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CORPORATE REPORTING
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Corporate Reporting
The Institute of Chartered Accountant
Accountantss in England and Wales
ISBN: 978-1-78363-795-9
Previous ISBN: 978-1-78363-487-3
The content of this publication is intended to prepare students for the ICAEW
examinations,, and should not be used as professional advice.
examinations
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Marketing
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© ICAEW 2018
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ii
The publishers are grateful to the IASB for permission to reproduce extracts from
the International Financial Reporting Standards including all International
Accounting Standards, SIC and IFRIC Interpretations (the Standard
Standards).
s). The
Standards together with their accompanying documents are issued by:
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Marketing
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iii
Contents
The following questions are exam-standard. Unless told otherwise, these questions are the style, content
and format that you can expect in your exam.
Time Page
allocation
Title Marks Mins Question Answer
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36 NetusUK Ltd 30 63 93 369
369
37 Verloc Group 30 63 96 372
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iv Corporate Reporting
Time Page
allocation
Title Marks Mins Question Answer
38 KK 30 63 100 380
39 UHN (July 2014) (amended) 45 95 102 387
40 ETP (July 2014) 30 63 106 393
41 Couvert (November 2014) 40 84 109 398
42 ERE (November 2014) 34 71 112 406
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Marketing
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Contents v
Exam
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Marketing
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vi Corporate Reporting
Question Bank
Privacy Policy
Marketing
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1
Privacy Policy
Marketing
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2
1 Kime
Kime plc is in the property industry, operating in both the commercial and private housing sectors.
Kime uses the cost model for measuring its property portfolio in its financial statements and has a
Using the trial balance and after making adjustments for matters arising from your review of the
outstanding issues (Exhibit 1) prepare a draft statement of financial position and statement of
comprehensive income."
Requirement
Respond to the finance director's instructions. Total: 30 marks
Exhibit: Work papers prepared by the junior assistant
Trial balance at 30 June 20X2
Debit Credit
Notes £m £m
Land 1 30.5
Buildings – cost 132.7
Buildings – accumulated depreciation 82.5
Plant and equipment – cost 120.0
Plant and
Trade equipment
receivables – accumulated depreciation
depreciation 2 174.5 22.8
22.8
Cash and cash equivalents 183.1
Ordinary share capital (£1 shares) 100.0
This website stores data such as
Share premium 84.0
cookies to enable essential site
Retained earnings at 1 July 20X1 102.0
functionality, as well as
Long-term marketing,
borrowings 80.0
personalization,
Deferred tax liability You
and analytics. at 1 July 20X1 3 33.0
may change yourand
Trade settings
otheratpayables
any time 54.9
or accept the default settings.
Sales 549.8
Operating costs 322.4
Distribution costs 60.3
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Administrative expenses
expenses 80.7
Finance costs 4.8
Marketing 1,109.0 1,109.0
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Notes and outstanding issues
(1) Freehold land and buildings – at 30 June 20X2
20X2
Land Buildings Total
£m £m £m
Cost:
At 1 July 20X1 34.0 118.4 152.4
Additions – 26.8 26.8
Disposals (3.5) (12.5) (16.0)
At 30 June 20X2
20X2 30.5 132.7 163.2
Accumulated depreciation:
depreciation:
At 1 July 20X1 – 84.8 84.8
Charge for the year – 5.9 5.9
Disposals – (8.2) (8.2)
At 30 June 20X2
20X2 – 82.5 82.5
Carrying amount:
At 30 June 20X2
20X2 30.5 50.2 80.7
The accounting policy states that land is not depreciated and all buildings are depreciated over
their expected useful life of 50 years with no residual value.
Additions –
Additions – total £26.8 million
The additions comprise two major commercial property projects: (These are the first construction
projects undertaken by Kime for a number of years):
Renovation of Ferris Street property (£8.8 million)
million)
Kime commenced this renovation during the year ended 30 June 20X2. The budgeted cost of
this project is £15 million, of which £12 million (80%) has been designated as capital
expenditure by the project manager. The remaining £3 million is charged in the budget as
repairs and maintenance cost.
In the year ended 30 June 20X2, the company incurred costs of £11 million on the project.
Therefore I have capitalised 80% of the cost incurred in line with the original budget.
Construction of a sports stadium in London (£18 million)
million)
On 1 July 20X1, Kime began constructing a sports stadium for a local authority, which was
expected to take 20 months to complete. Kime agreed a total contract price of £34 million.
Total contract costs were expected to be £16 million, however costs incurred at 30 June 20X2
are £18 million and these have been capitalised in the year ended 30 June 20X2. Reliable
estimates of costs to complete the project have been certified by the company's own surveyor
to be £4.5 million. He has also provided a value of work completed to date of £23.8 million.
In the
This website stores data yearasended 30 June 20X2, Kime raised invoices totaling £17 million to the local
such
authority
cookies to enable essential siteand recognised this amount in revenue for the year. The local authority had paid all
functionality, as well as marketing,invoices by 30 June 20X2.
outstanding
personalization,Disposals
and analytics. You
may change your settings at any time
Kime settings.
or accept the default disposed of two properties during the year:
Accumulated
Cost of Cost of depreciation at
Privacy Policy Property
Property land buildings disposal date
£m £m £m
Marketing FX House 2.0 8.0 4.2
Estate agency buildings 1.5 4.5 4.0
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Total 3.5 12.5 8.2
Analytics
FX House
This property was leased to a third party under an agreement signed on 1 January 20X2. This is a
40-year lease and the title to both the land and buildings transfers to the lessee
l essee at zero cost at the
end of the lease term. The annual rental is £2 million payable in advance. The present value on
1 January 20X2 of the future lease payments discounted at the interest rate of 10% implicit in the
lease was £21.5 million, which clearly exceeds the carrying amount at the date of disposal and the
lease is therefore a finance lease.
I have derecognised the property and recognised a loss on disposal equal to the carrying amount
of £5.8 million in administrative expenses for the year ended 30 June 20X2. The first annual lease
payment received on 1 January 20X2 has been credited to finance costs for the year ended
30 June 20X2.
Estate agency buildings
Due to the recession Kime has reconsidered its business model and closed down its high street
estate agencies buildings from which it operated its private housing business. The estate agencies
business is now operated entirely online.
In May 20X2 a contract for the sale of these buildings, including land was agreed for a price of
£10 million, with the sale to be completed in September 20X2. A gain has been recognised in
administrative expenses in profit or loss of £8 million and a receivable of £10 million in trade
receivables.
(2) Trade receivables and forward contract
contract
Included in trade receivables is an amount due from a customer located abroad in Ruritania. The
amount (R$60.48 million) was initially recognised on 1 April 20X2 when the spot exchange rate
was £1= R$5.6.
At 30 June 20X2,
20X2, the exchange
exchange rate was £1 = R$5.0. No adjustment has been made to the trade
receivable since it was initially recognised.
Given the size of the exposure, the company entered into a forward contract, at the same time as
the receivable was initially recognised on 1 April 20X2, in order to protect cash flows from
fluctuations in the exchange rate. The
The forward contract
contract is to sell R$60.48
R$60.48 million and the
the
arrangement satisfies the necessary criteria to be accounted for as a hedge.
At 30 June 20X2,
20X2, the loss in fair value of the
the forward contract
contract was £1.5 million.
million. The company
elected to designate the spot element of the hedge as the hedging relationship. The difference
between the change in fair value of the receivable and the change in fair value of the forward
contract since inception is the interest element of the forward contract.
(3) Current and deferred taxation
taxation
I have not yet made any adjustments for deferred or current taxation, but have been told to make
the following assumptions:
The tax rate is 24%.
Taxable profits are calculated on the same basis as IFRS profits except for temporary
This website stores data such asarising on plant and equipment.
differences
cookies to enable essential site
as
functionality, as well
Themarketing,
deferred tax temporary taxable differences have risen by £14 million over the year to
personalization, and 30 June 20X2
analytics. You after the effects of accounting for depreciation on plant and equipment only.
No taxatrelief
may change your settings is available on freehold buildings and land.
any time
or accept the default settings.
2 Mervyn plc
Mervyn plc manufactures electrical components for the motor trade. Mervyn is in the process of
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finalising its financial statements for the
the year ended 30 September 20X7.
20X7. Due to cash flowflow problems
Mervyn
Marketing sold two pieces of its freehold land during the current financial year. The land was held in the
financial statements
statements at cost. The finance
finance director, reviewing
reviewing the draft financial
financial statements, has
has asked for
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your advice on these
these sales as well as on some unusual features identified.
identified.
Analytics
An extract from
from the statement
statement of changes in equity in the draft financial
financial statements shows:
Retained earnings
£'000
At 1 October 20X6
20X6 2,190
Profit for the year 1,471
Dividends paid (515)
At 30 September
September 20X7 3,146
There is a note explaining that there is no 'other comprehensive income' in the statement of profit or
loss and other comprehensive income as there are no gains and losses other than those recognised in
profit or loss for the year.
The statement of profit or loss
l oss and other comprehensive income shows an 'exceptional' gain relating to
gains on the two land bank sales:
£'000
The Ridings 100
Hanger Hill Estate 250
350
A contract for
for the sale of land at The Ridings was entered
entered into in June
June 20X7 conditional
conditional upon obtaining
obtaining
a detailed planning consent, but only outline consent had been obtained by 30 September 20X7.
Planning consent was received in October and the landl and sale was completed in November 20X7. Tax of
£27,000 has been provided on the sale.
The sale of land at Hanger Hill to the Beauford Corp on 1 October 20X6 took place under a sale and
leaseback arrangement. The terms of the lease arrangement were:
Lease term Five years
Rentals first payable on 30 September 20X7 £80,000 per annum
On 1 October 20X6 the carrying amount of the Hanger Hill land was £900,000 and its fair value was
£950,000. The first rental was paid on its due date and charged to operating expenses.
Beauford Corp is expected to take possession of this land at the conclusion of the lease.
The cumulative discount factor for a five-year annuity at 10% (the appropriate interest rate for this
transaction) is 3.791.
Operating expenses include £405,000 relating to the company's defined benefit pension scheme. This
figure represents the contributions paid into the scheme in the year. No other entries have
have been made
relating to this scheme. The figures included in the draft statement of financial position represent
opening balances as at 1 October 20X6:
£'000
Pension scheme assets 2,160
Pension scheme liabilities (2,530))
(2,530
(370)
Mervyn's accounting policy is to recognise any gains and losses on remeasurement of the defined
benefit asset or liability (actuarial gains and losses) in accordance with IAS 19, Employee Benefits (revised
2011).
In the tax regime in which Mervyn operates, a tax deduction is allowed on payment of pension benefits.
No tax deduction is allowed for contributions made to the scheme. The rate of tax applicable to 20X6,
20X7 and announced for 20X8 is 23%.
In March 20X7, a customer of Mervyn brought legal proceedings against Mervyn for alleged injury to
employees and loss of business through a fault in one of Mervyn's products. In September 20X7, the
case came to court but Mervyn's lawyers think that it could be a very lengthy case and believe that
Mervyn will lose the case. The actual cost of damages and timing of the case are far from clear but
management have made a number of estimates. They believe that the best outcome for Mervyn will be
damages of £200,000 payable in one year's time. The worst possible outcome would be for the case to
continue for three more years in which case the estimate of damages and costs is £1,500,000 payable in
three years' time. A further estimate, between these two extremes, is that damages of £800,000 will be
payable in two years' time. Management's estimates of probabilities are best outcome 25%, worst case
outcome 15% and middle ground outcome 60%. No provision nor any disclosure has been made for
this court case in the financial statements.
Mervyn has a new arrangement with one particular customer that Mervyn will hold the goods that it
sells until such time as the customer needs them. The customer is invoiced
i nvoiced for the goods when they are
ready for delivery, but they are held until the customer needs them. The accountant of Mervyn has not
been recognising the revenue on these sales until the delivery has taken place to the customer. At
30 September 20X7, there were goods with a selling price of £138,000 and cost of £99,000 which had
not yet been delivered to the customer. These goods had been included at cost when the inventory
count took place.
The company
10,000 shares.granted share
The SARs appreciation
provide employeesrights (SARs)
at the datetothe
itsrights
employees on 1 October
are exercised 20X5
with the based
right on
to receive
cash equal to the appreciation in the company's share price since the grant date. The rights vested on
30 September 20X7 and payment was made on schedule on 1 November 20X7. The fair value of the
SARs per share at 30 September 20X6 was £6, at 30 September 20X7 was £8 and at 1 November 20X7
was £9. The company has recognised a liability for the SARs as at 30 September 20X6 based upon
IFRS 2, Share-based Payment but the liability was stated at the same amount at 30 September 20X7.
If any figures are to be discounted, a rate
ra te of 10% per annum should be used.
Requirement
Explain how each of the above transactions should be treated in the financial statements for the year
ended 30 September 20X7, briefly explaining how treatment of the sale and leaseback would change
under IFRS 16, Leases and prepare a statement of amended profit for the year ended
30 September 20X7. Total: 30 marks
3 Billinge
You are Anna Wotton,
Wotton, an ICAEW
ICAEW Chartered Accountant,
Accountant, and have
have recently been appointed as the
This website stores controller
financial data such
contro asBillinge, a manufacturer
ller at manufacturer of electrical co
components
mponents for vehicles.
vehicles. Billinge is a public
cookies to enable essential site
limited company with a number of subsidiaries located throughout the country and one foreign
functionality, as well as
subsidiary, marketing,
Quando.
personalization, and analytics. You
Peter McLaughlin, Finance Director of Billinge, is in the process of finalising the financial statements for
may change your settings at any time
the year ended 31 October 20X3. However, he is unsure about the impact of deferred taxation on
or accept the default settings.
various transactions of the company, because the previous financial controller, Jen da Rosa, always dealt
with this side of the financial statements preparation.
Privacy Policy ( Exhibit)) prepared by Jen before she left, which contains a number of
Peter has provided you with a file (Exhibit
transactions that have deferred tax implications. He has asked you to prepare a briefing note which
Marketing
provides explanations and calculations of the deferred tax implications for each of the transactions in the
file (Exhib
(Exhibit)
it) on
on the consolidated
consolidated financial
financial stateme
statements
nts of
of Bill
Billinge
inge for the
the year
year ended
ended 31 October
October 20X3.
20X3.
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In the country in which Billinge operates, the applicable tax rate is 30%. Peter has asked you to use the
Analytics
working assumption that Billinge will continue to pay tax at the current rate of 30%.
Requirement
Prepare the briefing note requested by Peter McLaughlin. Total: 30 marks
marks
Exhibit: Deferred tax issues identified by Jen da Rosa
(1) Fair value adjustment
adjustment
On 1 November 20X2, Billinge acquired a 100% subsidiary, Hindley for £10 million. On that date,
the fair value of Hindley's net assets was £8 million and the carrying amount was £7 million, which
is also the tax base under local tax law. The difference between the fair value and book value of net
assets relates to an item of property, plant and equipment which Hindley currently has no plans to
sell.
(2) Share options
options
On 1 November 20X1, Billinge granted 1,000 share options each to its 500 employees providing
they remained in employment until 31 October 20X4. The fair value of each option was £5 on
1 November 20X1, £6 on 31 October 20X2 and £7 on 31 October 20X3. Local tax law allows a tax
deduction at the exercise date of the intrinsic value of the options. The intrinsic value of each
option was £3 at 31 October 20X2 and £8 at 31 October 20X3. The percentage of employees
expected to leave over the vesting period was 20% as at 31 October 20X2 and has been revised
upwards to 25% as at 31 October 20X3. The deferred taxation on this transaction was correctly
accounted for in the year ended 31 October 20X2 but the finance director is unsure how to
account for the deferred taxation in the current year.
(3) Goods purchased from subsidiary
subsidiary
A wholly owned
owned subsidiary, Ince, sold goods for £5 million to Billinge on 20 September
September 20X3 at a
mark-up of 25%. At 31 October 20X3, Billinge has sold a quarter of these goods to third parties.
The financial
financial director
statemen
statementsts ofdoes
the not understand
subsidiary and how
and the this transaction
group for taxationshould
taxation be dealt with in the
purposes.
(4) Profits from foreign subsidiary
subsidiary
Quando, the 100% owned foreign subsidiary of Billinge, has undistributed post-acquisition profits
of 5 million Corona which would give rise to additional tax payable of £0.4 million if remitted to
Billinge's tax regime. As Quando is a relatively new and rapidly expanding company, Billinge
intends to leave the earnings within Quando for reinvestment.
(5) Property, plant and equipment
On 1 November 20X2, Billinge purchased an item of property, plant and equipment for
£12 million which qualified for a government capital grant of £2 million. The asset has a useful life
of five years and is depreciated on a straight line basis. Capital allowances are restricted by the
amount of the grant. Local tax law specifies a tax writing down allowance of 25% per annum.
(6) Lease
Due
now,toBillinge
the age hasofalways
its assets, Billinge its
purchased hasassets
recently begun
outright fora cash.
programme of capital
However, due to expenditure. Until
liquidity problems,
Billinge had to lease an item of machinery on 1 November 20X2. The asset has an expected
economic
This website stores life of
data such asfive years and the lease term is also for five years. Both the present value of
cookies to enable essential site payments and fair value of the asset are £6 million. The annual lease payments are
minimum lease
functionality, as £1.5
well asmillion payable in arrears on 31 October and the effective interest rate is 8% per annum.
marketing,
personalization,Under local tax You
and analytics. law the company can claim a tax deduction for the annual rental payment as the
may change your asset does not
settings qualify
at any time for capital allowances.
or accept the default settings.
4 Longwood
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The Longwood Group is a listed European entity specialising in high grade alloy production for civil
aviation, military and specialist engineering applications. On 1 January 20X7, Longwood completed the
Marketing
acquisition of a private company, Portobello Alloys, to strengthen its product offering in high
Personalization
performance electro-magnetic alloys.
Analytics
The total price paid to acquire the entire share capital of Portobello Alloys was £57 million in cash paid
on the deal date, along with a further £10 million in deferred cash and 5 million shares in The
Longwood Group, both to be paid or issued in three years' time. The share price of The Longwood
Group was £1.88 at 1 January 20X7, but rose to £2.04 shortly after the acquisition was completed. The
best estimate of the share price on the transfer date in three years is £2.25. The appropriate discount
rate for deferred consideration is 10%.
Longwood paid its bankers and lawyers fees of £0.8 million in connection with the deal. Longwood
estimates that £0.2 million of the finance department costs relate to time spent on the acquisition by
the Finance Director and his team.
Below is the draft 'deal-date' statement of financial position of Portobello Alloys. You may assume the
carrying amounts of assets and liabilities are equal to their fair values, except as indicated in the
information that follows.
Portobello Alloys – Statement of financial position at 1 January 20X7
Carrying
amount
£m
Property, plant and equipment 18.92
Development asset 0.00
Available-for-sale investments
investments 4.37
Deferred tax asset 0.77
Non-current assets 24.06
Inventory 7.33
Accounts receivable and prepayments 4.17
Cash and equivalents 4.22
Current assets
assets 15.72
15.72
Total assets 39.78
Both Longwood and Portobello report to 31 December each year. The Board has asked your firm to
This website stores data such as
examine the deferred tax implications of various areas relating to the acquisition.
cookies to enable essential site
functionality, as well as
Research andmarketing,
development
personalization, and analytics. You
Portobello Alloys applied a policy of expensing all development expenditure as incurred. Longwood's
may change your settings at any time
policy is to capitalise development cost as an intangible asset under IAS 38. The carrying amount of the
or accept the default settings.
development asset in the deal-date statement of financial position was £0 million. The fair value of the
development asset was actually £5.26 million at the deal date. None of this development asset will be
amortised over the next year.
Privacy Policy
Property, plant and equipment
Marketing
Portobello's premises are located on a prime piece of commercial real-estate. The surveyors have
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indicated that the land is worth £2.73 million in excess of its carrying amount in the financial statements
Analytics
of the company. Thelose
Longwood
location, they could some ofGroup
the keyhas no Longwood's
staff. intention of selling the
policy is toproperty as, ifatitdepreciated
carry assets changed cost,
and it does not revalue any assets on a regular basis.
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Financial reporting questions 9
Retirement benefit obligation
Portobello operates a defined benefit plan for its key research and production employees. The plan asset
manager has made some bad equity investments over the years, and the plan is in deficit by
£1.65 million. Portobello only recognised a liability of £0.37 million in its financial statements. The local
tax authorities grant tax relief on the cash contribution into the plan.
Tax losses
Portobello made a disastrous foray into supplying specialist alloys to a now defunct electronics business,
Electrotech. It set up a special division, took on new premises and staff, and spent a lot of money on
joint development with its client. Electrotech promptly went into liquidation. Portobello incurred total
tax losses of £7.40 million over
over the two years that it was involv
involved
ed with Electrotech – it has now paid all
the redundancy costs, sold all the assets and closed the division. To date, Portobello Alloys has only
relieved £1.20 million of the losses. The revised forecast numbers for Portobello's performance post-
acquisition suggest it will be able to relieve the balance of losses in the next couple of years (see below).
Up to the date of the deal, the management forecasts used to calculate the deferred tax in the financial
statements had only anticipated relieving £2.20 million of the losses, as indicated in the schedule below.
Profit forecasts for tax loss utilisation
20X7 20X8 Total
£m £m £m
Forecast taxable profit – original 0.98 1.22 2.20
Forecast taxable profit – revised 1.90 4.74 6.64
Enacted tax rates
Deferred taxes in the deal-date statement of financial position extracted above were calculated using a
tax rate of 30%. However, the corporate tax rate for Portobello has been enacted to fall to 23% for the
period after
included 1 January
in the 20X7.
deal-date A schedule
statement of the composition
of financial of thebelow.
position is shown deferred tax assets and liabilities
Marketing
(d) Calculate the goodwill
goodwill arising in the consolidated
consolidated financial statements in respect of this
this acquisition.
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Analytics
(e) Explain the deferred tax treatment of goodwill under two possible deal
deal structures for the
acquisition of Portobello Alloys:
As the acquisition actually took place, with the purchase of the shares of Portobello Alloys.
Under an alternative structure, with the purchase of the assets and
and liabilities of
of Portobello
Alloys instead, which
which would have granted tax relief charged
charged over 15 years
years on the straight-line
straight-line
basis on purchased goodwill.
Requirement
director.
Prepare the information required by the finance director. Total: 30 marks
5 Upstart Records
Upstart Records plc (Upstart) is a listed company and the parent company for a group that operates in
the music equipment industry. You are Thomas Mensforth, an ICAEW Chartered Accountant, and you
joined Upstart six months ago.
You have received
received the following
following email from Susan Ballion, the Group
Group Finance Director
Director of Upstart:
EMAIL
To:
To: Thomas Mensforth
From:
From: Susan Ballion
Date:
Date: 17 July 20X5
Subject:
Subject: Upstart
I have been called away to an urgent meeting, so I need your assistance
assi stance to finalise some aspects of the
Upstart consolidated financial statements for the year ended 30 June 20X5. I attach details of
transactions involving Liddle Music Ltd (Liddle) that occurred during the year ended 30 June 20X5
(Exhibit 1).
1).
I also attach the draft statements of profit or loss for the Upstart Group and for Liddle for the year ended
30 June 20X5. The draft group statement of profit or loss consolidates all group companies except
(Exhibit 2).
Liddle (Exhibit 2).
Finally, there are two financial reporting issues concerning the parent company that I have not had time
(Exhibit 3).
to deal with (Exhibit 3). These will need to be resolved before the consolidated financial statements can
be prepared.
I would like you to:
(a) show and
and explain, with supporting calculations, the
the appropriate financial reporting
reporting treatment
treatment of
goodwill and non-controlling interests for Liddle in Upstart's consolidated statement of financial
position at 30 June 20X5. Use the proportion of net assets method to determine non-controlling
non-controlling
interests;
(b) explain, with calculations, the appropriate accounting treatment
treatment in respect of the issues in Exhibit 3;
(c) prepare Upstart's revised
revised consolidated statement of profit or loss for the year
year ended 30
30 June 20X5
20X5
This website stores data such
to include as This should take account of any adjustments arising from the calculations above;
Liddle.
cookies to enableandessential site
functionality, as well as marketing,
(d) explain (without
(without calculations) the impact on Upstart's consolidated
consolidated financial
financial statements if the fair
personalization, and analytics. You
value method for measuring non-controlling interests were to be used instead of the proportion of
may change your settings at any time
net assets method.
or accept the default settings.
Requirement
Respond to Susan Ballion's email. Total: 30 marks
marks
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Marketing
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Analytics
Exhibit 1: Transactions in respect of Liddle
Original investment
Upstart purchased 250,000 ordinary shares in Liddle on 1 January 20X3 for £23 each, when Liddle had
in issue 1,000,000 £1 ordinary shares and retained earnings of £6.6 million. There are no other reserves
and there has been no change to Liddle's ordinary share capital since that date. Upstart appointed two
of the six directors on the Liddle board and recognised the investment as an associate in its group
financial statements
statements for the years ended
ended 30 June 20X3
20X3 and 30 June 20X4.
Shares purchased on 1 October 20X4
On 1 October 20X4, Upstart purchased a further 450,000 shares in Liddle from existing shareholders. At
this date, the fair value of Upstart's original 250,000 shares in Liddle had risen to £30 each. The
consideration was as follows:
800,000 new ordinary £1 shares
shares in Upstart issued on 1 October
October 20X4; the market price of
of one
one
share in Upstart at this date was £11.50.
Cash of £2 million payable on 1 October 20X4.
Cash of £3 million payable on 1 October 20X6.
Cash of £3 million
million payable on
on 1 October 20X7, subject toto Liddle increasing profits for the
the year
year
ending 30 June 20X7 by 35% compared with its profits for the year ended 30 June 20X4. The
board of Upstart believes there is a 50% probability of this profit increase being achieved.
Upstart paid professional fees of £250,000 in respect of this share purchase. These fees have been
debited to the cost of the investment in Liddle in Upstart's individual company statement of financial
position.
Analytics
Exhibit 2: Draft statements of profit or loss for the Upstart Group (excluding Liddle) and for
Liddle for the year ended 30 June 20X5
Upstart
Group Liddle
£'000 £'000
Revenue 23,800 15,600
Cost of sales (7,400) (5,400)
Gross profit 16,400 10,200
Operating costs (3,500) (1,500)
Profit from operations 12,900 8,700
Investment income 890 180
Interest paid (520) (300)
Profit before tax 13,270 8,580
Taxation (2,350) (1,800)
Profit for the year 10,920 6,780
Note:
6 MaxiMart plc
This websiteMaxiMart plc operates
stores data such as a national chain of supermarkets. You are Vimal Subramanian, the Assistant
cookies to enable essential siteand the accounting year-end is 30 September 20X1.
Financial Controller,
functionality,
It isasnow
well15
asNovember
marketing, 20X1 and the company's auditors are currently engaged in their work.
personalization, and analytics.
Jane Lewis, the FinancialYou Controller, is shortly to go into a meeting with the audit engagement partner,
may change yourMacIntyre,
Roger settings at to
any time some unresolved issues relating to employee remuneration, hedging and
discuss
or accept the
thedefault settings.
customer reward card. To save her time, she wants you to prepare a memorandum detailing the
correct financial reporting treatment. She has sent you the following email, in which she explains the
issues.
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Marketing
Personalization
Analytics
From:
From: [email protected]
To
To:: [email protected]
Date::
Date 15 November 20X1
Subject::
Subject Financial statements of MaxiMart
I am pleased you can help me out with the information for my forthcoming meeting with Roger
MacIntyre – as you know, I have been tied up with other work, and have not had time to look into these
outstanding issues.
(Exhibit 1)
As you will see (Exhibit 1) the principal issues concern remuneration:
Historically we have had a problem with high staff turnover due to low salaries and having to work
evenings and weekends. To encourage better staff retention, we introduced a share option scheme.
Details of the scheme are given in Exhibit 1. I need you to show how the share option scheme should be
dealt with in the financial statements of MaxiMart for the year ended 30 September 20X1.
1 also has details of the company pension scheme, which was introduced a few years ago to
Exhibit 1
encourage management trainees to stay with us. Since many of our rivals no longer provide defined
benefit schemes, this gives MaxiMart an edge. It would help in the meeting if I could show Roger
MacIntyre the relevant extracts from the financial statements. You will need to show the amounts to be
recognised in the statement of profit or loss and other comprehensive income of MaxiMart for the year
ended 30 September 20X1 and in the statement of financial position at that date so far as the
information permits, in accordance with IAS 19, Employee Benefits (revised 2011). You should also
include the notes, breaking down the defined benefit pension charge to profit or loss, other
comprehensive income,
income, net pension asset/liability at the year end and changes in the present value of
pension obligation and the fair value of plan assets.
There will be a deferred tax effect arising from the pension plan, but we will deal with that on a later
occasion, as there isn't time before the meeting.
( Exhibit 2).
I also attach details of three further issues (Exhibit 2). The first relates to our Reward Card. I believe
there is an IFRIC relevant to the treatment of these schemes, but I can't remember exactly what it says.
The second issue is a futures contract. It would be good if you could explain how we should treat this
and show the double entry. Also, IFRS 9, Financial Instruments will will come into force soon, and I'd like to
know how, if at all, the treatment will change. The third issue is a proposed dividend – we need to know
if the proposed treatment is correct.
Please draft a memorandum showing the appropriate treatment of these transactions together with
explanations and any necessary workings.
Requirement
Prepare the memorandum required by Jane Lewis. Total: 30 marks
Exhibit 1: Staff remuneration
Share options
On 1 October 20X0, the board decided to award share options to all 1,000 employees provided they
remained in employment for five years. At 1 October 20X0, 20% of employees were expected to leave
This website stores
over data such
the vesting as to 30 September 20X5 and as at 30 September 20X1, this expectation had risen
period
cookies to to
enable
25%.essential site of these options at 1 October 20X0 was £2 and this had risen to £3 by
The fair value
functionality, as well as marketing,
30 September 20X1. The number of options per employee is conditional on the average profit before
personalization, and analytics.
any expense for shareYou
options over the five years commencing 1 October 20X0 as follows:
may change your settings at any time
Average profit Number of options per employee
or accept the default settings.
From £1m up to £1.2m 100
Above £1.2m
£1.2m up to £1.4m 120
Above £1.4m
£1.4m up to £1.6m 140
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Above £1.6m
£1.6m up to £1.8m 160
Above £1.8m
£1.8m 180
Marketing
Profit before share option expense for the year ended 30 September 20X1 was £0.9 million and profit
Personalization
for the following
following four years was
was forecast to rise by £0.2
£0.2 million a year. The awarding of the options was
also conditional on the share price reaching at least £8 per share by 30 September 20X5. The share
Analytics
price at 30 September 20X1 was £6.
Save Accept All
14 Corporate Reporting: Question Bank
Bank
Pension scheme
MaxiMart set up a funded defined benefit pension plan for management-track employees three years
ago. The plan provides a pension based on 1/80th of the final salary for each year worked for the
company, subject to a minimum employment period of eight years.
The following information has been provided by the actuary for the year ended 30 September 20X1:
(a) The present value in terms
terms of future pensions from
from employee service during the year is £90,000.
This has been determined using the projected unit credit method.
(b) The present value of
of the obligation to provide benefits
benefits to current and former
former employees has
has been
calculated as £2.41 million at 30 September 20X1 and the fair value of plan assets was
£2.37 million at the same date.
(c) The interest
interest rate on
on high quality corporate bonds relevant
relevant to the year was 5%.
The following has been extracted from the financial records:
(a) The present value of of the define
defined
d benefit obligation was £2.2 million at 30 September 20X0 and the
fair value of the plan assets was £2.3 million at the same date.
(b) Pensions paid to former employees during the year amounted
amounted to £60,000.
£60,000.
(c) Contributions paid into the plan during the year as decided by the actuary were £68,000.
£68,000.
With effect from
from 1 October 20X0,
20X0, the company
company amended the the plan to increase pension entitlement
entitlement
for employees. The
The present value of the improvement
improvement in benefits was calculated by the actuary
actuary to
be approximately £100,000 at 1 October 20X0. The present value of the plan liability at
30 September 20X1 correctly reflects the impact of this increase.
(d) The company recognises
recognises gains and losses
losses on remeasurement
remeasurement of the defined
defined benefit asset or liability
(actuarial gains and losses) in accordance with IAS 19, Employee Benefits (revised 2011).
(e) Pension payments
payments and th
thee contributions
contributions into the plan were paid on 30 September 20X1.
20X1.
Exhibit 2: Other transactions
Reward card
MaxiMart offers its customers a reward card which awards customers points based on money spent.
These points may be redeemed as money off future purchases from MaxiMart or as free/discounted
goods from other retailers. Revenue from food sales for the year ended 30 September 20X1 amounted
to £100 million. At the year end, it is estimated that there are reward points worth £5 million arising
from this revenue
revenue which are eligible for redemption. Based on past experience,
experience, it is estimated th
that
at only
about two in five customers are likely to redeem their points.
Futures contract
MaxiMart entered into a futures contract during the year to hedge a forecast sale in the year ended
30
30 September
September 20X2.
20X1, The
had futures contract
the forecast sale was designated
occurred, and documented
the company as suffered
would have a cash flow hedge.
a loss of At
£1.9 million and the futures contract was standing at a gain of £2 million. No accounting entries have
This website stores
been madedata
to such
recordasthe futures contract.
cookies to enable essential site
Proposed
functionality, dividend
as well as marketing,
personalization, and analytics.
The company has a good You relationship with its shareholders and employees. It has adopted a strategy of
may change your settings
gradually at any
increasing itstime
dividend payments over the years. On 1 November 20X1, the board proposed a
or accept the default settings.
dividend of 5p per share for the year ended 30 September 20X1. The shareholders will approve the
dividend along with the financial statements at the general meeting on 1 December 20X1 and the
dividend will be paid on 14 December 20X1. The directors feel that the dividend should be accrued in
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the financial statements for the year ended 30 September 20X1 as a 'valid expectation' has been
created.
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Analytics
7 Robicorp plc
Robicorp plc is a listed company that develops robotic products for the defence industry. You are
Marina Nelitova, an ICAEW Chartered Accountant working within the finance team at Robicorp. You
receive the following email from Alex Murphy, who was appointed finance director of Robicorp in
October 20X4.
To:
To: Marina Nelitova
From:
From: Alex Murphy
Date:
Date: 3 November 20X4
Requirement
Reply to Alex Murphy's email. Total: 30 marks
marks
Exhibit 1: Transactions requiring further review
(a) On 1 October
October 20X3 Robicorp started
started work on the
the development
development of a new robotic
robotic device, the XL5.
Monthly development costs of £2 million were incurred from that date until 1 January 20X4, when
Robicorp made a breakthrough in relation to this project. On that date the XL5 was deemed
financially and commercially
commercially viable and thereafter
thereafter development
development costs increased to £2.5 million per
month until development work was completed on 30 June 20X4.
The XL5 went on sale on 1 August 20X4. By 30 September 20X4, Robicorp had received orders for
3,000 units priced at £25,000 per unit, of which it had manufactured and delivered 1,200 units to
customers. The terms of trade required a non-refundable payment in full on receipt of the order.
Robicorp anticipates the XL5 having a commercial life of four to five years, with total sales of
36,000 units over that period. Variable production costs are £11,000 per unit.
In the draft financial statements for the year ended 30 September 20X4, all XL5 development costs
have been capitalised. Cash received in respect of the 3,000 units ordered has been recognised as
revenue because the orders are non-cancellable.
In the draft financial statements the following accounting entries have been made in respect of the
bond and interest:
DEBIT Cash £40m
CREDIT Share capital £4m
CREDIT Share premium £36m
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At 1 October 20X3
20X3 40m
Convertible bond issue 1 January 20X4 4m
Analytics
At 30 September
September 20X4 44m
Basic earnings per share = 150.6 pence (£66.27m/44m shares).
Save Accept All
Financial reporting questions 17
8 Flynt plc
You are Miles Goodwin,
Goodwin, the newly-appointed
newly-appointed financial
financial controller of Flynt
Flynt plc, a company that
manufactures electronic components
components for the computer industry.
i ndustry. You receive the following email from
Andrea Ward, the CEO of Flynt.
To:
To: [email protected]
From: [email protected]
From:
Subject: Finalisation of consolidated
Subject: consolidated financial statements
statements for year ended
ended 31 May 20X6
20X6
Miles, I know you have just joined us, but I would be grateful if you could look at the impact of some
issues that
recently andwere
haveleftnot
unresolved by yourtopredecessor,
had the chance look at theseShane
issuesPonting IExhibit
myself. ((Exhibit 1). Iappreciate
1).
would also have been your
very busy
opinion on whether the accounting for the lease will change when IFRS 16, Leases comes into force – I
don't know anything about this but Shane mentioned it on a number of occasions.
I would like you to redraft the consolidated statement of profit or loss and other comprehensive income.
Exhibit 2).
I attach a draft for you to work from ((Exhibit 2). Please explain the reasoning for any adjustments you
make, as I would like a greater understanding of the impact of these issues on our post-tax profits. You
should also give journal entries.
I have a meeting with the board shortly, and we are concerned about earnings per share (EPS).
I would therefore be grateful if you would also calculate the basic and diluted EPS for the year ended
31 May 20X6 and the diluted EPS if applicable.
At this stage do not
not worry about any
any adjustments to the
the current or defe
deferred
rred tax charge; just assume an
effective rate of 23%.
Requirement
Draft a reply to the email from Andrea Ward. Total: 30 marks
marks
Exhibit 1: Consolidated financial statement
statementss for year ended 31 May 20X6: Unresolved issues –
arising from notes prepared by Shane Ponting
Share option scheme
On 1 September 20X5 the board approved a share option scheme for 20 senior executives. On that
date each executive was granted options over 10,000 shares at an exercise price of £39 per share, which
was the market price at 1 September 20X5. Each option gives the rights to one share. The options vest
on 1 September 20X9 subject to the following conditions:
(a) Each executive
executive remains in the employment of Flynt
Flynt until 1 September 20X9.
(b) The share price of Flynt has increased by at least 50% at 1 September 20X9.
20X9.
The fair value of an option was estimated to be £12.60 at 1 September 20X5 and £19.40 at
31 May 20X6.
This is the first time that Flynt has operated such a scheme. As there is no cash cost to the company, I
have not made any adjustments to the financial statements. The share price of Flynt at 31 May 20X6
This websitewasstores datathe
£52 and such as
average share price for the nine months to 31 May 20X6 was £48.
cookies to enable essential site
At as
functionality, 31well
Mayas20X6
20X 6 there were still
marketing, still 19 executives in the scheme, but I anticipate there will
will only be 16 still
employed
personalization, by 1 September
and analytics. You 20X9.
may change yourof
Lease settings
surplusatmachinery
any time
or accept the default settings.
On 1 June 20X5 Flynt leased some surplus machinery to Prior plc, an unrelated company, on the
following terms:
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Lease term and remaining useful life of machinery 5 years
Carrying amount and fair value of machinery at 31 May 20X5 £612,100
Marketing
Annual instalment payable in arrears £150,000
Interest rate implicit in lease
Personalization 10% per annum
Residual value guaranteed by Prior plc £61,000
Analytics
Expected
Initial residual
direct value at 31
costs incurred by May
Flynt20Y0 £70,000
£1,000
Save Accept All
18 Corporate Reporting: Question Bank
Bank
I have treated the agreement as an operating lease and recognised lease rental income of £150,000. I
have also charged depreciation of £122,420 and written off the direct costs incurred to profit or loss.
Acquisition of Dipper plc
On 1 December 20X5 Flynt purchased 100% of the ordinary shares of Dipper plc for a consideration of
£6.4 million when Dipper had net assets with a fair value of £4.9 million including a deficit on a defined
benefit pension scheme of £0.4 million. Goodwill of £1.5 million therefore arose on acquisition. The
consideration given was 150,000
150,000 ordinary shares in Flynt. This was the first equity issue
i ssue for a number of
years. There were 1.4 million ordinary
ordinary shares in issue on 31
31 May 20X5.
Flynt operates a defined contribution scheme, and I am unfamiliar with how to deal with Dipper's
defined benefit scheme.
We obtained the following figures from Dipper's actuaries at the
the acquisition date:
Fair value of scheme assets £2.2m
Present value of pension obligations £2.6m
Estimated service cost from 1 December 20X5 to 31 May 20X6 £560,000
Interest rate on high quality corporate bonds 5% per annum
Discount rate for scheme obligations 4% per annum
The total contributions paid into the scheme by Dipper from the acquisition date to 31 May 20X6 were
£480,000, and I have charged this sum to operating costs. I have had a letter from Dipper's pension
fund advising me that they have paid out £450,000
£450,000 to pensioners
pensioners in the same period.
period. I have not
adjusted the deficit in the statement of financial position.
Dipper recognises remeasurement (actuarial) gains and losses immediately in accordance with IAS 19,
Employee Benefits (revised 2011). I intend to continue to apply IAS 19 in the group financial statements
but I do not know how to calculate the remeasurement gain or loss.
I have been advised by the scheme actuary that at 31 May 20X6 the fair value of the pension assets was
£2.08 million and the present value of pension obligations was £2.75 million at that date.
We conducted an impairment review of goodwill at the the end of our accounting
accounting period and
and estimated
that goodwill arising on the acquisition of Dipper was worth £1.1 million. I have therefore debited
£400,000 to other comprehensive income. No other adjustments were required to goodwill.
Exhibit 2: Draft consolidated statement of profit or loss and other comprehensive income for
year ended 31
31 May 20X6
20X6 20X5
£'000 £'000
Revenue 14,725 13,330
Cost of sales (7,450) (7,560)
Gross profit 7,275 5,770
Operating costs (3,296) (3,007)
Other operating income 150 –
Operating profit
profit 4,129 2,763
2,763
Investment income 39 32
Finance costs
This website stores data such as
(452) (468)
Profit before tax 3,716 2,327
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Income tax expense (1,003) (628)
functionality, as well as marketing,
Profit after tax 2,713 1,699
personalization, and analytics. You
Other comprehensive income
may change your settings
Goodwill at any time
impairment (400) –
or accept the default settings. 2,313 1,699
Total comprehensive income for the year
Note: All calculations should be to the nearest £'000.
Note: All
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9 Gustavo plc
You are Anita Hadjivassili, the
the recently appoin
appointed
ted financial controller
controller at Gustavo plc, a manufacturer of
sports equipment. During the year ended 30 September 20X6, Gustavo has sold and purchased shares
respectively in two companies, Taricco Ltd and Arismendi Inc.
You have just received
received the following
following email from the CEO, Antonio
Antonio Bloom.
To:
To: Anita Hadjivassili
From: Antonio Bloom
From:
Subject: Draft Financial
Subject: Financial Statements
Statements for the Gustavo
Gustavo group
Exhibit 1).
I attach extracts from the draft financial statements for the year ended 30 September 20X6 ((Exhibit 1). I
know you are still unfamiliar with Gustavo's business, so I have also attached some file notes prepared by
(Exhibit 2).
your predecessor (Exhibit 2).
I would like you to prepare the draft consolidated statement of profit or loss and other comprehensive
income for the year ended 30 September 20X6 including other comprehensive income income,, as I need to
present it at the next board meeting. Please provide briefing notes to explain the impact of the share
transactions (Exhibit 2) on the consolidated statement of profit or loss and other comprehensive
income. Please show separately the profit attributable to the non-controlling interest.
I would also like you to advise on the impact that any future changes in exchange rates will have on the
consolidated statement of financial position.
In addition, we have a potential problem with one of our credit customers defaulting on payment
(Exhibit 3).
3). I have heard that the rules on revenue recognition are about to change to allow us to take
account of credit risk. I would like some advice on the existing rules and whether we can apply the
amended rules.
adjustments.
Ignore any further income tax or deferred tax adjustments.
Requirement
Respond to Antonio's email. Total: 30 marks
Exhibit 1: Extracts from the draft financial statements for year ended 30 September 20X6
Gustavo Taricco Arismendi
£'000 £'000 Kr'000
Revenue 35,660 28,944 48,166
Cost of sales (21,230) (22,164) (30,924)
Gross profit 14,430 6,780 17,242
Operating costs (5,130) (4,956) (9,876)
Profit from operations 9,300 1,824 7,366
Investment income 580 108 –
Finance costs (2,450) (660) (1,456)
Profit before taxation
taxation 7,430
7,430 1,272
1,272 5,910
5,910
Income tax expense (2,458 )
(2,458) (360) (2,240)
Profit for the year 4,972 912 3,670
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Retained earnings
functionality,
At as well as marketing,
1 October 20X5
20X5 11,720 4,824 14,846
personalization,
Profit for the year You
and analytics. 4,972 912 3,670
may change your settings
Dividends at July)
paid (1 any time (3,000) (600) –
or accept the default
At 30 settings.
Septem
September
ber 20X6 13,692 5,136 18,516
Analytics
Exhibit 2: File notes for key issues in year
Taricco
Gustavo bought 1.5 million ordinary shares in Taricco Ltd on 1 January 20X2 for £15 million when
Taricco had retained earnings of £2.4 million. The proportion of net assets method was used to value
the non-controlling interest as the acquisition occurred before IFRS 3 was revised. At the acquisition date
the fair value of Taricco's net assets was equal to the carrying amount.
Prior to 1 October 20X5 there had been goodwill impairments in relation to Taricco of £2.5 million.
There have been no changes in share capital or other reserves since acquisition.
On 1 April 20X6
represented Gustavo
by two soldon
directors 800,000 shares
Taricco's boardin to
Taricco forits
oversee £19.8 million.
remaining Gustavo
interest continues
in the to be
company.
(Taricco's board consists of eight directors.) The only entry in Gustavo's financial statements regarding
the sale has been to credit a suspense account with the sale proceeds.
It was estimated at 1 April 20X6 that Gustavo's remaining shares in Taricco had a fair value of
£8.2 million.
Arismendi
On 1 January 20X6 Gustavo bought 4 million shares in Arismendi Inc, a company located overseas,
(where the local currency is the Kr) for Kr75.6 million (£12.6 million). Professional fees relating to the
acquisition were £400,000, and these have been added to the cost of the investment.
At 1 January 20X6
20X6 Arismendi owned
owned property which
which had a fair value of
of Kr14.4 million
million (£2.4 million)
million) in
excess of its carrying amount. This property had a remaining life of eight years at this date.
Gustavo would like to adopt the fair value method to measure the non-controlling interest. At
1 January 20X6 the market price of Arismendi's shares was Kr12 each.
An impairment review
review of goodwill
goodwill took place at 30 September 20X6,
20X6, and no impairment
impairment was deemed
necessary.
Exchange rates which may be relevant are:
1 January 20X6 £1:Kr6
Average Jan-Sep
Jan-Sep £1:Kr5
30 September 20X6 £1:Kr4
Exhibit 3: Impaired receivable
Gustavo has entered into a contract with Bravo Ltd, a retail chain, to provide sports equipment at a
value of £200,000. The terms are that payment is due one month after the sale of the goods. On the
basis of experience with other contractors with similar characteristics, Gustavo considers that there is a
5% risk that the customer will not pay the amount due after the goods have been delivered and the
property transferred. Gustavo subsequently felt that the financial condition of the customer has
deteriorated and that the trade receivable is further impaired by £20,000.
We would like to know
know how the above transaction
transaction would be treated
treated in subsequent financial
financial statements
under IAS 18 and also whether there would be any difference in treatment under IFRS 9.
This website stores data such as
cookies to An
enable essential
annual site
discoun
discountt rate of 4% should
should be used in any calculations.
functionality, as well as marketing,
personalization, and analytics. You
may10change Inca
yourLtd
settings at any time
or accept the default settings.
Inca Ltd supplies specialist plant and machinery to the oil drilling industry. On 1 May 20X0 Inca acquired
80% of Excelsior Inc, a company based in Ruritania, where the currency is the CU.
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You are Frank
Frank Painter,
Painter, a chartered accountant employed on a temporary
temporary contract following the
retirement of the Inca finance director. You have been asked to assist the managing director in finalising
Marketing
the financial statements of Excelsior and the Inca group for the year ended 30 April 20X1.
Personalization
Both Inca and Excelsior prepare their financial statements using IFRS. You receive the following email
from the managing director of Inca.
Analytics
From:
From: Inca MD
Subject::
Subject Finalising Financial Statements
To
To:: Frank Painter
Date::
Date 25 July 20X1
Acquisition of Excelsior
Excelsior is the first subsidiary
subsidia ry that Inca has acquired, and so I would be grateful for some advice in
relation to the consolidated financial statements and also in finalising the financial statements of
Excelsior.
The cost of the investment in Excelsior was
was CU120 million,
milli on, and at 1 May 20X0 Excelsior had retained
earnings of CU64 million.
milli on. There were no fair value adjustments to the net assets of Excelsior. Inca uses
the proportion of net assets method to value non-controlling interest.
Assistance needed
I wish to show your findings to my fellow board members, as they are concerned about Excelsior's effect
on the consolidated financial statements.
statements. I have not told them that I have asked for your input as I would
like to make a favourable impression in terms of my accounting knowledg
knowledge. e.
(Exhibit 1).
I have provided you with the draft statements of financial position for both companies (Exhibit 1). I have
(Exhibit 2).
also provided some exchange rates (Exhibit 2). The accountant at Excelsior is unqualified. He has
( Exhibit 3).
identified a number of outstanding financial reporting issues (Exhibit 3).
I have heard that there is an option of valuing non-controlling interests at fair value, rather than using
the proportion of net assets method, as we do. The fair value of the non-controlling interest in Excelsior
is CU20 million. I understand that using this method would change the figures for goodwill and perhaps
the exchange difference relating to goodwill.
Inca Excelsior
Equity and liabilities
Share capital £1/CU1 4.0 10.0
Share premium account 12.0 16.0
Retained earnings 41.6 48.0
Non-current liabilities
Deferred tax 12.0 4.4
Loans 5.8 48.0
Current liabilities 22.2 9.2
Total equity and liabilities 97.6 135.6
US$1 = CU
1 May 20X0 3.2
Average for year
year 3.0
30 April 20X1 2.8
Exhibit 3: Excelsior – Outstanding financial reporting issues
issues prepared by Excelsior accountant
Excelsior 's draft statement of profit or loss and other
Excelsior's other comprehensive inc
income
ome shows an after-tax
after-ta x loss of
CU16 million for the year ended 30 April 20X1. The current tax has been correctly calculated by our tax
advisers. However,
However, I am not familiar with deferred tax and some of the more complex financial reporting
reporting
rules and the following matters are outstanding:
(1) At 1 May 20X0
20X0 there was a deferred
deferred tax liability of CU4.4 million in the statement
statement ofof financial
position and no adjustments have been made to this figure
f igure in the draft financial statements at 30
April 20X1.
20X1. This deferred tax provision
provision was
was solely in relation to the differences
differences b
between
etween the carrying
amount of property, plant and equipment and the tax base.
The carrying amount of property, plant and equipment on 1 May 20X0 was CU60 million,
compared with its tax base of CU38 million.
milli on. At 30 April 20X1 these figures were CU64 million and
CU36 million respectively.
Companies in Ruritania pay tax at a flat rate of 20%. This rate is not expected to change in future
years.
(2) In the year ended 30
30 April 20X1 Excelsior capitalised development
development costs of CU7 million. These costs
costs
are likely to be amortised over four years from 1 May 20X2.
Under Ruritanian tax law such costs are deductible when incurred.
(3) The tax trading
trading loss carried
carried forward
forward in respect of the year ended
ended 30 April 20X1 is CU16 million.
Excelsior has reliable budgets for
for a taxable profit of CU5 million
milli on for each of the next two financial
years, but it has no accurate budgets
budgets beyond
beyond that date. Tax losses can be carried
carried forward
forward indefinitely
indefinitely
This website stores
underdata such astax law.
Ruritanian
cookies to enable essential site
(4)as On
functionality, well1as
May 20X0 Excelsior
marketing,Excelsior issued a 5% bond to American financial institutions.
institutions. The bond had a
personalization,nominal value of
and analytics. US$16 million and is repayable on 30 April 20X3. The bond was issued at a
You
discount of US$1
may change your settings at any time million, and is redeemable at a premium over nominal value of US$1.79 million.
or accept the default settings.
Interest of US$800,000 is paid every 12 months commencing
commencing 30 April 20X1. The implicit interest
rate on the bond is approximately 10.91%.
10.91%.
Privacy Policy The loan has been translated on 1 May 20X0 and the interest paid in relation to the bond has been
charged to profit or loss. This sum was CU2.24 million (US$800,000
(US$800,000 × 2.8) but no other
Marketing
adjustments have been made.
Personalization
According to Ruritanian tax law, the only tax deduction in respect of the bond is for nominal
nominal interest
which is tax deductible when
when paid. Debits and credits relating to discounts and premiums are not
Analytics
tax deductible.
Save Accept All
Financial reporting questions 23
(5) On 1 April 20X1 Excelsior
Excelsior made a loan of CU2 million to oneone of the directors
directors of the company,
company, who
also happens to be a prominent politician. I do not expect any of this sum to be recoverable, but it
would be politically embarrassing to disclose this in the financial
f inancial statements. The loan has been
included in trade receivables and no adjustments have been made. On the grounds of materiality,
the board is very keen to exclude any reference to the loan.
11 Aytace plc
Aytace plc is the parent company of
of a group that operates golf courses in Europe.
Europe. It has had
investments in a number of 100% owned subsidiaries for many years, as well as owning 40% of the
share capital in Xema Limited since 20X0.
You are Frank Brown,
Brown, a Chartered Accountant. YouYou have recently taken up temporary employment
employment with
Aytace while the
the financial controller,
controller, Meg Blake, is on
on maternity leave.
leave.
You receive the following email from
from the finance
finance director, Willem Zhang.
Zhang.
To:
To: Frank Brown
From: Willem Zhang
From:
Subject: Draft consolidated statement of profit
Subject: profit or loss and other
other comprehensive
comprehensive income for the
the year
ended 31 May 20X3
Prior to maternity leave, Meg prepared a first draft consolidated statement of profit or loss and other
comprehensive income and has noted some outstanding matters relating to transactions in the year
(Exhibit
Exhibit).
).
Please prepare a working paper which comprises:
Advice, with explanations and relevant calculations, on the appropriate financial reporting
treatment of the outstanding matters highlighted by Meg in the Exhibit.
A revised consolidated statement of profit or loss and other comprehensive income, showing
clearly the financial reporting adjustments you have proposed.
Ignore any tax consequences arising from the outstanding matters, as these will be finalised by our tax
advisers.
Requirement
Prepare the working paper requested by the finance director. Total: 30 marks
Revenue £'000
£'000
14,450 Notes
1
Operating costs as
This website stores data such
(9,830) 1, 2
Operating profit 4,620
cookies to enable essential site
Income from associate 867 4
functionality, as well as marketing,
Other investment income 310
personalization, and analytics. You
Finance costs (1,320)
may change your settings at any time
Profit before tax 4,477
or accept the
Taxdefault settings. (1,220)
Profit for the year 3,257
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Notes on outstanding matters
I have not had sufficient time to look into the following matters because of my personal circumstances.
Marketing
(1) Golf tournament
tournament
Personalization
AnalyticsOn 1 December 20X2 Aytace won the tender to host an annual international golf tournament for
each of the next four years. The first golf tournament will take place in September 20X3.
Save Accept All
24 Corporate Reporting: Question Bank
Bank
The tender process commenced on 5 August 20X2 and the tender was submitted on 8 November
20X2. Internal management time costs of £1.2 million were incurred in relation to the tender
submission. These costs were capitalised and are being amortised from 1 December 20X2 over a
four-year period. Therefore
Therefore £150,000
£150,000 (6/48 × £1.2 million) has been recognised
recognised in profit or loss as
an operating cost for the year ended 31 May 20X3.
A separate contract was subsequently signed on
on 1 February 20X3
20X3 with a satellite television
television
company for the exclusive rights to broadcast the tournament. The contract fee is £4.8 million for
the whole four years of the tournament. The broadcaster made an advance payment of
£1.0 million to Aytace on 1 May 20X3. This amount was initially credited to deferred income. I
then decided to recognise revenue on the satellite television contract evenly over a four-year period
from 1 February 20X3.
20X3. An amount
amount of £400,000
£400,000 (£4.8m × 4/48) is therefore
therefore recognised
recognised as revenue
in profit or loss for the year ended 31 May 20X3.
(2) Defined benefit pension scheme
scheme
Aytace operates a defined
defined benefit pension scheme.
scheme. Employees are not
not required to make any
any
contributions into the scheme. Aytace recognises remeasurement (actuarial) gains and losses
immediately through other comprehensive income in accordance with IAS 19, Employee Benefits
(revised 2011).
The scheme assets had a fair value of £12.2 million and £13.5 million at 31 May 20X2 and
31 May 20X3 respectively. Scheme obligations had a present value of £18 million and
£19.8 million at 31 May 20X2 and 31 May 20X3 respectively.
At 1 June 20X2
20X2 the interest rate on high quality co
corporate
rporate bonds was 6%.
6%.
In the year ended 31 May 20X3, employer contributions paid into the scheme were £0.9 million,
and pensions paid by the scheme during the year amounted to £1.1 million. These payments took
place on 31 May 20X3. The service cost for the year ended 31 May 20X3 was £1.2 million.
Aytace decided to improve the pension
pension benefit at 1 June 20X2 forfor staff who will have worked
worked at
least five years for the company at the date the benefit is claimed. The scheme actuary calculated
the additional benefit obligation in present value terms to be £400,000.
The only entry in the financial statements in respect of the year ended 31 May 20X3 was to
recognise in profit or loss the contributions paid to the scheme by Aytace, with no adjustment to
the scheme obligations in the statement of financial position.
(3) Holiday pay
pay
The salaried employees of Aytace are entitled to 25 days paid leave each year. The entitlement
accrues evenly over the year and unused leave may be carried forward for one year. The holiday
year is the same as thethe financial year. At 31 May 20X3,
20X3, Aytace has 900
900 salaried employees and
and the
average unused holiday entitlement is three days per employee. 5% of employees leave without
taking their entitlement and there is no cash payment when an employee leaves in respect of
holiday entitlement. There are 255 working
working days in the year and the total annual salary cost is
£19 million. No adjustment has been made in the financial statements for the above and there was
no opening accrual required for holiday entitlement.
This website stores data such as
cookies to (4)
enableInvestment in Xema
essential site Xema
functionality, as On
well1as marketing,
January 20X0, Aytace bought 40% of the issued ordinary share capital of Xema Ltd, a
personalization,sportswear
and analytics. You for £2.3 million. Aytace has had significant influence over Xema since this
company,
may change your settings
date and hasat any
usedtime
the equity method to account for the investment.
or accept the default settings.
At 1 January 20X0,
20X0, Xema had an issued ordinary share capital of of 1 million £1 ordinary shares and
retained earnings of £3.4 million. There has been no change to Xema's issued share capital since
Privacy Policy 1 January 20X0. At 31 May 20X2 retained earnings were £4.8 million. Xema's statement of profit
or loss for the year ended 31 May 20X3 was as follows:
Marketing £'000
Revenue
Personalization 5,400
Operating costs (3,600))
(3,600
AnalyticsOperating profit 1,800
Other investment income 240
Finance costs (720)
Save Accept All
Financial reporting questions 25
Profit before tax 1,320
Tax (300)
Profit for the year 1,020
On 1 September 20X2 Aytace bought the remaining 60% of Xema's ordinary share capital for
£12.4 million, at which date its original 40% shareholding was valued at £3.8 million. There were
no material differences between carrying amounts and fair values of the identifiable net assets of
Xema at 1 September 20X2.
I recognised the investment in Xema using the equity method and credited £867,000 to profit or
loss (profit for the year of £1.02m × 3/12 × 40% pl
plus
us £1.02m × 9/12 × 100%).
The second incentive scheme is an employee scheme in the form of share appreciation rights for
senior managers. The vesting date is 31 May 20X5, and managers must be still in employment at
that date.
There are 60 managers eligible for the scheme, each of whom has appreciation rights over 4,000
shares. Under the scheme each manager will receive a cash amount equal to the fair value of the
rights over each share. I anticipate 50 of the managers being in the scheme at 31 May 20X5. The
fair value of the rights was £2.85 per share at 1 June 20X2 and £2.28
£2.28 per share at 31 May 20X3.
12 Razak plc
Razak plc is a listed
l isted parent company. During the year ended 30 September 20X2 Razak plc increased its
shareholding in its only equity investment, Assulin Ltd.
Razak publishes magazines in the UK. You are Kay Norton, a chartered accountant and a member of the
Razak financial reporting team. You report to the Razak group finance director, Andrew Nezranah, who
is also a chartered accountant.
You receive the following email:
This website stores data such as
cookies to To:
enable
To: essential site
Kay Norton
functionality, as well
From:
From: as marketing,
Andrew Nezranah
personalization,
Date: 29 October You
Date: and analytics. 20X2
may change your settings at any time
I have recently joined the board and I am preparing for our annual update presentation to our bank.
or accept the default settings.
As part of this update, I have been asked
asked to present the
the bank with draft
draft consolidated financial
financial
statements for the year ended 30 September 20X2. I appreciate that there will be tax issues to finalise at
Privacy Policy
a later stage, but the bank has said that it is not interested in these at present.
For a number of years Razak plc held 15% of the ordinary share capital of Assulin, a paper pulp
Marketing
manufacturer. On 31 March 20X2 this shareholding was increased to 80%, as we wanted to secure
Personalization
continuity of supply in relation to paper pulp. Further details of this transaction can be found in Exhibit 1.
1.
Analytics
Razak plc's draft financial statements at 30 September 20X2 are summarised in Exhibit 2.
2.
( Exhibit 3).
In addition I have some concerns about Razak plc's purchase of a bond in Imposter plc (Exhibit 3).
Save Accept All
26 Corporate Reporting: Question Bank
Bank
( Exhibit 4)
The directors are proposing to introduce a pension plan for next year (Exhibit 4) and are perhaps
unclear on how to account for it.
Please would you:
provide explanations of how the increase in the
the stake
stake in Assulin will be treated in Razak's
consolidated financial statements;
explain any adjustments needed to account for the purchase of the Imposter bond in Razak's
consolidated financial statements and evaluate any ethical issues arising from this matter;
prepare Razak's consolidated statement of financial position at 30
30 September 20X2 after making all
relevant adjustments; and
explain how the proposed pension plan would be accounted for in the financial statements.
Requirement
Reply to Andrew's email. Total: 30 marks
marks
Exhibit 1: Shareholding in Assulin
In 20W4 (eight years ago), Razak plc bought 75,000 shares in Assulin for £6 each. The shares were
classified as available-for-sale. At 30 September 20X1, the shares had a fair value of £16 each, and a
cumulative increase in fair value of £750,000 had been recognised in other comprehensive income and
was held in equity. In Razak plc's draft statement of financial position, the increase in the share valuation
has also been included in the investment in Assulin.
On 31 March 20X2 a further 325,000 shares in Assulin were purchased for £25 each. This sum has been
added to the investment in Assulin.
In addition to the cash consideration of £25 per share, Razak plc agreed to pay a further £6 per share on
31 March 20X4, subject to a condition that Assulin's management team, each of whom owned shares in
Assulin, remain with the company to that date. It is considered
considered to be highly
highly probable that this condition
condition
will be met. No adjustments for a contingent payment have been included in Razak's financial
statements. Razak has a cost of capital of 9%.
On 31 March 20X2, the fair value of an Assulin share was estimated to be £20. Razak has decided to use
the fair value (full goodwill) method to measure non-controlling interest.
The statements of financial position of Assulin at 30 September 20X2 and 31 March 20X2 were as
follows:
30 September 31 March
20X2 20X2
£'000 £'000
Non-current assets
Property, plant and equipment 3,460 3,210
Current assets
Inventories
Inventories 610
610 580
580
Receivables 400 280
This website stores
Cash data such as
at bank 70 90
cookies to Total
enableassets
essential
site 4,540 4,160
functionality, as well as marketing,
personalization,
Equityand
analytics. You
may change £1your settings
ordinary at any
shares time 500 500
or accept the defaultearnings
Retained settings.
2,740 2,540
Non-current liabilities
Loan from Razak plc 800 800
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Current liabilities
Trade payables 290 240
Marketing
Tax payable 210 80
Total equity and liabilities
Personalization 4,540 4,160
Included in Assulin's non-current assets is a property which had a carrying amount of £1.2 million at
Analytics
31 March 20X2. This property was estimated to have a fair value of £2.6 million at this date, and a
remaining useful life of five years.
Save Accept All
Financial reporting questions 27
Exhibit 2: Draft statement of financial position for Razak plc at 30 September 20X2
£'000
Non-current assets
Property, plant and equipment 6,000
Investment in Assulin 9,325
Loan to Assulin 800
Other financial assets 1,308
17,433
Current assets
Inventories 1,140
Receivables 960
2,100
Total assets 19,533
Equity
£1 ordinary shares 2,800
Share premium account 7,400
Retained earnings 2,510
Available-for-sale reserve
reserve 750
13,460
Non-current liabilities 2,788
Current liabilities
Bank overdraft 1,220
Trade payables 865
Tax payable 1,200
3,285
Total equity and liabilities 19,533
Exhibit 3: Imposter bond
Razak plc purchased a 6% bond in Imposter plc on 1 October 20X1 (the issue date) at par for
£1.2 million. The interest is payable annually in arrears. The bond is redeemable on 30 September 20X4
for £1.575 million. It is currently recognised
recognised in 'oth
'other
er financial assets' in the draft statement
statement of financial
position at amortised cost, and has been classified as 'held-to-maturity'. The bond has an effective
annual rate of interest of 15%.
After paying the interest on its due date of 30 September
September 20X2, Imposter
Imposter went into administration in
early October 20X2. It is estimated that only 40% of the maturity value will be repaid on the original
repayment date of 30 September 20X4. No further interest will be paid.
20X2.
The annual market interest rate on a similar two-year, zero-coupon bond is 15% at 30 September 20X2.
The chief executive of Razak plc is also a director of Imposter and has a 5% shareholding in Imposter.
The chief executive authorised the purchase of the bond. There is no record of this matter in the board
minutes.
Exhibit 4: Proposed pension plan
The directors of Razak are considering setting up a pension plan in the next accounting period with the
following characteristics:
characteristics:
This website stores data such as
cookies to (1)
enableThe pensionsite
essential liabilities would be fully insured and indexation of future liabilities will be limited up to
to
functionality, as and
well including the funds available in a special trust account set up for the plan, which is not at the
as marketing,
disposal of Razak.
personalization, and analytics. You
may change (2)your settings
The at any
unttime
trust account
acco will be built up by the insurance company
company from the surplus yield on investments.
investments.
or accept the
(3) default settings.plan will be an average pay plan in respect
The pension respect of which
which the entity
entity pays insurance
insurance
premiums to a third party insurance company to fund the plan.
(4) Every year 1% of the pension fund
Privacy Policy fund will be built up and employees
employees will pay a co contribution
ntribution of 4% of
their salary, with the employer paying the balance of the contribution.
Marketing
(5) If an employee leaves Razak and transfers
transfers the pension to another fund,
fund, Razak will be liable for, or is
refunded the difference between the benefits the employee is entitled to and the insurance
Personalization
premiums paid.
Analytics
In the light of the above, the directors believe that the plan will qualify as a defined contribution plan
under IAS 19, Employee Benefits rather than a defined benefit plan, and will be accounted for
Saveaccordingly. Accept All
28 Corporate Reporting: Question Bank
Bank
13 Finney plc
Finney plc is a UK-based company that produces engineering equipment for the mining industry. Finney
has a number of investments both in the UK and overseas, as well as an active treasury function that
trades in commodities.
You are Marina Bujnowicz,
Bujnowicz, and you recently
recently joined Finney
Finney as an ICAEW Chartered Accountant
Accountant to help
finalise the financial
financial statements for
for the year ended 30
30 September 20X2.
20X2.
You receive the following email from
from a director of Finney, Simone
Simone Hammond.
From:
From: Simone Hammond
To
To:: Marina Bujnowicz
Re
Re:: Financial Statements for year ended 30 September 20X2
Date: 3 November 20X2
Dear Marina,
Finney's treasury department has gathered together information relating to outstanding issues for
( Exhibit 1).
inclusion in the financial statements (Exhibit 1). Draft financial statements are shown in Exhibit 2.
2.
Please review this information and prepare for me a briefing note, including any relevant calculations
and journals, that sets out the financial reporting consequences for the year ended 30 September 20X2
of the issues contained in Attachment 1. 1. Discuss any further financial reporting consequences that may
arise in respect of these issues in future reporting periods including the implications of the future
implementation of IFRS 9, Financial Instruments .
2 in the light of your conclusions
Please could you also re-draft the financial statements in Attachment 2
regarding the financial reporting issues identified.
Regards
Simone
Requirement
Requirement
Draft the briefing note requested by Simone. Total: 30 marks
Exhibit 1: Outstanding issues
(a) Sale of specialist mining equipment to Muzza Ltd
Ltd
Finney sold a piece of specialist mining equipment to Muzza, on 1 October 20X1, for £5 million.
The terms of the transaction were that Muzza would pay for this equipment on 30 September 20X2
and incur an interest charge of 3% per annum until payment is made.
The market interest rate for companies with a similar risk profile to Muzza is 10% per annum.
Muzza contacted Finney in September 20X2 explaining that it is having financial difficulties, and
would not be in a position to make a payment on 30 September 20X2.
Muzza instead offered the following repayment schedule in full settlement of the equipment and
This website stores data such as
the interest obligation:
cookies to enable essential site
functionality, as Date
well as marketing, £'000
personalization,30 and analytics. 20X3
September You 1,500
may change your 30settings at any
September time
20X4 2,000
30 September
or accept the default settings. 20X5 2,000
Following a discussion with a credit agency, we are confident that Muzza can meet the revised
schedule of payments. We therefore believe we should accept the proposal.
Privacy Policy
(b) Other trade receivables
(b) receivables
Marketing
The impairment of other trade receivables has been calculated using a formulaic approach which is
Personalization
based on a specific percentage of the portfolio of trade receivables. The general provision approach
has been used by the company at 30 September 20X2. At 30 September 20X2, one of the credit
Analytics
customers,
of £4 millionTechnica, has come
from Technica will to
bean arrangement
paid with Finney
on 30 September 20X3whereby
togetherthe amount
with outstanding
a penalty of
Save Accept All
Financial reporting questions 29
£100,000. The total amount of trade receivables outstanding at 30 September 20X2 was £11 million
including the amount owed by Technica.
The following is the analysis of the trade receivables.
Cash to be
Balance received
£m £m
Technica 4 3.9*
Multica and other receivables 7 6.6
11 10.5
*£4.1m discounted at 5%
Finney has made an allowance of £520,000 against trade receivables which represents the
difference between the cash expected to be received and the balance outstanding plus a 2%
general allowance. Multica is one of Finney's largest customers and has a similar credit risk to the
'other receivables'. (Use a discount rate of 5% in any calculations.)
(c) Copper inventories contract
contract
At 1 July 20X2 Finney had inventories
inventories of 1,000
1,000 tonnes of copper. The average
average historic cost of
of the
copper was £9,200 per tonne.
To protect against a decline in copper prices, on 1 July 20X2 Finney entered into a futures contract,
using a recognised commodities exchange, to sell 1,000 tonnes of copper for £9,200 a tonne. (The
fair value
value of
of the futures
futures contract
contract at
at that date was
was zero.)
zero.) The
The contrac
contractt matures
matures on 31 Decemb
December er 20X2.
20X2.
Our compliance department designated the futures contract as a fair value hedge of the copper
inventory, and believes it to be highly effective in offsetting changes in the fair value of the copper.
At 30 September
September 20X2, the fair
fair value of the copper
copper inventory
inventory had fallen to £8,200
£8,200 a tonne
tonne and, at
In September 20X2 there was an explosion in one of Bopara's largest mines, which caused its
Marketing
permanent closure. Finney's shareholding in Bopara decreased in value to $11.34 million at
Personalization
30 September 20X2 as a consequence.
Analytics
Relevant exchange rates were:
1 October 20X0 £1 = $1.50
30 September 20X1 £1 = $1.60
30 September 20X2 £1 = $1.62
Other comprehensive
comprehensive income 7
Total comprehensive income for the year 38
Draft statement of financial position as at 30 September 20X2
£m
Non-current assets
Property, plant and equipment 84
Available-for-sale financial
financial assets 36
Other financial assets 10
Inventories 66
Receivables 56
Total assets 252
14 Melton plc
This website stores data such as
cookies to Melton plc ('Melton')
enable essential site owns a number of subsidiaries that operate high quality coffee bars.
functionality,
Youasare
wella as marketing,
recently appointed investment
appointed investment analyst for a major
major investment bank
bank that owns 6% of the
personalization, and analytics. You
issued equity of Melton. You have been asked to analyse the profitability, cash flows and investor ratios
may change of your settings
Melton. at anytotime
You need prepare notes for a meeting with the investment team to determine whether the
or accept the default settings.
investment bank should consider disposing of its investment.
One of your colleagues has left you a note of background information concerning ( Exhibit 1)
concerning Melton (Exhibit 1)
(Exhibit 2).
and some financial information (Exhibit 2).
Privacy Policy
Your meeting notes
notes should do the following:
Marketing
(a) Evaluate the investment team
team member's comment (Exhibit
(Exhibit 1 point
point (8)), explaining the usefulness
and limitations of diluted earnings per share information to investors.
Personalization
(b) Analyse the profitability, cash flow and investor ratios of Melton plc, calculating additional
additional relevant
Analytics
ratios tofurther
require assist in your analysis. Your notes should identify and justify matters that you consider
investigation.
Save Accept All
Financial reporting questions 31
(c) Explain the validity or otherwise
otherwise of your colleague's statement that Melton plc is unable to pay a
dividend because of the debit balance on consolidated retained earnings (Exhibit 1, point (7)).
(d) Discuss the reporting implications of the issue raised in the
the director's comment
comment in Exhibit 1, point (9).
(9).
Requirement
Prepare the meeting notes for the investment team. Total: 30 marks
marks
Exhibit 1: Notes on background information for Melton
(1) Melton has a reputation for
for depreciating its assets more slowly
slowly than others
others in the
the sector.
(2) The strategy of the group
group is to fund
fund new outlet capital expenditure
expenditure from existing operating cash
flows without the need to raise new debt.
(3) Like for like revenue growth in the sector is estimated at 4.1% pa.
(4) Grow 'outlet profits' (gross profits) as a percentage
percentage of outlet revenue year on year.
year.
(5) Increase promotional
promotional and advertising
advertising spend on new outlets to encourage
encourage strong initial sales.
(6) Management are accused
accused of concentrating
concentrating on new outlet openings to
to the detriment of existing
outlets.
(7) Melton is unable
unable to pay dividends as the
the company has a debit balance
balance on its consolidated retained
earnings.
(8) One member of of the investment
investment team has questioned
questioned the usefulne
usefulness
ss of diluted earnings per
per share,
which, he believes, 'adds in unnecessary complications that may never happen'.
(9) Melton acquired 8,000
8,000 out of the 10,000 shares of R.T. Café Ltd, which operates a chain of cafés
cafés
offering simple food and a good but limited range of coffees. Mr Bean, one of the directors of
Melton, has stated the following:
"While R.T. Café Ltd is profitable, long-term it is not a good fit with the image we are trying to
portray. I suggest we dispose 2,000 of our shares in this subsidiary in January 20X8. Preliminary
enquiries suggest that we could make a profit of £500,000, which would be a nice boost to
earnings per share for next year."
Exhibit 2: Financial information
Melton plc: Consolidated statement of profit or loss for the year ended 30 September
20X7 20X6
£'000 £'000
Revenue 37,780 29,170
Cost of sales (28,340) (22,080)
Gross profit 9,440 7,090
Administrative expenses
expenses (6,240) (4,480)
Profit from operations 3,200 2,610
Finance costs (410) (420)
Profit before taxation 2,790 2,190
Tax
Tax (610)
(610) (460)
(460)
Profit for the year 2,180 1,730
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enable essential
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– basic 26.8p 21.3p
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Earnings as marketing,
share – diluted 21.2p 19.2p
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may change Noyour
dividends have
settings been
at any paid or proposed in 20X6 and 20X7.
time
or accept the default settings.
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Marketing
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Melton plc: Consolidated statement of cash flows for the year ended 30 September
20X7 20X6
£'000 £'000 £'000 £'000
Cash flows from operating activities
Cash generated from operations (Note) 6,450 4,950
Interest paid (410) (440)
Tax paid (320))
(320 (260)
Net cash from operating activities 5,720 4,250
Cash flows from investing activities
Purchase of non-current assets (5,970) (5,790)
Proceeds on sale of non-current assets
assets 20 30
Net cash used in investing activities (5,950) (5,760)
Cash flows from financing activities
Proceeds of share issue 240 20
Borrowings 650
650 2,000
Net cash from financing activities 890 2,020
Analysis of revenue, outlet profits and new outlet openings for the year ended 30 September
30 new outlets were opened during the year ended 30 September 20X7 to bring the total to 115.
20X7 20X6
£'000 £'000
Revenue per outlet
Outlets open at 30 September 20X6 354 343
Outlets opened in current financial year 258 –
15 Fly-Ayres
Fly-Ayres plc (Fly-Ayres), an unlisted company, was established in 20X5 by Bill Ayres, a successful
entrepreneur, as a budget airline business. The business has grown rapidly since start up. Bill Ayres
currently owns 75% of the ordinary share capital, but in a recent press interview he announced that he
planned to seek a stock exchange listing for the company during 20X9. This would help to raise new
capital for Fly-Ayres' planned expansion of services over the next two or three years.
It is now 20 November 20X8. Fly-Ayres's finance director, Tom Briar, is an ICAEW Chartered Accountant.
He qualified many years ago and until 20X5 worked as an insurance salesman. In 20X5, Bill Ayres invited
Tom, an old school friend, to be Fly-Ayres' finance director.
The company has just appointed George, a recently-qualified ICAEW Chartered Accountant, as Tom's
assistant. George replaced Sally, also ICAEW qualified, who moved to another company. Tom has
prepared Fly-Ayres's financial statements for the year ended 31 October 20X8, in accordance with IFRS,
as set out in Exhibit 1,
1, and included some additional information in Exhibit 2, 2, including information
i nformation
from Sally on the
the share options scheme and the
the disposal of a financial asset.
financial asset.
Requirements
15.1 Draft the requested report for the non-executive director. Your report should:
(a) Address the usefulness of 'industry average' ratios.
(b) Provide additional comment oon
n whether
whether the finance
finance director, Tom Briar, is correct in his
comments about the financial reporting treatment of employee share options, and if i f not,
be.
what the correct treatment should be.
(c) Redraft the 20X8 financial
financial statements,
statements, making
making appropriate adjustments for
for the share options
options
and the disposal of the available-for-sale financial asset to comply with IFRS. You should make
adjustments, if needed, to ratios as calculated, in order to facilitate interpretation.
(26 marks)
15.2 Draft a note of any ethical implications of the scenario for both Tom Briar and his assistant George.
Your answer should refer to the back
background
ground information
information above and also to
to the ethical issue raised
( Exhibit 3)
in the last paragraph of Tom's email to George (Exhibit 3). (4 marks)
Total: 30 marks
Exhibit 1: Financial statements
Fly-Ayres: Statement of profit or loss and other comprehensive income for the year ended
31 October
20X8 20X7
£m £m
Revenue 158.4 138.3
Cost of sales (see below) (137.3) (103.8)
Gross profit 21.1 34.5
Other income 0.5
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Profit from operations 14.0 29.3
functionality, as well as marketing,
Finance costs (10.4) (10.0)
personalization,
Profit and analytics.
before taxationYou 3.6 19.3
may change your settings at any time
Taxation (1.4) (5.2)
or accept the default
Profit settings.
for the year 2.2 14.1
Other comprehensive
comprehensive income 30.0 1.0
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Total comprehensive income for the year 32.2 15.1
Marketing
No dividends have been paid or proposed.
Personalization
Analytics
Extract from the financial statements: Analysis of cost of sales
Cost as a Cost as a
percentage percentage
20X8 of revenue 20X7 of revenue
£m £m
Fuel 57.7 36.4% 36.4 26.3%
Airport charges 25.2 15.9% 20.2 14.6%
Crew costs 21.7 13.7% 21.2 15.3%
Depreciation and leasing costs 14.3 9.0% 10.6 7.7%
Other costs 18.4 11.6% 15.4 11.1%
137.3
137.3 103.8
103.8
Fly-Ayres: Statement of financial position as at 31 October
20X8 20X7
£m £m £m £m
ASSETS
Non-current assets
Property, plant & equipment 272.9 222.1
Financial asset 2.0 2.0
Current assets
Trade and other receivables 9.3 8.2
Cash and cash equivalents 11.2 7.4
20.5 15.6
Total assets 295.4 239.7
EQUITY AND LIABILITIES
Issued capital: £1 ordinary shares 25.0 25.0
Revaluation surplus
surplus 30.0
30.0 –
Retained earnings and other reserves 54.3 52.0
Equity 109.3 77.0
Non-current liabilities
Borrowings and obligations under finance leases 150.2 123.7
Maintenance provisions 5.2 4.8
Deferred tax liability 2.1 2.0
157.5 130.5
Current liabilities
Trade and other payables 18.4 17.3
Taxation 1.6 5.7
Borrowings and obligations under finance leases 8.6 9.2
28.6 32.2
Total equity and liabilities 295.4 239.7
Sally, George's predecessor, correctly accounted for the share option scheme in the financial
statements for the year ended 31 October 20X7, but left before making any adjustments for the
year ended 31 October 20X8.
(3) During the year ended
ended 31 October
October 20X8 Fly-Ayres
Fly-Ayres sold a financial asset which
which had a carrying
carrying value
of £2 million at 1 November 20X7 for £3 million in cash. This asset had always been classified as
available-for-sale by the company and during the period in which it was owned £500,000 of
valuation gains were recognised directly in equity, and on which deferred tax was provided at
20%. Sally correctly included the current tax payable on the sale in the income tax expense, but
she left before making any other accounting entries in
i n respect of this sale.
Personalization
Analytics
16 Aroma
Jo West owned a highly successful technology business which she sold five years ago for £20 million.
She then set up an investment entity that invests primarily in smaller private businesses in need of short
to medium term funding. Jo sits on the board as a non-executive director
director of a number of the entities
that her business has invested in and is often able to offer valuable business advice to these entities,
especially in the area of research and development activities. You are Lois Mortimer, a member of Jo's
investment management team.
Jo has been approached by the managing director of Aroma, a small private entity looking for
investment; she has asked you, as a member of her investment management
management team, to produce a report
analysing the financial performance of Aroma for the year ended 30 June 20X1 and its financial position
at that date. Your report should contain a recommendation as to whether she should consider this
investment further.
Jo has sent you the following email:
From:
From: [email protected]
To
To:: [email protected]
Date::
Date 31 August 20X1
Subject::
Subject Financial performance of Aroma
Thank you for agreeing to do this report for me. I've got hold of some extracts from Aroma's financial
(Exhibit).
statements (Exhibit).
Some background detail for you:
Aroma has been trading for more than 10 years manufacturing
manufacturing and selling its own branded perfumes,
perfumes,
lotions and candles
profits have to theover
been steady public
the in itsten
last 15 years.
retail stores and 18
However, to other
monthslarger
ago,retailing entities.
the newly Revenue
appointed salesand
director saw an opportunity to sell the products online. Using long-term funding, she set up an online
shop. The online shop has been operating successfully for the last 14 months. The sales director also
used her prior contacts to secure a lucrative deal with a boutique hotel chain for Aroma to manufacture
products for the hotel, which carry the hotel chain name and logo. The contract was set up on
1 January 20X1.
The managing director of Aroma now believes that the business could take advantage of further sales
opportunities and does not wish to lose the momentum created by the sales director. The bank that
currently provides both the long-term loan and an overdraft facility has rejected Aroma's request for
additional funds on the basis that there are insufficient assets to offer as security (the existing funding is
secured on Aroma's property, plant and equipment).
The online store earned a negligible amount of revenue and profit in the year ended 30 June 20X0.
Statement of financial position as at 30 June
June
20X1 20X0
£'000 £'000
ASSETS
Non-current assets
Property, plant and equipment 380 400
Intangible assets – development costs 20 10
400 410
Current assets
Inventories
Inventories
Receivables 1,260
1,260
455 1,180
1,180
310
Cash and cash equivalents – 42
1,715 1,532
Total assets 2,115 1,942
EQUITY AND LIABILITIES
Equity
Equity
Share capital (£1 equity shares) 550 550
Retained earnings 722 610
Total equity 1,272 1,160
Non-current liabilities
Long-term borrowings 412 404
Current liabilities
Payables 363 378
Short-term borrowings (overdraft) 68 –
431 378
Total liabilities 843 782
Total equity and liabilities 2,115 1,942
Requirement
Prepare the report required by Jo West. Total: 30 marks
17 Kenyon
You work for a team of investment
investment analysts at Inver
Inver Bank.
Kenyon plc, a listed entity, operates a number of bottling plants. The entity's business consists primarily
of contract work for regular customers. Revenue from existing contracts has increased in the year and in
November 20X0 Kenyon plc secured a new contract with a high profile drinks company. Kenyon plc
paid a dividend of £100 million during the year ended 31 October 20X1.
Gary, a client, recently received the latest published financial statements of Kenyon plc and was
impressed by the level of profitability and the dividend paid. He was also impressed with the fact that
the share price had increased from £2.80 per share on 31 October 20X0 to £4.90 on 31 October 20X1.
Gary is now considering acquiring some of Kenyon plc's shares and has asked for your advice in an
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"I am
functionality, interested
as well in your views on whether it is worth investing in Kenyon plc. It would be useful in
as marketing,
making
personalization, andmyanalytics.
decision You
if you could produce a report which:
may change (a)your settings
analyses at financial
the any time
finan cial performance of
of Kenyon plc for the year to 31 October 20X1
20X1 and its financial
financial
or accept the default settings.
position at that date and discusses whether or not it is a good investment at this time.
(b) shows the best and worst case potential impact of the contingent liability on
on Kenyon plc's
profitability and investment potential.
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discusses any further information I may need to access regarding the contingent liability in
Marketing advance of making a final investment decision."
You have obtained
obtained the financial statements
Personalization statements of Kenyon (Exhibit 1),
Kenyon plc (Exhibit 1), together with some further
(Exhibit 2).
information (Exhibit 2).
Analytics
Requirement
Save Acceptrequired
Prepare the report All by Gary Watson. Total: 30 marks
38 Corporate Reporting: Question Bank
Bank
Exhibit 1 – Financial statements
Kenyon plc
Statements of financial position as at 31 October
20X1 20X0
ASSETS £m £m
Non-current assets
Property, plant and equipment 381 346
Investment in associate (Note 1) 56 –
437 346
Current assets
Inventories 86 40
Receivables 72 48
Cash and cash equivalents 3 60
161 148
Total assets 598 494
Current liabilities
Trade and other payables
payables 95
95 66
66
Total liabilities 133 71
Total equity and liabilities 598 494
Kenyon plc
Statements of profit or loss and other comprehensive income for the year ended 31 October
20X1 20X0
£m £m
Revenue 663 463
Cost of sales (395) (315)
Gross profit 268 148
Distribution costs (27) (20)
Administrative expenses
expenses (28) (17)
Share of profit of associate (Note 1) 7 –
Investment income 1 6
Profit
Income before tax
tax
tax expense 221
221
(45) 117
117
(24)
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Profit datayear
for the such as 176 93
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enablecomprehensive
essential site income (not re-classified to P/L):
Remeasurement loss on pension assets and liabilities (Note 2)
functionality, as well as marketing, (48) (10)
Tax effect
personalization, and of other comprehensive
analytics. You income 14 2
Other comprehensive
may change your settings at any time income for the year, net of tax (34) (8)
Total
or accept the comprehensive
default settings. income 142 85
(c) Contingent liability
liability
The notes to the financial statements include details of a contingent liability of £10 million. On
5 October 20X1, Kenyon plc suffered a chemical leak at one of the bottling plants and there is
currently an investigation into the potential damage this caused to a nearby river and surrounding
area. The investigation is at an early stage and it is not yet clear whether Kenyon plc was negligent.
As stated in the notes to the financial
financial statements Kenyon plc's lawyers
lawyers have intimated that, in their
opinion, Kenyon plc is likely to lose the case. No obligation has been recorded because the amount
of potential damages could not be measured with sufficient reliability at the year-end. However,
the lawyers have given a range of possible estimates of between £7 million and £13 million. The
case is due to be decided by 31 October 20X2.
Analytics
Other comprehensive income 600 –
Draft statements of financial position at 31 May 20X4
Snedd Bellte
£'000 £'000
Assets
Non-current assets
Property, plant and equipment 3,512 1,463
Financial assets (Notes 1 and 2) 900 –
4,412 1,463
D$'000 D$'000
Non-current assets 160 –
Current liabilities – 40
Current assets 50 –
340 340
The functional currency of Terald is the Distanlan dollar (D$). The carrying amount of the net
assets of Terald at the acquisition date was D$160,000,
D$160,000, which approximated to fair value.
Terald uses Distanlan GAAP in preparing its financial statements. Distanlan GAAP is very similar to
IFRS. However, it differs in respect of the measurement of financial assets. Terald's non-current
assets at 31 May 20X4 include D$10,000, which is the cost of an investment in a derivative
financial asset acquired on
on 30 November
November 20X3. Distanlan
Distanlan GAAP requires
requires measurement of this type
of financial asset, subsequent to acquisition, at cost. The fair value of the financial asset at 31 May
20X4 was D$15,000.
Relevant exchange rates are as follows:
At 1 December
December 20X3 £1 = D$2.0
At 31 May 20X4
20X4 £1 = D$2.2
Average for period
period 1 December 20X3
20X3 to 31 May 20X4 £1 = D$2.1
D$2.1
(3) Deferred tax
No adjustments have been made for deferred tax in the draft financial statements for the year
ended 31 May 20X4. At that date, Snedd had taxable temporary differences in respect of
accelerated capital allowances of £300,000. Also, at 31 May 20X4, Bellte had taxable temporary
differences in respect of accelerated capital allowances of £180,000. During the year ended 31 May
20X4, Snedd recognised a revaluation surplus of £600,000 in respect of its head office building. As
permitted by
revaluation IFRS, Snedd's
surplus directors
in respect have decided
of this revaluation. notrevaluation
The to make ansurplus
annualwill
transfer fromwhen
be taxed the the
building is sold in the future. Snedd estimates that the appropriate tax rate for recognition of
deferred tax liabilities at 31 May 20X4 is 22%.
It may be assumed that no deferred tax adjustments are required in respect of any other items for
Snedd, Bellte or Terald.
(4) Payment of a supplier in ordinary shares
With effect from
from 1 April 20X4,
20X4, Snedd's directors decided to adopt a policy
policy of paying certain key
suppliers in Snedd's shares in order to ensure that the suppliers have a stake in the company's long-
term success.
On 1 April 20X4 Snedd issued 270 of its £1 ordinary shares to Whelkin Ltd, a supplier of soap
flakes, in full settlement
settlement of a trade pay
payable
able amount of £6,000
£6,000 which had been outstanding
outstanding since
28 February 20X4. No accounting entries have been made to recognise this transaction, and the
payable of £6,000 is still included in Snedd's trade payables in the draft financial statements at
31 May 20X4. An external consultant has estimated that, at 1 April 20X4, one ordinary share in
Snedd
This website stores had
data a fair
such asvalue of £26.50.
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19 BathKitz (November 2014)
personalization, and analytics. You
may change your settings at any time
You are an ICAEW Chartered Accoun
Accountant
tant employed as an analyst at the private equity
equity firm, ADV
or accept the default settings.
Investments (ADV), which ownsowns 20% of the equity shares in BathKitz plc. BathKitz is an AIM-listed
company, which sells a range of flat-pack kitchens and bathrooms to building trade customers. Your
manager, who has recently been appointed a non-executive director of BathKitz, gives you the
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following briefing:
briefing:
Marketing
"I have become increasingly concerned about ADV's investment in BathKitz. In particular, BathKitz's
revenue has increased, but there has been a net cash outflow from operating activities. The financial
Personalization
controller of BathKitz provided me with some extracts from the draft financial statements for the year
Analytics (Exhibit 1).
ended 30 September 20X4 (Exhibit 1). I have performed some initial analysis on these and asked the
financial contro2).
controller
(Exhibit
today (Exhibit 2ller
). for explanations
explanations of some of the numbers. The explanations were emailed to me
Save Accept All
42 Corporate Reporting: Question Bank
Bank
I have to go to a meeting now, so I would like you to review the draft financial statements extracts,
together with the explanations and prepare a briefing note for me. Specifically, in the briefing note I
would like you to:
(a) explain the appropriate financial reporting treatment
treatment for each
each of the
the matters in the email
(Exhibit 2) showing journal entry adjustments where possible. I will have the tax looked at
separately, so please ignore any current or deferred tax adjustments;
(b) prepare a revised statement of
of cash flows,
flows, after recording
recording your correcting
correcting journal entries. Include a
note reconciling the adjusted profit before tax with cash generated from operations; and
(c) explain briefly why the revised statement
statement of cash flows shows
shows a net cash outflow from operating
revenue."
activities despite an increase in revenue."
Requirement
Prepare the briefing note requested by your manager. Total: 26 marks
Exhibit 1: BathKitz draft financial statements extracts
Draft summary statement of profit or loss for the year ended 30 September 20X4
20X4 20X3
£'000 £'000
Revenue 617,000 553,000
Operating profit 41,039 52,500
Investment income 5,200 1,200
Finance costs (3,500) (1,000)
Profit before tax 42,739 52,700
Income tax expense (10,000) (11,000)
Current assets
Inventories 93,062
Trade receivables 134,500
Cash and cash equivalents 18,622
246,184
Analytics
Draft statement of cash flows for the year ended 30 September 20X4
£'000 £'000
Cash flows from operating activities
Profit before taxation 42,739
Adjustments for:
Depreciation 10,631
Increase in provisions 3,250
Gain on investment property (4,000)
Interest expense 3,500
56,120
Increase in inventories
Increase in trade receivables
receivables (53,978)
(53,978)
(23,090)
Increase in trade payables 27,400
Cash generated from operations 6,452
Interest paid (3,500)
Income taxes paid (12,000)
Net cash used in operating activities (9,048)
The manager remains in the employment of BathKitz until 1 January 20X7.
Revenue for their depot increases
increases by an average of 10% per year over the three years of
the vesting period.
The fair value of an option was estimated to be £4.60 at 1 January 20X4 and £4.80 at
30 September 20X4. The price of one BathKitz share at 30 September 20X4 was £5.90.
At 30 September
September 20X4, all 100 managers were still employed,
employed, but the directors
directors estimate that
six managers will leave the scheme before 1 January 20X7 when the options will vest.
As there is no cash cost to the company, no adjustment has been made to the financial
financial
statements for the share options, but the motivational impact has already been seen in the
increase in revenue, particularly in the last three months of the year.
(b) New 'Pick and Collect' sales
sales
Since incorporation, BathKitz has operated only by means of trade counter sales. Trade
counter customers visit a depot to order and collect their goods. The number of depots has
been constant for many years. Customers receive 60 days' credit and BathKitz recognises
revenue on collection of goods by the customer from its depots.
Following an internal review, a new online sales system was developed called 'Pick and
Collect'. The system allows trade customers to order goods online and collect directly from
the depot. To service this system, 10 new depots were opened on 1 July 20X4 in various
locations in the UK. Revenue from these sales is recognised when the order is placed online by
the customer and sales are made at a standard discount of 10% off list price and 60-day credit
terms. An analysis of revenue is as follows:
Year ended 30 September 20X4 20X3
£'000 £'000
Trade counter sales
sales 804,550
804,550 737,334
737,334
'Pick and Collect' sales 54,560 –
Total trade discounts (242,110) (184,334)
Revenue after trade discounts 617,000 553,000
The 'Pick and Collect' sales have created problems with credit co
control
ntrol as existing customers
continue to take 60 days' credit from when they collect their goods, which can be up to
two weeks after placing the order online. Receivables from 'Pick and Collect' customers were
£39 million at the year end, which included £10 million for goods sold and not collected.
(3) Decrease in operating profit margin from 9.5% (20X3) to 6.7% (20X4)
BathKitz installed automated storage and retrieval equipment in its depots. The equipment, which
is highly specific to BathKitz's business, was acquired by means of a lease with EG Capital. The
lease, which commenced
commenced on 1 July 20X4, has an implicit annual interest rate of 7%, and BathKitz is
required to make four annual payments of £4.7 million payable in arrears. The equipment could
have been purchased for a cash price of £16 million. A rental expense of £1.2 million, for the three
months to 30
equipment hasSeptember
a useful life20X4,
of sixhas been
years included
with in operating
a zero residual value.expenses and in provisions. The
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enableNew depot site
essential leases
functionality, as BathKitz
well as marketing,
rents its 10 new depots from a property company called HYH on four-year operating
personalization,leases
and analytics. You
which commenced on 1 July 20X4. The total annual rentals have been agreed at £10 million.
may change your settings as
However, at an
anyincentive
time to sign the lease, HYH gave BathKitz an initial rent-free period of six
or accept the default settings.
months, which means that BathKitz will pay £35 million in total. As the rent payment had not been
paid at the year-end, no charge has been made in the statement of profit or loss.
(5) Increase in long-term borrowings
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To finance expansion, on 1 October 20X3 BathKitz raised £20 million by issuing, at par, 5% three-
Marketing
year convertible bonds. The issue proceeds
proceeds of £20 million
million have been credited to long-term
long-term
borrowings. The coupon interest has been paid to the bond holders on 30 September 20X4 and
Personalization
has been recognised in finance costs for the year. The annual market rate of interest for a similar
Analyticsbond with a three-year term, but no conversion rights, is 7%.
Privacy Policy
Marketing
Personalization
Analytics
20 Dormro
You are Bernie Eters, an audit assistant manager working for FG, ICAEW Charte
Chartered
red Accountants. The
audit engagement manager in charge of the Dormro Ltd and Dormro group audit gives you the
following briefing:
"This audit is turning into a nightmare and I need your assistance today. The Dormro finance director
has just informed me that Dormro acquired an investment in Klip Inc., an overseas company resident in
Harwan, on 31 January 20X2, which is not included in the consolidation schedules. Klip is audited by a
local Harwanian auditor.
I am also unhappy about the level of detailed testing carried out by our audit senior. I have provided
you with the following relevant work papers:
I have a meeting with the audit partner tomorrow and I need to inform her of any issues relating to the
group financial statements and to provide a detailed summary of the progress of our work. Please review
all the information provided and prepare a work paper which:
(a) identifies and explains
explains any known
known and potential issues which you believe may give rise to material
audit adjustments or significant audit risks in the group financial statements; and
(b) outlines, for each issue, the additional audit procedures,
procedures, if any, required to enable us to sign our
audit opinion on the group financial statements.
Also, please include in your work paper a revised consolidated statement of financial position as at
30 April 20X2, which includes the overseas
ov erseas subsidiary, Klip."
Requirement
Prepare the work paper requested by the audit engagement manager. Total: 40 marks
Exhibit 1: Extract from Dormro audit planning memorandum for year ended 30 April 20X2
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Marketing
Personalization
Analytics
Exhibit 2: Dormro: consolidation schedules for the year ended 30 April 20X2
Statement of financial position
Dormro Secure CAM Adjustments Notes Group
ASSETS £'000 £'000 £'000 £'000 £'000
Non-current assets
Property, plant and equipment 45 2,181 788 3,014
Goodwill – – – 9,490 1 6,251
(3,239) 2
Investments 10,180 – 15 (10,010) 1 185
Current assets
assets
Inventories – 3,380 2,947 6,327
Trade receivables 4,292 4,849 9,141
Intercompany receivables 2,045 – 1,474 (3,519) 3 –
Cash and cash equivalents 567 (706))
(706 382 243
Total assets 12,837 9,147 10,455 (7,278) 25,161
EQUITY AND LIABILITIES
Equity
Share capital 200 10 510 (520) 1 200
Retained earnings at 1 May 20X1 4,523 973 1,758 (1,758) 2 5,496
Current liabilities
liabilities
Trade and
other payables 37 5,702 4,513 10,252
Intercompany payables – 3,329 90 (3,419) 3 –
Current tax payable 23 – 622 645
Marketing
2 This adjustment
adjustment removes from the statement of profit or loss half of CAM's results as the subsidiary
was acquired on 31 October 20X1. In addition, all pre-acquisition retained earnings have been
Personalization
eliminated and treated as part of the goodwill calculation.
Analytics
3 These adjustments eliminate intragroup balances and management charges from Dormro to its
subsidiaries. Theand
difference of £100,000 between the receivables and payables has been written off
Save to profitAccept
or loss All is concerning a dispute between Secure and CAM.
48 Corporate Reporting: Question Bank
4 This loan was taken out by Dormro on 1 May 20X1. I have agreed tthe he balance to the loan
agreement, noting capital repayable over 8 years in equal annual instalments commencing
1 May 20X2 and an effective interest rate of 6.68%. An arrangement fee of £200,000 has been
expensed to profit or loss and interest is payable at 6% annually in arrears. An adjustment is
required to accrue for interest
in terest of £480,000.
Outstanding audit procedures
I have reconciled all balances from the consolidation schedules to the audit work papers for each
company, noting no exceptions. The following procedures are outstanding:
outstanding:
Secure
Review of the directors' assessment of the company's ability to continue as a going concern given the
loss for the year, the overdraft balance and the company's reliance on loans from other group
companies.
companies.
CAM
Final conclusion on the adequacy of the inventory obsolescence provision. CAM has applied the group
accounting policy in determining its provision, but this is based on historical sales. Given the technical
issues with the product range, I am concerned that the calculated provision may be understated by
around £220,000.
Audit procedures on the provision for warranty costs of £205,000
£205,000 (20X1: £275,000).
£275,000). Management
Management have
failed to supply any supporting documentation for this provision.
provision.
Secure and CAM
Receipt of bank confirmation letters and confirmation of balances due to other group companies.
Non-current liabilities
Personalization
Long-term borrowings 1,400
Analytics
Current liabilities
Trade and other
Save Acceptpayables
payables
All 1,380
1,380
Total equity and liabilities 4,680
Audit and integrated
integrated questions 49
Clearance from Harwanian auditors of Klip
From: Mersander Partners, Harwan
Date: 26 July 20X2
Subject: Audit of Klip for the ye
year
ar ended 30 April 20X2
20X2
To: Finance director, Dormro, United Kingdom
We have performed an audit of the accompanying
accompanying reporting package of Klip for the year ende
ended
d
30 April 20X2 in accordance with Harwanian Standards on Auditing and using materiality specified by
you of £250,000. The reporting package has been prepared in accordance with group accounting
policies as notified by Dormro. Where no group policy has been notified, the reporting package has
been prepared using accounting policies consistent with those adopted in previous years.
The net profit for the year increased by 10% compared to the previous year. This is due to a decrease in
inventory obsolescence provisions when the group accounting policy was applied.
There is no outstanding audit work which would affect our opinion and there are no uncorrected audit
adjustments.
In our opinion, the reporting package of the entity has been prepared in all material respects in
accordance with group accounting policies and presents fairly the results of Klip for the year ended
30 April 20X2 and its financial position as at that date.
Mersander Partners
21 Johnson Telecom
Johnson Telecom plc (Johnson) is a telecommunications consultancy company delivering telecoms
support to businesses across Europe. Johnson's treasury department uses financial instruments for both
speculative and hedging purposes. The company has an accounting year end of 31 December. The
company's financial statements show the following financial instruments:
Extracts from financial statements at 31 December
Draft
20X6 20X7
Financial assets £'000 £'000
Investments in equity 485 321
Derivatives 98 102
Debt investments 143 143
726 566
Financial liabilities
Loan note 2,000 2,000
2,000 2,000
You are Poppy Posgen, a newly qualified audit senior at Beckett & Co, Chartered
Chartered Accountants, and you
This websitearestores
assigned
datatosuch
the statutory
as audit of Johnson for the year ended 31 December 20X7. You have received
cookies to the following
enable email
essential sitefrom your manager, Annette Douglas.
functionality, as :well as marketing,
Date 7 February 20X8
personalization,
From: and analytics.
AnnetteYou Douglas <[email protected]>
may change Toyour
: settings at any
Poppy time <[email protected]>
Posgen <[email protected]>
or accept the default
Subject: settings.
20X7 Financial Statements
Attachments: Market information
information
Privacy Policy
Poppy,
Marketing
Following our meeting yesterday, I would like you to review the way Johnson have accounted for a
number of financial instruments. As you know, the Finance Director, who has prepared the supporting
Personalization
documentation, is on sick leave at the moment and is not expected to return to work until after the
financial
Analytics statements are published. The Financial Controller
Controller has provided all the information she can
find, but lacks the background knowledge on these financial instruments.
Save Accept All
50 Corporate Reporting: Question Bank
I have attached below the notes that the audit junior has taken in relation to the financial instruments.
Bear in mind that planning materiality for the financial statements as a whole is £80,000, and we have
set a lower performance materiality level for investments at 20% of planning materiality.
Investments in equity
The £485,000 balance at 31 December 20X6 represents two small investments in UK equity shares.
Johnson has held the investment in Cole for a number of years, and sold it on 14 August 20X7 for
£242,000. The investment in International Energy plc was acquired on 1 November 20X6. Both Cole plc
and International Energy plc are listed companies.
Valuation at Draft at
31 December 31 December
Historical cost 20X6 20X7
£'000 £'000 £'000
Cole plc (50,000 shares) 163 230 –
Routers plc (16,000 shares) – – 93
International Energy plc (30,000 shares) 270 255 228
433 485 321
The investments in both Cole plc and International Energy plc are designated as available for sale. In
previous years, any fair value gains or losses have been taken to the AFS reserve.
A new investment of 16,000
16,000 shares (out of a total of 50,000 share
shares)
s) in Routers plc was made on
8 November 20X7. In the Finance Director's absence, the Financial Controller could not find supporting
documents for the investment.
According to the Financial Times on
on that date, the bid-offer spread was £5.80–£5.83 at acquisition. The
Directors explained to me that this investment is a short-term investment and is held for trading, with
the aim of generating a profit if the price changes. As a result, it was designated as at fair value through
profit or loss.
The journal entries in respect of the disposal of Cole plc and the acquisition of the new investment in
Routers plc are shown in Attachment 2.
Derivatives
The balance comprises two derivatives:
(1) Put option
There is a put option to hedge against a fall in the share price of the 30,000 shares in International
Energy. The put was purchased on 1 January 20X7 at £2 per option and is exercisable at £9.00
until 31 December 20X8.
In the absence of the Finance Director, who prepared the documentation to support this hedge,
the documentation cannot be found. The option is accounted for using hedge accounting.
The Directors are unfamiliar with the hedge accounting rules and have asked us to outline the
hedging
This website stores data principles,
such as and explain how fair value hedge accounting changes the way the investment
cookies to enable and option are
essential siteaccounted for.
functionality, as They
well as marketing,
have also asked us to provide suitable documentation to support the fair value hedge. As the
personalization,original
and analytics. You
documentation has been lost, the Directors have suggested they may backdate the
may change your settings at any time
documentation as 1 January 20X7.
or accept the default settings.
(2) Interest rate swap
The interest rate swap is a five-year variable-to-fixed interest rate swap to hedge the interest rate
Privacy Policy risk of the loan note liability. The swap was entered into on 30 November 20X6. In the financial
statements for the year ended 31 December 20X6, the swap was recorded at a fair value of
Marketing
£38,000. The swap was designated as a hedge at inception and the hedging documentation was w as
reviewed by the audit team as part of last year's statutory audit.
Personalization
AnalyticsThe company applies cash flow hedge accounting to this swap. The Finance Director has prepared
a note on the accounting treatment of the interest rate swap (see Attachment 5).
Save Accept All
Audit and integrated
integrated questions 51
The terms of the swap:
£2 million notional amount
Pay 7% fixed, receive variable at LIBOR
Semi annual payments
The fair value of the swap at 31 December 20X7, based on current LIBOR rates, is £30,000.
Debt investments
The debt investment is a four-year quoted bond in Spence and May plc acquired on 1 January 20X6 and
classified as held to maturity. Half of the holding was sold on the last day of this year for £83,000.
Terms:
Acquired at nominal value of £140,000
Redemption at premium of £10,000 on 31 December 20X9
Coupon 10% pa, payable six-monthly in arrears (5% per six-month period)
Effective interest rate is 11.79% per annum (5.73% per six-month period)
Loan note
The loan note was issued at nominal value on 31 December 20X6 and is a five-year note at LIBOR with
semi annual payments. Issue and redemption of the loan is at the nominal value of £2 million. The
variable interest rate payments are hedged by the interest rate swap referred to in the Derivatives
section above.
Actions
I need you to:
(a) evaluate the accounting treatment
treatment adopted in the draft financial statements for the above financial
instruments, showing any journal entries where relevant. Explain any audit adjustments required;
(b) draft a summary
summary of the hedge accounting rules and hedging principles as requested by the
Directors, along with a sample hedging documentation. Explain separately how we should
approach the Directors' proposal to use hedging documentation prepared by us to support the put
option;
(c) identify and explain five key
key risks that arise from the derivatives trading activities,
activities, and the internal
controls that should be in place to mitigate these risks; and
(d) identify and explain
explain any addit
additional
ional audit evidence the audit team will need
need to obtain with regards
to the financial instruments.
Requirement
Prepare a memorandum giving the information required by Annette Douglas. Total: 40 marks
Attachment 1: Market information as at 31 December 20X7
This websiteShare prices
stores data such as
cookies to enable essential site Day's close Mid market Bid Offer
functionality, as well as marketing, £ £ £ £
International
personalization, Energy You
and analytics. plc 7.70 7.62 7.60 7.64
may change Routers plc
your settings at any time 5.84 5.86 5.85 5.88
or accept the
Putdefault
optionsettings.
Fair value of option (per share)
31 December 20X6 £2
Privacy Policy
31 December 20X7 £2.40
Attachment 2: Journal entries in respect of investments
Marketing
Cole plc
Personalization
£'000 £'000
Analytics
DEBIT Cash 242
CREDIT Investment 230
CREDIT
Save Profit or loss
Accept All 12
52 Corporate Reporting: Question Bank
Being the disposal of the investment in Cole plc
Routers plc
£'000 £'000
DEBIT Investment 93.28
CREDIT Cash 93.28
Being acquisition of investment in Routers plc
Save – Accept
The £8,000All
£8,000
equity).
change in the fair value of the swap is released
released from equity
equity (other components
components of
This represents the settlement of £10,000 less the unwinding of the discounting in
the future swap settlements.
Audit and integrated
integrated questions 53
£'000 £'000
DEBIT Profit or loss – Interest expense 150
CREDIT Interest accrual 150
DEBIT Cash 10
CREDIT Profit or loss – Interest expense 10
DEBIT Equity 8
CREDIT Derivative asset 8
22 Biltmore
The Biltmore group, a property business which came into being on 1 January 20X8, owns a number of
investment properties. The parent company, Biltmore plc, and the other members of the group, had no
connection before that date.
The directors of Biltmore plc have a reputation for adopting aggressive accounting practices. At the
audit planning meeting, the need for professional scepticism was highlighted. Materiality for the
financial statements as a whole is set at 1%
1% of the group's total assets. Total group assets at the year
year end
are £2,423 million.
You are Jane Smith, a senior in James
James & Co, an accounting firm. David Williams, the audit partner, has
sent you the following email.
(a) The appropriate treatment of each investment property in the consolidated financial statements of
This website stores data such
the Biltmore as as at 31 December 20X8, with justifications in each case.
Group
cookies to enable essential site
(b)as Awell
functionality, calculation of the adjustments that would have to be made
as marketing, made to the figures in the draft financial
personalization,statements in order
and analytics. You to show the corrected figures relating to investment properties in the
may change your consolidated financial
settings at any time statements.
or accept the
(c) default settings.
A summary and explanation of the impact on our auditor's report if the directors refuse to put
through the reclassification adjustments, setting out the reasons for your conclusion.
Privacy Policy
Marketing
Personalization
Analytics
Appendix: Details of Biltmore investments
The draft financial statements are as follows:
Summarised statements of comprehensive income for the year ended 31 December 20X8
Biltmore plc Subone plc Subtoo plc
£m £m £m
Revenues
Rental income 500 – 300
Gains on investment properties 100 80 50
Operating costs
Depreciation of property (2) – (1)
Administration (12) (8) (9)
Finance costs (140) (50) (25)
Net profit 446 22 315
3,041
3,041 852
852 530
530
Equity 1,539 351 279
All of the property, plant and equipment is in the form of land and buildings. All of these were
professionally revalued as at the date of Biltmore plc's investment in the group members.
Biltmore plc owns 100% of the share capital of Subone plc and 80% of Subtoo plc.
All companies show all of their investment properties at fair value, unless otherwise stated.
All properties have an estimated useful life of 20 years.
The following information relates to the properties classed as investment properties in the draft
Present
carrying
Biltmore plc
amount
£m
Grove Place – an office block in Birmingham City Centre
This property had a fair value of £220 million on 1 January 20X8. During the year Biltmore
plc spent £30 million on a major programme of improvement and refurbishment and
capitalised these costs.
The latest valuation report, dated December 20X8, suggests that the property's fair value
remains at £220 million. 250
Head office – upper floors
Biltmore plc's head office is a 12-floor office block. The company occupies the bottom four
floors and has left the top eight floors vacant. The directors claim that they intend to hold
these vacant floors for their 'investment potential' and are not actively seeking a tenant or
buyer. An architect's report on the building states that it would be difficult to remodel the
building so as to let or sell the upper floors to a third party.
The upper floors are recognised in the financial statements at £100 million.
The fair value attributed to the upper floors on 1 January 20X8 was £80 million. 100
Northwest Forward – a mixed retail and office complex in Lancaster
This complex had a fair value of £240 million on 1 January 20X8.
Biltmore plc rents out 99% of the floor space in this development, but occupies a small
suite of management offices on the site. The complex cannot be sold separately. 300
Buy-to-let portfolio – Teesside
Biltmore plc owns a large number of flats and houses in the Northeast of England. These
had a fair value of £150 million as at 1 January 20X8.
There was a downturn in house market prices in that region at the end of January 20X9.
The portfolio's value was estimated at £120 million at that time. 150
Essex Mall
Subone plc's principal asset is the site of Essex Mall, which is presently under construction.
This will be a major shopping development and all of the units in the mall are under
contract to retail chains, with leases commencing from the estimated completion date of
1 September 20X9. Subone plc intends to sell the development once it is completed.
The cost of the site and building work as at 1 January 20X8 was £600 million. A further
£170 million was spent on the work done during the year ended 31 December 20X8.
This website stores data such as
cookies to The
enable essential
directors site
of Subone plc believe that the property has a fair value of £850 million in its
present
functionality, state.
as well as marketing, 850
personalization, and analytics. You
Subone plc's head office
may change your settings at any time
or accept the default
Subone plcsettings.
occupies a prestigious London office block which is leased from Subtoo plc on
a 20-year lease.
The property had a fair value of £120 million on 1 January 20X8. 150
Privacy Policy
Coventry building
Marketing
Subtoo plc owns a building in Coventry.
Personalization
Subtoo plc commenced development of the Coventry building in March 20X8 with a view
Analytics
to resale. At that time its fair value was £345 million. The property remains on the market
as at the present date. There have been several expressions of interest, but no formal offers. 360
Save Accept All
Requirement
Prepare the report required by the audit partner. Total: 40 marks
56 Corporate Reporting: Question Bank
23 Button Bathrooms
Button Bathrooms Ltd (BB) is a retailer of bathroom fittings and accessories.
a ccessories. You are a senior in Rudd &
Radcliffe LLP, the auditors of BB.
The meeting
You have been called to a meeting with
with the engagement partner, C
Carol
arol Ying, in respect of the audit of
BB's financial statements for the year ended 30 June 20X1. Carol opened the meeting.
"I would like you to act as senior on the BB audit. In the past year there have been some significant
changesthere
believe in BB's businesscontrol
is greater modelrisk
andthan
in itsinaccounting and internal
previous years. control
In addition, the systems.
companyAsis aseeking
consequence,
an AIM I
listing in 20X2 and the board is very keen to present the company's performance as favourably as
possible.
I realise that you are new to this client, so I have provided some background notes about the company
and the changes that have occurred this year ( Exhibit 1). Especially note BB's new, and very successful,
e-commerce activity and the defined benefit
benefit pension scheme. I have also provided you with the draft
accounts (Exhibit 2).
management accounts (
I have some particular concerns about the revenue recognition procedures that BB has adopted since
installing its new information systems. An audit junior has provided
pro vided some notes from a preliminary audit
visit (Exhibit 3), but he did not have time to follow up on these matters.
I am due to meet the finance director of BB next week and I would like you to provide briefing notes for
me which:
(a) With respect to each of the m
matters
atters raised
raised by the audit junior (Exhibit 3):
(1) Explain the financial reporting issues that arise and show any adjustments that will be required
to the draft management accounts.
(2) Describe the key audit risks and the related audit procedures that we should carry out.
(b) Other than the issues raised by the audit junior, set out the audit risks
risks which arise in respect of the
new e-commerce activities of BB, including those relating to SupportTech, and explain how we
should address these in our audit procedures.
(c) Outline the audit issues we will need to
to consider regarding the outsourcing of the payables ledger
function. Details are provided below. You do not need to refer
refer to any general issues relating to
SupportTech that you have already referred to in (b).
This morning I received an email from the finance director of BB ( Exhibit 4) relating to a cyber-security
breach at SupportTech. Fortunately as the breach occurred two days ago it does not have any direct
impact on the current year's audit. However, I do need to respond to his email and therefore I would
like your briefing notes to include a summary of points that can form the basis of my response.
Please ignore any tax issues."
This website stores data such as
cookies to Requirement
enable essential site
functionality, as well as marketing,
Respond
personalization, andtoanalytics.
the instructions
You of Carol Ying. Total: 40 marks
may change your settings
Exhibit at any time
1: Background details and recent changes
or accept the default settings.
History
BB was established 23 years ago as an upmarket retailer of bathroom fittings and accessories. By 20W9
Privacy Policy it was operating
(two years ago) it was operatin g from 30 showrooms. Of these, 20 large showrooms sold BB's full
product range and it offered
o ffered a service to design, supply and install bathrooms in customers' houses.
Marketing sold included baths, showers, toilets, taps, washbasins and bathroom accessories. The other 10
Products sold included
smaller showrooms sold only bathroom
Personalization ba throom accessories, a distinctive BB product range including towels,
bathrobes, lighting and decorative items.
Analytics
Competition and reorganisation
By 20W9 competition from comparable retailers, combined with the recession, forced
fo rced BB to reconsider
its business model. The board believed that the company's overheads were too high. As a consequence,
between 1 July 20X0 and 31 December 20X0,
20X0, BB closed the 10 smaller showrooms and ceased selling its
bathroom accessories range from the other 20 showrooms.
New e-commerce activity
BB decided to adopt an e-commerce business model for sales of all products
produ cts in its range, including
bathroom accessories, and it commenced the development of a website on 1 July 20X0. The website was
completed and ready for use by 31 December 20X0.
20X0. It enables customers to design their own ba bathrooms
throoms
online, select the required products and pay in advance, also online. The total cost
total cost of website
development in the year ended 30 June 20X1 was £1 million.
millio n. This was capitalised and is to be written off
over five years.
After initial development, the operation of the website, including collection of payments from customers,
was outsourced to an external service provider, SupportTech plc. BB receives the cash from SupportTech
each month after deduction of a service charge fee.
The selling prices of products have been reduced by approximately 10% for online sales, compared with
the showroom prices.
Inventories of a wide range of products were previously stored in four regional warehouses. Customer
orders for less popular items, not in inventory, needed to be ordered by BB, which sometimes caused
delays of up to four weeks. From 1 January 20X1 the range and the value of inventories held were
significantly reduced.
Goods sold via the website are all ordered
o rdered from the manufacturer automatically after the information is
input by the customer. Distribution of goods to the customer is outsourced
ou tsourced by BB to a third party courier.
Costs of reorganisation,
reorganisation , including redundancies (but excluding website development ccosts),
osts), in the year
to 30 June 20X1 amounted to £1.5 million. Further costs of £1 mill
million
ion are to be paid in August 20X1 as
a result of the reorganisation.
There have been problems with the new business model including high returns of goods from customers
compared with those sold through showrooms. There have also been errors in goods delivered arising
from customers' misunderstanding of the website.
Outsourcing of payables ledger function
Last year's audit identified a number of control issues with respect to payables and in the first half of this
year staff turnover in this department was high. Following the success of the outsourcing of online sales
to SupportTech management decided to outsource the payables ledger function too. Staff were told of
the decision including details of redundancies on 1 April 20X1. SupportTech took over responsibility for
the payables ledger from 1 May 20X1. Details of the way in which the system works are as follows:
Purchase orders are raised by BB BB and a delivery
delivery note is signed on receipt
receipt of the goods.
This website stores data such as
SupportTech is sent soft copies of the purchase orders and the signed delivery notes.
cookies to enable essential site
functionality,
as SupportTech
well as marketing,
receives invoices from suppliers directly and matches them to the purchase order and
personalization,delivery
and analytics.
note. You
may change your settings at any time
The Finance Director of BB receives a schedule
schedule detailing all the payments to be made for a given
or accept the default settings.
month one week before SupportTech processes the payments. This must be authorised by the
Finance Director before the payments are processed.
Privacy Policy
A portal has been set up which allows the Finance Director to interrogate purchase ledger accounts
held by SupportTech. The system does not allow the Finance Director to update or revise the
Marketing
accounts.
Personalization
Analytics
Exhibit 2: Draft management accounts: Statement of profit or loss and other comprehensive
income
Years to 30 June 20X1 20X0
£'000 £'000
Revenue
Showrooms 30,000 60,000
Online sales 33,000 –
Cost of sales (49,000) (42,000)
Gross profit 14,000 18,000
Less
Administration expenses
expenses (5,000)
(5,000) (5,000)
(5,000)
Distribution costs (5,000) (6,000)
Marketing costs for website (1,000) –
Website development cost – amortisation
amortisation (100) –
Reorganisation costs (1,500) –
SupportTech fees (1,800) –
Premises costs (2,500) (3,000)
Pension contributions (192) –
Profit on sale of eight small showrooms 4,000 –
Profit 908 4,000
All products sold from showrooms make a gross margin of 30% on selling price.
Exhibit 3: Notes on matters arising during interim audit – A. Junior
(1) Customers ordering online pay in full at the time of orde
ordering.
ring. BB recognises revenue when the cash
cash
is received from SupportTech. I am concerned about revenue recognition and in particular cut-off,
but I did not have a chance to look at this more closely.
(2) A New Year promotion was held for showroom sales on 1 January 20X1. Any customers placing an
order for a complete bathroom suite were given two years' interest free credit provided a 10%
deposit was paid. Delivery of the suites was guaranteed by the end of March 20X1. The promotion
was very successful and the total value of sales made to customers under this offer was £520,000. I
have confirmed that this amount has been recorded in sales and have traced a number of orders
through the sales system as part of my sales testing work. No cut-off issues were identified. I was
told by the Finance Director that BB's own incremental borrowing rate is 7% but that of its
customers is 10% but I don't understand the relevance of this information.
(3) The ten small showrooms were closed down between 1 July 20X0 and 31 December 20X0.
However, two of these (Bradford and Leeds) were still not sold by 30 JuneJu ne 20X1. These two
showrooms are disclosed in the BB statement of financial position as property, plant and equipment
at their carrying amounts of £1 million each. The Leeds site was acquired by BB fairly recently and is
stated at cost less depreciation. The Bradford site was revalued on 30 June 20X0 from its carrying
amount of £700,000 to £1 million.
millio n. The original cost of the Bradford site was £900,000.
A contract was agreed in June
June 20X1 for the sale of the Bradford showroom for £1.15 million, with
the sale
This website stores datatosuch
be completed
as in September 20X1. The Leeds showroom is being advertised, but there is
currently
cookies to enable essentialno site
buyer identified.
functionality,
(4)as Iwell
am as marketing,
unclear about what audit procedures
procedures should be carried out w
with
ith respect to the
the website
personalization,development
and analytics.costs
You and how these should be treated in the financial statements.
may change (5)your settings
Button at any time
Bathrooms started a defined benefit pension scheme on 1 July
July 20X0. I have obtained the
or accept the default settings.
following information at 30 June 20X1:
£'000
Present value of obligation 249.6
Privacy Policy Fair value of plan assets 240
Current service cost for the year 211.2
Marketing
Contributions paid 192
Interest cost on obligation for the year
Personalization 38.4
Interest on plan assets for the year 19.2
Analytics
The only entry which has been made in respect of this is the recognition of the contributions paid
Save as
these AcceptinAll
an expense
payments the
to statement
the of and
cash book profit or loss
bank and other
statement. comprehensive
However, I am notincome. I havethe
sure whether agreed
other
information is relevant and whether I should have performed any other audit procedures.
Audit and integrated
integrated questions 59
Exhibit 4: Email from finance director of BB
Date: 15 July 20X1
From: Andrew Brown <[email protected]>
To: Carol Ying <[email protected]>
Subject: Cyber-attack at SupportTech plc
I have just been informed by our account manager at SupportTech, to whom we outsource the
operation of our website and our payables ledger function, that the company experienced a significant
cyber attack two days ago which successfully breached its security systems. I have been assured that the
situation has been resolved however I am not clear what the potential consequences of this for us could
be and was hoping you could advise. Surely as it is SupportTech's system that has been attacked there
can be no direct consequences for us? If there are, what measures could we take to prevent this
situation arising with other suppliers?
24 Hillhire
You are an audit senior with Barber and Kennedy,
Kennedy, a firm of ICAEW Chartered Acc
Accountants.
ountants. Peter
Lanning, one of the firm's audit managers, has just been assigned to the audit of Hillhire plc after the
previous audit manager was signed off sick. Peter has given you some notes made by the previous
manager at the initial audit planning meeting (Exhibit 2), along with some other information, and he
has given you the following instructions:
"I would like you to assist me in the audit planning and first I would like you to prepare a memorandum
which identifies the key audit risks relating to Hillhire's financial statements some extracts from the
20X8 (Exhibit 1) for the year ended 31 March 20X8. You should also
financial statements for 20X7 and 20X8
Privacy Policy
Marketing
Personalization
Analytics
Exhibit 1: Extracts from draft financial statements
Statement of profit or loss and other comprehensive income for the year ended 31 March
20X8 Draft 20X7 Audited
£'000 £'000 £'000 £'000
The company's management has announced that 15 of its less profitable depots are to be sold off. Each
depot is viewed as a cash generating unit in its own right. The depots that are for sale are clustered in
Scotland and the decision to sell them is part of a strategic decision to withdraw from this area. The
results of these depots have been disclosed separately as discontinued operations in the draft statement
of profit or loss and other comprehensive income. The announcement was made on 1 January 20X8 and
management's intentions were minuted in the board minutes. Marketing of the depot is not due to start
until May or June 20X8 as Hillhire is yet to find alternative storage for the vehicles currently stored in
these depots which it is intending to relocate to other parts of the business. At 1 January the carrying
value of the depots was £44.52 million. They have been classified as held for sale at a fair value less costs
to sell of £40.13 million. At 1 January the depots had a remaining useful life of 25 years. The loss on the
discontinued operations of £4.39 million is only the loss on the classification of the depots to assets held
for sale.
On 1 April 20X7 Hillhire acquired 100% of the share capital of a competitor company, Loucamion SA,
based in France. The functional currency of Loucamion is the euro. The main reason for the acquisition
was the perceived value of the customer relationships built up by Loucamion in its local market. Assets
and liabilities recognised at the date of acquisition included £4 million in respect of customer lists.
Confidentiality agreements prohibit Loucamion from selling or exchanging information about its
customers on the list. At 1 April 20X7 the useful life of the list was estimated to be 10 years and the
intangible asset has been amortised on this basis.
A loan note was issued at nominal value on 1 April 20X720X7 and is included in the statement of financial
position. It is a five year note at LIBOR plus 2%. Issue and redemption of the loan is at nominal value of
£200 million. The variable interest rate payments are hedged by an interest rate swap (see below).
The company has entered into a five year interest rate swap on 1 April 20X7 for a notional amount of
£200 million to hedge the interest rate risk of the loan note liability. A swap agreement has been signed
whereby Hillhire plc will pay a fixed rate of 8% to a counterparty on this amount and the counterparty
will pay LIBOR plus 2% to Hillhire plc. Payments are semi-annual. This swap was designated as a cash
flow hedge on 1 May 20X7 and the directors of Hillhire plc believe that it is effective as such. No
adjustment has been made for interest for the six months to 31 March 20X8, and no entries have yet
been made for the change in fair value.
LIBOR rates are as follows:
1 April 20X7 7%
30 September 20X7 7.5%
31 March 20X8 7.5%
Exhibit 3: Email from Alison Ritchie, partner responsible for Technology Risk Services in
Barber and Kennedy
Date: 10 April 20X8
From: Alison Ritchie <a.ritchie@barberkennedy.
<[email protected]>
com>
To: Peter Lanning <[email protected]
<[email protected]> >
Subject
This website stores: dataHillhire
such as
cookies to Ienable essential
understand thatsite
you are now managing the audit of Hillhire plc. You should be aware that my team
functionality,
hasasbeen
well approached
as marketing, to tender for a one-off assurance assignment for this client. This would involve a
personalization, and analytics. You
review of risks and advice on controls in Hillhire's new online booking system, which has been piloted in
may change 20your settings
of their at any since
UK depots time 2 January 20X8, prior to a planned national launch later in the year.
or accept the default settings.
At present, each depot operates its own bookings. Customers who wish to hire a vehicle must contact
the nearest depot directly and make a booking by telephone. Transactions are logged on a networked
PC system that operates independently within each branch. Every evening, this information is uploaded
Privacy Policy
to the head office's computer system. Head office then processes credit card payments due from
personal customers and invoices business customers using information supplied by the depots.
Marketing
The new system provides a centralised booking system via the company's website. Customers can make
Personalization
a booking online rather than by telephone. If the vehicle type required by the customer is unavailable at
Analytics
that depot, the system can arrange to have a vehicle transferred from another depot provided the
distance is not too great. All transactions are processed by the new system immediately, thereby
Save
accelerating Accept Allprocess.
the billing
62 Corporate Reporting: Question Bank
Now that the system has been piloted, it will be extended to all depots. This will require a central
register to be compiled for all vehicles held at every branch. The standing data for business customers
will also have to be transferred to the new system.
It would be useful to discuss this at the earliest opportunity.
Exhibit 4: Details of share option scheme
On 1 April 20X7, 100 share options have been granted to each o
off the top senior 50 employees.
The options vest after three years on condition that the employees remain in the employment of
Hillhire; the directors believe that 10% of senior employees will leave during the three-year period. The
scheme is not expected to be available
av ailable to new employees.
Employing a binomial lattice model gives a fair value for the option on grant date of £10 and a value of
£8 at the year-end.
25 Hopper Wholesale
You are an audit senior in a firm of ICAEW Chartered
Chartered Accountants. You receive the following voicemail
message from one of the audit managers in your office.
"I need some help urgently with one of our clients, Hopper Wholesale Ltd. Hopper is an unquoted
company that supplies retailers with basic goods such as sugar, salt and similar items. It buys goods in
bulk and packages them in its own factory using simple packets bearing the 'Hopper Value' label. Draft
financial statements show revenue of £21.4 million, profit before tax of £2.75 million and total assets of
£65 million.
Callum
meetingthe
forsenior on the audit
the reporting is unwell
period and is likely
to 31 December to be
20X8 is off for the rest
scheduled of the
for the dayweek. The final audit
after tomorrow. I have
reviewed the audit file and have identified a number of areas where audit procedures are incomplete. I
will email you a summary of these including some background information ( Exhibit 1). I have spoken to
the junior staff on the audit and they have confirmed that these are areas where they have little
experience and require some guidance. I would like you to prepare a summary of audit procedures for
each of the outstanding matters. I would also like you to explain the key audit issues which need to be
addressed in each case – this will help the juniors to gain a better understanding of their work.
One more point. The directors of Hopper Wholesale Ltd are interested in sustainability reporting and are
proposing to include social and environmental information in their financial statements. They would like
us to clarify whether they are required to publish this information. Please outline the current situation so
that I can pass on the information to them. If they do include social and environmental information they
would like us to produce a verification report. I will email you a copy of the statements they are
planning to make (Exhibit 2). We have not been involved in this type of work before so I would like you
to outline the evidence which we should be able to obtain in order to verify these statements and any
difficulties we may experience in validating the information. You should also indicate any professional
This website stores
issues thatdata
we such
need as
to consider if we accept this work.
cookies to Thanks
enable essential site on this."
for your help
functionality, as well as marketing,
Requirement
personalization, and analytics. You
may change your settings
Respond to the at anymanager's
audit time voicemail. Total: 40 marks
or accept the default settings.
Exhibit 1: Hopper Wholesale Ltd – Audit – 31 December 20X8
Manager's review notes: Summary of outstanding matters
Privacy Policy
(a) Inventory
MarketingIn September 20X8 the company took delivery of 30,000 tonnes of flour from a former
f ormer competitor
who was going out of business. Normally Hopper would not carry this level of inventory of an
Personalization
individual line, representing a nine-month supply at normal rates of consumption; however, the
Analyticscompetitor was selling at a 10% discount to open market prices. Hopper paid £4.5 million for the
flour. At the time sales budgets suggested
suggested that 10,000 tonnes would be sold at a profit by
Save 31 sold Accept20X8,
December All which has proved to be the case and that the remaining 20,000 tonnes would
be steadily throughout the first half of 20X9.
Audit and integrated
integrated questions 63
The directors were concerned that the market price for flour can be volatile and so they took steps
to protect the company by entering into an agreement with a third party, Sweetcall, a food
manufacturer, under which Hopper has the right to sell 20,000 tonnes at the end of June 20X9 at
an agreed price of £140 per tonne. Hopper paid £250,000 for this option and this amount is
recognised in the statement of financial position within sundry receivables. If the price of flour falls
then the company will be able to retain their competitive advantage by selling the bulk
consignment to Sweetcall and replacing their own inventory with purchases on the open market.
The price of flour at 31 December had fallen to substantially less than £140 per tonne and
Sweetcall has offered £400,000 to Hopper to cancel the option.
Audit procedures completed
The quantity of flour inventory has been established by attendance at the inventory count.
Inventory has been valued at the lower of cost and net realisable value. Satisfactory audit
procedures have been carried out in this respect.
(b) Financial assets
The company has made a number of investments in shares in listed companies. These have been
recognised in non-current assets at £3.25 million. They have been classified as at 'fair value through
profit or loss' and are disclosed in a note to the financial statements as 'held for trading'. A gain has
been recognised in profit or loss of £515,000 in respect of these investments.
Audit procedures completed
The only audit procedure performed is reperformance of the calculation of the gain recognised in
profit or loss.
(c) Receivable
The statement of financial position shows a receivable balance of £50,000. This amount is owed to
Hopper Wholesale Ltd by Bourne Ltd, a company which is controlled by Hopper's managing
director, Jack Maddison. We have been told that it is due to be repaid within the next 12 months.
No information about this transaction is provided in the notes to the financial statements.
Audit procedures completed
A written representation has been obtained confirming
confirming the amount and that the company is
controlled by Jack Maddison.
(d) Share option scheme
On 1 January 20X8, Hopper Wholesale Ltd gave 100 employees 500 share options each which vest
on 31 December 20X9. The options are dependent on the employees working for the entity until
the vesting date. During 20X8, five employees left and Hopper Wholesale Ltd anticipates that in
total 10% of the current employees will leave over the two-year period, including the five
employees who left during 20X8. The fair value of the options has been estimated as follows:
This website stores data such
1 January 20X8as £12
cookies to enable 31essential
December site
20X8 £14
functionality, as 31
wellDecember
as marketing,
20X9 £15
personalization, and analytics. You
The share options have been recorded in the financial statements as an expense in profit or loss
may change your settings at any time
and asettings.
or accept the default credit to non-current liabilities of £700,000 (100 500 14).
Audit procedures completed
Agreed number of employees in the scheme to details set out in the contract.
Privacy Policy
The fair value of the share options has been confirmed with management.
Marketing
The adjustment required has been recalculated and agreed to the client's calculation.
Personalization
Exhibit 2: Social and environmental report – suggested assertions:
Analytics
(1) We do not use suppliers who use child labour.
(2) All our staff are paid at least 10% above the minimum wage. wage.
Save
(3) We have Accept
reduced Allstaff sickness to the rate of 2.4% calendar days.
(4) We have reduced the tonnage of waste sent to landfill by 10%. 10%.
(5) Through enhanced healthhealth and safety procedures, industrial accidents have been reduced by 40%.
64 Corporate Reporting: Question Bank
26 Lyght plc
The accounting firm for which you work, Budd & Cherry, is a five partner firm of chartered accountants
in general practice. It has 30 staff and it generated fee income last year of £5.2 million.
Budd & Cherry has recently gained a new client, Lyght plc (Lyght), as a result of a competitive tender.
The formalities connected with appointment as auditor, including communication with the previous
auditor, have been completed. The tender was for the audit work, but there is a strong possibility that
Budd & Cherry may also be appointed to carry out the tax work and some advisory work for Lyght.
Gary Orton has been appointed as manager on the Lyght audit for the year to 30 April 20X8 and you
are the senior. Gary calls you into his office and explains the situation:
"Lyght is by far the largest company that our firm has gained as a client so it's really important that we
do a good job and impress the board – not least because, if we are given the tax and advisory work, our
expected total fees from Lyght will be around £500,000 next year. The previous three auditors have
each lasted only three years before the audit was put out to tender by the Lyght board. I want to make
sure we retain them as a long-term client. They might be looking for an AIM listing in two to three
years' time and there will be major
major additional fees for our firm if we are appointed as their reporting
accountants for that process.
At the moment we are likely
likely to make a low recovery on the audit, as we had to make a low bid to win
the work. We therefore need to carry out the audit efficiently, but also look for opportunities to sell tax
and other services to the client. If I can help gain the tax and other advisory work for a client like this, I
think I could be made a partner in Budd & Cherry and, as the senior, there could also be a big
promotion in it for you.
Harry Roberts, our ethics partner, has some concerns over the fact that this is a large client for a firm of
Exhibit 2: Manager's briefing notes
(1) Lyght has grown significantly in the last few years and is in the process of updating its IT systems
with work already completed by an external contractor on the sales and purchase ledger systems
including both hardware and software. The project is ongoing and the next stage is to install new,
more sophisticated IT systems to monitor the flows of goods across the globe and for management
accounting purposes. Lyght directors have asked our firm if we wish to tender for a small part of
this work, including advice on the internal controls to be built into the new system. The total cost
of the new system will be about £9 million, of which £5 million will be the costs of IT consultants'
time in installation, data transfer and writing new software. Work would commence in July 20X8
and would take about a year to complete.
(2) Only about £2£2 million of inventories (out of a total carrying amount of approximately
approximately £20 million)
are held in the UK at any time. Inventories are normally shipped shortly after purchase. High value
inventories usually have an identified buyer prior to purchasing them, and goods are shipped to
the buyer within two months of acquisition. Smaller, low value goods are held at depots in the
countries of the intended customers so they are available for prompt sale. Our appointment as
auditors was only formalised after the year end and as a result we were not able to attend year-end
inventory counts. I am therefore worried about how we will audit inventory. I am also worried
about how inventories are going to be valued.
(3) A large batch of used tyres was acquired
acquired by Lyght from an army transport depot for £1,000 in
August 20X7. However, they
they were sold a few weeks later for £105,000
£105,000 to a foreign company, Hott,
in which VenRisk has a 30% equity holding giving it significant influence. Leslie Moore personally
arranged the sale with the manager of the depot. An invoice has been found for £3,487 for
personal gifts and entertainment for the depot manager paid for by Lyght. It also appears from a
few enquiries I made that the depot manager
manager is a cousin of Leslie Moore.
(4) At the start of the year Lyght took out a ten-ye
ten-year
ar non-cancellable lease on some offices that were
were
part of a new city centre development. Lyght has been keen to upgrade its offices for a while in
order to impress customers, particularly representatives
r epresentatives of overseas governments. The lease
payments, payable each year in advance, are £150,000. The present value of lease payments has
been calculated at £1.1 million and has been recognised as a non-current asset and a lease liability.
The non-current asset is being depreciated on a straight-line basis over ten years.
(5) As a result of entering this lease management decided that the existing head office should be sold.
The decision was taken on 1 January 20X8 and the draft financial statements show that the
property was classified as held for sale from this date. On 1 January 20X8 the property which had
been revalued in the past had a carrying amount of £2 million prior to being transferred to assets
held for resale. Its fair value was estimated at £1.6 million and costs to sell of £20,000. The
remaining useful life of the property at the date of reclassification was 20 years. The company is
not planning to market the property until May 20X8.
(6) At 30 April 20X8 an analysis of trade receivables showed the following:
£
This website stores data such
Boulogne SA as 1,200,000
cookies to enable essential
Cristina site 2,000,000
functionality, as well as marketing,
Other receivables 10,800,000
personalization, and analytics. You 14,000,000
may change your settings at any time
The amount due from Boulogne SA is denominated in Euros. All other receivables are denominated
or accept the default settings.
in pounds sterling.
The £2,000,000 due from Cristina represents an amount due from the government of Cristina
Privacy Policy which has been outstanding for some time. Considerable efforts by the sales director and his staff
have been required to recover previous amounts owed by the government of Cristina. However,
Marketingthe Cristina Government has now agreed with Lyght that the £2 million that it owes will be paid
on 1 May 20X9, together with a late payment charge, in lieu of interest, of £100,000. The effective
Personalization
interest rate at 30 April 20X8 is 8%.
Analytics
The allowance for impairment of trade receivables is to be partly calculated using a formula to give
a general allowance. The company is proposing to calculate its year end allowance for receivables
Save Accept All
as the £450,000 difference between balances owed and cash expected to be received, plus a
general allowance of 5%.
66 Corporate Reporting: Question Bank
27 Maykem
You are an ICAEW Chartered Accountant,
Accountant, working as an audit senior in a firm of ICAEW Charte
Chartered
red
Accountants. You receive the following email message
message from one of the audit managers in your office:
"I know you are unassigned today and I really need your help. Max, the senior on the audit of Maykem
Ltd for the year ended 31 May 20X8, has gone off sick and I would like you to take over his
responsibilities. There are three urgent issues I would like you to address initially:
Current liabilities
An assistant
Please has the
examine completed procedures
assistant's on current
work attached liabilities
( Exhibit 1) andbut Max has
prepare a listnot
of yet reviewed
review pointsher work.
explaining,
for each of the current liabilities, any key weaknesses
weaknesses in the audit procedures com completed
pleted to date and the
additional audit procedures necessary. As part of your review, select and explain the significant financial
reporting issues which need to be addressed prior to the completion of the audit.
Pension
Maykem operates a defined benefit pension plan. The assets of the plan are held separately from those
of the company in funds under the control of trustees. At a recent meeting with the client I was told
that the senior accountant who used to deal with the pension plan left suddenly during the year. This
individual has not been replaced and the directors are proposing that the only amount that they need
to recognise in profit or loss is the cash contribution paid by the company in the year of £306,000. I
need to speak to the directors about this tomorrow. I would like you to prepare a schedule for me
setting out the correct accounting treatment and any adjustments that need to be made. It would also
be helpful if you could set out the key audit issues we need to consider. I do not require a detailed list of
audit procedures at this stage. Information relating to the plan is attached ( Exhibit 2).
Ethical issue
Sophie, the trainee on the audit team, who is originally from France, has sent me an email yesterday
saying that she has an investment which tracks the performance of Euronext (French Stock Exchange),
which includes ParisMet. I am fairly confident that this is not a problem, but I would like you to confirm
whether or not this is the case with reference to the ICAEW Code of Ethics . Your notes will then provide
evidence that we have considered the issue.
Other information
Maykem Ltd manufactures and distributes refrigeration equipment and is a wholly-owned subsidiary of
a listed French company, ParisMet. ParisMet's recent results have been disappointing and we believe
that group management is under pressure to announce increased revenues and profit for the year
ended 31 May 20X8.
Our audit approach to Maykem Ltd is wholly substantive for efficiency reasons and materiality has been
set at £250,000.
Trade payables
This balance is made up as follows:
20X8 20X7
£'000 £'000
Trade payables ledger 11,023 12,586
Goods received not invoiced 2,319 2,622
13,342 15,208
From a discussion with Maggie Phillips (financial controller), the balance has decreased compared to the
prior year as fewer goods were purchased in the last month of the year, compared with the last month
of the previous year.
Audit procedures carried out:
Agreed trade payables balance to ledger, noting there are no reconciling items.
Reviewed trade payables ledger for unusual items. Debit balances totalling £345,601 were noted.
An adjustment has been raised to reclassify these
these to trade receivables.
Reconciled the five largest balances to statements received from the suppliers. The results of this
work are summarised below:
Balance Payments Invoices Balance per
Supplier per ledger in transit in transit Other statement
£'000 £'000 £'000 £'000 £'000
Note 1 Note 2
Metalbits Ltd 2,563 – 239 – 2,802
Hingeit Ltd 2,073 451 34 – 2,558
Metallo Spa
Spa 1,491
1,491 – 302
302 62
62 1,855
1,855 Note 3
3
Boxit Ltd 1,282 231 459 – 1,972
Bitso Supply
Ltd 1,184 104 510 – 1,798
8,593 786 1,544 62 10,985
Notes
1 All payments
payments in transit were agreed to the trade pay
payables
ables ledger
ledger and to the cash book before the
year end, and to bank statements
statements after the year end. They all appear as reconciling items on the
bank reconciliation.
2 All invoices in transit were agreed to supplier statements and to invoices posted to the trade
payables ledger after year end.
3 Metallo Spa invoices Maykem in euro. The supplier statement balance and invoices in transit
balance above have been translated at the year-end rate of €1.45:£1. Per discussion, the balance
This website stores datatrade
per the suchpayables
as ledger has been translated at a rate of €1.51:£1 as this is the rate in a
forward currency contract taken out to hedge purchases from Metallo. The 'other' reconciling ite item
m
cookies to enable essential site
shown above arises from the difference in exchange rates used.
functionality, as well as marketing,
personalization, and analytics. You
Accruals
may change your settings at any time
Accruals and the audit work performed is analysed as follows:
or accept the default settings.
20X8 20X7
£'000 £'000 Note
Privacy Policy
Commission 235 150 1
Bonus 4,000 2,300 2
Marketing
General and administration 1,504 1,895 3
Personalization
Legal fees 10 – 4
Royalties payable – 234 4
Analytics
5,749 4,579
Notes
1 The commission accrual represents sales commission payable for May 20X8. This amount was paid
in June 20X8 and has been agreed to the June payroll. The balance is much higher than in the prior
year because of exceptionally high sales
sales in May 20X8.
2 Staff bonuses will not be paid until September
September 20X8.
20X8. The amount
amount accrued is based on an estimate
prepared by the finance director. The accrual is much larger than in the prior year as a result of a
significant increase in the directors' bonuses which are based on company performance targets
agreed by group management.
3 An analysis
agreed of ge
general
neral documentation.
to supporting and administrative accruals was obtained
obtained and all items over £25,000
£25,000 were
4 From a discussion
discussion with Maggie Phillips, in May 20X7 Maykem received a letter
letter from Me
MegaCo
gaCo plc,
alleging that Maykem had breached one of MegaCo's patents and claiming royalties on sales of all
products in which the patented refrigeration technology was used. Although Maykem disputed
MegaCo's claim, a provision was made in the 20X7 accounts for estimated royalties payable on
sales to date. At that time the Maykem directors considered it more likely than not that some
payment would be made, given MegaCo's far superior size and resources. Maykem has now
sought independent legal advice and, in April 20X8, wrote to MegaCo plc totally refuting the
breach of patent claim. MegaCo's directors acknowledged the letter, stating that they would
respond after taking their own legal advice. To date nothing further has been heard from MegaCo.
On this basis, the provision for royalties has been released. The accrual for legal fees represents the
amount payable for legal advice taken to date.
Deferred income
Deferred income represents service revenues relating to future periods. When customers buy a
refrigeration unit from Maykem, they may choose to buy a three-year maintenance contract in addition
to the normal one-year warranty. Revenue for the maintenance contracts is deferred and released on a
straight line basis over the period to which the contracts relate.
During 20X8, Maykem has reassessed the costs it incurs in providing maintenance services. These costs
have reduced considerably as the reliability of the product has improved. As a result the margin earned
on the maintenance element is far in excess of that earned on the original product sale. An exercise has
therefore been undertaken to recalculate how the total revenue from a product and maintenance sale
should be allocated between the two elements so that the percentage margin earned on each element
is equal. This revised split of revenue has been retrospectively applied to all maintenance arrangements
still in force at 31 May 20X8, resulting in the release of nearly £4 million of deferred income.
The deferred income balance has been agreed to a detailed analysis which has been tested for accuracy
and completeness as part of our procedures on revenue. The revised calculations splitting the revenue
between the two elements have also been tested without exception.
Surplus property provision
This website stores
This data
relates such as factory premises which, until January 20X8, were occupied by Maykem's
to leasehold
cookies to domestic
enable essential site division. The trade of this division together with all related inventory was sold to
refrigeration
functionality, as well as marketing,
Coolit on 1 January 20X8. The sale excluded the leasehold premises and manufacturing plant as Coolit
personalization, and analytics. You
did not want these.
may change your settings at any time
or accept the
Fromdefault settings.with Maggie Phillips, Maykem's directors believe that it will take some time to find a
a discussion
replacement tenant for the leasehold factory premises, as they are not in good condition. The lease for
the factory expires in May 20Y8 (in 10 years' time) and the annual rental is £250,000. The provision of
Privacy Policy
£500,000 is based on the finance director's view
v iew that it will take two years to let the premises.
Included within profit or loss for the year ended 31 May 20X8 is a net gain on the sale of the domestic
Marketing
refrigeration business, which has been calculated as follows:
Personalization £'000
Proceeds from sale of trade and inventory
Analytics 1,300
Carrying amount of assets sold (200)
Provision for surplus property (500))
(500
Save Accept All
Net gain on sale of business 600
Audit and integrated
integrated questions 69
Exhibit 2: Pension plan
The terms of the pension plan have been summarised by Maykem as follows.
Employees contribute 6% of their salaries to the plan.
Maykem contributes, currently, the sam
same
e amount as the employees to the plan for the benefit of
the employees.
On retirement, employees are guaranteed a pension which is based upon the
the number of years
service with the company and their final salary.
The following details relate to the plan in the year to 31 May 20X8:
£'000
Present value of obligation at 1 June 20X7 3,600
Present value of obligation at 31 May 20X8 4,320
Fair value of plan assets at 1 June 20X7 3,420
Fair value of plan assets at 31 May 20X8 4,050
Current service cost 360
Pension benefits paid 342
Total contributions paid to the scheme for year to 31 May 20X8 306
Gains and losses on remeasurement (actuarial gains and losses) are recognised in accordance with
IAS 19, Employee Benefits .
The interest rate on high quality corporate bonds at 1 June 20X7 was 5%.
Assume cash contributions are received and pension
pension payments are made at the ye
year
ar end.
28 Sunnidaze
You are Jamie Spencer, the
the senior in charge of the final audit work on Sunnidaze LLtd
td for the financial
year ended 30 June 20X6.
20X6.
Sunnidaze is based in Birmingham and sells and installs hot tubs, saunas and jacuzzis. It was
incorporated five years ago by John and Mary Cotton, both of whom invested money they had earned
in the music industry. John and Mary each own 50% of the issued share capital of Sunnidaze and are
also directors. They delegate the day to day running of the company to the only other director, Arnold
Murray, a more experienced businessman.
Until recently, Sunnidaze focussed on sales to wealthy individuals in its local area. Its range of products
and installation expertise made it very successful and the business grew rapidly. However, in the year
ended 30 June 20X5 it was less successful.
su ccessful. Revenue fell to £4 million and the company broke even.
Arnold decided to expand operations to cover the whole of England and also introduced a range of
larger products suitable for spas and hotels. These changes required investment of £2 million. John and
Mary were not willing to invest more money so Arnold arranged for Sunnidaze to borrow £2 million
This website stores
from dataonsuch
a bank as20X5.
1 July 20X5.
cookies to enable essential site
Under the terms of the loan, Sunnidaze was required for the first time to have an audit and, in
functionality, as well as marketing,
April 20X6, your firm was appointed as auditors for the year ended 30 June 20X6. The final audit visit
personalization, and analytics. You
commenced in September 20X6 but progressed slowly. The financial controller, Maisie Juniper, was not
may change your settings at any time
ready for your team and could not provide you with the information to complete the audit procedures.
or accept the default settings.
Your team left at the end of the scheduled
scheduled audit visit with matters still outstanding.
Last week Maisie contacted you to let you know she was ready for a follow up audit visit and provided
Privacy Policy
you with summary financial information (Exhibit 1) incorporating all audit adjustments identified at
your previous visit and, in addition, two late client adjustments requested
requested by the directors. You arranged
Marketing
for a junior member of staff, Sam Burrows, to visit Sunnidaze
Sunnidaze to complete the necessary audit
procedures.
Personalization Sam has sent you an email ( Exhibit 2 ) summarising the audit procedures he has performed.
You receive a voicemail message from the Sunnidaze audit manager:
Analytics
"Hello Jamie. I know you are busy at the moment but I really need to understand the status of our audit
Save Accept All
procedures
whether weon Sunnidaze.
have Theaudit
any further directors have a meeting
adjustments and whatwith
ourthe bankon
opinion later
thethis week and
financial want towill
statements know
look like. They have asked me to meet with them tomorrow so I really need from you today:
70 Corporate Reporting: Question Bank
(a) A memorandum setting out and explaining the additional audit adjustments and unresolved audit
matters identified at our follow up visit, together with a brief summary of any additional audit
procedures required. You should also prepare revised draft summary financial statements to the
extent that the available information permits.
(b) Your comments on any more general concerns you have in relation to the audit as a whole
including ethical issues for our firm and what our audit response to these concerns should be.
(c) Brief notes setting out an explanation of the form of audit opinion we should give. (I have already
given them a copy of the standard unmodified opinion so you need only consider whether we
might modify this in some way.)
(d) The company is planning further expansion in the year ending 30 June 20X7. To help to fund the
expansion Arnold Murray is proposing to enter into a sale and leaseback arrangement regarding its
warehouse. Details are as follows:
The property
property would be sold on 1 January 20X7 for £280,000
£280,000 (the original cost was £75,000).
£75,000).
It would then be leased back on a 20 year lease
lease at an initial rental of £32,000 per annum.
The sale price and the rental amount both represent market value.
The land element of the property is not material.
Sunnidaze has an incremental borrowing rate of 1
10%
0% (annuity discount factor over 20 years =
8.5136).
Arnold would like me to explain to him the
the impact of this transaction on the financial statement
statementss
for the year ended 30 June 20X7 so please draft som
some
e notes that I can refer to outlining the effects.
I am indon't
Please a meeting
worryfor the tax
about restas
of the
the tax
day,department
so please leave the information
will address I have
any issues asked for on my desk.
here."
Requirement
Prepare the information requested by the audit manager. Total: 40 marks
Exhibit 1: Sunnidaze Ltd
Summary financial information for the year ended 30 June 20X6 prepared by Maisie Juniper
Per draft
Per trial Audit Late client financial
balance adjustments adjustments statements
£'000 £'000 £'000 £'000
Operating profit 651 (134) (50) 467
Exceptional items – (42) (42)
Interest payable (100) (100)
Profit before taxation 551 (134) (92) 325
This website stores data such as
Taxation
Taxation – (125)
(125) (125)
(125)
cookies to enableafter
Profit taxation
essential site
551 (259) (92) 200
functionality, as well as marketing,
Assetsand
personalization, analytics. You
Property, plant and equipment 357 35 392
may change your settings at any time
Intangible assets 500 500
or accept the default settings.
Inventories 1,392 1,392
Trade receivables 1,629 (42) 1,587
Other current assets 40 40
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Cash and cash equivalents 555 555
4,473 35 (42) 4,466
Marketing
Equity and liabilities
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Share capital 1,000 1,000
Analytics
Retained earnings 551 (259) (92) 200
Long-term borrowings 2,000 2,000
Save Accept All
Trade and other
Tax payable payables
payables 922
922
– 169
169
125 50
50 1,141
1,141
125
4,473 35 (42) 4,466
Audit and integrated
integrated questions 71
Exhibit 2: Email from Sam Burrows, audit junior
To: Jamie Spencer
From: Sam Burrows
Date: 1 November 20X6
Subject: Sunnidaze audit for the year ended 30 June 20X6
Jamie
I have now completed as many of the outstanding audit procedures as I can. I've summarised below the
procedures carried out in response to each of the points on the list of outstanding issues you gave me.
Interest of 5% per annum is payable annually in arrears and an arrangement fee of £40,000
was paid when the monies were advanced on 1 July 20X5.
There is a covenant within the agreement that operating profit for a financial year will fall no
lower than £280,000. Should it do so, the bank has the power to require immediate
repayment of the loan or to call on personal guarantees provided by the directors.
Audited financial statements for each financial year must
must be delivered to the bank no more
than 150 days after the financial year end.
(6) Review of events and results after the reporting period
The management accounts for the three months to 30 September 20X6 show revenue of
£1 million and operating profit of £50,000. These results are in line with the equivalent prior year
period, although below budget. The cash balance at 30 September 20X6 was £600,000. The
directors' latest forecast of revenue for the year ending 30 June 20X7 remains in line with their
budget of £7 million, which was a 25% increase on the previous year. They anticipate an operating
profit of £750,000 for the year ending 30 June 20X7. Maisie has told me in confidence that she
believes this budget is extremely optimistic.
My review of post year end board minutes revealed only one item of interest. John and Mary
Cotton are keen to sell their shareholding in the company and have already entered into
discussions with a number of investors. The minutes indicate that the budget is forming the basis
for negotiations on the valuation of the shares.
29 Tydaway
We have also been asked to give our client
client some accounting advice. Tydaway is finding the mmarket
arket for
the metals required to make the filing cabinets increasingly competitive. As a result it has been looking
for new suppliers and has identified one in China. Tydaway is to be invoiced by the Chinese company
company in
US dollars (as this is the functional currency of the Chinese company). On 15 July 20X1 the company
intends to enter into a contract with the Chinese company to purchase metals with a contract price of
$500,000. This is a large order but it has been made in the light of the lead time for transporting the
raw materials. The metal will be delivered to Tydaway on 15 December 20X1 and payment will be
made on that date.
The directors are concerned about the impact of foreign exchange risk and are considering whether to
enter into a forward contract on 15 July 20X1 to purchase $500,000 on 15 December 20X1. They have
asked me to meet them next week to discuss their options. I would like you to prepare some
information that I can refer to in my meeting as follows:
(c) Set out, using journal entries, the impact of this contract on the financial statements for the years
ending 31 July 20X1 and 31 July 20X2 under each of the following scenarios:
There is no hedging arrangement put in place.
Tydaway enters into the forward contract, but does not satisfy the conditions for hedge
accounting.
Tydaway enters into the forward contract, satisfies the conditions for hedge accounting and
chooses fair value hedge accounting.
Tydaway enters into the forward contract, satisfies the conditions for hedge accounting and
chooses cash flow hedge accounting.
(d) Explain and compare the financial reporting treatment for the four scenarios above.
I do not require you to consider the tax implications of these issues and I do not require you to list
hedging accounting conditions.
I have made some additional notes and working assumptions for you to use ( Exhibit 5).
We also need to consider the implications for our forthcoming audit. If hedge accounting is used certain
documentation must be kept. Please provide a list of the documentation we would be expecting to see.
I look forward
f orward to reviewing your work later today."
Requirement
Respond to Mary Cunningham's instructions.
(Assume that today is 5 July 20X1.) Total: 40 marks
Exhibit 1: Extracts from Tydaway Ltd management accounts for the 10 months to 31 May
20X1
Statement of profit or loss and other comprehensive income
This website stores data such as 10 months to 31 May
cookies to enable essential site 20X1 20X0 Notes
functionality, as well as marketing, £'000 £'000
Revenue
personalization, andgenerated
analytics. by
YouSouth London factory
External customers
may change your settings at any time 4,282 5,912
Sales to Woodtydy
or accept the default settings. 135 – 1
4,417 5,912
South London factory costs
Raw materials at standard cost
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Purchase price variances 296 (10) 2
Other purchase costs, including freight
Marketing 77 45
Movement in
Movement in inventory
inventory at
at standard
standard cost (99) 20
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Total raw material cost of goods sold 2,705 3,252
Movement in inventory provision – 5
Analytics
Labour 873 869
Overheads and
Overheads and delivery
delivery costs 345 354
Save Accept All
factory cost
Total factory
Total cost of goods
goods sold
sold 3,923
3,923 4,480
4,480
Margin as a percentage of total revenue 11% 24%
74 Corporate Reporting: Question Bank
Statement of financial position
31 May 31 May Notes
20X1 20X0
£'000 £'000
Inventory analysis
Raw materials 340 270 3
Raw material element of work-in-progress 131 157
Raw material element of finished goods 55 – 4
526 427
Inventory provision
Inventory (20) (20)
506
506 407
407
Notes
1 Represents goods sold to Woodtydy in the period since Tydaway acquired the division on
30 September 20X0.
2 Purchase price vari
variances
ances are adverse in the period ended
ended 3131 May 20X1 as a result of an unexpected
unexpected
increase in the price of steel. In addition, normal bulk discounts were unavailable on components
bought at short notice to fulfil a major order which was shipped in May 20X1 and gave rise to a
one-off adverse price variance of £25,000.
3 Raw material inventory has increased as a result of a slow-down in customer orders. During June
20X0, certain components were purchased
purchased in bulk in anticipation of orders which have not
materialised. Of these purchases, components costing approximately £60,000 remain in inventory
at 31 May 20X1.
4 Finished goods held in inventory represent the cost of goods produced for Swishman
Swishman plc, a
customer which ordered customised products in its corporate colours for a major office
refurbishment. Swishman has recently experienced financial difficulties and has cancelled its order,
leaving Tydaway with a number of finished cabinets already painted in Swishman's specified
colours. It is possible that these cabinets can be used to fulfil other orders, but they will need to be
stripped and repainted at a total cost of around
a round £10,000. A legal claim for £30,000 has already been
made against Swishman for breach of contract. Swishman has offered £6,000 in full and final
settlement of the liability.
Exhibit 2: Notes on inventory valuation from prior year audit file for Tydaway
Raw materials are valued at standard cost. Standard costs are reviewed
reviewed and updated on the first day
of each financial year and are then left unchanged throughout the year. Historically, our audit
testing on the valuation of a sample of items has led us to conclude that standard costs generally
represent a reasonable approximation to the actual cost of purchase.
Standard costs include an uplift of 1.5%
1.5% of the material cost to cover
cover freight and other purchase
costs.
This website
stores data such
Inventories as
of finished goods are typically
typically very low as all goods are shipped to to the customer as soon
cookies to enable essential site
as they are complete.
functionality, as well as marketing,
Work in progr
progress
ess (WIP)* is valued
valued initially at the standard cost of its raw material components. An
personalization, and analytics. You
adjustment is made at the year end (for statutory accounts purposes only) to include in inventory
invento ry an
may change your settings at any time
appropriate percentage of labour and factory overhead, calculated as follows:fo llows:
or accept the default settings.
Units in WIP × 50%
× (Total factory labour + Factory overhead)
Total units produced in the year
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*WIP is on average 50% complete
Marketing
Provision is made for any obsolete raw materials. No provision is required
required against finished goods or
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WIP as filing cabinets are typically built to order for specific
specific customers.
Analytics
Exhibit 3: Information on Woodtydy's inventory
inventory supplied by Woodtydy financial controller
(1) At 31 May 20X1,
20X1, the Woodtydy business had total inventory as analysed below:
below:
£'000
Raw materials 230
Work in progress 120
Finished goods 159
509
Provision (58)
451
The count was well organised and all counters were briefed beforehand. Counters worked in teams of
two, with one counting and the other recording the quantity counted and comparing it to the quantity
shown on the book inventory system, as supplied on the printed
prin ted inventory list prepared beforehand.
Where the quantity
quantity counted differed by more than 10%
10% from that on the system, a second count was
performed by a team from another area of the warehouse.
I performed independent counts on a sample of 25 types of raw material, noting the following
differences:
Quantities of smaller components were estimated by weighing a sample of ten to 20 20 items and
comparing their weight to the weight of the total inventory
in ventory of that item in order to estimate the
th e
overall quantity. When we performed our own tests, we noted differences of up to 5% in quantity
for such items. This does not appear unreasonable given the e estimation
stimation involved.
All tins of paint and chemicals
chemicals were treated as full tins although some of them were only partly full.
From a discussion with the inventory controller this is unlikely to have resulted in any material
overstatement of inventory.
This website stores data such as
Two differences
differences were noted in samples taken from the mezzanine area of the stores.
stores. In both cases,
cookies to enable essential site
the counters had recorded a count which agreed with the quantity on the system whereas our
functionality, as well as marketing,
count showed less in one case and more
mo re in the other. Our counts were agreed with the coun
counters
ters
personalization, and analytics. You
and the inventory sheets were updated to record the correct quantities.
may change your settings at any time
or accept the default settings.
I performed counts on a sample of five types of work in progress. All counts were accurate.
I inspected the despatch areas, noting that there were no shipments in progress during the count. In the
goods received area, I noted a large consignment of filing cabinet drawers which had not been counted.
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From a discussion with the inventory controller, these dr
drawers
awers had just been returned from a
subcontractor who finishes the premium range to a high
Marketing hi gh standard. They will be boo
booked
ked back into WIP
after the count is complete.
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Analytics
Exhibit 5: Additional notes and assumptions
Proposed contract with China
Hedging
Tydaway is considering two alternatives:
Do not hedge and therefore accept any consequent exchange rate risks.
Enter into a foreign exchange forward contract on 15 July 20X1 to purchase $500,000 on
15 December 20X1.
At 15 July 20X1, the spot exchange rate is expected
expected to be £1 = $1.6108.
At 15 July 20X1, the 5-month forward rate is also expect
expected
ed to be £1 = $1
$1.6108.
.6108. The forward rate
contract will have a zero fair value at 15 July 20X1.
At 15 July 20X1, the contract with China would be a firm comcommitment
mitment and, if Tydaway decides to enter
into the forward contract at that date, it is unsure whether it would be better to treat it as a fair value
hedge or as a cash flow hedge for financial reporting purposes. However, it may be that Tydaway
cannot satisfy the hedge accounting conditions, although it is hoped it will be able to do so.
Working assumptions
For illustrative purposes I would like you to adopt the following working assumptions as one possible
scenario of future exchange rate movements:
At 31 July 20X1
Spot £1 = $1.5108
Fair value of forward contract £20,544 positive (ie, in favour of Tydaway)
At 15 December 20X1
20X1
Spot £1 = $1.4108
Fair value of forward contract £43,994 positive (ie, in favour of Tydaway)
30 Wadi Investments
The Wadi Investments Group invests in capital markets and real estate primarily in the Indian
subcontinent and Asia. Your firm is responsible for the audit of Wadi Investments and the consolidated
financial statements. The audit has already commenced
commenced but you have been ask asked
ed to join the team as the
manager is concerned that there is not the appropriate level of expertise in the current team. You have
been sent the following email from your manager.
To: APerdan@ABCAccountants
From: TFlode@ABCAccountants
Date: 30 July 20X9
This website stores data such as
cookies to Subject : Audit of site
enable essential the financial statements for the year ended 30 June 20X9
functionality, as well as marketing,
Amar,
personalization, and analytics. You
may change your
I am settings
very at any
glad that youtime
are joining the audit as things have not been going well. I have had a fairly
or accept the default settings.
inexperienced team and I am concerned about some of the work which has been prepared to date. We
are responsible for both the parent company audit and the audit of the group. Work has already started
on the audit of the parent company. I have briefly reviewed most of the working papers produced to
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date but have not been able to look at them in detail. My review has raised a number of concerns which
I would like you to address in a report which I can use to evaluate how to approach the remaining audit
Marketing
work. I have listed my concerns below and have attached a number of other relevant documents
including relevant exchange rates ( Attachment 2). I have confirmed the exchange rates myself so you
Personalization
should use these in any calculations.
Analytics
Audit of the parent: Wadi Investments
Acquisition of Strobosch
We have been told that Wadi purchased an 80% subsidiary on 1 January 20 20X9.
X9. It is an investment
company based in Ruritania and its functional currency is the Ruritanian rand (RR). Some work has been
done on the investment in the parent's statement of financial position but from my review of the audit
assistant's working paper (Attachment 1) a number of significant issues have not been addressed.
Please identify these including any audit adjustments that may be required. You should also review the
work performed by the junior and list any additional procedures which are needed.
Investment property
The group carries all land and buildings, including investment property, at fair value. On
15 March 20X9 the head office building in London was vacated and is to be leased out for the next five
years to a company outside the Wadi Group. The building originally cost £90 million bac backk on 3 April
20X6 and as at the next valuation on 30 June 20X7 it was valued at £112 million. Its fair value at 15
March 20X9 was £124 million and at 30 June 20X9 is £128 million. The depreciation policy for
buildings is straight line over
50 years, measured to the nearest month. Our audit work to date shows that the asset has been
included in property, plant and equipment in the year end statement of financial position but any
further work on this issue is outstanding. Please can you set
set out how to account for the change in the
use of this asset and outline the audit adjustments required. You should also list the audit procedures
which should be performed.
Audit of Wadi Investments Group
This is still at the planning stage and there are a number of issues which I would like your help with.
(a) The Strobosch audit is being conducted by a local firm, Kale & Co. I am familiar with the firm and
its practices and am confident that they will do a professional job. However, I need to
communicate with them and will have to draft a letter of instruction. Please draw up a checklist of
the points which I need to include so that I can ensure that all necessary matters are covered.
(b) At a recent
recent meeting with the finance director of Wadi, he mentioned that the investment in
Strobosch was financed by a number of Ruritanian Rand loans in order to hedge the foreign
currency exposure and that hedging provisions are to be adopted. Total exchange losses on the
loans for the six months to 30 June 20X9 are £36 million. He also mentioned a loan made to
Strobosch on 1 January 20X9 to assist with expansion plans. Further details regarding the net
investment in Strobosch and the loan to Strobosch are attached ( Attachment 3). Please identify
the audit and financial reporting issues that we will need to consider.
Requirement
Respond to the manager's instructions. Total: 40 marks
Note: I have been told that the IRR on the debentures is 4.42% per six-month period but I am not sure
what the relevance of this is. Interest on the debentures is paid every six months.
Work performed
(1) Agreed cash paid to bank statement.
(2) Agreed £360
£360 million debentures
debentures to matching
matching liability in the statement of financial position.
(3) Obtained a schedule
schedule of the breakdown of costs.
(4) Cast total and agreed spot rate.
Attachment 2: Exchange rates
The following exchange rates should be used for the preparation of the 20X9 financial statements.
Date RR:£
1 January 20X9 1:0.45
30 June 20X9 1:0.47
Average for six months to 30 June X9
X9 1:0.46
RR = Ruritanian rand
Attachment 3: Hedge of net investment
Extract from the financial statements of Strobosch as at 30 June 20X9
Draft
RRm
Property, plant & equipment 389
Investment property 1,453
Financial assets 659
Current assets 124
Total assets
assets 2,625
2,625
Share capital 300
Retained earnings 1,720
2,020
Non-current liabilities 518
Current liabilities 87
Total liabilities and equity 2,625
Retained earnings at acquisition were RR1,440 million and the fair value of net assets at acquisition
was RR1,865 million.
The long-term liabilities of Strobosch
Strobosch include RR444 million in respect of a five-year interest free
loan of £200 million made by Wadi on 1 January 20X9.
31 Jupiter
This websiteIt isstores data such
15 January 20X9.asYou are the audit senior on the external audit of Jupiter Ltd. The company's year
cookies to end
enable essential
is 31 Decembersite20X8. The audit manager Jane Clarke has asked you to take responsibility for
f or the
functionality, as well as marketing,
audit procedures on development costs. You have a schedule of development costs produced by the
personalization,
client and analytics.
(Exhibit You
1), a summary of the board minutes produced by Jane on a preliminary visit to the client
may change your settings at any time
(Exhibit 2) and some notes of a meeting between the Finance Director of Jupiter Ltd and Jane Clarke
or accept the default3).settings.
(Exhibit
You receive the following voicemail message from Jane
Jane Clarke.
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"As you know I would like you to take responsibility for the audit procedures on development costs. My
review of the board minutes and my recent conversation with the finance director of Jupiter Ltd have
Marketing
given me some cause for concern in this area so we need to get this right. I would like you to prepare a
memorandum which sets out the audit issues and the audit procedures required to address these. You
Personalization
should also refer to any financial reporting issues which arise. Please quantify, as far as you can based on
Analytics
the information currently available, any adjustments required. I would also like you to consider any
potential professional and ethical implications for our firm based on the discoveries I have made –
Save Accept All
including matters we should consider in respect of the internal audit function.
James Brown the audit junior has been doing some work on the audit of trade payables. He has
obtained some information from the client (Exhibit 4) but is unsure how to progress. I would be
Audit and integrated
integrated questions 79
grateful if you could review the information he has obtained and make some notes for James explaining
the main audit issues and an outline of the audit procedures required to address these.
See you later!"
Requirement
Prepare the summary and notes requested by Jane Clarke in her voicemail message. Total: 30 marks
Exhibit 1: Development costs recognised in the year ended 31 December 20X8
£'000
Cost
01.01.X8 10,000
Additions 2,000
At 31.12.X8 12,000
Amortisation
01.01.X8 500
For the period 500
At 31.12.X8 1,000
31.12.X7 9,500
31.12.X8 11,000
knows about it because they used a firm of commercial investigators to find out what progress the rest
of the industry was making on alternative fuel sources. As part of this investigation, a senior design
engineer from the competitor was interviewed for a job that did not actually exist. He was encouraged
to talk about projects that he had been involved in during his time with the competitor. He gave
sufficient information about the new engine for Jupiter's directors to be extremely concerned. The
engineer then became suspicious of the investigator who was conducting the interview and refused to
disclose any further information about the new engine.
The Board has instructed the internal audit department to conduct a detailed risk assessment of this
discovery.
Notes
1 Myton Engineering Ltd is the sole supplier of a kkey
ey component which goes into the fuel conversion
device. In previous years the company has refused to respond to requests to confirm any year end
balance and does not issue statements. In addition this year Myton has introduced a reservation of
title clause on all invoices to Jupiter Ltd.
This website stores data such as
2 During the year the clerk responsible for managing
managing overseas suppliers resigned
resigned as she had found a
cookies to enable jobessential
closer tosite
home. The company has been unable to find a permanent replacement for her. The
functionality, as overseas
well as marketing,
suppliers balance at 31 December 20X8 includes £75,000 in respect of goods which are
personalization,still
andinanalytics. You
transit but which have been recognised in inventory.
may change your settings at any time
3 default
or accept the 'Othersettings.
suppliers' relates to around 150–200 small suppliers which produce a range of components.
This balance is net of £125,000 of debit balances.
4 The company experienced a ccomputer
omputer problem in the last week
week of the reporting period
period which
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Marketing
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32 Poe, Whitman and Co
You are an audit senior with Poe, Whitman and Co, Co, a firm of chartered accountants. Upon returning tto
o
the office this week from vacation, you find the following email in your in-box from Margaret Fleming,
one of your firm's audit managers.
Date: 2 April 20X7
From: Margaret Fleming <[email protected]>
To: Audit Senior <[email protected]>
Subject: Commedia Ltd
Attachments: Commedia background notes; email from Bob Kerouac
Kerouac
I hope you had a good holiday. As you may know I have recently been given managerial responsibility
for the firm's new audit client Commedia
Commedia Ltd, and I understand that you will be the senior on the
group's audit for the year ended 28 February 20X7. We have only recently been appointed
appo inted auditor
following the unexpected resignation of the previous auditor just two weeks
weeks ago.
Please could you consider the practical and ethical issues specifically in connection with our late
appointment and the steps we should take to ensure that these issues do not affect the performance of
our duties as the group's auditor.
Please also summarise for me the relevant audit procedures and our reporting responsibilities which arise
from the Commedia engagement
engagement being a new audit for Poe, Whitman and Co.
I have also attached to this email some notes on the Commedia group ( Attachment 1).
In addition to providing some background information on the group, the notes also include information
on some specific events that occurred within the group during the year. I would like you to identify the
audit risks relating to these events and draft the audit procedures required to mitigate them.
Finally, I attach an email I received last week from Bob Kerouac (Attachment 2), requesting advice on
some financial reporting matters. Please draft a response in note form for me to use at the meeting I
have arranged with Bob for next week.
Margaret
Requirement
Respond to the email from your audit manager. Total: 30 marks
Attachment 1: Commedia group background notes
Commedia Ltd (Commedia)
Commedia is an independent television production company with annual revenues last year of
approximately £60 million. The company's creative team develops ideas for television programmes,
which are then 'pitched' to one or more of the television broadcasting companies within the UK. If the
pitch is successful, the programme is commissioned by the broadcaster and then made by Commedia to
This website stores data such as
an agreed budget.
cookies to enable essential site
functionality, as well
During theasyear,
marketing,
a number of Commedia's customers changed the terms of some of their commissions
personalization,
from a 'funded' to a You
and analytics. 'licensed' basis.
may change your settings at any time
Funded commissions
or accept the default settings.
The broadcaster is responsible for funding the entire production budget (which includes an agreed
management fee for Commedia) in monthly instalments as the production progresses. Upon delivery of
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the programme to the broadcaster, all future rights to exploit the programme are signed over to the
broadcaster.
Marketing
Licensed commissions
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Under these arrangements, Commedia is paid an agreed amount, in full, upon delivery of the
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programme. The broadcaster acquires the rights to broadcast the programme an agreed number of
times, with Commedia retaining all residual rights to future exploitation of the programme. The price
Save Accept All for a licensed commission is 25% to 30% lower than that for the equivalent
paid by the broadcaster
funded commission. Where the cost of making
making the programme excee
exceeds
ds the value of the licensed
commission payment, the difference is carried forward as an intangible asset by Commedia to write off
against future revenues arising from the residual rights held.
At the start of this accounting period, 1 March 20X6, Commedia had two wholly-owned subsidiaries,
Scherzo Ltd and Riso Ltd. The subsidiaries were set up by Commedia Ltd many years ago. All three
companies have the same 28 February year end and they are all audited by your firm.
Scherzo Ltd (Scherzo)
Scherzo is a concert and events promotion company. The company stages major popular and classical
music concerts throughout the year, which are held principally in open-air venues.
Disposal of shareholding
On 30 April 20X6, Commedia disposed of 70% of its shareholding in Scherzo to that company's
management team for a possible total sum of £20 million. £15 million of this total was paid in cash on
completion of the sale, with the remainder to be paid 15 months later, contingent on the profit of the
company for the year ended 28 February 20X7. Scherzo has also appointed your audit firm as its
auditor. Extracts from the terms of the sale of shares in Scherzo are set out below.
Extracts from contract for sale of shares in Scherzo Ltd
(a) The completion date for the disposal of the shares was 30 April 20X6.
(b) Total possible consideration for the shares is £20m,
£20m, split as follows:
£15 million payable on completion.
£5 million payable on 31 July 20X7 if the pre-tax profit of the company
company for the year ended
28 February 20X7 is at least £5 million.
If the pre-tax profit for the year ended 28 February 20X7 is below
below £3 million, no further
consideration is payable.
For pre-tax profit between £3 million and £5 million, the further consideration payable is
calculated as follows:
Further consideration = £5m (pre-tax profit less £3m)/£2m
(c) Pre-tax profit for the purpose of this contract is defined as 'Profit before tax per the company's
audited financial statements excluding the following items:
Total directors' emoluments in excess of £350,000.
Exceptional items (ie, items of income
income and expense
expense of such materiality that IAS 1 requires their
nature and amount to be disclosed separately).
'Rock in the Park' concert
Scherzo was responsible again this year for 'Rock in the Park', a major outdoor series of popular music
concerts spanning three days in July 20X6. On the evening of the third day, part of the stage collapsed
causing injury to some members of the stage crew and audience. The incident also led to the
This websitecancellation
stores dataofsuch
the rest
as of the concert, including the performance scheduled for the event's most well
cookies to known
enable performer. Scherzo had sub-contracted the erection and maintenance of the stage to another
essential site
company, Highstand
functionality, as well as marketing,Limited.
personalization, and analytics.
The directors You have included a provision in the year-end financial statements of £2 million.
of Scherzo
may change your
This settings
is to at any
allow for time of refunding all monies received from the sale of tickets to the concerts, and
the cost
or accept the default settings.
to recognise the cost of personal injury claims received by the company as at the year end.
Riso Ltd (Riso)
Privacy Policy
Riso's sole activity is the operation of a large television studio which it hires out to customers for the
production of television programmes. The television studio is based in a former glass bottle factory and
Marketing
is occupied by Riso under a ten-year lease, originally taken out on 1 March 20X3. The studio is hired out
to Commedia (on an arm's length basis) approximately 30% of the time for the filming of its own
Personalization
commissions. For the remaining 70% of the time the studio was, until recently, hired out to two
Analytics
different broadcast companies, each for the production of their own competing daytime television
drama serial.
Save Accept
During the year All28 February 20X7, one of these broadcasters announced that, due to poor
ended
viewing figures, it would no longer be making a drama serial. Riso has spent the last three months
looking for an alternative customer, but has so far been unsuccessful. The directors of Riso are aware
that there is currently surplus capacity in UK-based studio facilities, due to a reduction in UK-produced
programmes. This reduction has been brought about by an increase in programmes imported from
overseas and reduced TV advertising budgets.
The directors of Riso have produced a forecast of future pre-tax cash-flows for the company as follows:
Year ending 28 February £'000 inflow/(outflow)
inflow/(outflow)
20X8 (100)
20X9 (50)
20Y0 900
20Y1 1,375
20Y2 1,495
20Y3
20Y3 1,695
1,695
Riso made an initial £8 million investment in the television production equipment required for its studio
on 1 March 20X3. No further capital expenditure is likely to be required for the foreseeable future. The
company expects the equipment to have an expected useful life of ten years at which point its disposal
value is estimated to be £2 million. Riso depreciates the equipment on a straight-line basis. The carrying
amount of the company's other assets and liabilities at 28 February 20X7, was £250,000.
Attachment 2: Copy of email from Bob Kerouac
Date: 26 March 20X7
From: Bob Kerouac <[email protected]>
To: Margaret Fleming <[email protected]>
Subject: Year end financial statements
Margaret,
It was good to meet you recently. Further to our scheduled meeting in two weeks' time, there are some
matters in connection
that when we meet youwith
canthe current
provide meyear
withfinancial statements
advice on that I want
their appropriate to discuss
treatment in with you. I hope
the financial
statements for the year ended 28 February 20X7. The matters are as follows:
(1) Disposal of our majority holding of shares in Sche
Scherzo:
rzo: as you know, we sold the majority
majority of our
shares held in this company during the year. I would be grateful if you could provide me with
some advice on how to account for this disposal in Commedia's own financial statements for the
year; and also how the remaining investment in Scherzo
Scherzo is now to be treated in the group's
consolidated financial statements.
(2) Treatment of the television production
production equipment in Riso: as you are aware, we have recently
recently lost a
major contract in this company due to cancellation by our customer of their daytime TV drama
serial. This has given rise to a loss in the company this year, and will mean future losses if an
alternative customer cannot be found. I am unsure how, if at all, this affects the value and
presentation of the equipment in the financial statements of Riso. I am particularly concerned as we
recently had the equipment externally valued at a figure of £4 million. Please could you clarify this
issue for me, indicating what adjustments, if any, are required to ensure proper presentation in the
This website stores data such as
financial statements for the year. I am unsure whether this is of use to you, but the pre-t
pre-tax
ax annual
cookies to enable essential
rate of returnsite
that the market would expect from this type of investment is 10%.
functionality, as well as marketing,
personalization, and analytics. You
may33change Precision
your settingsGarage Access
at any time
or accept the default settings.
Precision Garage Access plc (PGA) is a listed company which manufactures and installs garage doors for
private residences. You are a senior working for PGA's auditors and are currently supervising the
Privacy Policy
planning and interim audit work for the year ending 30 September 20X6. You are also carrying out a
review of the interim financial statements for the nine months to 30 June 20X6.
Marketing
As part of the planning process, an audit junior, Claire Chalker,
Chalker, has completed some initial analytical
Personalization
procedures on the management accounts for the nine months ended 30 June 20X6. She has provided
some background information (Exhibit 1) and set out some basic financial data and notes ( Exhibit 2).
Analytics
She does not however have the experience to analyse this data in order to identify audit risks.
The engagement manager, Gary Megg, reviewed Claire's work and sent you the following email:
To: A. Senior
From: Gary Megg, Engagement Manager
Date: 26 July 20X6
Subject: PGA audit
I have been through the notes prepared by Claire. I think she has highlighted some interesting points,
but she has not really analysed the data in any depth or identified key audit issues. There appear to be
some financial reporting issues arising from her work which may require adjustment to the management
accounts.
Prior to our audit planning meeting next week I would like you to do the following:
(a) Carry out revised analytical procedures using Claire's data
data and other information provided. This
work should:
identify any unusual patterns and trends in the data which may require further investigation.
Show supporting calculations (where appropriate assume 360 days in a year for the purpose
of computing any ratios); and
outline the audit risks that arise from the patterns and trends identified in the analytical
procedures and set out the audit procedures you would carry out.
(b) Set out the financial reporting issues that arise from the above audit work with respect to the
interim financial statements for the nine
nin e months ended 30 June 20X6 and are expected to arise for
the year ending 30 September 20X6. I do not require any detailed disclosure requirements. I do
not require you to consider tax, or deferred tax, implications at this stage.
There is one further matter which I would like you to look at. I have just received an email from David
May, the finance director of PGA. The board has acknowledged that the company is experiencing
difficulties retaining key staff. This is particularly the case with senior and middle management. Whilst a
bonus scheme has been introduced this year in place of a pay rise (see Claire's notes below) the
directors realise that they need to encourage individuals to commit to the company longer-term. David
has come up with a proposal for a share based bonus scheme but is concerned about its effects on
future profits. I have attached his email which provides details
details of the scheme and the information he
requires (Exhibit 3). I would like you to produce the information he has requested so that I can forward
it on to him. Please use his working assumptions. I think that his predicted share price increases may be
optimistic in the current climate but I can discuss this with him at a later date.
Many thanks,
Gary
Requirement
Respond to the engagement manager's instructions. Total: 30 marks
This website stores data such as
cookies to Exhibit 1: Background
enable essential site information prepared by Claire Chalker
functionality,
PGAas makes
well asand
marketing,
installs two types of garage doors:
personalization, and analytics. You
Manually
may change your settingsoperated
ope rated
at any wooden doors – the 'Monty'. The list price of the Monty was increased
time increased by
by 5%
5%
on 1 October
or accept the default settings. 20X5 to £840 each, including installation.
An electrically operated sesett of metal doors with a motor – the 'Gold'. The list price of the Gold was
increased by 5% on 1 October 20X5 to £2,520 each, including installation.
Privacy Policy
Nearly all doors are made to order.
Marketing
Each of the two types of door is made on a separate production line at PGA's factory in the south of
England. Production equipment is specialised and highly specific to each of the separate production
Personalization
processes.
Analytics
PGA makes about 70% of its sales of both products in Germany and France where it has a network of
sales offices. All selling prices are set at 1 October each year. Prices for overseas markets are fixed in euro
Save
at this time, Accept All
at the equivalent of pound sterling prices.
Audit and integrated
integrated questions 85
The company has had a difficult trading year so far, due to the general economic downturn. The trading
performance in the year ending 30 September 20X6 is thus expected to be weaker than in the previous
year.
In previous years, approximately equal quantities of Gold and Monty doors have been sold. However,
sales of the Gold have suffered particularly badly this year, as customers appear unwilling to spend large
sums on their garage doors in the recession. Sales of Gold doors are not expected to increase in the
foreseeable future.
Customers are either individual householders or small building companies. Discounts may be given to
building companies for large orders but PGA sales staff have stated that door prices to individual
customers are never discounted.
Exhibit 2: Financial data and notes prepared by Claire Chalker
Management accounts – Statements of profit or loss and other comprehensive income
Draft 9 months to 9 months to Year ended
Notes 30 June 20X6 30 June 20X5 30 Sept 20X5
£'000 £'000 £'000
Revenue: 1
Monty 7,500 9,600 10,400
Gold 14,000 28,800 31,200
Cost of sales: 2
Monty (6,700) (7,800) (9,200)
Gold (15,500) (23,400) (27,600)
Gross profit/(loss) (700) 7,200 4,800
Fixed administrative and
distribution costs (1,200) (1,200) (1,600)
Exceptional item
item
Staff bonus scheme 3 (450)
(450) – –
Profit/(loss) before tax (2,350) 6,000 3,200
Income tax expense – (1,680) (900)
Profit/(loss) for the period (2,350) 4,320 2,300
Notes
1 Revenue
This website stores data such as
cookies to enable Inventory records
essential site show the number of doors sold as:
functionality, as well as marketing, 9 months to 30 9 months to 30 Year ended
personalization, and analytics. You June 20X6 June 20X5 30 Sept 20X5
Monty 9,000 12,000 13,000
may change your settings at any time
Gold 6,000 12,000 13,000
or accept the default settings.
Sales volumes in the final quarter of the year ending 30 September 20X6 are expected to be the
same as the final quarter of the year ended 30 September 20X5 for both the Monty and the Gold.
Privacy Policy
Revenue from garage doors is recognised when they are delivered to a customer's house. Revenue
Marketing from installation is recognised when the contract is completed
completed to the customer's satisfaction.
2 Cost of sales
Personalization
The production process for the Gold is technologically advanced, so annual budgeted fixed
Analytics
production costs of £12 million are expected. For the Monty, annual budgeted fixed production
costs are £4 million. These fixed costs have not changed for some years and are incurred evenly
Save over theAccept All an equal amount being recognised in each quarter. The variable cost per unit
year, with
for each product is budgeted at 50%
50% of selling price.
86 Corporate Reporting: Question Bank
3 Staff bonus
As a result of the recession, there was a zero
zero general pay increase for employee
employees.
s. However, a bonus
scheme was introduced under which a payment to employees of £600,000 will be made for the
full year if revenue for the year ending 30 September 20X
20X66 exceeds £26 million.
4 Inventories and receivables
Inventories consist mainly of partly-made doors. There is little finished inventory as doors are
normally made to order.
Sales are normally on 30 day credit terms.
Exhibit 3: Extract of email from David May: share based bonus scheme
To tie in middle and senior managers to the company, a bonus would be given to existing managers
after three years of continued employment from 1 October 20X6, on which date the scheme would
commence. If these employees leave before 30 September 20X9 they will receive no bonus. Also,
however, I want to link the bonus to company performance – which I think is best achieved by basing it
on share price.
The proposal is to either: (A) issue 600 shares; or (B) pay a bonus equivalent to the value of 600 shares
at the date of redemption for each existing manager. The amount would only be given in either case
after three years' service. Those managers joining after 1 October in any year would not qualify for the
scheme in that year.
The problem is that these managers would probably stay for three years to receive the bonus and then
leave. My idea is – and this is the clever part – to have the same bonus scheme every year so, whenever
managers leave, they would be giving up a large sum in bonuses that have not vested.
Using Proposal A as an example, if we start the scheme on 1 October 20X6, each eligible manager will
receive 600 PGA ordinary shares on 30 September 20X9. There would then be another scheme on
1 October 20X7 for 600 shares which would
wo uld vest on 30 September 20Y0 (ie, three years llater),
ater), and the
same again in each future year. The same rolling system would apply if we decide to go with Proposal B
instead.
My working assumptions are as follows:
The PGA
PGA share price will be £8 on 1 October 20X6 and increase by 25%
25% in the first year and then
20% per annum thereafter (our future order book looks strong and I believe that there are signs
that we are coming out of the recession).
There are 80 eligible managers now. It is assumed that ten managers (all of whom are currently
currently in
employment) will leave during each year and ten managers will join.
The fair value of the
the share based cash settled instrument is equal to the share price.
This websiteInformation
stores datarequired
such as
cookies to Ienable
would essential site
like the following information:
functionality, as well as marketing,
(1) Using
personalization, my working
and analytics. Youassumptions, pre
prepare
pare a com
computation
putation of the effect on profit of this scheme
scheme for
may change your each of theatyears
settings any ending
time 30 September 20X7, 20X8 and 20X9 under the following alternative
assumptions:
or accept the default settings.
Proposal A – the
the bonus
bonus is given in the form of 600
600 PGA shares per manager each year.
34 Tawkcom
You are the senior responsible for the audit fieldwork at Tawkcom
Tawkcom Ltd, the UK trading subsidiary of
Colltawk plc, a major international telecommunications group, listed on the London Stock Exchange.
Tawkcom provides data and communication services to commercial and public organisations. These
services utilise Tawkcom's UK-wide fibre optic network, a valuable and unique asset built up over many
years.
You are currently completing the final audit of Tawkcom for the year ended 30 September
September 20X9. The
audit has not gone smoothly and reporting to the group audit team is overdue. The most significant
incomplete area of audit procedures is the work on property, plant and equipment (PPE), which has
been allocated to a junior member of your team, Jo Carter. You are due to meet the audit manager, Jan
Pickering, this evening to discuss progress on this work.
Jan has just left you this voicemail:
"The Colltawk group financial statements are due to be signed off early next week and I'm very worried
about the work we have left to do on Tawkcom. PPE is a key audit area for this business and Jo is likely
to require detailed guidance if she is to complete the procedures satisfactorily. I know you've been very
busy but I need you to look today at what she's done so far ( Exhibit 1), both to identify any unresolved
audit or financial reporting issues and to determine what audit procedures we have left to do.
I've sent you some extracts from the group audit instructions ( Exhibit 2) so you can take these into
account in determining the required audit procedures.
Please come to the meeting this evening prepared for a detailed discussion. You will need to prepare the
following documents for the meeting:
Freehold Fixtures
land and Leasehold Network and Investment
buildings improvements assets equipment property Total
£'000 £'000 £'000 £'000 £'000 £'000
Accumulated
depreciation
Brought forward at
1 October 20X8 476 882 38,697 14,577 0 54,632
Charge for the year 0 298 2,875 4,051 0 7,224
Disposals (95)
(95) (98) 0 (129) 0 (322)
Carried forward20X9
30 September at 381 1,082 41,572 18,499 0 61,534
Carrying amount at
30 September 20X9 25,069 6,385 155,650 2,654 3,936 193,694
(2) In September 20X9, the company's freehold property in Scotland, Glasgow House, was sold to LJ
Finance plc, a finance company owned by the bank for the Colltawk group. The group finance
team arranged this transaction and local management has limited information. Tawkcom is still
occupying the building as it has been leased back from LJ Finance under a 20-year lease, which can
be extended to 50 years at Colltawk's option. An external valuer revalued Glasgow House at
30 September 20X7, along with the company's other freehold properties. Its value of £5.8 million
was agreed to the prior year audit work papers. The valuation and associated accumulated
depreciation were correctly removed from the register of PPE, cash proceeds of £7 million were
vouched to the bank account on 30 September 20X9 and the gain of £1,295,00
£1,295,000
0 was agreed to
the statement of profit or loss and other comprehensive income.
(3) Tawkcom disposed of land for £1.5 million
million recognising a profit on disposal in profit or loss of
£750,000. The contract was entered into on 31 July 20X9 conditional upon detailed planning
approval being granted. By 30 September 20X9 outline planning consent only had been granted.
Full planning consent was received on 20 October and the sale was completed on 30 October 20X9.
Sale proceeds were agreed to the cash book and bank statement. The cost of land was correctly
removed from the register of PPE and the profit on disposal correctly calculated.
Transfer from assets held for sale
In the financial statements for
fo r the year ended 30 September 20X8, a freehold property, surpl
surplus
us to
Tawkcom's requirements, was transferred out of PPE and shown separately as a non-current asset held
for sale. Our prior year audit files concluded that this treatment
treatment was correct on the basis that tthe
he
property was being actively marketed and a sale at its carrying amount of £3.9 million was considered
imminent.
This sale was not concluded and management has now decided to retain the property for the time
being until the property market has improved. To generate some return from the property,
management intends to divide the property into small office units which it will rent out as office space
under short-term rental agreements. In order to make this more attractive to prospective tenants,
Tawkcom will provide services such as telecommunications, reception, secretarial support and meeting
rooms. As the property is now being held for its investment potential, it has been transferred back into
PPE and designated as an investment property.
Depreciation charge for the year
The Tawkcom financial statements for the year ended 30 September 20X8 disclose the following
depreciation policy:
Depreciation is charged so as to write off the cost or valuation of assets over the following periods:
Freehold buildings 50 years
Leasehold improvements 20 years (the minimum term of the lease)
Network assets 20 years
Fixtures and equipment
This website stores data such as 3–10 years
cookies to For
enable
eachessential
categorysite
of asset, an expectation for the depreciation charge for the year ended was formed
functionality, as well as marketing,
using the above rates and taking into account the timing of additions and disposals.
personalization, and analytics. You
may change The following
your settingspoints
at anywere
timenoted:
or accept the
(1) default settings. has been charged
No depreciation charged on freehold
freehold buildings as these properties are carried at
valuations which the finance director believes reflect their market value at the reporting date and
the buildings are maintained to a high standard.
Privacy Policy
(2) The depreciation charge for network assets is considerably
considerably lower than expected. This is as a result
Marketingof a group wide review of useful lives conducted by head office. This review concluded that the life
of network assets is greater than 20 years and a revised useful life of 22 years has been applied to
Personalization
all such assets. Calculations of the revised carrying amounts for a sample of assets were reviewed
Analyticsand verified as accurately reflecting for each asset the unexpired portion of a 22-year life.
Exhibit 2: Extracts from the Group audit instructions for the Colltawk plc group for the year
ended 30 September 20X9
Risk of fraud and misstatement
The following key risks have been identified and should be considered by all subsidiary audit teams:
(1) The group has banking covenants on long-term bank loans requiring it to maintain a certain ratio
of non-current assets to net borrowings (defined as bank borrowings and lease creditors less cash).
As a result, management may have an incentive to overstate non-current assets or to understate
understate
net borrowings.
(2) Subsidiary management participates in the group's bonus scheme.
scheme. The level of bonus to be paid
depends on the performance both of the individual subsidiary and of the group as a whole.
Management may therefore have an incentive to overstate profit either at a subsidiary or group
level.
Materiality and reporting of misstatements
Pre-tax materiality for the Colltawk group audit is £4 million. All individual misstatements over £200,000
should be reported to the group audit team.
35 Expando Ltd
You are a supervisor in the audit department of Jones & Co. You are currently in charge of the audit of
Expando Ltd (Expando), a private limited company which imports and retails consumer electronic
equipment. Expando's year-end is 30 June 20X7. Today you arear e in the office when
wh en you receive the
following email from the audit senior who is working for you on the audit of Expando:
Expando:
This is not depreciated. During the year it was revalued upwards, by £1 million, to £5 million. The
valuation was commissioned in the early summer of 20X6, to support the company's fundraising.
(2) New finance was taken
taken out on 1 July 20X6, in the form of an issue of a £2 million debenture loan.
Issue costs were £150,000. The coupon rate on the debenture is 3%. Its terms provide that it was
issued at par but that it will be redeemed at a premium. The overall effective interest rate for
Expando is 7%.
(3) On 1 September 20X6,
20X6, Expando acquired the business of Minnisculio, a small competitor,
competitor, for
£250,000. The acquisition was structured as a purchase of trade and assets, with £20,000 allocated
to inventories and the balance to goodwill. Expando has not conducted an impairment review in
respect of goodwill as there is no indication of circumstances which would give rise to an
impairment.
(4) Prior to the acquisition by Ex
Expando
pando of its trade and assets, Minnisculio had negotiated the
acquisition of new freehold premises, to be acquired on 1 October 20X6 for a consideration of
£125,000. The asset was estimated to have a useful life of 20 years and a policy of straight-line
depreciation was to be adopted. These premises were, however, surplus to requirements after
Minnisculio's business had been acquired by Expando. On 31 March 20X7 the management took
the decision to sell the premises at which date the fair value less costs to sell amounted to
£115,000.
(5) On 1 October 20X6, Expando acquired 25% of Titch Ltd, for a consideration of £400,000.
£400,000. Titch is
co-owned by three other UK companies, each of which holds 25% of its shares. Unfortunately, due
to unforeseen events which are not expected to be repeated, Titch made a trading loss for its year
ended 30 September 20X7 of £350,000. The results of Titch have not been reflected in Expando's
draft financial statements with the exception of the tax effect which has been dealt with by the tax
department.
(6) The tax impact
impact of the above is be
being
ing dealt with by the tax department.
Attachment 2
Summary draft statement of profit or loss and other comprehensive income and statement of
changes in equity
Year ended 30 June 30 June
20X7 20X6
(draft) (audited)
£'000 £'000
Revenue 4,430 3,660
Less operating expenses (3,620) (2,990)
Operating profit 810 670
Interest payable – Note 2 above (260) (200)
Profit before tax 550 470
This website stores data such as
Taxation (91) ( 141)
cookies to Profit
enableforessential
the year site
459 329
functionality, as well as marketing,
Other comprehensive income:
Gain on
personalization, andproperty revaluation
analytics. You 1,000 –
may change your settings at any time for the year
Total comprehensive income 1,459 329
or accept the default settings.
Retained Revaluation
Statement of changes in equity 30 June 20X7 (extract) earnings surplus
Privacy Policy £'000 £'000
Balance at 1 July 20X6 713 –
Total comprehensive income for the year
Marketing 459 1,000
Balance at 30 June 20X7 1,172 1,000
Personalization
Analytics
Attachment 3
Summary draft statement of financial position
Period end date 30 June 30 June
20X7 20X6
(draft) (audited)
£'000 £'000
Non-current assets
Land 5,000 4,000
Premises – Note 4 above 125 –
Plant and machinery 2 2
Investments – Notes 3, 5 above 650 –
Current assets 2,155 520
Current liabilities
Taxation (91) (141)
Other (300) (149)
Non-current liabilities
6% bank loan (3,333) (3,333)
3% debenture – Note 2 above (1,850) –
Deferred tax To be completed –
Net assets To be completed 899
Share capital 86 86
Share premium 100 100
Revaluation surplus – Note 1 above 1,000 –
Retained earnings 1,172 713
36 NetusUK Ltd
You are a senior on a large team which is planning for the audit of NetusUK Ltd, a media company,
company, for
the year ending 30 June 20X9. NetusUK is a wholly owned subsidiary of an Australian parent company,
Netus Oceania (also audited by your firm), and contributes a very substantial proportion of the revenue
and profit reported by the Netus Oceania Group. Your team is required to report to your firm's
Australian office in Perth on the results of NetusUK and also to report
report on NetusUK's statutory UK
accounts. Netus Oceania is planning to raise additional capital from shareholders and the deadlines for
group reporting are very tight. Your firm is required to provide the final report to the Perth office by
16 September 20X9.
You receive an email from the manager
manager with overall responsibility for the NetusUK audit, Louise
Manning:
This website stores data such as
cookies to To:
enable
essential site
A. Senior
From: L. Manning
functionality, as well as marketing,
Subject:
personalization, and NetusUK
analytics.audit
You planning
may change Date:
your settings
3 July at
20X9
any time
or accept the default to
Welcome settings.
the Netus team.
team. As you know, we have a large te
team
am assigned as this is a very significant
client. I'm asking each team member to take responsibility for a particular section of our work and to
prepare a detailed audit plan, setting out the procedures to be performed at our final audit visit in
Privacy Policy
August. Materiality for planning purposes has been set at £1.5 million.
Marketing
You will be responsible for staff costs and the assets and liabilities related to staff costs in the statement
of financial position. NetusUK has around 5,000 permanent employees, 1,000 of whom are
Personalization
remunerated on an hourly basis. A time sheet system records time for hourly paid staff and overtime for
those salaried staff who are entitled to overtime payments. The company runs a single computerised
Analytics
payroll system covering both hourly paid and salaried staff and all staff are paid monthly. Each staff
member is allocated to one of the company's 80 departments, which range in size from three to
Save Accept All
400 employees.
Audit and integrated
integrated questions 93
Results of our review of controls at the interim audit showed that controls were poor so a substantive
approach is to be adopted. Management's attitude regarding controls has been a concern in the past
however they are aware of the issues and have told us that they are in the process of resolving them.
Attached to this email is an extract from NetusUK's June 20X9 draft accounts (Exhibit 1) showing the
20X9
items for which I wish you to take responsibility.
I need you to send me the following planning documentation so that I can complete the overall
planning file for this audit and submit it for manager review. Apart from item (3), your responses should
concentrate solely on the audit of staff costs and related assets and liabilities in the statement of financial
position. You do not need to consider any corporation tax or deferred tax balances.
Planning documentation required
(a) (1) Briefing notes for Harry Thomas the Finance Director (see Exhibit 2) so he understands what
entries he needs to make to account correctly for pension costs and where he can obtain any
additional information necessary.
(2) A schedule summarising
summarising the audit procedures you
you believe we should complete at our final visit
in August. For the substantive procedures, please be specific about the procedures you plan to
perform on each relevant balance.
(b) Your comments on any other matters, including ethical issues, you think we should take into
account in planning our audit procedures more generally or any concerns you have as a result of
the information you have been given.
I look forward to receiving your audit planning.
In addition to this I would like your assistance with a special project. Our firm is looking into the
possibility of using data analytics in future as a means of making our audit process more efficient. At the
interim audit our IT specialists were given permission by NetusUK to use our newly devised data
analytics tool as part of a pilot scheme. A journals dashboard was produced as a result ( Exhibit 3).
I have not been part of the working party involved in the data analytics project and am unclear as to
what this is all about and its relevance to our audit work. Please produce some notes for me explaining
what data analytics is. Then I would like you to look at the information produced and set out how this
could assist in our risk assessment process. You should also indicate any further analysis which we could
perform using the data analytics tool.
Louise
Requirement
Respond to Louise Manning's email. Total: 30 marks
Exhibit 1: Extract from NetusUK's draft accounts for the year ended 30 June 20X9
Summary of staff costs reflected in the statement of profit or loss and other comprehensive
This website storesfor
income data
thesuch
yearasto 30 June 20X9
cookies to enable essential site Total Total
functionality, as well as marketing, Cost of Distribution Administrative year to year to
personalization, and analytics. You sales costs expenses 30 June 20X9 30 June 20X8
may change your settings at any time £'000 £'000 £'000 £'000 £'000
or accept the default
Payroll settings. 78,301 40,815 33,974 153,090 141,496
Pension cost 10,487 5,466 4,550 20,503 12,634
Temporary staff 5,690 0 2,451 8,141 1,065
Privacy Policy
Employee expenses 341 287 2,074 2,702 2,396
Total staff costs 94,819 46,568 43,049 184,436 157,591
Marketing
Personalization
Analytics
Summary of staff cost related balances in the statement of financial position at 30 June 20X9
30 June 20X9 30 June 20X8
£'000 £'000
Current liabilities
Employment taxes 6,903 6,287
Employer's pension contributions payable 2,397 1,484
Accruals
Temporary staff 204 119
Commission payable on June sales 454 429
Note: For the purposes of the draft accounts pension costs comprise only employer contributions
payable to NetusUK's defined benefit pension scheme. The rate of employer contribution increased from
10% of pensionable salary to 15% of pensionable salary with effect from 1 July 20X8 following an
actuarial valuation which showed a significant deficit.
Exhibit 2: Briefing notes
To: L. Manning
From: [email protected]
Subject: Audit planning
Date: 1 July 20X9
Hi Louise
You already have our draft accounts for the period ended
ended 30 June 20X9 which have been prepared on
the same basis as last year's group reporting. As you know, the group head office has never required us
to include adjustments for the pension scheme deficit. I've just received instructions from head office
which state that, for this year's group reporting, they want full compliance with IFRS and will not be
making central adjustments for our pension scheme. I'm going to need your help in calculating the
necessary entries as I have no real experience of accounting for pension schemes and you've always
helped me with the entries for our statutory accounts.
As you know, we have one UK defined benefit
benefit pension scheme open to all employee
employees.
s. Head office has
told me that I should recognise the actuarial gains and losses immediately.
I look forward to receiving your advice on these matters and to discussing your detailed audit plan.
Regards
Harry
Exhibit 3: Journals dashboard
COMPANY: NETUSUK 01.07.X8 – 30.06.X9
This website stores data such as
Journals
cookies to enable essential site
Dashboard
functionality, as well as marketing, Automated vs Manual
personalization, and analytics. You
may change 440your settings at any time Value
Total no ofsettings.
or accept the default journals
25%
£3,874,000
Privacy Policy
Total value of journals
Marketing
75%
Personalization
£8,805
Analytics
Average value of journals
Save Accept All
Audit and integrated
integrated questions 95
10 Volume
Number of users
40%
60%
Automated
Manual
Top 10 users Volume
V alue
Creator ID Department V alue Volume
£000 38
900 36
Andrews Finance 850 34
800 32
30
Conway Finance 750
700 28
650 26
24
Dalton Finance 600
550 22
(financial 500 20
450 18
controller) 400 16
350 14
Edwards Finance 300 12
250 10
200 8
Farley Finance 150 6
100 4
Lyndon Sales 50 2
This37
websiteVerloc Group
stores data such as
cookies to enable essential site
You
functionality, asare a as
well newly-promoted
marketing, audit manager at Marlow & Co, a firm of ICAEW Chartere
Chartered
d Accountants. You
arrive and
personalization, at the office onYou
analytics. a Monday morning and find the following email from Leonard Kurtz, the audit
engagement partner
may change your settings at any timefor Verloc Group.
or accept the default
Date: 4settings.
October 20X9
From: Leonard Kurtz <[email protected]>
To: Ruth Smith<[email protected]>
Privacy Policy
Subject: Verloc Group audit
Ruth,
Marketing
I know that you have not been involved in the Verloc Group audit before, but as you probably know,
Personalization
the audit manager on this account has just resigned and I need you to step in. I'm looking for someone
who can pick things up quickly and run with it, and you look like the right person for the job.
Analytics
I attach the following information, which I have just received from Verloc Group's Finance Director:
Save
Accept
Individual All
statements of profit or loss and other comprehensive income for the companies in the
group (Attachment 1).
Notes on the main transactions during the year ended 30 September 20X9 (Attachment 2).
96 Corporate Reporting: Question Bank
Draft consolidated statements of profit or loss and other comprehensive income with supporting
workings (Attachment 3).
The Finance Director has not yet sent me the statements of changes to equity and statements of
financial position but he promises to have them ready for us at the audit planning meeting this
afternoon.
I have also forwarded to you some handover notes prepared by your predecessor ( Attachment 4),
which may help us in planning the audit this year.
Ahead of the audit planning meeting, please review the information provided and:
Requirement
Respond to the audit partner's email. Assume that the tax figures will be audited by your firm's tax audit
specialists, so you can ignore tax for now. Total: 30 marks
Attachment 1: Statements of profit or loss and other comprehensiv
comprehensive
e income for three
entities for the year ended 30 September 20X9
Verloc Winnie Stevie
£'000 £'000 £'000
Revenue 6,720 6,240 5,280
Cost of sales (3,600) (3,360) (2,880)
Gross profit 3,120 2,880 2,400
Administrative expenses (760) (740) (650)
Distribution costs (800) (700) (550)
Investment income 80 – –
Finance costs (360))
(360 (240) (216)
Profit before tax 1,280 1,200 984
Income tax expense (400) (360) (300)
Profit for the year 880 840 684
Other comprehensive income (not reclassified to P/L):
Remeasurement gains on defined benefit pension plan 110 – 40
This websiteTaxstores
effectdata suchcomprehensive
of other as income (30) – (15)
cookies to Other
enablecomprehensive
essential site income for the year, net of tax 80 – 25
functionality, as well as marketing,
Total comprehensive income for the year
960 840 709
personalization, and analytics. You
may change Attachment
your settings2:atNotes on the main transactions during the year ended 30 September 20X9
any time
or accept the
(a) default
Verlocsettings.
acquired 160,000
160,000 of the 200,000 £1 issued ordinary shares of Winnie on 1 May 20X9 for
£2,800,000.. The reserves of Winnie at 1 May 20X9 were £2,050,000. A year end impairment
£2,800,000
review indicated that goodwill on acquisition of Winnie was impaired by 10%. The group policy is
Privacy Policy to charge impairment losses to administrative expenses. The group policy is to value the non-
controlling interest at the proportionate share of the fair value of the net assets at the date of
Marketing acquisition.
Personalization
The fair value of the net assets acquired was the same as the book value with the exception of an
investment property, which had been valued at the time of acquisition to be £960,000 above its
Analytics
book value. The property has an estimated total useful life of 50 years, and has been depreciated
on the cost model. At the date of acquisition Winnie had owned this property for 10 years.
Save Accept All
The
basisgroup policy
from the is to
date charge depreciation
of acquisition onofbuildings
to the date disposal.to administrative expenses on a monthly
Audit and integrated
integrated questions 97
(b) Verloc disposed of 40,000
40,000 £1 ordinary shares of Stevie on 1 July 20X9
20X9 for £960,000.
£960,000. Verloc had
acquired 75,000 of the 100,000 £1 issued ordinary shares of Stevie for £980,000 on
1 November 20X6, when the balance on reserves was £1,020,000.
£1,020,000. The fair value of the
shareholding retained at 1 July 20X9 was £792,000. There was no evidence of goodwill having
been impaired since the date of acquisition. The reserves of Stevie at 1 October 20X8 were
£1,300,000.
(c) Winnie paid a dividend of £1
£100,000
00,000 on 1 September
September 20X9
20X9 and Verloc
Verloc has recorded
recorded its share in
investment income.
(d) Verloc holds several
several available for sale investments, including some unquoted shares, and accounts
for these in accordance with IAS 39, Financial Instruments: Recognition and Measurement . Gains on
subsequent measurement of £46,000 occurred in the year. The financial controller, however, is
unsure how this should be presented within the statement of profit or loss and other
comprehensive income and so has yet to include it. He is also aware that the presentation may
change when IFRS 9, Financial Instruments comes into force.
(e) Verloc also disposed of an available for sale investment
investment during the year to 30 September
September 20X9 for
£630,000, when the carrying value of the investment
inv estment was £580,000. The gain on disposal of
£50,000 is included in administrative expenses in Verloc's individual financial statements. Previously
recognised gains associated with this investment of £40,000 have been recycled from other
comprehensive income to profit or loss (administrative expenses) in the draft consolidated financial
statements, although it had not been adjusted for in the individual statements of profit or loss and
other comprehensive income above.
Attachment 3: Draft consolidated statements of profit or loss and other comprehensive
income with supported workings
Verloc Group
Consolidated statement of profit or loss and other comprehensive income
income
for the year ended 30 September 20X9
£'000 £'000
Revenue (6,720 + (6,240 5/12) + 5,280) 14,600
Cost of sales (3,600 + (3,360 5/12) + 2,880) (7,880)
Gross profit 6,720
Administrative expenses (760 + (740 5/12) + 650 + 119 (W2) – 40 recycled (1,797)
AFS gains (W7))
Distribution costs (800 + (700 5/12) + 550) (1,642)
Finance costs (360 + (240 5/12) + 216) (676)
Profit before tax 2,605
Income tax expense (400 + (360 5/12) + 300) (850)
Profit for the year 1,755
This website stores data such as
cookies to Other
enablecomprehensive
essential site income:
income:
functionality, as well as marketing,
Items that will not be reclassified to profit or loss
Remeasurement
personalization, gains
and analytics. You on defined benefit pension plan (110 + 40) 150
Tax effect of other comprehensive
may change your settings at any time income (30 + 15) (45)
or accept the default settings.
Items that may be reclassified subsequently to profit or loss
Recycling of previously recognised gains on AFS investment (W7) (40))
(40
Other comprehensive income for the year, net of tax 65
Privacy Policy
Total comprehensive income for the year 1,820
Marketing
Profit for the year attributable to:
Personalization
Owners of the parent 1,242
Non-controlling interest (W1) 513
Analytics 1,755
WORKINGS
(1) Non-controlli
(1) Non-controlling
ng interests
PFY TCI
£'000 £'000
Winnie
As stated in Attachment 1 (840
(840 5/12) 350
Additional depreciation on fair value adjustment (10)
340
NCI share (NCI in TCI is the same as Winnie has no OCI) = 20%
68 = 68
Stevie
As stated in Attachment 1 684
684 709
65%
65% 65%
= 445 = 461
Total NCI 513 529
Goodwill (2,250)
1,192
(7) Available for sale investment
On disposal (30 September 20X9), previous revaluation gains of £40,000 were reclassified from
other comprehensive income to profit or loss ('administrative expenses').
Attachment 4: Handover notes – Verloc Group
Verloc is a family-owned retail business which had grown organically. In recent
recent years, it has sought to
expand in the domestic market by acquiring other synergistic businesses: Stevie in 20X6 and Winnie in
20X9.
We are auditors for Verloc, and have been auditing the individual financial statements of Stevie as well,
well,
although I am unsure whether this arrangement will continue.
The Verloc Group audit has always been extremely time-pressured. In the three years when I have
worked on this audit, the Board has insisted each time that the audit must be completed by
1 November. This deadline is completely artificial of course, but that's what the Group policy is.
Fortunately, this audit is very straightforward compared to most of the firm's other audit engagements
and presents low audit risk. Therefore, audit procedures can be simplified as much as possible. For
example, related party transactions and share capital are of low risk, so audit procedures can be
minimised on these two accounts.
Also, the timescale is such that there is insufficient time to apply the firm's statistic
statistical
al sampling methods
in selecting trade receivables balances for testing. It is more efficient to pick the sample based on the
audit team members' own judgement.
Materiality for the financial statements as a whole was £200,000, based on £12.8 million of revenue,
£2.1 million of profit before tax and £11.1 million of gross assets. I expect similar materiality levels can
be used on the 20X9 audit.
Last year, I gave two audit juniors the tasks of auditing trade payables and going concern. They
reviewed each other's work. This worked very well all round: reducing my review time and providing
good training for the audit juniors.
On a separate matter, I spoke with the Finance Director at a networking function two months ago, and
he mentioned that the Board is preparing for a listing on the London Stock Exchange in a bid to raise
long-term finance. I don't know where they are now on their listing plans.
38 KK
Kemsler Kessinger Ltd (KK) is a manufacturer of industrial cutting equipment.
You are a senior who has recently been assigned to the audit of KK. You work for Wight and JonesJones LLP
(WJ), a firm of ICAEW Chartered Accountants. WJ has recently been appointed as auditor for the KK
This website stores datafinancial
consolidated such asstatements for the year ended 30 June 20X4. WJ is also the auditor of all KK group
cookies to companies
enable essential site
and associates. The engagement partner, Emma Happ, invited you to a meeting with her to
functionality, as some
plan well as marketing,
aspects of the KK audit.
personalization, and analytics. You
Emma opened the meeting:
may change your settings at any time
or accept the
"KKdefault settings.
is a new client of WJ and we are still trying to understand fully its management processes and
corporate governance. My particular concern is that the interim audit discovered transactions with
directors and other related parties during the year which I suspect may not be at arm's length.
Privacy Policy
We need to make sure that the financial reporting treatment is appropriate in the KK consolidated
financial statements for the year ended 30 June 20X4 and that all necessary disclosures are made in each
Marketing
of the individual company financial statements.
Personalization
I have met with the KK chief executive, Mike Coppel. As a result of this discussion, I have prepared some
background information (Exhibit 1). In addition, the audit senior on the KK interim audit, Russell Reed
Analytics
(who no longer works for WJ), raised some matters of concern ( Exhibit 2).
One further issue
Save is that
Accept All Mike is unhappy with the due diligence work which was performed by the
accountants Trebant & Edsel LLP (TE) for KK's purchase of the shares in Crag Ltd (Exhibit 1). Mike is
considering asking WJ to review their work so the KK board can decide whether to undertake litigation
against TE. However, Mike emphasised that, while he is happy with the work of WJ so far, he would like
against TE. However, Mike emphasised that, while he is happy with the work of WJ so far, he would like
the audit for the year ended 30 June 20X4 to be completed to his satisfaction before he would consider
awarding this new review work to WJ, or indeed reappointing WJ for the audit engagement next year.
Please prepare notes for me as follows.
(a) For each of the issues in Exhibit 2:
describe the appropriate financial reporting treatment in the KK consolidated financial
statements for the year ended 30 June 20X4. Explain and justify whether or not disclosure of
any related party transactions needs to be made in the individual financial statements of the
companies concerned for the year ended 30 June 20X4, setting out any required disclosures;
and
explain the key audit issues and the audit procedures to be performed.
(b) Identify and explain
explain the key audit issues which arise from the acquisition by KK of shares and
options in Crag.
(c) Explain the ethical implications for WJ of Mike's
Mike's suggestion tthat
hat WJ carry out review work in respect
of the due diligence assignment performed by TE.
Please ignore tax and deferred tax for now."
Requirement
Respond to the instructions of Emma Happ, the engagement partner. Total: 30 marks
Exhibit 1: Background information
KK manufactures industrial cutting equipment at its factory in the UK. In the year ended 30 June 20X4,
the KK group had revenue of £126 million, made a profit before tax of £13 million and had net assets of
£88 million at that date.
Share ownership and the board
The ordinary share ownership and directors of KK at 30 June 20X4 were as follows:
On 1 August 20X3, KK acquired 45% of the ordinary shares in Crag Ltd, a competitor company. The
remaining 55% of the ordinary shares continue to be held by Woodland plc. Crag had previously been a
wholly-owned subsidiary of Woodland which is an unrelated company. Under the terms of the share
purchase, KK has an option, exercisable up to three years from the date of the share purchase, which
allows it to buy an additional 15% holding of Crag ordinary shares from Woodland at an exercise price
per share which is 10% higher than the actual price per share paid to purchase the 45% shareholding.
KK has been exercising its votes as a shareholder of Crag. Since 1 August 20X3, the fair value per
ordinary share of Crag is estimated to have risen by 13%. Crag's marketing director, who was appointed
by KK, has implemented a new successful marketing strategy which has been a key factor in increasing
the fair value per share.
The ordinary shares of all companies are voting shares. All companies have a 30 June accounting year
end.
Exhibit 2: Interim audit notes – prepared by Russell Reed
(1) Seal sold £12 million of goods to Crag, spread evenly over tthe
he year ended 30 June 20X4.
20X4. I am not
clear how this should be treated and whether there should be separate disclosure of these
transactions and, if so, what needs to be disclosed.
(2) On 6 June 20X4, Seal sold goods to Moose at a price of £2 million. At 30 June 20X4, none of these
goods remained in inventories held by Moose. There were no other transactions between Seal and
Moose during the year ended 30 June 20X4.
(3) On 15 December
December 20X3, Mike Coppel purchased a cutting machine from KK for £300,000.
£300,000. At the
date of sale, the carrying amount of the machine was £240,000 and its fair value was estimated to
be £380,000.
(4) On 2 October
October 20X3, KK
KK repaid a £9 million interest-free loan from Yissan. The loan was originally
raised on 12 March 20X1.
(5) On 20 January 20X4, Crag sold goods which had cost
cost £1 million, to KK for £1.5 million. One
quarter of these goods remain unsold by KK at the end of the year. There were no other
transactions between Crag and KK during the year ended 30 June 20X4.
39 UHN
You work for Hartner as an audit senior. Hartner is a firm of ICAEW
ICAEW Chartered Accountants. You have
recently been asked to act as an audit senior on the audit of UHN plc, an AIM-listed company.
UHN manufactures electronic navigation systems for the aircraft industry. It has survived the recession
and order levels have started to recover. In addition, low interest rates and the ability to keep costs
controlled have improved the company's financial performance in recent years.
The audit engagement partner, Petra Chainey, gives you the following briefing:
"We have been very short-staffed on the UHN audit and Greg Jones, the audit senior, has been acting as
This websitethestores
audit data
manager
suchonas this assignment. Greg has just gone on study leave and I would like you to take
cookies to on
enable essential
his role for thesite
remainder of the audit. Before he left, Greg prepared a handover note ( Exhibit 1)
which includes information on UHN's covenants and its draft summary financial statements for the year
functionality, as well as marketing,
endedand
personalization, 31 March 20X4.
analytics. YouThe handover note also includes Greg's summary of the key fin financial
ancial reporting
issues. These issues are
may change your settings at any time either unresolved or, in Greg's opinion, issues where the directors have exercised
judgement
or accept the in the application of accounting policies and estimates in the preparation of the financial
default settings.
statements for UHN. The planning materiality is £100,000. The audit closure meeting is scheduled for
this Friday.
Privacy Policy
I have also forwarded you an email from the UHN finance director, Melvyn Hansi, requesting Hartner to
accept a one-off assignment (Exhibit 2). I need to respond quickly to this email as the matter is urgent. I
Marketing
am concerned that if we do not do as UHN requests, they may engage with another assurance firm, not
Personalization
just for this one-off engagement, but also for future audits.
We may not have the expertise in-house to complete this one-off assignment as the nature of UHN's
Analytics
industry is specialised, but I am sure we can put together a convincing report.
Save Accept
I would like you All
to prepare a working paper in which you:
(a) Set out and explain the implications of the financial reporting issues in Greg's handover note
(Exhibit 1). For each issue, recommend the appropriate financial reporting treatment, showing any
adjustments that you would need to make to the draft summary financial statements.
(b) Using your recommendations
recommendations above, evaluate and explain
explain the overall impact of your adjustments
on the gearing ratio and the interest cover ratio at 31 March 20X4 in accordance with the bank's
loan covenants.
(c) Explain the key audit risks that we need to address before signing our audit report on the financial
statements. I do not need the detailed audit procedures; just concentrate on the key risks.
(d) Explain the responsibility and accountability
accountability of the UHN board for cyber security and make
appropriate recommendations.
I will ask the tax department to review any further deferred tax and current tax adjustments.
I would also like you to prepare a file note explaining the ethical implications for our firm if we decide to
accept the one-off assignment (Exhibit 2)."
Requirement
Prepare the working paper and the file note requested by the audit engagement partner.
Total: 45 marks
Exhibit 1: Handover note prepared by Greg Jones
Loan covenants
UHN is financed by equity and debt. In 20X0, UHN was rescued from insolvency by its bank, which
provided a £20 million loan, repayable in 20X8. The loan contract with the bank stipulates two
covenants which are based on the year-end audited financial statements. Failure to meet either
covenant could result in the loan facility being withdrawn.
The covenants are as follows:
(1) The gearing ratio is to be less than 130%. The ratio is defined as:
Non - current liabilities (excluding provisions and deferred tax liability)
100%
Equity (Share capital and reserves)
(2) The interest cover is to be greater than 3. The ratio is defined as:
Profit before finance costs (including exceptional items)
Finance costs
Covenants are determined at each 31 March year end.
As part of the loan agreement, audited financial statements
statements must be presented to
to the bank within four
months of the accounting year-end.
UHN – Draft summary financial statements for the year ended 31 March 20X4
This websiteStatement
stores dataof such
profitasor loss for the year ended 31 March 20X4
cookies to enable essential site £'000
£'000
functionality, as well as marketing,
Revenue 56,900
personalization, and analytics.
Operating costs You (49,893)
may change your settings
Exceptional itemat(Issue
any time
1) 3,040
or accept the default settings.
Operating profit 10,047
Finance costs (2,200)
Profit before tax 7,847
Privacy Policy
Statement of financial position at 31 March 20X4
Marketing £'000
ASSETS
Personalization
Non-current assets
Property, plant and equipment (Issue 2) 20,040
Analytics
Current assets
Save Accept
Inventories (Issue 3) All 21,960
Trade receivables
receivables
Cash and
cash equivalents 15,982
15,982
128
38,070
Total assets 58,110
£'000
EQUITY AND LIABILITIES
Equity
Share capital – ordinary £1 shares 1,000
Share premium 15,000
Retained earnings – deficit (500)
Total equity 15,500
Non-current liabilities
Loans 20,000
Long-term provision (Issue 4) 8,520
8,520
Deferred tax liability 1,000
Total non-current liabilities 29,520
Current liabilities
Trade and other payables (Issue 3) 12,350
Short-term provision (Issue 4) 740
Total current liabilities 13,090
Save Accept
As a consequence of All
this exercise, the service centre was determ
determined
ined to have a value in use of
RUB180 million and a fair value less cost to sell of RUB204 million at 31 March 20X4.
The finance director therefore calculated an impairment charge of RUB18 million. He translated this at
RUB48 = £1 to give an impairment charge of £375,000 in operating costs.
I haven't studied this area of financial reporting at college yet, so I thought I should bring it to your
attention. I have checked the exchange rates which are as follows:
At 1 April 20X3 RUB53 = £1
At 31 March 20X4 RUB48 = £1
Issue 3 – Hedge against increase in price of titanium
UHN uses titanium in its production process and holds titanium inventory of around 680,000 kilograms
to ensure a constant supply for production. UHN's selling price of its products is linked to the price of
titanium. On 1 January 20X4, UHN had 680,000 kilograms of titanium at a total cost of £8.2 million in
inventory. At that date, UHN signed a futures contract to deliver 680,000 kilograms of titanium at
£14 per kilogram on 30 September 20X4 to hedge against a possible price fluctuation of titanium. At
31 March 20X4, the market price of titanium was
w as £15 per kilogram and the futures
fu tures price for delivery on
30 September 20X4 was £16.60 per kilogram.
The arrangement was clearly designated as hedge accounting for financial reporting purposes in the
documentation prepared on 1 January 20X4. However, no adjustment has been made in the financial
statements to 31 March 20X4 to use hedge accounting or to adjust the fair value of the inventory. I was
informed that, as UHN had met the interest cover requirement for its bank covenant for the year ended
31 March 20X4, the directors want to hold back profit in order to recognise it in the year ending
31 March 20X5. The loss on the futures contract of £1.768 million is included in operating costs and in
trade and other payables.
Issue 4 – Provision for claim for damages
In 20X0, a cargo plane, fitted with a navigation system installed by UHN, crashed in the Saharan desert.
There was no loss of life, but the owner of the plane blames the crash on a failure of the UHN navigation
system. It is alleged that UHN's computer system had been hacked and the information used to attempt
to hi-jack the plane. UHN has strenuously denied this and contested the legal case. However, as the
UHN directors believed that it was probable that there would be a settlement, but were uncertain as to
the amount, a provision was made on 31 March 20X2 for the most likely outcome of £10 million to be
settled in approximately 3 years. The provision was discounted at 8% per annum.
In March 20X4, to avoid further bad publicity, UHN settled out of court with the owner of the plane and
agreed to pay £9.1 million. The payment terms have been agreed as 25% payable in April 20X4 and
75% payable in April 20X5. No adjustments have been made to the financial statements as a result of
the settlement because the directors believe that the existing provision should cover the payments they
will be required to make.
Exhibit 2: Email from finance director of UHN
To: Petra.Chainey
From: M.Hansi
Date:
This website stores data21 20X4
Julyas
such
cookies to enable essential site assignment
Subject: One-off
functionality,
TheasUHN
well board
as marketing,
is in disagreement about UHN's approach to cyber security.
personalization, and analytics. You
may change The operations
your settings director believes that a cyber incident would be so rare that despite the fact that the
at any time
effects
or accept the would
default be potentially significant it is not worth spending large amounts on attempting to
settings.
mitigate risks. He pointed out that the responsibility for cyber security lies with the IT senior manager
who is not a board director but is responsible for the IT and security budget.
Privacy Policy
The finance director believes that the amount UHN pays for cyber insurance premiums could be
reduced if it could demonstrate good cyber security practices. Other directors complain that there is a
Marketing
lack of information regarding security breaches. The HR director complained that she first heard about
the hacking allegations and the attempted hi-jacking of the cargo plane in the press.
Personalization
I would like Hartner to report to the board of directors about whether our spending on cyber security
Analytics
matters is providing value for money.
Save Accept to
I would like Hartner Allaccept this one-off assignment. I expect that Hartner will be able to charge a low
fee for this work as I am sure you will be able to use some of this report as part of your audit work.
Audit and integrated
integrated questions 105
40 ETP
You are Steph Carter, an audit senior
senior with J&K LLP, a firm of ICAEW Chart
Chartered
ered Accountants which audits
Erskin Technology plc (ETP).
You receive the following briefing from Lauren Haynes, the audit manager responsible for the ETP audit:
Welcome to the ETP audit team.
team. This week you are scheduled to plan the ETP audit for the year ending
30 September 20X4. It's important we get the planning completed so we can focus on updating our
controls work on revenue at our interim audit visit next month.
I'm aware that you have not worked on ETP before, so I have provided some background information
from last year's audit file (Exhibit 1). I've also sent you a working paper setting out the results of
preliminary analytical procedures performed last week by our audit assistant, Joshi Khan ( Exhibit 2).
Planning materiality has been set at £850,000.
email from the ETP finance director, Mari Johnson (Exhibit 3). She has asked us
Yesterday I received an email
for some advice and I'll need your help with my
my response.
You and I are scheduled to meet up later today. I would like you to do the following in preparation for
that meeting.
(a) In respect of the audit for the year ending 30 September 20X4:
(1) Prepare review notes
notes on Joshi's work (Exhibit
(Exhibit 2 ), which explain the weaknesses and limitations
2),
in the procedures he has performed. Perform additional analysis where you think this is
required. Set out clearly the additional audit procedures you would like him to perform and
the queries you would like him to resolve when he returns to the client later this week to
Service revenue is generated by sales of training and consultancy. This is a very competitive market
segment. It has been historically important for ETP and remains a core part of the company's business
segment. It has been historically important for ETP and remains a core part of the company s business
plan. Service revenue is recognised as the service is performed.
Exhibit 2: ETP audit for the year ending 30 September 20X4 – Preliminary analytical
procedures working paper prepared by Joshi Khan
This working paper considers the following key performance indicators identified by ETP:
Revenue growth
Gross margin
Receivables – days sales outstanding (DSO)
This working paper compares actual performance reported in the company's interim financial
statements for the six month period to 31 March 20X4, with:
the budget; and
the average performance of a comparator group of companies identified during the audit for the
the
year ended 30 September
September 20X3 as being
being most closely aligned to ETP in terms of activity.
Comparisons are also made if applicable to performance in a prior period. Where actual results appear
out of line with budget or the comparative data, explanations have been sought from Julie Barwell,
Financial Controller, and notes from these discussions are documented below.
(1) Revenue growth
Total revenue for the 6 months ended 31 March 20X4 was as follows:
£m
Hardware 25.4
Systems 100.3
Services 17.9
Total 143.6
Notes
1 Hardware sales of Stor-It
Stor-It devices were disappointing in the first half of the financial year
This website stores data such as
following the introduction of cheaper and more advanced products by ETP's competitors.
cookies to enable essential site
From discussions with Julie, sales have continued to decline in the third quarter and storage
functionality, as well as marketing,
space for hardware inventory is becoming a problem.
personalization, and analytics. You
2 Systems sales were very strong in the first half of the financial year.
year. ETP
ETP reviewed
reviewed its re
revenue
venue
may change your settings at any time
recognition policy for systems sales in October 20X3 and is now invoicing and recognising
or accept the default settings.
revenue and associated costs as each project progresses. This resulted in the recognition of
additional revenue totalling £30 million on part-completed projects in the six months ended
31 March 20X4. The recognition of revenue on part-completed projects was not foreseen at
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the time the budget was prepared and hence actual performance was significantly better than
Marketing budget.
3 Services revenues for training and consultancy
Personalization consultancy were strong in the first half of the year despite
an overall decline in this sector of the market. Julie attributes this strong performance to the
Analytics introduction of an 'all in' advice package. Customers pay an up-front annual fee and are then
able to access telephone and online advice as and when they need it. They are also entitled to
Save Accept of
discounts Allup to 20% for the company's training programmes. This new service has proved
very popular and revenues of £5 million were received in the six months ended 31 March 20X4.
The up-front fees are recognised as revenue on receipt as they are not refundable.
Audit and integrated
integrated questions 107
(2) Gross margin
Hardware Systems Services
% % %
ETP
Actual margin for six months to 31 March 20X4
20X4 31.4 46.0 63.9
Budgeted margin for six months to 31 March 20X4 35.0 45.0 50.0
Actual margin for six months to 30 September
September 20X3 35.0 44.8 50.1
ETP Days
Actual DSO as at 31 March 20X4
20X4 78.4
Budgeted DSO as at 31 March 20X4 66.0
Actual DSO as at 30 September
September 20X3 66.2
Comparator group of companies
Average DSO for comparator group as at 31 March 20X4 65.0
Note
Note 6
Note
6 Overall DSO increased to above the industry average and prior year, as customers were
generally slow to pay invoices for stage payments on systems sales. In addition, a number of
distributors for the 'Stor-It' hardware devices struggled to make timely payments as their sales
of the product fell and inventory levels increased.
Exhibit 3: Email from ETP finance director, Mari Johnson
This websiteTostores
: [email protected]
such as
cookies to enable essential site
From: [email protected]
functionality, as well as marketing,
Date: 21 July 20X4
personalization, and
Subject: analytics.
InterimYou
audit
may change your settings at any time
Hi Lauren
or accept the default settings.
I was surprised when I joined ETP that we did not ask J&K to complete review procedures on our interim
results. I'd like ETP to do this in future, but I am having some difficulty persuading the board that we
Privacy Policy
should incur the additional cost. Please therefore provide me with a brief summary of the key benefits
that an interim review and report by J&K would provide.
Marketing
ETP's budget for the year ending 30 September 20X5 forecasts revenue for the year to be £350 million.
Personalization
The revenue growth is mostly attributable to a major systems sales contract with an overseas company
which will commence in April 20X5. ETP will prepare interim results to 31 March 20X5 and I think it
Analytics
would be relevant information for our shareholders to recognise revenue evenly over the year and
therefore reflect half of this new contract revenue in the interim financial statements for the six months
Save to 31 MarchAccept
20X5. AAllreview and a report by J&K would add credibility to the interim financial
statements for our shareholders.
108 Corporate Reporting: Question Bank
41 Couvert
You are Anton Lee, a recently-qualified ICAEW
ICAEW Chartered Accountant working for Pryce Gibbs LLP (PG),
a firm of ICAEW Chartered Accountants. You are currently assigned as audit senior to the audit of
Couvert plc for the year ended 31 August 20X4. Couvert is a listed company.
Couvert sells high-quality carpets. It has struggled during the recession as demand for its products has
fallen. However, the company's directors are now confident that it will benefit from the expe
expected
cted
recovery in the carpet industry.
Couvert has several subsidiaries, most of them carpet retailers. In 20X3, Couvert's directors decided to
implement a strategy of vertical integration in order to protect the company's sources of supply. On
1 September 20X3, as part of this strategy, Couvert acquired 55% of the ordinary share capital of Ectal,
a carpet manufacturer based in Celonia. Background information on the investment in Ectal is provided
(Exhibit 1). On 1 March 20X4, Couvert also acquired 100% of the shares of Bexway Ltd, a UK carpet
manufacturer.
Mary, the audit manager assigned to the Couvert audit for the year ended 31 August 20X4, left PG last
week to start a new job in Australia. The audit partner, Lucille Jones, has sent you the following email:
Exhibit 1 – Background information on Couvert's investment in Ectal
Ectal was incorporated 20 ago in Celonia, a country well known in the carpet industry for the high
quality of its wool products and its skilled labour force. The currency of Celonia is the Celonian dollar
(C$).
Ectal was founded by Ygor Vitanie, who held a majority shareholding until, on 1 September 20X3,
Couvert purchased 55% of Ectal's ordinary share capital from him, at a substantial premium. The
remaining 45% of the shares are now held as follows:
Ygor Vitanie 35%
Due diligence
Due diligence in respect of Couvert's acquisition of Ectal was carried out jointly by PG and Stepalia. The
principal member of PG's staff involved in the due diligence exercise was Mary, the PG audit manager
who has just left the firm.
Exhibit 2: Year-end financial information received from Ectal
The Ectal financial statements have been prepared in compliance with IFRS.
Ectal: Statement of profit or loss for the year ended 31 August 20X4
20X4 20X3
Actual 20X4 Budget Actual
C$m C$m C$m
Analytics
Ectal: Statement of financial position at 31 August 20X4
20X4 20X3
Actual 20X4 Budget Actual
C$m C$m C$m
Issue 2 – Financial asset
On 1 April 20X4 Couvert's board bought a put option contract over 500,000 shares in an Australian
wool-producing company, The Brattle Company. The exercise price ofo f the option is £6.00 per share and
it will expire on 31 March 20X5. The bank has supplied me with the following information about the
put option:
1 April 20X4 31 August 20X4
Market price of one share in Brattle £6.00 £5.90
Value of put option contract £63,000 £95,000
I recorded the initial investment of £63,000 as an available-for-sale financial asset, but I have made no
other accounting entries in respect of this asset and I am not sure whether any adjustment is necessary.
Please explain the appropriate financial reporting treatment for this item, and set out the appropriate
journal entries.
I look forward to your response to my queries.
42 ERE
ERE Ltd designs (ERE), manufactures and installs medical equipment for healthcare providers. ERE is
currently unlisted but its shareholders are considering an AIM listing within the next three years. The
chief executive, Frank Mann, owns 30% of the shares in ERE and the remaining 70% are owned by
private equity investors. ERE has a 31 July accounting year end.
You are Tom Tolly, an audit senior with Ham and Heven
Heven LLP (HH), a firm of ICAEW CChartered
hartered
Accountants. HH has audited ERE for a number of years. You have just returned to work after study leave
and you have received the following email from your audit manager setting out your assignment for
today.
Requirement
Save Accept All
Prepare the report requested by your audit manager. Total: 34 marks
112 Corporate Reporting: Question Bank
Exhibit: Working paper: prepared by Chris King
ERE: Audit procedures for payables and deferred tax for the year ended 31 July 20X4
The planning materiality is £120,000.
Payables and deferred tax per the statement of financial position are as follows:
Reference to
audit procedures 20X4 20X3
£'000 £'000
Trade payables (1) 13,709 14,628
Other payables
Deferred tax (2)
(3) 2,620
440 550
950
(1) Audit procedures for trade payables
Trade payables comprise:
20X4 20X3
£'000 £'000
Trade payables ledger balances 11,820 12,036
Add: Debit balances 345 52
Add: Goods received not invoiced 1,544 2,540
Total trade payables 13,709 14,628
Privacy Policy KH is a new supplier and invoices ERE in euro. The supplier statement shows a balance of €2 million
at 31 July 20X4. On 1 October 20X3, ERE purchased a large consignment of monitors from KH for
€4 million and recorded this transaction at the exchange rate on that date. ERE paid €2 million to
Marketing
KH on 1 April 20X4 and made a final payment of €2 million on 1 November 20X4 at the exchange
Personalization
rate on that date of €1.28:£1. The year-end ledger balance has been adjusted for an exchange
Analyticsgain. I have checked the calculation of the exchange gain using the following exchange rates:
€/£ €'000 £'000
1 October 20X3 1.15 4,000 3,478
Save Accept All
1 April 20X4 1.20 (2,000) (1,667)
Exchangebalance
Year-end gain
gain (72))
(72
1,739
The €/£ exchange rate at 31 July 20X4 was €1.27:£1.
Disputed Medex invoices
I queried the £850,000 of disputed Medex invoices with Josi and have noted below her
explanation:
Medex supplies components to ERE. ERE used these components to manufacture its oxygen units,
which are installed for hospital customers in operating theatres. On 10 August 20X4, legal
proceedings were commenced against ERE by a hospital which claims that failure of the oxygen
units installed by ERE during the year ended 31 July 20X4 caused delays to the performance of
operations. The hospital is claiming £1.2 million compensation for loss of income.
On 14that
likely, September 20X4,
the claim ERE appointed
will succeed. legalthe
However, advisers who suggested
legal advisers estimatethat it ifis the
that, possible,
case isbut not it
settled,
would be in July 20X6. Also, they have advised that legal costs will be £100,000, which will also be
settled at that date. Josi has included an accrual for the legal fees as part of 'other payables' (see
below). The ERE board does not want to disclose any information regarding the legal case as the
directors believe that it will cause reputational damage for ERE.
ERE believes that the Medex components were faulty.
f aulty. Therefore Josi has requested credit notes
n otes
from Medex in respect of invoices for these components and has credited purchases with
£850,000 and debited the Medex payable ledger account.
Debit balances
This is an adjustment to reclassify debit balances as receivables. I have checked that the debit entry
of this adjustment is included in receivables.
Goods received not invoiced
I reviewed the list of goods received not invoiced and noted several items dating from January
(3) Audit procedures for deferred tax
Josi has provided the following deferred tax computation and notes:
Deferred tax computation
£'000
Taxable temporary difference:
Carrying amount of plant and equipment at 31 July 20X4 12,800
Tax base of plant and equipment at 31 July 20X4 (8,600)
Taxable temporary difference on plant and equipment 4,200
Notes
1 Accounting profits equal taxable profits except in respect of depreciation.
2 ERE made a tax loss of £2 million
million in the year ended 31
31 July 20X4. Under current
current tax legislation
this loss can be carried forward indefinitely. ERE has prepared a budget for 20X5 and 20X6
which shows taxable profits of £500,000 and £750,000. No projections are available after this
date due to the uncertainty of tax law.
3 ERE revalued its head office building on 31
31 July 20X4. The revalued carrying amount at
31 July 20X4 was £5 million and its tax base was £4 million. Gains on property are charged to
tax at 20% on disposal. However, ERE has no intention of selling its head office therefore no
deferred tax liability has been recognised.
4 I have agreed the carrying amount of plant and machinery to the financial statements and the
tax base to the company tax return.
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Marketing
Personalization
Analytics
Privacy Policy
Marketing
Personalization
Analytics
43 Congloma
Congloma plc is a UK listed company and it is the parent of a group of manufacturing companies
located across the UK. Your firm, A&M LLP, a firm of ICAEW Chartered Accountants, has audited
Congloma and its subsidiaries for three years.
You are assigned to the group
group audit team for Congloma
Congloma for the year ending 31 August 20X4. Your
manager, Harri Merr has asked for your help to finalise audit planning. Other audit teams from your firm
are responsible for the individual audits of Congloma's subsidiaries.
You meet with Harri, who
who gives you the following
following instructions:
"I've provided some background information ( Exhibit 1). The Congloma finance director, Jazz Goring,
has asked A&M to assist her in determining how a number of significant transactions should be treated
in the Congloma consolidated financial statements for the year ending 31 August 20X4. She also wants
to understand the overall impact of these transactions on the consolidated profit before taxation.
I've forwarded her email to you ( Exhibit 2), together with an attachment comprising briefing notes
from the Congloma corporate
corporate finance team which provides some further details ooff the transactions
(Exhibit 3). These briefing notes were presented at the Congloma board meeting in May 20X4 before
the significant transactions were completed. Jazz has assured me that none of the details changed when
the deals were finalised, so we can use this information for audit planning purposes.
I would like you to:
(a) draft a response to Jazz's email
email (Exhibit 2) and its attachment (Exhibit 3). In your response you
should:
(1) set out and explain, for each of the transactions she identifies, the correct financial reporting
treatment in Congloma's consolidated financial statements for the year ending
31 August 20X4. Recommend and include appropriate adjustments and calculations; and
(2) calculate the consolidated
consolidated profit before taxation for the year ending 31 August 20X4, taking
into account the adjustments you have identified; and
(b) set out, in a working paper, the additional audit procedures
procedures that we will need to perform as a result
of the transactions Jazz has identified. Include an explanation of the impact that the transactions
will have
This website stores data on
suchtheasscope of our audit procedures and the identification of components that we
consider
cookies to enable to be
essential sitesignificant.
functionality, as The
welladditional
as marketing,
audit procedures that you identify should include those we will perform both at the
personalization,significant
and analytics. You
component subsidiaries and head office. These procedures should only be those of
may change your settings at any time
relevance to our opinion on the Congloma consolidated financial statements for the year ending
or accept the default settings.
31 August 20X4. At this stage, I am not interested in the procedures we will need to perform in
order to sign an audit opinion on each individual group company."
Requirement
Privacy Policy
Respond to Harri's instructions. Total: 40 marks
Marketing
Personalization
Analytics
the attached
board briefing
meeting in Maynotes
20X4from the Congloma
(Exhibit 3). corporate finance team which were presented at our
The board is pressing me for a forecast of the consolidated profit before tax for the year ending
31 August 20X4. Therefore it would be helpful to have your advice on the financial reporting treatment
of the transactions set out below. Before accounting for the effect of any adjustments arising from these
transactions, our latest forecasts show a consolidated profit before tax of £7 million for the year ending
31 August 20X4.
Further investment in Oldone Ltd
In 20W4, ten years ago, Congloma subscribed £9.6 million for an 80% shareholding in Oldone on the
incorporation of the company. At that date, Anthony Myers, the Oldone chief executive subscribed for
the remaining 20% of Oldone shares.
On 1 June 20X4, Anthony retired and sold his shares in Oldone to Congloma for £4 million. Oldone is
expected to make a profit before taxation of £500,000 in the year ending 31 August A ugust 20X4. As for all our
This website stores data such as
group companies, Oldone's profits are not seasonal, but accrue evenly throughout the year.
cookies to enable essential site
functionality,
Theasidentifiable
well as marketing,
net assets of Oldone at 31 May 20X4 were £14 million and, in our interim financial
personalization, and analytics.
statements You we recognised a non-controlling interest of £2.8 million, using the proportion
at that date,
may change of your settings
net assets at anyalways
method time adopted by Congloma. I will instruct an expert valuer to determine the fair
or accept the default
value settings.assets so that I can calculate the goodwill to be included in the consolidated financial
of Oldone's
statements for the year ending 31 August 20X4. However, I need your advice on how to eliminate the
non-controlling interest balance of £2.8 million from the consolidated statement of financial position at
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31 August 20X4.
Issue of convertible bonds
Marketing
On 1 June 20X4, Congloma raised £10 million through an issue of convertible bonds to third party
Personalization
investors. Further details are included in the attached briefing notes (Exhibit 3). For the time being, I
Analytics
have recognised the £10 million as a liability.
liabili ty.
Investment in Neida Ltd
Save Accept All
On 1 June 20X4, Congloma acquired 45% of Neida's issued ordinary share capital and voting rights for
£3 million. Neida's remaining ordinary shares and voting rights are currently held equally by the two
individuals who founded the company. Congloma has an option to acquire a further 20% of Neida s
ordinary share capital in the future.
Neida is engaged in developing practical applications for Lastlo, an innovative new material. We expect
that the use of Lastlo will improve the durability and performance of a number of Congloma's products.
I believe that Congloma's holding of 45% of Neida's ordinary share capital and voting rights gives it
significant influence and so propose to account for Congloma's investment in Neida as an associate. As
you will see from the attached briefing notes (Exhibit 3), Neida has very fe
few
w assets or liabilities, so the
key impact on the group financial statements will be the recognition of the investment of £3 million.
Disposal of 75% interest in Tabtop
On 30 June 20X4, 75% of the ordinary shares and
an d voting rights in Tabtop Ltd, which was wholly owned
by Congloma, were sold to a third party for £6 million. The carrying amount of the net assets (excluding
goodwill) of Tabtop on 30 June 20X4 was £5.6 million and the carrying amount of goodwill relating to
Tabtop in Congloma's consolidated statement of financial position at that date was £1.5 million.
Therefore I have calculated, and propose to include, a group profit on the sale of £0.3 million
(£0.3 million = £6.0 million – (75% of £5.6 million) – £1.5 million).
Further details of this transaction are included in the attached briefing note (Exhibit 3).
I propose to equity account for our non-controlling
n on-controlling interest following the share sale. The disposal should
save you some time on the audit compared to last year, as now you will not need to perform group
audit procedures on Tabtop.
Impairment of investment in Shinwork Ltd
Congloma has an 80% holding of the ordinary share capital of Shinwork Ltd.
Demand for Shinwork's products has fallen and cash flow projections show that its business will have a
value in use of £9.2 million at 31 August 20X4. We will therefore need to record an impairment in our
group financial statements for the year ending 31 August 20X4.
I am not quite sure how to calculate this impairment charge from the information I have and would
welcome your advice. It would be helpful if you could highlight any other financial reporting points that
I should consider.
At 31 August 20X4, key financial data for Shinwork is projected to be as follows:
£m
Carrying amount of net separable assets 8.0
Carrying amount of goodwill relating to Shinwork in Congloma consolidated
statement of financial position 4.0
Non-controlling interest (determined using the proportion of net assets method) 1.06
Exhibit 3: Briefing notes from the Congloma corporate finance team, presented to the
Congloma board meeting on 21 May 20X4
This website stores data such as
Issue of convertible bond
cookies to enable essential site
functionality, as well as
Proposed marketing,
terms for the convertible bond issue have now been agreed. On 1 June 20X4, Congloma will
personalization, andmillion
raise £10 analytics. You 100,000 5% convertible bonds, each with a par value of £100. Each bond
by issuing
may change canyour settings at on
be converted anyortime
before its maturity date of 31 May 20X7 into 10 shares in Congloma plc.
or accept the default
Interest willsettings.
be payable annually in arrears.
By issuing a convertible bond, we not only obtain longer-term finance for the group, but also secure a
lower interest rate. The annual interest rate for similar debt without the conversion rights would be 8%.
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Investment in Neida
Marketing
We propose to proceed
proceed with the acquisition of 45%
45% of the issued share capital of
of Neida for £3 million
Personalization
on 1 June 20X4. We will also have a call option to acquire, from the two founding shareholders, a
further 20% of Neida's ordinary
ordinary share capital and voting rights for £1.5
£1.5 million. Neida ex
expects
pects to
Analytics
exercise this option before 1 June 20X9.
The draft shareholder
Save agreement states that the board of Neida will comprise the two founding
Accept All
shareholders and two individuals nominated by Congloma. Most decisions will be made by a majority of
Neida is expected to make a loss of £300,000 in the year ending 31 August 20X4 and the projected
carrying amounts of its net assets at the date of acquisition (1 June 20X4) are as follows.
£'000
Property, plant and equipment 150
Net current assets 50
Net assets 200
Given the nature of these assets and liabilities, their fair values are equal to their carrying amounts.
Disposal of 75% interest in Tabtop
Tabtop has been making losses for a number of years and is also incurring net cash outflows to an
extent that the Congloma group no longer wishes to fund. Its projected loss for the year ending
31 August 20X4 is £3 million. We have received an offer of £6 million for 75% of the Tabtop ordinary
shares which we believe we should accept. In addition, Congloma will retain a holding of 25% Tabtop's
ordinary share capital, which experts tell us would have a fair value of £1 million. Congloma would
continue to exercise some influence on the business through a seat on the board.
44 Heston
Heston plc is a listed company which manufactures engines. It has four autonomous divisions, which
operate from separate factories. Heston has no subsidiaries.
You recently joined Heston
Heston as deputy to the finance dire
director,
ctor, Edmund Rice. Edmund se
sent
nt you the
following email.
Marketing
prepare an adjusted statement of profit or
or loss for tthe
he year
year ended 30 June 20X5 and an
adjusted statement of financial position at that date in a form suitable for publication
Personalization
(including comparative figures for the year ended 30 June 20X4, in the form that they would
Analytics appear in the financial statements for year ended 30 June 20X5). Do not worry about the tax
or deferred tax effects of your adjustments at this stage.
Save
(2) To helpAccept All
me to prepare my section of the management commentary
commentary and to help me answer
answer
questions, please analyse Heston's performance and position for the year ended 30 June 20X5.
Include calculations and use the adjusted financial statements. Outline any further information
needed, so I can ask somebody to investigate.
Requirement
Respond to the instructions of the finance director. Total: 30 marks
Exhibit 1: Company background – prepared by the finance director
Heston produces engines. Heston has four divisions which are not separate subsidiaries and are part of
the Heston plc legal entity; they are autonomous and operationally independent of each other. Each of
its four separate divisions produces a different type of engine for: cars, motor bikes, boats and lawn
mowers.
Trading
Division,has been there
because difficult
wasfora all the divisions
major in recent
new entrant years,
in to this
into but particularly
industry in August for theThe
A ugust 20X4. Lawn Mower
chief executive,
Franz, therefore decided that Heston should sell off the Lawn Mower Division (Exhibit 3).
For the other three divisions, the key risk was a potential fall in future sales volumes. Such a fall would
affect Heston significantly because about 70% of cost of sales comprises fixed manufacturing costs,
which need to be incurred irrespective of sales volumes. To counter the risk of falling volumes, Franz
decided to reduce all selling prices in
i n these three divisions by 10% from 1 July 20X4.
Financial analysts have responded favourably to these decisions, but have been enquiring about their
impact on profit.
Exhibit 2: Draft financial information for the year ended 30 June 20X5 – prepared by the
finance director
Draft financial information for the statement of financial position at 30 June
20X5 20X4
£'000 £'000
ASSETS
Property, plant and equipment 113,660 120,400
Development costs 10,380 10,380
Inventories 32,300 23,200
Trade and other receivables 36,100 30,400
(Overdraft) / Cash (8,400))
(8,400 5,600
184,040 189,980
EQUITY AND LIABILITIES
Share capital 37,000 37,000
Retained earnings 85,220 68,520
Long-term borrowings 22,000 39,000
Trade and other payables 31,600 39,400
Current tax payable 4,420 6,060
Provision for redundancy costs 3,800 –
This website stores data such as 184,040 189,980
cookies to enable essential site
functionality, as well
Draft as marketing,
financial information for the statement of profit or loss for the year ended 30 June
personalization, and analytics. You 20X5 20X4
may change your settings at any time £'000 £'000
Revenue
or accept the default settings. 436,000 451,700
Cost of sales (306,180) (318,500)
Distribution costs and administrative expenses (107,200) (101,400)
Finance costs (1,500) (1,500)
Privacy Policy (4,420)
(4,420 ) (6,060)
Income tax expense
Profit for the year 16,700 24,240
Marketing
Exhibit 3: Issues requiring adjustment in the financial statements – prepared by the finance
Personalization
director
Analytics
(1) Disposal of the Lawn Mower Division
Save ImpactAccept
on results
All
On 1 January 20X5, Franz decided to dispose of the Lawn Mower Division, which had recently
started making losses. The Heston board formally approved the decision on 1 March 20X5 and the
division's assets were advertised for sale at their fair value from 1 April 20X5.
Heston intends to sell only the division's non-current assets (including its brand name, GrassGrind).
It is expected that these assets will be sold to a range of different buyers.
The land and buildings are expected to be sold at their fair value of £13 million and plant at its fair
value of £7 million. Selling costs are expected to be 4% of the fair value ffor
or these assets.
The Lawn Mower Division brand name, GrassGrind, including the legal right to trade under that
name, is expected to realise only £800,000. The brand was internally generated by Heston and so
is not recognised in the financial
fin ancial statements.
Draft financial information for the year ended 30 June 20X5 (Exhibit 2) includes the following
f ollowing
amounts in respect of the Lawn Mower Division:
20X5 20X4
£'000 £'000
Revenue 92,000 119,300
Cost of sales (72,084) (77,400)
Distribution costs and administrative expenses (Note) (33,800) (34,700)
(13,884) 7,200
Income tax credit/(charge) 2,600 (1,400)
(Loss)/profit after tax (11,284) 5,800
Note: Staff working in the Lawn Mower Division will be made redundant when the division is sold
and a provision for redundancy costs of £3.8 million has been recognised in distribution costs and
an d
administrative expenses for the year ended 30 June 20X5.
Impact on property, plant and equipment
Heston uses the cost model for property, plant and equipment.
An analysis of the property, plant and equipment
equipment figure in the draft financial statements is as
follows:
Plant and
Land Buildings equipment Total
£'000 £'000 £'000 £'000
Lawn Mower Division:
Cost at 30 June 20X4 and 30 June 20X5 5,600 6,000 12,000 23,600
Accumulated depreciation at 1 July 20X4 – (960) (3,400) (4,360)
Depreciation charge for the year ended
30 June 20X5 – (120) (860) (980)
Carrying amount at 30 June 20X5 5,600 4,920 7,740 18,260
Continuing activities:
This website stores data such as
cookies to enable (ie,essential
the othersite
three divisions)
functionality, as Carrying
well as marketing,
amount at 30 June 20X5
20X5 32,200
32,200 34,700
34,700 28,500
28,500 95,400
95,400
personalization, and analytics. You
Total carrying amount at 30 June 20X5 37,800 39,620 36,240 113,660
may change your settings at any time
or accept the default settings. are being depreciated over a 50-year life to a zero residual value. The plant and
The buildings
equipment is being depreciated on a 10% reducing balance basis. The company's policy is to
recognise all depreciation charges in cost of sales.
sal es.
Privacy Policy
There were no acquisitions or disposals of property, plant and equipment during the year ended
Marketing June 20X5.
30
(2) Cash flow hedge
Personalization
AnalyticsOn 1 May 20X5, Heston entered into a contract to purchase 6,000 tonnes of steel. The contract is
for delivery in September
September 20X5 at a price of
of £165 per tonne. Heston uses steel to mmake
ake most of its
engines and makes regular purchases of steel.
Save Accept All
At 30 June 20X5,
20X5, an equivalent new contract,
contract, for delivery of 6,
6,000
000 tonnes of steel in
September 20X5, could be entered into at £158 per tonne.
122 Corporate Reporting: Question Bank
Heston does not intend to take physical delivery of the 6,000 tonnes of steel, but intends to settle
the contract net in cash, then purchase the actual required quantity of steel as regular production
needs arise.
The contract is designated as a cash flow hedge of the highly probable forecast purchase of steel.
All necessary documentation was prepared to qualify the co contract
ntract as a cash flow hedge. N
No
o
accounting entries have been made in the draft
draf t financial statements.
45 Homehand
You are Jan Jenkins, an audit senior
senior with Brine & Weel ((BW)
BW) LLP, a firm of ICAEW
ICAEW Chartered Accountants
which is engaged as auditor to Homehand Ltd. Homehand manufactures and sells production
machinery to the food processing industry.
You are working on
on the final stages of the audit of Hom
Homehand
ehand for the year ended 331
1 March 20X5. Your
Your
predecessor, Min Wall, is on study leave.
l eave. You receive the following email from the manager responsible
for the Homehand audit, Leigh
Leigh Moore:
This website(c)stores
set out
datathe audit
such as procedures we need to perform to complete
complete our audit of the current tax and
cookies to enable deferred taxsite
essential balances; and
functionality,
(d)as identify
well as marketing,
and explain the ethical issues for our firm and any actions you believe
believe we should
should take.
personalization, and analytics. You
may change your settings at any time
Requirement
or accept the default settings.
Respond to Leigh Moore's instructions. Total: 30 marks
Exhibit 1: Schedule of uncorrected misstatements for the year ended 31 March 20X5 –
Privacy Policy
prepared by Min Wall
Marketing
Planning materiality for Homehand is £120,000. Misstatements below £6,000 are regarded as clearly
trivial and are not reported to those charged with governance.
Personalization
Last year (ie, the year ended 31 March 20X4) there was only one uncorrected misstatement, an over-
Analytics
provision of warranty costs of £60,000.
The schedule below does not include any adjustments arising
arisin g from my audit procedures on current and
Save Accept All
deferred tax (Exhibit 2) as these procedures are incomplete.
July 2015 questions 123
Explanation of warranty costs
BW's tax department informed me that the tax rules in respect of warranty costs are as follows:
Increase/decrease in the warranty provision is disallowed for tax purposes.
Warranty costs paid are allowed as tax deductions.
I agreed Karen's tax adjustment for the warranty cost above to an analysis of the warranty provision as
follows:
£'000
Warranty costs
Warranty provision
paidatin1the
April 20 X4
20X4
year 400
400
(150)
Charge for warranty costs per the statement of profit or loss 350
Warranty provision at 31 March
March 20X5 600
Note: Taxation
Note: Taxation paid in respect of the year ended 31 March 20X4
Karen Barnes informs me that the tax payment of £512,000 was higher than the £465,000 liability
recognised in the financial statements for the year ended 31 March 20X4 because of an arithmetical
error found by the tax authority on the company tax return which Karen had filed on 1 November 20X4.
Karen revised and re-filed the company tax return and Homehand paid the revised amount of tax of
£512,000 on 1 January 20X5.
When revising the company tax
tax return for the year ended 31 March 20X4 Kare
Karen
n noted a further error.
Legal expenses of £105,000 were treated as tax-deductible when they should have been added back as
non-deductible expenses. As the amount is not material, Karen does not propose to notify the tax
authority of this error.
The deferred tax liability at 31 March 20X4 was £87,000. Therefore, as the difference is not material,
Karen proposed that it is not worth adjusting the deferred tax liability at 31 March 20X5. I have
therefore not carried out any further audit procedures.
This website stores data such as
cookies to Ienable
have identified
essentialthe
sitefollowing further issue which may require adjustment to the current and deferred
functionality,
taxasliabilities:
well as marketing,
personalization,
Shareand analytics.
option scheme You
may change your settings at any time
An default
or accept the expensesettings.
of £450,000
£450,000 is included in the statement
statement of profit or loss fo
forr the year ended 31 March
March 20X5
in respect of share options granted on 1 April 20X4. The share option expense is based on 1,000
options vesting for each of 450 employees on 31 March 20X7. Each option has an exercise price of £4
and had a fair value of £3 at 1 April 20X4.
Privacy Policy
The BW tax department informed me that Homehand will receive a tax deduction only when the
Marketing
options are exercised and that this will be calculated on the basis of the options' intrinsic value at that
date. (The intrinsic value is the difference between the share price and the exercise price on the exercise
Personalization
date.) The price of one Homehand share at 31 March 20X5 was £8.50.
Analytics
Privacy Policy
Marketing
Personalization
Analytics
46 Larousse
You are Alex Chen, an ICAEW Chartered Accountant. You have just started work as financial controller at
Larousse plc, an unlisted company, which is the parent company of the Larousse Group. The Larousse
Group is a successful business, supplying fashion clothing to supermarkets and department stores both
in the UK and internationally.
Larousse plc designs clothes, but does not manufacture them. However, about 18 months ago the
board decided on a new business policy of vertical integration with its key suppliers. On
1 October 20X4, Larousse plc acquired 100% of the ordinary share capital of two separate companies,
HXP Ltd and Softex Ltd. HXP and Softex are manufacturers of clothing and both companies supply to
Larousse plc.
Currently, Larousse's finance director, Dennis Speed, who is an ICAEW Chartered Accountant, is out of
the country negotiating new contracts with some of the company's significant customers. The
accounting assistant, Marie Ellis, has just started a two-week period of study leave.
Larousse's managing director, Hal Benny, sends you the following email:
(c) respond to the proposals from the board about corporate responsibility by:
explaining the responsibilities of the Larousse Group's external auditors in respect of the
proposed corporate responsibility disclosures (Exhibit 3); and
determining the scope of an additional assurance report by the external auditors and
describing the type of work that might be involved in providing verification of progress on the
four key targets (Exhibit 3).
Requirements
Exhibit 2: Notes for completion of draft consolidated financial statements for the year ended
30 September 20X5 – prepared by Marie Ellis
Notes
1 Acquisition of HXP
On 1 October 20X4, Larousse plc acquired 100% of the ordinary share capital of HXP for
£12 million in cash. The fair values of the recognised net assets at the date of acquisition were
equivalent to their carrying amounts. Additional deferred consideration of £6 million will be
payable in cash on 30 September 20X7. Dennis told me to use an annual discount rate of 5%.
However, I was not sure what to do with this information, so have ignored it. I have added one-
third of the deferred consideration into the goodwill calculation, as follows:
£m
Consideration in cash 12.0
Deferred consideration 2.0
14.0
Less: share capital and retained earnings at date of acquisition (11.4)
Goodwill on consolidation 2.6
2 Acquisition of Softex
On 1 October 20X4, Larousse plc acquired 100% of the ordinary share capital o off Softex for
£22 million in cash. The fair values of the recognised net assets at the date of acquisition were
equivalent to their carrying amounts. Dennis left a note on the file saying that Softex also had an
unrecognised internally-generated research asset valued at £2 million at the date of acquisition.
This asset relates to the development of a waterproof fabric coating developed by Softex's
manufacturing team. As it is an intangible asset, I felt that it was prudent to ignore this in my
goodwill calculation, shown below:
£m
Consideration in cash 22.0
Less: share capital and retained earnings at date of acquisition (19.0))
(19.0
Goodwill on consolidation 3.0
3 Intra-group trading
I know that some adjustments will be required for intra-group trading, but I have not had time to
do them. I have set out information about intra-group trading in the following table:
HXP Softex
Privacy Policy Following a review of inventories at 30 September 20X5, the board decided that the inventories in
Softex were impaired and should be written down by £1.2 million. I have therefore adjusted
MarketingSoftex's cost of sales and inventories by £1.2 million, producing revised figures of £12.5 million for
cost of sales and £1.7 million for inventories.
Personalization
4 Share options
Analytics
On 1 October 20X4, Larousse plc introduced a share option scheme for senior staff. Each share
Save option entitles
AccepttheAll holder to subscribe for one Larousse plc share. On 1 October 20X4, 1,000 share
options were granted to each of 50 employees and directors. The share options will vest on
30 September 20X8 to those employees who are still in i n employment with Larousse plc at that
date. In the year ended 30 September 20X5, four of the 50 employees left the company and it is
expected that a further two employees will leave in each of the remaining years until the shares
vest. The fair value of each option was £20.00 at 1 October 20X4, and £21.74 at 30 September
20X5.
I have calculated the cost of the share option scheme in the financial statements for the year ended
30 September 20X5 as follows:
1,000 (50 – 4) £21.74 = £1m (to nearest £100,000)
This expense is included in administrative expenses and is credited to equity.
Exhibit 3: Proposals for corporate responsibility
responsibility disclosure and assurance – prepared by Hal
Benny
In recent years, the fashion industry has been subject to criticism. This criticism results from the fashion
industry's perceived indifference to issues such as the well-being of staff in developing countries, the use
of child labour and the environmental impact of its activities in cotton production and dyeing. Now that
the Larousse Group has direct interests in production and supply through our new shareholdings in HXP
and Softex, it is timely to reconsider its corporate responsibility policies and disclosures.
Both HXP and Softex produce a significant proportion of their fashion range in countries with low
economic standards of living. We know that staff in their factories are paid very low wages and that
working conditions are challenging. I have provisionally set four key performance targets for
achievement by HXP and Softex:
(1) A clean water
water initiative is to be undertaken
undertaken to mitigate
mitigate the environmental effects of fabric dyeing
dyeing
and cotton production. Scientists will monitor water quality regularly.
(2) An effective health and safety programme is to be launched
launched in the factories.
47 Telo
Privacy Policy
You are Sophie Blake, an ICAEW
ICAEW Chartered Accountant. You have been been appointed as the financial
Marketing
accountant of Telo plc, an unlisted company engaged in running marketing campaigns for its clients.
Personalization
Telo was established five years ago and its ordinary share capital is held equally by its three founder
shareholders. All three remain directors, and are actively involved in running the business. The directors'
Analytics
intention is to achieve an AIM listing within the next three years.
Your predecessor was John Birch, a part-qualified accountant who left Telo last month. Before he left,
Save Accept All
John prepared a draft trial balance as at 31 August 20X5, the company's year end, together with some
notes (Exhibit).
Telo s auditors are TCC Associates who were appointed three years ago. TCC completed a brief interim
audit in May 20X5, and is due to start work on the final audit next week.
Telo's operations director has given you the following instructions:
"Sophie, I have discussed with TCC the information that they will require next week. I would like
you to review John's draft trial balance and related notes (Exhibit) and prepare a working paper in
which you:
(a) explain the appropriate financial reporting treatment of the four matters highlighted in John's
notes, setting out any necessary adjustments; and
(b) prepare, including your adjustments, a draft statement of profit or loss and other
comprehensive income for the year ended 31 August 20X5, and a statement of fi financial
nancial
position at that date.
The current tax charge in the trial balance of £350,000 was estimated by John, and you can
assume for the purpose of preparing the draft financial statements that it is correct. Adjustments in
respect of deferred tax may, however, be required."
Requirement
Respond to the instructions of the operations director.
Work to the nearest £1,000.
£1,000. Total: 30 marks
Exhibit – Draft trial balance at 31 August 20X5 prepared by John Birch
−
The carrying amount of 53 Prospect Street in the trial balance is £3,335,000 and comprises:
£'000
Property at valuation at 31 August 20X4 3,180
Installation of air conditioning system (March 20X5) 100
Professional fees in respect of leasing 53 Prospect Street 25
Costs of relocation to 15 Selwyn Road 30
3,335
Analytics
48 Newpenny (amended)
You are Cary Lewis, an ICAEW Chartered Accountant working for a firm of accountants and auditors,
Linton LLP. You are the senior assigned to the audit of Newpenny plc, a UK company which
manufactures and distributes a range of vacuum cleaners. You are currently planning the Newpenny
audit for the year ending 31 December 20X5.
Your audit manager calls you into his office and briefs you:
"I have received an email (Exhibit 1) from Rosa Evans, the Newpenny finance director. She needs our
advice on some financial reporting matters and has also provided information about the purchasing
procedures Newpenny now has in place (Exhibit 2). She would like us to take these updated procedures
into account when planning our audit approach, so that we can place more reliance on internal controls
in our audit of trade payables and accruals.
Our audit of Newpenny's trade payables and accruals for the year ended 31 December 20X4 relied
wholly on substantive audit procedures. The results of these audit procedures are summarised in a
memorandum (Exhibit 3).
I need you to prepare the following:
(a) An email replying to Rosa Evans in which you provide, with explanations, the financial reporting
advice she has requested (Exhibit 1)
(b) A memorandum to me in which you re respond
spond to Rosa's suggestion that we should place more
reliance on internal controls in our audit of Newpenny's trade payables and accruals for the year
ending 31 December 20X5. I have set out in a note (Exhibit 4) how you should structure this
memorandum and the information you should include. (Ignore the results of the data analytics
noted below.)
(c) I have some concerns about N Newpenny's
ewpenny's purchase order and re receipt
ceipt of materials
materials systems. I have
therefore taken the opportunity to analyse the purchase data using Linton's new data analytics
system, DAACA. I have provided a 'dashboard' showing the results of this analysis ( Exhibit 5).
Using this data, set out and explain any further concerns (in addition to those identified in (b)
above) regarding Newpenny's internal control system for purchase orders."
Requirement
Prepare the documents requested by your audit manager. Total: 40 marks
Exhibit 1: Email from Rosa Evans
Advice needed on financial reporting matters
(1) Jones Engineering Ltd (JE) supplies Newpenny with vacuum cleaner cleaner motors. Historically
Historically we have
This website stores data such as
agreed with JE annually in advance the price per motor and JE has invoiced Newpenny at the
cookies to enable essential site
agreed price on delivery. In the year ended 31 December 20X4, Newpenny purchased 75,000
functionality, as well as marketing,
JE motors and the budget, prepared at 1 January 20X5, for the year ending 31 December 20X5
personalization, and analytics. You
showed that Newpenny would require 100,000 JE motors. The price agreed on 1 January 20X5
may change your settings at any time
was £20 per motor.
or accept the default settings.
When our new purchasing manager joined NewpennyNewpenny in May 20X5, he renegotiated
renegotiated the contract
with JE, resulting in a revised contract for the year ending 31 July 20X6. The renegotiated contract
Privacy Policy has the following terms:
The price
price per JE
JE motor
motor is reduced to £19
£19 for all motors de
delivered
livered to Newpenny
Newpenny on or after
Marketing
1 August 20X5 and this is invoiced by JE to Newpenny on delivery.
Personalization
If the total number
number of motors ordered in the year ending 31 July 20X6 is less
less than 100,000
Analytics then Newpenny will pay an additional £1 for each motor purchased in the year ending
31 July 20X6 (resulting in a price per motor of £20).
Save Accept
If the total All
number
number of motors ordered in the year ending 31 July 20X6 exceeds 110,000, then
JE will give Newpenny a refund which will reduce to £18.50 the price per motor supplied in
the year ending 31 July 20X6.
At the moment, we are recording
recording the liability to pay JE as invoices are received.
received. Please explain to
me any further accounting entries or disclosures I should make in Newpenny's financial statements
for the year ending 31 December
December 20X5.
(2) In the last month, Newpenny had an issue with a few of its Model2000
Model2000 industrial vacuum cleaners.
Customers complained that the vacuum cleaners overheat and one customer alleged that their
vacuum cleaner was the cause of a serious fire. Under its one-year warranty, Newpenny provides
free replacement cleaners to those
those who complain within the warranty period. To date, eight
vacuum cleaners at a total cost of £1,200 have been replaced and Newpenny made an offer of
£5,000 in compensation to the customer who reported a fire. Newpenny sells aroaround
und 10,000
Model2000 vacuum cleaners each year.
The costs to date have been covered by the warranty provision made each year on the basis of past
claims. Please advise me of the approach I should take when assessing the need for any additional
provision in the financial statements for the year ending 31 December 20X5.
Your audit approach
I understand that in last year's audit of trade payables and accruals you relied wholly on evidence
obtained from substantive testing and did not test the operating effectiveness of our controls. We have
introduced updated purchasing internal control procedures and I would like you to rely as much as
possible on the controls we now have in place. Please give this some consideration as you perform your
detailed audit planning.
I attach a copy of our updated purchasing internal control procedures (Exhibit 2) to assist you.
Rosa
Exhibit 2: Newpenny's updated purchasing internal control procedures – prepared by
Newpenny purchasing manager in July 20X5
Background
Month end accruals process
At the end of each month, an assistant in the finance department reviews open purchase orders (ie,
those orders which have not been matched to goods received or invoice) on the system and determines
whether the ordered materials or services were supplied before the month end. Accruals are made for all
items supplied before the month end. The accruals listing is reviewed by the financial controller, who
requests supporting information for a sample of items selected at random.
Where a supplier provides a monthly statement,
statement, this is reconciled to the balance on the purchase ledger
and GRNI accrual for that supplier by a member of staff in the finance department.
Cash payments
Every two weeks, all items due for payment are selected from the purchase ledger and added to the
automated payment run. The payment run is reviewed and authorised by the financial controller and
one of the other bank signatories before being notified to the bank. The payment is posted to both the
cash book and the purchase ledger. Bank and purchase ledger control account reconciliations are
performed at each month end by the financial controller.
Exhibit 3: Memorandum on trade payables and accruals from the audit working papers for
the year ended 31 December 20X4
We performed the planned audit procedures
procedures on trade payables and accruals. The following findings
were noted:
Our audit procedures on post year-end invoices identified omitted accruals of £103,000
£103,000 relating to
invoices for agency staff work performed before the year end, but invoiced a month later.
A review of the GRNI accrual listing revealed old items amounting to £50,000. Newpenny staff
were unable to explain why invoices had not been received and matched to these receipts of
materials.
Exhibit 4: Audit manager's note memorandum on Newpenny's controls over purchasing
−
Test Outcome
Outliers
One manufacturing manager, John Fuller, was identified as an outlier showing the following data:
Test Outcome
Frequency of
Average value per individual order £3,246 value of individual
Average value of monthly totals of orders £64,379 orders for John Fuller for
the year
% of individual orders exceeding £4,000 35%
% of individual orders in last three days of 27% 35%
This website stores data such as
cookies to Test
enable2: essential site - data dashboard
DAACA system
functionality, as well as marketing,
personalization,
Test and analytics. You Outcome
may change your settings at any time Top 4 suppliers
Number
or accept the defaultofsettings.
orders matched with GRN 13,546 Average no of days
Number of unmatched orders 1,175 delivery terms exceeded
Privacy Policy
Number of unmatched orders over 22
2 months old Wilson
Marketing
Number of unmatched GRNs 17
Personalization Man Inc
Analytics
UUP Ltd
49 Earthstor
Earthstor plc is listed on the AIM of the London Stock Exchange. It is a retailer of clothing and footwear
and sells products to customers in the UK.
You are a newly-qualified ICAEW Chartered Accountant working for the auditors of Earthstor. Your firm
is currently undertaking the audit of Earthstor for the year ended 30 June 20X6 and you have replaced
Greg Troy, the audit senior who has recently been reassigned to another client. You report to Tom
Chang, the audit manager.
Tom Chang gives you the following briefing:
"I have provided you with a draft statement of financial position at 30 June 20X6, prepared by
Earthstor's finance department (Exhibit 1).
Greg reviewed the minutes of the directors' quarterly board meetings and prepared a file note in respect
of some financial transactions undertaken by Earthstor during the year ended 30 June 20X6 (Exhibit 2).
Greg has set out Earthstor's draft financial reporting treatment and some additional information for
these transactions, but Greg had concerns about whether the financial reporting treatment is correct
(Exhibit 3).
Planning materiality is £2.4 million, which represents 5% of profit before tax. We agreed with the audit
committee that we will report to them each misstatement above £120,000 identified during our audit.
Please prepare a working paper in which you:
(a) explain the financial reporting implications of each of the transactions noted by Greg from the
board minutes (Exhibits 2 and 3). Recommend appropriate accounting adjustments. Please ignore
any tax or deferred tax implications of these adjustments;
(b) identify the key audit risks arising from each of the transactions (Exhibits 2 and 3) and recommend
the audit procedures that we will need to complete in order to address each risk;
(c) prepare a revised
revised draft statement
statement of financial position at 30 June 20X6 (Exhibit 1). This should
include any adjustments identified in (a) above; and
This website(d)stores
explain
dataany corporate
such as governance issues for Earthstor that you ide
identify
ntify from Greg's
Greg's file note
cookies to enable (Exhibit 2). Also,
essential site identify any ethical issues for our audit firm and recommend the actions that our
firm should take."
functionality, as well as marketing,
personalization, and analytics. You
Requirement
may change your settings at any time
Prepare
or accept the thesettings.
default working paper requested by Tom Chang. Total: 40 marks
Privacy Policy
Marketing
Personalization
Analytics
Current assets
Inventories 144,380
Trade and other receivables 22,420
Cash and cash equivalents 71,139
Total assets 333,548
Exhibit 2: File note – Transactions noted from review of the minutes of the directors'
quarterly board meetings – prepared by Greg Troy
I have summarised the key points from the minutes of the board meetings which relate to complex
financial transactions during the year. I have also set out in a separate
separate file note (Exhibit 3) Earthstor's
draft financial reporting treatment for the year ended 30 June 20X6, for each transaction. I am not sure
that the draft financial reporting treatment is always correct.
Meeting on 10 September 20X5
TraynerCo is an unquoted Malaysian company which supplies Earthstor with footwear, a core product
for Earthstor. An interruption in supply from TraynerCo would affect Earthstor's ability to trade
successfully in the footwear market.
TraynerCo suffered a serious cash flow problem in June 20X5 and Earthstor's CEO, Dominic Roberts,
This website storesthat,
reports dataonsuch as 20X5, he instructed the finance director to provide emergency finance to
1 July
cookies to TraynerCo.
enable essential
This issite
an interest-free loan of MYR20 million, repayable at par on 30 June 20X7. (MYR is the
functionality, as well as marketing,
currency
personalization, ofanalytics.
Malaysia.) Loans of equivalent risk in the marketplace have an annual effective interest rate
of 6%.and
In order You
to secure footwear supplies, the directors retrospectively approve the loan.
may change your settings at any time
or accept the defaultproposes
Dominic settings.a long-term investment in TraynerCo. Henry Min, an entrepreneur, owns 100% of
the share capital in TraynerCo. Dominic states that Henry Min has agreed to sell 10% of his
shareholding in TraynerCo to Earthstor for MYR45 million. The date of the transaction will be
1 October 20X5.
Privacy Policy
Although the board approves the purchase of the 10% shareholding in TraynerCo, there is a dissenting
Marketing
vote from the finance director, who believes that the price to be paid for the shares is above the market
Personalization
price. The finance director states that he will provide further evidence of the market price valuation.
Meeting on 10 January 20X6
Analytics
The board records the resignation of the finance director on 1 January 20X6. In his resignation letter to
Save Accept
the board, the Alldirector states that he can no longer work with Dominic, who is dominating the
finance
board and allowing a close friendship with Henry Min to compromise his judgement.
The HR director presents a short report on the process for recruiting a new finance director. Dominic
joins the meeting via teleconference from Singapore. Dominic tells the board that, in the interim period,
the finance department will have to cope until a replacement finance director is appointed.
Dominic is negotiating the purchase of an office building in Singapore for Earthstor, which will be
rented out entirely to third parties. He asks the board to approve this transaction in advance. Although
details of the purchase are not available, Dominic considers that it is a good investment opportunity for
Earthstor.
After the Singapore office building has been purchased by Earthstor, TraynerCo will relocate its
administration function on 1 August 20X6 to Singapore for tax reasons and has agreed to occupy one
floor of this Singapore office building. Dominic states that no rent will be charged
charged to TraynerCo as he
recently agreed a very low price for Earthstor's purchases of footwear from TraynerCo.
The above costs have not been amortised in the financial statements.
50 EyeOP
You are Greta Hao, an ICAEW Chartered Accountant working in the finance departmdepartment
ent at HiDef plc, an
AIM-listed company which manufactures medical equipment. HiDef has several wholly-owned
subsidiaries and prepares consolidated financial
fi nancial statements. Its year end is 30 November.
On 1 December 20X4, HiDef bought 50,000 of the 1 million issued ordinary shares in EyeOP Ltd, for
£700,000. EyeOP makes medical imaging cameras. HiDef classified its investment in 50,000 EyeOP
shares as an available-for-sale financial asset. On 30 November 20X5, the fair value of the 50,000 shares
HiDef intends to buy a further 650,000 of EyeOP's ordinary shares on 1 August 20X6 for £85 million.
The fair value of EyeOP's net assets at 1 August 20X6 is expected to be £63 million. EyeOP has a
31 December year end.
The fair value of HiDef's original shareholding of 50,000 shares is expected to be £6.2 million on
1 August 20X6. HiDef intends to use the proportion of net assets method to value non-controlling
interests.
You receive the following briefing from the HiDef CEO:
CEO:
"A finance assistant has provided some financial information, which comprises:
a draft
draft forecast statement of profit or loss and other ccomprehensive
omprehensive income for EyeOP
EyeOP for the year
ending 31 December 20X6; and
some notes on outstanding financial reporting issues and assumptions for 20X7 (Exhibit 1).
The HiDef directors want to understand the impact of buying a further 650,000 shares in EyeOP on the
group's ability to achieve the key group performance targets. I have provided you with the forecast
consolidated statement of profit or loss and other comprehensive income for the HiDef group
(excluding the impact of the proposed purchase of 650,000 EyeOP shares) for the year ending
30 November 20X6, together with other information and key group performance targets (Exhibit 2)."
The CEO's instructions
"I would like you to prepare a report for me in which you:
(a) calculate the goodwill relating to the proposed p purchase
urchase of 650,000
650,000 ordinary shares in EyeOP
EyeOP on
1 August 20X6, which would be included in HiDef's consolidated statement of financial position as
at the year ending 30 November 20X6. For this purpose, use the expected fair value of EyeOP's net
assets at 1 August 20X6 of £63 million;
This website(b)stores datathe
explain such as of each
impact each of the outstanding financial reporting issues (Exhibit 1)
1) on EyeOP's
EyeOP's
cookies to enable essential site
forecast financial statements for the year ending 3131 December 20X6.
20X6. Recommend appropriate
functionality, as well as marketing,
personalization,adjustments
and analytics. using
Youjournal entries;
may change (c)your
prepare a revised
settings forecast consolidated statement
at any time statement of profit or loss and other comprehensive income
income
for HiDef
or accept the default for the year ending 30 November
settings. November 20X6. Assume that HiDef buys 650,000 shares in
EyeOP on 1 August 20X6 and include any adjustments you recommend in respect of the
outstanding financial reporting issues (Exhibit 1); and
Privacy Policy
(d) analyse the impact of the purchase of 650,000
650,000 shares in EyeOP on HiDef's
HiDef's key performance targets
(Exhibit 2) for the year ending 30 November 20X6 and, where possible, for the year ending
Marketing
30 November 20X7.
Personalization
Please ignore any tax or deferred tax consequences."
Analytics
Requirement
Respond to the CEO's instructions.
Save Accept All
Total: 30 marks
140 Corporate Reporting: Question Bank
Exhibit 1: Financial information provided by the EyeOP finance assistant
EyeOP Draft forecast statement of profit or loss and other comprehensive income for the year
─
Depreciation of £4.1 million and operating lease rentals of £5.5 million are included in cost of sales.
Outstanding financial reporting issues
Notes
1 Pension schemes
EyeOP contributes to two pension schemes on behalf of its employees: Scheme A and Scheme B.
The total contribution paid to the company's pension schemes of £9.2 million is recognised in
administrative expenses. The breakdown of the contribution and details of the schemes are as
follows:
Scheme Details
A EyeOP will make a contribution of £6.4
£6.4 million to scheme A in the yyear
ear ending
31 December 20X6.
This scheme is for directors and employees who have worked for more than five years for
the company. EyeOP has a contractual obligation to ensure that its contributions are
sufficient to provide a pension to the scheme members at retirement. The pension is
based on an average of the member's final three years' salary. Scheme A is separately
constituted from Scheme B (see below). Scheme A is now closed to new members.
B EyeOP will make a contribution of £2.8 million to Scheme B in the year ending
This website stores data such31 asDecember 20X6.
cookies to enable essential siteThis scheme is for employees who are not eligible for Scheme A.
functionality, as well as marketing,
personalization, and analytics.Contributions
Yoube used tocreate,
can
for an employee, a right to a portion of the scheme assets, which
buy an annuity on retirement. Contributions are fixed at 7% of the annual
may change your settings at any time
salary for the employer and 3% for the employee.
or accept the default settings.
The following information relates to Scheme A as reported in the financial statements for the year
ended 31 December 20X5:
Privacy Policy £m
Pension scheme assets 22.0
Marketing
Present value of the obligation (60.0))
(60.0
Post-employment net benefit obligation (38.0)
Personalization
The scheme actuary provided the following information:
Analytics
During the year ending 31 December 20X6, 15 senior employees will be made redundant and
Save as Accept All
a consequence, EyeOP will commit to pay additional pensions to these employees under
the terms of their redundancy. This contributes an additional £4.2 million to the present value
of the pension obligation.
The valuation of the pension scheme assets and the present value of the pension obligation at
31 December 20X6 are now expected to be £32.6 million and £74.5 million respectively.
£m
Current service cost 5.9
Benefits paid to former employees 2.1
Actual return on scheme assets 6.3
Except for the recognition of the pension contributions of £9.2 million in administrative expenses,
no adjustments
31 December have been made to the draft forecast statement of profit or loss for the year ending
20X6.
2 Medical imaging camera – Medsee
On 1 October 20X4, EyeOP started to develop a new medical imaging camera, the Medsee.
Monthly development costs of £4 million were incurred from that date until 1 January 20X6, when
EyeOP made a technical breakthrough in relation to this project. On 1 January 20X6, the Medsee
was deemed financially and commercially viable and thereafter development costs decreased to
£3.5 million per month until development work
wo rk was completed on 30 April 20X6.
Marketing and production of the Medsee began on 1 May 20X6. EyeOP expects to receive o orders
rders
for 600 cameras priced at £60,000 each in the
the year ending 31 December
December 20X6. The terms
terms of trade
require a non-refundable payment of 25% of the selling price on receipt of the order. The order is
non-cancellable. There will be 50 cameras manufactured and delivered to customers in the year
ended 31 December 20X6 who will pay EyeOP the remaining 75% of the selling price in in
January 20X7.
EyeOP anticipates the Medsee having a commercial life of four years, with total sales of 3,500
cameras over that period. It is anticipated that 875 cameras will be delivered in the year ending
31 December 20X7.
Variable production costs are £22,000
£22,000 per camera.
In the forecast statement of profit or loss for the year ending 31 December 20X6, EyeOP intends to
expense all Medsee development costs. Because the orders are non-cancellable,
no n-cancellable, EyeOP intends to
recognise revenue in respect of the 600 cameras which customers will order by 31 December 20X6.
Entries made in the forecast financial statements for the year ending 31 December 20X6 to reflect
the above are:
£m £m
DEBIT Cash 9.0
DEBIT Receivables
This website stores data such as 27.0
CREDIT
cookies to enable Revenue
essential site 36.0
functionality, as well as marketing,
personalization,DEBIT
and analytics.Cost
You of sales 13.2
CREDIT Inventories 13.2
may change your settings at any time
or accept the default settings.
DEBIT Non-recurring item – development costs 14.0
CREDIT Cash 14.0
Analytics
Exhibit 2: HiDef consolidated forecast statement of profit or loss and other comprehensive
income for the year ending 30 November 20X6 (excluding the impact of the proposed
purchase of 650,000 EyeOP shares)
20X6
£m
Revenue 383.0
Cost of sales (264.2)
Gross profit 118.8
Administrative expenses (102.0)
Profit from operations 16.8
Finance costs (5.5)
Profit before tax 11.3
Income tax (2.3)
Profit for the year 9.0
Other comprehensive income for the year –
Total comprehensive income for the year 9.0
Other information
Depreciation of £28.1 million and operating lease rentals of £35.5 million are included in cost of sales.
HiDef's consolidated revenue and costs are expected to remain constant for the foreseeable future.
Revenue for the year ended 30 November 20X5 was £400 million.
Key group performance targets for HiDef
Revenue growth Increase of 7% each year
Gross profit percentage Greater than 35%
EBITDAR / Interest Greater than 12
51 Topclass Teach
You are Mo Ranza, an ICAEW Chartered
Chartered Accountant who recently joined Jones, Smith & Wilson LLP
(JSW) as an audit senior. You receive the following briefing from Sue Jessop, the JSW engagement
partner:
"Welcome to JSW. I need your help on the audit of Topclass Teach plc (TT) for the year ending
31 August 20X6. TT provides education and training, and it operates from an extensive campus. TT has
been an audit client of JSW for a number of years.
Our interim audit visit at TT starts next week and I am concerned that we have not yet planned our
audit approach on property, plant and equipment (PPE). The TT financial controller has sent me the PPE
This website stores
note fromdata
the such as
management accounts for the nine months ended 31 May 20X6. This gives you an idea
cookies to of
enable essential site
the significance of the PPE balances ( Exhibit 1). Planning materiality for the TT audit is £2 million and
functionality, as well as marketing,
we willand
personalization, report each proposed
analytics.pro
Youposed misstatement over £40,000 to the audit committee.
The only documentation
may change your settings at any time regarding PPE on our audit file is a planning memorandum prepared in
June
or accept the (Exhibit 2) by an audit assistant, Naomi Wills. This was not reviewed by the audit senior or
20X6 settings.
default
manager and, while it includes some useful information, it does not specifically identify or comment on
the audit risks.
Privacy Policy
I've received an email from the TT finance director, Karel Kovic, which requests advice on the financial
reporting implications of a proposed agreement and updates us on some recent developments at TT
Marketing
(Exhibit 3)."
Personalization
Partner's instructions
Analytics
"What I need you to do is to use the information I have provided to do the following:
(a) Draft a response to Karel's request for advice on the financial reporting implications of the
Save Accept All
proposed agreement with Beddezy on the TT financial statements for the year ending
31 August 20X6 (Exhibit 3). You can ignore any tax or deferred tax consequences.
(b) Identify and explain
explain the inherent,
inherent, control and detection audit risks associated with the audit of PPE
in TT's financial statements for the year ending 31 August 20X6.
Requirement
Respond to the instructions of Sue Jessop, the JSW engagement partner. Total: 30 marks
Exhibit 1: PPE note from TT management accounts for the 9 months ended 31 May 20X6 –
prepared by TT financial controller
Freehold land Assets under Fixtures, fittings
and buildings construction and equipment Total
£m £m £m £m
Cost or valuation
At 1 September 20X5
20X5 129.5 2.8 29.5 161.8
Additions – 21.8 4.1 25.9
Assets coming into use 13.5 (13.5) – –
Disposals – – (1.5))
(1.5 (1.5)
At 31 May 20X6 143.0 11.1 32.1 186.2
Depreciation
Depreciation
At 1 September 20X5
20X5 6.1 – 15.4 21.5
Charge for the period 2.4 – 2.8 5.2
Disposals – – (0.9) (0.9)
At 31 May 20X6 8.5 – 17.3 25.8
Carrying amount
At 1 September 20X5
20X5 123.4 2.8 14.1 140.3
At 31 May 20X6 134.5 11.1 14.8 160.4
The forecast for the three months ending 31 August 20X6 includes movements in PPE as follows:
Freehold land Assets under Fixtures, fittings
and buildings construction and equipment Total
This website stores data such as £m £m £m £m
cookies to Cost
enableoressential
valuationsite
At as
functionality, 31well
Mayas20X6
marketing, 134.5 11.1 14.8 160.4
personalization, and analytics. You
Additions – 8.0 0.5 8.5
may change Depreciation charge
your settings at anyfortime
the
period
or accept the default settings. (0.8) – (1.0) (1.8)
Revaluation gain 40.0 – – 40.0
At 31 August 20X6 173.7 19.1 14.3 207.1
Privacy Policy
The revaluation gain shown above is an estimate as the valuation will not be completed until early
September 20X6.
Marketing
Personalization
Analytics
Exhibit 2: Interim audit memorandum on PPE – prepared by Naomi Wills in June 20X6
This memorandum summarises relevant information from our prior-year audit file and discussions with
TT management to date to assist us in determining the risks associated with our audit of the PPE balance
at 31 August 20X6. Points noted are as follows:
TT's freehold land and buildings comprise teaching facilities, including lecture theatres, classrooms
and specialised laboratories. TT also has surplus land on its campus.
No audit adjustments
adjustments were raised in relation
relation to PPE balances during our audit of TT for the year
ended 31 August 20X5.
Prior-year audit work concluded that controls over the TT purchasing function (including the
purchase and classification of PPE) were appropriately designed and operating effectively.
The TT register
register of PPE is maintaine
maintained
d on a system
system which is separate from the main accounting
ledger. This system was developed by the TT finance department and uses spreadsheets run on a
laptop to calculate month-end journals and prepare year-end reports.
Freehold land and buildings are recognised at fair value in the financial statements. The most
recent valuation was performed by a professional valuer on 31 August 20X3. TT is planning to use
its own estate's department to determine the value of freehold land and buildings at
31 August 20X6. A significant increase in value is expected as property values in the area have
increased by an average of 25%.
During August 20X6, the TT finance department plans to conduct a physical verification exercise
focussing on small equipment and IT assets, as these are considered the categories of PPE most
most
susceptible to theft or other loss.
TT has a number of major capital projects in progress during the financial yyear
ear ending
31 August 20X6. The construction of a new business school was completed in May 20X6 at a total
cost of £13.5 million. Assets under construction include the refurbishment of two science
laboratories and the replacement of the IT system for recording attendance and marks.
Exhibit 3: Email from Karel Kovic to Sue Jessop – Request for advice and update
I need your advice on the financial reporting implications of a proposed agreement with Beddezy plc, a
UK company which runs an international chain of hotels. Under this agreement, which we plan to
finalise before 31 August 20X6,
20X6, Beddezy will build both a hotel and a management training centre
using surplus land on our campus. An outline of the key terms of the proposed agreement is as follows:
TT will sell land with a carrying amount of £3 million to Beddezy for £5 million.
personalization, and
for
Theitsanalytics.
hotel
visitors, You
will be
butoperated
it has noby Beddezy. TTtoexpects
commitment to use
do so. The approximately
prices half will
of hotel rooms of the
be hotel capacity
determined by
may change your settings at any time
Beddezy based on market conditions and are expected to vary over time. TT has no rights to
or accept the default settings.
acquire the hotel, or the land occupied by the hotel, at any stage in the future.
The management training centre will comprise lecture theatres and teaching facilities, with a wide
Privacy Policy variety of uses. It will be built by Beddezy and is expected to cost £4 million to build, excluding the
cost of the land. It will be completed by 31 August 20X7. For 15 years from that date, TT will have
Marketing
exclusive use of the management training centre to run training courses and conferences.
Personalization
In return, TT will pay to Beddezy (on 1 September each year) £300,000 to cover both the rental of
the management training centre and the supply of Beddezy staff to clean and maintain the
Analyticsbuilding, provide security and run the main reception. These staff will work under the direction of a
building manager employed by TT. If TT employed the staff it would cost approximately £100,000
Save Accept
per annum. All end of the 15-year period, TT will have the right to purchase from Beddezy the
At the
management training centre and the plot of land it occupies at a price equal to the market value at
that date.
July 2016 questions 145
Privacy Policy
Marketing
Personalization
Analytics
52 Zego
You are Andy Parker, an audit senior
senior working for Terry & Jonas LLP (TJ), a firm of ICAEW Chartered
Accountants. You have just been
been assigned to the audit of Zego Ltd, a 100% subsidiary o off Lomax plc, a
listed company. Lomax and its subsidiaries operate in the aerospace sector. You have received the
following email from Grace
Grace Wu, the audit manager witwith
h overall responsibility for the LLomax
omax Group
audit.
Exhibit 1: Background information about Zego and the Lomax Group – prepared by Grace
Wu, audit manager
The Lomax Group supplies communication products to the aerospace industry. The Lomax Group's
strategy in recent years has involved the development of new markets and products, partly through its
own research and development activities and partly through acquisitions of related businesses.
Zego Ltd specialises in fibre-optic aerospace products. During 20X3 and 20X4 Zego's research and
development team developed a product called Ph244. By 31 October 20X5, orders were received for
this product and the criteria had been fulfilled for recognition of a significant amount of development
Exhibit 3: Zego Ltd – Draft financial statements for the year ended 31 October 20X6 –
prepared by Julia Brookes, Zego's financial controller
Zego Ltd: Statement of profit or loss for the year ended 31 October 20X6
20X6 20X5
£m £m
Revenue 24.8 31.4
Cost of sales (15.2) (18.8)
Gross profit 9.6 12.6
Operating
Operating expenses
expenses
profit (7.2)
(7.2)
2.4 (8.8)
(8.8)
3.8
Finance costs (1.8) (1.4)
Profit before tax 0.6 2.4
Income tax – (0.6)
Profit for the year 0.6 1.8
Zego Ltd: Statement of financial position at 31 October 20X6
20X6 20X5
£m £m
ASSETS
Non-current assets
Property, plant and equipment 18.6 15.8
Intangible asset: R&D 14.0 15.4
32.6 31.2
Current assets
Inventories 12.0 7.8
Trade receivables
receivables 4.6
4.6 5.8
5.8
Cash and cash equivalents – 3.6
16.6 17.2
Total assets 49.2 48.4
EQUITY AND LIABILITIES
Ordinary share capital 4.0 4.0
Retained earnings 17.0 16.4
21.0 20.4
Long-term liabilities: borrowings 20.6 22.4
Deferred tax 0.6 0.6
21.2 23.0
Current liabilities
Trade payables 3.8 4.4
This website stores data such as
Tax payable – 0.6
cookies to enable essential site
Overdraft 3.2 –
functionality, as well as marketing,
personalization, and analytics. You 7.0
7.0 5.0
5.0
Total equity and liabilities 49.2 48.4
may change your settings at any time
Zego
or accept the Ltd: settings.
default Statement of cash flows for the year ended 31 October 20X6
20X6 20X6 20X5 20X5
£m £m £m £m
Privacy Policy
Cash flows from operating activities
Profit before tax 0.6 2.4
Marketing
Adjustments for:
Depreciation 1.2 0.9
Personalization
Amortisation 3.0 2.0
Finance costs
Analytics 1.8 1.4
6.6 6.7
Change in inventories (4.2) 0.4
Save Accept
Change in trade All
receivables 1.2 (0.7)
Change in trade payables (0.6))
(0.6 0.9
Cash generated from operations 3.0 7.3
Interest paid (1.8) (1.4)
Tax paid (0.6) (0.7)
Net cash from operating activities 0.6 5.2
Exhibit 4: Notes of a meeting with Grahame Boyle, the Lomax Group Finance Director –
prepared by Grace Wu, audit manager
(1) Lomax paid £18
£18 million for 100% of the shares in Zego onon 1 August 20X3,
20X3, resulting in
£3.75 million of goodwill on consolidation. Zego's performance until the year ended 31 October
20X5 was slightly worse than expected. In particular, the investment in Ph244 was a big
disappointment.
(2) Lomax made loans of around £10 million to to Zego and Lomax's main board directors have
have stated
that no more cash will be forthcoming to support Zego. From now on, Zego's directors must raise
all of its finance
finan ce from sources external to the Lomax Group.
(3) Lomax has no plans to sell its investment in Zego
Zego in the near future, but it is likely to take more
steps to exercise control.
Exhibit 5: Notes of a meeting with Jurgen Miles, Zego's Chief Executive – prepared by Grace
Wu, audit manager
(1) The development of Ph244 has been expensive and a disappointment. At 31 OctoberOctober 20X6, Zego
had a balance of capitalised development costs of £6 million in respect of the Ph244 product
technology (Exhibit 2). How much of this investment can be recovered is now uncertain.
Zego recently received an offer of £2.4 million for the Ph244 product technology from a non-UK
competitor. This offer includes the rights to use this intangible development asset and related plant
and equipment, but not the existing inventories
in ventories or the specially-constructed production building
for Ph244.
The Zego board is considering the offer. It is likely that Zego would incur
i ncur around £200,000 in legal
and related fees if it accepts the offer.
This website stores data such as
cookies to (2)
enable essential
Zego needs site
to renegotiate its bbank
ank finance. Of the
the long-term borrowings
borrowings of £20.6
£20.6 million in the
functionality, as statement
well as marketing,
of financial position at 31 October 20X6, £11 million is owed to the company's bank.
personalization,Theandremainder
analytics. is
You
owed to Lomax plc. Zego met a required repayment of £1 million to the bank on
may change your settings
1 June at any
20X6. time repayment of £1 million is due on 1 December 20X6.
A further
or accept the default settings.
The bank holds fixed and floating charges over Zego's assets, and agreed covenants requiring an
interest cover ratio of at least 1.2 and the gearing ratio to be no higher than 130% (calculated as
net debt/equity). Although these covenants were not breached at 31 October 20X6, based on the
Privacy Policy
draft financial statements, the bank has called for a meeting which will take place next week.
MarketingIt seems likely that further conditions will be imposed by the bank in order to continue the existing
level of financing. Jurgen thinks that additional financial support will be provided by Lomax, and is
Personalization
hopeful that finance will be provided for a new project which will require development investment
Analyticsof around £7 million. Jurgen knows that Lomax has stated that there will no more finance
finan ce available
for Zego. However,
However, he is confident that finance will,
will, ultimately, be provided b
byy Lomax if it
Save becomes really
Accept All necessary.
(3) Of the inventories
inventories of £12 million at 31 October 20X6,
20X6, £3.6 million relates to Ph244 products.
Production of Ph244 ceased in June 20X6. Sales of £1.4 million of Ph244 at a gross profit margin of
40% are expected in the year ending 31 October 20X7.
53 Trinkup
Trinkup plc operates a chain of coffee shops which sell coffee, tea and cakes. Its accounting year end is
30 September.
On 1 October 20X5, Trinkup acquired 80% of the ordinary share capital of The Zland Coffee Company
(ZCC), a coffee producer and distributor. Trinkup has no other subsidiaries.
You have recently started a new job as the financial accountant
accountant at Trinkup. The financial controller gives
gives
you the following briefing:
"I need your help in preparing the consolidated financial statements for the Trinkup
Tr inkup group now that we
have acquired ZCC.
ZCC operates in Zland, a country where the currency is the krone (K). Trinkup paid K350 million for its
investment in ZCC. As ZCC is not a listed company, Trinkup intends to use the proportion of net asset
method to value the non-controlling interest.
ZCC prepares its financial statements using Zland GAAP. Although there are similarities between Zland
GAAP and IFRS, there are differences
diff erences in pension accounting and deferred tax iiss not recognised under
Zland GAAP. I have provided you with a working paper which contains the draft finan financial
cial statements for
Trinkup and ZCC for the year ended 30 September 20X6, and notes on the outstanding financial
reporting issues (Exhibit).
I would like you to do the following.
(a) Set out and explain the appropriate adjustments for the outstanding financial reporting issues
(Exhibit) for the year ended 30 September 20X6 for:
(1) the individual company financial statements of Trinkup and ZCC; and
(2) the consolidated financial statements.
You should assume that the current tax charges are correct, but you should include any deferre
deferred
d
tax adjustments.
(b) Prepare Trinkup's consolidated statement
statement of comprehensive income for the year ended
30 September 20X6. Please use the adjusted individual company financial statements.
(c) Calculate Trinkup's consolidated goodwill and consolidated foreign exchange reserve at
30 September 20X6. Show your workings."
Requirement
Respond to the financial controller's instructions. Total: 32 marks
This website stores data such as
cookies to Exhibit: Working
enable essential paper prepared by the financial controller
site
functionality, as well
Draft as marketing,
statements of comprehensive income for the year ended 30 September 20X6
personalization, and analytics. You
may change your settings at any time Notes Trinkup ZCC
or accept the default settings. £m Km
Revenue 1 189.2 494.6
Cost of sales 1 (124.0))
(124.0 (354.2)
Gross profit
Privacy Policy 65.2 140.4
Other operating income 2 15.7 –
Operating expenses
Marketing 2 (35.0) (188.8)
Profit/(loss) before tax 45.9 (48.4)
Personalization
Tax 3 (9.0))
(9.0 –
Profit/(loss) for the year 36.9 (48.4)
Analytics
Other comprehensive loss 4 – (56.6)
Total comprehensive income/(loss) for the year 36.9 (105.0))
(105.0
Save Accept All
November 2016 questions 151
Non-current liabilities
Deferred tax 19.6 –
Long-term loan owed to Trinkup 5 – 160.0
259.3 345.5
Notes: Outstanding
Notes: Outstanding financial reporting issues
1 In the year ended
ended 30 September 20X6, Trinkup bought coffee from ZCC
ZCC for K294 million. Trinkup
paid
30 for the coffee
September 20X6,onTrinkup's
delivery and there are
inventory no trading
includes amounts
£18 million owingbought
of coffee to ZCCfrom
at theZCC.
yearZCC
end. At
charges a mark-up of 30% on cost of goods sold.
2 Trinkup's 'other operating income' comprises a management
management charge to ZCC of K75.3 million for
management support given to ZCC. This charge was paid by ZCC on 30 September 20X6 and is
included in ZCC's operating expenses. In future years there will be no management charge as it is
expected that ZCC will not require Trinkup's management support.
3 ZCC has a K100 million tax trading loloss
ss arising in the year ended
ended 30 September 20X6. Zland tax
law allows tax trading losses to be carried forward only against future taxable trading profits. ZCC
expects to make a taxable trading profit next year.
ZCC's accountant has suggested that the Zland tax authorities could investigate the K75.3 million
management charge made by Trinkup to ZCC and challenge the recovery of ZCC's tax loss. The
This website stores datafor
tax rate such as and ZCC is 20%.
Trinkup
cookies to enable essential site
4 as In
functionality, October
Octo
well as ber 20X5,
20X5, ZCC set up a defined contribution pension scheme
marketing, scheme for its directors and has
personalization,accrued
and analytics. You
a contribution of K56.6 million for the year ended 30 September 20X6. This contribution
may change your settings at anypension
was paid to the time fund on 15 October 20X6. Under Zland GAAP, pension contributions are
recognised
or accept the default directly in reserves through other comprehensive income. Tax relief for pension
settings.
contributions is claimed in the accounting year in which the cash is paid to the pension company.
5 On 1 April 20X6,
20X6, Trinkup
Trinkup made an additional investment in ZCC when it provided a loan of
Privacy Policy K160 million to ZCC with interest payable at 5.25% annually in arrears. Trinkup does not require
repayment of this loan in the near future. No adjustments have been made for this loan other than
Marketing
to include it in Trinkup's non-current assets at the rate of exchange at 1 April 20X6. ZCC has
Personalization
recognised the loan in non-current liabilities. No entries have been made in either company in
respect of the interest on the loan. Interest is taxed on an accruals basis.
Analytics
6 At 1 October 20X5, there were
were no differences between the fair value of
of ZCC's net assets and the
carrying amounts, except for the valuation of land owned by ZCC. PPE included land, at cost, of
Save Accept All
K156 million which had a fair value at 1 October 20X5 of K232 million. The directors do not intend
to sell the land. Zland GAAP does not allow revaluations.
The following tax rules apply to PPE in Zland:
No tax is charged on disposals of PPE.
Depreciation is an allowable expense for tax purposes.
Other information
£1/K exchange rates were as follows:
1 October 20X5 £1 = K5.4
1 April 20X6 £1 = K4.4
30 September 20X6 £1 = K4.2
Average for the year to 30 September 20X6
20X6 £1 = K4.8
54 Key4Link
You are an audit manager, working
working for ICAEW Chartered AcAccountants,
countants, HJM LLP. You have
have just been
assigned to finalise the audit procedures for Key4Link Ltd for the year ended 30 September 20X6.
Key4Link installs media systems.
You receive the following
following briefing note from the engagement
engagement partner:
Carey Knight, the senior manager working on the Key4Link audit, has had a cycling accident and will be
off work for two weeks. Our audit procedures on Key4Link need to be finalised this week as I have a
meeting with the finance director, Max Evans. I therefore need to understand the current position
regarding our audit work. I have provided you with background information on Key4Link (Exhibit 1).
Most of our audit procedures are complete and have been reviewed by Carey. Carey's file note
(Exhibit 2), prepared a week ago, lists a number of matters which were at that time unresolved.
Updated information
I asked Kevin Jones, the audit assistant, to find out more information about the unresolved matters in
Carey's file note (Exhibit 2). I have now received a memorandum ( Exhibit 3) from Kevin.
I have also received an email from Max, the Key4Link finance director (Exhibit 4) responding to some of
the unresolved matters in Carey's file note and asking for advice. I have not had time to review Max's
email in detail, but I did note that he is keen for HJM to bid for Key4Link's tax work.
Instructions
I would like you to review all of the documentation provided and complete the following tasks:
(a) For each of the matters
matters identified in Carey's file note (Exhibit 2),
2), taking into account the
procedures already undertaken by Kevin (Exhibit 3) and the observations in Max's email (Exhibit 4),
identify and explain:
(1) any additional
additional financial reporting adjustments required, including journals,
This website stores
(2) data
any such as issues and the additional audit procedures required in order to complete
auditing complete our
cookies to enable essential site
audit and reach a reasoned conclusion on the unresolved matters. Identify any further
functionality, as well as marketing,
information required from Key4Link.
personalization, and analytics. You
may change your You do notatneed
settings to consider any current tax o
any time orr deferred tax adjustments.
or accept the
(b) default
Explainsettings.
any ethical issues for HJM arising from Max's rerequest
quest for HJM to
to bid for Key4Link's
Key4Link's tax
advisory work (Exhibit 4). Set out any actions that HJM should take.
Requirement
Privacy Policy
Respond to the engagement partner's instructions. Total: 28 marks
Marketing
Exhibit 1: Background information on Key4Link – provided by the engagement partner
Personalization
At 30 September 20X6,
20X6, the three directors
directors of Key4Link had the following shareholdings:
Analytics
Name Position % shareholding in Number of £1
Save Accept All Key4Link ordinary shares held
Key4Link's draft financial statements for the year ended 30 September 20X6 recognise revenue of £25
million and a profit before taxation of £3.2 million.
Planning materiality for the financial statements as a whole has been set at £150,000. Performance
materiality is £100,000. Each potential audit adjustment of £5,000 or over should be recorded for
further consideration.
From the audit procedures completed and reviewed to date, we have identified only one uncorrected
misstatement – an understatement of accruals by £50,000 due to an error in the calculation of the sales
commission payable for the quarter ended 30 September 20X6.
Key4Link uses the revaluation model for freehold land and buildings and the cost model for all other
non-current assets.
Exhibit 2: File note – prepared by Carey Knight, HJM senior manager
Set out below is the status of the Key4Link audit as at 28 October 20X6. Our audit procedures are
almost complete, but I have identified the following unresolved matters:
(1) The audit procedures on trade payables are largely complete
complete but the supplier statements for tw
two
o
key suppliers still need to be obtained and reconciled.
(2) Our audit procedures
procedures on the valuation of the company's
company's freehold premises are substantially
complete, but we are awaiting a final signed copy of the report from the external valuer, Mason
Froome. Our audit procedures to date have been based on a draft report which we understand is
unlikely to change. We concluded that specialist input from an auditor's expert was not required as
a third party valuer with appropriate qualifications had performed the valuation.
(3) Max called me yesterday to say that he has adjusted the financial statements to include a provision
provision
of £175,000 for restructuring costs. I have asked him to provide Kevin, the audit assistant, with
more details.
(4) A Key4Link staff
staff member mentioned
mentioned to me that some of of the senior staff are expecting to exercise
share options as soon as the financial statements for the year ended 30 September 20X6 are signed
off. This worried me as no accounting entries or disclosures have been made in respect of any share
option scheme. Therefore, I have asked Max to provide me with information about the share
options.
(5) I have reviewed
reviewed the Key4Link
Key4Link draft annual report and I believe that
that the related party disclosures
may be incomplete. The only related party transaction identified is the remuneration paid to
Key4Link's directors, which we have already audited. However, I know that the Key4Link CEO, Jan
Furby, has other business interests and I am therefore concerned that there may be other
transactions
This website stores data suchto as
disclose.
cookies to Exhibit
enable essential
3: Update sitememorandum – prepared by Kevin Jones, HJM audit assistant
functionality, as well as marketing,
personalization,
This and analytics.records
memorandum You the audit procedures I performed during my visit to Key4Link on
4 November 20X6.
may change your settings at any time
or accept the defaultstatements
Supplier settings.
I obtained supplier statements for the remaining two key suppliers, Barnes Communications (Barnes)
and Farnell Engineering (Farnell). I have summarised below how the statements reconcile to the
Privacy Policy
purchase ledger balance for each supplier at 30 September 20X6.
Marketing Balance per Included in Balance per
Supplier
Personalization Note purchase ledger accruals Difference supplier statement
£ £ £ £
Analytics
Barnes 1 231,650 21,560 57,230 310,440
310, 440
Farnell 2 148,000 – 160,000 308,000
Save Accept All
154 Corporate Reporting: Question Bank
Notes
1 The difference of £57,230 relates to a missed accrual for inventory delivered on 28 September 20X6
direct to a customer's premises rather than to Key4Link. As the amount is not material, no
adjustment has been proposed.
2 Farnell's statement is dated
dated 5 October 20X6. It includes an invoice
invoice for £160,000 dated
1 October 20X6 for engineering services. I discussed this invoice with Max Evans who referred me
to Jan Furby (CEO), as Farnell is owned by Jan and his brother. Jan told me that Farnell had
performed these engineering services in September 20X6. As this amount relates to services
performed before the year end and is material, I have proposed an audit adjustment to increase
trade payables and cost of sales.
Restructuring costs
I obtained from Max details of the provision for restructuring costs. The board has decided to outsource
its delivery function, which will result in redundancy payments to its drivers and the disposal of its fleet
of trucks. The provision comprises:
£
Carrying amount of trucks at 30 September 20X6 100,000
Anticipated redundancy costs 75,000
175,000
I agreed the carrying amount of the trucks to the non-current asset register at 30 September 20X6,
which was tested by our audit procedures on non-current assets. I obtained calculations for the
anticipated redundancy costs; agreed the basis of the calculations to documented advice obtained from
Key4Link's employment lawyer; and agreed all details for each affected employee to the relevant
employment records. I also ensured that all the drivers were included in the calculation.
Exhibit 4: Email from Max Evans, Key4Link finance director
To: Engagement partner
From: Max Evans
Date: 7 November 20X6
Subject: Audit of Key4Link for the year ended 30 September 20X6
Valuation of freehold premises
Carey asked me to contact our valuer, Mason Froome, for a final copy of his valuation report. I now
have a copy of this.
Jan told me that he had a conversation with Mason at the golf club last week and Mason has now
This websiterevised some
stores dataof the as
such assumptions in his draft report. The final valuation is now £1.2 million, £200,000
cookies to higher
enable than in thesite
essential draft version of the report which you have audited. We will need to adjust the
financial statements
functionality, as well as marketing,for this.
personalization,
Shareand analytics.
option schemeYou
may change your settings at any time
Carey
or accept the also settings.
default asked me about the company's share option scheme. On 1 December 20X2, five key
members of staff, including me, were each granted options over 500 £1 ordinary shares. Each option
grants the right to acquire one share at an exercise price of £5 per share. These options vest on
30 November 20X6, provided that the company makes a profit before tax of £2.6 million or more for
Privacy Policy
the year ended 30 September 20X6. As you know, this profit level is expected to be achieved and all five
Marketing
of us are planning to exercise our options. I should have mentioned this scheme to you before but
forgot to do so, as there have been no cash entries to account for. WWhen
hen the options were grante
granted
dI
Personalization
calculated that each option had a fair value of £45.
Analytics
Key4Link's tax work
There is also one other matter I would like to discuss at our meeting. Our current tax advisors,
Save Accept All
Blethinsock Priory, have told me that they intend to resubmit the company tax return for last year as
they have identified an error, leading to an underpayment of Key4Link's tax. This seems ridiculous to me
– I cannot see why we need to draw attention to this error and I am not happy at the prospect of
paying more tax. I am considering changing advisors and would like HJM to bid for f or this work. We are
likely to need tax advice in the next few years, so there would be lots of work for HJM.
Privacy Policy
Marketing
Personalization
Analytics
55 Konext
Scenario
You work for Noland, a firm of ICAEW
ICAEW Chartered Accountants. Your firm is tthe
he auditor of Konext plc and
its subsidiaries. Konext is AIM-listed and is in the business communications sector. It sells mobile devices
to businesses and provides related software and repair services.
Noland has been asked to provide an assurance report on Konext's interim financial
finan cial statements for the
six months ended 30 June 20X4. You have been assigned to act as audit senior.
The recently-appointed Konext financial controller, Menzie Mees, has provided the following:
Extracts from the draft consolidated interim financial statements for the six months ended
30 June 20X4 (Exhibit 1)
• An extract from the proposed management commentary drafted by the finance director, Jacky
Jones, who is an ICAEW Chartered Accountant (Exhibit 2)
• A summary of financial reporting issues on which Menzie needs advice (Exhibit 3)
The engagement partner gives you the following briefing:
"I had a meeting with Jacky last week and she mentioned that there had been an information security
secur ity
issue. She has made some disclosure about this in her proposed
propo sed management commentary (Exhibit 2). I
have asked her to send more details to you ( Exhibit 4)."
Partner's instructions
"I would like you to:
(a) explain the appropriate financial reporting
reporting treatment of the issues in the summary
summary provided by
Menzie (Exhibit 3). Recommend appropriate adjustments, including journals, to the draft
consolidated interim financial statements for the six months ended 30 June 20X4;
(b) prepare a revised
revised consolidated statement
statement of profit or loss for the six months ended 30 30 June 20X4.
Set out analytical procedures on the revenue and gross profit prof it in the revised statement of profit or
This website stores data such as
loss. Identify potential risks of material misstatement arising from these analytical procedures; and
cookies to enable essential site
(c)as set
functionality, wellout
as briefly the key audit procedures required
marketing, required to address each of the risks of misstatement
misstatement
personalization, and analytics. You
relating to revenue that you have identified. For these risks, set out separately the audit procedures
for:
may change your settings at any time
or accept the default
• settings.
the interim financial statements; and
• the financial statements for the year ending 31 December 20X4.
(d) In respect of the details you receive from Jacky about the information security
Privacy Policy security issue (Exhibit 4):
• evaluate the adequacy of the management commentary disclosure in relation to the
Marketing information security issue (Exhibit 2); and
Personalization
• explain any ethical issues for Noland and set out the actions Noland should take."
Analytics
Requirement
Respond to the engagement partner's instructions. Total: 40 marks
Save Accept All
July 2017 questions 157
Exhibit 1: Extracts from the draft consolidated interim financial statements for Konext for the
six months ended 30 June 20X4 prepared by Menzie Mees, financial controller
Consolidated statement of profit or loss for the six months ended 30 June 20X4
Six months ended Year ended
30 June 31 December
Notes 20X4 20X3 20X3
£000 £000 £000
Revenue
Customised mobile devices
Software services devices 1
1 30,300
30,300
18,010 20,700
20,700
10,800 51,700
51,700
25,900
48,310 31,500 77,600
Other mobile devices 2 15,700 6,100 20,500
Mobile device repairs 3 2,100 5,200 7,800
Total revenue 66,110 42,800 105,900
Gross profit 39,541 21,625 54,025
Distribution costs (3,823) (3,122) (8,547)
Administrative expenses (6,563))
(6,563 (6,054) (13,755)
Operating profit 29,155 12,449 31,723
Finance costs (1,280) (1,550) (4,125)
Profit before tax 27,875 10,899 27,598
Taxation (2,000) (2,180) (5,520)
Profit for the period 25,875 8,719 22,078
Notes: Operating segments
The type of mobile device Konext sells are tablet computers. The following are the operating segments
used by the board to make strategic decisions:
1 Konext develops a software service specific for each client which enables the clients' employees to
access the clients' business processes. In each case, the software service contract includes data
security and storage services.
Konext buys mobile devices to which it uploads software specific to the client business. It then sells
the customised mobile devices to the client together with a software service contract.
2 Konext also sells other mobile devices to customers without customised software services.
3 Mobile device repairs for Konext clients and othe
otherr customers
customers are undertaken by a division of
Konext called 'Refone' (Exhibit 3).
This websiteExhibit
stores2:data
Draft management
such as commen
commentarytary for the six months ended 30 June 20X4 prepared by
cookies to Jacky
enableJones, finance
essential site director
functionality, as well performance
Financial as marketing,
personalization, and analytics. You
may change The Konext
your group
settings hadtime
at any a good financial performance across all operating segments in the first half of
20X4.
or accept the default settings.
Total revenue increased by 54.5% to £66.11 million in comparison with the equivalent six-month
period ended 30 June 20X3. Konext's sales of all mobile devices are seasonal,
seasonal , with 40% of mobile
Privacy Policy
devices delivered in the first six months of 20X4.
Marketing
The directors forecast that total revenue for the year ending 31 December 20X4 will grow by 20% in
comparison with the year ended 31 December 20X3.
Personalization
The directors estimate that the number of devices to be delivered in the year ending 31 December 20X4
Analytics
will be as follows:
20X4 20X3
Save Accept All
Number of devices Number of devices
Customised mobile devices 650,000 636,000
Other mobile devices 392,000 205,000
The combined gross profit margin on sales of customised mobile devices and sof
software
tware services has
increased from the 60% margin achieved in 20X3. The gross profit margins on sales of other mobile
devices and mobile device repairs have remained at 25% and 30% respectively.
Future prospects − New product, the Denwa+
Konext has signed a contract with JUI, a Japanese manufacturer
manuf acturer of mobile devices. JUI will sell a new
device called the Denwa+ to Konext. This device will beb e sold exclusively by Konext to its customers
together with specific software and services where relevant. From August 20X4, sales of the Denwa+ will
gradually replace sales by Konext of its current
curren t mobile device.
All the Denwa+ devices will be sold with a guarantee of a replacement device
device if the original is damaged.
This guarantee will apply regardless of the reason for the damage.
An advertising
of the campaign
sales starting for the
in August launch of the new Denwa+ device began in May 20X4 in anticipation
20X4.
Information security issue
An information security issue in a Konext subsidiary is under investigation. There is no evidence that
client accounts have been compromised.
Exhibit 3: Summary of financial reporting issues – prepared by Menzie Mees
I have set out below some financial reporting issues. I am not sure that the transactions are correctly
treated in the draft consolidated interim financial statements.
Revenue
In June 20X4, Konext received deposits totalling £2 million
millio n from clients for the new Denwa+ device. The
clients will make final payments totalling £13 million on delivery of the devices on 1 August 20X4. These
clients will also receive a software service contract for two years and a free guarantee for replacement
should the device be damaged or faulty. Revenue in relation to these sales has been recognised in full
and presented in the interim financial statements as follows:
£'000
Customised mobile devices 10,000
Software services 5,000
15,000
Recently Konext received an offer of £8 million after selling costs for the Refone trade and net assets.
Save
Jacky told meAccept All is currently no plan to sell the business as the budget shows that it can
that there
generate pre-tax cash flows of £1,200,000
£1,200,000 per annum for the five years to 30 June 20X9. With a pre-tax
annual discount rate of 5%, Jacky believes this business can be a success. However, I wonder if there
should be an adjustment to reflect the fall in value of the assets.
assets at fair value of £12.2 million and the present value of the obligations of £14.5 million. To date
the scheme has not paid out pensions or other benefits to beneficiaries of the scheme.
Jacky did not want to incur the cost of asking the scheme actuary to provide measurements of the
scheme's assets and liabilities at 30 June 20X4 as there have been no significant
signif icant changes since the
actuarial valuation at 31 December 20X 20X3.
3. For simplicity, Jacky told me to charge the employer
contributions to the interim statement of profit or loss and leave the net pension obligation unchanged.
issue – prepared by Jacky Jones,
Exhibit 4: Confidential details about information security issue
finance director
Last week the Konext IT department emailed me with details of a cyber attack
a ttack on a Konext data server
in Poland. The data server held clients' business details and bank
ban k accounts. It is possible that data ffrom
rom
500 client accounts could have been accessed during the attack.
This website stores
There data
is no such asso far that client accounts were accessed, so we have not informed the clients.
evidence
cookies to However,
enable essential
there issite
some risk that clients could suffer a financial
f inancial loss.
functionality, as well as marketing,
personalization, and analytics. You
I have included
financial a statement
statements. this disclosing the security issue in mywant
wmanagement
ant to say toocommentary in about
the interim
may change your settings at anyAstime is still being investigated, I don't much publicly it at
thedefault
or accept the moment. Further details will be announced in the year-end consolidated financial statements.
settings.
56 Elac
Privacy Policy
Scenario
Marketing
Elac plc is listed on the London Stock Exchange and supplies metal-framed windows for use in industrial
Personalization
buildings. Elac has investments in several wholly-owned subsidiaries.
Analytics
You are Elac's financial accountant and you
you report to El
Elac's
ac's finance director. You have just returned to
work after a holiday. Your assistant, Daniel, an unqualified accountant, has prepared the first draft of the
Save
consolidatedAccept
financialAll
statements for the year ended 31 May 20X7 using briefing papers prepared by
Elac's finance director. These briefing papers include details
detai ls of the following significant matters:
• The increase in Elac's investment in Fenner Ltd and transactions with Fenner Ltd (Exhibit 1)
• Trading outside the UK (Exhibit 2)
The first draft of Elac's consolidated statement of profit or lo
loss
ss for the year ended 31 May 20X7 and its
consolidated statement of financial position at that date ( Exhibit 3) exclude the results and balances of
Fenner Ltd. Fenner has prepared draft financial
f inancial statements for the year end
ended
ed 30 June 20X7. These are
shown in a separate column in Exhibit 3.
Exhibit 3 also includes Daniel's notes showing the adjustments that he has made to Elac's draft
d raft
consolidated financial statements. The notes explain areas where he is uncertain about the appropriate
financial reporting treatment.
Elac's finance director has asked you to draft a working paper in which you:
(a) explain the financial reporting adjustments re
required
quired in respect of the matters described in the
briefing any
Identify papers (Exhibits
further 1 and 2)
information and in Daniel's
required.Dan iel's the
Ignore notes
eff(Exhibit
effects 3). Include adjustments
ects of accounting relevant journal entries.
on taxation;
and
(b) prepare Elac's revised consolidated statement
statement of profit or loss for the year ended 31 May 20X7 and
consolidated statement of financial position at that date. These should include the adjustments
identified in (a) above.
Requirement
Prepare the working paper requested by Elac's finance director.
Work to the nearest £0.1 million.
million. Total: 30 marks
Exhibit 1: Elac's investment in Fenner Ltd – briefing paper prepared by Elac's finance director
Fenner, an important supplier to Elac, manufactures toughened glass. In 20X4, Elac bought 5% of the
ordinary share capital of Fenner for £50 million. This investment is recognised at cost (which
approximates to its fair value) in Elac's draft consolidated statement of financial position at 31 May 20X7
(Exhibit 3).
On 1 February 20X7, Elac bought an additional 20% of the ordinary share capital of Fenner for
£350 million in cash from one of Fenner's principal shareholders. This payment was debited to a
suspense account. The additional investment entitles Elac to appoint a director to Fenner's board. The
remaining 75% of Fenner's shares are held equally by three institutional investors, each of which is
entitled to appoint a director to the Fenner board.
Fenner has made losses during its financial years ended 30 June 20X6 and 30 June 20X7 but it has
continued to pay dividends throughout this period. Fenner paid a dividend of 20p per share on
1 October 20X6 and a dividend of 40p per share on 30 Apri
Aprill 20X7.
Trading with Fenner
Fenner sells goods to Elac at cost plus a mark-up of 20%. During Elac's financial year ended
This website stores data such as
cookies to 31
enable
Mayessential site supplied goods to Elac at a price of £145.2 million. Trade takes place evenly
20X7, Fenner
functionality, as well asthe
throughout marketing,
year. At 31 May 20X7, Elac's inventories included goods supplied by Fenner at a price of
personalization, and analytics. You
£35.0 million and Elac's trade payables included an amount of £37.6 million due to Fenner.
may change your settings at any time
Exhibit 2: Trading outside the UK – briefing paper prepared
or accept the default settings.
prepared by Elac's finance director
Until recently, all Elac's sales were to the UK construction industry. During the financial
f inancial year ended
31 May 20X7, the group started trading with construction companies in Otherland.
Privacy Policy
Otherland contract
Marketing
The currency of Otherland is the Otherland dollar (O$).
Personalization
In September 20X6,
20X6, an agent for several construction companies in Otherland agreed a one- year
contract with Elac to supply a single type of office
off ice window at a price of O$5,000 per window. The
Analytics
contract started on 1 January 20X7 and Elac expects to make a gross profit margin of approximately
30%, which is a much larger margin than UK sales.
Save Accept All
The contract includes a commitment by Elac to pay the agent a commission of 5% of sales value in O$,
provided that total sales for the calendar year 20X7 exceed 16,000 windows. If total sales for 20X7 are
below 16,000 windows the rate of commission is reduced to 3%. The commission is payable annually
annual ly in
arrears.
Average monthly sales for the five-month period from 1 January 20X720X7 to 31 May 20X7 were 1,6001,600
windows and this level of sales
sa les is expected to continue for the rest of the 20X
20X77 calendar year.
Exchange rates:
Spot rate at 1 January 20X7 £1 = O$2.2
Spot rate at 31 May 20X7 £1 = O$2.4
Forward rate (at 1 June 20X7) for 31 December 20X7 £1 = O$2.8
Exhibit 3 – Draft financial statements
Draft statements of profit or loss for the year
Elac: consolidated
(excluding Fenner) to Fenner to
31 May 20X7 30 June 20X7
Notes £m £m
Revenue 1,855.4 382.4
Cost of sales 1 (1,482.9) (272.0)
Gross profit 372.5 110.4
Operating expenses (270.8) (91.2)
Investment income 2 3.6 –
Finance costs (9.4) (77.7)
Profit/(loss) before tax 95.9 (58.5)
Income tax (19.1) 12.0
Profit/(loss) for the year 76.8 (46.5)
I have not recognised any accrual for agent's commission as this is a contingent liability depending
on performance, and should therefore
therefo re be disclosed only as a note to the ffinancial
inancial statements.
2 Investment income includes the dividends received
received from Fenner
Fenner on 1 October 20X6 (£100,000)
and on 30 April 20X7 (£1 million). I have made no adjustments in respect of trading with Fenner.
57 Recruit1
Scenario
You are an audit manager
manager working for Hind LLP, a firm of ICAEW Chartered Accountants w with
ith offices in
several countries. You have been assigned to the group audit of Recruit1 plc for the year ended
30 April 20X7. Recruit1 is the parent of an international group of companies engaged in executive
recruitment and training. You receive a briefing from the engagement partner on the Recruit1 group
audit:
"Our scoping and materiality planning summary (Exhibit 1) provides an overview of the audit
procedures planned at each entity within the Recruit1 group.
Our audit is nearly complete but I need your help with outstanding
o utstanding matters relating to Recruit1's
subsidiaries in the countries Arca and Elysia. These subsidiaries are
a re R1-Arca Inc and R1-Elysia Ltd. The
local currency in Arca is the Arcan dollar
do llar (A$) and in Elysia is the Elysian do
dollar
llar (E$).
Last week I received a reporting memorandum from the Hind audit team in Arca ( Exhibit 2) which I
need you to review. I was relieved to receive their report as the team has not replied to any of our other
requests for information.
During audit planning, R1-Elysia was assessed as an immaterial subsidiary. However, our review
procedures, completed last week, identified that the company bought a property during the year,
resulting in material property and loan balances at 30 April 20X7. I asked the audit senior to find
f ind out
more about this property transaction and she has provided additional information (Exhibit 3).
Partner's instructions
(a) I would like you to review the reporting memorandum from the Hind audit team in Arca
(Exhibit 2) and for each account identified:
• describe any weaknesses in the audit procedures;
• explain any potential financial reporting and audit issues; and
• set out further audit procedures
procedures that either
either the UK group audit team or the
the H
Hind
ind team
team in Arca
This website stores data such as
should perform, and identify any additional information needed for these procedures.
cookies to enable essential site
functionality,
(b)as In
well as marketing,
respect of R1-Elysia's property transaction and loan, re
review
view the further information provided
personalization, and analytics. You
may change your (Exhibit 3) at
settings and:
any time
• explain the financial reporting implications for the consolidated financial statements of
or accept the default settings.
Recruit1 for the year ended 30 April 20X7. Recommend appropriate accounting adjustments;
and
Privacy Policy • set out any additional audit procedures that should be performed."
Requirement
Marketing
Respond to the partner's instructions. Total: 30 marks
Personalization
Exhibit 1: Scoping and materiality planning summary for the Recruit1 group audit for the
Analytics
year ending 30 April 20X7 (Prepared byby Hind UK group
group audit team in January 20X7)
Recruit1 has Accept
Save trading All
subsidiaries, located in many countries around the world. All subsidiaries are wholly
owned by Recruit1. All subsidiaries report under IFRS.
The Hind UK audit team is responsible for the audit of the parent company, Recruit1 plc, the Recruit1
UK subsidiaries and the audit of the consolidated financial statements. The audits of Recruit1 plc's non-
UK subsidiaries are performed by Hind audit teams in the countries where the subsidiaries are located.
Group planning materiality has been determined at £1.2 million. Scoping and component materiality
are shown below:
Revenue 11,172 Selected a sample of items recorded within revenue and agreed
them to invoices and either to the receivables ledger as at 30 April
20X7 or to a cash receipt. No exceptions were noted.
Staff costs (4,924) Agreed the total staff costs to payroll schedules provided by the
service company which processes the payroll for R1-Arca.
Other operating (2,652) Agreed a sample of items to supporting documentation, ensuring
expenses that each item is a valid business expense, recorded in the correct
period and correctly classified within operating expenses. No
This website stores data such as exceptions were noted.
cookies to enable essential site
Interest
functionality, income
as well as marketing, 350 No audit procedures carried out as below materiality of A$600,000.
personalization, and analytics. You
may change Profit
yourbefore
settings at any time3,946
taxation
or accept the default settings.
Taxation Agreed to draft tax computation prepared by R1-Arca's tax advisors.
Checked that current tax payable is correctly calculated as taxable
Privacy Policy (1,715) profit of A$4.9 million at the Arcan corporate tax rate of 35%.
Profit for the year
Marketing 2,231
Retained earnings at
Personalization Reconciled to prior-year financial statements. Retained earnings as
1 May 20X6 reported to Recruit1 as at 30 April 20X6 were A$6,488,000.
Analytics
The difference of A$2,250,000 is due to the reversal of revenue
which was incorrectly included in the reporting pack for the year
Save Accept All ended 30 April 20X6 as it relates to recruitment services provided in
May and June 20X6.
This error was discovered during the preparation of the financial
This error was discovered during the preparation of the financial
4,238
4,238 statements for the year ended 30 April
Apri l 20X7.
Account A$'000 Notes on audit procedures and matters arising
Retained earnings 6,469
at 30 April 20X7
Property, plant and 1,065 In accordance with group policy, property, plant and equipment is
equipment measured at cost and depreciated over its useful life.
Movements in this account during the year ended 30 April 20X7
relate to immaterial additions and depreciation.
As all movements are below component materiality
materiality of A$600,000,
no further audit procedures have been performed.
Trade receivables 2,987 This balance was agreed to a detailed list of receivables which was
reviewed for any related party or unusual balances. No such items
were noted.
A sample of balances with a total of A$453,000
A$453,000 was selected to b
be
e
tested for agreement to cash received after the year end.
Of the sample, A$198,000 has been received to date.
As the unpaid element is below component materiality
materiality of
A$600,000, no further audit procedures have been performed.
Other receivables 592 No audit procedures carried out as below component materiality of
and prepayments A$600,000.
Trade payables and 2,218 The only material balance within this account is A$1,715,000
accruals relating to tax payable – this is discussed above.
Share capital 100 No audit procedures carried out as below component materiality of
A$600,000.
Retained earnings at
30 April 20X7 6,469
Total equity and 8,787
This website stores
liabilitiesdata such as
cookies to enable essential site
functionality, as well3:as
Exhibit marketing,
Further information on property transaction and loan in R1-Elysia – prepared by
personalization, and analytics. You
may change audit
yoursenior
settings at any time
I discussed the increase in property and loan balances in R1-Elysia with the group finance director as I
or accept the default settings.
was concerned that the carrying amounts are incorrect.
On 30 September 20X6, R1-Elysia bought a property for E$6 million with a bank loan of E$6 million
Privacy Policy
taken out on the same date. The loan is repayable in full after five years and interest is payable annually
in arrears at a fixed rate of 6% per annum. In Elysia, a tax deduction for interest is available only when
Marketing
the interest is paid.
Personalization
After buying the property, R1-Elysia converted it into a training facility. The conversion took six months
and was completed on 1 April 20X7 when the property was ready for use.
Analytics
From 1 April 20X7, R1-Elysia has used the property to run training courses for its clients. Also, training
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rooms are rented All parties on a daily or weekly basis. The rental income includes the use of all
to third
facilities, together with some administrative support. Catering
Catering is provided as an optional service. As the
property generates rental and other income, it has been classified as an investment property in the
consolidation reporting pack submitted by R1-Elysia. The property is expected to have a useful life of
25 years.
The carrying amounts of the property and the loan in the consolidation reporting pack at 30 April 20X7
are as follows:
Property Loan
E$'000 E$'000
Initial purchase transaction on 30 September 20X6 6,000 6,000
Conversion and start-up costs incurred (funded from cash)
External contractor costs 4,200
Allocated salary costs of R1-Elysia employees 850
Marketing costs 900
Security, insurance and other running costs incurred 750
750
while the building was empty
Interest for 7 months to 30 April 20X7 210
Fair value gain on property due to increase in Elysian 500
property prices in the 7 months to 30 April 20X7
Carrying amounts in the consolidation reporting pack at 13,200 6,210
30 April 20X7
Under Elysian tax rules, capital allowances of 50% of the cost of buying business property, including all
conversion and marketing costs, are given in the year of purchase. Therefore capital allowances of
E$6.35 million, based on a total cost before fair value changes of E$12.7 million, have been taken
correctly into account in calculating the Elysian current tax charge. No tax deduction is given for
depreciation.
No other accounting entries have been made in respect of the current or deferred tax on the property
or the loan. The tax base does not change if the property is subsequently revalued for accounting
purposes. The Elysian corporate tax rate is 35%.
Spot exchange rates are as follows:
30 September 20X6 £1 = E$4.0
30 April 20X7 £1 = E$3.6
Average for seven months from 1 October
October 20X6 to 30 April 2
20X7
0X7 £1 = E$3.8
Privacy Policy
Marketing
Personalization
Analytics
58 EF
You are an audit senior working
working for a firm of ICAEW Chartered Accountants, MKM LLP. You have been
been
assigned to the audit of EF Ltd, a UK company which sells home ffurnishings.
urnishings.
In July 20X7, your team completed audit planning and interim audit procedures on EF for its year ending
31 December 20X7. You prepared a file note ( Exhibit 1) outlining the key elements of your planned
audit approach.
The MKM audit manager for the EF audit engagement gives you the following briefing:
"On 31 August 20X7, EF was acquired by a listed multinational company, MegaB plc. I have received an
email from the EF chief financial officer (CFO) (Exhibit 2) which provides information that may affect
our audit plan. MegaB has told the CFO to make some adjustments to EF's financial statements for four
matters. These matters are included in an attachment to the email.
MegaB is a client of MKM's consulting division and we know its finance team well. We have not done
much work for the MegaB group in the last twelve months but MKM is currently tendering for a large
consultancy contract with MegaB which MKM is keen to win. It is therefore important that we perform
well on the EF audit this year.
MegaB is audited by Lewis-Morson LLP and today I received a telephone call from the Lewis-Morson
group audit partner. The telephone call raises issues for our audit approach and I have summarised it in
a brief note (Exhibit 3).
Instructions from the MKM audit manager
I need to respond to the CFO's email (Exhibit
( Exhibit 2) and consider its implications for the EF audit. To help
me, please prepare a briefing note in which you:
(a) Explain, for each
each of the four matters in the email attachment (Exhibit 2), the appropriate financial
reporting treatment in the financial statements of EF fo
forr the year ending 31 December 20X7.
Identify any additional information you need to finalise the accounting entries required. Ignore any
adjustments for current and deferred taxation.
This website(b)stores dataand
Identify such as the changes that
explain
explain that we nee
needd to make
make to each element of thethe planned audit
cookies to enable essential
approach site
summarised in the file note (Exhibit 1). You should
sh ould also consider any additional key areas
functionality, as of
well as marketing,
audit focus and risk using all the information available.
personalization, and analytics. You
may change (c)your
Explain anyatethical
settings matters which MKM now needs to consider in respect of the
any time the 20X7 EF audit and
any actions
or accept the default that MKM should take."
settings.
Requirement
Respond to the MKM audit manager's instructions.
Privacy Policy Total: 40 marks
Exhibit 1: File note – planned approach for EF audit
audit – prepared by audit
audit senior in July 20X7
Marketing
The key elements of our planned audit approach for EF for the year ending 31 December 20X7 are set
Personalization
out below.
Analytics
We have done the following:
followi ng:
Agreed engagement terms and an audit fee of £60,000,
£60,000, giving us an inflationary increase from the
Save Accept
prior year. All
• Established planning materiality
materiality at £800,000 based on a forecast profit after tax of £1
£16
6 million for
the year ending 31 December 20X7.
• Considered factors affecting the inherent risk associated with the client, noting:
– no new business risks;
– no unusual pressures on management; and
– no factors which cause us to question the effectiveness of the general control environment.
Financial performance
I summarise below key financial data from EF's management accounts for the nine months ended
30 September 20X7.
20X7. The results for October 20X7 are not yet available. I hope to provide these in early
December 20X7.
9 months ended Year ending Year ended
30 September 20X7 31 December 20X7 31 December 20X6
Actual Updated forecast Actual
£m £m £m
Revenue 175.0 274.3 214.0
Gross profit 51.0 76.2 64.2
Operating profit 18.9 34.0 21.4
Profit after tax 14.7 26.0 16.1
Net assets 53.1 74.9 38.4
Performance for the eight months to 31 August 20X7 was in line with the forecast and the previous year.
In September 20X7, revenue
revenue increased by around £15 million because of sales of EF products to MegaB
subsidiaries outside of the UK. These sales represent our first
f irst international revenue and are expected to
continue at the same level for the rest of the year. The gross margin is lower than on EF's other sales, as
the prices charged to group companies are lower than those charged to third parties.
p arties. I have updated
the whole forecast to reflect these sales.
There have been no changes to costs and revenue other than the additional international sales.
I would welcome your advice as to what, if anything, we should adjust. I am not sure Bob has really
considered the effect on EF's single company financial statements. The above four matters
ma tters are not
recognised in EF's management accounts.
Exhibit 3: Note of my telephone call with Petra Newton – prepared by MKM audit manager
I received a telephone call today from Petra Newton, the group audit partner from Lewis-Morson,
MegaB's auditor.
Lewis-Morson LLP expects to sign off the group audit opinion
opinio n by 28 February 20X8.
EF is a significant component of the MegaB group. By 15 February 20X8, Lewis-Morson needs us to do
a full audit of EF's financial
f inancial statements for the year ending 31 December 20X7, based on the component
materiality of £3 million, and to prepare a reporting memorandum to Lewis-Morson.
The partner confirmed that Lewis-Morson has completed audit procedures on the defined benefit
pension scheme obligations at 31 August 20X7, so we may not need to perform
perfo rm separate procedures on
these. He will send an email confirming the work done and that no issues were noted.
It is likely that, during 20X8, the EF business will be transferred into an existing MegaB subsidiary. As a
result, the audit this year may be MKM's last for EF. The MegaB board is interested only in ensuring that
there is no material misstatement at group level. Therefore, it expects MKM to adopt component
materiality of £3 million for the single company EF audit.
a udit. The MegaB board sees no great value in the
single company audit and just wants it to be completed as quickly and efficiently as possible.
59 Wayte
You are Damian Field, an ICAEW
ICAEW Chartered AcAccountant
countant and the financial controller at Wayte Ltd, a
manufacturer of industrial weighing machines. The ordinary shares in Wayte are held equally by four
f our
members of the Benson family, who are also the directors of the company. You have just returned to
work after a period of sick leave. During your absence, Wayte employed an unqualified accountant,
Jenny Smith, on an interim contract.
On your return to work, you received the following note from Gerard Benson, the production director
who is your line manager.
Wayte needs to expand production facilities and requires a loan of £10 million from the bank to invest
in plant and machinery. The bank has asked for information to support Wayte's application for this loan.
Jenny has prepared a draft information schedule as requested by the bank ( Exhibit 1). She has also
This website stores data
prepared such
a draft as
statement of cash flows for the year ended 30 September 20X7 ( Exhibit 2). Jenny told
cookies to me
enable
thatessential
her worksiteis incomplete and adjustments
ad justments are still required. She has left some handover notes for
functionality, as well as
you (Exhibit 3).marketing,
personalization, and analytics. You
may change your settings
I believe at any
that Wayte time
will have no problem obtaining bank finance because profitability is high and
or accept the default settings.
increasing, liquidity is generally good and there is ample security for the loan.
Instructions
Instructions
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I would like you to do the following:
(a) Explain the financial reporting adjustments required for the year ended 30 September 2 20X7
0X7 in
Marketing
respect of the issues identified in Jenny's handover notes (Exhibit 3). Include journal entries for
fo r
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each adjustment.
Analytics
(b) Prepare a revised information schedule for the bank (Exhibit 1) including your financial reporting
adjustments to both the figures and the key ratios.
ratios .
Save
(c) PrepareAccept
a reportAll
for the board in which you analyse and interpret the financial position and
performance of Wayte using your revised information
info rmation schedule and the draft statement of
cashflows (Exhibit 2). Provide a reasoned conclusion on whether the bank is likely to advance
ad vance the
£10 million loan.
Requirement
Respond to Gerard Benson's instructions. Total: 30 marks
Exhibit 1: Wayte draft information schedule requested by the bank – prepared by Jenny
Performance information
information for the year ended 30 September
20X7 20X6
£'000 £'000
Revenue 35,400 34,500
Gross profit 10,020 9,660
Cash generated from operations 6,320 3,990
Extracts from statement of financial position at 30 September
20X7 20X6
£'000 £'000
Total assets 35,670 33,560
Total liabilities 8,490 8,730
Equity 27,180 24,830
Net debt 450
Non-current assets available as security at 30 September 20X7
20X7
£'000
Land 1,000
Buildings 18,200
Financial assets: available-for-sale 430
Financial assets: fair value through profit or loss 192
Plant and equipment 8,678
28,500
Key ratios
20X7
Gearing (Net debt/equity) 100 1.7%
Gross profit margin 28.3%
Return on capital employed (Operating profit/net debt + equity) 100 16.0%
Exhibit 2: Wayte draft statement of cash flows for year ended 30 September 20X7 – prepared
by Jenny
20X7 20X6
£'000 £'000
Cash generated from operations (Note) 6,320 3,990
This websiteTaxstores
paid data such as (810))
(810 (790)
cookies to Net
enable
cashessential site
from operating activities 5,510 3,200
functionality, as well as marketing,
personalization, and analytics. You
may change your
Cash settings
flows
Dividends fromatinvesting
received any
timeactivities
activities 30
or accept the defaultofsettings.
Purchase PPE (2,408) (2,656)
Purchase of financial asset (192))
(192 (430)
(2,570) (3,086)
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Cash flows from financing activities
Marketing
Dividends paid (3,000) –
Directors' interest-free loan accounts repaid
Personalization (1,000) –
(4,000) –
Analytics
Net change in cash and cash equivalents (1,060) 114
Save Accept
Cash and cash All brought forward
equivalents 610 496
Cash and cash equivalents carried forward (450) 610
November 2017 questions 171
• Any temporary differences arising in respect of adjustments you make from note (1) above.
The tax treatment for financial instruments follows the accounting treatment in respect of
gains and losses recognised through profit or loss. Deferred tax arises in respect of gains or
losses on financial instruments which are recognised in other comprehensive income.
(4) Current tax
Adjustments from notes (1) and (2) above may require adjustments to the current tax
tax charge. Tax
is charged at 20%.
60 SettleBlue
SettleBlue plc (SB) is a UK AIM-listed company, operating in the outdoor retail sector. SB owns several
subsidiaries and has an
a n investment in CeeGreen Ltd (CG). Owen-Grey LLP, a firm
f irm of ICAEW Chartered
Accountants, is the auditor of SB and its subsidiaries. It also audits CG.
You are an audit senior working on the SB group audit and SB parent
parent company audit for the year ended
30 September 20X7. Other audit teams from Owen-Grey are responsible for
f or the individual audits of SB's
subsidiaries and CG.
The group audit engagement manager left you the following briefing note including instructions:
Briefing note
The draft consolidated financial statements for SB for the year ended 30 September 20X7 show profit
after tax of £5.3 million. SB uses the proportion of net asset
a sset method to value non-controlling interests
John, Ken and Sharon were the only directors of CG until 1 January 20X7. At 30 September 20X5,
SB recognised its investment in CG as an available-for-sale financial asset at its fair value of
£2 million. At 30 September 20X6, the SB board estimated the fair value
valu e of the investment
in vestment to be
£2.5 million and an increase of £0.5 million was recognised in other comprehensive income.
On 1 January 20X7, John offered to sell his 600,000 shares to SB for £15 million. SB bought 40% of
John's shares on 1 January 20X7 for a consideration of £6 million. SB also holds a call option to buy
the remaining 60% of John's shares on 1 January 20X8 for £9 million.
million .
On 1 January 20X7, John resigned as a director of CG. SB appointed two representatives to the CG
board as marketing and production directors. Since they joined the board, CG's performance has
improved significantly and this trend is expected to continue.
In SB's consolidated financial statements for the year ended 30 September 20X7, the investment in
CG is recognised at £8.5 million, as an available-for-sale financial
f inancial asset, since SB does not own the
majority of the shares in CG.
(2) Share options
On 1 January 20X7, as an incentive to work more closely with SB, Ken and Sharon were appointed
appo inted
as directors of SB. The service agreement includes the following key terms:
• Ken and Sharon are not paid cash salaries.
• data
This website stores On 1such
January
as 20X9, Ken and S Sharon
haron have the right to receive
receive (provided that they are still
directors
cookies to enable essential of SB at 1 January 20X9) either 32,000 SB shares or cash to the equivalent value of
site
28,000
functionality, as well as SB shares.
marketing,
personalization,•and Atanalytics.
1 JanuaryYou20X7,
20X7, the fair value of the share route has been calculated
calculated at £20 for the right to
may change your settings at any time
receive one SB share on 1 January 20X9.
or accept the default settings.
• The market
market value of SB's shares at 1 January 20X7 was £22 £22 per share and at
30 September 20X7, it was £24 per share. I have not n ot made any adjustment for this service
Privacy Policy agreement in the consolidated financial statements as no cash has been paid.
Exhibit 2: File note: Key issues arising from audit procedures on purchases, trade and other
Marketing
payables – prepared by Ann Zhang, Owen-Grey audit associate on SB audit
Personalization
Issue 1: Goods received not invoiced (GRNI)
( GRNI) accrual of £610,000
Analytics
When goods are received in SB's factory, they are matched to a purchase order on SB'sSB's computer system
and a goods received note (GRN) is produced and recorded on a list of goods received not invoiced
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(GRNI). When All
the purchase invoice is received from the supplier,
sup plier, it is matched to the GRN, which is
removed from the GRNI list on SB's computer system. The purchase invoice is then authorised forfo r
payment and recorded in the purchases and payables accounts.
At 30 September 20X7,
20X7, SB has calculated an accrual of £61
£610,000
0,000 from the list of GRNI and made the
following adjustment:
DEBIT Cost of sales £610,000
CREDIT Trade and other payables £610,000
My controls testing of the matching of GRNs to purchase
pu rchase invoices showed that the controls did not
operate effectively during the year ended 30 September 20X7
20X7.. This was due to inexperienced SB staff
members not matching purchase invoices to the correct GRNs. Therefore, I tested a sample of 10 GRNs
included on the GRNI list at 30 September 20X7 to make sure that the goods were received before the
year-end. I also tested completeness by agreeing large
large payments made to suppliers after
30 September 20X7 to the payables account for the appropriate supplier.
Issue 2: Accrual for a debit balance of £290,000 on MAK Ltd payables account
At 30 September 20X7,
20X7, the payable account of MAK Ltd, a large ssupplier
upplier of goods to SB, shows a debit
balance of £290,000. This balance arose because SB did not receive purchase invoices from MAK for
goods received in June and July 20X7 when MAK's accountant was on sick leave.
To authorise payments to MAK without purchase invoices, SB's accounts staff used GRNs prepared by
SB's warehouse and recorded on the GRNI list as evidence that the goods had been received from MAK.
SB accounted for the payments to MAK for these goods by crediting the cash account and
an d debiting
MAK's payables account. No adjustment has been made to the GRNI list for these payments.
SB has corrected the transaction by recording the following journal entry:
DEBIT Cost of sales £290,000
CREDIT Trade and other payables £290,000
I agreed payments of £290,000 made to MAK before 30 September 20X7 to SB's bank statements. I
confirmed that SB did not receive the invoices from MAK by agreeing the amounts to GRN on the GRNI
list at 30 September 20X7. Invoices relating to these goods have been received by SB and recorded
after 30 September 20X7. I have asked SB to provide a supplier statement from MAK but have not yet
received a response.
Exhibit 3: Dashboard of results from the application of the Titan analytics system
SB provided Owen-Grey with its purchases data files for the year ended 30 September 20X7.
Owen-Grey's Titan analytics system has been applied to this data. The system analysed 100% of
purchase orders and goods received notes raised in the year ended 30 September 20X7. The following
results have been obtained:
Test for all data (including MAK Ltd) Outcome Largest 4 suppliers:
Average number
number of days
Number of purchase orders raised 7,246
from GRN to receipt of
Number of GRNs raised and matched 6,884 purchase invoice
to stores
This website purchase such as
orders
data
cookies to Average
enable essential
number site
of days from GRN to 10 days
functionality, as well as marketing,
receipt of purchase invoice
MAK Ltd
personalization, and analytics. You
may change your settings
Number of GRNs at not
anyinvoiced
time at 311
or accept the default settings.
30 September 20X7 (GRNI) CG Ltd
Analytics
0 10 20 30
One supplier, MAK Ltd was identified as an outlier showing the following data:
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Marketing
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Analytics
Answer Bank
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Marketing
Personalization
Analytics
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Marketing
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1 Kime
Marking guide
Marks
Scenario
The candidate has been appointed to assist an FD for a property company, in the preparation of the
financial statements.
statements. The auditors are due to start their work andand the FD would
would like to be aware of any
contentious issue in advance of their arrival. The candidate is required to determine whether the
This websiteaccounting
stores datatreatment
such as applied is correct and determine the appropriate treatment given directors'
instructions
cookies to enable essentialto maximise
site the profit in the current period. The adjustments in respect of current tax and
deferred
functionality, as welltaxation are to be completed given the assumptions in the scenario. The financial reporting
as marketing,
issues and
personalization, include IAS 16You
analytics. (recognition of appropriate costs and depreciation), IAS 11, Construction Contracts ,
may change youraccounting,
lessor settings at any
assettime
held for sale and foreign currency adjustment in respect of a receivable, and a
or accept the default settings. candidate is required to prepare a summary statement of financial position and
cash flow hedge. The
statement of profit or loss and other comprehensive income.
Email
Privacy Policy
From: Jo Ng
From:
Marketing
To:
To: FD
Sent:
Sent: xx July 20X2
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Subject: Draft financial statements
Subject:
Analytics
Please find attached a draft statement of financial position and statement of profit or loss and other
comprehensive income (Attachment
(Attachment 1). I have also attached an explanation of my adjustments and a
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determination of their impact and proposed alternative accounting treatments (Attachment 2).
Regards
Jo
Attachment 1
Draft statement of profit or loss and other comprehensive income for the year ended
30 June 20X2
£m
Revenue (549.8 + 10.2) 560.0
Cost of sales (322.4 + 18) 340.4
Gross profit 219.6
Distribution costs 60.3
Administrative expenses
expenses (80.7 – 21.5
21.5 + 8)
8) 67.2
67.2
Finance costs (4.8 + 2.0 – 1.3 + 0.2 + 1.3 ) 7.0
Finance income (1.0)
Profit before tax 86.1
Income tax expense (17.3 + 3.4) (20.7)
Profit for the year 65.4
Cash flow hedge 1.3
Reclassification of cash flow hedge (1.3)
Total comprehensive income for the year 65.4
Draft statement of financial position as at 30 June 20X2
ASSETS £m
Non-current assets
Property, plant and equipment
(80.7 – 18 + 120 – 22.8) 159.9
Current assets
Finance
Gross lease receivable
amounts receivable
due from customers 20.5
20.5
10.2
Trade receivables (174.5 – 10 + 1.3) 165.8
Cash and cash equivalents 183.1
379.6
Non-current assets classified as held for sale 2.0
Marketing
Attachment 2
Freehold land and buildings
Personalization
(a) Additions
Analytics
Renovation of Ferris Street property – allocation of costs
Save Accept All
The basis on which the renovation costs have been allocated between repairs and maintenance
and capital appears somewhat arbitrary and has not been supported by adequate analysis.
IAS 16 requires that only direct expenditure on property improvements should be capitalised and
that maintenance
budgeted costs butcosts
has should be written
been used off to
to allocate profitspend
actual or loss.
to The
date.80:20 split was based on
It is possible that the expenditure to date may include a higher or lower proportion of maintenance
than that expected for the project as a whole. As repairs should be expensed as the work is
performed, this could affect the result for the period. Hence it is important to review a breakdown
of the costs actually incurred for the period.
For costs which are capital in nature, we need to evaluate whether any could more appropriately
be recorded as plant and machinery rather than included within building costs. The asset lives and
depreciation rates would then differ if the asset is not treated as a single composite property asset. I
need much more information on the nature of the project to do this.
No disposals have been recorded in the year for any previous renovation or construction work on
the Ferris Street building which has been replaced by the work done in the year. In a major project
of this type it is likely
li kely that there will be elements of the original cost or of previous renovation
projects which should be written off. I need to ascertain the nature of building and previous work
on it in order to determine what element of the carrying amount, if any, should be written off. For
example there may be partition walls which have been demolished and replaced.
I need to review the budget and the basis of the 80:20 split proposed by the project
pr oject manager. The
project manager may not understand the requirements of accounting standards and in particular
of IAS 16 and may have been motivated by capital budget constraints or other funding/approval
limits than by an analysis of the true nature of the costs to be incurred.
The allocation of costs on a project which includes both types of cost is open to manipulation and
can be judgmental and be challenged by our auditors.
Adjustments required?
I cannot at present quantify
qu antify whether any adjustment is required without further analysis being
performed on the additions accounts in the general ledger.
Save
A comparison of the two methods
Accept All
methods (assuming costs
costs are recognised on an incurred basis) is as
follows:
Statement of profit or loss
Contract cost Work certified
basis basis
£m £m
Revenue 27.2 23.8
Cost of sales (18.0))
(18.0 (18.0)
Profit 9.2 5.8
Work certified
£m
Gross amounts from customers
Costs 18.00
Recognised profit 8.05
26.05
26.05
Progress billings (17.00)
9.05
Implication for the financial statements
Using the work certified to date method results in a lower profit, although this method is also less
subjective since it does not rely on estimations of future costs to calculate the percentage
complete. To maximise the amount of profit recognised the directors could select the contract cost
method. Ultimately the profit recognised overall on the contract is i s the same over time, but the
allocation to accounting periods is affected by the choice of presentation.
As £17 million ofof revenue has already been recognised,
recognised, the follow
following
ing adjustment to the financial
This website stores data such
statements as
is required if the maximum amount of profit is to be recognised:
cookies to enable essential site
DEBIT Gross amounts from customers £10.2m
functionality, as well as marketing,
CREDIT Revenue £10.2m
personalization, and analytics. You
may change your settings at any time
Also I have reversed
reversed the additions to property, plant and equipment
equipment as follows:
or accept the default settings.
DEBIT Cost of sales £18m
CREDIT PPE £18m
Privacy Policy The assumption has been made that this has been classified as an asset under construction and no
depreciation has been charged.
Marketing
(b) Disposals
Disposals
Personalization
FX House
AnalyticsThe lease does appear to be a finance lease given the transfer to the lessee at the end of the
contract; this appears to be the case for both the buildings and the land.
Save Accept All
As the lease to the
the third party is a finance
finance lease it is correct to treat the property sale as a disposal.
However the junior assistant has failed to account correctly for the disposal and the new finance
lease following the guidance for lessor accounting as set out in IAS 17. As title to both land and
buildings transfer to the lessor at the end of the lease period, the lease should be accounted for as
a single lease comprising both land and building elements. Assuming that the new lease is at fair
market rates, Kime should realise a gain on the asset disposal and show a new lease receivable
equal to the net investment in the lease. This will be equal to the minimum lease payments
discounted at the rate implicit in the lease.
Correcting journal entries
Hence entries required to correct the accounting are:
At inception of
of lease on 1 January
January 20X2:
DEBIT Non-current assets – net investment in lease £21.5m
CREDIT Gain/loss on non-current asset disposal £21.5m
£m £m
DEBIT Trade receivables 1.3
2 Mervyn plc
Marking guide
Marks
(a) Explanations:
Sale of land: The Ridings/Event after reporting period 2
Sale of land: Hanger Hill/sale and leaseback 4
Pensions 6
Provision 3
Revenue 2
Share appreciation rights 2
One is to spread the gain of £200,000 over the life of the lease on a straight line basis. This gives
an annual credit of £40,000 to profit or loss for the year (200,000/5). The balance of £160,000 is
deferred income and recognised as a liability.
The other method looks at the substance of the arrangement. It treats the excess profit as a loan
paid back through higher lease rentals. Under IAS 39, Financial Instruments: Recognition and
Measurement the
the lease rentals must be split between the amount deemed to be a genuine lease
rental and the amount deemed to be a repayment of the loan.
The appropriate treatment here is (see (W1) for detailed calculations):
£
Loan repayment: Capital 33,000
Interest 20,000 Correct to charge
Lease rental 27,000 to profit or loss
Total rental paid 80,000
The capital repayment element must be eliminated from the profit or loss and offset against the
loan.
Tutorial note:
Either method of recognising the amortised profit is acceptable. The amended profit computation
in (b) below uses figures from the first method, giving the second method based on IAS 39 as an
alternative.
Under IFRS 16, Leases, the lease would not be an operating lease, as this distinction does not apply
for lessees. The transaction would need
need to meet the
the criteria in IFRS 15, Revenue from Contracts with
Customers for a genuine sale. There is some doubt
doubt as to whether
whether it does. If it does,
does, the asset sold is
derecognised and a right-of-use asset recognised together with a lease liability relating to the right
of use retained and a gain/loss in relation to the rights transferred.
Pensions
Pensions
The contributions paid have been charged to profit or loss in contravention of IAS 19, Employee
Benefits .
Under IAS 19, the following must be done:
Actuarial valuations of assets and liabilities revised at the year-end
This website stores data such as
All gains and losses recognised:
cookies to enable essential site
functionality, as well as
– marketing,
Current service cost
personalization, and –analytics. You
Transfers In profit or loss
may change your settings at any time
or accept the default –settings.
Interest on net defined asset/liability
– Remeasurement (actuarial) gains and losses – In other comprehensive income (per
IAS 19, as revised in 2011)
Privacy Policy
Deferred tax must also be recognised. The deferred tax is calculated as the difference between the
MarketingIAS 19 net defined benefit liability less its tax base (ie, nil as no tax deduction is allowed until the
pension payments are made). IAS 12, Income Taxes requires
requires deferred tax relating to items charged
Personalization
or credited to other comprehensive income to be recognised in other comprehensive income
Analyticshence the amount of the deferred tax movement relating to the actuarial losses charged directly to
OCI must be split out and credited directly to OCI.
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Provision
According to IAS
IAS 37, Provisions, Contingent Liabilities and Contingent Assets a provision shall be
recognised when:
an entity has a present obligation as a result of a past event;
it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
a reliable estimate can be made of the amount of the obligation.
If these conditions are met then a provision must be recognised.
The assessment of a provision for a legal claim is always a difficult area as it will be based upon the
evidence available but it could also be argued that any provision or disclosure could be prejudicial
to the court case itself.
In this case it would appear that the lawyers and management are fairly certain that damages and
costs will be payable. The problem is the amount of any provision to be made. As there is a
timescale involved here then the first stage will be to calculate the present value of each of the
outcomes. Management have also assigned probabilities to each of the three possible outcomes so
a further decision must be made as to whether to calculate an expected value or take the value of
the most likely outcome. IAS 37 states that where a single obligation is being measured the
individual most likely outcome may be the best estimate of the liability. Although in some
circumstances the range of outcomes may mean that a higher figure is required.
Outcome Discount factor Expected
@ 10% Present value Probability value
£'000 £'000 £'000
Best 200 1/1.10 182 25% 46
2
Most likely 800 1/1.10 661 60% 397
Worst 1,500
3
1/1.10 1,127 15% 169
612
IAS 37 requires the estimated value of the provision to be the amount that the entity would
rationally pay to settle the obligation. The directors are likely to want as low a provision as possible
so they are likely to prefer the expected value of £612,000. However, this is a single event, and
IAS 37 requires £661,000 as the most likely outcome or £612,000.
Bill and hold sales
When a buyer requests that the delivery of goods purchased does not take place immediately even
though the buyer takes legal title of the goods and pays for them such arrangements are
commonly referred to as 'bill and hold' sales. Revenue from such sales should be recognised when
the buyer takes title to the goods provided that:
it is probable that delivery will take place;
the goods are available and ready for delivery at the time that title passes;
the buyer specifies the deferred delivery arrangements; and
payment is under the usual terms of the seller.
This website stores data
In this such
case as appear that these sales are bill and hold sales. There is an established
it would
cookies to enable essential site
relationship with the customer and the arrangement
arr angement has taken place during the year. Therefore the
functionality, as revenue
well as marketing,
should be recognised when the title to the goods passes to the buyer which will be when
personalization,theandgoods
analytics. You for delivery and the buyer has been invoiced. Therefore the goods must be
are ready
may change your settings at any time
removed
or accept the default from closing inventories in the statement of financial position at their cost price of
settings.
£99,000, with a corresponding increase in cost of sales, and the additional revenue for the year to
30 September 20X7 must be recognised in the profit or loss for the year.
The additional expense of £10 million resulting from the remeasurement at the settlement date is
not included in the financial statements for the year ended 30 September 20X7, but is recognised
the following year.
(b) Amended profit
£'000
Profit for the year – per question 1,471
Eliminate net gain on sale – The Ridings (100 – 27) (73)
Eliminate gain on sale in excess of fair value – Hanger Hill Estate (W1) (200)
40
Portion of gain credited
Pension contributions to P/L (200,000 5) (W1)
(W1) 405
Current service cost (374)
Interest on obligation (W2) (253)
Interest on plan assets (W2) 216
Transfers (400,000 – 350,000) (50)
Share appreciation rights (50)
Deferred tax on pension obligation (W3) 13
Provision for damages for court case (see above) (661)
Additional revenue from bill and holdhold sales 138
Reduction in closing inventories (99))
(99
Amended profit for the year 523
Alternative calculation – IAS 39 method
method for sale and leaseback:
£'000
Profit for the year – per question 1,471
Eliminate net gain on sale – The Ridings (100 – 27) (73)
Eliminate gain on
Rental element sale inasexcess
treated capitalofrepayment
fair value –(W1)
Hanger Hill Estate (W1)
(W1) (200)
(200)
33
Pension contributions 405
Current service cost (374)
Interest cost (253)
Interest on plan assets 216
Share appreciation rights (50)
Transfers (400,000 – 350,000) (50)
Deferred tax on pension obligation (W3) 13
Provision for damages for court case (see above) (661)
Additional revenue
revenue from bill and hold hold sales 138
Reduction in closing inventories (99))
(99
Amended
This website stores data such profitasfor the year 516
cookies to WORKINGS
enable essential site
functionality, as well as marketing,
(1) Sale
personalization, and and leaseback
analytics. You (Hanger Hill Estate)
may change your settings at any time
or accept the default settings. £
Proceeds (bal. fig.) 1,150,000
Carrying value 900,000
900,000
Gain 250,000
Privacy Policy
Marketing
Personalization
FV – CV Proceeds
Proceeds – FV
Analytics £50,000 £200,000
= 'true' profit = loan
Rentals £80,000 pa
Save Accept All
188 Corporate Reporting: Answer
Reporting: Answer Bank
Bank
For alternative IAS 39 method only:
Loan repayment: repayment 3.791 = £200,000
200 000
,
Repayment =
3 791
.
= £53,000 (rounded)
Interest Capital
200,000 = 33,000
10% = 20,000
Remaining £27,000 (£80,000 – £53,000) represents operating lease rental.
(2) Pension scheme
scheme
Pension scheme Pension scheme
assets liabilities
£'000 £'000
At 1 October 20X6
20X6 2,160 2,530
Interest cost (10% 2,530,000) 253
Interest on plan assets (10% 2,160,000) 216
Current service cost 374
Contributions 405
Transfers (400) (350)
Pensions paid (220) (220)
Loss on remeasurement through other
comprehensive income* (71) 38
At 30 September
September 20X7 2,090 2,625
Note: IAS 19 (revised) stipulates that remeasurement losses must be recognised in other
*Note:
comprehensive income in the period in which they arise.
(3) Deferred tax on pension liability
liability
£'000
Net pension liability (2,625 – 2,090) (535)
Tax base (no deduction until benefits paid) (0)
This website stores data such as (535)
cookies to enable essential site
functionality, as Deferred tax asset @ 23%
well as marketing, 123
Deferred tax
personalization, and analytics.asset
Youb/f (85)
may change your settings at any time 38
Credited
or accept the default to OCI re losses ((38,000 + 71,000) × 23%)
settings. (25))
(25
Credit to profit or loss for the year 13
3 Policy
Privacy Billinge
Marketing
Marking guide
Personalization
Marks
Analytics
Explanations and calculations of deferred tax implications of: 1
(1) Fair valueAccept
Save adjustment
All 5
(2) Share-based payment 6
(3) Unrealised profit 5
(4) Unremitted earnings 5
(5) Property, plant and equipment 5
(6) Lease
Lease
Total
marks 8
35
Maximum marks 30
MEMO
To:
To: Peter McLaughlin
From: Anna Wotton
From:
Subject: Deferred Tax Issues relating to Billinge
Billinge
(1) Fair value adjustment
IFRS 3, Business Combinations requires the net assets in the subsidiary acquired to be recognised at
their fair value in the group financial statements. Therefore, in the group financial statements at the
acquisition date of 1 November 20X2, the net assets of Hindley will be recognised at their fair value
of £8 million.
The revaluation gain of £1 million will not be recognised by the tax authorities until the item of
property, plant and equipment has been disposed of or taxable income has been generated
through use of the asset. This gives rise to a temporary difference.
As Hindley will have
have to pay tax on the taxable income
income generated through
through use of the asset and
ultimately on any gain on disposal, this temporary difference results in a deferred tax liability in the
group financial statements.
£m
Carrying amount in group financial statements 8
Tax base (7)
Temporary difference 1
Deferred tax liability (30%) (0.3)
The deferred tax is recognised as a liability in the statement of financial position and results in an
increase in goodwill, rather than a charge to other comprehensive income,
income, as the fair value gain is
is
recognised on acquisition.
The deferred tax is recognised even though the entity does not intend to dispose of the asset. The
fair value adjustment still represents
represents a taxable temporary
temporary difference as the asset's value will be
recovered through use rather than sale, generating taxable income in excess of the depreciation
(based on original cost) allowed for tax purposes.
In Hindley's individual accounts, no fair value adjustment is required and no deferred tax liability
will arise as both the carrying amount and the tax base will be the same ie, £7 million.
The initial recognition of goodwill that arises on acquisition (£10m – £8m = £2m) will not give rise
to any deferred tax: IAS 12 does not permit recognition of deferred tax as goodwill is measured as
This website stores data such
a residual as recognition of a deferred tax liability would increase the carrying amount of the
and the
cookies to enable essential site
goodwill.
functionality, as well as marketing,
(2) Share-based
personalization, and analytics.payment
You
may change your settings at any time
IFRS 2,
or accept the default Share-based Payment requires equity settled share based payments to be recognised at the
settings.
fair value at the grant date ie, £5. The expense
expense should be spread over the vesting
vesting period of three
three
years with a corresponding
corresponding increase in equity.
equity.
Privacy Policy For the year ended 31 October 20X2, the equity and expense would have been recorded at
£666,667 (1,000 options 500 employees 80% to remove estimated leavers £5 fair value at
Marketing
grant date 1/3 vested).
Personalization
As at 31 October 20X3, equity would
would be revised to £1.25m (1,000 options 500 employees
£1.25m (1,000
75% to remove revised estimated leavers £5 fair value at grant date 2/3 vested). The
Analytics
movement in the year of £583,333 (£1.25m – £666,667) would be posted to profit or loss.
The deferred tax asset correctly recognised at 31 October 20X2 would have been calculated as
follows:
£m
Carrying amount of share-based payment expense 0
Tax base (1,000 options 500 employees 80% to remove leavers £3 intrinsic (0.4)
value 1/3 vested)
Temporary difference (0.4)
Deferred tax asset (30%) 0.12
Tutorial note:
It the grant had been deducted from the cost of the asset, the carrying amount would have been
calculated as [(£12m – £2m) – ((£12m – £2m) 1/5)] ie, £8 million, resulting in the same carrying
amount as if it had been treated as deferred income.
(6) Lease
This is a finance lease as the risks and rewards incidental to ownership have been transferred to the
lessee (Billinge). The evidence for this is that the present value of the minimum lease payments
This website stores data such
(£6 million) as same as the fair value and the economic life of the asset is the same as the lease
is the
cookies to enable essential site
term.
functionality, as well as marketing,
Under IAS 17, Leases, the accounting treatment for a finance lease follows the substance of the
personalization, and analytics. You
transaction rather than the form. This results in recognising an asset and a corresponding liability.
may change your settings at any time
or accept the default settings.difference
A temporary difference arises because in the accounts, th
thee asset is written off
off over its useful life
life and
the finance cost is recognised at a constant rate on the carrying amount of the liability; whereas the
tax authorities give tax relief as the rentals are paid.
Privacy Policy
The deferred tax is calculated as follows:
Marketing £m £m
Carrying amount:
Personalization
Property, plant and equipment (£6m – £6m/5 years) 4.8
Lease liability (£6m + [8% £6m] – £1.5m) (4.98) (0.18)
AnalyticsTax base 0
Temporary difference (0.18)
Save Deferred Accept All(30%)
tax asset 0.054
The resultant deferred tax is an asset (and credit in profit or loss) because the tax relief is based on
the rental of £1.5 million yet the expense in the profit or loss is £1.68 million (ie, depreciation of
£1.2 million and interest of £0.48 million) which means that part of the future tax saving on rental
deductions is recognised
the tax recoverable in thenow for accounting purposes, so the tax charge is reduced representing
future.
4 Longwood
Marking guide
Marks
DEBIT
CREDIT Deferred
Tax tax– asset
charge profit or loss 0.92 0.92
(c) Deferred taxes on fair value adjustments
These adjustments will arise as consolidation adjustments rather than in the financial statements of
Portobello Alloys.
The deferred tax adjustment in respect of the PPE should be to equity since the underlying
revaluation on land will be recognised through equity in the revaluation reserve. The land will not
be depreciated, and the deferred tax on the temporary difference will only crystallise when the
land is sold. It is clear that there is no intention to sell the property in the current horizon.
The required adjustments to the deferred tax assets and liabilities are summarised in the table
This website stores data such as
below.
cookies to enable essential site Carrying Temporary Deferred
functionality, as well as marketing, Fair value amount difference tax at 23%
personalization, and analytics. You £m £m £m £m
may change your settings at any time
Property,
or accept the default plant and
settings.
equipment and 21.65 18.92 (2.73) (0.63)
Development asset 5.26 0.00 (5.26) (1.21)
Post-retirement liability (1.65))
(1.65 (0.37) 1.28 0.29
Privacy Policy 25.26 18.55 (6.71) (1.55)
Deferred tax liability (1.84)
Marketing Deferred tax asset 0.29
(1.55)
Personalization
The resulting consolidation adjustment is:
Analytics
Debit Credit
£m £m
Save Accept
Deferred tax assetAll 0.29
Deferred tax liability 1.84
Goodwill adjustment 1.55
194 Corporate Reporting: Answer
Reporting: Answer Bank
Bank
(d) Goodwill calculation
calculation
The first step is to determine the fair value of the consideration.
Deferred consideration must be measured at its fair value at the date that the consideration is
recognised in the acquirer's financial statements, usually the acquisition date. The fair value
depends on the form of the deferred consideration.
Where the deferred
deferred consideration is in the form of
of equity shares:
Fair value
value is measured
measured at the
the date the consideration is recognised,
recognised, usually the
the acquisition
acquisition date.
Consequently, the share price used must be £1.88.
Where the deferred
deferred consideration is payable in cash:
Fair value is measured at the present value of the
the amount
amount payable, hence the present value of
of
the £10 million cash.
Under IFRS 3 (revised) all acquisition-related costs must be written off as incurred. They are not
included in the consideration transferred.
Fair value of consideration
£m
Cash payment 57.00
Deferred equity consideration (5m £1.88) 9.40
3
Deferred cash consideration (£10m/1.1 ) 7.51
73.91
The value of the net assets acquired needs to be adjusted for the changes to reflect the fair value of
PPE, the development asset, the pension and deferred taxes as shown below.
Fair value of net assets acquired
£m
Book value per statement of financial position provided 9.90
Fair value adjustment to PPE 2.73
Fair value adjustment to development asset 5.26
Fair value adjustment to pension liability (1.28)
Deferred tax – rate change 0.26
Deferred tax – tax losses (0.21 + 0.71) 0.92
Deferred tax – fair value adjustments (0.29 – 1.84) (1.55)
16.24
This website stores data such as
cookies to enableThe resultingsite
essential fair value of goodwill, on which no deferred tax is applicable is:
£m
functionality, as well as marketing,
Fair value of consideration 73.91
personalization, and analytics. You
Fair value of net assets acquired (16.24)
may change your settings at any time
or accept the default settings.
Goodwill
Goodwill 57.67
57.67
(e) Deferred taxes and goodwill
goodwill
Goodwill and share acquisitions
Privacy Policy
When an entity
entity purchases the shares
shares in a target and gains control,
control, IFRS 3 requires that consolidated
Marketing
financial statements
statements are produced and thethe target is introduced at fair value, including any
any
attributable goodwill.
Personalization
The goodwill arising in this manner does not appear in any of the companies' individual financial
Analytics
statements, but arises as a consolidation adjustment in the consolidated financial statements.
5 Upstart records
The candidate is required to reply to a request by a group finance director to assist with the finalisation
of the group accounts. The group's investment in Liddle Music Ltd has increased twice during the year
such that the investment has moved from being accounted for as an associate to a subsidiary requiring
the calculation of a profit to be recognised in the statement of profit or loss on crossing the 'control'
threshold. A further acquisition of more shares later in the year however, requires no further profit to be
recognised but does require changes to the percentage of non-controlling interest. Adjustments are
required for a restructuring provision and for share-based payment.
The candidate is required to explain the impact of the acquisition of shares in Liddle Music on goodwill
and non-controlling
restructuring interest,
provisions to explain
and share andtocalculate
options, prepareany required adjustments
a consolidated statement with regard
of profit to
or loss
including Liddle Music and finally to explain the impact of Upstart adopting an alternative accounting
policy regarding the recognition of the non-controlling interest.
Marking guide
Requirement Marks Skills
Total marks 38
Maximum marks 30
To: Susan
To: Susan Ballion
From: Thomas
From: Thomas Mensforth
Subject: Liddle
Subject: Liddle
(a) Explanation of financial reporting treatment of goodwill and non-controlling interest
Goodwill
This website stores data such as
cookies to enableGoodwill arises
essential siteat the date when control is achieved. In the case of Upstart and Liddle this is on
functionality, as well as marketing,when Upstart's investment in Liddle passes the 50% threshold.
1 October 20X4,
personalization,Until
and analytics.
that date, You
Liddle has been treated as an associate.
a ssociate. Under the equity accounting method the
may change your settings
group's at any
share time profits after tax is credited to the consolidated statement of profit or loss,
of Liddle's
or accept the default settings.
and the investment is measured at cost plus share of post-acquisition profits in the consolidated
statement of financial position. In the year ended 30 June 20X5 Liddle is therefore treated as an
associate for the period 1 July to 1 October 20X4.
Privacy Policy On 1 October 20X4, the equity value of Liddle was £7.174 million (W8) and this was remeasured
to fair value of £7.5 million (W8) for the purposes of calculating goodwill. The difference between
Marketing
the two figures (£326,000) was credited to the statement of profit or loss.
Personalization
Goodwill is measured as the fair value of consideration paid less the fair value of the net assets
Analyticsacquired.
The fair value of the consideration consists of the following elements:
Save Accept
Cash paid All
of £2 million.
The fair value
value of the original 25% investment in Liddle at 1 October 20X4.
The shares issued on 1 October 20X4.
The £3 million
million payable
payable on 1 October
October 20X6 is discounted
discounted to fair
fair value, and the interest is then
then
unwound in the statement of profit or loss.
The £3 million contingent consideration payable on 1 October 20X7 is measured
measured at its fair
fair
value (determined by the probability of it occurring), again discounted to a present value, and
unwound in the statement of profit or loss.
The professional fees of £250,000 are excluded from the goodwill calculation and instead
expensed to the statement of profit or loss as incurred.
As a result of applying these
these principles a goodwill
goodwill figure of £13.077
£13.077 million arose on
on the acquisition
of Liddle (W3).
There is no further adjustment to goodwill when Upstart acquired a further 100,000 shares in
Liddle on 1 April 20X5. Instead, the difference between the consideration paid and the decrease in
the non-controlling interest's share of net assets is taken to group reserves (W6).
Share options
IFRS 2, Share-based Payment requires
requires that the expense in respect of the share options must be
recognised in profit or loss for the year. This is an equity-settled share-based payment, so the fair
value of the share options is that at the grant date, and the corresponding credit is to equity:
DEBIT Profit or loss £133,333
CREDIT Equity £133,333
The expense is calculated as follows:
£'000
30 June 20X4 Equity b/d: 1,000 4 £50 13 66.67
(c) Consolidated Statement of Profit or Loss for year ended 30 June 20X5
£'000
Revenue (see (W5)) 34,420
Cost of sales (10,640)
Gross profit 23,780
Operating costs (5,358))
(5,358
Profit from operations 18,422
Investment income 905
Fair value gain on associate 326
Associate income 424
Interest paid (625 + 169 + 78 + 123 + 141)
141) (1,136)
(1,136)
Profit before tax 18,941
Taxation (3,700)
Profit for year 15,241
(3) Goodwill
Consideration: £'000
Shares issued (800,000 £11.50) 9,200
Cash 1/10/20X4 2,000
2
Deferred cash (£3 million/1.09 ) 2,525
3
Contingent cash ((£3 million 50%)/1.09 ) 1,158
Fair value of previously held equity investment (250,000 £30) 7,500
Non-controlling
Non-controllin g interest at 1/10/X4 3,989 (13,295 30%)
Less: Net assets at control (W2) (13,295))
(13,295
Goodwill 13,077
(4) Non-controllin
(4) Non-controlling g interests £'000
At 1 October 20X4
20X4 (W3) 3,989
Share of profit to 1 April 20X5
£5,025,000 (W5) 6/9 30% 1,005
NCI at 1 April 20X5 4,994
*Share transferred to Upstart
(4,994 10/30) see working below (1,665)
Share of profits 1 April-30 June 20X5
(1,675 (W2) 20%) 335
At 30 June 20X5
20X5 3,664
Liddle
Upstart (9/12) Adjust Group
£'000 £'000 £'000 £'000
Foreign loan interest (W11) (141) (141)
Exchange loss on loan (W7) (123) (123)
Taxation (2,350) (1,350) (3,700)
Profit for year 9,676 5,025 15,241
(8) Associate
Associate
£'000
Cost 5,750
Share 1/1/20X3 to 1/10/20X4 1,424
(25% 5,695 (W2)) 7,174
Fair value at 1 October 20X4 (250 £30) 7,500
Increase in value to SPL 326
6 MaxiMart plc
Marking guide
Marks
MEMO
To
To:: Jane Lewis
From::
From Vimal Subramanian
Date::
Date 15 November 20X1
Transactions of MaxiMart
(a) Share options awarded
Statement of profit or loss and other comprehensive income for the year ended 30
September 20X1 (extracts)
£'000
Profit or loss
Defined benefit expense 185
Other comprehensive income
Actuarial gain on defined
defined benefit obligation
obligation (30)
Return on plan assets (excluding amounts in net interest) 53
Net remeasurement loss 23
Note:
Note: IAS 19 (revised 2011) requires remeasurement gains and losses to be recognised in other
comprehensive income.
Notes to the financial statements
Defined benefit plan: amounts recognised in the statement of financial position
30 September 30 September
20X1 20X0
£'000 £'000
Present value of defined benefit obligation 2,410 2,200
Fair value of plan assets (2,370) (2,300)
40 (100)
Defined benefit expense recognised
recognised in profit or loss for the year ended 30 September 20X1
£'000
Current service cost 90
Net interest on the net defined benefit asset (115 – 110) (5)
Past service cost 100
100
185
Changes in the present value of the defined benefit obligation
£'000
Opening defined benefit obligation at 1 October 20X0 2,200
Past service cost 100
Interest on obligation (2,200 5%) 110
Current service cost 90
Benefits paid (60)
Remeasurement gain through OCI (balancing figure) (30))
(30
Closing defined benefit obligation at 30 September 20X1 2,410
This website stores data such as
cookies to enable Changes the fair value of plan assets
in site
essential
functionality, as well as marketing, £'000
Opening fair value of plan assets at 1 October 20X0
personalization, and analytics. You
2,300
Interest on at
plan 115
may change your settings anyassets
time (2,300 5%)
or accept the default settings.
Contributions
Contributions
Benefits paid 68
68
(60)
Remeasurement loss through OCI (balancing figure) (53))
(53
Closing fair value of plan assets at 30 September 20X1 2,370
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(c) Reward card
Marketing
IFRIC 13, Customer Loyalty Programmes requires
requires that reward points are treated as a separate
Personalization
component of the sale. They should be measured at the fair value to the customer (effectively the
amount for which they could be sold separately). This amount should be deferred and recognised
Analytics
in revenue when the reward points are redeemed.
Save In substance,
Acceptcustomers
All are implicitly paying for the reward points they receive when they buy
other goods and services and hence some of that revenue should be allocated to the points.
Here, total reward points have a face value of £5 million at the year end but only two in five
customers are expected to redeem their points, giving a value of £2 million (ie, £5m × 2/5).
Effectively MaxiMart has sold goods worth £102 million (ie, £100m + £2m) for a consideration of
£100 million.
£98.04 millionThus allocating
(£100m/£1
(£100m/£102m 02mthe× £2 millionwould
£100m) between the two elements
be allocated would mean
to food revenue that
and the balance of
£1.96 million (£2m/£102m × £100m) to the reward points. £98.04 million would be recognised as
revenue in year ended 30 September 20X1 and £1.96 million would be deferred in the statement
of financial position until the reward points are redeemed.
7 Robicorp plc
Privacy Policy
Marking guide
Marketing
Personalization
Requirement
Analytics Marks Skills
Recommend any 26 Apply technical knowledge
knowledge of IAS 38 to the scenario to determine
determine
Save
adjustments,Accept
with All appropriate accounting treatment of the application.
accompanying journal
Identify need for amortisation of development costs.
entries, that are
required to make the Analyse and interpret
interpret journal to determine
determine reversal of accrued
accounting treatment production costs required.
comply with IFRS, Link information to determine the correct accounting treatment for
explaining the
the revenue from the XL5 order.
reasons for your
proposed changes. Apply technical knowledge
knowledge to determine
determine treatment of
of bond.
Explain the appropriate treatment required to reflect the share
option scheme and the adjustment required.
Calculate the profit on disposal of the Lopex shares and the
appropriate recognition of the investment in Saltor.
Identify the difference between the fair value and the face value of
the interest-free loan to the employees as being the cost to the
employer, to be treated as compensation under IAS 19.
Apply the IAS 39
39 rules in accounting
accounting for the loan at amortised cost
using the effective interest method.\
method.\
Revise the draft basic 8 Assimilate adjustments and prepare revised profit after tax.
earnings per share
Calculate basic EPS and diluted EPS.
(Exhibit 2)
figure (Exhibit 2)
taking into account
your adjustments and
calculate the diluted
earnings per share.
Total marks available 34
Maximum marks 30
To: Murphy
Alex Murphy
From: Nelitova
Marina Nelitova
Subject: 20X4
Review of financial statements for year ended 30 September 20X4
XL5 costs and revenues
In order for development costs to be capitalised, the following criteria have to be satisfied. The project
must:
be technically feasible
be intended to be completed and used/sold
be able to be used/sold
This website stores data such as
cookies to enable
beessential
expectedsiteto generate probable future economic benefits
have sufficient resources to be completed
functionality, as well as marketing,
have
personalization, costs that You
and analytics. can be separately recognised
may change In your settings
the period to at any time20X4 not all these criteria appear to have been satisfied, and so the costs of
1 January
or accept the
£2 default
million settings.
a month should have been expensed in the statement of profit or loss.
Once the breakthrough was made on 1 January, the development costs should have been capitalised
until the project was completed on 30 June. An intangible asset of £15 million (6 £2.5 million) should
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therefore have been created.
Marketing
The following journal is therefore required:
Personalization
DEBIT Profit or loss £6m
CREDIT
Analytics Intangible asset £6m
Once sales of the XL5 commenced on 1 August 20X4 the development costs should be amortised. This
Save
could be doneAccept
eitherAll
on a time or sales basis. I have amortised the £15 million over the number of XL5
units delivered to customers by 30 September 20X4, and this gives an amortisation charge of £500,000
(£15 million 1,200/36,000).
1,200/36,000).
DEBIT Profit or loss £500,000
CREDIT Intangible asset £500,000
Revenue should only be recognised once the risks in relation to the XL5 orders have been transferred to
the buyer. This normally is upon delivery, and so revenue in respect of 1,200 units should be included in
the statement of profit or loss.
The accrual for cost of sales should therefore be removed in relation to the original journal for revenue
and the cash received in relation to orders not yet fulfilled should be treated as deferred income.
DEBIT Revenue (1,800 £25,000) £45m
CREDIT Deferred income £45m
The takeover by Saltor means that the investment in Lopex should be derecognised because Robicorp
no longer has any rights to cash flows in respect of the Lopex shares. The deemed consideration would
be the fair value of the shares in Saltor at the takeover date of £5.5 million (400,000 2.5 £5.50). The
balance in the available for sale reserve should be transferred to profit or loss at the derecognition date.
Robicorp should also have recognised a new financial asset in the form of the shares in Saltor at
1 August 20X4 at the fair value of £5.5 million.
DEBIT Financial asset (shares in Saltor) £5.5m
CREDIT
DEBIT Financial asset
Available (shares
for sale in Lopex)
reserve £1.28m £3.68m
CREDIT Profit or loss account, gain on disposal £3.10m
At 30 September
September 20X4 the shares
shares in Saltor should be remeasured at fair value,
value, which per IAS 39 is the
bid price of £4.80. This gives a value of £4.8 million (1m 480 pence) and the movement in fair value
of £700,000 (£5.5 million less £4.8 million) is taken to profit or loss.
DEBIT Profit or loss £700,000
CREDIT Financial asset £700,000
The sales commission of 4 pence per share is ignored.
Loans to employees
IAS 39, Financial Instruments: Recognition and Measurement requires
requires financial assets (except those at
FVTPL) to be measured on initial recognition at fair value plus transaction costs. Usually the fair value of
the consideration given represents the fair value of the asset. However, this is not necessarily the case
with an interest-free loan. An interest free loan to an employee is not costless to the employer, and the
face value may not
not be the same as the
the fair value.
To arrive at the fair value of the loan, Robicorp needs to consider other market transaction
transactionss in the same
instrument. The market rate of interest for a two year loan on the date of issue (1 October 20X3) and
the date of repayment (30 September 20X5) is 6% pa, and this is the rate that should be used in valuing
the instrument. The fair value may be estimated as the present value of future receipts using the market
interest rate. There will be a difference between the face value and the fair value of the instrument,
calculated as follows:
£'000
Face value of loan at 1 October 20X3 8,000
2
Fair value of loan at 1 October 20X3: (£8m/(1.06) ) 7,120
This website stores data such as
Difference 880
cookies to enable essential site
functionality,
Theasdifference
well as marketing,
of £880,000 is the extra cost to the employer of not charging a market rate of interest. It
personalization, and analytics. You
will be treated as employee compensation under IAS 19, Employee Benefits . This employee compensation
may change your settings at any time
must be charged over the two year period to the statement of profit or loss and other comprehensive
or accept the default
income, settings.
through profit or loss for the year.
Robicorp wishes to classify the loan under IAS 39 as 'loans and receivables'. It must therefore be
measured at 30 September 20X4 at amortised cost using the effective interest method. The effective
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interest rate is 6%, so the value of the loan in the statement of financial position is: £7,120,000 1.06 =
£7,547,200.. Interest will be credited to profit or loss for the year of: £7,120,000 6% = £427,200.
Marketing
£7,547,200
The double entry is as follows:
Personalization
At 1 October 20X3
Analytics
DEBIT Loan £7,120,000
Save
DEBIT Accept All
Employee compensation £880,000
CREDIT Cash £8,000,000
£8,000,000
At 30 September 20X4
DEBIT Loan £427,200
If Robicorp wishes to continue to hold the loans at amortised cost under IFRS 9, Financial Instruments,
two criteria must be met under IFRS 9:
(1) Business model test. The
test. The objective of the entity's business model is to hold the financial asset to
collect the contractual cash flows (rather than to sell the instrument prior to its contractual
maturity to realise its fair value changes).
(2) Cash flow characteristics test. The
test. The contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest on the principal outstanding.
These criteria have been met. Accordingly, following the introduction of IFRS 9, the loan may continue
to be measured at amortised cost using
cost using the effective interest method.
Earnings per share
After taking into consideration the
the above changes
changes basic earnings per share
share decreases to 83.4
83.4 pence
(W2).
A diluted earnings per share
share figure is calculated to take into account
account the worst case scenario
scenario in respect
of potential increases in the equity base of the company. This therefore takes into consideration that:
(a) the convertible
convertible bond could
could potentially increase
increase Robicorp's share capital by 4 million new
new shares,
but the interest saved by conversion is added back to profit. This is usually calculated net of tax,
but as per your instructions I have ignored the tax consequences; and
(b) the share option scheme could increase
increase Robicorp's share capital by a number of free shares. This is
calculated by converting the amount to be recognised in the profit or loss to a per share amount.
This is then added to the exercise price to work out the amount that is expected to be received on
exercise. Dividing
issued results in thethis by theofexercise
number price and comparing to the total number of shares to be
free shares.
Diluted earnings per share is
i s 82.9 pence (W3).
WORKINGS
(1)
Robicorp convertible bond £'000
PV Interest 31/12/X4 @10% 1,091
PV Interest 31/12/X5 @10% 992
PV Interest and capital 1/1/X7 @10% 30,954
Total 33,037
This website(2)stores data such as
cookies to enable essential site
functionality, as Basic
well asearnings per share
marketing, Earnings Shares
personalization, and analytics. You £'000
may change your Draft
settings
at any time 66,270 44,000,000
or accept the default settings.
Development
Developmen
Developmenttt costs
Developmen costs expensed
expensed
amortised (6,000)
(6,000)
(500)
Revenue/costs not recognised (25,200)
Bonds instead of shares (4,000,000)
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Interest expense (2,478)
Marketing Finance cost previously charged 900
Share option expense (1,568)
Personalization
Gain on sale of Lopex 3,100
Fair value loss on Saltor (700)
AnalyticsEmployee compensation (loan to employees)
(880)
Interest on employee loan 427
Save RevisedAccept
totals All 33,371 40,000,000
(3)
Diluted EPS
£'000
Basic totals 33,371 40,000,000
Convertibles (see below) 2,478 3,000,000
Share options (free shares) – 232,611
Total 35,849 43,232,611
Diluted EPS
EPS 82.9 pence
pence
Options calculation
Fair value of services yet to be rendered (48,000 (30 – 2)) £3.50 2/3) £3,136,000
Per option £3.136m/(48,000 (30 – 2)) £2.33
Adjusted exercise price (£4.00 + £2.33)
£2.33) £6.33
Number of shares treated as issued for nil consideration (free shares) 232,611
9
Earnings/shares = £2,478,000/
£2,478,000/ × 4m = 82.6p
12
As 82.6p is less than
than the basic EPS of
of 83.4p then the convertibles
convertibles are dilutive and therefore
therefore must be
included in the diluted EPS calculation.
8 Flynt plc
Scenario
The candidate is in the role of a newly appointed financial cont
controller
roller who is asked to produce journals
and adjust a statement of profit or loss and other comprehensive income in respect of three technical
issues: share options, defined benefit scheme and lease of surplus machinery. The candidate is also asked
This websiteto stores data
calculate thesuch
EPS as
and diluted EPS taking into account the adjustments to the statement of profit or
cookies to loss
enable
andessential site
other comprehensive income.
functionality, as well as marketing,
personalization, and analytics.
Marking guide You
may change your settings at any time
or accept the default settings.
Marks
(1) Redraft consolidated statement of profit or loss and other comprehensive income 28
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(2) Calculate EPS and diluted EPS where appropriate 7
Total marks 35
Marketing
Maximum marks 30
Personalization
Analytics
To:
To: [email protected]
From: [email protected]
From:
Save Accept All
Re:
Re: Finalisation of financial statements for year ended 31 May 20X6
I would respond to your email as follows:
Share option scheme
Shane Ponting's treatment of the option scheme is incorrect. IFRS 2, Share-based Payment should
should have
been applied as follows:
The fair value of the options at the grant date should be treated as an expense in profit or loss and
spread over the vesting period, which is from the grant date until the date the scheme conditions vest.
The scheme conditions are both market and non-market based, as they are impacted by both the share
price and continuing employment.
The fact that the share price has increased since the grant date is ignored when determining
determining the charge
to profit or loss. This is because market based conditions are embedded in the fair value calculations.
The continuing employment condition should be based on the best estimates at the statement of
financial position date, which in this case is for 16 executives
executives to be employed
employed at the vesting
vesting date.
The journal entry is as follows:
DEBIT Profit or loss £378,000
CREDIT Equity (retained earnings) £378,000
The charge to profit or loss is therefore £378,000 (10,000 × 16 × £12.60 × ¼ × 9/12). This will reduce
profit after tax and therefore EPS.
In addition this sum is also credited in
i n the statement of financial position to equity. IFRS 2 does not state
where in equity this entry should arise, and many companies add it to retained earnings.
When calculating diluted EPS it will normally be necessary to take into consideration the number of 'free'
shares being allocated to executives assuming the whole scheme will vest. Also, normally, there is an
adjustment to be made to the option exercise price in terms of the remaining IFRS 2 cost to be
expensed in future (per IAS 33 example 5A). However in the case of Flynt there is a share price condition
to be satisfied, in addition to the mere passage of time. There are therefore performance
performance based share
options and, in accordance with para 48 of IAS 33, these should be treated as contingently issuable
shares.
Para 54 of
number of IAS 33 therefore
ordinary applies
shares that which
would states that
be issued if the'the calculation
market price atofthe
diluted EPS
end of is reporting
the based on the
period
were the market price at the end of the contingency period'. In the case of Flynt, to satisfy this
contingency the price would need to rise to £58.5 (ie, £39 × 150%). At the period end it is only £52, so
in accordance with para 54 there is no dilution.
Lease of machinery
Shane Ponting's analysis of the agreement as an operating lease is incorrect. This would appear to be a
finance lease because:
because:
(a) the lease term and useful life of the asset are the
the same; and
This website(b)stores
the present value
data such as of the
the lease payments
payments received, plus the residual value guaranteed by Prior plc
come to £607,000
cookies to enable essential site (Appendix 2), which is almost all of the fair value of the machinery.
functionality,
Theasasset
well should
as marketing,
therefore be derecognised and a receivable created. This is called the net investment in
personalization,
the lease. The direct You
and analytics. costs incurred should be included in the initial measurement of the finance lease
may change your settings
receivable at any
and will time be recognised in profit or loss over the lease term as part of interest
therefore
or accept the default settings.
receivable.
The rental income of £150,000 is removed from profit or loss. Interest receivable of £61,000 is credited
to profit or loss (Appendix 3).
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Because the machinery is being derecognised the depreciation charge should be added back to profit.
Marketing
Overall the reclassification of the lease to a finance lease will increase EPS.
Personalization
In the statement of financial position at 31 May 20X6 there will be a receivable of £524,000 (Appendix
(Appendix
Analytics
3) which should be analysed between amounts due in less than and more than one year.
Journal entries are as follows:
Save Accept All
DEBIT Depreciation provision £122,000
CREDIT Profit or loss £122,000
Being removal of the depreciation charge
DEBIT Net investment in lease £1,000
CREDIT Profit or loss £1,000
Being adjustment re-allocation of direct costs
DEBIT Profit or loss £150,000
CREDIT Net investment in the lease £150,000
Being removal of rental income
DEBIT Net investment in the lease £61,000
CREDIT Profit or loss £61,000
Being interest income
The treatment under IFRS 16 will be the same – accounting for lessors is largely unchanged. IFRS 16 still
makes a distinction between finance and operating leases, but this is a finance lease under both
standards.
Dipper pension scheme
The accounting treatment for a defined benefit scheme is considerably different to that of a defined
contribution scheme. It is therefore necessary to remove the charge of £480,000 made by Shane
Ponting and replace it with the following.
The profit or loss charge is split into two elements:
(a) Service cost: This is the pension earned
earned by the employees ofof Dipper in the year, and
and is an operating
operating
cost. This means that operating costs will rise by a net £80,000 after deducting the contributions
paid into the scheme that have been incorrectly charged by Shane Ponting.
(b) Net interest on the net defined
defined benefit liability.
liability. This in turn consists of
of two elements:
elements:
(1) Interest on plan assets:.
assets:. This works out as £55,000 (5%
(5% × £2.2m × 6/12). IAS 19 does not
specify where this should appear in the statement of profit or loss and other comprehensive
income. I have treated it as investment income but it would not be incorrect to offset it
against operating costs.
(2) Interest on obligation: This is the unwinding
unwinding of the
the present value
value of the
the pension liability due
to employees who are one year closer to retirement at the end of the accounting period. A
charge of £65,000 (5% × £2.6m × 6/12) should therefore be made in profit or loss. Because it
relates to a present value, I have added this to finance costs, but once again IAS 19 is silent on
the issue.
The net charge to profit or loss is thus £(65,000 – 55,000) = £10,000
The actuarial difference reflects that so me of the above figures are estimates, and also the increase in
the net liability in the pension fund to £670,000 (£2.75m – £2.08m). This net liability will appear in the
statement of financial position as a liability.
This websitePerstores data 4such
Appendix asis a net remeasurement loss of £180,000. IAS 19 requires immediate recognition
there
cookies to of
enable
this inessential site
other comprehensive income.
functionality, as well
Journal as marketing,
entries are as follows:
personalization, and analytics. You
may change DEBIT
your settingsProfit or time
at any loss £560,000
CREDIT
or accept the Pension obligation
default settings. £560,000
Being recognition of service costs
DEBIT Pension asset £480,000
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CREDIT Profit or loss £480,000
Marketing
Being contributions paid into the scheme
DEBIT
Personalization Interest on assets £55,000
CREDIT Profit or loss £55,000
Analytics
Being recognition of interest on assets
Save
DEBIT Accept Allloss
Profit or £65,000
CREDIT Pension obligation £65,000
Being recognition of interest on obligation
DEBIT Other comprehensive income £205,000
CREDIT Pension asset £205,000
Appendix 3 – Net investment in lease
Bal b/f Interest income Instalment At 31 May
£'000 £'000 £'000 £'000
1 June 20X5 613 61 (150) 524
1 June 20X6 524 52 (150) 426
Appendix 4 – Pension calculations
Asset Obligation
Marking guide
Marks
To:
To: Antonio Bloom
From:
From: Anita Hadjivassili
Subject:
Subject: Gustavo plc financial statements
I attach the draft consolidated statement of profit or loss and other comprehensive income for the year
ended 30 September 20X6, the explanations you requested, and supporting workings.
Gustavo plc: Consolidated statement of profit or loss and other comprehensive income for year
ended 30 September 20X6 (Requirement 1)
£'000
Revenue 57,357
Cost of sales (37,221)
Gross profit 20,136
Operating costs (9,489)
Gain on sale of subsidiary 13,340
This website stores
Profit fromdata such as
operations 23,987
cookies to Share
enableofessential
profit of site
associate 160
Investment income
functionality, as well as marketing, 424
Finance
personalization, andcosts
analytics.
You (2,998)
Profit before taxation
may change your settings at any time 21,573
Income
or accept the taxsettings.
default expense (2,974)
Profit for the year 18,599
Other comprehensive income
Exchange differences on translating foreign operations
Privacy Policy 7,369
(Restatement of goodwill 4,370
Exchange gain in year
Marketing 2,999)
Total comprehensive income for the year 25,968
Personalization
Profit attributable to:
Non controlling interests (W9) 170
Analytics
Owners of parent company 18,429
18,599
Save Accept All
Total comprehensive income attributable to:
Non controlling interests (W9) 1,644
Owners of parent company 24,324