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ACFI3221

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Advanced Financial Reporting

 

ONLINE ASSESSMENT – OPEN BOOK EXAM

This assessment replaces the end of year examination. It is a pre-seen open book assessment and you may complete it in your own time, at any point up to the submission date.

Please follow all instructions carefully.

  • You may either type your answers into a word document or write your answers by hand.
  • If you write by hand, please either scan or take photos of your work for submission. These should be saved as a single document for submission.
  • Please save the document in the style “ACFIXXXX – Pnumber” e.g. “ACFI3221 – P1234567
  • Submit your document by Turnitin if you have access. If you do not have access, please contact your module leader lwakefield@dmu.ac.uk (Lisa Wakefield) for approval to submit by alternative means. (note that your answer will still be uploaded to Turnitin by your module leader)
  • You may submit your answers at any time up to the submission date, but you may not resubmit once your answers have been uploaded.

Submission date and time – Friday5th June 2020, 12 noon GMT

There are three (3) questions in this assessment. Question 1 is worth 60 marks, questions 2 and 3 are worth 20 marks each. Answer ALL questions

Maximum word count is listed against each question part where applicable. This does not include any calculations.


 

Question 1

Below are the statements of financial position for Elsa Plc, Anna Limited, Sven Limited and Olaf Co for the year ended 30 April 2020.

  Elsa   Anna   Sven   Olaf
  £000   £000   £000   R000
Non Current Assets              
Property, Plant and Equipment 27,950   11,150   3,500   45,000
Development Expenditure 2,500     275   2,000
Investments 3,000   1,650   250   500
  33,450   12,800   4,025   47,500
Current Assets              
Inventories 4,225   1,525   600   11,500
Trade and Other Receivables 7,315   2,338   875   15,000
Cash and Cash Equivalents 1,255    1,162   225   4,500
  12,795   5,025   1,700   31,000
Total Assets 46,245   17,825   5,725   78,500
Equity              
Ordinary Share Capital 7,500   2,000   625   15,000
Preference Share Capital 2,500      
Retained Earnings 9,290   7,050   1,600   6,000
  19,290   9,050   2,225   21,000
Non Current Liabilities              
Borrowings 12,500   4,000   1,200   18,000
Provisions 1,500   500   300  
  14,000   4,500   1,500   18,000
Current Liabilities              
Borrowings 2,500   1,000   450   2,500
Trade and Other Payables 8,455   2,525   1,300   25,000
Current Taxation 2,000   750   250   12,000
  12,955   4,275   2,000   39,500
               
Total Liabilities 26,955   8,775   3,500   57,500
Total Equity and Liabilities 46,245   17,825   5,725   78,500

 

Notes to the Statement of Financial Position

  1. Share Capital
  • All ordinary shares other than those in Olaf have a par value of 50 pence
  • All preference shares have a par value of £1 and the preference dividend rate on all preference shares is 6%
  • All preference shares are redeemable at par in 10 years time
  • Ordinary shares in Olaf have a par value of R1. Olaf is a company incorporated in Reenland and its accounts are denominated in Reenlandian Rand (R)

 

  1. Exchange Rates prevailing during the year
  • Average Rate for the year: £1 = R17.5
  • Opening Rate at 1 May 2019: £1 = R15
  • Closing Rate at 30 April 2020: £1 = R20

 

  • Elsa Plc
  • Elsa’s investments include an interest free loan to Olaf of £500,000 which is repayable in 10 years time. This loan was made to Olaf when the £:R exchange rate was £1 = R18 and the loan is still in Olaf’s books at this historical cost exchange rate
  • It is the group’s policy to value any non-controlling interests at their proportionate share of the fair value of the subsidiary’s identifiable net assets

 

 

 

  1. Anna Limited
  • Elsa purchased 3,200,000 ordinary shares and 100% of the preference shares in Anna Limited on 1 May 2019. The purchase consideration consisted of 2 shares in Elsa Plc and £1 in cash for every 4 shares in Anna. The double entry for the cash element of the transaction has been recorded in cash and in Elsa’s investments but the accountant has not recorded the number or value of shares issued nor the value of shares issued in Elsa’s investments. At the date of acquisition ONE share in Elsa was valued at £4.50
  • At the date of acquisition the retained earnings of Anna stood at £5,000,000
  • At the date of acquisition it was agreed that the book values of the assets and liabilities of Anna did not differ materially from the fair values for those assets and liabilities
  • Group policy is to capitalise development expenditure under the requirements of IAS38. Anna has a long-term development project in hand which at 30 April 2020 had incurred total expenditure of £1,200,000 all of which had been charged to the income statement in line with the UK accounting standard SSAP13 even though the criteria for capitalisation of this expenditure had been met under IAS38. Calculations indicate that the development expenditure incurred up to 30 April 2019 amounted to £1,050,000
  • Anna paid an interim dividend of £200,000 on 1 December 2019 and declared a final dividend of £350,000 on 28 April 2020
  • Half the preference dividend was paid on 31 October 2019 and the directors declared the final preference dividend on 28 April 2020
  • Elsa has taken credit for its share of the dividends from Anna in the statement of financial position above. All dividends receivable from Anna by Elsa are included in Trade and Other Receivables
  • All dividends payable are included in Trade and Other Payables
  1. Sven Limited
  • Elsa acquired 500,000 shares in Sven Limited on 1 January 2020 for £950,000
  • At 30 April 2019, the retained earnings of Sven stood at £1,300,000
  • At the date of acquisition it was agreed that the book values of the assets and liabilities of Sven did not differ materially from the fair values for those assets and liabilities
  • On 28 April 2020, Sven declared a final dividend for the year of 10 pence per share and paid an interim dividend of £40,000 on 1 December 2019
  • Elsa has not taken account of the dividend receivable from Sven in the statement of financial positionabove
  1. Olaf
  • Elsa paid £700,000 to acquire 28% of the shares in Olaf on 1 May 2019. On the same date Anna paid £1,600,000 to acquire 40% of the shares in Olaf
  • At 30 April 2019 Olaf’s retained earnings stood at R5,000,000
  • At the date of acquisition it was agreed that the fair value of Olaf’s buildings was R12,000,000 higher than book value. These buildings had an average remaining useful economic life of 30 years at the date of acquisition
  • Olaf sold goods to Elsa throughout the year to 30 April 2020 at cost plus a mark-up of 25%. At the year end,the goods purchased from Olaf, Elsa still held R1,000,000 of it. The directors have decided to calculate any provision for unrealised profit based on the closing exchange rate at the year end
  • Elsa sent Olaf a payment of £60,000 on 28 April 2020 to clear the current account balances between the two companies at the year end. Olaf received this payment on 10 May 2020 and has not taken account of this payment in its statement of financial positionabove
  • Olaf declared a final dividend for the year ended 30 April 2020 of R500,000 on 17 May 2020. Elsa and Anna have taken no account of this dividend in their statement of financial positionabove. The exchange rate at 17 May 2020 continued to be £1 = R20

 

vii) Goodwill

  • Positive goodwill is carried at cost and is reviewed annually for impairment
  • Negative goodwill is credited directly to retained earnings
  • An impairment review of goodwill had been carried out at the year end and had concluded that there had been no impairment of the goodwill associated with any of the investee companies

YOU ARE REQUIRED TO:

Prepare the group statement of financial positionfor Elsa Plc at 30 April 2020.

 

All your calculations should be made to the nearest £000.

 

TOTAL 60 MARKS

 

 

 

Question 2

In order for financial statements to truly reflect the reporting position of an organisation at a point in time, judgements and estimates must be used to reflect the obligations of an organisation.

 

YOU ARE REQUIRED TO:

  1. Define a provision.
    (maximum wordcount40 words)

(2 marks)

 

  1. Explain why an accounting standard in relation to the recognition and measurement of provisions was necessary with reference to the guidance in IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”.
    (maximum wordcount160 words)
  • marks)

 

  1. Consider the following situations:

 

  1. Rupert plc operates an offshore oilfield. The company’s licensing agreement requires it to remove the oil rig at the end of production and restore the seabed. Rupert plc estimates that the cost of the work will be £15 million in ten years’ time. The present value of the work is £10.5 million.           (2 marks)

 

  1. George plc manufactures small items of equipment which it sells via a retail network. The company sold 15,000 items during the current year. The company provides a one-year guarantee if the equipment fails. Based on past experience, 5% of items sold are returned for repair or replacement. One third of the items returned are able to be repaired at a cost of £50, whilst the remaining two thirds are scrapped and replaced. The manufacturing cost of a replacement item is £180. (4 marks)

 

  • Frederick plc intends to restructure its business model.
    The company’s Board of Directors met at the beginning of November 2019 and drew up a detailed business plan for the closure of one of its main production sites, sale of the buildings and the redundancy of 160 staff members.

The plans have been discussed with the Union representatives from all staff groups impacted and a formal announcement has been made publicly.

The closure of the site, profit on the building disposal and redundancy costs are expected to result in a net loss of £100,000.                                                                                              (4 marks)

 

YOU ARE REQUIRED TO:

Discuss the correct treatment under IAS 37, and, where appropriate, calculate the amounts to be included in the financial statements for each situation.

The allocation of available marks is shown within each element.
(maximum wordcount200 words)

(10 marks)

TOTAL 20 MARKS

 

 

Question 3

“The new Leases Standard (i.e. IFRS16) will provide much needed transparency on companies’ lease liabilities, meaning off-balance sheet financing is no longer lurking in the shadows”.

  • Hans Hoogervost, IASB Chairman

YOU ARE REQUIRED TO:

Discuss critically the benefits and implications of the new Leases Accounting Standard, IFRS16.
(maximum wordcount500 words)

TOTAL 20 MARKS

 

 

 

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