Question 1
a) Regarding the development of the Conceptual Framework, discuss the different theoretical approaches, including your view and justification of which is the best approach. (8 marks)
b) Discuss why it has taken so long to “agree a set of coherent principles” in the process of developing the Conceptual Framework. (7 marks)
c) Discuss, from the point of view of large international corporations, the advantages and disadvantages of the existence of common global accounting standards. (5 marks)
d) Identify the two fundamental characteristics of useful financial information and briefly justify them. (5 marks) (Total - 25 marks)
Question 2
Parachute ltd is a retailer of extreme sports equipment, and a significant portion of the equipment they sell is imported. In order to hedge against exchange rate risk, on 31 January 20X5 Parachute Ltd, entered a forward exchange contract to buy 21 million pesos at a rate of £1 = 35 pesos on 31 March 20X7. Parachute’s year end is on 31 March. Exchange rates at different dates was:
• 31 January 20X5: £1 = 28 pesos
• 31 March 20X5: £1 = 25 pesos
• 31 March 20X6: £1 = 32 pesos
Required:
a) Identify and briefly explain the qualifying criteria for the application of hedge accounting according to IFRS 9 – Financial Instruments. (6 marks)
b) Compute the gain/(loss) on the forward contract and prepare the relevant extracts from Parachute Ltd’s income statement and statement of financial position for both 31 March 20X5 and 31 March 20X6. Show all workings. (9 marks)
c) Identify and briefly explain the four tools used by companies in accounts management. (6 marks)
d) For each of the four tools identified in part c), provide an example of what the company can do and identify the objective they would be pursuing in taking that action. (4 marks) (Total - 25 marks)
Question 3
Two companies operating in the same industry, selling a homogeneous product, started operations during 20X0 and by 31 December had cash of £2,700, share capital of £2,500 and retained earnings of £200.
Both companies have a common accounting date of 30 June, and during the first six months of 20X1 the companies had the following activity:
Company ABC On 1 January bought 5 units of the product for £300 each.
At this date, the products could be sold for £400 per unit. On 15 February bought 4 units of the product for £325 each.
Company DEF On 1 January bought 5 units of the product for £300 each.
At this date, the products could be sold for £400 per unit.
On 15 February sold all five units for £440 each and bought another four units of the product for £325 each. Finally, on the 30 June, sold the four units of the product for £450 each and bought four replacement units for £340.
Required:
a) Prepare statements of financial position for both companies at 30 June 20X1, using (show all your workings): i. Historical cost ii. Replacement cost iii. Net realisable value (18 marks)
b) Define hyperinflation and indicate how it affects financial reporting. (3 marks)
c) Identify and briefly explain the main indicators of hyperinflation. (4 marks) (Total - 25 marks)
Question 4
Imajica plc introduced an incentive scheme for their managers on 1 January 20X4. This scheme has got two components First component: 100,000 share options are granted to each of Imajica plc's seven directors. Each option gives the right to buy one ordinary share in Imajica plc with an exercise price of £6.25 (share price at time of granting, i.e. 1 January 20X4) at the vesting date of 31 December 20X6.
The options vest only if the following conditions are met: - Imajica plc's share price on 31 December 20X6 is at least £7.43.
- The director is still in office at 31 December 20X6. The estimated fair value of a share option at 1 January 20X4 was £3.60. At 31 December 20X4 Imajica plc's share price was £6.90, the fair value of a share option was £3.75 and two directors were anticipated to leave Imajica plc prior to the vesting date.
Second component: Also, on 1 January 20X4, the same seven directors were offered a cash bonus payable on 31 December 20X5 based on Imajica plc’s share price.
Each of the seven directors will receive £9,000 for each £1 increase in the share price or proportion thereof by 31 December 20X5.
Required:
a) Identify the key disclosure requirements set by IFRS 2 in relation to share-based payment. (3 marks)
b) Provide the journal entries for both parts of the schemes for the financial year ended 31 December 20X4. Show all workings. (16 marks)
c) Share-based payments have vesting conditions that need to be met for them to be exercised. Discuss what those vesting conditions are and the implications of the different conditions in the application of Fair Value Measurement. (6 marks) (Total - 25 marks)
Question 5
Domain Inc., an entity whose functional and presentation currency is the US Dollar, recorded the following foreign exchange transactions for the year ended 30 September 20X2:
1. Having hired an agent on the first day of the calendar year to identify suitable locations to set up a factory, paid the agent’s fees of £50,000 on 28 February 20X2
2. Purchased land to build the factory for £350,000 on 25 March, paying a 20% deposit on the day.
The remainder was paid on 31 July 20X2
3. Bought and paid for building materials worth £40,000 on 20 April 20X2
4. Leased building equipment for three months on 30 April 20X2.
The lease involves three equal monthly payments of £45,000, the first one taking place on the day the contract was agreed.
The following exchange rate data is available:
1 January 20X2 $1 = £0.65
28 February 20X2 £1 = £0.68
25 March 20X2 $1 = £0.70
20 April 20X2 $1 = £0.71
30 April 20X2 $1 = £0.71
30 May 20X2 $1 = £0.72
30 June 20X2 $1 = £0.70
31 July 20X2 $1 = £0.70
30 September 20X2 $1 = £0.73
Required:
a) Explain whether each of the four transactions above result in any exchange differences (gains or losses) to be reported in Domain plc’s statement of comprehensive income for the year ending 30 September 20X2, briefly discussing the relevant IFRS rules. Show all workings. (20 marks)
b) Discuss the difference between Presentation Currency and Functional currency and provide an example of a situation where the two would be different for a company. (5 marks) (Total - 25 marks)
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