ACCA P2 (INT) Corporate Reporting - Study text

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Jeremy

IAS 27 permits exclusion of a subsidiary from consolidation only in limited

circumstances. With the exception of subsidiaries acquired with a view to re-

selling them (which should be accounted for in accordance with IFRS 5),

‘consolidated financial statements shall include all subsidiaries of the parent’

(IAS 27). A subsidiary is an entity that is controlled by the parent. The

unstable political situation in Overonia is not a sufficient reason to exclude

Jeremy from consolidation, if a controlling interest in Jeremy is acquired.

(b) Herbert Group income statement for the year ended 31 December Year 4 (See

working 1)

$000

Salesrevenue

400,000

Costofsales (223,000)

–––––––––––––––– ––––

Grossprofit 177,000

Distributioncosts

(61,200)

Administrativeexpenses

(24,800)

–––––––––––––––– ––––

Profitbeforetaxandfinancecosts 91,000

Shareofassociate’sloss(W4)

(3,500)

–––––––––––––––– ––––

Profitbeforetax 87,500

Incometaxexpense(25+12+Associate3)

(40,000)

–––––––––––––––– ––––

Profitfortheyearaftertax 47,500

–––––––––––––––– ––––

Attributableto:



Equityholdersoftheparent

44,300

Non‐controllinginterests

3,200

–––––––––––––––– ––––

47,500

–––––––––––––––– ––––

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Workings

(1) Income statement: Consolidation schedule

Herbert

Sarah Adjust Group

$000

Sales 290,000

110,000

400,000

Costofsales

(162,000)

(51,000) 

}

(223,000)

Unrealisedprofit

(10,000) (W2)

Grossprofit 128,000

49,000

177,000

Sellinganddistribution

costs

(48,800)

(12,400) 

}

(61,200)

Administrativeexpenses

(16,200)

(8,600)

(24,800)

Investmentincome

(9,000)

(9,000)

(W3)

Tax

(25,000)

(12,000)

(37,000)

Profitaftertax

16,000

Non‐controllinginterest

(20%)

(3,200)

(2) Unrealised profit

Sarah

$000

Broughtforward

10,000

Carriedforward 20,000

Increasechargedtocurrentperiod

10,000

(Tutorial note: No information has been given of the trading transactions

which have given rise to the unrealised profit. Group sales should be reduced

by the total amount of intra-group sales made in the year and this will have a

knock-on effect on cost of sales).

Amanda

Group share

/3 × $30m = $10m

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(3) Investment income

The investment income of $9m in the accounts of Herbert is all inter-company

dividends. $8m has come from Sarah (80% of $10m) and $1m has come from

Amanda (1/3 of $3m). Therefore this should not appear in the consolidated

income statement as the dividends have been replaced with the share of the

profits.

(4) Associate

$000

Shareofprofits

/3×19,500

6,500

Minus:groupshareofunrealisedprofit(W2) (10,000)

Lossattributabletoinvestmentinassociate,beforetax

(3,500)

Shareoftax

/3×9,000

(3,000)

Shareofassociate’sloss

(6,500)

11 Abbeville

(a) Abbeville: Statement of financial position after reorganisation

Tutorial note

Abbeville now has two direct subsidiaries (Narbonne and Bonneville) and one

indirect subsidiary investment in Lynette through its holding of Bonneville.

$000

Nettangibleassets

2,200

Investments:

Narbonne 1,000

Bonneville(seeWorking)

1,030

4,230

Capitalandreserves

Sharecapital 3,500

Otherreserves

200

Accumulatedprofits

530

4,230

Working

$000

Originalinvestment

580

Additionalshares 450

InvestmentinBonneville

1,030

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Bonneville: Statement of financial position after reorganisation

Tutorial note

Bonneville now has a wholly owned subsidiary: Lynette

$000

Nettangibleassets

1,300

InvestmentinLynette(note) 450

1,750

Capitalandreserves

Sharecapital(580+200) 780

Sharepremiumaccount(W)

250

Reserves

300

Accumulatedprofits

420

1,750

Note

The carrying value of the investment is maintained at the value in the books of

the transferor prior to the transfer, in accordance with local company law (as

stated in the question).

Working

The share premium is the difference between the base value of the shares

allotted and their nominal value. This base value is the amount at which the

assets acquired are recorded in the books of the transferor prior to transfer.

$000

Basevalue

450

Nominalvalueofshares 200

Sharepremium

250

(b) (i) Narbonne remains as a subsidiary because Abbeville still retains a

controlling interest (above 50%) of the equity shares. IAS 27 (revised)

states that a reduction in a shareholding in a subsidiary without loss of

control should be accounted for as an equity transaction and should not

be reported in consolidated profit or loss.

The adjustments required to account for the transaction as a n equity

transaction are:

Debit: Cash $700,000

Credit: Non-controlling interests (35% × $1,500,000) = $525,000

Credit: Equity attributable to owners of parent (balance) $175,000

Answers

Abbeville: Statement of financial position

Abbeville Group: Consolidated statement of financial position

$000

$000

Nettangibleassets(W1)

6,540

Equity



Equityattributabletoownersof

Abbeville



Sharecapital

3,500



Otherreserves(W2)

690



Accumulatedprofits(W3)

1,825



6,015

Non‐controllinginterest(W4)

525

6,540

Workings

(1) Net assets

$000

Abbeville(2,200+700cash)

2,900

Narbonne 1,500

Bonneville

1,300

Lynette

840

6,540

(2) Other reserves attributable to equity owners of Abbeville

$000

Abbeville

200

Narbonne 100

Bonneville

300

Lynnette

90

690

Since the sale of the shares in Narbonne is treated as an equity

transaction in the consolidated financial statements, there are no

adjustments to the post-acquisition other reserves or accumulated

profits attributable to the parent.

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(3) Accumulated profits attributable to equity owners of Abbeville

$000

Abbeville(530+equitytransaction175)

705

Narbonne 400

Bonneville

420

Lynette

300

1,825

(4) Non-controlling interest

$000

Narbonne35%of$1,500,000

525

(ii) In b (i) Abbeville retained 65% of its interest in Narbonne and hence

Narbonne remained a subsidiary and was consolidated with a non-

controlling interest of 35%.

If Abbeville were to sell 75%, then the remaining interest in Narbonne

would be only 25% and would result in a loss of control over the

operations of Narbonne. Given the 75% shareholding is sold to a

number of shareholders, the remaining 25% would probably leave

Abbeville with significant influence over Narbonne's financial and

operating decisions. If this is so, then Narbonne will be accounted for as

an associate using equity accounting. If Abbeville does not have

significant influence, the investment will be dealt with as a trade

investment under the provisions of IAS 39 on financial instruments.

IAS 27 (revised) states that the gain or loss on disposal of the shares

should be calculated as follows. In the individual statement of financial

position of Abbeville the investment will be reduced to 25% of its value:

$000

Considerationreceivedforsaleofshares

1,650

FairvalueofremainingsharesinNarbonne 400

2,050

NetassetsofNarbonnede‐recognised (1,500)

Totalgain

550

Answers

Abbeville Group: Consolidated statement of financial position

$000

Nettangibleassets(W1)

6,390

Equity



EquityattributabletoownersofAbbeville 

Sharecapital

3,500

Otherreserves(sameasanswerb(i))

690

Accumulatedprofits(W2)

2,200

6,390

Workings

(1) Net assets

$000

Abbeville(2,200+1,650cash+400investmentin

associate)

4,250

Bonneville 1,300

Lynette

840

6,390

(2) Accumulated profits attributable to equity owners of Abbeville

$000

Groupaccumulatedprofitsattimeofsharedisposal

(530+400+420+300)

1650

Gainondisposalofshares 550

2,200

The gain on disposal will be recognised in group profit or loss, unless

there is a revaluation reserve in Narbonne, in which case some of the

total gain might be transferred directly to equity reserves and not

recognised in profit or loss.

(iii) If the 75% interest has been acquired by a single buyer, it is unlikely that

Abbeville will exercise significant influence over Narbonne's financial

and operating policies as it will be controlled by the 75% shareholder.

Under such circumstances, Abbeville will not be able to treat Narbonne

as an associate but instead must include it in the consolidated statement

of financial position as an investment under the provisions of IAS 39.

When the shares are sold, the consolidated statement of financial

position will be the same as in the answer to b (ii), unless the fair value

of the remaining investment is less than $400,000. After the share

disposal, if the shareholding in Narbonne is accounted for as an

ordinary investment rather than an associate, consolidated profit or loss

will not include Abbeville's share of the profit of Narbonne, but only the

dividends received.

PaperP2: Corporate reporting (International)

exchange of shares (initially) between Gourmet Delights and Abbeville, then

this is a transaction which might in the past have been accounted for as a

merger using the pooling (uniting) of interests method of consolidation.

However, under the provisions of IFRS 3, the pooling of interests method is

not permitted and acquisition accounting must be used to account for a

business combination. This will involve identifying an acquirer (presumably

Abbeville); all net assets must be recognised at fair values and intangible

assets acquired must be recognised together with goodwill. Pre-acquisition

reserves will not be treated as profits belonging to the group. Goodwill must

be carried in the consolidated statement of financial position and subjected to

annual impairment reviews.

12 Orlando

(a) Year to June Year 4

 The revenue and the receivable for the sale of €96,000 should be translated

at the spot rate of 0.8 = $120,000

 The capital expenditure of €1m should also be translated at the spot rate of

0.8:

Debit Property, plant and equipment $1,250,000

Credit: Payables $1,250,000.

 The receipt on 12 June relating to the receivable is translated at the rate at

that date of 0.9. This generates cash of $106,667 to settle a receivable of

$120,000. Hence an exchange loss of $13,333 is recognised in profit or loss.

 The non-current asset is not re-translated at the year end, but the

outstanding payable (a monetary item) must be re-stated to the year end

exchange rate of 0.7. This gives a year-end payable balance of $1,428,571.

This has increased from the initial $1,250,000; therefore an exchange loss of

$178,571 will be recognised in profit or loss.

(b) Year to June Year 5

When the payable is settled after the year end at the spot rate of 0.8, it results

in a payment of $1,250,000. There is an exchange gain of $178,571 compared

with the carrying value at the end of Year 4.

13 Mancaster and Stockpot

Part A

(1) (a) Functional currency

Functional currency is the currency of the primary economic

environment in which the entity operates. It reflects the underlying

transactions, events and conditions that affect the company. It is not

simply the currency of the country where the company is based. For

example, if a company is incorporated and listed in the UK, but operates

Answers

in the South African mine fields, then its functional currency will be the

South African Rand, not Sterling, because the Rand is the currency in

which it generates and spends the most cash.

(b) Presentation currency

Presentation currency is the currency in which the financial statements

are presented. Continuing the example of the company referred to

above, since the company is listed in the UK it will present and file its

accounts in Sterling.

Transactions and balances measured in a currency other than the

presentation currency will have to be translated into the presentation

currency for reporting purposes. So the sales and operating costs

incurred in South Africa will need to be translated from Rand into

Sterling.

(2) Factors to be considered when determining the functional currency of an

overseas subsidiary

The primary economic environment in which an entity operates is defined in

IAS 21 as the one in which it primarily generates and expends cash.

Primary indicators

An entity must consider the following factors in determining its functional currency:

 the currency that mainly influences sales prices for goods and services

 the country whose competitive forces and regulations mainly determined the

sales prices of its goods and services

 the currency that mainly influences labour, material and other costs of goods or

services.

Additional indicators

The following factors may also provide evidence:

 the currency in which funds from financing activities are generated (i.e. currency

used for issuing debt and equity)

 the currency in which surplus cash is invested.

PaperP2: Corporate reporting (International)

Part B

(a) Translation: Statement of financial position of Stockpot at 31 March Year 4

 EU000 Rate $000

Property,plantandequipment 30,000 2.2 13,636

Inventories 18,000 2.2 8,182

Tradereceivables 15,000 2.2 6,819

Tradepayables (10,400) 2.2 (4,727)

Bankoverdraft (7,600) 2.2 (3,455)

Non‐currentliabilities (20,000) 2.2 (9,091)

 25,000  11,364



Issuedcapital 15,000 3.0 5,000

Pre‐acquisitionreserves 5,000 3.0 1,667

6,667

Post‐acquisitionreserves 5,000 balancingfigure 4,697

 25,000  11,364

Mancaster Group: Consolidated statement of financial position

at 31March Year 4

$000

Non‐currentassets

Goodwill(seeworkings)

682

Property,plantandequipment(20,000+13,636)

33,636

Currentassets:

Inventories(10,000+8,182) 18,182

Tradereceivables(10,000+6,819) 16,819

35,001

69,319

$000

Capitalandreserves:

Issuedcapital

9,000

Accumulatedprofits(seeworkings)

16,205

25,205

Non‐controllinginterest(seeworkings)

2,841

28,046

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

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