FIN5009 Financial Reporting: Time-Constrained Assessment Solution

This document presents a comprehensive solution to a Financial Reporting assessment, addressing various questions related to accounting standards, financial ratios, and the treatment of assets and liabilities. It covers topics such as lease accounting, consolidation adjustments, property, plant, and equipment (PPE), investment property, and the calculation and interpretation of financial ratios. The solution includes detailed calculations and explanations based on International Accounting Standards (IAS), offering insights into the correct application of accounting principles in different scenarios. Desklib provides this document along with a suite of AI-based study tools to support students in their learning journey.

FINANCIAL
REPORTING

Table of Contents
QUESTION 1...................................................................................................................................3
QUESTION 2 ..................................................................................................................................3
QUESTION 3...................................................................................................................................3
QUESTION 4...................................................................................................................................3
QUESTION 5...................................................................................................................................3
QUESTION 6...................................................................................................................................3
QUESTION 7...................................................................................................................................3
QUESTION 8...................................................................................................................................3
QUESTION 9...................................................................................................................................3
QUESTION 10.................................................................................................................................3
QUESTION 11.................................................................................................................................4
QUESTION 12.................................................................................................................................4
QUESTION 13.................................................................................................................................4
QUESTION 15.................................................................................................................................5
QUESTION 16.................................................................................................................................5
QUESTION 17.................................................................................................................................8
REFERENCES..............................................................................................................................10
APPENDICES...............................................................................................................................11

QUESTION 1
= D. A resource controlled by an entity as a result of past events, from which future economic
benefits are expected.
QUESTION 2
= A. Showing lease payments as a rental expense.
QUESTION 3
= B. £3.45
QUESTION 4
= A. The business model test.
QUESTION 5
= A. Fair value through profit and loss.
QUESTION 6
= B. (ii) and (iii) only.
QUESTION 7
= C. £9.5 million
QUESTION 8
= C. Sales of £200,000 on 30June 2022. The amount invoiced to and received from the customer
was £230,000, which includes £30,000 for ongoing servicing work to be done by Zigzag over the
next two years.
QUESTION 9
= C. 80% of Moore's revenue and expenses for the period 1st August 2021 to 31st December
2021.
QUESTION 10
= A. A parent sells a building originally costing £600,000 to its subsidiary for £700,000. The
subsidiary still holds this assets at the date of consolidation.
QUESTION 11

Total amount would be charged to Hanlon Plc's statement of profit and loss for the year ended on
30th September 2021 will be calculated as under:
1) Total lease rental amount debited to profit and loss account
= £18,000 + £90000
= £108000.
Therefore, total amount charged to profit and loss account will be £108000.
QUESTION 12
The amount shown in the non-current liabilities will be £10975 which is the historical cost.
The amount shown in the books of accounts will be the historical cost and market value of the
lease will not be recorded in the books of account.
QUESTION 13
Total cost of investment that will be used in the goodwill calculation in the consolidated
financial statements will be calculated as under:
Particulars Amount in £
No. of shares acquired by Bee Ltd. 800,000 shares
Ratio in which shares are issued by Bee Ltd
to the shareholders of Cee Ltd.
3 shares for each 4 shares
No. of shares issued By Bee Ltd. 800,000 * ¾
=600000 shares
Market Price of shares of Bee Ltd. £3.80 per shares
Total Amount of shares issued to Cee Ltd. £3.8 per shares * 600000 shares
= £2280000.00
ADD: Deferred consideration
£550,000 * 0.909
£499,950.00
ADD: Legal and consultancy charges £100,000.00
Total cost of investment £2,879,950.00
Therefore, total cost of investment incurred by Bee Ltd will be of £2,879,9500.00

QUESTION 14
During the year ending 31st December 2021 H sold inventory to S for an invoice price of
£800,000 and 25 % mark-up on the cost price in this transaction. At the reporting date, while
performing consolidation adjustments H is required to reverse the amount of unrealised profit on
the goods remain unsold for the subsidiary.
Total amount of goods remain unsold to S
= £800,000 * 25%
= £200,000. out of which amount of unrealised profit will required to reverse while
consolidation.
The amount of unrealised profit will be calculated as under:
= £200,000 * 20% on sale amount
= £40000.
Intergroup transactions performed between the subsidiary company and holding company is
required to exclude while consolidating.
QUESTION 15
The profits earned by the Golf limited on the sales to delta will considered profits for the
year which will be added to the profits of Golf Ltd. Profits of Golf Ltd would be reported
£660,000 in the year and will show in the consolidated financial statement. Non-controlling
interest in the following case suggest that the company will earn a profit as the sales will made as
the company need the product.
QUESTION 16
As per International Accounting Standard- 16 “ Property, Plant and Equipment” PPE are
tangible assets that are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes and which are expected to be used within a long period.
While as per International Accounting Standard-40 “ Investment Property” Investment property
can be defined as the property which is held to earn rentals or capital appreciations or both rather
that being used in production or administrative purposes or sale in the normal course of business.
Company can opt different valuation model based on their differential uses for property,
plant and equipments and investment property. Company can opt revaluation model to its PPE
and fair value model to its investment property. Depreciation and amortisation will be provided

on both the classified assets and is required to be accurately disclosed in the notes to account of
the company along with the financial statements.
Therefore, manufacturing building and administration building will be classified as PPE
by Match Limited at the year end 31st December 2020. The presentation for both the assets will
be as under:
Particulars Amount in £
Property, plant and equipments
Manufacturing Building- BD16956
01/04/20 £3,000,000.00
Land £1,000,000
Building £ 2,000,000
Residual value of the building is of £300,000.00
Years 25 years
Depreciation for the year ending 31st
December 2020 for 9th months
£51000.00
Carrying value of manufacturing building
as at 31st December 2020
£1,949,000.00
ADD: Land Value £1,000,000.00
Total carrying value of the
manufacturing building as at 31st
December 2020
£2,949,000.00
Administration Building- BD18643
01/01/20 £2,800,000.00
Land £900,000
Building £1,900,000
Residual value Nil

Years 20 years
Depreciation for the year ending 31st
December 2020 for the full year
£95,000.00
Carrying value of administration building
as at 31st December 2020
£1,805,000.00
ADD: Land value £900,000.00
Total carrying value of the
administration building as at 31st
December 2020
£2,705,000.00
In the year 2021, manufacturing building remain classified as Property, plant and equipments
and revaluations in the fair value has been done in the carrying value. While there is a change in
use in administration building now from the July 2021 as this building will be classified as
investment property for the next half financial year after 30th June 2021. According to
International Accounting Standard the change in use will be considered as change in accounting
estimate and not accounting policy and the value will be taken as carrying value at the end of 30th
June 2021. The presentation will be done as under:
Particulars Amount in £
Property, plant and equipments
Manufacturing Building- BD16956
01/04/21 £2,949,000.00
Land £1,000,000
Building £ 1,949,000
Residual value of the building is of £300,000.00
Years 24 years
Revalued value of building £2,200,000.00

Depreciation for the year ending 31st
December 2021 for the full year
£79,167.00
Carrying value of manufacturing building
as at 31st December 2021
£2,120,833.00
ADD: Land revalued value £1,080,000.00
Total carrying value of the
manufacturing building as at 31st
December 2021
£3,200,833.00
Revaluation gain recognised in OCI as at
31st December 2021
£251,000.00
Excess amount of depreciation £10,459.00
Net amount recognised in OCI as at 31st
December 2021
£240,541.00
Administration Building- BD18643
01/01/21 £2,705,000.00
Land £900,000
Building £1,805,000
Residual value Nil
Revalued amount of building at 30th June
2021
£2,000,000.00
Years 19 years
QUESTION 17
1. Calculate financial ratio for the year ended 30 June 2022.
a) Rate of return on investment: (Final value – Initial value) / Initial value
= (650000 – 80000) / 80000
= 7.125 Times

b) Earnings per ordinary share: (Net profit/Loss) / Weighted average number of equity
shares
= 1344000 / 400000
= £3.36
c) Receivables collection period in days: (Accounts receivables / Total sales of the
company) * 365
= (206000 / 3360000) * 365
= 22.38 Days
d) Payables payment period in days: 365/ Payable turnover ratio
Payable turnover ratio = Net credit purchase / Average account payables
= 2016000 / 210000
= 9.6 Days
e) Number of days’ inventory on hand: (Average inventory for the year / Cost of goods
sold) * 365
= (418000 / 2016000) * 365
= 75.68 Days
2. Interpret and analyse the following ratios:
a) Receivables collection period: The receivables collection period of the company is quite
high which states that the company requires more than ¾ of the month to recover the
amount from its debtors.
b) Payables payment period: The amount paid by the company is paid to the creditors within
the period of 9.6 days. It shows that the company is required more days to recover its
amount from debtors and pays to its creditors within a period of 10 days.
c) Number of days’ inventory on hand: Organisation rotates its inventory approximately 4
times in a year. In states the number of days the inventory resides in the warehouse.

REFERENCES
Books and Journals
Alozie, C., 2022. Structural Transformation of Government-Wide Accounting and
Modernisation of GPFRs Financial Reporting Architecture. Available at SSRN 4130421.
Bravo, F. and Reguera-Alvarado, N., 2018. Do independent director’s characteristics influence
financial reporting quality?. Spanish Journal of Finance and Accounting/Revista
Española de Financiación y Contabilidad, 47(1), pp.25-43.
Fang, T.Y. and et.al., 2020. The association between political connection and stock price crash
risk: Using financial reporting quality as a moderator. Finance Research Letters, 34(C).
Fang, T.Y., Lin, F., Lin, S.W. and Huang, Y.H., 2020. The association between political
connection and stock price crash risk: Using financial reporting quality as a
moderator. Finance Research Letters, 34(C).
Loftus, J. and et.al., 2020. Financial reporting. John Wiley & Sons.
Ma, M., Pan, J. and Stubben, S.R., 2020. The effect of local tournament incentives on firms'
performance, risk-taking decisions, and financial reporting decisions. The Accounting
Review, 95(2), pp.283-309.
Nurunnabi, M., 2021. International Financial Reporting Standards Implementation: A Global
Experience. Emerald Group Publishing.
Sabauri, L. and Kvatashidze, N., 2018. Prospects of Application of International Standards in
Financial Reporting by Small and Medium-size Businesses in Georgia. International
Journal of Business Administration, 9(2), pp.1-8.
Shreyes, N.R. and Gowda, K.N., 2018. An Empirical Study of Value Relevance of Financial
Reporting in Indian Corporate Sector. IUP Journal of Accounting Research & Audit
Practices, 17(2).
Ssenyonga, Y., 2019. Adoption of International Financial Reporting Standard for Small and
Medium Entities as a Financial Reporting Framework; A case study of the Greater
Kampala Metropolitan Area (Doctoral dissertation, Makerere University).
Tkhagapso, R., Kuter, M. and Trukhina, A., 2019, May. Liquidation financial reporting of
russian companies in terms of digital economy. In International Conference on
Integrated Science (pp. 72-81). Springer, Cham.

APPENDICES
Question 3
Bruno should value this inventory in its financial statements at the below calculated cost:
Particulars Amounts in £
Raw material cost 1.5
Import duties 0.4
Direct labour 0.5
Subcontracted labour costs 0.8
Recoverable sales tax -
Storage costs -
Production overheads (per unit) 0.25
Abnormal wastages costs -
Total cost of each unit of inventory 3.45
Note: Recoverable sales tax, storage costs and abnormal wastages costs are not being part of the
total product cost as only non recoverable taxes and duties are eligible to form part of the product
cost as well as storage costs and abnormal costs are indirect cost related to product and required
to debited in profit and loss account.
Question 5
Equity instruments can be classified either fair value through profit and loss or fair value
through other comprehensive income in the financial statements. Business entity can classify
equity instruments in fair value through profit and loss statement if equity instruments are in
nature of
 Derivatives or,
 Hedge instruments or,
 Foreign currency bonds.
Similarly a business entity can identify equity instruments as fair value through other
comprehensive income if there is a strategic aim of the entity for holding the equity instruments

for a long term and to earn strategic profits by increment in the buying value of equity
instruments. But if the business entity have neither a strategic aim and objective nor the
instruments are in nature of derivatives or hedge instruments or foreign currency bonds then
equity instruments can be categorized as fair value through profit and loss.
Question 6
As per International Accounting Standard 21 “ The Effects of Changes in Foreign
Exchange Rates” only exchange gains and losses arising on the retranslation of monetary items
are recognised in other comprehensive income for that forms part of a reporting entity's net
investment in a foreign operation. Therefore this statement is not true. While other two are
correct as non-monetary items in a financial statement measured at historical cost in a foreign
currency are not retranslated at the reporting date and intangible assets such as copy-rites, know-
how, patents and others are a non-monetary items because they cannot be readily converted into
cash and cash equivalents. Therefore, only (ii) and (iii) statements are true.
Question 7
Machinery is an example of non-monetary item as it cannot be converted rapidly into
cash and cash equivalents. Therefore at the reporting date it will be translated on the exchange
rate at the date of original transaction and not the rate at reporting date. Therefore, at the
reporting date machinery will be valued at $20 million less depreciation of $1 million that is
having carrying value of $19 million. The exchange rate will be used to translate it into pound
will be the rate at 1st January 2021 that is pound 2.
= translated value is £9.5 million.
Question 8
As per IFRS 15 “ Revenue from contracts with customers only sales of £200,000 on 30th
June 2022 has been recorded correctly as the extra amount of £30000 received from the
customers will be charged over the next two years. All other transactions are recorded incorrectly
in the financial statement of Zigzag Ltd.