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DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO. Financial Pillar F1 - Financial Operations 22 May 2014 - Thursday Morning Session Instructions to candidates You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlight and/or make notes on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or subquestions). ALL answers must be written in the answer book. Answers written on the question paper will not be submitted for marking. You should show all workings as marks are available for the method you use. ALL QUESTIONS ARE COMPULSORY. Section A comprises 10 sub-questions and is on pages 3 to 5. Section B comprises 6 sub-questions and is on pages 6 to 9. Section C comprises 2 questions and is on pages 12 to 15. References to IFRS in this paper refer to International Financial Reporting Standards or International Accounting Standards as issued or adopted by the International Accounting Standards Board. The country 'Tax Regime' for the paper is provided on page 2. Maths tables and formulae are provided on pages 17 and 18. The list of verbs as published in the syllabus is given for reference on page 19. Write your candidate number, the paper number and examination subject title in the spaces provided on the front of the answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close. Tick the appropriate boxes on the front of the answer book to indicate the questions you have answered. F1 - Financial Operations You are allowed three hours to answer this question paper. TURN OVER The Chartered Institute of Management Accountants 2014 COUNTRY X - TAX REGIME FOR USE THROUGHOUT THE EXAMINATION PAPER Relevant Tax Rules for Years Ended 31 March 2007 to 2014 Corporate Profits Unless otherwise specified, only the following rules for taxation of corporate profits will be relevant, other taxes can be ignored: Accounting rules on recognition and measurement are followed for tax purposes. All expenses other than depreciation, amortisation, entertaining, taxes paid to other public bodies and donations to political parties are tax deductible. Tax depreciation is deductible as follows: o 50% of additions to property, plant and equipment in the accounting period in which they are recorded; o 25% per year of the written-down value (i.e. cost minus previous allowances) in subsequent accounting periods except that in which the asset is disposed of; o No tax depreciation is allowed on land. The corporate tax on profits is at a rate of 25%. No indexation is allowable on the sale of land. Tax losses can be carried forward to offset against future taxable profits from the same business. Value Added Tax Country X has a VAT system which allows entities to reclaim input tax paid. In country X the VAT rates are: Zero rated Standard rated Exempt goods May 2014 0% 15% 0% 2 Financial Operations SECTION A - 20 MARKS [You are advised to spend no longer than 36 minutes on this section] ANSWER ALL TEN SUB-QUESTIONS IN THIS SECTION Instructions for answering Section A: The answers to the ten sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number and then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. Question One 1.1 Define the meaning of the term \"an indirect tax\". (2 marks) 1.2 List TWO main sources of tax rules in a country. (2 marks) 1.3 A withholding tax is: A B C D tax deducted at source before payment to a recipient in a foreign country. tax on profits that is then paid out net as a dividend to equity shareholders. tax paid to local tax authorities with an amount withheld from payment. tax withheld from employees' salaries with salaries paid to them net of tax. (2 marks) 1.4 During the VAT period ended 31 March 2014, EDF raised sales invoices (including VAT at standard rate) totalling $74,750. EDF incurred expenses during the period of $57,000, excluding VAT. All expenses incurred VAT at standard rate. Calculate the VAT due for the period. (2 marks) TURN OVER Financial Operations 3 May 2014 1.5 The tax rules of Country X allow an entity ceasing to trade to carry back terminal losses against the previous two years' profits. CT ceased trading on 31 March 2014, having incurred a trading loss of $75,000 for the year ended 31 March 2014. CT's profits for the previous 3 years were as follows: Year to 31 March: Taxable trading profit 2011 $95,000 2012 $40,000 2013 $25,000 Assuming that CT had paid all tax due up to 31 March 2013, calculate the tax refund that CT can claim for its terminal loss. (2 marks) 1.6 (i) (ii) (iii) (iv) Power to arrest individuals. Power of entry and search of premises. Power to exchange information with other tax authorities. Power to confiscate assets of the entity. Which TWO of the above are statutory powers that a tax authority may be granted to ensure compliance with tax regulations? A B C D (i) and (iii) (i) and (iv) (ii) and (iii) (ii) and (iv) (2 marks) 1.7 The IASB's Conceptual Framework for Financial Reporting (2010) (Framework) lists five elements of financial statements. Two of the elements are assets and liabilities, list the other three. (2 marks) 1.8 An external audit of VH's financial statements has discovered that a customer who, at 31 March 2014, owed VH $250,000 was declared bankrupt on 8 April 2014. VH has not provided for the bad debt in its financial statements for the year ended 31 March 2014. This is regarded as material but not pervasive. Assuming that the auditors find everything else satisfactory, which ONE of the following is the appropriate audit report for the auditors of VH to issue? A B C D The external audit report should be a modified report, with a qualified \"except for\" opinion. The external audit report should be an unmodified report with an emphasis of matter paragraph relating to the bad debt. The external audit report should be a modified report, with a disclaimer of opinion. The external audit report should be a modified report, with an adverse opinion. (2 marks) May 2014 4 Financial Operations 1.9 Under the current structure of regulatory bodies, which organisation is responsible for reviewing international reporting standards and issuing revised international reporting standards? A B C D IFRS Advisory Council IFRS Interpretations Committee International Accounting Standards Board IFRS Foundation (2 marks) 1.10 Which of the following is the correct meaning of \"rollover relief\"? A B C D A trading loss can be carried forward and used to reduce tax in a future profitable year. A capital loss incurred on the disposal of an asset can be carried forward to a future tax year. An entity ceasing to trade, carrying back a trading loss to set off against previous years' profits. A gain arising from the sale of an asset is deferred provided the entity reinvests the proceeds of the sale in a replacement asset. (2 marks) (Total for Section A = 20 marks) Reminder All answers to Section A must be written in your answer book. Answers or notes to Section A written on the question paper will not be submitted for marking. End of Section A Section B starts on the next page TURN OVER Financial Operations 5 May 2014 SECTION B - 30 MARKS [You are advised to spend no longer than 9 minutes on each sub-question in this section.] ANSWER ALL SIX SUB-QUESTIONS IN THIS SECTION - 5 MARKS EACH Question Two (a) LKO is a listed entity with five geographic segments, and reports segmental information under IFRS 8 Operating Segments in its financial statements. Financial information is reported to LKO's chief operating decision maker on a geographical basis. Each geographical region has separate risk characteristics. The results for the year ended 31 March 2014 are as follows: Europe Internal revenue External revenue Total revenue Segment profits Segment assets $m 100 90 190 14 210 North America $m 530 530 18 330 Middle East $m 340 340 7 230 Asia $m 10 720 730 119 1,040 Other $m 30 90 120 34 590 Total $m 140 1,770 1,910 192 2,400 Required: Explain with reasons which of LKO's geographical segments will be classified as reportable operating segments according to IFRS 8 Operating Segments. (Total for sub-question (a) = 5 marks) May 2014 6 Financial Operations (b) On 1 April 2013 IUJ acquired 100% of the equity shares of A and B as follows: Cost of acquisition Fair value of net assets at date of acquisition A $000 850 750 B $000 610 500 At 31 March 2014 IUJ carried out an impairment review of the goodwill arising on both acquisitions. At 31 March 2014: the goodwill in A was NOT impaired but had actually increased in value by $40,000. the goodwill in B had been impaired by $20,000. Required: (i) Explain how IUJ should account for the changes in goodwill values at 31 March 2014 and (ii) Calculate the goodwill that will be included in its statement of financial position at 31 March 2014. (Total for sub-question (b) = 5 marks) (c) UY prepares its financial statements to 31 March each year. UY discontinued production of one of its products on 31 October 2013 and declared the factory producing those products surplus to its requirements. UY agreed the sale of the factory completing all legal requirements of the sale by 1 March 2014. The final payment for the sale was received on 15 April 2014. UY made a substantial loss on the sale. The chairman of UY's management board does not want the loss to be recognised in the period ended 31 March 2014. The Chairman has instructed UY's Finance Director (a CIMA qualified accountant) to treat the factory as unsold at 31 March 2014 as all the cash was not received until 15 April 2014. Required: Explain the ethical issues that the Finance Director may face as a result of the Chairman's instruction. (Total for sub-question (c) = 5 marks) Section B continues on the next page TURN OVER Financial Operations 7 May 2014 (d) The International Accounting Standards Board's (IASB) Conceptual Framework for Financial Reporting (2010) (Framework) identifies two fundamental qualitative characteristics and four enhancing qualitative characteristics of financial statements. Required: Explain the two fundamental qualitative characteristics of financial statements as identified in the IASB's Framework. (Total for sub-question (d) = 5 marks) May 2014 8 Financial Operations Information for questions 2e and 2f. DTX is resident in Country X for tax purposes. DTX purchased machinery costing $776,000 on 1 April 2012, which qualified for tax depreciation allowances. On 1 April 2013 the machinery was damaged and $119,000 was written off its carrying value. DTX charges depreciation on a straight line basis over 8 years, with no residual value. DTX had profits of $341,000 for the year ended 31 March 2013 and $416,000 for the year ended 31 March 2014. These profits are after charging depreciation and before adjusting for tax allowances. (e) Required: Calculate DTX's corporate income tax due for the years ended 31 March 2013 and 31 March 2014. (Total for sub-question (e) = 5 marks) (f) Required: (i) Calculate the amount of income taxes charged to DTX's statement of profit or loss for the years ended 31 March 2013 and 31 March 2014. (ii) Calculate the deferred tax balance that will appear in DTX's statement of financial position at 31 March 2013 and 31 March 2014. (Total for sub-question (f) = 5 marks) (Total for Section B = 30 marks) End of Section B Section C starts on page 12 Financial Operations 9 May 2014 This page is blank May 2014 10 Financial Operations This page is blank TURN OVER Financial Operations 11 May 2014 SECTION C - 50 MARKS [You are advised to spend no longer than 45 minutes on each question in this section.] ANSWER BOTH QUESTIONS FROM THIS SECTION - 25 MARKS EACH Question Three The trial balance for XCB at 31 March 2014 was as follows: 7% Loan notes Administrative expenses Cash & cash equivalents Purchases Distribution costs Dividends paid Equity shares $1 each, fully paid at 31 March 2014 Interest paid Inventory at 31 March 2013 Operating licence Operating licence amortisation at 31 March 2013 Patent Patent amortisation at 31 March 2013 Plant & Equipment Property rentals paid Provision for legal claim Accumulated depreciation at 31 March 2013: Plant & Equipment Vehicles Allowance for doubtful trade receivables Restructuring costs Retained earnings at 31 March 2013 Sales revenue Share premium at 31 March 2014 Trade payables Trade receivables Vehicles Notes (xi) (iv) (ix) (xi) (iii) (viii) (viii) (vii) (vii) $000 $000 1,012 1,112 1,217 6,526 629 105 1,500 35 337 400 64 80 24 2,105 72 (x) (i) 17 737 116 42 (v) (vi) 90 938 8,356 285 564 (xii) (ix) 689 258 13,655 13,655 Notes: (i) Non-current assets are depreciated as follows: Plant & equipment: 20% per annum straight line Vehicles: 25% per annum reducing balance Depreciation of plant and equipment is charged to cost of sales, and depreciation of vehicles is a distribution cost. XCB's accounting policy for amortisation and depreciation is to charge a full year in the year of acquisition and none in the year of disposal. (ii) Tax due for the year to 31 March 2014 is estimated at $10,000. (iii) The closing inventory at 31 March 2014 was $438,000. (iv) An interim dividend was paid in February 2014; no final dividend is proposed. May 2014 12 Financial Operations (v) The allowance for doubtful trade receivables is to be increased to 10% of closing trade receivables. (vi) The restructuring costs in the trial balance represent the cost of the final phase of a fundamental restructuring of the entity. (vii) On 1 April 2010 XCB purchased a patent for a secret recipe and manufacturing process for one of its products. Due to recent economic difficulties in the market, XCB has carried out an impairment review of its patent. At 31 March 2014 the patent was found to have the following values: Value in use Fair value less cost to sell $42,000 $36,000 The patent is being amortised over 10 years. (viii) XCB paid for a 25 year licence to operate using a well respected and highly advertised international business name. The licence cost XCB $400,000 on 1 April 2009. (ix) On 1 October 2013, XCB issued 500,000 equity shares at $150 each. All proceeds had been received and correctly accounted for by the year end. (x) At 31 March 2013 XCB had an outstanding legal claim alleging that XCB's product had caused injury to a customer. At 31 March 2013 XCB was advised that it would probably lose the case. A provision of $17,000 was set up at 31 March 2013. During 2014 new evidence was discovered and the case against XCB was dropped. As there is no liability the directors have decided that the provision is no longer required. (xi) The loan notes are 10-year loans that were raised on 1 April 2013. XCB incurred no other interest charges in the year to 31 March 2014. (xii) The sales revenue for the year to 31 March 2014 includes $20,000 received from a new customer. The $20,000 was a 10% deposit for an order of $200,000 worth of goods. XCB is still waiting for the results of the new customer's credit reference and at 31 March 2014 had not despatched any goods. Required: Prepare the statement of profit or loss and a statement of changes in equity for XCB for the year ended 31 March 2014 and a statement of financial position at that date, in accordance with the requirements of International Financial Reporting Standards. Notes to the financial statements are not required, but all workings must be clearly shown. Do not prepare a statement of accounting policies. (Total for Question Three = 25 marks) TURN OVER Financial Operations 13 May 2014 Question Four WZQ's financial statements for 2013/2014 include the following: WZQ Statement of profit or loss and other comprehensive income for the year ended 31 March 2014 Note $000 Revenue 58,292 Cost of sales (27,605) Gross Profit 30,687 Administrative expenses (7,246) Distribution costs (2,410) Profit from operations 21,031 Finance cost (2,461) Profit before tax 18,570 Income tax expense (1,646) Profit for the period 16,924 Other comprehensive income - items that will not be reclassified subsequently to profit or loss Revaluation gain on properties (ii) 3,750 20,674 WZQ Statements of financial position at 31 March Note Non-current assets Property, plant and equipment Deferred development expenditure Current assets Inventories Trade receivables Investments Cash in hand and at bank Total Assets Equity and liabilities Equity Equity shares Share premium Revaluation reserve Retained earnings Total equity Non-current liabilities Long term loans Deferred tax Finance lease payable Current liabilities Total equity and liabilities (i);(ii);(iii)&(iv) (v) (vi) (vii) (ix) 2014 $000 $000 104,450 88,680 2,150 106,600 2,548 4,664 2,901 0 237 7,802 114,402 27,350 10,835 3,750 39,119 (iv) (viii) 26,350 1,258 1,491 3,780 5,046 350 712 91,228 9,888 101,116 18,350 1,835 0 24,732 81,054 (x) 2013 $000 $000 44,917 49,250 890 29,099 438 50,578 4,249 5,621 114,402 101,116 Notes: (i) Property, plant and equipment are comprised of: 2014 $000 62,120 42,330 Property Plant and equipment 2013 $000 52,000 36,680 Plant and equipment with a carrying value of $196,000 was sold during the year for $365,000. Any gain/loss on disposal is included in profit or loss. May 2014 14 Financial Operations (ii) Properties were revalued on 31 March 2014. (iii) Depreciation charged during the year to 31 March 2014 was $1,040,000 for property and $4,115,000 for plant and equipment. (iv) WZQ acquired new plant and equipment on a finance lease on 1 April 2013, debiting $1,500,000 to plant and equipment at that date. The total interest on finance leases for the year was $143,000. (v) Deferred development expenditure at 31 March 2013 comprised two projects as follows: Project A $2,260,000 - completed. Amortisation commenced on 1 April 2013 at 10% per year. Project B $288,000 - on 1 April 2013, WZQ decided to discontinue project B. During the year ended 31 March 2014, WZQ capitalised expenditure on a new project, Project C. (vi) The current asset investment, disposed of during the year, was a 30 day government bond. (vii) WZQ issued 9,000,000 $1 equity shares at a premium of $1 on 31 December 2013. (viii) Current liabilities: 2014 $000 1,250 1,166 1,490 343 4,249 Trade payables Loan interest payable Tax payable Finance lease payable Total current liabilities 2013 $000 1,850 2,024 1,620 127 5,621 (ix) A final dividend for the year ended 31 March 2013 was paid during the year ended 31 March 2014. (x) WZQ repaid $25,000,000 of its long term loans during the year. Required: Prepare WZQ's statement of cash flows, using the indirect method, for the year ended 31 March 2014 in accordance with IAS 7 Statement of Cash Flows. Notes to the financial statements are not required, but all workings must be clearly shown. (Total for Question Four = 25 marks) (Total for Section C = 50 marks) End of Question Paper Maths Tables and Formulae are on Pages 17 and 18 Financial Operations 15 May 2014 This page is blank May 2014 16 Financial Operations MATHS TABLES AND FORMULAE Present value table Present value of $1, that is (1 + r)-n where r = interest rate; n = number of periods until payment or receipt. Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 0.896 0.887 0.879 0.870 0.861 0.853 0.844 0.836 0.828 0.820 2% 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673 3% 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554 Interest rates (r) 4% 5% 6% 0.962 0.952 0.943 0.925 0.907 0.890 0.889 0.864 0.840 0.855 0.823 0.792 0.822 0.784 0.747 0.790 0.746 0.705 0.760 0.711 0.665 0.731 0.677 0.627 0.703 0.645 0.592 0.676 0.614 0.558 0.650 0.585 0.527 0.625 0.557 0.497 0.601 0.530 0.469 0.577 0.505 0.442 0.555 0.481 0.417 0.534 0.458 0.394 0.513 0.436 0.371 0.494 0.416 0.350 0.475 0.396 0.331 0.456 0.377 0.312 7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 0.339 0.317 0.296 0.277 0.258 8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215 9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 11% 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286 0.258 0.232 0.209 0.188 0.170 0.153 0.138 0.124 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104 13% 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087 Interest rates (r) 14% 15% 16% 0.877 0.870 0.862 0.769 0.756 0.743 0.675 0.658 0.641 0.592 0.572 0.552 0.519 0.497 0.476 0.456 0.432 0.410 0.400 0.376 0.354 0.351 0.327 0.305 0.308 0.284 0.263 0.270 0.247 0.227 0.237 0.215 0.195 0.208 0.187 0.168 0.182 0.163 0.145 0.160 0.141 0.125 0.140 0.123 0.108 0.123 0.107 0.093 0.108 0.093 0.080 0.095 0.081 0.069 0.083 0.070 0.060 0.073 0.061 0.051 17% 0.855 0.731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.043 18% 0.847 0.718 0.609 0.516 0.437 0.370 0.314 0.266 0.225 0.191 0.162 0.137 0.116 0.099 0.084 0.071 0.060 0.051 0.043 0.037 19% 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.079 0.062 0.052 0.044 0.037 0.031 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 0.112 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026 Financial Operations 17 May 2014 Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n years 1 (1+ r ) n r Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.990 1.970 2.941 3.902 4.853 5.795 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865 14.718 15.562 16.398 17.226 18.046 2% 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.679 16.351 3% 0.971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.754 14.324 14.878 Interest rates (r) 4% 5% 6% 0.962 0.952 0.943 1.886 1.859 1.833 2.775 2.723 2.673 3.630 3.546 3.465 4.452 4.329 4.212 5.242 5.076 4.917 6.002 5.786 5.582 6.733 6.463 6.210 7.435 7.108 6.802 8.111 7.722 7.360 8.760 8.306 7.887 9.385 8.863 8.384 9.986 9.394 8.853 10.563 9.899 9.295 11.118 10.380 9.712 11.652 10.838 10.106 12.166 11.274 10.477 12.659 11.690 10.828 13.134 12.085 11.158 13.590 12.462 11.470 7% 0.935 1.808 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 10.336 10.594 8% 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818 9% 0.917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.061 8.313 8.544 8.756 8.950 9.129 10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606 7.824 8.022 8.201 8.365 8.514 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 11% 0.901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7.702 7.839 7.963 12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469 13% 0.885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7.025 Interest rates (r) 14% 15% 16% 0.877 0.870 0.862 1.647 1.626 1.605 2.322 2.283 2.246 2.914 2.855 2.798 3.433 3.352 3.274 3.889 3.784 3.685 4.288 4.160 4.039 4.639 4.487 4.344 4.946 4.772 4.607 5.216 5.019 4.833 5.453 5.234 5.029 5.660 5.421 5.197 5.842 5.583 5.342 6.002 5.724 5.468 6.142 5.847 5.575 6.265 5.954 5.668 6.373 6.047 5.749 6.467 6.128 5.818 6.550 6.198 5.877 6.623 6.259 5.929 17% 0.855 1.585 2.210 2.743 3.199 3.589 3.922 4.207 4.451 4.659 4.836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.584 5.628 18% 0.847 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 19% 0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.486 4.611 4.715 4.802 4.876 4.938 4.990 5.033 5.070 5.101 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.870 FORMULAE Annuity Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year, discounted at r% per annum: 1 1 PV = 1 n r [1 + r ] Perpetuity Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, PV = discounted at r% per annum: 1 r May 2014 18 Financial Operations LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for each question in this paper. It is important that you answer the question according to the definition of the verb. LEARNING OBJECTIVE Level 1 - KNOWLEDGE What you are expected to know. Level 2 - COMPREHENSION What you are expected to understand. VERBS USED DEFINITION List State Define Make a list of Express, fully or clearly, the details/facts of Give the exact meaning of Describe Distinguish Explain Communicate the key features Highlight the differences between Make clear or intelligible/State the meaning or purpose of Recognise, establish or select after consideration Use an example to describe or explain something Identify Illustrate Level 3 - APPLICATION How you are expected to apply your knowledge. Apply Calculate Demonstrate Prepare Reconcile Solve Tabulate Level 4 - ANALYSIS How are you expected to analyse the detail of what you have learned. Level 5 - EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations. Financial Operations Analyse Categorise Compare and contrast Put to practical use Ascertain or reckon mathematically Prove with certainty or to exhibit by practical means Make or get ready for use Make or prove consistent/compatible Find an answer to Arrange in a table Construct Discuss Interpret Prioritise Produce Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between Build up or compile Examine in detail by argument Translate into intelligible or familiar terms Place in order of priority or sequence for action Create or bring into existence Advise Evaluate Recommend Counsel, inform or notify Appraise or assess the value of Advise on a course of action 19 May 2014 Financial Pillar Operational Level Paper F1 - Financial Operations May 2014 Thursday Morning Session May 2014 20 Financial Operations DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO. Financial Pillar F1 - Financial Operations Tuesday 26 August 2014 Instructions to candidates You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlight and/or make notes on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or subquestions). ALL answers must be written in the answer book. Answers written on the question paper will not be submitted for marking. You should show all workings as marks are available for the method you use. ALL QUESTIONS ARE COMPULSORY. Section A comprises 10 sub-questions and is on pages 3 to 6. Section B comprises 6 sub-questions and is on pages 8 to 11. Section C comprises 2 questions and is on pages 12 to 15. References to IFRS in this paper refer to International Financial Reporting Standards or International Accounting Standards as issued or adopted by the International Accounting Standards Board. The country 'Tax Regime' for the paper is provided on page 2. Maths tables and formulae are provided on pages 17 and 18. The list of verbs as published in the syllabus is given for reference on page 19. Write your candidate number, the paper number and examination subject title in the spaces provided on the front of the answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close. Tick the appropriate boxes on the front of the answer book to indicate the questions you have answered. F1 - Financial Operations You are allowed three hours to answer this question paper. TURN OVER The Chartered Institute of Management Accountants 2014 COUNTRY X - TAX REGIME FOR USE THROUGHOUT THE EXAMINATION PAPER Relevant Tax Rules for Years Ended 31 March 2007 to 2014 Corporate Profits Unless otherwise specified, only the following rules for taxation of corporate profits will be relevant, other taxes can be ignored: Accounting rules on recognition and measurement are followed for tax purposes. All expenses other than depreciation, amortisation, entertaining, taxes paid to other public bodies and donations to political parties are tax deductible. Tax depreciation is deductible as follows: o 50% of additions to property, plant and equipment in the accounting period in which they are recorded; o 25% per year of the written-down value (i.e. cost minus previous allowances) in subsequent accounting periods except that in which the asset is disposed of; o No tax depreciation is allowed on land. The corporate tax on profits is at a rate of 25%. No indexation is allowable on the sale of land. Tax losses can be carried forward to offset against future taxable profits from the same business. Value Added Tax Country X has a VAT system which allows entities to reclaim input tax paid. In country X the VAT rates are: Zero rated Standard rated Exempt goods September 2014 0% 15% 0% 2 Financial Operations SECTION A - 20 MARKS [You are advised to spend no longer than 36 minutes on this section] ANSWER ALL TEN SUB-QUESTIONS IN THIS SECTION Instructions for answering Section A: The answers to the ten sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number and then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. Question One 1.1 Define the meaning of the term \"a direct tax\". (2 marks) 1.2 Under the current structure of regulatory bodies, which organisation is responsible for seeking out the views of its members and passing them on in summary form to the International Accounting Standards Board (IASB)? A B C D IFRS Interpretations Committee International Organisation of Securities Commissions IFRS Foundation IFRS Advisory Council (2 marks) 1.3 MX suffered a major fire in its central warehouse on 14 March 2014. Inventory held in the warehouse with a value of $700,000 was either damaged or destroyed. An external audit of MX's financial statements discovered that the loss had not been recognised in MX's financial statements. This is regarded as material but not pervasive. What type of audit report should the auditor issue for MX's financial statements for the year ended 31 March 2014? A B C D A modified report, with a qualified opinion based on insufficient appropriate evidence. A modified report, with a qualified opinion, with a qualified \"except for\" opinion. An unmodified report with an unqualified opinion. An unmodified report with an emphasis of matter paragraph relating to the inventory. (2 marks) TURN OVER Financial Operations 3 September 2014 1.4 Define the meaning of the term \"tax gap\". (2 marks) 1.5 The tax rules of Country X allow an entity ceasing to trade to carry back terminal losses against the previous two years profits. QT ceased trading on 31 March 2014, having incurred a trading loss of $122,000 for the year ended 31 March 2014. QT's profits for the previous 3 years were: Year to 31 March 2011 2012 2013 Taxable profit $89,000 $62,000 $53,000 Assuming that QT had paid all tax due up to 31 March 2013, calculate how much tax refund QT can claim for its terminal loss: A B C D $28,750 $30,500 $115,000 $122,000 (2 marks) 1.6 ABC is registered for tax in Country X. ABC purchases goods and services from suppliers, including VAT at standard rate and sells goods to customers, including VAT at standard rate. The formal incidence of the VAT is on: A B C D ABC's customers ABC's suppliers ABC Country X's tax authority (2 marks) September 2014 4 Financial Operations 1.7 Country X is considering an excise duty of $1,000 per vehicle on all new motor vehicles sold. (i) (ii) (iii) (iv) (v) A progressive tax An indirect tax An ad valorem tax A regressive tax A unit tax Which TWO of the above would be regarded as a correct description of the $1,000 excise duty? A B C D (i) and (ii) (ii) and (v) (iii) and (iv) (iv) and (v) (2 marks) 1.8 The IASB's Conceptual Framework for Financial Reporting (2010) (Framework) lists four enhancing characteristics of financial statements. Comparability and timeliness are two of the enhancing characteristics, list the other two enhancing characteristics. (2 marks) 1.9 PX is registered for VAT in Country X. PX is partially exempt for VAT purposes. During the latest VAT period, PX purchased materials and services costing $661,250, including VAT at standard rate. These materials and services were used to produce both standard rated and exempt goods. Goods sold to customers, excluding VAT were: Standard rated goods Exempt goods $820,000 $205,000 Assume PX had no other VAT related transactions. Input tax that PX can claim on its purchases in its VAT return for the period is: A B C D $69,000 $86,250 $79,350 $99,188 (2 marks) 1.10 Describe the meaning of \"underlying tax\". (2 marks) (Total for Section A = 20 marks) Financial Operations 5 September 2014 Reminder All answers to Section A must be written in your answer book. Answers or notes to Section A written on the question paper will not be submitted for marking. End of Section A Section B starts on page 8 September 2014 6 Financial Operations This page is blank TURN OVER Financial Operations 7 September 2014 SECTION B - 30 MARKS [You are advised to spend no longer than 9 minutes on each sub-question in this section.] ANSWER ALL SIX SUB-QUESTIONS IN THIS SECTION - 5 MARKS EACH Question Two (a) Required: (i) Explain why the CIMA code of ethics is principles-based rather than rules-based. (3 marks) (ii) Describe TWO of the principles of the CIMA code of ethics. (2 marks) (Total for sub-question (a) = 5 marks) (b) The IASB partially updated its Framework for the Preparation and Presentation of Financial Statements, naming the revised version Conceptual Framework for Financial Reporting (2010). Required: Explain the purpose of the Conceptual framework for financial reporting. (Total for sub-question (b) = 5 marks) September 2014 8 Financial Operations (c) ACZ is a listed entity with six business segments, and reports segmental information under IFRS 8 Operating Segments in its financial statements. Financial information is reported to ACZ's chief operating decision maker on a geographical basis. Each geographical region has separate risk characteristics. The results for the year ended 31 March 2014 are as follows: Product Group Internal revenue External revenue Total revenue Segment Profit Segment Assets A $m 150 970 1,120 56 2,400 B $m 0 320 320 29 510 C $m 150 40 190 17 430 D $m 20 1410 1,430 155 2,900 E $m 0 310 310 37 590 F $m 0 180 180 10 300 Total $m 320 3,230 3,550 304 7,130 Required: Explain with reasons which of ACZ's geographical segments will be classified as reportable operating segments in accordance with IFRS 8 Operating Segments. (Total for sub-question (c) = 5 marks) (d) On 1 April 2013 XYK acquired 100% of EZ's 500,000 $1 equity shares. Cost of acquisition Retained earnings at 1 April 2013 Retained earnings at 31 March 2014 EZ $000 975 170 230 The fair value of net assets of EZ on 1 April 2013 was $140,000 more than its carrying value. On 31 March 2014 goodwill arising on XYK's investment in EZ had been impaired by 20%. Required: (i) Calculate the goodwill that will be included in XYK's statement of financial position at 31 March 2014. (ii) Explain, with supporting calculations, how XYK's consolidated interest in EZ would affect its consolidated statement of financial position at 31 March 2014. (Total for sub-question (d) = 5 marks) Financial Operations 9 September 2014 Information for questions 2e and 2f SMB is a small local corporate entity that operates a transport business in Country X. On 1 April 2013 SMB acquired an additional vehicle that qualified for tax depreciation allowances. The vehicle cost $46,000 and has an expected useful life of 7 years with a residual value of $4,000. The appropriate accounting entries for this vehicle have been included in the accounts. Extracts from SMB's financial statements: SMB Statement of financial position as at 31 March 2013 $ Non-current liability Deferred tax provision 155,000 Current liability Tax payable 30,000 SMB's Statement of profit or loss (extract) for year ended 31 March 2014 $ Revenue* 260,000 175,000 Expenses** 85,000 Profit before tax SMB Statement of cash flows for year ended 31 March 2014 $ Tax paid 33,000 * Revenue includes a non-taxable government grant of $5,000. ** Expenses include: Depreciation charges of $19,000 for SMB's other non-current assets. These assets qualified for tax depreciation allowances of $22,000. Entertaining costs of $3,000. (e) Required: Calculate SMB's corporate income tax due for the year ended 31 March 2014. (Total for sub-question (e) = 5 marks) September 2014 10 Financial Operations (f) Required: (i) Calculate the deferred tax balance that will appear in SMB's statement of financial position under non-current liabilities at 31 March 2014. (ii) Calculate the amount of income taxes charged to SMB's statement of profit or loss for the year ended 31 March 2014. (Total for sub-question (f) = 5 marks) (Total for Section B = 30 marks) End of Section B Section C starts on page 12 TURN OVER Financial Operations 11 September 2014 SECTION C - 50 MARKS [You are advised to spend no longer than 45 minutes on each question in this section.] ANSWER BOTH QUESTIONS FROM THIS SECTION - 25 MARKS EACH Question Three ZXC's trial balance at 31 March 2014 is shown below: Bank loan Administrative expenses Cash and cash equivalents Deferred development expenditure Deferred development expenditure amortisation at 1 April 2013 Distribution costs Equity dividend paid Finance lease payment Income tax Inventory at 31 March 2014 Land and buildings at cost Bank loan interest Equity shares $1 each, fully paid at 1 April 2013 Plant and equipment at cost at 1 April 2013 Provision for deferred tax at 1 April 2013 Accumulated depreciation at 1 April 2013: - buildings - plant and equipment Cost of sales Retained earnings at 1 April 2013 Sales revenue Share premium at 1 April 2013 Trade payables Trade receivables Suspense account Notes (i) (v) (v) (ii) (vi) (iii) $000 240 64 210 42 130 97 28 11 285 2,545 32 1,200 (iv),(viii) (vii) 615 76 (iii) (iv) 322 355 2,154 173 3,700 120 319 (viii) 263 233 6,907 Additional information: (i) The bank loan is a 10 year 8% loan received in 2009 and repayable in 2019. Interest is paid half yearly on 1 June and 1 December. (ii) ZXC acquired a motor vehicle using a finance lease on 1 April 2013. The fair value and present value of the minimum lease payments is $144,000. The lease terms are 6 annual payments of $28,000 due on 1 April commencing 1 April 2013. The rate of interest implicit in the lease is 6.61%. Depreciation of vehicles should be included in distribution costs. The only entry made for this transaction was to record the first rental payment. (iii) Depreciation is charged on buildings using the straight line method at 2% per annum. The cost of land included in land and buildings is $1,200,000. Buildings depreciation is treated as an administrative expense. There were no sales of land and buildings during the year ended 31 March 2014. (iv) Depreciation is charged on owned plant and equipment using the reducing balance method at 25% per year. Plant and equipment depreciation should be charged to cost of sales. September 2014 12 $000 600 Financial Operations 6,907 (v) (vi) Deferred development expenditure incurred in the year to 31 March 2013, is being amortised over 5 years. The income tax balance in the trial balance is a result of the under provision of tax for the year ended 31 March 2013. (vii) The tax due for the year ended 31 March 2014 is estimated at $125,000 and the deferred tax provision should be decreased by $15,000. (viii) The suspense account is comprised of two items: a. On 31 January 2014 ZXC purchased 240,000 of its own $1 equity shares at a premium of 5% on the local stock exchange. At 31 March 2014 ZXC held the shares with the intention to resell them. b. $19,000 cash received from the disposal of some plant and equipment that had an original cost of $75,000 and a carrying value of $32,000. The only entries made in ZXC's ledgers for these items was in cash and cash equivalents and suspense account. Required: Prepare the statement of comprehensive income and a statement of changes in equity for ZXC for the year ended 31 March 2014 and a statement of financial position at that date, in accordance with the requirements of International Financial Reporting Standards. Notes to the financial statements are not required, but all workings must be clearly shown. Do not prepare a statement of accounting policies. (Total for Question Three = 25 marks) Section C continues on page 14 TURN OVER Financial Operations 13 September 2014 Question Four EBS's financial statements for 2013/2014 include the following: EBS Statement of profit or loss and other comprehensive income for the year ended 30 June 2014 Note $000 Revenue 2,610 Cost of sales (vi),(viii) (890) Gross Profit 1,720 Administrative expenses (180) Distribution costs (125) Profit from operations 1,415 Finance cost (57) Profit before tax 1,358 Income tax expense (160) Profit for the period 1,198 Other comprehensive income - items that will not be reclassified subsequently to profit or loss Revaluation gain on properties (ii) 345 1,543 EBS Statements of financial position at 30 June Note Non-current assets Property, plant and equipment Deferred development expenditure Brand name Current assets Inventories Trade receivables Cash and cash equivalents Total Assets Equity and liabilities Equity Equity shares Share premium Revaluation reserve Retained earnings Total equity Non-current liabilities Long term loans Deferred tax Preferred shares Current liabilities Total equity and liabilities (i),(ii),(iii) (vi) (vi) 2014 $000 $000 2013 $000 $000 5,200 184 45 4,890 76 60 130 273 169 (vii) (vii) (ii) 5,429 572 6,001 2,200 580 345 2,006 105 189 210 (vii) (iv) 504 5,530 1,800 400 0 1,420 5,131 0 196 300 5,026 496 374 6,001 3,620 1,435 110 0 1,545 365 5,530 Additional information: (i) Non-current assets - property, plant and equipment, balances at 30 June were: 2014 2013 Cost or valuation: $000 $000 Property 3,825 3,900 Plant 3,000 2,850 Equipment 1,235 1,120 8,060 7,870 Depreciation: Property 45 420 Plant 2,000 1,700 Equipment 815 860 2,860 2,980 Net book value 5,200 4,890 September 2014 14 Financial Operations (ii) (iii) (iv) On 1 July 2013 property was revalued to $3,825,000. At that time the average remaining life of property was 85 years. Property is depreciated on a straight line basis. Equipment with a carrying value of $60,000 (original cost $210,000) was sold during the year for $25,000. Any gain/loss on disposal of property, plant and equipment is included in profit or loss. Current liabilities: 2014 $000 218 4 90 62 374 Trade payables Loan interest payable Tax payable Other provisions (see viii) Total current liabilities (v) (vi) (vii) (viii) 2013 $000 230 15 120 0 365 EBS paid a dividend on its equity and preferred shares during the year ended 30 June 2014. Cost of sales includes $27,000 for development expenditure amortised during the year and $15,000 for impairment of the purchased brand name. On 1 November 2013, EBS issued $1 equity shares at a premium. On 1 July 2013 EBS issued 6% cumulative redeemable preferred shares at par. No other finance was raised during the year. Other provisions relate to legal claims made against EBS during the year ended 30 June 2014. The amount provided is included in cost of sales. Required: Prepare EBS's Statement of cash flows, using the indirect method, for the year ended 30 June 2014 in accordance with IAS 7 Statement of Cash Flows. Notes to the financial statements are not required, but all workings must be clearly shown. (Total for Question Four = 25 marks) (Total for Section c = 50 marks) End of Question Paper Maths Tables and Formulae are on Pages 17 and 18 Financial Operations 15 September 2014 This page is blank September 2014 16 Financial Operations MATHS TABLES AND FORMULAE Present value table Present value of $1, that is (1 + r)-n where r = interest rate; n = number of periods until payment or receipt. Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.990 0.980 0.971 0.961 0.951 0.942 0.933 0.923 0.914 0.905 0.896 0.887 0.879 0.870 0.861 0.853 0.844 0.836 0.828 0.820 2% 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.820 0.804 0.788 0.773 0.758 0.743 0.728 0.714 0.700 0.686 0.673 3% 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.744 0.722 0.701 0.681 0.661 0.642 0.623 0.605 0.587 0.570 0.554 Interest rates (r) 4% 5% 6% 0.962 0.952 0.943 0.925 0.907 0.890 0.889 0.864 0.840 0.855 0.823 0.792 0.822 0.784 0.747 0.790 0.746 0.705 0.760 0.711 0.665 0.731 0.677 0.627 0.703 0.645 0.592 0.676 0.614 0.558 0.650 0.585 0.527 0.625 0.557 0.497 0.601 0.530 0.469 0.577 0.505 0.442 0.555 0.481 0.417 0.534 0.458 0.394 0.513 0.436 0.371 0.494 0.416 0.350 0.475 0.396 0.331 0.456 0.377 0.312 7% 0.935 0.873 0.816 0.763 0.713 0.666 0.623 0.582 0.544 0.508 0.475 0.444 0.415 0.388 0.362 0.339 0.317 0.296 0.277 0.258 8% 0.926 0.857 0.794 0.735 0.681 0.630 0.583 0.540 0.500 0.463 0.429 0.397 0.368 0.340 0.315 0.292 0.270 0.250 0.232 0.215 9% 0.917 0.842 0.772 0.708 0.650 0.596 0.547 0.502 0.460 0.422 0.388 0.356 0.326 0.299 0.275 0.252 0.231 0.212 0.194 0.178 10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.386 0.350 0.319 0.290 0.263 0.239 0.218 0.198 0.180 0.164 0.149 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 11% 0.901 0.812 0.731 0.659 0.593 0.535 0.482 0.434 0.391 0.352 0.317 0.286 0.258 0.232 0.209 0.188 0.170 0.153 0.138 0.124 12% 0.893 0.797 0.712 0.636 0.567 0.507 0.452 0.404 0.361 0.322 0.287 0.257 0.229 0.205 0.183 0.163 0.146 0.130 0.116 0.104 13% 0.885 0.783 0.693 0.613 0.543 0.480 0.425 0.376 0.333 0.295 0.261 0.231 0.204 0.181 0.160 0.141 0.125 0.111 0.098 0.087 Interest rates (r) 14% 15% 16% 0.877 0.870 0.862 0.769 0.756 0.743 0.675 0.658 0.641 0.592 0.572 0.552 0.519 0.497 0.476 0.456 0.432 0.410 0.400 0.376 0.354 0.351 0.327 0.305 0.308 0.284 0.263 0.270 0.247 0.227 0.237 0.215 0.195 0.208 0.187 0.168 0.182 0.163 0.145 0.160 0.141 0.125 0.140 0.123 0.108 0.123 0.107 0.093 0.108 0.093 0.080 0.095 0.081 0.069 0.083 0.070 0.060 0.073 0.061 0.051 17% 0.855 0.731 0.624 0.534 0.456 0.390 0.333 0.285 0.243 0.208 0.178 0.152 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.043 18% 0.847 0.718 0.609 0.516 0.437 0.370 0.314 0.266 0.225 0.191 0.162 0.137 0.116 0.099 0.084 0.071 0.060 0.051 0.043 0.037 19% 0.840 0.706 0.593 0.499 0.419 0.352 0.296 0.249 0.209 0.176 0.148 0.124 0.104 0.088 0.079 0.062 0.052 0.044 0.037 0.031 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162 0.135 0.112 0.093 0.078 0.065 0.054 0.045 0.038 0.031 0.026 Financial Operations 17 September 2014 Cumulative present value of $1 per annum, Receivable or Payable at the end of each year for n years 1 (1+ r ) n r Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1% 0.990 1.970 2.941 3.902 4.853 5.795 6.728 7.652 8.566 9.471 10.368 11.255 12.134 13.004 13.865 14.718 15.562 16.398 17.226 18.046 2% 0.980 1.942 2.884 3.808 4.713 5.601 6.472 7.325 8.162 8.983 9.787 10.575 11.348 12.106 12.849 13.578 14.292 14.992 15.679 16.351 3% 0.971 1.913 2.829 3.717 4.580 5.417 6.230 7.020 7.786 8.530 9.253 9.954 10.635 11.296 11.938 12.561 13.166 13.754 14.324 14.878 Interest rates (r) 4% 5% 6% 0.962 0.952 0.943 1.886 1.859 1.833 2.775 2.723 2.673 3.630 3.546 3.465 4.452 4.329 4.212 5.242 5.076 4.917 6.002 5.786 5.582 6.733 6.463 6.210 7.435 7.108 6.802 8.111 7.722 7.360 8.760 8.306 7.887 9.385 8.863 8.384 9.986 9.394 8.853 10.563 9.899 9.295 11.118 10.380 9.712 11.652 10.838 10.106 12.166 11.274 10.477 12.659 11.690 10.828 13.134 12.085 11.158 13.590 12.462 11.470 7% 0.935 1.808 2.624 3.387 4.100 4.767 5.389 5.971 6.515 7.024 7.499 7.943 8.358 8.745 9.108 9.447 9.763 10.059 10.336 10.594 8% 0.926 1.783 2.577 3.312 3.993 4.623 5.206 5.747 6.247 6.710 7.139 7.536 7.904 8.244 8.559 8.851 9.122 9.372 9.604 9.818 9% 0.917 1.759 2.531 3.240 3.890 4.486 5.033 5.535 5.995 6.418 6.805 7.161 7.487 7.786 8.061 8.313 8.544 8.756 8.950 9.129 10% 0.909 1.736 2.487 3.170 3.791 4.355 4.868 5.335 5.759 6.145 6.495 6.814 7.103 7.367 7.606 7.824 8.022 8.201 8.365 8.514 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 11% 0.901 1.713 2.444 3.102 3.696 4.231 4.712 5.146 5.537 5.889 6.207 6.492 6.750 6.982 7.191 7.379 7.549 7.702 7.839 7.963 12% 0.893 1.690 2.402 3.037 3.605 4.111 4.564 4.968 5.328 5.650 5.938 6.194 6.424 6.628 6.811 6.974 7.120 7.250 7.366 7.469 13% 0.885 1.668 2.361 2.974 3.517 3.998 4.423 4.799 5.132 5.426 5.687 5.918 6.122 6.302 6.462 6.604 6.729 6.840 6.938 7.025 Interest rates (r) 14% 15% 16% 0.877 0.870 0.862 1.647 1.626 1.605 2.322 2.283 2.246 2.914 2.855 2.798 3.433 3.352 3.274 3.889 3.784 3.685 4.288 4.160 4.039 4.639 4.487 4.344 4.946 4.772 4.607 5.216 5.019 4.833 5.453 5.234 5.029 5.660 5.421 5.197 5.842 5.583 5.342 6.002 5.724 5.468 6.142 5.847 5.575 6.265 5.954 5.668 6.373 6.047 5.749 6.467 6.128 5.818 6.550 6.198 5.877 6.623 6.259 5.929 17% 0.855 1.585 2.210 2.743 3.199 3.589 3.922 4.207 4.451 4.659 4.836 4.988 5.118 5.229 5.324 5.405 5.475 5.534 5.584 5.628 18% 0.847 1.566 2.174 2.690 3.127 3.498 3.812 4.078 4.303 4.494 4.656 4.793 4.910 5.008 5.092 5.162 5.222 5.273 5.316 5.353 19% 0.840 1.547 2.140 2.639 3.058 3.410 3.706 3.954 4.163 4.339 4.486 4.611 4.715 4.802 4.876 4.938 4.990 5.033 5.070 5.101 20% 0.833 1.528 2.106 2.589 2.991 3.326 3.605 3.837 4.031 4.192 4.327 4.439 4.533 4.611 4.675 4.730 4.775 4.812 4.843 4.870 FORMULAE Annuity Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year, discounted at r% per annum: PV = 1 1 1 n r [1 + r ] Perpetuity Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r% per annum: PV = 1 r September 2014 18 Financial Operations LIST OF VERBS USED IN THE QUESTION REQUIREMENTS A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for each question in this paper. It is important that you answer the question according to the definition of the verb. LEARNING OBJECTIVE Level 1 - KNOWLEDGE What you are expected to know. Level 2 - COMPREHENSION What you are expected to understand. VERBS USED DEFINITION List State Define Make a list of Express, fully or clearly, the details/facts of Give the exact meaning of Describe Distinguish Explain Communicate the key features Highlight the differences between Make clear or intelligible/State the meaning or purpose of Recognise, establish or select after consideration Use an example to describe or explain something Identify Illustrate Level 3 - APPLICATION How you are expected to apply your knowledge. Apply Calculate Demonstrate Prepare Reconcile Solve Tabulate Level 4 - ANALYSIS How are you expected to analyse the detail of what you have learned. Level 5 - EVALUATION How are you expected to use your learning to evaluate, make decisions or recommendations. Financial Operations Analyse Categorise Compare and contrast Put to practical use Ascertain or reckon mathematically Prove with certainty or to exhibit by practical means Make or get ready for use Make or prove consistent/compatible Find an answer to Arrange in a table Construct Discuss Interpret Prioritise Produce Examine in detail the structure of Place into a defined class or division Show the similarities and/or differences between Build up or compile Examine in detail by argument Translate into intelligible or familiar terms Place in order of priority or sequence for action Create or bring into existence Advise Evaluate Recommend Counsel, inform or notify Appraise or assess the value of Advise on a course of action 19 September 2014 Financial Pillar Operational Level Paper F1 - Financial Operations September 2014 Tuesday September 2014 20 Financial Operations DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO. Financial Pillar F1 - Financial Operations Tuesday 26 August 2014 Instructions to candidates You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and, if you wish, highlight and/or make notes on the question paper. However, you will not be allowed, under any circumstances, to open the answer book and start writing or use your calculator during this reading time. You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is all parts and/or subquestions). ALL answers must be written in the answer book. Answers written on the question paper will not be submitted for marking. You should show all workings as marks are available for the method you use. ALL QUESTIONS ARE COMPULSORY. Section A comprises 10 sub-questions and is on pages 3 to 6. Section B comprises 6 sub-questions and is on pages 8 to 11. Section C comprises 2 questions and is on pages 12 to 15. References to IFRS in this paper refer to International Financial Reporting Standards or International Accounting Standards as issued or adopted by the International Accounting Standards Board. The country 'Tax Regime' for the paper is provided on page 2. Maths tables and formulae are provided on pages 17 and 18. The list of verbs as published in the syllabus is given for reference on page 19. Write your candidate number, the paper number and examination subject title in the spaces provided on the front of the answer book. Also write your contact ID and name in the space provided in the right hand margin and seal to close. Tick the appropriate boxes on the front of the answer book to indicate the questions you have answered. F1 - Financial Operations You are allowed three hours to answer this question paper. TURN OVER The Chartered Institute of Management Accountants 2014 COUNTRY X - TAX REGIME FOR USE THROUGHOUT THE EXAMINATION PAPER Relevant Tax Rules for Years Ended 31 March 2007 to 2014 Corporate Profits Unless otherwise specified, only the following rules for taxation of corporate profits will be relevant, other taxes can be ignored: Accounting rules on recognition and measurement are followed for tax purposes. All expenses other than depreciation, amortisation, entertaining, taxes paid to other public bodies and donations to political parties are tax deductible. Tax depreciation is deductible as follows: o 50% of additions to property, plant and equipment in the accounting period in which they are recorded; o 25% per year of the written-down value (i.e. cost minus previous allowances) in subsequent accounting periods except that in which the asset is disposed of; o No tax depreciation is allowed on land. The corporate tax on profits is at a rate of 25%. No indexation is allowable on the sale of land. Tax losses can be carried forward to offset against future taxable profits from the same business. Value Added Tax Country X has a VAT system which allows entities to reclaim input tax paid. In country X the VAT rates are: Zero rated Standard rated Exempt goods September 2014 0% 15% 0% 2 Financial Operations SECTION A - 20 MARKS [You are advised to spend no longer than 36 minutes on this section] ANSWER ALL TEN SUB-QUESTIONS IN THIS SECTION Instructions for answering Section A: The answers to the ten sub-questions in Section A should ALL be written in your answer book. Your answers should be clearly numbered with the sub-question number and then ruled off, so that the markers know which sub-question you are answering. For multiple choice questions, you need only write the sub-question number and the letter of the answer option you have chosen. You do not need to start a new page for each sub-question. Question One 1.1 Define the meaning of the term \"a direct tax\". (2 marks) 1.2 Under the current structure of regulatory bodies, which organisation is responsible for seeking out the views of its members and passing them on in summary form to the International Accounting Standards Board (IASB)? A B C D IFRS Interpretations Committee International Organisation of Securities Commissions IFRS Foundation IFRS Advisory Council (2 marks) 1.3 MX suffered a major fire in its central warehouse on 14 March 2014. Inventory held in the warehouse with a value of $700,000 was either damaged or destroyed. An external audit of MX's financial statements discovered that the loss had not been recognised in MX's financial statements. This is regarded as material but not pervasive. What type of audit report should the auditor issue for MX's financial statements for the year ended 31 March 2014? A B C D A modified report, with a qualified opinion based on insufficient appropriate evidence. A modified report, with a qualified opinion, with a qualified \"except for\" opinion. An unmodified report with an unqualified opinion. An unmodified report with an emphasis of matter paragraph relating to the inventory. (2 marks) TURN OVER Financial Operations 3 September 2014 1.4 Define the meaning of the term \"tax gap\". (2 marks) 1.5 The tax rules of Country X allow an entity ceasing to trade to carry back terminal losses against the previous two years profits. QT ceased trading on 31 March 2014, having incurred a trading loss of $122,000 for the year ended 31 March 2014. QT's profits for the previous 3 years were: Year to 31 March 2011 2012 2013 Taxable profit $89,000 $62,000 $53,000 Assuming that QT had paid all tax due up to 31 March 2013, calculate how much tax refund QT can claim for its terminal loss: A B C D $28,750 $30,500 $115,000 $122,000 (2 marks) 1.6 ABC is registered for tax in Country X. ABC purchases goods and services from suppliers, including VAT at standard rate and sells goods to customers, including VAT at standard rate. The formal incidence of the VAT is on: A B C D ABC's customers ABC's suppliers ABC Country X's tax authority (2 marks) September 2014 4 Financial Operations 1.7 Country X is considering an excise duty of $1,000 per vehicle on all new motor vehicles sold. (i) (ii) (iii) (iv) (v) A progressive tax An indirect tax An ad valorem tax A regressive tax A unit tax Which TWO of the above would be regarded as a correct description of the $1,000 excise duty? A B C D (i) and (ii) (ii) and (v) (iii) and (iv) (iv) and (v) (2 marks) 1.8 The IASB's Conceptual Framework for Financial Reporting (2010) (Framework) lists four enhancing characteristics of financial statements. Comparability and timeliness are two of the enhancing characteristics, list the other two enhancing characteristics. (2 marks) 1.9 PX is registered for VAT in Country X. PX is partially exempt for VAT purposes. During the latest VAT period, PX purchased materials and services costing $661,250, including VAT at standard rate. These materials and services were used to produce both standard rated and exempt goods. Goods sold to customers, excluding VAT were: Standard rated goods Exempt goods $820,000 $205,000 Assume PX had no other VAT related transactions. Input tax that PX can claim on its purchases in its VAT return for the period is: A B C D $69,000 $86,250 $79,350 $99,188 (2 marks) 1.10 Describe the meaning of \"underlying tax\". (2 marks) (Total for Section A = 20 marks) Financial Operations 5 September 2014 Reminder All answers to Section A must be written in your answer book. Answers or notes to Section A written on the question paper will not be submitted for marking. End of Section A Section B starts on page 8 September 2014 6 Financial Operations This page is blank TURN OVER Financial Operations 7 September 2014 SECTION B - 30 MARKS [You are advised to spend no longer than 9 minutes on each sub-question in this section.] ANSWER ALL SIX SUB-QUESTIONS IN THIS SECTION - 5 MARKS EACH Question Two (a) Required: (i) Explain why the CIMA code of ethics is principles-based rather than rules-based. (3 marks) (ii) Describe TWO of the principles of the CIMA code of ethics. (2 marks) (Total for sub-question (a) = 5 marks) (b) The IASB partially updated its Framework for the Preparation and Presentation of Financial Statements, naming the revised version Conceptual Framework for Financial Reporting (2010). Required: Explain the purpose of the Conceptual framework for financial reporting. (Total for sub-question (b) = 5 marks) September 2014 8 Financial Operations (c) ACZ is a listed entity with six business segments, and reports segmental information under IFRS 8 Operating Segments in its financial statements. Financial information is reported to ACZ's chief operating decision maker on a geographical basis. Each geographical region has separate risk characteristics. The results for the year ended 31 March 2014 are as follows: Product Group Internal revenue External revenue Total revenue Segment Profit Segment Assets A $m 150 970 1,120 56 2,400 B $m 0 320 320 29 510 C $m 150 40 190 17 430 D $m 20 1410 1,430 155 2,900 E $m 0 310 310 37 590 F $m 0 180 180 10 300 Total $m 320 3,230 3,550 304 7,130 Required: Explain with reasons which of ACZ's geographical segments will be classified as reportable operating segments in accordance with IFRS 8 Operating Segments. (Total for sub-question (c) = 5 marks) (d) On 1 April 2013 XYK acquired 100% of EZ's 500,000 $1 equity shares. Cost of acquisition Retained earnings at 1 April 2013 Retained earnings at 31 March 2014 EZ $000 975 170 230 The fair value of net assets of EZ on 1 April 2013 was $140,000 more than its carrying value. On 31 March 2014 goodwill arising on XYK's investment in EZ had been impaired by 20%. Required: (i) Calculate the goodwill that will be included in XYK's statement of financial position at 31 March 2014. (ii) Explain, with supporting calculations, how XYK's consolidated interest in EZ would affect its consolidated statement of financial position at 31 March 2014. (Total for sub-question (d) = 5 marks) Financial Operations 9 September 2014 Information for questions 2e and 2f SMB is a small local corporate entity that operates a transport business in Country X. On 1 April 2013 SMB acquired an additional vehicle that qualified for tax depreciation allowances. The vehicle cost $46,000 and has an expected useful life of 7 years with a residual value of $4,000. The appropriate accounting entries for this vehicle have been included in the accounts. Extracts from SMB's financial statements: SMB Statement of financial position as at 31 March 2013 $ Non-current liability Deferred tax provision 155,000 Current liability Tax payable 30,000 SMB's Statement of profit or loss (extract) for year ended 31 March 2014 $ Revenue* 260,000 175,000 Expenses** 85,000 Profit before tax SMB Statement of cash flows for year ended 31 March 2014 $ Tax paid 33,000 * Revenue includes a non-taxable government grant of $5,000. ** Expenses include: Depreciation charges of $19,000 for SMB's other non-current assets. These assets qualified for tax depreciation allowances of $22,000. Entertaining costs of $3,000. (e) Required: Calculate SMB's corporate in