Monitoring Test MT2A

Corporate
Reporting
(International)

P2CR-MT2A-X09-Q


Time allowed 1.5 hours

BOTH questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.



Accountancy Tuition Centre Ltd

ATC
INTERNATIONAL

Accountancy Tuition Centre (International Holdings) Ltd 2009 2
BOTH questions are compulsory and MUST be attempted.
1 IFRS 3 Business Combinations was first issued by the IASB in 2004 as a replacement for IAS
22. It was then subsequently amended by the IASB in 2008. The original standard changed
the accounting requirements of business combinations in many ways, it also introduced new
definitions relating to business combinations, whilst the revised 2008 further changed the
method of accounting for business combinations.
Required:
(a) (i) Define goodwill in accordance with IFRS 3; (2 marks)
(ii) State the accounting treatment of both positive goodwill and a gain
from a bargain purchase; (5 marks)
(iii) State the accounting treatment of a deferred consideration and a
contingent consideration, relating to business combinations, in
accordance with IFRS 3. (4 marks)
(b) Oliver is a company which produces a range of compact office furniture specially
designed for firms with limited office space.
Oliver is keen to expand into new business areas and has identified a potential
target, Heldon. Oliver has decided that the best date for the investment is 1 July
2009 but has not yet decided on the percentage of shares to be acquired.
Oliver has performed a business valuation in which it has valued a 50% holding. Its
intention is that the cost of the investment will be made up as follows.
$50,000 cash payable on 1 July 2009
$50,000 cash payable on 1 July 2011
20,000 $1 shares with an agreed value of $3.25 each (in the draft accounts the
premium on this issue has been credited to the share premium account)
Heldon operates in a jurisdiction where the tax authority does not allow expenses
for the setting up of doubtful debt provisions as a deduction against taxable profit
and taxes interest on a cash basis. The rate of tax is 30%. Heldon does not account
for deferred tax in its own accounts.
Heldon has a December year-end. Oliver has obtained budgeted accounts of Heldon
for the year ended 31
st
December 2009.

Accountancy Tuition Centre (International Holdings) Ltd 2009 3
Information from the draft forecast accounts for Heldon for the year ended 31
December 2009 is provided below.
Budgeted accounts for the year ended 31 December 2009
Statement of financial position
Heldon
$000
Non-current assets 700
Current assets 390
_____
1,090
_____
Share capital 100
Retained earnings 140
Revaluation reserve 40
Current liabilities 200
Loan 610
_____
1,090
_____
Statement of comprehensive income
Heldon
$000
Profit before tax 145
Tax (45)
___
Profit after tax 100
Proposed dividend (20)
___
Retained profit 80
___
Preliminary investigations into Heldon have identified the following issues.
Non current assets
The non-current assets balance of Heldon include industrial buildings with a cost of
$250,000 which were acquired on 1 January 2004. Heldons policy is not to
depreciate buildings, whereas Oliver has a strict depreciation policy with a useful
economic life of fifty years for such buildings. A full years charge is taken in the
year of acquisition.
Under the tax regime operating in the country tax allowable depreciation on
industrial buildings is calculated on a 15% reducing balance basis. The tax authority
allows companies to claim a full years charge in the year of acquisition irrespective
of the date of acquisition.
Also included in non-current assets is a plot of land at a value of $320,000. This
valuation was carried out three years ago and current market conditions indicate that
$285,000 is a more realistic value. This plot of land is not being depreciated. It
originally cost $280,000. The land sits in a region that the government has
designated for special aid through the provision of tax breaks. The tax base of the
land is $250,000.

Accountancy Tuition Centre (International Holdings) Ltd 2009 4
The balance of the non current assets have a tax base equal to their carrying value
Receivables
Heldon has a very wide range of customers and a summary of the receivables
ledger as at 31 December 2008 is as follows.
Over 6-12 3-6
1 year months months Current Total
$ $ $ $ $
13,000 5,000 26,000 53,500 97,500

13.3% 5.1% 26.7% 54.9% 100%
The accounts of Heldon contain a doubtful debt allowance based on the following
formula.
Age % provided
Over one year 20%
6-12 months 10%
Olivers accountants believe that this provision is very optimistic. They would
prefer to bring Heldon into line with Olivers policy which is as follows.
Age % provided
Over one year 100%
6-12 months 40%
3-6 months 10%
The budgeted gross receivables are $111,000 as at 1 July 2009 and $117,000 as at
31 December 2009 (these figures are before deducting any allowance). The net
receivables figures actually included in the draft accounts are after calculating the
doubtful debt allowance in accordance with Heldons accounting policy. The aged
receivables analysis will not be available in respect of the balances at 1
st
July 2009
but Oliver has discovered that the profile has been quite stable for some time.
Loan
The loan represents a sum of $500,000 borrowed two years ago plus two years
interest at $55,000 per annum accrued on a straight-line basis. Under the terms of
the loan Heldon does not make interest payments but will settle the liability with a
single sum of $775,000 payable 5 years after the date upon which the loan was first
raised. Current interest rates have fallen to 10%. The tax authority recognises
interest on a cash basis.
Cost of Capital
The cost of capital to be used in any discounting calculations is 10%.
Non-controlling interest
Are to be valued at the proportionate share of the fair value of the identifiable net
assets, it is not credited with its share of goodwill.

Accountancy Tuition Centre (International Holdings) Ltd 2009 5
Required:
Calculate the goodwill arising on acquisition on the assumption that Oliver
acquires 50% of Heldon on 1
st
July 2009. (The calculation should be performed
in accordance with all relevant accounting standards. Assume that the tax base
of all assets and liabilities is equal to their carrying value except where the
question indicates otherwise) (14 marks)
(25 marks)

2 In the Framework for the preparation and presentation of financial statements the IASB has
developed a conceptual approach to financial reporting which includes the application of a
substance over form approach. This concept was included in the original IAS 1 Disclosure of
accounting policies as a consideration which should govern the selection of accounting
policies and in IAS 1 (revised) Presentation of financial statements where it is seen as a key
component of the reliability of information.
The following information relates to separate companies
(i) A car manufacturer, A Inc, supplies cars to a dealer, B Inc, on a consignment basis.
The terms of the deal allow either party to have the cars returned or, at the option of
A Inc, transferred to another dealer. B has to pay a monthly rental of 2% of the cost
of the car and has to arrange insurance.
When a car is sold to the public, B has to pay the lower of:
the original list price of the car when it was supplied; or
the current list price less the monthly charges to date.
B must also pay for the cars (on the same terms) if they remain unsold after three
months.
(ii) A property company, C Inc, sells some of its properties to D Inc, the subsidiary of a
bank. D is financed by loans from the bank.
C and D enter into a management contract whereby C agrees to manage the
properties in return for a management charge set at a level to absorb all of Ds
profits. Properties cannot be sold without the agreement of C and the management
charge is adjusted to ensure any profits or losses on disposal revert to C.
(iii) F Inc is a brewer which supplies beer to outlets in the UK. The Group has entered
into arrangements with a number of banks to advance loans to third party UK
outlets. These arrangements are both guaranteed and subsidised by the Group to
enable the Brewing division to obtain a beer supply agreement with the outlets.
Such agreements are generally cancellable at 3 months notice. Amounts advanced
by banks in accordance with these arrangements are reflected in the reported assets
and liabilities of the Group only to the extent that liabilities are known to exist in
respect of such guarantees.


Accountancy Tuition Centre (International Holdings) Ltd 2009 6
Required:
(a) Explain briefly how each of the above transactions should be accounted for.
(9 marks)
(b) The following transactions relate to the year end financial statements of G, an
incorporated entity.

(i) Properties held for resale

The draft year-end statement of financial position includes a material balance
properties held for resale included in current assets.
This consists of two properties as follows:
Net book
Value
$000

Head office 2,050
Warehouse 1,003

G plans to leaseback both these properties after the sale. The head office is
expected to raise $2,000,000, which is slightly lower than its fair value of
$2,075,000, and the leaseback will be for five years (after this the building has to be
sold to the government as it will have to be demolished to make way for a new ring
road). The purchasers have agreed to reduce the future lease instalments from their
market rate of $115,000 per annum to $100,000 per annum to reflect the relatively
low sales price. The warehouse is to be leased back for its estimated remaining life
of twenty years. The purchaser has agreed to pay $1,150,000 (which is 5% above
fair value) and will then lease it back for $85,000 per annum, payable in advance.
(ii) Loans issued in the year. Two new loans were taken out in the last few
days of the year.
(a) A $1,000,000 bond was issued for ten years with the interest rate
agreed as follows.
Year Interest
%

1 (next year) 8
2 8
3 8
4 10
5 10
6 10
7 13
8 13
9 13
10 13

(The financial controller of G has advised you that the interest
rate implicit in the transaction is 10.06%.)

Accountancy Tuition Centre (International Holdings) Ltd 2009 7
(b) A second loan was taken out for $470,000 (with issue costs of
$20,000) and this is redeemable at its par value of $1,000,000 in
ten years time. The coupon interest rate is 3% although the true
interest rate is believed to be 13.23%.
Required:
For each of these transactions:
comment briefly on appropriate accounting treatments, mentioning
alternatives where appropriate;
highlight how the transactions should initially be recorded; and
explain the total impact on the statement of comprehensive income
setting out the detailed journals for next year
(11 marks)
(c) The IASC issued IAS 39 Financial Instruments :recognition and measurement after
a long delay. IAS 39 has recently been revised and the IASB has also issued
implementation guidance and questions and answers in relation to the application of
IAS 39 due to the difficulty of accounting for financial instruments.

Required:
Explain the inadequacies of traditional accounting methods in dealing with
Financial Instruments. (5 marks)
(25 marks)



End of Question Paper