FAR quick tips/test

Question 1

Give some examples of financial assets

Answer 1

cash
contractual right to receive cash (receivable)
contractual right to exchnage financial assets/liabilities on favourable terms (derivatives)
Equity instrument in another entity

Question 2

Give some examples of financial liabilities

Answer 2

Contractusl obligation to pay cash (issuedf debentures, payables etrc)
TO exchnage assets/liabilties on unfavourable terms

Question 3

If someone purchases zero-coupon bonds for 175k nominal 200k, what do they have

Answer 3

financial asset as they have gained the bonds which will be paid back plus premium

much like if someone isssues bonds they have a finacnial iability as they will owe the money to those which purchased the bonds

Question 4

redeemable pref shares are classed as…irredeeemable are…unless.

Dividends come from…

Answer 4

redeemable are liability as can be deemed
irredmeeable are equity as cnnot redeem UNLESS
the company are obligated to pay didivndeds and then becomes liability

classification is made at ate of issue and should not be subseuqently changes

Dividends for redeemable are expensed to PL for irredeemable deducted from RE

Question 5

if a brand is internally generated should this be recorded as an intangible?

Answer 5

IAS 38 IAS 38 does not allow the recognition of internally generated brands so the brand
name cannot be recognised in the financial statements. This is because the costs cannot be
separately identified from the cost of developing the business as a whole. The recognition at
the valued amount of £X should therefore be reversed from profit for the year if put in

Question 6

if a brand is purchased can it be recognised? revalued?

Answer 6

yes-falls under ias 38 if purhase as seperately identifiable
and future benefits expecred

no. intangibles not currenlty in an active market therefore cant revalue even if purchse, in exam dont allow revalue unless they state it is in a active market or homogenous population etc.

Question 7

Initial recognition of financial assets/liabilites

Answer 7

At fair value (typically consideration)
plus costs if assets, less costs if liability

Question 8

In amortised cost for payment what would you use if not told?

Answer 8

nominal value*coupon rate of interest

Question 9

For converttible bonds what is the liability amount

Answer 9

PV of future cash flolws using rate of equivlane tbond w no conversion
ewuity is then the balancing figure from this and total bond value eg cash received

Question 10

On 1 August 2021 Aldinville Ltd entered into a share buyback scheme. It reacquired 10,000 £18
ordinary shares for £1.45 per share. The payment for the shares was credited to cash and debited
to share capital and share premium based on the nominal value and premium per share
reacquired.

How should this be adjusted for?

Answer 10

treasury shares should be dr treasury shares 1.45*10000 on BS whilst 10000 shares should be added to share cap as they have been bought back

as treasury no gain/loss should be recognised.s

Question 11

explain question on related parties transaction answer.(5)

Answer 11

Under IAS 24, Related Party Disclosures Jessica Nuttall’s controlling
interest in Scopi Ltd creates a related party relationship between Scopi Ltd
and Haltom Ltd on 1 October 20X5.

This is because she is a director of Haltom Ltd (hence qualifying as ‘key management’) and can exert control over Scopi Ltd.
Tutorial note

Disclosure of the aggregate amount of the transactions between Scopi Ltd
and Haltom Ltd subsequent to Jessica Nuttall’s appointment is required,
together with any outstanding balances.

The fact that the transactions
were carried out on arm’s length terms does not exempt them from
disclosure although these terms should be disclosed.

The names of the
parties do not require disclosure, but the nature of the relationship must
be.

Use OBT if forget but remember to explain why it is related parties not just state it and then explain the disclosure

Question 12

What are the three extras that come from a cCF compared to a CF and where do they go/effect? (3)

Answer 12

Dividends paid by subsid to NCI go in financing section
Dividends received from associate go into investing
Additions/disposals of subsid go into investing as net additions/disposals (proceeds) accotuning for what the subsid has in its accounts at time of disposal/subsid
ofc if have PPE lists etc this will effect reconciliatio note if using indirect method from pbt to cash from ops (which will be backwards pl)-unless cash which doesnt get this

Question 13

What are th CF proceeds from a lease?

Answer 13

Only lease payments and interest
Should be seperated in CF
interest would go into operating and the lease payments ie on nominal will go on financing

Question 14

When calculating dividend paid to NCI for CF how do you do this

Answer 14

NCI bf
+profit share of nci
+NCI share of net assets!!!

then remvoe from NCI cf figure to get didivdens paid as balancing

disposal unlikely in CF and more likely in PL

Question 15

when calculating proceeds from issue of ordinary shares when including acquisiton of subsid how would you calculate

Answer 15

start with combined share cap AND share prem
The use the market value of the shares of subsid as at acquisition

and find the difference from this to cf share cap and prem figure
eg you have 250k share cap and 100k share prem,
at end of year have 400k share cap and 167500 share prem, you purchase a subsid for which had 100000 shares £1 shares with MV £1.4
your proceeds from issue of ordinary shares would be 567500-350000-1.4*140k=77500

Question 16

When calculating purchase of PPE for cCF and one item has a FV upward of 30k on cv and a disposal of PPE how would you account for this?

Answer 16

start with PPE bf figure provided
add on acqn PPE and also add in the cv uplift of 30k
remove the disposal and remove the depreciation
Find the difference between this and the cf for additon amount.

Eg bf 304820, disposal of 34790 214600 subsid PPE, 30k FV excess from cv, depreciation 123500 and cf PPE 425600 then

425600-(304820-34790+214600+30000-123500)=34470 purchase of PPE

Remember would also need to include proceeds from the disposal eg cv +/- any profit or loss -just need actual money paid so say cv was 34790 and made 1k loss then must have only got 33790

Question 17

How would you work out dividends paid to NCI when there is an addition of a subsid?

Answer 17

bf NCI share of interest+profit/loss for NCI+acquistion of subsidiary (requires own working) less cf NCI share of interest figure

Question 18

How do you calculate the acquisition of a subsiduary

Answer 18

100% net assets acquired (equity+any fv changes from cv)+goodwill-NCI% of the NAs-shares issued-cash acquired from acqn (in subsid accounts)=net cash outflow

This would then go into dividends paid work:
bf NCI share of interest+profit/loss for NCI+acquistion of subsidiary (requires own working) less cf NCI share of interest figure

Question 19

Difference between joint operations and ventures

Answer 19

venture is a completely new entity and operation are share control but not new entity eg F does manufacturing but B does selling and both has equal contorl
an associate is significant control over decisions (20-50% but not joint or full control in financial and operating decisions
JV and associates are both accounted for using equity accounting

This explains why they are there own line on BS as a NCA as they are a speerate legal entity to the parent and the parent does not have control
Line is investment in associate line:
cost of investment +P% !!!of As post acqn movement(ie profit less dividends) less impairments less fv depreciation (P%) if required =investment in associate

eg if RE move from 70 to 145k increas of 75k would not be added but Parents sharing eg if a 25% associate then 18750

Question 20

What to not inlcude on cPL from associate

Answer 20

dividends from associate

instead include group share of associates profit less any impairments for the year

because dont own cant incur expenses and income!

Also balances for purchase or sales remain as outside the group BUT need to remove PURP if required for Ps share

Question 21

How is PURP dealt with for asssociates

Answer 21

If P sells then add P profit the % of the PURP to COS for SPL
For SFP Dr RE group Cr Investment in associate

If S sells to P deduct Ps share of PURP from share of profit of associate
SFP-Dr group RE Cr group inventort

Question 22

Profit/loss on disposal

Answer 22

Gain/loss on disposal+100% susbid results consolidated up to disposal date

Note for disposals nothing in SFP as no subsid at end

For SOCIE eliminate the NCI in the disposed subsid in NCI col

Question 23

How would you explain an acquisition of a loss making associate part way through the year with a fv uplift?

Answer 23

Per IAS 28, Investments in Associates and Joint Ventures, because this acquisition has given
Linnet Ltd significant influence over Woodlark Ltd, Woodlark Ltd should be treated as an
associate in the consolidated financial statements of Linnet Ltd, using the equity method.
In the consolidated statement of profit or loss the group’s share of the associate’s profit for the
year should be presented as a single line called “Share of profits of associate”. If the associate
is acquired mid-year its results should be time-apportioned.
Where the fair value of the net assets of the associate at acquisition exceeded the carrying
amount, the original cost of investment will effectively have included a fair value uplift.
Additional depreciation on the group share of the fair value uplift therefore needs to be
deducted from the group’s share of the associate’s profit for the year.
In the consolidated statement of financial position, the interest in the associate should be
presented as a single line called “Investment in associate” as a non-current asset. The associate
should initially be recognised at cost and subsequently adjusted in each period by the parent’s
share of the post-acquisition change in net assets. This figure should be reviewed for
impairment at each year end.
When an associate makes a loss, as here, the same principles apply, except that once the
carrying amount has been reduced to zero no further losses should be recognised by the
group, unless the group has a contractual obligation to make good the losses

Question 24

Explain forex transaction where half of goods remained in inventory and invoice unpaid

Answer 24

IAS 21, The Effects of Changes in Foreign Exchange Rates, states that a foreign currency
transaction should be initially recorded in the functional currency, by applying the exchange rate between the reporting currency and the foreign currency at the date of the
transaction/historic rate. When Linnet Ltd received the components on 1 November 2020 they should have been recorded in purchases and trade payables at the spot rate of €1:£0.80, ie at
an amount of £455,680 (569,600 × 0.80). At the year end, IAS 21 requires that any foreign currency monetary items are retranslated using the closing rate. Monetary items are defined as “units of currency held and asset and
liabilities to be received or paid in fixed or determinable number of units of currency”. The trade payables in respect of this purchase meet the definition of a monetary item and so should be restated at the closing rate, giving a trade payable at 31 December 2020 of
£398,720 (569,600 × 0.70). The exchange gain of £56,960 (455,680 – 398,720) should be recognised in the statement of profit or loss for the year ended 31 December 2020.
Because inventories do not meet the definition of a monetary item, they should be left as originally recorded and not restated. Inventories at 31 December 2020 should therefore include £227,840 (£455,680 × ½) in respect of these components

Question 25

Explain forex transaction where half of goods remained in inventory and invoice unpaid

Answer 25

Basically rmemeber trade payables are monetary and inventory is non-monteray therefore only moneetary items should be retranslated

IAS 21, The Effects of Changes in Foreign Exchange Rates, states that a foreign currency
transaction should be initially recorded in the functional currency, by applying the exchange rate between the reporting currency and the foreign currency at the date of the
transaction/historic rate. When Linnet Ltd received the components on 1 November 2020 they should have been recorded in purchases and trade payables at the spot rate of €1:£0.80, ie at
an amount of £455,680 (569,600 × 0.80). At the year end, IAS 21 requires that any foreign currency monetary items are retranslated using the closing rate. Monetary items are defined as “units of currency held and asset and
liabilities to be received or paid in fixed or determinable number of units of currency”. The trade payables in respect of this purchase meet the definition of a monetary item and so should be restated at the closing rate, giving a trade payable at 31 December 2020 of
£398,720 (569,600 × 0.70). The exchange gain of £56,960 (455,680 – 398,720) should be recognised in the statement of profit or loss for the year ended 31 December 2020.
Because inventories do not meet the definition of a monetary item, they should be left as originally recorded and not restated. Inventories at 31 December 2020 should therefore include £227,840 (£455,680 × ½) in respect of these components

Question 26

The Conceptual Framework sets out certain conditions which need to be met for assets and88.2
liabilities to be recognised in the statement of financial position. Explain these conditions and
illustrate them by reference to the treatment of the land and buildings and the goods received
not invoiced in the statement of financial position of Firecrest Ltd as at 31 December 2020

Answer 26

Items should be recognised in the financial statements if:
the item meets the definition of an element; and*
recognition of that element provides users of the financial statements with information that*
is useful.
To be useful the information should provide:
relevant information about the element; and*
be a faithful representation of the element.*
However, the benefits of providing that information should justify the costs of recognising it.
The land and buildings are recognised as an asset because Firecrest Ltd has control over them
and can use them to manufacture goods in future and hence the potential to produce
economic benefits in the form of profits from the sale of those goods. It will also receive
economic benefits ultimately when the land and buildings are sold. The valuation is relevant as
it shows the amount which might be receivable if the asset were sold. It has been performed
by an independent surveyor and so should be a faithful representation.
The goods received not invoiced are recognised as an asset within inventories as Firecrest Ltd
has control over the goods and has the potential to produce economic benefits in the form of
profits from the sale of those goods. The amount payable for the goods is also recognised as a
liability as Firecrest Ltd has an obligation to pay the suppler for the goods and there will be a
transfer of economic resource when that payment is made. The obligation arises from a past
event (the receipt of the goods). The invoice from the supplier gives a faithful representation of
the amount that will need to be paid ou

Question 27

How should you record reval surplus

Answer 27

increase in revlaution
less depreciation charge
add back the years depreciation based on orginal cost ovee the new useful life.

Question 28

Explain the accounting treatment of a joint venture with intra group trading with parent selling to JV

Answer 28

(4) Joint venture
Wayfaring plc should recognise its investment in Sitka Ltd as a joint venture. Wayfaring plc and
Aspen Ltd have joint control over Sitka Ltd and there is a contractual agreement in place to
share profits equally and unanimous consent is required for all key operating decisions.
IFRS 11, Joint Arrangements, requires the use of the equity method to account for joint
ventures. The investment of £40,000 has been correctly recognised at cost as a non-current
asset. This will then be increased each period by Wayfaring plc’s share of the joint venture’s
post-acquisition increase in net assets. This is £16,300 (£32,600 × 50%).
The £16,300 will be shown in the consolidated statement of profit or loss as a single line,
called ‘Share of profit of joint venture’.
As there has been inter-company trading between Wayfaring plc and Sitka Ltd and the goods
are still held by Sitka Ltd there is an element of unrealised profit which should be adjusted for.
The unrealised profit element relating to Wayfaring plc is £600 (6,000 × 25/125 × 50%). This
should reduce Wayfaring plc’s profits for the period (increase cost of sales) and reduce the
carrying amount of the investment in Sitka Ltd. The trade receivable is not removed, if it was
unpaid at 31 December 2020 as Sitka Ltd is not consolidated.
The ‘Investment in joint venture’ in the consolidated statement of financial position is shown as
a separate line and should be £55,700 (40,000 + 16,300 – 600) at 31 December 2020

Question 29

Explain the accounting treatment of a joint venture with intra group trading with parent selling to JV

Answer 29

(4) Joint venture
Wayfaring plc should recognise its investment in Sitka Ltd as a joint venture. Wayfaring plc and
Aspen Ltd have joint control over Sitka Ltd and there is a contractual agreement in place to
share profits equally and unanimous consent is required for all key operating decisions.
IFRS 11, Joint Arrangements, requires the use of the equity method to account for joint
ventures. The investment of £40,000 has been correctly recognised at cost as a non-current
asset. This will then be increased each period by Wayfaring plc’s share of the joint venture’s
post-acquisition increase in net assets. This is £16,300 (£32,600 × 50%).
The £16,300 will be shown in the consolidated statement of profit or loss as a single line,
called ‘Share of profit of joint venture’.
As there has been inter-company trading between Wayfaring plc and Sitka Ltd and the goods
are still held by Sitka Ltd there is an element of unrealised profit which should be adjusted for.
The unrealised profit element relating to Wayfaring plc is £600 (6,000 × 25/125 × 50%). This
should reduce Wayfaring plc’s profits for the period (increase cost of sales) and reduce the
carrying amount of the investment in Sitka Ltd. The trade receivable is not removed, if it was
unpaid at 31 December 2020 as Sitka Ltd is not consolidated.
The ‘Investment in joint venture’ in the consolidated statement of financial position is shown as
a separate line and should be £55,700 (40,000 + 16,300 – 600) at 31 December 2020

Question 30

Explain the IFRS treatment:

On 1 January 2021 Rigatoni Ltd borrowed £200,000 at 6% pa, being the
market rate of interest, to fund the construction of a new warehouse, a
qualifying asset. The cash received was immediately placed on deposit
earning interest at 2% pa. Construction did not begin until 1 February 2021.
A construction payment of £120,000 was made on 1 February 2021 and the
remaining £80,000 was paid on 1 November 2021. The warehouse was ready
for use on 1 December 2021 but Rigatoni Ltd did not start to use it until
1 January 2022. The directors estimate that the warehouse has a useful life of
10 years.
Rigatoni Ltd recognised the net interest in the statement of profit or loss for the
year ended 31 December 2021. The construction costs were included in
assets in the course of construction in the statement of financial position as at
31 December 2021. No depreciation is charged on assets in the course of
construction.

Answer 30

Per IAS 23, Borrowing Costs, directly attributable borrowing costs relating
to qualifying assets should be capitalised. As the loan was taken out specifically for the purpose of funding the construction of the warehouse the actual interest rate of 6% should be used.

Capitalisation of borrowing costs should commence when the entity meets
all three of the following conditions:
 it incurs expenditure on the asset (met on 1 February 2021 when the
first construction payment was made);
 it incurs borrowing costs (met on 1 January 2021 when the loan was
taken out); and
 it undertakes activities that are necessary to prepare the asset for its
intended use (met on 1 February 2021 when construction began).
The three conditions are therefore met on 1 February 2021 so
capitalisation should commence on that date. It should cease when the
asset is ready for use ie, on 1 December 2021, so borrowing costs of
£10,000 (200,000  6%  10/12) should be capitalised. The remaining £2,000
(200,000  6%  2/12) should be expensed. This has been done since the
net interest was recognised in profit or loss.

Any temporary investment income earned before capitalisation
commences should be recognised as part of profit or loss for the period.
This is the income earned in the one month before capitalisation begins,
so £333 (200,000  2%  1/12). This has already been taken to statement
of profit or loss for the year as part of the net interest recognised therein.
The borrowing costs capitalised should be reduced by the investment
income received on the invested funds during the capitalisation period. This
is the income earned between 1 February 2021 and 31 October 2021, so
£1,200 ((200,000 – 120,000)  2%  9/12).

Any temporary investment income earned before capitalisation
commences should be recognised as part of profit or loss for the period.
This is the income earned in the one month before capitalisation begins,
so £333 (200,000  2%  1/12). This has already been taken to statement
of profit or loss for the year as part of the net interest recognised therein.
The borrowing costs capitalised should be reduced by the investment
income received on the invested funds during the capitalisation period. This
is the income earned between 1 February 2021 and 31 October 2021, so
£1,200 ((200,000 – 120,000)  2%  9/12).

Question 31

Explain the IFRS treatment:

On 1 January 2021 Rigatoni Ltd borrowed £200,000 at 6% pa, being the
market rate of interest, to fund the construction of a new warehouse, a
qualifying asset. The cash received was immediately placed on deposit
earning interest at 2% pa. Construction did not begin until 1 February 2021.
A construction payment of £120,000 was made on 1 February 2021 and the
remaining £80,000 was paid on 1 November 2021. The warehouse was ready
for use on 1 December 2021 but Rigatoni Ltd did not start to use it until
1 January 2022. The directors estimate that the warehouse has a useful life of
10 years.
Rigatoni Ltd recognised the net interest in the statement of profit or loss for the
year ended 31 December 2021. The construction costs were included in
assets in the course of construction in the statement of financial position as at
31 December 2021. No depreciation is charged on assets in the course of
construction.

Answer 31

Per IAS 23, Borrowing Costs, directly attributable borrowing costs relating
to qualifying assets should be capitalised. As the loan was taken out specifically for the purpose of funding the construction of the warehouse the actual interest rate of 6% should be used.

Capitalisation of borrowing costs should commence when the entity meets
all three of the following conditions:
 it incurs expenditure on the asset (met on 1 February 2021 when the
first construction payment was made);
 it incurs borrowing costs (met on 1 January 2021 when the loan was
taken out); and
 it undertakes activities that are necessary to prepare the asset for its
intended use (met on 1 February 2021 when construction began).
The three conditions are therefore met on 1 February 2021 so
capitalisation should commence on that date. It should cease when the
asset is ready for use ie, on 1 December 2021, so borrowing costs of
£10,000 (200,000  6%  10/12) should be capitalised. The remaining £2,000
(200,000  6%  2/12) should be expensed. This has been done since the
net interest was recognised in profit or loss.

Any temporary investment income earned before capitalisation
commences should be recognised as part of profit or loss for the period.
This is the income earned in the one month before capitalisation begins,
so £333 (200,000  2%  1/12). This has already been taken to statement
of profit or loss for the year as part of the net interest recognised therein.
The borrowing costs capitalised should be reduced by the investment
income received on the invested funds during the capitalisation period. This
is the income earned between 1 February 2021 and 31 October 2021, so
£1,200 ((200,000 – 120,000)  2%  9/12).

Therefore, the total interest capitalised should be £8,800 (10,000 – 1,200).

Since the warehouse was ready for use on 1 December 2021 it should
have been transferred out of assets in the course of construction and into
property at a cost of £208,800 (200,000 + 8,800).
Per IAS 16, Property, Plant and Equipment, depreciation should have
commenced on this date. The depreciation charge for the year should
therefore have been £1,740 (208,800 ÷ 10  1/12). The carrying amount of
the warehouse at 31 December 2021 is therefore £207,060 (208,800 –
1,740).

Question 32

NCA PURPs treatment

Answer 32

DR retained earnings of seller eg W2 if subsid or W5 if parent
Cr to PPE

Question 33

which costs can you capitalise as PPE?

Answer 33

directly attributable costs-ie costs that could not be avoided: :
eg legal fees, unrecoverable taxes, delivery costs, installation cost, materials, direct labour, site prep and clearance, dismantling- costs

Question 34

which costs can you capitalise as PPE?

Answer 34

directly attributable costs-ie costs that could not be avoided: :
eg legal fees, unrecoverable taxes, delivery costs, installation cost, materials, direct labour, site prep and clearance, dismantling costs

note dismantling costs need a liability recognised at present value
note 2 only can capitalise enhancing ppe expenditure or major overhaul

cant capitalise need to expense:
abnormal labour or material costs
general admin/overheads
servicing costs

Question 35

Korma Ltd is constructing an asset for its own use. It is financed by a loan of £1 million at 10%.

Surplus funds are held in a deposit account earning 3%.

Construction commences on 1.1.20X1 with a payment made of £400,000. On 31.3.20X1 the other £600,000 is paid out.

Construction finishes on 30.9.20X1.

What is the interest capitalised?

Answer 35

Borrowing costs incurred as 1m10%9/12
=75000
interest earnt as 600k3%3/12
=4500

Therefore these must be netted off to capitalise £70500

Question 36

how to calculate dividends paid to nci when a disposal of a subsid has taken place

Answer 36

cf
less
(bf
less gw of nci
add profit attributable to nci)

Question 37

how to calculate additions in ppe in cashflow with acquisition of roua and disposal of subsid

Answer 37

cf
less:
(bf less
disposal subsids ppe figure, less depreciation, plus ROUA, less disposal of GW of subsid)

Question 38

How to deal with eps for diff shares

Answer 38

-for bonus issue multiply all shares lines above the issue wiht the bolnus fraction
-for ordianry shares with a premium you ignore the premium
-for rights issue multiply by terp discount fraction for all above
treasury shares reduces share cap so works opposite way to ordinary share issue

Question 39

What are distributable profits

Answer 39

accumulated realised profits less accumulated realised losses
based on indiviual company information not consol statements
a provision is a realised loss
a reval surplus is an unrealised profit therefore non-distributable
if nca are revalued and depn increases the additional depn may be treat as part of realised profit for dividend purposes
on disposal of revalued nca any unrealised surplus or loss on valuation immediately becomes realiseds
gains are unrealised on revaluation unless undoing loss previously realised
losses on reval are realised except when:
loss offsets surplus
arises from reassessment of value of all NCAs
-arises from reassessment of some NCAs where the assets not revalued are worth at least their CVs

Question 40

distriutbale resevrs for public companies

Answer 40

public companies may not reduce NA below a certain amount pf called up share cap and undistributable resevers

distributable profits for prvite less excess unrealise lossess over unrealised profits=distributable profits for a public company