ACCA DipIFR question papers and answers on IAS 1 and Conceptual framew

ACCA DipIFR question papers and answers on IAS 1 and Conceptual framework from June 2014

Question

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

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

Provide answers to the query raised by the managing director. Your answers should refer to relevant provisions of International Financial Reporting Standards

Answer

A non-current asset is classified as held for sale when its carrying amount will be recovered principally through a sale transaction, rather than through continuing use.

Such assets are measured at the lower of their carrying amount and fair value less costs to sell. Any write downs arising out of this process are treated as impairment losses.

The ‘held for sale’ definition can apply to groups of assets as well as single assets where the group of assets is to be sold as a single unit. It is in situations such as this that liabilities associated with such groups of assets are separately identified.

 

Examiners feedback

Answers were generally satisfactory

Question

Non-current assets are often a highly significant component of the total assets of an entity. Therefore, a number of different International Financial Reporting Standards have been published which regulate their definition, recognition, measurement and disclosure. IAS 1 Presentation of Financial Statements distinguishes between current and non-current assets. 

Required: Explain how:

  1. (i)  IAS 1 distinguishes between current and non-current assets.

Answer

IAS 1 distinguishes between current and non-current assets by identifying the meaning of the term ‘current asset’.

An asset is classified as current when the entity:

  • Expects to realise the asset, or intends to sell or consume it, in its normal operating cycle.

  • Holds the asset primarily for the purpose of trading.

  • Expects to realise the asset within 12 months after the reporting period.

  • Has cash or a cash equivalent which is not subject to an exchange restriction.

    An entity classifies all other assets as non-current.

Examiners feedback

Most had clearly studied the relevant financial reporting standards and were and were able to explain the relevant distinctions. This reflects well on both candidates and tutors.

You are the financial controller of Omega, a listed entity which prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). One of your assistants, a trainee accountant, is involved in the preparation of the consolidated financial statements for the year ended 31 March 2017. She is also involved in the preparation of the individual financial statements for the entities in the group. She has sent you an email with the following queries:

Query

On 1 April 2016 we acquired a new subsidiary. This subsidiary has always prepared its financial statements in $ but has used IFRS for the first time this year. Previously, they have used local standards. This means that the comparative figures (they present comparatives for one year only), taken from last year’s financial statements, will be based on local standards not IFRS. How do I make sure we are comparing like with like in the current year individual financial statements of the subsidiary? Please just give me the general procedure, rather than dealing with any specialised exemptions.

Provide answers to the query raised by the trainee accountant. Your answers should refer to relevant provisions of International Financial Reporting Standards.

Answer

When an entity adopts International Financial Reporting Standards (IFRSs) for the first time, the entity needs to prepare an opening IFRS statement of financial position at the date of transition to IFRS. This is a requirement of IFRS 1 First Time Adoption of International Financial Reporting Standards.

The date of transition to IFRS is the beginning of the earliest period for which the entity provides comparative information. In our case, this date is 1 April 2015.

The opening IFRS statement of financial position should be prepared in accordance with IFRSs which are in force for the current reporting period – in this case, the year ended 31 March 2017.

The statement of profit or loss and other comprehensive income, and the statement of changes in equity, which are presented as comparative figures in the financial statements for the year ended 31 March 2017, shall also be prepared in accordance with IFRSs which are in force for the year ended 31 March 2017.

In the first set of financial statements we will need a reconciliation of those amounts which were previously reported under local standards in the previous year’s financial statements.

The reconciliation will be between the amounts reported in previous periods under local standards and the equivalent amounts reported as comparatives in the current period under IFRSs.

For us, this will mean reconciling equity at 1 April 2015 and 31 March 2016, plus total comprehensive income for the year ended 31 March 2016.

Examiners Feedback

Answers to this question were mixed. A majority of candidates were able to correctly state that the prior-period financial statements of the subsidiary preparing financial statements under IFRS for the first time would need to be restated into ‘IFRS format’ for comparison purposes. However only a few candidates specifically stated the need for an ‘opening IFRS statement of financial position’ and for reconciliations from previously reported figures to IFRS in the opening set of IFRS financial statements. A disappointing minority of candidates misread the question completely and talked about the translation of the financial statements of a subsidiary whose financial statements were prepared in a currency other than that of the parent.

 

Question

Epsilon, a company with a year end of 30 September 20X7, is listed on a securities exchange. A director of Epsilon has a number of questions relating to the application of International Financial Reporting Standards (IFRS® Standards) in its financial statements for the year ended 30 September 20X7. The questions appear in notes 1–2.

Note 1 – Inconsistencies

I have recently been appointed to the board of another company which is growing very quickly and will probably seek a securities exchange listing in the next few years. As part of my familiarisation process, I’ve been reviewing their financial statements which they state comply with IFRS Standards. I have been comparing them with the financial statements of Epsilon. There appear to be some inconsistencies between the two sets of financial statements:

  • –  The financial statements of the other company contain no disclosure of the earnings per share figure and there is no segmental analysis despite this company having a number of divisions with different types of business. Epsilon gives both of these disclosures.

  • –  Both Epsilon and this other company have received government grants to assist in the purchase of a non-current asset. We have deducted the grant from the cost of the non-current asset. They have recognised the grant received as deferred income.

    Please explain the apparent inconsistencies to me.

Note 2 – Statement of profit or loss and other comprehensive income
I’ve been reviewing the statement of profit or loss and other comprehensive income and it appears to be in two sections. The first section appears to be entitled ‘profit or loss’ and the second ‘other comprehensive income’. It appears that the tax charge is included in the ‘profit or loss’ section of the statement as there is no tax charge included in the ‘other comprehensive income’ section of the statement. I have a number of questions regarding this statement:
  • How do we decide where to put a particular item of income or expenditure?
  • Where does the tax relating to ‘other comprehensive income’ get shown?
  • Do the above points have an impact on the computation of performance evaluation indicators which will be of interest to shareholders?
Provide answers to the questions raised by the director in notes 1–2. You should justify your answers with reference to relevant International Financial Reporting Standards.

Answer

Note 1 – Inconsistencies

It is possible for two sets of financial statement to comply with IFRS standards and yet be inconsistent with each other. Some individual IFRS standards allow a choice of accounting treatment and some IFRS standards are only compulsory for listed entities like Epsilon. 

Both IFRS 8 – Operating Segments – and IAS® 33 – Earnings per Share – are only compulsory for listed entities. The other company is not currently listed and is not required to give either of these disclosures but can do so on a voluntary basis. If the other company obtains a listing, then they will have to give these disclosures. 

IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance – requires government grants to be recognised in profit or loss on a systematic basis over the period in which the entity recognises as expenses the related cost. However, IAS 20 allows entities to choose from two alternative
models for presenting the government grants. These are the approach, which Epsilon uses, which deducts the grant in arriving at the non-current asset’s carrying amount and will result in a reduced depreciation charge through profit or loss. The other company uses the allowed alternative of setting up the grant as
deferred income and releasing the grant systematically to profit or loss. The net effect on profit or loss will be the same, whichever approach is used. Consistency of choice is required
within entities. Therefore the other company could continue to use the deferred income approach to present its government grants even
after obtaining a listing.

Note 2 – Statement of profit or loss and other comprehensive income

The principles underpinning the overall presentation of financial statements are set out in IAS 1 – Presentation of Financial Statements. IAS 1 requires that all income and expenses are presented in a statement of profit or loss and other comprehensive income. 

IAS 1 does not allow entities to choose whether to present income and expenses in the profit or loss or the other comprehensive income section of the statement. IAS 1 states that, unless required or permitted by a specific IFRS standard, all items of income and expense should be presented in the profit or loss section of
the statement. 

IAS 1 states that the tax relating to items of other comprehensive income is either shown as a separate line in the ‘other comprehensive income’ section of the statement or netted off against each component of other comprehensive income and disclosed in the notes to the financial statements. 

The key implication of an item being presented in other comprehensive income rather than profit or loss is that the item would not be taken into account when measuring earnings per share, an important performance indicator for listed entities like Epsilon.

Examiners feedback

In answering the question that appeared in note 1 most candidates correctly observed that certain International Financial Reporting Standards only apply to listed entities. Having said this, most candidates did not note that unlisted entities have the option to voluntarily apply such standards. A significant number of candidates wasted time by producing lengthy descriptions of the provisions of IFRS 8 – Operating Segments – and IAS 33 – Earnings per Share. These descriptions were not asked for in the question so even where they were correct they did not attract marks. Most candidates correctly applied IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance – to the issue of the accounting treatment of government grants.

Answers to note 2 were generally of an acceptable standard. Given the lack of a robust conceptual distinction between ‘profit or loss items’ and ‘other comprehensive income items’ candidates who supplemented their discussion of this distinction with examples were given credit. As far as the tax relating to other comprehensive income is concerned a number of common errors were made:

  1. Stating that items of other comprehensive income have no tax implications whatsoever.

  2. Stating that the tax implications of items of other comprehensive income are solely going to be deferred tax rather than current tax (often true in practice) but then embarking on a lengthy discussion of provisions of IAS 12 – Income Taxes (not needed to answer the

    question).

  3. Stating that any tax implications of items of other comprehensive income will be reflected in

    the tax charge in the profit or loss section of the statement of comprehensive income.