SECTION A
A1. On 1 June 2015, Marlin acquired 80% of the equity share capital of Bandit.
The consideration was provided in cash totalling £6.4m, this has not yet been deducted from Marlin's current assets figure.
At this time the Fair Value of Bandit's net assets was £8.75m.
Below are the summarised draft financial statements of both companies.
|
Statements of comprehensive income for the year ended 30 September 2015
|
|
|
|
|
|
|
Marlin
|
Bandit
|
|
|
£'000
|
£'000
|
|
Revenue
|
46,250
|
22,500
|
|
Cost of sales
|
- 35,250
|
- 18,000
|
|
Gross profit
|
11,000
|
4,500
|
|
|
|
|
|
Distribution costs
|
- 1,250
|
- 600
|
|
Administrative expenses
|
- 2,750
|
- 1,200
|
|
Finance costs
|
- 50
|
-
|
|
Profit before tax
|
6,950
|
2,700
|
|
|
|
|
|
Income tax expense
|
- 1,950
|
- 750
|
|
Profit for the year
|
5,000
|
1,950
|
|
Other comprehensive income:
|
|
|
|
Gain on revaluation of land (note (d))
|
125
|
-
|
|
Total comprehensive income
|
5,125
|
1,950
|
|
Statements of financial position as at 30 September 2015
|
|
|
Marlin
|
Bandit
|
|
|
£'000
|
£'000
|
|
Assets
|
|
|
|
Non-current assets
|
|
|
|
Property, plant and equipment
|
12,750
|
6,950
|
|
Investments
|
900
|
-
|
|
|
13,650
|
6,950
|
|
|
|
|
|
Current assets
|
6,250
|
1,200
|
|
Total assets
|
19,900
|
8,150
|
|
|
|
|
|
Equity and liabilities
|
|
|
|
Equity shares of £1 each
|
6,000
|
2,500
|
|
Land revaluation reserve - 30 September 2015 (note (a))
|
1,000
|
-
|
|
Other equity reserve - 30 September 2014 (note (d))
|
250
|
-
|
|
Retained earnings
|
6,150
|
2,250
|
|
|
13,400
|
4,750
|
|
Non-current liabilities
|
|
|
|
6% loan notes
|
1,500
|
-
|
|
Current liabilities
|
5,000
|
3,400
|
|
Total equity and liabilities
|
19,900
|
8,150
|
The following information is relevant:
(a) At the date of acquisition, the fair values of Bandit's assets were equal to their carrying amounts with the exception of its property. This had a fair value of £600,000 above its carrying amount and will result in an increased depreciation charge of £25,000 in the post- acquisition period. Bandit has not incorporated this change in value into its financial statements.
Marlin's group policy is to revalue all properties to current value at each year end. On 30 September 2015, the value of Bandit's property was unchanged from its value at acquisition, but the land element of Marlin's property had increased in value by £100,000 this has not yet been accounted for.
(b) Sales from Bandit to Marlin throughout the year ended 30 September 2015 had consistently been £500,000 per month. Bandit made a mark-up on cost of 20% on these sales. Marlin had £1 million (at cost to Marlin) of inventory that had been supplied in the post-acquisition period by Bandit as at 30 September 2015.
(c) Marlin had a trade payable balance owing to Bandit of
£200,000 as at 30 September 2015. This agreed with the corresponding receivable in Bandit's books.
(d) Marlin's investments include some available-for-sale investments that have increased in value by £125,000 during the year. The other equity reserve relates to these investments and is based on their value as at 30 September 2014. There were no acquisitions or disposals of any of these investments during the year ended 30 September 2015.
(e) Goodwill should be calculated using the fair value method in accordance with IFRS 3 Business Combinations. There has been no impairment of consolidated goodwill.
Required:
Prepare the consolidated statement of comprehensive income for the year ended 30 September 2015 and the consolidated statement of financial position as at that date for Marlin Group.
SECTION B
You must answer ONE question from this section.
B1. Pronto, an unlisted company operates in the hospitality sector, owning several different chain restaurants and bars. The sector has seen increased competition in recent years with the entry of new competitors into the market. The directors have been considering future plans with a view to determining their impact on the financial statements for the financial year to 31 December 2015.
(a) The directors of Pronto wish to obtain a stock exchange listing in the year to 31 December 2015 to enable them to raise additional funds through share issues. To do so, it is to be acquired by Tango, a significantly smaller listed company in a share for share exchange. Pronto will receive sufficient shares to control the new group with approximately 75 per cent of the enlarged capital of Tango. The executive management of the new group will be dominated by Pronto executives.
As part of the purchase consideration Tango will issue preference shares and convertible loan notes on favourable terms.
The business will also change its name to Pronto Group PLC.
(b) Tango has long term contracts with a number of businesses to provide hospitality for their corporate events. Despite its size, Tango is well known by the public and has an excellent reputation for quality. The directors would like to know how such qualitative information can be captured in the annual accounts.
(c) Pronto currently prepares its financial information in accordance with UK Financial Reporting Standards and would like the enlarged group to conform to its existing accounting processes and policies.
This will include Tango moving from the historic cost to the revaluation model for fixed assets and changing the way it estimates certain provisions amongst others.
The directors have indicated that they would like to present the company in as profitable position as possible to boost the potential funds that might be raised when new shares are issued to the market.
(d) The directors intend to amortise any goodwill and other non-current assets identified on acquisition over a twenty-year period, as it reflects fairly the long-term nature of the assets being assessed and the significance of the acquisition.
The directors are keen to avoid any impairment losses for as long as possible.
Required:
Draft a report to the directors of Pronto, setting out the financial reporting implications of the above plans for the financial statements for the year to 31 December 2015.
B2. Everset plc has entered into contract to lease new equipment to allow it to expand. The retail price of the equipment is
£650,000. The lease agreement requires four annual payments of £177,500, payable in advance.
The lease commenced on 1 January 2015. It is expected that the equipment will have a useful life of four years and will be scrapped at the end of this life.
Required:
(a) Explain the concept of substance over form and with examples explain how it is relevant to IAS 17 Leases.
(b) Explain the terms 'operating' and 'finance' lease and the criteria that determines whether a lease is a finance lease or operating lease.
(c) Assuming the lease is a finance lease; calculate the amounts to be included within the income statement and statement of financial position of Everset plc for each of the years ended 31 December 2015 to 31 December 2018 in respect of the equipment. Assume an implicit interest rate of 6.25%.
(d) Assuming the lease is an operating lease; calculate the amounts to be included in the income statement and provide the disclosures required by IAS 17 Leases for the accounts of Everset plc for year ended 31 December 2015.
SECTION C
You must answer ONE question from this section.
C1. The move towards global accounting standards has stalled.
Required:
Explain whether you agree with the above statement and provide reasons for the observed level of adoption globally.
C2. Are annual accounts of FTSE 100 companies fit for purpose?
Required:
Draft a report explaining if annual accounts are needed and whether, in their current format, the accounts of FTSE 100 companies are meeting this need.