BPP ACCA P2 Advance Financial Reporting 2017

http://www.freeaccountingbooks.com/bpp-acca-p2-advance-financial-reporting-2017/

D1 Preparation question: Simple consolidation

Alpha Co purchased 1,450,000 ordinary shares in Beta Co in 20X0, when the general reserve of Beta stood at

$400,000 and there were no retained earnings.

The statements of financial position of the two companies as at 31 December 20X4 are set out below.

Alpha Beta

$'000 $'000

Assets

Non current

Property, plant and equipment 8,868 1,787

Investment in Beta at cost 1,450 –

10,318 1,787

Current assets

Inventories 1,983 1,425

Receivables 1,462 1,307

Cash 25 16

3,470 2,748

Total assets 13,788 4,535

Equity and liabilities

Equity

Share capital (50c ordinary shares) 5,500 1,000

General reserve 1,200 800

Retained earnings 485 100

Total equity 7,185 1,900

Non-current liabilities

Borrowings 10% 4,000

Borrowings 15% – 500

Total non-current liabilities 4,000 500

Current liabilities

Bank overdraft 1,176 840

Trade payables 887 1,077

Taxation 540 218

Total current liabilities 2,603 2,135

Total liabilities 6,603 2,635

Total equity and liabilities 13,788 4,535

At the end of the reporting period the current account of Alpha with Beta was agreed at $23,000 owed by Beta. This

account is included in the appropriate receivable and trade payable balances shown above. There has been no

impairment of goodwill since the date of acquisition.

It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's net assets.

Required

(a) Prepare a consolidated statement of financial position for the Alpha Beta Group.

(b) Show the alterations necessary to the group statement of financial position if the intragroup balance owed

by Beta to Alpha represented an invoice for goods sold by Alpha to Beta at a mark-up of 15% on cost, and

still unsold by Beta at 31 December 20X4.

QUESTIONS

Guidance notes

1 Lay out the pro-forma statement of financial position, leaving plenty of space.

2 Lay out workings for: goodwill calculation; general reserve; retained earnings; and non-controlling interest.

3 Fill in the easy numbers given in the question.

4 Work out the more complicated numbers using the workings and then add up the statement of financial

position.

5 Keep all your work very neat and tidy to make it easy to follow. Cross reference all your workings.

D2 Preparation question: Associate

The statements of financial position of J Co and its investee companies, P Co and S Co, at 31 December 20X5 are

shown below.

STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5

J Co P Co S Co

$'000 $'000 $'000

Assets

Non-current assets

Freehold property 1,950 1,250 500

Plant and equipment 795 375 285

Investments 1,500 – –

4,245 1,625 785

Current assets

Inventories 575 300 265

Trade receivables 330 290 370

Cash 50 120 20

955 710 655

5,200 2,335 1,440

Equity and liabilities

Equity

Share capital ($1 ordinary shares) 2,000 1,000 750

Retained earnings 1,460 885 390

3,460 1,885 1,140

Non-current liabilities

12% debentures 500 100 –

Current liabilities

Bank overdraft 560 – –

Trade payables 680 350 300

1,240 350 300

5,200 2,335 1,440

Additional information

(a) J Co acquired 600,000 ordinary shares in P Co on 1 January 20X0 for $1,000,000 when the accumulated

retained earnings of P Co were $200,000.

(b) At the date of acquisition of P Co, the fair value of its freehold property was considered to be $400,000

greater than its value in P Co's statement of financial position. P Co had acquired the property in January

20W0 and the buildings element (comprising 50% of the total value) is depreciated on cost over 50 years.

S Co were $150,000.

QUESTIONS

(d) P Co manufactures a component used by J Co only. Transfers are made by P Co at cost plus 25%. J Co held

$100,000 of these components in inventories at 31 December 20X5.

(e) It is the policy of J Co to review goodwill for impairment annually. The goodwill in P Co was written off in full

some years ago. An impairment test conducted at the year end revealed impairment losses on the

investment in S Co of $92,000.

(f) It is the group's policy to value the non-controlling interest at acquisition at fair value. The market price of

the shares of the non-controlling shareholders just before the acquisition was $1.65.

Required

Prepare, in a format suitable for inclusion in the annual report of the J Group, the consolidated statement of

financial position at 31 December 20X5.

D3 Baden 45 mins

(a) IAS 28 Investments in associates and IAS 31 Interests in joint ventures deal with associates and joint

ventures respectively. The method of accounting for interests in joint ventures depends on whether they are

interests in jointly controlled operations, jointly controlled assets or jointly controlled entities.

Required

(i) Explain the criteria which distinguish an associate from an ordinary non-current asset investment.

(5 marks)

(ii) Explain the principal differences between a jointly controlled operation, a jointly controlled asset and

a jointly controlled entity. (5 marks)

(b) The following financial statements relate to Baden, a public limited company.

INCOME STATEMENT

FOR YEAR ENDED 31 DECEMBER 20X8

Revenue 212

Cost of sales (178)

Gross profit 34

Other income 12

Distribution costs (17)

Administrative expenses (8)

Finance costs (4)

Profit before tax 17

Income tax expense (5)

Profit for the year 12

Ordinary dividend – paid 4

STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X8

Property, plant and equipment 37

Current assets 31

Equity

Ordinary shares of $1 10

Share premium account 4

Retained earnings 32

Non-current liabilities 10

Current liabilities 12

QUESTIONS

(i) Cable, a public limited company, acquired 30% of the ordinary share capital of Baden at a cost of $14

million on 1 January 20X7. The share capital of Baden has not changed since acquisition when the

retained earnings of Baden were $9 million.

(ii) At 1 January 20X7 the following fair values were attributed to the net assets of Baden but not

incorporated in its accounting records. Fair values are to be taken into account when assessing any

goodwill arising on acquisition.

Property, plant and equipment 30 (carrying value $20m)

Current assets 31

Current liabilities 20

Non-current liabilities 8

(iii) Guy, an associate of Cable, also holds a 25% interest in the ordinary share capital of Baden. This was

acquired on 1 January 20X8.

(iv) During the year to 31 December 20X8, Baden sold goods to Cable to the value of $35 million. The

inventory of Cable at 31 December 20X8 included goods purchased from Baden on which the

company made a profit of $10 million.

(v) The policy of all companies in the Cable Group is to depreciate property, plant and equipment at 20%

per annum on the straight line basis.

Required

(i) Show how the investment in Baden would be stated in the consolidated statement of financial

position and income statement of the Cable Group under IAS 28 Investments in associates, for the

year ended 31 December 20X8 on the assumption that Baden is an associate. (8 marks)

(ii) Show and explain how the treatment of Baden would change if Baden was classified as an investment

in a joint venture and it utilised the proportionate consolidation method in IAS 31 Interests in joint

ventures. (7 marks)

(Total = 25 marks)

D4 Preparation question: 'D'-shaped group

Below are the statements of financial position of three companies as at 31 December 20X9.

Bauble Jewel Gem

Co Co Co

$'000 $'000 $'000

Non-current assets

Property, plant and equipment 720 60 70

Investments in group companies 185 100 –

905 160 70

Current assets 175 95 90

1,080 255 160

Equity

Share capital – $1 ordinary shares 400 100 50

Retained earnings 560 90 65

960 190 115

Current liabilities 120 65 45

1,080 255 160

QUESTIONS

You are also given the following information:

(a) Bauble Co acquired 60% of the share capital of Jewel Co on 1 January 20X2 and 10% of Gem on 1 January

20X3. The cost of the combinations were $142,000 and $43,000 respectively. Jewel Co acquired 70% of the

share capital of Gem Co on 1 January 20X3.

(b) The retained earnings balances of Jewel Co and Gem Co were:

1 January 20X2 1 January 20X3

$'000 $'000

Jewel Co 45 60

Gem Co 30 40

(d) It is the group's policy to value the non-controlling interest at acquisition at its proportionate share of the fair

value of the subsidiary's identifiable net assets.

Required

(a) Prepare the consolidated statement of financial position for Bauble Co and its subsidiaries as at 31

December 20X9.

(b) Calculate the total goodwill arising on acquisition if Bauble Co had acquired its investments in Jewel and

Gem on 1 January 20X3 at a cost of $142,000 and $43,000 respectively and Jewel Co had acquired its

investment in Gem Co on 1 January 20X2.

D5 Question with analysis: X Group 54 mins

X, a public limited company, acquired 100 million ordinary shares of $1 in Y , a public limited company on

1 April 20X6 when the retained earnings were $120 million. Y acquired 45 million ordinary shares of $1 in Z,

a public limited company, on 1 April 20X4 when the retained earnings were $10 million. On 1 April 20X4

there were no material differences between the book values and the fair values of Z. On 1 April 20X6, the

retained earnings of Z were $20 million.

Y acquired 30% of the ordinary shares of W , a limited company, on 1 April 20X6 for $50 million when the

retained earnings of W were $7 million. Y is in a position to exercise significant influence over W and there

were no material differences between the book values and the fair values of W at that date.

There had been no share issues since 1 April 20X4 by any of the group companies. The following statements

of financial position relate to the group companies as at 31 March 20X9.

X Y Z W

$m $m $m $m

Property, plant and equipment 900 100 30 40

Intangible assets 30

Investment in Y 320

Investment in Z 90

Investment in W 50

Net current assets 640 360 75 73

1,860 630 105 113

Share capital 360 150 50 80

Share premium 250 120 10 6

Retained earnings 1,050 210 30 17

1,660 480 90 103

Non-current liabilities 200 150 15 10

1,860 630 105 113

What

percentage?

What is the

status?

What is the

status? What

does X

control?

QUESTIONS

(i) The following fair value table sets out the book values of certain assets and liabilities of the

group companies together with any accounting policy adjustments to ensure consistent group

policies at 1 April 20X6.

Book value Accounting Fair value Value after

policy adj. adj. adjustments

$m $m $m $m $m $m $m $m

Y Z Y Z Y Z Y Z

Property, plant and equipment 90 20 30 10 120 30

Intangible non-current assets 30 (30) -

Inventory 20 12 2 (8) (5) 14 7

Allowance for receivables (15) (9) (24)

These values had not been incorporated into the financial records. The group companies have

consistent accounting policies at 31 March 20X9, apart from the non-current intangible assets in Y's

books.

(ii) During the year ended 31 March 20X9, Z had sold goods to X and Y . At 31 March 20X9, there were

$44 million of these goods in the inventory of X and $16 million in the inventory of Y. Z had made a

profit of 25% on selling price on the goods.

(iii) On 1 June 20X7, an amount of $36 million was received by Y from an arbitration award against Q.

This receipt was secured as a result of an action against Q prior to Y's acquisition by X but was not

included in the assets of Y at 1 April 20X6.

(iv) The group writes goodwill off immediately to reserves. However it has decided to bring its accounting policies into

line with IFRSs and not local accounting policies. Thus goodwill will be capitalised under IFRS 3 Business

combinations. At 31 March 20X6, property, plant and equipment had a remaining useful life of 10 years.

(v) It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's identifiable net assets.

Required

(a) Prepare a consolidated statement of financial position as at 31 March 20X9 for the X group. (25 marks)

(b) Explain how the change in accounting policy as regards goodwill should be dealt with in the financial

statements of the X group under International Financial Reporting Standards. (5 marks)

All calculations should be rounded to the nearest million dollars. (Total = 30 marks)

Straightforward

intragroup

trading.

A contingent

asset?

Use tables to

work out total

values for X and

Z at acquisition

and at the end

of the reporting

period.

QUESTIONS

D6 Glove 45 mins

ACR, 6/07, amended

The following draft statements of financial position relate to Glove, Body and Fit, all public limited companies, as at

31 May 20X7.

Glove Body Fit

$m $m $m

Assets

Non-current assets

Property, plant and equipment 260 20 26

Investment in Body 60

Investment in Fit 30

Available for sale investments 10

Current assets 65 29 20

Total assets 395 79 46

Ordinary shares 150 40 20

Other reserves 30 5 8

Retained earnings 135 25 10

Total equity 315 70 38

Non-current liabilities 45 2 3

Current liabilities 35 7 5

Total liabilities 80 9 8

Total equity and liabilities 395 79 46

The following information is relevant to the preparation of the group financial statements.

(a) Glove acquired 80% of the ordinary shares of Body on 1 June 20X5 when Body's other reserves were $4

million and retained earnings were $10 million. The fair value of the net assets of Body was $60 million at 1

June 20X5. Body acquired 70% of the ordinary shares of Fit on 1 June 20X5 when the other reserves of Fit

were $8 million and retained earnings were $6 million. The fair value of the net assets of Fit at that date was

$39 million. The excess of the fair value over the net assets of Body and Fit is due to an increase in the value

of non-depreciable land of the companies. There have been no issues of ordinary shares in the group since 1

June 20X5.

(b) Body owns several trade names which are highly regarded in the market place. Body has invested a

significant amount in marketing these trade names and has expensed the costs. None of the trade names

has been acquired externally and, therefore, the costs have not been capitalised in the statement of financial

position of Body. On the acquisition of Body by Glove, a firm of valuation experts valued the trade names at

$5 million and this valuation had been taken into account by Glove when offering $60 million for the

investment in Body. The valuation of the trade names is not included in the fair value of the net assets of

Body above. Group policy is to amortise intangible assets over ten years.

unrecognised actuarial gains and losses. The following information relates to the retirement plan.

31 May 20X6 31 May 20X7

$m $m

Unrecognised actuarial losses to date 3 5

Present value of obligation 20 26

Fair value of plan assets 16 20

The expected average remaining working lives of the employees in the plan is ten years at 31 May 20X6 and

31 May 20X7. Glove wishes to defer actuarial gains and losses by using the 'corridor' approach. The defined

benefit liability is included in non-current liabilities.

QUESTIONS

(d) Glove has issued 30,000 convertible bonds with a three year term repayable at par. The bonds were issued

at par with a face value of $1,000 per bond. Interest is payable annually in arrears at a nominal interest rate

of 6%. Each bond can be converted at any time up to maturity into 300 shares of Glove. The bonds were

issued on 1 June 20X6 when the market interest rate for similar debt without the conversion option was 8%

per annum. Glove does not wish to account for the bonds at fair value through profit or loss. The interest

has been paid and accounted for in the financial statements. The bonds have been included in non-current

liabilities at their face value of $30 million and no bonds were converted in the current financial year.

(e) On 31 May 20X7, Glove acquired plant with a fair value of $6 million. In exchange for the plant, the supplier

received land, which was currently not in use, from Glove. The land had a carrying value of $4 million and an

open market value of $7 million. In the financial statements at 31 May 20X7, Glove had made a transfer of

$4 million from land to plant in respect of this transaction.

(f) Goodwill has been tested for impairment at 31 May 20X6 and 31 May 20X7 and no impairment loss

occurred.

(g) It is the group's policy to value the non-controlling interest at acquisition at its proportionate share of the fair

value of the subsidiary's identifiable net assets.

(h) Ignore any taxation effects.

Required

Prepare the consolidated statement of financial position of the Glove Group at 31 May 20X7 in accordance with

International Financial Reporting Standards (IFRS).

(25 marks)

D7 Largo 54 mins

ACR, 12/03, amended

The following draft statements of financial position relate to Largo, a public limited company, Fusion, a public

limited company and Spine, a public limited company, as at 30 November 20X4:

Largo Fusion Spine

$m $m $m

Non-current assets

Property, plant and equipment 329 185 64

Investment in Spine 50

Investment in Micro 11

340 235 64

Current assets 120 58 40

460 293 104

Equity

Called up ordinary share capital of $1 280 110 50

Share premium account 30 20 10

Retained earnings 120 138 35

430 268 95

Non-current liabilities

Deferred tax liability 20 20 5

Current liabilities 10 5 4

460 293 104

The following information is relevant to the preparation of the group financial statements:

(a) Largo acquired ninety per cent of the ordinary share capital of Fusion and twenty-six per cent of the ordinary

share capital of Spine on 1 December 20X3 in a share for share exchange when the retained earnings were

QUESTIONS

Fusion $136 million and Spine $30 million. The fair value of the net assets at 1 December 20X3 was Largo

$650 million, Fusion $330 million and Spine $128 million. Any increase in the consolidated fair value of the

net assets over the carrying value is deemed to be attributable to property held by the companies.

The share for share exchange on the purchase of Fusion and Spine on 1 December 20X3 has not yet been

recorded in Largo's books. Largo issued 150m of its own shares to purchase Fusion and 30m to purchase

Spine. There have been no new issue of shares since 1 December 20X3. On 1 December 20X3, before the

share for share exchange, the market capitalisation of the companies was $644 million: Largo; $310 million:

Fusion; and $130 million: Spine.

(b) In arriving at the fair value of net assets acquired at 1 December 20X3, Largo has not accounted for the

deferred tax arising on the increase in the value of the property of both Fusion and Spine. The deferred tax

arising on the fair valuation of the property was Fusion $15 million and Spine $9 million.

when the retained earnings reserve of Spine was $10 million. The fair value of the net assets at that date was

$80 million with the increase in fair value attributable to property held by the companies. Property is

depreciated within the group at five per cent per annum.

(d) Largo purchased a forty per cent interest in Micro, a limited liability investment company on 1 December

20X3. The only asset of the company is a portfolio of investments which is held for trading purposes. The

stake in Micro was purchased for cash for $11 million. The carrying value of the net assets of Micro on 1

December 20X3 was $18 million and their fair value was $20 million. On 30 November 20X4, the fair value

of the net assets was $24 million. Largo exercises significant influence over Micro. Micro values the

portfolio on a 'mark to market' basis.

(e) Fusion has included a brand name in its property, plant and equipment at the cost of $9 million. The brand

earnings can be separately identified and could be sold separately from the rest of the business. The fair

value of the brand at 30 November 20X4 was $7 million. The fair value of the brand at the time of Fusion's

acquisition by Largo was $9 million.

(f) It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's identifiable net assets.

Required

Prepare the consolidated statement of financial position of the Largo Group at the year ended 30 November 20X4 in

accordance with International Financial Reporting Standards. (30 marks)

D8 Case study question: Rod 90 mins

The following draft statements of financial position relate to Rod, a public limited company, Reel, a public limited

company, and Line, a public limited company, as at 30 November 20X3.

Rod Reel Line

$m $m $m

Non-current assets

Property, plant and equipment 1,230 505 256

Investment in Reel 640

Investment in Line 160 100

2,030 605 256

Current assets

Inventory 300 135 65

Trade receivables 240 105 49

Cash at bank and in hand 90 50 80

630 290 194

Total assets 2,660 895 450

QUESTIONS

Rod Reel Line

$m $m $m

Equity

Share capital 1,500 500 200

Share premium account 300 100 50

Revaluation surplus 70

Retained earnings 625 200 60

2,425 800 380

Non-current liabilities 135 25 20

Current liabilities 100 70 50

Total equity and liabilities 2,660 895 450

The following information is relevant to the preparation of the group financial statements.

(a) Rod had acquired eighty per cent of the ordinary share capital of Reel on 1 December 20X0 when the

retained earnings were $100 million. The fair value of the net assets of Reel was $710 million at 1 December

20X0. Any fair value adjustment related to net current assets and these net current assets had been realised

by 30 November 20X3. There had been no new issues of shares in the group since the current group

structure was created.

(b) Rod and Reel had acquired their holdings in Line on the same date as part of an attempt to mask the true

ownership of Line. Rod acquired forty per cent and Reel acquired twenty-five per cent of the ordinary share

capital of Line on 1 December 20X1. The retained earnings of Line on that date were $50 million and those

of Reel were $150 million. There was no revaluation surplus in the books of Line on 1 December 20X1. The

fair values of the net assets of Line at December 20X1 were not materially different from their carrying

values.

development of products. These costs were formerly written off to the income statement as incurred but

then reinstated when the related products were brought into commercial use. The reinstated costs are

shown as 'development inventories'. The costs do not meet the criteria in IAS 38 Intangible assets for

classification as intangibles and it is unlikely that the net cash inflows from these products will be in excess

of the development costs. In the current year, Reel has included $20 million of these costs in inventory. Of

these costs $5 million relates to expenditure on a product written off in periods prior to 1 December 20X0.

Commercial sales of this product had commenced during the current period. The accountant now wishes to

ensure that the financial statements comply strictly with IAS/IFRS as regards this matter.

(d) Reel had purchased a significant amount of new production equipment during the year. The cost before

trade discount of this equipment was $50 million. The trade discount of $6 million was taken to the income

statement. Depreciation is charged on the straight line basis over a six year period.

(e) The policy of the group is now to state property, plant and equipment at depreciated historical cost. The

group changed from the revaluation model to the cost model under IAS 16 Property, plant and equipment in

the year ended 30 November 20X3 and restated all of its assets to historical cost in that year except for the

property, plant and equipment of Line which had been revalued by the directors of Line 1 December 20X2.

The values were incorporated in the financial records creating revaluation surplus of $70 million. The

property, plant and equipment of Line were originally purchased on December 20X1 at a cost of $300

million. The assets are depreciated over six years on the straight line basis. The group does not make an

annual transfer from revaluation reserves to retained earnings in respect of the excess depreciation charged

on revalued property, plant and equipment. There were no additions or disposals of the property, plant and

equipment of Line for the two years ended 30 November 20X3.

(f) It is the group's policy to value the non-controlling interest at acquisition at its proportionate share of the

subsidiary's identifiable net assets.

QUESTIONS

(g) During the year the directors of Rod decided to form a defined benefit pension scheme for the employees of

the parent and contributed cash to it of $100 million. The following details relate to the scheme at 30

November 20X3.

Present value of obligation 130

Fair value of plan assets 125

Current service cost 110

Interest cost – scheme liabilities 20

Expected return on pension scheme assets 10

The only entry in the financial statements made to date is in respect of the cash contribution which has been

included in Rod's trade receivables. The directors have been uncertain as how to deal with the above

pension scheme in the consolidated financial statements because of the significance of the potential increase

in the charge to the income statement relating to the pension scheme. They wish to recognise immediately

any actuarial gain in profit or loss.

Required

(a) Show how the defined benefit pension scheme should be dealt with in the consolidated financial statements.

(5 marks)

(b) Prepare a consolidated statement of financial position of the Rod Group for the year ended 30 November

20X3 in accordance with the standards of the International Accounting Standards Board. (22 marks)

year ended 30 November 20X4. The director has summarised these points as follows.

(i) Restructuring of the group. A formal announcement for a restructuring of the group was made after

the year end on 5 December 20X4. A provision has not been made in the financial statements as a

public issue of shares is being planned and the company does not wish to lower the reported profits.

Prior to the year end, the company has sold certain plant and issued redundancy notices to some

employees in anticipation of the formal commencement of the restructuring. The company prepared

a formal plan for the restructuring which was approved by the board and communicated to the trade

union representatives prior to the year end. The directors estimate the cost of the restructuring to be

$60 million, and it could take up to two years to complete the restructuring. The estimated cost of

restructuring includes $10 million for retraining and relocating existing employees, and the directors

feel that costs of $20 million (of which $5 million is relocation expenses) will have been incurred by

the time the financial statements are approved. (7 marks)

(ii) Fine for illegal receipt of a state subsidy. The company was fined on 10 October 20X4 for the

receipt of state subsidies that were contrary to a supra-national trade agreement. The subsidies were

used to offset trading losses in previous years. Rod has to repay to the government $300 million plus

interest of $160 million. The total repayment has been treated as an intangible asset which is being

amortised over twenty years with a full year's charge in the current year. (5 marks)

The financial director wishes to prepare a report for submission to the Board of Directors which discusses

the above accounting treatment of the key points in the financial statements.

(d) Rod spends many millions of pounds on research in innovative areas. Often the research and development

expenditure does not provide a revenue stream for many years. The company has gained a significant

expertise in this field and is frustrated by the fact that the value which is being created is not shown in the

statement of financial position, but the cost of the innovation is charged to profit or loss. The knowledge

gained by the company is not reported in the financial statements.

Advise the directors on the current problems of reporting financial performance in the case of a 'knowledge

led' company such as Rod. (8 marks)

(e) In many organisations, bonus payments related to annual profits form a significant part of the total

remuneration of all senior managers, not just the top few managers. The directors of Rod feel that the chief

QUESTIONS

internal auditor makes a significant contribution to the company's profitability, and should therefore receive

a bonus based on profit.

Advise the directors as to whether this is appropriate. (3 marks)

(Total = 50 marks)

D9 Case study question: Exotic 90 mins

The Exotic Group carries on business as a distributor of warehouse equipment and importer of fruit into the

country. Exotic was incorporated in 20X1 to distribute warehouse equipment. It diversified its activities during 20X3

to include the import and distribution of fruit, and expanded its operations by the acquisition of shares in Melon in

20X5 and in Kiwi in 20X7.

Accounts for all companies are made up to 31 December.

The draft income statements for Exotic, Melon and Kiwi for the year ended 31 December 20X9 are as follows.

Exotic Melon Kiwi

$'000 $'000 $'000

Revenue 45,600 24,700 22,800

Cost of sales 18,050 5,463 5,320

Gross profit 27,550 19,237 17,480

Distribution costs 3,325 2,137 1,900

Administrative expenses 3,475 950 1,900

Finance costs 325 – –

Profit before tax 20,425 16,150 13,680

Income tax expense 8,300 5,390 4,241

Profit for the year 12,125 10,760 9,439

Dividends paid and declared for the period 9,500 – –

The draft statements of financial position as at 31 December 20X9 are as follows.

Exotic Melon Kiwi

$'000 $'000 $'000

Non-current assets

Property, plant and equipment (NBV) 35,483 24,273 13,063

Investments

Shares in Melon 6,650

Shares in Kiwi 3,800

42,133 28,073 13,063

Current assets 1,568 9,025 8,883

43,701 37,098 21,946

Equity

$1 ordinary shares 8,000 3,000 2,000

Retained earnings 22,638 24,075 19,898

30,638 27,075 21,898

Current liabilities 13,063 10,023 48

43,701 37,098 21,946

QUESTIONS

The following information is available relating to Exotic, Melon and Kiwi.

(a) On 1 January 20X5 Exotic acquired 2,700,000 $1 ordinary shares in Melon for $6,650,000 at which date

there was a credit balance on the retained earnings of Melon of $1,425,000. No shares have been issued by

Melon since Exotic acquired its interest.

(b) On 1 January 20X7 Melon acquired 1,600,000 $1 ordinary shares in Kiwi for $3,800,000 at which date there

was a credit balance on the retained earnings of Kiwi of $950,000. No shares have been issued by Kiwi since

Melon acquired its interest.

$75,000 of these goods were in inventories at 31 December 20X9.

(d) During 20X9, Melon had made intragroup sales to Exotic of $260,000 making a profit of 331/3% on cost and

$60,000 of these goods were in inventories at 31 December 20X9.

(e) On 1 November 20X9 Exotic sold warehouse equipment to Melon for $240,000 from inventories. Melon has

included this equipment in its property, plant and equipment. The equipment had been purchased on credit

by Exotic for $200,000 in October 20X9 and this amount is included in its current liabilities as at 31

December 20X9.

(f) Melon charges depreciation on its warehouse equipment at 20% on cost. It is company policy to charge a

full year's depreciation in the year of acquisition to be included in the cost of sales.

(g) An impairment test conducted at the year end did not reveal any impairment losses.

(h) It is the group's policy to value the non-controlling interest at fair value at the date of acquisition. The fair

value of the non-controlling interests in Melon on 1 January 20X5 was $500,000. The fair value of the 28%

non-controlling interest in Kiwi on 1 January 20X7 was $900,000.

Required

Prepare for the Exotic Group:

(a) A consolidated income statement for the year ended 31 December 20X9 (16 marks)

(b) A consolidated statement of financial position as at that date (12 marks)

and merged Zest Software with its existing business. The directors feel that the goodwill ($10 million)

arising on the purchase has an indefinite economic life. Additionally, Exotic acquired a 50% interest in a joint

venture which gives rise to a net liability of $3 million. The reason for this liability is the fact that the negative

goodwill ($6 million) arising on the acquisition of the interest in the joint venture was deducted from the

interest in the net assets ($3 million). Exotic is proposing to net the liability of $3 million against a loan made

to the joint venture by Exotic of $5 million, and show the resultant balance in property, plant and equipment.

The equity method of accounting has been used to account for the interest in the joint venture. It is

proposed to treat negative goodwill in the same manner as the goodwill on the purchase of Zest Software

and leave it in the statement of financial position indefinitely. (11 marks)

(d) Advise the directors of Exotic on the issues relating to the reporting of environmental information in financial

statements and the current reporting requirements in the UK. (11 marks)

(Total = 50 marks)

QUESTIONS

D10 Preparation question: Part disposal

Angel Co bought 70% of the share capital of Shane Co for $120,000 on 1 January 20X6. At that date Shane Co's

retained earnings stood at $10,000.

The statements of financial position at 31 December 20X8, summarised income statements to that date and

movement on retained earnings are given below:

Angle Co Shane Co

$'000 $'000

STATEMENTS OF FINANCIAL POSITION

Non-current assets

Property, plant and equipment 200 80

Investment in Shane Co 120 –

320 80

Current assets 890 140

1,210 220

Equity

Share capital – $1 ordinary shares 500 100

Retained reserves 400 90

900 190

Current liabilities 310 30

1,210 220

SUMMARISED INCOME STATEMENTS

Profit before interest and tax 100 20

Income tax expense (40) (8)

Profit for the year 60 12

Other comprehensive income, net of tax 10 6

Total comprehensive income for the year 70 18

MOVEMENT IN RETAINED RESERVES

Balance at 31 December 20X7 330 72

Total comprehensive income for the year 70 18

Balance at 31 December 20X8 400 90

Angel Co sells one half of its holding in Shane Co for $120,000 on 30 June 20X8. At that date, the fair value of the

35% holding in Shane was slightly more at $130,000 due to a share price rise. The remaining holding is to be dealt

with as an associate. This does not represent a discontinued operation.

No entries have been made in the accounts for the above transaction.

Assume that profits accrue evenly throughout the year.

It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's identifiable net assets.

Required

Prepare the consolidated statement of financial position, statement of comprehensive income and a reconciliation of

movement in retained reserves for the year ended 31 December 20X8.

Ignore income taxes on the disposal. No impairment losses have been necessary to date.

QUESTIONS

D11 Preparation question: Plans

X, a public limited company, owns 100 per cent of companies Y and Z which are both public limited companies. The

X group operates in the telecommunications industry and the directors are considering two different plans to

restructure the group. The directors feel that the current group structure is not serving the best interests of the

shareholders and wish to explore possible alternative group structures.

The statements of financial position of X and its subsidiaries Y and Z at 31 May 20X1 are as follows:

X Y Z

$m $m $m

Property, plant and equipment 600 200 45

Cost of investment in Y 60

Cost of investment in Z 70

Net current assets 160 100 20

890 300 65

Share capital – ordinary shares of $1 120 60 40

Retained earnings 770 240 25

890 300 65

X acquired the investment in Z on 1 June 20W5 when the company retained earnings balance was $20 million. The

fair value of the net assets of Z on 1 June 20W5 was $60 million. Company Y was incorporated by X and has always

been a 100 per cent owned subsidiary. The fair value of the net assets of Y at 31 May 20X1 is $310 million and of Z

is $80 million. The fair values of the net current assets of both Y and Z are approximately the same as their book

values.

The directors are unsure as to the impact or implications that the following plans are likely to have on the individual

accounts of the companies and the group accounts.

Local companies legislation requires that the amount at which share capital is recorded is dictated by the nominal

value of the shares issued and if the value of the consideration received exceeds that amount, the excess is

recorded in the share premium account. Shares cannot be issued at a discount. In the case of a share for share

exchange, the value of the consideration can be deemed to be the book value of the investment exchanged.

It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's identifiable net assets.

The two different plans to restructure the group are as follows.

Plan 1

Y is to purchase the whole of X's investment in Z. The directors are undecided as to whether the purchase

consideration should be 50 million $1 ordinary shares of Y or a cash amount of $75 million.

Plan 2

The assets and trade of Z are to be transferred to Y. Company Z would initially become a non trading company. The

assets and trade are to be transferred at their book value. The consideration for the transfer will be $60 million

which will be left outstanding on the intercompany account between Y and Z.

Required

Discuss the key considerations and the accounting implications of the above plans for the X group. Your answer

should show the potential impact on the individual accounts of X, Y and Z and the group accounts after each plan

has been implemented.

QUESTIONS

D12 Ejoy 45 mins

ACR, 6/06, amended

Ejoy, a public limited company, has acquired two subsidiaries. The details of the acquisitions are as follows:

Ordinary Fair value Ordinary

share Reserves of net share capital

capital at assets at Cost of of $1

Company Date of acquisition of $1 acquisition acquisition investment acquired

$m $m $m $m $m

Zbay 1 June 20X4 200 170 600 520 160

Tbay 1 December 20X5 120 80 310 216 72

The draft income statements for the year ended 31 May 20X6 are:

Ejoy Zbay Tbay

$m $m $m

Revenue 2,500 1,500 800

Cost of sales (1,800) (1,200) (600)

Gross profit 700 300 200

Other income 70 10 –

Distribution costs (130) (120) (70)

Administrative expenses (100) (90) (60)

Finance costs (50) (40) (20)

Profit before tax 490 60 50

Income tax expense (200) (26) (20)

Profit for the year 290 34 30

Profit for year 31 May 20X5 190 20 15

The following information is relevant to the preparation of the group financial statements.

(a) Tbay was acquired exclusively with a view to sale and at 31 May 20X6 meets the criteria of being a disposal

group. The fair value of Tbay at 31 May 20X6 is $300 million and the estimated selling costs of the

shareholding in Tbay are $5 million.

(b) Ejoy entered into a joint venture with another company on 31 May 20X6. The joint venture is a limited

company and Ejoy has contributed assets at fair value of $20 million (carrying value $14 million). Each party

will hold five million ordinary shares of $1 in the joint venture. The gain on the disposal of the assets ($6

million) to the joint venture has been included in 'other income'.

Tbay paid a dividend of $40 million. The receipt of the dividend is included in other income in the income

statement of Ejoy. Since the acquisition of Zbay and Tbay, there have been no further dividend payments by

these companies.

(d) Zbay has a loan asset which was carried at $60 million at 1 June 20X5. The loan's effective interest rate is

six per cent. On 1 June 20X5 the company felt that because of the borrower's financial problems, it would

receive $20 million in approximately two years time, on 31 May 20X7. At 31 May 20X6, the company still

expects to receive the same amount on the same date. The loan asset is classified as 'loans and receivables'.

(e) On 1 June 20X5, Ejoy purchased a five year bond with a principal amount of $50 million and a fixed interest

rate of five per cent which was the current market rate. The bond is classified as an 'available for sale'

financial asset. Because of the size of the investment, Ejoy has entered into a floating interest rate swap. Ejoy

has designated the swap as a fair value hedge of the bond. At 31 May 20X6, market interest rates were six

per cent. As a result, the fair value of the bond has decreased to $48·3 million. Ejoy has received $0·5 million

in net interest payments on the swap at 31 May 20X6 and the fair value hedge has been 100% effective in

QUESTIONS

the period, and you should assume any gain/loss on the hedge is the same as the loss/gain on the bond. No

entries have been made in the income statement to account for the bond or the hedge.

(f) No impairment of the goodwill arising on the acquisition of Zbay had occurred at 1 June 20X5. The

recoverable amount of Zbay was $630 million and that of Tbay was $290 million at 31 May 20X6.

Impairment losses on goodwill are charged to cost of sales.

(g) Assume that profits accrue evenly throughout the year and ignore any taxation effects.

(h) It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's identifiable net assets.

Required

Prepare a consolidated income statement for the Ejoy Group for the year ended 31 May 20X6 in accordance with

International Financial Reporting Standards.

(25 marks)

D13 Case study question: Base Group 90 mins

(a) Base, a public limited company, acquired two subsidiaries, Zero and Black, both public limited companies,

on 1 June 20X1. The details of the acquisitions at that date are as follows.

Ordinary Fair value Ordinary

Share capital of net assets Cost of share capital

Subsidiary of $1 Reserves at acquisition Investment acquired

$m $m $m $m $m

Zero 350 250 770 600 250

Black 200 150 400 270 120

The draft income statements for the year ended 31 May 20X3 are:

Base Zero Black

$m $m $m

Revenue 3,000 2,300 600

Cost of sales (2,000) (1,600) (300)

Gross profit 1,000 700 300

Distribution costs (240) (230) (120)

Administrative expenses (200) (220) (80)

Finance cost: interest expense (20) (10) (12)

Investment income receivable

(including intragroup dividends paid May 20X3) 100 – –

Profit before tax 640 240 88

Income tax expense (130) (80) (36)

Profit for the year 510 160 52

Reserves 1 June 20X2 1,400 400 190

The following information is relevant to the preparation of the group financial statements.

(i) On 1 December 20X2, Base sold 50 million $1 ordinary shares in Zero for $155 million. The only

accounting entry made by Base was to record the receipt of the cash consideration in the cash

account and in a suspense account.

(ii) The fair value of Base's investment in Zero on 1 December 20X2 (just after the disposal) was $650m.

The fair value of Base's investment in Black on 1 March 20X3 (just after the disposal) was $240m.

(iii) On 1 March 20X3, Base sold 40 million $1 ordinary shares in Black for $2.65 per share. Only the

cash receipt has been recorded in the cash account and a suspense account.

QUESTIONS

(iv) Black had sold $150 million of goods to Base on 30 April 20X3. There was no opening inventory of

intragroup goods but the closing inventories of these goods in Base's financial statements was $90

million. The profit on these goods was 30% on selling price.

(v) Base has implemented in full IAS 19 Employee benefits in its financial statements. The directors have

included the following amounts in the figure for cost of sales.

Current service cost 5

Actuarial deficit on obligation 4

Interest cost 3

Actuarial gain on assets (2)

Charged to cost of sales 10

The accounting policy in respect of these accounts is recognition in profit or loss using the 10%

corridor approach. The fair value of the plan assets at 31 May 20X2 was $48 million and the present

value of the defined benefit obligation was $54 million at that date. The net cumulative unrecognised

actuarial loss at 31 May 20X2 was $3 million and the expected remaining working lives of the

employees was ten years.

(vi) Base issued on 1 June 20X2 a redeemable debt instrument at a cost of $20 million. The debt is

repayable in four years at $24.7 million. Base has included the redeemable debt in its statement of

financial position at $20 million. The effective interest cost on the bond is 5.4%.

(vii) Base had carried out work for a group of companies (Drum Group) during the financial year to 31

May 20X2. Base had accepted one million share options of the Drum Group in full settlement of the

debt owed to them. At 1 June 20X2 these share options were valued at $3 million which was the

value of the outstanding debt. The following table gives the prices of these shares and the fair value

of the option.

Share price Fair value of option

31 May 20X2 $13 $3

31 May 20X3 $10 $1

The options had not been exercised during the year and remained at $3 million in the statement of

financial position of Base. The options can be exercised at any time after 31 May 20X5 for $8·50 per

share.

(viii) Base had paid a dividend of $50 million in the year and Zero had paid a dividend of $70 million in

May 20X3.

(iv) The post acquisition profit or loss effect of the fair value adjustments has been incorporated into the

subsidiaries' records. Goodwill is reviewed for impairment annually. At 1 June 20X2 the group had

recognised impairment losses of $10 million relating to Zero and $6 million relating to Black. No

further impairment losses were necessary during the year ending 31 May 20X3.

(x) Ignore the tax implications of any capital gains made by the Group and assume profits accrue evenly

throughout the year.

Required

Prepare a consolidated income statement for the Base Group for the year ended 31 May 20X3 in accordance

with International Accounting Standards/International Financial Reporting Standards.

Show separately any required adjustment to the parent's equity in the group statement of financial position

on the disposal of shares in subsidiaries. (30 marks)

(b) A small but material part of the revenue of the group results mainly from the sale of software under licences

which provide customers with the right to use these products. Base has stated that it follows emerging best

practice in terms of its revenue recognition policy which it regards as US GAAP. It has stated that the

International Accounting Standards Board has been slow in revising its current standards and the company

QUESTIONS

has therefore adopted the US standard SAB101 Revenue Recognition in Financial Statements. The group

policy is as follows.

(i) If services are essential to the functioning of the software (for example setting up the software) and

the payment terms are linked, the revenue for both software and services is recognised on

acceptance of the contract.

(ii) Fees from the development of customised software, where service support is incidental to its

functioning, are recognised at the completion of the contract.

Required

Discuss whether this policy is acceptable. (No knowledge of US GAAP is required.) (5 marks)

users' needs. They have reviewed the published financial statements and have realised that there is very little

information about the corporate environmental governance. Base discloses the following environmental

information in the financial statements.

(i) The highest radiation dosage to a member of the public

(ii) Total acid gas emissions and global warming potential

Contribution to clean air through emissions savings

Required

(i) Explain the factors which provide encouragement to companies to disclose social and environmental

information in their financial statements, briefly discussing whether the content of such disclosure

should be at the company's discretion. (9 marks)

(ii) Describe how the current disclosure by the Base Group of 'corporate environmental governance'

could be extended and improved. (6 marks)

(Total = 50 marks)

D14 Preparation question: Foreign operation

BPP Note. In this question the proformas are given to you to help you get used to setting out your answer. You

may wish to transfer them to a separate sheet, or alternatively use a separate sheet for your workings only.

Standard Co acquired 80% of Odense SA for $520,000 on 1 January 20X4 when the retained earnings of Odense

were 2,100,000 Danish Krone.

An impairment test conducted at the year end revealed impairment losses of 168,000 Danish Krone relating to

Odense's recognised goodwill. No impairment losses had previously been recognised.

The translation differences in the consolidated financial statements at 31 December 20X5 relating to the translation

of the financial statements of Odense (excluding goodwill) were $27,000. Retained earnings of Odense in Odense's

separate financial statements in the post-acquisition period to 31 December 20X5 as translated amounted to

$138,000. The dividends charged to retained earnings in 20X6 were paid on 31 December 20X6.

It is the group's policy to value the non-controlling interest at acquisition at its proportionate share of the fair value

of the subsidiary's net assets.

Exchange rates were as follows:

Kr to $1

1 January 20X4 9.4

31 December 20X5 8.8

31 December 20X6 8.1

Average 20X6 8.4

QUESTIONS

Required

Prepare the consolidated statement of financial position, statement of comprehensive income and statement of

changes in equity extract for retained earnings of the Standard Group for the year ended 31 December 20X6.

Set out your answer below, using a separate sheet for workings.

STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER 20X6

Standard Odense Rate Odense Consol

$'000 Kr'000 $’000 $’000

Property, plant and equipment 1,285 4,400 8.1 543

Investment in Odense 520 – –

Goodwill – – –

1,805 4,400 543

Current assets 410 2,000 8.1 247

2,215 6,400 790

Share capital 500 1,000 9.4 106

Retained earnings 1,115

Pre-acquisition 2,100 9.4 224

Post-acquisition Bal 324

– –

1,615 5,300 654

Non-controlling interest

Loans 200 300 8.1 37

Current liabilities 400 800 8.1 99

600 1,100 136

2,215 6,400 790

STATEMENT OF COMPREHENSIVE INCOME FOR YEAR ENDED 31 DECEMBER 20X6

Standard Odense Rate Odense Consol

$'000 Kr'000 $’000 $’000

Revenue 1,125 5,200 8.4 619

Cost of sales (410) (2,300) 8.4 (274)

Gross profit 715 2,900 345

Other expenses (180) (910) 8.4 (108)

Impairment loss – – –

Dividend from Odense 40

Profit before tax 575 1,990 237

Income tax expense (180) (640) 8.4 (76)

Profit for the year 395 1,350 161

Other comprehensive income for the year

Exchange differences on translation of foreign

operation

–

Total comprehensive income for the year 395 1,350

Profit attributable to:

Owners of the parent

Non-controlling interest

Total comprehensive income attributable

Owners of the parent

Non-controlling interest

QUESTIONS

STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR (EXTRACT FOR RETAINED EARNINGS)

Standard Odense

$'000 Kr'000

Balance at 1 Janaury 20X6 915 3,355

Dividends paid (195) (405)

Total comprehensive income for the year 395 1,350

Balance at 31 December 20X6 1,115 4,300

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR YEAR ENDED 31 DECEMBER 20X6 (EXTRACTS)

Retained

Earnings

$'000

Balance at 31 December 20X5 1,065

Dividends paid

Total comprehensive income for the year

Balance at 31 December 20X6

D15 Hyperinflation 45 mins

IAS 21 The effects of changes in foreign exchange rates states that where an entity has foreign operations, such as

overseas subsidiaries, branches, joint ventures or associates, it should determine the functional currency of that

foreign operation. The functional currency is the currency of the primary economic environment in which the entity

operates. Where a foreign operation has a functional currency that is different from that of the reporting entity, it

will be necessary to translate the financial statements of the foreign operation into the currency in which the

reporting entity presents its financial statements.

However, where the foreign operation is located in a country with a high rate of inflation, the translation process

may not be sufficient to present fairly the financial position of the foreign operation. Some adjustment for inflation

should be undertaken to the local currency financial statements before translation. IAS 29 Financial reporting in

hyper-inflationary economies deals with this issue.

Required

(a) Explain the factors which should be taken into account in determining whether or not the functional currency

of a foreign operation is the same as that of its parent. (10 marks)

(b) Discuss the effects that hyper-inflation can have on the usefulness of financial statements, and explain how

entities with subsidiaries that are located in hyper-inflationary economies should reflect this fact in their

consolidated financial statements. You should restrict your discussion to financial statements that have been

prepared under the historical cost convention. (7 marks)

The principal assets of this subsidiary were a chain of hotels. The value of the hotels on this date was 20

million effados. The rate of inflation for the period 30 November 20X3 to 30 November 20X7 has been

significantly high. The following inflation is relevant to the economy of the foreign country.

Consumer price

Effados in exchange for index in foreign

$ country

30 November 20X3 1.34 100

30 November 20X7 17.87 3,254

There is no depreciation charged in the financial statements as the hotels are maintained to a high standard.

QUESTIONS

Required

(i) Calculate the value at which the hotels would be included in the group financial statements of Gold Co

on the following dates.

(1) At 30 November 20X3 and 30 November 20X7.

(2) At 30 November 20X7 after adjusting for current price levels. (4 marks)

(ii) Discuss the results of the valuations of the hotels, commenting on the validity of the different bases

outlined above. (4 marks)

(Total = 25 marks)

D16 Question with helping hands: Zetec 45 mins

ACR, 12/01, amended

Zetec, a public limited company, owns 80% of the ordinary share capital of Aztec, a public limited company which

is a foreign operation. Zetec acquired Aztec on 1 November 20X1 for $44 million when the retained earnings of

Aztec were 98 million Krams (Kr). Aztec has not issued any share capital, nor revalued any assets since acquisition.

The following financial statements relate to Zetec and Aztec.

STATEMENT OF FINANCIAL POSITION AT 31 OCTOBER 20X2

Zetec Aztec

$m Kr'm

Non-current assets

Tangible assets (including investments) 180 380

Investment in Aztec 44

Intangible assets 12

Net current assets 146 116

370 508

Equity

Ordinary shares of $1/1Kr 65 48

Share premium 70 18

Revaluation surplus – 12

Retained earnings 161 110

296 188

Non-current liabilities 74 320

370 508

INCOME STATEMENTS FOR THE YEAR ENDED 31 OCTOBER 20X2

Zetec Aztec

$m Kr'm

Revenue 325 250

Cost of sales (189) (120)

Gross profit 136 130

Distribution and administrative expenses (84) (46)

Interest payable (2) (20)

Profit before taxation 50 64

Income tax expense (15) (30)

Profit on ordinary activities after taxation 35 34

Extraordinary items – (22)

Retained profit for the year 35 12

QUESTIONS

The directors of Zetec have not previously had the responsibility for the preparation of consolidated financial

statements and are a little concerned as they understand that the financial statements of Aztec have been prepared

under local accounting standards which are inconsistent in some respects with International Financial Reporting

Standards (IFRS). They wish you to prepare the consolidated financial statements on their behalf and give you the

following information about the financial statements of Aztec.

(a) Under local accounting standards, Aztec had capitalised 'market shares' under intangible assets. Aztec

acquired a company in the year to 31 October 20X2 and merged its activities with its own. The acquisition

allowed the company to obtain a significant share of a specific market and, therefore, the excess of the price paid

over the fair value of assets is allocated to 'market shares'. The amount capitalised was Kr12 million and no

amortisation is charged on 'market shares'.

Further, under local accounting standards, from 1 November 20X1 Aztec classified revaluation gains and

losses and the effects of changes in accounting policies as extraordinary items. During the year, the

amounts classified as extraordinary items were as follows:

Revaluation loss

A non-current asset was physically damaged during the year and an amount of Kr9 million was written off its

carrying value as an impairment loss. This asset had been revalued on 31 October 20X0 and a credit of Kr6

million still remains in revaluation surplus in respect of this asset.

Changes in accounting policy

A change in the accounting policy for research expenditure has occurred during the period, in an attempt to

bring Aztec's policies into line with IFRS. Prior to November 20X1, research expenditure was capitalised and

amortised. The amount included in extraordinary items as a prior year adjustment was Kr13 million.

(b) The fair value of the net assets of Aztec at the date of acquisition was Kr240 million after taking into account

any changes necessary to align the financial statements with IFRS. The directors do not know how to

calculate the amount of goodwill. The increase in the fair value of Aztec over the net assets' carrying value

relates to a stock market portfolio (included in tangible assets) held by Aztec. The value of these investments

(in Krs) has not changed materially since acquisition.

20X2. The goods were received by Aztec on 30 June 20X2 as there had been a problem in the shipping of

the goods. Zetec made a profit of 20% on selling price on the components. All of the goods had been

utilised in the production process at 31 October 20X1 but none of the finished goods had been sold at that

date. Aztec had paid for the goods on 31 July 20X2. This was the only intragroup transaction in the year.

Foreign exchange gains/losses on such transactions are included in cost of sales by Aztec.

(d) The following exchange rates are relevant to the financial statements.

Krams to the $

31 October 20X0 5

1 November 20X1 6

1 April 20X2 5.3

31 May 20X2 5.2

30 June 20X2 5.1

31 July 20X2 4.2

31 October 20X2 4

Weighted average for year to 31 October 20X2 5

(e) A dividend of $4 million has been paid by Zetec during the financial year.

(f) It is the group's policy to value the non-controlling interest at its proportionate share of the subsidiary's

identifiable net assets.

QUESTIONS

Required

Prepare a consolidated income statement for the year ended 31 October 20X2 and a statement of financial position

as at that date for the Zetec group.

(Candidates should show any exchange gains or losses arising in the consolidated financial statements. A

statement of comprehensive income is not required, but you should calculate the exchange differences arsing in the

year that would be shown in the statement of comprehsive income.)

(25 marks)

Helping hands

1 Learn our format for translation of the income statement and statement of financial position

2 It is best to do workings for property, plant and equipment and net current assets on the face of the I/S and

statement of financial position with reference to supporting workings where appropriate.

3 Remember that goodwill is translated at the closing rate, which means that there will be an exchange

difference. The best and neatest way to calculate this difference is to set out your goodwill working as we

have done.

D17 Memo 58 mins

ACR, 6/04, amended

Memo, a public limited company, owns 75% of the ordinary share capital of Random, a public limited company

which is situated in a foreign country. Memo acquired Random on 1 May 20X3 for 120 million crowns (CR) when

the retained profits of Random were 80 million crowns. Random has not revalued its assets or issued any share

capital since its acquisition by Memo. The following financial statements relate to Memo and Random:

STATEMENTS OF FINANCIAL POSITION AT 30 APRIL 20X4

Memo Random

$m CRm

Property, plant and equipment 297 146

Investment in Random 48 –

Loan to Random 5 –

Current assets 355 102

705 248

Equity

Ordinary shares of $1/1CR 60 32

Share premium account 50 20

Retained earnings 360 95

470 147

Non current liabilities 30 41

Current liabilities 205 60

705 248

QUESTIONS

INCOME STATEMENTS FOR YEAR ENDED 30 APRIL 20X4

Memo Random

$ CRm

Revenue 200 142

Cost of sales (120) (96)

Gross profit 80 46

Distribution and administrative expenses (30) (20)

Profit from operations 50 26

Interest receivable 4 –

Interest payable – (2)

Profit before taxation 54 24

Income tax expense (20) (9)

Profit after taxation 34 15

The following information is relevant to the preparation of the consolidated financial statements of Memo.

(a) Goodwill is reviewed for impairment annually. At 30 April 20X4, the impairment loss on recognised goodwill

was CR4.2m.

(b) During the financial year Random has purchased raw materials from Memo and denominated the purchase

in crowns in its financial records. The details of the transaction are set out below:

Profit percentage

Date of transaction Purchase price on selling price

Raw materials 1 February 20X4 6 20%

At the year end, half of the raw materials purchased were still in the inventory of Random. The intragroup

transactions have not been eliminated from the financial statements and the goods were recorded by

Random at the exchange rate ruling on 1 February 20X4. A payment of $6 million was made to Memo when

the exchange rate was 2·2 crowns to $1. Any exchange gain or loss arising on the transaction is still held in

the current liabilities of Random.

May 20X4. Random had included the loan in non-current liabilities and had recorded it at the exchange rate

at 1 May 20X3.

(d) The fair value of the net assets of Random at the date of acquisition is to be assumed to be the same as the

carrying value.

(e) The functional currency of Random is the Crown.

(f) The following exchange rates are relevant to the financial statements:

Crowns to $

30 April/1 May 20X3 2·5

1 November 20X3 2·6

1 February 20X4 2·5

30 April 20X4 2·1

Average rate for year to 30 April 20X4 2·5

(g) Memo has paid a dividend of $8 million during the financial year and this is not included in the income

statement.

It is the group's policy to value the non-controlling interest at acquisition at its proportionate share of the fair

value of the subsidiary's identifiable net assets.

QUESTIONS

Required

Prepare a consolidated statement of comprehensive income for the year ended 30 April 20X4 and a consolidated

statement of financial position at that date in accordance with International Financial Reporting Standards.

(Candidates should round their calculations to the nearest $100,000.) (32 marks)

D18 Preparation question: Statement of cash flows

The summarised financial statements of Charmer for the year to 30 September 20X1, together with a comparative

statement of financial position, are as follows.

INCOME STATEMENT

$'000

Revenue 7,482

Cost of sales (4,284)

Gross profit 3,198

Operating expenses (1,479)

Interest payable (260)

Investment income 120

Profit before tax 1,579

Income tax expense (520)

Profit for the year 1,059

STATEMENT OF FINANCIAL POSITION AS AT:

30 September 20X1 30 September 20X0

Cost/

valuation

Depreciation

NBV

Cost/

valuation

Depreciation

NBV

$'000 $'000 $'000 $'000 $'000 $'000

Assets

Non-current assets

Property, plant and

equipment 3,568 1,224 2,344 3,020 1,112 1,908

Investment 690 nil

3,034 1,908

Current assets

Inventories 1,046 785

Trade receivables 935 824

Short term treasury bills 120 50

Bank nil 122

2,101 1,781

Total assets 5,135 3,689

QUESTIONS

30 September 20X1 30 September 20X0

Cost/

valuation

Depreciation

NBV

Cost/

valuation

Depreciation

NBV

$'000 $'000 $'000 $'000 $'000 $'000

Equity and liabilities

Equity

Ordinary shares of $1 each 1,400 1,000

Share premium 460 60

Revaluation surplus 90 40

Equity component of 10% convertible

loan stock nil 20

Retained earnings

Retained earnings b/d 192 177

Profit for period 1,059 65

Dividends paid (180) (50)

Retained earnings c/d 1,071 192

3,021 1,312

Non-current liabilities

Deferred tax liability 439 400

Government grants 275 200

10% convertible loan stock nil 380

714 980

Current liabilities

Trade payables 644 760

Interest payable 40 25

Provision for negligence claim nil 120

Current tax payable 480 367

Government grants 100 125

Overdraft 136 nil

1,400 1,397

Total equity and liabilities 5,135 3,689

The following information is relevant.

(a) Non-current assets

Property, plant and equipment is analysed as follows.

30 September 20X1 30 September 20X0

Cost/

valuation

Depreciation

NBV

Cost/

valuation

Depreciation

NBV

$'000 $'000 $'000 $'000 $'000 $'0

Land and

buildings 2,000 760 1,240 1,800 680 1,1

Plant 1,568 464 1,104 1,220 432 7

3,568 1,224 2,344 3,020 1,112 1,9

On 1 October 20X0 Charmer recorded an increase in the value of its land of $150,000.

During the year an item of plant that had cost $500,000 and had accumulated depreciation of $244,000 was

sold at a loss (included in cost of sales) of $86,000 on its carrying value.

(b) Government grant

A credit of $125,000 for the current year's amortisation of government grants has been included in cost of

sales.

QUESTIONS

The increase in the share capital during the year was due to the following events.

(i) On 1 January 20X1 there was a bonus issue (out of the revaluation reserve) of one bonus share for

every 10 shares held.

(ii) On 1 April 20X1 the 10% convertible loan stock holders exercised their right to convert to ordinary

shares. The terms of conversion were 25 ordinary shares of $1 each for each $100 of 10%

convertible loan stock.

(iii) The remaining increase in the ordinary shares was due to a stock market placement of shares for

cash on 12 August 20X1.

(d) Dividends

The directors of Charmer always declare a final dividend (if the company has made a profit) in the week

following the company's year end. It is paid after the annual general meeting of the shareholders.

(e) Provision for negligence claim

In June 20X1 Charmer made an out of court settlement of a negligence claim brought about by a former

employee. The dispute had been in progress for two years and Charmer had made provisions for the

potential liability in each of the two previous years. The unprovided amount of the claim at the time of

settlement was $30,000 and this was charged to operating expenses.

(f) Short term treasury bills

The treasury bills mature on 31 July 20X2.

(g) It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's identifiable net assets.

Required

Prepare a statement of cash flows for Charmer for the year to 30 September 20X1 in accordance with IAS 7

Statement of cash flows using the indirect method.

Notes to the statement of cash flows are not required.

D19 Preparation question: Consolidated statement of cash

flows

On 1 September 20X5 Swing Co acquired 70% of Slide Co for $5,000,000 comprising $1,000,000 cash and

1,500,000 $1 shares.

The statement of financial position of Slide Co at acquisition was as follows:

$'000

Property, plant and equipment 2,700

Inventories 1,600

Trade receivables 600

Cash 400

Trade payables (300)

Income tax payable (200)

4,800

QUESTIONS

The consolidated statement of financial position of Swing Co as at 31 December 20X5 was as follows:

20X5 20X4

Non-current assets $'000 $'000

Property, plant and equipment 35,500 25,000

Goodwill 1,400 –

36,900 25,000

Current assets

Inventories 16,000 10,000

Trade receivables 9,800 7,500

Cash 2,400 1,500

28,200 19,000

65,100 44,000

Equity attributable to owners of the parent

Share capital 12,300 10,000

Share premium 5,800 2,000

Revaluation surplus 500 –

Retained earnings 32,100 21,900

50,700 33,900

Non-controlling interest 1,600 –

52,300

33,900

Current liabilities

Trade payables 7,600 6,100

Income tax payable 5,200 4,000

12,800 10,100

65,100 44,000

The consolidated income statement of Swing Co for the year ended 31 December 20X5 was as follows:

20X5

$'000

Profit before tax 16,500

Income tax expense (5,200)

Profit for the year 11,300

Other comprehensive income

Revaluation surplus 500

Total comprehensive income for the year 11,800

Profit attributable to:

Owners of the parent 11,100

Non-controlling interest 200

11,300

Total comprehensive income for the year attributable to

Parent 11,450

Non-controlling interest 200 + (500 × 30%) 350

11,800

Notes:

1 Depreciation charged for the year was $5,800,000. The group made no disposals of property, plant and

equipment.

2 Dividends paid by Swing Co amounted to $900,000.

QUESTIONS

It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's identifiable net assets.

Required

Prepare the consolidated statement of cash flows of Swing Co for the year ended 31 December 20X5. No notes are

required.

D20 Portal 45 mins

ACR, Pilot Paper, amended

Portal Group, a public limited company, has prepared the following group statement of cash flows for the year

ended 31 December 20X0.

PORTAL GROUP

GROUP STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 20X0 (DRAFT)

$m $m

Cash generated from operations 875

Interest paid (9)

Income taxes paid 31 22

Net cash from operating activities 897

Cash flows from investing activities

Disposal of subsidiary (25)

Purchase of property, plant and equipment (380)

Disposal and transfer of property, plant and equipment at carrying value 1,585

Purchase of interest in joint venture (225)

Interest received 26

Net cash used in investing activities 981

Cash flows from financing activities

Increase in short term deposits (143)

Non-controlling interest (40)

Net cash used in financing activities (183)

Net increase in cash and cash equivalents 1,695

The accountant has asked your advice on certain technical matters relating to the preparation of the group

statement of cash flows. Additionally the accountant has asked you to prepare a presentation for the directors on

the usefulness and meaning of statements of cash flows generally and specifically on the group statements of cash

flows of Portal.

The accountant has informed you that the actual change in cash and cash equivalents for the period is $185 million,

which does not reconcile with the figure in the draft group statement of cash flows above of $1,695 million. The

figures for cash and cash equivalents were $600 million at 1 January 20X0 and $785 million at 31 December 20X0.

The accountant feels that the reasons for the difference are the incorrect treatment of several elements of the

statement of cash flows of which he has little technical knowledge. The following information relates to these

elements:

(a) Portal has disposed of a subsidiary company, Web, during the year. At the date of disposal (1 June 20X0)

the following statement of financial position was prepared for Web:

QUESTIONS

$m $m

Property, plant and equipment: valuation 340

depreciation (30)

310

Inventory 60

Trade receivables 50

Cash 130

240

550

Share capital 100

Retained earnings 320

420

Current liabilities (including taxation $25 million) 130

550

The loss on the sale of the subsidiary in the group accounts comprised:

Sale proceeds: ordinary shares 300

cash 75

375

Net assets sold (80% of 420) (336)

Goodwill (64)

Loss on sale (25)

The accountant was unsure as to how to deal with the above disposal and has simply included the above

loss in the statement of cash flows without any further adjustments.

(b) During the year, Portal has transferred several of its items of property, plant and equipment to a newly

created company, Site, which is owned jointly with another company.

The following information related to the accounting for the investment in Site:

Purchase cost: property, plant and equipment transferred 200

cash 25

225

Dividend received (10)

Profit for year on joint venture after tax 55

Revaluation of property, plant and equipment 30

Closing balance per statement of financial position – Site 300

The statement of cash flows showed the cost of purchasing a stake in Site of $225 million. Site is accounted

for using the equity accounting approach rather than by proportional consolidation.

balances on the taxation account. The charge for taxation in the income statement is $171.

(d) Included in the cash flow figure for the disposal of property, plant and equipment is the sale and leaseback,

on an operating basis, of certain land and buildings. The sale proceeds of the land and buildings were

$1,000 million in the form of an 8% loan note receivable by Portal in 20X2. The total profit on the sale of

tangible non-current assets, including the land and buildings, was $120 million.

(e) The non-controlling interest figure in the statement comprised the difference between the opening and

closing statement of financial position totals. The profit attributable to the non-controlling interest for the

year was $75 million.

(f) The cash generated from operations is the profit before taxation adjusted for the statement of financial

position movement in inventory, trade receivables and current liabilities and the depreciation charge for the

year. The interest receivable credited to the income statement was $27 million and the interest payable was

$19 million.

QUESTIONS

(g) It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's identifiable net assets.

Required

(a) Prepare a revised group statement of cash flows for Portal, taking into account notes (a) to (f) above, and

using the format set out in the question. (18 marks)

(b) Prepare a brief presentation on the usefulness and information content of group statements of cash flows

generally and specifically on the group statement of cash flows of Portal. (7 marks)

(Total = 25 marks)

D21 Cash study question: Andash 90 mins

(a) The following draft group financial statements relate to Andash, a public limited company.

ANDASH

DRAFT GROUP STATEMENTS OF FINANCIAL POSITION AS AT

20X6 20X5

Assets $m $m

Non-current assets

Property, plant and equipment 5,170 4,110

Goodwill 120 130

Investment in associate 60 –

5,350 4,240

Current assets

Inventories 2,650 2,300

Trade receivables 2,400 1,500

Cash and cash equivalents 140 300

5,190 4,100

Total assets 10,540 8,340

Equity and liabilities

Equity attributable to owners of parent

Share capital 400 370

Other reserves 120 80

Retained earnings 1,250 1,100

1,770 1,550

Non-controlling interest 200 180

Total equity 1,970 1,730

Non-current liabilities

Long term borrowings 3,100 2,700

Deferred tax 400 300

Total non-current liabilities 3,500 3,000

Current liabilities

Trade payables 4,700 2,800

Interest payable 70 40

Current tax payable 300 770

Total current liabilities 5,070 3,610

Total liabilities 8,570 6,610

Total equity and liabilities 10,540 8,340

QUESTIONS

ANDASH

DRAFT GROUP INCOME STATEMENT FOR THE YEAR ENDED 31 OCTOBER 20X6

Revenue 17,500

Cost of sales (14,600)

Gross profit 2,900

Distribution costs (1,870)

Administrative expenses (490)

Finance costs – interest payable (148)

Gain on disposal of subsidiary 8

Profit before tax 400

Income tax expense (160)

Profit for the year 240

Profit attributable to owners of parent 200

Profit attributable to non-controlling interest 40

240

ANDASH

DRAFT STATEMENT OF CHANGES IN EQUITY OF THE PARENT FOR THE YEAR ENDED 31 OCTOBER 20X6

Share capital Other reserves Retained earnings Total

$m $m $m $m

Balance at 31 October 20X5 370 80 1,100 1,550

Profit for period 200 200

Dividends (50) (50)

Issue of share capital 30 30 60

Share options issued 10 10

Balance at 31 October 20X6 400 120 1,250 1,770

The following information relates to the draft group financial statements of Andash.

(i) There had been no disposal of property, plant and equipment during the year. The depreciation for

the period included in cost of sales was $260 million. Andash had issued share options on 31

October 20X6 as consideration for the purchase of plant. The value of the plant purchased was $9

million at 31 October 20X6 and the share options issued had a market value of $10 million. The

market value had been used to account for the plant and share options.

(ii) Andash had acquired 25 per cent of Joma on 1 November 20X5. The purchase consideration was 25

million ordinary shares of Andash valued at $50 million and cash of $10 million. Andash has

significant influence over Joma. The investment is stated at cost in the draft group statement of

financial position. The reserves of Joma at the date of acquisition were $20 million and at 31 October

20X6 were $32 million. Joma had sold inventory in the period to Andash at a selling price of $16

million. The cost of the inventory was $8 million and the inventory was still held by Andash at 31

October 20X6. there was no goodwill arising on the acquisition of Joma.

(iii) Andash owns 60% of a subsidiary Broiler, a public limited company. The goodwill arising on

acquisition was $90 million. The carrying value of Broiler's identifiable net assets (excluding goodwill

arising on acquisition) in the group consolidated financial statements is $240 million at 31 October

20X6. The recoverable amount of Broiler is expected to be $260 million and no impairment loss has

been recorded up to 31 October 20X5.

(iv) On 30 April 20X6 a wholly owned subsidiary, Chang was disposed of Chang prepared interim

financial statements on that date which are as follows:

QUESTIONS

Property, plant and equipment 10

Inventories 8

Trade receivables 4

Cash and cash equivalents 5

Share capital 10

Retained earnings 4

Trade payables 6

Current tax payable 7

The consolidated carrying values of the assets and liabilities at that date were the same as above. The

group received cash proceeds of $32 million and the carrying amount of goodwill was $10 million.

(Ignore the taxation effects of any adjustments required to the group financial statements and round

all calculations to the nearest $million.)

BPP note: Assume no dividend was paid by Joma during the period.

(v) It is the group's policy to value the non-controlling interest at its proportionate share of the fair value

of the subsidiary's identifiable net assets.

Required

Prepare a group statement of cash flows using the indirect method for the Andash Group for the year ended

31 October 20X6 in accordance with IAS 7 Statement of cash flows after making any necessary adjustments

required to the draft group financial statements of Andash as a result of the information above.

(Candidates are not required to produce the adjusted group financial statements of Andash.) (25 marks)

(b) Andash manufactures mining equipment and extracts natural gas. You are advising the directors on matters

relating to the year ended 31 October 20X7.

The directors are uncertain about the role of the IASB's Framework for the Preparation and Presentation of

Financial Statements (the Framework) in corporate reporting. Their view is that accounting is based on the

transactions carried out by the company and these transactions are allocated to the company's accounting

periods by using the matching and prudence concepts. The argument put forward by the directors is that the

Framework does not take into account the business and legal constraints within which companies operate.

Further they have given two situations which have arisen in the current financial statements where they feel

that the current accounting practice is inconsistent with the Framework.

Situation 1

Andash has recently constructed a natural gas extraction facility and commenced production one year ago (1

November 20X6). There is an operating licence given to the company by the government which requires the

removal of the facility and rectification of the damage caused by extraction of natural gas at the end of its

life, which is estimated at 20 years. Depreciation is charged on the straight line basis. The cost of the

construction of the facility was $200 million and the net present value at 1 November 20X6 of the future

costs to be incurred in order to return the extraction site to its original condition are estimated at $50 million

(using a discount rate of 5% per annum). 80 per cent of these costs relate to the removal of the facility and

20% relate to the rectification of the damage caused through the extraction of the natural gas. The auditors

have told the company that a provision for decommissioning has to be set up.

Situation 2

Andash purchased a building on 1 November 20X6 for $10 million. The building qualified for a grant of $2

million which has been treated as a deferred credit in the financial statements. The tax allowances are

reduced by the amount of the grant. There are additional temporary differences of $40 million in respect of

QUESTIONS

deferred tax liabilities at the year end. Also the company has sold extraction equipment which carries a five

year warranty. The directors have made a provision for the warranty of $4 million at 31 October 20X7 which

is deductible for tax when costs are incurred under the warranty. In addition to the warranty provision the

company has unused tax losses of $70 million. The directors of the company are unsure as to whether a

deferred tax liability is required.

(Assume that the depreciation of the building is straight line over ten years, and tax allowances of 25% on

the reducing balance basis can be claimed on the building. Tax is payable at 30%.)

Required

(i) Explain the importance of the Framework to the reporting of corporate performance and whether it

takes into account the business and legal constraints placed upon companies. (6 marks)

(ii) Explain with reasons and suitable extracts/computations the accounting treatment of the above two

situations in the financial statements for the year ended 31 October 20X7. (14 marks)

(iii) Discuss whether the treatment of the items in the situations above appears consistent with the

Framework. (5 marks)

(Total = 50 marks)

D22 Case study question: Squire 90 mins

(a) The following draft financial statements relate to Squire, a public limited company.

SQUIRE

DRAFT GROUP STATEMENT OF FINANCIAL POSITION

AT 31 MAY 20X2

20X2 20X1

$m $m

Non-current assets

Property, plant and equipment 2,630 2,010

Intangible assets 105 65

Investment in associate 535 550

3,270 2,625

Retirement benefit asset 22 16

Current assets

Inventories 1,300 1,160

Trade receivables 1,220 1,060

Cash at bank and in hand 90 280

2,610 2,500

Total assets 5,902 5,141

Equity attributable to owners of the parent

Share capital 200 170

Share premium account 60 30

Revaluation surplus 92 286

Retained earnings 533 505

885 991

Non-controlling interest 522 345

Total equity 1,407 1,336

Non-current liabilities 1,675 1,320

Deferred tax liability 200 175

Current liabilities 2,620 2,310

Total liabilities 4,495 3,805

Total equity and liabilities 5,902 5,141

QUESTIONS

SQUIRE

DRAFT GROUP STATEMENT OF COMPRREHENSIVE INCOME

FOR THE YEAR ENDED 31 MAY 20X2

Revenue 8,774

Cost of sales (7,310)

1,464

Distribution and administrative expenses (1,005)

Exchange difference on payment for purchase of non-current assets (9)

Finance costs (75)

Share of profit of associate 45

Profit before tax 420

Income tax expense (205)

Profit for the year 215

Other comprehensive income

Foreign exchange difference on associate (10)

Impairment losses on non-current asset set off against revaluation surplus (194)

Total comprehensive income for the year 11

(204)

Profit attributable to

Owners of the parent 123

Non-controlling interests 92

Total comprehensive income attributable to 215

Owners of the parent (20)

Non-controlling interests 31

SQUIRE

DRAFT GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 20X2

Balance at 1 June 20X1 1,336

Issue of share capital 60

Non-controlling interest acquired on acquisition of subsidiaries 90

Dividends (parent and non-controlling interest) (90)

Total comprehensive income for the year 11

1,407

The following information relates to Squire.

(i) Squire acquired a seventy per cent holding in Hunsten Holdings, a public limited company, on 1 June

20X1. The fair values of the net assets acquired were as follows.

Property, plant and equipment 150

Inventories and work in progress 180

Provisions for onerous contracts (30)

300

The purchase consideration was $200 million in cash and $50 million (discounted value) deferred

consideration which is payable on 1 June 20X3. The provision for the onerous contracts was no

longer required at 31 May 20X2 as Squire had paid compensation of $30 million in order to terminate

the contact on 1 December 20X1. The intangible asset in the group statement of financial position

comprises goodwill only. The difference between the discounted value of the deferred consideration

($50m) and the amount payable ($54m) is included in 'finance costs'.

QUESTIONS

(ii) There had been no disposals of property, plant and equipment during the year. Depreciation for the

period charged in cost of sales was $129 million.

(iii) Current liabilities comprised the following items.

20X2 20X1

$m $m

Trade payables 2,355 2,105

Interest payable 65 45

Taxation 200 160

2,620 2,310

(iv) Non-current liabilities comprised the following.

20X2 20X1

$m $m

Deferred consideration – purchase of Hunsten 54 –

Liability for the purchase of non-current assets 351 –

Loans repayable 1,270 1,320

1,675 1,320

(v) The retirement benefit asset comprised the following.

Movement in year:

Surplus at 1 June 20X1 16

Current and past service costs charged to income statement (20)

Contributions paid to retirement benefit scheme 26

Surplus at 31 May 20X2 22

Required

Prepare a group statement of cash flows using the indirect method for Squire group for the year ended 31

May 20X2 in accordance with IAS 7 Statement of cash flows.

The note regarding the acquisition of the subsidiary is not required. (27 marks)

You have been asked to conduct an environmental audit for the Squire Group to assess how 'green' it is in terms of

energy consumption, use of renewable resources, and employee awareness of these issues.

(b) Describe the information you would seek when planning the audit. (8 marks)

initiative. (6 marks)

(d) Discuss the reasons why companies wish to disclose environmental information in their financial

statements. Discuss whether the content of such disclosure should be at the company's discretion.

(9 marks)

(Total = 50 marks)

QUESTIONS

D23 Case study question: Zambeze 90 mins

Pilot paper, amended

The following draft financial statements relate to Zambeze, a public limited company:

ZAMBEZE

DRAFT GROUP STATEMENTS OF FINANCIAL POSITION AT 30 JUNE

20X6 20X5

$m $m

Assets:

Non-current assets

Property, plant and equipment 1,315 1,005

Goodwill 30 25

Investment in associate 270 290

1,615 1,320

Current assets

Inventories 650 580

Trade receivables 610 530

Cash at bank and cash equivalents 50 140

1,310 1,250

Total assets 2,925 2,570

20X6 20X5

$m $m

Equity and liabilities

Equity

Share capital 100 85

Share premium account 30 15

Revaluation reserve 50 145

Retained earnings 254 250

434 495

Non-controlling interest 60 45

Total equity 494 540

Non-current liabilities 850 600

Current liabilities 1,581 1,430

Total liabilities 2,431 2,030

Total equity and liabilities 2,925 2,570

ZAMBEZE

DRAFT GROUP STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20X6

Revenue 4,700

Cost of sales (3,400)

Gross profit 1,300

Distribution and administrative expenses (600)

Finance costs (40)

Share of profit in associate 20

Profit before tax 680

Income tax expense (200)

Profit for the year 480

Other comprehensive income

Foreign exchange difference of associate (5)

Impairment losses on property, plant and equipment offset against revaluation surplus (95)

Total comprehensive income for the year 380

QUESTIONS

Profit attributable to

Owners of the parent 455

Non-controlling interest 25

480

Total comprehensive income attributable to

Owners of the parent 355

Non-controlling interest 25

380

ZAMBEZE

DRAFT STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20X6

Balance at 1 July 20X5 540

Issue of share capital 30

Total comprehensive income for the year 380

Acquisition of non-controlling interest of Damp 48

Dividends paid (parent and non-controlling interest) (504)

Balance at 30 June 20X6 494

The following relates to Zambeze:

(a) Zambeze acquired a seventy per cent holding in Damp, a public limited company, on 1 July 20X5. The fair

values of the net assets acquired were as follows:

Property, plant and equipment 70

Inventories and work in progress 90

160

The purchase consideration was $100 million in cash and $25 million (discounted value) deferred

consideration which is payable on 1 July 20X6. The difference between the discounted value of the deferred

consideration ($25 million) and the amount payable ($29 million) is included in 'finance costs'. Zambeze

wants to set up a provision for reconstruction costs of $10 million retrospectively on the acquisition of

Damp. This provision has not yet been set up.

(b) There had been no disposals of property, plant and equipment during the year. Depreciation for the period

charged in cost of sales was $60 million.

20X6 20X5

$m $m

Trade payables 1,341 1,200

Interest payable 50 45

Taxation 190 185

1,581 1,430

(d) Non-current liabilities comprised the following:

20X6 20X5

$m $m

Deferred consideration – purchase of Damp 29 –

Liability for the purchase of property, plant and equipment 144 –

Loans repayable 621 555

Deferred tax liability 30 25

Retirement benefit liability 26 20

850 600

QUESTIONS

(e) The retirement benefit liability comprised the following:

Movement in year

Liability at 1 July 20X5 20

Current and past service costs charged to profit or loss 13

Contributions paid to retirement benefit scheme (7)

Liability 30 June 20X6 26

There was no actuarial gain or loss in the year.

(f) Goodwill was impairment tested on 30 June 20X6 and any impairment was included in the financial

statements for the year ended 30 June 20X6.

(g) The Finance Director has set up a company, River, through which Zambeze conducts its investment

activities. Zambeze has paid $400 million to River during the year and this has been included in dividends

paid. The money was invested in a specified portfolio of investments. Ninety five per cent of the profits and

one hundred per cent of the losses in the specified portfolio of investments are transferred to Zambeze. An

investment manager has charge of the company's investments and owns all of the share capital of River. An

agreement between the investment manager and Zambeze sets out the operating guidelines and prohibits

the investment manager from obtaining access to the investments for the manager's benefit. An annual

transfer of the profit/loss will occur on 30 June annually and the capital will be returned in four years time.

The transfer of $400 million cash occurred on 1 January 20X6 but no transfer of profit/loss has yet

occurred. The statement of financial position of River at 30 June 20X6 is as follows:

RIVER: STATEMENT OF FINANCIAL POSITION AT 30 JUNE 20X6

Investment at fair value through profit or loss 390

390

Share capital 400

Retained earnings (10)

390

(h) It is the group's policy to value the non-controlling interest at its proportionate share of the fair value of the

subsidiary's identifiable net assets.

Required

(a) Prepare a group statement of cash flows for the Zambeze Group for the year ended 30 June 20X6 using the

indirect method. (35 marks)

(b) Discuss the issues which would determine whether River should be consolidated by Zambeze in the group

financial statements. (9 marks)

the creation of River could constitute unethical practice by the finance director of Zambeze. (6 marks)

(Total = 50 marks)

Two marks are available for the quality of the discussion of the issues regarding the consolidation of River and

the importance of ethical behaviour.

ANSWERS

D1 Preparation question: Simple consolidation

Text reference. Simple groups are covered in Chapter 12.

Top tips. This is a simpler question than any you will meet with in the examination. It is designed as a gentle

introduction to the basic principles of consolidation, illustrating the calculation and accounting treatment of

goodwill.

(a) ALPHA

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X4

$'000

Assets

Non-current

Property, plant and equipment 10,655.0

Goodwill (W1) 435.0

11,090.0

Current assets

Inventories 3,408.0

Receivables (1,462 + 1,307 – 23) 2,746.0

Cash 41.0

6,195.0

Total assets 17,285.0

Equity and liabilities

Equity attributable to owners of the parent

Share capital (50c ordinary shares) 5,500.0

General reserve (W5) 1,490.0

Retained earnings (W4) 557.5

7,547.5

Non-controlling interest (W3) 522.5

Total equity 8,070.0

Non current liabilities

Borrowings 4,500.0

Current liabilities

Overdraft 2,016.0

Trade payables (887 + 1,077 – 23) 1,941.0

Taxation 758.0

Total current liabilities 4,715.0

Total liabilities 9,215.0

Total equity and liabilities 17,285.0

(b) Alpha has made a profit of 15/115 × $23,000 = $3,000 on its sale of goods to Beta. Beta has not yet sold

goods to an outside party and the profit is therefore unrealised as far as the group is concerned. An

adjustment is necessary to reduce the balance of retained earnings, and the value of inventory by $3,000.

Workings

Group structure

1 Alpha

1,450,000

2,000,000

= 72.5%

Beta

ANSWERS

2 Goodwill

$'000 $'000

Cost of combination 1,450

Fair value of identifiable net assets acquired

Share capital 1,000

General reserve 400

1,400

Group share (72½%) 1,015

435

3 Non-controlling interest

$'000

Share capital 1,000

Reserves (800 + 100) 900

1,900

Minority interest (27½%) 522.5

4 Retained earnings

Alpha Beta

$'000 $'000

Per question 485.0 100

At acquisition – –

485.0 100

Share of post acquisition profits

of Beta (72½ % × 100) 72.5

557.5

5 General reserve

Alpha Beta

$'000 $'000

Per question 1,200 800

At acquisition – (400)

1,200 400

Share of post acquisition reserves

of Beta (72½% × 400) 290

1,490

D2 Preparation question: Associate

J GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5

Assets $'000

Non-current assets

Freehold property (1,950 + 1,250 + 370 (W2)) 3,570

Plant and equipment (795 + 375) 1,170

Investment in associate (W5) 480

5,220

Current assets

Inventories (575 + 300 – 20 (W3)) 855

Trade receivables (330 + 290)) 620

Cash at bank and in hand (50 + 120) 170

1,645

6,865

ANSWERS

$'000

Equity and liabilities

Equity attributable to owners of the parent

Issued share capital 2,000

Retained earnings 1,781

3,781

Non-controlling interests (W6) 894

Total equity 4,675

Non-current liabilities

12% debentures (500 + 100) 600

Current liabilities

Bank overdraft 560

Trade payables (680 + 350) 1,030

1,590

Total liabilities 2,190

6,865

Workings

1 Group structure

600/1,000 60% 30% 225/750

P S

Pre acquisition

profits $200k $150k

2 Fair value adjustment table

At reporting

At acquisition Movement date

$'000 $'000 $'000

Land 200 – 200

Buildings 200 (30) 170 (200 × 34/40)

400 (30) 370

3 Unrealised profit on inventories

P Co J Co $100k × 25/125 = $20,000

4 Goodwill

P Co NCI

$'000 $'000 $'000

Consideration transferred/FV NCI (400 × $1.65) 1,000 660

Net assets acquired:

Share capital 1,000

Retained earnings at acquisition 200

Fair value adjustment (W2) 400

1,600

Group/NCI share (× 60%/40%) (960) (640)

40 20

Impairments to date (40) (20)

Year-end value – –

ANSWERS

5 Investment in associate

$'000

Cost of associate 500.0

Share of post acquisition retained reserves

((390 – 150) × 30%) 72.0

Less impairment of investment in associate (92.0)

480.0

6 Non-controlling interest

$'000 $'000

Net assets per question 1,885

Unrealised profit (W3) (20)

Fair value adjustment (W2) 370

2,235 × 40% = 894

Non-controlling interest in goodwill –

894

7 Retained earnings

J Co P Co S Co

$'000 $'000 $'000

Retained earnings per question 1,460 885 390

Unrealised profit (W3) (20)

Retained earnings profits at acquisition (200) (150)

Fair value adjustment

movement (W2) (30)

635 240

P Co: share of post acquisition profits

60% × 635 381

S Co: share of post acquisition profits

30% × 240 72

Goodwill impairments to date

(40 + 92) (W4) (132)

1,781

D3 Baden

Text reference. For associates, see Chapter 12 of the Study Text.

Top tip. A thorough testing of the different treatments for associates and joint ventures under IAS 28 and IAS 31.

(a) (i) Associate v ordinary non-current asset investment

An investor will take a relatively passive role in an ordinary non current asset investment; whereas

an associate is a vehicle for the conduct of business since the investor can exercise significant

influence over the financial and operational policies of the investee company.

Under IAS 28, a holding of 20% or more of voting rights suggests the investor has significant influence.

The attitude of the investor towards dividends, is important. For an investment, the investor will press for

high dividends, but for an associate the investor will be keen to see profits reinvested.

IAS 28 indicates that board representation plus at least 20% voting rights will indicate associate

status. Significant influence can also be exercised by intra company trading, exchange of key staff or

providing technical support or information.

ANSWERS

(ii) Principal differences: jointly controlled operation/asset/entity

Under IAS 31, jointly controlled operations utilise assets and resources from the venturers and are

not separate entities. A venturer will recognise the assets it controls, the liabilities incurred, the

expenses incurred and the share of income in its consolidated accounts.

A jointly controlled asset occurs when there is no separate entity. The venturer will recognise its

share of the asset, any liabilities incurred and its share of any joint liabilities in its accounts.

A jointly controlled entity is a separate entity in which each venturer has an interest. Proportionate

consolidation is used to account for these on an aggregate or line by line basis. IAS 31 permits the

use of equity accounting in group accounts for jointly controlled entities as well.

(b) (i) At 1 January 20X7, goodwill is calculated as follows.

$m $m

Cost of investment 14.0

Property, plant and equipment 30.00

Current assets 31.00

Current liabilities (20.00)

Non-current liabilities (8.00)

Fair value of net assets 33.00

30% thereof 9.9

Goodwill 4.1

Carrying value 31.12.20X8 in the statement of financial position

Investment cost 14.0

30% post acquisition profit

(32 – 9) 6.9

Fair value adjustment for depreciation

(2 × 20% × (30 – 20) × 30%) (1.2)

19.7

The following would appear in the consolidated income statement.

Share of profit of associate −

((30% × 12) – inter co profit 3.0* – depreciation 0.6 )

*10 × 30%

Intragroup profit on the inventory will be treated as follows.

• Deducted from share of associate profit.

• Deduct from inventory as the asset subject to the transaction is held by the parent.

(ii) Change in treatment

Jointly controlled entities are accounted for using proportionate consolidation, as required by IAS

31 Interests in joint ventures. The venture can aggregate its share of joint assets, liabilities, income or

expenses with similar items in the consolidated accounts on a line by line basis or include as

separate items.

All the items (except the dividend) would be multiplied by 30% and consolidated in the income

statement:

BADEN

CONSOLIDATED INCOME STATEMENT

Revenue (212 – 35) × 30 % 53.1

Cost of sales ((178 – 35) × 30%)+ 3 + 0.6)) (46.5)

Other income 3.6

Distribution costs (5.1)

Administration expenses (2.4)

Finance costs (1.2)

Income tax expense (1.5)

Profit for the year 0.0

ANSWERS

The statement of financial position would include:

Non current assets 12.9

(30% × 37 + fair value adjustment (10 × 30% – depreciation 1.2))

Goodwill 4.1

Current assets (30% × 31) 9.3

26.3

Non current liabilities (30% × 10) (3.0)

Current liabilities (30% × 12) (3.6)

19.7

D4 Preparation question 'D'-shaped group

(a) BAUBLE GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X9

$'000

Non-current assets

Property, plant and equipment (720 + 60 + 70) 850

Goodwill (W2) 111

961

Current assets (175 + 95 + 90) 360

1,321

Equity attributable to owners of the parent

Share capital – $1 ordinary shares 400

Retained earnings (W4) 600

1,000

Non-controlling interest (W3) 91

1,091

Current liabilities (120 + 65 + 45) 230

1,321

Workings

1 Group Structure

Bauble

60%

Jewel 10%

70%

Gem

ANSWERS

Bauble interest in Gem

– direct 10%

– indirect (60% × 70%) 42%

52%

Non-controlling interest in Gem 48%

2 Goodwill

B in J B in G J in G

$'000 $'000 $'000 $'000 $'000 $'000

Consideration transferred 142 43 60% × 100 60.0

Share of net assets acquired

as represented by

Share capital 100 50 50

Ret'd earnings 45 40 40

145 90 90

Group share 60% 10% 42%

87 9 37.8

Goodwill 55 34 22.2

Total goodwill = $111,200

3 Non-controlling interest

Jewel Gem

$'000 $'000

Net assets per question 190 115

Less: cost of investment in Gamma (100)

90 115

Non-controlling share × 40% × 48%

36 55.2

91.2

4 Consolidated retained earnings

B J G

$'000 $'000 $'000

Per Q 560 90 65

Less: pre-acquisition ret'd earnings (45) (40)

45 25

J – share of post acquisition ret'd 27

earnings (45 × 60%)

G – share of post acquisition ret'd 13

earnings (25 × 52%)

600

ANSWERS

(b)(100.0)

60.0 × 60% (36.0)

Gem Share capital 50.0

Retained earnings (1 January 20X3) 40.0

90.0 × 42% (37.8)

68.2

Bauble in Gem (per part (a) 34.0

102.2

D5 Question with analysis: X Group

Text reference. Complex groups are covered in Chapter 18.

Top tips. This is a complicated question. However, you should be able to answer it if you work logically and

methodically through the information given.

Marking scheme

Marks

(a) Property, plant and equipment 3

Goodwill and investment in W 8

Net current assets 2

Non current liabilities 1

Non-controlling interest 7

Capital and reserves 5

Available 26

Maximum 25

(b) Subjective 5

Maximum 30

(a) X GROUP

STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X9

Property, plant and equipment (W3) 1,058

Goodwill (W5) 79

Investment in associate (W4) 53

Net current assets 640 + 360 + 75 – 15 (W6) 1,060

2,250

Equity 360

Share premium 250

Retained earnings (W8) 1,114

Non-controlling interest (W7) 161

1,885

Non current liabilities 200 + 150 + 15 365

2,250

ANSWERS

Workings

1 Group structure

Holding

Date acquired

Retained

earnings

1.4.X4

Retained

earnings

1.4.X6

662/3% Y

90% 150m

100m

662/3%

1.4.X6 N/A $120m

30% Z

50m

45m

= 90% 1.4.X4 $10m $20m

W 30% 1.4.X6 – $7m

2 Fair value adjustments and other adjustments to net assets

Acquisition

At reporting

date

$'m $'m

Property, plant and equipment 30 30

Amortisation (30 × 10% × 3) (9)

Non-current intangible assets (30) (30)

Inventory (2 – 8) (6)

Allowance for doubtful debts ( (9)

(15) (9)

Acquisition

At reporting

date

$'m $'m

Property, plant and equipment 10 10

Amortisation (10 × 10% × 3) (3)

Inventory (5)

5 7

Note

The amount received as a result of the arbitration award was a contingent asset at the date of

acquisition and is therefore not recognised as a fair value adjustment. IFRS 3 only requires

recognition of contingent liabilities.

3 Property, plant and equipment

X Y Z

$m $m $m

Per question 900 100 30

Fair value adjustments (W2) – 30 10

Amortisation (W2) – (9) (3)

900 121 37

Y 121

Z 37

1,058

4 Investment in W – associate

Cost 50

Add 30% post acquisition profit (17 – 7) 3

ANSWERS

5 Goodwill

2/3

90%

Y Z

Investment by X 2/3 60% (2/3 of 90%)

Non-controlling interest 1/3 40%

$m $m

Consideration transferred (Y and Z) 320

Fair value of identifiable net assets acquired in Y:

Share capital 150

Share premium 120

Reserves 120

Fair value adjustments (W2) (15)

Investment in Z (90)

285

2/3 (190)

Fair value of identifiable net assets acquired in Z:

Share capital 50

Share premium 10

Reserves 20

Fair value adjustments (W2) 5

60% 85

(51)

6 Unrealised profit

On sales to X 44

On sales to Y 16

Unrealised profit 25% × 60 = $15m

7 Non-controlling interests

$m $m

Net assets at reporting date per question 480

Fair value adjustments (W2) (9)

Cost of investment in Z (90)

Cost of investment in associate (50)

Investment in associate (W4) 53

1/3 384 128

Net assets at reporting date per question 90

Fair value adjustments (W2) 7

Intragroup profit in inventories (44 + 16 × 25%) (15)

40% 82 33

161

ANSWERS

8 Consolidated retained earnings

X Y Z W

$m $m $m $m

Per question 1,050 210 30 17

Intragroup profit in inventories (W8) (15)

Fair value adjustments (W2) – 6 2 –

Retained earnings at acquisition (W5) – (120) (20) (7)

1,050 96 (3) 10

Post-acquisition profits of Y (2/3 × 96) 64

Post-acquisition profits of Z (60% × (3)) (2)

Post-acquisition profits of W (20% × 10) 2

1,114

(b) Change of policy re goodwill

IFRS 1 First time adoption of International Financial Reporting Standards is relevant as the company appears

to be adopting IFRSs for the first time.

IFRS 1 requires retrospective adoption of all IFRSs in force at the reporting date for the first IFRS financial

statements (31 March 20X9). Assuming that the company presents comparative figures for one year only

(the minimum required by IFRS 1), it will prepare an opening IFRS statement of financial position at 1 April

20X7, which will be the date of transition to IFRSs. As all its investments were acquired before this date, it

must recognise the goodwill arising as an intangible asset.

Retrospective application means that X should adjust opening retained earnings for the effect of the change.

X must also test the goodwill for impairment at the date of transition.

IFRS 1 contains an exemption from applying IFRS 3 retrospectively. However, the group wishes to account

for the change in policy retrospectively and therefore is not claiming the exemption.

D6 Glove

Text reference. Complex groups are covered in Chapter 13.

Top tips. This question required the preparation of a consolidated statement of financial position of a group which

contained a sub-subsidiary. In addition, candidates had to account for brand names, a retirement benefit plan, a

convertible bond, and an exchange of plant. The question was a little easier than in previous exams, and you should

not have been alarmed at getting both pensions and financial instruments, since only the straightforward aspects

were being tested.

Easy marks. There are marks for standard consolidation calculations (goodwill, NCI, retained earnings) which

should be familiar to you from your earlier studies, and for setting out the proforma, even if you didn’t have time to

do the fiddly adjustments for retirement benefits and exchange of assets. The convertible bond – don’t be scared

because it is a financial instrument! – is something you have covered at an earlier level.

Examiner’s comment. The accounting for the sub-subsidiary was reasonably well answered but candidates found

the application of the corridor approach a major problem. The convertible bond element was relatively

straightforward and would have sat quite well in a lower level paper. However, candidates found this element quite

difficult.

The parameters of the syllabus in the area of financial instruments have been well documented, but candidates do

not seem to be able to grasp the fundamentals of the subject. The treatment of the trade name was again not well

answered with the principles of recognition seldom set out correctly. Overall, the consolidation element was quite

well answered but the additional technical elements were poorly treated by candidates in their answers.

ANSWERS

Marking scheme

Marks

Equity 7

Reserves 6

Non-current liabilities 3

Defined benefit plan 4

Convertible bond 4

Plant 2

Trade name 3

Available 29

Maximum 25

GLOVE GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X7

Non-current assets

Property, plant and equipment

260 + 20 + 26 + 6 (W2) + 5(W2) + 3 (W5) 320.0

Goodwill (W6) 10.1

Other intangibles: trade name (W2) 4.0

Available for sale investments 10.0

Current assets: 65 + 29 + 20 344.1

114.0

Total assets 458.1

Equity and liabilities

Equity attributable to owners of parent

Ordinary shares 150.0

Other reserves (W8) 30.8

Retained earnings (W8) 150.8

Equity component of convertible debt (W4) 1.6

333.2

Non-controlling interests (W7) 28.9

362.1

Non-current liabilities (W10)

45 + 2 + 3 + 0.1 (W3) – 30 + 28.9 (W4) 49.0

Current liabilities: 35 + 7 + 5 47.0

96.0

Total equity and liabilities 458.1

Workings

1 Group structure

Glove

1 June 20X5 80% Retained earnings $10m

Other reserves $4m

Body

1 June 20X5 70% Retained earnings $6m

Other reserves $8m

Fit

ANSWERS

Effective interest: 80% × 70% 56

... Non-controlling interest 44

100

Note. The acquisitions were on the same date. Our calculation of goodwill is done as if Body was acquired

first, but either method would be acceptable.

2 Fair value adjustments

At reporting

Movement date

At acquisition (2 years) (31 May 20X7)

$m $m $m

Body

Land: 60 – (40 + 10 + 4) 6 – 6

Brand name (note) 5 (1) 4

11 (1) 10

Fit

Land: 39 – (20 + 8 + 6) 5 – 5

Note. The trade name is an internally generated intangible asset. While these are not normally recognised

under IAS 38 Intangible assets, IFRS 3 Business combinations allows recognition if the fair value can be

measured reliably. Thus this Glove should recognise an intangible asset on acquisition (at 1 June 20X5).

This will reduce the value of goodwill.

The trade name is amortised over ten years, of which two have elapsed: $5m × 2/10 = $1m.

So the value is $(5 – 1)m = $4m in the consolidated statement of financial position.

3 Defined benefit pension scheme

Present value of obligation 26.0

Fair value of plan assets (20.0)

Unrecognised actuarial losses (note) ($3m – $0.1m (note)) (2.9)

3.1

Note. recognised actuarial losses

Corridor amounts:

10% of present value of obligation: 10% × $20m = $2m

10% of fair value of plan assets: 10% × $16m = $1.6m

... Use $2m

Unrecognised losses at 1 June 20X6 3

Less 10% of P.V. of obligation (2)

Excess 1

Amortised over ten years ... $1m/10 = $0.1m

Accounting entries:

DEBIT Retained earnings $0.1m

CREDIT Unrecognised actuarial losses $0.1m

ANSWERS

4 Convertible bond

Under IAS 39, the bond must be split into a liability and an equity component:

$’000 $’000

Proceeds: 30,000 × $1,000 30,000

Present value of principal in three years' time

$30m ×

1.083

23,815

Present value of interest annuity

$30m × 6% = $1,800,000

1.08

× 1,667

(1.08)2

× 1,543

(1.08)3

× 1,429

Liability component (28,454)

... Equity component 1,546

Rounded to $1.6m

Balance of liability at 31 May 20X7

$‘000

Balance b/d at 1 June 20X6 28,454

Effective interest at 8% 2,276

Coupon interest paid at 6% (1,800)

Balance c/d at 31 May 20X7 28,930

5 Exchange of assets

The cost of the plant should be measured at the fair value of the asset given up, rather than the carrying

value. An adjustment must be made to the value of the plant, and to retained earnings.

Fair value of land 7

Carrying value of land (4)

... Adjustment required 3

DEBIT Plant $3m

CREDIT Retained earnings $3m

6 Goodwill

Glove in Body Body in Fit

$m $m $m $m

Consideration transferred 60 80% × 30 24.00

Fair value of net assets acquired

Per question 60 39

Trade name (W2) 5 –

65 39

Group share 80%/56% (52) (21.84)

8 2.16

10.16

ANSWERS

7 Non-controlling interest

Body Fit

$m $m

Net assets per question 70.0 38

Cost of investment in Fit (30.0) –

Fair value adjustment (W2) 10.0 5

50 43

× 20% × 44%

10.00 18.92

$28.92m

8 Retained earnings

Glove Body Fit

$m $m $m

Per question 135.00 25 10

Fair value movement (W2) – (1) –

Pension scheme (W3) (0.10)

Convertible bonds (W4) (2.3 – 1.8) (0.50)

Assets exchange:

Adjustment to plant (W5) 3.00

Less pre-acquisition (10) (6)

14 4

Share of Body

80% × 14

11.20

Share of Fit

56% × 4 2.24

150.84

9 Other reserves

Glove Body Fit

$m $m $m

Per question 30.0 5 8

Less pre-acquisition (4) (8)

1 –

Share of body

80% × 1 0.8

Share of Fit

56% × 0 0.0

30.8

10 Non-current liabilities

Note. This working is for additional information. To save time, you should do yours on the face of the

consolidated position statement

ANSWERS

$m $m

Non-current liabilities per question:

Glove 45

Body 2

Fit 3

50.0

Unrecognised actuarial losses (W3) 0.1

Proceeds of convertible bond (30.0)

Value of liability component 28.9

49.0

D7 Largo

Text reference. Complex groups are covered in Chapter 13 of the text.

Top tips. In this question you had to prepare a consolidated statement of financial position of a group where there

were multiple shareholdings. You had to determine the date at which control was gained for the purpose of the

group accounts. Since the question was set, IFRS 3 has outlawed the pooling of interests method, so the purchase

method had to be used. You were also required to deal with deferred tax arising on the fair value of the tangible

non-current assets and the impairment of a brand name.

Easy marks. As always, there are easy marks for basic consolidation techniques and for determining the group

structure. If you did not correctly value the consideration given, this would not result in a significant loss of marks

as it was only one element of the goodwill calculation.

Examiner's comment. This question was well answered in most cases. However, many candidates did not charge

the additional depreciation on the fair value increase on the property of the subsidiaries, and failed to treat the brand

name correctly on acquisition.

Marking scheme

Marks

Discussion of method of accounting for shareholdings 3

Equity of Fusion 6

Equity of Spine 5

Fair value calculation – assets 3

Fair value of consideration 3

Brand name 2

Property, plant and equipment 3

Group reserves 2

Micro 3

Available 30

Maximum 25

ANSWERS

LARGO

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 NOVEMBER 20X4

Assets

Non current assets

Property, plant and equipment (329 + 185 + (W2) + 60.8 + 64 + (W2) 36.1 – 9 brand) 665.9

Goodwill (W3) 80.3

Other intangible assets 7.0

Investment in associate (W4) 12.6

765.8

Current assets (120 + 58 + 40) 218.0

983.8

Equity and liabilities

Equity attributable to owners of the parent

Share capital (280 + 150 + 30) 460.0

Share premium [30 + (150 × $1.30) + (30 × $1.30)] 264.0

Retained earnings (W6) 122.2

846.2

Non-controlling interest (W5) 50.8

897.0

Non-current liabilities

Deferred tax liability (20 + 20 + (W2) 14.25 + 5 + (W2) 8.55) 67.8

Current liabilities (10 + 5 + 4) 19.0

983.8

Workings

1 Group structure

Largo

1.12.X3

1.12.X3 90% 40%

Micro

Fusion 1.12.X3

26%

1.12.X0 60%

Spine Effective interest (90% × 60%) + 26% = 80%

∴Non-controlling interest 20%

100%

2 Fair value adjustments

At acq'n

1.12.X3

Movement

(5%)

At reporting date

30.11.X4

Fusion $m $m $m

Property (330 – 110 – 20 – 136) 64 (3.2) 60.8

Deferred tax liability (15) 0.75 (14.25)

49 (2.45) 46.55

Spine

Property (128 – 50 – 10 – 30) 38 (1.9) 36.1

Deferred tax liability (9) 0.45 (8.55)

29 (1.45) 27.55

ANSWERS

3 Goodwill

Largo in Fusion Group Largo in Spine

$m $m $m $m

Consideration transferred (150 × $2.30*)/

(30 × $2.30*)

345 69

Fair value of net assets acquired:

Fusion

Share capital 110

Share premium 20

Retained earnings (1.12.X3) 136

Fair value adjustments: Property (W2) 64

Deferred tax liability (15)

Cost of investment in Spine (50)

265

Group share 90% (238.5)

Spine

Share capital 50 50

Share premium 10 10

Retained earnings (1.12.X3) 30 30

Fair value adjustments: Property (W2) 38 38

Deferred tax liability (9) (9)

119 119

Group share 54% (64.26) 26% (30.94)

42.24 38.06

80.30

Note. IFRS 3 requires goodwill arising on a business combination to be tested annually for impairment.

There is no information as to whether the goodwill is impaired hence no adjustment for impairment is

necessary.

*The market price of the shares is calculated by reference to the market capitalisation of Largo: $644 million

÷ 280 million shares = $2.30 per share. Therefore the premium on each share is $1.30.

4 Investment in associate

Cost of associate 11.0

Share of post acquisition retained reserves ((24 – 20) × 40%) 1.6

12.6

5 Non-controlling interest

Fusion Spine

$m $m

Net assets at reporting date per question 268 95

Fair value adjustments (W2) 46.55 27.55

Cost of investment in Spine (50)

Impairment of brand (9 – 7) (2) –

262.55 122.55

NCI share (10%/20% effective interest (W1)) 26.26 24.51

50.77

ANSWERS

6 Retained earnings

Largo Fusion Spine

$m $m $m

Per question 120 138.00 35.00

Fair value change (W2) (2.45) (1.45)

Impairment loss (2.00) –

133.55 33.55

At acquisition (136.00) (30.00)

(2.45) 3.55

Group share of Fusion ((2.45) × 90%) (2.21)

Group share of Spine (3.55 × 80%) 2.84

Share of profit of associate ((24 – 20) × 40%) 1.60

122.23

D8 Case study question: Rod

Text reference. Complex groups are covered in Chapter 13; provisions in Chapter 9; intangibles in Chapter 4; ethics

in Chapter 2.

Top tips. This question required candidates to prepare a consolidated statement of financial position of a complex

group. Candidates were given a basic set of data – information concerning current accounting practices – which

required adjustment in the financial statements, and information about the implementation of 'new' accounting

standards. This type of question will appear regularly on this paper (obviously with different group scenarios and

different accounting adjustments). Candidates had to deal with adjustments relating to tangible non-current assets,

inventory and defined benefit pension schemes. Part (c) is a practical question on key issues. In part (d), do not be

tempted to waffle. Part (e) concerns ethics, a topic new to this syllabus.

Examiner's comment. Generally speaking, candidates performed quite well on this question but often struggled

with the accounting for the defined benefit pension scheme. Many candidates treated one of the subsidiaries as an

associate. In this situation, where the relationship between the companies has been incorrectly determined, marks

are awarded for the methodology used in the question.

Marking scheme

Marks

(a) Defined benefit pension scheme 5

(b) Shareholding 3

Equity – Line 6

Non current assets – Line 4

Equity – Reel 8

Fair value adjustment 2

Group properties, plant and equipment 2

Group retained earnings 3

Trade receivables 1

Inventory 1

acceptability 2

(ii) Fine: intangible asset 3

acceptability 2

(d) 1 mark per valid point 10

ANSWERS

(e) For 2

Against 2

Conclusion 1

Available 61

Maximum 50

(a) Defined benefit pension scheme

The defined benefit pension scheme is treated in accordance with IAS 19 Employee benefits.

The pension scheme has a deficit of liabilities over assets:

Fair value of scheme assets 125

Less present value of obligation (130)

(5)

The deficit is reported as a liability in the statement of financial position.

The income statement for the year includes:

Current service cost 110

Interest cost 20

Expected return on plan assets (10)

Actuarial gain (see note) (15)

105

The balance sheet includes:

Present value of pension obligation (130)

Fair value of plan assets 125

Liability (5)

Changes in present value of the defined benefit obligation

Opening defined benefit obligation nil

Interest cost 20

Current service cost 110

Closing defined benefit obligation 130

Changes in fair value of plan assets

Opening fair value of plan assets nil

Expected return on plan assets 10

Contributions 100

Actuarial gain (balancing figure) 15

Closing fair value of plan assets 125

There is an actuarial gain of $15 million on the defined benefit pension scheme assets (W). Under IAS 19 the

unrecognised gains and losses at the end of the previous reporting period can be recognised in profit or

loss for the year using the '10% corridor' approach or any other systematic approach including immediate

recognition, either in retained earnings or in profit or loss for the year. Here, the directors have chosen to

recognise the gain immediately in profit or loss for the year.

Adjustment to the group accounts:

$m $m

DEBIT Retained earnings 105

CREDIT Trade receivables 100

CREDIT Defined benefit pension scheme 5

ANSWERS

(b) ROD

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 NOVEMBER 20X2

Non-current assets

Property, plant and equipment (W5) 1,930

Goodwill (W2) 132

2,062

Current assets

Inventories (300 + 135 + 65 – 20) 480

Receivables (240 + 105 + 49 – 100) 294

Cash at bank and in hand 220

994

3,056

Equity attributable to owners of the parent

Share capital 1,500

Share premium 300

Retained earnings (W4) 586

2,386

Non-controlling interest (W3) 265

2,651

Non-current liabilities

Pension scheme 5

Other 180

Current liabilities 220

3,056

Workings

1 Group structure

Rod's total holding in Line is 60% (40% direct + 80% × 25% indirect).

2 Goodwill

Rod in Reel Reel in Line Rod in Line

$m $m $m $m $m $m

Consideration transferred 640 80% × 100 80 160

Net assets acquired

Share capital 500 200 200

Share premium 100 50 50

Retained earnings 100 50 50

Fair value adjustment 10 – –

710 300 300

Group share 80% 20% 40%

(568) (60) (120)

72 20 40

Total goodwill: $72m + $20m + $40m = $132m

ANSWERS

3 Non-controlling interests

Reel Line

$m $m

Net assets per question 800 380

Investment in Line (100) –

Development costs written off (20) –

Trade discount on PPE less depreciation (5) –

Elimination of revaluation reserve (W6) – (70)

Adjustment for excess depreciation (W6) – 14

675 324

× 20% × 40%

135 129.6

264.6

4 Retained earnings

Rod Reel Line

$m $m $m

Per question 625.0 200 60

Fair value adjustment realised (10)

Development costs written off (20)

Trade discount on tangible assets less depreciation (5)

Adjustment for excess depreciation (W6) 14

At acquisition (100) (50)

625.0 65 24

Group share of Reel (80% × 65) 52.0

Group share of Line (60% × 24) 14.4

Less defined benefit pension scheme (part (a)) (105.0)

586.4

Note. The development costs do not meet the recognition criteria in IAS 38 and they cannot be

treated as inventory because they have previously been written off as incurred. They were reinstated

after acquisition, so they must be written off post-acquisition reserves.

5 Property, plant and equipment

Rod 1,230

Reel 505

Line 256

1,991

Less adjustment to PPE of Line (W6) (56)

Reel: trade discount net of depreciation (6 × 5/6) (5)

1,930

Note. IAS 16 states that the cost of a item of PPE should be measured net of trade discounts. The

trade discount must be deducted from Reel's tangible assets.

6 Adjustment to property, plant and equipment of Line

An adjustment must be made to re-state the PPE of Line from their revalued amount to depreciated

historical cost, in line with group accounting policies.

The revaluation took place after acquisition, so the adjustment does not affect goodwill.

ANSWERS

Depreciated

Valuation historic cost

$m $m

Cost at 1 December 20X1 (date of acquisition by Rod) 300 300

Depreciation (300/6) (50) (50)

NBV at 30 November 20X2 250 250

Revaluation 70 –

Revalued amount 320

Depreciation (320/5) (64) (50)

NBV at 30 November 20X3 256 200

Adjustment required to the group accounts: $m $m

DEBIT Revaluation surplus 70

CREDIT Retained earnings (64 – 50) 14

CREDIT Property, plant and equipment (256 – 200) 56

IAS 37 Provisions, contingent liabilities and contingent assets contains specific requirements

relating to restructuring provisions. The general recognition criteria apply and IAS 37 also states that

a provision should be recognised if an entity has a constructive obligation to carry out a

restructuring. A constructive obligation exists where management has a detailed formal plan for the

restructuring and has also raised a valid expectation in those affected that it will carry out the

restructuring. In this case, the company made a public announcement of the restructuring after the

year end, but it had actually drawn up the formal plan and started to implement it before the year

end, by communicating the plan to trade union representatives. Although the plan is expected to take

two years to complete, it appears that the company had a constructive obligation to restructure at

the year end. Therefore a provision should be recognised.

IAS 37 states that a restructuring provision should include only the direct expenditure arising from

the restructuring. Costs that relate to the future conduct of the business, such as training and

relocation costs, should not be included. Measuring the provision is likely to be difficult in practice,

given that the restructuring will take place over two years. IAS 37 requires the provision to be the

best estimate of the expenditure required to settle the present obligation at the reporting date, taking

all known risks and uncertainties into account. There may be a case for providing $50 million

(total costs of $60 million less relocation costs of $10 million) and the company should certainly

provide at least $15 million ($20 million incurred by the time the financial statements are approved

less $5 million relocation expenses). IAS 37 requires extensive disclosures and these should

include an indication of the uncertainties about the amount or timing of the cash outflows.

(ii) Fine for illegal receipt of a state subsidy

IAS 38 Intangible assets defines an intangible asset as a resource controlled by the company as a

result of past events and from which economic benefits are expected to flow. The fine does not

meet this definition. The subsidy was used to offset trading losses, not to generate future income.

The fine should be charged as an expense in the income statement for the year ended 30 November

20X4. As it is material it should be separately disclosed.

(d) Rod spends considerable amounts of money on research that ultimately creates economic benefits and

enhances shareholder value. However, this research does not meet the criteria for deferral under IAS 38

Intangible assets because of the time lag between the expenditure and the revenue that it generates.

Therefore the company's activities appear to reduce profits, rather than increase them. The company's

expertise is part of its inherent goodwill and cannot be valued reliably at a monetary amount. Therefore it is

not recognised on the statement of financial position.

ANSWERS

There is a strong argument that traditional financial reporting is inadequate to deal with 'knowledge led'

companies such as Rod. It is possible that the capital markets will undervalue the company because the

financial statements do not reflect the 'true' effect of the company's research activities. The economy is

becoming more 'knowledge based' and many companies find themselves in this situation.

The market value of a company is based on the market's assessment of its future prospects, based on

available information. Analysts have developed alternative measures of performance such as Economic

Value Added (EVA). These take factors such as expenditure on research and development expenditure into

account, so that they attempt to assess estimated future cash flows. There is a growing interest in ways of

measuring shareholder value as opposed to earnings.

Analysts and other users of the financial statements now recognise the importance of non-financial

information about a company. Many Stock Exchanges require companies to present an Operating and

Financial Review (sometimes called Management Discussion and Analysis) and some large companies do so

voluntarily. This normally includes a description of the business, its objectives and its strategy. It is current

best practice to analyse the main factors and influences that may have an effect on future performance

and to comment on how the directors have sought to maintain and improve future performance. In this

way the directors of Rod can make the markets aware of its research activities and the way in which they

give rise to future income streams and enhance shareholder value.

(e) Internal auditor bonus

For

The chief internal auditor is an employee of Rod, which pays a salary to him or her. As part of the internal

control function, he or she is helping to keep down costs and increase profitability. It could therefore be

argued that the chief internal auditor should have a reward for adding to the profit of the business.

Against

Conversely, the problem remains that, if the chief internal auditor receives a bonus based on results, he or

she may be tempted to allow certain actions, practices or transactions which should be stopped, but

which are increasing the profit of the business, and therefore the bonus.

Conclusion

On balance, it is not advisable for the chief internal auditor to receive a bonus based on the company's

profit.

D9 Case study question: Exotic

Text reference. Complex groups are covered in Chapter 13; intangibles in Chapter 4; joint ventures in Chapter 6;

environmental reporting in Chapter 3.

Top tips. The consolidation section of this question is quite straightforward as long as you remember how to

calculate the NCI of a sub-subsidiary. Points to watch in this question are the treatment of intragroup transactions

and the calculation of non-controlling interest.

Part (c) required candidates to advise a client about the acceptability of certain accounting practices used by that

client. These related to joint ventures and intangibles. Part (d) required candidates to discuss the issues

surrounding environmental reporting.

Easy marks. With complex groups, remember to sort out the group structure first. There are enough

straightforward marks available here if you remember your basic rules for consolidations. The consolidation is quite

straightforward as long as you remember how to calculate the NCI of a sub-subsidiary.

ANSWERS

(a) EXOTIC GROUP

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 20X9

$'000

Revenue (W4) 92,120

Cost of sales (W5) (27,915)

Gross profit 64,205

Distribution costs (3,325 + 2,137 + 1,900) (7,362)

Administrative expenses (3,475 + 950 + 1,900) (6,325)

Finance costs (325)

Profit before tax 50,193

Income tax expense (8,300 + 5,390 + 4,241) (17,931)

Profit for the year 32,262

Profit attributable to:

Owners of the parent 28,549

Non-controlling interest (W6) 3,713

32,262

Dividends paid and declared for the period 9,500

(b) EXOTIC GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X9

$'000

Non-current assets

Property, plant and equipment (35,483 + 24,273 + 13,063 – (W3) 40 + (W3) 8) 72,787

Goodwill (W7) 4,094

76,881

Current assets (1,568 + 9,025 + 8,883 – (W2) 15 – (W2) 15) 19,446

96,327

Equity attributable to owners of the parent

Share capital 8,000

Retained earnings (W9) 56,609

64,609

Non-controlling interest (W8) 8,584

73,193

Current liabilities (13,063 + 10,023 + 48) 23,134

96,327

Workings

1 Group structure

Exotic

⏐ 90%

Melon

⏐ 80%

Kiwi Effective interest (90% × 80%) 72%

∴Non-controlling interest 28%

100%

2 Intragroup trading

(i) Cancel intragroup sale/purchase:

DEBIT group revenue (260 + 480) $740,000

CREDIT group cost of sales $740,000

ANSWERS

(ii) Unrealised profit

$'000

Melon (60 × 331/3/1331/3) 15

Kiwi (75 × 25/125) 15

Adjust in books of seller:

DEBIT Cost of sales/retained earnings

CREDIT Group Inventories

3 Intragroup transfer of equipment

(i) Cancel intragroup sale/purchase:

DEBIT group revenue $240,000

CREDIT group cost of sales $240,000

(ii) Unrealised profit on intragroup sale of equipment

$'000

$(240,000 – 200,000) 40

Adjust in books of seller (Exotic):

DEBIT Cost of sales/retained earnings $40,000

CREDIT Group property, plant and equipment $40,000

(iii) Excess depreciation

$'000

(240,000 – 200,000) × 20% 8

Adjust in books of seller (Exotic):

DEBIT Property, plant and equipment $8,000

CREDIT Cost of sales/retained earnings $8,000

4 Revenue

$'000

Exotic 45,600

Melon 24,700

Kiwi 22,800

Less intragroup sales (W2) (740)

Less intragroup transfer of equipment (W3) (240)

92,120

5 Cost of sales

$'000

Exotic 18,050

Melon 5,463

Kiwi 5,320

Less intragroup purchases (W2) (740)

Less intragroup transfer of equipment (at transfer price) (W3) (240)

Add unrealised profit on transfer of equipment (W3) 40

Less excess depreciation (240 – 200) × 20% (8)

Add PUP (W2): Melon 15

Kiwi 15

27,915

ANSWERS

6 Non-controlling interest (income statement)

$'000

Melon ((10,760 – (W2) 15) × 10%) 1,074

Kiwi ((9,439 – (W2) 15) × (W1) 28%) 2,639

3,713

7 Goodwill on acquisition

Exotic in Melon Melon in Kiwi

Group NCI Group NCI

$'000 $'000 $'000 $'000 $'000 $'000

Consideration transferred/FV NCI: 6,650 500.0 90% ×

3,800

3,420 900

Share of net assets acquired:

Share capital 3,000 2,000

Retained earnings at acquisition 1,425 950

4,425 2,950

Group/NCI share 90% 10% 72% 28%

(3,983) (442.5) (2,124) (826)

2,667 57.5 1,296 74

4,094.5

8 Non-controlling interest (statement of financial position)

Melon Kiwi

$'000 $'000

Net assets per question 27,075 21,898

Less: PUP (W2) (15) (15)

Less: Cost of investment in Kiwi (3,800)

23,260 21,883

× 10% × 28%

Non-controlling interest share 2,326.0 6,127

Non-controlling interests in goodwill (W7) 57.5 74

2,383.5 6,201

8,584.5

9 Retained earnings

Exotic Melon Kiwi

$'000 $'000 $'000

Retained earnings per question 22,638 24,075 19,898

Less: PUP (W2) (15) (15)

Transfer of equipment (W3): PUP (40)

excess dep'n 8 -

Pre-acquisition retained earnings (1,425) (950)

22,635 18,933

Share of Melon (22,635 × 90%) 20,372

Share of Kiwi (18,933 × (W1) 72%) 13,631

56,609

The company believes that this goodwill has an indefinite economic life and therefore it will be retained in

the statement of financial position indefinitely. IFRS 3 Business combinations states that goodwill arising

on a business combination should be recognised as an intangible asset and is not amortised. However,

goodwill must be reviewed for impairment annually and impairment losses charged to the income

ANSWERS

statement where necessary. It should be noted that software products generally have short lives and the

sector is not noted for stability. This suggests that in practice the goodwill is likely to suffer impairment

within a reasonably short time.

Interest in joint venture

Although the main standard dealing with joint ventures is IAS 31 Interests in joint ventures, the company

uses the equity method to account for its interest. IAS 31 allows the use of the equity method and IAS 28

Investments in associates deals with its application.

IAS 28 states that if an investor's share of the losses of an associate equals its interest in the associate, it

discontinues recognising its share of further losses. The investment is reported at nil value. In theory, IAS

28 does not prevent the company from including the loan to the joint venture as part of its investment,

particularly if it is a long-term loan. Therefore the net liability in the joint venture should not be offset

against the loan. (However, IAS 1 Presentation of financial statements prohibits offsetting unless required

or permitted by a standard.)

This leaves a net liability of $3 million (the company's share of the net assets of the joint venture of $3

million less negative goodwill of $6 million). In this case the net liability arises from negative goodwill,

rather than net liabilities in the joint venture itself. IAS 28 states that where there is negative goodwill this

should be excluded from the carrying amount of the investment and should be immediately recognised in

profit or loss (as a gain). This treatment of negative goodwill is also required by IFRS 3.

Therefore the net interest in the joint venture should be reported in the statement of financial position as a

non-current asset investment (the usual treatment for an investment in a joint venture accounted for using

the equity method at a value of $3 million and the negative goodwill of $6 million recognised in profit or

loss).

(d) Environmental reporting

At present, most companies are not specifically required to report any information about the way in which

their activities affect the environment.

Some accounting standards require disclosure of specific environmental information:

• IAS 1 Presentation of financial statements requires details of material items recognised in profit or

loss; these may include environmental costs.

• IAS 37 Provisions, contingent liabilities and contingent assets requires disclosure of information

about provisions and contingent liabilities relating to environmental matters.

In addition, many companies, particularly listed companies, may present an Operating and Financial Review

or Management Discussion and Analysis. It is best practice to describe business risks related to

environmental issues, and to disclose details of potential environmental liabilities and environmental

protection costs.

Apart from this, companies can disclose as much or as little information as they wish in whatever way that

they wish.

In practice companies often present information selectively or in such a general way that it is meaningless.

This means that it is difficult to compare the performance of different companies. However, many large

companies publish extensive and extremely informative 'environmental reports' that are completely separate

from the financial statements themselves. Because most environmental disclosures do not have to be

audited, users cannot yet rely on the environmental information included in the financial statements.

Progas's operations clearly do have an impact on the environment and the company should seriously

consider disclosing environmental information in its financial statements. By acknowledging its responsibility

for the environment, a company can enhance its reputation and distinguish itself from competitors.

Information that would be useful to users of the financial statements might include the following.

(i) Details of emissions, including reductions/increases from the previous year;

(ii) The impact of gas emissions on the environment and action taken to minimise this impact;

ANSWERS

(iii) Expenditure on restoring the countryside after pipelines have been laid;

(iv) Details of any infringement of environmental laws/guidelines including details of any fines.

There are a number of codes of practice which companies may follow, for example, the Sustainability

Reporting Guidelines published by the Global Reporting Initiative (GRI). The company may also consider

signing up to the Eco Management and Audit Scheme (EMAS). This would involve agreeing to a specific

code of practice with the environmental report being validated by an accredited independent verifier.

D10 Preparation question: Part disposal

ANGEL GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8

$'000

Non-current assets

Property, plant and equipment 200.00

Investment in Shane (W3) 133.15

333.15

Current assets (890 + 120) 1,010.00

1,343.15

Equity attributable to owners of the parent

Share capital 500.00

Retained earnings (W5) 533.15

1,033.15

Current liabilities 310.00

1,343.15

ANGEL GROUP

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X8

$'000

Profit before interest and tax [100 + (20 × 6/12)] 110.00

Profit on disposal of shares in subsidiary (W4) 80.30

Share of profit of associate (12 × 35% × 6/12) 2.10

Profit before tax 192.40

Income tax expense [40 + (8 × 6/12)] (44.00)

Profit for the year 148.40

Other comprehensive income net of tax [10 + (6 × 6/12)] 13.00

Share of other comprehensive income of associate (6 × 35% × 6/12) 1.05

Other comprehensive income for the year 14.05

Total comprehensive income for the year 162.45

Profit attributable to:

Owners of the parent 146.60

Non-controlling interests (12 × 6/12 × 30%) 1.80

148.40

Total comprehensive income attributable to:

Owners of the parents 159.75

Non controlling interests (18 × 6/12 × 30%) 2.70

162.45

ANSWERS

ANGEL GROUP

CONSOLIDATED RECONCILIATION OF MOVEMENT IN RETAINED RESERVES

$'000

Balance at 31 December 20X7 (W6) 373.40

Profit for the year 159.75

Balance at 31 December 20X8 (W5) 533.15

Workings

1 Timeline

2 Goodwill - Shane

$'000 $'000

Consideration transferred 120

Less:

Share capital 100

Retained earnings 10

110

Group share (110 × 70%) (77)

3 Investment in associate

$'000

Fair value at date control lost 130.00

Share of post 'acquisition' retained reserves: 18 × 6/12 × 35% 3.15

133.15

4 Group profit on disposal of Shane

$'000 $'000

Fair value of consideration received 120.0

Fair value of 35% investment retained 130.0

Less share of carrying value when control lost

Net assets (190 – (18 × 6/12)) × 70% 126.7

Goodwill belonging to owners of the parent (W2) 43.0

(169.7)

80.3

5 Group retained reserves

Angel Shane Shane

35% 35% sold

Per qu/dates of disposal (90 – (18 × 6/12)) 400.00 90 81

Group profit on disposal (W4) 80.30

Less pre-acquisition (10) (10)

80 71

Shane: 35% retained × 80 28.00

Shane: 35% sold × 71 24.85

533.15

1.1.X8 31.12.X8

Subsidiary – 6/12

Group gain on

disposal

Equity account in

SOFP

30.6.X8

I/S

Associate – 6/12

ANSWERS

6 Retained reserves b/f

Angel Shane

$'000 $'000

Per Q 330.0 72

Less: Pre-acquisition retained reserves (10)

330.0 62

Shane – Share of post acquisition ret'd reserves (62 × 70%) 43.4

373.4

D11 Preparation question: Plans

Key considerations and accounting impacts

There are a number of reasons why a group may re-organise.

• To reduce gearing by floating a business

• Companies may be transferred to another business during a divisionalisation process

• To create efficiencies of group structure for tax purposes

The impact of each of the proposed structures is discussed below.

Plan 1

The implications of this plan will be different, depending on the choice of purchase consideration.

Share for share exchange

If the purchase consideration is in the form of shares, then a share premium account will need to be set up in the

books of Y. This share premium account must comprise the minimum premium value, which is the excess of the

book value of the investment over the nominal value of the shares issued: $70m − $50m = $20m.

The impact on the individual company accounts and on the group accounts is as follows.

Note X Y Z Group

$m $m $m $m

Property, plant and equipment 600 200 45 845

Intangible assets: goodwill 10

Cost of investment in Y 1 130

Cost of investment in Z 2 70

Net current assets 160 100 20 280

890 370 65 1,135

Note X Y Z Group

Share capital 3 120 110 40 120

Share premium 4 20

Retained earnings 5 770 240 25 1,015

890 370 65 1,135

Notes

1 Cost of investment in Y

This is increased by the total value of the shares issued: $50m + $20m = $70m.

2 Cost of investment in Z

Transferred to Y. The book value of the investment is preserved.

3 Share capital

Y's share capital is increased by the nominal value of the shares issued, $50m.

ANSWERS

4 Share premium

This is as discussed above.

5 Retained earnings

Goodwill arising on the purchase of Z is $10m ($70m − ($40m + $20m)). The group retained earnings are

calculated as follows.

X Y Z

$m $m $m

Per question 770 240 25

Retained earnings at acquisition – (20)

770 240 5

Share of post-acquisition profits of Y (100%) 240

Share of post-acquisition profits of Z (100%) 5

1,015

Cash purchase

The group accounts are not affected by the change as the reorganisation is internal. It has no impact on the group

as a single entity.

If the purchase consideration is in the form of cash, a gain or loss on the sale of Z will arise in the books of X. This

does not count as a distribution as the cash price of $75m is not in excess of the fair value of the net assets of Z,

$80m. The effect on the accounts would be as follows.

Note X Y Z Group

$m $m $m $m

Property, plant and equipment 600 200 45 845

Goodwill 10

Cost of investment in Y 60

Cost of investment in Z 1 75

Net current assets 2 235 25 20 280

895 300 65 1,135

Share capital 120 60 40 120

Retained earnings 3 775 240 25 1,015

895 300 65 1,135

Notes

1 Cost of investment in Z

This is the cash consideration of $75m.

2 Net current assets

X's cash increases by $75m and Y's cash decreases by $75m.

3 Retained earnings

X's retained earnings have been increased by $5m, being the profit on the sale of the investment in Z. This is

eliminated on consolidation as it is an intra-group transaction. The consolidated retained earnings are

calculated in exactly the same way as in the share for share exchange.

Plan 2

This restructuring plan is a rationalisation, aimed at simplifying the group structure. An important point to take into

account is that the investment in Z in the books of X may be impaired. Z was originally purchased for $70m, with

goodwill of $10m arising, but the assets have been transferred to Y at book value of $60m. Z will be a shell

company with a net asset value of $60m and this will be shown as an intercompany account with Y. The cost of X's

ANSWERS

investment in Z should be reduced to $60m, with a corresponding charge to the retained earnings. The accounts

would appear as follows.

Note X Y Z Group

$m $m $m $m

Goodwill 10

Property, plant and equipment 600 245 845

Cost of investment in Y 60

Cost of investment in Z 1 60

Net current assets 2 160 60 60 280

880 305 60 1,135

Share capital 120 60 40 120

Revaluation surplus 3 5

Retained earnings 4 760 240 20 1,015

880 305 60 1,135

Notes

1 Cost of investment in Z

Per question 70

Less impairment (10)

2 Net current assets

Y's net current assets are $100m + $20m less intragroup payable $60m.

Note that this calculation is based on the assumption that the $10m loss in X's books, the revaluation gain in

Y's books and the loss on the transfer of assets to Y in Z's books are intragroup items and can be ignored.

3 Revaluation surplus

This is the gain on the purchase of the assets from Z: $65m − $60m.

4 Retained earnings

X's individual retained earnings are $770m less the impairment of $10m, which gives $760m.

The group retained earnings are calculated as follows.

X Y Z

$m $m $m

Per question 770 240 25

Retained earnings at acquisition – – (20)

770 240 5

Share of post-acquisition profits of Y (100%) 240

Share of post-acquisition profits of Z (100%) 5

1,015

Z's retained earnings are $20m, ie $25m less $5m loss on transfer of assets.

Summary and conclusion

There are advantages and disadvantages to each of the three plans. Before we could make a recommendation we

would need more information about why the group wishes to restructure.

Plan 1 does not change the group financial statements. From an internal point of view it results in a closer

relationship between Y and Z. This may be advantageous if Y and Z are close geographically or in terms of similarity

of business activities. Alternatively, it might be advantageous for tax reasons.

ANSWERS

Plan 2 is an example of divisionalisation: the assets and trade of Z are transferred to Y and Z becomes a shell

company. This could result in cost savings overall. Furthermore, Z becomes a non-trading company and this could

be used for some other purpose.

D12 Ejoy

Text reference. Changes in group structure are covered in Chapter 14.

Top tips. This question required the production of a consolidated income statement of a group. Candidates were

expected to calculate and impairment test the investment in a subsidiary, to account for a joint venture, to deal with

impairment and hedging of financial assets, and account for a pre-acquisition dividend and a discontinued

operation.

Easy marks. Do not spend too long on the discontinued operation. You would not be penalised too heavily if you

got this wrong and there are easy marks to be gained for adding across and other basic consolidation aspects.

Examiner's comment. Overall the question was quite well answered, with the majority of candidates achieving a

pass mark. However, candidates answered the financial instruments part of the question quite poorly. The main

problem seemed to be the application of knowledge; candidates could recite the principles of accounting for

financial instruments but could not deal with the practical application thereof. The calculation of the goodwill was

done well, as was the accounting for the pre-acquisition dividend. However, the impairment testing of the

investment in the subsidiary was poorly answered. Candidates need to understand this procedure as it will be a

regular feature of future papers.

Marking scheme

Marks

Goodwill 7

Joint venture 2

Financial assets 7

Dividend 2

Income statement 7

Tbay 4

Non-controlling interest 2

Available 31

Maximum 25

ANSWERS

EJOY: CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 20X6

Continuing operations

Revenue (2,500 + 1,500) 4,000

Cost of sales (1,800 + 1,200 + 26 (W8)) (3,026)

Gross profit 974

Other income (70 + 10 – 3 (W11) – 24 (W2)) 53

Distribution costs (130 + 120) (250)

Administrative expenses (100 + 90) (190)

Finance income (W5) 6

Finance costs (W6) (134)

Profit before tax 459

Income tax expense (200 + 26) (226)

Profit for period from continuing operations 233

Discontinued operations

Profit for the year from discontinued operations ((30 × 6/12) – 2 (W8)) 13

Profit for the year 246

Profit attributable to:

Owners of the parent 241

Non-controlling interest (W12) 5

246

Workings

1 Group structure

Ejoy

160

200

= 80% 72

120

= 60% (owned for six months)

Zbay Tbay

Tbay is a discontinued operation (IFRS 5).

Timeline

1.6.X5 1.12.X5 31.5.X6

Ejoy

Zbay

Tbay

2 Pre-acquisition dividend income

Pre-acquisition dividend income (Tbay)

$m $m

Dividend treated as a reduction in cost of investment (60% × 40) 24

DEBIT Dividend income 24

CREDIT Cost of investment in Tbay (W7) 24

ANSWERS

3 Loan asset held by Zbay

Carrying value of loan at 1.6.X5 (a financial asset) 60.0

Impairment loss (balancing figure) (42.2)

Present value of expected future cash flows (20 ×

1.06

at 1.6.X5 (note) 17.8

Interest income (6% × 17.8) 1.1

At 31.5.X6 18.9

Note. The $20 million is expected to be received on 31 May 20X7, ie. in two years' time.

4 Hedged bond (Ejoy)

1.6.X5 50.0

Interest income (5% × 50) 2.5

Fair value loss (balancing figure) (1.7)

Fair value at 31.5.X6 (per question) 48.3

Because the interest rate swap is 100% effective as a fair value hedge, it exactly offsets the loss in value of

$1.7 million on the bond. The bond is an 'available for sale' item (per IAS 39) and therefore the loss would

normally be taken to equity, but because hedge accounting is adopted both the gain on the swap and the

loss on the bond are recognised in profit or loss as income and expense. The net effect on profit or loss is

nil.

5 Finance income

Interest income on loan asset held by Zbay (W3) 1.1

Interest receivable on bond held by Ejoy (W4) 2.5

Interest received on interest rate swap held by Ejoy 0.5

Fair value gain on interest rate swap 1.7

5.8

6 Finance costs

Per draft income statements (50 + 40) 90.0

Impairment loss (loan asset held by Zbay) (W3) 42.2

Fair value loss on hedged bond (W4) 1.7

133.9

7 Goodwill

Zbay Tbay

$m $m $m $m

Consideration transferred 520 216

Less pre-acquisition dividend (W2) (24)

Fair value of net assets at

Acquisition 600 310

Group share (W1) 80% 60%

(480) (186)

40 6

ANSWERS

8 Impairment losses

Zbay Tbay

$m $m

Notional goodwill (40 × 100/80) (6 × 100%) (W7) 50.0 10.0

Carrying amount of net assets (W9)/(W10) 612.9 285.0

662.9 295.0

Recoverable amount 630/(300 – (5 × 100/60)) (630.0) (291.7)

Impairment loss: gross 32.9 3.3

Impairment loss recognised: all allocated to goodwill

(80% × 32.9)/(60% × 3.3) 26.3 2.0

9 Carrying amount of net assets at 31 May 20X6 (Zbay)

Fair value of identifiable assets and liabilities acquired (1 June 20X4) 600.0

Profit for year to 31 May 20X5 20.0

Profit for year to 31 May 20X6 per draft income statement 34.0

Less impairment loss (loan asset) (W3) (42.2)

Interest income (loan asset) (W3) 1.1

612.9

10 Carrying amount of net assets (Tbay)

Carrying value of investment in Tbay at 31 May 20X6:

Fair value of net assets at acquisition (1 December 20X5) 310

Post acquisition profit (30 × 6/12) 15

Less dividend (40)

285

11 Joint venture

$m $m

Elimination of other venturer's share of gain on disposal (50% × 6) 3

DEBIT Other income 3

CREDIT Investment in joint venture 3

12 Non-controlling interest

Zbay Tbay

$m $m

Profit for period per question 34.0

× 6/12 15

Less impairment loss on loan asset (W3) (42.2)

Interest income on loan asset (W3) 1.1

(7.1) 15

× 20% × 40%

(1.4) 6

4.6

ANSWERS

D13 Case study question: Base Group

Text reference. Changes in group structure are covered in Chapter 14. Revenue recognition is in Chapter 1. Social

and environmental reporting is in Chapter 3.

Top tips. This question required a consolidated income statement. This included the calculation of the profit/loss on

a disposal of shares, adjustments for intragroup profit, retirement benefits, convertible debt instruments and share

options as well as dealing with accounting for associates, non-controlling interests and goodwill. Part (b) deals with

revenue recognition. In part (c) there are easy marks to be had for backing up your arguments.

Easy marks. There are a lot of easy marks here for basic consolidation technique, which, even if you missed

complications you could still gain.

Examiner's comment. In general this question was well answered. However, some candidates used proportional

consolidation for the subsidiary, and few treated the share options correctly.

Marking scheme

Marks

(a) Revenue 1

Cost of sales 3

Distribution/administration 1

Interest expense 2

Investment income 1

Taxation 1

Goodwill 3

Inter-company profit 2

Retirement benefit – explanation 2

Debt – explanation 2

Share options – explanation 2

Associate 4

Non-controlling interest 2

Gain on disposal/adjustment to parent equity 4

(b) Revenue recognition 5

Sustainable performance 1

Transparency 1

Best practice 1

Responsible ownership 1

Reduction of risks 1

Reputation 1

Governments 1

Cultural/social pressures 1

(ii) 1 mark per point up to a maximum 6

Maximum 50

ANSWERS

(a) BASE GROUP

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 20X3

Revenue (3,000 + 2,300 + (600 × 9/12)) 5,750

Cost of sales (W2) (2,000 + 1,600 + 225 – 5 – (3 – 1) (3,822)

Gross profit 1,928

Distribution costs (240 + 230 + (120 × 9/12)) (560)

Administrative expenses (200 + 220 + (80 × 9/12)) (480)

Profit on disposal of shares in subsidiary (W8) 35

Finance costs (W3) (20 + 10 + 9 + 1.1 + 3) (43)

Investment income receivable (100 – (200/350 × 70)) 60

Share of loss of associate (W6) (6)

Profit before tax 934

Income tax expense (130 + 80 + 27) (237)

Profit for the year 697

Profit attributable to

Owners of the parent 624

Non-controlling interests (W7) 73

697

Because Base retained control of Zero, the gain on the sale of the 50 million shares in Zero is treated as an

adjustment to the parent's equity in the consolidated statement of financial position. It is calculated as $12m

(W9). In the SOFP, goodwill on the acquisition of Zero will remain at $8m. Non-controlling interests will

increase.

Workings

1 Group structure

Base

Zero Black

250/350 for 6 months

200/350 for 6 months

60% for 9 months

40% for 3 months

Zero was a subsidiary throughout the year.

Black became an associate on 1 March 20X3.

2 Cost of sales

Base 2,000

Zero 1,600

Black (300 × 9/12) 225

3,825

Retirement benefit (W4) (5)

Share options (3 – 1) 2

3,822

Note. The loss in the value of the share options is included in cost of sales because the options were

received in exchange for trade receivables.

ANSWERS

3 Finance costs

Base 20

Zero 10

Black (12 × 9/12) 9

Redeemable debt (20 × 5.4%) 1.1

Retirement benefit plan 3

43.1

4 Retirement benefits

Amount originally included in cost of sales 10

Amount that should be included (current service cost only) (5)

Adjustment (reduction) 5

10% 'corridor' (based on amounts at 31 May 20X2)

10% of present value of defined benefit obligation ($54m) $5.4m

10% of fair value of plan assets ($48 m) $4.8 m

The unrecognised actuarial loss is only $3 million and therefore no loss is recognised during the

year.

5 Goodwill

Zero Black

$m $m

Consideration transferred 600 270

Less: fair value of net assets acquired:

(250/350 × 770) (550

(60% × 400) (240)

50 30

Impairment losses to 1 June 20X2 (10 (6)

Goodwill not yet written off at date of disposal 40 24

6 Share of loss of associate

Profit for the year (52 × 3/12 × 40%) 5.2

Provision for unrealised profit (90 (W10)) (10.8)

(5.6)

7 Non-controlling interests

Zero to 1 December 20X2 (160 × 6/12 × 100/350) 23

Zero to 31 May 20X3 (160 × 6/12 × 150/350) 34

Black to 1 March 20X3 (52 × 9/12× 40%) 16

8 Profit on disposal of shares in Black

$m $m

Fair value of consideration received 106.0

Fair value of 40% investment retained (40m × $2.65) 240.0

Base's share of consolidated carrying value when control lost

Share capital 200

Retained earnings at start of year 190

Profit for current year (52 × 9/12) 39

Fair value adjustment ((400 – (200 + 150)) 50

479 × 60 % (287.4)

Goodwill not yet written off attributable to owners of parent(W5) (24.0)

34.6

ANSWERS

9 Adjustment to parent's equity on disposal of Zero

$m $m

Fair value of consideration received 155

Increase in NCI in net assets at disposal

Share capital 350

Retained earnings at start of year 400

Profit for current year (160 × 6/12) 80

Fair value adjustment (770 – 350 – 250) 170

1,000

Increase in NCI 50/350 (143)

Note: No adjustment is made to the non-controlling interests in goodwill as they are not recognised

as a group policy is to hold non-controlling interests at their proportionate share of the fair because

value of the identifiable net assets not at fair value.

10 Provision for unrealised profit

$90 × 30% = $25m

Group share: 40% = $10.8m

(b) Revenue from the sale of software under licences

At present the company must comply with IAS 18 Revenue, although this standard only sets out general

principles. There have recently been several high profile cases in which companies have been criticised for

adopting questionable revenue recognition policies. As a result, many companies have turned to US GAAP

where this provides further guidance on reporting specific types of transaction. In itself, this does not

contravene IAS 18.

However, IAS 18 does require that where a transaction consists of more than one distinct element, each

element should be accounted for separately. An Appendix to IAS 18 states that where the selling price of

the product includes an identifiable amount for subsequent servicing, that amount, including a profit

element, should be deferred and recognised as revenue over the period during which the service is

performed. Alternatively, it could be argued that the provision of the software and the services are linked

and should be treated as one transaction. The correct accounting treatment depends on the economic

substance of the transactions.

The Appendix to IAS 18 also states that fees from the development of customised software should be

recognised by reference to the stage of completion of the development. At present the company only

recognises revenue at the completion of the contract and therefore this accounting policy should be

changed.

information in their financial statements.

Public interest in corporate social responsibility is steadily increasing. Although financial statements

are primarily intended for investors and their advisers, there is growing recognition that companies

actually have a number of different stakeholders. These include customers, employees and the

general public, all of whom are potentially interested in the way in which a company's operations

affect the natural environment and the wider community. These stakeholders can have a

considerable effect on a company's performance. As a result many companies now deliberately

attempt to build a reputation for social and environmental responsibility. Therefore the disclosure

of environmental and social information is essential. There is also growing recognition that corporate

social responsibility is actually an important part of an entity's overall performance. Responsible

practice in areas such as reduction of damage to the environment and recruitment increases

shareholder value. Companies that act responsibly and make social and environmental disclosures

are perceived as better investments than those that do not.

ANSWERS

Another factor is growing interest by governments and professional bodies. Although there are no

IFRSs that specifically require environmental and social reporting, it may be required by company

legislation. There are now a number of awards for environmental and social reports and high

quality disclosure in financial statements. These provide further encouragement to disclose

information.

At present companies are normally able to disclose as much or as little information as they wish in

whatever manner that they wish. This causes a number of problems. Companies tend to disclose

information selectively and it is difficult for users of the financial statements to compare the

performance of different companies. However, there are good arguments for continuing to allow

companies a certain amount of freedom to determine the information that they disclose. If detailed

rules are imposed, companies are likely to adopt a 'checklist' approach and will present

information in a very general and standardised way, so that it is of very little use to stakeholders.

(ii) The Base Group could improve its disclosure of 'Corporate Environmental Governance' by including

the following information in its financial statements:

(1) a general description of its policies relating to the environment

(2) descriptions of the ways in which the company seeks to manage and minimise

environmental risks

(3) details of any serious pollution incidents that have occurred during the year and details of

any fines imposed for environmental offences

(4) a report on the company's environmental performance including details of acid gas and

other emissions and details of how the company's activities affect the natural environment in

other ways. The report should include narrative information (descriptions of how the risks

are reduced) and numerical information if this is verifiable

(5) details of the company's targets (key performance indicators) for reducing emissions and

other forms of pollution and whether these have been met; historical data should be included

here if this is practicable

There exist a number of guidelines that set out the information that should be disclosed in an

environmental report (for example, the Global Reporting Initiative (GRI) framework of performance

indicators). The guidance is non-mandatory, but represents best practice. Ideally, the environmental

information should be audited.

ANSWERS

D14 Preparation question: Foreign operation

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Standard Odense Rate Odense Consol

$'000 Kr'000 $'000 $'000

Property, plant and equipment 1,285 4,400 8.1 543 1,828

Inv in Odense 520 – – –

Goodwill (W2) – – – 277

1,805 4,400 543 2,105

Current assets 410 2,000 8.1 247 657

2,215 6,400 790 2,762

Share capital 500 1,000 9.4 106 500

Retained earnings (W3) 1,115 1,395

Pre-acq'n 2,100 9.4 224

Post acq'n – 2,200 Bal fig 324

1,615 5,300 654 1,895

Non-controlling interest (654 × 20%) 131

2,026

Loans 200 300 8.1 37 237

Current liabilities 400 800 8.1 99 499

600 1,100 136 736

2,215 6,400 790 2,762

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Standard Odense Rate Odense Consol

$'000 Kr'000 $'000 $'000

Revenue 1,125 5,200 8.4 619 1,744

Cost of sales (410) (2,300) 8.4 (274) (684)

Gross profit 715 2,900 345 1,060

Other expenses (180) (910) 8.4 (108) (288)

Impairment loss (W2) (21)

Dividend from Odense 40 –

Profit before tax 575 1,990 237 751

Income tax expense (180) (640) 8.4 (76) (256)

Profit for the year 395 1,350 161 495

OTHER COMPREHENSIVE INCOME

Exchange difference on translating foreign

operations (W4)

–

395 1,350 161 567

TOTAL COMPREHENSIVE INCOME FOR THE YEAR

Profit attributable to:

Owners of the parent 463

Non-controlling interest (161× 20%) 32

495

Total comprehensive income for the year attributable to:

Owners of the parent 525

Non-controlling interest (161 + 48) × 20% 42

567

ANSWERS

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (EXTRACT)

Retained

earnings

$'000

Balance at 20X5 1,065

Dividends paid (195)

Total comprehensive income for the year (per SOCI) 525

Balance at 31/12/X6 (W3)/(W4) 1,395

Workings

1 Group structure

Standard

1.1.X4 80%

Pre-acquisition ret'd earnings 2,100,000 Krone

Odense

2 Goodwill

Kr'000 Kr'000 Rate $'000

Consideration transferred 4,888

Share capital 1,000

Retained earnings 2,100

3,100

Group share (80%) (2,480)

2,408 9.4 256

Exchange differences 20X4-20X5 - β 18

At 31.12.X5 2,408 8.8 274

Impairment losses 20X6 (168) 8.1 (21)

Exchange differences 20X6 - β 24

At 31.12.X6 2,240 8.1 277

3 Consolidated retained earnings carried forward

Standard

$'000

Standard 1,115

Group share of post acquisition reserves at Odense (324 × 80%) 259

1,374

Less goodwill impairment losses (W2) (21)

Exchange on differences on goodwill (18 + 24) 42

1,395

4 Exchange differences

$'000 $'000

On translation of net assets:

Closing NA @ CR 654

Opening NA @ OR (5,300 – 1,350 + 405 = 4,355 @ 8.8) (495)

Less retained profit as translated (161 (SOCI) – 405 @ 8.1) (111)

Exchange gain 48

On goodwill (W2) 24

ANSWERS

5 Consolidated retained earnings b/f proof

$'000

Standard 915

Add post-acquisition retained earings of Odense

(4,355 @ 8.8 – 3,100 @ 9.4) × 80% 132

Less goodwill impairment losses (W2) 0

Exchange differences on goodwill (W2) 18

1,065

D15 Hyperinflation

(a) A foreign operation normally has the same functional currency of its parent when:

(i) The foreign company is merely an extension of the investing company operations overseas.

(ii) The foreign company is dependent upon the investing company for financing.

(iii) The foreign company cash flows have a material impact on those of the investing company.

(iv) The majority of the transactions are denominated in the investing company currency.

A foreign operation normally has a different functional currency from is parent when:

(i) The foreign operation is separate or independent.

(ii) The normal operations are denominated in the local currency.

(iii) The normal operations are (at least partially) financed locally.

(iv) The foreign operation has a management team committed to maximisation of the local currency

profits.

(v) The financial statements of the foreign operation are be expressed in the local currency as the best

indicator of the performance locally.

Factors which may be taken into account in determining the functional currency include the following.

(i) Pricing and market conditions. Are they determined locally or by the investing company?

(ii) Does the foreign operation buy goods and services locally or rely on imports?

(iii) How is the foreign operation financed? Locally or by the investing company?

(iv) What is the extent of intra-group trading?

(b) The effects of hyper-inflation on the financial statements

Hyper-inflation can reduce the usefulness of financial statements in the following ways:

• The amounts at which assets are stated in the statement of financial position are unlikely to reflect

their current values.

• The level of profit for the year may be misleading. Income appears to increase rapidly, while

expenses such as depreciation may be based on out of date costs and are artificially low.

• It is therefore difficult to make any meaningful assessment of an entity's performance as assets are

understated and profits are overstated.

These are well known disadvantages of basing financial statements on historic cost and they affect most

entities. However, where there is hyper-inflation these problems are exacerbated. In addition, where an

entity's financial statements are translated into dollars, hyper-inflation often gives rise to significant

exchange differences which may absorb reserves.

ANSWERS

How hyper-inflation should be dealt with in the financial statements

IAS 29 does not provide a definition of hyper-inflation. However, it does include guidance as to

characteristics of an economic environment of a country in which hyper-inflation may be present. These

include, but are not limited to, the following.

• The general population prefers to keep its wealth in non-monetary assets or in a relatively stable

foreign currency

• Interest rates, wages and prices are linked to a price index

• The cumulative inflation rate over three years is approaching, or exceeds, 100%

IAS 29 states that the financial statements of an entity that reports in the currency of a hyper-inflationary

economy should be restated in terms of the measuring unit current at the reporting date. This involves

remeasuring assets and liabilities by applying a general price index. The gain or loss on the net monetary

position is included in net income and separately disclosed. The fact that the financial statements have

been restated should also be disclosed, together with details of the index used.

IAS 21 The effects of changes in foreign exchange rates states that where there is hyper-inflation, the

financial statements of a foreign operation should be restated in accordance with the requirements of IAS

29 before they are translated into the currency of the reporting entity. In this way users are made aware of

the effect of hyper-inflation on the results and net assets of the entity.

(1) Value Exchange

(E million) rate $m

30 November 20X3 20 1.34 14.93

30 November 20X7 20 17.87 1.12

(A material reduction in value)

(2) Value Exchange

E million Index rate $m

30 November 20X7 20 × 3,254/100 17.87 36.42

(ii) In example (1) the tremendous reduction is due to severe exchange rate movements and has

nothing at all to do with trading performance from the assets.

In example (2) a paper gain emerges simply as a result of revaluation locally, again this has little to

do with trading performance and reflects an unrealised holding gain measured locally. However, this

method does eliminate the 'disappearing assets' problem and IAS 29 requires restatement using this

method where there is hyperinflation.

ANSWERS

D16 Question with helping hands: Zetec

Text reference. Foreign currency translation is covered in Chapter 16 of the Study Text.

Top tips. This question required candidates to produce a consolidated income statement and statement of financial

position for a parent company and its foreign subsidiary. Adjustments had to be made before consolidation to bring

the subsidiary's financial statements into line with 'local' accounting standards.

Examiner's comment. Candidates generally made good attempts at the translation of the foreign subsidiary and the

calculation of goodwill, inter company profit in inventory, and the gain in translation. At the same time, there were

problems with the 'extraordinary' items and surprisingly with the rates of exchange to be used in translating the

income statement and statement of financial position of the subsidiary. However, generally the performance on this

question was good.

Marking scheme

Marks

Consolidated income statement 13

Consolidated statement of financial position 12

Maximum 25

ZETEC GROUP

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20X2

Non-current assets: 180 + 95 (W1) + 19.3 (W3) 294

Goodwill: (3 + 18) (W1, W7) 21

Net current assets: 146 + 29 (W1) – 3 (W4) 172

487

Equity attributable to the owners of the parent

Ordinary shares of $1 65

Share premium 70

Retained earnings (W9) 185

320

Non-controlling interest (W8) 13

333

Non-current liabilities: 74 + 80 (W1) 154

487

ZETEC GROUP

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 OCTOBER 20X2

Revenue: 325 + 50 (W2) – 15 (W4) 360

Cost of sales: 189 + 24.6 (W2) – 15 (W4) + 3 (W4) (202)

Gross profit 158

Distribution and administrative expenses: 84 + 9 (W2) (93)

Finance costs: 2 + 4 (W2) (6)

Profit before tax 59

Income tax expense: 15 + 6 (W2) (21)

Profit for the year 38

Profit attributable to:

Owners of the parent 37

Non-controlling interest: 6.2 (W2) × 20% 1

ANSWERS

Workings

1 Translation of subsidiary's statement of financial position/adjustment to IFRS

Per qu Adjustments Note/ Total Rate

Kr'm Working (Note 1) $m

Non-current assets 380 380 4 95.0

Goodwill 12 2 12 4 3.0

Net current assets 116 116 4 29.0

508 508 127.0

Equity

Ordinary shares: 1 kr 48 48 6 8.0

Share premium 18 18 6 3.0

Pre-acq'n reserves:

Revaluation surplus 12 12 6 2.0

Retained earnings 98 (13) (W6) 85 6 14.2

176 163 27.2

Post-acq'n reserves:

Profit (Note 3) 34 (3) 31 ß 21.0

'Extraordinary' item (22) 3 + 6 + 13 (W6) - -

Revaluation surplus (6) (W6) (6) 5 (1.2)

188 188

Long-term liabilities 320 320 4 80.0

508 508 127.0

Notes

1 Translate assets and liabilities at the rate ruling at the reporting date, and share capital and preacquisition

reserves at the historic rate. Post-acquisition reserves are as calculated above. The

translation reserve is the balancing figure.

2 Aztec has allocated the excess of the price paid for its acquisition of a company over the fair value of

the company's net assets to 'market share'. However, this should be re-classified as goodwill.

3 Profit excludes the extraordinary item but includes exchange differences arising on retransaltion of

the subsidiary.

2 Translation of Aztec income statement

Kr'm Rate $m

Revenue 250 5 50.0

Cost of sales (120 – 3 (W6)) (123) 5 24.6

Gross profit 127 25.4

Distribution and administrative expenses (46) 5 (9.2)

Interest payable (20) 5 (4.0)

Profit before tax 61 12.2

Income tax expense (30) 5 6.0

Profit for the year 31 6.2

3 Fair value adjustment

Acquisition Movement Exchange

differences

Reporting

date

Kr'm Kr'm Kr'm Kr'm

Stock market portfolio (240 – (W1) 163) 77 – – 77

Exchange rate 6 5 – 4

Translated 12.8 – 6.5 19.3

ANSWERS

4 Unrealised profit in inventories

Although the goods sold by Zetec to Aztec have been consumed in the manufacturing process, they have not

been sold and are included in closing finished goods inventories. Hence, the unrealised profit must be

eliminated on consolidation. The profit sits in Zetec's (the parent) books and must therefore be adjusted in

full against its profits.

Goods transferred from Zetec at selling price $15m

Percentage profit on selling price × 20%

Unrealised profit sitting in Zetec $3m

5 Settlement of debt from inventory transfer

A gain would be made by Aztec, calculated as follows:

Kr'm

Liability arising on transfer of the goods at 31 May 20X2: 15m × 5.2 78

Settlement on 31 July 20X2: 15m × 4.2 63

Gain 15

This would have already been included in Aztec's income statement (in cost of sales) and is therefore

recorded in Aztec's income statement in the amount of Kr 15 million in cost of sales and included in the

group accounts accordingly.

6 Elimination of extraordinary item

The extraordinary items figure of Kr 22m in the income statement of Aztec has been eliminated in Working 1

as follows.

Kr'm

Accounting policy adjustment to opening reserves * 13

Impairment of non-current asset charged to revaluation surplus ** 6

Impairment of non-current asset charged to cost of sales (9 – 6) 3

*Aztec has written the prior year adjustment of Kr 13m off to the current period's income statement. Under

IAS 8, it should be treated as a prior year adjustment and charged against opening retained earnings, ie

deducted from pre-acquisition profits and added back to post-acquisition profits.

**This would result in a debit balance on the post acquisition revaluation surplus. Consequently, on

consolidation the translated figure of 1.2 (6 ÷ 5 from Working 1) will have to be offset against group retained

earnings (see Working 9 below).

7 Goodwill arising on acquisition of Aztec

Kr'm Kr'm Rate $m

Consideration transferred 264

Less fair value of net assets acquired 240

Group share: 80% 192

72 6 12

FX gain – β 6

72 4 18

8 Non-controlling interest

Net assets at reporting date [47.0 (W1) + 19.3 (W3)] 66.3

Minority share × 20%

13.3

ANSWERS

9 Retained earnings

Zetec per question 161.0

Aztec post-acquisition (21 (W1) – 1.2 (W1, W6 note)) × 80% 15.8

Difference on fair value adjustments (6.5 (W3)) × 80%] 5.2

On goodwill (W7) 6.0

Unrealised profit (3.0)

185.0

10 Proof of movement on retained earnings

Retained earnings at 1 November 20X1 [161 – 35 + 4] 130

Profit for the year 37

Dividends paid (4)

Impairment of non-current asset charged to rev'n surplus (1.2 (W1, W6 note) × 80%) (1)

Retained earnings as at as at 31 October 20X2 162

Analysis of exchange gain (specifically asked for in the requirement)

Closing net assets at closing rate (W1) 47.0

Opening net assets at opening rate (W1) (27.2)

Increase in net assets 19.8

Less: profit for year (W1) (6.2)

Add back: charge to revaluation surplus in the year (W1) 1.2

Translation differences arising in the year 14.8

D17 Memo

Text reference. Foreign currency is covered in Chapter 16.

Top tips. In this question, you had to produce a consolidated income statement and statement of financial position

for a parent company and its foreign subsidiary. Adjustments had to be made for intragroup items such as loans

and inventory, and candidates had to deal with the treatment of goodwill as a foreign currency asset. Exchange

gains and losses had to be recognised in the financial statements.

Easy marks. Just setting out the proforma and doing the mechanics of translation will earn you easy marks, even if

you struggle with more difficult aspects.

Examiner's comment. This question was well answered. Candidates generally made good attempts at the

translation of the foreign subsidiary, the calculation of goodwill, intragroup profit in inventory, and the gain on

translation. At the same time, there were problems with the treatment of goodwill as a foreign currency asset, and

the exchange gain on the intra group loan.

ANSWERS

Marking scheme

Marks

Consolidated statement of financial position 7

Translation of sub- statement of financial position 5

Goodwill 1

Non-controlling interest 2

Post acquisition reserves 5

Consolidated income statement 5

Unrealised profit 4

Loan 3

Available 32

Maximum 32

(Movement on reserves and exchange gain analysis not asked for)

MEMO

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 APRIL 20X4

Assets

Property, plant and equipment 367

Goodwill (W4) 8

Current assets (355 + 48.6 – 0.6) (W8) 403

778

Equity and liabilities

Equity attributable to owners of the parent:

Share capital 60

Share premium 50

Retained earnings (W7) 372

482

Non-controlling interest (W6) 18

500

Non-current liabilities (30 + 18.6 – 5) 44

Current liabilities 234

778

MEMO

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 APRIL 20X4

Revenue (200 + 71 – 6) 265

Cost of sales (120 + 48 – 6 + 0.6 (W8) (163)

Gross profit 102

Distribution costs and administrative expenses (40)

Impairment of goodwill (W5) (2)

Finance costs (1)

Interest receivable 4

Exchange gains (W8) 1

Profit before tax 64

Income tax expense (24)

Profit for the year 40

Other comprehensive income

Exchange differences on foreign operations (W9) (9.7 + 1.6) 11

Total comprehensive income for the year 51

Profit attributable to

Owners of the parent 38

Non-controlling interest (25% × 7.9) (W6) 2

Total comprehensive income for the year attributable to

Owners of the parent 47

Non-controlling interest (7.9 + 9.7) × 25% 4

ANSWERS

Workings

1 Group structure

Memo

1 May 20X3 75%

Random

2 Translation of statement of financial position

CRm Rate $m

Property, plant and equipment 146.0 2.1 69.5

Current assets 102.0 2.1 48.6

248.0 118.1

Share capital 32.0 2.5 12.8

Share premium 20.0 2.5 8.0

Retained earnings:

Pre-acquisition 80.0 2.5 32.0

132.0 52.8

Post– acquisition: 15 + (2 – 1.2) (W8) 15.8 β 17.6

147.8 70.4

Non-current liabilities (41 – 2 (W8)) 39.0 2.1 18.6

Current liabilities (60 + 1.2 (W8)) 61.2 2.1 29.1

248.0 118.1

3 Translation of income statement

CRm Rate $m

Revenue 142 2 71

Cost of sales (96) 2 (48)

Gross profit 46 23

Distribution and administrative expenses (20) 2 (10)

Interest payable (2) 2 (1)

Exchange gain (2 – 1.2) (W8) 0.8 2 0.4

Profit before tax 24.8 12.4

Income tax expense (9) 2 (4.5)

Profit for the year 15.8 7.9

4 Provision for unrealised profit

Sale by parent to subsidiary (6 million × 20% × ½) 0.6

5 Goodwill

CRm CRm Rate $m

Consideration transferred 120.0

Less fair value of net assets acquired

Share capital 32

Share premium 20

Retained earnings 80

132

Group share (75%) (99.0)

21.0 2.5 8.4

Impairment losses (4.2) 2.1 (2.0)

FX gain – β 1.6

At 30.4.X4 16.8 2.1 8.0

Cost = 120m crowns

PAR = 80m crowns

ANSWERS

6 Non-controlling interest

Non-controlling interest share of net assets (25% × 70.4 (W2)) 17.6

7 Retained earnings

Memo 360.0

Random (75% × 17.6 (W3)) 13.2

Provision for unrealised profit (W4) (0.6)

Impairment of goodwill (W5) (2.0)

Exchange differences on goodwill (W5) 1.6

372.2

8 Exchange gains and losses in the accounts of Random

Loan to Random (non-current liabilities)

CRm

At 1 May 20X3 ($5 million × 2.5) 12.5

At 30 April 20X4 ($5 million × 2.1) (10.5)

Gain 2.0

Intro-group purchases (current liabilities)

CRm

Purchase of goods from Memo ($6 million × 2) 12

Payment made ($6 million × 2.2) (13.2)

Loss (1.2)

Exchange differences in income statement (retranslated to dollars)

Gain on loan (2 ÷ 2) 1.0

Loss on current liability/purchases (1.2 ÷ 2) (0.6)

0.4

(Note. This has been rounded up to $1 million.)

9 Exchange differences arising during the year

$m $m

Closing net assets at closing rate (W2) 70.4

Less opening net assets at opening rate (W2) (52.8)

17.6

Less retained profit as translated (W3) (7.9)

9.7

Exchange gain on retranslation of goodwill (W4) 1.6

11.3

ANSWERS

D18 Preparation question: Statement of cash flows

CHARMER

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 SEPTEMBER 20X1

$'000 $'000

Cash flows from operating activities

Profit before taxation 1,579

Adjustments for

Depreciation ((W1) 80 + 276) 356

Loss on disposal of plant 86

Amortisation of government grant (125)

Negligence claim previously provided (120)

Investment income (120)

Interest expense 260

1,916

Increase in trade receivables (935 – 824) (111)

Increase in inventories (1,046 – 785) (261)

Decrease in trade payables (760 – 644) (116)

Cash generated from operations 1,428

Interest paid (W5) (245)

Income taxes paid (W3) (368)

Net cash from operating activities 815

Cash flows from investing activities

Purchase of property, plant and equipment ((W1) 50 + 848) (898)

Purchase of non-current investments (690)

Purchase of treasury bills (120 – 50) (70)

Proceeds from sale of plant (W1) 170

Government grant received (W4) 175

Investment income received 120

Net cash used in investing activities (1,193)

Cash flows from financing activities

Proceeds from issue of share capital (W2) 300

Dividends paid (180)

Net cash from financing activities 120

Net decrease in cash and cash equivalents (258)

Cash and cash equivalents at beginning of period 122

Cash and cash equivalents at end of period (136)

Workings

1 Non-current assets and depreciation

LAND AND BUILDINGS – COST/VALUATION

$'000 $'000

Balance b/f 1,800

Revaluation 150

Cash purchase (bal fig) 50 Balance c/f 2,000

2,000 2,000

PLANT – COST

$'000 $'000

Balance b/f 1,220 Disposal 500

Cash purchases (bal fig) 848 Balance c/f 1,568

2,068 2,068

ANSWERS

Disposal proceeds:

$'000

Cost 500

Accumulated depreciation (244)

NBV 256

Loss on sale (86)

∴ Disposal proceeds 170

LAND AND BUILDINGS – ACC'D DEPRECIATION

$'000 $'000

Balance b/f 680

Balance c/f 760 Depreciation (bal fig) 80

760 760

PLANT – ACC'D DEPRECIATION

$'000 $'000

Disposal 244 Balance b/f 432

Balance c/f 464 Depreciation (bal fig) 276

708 708

2 Issue of share capital

SHARE CAPITAL

$'000 $'000

Balance b/f 1,000

Bonus issue 1 for 10 100

Conversion of loan stock* 100

Balance c/f 1,400 Issued for cash (bal fig) 200

1,400 1,400

SHARE PREMIUM

$'000 $'000

Balance b/f 60

Balance c/f 460 Conversion of loan stock* 300

Issued for cash (bal fig) 100

460 460

∴ Total for cash = $200,000 + $100,000 = $300,000

* Conversion of loan stock:

Carrying value of loan stock = $20,000 + $380,000 = $400,000

∴ No of shares = $400,000 ×

100

= 100,000

Shares must be at a premium of $400,000 – $100,000 = $300,000

3 Income taxes paid

INCOME TAX PAYABLE

$'000 $'000

Deferred tax b/f 400

Income taxes paid (bal fig) 368 Current tax b/f 367

Deferred tax c/f 439 Income tax charged to I/S 520

Current tax c/f 480

1,287 1,287

ANSWERS

Accounting Books Pdf

Wednesday, March 1, 2017