Section A – THIS ONE question is compulsory and MUST be attempted

1.
Minny is a company which operates in the service sector. Minny has business relationships with
Bower and Heeny. All three entities are public limited companies. The draft statements of
financial position of these entities are as follows at 30 November 2012:
Minny Bower Heeny
$m $m $m
Assets:
Non-current assets
Property, plant and equipment 920 300 310
Investments in subsidiaries
Bower 730
Heeny 320
Investment in Puttin 48
Intangible assets 198 30 35
–––––– –––––– ––––
1,896 650 345
Current assets 895 480 250
–––––– –––––– ––––
Total assets 2,791 1,130 595
–––––– –––––– ––––
Equity and liabilities:
Share capital 920 400 200
Other components of equity 73 37 25
Retained earnings 895 442 139
–––––– –––––– ––––
Total equity 1,888 879 364
–––––– –––––– ––––
Non-current liabilities 495 123 93
–––––– –––––– ––––
Current liabilities 408 128 138
–––––– –––––– ––––
Total liabilities 903 251 231
–––––– –––––– ––––
Total equity and liabilities 2,791 1,130 595

The following information is relevant to the preparation of the group financial statements:
1. On 1 December 2010, Minny acquired 70% of the equity interests of Bower. The purchase
consideration comprised cash of $730 million. At acquisition, the fair value of the non-controlling
interest in Bower was $295 million. On 1 December 2010, the fair value of the identifiable net
assets acquired was $835 million and retained earnings of Bower were $319 million and other
components of equity were $27 million. The excess in fair value is due to non-depreciable land.
2. On 1 December 2011, Bower acquired 80% of the equity interests of Heeny for a cash
consideration of $320 million. The fair value of a 20% holding of the non-controlling interest was
$72 million; a 30% holding was $108 million and a 44% holding was $161 million. At the date of
acquisition, the identifiable net assets of Heeny had a fair value of $362 million, retained earnings
were $106 million and other components of equity were $20 million. The excess in fair value is
due to non-depreciable land.

It is the group’s policy to measure the non-controlling interest at fair value at the date of
acquisition.

3. Both Bower and Heeny were impairment tested at 30 November 2012. The recoverable
amounts of both cash generating units as stated in the individual financial statements at 30
November 2012 were Bower, $1,425 million, and Heeny, $604 million, respectively. The directors
of Minny felt that any impairment of assets was due to the poor performance of the intangible
assets. The recoverable amount has been determined without consideration of liabilities which
all relate to the financing of operations.

4. Minny acquired a 14% interest in Puttin, a public limited company, on 1 December 2010 for a
cash consideration of $18 million. The investment was accounted for under IFRS 9 Financial
Instruments and was designated as at fair value through other comprehensive income. On 1 June
2012, Minny acquired an additional 16% interest in Puttin for a cash consideration of $27 million
and achieved significant influence. The value of the original 14% investment on 1 June 2012 was
$21 million. Puttin made profits after tax of $20 million and $30 million for the years to 30
November 2011 and 30 November 2012 respectively. On 30 November 2012, Minny received a
dividend from Puttin of $2 million, which has been credited to other components of equity.

5. Minny purchased patents of $10 million to use in a project to develop new products on 1
December 2011. Minny has completed the investigative phase of the project, incurring an
additional cost of $7 million and has determined that the product can be developed profitably.
An effective and working prototype was created at a cost of $4 million and in order to put the
product into a condition for sale, a further $3 million was spent. Finally, marketing costs of $2
million were incurred. All of the above costs are included in the intangible assets of Minny.

6. Minny intends to dispose of a major line of the parent’s business operations. At the date the
held for sale criteria were met, the carrying amount of the assets and liabilities comprising the
line of business were:
$m
Property, plant and equipment (PPE) 49
Inventory 18
Current liabilities 3
It is anticipated that Minny will realise $30 million for the business. No adjustments have been
made in the financial statements in relation to the above decision.

Required:
(a) Prepare the consolidated statement of financial position for the Minny Group as at 30
November 2012.
(35 marks)

(b) Minny intends to dispose of a major line of business in the above scenario and the entity has
stated that the held for sale criteria were met under IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations. The criteria in IFRS 5 are very strict and regulators have been known to
question entities on the application of the standard. The two criteria which must be met before
an asset or disposal group will be defined as recovered principally through sale are: that it must
be available for immediate sale in its present condition and the sale must be highly probable.

Required:
Discuss what is meant in IFRS 5 by ‘available for immediate sale in its present condition’ and ‘the
sale must be highly probable’, setting out briefly why regulators may question entities on the
application of the standard. (7 marks)

(c) Bower has a property which has a carrying value of $2 million at 30 November 2012. This
property had been revalued at the year end and a revaluation surplus of $400,000 had been
recorded in other components of equity. The directors were intending to sell the property to
Minny for $1 million shortly after the year end. Bower previously used the historical cost basis for
valuing property.

Required:
Without adjusting your answer to part (a), discuss the ethical and accounting
implications of the above intended sale of assets to Minny by Bower. (8 marks)
(50 marks)
Section B – TWO questions ONLY to be attempted
2
Transystems, a public limited company, designs websites and writes bespoke software. The
following accounting practices are proposed by the directors:

a) Transystems enters into contracts with both customers and suppliers. The supplier solves
system problems and provides new releases and updates for software. Transystems provides
maintenance services for its customers. In previous years, Transystems recognised revenue and
related costs on software maintenance contracts when the customer was invoiced, which was at
the beginning of the contract period. Contracts typically run for two years.
During 2010, Transystems had acquired Xavier Co, which recognised revenue, derived from a
similar type of maintenance contract as Transystems, on a straight-line basis over the term of the
contract. Transystems considered both its own and the policy of Xavier Co to comply with the
requirements of IAS 18 Revenue but it decided to adopt the practice of Xavier Co for itself and
the group. Transystems concluded that the two recognition methods did not, in substance,
represent two different accounting policies and did not, therefore, consider adoption of the new
practice to be a change in policy.
In the year to 30 April 2011, Transystems recognised revenue (and the related costs) on a
straight-line basis over the contract term, treating this as a change in an accounting estimate. As
a result, revenue and cost of sales were adjusted, reducing the year’s profits by some $6 million.
(5 marks)

b) In group structure of Transystems , Transystems owns 80% of Briars, 60% of Doye, and 30% of
Eye. Transystems exercises significant influence over Eye. The directors of Transystems are also
directors of Briars and Doye but only one director of Transystems sits on the management board
of Eye. The management board of Eye comprises five directors. Originally the group comprised
five companies but the fifth company, Tang, which was a 70% subsidiary of Transystems, was sold
on 31 January 2006. There were no transactions between Tang and the Transystems Group during
the year to 31 May 2006. 30% of the shares of Transystems are owned by another company,
Atomic, which exerts significant influence over Transystems. The remaining 40% of the shares of
Doye are owned by Spade.
 Atomic
30%

↙
Transystems

∣ －－－－∣－－－－∣
80% 60% 30%
Briars Doye Eye

↖
Spade
40%

During the accounting period, Doye has sold a significant amount of plant and equipment to
Spade at the normal selling price for such items. The directors of Transystems want to
describe the nature of any related party relationships and transactions which exists:
– within the Transystem Group including Tang (5 marks)
– between Spade and the Transystem Group (3 marks)
– between Atomic and the Transystem Group (3 marks)

c) There are specific assets on which the company wishes to seek advice. The company holds
certain non-current assets, which are in a development area and carried at cost less
depreciation. These assets cost $3 million on 1 June 2008 and are depreciated on the
straight-line basis over their useful life of fi ve years. An impairment review was carried out on
31 May 2009 and the projected cash fl ows relating to these assets were as follows:
Year to 31 May 2010 31 May 2011 31 May 2012 31 May 2013
Cash flows ($000) 280 450 500 550
The company used a discount rate of 5%. At 30 November 2009, the directors used the same
cash flow projections and noticed that the resultant value in use was above the carrying
amount of the assets and wished to reverse any impairment loss calculated at 31 May 2009.
The government has indicated that it may compensate the company for any loss in value of the
assets up to 20% of the impairment loss.
(7 marks)

Required:
Discuss the accounting treatment of the above transactions in accordance with the
advice required by the directors.
(25 marks including 2 professional marks)

3
a)Leigh granted and issued fully paid shares to its own employees on 31 March 2015.
Normally share options issued to employees would vest over a three year period, but these
shares were given as a bonus because of the company’s exceptional performance over the
period. The shares in Leigh had a market value of $3 million (one million ordinary shares of $1
at $3 per share) on 31 March 2015 and an average fair value of $2·5 million (one million
ordinary shares of $1 at $2·50 per share) for the year ended 31 March 2015. It is expected that
Leigh’s share price will rise to $6 per share over the next three years. (5 marks)

b) Leigh’s pension plan was accounted for as a defined benefit plan in 2010. In the year ended
30 April 2011, Leigh changed the accounting method used for the scheme and accounted for it
as a defined contribution plan, restating the comparative 2010 financial information. The effect
of the restatement was significant. In the 2011 financial statements, Leigh explained that,
during the year, the arrangements underlying the retirement benefit plan had been subject to
detailed review. Since the pension liabilities are fully insured and indexation of future liabilities
can 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 Leigh, the plan qualifies as a defined contribution plan
under IAS 19 Employee Benefits rather than a defined benefit plan. Furthermore, the trust
account is built up by the insurance company from the surplus yield on investments. The
pension plan is an average pay plan in respect of which the entity pays insurance premiums to
a third party insurance company to fund the plan. Every year 1% of the pension fund is built up
and employees pay a contribution of 4% of their salary, with the employer paying the balance
of the contribution. If an employee leaves Leigh and transfers the pension to another fund,
Leigh is liable for, or is refunded the difference between the benefits the employee is entitled to
and the insurance premiums paid.
(7 marks)

c) Leigh has obtained a significant amount of grant income for the development of hotels in
Europe. The grants have been received from government bodies and relate to the size of the
hotel which has been built by the grant assistance. The intention of the grant income was to
create jobs in areas where there was significant unemployment. The grants received of $70
million will have to be repaid if the cost of building the hotels is less than $500 million. (4
marks)

d) The Leigh Group, a public limited company, and Glass, a public limited company, have
agreed to create a new entity, York, a limited liability company on 31 March 2015. The
companies’ line of business is the generation, distribution, and supply of energy. Leigh
supplies electricity and Glass supplies gas to customers. Each company has agreed to
subscribe net assets for a 50% share in the equity capital of York. York is to issue 30 million
ordinary shares of $1. There was no written agreement signed by Leigh and Glass but the
minutes of the meeting where the creation of the new company was discussed have been
approved formally by both companies. Each company provides equal numbers of directors to
the Board of Directors. The net assets of York were initially shown at amounts agreed between
Leigh and Glass, but their values are to be adjusted so that the carrying amounts at 31 March
2015 are based on International Financial Reporting Standards. (5 marks)

Required:
Discuss the accounting treatment of the above transactions in accordance with the
advice required by the directors.
(25 marks in which 4 marks relating to professional marks)
4
(a) Leasing is important to Holcombe, a public limited company as a method of financing the
business. The Directors feel that it is important that they provide users of financial statements
with a complete and understandable picture of the entity’s leasing activities. They believe that
the current accounting model is inadequate and does not meet the needs of users of financial
statements.

Holcombe has leased plant for a fixed term of six years and the useful life of the plant is 12
years. The lease is non-cancellable, and there are no rights to extend the lease term or
purchase the machine at the end of the term. There are no guarantees of its value at that point.
The lessor does not have the right of access to the plant until the end of the contract or unless
permission is granted by Holcombe.

Fixed lease payments are due annually over the lease term after delivery of the plant, which is
maintained by Holcombe. Holcombe accounts for the lease as an operating lease but the
directors are unsure as to whether the accounting treatment of an operating lease is
conceptually correct.

Required:
(i) Discuss the reasons why the current lease accounting standards may fail to meet the
needs of users and could be said to be conceptually fl awed; (7 marks)
(ii) Discuss whether the plant operating lease in the financial statements of Holcombe
meets the definition of an asset and liability as set out in the ‘Framework for the
Preparation and Presentation of Financial Statements.’ (7 marks)
Professional marks will be awarded in part (a) (i) and (ii) for clarity and quality of discussion. (2
marks)

(b) Holcombe also owns an office building with a remaining useful life of 30 years. The carrying
amount of the building is $120 million and its fair value is $150 million. On 1 May 2009,
Holcombe sells the building to Brook, a public limited company, for its fair value and leases it
back for five years at an annual rental payable in arrears of $16 million on the last day of the
financial year (30 April). This is a fair market rental. Holcombe’s incremental borrowing rate is
8%.

On 1 May 2009, Holcombe has also entered into a short operating lease agreement to lease
another building. The lease will last for three years and is currently $5 million per annum.
However an inflation adjustment will be made at the conclusion of leasing years 1 and 2.
Currently inflation is 4% per annum.

The following discount factors are relevant (8%).

Required:
(i) Show the accounting entries in the year of the sale and lease back assuming that the
operating lease is recognised as an asset in the statement of financial position of
Holcombe; (6 marks)

(ii) State how the inflation adjustment on the short term operating lease should be dealt
with in the financial statements of Holcombe. (3 marks)
(25 marks)