FAR IFRS 2020 errata sheet PDF

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Financial Accounting and Reporting errata sheet 2020 QUESTION BANK Errata and clarifications Answer to Q3 Temera The asset (£18,000) involved in the R&D may capitalise the depreciation of the asset from 1 July to 30 November as development costs (once economically viable). Before this date, the depreciation is expensed (as Research) and from 1 Dec (product launched) as depreciation on the working non-current asset. Therefore, the following changes should be noted in the answer: £ Trial balance Less amounts charged to profit or loss Prior to 1 July 2012 Staff training Promotional spend

£ 115,000

28,000 8,000 10,000 (46,000)

Depreciation development equipment (6,000 (W6)  5/12) (1 July - 30 November) Intangible asset at 30 November 2012 Amortisation (71,500/4yrs  4/12)

2,500 71,500 (5,958) 65,542 The R&D amortisation taken to the P&L is £5,958 (not £6,125), the depreciation charge development equipment is £3,500 (not £1,500), making the Other Operating Costs of £86,018. Profit is revised to £116,043 (not £117,876). Revising total intangible assets in the SOFP £72,082 (from £73,915).

Question 4 Dedlock Note 6 should read as follows: "A provision needs to made for dismantling one of Dedlock Ltd's retail units and returning the site to its original condition." The total of the SOPL should read "£195,050" (RE is correct)

Answer Q8 Laderas (8.2)/ Working 5 The right-of -use asset should be initially measured as the initial measurement of the lease liability plus any payments made in advance: Lease liability (4,000/1.06) + (4,000/1.062) = 7,334 Advance payment = 4,000 Right-of-use asset =11,334 Year ended

Balance b/f

Payment

30.9.15 30.9.16

7,334 7,774

(4,000)

Financial Accounting and Reporting IFRS 2020 errata sheet 060720.docx

Capital balance remaining 7,334 3,774

Finance cost @ 6% 440 226

Balance c/f 7,774 4,000

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Current liability = £4,000 (this is the lease payment due to be paid on 1.10.15) Non-current liability = £7,774 - £4,000 = £3,774 (this is capital balance remaining after the lease payment made on 1.10.15).

Question 14 Arenas Ltd Note 6 should read: The present value of the future lease payments was £31,990.

Answer to Q19 Helier plc Statement of profit or loss for the year ended 30 September 2007 (extracts) Operating expenses (300 (W1) + 10,000 + 5,000 (W2)) Finance costs (400,000  3%  1/12 (W2) + 420,077 (W3)) Depreciation (775 (W2) + 280,052 (W3))

£ (15,300) (421,077) (280,827)

Statement of cash flows for the year ended 30 September 2007 (extracts) £ Cash flows from operating activities Interest paid (1,000 (W2) + 420,077 (W3)) Cash flows from investing activities Purchase of property, plant and equipment (W2) Cash flows from financing activities Payment under lease ((610,400 - 420,077))+200)

(421,077) (436,000) (190,523)

Answer to Q20 Cristanos 20.1.1 Statement of profit or loss for year ended 30 June 2009 (extracts relating to the maintenance contract only) £ Revenue High technology fittings (85,000 x (85,000 / 93,000)) 77,688 Maintenance income (85,000 x (8,000 / 93,000) x 3/24 914 Cost of sales (45,000+35,000) x 50% (40,000) Current liabilities Deferred income (7.312 x 12/24) Non-current liabilities Deferred income (7,312 x 9/24)

3,656 2,742

Answer to Q21 Ticktoe (issue 2). The statement of financial position as at 30 June 2010 will contain £100,000 of deferred grant income remaining (not £50,000 as currently stated).

Answer to Q22 Bainsford The method is correct, but the rounding on some of the numbers due to discount factors means that the correct answers are as follows: PVFLP is £348,927 The annual payments of £185,000 are made in arrears at the end of year 1 and year 2 of the lease. These payments are discounted at the rate of interest implicit in the lease to give the present value of the future lease payments on commencement of the lease. This is the approach required per IFRS 16, para 26. “ At the commencement date, a lessee shall measure the lease liability at the present value of the lease

Financial Accounting and Reporting IFRS 2020 errata sheet 060720.docx

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payments that are not paid at that date. The lease payments shall be discounted using the interest rate implicit in the lease” For clarity, the calculation is shown below Year 1 2

Payment 185,000 185,000

Discount factor @ 4% 0.9615 0.9246

Present value future lease payments

Present value 177,878 171,051 348,929

There is a minor (£2) rounding difference to the amount shown as the PVFLP in the solution, but this is due to working with discount tables and does not represent an error Right-of-use asset is £85,187 (depreciation is £42,594 (85,187/2 years) (22.1 (a)) Statement of financial position (revised) £ Non-current assets Right of use asset (W3)

42,594

Current assets (275,850 + 9,600 (W1) – 3,000 (W2))

282,450

Current liabilities (141,700 + 177,884 (W3))

319,584

(22.1 (b)) Statement of profit or loss (revised) Draft profit before tax Increase in raw materials Decrease in finished goods Finance costs (W3) Sale and leaseback adjustment (375,000 – 111,260) Depreciation on right of use asset

£ 497,300 9,600 (3,000) (13,957) (263,740) (42,594) 183,609

(W4) Calculation of sale and leaseback: Gain on the sale (based on fair value) = £900,000 - £775,000 = £125,000 Gain relating to the rights retained: 125,000 x 98,927/900,000=£13,740 Gain relating to the rights transferred: 125,000-13,740=£111,260 (22.2) Therefore, the adjustment to profit is £313,691 (497,300-183,609) which is a profit reduction of 37%

Question to Q25 Papillion Ltd: Q25(3): The question should state: The present value of future lease payments at 1 January 2016, based on an annual interest rate of 5% is £43,571. This excludes the initial payment of £16,000 made on 1 January 2016. Answer to Q25 Papillion Ltd: (25.3) Interest on lease = 59,571-16,000 = 43,571 x 5% = 2,179 [The working is added to demonstrate how the numbers are derived]

Answer to Q38 Altima (38.2) Retained earnings (per part 38.1) Additional impairment re Tacoma Ltd (21,000  25%)

Financial Accounting and Reporting IFRS 2020 errata sheet 060720.docx

501,810 (5,250) 496,560

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Answer to Q45 Millomops In the answer to 45.1 the statement should read as follows: "The combined impact of the correction of the accounting treatment for the sale and leaseback transaction on the financial statements of HoPe Ltd and Millomops plc group is a reduction in profit of £1,495,819 (see working in 45.2)" 45.2 Consolidated total comprehensive income for the MilloMops plc Group for the year ended 31 March 2011 £ MilloMops plc (draft) 12,500,000 Sale of shares in RoPa Ltd Reversal of proceeds (11,000,000) Profit on disposal for consolidation purposes 5,700,000 HoPe Ltd (W) 4,181 Depreciation adjustment 88,025 Consolidated total comprehensive income for the year 7,292,206 WORKING Total comprehensive income of HoPe Ltd Per draft Sale and leaseback Remove sale proceeds Depreciation Recognise gain on rights transferred Lease finance cost Reverse lease payment Total comprehensive income of HoPe Ltd

£

£ 1,500,000

(1,800,000) (134,165) 193,344 (114,998) 360,000 (1,495,819) 4,181

There is a note following the table above which states the following: Note: As MilloMops has disposed of its only subsidiary, it will not need to prepare a consolidated statement of financial position but will need to prepare total comprehensive income to reflect the profit on disposal. This note is incorrect and should be ignored as MilloMops plc still has HoPe Ltd as a subsidiary at the reporting date.

Question 48 Advent Changes to the question are shown in red : "On 1 July 2011, Advent plc entered into a new contract in respect of its head office building. The contract met the definition of a lease under IFRS 16, Leases. Advent plc has recognised the lease payment of £12,000 made on 30 June 2012 in administrative costs. The £3,000 incentive payment has been included within revenue."

Answer to 48 Advent (48.2): Changes to the answer are shown in red: "Therefore, depreciation of £9,240 (£46,200/5 years) will be expensed to the statement of profit or loss." The calculation of the lease liability is as follows:

Financial Accounting and Reporting IFRS 2020 errata sheet 060720.docx

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Year ended

B/fwd

Finance cost @ 7%

Lease payment

C/fwd

£

£

£

£

30 June 2012

49,200

3,444

(12,000)

40,644

30 June 2013

40,644

2,845

(12,000)

31,489

Non-current liability is the balance outstanding at 30 June 2013 = £31,489 Current liability is the capital amount to be paid in the next 12 months = £9,155 (£40,644 - £31,489) Answer to (48.4): Remove the comment regarding the 'lease incentive adjustment is attributable to Advent..' The distributable reserves are therefore: 2,370,000 - 162,500 - 157,075 - 3,000 - 9,240 - 3,444 + 12,000 = £2,046,741

Answer to Q49 Nickelby Depreciation adjustment journal should read £163,350. The statement 'ignore adjustments required in 56.1' should refer to 49.1

Question and answer to Q51 Meitner The wording in respect of the sale and leaseback arrangement in note 2 should read: "The present value of the future lease payments not paid on the commencement date of the lease is £1,300,950 and the interest rate implicit in the lease is 3%." As the leaseback commenced on 1 July 20X4, only 9 months of interest will apply to the leaseback arrangement in the first period. The interest calculated therefore requires to be pro-rated accordingly. The correct answer is as follows: Bfwd

Payment (advance)

Interest 3% x 9/12

Cfwd

£

£

£

£

1,300,950

(0)

29,271

1,330,221

Profit before tax £ £ 1,460,000 (250,000) (804,214) (127,010) (29,271) 15,250 (164,997) 2,619 – (18,750)

Equity £ 2,600,180

(1,376,373) 83,627

(1,376,373) 563,807

The adjustment to profit before tax is as follows:

Draft (1) Deferred income (2) Other income (1,500,000 - 695,786) (2) Depreciation expense (2) Interest expense (3) Reversal of depreciation - Ostwald (3) Impairment – Dirac (3) Reversal of excess depreciation – Dirac (4) Treasury shares (5) Irredeemable preference shares

Financial Accounting and Reporting IFRS 2020 errata sheet 060720.docx

(210,000) (450,000)

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Answer to Q50 Limerick Carrying amount of the asset should read £1,966,829. Please note that journals are not required to be compiled by students, they are only there to give tutorial assistance. IAS 1 requires that the lease liability should be split between creditors falling due within one year and creditors falling due after one year, therefore, students would gain credit for this in their answer.

Answer to Q54 Naples As the depreciation in respect of the £20,000 asset may be allocated to the development costs for the period 1 April - 31 August, the following journals may be applied However, the depreciation on the machine can be charged to development costs from the point when the capitalisation criteria were met on 31 March 2015 to the point where development is complete (31 August). The amount to be charged to development costs will be (20,000/4 × 5/12) = £2,083. The capitalised development expenditure should therefore be the development costs incurred from 1 April 2015 plus the depreciation on the machine, giving a carrying amount of £227,083 (225,000 + 2,083). The cost of intangible assets should be decreased by £163,417 (390,500 – £227,083) and a tangible non-current asset of £20,000 capitalised. To correct this the journal entries should be: £ 20,000 143,417

DR Tangible non-current asset DR Profit or loss account CR Intangible assets – cost

£

£163,417

An intangible asset with a finite useful life, as here, should be amortised over its expected useful life. Luigi should therefore have charged amortisation for four months of the current year, over an expected three-year useful life, a charge of £25,231 (£227,083  4/36). The journal entries are: DR Amortisation charge CR Intangible assets – accumulated amortisation

£ £25,231

£ £25,231

The carrying amount of intangible assets at 31 December 2015 will therefore be £201,852 (£227,083 – £25,231).

Question to Q60 Calrose p.95, the figure for Plant and machinery cost should be £756,800 in the trial balance. Answer to Q60 Calrose p.339 should read "Calrose Ltd's distributable profits will therefore be £549,714 (517,614+32,100) [£517,614 is retained earnings restated and £32,100 is given in part 60.3 of the question]

Answer to Q 70 Linguine Ltd Working 6 (retained earnings) contains an error. The corrected working is shown below. (6) Retained earnings Cash (β) C/d

£ 443,300 3,560,800 4,004,100

B/d PPE (β) Profit for the year

£ 2,968,500 1,035,600 4,004,100

Question Q73 Peony. The question states that 'The present value of future lease payments is £68,880 as of the inception date'. The PVFLP excludes the initial £16,800 (ie it is the future lease payments)

Financial Accounting and Reporting IFRS 2020 errata sheet 060720.docx

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Answer to Q73.2 Peony The column total should read £448,181

Question Q76 Grouper Ltd: The trial balance is missing administrative expenses of £349,860 and trade payables of £160,300

Answer to Q80 Burator The cost of sales figure in the statement of profit or loss should read £869,249 which corresponds with the working (W1). The figures in the rest of the statement are correct.

Question 83 Chelker Total for column Ogston Ltd profit for the year should read £121,800

STUDY MANUAL Errata and clarifications Chapter 6 Self test Q12 Airphone. The following information is required to answer the question; Analysis of similar past promotions shows that on average subscribers use only 1,200 MB over the year, with 400 MB used evenly over the first six months and 800 MB used evenly over the second six months

Chapter 7 p313: s.2.1 the right- of-use asset is measured including 'any lease payments made before and on the commencement date, less any lease incentives' p316 s3.1 should state 'The amount to be recorded in this way is the present value of future lease payments at the inception of the lease' p.318 Worked example: Lease payments in advance (solution). The lease liability will not include the initial £10,000, therefore the PVFLP will be £17,350. Solution The lease liability is measured at the present value of the future payments: 1 January 20X2 £10,000/1.10

9,090

1 January 20X3 £10,000/1.102

8,260

Present value of future lease payments

17,350

Financial Accounting and Reporting IFRS 2020 errata sheet 060720.docx

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Lease liability

20X1 20X2 20X3

CR Balance b/f 1 Jan £ 17,350 19,085 9,994 46,429

DR Payment 1 Jan £ (10,000) (10,000) 20,000

CR Capital balance remaining 31 Dec £ 17,350 9,085 –

CR Interest accrued @ 10% 31 Dec £ 1,735 909 – 2,644

CR Balance c/f 31 Dec £ 19,085 9,994 –

Worked example: Sale and leaseback not at market rates (p.323-324) In Step 3, the lease liability of £913,640 should be split between the lease liability of £713,640 and financial liability £200,000. This is because it is reflecting the additional financing of £200,000 (effectively a loan) due to the excess paid by the purchaser above fair value (£1.2m-£1m). Leasing Question 6 The carrying amount of the right-of-use asset at 31 December 20X6 is £999,675 Leasing Question 10 Astley Sale and leaseback, proceeds below fair value £ DR Cash DR Prepayment (W1) DR Right of use asset CR PPE CR Lease liability (W2) CR Gain on rights transferred

£ 3,850,000 150,000 1,207,394 3,400,000 1,420,463 386,931

(W1) Proceeds below fair value = £4,000,000 - £3,850,000 (W2) PVFLP £1,270,463 + prepayment £150,000 Note that the prepayment is meant to represent an advance payment against the lease liability (by having accepted less money up front on sale). As such we would expect the lease payments to be lower than they would have been had the proceeds been at FV, and hence the PV of lease payments on their own understates the liability. The total contribution towards the lease is therefore the prepayment up front plus the PV of the subsequent lease rentals. Right of use asset = CA x Lease liability/FV = £3,400,000 x £1,420,463/£4,000,000 Gain on rights transferred = (FV – CA) x ((FV – Lease liability)/FV) = (£4,000,000 - £3,400,000) x ((£4,000,000 - £1,420,463)/£4,000,000) Option 1, Stage 3: References to this stage should show the gain as £386,931 as in the calculation above. Finally, a word on the treatment of lease payments made in advance - the payment in advance is added to the right-of-use asset measurement; but - the payment in advance is excluded from the calculation of the lease liability at year end

Financial Accounting and Reporting IFRS 2020 errata sheet 060720.docx

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