Professional Stage Financial Accounting June 2009

PROFESSIONAL STAGE FINANCIAL ACCOUNTING OT EXAMINERS COMMENTS

The performance of candidates in the June 2009 objective test questions section for the Professional Stage
Financial Accounting paper was good. Candidates performed well across all syllabus areas.
When practising OT items, care should always be taken to ensure that the principles underlying any particular
item are understood rather than the answer learned from previous experience. In particular, candidates should
ensure that they read all items very carefully.
The following table summarises how well* candidates answered each syllabus content area.
Syllabus area

Number of questions

Well answered

Poorly answered

LO1

LO2

LO3

Total

15

13

*If 50% or more of the candidates gave the correct answer, then the question was classified as well answered.
Both poorly answered questions were on LO3 (the preparation of consolidated financial statements). Comments
on these two items are:
Item 1
This item required candidates to calculate the profit from discontinued operations, for disclosure in a
consolidated income statement, in respect of a subsidiary disposed of during the year. The correct figure was
made up of the subsidiarys profit for the year up to disposal and the parent companys profit on disposal of the
shares held in the subsidiary. A significant number of candidates omitted to include the former figure in their
calculation.
Item 2
This item required candidates to calculate the amount to be shown as trade payables in a consolidated
statement of financial position. To arrive at the correct figure candidates needed to adjust for cash-in-transit in
the books of the receiving company, and then cancel the intra-group balances. A significant number of
candidates failed to recognise that the balance in the paying companys books would already reflect the cash-intransit.

The Institute of Chartered Accountants in England and Wales 2009

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Professional Stage Financial Accounting June 2009

MARK PLAN AND EXAMINERS COMMENTARY

The mark plan set out below is that to be used to mark these questions. Markers are encouraged to use
discretion and to award partial marks where a point was either not explained fully or made by implication. More
marks are available than could be awarded for each requirement, where indicated. This allows credit to be given
for a variety of valid points, which are made by candidates. The answers provided are more comprehensive
than would be possible in the time available from pass standard candidates. They have been prepared to
accommodate a wide range of possible answers and interpretations by candidates.

Question 1
General comments
This question tested the preparation of an income statement and statement of financial position from a trial
balance plus a number of adjustments. Matters to be adjusted for included an increase in a bad debt
allowance, closing inventories, development costs, an asset classified as held for sale, annual
depreciation charges, a preference dividend declared and the income tax charge for the year.

Larch plc
Income statement for the year ended 31 March 2009

3,301,700
(2,162,685)
1,139,015
(229,100)
(903,900)
6,015
(10,500)
(4,485)

Revenue
Cost of sales (W1)
Gross profit
Distribution costs (W1)
Administrative expenses (W1)
Profit before tax
Income tax expense
Loss for the period

Statement of financial position as at 31 March 2009

Assets
Non-current assets
Property, plant and equipment
Intangibles (W3)
Current assets
Inventories
Trade and other receivables (869,200 35,000)
Cash and cash equivalents
Non-current asset held for sale (W6)
Total assets

The Institute of Chartered Accountants in England and Wales 2009

2,357,940
16,225
2,374,165
37,850
834,200
120
872,170
79,700
951,870
3,326,035

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Professional Stage Financial Accounting June 2009

Equity and liabilities

Equity
Ordinary share capital
Preference share capital (irredeemable)
Share premium
Retained earnings (W4)

1,000,000
500,000
650,000
569,035
2,719,035

Current liabilities
Trade and other payables
Taxation
Dividends payable (W4)
Borrowings

557,900
10,500
25,000
13,600
607,000
3,326,035

Total equity and liabilities

Workings
(1) Allocation of expenses
Cost of sales

Per Q
Movement on bad debt allowance (35,000
25,000)
Opening inventories
Project X costs (53,100 x 6/9)
Amortisation of development costs (W3)
Closing inventories
Depreciation land (72,000 x 80%/20%)
Depreciation plant
Impairment charge (W5)

1,345,600
536,700

Administrative
expenses

Distribution
costs

879,500

156,400

10,000
45,600
35,400
1,475
(37,850)
57,600
167,860
10,300
2,162,685

903,900

229,100

Land and
buildings

Plant and
equipment

Total

5,600,000
(3,456,000)
(72,000)
2,072,000

914,300
(150,000)
(370,500)
70,300
(178,160)
285,940

72,700

14,400

(2) Property, plant and equipment

Cost b/f
Machine held for sale
Acc dep b/f
Eliminated on machine held for sale (W6)
Depreciation/impairment charges for year (W5)
(3) Development costs carried forward
Materials, labour and consumables (53,100 x 3/9)
Amortisation (x 3/36)
C/f at 31 March 2009

The Institute of Chartered Accountants in England and Wales 2009

2,357,940

17,700
(1,475)
16,225

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Professional Stage Financial Accounting June 2009

(4) Retained earnings

At 1 April 2008
Preference dividend (500,000 x 5%)
Loss for the period
At 31 March 2009

598,520
(25,000)
(4,485)
569,035

(5) Depreciation and impairment charges

Buildings (3,600,000 50)

Plant held throughout year ((914,300 150,000) 5)

On plant held for sale (150,000 5 x 6/12)
Impairment loss on plant held for sale (W7)

72,000

152,860
15,000
167,860
10,300
178,160

(6) Plant held for sale

Cost
Acc dep to 30 September 2008 (150,000 5 x 2)
Carrying amount at classification as held for sale
Fair value less costs to sell (80,000 300)
Impairment
Total eliminated on plant held for sale (60,000 + 10,300)

150,000
(60,000)
90,000
(79,700)
10,300
70,300

Tutorial note
Marks were also awarded if the impairment was shown separately on the face of the income statement
(instead of within cost of sales) on the grounds that without this the loss for the period would have been a
profit.

The Institute of Chartered Accountants in England and Wales 2009

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Professional Stage Financial Accounting June 2009

As in previous sittings, candidates were clearly very well-prepared for this type of question. Almost all
candidates produced a well-laid out income statement with all narrative and sub-totals completed.
Presentation of the statement of financial position was more varied. Many candidates lost presentation
marks by not adding across numbers in brackets or failing to complete sub-totals and/or totals on their
statements or by having incomplete or abbreviated narrative. Candidates should remember that this type of
question requires financial statements to be in a form suitable for publication.
Although many workings, in particular the cost matrix and property, plant and equipment working, were
clearly laid out some candidates workings were disorganised, untidy and therefore hard to follow, making it
difficult to establish candidates approaches where they had not calculated the correct figure.
Most candidates were able to deal with the more straightforward adjustments such as the increase in the
bad debt provision, the preference dividend, the income tax charge/liability and the basic annual
depreciation charges. Most correctly classified the irredeemable preference shares as equity but not all
treated the dividends as such, instead including them as a finance cost.
Most candidates made a good attempt at the property, plant and equipment calculations, remembering to
reduce both cost and accumulated depreciation by the asset classified as held for sale. The majority of
candidates also arrived at the correct figure for the impairment on the asset classified as held for sale
although a few calculated accumulated depreciation incorrectly. However, not all candidates who arrived at
an impairment loss then charged this loss to the income statement.
A number of candidates misclassified costs between cost of sales, distribution costs and administrative
expenses. The question included sufficient information for candidates to be in no doubt as to the correct
classification for each expense. The most common misallocations were:
Not writing off the marketing costs to (marketing, selling and) distribution costs.
Not classifying the write-off of development costs incurred before the project was judged
commercially viable and the amortisation charge on development costs subsequently capitalised to
cost of sales.
Not classifying depreciation (and the impairment loss) as specified in the question.
Not classifying manufacturing overheads as cost of sales.
Errors in dealing with the other adjustments included the following:
Failing to disclose the asset held for sale correctly on the statement of financial position (within
current assets after a separate sub-total for all other current assets).
Offsetting the cash in hand against the overdraft.
Showing the bad debt allowance as a liability rather than as a deduction from receivables.
Reducing receivables by the 10,000 movement in the bad debt allowance, as opposed to by the
closing allowance of 35,000 (even when the 10,000 had been correctly charged in the income
statement).
When calculating the fair value less costs to sell of the asset held for sale, adding the costs of 300
instead of deducting them.
Reflecting the income tax charge for the year in the income statement but not showing the
corresponding liability.
Reducing retained earnings by the preference dividend for the year but not showing the
corresponding liability.
Calculating the dividend incorrectly by multiplying the number of shares by 5% instead of the
nominal value.
Including the capitalised development costs within property, plant and equipment instead of
showing them as a separate intangible asset.
Using the incorrect fractions (number of months) to split the 53,100 costs incurred this year on the
calculator project between the pre and post-capitalisation periods and when calculating the
amortisation charge on the amount capitalised.
Trying to reinstate the research costs written of against last years profits as part of the amount that
could be capitalised in respect of the calculator project this year.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

25
24

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Professional Stage Financial Accounting June 2009

Question 2
General comments
This mixed topic question covered consolidation, leasing and accounting concepts. Part (a) tested the
principles underlying the preparation of both a consolidated income statement and a consolidated statement
of financial position. It required the calculation of specified figures in respect of a group containing a
subsidiary and an associate, both acquired during the current year. Part (b) required extracts from the
financial statements in relation to both a finance and an operating lease. Part (c) tested knowledge of the
accruals basis of accounting as compared to the cash basis in the context of IAS 17, Leases.

Beech Ltd
(i) Consolidated income statement for the year ended 31 March 2009
Cost of sales
Beech Ltd
Willow Ltd per Q
Less: Intra group sales
PURP (9,000 x x 20/100)

1,346,400
917,700
(9,000)
900
2,256,000

Share of profits of associate

Laburnum Ltd per Q (69,800 x 6/12)
Less: PURP (5,000 x x 20/100)

34,900
(500)
34,400

Group share at 30%

10,320

(ii) Consolidated statement of financial position as at 31 March 2009

Goodwill (Willow Ltd)
Consideration transferred
Plus: Non-controlling interest at acquisition (20% x 618,700 (W))
Less: Fair value of net assets at acquisition (W)

750,000
123,740
(618,700)
255,040

Investment in associate (Laburnum Ltd)

Cost
Share of post-acquisition increase in retained earnings (34,900 (per (i)) x 30%)

85,000
10,470
95,470

Retained earnings
Beech Ltd
Willow Ltd (80% x 97,800 (W))
Laburnum Ltd (per (i))

Non-controlling interest (20% x 716,500 (W))

The Institute of Chartered Accountants in England and Wales 2009

1,420,500
78,240
10,320
1,509,060

143,300

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Professional Stage Financial Accounting June 2009

Working
Net assets Willow Ltd

Share capital
Retained earnings
Per Q (567,400 98,700)
PURP (i)
FV adj

Year end

100,000

Acquisition

100,000

Post acq

567,400
(900)
50,000
716,500

468,700
50,000
618,700

97,800

A very pleasing number of candidates scored highly on this question which provided a thorough test of
consolidation principles via the calculation of a series of figures. Conversely, other candidates clearly
struggled to apply consolidation principles outside the more familiar complete consolidated income statement
or complete consolidated statement of financial position. Many of the latter candidates failed to make use of
standard consolidation workings (such as a net assets table for the subsidiary) which might have improved
the accuracy of their calculations.
The most notable feature of the poorer answers was the lack of consistency between the different
requirements. For example, a number of candidates calculated the share of profits of the associate figure for
the consolidated income statement but instead of then using that figure in the calculation of retained earnings
for the consolidated statement of financial position calculated a completely different figure.
A significant number of candidates clearly do not understand the relationship between net assets on
acquisition, year-end figures and movements during the year. For example, many candidates used a yearend net asset figure to calculate retained earnings.
Many candidates wasted time producing extracts from the consolidated financial statements when these were
not required. A requirement to calculate is one which needs only a (clearly laid out) working there are no
presentation marks available. Others wasted time setting out a group structure diagram when the percentage
holdings were given in the question.
Common errors included the following:
Using a mark-up as opposed to a margin when calculating the provisions for unrealised profits.
Eliminating the provision for unrealised profits in respect of the associate against the investment in
associate balance (when it would be eliminated against inventories).
When calculating the share of profits of the associate not reducing the associates profit for the year
by the provision for unrealised profits in respect of the associate.
Taking the wrong figures from the question for retained earnings at acquisition and/or at the year end.
Deducting the provision for unrealised profits in respect of the subsidiary from cost of sales instead of
adding it.
Failing to reduce cost of sales by the goods sold by the subsidiary to the parent.
Incorrectly adjusting cost of sales for transactions with the associate.
Not making the fair value adjustment to the net assets of the subsidiary.
Failing to deduct the provision for unrealised profits in respect of the subsidiary from the subsidiarys
year-end net assets.
Calculating the investment in associate figure for the consolidated statement of financial position
instead of the share of profits of the associate figure for the consolidated income statement.
Calculating the non-controlling interest figure for the consolidated income statement instead of for the
consolidated statement of financial position.
Calculating a non-controlling interest figure for the associate.
Calculating goodwill based on a net assets figure made up of only share capital, or only share capital
and the fair value adjustment, or a figure including retained earnings at the year end instead of
retained earnings at acquisition.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

12
10

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Professional Stage Financial Accounting June 2009

(b) Lease extracts

Income statement for the year ended 31 March 2009 (extracts)
Depreciation (272,850 6)
Operating lease payments
Finance costs (W)

45,475
6,000
19,460

Statement of financial position as at 31 March 2009 (extracts)

Non-current assets
Property, plant and equipment (272,850 45,475)

227,375

Non-current liabilities
Finance lease liabilities (W)

135,810

Current liabilities
Finance lease liabilities (214,060 135,810) (W)

78,250

Statement of cash flows for the year ended 31 March 2009 (extracts)
Cash flows from financing activities
Payment of finance lease liabilities

The Institute of Chartered Accountants in England and Wales 2009

(78,250)

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Professional Stage Financial Accounting June 2009

Notes to the financial statements (extracts)

(1) Analysis of finance lease liabilities
Gross basis
Finance lease liabilities include

Gross payments due within

One year
Two to five years (2 x 78,250)
Less: Finance charges allocated to future periods ((78,250 x 4)) 272,850 19,460)

78,250
156,500
234,750
(20,690)
214,060

Net basis
Finance lease liabilities include
Amounts due within
One year
Two to five years

78,250
135,810
214,060

(2) Commitments under operating leases

The minimum lease payments under non-cancellable operating leases are

6,000
6,000
12,000

Within one year

Within two to five years

Working
Lease of plant
Year to 31 March

2009
2010

B/f

Payment

Capital

272,850
214,060

(78,250)
(78,250)

194,600
135,810

The Institute of Chartered Accountants in England and Wales 2009

Interest
accrued @
10%

19,460

C/f

214,060

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Professional Stage Financial Accounting June 2009

In contrast with Part (a), where extracts were not required, this part of the question did require extracts from
the financial statements. A number of candidates lost marks for the simpler numbers by not presenting their
answer as extracts from the financial statements, in addition to losing presentation marks.
Not all candidates attempted the required notes to the financial statements. Those that did usually made a
better attempt at those in relation to the finance lease than the operating lease although there were few
correct attempts at the gross analysis of lease liabilities. Few candidates provided extracts from the statement
of cash flows and where such extracts were provided the figures were often incorrect.

Answers in relation to the finance lease were generally good with most marks being lost due to:

a lack of properly presented extracts

setting up the liability at the fair value of 275,000 instead of the lower figure of 272,850, the present
value of the minimum lease payments

calculating depreciation based on 275,000 instead of 272,850 (even if the liability had been set up at
the correct figure)

depreciating the asset over seven instead of six years when the question clearly stated that six was the
assets estimated useful life

treating the annual payments on the finance lease as being in arrears, instead of in advance

failing to pick up the correct figures from the leasing table for the financial statement extracts or notes.
A number of candidates treated the operating lease as a finance lease, even describing the liabilities in
respect of that lease as Operating lease liabilities. Where this lease was correctly treated as an operating
lease the charge of 6,000 in the income statement was often included in finance costs.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

10
9

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Professional Stage Financial Accounting June 2009

(c) The accrual basis of accounting and cash accounting

(i) Difference between the accrual basis of accounting and cash accounting
Under the accrual basis of accounting, transactions are recognised when they occur, not when the related
cash flows into or out of the entity. Under cash accounting, only the cash impact of a transaction is recorded.
This can be illustrated by reference to Beech Ltds finance lease and the financial statements for the year
ended 31 March 2009.
Under cash accounting, the financial statements would reflect the whole 78,250 paid in the current
year as an expense/cash outflow. However, the accrual basis of accounting recognises expenses in the
period in which the related goods or services are consumed. The expense in relation to the lease
liability is the interest payable for the current year, calculated as 19,460 and only this is recognised as
an expense in the current year.
Furthermore, this amount is recognised as an expense even though none of it will be paid until the next
instalment of 78,250 is paid on 1 April 2009. (Because the 78,250 paid in the current year is paid on
the first day of the lease it cannot include any interest (as none will have accrued at that point)
therefore the whole of this is a reduction of capital (as reflected in the statement of cash flows).
Under the accrual basis of accounting the consumption of plant and equipment is also recognised over
the period during which they are used by the entity. Hence, a deprecation charge is calculated to
allocate the cost of the plant of 272,850 over its useful life of six years. Under cash accounting only an
expense/cash outflow in the year of purchase would be recognised (not relevant here as there is no
cash purchase of plant).
Over the life of the asset the cash payments (4 x 78,250) (cash basis) will equal the total interest plus
deprecation charged (accrual basis).
The accrual basis also informs users of obligations to pay cash in the future. Hence, at the inception of
the finance lease, a liability for future lease payments is set up.
(ii) Why the actuarial method is the most appropriate method of allocating finance costs under
the accrual basis
IAS 17, Leases, requires the total finance charge to be allocated to each period in such a way as to produce a
constant periodic rate of interest on the outstanding lease obligation. The most accurate way to do this is on
an actuarial basis, using the interest rate implicit in the lease. Therefore, in this case, it has been calculated
that 19,460 of the total finance charge of 40,150 relates to the year ended 31 March 2009. This is far in
excess of one quarter of the total interest, recognising the fact that interest payable should fall each period as
the capital amount of the lease is gradually repaid. This is why the straight-line basis would only be
acceptable for immaterial leases. The sum-of-the-digits basis does provide an approximation to the actuarial
basis as it gives higher interest charges in earlier years.

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Professional Stage Financial Accounting June 2009

This part of the question was poorly answered with some fundamental misconceptions in Part (ii).
In Part (i) few candidates got beyond an initial explanation that the accrual basis recognises transactions
when they occur and that the cash basis is based purely on cash flows. Only a minority were able to
illustrate this difference by reference to the two leases in the question. Of those that did, some tried to
illustrate using the operating lease when in fact there was no difference between the two bases for this
particular lease. A number of candidates explained the differences using other examples (eg the sale of
goods on credit), which was not what was required.
In Part (ii) few candidates demonstrated that they understood that the actuarial basis is the most accurate
because it applies a real interest rate to the balance outstanding on the liability and hence interest
charges fall over the life of the lease as the amount outstanding reduces despite the fact that the vast
majority had correctly applied this basis in their leasing table in Part (b).
A worrying number of candidates recognised that there was a pattern of falling interest charges but said this
was appropriate because it reflected the fact that the asset was more useful/productive in the earlier years
of its life. Others said that the actuarial basis spread interest charges evenly over the life of the asset
again despite the fact that their leasing table demonstrated otherwise. Few realised that the sum-of-thedigits basis does provide an approximation to the actuarial basis.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

8
6

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Professional Stage Financial Accounting June 2009

Question 3
General comments
This question tested the preparation of a consolidated statement of cash flows and supporting note. Missing
figures to be calculated included dividends received from an associate, dividends paid (to the group and to
the non-controlling interest), interest paid, tax paid, the depreciation charge for the year and proceeds from
the issue of borrowings.

Maple plc
Consolidated statement of cash flows for the year ended 31 March 2009

Cash flows from operating activities

Cash generated from operations (Note)
Interest paid (W1)
Income tax paid (W2)
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Proceeds from sales of property, plant and equipment
(530,000 35,000)
Dividends received from associate (W4)
Net cash from investing activities
Cash flows from financing activities
Proceeds from issue of borrowings (600,000 550,000 +
200,000)
Redemption of borrowings
Dividends paid (W5)
Dividends paid to non-controlling interest (W6)
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

2,943,400
(159,700)
(1,161,000)
1,622,700
(608,900)
495,000
425,700
311,800
250,000
(200,000)
(1,290,300)
(566,100)
(1,806,400)
128,100
252,500
380,600

Note: Reconciliation of profit before tax to cash generated from operations

Profit before tax
Share of profits of associate
Finance cost
Impairment losses (1,678,500 1,567,500)
Depreciation charge (W3)
Loss on disposal of property, plant and equipment
Increase in trade and other receivables (3,303,800 3,105,600)
Decrease in trade and other payables ((966,600 25,000) (1,001,500 31,000))
Cash generated from operations

The Institute of Chartered Accountants in England and Wales 2009

2,871,200
(456,800)
153,700
111,000
456,400
35,000
(198,200)
(28,900)
2,943,400

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Professional Stage Financial Accounting June 2009

Workings
(1) Interest paid

Cash ()
C/d

159,700
25,000
184,700

B/d
CIS

31,000
153,700
184,700

1,161,000
870,000
2,031,000

B/d
CIS

1,060,000
971,000
2,031,000

Disposals
Depreciation charge ()
C/d

530,000
456,400
5,266,000
6,252,400

1,456,400
456,800
1,913,200

Cash ()
C/d

425,700
1,487,500
1,913,200

1,290,300
5,845,300
7,135,600

B/d
CIS

5,468,300
1,667,300
7,135,600

566,100
2,123,500
2,689,600

B/d
CIS

2,456,700
232,900
2,689,600

(2) Income tax paid

Cash ()
C/d

(3) PPE

B/d
Additions

5,643,500
608,900
6,252,400

(4) Investment in associate

B/d
CIS

(5) Retained earnings

Dividends in SCE ()
C/d

(6) Non-controlling interest

Cash ()
C/d

The Institute of Chartered Accountants in England and Wales 2009

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Professional Stage Financial Accounting June 2009

Candidates were clearly well-prepared for this type of question and there were some very good answers. Many
scored high marks on the reconciliation note, and on the figures for tax paid, interest paid, depreciation charge
for the year and the opening and closing figures for cash and cash equivalents.
Most candidates produced workings in the form of T accounts and very few made the mistake of putting
opening and closing balances on the wrong side of those T accounts. Generally, candidates showed a good
grasp of basic double entry principles, which underpin the preparation of a statement of cash flows, whether
single company or consolidated. Where opening and closing balances were on the wrong side of T accounts
this was generally in relation to the investment in the associate, non-controlling interest or retained earnings
ie the groups T accounts. A minority of candidates failed to calculate any group figures such as dividends
received from the associate or dividends paid to the non-controlling interest.
Disappointingly, the standard of presentation was often poor, with a number of very untidy answers,
particularly in relation to the reconciliation note, which many candidates seemed to view more as a working.
Some candidates lost easy marks by using the incorrect bracket convention (ie failing to show outflows of cash
in brackets).
Where errors were made they included the following:
Putting the interest payable figure on the face of the statement rather than the interest paid figure.
Including the loss on disposal on the face of the statement instead of in the reconciliation note.
Adding the loss on disposal to the carrying amount (rather than deducting it) when calculating the
proceeds on sale of plant and equipment.
Netting off the movements on the two different borrowings when sufficient information was given in the
question to allow the two separate movements to be calculated.
Not starting the reconciliation note with the correct profit figure (ie profit before tax).
Failing to reduce this figure by the share of the associates profits.
Failing to adjust the movement on trade payables for the opening and closing interest accrual.
In a property, plant and equipment T account working, used to calculate the depreciation charge for
the year, crediting the proceeds of the disposal of the plant, instead of the carrying amount.
Calculating dividends paid to group shareholders using the total profit for the period as opposed to the
profit attributable to the equity holders.
Calculating dividends received from the associate as the difference between the opening and closing
investment in the associate with no adjustment for the share of profits of the associate for the year.
Presenting dividends paid to the non-controlling interest under investing activities.
Presenting dividends received from the associate under financing activities.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

15
15

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Professional Stage Financial Accounting June 2009

Question 4
General comments
This question featured a number of issues relating to share capital and reserves. Part (a) required the draft
profit figure supplied in the question to be revised for the given issues, with Part (b) requiring the
preparation of a statement of changes in equity. The matters described in the question included share
issues during the year (including an issue of redeemable preference shares), dividends paid, an upwards
revaluation during the year, an impairment of a previously revalued asset and a prior period error. Part (c)
required an explanation of how the both the profit figure and the presentation of the information in the
statement of changes in equity would differ under UK GAAP.

Oak Ltd
(a) Revised profit for the year

Per Q
Plus: Current year impact of prior period error (decrease to opening inventory)
Less: Impairment of land (600,000 500,000)
Depreciation on plant (1,000,000 5)
Dividend on redeemable preference shares (1,000,000 x 5% x 3/12)

457,900
60,000
(100,000)
(200,000)
(12,500)
205,400

Most candidates did attempt to calculate a revised profit figure but a significant number did not appear to
understand which adjustments would impact on profit for the year and which would only impact on
retained earnings.
Common errors included the following:
Deducting dividends on ordinary shares from profit for the year.
Calculating the dividend on the redeemable preference shares as relating to a full year rather than
three months.
Ignoring the impact of the adjustment to opening inventory on current year profit or deducting it from,
rather than adding it to, profit.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

3
3

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Professional Stage Financial Accounting June 2009

(b) Statement of changes in equity for the year ended 31 March 2009
Ordinary
share
capital
At 1 April 2008
Correction of prior period
error
Restated balance
Issue of share capital
Bonus issue (W3)
Interim dividends on
ordinary shares
(1,155,000 (W3) x 10p)
Total comprehensive
income for the year (W1)
Transfer to retained
earnings (W2)
At 31 March 2009

Share
premium

Revaluation
surplus

Retained
earnings

Total

750,000
-

655,000
-

200,000
-

3,456,700
(60,000)

5,061,700
(60,000)

750,000
300,000
105,000
-

655,000
600,000
(105,000)
-

200,000
-

3,396,700
(115,500)

5,001,700
900,000
(115,500)

250,000

205,400

455,400

(90,000)

90,000

1,155,000

1,150,000

3,576,600

6,241,600

360,000

Workings
(1) Movement on revaluation surplus
Impairment of land
Revaluation of plant (1,000,000 (750,000 200,000))

(200,000)
450,000
250,000

(2) Transfer between revaluation surplus and retained earnings

Depreciation charged on revalued amount (a)
Depreciation based on cost ((750,000 200,000) 5)

200,000
(110,000)
90,000

(3) Ordinary shares issued

At 1 April 2008
Issue on 1 October
Bonus issue 10

The Institute of Chartered Accountants in England and Wales 2009

No of shares
750,000
300,000
1,050,000
105,000
1,155,000

Page 17 of 19

Professional Stage Financial Accounting June 2009

This part of the question was well answered by the majority of candidates with most realising that the
redeemable preference shares should be treated as debt rather than equity. Most candidates also made
some effort to include a total column and to calculate the carried forward balances. Most correctly
calculated and reflected the share issue at market price, the bonus issue and the interim dividend on
ordinary shares. A number of candidates made one-sided entries particularly in relation to the bonus
issue and the transfer between the revaluation surplus and retained earnings.
Other common errors included the following:
Failing to show the correction of the prior period error at all or including it further down the
statement rather than immediately below the opening balances.
Failing to show restated balances after the correction of the prior period error.
Debiting the bonus issue to retained earnings rather than to the share premium account (when the
question had stated that the company wished to retain the maximum balance on retained
earnings).
Including an impairment of 100,000 against the revaluation reserve instead of 200,000 (and
often contradicting the adjustments made in Part (a)).
Failing to include the net movement on the revaluation surplus on the same line as profit for the
year and not describing these figures as total comprehensive income.
Incorrectly calculating the depreciation charge based on historic cost by dividing cost rather than
carrying amount by remaining life. (This was needed to calculate the transfer between the
revaluation surplus and retained earnings.)
Including the dividend in respect of the redeemable preference shares as a deduction from
retained earnings (sometimes even where this had already been adjusted for in Part (a)).
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

10
9

Page 18 of 19

Professional Stage Financial Accounting June 2009

(c) How the profit figure and the statement of changes in equity would differ under UK GAAP
Under UK GAAP (FRS 15) the impairment of the land would all be charged to profit and loss as it reflects a
consumption of economic benefits. So an additional 200,000 would be charged against profit for the year.
Under UK GAAP (FRS 3) comparative information is only required to be restated where a fundamental prior
period error has occurred. Therefore under UK GAAP current years profits will be 60,000 lower.
Under UK GAAP the information presented in the statement of changes in equity (and the statement of
comprehensive income) is presented in two statements: the statement of total recognised gains and losses
and the reconciliation of movements in shareholders funds.
The statement of total recognised gains and losses would reflect the profit for the year plus the movements
on the revaluation surplus (the detail as in the statement of comprehensive income under IFRS) and any
prior period adjustments.
The reconciliation of movements in shareholders funds would reflect the profit for the year plus dividends
and the impact of share issues.

This part of the question proved a real discriminator with some candidates not attempting it at all. Those that
did attempt it frequently wasted time by:
not focusing on the specific requirement and just describing general differences such as the
terminology is not the same
giving differences that were simply not factually correct, such as stating that the reserve transfer
would not be allowed in the UK.
Few candidates were able to accurately name the two UK statements which are produced instead of the
statement of changes in equity. Where valid differences were given few explained how such differences
would impact on the profit for the period.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

5
4

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