ACCA P2 (INT) Corporate Reporting - Study text

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P has an 80% interest in S1 and a 66% interest in S2. The non-controlling interest is

20% in S1 and 34% in S2. These percentages should be used in the consolidation

process, when the one-stage method is used..

5 H, S and T

There is a vertical group structure. S joined the group on 1 January Year 2 and T

joined the group at a later date, 1 January Year 3.

Step 1

Calculate the percentage ownership of the subsidiaries held by H and the

percentage ownership of the non-controlling interests.

H acquired 80% of the shares of S (160,000/200,000)

S acquired 70% of the shares of T (35,000/50,000)

OwnershipofS

DirectholdingofH 80%

Non‐controllinginterestinS(balancingfigure) 20%

100%

OwnershipofT

Indirectholding(80%×70%) 56%

Non‐controllinginterestinT(balancingfigure)

44%

100%

Step 2

Calculate the net assets of S and T at (1) the end of the current reporting period and

(2) the date of acquisition by the group.

At31

December

Year6

Atacquisition

date

Post‐acquisition

accumulatedprofits

$000 $000 $000

EntitySnetassets 630 480 150

EntityTnetassets

250 150 100

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Step 3

Calculate the non-controlling interest

Non‐controllinginterestinnetassetsofS

20%×630 126.0

Non‐controllinginterestinnetassetsofT 44%×250 110.0

236.0

Subtract

Costofindirectnon‐controllinginterestinT 20%×109 (21.8)

(20%×CostofinvestmentbySinT)

Non‐controllinginterestinHGroup

214.2

Step 4

Calculate the purchased goodwill.

To do this, we must first calculate the cost of the parent company’s investment in

Entity T.

$000

CostofinvestmentofSinT

109.0

Costofindirectnon‐controllinginterestinT(seeabove) (21.8)

Costofparent’sinvestmentinT

87.2

InvestmentinS

InvestmentinT

$000

Costofinvestment 444 (seeabove) 87.2

Minusshareofnetassetsacquired:

80%×480 384

56%×150

84.0

Purchasedgoodwill

3.2

Total purchased goodwill for the group (in $000) before impairment = 60 + 3.2 =

63.2. There has been impairment of $26,000, so the purchased goodwill in the

consolidated statement of financial position is $63,200 - $26,000 = $37,200.

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Step 5

Calculate the post-acquisition accumulated profits of the parent company.

$000

EntityHaccumulatedprofits(parentcompany)

500

Parent’sshareof: 

EntitySaccumulatedprofits(80%×150)–seeStep2

120

EntityTaccumulatedprofits(56%×100)–seeStep2

56

676

Accumulatedimpairmentofgoodwill (26)

650

Consolidated statement of financial position at 31

DecemberYear6

$000

Goodwill(Step4)

37.2

Sundrynetassets(256+521+250) 1,027.0

1,064.2



Sharecapital 200.0

Reserves(Step5)

650.0

Parentcompany’sshareinequityofthegroup

850.0

Non‐controllinginterests(Step3) 214.2

1,064.2

6 Disposal

$

million

$

million

Considerationfromsaleofshares

960

FairvalueofretainedsharesinSpool

100

1,060

NetassetsofSpoolatcarryingvalue 800

Minus:non‐controllinginterestde‐recognised(10%×800) (80)

720

Gainonsaleofshares

340

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None of the assets of Spool have been re-valued, therefore there is no balance on a

revaluation reserve; therefore none of this gain should be transferred directly to

retained earnings and not reported in profit or loss.

There is no information to suggest that a reclassification adjustment is required to

reclassify income previously reported as other comprehensive income as profit or

loss.

The total gain of $340 million on disposal of the shares should therefore be

recognised in profit or loss for the period.

Hoo will recognise an investment in Spool in its statement of financial position in

accordance with the requirements of IAS 39. On initial recognition, this investment

should be valued at $100 million.

7 Step acquisiton and partial disposal

(a) The profits of AS since the investment was acquired (all retained) are $40

million (= $300m – $260m). During this period, HH held 25% of the equity of

AS and it is assumed that AS is an associate. Profits attributable to H for the

year are therefore $10 million (= 25% × $40 million).

$ million

Initial investment in associate at cost 80

Share of post-investment retained profits 10

Fair value of investment at 30 June 95

Gain recognised when step acquisition occurs 5

The total gain/profit recognised for the year from the investment in AS is

therefore $10 million + $5 million = $15 million.

Goodwill

$ million

Fair value of investment in 25% of AS 95

Cost of additional 40% of shares 160

255

H share of net assets of AS at 30 June (65% × 300)

195

Goodwill attributable to owner of H 60

Goodwill attributable to non-controlling interests 15

Total goodwill 75

$ million

Fair value of investment in 25% of AS (35% × 300)

105

Goodwill attributable to non-controlling interests 15

Total NCI 120

(b) The disposal of 10% of the shares in S leaves P with a controlling interest;

therefore the disposal of the shares should be accounted for as an equity

Answers

transaction between owners of the group. No gain or loss is recognised in the

consolidated financial statements of P.

It is assumed that the profits of S for the year were $200 million (all retained;

therefore $900 million - $700 million). At 30 June it is assumed that profits for

the year to date were $100 million (= $200 million × 6/12); therefore the net

assets of S at this date were $800 million.

P NCI

$m $m

Before the share sale

(80% × 800)

640 (20%) 160

After the share sale (70%)

560 (30%) 240

Change in interest in S - 80 + 80

The shares were sold for $94 million adding to the assets in P’s statement of

financial position. The transaction should therefore be accounted for in equity

as follows:

Debit: Cash $94 million

Credit: NCI $80 million

Credit: Reserves attributable to P (= gain = balance) $14 million

$ million $ million

Post-acquisition profit attributable to S (see above) 200

Less: Impairment of goodwill (8)

Recognised profit 192

Attributable to equity owners of P

1 January – 30 June (80% × 200 × 6/12)

1 July – 31 December (70% × 200 × 6/12)

Goodwill impairment (8)

Attributable to NCI 142

1 January – 30 June (20% × 200 × 6/12)

1 July – 31 December (30% × 200 × 6/12)

192

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8 The Edgeley Group

Consolidated statement of financial position at 31

December Year 4

ASSETS

$m

Non‐currentassets



Intangible:Goodwill(652+148(W3)

800

Tangible(1,840+863+520)

3,223

Currentassets



Inventory(350‐20unrealisedprofit+212+108)

650



Receivables(213+127+82)

422



Bank(234+26+19)

279



1,351

TOTALASSETS

5,374



EQUITYANDLIABILITIES



Equity



Ordinarysharecapital

500

Accumulatedprofits(W5)

3,737

EquityattributabletoownersofEdgeley

4,237

Non‐controllinginterest(W6)

446

Totalequity

4,683

Currentliabilities



Tradepayables(262+151+92)

505



Taxationpayable(112+47+27)

186



691

TOTALEQUITYANDLIABILITIES

5,374

Workings

(1) Group structure

80 × 75 = 60% indirectly held by E in W.

NCI = 40%

Answers

Consolidation adjustments

(2) Intra-group trading

Cost

100%

Mark‐up

40%

Intra‐groupsalesprice

140%

Unrealised profit in inventory still held

25% × 280 ×

140

= 20

Consolidation adjustment:

DR Reserves account of Cheadle 20

CR Inventory 20

(3) Goodwill

Cheadle Wilmslow

$000

Costofinvestment 1,452

500

Minusindirectholdingadjustment(20%x500)

(100)

Minusgroupshareofthefairvalueofnetassetsat

acquisitionasrepresentedbythepre‐acquisition

sharecapitalandreserves:

80%×1000(200+800) (800)

60%×420(100+320)

(252)

Goodwill

652

148

(4) Cheadle’s revised reserves

$000

Asgiveninthequestion

1,330

Minusunrealisedprofitincludedininventory(W2) (20)

Adjustedreserves

1,310

(5) Consolidated reserves

$000

Edgeley

3,215

Plusgroupshareofthepost‐acquisitionprofitsofthe

subsidiaries:



Cheadle:80%(1,310(W4)–800atacquisition)

408

Wilmslow:60%(510–320atacquisition)

114

3,737

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Note: Wilmslow only became a subsidiary of the group when Cheadle was

acquired by Edgeley. Hence the acquisition date for Wilmslow is treated as the

1 January Year 4.

(6) Non-controlling interest

$000

Cheadle:20%(200+1,310(W4)

302

Wilmslow:40%(100+510) 244

Minusindirectholdingadjustment:(20%×500)

(100)

446

9 The A Group

A‘s original investment in C was 90% of C’s 400,000 shares (360,000 shares). During

the year A has disposed of 350,000 of these shares, which reduces the investment

from subsidiary status to that of a ‘simple’ investment.

AGroup

Consolidatedstatementoffinancialpositionasat31DecemberYear4

$000

Goodwill(W2,Bonly) 428

InvestmentinCatfairvalue

44

Othernetassets(W4)

6,661

7,133

Equity 

Sharecapital 1,500

AccumulatedprofitsattributabletoownersofA(working1)

5,347

EquityattributabletoownersofA

6,847

Non‐controllinginterest:20%×(1,260+170) 286

Totalequity

7,133

Income statement working schedule for year ended 31 December Year 4

Group

$000

Operatingprofit 1,200

250

Minus:DividendfromB (16)

nil

1,184

250

1,434

GainondisposalofC(W2) 237

237

Profitbeforetax

1,421

250

1,771

Tax (360)

(60)

(420)

Profitaftertax

1,061

190

1,251

Answers

Attributableto:

EquityownersofA(1,061+80%×190)

1,213

Non‐controllinginterest:20%×190

1,251

Workings

(1) Movement on consolidated reserves attributable to owners of parent

Group

$000

At31DecemberYear3(W5) 3,300

272

612

4,184

ProfitforyearattibutabletoA

1,213

DividendspaidbyA

(50)

At31DecemberYear4

5,347

(2) Disposal of shares in C, with loss of control

Gain to parent

$000 $000

NetassetsofCatdateofdisposal:de‐recognised

1,400

PurchasedgoodwillinCde‐recognised(seeworking3)

472

1,872

Minus:Non‐controllinginterestde‐recognised(10%×1,400) (140)

AssetsattributabletoAde‐recognised

1,732

Fairvalueofinvestmentretained 44

Saleproceeds 1,925 

1,969

Totalgainondisposalofshares

237

Since there has been no revaluation of non-current assets and there is no

information about any reclassification adjustments that might be required, it is

assumed that this entire gain should be included in profit or loss for the year.

(3) Calculation of goodwill

B

C

$000

CostofInvestment 1,164

1,120

Less:Groupshareofthefairvalueofthenetassetsat

acquisition

80%×(500+420) (736)

90%×(400+320)

(648)

428

472

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(4) Other net assets

$000

A’snetassetsas1JanuaryYear4

2,516

B’snetassetsat1JanuaryYear4 1,260

A’sretainedprofityearended31DecemberYear4

790

B’sretainedprofityearended31DecemberYear4

170

ProceedsofdisposalofC

1,925

6,661

(5) Calculation of post-acquisition retained profits b/fwd attributable to A

$000

Asgiveninthequestion 3,300

BandC Groupshareofpost‐acquisition 

B80%×(760‐420) 272

C90%×(1,000‐320) 612

Total

4,184

10 Herbert

(a) Memorandum

To: The Managing Director

From: Accountant

Date:

Subject: Exclusion of subsidiaries from consolidation

Sarah

It has been suggested that Sarah should not be included in the consolidated

financial statements for the year ended 31 December Year 4 on the grounds

that the group’s interest in this company may be sold in the near future.

IAS 27 Consolidated financial statements and accounting for investments in

subsidiaries sets out the conditions under which subsidiaries may be excluded

from consolidation. It is quite correct that subsidiaries should not be

consolidated if they are acquired and held exclusively with a view to

subsequent re-sale. However, the group’s shareholding in Sarah does not

come within the definition of an interest held exclusively with a view to

subsequent resale from the time it was acquired.

It was clearly not originally acquired with a view to subsequent re-sale. Even

if a purchaser had been identified, the definition would still not be met.

Therefore Sarah must be included in the consolidated financial statements

until a disposal actually takes place.

ACCA P2 (INT) Corporate Reporting - Study text - 2010 (Emile Woolf)

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