ACCA Paper P2 Corporate Reporting Mock Exam Question Paper 3 hours and 15 minutes
Time allowed This paper is divided into two sections Section A
This question is compulsory and MUST be attempted
Section B
TWO questions ONLY to be attempted
Instructions: Take a few moments to review the notes on the inside of this page titled, 'Get into good exam habits now!' before attempting this exam.
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER EXAMINATION CONDITIONS
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Get into good exam habits now! Take a moment to focus on the right approach for this exam.
Effective time management
Watch the clock and allow 1.95 minutes per mark. Work out how long you can spend on each question and do not exceed that time.
Take a few moments to think what the requirements are asking for and how you are going to answer them.
Effective planning
This paper is in exactly the same format as the real exam. You should read through the paper and plan the order in which you will tackle the questions. Always start with the one you feel most confident about and take time to choose the questions you will answer in sections with choice.
Read the requirements carefully: focus on mark allocation, question words (see below) and potential overlap between requirements.
Identify and make sure you pick up the easy marks available in each question.
Effective layout
Present your numerical solutions using the standard layouts you have seen. Show and reference your workings clearly.
With written elements try and make a number of distinct points using headings and short paragraphs. You should aim to make a separate point for each mark.
Ensure that you explain the points you are making i.e. why is the point a strength, criticism or opportunity?
Give yourself plenty of space to add extra lines as necessary; it will also make it easier for the examiner to mark.
Common terminology Identify Discuss Describe Summarise Recommend Analyse Explain Illustrate Appraise/assess/ evaluate
List relevant points Explain the opposing arguments Present the characteristics of State briefly the essential points Present information to enable the recipient to take action Determine and explain the constituent parts of Set out in detail the meaning of Use an example to explain something Judge the importance or value of
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Section A This question is compulsory and MUST be attempted
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Milton
The following financial statements relate to Milton, a public limited company. MILTON GROUP STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20X5 Milton Newbolt $m $m Revenue 1,941 564 Cost of sales (1,650) (328) Gross profit 291 236 Other income 75 44 Distribution costs (72) (50) Administrative costs (132) (70) Finance costs (21) (20) Profit before tax 141 140 Income tax expense (50) (56) Profit for the year 91 84 Other comprehensive income for the year (not reclassified to profit or loss), net of tax: Investment in equity instruments Gains (net) on PPE revaluation Remeasurement losses on defined benefit plan Other comprehensive income for the year, net of tax Total comprehensive income and expense for year
Owen $m 340 (202) 138 29 (62) (28) (19) 58 (24) 34
Pope $m 194 (121) 73 8 (28) (16) (10) 27 (11) 16
48 28 (34) 42
22 14 – 36
16 – – 16
24 8 – 32
133
120
50
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The following information is relevant to the preparation of the group statement of profit or loss and other comprehensive income: (i)
During 20X0, Milton acquired a 10% interest in Newbolt, a public limited company. This investment was measured at fair value with changes in value presented in other comprehensive income. At the reporting date of 30 September 20X4 its fair value was $9 million. There were no changes in the fair value of the investment between 30 September 20X4 and 31 December 20X4. On 1 January 20X5, Milton acquired a further 50% of the equity interests of Newbolt. The purchase consideration comprised cash of $200 million paid on the acquisition date with a further amount to be paid on 1 January 20X6. The amount payable is based on a multiple of Newbolt's profit before tax over the three years after the acquisition. The fair value of this amount was estimated to be $250 million as at the acquisition date. This estimate was revised to $220 million as at 30 September 20X5 because subsequent work carried out by Milton's group accountant identified errors in the profit projections used in the original estimate. The fair value of Newbolt's identifiable net assets at the acquisition date was $380 million. The fair value of the non-controlling interest in Newbolt was $40 million on 1 January 20X5. Milton wishes to use the 'full goodwill' method for all acquisitions. The share capital and retained earnings of Newbolt were $100 million and $160 million respectively and other components of equity were $100 million at the date of acquisition. The excess of the fair value of the identifiable net assets at acquisition is due to an increase in the value of plant, which is depreciated on the straight-line method and has a ten year remaining life at the date of acquisition. Newbolt's profits are deemed to accrue evenly over the year. The goodwill on the acquisition of Newbolt was reviewed for impairment at the reporting date and this indicated that it had suffered an impairment of 10% of its value.
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(ii)
Milton acquired 75% of the equity interests of Owen, a public limited company, on 1 April 20X5. There was no significant difference between the fair values of Owen's net assets and their carrying values at the acquisition date. Since 20X2 Owen has owned a 25% interest in Pope, a public limited company and exercises significant influence over that company. Owen carries the investment in Pope at fair value with changes in value recognised in other comprehensive income. In the current year a gain of $6 million has been recognised. Goodwill had been impairment tested and no impairment had occurred. Profits of both Owen and Pope are deemed to accrue evenly over the year.
(iii)
In August 20X5 Newbolt sold inventory to Milton. The sale price of the inventory was $72 million. Newbolt sells goods at a mark-up of 20% to group companies and third parties. At the year-end, half of the inventory sold to Milton remained unsold.
(iv)
Newbolt paid a dividend of $20 million on 30 June 20X5. Milton recognised the amount received on that date in other income.
(v)
The parent company, Milton, is the only part of the group to operate a defined benefit pension plan. It has been negotiating with its employees and their representatives to change the terms of the plan and an agreement was finalised and signed on 28 September 20X5. Defined contribution arrangements will apply to all future service although the company will retain its defined benefit obligation in connection with past service. However, benefits relating to employees' past service will be based on salaries as at 30 September 20X5, rather than on final salaries. The net defined benefit liability included in the draft financial statements was $145 million but the actuary has advised that the change to the plan will reduce this to $105 million.
(vi)
As permitted by IFRS 9 Financial instruments all group companies have made an irrevocable election to recognise changes in the fair value of investments in equity instruments in other comprehensive income.
(vii)
Ignore any taxation effects of the above adjustments.
Required (a)
Prepare a consolidated statement of profit or loss and other comprehensive income for the year ended 30 September 20X5 for the Milton Group. (35 marks)
(b)
Explain the principles of how the additional investment in Newbolt is treated in the consolidated financial statements and also how any further changes in the estimated fair value of the contingent consideration will be treated. (7 marks) Milton's board of directors have been discussing how the enlarged group will affect some of the main disclosures in the financial statements. During the discussions the finance director suggested amending the structure of the monthly accounting information presented to the chief executive and the board so that the two main divisions of Newbolt are reported as one segment. The two divisions produce and market aircraft components and both produce a similar amount of revenue. One of these divisions produces components for civil aircraft and sells these in a fairly competitive market, where margins vary widely over time. The other division sells components for defence aircraft under long-term contracts with governments where margins are very low and are fixed for a period of years. The two divisions are managed separately and under the current structure are accounted for separately for internal reporting purposes. The finance director commented that separating the two divisions could draw attention to the poor financial performance of the defence division.
(c)
Discuss briefly the importance of ethical behaviour in the preparation of financial statements and whether the finance director's proposals in respect of segment reporting could constitute unethical behaviour. (8 marks) (Total = 50 marks)
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Section B TWO questions ONLY to be attempted
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McNiven
(a)
On 1 October 20X4 McNiven, a public limited company with a 30 September year end, granted to each of its senior management team either 6,500 shares in McNiven or a cash equivalent equal to the market price of 6,000 shares. The right is conditional on the managers remaining in employment at McNiven until 30 September 20X6. McNiven reserves the right to choose whether to settle the scheme in cash or shares. However, in the past, McNiven has always opted to settle similar schemes in cash. If the shares are issued, they must be held for two years from 30 September 20X6 before being sold. McNiven's share price was $8.50 on the 1 October 20X4 and $9.00 on 30 September 20X5. It rose to $9.25 on 20 October 20X5, the date the financial statements were authorised for issue. The fair value of the shares alternative was calculated at $8.10, $8.60 and $8.85 at the same dates respectively. At 1 October 20X4, there were 30 members of the senior management team. As at 1 October 20X4 no members of the team were expected to leave during the vesting period. However, due to a buoyant job market, two managers left in September 20X5 and as at 30 September 20X5, a third manager was expected to leave within a few months of the year end. The new finance director is unsure how to account for the above scheme. He is also aware that because tax relief will be granted on exercise (based on the entity's share price at the date of exercise), there might be some deferred tax implications. Required (i)
Discuss, with suitable computations, the accounting treatment for the above scheme in the financial statements of McNiven for the year ended 30 September 20X5, taking into account any deferred tax implications and the impact of events occurring after the end of the reporting period. Assume a tax rate of 30%.
(ii)
(b)
(7 marks)
The finance director is worried about the company's projected cash flow over the next 12 months and is considering negotiating with the managers to replace these rights with a new scheme that will vest in four years' time. This will probably include a reduced cash payment at the date when the original rights would have vested. Explain the accounting treatment that would be required if this change was made. (3 marks)
The 1,000 factory employees of McNiven are entitled to 20 days of paid annual leave each year. The entitlement accrues evenly through the year and unused leave may be carried forward for one year only. Each year the current year's entitlement is used before any balance brought forward from the previous year. The estimated total wage expense for the factory workers for the year is $840,000. The workers do not work at weekends or on public holidays so this means there are 253 working days per year. At 30 September 20X5, all the employees have two days unused leave and management's estimates, based on past experience, are that: (i)
75% of employees will take 22 days of holiday in the year to 20 September 20X6 (including the two brought forward days)
(ii)
15% will take 20 days (losing their brought forward days), and
(iii)
10% will take 18 days (losing their brought forward days and with two days to carry forward to the following year)
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Required Explain, with suitable calculations, the liability that should be recognised for unused leave in McNiven's statement of financial position as at 30 September 20X5. (6 marks) (c)
McNiven acquired a new subsidiary on I January 20X5. The subsidiary operated a defined benefit pension plan for its senior management. As part of the fair value exercise, an actuarial valuation was carried out on the defined benefit pension plan at that date. The plan assets had a fair value of $72,600 and the present value of the pension obligation was $116,500. The following information has been provided for nine months to 30 September 20X5: Plan assets at 30 September 20X5 at fair value Present value of obligation at 30 September 20X5 Current service cost Contributions paid into the fund by McNiven Benefits paid to pensioners Yield on high quality corporate bonds (per annum)
$'000 102,100 119,500 15,500 48,200 10,600 6%
The group accountant of McNiven is unfamiliar with accounting for defined benefit plans, as the other plans within McNiven are defined contribution plans. She has been advised that the directors must account for the plan in accordance with IAS 19 Employee benefits as revised in 2011. Required: Prepare the extracts from the consolidated statement of profit or loss and other comprehensive income and statement of financial position for the year ended 30 September 20X5. (7 marks) Professional skills will be awarded for the clarity and quality of the presentation and discussion. (2 marks) (Total = 25 marks)
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Saverfast Saverfast is a company that operates a chain of large out of town supermarkets. It has expanded rapidly over the last ten years, opening new stores in its home country and overseas. It has also moved into a wide-range of non-food sales and the provision of services, such as opticians. The company is currently preparing its consolidated financial statements for the year ending 30 September 20X5. Saverfast offers its customers a loyalty card which awards customers points based on money spent. These points may be redeemed as money off future purchases from Saverfast or as free/discounted goods from other retailers. Revenue from food sales for the year ended 30 September 20X5 amounted to £12,000 million. At the year end, it is estimated that there are reward points worth £1,000 million arising from this revenue which are eligible for redemption. Based on past experience, it is estimated that only about three in five customers are likely to redeem their points. (4 marks) On 1 October 20X3 Saverfast purchased land and buildings in an overseas capital city in order to open a new store. The land and buildings cost $20 million, of which $8 million related to the cost of the land. The property is being depreciated over 20 years on the straight-line basis with zero residual value. On 30 September 20X4, it was revalued to $23 million (including land valued at $10 million) and on 30 September 20X5, the land and buildings were revalued to $15 million. The whole of the revaluation loss had been posted to other comprehensive income and depreciation has been charged for the year. It is Saverfast's company policy to make all necessary transfers for excess depreciation following revaluation. The directors of Saverfast are concerned about the most recent valuation, as well as the disappointing results from the new store and the possibility of closing down this operation was discussed at the most recent board meeting. (7 marks) During the last year, Saverfast began to operate an online retail division, Saferfast Direct, as a pilot scheme. The service uses a fleet of delivery vans. This has proved to be very popular with customers and the company wants to expand this operation. The finance director identified a key risk of volatility of diesel prices and has taken out a forward contract to hedge against this. On 1 August 20X5, Saverfast entered into a forward contract to hedge its expected fuel requirements for the second quarter of the next financial year for delivery of 1 million litres of diesel on 31 December 20X5 at a price of $2.04 per litre. The company intended to settle the contract net in cash and purchase the actual required quantity of diesel in the open market on 31 December 20X5. At the company's year end the forward price for delivery on 31 December 20X5 had risen to $2.16 per litre of fuel. (6 marks) During the year, Saverfast has commenced a programme of building 20 new stores in its home country. Costs of $68 million have been incurred in the current year in respect of site preparation and payments to contractors. No specific loans were taken out to fund the building as Saverfast was able to use funds available to it through its existing set of borrowings. One director has suggested that the an amount of interest calculated at the highest interest rate currently being suffered by the company should be capitalised in order to improve reported profits. (4 marks) In overseas countries, Saverfast normally leases its supermarket buildings. A number of properties leased over two years ago are now surplus to requirements. Although every effort has been made to sub-let these premises in the current economic climate it is recognised that it may not be possible to do so immediately. Therefore there will be a shortfall arising from sublease rental income being lower than the lease costs being borne by Saverfast. (2 marks) Professional marks will be awarded for the clarity and quality of the presentation and discussion. (2 marks) Required Write a report to the directors of Saverfast explaining how each of these matters should be dealt with in the group financial statements for the year ending 30 September 20X5. (Total = 25 marks)
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Equitus Classification of financial instruments as debt or equity can have a significant effect on the financial statements. Guidance is provided in IAS 32 Financial instruments: presentation (and other standards for items outside IAS 32's scope) although there are sometimes areas where it is difficult to determine whether a transaction is debt or equity. Required: (a)
Explain why the classification of a financial instrument as debt or equity is relevant to a user of the financial statements in making economic decisions. (6 marks)
(b)
Discuss how financial instruments are classified as debt or equity in accordance with current accounting rules and explain why further guidance is desirable. (6 marks)
(c)
Discuss the classification and accounting treatment of the following items under current accounting rules: (i)
Equitus issued 40 million non-redeemable $1 preference shares at par value. Under the terms attaching to the preference shares, a dividend is payable on the preference shares only if Equitus also pays a dividend on its ordinary shares relating to the same period. (4 marks)
(ii)
Equitus entered into a contract with a supplier to buy a significant item of equipment. Under the terms of the agreement the supplier will receive ordinary shares with an equivalent value of $5 million one year after the equipment is delivered. (4 marks)
(iii)
The directors of Equitus, on becoming directors, are required to invest a fixed agreed sum of money in a special class of $1 ordinary shares that only directors hold. Dividend payments on the shares are discretionary and are ratified at the Annual General Meeting of the company. When a director's service contract expires, Equitus is required to repurchase the shares at their nominal value. (3 marks)
Professional marks will be awarded for the clarity and quality of the presentation and discussion. (2 marks) (Total = 25 marks)
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Student self-assessment Having completed this paper take a few minutes to consider what you did well and what you found difficult. Use this as a basis to focus your future study on effectively improving your performance.
Common problems
Future emphasis if you answer Yes
Timing and planning Did you finish too early?
Y/N
Focus your planning time on generating more ideas. Use models to help develop width to your thinking.
Did you overrun?
Y/N
Focus on allocating your time better. Practise questions under strict timed conditions. If you get behind leave space and move on.
Did you waffle?
Y/N
Focus your planning time on developing a logical structure to your answer.
Was your answer difficult to follow?
Y/N
Use headings and subheadings. Use numbering sequences when identifying points. Leave space between each point.
Did you fail to explain each point?
Y/N
Show why the point identified answers the question set.
Layout
Were some of your workings unclear? Y/N
Give yourself time and space to make the marker's job easy.
Content Did you struggle with: Interpreting the questions?
Y/N
Learn the meaning of question words (inside front cover). Learn subject jargon (study text glossary). Read questions carefully noting all the parts. Practise as many questions as possible.
Understanding the subject?
Y/N
Review your notes/text. Work through easier examples first. Contact a tutor for help.
Remembering the notes/text?
Y/N
Quiz yourself constantly as you study. You need to develop your memory as well as your understanding of a subject.
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