1

INSTITUTE OF FINANCIAL ACCOUNTANTS

JANUARY 2011 EXAMINATION

P1. Financial Accounting and IFRS for SMEs

Instructions to candidates

1. Time allowed is 3 hours and 10 minutes, which includes 10

minutes reading time.

2. This is a closed book examination.

3. Use of a silent, non-programmable calculator, which is NOT part

of a mobile phone or any other device capable of
communication, is allowed.
4. Put your candidate number on the top of each answer page.

5. Start each new question on a new page.

6. Include any workings.

Answer ALL questions:

Part A: all questions are worth 10 marks

Part B: all questions are worth 20 marks

Part C: question worth 30 marks

©IFA Financial Accounting and IFRS for SMEs January 2011

 2

Part A
Answer ALL questions
Question 1
(a) Section 2.8 of the IFRS for SMEs states “Transactions and other
events and conditions should be accounted for and presented in
accordance with their substance and not merely their legal
form”.

Required:

Briefly discuss the above statement giving two examples where

substance over form takes precedence over the legal position.
(6 marks)

(b) Briefly describe two other qualitative characteristics of

information in financial statements.
(4 marks)

(Total 10
marks)

©IFA Financial Accounting and IFRS for SMEs January 2011

 3

Question 2

(a) Your organisation issued a bond for $100,000 on 1 January 2010.

Under the terms of the bond interest of 3% per annum is paid
annually in arrears over the next five years after which the bond
will be mandatorily redeemed at $123,000. The effective
interest rate on the bond is 7%. The organisation’s year-end is 31
December.

Required:

Calculate the finance income to be shown in the statement of

comprehensive income for years ending 31 December 2010, 2011 and
2012. (5 marks)

(b) On 1 July 2010 the organisation entered into a finance lease for
a piece of machinery costing $36,000. The organisation has the
“risks and rewards incidental to ownership” for the machinery.
The rate implicit in the lease is 5% per annum and the lease
payments are in arrears.

Required:

Prepare the journal entries to record the above transaction for the year
ended 31 December 2010.
(3 marks)

(c) On 31 July 2010 the organisation entered into an operating lease

to acquire a machine costing $500 per month for the year to 31
July 2011.

Required:

Record the above transaction for the year ended 31 December 2010.
(2 marks)

©IFA Financial Accounting and IFRS for SMEs January 2011

 4

(Total 10
marks)

Question 3

Over many years there has been a debate about whether small and
medium sized entities should be audited. Companies in this group are
often owned and managed by the same people so it could be argued
that few if any stakeholders receive any benefit from an audit.

Required:

Discuss the arguments for and against maintaining the small company
audit identifying four user groups.

(Total 10
marks)

©IFA Financial Accounting and IFRS for SMEs January 2011

 5

Part B
Answer ALL questions

Question 4
You have just produced Rome Co’s statement of financial position at 31
December 2010 and statement of comprehensive income for the year
ended 31 December 2010.

Statement of comprehensive income for the year ended 31

December 2010

$’000

Revenue 1,383

Cost of sales (1,111

)

Gross profit 272

Investment income 13

Administrative expenses (30)

Distribution costs (57)

Operating profit 198

Finance costs (16)

Profit before tax 182

Income tax expense (56)

Profit/Total comprehensive income for the year 126

©IFA Financial Accounting and IFRS for SMEs January 2011

 6

Statements of financial positions

2010 2009

$’000 $’000

Non-current assets 930 716

Current assets

Inventories 164 144

Trade and other receivables 138 142

Bank 54 108

356 394

Total assets 1,286 1,110

Equity

Share capital $1 shares 300 200

Share premium 46 30

Retained earnings 517 423

863 653

Non-current liabilities

Loan stock 120 250

Current liabilities

Trade payables 180 102

©IFA Financial Accounting and IFRS for SMEs January 2011

 7

Accruals 55 65

Income tax 68 40

303 207

Total equity and liabilities 1286 1,110

The following information is also available with respect to the year in

question:

• Non-current assets with a net book value of $30,000 were

disposed of resulting in a loss of $18,000.

• The depreciation charge for the year was $118,000.

• Dividends paid during the year amounted to $32,000.

• Included within accruals at 31 December 2010 is interest of

$5,000, (2009 $6,000).

Required:

(a) Prepare a statement of cash flows as per section 7 of the IFRS for
SMEs using the indirect method for the year ended 31 December
2010. (15 marks)

(b) Briefly explain the information produced in the statement of cash

flows.
(5 marks)

(Total 20
marks)

©IFA Financial Accounting and IFRS for SMEs January 2011

 8

Question 5

Murray Co is an exploration company that has been experiencing

difficult times with its American operations. It decided to close those
operations in November 2010. Murray Co’s trial balance at 31
December 2010 is as follows:

$’000 $’000
Ordinary shares 12,000
10% Redeemable 2014 preference 9,600
shares
Retained earnings 12,825
Land and buildings at cost 50,000
Buildings – depreciation at 1 January 3,500
2010
Plant and machinery at cost 33,000
Plant & machinery – depreciation at 1 8,250
January 2010
Investment Property 3,000
Income tax 708
Deferred tax 2,304
Trade payables 11,620
Inventories at 31 December 2010 8,920
Trade receivables 10,460
Bank 7,600
Revenue 107,588
Property investment income 400
Cost of sales 53,251
Net book value of plant and machinery 4
sold
Administrative expenses 8,880
Distribution costs 7,800
Ordinary dividend paid 600
Preference dividend paid 480

©IFA Financial Accounting and IFRS for SMEs January 2011

 9

176,395 176,395
The following information is also available:

Non-current assets:

• The building element included in land and buildings was

$35,000,000.
• Buildings are depreciated at 2% per annum, which is
charged to administrative expenses.
• Plant and machinery has been sold for $5,000 with the
proceeds being included in revenue. The net book value of
this plant and machinery sold is shown separately in the
above trial balance.
• Plant and machinery is to be depreciated at 20% on the
reducing balance method and charged to cost of sales. No
deprecation is to be charged in the year of disposal.
Income tax

• The income tax balance on the trial balance is an

under/over provision of the 2009 provision.
• The income tax for 2010 is estimated to be $10,000,000

Deferred taxation

• During 2010 Murray’s temporary timing differences

increased by $8,400,000. This increase should be included
in the income statement. The tax rate applicable is 30%.

Discontinued operations

• On 1 November 2010 the Directors decided to close down

its American operations. The figures for the year relevant
to this operation were as follows:

$’000
Revenue 2,300
Cost of sales 1,510
Administrative costs 980
Net assets sold (included in cost of sales) 690

Investment property

©IFA Financial Accounting and IFRS for SMEs January 2011

 10

Murray has owned an investment property, which has fallen in value

during 2010 by 10%. Section 16.7 of the IFRS for SMEs states that “a
property can be relavalued at fair value at the reporting date if the
valuation can be acquired without undue cost or effort”. This was the
case for Murray.

Required:

Prepare for Murray a statement of comprehensive income for the year

ended 31 December 2010 and statement of financial position at that
date
(Total 20 marks)

Part C

Question 6

Helsinki Co acquired 3,360,000 of the ordinary shares of S Co on 31

December 2006 for $5,760,000 when the retained earnings were
$1,150,000. On 31 December 2007 Helsinki Co also acquired
1,200,000 of the ordinary shares in A Co for $2,880,000 when the
retained profits were $856,000.

The statements of financial position for the companies at 31 December

2010 were as follows:

Helsinki S Co A Co
$’000 $’000 $’000
Non-current assets
Property 11,232 7,200 2,880
Other non-current assets 4,580 2,160 1,640
Investments 8,640
24,452 9,360 4,520
Current assets
Inventories 3,312 1,628 1,526
Receivables 1,900 1,670 2,131
Bank 288 692 117
5,500 3,990 3,774
Total assets 29,952 13,350 8,294
Equity and liabilities
Ordinary $1 shares 11,520 5,600 4,000

©IFA Financial Accounting and IFRS for SMEs January 2011

 11

Retained earnings 8,410 5,158 2,566

19,930 10,758 6,566
Non-current liabilities
10% Loan notes 2,880 576 -

Current liabilities
Payables 3,916 2,016 1,728
Bank overdraft 3,226
7,142 2,016 1,728
29,952 13,350 8,294

The following information is also available:

• The goodwill of S Co is to be written off over 5 years. An

impairment loss of $1,500,000 is to be written off A Co.

• When S was acquired the fair value of its property was

$2,000,000 greater than its book value. This revaluation
has not been included in the accounting records of S. The
building element was 60% of the total cost and is
depreciated at 2% per annum on a straight-line basis.

Required:

(a) Prepare a statement of financial position for Helsinki Co at 31

December 2010.
(26 marks)

(b) Helsinki are planning to enter into a joint ownership project.

Describe how joint ownership would be recognised in Helsinki’s
financial statements.
(4 marks)

(Total 30
marks)

©IFA Financial Accounting and IFRS for SMEs January 2011