Exchange Rates

On 1 January 2020, Home plc acquired 70% of the equity shares of Foreign Ltd for £400,000. Foreign Ltd.’s share capital at that date comprised 100,000 equity shares of $1 each and its retained earnings and share premium were $216,000 and $50,000 respectively.  The draft financial statements of the two entities for the year ended 31 December 2020 are shown below:

Statements of Profit or Loss for the year ended 31 December 2020.
                            Home                Foreign
                                  £                      $
Revenue                        800,000            300,000
Cost of sales                              (500,000)            (250,000)
Gross profit                        300,000                50,000
Operating expenses                    (120,000)              (60,000)
Finance costs                    (40,000)            (20,000)
Profit before tax                    140,000            (30,000)
Tax                            (40,000)                (6,000)
Profit for the year                    100,000            (36,000)

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Statements of Financial Position at 31 December 2020       
      £                      $
Property, plant and equipment            270,000            350,000
Investment in Foreign Ltd                400,000                                    NIL
Total non-current assets                670,000            350,000

Current assets
Inventory                        120,000            80,000
Receivables                        100,000            40,000
Total assets                        890,000                  470,000

Equity and liabilities
Equity shares of £1/$                500,000            100,000
Share premium                    100,000              50,000
Retained earnings                    150,000            180,000
Total equity                        750,000            330,000
Non-current liabilities                110,000              70,000
Current liabilities                            30,000              70,000
Total equity and liabilities                890,000            470,000                       
Question 1 continues
Question 1 continued

Note 1: Presentation currency of the group
The presentation currency of the group is UK Pound Sterling (£) and Foreign Ltd.’s functional currency is the dollar ($).

Note 2: Investment in Foreign Ltd
The fair value of Foreign Ltd.’s net assets at the date of acquisition was $40,000 higher than the carrying amount. The fair value adjustment relates to a non-depreciable land.

Note 3: Interest free loan to Foreign Ltd.               
Home plc made an interest free loan to Foreign Ltd of £30,000 on 1 January 2020.  The loan was repaid on 1 July 2020. Foreign Ltd had included the loan in non-current liabilities and had recorded the repayment at the exchange rate on 1 July 2020. No other entries have been made in the books of Foreign Ltd in respect of this transaction.

Note 4: Purchase of plant
On 1 January 2020, Home plc purchased an item of plant for $38,000 on credit from a foreign supplier. At year end, the amount payable to the supplier had not yet been settled. No exchange gain or loss in respect of this item is reflected in Home plc’s Statement of Profit or Loss for the year ended 31 December 2020.

Note 5: Inter-company sales
On 1 March 2020, Home plc sold  goods valued £20,000 to Foreign Ltd at a profit of 25% on the selling price. On 31 December 2020, one-half of these goods were still in the inventory of Foreign Ltd. The transaction was recorded by Foreign Ltd at the exchange rate ruling on 1 March 2020. A payment of £15,000 relating to the above sale was made to Home plc when the exchange rate was $1.4 to £1.  Any exchange gain or loss arising on the transaction is still held in the current liabilities of Foreign Ltd. The remaining £5,000 was included in Foreign Ltd current liabilities at the historical rate.               

Note 6-Goodwill impairment
The directors of Home plc conducted an impairment review of the goodwill arising on the acquisition of Foreign Ltd and concluded that the goodwill arising on the acquisition of Foreign Ltd had lost 20% of its value during the year. Goodwill impairment loss should be charged to operating expenses.

  Question 1 continues.

Question 1 continued

Note 7-Non-controlling interest.
The group’s policy is to value non-controlling interest at acquisition date at the fair value. The fair value of the non-controlling interest at the date of acquisition was $120,000.

Note 8-Exchange rates
The following exchange rates are relevant to the preparation of the financial

1 January 2020                            £1=$1.50
1 March 2020                            £1=$1.90
1 July 2020                                £1=$1.80
31 December 2020                            £1=$2.00
Average rate for the year ended 31 December 2020    £1=$1.80

(i) Prepare the Consolidated Statement of Profit of Loss and Other Comprehensive Income for Home plc for the year ended 31 December 2020.
                                            (20 marks)

(ii) Prepare the Consolidated Statement of Financial Position for Home plc at 31 December 2020.
                                            (12 marks)

(b)      Home plc formed a new subsidiary in Libya  on 31 January 2021.  The subsidiary has issued 4 million dinars of equity capital to Home plc, which paid for these shares in Libyan dinars. The subsidiary has also raised equity capital of 500,000 Libyan dinars from external sources and has deposited the whole of the capital with a bank in an overseas country whose currency is the Yuan. The capital is to be invested in Libyan dinar denominated bonds. The subsidiary has a small number of staff and its operating expenses, which are low, are incurred in American dollars. The profits are under the control of Home plc.  Any income from the investment is either passed on to Home plc in the form of a dividend or reinvested under instruction from Home plc. The subsidiary does not make any decisions as to where to place the investments.

Advise the directors of Home plc on how to determine the functional currency of the Libyan subsidiary.
                                            (6 marks)   

Total:  38 marks
Question 2
(a) Abdaless has a defined contribution pension scheme that all employees are enrolled into. However, in the year ended 31 December 2020, it set up an
Enhancement fund (Fund) as a way of enhancing post-retirement benefits of its employees. The terms of the Fund are as follows:

-Employees with more than five years’ service will be automatically enrolled into the Fund.
-Abdaless’ contributions into the Fund are voluntary. In the year ended 31 December 2020, its contributions were equivalent to 10% of wages and salaries. Whilst the fund is in existence members will, upon retirement, receive an annual sum based on their number of years of service.

Abdaless can cancel the Fund at any point. If cancelled, no further benefits or compensation will be paid to members. Abdaless has written to the local trade union to assure them of the company’s commitment to take care of its employees after they have retired. The employees have a high level of trust in the senior management and directors of Abdaless.

Advise the directors of Abdaless on whether the Fund is a defined benefit or a
defined contribution pension plan.

                                                (5 marks)

(b) Abdaless operates a defined benefit post-employment plan for its employees.    
Information relating to the firm’s defined benefit plan for the year ended 31 December 2020 is as follows:                               

On 1 January 2020, the plan obligation was £200 million and the fair value of the
plan assets was £150 million.                                

The current service cost for the year ended 31 December 2020 was £30 million.

The actuary estimated the past service cost for the year ended 31 December 2020 at £15 million. The past service cost was caused by an increase in pension benefits with effect from 1 May 2020.   
Abdaless paid contributions of £40 million into the pension fund.           


Question 2 continues.
Question 2 continued

Interest rate on high quality corporate bonds for the year ended 31 December
2020 was 10%.

The pension plan paid out benefits totalling £30 million to retired members on 31 December 2020.                               

On 31 December 2020, the plan obligation was £250 million and the fair value of
the plan assets was £190 million.                               
(i)  Compute the amounts that will appear in the Statement of Profit or Loss and
Other Comprehensive Income of Abdaless for the year ended 31 December 2020.
                                              (9 marks)

(ii)  Compute the amount that will appear in the Statement of Financial Position of Abdaless at 31 December 2020
                                            (1 mark)
(c) On 1 January 2019, Abdaless granted 100,000 share options to each of its 20 key management personnel. The exercise price of the options was £20. The share options will vest if the managers remain employed on 31 December 2021. The fair value of the options at the grant date is £8. In the year ended 31 December 2019, two managers left and another three were expected to leave prior to the vesting date.

On 1 October 2020, Abdaless’ share price fell. The share option scheme was modified by reducing the exercise price to £10. The fair value of the share options was £6 immediately before the re-pricing and £8 immediately afterwards. In the year ended 31 December 2020, two managers left and four more were expected to leave prior to the vesting date.

Explain how Abdaless should account for the above share-based payment transaction for each of the years ended 31 December 2019 and 2020.
                                                (6 marks)


      Question 2 continues.
Question 2 continued

(d) On 1 January 2020, Abdaless issued 400 million £1 bonds at par. The interest payable on the bonds is 4% per annum, payable on 31 December in arrears. The bonds are repayable at par on 31 December2029. Alternatively, the Investors have the option to convert the bonds into  a fixed number of equity shares in Abdaless on 31 December 2029.

On 1 January 2020, Abdaless recognised a financial liability of £400 million in its statement of financial position. On 31 December 2020, Abdaless recognised the interest paid on that date as a finance cost in its Statement of Profit or

On 1 January 2020 investors would have expected an annual return of 6% on non-convertible bonds. At a discount rate of 6% per annum, the present value of £1 receivable at the end of Year 10 is 55·8 pence and the present value of £1 receivable at the end of each of Years 1 to 10 is £7·36.

Explain how the above bond should have been accounted for in the books and show the effect of any corrections to the above accounting treatment.

                                                  (7 marks)


                                        Total :28 Marks








Question 3
The draft Consolidated Statement of Profit or Loss and Other Comprehensive Income of Bola plc for the year ended 31 March 2021 is as follows:
Revenue                                            9,000
Cost of sales                                                  (6,500)
Gross profit                                            2,500
Distribution and administrative expenses                        (500)
Loss on sale of a subsidiary                                ( 150)
Interest payable                                                (100)
Interest receivable                                          130
Share of Associate’s Loss                                    (  40)
Profit before tax                                              1,840
Income tax                                                     (140)
Profit for the year                                              1,700

Other comprehensive income
Impairment losses on property, plant and equipment                      (120)
Profit attributable to:
Owners of the parent entity                                    1,620
Non-controlling interest                                              80
Total comprehensive income attributable to:
Owners of the parent entity                                    1,500
Non-controlling interest                                              80








Question 3 continues
Question 3 continued
Draft Consolidated Statements of Financial Position as at: 
        31 March 2021        31 March 2020
                                                                              £m                    £m
Goodwill                                        400            600
Property, plant and equipment                               7,200                7,320
Investment in Associate                        680            750
Other investments                                1,000            500
Inventories                                            2,550                2,800
Trade receivables                                            1,200                2,000
Interest receivable                                8                5
Cash and cash equivalents                            50                        105
Total assets                                            13,088              14,080

Equity and liabilities
Capital and reserves:                        £m                  £m
Equity shares of £1 each                                          6,000                    4,000
Share premium                                                800                400
Revaluation                                                    150                 270
Retained earnings                                             2,900                    3,500
                                        9,850                    8,170
Non-controlling interest                              900                800
                                    10,750            8,970
Deferred tax                                                    350                400
Loan                                                  nil                100
Government grants                                          300                        150
Trade payables                                                      320                        550
Interest payable                                                  90                           50
Income tax                                                  250                         300
Overdraft                                            1,028                      3,560
Total equity and liabilities                                  13,088          14,080

The following information is relevant:
(i) Depreciation for the period for property, plant and equipment charged to cost of sales was £136 million.

(ii) A credit of £190 million for the current year’s amortisation of government grants for capital expenditure has been included in cost of sales.

Question 3 continues
Question 3 continued

(iii) Goodwill was impairment tested on 31 March 2021 and any impairment was included in the financial statements for the year ended 31 March 2021. The goodwill impairment loss for the year relates to the only the wholly owned subsidiaries of Bola. 

(iv) On 1 April 2020, Bola acquired 60% of the equity shares of Bim for cash of £400 million. The fair value of the identifiable net assets of Bim at the date of acquisition comprised the following:
Property, plant and equipment                                360
Trade receivables                                          80
Cash at bank                                                20
Inventories                                            320
Tax payable                                            (280)
Trade payables                                        (120)
Fair value of net assets at acquisition date                        380

The fair value of the non-controlling interest in Bim on 1 April 2020 was £150 million.

(v) Bola disposed of a wholly owned subsidiary, Tunde on 1 February 2021.  The group required the subsidiary, Tunde to prepare an interim statement of financial position at the date of the disposal. The consolidated carrying values of the net assets at the date of disposal are set out below in the summarised statement of financial position at 1 February 2021.
Property, plant and equipment                                250
Inventories                                            150
Trade receivables                                            70
Cash                                                    50
Trade payables                                        (20)
Tax payable                                            (40)

The carrying amount of the gross goodwill arising on the acquisition Tunde was £80m at the disposal date.

      Question 3 continues

Question 3 continued

(vi)  The increase in the share capital during the year was due to issue of shares for cash on 1 March 2021.

(vii) Consolidated retained earnings are comprised of:
31 March 2021        31 March 2020
                            £000                        £000
Opening balance                    3,500                      3, 600
Profit for the year                    1,620                                1,500
Dividends                            (2,220)                                    (1,600)
                            2,900                        3,500
(a) Prepare the Group Statement of Cash Flows for the Bola Group for the year ended 31 March 2021 using the indirect method.
                                            (28 marks)

(b)  Discuss the issues revealed by Bola’s Statement of Cash Flows for the year ended 31 March 2021.
                                            (6 marks)

    Total: 34 marks

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