Dip IFR

Diploma in
International
Financial Reporting
Thursday 10 June 2010

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

This paper is divided into two sections:

Do NOT open this paper until instructed by the supervisor.

The Association of Chartered Certified Accountants

1 Alpha holds investments in two other entities, Beta and Gamma. The statements of financial position of the three
entities at 31 March 2010 were as follows:
Alpha Beta Gamma
$’000 $’000 $’000
ASSETS
Non-current assets:
Property, plant and equipment (Note 1) 135,000 100,000 110,000
Investments (Notes 1 and 2) 139,000 15,000 Nil
–––––––– –––––––– ––––––––
274,000 115,000 110,000
–––––––– –––––––– ––––––––
Current assets:
Inventories (Note 4) 45,000 32,000 27,000
Trade receivables (Note 5) 50,000 34,000 35,000
Cash and cash equivalents 10,000 4,000 8,000
–––––––– –––––––– ––––––––
105,000 70,000 70,000
–––––––– –––––––– ––––––––
Total assets 379,000 185,000 180,000
––––––––
–––––––– ––––––––
–––––––– ––––––––
––––––––
EQUITY AND LIABILITIES
Equity
Share capital ($1 shares) 120,000 80,000 60,000
Retained earnings 163,000 44,000 55,000
–––––––– –––––––– ––––––––
Total equity 283,000 124,000 115,000
–––––––– –––––––– ––––––––
Non-current liabilities:
Long-term borrowings 40,000 25,000 30,000
Deferred tax 20,000 8,000 10,000
–––––––– –––––––– ––––––––
Total non-current liabilities 60,000 33,000 40,000
–––––––– –––––––– ––––––––
Current liabilities:
Trade and other payables 30,000 22,000 20,000
Short-term borrowings 6,000 6,000 5,000
–––––––– –––––––– ––––––––
Total current liabilities 36,000 28,000 25,000
–––––––– –––––––– ––––––––
Total equity and liabilities 379,000 185,000 180,000
––––––––
–––––––– ––––––––
–––––––– ––––––––
––––––––
Note 1 – Alpha’s investment in Beta:
On 1 April 2009 Alpha purchased 60 million shares in Beta for an immediate cash payment of $100 million. The
retained earnings of Beta at 1 April 2009 were $35 million.
It is the group policy to value the non-controlling interest in subsidiaries at the date of acquisition at fair value. The fair
value of an equity share in Beta at 1 April 2009 was estimated at $1·70. This fair value is considered by the directors
of Alpha to be an appropriate basis for measuring the non-controlling interest in Beta on 1 April 2009.
The terms of the business combination provide for the payment of an additional $15 million to the former shareholders
of Beta on 31 March 2011. On 1 April 2009 Alpha’s credit rating was such that it could have borrowed funds at an
annual finance cost of 8%. The statement of financial position of Alpha includes this investment at its original cost of
$100 million.

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The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at
1 April 2009. The following matters emerged:
– A property having a carrying value of $40 million (depreciable amount $24 million) had a fair value of $60 million
(depreciable amount $36 million). The estimated future economic life of the depreciable amount of the property
at 1 April 2009 was 30 years.
– Plant and equipment having a carrying value of $51 million had a fair value of $54 million. The estimated future
economic life of the plant at 1 April 2009 was three years.
The fair value adjustments have not been reflected in the individual financial statements of Beta. In the consolidated
financial statements the fair value adjustments will be regarded as temporary differences for the purposes of computing
deferred tax. The rate of tax to apply to temporary differences is 30%.
The goodwill arising on acquisition of Beta has not suffered any impairment since 1 April 2009.
Note 2 – Alpha’s investment in Gamma:
On 1 October 2009 Alpha paid $39 million for 30% of the equity shares of Gamma. This investment gave Alpha
significant influence over Gamma. The retained earnings of Gamma on 1 October 2009 were $60 million. You can
ignore any deferred taxation implications of the investment by Alpha in Gamma. The investment in Gamma has not
suffered any impairment since 1 October 2009.
Note 3 – Beta’s investment:
Beta’s investment is a strategic equity investment in Sigma – key supplier. This investment does not give Beta control or
significant influence over Sigma. Sigma is not a joint venture for Beta. The investment in Sigma is correctly classified as
available for sale and on 1 April 2009 was included in the financial statements of Beta at its fair value of $15 million.
The fair value of the investment in Sigma on 31 March 2010 was $17 million. In the tax jurisdiction in which Beta is
located unrealised profits on the revaluation of equity investments are not subject to current tax. Any such profits are
taxed only when the investment is sold.
Note 4 – Inter-company sale of inventories:
The inventories of Beta and Gamma at 31 March 2010 included components purchased from Alpha during the year at
a cost of $10 million to Beta and $12 million to Gamma. Alpha generated a gross profit margin of 25% on the supply
of these components. You can ignore any deferred tax implications of the information in this note.
Note 5 – Trade receivables and payables:
The trade receivables of Alpha included $5 million receivable from Beta and $4 million receivable from Gamma in
respect of the purchase of components (see Note 4). The trade payables of Beta and Gamma do not include any
amounts payable to Alpha. This is because on 29 March 2010 Beta and Gamma paid $5 million and $4 million
respectively to Alpha to eliminate the balances. Alpha received and recorded these payments on 2 April 2010.

Required:
Prepare the consolidated statement of financial position of Alpha at 31 March 2010.
The following mark allocation is provided as guidance for this question:
25 marks

(25 marks)

3 [P.T.O.
Section B – THREE questions ONLY to be attempted

2 Delta’s financial statements for the year ended 31 March 2010 are being prepared and you are provided with the
following trial balance at that date:
$’000 $’000
Revenue (Note 1) 350,000
Inventories at 31 March 2009 36,400
Raw material purchases 180,000
Production costs 70,000
Distribution costs 10,000
Administrative expenses 30,000
Research and development expenditure (Note 3) 4,100
Property, plant and equipment:
– at cost (Note 4) 200,000
– accumulated depreciation at 31 March 2009 (Note 4) 60,000
Finance cost of long-term borrowing 4,800
Income tax account (Note 5) 300
Deferred tax (Note 5) 6,000
Trade receivables (Note 6) 100,000
Cash and cash equivalents 34,500
Trade payables 60,000
Long-term borrowings at 6% repayable 2014 80,000
Equity share capital ($1 shares) 100,000
Equity dividend paid 31 December 2009 31,000
Retained earnings at 31 March 2009 44,500
–––––––– ––––––––
700,800 700,800
–––––––– ––––––––
Notes to the trial balance
Note 1 – Revenue:
On 29 March 2010 Delta sold goods for a total sales price of $7·5 million. The goods were sold by Delta at a mark-up
of 25% on cost. The goods were supplied on a sale or return basis – the return period expiring on 30 June 2010. It
was not possible to accurately estimate the extent to which these customers would exercise their rights to return the
goods. Delta has treated this transaction as a normal sale and eliminated the goods from inventories. Trade receivables
includes $7·5 million in respect of this transaction.
Note 2 – Inventories:
On 31 March 2010 the value of the inventories at cost at Delta’s premises was $40 million.
Note 3 – Research and development expenditure:
On 1 April 2009 Delta commenced a project investigating a new production technique that would significantly reduce
wastage. A team of 50 staff were employed on the project and the total annual salary cost of this team was $2 million,
accruing evenly over the year. Other direct costs of the design and testing of the new technique were $200,000 per
month from 1 April 2009 to 31 December 2009 and $100,000 per month in January, February and March 2010.
By 30 June 2009 the team had developed an initial proposal and the technique was refined over the next six months,
being subject to rigorous field-testing. This testing was completed on 31 December 2009 and the new production
technique was approved as being technically feasible and commercially viable from that date. It was decided that the
new production technique would be brought into practical use from 1 July 2010. On 31 December 2009 the directors
estimated that the present value of the potential future cost savings the technique would generate were approximately
$5 million.

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Note 4 – Property, plant and equipment:
Cost Accumulated depreciation at
31 March 2009
$’000 $’000
Property 100,000 20,000
Plant and equipment 100,000 40,000
–––––––– –––––––
200,000 60,000
–––––––– –––––––
(i) Depreciation of all property, plant and equipment should be charged to cost of sales. It has not been included in
the cost of sales figure in the trial balance.
(ii) The plant and equipment is being depreciated using the diminishing balance method at 331/3% per annum. No
disposals of property, plant and equipment occurred in the period.
(iii) The depreciable element of the property has an allocated cost of $40 million and is being depreciated on a
straight-line basis over 40 years from the date of original purchase. On 1 April 2009 the directors of Delta revalued
this property for the first time. The property had an estimated market value at 1 April 2009 of $115 million. It
is further estimated that $30 million of this value relates to the depreciable element. The original estimate of the
useful economic life is still considered valid.
(iv) The directors have decided to make an annual transfer of excess depreciation on revalued assets to retained
earnings.
Note 5 – Income tax:
(i) On 31 December 2009 Delta made a full and final payment to discharge the income tax liability for the year
ended 31 March 2009. The balance on the income tax account in the trial balance is the residue after making
that payment.
(ii) The estimated income tax liability for the year ended 31 March 2010 is $8 million.
(iii) On 31 March 2010 the carrying values of the net assets of Delta exceeded their tax base by $60 million, creating
a taxable temporary difference of that amount. This includes a taxable temporary difference of $35 million that
arose as a result of the revaluation of the property on 1 April 2009 (see note 4 above).
(iv) The rate of corporate tax in the jurisdiction in which Delta operates is 25%.
Note 6 – Trade receivables:
On 1 March 2010 Delta sold trade receivables with an invoiced value of $25 million to a factor. The factor paid
$20 million to Delta on 1 April 2010 and took over the duties of collecting the debts. The balance of $5 million (less an
administrative fee of 1% of the amount advanced to Delta for every month the debts remain outstanding) will be paid to
Delta when the invoices are settled. None of the outstanding debts were settled in March 2010. If the factor is unable
to collect the receivables within three months the legal title on the uncollected receivables returns to Delta. When Delta
received the cash from the factor they debited cash and credited trade receivables with $20 million.

Required:
(a) Prepare the statement of comprehensive income for Delta for the year ended 31 March 2010.

(b) Prepare the statement of financial position for Delta as at 31 March 2010.
Notes to the statement of comprehensive income and statement of financial position are not required.
The following mark allocation is provided as guidance for this question:
(a) 12 marks
(b) 13 marks

(25 marks)

5 [P.T.O.
3 Epsilon is a listed entity preparing financial statements to 31 March each year. Details of the following complex
transactions that have occurred in recent periods appear below:

(a) On 1 April 2007 Lambda, another entity, issued 200,000 bonds that had a nominal value of $100 per bond.
The bonds were issued at $90 per bond and were redeemable at nominal value on 31 March 2012. Epsilon
purchased all 200,000 of these bonds and intended to hold them to their maturity date. Annual interest payments
of $6 per bond were due on 31 March in arrears. The effective annual rate of interest inherent in the bonds was
8·5%. Lambda paid the interest due on 31 March 2008 and 31 March 2009 in full. On 31 March 2009 it
became apparent that Lambda was in financial difficulty and would be unable to make all the repayments due on
the loan. An agreement was reached whereby Lambda would make reduced interest payments of $2 per bond on
31 March 2010, 2011 and 2012 and would then redeem the bonds at nominal value on 31 March 2012. On
31 March 2009 Epsilon would have required an annual effective return of 7·5% on new investments of this
nature.
The reduced interest of $2 per bond was received by Epsilon on 31 March 2010. On 31 March 2010 there was
every expectation that the revised future repayment terms would be adhered to by Lambda. Epsilon does not
wish to measure financial instruments at fair value unless this is required by International Financial Reporting
Standards.
Relevant discount factors are as follows:
Present value of $1 receivable in:
7·5% 8·5%
1 year 93·0 cents 92·2 cents
2 years 86·5 cents 84·9 cents
3 years 80·5 cents 78·3 cents

Required:
Produce relevant extracts that show how the bond investment would be reported in the statement of financial
position of Epsilon at 31 March 2008, 2009 and 2010 and in the statement of comprehensive income for the
years ended 31 March 2008, 2009 and 2010. Provide any explanations you consider relevant. (12 marks)

(b) On 1 April 2009 Epsilon began to lease an office building on a 10-year operating lease. For the first five years of
the lease the annual lease rentals were set at $400,000, payable in advance. For the second five years this annual
rental is to increase to $450,000, payable in advance. On 1 April 2009 Epsilon carried out some alterations to
the property involving the erection of temporary partitions to create suitable office space. The total cost of the
alterations was $600,000. Under the terms of the lease the building had to be returned to the owner in its original
condition. The estimated cost of removing the partitions at the end of the lease term is $300,000. A relevant risk
adjusted discount rate is 5% per annum. The present value of $1 payable in 10 years at a discount rate of 5% is
61·4 cents.

Required:
Produce relevant extracts that show how this transaction would be reported in the statement of financial
position of Epsilon at 31 March 2010 and in the statement of comprehensive income for the year ended
31 March 2010. Provide any explanations you consider relevant. (9 marks)

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(c) On 1 October 2009 Epsilon ordered a quantity of inventory from a customer whose functional currency was the
Euro. The agreed purchase price was 200,000 Euros. The inventory was delivered on 1 December 2009 and
paid for on 31 January 2010. Half the inventory was sold prior to 31 March 2010. Relevant exchange rates are
as follows ($s to 1 Euro):
1 October 2009 – 1·20
1 December 2009 – 1·25
31 January 2010 – 1·30
31 March 2010 – 1·35.
Epsilon made no attempt to hedge the exchange risk arising out of the purchase of inventory denominated in
Euros.

Required:
Produce relevant extracts that show how this transaction would be reported in the statement of financial
position of Epsilon at 31 March 2010 and in the statement of comprehensive income for the year ended
31 March 2010. Provide any explanations you consider relevant. (4 marks)

(25 marks)

7 [P.T.O.
4 (a) Revenue is usually one of the largest numbers that appears in the financial statements of an entity. Therefore it is
important to ensure that revenue is recognised and measured appropriately. IAS 18 – Revenue – was issued in
order to provide standard accounting practice in this area.

Required:
(i) Describe the meaning of revenue and the basis on which it should be measured under the principles of
IAS 18; (3 marks)
(ii) Outline the criteria that need to be satisfied before revenue can be recognised under the principles of
IAS 18. You should consider revenue from the sale of goods and from the rendering of services
separately. (5 marks)

(b) Kappa is an entity that prepares financial statements to 31 March each year. During the year ended 31 March 2010
the following transactions occurred:
(i) On 29 March 2010 Kappa delivered two machines to a customer. Details relating to the machines are as
follows:
Machine Construction cost Invoiced price
$ $
A 190,000 250,000
B 200,000 300,000
Machine A was unpacked and connected to the power supply necessary to operate the machine on
2 April 2010. As soon as this was done, the machine was able to operate immediately.
Machine B needed to be installed by an expert fitter before it was capable of operating in the intended
manner. The installation process was complete, and the machine passed ready for use, on 4 April 2010.
The customer paid for both machines on 30 April 2010. (5 marks)
(ii) On 15 March 2010 Kappa transferred goods to a third party, Omicron, on a consignment basis. Omicron
undertook to sell the goods on behalf of Kappa and remit the proceeds, less a commission of 10%, when
the final purchaser paid Omicron for them. The invoiced value of these goods (the price payable by the
final purchaser was $400,000). The goods cost Kappa $320,000 to manufacture. By 31 March 2010
Omicron had sold goods at an invoiced price of $240,000 and received payments of $160,000. No payment
had been made to Kappa by Omicron by 31 March 2010. Since 31 March 2010 Omicron has sold the
remaining goods, received all the proceeds, and remitted $360,000 ($400,000 x 90%) to Kappa.
(5 marks)
(iii) On 1 April 2009 Kappa sold a property it owned to a bank for $3,000,000. The carrying value of the
property at 1 April 2009 was $2,000,000, of which $1,200,000 was depreciable. The remaining useful
economic life of the depreciable element was 30 years from 1 April 2009. Kappa continued to occupy
the property and be responsible for its security and maintenance. The market value of the property on
1 April 2009 was $5,000,000 and it is considered unlikely that this will fall significantly in the foreseeable
future. Kappa measures all its property, plant and equipment under the cost model.
The terms of the sale allowed Kappa the option to repurchase the property as follows:
– On 31 March 2010 for $3,300,000.
– On 31 March 2011 for $3,630,000.
– On 31 March 2012 for $3,993,000. (7 marks)

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Required:
For each of the above transactions:
– Explain and compute, by applying the principles of IAS 18, how much revenue should be recognised in
the statement of comprehensive income for the year ended 31 March 2010.
– Identify and compute any other amounts relating to each transaction that will be included in the statement
of comprehensive income for the year ended 31 March 2010 and the statement of financial position at
31 March 2010.

(25 marks)

9 [P.T.O.
5 Omega prepares financial statements under International Financial Reporting Standards (IFRS). In the two-year period
ended 31 March 2010 the following events occurred:

(a) On 1 October 2008 Omega began the construction of a new factory. Costs relating to the factory were as
follows:
Details Amount
$’000
Purchase of land on which to build the factory 20,000
Cost of levelling the land prior to beginning construction 850
Cost of materials needed to construct the factory (Note 1) 8,000
Monthly employment costs of the construction staff (Note 1) 500
Monthly amount of other overheads directly related to the
construction (Note 1) 200
Payments to external advisors relating to the construction 500
Income from temporary use of part of the site as a car park
during the construction period. (250)
Costs of relocating staff to work in the new factory 400
Costs relating to the public opening of the factory (Note 2) 200
Note 1
In December 2008 a fire destroyed materials costing $500,000. The cost of these materials is included in the
material figure that is given above. Construction work was suspended for two weeks because of the fire. The
construction workers continued to be paid during this two-week period and other additional overheads of $40,000
were incurred in this period. These related to keeping the construction site secure during the temporary cessation
of construction.
Note 2
Construction of the factory was completed on 28 February 2009 and the construction workers transferred to
other projects from that date. The factory was not available for use until 31 March 2009, when the factory was
inspected by local government officials (as required by local legal regulations) and certified as safe for use. The
factory was not actually brought into use until 31 May 2009, following a public opening ceremony.
Note 3
The costs of construction were mainly financed by a loan of $30 million that was arranged during September
2008. The effective annual interest rate on the loan was 8%. The proceeds were invested prior to being needed to
finance the construction cost and in the period ended 31 March 2009 the temporary investment produced income
of $300,000.
Note 4
The depreciable element of the factory comprises the building costs. The majority of these costs have an estimated
useful economic life of 40 years. However, the factory roof will need to be replaced after 20 years. The estimated
cost of replacing the roof at current prices is $2·4 million.
Note 5
Omega computes its depreciation charge on a monthly basis and measures property, plant and equipment using
the cost model.
Note 6
No impairment of the factory had occurred by 31 March 2010.

Required:
Compute the carrying value of the factory in the statement of financial position of Omega at 31 March 2010.
You should support your computations with appropriate explanations of the amount you have included for the
cost of the factory and for its subsequent depreciation. (17 marks)

10
(b) On 31 December 2009 the directors of Omega decided to dispose of two properties in different locations. Both
properties were actively marketed by the directors from 1 January 2010 and sales are expected before the end of
July 2010.
Summary details of the two properties are as follows:
Property Carrying Depreciable Estimated Estimated fair value
amount amount future economic life less costs to sell
at 31 March 2009 at 31 March 2009 at 31 March 2009 at 31 December 2009
$’000 $’000 $’000 $’000
A 25,000 15,000 30 years 28,000
B 22,000 16,000 40 years 18,000
Property A was available for sale without modifications from 1 January 2010 onwards. On 31 March 2010
the directors of Omega were reasonably confident that a sale could be secured for $28 million. However, after
the year-end property prices in the area in which property A is located started to decline. This was due to an
unexpected adverse local economic event in April 2010. Following this event the directors of Omega estimated
that property A would now be sold for $22 million less selling costs and they are very confident that this lower
price can be achieved.
Property B needed repair work carried out on it before a sale could be completed. This repair work was carried out
in the two-week period beginning 10 April 2010. The costs of this repair work are reflected in the estimated fair
value less costs to sell figure for property B of $18 million (see above). This estimate remains valid.

Required:
Compute:
– The carrying values of both properties in the statement of financial position of Omega at 31 March
2010.
– The amounts charged to the statement of comprehensive income in respect of both properties for the year
ended 31 March 2010.
You should support your computations with appropriate explanations of the treatments you have adopted.
(8 marks)

(25 marks)

End of Question Paper

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