Tuition Course Exam:
Questions
ICAEW Advanced Level
Corporate Reporting
Time allowed: 3 hours 30 minutes
This exam consists of three questions (100 marks).
Marks breakdown
Question 1 28 marks
Question 2 41 marks
Question 3 31 marks
To attempt the exam in the ICAEW software please download from Analysis and Development ([Link])
Alternatively, you may wish to focus on the content in this exam and complete in word or excel
2 T u i t i on Co u rs e e xami n a t i o n qu e s t io n s ICAEW CR
1 BAUHAUS PLC
Bauhaus plc is an AIM-listed company that manufactures bicycles and cycling accessories. The company
is planning to obtain a full listing on the London Stock Exchange in early 20X5, following significant
growth in recent years.
You are Maida Cheema, an ICAEW Chartered Accountant working on a short-term contract at Bauhaus,
and you receive the following email from the Bauhaus finance director, Carl McCoy.
MEMO
To: [Link]@[Link]
From: [Link]@[Link]
Date: 22 July 20X4
Subject: Year end 31 May 20X4 – financial reporting adjustments
Maida, I have a meeting with the board in the next few days and I want to be able to give them an
indication of financial performance for the year ended 31 May 20X4, including earnings per share (EPS).
The consolidated financial statements are not yet finalised.
I am concerned that Andrea Eldritch, who was responsible for drafting the Bauhaus consolidated
financial statements, is inexperienced and is not familiar with IFRS. At my request, Andrea has
prepared: a file note showing outstanding issues (Exhibit 1); a draft consolidated statement of changes
in equity (Exhibit 2) and her EPS calculation (Exhibit 3).
I would like you to draft a memorandum in which you:
explain the correct financial reporting treatment of the items in Exhibit 1 and prepare journal
entries for any adjustments you propose;
prepare a revised consolidated statement of changes in equity for the year ended 31 May 20X4;
and
determine basic and diluted EPS figures for the Bauhaus Group for the year ended 31 May 20X4.
Ignore tax and deferred tax on any adjustments.
Required:
Draft the memorandum requested by Carl McCoy.
(28 marks)
Exhibit 1: File note: outstanding issues – prepared by Andrea
Eldritch Change in Bauhaus' shareholding in Mission Mouldings Ltd (MM)
MM produces alloy mouldings which are used extensively in our bicycle manufacturing process.
On 1 January 20X0, Bauhaus acquired 375,000 of the ordinary shares of MM for £32 each. Bauhaus
elected to hold this investment at cost in its separate financial statements. At this date MM had a
share capital of 500,000 50p shares issued at par, and reserves of £2.75 million. On 1 January 20X0, the
net assets of MM had a fair value which was equal to their carrying amount, with the exception of
non-depreciable land, which had a fair value £400,000 higher than its carrying amount. Bauhaus has
accounted for MM as a subsidiary since 1 January 20X0.
Bauhaus decided to use the fair value method to measure the non-controlling interest in MM. The fair
value of the non-controlling interest at 1 January 20X0 was estimated at £25 per share.
There have been no goodwill impairments since acquisition, and revenue and costs accrue evenly over
the year.
ICAEW TC T u i t i on Co u rs e e xami n a t i o n qu e s t io n s 3
On 1 March 20X4, Bauhaus sold 200,000 ordinary shares in MM for £100 each. I was unsure what to
do here so I credited the sales proceeds to a suspense account. According to a file note dated 1 March
20X4, the remaining shares in MM held by Bauhaus, were valued at £80 each after the disposal.
Bauhaus still appoints one director to the board of MM.
MM had reserves of £12.75 million at 1 June 20X3 and made a post-tax profit of £7.2 million in the year
ended 31 May 20X4. At 31 May 20X4, MM had a share capital of 500,000 50p shares. I have
consolidated MM's results for the whole year and attributed £1.8 million to the non-controlling
interest, being 25% of MM's after-tax profit for the year ended 31 May 20X4.
Team Bauhaus
On 1 June 20X2, Bauhaus employed twelve elite cyclists as part of the creation of 'Team Bauhaus' to
race Bauhaus bicycles in international cycling events.
Also, on 1 June 20X2 Bauhaus granted each cyclist 20,000 share options. Each option entitles the
holder to subscribe for one ordinary share in Bauhaus on 31 May 20X6 at the market price on the
grant date of £210. The options are exercisable subject to the cyclist remaining with Team Bauhaus
until 31 May 20X6. The fair value of each option was £24 at 1 June 20X2; £30 at 31 May 20X3; and £28
at 31 May 20X4. The average market price per Bauhaus share during the year ended 31 May 20X4 was
£230.
All the cyclists were still employed on 1 June 20X3 and, at that time, they were all anticipated to
remain in employment with Bauhaus until at least June 20X6. However, four cyclists unexpectedly
resigned in April 20X4, and left in June 20X4 to join a rival team. The Team Bauhaus manager does not
expect any further departures before the vesting date.
For the year ended 31 May 20X4, I have debited £6.96 million to retained earnings (12 × 20,000 × £29
(the average fair value for the year)) in the statement of changes in equity, and credited the same
amount to the share option reserve.
New York Wheels (NYW)
On 1 June 20X3, Bauhaus bought 100% of NYW's 2 million, $1 ordinary shares for $6 each. NYW is a
bicycle distribution company in the USA. At that date £1 = $1.60.
I have debited investments and credited cash with £7.5 million.
NYW had net assets with a fair value of $8 million at 1 June 20X3 and made a profit after tax of
$3 million for the year ended 31 May 20X4.
I have consolidated NYW in the group statement of profit or loss using the exchange rate at 1 June
20X3. NYW has therefore contributed £1.875 million to group profit after tax. I have also added this
amount to the cost of the investment in NYW, making a total cost for this investment of £9.375 million
in the consolidated statement of financial position.
I understand that the average exchange rate for the year ended 31 May 20X4 was £1 = $1.50, and the
exchange rate at 31 May 20X4 was £1 = $1.45, but I don't know if these rates are of any assistance.
Electrostatic spraying room
On 1 June 20X2, Bauhaus purchased an electrostatic spraying room for £1 million and this is being
depreciated using the straight line basis over 10 years with a zero residual value. At 31 May 20X3, the
asset was revalued to £1.2 million but at 31 May 20X4, its value had fallen to £0.6 million. Bauhaus
uses the revaluation model to value its non-current assets. The effect of the revaluation at 31 May
20X4 has not been taken into account in total comprehensive income for this year, although
depreciation has been charged on the asset. The revaluation gain of £300,000 for last year (the year
ended 31 May 20X3) was taken to other comprehensive income and is shown in the other components
of equity opening balance. However, I cannot find the calculation, so this will need to be done again to
check that it is right and the correct figures put through for the current year. Bauhaus does not make
annual transfers between the revaluation surplus and retained earnings.
4 Co u rs e e xami n at i o n qu e s t io n s ICAEW CR
Exhibit 2: Draft consolidated statement of changes in equity at 31 May 20X4 – prepared
by Andrea Eldritch
Equity share Share Other Non-
capital £10 Share Retained option components controlling
shares premium earnings reserve of equity interest Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 May 20X3 80,000 48,000 49,200 1,440 300 5,625 184,565
Profit for the year – – 29,800 – – 1,800 31,600
Share option expense – – (6,960) 6,960 – – –
Ordinary dividend
paid – – (4,000) – – – (4,000)
At 31 May 20X4 80,000 48,000 68,040 8,400 300 7,425 212,165
Exhibit 3: EPS calculation for year ended 31 May 20X4 – prepared by Andrea Eldritch
The consolidated profit for the year ended 31 May 20X4 is £31.6 million.
The weighted average number of £10 ordinary shares for the year is 8 million. Therefore EPS is £3.95
per share.
2 XYLO
You are an audit senior working for Jones Auditors & Co, a global professional services firm. Your firm
has been approached to tender for the annual audit for the year ended 31 December 20X4 for Xylo
Retail Group plc, a publicly listed retail company with 2,000 members of staff and stores in 30
countries worldwide. Xylo Retail Group plc imports clothing and household goods from various
suppliers throughout the world to their central distribution centre in Woking and then distributes the
inventories to their various outlets worldwide.
You arrive at your office on Monday morning 5 July, to find the following email:
To: Audrey Senior
From: Sarah Roberts, Partner
Date: 5 July 08:30am
Attachments: Minutes
Dear Audrey,
I hope you had a good weekend.
As you are aware, we are in the process of deliberating whether we should tender for Xylo Retail
Group plc and what the issues involved would be.
As such, I would like you to evaluate the attached minutes from a preliminary meeting with the Chief
Financial Officer of Xylo Retail Group plc, Andrew Simmons, and prepare a memo outlining the ethical
issues, audit risks and planning issues that Jones Auditors & Co would need to bear in mind when
deciding what would be a reasonable fee. The amount of work IT specialists will have to do is also a
concern of mine (extra budget pressure!). Please outline the audit procedures they would have
involvement in.
The group has acquired a subsidiary, Sheldon Ltd, during the year. Please comment on the proposed
financial reporting treatment of the acquisition (set out in Exhibit 1) and identify the steps or
procedures we will need to take in response, if we are appointed as auditors this year.
ICAEW TC T u i t i on Co u rs e e xami n a t i o n qu e s t io n s 5
Last but not least, please review and comment on the financial reporting treatment of the group's
defined benefit pension scheme in the prior year. Please explain the steps we would need to take as
the group's new auditors. Please also comment on the proposed financial reporting treatment of the
new pension plan.
I look forward to hearing from you within the next two days.
Regards,
Sarah
Attachment:
Minutes from a meeting with Andrew Simmons
25 June 20X4
Andrew Simmons joined Xylo Retail Group plc in June 20X4 replacing the previous CFO who
resigned after a material accounting fraud in the inventory account was discovered by the
previous auditors.
With the arrival of Andrew Simmons, the accounting department is in the process of being
re-organised. A new bespoke computerised system costing £350,000 was also introduced on his
arrival in June. The system is expected to have a useful life of five years. The previous system
which had a carrying amount of £35,000 is still being used in parallel with the new system until
all data transfer and system operation issues have been resolved. This is expected to be
June 20X5.
Xylo Retail Group plc is in the process of recruiting an internal auditor as part of the company's
Corporate Governance requirements, and this is expected to take place by the end of
November 20X4.
The previous auditors resigned last week. The audit of the financial statements for the year
ended 31 December 20X3 has been completed, with the financial statements signed in May.
The auditor's report on the 20X3 financial statements contained a qualified opinion, pointing to
material misstatements in respect of pension accounting.
Additional software of £300,000 was purchased during the year to facilitate the tailoring of
Sheldon Ltd's existing website. Training costs of £150,000 were also incurred during the year.
Both the software costs and the training costs have been capitalised in the trial balance.
The company operates a defined benefit pension scheme providing for a pension of 2% of the
final salary for each year of service.
For the year ended 31 December 20X3, the following details applied:
£m
Contributions paid to the scheme in the year 12
Pension benefits paid to former employees in the year 15
Present value of the pension benefits earned by employees in the year 18
Present value of the obligation to provide benefits to current and former
employees at 31 December 20X3 670
Present value of the obligation to provide benefits to current and former
employees at 31 December 20X2 470
Fair value of the plan assets at 31 December 20X3 450
Fair value of the plan assets at 31 December 20X2 250
All contributions and benefits are assumed to be paid at the end of the year.
The interest rate on high quality corporate bonds at 31 December 20X3 was 5%. The expected
rate of return on plan assets was estimated at 6%: this takes into account the interest, dividends
and other income derived from plan assets, less any costs of administering the plan and less any
tax payable by the plan itself. Xylo's management is confident that the plan assets are
6 Co u rs e e xami n at i o n qu e s t io n s ICAEW CR
outperforming, and will continue to outperform the interest rate on high quality corporate
bonds.
The disclosure note in respect of the pension scheme included in the published financial
statements for the year ended 31 December 20X3 is set out in Exhibit 2.
The company proposes to introduce a new pension plan in 20X5. The proposed changes are set
out in Exhibit 3.
Other information regarding the pension fund:
The service cost for the year is determined using the projected unit credit method. This reflects service
rendered to the dates of valuation of the plan and incorporates actuarial assumptions primarily
regarding discount rates, which are based on the market yields of high quality corporate bonds.
All the actuarial valuations have been carried out by an internal actuary.
Required:
Prepare the memo requested by Sarah Roberts.
(41 marks)
Exhibit 1: Accounting note for the acquisition of Sheldon Ltd
The group acquired 80% of the e-commerce company Sheldon Ltd, a private company, for £1 million in
May 20X4 with the view of extending its market online. On the date of acquisition, the share capital of
Sheldon was £500,000 and its retained earnings were £200,000. The fair values of Sheldon's
recognised net assets were equivalent to their book values at acquisition. It is group policy to measure
non-controlling interests at the date of acquisition at the proportionate share of the fair value of the
acquiree's identifiable assets acquired and liabilities assumed.
Sheldon Ltd had a customer list which had not previously been recognised as an asset because it was
internally generated. However, on acquisition, as customer lists are often leased or exchanged,
external experts managed to establish a fair value for the list of £80,000.
Goodwill arising from the acquisition of £220,000 has been recognised in Xylo's draft accounts. An
intangible asset of £80,000 will be recognised in the consolidated financial statements for the year
ended 31 December 20X4 in respect of the customer list.
Exhibit 2: Pension accounting
£m
Fair value of the plan assets at 1 January 20X3 250
Interest on plan assets (6% × 250) 15
Contributions paid into the plan in the year 12
Pension benefits paid out (15)
Remeasurement gain (bal figure) 188
Fair value of the plan assets at 31 December 20X3 450
Present value of the obligation to provide benefits to current and former employees at
1 January 20X3 470.0
Interest on obligation (5% × 470) 23.5
Current service cost 18.0
Pension benefits paid out (15.0)
Remeasurement loss (bal figure) 173.5
Present value of the obligation to provide benefits to current and former employees at
31 December 20X3 670.0
ICAEW TC T u i t i on Co u rs e e xami n a t i o n qu e s t io n s 7
Amounts to be recognised in the financial statements
Defined benefit expense recognised in profit or loss
£m
Current service cost 18.0
Net interest on net defined benefit liability (23.5 – 15) 8.5
Remeasurement gain on plan assets (188.0)
Remeasurement loss on defined benefit obligation 173.5
Net expense 12.0
Net defined benefit liability recognised in the statement of financial position
£m
Present value of the obligation to provide benefits to current and former employees
at 31 December 20X3 670
Fair value of the plan assets at 31 December 20X3 (450)
Net defined benefit liability 220
Exhibit 3: Proposed new pension plan
The directors of Xylo are considering setting up a new pension plan in 20X5 with the following
characteristics:
(1) The pension liabilities would be fully insured and indexation of future liabilities will be limited
up to and including the funds available in a special trust account set up for the plan, which is not
at the disposal of Xylo.
(2) The trust account will be built up by the insurance company from the surplus yield on
investments.
(3) The pension plan will be an average pay plan in respect of which Xylo pays insurance premiums
to a third party insurance company to fund the plan.
(4) Every year 1% of the pension fund will be built up and employees will pay a contribution of 4%
of their salary, with the employer paying the balance of the contribution.
(5) If an employee leaves Xylo and transfers the pension to another fund, Xylo will be liable for, or is
refunded the difference between the benefits the employee is entitled to and the insurance
premiums paid.
In the light of the above, the directors believe that the plan will qualify as a defined contribution plan
under IAS 19, Employee Benefits rather than a defined benefit plan, and will be accounted for
accordingly.
3 THYME LTD
Assume the current date is August 20X2. The firm of ICAEW Chartered Accountants that you work for
as an audit senior has recently been appointed as auditors of Thyme Ltd, a distributor and adviser on
business software and IT solutions. Thyme is a wholly-owned subsidiary of a US parent company, Utah
Inc, which is also audited by your firm. You are currently working on the audit of Thyme's financial
statements for the year ended 30 September 20X2. Thyme contributes a very substantial proportion of
the revenue and profit reported by the Utah group. Your firm is required to report to its US office on
the results of Thyme and also to report on Thyme's individual company financial statements.
8 Co u rs e e xami n at i o n qu e s t io n s ICAEW CR
You receive the following instructions from the audit manager with overall responsibility for the
Thyme audit:
"I'm asking each team member to take responsibility for a particular section of our work and to
prepare a detailed audit plan, setting out the work to be performed. Materiality for planning purposes
has been set at £500,000.
You will be responsible for staff costs in the statement of profit or loss and staff cost payables and
accruals in the statement of financial position. An audit junior, Tina Jie, has provided some financial
data and preliminary analytical procedures using the June 20X2 management accounts (Exhibit 1). She
has performed some preliminary analytical procedures, but does not have enough experience to
identify audit risks.
Thyme's financial controller, Jon Dillan, has told me that the previous auditors relied on internal
controls for the audit of staff costs, supplemented by analytical procedures work. Jon, who is Tina Jie's
boyfriend, used to work for our firm as an audit senior a number of years ago. He is hoping to become
the Thyme finance director, a post which is currently vacant. I have forwarded you an email from him
(Exhibit 2) which includes two attachments:
Attachment 1: Details of the employee incentive schemes.
Attachment 2: A summary of key internal payroll controls.
I would like you to prepare an audit work paper in which you:
(a) explain the correct financial reporting treatment for employee incentive schemes at Thyme Ltd
including those set out in Jon's email (Exhibit 2, Attachment 1) showing, where appropriate,
calculations and correcting journal adjustments. You do not need to consider any corporation
tax or deferred tax balances;
(b) perform relevant analytical procedures for staff costs based on the information available,
identifying any unusual patterns and trends and outlining the audit risks which arise from your
work; and
(c) evaluate the summary of key internal payroll controls prepared by Jon Dillan. Identify any areas
where controls appear inadequate and any further risks associated with staff costs not covered
by these controls (Exhibit 2, Attachment 2). Determine the extent of reliance that can be placed
on these controls in reducing the risk that the financial statements will be materially misstated.
(d) I would also like your comments on any ethical issues or concerns you have arising from the
information you have received."
Required:
Respond to the audit manager's instructions.
(31 marks)
ICAEW TC T u i t i on Co u rs e e xami n a t i o n qu e s t io n s 9
Exhibit 1: Financial data and analytical review – prepared by Tina Jie, audit junior
Management accounts: statements of profit or loss
9 months to 9 months to Year ended
30 June 20X2 30 June 20X1 30 September 20X1
£'000 £'000 £'000
Revenue 21,500 28,400 31,600
Cost of sales (1,505) (2,700) (2,920)
Gross profit 19,995 25,700 28,680
Operating expenses (other than staff costs) (520) (520) (690)
Staff costs
Directors' salaries (Note 1) (700) (600) (800)
Payroll (Note 2) (15,300) (14,150) (18,860)
Pension costs (Note 3) (2,050) – –
Temporary staff (Note 4) (815) (105) (110)
Employee expenses (270) (240) (250)
Operating profit 340 10,085 7,970
Notes on analytical procedures
(1) Directors' salaries have increased because a bonus payment of £100,000 has been accrued. The
bonus is payable if operating profit, before charging the bonus, is greater than £300,000 for the
year. Jon says it is fairly certain that this bonus will be paid and has therefore accrued all of the
£100,000 payable to the directors.
(2) The payroll cost for the nine months to 30 June 20X2 has increased by £1,150,000. This is
because an additional 25 employees joined on 5 July 20X1 increasing the number of employees
from 500 to 525. Also a staff bonus has been accrued of £450,000.
(3) Pension costs comprise employer contributions paid to Thyme's defined benefit pension
scheme. The scheme, which is open to all employees, was introduced in July 20X1. Jon has
informed me that the parent company actuaries have all the details and the £2,050,000 agrees
to their instructions. I have agreed this amount to the bank statement.
(4) Temporary staff are paid on a commission basis. Jon has told me that there will be no further
temporary staff costs in the three months to 30 September 20X2. This is a quiet time in the
industry and revenue is expected to be the same in the final quarter to 30 September 20X2 as it
was in the quarter to 30 September 20X1.
Exhibit 2: Email and attachments 1 and 2
To: Audit manager
From: [Link]@[Link]
Subject: Audit planning
Date: 15 August 20X2
I have attached details of the employee incentive schemes (Attachment 1). I have not made any
entries in the financial statements in respect of these schemes other than to accrue the staff bonus of
£450,000. I would be grateful if you would provide me with the journal entries that I need to account
correctly for these schemes.
Following our planning meeting last week, I attach a summary of key internal payroll controls
(Attachment 2). I prepared this document as part of a large project instigated by our parent company
to document controls in all areas. This project has taken up a huge amount of my time for little, if any,
obvious benefit. I'm encouraged therefore that you will be able to put it to use in your audit and pass
on the cost saving to Thyme in a reduced audit fee. This will obviously improve my chances of a
permanent appointment as financial director.
10 Co u rs e e xami n at i o n qu e s t io n s ICAEW CR
I look forward to receiving your advice on these matters and to discussing your detailed audit plan.
Regards
Jon
Attachment 1: Employee incentive schemes
Thyme has introduced two incentive schemes. On 1 October 20X1 all of the 500 employees of Thyme
(excluding directors) accepted a 10% reduction in their basic pay in exchange for being eligible for both
of the following incentive schemes:
(1) Staff bonus scheme
A bonus scheme was introduced under which a payment to employees of £600,000 will be
made for the full year if revenue for the year ending 30 September 20X2 exceeds £26 million.
(2) Share appreciation rights
On 1 October 20X1 Thyme introduced an employee incentive scheme in the form of share
appreciation rights for employees. These are based on the shares of the US parent company for
employees. The vesting date is 30 September 20X4, and employees must be still in employment
at that date.
There are 500 employees eligible for the scheme, each of whom has appreciation rights over
4,000 shares. Under the scheme, each employee will receive a cash amount equal to the fair
value of the rights over each share. I anticipate 450 of the employees being in the scheme at
30 September 20X4. The fair value of the rights was £2.85 per share at 1 October 20X1 and
expected to be £2.28 per share at 30 September 20X2.
Attachment 2: A summary of key internal payroll controls
Thyme has around 500 permanent employees, 100 of whom are remunerated on an hourly basis. A
timesheet system records time and overtime for staff who are entitled to overtime payments. The
company runs a computerised payroll system covering all staff who are paid monthly. Each staff
member is allocated to one of the company's eight departments, which range in size from three to
100 employees.
Control objectives Controls
Only valid payroll costs are (1) Payroll summary is authorised by the financial controller before
recorded and paid. payment.
(2) Hours recorded are taken directly from time-recording system.
(3) All new staff are authorised by departmental heads.
(4) Departmental heads review payroll costs for their departments and
raise queries if there were unexpected costs.
All payroll costs are (1) Hours recorded are taken directly from time-recording system, so hours
recorded in the correct worked in the period cannot be missed.
period. (2) Review of monthly management accounts would identify a missed
payroll journal.
(3) The nominal ledger journal is posted automatically from the payroll
system to the ledger when the payroll is prepared five days before each
month end.
(4) Departmental heads review payroll costs for their departments and
raise queries if the costs were not as expected.
ICAEW TC T u i t i on Co u rs e e xami n a t i o n qu e s t io n s 11
Control objectives Controls
Payroll costs are recorded (1) Rates of pay are agreed annually. They are input to the payroll system
accurately at the by the payroll clerk and checked by the departmental heads. Changes
appropriate rates. to the rates are made by the payroll clerk only when written authority
received from a departmental head.
(2) Rates of pay for new staff are authorised by the departmental head and
detailed on the new joiners form used by the payroll clerk to update
the system.
Payroll related liabilities are (1) Monthly payroll is always paid on the last working day of each month so
recorded accurately in the no accruals are generally necessary.
accounts. (2) Employment tax liabilities are reconciled to the payroll summary at each
month end.
12 Co u rs e e xami n at i o n qu e s t io n s ICAEW CR