Escolar Documentos
Profissional Documentos
Cultura Documentos
BUSINESS REPORTING
This paper consists of FOUR written test questions (100 marks).
1.
Ensure your candidate details are on the front of your answer booklet.
2.
3.
Answers to each written test question must begin on a new page and must be clearly
numbered. Use both sides of the paper in your answer booklet.
4.
The examiner will take account of the way in which material is presented.
The questions in this paper have been prepared on the assumption that candidates do
not have a detailed knowledge of the types of organisations to which they relate. No
additional credit will be given to candidates displaying such knowledge.
Interest tables are provided with this examination paper.
IMPORTANT
Question papers contain confidential
information and must NOT be
removed from the examination hall.
171057
BLANK PAGE
ICAEW\J13
Page 2 of 15
QUESTION 1
Bauhaus plc is an AIM-listed company that manufactures bicycles and cycling accessories.
The company is planning to obtain a full listing on the London Stock Exchange in early 2014,
following significant growth in recent years.
You are Maida Cheema, an accountant working on a short-term contract at Bauhaus, and
you receive the following email from the Bauhaus finance director, Carl McCoy.
To:
Maida.Cheema@Bauhaus.com
From: Carl.McCoy@Bauhaus.com
Date:
22 July 2013
Subject: Year end 31 May 2013 financial reporting adjustments
Maida, I have a meeting with the board in the next few days and I want to be able to give
them an indication of financial performance for the year ended 31 May 2013, including
earnings per share (EPS). The consolidated financial statements are not yet finalised.
I am concerned that Andrea Eldritch, who was responsible for drafting the Bauhaus
consolidated financial statements, is inexperienced and is not familiar with IFRS. At my
request, Andrea has prepared: a file note showing outstanding issues (Exhibit 1); a draft
consolidated statement of changes in equity (Exhibit 2); and her EPS calculation (Exhibit 3).
I would like you to draft a memorandum in which you:
Explain the correct financial reporting treatment of the items in Exhibit 1 and prepare
journal entries for any adjustments you propose;
Prepare a revised consolidated statement of changes in equity for the year ended 31
May 2013; and
Determine basic and diluted EPS figures for the Bauhaus Group for the year ended 31
May 2013.
Requirement
Draft the memorandum requested by Carl McCoy.
(24 marks)
Exhibits 1 3 overleaf
ICAEW\J13
Page 3 of 15
ICAEW\J13
Page 4 of 15
Exhibit 2 Draft consolidated statement of changes in equity at 31 May 2013 prepared by Andrea Eldritch
At 31 May 2012
Profit for the year
Share option
expense
Ordinary dividend
paid
At 31 May 2013
Equity share
capital
10 shares
000
Share
premium
Retained
earnings
Noncontrolling
interest
000
Total
000
Share
option
reserve
000
000
80,000
-
48,000
-
49,500
29,800
(6,960)
1,440
6,960
5,625
1,800
-
184,565
31,600
-
(4,000)
80,000
48,000
8,400
7,425
68,340
000
(4,000)
212,165
Exhibit 3 EPS calculation for year ended 31 May 2013 - prepared by Andrea Eldritch
The consolidated profit for the year ended 31 May 2013 is 31.6 million.
The weighted average number of 10 ordinary shares for the year is 8 million.
Therefore EPS is 3.95 pence per share.
ICAEW\J13
Page 5 of 15
QUESTION 2
You work in the finance department of Kare Ltd as a newly-appointed assistant to the finance
director, Jon Kildare. Kare has various activities in the private healthcare industry.
Background information
Kare is a UK-resident company incorporated in 2002 by the following consortium of corporate
shareholders.
% shareholding in
Kare
Country of
residence
SGF Inc.
30
Malaysia
Branmoor Ltd
70
UK
Explain the ways in which the tax losses for the year ended 31 March 2013 (Exhibit 1)
can be used within the current group structure.
In return for losses surrendered by Kare, its subsidiaries and shareholders have agreed
to pay to Kare an amount of cash equal to the additional tax they would otherwise have
paid. Calculate:
(i)
the maximum loss relief available to Kares subsidiaries and to the consortium
shareholders; and
(ii)
the amount of cash that would be paid to Kare by the subsidiaries and
shareholders in respect of losses surrendered to them.
The Kare board considers cash flow to be an important objective. However, it would also
like to reduce tax compliance time and costs. In light of these objectives, evaluate,
making appropriate recommendations, the proposals set out by your predecessor in his
handover notes (Exhibit 2).
Requirement
Prepare a working paper responding to the briefing from Jon Kildare.
(25 marks)
NOTE: Assume the RPI for January 2013 is 245.8
ICAEW\J13
Page 6 of 15
Exhibit 1 Kare and subsidiaries tax trading results and related issues for the year
ended 31 March 2013
Trading
profit / (loss)
Kare
MedServ
ResHomes
Goodhealth
HGH
000
(1,200.0)
(250.0)
415.8
(210.0)
48.0
Property income
000
326.2
-
Profits from
permanent
establishment in
Ruritan
000
160.0
-
Kare provides general services and rents accommodation to elderly residents. All supplies
made by Kare in the UK are standard rated for VAT purposes.
Kare also operates residential homes in Ruritan, an overseas tax jurisdiction, through a
permanent establishment. The tax rate on trading profits of permanent establishments in
Ruritan is 15%. The overseas permanent establishment was set up in February 2010 and is
controlled from the UK by Kare. There is no tax treaty between the UK and Ruritan and no
election has been made to exempt the profits of the permanent establishment. The business
in Ruritan is outside the scope of VAT in the UK.
MedServ provides medical services and its supplies are entirely exempt for VAT purposes.
ResHomes operates residential care homes for the elderly. ResHomes is a partially-exempt
business for VAT purposes. ResHomes sold a residential home for 745,600 in January
2013 which had cost 400,000 in February 2006.
Goodhealth imports a range of herbal medicines and sells goods from high street stores. It
has made losses for a number of years and has significant tax losses brought forward at
1 April 2012. Management expects to return Goodhealth to profit within two years. Its
supplies are all standard rated for VAT purposes.
On 1 December 2012, Goodhealth sold a warehouse for 390,000 which was surplus to its
requirements. The warehouse cost 480,000 in February 2004.
HGH supplies goods to residential care homes. It makes mostly zero rated supplies, but also
some standard rated supplies.
Exhibit 2 overleaf
ICAEW\J13
Page 7 of 15
ICAEW\J13
Page 8 of 15
QUESTION 3
You are Cary Maynard, an audit senior working for Gerrards LLP, a firm of ICAEW chartered
accountants and registered auditors. Gerrards has recently been appointed as auditor of
UniSel Ltd, following an introduction by Mary Flack, the finance director of another Gerrards
audit client, East Coast University (ECU). Gerrards first audit of UniSel is for the year ended
31 May 2013.
Your audit manager calls to give you some background information on UniSel and to explain
what he needs you to do:
Hi Cary,
I really need your help with the UniSel audit. We started our audit fieldwork last week but
Harry Lewis, who was leading our team, has broken his leg and will not be back at work for
some time.
UniSel was incorporated on 1 June 2011 by ECU and two other universities, South
University and North University, to exploit commercial opportunities arising from university
research. Each of the universities owns one-third of UniSels issued ordinary shares. The
company is too small to require an audit, but the shareholder agreement states that any
shareholder can request one. That request was made by ECU in June 2012 when Mary Flack
became concerned that the amounts invoiced by UniSel to ECU were consistently higher
than those invoiced to the other two university shareholders.
UniSel is managed on a day-to-day basis by an executive team led by Marco Nylor, chief
executive officer. Marco joined the company on its incorporation, from his previous post as
lead researcher at Smyth Laboratories (where he still retains the role of non-executive
director). He is a director of UniSel and is joined on the board by three other directors, each
representing a university shareholder. Marco has the casting vote in the event that any board
decision is tied. The UniSel director representing ECU has commented to Mary that Marco
appears to have a lot of influence in board decisions, as the directors from the other
universities tend to go along with his view.
As well as a basic salary, Marco will be awarded a bonus of 50,000 if UniSel exceeds its
budgeted revenue of 6 million. Based on the unaudited results for the year ended 31 May
2013, he can expect to receive this bonus. No provision has been made for this bonus as the
audit is not yet complete.
Just before his accident, Harry told me that progress on the audit was slow. The part-time
bookkeeper, Beatrice Bond, is helpful but she is inexperienced and knows little about the
companys operations. Marco has not been available much to answer our questions. Im
meeting Mary Flack this Friday to plan our audit of ECU and she has requested an update on
the UniSel audit. It is therefore important that as much of the audit as possible is completed
before Friday.
I have reviewed the audit working papers completed to date and have identified revenue as
one of the key outstanding areas, but I am also concerned about other financial reporting
issues. Im sending you Harrys memo on revenue (Exhibit 1), together with UniSels
summary financial statements (Exhibit 2).
Planning materiality for the audit has been set at 30,000.
ICAEW\J13
Page 9 of 15
As time is short, Im keen to meet you later today to determine what we need to do to
complete the UniSel audit. For this meeting, please prepare:
A document which explains the specific audit risks and potential financial reporting
issues you have identified;
In respect of revenue only, a summary of the audit procedures that you believe we
should perform in order to obtain sufficient assurance for the year ended 31 May 2013;
and
Notes assessing the ethical issues arising from the audit of UniSel and which explain
how we should respond to Marys request for an update on the progress of the UniSel
audit.
Requirement
Prepare the information requested by your audit manager.
(28 marks)
779
231
317
489
330
298
4,423
2,207
582
6,332
3,324
ICAEW\J13
Page 10 of 15
At this point, UniSel enters into a licence agreement with the university from whose research
the idea has been developed. Each licence agreement transfers to UniSel the right to exploit
the intellectual property (IP) concerned in return for a licence fee payable to the originating
university. This comprises 85% of all third-party cash received arising from that IP. Once a
licence agreement has been signed, UniSel bears any costs of further development, along
with all costs of marketing and administration. Thereafter, UniSel no longer charges time to
the university at a daily rate.
Marco Nylor has indicated that UniSels income from ECU is higher than that from the other
two shareholder universities, as ECUs researchers require more assistance in progressing
commercial propositions to the point where UniSels development committee is prepared to
enter into a licence agreement.
Licence and royalty income from third parties
Licence and royalty income from third parties represents the income generated from the IP
that UniSel has licensed. This can be in the form of licence fees or royalties.
Income from third parties has increased due to royalties from contracts entered into in the
prior year and a number of new contracts. Included in revenue for the year ended 31 May
2013 are:
- an upfront licence fee of 1 million in respect of a five-year contract with Hickman
Research for the licence of Galtonin (an innovative pain relief drug) signed on 1 June
2012. Should annual revenue from sales of Galtonin exceed 5 million in any of the
5 years to 31 May 2017, royalties of 4% on the excess sales will be payable to UniSel.
No such royalty income has been recognised in the year ended 31 May 2013.
- royalties of 650,000 from a contract signed in December 2011 with OZ Inc, a US
company, under which royalties are payable based on its sales of the licensed product
for each calendar year. Of the 650,000 recognised as revenue in the year ended
31 May 2013, 300,000 relates to the calendar year ended 31 December 2012. It was
received and recognised as revenue by UniSel in February 2013. The remaining
350,000 has been recognised as accrued income, based on projected sales figures
for the five months to 31 May 2013, supplied by OZ in January 2013.
Other income
Other income represents a new income stream for UniSel and comprises fees earned from
the provision of consultancy and support services to research institutions. Income is invoiced
monthly in arrears and is recognised when it is invoiced.
The other income recognised in the year ended 31 May 2013 includes:
- 200,000 from Hickman Research for time spent by Marco Nylor and other UniSel
staff working on Galtonin.
- 350,000 from Smyth Laboratories, for consultancy work performed by UniSel staff at
a daily rate of 300.
Exhibit 2 overleaf
ICAEW\J13
Page 11 of 15
Exhibit 2 UniSel - Summary financial statements for the year ended 31 May 2013
Statement of comprehensive income
Revenue
Costs:
- Royalties payable to shareholder universities
under licensing agreements
- Staff costs
- Other costs
6,332
3,324
(3,760)
(1,576)
(849)
(1,876)
(727)
(719)
147
Non-current assets
- Property, plant and equipment
183
223
Current assets
- Trade and other receivables
- Accrued income
- Cash and bank balances
960
950
128
290
951
2,221
1,464
Current liabilities
- Trade and other payables
- Deferred revenue
- Amounts due to shareholder universities
341
50
781
196
366
Equity
- Share capital ordinary 1 shares
- Retained earnings
900
149
900
2
2,221
1,464
Total assets
ICAEW\J13
Page 12 of 15
QUESTION 4
Stoghopper plc manufactures machine tools for use by companies operating in the
construction and mining industries. You are a senior working for Trot, Canter and Gallop LLP
(TCG), a firm of ICAEW chartered accountants and registered auditors.
TCG is currently engaged in the audit of Stoghopper for the financial year ended
30 June 2013. Whilst not initially allocated to the Stoghopper audit, you and some colleagues
were reassigned to this client last week to replace a number of the original audit staff, who
were injured in a road traffic accident.
Engagement managers briefing
The engagement manager called you to a meeting: I realise that you have only just joined
the Stoghopper audit, so I have provided some background notes about the company
(Exhibit 1). Stoghopper has begun to establish overseas operations in Thailand in the past
year. Nancy Noonan was carrying out the audit procedures relating to this new activity, but
unfortunately she was in the car accident, so we cannot speak to her. I will, however, make
her working papers available to you (Exhibit 2).
For each of the three issues raised by Nancy (Exhibit 2), I would like you to:
set out and explain the appropriate financial reporting treatment in the financial
statements of Stoghopper for the year ended 30 June 2013; and
prepare notes describing the audit risks and related audit procedures. I do not want
general audit risks, so please focus on each of the three issues.
ICAEW\J13
Page 13 of 15
ICAEW\J13
50.0
52.0
54.5
55.0
55.5
52.5
baht = 1
baht = 1
baht = 1
baht = 1
baht = 1
baht = 1
Page 14 of 15
ICAEW\J13
Page 15 of 15