CORPORATE REPORTING

JULY 2019 INTERIM ASSESSMENT

Instructions

The exam needs to be attempted on the blank version of the ICAEW software, which you should
have downloaded per the instructions on MyKaplan.

You then need to save your answers as a PDF and upload for marking via MyKaplan – the
instructions for how to do this are also on MyKaplan.

Please ensure that this is submitted by the given deadline in order for it to be marked.

You may use pen and paper for additional notes but these cannot be uploaded and will not be
marked.

Your results will be reported to PwC.

If you need any further guidance please contact your PLA.

© Kaplan Financial 2019

Question 1 – Talbot plc
Talbot plc (Talbot) is a glass recycling company, whose shares are quoted on AIM. You are the
company's financial controller, and the year end is 30 April 20X4.
Demand for glass recycling has expanded rapidly in the UK, and accordingly Talbot has grown
organically in its home market. Recycling is also becoming more popular overseas, as companies
become more aware of their responsibilities to stakeholders. Flask Co (Flask), a recycling company
operating in Ruritania, has achieved substantial growth in recent years and John Goddard, the Chief
Executive of Talbot, saw it as a target for acquisition.
Accordingly, on 1 May 20X3, Talbot acquired 75% of the issued ordinary share capital of Flask for
240 million Ruritanian kromits (K). The retained earnings of Flask at that date were 160 million
kromits.
It is now 15 June 20X4. You have received the following email from the finance director of Talbot.
To: Group Financial Controller
From: Finance Director
Date: 15 June 20X4
Subject: Acquisition of Flask Co
Please find attached the separate financial statements of Talbot plc and Flask Co (see Appendix 1). I
also attach some notes relating to the acquisition; some of this information has come from the Chief
Accountant of Flask. The notes are contained in Appendix 2.
John Goddard is a little concerned that the performance of Flask Co has failed to meet his
expectations. He was wondering if there was a way to minimise disclosure about its results, or, failing
that, whether there could be a way that the favourable movement in exchange rates might be used to
show these results in the best possible light.
I therefore need you to prepare a report containing the following information:
• An explanation of the required financial reporting treatment of Flask Co.
• A draft of the consolidated financial statements, together with supporting workings.
Assume the tax figures are correct for the purposes of your report.
Requirement
Prepare the report required by the finance director of Talbot plc. Total: 35 marks

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Appendix 1: Separate financial statements
Statement of financial position at 30 April 20X4
Talbot Flask
£m Km
Property, plant and equipment 594 292
Investment in Flask 96 –
Loan to Flask 10 –
Current assets 710 204
1,410 496
Equity
Ordinary shares of £1/K1 120 64
Share premium account 100 40
Retained earnings 720 190
940 294
Non-current liabilities 60 82
Current liabilities 410 120
1,410 496

Statements of profit or loss for year ended 30 April 20X4

Talbot Flask
£m Km
Revenue 400 284
Cost of sales (240) (192)
Gross profit 160 92
Distribution and administrative expenses (60) (40)
Profit from operations 100 52
Interest receivable 8 –
Interest payable – (4)
Profit before taxation 108 48
Income tax expense (40) (18)
Profit after taxation 68 30

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Appendix 2: Notes
1 As you know, under revised IFRS 3, Business Combinations we may now value the non-controlling
interest at acquisition at fair value and we want to do this. The fair value of the non-controlling interest
of Flask at acquisition was K76 million.
2 Goodwill is reviewed for impairment annually. At 30 April 20X4, the impairment loss in respect of
recognised goodwill (group plus non-controlling interest) was K11.2 million.
3 During the financial year Flask has purchased raw materials from Talbot and denominated the
purchase in kromits in its financial records. The details of the transaction are set out below:
Selling price Talbot's margin
Date of transaction £m on selling price
Raw materials 1 February 20X4 12 20%
At the year-end, half of the raw materials purchased were still in the inventory of Flask. The intragroup
transactions have not been eliminated from the financial statements and the goods were recorded by
Flask at the exchange rate ruling on 1 February 20X4. A payment of £12 million was made to Talbot
when the exchange rate was K2.2 to £1. Any exchange gain or loss arising on the transaction is still
held in the current liabilities of Flask.
4 Flask has not revalued its assets or issued any share capital since its acquisition by Talbot.
5 Talbot had made an interest free loan to Flask of £10 million on 1 May 20X3. The loan was repaid on
30 May 20X4. Flask had included the loan in non-current liabilities and had recorded it at the
exchange rate at 1 May 20X3.
6 The fair value of the net assets of Flask at the date of acquisition is to be assumed to be the same as
the carrying amount.
7 Talbot has paid a dividend of £16 million during the financial year.
8 The functional currency of Flask is the kromit.
9 The following exchange rates are relevant to the financial statements:

K to £
30 April/1 May 20X3 2.5
1 November 20X3 2.6
1 February 20X4 2.0
30 April 20X4 2.1
Average rate for year to 30 April 20X4 2.0

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Question 2 – Hoop plc
Hoop plc (Hoop) is an AIM-listed company which operates in the food packaging industry. It provides
a wide range of food products to UK and other European food retailers and food distributors.
You work for Rawls and Nosick LLP (RN), a firm of ICAEW Chartered Accountants. Hoop is an audit
client of RN. RN is currently completing the audit for the accounting year ended 30 June 20X4.
You have been transferred to the Hoop audit to replace the current audit senior, Gary Kant, who was
needed by another client. The engagement manager, Jane Leigh, provided you with some
instructions:
"I am concerned about the completion of this audit, as Gary is no longer available. Additionally, the
finance director is ill and the Hoop finance team lacks expertise on some financial reporting matters.
As a result, they may need some guidance on the final adjustments to the financial statements. Gary
has left several financial reporting and audit issues unresolved, which he has highlighted in his
working papers (Exhibit).
The planning materiality is £400,000 based on a profit before tax of £8 million and revenue of
£42 million. The engagement partner's final review is scheduled for next week.
In order to complete the required procedures on time, I would like you to prepare a working paper for
the audit team in which, for each of the issues raised by Gary (Exhibit), you set out and explain:
• the appropriate financial reporting treatment; and
• the key audit risks and the detailed audit procedures.
In addition, Hoop has been much more profitable this year, in comparison with recent years, and
consequently Gary believes that the Hoop board may be trying to reduce the profit for the year, as
much as possible, by its choice of accounting policies and estimates. I do not agree with Gary, but we
need more evidence. Therefore, for the issues highlighted by Gary (Exhibit), please explain whether
these give any evidence of manipulation of profit in order to understate reported income.
I will ask the tax department to review the deferred tax and current tax at a later date, so do not worry
about tax for now."
Requirement
Respond to the instructions from the engagement manager, Jane Leigh. Total: 25 marks

Exhibit: Unresolved financial reporting and audit issues – prepared by Gary Kant
(1) Pension obligation
Hoop operates a defined benefit pension scheme for its employees, although the scheme was closed
to new employees three years ago. Employees in the scheme are required to make contributions. I
have completed the audit procedures on the scheme assets, valued at £19.4 million at 30 June 20X4,
and these have been reviewed. The scheme assets at 30 June 20X3 also had a value of £19.4 million.
In respect of pension obligations, however, my audit procedures are incomplete. I have agreed the
present value of the obligations with the actuary appointed by RN. I have also verified the cash
contributions and the benefits paid to supporting documentation. I have not, however, had the chance
to carry out any audit procedures in respect of the service costs, past service costs or interest costs. I
am concerned about this as Hoop improved the pension benefits to all existing employee members of
the scheme on 1 July 20X3, based on their historic service with Hoop.
The only entries made by Hoop during the year are in respect of the employer pension contributions
and these payments have been treated as an expense.

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 Details of the scheme for the year ended 30 June 20X4 are as follows:
£'000
Present value of plan obligations at 30 June 20X3 20,500
Present value of plan obligations at 30 June 20X4 22,700
Past service cost (effective from 1 July 20X3) 800
Current service cost 2,100
Pension contributions:
Employer's pension contributions 1,000
Employees' pension contributions 900
Benefits paid 1,500

Annual market yield on high-quality corporate bonds with a similar maturity date:
At 30 June 20X3 4%
At 30 June 20X4 5%
The current service cost accrues evenly throughout the year. The contributions and benefits are paid
on the 15th of each month during the year.
(2) Change of accounting policy – inventories
The Hoop directors have informed me that they wish to change the accounting policy for inventory
measurement from first-in first-out (FIFO) to weighted average cost. Closing inventories measured for
the years ended 30 June under the two different methods are as follows:
20X3 20X4
£'000 £'000
FIFO 785 795
Weighted average cost 782 786

I am concerned about the impact on profit of the change in the accounting policy for the year ended 30
June 20X4 and I am unsure about the audit procedures I need to perform in respect of this issue.
(3) Revenue recognition
Larger customers who order significant volumes of non-perishable produce require a production run
which is specific to them. In the past, some of these customers have changed their minds after
production has commenced and Hoop has been left with inventories which it cannot sell.
As a result, Hoop has introduced new contract terms. These require customers to pay a 20% cash
deposit before commencement of production in order to reduce the risk of obsolete inventory.
At 30 June 20X4, an order for packaged foods produced for a large customer, DistribFoods plc, had
been completed under these new contract terms. 30% of the goods, by value, were still in inventory at
30 June 20X4, while the remainder had been delivered to the customer on 14 June 20X4.
On 19 May 20X4 a 20% deposit of £90,000 was received by Hoop from DistribFoods for the entire
order. Hoop recognised this £90,000 as revenue at that date, but did not recognise any other revenue
for this contract in the year ended 30 June 20X4. The production cost to Hoop of this contract was
£200,000, which has been recognised, in full, in cost of sales in the year ended 30 June 20X4.

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