ACCA FR Exam 1

✅ Correct answer: Predictive value; Confirmatory value

📌 Explanation: The Conceptual Framework says financial information is relevant when it can make a difference to users' decisions because it has predictive value, confirmatory value or both. Using the disclosures to forecast future loan losses is predictive value; checking last year's estimates against outcomes is confirmatory value.

❌ Why the other options are wrong: Independent verifiability is an enhancing characteristic meaning different observers could agree on the depiction, not an aspect of relevance; neutral depiction is part of faithful representation, the other fundamental characteristic; timely publication is the enhancing characteristic of timeliness, which supports usefulness but is not what the director describes.

📋 Objective: 1.1 (Conceptual framework and the qualitative characteristics of useful information)

✅ Correct answer: $2,394,400

📌 Explanation: IAS 16 cost is the purchase price after trade discounts plus costs directly attributable to bringing the asset to working condition: $2,340,000 x 96% = $2,246,400, plus delivery $46,000, installation $83,000 and testing $19,000, giving $2,394,400. Training, maintenance and general overheads are expensed.

❌ Why the other options are wrong: $2,456,400 wrongly capitalises the staff training and the maintenance contract, which are operating costs; $2,488,000 uses the list price and ignores the 4% trade discount; $2,416,400 adds the allocated general administration overheads, which are not directly attributable to the asset.

📋 Objective: 2.1 (Tangible non-current assets)

✅ Correct answer: More judgement in applying standards

📌 Explanation: A principles-based framework such as IFRS Accounting Standards sets out broad principles grounded in the Conceptual Framework rather than detailed rules, so preparers must apply more professional judgement to reflect the substance of each transaction. This makes it harder to structure deals around bright-lines.

❌ Why the other options are wrong: Bright-line tests for most transactions describe a rules-based system, the opposite of a principles-based one; more judgement usually needs more disclosure of key judgements, not fewer; IFRS Accounting Standards are issued by the IASB, an independent standard-setter, not enacted by a national legislature.

📋 Objective: 1.3 (Regulatory framework)

✅ Correct answer: $810,000

📌 Explanation: The purchased licence is capitalised and amortised from 1 July 20X5: $480,000 / 8 x 6/12 = $30,000, leaving $450,000. Development costs after the criteria are met are capitalised at $360,000 and not amortised until the feed is available for use. Total: $810,000.

❌ Why the other options are wrong: $960,000 capitalises the $150,000 internally generated brand spend, which IAS 38 prohibits; $780,000 charges a full year of licence amortisation although it was bought in July; $1,020,000 capitalises the $210,000 of research, which must be expensed.

📋 Objective: 2.2 (Intangible non-current assets)

✅ Correct answer: Compare carrying amount with recoverable amount; Allocate any loss to goodwill first

📌 Explanation: IAS 36 compares the unit's carrying amount with its recoverable amount, the higher of fair value less costs of disposal and value in use. Any impairment loss is allocated first to goodwill allocated to the unit and then pro rata to the other assets within the scope of IAS 36.

❌ Why the other options are wrong: Recoverable amount is the higher, not the lower, of the two measures; value in use excludes cash flows from future enhancements or planned expansion; inventory is outside the scope of IAS 36 and is measured under IAS 2, so it does not absorb a share of the loss.

📋 Objective: 2.3 (Impairment of assets)

✅ Correct answer: $732,970

📌 Explanation: Inventory is measured at the lower of cost and net realisable value. NRV per tonne is $436 - $18 bagging - $21.80 commission (5% x $436) = $396.20, below the $412 cost, so the rice is written down to 1,850 x $396.20 = $732,970.

❌ Why the other options are wrong: $762,200 is cost, which is higher than net realisable value once the commission is deducted; $735,190 calculates the commission on cost rather than on the selling price; $806,600 values the rice at its expected selling price without deducting any costs to sell.

📋 Objective: 2.4 (Inventories and agriculture)

✅ Correct answer: $5,989,920

📌 Explanation: Under IFRS 9 the liability is initially measured at net proceeds of $5,760,000 and then at amortised cost. The finance cost is $5,760,000 x 9.2% = $529,920 and the coupon paid is $300,000, so the closing carrying amount is $5,760,000 + $529,920 - $300,000 = $5,989,920.

❌ Why the other options are wrong: $6,252,000 ignores the issue costs and starts from the $6,000,000 par value; $5,760,000 treats the finance cost as equal to the coupon, so the premium is never accrued; $6,289,920 adds the effective interest but forgets to deduct the $300,000 coupon paid.

📋 Objective: 2.5 (Financial instruments)

✅ Correct answer: $155,489

📌 Explanation: The liability at 31 December 20X5 is $291,300 x 1.07 - $86,000 = $225,691. The non-current part is the balance still owed after the 20X6 payment: $225,691 x 1.07 - $86,000 = $155,489. The difference of $70,202 is the current liability.

❌ Why the other options are wrong: $225,691 is the total lease liability at 31 December 20X5, not the non-current portion; $70,202 is the current portion due within one year; $205,300 deducts the first payment from the present value without charging any interest for 20X5.

📋 Objective: 2.6 (Leasing)

✅ Correct answer: $120,843

📌 Explanation: IAS 37 requires the provision at present value: $1,450,000 x 0.463 = $671,350, added to the plant's cost. For 20X5 the company charges depreciation on that amount of $67,135 ($671,350 / 10) plus unwinding of the discount of $53,708 ($671,350 x 8%), a total of $120,843.

❌ Why the other options are wrong: $53,708 is only the unwinding of the discount and leaves out depreciation of the capitalised restoration cost; $145,000 depreciates the undiscounted cost and ignores discounting; $725,058 is the closing provision in the statement of financial position, not an expense.

📋 Objective: 2.7 (Provisions and events after the reporting period)

✅ Correct answer: $28,000

📌 Explanation: IAS 12 records deferred tax in the same place as the item it relates to. The deferred tax on the revaluation, $640,000 x 22% = $140,800, is charged to other comprehensive income. Only the movement on the other temporary differences, $214,000 - $186,000 = $28,000, goes to profit or loss.

❌ Why the other options are wrong: $168,800 wrongly charges the revaluation's deferred tax to profit or loss as well; $354,800 is the total closing deferred tax liability, not the charge; $140,800 is the deferred tax on the revaluation, which belongs in other comprehensive income.

📋 Objective: 2.8 (Taxation)

✅ Correct answer: 42.4 cents

📌 Explanation: The theoretical ex-rights price is (7 x $4.36 + 2 x $3.10) / 9 = $4.08, so the bonus fraction is 4.36/4.08. Weighted shares: 18.9m x 4/12 x 4.36/4.08 + 24.3m x 8/12 = 22,932,353. EPS = $9,730,000 / 22,932,353 = 42.4 cents.

❌ Why the other options are wrong: 43.2 cents time-weights the shares but omits the bonus fraction for the bonus element of the rights issue; 40.0 cents divides by the 24.3m shares in issue at the year end; 44.0 cents inverts the bonus fraction, applying 4.08/4.36 instead of 4.36/4.08.

📋 Objective: 2.9 (Reporting financial and non-financial performance)

✅ Correct answer: $39,690

📌 Explanation: The price is allocated on relative standalone selling prices (total $50,400): hides $45,360 x 42/50.4 = $37,800, recognised on delivery; grading $45,360 x 8.4/50.4 = $7,560, recognised over 12 months, so 3/12 = $1,890. Revenue for 20X5 is $39,690.

❌ Why the other options are wrong: $45,360 recognises the whole price on delivery, including grading services not yet provided; $37,800 recognises the hides but none of the three months of grading already performed; $44,100 uses the standalone prices without allocating the $5,040 discount across both obligations.

📋 Objective: 2.10 (Revenue)

✅ Correct answer: 78.4 days; covenant breached

📌 Explanation: Using the covenant definition, inventory days are $3.05m / $14.2m x 365 = 78.4 days, above the 75-day limit, so the covenant is breached. The company must use the definition in the loan agreement, even though an average-inventory measure would look better.

❌ Why the other options are wrong: 70.7 days uses average inventory, which the covenant definition does not allow; 59.9 days divides by revenue instead of cost of sales, mixing selling prices with inventory at cost; 49.9 days is the payables payment period, a different working-capital ratio.

📋 Objective: 3.2 (Calculation and interpretation of accounting ratios and trends)

✅ Correct answer: Fall in local malaria admissions

📌 Explanation: Value for money covers economy, efficiency and effectiveness. Effectiveness asks whether the programme achieves its objective, which for a malaria programme is reducing the disease; a fall in local malaria admissions measures that outcome directly.

❌ Why the other options are wrong: Average cost per patient consultation measures efficiency, relating outputs to resources used; the price paid per test kit measures economy, the cost of inputs; the number of mobile clinics operated is an output count that says nothing about whether malaria has fallen.

📋 Objective: 3.4 (Not-for-profit and public sector entities)

✅ Correct answer: Window dressing of year-end liquidity; Year-end position unrepresentative of year

📌 Explanation: Accelerating collections and delaying payments just before the year end inflates cash and flatters liquidity ratios, a form of window dressing. The statement of financial position is a snapshot at one date, so it may not represent the typical position during the year.

❌ Why the other options are wrong: Loans to customers are measured at amortised cost less expected credit losses, and the concern here is timing, not measurement; the question concerns a single entity, so consolidation effects do not arise; inflation affects comparisons over time but does not explain the year-end timing actions described.

📋 Objective: 3.1 (Limitations of financial statements)

✅ Correct answer: $8,750,000

📌 Explanation: After four years of use the remaining life at revaluation is 26 years (30 - 4). Depreciation for the year is $9,100,000 / 26 = $350,000, so the carrying amount at 31 March 20X6 is $9,100,000 - $350,000 = $8,750,000.

❌ Why the other options are wrong: $8,796,667 depreciates the revalued amount over the original 30-year life instead of the remaining 26 years; $8,820,000 keeps the old $280,000 annual charge based on cost; $9,100,000 charges no depreciation in the year after the revaluation.

📋 Objective: 2.1 (Tangible non-current assets)

✅ Correct answer: $1,274,000

📌 Explanation: The carrying amount at 1 April 20X5 was $8,400,000 - 4 x $280,000 = $7,280,000, so the gain is $1,820,000. Deferred tax of 30% ($546,000) is charged to other comprehensive income with the gain, leaving a net gain of $1,274,000.

❌ Why the other options are wrong: $1,820,000 ignores the deferred tax that IAS 12 requires on the revaluation; $546,000 is the deferred tax itself, not the net gain; $1,204,000 also deducts the $70,000 excess depreciation transfer, which is a movement within equity and not part of other comprehensive income.

📋 Objective: 2.8 (Taxation)

✅ Correct answer: $5,850,000

📌 Explanation: Recoverable amount is the higher of $6,900,000 and $7,350,000, so the loss is $9,200,000 - $7,350,000 = $1,850,000. Goodwill absorbs $1,200,000 first. The quarry rights cannot fall below $1,500,000, so they take only $100,000 and the plant takes the remaining $550,000: $6,400,000 - $550,000 = $5,850,000.

❌ Why the other options are wrong: $5,880,000 spreads the remaining $650,000 pro rata without respecting the $1,500,000 floor on the quarry rights; $5,113,000 spreads the whole loss pro rata including goodwill, instead of writing off goodwill first; $5,400,000 uses the lower fair value less costs of disposal as recoverable amount.

📋 Objective: 2.3 (Impairment of assets)

✅ Correct answer: Entity-specific current value measure

📌 Explanation: The Conceptual Framework classes value in use as a current value measurement basis for assets. It is the present value of the cash flows the entity expects to derive from the asset's use and disposal, so it reflects entity-specific assumptions rather than those of market participants.

❌ Why the other options are wrong: Fair value is also a current value, but it uses market-participant assumptions rather than the entity's own; historical cost is based on the original transaction price and is not updated for expected cash flows; current cost is the cost of an equivalent asset at the measurement date, not the value of its future cash flows.

📋 Objective: 1.2 (Recognition and measurement)

✅ Correct answer: Kilele's ROCE understated against the rival

📌 Explanation: The revaluation raises Kilele's equity, and so its capital employed, and it also increases depreciation, which reduces profit. Both effects lower ROCE relative to a rival using the cost model, so different accounting policies limit the comparison unless the figures are adjusted.

❌ Why the other options are wrong: The revaluation gain goes to other comprehensive income, not operating profit, so it does not overstate ROCE; the revaluation surplus is part of equity and capital employed, so ROCE is affected even though the gain is unrealised; higher equity lowers Kilele's gearing rather than overstating it.

📋 Objective: 3.3 (Limitations of interpretation techniques)

✅ Correct answer: $7,575,000

📌 Explanation: Consideration is 6,300,000 x $2.80 = $17,640,000 and NCI at fair value is 2,100,000 x $2.35 = $4,935,000. Net assets at acquisition are $8,400,000 + $5,160,000 + $1,440,000 fair value uplift = $15,000,000. Goodwill = $17,640,000 + $4,935,000 - $15,000,000 = $7,575,000.

❌ Why the other options are wrong: $6,390,000 measures NCI at its proportionate share of net assets, although the group uses fair value; $9,015,000 omits the $1,440,000 fair value uplift on the plant; $7,155,000 deducts the $420,000 impairment, which arose later and does not change goodwill at acquisition.

📋 Objective: 4.2 (Preparation of consolidated financial statements for a simple group)

✅ Correct answer: $45,090,000

📌 Explanation: Consolidated PPE adds the two companies' balances ($31,650,000 + $12,480,000) and the fair value uplift of $1,440,000, less two years of extra depreciation on it ($1,440,000 / 6 x 2 = $480,000): $44,130,000 + $960,000 = $45,090,000.

❌ Why the other options are wrong: $45,570,000 adds the uplift but charges no extra depreciation on it; $45,330,000 charges only one year of extra depreciation although two years have passed since acquisition; $44,130,000 ignores the fair value adjustment altogether.

📋 Objective: 4.2 (Preparation of consolidated financial statements for a simple group)

✅ Correct answer: $5,386,250

📌 Explanation: Oryx's adjusted post-acquisition profit is $8,020,000 - $5,160,000 - $480,000 extra depreciation - $155,000 unrealised profit ($930,000 x 20/120) = $2,225,000. NCI = $4,935,000 + 25% x $2,225,000 - 25% x $420,000 impairment = $5,386,250; the NCI share the unrealised profit because the subsidiary was the seller.

❌ Why the other options are wrong: $5,425,000 ignores the unrealised profit on goods sold by the subsidiary; $5,491,250 omits the NCI share of the goodwill impairment, which applies when NCI is measured at fair value; $4,306,250 is 25% of the subsidiary's adjusted net assets, the proportionate method the group does not use.

📋 Objective: 4.2 (Preparation of consolidated financial statements for a simple group)

✅ Correct answer: $22,733,750

📌 Explanation: Group retained earnings = Serowe's $21,380,000 + 75% of Oryx's adjusted post-acquisition profit of $2,225,000 ($1,668,750) - 75% of the $420,000 impairment ($315,000) = $22,733,750.

❌ Why the other options are wrong: $22,695,000 charges the whole $155,000 unrealised profit to the group as if the parent were the seller; $23,093,750 leaves out the $480,000 extra depreciation on the fair value uplift; $22,628,750 charges the full impairment to the group instead of sharing 25% with the NCI.

📋 Objective: 4.2 (Preparation of consolidated financial statements for a simple group)

✅ Correct answer: Group totals hide Oryx's own liquidity

📌 Explanation: Consolidated statements present the group as a single economic entity, so Oryx's own assets, liabilities and cash position are merged with Serowe's. The lender to Oryx has a claim only on Oryx, so it needs Oryx's individual statements to judge its liquidity and ability to repay.

❌ Why the other options are wrong: Intra-group sales are eliminated on consolidation, not double counted; non-controlling interests are shown within group equity; goodwill is recognised as a group asset rather than removed, so none of these is the problem for a lender to Oryx.

📋 Objective: 3.1 (Limitations of financial statements)

✅ Correct answer: $8,865,000

📌 Explanation: Start with operating profit $5,940,000, add back depreciation $2,730,000 and the $85,000 loss on disposal, deduct the $770,000 increase in inventory, add the $225,000 decrease in receivables and add the $655,000 increase in payables: $8,865,000.

❌ Why the other options are wrong: $8,415,000 deducts the fall in receivables instead of adding it; $8,780,000 fails to add back the non-cash loss on disposal; $10,405,000 adds the increase in inventory as if it released cash rather than absorbing it.

📋 Objective: 4.1 (Preparation of single entity financial statements)

✅ Correct answer: $6,650,000

📌 Explanation: Closing PPE = opening + additions - depreciation - carrying amount of disposals, so additions = $24,860,000 - $21,340,000 + $2,730,000 + $400,000 = $6,650,000. The $315,000 proceeds are shown separately as an investing inflow.

❌ Why the other options are wrong: $6,565,000 deducts the $315,000 sale proceeds instead of the $400,000 carrying amount; $6,250,000 omits the carrying amount of the fittings sold; $3,920,000 forgets to add back the year's depreciation.

📋 Objective: 4.1 (Preparation of single entity financial statements)

✅ Correct answer: $485,000 in financing activities

📌 Explanation: Interest paid is the opening accrual $60,000 plus the finance cost $520,000 less the closing accrual $95,000 = $485,000. After the IFRS 18 amendments to IAS 7, an entity whose main business is not providing finance or investing classifies interest paid in financing activities.

❌ Why the other options are wrong: $520,000 is the finance cost charged in profit or loss, ignoring the rise in the accrual; $485,000 in operating activities uses the choice removed by the IFRS 18 amendments for non-financial entities; $555,000 adds the increase in interest payable instead of deducting it.

📋 Objective: 4.1 (Preparation of single entity financial statements)

✅ Correct answer: 0.50 : 1

📌 Explanation: Current assets less inventory are receivables $2,185,000 + cash $310,000 = $2,495,000. Current liabilities are trade payables $3,870,000 + interest payable $95,000 + current tax $1,020,000 = $4,985,000. The quick ratio is 2,495 / 4,985 = 0.50 : 1.

❌ Why the other options are wrong: 1.45 : 1 is the current ratio, which includes inventory; 0.63 : 1 leaves the current tax payable out of current liabilities; 0.86 : 1 is the 20X5 quick ratio, not the 20X6 figure.

📋 Objective: 3.2 (Calculation and interpretation of accounting ratios and trends)

✅ Correct answer: Add back loss; $315,000 investing inflow

📌 Explanation: The $85,000 loss on disposal is a non-cash expense included in operating profit, so the indirect method adds it back. The cash actually received, the $315,000 sale proceeds, is presented as an inflow from investing activities, because it relates to a non-current asset.

❌ Why the other options are wrong: Deducting the loss treats it like a gain and double counts it against operating cash flow; the $400,000 carrying amount is not a cash receipt, so it cannot be the investing inflow; proceeds from selling property, plant and equipment belong in investing activities, not operating activities.

📋 Objective: 4.1 (Preparation of single entity financial statements)

Ratios for the year ended 31 March 20X7 (20X6 in brackets)

• Operating profit margin: 8,460 / 84,600 x 100 = 10.0% (11.5%)
• Return on capital employed: 8,460 / (45,230 equity + 19,500 loan notes) x 100 = 8,460 / 64,730 = 13.1% (17.8%)
• Inventory holding period: 9,870 / 63,450 x 365 = 56.8 days (47.1 days)
• Current ratio: (9,870 + 1,140 + 620) / (10,455 + 1,945) = 11,630 / 12,400 = 0.94 : 1 (1.58 : 1)
• Gearing: 19,500 / 45,230 x 100 = 43.1% (18.0%)

W1 Equity = 20,000 + 25,230 = 45,230.

📋 Objective: 3.2 (Calculation and interpretation of accounting ratios and trends)

Ratios excluding the acquisition ($000)

• Operating profit without the chain: 8,460 - 160 = 8,300; revenue without the chain: 84,600 - 2,350 = 82,250.
• Capital employed without the new loan notes: 45,230 + (19,500 - 12,000) = 52,730.
• Adjusted return on capital employed: 8,300 / 52,730 x 100 = 15.7%
• Adjusted operating profit margin: 8,300 / 82,250 x 100 = 10.1%
• Adjusted gearing: 7,500 / 45,230 x 100 = 16.6%

📋 Objective: 3.1 (Limitations of financial statements)

Revenue. Group revenue rose by 11.3%, but 2,350 of the increase came from the new chain in March. Excluding it, organic growth was 8.2%, which is still healthy for an existing store estate and suggests the Dar es Salaam business traded well.

Margins. The gross profit margin fell from 26.0% to 25.0% and the operating profit margin from 11.5% to 10.0%. Part of the fall is the acquired chain: its operating margin in March was only 6.8% (160 / 2,350), probably because of integration costs, rebranding and the lower-margin product mix of a smaller regional chain that lacks the parent's buying power. Excluding the chain, the operating margin is 10.1%, so the existing business also saw margin pressure, perhaps from price cuts to defend market share or higher staff and energy costs. As the chain is integrated, bulk buying should improve its margins.

Return on capital employed. ROCE fell sharply from 17.8% to 13.1%, but this is distorted by the timing of the acquisition. The statement of financial position includes all of the chain's assets and the 12,000 of new loan notes, while profit includes only one month of its results. The new capital has not yet earned a full year of return. Excluding the acquisition, ROCE would be 15.7%, so the underlying fall is much smaller; the remaining fall reflects the lower margin of the existing business. With annual revenue of about 28,000, the chain should add materially to profit in 20X8.

Working capital and liquidity. The inventory holding period rose from 47.1 to 56.8 days, but this is also distorted: year-end inventory includes the chain's stock while cost of sales includes only one month of its trading, so the true period is likely to be much lower. The current ratio fell from 1.58 to 0.94 : 1 because cash reserves of 3,950 were largely spent on the acquisition and trade payables almost doubled after taking on the chain's suppliers. Supermarkets normally operate with low current ratios because they sell for cash and take credit from suppliers, but liquidity has weakened and there is little cash left to absorb shocks.

Gearing and finance. Gearing rose from 18.0% to 43.1% because the acquisition was financed mainly by debt. Interest cover fell from 14.6 times to 12.4 times (8,460 / 680), and it will fall further next year when a full year of interest on the new notes (960) is charged, although it remains comfortable. Without the acquisition gearing would have been 16.6%.

Conclusion. The deterioration in the 20X7 ratios is largely caused by the acquisition near the year end rather than by weaker underlying trading. It is too early to judge the acquisition: the chain's full-year results and the synergies from integration will only show next year. Management should monitor cash and the chain's margins closely, since the group is now more highly geared and less liquid.

📋 Objective: 3.2 (Calculation and interpretation of accounting ratios and trends)

W1 Goodwill on acquisition of Tausi Orchards Ltd ($000)

• Share exchange: 5,100 / 3 = 1,700 shares x $8.10 = 13,770
• Deferred cash at present value: 5,184 / 1.08 = 4,800
• Non-controlling interests at fair value: 900 x $2.65 = 2,385
• Total: 13,770 + 4,800 + 2,385 = 20,955
• Less fair value of net assets at acquisition: share capital 6,000 + retained earnings 10,720 (9,340 + 2,760 x 6/12) + land 1,250 + plant 960 = 18,930
• Goodwill at acquisition = 20,955 less 18,930 = 2,025

📋 Objective: 4.2 (Preparation of consolidated financial statements for a simple group)

Guava group: consolidated statement of financial position at 31 December 20X6 ($000)

W2 Property, plant and equipment: 56,750 + 15,860 + land 1,250 + plant 960, less additional depreciation 120 (960 / 4 x 6/12) = 74,700.

W3 Retained earnings: Tausi Orchards Ltd's post-acquisition profit is 12,100 - 10,720 = 1,380, less additional depreciation 120 and unrealised profit 210 (840 x 25%) = 1,050. Group retained earnings = 28,460 + 85% x 1,050 (892.5) - 85% x 450 impairment (382.5) - 192 unwinding of the discount on the deferred consideration (4,800 x 8% x 6/12) = 28,778.

W4 Non-controlling interests: 2,385 at acquisition + 15% x 1,050 (157.5) - 15% x 450 impairment (67.5) = 2,475.

The deferred consideration is due on 1 July 20X7, so it is a current liability.

📋 Objective: 4.2 (Preparation of consolidated financial statements for a simple group)