UNIVERSITY EXAMINATIONS: MAY 2022

Module Code: ACF518 / ACF566

CRN:  10071/16832

Module Title:     ADVANCED FINANCIAL ACCOUNTING / FINANCIAL REPORTING

SECTION A – Answer BOTH questions

Question 1

Gort Plc (Gort) drew up the following trial balance as at 31/12/21

Additional information:

1.   Due to a downturn in the property market, the recoverable amount of one of Gort’s properties has fallen below its net book value.  The property currently has a fair value less costs of disposal of £2,250k.  It has been included in the financial statements as follows:

(5 marks)

2    Motor  vehicles  were all  purchased on 01/01/2020.   They  have  been  depreciated straight line over 5 years. After careful consideration it has been decided depreciation at  25%  reducing  balance  would  result  in  more  relevant  reliable  information.     If comparative figures are to be adjusted these adjustments must be made manually. (5 marks)

3    Included in closing inventories are 8,000 units of product A at a total cost of £64,000 and 5,000 units of product B at a total cost of £75,000.   Relevant  information  on product A and product B is provided below:

(5 marks)

4    On 01/01/21 Gort acquired an item of plant under a 3 year lease agreement.   The agreement  had an  implicit finance cost of 6%.   Gort  made  an  initial  payment  of £150,000 at the inception of the agreement and pays further annual payments of £ 100,000 on the 31/12/21, 31/12/22 and 31/12/23. Gort incurred expenses of £42,000 re shipping and installation of the plant.  The plant has a useful life of 5 years.  Plant and equipment is depreciated on a straight line basis.

The only entries in the accounts are as follows:

(10 marks)

5    After reconfiguring its distribution network Gort had an off-site warehouse it no longer needed.  The warehouse had cost £1,200,000 and had accumulated depreciation of £300,000 to 31/12/20.  On 01/01/21 Gort rented the warehouse to a third party, at this date the warehouse had a net book value of £900,000, and a fair value of £980,000. At 31/12/21 the warehouse had a fair value of £ 1,150,000.  The only entries made during the year regarding the warehouse were to record the rents received of £60,000. Gort values land and buildings under the cost model but investment properties using the fair value model. (5 marks)

Required:

Explain the required treatment of items 1 to 5 above.  Your explanation should refer to relevant accounting standards and include any journal entries necessary to correct the trial balance.

Round figures to the nearest £000.

[Total: 30 Marks]

Question 2

The financial statements of HENDRIX  Plc (HENDRIX),  REDDING  Ltd  (REDDING) and MITCH Ltd (MITCH) are presented below.

Additional information:

1.       HENDRIX acquired a 30% shareholding in MITCH on 01/06/2021.  The Directors of HENDRIX do not have a role in the day-to-day running of MITCH.

2.       HENDRIX acquired 48 million £0.50 ordinary shares in  REDDING on 01/01/2018. The retained earnings at that date were £25,000,000; the fair value of REDDING’s net assets was the same as their book value, with the exception of property.  The market value of property was £5,000,000 above the book value.  At acquisition, the property  had  a  remaining  useful  life  of  20  years,  depreciation   is  charged  to administrative expenses.   The  fair  value  of  the  remaining  9  million  shares  was £20,000,000 on 01/01/2018.  HENDRIX values non-controlling interests at fair value when calculating goodwill on acquisition of subsidiaries.

3.       Since  acquisition  HENDRIX has become a customer of REDDING.   REDDING’s Trade receivables include £3,200,000 owed by HENDRIX; total sales to HENDRIX since acquisition, were £15,000,000. REDDING sells goods to HENDRIX at a margin of 20%.  At 31/12/2021, HENDRIX still held 40% of these goods in inventory.

4.       An  impairment  test  on  the  goodwill  of  REDDING,  conducted  on  31/12/2021, concluded that goodwill on acquisition is now impaired by £2,000,000. The value of the investment in MITCH was not impaired.

5.       REDDING  paid dividends of £ 1,600,000 relating to the period from 01/01/2021 to 31/12/2021.  MITCH paid dividends of £800,000 during the year ended 31/12/2021. All dividends receivable by HENDRIX have been credited to other income in the statement of profit or loss above.

6.       All items in the above income statements are deemed to accrue evenly over the year.

Required:

Prepare the consolidated statement of profit or loss for the HENDRIX Group for the year ended 31/12/2021 and a consolidated statement of financial position as at that date.  (Show workings including ALL JOURNAL ENTRIES REQUIRED)

Round figures to the nearest £000. (30 marks)

[Total: 30 Marks]

Question 3

IFRS  15 Revenue  from Contracts  with Customers has  applied  for  accounting  periods starting after 01 January 2018.

Required:

(a) Explain why there was a need for a new standard on revenue and what impact on the financial statements IFRS 15 has had. (3 marks)

BKWD Plc (BKWD) is a conglomerate business with a year end of 31/12/2021 working across many different industries.  Details of their revenue for the year are provided below:

1.     BKWD run an online clothing store.  Clothing and accessory sales for the year came to £12,000,000 spread evenly throughout the year.   Customers  have  a 4-month period in which they may return items, based on past-experience, BKWD expect 20% of sales to be returned.  All goods are sold at a 25% mark-up, all returns are returned to the warehouse and sold at a later date. (4 marks)

2.     On 01/10/21 BKWD sold specialist construction equipment to APPL Ltd (APPL) for £ 1,250,000.  APPL paid £250,000 to BKWD on delivery but has been allowed to defer payment of the remaining £1,000,000 to 30/09/2025.   BKWD has a cost of capital of 5%. No entries have been made to record this transaction. (5 marks)

3.     BKWD also operate a construction company.  They entered into a contract to build a  large  office  block  on  01/01/2021.    The  contract  is  to  be  treated  as  a  single performance obligation to be satisfied over time.  The contract price is dependent on completion  date,  with  £15m  payable  if  completed  by  31/12/2024  and  £17m  if completed by 30/06/2024.  BKWD’s Finance Director is confident of completing the contract by 30/06/2024.

The total construction costs for 2021 were £3m, excluding inventory of building materials of £300k.   BKWD estimate the further costs to complete the contract at £8m.   The  customer  made stage payments of £1m on 30/06/2021 and £2m on 31/12/2021, with the balance to be paid on completion. (8 marks)

Required:

(b) Explain  how  BKWD  should  account  for  the  above  under  IFRS  15 Revenue from Contracts, along with any journal entries necessary to correct the financial statements for the year ended 31/12/2021.

Round figures to the nearest £000.

[Total: 20 Marks]

Question 4

Aosta Plc prepares financial statements to 31 December each year. Aosta has a number of highly skilled employees it wishes to retain and has put two schemes in place to encourage staff retention:

Scheme A

On 01/01/2022 Aosta granted share options to 400 employees. Each employee was entitled to 500 options to purchase equity shares (nominal value £1) at £9 per share. The options vest on 31/12/2024 if the employees continue to work for Aosta throughout the three-year period.  Payment for the shares is due from the employees on 31 January 2025.

Relevant data is as follows:

Scheme B

On 01/01/2022 Aosta granted 3 share appreciation rights to 300 employees. Each right gave the holder a cash payment of £150 for every 50p increase in the share price from the 01/01/2022 value to the date the  rights vest. The  rights vest on  31/12/2024 for those employees who continue to work for Aosta throughout the three-year period. Payment is due to the employees on 31 January 2025.

Relevant data is as follows:

Required

(a) For both schemes apply the principles of IFRS 2 Share Based Payment to calculate the annual charge to the income statement over the course of the schemes and draw up the extracts from the accounts  relating to the schemes for the years ended 31/12/22, 31/12/23, 31/12/24, 31/12/25. (12 Marks)

(b) Draw up journals to record the schemes in each year. (8 Marks)

Do not round figures, show in £.

[Total: 20 Marks]

Question 5

“In a future society, successful firms are going to be those that can link together the environment, society and their economic prosperity. They will look to the long term and find resources that are sustainable and assurance that those costs are not going to skyrocket. ”

Michael Radcliffe, KPMG Director Global Sustainability Network (2002) Required:

Explain what is meant by the green revolution in financial reporting and critically evaluate the attempts by the accounting profession to achieve greater transparency in reporting of environmental issues. (20 Marks)

[Total: 20 Marks]

Examinable accounting standards

IAS1 Presentation of financial statements

IAS2 Inventories

IAS8 Accounting policies, changes in accounting estimates and errors

IAS10 Events after the reporting period

IAS16 Property, plant and equipment

IAS19 Employee benefits

IAS20 Accounting for government grants and disclosure of government assistance

IAS21 The effect of changes in foreign exchange rates

IAS23 Borrowing costs

IAS27 Consolidated and separate financial statements

IAS28 Investments in associates and joint ventures

IAS33 Earnings per share

IAS36 Impairment of assets

IAS37 Provisions, contingent liabilities and contingent assets

IAS38 Intangible assets

IAS40 Investment property

IFRS2 Share based payment

IFRS3 Business combinations

IFRS5 Non-current assets held for sale and discontinued operations

IFRS10 Consolidated financial statements

IFRS13 Fair value measurement

IFRS15 Revenue from contracts with customers

IFRS16 Leases