The Price Earnings (P/E) ratio is calculated by dividing the market price per share by the Earnings Per Share (EPS).

1. Calculate the number of ordinary shares:

Total value of ordinary shares / Nominal value per share

$2,250,000 / $0.50 = 4,500,000 shares

2. Calculate the Earnings Per Share (EPS):

Profit for the year / Number of ordinary shares

$1,350,000 / 4,500,000 shares = $0.30

3. Calculate the P/E ratio:

Market price per share / EPS

$4.75 / $0.30 = 15.83

B. 7.92: This figure does not result from the correct application of the P/E ratio formula using the provided financial data.

C. 10.56: This is an incorrect calculation, likely resulting from an error in determining either the earnings or the number of shares outstanding.

D. 9.31: This result is arithmetically incorrect. It may stem from using an improper value, such as book value, instead of earnings per share.

1. International Accounting Standards Board (IASB). (2003). International Accounting Standard 33: Earnings Per Share.

IAS 33

Paragraph 10: "Basic earnings per share shall be calculated by dividing profit or loss attributable to ordinary equity holders of the parent entity (the numerator) by the weighted average number of ordinary shares outstanding (the denominator) during the period." This standard supports the calculation of EPS as $1

350

000 / 4

500

000 shares.

2. Damodaran

A. (2005). Valuation Approaches and Metrics: A Survey of the Theory and Evidence. Stern School of Business

New York University.

Page 23

Section: Earnings Multiples: "The price-earnings ratio (PE) is the most widely used and misused of all multiples. It is defined as the ratio of the market price per share to the earnings per share: PE = Market Price per Share / Earnings per Share." This academic source confirms the fundamental formula used in the calculation.

3. Whittington

G. (2005). The Adoption of International Accounting Standards in the European Union. European Accounting Review

14(1)

127-153. https://doi.org/10.1080/0963818042000338012

This peer-reviewed article discusses the framework of IFRS

which includes IAS 33. The principles outlined in the standard for calculating EPS are foundational for deriving the P/E ratio

a key performance indicator used in financial analysis across the EU and globally. The calculation method used is consistent with these principles.

According to IAS 17, lease payments for an operating lease must be recognized as an expense on a straight-line basis over the lease term, regardless of the timing of cash payments. The total payments over the 5-year lease term are $200,000 (4 payments × $50,000). The annual straight-line expense is therefore $40,000 ($200,000 / 5 years).

For the year ended 31 December 20X8, LM recognizes a lease expense of $40,000. However, the cash paid during this first year was $0. The difference between the expense recognized ($40,000) and the cash paid ($0) results in a liability, which is an accrual of $40,000 on the statement of financial position.

B. An accrual of $50,000 was recognised.

This is incorrect. $50,000 is the annual cash payment from year two onwards, not the straight-line annual expense or the resulting accrual in year one.

C. A prepayment of $10,000 was recognised.

This is incorrect. A prepayment arises when cash paid exceeds the expense recognized. In this case, the expense recognized is greater than the cash paid.

D. An expense of $50,000 was recognised.

This is incorrect. The expense must be calculated on a straight-line basis over the entire lease term, not based on the cash payment amount for a specific year.

1. International Accounting Standards Board (IASB). (2003). International Accounting Standard 17 Leases.

Paragraph 33: "Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit." This paragraph directly mandates the straight-line method used in the calculation.

2. Kieso

D. E.

Weygandt

J. J.

& Warfield

T. D. (2020). Intermediate Accounting

IFRS Edition (4th ed.). John Wiley & Sons.

Chapter 21

Leases

Section on Operating Lease - Lessee: This chapter explains that for operating leases with uneven payment patterns (such as a rent-free period)

the total lease payment is allocated evenly over the lease term. The difference between the recognized expense and the cash paid in a period is recorded as a lease liability (accrual) or lease asset (prepayment).

3. University of Cambridge

Judge Business School. (n.d.). MFin Accounting Course Materials - Module on Leases.

Section: Accounting for Operating Leases under IAS 17: Course notes illustrate that when lease payments are not made on a straight-line basis (e.g.

rent holidays)

the total cost is annualized. For a rent-free initial period

an expense is recognized along with a corresponding accrual

reflecting the consumption of the economic benefit of using the asset.

Consolidated retained earnings are calculated by taking the parent company's (LM) retained earnings and adding its share of the subsidiary's (ST) post-acquisition profits.

1. Parent's Retained Earnings: $200 million.

2. Subsidiary's Post-Acquisition Profit:

Reported increase in retained earnings: $80 million - $50 million = $30 million.

Under IFRS 3, a contingent liability is recognized at fair value at acquisition. The subsequent decrease in this liability from $100 million to $40 million represents a gain of $60 million, which is recognized in ST's post-acquisition profit for consolidation purposes.

Total post-acquisition profit of ST: $30 million + $60 million = $90 million.

3. Parent's Share: LM's 80% share of ST's post-acquisition profit is 0.80 $90 million = $72 million.

4. Consolidated Retained Earnings: $200 million (LM) + $72 million (share of ST) = $272 million.

A. $164 million: This result is derived from an incorrect calculation, likely by improperly subtracting the subsidiary's profit and liability movements.

B. $176 million: This figure incorrectly subtracts the gain on the contingent liability or miscalculates the parent's share of post-acquisition profits.

D. $284 million: This figure incorrectly adds the entire post-acquisition profit of the subsidiary ($90m) to the parent's earnings, failing to allocate any share to the non-controlling interest.

References:

1. International Financial Reporting Standard (IFRS) 3, Business Combinations.

Paragraph 23: States that an acquirer must recognize a contingent liability assumed in a business combination at its acquisition-date fair value, even if it is not probable that an outflow of resources will be required. This supports the initial recognition of the $100 million liability.

Paragraph 56: Specifies the subsequent measurement of a contingent liability recognized in a business combination. It requires measurement at the higher of the amount under IAS 37 and the amount initially recognized less cumulative income recognized. Changes in value are typically recognized in profit or loss. The decrease from $100m to $40m results in a gain in the subsidiary's post-acquisition profit.

2. University of Melbourne, Department of Accounting. (2022). ACCT90013 Financial Accounting: Lecture Notes - Consolidation: Intra-group Transactions and Fair Value Adjustments.

Section 4.3, "Fair Value Adjustments at Acquisition Date": The courseware explains that fair value adjustments to a subsidiary's net assets at acquisition date must be accounted for in subsequent periods. The unwinding or remeasurement of these adjustments (such as the gain on the contingent liability) affects the calculation of the subsidiary's post-acquisition profit, which is then allocated between the parent and non-controlling interests.

3. Deloitte. (2021). iGAAP 2021: A guide to IFRS reporting, Volume B.

Chapter 29, Section 3.8.3, "Subsequent measurement of contingent consideration and other contingent payments": This professional guide, interpreting IFRS, clarifies that changes in the fair value of contingent liabilities that are not contingent consideration are recognized in profit or loss in accordance with the relevant IFRS (e.g., IFRS 9 or IAS 37). This confirms that the $60 million gain is a component of post-acquisition profit.

According to IAS 24 Related Party Disclosures, a related party relationship exists between the reporting entity (the XY group) and close family members of its key management personnel (KMP). A director of a subsidiary (AB) is considered KMP for the purposes of the group's consolidated financial statements. A spouse is defined as a close family member. Therefore, the spouse of a Director of AB is a related party of the XY group. Any transaction between a member of the group (XY) and this related party must be disclosed. The fact that the transaction was at market value is irrelevant to the disclosure requirement itself, although it would form part of the disclosure details.

A. A major customer is not defined as a related party under IAS 24 simply because of the significance of its transactions with the entity.

C. This transaction is likely disclosable, but the related party status depends on the rebuttable presumption that a directorship confers significant influence (IAS 28), making it less definitive than option B.

D. Two entities are not considered related parties merely because they are both associates of the same investor ('fellow associates').

1. International Accounting Standards Board (IASB). (2011). International Accounting Standard 24: Related Party Disclosures. IFRS Foundation. Paragraph 9

Definitions of "Related party" (specifically (a)(i) and (b)(iv)

(v))

"Key management personnel

" and "Close members of the family of a person."

2. IFRS Foundation. (2012

March). IFRS Interpretations Committee Update. Agenda Paper 12: IAS 24—Identification of related parties by a parent entity. This paper clarifies that key management personnel of a subsidiary are considered related parties of the reporting entity (the group) in its consolidated financial statements.

3. International Accounting Standards Board (IASB). (2011). International Accounting Standard 28: Investments in Associates and Joint Ventures. IFRS Foundation. Paragraph 6(a)

which lists "representation on the board of directors or equivalent governing body of the investee" as evidence of significant influence.

The investment should be classified as an associate. According to International Accounting Standard (IAS) 28, significant influence is the power to participate in the financial and operating policy decisions of an investee, but not control or jointly control those policies. A holding of 20% or more of the voting power gives rise to a presumption of significant influence. GH holds 25% (3,000,000 / 12,000,000) of the shares and is explicitly stated to have the power to participate in policy decisions without having control. This directly meets the definition of an associate, which must be accounted for using the equity method.

B. Joint venture: This requires joint control established through a contractual agreement between parties to share control, which is not indicated in the scenario.

C. Joint arrangement: This is a broader term that also requires contractually agreed joint control, which is absent from the provided information.

D. Financial asset: This classification applies when an investor lacks significant influence. GH's 25% holding and participation power clearly demonstrate significant influence, making this classification inappropriate.

---

1. International Accounting Standards Board (IASB). (2011). International Accounting Standard 28: Investments in Associates and Joint Ventures.

Paragraph 3: Defines an 'associate' as "an entity over which the investor has significant influence" and 'significant influence' as "the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies."

Paragraph 5: Establishes the presumption of significant influence: "If an entity holds

directly or indirectly... 20 per cent or more of the voting power of the investee

it is presumed that the entity has significant influence

unless it can be clearly demonstrated that this is not the case."

2. International Accounting Standards Board (IASB). (2011). International Financial Reporting Standard 11: Joint Arrangements.

Appendix A: Defines 'joint control' as "The contractually agreed sharing of control of an arrangement

which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control." This supports why options B and C are incorrect as no contractual agreement is mentioned.

3. PwC. (2023). IFRS Manual of Accounting - Chapter 23: Investments in associates and joint ventures (IAS 28).

Section 23.7: "An investment of 20% or more of the voting power (that is

the right to vote) leads to a presumption of significant influence. The presumption can be rebutted if there is clear evidence to the contrary." This source corroborates the application of the 20% threshold from IAS 28.

Under IAS 17, a finance lease is accounted for by the lessee as the acquisition of an asset with loan financing. The lessee recognizes the asset on the statement of financial position and depreciates it over its useful life. This depreciation is charged as an expense to the statement of profit or loss.

Simultaneously, a lease liability is recognized. Each lease payment is apportioned between a finance charge (interest) and a capital repayment. The finance charge is calculated to produce a constant periodic interest rate on the outstanding liability and is recognized as an expense in the statement of profit or loss. The capital repayment reduces the liability on the statement of financial position.

C. Lease payments paid represent a cash outflow, which is split between the finance cost (P&L) and capital repayment (Statement of Financial Position), not expensed in its entirety.

D. Lease payments payable is the outstanding liability and is presented on the statement of financial position, not as an expense in the statement of profit or loss.

E. The capital repayment element of the lease payments reduces the principal of the lease liability on the statement of financial position; it is not a P&L expense.

1. International Accounting Standards Board (IASB). (2003). International Accounting Standard 17: Leases. Paragraph 27. This paragraph explicitly states: "A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period."

2. Elliott

B.

& Elliott

J. (2019). Financial Accounting and Reporting (19th ed.). Pearson Education. In Chapter 19

'Leasing'

the section on lessee accounting for finance leases details that both depreciation and interest expense are charged to the income statement (statement of profit or loss).

3. Weygandt

J. J.

Kimmel

P. D.

& Kieso

D. E. (2019). Financial Accounting: IFRS (4th ed.). John Wiley & Sons. Chapter 15

'Long-Term Liabilities'

explains that for a finance lease

the lessee records depreciation expense on the leased asset and interest expense on the lease liability in the income statement.

High and differential inflation rates severely limit the comparability of ROCE. In Country Y, with 10% inflation, company CD's revenues reflect current prices, while depreciation is based on the lower historical cost of assets. This understates expenses and overstates the operating profit (numerator). Concurrently, the capital employed base (denominator) is significantly understated relative to its current economic value. This combination artificially inflates CD's ROCE, rendering a direct comparison with AB, from a low-inflation environment, fundamentally misleading. The ratio no longer reflects true comparative operational efficiency.

A. ROCE uses profit before tax (PBIT), so corporate tax rates do not impact the calculation, making the comparison valid.

C. ROCE uses profit before interest (PBIT), meaning different borrowing costs do not affect the ratio's components or its comparability.

D. Different currencies are not a fundamental barrier; financial statements can be translated into a common currency using standard accounting rules, enabling a valid comparison.

---

1. International Accounting Standard (IAS) 29

Financial Reporting in Hyperinflationary Economies. Paragraph IN1 states

"In a hyperinflationary economy

reporting of operating results and financial position in the local currency without restatement is not useful. Money loses purchasing power at such a rate that comparison of amounts from transactions...is misleading." While the 10% inflation in the scenario is not defined as hyperinflation

the underlying principle of distortion to historical cost accounts is the same and significantly impairs comparability.

2. Atrill

P.

& McLaney

E. (2018). Accounting and Finance for Non-Specialists (11th ed.). Pearson Education. In Chapter 3

"Analysing and interpreting financial statements

" the text discusses the limitations of ratio analysis

noting: "The effects of price changes over time can distort accounting ratios. The problem is that assets acquired at different times will be expressed in the balance sheet at different prices... This can make it difficult to compare the performance of a business over time and with other businesses." (Specific discussion on inflation's impact on historical cost accounting).

3. Penman

S. H. (2013). Financial Statement Analysis and Security Valuation (5th ed.). McGraw-Hill Education. In Chapter 6

"The Analysis of the Financial Statements

" Penman discusses the problems with historical cost accounting in the presence of inflation. He explains that holding gains on assets are not recognized

and expenses like depreciation are understated

which in turn overstates income. This directly impacts both the numerator and denominator of ROCE

distorting the ratio. (See section on "Inflation and the Quality of Accounting Numbers").

The gearing ratio is calculated using the formula: Debt / (Debt + Equity). This measures the proportion of a company's assets that are financed by debt. Using the provided data, Debt is the non-current loan (150) and Equity is total equity (850).

Gearing = 150 / (150 + 850) = 150 / 1,000 = 15%.

The interest cover ratio is calculated as: Operating Profit / Finance Cost. This indicates a company's ability to meet its interest payments. From the income statement, Operating Profit is 240 and Finance Cost is 40.

Interest Cover = 240 / 40 = 6.

Therefore, the correct gearing is 15% and the interest cover is 6.

B. The gearing calculation is incorrect. The ratio of debt to total capital employed (debt + equity) is 15%, not 16%.

C. The interest cover calculation is incorrect. The ratio of operating profit to finance cost is 6, not 4.

D. Both the gearing and interest cover calculations are incorrect based on the provided financial data and standard formulas.

1. Atrill

P. (2020). Financial Accounting for Decision Makers (10th ed.). Pearson. In Chapter 10

"Measuring and reporting financial performance

" the gearing ratio is defined as 'Long-term (non-current) liabilities / (Shareholders’ funds + Long-term (non-current) liabilities) × 100' (p. 369)

and the interest cover ratio is defined as 'Operating profit / Interest payable' (p. 367). Applying these formulas to the question's data yields 15% and 6

respectively.

2. Weetman

P. (2019). Financial Accounting: An Introduction (8th ed.). Pearson. Chapter 13

"Interpretation of financial statements

" presents the gearing ratio as 'non-current liabilities as a percentage of shareholders’ funds plus non-current liabilities' (Section 13.5

p. 465) and interest cover as 'operating profit/interest payable' (Section 13.4

p. 462). These definitions support the calculations for answer A.

3. Chartered Institute of Management Accountants. (2017). CIMA Official Terminology. CIMA Publishing. The official terminology defines interest cover as "profit before interest and tax divided by interest charges" and gearing as "the relationship

or ratio

of debt finance to equity finance." The formula Debt/(Debt+Equity) is a standard representation of this relationship used in the CIMA syllabus.

1. Subsidiary's Profit after Tax: The net profit of the subsidiary for the year ended 31 December 20X4.

2. Consolidation Adjustments: Any adjustments to the subsidiary's profit, such as additional depreciation arising from fair value adjustments on acquisition or the removal of unrealised profit from intra-group transactions.

3. Subsidiary's Other Comprehensive Income (OCI): Items like revaluation gains on property, plant, and equipment that are recognized in OCI.

4. NCI Percentage: The proportion of the subsidiary's equity not owned by the parent company (GHI).

Without these specific values, any attempt to select an answer would be speculative and would not adhere to the rigorous standards of a certified examiner.

IFRS 10

Consolidated Financial Statements: This standard mandates the allocation of profit or loss and each component of other comprehensive income to the owners of the parent and to the non-controlling interests. Specifically

paragraph B94 states

"The income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date... Profit or loss and each component of other comprehensive income are attributed to the owners of the parent and to the non-controlling interests."

Deloitte

iGAAP 2021: A guide to IFRS reporting

Volume A

Chapter 8

Section 4.4: This section details the accounting for non-controlling interests

explaining that TCI must be allocated to the parent and NCI

even if this results in the NCI having a deficit balance. The allocation is based on the NCI's proportionate share of the subsidiary's post-acquisition TCI.