Section A – Compulsory

The directors of Pacer Plc (a Steel Manufacturer) decided to grow their business by acquiring interests in other companies. The acquisition of a shareholding in Sprinter Plc has made the access to retailers easier and the acquisition of a shareholding in IWL Mining Ltd has given access to raw materials.

The summarised statement of profit or loss for the three companies for the year ended 31 December

2021 are:

Revenue

Cost of sales

Gross profit (loss)

Distribution costs

Administrative expenses

Investment income (note 3)

Finance costs

Profit (loss) before tax

Income tax (expense) credit

Profit (loss) for the period

Pacer Plc

£000

420,000

(272,000)

----------

148,000

(16,000)

(30,000)

1,600

(4,800)

---------

98,800

(34,800)

---------

64,000

=====

Sprinter Plc

£000

248,000 (146,000)

---------

102,000 (8,000)

(28,000)

nil

(3,600)

---------

62,400 (10,400)

---------

52,000

=====

IWL Mining Ltd

£000

200,000 (244,000)

---------

(44,000) (18,000)

(34,000)

nil nil

---------

(96,000) 16,000

---------

(80,000) =====

Pacer Plc purchased the following equity investments:

(1) On 1 July 2021: 75% of the issued share capital of Sprinter Plc. The acquisition was through a share exchange of three shares in Pacer Plc for every five shares in Sprinter Plc. The market price of Pacer's shares at 1 July 2021 was £5 per share.

(2) On 1 October 2021: 24 million shares in IWL Mining Ltd, paying £4 per share in cash.

* Both Sprinter Plc and IWL Mining Ltd didn’t issue any new shares after the above investment.

The following information is also relevant:

(3)    Immediately after the acquisition of Sprinter on 1 July 2021, Pacer provided a three-year loan to Sprinter Plc. The investment income in Pacer Plc is the interest received from Sprinter Plc on 31 December 2021. All the related accounts were correctly recorded by the both companies.

(4)    The details of Sprinter's and IWL Mining’s share capital and retained earnings at 1 January

2021 were:

	Sprinter	IWL Mining Ltd
	£000	£000
Equity shares of £1 each	80,000	60,000
Retained earnings	46,000	140,000

(5)    A fair value exercise was carried out at the date of acquisition of Sprinter Plc with the following results:

	Carrying amount	Fair Value	Remaining life (straight line)
	£000	£000
Patent	88,000	72,000	not applicable
Land	68,000	80,000	not applicable
Plant	120,000	140,000	5 years

The fair values have not been recorded in Sprinter Plc’s financial statements.

Plant depreciation is included in cost of sales. No fair value adjustments were needed on the acquisition of IWL Mining Ltd.

(6)    After the acquisition, Pacer Plc sold goods to Sprinter Plc at a selling price of £72 million. Pacer Plc made a profit of cost plus 20% on these sales. £30 million (at cost to Sprinter Plc) of these goods were still in the inventories of Sprinter Plc at 31 December 2021.

(7)    Following an impairment review carried out at 31 December 2021, the directors of Pacer Plc have decided that the value of the goodwill arising from the acquisition of Sprinter Plc had decreased by £6.4 million and, due to its losses since acquisition, the investment in IWL Mining Ltd was worth £70 million.

(8)    Pacer Plc’s policy is to account for any non-controlling interest (NCI) at fair value. At the date of acquisition, the goodwill attributable to NCI in Sprinter Plc was £18 million.

(9)    All trading profits and losses are accrued evenly throughout the year.

Required:

(a) Calculate the goodwill arising on the acquisition of Sprinter Plc at 1 July 2021. (8 marks)

(b) Calculate the carrying amount of the investment in IWL Mining Ltd at 31 December 2021,

prior to the impairment review. (3 marks)

(c) Prepare the consolidated statement of profit or loss of the Pacer Group for the year ended 31 December 2021. (18 marks)

(d) Explain, in a short briefing note to the Chairman of Pacer Plc, the treatment of the following items in the consolidated statement of financial position;

(i) Inventory held at 31 December 2021 by Sprinter Plc purchased from Pacer Plc. (3 marks)

(ii) How would your answer be different to (i) if the goods had been sold by Sprinter Plc to Pacer Plc? (3 marks).

Section A: Total 35marks

All calculations must be clearly shown

Section B–Compulsory

The Statements of Financial Position for Trench plc at 31 December are as follows:

Non-current assets

Tangible Non-current Assets

Property plant and equipment

Other Investments (at cost)

Current Assets

Inventories

Trade and other receivables

Cash and bank

Total Assets

Equity

Share capital

Share premium

Revaluation surplus

Retained earnings

Non-current Liabilities

8% Debentures

Current Liabilities

Trade and other payables

8% Debentures

Accrued interest

Provision for law-suit

Current Tax

Bank overdraft

Total Equity and Liabilities

2021

£000

770

470

10

-----

1,200

350

200

2,450

-------

390

400

20

160

260

120

-----

£000

5,330

170

1,250

-------

6,750

====

4,200

1,200

1,350

-------

6,750

====

2020

£000

690

410

100

-----

1,000

200

nil

2,200

-------

520

400

40

60

330

nil

-----

£000

5,000

150

1,200

-------

6,350

====

3,400

1,600

1,350

-------

6,350

====

Extract from Statement of Profit or Loss for the year ended 31 December 2021

Profit from operations

Finance cost

Income tax expense

Profit for the year

£000

1,010

(160)

(300)

------

550

==== Extract from Statement of Changes in Equity for the year ended 31 December 2021

£000

Retained Earnings at 1 January 2021

Profit for the year

Dividends

Retained Earnings at 31 December 2021

2,200

550

(300)

-------

2,450

====

Additional Information

(1)    The depreciation charge for 2021 was £750,000.

(2)    During the year ended 31 December 2021, the company sold a tangible non-current asset for £70,000 cash. The asset had originally cost £600,000 and on 1 January 2021, the accumulated depreciation was £540,000.

(3)    No investments were sold during the year.

(4)    The company's depreciation policy is to charge a full year's depreciation in the year of acquisition and none in the year of disposal.

Required:

(a) Prepare a statement of cash flows for Trench plc for the year ended 31 December 2021 using the indirect method in IAS 7 Statement of Cash Flows. (20 marks)

(b) Analyse the statement of cash flow prepared above and discuss what it might be saying about the cash management of Trench plc. (5 marks)

Section B: Total 25 marks

All calculations must be clearly shown

SECTION C: Compulsory

Answer all parts of the section (from part C1 to C4).

Total 40 marks for section C (Part C1- 12 marks, Part C2-9 marks, Part C3-9 marks and Part C4- 10 marks). All calculations must be clearly shown.

Part C1

The objective of IAS32 (Financial Instruments: Presentation) is to clarify the distinction between liabilities and equity and so ensure that financial liabilities and equity instruments are correctly identified in financial statements. If IAS32 did not exist, an entity might be able to incur a financial liability but present this liability as equity.

Required.

(a) Explain the way in which IAS 32 classifies a financial instrument as an equity instrument. (3 marks).

(b) Explain the IAS 32 accounting treatment of redeemable preference shares. (2 marks)

Xinghai Ltd. issues a £10 million convertible loan at 4% annual interest on 1 January 2021.    Interest expense will be paid in arrears. The annual market rate for an equivalent debt with the same level of risk but without the conversion option is 8%. The loan is repayable in full, or is convertible into equity, at the holder's option after three years (i.e., on 31 December 2023).

Discount factors are as follows;

	4%	8%
Year 1	0.980	0.926
Year 2	0.961	0.857
Year 3	0.942	0.794

(c) Split the convertible loan between its liability and equity components on issue on 1 January

2021. (4 marks)

(d) Calculate the finance charge and carrying value for each year until redemption or conversion on 31 December 2023 using the effective interest rate method (i.e., armotised cost method). (3 marks)

Total for part C1: 12 marks

Part C2

IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) contains guidance on the use of both accounting policies and accounting estimates.

The Directors of Aaron plc are disappointed in the profit reported in the draft statement of profit or loss presented to them for the year ended 30 June 2021. The company's assistant accountant has made a suggestion as to how she believes reported profit could be improved.

A major item of plant cost £40 million to purchase and install on 1 July 2018 and it has been depreciated on a straight-line basis over five years, assuming no residual value. At the start of the current financial year (i.e., 1 July 2020), the Production Manager believed the plant had a longer useful life than originally estimated. He believed its useful economic life was eight rather than five years. Based on these figures the assistant accountant has prepared the following calculations:

	Original estimate	Revised estimate
Useful economic life	5 years	8 years
	£ million	£ million
Original cost on 1 July 2018	40.0	40.0
Depreciation to 30 June 2020 (2/5 x £40 million) (2/8 x £40 million)
	(16.0)
		(10.0)
Depreciation for the year to 30 June 2021 (1/8 x £40 million)	see below
		(5.0)
	------	------
Carrying amount at 30 June 2021	24.0	25.0
	===	===

By adopting an eight-year life the assistant accountant suggests that no depreciation needs to be provided in the current year, rather a credit of £1.0 million (£16 million – £15 million) can be reported which will help to improve the reported profit. She argues this will both incorporate the new annual depreciation charge of £5.0 million and make a "one-off" adjustment of £6.0 million for the effects of the asset's revised useful economic life by using this as if it had always been appropriate.

Required:

(a) Distinguish between a change in accounting policy and a change in accounting estimate,

using an example of each. (4 marks)

(b)  Critically  comment  on whether the  assistant  accountant's proposed  treatment  of the depreciation on the plant is acceptable in accordance with IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors). If it is unacceptable, explain the correct accounting treatment. (5 marks)

Total marks for part C2: 9 marks

Part C3

The main objective of international standard IAS20 (Accountingfor Government Grants and Disclosure of Government Assistance) is to prescribe the accounting treatment of government grants. IAS20 defines government grants as "assistance by government in theform of transfers of resources to an entity in returnfor past orfuture compliance with certain conditions relating to the operating activities of the entity".

On 1 January 2021, a company which prepares financial statements to 31 December acquires an item of property, plant and equipment and receives a government grant of 36% towards the item's cost. The item costs  ￡250,000 and has a useful life of three years. Its residual value is ￡70,000.

Required:

(a) Explain two main types of government grant in accordance with IAS20. (3 marks)

(b) Calculate the depreciation charge and the amount of the grant that should be recognised as

income for each of the three years to 31 December 2023 if the asset is depreciated on the straight-line method. (3 marks).

(c) Assuming that the straight-line method is used, explain how the grant will be dealt with in the financial statements if <