Answers - ACCA Global

1 AnswersProfessional Level Essentials Module, Paper P2 (INT)Corporate Reporting (International)March/June 2016 Sample Answers1 (a)Weston Group Statement of cash flows for year ended 31 January 2016$mCash flow from operating activitiesProfit for the year (W1)182 Finance cost23 Associate s profits(16)Service cost component11 Cash contributions to pension scheme(19)Depreciation (W7)20 Impairment on amortised cost asset (W1)8 Gain on contingent consideration (W8)(4)Impairment of goodwill (19 9 4)6 Amortisation of intangible assets7 218 Movements in working capitalIncrease in trade and other payables (W9)15 Increase in trade and other receivables (104 23 106)(25)Decrease in inventories (165 38 108)19 Cash generated from operating activities227 Finance costs paid (W8)(22)Income taxes paid (W5)(81) Net cash generated by operating activities124 Cash flows from investing activitiesPurchase of property, plant and equipment (W7)(74)Purchase of intangible assets (W6)(17)Dividends received from associate (W4)4 Purchase of associate (W4)(90)Proceeds on disposal of Northern (W3)

2 87 4 Acquisition of amortised cost asset(20)Settlement of contingent cash(7) (116 6) Cash flows from financing activitiesRepayment of long-term borrowings (48 26)(22)Dividends paid to non-controlling interest (W10)(8 4) (30 4) Net decrease in cash and cash equivalents(23)Cash and cash equivalents at beginning of period43 Cash and cash equivalents at end of period20 Workings(1) Impairment on amortised cost financial assetThe financial asset has only one year to run at 31 January 2016. The remaining cash flows to be received are therefore$21 6m (($20m + (8% x $20m)). Since there is a 40% chance of default, the expected cash flow at present valuewould be $12m (60% x $21 6m/1 08).)

3 A further impairment of $7m ($19m $12m) is required against , the overall impairment charged for the year of $8m, including the expected 12-month credit loss of $1m,should be added back to operating profits within the operating activities reconciliation. (Tutorial note:The carrying valueof the investment is $19mwhich is after $1mimpairment for 12 months expected credit losses.)13 The profit for the year will be:$mProfit before tax continuing activities183 Profit before tax discontinued activities6 Impairment loss(7) 182 (2)Goodwill on acquisition of Northern$mCash paid132 Fair value of non-controlling interest28 160 Identifiable net assets at acquisition(124) Goodwill on acquisition36 Impairment of goodwill (75%) (27) Carrying value of goodwill at disposal 9 (3)Proceeds on disposal of NorthernThe fair value of the property, plant and equipment at disposal will be $80m as per the question plus $16m fair valueuplift less 4/8 depreciation = $88m.

4 A deferred tax liability on the fair value adjustment would arise of (25% x $16m)= $4m. This will be released in line with the extra depreciation, so the carrying value at disposal will be only $2m ($4m ($4m x 4/8)). The carrying value of the entire deferred tax liability at disposal is therefore $8m ($6m per question +$2m).The revised carrying values at disposal are therefore:$mProperty, plant and equipment (W7)88 Inventory38 Trade receivables23 Trade and other payables (W9)(10)Deferred tax (W5)(8)Bank overdraft(2) 129 Goodwill (W2)9 138 The non-controlling interest at disposal will be:$mNon-controlling interest at acquisition28 Addshare of post-acquisition profits (20% x (129m 124m))1 Lessshare of goodwill impairment (20% x 27m) (W2)(5 4) 23 6 Loss on disposal per question (29)Fair value of net assets at disposal138 Non-controlling interest at disposal(23 6) Proceeds on disposal85 4 Add backoverdraft disposed in year2 Net proceeds on disposal of Northern87 4 (4)Associate$mBalance at 31 January 2016102 Lessshare of associate profit(16)Adddividend received ($10m x 40%)4 Cost of acquisition (cash)

5 90 Therefore, cash paid for the associate is $90 million, and cash received from the dividend is $4 (5) Taxation$m$mOpening tax balances at 1 February 2015 Deferred tax15 Current tax92 107 Charge for year continuing40 Charge for year discontinuing2 Deferred tax on disposal (W3)(8)Deferred tax on actuarial gain (25% x $4m) 1 Lessclosing tax balances at 31 January 2016 Deferred tax14 Current tax47 (61) Cash paid81 The 31 January 2015 deferred tax asset for the pension scheme would be (25% x $72m) = $18m. At 31 January2016, the deferred tax assets would only be (25% x $60m) = $15m. Since the actuarial gain of $4m would berecorded in other comprehensive income, the deferred tax on the actuarial gain of $1m (25% x $4m) will also be inother comprehensive income.

6 The net gain included within other comprehensive income is $3m ($4m $1m). Theremaining movement in the deferred tax on the pension of $2m will already be included within the charge for the year.(6) Other intangibles$mOpening balance at 1 February 201527 Amortisation(7)Lessclosing balance at 31 January 2016(37) Cash additions17 (7) Property, plant and equipment$mOpening balance at 1 February 2015386 Fair value of disposal (W3)(88)Depreciation charge(20)Lessclosing balance at 31 January 2016(352) Cash additions74 (8) Contingent consideration and finance costs paidThe $10m contingent consideration would have been discounted at 10% and should therefore be unwound with $1m($10m x 10%) charged to finance cost.

7 A gain on settlement therefore arises of $4m ($10m + $1m $7m). Thefinance cost per P&L is $ paid is therefore $23m less $1m unwinding = $22m.(9) Trade payables$mOpening balance at 1 February 201541 Contingent cash consideration at 1 February 2015(10)Disposal of subsidiary (W3)(10)Lessbalance at 31 January 2016(36) Increase in payables 15 (10) Non-controlling interest$mOpening balance at 1 February 201585 Total comprehensive income of NCI11 Disposal of subsidiary (W3)(23 6)Lessclosing balance at 31 January 2016(64) Dividends paid to NCI8 4 15(b)Statements of cash flows provide valuable information to stakeholders on the financial adaptability of an entity.

8 Cash flowsare objective and verifiable and so are more easily understood than profits. Profits can be manipulated through the use ofjudgement or choice of a particular accounting policy. Operating cash flows are therefore useful at highlighting the differencesbetween cash and profits. The cash generated from operations is a useful indication of the quality of the profits generated bya business. Good quality profits will generate cash and increase the financial adaptability of an entity. Cash flow informationwill also have some predictive value. It may assist stakeholders in making judgements on the amount, timing and degree ofcertainty on future cash flows.

9 Cash flow information should be used in conjunction with the rest of the financial statements. The adjustment of non-cashflow items within operating activities may not be easily understood. The classification of cash flows can be manipulatedbetween operating, investing and financing activities. It is important therefore not to examine the cash flow information inisolation. It is only through an analysis of the statement of financial position, statement of comprehensive income and notes,together with cash flow, that a more comprehensive picture of the entity s position and performance is true that International Financial Reporting Standards are extensive and their required disclosures very has led to criticism that the usefulness may be limited where the most relevant information is obscured by immaterialdisclosures.

10 An integrated reporting system would increase disclosure as well as imposing additional time and cost constraintson the reporting entity. However, integrated reporting will provide stakeholders with valuable information which would not beimmediately accessible from an entity s financial statements are based on historical information and may lack predictive value. They are essential in corporatereporting, particularly for compliance purposes but do not provide meaningful information regarding business value. Theprimary purpose of an integrated report is to explain to providers of capital how the organisation generates value over is summarised through an examination of the key activities and outputs of the organisation whether they be financial,manufactured, intellectual, human, social or integrated report seeks to examine the external environment which the entity operates within and to provide an insightinto the entity s resources and relationships to generate value.