Public Sector Financial Reporting (International version) June 2015 Examination Guide

The Examination Guide contains all questions from the June 2015 examination paper together with the marking scheme answers and comments from the examiner. The answers detailed below show some but not all possible answers that were accepted by the marking team. Marks were awarded for other valid answers that might not be included in this guide. The Examination Guide has been created and should be used as a study aid.

© 2015 Chartered Institute of Public Finance and Accountancy

PUBLIC SECTOR FINANCIAL REPORTING (International version) 01 June 2015 Reading time: 10 minutes Writing time: 3 hours Instructions to candidates 10 minutes of reading time is allowed before starting this examination. There are two sections in the examination. Section A contains 20 multiple choice questions, each worth 2 marks. Answer all questions using the answer sheet provided. Section B contains four questions, each worth 20 marks. Answer three of four questions.

All workings should be shown. Where calculations are required using formulae, calculators may be used but steps in the workings must be shown. Calculations with no evidence of this (for example, using the scientific functions of calculators) will receive no credit. Programmable calculators are not permitted in the examinations room. Where a question asks for a specific format or style, such as a letter, report or layout of accounts, marks will be awarded for presentation and written communication. In this paper the unit of currency used is the pound (£), however the currency itself does not affect the calculations, and no knowledge of the UK currency or currency market is required.

© 2015 Chartered Institute of Public Finance and Accountancy

IPFM PSFR Examination Guide

SECTION A

1

June 2015

Select one correct answer per question. Use the separate answer sheet provided.

Authority A has a number of subsidiaries and a 30% share in X Ltd. The shares were acquired 3 years ago for £520 000 when the balance on X Ltd’s accumulated surpluses was £62 000. At the reporting date, the statements of financial position of the authority and X Ltd were as follows:

Investment in X Ltd Other assets Total assets

Authority £ 000 520 2 500 3 020

X Ltd £ 000 1 506 1 506

2 250 620 150 3 020

1 400 92 14 1 506

Share capital Contributed capital Accumulated surplus Liabilities Total capital and liabilities

Calculate the ‘investment in associate’ to be included in Authority A’s consolidated financial statements. (a)

£ 560 000

(b)

£ 529 000

(c)

£ 588 000

(d)

£ 652 000

2

Which ratios would be most useful to an entity’s suppliers?

(a)

Average trade payables days and the current ratio

(b)

Average trade receivable days and the current ratio

(c)

Gearing and interest cover

(d)

Return on capital employed and surplus margin

Page 3

IPFM PSFR Examination Guide

3

June 2015

Entity A owns a tangible asset which cost £15 000 and has been depreciated by £7 000 as at 31 December 2013. During 2014 the asset was improved. The cost of this improvement was £4 000. The remaining useful economic life of the asset was also reassessed and determined to be 10 years from 1 January 2014. Calculate the net book value of the asset at 31 December 2014.

(a)

£6 800

(b)

£7 200

(c)

£10 800

(d)

£17 800

4

Which of the following can be recognised as provisions: (i) (ii) (iii) (iv)

Anticipated future losses of £16m relating to a separately identifiable contract Anticipated costs of £2m relating to a personal injury claim which is likely to be paid A guarantee relating to a charity which has filed for protection from its creditors Future costs of repairing major tangible assets. Costs are estimated to be £4m.

(a)

(i) and (ii) only

(b)

(ii) and (iii) only

(c)

(ii) only

(d)

All of the above

5

Which of the following should be treated as prior period errors: (i) (ii) (iii) (iv)

Creditor balances which were omitted from the financial statements Adjustment to the value of an asset as a result of an impairment review Change in the discount factor used for provisions as a result of changes in market interest rates Changes in the net realisable value of inventory due to certain items becoming obsolete

(a)

(i) only

(b)

(ii) and (iii) only

(c)

(i) and (iv) only

(d)

None of the above

Page 4

IPFM PSFR Examination Guide

6

Which of the following can be included in the cost of inventories: (i) (ii) (iii) (iv)

Abnormal wastage Cost of storage of finished goods Selling costs Administrative overheads

(a)

All of the above

(b)

(ii) and (iv) only

(c)

(ii) only

(d)

None of the above

7

Which of the following statements is TRUE in relation to consolidating financial statements: (i) (ii) (iii) (iv)

An entity should only be consolidated as a subsidiary when at least 50% of its share capital is owned by the controlling entity. Where less than 20% of the voting rights are controlled then the entity should be accounted for as an associate. Control may exist where the controlling entity has the power to cast the majority of votes at a board meeting. Control is likely to exist where the controlling entity has the power to dissolve the other entity and obtain a significant level of residuary assets or bear significant obligations.

(a)

All of the above

(b)

(i) and (iii) only

(c)

(ii)and (iii) only

(d)

(iii) and (iv) only

8

June 2015

Blue Lake Authority owns a building which cost £1 200 000 when it was purchased in 2008. At the time of purchase it was estimated to have a useful economic life of 60 years and zero residual value. It is the policy of Blue Lake Authority to charge a full year depreciation in the year of acquisition. The building is revalued every five years. At the last valuation in 2012 the value was deemed to be £1 400 000. Calculate the net book value of the property at 31 December 2014 and the balance on the revaluation reserve.

(a)

NBV £1 325 000DR

Revaluation Reserve £200 000CR

(b)

NBV £1 325 000DR

Revaluation Reserve £280 000CR

(c)

NBV £1 330 000DR

Revaluation Reserve £220 000CR

(d)

NBV £1 330 000DR

Revaluation Reserve £280 000CR Page 5

IPFM PSFR Examination Guide

9

Which of the following are short-term employee benefits as defined by IPSAS 25: (i) (ii) (iii) (iv)

salaries pensions holiday pay bonuses

(a)

All of the above

(b)

(i), (ii) and (iv) only

(c)

(i), (iii) and (iv) only

(d)

(i) and (iv) only

10

June 2015

According to IPSAS 29 how should ‘available for sale financial assets’ be valued in the financial statements?

(a)

Initially valued at cost, subsequently adjusted to fair value at the reporting date

(b)

At amortised cost

(c)

Initially at fair value and then subsequently at amortised cost

(d)

At depreciated cost

11

Which of the following might be indications of impairment: (i) (ii) (iii) (iv)

Significant changes in customer tastes Significant increases in the market value of an asset Significant increases in market interest rates Reduction in the useful economic life of an asset

(a)

None of the above

(b)

(i) and (iv) only

(c)

(i), (iii) and (iv) only

(d)

(i) and (iii) only

Page 6

IPFM PSFR Examination Guide

12

June 2015

Authority D is being consolidated into whole-of-government accounts (WGA). Which of the following transactions should be eliminated on consolidation: (i) (ii) (iii) (iv)

A loan from the national government to Authority D A loan from Authority D to another public sector body also being consolidated in WGA Taxes paid by Authority D to the national government Fees and charges paid by the public to Authority D

(a)

All of the above

(b)

(i), (ii) and (iii) only

(c)

(i) and (iii) only

(d)

None of the above

13

In 2013 Verde County Council set up a provision for £200 000 for a legal claim which it expected to settle in 2014. When the claim was settled in 2014 the actual costs incurred were only £175 000. How should this be treated in the accounts?

(a)

The accounts for 2013 should be restated so that the provision costs are correctly recorded as £175 000

(b)

The difference of £25 000 should be credited to the statement of financial performance in 2014 as operating income

(c)

The balance of £25 000 on the provision should be retained to pay for future possible legal claims

(d)

The difference of £25 000 should be credited to the cash flow statement

14

Which of the following statements is TRUE in relation to IPSAS 12 Inventories?

(a)

FIFO is not allowed by IPSAS 12

(b)

All individual items of inventory must be separately priced and valued

(c)

Inventory should be valued at the higher of cost or net realisable value

(d)

The entity shall use the same cost formula for all inventories of a similar nature

Page 7

IPFM PSFR Examination Guide

15

Which of the following ratios provide information about an entity’s efficiency? (i) (ii) (iii) (iv)

Return on capital employed Gearing Interest cover Non-current asset turnover

(a)

None of the above

(b)

(i) and (iv) only

(c)

(iv) only

(d)

(ii) and (iii)

16

Which of the following would require disclosure as a related party transaction: (i) (ii) (iii) (iv)

A charity buys some goods from a company owned by one of the charity’s trustees. A school leases some kitchen equipment from the wife of the school cook. A local authority finance director bought shares in a wholly owned subsidiary of the local authority. Charity X provided payroll and finance services on behalf of Charity Y. Both charities are owned by the same municipal authority.

(a)

All of the above

(b)

(iii) only

(c)

(i) and (iii) only

(d)

(i), (iii) and (iv)

17

June 2015

Which of the following are eliminated when consolidating an associate: (i) (ii) (iii) (iv)

Money owed by the parent to an associate Sales and purchases between associate and parent Unrealised gains relating to sales and purchases between associate and parent Money owed by the associate to the parent

(a)

None of the above

(b)

All of the above

(c)

(i) and (ii) only

(d)

(i), (iii) and (iv) only

Page 8

IPFM PSFR Examination Guide

18

Which of the following does the Cash Basis IPSAS require to be included in the statement of cash receipts and payments: (i) (ii) (iii) (iv)

Cash balances Cash payments and receipts Payments made by third parties on behalf of the entity Receivables and payables

(a)

All of the above

(b)

(i), (ii) and (iii)

(c)

(ii) and (iii)

(d)

(i), (ii) and (iv)

19

According to IPSAS 3, how should a change in accounting policy be treated?

(a)

Prospectively

(b)

Retrospective restatement

(c)

Restrospective application

(d)

Prospective restatement

20

June 2015

XL Authority controls a number of entities and therefore prepares consolidated financial statements. XL is also a venturer in LP Ltd, a jointly controlled entity in which XL owns 30%. XL acquired its share of LP at a cost of £3m. At that time LP had net assets of £6m. A summarised draft statement of financial position for XL Group (excluding LP) and LP is as follows:

Non current assets Current assets Equity Current liabilities

XL Group £m 120 45 ( 110) ( 55) -

LP Ltd £m 12 6 ( 13) ( 5) -

Calculate the group’s equity including the joint venture. (a)

£112m

(b)

£114m

(c)

£120m

(d)

£123m

Total marks (40) Page 9

IPFM PSFR Examination Guide

June 2015

SECTION B (Answer THREE from four questions)

1

The following trial balance was extracted from the accounting records of a university at 31 December 2014. Funding council grants Academic fees and support grants Research grants and contracts Long term loans Salaries and wages Operating expenses Research and development costs (note 1) Land - at valuation Buildings - at valuation Other tangible assets at cost Investments Accumulated depreciation: buildings (at 1 Jan 2014) Accumulated depreciation: other tangible assets (at 1 Jan 2014) Loan interest paid Trade receivables and payables Retained earnings (at 1 Jan 2014) Revaluation reserve Bank Current asset investments Inventory (at 31 December 2014)

£ 000

71 35 11 16 150 24 35

240 600 500 500 300 500 780

£ 000 64 600 50 400 12 750 70 000

75 150 4 950 6 598 27 404 11 250 250 395 872

11 025 41 925 36 172 33 850

395 872

The following additional information is available: 1. The research and development costs of £11 500 000 included in the trial balance are made up of the following elements: • • •

•

Project 1: £2 500 000 spent on applied medical research. It is hoped that this will ultimately lead to development of a new vaccine. Project 2: £4 000 000 spent on development of a new synthetic material. The university intends to sell the technology and patent to a commercial company within the next 12 to 18 months. Project 3: £5 000 000 spent on developing a new type of scanner. While the university considers this project to be technically feasible and is aiming to complete the project, the project is no longer a priority of the national government and at 31 December 2014 no funding had been identified to continue this project in 2015. However on 15th January 2015 a loan was obtained from a commercial organisation which means that the project can be completed and the scanner sold commercially. The costs to complete all three projects have been reliably estimated by the university.

2. Buildings are depreciated straight line over 40 years and other tangible assets are depreciated at 25% reducing balance.

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IPFM PSFR Examination Guide

June 2015

3. The research grants and contracts of £12 750 000 included in the trial balance are to fund the three projects referred to in note 1 above. It is the policy of the university to recognise income on the basis of percentage completion of the project. Income included in trial balance

% of project completed

Project 1

£ 3 000

80%

Project 2 Project 3

4 200 5 550

96% 90%

12 750

•

Requirement for question 1

(a)

Prepare the statement of financial performance for the university for the year ended 31 December 2014.

(5)

(b)

Prepare the statement of financial position for the university for the year ended 31 December 2014.

(6)

(c)

With reference to relevant IPSAS(s), explain your treatment of the costs of £5 000 000 which relate to Project 3.

(4)

(d)

With reference to relevant IPSAS(s), explain your treatment of the income of £12 750 000 from research grants and contracts.

(5) (20)

Page 11

IPFM PSFR Examination Guide

2

June 2015

Halsetown Authority owns 60% of the equity share capital of Lelant Leisure. The individual statements of financial performance of each entity for the year ended 31 December 2014 are shown below: Statements of financial performance Halsetown Lelant Leisure Authority £m £m 910 145 ( 360) ( 75) ( 138) ( 29) ( 245) ( 25) 4 18 ( 28) ( 1) 157 19 ( 24) 133 19 67 6 200 25

Revenue Direct operating expenses Distribution costs Admin expenses Gain on disposal of non-current asset Dividend from Lelant Leisure Finance costs Surplus before tax Tax Surplus for the year Surplus brought forward Retained surplus Additional information

1. During the year ended 31 December 2014, Lelant Leisure sold property, plant and equipment with a net book value of £2m to Halsetown Authority for £6m. The group charges depreciation on the reducing balance basis at 25% with a full year charge made in the year of acquisition but none in the year of disposal. 2. During the year Halsetown Authority sold goods to Lelant Leisure for £15m. These goods had cost Halsetown Authority £10m. At the year end Lelant Leisure still had 40% of these goods in inventory. •

Requirement for question 2

(a)

Prepare the group's consolidated statement of financial performance for the year ended 31 December 2014.

(10)

(b)

Explain five potential benefits of preparing whole-of-government accounts (WGA).

(10) (20)

Page 12

IPFM PSFR Examination Guide

3

June 2015

The statements of financial position for Woodlands Hospital as at 31 December 2013 and 2014 are as follows: 2013 £ 000

ASSETS Non Current Assets Intangible assets Property, plant and equipment Total non current assets Current Assets Inventories (drugs) Receivables Cash and cash equivalents Total current assets TOTAL ASSETS

2014 £ 000

6 513 158 000 164 513

7 418 177 000 184 418

4 195 9 762 36 799 50 756 215 269

4 566 11 755 46 874 63 195 247 613

79 163 42 300 76 556 198 019

71 246 46 874 88 927 207 047

Non current liabilities Long term borrowing Provisions Total current liabilities

8 700 350 9 050

23 500 507 24 007

Current liabilities Trade and other payables Borrowings Total current liabilities

7 850 350 8 200

15 619 940 16 559

215 269

247 613

EQUITY AND LIABILITIES Capital contributed by government Revaluation reserve Retained surplus / (deficit) Total equity

TOTAL EQUITY AND LIABILITIES

The hospital’s statement of financial performance for the year ended 31 December 2014 was as follows: 2014 £ Revenue Income from patient related activities 257 500 Other operating income 24 580 282 080 Expenses Staff costs ( 199 500) Drug costs ( 25 700) Depreciation ( 10 400) Other operating expenses ( 32 890) ( 268 490) Interest received 134 Loss on disposal of asset ( 180) Finance costs - interest paid ( 1 231) Finance costs - unwinding of discount on provisions ( 7) ( 1 284) Surplus for the period 12 306 Page 13

IPFM PSFR Examination Guide

June 2015

1. During 2014 the hospital incurred costs of £1 255 000 on research and development. Research costs of £350 000 were written off to the statement of financial performance as 'other operating expenses'. The remainder of £905 000 were development costs which were capitalised. 2. The loss on disposal of assets relates to some outdated medical equipment with a net book value of £200 000. The equipment had previously been revalued by £65 000. Half of the proceeds of sale were received on 1 October 2014 with the remainder due to be received on 1 February 2015. 3. The receivables balances relate to income from patient related activities and the amount owed in relation to the disposed asset referred to in note 2. 4. The payables balances relate entirely to staff costs. 5. Each year approximately 10% of the opening balance of the capital contributed by government is repaid to Central Government. The payment of £7 917 000 was made on 1 March 2014. 6. The revaluation reserve relates entirely to property, plant and equipment. 7. During 2014 new long term loans of £20 000 000 were received from the Hospital Financing Facility. Some long term loans were also repaid during the year. 8. During the year ending 31 December 2014 new provisions totalling £150 000 were set up for new medical negligence claims.

•

Requirement for question 3

(a)

Prepare the cash flow statement for Woodlands Hospital for the year ended 31 December 2014 using the direct method.

(16)

(b)

Prepare the reconciliation of net cash flows from operating activities to surplus for Woodlands Hospital for the year ended 31 December 2014.

(4) (20)

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IPFM PSFR Examination Guide

4

•

June 2015

Requirement for question 4 Two sources of finance for public sector organisations are taxes and grants. With reference to the relevant IPSAS(s), explain how each of these two sources of finance should be treated in the financial statements of public sector organisations.

(8)

(b)

Explain how the variety of sources of income in the public sector might impact on the features of financial reporting in the public sector.

(6)

(c)

The following information is available on sources of funding for a housing organisation:

(a)

Long term loans Deferred grant income Share capital

2013 £ 5 000 3 500 9 000 17 500

2014 £ 10 000 3 150 9 000 22 150

Using the formula below, calculate the gearing ratio for each year and interpret your results. Gearing % = (Non-equity finance / capital employed) x 100

Page 15

(6) (20)

IPFM PSFR Examination Guide

June 2015

Marking Scheme for section A Question number

(a)

1 2

(b)

(d)

X X

3

X

4 5

(c)

X X

6

X

7

X

8

X

9 10

X X

11

X

12

X

13

X

14

X

15

X

16

X

17

X

18

X

19 20

X X

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IPFM PSFR Examination Guide

June 2015

Please give additional workings for more complex MCQs: Question 1 Investment in associate

£ 000 520

Cost of investment Share of post-acquisition surpluses: (30% x (92 - 62)

9

Investment in associate

529

Question 3 Cost Acc Depn NBV at 31 Dec 2013 Add: cost of improvement Revised NBV UEL Depreciation charge for 2014 NBV at 31 Dec 2014

£000 15 ( 7) 8 4 12 10

years

1.2 10.8

Question 8 Cost Undepreciated proportion NBV before reval Revalued amount Balance on reval reserve Revalued amount Undepreciated proportion NBV at 31 Dec 2014

£ 1 200 000 x 56 /60 1 120 000 1 400 000 ( 280 000) 1 400 000 x 53 / 56 1 325 000

Page 17

IPFM PSFR Examination Guide

June 2015

Question 20

Non current assets Current assets Equity Current liabilities

XL Group £m 120 45 ( 110) ( 55) -

Calculate the groups equity including LP Ltd XL Group equity LP Ltd (13-6)x30% Group equity including joint venture

110 2 112

Page 18

LP Ltd £m 12 6 ( 13) ( 5) -

IPFM PSFR Examination Guide

June 2015

Examiner’s comments on section A question 1

This section consisted of 20 multiple choice questions which were worth 2 marks each. Performance was generally good in this section. The questions which seemed to cause the greatest difficulty were those testing: • • • •

Identifying efficiency ratios (19%) Accounting for associates (29%) Provisions (29%) Related party transactions (36%)

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IPFM PSFR Examination Guide

June 2015

SECTION B Marking scheme for question 1 (a)

Statement of financial performance for the university for year ended 31 December 2014 £ 000

Revenue Funding council grants Academic fees and support grants Research grants and contracts Total operating revenue

£ 000

64 600 50 400 11 427

Expenses Salaries and wages Operating expenses Write-off of research costs Depreciation - buildings Depreciation - other tangibles Total operating expenses

* 0.5 126 427

( 71 240) ( 35 600) ( 2 500) ( 3 758) ( 3 369)

( 116 467)

( 4 950)

(Note 1(i) (W2) (W3)

*

Total non-operating revenue

( 4 950)

Surplus for the period

5 010

*For including other trial balance figures Workings Presentation

Total part (a)

Workings

0.5 2 0.5 5 Marks

1. Research grants and contracts

Buildings at valuation Useful life

0.5 0.5 0.5

9 960

Non-operating revenue / expenses Interest costs

2. Buildings depreciation

(W1)

*

Surplus from operating activities

Project 1 Project 2 Project 3

Marks

Income included in trial balance £ 000 3 000 4 200 5 550 12 750

% of project completed 80% 96% 90%

£ 000 150 300 40 3 758 Page 20

Revenue to be recognised £ 000 2 400 4 032 4 995 11 427

years

1

0.5

IPFM PSFR Examination Guide

June 2015

3. Other tangible assets

£ 24 500 ( 11 025) 13 475

Cost Accum depreciation Net book value Depreciable amount Reducing balance Depreciation for 2014

13 475 25% 3 369

0.5

Total workings for statement of financial performance (b)

2

Statement of financial position for the university as at 31 December 2014

ASSETS Non-current assets Property, plant and equipment Intangible assets (4 000 + 5 000) Investments Total non-current assets Current assets Inventory Trade receivables Investments Cash and cash equivalents Total current assets

£ 000

£ 000

97 998 9 000 35 780

250 6 598 11 250 27 404

TOTAL ASSETS

142 778

Marks

**

0.5 1.0

(W4)

0.5

(W6)

0.5

(W5)

** ** ** ** 45 502 188 280

EQUITY AND LIABILITIES Revaluation reserve Retained earnings Total equity

( 33 850) ( 41 182)

Non-current liabilities Long term borrowings Total non-current liabilities

( 70 000)

Current liabilities Trade payables Deferred income Total current liabilities

( 41 925) ( 1 323)

TOTAL EQUITY AND LIABILITIES

** ( 75 032)

( 70 000)

**

** ( 43 248) ( 188 280)

**For including other TB figures Workings

1.0 2.0

Presentation

0.5

Total part (b)

6.0

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IPFM PSFR Examination Guide

June 2015

Workings 4. Property, plant and equipment Land Valuation / cost Accumulated depreciation

£ 000 16 500 16 500

Buildings £ 000 150 300 ( 78 908) 71 392

5. Deferred income - research grants and contracts £ 000 Income included in trial balance 12 750 Less: revenue recognised in 2014 ( 11 427) Deferred income 1 323 6. Retained earnings At 1 January 2014 Plus surplus in 2014

Other tangibles £ 000 24 500 ( 14 394) 10 106

Total £ 000 191 300 ( 93 302) 97 998

0.5 1.0

0.5

£ 000 36 172 5 010 41 182

Total workings for statement of financial position

2

(c) • •

IPSAS 31 governs the treatment of intangible assets including research and development costs and IPSAS 14 governs events after the reporting date Development costs can be capitalized if they meet the six criteria: Criteria Saleable or useable by the entity Technically feasible to complete Economic benefits expected to flow Measureable expenditure Intention to complete Completable

• •

Project 3 Yes can be sold once complete Yes technically feasible Yes can be sold commercially to generating economic benefits to university Yes expenditure has been measured and included in trial balance Yes intending to complete Yes. Although no funding in place at year end, shortly after year end a loan was obtained so that project can be completed.

Project 3 meets the six criteria and therefore can be capitalized. Although the loan was obtained after the balance sheet date it provides information about balances at the balance sheet date i.e. the costs of project 3. The intangible asset should not be amortised until the expected economic benefits commence. 1 mark per well-explained point up to a maximum of (4)

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IPFM PSFR Examination Guide

June 2015

(d) • IPSAS 9 governs the treatment of revenue from exchange transactions including income from research grants and contracts. • Revenue is recognized when it is probable that future economic benefits or service potential will flow to the entity and these benefits can be measured reliably. • Where revenue relates to ‘rendering of services’ it must also be possible to (1) reliably measure the stage of completion, and (2) reliably measure the costs incurred and the costs to complete. • In relation to the research grants and contracts, economic benefits of £12 750 000 have already flowed to the entity and can be measured reliably. • Information is available on stage of completion (percentages given in note 3) and costs to complete are known to the university. • Revenue of £11 427 000 should therefore be recognized based on the percentage of completion (see working 1 above) in 2014. • The remaining amount of £1 323 000 should be held as deferred income on the statement of financial position. 1 mark per well-explained point up to a maximum (5) (20)

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IPFM PSFR Examination Guide

June 2015

Examiner’s comments on question 1 This question related to single entity financial statements and particularly the treatment of research and development. Candidates were required to prepare the statement of financial performance (5 marks), the statement of financial position (6 marks), explain the treatment of some development costs (4 marks) and finally explain the treatment of income from research grants and contracts (5 marks). This question was the second most popular with 73% of candidates, attempting it. . Most candidates attempted both the numerical and narrative parts of this question and while performance overall was a little disappointing, it was the second best answered question in this section of the paper. In relation to the preparation of financial statements, most candidates made a fairly full attempt and scored fairly well. A common error related to using cost for calculating reducing balance depreciation instead of net book value. Some candidates also struggled to decide how to treat the research and development costs and how to recognise the income associated with the research and development. A few candidates also spent time unnecessarily producing a full property, plant and equipment disclosure note. Parts (c) and (d) were generally less well answered. Candidates generally wrote very little despite these narrative elements being worth 9 out of the 20 marks. While lengthy answers were not required, generally candidates should assume that to earn 9 marks they will need to make 9 clear and relevant points.

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IPFM PSFR Examination Guide

June 2015

Marking scheme for question 2 (a)

Group consolidated statement of financial performance for Halsetown Authority for the year ended 31 March 2014 Marks

Revenue Direct operating expenses Distribution costs Admin expenses Gain on disposal of non-current asset Dividend from Lelant Leisure Finance costs Surplus before tax Tax Surplus for the year Attributable to: Halsetown Authority Minority Interest Surplus for the year

(910+145-15) (360+75-15+2-1) (138+29) (245+25) (4-4) (28+1)

Balancing figure 19 - 4 = 15 x 40% Presentation Workings

£m 1 040 ( 421) ( 167) ( 270)

0.5 0.5 0.5

( 29) 153 ( 24) 129

0.5

123 6 129

0.5 0.5 0.5 (3.5) (6.5) (10.0) Marks

Workings Step 1 - establish group structure Halsetown Authority

60%

Lelant Leisure Minority Interest

40%

Step 2 - calculate unrealised gains Goods transferred from HA to LL Cost of goods transferred Gain Percentage unsold Unrealised gain

£m 15 ( 10) 5 40% 2

Page 25

0.5 0.5 0.5

IPFM PSFR Examination Guide

Adjustment: Debit Direct Operating Costs Credit Closing inventory

June 2015

2 2

Step 3 - calculate direct and operating costs Revenue - Halsetown Revenue - Lelant Less: intra group sale Consolidated revenue Operating costs - Halsetown Operating costs - Lelant Less: intra group purchase Add: unrealised gain on inventory Less: extra depreciation (£4m x 25%) Consolidated operating costs

910 145 1 055 ( 15) 1 040

0.5 0.5

360 75 435 ( 15)

0.5 0.5 0.5

2 ( 1)

1.0

421

Step 4 - minority interest Surplus for the year Less: gain on sale of PPE MI percentage Minority Interest

0.5

19 ( 4) 15 40% 6

0.5 0.5

Total for workings

6.5 Total part (a) (10)

(b) List and explain five potential benefits of WGA Answers may include the following potential benefits: Assistance in setting and monitoring of fiscal policy

Promoting consistency in financial reporting across the public sector

Fiscal policy is how the government uses taxation and public expenditure to influence the economy. A single set of financial statements for the WGA group means there is clear and audited information on taxation and particularly expenditure at a national level. Better information facilitates better decision making and financial planning across the whole of government In most countries the public sector will include a wide range of bodies providing different services, with different sources of funding and often using different financial reporting. Preparation of WGA means that financial reporting will be aligned (at least for WGA). Consistent reporting will make

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IPFM PSFR Examination Guide

June 2015

Improving capital planning

Providing users with an overall audited view of public services performance

Aiding financial and non-financial planning and investment

Increased accountability to stakeholders

Ability to make governments

comparisons

with

other

financial information more accessible and understandable for users of the accounts. Users will be able to compare organisations and this should result in improved public accountability Governments have to make decisions about where capital investment should be made. A more complete view of the public services financial performance means that these decisions will be better informed. Without WGA the public cannot see what the public services are worth in total. WGA means that the public will be able to see at a glance what the public services are worth and better judge the value of services they are receiving, improving accountability. By knowing how much is spent in total on the public services and in specific areas of the public services, investment decisions can be better made. For example using WGA it will be possible to see totals for each class of non-current assets and how the assets have been funded. Stakeholders will be able to easily identify the totals raised from different types of taxation and how the money has been spent. This will facilitate a better understanding by stakeholders and allow for more meaningful dialogue between stakeholders and politians. It will be possible to compare taxation and expenditure levels with other countries preparing WGA

Up to 2 marks per relevant point of which 0.5 is for identifying the benefit and up to 1.5 for explanation Note: No additional marks should be awarded where candidates identify more than the required five benefits (10) (20)

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IPFM PSFR Examination Guide

June 2015

Examiner’s comments on question 2 This question related to group accounts and required candidates to prepare the consolidated statement of financial performance for a parent and subsidiary (10 marks) and then explain five potential benefits of preparing whole-of-government accounts (10 marks). This question was the most popular with 93% of candidates attempting it and, on average, it was the best answered question in this section of the paper. Many candidates scored well on preparation of the group statement. Some candidates while able to calculate the unrealised profit and excess depreciation, were not able to make the correct adjustments in the statement of financial performance. Re part (b), some candidates had clearly properly revised this part of the syllabus and therefore scored well. Most candidates were able to identify a couple of potential benefits. Many, however, continued far beyond the five benefits that were asked for whereas their time would have been better spent identifying the best five and explaining them more fully and devoting time to other parts of the exam instead.

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IPFM PSFR Examination Guide

June 2015

Marking scheme for question 3

(a) Cash Flow Statement for Woodlands Hospital the year ended 31 December 2014 Cashflows from operating activities Receipts Income from patient related activities (257 500 + 9 762 - (11 755-10)) Other operating income Interest received Payments Staff costs (199 500 + 7 850 - 15 619) Drug costs (25 700 - 4 195 + 4 566) Other operating expenses (32 890 - 150 provisions) Interest paid

£ 000

Marks

1.5

255 517 24 580 134 280 231

0.5 0.5

(191 731) (26 071) (32 740) (1 231) (251 773) 28 458

1 1 1 0.5

10 (24 961) ( 905) (25 856)

0.5 0.5 0.5

(7 917) (5 200) 20 000 590 7 473

0.5 0.5 0.5 0.5

Net increase / (decrease) in cash and cash equivalents

10 075

0.5

Cash and cash equivalents at the beginning of the year

36 799

Cash and cash equivalent at the end of the year

46 874

Net cashflows from operating activities Cashflows from investing activities Proceeds from disposal of PPE (W1) Payments to acquire PPE (W2) Payment to acquire intangible assets (development costs) Cashflows from financing activities Repayment of capital contributed by government Repayment of long term borrowing (W3) Proceeds from new long term loan Proceeds from new short term loans (940 – 350)

0.5 5 0.5

Marks from workings Presentation

( 16) Working 1 - Proceeds from disposal

£000 200 ( 180) 20 ( 10) 10

Book value Loss on disposal Proceeds from disposal Less cash not received at year end

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0.5 0.5

IPFM PSFR Examination Guide

June 2015

Working 2 - Property, plant and equipment PPE £000 Opening balance 158 000 Depreciation Additions (bal fig) 24 961 Disposals Revaluation 4 639 Closing balance (46 874 + 65 -42 300) 187 600 Working 3 - Long term borrowing Loans repaid (Bal fig) Closing balance

£000 5 200 23 500 28 700

LTB

£000 10 400 200 177 000 187 600

0.5 1 1.5

£000

Opening balance New loan

8 700 20 000

0.5 0.5

28 700

(b) £000

Cashflow from operating activities Surplus / (deficit) in year Depreciation and impairment Loss on disposal Increase in inventories (4 566 – 4 195) Increase in receivables (11 755 – 10 – 9 762) Increase in payables (15 619 – 7 850) Increase in provisions (507 – 350) Net cashflows from operating activities

12 306 10 400 180 ( 371) (1 983) 7 769 157 28 458 Presentation

0.5 0.5 0.5 0.5 0.5 0.5 0.5

0.5 ( 4) (20)

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IPFM PSFR Examination Guide

June 2015

Examiner’s comments on question 3 This question required candidates to prepare a cash flow statement using the direct method (16 marks) and then prepare the reconciliation of net cash flows from operating activities to surplus (4 marks). Preparation of the cash flow statement required candidates to calculate property, plant and equipment cash additions, loans repaid and proceeds from disposal of a non-current asset, as well as adjusting revenue and expenses for opening and closing payables and receivables and inventory. This question was the least popular and was only attempted by 56% of candidates. Though performance overall was generally a little disappointing, some candidates did make a very good attempt at the cash flow statement. The most striking point noted during marking was that many candidates clearly do not know the difference between the direct and indirect method. A significant number of candidates used the indirect method for the cash flow statement and therefore immediately lost 6 out of 16 available marks. Other common errors related to property, plant and equipment workings and not adjusting for payables, receivables and inventory. Re part (b), many candidates did not appear to know what was required. Those who attempted it however generally got most of it right. The most common error related to adjusting for provisions – this was arguably the most complex part of the question though.

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IPFM PSFR Examination Guide

June 2015

Marking scheme for question 4 (a)

Treatment of taxes and grants in financial statements IPSAS Recognition

Taxes IPSAS 23 Non Exchange Revenue When taxable event occurs (eg earning of income for income tax) and asset recognition criteria are met. Payments on account should not be recognized as revenue until the tax is properly due.

Grants IPSAS 23 Non Exchange Revenue When asset recognition criterial are met. Grants with conditions (where the money must be spent as specified or returned to donor) • Recognize asset (cash) and associated liability • Release liability to statement of financial performance as conditions met Grants with restrictions over where to spend money (but no requirement to return) • Recognize revenue immediately

Measurement

Other

At fair value at the date of acquisition.

At fair value at date of acquisition.

Should not be reduced for expenses paid through tax system or grossed up for tax expenditures.

For grants with conditions, reduce liability as conditions are met

Information on ‘missing’ tax revenue should be disclosed. 1 mark in total for correctly identifying IPSAS 23 for both taxes and grants Thereafter up to 1 mark per relevant point Credit should be given for relevant points not included above No more than 4 marks per source of finance (8)

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IPFM PSFR Examination Guide

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(b) Impact on financial reporting of variety of sources of income in public sector Answers may include the following: • •

•

A focus on the source of income – a municipal authority’s statement of financial performance will need to show amounts raised from different sources of income so users of the accounts can see how its operations have been funded A need to match income and expenditure – to ensure that funds received for specific purposes have been applied correctly there is a need to match income and expenditure in the statements. For example if a housing association has received grants to fund development of new housing, it will need to be able to show that is how the funds have been spent. Separating income from chargeable services – it may be necessary to separate out the income (and costs) or chargeable services so show whether the income has covered the costs of the service and whether there has been any cross-subsidisation of other services. Up to 2 marks per relevant point (6)

(c)

Long term loans Deferred grant income Share capital

Non-equity finance All long term finance Gearing ratio

2013 £ 000 5 000

2014 £ 000 10 000

3 500 9 000 17 500

3 150 9 000 22 150

8 500 17 500 = 49%

13 150 22 150 = 59%

Comments may include the following: • Gearing measures the proportion of non-equity to equity finance • Non-equity finance is considered higher risk because loans must be serviced and repaid, deferred grants may have to be repaid if grant conditions are not met • Gearing for this organization has increased from 49% to 59% because the amount of long term loans has doubled between 2013 and 2014 • This may make it more difficult to raise finance in the future • Existing and potential shareholders may be concerned that they won’t get a return on their investment because of higher interest costs or that higher interest costs will reduce possible investment in the housing stock • Lenders may be concerned about the organisation’s ability to service its debts 1 mark per ratio per year Up to 4 marks for interpretation of the results (6) (20)

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IPFM PSFR Examination Guide

June 2015

Examiner’s comments on question 4 This question related to the area of public sector funding / financing. Part (a) required candidates to explain how taxes and grants should be treated in the financial statements (8 marks). Part (b) required candidates to explain how the variety of sources of income in the public sector might impact on the features of financial reporting (6 marks). Part (c) required candidates to calculate the gearing ratio for two years from a limited data set and interpret the results (6 marks). The question was attempted by 64% of candidates, but was overall the least well answered question in this section of the paper. The better answers to parts (a) focussed specifically on how taxes and grants should be accounted for. Many candidates however spent too much time giving examples of different types of taxes that governments might collect or wrote about how organisations account for taxes that they pay. Many candidates did not appear familiar with IPSAS 23 on Non Exchange Revenue. Better answers to part (b) concentrated on how financial reporting in the public sector is influenced by the wide range of income sources. All reasonable points were rewarded. Unfortunately many candidates spent most or all of their time listing the various sources of income for public sector organisations and did not address the specific question asked. Most candidates were able to make a couple of basic points interpreting the ratios they had calculated. The better answers referred to possible difficulties raising more finance in the future and the possibility of higher interest costs. The most disappointing aspect of part (c) was that most candidates attempting the question were not able to correctly identify nonequity finance and all long-term finance. Because of some ambiguity in the question over whether the deferred grant income was short or long term, credit was given whether candidates included or excluded it, as long as they did so consistently.

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IPFM PSFR Examination Guide

June 2015

Summary The candidates that passed this exam demonstrated a good understanding of financial reporting techniques and their application to a variety of scenarios. Successful candidates generally provided concise, clear workings and made use of the pro-formas in numerical questions. In narrative questions, successful candidates demonstrated that they had carefully read the question and kept their answers focused, clear and concise, using bullet points and table formats where appropriate. Invariably successful candidates answered three questions in part B. Poorer scripts tended to lack clear workings, include unnecessary calculations (thereby wasting valuable time) and/or include more than one attempt at the same question (or parts of a question), again a misuse of limited exam time. Narrative answers often tended to lack focus, and appeared to form a list of everything the candidate knew about a particular subject rather than answering the specific question asked. Although most of the poorer scripts did include answers to three questions in part B it was usually fairly apparent that the time had not been spent equally across the three questions and usually one question was answered significantly better than the other two.

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