ACCA financial reporting f72010 examiner feedback

F 7 Int FINANCIAL REPORTING: REVISIONPLATEAU On 1 October 2006 Plateau acquired the following non-current investments: – 3 million equity shares in Savannah by an exchange of one share i

Examiner’s Feedback - Steve Scott (F7)

- a compendium from several exam sittings (source ‘Student Accountant’)

Please note that this has just been amended to include most recent feedback, so differs slightly from filmed comments

 Many markers reported in this session that a large number of candidates were not providing workings for figures in their answers

This is a serious problem If an answer is wrong it is unlikely that any marks can be awarded, as the marker will not be able to determine how the answer was arrived at.

 If a numerical answer is wrong, markers can only give some merit if

they are able to determine the approach taken by the candidate.

This is impossible without legible workings

 The layout of answers by a number of candidates was poor, with

workings being squashed into corners of pages and thus being

difficult to follow

 …less well-organised candidates occasionally spread an answer to a particular question throughout their script For example, a candidate might start answering Part (a) of Question 3 on one page, then start a

different question on the next page, then later in the script return to

the rest of Question 3 Such practice is contrary to examination advice and makes the script difficult to mark and appraise ACCA also advises candidates to start each question at the top of a new page

 A worrying development reported by several markers was that a small

number of candidates were giving as their answer the composition of the line items without cross-casting to give the required answers Such a technique is unwelcome and places an unfair burden on the marker, and is not strictly answering the question.

‘I am listening’:

Examiner Steve Scott at the recent Lecturers’

conference

 Some candidates, who are perhaps running low on time, give a blank proforma answer (for example, to the income statement and statement

of financial position) (Balance Sheet) Such an answer would gain little (if any) marks and is therefore a waste of time It would be far better

to complete the numerical elements of only part of a required statement than to produce a complete statement with no figures

 The best answered sections of the paper were invariably the computational elements; sadly, the analysis and discursive areas of the paper were again generally much weaker A significant number of candidates did not even attempt these sections; as they accounted for

32 marks, it must be stressed that it is highly unlikely that a candidate will pass this paper by relying entirely on their computational ability

 A small number of candidates wrote in their answer paper that they were short of time Sensible time allocation and the avoidance of time wasting activities is an important part of exam technique

Common Errors:

 Incorrect use of proportional consolidation for the subsidiary I seem

to refer to this error each time I write a report

 A few calculated the minority interest based on the share capital and reserves This is the basis of the minority interest in the balance sheet

and completely inappropriate for the income statement (P&L).

Some candidates calculated a minority interest for the associate thus showing a lack of understanding of equity accounting

 …candidates did not read the question properly and treated the ordinary shares at $1 (£1) each rather than 25 cents (pence) this also led to errors in the dividend calculations

 There were a limited number of overly detailed workings and unnecessary explanations of relatively obvious figures While this practice is not penalised, it does disadvantage candidates because it wastes valuable time…

 Another common example of poor exam technique, perhaps caused by poor timing and planning, was that many candidates did not answer all five questions (and sometimes not all parts of questions)

The above …may appear to give an overly pessimistic view of performance This is not the intention, nor is it the case There were many excellent papers, where it was apparent that candidates had done a great deal of studying, and these were rewarded appropriately

F 7 (Int) FINANCIAL REPORTING: REVISION

PLATEAU

On 1 October 2006 Plateau acquired the following non-current investments:

– 3 million equity shares in Savannah by an exchange of one share in Plateau for every two shares in Savannah plus $1.25 per acquired Savannah share in cash The market price of each Plateau share at the date of acquisition was $6 and the market price of each Savannah share at the date of acquisition was $3.25 – 30% of the equity shares of Axle at a cost of $7·50 per share in cash

Only the cash consideration of the above investments has been recorded by Plateau

In addition$500,000 of professional costs relating to the acquisition of Savannah are also included in the cost of the investment

The summarised draft statements of financial position of the three companies at 30 September 2007 are:

Plateau Savannah Axle

$’000 $’000 $’000

Assets

Non-current assets

Property, plant and equipment 18,400 10,400 18,000 Investments in Savannah and Axle 13,250 nil nil Available-for-sale investments 6,500 nil nil

38,150 10,400 18,000

Current assets

Trade receivables 3,200 1,500 2,400

Total assets 48,250 18,100 24,000

Equity and liabilities

Equity shares of $1 each 10,000 4,000 4,000 Retained earnings

– at 30 September 2006 16,000 6,000 11,000 – for year ended 30 September 2007 9,250 2,900 5,000

35,250 12,900 20,000

Non-current liabilities

Current liabilities 8,000 4,200 3,000

Total equity and liabilities 48,250 18,100 24,000

The following information is relevant:

(i) At the date of acquisition Savannah’s had five years remaining of an agreement

to supply goods to one of its major customers Savannah believes it is highly likely that the agreement will be renewed when it expires The directors of Plateau estimate that the value of this customer based contract has a fair value

of $1 million and an indefinite life and has not suffered any impairment

(ii) On 1 October 2006, Plateau sold an item of plant to Savannah at its agreed fair value of $2·5 million Its carrying amount prior to the sale was $2 million The estimated remaining life of the plant at the date of sale was five years (straight-line depreciation)

(iii) During the year ended 30 September 2007 Savannah sold goods to Plateau for

$2·7 million Savannah had marked up these goods by 50% on cost Plateau had a third of the goods still in its inventory at 30 September 2007 There were

no intra-group payables/receivables at 30 September 2007

(iv) Impairment tests on 30 September 2007 concluded that neither consolidated goodwill nor the value of the investment in Axle were impaired

(v) The available-for-sale investments are included in Plateau’s statement of

financial position (above) at their fair value on 1 October 2006, but they have a fair value of $9 million at 30 September 2007

(vi) No dividends were paid during the year by any of the companies

(vii) It is the group policy to value non-controlling interest at acquisition at full (or fair) value For this purpose the share price of Savannah at this date should be used

Required

(a) Prepare the consolidated statement of financial position for Plateau as at 30 September 2007

(20 marks)

(b) A financial assistant has observed that the fair value exercise means that a subsidiary’s net assets are included at acquisition at their fair (current) values

in the consolidated statement of financial position The assistant believes that it

is inconsistent to aggregate the subsidiary’s net assets with those of the parent because most of the parent’s assets are carried at historical cost

Required

Comment on the assistant’s observation and explain why the net assets of acquired subsidiaries are consolidated at acquisition at their fair values

(5 marks) (Total = 25 marks)

Kala

The following trial balance relates to Kala, a publicly listed company, at 31 March 2006:

$'000 $'000 Land and buildings at cost (note (i)) 270,000

Plant – at cost (note (i)) 156,000

Investment properties – valuation at 1 April 2005 (note (i)) 90,000

Rental of leased plant (note (ii)) 22,000

Inventory at 1 April 2005 37,800

Equity shares of $1 each fully paid 150,000 Retained earnings at 1 April 2005 119,500 8% (actual and effective) loan note (note (iii)) 50,000 Accumulated depreciation at 1 April 2005 – buildings 60,000

739,700 739,700

The following notes are relevant:

(i) The land and buildings were purchased on 1 April 1990 The cost of the land was $70 million No land and buildings have been purchased by Kala since that date On 1 April 2005 Kala had its land and buildings professionally valued at

$80 million and $175 million respectively The directors wish to incorporate these values into the financial statements The estimated life of the buildings was originally 50 years and the remaining life has not changed as a result of the valuation

Later, the valuers informed Kala that investment properties of the type Kala owned had increased in value by 7% in the year to 31 March 2006

Plant, other than leased plant (see below), is depreciated at 15% per annum

using the reducing balance method Depreciation of buildings and plant is

charged to cost of sales

(ii) On 1 April 2005 Kala entered into a lease for an item of plant which had an

estimated life of five years The lease period is also five years with annual

rentals of $22 million payable in advance from 1 April 2005 The plant is

expected to have a nil residual value at the end of its life If purchased this

plant would have a cost of $92 million and be depreciated on a straight-line

basis The lessor includes a finance cost of 10% per annum when calculating

annual rentals (Note: you are not required to calculate the present value of the minimum lease payments.)

(iii) The loan note was issued on 1 July 2005 with interest payable six monthly in

arrears

(iv) The provision for income tax for the year to 31 March 2006 has been estimated

at $28.3 million The deferred tax provision at 31 March 2006 is to be adjusted

to a credit balance of $14.1 million

(v) The inventory at 31 March 2006 was valued at $43.2 million

Required, prepare for Kala:

(a) An income statement and statement of other comprehensive income for the year ended 31 March 2006 (10 marks)

(b) A statement of changes in equity for the year ended 31 March 2006 (4 marks)

(c) A statement of financial position as at 31 March 2006 (11 marks)

(Total = 25 marks)

The following draft financial statements relate to Tabba, a private company

Statements of financial position as at: 30 September 2005 30 September

2004

$'000 $'000 $'000 $'000 Property, plant and equipment (note (ii)) 10,600 15,800 Current assets

Insurance claim (note (iii)) 1,500 1,200

8,000 5,650

Equity and liabilities

Reserves:

Retained earnings 2,550 850

2,550 2,450

Non–current liabilities

Finance lease obligations (note (ii)) 2,000 1,700

Government grants (note (ii)) 1,400 900

Current liabilities

Government grants (note (ii)) 600 400

Finance lease obligations (note (ii)) 900 800

Current tax payable 100

5,650

1,200

5,900

Total equity and liabilities 18,600 21,450

The following additional information is relevant:

(i) Income statement extract for the year ended 30 September 2005:

$’000 Operating profit before interest and tax 270

Note The interest expense includes finance lease interest.

(ii) The details of the property, plant and equipment are:

Acc'd Carrying Cost depreciation value

$’000 $’000 $’000

At 30 September 2004 20,200 4,400 15,800

At 30 September 2005 16,000 5,400 10,600 During the year Tabba sold its factory for its fair value $12 million and agreed to rent it back, under an operating lease, for a period of five years at $1 million

per annum At the date of sale it had a carrying value of $7.4 million based on a previous revaluation of $8.6 million less depreciation of $1.2 million since the

revaluation The profit on the sale of the factory has been included in operating profit The surplus on the revaluation reserve related entirely to the factory No other disposals of non–current assets were made during the year

Plant acquired under finance leases during the year was $1.5 million Other

purchases of plant during the year qualified for government grants of $950,000 Amortisation of government grants has been credited to cost of sales

(iii) The insurance claim related to flood damage to the company’s inventories

which occurred in September 2004 The original estimate has been revised

during the year after negotiations with the insurance company The claim is

expected to be settled in the near future

Required

(a) Prepare a statement of cash flows using the indirect method for Tabba in

accordance with IAS 7 Statement of Cash Flows for the year ended 30

(b) Using the information in the question and your statement of cash flows,

comment on the change in the financial position of Tabba during the year

Note You are not required to calculate any ratios. (Total = 25 marks)

Harper

You are a partner in a small audit and accounting practice You have just completed the audit and finalised the financial statements of a small family owned company in discussion with its managing director Mrs Harper After the meeting Mrs Harper has asked for your help She has obtained the published financial statements of several quoted companies in which she is considering buying some shares as a personal

investment She presents you with the following information:

(a) In the year to 30 September 2008, two companies, Gamma and Toga, reported identical profits before tax of $100 million Information in the Chairmen’s

reports said both companies also expected profits from their core activities (to

be interpreted as from continuing operations) to grow by 10% in the following year Mrs Harper has extracted information from the income statements and

made the following summary:

Gamma Toga

Discontinued activities 30 (40)

A note to the financial statements of Toga said that both the discontinuation

and acquisition occurred on 1 April 2008 and were part of an overall plan to

focus on its traditional core activities after incurring large losses on a new

foreign venture

Required

(i) Briefly explain to Mrs Harper why information on discontinued operations

(ii) Calculate the expected operating profit for both companies for the year to

30 September 2009 (assuming the Chairmen’s growth forecasts are

correct):

– in the absence of information of the discontinued operations; and

– based on the information provided above (4 marks)

(b) Taylor is another company about which Mrs Harper has obtained the following information from its published financial statements:

Earnings per share:

Basic earnings per share 25 cents 20 cents The earnings per share is based on attributable earnings of $50 million ($30

million in 2007) and 200 million ordinary shares in issue throughout the year

(150 million weighted average number of ordinary shares in 2007)

Statement of financial position extracts: $ million $ million

The loan stock is convertible to ordinary shares in 2010 on the basis of 70 new shares for each $100 of loan stock

Note to the financial statements:

There are directors’ share options (in issue since 2005) that allow Taylor’s

directors to subscribe for a total of 50 million new ordinary shares at a price of

$1·50 each

(Assume the current rate of income tax for Taylor is 25% and the market price

of its ordinary shares throughout the year has been $2·50)

Mrs Harper has read that the trend of the earnings per share is a reliable

measure of a company’s profit trend She cannot understand why the increase

in profits is 67% ($30 million to $50 million), but the increase in the earnings

per share is only 25% (20 cents to 25 cents) She is also confused by the

company also quoting a diluted earnings per share figure, which is lower than the basic earnings per share

Required

(i) Explain why the trend of earnings per share may be different from the

trend of the reported profit, and which is the more useful measure of

(ii) Calculate the diluted earnings per share for Taylor based on the effect of the convertible loan stock and the directors’ share options for the year to

30 September 2008 (ignore comparatives); and (5 marks)

(iii) Explain the relevance of the diluted earnings per share measure (4 marks)

(c) Mrs Harper has noticed that the tax charge for a company called Stepper is $5 million on profits before tax of $35 million This is an effective rate of tax of

14·3% Another company Jenni has an income tax charge of $10 million on