(ii) Upwards; (3 marks)

正确答案：
(ii) Theory Y is at the opposite end of the continuum and reflects a contemporary approach to motivation, reflecting growth in professional and service employment. It is based on the idea that the goals of the individual and the organsiation can– indeed should – be integrated and that personal fulfilment can be achieved through the workplace. It assumes that for most people, work is as natural as rest or play and employees will exercise self-discipline and self-direction in helping to achieve the organisation’s objectives. Physical and mental effort at work is perfectly natural and is actively sought as a source of personal satisfaction.
In addition, the average employee seeks and accepts responsibilty and creativity. Innovative thinking is widely distributed amongst the whole population and should therefore be encouraged in the work situation.
The intellectual ability of the average person is only partly used and should be encouraged and thus individuals are motivated by seeking self-achievement. Since control and punishment are not required, management therefore has to encourage and develop the individual. However, the operation of a Theory Y approach can be difficult and frustrating,time consuming and sometimes regarded with suspicion.

正确答案：
(ii) Fair value option
As set out above, the standard permits entities to designate irrevocably on initial recognition any financial asset or liability
as one to be measured at fair value with gains and losses recognised in profit or loss. The fair value option was generally
introduced to reduce profit or loss volatility as it can be used to measure an economically matched position in the same
way (at fair value). Additionally it can be used in place of IAS 39’s requirement to separate embedded derivatives as
the entire contract is measured at fair value with changes reported in profit or loss.
Although the fair value option can be of use, it can be used in an inappropriate manner thus defeating its original
purpose. For example, companies might apply the option to instruments whose fair value is difficult to estimate so as
to smooth profit or loss as valuation of these instruments might be subjective. Also the use of this option might increase
rather than decrease volatility in profit or loss where, for example, a company applies the option to only one part of a
‘matched’ position. Finally, if a company applied the option to financial liabilities, it might result in the company
recognising gains or losses for changes in its own credit worthiness.
The IASB has issued an exposure draft amending IAS 39 in this area restricting the financial assets and liabilities to
which the fair value option can be applied.
I hope that the above information is useful.

正确答案：
(ii) The development of IFRSs for SMEs as a modification of existing IFRSs
Most SMEs have a narrower range of users than listed entities. The main groups of users are likely to be the owners,
suppliers and lenders. In deciding upon the modifications to make to IFRS, the needs of the users will need to be taken
into account as well as the costs and other burdens imposed upon SMEs by the IFRS. There will have to be a relaxation
of some of the measurement and recognition criteria in IFRS in order to achieve the reduction in the costs and the
burdens. Some disclosure requirements, such as segmental reports and earnings per share, are intended to meet the
needs of listed entities, or to assist users in making forecasts of the future. Users of financial statements of SMEs often
do not make such kinds of forecasts. Thus these disclosures may not be relevant to SMEs, and a review of all of the
disclosure requirements in IFRS will be required to assess their appropriateness for SMEs.
The difficulty is determining which information is relevant to SMEs without making the information disclosed
meaningless or too narrow/restricted. It may mean that measurement requirements of a complex nature may have to be
omitted.
There are, however, rational grounds for justifying different treatments because of the different nature of the entities and
the existence of established practices at the time of the issue of an IFRS.

正确答案：
(ii) Accountability to equity investors
Voluntary disclosures are an effective way of redressing the information asymmetry that exists between management and
investors. In adding to mandatory content, voluntary disclosures give a fuller picture of the state of the company.
More information helps investors decide whether the company matches their risk, strategic and ethical criteria, and
expectations.
Makes the annual report more forward looking (predictive) whereas the majority of the numerical content is backward
facing on what has been.
Helps transparency in communicating more fully thereby better meeting the agency accountability to investors,
particularly shareholders.
There is a considerable amount of qualitative information that cannot be conveyed using statutory numbers (such as
strategy, ethical content, social reporting, etc).
Voluntary disclosure gives a more rounded and more complete view of the company, its activities, strategies, purposes
and values.
Voluntary disclosure enables the company to address specific shareholder concerns as they arise (such as responding
to negative publicity).
[Tutorial note: other valid points will attract marks]

正确答案：
(ii) Four factors that could be considered are as follows:
(i) The quality of the service provided by NSC as evidenced by, for example, the comfort of the ferries, on-board
facilities, friendliness and responsiveness of staff.
(ii) The health and safety track record of NSC – passenger safety is a ‘must’ in such operations.
(iii) The reliability, timeliness and dependability of NSC as a service provider.
(iv) The potential loss of image due to redundancies within Wonderland plc.

正确答案：
(ii) The use of its own tree plantations as a source of raw materials not only ensures available supplies of timber but may
also demonstrate that the directors of Our Timbers Ltd are mindful of the need for careful planning in the consumption
of natural resources. This concern with the need to protect the environment will enhance the reputation of Our Timbers
Ltd as an environmentally-conscious organisation which in turn may translate into a source of competitive advantage
since contemporary thought is very much focused on the environmental responsibilities of organisations with particular
regard to the use of natural resources such as timber.

正确答案：
(ii) Disadvantages of an EVA approach to the measurement of financial performance include:
(i) The calculation of EVA may be complicated due to the number of adjustments required.
(ii) It is difficult to use EVA for inter-firm and inter-divisional comparisons because it is not a ratio measure.
(iii) Economic depreciation is difficult to estimate and conflicts with generally accepted accounting principles.
Note: Other relevant discussion would be acceptable.

正确答案：

 

正确答案：
(ii) As Sharon is entitled to the full rate of business asset taper relief, any gain will be reduced by 75%. The position is
maximised where the chargeable gain equals Sharon’s unused capital gains tax annual exemption of ￡8,500. Thus,
before taper relief, the gain she requires is ￡34,000 (1/0·25 x ￡8,500).
The amount to be held over is therefore ￡46,000 (80,000 – 34,000). Where part of the consideration is in the form
of cash, the gain eligible for incorporation relief is calculated using the formula:
Gain deferred           =                    Gain x value of shares issued/total consideration
The formula is        manipulated on the following basis:
￡46,000                    =                     ￡80,000 x (shares/120,000)
Shares/120,000     =                     ￡46,000/80,000
Shares                     =                     ￡46,000 x 120,000/80,000
i.e. ￡69,000.
As the total consideration is ￡120,000, this means that Sharon can take ￡51,000 (￡120,000 – ￡69,000) in cash
without any CGT consequences.

正确答案：
(ii) A company needs to be aware of the following issues:
Equity
(1) Costs incurred in issuing share capital are not allowed as a trading deduction.
(2) Distributions to investors are not allowed as a trading deduction.
(3) The cost of making distributions to shareholders are disallowable.
(4) Where profits are taxed at an effective rate of less than 19%, any profits used to make a distribution to noncorporate
shareholders will themselves be taxed at the full 19% rate.
Loan finance/debt
(1) The incidental costs of obtaining/raising loan finance are broadly deductible as a trading expense.
(2) Capital costs of raising loan finance (for example, loans issued at a discount) are not deductible for tax purposes.
(3) Interest incurred on a loan to finance a business is deductible from trading income.

正确答案：
(ii) Vehicles
■ Agreeing opening ledger balances of cost and accumulated depreciation (and impairment losses) to the non-current
asset register to confirm the comparative amounts.
■ Physically inspecting a sample of vehicles (selected from the asset register) to confirm existence and condition (for
evidence of impairment). If analytical procedures use management information on mileage records this should be
checked (e.g. against milometers) at the same time.
■ Agreeing additions to purchase invoices to confirm cost.
■ Reviewing the terms of all lease contracts entered into during the year to ensure that finance leases have been
capitalised.
■ Agreeing the depreciation rates applied to finance lease assets to those applied to similar purchased assets.
■ Reviewing repairs and maintenance accounts (included in materials expense) to ensure that there are no material
items of capital nature that have been expensed (i.e. a test for completeness).

正确答案：
(ii) Further audit procedures:
Request from Peter Sheffield a written representation detailing:
– the exact nature of his control over Jarvis Co, i.e. if he is a shareholder then state his percentage shareholding, if
he is a member of senior management then state his exact position within the entity,
– a comment on whether in his opinion the balance is recoverable,
– a specific date by which the amount should be expected to be repaid, and
– a confirmation that there are no further balances outstanding from Jarvis Co, or any further transactions between
Jarvis Co and Pulp Co.
Tutorial note: Reference to the Exposure Draft ISA 550 Related Parties (Revised and Redrafted) requirement for both
general and specific management representations will be awarded credit.
Review the terms of any written confirmation of the amount, such as a signed agreement or invoice, checking whether
any interest is due to Pulp Co. The terms should be reviewed for details of any security offered, and the nature of the
consideration to be provided in settlement.
From discussion with Peter Sheffield, develop an understanding of the business purpose of the transaction, particularly
to understand whether the balance is a trade receivable or an investment.
Review the board minutes for evidence of any discussion of the transaction and the recoverability of the balance
outstanding.
Obtain the most recent audited financial statements of Jarvis Co and:
– ascertain whether Peter Sheffield is disclosed as the ultimate controlling party or disclosed as a member of key
management personnel,
– scrutinise the disclosure notes to find any disclosure of the transaction, where it should be described as a related
party liability, and
– perform. a liquidity analysis to establish whether the amount can be repaid from liquid assets.

正确答案：
(ii) ‘No frills’ low-cost budget airlines are usually associated with the following characteristics. Each of these characteristics
is considered in the context of Oceania National Airlines (ONA).
– Operational economies of scale
Increased flight frequency brings operational economies and is attractive to both business and leisure travellers. In
the international sector where ONA is currently experiencing competition from established ‘no frills’ low-cost budget
airlines ONA has, on average, one flight per day to each city. It would have to greatly extend its flight network, flight
frequency and the size of its aircraft fleet if it planned to become a ‘no frills’ carrier in this sector. This fleet
expansion appears counter to the culture of an organisation that has expanded very gradually since its formation.
Table 1 shows only three aircraft added to the fleet in the period 2004–2006. It is likely that the fleet size would
have to double for ONA to become a serious ‘no frills’ operator in the international sector. In the regional sector, the
flight density, an average of three flights per day, is more characteristic of a ‘no frills’ airline. However, ONA would
have to address the relatively low utilisation of its aircraft (see Tables 1 and 2) and the cost of maintenance
associated with a relatively old fleet of aircraft.
– Reduced costs through direct sales
On-line booking is primarily aimed at eliminating commission sales (usually made through travel agents). ‘No frills’
low-cost budget airlines typically achieve over 80% of their sales on-line. The comparative figure for ONA (see
Table 2) is 40% for regional sales and 60% for international sales, compared with an average of 84% for their
competitors. Clearly a major change in selling channels would have to take place for ONA to become a ‘no frills’
low-cost budget airline. It is difficult to know whether this is possible. The low percentage of regional on-line sales
seems to suggest that the citizens of Oceania may be more comfortable buying through third parties such as travel
agents.
– Reduced customer service
‘No frills’ low-cost budget airlines usually do not offer customer services such as free meals, free drinks and the
allocation of passengers to specific seats. ONA prides itself on its in-flight customer service and this was one of the
major factors that led to its accolade as Regional Airline of the Year. To move to a ‘no frills’ strategy, ONA would
have to abandon a long held tradition of excellent customer service. This would require a major cultural change
within the organisation. It would also probably lead to disbanding the award winning (Golden Bowl) catering
department and the redundancies of catering staff could prove difficult to implement in a heavily unionised
organisation.
Johnson, Scholes and Whittington have suggested that if an organisation is to ‘achieve competitive advantage through
a low price strategy then it has two basic choices. The first is to try and identify a market segment which is unattractive
(or inaccessible) to competitors and in this way avoid competitive pressures to erode price.’ It is not possible for ONA to
pursue this policy in the international sector because of significant competition from established continental ‘no frills’
low-cost budget airlines. It may be a candidate strategy for the regional sector, but the emergence of small ‘no frills’ lowcost
budget airlines in these countries threaten this. Many of these airlines enter the market with very low overheads
and use the ‘no frills’ approach as a strategy to gain market share before progressing to alternative strategies.
Secondly, a ‘no frills’ strategy depends for its success on margin. Johnson, Scholes and Whittington suggest that ‘in the
long run, a low price strategy cannot be pursued without a low-cost base’. Evidence from the scenario suggests that ONA
does not have a low cost base. It continues to maintain overheads (such as a catering department) that its competitors
have either disbanded or outsourced. More fundamentally (from Table 2), its flight crew enjoy above average wages and
the whole company is heavily unionised. The scenario acknowledges that the company pays above industry salaries and
offers excellent benefits such as a generous non-contributory pension. Aircraft utilisation and aircraft age also suggest a
relatively high cost base. The aircraft are older than their competitors and presumably incur greater maintenance costs.
ONA’s utilisation of its aircraft is also lower than its competitors. It seems highly unlikely that ONA can achieve the
changes required in culture, cost base and operations required for it to become a ‘no frills’ low-cost budget airline. Other
factors serve to reinforce this. For example:
– Many ‘no frills’ low-cost budget airlines fly into airports that offer cheaper taking off and landing fees. Many of these
airports are relatively remote from the cities they serve. This may be acceptable to leisure travellers, but not to
business travellers – ONA’s primary market in the regional sector.
– Most ‘no frills’ low-cost budget airlines have a standardised fleet leading to commonality and familiarity in
maintenance. Although ONA has a relatively small fleet it is split between three aircraft types. This is due to
historical reasons. The Boeing 737s and Airbus A320s appear to be very similar aircraft. However, the Boeings
were inherited from OceaniaAir and the Airbuses from Transport Oceania.
In conclusion, the CEO’s decision to reject a ‘no frills’ strategy for ONA appears to be justifiable. It would require major
changes in structure, cost and culture that would be difficult to justify given ONA’s current position. Revolution is the
term used by Baligan and Hope to describe a major rapid strategic change. It is associated with a sudden transformation
required to react to extreme pressures on the organisation. Such an approach is often required when the company is
facing a crisis and needs to quickly change direction. There is no evidence to support the need for a radical
transformation. This is why the CEO brands the change to a ‘no frills’ low-cost budget airline as ‘unnecessary’. The
financial situation (Table 3) is still relatively healthy and there is no evidence of corporate predators. It can be argued
that a more incremental approach to change would be beneficial, building on the strengths of the organisation and the
competencies of its employees. Moving ONA to a ‘no frills’ model would require seismic changes in cost and culture. If
ONA really wanted to move into this sector then they would be better advised to start afresh with a separate brand andairline and to concentrate on the regional sector where it has a head start over many of its competitors.

正确答案：
(ii) Strategy of the business regarding its treasury policies
Treasury policies are reviewed regularly by the Board. It is group policy to account for all financial instruments as cash
flow hedges. As a result, changes in the fair values of financial instruments are deferred in reserves to the extent the
hedge is effective and released to profit or loss in the time periods in which the hedged item impacts profit or loss.
The Group contracts fixed rate currency swaps and issues floating to fixed rate interest rate swaps to meet the objective
of protecting borrowing costs. The cash flow effects of the interest rate swaps match the cash flows on the underlying
instruments so that there is no net cash flow effect from movements in market interest rates. If the interest rate swaps
had not been transacted there could have been an increase in the annual net interest payable to the Group. The strategy
of the group is to minimise the exposure to interest rate fluctuations.

正确答案：

(b) Provisions – IAS37
An entity must recognise a provision under IAS37 if, and only if:
(a) a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event)
(b) it is probable (‘more likely than not’), that an outflow of resources embodying economic benefits will be required to settle
the obligation
(c) the amount can be estimated reliably
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an enterprise having
no realistic alternative but to settle the obligation. A constructive obligation arises if past practice creates a valid expectation
on the part of a third party. If it is more likely than not that no present obligation exists, the enterprise should disclose a
contingent liability, unless the possibility of an outflow of resources is remote.
The amount recognised as a provision should be the best estimate of the expenditure required to settle the present obligation
at the balance sheet date, that is, the amount that an enterprise would rationally pay to settle the obligation at the balance
sheet date or to transfer it to a third party. This means provisions for large populations of events such as warranties, are
measured at a probability weighted expected value. In reaching its best estimate, the entity should take into account the risks
and uncertainties that surround the underlying events.
Expected cash outflows should be discounted to their present values, where the effect of the time value of money is material
using a risk adjusted rate (it should not reflect risks for which future cash flows have been adjusted). If some or all of the
expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement should be
recognised as a separate asset when, and only when, it is virtually certain that reimbursement will be received if the entity
settles the obligation. The amount recognised should not exceed the amount of the provision. In measuring a provision future
events should be considered. The provision for the warranty claim will be determined by using the expected value method.
The past event which causes the obligation is the initial sale of the product with the warranty given at that time. It would be
appropriate for the company to make a provision for the Year 1 warranty of $280,000 and Year 2 warranty of $350,000,
which represents the best estimate of the obligation (see Appendix 2). Only if the insurance company have validated the
counter claim will Macaljoy be able to recognise the asset and income. Recovery has to be virtually certain. If it is virtually
certain, then Macaljoy may be able to recognise the asset. Generally contingent assets are never recognised, but disclosed
where an inflow of economic benefits is probable.
The company could discount the provision if it was considered that the time value of money was material. The majority of
provisions will reverse in the short term (within two years) and, therefore, the effects of discounting are likely to be immaterial.
In this case, using the risk adjusted rate (IAS37), the provision would be reduced to $269,000 in Year 1 and $323,000 in
Year 2. The company will have to determine whether this is material.
Appendix 1
The accounting for the defined benefit plan is as follows:

正确答案：
(ii) The forecast situation of Diverse Holdings Plc is not without its problems. KAL and OPL require the immediate attention
of management. The position of KAL is precarious to say the least. There is a choice of strategies for it:
(i) Outsource the manufacture of appliances
(ii) Set up a manufacturing operation overseas
(ii) Withdraw from the market.
Each alternative must be assessed. Whatever decision is taken it is unlikely to affect the other four subsidiaries.
PSL is also independent of the other subsidiaries. A strategic decision to widen its range of products and outlets must
surely help. Hence management should endeavour to find new markets for its products, which are separate and distinct
from those markets served by its appointed distributors.
21
In order to improve the prospects of OPL management need to adopt appropriate strategies since at the present time the
company appears to be in a high growth market but is unable to capture a reasonable market share. Perhaps the answer
lies in increased or more effective advertising of the endorsement of the product range by health and safety experts.
Management should endeavour to develop a strategy to integrate further its subsidiaries so that they can benefit from
each other and also derive as much synergy as possible from the acquisition of HTL.
It is of paramount importance that management ensure that sufficient funds are channelled into growing OFL and HTL,
which are both showing a rising trend in profitability. The group has depleted cash reserves which must to some extent
be attributable to the purchase of HTL. It is possible that the divestment of KAL would provide some much needed
funding.

正确答案：
(ii) Market Penetration
With regard to existing products it would appear that a strategy of market penetration is being followed, whereby attempts
are made to sell existing products into existing markets. This is a low risk strategy which is most unlikely to lead to high
rates of growth, reflected in the forecast increase of 2% per annum in the years ending 30 November 2008 and 2009.
Management seeks here to increase its market share with the current product range. In pursuing a penetration strategy
the management of Vision plc may to some extent be able to exploit opportunities including the following:
– Encouraging existing customers to buy more of their brand
– Encouraging customers who are buying a competitor’s brand to switch to their brand
– Encouraging non-users within the segment to buy their brand
‘Strengths’ within the current portfolio will need to be consolidated and any areas of weakness addressed with remedial
action.
Market Development
The purchase of the retail outlets will enable management to sell existing products via new channels of distribution. The
products of both the Astronomy and Outdoor Pursuits divisions could be sold via the retail outlets. Very often new
markets can be established in geographical terms. Management could, for example, look to promote the sale of
microscopes and associated equipment to overseas hospitals.
Product Development
The launch of the Birdcam-V is an example of a product development strategy whereby new products are targeted at
existing markets. Very often, existing products can be improved, or if an organisation possesses adequate resources,
completely new products can be developed to meet existing market needs. Some of the main risks here lie in the ‘time
to market’ and product development costs which frequently go well beyond initial estimates.
Diversification
The purchase of Racquets Ltd is an example of diversification on the part of Vision plc since the products and markets
of Racquets Ltd bear no relationship to the existing products and markets of the company. In this regard the
diversification is said to be unrelated.
The establishment of the Oceanic division could be regarded as a related diversification since existing technology will be
used to develop new products for new markets. The success of this strategy will very much depend on the strength of
the Vision brand.

正确答案：
(ii) Sensitivity analysis could be used to assess how responsive the NPV calculated in part (a) in respect of each decision
option change is to changes in the variables used to calculate it. The application of sensitivity analysis requires that the
net present values are calculated under alternative assumptions in order to determine how sensitive they are to changing
conditions. In this particular example then a relatively small change in the forecast cash flows might lead to a change
in the investment decision. The application of sensitivity analysis can indicate those variables to which the NPV is most
sensitive and the extent to which these variables may change before an investment results in a negative NPV. Thus the
application of sensitivity analysis may provide management with an indication of why a particular project might fail. The
directors of Stay Cool Ltd should give consideration to the potential variations in the independent variables which feature
in the decision-making process such as:
– estimated revenues
– estimated operating costs
– estimated working lives
– estimated repair costs
– the estimated discount rate i.e. cost of capital of each alternative investment.
Sensitivity analysis has some serious limitations. The use of the method requires changes in each variable under
consideration are isolated. However management may be focused on what happens if changes occur in two or more
critical variables. Another problem relating to the use of sensitivity analysis to forecast outcomes lies in the fact that it
provides no indication of the likelihood of the occurrence of changes in critical variables.

正确答案：
(ii) The summary analysis in (a)(i) shows that using overall points gained, Michaelangelotown has achieved the best
performance with 12 points. Donatellotown and Leonardotown have achieved a reasonable level of performance with
eight points each. Raphaeltown has under performed, however, gaining only four out of the available 12 points.
Michaelangelotown is the only depot to have achieved both an increase in revenue over budget and an increased
profit:revenue percentage.
In the customer care and service delivery statistics, Michaelangelotown has achieved all six of the target standards,
Donatellotown four; Leonardotown three. The Raphaeltown statistic of achieving only one out of six targets indicates the
need for investigation.
With regard to the credit control and administrative efficiency statistics, Leonardotown and Michaelangelotown achieved
all four standards and Donatellotown achieved three of the four standards. Once again, Raphaeltown is the ‘poor
performer’ achieving only two of the four standards.

正确答案：

 

正确答案：
(ii) Government stock is an exempt asset for the purposes of capital gains tax, however, as Andrew’s holding has a nominal
value in excess of ￡5,000, a charge to income tax will arise under the accrued income scheme. This charge to income
tax will arise in 2005/06, being the tax year in which the next interest payment following disposal falls due (20 April
2005) and it will relate to the income accrued for the period 21 October 2004 to 14 March 2005 of ￡279 (145/182
x ￡350). As interest on Government Stock is paid gross (unless the holder applies to receive it net), the tax due of ￡112
(￡279 x 40%) will be collected via the self-assessment system and as the interest was an ongoing source of income
will be included within Andrew’s half yearly payments on account payable on 31 January and 31 July 2006.

正确答案：
(ii) The implications of selling the Oxford house and garden in two separate disposals
The additional sales proceeds would result in an increase in Clifford’s capital gains and consequently his tax liability.
When computing the gain on the sale of the house together with a small part of the garden, the allowable cost would
be a proportion of the original cost. That proportion would be A/A + B where A is the value of the house and garden
that has been sold and B is the value of the part of the garden that has been retained. Principal private residence relief
and taper relief would be available in the same way as that set out in (i) above.
When computing the gain on the sale of the remainder of the garden, the cost would be the original cost of the property
less the amount used in computing the gain on the earlier disposal. Principal private residence relief would not be
available as the land sold is not a dwelling house or part of one.

正确答案：
(ii) Evidence supporting the assertion that development costs are technically feasible would include the following:
– Review the results of scientific tests performed on the products, for example, the results of animal or human testing
of the products.
– Discuss any detrimental results of these tests, e.g. harmful side effects, with the scientists working on the project
to determine what corrective action is being taken.
– Enquire whether any licences necessary for continued development and/or commercial production have been
granted by the appropriate regulatory body.
– Compare expected to actual development costs incurred per product being developed. Where actual costs are in
excess of expected costs investigate whether the extra costs have been incurred in order to make good any problems
identified in the development process.
– Review board minutes for relevant discussion of the product development taking place during the year.