ACF518 / ACF566 CORPORATE FINANCIAL REPORTING JAN 2023

Module Title: CORPORATE FINANCIAL REPORTING

Additional information:

1.       PLANT acquired a 40% shareholding in JONES on 01/09/2022.   The  Directors of PLANT do not have a role in the day-to-day running of JONES.

2.       Since acquisition, JONES sold £1,000,000 of goods to PLANT at a margin of 20%. At the year end half these goods remained in PLANT’s closing inventory, JONES’s accounts receivable include £300,000 owed by PLANT.

3.       PLANT acquired  15,600,000 £1.50 ordinary shares in PAGE on 01/01/2017.   The retained earnings at that date were £32,000,000; the fair value of PAGE’s net assets was the same as their book value, with the exception of property.  The market value of property was £15,000,000 above the book value.  At acquisition, the property had a  remaining  useful  life  of  15  years,  depreciation  is  charged  to  administrative expenses.  The fair value of the remaining 10,400,000 shares was £36,000,000 on 01/01/2017.  PLANT values non-controlling interests at fair value when calculating goodwill on acquisition of subsidiaries.

4.       Since  acquisition  PAGE has become a customer of PLANT.   PLANT’s  accounts receivable include £4,800,000 owed by PAGE; total sales to PAGE in the year were £8,000,000.   PLANT sells goods to  PAGE at a mark-up of 25%.   At 31/12/2022, PAGE still held 20% of these goods in inventory.

5.       An impairment test on the goodwill of PAGE, conducted on 31/12/2022, concluded that  goodwill  on  acquisition  is  now  impaired  by  £10,000,000.  The  value  of  the investment in JONES was not impaired.

6.       PAGE  paid  dividends  of  £2,400,000  relating  to  the  period  from  01/01/2022  to 31/12/2022.   JONES did not pay dividends during the year ended.   All dividends receivable by PLANT have been credited to other income in the statement of profit or loss above.

7.       All items in the above income statements are deemed to accrue evenly over the year.

Required:

Prepare the consolidated statement of profit or loss for the PLANT Group for the year ended 31/12/2022 and a consolidated statement of financial position as at that date. (Show workings including ALL JOURNAL ENTRIES REQUIRED)

Round figures to the nearest £000. (30 marks)

[Total: 30 Marks]

Question 3

IAS 37 Provisions, contingent  liabilities and  contingent assets has  applied  for accounting periods starting after 01 July 1999.

Required:

(a) Set out the definition of a provision as per IAS along with the criteria it sets out for recognising a provision. (4 marks)

BARRI Plc (BARRI) is a conglomerate business with a year end of 31/12/2022 working across many different industries.  The assistant accountant has asked for your assistance with the following issues:

1.     BARRI  supply  concrete  to  building  firms.    At  the  beginning  of  2022  a  building company was supplied with a faulty batch of cement.  As a consequence a number of houses they constructed will have to be demolished and rebuilt.  The builder is suing BARRI for £1,500,000, the selling price of the houses. BARRI’s solicitors have examined the case and the builder appears to have sufficient evidence to show the problems were caused by the cement BARRI supplied. The solicitors feel it is almost certain BARRI will have to pay damages, but the most likely amount to be paid is the cost of constructing the houses, £1,000,000 rather than the selling price.  The case is forecast to cost BARRI £100,000 in solicitors/architects/engineers fees.

BARRI in turn are suing the company who supplied the cement to BARRI.  BARRI’s solicitors feel they have and 80% chance of success, with £700,000 the most likely amount they will receive. (6 marks)

2.     BARRI manufactures and sells widgets.  They offer warranties on goods which are not  performing  to  the  customers’  satisfaction.     From  past-experience,  80%  of customers make no warranty claim, 15% make claims which cost BARRI £500 to repair each unit and 5% make claims which cost BARRI £2,000 to repair each unit. Total sales for the year ended 31/12/2022 were 10,000 units.  BARRI has no current provision for warranty claims, expensing each claim as it is received. (5 marks)

3.     BARRI also operate a construction company.  They entered into a contract to build a large office block on 01/01/2022.   It is a fixed price contract with BARRI receiving £5,000,000 on completion, which is due on 31/03/2023.

Since  entering   into  the  contract   building  costs  and   labour   prices  have  risen dramatically.  BARRI’s total costs to date are £4,000,000 and they estimate it will cost a further £2,000,000 to complete the office block. (3 marks)

4.     BARRI  has  had  recent  difficulties  with  its  Republic  of  Ireland  factory  and  are considering closing it down in six months’ time. The Board of Directors has discussed this action at its last meeting but no firm decision has been made.  The company estimates the redundancy costs of winding up operations at £400,000.  No provision has been made as the factory will continue production until 30/06/2021. (2 marks)

Required:

(b) Explain how BARRI should account for the above under IAS 37 Provisions, contingent liabilities and contingent assets, along with any journal entries necessary to correct the financial statements for the year ended 31/12/2022.

[Total: 20 Marks]

Question 5

“In a future society, successful firms are going to be those that can link together the environment, society and their economic prosperity. They will look to the long term and find resources that are sustainable and assurance that those costs are not going to skyrocket. ”

Michael Radcliffe, KPMG Director Global Sustainability Network (2002) Required:

Explain what is meant by the green revolution in financial reporting and critically evaluate the attempts by the accounting profession to achieve greater transparency in reporting of environmental issues.

(20 Marks)

[Total: 20 Marks]