P2 Workbook Q &amp A PDF

P2 Corporate Reporting
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ACCA P2 - Corporate Reporting Workbook - Questions & Solutions
Group Accounts
Illustration 1
Almeria Non Current Assets Tangible Investment in Murcia 100 300 100 Murcia
Current Assets Inventory Receivables Cash 40 60 200 700 200 100 200 600
Ordinary Shares Accumulated Prots Equity
160 240 400
100 200 300
Non Current Liabilities Current Liabilities
100 200 700
200 100 600
Additional Information Almeria today acquired all the shares in Murcia for $300m Required Prepare the consolidated statement of nancial position for the Almeria group
Pro-Forma
Working 1 - Group Structure
Almeria
Murcia Date Acquired Parent Share NCI
Working 2 - Equity Table

At Acquisition Share Capital Accumulated Prots At Year End
! Working 3 - Goodwill
Cost of Parent Investment Less Parent % of the net assets at acquisition (W2)
Goodwill
Working 4 - NCI
$ NCI % of the subsidiarys net assets at the year end (W2)
Working 5 - Accumulated Prots

$ Parents Accumulated Prots Add: Parent % of the subsidiarys post acquisition prots
SFP for Almeria Group

Almeria Non Current Assets Goodwill Tangible Investment in Murcia 100 300 100 Murcia Group
Current Assets Inventory Receivables Cash 40 60 200 700 200 100 200 600
Ordinary Shares Accumulated Prots Non Controlling Interest Equity
160 240
100 200
400
300
100 200 700
200 100 600
Solution
Working 1 - Group Structure
Almeria
Date Acquired Parent Share NCI
100%
Murcia TODAY 100% 0%

At Acquisition Share Capital Accumulated Prots 100 200 300 At Year End 100 200 300
Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) (300 x 100%)
300 -300
Goodwill
Working 4 - NCI
$ NCI % of the subsidiarys net assets at the year end (W2) (300 x 0%) 0
! Working 5 - Accumulated Prots

$
Parents Accumulated Prots Add: Parent % of the subsidiarys post acquisition prots
240 Nil 240
SFP for Almeria Group

Almeria Non Current Assets Goodwill Tangible Investment in Murcia 100 300 100 None (W3) 100 + 100 Cancel out Nil 200 Nil Murcia Group
Current Assets Inventory Receivables Cash 40 60 200 700 200 100 200 600 40 + 200 60 +100 200 + 200 240 160 400 1000
Ordinary Shares Accumulated Prots Non Controlling Interest Equity
160 240
100 200
Parent W5 W4
160 240 Nil 400
400
300
100 200 700
200 100 600
100 + 200 200 + 100
300 300 1000
Illustration 2
Ant Dec
Assets Investment in Dec
500 350 850
500
500
Ordinary Shares Accumulated Prots Equity
100 250 350
200 100 300
Liabilities
500 850
200 500
Additional Information Ant today acquired 160m of the 200m shares in Dec. Required Prepare the consolidated statement of nancial position for the Ant group
Illustration 2 Pro-Forma
Working 1- Group Structure
Working 2- Equity Table

Working 3 - Goodwill
Goodwill
Working 4 NCI

$
Statement of Financial Position for Ant Group

Ant Dec Group
Goodwill Assets Investment in Dec 500 350 850 500 500
Ordinary Shares Accumulated Prots NCI Equity
100 250
200 100
350
300
Liabilities
500 850
200 500
Illustration 2 Solution
Ant
Dec Date Acquired Parent Share NCI
80%
TODAY 80% 20% 100%
Working 2- Equity Table

350 -240
Goodwill
110
Working 4 NCI

$ 250 Nil 250
Statement of Financial Position for Ant Group

Ant Dec Group
Goodwill Assets Investment in Dec 500 350 850 500 500
W3 500 + 500 Cancelled in Goodwill W3
110 1000 Nil 1110
Ordinary Shares Accumulated Prots NCI Equity
100 250
200 100
Parent Only W5 W4
100 250 60 410
350
300
Liabilities
500 850
200 500
500 +200
700 1110
Illustration 4
Evan Dando
Assets Investment in Dando
200 500
350
Current Assets
200 900
300 650
Ordinary Shares ($1) Accumulated Prots Equity
200 250 450
200 100 300
Non Current Liabilities Liabilities
280 170 900
200 150 650
Additional Information Evan acquired 150m shares in Dando one year ago when the reserves of Dando were $40m. Required Prepare the consolidated statement of nancial position for the Evan group and show the journal entries for accumulated prots.
Solution

Goodwill
Working 4 - NCI

$ Parents Accumulated Prots Add: Parent % of the subsidiarys post acquisition prots
Statement of Financial Position for Evan Group

Evan Dando Group
Goodwill Assets Investment in Dando 200 500 350
Current Assets
200 900
300 650
Ordinary Shares ($1) Accumulated Prots NCI Equity
200 250
200 100
450
300
280 170 900
200 150 650
Accumulated Prots Double Entry

DR CR
Solution
Evan
75%
Dando 1 Year Ago 75% 25% 100%

500 -180
Goodwill
320
Working 4 - NCI

$ Parents Accumulated Prots Add: Parent % of the subsidiarys post acquisition prots (75% x 60m) 250 45 295
Statement of Financial Position for Evan Group

Evan Dando Group
Goodwill Assets Investment in Dando 200 500 350
W3 200 + 350 Cancelled out in W3.
320 550 Nil
Current Assets
200 900
300 650
200 + 300
500 1370
200 250
200 100
Parent Only W5 W4
200 295 75 570
450
300
280 170 900
200 150 650
280 + 200 170 + 150
480 320 1370
Accumulated Prots Double Entry

DR DR CR CR CR Subsidiary Accumulated Prots at year end NCI Parent share of pre acquisition prots (W3) Parent share Post acquisition Prots 100 x 25% 40 x 75% 60 x 75% 100 25 30 45 CR
Illustration 5
Virtual Insanity
Assets Investment in Insanity
1000 600
800
Current Assets
400 2000
200 1000
800 750 1550
100 400 500
250 200 2000
300 200 1000
Additional Information Virtual acquired 60m shares in Insanity one year ago when the reserves of Insanity were $60m. Required Prepare the consolidated statement of nancial position for the Virtual group
Solution
Virtual
60%
Insanity 1 Year Ago 60% 40% 100%
! Working 2 - Equity Table

! !
! !
! !
! ! Working 3 - Goodwill
Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) 160 x 60%
600 -96
Goodwill
504
Working 4 - NCI
$ Parents Accumulated Prots Add: Parent % of the subsidiarys post acquisition prots (60% x (500 160) 750 204 954
Statement of Financial Position for Virtual Group

Virtual Insanity Group
Goodwill Assets Investment in Insanity 1000 600 800
W3 1000 + 800 Cancelled in W3
504 1800 Nil
Current Assets
400 2000
200 1000
400 + 200
600 2904
800 750
100 400
Parent Only W5 W4
800 954 200 1954
1550
500
250 200 2000
300 200 1000
250 + 300 200 + 200
550 400 2904
Illustration 6
Jabba has acquired 100% of the shares in Hutt. The consideration was as follows: 1. Cash of $36,000. 2. 2000 Shares in Jabba (the share price is currently $3). 3. $30,000 to be paid three years after the date of acquisition. The relevant discount rate is 10% 4. If the group meets certain targets there will be a further payment with fair value of $60,000 at a later date. Required: Calculate the fair value of the consideration which Jabba has given in purchasing the investment in Hutt.
$ Cash Shares Deferred Consideration Contingent Consideration Amount Market Value (2000 x 3) 30,000 x 0.751 Fair Value Total 36,000 6,000 22,530 60,000 124,530
Illustration 7
Brad acquires 80% of Angelinas share capital in a share for share exchange. Brad gives Angelina 2 shares for every one in Angelina. Angelina has 100 shares in issue with a nominal value of $1. Brads share price is $5. At the date of acquisition the net assets of Angelina are $600. Calculate the goodwill arising using the proportionate method and the NCI.
Consideration Brad is purchasing 80% of 100 shares = 80 shares He is issuing 2 shares for each of the 80 he is purchasing (80 x 2) = 160 Each of the 160 shares is worth $5 so consideration is (160 x 5) = $800 Goodwill
Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) 600 x 80%
800 -480
Goodwill
320
NCI
NCI % of the subsidiarys net assets
600 x 20%
120
Illustration 8
Brad acquires 80% of Angelinas share capital in a share for share exchange. Brad gives Angelina 2 shares for every one in Angelina. Angelina has 100 shares in issue with a nominal value of $1 and a current share price of $8. Brads share price is $5. At the date of acquisition the net assets of Angelina are $600. Calculate the gross goodwill and the NCI.
Solution
Consideration Brad is purchasing 80% of 100 shares = 80 shares He is issuing 2 shares for each of the 80 he is purchasing (80 x 2) = 160 Each of the 160 shares is worth $5 so consideration is (160 x 5) = $800 Goodwill $ Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) 600 x 80% 800 -480
Goodwill attributable to Parent
320 $
Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2)
(100 x 20%) x $8 (20% x 600)
160 -120
Goodwill attributable to NCI
40
$ Goodwill Attributable to Parent Goodwill Attributable to Subsidiary Gross Goodwill 320 40 360
Alternative working
Cost of Parents investment Fair value of NCI at acquisition (Market Value)
800 160 960
Less 100% net assets at acquisition in W2 Gross Goodwill
-600 360
NCI
NCI % of the subsidiarys net assets Add goodwill attributable to NCI
600 x 20%
120 40 160
Illustration 9 - Do this yourself!

Archie acquires 60% of Mitchells share capital with consideration of $900. Mitchell has 200 shares in issue with a share price is $5. At the date of acquisition the net assets of Mitchell were $800 and are $950 at the year end. Calculate the gross goodwill and the NCI.
Solution
Goodwill $ Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) 800 x 60% 900 -480
420
$ Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2) (200 x 40%) x $5 (40% x 800) 400 -320
Goodwill attributable to NCI
80 $
Goodwill Attributable to Parent Goodwill Attributable to Subsidiary Gross Goodwill at acquisition
420 80 500
Alternative working
900 400 1300
-800 500
NCI
NCI % of the subsidiarys YEAR END net assets Add goodwill attributable to NCI
950 x 40%
380 80 460
Illustration 9a - And another one to try!

French acquired 75% of Shambles several years ago.
Cost of Investment $ 1,000 Fair Value of NCI at acquisition $ 300 Net assets at acquisition $ 800 Net assets at year end $ 3,000
Calculate the gross goodwill and the NCI.
Solution
Goodwill $ Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) 800 x 75% 1,000 600
400
$ Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2) Goodwill attributable to NCI (25% x 800) 300 -200 100 $ Goodwill Attributable to Parent Goodwill Attributable to Subsidiary Gross Goodwill at acquisition 400 100 500
Alternative working
1,000 300 1300
Less 100% net assets at acquisition in W2 Gross Goodwill NCI
-800 500
NCI % of the subsidiarys YEAR END net assets Add goodwill attributable to NCI
3000 x 25%
750 100 850
or
Fair Value of NCI at acquisition Plus NCI share of post acquisition prots 2200 x 25%
300 550 850
Illustration 10
Jimmy acquired 80% of Gent 1 year ago. The following information relates to Gent at the date of acquisition.
Accumulated prots at acquisition $ 150 Fair Value adjustment of plant at acquisition $ 100 Cost of investment Fair Value of NCI at acquisition
$ 800
$ 160
The plant subject to the fair value adjustment had a remaining life of 5 yrs at the date of acquisition. Goodwill is to be calculated gross.
Jimmy Investment in Gent Assets 800 700 1500 700 700 Gent
700 500 1200
250 350 600
Liabilities
300 1500
100 700
Solution
Jimmy
Gent Date Acquired Parent Share NCI
80%
1 Year Ago 80% 20% 100%

At Acquisition Share Capital Accumulated Prots Fair Value Adjustment Additional Depreciation 500 250 150 100 At Year End 250 350 100 -20 680
$ Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2) Goodwill attributable to NCI Gross Goodwill on Acquisition 500 x 20% 160 -100 60 460 500 x 80% 800 -400 400
Alternative working
800 160 960
-500 460
Working 4 - NCI
$ NCI % of the subsidiarys net assets at the year end (W2) Add Goodwill attributable to NCI (W3) 680 x 20% 136 60 196
or
Fair Value of NCI at acquisition Plus NCI share of post acquisition prots 2200 x 25%
300 550 850
Working 5 - Group Accumulated Prot

$ Parents Accumulated Prots Add: Parent % of the subsidiarys post acquisition prots 80% x (680 500) (W2) 500 144 644
Statement of Financial Position for Jimmy Group
Jimmy Goodwill Investment in Gent Assets 800 700 1500
Gent W3 Cancelled 700 700 700 + 700 + 100 - 20
Group 460 Nil 1480 1940
700 500
250 350
Parent only W5 W4
700 644 196 1540
1200
600
Liabilities
300 1500
100 700
300 + 100
400 1940
Double Entry
Item DR CR Plant Pre Acquisition Reserves DR 100 100 CR
This increases the value of the asset by the fair value adjustment and also increases reserves
Item DR CR Post Acquisition Reserves Plant
DR 20
CR
20
This entry adjusts post acquisition reserves for additional depn and decreases the value of plant
Illustration 11
Devil acquired 90% of Detail 2 years ago. The following information relates to Gent at the date of acquisition.
Accumulated prots at acquisition $ 250 Fair Value adjustment of plant at acquisition $ 100 Cost of investment $ 1000
The plant subject to the fair value adjustment had a remaining life of 4 yrs at the date of acquisition. Goodwill is to be calculated using the proportionate method.
Devil Investment in Detail Assets 1000 600 1600 800 800 Detail
650 250 900
100 500 600
Liabilities
700 1500
200 700
Solution
Devil
90%
Detail 2 Years Ago 90% 10% 100%
Working 2 - Net Assets Subsidiary

At Acquisition Share Capital Accumulated Prots Fair Value Adjustment Additional Depreciation (2yrs) 450 100 250 100 At Year End 100 500 100 -50 650
$ Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) Goodwill 450 x 90% 1000 -405 595
!
Working 4 - NCI
$
NCI % of the subsidiarys net assets at the year end (W2)
650 x 10%
65
!
$ Parents Accumulated Prots Add: Parent % of the subsidiarys post acquisition prots 90% x (650 450) (W2) 250 180 430
Statement of Financial Position for Devil Group

Devil Goodwill Assets 1000 600 1600 800 800 Detail W3 600 + 800 + 100 - 50 595 1450 2045 2070
650 250
100 500
Parent W5 W4
650 430 65 1145
900
600
Liabilities
700 1500
200 700
700 + 200
900 2045
Illustration 12
Pinky acquired 80% of Brain 4 years ago. The following information is relevant:
Net Assets at year end $ 150 Net Assets at acquisition $ 100 Cost of investment $ 175 Fair Value of NCI at acquisition $ 25 Recoverable amount at year end $ 230
Goodwill is calculated gross and is subject to an annual impairment review.

Pinky Investment in Pinky Assets 175 100 100 Brain
Inventory Receivables Bank
140 160 125 700
200 100 200 600
160 240 400
50 100 150
Non current liabilities Liabilities
100 300 700
250 100 600
Solution
Pinky
Brain Date Acquired Parent Share NCI
80%
4 Years Ago 80% 20% 100%

! !
$ Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2) Goodwill attributable to NCI Gross Goodwill on Acquisition 100 x 20% 25 -20 5 100 100 x 80% 175 -80 95
Alternative working
175 25 200
-100 100
Impairment
Impairment Review Carrying Value of asset Less Recoverable amount Impairment Loss Net Assets + Goodwill (150 + 100) 250 -230 20
!
Goodwill after impairment 100 -20 80
Gross Goodwill Impairment Loss Goodwill after impairment
!
Working 4 - NCI
$
NCI % of the subsidiarys net assets at the year end (W2) Add Goodwill attributable to NCI (W3) Less Impairment of goodwill
150 x 20%
30 5
20 x 20%
-4 31
or
Fair Value of NCI at acquisition Plus NCI share of post acquisition prots Less Goodwill Impairment 50 x 20% 20 x 20%
25 10 -4 31

$ Parents Accumulated Prots Less Goodwill Impairment Add: Parent % of the subsidiarys post acquisition prots 20 x 80% 80% x (100 150) (W2) 240 -16 40 264
Statement of Financial Position for Pinky Group

Pinky Goodwill Assets 100 100 Brain W3 100 + 100 Group 80 200
Inventory Receivables Bank
140 160 125 700
200 100 200 600
140 + 200 160 + 100 125 + 200
340 260 325 1205
160 240
50 100
Parent Only W5 W4
160 264 31 455
400
150
Non current liabilities Liabilities
100 300 700
250 100 600
100 + 250 300 + 100
350 400 1205
Illustration 13
George owns 80% of the subsidiary Bungle. During the impairment review it was found that the carrying value of Bungles net assets were $250 and the goodwill $300. The recoverable amount of the subsidiary is $500 and goodwill is calculated on a proportionate basis. What amount of goodwill will appear on the group SFP?
Solution
Gross up proportionate goodwill Proportionate Goodwill Gross this up (300 x 100/80) 300 375
We will use this grossed up value for goodwill in the impairment review.
Impairment Review Carrying Value of asset Grossed up Goodwill Less Recoverable amount Impairment Loss 250 375 -500 125
Goodwill on Balance Sheet Proportionate goodwill Share of Impairment (125 x 80%) Goodwill after impairment 300 -100 200
Illustration 14
A Parent company has recorded an asset of $300 goods receivable with a subsidiary. The subsidiary had recorded this as an initial liability payable of $300 but has just recorded and sent a cheque payment to the parent of $50 leaving the payable balance of $250. How should this be adjusted for on consolidation?
Solution
When cross casting assets & liabilities: Less Payables $250 (DR) Plus Cash at bank $50 (DR) Less Receivables $300 (CR)
Illustration 15
Parent has been selling goods to subsidiary. The parent has recorded an asset of $500 receivable from the subsidiary. The $500 includes goods worth $100 sent prior to the year end to the subsidiary who has not received them. As a result the subsidiary has a balance of $400 recorded as a liability in payables. How should this be treated on consolidation?
Solution
When cross casting assets & liabilities: Less Payables $400 (DR) Plus Inventory $100 (DR) Less Receivables $500 (CR)
Illustration 16
Arctic is the parent of a subsidiary Monkeys. Extracts of their SFPs are below Arctic Current Assets Inventory Receivables Bank 300 200 100 600 100 250 50 400 Monkeys
Current Liabilities
420
220
The trade payables of Monkeys includes $35m due to Arctic. This was after the deduction of $10m in respect of cash sent by Monkeys but not yet received by Arctic. The receivables of Arctic at the year end include $70m due from Monkeys. $25m of these goods had been dispatched by Arctic, but were not yet received by Monkeys. Show the treatment on consolidation.
Solution
Remember! Add the goods/cash in transit Subtract the inter company current accounts
+/+ + Cash in transit
Item
Where? Cash at Bank Inventory Payables Receivables
$m 10 25 35 70 Group
Goods in transit Inter Company Current Account inter Company Current Account Arctic Monkeys
Current Assets Inventory Receivables Bank 300 200 100 600 100 250 50 400 300 + 100 + Goods in transit of 25 200 + 250 - 70 inter company current account 100 + 50 + cash in transit 10 425 380 160 965
Current Liabilities
420
220
420 + 220 - inter company current account 35
605
Illustration 17
Sea is the parent of a subsidiary Lion. Extracts of their SFPs are below Sea Current Assets Inventory Receivables Bank 400 100 150 650 250 100 100 450 Lion
Current Liabilities
90
140
The trade payables of Lion includes $20m due to Arctic. This was after the deduction of $15m in respect of cash sent by Lion but not yet received by Sea. The receivables of Sea at the year end include $50m due from Lion. $15m of these goods had been dispatched by Sea, but were not yet received by Lion. Show the treatment on consolidation.
Solution
Remember! Add the goods/cash in transit Subtract the inter company current accounts
+/+ + Cash in transit
Item
Where? Cash at Bank Inventory Payables Receivables
$m 15 15 20 50 Group
Goods in transit Inter Company Current Account inter Company Current Account Sea Lion
Current Assets Inventory Receivables Bank 400 100 150 650 250 100 100 450 400 + 250 + Goods in transit of 15 100 + 100 - 50 inter company current account 150 + 100 + cash in transit 15 665 150 265 965
Current Liabilities
90
140
90 + 140 - inter company current account 20
210
Illustration 18
Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun. I. II. Calculate the PURP. Show the accounting treatment if the parent company is the seller.
III. Show the accounting treatment if the subsidiary company is the seller. IV. Do parts I - III if the goods had been sold at a margin of 30%.
Solution (Mark-up)
Unsold Inventory (400 x 3/4) = 300 Parent is seller DR/CR DR CR Account Accumulated Prots (W5) to decrease Inventory to decrease $ 60 60 $ Mark-up 25/125 PURP 60
Subsidiary is seller DR/CR DR DR CR Account Accumulated Prots (W5) with parent share to decrease (60 x 80%) NCI (W4) with subsidiary share to decrease Inventory to decrease $ 48 12 60 $
Solution (Margin)
Unsold Inventory (400 x 3/4) = 300 Parent is seller DR/CR DR CR Account Accumulated Prots (W5) to decrease Inventory to decrease $ 90 90 $ Margin 30% PURP 90
Subsidiary is seller DR/CR DR DR CR Account Accumulated Prots (W5) with parent share to decrease (90 x 80%) NCI (W4) with subsidiary share to decrease Inventory to decrease $ 72 18 90 $
Illustration 19
Argentina owns an 80% share of Messi which it purchased one year ago. The information below relates to Messi at the date of acquisition. Ordinary Share Capital $m 200 Reserves $m 400 Fair Value of the net assets $m 800 Fair value of the NCI $m 200 Cost of the investment $m 1900
The income statements for both are: Argentina Revenue Cost of Sales Gross Prot Operating Costs Finance Costs Prot Before Tax Tax Prot for the year Other information I. II. Argentina sold goods to Messi during the year at a margin of 40% and worth $100m. Half of these goods have been sold on by Messi by the year end. The fair value of Messis net assets were equal to their book value at the date of acquisition, with the exception of some machinery which had a useful life of 5 years. 8000 -4000 4000 -1500 -1000 1500 -700 800 Messi 3000 -1000 2000 -1500 -200 300 -100 200
III. Calculate goodwill using the fair value of the NCI at the date of acquisition. At the year end an impairment review has found that the goodwill has been impaired by 10%. Produce a consolidated Income Statement for the Argentina group.
Argentina
80%
Messi 1 Year Ago (No time apportionment) 80% 20% 100%
Working 2 - Inter Company

PURP Unsold Inventory (100 x 1/2) = 50 Margin 40% PURP 20
As the Parent is seller DR/CR DR CR Account Cost of sales to increase Inventory to decrease $ 20 20 $
Remember to remove the total amount of the sales also from sales and cost of sales DR/CR DR CR Account Revenue to decrease Cost of sales to decrease $ 100 100 $
We dont need the net assets at the year end, but we do need them at acquisition to calculate goodwill. Be careful - we are given the total and told that the difference is machinery - this will lead to an additional depreciation expense. At Acquisition Share Capital Accumulated Prots Fair Value Adjustment (Balancing gure) 200 400 200 800 At Year End N/A N/A N/A N/A
The $200m asset has a useful life of 5 years so the extra depreciation will be $200m x 1/5 = $40m. The treatment for this is: DR/CR DR CR Account Cost of sales to increase Non current assets to decrease $ 40 40 $
We can then use this to calculate the goodwill on acquisition $ Cost of Parent Investment Less Parent % of the net assets at acquisition Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition Goodwill attributable to NCI Gross Goodwill on Acquisition 800 x 20% 200 160 40 1300 800 x 80% 1900 640 1260
Alternative working
1900 200 2100
-800 1300
Goodwill impairment Gross Goodwill Impairment Loss (1300 x 10%) 1300 130
!
DR/CR DR CR
!
Account $ 130 130 $
The treatment for this is:
Cost of sales to increase Goodwill Intangible Asset to decrease
Working 4 - Cost of Sales

$m Parent Subsidiary Less Inter Company Sales Plus the PURP Plus additional depreciation Plus impairment loss 4000 1000 -100 20 40 130 5090
Working 5 - NCI
$ NCI % of the subsidiarys prots in question Less NCI share of additional depreciation Less NCI share of Impairment of goodwill 200 x 20% 40 x 20% 130 x 20% 40 -8 -26 6
Income statement for Argentina Group

Argentina Revenue Cost of Sales Gross Prot Operating Costs Finance Costs Prot Before Tax Tax Prot for the year 8000 -4000 4000 -1500 -1000 1500 -700 800 Messi 3000 -1000 2000 -1500 -200 300 -100 200 700 + 100 1500 + 1500 1000 + 200 8000 + 3000 - 100 inter company sales W4 Group 10900 -5090 5810 -3000 -1200 1610 -800 810
Attributable to Parent (Balancing Figure) Attributable to NCI (W5)
804 6 810
Statement of Changes in Equity Pro-forma

Share Capital OBalance Share Issues Revaluation Gains Prot for period Less Dividends ClBalance X X X X X Share Premium X X X X (X) X X X (X) X Revaluation Reserve X Accumulated Prots X NCI X Total X X X X (X) X
Illustration 20
Nadal is a 90% subsidiary of Federer. It was acquired one year ago for $4000m. At that time the accumulated prots were $800m. Income Statements Federer Revenue Cost of Sales Gross Prot Distribution Costs Admin Expenses Operating Prot Exceptional Gain Investment Income Finance Costs Prot Before Tax Tax Prot for the year Statements of Financial Position Federer Investment in Nadal Assets 4000 20000 24000 5000 5000 Nadal 20000 -12000 8000 -2100 -1400 1500 Nil 90 -600 3990 -700 3290 Nadal 4000 -2000 2000 -300 -500 1200 580 Nil -150 1630 -130 1500
Share Capital Accumulated Prots Equity
5000 15690 20690
1000 2200 3200
Liabilities
3310 24000
1800 5000
Federer Statement of changes in Equity Share Capital Opening Balance Prots for the year Less Dividends Closing Balance 5000 5000 Accumulated Prots 12600 3290 -200 15690 Total Equity 17600 3290 -200 20690
Nadal Statement of changes in Equity Share Capital Opening Balance Prots for the year Less Dividends Closing Balance 1000 1000 Accumulated Prots 800 1500 -100 2200 Total Equity 1800 1500 -100 3200
Other Information: In the year Federer sold goods to Nadal at a margin of 20%. The total amount sold was $100m, of which a quarter remain in inventory at the year end. Also during the year Nadal sold $180m of goods to Federer. These goods were sold at a mark up of 50%. Half of the goods remain in inventory at the year end. At the date of acquisition the fair values of Nadals net assets were equal to their book value with the exception of an item of plant that had a fair value of $200m in excess of its carrying value and a remaining useful life of 4 years. Goodwill is to be calculated on a proportionate basis. Federer paid a dividend during the year of $200m while Nadal paid a dividend of $100m. Federer has recognised the dividend received from Nadal as investment income. Required Prepare the consolidated Income Statement, consolidated Statement of Changes in Equity and the consolidated Statement of Financial Position for the Federer group.
Solution
Working 1- Group Structure & PURP
Federer
90%
Nadal 1 Year Ago 90% 10% 100%
!
Margin 20%
!
PURP 5
PURP
Unsold Inventory (100 x 1/4) = 25 Parent is seller DR/CR DR CR Account Accumulated Prots (W5) to decrease Inventory to decrease Margin 50/150 PURP 30 $ 5 5 $
Unsold Inventory (180 x 1/2) = 90 Subsidiary is seller DR/CR DR DR CR Account
$ 27 3
Accumulated Prots (W5) with parent share to decrease (30 x 90%) NCI (W4) with subsidiary share to decrease Inventory to decrease
30

At Acquisition Share Capital Accumulated Prots Fair Value Adjustment Additional Depn (200 x 1/4) 2000 1000 800 200 At Year End 1000 2200 200 -50 3350
Remember to take the $50m extra depn to the income statement!
!
$
Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) Goodwill 2000 x 90%
4000 -1800 2200
!
SFP
!
Working 4 - NCI
$
NCI % of the subsidiarys net assets at the year end (W2) PURP
3350 x 10% W1
335 -3 332
Income Statement $ NCI Percentage of prot from question Additional Depreciation PURP 1500 x 10% 50 x 10% W1 150 -5 -3 142
!
$
Parents Accumulated Prots PURP Add: Parent % of the subsidiarys post acquisition prots 5 + 27 90% x (2000 3350) (W2)
15690 -32 1215 16873
Income Statement Federer Revenue Cost of Sales Gross Prot Distribution Costs Admin Expenses Operating Prot Exceptional Gain Investment Income Finance Costs Prot Before Tax Tax Prot for the year 20000 -12000 8000 -2100 -1400 1500 Nil 90 -600 3990 -700 3290 Nadal 4000 -2000 2000 -300 -500 1200 580 Nil -150 1630 -130 1500 700 + 130 600 + 150 2100 + 300 1400 + 500 20000 + 4000 100 - 180 12000 + 2000 100 - 180 - 35 - 50 Group 23720 -13805 9915 -2400 -1900 5615 580 Nil -750 5445 -830 4615
Attributable to Parent Attributable to NCI
(Balancing Figure) W4
4473 142 4615
Statement of Financial Position Federer Goodwill Investment in Nadal Assets 4000 20000 24000 5000 5000 Nadal W3 Cancelled 20000 + 5000 + 200 - 50 -35 Group 2200 Nil 25115 27315
Share Capital Accumulated Prots NCI Equity
5000 15690
1000 2200
Parent Only W5 W4
5000 16873 332 22205
20690
3200
Liabilities
3310 24000
1800 5000
3310 + 1800
5110 27315
Statement of changes in Equity Share Capital Opening Balance Prots for the year Less Dividends Closing Balance 5000 5000 Accumulated Prots 12600 4473 -200 16873 NCI 200 142 -10 332 Total Equity 17800 4615 210 22205
Illustration 21 (December 2010 Q3 (b))

Greenie was one of three shareholders in a regional airport Manair. As at 30 November 2010, the majority shareholder held 601% of voting shares, the second shareholder held 20% of voting shares and Greenie held 199% of the voting shares. The board of directors consisted of ten members. The majority shareholder was represented by six of the board members, while Greenie and the other shareholder were represented by two members each. A shareholders agreement stated that certain board and shareholder resolutions required either unanimous or majority decision. There is no indication that the majority shareholder and the other shareholders act together in a common way. During the financial year, Greenie had provided Manair with maintenance and technical services and had sold the entity a software licence for $5 million. Additionally, Greenie had sent a team of management experts to give business advice to the board of Manair. Greenie did not account for its investment in Manair as an associate, because of a lack of significant influence over the entity. Greenie felt that the majority owner of Manair used its influence as the parent to control and govern its subsidiary. (10 marks) Discuss how the above be accounted for in the financial statements of Greenie. In order for Greenie to treat Manair as an Associate it will have to have significant influence over them, otherwise they will treat Manair as a simple investment. IAS 28 states that significant influence is the power to participate in the financial and operating decisions of the investee but is not control or joint control over the policies. This will be demonstrated by holding 20% of the voting rights. If they dont hold 20% as in this case then it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. This can be demonstrated by: (i) representation on the board of directors or equivalent governing body of the investee; (ii) participation in the policy-making process; (iii) material transactions between the investor and the investee; (iv) interchange of managerial personnel; or (v) provision of essential technical information. In this case it appears likely that the shareholders agreement enables Greenie to participate in policy decisions. There is also management representation by Greenie on the board of directors which will enable Greenie to influence decisions. In addition there is evidence of material transactions between the investor and the investee and technical and maintenance services provided by Greenie. All the evidence suggests that Greenie has significant influence and should be treated as an Associate. The transactions between the two companies are therefore related party transactions and should be disclosed under IAS 24.
Illustration 21 (December 2010 Q3 (b))

Greenie was one of three shareholders in a regional airport Manair. As at 30 November 2010, the majority shareholder held 601% of voting shares, the second shareholder held 20% of voting shares and Greenie held 199% of the voting shares. The board of directors consisted of ten members. The majority shareholder was represented by six of the board members, while Greenie and the other shareholder were represented by two members each. A shareholders agreement stated that certain board and shareholder resolutions required either unanimous or majority decision. There is no indication that the majority shareholder and the other shareholders act together in a common way. During the financial year, Greenie had provided Manair with maintenance and technical services and had sold the entity a software licence for $5 million. Additionally, Greenie had sent a team of management experts to give business advice to the board of Manair. Greenie did not account for its investment in Manair as an associate, because of a lack of significant influence over the entity. Greenie felt that the majority owner of Manair used its influence as the parent to control and govern its subsidiary. (10 marks) Discuss how the above be accounted for in the financial statements of Greenie. In order for Greenie to treat Manair as an Associate it will have to have significant influence over them, otherwise they will treat Manair as a simple investment. IAS 28 states that significant influence is the power to participate in the financial and operating decisions of the investee but is not control or joint control over the policies. This will be demonstrated by holding 20% of the voting rights. If they dont hold 20% as in this case then it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. This can be demonstrated by: (i) representation on the board of directors or equivalent governing body of the investee; (ii) participation in the policy-making process; (iii) material transactions between the investor and the investee; (iv) interchange of managerial personnel; or (v) provision of essential technical information. In this case it appears likely that the shareholders agreement enables Greenie to participate in policy decisions. There is also management representation by Greenie on the board of directors which will enable Greenie to influence decisions. In addition there is evidence of material transactions between the investor and the investee and technical and maintenance services provided by Greenie. All the evidence suggests that Greenie has significant influence and should be treated as an Associate. The transactions between the two companies are therefore related party transactions and should be disclosed under IAS 24.
Illustration 22
On 1 April 2009 Picant acquired 75% of Sanders equity shares in a share exchange of three shares in Picant for every two shares in Sander. The market prices of Picants and Sanders shares at the date of acquisition were $320 and $450 respectively. In addition to this Picant agreed to pay a further amount on 1 April 2010 that was contingent upon the post-acquisition performance of Sander. At the date of acquisition Picant assessed the fair value of this contingent consideration at $42 million, but by 31 March 2010 it was clear that the actual amount to be paid would be only $27 million (ignore discounting). Picant has recorded the share exchange and provided for the initial estimate of $42 million for the contingent consideration. On 1 October 2009 Picant also acquired 40% of the equity shares of Adler paying $4 in cash per acquired share and issuing at par one $100 7% loan note for every 50 shares acquired in Adler. This consideration has also been recorded by Picant. Picant has no other investments. The summarised statements of financial position of the three companies at 31 March 2010 are: Picant Property, plant & equipment Investments 37,500 45,000 82,500 Inventory Receivables Total Assets 10,000 6,500 99,000 24,500 9,000 1,500 35,000 21,000 5,000 3,000 29,000 Sander 24,500 Alder 21,000
Ordinary Shares Share Premium Ret. Earnings B/F For year to 31/3/10
25,000 19,800 16,200 11,000 72,000
8,000 0 16,500 1,000 25,500 2,000 0 7,500 35,000
5,000 0 15,000 6,000 26,000 0 0 3,000 29,000
7% Loan Notes Contingent Consideration Current Liabilities Total Equity & Liabilities
14,500 4,200 8,300 99,000
(i) At the date of acquisition the fair values of Sanders property, plant and equipment was equal to its carrying amount with the exception of Sanders factory which had a fair value of $2 million above its carrying amount. Sander has not adjusted the carrying amount of the factory as a result of the fair value exercise. This requires additional annual depreciation of $100,000 in the consolidated financial statements in the postacquisition period. (ii)Also at the date of acquisition, Sander had an intangible asset of $500,000 for software in its statement of financial position. Picants directors believed the software to have no recoverable value at the date of acquisition and Sander wrote it off shortly after its acquisition. (iii)At 31 March 2010 Picants current account with Sander was $34 million (debit). This did not agree with the equivalent balance in Sanders books due to some goods-intransit invoiced at $18 million that were sent by Picant on 28 March 2010, but had not been received by Sander until after the year end. Picant sold all these goods at cost plus 50%. (iv)Picants policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose Sanders share price at that date can be deemed to be representative of the fair value of the shares held by the non-controlling interest. (v)Impairment tests were carried out on 31 March 2010 which concluded that the value of the investment in Adler was not impaired but, due to poor trading performance, consolidated goodwill was impaired by $38 million. (vi)Assume all profits accrue evenly through the year.

Picant
75%
40%
Sander
Alder
Sander Date Acquired Parent Share NCI 1 April 2009 (1 Yr ago) 75 25 100
Consideration for Sander

Item Share Exchange No. Shares Purchased (8000 x 75%) = 6000 Picant Shares Issued ((6000 / 2) x 3) = 9000 Total Value (9000 x 3.20) = $28,800 Contingent Consideration Fair Value Total Consideration 28,800 4,200 33,000 $000
Consideration for Alder

Item Cash Loan Notes Fair Value (4 x (5000 x 40%)) (5000 x 40%) / 50 x 100 Total Consideration $000 8,000 4,000 12,000

At Acquisition Share Capital Accumulated Prots Fair Value of Factory Additional Depn Software -500 26,000 27,400 8,000 16,500 2,000 At Year End 8,000 17,500 2,000 -100
Working 3 - Goodwill in Sander

$000 Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2) Goodwill attributable to NCI Gross Goodwill on Acquisition Impairment Goodwill at year end Impairment to Parent in W5 (3,800 x 75%) Impairment to NCI in W4 (3,800 x 25%) (8,000 x 25%) x $4.5 26,000 x 25% 9,000 6,500 2,500 16,000 -3,800 12,200 2,850 950 26,000 x 75% 33,000 19,500 13,500 $000
Working 4 - NCI
$ NCI % of net assets at the year end (W2) Goodwill Attributable to NCI (W3) Goodwill Impairment to NCI (W3) 27,400 x 25% 6,850 2,500 -950 8,400
Working 5 - PURP & Group Accumulated Prot PURP

Total Unsold Goods 1,800 DR Retained Earnings (W5) CR Inventory (SFP) Prot on Goods 1,800 /150 x 50 600 600 PURP 600
Group Accumulated Prot

$ Parents Accumulated Prots Add: Parent % of Subs post acquisition prots (W2) Add: Parent % of Associate post acquisition prots PURP Parent Share of goodwill impairment Gain on contingent consideration W3 4,200 - 2,700 (27,400 - 26,000) x 75% (6,000 x 6/12) x 40% 27,200 1050 1,200 -600 -2850 1,500 27,500
Working 6 - Associate
$000 Cost of Parents Investment (W1) Post Acquisition Prots ((6000 x 6/12) x 40%) 12,000 1,200 13,200
SFP
Picant Goodwill Property, plant & equipment Associate Investment Investments 45,000 82,500 Inventory Receivables Total Assets 10,000 6,500 99,000 24,500 9,000 1,500 35,000 10,000 + 9,000 - 600 +1,800 6,500 + 1,500 - 3,400 37,500 24,500 Sander W3 37,500 + 24,500 + 2,000 - 100 W6 Group 12,200 63,900 13,200 0 89,300 20,200 4,600 114,100
Ordinary Shares Share Premium Ret. Earnings B/F For year to 31/3/10 NCI
25,000 19,800 16,200 11,000
8,000 0 16,500 1,000
Parent Only
25,000 19,800
W5 W4
27,500 8,400 80,700
72,000 7% Loan Notes Contingent Consideration Current Liabilities Total Equity & Liabilities 14,500 4,200 8,300 99,000
25,500 2,000 0 7,500 35,000 14,500 + 2,000 4,200 - 1,500 8,300 + 7,500 - 1,600
16,500 2,700 14,200 114,100
Illustration 23
Vic purchased 10% of the shares in Bob several years ago. The investment cost $17,000 and Vic currently carries the investment at cost in the accounts. Vic has subsequently purchased 45% of the shares in Bob for $120,000. The net assets of Bob have a fair value of $60,000 and the fair value of the original investment is $45,000. The fair value of the NCI is $90,000. Calculate the gross goodwill arising on the acquisition of Bob.
Solution 23
Vic
Date 20% Acquired Date 45% Acquired Parent Share NCI
10% Bob
45%
2 Years Ago Now 55% 45% 100%
Working 2 - Revaluation
Fair value of original investment Less the cost of the original investment Gain taken to income statement 45,000 -17,000 28,000
$ Fair Value of original investment Fair value consideration for second investment 45,000 120,000 165,000 Less Parent % of the net assets at acquisition Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition Goodwill attributable to NCI Gross Goodwill on Acquisition 60000 x 45% 90,000 -27,000 63,000 195,000 60000 x 55% -33,000 132,000
Alternative working
Fair value of original investment Fair value of consideration for second investment
45,000 120,000 165,000
Fair value of NCI at acquisition Less 100% net assets at acquisition Gross Goodwill
90,000 -60,000 195,000
Illustration 24
A parent has owned 90% of a subsidiary for a long period of time. The NCI in the subsidiary is currently measured at $300,000. I. II. The parent acquires all of the remaining shares for consideration of $250,000. The parent acquires 3% of the shares for $200,000 reducing the NCI to 7%.
What is the difference taken to equity in both situations?
Solution I.
$ Amount of cash paid for subsequent investment Decrease in the NCI Difference to an equity reserve 250,000 300,000 50,000
II.
$ Amount of cash paid for subsequent investment Decrease in the NCI Difference to an equity reserve 300,000 x 3/10 200,000 90,000 -110,000
Illustration 25
Inter purchased 70% of the shares in Milan several years ago. At that time goodwill of $80,000 arose. The net assets of Milan are currently $100,000 and the NCI is $18,000. I. II. Calculate the gain arising on disposal if Inter sells its entire holding for $350,000. Calculate the gain arising on disposal if Inter sells 30% for $250,000 and the fair value of the residual value is $30,000
Solution 25
I. $ Sale Proceeds Less net assets of sub at date of disposal Less all goodwill remaining at disposal Plus all NCI at date of disposal Plus fair value of any residual holding 350,000 -100,000 -80,000 18,000 Nil
Gain to group II.
188,000
$ Sale Proceeds Less net assets of sub at date of disposal Less all goodwill remaining at disposal Plus all NCI at date of disposal Plus fair value of any residual holding 250,000 -100,000 -80,000 18,000 30,000
Gain to group
118,000
Illustration 26
For several years Jeremy has owned 70% of Richard. The net assets of Richard at this time are $250,000. The NCI is $68,000 and the gross goodwill is $200,000. Jeremy has just sold 15% to take the holding to 55% for consideration of $150,000. Calculate the difference arising that will be taken to equity.
Solution 26
$ Amount of cash received for sale of subsequent investment Increase in the NCI (% of net assets & goodwill) Difference to an equity reserve 15% x (250,000 + 200,000) 150,000 67,500 82,500
Illustration 27a
P
80% - 1 Year Ago
S1
60% - 1 Year Ago
Cost of Investment S S1 250 220
Net Assets 1 Year Ago 200 150
FV NCI 60 100
Calculate the Goodwill & the NCI at the acquisition date.
Working 1 - Effective Interest

Working Ps Direct Interest in S Non Controlling Interest in S Total 80% 20% 100%
Ps direct interest in S1 Ps indirect interest in S1 Ps effective interest in S1 Non Controlling Interest in S1 (Balancing gure) (80% x 60%)
0% 48% 48% 52% 100%
Working 2 - Goodwill in S
$ Cost of Parent Investment Less Parent % of the net assets at acquisition Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition Goodwill attributable to NCI Gross Goodwill on Acquisition 200 x 20% 60 -40 20 110 200 x 80% 250 -160 90
Working 3 - Goodwill in S1
$ Cost of Investment Less indirect holding adjustment Less Parent % of the net assets at acquisition Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition Goodwill attributable to NCI Gross Goodwill on Acquisition 150 x 52% 100 -78 22 126 220 x 20% 150 x 48% 220 -44 -72 104
Working 4 - NCI
$ NCI % of Ss net assets NCI % of S1s net assets Less indirect holding adjustment Add Ss goodwill attributable to NCI Add S1s goodwill attributable to NCI 200 x 20% 150 x 52% 40 78 -44 20 22 116
Illustration 28
Ozzy acquired a 70% holding in Sharon 2 years ago. Sharon purchased a 60% shareholding in Jack one year ago. The following nancial statements relate to the Ozzy group. Statements of Financial Position Ozzy $ Investment in Sharon Investment in Jack Other assets 25 75 Ordinary Shares Accumulated prots Equity 50 20 70 50 17 18 35 20 12 32 20 20 8 8 16 Sharon $ Jack $
Liabilities
5 75 Income Statements Ozzy $
3 35 Sharon $ 60 55 5 -2 3 Sharon 3 2 Jack 4 3
4 20 Jack $ 85 -83 2 -1 1
Revenue Operating Costs Operating Prot Tax Prot for Year Accumulated Prots One year ago Two years ago
400 -395 5 -3 2
Fair Value of NCI based on effective shareholdings One year ago Two years ago
Sharon 8 7
Jack 10 6
Goods worth $8m were sold in the year by Jack to Sharon and by the year end all of these had been sold to a third party. An impairment review at the year end found the goodwill of Sharon to be impaired by $3m, goodwill is to be calculated gross. Prepare the consolidated statement of nancial position and consolidated income statement for the Ozzy group.
Solution
Ozzy
70% - 2 Years Ago
Sharon
60% - 1 Year Ago
Jack
Ozzys effective Interest in Jack Working Ozzys direct interest in Jack Ozzys indirect interest (via Sharon) Ozzys effective interest in Jack Non Controlling Interest in Jack (Balancing gure) (70% x 60%) Total 0% 42% 42% 58% 100%
Ozzys Direct Interest in Sharon Non Controlling Interest in Sharon
70% 30% 100%

At Acquisition Sharon Share Capital Accumulated Prots 20 2 22 20 12 32 8 4 12 At Year End At Acquisition Jack 8 8 16 At Year End
Working 3 - Goodwill in Sharon

$ Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2) Goodwill attributable to NCI Gross Goodwill on Acquisition Impairment Goodwill after Impairment 22 x 30% 7 -6.6 0.4 35 -3 32 22 x 70% 50 -15.4 34.6
Alternative working
50 7 57
Less 100% net assets at acquisition in W2 Gross Goodwill Impairment Goodwill after Impairment
-22 35 -3 32
Working 3 - Goodwill in Jack

$ Cost of Parent Investment Less indirect holding adjustment Less Parent % of the net assets at acquisition (W2) Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2) Goodwill attributable to NCI Gross Goodwill on Acquisition 12 x 58% 10 -6.96 3.04 9.9 17 x 30% 12 x 42% 17 -5.1 -5.04 6.86
Alternative working
Cost of Parents investment Less indirect holding adjustment Fair value of NCI at acquisition (Market Value)
17 -5.1 10 21.9
-12 9.9
Working 4 - NCI
$ NCI % of Sharons net assets at the year end (W2) NCI % of Jacks net assets at the year end (W2) Less indirect holding adjustment Add Sharons goodwill attributable to NCI Add Jacks goodwill attributable to NCI Less NCI share of Sharons Impairment of goodwill 3 x 30% 32 x 30% 16 x 58% 9.6 9.28 -5.1 0.4 3.04 -0.9 16.32
or
Fair Value of Sharons NCI at acquisition Fair Value of Jacks NCI at acquisition Less indirect holding adjustment Plus Sharon NCI share of post acquisition prots Plus Jack NCI share of post acquisition prots Less NCI share of Sharon Goodwill Impairment (32-22) x 30% (16-12) x 58% 3 x 30%
7 10 -5.1 3 2.32 -0.9 16.32

$ Parents Accumulated Prots Less Goodwill Impairment Add: Parent % of Sharons post acquisition prots Add: Parent % of the Jacks post acquisition prots 3 x 70% 10 x 70% 4 x 42% 20 -2.1 7 1.68 26.58
Financial Statements for Ozzy Group Statement of Financial Position Ozzy $ Goodwill Other assets 25 18 20 Sharon $ Jack $ W3 25 + 18 +20 41.9 63 104.9 Group
Ordinary Shares Accumulated prots NCI Equity
50 20
20 12
8 8 W5 W4
50 26.58 16.32 92.9
70
32
16
Liabilities
5+3+4
12 104.9
Income Statement
Ozzy $
Sharon $ 60 -55 5 -2 3
Jack $ 85 -83 2 -1 1 3+2+1 400 + 60 + 85 - 8 (inter company) 395 +55 + 83 - 8 537 -525 12 -6 6
Revenue Operating Costs Operating Prot Tax Prot for Year
400 -395 5 -3 2
Attributable to parent (Balancing gure) Attributable to NCI (3 x 30%) + (1 x 58%)
4.52 1.48 6
Illustration 29
The parent has an 60% holding in the subsidiary. The subsidiary has an associate in which it holds 40%. The following information is relevant. Subsidiarys cost of investment in associate Fair value of net assets in associate at acquisition Fair value of net assets in associate at year end Show the treatment for the associate in the group nancial statements. 200 120 300
Solution 29
Effective interest & NCI Parentss indirect interest (via Sub) NCI Parents effective interest (60% x 40%) (Balancing gure) 24% 16% 40%
Post Acquisition Prots Fair value of net assets in associate at year end Fair value of net assets in associate at acquisition Post acquisition prots 300 -120 180
Carrying Value of Associate Cost of Investment Subsidiary share of post acquisition prots (40% x 180) Carrying Value of Associate
$ 200 72 272
Treatment DR CR CR Investment in Associate Equity W5 (Parent share of post acquisition prots) NCI W4 (NCI share of post acquisition prots) 40% x 180 24% x 72 16% x 72 72 43.2 28.8
Illustration 30
The statements of nancial position for 3 companies are as follows: John Investments Assets 675 900 1575 Paul 200 700 900 400 400 Ringo
Share Capital Accumulated Prots Equity
300 700 1000
200 400 600
100 100 200
Liabilities
575 1575
300 900
200 400
Other information: I. II. John acquired a 60% holding in Paul for $600 Paul acquired a 60% holding in Ringo for $200
III. John acquired a 30% holding in Ringo for $75 IV. All of the investments were made on the same date V. Goodwill is to be calculated gross and no impairment has been recorded
VI. The carrying value of assets & liabilities were the same as the fair values on the date of acquisition VII. On the date of acquisition the following information was correct: Paul Accumulated Prots Fair value of the effective NCI 250 100 Ringo 60 60
Prepare the consolidated statement of nancial position for John Group.
Solution 30
John

30%
60%
Paul
60%
Ringo
Control John Controls Paul. Paul controls Ringo and in addition John controls another 30% of Ringo. Ringo is therefore a subsidiary of John group.
Effective interest & NCI Johns direct interest in Ringo Johns indirect interest in Ringo Johns effective interest in Ringo Effective NCI in Ringo Indirect Holding Adjustment NCI in Paul 40% X Pauls investment in Ringo 200 = 80 100% - 66% (60% x 60%) 30% 36% 66% 34%
Use this to reduce the cost of investment in W3 and the NCI in W4.

At Acquisition Paul Share Capital Accumulated Prots 200 250 450 200 400 600 100 60 160 At Year End At Acquisition Ringo 100 100 200 At Year End
Working 3 - Goodwill in Paul

$ Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2) Goodwill attributable to NCI Gross Goodwill on Acquisition 450 x 40% 100 -180 -80 250 450 x 60% 600 -270 330
Alternative working
600 100 700
-450 250
Working 3 - Goodwill in Ringo

$ Cost of Paul Investment Cost of John Investment Less indirect holding adjustment Less Parent % of the net assets at acquisition (W2) Goodwill attributable to Parent Fair Value of NCI at acquisition Less NCI% of the net assets at acquisition (W2) Goodwill attributable to NCI Gross Goodwill on Acquisition 160 x 34% 60 -54.4 5.6 95 W1 160 x 66% 200 75 -80 -105.6 89.4
Alternative working
Cost of Pauls investment Cost of Johns investment Less indirect holding adjustment Fair value of NCI at acquisition (Market Value)
200 75 -80 60 255
-160 95
Working 4 - NCI
$ NCI % of Pauls net assets at the year end (W2) NCI % of Ringos net assets at the year end (W2) Less indirect holding adjustment Add Pauls goodwill attributable to NCI Add Ringos goodwill attributable to NCI 600 x 40% 200 x 34% 240 68 -80 -80 5.6 153.6
or
Fair Value of Sharons NCI at acquisition Fair Value of Jacks NCI at acquisition Less indirect holding adjustment Plus Paul NCI share of post acquisition prots Plus Ringo NCI share of post acquisition prots (600-450) x 40% (100 - 60) x 34%
100 60 -80 60 13.6 153.6

$ Parents Accumulated Prots Add: Parent % of Pauls post acquisition prots Add: Parent % of Ringos post acquisition prots 150 x 60% 40 x 66% 700 90 26.4 816.4
Statement of nancial position for John Group

John Goodwill Assets 900 700 400 Paul Ringo W3 (95 + 250) 900 + 700 + 400 Group 345 2000 2345
Share Capital Accumulated Prots NCI Equity
300 700
200 400
100 100
Parent W5 W4
300 816.4 153.6 1270
Liabilities
575
300
200
500 + 300 +200
1075 2345
Changes in Mixed Groups
Solutions to Lecture Illustrations

Working As direct interest in C As indirect interest (via B) As effective interest in C Non Controlling Interest in C (Balancing gure) (90% x 70%) Total 25% 63% 88% 12% 100%
Working Ds direct interest in F Ds indirect interest (via E) Ds effective interest in F Non Controlling Interest in F (Balancing gure) (70% x 40%)
Total 30% 28% 58% 42% 100%
Action D invests in E in 2008 D invests in F in 2009 E invests in F in the current year
Result D owns 70% of E making it a subsidiary D owns 30% of F making it an associate This makes Ds effective interest in F 58% as per our working.
F has gone from an associate to a subsidiary. This is a step-acquisition so we need to revalue the current investment in F and take the gain or loss to the income statement.
Action D invests in E in 2008 E invests in F in 2009
Result D owns 70% of E making it a subsidiary E owns 40% of F making it an associate as E has signicant inuence and D controls that inuence. This makes Ds effective interest in F 58% as per our working.
D invests in F in the current year
F has gone from an associate to a subsidiary. This is a step-acquisition so we need to revalue the current investment in F and take the gain or loss to the income statement.
Working Gs direct interest in I Gs indirect interest (via H) Gs effective interest in I Non Controlling Interest in I (Balancing gure) (90% x 10%)
Total 80% 9% 89% 11% 100%
Action G invests in H in 2008 G invests in I in 2009 H invests in I in the current year
Result G owns 90% of H making it a subsidiary G owns 80% of I making it a subsidiary This makes Gs effective interest in I 89% as per our working.
I was a subsidiary before with an 80% holding. It is now still a subsidiary with an 89% holding. This is a decrease in the NCI of 9% and will be a transaction within equity.
Action G invests in H in 2008 H invests in I in 2009 G invests in I in the current year
Result G owns 90% of H making it a subsidiary I is a simple investment of 10% This makes Gs effective interest in I 89% as per our working.
I was an investment before. It is now a subsidiary with an 89% holding. This is a step acquisition.
IAS 21 Foreign Currency
Illustration 1
June 2008 Q1 (Small section) Zian is located in a foreign country and imports its raw materials at a price which is normally denominated in dollars. The product is sold locally at selling prices denominated in dinars, and determined by local competition. All selling and operating expenses are incurred locally and paid in dinars. Distribution of prots is determined by the parent company, Ribby. Zian has nanced part of its operations through a $4 million loan from Hall which was raised on 1 June 2007. This is included in the nancial assets of Hall and the non-current liabilities of Zian. Zians management have a considerable degree of authority and autonomy in carrying out the operations of Zian and other than the loan from Hall, are not dependent upon group companies for nance. Required Discuss and apply the principles set out in IAS 21 The effects of changes in foreign exchange rates in order to determine the functional currency of Zian. # # # # # # # # # # # # # (8 marks)
Solution to Illustration 1
The functional currency is the currency of the primary economic environment in which the entity operates (IAS21). The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. An entitys management considers the following factors in determining its functional currency (IAS21): (i)the currency that dominates the determination of the sales prices; and (ii) the currency that most inuences operating costs The currency that dominates the determination of sales prices will normally be the currency in which the sales prices for goods and services are denominated and settled. It will also normally be the currency of the country whose competitive forces and regulations have the greatest impact on sales prices. In this case it would appear that currency is the dinar as Zian sells its products locally and the prices are determined by local competition. However, the currency that most inuences operating costs is in fact the dollar, as Zian imports goods which are paid for in dollars although all selling and operating expenses are paid in dinars. The emphasis is, however, on the currency of the economy that determines the pricing of transactions, as opposed to the currency in which transactions are denominated. Factors other than the dominant currency for sales prices and operating costs are also considered when identifying the functional currency. The currency in which an entitys nances are denominated is also considered. Zian has partly nanced its operations by raising a $4 million loan from Hall but it is not dependent upon group companies for nance. The focus is on the currency in which funds from nancing activities are generated and the currency in which receipts from operating activities are retained. Additional factors include consideration of the autonomy of a foreign operation from the reporting entity and the level of transactions between the two. Zian operates with a considerable degree of autonomy both nancially and in terms of its management. Consideration is given to whether the foreign operation generates sufcient functional cash ows to meet its cash needs which in this case Zian does as it does not depend on the group for nance. It would be said that the above indicators give a mixed view but the functional currency that most faithfully represents the economic effects of the underlying transactions, events, and conditions is the dinar, as it most affects sales prices and is most relevant to the nancing of an entity. The degree of autonomy and independence provides additional supporting evidence in determining the entitys functional currency.
Illustration 2
Bulldog Ltd has a year end of 31 January. On 13th October Bulldog Ltd buys goods from Eagle Inc. a US supplier for $250,000. On 24th November Bulldog settles the transaction in full. Exchange rates 13th October 1 : $1.45 24th November 1 : $1.55 Show the accounting entries for these transactions.
Agreeing Transaction On date of agreeing the transaction use the spot rate to record it DR Purchases CR Payables
Working 250,000 / 1.45
172,414 172,414 172,414
On Settlement On date of agreeing the transaction use the spot rate to record it DR Payables CR Cash with amount actually paid CR FX Gain with the difference
Working 250,000 / 1.55
161,290 172,414 161,414 11,000
Illustration 3
Jeff Ltd. purchases an item of plant from a foreign supplier for cash of 100,000. Jeff is a US company and the exchange rate at the time was $ = 1.50. What value in $ will the asset be recorded at?
Working The rate at the time of purchase is $ : 1.50 DR Asset CR Cash 100,000 / 1.50
$ 66,666 66,666 66,666
Illustration 4
Jeff Ltd. purchases an item of plant on 1st June from a foreign supplier on one months credit for 100,000. Jeff is a US company. Exchange rates 1st June# # 21st June## $ = 1.50 $ = 1.40
How will this transaction be dealt with in the accounts for the year to 21st June?
At Purchase Date The rate at the time of purchase is $ : 1.50 DR Asset CR Payables
Working 100,000 / 1.50
$ 66,666 66,666 66,666
At 21st June The rate at this time is $ : 1.40
Working 100,000 / 1.40
$ 71,429
The payable must be retranslated at the year end as it is a monetary balance. So........ DR FX Loss CR Payables (71,429 - 66,666) (71,429 - 66,666) 4,763 4,763
The $4,763 is unrealised so is included in Other Comprehensive Income.
Pro-Forma for FX Differences on SCI

Exchange Difference $ $ Group % NCI%
Opening Net assets at acquisition rate Opening Net assets at closing rate
X (X) X X X
Prot for the year (W2) at average rate Prot for the year (W2) at closing rate
X (X) X X X
Goodwill at acquisition rate Goodwill at closing rate
X (X) X X X X X
Total FX exchange gains & losses
Illustration 5
Big Ltd. acquired 80% of Cahoona Inc. on 1st July 2001. Cahoona Inc are based in Burgerland where the functional currency is Francs (Fr). The nancial statements for the year to 30 June 2002 are below. SFP Investment in Cahoonas Non Current Assets Current Assets Big $ 5000 10,000 5,000 20,000 Share Capital Retained Earnings Liabilities 6,000 4,000 10,000 20,000 3,000 2,000 5,000 1,500 2,500 1,000 5,000 Cahoona Fr
Income Statement Revenue Operating Costs Prot Before Tax Tax Prot for the Year
Big $ 25,000 -15,000 10,000 -5,000 5,000
Cahoona Fr 35,000 -26,250 8,750 -7,450 1,300
There was no other comprehensive income for either entity in the period. Other information: I. The fair value of the net assets of Cahoona was Fr6,000 on the date of acquisition with any increase being attributable to land held at historic cost. II. Big sold goods to Cahoona during the year for $1,000 cash.
III. Big made a short term loan to Cahoona on 1 June 2002. The loan was for $400 and is recorded as a liability by Cahoona at the historic rate. IV. The NCI is valued using the proportionate method. Exchange rates to $1: # # # 1 July 2001# Average rate# 1 June# # 30 June# # # # # # # Fr 1.5 1.75 1.9 2
Prepare the group statement of nancial position, income statement, and statement of other comprehensive income.
Big
80%
Cahoona 1 Year Ago 80% 20% 100%
Removal of Loan Working Loan Received 1 June by Cahoona Retranslate at closing rate on 30 June Difference $400 / 1.9 $400 / 2 (760 - 800) Fr 760 800 -40
This is an FX loss which reduces the net assets of Cahoona at the year end. We need to take this to our W2.
Working 2 - Equity Table in Functional Currency

At Acquisition Fr Share Capital Accumulated Prots Fair Value Adjustment on land (Balancing gure) FX Loss on Loan (W1) 6,000 Post acquisition prot (7,260 - 6,000) 1,260 1,500 1,200 3,300 At Year End Fr 1,500 2,500 3,300 -40 7,260
Working 3 - Goodwill in Functional Currency

Fr Cost of Parent Investment Less Parent % of the net assets at acquisition (W2) Goodwill Translated at closing rate (2,700 / 2) = $1,350 to SFP. FX Loss on Investment by the parent in $ $ Cost of Investment at acquisition rate Cost of Investment at closing rate Fr7,500 @ 1.5 Fr7,500 @ 2 5,000 3,750 1,250 $ (5,000 @ 1.5) 6,000 x 80% 7,500 -4,800 2,700 Fr
FX Loss on retranslation of investment by the parent
Working 4 - NCI
$ NCI % of the subsidiarys net assets at the year end (W2) translated at the closing rate (Fr7,260 x 20%) / 2 726 726

$ Parents Accumulated Prots Share of Sub at closing rate Less FX loss on cost of investment (W3) 80% x (1,260 / 2) 4,000 504 -1,250 3,254
Working 8 - FX Differences for SCI

Exchange Difference Working $ $ Group % NCI%
Opening Net assets (W2) at closing rate Opening Net assets (W2) at acquisition rate
(6,000 / 2) (6,000 / 1.5)
3,000 -4,000 -1,000 -800 -200
Prot for the year (W2) at closing rate Prot for the year (W2) at average rate
(1,260 / 2) (1,260 / 1.75
630 -720 -90 -72 -18
Goodwill at closing rate Goodwill at acquisition rate
(2,700 / 2) (2,700 / 1.5)
1,350 -1,800 -450 -450 -1,322 -218
Total FX exchange gains & losses
-1,540
Statement of Financial Position SFP Non Current Assets Goodwill (W3) Current Assets 5,000 (2000 / 2) - 400 Inter Co(W1) Big 10,000 Cahoona ((3,000 + 3,300) / 2) = 3,150 $ 13,150 1,350 5,600 20,100
Share Capital Retained Earnings NCI Liabilities
6,000 4,000
Parent W5 W4
6,000 3,254 726 10,120 20,100
10,000 20,000
((1,000 + 40(W1)) / 2) - 400 Inter Co(W1) 0
Statement of Comprehensive Income Income Statement Revenue Operating Costs Prot Before Tax Tax Prot for the Year -5000 (7,450 / 1.75) Big 25,000 -15,000 Cahoonas (35,000 / 1.75) (26,250 + 40(W1)) / 1.75 Adjustment Inter Co -1,000 Inter Co -1,000 $ 44,000 -29,023 14,977 -9257 5,720
Prot Attributable to: Parent Non Controlling Interest (Balance) (20% x (1,260 / 1.75) 5,576 144 5,720 Comprehensive Income Prot for the Year FX differences on translation of foreign operations (W6) 5,720 -1,540 4,180
Ethics
Illustration 1
December 2010 Q1 (Small section) Jocatt operates in the energy industry and undertakes complex natural gas trading arrangements, which involve exchanges in resources with other companies in the industry. Jocatt is entering into a long-term contract for the supply of gas and is raising a loan on the strength of this contract. The proceeds of the loan are to be received over the year to 30 November 2011 and are to be repaid over four years to 30 November 2015. Jocatt wishes to report the proceeds as operating cash ow because it is related to a long-term purchase contract. The directors of Jocatt receive extra income if the operating cash ow exceeds a predetermined target for the year and feel that the indirect method is more useful and informative to users of nancial statements than the direct method. (i) Comment on the directors view that the indirect method of preparing statements of cash ow is more useful and informative to users than the direct method. (7 marks) (ii) Discuss the reasons why the directors may wish to report the loan proceeds as an operating cash ow rather than a nancing cash ow and whether there are any ethical implications of adopting this treatment.# (6 marks) Professional marks will be awarded in part (b) for the clarity and quality of discussion. # # # # # # # # # # # # # # (2 marks)
i. Many companies use the indirect method for preparing the statement of cash ow on the grounds of cost. The indirect method is essentially a reconciliation of the net income reported in the statement of nancial position with the cash ow from operations whereas the direct method shows the inows and outows of cash under different categories. The method of reconciliation in the indirect method is confusing to users and not easy to match to the rest of the nancial statements with the only real information being the difference between net prot before tax and cash from operations. The direct method allows for reporting operating cash ows by understandable categories as they can see the amount of cash collected from customers, cash paid to suppliers, cash paid to employees and cash paid for other operating expenses. Users can gain a better understanding of the major trends in cash ows and can compare these cash ows with those of the entitys competitors. An issue in the use of the indirect method for users is the abuse of the classications of specic cash ows such as cash outows which should have been reported in the operating section being classied as investing cash outows with the result that companies enhance operating cash ows. A problem for users is the fact that entities can choose the method used and there is not enough guidance on the classication of cash ows in the operating, investing and nancing sections of the indirect method used in IAS 7.
ii. The directors main reason for wishing to do this is to manipulate the income of the rm. The complex nature of the indirect method as discussed previously means that the directors are attempting to confuse users who do not have a detailed understanding of cash ow accounting. The information provided by directors should be a faithful representation which is unbiased so that information disclosed is truthful and neutral. They have a responsibility to perform in an ethical manner. The reliance of users on the information provided for investment decisions means that the directors must put aside their own self interest to provide information that is true and fair. They may be tempted to manipulate the income of the rm for several reasons: i. To gain performance related bonuses. ii.To protect the share price of the rm. iii.To ensure that their jobs are safe and reputations enhanced. Regardless of the personal impact on the directors they must act independently and objectively in the application of the accounting standards reporting the loan as cash ows from nancing activities.
IFRS 8 & IAS 33 Operating Segments & EPS
Illustration 1 (June 2008 Q2 (a))

Norman, a public limited company, has three business segments which are currently reported in its nancial statements. Norman is an international hotel group which reports to management on the basis of region. It does not currently report segmental information under IFRS8 Operating Segments. The results of the regional segments for the year ended 31 May 2008 are as follows: Revenue Region External $m European South East Asia Other 200 300 500 Internal $m 3 2 5 Segmental Prot/Loss $m -10 60 105 Segmental Assets $m 300 800 2,000 Segmental Liabilities $m 200 300 1,400
There were no signicant inter company balances in the segment assets and liabilities. The hotels are located in capital cities in the various regions, and the company sets individual performance indicators for each hotel based on its city location. Required: Discuss the principles in IFRS8 Operating Segments for the determination of a companys reportable operating segments and how these principles would be applied for Norman plc using the information given above.
Solution
Requirements of IFRS 8 IFRS 8 requires operating segments to be identied based on the management structure and reporting system in the entity. The components that are reviewed regularly by the CEO in order to allocate resources and assess performance will form the segments. The standard seeks to enable users to view information on the business operations which fully discloses the nancial effects of the different areas and types of operations undertaken. Under the standard an operating segment is dened as a component: I. II. That engages in business activities from which it may earn revenues and incur expenses (even if the revenues & expenses are with other components in the entity). Whose operating results are reviewed regularly by the entitys chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance; and for which discrete nancial information is available
An operating segment will be a reportable segment if it meets the following criteria: I. II. Revenues (internal & external) are more than 10% of combined revenue. Prot or loss is more than 10% of combined total.
III. Assets are more than 10% of combined total. 75% or more of the entities external revenue must be reported by operating segments. If not then, other segments must be identied even if they do not meet the criteria for reportable segments until 75% is reported.
Application to Norman The KPIs used by the management of Norman are based on city so it may well be that the operating segments of Norman could be split further on a city basis. Norman should investigate their reporting structure to evaluate whether decisions about allocation and performance are made within the entity on a city basis and consider splitting the segments further. Regarding the current segments, only the South East Asia segment passes all 3 tests for a reportable segment. The European segment meets only the criteria for 10% + of reported revenue and fails on the others.
The current reported segments report only 50% of the entitys total external revenue so they will have to identify further operating segments regardless of whether they meet the criteria until the reach 75%. By examining the internal reports of Norman the entity can determine whether the operating segments should be further split based on the information used by management.
Illustration 2
An entity issued 300,000 shares at full market price on 1st July 2009. The year end of the entity is 31st December. There were 900,000 shares in issue on 1st Jan 2009 and the prot for the year to 31st December 2009 was $1,000,000. Calculate the EPS at 31st December 2009.
Solution
Date 1/01/09 1/07/09 Shares 900,000 1,200,000 Months 6/12 6/12 Fraction Ave 450,000 600,000 1,050,000 EPS = 1,000,000 / 1,050,000 = 95.24c
Illustration 3
ABC Ltd. makes a bonus issue of 1 for 6 on 1st July 2009. The year end of the entity is 31st December. There were 900,000 shares in issue on 1st Jan 2009 and the prot for the year to 31st December 2009 was $1,000,000. Calculate the EPS at 31st December 2009.
Solution
Date 1/01/09 1/07/09 Shares 900,000 1,050,000 Months 6/12 6/12 Fraction 7/6 Ave 525,000 525,000 1,050,000 EPS = 1,000,000 / 1,050,000 = 95.24c
Illustration 4
ABC Ltd. makes a rights issue of 1 for 3 on 1st July 2009. The current share price is $4 and the rights issue is at a price of $3 The year end of the entity is 31st December. There were 900,000 shares in issue on 1st Jan 2009 and the prot for the year to 31st December 2009 was $1,000,000. Last years earnings were $900,000 Calculate the EPS at 31st December 2009 and the new EPS for 2008.
Solution
No. Shares 3 1 4 THERP = (15 / 4) = $3.75 so rights fraction is: 4/3.75 Price 4 3 Total 12 3 15
Date 1/01/09 1/07/09
Shares 900,000 1,200,000
Months 6/12 6/12
Fraction 4/3.75
Ave 480,000 600,000 1,080,000
December 2009 EPS = 1,000,000 / 1,080,000 = 92.59c
c December 2008 EPS (900,000 / 900,000) Inverted Bonus Fraction Comparable EPS 100 3.75/4 93.75
IFRS 5 & IAS 18 AHFS & Revenue Recognition
Illustration 1 (June 2004 (Adapted))

Rockby, a public limited company, has committed itself before its year-end of 31 March 2004 to a plan of action to sell a subsidiary, Bye. The sale is expected to be completed on 1 July 2004 and the nancial statements of the group were signed on 15 May 2004. The subsidiary, Bye, a public limited company, had net assets at the year end of $5 million and the book value of related goodwill is $1 million. Bye has made a loss of $500,000 from 1 April 2004 to 15 May 2004 and is expected to make a further loss up to the date of sale of $600,000. Rockby was at 15 May 2004 negotiating the consideration for the sale of Bye but no contract has been signed or public announcement made as of that date. Rockby expected to receive $45 million for the company after selling costs. The value-inuse of Bye at 15 May 2004 was estimated at $39 million. Further the non-current assets of Rockby include the following items of plant and head ofce land and buildings: I. Tangible non-current assets held for use in operating leases: at 31 March 2004 the company has at carrying value $10 million of plant which has recently been leased out on operating leases. These leases have now expired. The company is undecided as to whether to sell the plant or lease it to customers under nance leases. The fair value less selling costs of the plant is $9 million and the value-in-use is estimated at $12 million.Plant with a carrying value of $5 million at 31 March 2004 has ceased to be used because of a downturn in the economy. The company had decided at 31 March 2004 to maintain the plant in workable condition in case of a change in economic conditions. Rockby subsequently sold the plant by auction on 14 May 2004 for $3 million net of costs. The Board of Rockby approved the relocation of the head ofce site on 1 March 2003. The head ofce land and buildings were renovated and upgraded in the year to 31 March 2003 with a view to selling the site. During the improvements, subsidence was found in the foundations of the main building. The work to correct the subsidence and the renovations were completed on 1 June 2003. As at 31 March 2003 the renovations had cost $23 million and the cost of correcting the subsidence was $1 million. The carrying value of the head ofce land and buildings was $5 million at 31 March 2003 before accounting for the renovation. Rockby moved its head ofce to the new site in June 2003 and at the same time, the old head ofce property was offered for sale at a price of $10 million. However, the market for commercial property had deteriorated signicantly and as at 31 March 2004, a buyer for the property had not been found. At that time the company did not wish to reduce the price and hoped that market conditions would improve. On 20 April 2004, a bid of $83 million was received for the property and eventually it was sold (net of costs) for $75 million on 1 June 2004. The carrying value of the head ofce land and buildings was $7 million at 31 March 2004.
II.
Non-current assets are shown in the nancial statements at historical cost.
Required: (a) Discuss the way in which the sale of the subsidiary, Bye, would be dealt with in the group nancial statements of Rockby at 31 March 2004 under IFRS 5 Noncurrent assets held for sale and discontinued operations. # (8 marks) (b) Discuss whether the following non-current assets would be classed as held for sale if IFRS 5 had been applied to: (i) the items of plant in the group nancial statements at 31 March 2004; (7 marks) (ii)the head ofce land and buildings in the group nancial statements at 31 March 2003 and 31 March 2004.# (5 marks) # # # # # # # # # # # (20 marks)
Solution
(a) Under IFRS5, a non-current asset or disposal group (in this case Bye as it is a cash generating unit) should be classied as held for sale if its carrying amounts will be recovered principally through a sale transaction rather than through continuing use. The criteria which have to be met are: (i) a commitment to a plan (ii) the asset is available for immediate sale (iii) actively trying to nd a buyer (iv) sale is highly probable (v) asset is being actively marketed (vi) unlikely to be signicant changes to the plan These criteria seem to have been met in this case. Before classication of the item as held for sale an impairment review will need to be undertaken irrespective of any indication or otherwise of impairment. Any loss will be charged to the income statements. IFRS5 requires items held for sale to be reported at the lower of carrying value and fair value less costs to sell. IFRS 5 requires extensive disclosure on the face of the income statements and in the notes regarding the subsidiary. In the balance sheet, it should be presented separately from other assets and liabilities. The assets and liabilities should not be offset. There are additional disclosures to be made concerning the facts and circumstances leading to the disposal and the segment in which the subsidiary is presented under IFRS 8 Operating Segments. The gure of $45 million will be used as fair value less costs to sell. The net assets and goodwill will be written down to $45 million with the write off going against non-current assets in the rst instance.
(b) (i) To qualify as a held for sale asset, the sale must be highly probable and generally must be completed within one year. In the case of the operating lease assets, they will not qualify as held for sale assets at 31 March 2004 as the company has not made a decision as to whether they should be sold or leased. They should, therefore, be shown as non-current assets and depreciated. Held for sale assets are not depreciated. The carrying value of the assets will be $10 million. Held for sale assets are valued at the lower of carrying value and fair value less selling costs under IFRS 5. The assets are not impaired because the value-in-use is above the carrying value. The plant would not be classed as a held for sale asset at 31 March 2004 even though the plant was sold at auction prior to the date that the nancial statements were signed. The held for sale criteria were not met at the Statement of Financial Position date and IFRS prohibits the classication of non-current assets as held for sale if the criteria are
met after that date and before the nancial statements are signed. The company should disclose relevant information in the nancial statements for the year ended 31 March 2004. (ii)Under IFRS 5, a non-current asset qualies as held for sale if it is available for immediate sale in its present condition subject to the usual selling terms. The company should have the intent and the ability to sell the asset in its present condition. At 31 March 2003, although the company ultimately wishes to sell the property, it would be unlikely to achieve this until the subsidence was dealt with. Additionally the companys view was that the property should be sold when the renovations were completed which would have been at 1 June 2003. Also as at 31 March 2003, the company had not attempted to nd a buyer for the property. Hence the property could not be classed as held for sale at that date. As at 31 March 2004, the property had not been sold although it had been on the market for over nine months. The market conditions had deteriorated signicantly and yet the company did not wish to reduce the price. It seems as though the price asked for the property is in excess of its fair value especially as a bid of $83 million was received shortly after the year end (20 April 2004). The property has been vacated and, therefore, is available for sale but the price does not seem reasonable in relation to its current fair value ($10 million price as opposed to $83 million bid and ultimate sale of $75 million). Therefore, it would appear that at 31 March 2004, the intent to sell the asset might be questionable. The property fails the test set out in IFRS 5 as regards the reasonableness of price and, therefore, should not be classed as held for sale.
Illustration 2 (December 08 Q3)

Johan purchases telephone handsets from a manufacturer for $200 each, and sells the handsets direct to customers for $150 if they purchase call credit (call card) in advance on what is called a prepaid phone. The costs of selling the handset are estimated at $1 per set. The customers using a prepaid phone pay $21 for each call card at the purchase date. Call cards expire six months from the date of rst sale. There is an average unused call credit of $3 per card after six months and the card is activated when sold. Johan also sells handsets to dealers for $150 and invoices the dealers for those handsets. The dealer can return the handset up to a service contract being signed by a customer. When the customer signs a service contract, the customer receives the handset free of charge. Johan allows the dealer a commission of $280 on the connection of a customer and the transaction with the dealer is settled net by a payment of $130 by Johan to the dealer being the cost of the handset to the dealer ($150) deducted from the commission ($280). The handset cannot be sold separately by the dealer and the service contract lasts for a 12 month period. Dealers do not sell prepaid phones, and Johan receives monthly revenue from the service contract. The chief operating ofcer, a non-accountant, has asked for an explanation of the accounting principles and practices which should be used to account for the above events. Required: Discuss the principles and practices which should be used in the nancial year to 30 November 2008 to account for the purchase of handsets and the recognition of revenue from customers and dealers. # # # # # # # # # # (8 marks)
Solution 2
The inventory of handsets should be measured at the lower of cost and net realisable value (IAS2, Inventories, para 9). Johan should recognise a provision at the point of purchase for the handsets to be sold at a loss. The inventory should be written down to its net realisable value (NRV) of $149 per handset as they are sold both to prepaid customers and dealers. The NRV is $51 less than cost. Net realisable value is the estimated selling price in the normal course of business less the estimated selling costs. IAS18, Revenue, requires the recognition of revenue by reference to the stage of completion of the transaction at the reporting date. Revenue associated with the provision of services should be recognised as service as rendered. Johan should record the receipt of $21 per call card as deferred revenue at the point of sale. Revenue of $18 should be recognised over the six month period from the date of sale. The unused call credit of $3 would be recognised when the card expires as that is the point at which the obligation of Johan ceases. Revenue is earned from the provision of services and not from the physical sale of the card. IAS18 does not deal in detail with agency arrangements but says the gross inows of economic benets include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Revenue is the amount of the commission. Additionally where there are two or more transactions, they should be taken together if the commercial effect cannot be understood without reference to the series of transactions as a whole. As a result of the above, Johan should not recognise revenue when the handset is sold to the dealer, as the dealer is acting as an agent for the sale of the handset and the service contract. Johan has retained the risk of the loss in value of the handset as they can be returned by the dealer and the price set for the handset is under the control of Johan. Note that no money changes hands at this point as the cost of the handset is netted off the commission. The handset sale and the provision of the service would have to be assessed as to their separability. However, the handset cannot be sold separately and is commercially linked to the provision of the service. Johan would, therefore, recognise the net payment of $130 as a customer acquisition cost which may qualify as an intangible asset under IAS38, and the revenue from the service contract will be recognised as the service is rendered. The intangible asset would be amortised over the 12 month contract. The cost of the handset from the manufacturer will be charged as cost of goods sold ($200).
so... Valuation of Inventory (Handsets) Inventory should be valued at the lower of cost and net realisable value (IAS 2) Cost of the handsets is $200. Net realisable value is (150 -1) $149. Inventory should be written down to $149 per handset allow for the sale at a lower than cost price. Revenue Recognition 1. On the call cards, This is revenue from a service provision and therefore should be recognised over the length of time of the contract under IAS 18. The $21 received in advance should be deferred and recognised as the service is rendered. If there is any unused call credit at the end of the six months this should be recognised at the end of the 6 months when the obligation of Johan ceases. 2. Agency Agreement The risk & reward of ownership of the handset transfers to the dealer only when they sell a contract on to a customer. No revenue should therefore be recognised by Johan when the handset is sold to the dealer as they have the right to return it to Johan. The service contract and the handset sale cannot be separated as they cannot be sold in isolation. Payment by Johan The payment by Johan of $130 (net) to the dealer can be treated as a customer acquisition cost.
IAS 19 Pensions
Illustration 1
A company maintains a dened benet pension scheme for its employees. The following information is relevant: The pension assets brought forward in 20X0 $1,000 with a closing balance of $2,000. The expected return on these assets is 11%. Calculate the expected return on Pension Assets.
Solution
Pension Assets Brought Forward Expected Return % Expected Return on Plan Assets
1,000 11% 110
Illustration 2
A company maintains a dened benet pension scheme for its employees. The following information is relevant: The liabilities of the scheme were $1,400 at the start of the period and $2,600 at the end. The discount rate for liabilities is 12%. Calculate the Interest Cost for the period.
Solution
Pension Liabilities Brought Forward Discount Rate Interest Cost
1,400 12% 168
Illustration 3
The following details refer to Company As pension scheme. B/F Pension Assets Pension Liabilities Unrecognised Gains 1,000 1,400 350 C/F 2,000 2,600 700
The average working lives of the employees is 20 years.
Calculate the amount of any actuarial gains or losses recognised in the Income Statement if the company wishes to use the 10% corridor method to recognise those gains & losses.
Solution
Working 10% Opening Assets 10% Opening Liabilities Liabilities are higher so use them 10% Opening Liabilities Opening Unrecognised Gains Difference Working Lives of Employees Amount to Recognise (210 / 20) 140 350 210 20 10.5 (1,000 x 10%) (1,400 x 10%) $ 100 140
Illustration 4
A company maintains a dened benet pension scheme for its employees. The following information is relevant: The pension assets brought forward in 20X0 $1,800 with a closing balance of $2,700. The expected return on these assets is 14%. The company contributes $90 per year into the scheme. Benets paid out in the period were $100. The liabilities of the scheme were $1,600 at the start of the period and $2,100 at the end. The discount rate for liabilities is 12%. The terms of the scheme have changed meaning that past service costs have arisen of $35 and the current service costs for the period are $70. The company has unrecognised gains brought forward of $347 and wishes to use the 10% corridor method to recognise gains & losses. The expected average working life remaining of employees is 10 years. Required: Show the treatment for the pension scheme in the nancial statements of the company.
IFRS 2 Share Based Payments
Illustration 1
An entity grants 1 share option to each of its 100 employees on 1 January Year 1. Each grant is conditional upon the employee working for the entity over the next three years. The fair value of each share option as at 1 January Year 1 is $8 At the end of each year the number of employees expected to take up the options are: Year 1:# Year 2:# 95 97
When the rights are taken up in year 3, 98 employees actually receive the options. Show the treatment for the employee benets over the three years.
Solution
Year Total Employees expected to qualify 95 97 98 Value of option Proportion of vesting period 1/3 2/3 3/3 Total cumulative charge 253 517 784 Cost for each period Dr Wages Cr equity 253 517 - 253 = 264 784 - 253 - 264 = 267
1 2 3
8 8 8
Illustration 2
An entity grants 1 share option to each of its 500 employees on 1 January Year 1. Each grant is conditional upon the employee working for the entity over the next three years. The fair value of each share option as at 1 January Year 1 is $10 On the basis of a weighted average probability, the entity estimates on 1 January that 100 employees will leave during the three-year period and therefore forfeit their rights to share options. The following actually occurs: 20 employees leave during Year 1 and the estimate of total employee departures over the three-year period is revised to 70 employees 25 employees leave during Year 2 and the estimate of total employee departures over the three-year period is revised to 60 employees 10 employees leave during Year 3
Solution
Year
Employee Departures 20 25 10
Total EXPECTED to leave 70 60 20 + 25 + 10 (Actual)
TOTAL EXPECTED TO VEST AT YEAR END 430 440 445
1 2 3
Year
Total Employees expected to qualify 430 440 445
Value of option
Proportion of vesting period 1/3 2/3 3/3
Total cumulative cost 1433 2933 4450
Cost for each period Dr Expense Cr equity 1433 2,933 - 1,433 = 1,500 4,450 - 2933 = 1,517
1 2 3
10 10 10
Illustration 3
Same question with additional information of share option price at the end of each year: Year 1# # Year 2# # Year 3# # 10 12 14
Solution
Year Total Employees expected to qualify 430 440 445 Share Option Price 10 12 14 Proportion of vesting period 1/3 2/3 3/3 Total cumulative cost 1433 3520 6230 Cost for each period Dr Expense Cr Liability 1433 3,520 - 1,433 = 2,087 6,230 - 3,520 = 2,710
1 2 3
Illustration 4
At the beginning of year 1, an entity grants 1 share options to each of its 500 employees over a vesting period of 3 years at a fair value of $15 Year 1 40 leave, further 70 expected to leave; Share options now repriced (as market value of shares has fallen) as the Fair Value of the options had fallen to $5. After the repricing they are now worth $8. The modication has therefore increased the Fair Value from $5 to $8. Year 2 35 leave, further 30 expected to leave Year 3 28 leave Hint! The repricing has increased the Fair Value of the Option by $3. This amount is recognised over the remaining two years of the vesting period, along with remuneration expense based on the original option value of $15
Solution
Year Total Employees expected to qualify 390 395 397 Option Value Proportion of vesting period 1/3 2/3 3/3 Total cumulative cost 1950 3950 5955 Cost for each period Dr Expense Cr Equity 1950 3,950 - 1,950 = 2,000 5,955 - 3,950 = 2,005
1 2 3
15 15 15
Year
Total Employees expected to qualify 395 397
Option Value
Proportion of vesting period 1/2 2/2
Total cumulative cost 593 1191
Cost for each period Dr Expense Cr Equity 593 1191 - 593 = 598
2 3
3 3
Year 1 2 3 Total
Original Charge 1950 2000 2005 5955
Additional Charge
Total Charge in Year 1950
593 598 1191
2593 2603 7146
IAS 16 & 36 Non Current Assets and Impairment
Illustration 1
A company purchases a crane with a useful economic life of 15 years for $200m with an obligation to decommission at a cost of $50m. The applicable discount rate is 8%. Show the recognition of the asset in the nancial statements and the treatment over the rst accounting period.
Solution
Initial Recognition Asset (200 + (50 x 1/1.0815) Cash Liability
DR 215.75
CR
200 15.75
Year 1 Treatment Depreciation Charge (215.75 / 15) Accumulated Depreciation Finance Cost to I/S (15.75 x 8%) Dismantling Liability
DR 14.38
CR
14.38 1.26 1.26
Illustration 2 IAS 16 (June 2010 Q1)

Ashanti owned a piece of property, plant and equipment (PPE) which cost $12 million and was purchased on 1 May 2008. It is being depreciated over 10 years on the straight-line basis with zero residual value. On 30 April 2009, it was revalued to $13 million and on 30 April 2010, the PPE was revalued to $8 million. The whole of the revaluation loss had been posted to the statement of comprehensive income and depreciation has been charged for the year. It is Ashantis company policy to make all necessary transfers for excess depreciation following revaluation.
Solution
Balance B/F Initial Revaluation Transfer to Equity C/F 0.00 2.20 -0.24 1.96
Historic Cost BF Depn (12/10) Revaluation CF Depn NBV 10.8 -1.2 9.6 New Valuation Total Impairment Remove revaluation less depn Income Statement 12 -1.2
Revalued Amt 12 -1.2 2.2 13 -1.44 11.56 8 3.56 1.96 1.6
Revaluation Reserve 0.0 0.0 2.2 2.2 -0.24 1.96
Illustration 3
Property, plant & equipment with a total cost of $1m has components of a structure valued at $700,000 with a useful economic life of 20 years and plant worth $300,000 with a useful economic life of 10 years. Show the depreciation charges in the nancial statements in year 1.
Solution
Structure Cost Depreciation NBV 700,000 Plant 300,000 Total 1,000,000 65,000 935,000
(700,000 / 20) = 35,000 (300,000 /10) = 30,000 665,000 270,000
Illustration 4
The carrying value of an item of plant in the nancial statements is $400,000. By operating the plant the business expects to earn discounted cash-ows of $350,000 over the rest of its useful life. The could sell the plant now for $300,000 with costs to sell of $25,000. What is the recoverable amount?
Solution
$m Value in Use Fair Value less cost to sell (300,000 - 25,000) 350,000 275,000
Recoverable amount is the higher of these two which is the Value in Use of $350,000.
Illustration 5
A company has an asset for which the following information is relevant: $000 Carrying amount Fair Value Cost to sell Cash ows expected in each of the next 5 years Discount rate Annuity rate for 10% over 5 years Carry out the impairment review for the asset. 400 350 25 90 10% 3.791
Solution
$000 Value in Use (90 x 3.791) Fair Value less cost to sell (350,000 - 25,000) 341.19 325
Recoverable amount is the higher of these two which is the Value in Use of $341,190. Carrying Value Recoverable Amount Impairment 400 341.19 58.81
Illustration 6
A cash generating unit has the assets outlined below. Its recoverable amount has been assessed as $1,000. Show the treatment for any impairment.
Assets Goodwill PPE Intangible
Carrying Value 100 800 400 1300
Solution
Impairment Test Carrying Value of Assets Recoverable Amount Impairment Assets Goodwill PPE Intangible Carrying Value 100 800 400 1300 Impairment -100 (200 x 800/1,200) = -133 (200 x 400/1,200) = -67 1,300 1,000 300 Post Impairment Nil 667 333 1,000
IAS 40, 38, 20, 23 Investment Property Intangible Assets Government Grants Borrowing Costs
Illustration 1
Which of the following are Investment Property? Building once used and now held for resale. Land purchased as an investment. No planning consent yet. New ofce building purchased for capital appreciation.
Solution
Building once used and now held for resale. Land purchased as an investment. No planning consent yet. New ofce building purchased for capital appreciation.
HFS (IFRS 5) IAS 40 IAS 40
Illustration 2
Lockne has internally developed intangible assets comprising the capitalised expenses of the acquisition and production of electronic map data which indicates the main shing grounds in the world. The intangible assets generate revenue for the company in their use by the shing eet and are a material asset in the statement of nancial position. Lockne had constructed a database of the electronic maps. The costs incurred in bringing the information about a certain region of the world to a higher standard of performance are capitalised. The costs related to maintaining the information about a certain region at that same standard of performance are expensed. Locknes accounting policy states that intangible assets are valued at historical cost. The company considers the database to have an indenite useful life which is reconsidered annually when it is tested for impairment. The reasons supporting the assessment of an indenite useful life were not disclosed in the nancial statements and neither did the company disclose how it satised the criteria for recognising an intangible asset arising from development.# # # # # # # # # # # # (6 marks)
Solution
An intangible asset is an identiable non-monetary asset without physical substance. Thus, the three critical attributes of an intangible asset are: (a) identiability (b) control (power to obtain benets from the asset) (c) future economic benets (such as revenues or reduced future costs) The electronic maps meet the above three criteria for recognition as an intangible asset as they are identiable, Lockne has control over them and future revenue will ow from the maps. The maps will be recognised because there are future economic benets attributable to the maps and the cost can be measured reliably. After initial recognition the benchmark treatment is that intangible assets should be carried at cost less any amortisation and impairment losses and thus Locknes accounting policy is in compliance with IAS 38. An intangible asset has an indenite useful life when there is no foreseeable limit to the period over which the asset is expected to generate net cash inows for the entity. The term indenite does not mean innite. An important underlying assumption in assessing the useful life of an intangible asset is that it reects only the level of future maintenance expenditure required to maintain the asset at its standard of performance assessed at the time of estimating the assets useful life. The indenite useful life should not depend on planned future expenditure in excess of that required to maintain the asset. The companys accounting practice in this regard seems to be in compliance with IAS 38. IAS 38 identies certain factors that may affect the useful life and it is important that Lockne complies with IAS 38 in this regard. For example, technical, technological or commercial obsolescence and expected actions by competitors. IAS 38 species the criteria that an entity must be able to satisfy in order to recognise an intangible asset arising from development. There is no specic requirement that this be disclosed. However, IAS 1 Presentation of Financial Statements requires that an entity discloses accounting policies relevant to an understanding of its nancial statements. Given that the internally generated intangible assets are a material amount of total assets, this information should also have been disclosed.
Illustration 3
A company purchases an item of plant on which it receives a government grant of 30% of the purchase price. The plant cost $2m and has no residual value. The plant is to be depreciated on a straight line basis over its 10 year life. Show the accounting treatment for the government grant in the rst year if they decide to use the deferred income method.
Solution
DR Cash ($2m x 30%) Deferred Income Deferred Income (600,000 / 10) Income Statement 60,000 60,000 600,000 600,000 CR
Illustration 4
Borrow 1m at 7.5% to construct a building. As all was not needed at once, the unused cash was reinvested and interest received was 35,000. What borrowing costs should be capitalised?
Solution
Borrowing Cost ($1m x 7.5%) Interest Received Capitalise
75,000 -35,000 40,000
Illustration 5
A company has a 1m 6% loan and a 2m 8% loan. It builds a building costing 600,000 and it takes 8 months. What borrowing costs should be capitalised?
Solution
Total Borrowing $1m $2m $3m Cost 6% 8% At total cost Total Cost 6 16 22
Average Rate therefore is (22/3) = 7.33% We can capitalise 600,000 x 7.33% x 8/12 = $29,320
Illustration 6
Company buys land on 1/12, a planning application is prepared during December and January. Permission is obtained at the end of January. Payment for the land is made on 1/2. On this date a loan is taken out to pay for the land and building construction Adverse weather conditions meant a delay in the commencement of work until 15/3. When should interest be capitalised from?
Solution
Expenses start being incurred Borrowing costs incurred Activities started Start Capitalising on 15 March
1 December 1 February 15 March
IAS 17 Leases
Illustration 1
An asset is leased by a company on the 01/01/X0 over a 3 year period. They pay 3 annual payments of $2,500, the rst of which is payable on 31/12/X0. The actuarial interest rate is 12% (annuity rate for 3 years 2.402) and the fair value of the asset was $6,500. Show the treatment in the lessees nancial statements over the life of the asset.
Solution
Recognition of the Asset Fair Value PV minimum lease payments Recognise at lower of the two so..... DR Asset CR Lease Liability 6,005 6,005 2,500 x 2.402 6,500 6,005 6,005
Lease Liability on SFP Period Opening Bal 6,005 4,226 2,233 Interest Charge(12%) DR Income Statement CR Lease Liability 721 507 268 Lease Payment DR Lease Liability CR Cash -2,500 -2,500 -2,500 Closing Bal
1 2 3
4,226 2,233 0
The asset will be depreciated over the 3 year period at (6,005 x 1/3) = 2,002
Illustration 2
A company takes out a 20 year lease on 01/01/X0 the useful life of the building is 20 years. $60,000 is to be paid in advance each year. The interest rate is 6% and the fair value of the land is $70,000 of the $700,000 total value in the land & buildings. The present value of the lease payments to be made is $700,000. Show the treatment in the income statement and the statement of nancial position for the year ended 31/12/X0.
Solution
Land is always an operating lease Buildings will be a nance lease 700,000 - 70,000
70,000 630,000
Therefore 10% of the lease payments will be for land and the rest for buildings
DR Buildings Finance Lease Liability Depreciation (630,000 / 20) Accumulated Depreciation Buildings Lease Finance Lease Liability (60,000 x 90%) Cash Interest Charge (630,000 - 54,000) x 6%) Finance Lease Liability Operating Lease on Land Income Statement (60,000 x 10%) Cash 6,000 34,560 54,000 31,500 630,000
CR
630,000
31,500
54,000
34,560
6,000
Illustration 3
A Lease term 4 years from 1/1/2010. Annual installments are payable in advance of $10,000. The expected residual value at end of lease is $6,000 . Fair value of the asset $39,366 Interest rate implicit in the lease 10%. Show the treatment for the lease in the nancial statements of the lessor.
Solution
Present Value of minimum lease payments $ 1 2 3 4 Payment Payment Payment Payment 10,000 10,000 10,000 10,000 Discount Rate 1 0.909 0.826 0.751 Lessees Liability 10,000 9,090 8,260 7,510 34,860
Un-guaranteed Residual Value $ Residual Value 6,000 Discount Rate 0.751 4,506
Net Investment in Lease Present value of minimum lease payments Un-guaranteed Residual Value Lessors Net Investment in Lease 34,860 4,506 39,366
Net Investment over term of the lease OBal 39,366 32,303 24,533 15,986 Receipt 10,000 10,000 10,000 10,000 Balance 29,366 22,303 14,533 5,986 Interest Income (10%) 2,937 2,230 1,453 ClBal 32,303 24,533 15,986
The 5,986 is the 6,000 un-guaranteed residual value with slight rounding difference.
Illustration 4
A company hires out plant to other businesses on long term operating leases. On 01/04/X0 it hires out an item of plant on a 6 year lease with an amount payable on that date of $200,000 followed by 5 payments of $100,000 on 01/04/X1 - 01/04/X5. The plant will be returned to the company on 31/03/X6. The cost of the plant to the company was $1,100,000 and it has a 30 year useful economic life with no residual value. i. What is the annual rental income recognised by the company? ii.Show the treatment in the income statement and the statement of nancial position for the years 20X0 and 20X1.
Solution
i.
Total Rental Income over the lease Recognise on Straight Line Basis
200,000 + (100,000 x 5) 700,000 / 6
700,000 116,667 116,667
Rental Income to be recognised in Income Statement each period
ii. Period 20X0 20X1 Rental Received 200,000 100,000 Rental Recognised 116,667 116,667 Difference to Deferred Income 83,333 -16,667 Total Deferred Income 83,333 66,666
Income Statement Rental Income Receivable Depreciation ($1.1m / 30 yrs.)
20X0 116,667 -36,667 20X0
20X1 116,667 -36,667 20X1 1,100,000 -73,334 1,026,666
Plant at Cost Depreciation Carrying Value
1,100,000 -36,667 1,063,333
Non Current Liabilities Deferred Income Current Liabilities Deferred Income
66,666 16,667 83,333
49,999 16,667 66,666
Illustration 5
Company A acquires a new tractor to rent out over 2 years. The tractor cost $30,000 on 01/01/X0 with a residual value of $9,000 in 2 years It immediately rented the tractor out to Company B on a 2 year lease for $1,000 per month payable in advance. $600 negotiation costs were incurred by Company A and an incentive of $300 cash-back given to Company B to encourage them to take up the lease. Show the treatment in the accounts of each Company for the year ended 31/12/X0.
Solution
Company A Capitalise Cost Depreciation Capitalise Negotiation Cost Capitalise Incentive Cost (30,000 - 9,000) / 2) $ 30,000 10,500 600 300
Rental Income Release Negotiation Costs Incentive Net Rental Income (600 / 2) (300 / 2)
12,000 -300 -150 11550
Company B Capitalise Incentive
$ 300
Rental Payments Release Incentive Rental Payments (300/2)
12,000 -150 11,850
Illustration 6
How would the following be treated in the nancial statements for the next year? Company A has sold 6 assets with the intention of leasing them back on 5 year operating leases. Item 1 2 3 4 5 6 Carrying Value 360 400 300 300 360 400 Proceeds 300 300 360 400 400 360 Fair Value 400 360 400 360 300 300 Annual Lease Payments 50 50 66 70 70 66
Solution
Item Carrying Value 360 400 300 300 360 400 Proceeds Fair Value Above/ Below Fair Value? Below Below Below Above Above Above Gain/Loss
1 2 3 4 5 6
300 300 360 400 400 360
400 360 400 360 300 300
-60 -100 60 100 40 -40
Year 1 Treatment Item 1 2 3 4 5 6 60 loss on sale (unless lower future rentals) 100 loss on sale (unless 60 is for lower future rentals) 60 gain on sale 60 gain on sale; 40 to deferred income 60 impairment to income statement; 100 to deferred income 100 impairment to income statement; 60 to deferred income Gain/Loss Recognised Lease Payments 50 50 66 70 70 66
-60 -100 60 60 + (40 /5) = 68 60 Impairment 20 Deferred Income 100 Impairment 12 Deferred Income
Illustration 7
A company enters into a sale and nance leaseback agreement on 1/1/X1 when the Carrying Value of the asset was $70,000. The sale proceeds were $120,000, which was the fair value of the asset, with the remaining useful economic life of the asset being 5 years. The lease was for 5 annual rentals of $30,000 in arrears. Implicit interest rate of 8% (5 year annuity 3.99). What are the journal entries at the date of disposal and show the lease effects in the income statement and SFP for the rst year.
Solution
Removal of Asset Cash Asset Deferred Income DR 120,000 70,000 50,000 CR
Finance Lease Asset (30,000 x 3.99 (8% 5 yrs.) Finance Lease Interest (119,700 x 8%) Finance Lease Finance Lease (Cash Paid) Cash
DR 119,700
CR
119,700 9,576 9,576 30,000 30,000
Deferred Income Amortisation Deferred Income (50,000 / 5) Income Statement
DR 10,000
CR
10,000
Illustration 8
Sale and leaseback of football stadium (excluding the land element) The football stadium is currently accounted for using the cost model in IAS16, Property, Plant, and Equipment. The carrying value of the stadium will be $12 million at 31 December 2006. The stadium will have a remaining life of 20 years at 31 December 2006, and the club uses straight line depreciation. It is proposed to sell the stadium to a third party institution on 1 January 2007 and lease it back under a 20 year nance lease. The sale price and fair value are $15 million which is the present value of the minimum lease payments. The agreement transfers the title of the stadium back to the football club at the end of the lease at nil cost. The rental is $12 million per annum in advance commencing on 1 January 2007. The directors do not wish to treat this transaction as the raising of a secured loan. The implicit interest rate on the nance in the lease is 56%. # # # # # # # # # # # (9 Marks)
Solution
A sale and leaseback agreement releases capital for expansion, repayment of outstanding debt or repurchase of share capital. The transaction releases capital tied up in non liquid assets. There are important considerations. The price received for the asset and the related interest rate/rental charge should be at market rates. The interest rate will normally be dependent upon the nancial strength of the tenant and the risk/reward ratio which the lessor is prepared to accept. There are two types of sale and leaseback agreements. One utilising a nance lease and another an operating lease. The accounting treatment is determined by IAS17, Leases. The substance of the transaction is essentially one of nancing as the title to the stadium is transferred back to the club. Thus a sale is not recognised. The excess of the sale proceeds over the carrying value of the assets is deferred and amortised to prot or loss over the lease term. The leaseback of the stadium is for the remainder of its economic and useful life, and therefore under IAS17, the lease should be treated as a nance lease. The stadium will remain as a non-current asset and will be depreciated. The nance lease loan will be accounted for under IAS39 Financial Instruments: Recognition and Measurement in terms of the derecognition rules in the standard. The transaction will be recognised by the club as follows in the year to 31 December 2007: Removal of Asset Cash Asset Deferred Income DR 15 12 3 CR
Finance Lease Asset Finance Lease Interest (15 - 1.2 x 5.6%) Finance Lease Finance Lease (Cash Paid) Cash
DR 15,000,000
CR
15,000,000 773,000 773,000 1,200,000 1,200,000
Deferred Income Amortisation Deferred Income (3,000,000 / 20) Income Statement
DR 150,000
CR
150,000
Depreciation Income Statement (15m / 20yrs) Accumulated Depn
DR 750,000
CR
750,000
Summary Income Statement Deferred Income Depreciation Finance Charge 150,000 -750,000 -773,000
Statement of Financial Position Stadium (15m - 750,000) Deferred Income (3m - 150,000) LT Liability (15m - (1.2m x 2) + 773,000 Current Lease Liability 14,250,000 2,850,000 13,373,000 1,200,000
IAS 37 Provisions
Illustration 1
Greenie, a public limited company, builds, develops and operates airports. During the nancial year to 30 November 2010, a section of an airport collapsed and as a result several people were hurt. The accident resulted in the closure of the terminal and legal action against Greenie. When the nancial statements for the year ended 30 November 2010 were being prepared, the investigation into the accident and the reconstruction of the section of the airport damaged were still in progress and no legal action had yet been brought in connection with the accident. The expert report that was to be presented to the civil courts in order to determine the cause of the accident and to assess the respective responsibilities of the various parties involved, was expected in 2011. Financial damages arising related to the additional costs and operating losses relating to the unavailability of the building. The nature and extent of the damages, and the details of any compensation payments had yet to be established. The directors of Greenie felt that at present, there was no requirement to record the impact of the accident in the nancial statements. Compensation agreements had been arranged with the victims, and these claims were all covered by Greenies insurance policy. In each case, compensation paid by the insurance company was subject to a waiver of any judicial proceedings against Greenie and its insurers. If any compensation is eventually payable to third parties, this is expected to be covered by the insurance policies. The directors of Greenie felt that the conditions for recognising a provision or disclosing a contingent liability had not been met. Therefore, Greenie did not recognise a provision in respect of the accident nor did it disclose any related contingent liability or a note setting out the nature of the accident and potential claims in its nancial statements for the year ended 30 November 2010.# # # # # # # # # # # # # (6 marks)
Solution
IAS 37 paragraph 14, states that an entity must recognise a provision if, and only if: (i) a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), (ii)payment to settle the obligation is probable (more likely than not), (iii)and the amount can be estimated reliably. An obligating event is an event that creates a legal or constructive obligation and, therefore, results in an enterprise having no realistic alternative but to settle the obligation [IAS 37.10]. At the date of the nancial statements, there was no current obligation for Greenie. In particular, no action had been brought in connection with the accident. It was not yet probable that an outow of resources would be required to settle the obligation. Thus no provision is required. Greenie may need to disclose a contingent liability. IAS 37 denes a contingent liability as:
(a) a possible obligation that has arisen from past events and whose existence will be conrmed by the occurrence or not of uncertain future events; or (b) a present obligation that has arisen from past events but is not recognised because: (i) it is not probable that an outow of resources will occur to settle the obligation; or (ii)the amount of the obligation cannot be measured with sufcient reliability. IAS 37 requires that entities should not recognise contingent liabilities but should disclose them, unless the possibility of an outow of economic resources is remote. It appears that Greenie should disclose a contingent liability. The fact that the real nature and extent of the damages, including whether they qualify for compensation and details of any compensation payments remained to be established all indicated the level of uncertainty attaching to the case. The degree of uncertainty is not such that the possibility of an outow of resource could be considered remote. Had this been the case, no disclosure under IAS 37 would have been required. Thus the conditions for establishing a liability are not fullled. However, a contingent liability should be disclosed as required by IAS 37. The possible recovery of these costs from the insurer give rise to consideration of whether a contingent asset should be disclosed. Given the status of the expert report, any information as to whether judicial involvement is likely will not be available until 2011. Thus this contingent asset is more possible than probable. As such no disclosure of the contingent asset should be included.
Illustration 2
Grange has prepared a plan for reorganising the parent companys own operations. The board of directors has discussed the plan but further work has to be carried out before they can approve it. However, Grange has made a public announcement as regards the reorganisation and wishes to make a reorganisation provision at 30 November 2009 of $30 million. The plan will generate cost savings. The directors have calculated the value in use of the net assets (total equity) of the parent company as being $870 million if the reorganisation takes place and $830 million if the reorganisation does not take place. Grange is concerned that the parent companys property, plant and equipment have lost value during the period because of a decline in property prices in the region and feel that any impairment charge would relate to these assets. There is no reserve within other equity relating to prior revaluation of these non-current assets.
Solution
A provision for restructuring should not be recognised, as a constructive obligation does not exist. A constructive obligation arises when an entity both has a detailed formal plan and makes an announcement of the plan to those affected. The events to date do not provide sufcient detail that would permit recognition of a constructive obligation. Therefore no provision for reorganisation should be made and the costs and benets of the plan should not be taken into account when determining the impairment loss. Any impairment loss can be allocated to non-current assets, as this is the area in which the directors feel that loss has occurred.
Interim Reporting (IAS 34) & First Time Adoption (IFRS 1)
Illustration 1
In the IFRS opening statement of nancial position at 1 May 2009, Lockne elected to measure its shing eet at fair value and use that fair value as deemed cost in accordance with IFRS 1 First Time Adoption of International Financial Reporting Standards. The fair value was an estimate based on valuations provided by two independent selling agents, both of whom provided a range of values within which the valuation might be considered acceptable. Lockne calculated fair value at the average of the highest amounts in the two ranges provided. One of the agents valuations was not supported by any description of the method adopted or the assumptions underlying the calculation. Valuations were principally based on discussions with various potential buyers. Lockne wished to know the principles behind the use of deemed cost and whether agents estimates were a reliable form of evidence on which to base the fair value calculation of tangible assets to be then adopted as deemed cost.# Lockne was unsure as to whether it could elect to apply IFRS 3 Business Combinations retrospectively to past business combinations on a selective basis, because there was no purchase price allocation available for certain business combinations in its opening IFRS statement of nancial position.
Solution
The question arises as to whether the selling agents estimates can be used to calculate fair value in accordance with IFRS 1 First Time Adoption of International Financial Reporting Standards. Assets carried at cost (e.g. property, plant and equipment) may be measured at their fair value at the date of the opening IFRS statement of nancial position. Fair value becomes the deemed cost going forward under the IFRS cost model. Deemed cost is an amount used as a surrogate for cost or depreciated cost at a given date. If, before the date of its rst IFRS statement of nancial position, the entity had revalued any of these assets under its previous GAAP either to fair value or to a priceindex-adjusted cost, that previous GAAP revalued amount at the date of the revaluation can become the deemed cost of the asset under IFRS 1. It is generally advantageous to use independent estimates when determining fair value, but Lockne should ensure that the valuation is prepared in accordance with the requirements of the relevant IFRS standard. An independent valuation should generally, as a minimum, include enough information for Lockne to assess whether or not this is the case. The selling agents estimates provided very little information about the valuation methods and underlying assumptions that they could not, in themselves, be relied upon for determining fair value in accordance with IAS 16 Property, Plant and Equipment. Furthermore it would not be prudent to value the boats at the average of the higher end of the range of values. IFRS 1, however, does not set out detailed requirements under which fair value should be determined. Issuers who adopt fair value as deemed cost have only to provide the limited disclosures, and methods and assumptions for determining the fair value do not have to be disclosed. The revaluation has to be broadly comparable to fair value. The use of fair value as deemed cost is a cost effective alternative approach for entities which do not
perform a full retrospective application of the requirements to IAS 16. Thus Lockne was not in breach of IFRS 1 and can determine fair value on the basis of selling agent estimates. In accordance with IFRS 1, an entity which, during the transition process to IFRS, decides to retrospectively apply IFRS 3 to a certain business combination must apply that decision consistently to all business combinations occurring between the date on which it decides to adopt IFRS 3 and the date of transition. The decision to apply IFRS 3 cannot be made selectively. The entity must consider all similar transactions carried out in that period; and when allocating values to the various assets (including intangibles) and liabilities of the entity acquired in a business combination to which IFRS 3 is applied, an entity must necessarily have documentation to support its purchase price allocation, extended or applied to other similar situations.
Financial Instruments I
Illustration 1
Aron held 3% holding of the shares in Smart, a public limited company. The investment was classied as available-for-sale and at 31 May 2009 was fair valued at $5 million. The cumulative gain recognised in equity relating to the available-for-sale investment was $400,000. On the same day, the whole of the share capital of Smart was acquired by Given, a public limited company, and as a result, Aron received shares in Given with a fair value of $55 million in exchange for its holding in Smart. Show the treatment for the transaction in the accounts to the 31 May 2009: i) Under IAS 39 ii)If the asset was classied as FVOCI under IFRS 9
Solution
i) IAS 39 Proceeds of Share exchange Carrying amount of Shares Gain on de-recognition Recycle gain previously recognised in Equity Gain to Income Statement $m 5.5 5 0.5 0.4 0.9
IFRS 9 Proceeds of Share exchange Carrying amount of Shares Gain on de-recognition Gain to Income Statement Previous gain transferred from other reserves to retained earnings
$m 5.5 5 0.5 0.5 0.4
Illustration 2
The publication of IFRS 9, Financial Instruments, represents the completion of the rst stage of a three-part project to replace IAS 39 Financial Instruments: Recognition and Measurement with a new standard. The new standard purports to enhance the ability of investors and other users of nancial information to understand the accounting of nancial assets and reduces complexity. Required: Discuss the approach taken by IFRS 9 in measuring and classifying nancial assets and the main effect that IFRS 9 will have on accounting for nancial assets.# (11 marks)
Solution
IFRS 9 Financial instruments retains a mixed measurement model with some assets measured at amortised cost and others at fair value. The distinction between the two models is based on the business model of each entity and a requirement to assess whether the cash ows of the instrument are only principal and interest. The business model approach is fundamental to the standard and is an attempt to align the accounting with the way in which management uses its assets in its business whilst also looking at the characteristics of the business. A debt instrument generally must be measured at amortised cost if both the business model test and the contractual cash ow characteristics test are satised. The business model test is whether the objective of the entitys business model is to hold the nancial asset to collect the contractual cash ows rather than have the objective to sell the instrument prior to its contractual maturity to realise its fair value changes. The contractual cash ow characteristics test is whether the contractual terms of the nancial asset give rise, on specied dates, to cash ows that are solely payments of principal and interest on the principal amount outstanding. All recognised nancial assets that are currently in the scope of IAS 39 will be measured at either amortised cost or fair value. The standard contains only the two primary measurement categories for nancial assets unlike IAS 39 where there were multiple measurement categories. Thus the existing IAS 39 categories of held to maturity, loans and receivables and available-for-sale are eliminated along with the tainting provisions of the standard. A debt instrument (e.g. loan receivable) that is held within a business model whose objective is to collect the contractual cash ows and has contractual cash ows that are solely payments of principal and interest generally must be measured at amortised cost. All other debt instruments must be measured at fair value through prot or loss (FVTPL). An investment in a convertible loan note would not qualify for measurement at amortised cost because of the inclusion of the conversion option, which is not deemed to represent payments of principal and interest. This criterion will permit amortised cost measurement when the cash ows on a loan are entirely xed such as a xed interest rate loan or where interest is oating or a combination of xed and oating interest rates.
IFRS 9 contains an option to classify nancial assets that meet the amortised cost criteria as at FVTPL if doing so eliminates or reduces an accounting mismatch. An example of this may be where an entity holds a xed rate loan receivable that it hedges with an interest rate swap that swaps the xed rates for oating rates. Measuring the loan asset at amortised cost would create a measurement mismatch, as the interest rate swap would be held at FVTPL. In this case the loan receivable could be designated at FVTPL under the fair value option to reduce the accounting mismatch that arises from measuring the loan at amortised cost. All equity investments within the scope of IFRS 9 are to be measured in the statement of nancial position at fair value with the default recognition of gains and losses in prot or loss. Only if the equity investment is not held for trading can an irrevocable election be made at initial recognition to measure it at fair value through other comprehensive income (FVTOCI) with only dividend income recognised in prot or loss. The amounts recognised in OCI are not recycled to prot or loss on disposal of the investment although they may be reclassied in equity. The standard eliminates the exemption allowing some unquoted equity instruments and related derivative assets to be measured at cost. However, it includes guidance on the rare circumstances where the cost of such an instrument may be appropriate estimate of fair value. The classication of an instrument is determined on initial recognition and reclassications are only permitted on the change of an entitys business model and are expected to occur only infrequently. An example of where reclassication from amortised cost to fair value might be required would be when an entity decides to close its mortgage business, no longer accepting new business, and is actively marketing its mortgage portfolio for sale. When a reclassication is required it is applied from the rst day of the rst reporting period following the change in business model. All derivatives within the scope of IFRS 9 are required to be measured at fair value. IFRS 9 does not retain IAS 39s approach to accounting for embedded derivatives. Consequently, embedded derivatives that would have been separately accounted for at FVTPL under IAS 39 because they were not closely related to the nancial asset host will no longer be separated. Instead, the contractual cash ows of the nancial asset are assessed as a whole and are measured at FVTPL if any of its cash ows do not represent payments of principal and interest. One of the most signicant changes will be the ability to measure some debt instruments, for example investments in government and corporate bonds at amortised cost. Many available-for-sale debt instruments currently measured at fair value will qualify for amortised cost accounting. Many loans and receivables and held-to-maturity investments will continue to be measured at amortised cost but some will have to be measured instead at FVTPL. For example some instruments, such as cash-collateralised debt obligations, that may under IAS 39 have been measured entirely at amortised cost or as available-for-sale will more likely be measured at FVTPL. Some nancial assets that are currently disaggregated into host nancial assets that are not at FVTPL will instead by measured at FVTPL in their entirety.
IFRS 9 may result in more nancial assets being measured at fair value. It will depend on the circumstances of each entity in terms of the way it manages the instruments it holds, the nature of those instruments and the classication elections it makes. Assets that are currently classied as held-to-maturity are likely to continue to be measured at amortised cost as they are held to collect the contractual cash ows and often give rise to only payments of principal and interest. IFRS 9 does not directly address impairment. However, as IFRS 9 eliminates the available-for-sale (AFS) category, it also eliminates the AFS impairment rules. Under IAS 39 measuring impairment losses on debt securities in illiquid markets based on fair value often led to reporting an impairment loss that exceeded the credit loss that management expected. Additionally, impairment losses on AFS equity investments cannot be reversed within the income statement section of the statement of comprehensive income under IAS 39 if the fair value of the investment increases. Under IFRS 9, debt securities that qualify for the amortised cost model are measured under that model and declines in equity investments measured at FVTPL are recognised in prot or loss and reversed through prot or loss if the fair value increases.
Financial Instruments II
Illustration 1
A company invests $10,000 in a 3 year redeemable 10% bond which is redeemable at a premium. The bond consists of interest payments and principle only and the company intends to hold it until it is redeemed. The effective interest rate on the bond is 12%. Show the treatment for the bond over the 3 year period.
OBal
Interest (12%) DR Financial Asset CR Income Statement 1,200 1,224 1,251
Cash Recd (10% x 10,000) DR Cash CR Financial Asset -1,000 -1,000 -1,000
Clbal
10,000 10,200 10,424
10,200 10,424 10,675
The Premium payable at the end of the term therefore is $675.
Illustration 2
A company issues a $30,000 3 year 7% redeemable bond at a discount of 10% with issue costs of $1,000. The bond is redeemable at a premium of $1,297. The effective interest rate is 14%. Show the treatment for the bond over the 3 year period.
$ Issue Proceeds Discount Issue Costs Net Proceeds 30,000 -3,000 -1,000 26,000
OBal
Interest (14%) DR Income Statement CR Financial Liability 3,640 3,856 4,101
Cash Paid (7% x 30,000) DR Financial Liability CR Cash -2,100 -2,100 -2,100
Clbal
26,000 27,540 29,296
27,540 29,296 31,297
Illustration 3
Ambush loaned $200,000 to Bromwich on 1 December 2003. The effective and stated interest rate for this loan was 8 per cent. Interest is payable by Bromwich at the end of each year and the loan is repayable on 30 November 2007. At 30 November 2005, the directors of Ambush have heard that Bromwich is in nancial difculties and is undergoing a nancial reorganisation. The directors feel that it is likely that they will only receive $100,000 on 30 November 2007 and no future interest payment. Interest for the year ended 30 November 2005 had been received. The nancial year end of Ambush is 30 November 2005. Required: (i)# Outline the requirements of IAS 39 as regards the impairment of nancial # assets.# # # # # # # # # # (6 marks) (ii)# # Explain the accounting treatment under IAS39 of the loan to Bromwich in the nancial statements of Ambush for the year ended 30 November 2005.# (4 marks)
Solution
IAS 39 requires an entity to assess at each balance sheet date whether there is any objective evidence that nancial assets are impaired and whether the impairment impacts on future cash ows. Objective evidence that nancial assets are impaired includes the signicant nancial difculty of the issuer or obligor and whether it becomes probable that the borrower will enter bankruptcy or other nancial reorganisation. For investments in equity instruments that are classied as available for sale, a signicant and prolonged decline in the fair value below its cost is also objective evidence of impairment. If any objective evidence of impairment exists, the entity recognises any associated impairment loss in prot or loss. Only losses that have been incurred from past events can be reported as impairment losses. Therefore, losses expected from future events, no matter how likely, are not recognised. A loss is incurred only if both of the following two conditions are met: (i) there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event), and (ii) the loss event has an impact on the estimated future cash ows of the nancial asset or group of nancial assets that can be reliably estimated The impairment requirements apply to all types of nancial assets. The only category of nancial asset that is not subject to testing for impairment is a nancial asset held at fair value through prot or loss, since any decline in value for such assets are recognised immediately in prot or loss.
For assets at amortised cost, impaired assets are measured at the present value of the estimated future cash ows discounted using the original effective interest rate of the nancial assets. Any difference between the carrying amount and the new value of the impaired asset is an impairment loss. There is objective evidence of impairment because of the nancial difculties and reorganisation of Bromwich. The impairment loss on the loan will be calculated by discounting the estimated future cash ows. The future cash ows will be $100,000 on 30 November 2007. This will be discounted at an effective interest rate of 8% to give a present value of $85,733. The loan will, therefore, be impaired by ($200,000 $85,733) i.e. $114,267.
Illustration 4
A company purchases a $2 million bond that has a xed interest rate of 6% per year . The instrument is classed as a FVPL nancial asset. The fair value is $2 million. The company enters into an interest rate swap (fair value zero) to offset the risk of a decline in fair value. If the derivative hedging instrument is effective, any decline in the fair value of the bond should be offset by opposite increases in the fair value of the derivative instrument. The swap is expected to be 100% effective. The company designates and documents the swap as a hedging instrument. Market interest rates increase to 7% and the fair value of the bond decreases to $1,920,000. The instrument is a hedged item in a fair value hedge, this change in fair value of the instrument is recognised in prot or loss, as follows: Dr Income statement 80,000 Cr Bond 80,000 The fair value of the swap has increased by $80,000. Since the swap is a derivative, it is measured at fair value with changes in fair value recognised in prot or loss. Dr Swap 80,000 Cr Income statement 80,000 The changes in fair value of the hedged item and the hedging instrument exactly offset, the hedge is 100% effective and, the net effect on prot or loss is zero.
Financial Instruments II
Illustration 1
Aron issued one million convertible bonds on 1 June 2006. The bonds had a term of three years and were issued with a total fair value of $100 million which is also the par value. Interest is paid annually in arrears at a rate of 6% per annum and bonds, without the conversion option, attracted an interest rate of 9% per annum on 1 June 2006. The company incurred issue costs of $1 million. If the investor did not convert to shares they would have been redeemed at par. At maturity all of the bonds were converted into 25 million ordinary shares of $1 of Aron. No bonds could be converted before that date. The directors are uncertain how the bonds should have been accounted for up to the date of the conversion on 31 May 2009 and have been told that the impact of the issue costs is to increase the effective interest rate to 938%.
Solution
Debt & Equity Split Year 1 2 3 3 Cash Flows 6 6 6 100 DR 9% 0.917 0.841 0.772 0.772 Debt Total Total Value Equity Total (Bal) PV 5.50 5.05 4.63 77.20 92.38 100.00 7.62
Issue Costs Debt Equity ($1m x 92.38/100) ($1m x 7.62/100)
$ 923,800 76,200
Debt Pre- Issue Costs Issue Costs Net Value 92.38 0.92 91.46
Equity 7.62 0.08 7.54
Total 100 1 99
Year 1 2 3
Obal 91.46 94.04 96.86
Interest (9.38%) 8.58 8.82 9.09
Cash Paid 6.00 6.00 6.00
Clbal 94.04 96.86 99.95
This is the $100m conversion value of the bond with slight rounding difference
IAS 12 Deferred Tax
Illustration 1
An entity has the following assets & liabilities recorded in its balance sheet at 31 December 2008: Carrying Value $m Property Plant & Equipment Inventory Trade Receivables Trade Payables Cash 20 10 8 6 12 4 Tax Base $m 14 8 12 8 12 4
The entity had made a provision for inventory obsolescence of $4m that is not allowable for tax purposes until the inventory is sold and an impairment charge against trade receivables of $2m that will not be allowed in the current year for tax purposes but will be in the future. Income tax paid is at 30%. Required: Calculate the deferred tax provision at 31 December 20X8.
Solution
Carrying Value $m Property Plant & Equipment Inventory Trade Receivables Trade Payables Cash 20 10 8 6 12 4 Tax Base $m 14 8 12 8 12 4 Total Temporary Difference 6 2 -4 -2 0 0 2 Asset/ Liability? Liability Liability Asset Asset Liability
The deferred tax liability will be $2,000,000 x 30% = $600,000
Illustration 2
Show the accounting treatment in the following situations: (i) A company treats royalties as income when receivable in accordance with IFRS. The tax regime taxes royalties when they are received. The Income Statement of the company shows $1m of royalties in the period of which $500,000 have been received. (ii)In accordance with IFRS a company has deferred $2m of income on a long term contract. The tax rules state that the income should be recognised immediately. (iii)Depreciation on Plant & Equipment in the period under IFRS is $4m where the tax allowable depreciation is $2m. (iv)Depreciation on Buildings in the period under IFRS is $3m where the tax allowable depreciation is $4m. The tax rate is 30%
Solution
Situation Royalties Deferred Income Plant & Equipment Buildings Financial Statements More Income Less Income More Expense Less Expense Tax Effect More Tax Less Tax Less Tax More Tax Deferred Tax Liability Asset Asset Liability
Situation
Working DR
Tax CR
Deferred Tax DR CR 150 600 600 600 600 300
Royalties Deferred Income Plant & Equipment Buildings
(1m - 500k) x 30% (2m x 30%) (4m - 2m) x 30% (4m - 3m) x 30%
150
300
Illustration 3
An entity granted 1,000 share options to an employee vesting 3 years later. The fair value of at the grant date was $3 Tax law allows a tax deduction of the intrinsic value at the end of the vesting period. The intrinsic value is $1.20 at the end of year 1 and $3.40 at the end of year 2 Assume a tax rate of 30%.
Solution
Step 1 - Calculate the Options Expense. Year 1 2 No. Options 1000 1000 Value of option 3 3 Proportion 1/3 2/3 Dr Expense Cr equity 1000 2000 Period Expense 1000 1000
Step 2 - Calculate the Tax Allowable Deduction Year 1 2 No. Options 1000 1000 Intrinsic Value of option 1.20 3.40 Proportion 1/3 2/3 Total Tax Allowable 400 2267 Period Expense 400 1867
Step 3 - Treatment Share Expense Year 1 Year 2 Total 1,000 1000 2,000 Tax Allowable (At Exercise Date) 400 1,867 2,267 SFP Asset (400 x 30%) =120 (1,867) x 30% = 560 680 I/S CR 120 480 600 SCI CR Nil 80 80
The share expense of 2,000 is less than the 2,267 tax allowable so the extra (267 x 30% = 80) goes to equity rather than the income statement.
Entity Reconstructions
Illustration 1
$000 Assets 500 500 Equity & Liabilities Issued Equity Shares @ $1 each Share Premium Retained Earnings Liabilities 600 100 -300 100 500 Dividends cannot be paid while accumulated losses exist. Equity of $600,000 is only backed by assets of $500,000. Loan nance cannot be raised due to the current nancial position. Required Apply a capital reduction and restate the statement of nancial position.
Solution
DR Share Premium Equity Share Capital Retained Earnings 100 200 300 CR
$000 Assets 500 500 Equity & Liabilities Issued Equity Shares Share Premium Retained Earnings Liabilities 400 0 0 100 500
Illustration 2
$000 Intangible Asset (Brand) Non Current Assets 50,000 220,000 270,000
Inventory Receivables
20,000 30,000 320,000
Equity & Liabilities Issued Equity Shares @ $1 each Share Premium Retained Earnings 100,000 75,000 -100,000 75,000
Debenture Loan Overdraft Payables
125,000 20,000 100,000 320,000
A reconstruction scheme is to take place under the following conditions: (i) The equity shares of $1 nominal currently in issue will be written off and will be replaced on a one-for-one basis by new equity shares with nominal value of $0.25. (ii)The debenture loan will be replaced by the issue of new equity shares - four new shares with nominal value of $0.25 each for every $1 debenture loan converted. (iii)New shares with a nominal value of $0.25 will be offered to the existing equity holders in the ratio of three new shares for every one currently held. All current equity holders are expected to take this up. (iv)Share premium account to be eliminated. (v)Brand to be written off as it is impaired. (vi)Decit on the retained earnings to be eliminated. Prepare the revised SFP and show any workings undertaken to achieve this.
Solution
Reconstruction Account DR New Equity Shares (100,000 x 0.25) Note (i) Conversion of Debenture (125,000 x 4 x 0.25) Note (ii) Brand Impairment Note (v) Retained Earnings Note (vi) 25,000 125,000 50,000 100,000 300,000 300,000 $000 Intangible Asset (Brand) Non Current Assets 0 220,000 220,000 Bank (-20,000 + 75,000) Note (iii) Inventory Receivables 55,000 20,000 30,000 325,000 Equity & Liabilities Issued Equity Shares (125,000 + 25,000 + 75,000) Share Premium Retained Earnings 225,000 0 0 225,000 CR Remove Equity Shares Note (i) Remove Debenture Loan Note (ii) Share Premium Removed Note (iv) 100,000 125,000 75,000
Debenture Loan Overdraft Payables
0 0 100,000 325,000
IAS 7 Cash Flow Statements
Illustration 1
The group nancial statements for Nasser Ltd. show the following information: X1 NCI on Statement of Financial Position NCI share of Prot after Tax What was the dividend paid to the NCI in the year X1? 820 220 X0 700 130
Solution 1
NCI DR CR Balance Brought Forward Share of Prot in X1 Dividend Paid to NCI 100 700 220
Balance Carried Down
820 920 920
NCI Balance Brought Forward
$ 700
Share of Prot in X1
220
Dividend Paid to NCI (BALANCING FIGURE)
-100
820
Illustration 2
Indigo Ltd, took up a 40% holding in Violet Ltg. for consideration of $120 in 20X1. Tthe group nancial statements for Indigo Ltd. show the following information: X1 Post tax Income from Associate (Income Statement) Investment in Associate (SFP) Loan to Associate 50 150 20 X0 0 0 0
What amounts will be included in the group cash ow statement in the year X1?
Solution 2
Associate DR Balance Brought Forward Consideration Paid Prot in period 0 120 50 Dividend Received 20 CR
Balance Carried Down 170
150 170
Associate Balance Brought Forward
$ 0
Consideration
120
Income From Associate
50
Dividend received from Associate (BALANCING FIGURE)
-20
150
Amounts for cash ow statement Income from Associate (Remove from prot before tax) Consideration Paid (Cash paid out) Dividend Received from associate Loan to Associate 0 - 20
$ -50 -120 20 -20
Illustration 3
Extracts from the group SFP of Express Ltd are outlined below: X1 Property Plant & Equipment Inventory Receivables Trade Payables 50,600 33,500 27,130 33,340 X0 44,050 28,700 26,300 32,810
During the period Express Ltd purchased 75% of Delivery Ltd. At the date of acquisition the fair value of the following assets and liabilities were determined:
Property Plant & Equipment Inventory Receivables Payables
4,200 1,650 1,300 1,950
Show the movements in cash for the 4 items outlined above.
Solution 3
X1 Property Plant & Equipment Inventory Receivables Trade Payables 50,600 33,500 27,130 33,340 X0 44,050 28,700 26,300 32,810 Delivery 4,200 1,650 1,300 1,950 Working (44,050 + 4,200 - 50,600) (28,700 + 1,650 - 33,500) (26,300 + 1,300 - 27130) (32,810 + 1,950 - 33,340) Cash -2,350 -3,150 470 -1,420
Illustration 4
Using the information in illustration 3 show the movements in cash if Express Ltd. Had already owned the subsidiary and sold it during the period.
Solution 4
X1 Property Plant & Equipment Inventory Receivables Trade Payables 50,600 33,500 27,130 33,340 X0 44,050 28,700 26,300 32,810 Delivery 4,200 1,650 1,300 1,950 Working (44,050 - 4,200 - 50,600) (28,700 - 1,650 - 33,500) (26,300 - 1,300 - 27,130) (32,810 - 1,950 - 33,340) Cash -10,750 -6,450 -2,130 2,480
Illustration 5
Consolidated Financial Statements for Group. Group Income Statement Revenue COS Gross Prot Other Expenses Prot from operations Gain on sale of sub (Note i) Finance cost (Note ii) PBT Tax Prot after tax Foreign Currency Translations Total Comprehensive Income Attributable to Parent Attributable to NCI $m 4,000 -2,200 1,800 -789 1,011 50 -200 861 -180 681 62 743 600 143
Group Statement of Changes in Equity Balance B/F Prot Attributable to Parent Dividends Paid Issue of Shares Balance C/F
$m 3,307 600 -240 1000 4,667
20X2 Goodwill Property Plant & Equipment 52 5,900
20X1 72 4,100
Inventories Receivables Cash
950 1,000 80 7,982
800 900 98 5,970
Share Capital Retained Earnings NCI Non-Current Liabilities Obligations under Finance Leases Long term borrowings Deferred Tax Current Liabilities Trade Payables Accrued Interest Income Tax Obligations under Finance Leases Overdraft
3,500 1,167 543
2,500 807 500
225 1,554 278
140 1,200 218
450 25 130 45 65 7,982
400 20 120 25 40 5,970
(i) On 1 April 20X2 the parent disposed of a 75% subsidiary for $250m in cash which had the following net assets at the time: # # # # # # $m Property Plant & Equipment# # 200 Inventory# # # # # 100
Receivables# # # # Cash# # # # # Payables# # # # Income Tax# # # # Interest bearing borrowings# # # # # #
# # # # # #
110 10 (80) (25) (75) 240
The subsidiary had been purchased several years ago for a cash payment of $110m when its net assets had been $120m. (ii) Goodwill is measured using the proportionate method (iii)The following currency differences occurred Total $m On retranslation of net assets: Property Plant & Equipment Inventories Receivables Payables 25 20 20 -9 56 Retranslation of Prot for period Offset exchange losses on borrowings (see below) 16 -10 62 20 15 16 -6 45 12 -10 47 Parent Share $m
The exchange losses on borrowings relate to foreign loans taken out to nance investments in subsidiaries. The accounts assistant has offset these against the retranslation of the net investments in the subsidiaries. The exchange gain on retranslation of the income statement (from average rate for the year to the closing rate) relates to operating prot excluding depreciation. (iv) Depreciation for the year was $320m and the group disposed of PPE with a net book value of $190m for cash of $198m. the prot on this disposal has been credited to Other operating expenses. The group entered into a signicant number of new nance leases in the period of which $250m related to additions to property, plant & equipment. Prepare the consolidated cash ow statement for the period.
Solution
W1 - Disposal of Subsidiary Goodwill in Disposal Subsidiary Cost of Investment Net assets acquired Goodwill Goodwill (Proof) DR Balance b/d 72 Disposal Goodwill 20 CR 120 x 75% $m 110 -90 20
Balance c/d 72 W2 - Working Capital Movements 20X2 Inventories Receivables Payables 950 1,000 450 20X1 800 900 400 Sub 100 110 80 Total Movement Cash -250 -210 130 -330
52 72
W3 - NCI Non Controlling Interest DR Balance b/d Disposal of Sub (240 x 25%) Cash Paid to NCI Balance c/d 60 40 543 643 643 Prot to NCI 143 CR 500
W4 - PPE Property, Plant & Equipment DR Balance b/d Exchange Differences Finance Leases 4,100 25 250 2235 Subsidiary Disposal Other Disposals Depreciation Balance c/d 6610 200 190 320 5,900 6610 CR
Cash Paid
W4 - Share Capital 20X2 3,500 20X1 2,500 Movement 1,000
W5 - Finance Leases Finance Leases DR CR Balance b/d (140 + 25) New Leases Cash Repaid 145 165 250
Balance c/d (225 + 45)
270 415 415
W6 - Long Term borrowings Long Term Borrowings DR Balance b/d Disposal of Sub New Borrowings (Cash) 75 -419 Exchange Loss CR 1,200 10
Balance c/d (225 + 45)
1,554 1,210 1,210
W7 - Tax Tax DR CR Balance b/d Income Tax Disposal of Sub 25 Balance b/d Deferred Tax Income Statement Tax Paid Bal c/d Deferred Tax Balance c/d Income Tax 85 278 130 518 518 120 218 180
W8 - Interest Payable Interest Payable DR Balance b/d Income Statement Cash Paid 195 CR 20 200
Balance c/d
25 220 220
Cash Flow Statement

$m Prot Before Tax Depreciation FX Differences on Prot FX Differences on Working Capital Prot on sale of PPE Gain on Sale of Subsidiary Finance Expense Working Capital Movements Cash Generated from Operations Interest Paid Income Taxes Paid Net Cash from Operating activities (10 + 20 -9) (198 - 190) 250 - ((240 x 75%)+ 20) 861 320 16 31 -8 -50 200 -330 1040 -195 -85 760
Cash Flow from Investing Activities Receipts from the sale of PPE Purchases of PPE (W4) Sale of Subsidiary Less cash sold 198 -2,235 240 -1,797 Cash Flow from Financing Activities Issue of Shares New Long Term Borrowings (W6) Finance Leases Repaid (W5) Dividends Paid Dividend Paid to NCI (W3) 1,000 419 -145 -240 -40 994 Net Decrease in Cash & Cash equivalents Cash b/f Cash c/f (98 - 40) (80 - 65) -43 58 15
IAS 19 (Updated) Pensions
Illustration 1
A company maintains a dened benet pension scheme for its employees. The following information is relevant: The pension assets brought forward in 20X0 $1,000 with a closing balance of $2,000. The Discount Rate is 11%. Calculate the expected return on Pension Assets.
Solution
1,000 11% 110
Illustration 2
A company maintains a dened benet pension scheme for its employees. The following information is relevant: The liabilities of the scheme were $1,400 at the start of the period and $2,600 at the end. The discount rate is 12%. Calculate the Interest Cost for the period.
Solution
1,400 12% 168
Illustration 3 - Try this yourself!

The following details refer to Company As pension scheme. B/F Pension Assets Pension Liabilities The discount rate is 11% 1,000 1,400 C/F 2,000 2,600
Calculate the return on assets and the interest cost.
Solution
1,000 11% 110
1,400 11% 154
Illustration 4
A company maintains a dened benet pension scheme for its employees. The following information is relevant: The pension assets brought forward in 20X0 $1,800 with a closing balance of $2,700. The company contributes $90 per year into the scheme. Benets paid out in the period were $100. The liabilities of the scheme were $1,600 at the start of the period and $2,100 at the end. The discount rate is 12%. The terms of the scheme have changed meaning that past service costs have arisen of $35 and the current service costs for the period are $70.
Required: Show the treatment for the pension scheme in the nancial statements of the company. (See Video)

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P2 Corporate Reporting

ACCA P2 - Corporate Reporting Workbook - Questions & Solutions

Ordinary Shares Accumulated Prots Equity

160 240 400

100 200 300

Non Current Liabilities Current Liabilities

100 200 700

200 100 600

Murcia Date Acquired Parent Share NCI

Working 2 - Equity Table

Working 5 - Accumulated Prots

SFP for Almeria Group

Ordinary Shares Accumulated Prots Non Controlling Interest Equity

Non Current Liabilities Current Liabilities

100 200 700

200 100 600

Date Acquired Parent Share NCI

Murcia TODAY 100% 0%

Working 2 - Equity Table

! Working 5 - Accumulated Prots

240 Nil 240

SFP for Almeria Group

Ordinary Shares Accumulated Prots Non Controlling Interest Equity

160 240 Nil 400

Non Current Liabilities Current Liabilities

100 200 700

200 100 600

100 + 200 200 + 100

300 300 1000

Assets Investment in Dec

500 350 850

Ordinary Shares Accumulated Prots Equity

100 250 350

200 100 300

Date Acquired Parent Share NCI

Working 2- Equity Table

! Working 5 - Accumulated Prots

Statement of Financial Position for Ant Group

Goodwill Assets Investment in Dec 500 350 850 500 500

Ordinary Shares Accumulated Prots NCI Equity

Dec Date Acquired Parent Share NCI

TODAY 80% 20% 100%

Working 2- Equity Table

! Working 5 - Accumulated Prots

Statement of Financial Position for Ant Group

Goodwill Assets Investment in Dec 500 350 850 500 500

W3 500 + 500 Cancelled in Goodwill W3

110 1000 Nil 1110

Ordinary Shares Accumulated Prots NCI Equity

100 250 60 410

Assets Investment in Dando

Ordinary Shares ($1) Accumulated Prots Equity

200 250 450

200 100 300

Non Current Liabilities Liabilities

280 170 900

200 150 650

Date Acquired Parent Share NCI

Working 2 - Equity Table

Working 5 - Accumulated Prots

Statement of Financial Position for Evan Group

Goodwill Assets Investment in Dando 200 500 350