Answers

Applied Skills (FR)

Financial Reporting (FR) March/June 2022 Sample Answers

Section C

Venus Co

(a) Workings 20X8 Workings 20X7

Gross profit % 12,500/39,000 x 100 32·1% 11,000/32,000 x 100 34·4%
Net profit % 9,800/39,000 x 100 25·1% 8,900/32,000 x 100 27·8%
Return on equity 9,800/87,500 x 100 11·2% 8,900/42,000 x 100 21·2%

(b) (i) Adjusted profit:

$’000
Venus Co consolidated profit for the year 9,800
Deduct Luto Co post-acquisition profit – note (1) (2,000 )
Deduct savings due to discounts received from Luto Co – note (2) (500 )
Add back unwinding of discount on deferred consideration (W1) – note (3) 185
Add back fair value adjustment depreciation (900/3 x 6/12) – note (4) 150
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Venus Co single entity net profit 7,635
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Net profit % working: 7,635/(39,000 – 5,000 post-acquisition revenue) x 100 22·5%
Workings
W1
$’000
Discount unwound (5m x 0·926 x 8% x 6/12) 185
Alternatively:
$’000
Discount unwound ((5m/1·08) x 8% x 6/12) 185
(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.
Equity in consolidated financial statements will be increased by the addition of the non-controlling interest and the
post‑acquisition retained earnings from subsidiaries.
Intra-group balances are removed on consolidation; however, the single entity financial statements will include items like intra-
group loans, intra-group receivables and intra-group payables.

(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 % 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% – 25·1%), but to the increase in equity ($87·5m
compared to $42m).
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.

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 Managing director’s (MD’s) comments
The MD is incorrect to be disappointed in the performance of the subsidiary as it has had an overall positive impact on group
performance (see performance comments above) which should increase when a full year’s results are consolidated in 20X9.
The MD was expecting to see a favourable effect on gross profit due to the new discount from Luto Co. This has no effect on the
consolidated financial statements, or the ratios based on the consolidated financial statements, as intra-group trading is eliminated
on consolidation.
Conclusion
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.
Additional points which could have been made:
There may also be synergies arising from the acquisition which will reduce operating costs in future years but have not yet had time
to fully emerge.
It is also relevant to note that, while Luto Co’s assets have undergone a fair value uplift, the non-current assets of Venus Co are
carried at historical cost, which can have the effect of inflating ROE. If Venus Co’s assets were fair valued, this would probably
increase equity and also reduce earnings through a higher depreciation charge.

Print Co

All figures are in $’000 unless stated otherwise.

(a) Statement of profit or loss for the year ended 30 June 20X2
$’000
Revenue 97,400
Cost of sales (W1) (63,910)
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Gross profit 33,490
Distribution costs (7,200)
Administrative expenses (29,570 + 3,375 (W5)) (32,945)
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Profit from operations (6,655)
Finance costs (750 – 350 (W4)) (400)
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Loss before tax (7,055)
Income tax refund 2,530
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Net loss for the period (4,525)
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(b) Statement of financial position as at 30 June 20X2
$’000 $’000
Assets
Non-current assets
Property, plant and equipment 50,340
Current assets
Inventories 5,560
Trade and other receivables 25,010
Taxation 2,530
Bank 4,700
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37,800
Non-current assets held for sale 1,100
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38,900
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Total assets 89,240

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Equity and liabilities
Equity
Ordinary share capital (29,600 + 7,000 (W7)) 36,600
Other components of equity (15,500 + 7,000 (W7)) 22,500
Retained earnings (11,470 – 4,525) 6,945
–––––––
66,045
Non-current liabilities
Bank loan (30,000 – 14,000 (W7)) 16,000
Provisions (W5) 2,250
–––––––
18,250
Current liabilities
Trade and other payables (4,170 – 350) 3,820
Provisions (W5) 1,125
–––––––
4,945
–––––––
Total equity and liabilities 89,240

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W1 Cost of sales
$’000
Opening inventory 6,850
Production costs 60,150
Less closing inventory (W6) (5,560)
Depreciation charge (W2) 2,070
Held for sale asset (HFS asset) impairment (W3) 400
–––––––
63,910
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W2 Property, plant and equipment
Land Plant and machinery Total
$’000 $’000 $’000
Cost
Brought forward 45,000 16,200 61,200
HFS asset – (2,400) (2,400)
––––––– ––––––– –––––––
45,000 13,800 58,800
Accumulated depreciation
Brought forward – (7,290) (7,290)
Charge for the year (13,800 x 15%) – (2,070) (2,070)
HFS asset accumulated depreciation (2,400 – 1,500) – 900 900
––––––– ––––––– –––––––
– (8,460) (8,460)
––––––– ––––––– –––––––
Carrying amount 45,000 5,340 50,340
––––––– ––––––– –––––––

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 W3 Held for sale asset
$’000
Carrying amount at 1 July 20X1 1,500
Fair value less costs to sell at 30 June 20X2 (1,100)
–––––
Impairment loss to be recognised in the year ended 30 June 20X2 400
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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 1 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 1 July 20X1 1,140
––––––
Impairment 360
Fair value less costs to sell at 30 June 20X2 (using net proceeds received on
1 July 20X2) 1,100
––––––
Further impairment required 40
––––
Total impairment for year ended 30 June 20X2 400
––––
W4 Finance costs
$’000
Included in TB (30,000 x 5% x 6/12) 750
Correction of error (14,000 x 5% x 6/12) (350)
––––
400
––––
W5 Onerous contract
$
Price per unit 450
Costs of conversion 600
––––––
1,050
Net realisable value 900
––––––
Loss per unit (150)
––––––
$’000
Loss on fulfilling contract ($150 x 22,500 units) 3,375
$’000
Loss expected in the next 12 months (current) (3,375 x 1/3 years) 1,125
Loss expected beyond 12 months (non-current) (3,375 – 1,125) 2,250
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3,375
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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
$’000
Cost of units requiring modification $1,400 x 700 units 980
Net realisable value of units requiring additional
modification ($1,600 – $400) x 700 units (840)
––––
Inventory write down required 140
––––
$’000
Closing inventory (note 2) 5,700
Inventory write down (140)
––––––
Adjusted closing inventory 5,560
––––––
W7 Correction of share issue and bank loan
$’000
Share capital 7,000 share x $1 7,000
Share premium (other components of equity) 14,000 proceeds – 7,000 share capital 7,000
–––––––
Proceeds received and incorrectly included as part of the bank loan 14,000
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Applied Skills (FR)
Financial Reporting (FR) March/June 2022 Sample Marking Scheme

Section C

Marks
Venus Co

(a) Ratios 3
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(b) (i) Venus Co profit 5

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(ii) Comparability 3
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(c) Performance and conclusion 9

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20
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Print Co

(a) Statement of profit or loss 8

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(b)
Assets 6
Equity and liabilities 6
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12
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20
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