Institute of Chartered Accountants – Ghana (ICAG) Paper 3 ...

1 Institute of Chartered Accountants Ghana (ICAG) Paper Corporate Reporting Final mock Exam 1 Marking scheme and suggested solutions DO NOT TURN THIS PAGE UNTIL YOU HAVE COMPLETED THE mock EXAM Corporate ReportingThe Institute of Chartered Accountants Ghana First edition 2015 ISBN 9781 4727 2842 5 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd. Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA The Institute of Chartered Accountants Ghana 2015 Final mock Exam 1: Answers 1 Question 1 Marking scheme Marks Consolidated SPLOCI 4 NBT 3 ONW 3 PLP 2 Inventory 1 Dividend Eliminate FV of investment in associate NCI 4 20 MLT GROUP CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20X5 GHSm Revenue: 1,941 + (564 129) + (340 126) 72 (W4) 2, Cost of sales: 1,650 + (328 129) + (202 126) 72 (W4) + 6 (W4) (1, ) Gross profit Other income: 75 + (44 129) + (29 126) 12 (W5) Distribution costs: 72 + (50 129) + (62 126) ( ) Administrative expenses: 92 + (70 129) + (28 126) + 2 (W3) + 9 (W6) ( ) Finance costs.

2 21 + (20 129) + (19 126) ( ) Share of profit of associate: 16 126 25% Profit before tax Income tax expense: 50 + (56 129) + (24 126) ( ) Profit for the year Other comprehensive income (not reclassified to profit or loss) Derecognition of available-for-sale financial asset (10 9 (W6)) Gains on available-for-sale financial assets: 48 + (22 129) ((16 6 (W7)) 126) Gains/losses on property revaluation: 28 + (14 129) Remeasurement losses on defined benefit plan: ( ) Share of other comprehensive income of associate: 32 126 25% Other comprehensive income for the year net of tax Total comprehensive income for the year 2 Final mock Exam 1: Answers GHSm Profit attributable to: Owners of the parent (bal.)

3 Fig.) Non-controlling interests (W2) Total comprehensive income attributable to: Owners of the parent (bal. fig.) Non-controlling interests (W2) Workings 1 Group structure MLT NBT ONW PLP The MLT group controls ONW so the indirect associate, PLP, will be equity accounted using 25% but part of this is owned by the 25% non-controlling interest (NCI) in ONW. Timeline MLT NBT Subsidiary with 40% NCI 129 ONW Subsidiary with 25% NCI 126 PLP 25% associate (with 25% NCI by ONW) 10% 50% 60% 0% 75% 25% Final mock Exam 1: Answers 3 2 Non-controlling interests NBT ONW Profit for yearTCI Profit for year TCI GHSm GHSm GHSm GHSm Per question 84 129 63 120 129 90 34 126 50 126 25

4 Depreciation of fair value adjustment (W3) ( ) ( ) Elimination of fair value gain recognised on investment in PLP (W7) (6) Impairment of 'full' goodwill (W6) ( ) ( ) Unrealised profit (W4) ( ) ( ) Share of profit of associate Per SPLOCI Share of TCI of associate ( + (32 126 25%) 6 25 40% 40% 25% 25% 3 Fair value adjustments NBT At acquisition Movement At year end 1 Jan 20X5 20X5 30 September 20X5 GHSm GHSm GHSm Plant (380 (100 + 160 + 100)) 20 1020 9/12= ( ) 4 Intragroup trading (i))

5 Cancel intra group sales/purchases: DEBIT Revenue GHS72m CREDIT Cost of sales (purchases) GHS72m (ii) Eliminate unrealised profit: DEBIT Cost of sales (72 12020) GHS6m CREDIT Inventories (SOFP) GHS6m 4 Final mock Exam 1: Answers Note. As the intra-group sale was made by the subsidiary, the unrealised profit adjustment must also be reflected in the non-controlling interest. 5 Intra-group dividend The dividend received from NBT by MLT must be cancelled out on consolidation of the statement of profit or loss and other comprehensive income. DEBIT Other income (P/L)(GHS20m 60%) GHS12m CREDIT Dividends paid (NBT (in SOCIE)) GHS12m 6 Goodwill NBT GHSm Consideration transferred: Cash Contingent consideration (Note 2) Fair value of previously held investment (10%/40% 40) (Note 3) Non-controlling interest (at FV) Fair value of net assets ( ) Impairment loss 10% ( ) Notes.

6 1 No information was provided in respect of the goodwill on the acquisition of ONW, but as no impairment has arisen, it would have no effect in the statement of profit or loss and other comprehensive income. 2 Although the original estimate of the FV of the contingent consideration would have been used at the acquisition date, IFRS 3 Business combinations allows the figure to be adjusted through goodwill if changes arise from additional information about facts and circumstances that existed at the acquisition date (IFRS 3 para. 58). 3 The fair value of MLT s original 10% holding in NBT would be measured using the same share price as for the non-controlling interest at that date. The gain on the derecognition of the available-for-sale financial asset at the date control is obtained is therefore: GHSm Fair value at date control obtained 10 Carrying value brought down from previous year end ( ) (9) 1 7 Fair value of ONW s investment in PLP The fair value uplift on the investment in PLP (GHS6m) that has been recognised in ONW s other comprehensive income must be eliminated on consolidation.

7 The carrying value of the investment in associate in the consolidated statement of financial position would be based on the fair value paid at the acquisition date, plus the group share of the associate s income surplus. to OCI Final mock Exam 1: Answers 5 Question 2 Marking scheme Marks (a) Entity has choice/cash-settled due to past practice 1 Measure at FV at y/e, spread over vesting period, remove leavers 2 Change in share price after y/e = non adjusting event after reporting period 2 Calculation of expense/liability 1 Explain deferred tax 2 Calculate deferred tax 2 Available/Maximum 10 (b) CSC 1 Benefits 1 Interest on liability (9/12) 2 Expected return on assets (9/12) 2 Financial statement extracts 4 Available/Maximum 10 20 (a) Accounting treatment for share-based payment This is a share-based payment transaction where the entity (MCN) has a choice of settlement.

8 IFRS 2 Share-based payment requires the transaction to be treated as cash-settled if there is a present obligation to settle in cash. If there is no obligation, the transaction should be treated as equity-settled. Here, MCN's past practice of always settling in cash has created a valid expectation in employees that they will receive cash. Therefore, there is a constructive present obligation for MCN to settle in cash and MCN should account for the scheme as a cash-settled transaction. Cash-settled share-based payments are accounted for as follows: (i) An expense should be recognised over the vesting period (two years) (ii) A corresponding liability should be recorded in the statement of financial position (iii) The liability should be measured at fair value and this fair value updated each year end to give the best estimate of amount to be paid (iv) Any expected leavers over the vesting period should be removed from the number of employees as they will not receive the share-based payment (the best estimate at each year end should be used) Calculation The fair value of the liability at the year end is valued using the year end share price as this represents the cash value at that date.

9 The liability as at 30 September 20X5 and the corresponding expense to be recognised in profit or loss for the year ended 30 September 20X5 is calculated as follows: [(30 managers 2 leavers) 6,000 shares GHS9 year end fair value vested] = GHS756,000 6 Final mock Exam 1: Answers Event after the reporting period The post year end increase in the share price to on 20 October 20X5 is a non-adjusting event after the reporting period. This is because it relates to conditions that arose after the 30 September 20X5 year end. The liability at 30 September 20X5 is not adjusted for this but the difference of GHS21,000 [28 managers 6,000 shares ( GHS9) ] would be disclosed as a non-adjusting event after the reporting period if considered material. Deferred tax IAS 12 Income taxes requires deferred tax to be recognised on temporary differences.

10 With this cash-settled scheme, a temporary difference arises because an expense is recognised in profit or loss over the vesting period whereas a tax deduction is given at one point in time ie on exercise. The carrying amount of the share-based payment expense is zero as it has already been deducted in determining accounting profit. The tax base is calculated as the expected tax deduction on exercise (estimated by using the year end share price in this case) based on employees' services to date. GHS Carrying amount of share-based payment expense 0 Tax base (same as expense as calculated above as based on y/e price) (756,000) Temporary difference (756,000) Deferred tax asset (GHS756,000 30%) 226,800 This deferred tax asset (representing future tax relief on exercise of the instruments) should only be recognised if MCN has sufficient future taxable profits against which it can be offset.