Question A.1

In recent years the large accountancy firms have been subject to much criticism. Discuss the reasons for this criticism and assess whether it is justifiable.

(Maximum 700 words)

[Total 30 marks]

OR

Question A.2

Critically discuss why there is a demand for globally uniform accounting standards, and how     local endorsement processes of global accounting standards may help (or not) in satisfying this demand.

(Maximum 700 words)

[Total 30 marks]

Question B.1

The following information is available for Norton Ltd.

Statement of Financial Position as at 31 March

Non-current assets

Property, plant and equipment

Intangible assets

Investments

Total non-current assets

Current assets

Inventory

Trade receivables

Investment income receivable

Bank

Total current assets

Total Assets

Equity

Ordinary share capital

Share premium

Revaluation reserve

Retained earnings

Total equity

Non-current liabilities

Loans

Provisions for liabilities

Total non-current liabilities

Current liabilities

Trade payables

Taxation payable

Interest payable

Total current liabilities

Total equity and liabilities

2021

£000

 

42,000

19,000

16,400

 

77,400

20,700 19,600 4,200 48,900

93,400

170,800

 

1,630

13,070

5,200

113,800

133,700

700 3,300

4,000

30,300 2,792 8

33,100

170,800

 

2020

£000

 

35,300

17,400

11,700

 

64,400

24,200 18,800 3,800 26,400

73,200

137,600

 

1,600

12,300

4,700

87,900

 

106,500

1,000 1,800

2,800

19,200 9,100 -

28,300

137,600

Additional information:

1.    Total comprehensive income for the year to 31 March 2021 is £71,800,000 comprising   profit after tax of £71,300,000 and other comprehensive income of £500,000 relating to revaluation of property, plant and equipment.

2.    Profit after tax is the operating profit for the year after charging tax expense of £18,100,000 and Interest expense of £42,000.

3.    The following items are included in the calculation of operating profit:

-    depreciation of £8,800,000 and impairment losses of £300,000 relating to property, plant and equipment

-    amortisation of £6,100,000 and impairment losses of £280,000 on intangibles.

-    gain of £325,000 on disposal of Items of equipment costing £1,800,000. The property, plant and equipment note to the financial statements shows that £1,200,000 of           depreciation had been charged on these items since acquisition.

-    investment income totalling £6,800,000 has been earned during the year.

-    changes in estimates for provisions for liabilities are incorporated into the calculation of operating profit through operating expenses.

4.    The company paid a dividend during the year to 31 March 2021 and this, together with the profit after tax, are the only movements in retained earnings.

 

REQUIRED:

a)   Prepare the statement of cash flows for Norton Ltd. for the year ended 31 March 2021 in accordance with IAS 7 (using the indirect method). Taxation and interest paid are to be classified as operating cash flows. Clearly show all workings.

[20 marks]

b)   IAS 7, Statement of Cash Flows allows for some flexibility in the presentation and       categorisation of certain aspects of the statement. Outline some of these differences and consider how they may impact the reader’s understanding of the information      presented.

[6 marks] [Total marks Question B.1: 26 marks]

Question B.2

Haldane Ltd.

Haldane Ltd. prepares its financial statements to 31 March each year. The company operates as a homeware retailer with retail outlets in many cities throughout the UK and some                       international locations. Most of the shops are rented but some sites in the major UK cities are   owned by the company and are included in property, plant and equipment. The company           applies International Financial Reporting Standards and uses the cost model for the                      measurement of buildings.

On 1 June 2020, the company appointed an agent to actively market the sale of one of its shops in Glasgow. The shop will continue to operate but as soon as a buyer is found, the existing          inventory will be moved to another shop in the city. Management expect that the sale will be    completed by the end of May 2021.

The following additional information relating to this property is available:

1 June 2020:

Building carrying amount £430,000

Fair value less costs to sell £410,000

31 March 2021:

At the year-end the property remained unsold but strict planning regulations that previously applied to the building have been relaxed. This resulted in a revised independent valuation,  based on the selling price of a similar property on the same street, of £455,000.

10 May 2021:

The building sale was completed on 10 May 2021 and the sale proceeds after selling costs totalled £463,000.

REQUIRED:

Explain how Haldane Ltd. will account for this building, including any reasons or assumptions you make in arriving at this treatment and calculating any impairment losses or gains that     should be recognised:

-    when the building is first put on the market on 1 June 2020

-    at 31 March 2021, clearly stating the amounts that will appear on the Statement of Comprehensive Income and Statement of Financial Position at that date

-    at the date of sale on 10 May 2021 to record the disposal of the building.

[9 marks] [Total marks Question B.2: 9 marks]

[Total marks Section B: 35 marks]

Question C.1

Below are the summarised statements of financial position of two companies, Sparkle Ltd. (Sparkle) and Gleam Ltd. (Gleam) as at 31 December 2020

Non-current assets

Property, plant and equipment

Investment in Gleam

Current Assets

Inventory

Trade and other receivables

Loan due from Gleam

Bank

Total assets

Equity

Ordinary share capital (£1 shares)    Preference share capital (£1 shares)

Share premium

Revaluation reserve

Retained earnings

Current Liabilities

Trade payables

Loan due to Sparkle

 

Total equity and liabilities

SPARKLE

31 Dec. 2020

E000s

3,184

959

 

4,143
357 312 17 21
707
4,850
2,000 500 440 240 980
4,160   690 -
690
4,850

GLEAM

31 Dec. 2020

E000s

1,290

-

1,290

 

198

144

-

16

 

358

1,648

 

800

200

120

-

190

1,310   326 12

338

1,648

The following additional information is available:

1.    Sparkle acquired 70% of Gleam’s ordinary share capital and 15% of preference share         capital on 1 January 2020. At that date, Gleam’s retained earnings were £150,000. Gleam uses the cost model (rather than the revaluation model) for its non-current assets. At the date of acquisition, the fair value of Gleam’s property, plant and equipment was assessed as being £100,000 higher than the carrying amount. There has been no change in Gleam’s share capital since the date of acquisition.

2.    Goodwill on acquisition has suffered an impairment loss of 40%.

3.    Non-controlling interests in subsidiaries are to be measured at the appropriate portion of the subsidiary’s identifiable net assets.

4.    During the year, Sparkle made sales of £96,000 to Gleam. The cost of these goods was £56,000. At 31 December 2020, Gleam had only sold three quarters of these goods to customers outside the group.

5.    In June 2020 Sparkle provided an interest free loan to Gleam with the agreement that the full amount of the loan would be repaid within 18 months. On the last day of December    2020, Gleam repaid £5,000 of this loan and has correctly recorded this payment, however Sparkle has not yet recorded the receipt of this amount. The balance of the loan will be    repaid before December 2021.

REQUIRED:

a)      Prepare the consolidation adjustment journal entries AND the consolidated statement of financial position for the Sparkle Group as at 31 December 2020 in accordance with          International Financial Reporting Standards. Clearly show all workings

[20 marks]

b)      If the intra-group trading which occurred during the year (described in item 4 of the           additional information above) had been sales made by Gleam to Sparkle, explain how this would have been treated in the preparation of the Group Statement of Financial Position (SFP). Identify which items would be affected in the Group SFP and the amounts that         would appear for these items. (Note: there is no requirement to prepare a revised Group SFP).

[3 marks]

c)      On 1st January 2021, Sparkle paid £350,000 to acquire 264,000 ordinary shares of Bright    Ltd (Bright). At that date Bright’s ordinary share capital was £600,000 (Nominal value 50p) and it had retained earnings of £180,000.

-     Identify the nature of the ownership relationship that exists between Sparkle and Bright and explain the method used to account for this investment in accordance with the relevant International Financial Reporting Standards.

-     Show the figures that will appear in Sparkle’s financial statements for the year end

31 December 2021 in relation to the investment in Bright assuming Bright’s profits after tax for the year to 31 December 2021 are £150,000 and Bright pays out total dividends of £20,000 during the year to 31 December 2021.

[6 marks]

d)   After the publication of the 31 December 2020 financial statements, Sparkle became

aware of two issues relating to items that were presented in the published financial        statements. The first issue relates to a significant reduction in the expected useful life of a building. In an email to the financial controller, a member of the accounts team has     highlighted that if this shorter useful life had been used from when the asset was first    acquired 5 years ago then deprecation charged each year for the past 5 years would       have been £100,000 higher. The second issue relates to an error with regard to revenue recognition during the year to 31 December 2020. Sales invoices totalling £450,000         were recorded as sales in December 2020 but these items were not delivered to              customers until February 2021. The cost of these goods, £290,000, was included in          inventory at 31 December 2020.

Explain how each of these events should be dealt with in accordance with the appropriate International Financial Reporting Standards .

[6 marks] [Total marks C.1: 35 marks]

Question C.2

Melville plc. (Melville) is preparing its financial statements for the year ended 31 March 2021.  The following items are still being considered. You are required to explain the treatment of      these items in Melville’s financial statements for the year-ended 31 March 2021 in accordance with the appropriate International Financial Reporting Standards.

Item 1: Warehouse construction

Melville is constructing a new building which will become their new distribution warehouse.      Total construction costs to date amount to £2,700,000 and this amount is showing as an asset   under construction in the draft statement of financial position. Much of the financing of the       project has come from a surplus of cash flows from operations. Due to higher than usual             demand for its products the need for the warehouse became more urgent and additional costs were incurred to speed up the construction. A loan of £600,000 was taken out on 1 September 2020 to provide additional finance. Interest on that loan is charged at a rate of 5% per annum.  The interest costs are showing as interest expense on the draft income statement. The full         amount of the loan is being used to finance the additional construction costs of the warehouse. The warehouse became fully operational on 1 April 2021. The loan is still outstanding and will    be repaid in full on 31 August 2021. The asset is considered to be a “qualifying asset” in               accordance with IAS23 (revised), Borrowing Costs.

REQUIRED:

-   Explain the appropriate treatment of the interest costs on the loan in the year to 31 March 2021, and the year to 31 March 2022, clearly outlining the rationale behind the treatment.

-   Show the figures that will appear on the Statement of Comprehensive Income and Statement of Financial Position for the year ended 31 March 2021 in relation to this warehouse.

[7 marks]

Item 2: Goodwill

Melville has spent £2,000,000 on raising brand awareness this year and already sales have risen sharply. Excellent sales and profit growth are expected next year. As a result of this enhanced    reputation and its impact on future sales, profitability, and sustainable future cash flows,            Melville has re-categorised this £2,000,000 as an intangible asset of Goodwill on its draft             statement of financial position and plans to amortise it over the next 3 years.

REQUIRED:

-   Explain whether this is the appropriate categorisation of this spending in accordance with International Financial Reporting Standards.

-   Show the figures that will appear on the Statement of Comprehensive Income and             Statement of Financial Position for the year ended 31 March 2021 in relation to this item.

[5 marks]

Item 3: Discontinued operations

Melville has sold a division of its business in South America during the year to 31 March 2021.   The division had sales of £10,000,000 but had made losses of £3,200,000 this year. The division, which had a carrying value in Melville’s accounts of £22,000,000 was eventually sold to a large  US company for £18,000,000. All aspects of the disposal of the division have been correctly        accounted for in the draft financial statements and Melville’s management understand that it    must disclose information regarding this discontinued operation but are unclear as to why          users of financial statements would find such detailed information useful.

REQUIRED:

-     Explain how this information would be disclosed in the financial statements and             particularly why these disclosures are useful to Melville’s investors/potential investors.

[5 marks]

Item 4: De-recognition of Revalued Land

During the year to 31 March 2021, Melville disposed of one of its plots of land which had been acquired some years ago for £1,100,000. Melville uses the revaluation        model to accounts for land (which is not held for investment purposes) and                revaluations have taken place twice since acquisition.

The land was sold for £1,950,000 on 29 March 2021. At the date of disposal this land was included in the accounts at a carrying amount of £1,600,000. The revaluation      reserve includes £500,000 relating to the revaluation of this land.

This transaction has not yet been accounted for in the draft financial statements.

REQUIRED:

-    Explain the treatment of this sale and show the appropriate journal entry.

-    Show the figures that will appear on the Statement of Comprehensive Income,              Statement of Changes in Equity and Statement of Financial position for the year ended

31 March 2021 in relation to the de-recognition of this land.

[6 marks]

Item 5: Underestimate of taxation

Melville’s income statement for the year ended 31 March 2020 (last year) showed a tax           expense of £1,100,000 which was the estimated charge calculated by the company’s tax          advisers. Following a review by HMRC (UK tax authority) the tax bill issued amounted to           £1,620,000 and this amount had been paid in full before the end of December 2020.                 An amount of £520,000 is showing as a Debit balance for Corporation Tax on the Trial Balance at 31 March 2021.

Having considered the results of the HMRC review, the tax advisers have estimated that the tax charge based on the profits for the year to 31 March 2021 will be £2,300,000.

REQUIRED

-   Explain the distinction between a change in accounting estimate and a prior period error.    Based on your understanding of this distinction, explain how the information relating to the taxation should be accounted for in the financial statements for the year ended 31 March    2021.

-   Show the figures that will appear in relation to taxation on the Statement of Comprehensive Income and the Statement of Financial Position for the year ended 31 March 2021.

[6 marks]

Item 6: Earnings per share

On 1 April 2019, the company’s issued share capital consisted of 2,000,000 ordinary shares and no shares were issued during the year to 31 March 2020.

On 1 July 2020 the company made a 1 for 4 bonus issue of shares.

On 1 January 2021 the company issued a further 150,000 shares at full market price.

Profit after tax figures are as follows:

31 March 2020

31 March 2021

£6,450,000

£7,200,000 (Based on draft figures)