum word count for this requirement is 440 words. Evaluate the extent to which the accounting treatment required in IFRS 16: Leases provides information that is useful to the users of financial statements.
As part of your answer you should briefly explain some of the challenges posed to the users of financial statements by IFRS16: Leases. [11 marks]
PART C
Lightwood Ltd has investments in two subsidiary companies. It is preparing its consolidated statement of cash flows for the year ended 31 December 2021. The following summarised information is taken from the consolidated financial statements for Lightwood Ltd for the year ended 31 December 2021:
Consolidated statements of financial position at 31 December (extracts)
The following transactions have been correctly recorded in the extract consolidated financial statements position above:
(1) On 1 July 2021, Lightwood Ltd acquired 60% of the ordinary share capital of Pembroke Ltd. The consideration consisted of cash and an issue of shares. No shares other than those in respect of the acquisition of Pembroke Ltd have been issued during the year.
Goodwill arising on the acquisition was £1,265,000. Goodwill is measured using the fair value method and is not impaired.
The fair values of Pembroke Ltd’s assets and liabilities were the same as the carrying amounts at acquisition. The fair value of the non-controlling interest on 1 July 2021 was £608,000.
(2) During the year:
➢ The depreciation charge for the year was £1,408,000.
➢ An asset costing £900,000 and with accumulated depreciation of £193,500, was sold at a profit of £63,000.
REQUIRED:
(a) There is no maximum word count for this requirement. Calculate the following amounts for inclusion in the consolidated statement
Cash flows from investing activities Acquisition of a subsidiary Associate dividend Acquisition of property, plant and equipment Disposal of property, plant and equipment Cash flows from financing activities Dividend – non-controlling interest Dividend – shareholders of Lightwood You are not required to produce a full consolidated statement of cash flows.
You should make clear whether the cash flows are inflows or outflows. [16 marks]
(b) The maximum word count for this requirement is 80 words. Briefly explain what the cash from operations tells users of financial statements. [2 marks] TOTAL 50 MARKS
QUESTION 3
ANSWER ALL PARTS OF THIS QUESTION
The maximum word count for both requirements combined (Part A and Part B) is a total of 2,000 words. It is recommended you use no more than 1,000 words for Part A and 1,000 words for Part B.
PART A
Napier and Stadler (2020) suggest that the implementation of a new accounting standard not only leads to changes in accounting numbers but also changes in the way in which an entity operates, referred to as “real effects”.
REQUIRED:
Using the points raised by Napier and Stadler (2020) to illustrate your answer discuss the real effects arising from the implementation of IFRS 15: Revenue from Contracts with Customers. Reference: Napier, C. J. and Stadler, C. (2020) The real effects of a new accounting standard: the case of IFRS 15 Revenue from Contracts with Customers. Accounting and Business Research, 50 (5), 474-503. [25 marks]
PART B
Graham et al (2006) report that Chief Finance Officers (CFO) believe that earnings are the key metric observed by users of financial statements and that “hitting earnings benchmarks” is essential. REQUIRED: Using the points raised by Graham et al (2006):
(1) Discuss the reasons and ways in which CFOs legitimately meet earnings benchmarks.
(2) Analyse the impact of such behaviours by CFOs upon the users of financial statements. You may use the characteristics of financial information within the conceptual framework and examples from company financial statements as part of your arguments.
Reference: Graham, J. R., Harvey, C, R. and Rajgopal, S. (2006). Value Destruction and Financial Reporting Decisions Financial Analysts Journal 62 (6), 27-39. [25 marks] TOTAL 50 MARKS
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