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IAS 34Case studies (Step 3 of 5)

Case study

Step 3 of 5
Professional fileIAS 34L4 · Expert

File on a half-year financial report: content and headings, year-to-date measurement, income tax at the estimated annual rate, change in policy and impaired goodwill (IAS 34)

8 documents18 tasks≈ 300 min
0 / 20 items completed
Standards
IAS 34 — Interim Financial Reporting
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Altavia SA (fictitious entity), a maker of packaging machines, closes its accounts on 31 December and publishes a condensed report at the end of each quarter. The preparer builds the file of the 20X6 half-year report (period ended 30 June 20X6) submitted to a review check: content and headings of the condensed statement, year-to-date amount of the quarters, change in accounting policy on raw materials and restatement of the first quarter, income tax at the estimated annual effective rate revised in the second quarter, goodwill impairment loss and the question of its reversal at the annual closing. Teaching simulation: the review trail of the file (preparation, reviewer notes and final sign-off) is simulated for demonstration purposes; it is neither a real review nor a validation of the content.

Your assignment

Check the components and headings of the draft; compute second-quarter revenue from the year-to-date amounts; judge the restatement of the change in policy and compute the restated result of the first quarter and then the half-year profit before tax; compute the expected annual tax, the tax expense of the first quarter, the year-to-date expense at the revised rate and the adjustment of the second quarter, judge the estimated rate and record the adjustment; compute the carrying amount of goodwill, record the impairment loss and say whether the reversal considered at the annual closing is allowed; present the cumulative effect of the entries and the plan of the notes; deal with the review points; conclude. One document is not useful.

You prepare a complete file: documents, work, entries and conclusion, then compare your work with the solution and the review points of the file.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Documents

File documents

8 documents: open each one to read it.

Document 1Memo

Company profile and case conventions

Altavia SA (fictitious entity) makes packaging machines; it closes its accounts on 31 December and publishes a condensed report at the end of each quarter; its functional currency is the euro. Case conventions: amounts in EUR; the estimated annual effective rates are estimates of management given by the case; case convention (pedagogical assumption, not attributed to the standard): the pre-tax profit of the second quarter is given after the goodwill impairment loss; the entries are illustrative, use generic accounts and exclude deferred tax; the tax effect of the change in policy is picked up by the year-to-date measurement.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Minimum components5 units
Components present in the draft4 units
Lines of the annual income statement10 units
Annual lines kept in the draft6 units
Annual lines not kept4 units
Year-to-date revenue at 31 March€4,610,000.00
Year-to-date revenue at 30 June€9,640,000.00
Published pre-tax profit of the first quarter€520,000.00
Pre-tax profit of the second quarter€780,000.00
Estimated annual pre-tax profit€3,000,000.00
Estimated annual effective rate in the first quarter28%
Revised annual effective rate in the second quarter30%
Effect of the change in formula in the first quarter (decrease)€26,000.00
Goodwill at 31 December 20X5€2,400,000.00
Goodwill impairment loss at 30 June€600,000.00
Goodwill shown in the annual projection€2,000,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort8

  • Company profile and case conventions

  • Components and income statement lines of the draft

  • Year-to-date amounts and quarterly results of 20X6

  • Estimate of the annual tax rate

  • Technical note: change in the cost formula of raw materials

  • Goodwill: impairment test of the half-year and annual projection

  • Audit committee: questions on the year-to-date measurement

  • Programme of a trade fair

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Draw up the plan of the file: which points of the half-year report are at stake and which documents are useful?

      2. Task 2Analysis

        Does the draft contain the minimum components and keep each heading and subtotal of the annual income statement?

      3. Task 3Calculation

        Compute second-quarter revenue from the year-to-date amounts.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute second-quarter revenue from the year-to-date amounts.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Professional judgement

        Must the published first quarter be restated for the change in the cost formula of raw materials?

      5. Task 5Calculation

        Compute the restated result of the first quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the restated result of the first quarter.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      6. Task 6Calculation

        Compute the half-year profit before tax from the quarters.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the half-year profit before tax from the quarters.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Compute the expected annual tax at the estimated annual effective rate of the first quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the expected annual tax at the estimated annual effective rate of the first quarter.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      8. Task 8Calculation

        Compute the year-to-date tax expense of the first quarter at the estimated rate.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the year-to-date tax expense of the first quarter at the estimated rate.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      9. Task 9Professional judgement

        Can the estimated annual effective rate be revised to 30% in the second quarter, and is the published first quarter restated for that reason?

      10. Task 10Calculation

        Compute the year-to-date expense of the half-year at the revised rate.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the year-to-date expense of the half-year at the revised rate.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      11. Task 11Calculation

        Compute the adjustment recognised in the second quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the adjustment recognised in the second quarter.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      12. Task 12Journal entries

        Record the adjustment of the income tax expense of the second quarter.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      13. Task 13Calculation

        Compute the carrying amount of goodwill after the impairment loss and the control difference with the annual projection.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the carrying amount of goodwill after the impairment loss and the control difference with the annual projection.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Control difference with the projection (2,000,000 − 1,800,000)

      14. Task 14Journal entries

        Record the goodwill impairment loss of the half-year.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      15. Task 15Professional judgement

        Is the reversal of EUR 200,000 planned at the annual closing allowed, and what to think of the proposals of the audit committee?

      16. Task 16Effects on the financial statements

        What is the cumulative effect of the two entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      17. Task 17Analysis

        Which information is to be prepared for the notes of the half-year report?

      18. Task 18Conclusion

        Write the conclusion of the file and deal with the review points.

      File review

      Points raised during the review of this file: read them as the preparer would.

      Review notes

      • BlockingResolvedReview point (blocking): attach the dated technical note establishing that the cumulative effect at 1 January is determinable
      • Non-blockingOpenReview point: document the decision to keep the year-to-date measurement of tax in the following reports

      Information requests

      • ObtainedRequest to the finance department: date of the decision and cumulative effect
      • Assumption documentedDocumented assumption: no change in statutory rate after 30 June

      Completion checklist

      • Components and headings of the draft checkedDone
      • Dated technical note attached for the change in policyDone
      • Year-to-date amounts and restated result reconciledDone
      • Year-to-date tax, adjustment and estimated rate supportedDone
      • Entries balanced and effect on the financial statements establishedDone
      • Plan of the notes to be completed with the date of adoption of the decisionTo review

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 20).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 34 §8
      • IAS 34 §10
      • IAS 34 §28
      • IAS 34 §30
      • IAS 34 §B12