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ACCA Paper F7 Financial Reporting September 2017 to June 2018 Final Assessment – Answers

To gain maximum benefit, do not refer to these answers until you have completed the final assessment questions and submitted them for marking.

ACCA F7: FIN ANCIAL R E P OR TING

© Kaplan Financial Limited, 2017 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing. 2

K AP L AN P U B L ISH IN G

FINAL ASSE SSME NT ANSW E R S

SECTION A 1

C In order to be classified as held for sale, the following conditions must be met: –

The asset must be available for immediate sale in its present condition

–

Management are committed to a plan to sell the asset

–

There is an active programme to locate a buyer

–

The asset is being actively marketed

–

The sale is expected to be completed within 12 months of classification as held for sale

–

It is unlikely that the plan will be significantly changed or withdrawn

Although it should be unlikely that the plan will be significantly changed or withdrawn, sometimes the sale may not happen due to factors beyond the control of the entity. Therefore, the asset does not definitely have to be sold. The asset must be being currently marketed in order to be held for sale.

2

D The liability element of convertible bonds is valued at the present value of the interest and debt payments, discounted at a rate of interest for a similar instrument with no conversion option, in this case 7%. The annual interest paid is based on the nominal rate of 5%, which is $12,500 ($250,000 × 5%) annually. Discounted at 7%, the value of the liability is as follows: Discount Factor 0.93

Present Value 11,625

12,500

0.87

10,875

262,500

0.82

215,250

Time 1

Interest

Cashflow 12,500

2

Interest

3

Interest and capital

Liability

237,750

The equity component of a convertible is the balancing figure once the liability component has been valued. As the liability component has been valued at $237,750, and the total proceeds of the issue of the convertible bond are $250,000, the equity element must therefore be valued at $250,000 – $237,750 = $12,250

3

B According to IAS8 a material error and change in accounting policy require retrospective application and restatement of the Financial Statements, while a change in accounting estimate is applied prospectively (going forward).

K AP L AN P U B L ISH IN G

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ACCA F7: FIN ANCIAL R E P OR TING

4

C Investment properties are valued at current market values when the fair value model is used. Therefore the property should be valued at $3,250,000. The gain or loss is taken directly to the statement of profit or loss. When the fair value model is used for investment properties, no depreciation is charged on them.

5

A The grant income is released to the profit or loss account over the life of the asset, which is 12 years. Therefore each year $2,500 ($30,000/12) is released to the statement of profit or loss. After two years, which is 30 June 20X4, the deferred income balance is $25,000 ($30,000 – ($2,500 × 2))

6

D There are $2m 50c shares in issue at the start of 20X4, giving 4 million shares in issue. For market value issues of shares we calculate a weighted average in the year of issue. Bonus issues are treated as if the shares were issued at the same time as the original shares. A bonus issue of 1 for 5 means that 900,000 (4.5m × 1/5) additional shares were issued. We can apply a bonus fraction of 6/5 to allow for the bonus issue. The weighted average share calculation is as follows:

b/f Market value issue

1:5 Bonus issue

No of shares 4,000,000 500,000 –––––––– 4,500,000 900,000 –––––––– 5,400,000 ––––––––

Period of the year 4/12

Bonus Fraction 6/5

8/12 Total

Weighted Average 1,600,000

3,600,000 –––––––– 5,200,000 ––––––––

If you chose A, you used the value of the shares of $2 million rather than the number of shares, which is 4 million. If you chose B, you used the value of the shares of $2 million rather than the number of shares which is 4 million, and applied the bonus fraction to all periods. If you chose C, you treated the market issue as 250,000 shares rather than 500,000 shares.

4

K AP L AN P U B L ISH IN G

FINAL ASSE SSME NT ANSW E R S

7

A Only current year impairments are recognised in the consolidated statement of profit or loss. Goodwill: Cost of Investment Fair Value of NCI at acquisition Less: Fair Value of Net Assets Goodwill at acquisition Impairment year ended 30 June 20X5 (20%) Goodwill as at 30 June 20X5

10% impairment year ended 30 June 20X6

8

$ 2,000,000 500,000 (1,750,000) ––––––––– 750,000 (150,000) ––––––––– 600,000 ––––––––– 60,000 –––––––––

B Despite the fall in cash, QW appears to be expanding due to the large cash outflow in investing activities. QW is not facing liquidity problems as there is a substantial cash balance at the year end. Whilst the cash from operating activities is positive, it doesn’t necessarily mean QW have made a profit. Non-cash items, such as depreciation and amortisation, would have been added back to the profit figure, and there could also have been a positive cash impact from movements in working capital.

9

D The increase in the payables payment period will have had a positive impact on the cash position, as this cash will not yet have been paid.

10

C Although holding the majority of shares in the investee may be a situation which leads to control, it is not included within the definition of control per IFRS 10.

11

D

12

D All of the listed examples are advantages except (iv) as a principles-based framework recognises that it is not possible to draw up a set of rules to cover every eventuality and therefore does not attempt to do so.

K AP L AN P U B L ISH IN G

5

ACCA F7: FIN ANCIAL R E P OR TING

13

B Head Office

Revaluation Surplus

$000

$000

1 January 20X5

21,000

7,000

4 years depreciation/transfer (4/35)

(2,400)

(800)

–––––––

–––––––

1 January 20X9 carrying amount

18,600

6,200

Impairment (balancing figure)

(7,600)

(6,200)

–––––––

–––––––

11,000 –––––––

–––––––

Annual depreciation = $21m/35 years = $600,000 Annual reserves transfer = $7m/35 years = $200,000 On 1 January 20X9 the carrying amount of the asset is $18.6m and the revaluation surplus is $6.2m. When the head office is revalued to $11m, this creates a loss of $7.6m. Of this, $6.2m will be debited to the revaluation surplus, leaving $1.4m to be taken to the statement of profit or loss.

14

B The total consideration is made up as follows: Shares issued Cash paid Deferred cash Total

(500,000 × $3.50) ($1,000,000/1.092)

$000 1,750 408 842 ––––– 3,000 –––––

The professional fees are excluded from consideration.

15

B Biological assets should be revalued to fair value less point of sale costs at the year-end, with the gain or loss being taken to the statement of profit or loss. At year-end the cattle would be 2 years old, so the cattle should be revalued to the value of a 2 year-old herd of cattle, less commission of 5%.

6

K AP L AN P U B L ISH IN G

FINAL ASSE SSME NT ANSW E R S

SECTION B 16

B Items are more verifiable under historical cost, as the amount can be confirmed by examining the amount paid for an asset.

17

B Level 3 inputs do include the best information available, but this is not regarded as the most reliable evidence of fair value, as this is likely to be level 1 inputs.

18

D Annual interest on loan is $900,000 ($10m × 9%) and construction takes place for 8 months from 1 March to 1 November. Interest capitalised is therefore $600,000 ($900,000 × 8/12). The interest earned on the temporary investment of surplus funds during the construction period must be netted off this amount to give the total to be capitalised. The amount earned during this two-month period (1 Mar to 30 Apr) is $16,667 ($2m × 5% × 2/12). Therefore the amount to be capitalised = $600,000 - $16,667 = $583,333. Any interest incurred or earned before construction begins should be taken to the statement of profit or loss as finance costs or investment income.

19

D The $2 million loss should be taken to the statement of profit or loss as an expense, meaning that a gain of $26 million should be recorded in the revaluation surplus. From this, the reserves transfer will mean that an additional $2.6 million ($26m/10) is transferred into retained earnings each year. Therefore the balance on the revaluation surplus will be $23.4 million at 31 December 20X7.

20

C If Vendo uses the revaluation model for its properties, all properties must be revalued, but not all non-current assets. Vendo must keep revaluations up to date, but there is no defined time period for what this means in IAS 16 Property, Plant and Equipment.

K AP L AN P U B L ISH IN G

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ACCA F7: FIN ANCIAL R E P OR TING

21

B Contract price Total contract cost Estimated total profit

$ 8,000,000 (5,000,000) ––––––––– 3,000,000 –––––––––

Progress 40% Profit = 3,000,000 x 40%

Statement of financial position Costs to date Profit to date as above Less: Amount billed Contract asset

22

1,200,000 –––––––––

2,000,000 1,200,000 (1,500,000) ––––––––– 1,700,000 –––––––––

A Contract price Total contract cost Estimated total loss

7,000,000 (9,000,000) ––––––––– (2,000,000) –––––––––

To be recognised in full

Progress 60% Statement of profit or loss Revenue (60% × 7,000,000) Cost of sales (balancing figure) Full loss to be recognised

23

4,200,000 (6,200,000) ––––––––– (2,000,000) –––––––––

C When the progress of a contract cannot be measured reliably, revenue should be recognised to the level of recoverable costs, which is the $100,000 costs incurred to date.

24

D

25

D Revenue of $1 million should be recognised, with the other $4 million held in payables. It is incorrect to recognise $5 million in revenue and $4 million in cost of sales.

8

K AP L AN P U B L ISH IN G

FINAL ASSE SSME NT ANSW E R S

26

A

Cash paid (bal fig) c/f

27

29

8,824 627 ––––– 9,451 –––––

B Tax paid b/f (108 + 250) 496 SPL charge 534 ––––– 1,030 –––––

––––– 1,030 –––––

Property, plant and equipment b/f 13,918 Finance lease assets 960 Disposal Cash paid (bal fig) 4,586 Depreciation c/f ––––– 19,464 –––––

965 2,395 16,104 ––––– 19,464 –––––

Cash paid (bal fig) c/f (234 + 300)

28

Retained earnings b/f 500 Profit for year 8,951 ––––– 9,451 –––––

358 672

A

A Both depreciation and loss on disposal are non-cash expenses, so both must be added to profit from operations in calculating the cash generated from operations.

30

B Lease liabilities repaid are shown within financing activities, with the interest paid being shown within operating activities.

K AP L AN P U B L ISH IN G

9

ACCA F7: FIN ANCIAL R E P OR TING

SECTION C 31

BARTLETT

Key answer tips When asked to produce an analysis, the answers should be written in brief paragraphs, making no more than one or two points per paragraph. The points made should always refer to the scenario, as generic statements (such as gross profit has decreased, meaning either sales price has gone down or cost of sales have gone up) rarely score any marks. Complete the ratio calculations as quickly as possible, ensuring that you show your workings. While the ratios are relatively easy marks, it is not uncommon for people to score nothing for analysis due to poor time management. (a)

Ratio calculations Gross profit margin Operating profit margin Current ratio Quick (Acid test) ratio Inventory days Receivable days Payables days

(b)

20X5 28%

20X4 30.2%

(2,860/10,200) × 100%

(3,870/12,800) × 100%

0.9%

14.3%

(90/10,200) × 100%

(1,830/12,800) × 100%

3:1

2.9:1

2,680/900

2,190/750

1.8:1

1.9:1

1,580/900

1,390/750

55 days

33 days

1,100/7,340 × 365

800/8,930 × 365

56 days

35 days

1,560/10,200 × 365

1,240/12,800 × 365

45 days

31 days

900/7,340 × 365

750/8,930 × 365

Analysis of the performance and position of Bartlett Performance Revenue has declined significantly, by over 20%. This is likely to be due to the negative press coverage and the resulting boycott. This negativity may also be affecting the success of CoolYo, but it is difficult to judge the success of this new product without a further breakdown of sales. Also, CoolYo was only taken up by supermarkets during April, so has only had six months of sales so far. It may be that the revenue will improve once CoolYo contributes a full year of sales. The gross profit margin has deteriorated. It may be that Bartlett has been forced to reduce the price in order to maintain sales in the face of its declining reputation. Following the negative press coverage the ingredients have been altered, which will potentially have led to higher cost of sales.

10

K AP L AN P U B L ISH IN G

FINAL ASSE SSME NT ANSW E R S

The outsourcing of production will have impacted the gross profit margin. Usually outsourcing is cheaper, but Bartlett may have actually paid more for using the specialist factory following the changes in production method. The introduction of CoolYo is likely to be at a different margin to the rest of the products. Following lengthy negotiations with the supermarkets, it may be that Bartlett have had to offer the product at low prices initially. The operating margin has fallen to nearly zero, so Bartlett is struggling to break even. The new website is likely to have had significant initial set-up costs, many of which may have been expensed through administrative expenses, which have increased by 30% on 20X4. Additionally, it is likely that the launch of CoolYo will include significant advertising expenses which will be included here, probably within distribution costs which have increased by 46% on 20X4. Both this and the website costs are likely to be higher in this initial year as Bartlett seeks to establish CoolYo as a product. The introduction of online sales will lead to increased delivery costs going forward as Bartlett now sell goods directly to the public. This will be an ongoing expense, and Bartlett are likely to incur further costs in relation to this as fuel prices rise and additional vehicles are required. Position The current and quick ratios are both comparable with the prior year. However, inventory, receivables and payables have all increased significantly during the year, while the cash balance has fallen. Inventory The increase in inventory days is a concern, mainly because Bartlett sells goods which are perishable and therefore have a limited shelf life. This increase could signify that there are large amounts of ice cream unsold following the protests, which could lead to a large write-off. The increase could also be due to the launch of CoolYo, and Bartlett may be gearing up for a big marketing push with the new product and the new online sales. Receivables The increase in receivable days is surprising. The introduction of the website means that customers will pay up front, which should decrease the receivables days. The increase in the balance is therefore likely to be due to tough negotiations with the supermarkets, who may have demanded improved credit terms in order to take CoolYo. Payables The payable days have also increased. The outsourcing of production is likely to mean that Bartlett is now invoiced for production costs rather than paying staff directly. Therefore there may be a payable in 20X5 that did not exist in 20X4. The rise in payable days may also be linked to the low cash balance. This low balance may mean that Bartlett is struggling to pay its suppliers, which could be a serious cause for concern.

K AP L AN P U B L ISH IN G

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ACCA F7: FIN ANCIAL R E P OR TING

Cash The decrease in cash is a significant concern, especially when one considers that Bartlett increased its borrowings by $200,000 this year. While cash is likely to have been required for the website and perhaps changes in production methods, it appears that Bartlett is not in a strong liquidity position. Conclusion Bartlett appears to be going through a difficult time. There has been a significant negative impact from the press reports in the year which seem to have damaged the operating performance and cash flow. Bartlett is attempting to turn this round by launching new products and new routes to market. However, there is a risk that Bartlett does not have sufficient cash to see these ambitious plans through, which casts serious doubt over their ability to continue as a going concern. Marking scheme Marks General commentary One mark per ratio One mark per relevant comment

7 13 –––

Total

32

20 –––

PACKER AND SCOTT

Key answer tips Remembering to time-apportion the figures in the statement of profit or loss is vital here, otherwise this can cost quite a lot of marks. Forgetting to time-apportion the post-acquisition depreciation or the intra-group sales is a very common mistake. Items such as share exchange and fair value adjustments are extremely common and should be areas to score well on. (a)

Extract from Packer consolidated statement of profit or loss for the year ended 30 September 20X4 $000 Reven...