Diploma in

Dip IFR
International
Financial Reporting
(Dip IFR)
Friday 6 December 2019

IFR INT ACCA EN

Time allowed: 3 hours 15 minutes

ALL FOUR questions are compulsory and MUST be attempted.

Do NOT open this question paper until instructed by the supervisor.

This question paper must not be removed from the examination hall.

The Association of
Chartered Certified
Accountants
ALL FOUR questions are compulsory and MUST be attempted

1 Alpha, a parent with a subsidiary Beta, is preparing the consolidated statement of financial position at 30 September
20X7. The draft statements of financial position for both entities as at 30 September 20X7 are given below:
Alpha Beta
$’000 $’000
Assets
Non-current assets:
Property, plant and equipment (note 1) 966,500 546,000
Development project (note 1) 0 20,000
Investment in Beta (note 1) 450,000 0
–––––––––– ––––––––
1,416,500 566,000
–––––––––– ––––––––
Current assets:
Inventories (note 2) 165,000 92,000
Trade receivables 99,000 76,000
Cash and cash equivalents 18,000 16,000
–––––––––– ––––––––
282,000 184,000
–––––––––– ––––––––
Total assets 1,698,500 750,000
–––––––––– ––––––––
Equity and liabilities
Equity
Share capital ($1 shares) 360,000 160,000
Retained earnings 570,000 360,000
Other components of equity 102,000 0
–––––––––– ––––––––
Total equity 1,032,000 520,000
–––––––––– ––––––––
Non-current liabilities:
Long-term borrowings (note 3) 300,000 85,000
Pension liability (note 4) 187,500 0
Deferred tax (note 1 and 2) 69,000 54,000
–––––––––– ––––––––
Total non-current liabilities 556,500 139,000
–––––––––– ––––––––
Current liabilities:
Trade and other payables 70,000 59,000
Short-term borrowings 40,000 32,000
–––––––––– ––––––––
Total current liabilities 110,000 91,000
–––––––––– ––––––––
Total equity and liabilities 1,698,500 750,000
––––––––––
–––––––––– ––––––––
––––––––
Note 1 – Alpha’s investment in Beta
On 1 April 20X7, Alpha acquired 120 million shares in Beta. Alpha made a payment of $450 million in exchange
for these shares. The individual interim financial statements of Beta showed a balance of $340 million on its retained
earnings on 1 April 20X7.
The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at 1 April
20X7. The following matters emerged:
− Plant and equipment having a carrying amount of $440 million had an estimated fair value of $480 million. The
estimated remaining useful life of this plant and equipment at 1 April 20X7 was four years.
− An in-process development project of Beta’s had a carrying amount of $8 million and a fair value of $18 million.
During the six-month period from 1 April 20X7 to 30 September 20X7, Beta incurred further development costs
of $12 million relating to this project. These costs were correctly capitalised in accordance with the requirements
of IAS® 38 – Intangible Assets. No amortisation of the capitalised costs of this project was required prior to
30 September 20X7.

2
− The fair value adjustments have not been reflected in the individual financial statements of Beta. In the consolidated
financial statements, the fair value adjustments will be regarded as temporary differences for the purposes of
computing deferred tax. The rate of deferred tax to apply to temporary differences is 20%.
On 1 April 20X7, the directors of Alpha measured the non-controlling interest in Beta at its fair value on that date. On
1 April 20X7, the fair value of an equity share in Beta was $3·80.
Note 2 – Intra-group trading
Since 1 April 20X7, Alpha has supplied a product to Beta. Alpha applies a mark-up of 25% to its cost of supplying
this product. Sales of the product by Alpha to Beta in the period from 1 April 20X7 to 30 September 20X7 totalled
$30 million. One-third of the products which Alpha has supplied to Beta since 1 April 20X7 were still unsold by Beta
at 30 September 20X7. Any adjustment which is necessary in the consolidated financial statements as a result of
these sales will be regarded as a temporary difference for the purposes of computing deferred tax. The rate of deferred
tax to apply to temporary differences is 20%. No amounts were owing to Alpha by Beta in respect of these sales at
30 September 20X7.
Note 3 – Long-term borrowings
Prior to 1 October 20X6, Alpha had no long-term borrowings. On 1 October 20X6, Alpha borrowed $300 million to
finance its future expansion plans. The term of the borrowings is five years and the annual rate of interest payable on
the borrowings is 6%, payable in arrears. Alpha charged the interest paid on 30 September 20X7 as a finance cost in
its financial statements for the year ended 30 September 20X7.
The borrowings are repayable in cash at the end of the five-year term or convertible into equity shares on that date at
the option of the lender. If the borrowings had not contained a conversion option, the lender would have required an
annual return of 8%, rather than 6%. Discount factors which may be relevant are as follows:
Discount factor Present value of Cumulative present
$1 payable at the value payable
end of year 5 at the end of
years 1–5 inclusive
6% 74·7 cents $4·21
8% 68·1 cents $3·99
Note 4 – Pension liability
Alpha has established a defined benefit pension plan for its eligible employees. The statement of financial position
of Alpha at 30 September 20X7 currently includes the estimated net liability at 30 September 20X6. The following
matters relate to the plan for the year ended 30 September 20X7:
– The estimated current service cost was advised by the actuary to be $60 million.
– On 30 September 20X7, Alpha paid contributions of $70 million into the plan and charged this amount as an
operating expense.
– The annual market yield on high quality corporate bonds on 1 October 20X6 was 8%.
– The estimated net liability at 30 September 20X7 was advised by the actuary to be $205 million.
No benefits have been paid to date.

Required:
Using the draft statements of financial position of Alpha and its subsidiary Beta at 30 September 20X7, and
the further information provided in notes 1–4, prepare the consolidated statement of financial position of Alpha
at 30 September 20X7. Unless specifically told otherwise, you can ignore the deferred tax implications of any
adjustments you make.
Note: You should show all workings to the nearest $’000.

(25 marks)

3 [P.T.O.
2 Gamma prepares its financial statements to 30 September each year. Notes 1 and 2 contain information relevant to
these financial statements:

Note 1 – Purchase of equity shares in a key supplier

On 1 October 20X6, Gamma purchased 200,000 equity shares in entity A, a key supplier. Entity A’s shares are listed
on the local stock exchange. This share purchase did not give Gamma control or significant influence over entity A but
Gamma intends to retain the shares in entity A as a long-term strategic investment.
Gamma paid $2·40 per share for these shares. This amount represents their fair value at the date of purchase.
Additionally, brokers charge a fee of 2% of the amounts paid to buy or sell a share on the stock exchange on which
entity A’s shares are quoted.
On 31 March 20X7, entity A paid a dividend of 25 cents per share. For the last few years entity A has made just one
dividend payment each year, in the month of March.
On 30 September 20X7, information received from the local stock exchange regarding entity A’s share price was:
– Broker’s bid price (the price the broker will pay to buy a share) – $2·70 per share.
– Broker’s ask price (the price which the broker requires when selling a share) – $2·90 per share. (13 marks)

Note 2 – Jointly manufactured product

On 1 October 20X6, Gamma entered into an agreement with entity B to manufacture and sell a product.
Under the terms of the agreement, pricing decisions, manufacturing specifications and selling decisions must be agreed
by both entities. Any relevant obsolescence risk or bad debt risk is jointly borne by both entities.
Entity B completes the first stage and the partially manufactured product is then transferred to Gamma who completes
the manufacture and delivers the product to the customer. Gamma invoices the customer and collects payment.
Entity B receives no payment for the goods they have manufactured until they are sold and the customer has paid
Gamma.
Revenue from the sale of the completed product is shared equally between Gamma and entity B. Each month Gamma
pays entity B its share of any amounts received from customers in the previous month. Under the terms of the
agreement, the payments to entity B must be made within two weeks of the end of each month.
Financial data relevant to the agreement for the year ended 30 September 20X7 is as follows:
Relating to the manufacture of the product:
Entity B Gamma
$m $m
Manufacturing costs 8 7
Inventories at 30 September 20X7 2 3·8 (note (i))
Relating to the sale of the product:
$m
Revenue 22
Trade receivables at 30 September 20X7 (note (ii)) 5
Bad debts written off (note (iii)) 0·1
Notes:
(i) $2·1 million of this cost related to costs incurred by entity B and $1·7 million related to costs incurred by Gamma.
All inventory is measured using IAS 2 – Inventories.
(ii) Amounts received from customers during September 20X7 were $1·5 million.
(iii) No further bad debts are expected. (12 marks)

4
Required:
Explain and show how the two events detailed in notes 1 and 2 would be reported in the financial statements of
Gamma for the year ended 30 September 20X7. Where alternative reporting treatments are permitted in note 1,
you should explain and show both alternatives. Marks will be awarded for BOTH figures AND explanations.
Note: The mark allocation is shown against the two notes above.

(25 marks)

5 [P.T.O.
3 (a) IFRS® 15 – Revenue from Contracts with Customers – was issued in September 2015 and applies to accounting
periods beginning on or after 1 January 2018. IFRS 15 replaces IAS 11 – Construction Contracts – and IAS 18
– Revenue. IFRS 15 contains principles which underpin the timing of the recognition of revenue from contracts
with customers and the measurement of that revenue.

Required:
Explain the principles underpinning the TIMING of revenue recognition and the MEASUREMENT of that
revenue which are outlined in IFRS 15. You should provide examples of revenue transactions to support your
explanations of these key principles. (12 marks)

(b) Delta prepares financial statements to 30 September each year. Notes 1 and 2 provide information on revenue
transactions relevant to the year ended 30 September 20X7.
Note 1 – Sale of product with right of return
On 1 April 20X7 Delta sold a product to a customer for $121,000. This amount is payable on 30 June 20X9. The
manufacturing cost of the product for Delta was $80,000. The customer had a right to return the product for a full
refund at any time up to and including 30 June 20X7. At 1 April 20X7, Delta had no reliable evidence regarding
the likelihood of the return of the product by the customer. The product was not returned by the customer before
30 June 20X7 and so the right of return for the customer expired. On both 1 April 20X7 and 30 June 20X7, the
cash selling price of the product was $100,000. A relevant annual rate to use in any discounting calculations is
10%. (7 marks)
Note 2 – Sale with a volume discount incentive
On 1 January 20X6 Delta began an arrangement to sell goods to a third party – entity B. The price of the goods
was set at $100 per unit for all sales in the two-year period ending 31 December 20X7. However, if sales of the
product to entity B exceed 60,000 units in the two-year period ending 31 December 20X7, then the selling price
of all units is retrospectively set at $90 per item.
Sales of the goods to entity B in the nine-month period ending on 30 September 20X6 totalled 20,000 units and
this volume of sales per month was not expected to change before 31 December 20X7.
However, in the year ended 30 September 20X7, total sales of the goods to entity B were 35,000 and based on
current orders from entity B, the estimate was revised. The directors of Delta estimated that the total sales of the
goods to entity B in the two-year period ending 31 December 20X7 would be more than 60,000 units.
(6 marks)

Required:
Explain and show how the transactions in notes 1 and 2 would be reported in the financial statements of Delta
for the year ended 30 September 20X7.
Note: The mark allocation is shown against the two transactions in the separate notes above.

(25 marks)

6
4 Epsilon, a company with a year end of 30 September 20X7, is listed on a securities exchange. A director of Epsilon has
a number of questions relating to the application of International Financial Reporting Standards (IFRS® Standards) in
its financial statements for the year ended 30 September 20X7. The questions appear in notes 1–3.

Note 1 – Inconsistencies
I have recently been appointed to the board of another company which is growing very quickly and will probably seek a
securities exchange listing in the next few years. As part of my familiarisation process, I’ve been reviewing their financial
statements which they state comply with IFRS Standards. I have been comparing them with the financial statements
of Epsilon. There appear to be some inconsistencies between the two sets of financial statements:
– The financial statements of the other company contain no disclosure of the earnings per share figure and there is
no segmental analysis despite this company having a number of divisions with different types of business. Epsilon
gives both of these disclosures.
– Both Epsilon and this other company have received government grants to assist in the purchase of a non-current
asset. We have deducted the grant from the cost of the non-current asset. They have recognised the grant received
as deferred income.
Please explain the apparent inconsistencies to me. (7 marks)

Note 2 – Pending legal cases

At a recent board meeting, we discussed legal cases which customers A and B are bringing against Epsilon in respect
of the supply of products which were allegedly faulty. We supplied the goods in the last three months of the financial
year.
We have reliably estimated that if the actions succeed, we are likely to have to pay out $10 million in damages to
customer A and $8 million in damages to customer B.
Epsilon’s legal advisers have reliably estimated that there is a 60% chance that customer A’s claim will be successful
and a 25% chance that customer B’s claim will be successful.
I know we have insurance in place to cover us against claims like this. It is highly probable that any claims which were
successful would be covered under our policy. Therefore I would have expected to see a provision for legal claims based
on the likelihood of the claims succeeding. However, I would also have expected to see an equivalent asset in respect
of amounts recoverable from the insurance company. The financial statements do contain a provision for $10 million
but no equivalent asset. Disclosure of the information relating to both of the claims and the associated insurance is
made in the notes to the financial statements. How can it be the correct accounting treatment to include a liability but
not the corresponding asset, given the above facts? (12 marks)

Note 3 – Statement of profit or loss and other comprehensive income

I’ve been reviewing the statement of profit or loss and other comprehensive income and it appears to be in two sections.
The first section appears to be entitled ‘profit or loss’ and the second ‘other comprehensive income’. It appears that
the tax charge is included in the ‘profit or loss’ section of the statement as there is no tax charge included in the ‘other
comprehensive income’ section of the statement. I have a number of questions regarding this statement:
– How do we decide where to put a particular item of income or expenditure?
– Where does the tax relating to ‘other comprehensive income’ get shown?
– Do the above points have an impact on the computation of performance evaluation indicators which will be of
interest to shareholders? (6 marks)

Required:
Provide answers to the questions raised by the director in notes 1–3. You should justify your answers with reference
to relevant International Financial Reporting Standards.
Note: The mark allocation is shown against each of the three notes above.

(25 marks)

End of Question Paper

7
Answers
Diploma in International Financial Reporting (Dip IFR) December 2019 Answers
and Marking Scheme

Marks
1 Consolidated statement of financial position of Alpha at 30 September 20X7
(Note: All figures below in $’000)
$’000
Assets
Non-current assets:
Property, plant and equipment (966,500 + 546,000 + 35,000 (W1)) 1,547,500 ½+½
Goodwill (W2) 62,000 3½ (W2)
Intangible assets (20,000 + 10,000 (W1)) 30,000 ½+½
––––––––––
1,639,500
––––––––––
Current assets:
Inventories (165,000 + 92,000 – (30,000 x 1/3 x 25/125%) 255,000 ½+1
Trade receivables (99,000 + 76,000) 175,000 ½
Cash and cash equivalents (18,000 + 16,000) 34,000 ½
––––––––––
464,000
––––––––––
Total assets 2,103,500
––––––––––
––––––––––
Equity and liabilities
Equity attributable to equity holders of the parent
Share capital ($1 shares) 360,000 ½
Retained earnings (W4) 571,310 7 (W4)
Other components of equity (W8) 113,380 4 (W8)
––––––––––
1,044,690
Non-controlling interest (W3) 156,000 1 (W3)
––––––––––
Total equity 1,200,690
––––––––––
Non-current liabilities:
Long-term borrowings (W10) 365,210 1½ (W10)
Deferred tax (W11) 131,600 1½ (W11)
Pension liability 205,000 ½
––––––––––
Total non-current liabilities 701,810
––––––––––
Current liabilities:
Trade and other payables (70,000 + 59,000) 129,000 ½
Short-term borrowings (40,000 + 32,000) 72,000 ½
––––––––––
Total current liabilities 201,000
–––––––––– –––
Total equity and liabilities 2,103,500 25
––––––––––
–––––––––– –––
WORKINGS – DO NOT DOUBLE COUNT MARKS. ALL NUMBERS IN $’000 UNLESS OTHERWISE STATED.
Working 1 – Net assets table for Beta
1 April 30 September
20X7 20X7
$’000 $’000 For W2 For W4
Share capital 160,000 160,000 ½
Retained earnings:
Per financial statements of Beta 340,000 360,000 ½ ½
Fair value adjustments:
Plant and equipment 40,000 35,000 ½ 1
Development project 10,000 10,000 ½ ½
Deferred tax on fair value adjustments:
Date of acquisition (20% x (40,000 + 10,000)) (10,000) ½
Year end (20% x (35,000 + 10,000)) (9,000) ½
–––––––– ––––––––
Net assets for the consolidation 540,000 556,000 2½ 2½
–––––––– –––––––– –––– ––––
⇒ W2 ⇒ W4
–––– ––––
Increase in net assets post-acquisition (556,000 – 540,000) 16,000
––––––––

11
 Marks
Working 2 – Goodwill on acquisition of Beta
$’000
Cost of investment:
Cash paid 450,000 ½
Non-controlling interest at date of acquisition (40,000 x $3·80) 152,000 ½
Net assets at date of acquisition (W1) (540,000) 2½ (W1)
–––––––– –––
62,000 3½
–––––––– –––
Working 3 – Non-controlling interest in Beta
$’000
At date of acquisition (W2) 152,000 ½
25% of post-acquisition increase in net assets of 16,000 (W1) 4,000 ½
–––––––– –––
156,000 1
–––––––– –––
Working 4 – Retained earnings
$’000
Alpha – per draft SOFP 570,000 ½
Adjustment for unrealised profit on unsold inventory (2,000 less 20% (deferred tax)) (1,600) ½
Adjustment for finance cost of loan (W6) (4,090) 1 (W6)
Adjustment re: defined benefit retirement benefit plan (W7) (5,000) 2 (W7)
Beta – 75% x 16,000 (W1) 12,000 ½ + 2½ (W1)
–––––––– –––
571,310 7
–––––––– –––
Working 5 – Equity component of long-term loan
$’000
Total proceeds of compound instrument 300,000 ½
Debt component:
– Interest stream – 300,000 x 6% x $3·99 (71,820) ½
– Principal repayment – 300,000 x $0·681 (204,300) ½
–––––––– –––
So equity component equals 23,880 1½
–––––––– –––
Working 6 – Adjustment for finance cost of loan
$’000
Actual finance cost – 8% (300,000 – 23,880 (W5)) 22,090 ½
Incorrectly charged by Alpha (300,000 x 6%) (18,000) ½
–––––––– –––
So adjustment equals 4,090 1
–––––––– –––
Working 7 – Adjustment re: defined benefit retirement benefit plan
$’000
Current service cost 60,000 ½
Interest cost (8% x 187,500) 15,000 1
Contributions incorrectly charged to profit or loss (70,000) ½
–––––––– –––
So adjustment equals 5,000 2
–––––––– –––
Working 8 – Other components of equity
$’000
Alpha – per draft financial statements 102,000 ½
Equity element of convertible loan (W5) 23,880 1½
Actuarial gain/(loss) on defined benefit retirement benefits plan (W9) (12,500) 2
–––––––– –––
113,380 4
–––––––– –––

12
 Marks
Working 9 – Actuarial gain/(loss) on defined benefit pension plan
$’000
Opening liability 187,500 ½
Current service cost 60,000 ½
Interest cost (principle mark already awarded) 15,000
Contributions paid into plan (70,000) ½
––––––––
192,500
Actuarial loss on re-measurement (balancing figure) 12,500 ½
––––––––
Closing liability (principle mark already awarded) 205,000
–––––––– –––
2
–––
Working 10 – Long-term borrowings
$’000
Opening loan element (300,000 – 23,880 (W5)) 276,120 ½
Finance cost less interest paid (W6) 4,090 ½
––––––––
So closing loan element for Alpha equals 280,210
Long-term borrowings of Beta 85,000 ½
–––––––– –––
So consolidated long-term borrowings equals 365,210 1½
–––––––– –––
Working 11 – Deferred tax
$’000
Alpha + Beta – per draft SOFP (69,000 + 54,000) 123,000 ½
On closing fair value adjustments in Beta (W1) 9,000 ½
On unrealised profits in inventory (2,000 x 20%) (400) ½
–––––––– –––
131,600 1½
–––––––– –––

2 Note 1 – Purchase of equity shares in a key supplier

Under the principles of IFRS® 9 – Financial Instruments – equity investments must be measured at fair
value because the contractual terms associated with the investment do not entitle the holder to specific
payment of interest and principal (sense of the point only needed). 1
The fair value of the investment in entity A at the date of purchase is $480,000 (200,000 x $2·40). ½
The amount actually paid for the shares (incorporating broker’s fee) in entity A on 1 October 20X6 was
$489,600 (480,000 x 1·02). ½
The difference between the price paid for the shares and their fair value is $9,600 ($489,600 – $480,000).
This difference is regarded as a transaction cost by IFRS 13 – Fair Value Measurement. 1
IFRS 9 would normally require equity investments to be measured at fair value through profit or loss. 1 (principle)
Where financial assets are measured at fair value through profit or loss, transaction costs are recognised
in profit or loss as incurred. Therefore in this case, $9,600 would be taken to profit or loss on 1 October
20X6. 1
Under the principles of IFRS 13, the fair value of an asset is the amount which could be received to
sell the asset in an orderly transaction. Where the asset is traded in an active market (as is the case for
the investment in entity A), then fair value should be determined with reference to prices quoted in that
market. 1 (principle)
Therefore the fair value of the investment in entity A at the year end is $540,000 (200,000 x $2·70). 1
The year-end fair value of $540,000 is unaffected by the broker’s fees which would be incurred if the
shares were to be sold – these fees are not a component of fair value measurement. ½ (principle)
The change in fair value of $60,000 ($540,000 – $480,000) between 1 October 20X6 and 30 September
20X7 would be taken to profit or loss at the end of the reporting period. 1
The dividend received of $50,000 (200,000 x 25 cents) would be recognised as other income in profit or
loss at 31 March 20X7. 1
Because the shares in entity A are not held for trading, Gamma has the option to make an irrevocable
election on 1 October 20X6 to measure the shares at fair value through other comprehensive income. 1 (principle)

13
 Marks
Were this election to be made, then the transaction cost would be included in the initial carrying amount
of the financial asset, making this $489,600. 1
The difference between the closing fair value of the investment and its initial carrying amount is $50,400
($540,000 – $489,600). This is recognised in other comprehensive income. 1
The dividend income of $50,000 is still recognised in profit or loss regardless of how the financial asset is
measured. ½
–––
13
–––

Note 2 – Joint manufacture of a product with entity B

Under the principles of IFRS 11 – Joint Arrangements – the agreement with entity B is a joint arrangement.
This is because key decisions, e.g. pricing and selling decisions, manufacturing specifications, require the
consent of both parties and so joint control is present. 2
IFRS 11 would regard the type of arrangement with entity B as a joint operation. This is because the two
parties have rights to specific assets and liabilities relating to the arrangement and no specific entity has
been established. 2
Because of the type of joint arrangement, each entity will recognise specific assets and liabilities relating to
the arrangement (exact wording not necessary – just sense of the point). 1
This means that Gamma will recognise revenues of $11 million ($22 million x 50%). 1
Gamma will recognise bad debt expense of $50,000 ($100,000 x 50%). 1
Gamma’s trade receivables at 30 September 20X7 will be $2·5 million ($5 million x 50%). 1
Gamma will show a payable to entity B of $750,000 ($1·5 million x 50%) 30 September 20X7. 1
Gamma’s inventories at 30 September 20X7 will be $1·7 million ($3·8 million – $2·1 million). 1½
Gamma’s cost of sales will be $5·3 million ($7 million – $1·7 million). 1½
–––
12
–––
25
–––

3 (a) The timing of the recognition of revenue under IFRS 15 – Revenue from Contracts with Customers –
depends on the type of performance obligation the entity has under the contract with the customer.
A performance obligation is a distinct promise to transfer goods or services to the customer (sense of
the point only required). 1 (principle)
IFRS 15 requires that revenue should be recognised when (or as) a particular performance obligation
is satisfied. 1 (principle)
In many cases (e.g. the sale of goods in the ordinary course of business), performance obligations are
satisfied at a point in time. In such cases, the revenue is recognised at the point control of the goods
is transferred to the customer. 2
In some cases (e.g. a contract to construct an asset for use by a customer), performance obligations
are satisfied over a period of time. In such cases, the proportion of the total revenue recognised is the
proportion of the performance obligation which has been satisfied by the reporting date. 2
The measurement of revenue is based on the transaction price. The transaction price is the amount of
consideration to which an entity expects to be entitled in exchange for transferring the promised goods
and services to the customer. 1
In many cases, where the consideration for the transaction is fixed and payable immediately after the
revenue has been recognised (e.g. most sales of goods), the transaction price is the invoiced amount
less any sales taxes collected on behalf of third parties. 1
Where the due date for payment of the invoiced price is ‘significantly different’ (certainly more than
12 months) from the date of recognition of the revenue, then the time value of money should be
taken into account when measuring the transaction price. This means that the revenue recognised on
the sale of goods with deferred payment terms would be split into a ‘sale of goods’ component and a
financing component. 2
Where the total consideration due from the customer contains variable elements (e.g. the possibility
that the customer obtains a discount for bulk purchases depending on the total purchases in a period),
then the transaction price should be based on the best estimate of the total amount receivable from
the customer as a result of the contract. 2
–––
12
–––
14
 Marks
(b) Note 1 – Sale of product with right of return
Under the principles of IFRS 15, revenue cannot be recognised on 1 April 20X7 because at that
date the consideration is variable and the amount of the variable consideration cannot be reliably
estimated. 1
However, on 1 April 20X7 $80,000 would be removed from inventory and included as a ‘right to
recover asset’ (any reasonable description of this would be permitted). 1
Revenue of $100,000 (the present value of $121,000 receivable in two years) is recognised on
30 June 20X7 when the uncertainty regarding potential returns is resolved. 1
On the same day, the ‘right to recover asset’ will be de-recognised and transferred to cost of sales. 1
Delta will also recognise finance income of $2,500 ($100,000 x 10% x 3/12) in the year ended
30 September 20X7. 2
At 30 September 20X7, Delta will recognise a trade receivable of $102,500 ($100,000 + $2,500). 1
–––
7
–––
Note 2 – Sale to a customer with a volume discount incentive
The consideration payable by the customer is variable as it depends on the volume of sales in the
two-year period. However, Delta can reliably estimate the outcome and that the volume discount
threshold will not be exceeded (sales for 9 months: 20,000 x 24/9 = 53,333). The revenue included
for the year ended 30 September 20X6 will be booked at $100 per unit and will be $2 million (20,000
x $100). 3
During the year ended 30 September 20X7, actual sales volumes and estimates change such that
the cumulative revenue should now be booked at $90 per unit. It is now expected that the volume
discount threshold will be exceeded. This means that the cumulative revenue relating to these goods
at 30 September 20X7 will be $4,950,000 ((20,000 + 35,000) x $90). 2
The revenue which will actually be booked by Delta for the year ended 30 September 20X7 will be
$2,950,000 ($4,950,000 – $2 million recognised in 20X6). 1
–––
6
–––
25
–––

4 Note 1 – Inconsistencies
It is possible for two sets of financial statement to comply with IFRS standards and yet be inconsistent
with each other. Some individual IFRS standards allow a choice of accounting treatment and some IFRS
standards are only compulsory for listed entities like Epsilon. 2
Both IFRS 8 – Operating Segments – and IAS® 33 – Earnings per Share – are only compulsory for listed
entities. The other company is not currently listed and is not required to give either of these disclosures but
can do so on a voluntary basis. If the other company obtains a listing, then they will have to give these
disclosures. 2
IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance – requires
government grants to be recognised in profit or loss on a systematic basis over the period in which the entity
recognises as expenses the related cost. However, IAS 20 allows entities to choose from two alternative
models for presenting the government grants. These are the approach, which Epsilon uses, which deducts
the grant in arriving at the non-current asset’s carrying amount and will result in a reduced depreciation
charge through profit or loss. The other company uses the allowed alternative of setting up the grant as
deferred income and releasing the grant systematically to profit or loss. The net effect on profit or loss will
be the same, whichever approach is used. Consistency of choice is required within entities. Therefore the
other company could continue to use the deferred income approach to present its government grants even
after obtaining a listing. 3
–––
7
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Note 2 – Pending legal cases

Provisions are covered by IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. IAS 37 states
that for a provision to be recognised, an obligating event must have incurred before the year end. In
this case, both customer A and B were sold the product before the year end so an obligating event has
occurred. 2

15
 Marks
IAS 37 further states that a provision is only recognised when there is a probable outflow of economic
benefits. IAS 37 interprets ‘probable’ to be 50% or more. This is only the case with the supply to customer A,
so it is correct to only recognise a provision for customer A’s claim. 3
IAS 37 also states that any provision should be measured based on the best estimate of the likely outflow
of economic benefits. In this case, this amount is $10 million. 2
Any liability arising from the legal case brought by customer B would be regarded as a contingent liability
because there is only a possible (rather than a probable) chance of an outflow of economic benefits. In this
case, it is dealt with by disclosure, rather than provision. 2
In addition to the recognition of a provision in the case of customer A’s claim, it is also necessary to disclose
key facts relating to the case in the notes to the financial statements. 1
The possible recovery of funds from the insurance company would be regarded as a contingent asset. This
would always be the case for possible assets unless it is virtually certain (rather than highly probable) that
there will be an inflow of economic benefits. Where there is a probability of an inflow of funds relating to a
contingent asset, then this is dealt with by disclosure under IAS 37. 2
–––
12
–––

Note 3 – Statement of profit or loss and other comprehensive income

The principles underpinning the overall presentation of financial statements are set out in IAS 1 –
Presentation of Financial Statements. IAS 1 requires that all income and expenses are presented in a
statement of profit or loss and other comprehensive income. 1
IAS 1 does not allow entities to choose whether to present income and expenses in the profit or loss or the
other comprehensive income section of the statement. IAS 1 states that, unless required or permitted by a
specific IFRS standard, all items of income and expense should be presented in the profit or loss section of
the statement. 2
IAS 1 states that the tax relating to items of other comprehensive income is either shown as a separate line
in the ‘other comprehensive income’ section of the statement or netted off against each component of other
comprehensive income and disclosed in the notes to the financial statements. 2
The key implication of an item being presented in other comprehensive income rather than profit or loss
is that the item would not be taken into account when measuring earnings per share, an important
performance indicator for listed entities like Epsilon. 1
–––
6
–––
25
–––

16
Examiner’s report
Diploma in International Financial Reporting (DipIFR)
December 2019

The examining team share their observations from the marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer constructive advice for future candidates.

General Comments

The examination consisted of four compulsory questions. All questions carried 25 marks. This is a
change from the previous format, where question one carried 40 marks and the other three
questions carried 20 marks.

In previous examiners reports I have commented on the fact that a number of candidates appeared
to be focusing their studies on the preparation of consolidated financial statements (always a key
component of question one) whilst neglecting other syllabus areas. I also commented on the fact
that this approach would clearly be less effective when the mark allocation for question one
changed from 40 marks to 25 marks. Unfortunately the apparent tendency to focus on question
one (and particularly the consolidation aspects of that question) was evident again in December
2019. I therefore feel it necessary to emphasise once again that the apparent focus of attention on
the preparation of consolidated financial statements to the exclusion of other syllabus areas is a
very unwise tactic for candidates to employ.

Overall candidate performance on this paper was disappointing and there was an increase in the
number of instances of candidates being extremely unprepared for the examination. In order to
succeed in this paper it is necessary to undertake a rigorous programme of study of the whole
syllabus. This had clearly not happened in the case of a number of candidates who presented
themselves in December 2019. The more specific comments I make later in this report do not refer
to those candidates who appear to be extremely unprepared and are therefore scoring very low
marks.

There are no overall observations concerning particularly good or poor performance on individual
questions beyond the analysis of specific questions that is given below. However two general
comments that I would make are:

1. Where questions ask for computation and explanation of figures (this tends to happen in
questions two, three and four on this paper) candidates should ensure that explanations
are given. Explanation marks will only be given if the explanations are given – they will not
be ‘assumed’ if the correct figures are given without explanations.
2. It is very important to read the question requirements carefully in questions two, three and
four and make sure that answers reflect the requirements of the questions. There were a
number of instances where candidates saw that a particular International Financial
Reporting Standard was relevant (for example IFRS 15 – Revenue from Contracts with
Customers – in question three of the December paper) and proceeded to refer to specific
aspects of the standard in an unstructured way that did not address the actual question
requirements. This approach will not attract many marks.

Examiner’s report – Dip IFR - December 2019 1

Specific Comments

Question One

The scenario for the question was based around a parent entity, Alpha, with a subsidiary, Beta.
Beta was acquired part-way through the current accounting period (the year ended 30 September
20X7). The question required candidates to prepare the consolidated statement of financial
position of Alpha at 30 September 20X7. The financial statements of Alpha needed to be adjusted
for the impact of two issues that had not been correctly dealt with by Alpha:
The treatment of a convertible loan.
The treatment of a defined benefit pension plan.

On the whole, this question was answered satisfactorily. This applies both to the consolidation
aspects and the adjustments to the individual financial statements of Alpha prior to consolidation.
Candidates know that question 1 will always be a consolidation question and so understandably
study the topic thoroughly. A number of relatively common errors were noted and these are
summarised below:
Consolidating only 6/12 of Beta’s assets and liabilities (presumably on the basis that Beta
was acquired on 1 April 20X7).
Incorrectly computing the closing fair value adjustment to the property, plant and equipment
of Beta for consolidation purposes. This was usually by allowing for extra depreciation for a
full twelve months instead of six months (from the date of acquisition).
Treating the increase in the cost of Beta’s development project post acquisition (from $8
million to $20 million) as an additional fair value adjustment at the date of acquisition.
Ignoring the fair value adjustment to Beta’s development project (perhaps because the
capitalised cost of the project at 30 September 20X7 was greater than the fair value of the
project at 31 March 20X7 (the date of acquisition of Beta by Alpha).
Computing an unrealised profit adjustment on the total sales made by Alpha to Beta since
the date of acquisition rather than on the amounts still included in Beta’s inventories at 30
September 20X7.
Using a fraction of 1/3 or ¼ to compute the unrealised profit (rather than 25/125, or 1/5).
Computing the finance cost on the convertible loan at an annual rate of 6% rather than 8%.
Using present value factors for 6% (rather than 8%) to compute the loan element of the
convertible loan.
Incorrectly computing the interest cost on the opening defined benefit pension liability.
Where this occurred it was often the closing liability that was used for the computation
rather than the opening one.
Correctly computing the actuarial difference on the defined benefit pension liability but
showing this as a gain rather than a loss.
Posting the actuarial difference on the defined benefit pension liability to consolidated
retained earnings rather than consolidated other components of equity.

A minority of candidates wasted time in this question by giving unnecessary explanations of the
consolidation procedures involved, sometimes at the expense of actually carrying out all the
procedures. Detailed explanations are not required in question one – what is important here is
application of techniques. Question Two

Examiner’s report – Dip IFR – December 2019 2

This question required candidates to explain and show the accounting treatment of 2 separate
issues in the financial statements of Gamma:
a) The accounting treatment of the purchase of shares in a key supplier (entity A).
b) The accounting treatment of a jointly manufactured product (with entity B).

Answers to part (a) were variable. Most candidates realised that, in the absence of control or
significant influence by Gamma, the relevant financial reporting standard to apply was IFRS 9 –
Financial Instruments. However a minority of candidates made inappropriate references to IAS 24
– Related Party Disclosures. In the absence of control or significant influence a key supplier is not
a related party according to IAS 24. A number of candidates were not specific enough in applying
IFRS 9 to the scenario. They should have stated that, under IFRS 9, equity investments are
measured at fair value through profit or loss unless they are held for the long term and an
irrevocable election is made to measure them at fair value through other comprehensive income.
Instead they wasted time talking about IFRS 9 measurement issues regarding the business model
and the contractual cash flows concerning financial assets generally. Much of this discussion was
not relevant to the scenario. Even where candidates did move on to discuss accounting for the
investment under both fair value alternatives the following common errors occurred:
1. Stating that the broker’s fee payable on purchase (a transaction cost) is always charged as
an expense. This is not so where the investment is measured at fair value through other
comprehensive income – in this case the transaction cost is included in the initial carrying
amount of the investment.
2. Deducting the transaction cost from the carrying amount of the investment rather than
adding it.
3. Time apportioning the dividend received from the investment on 31 March 20X7 (half-way
through the current accounting period) and only including six months of this dividend as
income.
4. Stating that, where the investment is measured at fair value through other comprehensive
income, dividend income is recognised in other comprehensive income rather than in profit
or loss.
5. Incorrectly computing the fair value of the investment at the reporting date. A number of
candidates used the ask price rather than the bid price, or even an average of the two.
Others included the brokers fee that would be payable on sale of the share as part of the
fair value measurement. In a number of cases candidates demonstrated little understanding
of the requirements of IFRS 13 – Fair Value Measurement.

Answers to part (b) were also variable. Most candidates seemed to appreciate that the scenario
was a joint arrangement and that the relevant International Financial Reporting Standard was
therefore IFRS 11 – Joint Arrangements. However a significant number of candidates did not
adequately explain that in the circumstances outlined the arrangement was a joint operation rather
than a joint venture and so lost out on explanation marks. That said, the majority of candidates did
endeavour to produce numerical extracts from the financial statements based on treating the

Examiner’s report – Dip IFR – December 2019 3

arrangement as a joint operation rather than a joint venture. The following common errors were
noted in the production of the financial statement extracts:
1. Treating the arrangement as if the costs were shared equally as well as the revenues.
2. Including the costs incurred by entity B relating to inventories held by Gamma as part of
Gamma’s closing inventories.
3. Not deducting Gamma’s closing inventories from Gamma’s costs of production when
computing Gamma’s cost of sales.
4. Deducting the cash received from customers in September 20X7 from the closing
receivables at 30 September 20X7.
5. Not showing the amounts payable by Gamma to entity B in respect of cash collections from
customers in September 20X7.

Question Three

This question required candidates to:

a) Explain the principles of timing and measurement of revenue that are outlined in IFRS 15 –
Revenue from Contracts with Customers.
b) Apply the principles discussed in part (a) to the recognition and measurement (in the
financial statements of Delta) of:
The sale of a product with right of return (note 1).
The sale of a product with a volume discount incentive (note 2).

Answers to part (a) were somewhat disappointing. Many candidates did not appear to have read
the requirements of the question carefully enough. Instead of describing the principles of timing
and measurement of revenue a majority of candidates simply set out the 5 step revenue
recognition model that is identified in IFRS 15 but made no real attempt to address the specific
requirements of the question. Whilst some marks were gained for setting out the 5 step model
(because it does contain some timing and measurement principles) a number of issues that were
raised by simply stating the model did not attract marks because they were unrelated to the actual
question requirements.

Answers to part (b) – note 1 were also disappointing. Many candidates incorrectly stated that
revenue could be recognised on 1 April 20X7 (the date the goods were sold to the customer) as
there was no reliable estimate available at this time of the likelihood that the goods would be
returned by the customer. Therefore many candidates failed to mention that Delta would recognise
a ‘right to recover’ asset on 1 April 20X7. A number of candidates also failed to appreciate that
given the two-year time difference between revenue recognition and date of payment the
transaction included a significant financing component.

Answers to part (b) – note 2 were on the whole rather better. Most candidates noted that the sales
in the year ended 30 September 20X6 (a nine-month period from 1 January 20X6 to 30 September

Examiner’s report – Dip IFR – December 2019 4

20X6) would initially be recorded at $100 per unit. However marks were often lost by candidates
due to:
1. A failure to fully use the monthly sales made in the nine-month period to 30 September
20X6 to predict the likely level of sales in the two-year period from 1 January 20X6 to 31
December 20X7.
2. Recording twelve months’ sales at $100 per unit in the year ended 30 September 20X6
(rather than nine months from 1 January 20X6.

The majority of candidates correctly concluded that ultimately all the goods would be sold to entity
B at a price of $90 per unit. They also correctly concluded that the revenues for the year ended 30
September 20X7 would reflect a ‘catch-up’ adjustment regarding the revenues that had been
booked in the previous period at $100 per unit. However it is worth noting that:

1. A number of candidates incorrectly concluded that there would need to be provision in the
statements of Delta at 30 September 20X7 regarding the revenues initially booked at $100
per unit.
2. A number of candidates wasted time by making lengthy references to the provisions of IAS
8 – Accounting Policies, Changes in Accounting Estimates and Errors. Appropriate
application of IFRS 15 almost negates the need to refer to IAS 8 in this question.

Question Four

This question required candidates to answer questions from a director of Epsilon (a listed entity)
relating to
a) Apparent inconsistencies between the financial statements of Epsilon and those of an
unlisted entity (note 1).
b) The accounting treatment of pending legal cases against Epsilon, plus associated
insurance cover (note 2).
c) The difference between ‘profit or loss’ and ‘other comprehensive income’ and the impact on
performance measurement of showing an item of income or expense in one or another
section (note 3).

In answering the question that appeared in note 1 most candidates correctly observed that certain
International Financial Reporting Standards only apply to listed entities. Having said this, most
candidates did not note that unlisted entities have the option to voluntarily apply such standards. A
significant number of candidates wasted time by producing lengthy descriptions of the provisions of
IFRS 8 – Operating Segments – and IAS 33 – Earnings per Share. These descriptions were not
asked for in the question so even where they were correct they did not attract marks. Most
candidates correctly applied IAS 20 – Accounting for Government Grants and Disclosure of
Government Assistance – to the issue of the accounting treatment of government grants.

Examiner’s report – Dip IFR – December 2019 5

Answers to the question that appeared in note 2 were generally of a good standard. The most
common error that was made by candidates was computing a provision in respect of the two legal
claims as 60% of customer A’s claim plus 25% of customer B’s claim. Such an approach is not
acceptable when measuring discrete obligations.

Answers to note 3 were generally of an acceptable standard. Given the lack of a robust conceptual
distinction between ‘profit or loss items’ and ‘other comprehensive income items’ candidates who
supplemented their discussion of this distinction with examples were given credit. As far as the tax
relating to other comprehensive income is concerned a number of common errors were made:
1. Stating that items of other comprehensive income have no tax implications whatsoever.
2. Stating that the tax implications of items of other comprehensive income are solely going to
be deferred tax rather than current tax (often true in practice) but then embarking on a
lengthy discussion of provisions of IAS 12 – Income Taxes (not needed to answer the
question).
3. Stating that any tax implications of items of other comprehensive income will be reflected in
the tax charge in the profit or loss section of the statement of comprehensive income.

Examiner’s report – Dip IFR – December 2019 6