PROFESSIONAL LEVEL EXAMINATION

MONDAY 9 MARCH 2020

(3 HOURS)

FINANCIAL ACCOUNTING AND

REPORTING – IFRS
This exam consists of four questions (100 marks).

Marks breakdown

Question 1 27 marks
Question 2 31 marks
Question 3 19 marks
Question 4 23 marks

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Unless otherwise stated, make all calculations to the nearest month and the nearest £.

All references to IFRS are to International Financial Reporting Standards and International
Accounting Standards.
Question 1

Bilberry Ltd is preparing its financial statements for the year ended 30 September 2019. The
following balances have been extracted from the nominal ledger of Bilberry Ltd at
30 September 2019.
Notes £
Sales (1) 1,264,780
Purchases 567,300
Administrative expenses 249,860
Operating costs 197,350
Inventories at 30 September 2018 61,320
Trade and other receivables (1) 59,700
Trade and other payables 78,300
Land and buildings (3), (5)
Cost (land £250,000) 964,000
Accumulated depreciation at 30
September 2018 303,660
Plant and machinery (4), (5)
Cost 245,000
Accumulated depreciation at
30 September 2018 61,250
Retained earnings at 30 September 2018 40,240
Ordinary share capital (£1 shares) 480,000
Share premium account 120,000
Cash at bank 3,700

Notes:

(1) On 1 June 2019 Bilberry Ltd made sales to a new customer totalling £30,600 (which
represented the normal stand-alone selling price) and the full amount was recognised in
revenue and receivables. This included a free 12-month after-sales support package
which would normally sell for £5,400.

(2) Inventories were counted and valued at 30 September 2019 at £40,900. However, the
following additional information was discovered after the count and has not been taken
into account in arriving at the value of £40,900.

The supervisor of one of the warehouses was off sick on

30 September 2019 so no count was carried out. Instead the supervisor carried out
a count on 2 October 2019 which identified inventories with a cost of £11,800. On
1 October 2019 there had been a delivery into the warehouse of inventories costing
£1,600 and a customer order with a sales value of £2,500 had been despatched. A
standard 25% mark-up is made on all sales.

Additional inventories, located in a holding area at the time of the count, were
discovered in one of the warehouses. The additional inventories were 800 units of a
recently manufactured item.

Planned production of this item was for 3,000 units, although only 2,800 units had
actually been manufactured due to an unforeseen incident at the factory. The selling
 price of each unit is £10.75 and the total associated costs for the manufacture of all
2,800 units were:

£
Materials and direct labour 16,020
Variable overheads 4,700
Fixed overheads 3,600
24,320

(3) Bilberry Ltd purchased some land on 1 October 2017 for £150,000 which it planned to
build a warehouse on.

On 1 October 2018 plans were announced for a new recycling centre to be built close to
the piece of land which will reduce local land prices.

On 1 October 2018 the land was estimated as having a value in use of £130,000 and a
fair value of £110,000 with costs to sell estimated at £5,000. No adjustments have been
made to Bilberry Ltd’s financial statements relating to this announcement.

(4) On 1 October 2018 Bilberry Ltd entered into a six year lease for a machine. The
machine has a useful life of six years and a cash price of £18,000. The present value of
the minimum lease payments approximates to the cash price. Six annual instalments of
£3,660 are payable on 30 September each year, with the first payment made on
30 September 2019. The interest rate implicit in the lease is 6% pa. The only accounting
entries made in respect of the lease were to credit cash for the first instalment paid and
debit operating costs.

(5) No adjustments have been made for depreciation for the year ended 30 September
2019. The straight-line method of depreciation is used. Unless stated otherwise,
buildings have a 40 year useful life and plant and machinery a 10 year useful life.

All expenses associated with property, plant and equipment are recognised in cost of
sales.

(6) The income tax liability for the year ended 30 September 2019 has been estimated at
£37,000.

Requirements

1.1 Prepare a statement of profit or loss for Bilberry Ltd for the year ended 30 September
2019 and a statement of financial position as at that date, in a form suitable for
publication. (22 marks)

1.2 The IASB’s Conceptual Framework defines assets, liabilities, equity, income and
expenses. Provide one example of each of these elements from the financial
statements of Bilberry Ltd, explaining how each example meets the definition of the
relevant element. (5 marks)

Total: 27 marks
Question 2

Jonica plc operates in the manufacturing and retail sectors. Draft financial statements for the
year ended 30 September 2019 have been prepared by the financial controller. Draft profit for
the year was £1,035,000. However, the following outstanding issues have been identified.

(1) On 1 October 2018 Jonica plc issued 4,000 6% £100 convertible bonds. Each bond is
redeemable in three years’ time at par or can be converted into 100 £1 ordinary shares.
Interest is payable annually in arrears. The market rate of interest for similar bonds
without the conversion option is
8% pa.

The total cash received was credited to non-current

liabilities. The interest paid on 30 September 2019 was debited to finance costs.

(2) On 1 January 2019 Jonica plc received a government grant for £150,000 towards the
cost of a depreciating asset. The asset was acquired on 1 January 2019 for £325,000
and has a 10-year useful life. The asset is being depreciated on a straight-line basis.
The government grant was recognised as income on receipt as there were no
conditions attached to the use of the grant. Jonica plc has an accounting policy of
netting-off government grants.

(3) On 1 June 2019 a claim of £35,000 was made against Jonica plc by a customer, Kiko
Ltd, for supplying faulty goods. The goods were sold to Kiko Ltd for £21,000. However,
Kiko Ltd had sold the goods on to a number of its customers and, as a result, has
claimed an additional £14,000 in compensation for the damage to its reputation. On
further investigation it appears that this is unlikely to reoccur.
Jonica plc’s lawyers believe that Kiko Ltd is likely to win any court case and therefore
has recommended that Jonica plc makes an out-of-court settlement as soon as
possible. The lawyers have estimated the probabilities for the following levels of
damages:

Damages payable Probability

None 10%
£10,500 20%
£21,000 60%
£35,000 10%

No accounting entries have been made at 30 September 2019 in relation to the claim
made by Kiko Ltd.

At 1 October 2018 Jonica plc had 600,000 £1 ordinary shares in issue. On 1 February 2019 it
made a 1 for 3 rights issue at £3.20 per share. The market price of one Jonica plc ordinary
share at that date, immediately before the rights issue, was £3.80.

Jonica plc presents expenses by function in its statement of profit or loss. However, a
number of other companies operating in its industry present expenses by nature. The
directors would like to understand how the alternative classification affects the company’s
financial statements.
Requirements

2.1 Explain the required IFRS financial reporting treatment of Issues (1) to (3) above in
Jonica plc’s financial statements for the year ended 30 September 2019, preparing all
relevant calculations. (18 marks)

2.2 Calculate Jonica plc’s:

revised profit for the year ended 30 September 2019; and

basic earnings per share. (6 marks)

2.3 Explain the impact on Jonica plc’s statement of profit or loss of presenting expenses by
nature as permitted by IAS 1, Presentation of Financial Statements. You should indicate
if this change would be appropriate for Jonica plc. (3 marks)

2.4 Describe, with supporting calculations, any differences between IFRS and UK GAAP in
respect of the financial reporting treatment of Issue (2) above. (4 marks)

Total: 31 marks
Question 3

Question 3.1

Verata Ltd is preparing its financial statements for the year ended
30 September 2019. The following information is relevant for the preparation of the statement
of cash flows.

Statement of financial position as at 30 September 2019 (extract)

2019 2018
£ £
Non-current assets
Property, plant and equipment 498,400 512,700

Equity and liabilities

Ordinary share capital (£1 shares) 270,000 200,000
Share premium account 68,000 50,000
Retained earnings 233,700 239,600

Additional information:

(1) Profit for the year ended 30 September 2019 was £132,100. A draft figure for ‘Net cash
from operating activities’ was calculated at £37,420.

(2) During the year ended 30 September 2019 the following transactions occurred in
relation to property, plant and equipment. All transactions have been correctly
recognised in the statement of profit or loss and statement of financial position.

No adjustments were made for these transactions in calculating the draft figure for net
cash from operating activities, unless stated otherwise.

A machine with a carrying amount of £24,900 was sold for cash of £31,000. In the
calculation of the draft figure for net cash from operating activities the only
adjustment made for this transaction was to deduct the sale proceeds.

On 30 September 2019 a machine with a carrying amount of £4,500 was scrapped.

Depreciation of £63,600 was recognised for the year ended 30 September 2019.

A number of new items of plant and machinery were acquired during the year. One
item of plant costing £10,000 was acquired on credit (and remained unpaid at
30 September 2019), but all other purchases of plant and machinery were for cash.

An impairment of an item of plant with a carrying amount of £11,800 was identified.

The plant had a recoverable amount of £8,250.

(3) On 1 May 2019 Verata Ltd issued 40,000 £1 shares for a cash price of £1.45 per share.
A bonus issue of shares was subsequently made out of retained earnings.

(4) Verata Ltd paid an ordinary dividend during the year.

Requirements

For inclusion in Verata Ltd’s statement of cash flows for the year ended 30 September 2019:

Calculate a revised figure for ‘Net cash from operating activities’, starting with the draft
figure of £37,420.
Prepare the investing activities and financing activities sections of the statement of cash
flows, in so far as the above information allows. (9 marks)

Question 3.2

Poitou Ltd has a number of subsidiary companies and is preparing its consolidated financial
statements for the year ended 30 September 2019.

On 1 March 2019 Poitou Ltd purchased 25% of the ordinary share capital of Chigu Ltd, a
separate legal entity, for £80,000. There are three other investors, each of which has a 25%
holding in Chigu Ltd. Under a contractual agreement between the four parties, each investor
is entitled to an equal share of the profits and losses of Chigu Ltd. Unanimous consent is
required by all four parties for all key operating decisions.

Chigu Ltd made a profit for the year ended 30 September 2019 of £108,000. All profits and
losses accrued evenly throughout the year.

Requirement

Explain the required IFRS financial reporting treatment of the investment in Chigu Ltd in
Poitou Ltd’s consolidated financial statements for the year ended 30 September 2019,
preparing all relevant calculations. (5 marks)

Question 3.3

As a newly-qualified ICAEW Chartered Accountant you have been asked by your firm of
ICAEW Chartered Accountants to prepare a checklist covering the fundamental principles of
the ICAEW’s Code of Ethics.

Requirement
Prepare the checklist which should set out the five fundamental principles with a series of
relevant questions for each to help assess whether an individual has complied with each
principle on each new assignment undertaken. (5 marks)

Total: 19 marks
 Question 4

At 1 October 2018 Chamba Ltd had an investment in a subsidiary, Hejazi Ltd, as well as a
number of other insignificant investments. On 1 January 2019 Chamba Ltd acquired 80% of
the ordinary share capital of Surati Ltd.

The draft summarised statements of financial position of Chamba Ltd, Hejazi Ltd and Surati
Ltd as at 30 September 2019 are shown below.

Chamba Hejazi Ltd Surati

Ltd Ltd
ASSETS £ £ £
Non-current assets
Property, plant and 562,000 374,000 235,000
equipment
Investments 565,000 – –
1,127,000 374,000 235,000
Current assets
Inventories 72,000 59,400 35,300
Trade and other 47,800 31,000 29,400
receivables
Cash and cash 7,100 3,200 1,800
equivalents
126,900 93,600 66,500
Total assets 1,253,900 467,600 301,500

EQUITY AND LIABILITIES

Equity
Ordinary share capital 600,000 300,000 200,000
(£1 shares)
Share premium account 200,000 – –
Retained earnings 280,900 89,700 45,600
1,080,900 389,700 245,600
Current liabilities
Trade and other 93,000 40,900 31,900
payables
Income tax 80,000 37,000 24,000
173,000 77,900 55,900
Total equity and liabilities 1,253,900 467,600 301,500

Additional information:
Hejazi Ltd Surati Ltd
Date of acquisition 1 Oct 2015 1 Jan 2019
Percentage holding acquired 65% 80%
Consideration (note (2)) £295,000 £250,000
Retained earnings at date of acquisition £42,400 £51,000
Goodwill and non-controlling interest method Proportionate Fair value
Cumulative goodwill impairment to
30 September 2018 £6,000 –
Goodwill impairment for year ended
30 September 2019 – £3,000
(1) At the dates of acquisition the fair values of the assets, liabilities and contingent
liabilities of Hejazi Ltd and Surati Ltd were equal to their carrying amounts, with one
exception.

Surati Ltd has an internally-generated brand which was not recognised in its own
financial statements. However, an independent expert valued this brand at £40,000, with
a useful life of five years, at 1 January 2019, the date of acquisition of Surati Ltd by
Chamba Ltd.

(2) The consideration for the acquisition of Hejazi Ltd was made up of cash of £190,000
paid on 1 October 2015 and a further cash payment of £105,000, deferred until
1 October 2016. An appropriate discount factor is 5% pa. Chamba Ltd accounted for
the deferred consideration correctly.

(3) The fair value of the non-controlling interest in Surati Ltd on 1 January 2019 was
£64,000.

(4) On 1 October 2018 Chamba Ltd sold a machine to Hejazi Ltd for £63,000. On that date
the machine had a remaining useful life of six years and a carrying amount of £48,000.

Requirements

4.1 Prepare the consolidated statement of financial position of Chamba Ltd as at 30

September 2019. (19 marks)

4.2 Set out the journal entries that will be required on consolidation to recognise the
goodwill relating to the acquisition of Surati Ltd in the consolidated statement of financial
position of Chamba Ltd as at 30 September 2019.
(2 marks)

4.3 One month after the year end on 31 October 2019 Chamba Ltd sold its 65% holding in
Hejazi Ltd for £346,000. Hejazi Ltd made a profit for the month of October 2019 of
£18,900.

Calculate the profit or loss on disposal of Hejazi Ltd.

(2 marks)

Total: 23 marks