ADVANCED LEVEL EXAMINATION MONDAY 17 JULY 2017 CORPORATE REPORTING JULY 2017

1. Copyright © ICAEW 2017. All rights reserved.
ICAEWJ17 234061
ADVANCED LEVEL EXAMINATION
MONDAY 17 JULY 2017
(3½ HOURS)
CORPORATE REPORTING
This paper consists of three questions (100 marks).
1. Ensure your candidate details are on the front of your answer booklet. You will be given
time to sign, date and print your name on the answer booklet, and to enter your
candidate number on this question paper. You may not write anything else until the
exam starts.
2. Answer each question in black ball point pen only.
3. Answers to each question must begin on a new page and must be clearly numbered.
Use both sides of the paper in your answer booklet.
4. The examiner will take account of the way in which material is presented.
5. When the assessment is declared closed, you must stop writing immediately. If you
continue to write (even completing your candidate details on a continuation booklet), it
will be classed as misconduct.
The questions in this paper have been prepared on the assumption that candidates do
not have a detailed knowledge of the types of organisations to which they relate. No
additional credit will be given to candidates displaying such knowledge.
IMPORTANT
Question papers contain confidential
information and must not be removed
from the examination hall.
DO NOT TURN OVER UNTIL YOU
ARE INSTRUCTED TO BEGIN
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You must enter your candidate number in this box

2. Page 2 of 19
QUESTION 1
You work for Noland, a firm of ICAEW Chartered Accountants. Your firm is the auditor of
Konext plc and its subsidiaries. Konext is AIM-listed and is in the business communications
sector. It sells mobile devices to businesses and provides related software and repair
services.
Noland has been asked to provide an assurance report on Konext’s interim financial
statements for the six months ended 30 June 2017. You have been assigned to act as audit
senior.
The recently-appointed Konext financial controller, Menzie Mees, has provided the following:
 extracts from the draft consolidated interim financial statements for the six months ended
30 June 2017 (Exhibit 1);
 an extract from the proposed management commentary drafted by the finance director,
Jacky Jones, who is an ICAEW Chartered Accountant (Exhibit 2); and
 a summary of financial reporting issues on which Menzie needs advice (Exhibit 3).
The engagement partner gives you the following briefing:
“I had a meeting with Jacky last week and she mentioned that there had been an information
security issue. She has made some disclosure about this in her proposed management
commentary (Exhibit 2). I have asked her to send more details to you (Exhibit 4).”
Partner’s instructions
“I would like you to:
(1) Explain the appropriate financial reporting treatment of the issues in the summary
provided by Menzie (Exhibit 3). Recommend appropriate adjustments, including
journals, to the draft consolidated interim financial statements for the six months
ended 30 June 2017.
(2) Prepare a revised consolidated statement of profit or loss for the six months ended
30 June 2017. Set out analytical procedures on the revenue and gross profit in the
revised statement of profit or loss. Identify potential risks of material misstatement
arising from these analytical procedures.
(3) Set out briefly the key audit procedures required to address each of the risks of
misstatement relating to revenue that you have identified. For these risks, set out
separately the audit procedures for:
 the interim financial statements; and
 the financial statements for the year ending 31 December 2017.
(4) In respect of the details you receive from Jacky about the information security issue
(Exhibit 4):
 evaluate the adequacy of the management commentary disclosure in relation to
the information security issue (Exhibit 2); and
 explain any ethical issues for Noland and set out the actions Noland should take.”
Requirement
Respond to the engagement partner’s instructions.
Total: 40 marks

3. Page 3 of 19
Exhibit 1: Extracts from the draft consolidated interim financial statements for Konext
for the six months ended 30 June 2017 prepared by Menzie Mees, financial controller
Consolidated statement of profit or loss for the six months ended 30 June 2017
Six months ended
30 June
Year ended
31 December
Notes 2017 2016 2016
Revenue
£000 £000 £000
Customised mobile
devices
Software services
1
1
30,300
18,010
20,700
10,800
51,700
25,900
48,310 31,500 77,600
Other mobile devices 2 15,700 6,100 20,500
Mobile device repairs 3 2,100 5,200 7,800
Total revenue 66,110 42,800 105,900
Gross profit 39,541 21,625 54,025
Distribution costs (3,823) (3,122) (8,547)
Administrative expenses (6,563) (6,054) (13,755)
Operating profit 29,155 12,449 31,723
Finance costs (1,280) (1,550) (4,125)
Profit before tax 27,875 10,899 27,598
Taxation (2,000) (2,180) (5,520)
Profit for the period 25,875 8,719 22,078
Notes: Operating segments
The type of mobile device Konext sells are tablet computers. The following are the operating
segments used by the board to make strategic decisions:
1 Konext develops a software service specific for each client which enables the clients’
employees to access the clients’ business processes. In each case, the software
service contract includes data security and storage services.
Konext buys mobile devices to which it uploads software specific to the client
business. It then sells the customised mobile devices to the client together with a
software service contract.
2. Konext also sells other mobile devices to customers without customised software
services.
3. Mobile device repairs for Konext clients and other customers are undertaken by a
division of Konext called ‘Refone’ (Exhibit 3).

4. Page 4 of 19
Exhibit 2: Draft management commentary for the 6 months ended 30 June 2017 prepared
by Jacky Jones, finance director
Financial performance
The Konext group had a good financial performance across all operating segments in the
first half of 2017.
Total revenue increased by 54.5% to £66.11 million in comparison with the equivalent
6-month period ended 30 June 2016. Konext’s sales of all mobile devices are seasonal, with
40% of mobile devices delivered in the first six months of 2017.
The directors forecast that total revenue for the year ending 31 December 2017 will grow by
20% in comparison with the year ended 31 December 2016.
The directors estimate that the number of devices to be delivered in the year ending
31 December 2017 will be as follows:
2017 2016
Number of
devices
Number of
devices
Customised mobile devices 650,000 636,000
Other mobile devices 392,000 205,000
The combined gross profit margin on sales of customised mobile devices and software
services has increased from the 60% margin achieved in 2016. The gross profit margins on
sales of other mobile devices and mobile device repairs have remained at 25% and 30%
respectively.
Future prospects − New product, the Denwa+
Konext has signed a contract with JUI, a Japanese manufacturer of mobile devices. JUI will
sell a new device called the Denwa+ to Konext. This device will be sold exclusively by Konext
to its customers together with specific software and services where relevant. From August
2017, sales of the Denwa+ will gradually replace sales by Konext of its current mobile device.
All the Denwa+ devices will be sold with a guarantee of a replacement device if the original is
damaged. This guarantee will apply regardless of the reason for the damage.
An advertising campaign for the launch of the new Denwa+ device began in May 2017 in
anticipation of the sales starting in August 2017.
Information security issue
An information security issue in a Konext subsidiary is under investigation. There is no
evidence that client accounts have been compromised.

5. Page 5 of 19
Exhibit 3: Summary of financial reporting issues – prepared by Menzie Mees
I have set out below some financial reporting issues. I am not sure that the transactions are
correctly treated in the draft consolidated interim financial statements.
Revenue
In June 2017, Konext received deposits totalling £2 million from clients for the new Denwa+
device. The clients will make final payments totalling £13 million on delivery of the devices on
1 August 2017. These clients will also receive a software service contract for two years and a
free guarantee for replacement should the device be damaged or faulty. Revenue in relation
to these sales has been recognised in full and presented in the interim financial statements
as follows:
£’000
Customised mobile devices 10,000
Software services 5,000
15,000
An estimate of the cost of sales for these devices has been recognised in the interim financial
statements, assuming a gross profit margin of 60%.
Jacky, the finance director, said that we should recognise the Denwa+ sales in full because
the contracts were signed before 30 June 2017 and are legally binding. Jacky added that,
because the devices will be delivered before 31 December 2017, it does not make much
difference whether we recognise the revenue in the first or second half of the year.
Impairment of Refone
In January 2015, Konext bought the trade and net assets of Refone, a mobile device repair
business. Refone’s cash flow is independent of other group cash flows and it is regarded as a
separate cash generating unit. At 30 June 2017, the carrying amounts of the net assets of
Refone were:
£’000
Property plant and equipment 7,550
Brand name 4,175
Goodwill 1,975
Inventory 225
Receivables 1,950
15,875
Payables and other liabilities (3,425)
Net assets 12,450
Recently Konext received an offer of £8 million after selling costs for the Refone trade and
net assets. Jacky told me that there is currently no plan to sell the business as the budget
shows that it can generate pre-tax cash flows of £1,200,000 per annum for the five years to
30 June 2022. With a pre-tax annual discount rate of 5%, Jacky believes this business can
be a success. However, I wonder if there should be an adjustment to reflect the fall in value
of the assets.

6. Page 6 of 19
Deferred advertising costs
In March 2017, Nika, an advertising company, was engaged to market the new mobile
device, Denwa+. On 30 June 2017, Konext recorded invoices totalling £1 million from Nika
for marketing services delivered by that date by debiting the statement of profit or loss and
crediting the Nika payable account. Konext has agreed to issue 100,000 of its £1 ordinary
shares to Nika, in full settlement of the £1 million owed to Nika. The date of the share issue is
expected to be 1 September 2017.
However, Jacky has accounted for the £1 million as a prepayment in the interim financial
statements for the six months ended 30 June 2017 by debiting prepayments and crediting the
statement of profit or loss. She explained to me that the final cost for the marketing services
will depend on the share price on 1 September 2017 and it should, in any case, be matched
against the deliveries of the Denwa+, which start in August 2017. I am concerned that this
treatment is not correct.
Defined benefit scheme
Konext operates a defined benefit pension scheme for its senior executives and a defined
contribution scheme for other employees. Konext’s employer contributions to the schemes for
the 6 months to 30 June 2017 have been charged to the interim statement of profit or loss as
follows:
£’000
Defined benefit scheme 900
Defined contribution scheme 3,600
4,500
The service cost for the defined benefit scheme for the year ending 31 December 2017 is
expected to be £2.8 million. The six-month interest rate to 30 June 2017 on a selection of
corporate bonds is 3.25%. The net benefit pension obligation of £2.3 million reported at
31 December 2016 comprised assets at fair value of £12.2 million and the present value of
the obligations of £14.5 million. To date the scheme has not paid out pensions or other
benefits to beneficiaries of the scheme.
Jacky did not want to incur the cost of asking the scheme actuary to provide measurements
of the scheme’s assets and liabilities at 30 June 2017 as there have been no significant
changes since the actuarial valuation at 31 December 2016. For simplicity, Jacky told me to
charge the employer contributions to the interim statement of profit or loss and leave the net
pension obligation unchanged.

7. Page 7 of 19
Exhibit 4: Confidential details about information security issue – prepared by Jacky
Jones, finance director
Last week the Konext IT department emailed me with details of a cyber-attack on a Konext
data server in Poland. The data server held clients’ business details and bank accounts. It is
possible that data from 500 client accounts could have been accessed during the attack.
There is no evidence so far that client accounts were accessed, so we have not informed the
clients. However, there is some risk that clients could suffer a financial loss.
I have included a statement disclosing the security issue in my management commentary in
the interim financial statements. As this is still being investigated, I don’t want to say too
much publicly about it at the moment. Further details will be announced in the year-end
consolidated financial statements.

8. Page 8 of 19
BLANK PAGE

9. Page 9 of 19
QUESTION 2
Elac plc is listed on the London Stock Exchange and supplies metal-framed windows for use
in industrial buildings. Elac has investments in several wholly-owned subsidiaries.
You are Elac’s financial accountant and you report to Elac’s finance director. You have just
returned to work after a holiday. Your assistant, Daniel, an unqualified accountant, has
prepared the first draft of the consolidated financial statements for the year ended 31 May
2017 using briefing papers prepared by Elac’s finance director. These briefing papers include
details of the following significant matters:
 The increase in Elac’s investment in Fenner Ltd and transactions with Fenner Ltd (Exhibit 1)
 Trading outside the UK (Exhibit 2)
The first draft of Elac’s consolidated statement of profit or loss for the year ended 31 May
2017 and its consolidated statement of financial position at that date (Exhibit 3) exclude the
results and balances of Fenner Ltd. Fenner has prepared draft financial statements for the
year ended 30 June 2017. These are shown in a separate column in Exhibit 3.
Exhibit 3 also includes Daniel’s notes showing the adjustments that he has made to Elac’s
draft consolidated financial statements. The notes explain areas where he is uncertain about
the appropriate financial reporting treatment.
Elac’s finance director has asked you to draft a working paper in which you:
(1) Explain the financial reporting adjustments required in respect of the matters
described in the briefing papers (Exhibits 1 and 2) and in Daniel’s notes (Exhibit 3).
Include relevant journal entries. Identify any further information required. Ignore the
effects of accounting adjustments on taxation.
(2) Prepare Elac’s revised consolidated statement of profit or loss for the year ended
31 May 2017 and consolidated statement of financial position at that date. These
should include the adjustments identified in (1) above.
Requirement
Prepare the working paper requested by Elac’s finance director.
Total: 30 marks
Work to the nearest £0.1 million

10. Page 10 of 19
Exhibit 1: Elac’s investment in Fenner Ltd – briefing paper prepared by Elac’s finance
director
Fenner, an important supplier to Elac, manufactures toughened glass. In 2014, Elac bought
5% of the ordinary share capital of Fenner for £50 million. This investment is recognised at
cost (which approximates to its fair value) in Elac’s draft consolidated statement of financial
position at 31 May 2017 (Exhibit 3).
On 1 February 2017, Elac bought an additional 20% of the ordinary share capital of Fenner
for £350 million in cash from one of Fenner’s principal shareholders. This payment was
debited to a suspense account. The additional investment entitles Elac to appoint a director
to Fenner’s board. The remaining 75% of Fenner’s shares are held equally by three
institutional investors, each of which is entitled to appoint a director to the Fenner board.
Fenner has made losses during its financial years ended 30 June 2016 and 30 June 2017 but
it has continued to pay dividends throughout this period. Fenner paid a dividend of 20p per
share on 31 October 2016 and a dividend of 40p per share on 30 April 2017.
Trading with Fenner
Fenner sells goods to Elac at cost plus a mark-up of 20%. During Elac’s financial year ended
31 May 2017, Fenner supplied goods to Elac at a price of £145.2 million. Trade takes place
evenly throughout the year. At 31 May 2017, Elac’s inventories included goods supplied by
Fenner at a price of £35.0 million and Elac’s trade payables included an amount of £37.6
million due to Fenner.

11. Page 11 of 19
Exhibit 2: Trading outside the UK – briefing paper prepared by Elac’s finance director
Until recently, all Elac’s sales were to the UK construction industry. During the financial year
ended 31 May 2017, the group started trading with construction companies in Otherland.
Otherland contract
The currency of Otherland is the Otherland dollar (O$).
In September 2016, an agent for several construction companies in Otherland agreed a one-
year contract with Elac to supply a single type of office window at a price of O$5,000 per
window. The contract started on 1 January 2017 and Elac expects to make a gross profit
margin of approximately 30%, which is a much larger margin than UK sales.
The contract includes a commitment by Elac to pay the agent a commission of 5% of sales
value in O$, provided that total sales for the calendar year 2017 exceed 16,000 windows. If
total sales for 2017 are below 16,000 windows the rate of commission is reduced to 3%. The
commission is payable annually in arrears.
Average monthly sales for the five-month period from 1 January 2017 to 31 May 2017 were
1,600 windows and this level of sales is expected to continue for the rest of the 2017
calendar year.
Exchange rates:
Spot rate at 1 January 2017 £1 = O$2.2
Spot rate at 31 May 2017 £1 = O$2.4
Forward rate (at 1 June 2017) for 31 December 2017 £1 = O$2.8

12. Page 12 of 19
Exhibit 3 – Draft financial statements
Draft statements of profit or loss for the year
Elac: consolidated
(excluding Fenner)
to 31 May 2017
Fenner
to 30 June 2017
Notes £m £m
Revenue 1,855.4 382.4
Cost of sales 1 (1,482.9) (272.0)
Gross profit 372.5 110.4
Operating expenses (270.8) (91.2)
Investment income 2 3.6 –
Finance costs (9.4) (77.7)
Profit/(loss) before tax 95.9 (58.5)
Income tax (19.1) 12.0
Profit/(loss) for the year 76.8 (46.5)
Draft statements of financial position
Elac: consolidated
(excluding Fenner)
at 31 May 2017
Fenner
at 30 June 2017
Notes £m £m
Non-current assets
Tangible assets 1,799.7 1,180.0
Investments 456.0 –
Suspense account 350.0 –
Current assets
Inventories 243.8 43.2
Trade receivables 1 238.9 88.8
Cash 16.4 –
Total assets 3,104.8 1,312.0
Equity
Ordinary share capital (£1 shares) 150.0 10.0
Reserves 2,255.4 208.4
Long-term liabilities 388.3 1,003.2
Current liabilities
Trade payables and accruals 305.6 65.6
Provisions and borrowings 1 5.5 24.8
Total equity and liabilities 3,104.8 1,312.0

13. Page 13 of 19
Notes to Elac’s draft consolidated financial statements for the year ended 31 May 2017 –
prepared by Daniel
1. Cost of sales includes a provision relating to the Otherland contract. I have classified
this as an onerous contract because of the exchange losses I expect to occur between
31 May and 31 December 2017. I have calculated expected sales over this period as
O$56 million (7 months x 1,600 x O$5,000). Using the 1 January 2017 exchange rate,
£ equivalent sales would have been £25.5 million, but at the 31 December 2017
forward rate, the £ equivalent sales will be only £20 million. I have recognised a
provision of £5.5 million under current liabilities.
Elac’s trade receivables at 31 May 2017 include £4.8 million due from Otherland
customers. This is the equivalent of O$10.1 million translated at O$2.1 = £1, which
was the average exchange rate during the period 1 January 2017 to 31 May 2017.
I have not recognised any accrual for agent’s commission as this is a contingent
liability depending on performance, and should therefore be disclosed only as a note
to the financial statements.
2. Investment income includes the dividends received from Fenner on 1 October 2016
(£100,000) and on 30 April 2017 (£1 million). I have made no adjustments in respect
of trading with Fenner.

14. Page 14 of 19
QUESTION 3
You are an audit manager working for Hind LLP, a firm of ICAEW Chartered Accountants
with offices in several countries. You have been assigned to the group audit of Recruit1 plc
for the year ended 30 April 2017. Recruit1 is the parent of an international group of
companies engaged in executive recruitment and training. You receive a briefing from the
engagement partner on the Recruit1 group audit:
“Our scoping and materiality planning summary (Exhibit 1) provides an overview of the audit
procedures planned at each entity within the Recruit1 group.
“Our audit is nearly complete but I need your help with outstanding matters relating to
Recruit1’s subsidiaries in the countries Arca and Elysia. These subsidiaries are R1-Arca Inc
and R1-Elysia Ltd. The local currency in Arca is the Arcan dollar (A$) and in Elysia is the
Elysian dollar (E$).
“Last week I received a reporting memorandum from the Hind audit team in Arca (Exhibit 2)
which I need you to review. I was relieved to receive their report as the team has not replied
to any of our other requests for information.
“During audit planning, R1-Elysia was assessed as an immaterial subsidiary. However, our
review procedures, completed last week, identified that the company bought a property
during the year, resulting in material property and loan balances at 30 April 2017. I asked the
audit senior to find out more about this property transaction and she has provided additional
information (Exhibit 3).
Partner’s instructions
“I would like you to:
(1) Review the reporting memorandum from the Hind audit team in Arca (Exhibit 2) and for
each account identified:
 describe any weaknesses in the audit procedures;
 explain any potential financial reporting and audit issues; and
 set out further audit procedures that either the UK group audit team or the Hind
team in Arca should perform, and identify any additional information needed for
these procedures.
(2) In respect of R1-Elysia’s property transaction and loan, review the further information
provided (Exhibit 3) and:
 explain the financial reporting implications for the consolidated financial
statements of Recruit1 for the year ended 30 April 2017. Recommend appropriate
accounting adjustments; and
 set out any additional audit procedures that should be performed.”
Requirement
Respond to the partner’s instructions.
Total: 30 marks

15. Page 15 of 19
Exhibit 1: Scoping and materiality planning summary for the Recruit1 group audit for
the year ending 30 April 2017 (Prepared by Hind UK group audit team in January 2017)
Recruit1 has trading subsidiaries, located in many countries around the world. All
subsidiaries are wholly owned by Recruit1. All subsidiaries report under IFRS.
The Hind UK audit team is responsible for the audit of the parent company, Recruit1 plc, the
Recruit1 UK subsidiaries and the audit of the consolidated financial statements. The audit of
Recruit1 plc’s non-UK subsidiaries are performed by Hind audit teams in the countries where
the subsidiaries are located.
Group planning materiality has been determined at £1.2 million.
Scoping and component materiality are shown below:
Entity Level of component materiality Audit procedures to
be performed by Hind
Recruit1 plc - the
parent company
£850,000 UK audit team
UK subsidiaries Materiality will be determined
separately for each.
UK audit team
R1-Arca
Results are expected to
be material to the
Recruit1 group.
This entity is not required to issue
audited financial statements and
so work will be performed using
component materiality of £300,000
(A$600,000 as at 31 December
2016).
Hind audit team in Arca
to perform audit
procedures
Other non- UK
subsidiaries (including
R1-Elysia)
Results are not
expected to be material
to the Recruit1 group.
£500,000 UK audit team to
perform review
procedures for
unexpected fluctuations
or material balances

16. Page 16 of 19
Exhibit 2: Reporting memorandum received from the Hind audit team in Arca on
14 July 2017
The table below sets out the audit procedures we have performed on the financial statements
of R1-Arca for the year ended 30 April 2017 and highlights matters arising. All accounts have
been agreed to the consolidation schedules provided to Recruit1. These are reported in A$.
At 30 April 2017, the exchange rate was £1 = A$1.8.
Account A$’000 Notes on audit procedures and matters arising
Revenue 11,172 Selected a sample of items recorded within revenue and
agreed them to invoices and either to the receivables
ledger as at 30 April 2017 or to a cash receipt. No
exceptions were noted.
Staff costs (4,924) Agreed the total staff costs to payroll schedules provided
by the service company which processes the payroll for
R1-Arca.
Other operating
expenses
(2,652) Agreed a sample of items to supporting documentation,
ensuring that each item is a valid business expense,
recorded in the correct period and correctly classified
within operating expenses. No exceptions were noted.
Interest income 350 No audit procedures carried out as below materiality of
A$600,000.
Profit before
taxation 3,946
Taxation (1,715) Agreed to draft tax computation prepared by
R1-Arca’s tax advisors. Checked that current tax payable
is correctly calculated as taxable profit of A$4.9 million at
the Arcan corporate tax rate of 35%.
Profit for the year 2,231
Retained earnings
at 1 May 2016
4,238 Reconciled to prior-year financial statements. Retained
earnings as reported to Recruit1 as at 30 April 2016 were
A$6,488,000.
The difference of A$2,250,000 is due to the reversal of
revenue which was incorrectly included in the reporting
pack for the year ended 30 April 2016 as it relates to
recruitment services provided in May and June 2016.
This error was discovered during the preparation of the
financial statements for the year ended 30 April 2017.
Retained earnings
at 30 April 2017 6,469

17. Page 17 of 19
Account A$’000 Notes on audit procedures and matters arising
Property, plant and
equipment
1,065 In accordance with group policy, property, plant and
equipment is measured at cost and depreciated over its
useful life.
Movements in this account during the year ended
30 April 2017 relate to immaterial additions and
depreciation.
As all movements are below component materiality of
A$600,000, no further audit procedures have been
performed.
Trade receivables 2,987 This balance was agreed to a detailed list of receivables
which was reviewed for any related party or unusual
balances. No such items were noted.
A sample of balances with a total of A$453,000 was
selected to be tested for agreement to cash received
after the year end.
Of the sample, A$198,000 has been received to date.
As the unpaid element is below component materiality of
A$600,000, no further audit procedures have been
performed.
Other receivables
and prepayments
592 No audit procedures carried out as below component
materiality of A$600,000.
Cash and short-
term investments
4,143 Agreed to bank statements or investment confirmations.
Total assets 8,787
Trade payables
and accruals
2,218 The only material balance within this account is
A$1,715,000 relating to tax payable – this is discussed
above.
Share capital 100 No audit procedures carried out as below component
materiality of A$600,000.
Retained earnings
at 30 April 2017
6,469
Total equity and
liabilities
8,787

18. Page 18 of 19
Exhibit 3: Further information on property transaction and loan in R1-Elysia – prepared
by audit senior
I discussed the increase in property and loan balances in R1-Elysia with the group finance
director as I was concerned that the carrying amounts are incorrect.
On 30 September 2016, R1-Elysia bought a property for E$6 million with a bank loan of
E$6 million taken out on the same date. The loan is repayable in full on 30 September 2021
and interest is payable annually in arrears at a fixed rate of 6% per annum. In Elysia, a tax
deduction for interest is available only when the interest is paid.
After buying the property, R1-Elysia converted it into a training facility. The conversion took
six months and was completed on 1 April 2017 when the property was ready for use.
From 1 April 2017, R1-Elysia has used the property to run training courses for its clients.
Also, training rooms are rented to third parties on a daily or weekly basis. The rental income
includes the use of all facilities, together with some administrative support. Catering is
provided as an optional service. As the property generates rental and other income, it has
been classified as an investment property in the consolidation reporting pack submitted by
R1-Elysia. The property is expected to have a useful life of 25 years.
The carrying amounts of the property and the loan in the consolidation reporting pack at
30 April 2017 are as follows:
Property
E$’000
Loan
E$’000
Initial purchase transaction on 30 September 2016 6,000 6,000
Conversion and start-up costs incurred (funded from cash)
- External contractor costs
- Allocated salary costs of R1-Elysia employees
- Marketing costs
- Security, insurance and other running costs incurred
while the building was empty
4,200
850
900
750
Interest for 7 months to 30 April 2017 210
Fair value gain on property due to increase in Elysian
property prices in the 7 months to 30 April 2017
500
Carrying amounts in the consolidation reporting pack at
30 April 2017
13,200 6,210

19. Page 19 of 19
Under Elysian tax rules, capital allowances of 50% of the cost of buying business property,
including all conversion and marketing costs, are given in the year of purchase. Therefore
capital allowances of E$6.35 million, based on a total cost before fair value changes of
E$12.7 million, have been taken correctly into account in calculating the Elysian current tax
charge. No tax deduction is given for depreciation.
No other accounting entries have been made in respect of the current or deferred tax on the
property or the loan. The tax base does not change if the property is subsequently revalued
for accounting purposes. The Elysian corporate tax rate is 35%.
Spot exchange rates are as follows:
30 September 2016 £1 = E$4.0
30 April 2017 £1 = E$3.6
Average for seven months from 1 October 2016 to 30 April 2017 £1 = E$3.8