ACCA/CAT

The following information has been obtained from the Chairman's Statement and the notes to the financial statements:

'Market conditions during the year ended 30 September 2010 proved very challenging due largely to difficulties in the global economy as a result of a sharp recession which has led to steep falls in share prices and property values. Hardy has not been immune from these effects and our properties have suffered impairment losses of $6 million in the year.'

The excess of these losses over previous surpluses has led to a charge to cost of sales of $1·5 million in addition to the normal depreciation charge.

'Our portfolio of investments at fair value through profi t or loss has been 'marked to market' （fair valued） resulting in a loss of $1·6 million（included in administrative expenses）.'

There were no additions to or disposals of non-current assets during the year.

'In response to the downturn the company has unfortunately had to make a number of employees redundant incurring severance costs of $1·3million（included in cost of sales）and undertaken cost savings in advertising and other administrative expenses.'

'The difficulty in the credit markets has meant that the finance cost of our variable rate bank loan has increased from 4·5% to 8%.In order to help cash flows,the company made a rights issue during the year and reduced the dividend per share by 50%.'

'Despite the above events and associated costs,the Board believes the company's underlying performance has been quite resilient in these diffi cult times.'

Required:

Analyse and discuss the financial performance and position of Hardy as portrayed by the above financial statements and the additional information provided.

Your analysis should be supported by profitability,liquidity and gearing and other appropriate ratios（up to 10 marks available）.

（25 marks）

4 （a）IAS 8 Accounting Policies,Changes in Accounting Estimates and Errors contains guidance on the use of accounting policies and accounting estimates.

Required:

Explain the basis on which the management of an entity must select its accounting policies and distinguish,with an example,between changes in accounting policies and changes in accounting estimates.（5 marks）

（b）The directors of Tunshill are disappointed by the draft profit for the year ended 30 September 2010.The company's assistant accountant has suggested two areas where she believes the reported profi t may be improved:

（i）A major item of plant that cost $20 million to purchase and install on 1 October 2007 is being depreciated on a straight-line basis over a fi ve-year period （assuming no residual value）.The plant is wearing well and at the beginning of the current year（1 October 2009）the production manager believed that the plant was likely to last eight years in total（i.e. from the date of its purchase）.The assistant accountant has calculated that,based on an eight-year life（and no residual value）the accumulated depreciation of the plant at 30 September 2010 would be $7·5 million（$20 million/8 years x 3）.In the fi nancial statements for the year ended 30 September 2009,the accumulated depreciation was $8 million （$20 million/5 years x 2）.Therefore,by adopting an eight-year life,Tunshill can avoid a depreciation charge in the current year and instead credit $0·5 million（$8 million – $7·5 million）to the income statement in the current year to improve the reported profi t.（5 marks）

（ii）Most of Tunshill's competitors value their inventory using the average cost（AVCO）basis,whereas Tunshill uses the first in first out（FIFO）basis.The value of Tunshill's inventory at 30 September 2010（on the FIFO basis）is $20 million,however on the AVCO basis it would be valued at $18 million.By adopting the same method （AVCO）as its competitors,the assistant accountant says the company would improve its profi t for the year ended 30 September 2010 by $2 million.Tunshill‘s inventory at 30 September 2009 was reported as $15 million,however on the AVCO basis it would have been reported as $13·4 million.（5 marks）

Required:

Comment on the acceptability of the assistant accountant‘s suggestions and quantify how they would affect the financial statements if they were implemented under IFRS.Ignore taxation.

Note:the mark allocation is shown against each of the two items above.

（15 marks）

5 Manco has been experiencing substantial losses at its furniture making operation which is treated as a separate operating segment.The company‘s year end is 30 September.At a meeting on 1 July 2010 the directors decided to close down the furniture making operation on 31 January 2011 and then dispose of its non-current assets on a piecemeal basis.Affected employees and customers were informed of the decision and a press announcement was made immediately after the meeting.The directors have obtained the following information in relation to the closure of the operation:

（i）On 1 July 2010,the factory had a carrying amount of $3·6 million and is expected to be sold for net proceeds of $5 million.On the same date the plant had a carrying amount of $2·8 million,but it is anticipated that it will only realise net proceeds of $500,000.

（ii）Of the employees affected by the closure,the majority will be made redundant at cost of $750,000,the remainder will be retrained at a cost of $200,000 and given work in one of the company's other operations.

（iii）Trading losses from 1 July to 30 September 2010 are expected to be $600,000 and from this date to the closure on 31 January 2011 a further $1 million of trading losses are expected.

Required：

Explain how the decision to close the furniture making operation should be treated in Manco‘s fi nancial statements for the years ending 30 September 2010 and 2011. Your answer should quantify the amounts involved.（10 marks）

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