DO NOT OPEN THIS QUESTION PAPER UNTIL YOU ARE TOLD TO DO SO.

Financial Pillar

F2 – Financial Management
23 May 2013 – Thursday Afternoon Session

Instructions to candidates

F2 – Financial Management
You are allowed three hours to answer this question paper.

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 sub-
questions).

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 5 questions and is on pages 2 to 6.

Section B comprises 2 questions and is on pages 8 to 12.

Maths tables and formulae are provided on pages 15 to 17.

References to IFRS in this paper refer to the International Financial Reporting

Standards as issued by the International Accounting Standards Board.

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.

TURN OVER

¤ The Chartered Institute of Management Accountants 2013

SECTION A – 50 MARKS
[You are advised to spend no longer than 18 minutes on each question in this section.]

ANSWER ALL FIVE QUESTIONS IN THIS SECTION

Question One

GH operates a defined benefit pension plan for its employees. At 1 April 2012 the fair value of the
pension plan assets was $2,700,000 and the present value of the pension plan obligations was
$3,000,000.

The service cost for the year ended 31 March 2013 was $650,000. On 1 April 2012 the pension plan
was amended to offer additional benefits to members resulting in past service costs of $200,000. The
relevant discount rate for the year ended 31 March 2013 was estimated at 5% and GH paid $950,000
in contributions to the plan. The pension plan paid $320,000 to retired members in the year to 31
March 2013.

At 31 March 2013 the fair value of the pension plan assets was $3,600,000 and the present value of
the pension plan obligations was $3,800,000.

The directors of GH have chosen early adoption of the revised provisions of IAS 19 (revised)
Employee Benefits and are applying the revised standard from 1 April 2012.

Required:

Calculate, in accordance with IAS 19 (revised) Employee Benefits, the following in respect of
GH’s pension plan:

(a) The expense in the income statement for the year ended 31 March 2013.
(3 marks)

(b) The amounts that will be included in other comprehensive income for the year
ended 31 March 2013.
(5 marks)

(c) The net pension asset or obligation (stating which) that will be included in the statement of
financial position as at 31 March 2013.
(2 marks)

Total for Question One = 10 marks

Financial Management 2 May 2013

Question Two

The statements of financial position for ER and MR as at 31 December 2012 are provided below.

ER MR
ASSETS $000 $000
Non-current assets
Property, plant and equipment 5,900 2,000
Investment in MR 2,000 -
7,900 2,000

Current assets 3,200 1,000

Total assets 11,100 3,000

EQUITY AND LIABILITIES

Equity
Share capital ($1 equity shares) 5,000 500
Retained earnings 3,800 2,000
Total equity 8,800 2,500

Non-current liabilities
Long term borrowings 1,300 -
Current liabilities 1,000 500
Total liabilities 2,300 500
Total equity and liabilities 11,100 3,000

Additional information

1. ER acquired 80% of the equity share capital of MR on 1 January 2010 for $2,000,000 when
the retained earnings of MR were $1,200,000. There have been no share issues since the
date of acquisition of MR.
2. At the date of acquisition the fair value of the net assets of MR was the same as the book
value with the exception of property, plant and equipment. The fair value of property, plant
and equipment was $400,000 higher than the book value. Property, plant and equipment had
an estimated useful life of 10 years from the date of acquisition.
3. Non-controlling interest was valued at its fair value of $450,000 at the date of acquisition.
4. There has been no impairment of goodwill since the date of acquisition.
5. ER purchased goods from MR for $200,000 during the year ended 31 December 2012 and
25% of these items remain in ER’s inventories at the year-end. MR earns a 20% profit margin
on all sales.

Required:
Prepare the consolidated statement of financial position for the ER group as at
31 December 2012.

Total for Question Two = 10 marks

TURN OVER

May 2013 3 Financial Management

Question Three

SAF has experienced a period of rapid expansion in the last 6 months following the launch of a new
product on 1 July 2012. The following information is available from the management accounts of SAF:

6 months to 31 6 months to 30
December 2012 June 2012
$000 $000
Inventories at period end 1,220 460
Receivables at period end 1,715 790
Cash and cash equivalents at period end - 150
Trade payables at period end 1,190 580
Short-term borrowings at period end 250 -
Revenue for the period 3,100 2,000
Cost of sales for the period 2,420 1,450

Required:
Analyse the financial performance and working capital position of SAF.
(5 marks are available for the calculation of relevant ratios.)

Total for Question Three = 10 marks

Financial Management 4 May 2013

Question Four

CLW issued a $4 million 7% convertible bond on 1 January 2012 at par value. The bond is
redeemable at par on 31 December 2016 or can be converted at that date on the basis of two $1
ordinary shares for every $10 of bonds held.

The prevailing market rate at 1 January 2012 for a similar bond without conversion rights was 9% per
annum. All interest due in the year to 31 December 2012 has been paid.

Required:

(a) Prepare the journal entry to initially record the issue of the convertible bond by CLW, in
accordance with IAS 32 Financial Instruments: Presentation.
(6 marks)

(b) Calculate the amounts to be included in the statement of financial position of CLW in respect of
the convertible bond as at 31 December 2012, in accordance with IAS 39 Financial
Instruments: Recognition and Measurement.
(4 marks)

Total for Question Four = 10 marks

TURN OVER

May 2013 5 Financial Management

Question Five

Mr B wishes to invest in the stock market. He has approached you for some advice as he has no
experience in reviewing financial statements or making investment decisions. Three of the four
entities in which he is interested operate in the service industry and he has commented that their
financial statements look quite different from those of the one manufacturing entity that he is
considering. Furthermore, he has highlighted a comment made, in the chairman’s statement of one of
the service entities, that employees are seen as a substantial asset of the business.

Required:
Discuss why the narrative elements of financial statements are likely to include comments about
employees being an asset AND the recognition criteria that prevent employees from being
recorded as an asset in the statement of financial position.

Total for Question Five = 10 marks

Total for Section A = 50 marks

End of Section A

Section B starts on page 8

Financial Management 6 May 2013

 This page is blank

TURN OVER

May 2013 7 Financial Management

SECTION B – 50 MARKS
[You are advised to spend no longer than 45 minutes on each question in this section.]

ANSWER BOTH QUESTIONS IN THIS SECTION – 25 MARKS EACH

Question Six

Extracts from the financial statements of A and its subsidiary B are presented below.

Summarised statements of comprehensive A B

income for the year ended 31 December 2012
A$000 B$000
Revenue 8,000 3,000
Cost of sales and operating expenses (4,500) (1,800)
Profit before tax 3,500 1,200
Income tax (1,000) (400)
Profit for the year 2,500 800
Other comprehensive income
Items that will not be reclassified to profit or loss
Revaluation gains on property (net of tax) 400 300
Total other comprehensive income 400 300
Total comprehensive income 2,900 1,100

Statements of financial position as at 31 A B

December 2012
ASSETS A$000 B$000
Non-current assets
Property, plant and equipment 6,700 3,500
Investment in B (held at cost) 1,800 -
8,500 3,500

Current assets 4,000 3,000

Total assets 12,500 6,500

EQUITY AND LIABILITIES

Equity
Share capital (A$1 equity shares/B$1 equity 2,000 1,000
shares)
Reserves 8,500 3,500
Total equity 10,500 4,500

Current liabilities 2,000 2,000

Total equity and liabilities 12,500 6,500

Financial Management 8 May 2013

Additional information

1. A acquired 80% of the equity share capital of B on 1 January 2010 for A$1,800,000 when the
reserves of B were B$1,900,000. The investment is held at cost in the individual financial
statements of A. There have been no issues of share capital since the date of acquisition.

2. The group policy is to value non-controlling interest at fair value at the date of acquisition.
The fair value of the non-controlling interest of B was A$410,000 at the date of acquisition.

3. The functional currency of A is the A$. The functional currency of B is the B$. Relevant
exchange rates (where A$/B$ 2.00 means A$1 = B$2.00) are:

1 January 2010 A$/B$2.00

31 December 2011 A$/B$2.10
31 December 2012 A$/B$2.30
Average rate for the year ended 31 December 2012 A$/B$2.20

4. An impairment review conducted on 31 December 2011 resulted in the goodwill arising on the
acquisition of B being written down by 20%.

Required:
Prepare the following for the A group:

(a) the consolidated statement of profit or loss for the year ended 31 December 2012;

(b) the consolidated statement of comprehensive income for the year ended
31 December 2012; and

(c) the consolidated statement of financial position as at 31 December 2012.

(Please round all numbers to the nearest $000.)

Total for Question Six = 25 marks

TURN OVER

May 2013 9 Financial Management

Question Seven

POP organises events and music festivals throughout the USA and in July 2011 made two 100%
acquisitions. The first was to acquire A, an events security business that POP had been using to
provide security services on an outsourcing basis. The second acquisition was B, a highly successful
entity that organises and runs events and music festivals in Europe. Both A and B had established
good reputations and as a result a number of intangible assets were recognised on acquisition, in
accordance with IFRS 3 Business Combinations and IAS 38 Intangible Assets.

POP uses an online ticket agent for ticket sales for all of its events. POP paid a dividend of $30
million relating to the year ended 31 March 2012 and declared a dividend of $40 million for the year
ended 31 March 2013 which was paid after the year end. The share price of POP was $2.90 per
share on 31 March 2012 and $2.50 on 31 March 2013.

You have been approached by a client who is considering making an equity investment in POP. You
have been asked to perform some preliminary analysis of its financial performance and financial
position.
POP’s financial statements are presented below.

Consolidated statement of financial position of POP group as 2013 2012

at 31 March

ASSETS $m $m
Non-current assets
Property, plant and equipment 306 156
Goodwill 740 740
Other intangible assets 360 410
1,406 1306
Current assets
Trade receivables 140 128
Cash and cash equivalents ____- 60
140 188
Total assets 1,546 1,494

EQUITY AND LIABILITIES

Equity
Share capital ($1 equity shares) 300 300
Equity element of convertible debt 110 110
Share premium 100 100
Translation reserve 7 9
Retained earnings 482 450
Total equity 999 969
Long term borrowings
4% Convertible bonds 2015 367 350
Current liabilities
Trade payables 120 145
Dividend payable 40 30
Short term borrowings 20 -
180 175
Total liabilities 547 525
Total equity and liabilities 1,546 1,494

Financial Management 10 May 2013

Summarised statement of comprehensive income of POP for 2013 2012
the year ended 31 March
$m $m
Revenue 1,074 1,290
Cost of sales (914) (1,120)
Gross profit 160 170
Administrative expenses (23) (57)
137 113
Finance costs (45) (15)
Profit before tax 92 98
Income tax (20) (22)
Profit for the year _72_ _76_
Other comprehensive income
Items that may subsequently be reclassified to profit or loss
Exchange differences on translation of foreign operations _(2)_ _3_
Total comprehensive income _70_ _79_

Additional information

1. In July 2012 there was an accident at one of the music festivals being organised by POP’s
subsidiary, B, in Europe and one of the main performers was injured. The performer is
pursuing a lawsuit and his lawyer is claiming that the safety equipment was faulty and caused
the accident. The lawsuit was filed in February 2013 and at the year-end POP’s lawyers
advised that B was likely to lose the case but at that time no reliable estimate of the likely
payout could be made. Details of the lawsuit and its cause were provided in a note to the
financial statements as a contingent liability.
2. Following the accident in July 2012, POP invested in new safety equipment for all of its
entities. Several key performers have expressed concerns, however, about performing at an
event that is due to be held in Europe in May 2013. The directors believe that the bad
publicity that B received following the accident had a negative effect on revenue generated by
B in the year to 31 March 2013. The directors concluded, however, that no impairment of the
goodwill in B was required as the issue was a one-off and had been addressed by the
investment in the new equipment.
3. The investment in the new safety equipment resulted in POP avoiding significant repairs
which had been a large part of administrative expenses in previous years.

The requirement for question seven is on the next page

TURN OVER

May 2013 11 Financial Management

Required:

(a) Calculate the following ratios for POP for the year ended 31 March 2013, including comparatives:

x Earnings per share

x Price/earnings ratio
x Dividend yield
(3 marks)

(b) Analyse the financial performance of POP for the year ended 31 March 2013 and its financial
position at that date based on the information provided. (Your analysis should include discussion
relating to the ratios calculated in (a). A further 5 marks are available for the calculation of other
relevant ratios.)
(18 marks)

(c) Discuss what additional information your client could obtain in order to help him arrive at a
decision about whether or not to invest.
(4 marks)

Total for Question Seven = 25 marks

Total for Section B = 50 marks

End of Question Paper

Maths Tables and formulae are on pages 15 to 17

Financial Management 12 May 2013

 This page is blank

May 2013 13 Financial Management

 This page is blank

Financial Management 14 May 2013

 MATHS TABLES AND FORMULAE

Present value table

-n
Present value of $1, that is (1 + r) where r = interest rate; n = number of periods until payment or receipt.

Periods Interest rates (r)

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026

May 2013 15 Financial Management

Cumulative present value of $1 per annum,

1 (1 r )  n
Receivable or Payable at the end of each year for n years r

Periods Interest rates (r)

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Periods Interest rates (r)

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

Financial Management 16 May 2013

 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:

1ª 1 º
PV = «1  »
r «¬ [1  r ]n »¼

Perpetuity
Present value of $1 per annum receivable or payable in perpetuity, commencing in one year,
discounted at r% per annum:

1
PV =
r

Growing Perpetuity
Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity
at a constant rate of g% per annum, discounted at r% per annum:

1
PV =
r g

May 2013 17 Financial Management

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Financial Management 18 May 2013

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 VERBS USED DEFINITION

Level 1 - KNOWLEDGE
What you are expected to know. List Make a list of
State Express, fully or clearly, the details/facts of
Define Give the exact meaning of

Level 2 - COMPREHENSION
What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning or
purpose of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something

Level 3 - APPLICATION
How you are expected to apply your knowledge. Apply Put to practical use
Calculate Ascertain or reckon mathematically
Demonstrate Prove with certainty or to exhibit by
practical means
Prepare Make or get ready for use
Reconcile Make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table

Level 4 - ANALYSIS
How are you expected to analyse the detail of Analyse Examine in detail the structure of
what you have learned. Categorise Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct Build up or compile
Discuss Examine in detail by argument
Interpret Translate into intelligible or familiar terms
Prioritise Place in order of priority or sequence for action
Produce Create or bring into existence

Level 5 - EVALUATION
How are you expected to use your learning to Advise Counsel, inform or notify
evaluate, make decisions or recommendations. Evaluate Appraise or assess the value of
Recommend Advise on a course of action

May 2013 19 Financial Management

 Financial Pillar

Management Level Paper

F2 – Financial Management

May 2013

Thursday Afternoon Session

Financial Management 20 May 2013