FINANCIAL REPORTING (FR)
SOLUTION PACK
S. No
Question
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Perd Co
Treats Co
Venus
Print
Mims Co
Pinardi
Karl Group
Loudon Co
Plank Co
Fit Co
Bun Co
Runner Co
Pirlo
Vernon
Perkins
Haverford
Duke
Duggan
Yogi
Cyclip
Xpand
Quincy
Plastik
Enca
Skeptic
Woodbank
X-tol
Penketh
Polestar
Kingdom
Speculate
Pulsar
Monty
Shawler
Viagem
Learning Co
Page 1 of 87
ACCA Exam Paper
Sep/Dec 2022
Sep/Dec 2022
Mar/Jun 2022
Mar/Jun 2022
Sep/Dec 2021
Sep/Dec 2021
Sep/Dec 2020
Sep/Dec 2020
Mar/Jun 2020
Mar/Jun 2020
Sep/Dec 2019
Sep/Dec 2019
Mar/Jun 2019
Mar/Jun 2019
Mar/Jun 2018
Mar/Jun 2018
Mar/Jun 2018
Mar/Jun 2018
Jun 2015
Jun 2015
Dec 2014
Dec 2014
Dec 2014
Jun 2014
Jun 2014
Jun 2014
Jun 2014
Jun 2014
Dec 2013
Dec 2013
Jun 2013
Jun 2013
Jun 2013
Dec 2012
Dec 2012
N/A
Syllabus Area
Preparation of consolidated financial statements
Analysing and interpreting the financial statements
Analysing and interpreting the financial statements
Preparation of single entity financial statements
Preparation of single entity financial statements
Analysing and interpreting the financial statements
Preparation of consolidated financial statements
Preparation of single entity financial statements
Preparation of consolidated financial statements
Analysing and interpreting the financial statements
Analysing and interpreting the financial statements
Preparation of consolidated financial statements
Analysing and interpreting the financial statements
Preparation of single entity financial statements
Analysing and interpreting the financial statements
Preparation of single entity financial statements
Preparation of consolidated financial statements
Preparation of single entity financial statements
Analysing and interpreting the financial statements
Preparation of consolidated financial statements
Analysing and interpreting the financial statements
Preparation of single entity financial statements
Preparation of consolidated financial statements
Tangible non-current assets
Accounting for transactions in financial statements
Analysing and interpreting the financial statements
Preparing single entity financial statements
Preparation of consolidated financial statements
Preparation of consolidated financial statements
Statement of cash flows
Tangible non-current assets
Reporting financial performance
Preparation of single entity financial statements
Tangible non-current assets
Preparation of consolidated financial statements
Preparing single entity financial statements
Perd Co
Part (a)
Consolidated statement of profit or loss and other comprehensive income for Perd Co
For the year-ended 31-Mar-20X8
Revenue
Cost of sales
Gross profit
Operating expenses
Profit from operations
Investment income
Finance costs
Profit before tax
Tax
Profit for the year
Other comprehensive income
Gain on revaluation
Total comprehensive income
Profit attributable to:
Shareholders of Perd Co
Non-controlling interests
Total comprehensive income attributable
to:
Shareholders of Perd Co
Non-controlling interests
58,200 + 34,300 – 9,000 (intra-group)
34,340 + 20,400 – 9,000 + 600 (unrealised
profit)
W1
3,000 – 800 dividends ($1m x 80%)
3,240 + 1,600 + 453 unwinding (W2)
1,560 + 1,480
4,100 + 700
$’000
83,500
(46,340)
37,160
(28,270)
8,890
2,200
(5,293)
5,797
(3,040)
2,757
4,800
7,557
(W3)
2,639
118
2,757
(W3)
7,299
258
7,557
Part (b)
Total assets
Perd Co
Sebastian Co
Goodwill
Impairment (400 + 300)
Unrealised profit
Intra-group balance
Revaluation gain
$’000
297,310
110,570
3,200
(700)
(600)
(7,000)
4,800
407,550
Workings
W1 – operating expenses
Perd Co
Sebastian Co
Impairment
Fair value depreciation ($3m / 15 years x 6/12)
Removal of Sebastian profit on disposal (see below)
Group profit on disposal (see below)
Page 2 of 87
$’000
18,040
7,130
300
100
5,100
(2,400)
28,270
Sebastian Co would have recorded a profit on disposal based on historical cost. At 30 September 20X7,
the property would have had a carrying amount of $9,900, being $11m less 1.5 years’ depreciation
($11m/15 x 1.5 = $1.1m). Therefore, the profit on disposal would have been $5.1m, being $15m less
$9.9m.
The group profit on disposal would be based on the carrying amount to the group. The carrying amount
of the property in the consolidated financial statements at 30 September 20X7 would have been $12.6m
($14m less 1.5 years’ depreciation). Therefore, the profit on disposal will be $2.4m ($15m less $12.6m).
W2 – Unwinding discount
$’000
$7.547m x 6% = $0.453m
453
W3 – NCI
Profit for the year
Adjusted profit on disposal ($5.1m – $2.4m)
Fair value depreciation
Goodwill impairment
NCI share of profit at 20%
Total comprehensive income
Profit (from above)
20% of 700 revaluation gain
Total comprehensive income
Marking scheme
Part
Detail
(a)
Revenue / COS
Other income and expense
Profit / OCI appropriation
Total assets
TOTAL
Page 3 of 87
$’000
3,690
(2,700)
(100)
(300)
118
118
140
258
Marks
3.5
8
3.5
5
20
Treats Co
Part (a)
Ratio
Return on year-end capital employed (ROCE)
Net asset turnover
Gross profit margin
Operating profit margin
Current ratio
Inventory turnover period
Gearing (debt / equity)
Receivables collection period
Working
7,466 / (25,968 + 33,621)
214,553 / (25,968 + 33,621)
106,544 / 214,553
7,466 / 214,553
47,996 / 50,391
(30,393 / 108,009) x 365
33,621 / 25,968
17,603 / 214,553
Treats Co
12.5%
3.6 times
49.7%
3.5%
0.95 : 1
103 days
129%
30 days
Industry
28.8%
2.4 times
55%
12%
1.8 : 1
25 days
43%
15 days
Part (b)
Performance
Treats Co's gross profit margin is slightly below the market average. This is not surprising as Treats Co
sells goods to supermarkets which are likely at lower margins than goods sold directly to the public.
However, Treats Co’s operating profit margin is significantly below the industry average. It is unclear
what the cause of this is, but it does suggest cost control issues as this is much worse than the sector
average, compared to the difference in gross profit margin.
The fact that the assets held by the company are old and may need replacing may mean there have
been large repairs and maintenance expenses in the year or have had impairment charges applied to
them.
ROCE is much lower than the industry average. This is as a direct result of the low operating profit
margin as the net asset turnover is above the sector average.
The fact that the ROCE is low in comparison to the industry average is concerning as this figure would
drop further following an investment in property, plant and equipment (PPE).
Currently Treats Co does not have the cash to acquire assets, so replacements are likely to lead to an
increase in debt (whether due to loans or leasing assets), which would further reduce the ROCE.
The net asset turnover is higher than the industry average. Again, it must be noted that once the PPE is
replaced, this figure will be significantly reduced.
Position
The current ratio is significantly lower than the industry average. This is likely to be due to the significant
overdraft which Treats Co uses for working capital management.
It appears that a lot of cash is tied up in inventories. This could be due to the need to hold large volumes
of goods to meet the supermarket contracts but could also signify issues over demand for Treats Co’s
products.
The inventory holding period is more than four times longer than the industry average. Considering that
Treats Co sells perishable food products, this is of concern as items may require to be written down/off.
Treats Co's receivables collection period is not particularly high at 30 days but is still twice that of the
industry average. This is likely to be due to the supermarket contract which will demand much longer
payment terms.
Most of the sector sells goods solely through their own stores and so these are likely to be cash sales.
As a result, the receivables days ratio is not comparable with many companies in the sector.
The gearing ratio is significantly higher than the industry average, which ts a significant concern,
particularly in the light of Treats Co's cash position.
Treats Co is likely to need investment in non-current assets; it is doubtful whether it will be possible to
raise debt finance to do this.
The large dividend payment is questionable as $7.14m has been paid despite the entity being overdrawn
and in need of investment.
Conclusion
Overall, the results are mixed and further information is required to fully investigate the performance and
financial position of Treats Co.
Further investigation is required of the composition of operating expenses. Neither the inventory nor the
cash position looks very strong in comparison to the industry averages. Finally, gearing is high and so
more information relating to the terms of borrowings would also be useful.
Page 4 of 87
Marking scheme
Part
Detail
(a)
Ratio analysis
(b)
Performance
Position / conclusion
Total
Page 5 of 87
Marks
5
6
9
20
Venus
Part (a)
Gross profit %
Net profit %
Return on equity
Workings
12,500/39,000 x 100
9,800/39,000 x 100
9,800/87,500 x 100
20X8
32.1%
25.1%
11.2%
Workings
11,000/32,000 x 100
8,900/32,000 x 100
8,900/42,000 x 100
20X7
34.4%
27.8%
21.2%
(b) (i) Adjusted profit:
Venus Co consolidated profit for the year
Deduet Luto Co post-acquisition profit - note (1)
Deduct savings due to discounts received from Luto Co — note (2)
Add back unwinding of discount on deferred consideration (W1) — note (3)
Add back fair value adjustment depreciation (900/3 x 6/12) — note (4)
Venus Co single entity net profit
Net profit % working: 7,635/(39,000 - 5,000 post-acquisition revenue) x 100
Working (W1)
Discount unwound (5m x 0.926 x 8% x 6/12)
Alternatively:
Discount unwound ((5m/1.08) x 8% x 6/12)
$'000
9,800
(2,000)
(500)
185
150
7,635
22.5%
185
185
(b) (ii) Comparability
It is not possible to compare consolidated financial statements with those of a single entity for a number
of reasons which include:
• The results in a consolidated statement of profit or loss include not only the income and
expenses of the parent, but also the income and expenses of any subsidiaries for the period
during the year that they are controlled by the parent.
•
Transactions between the parent and its subsidiaries, like intra-group sales, will be eliminated on
consolidation but will remain in the single entity statement of profit or loss.
•
The consolidated statement of financial position includes all of the assets and liabilities controlled
by the parent at the year end, including those of its subsidiaries.
(c) Performance
Despite the increase in revenue, profit attributable to the owners of Venus Co has increased by only
$0.3m ($9.2m – $8.9m) following the acquisition.
As Luto Co has made a profit of $2m, this suggests that Venus Co has made a smaller profit than in the
previous year.
The disappointing gross profit noted by the managing director and the resulting fall in the gross profit %
will be partly due to a loss of profitability in Venus Co's own business.
Venus Co's 20X8 net profit without Luto Co would have been down on 20X7 by $2.165m ($9.8m –
$7.635m (part (b))) and the net profit 9% would have fallen to 22.5%.
Venus Co has maintained its profit at a comparable level to the previous year only through the
contribution of its subsidiary. This shows that the profits of Luto Co have had a positive impact on the
group.
The acquisition has led to a significant deterioration in return on equity (ROE) (11.2% compared to
21.2%).
This is not so much due to the net profit %, which is down by less than three percentage points (27.8% –
25.19%).
The acquisition has increased share capital and share premium and brought in non-controlling interests
(NCI). The financial statements show the whole share issue and NCI but only six months’ group trading
which will have a negative impact on ROE.
Conclusion
Page 6 of 87
It does not appear that the disappointing results for the year to 30 June 20X8 can be attributed to the
acquisition, as the results of Venus Co would have been down on the previous year if the acquisition had
not taken place.
Marking guide
Part
Description
(a)
Ratios
(b) (i)
Venus Co profit
(b) (ii)
Comparability
(c)
Performance and conclusion
TOTAL
Page 7 of 87
Maximum
3
5
3
9
20
Print
All figures are in $’000 unless stated otherwise.
Part (a) Statement of profit or loss for the year ended 30 June 20X2
Revenue
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Profit from operations
Finance costs
Loss before tax
Income tax refund
Net loss for the period
$'000
97,400
(63,910)
33,490
(7,200)
(32,945)
(6,655)
(400)
(7,055)
2,530
(4,525)
(W1)
(29,570 + 3,375 (W5))
(750 – 350 (W4))
Part (b) Statement of financial position as at 30 June 20X2
$'000
Assets
Non-current assets
Property, plant and equipment
Current assets
Inventories
Trade and other receivables
Taxation
Bank
50,340
5,560
25,010
2,530
4,700
37,800
1,100
Non-current assets held for sale
38,900
89,240
Total assets
Equity and liabilities
Equity
Ordinary share capital
Other components of equity
Retained earnings
$'000
(29,600 + 7,000 (W7))
(15,500 + 7,000 (W7))
(11,470 - 4,525)
36,600
22,500
6,945
66,045
Non-current liabilities
Bank loan
Provisions
(30,000 - 14,000 (W7))
(W5)
16,000
2,250
18,250
Current liabilities
Trade and other payables
Provisions
(4,170 — 350)
(W5)
3,820
1,125
4,945
89,240
Total equity and liabilities
Workings
W1 Cost of sales
Opening inventory
Production costs
Less closing inventory
Depreciation charge
Held for sale asset (HFS asset) impairment
Page 8 of 87
W6
W2
W3
$'000
6,850
60,150
(5,560)
2,070
400
63,910
W2
Property, plant and equipment
$000
Plant and
machinery
$000
45,000
45,000
16,200
(2,400)
13,800
61,200
(2,400)
58,800
45,000
(7,290)
(2,070)
900
(8,460)
5,340
(7,290)
(2,070)
900
(8,460)
50,340
Land
Cost
Brought forward
HFS asset
Accumulated depreciation
Brought forward
Charge for the year (13,800 x 15%)
HFS asset accumulated depreciation (2,400 – 1,500)
Carrying amount
W3
Total
$000
$’000
1,500
(1,100)
400
Held for sale asset
Carrying amount at 1 July 20X1
Fair value less costs to sell at 30 June 20X2
Impairment loss to be recognised in the year ended 30 June 20X2
Tutorial note: A non-current asset classified as held for sale (i.e. a held for sale asset) should be
measured at the lower of its carrying amount and fair value less costs to sell. The fair value less
costs to sell at 30 June 20X2 will be the same as the net sales proceeds received on I July 20X2.
The above working simplifies this to a single adjustment since no accounting has been done to
date, but it could also be shown as:
$000
$000
Carrying amount at 1 July 20X1
1,500
Fair value less costs to sell at I July 20X1
1,140
Impairment
360
Fair value less costs to self at 30 June 20X2 (using
1,100
net proceeds received on I July 20X2)
Further impairment required
40
Total impairment for year ended 30 June 20X2
400
W4
W5
Finance costs
Included in TB
Correction of error
(30,000 x 5% x 6/12)
(14,000 x 5% x 6/12)
Onerous contract
Price per unit
Costs of conversion
$
450
600
1,050
(900)
150
Net realisable value
Loss per unit
Loss on fulfilling contract
Loss expected in the next 12 months (current)
Loss expected beyond 12 months (non-current)
$’000
750
(350)
400
($150 x 22,500 units)
(3,375 x 1/3 years)
(3,375 - 1,125)
$’000
3,375
1,125
2,250
3,375
Tutorial note: As the loss on fulfilling the contract ($3.375m) is lower than the cost of cancelling the
contract (£4m), a loss of $3.375m should be provided for.
W6
Inventory
Cost of units requiring modification
Page 9 of 87
$1,400 x 700 units
$’000
980
Net realisable value of units requiring additional
modification
Inventory write down required
W7
($1,600 — $400) x 700 units
(840)
140
Closing inventory (note 2)
Inventory write down
Adjusted closing inventory
5,700
(140)
5,560
Correction of share issue and bank loan
Share capital
$'000
7,000
7,000 share x $1
14K proceeds – 7K share
Share premium (other components of equity)
capital
Proceeds received and incorrectly included as part of the bank
loan
Marking guide
Part
Description
(a)
Statement of profit or loss
(b)
Assets
Equity and liabilities
TOTAL
Page 10 of 87
7,000
14,000
Maximum
8
6
6
20
Mims Co
Part (a) Statement of profit or loss for the year ended 31 December 20X5
Revenue
Cost of sales
Gross profit
Administrative expenses
Distribution costs
Loss from operations
Finance costs
Investment income
Loss before taxation
Taxation
Loss for the year
11,600 – 700 (overstated closing inventory from last
period)
W1
500 + 2,000 (investment property gain)
W2 (refund)
$’000
24,300
(10,900)
13,400
(9,700)
(7,300)
(3,600)
(1,400)
2,500
2,500
560
(1,940)
Workings
W1 Administrative expenses
As per the trial balance
Provision (note 2) [6,000 – 4,600]
Promoting brand (note 6) – incorrectly shown as intangible asset
Amortisation of brand (note 6) – $2m x 1/5 x 3/12
Depreciation of investment property incorrectly charged (note 5) – $20m x 1/20
Dividend incorrectly recorded as admin expense (note 7) – $0.04 x 75,000*
Total
* Shares in trial balance =
Rights issue in note (4) of 1 for 4: 60,000 x ¼ =
Number of shares at year end=
75,000
$’000
10,900
1,400
1,300
100
(1,000)
(3,000)
9,700
60,000
15,000
W2 Taxation
As per the trial balance
Current tax refund (note 3)
Increase in deferred tax liability ($8.2m – $7.7m)
Total
Page 11 of 87
$’000
140
(1,200)
500
(560)
Part (b) Statement of changes in equity for the year ended 31 December 20X5
Share capital
Share premium
Retained earnings
$’000
$’000
$’000
Balance at 1 January 20X5
60,000
43,200
Prior period error
(700)
Restated balance 1 January 20X5
60,000
42,500
Share issue (W1)
15,000
37,500
Profit for the year (from part (a))
(1,940)
Dividends paid (from part (a) W1)
(3,000)
Balance 31 December 20X5
75,000
37,500
37,560
Workings
W1 Rights issue
Rights issue from note (4) = 60,000 x 1/4 = 15,000
Exercise price is $3.5 per share, the nominal share price is $1, therefore, share premium per share will
be: $3.5 - $1 = $2.5
Double entry to record the rights issue will be:
Debit cash 15,000 x $3.5 = $52,500
Credit ordinary share capital = 15,000 x $1 = $15,000
Credit share premium = 15,000 x $2.5 = $37,500
Part (c) Extracts from statement of cash flows for the year ended 31 December 20X5
$’000
Cash flows from investing activities
Purchase of brand (note 6)
Purchase of investment property (note 5)
Net cash used in investing activities
(2,000)
(20,000)
(22,000)
Cash flows from financing activities
Proceeds from issue of share capital (from part (b) W1)
Dividends paid (from part (a) (W1))
Net cash from financing activities
Marking guide
Part
Detail
(a)
Statement of profit or loss
(b)
Statement of changes in equity
(c)
Extracts from statement of cash flows
Page 12 of 87
52,500
(3,000)
49,500
Marks
12
5
3
Pinardi
Part (a) Gain on disposal
Proceeds
Less: Net assets at disposal
Less: Goodwill at disposal (W1)
Gain on disposal
$’000
42,000
(35,000)
(4,200)
2,800
Workings
W1 Goodwill on disposal
Goodwill at acquisition
Less: Impairment (6,000 x 30%)
Goodwill at disposal
$’000
6,000
(1,800)
4,200
Part (b) Explanation of Silva Co disposal
• Silva Co is likely to meet the criteria as it is a separate major line of operations which has been
disposed of during the year.
• As a discontinued operation, the results would be removed and presented separately on the face of
the statement of profit or loss together with the gain (post-tax) on disposal of $2.8m.
• As Silva Co was sold on 1 January 20X7, there are no results to incorporate for the current year.
However, the results of 20X6 should be shown as a discontinued operation for comparative
purposes.
Part (c) Ratio calculations
Ratio
Gross profit margin
Operating profit margin
Interest cover
Inventory turnover days
20X7
Calculation
50,700 / 98,300 x 100
17,000 / 98,300 x 100
17,000 / 3,200
(13,300 / 47,600) x 365
Result
51.6%
17.3%
5.3 times
102 days
20X6
Calculation
50,600 / 122,400 x 100
13,200 / 122,400 x 100
13,200 / 5,500
(22,400 / 71,800) x 365
Result
41.3%
10.8%
2.4 times
114 days
Part (d) Analysis
Performance
There is a significant decrease in the total revenue reported by the group in 20X7, the revenue has
decreased by $24.1 million (122.4m – 98.3m), which represents 19.7% (24.m / 122.4m) decrease from
last year. However, this can be due the sale of Silva Co. If we remove the revenue of Silva Co from 20X6
results as well, we see that the revenue has increased by $11.9 million (98.3m – (122.4m – 36m)).
We can see a substantial increase in the gross profit margin in 20X7 as compared to the last year, the
gross profit margin shows increase of 10.3% (51.6% - 41.3%), which shows that improved efficiency and
cost control.
If we look at the gross profit margin of Silva Co in 20X6, it was 35% (12.6m / 36m). This demonstrates
that the profit margin of other components of the group are higher than Silva Co, and this can be one
reason for its disposal, apart from the fact that group wanted to exit from this sector.
One area of concern is the operating profit of the group. We see that there is an increase in the
operating profit margin, however, the increase is not as substantial as the increase in the gross profit
margin. Operating profit margin only shows an increase of 6.5% (17.3% - 10.8%), as compared to the
increase in gross profit margin of 10.3%. This signals concerns over the operating costs of the group.
There is another area of concern within the operating expenses, which relates to foreign exchange gains
and losses. Last year there was a foreign exchange gain of $3 million, and this year there has been a
Page 13 of 87
foreign exchange loss of $1 million. This shows a high fluctuation foreign exchange gain and loss, and
high exposure of the group towards foreign exchange transactions. This can be a reason for the lower
increase of operating profit margin when compared with the increase in the gross profit margin. The
group should review possible hedging strategies to control and reduce this exposure to foreign exchange
transactions.
Overall, the group needs to investigate the area of operating costs further and ascertain whether the
lower increase in the operating profit is due to one-off expenses and exchange loss, or the company
needs to control its operating expenses more effectively.
Finally, the interest cover has also shown substantial increase, which is due to the reduction in the
finance costs and increase in the operating profit margin. The decrease in the finance cost is expected
due to the exit from the lease contract.
Position
Non-current liabitlies have reduced significantly (reduction of $19 (61m – 42m) million from last year).
This can be due to the exit from the lease agreement for the cosmetic division.
The reduction in the non-current liabilities can also be from the proceeds of the sale of Silva Co. The
subsidiary was sold for $42 million, however, we see only an increase of $16.8 million (31.4 – 14.6),
which indicates that the group used some of the proceeds to pay-off the non-current liabilities, explaining
the substantial decrease over this area.
Another reason for the decrease in the non-current liabilities can be the disposal of Silva Co, as these
balances have been removed from the financial position of the group in 20X7. This would indicate that
the subsidiary had large non-current liabilities appearing in its statement of financial position, and can be
one of the reason for the disposal (apart from the reason to exit from the jewelry sector).
The inventory turnover figure shows a reduction, demonstrating improved working capital management.
The reduction shows that the group is able to turn over inventory more quickly than previously. Although,
the inventory days are high, but this can be due to the nature of the operations of the group. We will
have to investigate the average inventory holding for the industry sectors in which the group’s different
businesses operate, in order to provide a more thorough analysis of this area.
The improvement in the inventory turnover can also be linked to the disposal of Silva Co, indicating that
the subsidiary has a higher average of inventory holding time, then the other components of the group.
Conclusion
Although Silva Co generated good profits, the disposal seems to have a good overall impact on the
group’s performance and position. Silva Co’s results have also improved since disposal, showing it is not
a struggling business.
Overall, the profit margins for the group have increased after the disposal of Silva Co, and the noncurrent liabitlies have substantially decreased. The group’s focus should be on investing the operating
costs in more detail, and comparing its working capital management with the industry averages.
Marking guide
Part
Detail
(a)
Calculations
(b)
Explanation
(c)
Ratios
(d)
Analysis
Page 14 of 87
Marks
2
3
4
11
Karl Group
Part (a)
Loss on disposal
The loss on disposal in the consolidated financial statements is:
Proceeds
Less: net assets
Less: carrying amount of goodwill (W1)
Loss on disposal
W1) Goodwill
FV/cost of investment
Less net assets at acquisition
Goodwill at acquisition
Goodwill impairment (70%)
Carrying amount of goodwill
Marking scheme
Disposal loss
$'m
20
-29
-2.1
-11.1
35
-28
7
-4.9
2.1
4
Part (b)
20X8
20X7
Profitability ratios
Gross profit margin
$124m / $289m x 100 = 42.9% $132m / $272m x 100 = 48.5%
Operating profit margin
$64m / $289m x 100 = 22.1% $96m / $272m x 100 = 35.3%
ROCE (operating profit / equity + $64m / ($621m + $100m = $96m / ($578m + $150m =
NCL)
8.9%
13.2%
Current ratio
$112m / $36m = 3.1 : 1
$125m/$161m = 0.8 : 1
Gearing (debt/ debt + equity)
100/(100+621) = 13.9%
150/(150+578) = 20.6%
Financial performance
Consolidated revenue has increased from 20X7 to 20X8, despite the loss of Sinker Co’s significant
customer contract three months into the financial year. This might suggest that an increase in the
revenue of Karl (or its other subsidiary, or both) has more than compensated for Sinker Co’s lost
revenue. However, even though the group revenue has increased, the gross profit margin has fallen by
5.6% and the group cost of sales is higher than 20X7. This is likely to have been impacted by the poor
financial performance of Sinker Co. Alternatively, it may be that the sales mix of the group has changed.
As sales of Sinker Co represent 14% of the total group sales, this poor performance will also have
impacted on the group operating margin. Operating profit margin has dropped significantly from 35.3% to
22.1%. Administrative expenses have almost doubled from $23m for the year ended 31 December 20X7
to $45m for the year ended 31 December 20X8. Part of this increase will be due to the $11.1m loss on
disposal of Sinker Co. The administrative expenses will also have increased as a result of the $15m staff
redundancy costs and impairment of goodwill.
ROCE has fallen from 13.2% to 8.9%, but this figure is hard to interpret, as the return includes the
results of Sinker Co (including the loss on disposal and impairment of goodwill) but the capital employed
does not include the capital of Sinker Co due to the disposal at the year end. The operating loss made
by Sinker Co of $17m, plus the loss on disposal of $11.1m and impairment of $4.9m will have reduced
operating profit. Although it is a simplification, removing these balances would result in a group ROCE of
12.9% ($64m + ($17m + $11m + $4.9m)) / (($621m + $17m + $11.1m + $4.9m) + $100m) which is more
in line with the 20X7 figure.
Page 15 of 87
Financial position
The current ratio shows considerable improvement for the year ended 20X8, following the disposal of
Sinker Co. The group was in a net current liability position at the end of 20X7. This would suggest that
Sinker Co may have had a large bank overdraft balance or high levels of payables at 31 December
20X8. It would appear that the sale of Sinker Co has improved the liquidity of the group.
It should be noted that 20X8 group current assets of $112m will include the $20m consideration for
Sinker Co. This could be used to settle some of the long-term debt. Bank loans have already decreased
by at least $50m. There is no information about the longterm loans of Sinker Co.
Gearing has been reduced during the year from 20.6% to 13.9% but, without further information on
Sinker Co’s non-current liabilities, it is very difficult to tell if this is a result of the disposal or whether Karl
Co has simply repaid debt during the year.
Conclusion
The inclusion of Sinker Co in the consolidated statement of profit or loss does not appear to have had an
adverse impact on revenue generation but, now that Karl Co has disposed of the poorly performing
subsidiary, it might be able to better control costs, thereby improving gross and operating profit margins.
Sinker Co appears to have been a drain on the liquidity of the group, and the position of the group
appears to be much healthier following the disposal of Sinker Co.
Marking scheme
Ratio calculations
Analysis
TOTAL
Page 16 of 87
Marks
5
8
13
Loudon Co
(a) Schedule of adjusted retained earnings of Loudon as at 30 September 20X8
$'000
Retained earnings per trial balance
Adjustments:
Add back issue costs of loan
Loan finance costs (W1)
Building depreciation (W2)
Impairment (W2)
Factory depreciation (W2)
Disposal gain on factory (W2)
Unwinding of discount on environmental provision ($1,228 x 5%)
Deferred tax adjustment (W3)
Adjusted retained earnings
4122
125
-390
-900
-3600
-3885
500
-61
-203
-4292
(b) Statement of financial position as at 30 September 20X8
Assets
Non-current assets
Property, plant and equipment ($11,500 + $22,015) (W2)
Current assets (per TB)
Total assets
Equity and liabilities
Equity
Equity shares $1 each (per TB)
Retained earnings (part (a))
Non-current liabilities
5% loan note (W1)
Environmental provision ($1,228 + $61 (part(a))
Deferred Taxation (W3)
33515
14700
48215
10000
-4292
5708
5015
1289
1703
8007
Current liabilities (per TB)
34500
Total equity and liabilities
48215
Workings
W1) Loan note
The issue costs should be deducted from the proceeds of the loan note and not charged
as an expense. This gives the loan note an opening carrying amount of $4,875,000
($5,000,000 - $125,000). The finance cost of the loan note, at the effective interest rate
of 8% applied to the carrying amount of the loan is $390,000. The actual interest paid is
$250,000 (see TB) which leaves a closing carrying amount of $5,015,000 for inclusion
as a non-current liability in the statement of financial position.
Opening balance 1 October 20X7
Finance costs 8% x ope Interest paid 5% Closing balance 30 Sep
ning balance
x principa
tember 20X8
$'000
$'000
$'000
$'000
Page 17 of 87
4,875
390
-250
W2) Non-current assets
Office Building
Carrying amount at 1 September 20X7 ($20,000 - $4,000)
Depreciation to 1 April 20X8 ($20,000/25 years x 6/12 months)
Carrying amount at 1 April 20X8
Impairment
Fair value at 1 April 20X8
Depreciation to 30 September 20X8 ($12,000/12 years x 6/12 months)
Factories
Carrying amount at 1 September 20X7 ($40,000 - $11,100)
Disposal at carrying amount
Carrying amount at 1 September 20X
8
Depreciation for the year to 30 September 20X8 ($25,900 x 15%)
Disposal of factory
Proceeds
Carrying amount
Gain in disposal
W3) Deferred Tax
Tax written down value of PPE at 30
September 20X8
Carrying amount of PPE at 30 Septe
mber 20X8 per SOFP
5015
$'000
16000
-400
15600
-3600
12000
-500
11500
28900
-3000
25900
-3885
22015
3500
-3000
500
25000
-33515
-8515
Deferred tax provision required at 30 September 20X8 ($8,515 x 20%)
Deferred tax provision at 30 September 20X7 (per TB)
Deferred tax charge for year ended 30 September 20X8
1703
-1500
203
Marking scheme
(a) Adjust profit
(b) SFP
TOTAL
Marks
8
12
20
Page 18 of 87
Plank Co
Part (a)
Consolidated statement of profit or loss and other comprehensive income for the year ended 31
December 20X8
$'000
Revenue
705,000 + (9/12 x 218,0 829,500
00) - 39,000
Cost of sales
Working 1
-346,000
Gross profit
483,500
Distribution costs
58,000 + (9/12 x 16,000 -70,000
)
Administrative expenses
92,000 + (9/12 x 28,000 -113,000
)
Investment income
Share of profit of associate
Working 2
30,300
Other income
46,000 + (9/12 x 2,000) 14,950
-5,000 - 12,250 15,300
Finance costs
12,000 + (9/12 x 14,000 -17,500
) - 5,000
Profit before tax
328,250
Income tax expense
51,500 + (9/12 x 15,000 -62,750
)
Profit for the year
265,500
Other comprehensive income:
Gain on revaluation of land
2,800 + 3,000
5,800
Total comprehensive income for the year
271,300
Profit attributable to Parent
(Total profit less NCI)
258,375
Profit attributable to NCI
Working 3
7,125
265,500
Total comprehensive income attributable to Parent
(Total profit less NCI)
263,725
Total comprehensive income attributable to NCI
Working 3
7,575
271,300
Workings
W1) Cost of sales
Plank Co
320,000
Strip Co
81,000 x 9/12
60,750
Intercompany purchases
-39,000
Additional depreciation on plant
$8 million / 3 years x 9/1 2,000
2
Unrealised profit adjustment
Plank to Strip
$39million x 1/4 x 30/13 2,250
0
346,000
W2) Income from associate
Share of profit after tax
$92.57m x 35%
32,400
Unrealised profit
$26m x 35% x 30/130 -2,100
30,300
W3) Share of profit/total comprehensive income to parent and NCI
Page 19 of 87
Strip post acquisition profit
Less: Additional depreciation on machinery
Plank to Arch
Total profit of NCI
Other comprehensive income
Total comprehensive income of NCI
9/12 x 66,000
x 15%
3,000 x 15%
49,500
-2,000
47,500
7,125
450
7,575
Part (b)
Investment in Associate
Carrying amount of investment at 31 December 20X7
Share of post-acquisition profits
$92.57 million x 35% (W2-part (a))
Dividends paid
$35 million x 35% (SOPL)
Unrealised profit adjustment
$26 million x 30/130 x 35% (W2-part (a))
Carrying amount at 31 December 20X8
Page 20 of 87
$'000
145,000
32,400
-12,250
-2,100
163,050
Fit Co
Part (a)
Ratio
Gross profit
Operating profit
Trade payables days
ROCE
Gearing
Fit Co
60,000/250,000*100%
24.00%
25,000/250,000*100%
10
35,000/190,000*365
67.24
25,000/(90,000+45,000)*100% 18.52%
45,000/90,000*100%
50.00%
Sporty
70,000/220,000*100%
31.82%
32,000/220,000*100%
14.55%
12,000/150,000* 365
29.20
32,000/(60,000+15,000)*100% 42.67%
15,000/60,000*100%
25.00%
Part (b)
Performance
As can be seen from the ratio calculations, Sporty Co has a higher gross profit margin than Fit Co, even
though it has lower revenue overall. The reason for this could be that Sporty Co sources its items direct
from the manufacturer, and so does not incur manufacturing costs.
Indeed, it is surprising that Fit Co has a lower GPM than Sporty Co given that it is selling premium
branded goods – it would be expected that such goods would be sold at a higher margin.
The difference could also be a result of the competition suffered by Fit Co in the year, which may have
led Fit Co to decrease its selling prices.
The gross profit margin of Fit Co may also fall further, as the gross profit margin of the Active division is
40%, which is much higher than Fit Co overall. Therefore, the underlying gross profit margin of the
remaining Fit Co business would be expected to be lower than that shown for the current year.
The operating profit for Sporty Co is 4% higher than Fit Co. This is not surprising given that Sporty Co’s
GPM is higher than that of Fit Co. On closer inspection, Fit Co’s OPM is inflated because of the nonrecurring $5m gain on disposal. In addition to this, Fit Co profit for 31 December 20X0 includes central
services income of $1.2m which will not recur following the disposal of the Active division. It is also worth
noting that Fit Co will have a higher cost base, which would be expected as it operates its own stores,
whereas Sporty Co uses department stores.
Sporty Co has a much higher return on capital employed than Fit Co, as it has a higher operating profit,
and lower long-term debt and equity.
Position
Fit Co has a gearing ratio twice that of Sporty Co, as it has much higher long-term debt. This makes Fit
Co a riskier business than Sporty Co, as it must meet these debt repayments or would face insolvency.
As the gearing for Sporty Co is much lower than that of Fit Co, Sporty Co should be able to secure debt
finance if needed for its planned international expansion.
Fit Co will incur much higher finance costs on its debt than Sporty Co, which is equity financed. Both
companies can currently cover interest payments from operating profits however the cash balance for Fit
Co is much lower than Sporty Co, which applies further pressure to Fit Co as it must meet high interest
payments. The current year interest payments for Fit Co exceed the cash balance at year-end, therefore
Fit Co must ensure that its cash interest payments are sustainable in the long term.
Trade payables days are 67 for Fit Co and 29 for Sporty Co. This is consistent with the fact that Fit Co
has a much lower cash balance than Sporty Co and shows that Fit Co are unable to pay suppliers
Page 21 of 87
quickly. This could lead to future problems with suppliers and shows that Fit Co needs to monitor its cash
balance to ensure it can continue to trade in the long term.
Conclusion
Overall, it would appear that Sporty Co is in a better financial position than Fit Co, as it is more profitable,
has lower debt, and should be able to access additional resources for its planned expansion.
Page 22 of 87
Bun Co
Part (a)
Inventory adjustment
The disposal of the inventory at a discounted price would be classified as an adjusting event in
accordance with IAS 10.
Retail price of the inventory = $1.5 million; GP margin 20% = $0·3 million
Closing inventory (currently credited to SOPL) = $1.2 million
Impact on profit or loss:
Cost of sales will increase by ($1.2 x 50% =) $0.6m to (70m + 0.6m =) $70·6 million.
Profit from operations will reduce to (13.16m – 0.6m =) $12.56 million.
Impact on financial position:
Inventory is written down to (3.96m – 0.6m =) $3.36 million
Equity will be reduced to (32.88m – 0.6m =) $32·28 million
Ratios
Ratio
Return on year-end capital employed
Operating profit margin
Inventory holding period days
Debt to equity (debt/equity)
Workings
12,560/(32,280 + 14,400) x 100
12,560/100,800 x 100%
3,360/70,600 x 365
14,400/32,280 x 100
Asset turnover
100,800/46,680
Buns Co Sector average
26·9%
18·6%
12·5%
8·6%
17·4 days
4 days
44·6%
80%
2·01
2·16
Part (b)
Analysis of financial performance
Profitability
The primary measure of profitability is the return on capital employed (ROCE) and this shows that Buns
Co (26·9%) is outperforming the sector (18·6%). The ROCE measures the operating profit relative to the
equity employed in the business. As a percentage, it would appear that Buns Co is 31% ((26·9 –
18·6)/26·9) more efficient that its competitors.
However, Bun Co’s capital employed includes its revaluation surplus. If Buns Co’s competitors did not
revalue their property, then the ratio is not directly comparable. Removing the impact of revaluation
surplus would increase ROCE to be even higher than the sector average.
There is little difference between the asset turnover of Buns Co and that of the sector, it would appear
that the main cause of ROCE over-performance is due to a significantly higher operating profit margin
(12·5% compared to 8·6%).
Offering meal deals is advisable, as the company can still afford to reduce its prices and still make a high
operating profit margin compared to the industry sector average. By offering meal deals at reduced
prices, Buns Co would look to increase their sales volume and therefore this may help them to control
and reduce inventory days.
Alternatively, it may be that Buns Co has better control over its costs (either direct or indirect costs or
both) than its competitors; for example, Buns Co may have lower operating costs.
Page 23 of 87
Inventory
Buns Co is taking significantly longer than its competitors to sell its inventory which is being held on
average for 17 days instead of 4 days as per the sector average. The main worry is that the inventory is
largely perishable.
Gearing
Buns Co’s debt to equity at 44·6% is lower than the sector average of 80%. This could be because Buns
Co acquired its property which has no associate finance.
There is a bank loan of $14·4m and, although the bank loan interest rate of 10% might appear quite
high, it is lower than the ROCE of 26·9% (which means shareholders are benefiting from the
borrowings).
Buns Co also has sufficient tangible non-current assets to give more than adequate security on any
future borrowings. Therefore there appears to be no adverse issues in relation to gearing.
Conclusion
Buns Co is right to be concerned about its declining profitability compared to previous years, but from the
analysis compared to the industry sector averages, it seems that Buns Co may be in a strong position.
The information shows that Buns Co has a much better profitability compared to the industry, but the
worrying issue is holding inventory (working capital management).
Buns Co should seriously consider the strategy of reducing their prices to enable them to sell more
inventory and reduce wastage.
Should Buns Co wish to raise finance in the future, it seems to be in a strong position to do so.
Part (c)
• It is unlikely that all the companies which have been included in the sector averages will use the
same accounting policies. In the example of Buns Co, it is apparent that it has revalued its
property; this will increase its capital employed and (probably) lower its gearing (compared to if it
did not revalue).
•
There could also be differences as Buns Co owns the shop, and yet other companies in the
sector may not own the freehold and may just rent the shop space. Dependent on how the
depreciation compares to the equivalent rate would lead to differences in the profits.
•
The accounting dates may not be the same for all the companies.
•
If the sector is exposed to seasonal trading (which could be likely if there are cakes made for
Christmas orders, large bread orders for Christmas and New Year parties), this could have a
significant impact on working capital based ratios.
•
It may be that the definitions of the ratios have not been consistent across all the companies
included in the sector averages (and for Buns Co). This may be a particular problem with ratios
like gearing.
•
Sector averages are just that: averages. Many of the companies included in the sector may not
be a good match to the type of business and strategy of Buns Co. This company not only has
bakery stores but cafés too and this may cause distortions if comparing to companies within the
sector who do not have the same facilities.
Page 24 of 87
Runner Co
Part (a)
Runner Co consolidated statement of financial position as at 31 March 20X5
$’000
Assets
Non-current assets
Property plant and equipment (455,800 + 44,700+ 9,000 (w1))
Investment
Goodwill (w2)
Current assets
Inventory (22,000 + 16,000 – 720 (w4))
Trade receivables (35,300 + 9,000 – 3,000 – 3,400)
Bank (2,800 + 1,500 + 3,000)
509,500
12,500
20,446
–––––––––
542,446
37,280
37,900
7,300
–––––––
Total assets
Equity and liabilities
Equity attributable to the owners of the parent
Equity shares of $1 each
Retained earnings (w5)
Total equity
Current liabilities (81,800 + 17,600 – 3,400)
Deferred consideration (19,446 + 1,554)
96,000
21,000
–––––––
Total equity and liabilities
Workings
(1) Net assets of Jogger Co
Share capital
Retained earnings
Fair value adjustment
Unrealised profit
Page 25 of 87
82,480
–––––––––
624,926
–––––––––
202,500
290,950
–––––––––
493,450
14,476
–––––––––
507,926
Non-controlling interest (w3)
Year-end
$’000
25,000
28,600
9,000
(720)
–––––––
61,880
–––––––
$’000
Aquisition
$’000
25,000
19,500
10,000
0
–––––––
54,500
–––––––
Post-aquisition
$’000
0
9,100
(1,000)
(720)
––––––
7,380
––––––
117,000
–––––––––
624,926
–––––––––
(2) Goodwill in Jogger Co
Cost of investment:
Cash
Deferred consideration (21,000 x 0·926)
$’000
$’000
42,500
19,446
–––––––
61,946
Non-controlling interest
Less: Net assets acquired (w1)
Goodwill
13,000
–––––––
74,946
(54,500)
–––––––
20,446
–––––––
(3) Non-controlling interest
NCI at acquisition
NCI share of post-acquisition reserves (7,380 x 20%)
$’000
13,000
1,476
–––––––
14,476
–––––––
(4) Intercompany transaction
Inventory held at year end
Unrealised profit (4,800 x 15%)
$’000
4,800
720
(5) Retained earnings
Runner Co
Runner Co’s share of Jogger Co’s post-acquisition RE (7,380 (w1) x 80%)
Unwinding discount on deferred consideration (21,000 – 19,446 (w1))
$’000
286,600
5,904
(1,554)
––––––––
290,950
––––––––
Part (b)
Runner Co has significant influence over Walker Co, therefore Walker Co should be treated as an
associate in the consolidated financial statements, using the equity method.
In the consolidated statement of financial position, the interest in the associate should be presented as
‘investment in associate’ as a single line under non-current assets.
The associate should initially be recognised at cost and subsequently adjusted each period for the
parent’s share of the post-acquisition change in net assets (retained earnings).
This figure should be reviewed for impairment at each year end.
Calculation:
Cost of investment
Share of post-acquisition change in net assets ((30,000 x 30%) = 9,000)
Page 26 of 87
$’000
13,000
(9,000)
–––––––
4,000
–––––––
Pirlo
Part (a)
(i) Extract from the Financial Statement of Pirlo.
Consideration received
Investment at cost
Gain on Disposal
300,000
(210,000)
90,000
(ii) Consolidated Financial Statements of the Pirlo Group.
Consideration received
- Goodwill
- Net Assets
+ NCI
300,000
(70,000)
(310,000)
66,000
Loss on the disposal
(14,000)
Part (b)
Key Ratios
Gross Profit Margin
Operating Margin
Interest Cover
20X9
20X8
45.8%
44.9%
(97,860 / 213,480) x 100
(97,310 / 216,820) x 100
11.9%
13.5%
(25,500 / 213,480) x 100
(29,170 / 216,820) x 100
1.43
1.8
(25,500 / 17,800)
(29,170 / 16,200)
Part (c)
Comment on the Performance:
The revenue of Pirlo group has declined over the past 12 months. The scenario in the question presents
a situation wherein the revenue for the Samba Co has stayed the same in both years. The performance
shown appears to show a decline from the remaining companies in the group.
There was an improvement in 20X9 in the operating profit margin of the group. The performance has
increased from 44.9% to 45.8%. Furthermore there has been an increase in the gross profit margin in
relation to the rest of the group. This furthermore suggests that the other companies in the Prilo group is
operating at a lower gross profit margin.
There has been a decrease in the operating profit margin for the group. This has decreased from 13.5%
down to 11.9%. The operating profit on the other hand has increased which is surprising at first. Two
major changes in the last year may help to account for this:
Page 27 of 87
-
The company recorded a $2M profit on the sale of properties. This is likely to be a one off
income and not likely to be repeated annually.
Samba Co was also charged a lower rate of rent which may not continue into the future.
There is a concern as well when the profit from the associate is considered. The share of profit from the
associate is $4.6M and this represents 40% of the profit for the year.
There are concerns for the overall profitability of the Pirlo group as they appear to be loss making overall
and this would bring into question the future going concern of the group unless financial performance
can improve.
There appears to be a reduction in the interest cover. This is been driven by the decrease in profit from
Operations and there has also been an increase in finance costs. The reduction in the interest cover
raises further concerns for the future of the company unless performances improve or the finance costs
can be lowered.
The decision to get rid of Samba Co is a little worrying as the company was generating strong financial
concerns. This raises questions around the ability of the management to make such financial decisions.
There may be an alternative strategic decision behind the sale of Salmba Co. The fact that Pirlo Co has
managed to secure the two founding directors may well be seen as a large coup for the company.
Conclusion
The decision to dispose of Samba does not appear to be a good fit for the business. The basis for this is
that Samba Co was a strong former financially. The move by Pirlo Co to start competing against Samba
Co can be seen to be high risk.
Page 28 of 87
Vernon
Part (a)
Statement of P/L and OCI.
Revenue W1
Cost of Sales
80,632
(46,410)
Gross Profit
Operating Expenses W2
34,222
(20,115)
Profit from Operations
Finance Costs
Investment income W3
14,107
(4,050)
6,118
Profit before Tax
Tax Expense W8
16,175
(3,330)
Profit for the year
12,845
Other Comprehensive Income
Gain on Revaluation W7
Total Comprehensive Income
9,000
21,845
* Workings
W1: 75,350 + 3,407 (w4) + 1,875 (w5)
W2: 20,640 - 125 (w5) - 400 (w6).
W3: 1,520 + 296 (w4) + 302 (w6) + 4000 (w7)
W4: Initial Revenue = (8M /1.08) $7.407M. $4M has been already recognised. This leaves the final
(7.407 - 4) $3,407M to recognised.
Furthermore the 7,407 should be increased by 8%. This will give rise to the final $8M. This is due in
June 20X9. Vernon has a year end on 21 Dec 20X8. We should recognise 6 months interest.
→ $7,407 x 8% x 6/12 = $296k. This would be added to finance income and receivables.
W5: Overseas Sale. This should be recorded at the historical rate at the date of the transaction. 12m
KR / 6.4 = $1,875. This is the figure to be used in Revenue and Receivables.
At the year end, ) 31 Dec 20X8, the unsettled balance should be retranslated at the new closing rate.
This gives a balance of $2M, The receivable now must be increased by 125k, the increase is
reflected in P/L.
W6: Bonds are assets and not to be expensed.
The Bonds are held at amortised:
Bal brought forward
9,400
Page 29 of 87
Int @ 8%
752
Payment
(450)
Bal Carried Forward
9,702
752K should be recorded at investment income. 450K has been recorded to date, this a further
302K must be added to the investment income.
W7: Revaluations Gain of $12M must be shown in OCI, net of $3M due to a deferred tax liability.
Gains on the investment property must go through P/L, not via the OCI.
W8: There is $130K in the trial balance. The $3.2m tax estimate should be added to calculate the
final tax expense for the year.
Part (b)
Earnings per Share
12,845,000 / 41,870,689 W1 = 30.7c
W1
Date
1/01
1/04
1/07
Number
30M
35M
49M
Rights Fraction
3.1/ 2.9
3.1/ 2.9
W2
Theoretical ex - rights price
5
2
7
at $3.1
at $2.4
TERP = 20.30 / 7 = $2.90
Page 30 of 87
$15.50
$4.80
$20.30
Period
3/12
3/12
6/12
W’ed Average
8,017,241
9,353,448
24,500,000
41,870,698
Perkins
Part (a)
Gain on disposal in Perkins group consolidated statement of profit or loss
$000
28,640
(4,300)
(26,100)
6,160
4,400
Proceeds
Less: Goodwill (w1)
Less: Net assets at disposal
Add: NCI at disposal (w2)
(w1) Goodwill
Consideration
NCI at acquisition
Less: Net assets at acquisition
$000
19,200
4,900
(19,800)
4,300
(w2) NCI at disposal
NCI at acquisition
NCI% x S post acquisition 20% x (26,100 – 19,800)
$000
4,900
1,260
6,160
Part (b)
Adjusted P/L extracts:
Revenue (46,220 – 9,000 (S x 8/12) + 1,000 (intra-group))
Cost of sales (23,980 – 4,400 (S x 8/12)) [see note]
Gross profit
Operating expenses (3,300 – 1,673 (S x 8/12) + 9,440 profit on disposal)
Profit from operations
Finance costs (960 – 800 (S x 8/12))
$000
38,220
(19,580)
18,640
(11,067)
7,573
(160)
Note: Originally, the intra-group sale resulted in $1m turnover and $0·7m costs of sales. These amounts
were recorded in the individual financial statements of Perkins Co. On consolidation, the $1m turnover
was eliminated – this needs to be added back. The corresponding $1m COS consolidation adjustment is
technically made to Swanson Co’s financial statements and so can be ignored here.
Part (c)
Ratios of Perkins Co, eliminating impact of Swanson Co and the disposal during the year
Gross profit margin
Operating margin
Interest cover
Page 31 of 87
20X7
recalculated
48·8%
19·8%
47·3 times
Working
(see P/L above)
18,640/38,220
7,573/38,220
7,573/160
20X7
original
48·1%
41%
19·7 times
20X6
44·8%
16·8%
3·5 times
Part (d)
Analysis of Perkins Co
Gross profit margin
In looking at the gross margin of Perkins Co, the underlying margin made by Perkins Co is higher than in
20X6.
After the removal of Swanson Co’s results, this continues to increase, despite Swanson Co having a
gross margin of over 50%.
It is possible that Swanson Co’s gross profit margin was artificially inflated by obtaining cheap supplies
from Perkins Co. Perkins Co makes a margin of 48·8%, but only sold goods to Swanson at 30%.
Operating margin
The operating margin appears to have increased significantly on the prior year. It must be noted that this
contains the profit on disposal of Swanson Co, which increases this significantly.
Removing the impact of the Swanson Co disposal still shows that the margin is improved on the prior
year, but it is much more in line.
Swanson Co’s operating margin is 32·6%, significantly higher than the margin earned by Perkins Co,
again suggesting that a profitable business has been sold. This is likely to be due to the fact that
Swanson Co was able to use Perkins Co’s facilities with no charge, meaning its operating expenses
were understated compared to the market prices.
It is likely that the rental income earned from the new tenant has helped to improve the operating margin,
and this should increase further once the tenant has been in for a full year.
Interest cover
Initially, the interest cover has shown good improvement in 20X7 compared to 20X6, as there has been
a significant increase in profits. Even with the profit on disposal stripped out, the interest cover would still
be very healthy.
Following the removal of Swanson Co, the interest cover is improved further. This may be because the
disposal of Swanson Co has allowed Perkins Co to repay debt and reduce the interest expense incurred
Conclusion
Swanson Co seems to have been a profitable company, which raises questions over the disposal.
However, some of these profits may have been derived from favourable terms with Perkins Co, such as
cheap supplies and free rental. It is worth noting that Perkins Co now has rental income in the year. This
should grow in future periods, as this is likely to be a full year’s income in future periods.
Page 32 of 87
Haverford
Part (a)
Adjustments to Harverford Co’s profit for the year ended 31 December 20X7
$000
2,250
(135)
5,600
(3,600)
(720)
(480)
390
3,305
Draft profit
Convertible loan notes (w1)
Contract revenue (w2)
Contract cost of sales (w2)
Depreciation (w4)
Property impairment (w4)
Closing inventories (w5)
Revised profit
Part (b)
Statement of changes in equity for the year ended 31 December 20X7
Share
capital
$000
Balance as at 1 January 20X7 20,000
Profit – from (a)
Revaluation loss (w4)
Bonus issue (w3)
4,000
Convertible loan notes issued
(w1)
Dividend paid
Balance as at 31 Dec 20X7
24,000
Page 33 of 87
OCE
$000
3,000
Retained
earnings
$000
6,270
3,305
Revaluation
surplus
$000
800
Option
$000
-
(800)
(3,000)
(1,000)
-
(3,620)
4,955
424
-
424
Part (c)
Statement of financial position for Haverford Co as at 31 December 20X7
$000
Assets
Non-current assets:
Property (w3)
Current assets:
Inventory (w5)
Trade receivables
Contract asset (w2)
Cash
Total assets
Equity and liabilities
Equity:
Share capital
Retained earnings
Convertible option
Total equity
Non-current liabilities:
Convertible loan notes (w1)
Current liabilities:
Total equity and liabilities
Working 1 – Convertible loan notes
Payment
$000
20X7
320
20X8
320
20X9
8,320
16,000
4,700
5,510
2,500
10,320
39,030
24,000
4,955
424
29,379
7,711
1,940
39,030
Discount rate
$000
0.943
0.890
0.840
Present value
$000
302
285
6,989
7,576
As the full amount of $8m has been taken to liabilities, adjustment required is:
Dr Liability
$424k
Cr Equity
$424k
The liability should then be held at amortised cost, using the effective interest rate.
Balance
b/f
$000
7,576
Interest
6%
$000
455
Payment
Payment
$000
(320)
As only $320k has been recorded in finance costs:
Dr Finance costs
$135k
Cr Liability
$135k
Page 34 of 87
Balance
c/f
$000
7,711
Working 2 – Contract with customer
Overall contract:
$000
14,000
(1,900)
(7,100)
5,000
Price
Costs to date
Costs to complete
Progress: 40%
Statement of profit or loss:
$000
5,600
(3,600)
2,000
Revenue ($14,000 x 40%)
Cost of sales ($9,000 x 40%)
Statement of financial position:
$000
1,900
2,000
(1,400)
2,500
Costs to date
Profit to date
Amount billed to date
$5.6m should be recorded in revenue, and $3.6m in cost of sales, giving an overall increase to the draft
profit of $2m. $2.5m should then be recorded in the statement of financial position as a current asset.
Working 3 – Bonus issue
The 1 for 5 bonus issue will lead to an increase in share capital of $4m ($20m x 1/5). Of this, $3m will be
debited to other components of equity to take it to zero. The remaining $1m will be deducted from
retained earnings.
Adjustment:
Dr Share premium
Dr Retained earnings
Cr Share capital
$3m
$1m
$4m
Working 4 – Property
The asset should first be depreciated. $18m/25 = $720k. This should be deducted from the draft profit
and the asset, giving a carrying amount of $17,280k.
Dr Draft profit
Cr Property
$720k
$720k
Then the asset should be revalued from $17,280k to $16,000k, giving a revaluation loss of $1,280k. As
the revaluation surplus is only $800k, only $800k can be debited to this, with the remaining $480k being
debited from the draft profit for the year.
Dr Revaluation surplus
Dr Draft profit
Cr Property
Page 35 of 87
$800k
$480k
$1,280k
Working 5 – Inventories
Closing inventories should be adjusted from $4,310k to $4,700k.
Dr Inventories
Cr Draft profit
Page 36 of 87
$390k
$390k
Duke
Solution:
a) Non-controlling interest and Retained earnings
$000
Non-controlling interest (W1)
3,740
Retained earnings (W2)
14,060
Working 1: Non-controlling interest
$000
NCI fair value at acquisition
3,400
NCI’s share of Smooth’s post-acquisition profits
(20% x $7m x 6/12)
700
NCI’s share of brand amortisation
(20% x $3m/5 x 6/12)
(60)
NCI’s share of unrealised profit from land sale
[20% x ($4m - $2.5m)]
(300)
3,740
Working 2: Retained earnings
$000
Duke retained earnings
13,200
Adjustment for professional fees
(500)
Duke’s share of Smooth’s post-acquisition profit
(80% x $7m x 6/12)
2,800
Duke’s share of brand amortisation
(80% x $3m/5 x 6/12)
(240)
Duke’s share of unrealised profit from land sale
[80% x ($4m - $2.5m)]
(1,200)
14,060
b) Ratios as at 30 June:
Current ratio
ROCE
Gearing (debt/equity)
Page 37 of 87
20X8
Working
20X7
Working
1.43
30,400/21,300
1.84
28,750/15,600
31.3%
14,500/(11,000 +
6,000 + 14,060 +
3,740 + 11,500)
11,500/(11,000 +
6,000 + 14,060 +
3,740)
48.1%
12,700/(8,000 + 2,000 +
9,400 + 7,000)
36.1%
7,000/(8,000 + 2,000 +
9,400)
33.0%
c) Performance
ROCE has declined from 48.1% for 20X7 to just 31.3% for 20X8. This is primarily due to the increase
in group capital employed (from $26.4 to $46.3m), which was partially caused by the fact that the
acquisition of Smooth was financed by an issue of Duke shares.
What is more, ROCE computed in respect of 20X8 looks especially depressed as only six months’
worth of Smooth’s operating earnings are included in the numerator of the ratio, whereas Smooth’s
year-end liabilities and non-controlling interest feature in full in the denominator.
Position
The current ratio has fallen from 1.84 to 1.43. Possible explanations for this include the fact that
Smooth operates in the provision of training and recruitment services. As such, it is unlikely to hold
significant inventory. This is further supported by the pronounced decrease in inventory holding
period. On the other hand, the receivables collection period has visibly gone up. This may once
again be explained by the nature of Smooth’s industry and its clients – presumably large entities with
preferential, i.e. long, payment terms. Although a longer collection period may put some strain on the
group’s cash flow, the size and financial stability of Smooth’s clients should ensure a high level of
debt recoverability.
The group’s gearing has dropped from a level of just over 36% to 33%. This is despite an increase in
the level of debt held, as the non-current liabilities of Smooth were added to Duke’s existing debt.
This growth was offset by a significant increase in equity, resulting from the issue of shares by Duke.
Conclusion
Smooth is a profitable business and is likely to have boosted Duke’s profits. Smooth may have
increased the group’s level of debt and put some pressure on cash flows but the group’s financial
position remains strong.
Page 38 of 87
Duggan
Solution:
a) Duggan Co - Statement of profit or loss for y/e 30 June 20X8
$000
Revenue (W1)
(43,200 + 2,700)
45,900
Cost of sales
(21,700 + 1,500 (W1))
(23,200)
Gross profit
22,700
Operating expenses
(13,520 + 120 (W2) – 8 (W3) + 900 (W4))
(14,532)
Profit from operations
8,168
Finance costs
(1,240 + 46 (W2) + 640 (W3) + 86 (W5))
(2,012)
Investment income
120
Profit before tax
6,276
Income tax expense
(2,100 – 130 (overprovision from last year) – (2,000 x 25%))
(1,470)
Net profit for the year
4,806
b) Duggan Co - Statement of changes in equity for y/e 30 June 20X8
Opening b/ce as at 1 July 20X7
Share
capital
$000
12,200
Share
premium
$000
-
33,800
Restated opening b/ce
1,500
1,800
180
Convertible loan note issue
4,806
Profit for the year (from a)
Closing b/ce as at at 30 June 20X8
Page 39 of 87
Conversion
option
$000
-
(1,600)
Prior year error correction (W4)
Share issue
[Premium = (2.20 – 1.00) x 1,500]
Retained
earnings
$000
35,400
13,700
1,800
38,606
180
c) Basic earnings per share:
$4,806k (from a) / 13,200k shares (W6) = $0.36 per share
Working 1: Contract
Revenue: (80% - 50%) x $9m = $2.7m
Cost of sales: (80% - 50%) x $5m = $1.5m
Working 2: Provision for court proceedings
Include provision for full $1.012m but discounted by one year at 10%: 1.012 x 0.9091 = $0.92m
The provision already made ($0.8m) must therefore be increased by $0.12m, which is charged to
operating expenses.
The subsequent unwinding of discount on the provision value (for half of the year) is charged to finance
cost: $0.92m x 10% x 6/12 = $46,000.
Working 3: Property construction
Of the $2.56m interest capitalised, only 9/12 should be included in initial asset value. The remaining 3/12
($640,000) should be taken to finance costs.
Initial asset value must therefore be reduced by $640,000, leading to a reduction in depreciation
expense (taken to operating expenses) equal to $640,000 / 20 years x 3/12 = $8,000.
Working 4: Fraudulent accounting discovered
Of the $2.5m error: $1.6m should be taken to opening equity (correction of prior period error), whereas
the remaining $0.9m ought to be charged to operating expenses.
Working 5: Convertible loan notes
The $5m proceeds from the issue of convertible loan notes should have been booked as follows (in
$000):
Dr
Cash 5,000
Cr
Liabilities 4,820 (300 x 0.926 + 5,300 x 0.857)
Cr
Equity 180 (5,000 – 4,820)
Interest expense for the year: $4,820k x 8% =$386k
Reported finance costs must therefore be increase by $86k ($386k required - $300k already recorded)
Working 6: Weighted average number of shares
From:
To:
1 July 20X7
1 November 20X7
1 November 20X7
30 June 20X8
Fraction of year
4/12
8/12
Weighted average: 4/12 x 12,200k + 8/12 x 13,700k = 13,200k
Page 40 of 87
Number of shares
12,200k
13,700k
Yogi
Requirement (a)
Ratios
2014
excluding division (i)
2015
as reported (ii)
2014
Given
Gross profit
margin
37.5%
(20,000 – 8,000)/(50,000 – 18,000)
33.3%
12,000/36,000
40.0%
Operating profit
margin
18.8%
(11,000 + 800 – 5,800)/(50,000 –
18,000)
10.3%
(4,300 + 400 – 1,000)/36,000
23.6%
ROCE
40.0%
(11,000 + 800 – 5,800)/(29,200 –
7,200 – 7,000*)
21.8%
(4,300 + 400 – 1,000)/(22,500
– 5,500)
53.6%
Net asset turnover
2.13 times
(50,000 – 18,000)/(29,200 – 7,200 –
7,000*)
2.12 times
36,000/(22,500 – 5,500)
2.27
times
* The $7 million adjustment to capital employed and net asset turnover reflects the capital employed/net
assets of the division sold: $8 million consideration less $1 million profit made on disposal.
Requirement (b)
Discussion
Yogi’s revenue, adjusted for the division sold, has grown from $32 million in 2014 to $36 million, i.e. by
$4 million. Despite this, the adjusted gross profit margin fell from 37.5% to 33.3%. It seems that the
division which was sold earned a gross profit margin of 44.4% (8,000 / 18,000) in 2014, so its sale has
had a detrimental effect on Yogi’s profitability. This has also had a knock-on effect on operating profit
margin, which, on an adjusted basis fell from a level of 18.8% in 2014 to just 10.3% in 2015.
Yogi’s performance as measured by ROCE (adjusted) has suffered a sharp fall from 40% in 2014 to
21.8% in 2015. Given the fact that asset utilisation, as measured by net asset turnover, has remained
almost flat, the drop is attributable to the deterioration in profitability discussed above.
Even though the company seems to have sold the best performing part of the business this does not
explain the deterioration in adjusted profitability ratios, which exclude the performance of the division for
the year 2014. Yogi’s management would be advised to investigate the disappointing performance of the
remaining business and whether this is linked to the sale of the division or other factors.
A controversial issue is the size of the dividend which was offered to Yogi’s shareholders so as to
persuade them to vote in favour of the disposal. The dividend amounted to $4 million (10 million shares x
40 cents) and was twice the size of Yogi’s 2015 profit for the year if the gain on disposal is excluded.
Another effect of the disposal is that Yogi seems to have used the disposal proceeds, after paying the
dividend, to pay down a significant portion of its loan notes. Given the fact that the cost associated with
the notes was just 10% and therefore much lower than the company’s return on capital employed,
eliminating this relatively cheap source of funding may have not been in the best interests of
shareholders.
Page 41 of 87
In summary, the decision to sell Yogi’s most profitable division may have been unwise, especially when
we take into account that the sale proceeds were not used to replace lost capacity or improve the
company’s long-term prospects.
Page 42 of 87
Cyclip
Part (a)
Bycomb: Goodwill on acquisition of Cyclip as at 1 July 2014
$’000
Investment at cost:
Shares (12,000 x 80% x 2/3 x $3·00)
Deferred consideration (12,000 x 80% x $1·54/1·1)
Non-controlling interest (12,000 x 20% x $2·50)
Net assets (based on equity) of Cyclip as at 1 July 2014
Equity shares
Retained earnings b/f at 1 April 2014
Earnings 1 April to acquisition:
[(2,400 + 100) x 3/12)] – see note below
Fair value adjustment to plant
Net assets at date of acquisition
Consolidated goodwill
$’000
19,200
13,440
6,000
38,640
12,000
13,500
625
720
(26,845)
11,795
Note: The profit for the year for Cyclip would be increased by $100,000 due to interest capitalised, in
accordance with IAS 23 Borrowing Costs. Alternatively, this could have been calculated as: 2400 x 3/12
+ 25. As the interest to be capitalised has accrued evenly throughout the year, $25,000 would relate to
pre-acquisition profits and $75,000 to post-acquisition profits.
Part (b)
Bycomb: Extracts from consolidated statement of profit or loss for the year ended 31 March 2015
(i) Revenue (24,200 + (10,800 x 9/12) – 3,000 intra-group sales)
(ii) Cost of sales (w (i))
(iii) Finance costs (w (ii))
(iv) Profit for year attributable to non-controlling interest (1,015 x 20% (w (iii)))
Page 43 of 87
$’000
29,300
(20,830)
(1,558)
203
Workings in $’000
(i) Cost of sales
Bycomb
Cyclip (6,800 x 9/12)
Intra-group purchases
URP in inventory (420 x 20/120)
Impairment of goodwill per question
Additional depreciation of plant (720 x 9/18 months)
(ii) Finance costs
Bycomb per question
Unwinding of deferred consideration (13,440 x 10% x 9/12)
Cyclip ((300 – 100 see below) x 9/12)
17,800
5,100
(3,000)
70
500
360
20,830
400
1,008
150
1,558
The interest capitalised in accordance with IAS 23 of $100,000 would reduce the finance costs of Cyclip
for consolidation purposes.
(iii) Post-acquisition profit of Cyclip
Profit plus interest capitalised and time apportioned
((2,400 + 100) x 9/12) – see note below
Impairment of goodwill (per question)
Additional depreciation of plant (w (i))
Note: This could also have been calculated as (2,400 x 9/12) + 75 (see 1(a) above).
Page 44 of 87
1,875
(500)
(360)
1,015
Xpand
Requirement (a)
The following adjustments to Hydan’s statement of profit or loss would be required to reflect the effects
of the purchase. This is based on the assumption that the buying of inventory on favourable terms would
cease.
$’000
50,000
2,500
1,000
Cost of sales (45,000/0.9)
Directors’ remuneration
Loan interest (10% x 10,000)
Revised statement of profit or loss:
$’000
70,000
(50,000)
20,000
(7,000)
(2,500)
(1,000)
9,500
(3,000)
6,500
Revenue
Cost of sales
Gross profit
Operating costs
Directors’ salaries
Loan interest
Profit before tax
Income tax expense
Profit for the tear
In the statement of financial position, the following adjustments would be made:
Equity (replaced by purchase price)
Director’s loan turned into debt
$’000
30,000
10,000
Ratios:
Return on equity (ROE)
Net asset turnover
Gross profit margin
Net profit margin
Hydan
Adjusted
21.7%
6,500/30,000
1.75 times
70,000/(30,000 + 10,000)
28.6%
20,000/70,000
9.3%
6,500/70,000
Hydan
as reported
Sector
average
47.1%
22.0%
2.36 times
1.67 times
35.7%
30.0%
20.0%
12.0%
Requirement (b)
Discussion:
Hydan’s profitability, as judged on ratios calculated on the basis of reported figures, reveals strong
performance relative to other companies from the same sector. Higher-than-average gross profit and net
profit margins as well as net asset turnover, lead to a return on equity which is more than twice the
sector average. However, when Hydan’s statement of profit or loss is adjusted for the effects of
favourable transactions with other companies owned by the same family, the picture changes
Page 45 of 87
significantly. Gross profit margin drops from 35.7% to a below-sector-average of 28.6%. The effects of
the favourable inventory purchases carry through to the level of net profit. What is more, the existing
directors of Hydan seem to earn a remuneration that is below commercial rates. When the upward
adjustment to directors’ salaries is taken into account, coupled with the interest that would need to be
charged on a commercial loan, Hydan’s net profit margin would drop to just 9.3% (from an existing level
of 20%), causing ROE to decrease to 21.7%, which is roughly in-line with the sector average.
A similar convergence to the sector average is observed when net asset turnover is calculated on the
basis of adjusted figures.
In summary, Hydan’s adjusted results are much closer to sector averages and far from the excellent
performance computed on the basis of reported figures.
Page 46 of 87
Quincy
Requirement (a)
Quincy – Statement of Comprehensive Income for the year ended 30 September 2012
$’000
Revenue (W1)
211,900
Cost of sales (W2)
(147,300)
Gross profit
64,600
Distribution costs
(12,500)
Administrative expenses (W4)
(18,000)
Loss on equity investments (17,000 – 15,700)
(1,300)
Investment income
400
Finance costs (W5)
(1,920)
Profit before tax
31,280
Income tax expense (W6)
(8,300)
Profit for the year
22,980
Other comprehensive income:
Gain on revaluation of land and buildings (W3)
18,000
Total comprehensive income
40,980
Requirement (b)
Quincy – Statement of Changes in Equity for the year ended 30 September 2012
Balance at 1 October 2011
Total comprehensive income
Transfer to retained earnings (W3)
Dividend paid (8 cents x 60,000 / 0.25)
Balance at 30 September 2012
Page 47 of 87
Equity
shares
$’000
60,000
60,000
Revaluation
reserve
$’000
18,000
(1,000)
17,000
Retained
earnings
$’000
18,500
22,980
1,000
(19,200)
23,280
Total
equity
$’000
78,500
40,980
(19,200)
100,280
Requirement (c)
Quincy – Statement of Financial Position as at 30 September 2012
Assets
$’000
$’000
Non-current assets
Property, plant and equipment (57,000 + 42,500)
99,500
Equity investments
15,700
115,200
Current assets
Inventory
24,800
Trade receivables
28,500
Bank
2,900
Total assets
56,200
171,400
Equity and liabilities
Equity
Equity shares
60,000
Revaluation reserve
17,000
Retained earnings
23,280
100,280
Non-current liabilities
Loan note (W5)
Deferred tax (5,000 x 20%)
Deferred revenue (1/2 x 1,600)
24,420
1,000
800
26,220
Current liabilities
Trade payables
Current tax payable
Deferred revenue (1/2 x 1,600)
36,700
7,400
800
44,900
171,400
Page 48 of 87
W1 – Revenue
$’000
213,500
(1,600)
Per trial balance
Less: deferred revenue (incl. 25% profit margin)
(600 x 100/75) x 2 years of servicing left
211,900
W2 – Cost of Sales
$’000
136,800
3,000
7,500
147,300
Per trial balance
Depreciation of buildings (W3)
Depreciation of plant and equipment (W3)
W3 – Non-Current Assets
Land and buildings:
The gain on the revaluation performed on 1 October 2012 may be computed as follows:
Land
Buildings
Total
Carrying amount as at 1
October 2011
$’000
10,000
40,000 – 8,000 = 32,000
42,000
Revalued amount as at 1
October 2011
$’000
12,000
48,000
60,000
Gain on
revaluation
$’000
2,000
16,000
18,000
The depreciation expense in respect of buildings for the year ended 30 September 2012 is:
48,000 / 16 years = 3,000
The amount of annual transfer from revaluation reserve to retained earnings is:
16,000 (gain on revaluation of buildings) / 16 years = 1,000
The carrying amount of Land and Buildings as at 30 September 2012 is:
60,000 – 3,000 = 57,000
Plant and equipment:
The depreciation expense in respect of plant and equipment for the year ended 30 September 2012 is:
(83,700 – 33,700) x 15% = 7,500
The carrying amount of Plant and Equipment as at 30 September 2012 is:
83,700 – 33,700 - 7,500 = 42,500
Page 49 of 87
W4 – Administrative Expenses
Per trial balance
Less: issue costs (these ought to be recognised as
an adjustment to the carrying amount of the loan
note liability)
$’000
19,000
(1,000)
18,000
W5 – Loan Note
The issue costs of $1 million (originally included in administrative expenses) ought to be deducted from
the loan proceeds, producing an initial carrying amount of $24 million. The effective interest rate of 8%
should be applied to this balance to produce the finance cost for the year: 8% x $24,000 = $1,920.
The carrying amount of the loan note as at 30 September 2012 is the result of increasing its opening
balance by the amount of interest cost incurred in respect of the year (1,920) and reducing it by the
amount of interest actually paid (6% x 25,000 = $1,500), i.e.:
Loan note balance as at 30 Sept 2012 = 24,000 + 1,920 – 1,500 = 24,420
W6 – Income Tax Expense
Current year income tax charge
Current tax under provision from previous year
Deferred tax credit to P&L
(5,000 x 20% - 1,1200)
$’000
7,400
1,100
(200)
8,300
Page 50 of 87
Plastik
(a) Consolidated statement of profit or loss and other comprehensive income for the year ended
30 September 2014
$’000
Revenue (62,600 – 300 x 9 months + 30,000 x 9/12)
Cost of sales (Working)
82,400
(61,320)
Gross profit
21,080
Distribution costs (2,000 + 1,200 x 9/12)
(2,900)
Administrative expenses (3,500 + 1,800 x 9/12 + 500)
(5,350)
Finance costs (200 + [(27.5c x 80% x 9,000)/1.1] x 10% x 9/12)
(335)
Profit before tax
12,495
Income tax expense (3,100 + 9/12 x 1,000)
(3,850)
Profit for the year
8,645
Other comprehensive income (1,500 + 600)
2,100
Total comprehensive income
10,745
Profit attributable to:
Equity holders of the parent (balancing figure)
Non-controlling interest [(2,000 x 9/12) – 100 – 500] x 20%
8,465
180
8,645
Total comprehensive income attributable to:
Equity holders of the parent (balancing figure)
Non-controlling interest: 180 + 20% x 600
10,445
300
10,745
Page 51 of 87
(b) Consolidated statement of financial position as at 30 September 2014
$’000
Assets
Non-current assets
Property, plant and equipment (18,700 + 13,900 + 4,000 + 600 – 100)
37,100
Goodwill (Working 3)
5,200
42,300
Current assets
Inventory (4,300 + 1,200 – 120)
5,380
Trade receivables (4,700 + 2,500 – 1,200)
6,000
Bank
300
11,680
Total assets
53,980
Equity and liabilities
Equity shares of $1 each (10,000 + 4,800)
14,800
Share premium [4.8 million shares x ($3 - $1)
9,600
Revaluation surplus (2,000 + 80% x 600)
2,480
Retained earnings (Working 5)
6,765
33,645
Non-controlling interest (Working 4)
4,800
Total equity
38,445
Non-current liabilities
10% loan notes
2,500
Current liabilities
Trade payables (3,400 + 3,600 – 800)
6,200
Current tax payable (2,800 + 800)
3,600
Deferred consideration (1,800 + 135)
1,935
Bank (1,700 – 400)
1,300
13,035
Total equity and liabilities
Page 52 of 87
53,980
(c) The recognition of separable intangibles assets is addressed by IFRS 3. The two items identified by
the directors in the acquisition of Dilemma should be recognised as separate intangible assets on the
acquisition of Dilemma. Both IFRS 3 Business Combinations and IAS 38 Intangible Assets require
in-process research in a business combination to be separately recognised at its fair value provided
this can be reliably measured ($1·2 million in this case). The recognition of customer list as an
intangible asset is a specific illustrative example given in IFRS 3 (IE 24) and should also be
recognised at its fair value of $3 million.
Workings (note figure in brackets are in $’000)
W1 - Cost of Sales
$’000
Plastik
45,800
Subtrak (24,000 x 9/12)
18,000
Intra-group transaction (300 x 9 months)
(2,700)
Unrealised profit in Subtrak’s inventory (600 x 25/125)
120
Additional depreciation
100
61,320
W2 – Subsidiary Net Assets
Acquisition
Consolidation
$’000
date
$’000
date
$’000
acquisition
Equity shares
9,000
9,000
-
Retained earnings
2,000
3,500
1,500
Fair value adjustments
4,000
4,600
600
-
(100)
(100)
15,000
17,000
2,000
Fair
value
adjustments
Page 53 of 87
depreciation
Post-
W3 – Goodwill
$’000
Investment by Plastik:
Share exchange (9,000 x 80% x 2/3 x $3)
14,400
Deferred consideration
1,800
NCI value at acquisition (1,800 shares x $2.5)
4,500
20,700
Less: Fair value of subsidiary’s net assets at acquisition (Working 2)
(15,000)
Goodwill at acquisition
5,700
Impairment as at 30 September 2014
(500)
Goodwill at 30 September 2014
5,200
W4 – NCI
$’000
NCI value at acquisition (working 3)
NCI’s share of consolidated comprehensive income
4,500
300
4,800
Alternatively:
$’000
NCI value at acquisition (working 3)
4,500
NCI’s share of post-acquisition reserves
400
(20% x 2,000)
NCI’s share of goodwill impairment (20% x 500)
(100)
4,800
Page 54 of 87
W5 - Consolidated Retained Earnings
$’000
Plastik retained earnings at 30 September 2014
Plastk profit for the year
Consolidated profit attributable to equity holders of the parent
6,300
(8,000)
8,465
6,765
Alternatively:
$’000
Plastik retained earnings at 30 September 2014
6,300
Unrealised profit
(120)
Unwinding of discount on deferred consideration
(135)
Post-acquisition RE less additional dep: W2 - 80% x (1,500 - 100)
1,120
Group’s share of goodwill impairment
(400)
(80% x 500)
6,765
Page 55 of 87
Enca
Requirement (a)
The requirements of IAS 16 Property, Plant and Equipment may, in part, offer a solution to the director’s
concerns. IAS 16 allows (but does not require) entities to revalue their property, plant and equipment to
fair value; however, it imposes conditions where an entity chooses to do this. First, where an item of
property, plant and equipment is revalued under the revaluation model of IAS 16, the whole class of
assets to which it belongs must also be revalued. This is to prevent what is known as ‘cherry picking’
where an entity might only wish to revalue items which have increased in value and leave other items at
their (depreciated) cost. Second, where an item of property, plant and equipment has been revalued, its
valuation (fair value) must be kept up-to-date. In practice, this means that, where the carrying amount of
the asset differs significantly from its fair value, a (new) revaluation should be carried out. Even if there
are no significant changes, assets should still be subject to a revaluation every three to five years.
A revaluation surplus (gain) should be credited to a revaluation surplus (reserve), via other
comprehensive income, whereas a revaluation deficit (loss) should be expensed immediately (assuming,
in both cases, no previous revaluation of the asset has taken place). A surplus on one asset cannot be
used to offset a deficit on a different asset (even in the same class of asset).
Subsequent to a revaluation, the asset should be depreciated based on its revalued amount (less any
estimated residual value) over its estimated remaining useful life, which should be reviewed annually
irrespective of whether it has been revalued.
An entity may choose to transfer annually an amount of the revaluation surplus relating to a revalued
asset to retained earnings corresponding to the ‘excess’ depreciation caused by an upwards revaluation.
Alternatively, it may transfer all of the relevant surplus at the time of the asset’s disposal.
The effect of this, on Enca’s financial statements, is that its statement of financial position will be
strengthened by reflecting the fair value of its property, plant and equipment. However, the downside
(from the director’s perspective) is that the depreciation charge will actually increase (as it will be based
on the higher fair value) and profits will be lower than using the cost model. Although the director may
not be happy with the higher depreciation, it is conceptually correct. The director has misunderstood the
purpose of depreciation; it is not meant to reflect the change (increase in this case) in the value of an
asset, but rather the cost of using up part of the asset’s remaining life.
Page 56 of 87
Requirement (b)(i)
Delta – Extracts from statement of profit or loss (see workings):
$’000
Year ended 31 March 2013
Plant impairment loss
Plant depreciation (32,000 + 22,400)
Year ended 31 March 2014
Loss on sale
Plant depreciation (32,000 + 26,000)
20,000
54,400
8,000
58,000
Requirement (b)(ii)
Delta – Extracts from statement of financial position (see workings):
$’000
As at 31 March 2013
Property, plant and equipment (128,000 + 89,600)
Revaluation surplus
Revaluation of item B (1 April 2012)
Transfer to retained earnings (32,000/5 years)
Balance at 31 March 2013
As at 31 March 2014
Property, plant and equipment (item A only)
Revaluation surplus
Balance at 1 April 2013
Transfer to retained earnings (asset now sold)
Balance at 31 March 2014
217,600
32,000
(6,400)
––––––––
25,600
––––––––
96,000
25,600
(25,600)
–––––––
nil
–––––––
Workings (figures in brackets in $'000)
Carrying amounts at 31 March 2012
Balance = loss to statement of profit or loss
Balance = gain to revaluation surplus
Revaluation on 1 April 2012
Depreciation year ended 31 March 2013 (160,000/5 years)
Carrying amount at 31 March 2013
Subsequent expenditure capitalised on 1 April 2013
Depreciation year ended 31 March 2014 (unchanged)
Item A
$’000
180,000
(20,000)
––––––––
32,000
––––––––
160,000
(32,000)
––––––––
128,000
nil
––––––––
(32,000)
––––––––
Sale proceeds on 31 March 2014
Loss on sale
Carrying amount at 31 March 2014
Page 57 of 87
96,000
––––––––
Item B
$’000
80,000
112,000
(22,400)
––––––––
89,600
14,400
––––––––
104,000
(26,000)
––––––––
78,000
(70,000)
––––––––
(8,000)
––––––––
nil
––––––––
Skeptic
i.
Changing the classification of an item of expense is an example of a change in accounting policy, in
accordance with FRS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Such a
change should only be made where it is required by an FRS or where it would lead to the information
in the financial statements being more reliable and relevant. It may be that this change does
represent an example of the latter, although it is arguable that amortised development costs should
continue to be included in cost of sales as amortisation only occurs when the benefits from the
related project(s) come on-stream. If it is accepted that this change does constitute a change of
accounting policy, then the proposed treatment by the directors is acceptable; however, the
comparative results for the year ended 31 March 2013 must be restated as if the new policy had
always been applied (known as retrospective application).
ii. The two provisions must be calculated on different bases because FRS 37 Provisions, Contingent
Liabilities and Contingent Assets distinguishes between a single obligation (the court case) and a
large population of items (the product warranty claims).
For the court case the most probable single likely outcome is normally considered to be the best
estimate of the liability, i.e. $4 million. This is particularly the case as the possible outcomes are
either side of this amount. The $4 million will be an expense for the year ended 31 March 2014 and
recognised as a provision. The provision for the product warranty claims should be calculated on an
expected value basis at $3.4 million (((75% x nil) + (20% x $25) + (10% x $120)) x 200,000 units).
This will also be an expense for the year ended 31 March 2014 and recognised as a current liability
(it is a one-year warranty scheme) in the statement of financial position as at 31 March 2014.
iii. Government grants related to non-current assets should be credited to the statement of profit or loss
over the life of the asset to which they relate, not in accordance with the schedule of any potential
repayment. The directors’ proposed treatment is implying that the government grant is a liability
which decreases over four years. This is not correct as there would only be a liability if the directors
intended to sell the related plant, which they do not. Thus in the year ended 31 March 2014,
$800,000 (8 million/10 years) should be credited to the statement of profit or loss and $7•.2 million
should be shown as deferred income ($800,000 current and $6.4 million non-current) in the
statement of financial position.
Page 58 of 87
Woodbank
Part (a) Note: Figures in the calculations of the ratios are in $million
(i) 2014
As reported
(ii) 2014
Excluding Shaw
2013
From
question
Return on (year end) capital
employed
12.0%
18/(175 –
25)
13.0%
(18 – 5)/(150 –
50)
10.5%
Net asset turnover
1.0
times
150/150
1.2
times
(150 – 30)/100
1.6 times
Gross profit margin
22.0%
33/150
20.0%
12.0%
18/150
10.8%
1.08:1
36.7%
27/25
55/(95 + 55)
Profit before interest and tax
margin
Current ratio
Gearing (debt/(debt + equity))
(33 – 9)/(150 –
30)
(18 – 5)/(150 –
30)
22.0%
9.1%
1.67:1
5.3%
Part (b) Analysis of the comparative financial performance and position of Woodbank for the year
ended 31 March 2014
Note: References to 2014 and 2013 should be taken as the years ended 31 March 2014 and 2013
respectively.
Introduction
When comparing a company’s current performance and position with the previous year (or years), using
trend analysis, it is necessary to take into account the effect of any circumstances which may create an
inconsistency in the comparison. In the case of Woodbank, the purchase of Shaw is an example of such
an inconsistency. 2014’s figures include, for a three-month period, the operating results of Shaw, and
Woodbank’s statement of financial position includes all of Shaw’s net assets (including goodwill) together
with the additional 10% loan notes used to finance the purchase of Shaw. None of these items were
included in the 2013 financial statements. The net assets of Shaw when purchased were $50 million,
which represents one third of Woodbank’s net assets (capital employed) as at 31 March 2014; thus it
represents a major investment for Woodbank and any analysis necessitates careful consideration of its
impact.
Profitability
ROCE is considered by many analysts to be the most important profitability ratio. A ROCE of 12·0% in
2014, compared to 10·5% in 2013, represents a creditable 14·3% (12·0 – 10·5)/10·5) improvement in
profitability. When ROCE is calculated excluding the contribution from Shaw, at 13·0%, it shows an even
more favourable performance. Although this comparison (13·0% from 10·5%) is valid, it would seem to
imply that the purchase of Shaw has had a detrimental effect on Woodbank’s ROCE. However, caution
is needed when interpreting this information as ROCE compares the return (profit for a period) to the
capital employed (equivalent to net assets at a single point in time). In the case of Woodbank, the
statement of profit or loss only includes three months’ results from Shaw whereas the statement of
financial position includes all of Shaw’s net assets; this is a form of inconsistency. It would be fair to
speculate that in future years, when a full year’s results from Shaw are reported, the ROCE effect of
Shaw will be favourable. Indeed, assuming a continuation of Shaw’s current level of performance, profit
in a full year could be $20 million. On an investment of $50 million, this represents a ROCE of 40%
(based on the initial capital employed) which is much higher than Woodbank’s pre-existing business.
The cause of the improvement in ROCE is revealed by consideration of the secondary profitability ratios:
asset turnover and profit margins. For Woodbank this reveals a complicated picture. Woodbank’s results,
as reported, show that it is the increase in the profit before interest and tax margin (12·0% from 9·1%)
which is responsible for the improvement in ROCE, as the asset turnover has actually decreased (1·0
Page 59 of 87
times from 1·16 times) and gross profit is exactly the same in both years (at 22·0%). When the effect of
the purchase of Shaw is excluded the position changes; the overall improvement in ROCE (13·0% from
10·5%) is caused by both an increase in profit margin (at the before interest and tax level, at 10·8% from
9·1%), despite a fall in gross profit (20·0% from 22·0%) and a very slight improvement in asset turnover
(1·2 times from 1·16 times). Summarising, this means that the purchase of Shaw has improved
Woodbank’s overall profit margins, but caused a fall in asset turnover. Again, as with the ROCE, this is
misleading because the calculation of asset turnover only includes three months’ revenue from Shaw,
but all of its net assets; when a full year of Shaw’s results are reported, asset turnover will be much
improved (assuming its three-months performance is continued).
Liquidity
The company’s liquidity position, as measured by the current ratio, has fallen considerably in 2014 and is
a cause for concern. At 1·67:1 in 2013, it was within the acceptable range (normally between 1·5:1 and
2·0:1); however, the 2014 ratio of 1·08:1 is very low, indeed it is more like what would be expected for
the quick ratio (acid test). Without needing to calculate the component ratios of the current ratio (for
inventory, receivables and payables), it can be seen from the statements of financial position that the
main causes of the deterioration in the liquidity position are the reduction in the cash (bank) position and
the dramatic increase in trade payables. The bank balance has fallen by $4·5 million (5,000 – 500) and
the trade payables have increased by $8 million.
An analysis of the movement in the retained earnings shows that Woodbank paid a dividend of $5·5
million (10,000 + 10,500 – 15,000) or 6·88 cents per share. It could be argued that during a period of
expansion, with demands on cash flow, dividends could be suspended or heavily curtailed. Had no
dividend been paid, the 2014 bank balance would be $6·0 million and the current ratio would have been
1·3:1 ((27,000 + 5,500):25,000). This would be still on the low side, but much more reassuring to credit
suppliers than the reported ratio of 1·08:1.
Gearing
The company has gone from a position of very modest gearing at 5·3% in 2013 to 36·7% in 2014. This
has largely been caused by the issue of the additional 10% loan notes to finance the purchase of Shaw.
Arguably, it might have been better if some of the finance had been raised from a share issue, but the
level of gearing is still acceptable and the financing cost of 10% should be more than covered by the
prospect of future high returns from Shaw, thus benefiting shareholders overall.
Conclusion
The overall operating performance of Woodbank has improved during the period (although the gross
profit margin on sales other than those made by Shaw has fallen) and this should be even more marked
next year when a full year’s results from Shaw will be reported (assuming that Shaw can maintain its
current performance). The changes in the financial position, particularly liquidity, are less favourable and
call into question the current dividend policy. Gearing has increased substantially, due to the financing of
the purchase of Shaw; however, it is still acceptable and has benefited shareholders. It is interesting to
note that of the $50 million purchase price, $30 million of this is represented by goodwill. Although this
may seem high, Shaw is certainly delivering in terms of generating revenue with good profit margins.
Page 60 of 87
X-tol
Part (a) – Xtol – Statement of profit or loss for the year ended 31 March 2014
$’000
Revenue (490,000 – 20,000 agency sales (w (i)))
470,000
Cost of sales (w (i))
(294,600)
Gross profit
175,400
Distribution costs
(33,500)
Administrative expenses
(36,800)
Other operating income – agency sales
2,000
Finance costs (900 overdraft + 3,676 (w (ii)))
(4,576)
Profit before tax
102,524
Income tax expense (28,000 + 3,200 + 3,700 (w (iii)))
(34,900)
Profit for the year
67,624
Part (b) – Xtol – Statement of changes in equity for the year ended 31 March 2014
Share capital
$’000
Equity options
$’000
Balance at 1 April 2013
42,600
Nil
Rights issue (see below)
38,400
5% loan note issue (w (ii))
26,080
4,050
Profit for the year
81,000
Total equity
$’000
68,680
38,400
Dividends paid (w (iv))
Balance at 31 March 2014
Retained earnings
$’000
4,050
4,050
(10,880)
(10,880)
67,624
67,624
82,824
167,874
The number of shares prior to the 2 for 5 rights issue was 160 million (i.e. 224,000 shares x 5/7).
Therefore the rights issue was 64 million shares at 60 cents each, giving additional share capital of $38.4
million.
Page 61 of 87
Part (c) – Xtol – Statement of financial position as at 31 March 2014
$’000
$’000
Assets
Non-current assets
Property, plant and equipment ((100,000 – 30,000) + (155,500 – 57,500))
168,000
Current assets
Inventory
61,000
Trade receivables
63,000
Total assets
124,000
292,000
Equity and liabilities
Equity (see (b) above)
Equity shares
81,000
Other component of equity – equity option
4,050
Retained earnings
82,824
167,874
Non-current liabilities
Deferred tax
5% convertible loan note (w (ii))
8,300
47,126
55,426
Current liabilities
Trade payables (32,200 + 3,000 re Francais (w (i)))
Bank overdraft
Current tax payable
Total equity and liabilities
35,200
5,500
28,000
68,700
292,000
Part (d) – Xtol – Basic earnings per share for the year ended 31 March 2014
Profit per statement of profit or loss
Weighted average number of shares (w (v))
Earnings per share ($67.624m/209.7m)
Page 62 of 87
$67.624 million
209.7 million
32.2 cents
Workings (figures in brackets in $’000)
(i)
Cost of sales (including the effect of agency sales on cost of sales and trade payables)
$’000
Cost of sales per question
290,600
Remove agency costs
(15,000)
Amortisation of leased property (100,000/20 years)
5,000
Depreciation of plant and equipment ((155,500 – 43,500) x 12½%)
14,000
294,600
The agency sales should be removed from revenue (debit $20 million) and their ‘cost’ from cost
of sales (credit $15 million). Instead, Xtol should report the commission earned of $2 million
(credit) as other operating income (or as revenue would be acceptable). This leaves a net
amount of $3 million ((20,000 – 15,000) – 2,000) owing to Francais as a trade payable.
(ii)
5% convertible loan note
The convertible loan note is a compound financial instrument having a debt and an equity
component which must be accounted for separately:
Year ended 31 March
Outflow
$’000
Present value
$’000
8%
2014
2,500
0.93
2,325
2015
2,500
0.86
2,150
2016
52,500
0.79
41,475
Debt component
45,950
Equity component (= balance)
4,050
Proceeds of issue
50,000
The finance cost for the year will be $3,676,000 (45,950 x 8%) and the carrying amount of the
loan as at 31 March 2014 will be $47,126,000 (45,950 + (3,676 – 2,500)).
(iii)
Deferred tax
$’000
Provision at 31 March 2014
Balance at 1 April 2013
Charge to statement of profit or loss
Page 63 of 87
8,300
(4,600)
3,700
(iv)
Dividends
The dividend paid on 30 May 2013 was $6.4 million (4 cents on 160 million shares) and the
dividend paid on 30 November 2013 (after the rights issue) was $4.48 million (2 cents on 224
million shares). Total dividends paid in the year were $10.88 million.
(v)
Number of shares outstanding (including the effect of the rights issue)
Theoretical ex-rights fair value:
Shares
Holiday (say)
Rights issue (2 or 5)
$
$
100
1.02
102
40
0.60
24
140
Theoretical ex-rights fair value
126
0.90
($126/140)
Weighted average number of shares:
1 April 2013 to 31 July 2013
1 August 2013 to 31 March 2014
Weighted average for year
Page 64 of 87
160 million x $1.02/$0.90 x 4/12 =
60.4 million
224 million x 8/12 =
149.3 million
209.7 million
Penketh
Requirement (a)
Consolidated goodwill as at 1 October 2013
$’000
Investment by Sphere :
Share exchange
(90 million shares x 1/3 x $4)
Deferred consideration
(90 million x $1.54 / 1.1)
NCI value at acquisition
[(150 – 90) million shares x $2.50]
120,000
126,000
150,000
396,000
Less: fair value of subsidiary’s net assets at acquisition (see Working – Subsidiary
net asset below)
Goodwill at acquisition
Group structure
Penketh
30%
90/150 = 60%
Ventor
Sphere
Acquisition date: 1 October 2013
Consolidation date: 31 March 2014 (6 months later)
Subsidiary net assets
Equity shares $1 each
Retained earnings
[120,000 + (80,000 x 6/12)]
Fair value adjustments
(2,000 + 6,000 + 5,000)
Acquisition date
$’000
150,000
160,000
13,000
323,000
Page 65 of 87
(323,000)
73,000
Requirement (b)
Penketh – Consolidated Statement of Profit or Loss and Other Comprehensive Income for the
year ended 31 March 2014
Revenue (Working – Revenue)
Cost of sales (Working – Cost of Sales)
Gross profit
Distribution costs (40,000 + 20,000 x 6/12)
Administrative expenses (Working – Admin expenses)
Investment income (Working – Investment income)
Finance costs (Working – Finance costs)
Share of associate’s profit (adjusted for unrealised profit)
[(30% x 10,000 x 6/12) – (30% x 15,000 x 25/125)]
Profit before tax
Income tax expense (45,000 + 6/12 x 31,000)
Profit for the year
Other comprehensive income
Gain / (Loss) on revaluation of land
[-2,200 + (3,000 – 2,000)]
Total comprehensive income
130,500
116,500
15,200
131,700
Total comprehensive income attributable to:
Equity holders of the parent (balancing figure)
Non-controlling interest: (Working – NCI)
114,900
15,600
130,500
Working – Revenue
$’000
620,000
(20,000)
155,000
755,000
Working – Cost of Sales
Penketh
Intragroup sales to Sphere
Unrealised profit in Sphere’s inventory*
Sphere (150,000 x 6/12)
Additional plant depreciation
(6,000/2 years x 6/12)
$’000
400,000
(20,000)
800
75,000
1,500
457,300
Page 66 of 87
192,200
(60,500)
131,700
(1,200)
Profit attributable to:
Equity holders of the parent (balancing figure)
Non-controlling interest (Working – NCI)
Penketh
Intragroup sales to Sphere
Sphere (310,000 x 6/12)
$’000
755,000
(457,300)
297,700
(50,000)
(49,000)
4,000
(11,100)
600
*The unrealised profit in Sphere’s inventory is computed as (all figures in $’000):
Profit on the sale of goods to Sphere: 20,000 x 25/125 = 4,000
Unrealised profit = 1/5 x 4,000 = 800
The unrealised profit on the sale of goods to Ventor is eliminated against Penketh’s share of the
associate’s profit for the year.
Working – Administrative expenses
Penketh
Sphere (25,000 x 6/12)
Amortisation of customer relationships
(5,000/5 years x 6/12)
$’000
36,000
12,500
500
49,000
Working – Investment income
Penketh
Dividend from Ventor (6,000 x 30%)
Sphere (1,600 x 6/12)
$’000
5,000
(1,800)
800
4,000
Working – Finance costs
Penketh
Sphere (5,600 x 6/12)
Unwinding of discount on deferred consideration
(10% x 126,000 x 6/12)
$’000
2,000
2,800
6,300
11,100
Working – Share of associate’s profit
Sphere (5,600 x 6/12)
Unwinding of discount on deferred consideration
(10% x 126,000 x 6/12)
$’000
2,000
2,800
6,300
11,100
Page 67 of 87
Working – NCI
NCI’s share of consolidated profit
Sphere’s post-acquisition profit (80,000 x 6/12)
Less: Additional depreciation of plant
Less:
Additional
amortisation
of
customer
relationships
Adjusted profit
$’000
40,000
(1,500)
(500)
38,000
x 40% = 15,200
NCI’s share of consolidated total comprehensive income
NCI’s share of consolidated profit (see above)
NCI’s share of OCI [(3,000 – 2,000) x 40%]
Page 68 of 87
$’000
15,200
400
15,600
Polestar
Requirement (a)
Polestar – Consolidated Statement of Profit or Loss for the year ended 30 September 2013
Revenue (Working - Revenue)
Cost of sales (Working - Cost of Sales)
Gross profit
Distribution costs (3,000 + 2,000 x 6/12)
Administrative expenses (5,250 + 2,400 x 6/12 – 3,400 [W3])
Fall in contingent consideration (1,800 – 1,500)
Loss on equity investments
Finance costs
Profit before tax
Income tax expense (3,500 - 6/12 x 1,000)
Profit for the year
Profit attributable to:
Equity holders of the parent (balancing figure)
Non-controlling interest (from Working 4): [- 600 – 150]
$’000
130,000
(109,300)
20,700
(4,000)
(3,050)
300
(200)
(250)
13,500
(3,000)
10,500
11,250
(750)
10,500
Requirement (b)
Polestar – Consolidated Statement of Financial Position as at 30 September 2013
$’000
Assets
Non-current assets
Property, plant and equipment
63,900
(41,000 + 21,000 + 2,000 – 100)
Financial assets
2,300
[16,000 – 13,500 (cash consideration: Working 2) – 200]
66,200
Current assets [16,500 + 4,800 – 600 (unrealised profit)]
Total assets
Equity and liabilities
Equity shares of 50c each
Retained earnings (Working 5)
Non-controlling interest (Working 4)
Total equity
Current liabilities
Contingent consideration
Other (15,000 + 7,800)
Total equity and liabilities
Page 69 of 87
20,700
86,900
30,000
29,750
59,750
2,850
62,600
1,500
22,800
24,300
86,900
Working 1 – Group structure
Polestar
75%
Southstar
Date of acquisition: 1 April 2013
Date of consolidation: 30 September 2013 (6 months after the acquisition)
Working 2 – Subsidiary net assets
Equity shares
Retained earnings
Fair value adjustments
Fair
value
adjustments
depreciation
Acquisition date
Consolidation date
$’000
$’000
6,000
14,300
[12,000 + (6/12 x
4,600)]
2,000
-
22,300
6,000
12,000
(2,300)
2,000
(100)
(2,000/10 years) x
6/12
19,900
(100)
Working 3 - Goodwill
$’000
Investment by Polestar:
Cash payment
[6,000 / 0.5) x $1.50 x 75%]
Contingent consideration
NCI value at acquisition
(6,000 / 0.5 x 25% x $1.20)
13,500
1,800
3,600
18,900
Less: fair value of subsidiary’s net assets at acquisition (Working 2)
Gain on bargain purchase (to P&L)
Working 4 – Non-controlling interest
NCI value at acquisition (working 3)
NCI’s share of post-acquisition reserves (25% x 2,400)
NCI’s share of unrealised profit (25% x 600)
Page 70 of 87
Postacquisition
$’000
$’000
3,600
(600)
(150)
2,850
(22,300)
(3,400)
(2,400)
Working 5 – Group retained earnings
$’000
28,500
(10,000)
11,250
Polestar retained earnings at 30 September 2013
Polestar profit for the year
Consolidated profit attributable to equity holders of
the parent (from P&L)
29,750
$’000
Alternatively:
Polestar retained earnings at 30 September 2013
Gain on bargain purchase
Loss on equity investments
Drop in contingent consideration
Group’s share of post-acquisition retained earnings
less additional depreciation - Working 2
75% x (2,400)
Group’s share of unrealised profit (75% x 600)
28,500
3,400
(200)
300
(1,800)
(450)
29,750
Irrespective of the method adopted for the purposes of computing goodwill, a gain on a bargain purchase
is always fully credited to the equity holders of the parent and accordingly to group retained earnings.
Working – Revenue
Polestar
Intragroup sales to Southstar
Southstar (66,000 x 6/12)
Intragroup sales to Polestar
$’000
110,000
(4,000)
33,000
(9,000)
130,000
Working – Cost of Sales
Polestar
Intragroup sales to Southstar
Southstar (67,200 x 6/12)
Intra-group sales to Polestar
Unrealised profit in Polestar’s inventory*
Additional depreciation
(2,000/10 years x 6/12)
$’000
88,000
(4,000)
33,600
(9,000)
600
100
109,300
*The unrealised profit in Polestar’s inventory is computed as (all figures in $’000):
Total profit on the sale of goods back to Polestar: 9,000 – (4,000 + 1,400) = 3,600
Unrealised profit = (1,500 / 9,000) x 3,600 = 600
Page 71 of 87
Kingdom
Page 72 of 87
Page 73 of 87
Page 74 of 87
Page 75 of 87
Speculate
Requirement (a)(i)
IAS 40 identifies investment property as land or buildings which are held for the purposes of generating
income from rent or for capital appreciation (or both purposes simultaneously) rather than for use in
production or administration. Another perspective is to think of investment properties as generating cash
flows which are largely independent from the remaining assets of the business whereas non-investment
property (classified under property, plant and equipment) will typically generate cash flows in
combination with other assets.
Requirement (a)(ii)
The revaluation and fair value models both require that properties be valued at their fair values. Under
the revaluation model, however, the revalued amount is subsequently adjusted to take account of
depreciation and possible impairment, which do not feature under the fair value approach.
What is more, increases in the revalued amount are reported as gains within other comprehensive
income. Losses are taken to the income statement unless they reverse a previous gain reported within
other comprehensive income.
In the case of investment property carried under the fair value model, all gains and losses are reported
within P&L.
Requirement (b)
Extracts from Speculate’s statement of profit or loss and other comprehensive income for the
year ended 31 March 2013
$’000
(50)
Depreciation (expense)
Gain on fair value increases
190
Other
(gain)
350
comprehensive
income
Property A: (2,000/20 years x 6/12) to account for the 6
months until reclassification to investment property
Property A: 2,340 – 2,300 = 40
Property B: 1,650 – 1,500 = 150
[2,300 – (2,000 – 50)] fair value
reclassification to investment property
increase
upon
Extracts from Speculate’s statement of financial position as at 31 March 2013
$’000
Non-current assets
Investment property
3,990
Equity
Revaluation reserve
350
(2,340 + 1,650)
[2,300 – (2,000 – 50)] fair value
reclassification to investment property
increase
upon
In Speculate’s consolidated financial statements property B would be classified as Property, plant and
equipment and therefore accounted for in accordance with IAS 16.
Page 76 of 87
Pulsar
Requirement (a)
IFRS 5 defines a discontinued operation as a component of an entity which has either already been
disposed of or is classified as held for sale and:
•
•
•
represent a separate major line of business or geographical area of operations,
is part of a coordinated plan to dispose of one of the above, or
is a subsidiary acquired exclusively with a view to resale.
The separate disclosure of the results generated from a discontinued operation is valuable to users of
financial statements when evaluating past performance and more importantly, when formulating
expectation for the future. For example, if before the year-end, a company disposed of a major lossmaking segment, an analyst should find the split into continued and discontinued operations useful when
generating earnings projections.
Requirement (b)
The decision to dispose of all of the company’s hotels in country A will probably give rise to classification
as a discontinued operation, based on the reasoning that country A represents a separate geographical
area of operation.
On the other hand, the refurbishment of hotels in country B may or may not give rise to treatment as a
discontinued operation. If the shift from business clients to the holiday and tourism market is deemed to
constitute a change in major line of business, then presenting the results previously generated by the
hotels would qualify for separate disclosure as a discontinued operation. On the other hand, if the move
is treated as a mere adaptation of an existing service, then such qualification would not apply.
Requirement (c)
Because a formal plan to close the factory was formulated, details of which were communicated to
interested parties, most notably the employees, a constructive obligation was created which leads to the
creation of a restructuring provision.
In Pulsar’s income statement for the year ended 31 March 2013, the following amounts should be
charged to expenses:
$’000
Redundancy costs
1,000 (5 x 200 employees)
Impairment loss on plant
1,750 [2,200 – (500 – 50)]
Onerous contract
850 (lower of the costs)
Penalty costs
200
3,800
Within the statement of financial position as at 31 March 2013, this amount will be split between a
downward adjustment to the carrying amount of plant ($1.75 million) and provisions recorded within
liabilities ($2.05 million). Furthermore, both the plant and factory should be reported under non-current
assets held for sale. The factory should be carried at its existing carrying amount, whereas the plant
ought to be measured at its fair value less cost to sell ($450,000).
Finally, the $125,000 of costs necessary to retrain the 50 remaining employees do not qualify to be
included within the provision as they relate to a future activity, as opposed to one which is being shut
down.
Page 77 of 87
Monty
Requirement (a)
Monty – Statement of cash flows for the year ended 31 March 2013
$’000
Cash flows from operating activities
Profit before tax
Adjustments for:
Depreciation of PPE
Amortisation of development expenditure
Finance costs
3,000
900
200
400
4,500
500
(750)
550
4,800
(400)
(425)
3,975
Decrease in inventory (3,800 – 3,300)
Increase in trade receivables (2,950 – 2,200)
Increase in trade payables (2,650 – 2,100)
Cash generated from operations
Interest paid
Income tax paid [Working 1]
Net cash from operating activities
Cash flows from investing activities
Purchase of PPE [Working 2]
Deferred development expenditure (1,000 + 200)
Net cash used in investing activities
(2,200)
(1,200)
(3,400)
Cash flows from financing activities
Redemption of loan notes (3,125 – 1,400)
Proceeds from bank loan
Repayment of bank loan [Working 3]
Dividends paid (1,750 + 2,000 – 3,200)
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of the period
Cash and cash equivalents at the end of the period
(1,725)
1,500
(1,050)
(550)
(1,825)
(1,250)
1,300
50
Working 1: Income tax paid
Current tax payable (opening b/ce)
Deferred tax liability (opening b/ce)
Income tax expense (from income statement)
Deferred tax on revaluation
Current tax payable (closing b/ce)
Deferred tax liability (closing b/ce)
Income tax paid
Working 2: Property, plant and equipment
Opening b/ce
Page 78 of 87
$’000
$’000
725
800
1,000
650
(1,250)
(1,500)
425
$’000
10,700
Revaluation
Depreciation
Closing b/ce
Cash purchases (incl. PPE acquired from loan proceeds)
2,000
(900)
(14,000)
(2,200)
Working 3: Bank loan
$’000
1,500
1,500
(1,950)
1,050
Opening b/ce (900 + 600)
New loan proceeds
Closing b/ce (1,200 + 750)
Loan repayment
Requirement (b)
Ratios
Return on capital
employed (ROCE)
Gross profit margin
Operating profit margin
Net asset turnover
Gearing
2013
2012
21.4%
(3,000 + 400)/(12,550 + 1,400 + 1,200
+ 750)
29.7%
9,200/31,000
11.0%
(3,000 + 400)/31,000
1.95 times
31,000/(21,300 – 1,250 – 2,650 –
1,500)
26.7%
(1,400 + 1,200 + 750)/12,550
16.7%
(2,050 + 350)/(9,750 + 3,125 + 900
+ 600)
25.6%
6,400/25,000
9.6%
(2,050 + 350)/25,000
1.74 times
25,000/(18,000 – 725 – 2,100 –
800)
47.4%
(3,125 + 900 + 600)/9,750
Monty’s return on capital employed has shown significant improvement, rising by more than 28%
[(21.4/16.7 – 1) x 100]. This growth would have been even bigger had the company not revalued its
property.
The increase in ROCE is mainly driven by improvements in gross profit margin, which also had a knockon effect on operating margins. The latter did not, however, exhibit such strong growth, due to the fact
that administrative expenses and distribution costs both increased at rates which were higher than the
growth in revenue.
Another contributor to Monty’s ROCE improvement was the more than 12% [(1.95/1.74 -1) x 100]
increase in asset utilisation as measured by net asset turnover. This is impressive growth, especially
considering the asset revaluation and mid-year investment in additional plant.
Finally, Monty repaid a significant portion of its 8% loan notes, substituting these with new bank loans,
whose balance increased by a net $450,000, leading to an overall drop in the amount of debt
outstanding. Coupled with the increase in equity, of which nearly half was derived from the property
revaluation, this led to a marked drop in the level of gearing.
Page 79 of 87
Shawler
Requirement (a)(i)
Extracts from Shawler’s statement of financial position as at 30 September 2012
Carrying
amount
$
Non-current assets
Furnace: main body
replaceable liner
Current liabilities
Government grant
Non-current liabilities
Government grant
Environmental provision
42,000
4,000
1,200
7,200
19,440
48,000 – (60,000/10 years)
6,000 – (10,000/5 years)
Equal to the amount which will be transferred to income
over the upcoming 12 months
8,400 – (12,000/10 years) transferred to current liabilities
(18,000 x 1.08) growth to reflect unwinding of discount
Requirement (a)(ii)
Extracts from Shawler’s income statement for the year ended 30 September 2012
Depreciation (expense)
Government grant (income)
Finance costs (expense)
$
(8,000)
1,200
(1,440)
(6,000 + 2,000)
(18,000 x 8%) unwinding of discount
Requirement (b)
Although the new legislation has already been passed, there are still two years left until it becomes
mandatory to fit filters. Nevertheless, a provision should not be made even if the company has the
intention of fitting the filters, as the passing of the legislation does not, on its own, constitute an obligating
event. Shawler may still avoid the cost of fitting the filters, for example by pulling out of certain segments
of its operations or shifting to a less-polluting production technology.
Until the filters are actually fitted, there should be no reduction in the amount of environmental provision.
Page 80 of 87
Viagem
Requirement (a)
Consolidated goodwill at the date of acquisition
$’000
Investment by Viagem:
Share exchange
(90% x 10,000 shares x 2/3 x $6.50)
Deferred consideration
(9,000 shares x $1.76 / 1.1)
NCI value at acquisition
(1,000 shares x $2.50)
39,000
14,400
2,500
55,900
Less: fair value of subsidiary’s net assets at acquisition (see Working – Subsidiary net
asset below)
Goodwill at the date of acquisition
Group structure
Viagem
90%
Greca
Acquisition date: 1 January 2012
Consolidation date: 30 September 2012 (9 months later)
Subsidiary net assets
Equity shares $1 each
Retained earnings
[35,000 + (6,200 x 3/12)]
Fair value adjustments
(1,800 - 450)
Acquisition date
$’000
10,000
36,550
1,350
47,900
Page 81 of 87
(47,900)
8,000
Requirement (b)
Viagem – Consolidated Income Statement for the year ended 30 September 2012
$’000
85,900
(64,250)
21,650
(2,950)
(7,600)
(1,500)
800
10,400
(4,000)
6,400
Revenue (Working – Revenue)
Cost of sales (Working – Cost of Sales)
Gross profit
Distribution costs (1,600 + 1,800 x 9/12)
Administrative expenses (Working – Admin expenses)
Finance costs (Working – Finance costs)
Share of associate’s profit (40% x 2,000)
Profit before tax
Income tax expense (2,800 + 9/12 x 1,600)
Profit for the year
Profit attributable to:
Equity holders of the parent (balancing figure)
Non-controlling interest (Working – NCI)
6,180
220
6,400
Working – Revenue
Viagem
Intragroup sales to Greca (9 months x 800)
Greca (38,000 x 9/12)
$’000
64,600
(7,200)
28,500
85,900
Working – Cost of Sales
Viagem
Intragroup sales to Greca
Unrealised profit in Greca’s inventory*
Greca (26,000 x 9/12)
Additional plant depreciation
(1,800/3 years x 9/12)
$’000
51,200
(7,200)
300
19,500
450
64,250
*The unrealised profit in Greca’s inventory is computed as (all figures in $’000):
Profit on the sale of goods to Greca: 7,200 x 25/125 = 1,440
Unrealised profit = 1.5/7.2 x 1,440 = 300
Working – Administrative expenses
Viagem
Greca (2,400 x 9/12)
Goodwill impairment
Page 82 of 87
$’000
3,800
1,800
2,000
7,600
Working – Finance costs
Viagem
Unwinding of discount on deferred consideration
(10% x 14,400 x 9/12)
$’000
420
1,080
1,500
Working – NCI
NCI’s share of consolidated profit
Greca’s post-acquisition profit (6,200 x 9/12)
Less: Additional depreciation of plant
Less: Impairment of goodwill
Adjusted profit
$’000
4,650
(450)
(2,000)
2,200
x 10% = 220
Requirement (c)
IFRS 3 requires that at the time of acquisition, the assets and liabilities of the target, including items of
property, be identified and recognised in the consolidated statement of financial position at their fair
values.
When an item of property undergoes a fair value adjustment upon incorporation in the consolidated
financial statements, this also triggers an adjustment to the amount of depreciation expense as charged
to consolidated P&L.
If the group follows a policy of measuring property under the historical cost approach, any subsequent
changes in fair value will not be reflected in the consolidated financial statements. The opposite is true if
the group adopts the revaluation model instead.
Page 83 of 87
Learning Co.
Remember:
Not all statements may be required to produce in other questions of such type. Also, statement of cash
flow may be asked to figure out in other questions. Required statements will be specified in question
directly.
Remember:
Use standard pro-formas for calculation of income statement and statement of financial position.
Statement of profit or loss and other comprehensive income for the year ended 31 December
2014
Workings:
Working 1 - Cost of sales
$’000
Purchases
2,152
Opening inventory
190
Subsidiary inventory sold during the year
34
Depreciation for the year, buildings $100,000 / 50
2
Depreciation - plant and equipment
36
Less: closing inventory
(220)
Cost of sales
2,194
Working 2 - Disposal - Plant and equipment
$’000
Sales proceeds
300
Less: net book value
(274)
Gain on sale
26
Working 3 - Administrative expenses
$’000
Page 84 of 87
Wages and salaries 254 + commission 20
274
Light and heat 31 - commission 20 + accrual 3
14
Sundry expenses 113 - prepayment 6
(9 x 8 / 12 months)
107
Audit fees accrual
4
Administrative expenses
399
Working 4 - Finance costs and % accrual
$’000
Charge for the year 200 x 10%
20
Less: interest paid
(10)
Accrual
10
Working 5 - Non-current assets: property, plant and equipment
(i) Land and buildings
Cost at 1.1.2014
430
Accumulated depreciation at 1.1.2014
(20)
Carrying amount at 1.1.2014
410
Depreciation for the year, buildings (Working 1)
(2)
Carrying amount at 31.12.2014
408
Revaluation surplus (ß) 800 - 408
392
Revalued amount at 31.12.2014
800
(ii) Plant and machinery
$’000
Cost at 1.1.2014
830
Accumulated depreciation at 1.1.2014
(222)
Carrying amount at 1.1.2014
608
Depreciation for the year, plant (Working 1)
(36)
Disposal (working 2)
(274)
Carrying amount at 31.12.2014
298
Total carrying value at 31.12.2014:
Page 85 of 87
$’000
1,098
Statement of financial position at 31 December 2014
Workings:
Working 6 - Goodwill on acquisition of Mary & Co
$’000
Consideration
285
Less: net assets
(265)
Goodwill on acquisition
20
The equity instruments totalling $231,000 were still held by Learning at 31.12.2014 as per note (c).
Working 7 - Equity accounts:
(i) Share issue
$’000
Page 86 of 87
Share issue proceeds
120
Less: nominal value
(100,000 ordinary shares 50c each)
(50)
Share premium on issue
(70)
(ii) Statement of changes in equity for the year ended 31 December 2014
Working 8 - Accruals
$’000
Page 87 of 87
Light and heat (Working 3)
3
Audit fees (Working 3)
4
Finance costs (Working 4)
10
Accruals
17