DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO.
Financial Pillar
Friday 2 March 2012 Instructions to candidates You are allowed three hours to answer this question paper. You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlight and/or make notes on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or subquestions). ALL answers must be written in the answer book. Answers written on the question paper will not be submitted for marking. You should show all workings as marks are available for the method you use. ALL QUESTIONS ARE COMPULSORY. Section A comprises 5 questions and is on pages 2 to 5. Section B comprises 2 questions and is on pages 6 to 9. Maths tables and formulae are provided on pages 11 to 13. The list of verbs as published in the syllabus is given for reference on page 15. Write your candidate number, the paper number and examination subject title in the spaces provided on the front of the answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close. Tick the appropriate boxes on the front of the answer book to indicate the questions you have answered.
The Chartered Institute of Management Accountants 2011
F2 – Financial Management
F2 – Financial Management
SECTION A – 50 MARKS [You are advised to spend no longer than 18 minutes on each question in this section.]
ANSWER ALL FIVE QUESTIONS IN THIS SECTION
Question One KOL granted share options to all of its 400 employees on 1 January 2010. Each employee will receive 1,000 share options provided they continue to be employed by KOL for four years from the grant date. The fair value of an option at the grant date was $2.20. On the same date KOL granted 500 share appreciation rights to each of its employees. To be eligible, employees again have to be employed by KOL for four years from the grant date. The rights are exercisable in the two-month period from 1 January 2014 and will be settled in cash. The fair value of each share appreciation right was $12 at 31 December 2010 and $14 at 31 December 2011. The actual and expected future staff movements as at 31 December 2010 and 31 December 2011 are provided below. 2010 15 left and another 55 were expected to leave over the next three years. 2011 a further 22 left and another 36 were expected to leave over the next two years.
Required: (a)
(b)
Prepare, in accordance with IFRS 2 Share-based Payment, the accounting entries required in the financial statements of KOL for the year to 31 December 2011 in respect of the two financial instruments identified above. (6 marks) Explain the main principle of recognition set out by IFRS 2 Share-based Payment for share based payments AND why the treatment of the two financial instruments identified above will differ in the statement of financial position. (4 marks) (Total for Question One = 10 marks)
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Question Two The income statements for HM and OS for the year ended 31 December 2011 are shown below. HM OS A$000 Crowns 000 Revenue 5,200 4,500 Cost of sales (3,200) (3,000) Gross profit 2,000 1,500 Distribution costs (800) (420) Administrative expenses (450) (450) Other income 80 Profit before tax 830 630 Income tax expense (250) (180) Profit for the year 580 450 Additional information 1.
HM acquired 80% of the ordinary share capital of a foreign entity, OS, on 1 January 2011 for Crowns 13,984,000. At the date of acquisition the net assets of OS had a fair value of Crowns 15,800,000. The group policy is to value non-controlling interest at fair value at the date of acquisition. The fair value of the non-controlling interest at the date of acquisition was Crowns 3,496,000. The fair value adjustments related to nondepreciable land. At 31 December 2011 the goodwill that arose on the acquisition of OS was impaired by 20%. Impairment is translated at the average rate and is charged to group administrative expenses.
2.
The relevant exchange rates were as follows: 1 January 2011
A$/Crowns 1.61 (A$1 = Crowns 1.61)
31 December 2011
A$/Crowns 1.52 (A$1 = Crowns 1.52)
Average rate for 2011
A$/Crowns 1.58 (A$1 = Crowns 1.58)
Required: (a)
Calculate the translation gain or loss for the HM Group for the year ended 31 December 2011. (5 marks)
(b)
Prepare the consolidated statement of comprehensive income for the HM Group for the year ended 31 December 2011. (5 marks) (Total for Question Two = 10 marks)
TURN OVER
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Question Three The Global Reporting Initiative (“GRI�) is an organisation set up in 1997, to develop a sustainability reporting framework for businesses. To this end a number of versions of Sustainability Reporting Guidelines have been issued. The GRI Sustainability Reporting Guidelines gives guidance to entities on how to measure and report on managements’ approach to the economic, environmental and social aspects that impact on their businesses.
Required: (a)
Discuss the benefits to investors of entities preparing disclosures that follow the GRI guidelines on reporting. (4 marks)
(b)
Explain the nature of the information that could be disclosed by entities in their external reports in respect of the economic, environmental and social aspects that impact on their businesses, in order to comply with the GRI guidelines. (6 marks) (Total for Question Three = 10 marks)
Question Four BN issued $6 million 7% convertible bonds on 1 January 2011 at par. The bonds are redeemable at par on 31 December 2014 or convertible at that date on the basis of two $1 ordinary shares for every nominal $10 of bonds. At the date of issue the prevailing market rate for similar debt without conversion rights was 9%. The interest due was paid on 31 December 2011 and recorded within finance costs during the year.
Required: (a)
Explain how convertible instruments are initially recognised, in accordance with IAS 32 Financial Instruments: Presentation, and prepare the journal entry to record the issue of the bonds by BN. (5 marks)
(b) (i) Explain how the bonds will be subsequently measured, in accordance with IAS 39 Financial Instruments: Recognition and Measurement, and prepare the journal entry to record the subsequent measurement of the bonds in the financial statements of BN for the year to 31 December 2011. (ii) Prepare extracts that illustrate how the bonds will be presented in the statement of financial position of BN as at 31 December 2011. (5 marks) (Total for Question Four = 10 marks)
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Question Five A quote from a colleague: “I never look at the operating segment information in a set of financial statements when I am making investment decisions – it’s just lots and lots of numbers I won’t understand. It must cost entities a significant amount of money to produce the information, which must outweigh the benefits it provides.”
Required: (a) Discuss the benefits that could be gained by investors from reviewing the operating segment disclosures when making future decisions on investment. (5 marks)
(b) Discuss the limitations of using operating segment information when making investment decisions. (3 marks)
(c) Discuss how the requirements of IFRS 8 Operating Segments assist entities in minimising the costs of producing these disclosures. (2 marks) (Total for Question Five = 10 marks)
(Total for Section A = 50 marks)
End of Section A Section B starts on page 6
TURN OVER
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Financial Management
SECTION B – 50 MARKS [You are advised to spend no longer than 45 minutes on each question in this section.]
ANSWER BOTH QUESTIONS IN THIS SECTION – 25 MARKS EACH
Question Six The statements of financial position for ST and UV as at 31 December 2011 are provided below: ST UV ASSETS $000 $000 Non-current assets Property, plant and equipment 2,760 1,000 Available for sale investment 1,190 3,950 1,000 Current assets Inventories 550 200 Receivables 850 225 Cash and cash equivalents 200 75 1,600 500 Total assets
5,550
1,500
EQUITY AND LIABILITIES Equity Share capital ($1 equity shares) Retained earnings Other reserves Total equity
2,500 1,785 90 4,375
250 1,000 1,250
Non-current liabilities Long term borrowings Current liabilities Total liabilities
675 500 1,175
250 250
Total equity and liabilities
5,550
1,500
Additional information: 1.
ST acquired 80% of the ordinary shares of UV on 1 May 2008 for $1,100,000. The investment is classified as available for sale in the books of ST. The gains recognised on the subsequent measurement of the investment to 31 December 2011 have been recorded within other reserves in ST’s financial statements. At the date of acquisition UV had retained earnings of $360,000. Goodwill that arose on the acquisition of UV was impaired by 20% in the year to 31 December 2009.
2.
At the date of acquisition the fair value of the net assets of UV was the same as the book value with the exception of property, plant and equipment. The fair value of the property, plant and equipment was $240,000 higher than the book value and had an estimated useful life of 10 years from the date of acquisition. Depreciation is charged on a monthly basis.
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3.
It is the group policy to value non-controlling interest at its proportionate share of net assets at the date of acquisition.
4.
On 1 October 2011 ST disposed of 20,000 $1 ordinary shares of UV for $115,000. The proceeds were debited to cash and credited to retained earnings.
5.
The profit of UV for the year ended 31 December 2011 was $220,000. Profits are assumed to accrue evenly throughout the year.
6.
UV purchased goods from ST in November 2011 for $80,000, half of which remain in UV’s inventories at 31 December 2011. ST earns a 25% profit margin on all items sold.
Required: (a)
Explain how the disposal of shares in UV should be accounted for in the consolidated financial statements of ST for the year to 31 December 2011. (3 marks)
(b)
Prepare the consolidated statement of financial position for the ST group as at 31 December 2011. (22 marks) (Total for Question Six = 25 marks)
Section B continues on the next page
TURN OVER
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Question Seven SDF, a listed entity, operates a number of bottling plants. The entity’s business consists primarily of contract work for regular customers. Revenue from existing contracts has increased in the year and in November 2010 SDF secured a new contract with a high profile drinks company. SDF paid a dividend of $100 million during the year ended 31 October 2011. A colleague of yours recently received the latest published financial statements of SDF and was impressed by the level of profitability and the dividend paid. He was also impressed with the fact that the share price had increased from $2.80 per share on 31 October 2010 to $4.90 on 31 October 2011. Your colleague is now considering acquiring some of SDF’s shares and has asked for your advice. The statements of financial position for SDF as at 31 October are shown below: 2011 $m
2010 $m
381 56 437
346 346
86 72 3 161 598
40 48 60 148 494
150 50 265 465
150 50 223 423
38
5
Current liabilities Trade and other payables
95
66
Total liabilities Total equity and liabilities
133 598
71 494
ASSETS Non-current assets Property, plant and equipment Investment in associate (Note 1) Current assets Inventories Receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity Share capital (50 cent shares) Share premium Retained reserves Total equity Non-current liabilities Pension liability (Note 2)
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The statements of comprehensive income for SDF for the year ended 31 October are shown below: 2011 2010 $m $m Revenue 663 463 Cost of sales (395) (315) Gross profit 268 148 Distribution costs (27) (20) Administrative expenses (28) (17) Share of profit of associate (note 1) 7 Investment income 1 6 Profit before tax 221 117 Income tax expense (45) (24) Profit for the year 176 93 Other comprehensive income: Actuarial loss on pension assets and liabilities (Note 2) (48) (10) Tax effect of other comprehensive income 14 2 Other comprehensive income for the year, net of tax (34) (8) Total comprehensive income 142 85 Additional information: 1.
Investment in associate SDF acquired 40% of AB, its associate investment on 1 April 2011 for $49 million.
2.
Pension liability The actuary has provided the valuations of pension assets and liabilities as at 31 October 2011 in the financial statements. However, as yet the actuary has not informed SDF of the contribution level required for the year to 31 October 2012.
3.
Contingent liability The notes to the financial statements include details of a contingent liability of $10 million. On 5 October 2011, SDF suffered a chemical leak at one of the bottling plants and there is currently an investigation into the potential damage this caused to a nearby river and surrounding area. The investigation is at an early stage and it is not yet clear whether SDF was negligent. As stated in the notes to the financial statements SDF’s lawyers have intimated that, in their opinion, SDF is likely to lose the case, although the amount of potential damages could not be measured with sufficient reliability at the year-end and hence no obligation has been recorded.
Required: (a)
(b)
Analyse the financial performance of SDF for the year to 31 October 2011 and its financial position at that date and discuss whether or not it is a good investment at this time (8 marks are available for the calculation of relevant ratios). (21 marks) Discuss what further information your client may want to access regarding the contingent liability in advance of making a final investment decision. (4 marks) (Total for Question Seven = 25 marks) (Total for Section B = 50 marks)
End of Question Paper Maths Tables and Formulae are on pages 11 to 13 March 2012
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MATHS TABLES AND FORMULAE Present value table -n
Present value of $1, that is (1 + r) where r = interest rate; n = number of periods until payment or receipt. Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
1% 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 0.896 0.887 0.879 0.870 0.861 0.853 0.844 0.836 0.828 0.820
2% 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673
3% 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554
4% 0.962 0.925 0.889 0.855 0.822 0.790 0.760 0.731 0.703 0.676 0.650 0.625 0.601 0.577 0.555 0.534 0.513 0.494 0.475 0.456
Interest rates (r) 5% 6% 0.952 0.943 0.907 0.890 0.864 0.840 0.823 0.792 0.784 0.747 0.746 0.705 0.711 0.665 0.677 0.627 0.645 0.592 0.614 0.558 0.585 0.527 0.557 0.497 0.530 0.469 0.505 0.442 0.481 0.417 0.458 0.394 0.436 0.371 0.416 0.350 0.396 0.331 0.377 0.312
7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 0.339 0.317 0.296 0.277 0.258
8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215
9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178
10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149
Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
11% 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286 0.258 0.232 0.209 0.188 0.170 0.153 0.138 0.124
12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104
13% 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087
14% 0.877 0.769 0.675 0.592 0.519 0.456 0.400 0.351 0.308 0.270 0.237 0.208 0.182 0.160 0.140 0.123 0.108 0.095 0.083 0.073
Interest rates (r) 15% 16% 0.870 0.862 0.756 0.743 0.658 0.641 0.572 0.552 0.497 0.476 0.432 0.410 0.376 0.354 0.327 0.305 0.284 0.263 0.247 0.227 0.215 0.195 0.187 0.168 0.163 0.145 0.141 0.125 0.123 0.108 0.107 0.093 0.093 0.080 0.081 0.069 0.070 0.060 0.061 0.051
17% 0.855 0.731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.043
18% 0.847 0.718 0.609 0.516 0.437 0.370 0.314 0.266 0.225 0.191 0.162 0.137 0.116 0.099 0.084 0.071 0.060 0.051 0.043 0.037
19% 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.079 0.062 0.052 0.044 0.037 0.031
20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 0.112 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026
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Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n years Periods (n) 1 2 3 4 5
1− (1+ r ) − n r
1% 0.990 1.970 2.941 3.902 4.853
2% 0.980 1.942 2.884 3.808 4.713
3% 0.971 1.913 2.829 3.717 4.580
4% 0.962 1.886 2.775 3.630 4.452
Interest rates (r) 5% 6% 0.952 0.943 1.859 1.833 2.723 2.673 3.546 3.465 4.329 4.212
7% 0.935 1.808 2.624 3.387 4.100
8% 0.926 1.783 2.577 3.312 3.993
9% 0.917 1.759 2.531 3.240 3.890
10% 0.909 1.736 2.487 3.170 3.791
6 7 8 9 10
5.795 6.728 7.652 8.566 9.471
5.601 6.472 7.325 8.162 8.983
5.417 6.230 7.020 7.786 8.530
5.242 6.002 6.733 7.435 8.111
5.076 5.786 6.463 7.108 7.722
4.917 5.582 6.210 6.802 7.360
4.767 5.389 5.971 6.515 7.024
4.623 5.206 5.747 6.247 6.710
4.486 5.033 5.535 5.995 6.418
4.355 4.868 5.335 5.759 6.145
11 12 13 14 15
10.368 11.255 12.134 13.004 13.865
9.787 10.575 11.348 12.106 12.849
9.253 9.954 10.635 11.296 11.938
8.760 9.385 9.986 10.563 11.118
8.306 8.863 9.394 9.899 10.380
7.887 8.384 8.853 9.295 9.712
7.499 7.943 8.358 8.745 9.108
7.139 7.536 7.904 8.244 8.559
6.805 7.161 7.487 7.786 8.061
6.495 6.814 7.103 7.367 7.606
16 17 18 19 20
14.718 15.562 16.398 17.226 18.046
13.578 14.292 14.992 15.679 16.351
12.561 13.166 13.754 14.324 14.878
11.652 12.166 12.659 13.134 13.590
10.838 11.274 11.690 12.085 12.462
10.106 10.477 10.828 11.158 11.470
9.447 9.763 10.059 10.336 10.594
8.851 9.122 9.372 9.604 9.818
8.313 8.544 8.756 8.950 9.129
7.824 8.022 8.201 8.365 8.514
11% 0.901 1.713 2.444 3.102 3.696
12% 0.893 1.690 2.402 3.037 3.605
13% 0.885 1.668 2.361 2.974 3.517
14% 0.877 1.647 2.322 2.914 3.433
Interest rates (r) 15% 16% 0.870 0.862 1.626 1.605 2.283 2.246 2.855 2.798 3.352 3.274
17% 0.855 1.585 2.210 2.743 3.199
18% 0.847 1.566 2.174 2.690 3.127
19% 0.840 1.547 2.140 2.639 3.058
20% 0.833 1.528 2.106 2.589 2.991
6 7 8 9 10
4.231 4.712 5.146 5.537 5.889
4.111 4.564 4.968 5.328 5.650
3.998 4.423 4.799 5.132 5.426
3.889 4.288 4.639 4.946 5.216
3.784 4.160 4.487 4.772 5.019
3.685 4.039 4.344 4.607 4.833
3.589 3.922 4.207 4.451 4.659
3.498 3.812 4.078 4.303 4.494
3.410 3.706 3.954 4.163 4.339
3.326 3.605 3.837 4.031 4.192
11 12 13 14 15
6.207 6.492 6.750 6.982 7.191
5.938 6.194 6.424 6.628 6.811
5.687 5.918 6.122 6.302 6.462
5.453 5.660 5.842 6.002 6.142
5.234 5.421 5.583 5.724 5.847
5.029 5.197 5.342 5.468 5.575
4.836 4.988 5.118 5.229 5.324
4.656 7.793 4.910 5.008 5.092
4.486 4.611 4.715 4.802 4.876
4.327 4.439 4.533 4.611 4.675
16 17 18 19 20
7.379 7.549 7.702 7.839 7.963
6.974 7.120 7.250 7.366 7.469
6.604 6.729 6.840 6.938 7.025
6.265 6.373 6.467 6.550 6.623
5.954 6.047 6.128 6.198 6.259
5.668 5.749 5.818 5.877 5.929
5.405 5.475 5.534 5.584 5.628
5.162 5.222 5.273 5.316 5.353
4.938 4.990 5.033 5.070 5.101
4.730 4.775 4.812 4.843 4.870
Periods (n) 1 2 3 4 5
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FORMULAE Annuity Present value of an annuity of $1 per annum receivable or payable for n years, commencing in one year, discounted at r% per annum:
PV =
1 1 1 − r [1 + r ]n
Perpetuity Present value of $1 per annum receivable or payable in perpetuity, commencing in one year, discounted at r% per annum: PV =
1 r
Growing Perpetuity Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a constant rate of g% per annum, discounted at r% per annum: PV =
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1 r −g
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LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for each question in this paper. It is important that you answer the question according to the definition of the verb. LEARNING OBJECTIVE Level 1 - KNOWLEDGE What you are expected to know.
Level 2 - COMPREHENSION What you are expected to understand.
VERBS USED
DEFINITION
List State Define
Make a list of Express, fully or clearly, the details/facts of Give the exact meaning of
Describe Distinguish Explain
Communicate the key features Highlight the differences between Make clear or intelligible/State the meaning or purpose of Recognise, establish or select after consideration Use an example to describe or explain something
Identify Illustrate Level 3 - APPLICATION How you are expected to apply your knowledge.
Apply Calculate Demonstrate Prepare Reconcile Solve Tabulate
Level 4 - ANALYSIS How are you expected to analyse the detail of what you have learned.
Level 5 - EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations.
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Analyse Categorise Compare and contrast
Put to practical use Ascertain or reckon mathematically Prove with certainty or to exhibit by practical means Make or get ready for use Make or prove consistent/compatible Find an answer to Arrange in a table
Construct Discuss Interpret Prioritise Produce
Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between Build up or compile Examine in detail by argument Translate into intelligible or familiar terms Place in order of priority or sequence for action Create or bring into existence
Advise Evaluate Recommend
Counsel, inform or notify Appraise or assess the value of Advise on a course of action
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Financial Pillar
Management Level Paper
F2 – Financial Management
March 2012
Friday Session
March 2012
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Financial Management