P2 - SAA-GE

Mock Examination
: ACCA Paper P2
Corporate Reporting
Session
: June 2014
Set by
: Mr Ben Lee
Your Contact Number : ______________________________________
I wish to have my script marked by the lecturer and
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collect the marked script at the SAA-GE Reception Counter
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email me the marked script to ____________________________
(Please submit your script latest by 9th May 2014 for marking)
SAA GLOBAL EDUCATION CENTRE PTE LTD
Company Registration No. 201001206N
111 Somerset Road, TripleOne Somerset #06-01/02
Singapore 238164
Tel: (65) 6733 5731 Fax: (65) 6733 5750
Website: www.saage.edu.sg
Email: [email protected]
ACCA P2
Mock Examination
June 2014
Time allowed: 3 Hours plus 15 Minutes reading time
Q1 Compulsory (50 marks)
Q2 to Q4, Choose any two (2 x 25 marks)
Question 1
UH, a public limited company in the Home appliance trade, acquired the following shareholdings in
WK and OG:
Date of acquisition
WK
OG
1 November 20X7
1 November 20X6
Retained earnings
at acquisition
Share capital
acquired
$m
120
260
$m
200
300
Fair value of net
assets at
acquisition
$m
450
700
The following statements of financial position relate to UH, WK and OG as at 31 October 20X8.
UH
$m
WK
$m
OG
$m
310
380
550
62 _
1,302
300
400
___
300
___
400
TOTAL ASSETS
400
160
140
700
2,002
150
80
90
320
620
300
190
110
600
1,000
Equity
Share capital of $1
Share premium
Retained earnings
Total equity
500
100
652
1,252
250
50
180
480
400
40
310
750
40
100
140
620
100
150
250
1,000
Assets
Non-current assets
Property. Plant and equipment
Investment in WK (at cost)
Investment in OG (at cost)
Held to maturity financial asset
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Non-current liabilities
Current liabilities
Total liabilities
TOTAL EQUITY AND LIABILITIES
400
350
750
2,002
The following information is relevant to the preparation of the group financial statements for the UH
Group:
(a)
There have been no new issues of shares in the group since acquisition of subsidiaries. The
group policy is to value non-controlling interests at the date of acquisition at the proportionate
share of the fair value of the acquiree’s assets acquired and liabilities assumed.
(b)
The increase in the fair value of the WK’s net assets over their carrying values at acquisition is
attributable to plant and equipment which had a remaining useful life of 3 years.
(c)
On 10 September 20X8, UH sold inventories to OG at an agreed price of $5 million, at a mark
up of 25% on cost. OG had sold half of these goods to third parties by the year end and had
settled all amounts owing to UH.
(d)
An impairment test on WK and OG indicate that there had been no impairment of goodwill on
WK and OG.
(e)
On 31 July 20X8, UH sold 140 million of their 300 million shares in OG for consideration of
$300m. Subsequent to the disposal, UH maintained significant influence over OG. Their fair
value of the remaining shareholding at 31 July 20X8 was $340m. OG’s profit (and total
comprehensive income) for the year ended 31 October 20X8 was $20 million and no dividends
were paid or declared in the year. This disposal has not yet been accounted for.
(f)
UH had purchased a debt instrument with five years remaining to maturity on 1 November
20X6. The purchase price and fair value was $62 million at the date. The instrument will be
repaid on 31 October 20Y1 at an amount of $80 million. The instrument carries fixed interest
of 4% per annum paid annually on 31 October on the principal of $80 million and has an
effective interest rate of 10% per annum.
In the current period the fixed interest has been received and accounted for as finance income,
but no other accounting entry has been made.
(g)
UH recognized a trade receivable on 1 November 20X6 due from its customer Thomson at
$51,542,000 payable in three annual instalments of $20,000,000 commencing 31 October 20X7
discounted at a market rate of interest adjusted to reflect the risks at 8% per annum.
During November 20X8 (before UH’s financial statements were authorized for issue),
Thomson entered into liquidation and the liquidator notified that UH would receive only 80%
of amounts owed on original payment dates. The effective interest rate was 9% at the year end.
(h)
UH entered into a features contract during the year to hedge a forecast sale in the year ended 31
October 20X9. The futures contract was designated and documented as a cash flow hedge. At
31 October 20X8, had the forecast sale occurred, UH would have suffered a loss of $19m and
the futures contract was standing at a gain of $20m. No accounting entries have been made to
record the futures contract.
Required:
(a)
Prepare the consolidated statement of financial position of the UH group as at 31 October 20x8.
Work to the nearest $0.1m.
(35 marks)
On 3 November 20X8, UH sold to some of its land (which had cost $8 million) to Hendrix Bank for
$10 million, its open market value determined by an independent surveyor. The terms of the agreement
was as follows:





UH has the right to develop the land at any time during the bank’s ownership. For this
right, UH has to pay all the outgoings on the land plus an annual fee of 5% of the
purchase price;
Hendrix Bank maintains a memorandum account for the purpose of determining the
price to be paid by UH, should UH ever re-acquire the land or any adjustments be
necessary to the original purchase price. In this account will be entered the purchase
price, any expenses incurred by Hendrix Bank in relation to the transaction, a sum
added quarterly (or on the sale by Hendrix Bank of the land), calculated by reference to
Hendrix Bank’s lending rate plus 2% per annum applied to the daily balance on the
account; and from the account will be deducted the annual fees paid by UH to Hendrix
Bank;
UH has the option to acquire the land at any time within 5 years from the date of sale;
the acquisition price is to be the balance on the memorandum account at that time;
On the expiry of 5 years from the date of acquiring the land, Hendrix Bank will offer it
for sale generally; and at any time prior to that it may with the consent of UH, offer the
land for sale;
In the event of Hendrix Bank selling the land to a third party, the proceeds of the sale
shall be deducted from the memorandum account and the balance shall be settled
between UH and Hendrix Bank in cash, as a retrospective adjustment to the price at
which Hendrix Bank originally purchased the land from UH;
The finance director of UH entered into this transaction to raise finance without increasing the gearing
ratio of UH. He has recorded the transaction as a normal disposal of property, plant and equipment.
(b)
Discuss whether the finance director’s proposed accounting treatment of the sale and the
repurchase of land is correct.
(7 marks)
(c)
Discuss briefly the importance of ethical behaviour in the preparation of financial statements
and whether the finance director’s proposed accounting treatment for the sale and repurchase of
the land could constitute unethical behaviour.
(8 marks)
Note: Requirement (c) includes two professional marks for the development of the discussion of the
ethical responsibilities of the UH group.
(Total = 50 marks)
Question 2
Tele8 is a company in the telecommunications industry providing landline and mobile telephone
connections. The company is currently preparing its consolidated financial statements for the year
ending 31 October 2013.
a)
Tele8 charges a one-time connection fee to a customer, this enables the customers to enjoy the
landline services for 5 years. The directors at Tele8 felt that the entire connection fee should be
recognized at the date of connection.
(4 marks)
b)
The purchase of license for operations from governments are treated as intangible assets and
are capitalized at their initial cost. As Tele8 is confident that the license will be renewed (at no
additional cost) after 10 years, no amortization is charged in the current year.
(4 marks)
c)
Tele8 has sold its office building to a third party institution on 1 Nov 2012 and then leased it
back for a period of 15 years. The sale price of the building and its fair value are $8.5 million
which is the present value of the minimum lease payments. At the end of the agreement the
building will be transferred back to Tele8 at nil cost. At 1 Nov 2012 the carrying value of the
building was $7 million. The rental under the lease agreement is $0.8 million per annum
payable in advance and the interest rate implicit in the lease is 5.44%.
The directors of Tele8 are proposing to include the profit in disposal of $1.5 million in profit or
loss for the year and to treat the lease as an operating lease.
(6 marks)
d)
On 1 Nov 2012 Tele8 held a 30% holding in a communications software development company
CSD, which originally cost $24 million a number of years ago. On 31 March 2013, Tele8 sold a
15% holding in CSD reducing its investment to a 15% holding meaning that Tele8 no longer
exercises significant influence over CSD.
Before the sale of the shares the net asset value of CSD at 31 March 2013 was $100 million,
rising from $70 million on the date of the original acquisition. Tele8 received $20 million for
its sale of the shares in CSD and the fair value of its remaining holding in CSD at 31 March
2013 was $17 million. At 31 Oct 2013 the fair value of this holding was $19 million.
(6 marks)
e)
Tele8 has a property held under finance leases which is surplus to requirements, the annual
lease payment is $3 million per annum payable in arrear for 5 years. Although every effort has
been made to sub-let these premises in the current economic climate it is recognized that it may
not be possible to do so immediately. Therefore there will be a shortfall arising from sublease
rental income being lower than the lease costs being borne by $1 million over the remaining
lease period. Cost of funds can be taken as 5% per annum
(3 marks)
Effective communication to the directors.
(2 marks)
Required:
Write a report to the directors of Tele8 explaining how each of these matters should be dealt with in
the group financial statements for the year ending 31 October 2013.
(25 marks)
Question 3
Draft financial statements have been prepared for JJW, a public limited company, and these show a
profit before tax of $1,110,000 for the year ended 31 October 2013, but no accounting entries have
been made in respect of the following financial instruments.
The following information relates to the financial instruments held by JJW during the year:
(i)
$1,200,000 6% 4 year bonds issued by JJW at a discount of 3% on 1 November 2012. The
internal rate of return of the debt is 7%.
(ii)
6% debentures in LKW, redeemable at par on 31 October 2014 with interest paid annually
on 31 Oct. JJW had paid $500,000 (the nominal value) for the debentures on 1 Nov 2012 and
intends to hold these debentures until their maturity date.
Market rates for similar debentures was 6% on 1 Nov 2012 when it is issued, it has
increased to 7% on 31 Oct 2013.
On 31 Oct 2013, JJW was notified that due to financial difficulties, LKW will only be able to
repay $400,000 on the original maturity date. All interest will however be paid in full.
(iii)
JJW had issued 1,000,000 $1 ordinary shares issued at par when it was set up in 2010 and a
further 500,000 $1 ordinary shares on 1 January 2011 at $1.40 per share. Issue costs amounted
to $20,000 in 2010 and $15,000 in 2011.
Market value of each share was $3.00 at 31 Oct 2013.
(iv)
Shares held as an “Available for sales” investment in another company BCW. The shares were
bought in March 2012 for $99,000 inclusive of transaction costs of $1,000. Open market value
of the shares was $120,000 at 31 Oct 2012. The shares were sold for $114,000 in 12 Nov 2012.
JJW’s accounting policy states that fair values are determined by reference to open market values
where available and where not available by discounting the relevant cash flows at a market rate of
interest on similar instruments.
Required
(a)
Prepare a calculation of the revised profit before tax after making the necessary adjustments
in respect of the financial instruments. Include an explanation of the treatment of each of the
financial instruments.
(11 marks)
(b)
There has been a great deal of debate over the accounting treatment of financial instruments,
particularly over the increased use of fair values. Discuss the benefits and drawbacks of using
fair values to measure financial instruments and how these re-measurements are presented in
the statement of comprehensive income.
(6 marks)
(c)
The directors of JJW have asked for your advice on the accounting implications of two
transactions.
(i)
(ii)
JJW (whose currency is $) is negotiating a contract to sell components to a French
purchaser, whose currency is FFranc, the contract is denominated in FFranc. This is the
first contract that JJW has entered into with this purchaser but the terms relating to
physical delivery of the components are identical to those of their normal sales.
JJW is considering leasing a property. Under the terms of the agreement the rental
payments are contractually fixed for the first year but thereafter fluctuate in line with
the increase or decrease in the company’s share price.
Required
Explain the principles outlined in the IAS 39 Financial Instruments: Recognition and Measurement in
respect of embedded derivatives and how the two transactions should be reflected in the financial
statements of JJW for the year ended 31 Oct 2013.
(6 marks)
Appropriateness and quality of discussion.
(2 marks)
Work to the nearest $’000. Ignore deferred tax.
(Total = 25 marks)
Present values
Period
6%
1
0.943
2
0.890
3
0.840
4
0.792
7%
0.935
0.873
0.816
0.763
71/2 %
0.930
0.865
0.805
0.749
8%
0.926
0.857
0.794
0.735
Present value of annuities
Period
6%
1
0.943
2
1.833
3
2.673
4
3.465
7%
0.935
1.808
2.624
3.387
71/2 %
0.930
1.796
2.601
3.349
8%
0.926
1.783
2.577
3.312
Question 4
The increasing trend of providing management commentary in corporate reporting has led IASB to
issue a discussion paper entitled “Management Commentary”, to provide guidelines to companies on
the inclusion of “Management Commentary”.
Required
(a)
Why is a management commentary accompanying a set of financial statements considered
necessary?
(7 marks)
(b)
Identify and explain the key contents of a management commentary.
(c)
Critically appraise the following extract from a company’s management commentary section
on business performance and prospects:
(10 marks)
Appropriateness and quality of discussion of items in (a) – (c)
(6 marks)
(2 marks)
(Total = 25 marks)
Business performance
Sales revenues from the Group’s continuing businesses rose to $59 million in 20X5, an increase of
12% in local currencies (9% in dollars); these results exclude the results of businesses which were sold
in 20X4. Both of the Group’s divisions, Office products and Office systems, grew significantly faster
than the global market. The Office products division sales advanced 13% in local currencies (10% in
dollars). In the Office systems division sales rose 8% in local currencies (6% in dollars), which posted
growth significantly above the market average.
Operating profit from continuing businesses was up substantially for the year, advancing 24% in local
currencies (20% in dollars) to nearly $14 million (before exceptional items). The operating profit
margins in both divisions again increased sharply. In the office products division the operating profit
margin rose 1.9 percentage points to 25.7%, while the margin in the office systems division gained 2.4
percentage points to reach 21.4%. Strong sales growth, productivity improvements and the gains
realized on the disposal of non-core products and technologies as the group continued to realign its
product portfolio were major contributors to the Group’s improved profitability. Together these factors
more than offset increased costs for new product launches and expenditures on licensing agreements
for products and technologies. Even excluding gains from the disposal of products, the operating
margin improved significantly.
Thanks to the strong operating performances of the Group’s continuing businesses, EBITDA from
these businesses increased by 15% to $9.2 million. The EBITDA margin in the Office products
division reached 32.6%, compared with 31.5% the year before, and in the Office systems division the
EBITDA margin advanced 2.7 percentage points to 31.2%.
The sale of non-core areas of the Office products division resulted in an exceptional pre-tax gain
totalling $4.6 million.
The Group also completed a major acquisition during the year, purchasing Tentax in the United States
in early 2005 for a total consideration of $3.6 million.
Future prospects
In 20X6 the results in the Office products division will be influenced by the expiry of the US patent for
a key product and by costs for product launches in key markets and significant development activities.
As an overall outcome we anticipate local-currency sales growth above the world market and an
operating profit margin (before exceptional items) broadly in line with that for 20X5.
In 20X6 the office systems division expects to outgrow the world market again in terms of localcurrency sales. The division also expects further progress towards its goal of an operating profit margin
(before exceptional items) of around 23% in 20X7.

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