SECTION A

SECTION A CONSISTS OF QUESTION 1. YOU MUST ANSWER THIS QUESTION

QUESTION 1

ANSWER ALL PARTS OF THIS QUESTION

On 1 June 2020, Merlin Ltd acquired 60% of the ordinary shares in Arthur Ltd. The draft summarised financial statements of Merlin Ltd and Arthur Ltd as at 31            December 2020 are shown below:

ASSETS

Non-current assets

Property, plant and equipment

Investments

Current assets

Inventories

Trade receivables

Cash and cash equivalents

Total assets

EQUITY AND LIABILITIES

Equity

Ordinary share capital (£1 shares) Retained earnings

Current liabilities

Trade payables

Tax liability

Total equity and liabilities

Merlin Ltd £

1,264,200

265,000

820,000

1,179,500

Arthur Ltd

£

949,350

400,000

775,550

The following information is also relevant:

(1)   The shares in Arthur Ltd were acquired for the following consideration:

   Cash of £180,000 paid on 1 June 2020.

  A further cash payment of £110,000, payable on 1 June 2023. An

appropriate discount rate is 4% per annum.

   600,000 ordinary shares in Merlin Ltd. The market value of one

ordinary share in Merlin Ltd on 1 June 2020 was £1.25. This had risen to £1.30 by 31 December 2020.

The cash paid on 1 June 2020 was debited to investments and credited to bank. No other entries have made in relation to the consideration.

Arthur Ltd made a profit for the year ended 31 December 2020 of £102,600. Merlin Ltd uses the proportionate method to measure goodwill and the non- controlling interest for Arthur Ltd.

The fair value of Merlin Ltd’s assets and liabilities at acquisition were equal  to their carrying amounts with the exception of a machine. This machine had a fair value which was £30,000 higher than the carrying amount within the    financial statements of Merlin Ltd. The machine had a useful life of 6 years   when it was acquired 2 years ago on 1 January 2019. The useful life has not changed.

(2)  On 1 October 2020, Arthur Ltd sold a piece of land to Merlin Ltd for £100,000 which had originally cost £80,000.

(3)  On 1 March 2020, Merlin Ltd acquired 30% of the ordinary shares of         Lancelot Ltd for £85,000 cash. This investment gave Merlin Ltd significant influence over Lancelot Ltd.

Lancelot Ltd’s profit for the year ended 31 December 2020 was £6,000. This was much lower than originally expected and as a result, the investment in   Lancelot Ltd has become impaired by £20,000.

The cash paid on 1 March 2020 was debited to trade receivables and           credited to bank. No other entries have made in relation to the investment in

Lancelot Ltd.

(4)   On 1 November 2020, Arthur Ltd sold goods to Merlin Ltd. These goods had originally cost Arthur Ltd £12,000 and were sold at a mark-up of 25%. Half of these goods remain in inventory at the year end.

On 1 December 2020, Merlin Ltd sold goods to Lancelot Ltd at a selling price of £5,000. These were sold at a margin of 40% and all of these goods           remain in inventory at the year end.

(5)   On the 31 December 2020, Merlin Ltd showed a trade payable balance of £22,000 owing to Arthur Ltd. Arthur Ltd showed a trade receivable balance of £29,500 owed from Merlin Ltd. The difference is explained by cash in     transit.

You can assume that all income, expenses and profits accrue evenly throughout the year.

REQUIRED:

(a)   There is no maximum word count for this requirement.

Prepare the consolidated statement of financial position for Merlin Ltd as at 31 December 2020. You should show your workings.

[36 marks]

(b)   Please note: the maximum word count for this requirement is 160

words.

Briefly discuss why an adjustment is made for intra-group trade receivables and trade payables balances within the consolidated statement of financial position. You may refer to (5) above as part of your answer.

[4 marks]

(c)   Please note: the maximum word count for this requirement is 400 words.

IFRS 3 allows an accounting policy choice, on a transaction by transaction    basis, to measure non-controlling interests either at fair value or the non-       controlling interest’s proportionate share of net assets. Evaluate the extent to which this accounting policy choice provides information that is useful to the  users of financial statements. You should consider the characteristics of        financial information according to the conceptual framework as part of your   answer.

[10 marks]

TOTAL 50 MARKS

SECTION B

SECTION B CONSISTS OF QUESTIONS 2 AND 3.

ANSWER ONLY ONE QUESTION FROM SECTION B (EITHER QUESTION 2 OR

QUESTION 3).

QUESTION 2

ANSWER ALL PARTS OF THIS QUESTION

PART A

You are the Financial Controller for Uther plc. Draft financial statements for the year ended 31 December 2020 have been prepared by the assistant accountant. The     Finance Director has asked you to make any adjustments required in respect of the following outstanding matters.

An e-mail received from the Finance Director stated the following:

“As you know, the year-end profit figure is of critical importance. It is essential that the profit figure is as high as possible so that we retain the confidence of our shareholders and lenders. We also need to keep gearing as low as          possible so that we can obtain further borrowing. Without this borrowing we   may need to make redundancies. Please provide me with a revised figure for the profit for the year and a calculation of earnings per share.”

Consolidated profit for the year in the draft statement of profit or loss is £937,000. The following outstanding matters have been identified:

(1)   On 1 January 2020, Uther plc received a government grant of £100,000,     representing 50% of the cost of a specialised asset, which was acquired on

1 January 2020. The asset has a four-year useful life and has been correctly depreciated in the draft financial statements on a straight-line basis. Uther    plc’s stated accounting policy is to recognise government grants using the    deferred income method. The grant is only repayable if the asset is sold        within four years of the date of receipt of the grant. Management currently    plan to continue using the asset for the full useful life.

The Finance Director asked the assistant accountant to credit the full grant  of £100,000 to investment income in the draft statement of profit or loss for  the year ended 30 December 2020 on the grounds that she does not expect the grant will have to be repaid.

(2)   Uther plc has the right to use the first floor of a building as its head office      under a lease arrangement. The commencement date of the lease was 1     January 2020. The lease term is 20 years, which is the same as the             remaining useful life of the building. Uther plc paid legal fees of £20,000 and

is required to pay £50,000 on 31 December each year commencing on 31

December 2020.

The assistant accountant has posted both the legal fees and the payment on 31 December 2020 as debit to administration expenses in the statement of   profit or loss. This is on the basis that Uther plc only uses one floor out of the twenty-five floors of the building and therefore Uther plc is only using a very  small portion of the building.

The interest rate implicit in the lease is 4% and on 1 January 2020, the       present value of the future lease payments was £679,500. Company policy is to recognise depreciation of similar non-current assets on a straight line basis within administration expenses.

(3)   On 1 January 2020, Uther plc had ordinary share capital of £4m, with each   share having a nominal value of 50p per share. On 1 June 2020, Uther plc    made a 1 for 4 rights issue at a price of £1.10 per share. The market value of each share on this date was £1.30

REQUIRED:

(a)   Please note: the maximum word count for this requirement is 640

words.

Explain the IFRS financial reporting treatment of items (1) and (2) in the       financial statements of Uther plc for the year ended 31 December 2020,       preparing all relevant calculations. As part of your answer you need to make reference to the definitions and treatments required by the relevant financial reporting standards.

[16 marks]

(b)   Please note: the maximum word count for this requirement is 520

words.

Evaluate the extent to which accounting treatment for items (1) and (2)         provide information that is useful to the users of financial statements. As part of your answer you should also consider the likely impact upon the gearing   ratio and the extent to which the relevant financial reporting standards           prevent the Finance Director of Uther plc from manipulating the financial       statements.

You may use the characteristics of financial information according to the conceptual framework to support your arguments.

[13 marks]

(c)   There is no maximum word count for this requirement.

Using the information provided in items (1) to (3) calculate a revised profit for the year and the basic earnings per share.

[6 marks]

PART B

Fredo plc is preparing its consolidated statement of cash flows for the year ended 31 December 2020. The following summarised information is taken from the                  consolidated statement of financial position as at the 31 December:

Consolidated statements of financial position at 31 December (extracts)

2020                2019

£                      £

The following information is also relevant. All of the following transactions have been correctly recorded in the extract consolidated statement of financial position above:

(1)   On 1 January 2020, Fredo plc disposed of all of the 80% ordinary      shareholding in a subsidiary, Gollam Ltd. The following information is relevant to the disposal:

Goodwill at acquisition

Net assets of the Gollam Ltd at 1 January 2020 Of which:

Trade receivables

payables

Profit on disposal

£1,000,000

£3,294,100

£962,000

£843,500

£25,100

£240,000

Fredo plc uses the proportion of net assets method to measure goodwill.  Goodwill in Gollam Ltd was not impaired at the date of disposal. Fredo plc holds other investments in subsidiaries, the value of which have become  impaired during the year ended 31 December 2020.

(2)   Fredo plc owns 25% of the ordinary share capital of Samwise Ltd, an associate. Samwise Ltd made a profit for the year of £1,432,000.

(3)   Profit attributable to the non-controlling interest in the consolidated statement of profit or loss for the year ended 31 December 2020 was £1,083,200.

REQUIRED:

There is no maximum word count for this requirement.

Calculate the following amounts for inclusion in the consolidated statement of cash flows for Fredo plc at 31 December 2020:

Cash flows from operating activities

Change in trade receivables

Change in trade payables

Impairment of goodwill

Cash flows from investing activities

Proceeds from disposal of a subsidiary

Dividend from associate

Cash flows from financing activities

Dividend paid to the non-controlling interest

For cash flows from operating activities you should make clear whether these result  in an increase or decrease from the profit from operations figure. For cash flows from investing and cash flows from financing activities you should make clear whether the cash flows are inflows or outflows.

Please note that you are not required to produce a full consolidated statement of cash flows.

[15 marks]

TOTAL 50 MARKS

QUESTION 3

ANSWER ALL PARTS OF THIS QUESTION

Please note: the maximum word count for both requirements combined (Part A and Part B) is a total of 2,000 words. It is recommended you use no more than  1,000 words for Part A and 1,000 words for Part B.

PART A

Nobes (2013) identifies a number of areas where differences exist across countries and in the application of accounting policies.

REQUIRED:

Evaluate the impact of differences in the application of international financial             reporting standards, using the points raised by Nobes (2013) to illustrate your           answer. You should explore areas where differences exist and how these arise. You may use the characteristics of financial information within the conceptual framework and examples from company financial statements as part of your arguments.

Reference: Nobes, C. (2013). The continued survival of international differences under IFRS Accounting and Business Research 43 (2), 83-111.

[25 marks]

PART B

In 2018, the IFRS Foundation produced a discussion paper discussing ‘Financial       Instruments with Characteristics of Equity’ . Fargher et al (2018) discuss the impact    upon firm’s financing choices and users’ decision making as a result of the manner in which firms account for compound financial instruments.

REQUIRED:

Evaluate the current accounting treatment for compound financial instruments           (referred to as debt with characteristics of equity). As part of your answer you may    wish to consider (i) some of the issues caused by the current accounting standard,   IAS 32: Financial instruments: Presentation (ii) the potential impact upon firm’s          financing choices and users’ decision making and (iii) the extent to which IAS 32:      Financial instruments: Presentation provides information that is useful to the users of financial statements.

You should use the points raised by Fargher et al (2018) to illustrate your answer      and you may wish to comment upon some of the points made in DP/2018/1Financial Instruments with the Characteristics of Equity. You may use the characteristics of