F2 - 14. Group Accounts - Additional Disclosure Issues

Question 1

What is a related party?

Answer 1

A person or entity that is related to the reporting entity

Question 2

What is a related party transaction?

Answer 2

A transfer of resources, services or obligations between a reporting entity and a related party (regardless of whether a price is charged)

Question 3

What are the 3 reasons that related party disclosures must be made?

Answer 3

1. Draw users attention to the fact that SFP & P&L may have been affected by the existence and interaction with related parties
2. Assumption may otherwise be that all sales and purchases are at arms length
3. The existence of related parties may affect performance even if there are no transactions (e.g. instructing to engage in an activity)

Question 4

When is a person (or close member of that person’s family) a related party? (3)

Answer 4

1. Control over the entity
2. Significant influence over the entity
3. Key management personnel of the entity or parent

Question 5

When is an entity a related party? (5)

Answer 5

1. Parent and sub/associate/JV
2. Both JVs of the same 3rd party
3. Post employment benefit plan of the entity
4. Entity controlled by related party person
5. Someone with control of the reporting entity has significant influence or is key personnel of the other party

Question 6

Are two entities that have a common director related parties?

Answer 6

No

Question 7

Are two entities that are in a joint venture together related parties?

Answer 7

No

Question 8

Are providers of finance, governments, customers and suppliers related parties?

Answer 8

No

Question 9

What 3 things must be disclosed regarding related parties?

Answer 9

1. The name of parent/ultimate controlling party
2. Information about transaction
3. Key management compensation (total level)

Question 10

What is earnings per share?

Answer 10

An entity specific measure that summarises an entity’s performance

Question 11

Who must disclose earnings per share, and diluted earnings per share, on the face of their financial statements?

Answer 11

All publicly traded entities

Question 12

What is the equation for EPS?

Answer 12

Earnings / no. of shares

Earnings = profit after tax, NCI and preference dividends
No shares = weighted average equity shares in issue

Question 13

What happens if there is an issue of shares at full market price part way through the year?

Answer 13

No of shares for the year is time apportioned (weighted average)

Question 14

What is a bonus share issue?

Answer 14

Where shares are issued for no consideration

Question 15

What is the bonus fraction to adjust to shareholdings prior to a bonus issue?

Answer 15

New number of shares / old number of shares

Question 16

What is a rights share issue?

Answer 16

Giving current shareholders the right but not obligation to buy new shares in the company at a discount

Question 17

What is the bonus fraction to adjust to shareholdings prior to a rights issue?

Answer 17

Fair value per share before exercise of rights / theoretical ex rights price

Question 18

What is diluted EPS?

Answer 18

A ‘warning sign’ to investors that includes any potential ordinary shares that are not in issue but could be in issue in the future (based on options or conversions)

Question 19

How is EPS adjusted for convertible debt / preference shares?

Answer 19

• Increase earnings by interest saved net of tax relief (i% x liability x (1 - t))
• Increase shares by maximum possible no of shares on conversion

Question 20

How is EPS adjusted for share options?

Answer 20

1. Calculate the cash receivable on exercise of the options
2. Calculate the number of shares that would have been issued if the cash was used to buy shares at current market rate
3. Deduct (2) from (1) to find the no of ‘free shares’
4. Add this to the number of shares in the diluted EPS calc