Dip IFR

Diploma in
International
Financial Reporting
Friday 9 December 2016

Time allowed 3 hours 15 minutes

ALL FOUR questions are compulsory and MUST be attempted.

Do NOT open this question paper until instructed by the supervisor.

This question paper must not be removed from the examination hall.

The Association of
Chartered Certified
Accountants
 This is a blank page.
The question paper begins on page 3.

2
ALL FOUR questions are compulsory and MUST be attempted

1 Alpha holds investments in two entities, Beta and Gamma. The draft statements of financial position of the three
entities at 30 September 2016 were as follows:
Alpha Beta Gamma
$’000 $’000 $’000
Assets
Non-current assets:
Property, plant and equipment (Notes 1 and 3) 524,000 370,000 162,000
Investments (Notes 1 and 3) 423,000 Nil Nil
–––––––––– –––––––– ––––––––
947,000 370,000 162,000
–––––––––– –––––––– ––––––––
Current assets:
Inventories 120,000 75,000 60,000
Trade receivables (Note 4) 90,000 66,000 55,000
Cash and cash equivalents 15,000 12,000 10,000
–––––––––– –––––––– ––––––––
225,000 153,000 125,000
–––––––––– –––––––– ––––––––
Total assets 1,172,000 523,000 287,000
––––––––––
–––––––––– ––––––––
–––––––– ––––––––
––––––––
Equity and liabilities
Equity
Share capital ($1 shares) 140,000 100,000 80,000
Retained earnings (Notes 1 and 3) 573,000 210,000 90,000
Other components of equity (Notes 1 and 3) 250,000 10,000 Nil
–––––––––– –––––––– ––––––––
Total equity 963,000 320,000 170,000
–––––––––– –––––––– ––––––––
Non-current liabilities:
Provisions (Note 5) 1,250 Nil Nil
Long-term borrowings 82,750 90,000 48,000
Deferred tax 45,000 28,000 30,000
–––––––––– –––––––– ––––––––
Total non-current liabilities 129,000 118,000 78,000
–––––––––– –––––––– ––––––––
Current liabilities:
Trade and other payables 60,000 50,000 30,000
Short-term borrowings 20,000 35,000 9,000
–––––––––– –––––––– ––––––––
Total current liabilities 80,000 85,000 39,000
–––––––––– –––––––– ––––––––
Total equity and liabilities 1,172,000 523,000 287,000
––––––––––
–––––––––– ––––––––
–––––––– ––––––––
––––––––
Note 1 – Alpha’s investment in Beta
On 1 October 2013, Alpha acquired 80 million shares in Beta by means of a share exchange of one share in Alpha
for every two shares acquired in Beta. On 1 October 2013, the market value of an Alpha share was $7·00.
Alpha incurred directly attributable due diligence costs of $3 million on acquisition of Beta. The directors of Alpha
included these acquisition costs in the carrying amount of the investment in Beta in the draft statement of financial
position of Alpha. There has been no change to the carrying amount of this investment in Alpha’s own statement of
financial position since 1 October 2013.
On 1 October 2013, the individual financial statements of Beta showed the following balances:
– Retained earnings $150 million.
– Other components of equity $5 million.

3 [P.T.O.
The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at
1 October 2013. The following matters emerged:
– Property having a carrying amount of $160 million (land component $70 million, buildings component
$90 million) had an estimated fair value of $200 million (land component $80 million, buildings component
$120 million). The buildings component of the property had an estimated useful life of 30 years at 1 October
2013.
– Plant and equipment having a carrying amount of $120 million had an estimated fair value of $140 million. The
estimated remaining useful life of this plant at 1 October 2013 was four years. None of this plant and equipment
had been disposed of between 1 October 2013 and 30 September 2016.
– On 1 October 2013, the notes to the financial statements of Beta disclosed a contingent liability. On 1 October
2013, the fair value of this contingent liability was reliably measured at $6 million. The contingency was resolved
in the year ended 30 September 2014 and no payments were required to be made by Beta in respect of this
contingent liability.
– The fair value adjustments have not been reflected in the individual financial statements of Beta. In the
consolidated financial statements the fair value adjustments will be regarded as temporary differences for the
purposes of computing deferred tax. The rate of deferred tax to apply to temporary differences is 20%.
The directors of Alpha used the proportion of net assets method when measuring the non-controlling interest in Beta
in the consolidated statement of financial position.
Note 2 – Impairment review of goodwill on acquisition of Beta
No impairment of the goodwill on acquisition of Beta was evident when the reviews were carried out on 30 September
2014 and 2015. On 30 September 2016, the directors of Alpha carried out a further review and concluded that the
recoverable amount of the net assets of Beta at that date was $400 million. Beta is regarded as a single cash
generating unit for the purpose of measuring goodwill impairment.
Note 3 – Alpha’s investment in Gamma
On 1 October 2015, Alpha acquired 60 million shares in Gamma by means of a cash payment of $140 million. The
purchase agreement provided for an additional payment on 31 October 2017 to the former holders of the 60 million
acquired shares. The amount of this additional payment is dependent on the financial performance of Gamma in the
two-year period from 1 October 2015 to 30 September 2017. On 1 October 2015, the fair value of this additional
payment was estimated to be $20 million. This estimate was revised to $24 million on 30 September 2016. Alpha
has not made any entries in its draft financial statements to record this potential additional payment.
On 1 October 2015, the individual financial statements of Gamma showed a balance on retained earnings of
$75 million.
On 1 October 2015, the fair values of the net assets of Gamma were the same as their carrying amounts with the
exception of some land which had a carrying amount of $50 million and a fair value of $70 million. This land
continued to be an asset of Gamma at 30 September 2016. The fair value adjustment has not been reflected in the
individual financial statements of Gamma. In the consolidated financial statements the fair value adjustment will be
regarded as a temporary difference for the purposes of computing deferred tax. The rate of deferred tax to apply to
temporary differences is 20%.
No impairment issues arose concerning the measurement of Gamma in the consolidated statement of financial
position of Alpha at 30 September 2016.
The directors of Alpha used the full goodwill (fair value) method when measuring the non-controlling interest in
Gamma in the consolidated statement of financial position. On 1 October 2015, the fair value of a share in Gamma
was $2·30.
Note 4 – Trade receivables and payables
Group policy is to clear intra-group balances on a given date prior to each year end. Beta complied with this policy
at 30 September 2016 but Gamma was late in making the required payment of $10 million to Alpha. The payment
was made by Gamma on 29 September 2016 and received and recorded by Alpha on 2 October 2016.

4
Note 5 – Provision
On 1 October 2015, Alpha completed the construction of a non-current asset with an estimated useful life of 20 years.
The costs of construction were recognised in property, plant and equipment and depreciated appropriately. Alpha has
a legal obligation to restore the site on which the non-current asset is located on 30 September 2035. The estimated
cost of this restoration work, at 30 September 2035 prices, is $25 million. The directors of Alpha have made a
provision of $1·25 million (1/20 x $25 million) in the draft statement of financial position at 30 September 2016.
An appropriate annual discount rate to use in any relevant calculations is 6% and at this rate the present value of $1
payable in 20 years is 31·2 cents.

Required:
Prepare the consolidated statement of financial position of Alpha at 30 September 2016. You need only consider
the deferred tax implications of any adjustments you make where the question specifically refers to deferred tax.

(40 marks)

5 [P.T.O.
2 Delta is an entity which prepares financial statements to 30 September each year. The financial statements for the
year ended 30 September 2016 are shortly to be authorised for issue. The following events are relevant to these
financial statements:

(a) On 1 October 2014, Delta purchased an asset for $20 million. The estimated useful life of the asset was
10 years, with an estimated residual value of zero. Delta immediately leased the asset to Epsilon. The lease term
was 10 years and the annual rental, payable in advance by Epsilon, was $2,787,000. Delta incurred direct costs
of $200,000 in arranging the lease. The lease contained no early termination clauses and responsibility for
repairs and maintenance of the asset rest with Epsilon for the duration of the lease. The directors of Delta correctly
computed the annual rate of interest implicit in the lease as 8%. At an annual discount rate of 8% the present
value of $1 receivable at the start of years 1–10 is $7·247. (8 marks)

(b) On 1 September 2016, Delta sold a product to Customer X. Customer X is based in a country whose currency
is the florin and Delta has a large number of customers in that country to whom Delta sell similar products. The
invoiced price of the product was 500,000 florins. The terms of the sale gave the customer the right to return
the product at any time in the two-month period ending on 31 October 2016. On 1 September 2016, Delta
estimated that there was a 22% chance the product would be returned during the two-month period. The product
had not been returned to Delta by 15 October 2016 (the date the financial statements for the year ended
30 September 2016 were authorised for issue). On 15 October 2016, the directors estimated that there was an
8% chance the product would be returned before 31 October 2016. The directors of Delta considered that the
most reliable method of measuring the price for this transaction was to estimate any variable consideration using
a probability (expected value) approach. Exchange rates (florins to $1) are as follows:
– 1 September 2016 – 2 florins to $1.
– 30 September 2016 – 2·1 florins to $1.
– 15 October 2016 – 2·15 florins to $1.
– 31 October 2016 – 2·2 florins to $1. (7 marks)

(c) On 1 October 2014, Delta granted 250 share appreciation rights to 100 senior executives. The rights vest on
30 September 2017 provided the executives remain with Delta for the three-year period from 1 October 2014
to 30 September 2017. The rights can be exercised from 30 November 2017 to 31 December 2017. On
1 October 2014, it was expected that 10 executives would leave over the three-year period from 1 October 2014
to 30 September 2017. This estimate was confirmed on 30 September 2015 but two executives left
unexpectedly during the year ended 30 September 2016 and Delta now expects that 12 executives will leave
over the three-year period ending on 30 September 2017. Delta further estimated that all executives who were
eligible to exercise the rights would do so. On 1 October 2014, the fair value of a share appreciation right was
$3·20. The fair value increased to $3·50 by 30 September 2015 and to $3·60 by 30 September 2016.
(5 marks)

Required:
Explain and show how the three events would be reported in the financial statements of Delta for the year ended
30 September 2016.
Notes:
1. The mark allocation is shown against each of the three events above.
2. In explaining event (b), you do not need to consider the impact on inventory and cost of sales.

(20 marks)

6
3 (a) One of the matters addressed in IFRS 9 – Financial Instruments is the initial and subsequent measurement of
financial assets. IFRS 9 requires that financial assets are initially measured at their fair value at the date of initial
recognition. However, subsequent measurement of financial assets depends on their classification for which
IFRS 9 identifies three possible alternatives.

Required:
Explain the three classifications which IFRS 9 identifies for financial assets and the basis of measurement
which is appropriate for each classification. You should also identify any exceptions to the normal
classifications which may apply in specific circumstances. (8 marks)

(b) Kappa prepares financial statements to 30 September each year. During the year ended 30 September 2016
Kappa entered into the following transactions:
(i) On 1 October 2015, Kappa made an interest free loan to an employee of $800,000. The loan is due for
repayment on 30 September 2017 and Kappa is confident that the employee will repay the loan. Kappa
would normally require an annual rate of return of 10% on business loans (5 marks)
(ii) On 1 October 2015, Kappa made a three-year loan of $10 million to entity X. The rate of interest payable
on the loan was 8% per annum, payable in arrears. On 30 September 2018, Kappa will receive a fixed
number of shares in entity X in full settlement of the loan. Entity X paid the interest due of $800,000 on
30 September 2016 and entity X has no liquidity problems. Following payment of this interest, the fair value
of this loan asset at 30 September 2016 was estimated to be $10·5 million. (4 marks)
(iii) On 1 October 2015, Kappa purchased an equity investment in entity Y for $12 million. The investment did
not give Kappa control or significant influence over entity Y but the investment is seen as a long-term one.
On 30 September 2016, the fair value of Kappa’s investment in entity Y was estimated to be $13 million.
(3 marks)

Required:
Explain and show how the above transactions would be reported in the financial statements of Kappa for the
year ended 30 September 2016.
Note: The mark allocation for part (b) is shown against each of the three transactions above.

(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). You have recently produced the final draft of the
financial statements for the year ended 30 September 2016 and these are due to be published shortly. The managing
director, who is not an accountant, reviewed these financial statements and prepared a list of queries arising out of
the review.

Query One
One of the notes to the financial statements gives details of purchases made by Omega from entity X during the period.
I own 100% of the shares in entity X but I do not understand why it is necessary for any disclosure whatsoever to be
made in the Omega financial statements. The transaction is carried out on normal commercial terms and is totally
insignificant to Omega, representing less than 1% of Omega’s purchases. (5 marks)

Query Two
The notes to the financial statements say that plant and equipment is held under the ‘cost model’. However, property
which is owner occupied is revalued annually to fair value. Changes in fair value are sometimes reported in profit or
loss but usually in ‘other comprehensive income’. Also, the amount of depreciation charged on plant and equipment
as a percentage of its carrying amount is much higher than for owner occupied property. Another note says that
property we own but rent out to others is not depreciated at all but is revalued annually to fair value. Changes in value
of these properties are always reported in profit or loss. I thought we had to be consistent in our treatment of items
in the accounts. Please explain how all these treatments comply with relevant reporting standards. (7 marks)

Query Three
As you know, in the year to September 2016 we spent considerable sums of money designing a new product. We
spent the six months from October 2015 to March 2016 researching into the feasibility of the product. We charged
these research costs to profit or loss. From April 2016, we were confident that the product would be commercially
successful and we fully committed ourselves to financing its future development. We spent most of the rest of the year
developing the product, which we will begin to sell in the next few months. These development costs have been
recognised as intangible assets in our statement of financial position. How can this be right when all these research
and development costs are design costs? Please justify this with reference to relevant reporting standards.
(5 marks)

Query Four
On reviewing our financial statements, I found a note giving information about the different segments of our business
and also the disclosure of the earnings per share of our entity. Neither the segment note nor the earnings per share
disclosure appears in the financial statements of entity X (see query 1 above). Even though entity X is unlisted, both
entities report under full International Financial Reporting Standards so I do not understand how this difference can
occur. Please explain this to me. (3 marks)

Required:
Provide answers to the queries raised by the managing director.
Note: The mark allocation is shown against each of the four queries above.

(20 marks)

End of Question Paper

8
Answers
Diploma in International Financial Reporting December 2016 Answers
and Marking Scheme

Marks
1 Consolidated statement of financial position of Alpha at 30 September 2016
Assets $’000
Non-current assets:
Property, plant and equipment (524,000 + 370,000 + 162,000) + [(40,000 (W1) –
3,000 (W1)) + (20,000 (W1) – 15,000 (W1)) + 20,000 (W2) + (7,800 – 390) (W8))] 1,125,410 ½ + 1½ + ½
Goodwill (W3) 72,120 13 (W3)
––––––––––
1,197,530
––––––––––
Current assets:
Inventories (120,000 + 75,000 + 60,000) 255,000 ½
Trade receivables (90,000 + 66,000 + 55,000 – 10,000 (intra-group) 201,000 ½+½
Cash and cash equivalents (15,000 + 12,000 + 10,000 + 10,000 (cash in transit)) 47,000 ½+½
––––––––––
503,000
––––––––––
Total assets 1,700,530
––––––––––
––––––––––
Equity and liabilities
Equity attributable to equity holders of the parent
Share capital 140,000 ½
Retained earnings (W6) 613,642 13 (W6)
Other components of equity (W7) 254,000 1 (W7)
––––––––––
1,007,642
Non-controlling interest (W5) 120,470 2 (W5)
––––––––––
Total equity 1,128,112
––––––––––
Non-current liabilities:
Provision (7,800 + 468 (W8)) 8,268 ½+½
Long-term borrowings (82,750 + 90,000 + 48,000 ) 220,750 ½
Deferred consideration (20,000 + 4,000) 24,000 ½+½
Deferred tax (W9) 115,400 1½ (W9)
––––––––––
Total non-current liabilities 368,418
––––––––––
Current liabilities:
Trade and other payables (60,000 + 50,000 + 30,000) 140,000 ½+½
Short-term borrowings (20,000 + 35,000 + 9,000) 64,000 ½
–––––––––– –––
Total current liabilities 204,000 40
–––––––––– –––
Total equity and liabilities 1,700,530
––––––––––
––––––––––

11
 Marks
WORKINGS – DO NOT DOUBLE COUNT MARKS. ALL NUMBERS IN $’000 UNLESS OTHERWISE
STATED:
Working 1 – Net assets table – Beta:
1 October 30 September
2013 2016 For W3 For W6
$’000 $’000
Share capital 100,000 100,000 ½
Retained earnings:
Per accounts of Beta 150,000 210,000 ½ ½
Fair value adjustments:
Property (200,000 – 160,000) 40,000 40,000 ½ ½
Extra depreciation due to buildings uplift ((120,000 – 90,000) x 3/30) (3,000) ½
Plant and equipment (140,000 – 120,000) 20,000 20,000 ½ ½
Extra depreciation due to plant and equipment uplift (20,000 x ¾) (15,000) ½
Contingent liability (6,000) Nil ½ ½
Other components of equity 5,000 10,000 ½ ½
Deferred tax on fair value adjustments:
Date of acquisition (20% x 54,000 (see above)) (10,800) ½
Year end (20% x 42,000 (see above)) (8,400) ½
–––––––– ––––––––
Net assets for the consolidation 298,200 353,600
–––––––– ––––––––
The post-acquisition increase in net assets is 55,400 (298,200– 353,600). ½
5,000 of this increase is due to changes in other components of equity and ½
the remaining 50,400 to changes in retained earnings.
––– –––
3½ 5
––– –––
⇒W3 ⇒W6
Working 2 – Net assets table – Gamma:
1 October 30 September
2013 2016 For W3 For W6
$’000 $’000
Share capital 80,000 80,000 ½
Retained earnings: 75,000 90,000 ½ ½
Land adjustment (70,000 – 50,000) 20,000 20,000 ½ ½
Deferred tax on fair value adjustment (20% x 20,000) (4,000) (4,000) ½ ½
–––––––– ––––––––
Net assets for the consolidation 171,000 186,000
–––––––– ––––––––
The post-acquisition increase in net assets is 15,000 (186,000 – 171,000). ½
––– –––
2 2
––– –––
⇒W3 ⇒W6
Working 3 – Goodwill on consolidation
Beta Gamma
$’000 $’000
Costs of investment:
Shares issued to acquire Beta (40,000 x $7·00) 280,000 1
Cash paid to acquire shares in Gamma 140,000 ½
Contingent consideration re: Gamma acquisition 20,000 1
Non-controlling interests at date of acquisition:
Beta – 20% x 298,200 (W1) 59,640 1
Gamma – 20,000 x $2·30 46,000 1
Net assets at date of acquisition (W1/W2) (298,200) (171,000) 3½ (W1) + 2 (W2))
–––––––– ––––––––
Goodwill before impairment 41,440 35,000
Impairment of Beta goodwill (W4) (4,320) Nil 3 (W4)
–––––––– –––––––– –––
37,120 35,000 13
–––––––– –––––––– –––
The total goodwill is 72,120 (37,120 + 35,000).

12
 Marks
Working 4 – Impairment of Beta goodwill
$’000
Net assets of Beta as per working 1 353,600 ½
Grossed up goodwill on acquisition (100/80 x 41,440) 51,800 1
––––––––
405,400
Recoverable amount of Beta as a CGU (400,000) ½
––––––––
So gross impairment equals 5,400 ½
––––––––
80% thereof equals 4,320 ½
–––––––– –––
3
–––
⇒W3
Working 5 – Non-controlling interest
Beta Gamma
$’000 $’000
At date of acquisition (W3) 59,640 46,000 ½+½
Share of post-acquisition increase in net assets per workings 1 and 2:
Beta – 20% x 55,400 (W1) 11,080 ½
Gamma – 25% x 15,000 (W2) 3,750 ½
––––––– –––––––
70,720 49,750
––––––– ––––––– –––
2
–––
The total NCI is 120,470 (70,720 + 49,750).
Working 6 – Retained earnings
$’000
Alpha 573,000 ½
Adjustment for acquisition costs (3,000) ½
Adjustment for increase in contingent consideration re: Gamma (24,000 – 20,000) (4,000) ½
Adjustment for restoration provision (W8) 392 3 (W8)
Beta (80% x 50,400 (W1)) 40,320 ½ + 5 (W1)
Gamma (75% x (15,000 (W2)) 11,250 ½ + 2 (W2)
Impairment of Beta goodwill (W4) (4,320) ½
–––––––– –––
613,642 13
–––––––– –––
Working 7 – Other components of equity
$’000
Alpha – per own financial statements 250,000 ½
Beta (80% x 5,000 (W1) 4,000 ½
–––––––– –––
254,000 1
–––––––– –––
Working 8 – Adjustment re: restoration provision
$’000
Originally required provision (25,000 x 0·312) 7,800 1
––––––
One year’s unwinding of discount (7,800 x 6%) (468) ½
One year’s depreciation of capitalised cost (7,800 x 1/20) (390) 1
Original provision incorrectly made 1,250 ½
–––––– –––
So retained earnings adjustment equals 392 3
–––––– –––
⇒W6
Working 9 – Deferred tax
$’000
Alpha + Beta + Gamma 103,000 ½
On fair value adjustments in Beta (W1) 8,400 ½
On fair value adjustments in Gamma (W2) 4,000 ½
–––––––– –––
115,400 1½
–––––––– –––

13
 Marks
2 (a) All numbers in $’000 unless otherwise stated
The lease of the asset by Delta to Epsilon would be regarded as a finance lease because the risks
and rewards of ownership have been transferred to Epsilon. Evidence of this includes the lease is
for the whole of the life of the asset and Epsilon being responsible for repairs and maintenance. ½+½+½
Since the lease is a finance lease and Delta is the lessor, Delta will recognise a financial asset – the
‘net investment in finance leases’. The amount recognised will be the present value of the minimum
lease payments which will be 2,787 x 7·247 which (subject to rounding) equals 20,200. ½+1
[NB: This mark can also be awarded if candidates state that the initially recognised amount is the
purchase cost of the asset plus the initial direct costs.]
The impact of the lease on the financial statements for the year ended 30 September 2016 can best
be seen by preparing a profile of the net investment in the lease for the first three years of the lease
and shown below:
Year to Balance Rental Balance Finance Balance
30 September b/fwd in period income c/fwd
2015 20,200 (2,787) 17,413 1,393 18,806 1½
2016 18,806 (2,787) 16,019 1,282 17,301 1
2017 17,301 (2,787) 14,514 ½
During the year ended 30 September 2016, Delta will recognise income from finance leases of
1,282. ½
The net investment on 30 September 2016 will be 17,301. ½
Of the closing net investment of 17,301, 2,787 will be shown as a current asset and 14,514 as a
non-current asset. ½+ ½
–––
8
–––

(b) When the customer has a right to return products, the transaction price contains a variable element.
When this element can be reliably measured, it is taken account of in measuring the revenue. ½+½
The information regarding the change in likelihood of return after 30 September 2016 is an
adjusting event as it gives more information about conditions existing at the reporting date. ½
Therefore the revenue in florins for the year ended 30 September 2016 will be 460,000 (500,000
x 92%). ½
This will be recognised in the financial statements of Delta using the rate of exchange in force at the
date of the transaction (2 florins to $1). Therefore revenue of $230,000 will be recognised. ½
Delta will initially recognise a trade receivable of 500,000 florins. This will be initially recognised in
$ as $250,000. At the year end, the trade receivable will be re-translated using the closing rate of
2.·1 florins to $1 because it is a monetary item. The closing trade receivable will be $238,095
(500,000/2·1). ½+½
The loss on re-translation of the trade receivable of $11,905 ($250,000 – $238,095) will be
recognised in profit or loss. ½+½
The difference (in florins) of 40,000 between the revenue recognised (460,000) and the trade
receivable (500,000) will be recognised as a refund liability. This liability will initially be included
in the financial statements at $20,000 (40,000/2). ½+½
The refund liability is monetary so it will be re-translated to $19,048 (40,000/2·1). ½
The gain on re-translation of $952 ($20,000 – $19,048) will be recognised in profit or loss. ½+½
–––
7
–––

(c) In accordance with IFRS 2 – Share Based Payments – this cash settled share based payment
arrangement should be measured using the fair value of an option on the reporting date, with a debit
to profit or loss and a corresponding credit to liabilities. ½+½
The liability should be built up over the vesting period based on the estimated number of rights
ultimately estimated to vest. ½+½
The liability at 30 September 2015 would have been $26,250 [1/3 (250 x 90 x $3·50)]. 1
The liability at 30 September 2016 would have increased to $52,800 [2/3 (250 x 88 x $3·60].
This will be shown as a non-current liability. 1

14
 Marks
The increase in the liability over the year of $26,550 ($52,800 – $26,250) will be shown as an
expense in profit or loss for the year ended 30 September 2016. 1
–––
5
–––
20
–––

3 (a) The classification and measurement of financial assets is largely based on:
The business model for managing the asset – specifically whether or not the objective is to hold the
financial asset in order to collect the contractual cash flows. 1
Whether or not the contractual cash flows are solely payments of principal and interest on the
principal amount outstanding. 1
Where the business model for managing the asset is to hold the financial asset in order to collect the
contractual cash flows and the contractual cash flows are solely payments of principal and interest
on the principal amount outstanding, then the financial asset is normally measured at amortised
cost. 1
Where the business model for managing the asset is to both hold the financial asset in order to
collect the contractual cash flows and to sell the financial asset and the contractual cash flows are
solely payments of principal and interest on the principal amount outstanding, then the financial
asset is normally measured at fair value through other comprehensive income. Interest income on
such assets is recognised in the same way as if the asset were measured at amortised cost. 1+1
In other circumstances, financial assets are normally measured at fair value through profit or loss. 1
Notwithstanding the above, where equity investments are not held for trading, an entity may make
an irrevocable election to measure such investments at fair value through other comprehensive
income. 1
Finally an entity may, at initial recognition, irrevocably designate a financial asset as measured at fair
value through profit or loss if to do so eliminates or significantly reduces an accounting mismatch. 1
–––
8
–––

(b) (i) The loan is a financial asset which would initially be recognised at its fair value on 1 October
2015. ½
Given the fact that Kappa normally requires a return of 10% per annum on business loans of
this type, the loan asset should be initially recognised at $661,157 ($800,000/(1·10)2). 1
An amount of $138,843 ($800,000 – $661,157) would be charged to profit or loss at
1 October 2015. 1
Because of the business model and the contractual cash flows, this loan asset will subsequently
be measured at amortised cost. 1
Therefore $66,116 ($661,157 x 10%) will be recognised as finance income in the year ended
30 September 2016. The closing loan asset $727,273 will be ($661,157 + $66,116). This
will be shown as a current asset since repayment is due on 30 September 2017. ½+½+½
–––
5
–––
(ii) Since the loan is at normal commercial rates, the loan would initially be recognised at
$10 million – the amount advanced. ½
The interest received and receivable of $800,000 would be credited to profit or loss as finance
income. 1
In this case, the contractual cash flows are not solely payments of principal and interest on the
principal amount outstanding. Therefore the asset would be measured at fair value through
profit or loss. 1
A fair value gain of $500,000 ($10·5 million – $10 million would be recognised in profit or
loss. 1
The loan asset of $10·5 million would be shown as a non-current asset. ½
–––
4
–––
(iii) The equity investment would be initially recognised at its cost of purchase – $12 million. 1

15
 Marks
The contractual cash flows relating to an equity investment are not solely payments of principal
and interest on the principal amount outstanding. Therefore the asset would normally be
measured at fair value through profit or loss. This would result in a gain on remeasurement to
fair value of $1 million ($13 million – $12 million) being recognised in profit or loss. 1
Since the equity investment is being held for the long term, rather than as part of a trading
portfolio, it is possible to make an irrevocable election on 1 October 2015 to classify the asset
as fair value through other comprehensive income. In such circumstances, the remeasurement
gain of $1 million would be recognised in other comprehensive income rather than profit or
loss. 1
–––
3
–––
20
–––

4 Query One
The reason disclosure of this transaction is necessary is because entity X is a related party of Omega.
Related parties are generally characterised by the presence of control or influence between the two
parties. ½+½
IAS 24 – Related Party Disclosures – identifies related parties as, inter alia, key management personnel
and companies controlled by key management personnel. On this basis, entity X is a related party of
Omega. ½+½
Where related party relationships exist, IAS 24 requires the disclosure of the existence of the relationship
where the related party controls the reporting entity. This is not the case here, so in the absence of
transactions disclosure would not be required. 1
Where transactions occur with related parties, IAS 24 requires that details of the transactions are disclosed
in a note to the financial statements. This is required even if the transactions are carried out on a normal
arm’s length basis. 1
Transactions with related parties are material by their nature, so the fact that the transaction may be
numerically insignificant to Omega does not affect the need for disclosure. 1
–––
5
–––

Query Two
The accounting treatment of the majority of tangible non-current assets is governed by IAS 16 – Property,
Plant and Equipment (PPE). ½
IAS 16 states that the accounting treatment of PPE is determined on a class by class basis. For this
purpose, property and plant would be regarded as separate classes. 1
IAS 16 requires that PPE is measured using either the cost model or the revaluation model. This model
is applied on a class by class basis and must be applied consistently within a class. 1
IAS 16 states that when the revaluation model applies, surpluses are recorded in other comprehensive
income, unless they are cancelling out a deficit which has previously been reported in profit or loss, in
which case it is reported in profit or loss. 1
Where the revaluation results in a deficit, then such deficits are reported in profit or loss, unless they are
cancelling out a surplus which has previously been reported in other comprehensive income, in which
case they are reported in other comprehensive income. ½
According to IAS 16, all assets having a finite useful life should be depreciated over that life. Where
property is concerned, the only depreciable element of the property is the buildings element, since land
normally has an indefinite life. The estimated useful life of a building tends to be much longer than for
plant. These two reasons together explain why the depreciation charge of a property as a percentage of
its carrying amount tends to be much lower than for plant. ½+½+½
Properties which are held for investment purposes are not accounted for under IAS 16, but under IAS 40
– Investment Property. ½
Under the principles of IAS 40, investment properties can be accounted for under a cost or a fair value
model. We apply the fair value model and thus our investment properties are revalued annually to fair
value, with any changes being reported in profit or loss. 1
–––
7
–––

16
 Marks
Query Three
Accounting for product design costs is governed by IAS 38 – Intangible Assets. ½
Under IAS 38, the treatment of expenditure on intangible items depends on how it arose. ½
Generally internal expenditure on intangible items cannot be recognised as assets. 1
The exception to the above rule is that once it can be demonstrated that a development project is likely
to be technically feasible, commercially viable, overall profitable and can be adequately resourced, then
future expenditure on the project can be recognised as an intangible asset. This explains the differing ½+½+½
treatment of expenditure up to 31 March 2016 and expenditure after that date. ½ + ½+ ½
–––
5
–––

Query Four
Where two companies report under the same reporting framework, you would generally expect the same
reporting requirements to apply to both companies. However, there are certain requirements of IFRS
which apply to listed companies only. ½+½
The requirement to provide segmental information and to disclose earnings per share are both examples
of requirements which only listed companies are forced to comply with. 1
If an unlisted entity voluntarily chooses to provide segmental information, or to disclose its earnings per
share, then it must comply with the provisions of the relevant IFRS in both cases. 1
–––
3
–––
20
–––

17
Examiner’s report
Diploma in International Financial Reporting
December 2016

General Comments

The examination consisted of four compulsory questions. Question 1 was primarily computational in nature and
questions 2, 3 and 4 contained a mix of computation and explanation.

Candidates generally performed well on questions 1, 2(c) and 4. Performance was variable on questions 2(a), 2
(b) and 3 (all parts). The detailed question analysis later on in this report provides further detail for this overall
assessment.

Question 1 is always a consolidation question and unsurprisingly the majority of candidates seemed to have
studied this topic thoroughly and generally scored very good marks. However, candidates must be reminded that
they should balance their study across the syllabus in order to ensure that they can answer all sections of the
paper.

Following comments made in previous examiner reports, it is worth re-iterating that where the requirements
include the verb ‘explain’ then marks will be given for explanations and candidates who only provide financial
statement extracts will not gain full marks. This was much improved compared with recent sittings and it is
pleasing to see that tutors and candidates are taking comments made in previous examiners reports on board.
The ‘explain’ requirement is not normally included in question 1. Whilst it is clearly important that the marker
can see where figures in question 1 come from, detailed explanations are not necessary and therefore providing
such explanations wastes time in the examination. It is very important to read the requirements to see whether or
not detailed explanations are required.

A recurring theme of the general comments in examiner’s report is that a minority of candidates present
themselves for this examination having apparently done little or no preparation for it. It is important to realise
that this examination is a demanding one that requires a thorough programme of study in order to achieve
success. The specific comments that are made in the next section of the report do not refer to such candidates,
who not surprisingly tended to perform poorly throughout the paper. The comments in the next section are
derived from the performance of candidates who appeared to have made a reasonable effort to study the syllabus
appropriately based on the scripts they submitted.

Specific Comments

Question 1

The scenario for the question was based around a parent entity, Alpha, with two subsidiaries, Beta and Gamma.
Candidates were required to prepare a consolidated statement of financial position for the Alpha group as at 30
September 2016. The question incorporated a number of standard consolidation procedures but also required
candidates to compute and process the following events:
The impairment of goodwill on acquisition of Beta, where the non-controlling interest was measured
using the proportion of net assets method.
The inclusion of a contingent element in the purchase consideration for the acquisition of Gamma. The
contingent element was still outstanding at the reporting date and its fair value had increased since the
date of acquisition.
The treatment at the date of acquisition of a contingent liability of Gamma that was unrecognised by
Gamma in its individual financial statements. The contingent liability no longer existed at the reporting
date.

Examiner’s report – Dip IFR - December 2016 1

As well as consolidation procedures, candidates also had to account for the expected cost of restoring the site on
which a non-current asset had been constructed and brought into use on the first day of the accounting period.

On the whole, this question was answered satisfactorily. Candidates know that question 1 will always be a
consolidation question and so understandably study the topic thoroughly. Many candidates obtained extremely
high marks here. More particularly, most candidates performed well in the following areas:
General consolidation procedures – aggregation, elimination of pre-acquisition profits and the
computation of non-controlling interests.
The calculation of the fair value adjustments required due to the acquisitions of Beta and Gamma.
The calculation of goodwill and (in the case of Beta) related impairment. It was pleasing to note that a
majority of candidates realised that the goodwill of Beta had to be grossed up in the impairment review
calculation since the non-controlling interest in Beta was initially measured using the proportion of net
assets method.
The elimination of intra-group balances and the treatment of reconciling items. Having said this, a
significant minority of candidates incorrectly ‘eliminated’ the cash in transit by deducting it from
consolidated trade payables rather than adding to cash and cash equivalents.

Areas that candidates should work to improve on include:

A number of candidates misread the information relating to the acquisition of Beta and assumed that the
share exchange to effect the acquisition had not been accounted for by Alpha.
A majority of candidates did not realise that the change in the fair value of contingent consideration since
the date of acquisition should lead to an adjustment to consolidated retained earnings.
Many candidates treated the contingent liability of the subsidiary at the date of acquisition, failing to
recognise that this liability should be recognised at its fair value in the consolidated financial statements.
Whilst most candidates were able to make a reasonable attempt to compute the restoration provision
that was initially necessary at the start of the year, many candidates were not able to correctly account
for the subsequent impact on property, plant and equipment (in terms of capitalisation and additional
depreciation) and on the closing provision (in terms of the unwinding of the discount).

Question 2

This 20-mark question required candidates to explain and show the accounting treatment of 3 separate issues in
the financial statements of Delta:
a) An asset leased by Delta as a lessor under a finance lease
b) The sale of a product to an overseas customer where the customer had a right to return the product
within a specified period.
c) A cash settled share-based payment arrangement

In part (a), the majority of candidates realised that the lease was a finance lease. However many candidates did
not seem to realise that this involved the lessor recognising a financial asset rather than an investment property
(or property, plant and equipment). A large number of candidates incorrectly stated that Delta would depreciate
the asset and recognise rental income in profit or loss. This is of course the treatment that would have been
appropriate had the lease been an operating lease. A significant minority of candidates answered this question as
if Delta were the lessee, rather than the lessor.

Examiner’s report – Dip IFR – December 2016 2

In part (b) most candidates were able to correctly quote relevant sections from IFRS 15 – Revenue regarding the
recognition of revenue. However a significant number of candidates were unable to correctly compute the refund
liability that should have been provided for. Common errors here included applying IAS 37 - Provisions,
Contingent Assets and Contingent Liabilities rather than IFRS 15. This often led to the incorrect conclusion that
the refund liability was contingent and should be disclosed, rather than recognised. Even where the need to
compute a refund liability was recognised, many candidates incorrectly used 22% rather than 8%, on the
(incorrect) basis that the estimate made on 15th October 2016 was a non-adjusting event after the reporting
date. It was pleasing to note, though, that most candidates were able to gain some marks in this part by correctly
applying the requirements of IAS 21 – Foreign Currency Transactions – to this scenario.

Part (c) was generally answered quite well – almost all candidates had the basic idea that the cost should be
taken to profit or loss over the vesting period based on the expected number of options vesting. However a
minority of candidates appeared unclear of the differences between cash and equity settled share based
payments. Common errors included using the fair value at the grant date throughout (that would have been
appropriate had this been an equity settled scheme) and presenting the credit entry in equity rather than
liabilities (again, this would have been correct had the scheme been equity, rather than cash settled.

Question 3

This 20-mark question required candidates to:

a) Explain the way in which IFRS 9 – Financial Instruments – requires financial assets to be classified and
measured.
b) Apply the classification and measurement rules for financial assets to three specific transactions relating
to Kappa.

Answers to part (a) were mixed. Most candidates were able to identify that there were three different
measurement bases for financial assets dependent on the nature of the cash flows and the business model.
However only a minority of candidates were able to correctly describe when each measurement basis would be
appropriate. A minority of candidates mistakenly thought they were being asked to describe the requirements of
IFRS 13 – Fair Value. This was not asked for and did not attract marks. Other candidates wasted time by
referring to the measurement of financial liabilities and equity instruments – the question was clearly focused on
financial assets. Still other candidates made out of date references to the classifications used in IAS 39 – the
predecessor standard. A popular reference in this regard was to ‘Available for Sale’ assets.

Most candidates realised that the loan to the employee (part b(i)) was a financial asset that should be measured
at amortised cost. However only about half the candidates realised that the initial carrying amount of the asset
(on which the subsequent amortised cost measurement was based) would be the fair value of the loan at its
inception (involving discounting).

Answers to part b(ii) were generally rather disappointing. Few candidates appreciated that the three year loan to
company X failed the ‘contractual cash flow test’, meaning that the loan asset would be classified as fair value
through profit or loss. A minority of candidates attempted to compute a ‘split presentation’ of the financial
instrument along the lines of a convertible loan treated as part liability and part equity. All in all, answers to this
part were unsatisfactory.

Examiner’s report – Dip IFR – December 2016 3

Answers to part b(iii) were generally satisfactory. Almost all candidates appreciated that equity investments had
to be measured at fair value. However only some candidates mentioned the need to make an election should
Kappa wish to measure the asset at fair value through other comprehensive income.

Question 4

This 20-mark question required candidates, in their capacity as financial controller of Omega, to answer
questions from a managing director relating to
a) Disclosure of related party transactions
b) The measurement of tangible non-current assets
c) The accounting treatment of research and development expenditure
d) The difference between listed and unlisted entities reporting under full International Financial Reporting
Standards

In part (a) most candidates realised that entity X was a related party to Omega. However only few fully explained
exactly why this was so, and that related party transactions are material by their nature rather than on the basis
of their size. A few candidates made the erroneous statement that entity X was a subsidiary of Omega and should
be consolidated by Omega.

Parts (b) and (c) were generally answered satisfactorily, with a pleasing level of knowledge being displayed by the
majority of candidates. Answers to part (d) were more variable. Whilst some candidates scored good marks here,
others wasted time by referring to the IFRS for SMEs – the question made it clear that entity X reported under full
IFRS. Other candidates referred specifically to the reporting requirements of IFRS 8 – Operating Segments, and
IAS 33 – Earnings per Share. Even where such references were accurate, no marks could be awarded since this
was not what the question was asking.

Examiner’s report – Dip IFR – December 2016 4