F2: Advanced Financial Reporting

• Topic 01

  Group Accounts

  69 questions
• Topic 02

  Financial Reporting Standards

  69 questions
• Topic 03

  Analysing Financial Statements

  61 questions
• Topic 04

  Financing Capital Projects

  64 questions
• Topic 05

  Integrated Reporting

  60 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. Alpha plc acquired 80% of Beta Ltd on 1 January 20X5 for £1,200,000. At acquisition, Beta's identifiable net assets had a book value of £900,000, but property with a book value of £400,000 had a fair value of £550,000. Beta also had an internally generated customer list (not recognised) with a fair value of £200,000. Using the proportionate share method, what goodwill will Alpha recognise?

   • A
     £180,000
   • B
     £240,000
   • C
     £300,000
   • D
     £120,000
     Correct answer
   Explanation

   First, calculate the fair value of identifiable net assets:

   • Book value: £900,000
   • Property FV adjustment: £550,000 - £400,000 = +£150,000
   • Customer list (identifiable intangible): +£200,000
   • Fair value of net assets = £1,250,000

   Under the proportionate share method:

   $Goodwill = Consideration - (Parent\ \% \times FV\ of\ Net\ Assets)$

   $Goodwill = £1,200,000 - (80\% \times £1,250,000)$ $Goodwill = £1,200,000 - £1,000,000 = £120,000$

   This is the parent's share only. The NCI would be measured at 20% × £1,250,000 = £250,000 (excluding any goodwill allocation).

2. A company enters a 3-year software licence contract with a customer for annual payments of £10,000. How should the revenue be recognised under IFRS 15?

   • A
     £10,000 revenue recognised each year over the 3-year period
     Correct answer
   • B
     £10,000 recognised in year 1 only, with the remainder contingent
   • C
     £30,000 revenue recognised immediately at contract inception
   • D
     £15,000 recognised in years 1 and 2, with £0 in year 3
   Explanation

   Under IFRS 15, when a performance obligation is satisfied over time (such as providing continuous access to software), revenue is recognised as the performance obligation is satisfied. For a 3-year licence with equal annual payments, £10,000 is recognised each year as the service is provided.

3. Omega Group acquired 70% of Delta Ltd for £4,200,000 on 1 July 2024. At acquisition, Delta's book values showed equity of £5,000,000, but identifiable net assets had a fair value of £5,800,000 due to unrecorded intangible assets (customer relationships £600,000) and property undervaluation (£200,000). Omega elected to measure NCI using the proportionate share method. Transaction costs of £50,000 were incurred. Calculate the goodwill recognised in the consolidated statement of financial position.

   • A
     £140,000
     Correct answer
   • B
     £4,060,000
   • C
     £200,000
   • D
     £1,000,000
   Explanation

   Under the proportionate share method: Goodwill = Consideration only - (Parent % × FV of identifiable net assets). Transaction costs are expensed, not included in consideration. Calculation: £4,200,000 - (70% × £5,800,000) = £4,200,000 - £4,060,000 = £140,000. The £50,000 transaction costs are expensed to P&L. Only the parent's 70% share of goodwill is recognised; NCI has no goodwill allocated under proportionate method.