Dip IFR

Diploma in
International
Financial Reporting
Tuesday 9 December 2014

Time allowed
Reading and planning: 15 minutes
Writing: 3 hours

ALL FOUR questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

The Association of Chartered Certified Accountants

ALL FOUR questions are compulsory and MUST be attempted

1 Alpha holds investments in two other entities, Beta and Gamma. The statements of profit or loss and other
comprehensive income and summarised statements of changes in equity of the three entities for the year ended
30 September 2014 were as follows:
Statements of profit or loss and other comprehensive income
Alpha Beta Gamma
$’000 $’000 $’000
Revenue (Note 3) 260,000 200,000 180,000
Cost of sales (Notes 1-3) (130,000) (110,000) (90,000)
–––––––– –––––––– ––––––––
Gross profit 130,000 90,000 90,000
Distribution costs (20,000) (15,000) (13,500)
Administrative expenses (Note 4 ) (25,000) (20,000) (18,000)
Redundancy and reorganisation costs (Note 5) (14,000) Nil Nil
Investment income (Note 6) 12,600 Nil 1,500
Finance costs (Note 7) (26,000) (15,000) (12,000)
–––––––– –––––––– ––––––––
Profit before tax 57,600 40,000 48,000
Income tax expense (14,000) (10,000) (12,000)
–––––––– –––––––– ––––––––
Profit for the year 43,600 30,000 36,000
Other comprehensive income:
Items that will not be reclassified to profit or loss
Gains on financial assets designated at fair value
through other comprehensive income (Note 8) 9,000 Nil 1,400
–––––––– –––––––– ––––––––
Total comprehensive income 52,600 30,000 37,400
–––––––– –––––––– ––––––––
Summarised statements of changes in equity
Balance on 1 October 2013 180,000 140,000 120,000
Comprehensive income for the year 52,600 30,000 37,400
Dividends paid on 31 December 2013 (30,000) (10,000) (14,000)
–––––––– –––––––– ––––––––
Balance on 30 September 2014 202,600 160,000 143,400
–––––––– –––––––– ––––––––
Note 1 – Alpha’s investment in Beta
On 1 October 2001, Alpha acquired 75% of the equity shares of Beta. This gave Alpha control over Beta. On
1 October 2001, the net assets of Beta had a fair value of $80 million. None of the assets and liabilities of Beta which
existed on 1 October 2001 were still assets or liabilities of Beta on 30 September 2013. On 1 October 2001, Alpha
measured the non-controlling interest in Beta at its fair value of $22 million. Goodwill on consolidation of $18 million
arose on the acquisition of Beta. No impairment of goodwill on the acquisition of Beta has been necessary up to and
including 30 September 2013.
Beta has four operating segments which are also cash generating units (CGUs) for the purposes of impairment
reviews. On 1 October 2001, the goodwill on acquisition of Beta was allocated between these units on the following
basis:
Unit 1 – $8 million.
Unit 2 – $4 million.
Unit 3 – $3 million.
Unit 4 – $3 million.

2
On 30 September 2014, the carrying amounts of the net assets (excluding goodwill) and recoverable amounts of the
four CGUs of Beta were as follows:
Unit 1 Unit 2 Unit 3 Unit 4 Total
$’000 $’000 $’000 $’000 $’000
Carrying amount 45,000 55,000 30,000 30,000 160,000
––––––– ––––––– ––––––– ––––––– ––––––––
Recoverable amount 50,000 65,000 35,000 35,000 185,000
––––––– ––––––– ––––––– ––––––– ––––––––
Any impairment of goodwill should be charged to cost of sales.
Note 2 – Alpha’s investment in Gamma
On 1 February 2014, Alpha acquired 80% of the equity shares in Gamma and gained control of Gamma.
On 1 February 2014, the fair value of Gamma’s property, plant and equipment exceeded the carrying amounts in the
individual financial statements of Gamma as follows:
– Property excess $20 million (land element of excess $11 million). The estimated remaining useful life of the
buildings element of the property at 1 February 2014 was 25 years.
– Plant and equipment excess $7·2 million. The estimated remaining useful life of the plant and equipment of
Gamma at 1 February 2014 was three years.
All depreciation of property, plant and equipment is charged to cost of sales.
Alpha measured the non-controlling interest in Gamma on 1 February 2014 at its fair value of $28 million. There
was no impairment of the goodwill arising on the acquisition of Gamma in the year ended 30 September 2014. The
profit of Gamma for the year ended 30 September 2014 accrued evenly over the year, but see note 8 regarding the
other comprehensive income of Gamma.
Note 3 – Intra-group trading
Alpha supplies a component used by both Beta and Gamma. Alpha applies a mark-up of 25% to cost when
computing the intra-group selling price. All of the sales of this component by Alpha to Gamma occurred after the
acquisition of Gamma on 1 February 2014. Details of the sales of the component, and the holdings of inventory of
the component by group entities, are as follows:
Beta Gamma
$’000 $’000
Sales of the component 12,000 5,000
––––––– ––––––
Inventory of component at 30 September 2014 (at cost to Beta/Gamma) 2,400 2,000
––––––– ––––––
Inventory of component at 30 September 2013 (at cost to Beta/Gamma) 1,800 Nil
––––––– ––––––
Note 4 – Post-employment benefits
The group makes contributions into both defined benefit and defined contribution retirement benefit plans. All the
employees of Beta and Gamma are members of defined contribution plans but many of the employees of Alpha are
members of a defined benefit plan. The following are relevant details regarding the defined benefit plan:
– Obligation at 30 September 2014: $40 million (30 September 2013: $32 million).
– Fair value of plan assets at 30 September 2014: $34 million (30 September 2013: $27 million).
– Current service cost for the year ended 30 September 2014: $6 million.
– Contributions paid into the plan by Alpha in the year ended 30 September 2014: $5·4 million.
– Benefits paid to retired members: $2 million.
– Relevant market yield: 5% per annum throughout the period.
Alpha has charged the contributions paid into the defined benefit plan in the year ended 30 September 2014
($5·4 million) as an administrative expense. Alpha has made no other entries in respect of the plan in the statement
of profit or loss and other comprehensive income. However, Alpha correctly accounted for the defined benefit plan in
the financial statements for the year ended 30 September 2013.

3 [P.T.O.
Note 5 – Redundancy and reorganisation costs
Following the acquisition of Gamma on 1 February 2014, the directors of Alpha formulated a plan to reorganise the
group. The plan involved some redundancies and some employees changing their roles within the group. As a result
of the reorganisation, certain non-current assets of Alpha will no longer be required. The final version of the plan was
agreed on 31 July 2014 and made public on 15 August 2014. The plan was implemented from 1 November 2014.
The total cost of the plan will be borne by Alpha. The directors of Alpha made a provision, with a corresponding charge
to profit or loss, in respect of the plan as follows:
$’000
Redundancy costs 10,000
Costs of training staff in new roles 5,500
Expected profit on the sale of surplus non-current assets (1,500)
–––––––
14,000
–––––––
Note 6 – Investment income
All of the investment income of Alpha, including dividends received from subsidiaries, has been correctly recognised
in the individual financial statements of Alpha.
Note 7 – Bond issue
On 1 October 2013, Alpha issued 300 million $1 bonds at par. The interest payable on the bonds is 5% per annum,
payable on 30 September in arrears. The bonds are repayable at par on 30 September 2023. Alternatively, the
investors have the option to convert the bonds into equity shares in Alpha on 30 September 2023.
On 1 October 2013, Alpha recognised a financial liability of $300 million in its statement of financial position. On
30 September 2014, Alpha recognised the interest paid on that date as a finance cost in its statement of profit or
loss.
On 1 October 2013, investors would have expected an annual return of 8% on non-convertible bonds. At a discount
rate of 8% per annum, the present value of $1 receivable at the end of year 10 is 46·3 cents and the present value
of $1 receivable at the end of each of years 1 to 10 is $6·71.
Note 8 – Other comprehensive income
Both Alpha and Gamma have financial assets which are appropriately classified as fair value through other
comprehensive income. On 1 February 2014, the fair value of the financial assets of Gamma had not changed from
30 September 2013.
Note 9 – Forward currency contract
On 15 August 2014, Alpha entered into a commitment to supply a large consignment of components to a foreign
customer whose currency is the Kroner. The agreed value of the order was 25 million Kroner and this amount is
expected to be paid by the customer on 30 November 2014. On 15 August 2014, Alpha entered into a contract to
sell 25 million Kroner for $13 million on 30 November 2014. Currency fluctuations in August and September 2014
were such that on 30 September 2014 the fair value of this currency contract was $1·1 million (a financial liability).
The draft financial statements of Alpha do not include any amounts in respect of this currency contract since it has a
zero cost. Alpha wishes to use cash-flow hedge accounting whenever permitted by International Financial Reporting
Standards. The directors of Alpha have estimated that the currency contract is a perfectly effective hedge of the
commitment to supply the components.

4
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income of Alpha for the year
ended at 30 September 2014. You do not need to consider the deferred tax effects of any adjustments you
make. (32 marks)

(b) Prepare the summarised consolidated statement of changes in equity of Alpha for the year ended
30 September 2014, including a column for the non-controlling interest. (8 marks)
Note: You should show all workings to the nearest $’000.

(40 marks)

5 [P.T.O.
2 Delta is an entity which prepares financial statements to 30 September each year. Each year the financial statements
are authorised for issue on 30 November. During the year ended 30 September 2014, the following transactions
occurred:

(a) On 1 October 2013, Delta sold a machine to a customer for a total price of $500,000. Delta invoiced the
customer for $500,000 on 1 October 2013 and the customer made a payment of $500,000 to Delta on
15 October 2013. The terms of sale included an arrangement that Delta would service and maintain the machine
for a four-year period from 1 October 2013. Delta would normally charge an annual fee of $37,500 for a service
and maintenance arrangement of this nature.
The normal selling price of the machine without a service and maintenance arrangement was $450,000. The
saving available to the customer as a result of purchasing the machine and the service and maintenance
arrangement should be allocated to the two components of the transaction in proportion to their stand-alone fair
values. (9 marks)

(b) On 1 October 2013, Delta completed the construction of a factory at a total construction cost of $40 million. The
factory was constructed on land which was being leased on an operating lease until 30 September 2053. Annual
lease rentals were $800,000, payable on 30 September in arrears. The expected useful economic life of the
factory at 1 October 2013 was 40 years. Under the terms of the leasing agreement, Delta is required to dismantle
the factory on 30 September 2053 and return the land to its original state. The latest estimated cost of this
process, at 30 September 2053 prices, is $55 million. An appropriate discount rate to use in any relevant
calculations is 5% per annum. At this discount rate, the present value of $1 receivable in 40 years is 14·2 cents.
(8 marks)

(c) On 15 May 2014, Delta was notified that a customer (Chi) was taking legal action against Delta in respect of
financial losses incurred by Chi. Chi alleged that the financial losses were caused due to the supply by Delta of
faulty products on 30 November 2013. Delta defended the case but considered, based on the progress of the
case up to 30 September 2014, that there was a 75% probability they would have to pay damages of
$20 million to the customer. The case was ultimately settled by Delta paying damages of $18 million to Chi on
15 November 2014. (3 marks)

Required:
Explain and show (where possible by quantifying amounts) how the three events would be accounted for in the
financial statements of Delta for the year ended 30 September 2014.
Note: The mark allocation is shown against each of the three events above. You should assume that all transactions
described here are material.

(20 marks)

6
3 (a) IFRS 3 – Business Combinations – prescribes the method of accounting to be used when an entity (the acquirer)
obtains control of a business. Control is not defined in IFRS 3 but a definition is provided in IFRS 10 –
Consolidated Financial Statements.

Required:
(i) Define ‘control’ as outlined in IFRS 10. Where relevant, you should provide appropriate explanations for
the terms you use in your definition. (4 marks)
(ii) Explain the way in which goodwill on acquisition and gains on bargain purchases should be initially
computed and subsequently accounted for. (5 marks)

(b) Epsilon prepares consolidated financial statements to 30 September each year. On 1 January 2014, Epsilon
acquired 75% of the equity shares of Kappa and gained control of Kappa. Kappa has 12 million equity shares
in issue. Details of the purchase consideration are as follows:
– On 1 January 2014, Epsilon issued two shares for every three shares acquired in Kappa. On 1 January
2014, the market value of an equity share in Epsilon was $6·50 and the market value of an equity share
in Kappa was $6·00.
– On 31 December 2014, Epsilon will make a cash payment of $7·15 million to the former shareholders of
Kappa who sold their shares to Epsilon on 1 January 2014. On 1 January 2014, Epsilon would have
needed to pay interest at an annual rate of 10% on borrowings.
– On 31 December 2015, Epsilon may make a cash payment of $30 million to the former shareholders of
Kappa who sold their shares to Epsilon on 1 January 2014. This payment is contingent upon the revenues
of Epsilon growing by 15% over the two-year period from 1 January 2014 to 31 December 2015. On
1 January 2014, the fair value of this contingent consideration was $25 million. On 30 September 2014,
the fair value of the contingent consideration was $22 million.
On 1 January 2014, the carrying values of the identifiable net assets of Kappa in the books of that company
totalled $60 million. On 1 January 2014, the fair values of these net assets totalled $70 million. The rate of
deferred tax to apply to temporary differences is 20%.
During the nine months ended on 30 September 2014, Kappa had a poorer than expected operating
performance. Therefore on 30 September 2014 it was necessary for Epsilon to recognise an impairment of the
goodwill arising on acquisition of Kappa, amounting to 10% of its total computed value.

Required:
Compute the impairment of goodwill and explain how this impairment should be recognised in the
consolidated financial statements of Epsilon. You should do this under BOTH the methods permitted by
IFRS 3 for the initial computation of the non-controlling interest in Kappa at the date of acquisition.
(11 marks)

(20 marks)

7 [P.T.O.
4 You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in
accordance with International Financial Reporting Standards (IFRS). The managing director, who is not an
accountant, has recently been appointed. She formerly worked for Rival, one of Omega’s key competitors. She has
reviewed the financial statements of Omega for the year ended 30 September 2014 and has prepared a series of
queries relating to those statements:

Query One
‘I was very confused by the note that included financial information relating to our operating segments. This note bears
very little resemblance to the equivalent note included in the financial statements of Rival. Please explain how the
two notes can be so different.’ (8 marks)

Query Two
‘The notes to our financial statements refer to equity settled share-based payments relating to the granting of share
options. When I joined Omega, I was granted share options but I can only exercise those options if I achieve certain
performance targets in my first three years as managing director. I know that other directors are also granted similar
option arrangements. I don’t see why they affect the financial statements when the options are granted though,
because no cash is involved unless the options are exercised. Please explain to me exactly what is meant by an ‘equity
settled share-based payment’. Please also explain how, and when, equity settled share-based payments affect the
financial statements of entities that grant them to their employees. I would like to know how such ‘payments’ are
measured, over what period the ‘payments’ are recognised, and exactly what accounting entries are involved.’
(8 marks)

Query Three
‘I was confused when I looked at the statement of financial position and saw that the assets and liabilities were divided
up into three sections and not two. The current and non-current sections I understand but I don’t understand the
‘non-current assets held for sale’ and ‘liabilities directly associated with non-current assets held for sale’ sections.
Please explain the meaning and accounting treatment of a non-current asset held for sale. Please also explain how
there can be liabilities directly associated with non-current assets held for sale.’ (4 marks)

Required:
Provide answers to the three queries raised by the managing director. Your answers should refer to relevant
provisions of International Financial Reporting Standards
Note: The mark allocation is shown against each of the three issues above.

(20 marks)

End of Question Paper

8
Answers
Diploma in International Financial Reporting December 2014 Answers
and Marking Scheme

Marks
1 (a) Consolidated statement of profit or loss and other comprehensive income of Alpha for the year
ended 30 September 2014
$’000
Revenue (W1) 563,000 1½ (W1)
Cost of sales (W2) (288,360) 8½ (W2)
–––––––––
Gross profit 274,640
Distribution costs (20,000 + 15,000 + 13,500 X 8/12) (44,000) ½
Administrative expenses (W4) (57,600) 1½ (W4)
Redundancy and reorganisation costs (W5) (10,000) 1½ (W5)
Investment income (W6) 6,100 1½ (W6)
Finance costs (W7) (53,414) 4½ (W7)
–––––––––
Profit before tax 115,726
Income tax expense (14,000 + 10,000 + 8/12 X 12,000) (32,000) ½
–––––––––
Profit for the year 83,726
Other comprehensive income:
Items that will not be reclassified to profit and loss
Gains on financial assets designated at fair value through other
comprehensive income (9,000 + 1,400) 10,400 1
Actuarial loss on defined benefit retirement benefits plan (W9) (150) 4 (W9)
Items that may be reclassified subsequently to profit or loss: ½
Cash flow hedges (1,100) 1
–––––––––
Total comprehensive income for the year 92,876
–––––––––
Profit attributable to:
Owners of Alpha (balancing figure) 72,544 ½
Non-controlling interest (W10) 11,182 3 (W10)
–––––––––
83,726
–––––––––
Total comprehensive income attributable to:
Owners of Alpha (balancing figure) 81,414 ½
Non-controlling interest (W11) 11,462 1½ (W11)
–––––––––
92,876
––––––––– ––––
32
––––

(b) Consolidated statement of changes in equity of Alpha for the year ended 30 September 2014
Alpha group Non-controlling Total
interest
$’000 $’000 $’000
At 1 October 2013 (W12/13) 224,640 (W12) 37,000 (W13) 261,640 2½ (W12) + 1 (W13)
Increase due to acquisition 28,000 28,000 1
Equity element of bond issue (W14) 60,450 60,450 1 (W14)
Comprehensive income for the year 81,414 11,462 92,876 ½+½
Dividends paid (30,000) (2,500) (32,500) ½+1
–––––––– ––––––– ––––––––
At 30 September 2014 336,504 73,962 410,466
–––––––– ––––––– –––––––– ––––
8
––––
40
––––
WORKINGS – DO NOT DOUBLE COUNT MARKS. ALL NUMBERS IN $’000 UNLESS
OTHERWISE STATED.
Working 1 – Revenue
$’000
Alpha + Beta + 8/12 X Gamma 580,000 ½
Intra-group revenue (12,000 + 5,000) (17,000) ½+½
–––––––– ––––
563,000 1½
–––––––– ––––

11
 Marks
Working 2 – Cost of sales
$’000
Alpha + Beta + 8/12 X Gamma 300,000 ½
Intra-group purchases (as W1) (17,000) ½
Unrealised profit:
Closing inventory (25/125 X (2,400 + 2,000)) 880 1
Opening inventory (25/125 X 1,800) (360) ½+½
Impairment of Beta goodwill (W3) 3,000 3½
Extra depreciation on fair value adjustments:
Property ((20,000 – 11,000) X 1/25 X 8/12) 240 1
Plant and equipment (7,200 X 1/3 X 8/12) 1,600 1
–––––––– ––––
288,360 8½
–––––––– ––––
Working 3 – Impairment of Beta goodwill
Unit 1 Unit 2 Unit 3 Unit 4 ½
$’000 $’000 $’000 $’000
Carrying amount
(excluding goodwill) 45,000 55,000 30,000 30,000 ½
Allocated goodwill 8,000 4,000 3,000 3,000 ½
––––––– ––––––– ––––––– –––––––
53,000 59,000 33,000 33,000
Recoverable amount 50,000 65,000 35,000 35,000
––––––– ––––––– ––––––– –––––––
So impairment equals 3,000 Nil Nil Nil ½+½+½+½
––––––– ––––––– ––––––– ––––––– ––––
3½
––––
⇒ W2
Working 4 – Administrative expenses
$’000
Alpha + Beta + 8/12 X Gamma 57,000 ½
Contributions to defined benefit plan incorrectly charged (5,400) ½
Current service cost of defined benefit plan 6,000 ½
––––––– ––––
57,600 1½
––––––– ––––
Working 5 – Redundancy and reorganisation costs
$’000
Redundancy costs (valid as constructive obligation at year end) 10,000 ½
Cost of new staff training (on-going costs cannot be included) Nil ½
Expected profit on the sale of assets (cannot include) Nil ½
––––––– ––––
10,000 1½
––––––– ––––
Working 6 – Investment income
$’000
Alpha + 8/12 X Gamma 13,600 ½
Intra-group dividends eliminated:
– Beta (75% X 10,000) (7,500) ½
– Gamma (paid pre-acquisition) Nil ½
––––––– ––––
6,100 1½
––––––– ––––
Working 7 – Finance cost
$’000
Alpha + Beta + 8/12 X Gamma 49,000 ½
Reversal of interest paid on convertible loan incorrectly recognised
as a finance cost (300,000 X 5%) (15,000) 1
Correct finance cost on convertible loan (W8) 19,164 2½ (W8)
Interest cost on net defined benefit plan liability (W9) 250 ½
–––––––– ––––
53,414 4½
–––––––– ––––

12
 Marks
Working 8 – Finance cost on convertible loan
$’000
Liability element of loan (15,000 X 6·71 + 300,000 X 0·463) 239,550 ½+½+½+½
––––––––
So appropriate finance cost = 8% X 239,550 19,164 ½
––––
2½
––––
⇒ W7
Working 9 – Actuarial loss on defined benefits retirement benefits plan
Liability Asset Net
$’000 $’000 $’000
Opening balance 32,000 (27,000) 5,000 ½
Current service cost 6,000 6,000 ½
Interest cost (5%) 1,600 (1,350) 250 1
Benefits paid (2,000) 2,000 Nil ½
Contributions paid (5,400) (5,400) ½
Actuarial loss (gain) – balancing figure 2,400 (2,250) 150 ½
––––––– ––––––– ––––––
Closing balance 40,000 (34,000) 6,000 ½
––––––– ––––––– –––––– ––––
4
––––
Working 10 – Non-controlling interest in profit
Beta Gamma (8/12) Total
$’000 $’000 $’000
Profit after tax 30,000 24,000 1
Extra depreciation – Gamma (240 + 1,600 (W2)) Nil (1,840) ½
Impairment of Beta goodwill (W3) (3,000) ½
––––––– –––––––
Relevant profit 27,000 22,160
––––––– –––––––
Non-controlling interest (25%/20%) 6,750 4,432 11,182 ½+½
––––––– ––––––– ––––––– ––––
3
––––
Working 11 – Non-controlling interest in total comprehensive income
$’000
Non-controlling interest in profit (W10) 11,182 ½
Non-controlling interest in Gamma’s other comprehensive income (20% X 1,400) 280 ½+½
––––––– ––––
11,462 1½
––––––– ––––
Working 12 – Opening equity – Alpha group
$’000
Alpha 180,000 ½
Beta: 75% X (140,000 – 80,000) 45,000 ½+½
Opening provision for unrealised profit (W2) (360) 1
–––––––– ––––
224,640 2½
–––––––– ––––
Working 13 – Opening non-controlling interest (in Beta)
$’000
At date of acquisition 22,000 ½
Increase since acquisition: 25% (140,000 – 80,000) 15,000 ½
––––––– ––––
At start of the year 37,000 1
––––––– ––––
Working 14 – Equity element of bond issue
$’000
Total proceeds 300,000 ½
Loan element (W8) (239,550) ½
–––––––– ––––
So equity element equals 60,450 1
–––––––– ––––

13
 Marks
2 (a) IAS 18 – Revenue – regards a transaction such as this as having two components – the supply of
goods and the supply of services. ½
The total revenue of $500,000 would need to be allocated between the two components and
appropriate recognition criteria applied to each part. ½
The fair value of the supply of goods is $450,000 and the fair value of the supply of services is
$150,000 (4 X $37,500). The total stand-alone fair values therefore total $600,000. 1
Revenue of $375,000 ($500,000 X 450,000/600,000) is allocated to the supply of goods. The
balance of revenue of $125,000 is allocated to the supply of services. 1+½
On 1 October 2013, Delta would recognise revenue from the supply of goods of $375,000. ½
On the same date Delta would recognise a receivable of $500,000. ½
The balance of $125,000 would initially be recognised as deferred income. ½
On 15 October 2013, the receivable of $500,000 would be de-recognised when the payment was
received from the customer. ½
In the year ended 30 September 2014, service revenue of $31,250 ($125,000 X ¼) can be
recognised. 1
The closing balance of deferred income on 30 September 2014 will be $93,750 ($125,000 –
$31,250). ½
$31,250 of this balance will be shown as a current liability as this refers to service revenue to be
recognised in the year ended 30 September 2015. 1
The balance of deferred income of $62,500 ($125,000 – $31,250 – $31,250) would be shown
as a non-current liability. 1
––––
9
––––
Summary of reported amounts (for tutorial purposes)
– Revenue from the supply of goods – $375,000.
– Revenue from the provision of services – $31,250.
– Cash balance – $500,000.
– Deferred income in non-current liabilities – $62,500.
– Deferred income in current liabilities – $31,250.

(b) No asset is recognised in respect of the land as it is being leased under an operating lease. ½
A rental expense of $800,000 on the land is charged to profit or loss in the statement of profit or
loss for the year ended 30 September 2014. ½
The construction cost of $40 million is shown in property, plant and equipment (PPE) from
1 October 2013. ½
On 1 October 2013, the obligation to dismantle the factory and restore the land is a present
obligation arising out of a past event. Therefore it should be recognised as a provision. ½
The initial carrying value of the provision is its discounted present value of $7·81 million
($55 million X 0·142). 1
The debit entry for this provision is to PPE as the relevant expenditure provides access to future
economic benefits. ½
Therefore the carrying value of PPE at 1 October 2013 is $47·81 million ($40 million +
$7·81 million). ½
In the year ended 30 September 2014, Delta would charge deprecation of $1,195,250
($47·81 million X 1/40). ½
The carrying value of PPE at 30 September 2014 (to be shown under non-current assets) would
be $46,614,750 ($47·81 million – $1,195,250). ½+½
As the date for the dismantling approaches, the discount unwinds. The unwinding is shown as a
finance cost. ½
The finance cost for the year ended 30 September 2014 is $390,500 ($7·81 million X 5%). ½
This is added to the opening provision to give a closing provision of $8,200,500 ($7·81 million
+ $390,500). ½+½

14
 Marks
The closing provision is shown as a non-current liability. ½
––––
8
––––
Summary of reported amounts (for tutorial purposes)
– Rental expense – $800,000.
– Depreciation – $1,195,250.
– Finance cost – $390,500.
– Provision in non-current liabilities – $8,200,500.

(c) The potential payment of damages to Chi is an obligation arising out of a past event which can
be reliably estimated. Therefore, following IAS 37 – Provisions, Contingent Liabilities and
Contingent Assets – a provision is required. ½+½
The provision should be for the best estimate of the expenditure required to settle the obligation at
30 September 2014. ½
Under the principles of IAS 10 – Events After the Reporting Period – evidence of the settlement
amount is an adjusting event. ½
Therefore at 30 September 2014 a provision of $18 million should be recognised as a current
liability. ½+½
––––
3
––––
20
––––

3 (a) (i) IFRS 10 defines control as exposure, or rights to variable returns from the acquired business
and the ability to affect those returns through its power over the acquired business. ½+½+½
To have power, the acquirer must have existing rights which give it the current ability to direct
the ‘relevant activities’ of the acquired business. ½+½
The ‘relevant activities’ of a business are activities which significantly affect the returns of the
business. Where two or more investors have the ability to direct relevant activities, control is
exercised by the investor who directs the activities which most significantly affect the returns
to the acquired business. ½+½+½
––––
4
––––
Note: Exact wordings NOT required for marks.
(ii) Goodwill on acquisition is measured as the excess of the sum of the fair value of the
consideration transferred in exchange for control of the acquired business, plus the initial
carrying value of any non-controlling interest in the acquired business less the fair values of ½+
the net assets of the acquired business on the acquisition date. ½+½+½+½
Goodwill is not amortised but must be tested annually for impairment in accordance with
IAS 36 – Impairment of Assets. Unimpaired goodwill is shown under non-current assets. ½+½+½
In the case of a bargain purchase (where ‘goodwill is negative’), the acquirer should, after
ensuring that it has been appropriately measured, recognise an immediate gain in profit or
loss at the acquisition date. ½+½
––––
5
––––

15
 Marks
(b) Computation of goodwill impairment
NCI at NCI at % ½+½
fair value of net assets
$’000 $’000
Cost of investment
Share exchange (12 million X 75% X 2/3 X $6·50) 39,000 39,000 ½+½+½
Deferred consideration (7·15 million/1·10) 6,500 6,500 1
Contingent consideration 25,000 25,000 1
Non-controlling interest at date of acquisition:
Fair value – 3 million X $6·00 18,000 1
% of net assets – 68,000 (working) X 25% 17,000 1
Net assets at date of acquisition (Working) (68,000) (68,000) 2 (working)
––––––– –––––––
Goodwill on acquisition 20,500 19,500
––––––– –––––––
Impairment – 10% 2,050 1,950 ½+½
––––––– –––––––
Where the NCI is measured at fair value, the impairment should be attributed partly to retained
earnings ($153,750) and partly to NCI ($51,250). The allocation is normally based on the group
structure (75/25 in this case). 1
Where the NCI is measured at % of net assets, the impairment should be attributed wholly to
retained earnings. ½
––––
11
––––
20
––––
Working – Net assets at date of acquisition
$’000
Fair value at acquisition date 70,000 ½
Deferred tax on fair value adjustments (20% (70,000 – 60,000)) (2,000) ½+½+½
––––––– ––––
68,000 2
––––––– ––––

4 Query One
It is true that the there is an International Financial Reporting Standard (IFRS) which deals with
operating segments and lays down the content of segmental reports (concept). The relevant standard is
IFRS 8 – Operating Segments. ½
However, differences between the segment reports of organisations will arise from how segments are
identified and what exactly is reported for each segment (concept). ½+½
IFRS 8 defines an operating segment as a component of an entity which engages in revenue earning
activities and whose results are regularly reviewed by the chief operating decision maker (CODM). ½+½
The CODM is the individual, or group of individuals, who makes decisions about segment performance
and resource allocation. ½+½+½
This definition means that the operating segments of apparently similar organisations could be identified
very differently, with a consequential impact on the nature of the report. ½
As stated above, differences also arise due to the reporting requirements for each segment. IFRS 8
requires that ‘a measure’ of profit or loss is reported for each segment. However, the measurement of
revenues and expenses which are used in determining profit or loss is based on the principles used
in the information the CODM sees. This is so, even if these principles do not correspond with IFRS.
This could clearly cause differences between reports from apparently similar organisations. ½+½+½+½
Additionally, IFRS 8 requires a measure of total assets and liabilities by operating segment if the CODM
sees this information. Since some CODMs may see this information and some may not, this could
once again cause differences between the reports of apparently similar organisations. ½+½+½
––––
8
––––

Query Two
An equity settled share-based payment transaction is one in which an entity receives goods or services
in exchange for a right over its equity instruments. ½

16
 Marks
Where the payments involve the granting of share options, IFRS 2 – Share-based Payment – requires
that the payments are measured at the fair value of the options at the grant date. No change is made
to this measurement when the fair value changes after the grant date. ½+½+½
Unless the entity has traded options which have exactly the same terms and conditions as those granted
to employees (unlikely), then fair value is estimated using an option pricing model. ½
The first step in accounting for such payments is to estimate the total expected cost of the share-based
payment. ½
This estimate takes account of any conditions attaching to the options vesting (the employees becoming
unconditionally entitled to exercise them) other than market conditions (those based on the future share
price, which are taken account of in estimating the fair value of the option at the grant date). ½+½+½
The total expected cost is recognised in the financial statements over the vesting period (i.e. the period
from the grant date to the vesting date). ½
In the case of options granted to employees, the debit entry would be recorded as remuneration
expense. Normally this would mean the debit entry being shown in the statement of profit or loss but
in theory the debit entry could be an asset depending on the work of the employee involved. ½+½
The credit entry is taken to equity. IFRS 2 is silent as to which component of equity this should be –
normally it would be to an option reserve. ½+½
The above treatment is unaffected by whether or not employees subsequently exercise vested options.
If they do, then the entity debits cash and credits equity with the cash proceeds. ½+½
––––
8
––––

Query Three
A non-current asset is classified as held for sale when its carrying amount will be recovered principally
through a sale transaction, rather than through continuing use. 1
Such assets are measured at the lower of their carrying amount and fair value less costs to sell. Any
write downs arising out of this process are treated as impairment losses. ½+½+½
The ‘held for sale’ definition can apply to groups of assets as well as single assets where the group of
assets is to be sold as a single unit. It is in situations such as this that liabilities associated with such
groups of assets are separately identified. ½+½+½
––––
4
––––
20
––––

17
Examiner’s report
DipIFR Diploma in International Financial Reporting
December 2014

General Comments

The examination consisted of four compulsory questions. Section A contained one question for 40 marks. Section
B contained three further questions of 20 marks each.

The vast majority of candidates attempted all four questions, and there was little evidence of time pressure.
Where questions were left unanswered by candidates, this appeared to be due to a lack of knowledge or poor
exam technique, as opposed to time pressure.

A majority of candidates answered the questions in the order in which they appeared on the paper. However
there appeared to be two other relatively common strategies adopted by candidates:
Leaving question 1 to the end, possibly on the basis that there was more potential for time over-run on
this question.
Answering the questions in the order that reflected (usually accurately) candidate perceptions of how
well they could answer them.

Generally speaking candidates performed well in questions 1a, 2 (all parts), 3a(ii), 3(b) and 4c. Candidates
performed satisfactorily in questions 1b and 4b. On the whole candidates found questions 3a(i) and 4a
somewhat challenging. This appeared to be due to candidates not having a sufficiently up to date knowledge of
recent changes in International Financial Reporting Standards. Question 3 a(i) tested the definition of control in
the context of a parent-subsidiary relationship. Question 4a tested the requirement for certain entities to produce
segment reports. The standard requirements for both of these topics have been subject to relatively recent change
(IFRS 10 and IFRS 8 respectively).

A number of common issues arose in candidate’s answers:

Failing to read the question requirement clearly and therefore providing irrelevant answers which scored
few if any marks.
Poor time management between questions, some candidates wrote far too much for some questions and
this put them under time pressure to finish the remaining questions.
Not learning lessons from earlier examiner’s reports and hence making the same mistakes, especially in
relation to the amount of preparation needed for this paper.
Illegible handwriting and poor layout of answers.

Specific Comments

Question One

This 40 mark question tested the preparation of consolidated financial statements . The group consisted of a
parent entity, Alpha, and two partly owned subsidiaries, Beta and Gamma. Gamma was acquired part way
through the accounting period. In part (a), for 32 marks candidates were required to prepare the consolidated
statement of comprehensive income. In part (b), for 8 marks, candidates were required to prepare the
summarised consolidated statement of changes in equity.

Many of the consolidation procedures that were required in order to answer part (a) of this question - the need to
reflect the impact of intra-group transactions such as intra-group trading and intra-group dividend payments, the
treatment of fair value adjustments, the identification of non-controlling interests, and the treatment of a

Examiner’s report – Dip IFR - December 2014 1

subsidiary acquired part-way through the accounting period would have been expected by candidates and in the
main were dealt with satisfactorily. However a reasonable minority of candidates made one or more of the
following ‘basic’ consolidation errors when answering this part:
Using proportional consolidation for both subsidiaries.
Failing to time –apportion the profits of Gamma or time-apportioning the profits for the wrong number of
months.
Failing to appreciate that Gamma’s other comprehensive income all arose post-acquisition but that
Gamma’s dividend was paid prior to the date of acquisition.
Deducting unrealised profits on intra-group sales from consolidated revenues.
Reflecting the unrealised profit on intra-group sales when computing the non-controlling interest in Beta
and Gamma when the sales were made by Alpha, the parent.

A further required consolidation procedure in this part was for candidates to implement the impact of an
impairment review of the goodwill on acquisition of Beta. Beta had four cash-generating units. This procedure
was one that would have perhaps been less expected but it is very pleasing to note that the vast majority of
candidates were able to perform it to a satisfactory standard.

This part included a number of ‘single entity’ financial reporting issues that affected the financial statements of
Alpha (the parent) and so affected the consolidated financial statements in the same way. These issues were:
Accounting for the impact of a defined benefit retirement benefit plan.
Identifying the appropriate amounts to include in a re-organisation provision.
Accounting for a bond issued by Alpha with an option for the holders to convert into equity shares.
Accounting for the impact of a perfectly effective cash flow hedge of the foreign currency risk of a firm
future commitment.

The majority of candidates coped quite reasonably with all four issues. However, only a minority of candidates
were able to identify that the equity component of the bond issued during the period would need to be included
in the consolidated statement of changes in equity (see below).

On the whole, candidates were less able to prepare the consolidated statement of changes in equity. As stated
above, few candidates appreciated the impact of the issue of the convertible bond on this statement. Similarly,
only a minority of candidates realised that the non-controlling interest column of this statement would be affected
by the acquisition of Gamma part-way through the year. It would seem that candidates need to give this
statement more attention when preparing for the Dip IFR examination.

Question Two

This 20 mark question required candidates to explain and show the financial reporting treatment of three issues:

a) The sale of a machine including post-sale maintenance.

b) The construction of a factory on a leased piece of land.
c) The post year-end settlement of a legal case in which the relevant entity (Delta) was the defendant.

Overall, the performance of candidates on this question was very pleasing. However, a number of specific issues
arose in each part that future candidates for this paper may wish to note:

In part (a) a number of candidates allocated the sale price between the two components of the
transaction but then failed to develop their answers by explaining the differing pattern of revenue
recognition that should have been applied to each component in the year ended 30 September 2014..
In part (b) a number of candidates wasted time by discussing the distinction between operating leases
and finance leases when the question quite clearly stated that the lease of the land was an operating

Examiner’s report – Dip IFR - December 2014 2

 lease. A smaller number wasted further time by reflecting on how the ‘lease of the factory’ should have
been treated. This was not necessary given that the factory was constructed, not leased.

In part (c), whilst the vast majority of candidates realised a provision was required for the damages
payable to Chi (the plaintiff), a number of candidates incorrectly stated that the payment of damages
was a non-adjusting event. A significant number of candidates, whilst correctly stating that a liability
existed, referred to this liability as a ‘contingent liability’, indicating a lack of understanding of the
meaning of the term ‘contingent liability’.

Question Three

This 20 mark question required candidates to:

Define ‘control’ in the context of consolidated financial statements – part a(i).
Explain how goodwill and gains on bargain purchases are computed and accounted for – part a(ii).
Compute goodwill for a given business combination – Epsilon acquiring Kappa (part b).

Answers to part a(i) were of a variable standard. The majority of candidates were aware of the fact that control
can be achieved in a number of ways and is considered in accordance with its commercial substance, rather than
simply in relation to share ownership. However, only a minority of candidates were aware of the way in which
control is defined and interpreted in IFRS10 – Consolidated Financial Statements. IFRS10 has become
examinable only relatively recently but candidates need to ensure they are aware of all standards as soon as they
become examinable.

Answers to parts a (ii) and part (b) were generally of a satisfactory standard. Having said this, a number of
candidates struggled to correctly measure the three- part cost of Epsilon’s investment in Kappa.
The share exchange should be measured at the market value of the shares issued by Epsilon.
The deferred cash consideration should be measured at the present value of the future payment.
The contingent consideration should be measured at its fair value at the acquisition date.

Question Four

This 20 mark question required candidates to answer questions concerning:

a) The reporting of financial information by segment.

b) Equity-settled share-based payments.
c) Non-current assets held for sale.

Candidates did not answer part (a) very well. A significant number of candidates were unaware of any of the
requirements of the international financial reporting standard on segment reporting – IFRS 8. Many such
candidates made reference to IAS 14 – the predecessor standard to IFRS 8. It has already been stated in this
report that candidates need to keep their knowledge up to date and it appears that further attention is required to
new standards. Another factor in part (a) was that many candidates did not address the requirements of the
question specifically enough. The question asked why the segment reports of two apparently similar entities
could be so different. A number of candidates did not really attempt to address this issue, but simply defined the
meaning of an operating segment and (in some cases at least) the relevant requirements of IFRS 8.

Answers to part (b) were generally of a satisfactory standard but a significant minority of candidates wasted time
by making references to cash settled share based payments. These were not part of the requirement so, whilst

Examiner’s report – Dip IFR - December 2014 3

the comments were in many cases correct, they did not score marks. Once again the message here is that
candidates must focus carefully on the exact requirements of each question.

Answers to part (c) were generally satisfactory.

Examiner’s report – Dip IFR - December 2014 4