3-6int_2002_dec_q[1]

Section A – This ONE question is compulsory and MUST be attempted1The following draft balance sheets relate to Rod, a public limited company, Reel, a public limited company, and Line,a public limited company, as at 30 November 2002:Rod Reel Line$m$m$m Non-current AssetsT angible non-current assets – cost/valuation1,230505256Investment in Reel640Investment in Line160100_____________2,030605256_____________ Current AssetsInventory30013565T rade receivables24010549Cash at bank and in hand905080_____________630290194_____________T otal assets2,660895450_____________ Capital and reservesCalled up share capital1,500500200Share premium account30010050Revaluation Reserve70Accumulated Reserves62520060_____________2,425800380 Non-current liabilities1352520Current liabilities1007050_____________T otal equity and liabilities2,660895450_____________ The following information is relevant to the preparation of the group financial statements:(i)Rod had acquired eighty per cent of the ordinary share capital of Reel on 1 December 1999 when theaccumulated reserves were $100 million. The fair value of the net assets of Reel was $710 million at1 December 1999. Any fair value adjustment related to net current assets and these net current assets had beenrealised by 30 November 2002. There had been no new issues of shares in the group since the current group structure was created.(ii)Rod and Reel had acquired their holdings in Line on the same date as part of an attempt to mask the true ownership of Line. Rod acquired forty per cent and Reel acquired twenty-five per cent of the ordinary share capital of Line on 1 December 2000. The accumulated reserves of Line on that date were $50 million and those of Reel were $150 million. There was no revaluation reserve in the books of Line on 1 December 2000. The fair values of the net assets of Line at 1 December 2000 were not materially different from their carrying values.(iii)The group operates in the pharmaceutical industry and incurs a significant amount of expenditure on the development of products. These costs were formerly written off to the income statement as incurred but then reinstated when the related products were brought into commercial use. The reinstated costs are shown as ‘Development Inventory’. The costs do not meet the criteria in IAS38 ‘Intangible Assets’ for classification as intangibles and it is unlikely that the net cash inflows from these products will be in excess of the development costs. In the current year, Reel has included $20 million of these costs in inventory. Of these costs $5 million relates to expenditure on a product written off in periods prior to 1 December 1999. Commercial sales of this product had commenced during the current period. The accountant now wishes to ensure that the financial statements comply strictly with IAS/IFRS as regards this matter.(iv)Reel had purchased a significant amount of new production equipment during the year. The cost before trade discount of this equipment was $50 million. The trade discount of $6 million was taken to the income statement.Depreciation is charged on the straight line basis over a six year period.(v)The policy of the group is now to state tangible non-current assets at depreciated historical cost. The group changed from the allowed alternative treatment to the benchmark treatment under IAS16 ‘Property, Plant and Equipment’ in the year ended 30 November 2002 and restated all of its tangible non-current assets to historical cost in that year except for the tangible non-current assets of Line which had been revalued by the directors of Line on 1 December 2001. The values were incorporated in the financial records creating a revaluation reserve of $70 million. The tangible non-current assets of Line were originally purchased on 1 December 2000 at a cost of $300 million. The assets are depreciated over six years on the straight line basis. The group does not make an annual transfer from revaluation reserves to the accumulated reserve in respect of the excess depreciation charged on revalued tangible non-current assets. There were no additions or disposals of the tangible non-current assets of Line for the two years ended 30 November 2002.(vi)During the year the directors of Rod decided to form a defined benefit pension scheme for the employees of the holding company and contributed cash to it of $100 million. The following details relate to the scheme at30 November 2002:$mPresent value of obligation130Fair value of plan assets125Current service cost110Interest cost – scheme liabilities20Expected return on pension scheme assets10The only entry in the financial statements made to date is in respect of the cash contribution which has been included in Rod’s trade receivables. The directors have been uncertain as how to deal with the above pension scheme in the consolidated financial statements because of the significance of the potential increase in the charge to the income statement relating to the pension scheme. They wish to immediately recognise any actuarial gain.(vii)Goodwill is written off over four years on the straight line basis.(viii)The group uses the allowed alternative treatment in IAS22 ‘Business Combinations’ to allocate the cost of acquisition.Required:(a)Show how the defined benefit pension scheme should be dealt with in the consolidated financial statements.(4 marks)(b)Prepare a consolidated balance sheet of the Rod Group for the year ended 30 November 2002 in accordancewith the standards of the International Accounting Standards Board.(21 marks)(25 marks)This is a blank page. Question 2 begins on page 5.Section B – THREE questions ONLY to be attempted2Autol, a public limited company, currently prepares its financial statements under local GAAP (Generally Accepted Accounting Practice). The company currently operates in the telecommunications industry and has numerous national and international subsidiaries. It is also quoted on the local stock exchange. The company invests heavily in research and development which it writes off immediately, and uses the pooling of interests method for accounting for its subsidiaries wherever possible. The local rules in this area are not prescriptive. The company does not currently provide for deferred taxation or recognise actuarial gains and losses arising on defined benefit plans for employees. It wishes to expand its business activities and raise capital on international stock exchanges. The directors are somewhat confused over the financial reporting requirements of multi-national companies as they see a variety of local GAAPs and reporting practices being used by these companies including the preparation of reconciliations to alternative local GAAPs such as that of the United States of America, and the use of the accounting standards of the International Accounting Standards Board (IASB).The directors have considered the use of US GAAP in the financial statements but are unaware of the potential problems that might occur as a result of this move. Further the directors are considering currently the use of the accounting standards of the IASB in the preparation of the consolidated financial statements and require advice as to the potential impact on reported profit of a move from local GAAP to these accounting standards given their current accounting practice in the areas of deferred tax, research and development expenditure, employee benefits and the uniting of interests.Required:Write a report suitable for presentation to the directors of Autol that sets out the following information:(a)the variety of local GAAPs and reporting practices currently being used by multi-national companies settingout brief possible reasons why such companies might prepare financial statements utilising a particular set of generally accepted accounting practices.(6 marks)(b)advice as to whether Autol should prepare a single set of consolidated financial statements that comply onlywith US GAAP.(3 marks)(c)the problems relating to the current use of GAAP reconciliations by companies and whether the use of suchreconciliations is likely to continue into the future.(5 marks)(d)the potential impact on the reported profit of Autol if it prepared its consolidated financial statements inaccordance with the accounting standards of the IASB in relation to its current accounting practices for deferred tax, research and development expenditure, employee benefits and uniting of interests.(11 marks)(25 marks)3TAS, a public limited company, owns 100 per cent of the ordinary share capital of X and Y, who themselves are public limited companies. The group operates in the aircraft manufacturing industry which is currently a depressed market.It is accepted by the group that there is over capacity in the sector with several companies struggling to remain solvent.The trade payables of the company Y amount to $30 million and are exerting pressure on the group. The directors are afraid that the trade payables may attempt to prove that company Y is insolvent. Company Y has made small losses for the last two years and its liquidity is poor. The majority of its net current assets is in the form of work-in-progress which is unlikely to be sold and which needs some cash investment to complete. The directors have decided to put forward two different restructuring plans as at 30 November 2002.Plan 1X is to purchase the whole of TAS’ investment in Y. The purchase consideration was to be $100 million payable in cash to TAS. This amount will then be loaned on a long-term unsecured basis to Y by TAS.Plan 2The net assets and trade of Y are to be transferred to X. Y would become a non-trading company. For the purpose of plan 2 only, the purchase consideration was to be $71 million which represents the group’s view of the value of the trade and net assets of Y. This amount will be left outstanding on the inter company account between X and Y. The net assets and trade are to be transferred at book value after any necessary adjustments required by the information below.The balance sheets of TAS and its subsidiaries at 30 November 2002 produced in summary form are as follows:TAS X Y$m$m$m T angible non-current assets atdepreciated cost/valuation80027060Cost of investment in X150Cost of investment in Y95Net current assets15513025Long-term loan(10)____________1,20040075____________ Share Capital – ordinary shares of $11508070Accumulated reserves1,0503205____________1,20040075____________ TAS acquired the investment in X on 1 December 1998. The fair value of the net assets of X at that date was $134 million. Y was purchased on 1 December 2000. The fair value of the net assets at that date was $87 million.At the dates of acquisition there was no material difference between the book values and fair values of the net assets of X and Y.The following information should be taken into account in the restructuring of the group:(a)The value of the assets of Y at 30 November 2002 is currently being discussed by the directors. The tangiblenon-current assets of Y comprise entirely of a manufacturing unit which is currently operating at 30–35% of capacity due to the depressed market and over capacity in the sector. The unit was completed on 1 June 2001 at a total cost of DM135 million which was converted into dollars at an exchange rate of $1 = DM1·35. The original manufacturing unit, which was in existence at the time of TAS acquisition of Y, was sold for its carrying value on 1 June 2001 to a third party.(b)The manufacturing unit of Y was constructed with the aid of a foreign currency debt of DM13 million, whichremains in the balance sheet at 30 November 2002 at its original translated amount as at 1 December 2000.Exchange rates over the last three years are:30 November/1 December DM to $20001·32001 1·420021·6The trade payables of the company are arguing that because of the current strength of the dollar against the DM, the value of the manufacturing unit should be adjusted downwards to reflect current exchange rates.(c)The directors have produced information about the cash flows expected to be generated by the manufacturingunit of Y which has resulted in an expected value in use of $34 million as at 30 November 2002. The net selling price of the manufacturing unit is difficult to estimate but is approximately $8 million.(d)The group writes off goodwill over four years and depreciates its non-current assets at 20% per annum straightline with a full year’s charge in the year of recognition for both items. Further the directors wish to make a restructuring provision of $5 million.Required:(a)Prepare the individual balance sheets of TAS, X, and Y, and the group balance sheet in accordance withRestructuring Plan 1 as at 30 November 2002.(10 marks)(b)Prepare the individual balance sheets of TAS, X and Y in accordance with Restructuring Plan 2 as at30 November 2002.(7 marks)(c)Discuss the key considerations and implications of the proposed plans for the restructuring of the groupincluding their effect upon the position of the trade payables.(8 marks)(25 marks)The group accountant has asked for your advice as to the acceptability of the above accounting practices under International Accounting Standards/International Financial Reporting Standards as he does not wish to suffer a qualification of the audit report or have any special comment in that report.(3 marks)Required:Write a report to the group accountant advising him as to the acceptability of the above accounting practices utilised by Transystems plc.Note to candidatesCandidates do not need any knowledge of US Standard SAB101 ‘Revenue Recognition in Financial Statements’ in order to answer this question.(25 marks)5The ‘value relevance’ of published financial statements is increasingly being put into question. Financial statements have been said to no longer have the same relevance to investors as they had in the past. Investment analysts are developing their own global investment performance standards which increasingly do not use historical cost as a basis for evaluating a company. The traditional accounting ratio analysis is outdated with a new range of performance measures now being used by analysts.Companies themselves are under pressure to report information which is more transparent and which includes many non-financial disclosures. At the same time the move towards global accounting standards has become more important to companies wishing to raise capital in foreign markets. Corporate reporting is changing in order to meet the investors’ needs. However, earnings are still the critical ‘number’ in both the company and the analyst’s eyes.In order to meet the increasing information needs of investors, standard setters are requiring the use of prospective information and current values more and more with the traditional historical cost accounts and related ratios seemingly becoming less and less important.Required:(a)Discuss the importance of published financial statements as a source of information for the investor, givingexamples of the changing nature of the performance measures being utilised by investors.(11 marks)(b)Discuss how financial reporting is changing to meet the information requirements of investors and why theemphasis on the ‘earnings’ figure is potentially problematical.(8 marks)(c)Discuss whether the intended use of fair values will reduce the importance of historical cost information.(6 marks)(25 marks)End of Question Paper。