PROFESSIONAL LEVEL

2022
ORCHID
(3 HOURS)

FINANCIAL ACCOUNTING AND

REPORTING – IFRS STANDARDS
This exam consists of four questions (100 marks).
Marks breakdown
Question 1 31 marks
Question 2 32 marks
Question 3 15 marks
Question 4 22 marks
Unless otherwise stated, make all calculations to the nearest month and the
nearest £.
All references to IFRS® Standards are to International Financial Reporting
Standards and International Accounting Standards.
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1 Assume that it is now 31 January 2022.
You are the financial controller of Penne Ltd and an ICAEW Chartered
Accountant. You report to Giorgio, the finance director, who is also an ICAEW
Chartered Accountant. Giorgio is not a shareholder in Penne Ltd.
Penne Ltd’s shares are owned by three brothers, one of whom, Andreas, is
planning to sell his shares and resign his seat on the board. Andreas has not yet
tried to find a buyer. It is likely that the new shareholder would be appointed to the
board. Giorgio told his friend Marco, who is looking for a suitable investment,
about the sale:
I know the shares will be for sale soon, although Andreas hasn’t looked for a
buyer as yet. The share price will be based on a profit multiple for the year
ended 31 December 2021. This would be a good investment opportunity for
you, and I will see what I can do to keep the reported profit down which should
make the shares cheaper. I know you will look on me favourably if you
become a Penne Ltd shareholder.
Prior to preparing the financial statements for the year ended 31 December 2021
Giorgio extracted the following list of balances from the nominal ledger. These
balances include initial year-end adjustments made by Giorgio.
Note(s) £
Revenue 6,256,800
Cost of sales 1 to 4 3,983,900
Operating expenses 2,005,500
Property, plant and equipment at
31 December 2021 – carrying amount 1, 2 1,150,700
Inventories at 31 December 2021 3 256,800
Trade and other receivables 5 586,250
Cash and cash equivalents 10,100
Ordinary share capital (£1 shares) 75,000
Revaluation surplus 305,200
Retained earnings at 1 January 2021 857,550
Trade and other payables 3 498,700
Giorgio told the brothers that the profit before tax for the year, based on the above
list of balances, is £267,400. The brothers are disappointed by this figure, which is
lower than expected. They have asked you to review the financial statements and
make any amendments necessary. The brothers are also concerned that Giorgio
has not been keeping his technical knowledge up to date, and are worried he may
have made errors.
Giorgio knows that you are doing this work and said that he doesn’t expect you to
find any errors. He also said that if you support his figures, he will recommend a
significant salary increase for you.

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Notes
1 Factory and warehouse buildings and related land are measured under the
revaluation model. Depreciation is recognised in cost of sales. Penne Ltd
makes annual transfers between the revaluation surplus and retained
earnings.
The year-end review of the factory buildings showed that valuations were up to
date. However, it was discovered that a fire at one of the warehouses on
30 December 2021 had caused significant damage. As a result, the
warehouse has a recoverable amount of £11,600 at 31 December 2021. This
warehouse was acquired on 1 January 2019 for £100,000 and was revalued to
£120,000 on 1 January 2020. It is being depreciated over five years from
1 January 2019.
Giorgio recognised an impairment loss of £88,400 on this warehouse,
calculated as cost less recoverable amount. He debited cost of sales and
credited property, plant and equipment with this figure. He recognised the
correct depreciation charge on this warehouse for the year in cost of sales and
the correct transfer between the revaluation surplus and retained earnings.
2 On 1 January 2021 Penne Ltd entered into a three-year lease contract for a
machine which had a five-year useful life. The lease requires three payments
of £19,000 on 1 January each year. The first payment was made on 1 January
2021 and Giorgio debited this to cost of sales and credited it to cash. Giorgio
has made no other accounting entries in respect of this lease. The interest rate
implicit in the lease is 5%. There is no option to purchase the machine at the
end of the lease term.
3 Penne Ltd previously traded only within the UK. In November 2021 the
production director visited Italy and placed orders for goods of €100,000.
Giorgio debited purchases and credited trade payables using the exchange
rate on 15 December 2021, the date when Penne Ltd received the goods. No
further accounting entries were made in respect of this transaction.
On 31 December 2021 half of the goods remained in inventory but in error
were excluded from the year-end physical inventory count. The invoice for
these goods was unpaid at 31 December 2021.
The spot exchange rates were:
15 December 2021 – €1:£0.95
31 December 2021 – €1:£0.90
4 During the year ended 31 December 2021 Penne Ltd incurred £315,000 on
research and development expenditure for a new product. Giorgio recognised
this sum in cost of sales. The £315,000 was made up as follows:
£
Initial investigation work 59,200
Product development costs 240,000
Product launch costs 10,800
Staff training 5,000
315,000

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 The development costs accrued evenly over the period from 1 February 2021
to 30 September 2021. The product was assessed as commercially viable on
1 May 2021. Sales commenced on 1 November 2021. The product is
expected to be sold for four years before it is superseded.
5 Giorgio has not yet made any adjustment for the income tax due for the year
ended 31 December 2021. An appropriate estimate of this amount is £53,500.
Income tax for the year ended 31 December 2020 was settled during the
current year for £1,200 more than the amount recognised in the financial
statements. Giorgio debited the £1,200 additional payment to trade and other
receivables in the list of balances.
Requirements
1.1 Prepare, for Penne Ltd, a statement of profit or loss for the year ended
31 December 2021 and a statement of financial position as at that date, in a
form suitable for publication. (26 marks)
1.2 Discuss the ethical issues arising for yourself and Giorgio and the steps that
you should take to address them. (5 marks)
Total: 31 marks

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2 Assume that it is now 31 January 2022.
The following matters need to be dealt with to finalise the consolidated financial
statements of Rigatoni Ltd for the year ended 31 December 2021. Before adjusting
for these matters the consolidated profit for the year was £145,800.
(1) On 1 July 2021 Rigatoni Ltd and Tagliatelle Ltd, an unrelated company, each
subscribed for half of Spaghetti Ltd’s 100,000 £1 ordinary shares on Spaghetti
Ltd’s incorporation. A contract between Rigatoni Ltd and Tagliatelle Ltd gives
them equal profit shares and states that unanimous consent is required for all
key operating decisions.
Spaghetti Ltd made a profit for the six months ended 31 December 2021 of
£15,600. In December 2021 Rigatoni Ltd made sales of £5,000 to Spaghetti
Ltd, at a mark-up of 25%. Spaghetti Ltd still held all these goods in inventories
at 31 December 2021. Rigatoni Ltd recognised its cost of investment in
Spaghetti Ltd of £50,000 in current assets, but made no further accounting
entries, other than to record the sale of the goods.
(2) On 1 January 2021 Rigatoni Ltd issued 75,000 £1 ordinary shares at a
premium of 20 pence per share to Gemelli Ltd, an unconnected company.
These shares amount to 10% of Rigatoni Ltd’s ordinary shares and carry the
same rights as Rigatoni Ltd’s existing ordinary shares. The proceeds were
debited to cash and credited to a suspense account.
(3) On 1 January 2021 Rigatoni Ltd borrowed £200,000 at 6% pa, being the
market rate of interest, to fund the construction of a new warehouse, a
qualifying asset. The cash received was immediately placed on deposit
earning interest at 2% pa. Construction did not begin until 1 February 2021.
A construction payment of £120,000 was made on 1 February 2021 and the
remaining £80,000 was paid on 1 November 2021. The warehouse was ready
for use on 1 December 2021 but Rigatoni Ltd did not start to use it until
1 January 2022. The directors estimate that the warehouse has a useful life of
10 years.
Rigatoni Ltd recognised the net interest in the statement of profit or loss for the
year ended 31 December 2021. The construction costs were included in
assets in the course of construction in the statement of financial position as at
31 December 2021. No depreciation is charged on assets in the course of
construction.
(4) On 1 September 2021 Rigatoni Ltd received a government grant of £72,000
which it credited to other income in accordance with its accounting policy. The
grant is to help fund additional employees needed for the new warehouse. A
condition of the grant is that for five years from its receipt 50% of these new
employees must be 'local' ie, must live within a 20-mile radius of Rigatoni Ltd’s
premises. All the new employees started work on 1 December 2021 and had
one month’s training before the warehouse became operational. 60% of the
new employees are 'local' and Rigatoni Ltd expects to be able to maintain this
percentage for the five years.

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Requirements
2.1 Explain the required IFRS Standards financial reporting treatment of matters
(1) to (4) in the consolidated financial statements of Rigatoni Ltd for the year
ended 31 December 2021, preparing all relevant calculations. (26 marks)
2.2 Calculate the revised consolidated profit for the year. (2 marks)
2.3 Describe any differences between IFRS Standards and UK GAAP in respect
of the above financial reporting treatments. (4 marks)
Total: 32 marks

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3 Assume that it is now 31 January 2022.
Linguine plc is a listed company and is financed by both debt and equity. It
manufactures medicines for the pharmaceutical industry and has a high turnover
of staff.
3.1 The following information is relevant to the statement of cash flows for the year
ended 31 December 2021.
(1) Extracts from Linguine plc’s statement of financial position as at
31 December 2021:
2021 2020
£ £
Property, plant and equipment 969,400 987,200
Ordinary share capital (£1 shares) 2,500,000 1,500,000
Share premium 400,000 600,000
Revaluation surplus 275,600 150,300
Retained earnings 3,560,800 2,968,500
(2) During the year ended 31 December 2021 Linguine plc:
 made a profit for the year of £1,035,600;
 paid ordinary dividends;
 paid £15,000 (including £1,000 interest) due on a lease taken out in
the previous financial year;
 purchased new machines for cash of £214,600;
 sold a machine, making a profit of £12,700. The receivable remained
unpaid at 31 December 2021;
 charged depreciation of £314,000; and
 revalued its land.
(3) On 1 March 2021 Linguine plc made a 1 for 4 bonus issue out of share
premium. On 1 August 2021 ordinary shares were issued for cash.
(4) Trade and other receivables included the amount due for the machine
sold.
(5) Cash generated from operations was £256,200 before adjusting for
relevant information above.
Requirement
Prepare an extract from Linguine plc's statement of cash flows for the year
ended 31 December 2021, showing:
 cash generated from operations;
 cash flows from investing activities; and
 cash flows from financing activities. (10 marks)

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3.2 The IASB’s Conceptual Framework identifies the primary users of financial
statements as those who use the financial statements to make decisions about
providing resources to an entity. The Conceptual Framework also
acknowledges that other user groups may use the information presented in the
financial statements.
Requirement
Identify five possible user groups for Linguine plc and, for each user group, list
the type(s) of decisions they regularly make from information contained within
financial statements. (5 marks)
Total: 15 marks

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4 Assume that it is now 31 January 2022.
On 1 January 2021 Barbina plc had one subsidiary company, Fusilli Ltd. On
1 May 2021 Barbina plc acquired shares in a second subsidiary company,
Macaroni Ltd.
The individual statements of profit or loss for the year ended 31 December 2021
for Barbina plc and its subsidiaries are set out below:
Statements of profit or loss for the year ended 31 December 2021
Barbina plc Fusilli Ltd Macaroni Ltd
£ £ £
Revenue 789,600 501,200 301,200
Cost of sales (401,200) (302,800) (158,160)
Gross profit 388,400 198,400 143,040
Operating expenses (201,100) (111,200) (98,280)
Operating profit 187,300 87,200 44,760
Investment income 97,000 – –
Profit before tax 284,300 87,200 44,760
Income tax expense (56,000) (17,400) (9,000)
Profit for the year 228,300 69,800 35,760

Additional information
(1) Extracts from the statements of financial position as at 31 December 2021:
Barbina plc Fusilli Ltd Macaroni Ltd
£ £ £
Ordinary share capital
(£1 shares) 500,000 400,000 300,000
Retained earnings 1,250,600 524,800 161,900
(2) Barbina plc owns 70% of Fusilli Ltd’s ordinary shares. At the acquisition date:
 the fair values of the assets acquired and liabilities assumed by Barbina
plc were the same as their carrying amounts;
 the fair value of the non-controlling interests was £123,600; and
 retained earnings were £325,600.
Barbina plc chose to measure the non-controlling interests and goodwill on
this acquisition using the fair value method.
(3) On 1 May 2021 Barbina plc acquired 60% of Macaroni Ltd’s ordinary shares.
Barbina plc chose to measure the non-controlling interests and goodwill on
this acquisition using the proportionate method. Macaroni Ltd’s profits for the
year ended 31 December 2021 accrued evenly over the year.
On the acquisition date, the fair values of the assets acquired and liabilities
assumed by Barbina plc were the same as their carrying amounts with the
exception of a machine which had a fair value of £8,400 in excess of its
carrying amount. The machine had a remaining estimated useful life of seven

10 of 12
 years at 1 May 2021. Depreciation on this machine is recognised in cost of
sales.
(4) Cumulative impairments of £14,000 had been recognised by 31 December
2020 in respect of goodwill arising on the acquisition of Fusilli Ltd.
(5) In December 2021 Barbina plc sold goods to Fusilli Ltd for £16,000 at a gross
margin of 20%. At 31 December 2021 half of these goods remained unsold by
Fusilli Ltd.
(6) In September 2021 Barbina plc and Fusilli Ltd paid ordinary dividends of 20p
and 30p per share respectively.
Requirement
Prepare for the year ended 31 December 2021 for Barbina plc:
 the consolidated statement of profit or loss; and
 an extract from the consolidated statement of changes in equity showing the
retained earnings and non-controlling interests columns.
Total: 22 marks

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