Diploma in

Dip IFR
International
Financial Reporting
(Dip IFR)
Specimen Exam applicable from
December 2019

IFR INT ACCA

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
ALL FOUR questions are compulsory and MUST be attempted

1 Alpha, a parent with a subsidiary Beta, is preparing the consolidated statement of financial position at 30 September
20X7. The draft statements of financial position of Alpha and Beta were as follows:
Alpha Beta
$’000 $’000
Assets
Non-current assets
Property, plant and equipment (note 1) 731,200 310,000
Investments (note 1) 249,500 0
–––––––––– ––––––––
980,700 310,000
–––––––––– ––––––––
Current assets
Inventories 140,000 85,000
Trade receivables (note 2) 95,000 70,000
Cash and cash equivalents (note 2) 16,000 13,000
–––––––––– ––––––––
251,000 168,000
–––––––––– ––––––––
Total assets 1,231,700 478,000

––––––––––
–––––––––– ––––––––
––––––––
Equity and liabilities
Equity
Share capital ($1 shares) 240,000 120,000
Retained earnings 550,700 168,000
Other components of equity (notes 1 and 3) 202,000 0
–––––––––– ––––––––
Total equity 992,700 288,000
–––––––––– ––––––––
Non-current liabilities
Long-term borrowings 100,000 70,000
Deferred tax 59,000 38,000
–––––––––– ––––––––
Total non-current liabilities 159,000 108,000
–––––––––– ––––––––
Current liabilities
Trade and other payables 60,000 52,000
Short-term borrowings 20,000 30,000
–––––––––– ––––––––
Total current liabilities 80,000 82,000
–––––––––– ––––––––
Total equity and liabilities 1,231,700 478,000

––––––––––
–––––––––– ––––––––
––––––––
Note 1 – Alpha’s investments
The investments figure in the individual financial statements of Alpha is made up as follows:
$’000
Investment in Beta (see note (i) below) 236,500
Other equity investments (see note (ii) below) 13,000
––––––––
249,500
––––––––
Note (i) – Alpha’s investment in Beta
On 1 October 20X4, Alpha acquired 90 million shares in Beta by means of a share exchange of two shares in Alpha
for every three shares acquired in Beta. On 1 October 20X4, the market value of an Alpha share was $3·90. Alpha
incurred directly attributable costs of $2·5 million on acquisition of Beta. Alpha included these costs in the carrying
amount of its investment in Beta in its own statement of financial position. These costs comprised:

2
 – $1 million – cost of issuing own shares.
– $1·5 million due diligence costs.
On 1 October 20X4, the individual financial statements of Beta showed retained earnings of $60 million.
The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at
1 October 20X4. The following matters emerged:
– Freehold land which had a carrying amount of $150 million had an estimated fair value of $210 million. The land
was still owned by Beta on 30 September 20X7.
– Plant and equipment having a carrying amount of $121 million had an estimated fair value of $145 million. The
estimated remaining useful life of this plant at 1 October 20X4 was four years.
– A brand name relating to Beta had a fair value of $25 million. This brand name was not recognised in the
individual financial statements of Beta as it was internally developed. The directors of Alpha considered that the
useful life of this brand name was 25 years from 1 October 20X4.
– 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%.
On 1 October 20X4, the directors of Alpha initially measured the non-controlling interest in Beta at its fair value on that
date. On 1 October 20X4, the fair value of an equity share in Beta (which can be used to measure the fair value of the
non-controlling interest) was $2·35.
Note (ii) – other equity investments Alpha
These investments are classified as ‘fair value through profit or loss’. The fair value of these investments at 30 September
20X7 was $13·8 million.
Note 2 – intra-group trading
Alpha provides Beta with management services and levies a monthly charge for these services. On 29 September
20X7, Beta made a payment of $8 million to Alpha to eliminate the amount owing to Alpha at that date. This payment
was received and recorded by Alpha on 2 October 20X7.
Note 3 – share-based payment
On 1 October 20X5, Alpha granted 200 senior managers options to buy 100,000 shares each between 30 September
20X8 and 31 December 20X8. The options are due to vest on 30 September 20X8 provided the relevant managers
remain employed over the three-year vesting period ending on that date. Since 1 October 20X5, the expectation of the
number of managers in whom the options would vest has varied as follows:
Date Expected number of managers for whom the options will vest
1 October 20X5 200
30 September 20X6 180
30 September 20X7 190
In preparing the financial statements of Alpha for the year ended 30 September 20X6, the directors of Alpha debited
retained earnings and credited other components of equity with the appropriate amount required by IFRS® 2 –
Share‑based Payment. The directors of Alpha have made no additional entries in respect of this arrangement in the
draft financial statements for the year ended 30 September 20X7.
On 1 October 20X5, the fair value of one option was estimated to be $1·20. The fair value of the same option at
30 September 20X6 and 20X7 respectively was estimated to be $1·25 and $1·30.

Required:
Using the draft statements of financial position of Alpha and its subsidiary Beta at 30 September 20X7, and the
further information provided in notes 1–3, prepare the consolidated statement of financial position of Alpha at
30 September 20X7.
Note: You should show all workings to the nearest $’000.

(25 marks)

3 [P.T.O.
2 Gamma, a company with a year end of 30 September 20X7, has three outstanding events which need to be reported
in the financial statements. Information is provided in the following notes:

Note 1 – contract to purchase new machinery

On 1 July 20X7, Gamma entered into a contract with a foreign supplier. The terms of the contract were that the supplier
would construct a machine for Gamma’s use and deliver the machine to Gamma on 31 December 20X7. The agreed
construction price of the machine was 20 million groats (the currency of the supplier). The invoice is due for payment
on 31 January 20X8.
On 1 July 20X7, Gamma entered into an agreement for the forward purchase of 20 million groats. The settlement date
for this forward purchase of foreign currency was 31 January 20X8. Gamma intends to use this forward purchase as
a hedge of the expected cash outflows arising under the contract to pay for the machine on 31 January 20X8.
Gamma wishes to use hedge accounting for this arrangement if this is possible under International Financial Reporting
Standards (IFRS®). Gamma has prepared all relevant documentation which is necessary to enable hedge accounting
to be used if the qualifying conditions are met.
Data relevant to the contract and to the forward purchase of currency is as follows:
– Increase in expected cash flows arising under the contract due to market changes between 1 July 20X7 and
30 September 20X7 = $2,600,000.
– Positive fair value of forward currency purchase contract at 30 September 20X7 = $2,700,000. (9 marks)

Note 2 – purchase of inventory from a foreign supplier

On 1 August 20X7, Gamma purchased some inventory from a supplier whose functional currency was the dinar. The
total purchase price was 3·6 million dinars. The terms of the purchase were that Gamma would pay for the goods in
two instalments. The first instalment payment of 1,260,000 dinars was due on 15 September 20X7 and the second
payment of 2,340,000 dinars on 30 October 20X7. Both payments were made on the due dates. Gamma did not
undertake any activities to hedge its currency exposure arising under this transaction. Gamma sold 60% of this
inventory prior to 30 September 20X7 for a total sales price of $480,000. All sales proceeds were receivable in $. After
30 September 20X7, Gamma sold the remaining inventory for sales proceeds which were in excess of their cost.
Relevant exchange rates are as follows:
– 1 August 20X7 – 6·0 dinars to $1.
– 15 September 20X7 – 6·3 dinars to $1.
– 30 September 20X7 – 6·4 dinars to $1. (11 marks)

Note 3 – receivable from entity Z

On 30 September 20X7, Gamma was owed $10m by entity Z. The amount was due for payment by 30 October 20X7.
Entity Z has been a customer for many years and has an excellent payment record. At 30 September 20X7, there was
no reason to suppose that entity Z would fail to pay the $10m owed to Gamma by 30 October 20X7. However, on
20 October 20X7, a fire at entity Z’s place of business put the going concern status of entity Z in considerable doubt.
(5 marks)

Required:
Explain and show how the above three events would be reported in the financial statements of Gamma for the year
ended 30 September 20X7. Marks will be awarded for BOTH figures AND explanations.
Note: The mark allocation is shown against each of the three notes above.

(25 marks)

4
3 Delta, a company with a year end of 30 September 20X7, applies IFRS 16 – Leases – to report lease transactions in
the financial statements. The following information is provided in the notes:
Note 1 – property lease
On 1 October 20X6, Delta began to lease a property on a 10-year lease. The annual lease payments were $500,000,
payable in arrears – the first payment being made on 30 September 20X7. Delta incurred initial direct costs of
$60,000 in arranging this lease. The annual rate of interest implicit in the lease was 10%. When the annual discount
rate is 10%, the present value of $1 payable at the end of years 1–10 is $6·145. (8 marks)
Note 2 – sale and leaseback
On 1 April 20X7, Delta sold a property to a third party for proceeds of $4,500,000. The carrying amount of the property
in the financial statements of Delta at 1 October 20X6 was $17,500,000 (depreciable component $12,000,000) and
its estimated future useful life was 20 years.
On 1 April 20X7, Delta began a 10-year leaseback of the property from the third party. The annual rate of interest
implicit in the lease was 10%. Annual rentals were $732,300, payable in arrears.
The sale of the property by Delta does not constitute the satisfaction of a relevant performance obligation under
IFRS 15 – Revenue from Contracts with Customers. (9 marks)

Required:
(a) Explain how IFRS 16 – Leases – requires lessees to recognise and measure rights and obligations under
leasing arrangements. (4 marks)

(b) Explain the exceptions to the usual requirements you have outlined in requirement (a).
Note: Your answer should briefly describe the accounting treatment required in the case of such exceptions and,
where appropriate, state example of assets which these exceptions might apply to. (4 marks)

(c) Explain and show how the transactions described in notes 1 and 2 would be reported in the financial statements
of Delta for the year ended 30 September 20X7.
Note: The mark allocation is shown against each of the notes above.

(25 marks)

5 [P.T.O.
4 Your managing director has raised a number of queries relating to the application of various IFRS Standards.

Query one – reporting by segment

I notice that the disclosures relating to operating segments in the consolidated financial statements appear to be based
on the geographical location of the customers of the group. I am the non-executive director of another large listed
entity and the segment disclosures in their consolidated financial statements are based on the type of products sold.
Also, some of our larger subsidiaries have customers located in more than one geographical region, yet they provide
no segment disclosures whatsoever in their individual financial statements. I would like to see segment disclosures
given in the individual subsidiary accounts as well. I really don’t understand these inconsistencies given that all
these financial statements have been prepared using IFRS Standards. Please explain the reasons for these apparent
inconsistencies. (6 marks)

Query two – accounting policies and accounting estimates

I have recently heard someone talking about accounting policies and accounting estimates. He said that when there’s
a change of these items, sometimes the change is made retrospectively and sometimes it’s made prospectively. Please
explain the difference between an accounting policy and an accounting estimate and give me an example of each.
Please also explain the difference between retrospective and prospective adjustments and how this applies to accounting
policies and accounting estimates. (7 marks)

Query three – new subsidiary adopting IFRS Standards

You will know we have recently acquired a new subsidiary. This subsidiary has always prepared its financial statements
in $ but has used IFRS Standards for the first time in its financial statements for the year ended 30 September 20X7.
Previously, they’ve 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 Standards. How do I
make sure we’re 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. (7 marks)

Query four – revaluation of property portfolio

When looking at the statement of other comprehensive income, I noticed that a gain of $64 million was included
relating to the revaluation of our portfolio of properties. I looked in the notes to check that a corresponding amount of
$64 million had been added to property, plant and equipment. However, the note explaining movements in property,
plant and equipment showed a revaluation increase of $80 million. There was a reference to tax in one of the notes I
looked at but I don’t see why this is relevant. I know our rate of tax is 20% and this would explain the difference but
we won’t pay any tax on this gain unless we sell the properties. We have no intention of selling any of them in the
foreseeable future, so what relevance does tax have? Please explain the difference between the $64 million gain in the
statement of other comprehensive income and the $80 million gain added to property, plant and equipment.
(5 marks)

Required:
Provide answers to the following questions raised by the managing director. Your answers should refer to relevant
provisions of the IFRS Standards.
Note: The mark allocation is shown against each of the four queries above.

(25 marks)

End of Question Paper