FAC4862/NFA4862/ZFA4862

Transcription

1 /0/2017 /0/2017 /0/2017 Tutorial letter 102/0/2017 ADVANCED FINANCIAL ACCOUNTING II FAC4862/NFA4862/ZFA4862 Year Module Department of Financial Governance IMPOTANT INFOMATION: This tutorial letter contains important information about your module.

2 2 INDEX Page Due date 3 Personnel and contact details 3 Prescribed method of study 3 Suggested working programme 4 Exam technique 4 Learning unit 1 Consolidated and separate financial statements 7 2 Business combinations 37 Self assessment questions and suggested solutions 56

3 3 DUE DATE DUE DATE FO THIS TUTOIAL LETTE: 14 FEBUAY 2017 TEST 1 ON TUTOIAL 102: 14 MACH 2017 PESONNEL AND CONTACT DETAILS Personnel Lecturers Prof Z Koppeschaar (CTA coordinator) Ms A de Wet (Course leader) Ms C Wright (Course leader) Mr HA Combrink Ms T Deysel Mr T Nkwane Ms A Oosthuizen Ms S iekert Ms T van Mourik Secretary Ms MJ Marais Telephone Number Please send all queries to: fac4862postgrad@unisa.ac.za Please use the module telephone number to contact the lecturers: PESCIBED METHOD OF STUDY 1. Firstly study the relevant chapter(s) in your prescribed textbook so that you master the basic principles and supplement this with the additional information in the learning unit (where applicable). 2. ead the standards and interpretation(s) covered by the learning unit. 3. Do the questions in the study material and make sure you understand the principles contained in the questions. 4. Consider whether you have achieved the specific outcomes of the learning unit. 5. After completion of all the learning units - attempt the self assessment questions (open book, but within the time constraint) to test whether you have mastered the contents of this tutorial letter.

4 4 SUGGESTED WOKING POGAMME FEBUAY 2017 WEDNESDAY THUSDAY FIDAY SATUDAY SUNDAY MONDAY TUESDAY Consolidated and separate financial statements Consolidated and separate financial statements Consolidated and separate financial statements Consolidated and separate financial statements Consolidated and separate financial statements Business combinations Business combinations 8 Business combinations 9 Business combinations 10 Business combinations 11 Business combinations 12 Do self assessment questions 13 Do self assessment questions 14 Do self assessment questions EXAM TECHNIQUE 1. Introduction Examination technique remains the key distinguishing feature between candidates who pass and those that fail. Practice by answering questions under exam conditions by preparing the solution within the time limits and then by marking your solution. By marking your solution you will learn from your mistakes. 2. Examination technique From a review of candidates answers to past examination questions, the general examination technique issues were identified. These problems affected the overall performance of candidates. Although these aspects seem like common sense, candidates who pay attention to them are likely to obtain better marks. To improve your overall examination technique and performance take note of the following: Discussion questions Lay the foundation of your answer by stating the relevant theory first. Stating the theory provides perspective from which the question is answered. Then proceed to apply the theory and to demonstrate insight into the question. Identify all the issues and address all considerations in your application. emember to conclude at the end. In addition markers found that candidates used their own abbreviations (sms messaging style) in their answers. Marks could not be awarded here as it is not up to the markers to interpret abbreviations that are not commonly used. The increased use of an sms style of writing in a professional examination is a major concern. Candidates should pay specific attention to the way in which they write their answers, and bear in mind that this is a professional examination for which presentation marks are awarded. Journal entries Describe the specific accounts affected by the journals and clearly convey the classification of the account (e.g. P/L; OCI; SFP; SCE). Ensure that the journal entries are processed the correct way around. Indicate the debit and credit of accounts clearly.

5 5 Layout and presentation Narrations to journals should always be provided, except for when it is stated in a question that it is not required. Candidates should allocate time to planning the layout and presentation of their answers before committing thought to paper. Very often, candidates start to write without having read the question properly, which invariably leads to, for example, parts of the same question being answered in several places or restatement of facts in different parts. Marks are awarded for appropriate presentation and candidates should answer questions in the required format, that is, in the form of a letter, memorandum or a report, if this is what is required. The quality of handwriting is also an ongoing problem. The onus is on the candidate to produce legible answers. Irrelevancy Marks are awarded for quality, not quantity. Long-windedness is no substitute for clear, concise, logical thinking and good presentation. Candidates should bear in mind that a display of irrelevant knowledge, however sound, will gain no marks. Calculations Always show all your calculations. emember that your calculations should contain a reference when used in a solution. Calculations done in pencil will NOT be marked. Time management Use the reading time allocated to a question wisely, by highlighting important issues by trying to envisage the required. Candidates are advised to use their time wisely and budget time for each question. The marks allocated to each question are an indication of the relevant importance the examiners attach to that question and thus the time that should be spent on it. Candidates should beware of the tendency to spend too much time on the first question attempted and too little time on the last. They should never overrun on time on any question, but rather return to it after attempting all other questions. ecommendations / interpretations esponses to these requirements are generally poor, either because candidates are unable to explain principles that they can apply numerically or because they are reluctant to commit themselves to one course of action. It is essential to make a recommendation when a question calls for it, and to support it with reasons. Not only the direction of the recommendation (i.e. to do or not to do something) is important, but particularly the quality of the arguments in other words, whether they are relevant to the actual case and whether the final recommendation is consistent with those arguments. Unnecessary time is wasted by stating all the alternatives.

6 6 Open-book examination Candidates are reminded that they MUST familiarise themselves with the open book policy. To this end candidates are advised of the following: No loose pages (of any kind) may be brought into the exam. Writing on flags Candidates are only allowed to highlight, underline, sideline and flag in the permitted texts. Writing on flags is permitted for reference and crossreferencing purposes only, that is, writing may only refer to the name or number of the relevant discipline, standard, statement or section in the legislation. Any contravention of this regulation will be considered to be misconduct.

7 7 LEANING UNIT 1 - CONSOLIDATED AND SEPAATE FINANCIAL STATEMENTS INTODUCTION IAS 27 prescribes accounting and disclosure requirements on how to account for the cost of an investment in the separate records of the investor for investments in subsidiaries, joint ventures and associates. This includes use of IFS 9 where the entity exercises the policy choice. IFS 10 deals with the definition of control and establishes control as the basis for consolidation. IFS 10 also sets out how to apply the principle of control and sets out the accounting requirements for preparation of consolidated financial statements. IFS 10 deals with the principles that should be applied to a business combination (including the elimination of intragroup transactions, consolidation procedures, etc.) from the date of acquisition until date of loss of control. OBJECTIVES/OUTCOMES After you have studied this learning unit, you should be able to demonstate knowledge of: 1. Define control (IFS 10 Appendix A and IFS ). 2. Identify situations in which consolidated financial statements should be presented and the scope of consolidated financial statements (IFS 10.4). 3. Apply the consolidation procedure (IFS and IFS 10.B86-.B96) including: 3.1 Elimination of the parent s investment in the subsidiary; 3.2 Account for non-controlling interests in the profit or loss of consolidated subsidiaries; 3.3 Account for non-controlling interests in the net assets of consolidated subsidiaries; 3.4 Elimination of intragroup balances, transactions, income and expenses; 3.5 Use of uniform accounting policies; 3.6 Use of the same end of reporting period date; and 3.7 Presentation of non-controlling interests in the statement of financial position. 4. Account for a loss of control transaction (IFS and IFS 10.B97-.B99) Details in Tutorial Letter 104/ Account for changes in ownership interest Details in Tutorial Letter 104/ Account for the cost of investments in subsidiaries, joint ventures and associates in the separate financial statements of the investor (IAS ) either: 6.1 At cost; 6.2 In accordance with IFS 9; or 6.3 Using the equity method as described in IAS Account for dividends from subsidiaries, joint ventures and associates (IAS 27.12).

8 8 OBJECTIVES/OUTCOMES 8. Disclosures in separate financial statements (IAS ). 9. Disclosures in consolidated financial statements (IFS 12). 9.1 Disclose significant judgements and assumptions that an entity made in determining that it has control of another entity; 9.2 Disclose interests in subsidiaries; 9.3 Disclose interest in unconsolidated subsidiaries held by an investment entity; 9.4 Disclose interest in unconsolidated structured entities. 10. Accounting for investment entities (IFS 10, IFS 12 and IAS 27): 10.1 Define an investment entity; 10.2 Account for an investment entity; and 10.3 Disclose an investment entity. PESCIBED STUDY MATEIAL The following must be studied before you attempt the questions in this learning unit: 1. Group Statements, 16 th edition, Volume 1 Chapter 1 A group of entities and its financial statements: theory and background 3 Consolidation at acquisition date 4 Consolidation after acquisition date 5 Intragroup transactions 6 Adjustments and sundry aspects of group statements 7 Consolidation of complex group 8 Interim acquisition of an interest in a subsidiary 2. Group Statements, 16 th edition, Volume 2, Chapter IAS 27 Separate Financial Statements. 4. IFS 10 Consolidated Financial Statements. 5. IFS 12 Disclosure of Interests in Other Entities. 6. Understanding of IFS 9 Financial Instruments. COMMENT Please note that Group Statements, Volume 1, was covered thoroughly in your undergraduate studies and therefore this tutorial letter is only a revision of the basic consolidation principles. It is very important that you spend enough time to revise these principles.

9 Disclosure Measurement ecognition Definitions 9 THE EST OF LEANING UNIT 1 IS BASED ON THE ASSUMPTION THAT YOU HAVE ALEADY STUDIED THE ELEVANT CHAPTES IN THE PESCIBED TEXTBOOK. SECTION A - ADDITIONAL INFOMATION 1. Overview - IAS 27 Separate Financial Statements IAS Consolidated financial statements 27.4 Separate financial statements 27.4 Dividends received from a subsidiary, joint venture or associate When an entity prepares separate financial statements, it shall account for investments in subsidiaries, joint ventures and associates either: (a) at cost, (b) in accordance with IFS 9, or (c) using the equity method as described in IAS 28. When an investment is accounted for at cost or using the equity method in terms of IAS and it s classified as held for sale account for in accordance with IFS 5. When an investment is accounted for in accordance with IFS 9 in terms of IAS and it s classified as held for sale continue to account for investments in terms of IFS efer to IAS

10 Framework Disclosure Derecognition Consolidation procedures Definitions Overview - IFS 10 Consolidated Financial Statements IFS Consolidated financial statements 10 App A Decision maker 10 App A Group 10 App A Parent 10 App A elevant activities 10 App A emoval rights 10 App A Subsidiary 10 App A Control of an investee 10 App A; Power 10 App A; eturns Link between power and returns 10 App A; Non-controlling interests 10 App A; Substantive voting rights 10.B22-.B25 Protective rights 10 App A;10.B26-.B28 Potential voting rights 10.B47-.B50 Variable returns 10.B55-.B57 Investment entity 10 App A (a) (b) (c) Combine like items of assets, liabilities, equity, income, expenses and cash flows of parent with those of subsidiary. Eliminate the carrying amount of the parent s investment in subsidiary and the parent s portion of equity of the subsidiary. Eliminate intragroup transactions and balances. 10.B86 If a parent loses control of a subsidiary, the parent (a) Derecognise assets (including goodwill) and liabilities of subsidiary; (b) Derecognise the carrying amount of any non-controlling interests; (c) ecognise the fair value of the consideration received; (d) ecognise the retained investment at fair value; (e) eclassify to P/L or transfer directly to retained earnings the amounts recognised in OCI; (f) ecognise any resulting difference as a gain/loss in profit/loss B97-.B99 efer to IFS 12 Disclosure of Interests in Other Entities Definition of liability: Paragraphs and 4.46 Definition of equity: Paragraphs

11 Disclosure Scope Objective Definitions Overview - IFS 12 Disclosure of Interests in Other Entities Sections relating to disclosure of interests in subsidiaries IFS / IAS Income from a structured entity 12 App A Interest in another entity 12 App A Structured entity 12 App A Consolidated financial statements 27.4 Control of an entity 10 App A Group 10 App A Non-controlling interests 10 App A Parent 10 App A Protective rights 10 App A elevant activities 10 App A Separate financial statements 27.4 Subsidiary 10 App A Investment entity 10 App A Objective of the standard is to disclose significant judgements and assumptions made in determining: the nature of an interest in an entity or arrangement; and 12.2(a)(i) that it meets the definition of an investment entity, if applicable 12.2(a)(iii) This IFS shall be applied by an entity that has an interest in any of the following: subsidiaries 12.5(a) unconsolidated structured entities 12.5(d) disclose information about unconsolidated structured entities in the 12.6(b) separate financial statements of the entity if consolidated financial statements are not prepared Significant judgements and assumptions Disclose information about significant judgements and assumptions it has made (and changes to those judgements and assumptions) in determining: - that it has control of another entity - that the parent is an investment entity Examples of disclosure of significant judgements and assumptions made in determining that: - it does not control another entity even though it holds more than half of the voting rights of the other entity - it controls another entity even though it holds less than half of the (a) 9A (a) 12.9(b) voting rights of the other entity - it is an agent or a principal 12.9(c);

12 Disclosure 12 Interests in subsidiaries Disclose information about interests in subsidiaries to understand: the composition of the group 12.10(a)(i) - the interest that non-controlling interests have in the group s activities and cash flows Disclose information about interests in subsidiaries to evaluate: - the nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group 12.10(a)(ii) & (b)(i) & the nature of, and changes in, the risks associated with its interests in consolidated structured entities 12.10(b)(ii) & the consequences of changes in its ownership interest that do not result in a loss of control 12.10(b)(iii) & the consequences of losing control during the reporting period 12.10(b)(iv) & If date or reporting period of subsidiary s financial statements differ with the consolidated financial statements, disclose the date of the end of the reporting period and the reason for using a different date or period Non-controlling interests Disclose for each of an entity s subsidiaries that have noncontrolling interests that are material to the reporting entity: - the name of the subsidiary 12.12(a) - the principal place of business (and country of incorporation if 12.12(b) different from the principal place of business) - the proportion of ownership interests held by non-controlling 12.12(c) interests - the proportion of voting rights held by non-controlling interests, 12.12(d) if different from the proportion of ownership interests held - the profit or loss allocated to non-controlling interests of the 12.12(e) subsidiary during the reporting period - accumulated non-controlling interests of the subsidiary at the 12.12(f) end of the reporting period - summarised financial information about the subsidiary 12.12(g) estrictions and changes in ownership Disclose significant restrictions on the entity s ability to access or use the assets and settle the liabilities of the group Disclose the terms of any contractual arrangements that could require the parent or its subsidiaries to provide financial support to a consolidated structured entity, including events or circumstances that could expose the reporting entity to a loss Present a schedule that shows the effects on the equity attributable to owners of the parent of any changes in its ownership interest in a subsidiary that do not result in a loss of control If control of a subsidiary is lost, disclose the gain or loss, if any, calculated in accordance with IFS When an entity becomes, or ceases to be, an investment entity, it shall disclose the change of investment entity status and the reasons for the change Interest in unconsolidated subsidiaries (investment entities) B 12.19A-.19G Interest in unconsolidated structured entities

13 13 EXAMPLES The following examples illustrates the basic consolidation process: 1. Investment in subsidiary accounted for at cost P Ltd acquired a 100% interest in S Ltd for on 1 January when S Ltd s share capital and retained earnings amounted to and respectively. Investments in subsidiaries are accounted for at cost in terms of IAS 27.10(a). Parent (P) Separate Financial Statements Subsidiary (S) Financial Statements Total Pro forma journals Consolidated Financial Statements (P + S) Assets Assets Assets Investment in S Ltd (cost) 200 Investments (200) Investment in S Ltd (cost) - Trade debtors 100 Trade debtors Trade debtors 380 Equity Equity Equity Share capital (50) Share capital (80) (130) 80 Share capital (50) etained earnings (150) etained earnings (150) (300) 120 etained earnings (180) Liabilities Liabilities Liabilities Long-term loan (100) Long-term loan (50) (150) Long-term loan (150) Note 1 Note 2 Note 3 Notes 1. When a parent prepares separate financial statements, it shall account for investments in subsidiaries at cost, in accordance with IFS 9 at fair value or using the equity method as described in IAS 28. In this case P Ltd accounted for the investment in S Ltd at cost in its separate financial statements. Separate financial statements are prepared by the parent and are presented in addition to the consolidated financial statements. 2. Broadly speaking, the first step in preparing consolidated financial statements is to combine the financial statements of the parent and the subsidiaries (i.e. 100% of the net of the subsidiary is added to the net of the parent). 3. Pro forma journals are prepared for consolidation purposes only and are not recognised in the individual records of either the parent or the subsidiary. The pro forma journals eliminate common balances. The only two common items in this case is the investment in the subsidiary on the statement of financial position in the parent (P) and the portion of the equity of the subsidiary (S) held by the parent. The investment held by the parent in the subsidiary is therefore set off against the equity of the subsidiary as follows: Dr Cr Share capital (SCE) 80 etained earnings (SCE) 120 Investment in S Ltd (SFP) 200 At acquisition elimination journal

14 14 2. Investment in subsidiary accounted for at fair value P Ltd acquired a 100% interest in S Ltd for on 1 January when S Ltd s share capital and retained earnings amounted to and respectively. Investments in subsidiaries are accounted for at fair value through other comprehensive income (OCI) in terms of IAS 27.10(b). At 31 December the fair value of the investment in S Ltd amounted to Ignore the effects of tax. Parent (P) Separate Financial Statements Subsidiary (S) Financial Statements Total Pro forma journals Consolidated Financial Statements (P + S) Assets Assets Assets Investment in S Ltd ( ) 220 Investments (220) Investment in S Ltd - Trade debtors 100 Trade debtors Trade debtors 380 Equity Equity Equity Share capital (50) Share capital (80) (130) 80 Share capital (50) etained earnings (150) etained earnings (150) (300) 120 etained earnings (180) Mark-to-market (20) Mark-to-market - (20) 20 Mark-to-market - Liabilities Liabilities Liabilities Long-term loan (100) Long-term loan (50) (150) Long-term loan (150) Note 1 Note 2 Notes 1. P Ltd elected to measure its investment in S Ltd in terms of IFS 9 i.e. at fair value through other comprehensive income. Therefore at initial recognition P Ltd measures the investment in S Ltd at its fair value of (generally being the consideration given). P Ltd subsequently measures the investment in S Ltd at fair value ( ). The fair value adjustment of ( ) is recognised in OCI and accumulated in equity through the mark-to-market reserve. 2. On consolidation, any fair value adjustments recognised in the separate financial statements of the parent (P Ltd) on its investment in the subsidiary (S Ltd) since acquisition must be reversed to start at cost. The pro forma journals will be as follows: Dr Cr Mark-to-market reserve (OCI) 20 Investment in S Ltd (SFP) 20 eversal of fair value adjustment on investment in S Ltd Share capital (SCE) 80 etained earnings (SCE) 120 Investment in S Ltd (SFP) 200 At acquisition elimination journal

15 15 3. Investment in subsidiary accounted for using the equity method P Ltd acquired a 100% interest in S Ltd for on 1 January when S Ltd s share capital and retained earnings amounted to and respectively. Investments in subsidiaries are accounted for using the equity method in terms of IAS 27.10(c). Ignore the effects of tax. Parent (P) Separate Financial Statements Subsidiary (S) Financial Statements Total Pro forma journals Consolidated Financial Statements (P + S) Assets Assets Assets Investment in S Ltd (200 + (100% x 30)) 230 Investments (230) Investment in S Ltd - Trade debtors 100 Trade debtors Trade debtors 380 Equity Equity Equity Share capital (50) Share capital (80) (130) 80 Share capital (50) etained earnings (180) etained earnings (150) (330) 150 etained earnings (180) Liabilities Liabilities Liabilities Long-term loan (100) Long-term loan (50) (150) Long-term loan (150) Note 1 Note 2 Notes 1. P Ltd elected to measure its investment in S Ltd by using the equity method. Therefore at initial recognition P Ltd measures the investment in S Ltd at cost of (generally being the consideration given). P Ltd subsequently equity accounts for its share in S Ltd s postacquisition net assets. P Ltd s profit or loss will include ( ) as its share of profit of subsidiary. 2. On consolidation, any equity accounting adjustments recognised in the separate financial statements of the parent (P Ltd) on its investment in the subsidiary (S Ltd) since acquisition must be reversed to start at cost. The pro forma journals will be as follows: Dr Cr Share of profit of subsidiary (P/L) 30 Investment in S Ltd (SFP) 30 eversal of equity accounting of investment in S Ltd Share capital (SCE) 80 etained earnings (SCE) 120 Investment in S Ltd (SFP) 200 At acquisition elimination journal

16 16 COMMENT If the investor s accounting policy is to account for investments in subsidiaries using the equity method in terms of IAS 27.10(c), the accounting implication will be as follows: In the separate financial statements of the investor: - The investment in subsidiary is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor s share of the investee s net assets. The investor s profit or loss includes its share of the investee s profit or loss and the investor s other comprehensive income includes its share of the investee s other comprehensive income. - Dividends received from the subsidiary shall be recognised as a reduction from the carrying amount of the investment. In the consolidated financial statements of the group: - The post-acquisition change in the investor s share of the investee s net assets will be reversed so that the investment is again stated at cost before the at acquisition elimination journal entry is processed. - The intragroup dividend paid by the subsidiary will be eliminated against the investment (instead of other income) and non-controlling interests.

17 17 SECTION B - QUESTIONS ON CONSOLIDATED AND SEPAATE FINANCIAL STATEMENTS QUESTION 1.1 (112 marks 168 minutes) The following trial balances of Bonn Ltd, Sydney Ltd and York Ltd are provided for the year ended 31 December 20.12: Credits Bonn Ltd Sydney Ltd York Ltd Share capital ordinary shares (one share, one vote) ordinary shares (one share, one vote) ordinary shares (one share, one vote) etained earnings - 1 January Mark-to-market reserve - 31 December Deferred tax evenue Other income Long-term borrowings Debits Property, plant and equipment Investments - Sydney Ltd at fair value - York Ltd at fair value Loan to York Ltd (interest free) Cost of sales Finance costs Other expenses Dividends paid - ordinary Income tax expense Trade receivables Inventories Additional information 1. Bonn Ltd acquired an 80% interest in Sydney Ltd on 1 July and paid cash of for the investment. From this date Bonn Ltd had control over Sydney Ltd as per the definition of control in terms of IFS 10. At that date the equity of Sydney Ltd was as follows: Share capital ( ordinary shares) etained earnings Sydney Ltd acquired a 70% interest in York Ltd on 1 January and paid for the investment. From this date Sydney Ltd had control over York Ltd as per the definition of control in terms of IFS 10. On the date of acquisition the fair value of the assets and liabilities of York Ltd was as follows:

18 18 Property, plant and equipment Inventories Trade receivables Carrying amount Fair value Bonn Ltd sold machinery to Sydney Ltd on 1 July for The sale was made at cost plus 20%. Sydney Ltd depreciates machinery at 20% per annum on the straight-line method. This is the same policy as used by the SAS. 4. At 31 December the directors of Bonn Ltd determined that the goodwill of Sydney Ltd had been impaired by Assume a current tax rate of 28% and a capital gains tax inclusion rate of 80%. Ignore Value Added Tax (VAT) and Dividend Tax. 6. Investments in subsidiaries are accounted for in accordance with IFS 9 in terms of IAS 27.10(b). Bonn Ltd irrevocably elected to present subsequent changes in the fair value of the investments in other comprehensive income in a mark-to-market reserve. 7. None of the companies are considered a share trader for income tax purposes or an investment entity as defined in IFS 10 Consolidated Financial Statements.

19 19 EQUIED PAT A Marks Prepare the following for the Bonn Ltd Group for the year ended 31 December 20.12: (a) (b) consolidation journals; and consolidated financial statements Communication skills: Presentation and layout 3 Assume that the group elected to measure non-controlling interests at the proportionate share of the identifiable net assets at the acquisition date. PAT B Assume that the group elected to measure non-controlling interests of Sydney Ltd at fair value at the acquisition date. The fair value of the non-controlling interests of Sydney Ltd was determined at acquisition date at Prepare the following for the Bonn Ltd Group for the year ended 31 December 20.12: (a) (b) the at acquisition (1 July 20.11) consolidation journal to eliminate owners equity; and the ASSETS section of the consolidated statement of financial position Please note: Notes to the consolidated financial statements are not required. Comparative figures are not required. The presentation of earnings per share is not required. ound off all amounts to the nearest and. Your answer must comply with International Financial eporting Standards (IFS).

20 20 QUESTION Suggested solution PAT A BONN LTD GOUP (a) Pro forma consolidation journals Dr Cr J1 Mark-to-market reserve (OCI/SCE) ( ) Deferred tax (SFP) ( x 80% x 28%) Investment in Sydney Ltd (SFP) ( ) eversal of mark-to-market reserve in separate financial statements J2 Share capital (SCE) etained earnings (SCE) Goodwill (SFP) (balancing) Non-controlling interests (SFP/SCE) [( ) x 20%] Investment in Sydney Ltd (SFP) Elimination of owners equity at acquisition J3 etained earnings (SCE) [( ) x 20%] Non-controlling interests (SFP/SCE) Non-controlling interests in retained earnings since acquisition COMMENT f (1½) (1½) (1½) (1) (2) (2) For further guidance on intragroup sales refer to: Group Statements Vol 1 Par Work through these examples: Group Statements Vol 1 Example 5.10 Group Statements Vol 1 Example 5.14 J4 Other income (P/L) ( x 20/120) Property, plant and equipment (SFP) Deferred tax (SFP) (7 500 x 28%) Income tax expense (P/L) Accumulated depreciation (SFP) (7 500/5 x 6/12) Depreciation (P/L) Income tax expense (P/L) (750 x 28%) Deferred tax (SFP) ecording of intragroup sale of equipment [C1] J5 Non-controlling interests (P/L) Non-controlling interests (SFP/SCE) Non-controlling interests in profit for the current year [(( ) x 20%) + ( x 20%) + (2 800 x 20% gain on bargain purchase Sydney)] (2) (1) (2) (1) (6½)

21 21 Dr Cr J6 Dividend received (P/L) (5 000 x 80%) Non-controlling interests (SFP/SCE) (5 000 x 20%) Dividend paid (SCE) (Sydney Ltd) Elimination of intragroup dividends and recording of non-controlling interests therein J7 Long-term borrowings (SFP) Loan to York Ltd (SFP) Elimination of intragroup loans J8 Other expenses (impairment of goodwill) (P/L) Accumulated impairment losses (SFP) (see comment below) Impairment of Sydney Ltd s goodwill at 31 December J9 Share capital (SCE) etained earnings (SCE) (given) Inventory (SFP) ( ) Trade receivables (SFP) ( ) Deferred tax (SFP) [( ) x 28%] Non-controlling interests (SFP/SCE) [( ) x 30%] Gain from bargain purchase (P/L) Investment in York Ltd (SFP) Elimination of owners equity at acquisition J10 Inventory (SFP) Cost of sales (P/L) Trade receivables (SFP) Other expenses [C2] (P/L) eversal of fair value adjustments at acquisition (see comment below) J11 Income tax expense (P/L) [( ) x 28%] Deferred tax (SFP) Tax effect of reversal of fair value adjustments at acquisition J12 Non-controlling interests (P/L) Non-controlling interests (SFP/SCE) Non-controlling interests in profit for the current year [( [C2]) [C2] [C2]) x 30%] J13 Dividend received (P/L) (9 000 x 70%) Non-controlling interests (SFP/SCE) (9 000 x 30%) Dividend paid (SCE) (York Ltd) Elimination of intragroup dividends and recording of the noncontrolling interests therein (1½) (1½) (1) (1) g (1) a (1½) (1½) (2) (2) (1) (1) (1) (1) (5) (1½) (1½) (1) (57) Communication skills: Presentation and layout (1)

22 22 COMMENT Journal 8 When NCI is measured at the proportionate share of the identifiable net assets, NCI will not share in impairment losses relating to goodwill. For further guidance on NCI and goodwill refer to: Group Statements Vol 1 Par Work through these examples: Group Statements Vol 1 Example 6.9 Group Statements Vol 1 Example 6.10 Group Statements Vol 1 Example 6.11 Journal 10 and Journal 11 When an acquirer obtains control over an acquiree, the acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition date fair values. In journal 9, the inventory and trade receivables of York Ltd are thus remeasured to its fair value on the acquisition date (1 January 20.12). Inventory and trade receivables are both current assets, which means it can be assumed that the inventory will be sold within the next 12 months and the trade receivables will be recovered within the next 12 months. For this reason, the fair value adjustments recognised at acquisition date in journal 9, will have to be reversed at year end. This reversal is done in journal 10 with the tax implication in journal 11.

23 23 (b) Consolidated financial statements BONN LTD GOUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBE ASSETS Non-current assets Property, plant and equipment ( [C1] + 750[C1]) Goodwill ( f g ) Deferred tax ( (J1) [C1] 210[C1] [C2] 4 200[C2]) Current assets Inventories ( ) Trade receivables ( ) Total assets (2½) (1) (2) (1½) (1½) EQUITY AND LIABILITIES Equity attributable to owners of the parent Share capital etained earnings Non-controlling interests ( e l ) (2) Total equity (3) Non-current liabilities Long-term borrowings ( (interco loan) (J7)) (2) Total liabilities Total equity and liabilities Total (16) Communication skills: Presentation and layout (2)

24 24 BONN LTD GOUP CONSOLIDATED STATEMENT OF POFIT O LOSS AND OTHE COMPEHENSIVE INCOME FO THE YEA ENDED 31 DECEMBE evenue ( ) Cost of sales ( ([C2] or J10)) Gross profit Other income ( (div)(J6) 6 300(div)(J13) 7 500[C1] a ) Other expenses ( g 750[C1] (J10)) Finance costs ( ) Profit before tax Income tax expense ( [C1] + 210[C1] ([C2] or J11)) POFIT FO THE YEA Other comprehensive income for the year, net of tax ( ) (56 250) (9 500) (1½) (2) (3) (3) (1½) (47 040) (3) TOTAL COMPEHENSIVE INCOME FO THE YEA Profit attributable to: Owners of the parent ( ) Non-controlling interests (9 173 j c ) Total comprehensive income attributable to: Owners of the parent ( ) Non-controlling interests (9 173 j c ) BONN LTD GOUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FO THE YEA ENDED 31 DECEMBE Noncontrolling Share capital etained earnings Total interests Balance at 1 January Changes in equity for Acquisition of subsidiary Total comprehensive income for the year Profit for the year Dividends paid (0,15 per share) (6 000) (6 000) b (3 700) Total equity (9 700) (1½) Balance at 31 December (6) (1) (1) (16) (3½) (1) h = or (( ) x 80%) = i or (J3) (J4) = d k = 3 700

25 25 CALCULATIONS C1. Sale of machinery Intragroup profit Selling price Intragroup profit ( x 20/120) Tax 28% Depreciation 7 500/5 years x 6/ Tax 28% 210 C2. Fair value adjustment York Ltd evenue Cost of sales Finance costs Other expenses Income tax expense = (J10) = (J10) x 28% = (J11) Profit before adjustments (70 000) (5 000) (22 000) (14 280) Fair value adjustments Profit for the year (65 000) (5 000) (12 000) (4 200) (18 480) C3. Analysis of the owners equity of York Ltd At acquisition Share capital etained earnings ( [C2]) Equity represented by gain on bargain purchase Total (2 800) Sydney Ltd 70% NCI At Since (2 800) a b - Consideration and NCI Since acquisition Current year Profit for the year [C2] Dividend paid (9 000) (6 300) c (2 700) d e

26 26 C4. Proof of goodwill of York Ltd (IFS 3.32) COMMENT For further guidance on gain on bargain purchase refer to: Group Statements Vol 1 Par 2.7 Work through these examples: Group Statements Group Statements Vol 1 Vol 1 Example 2.7 Example 2.8 Consideration transferred at acquisition date Fair value of non-controlling interests (( ) x 30%) Acquisition date fair value of previously held equity Net amount of identifiable assets acquired and liabilities assumed at acquisition date ( ) (54 000) Gain on bargain purchase (2 800) Consolidated gain on bargain purchase (2 800 x 80%) ( Analysis of Sydney Ltd) (2 240) C5. Analysis of the owners equity of Sydney Ltd At acquisition Share capital etained earnings Total Bonn Ltd 80% NCI At Since Equity represented by goodwill f Consideration and NCI Since acquisition etained earnings ( ) h і Current year Profit for the year 1 Profit for the year - York Ltd Gain taken to statement of profit or loss and other comprehensive income - York Ltd Total current year profit (before impairment losses) j Dividend Impairment of goodwill (5 000) (10 000) (4 000) (10 000) g (1 000) k l 1 Profit for the year evenue Other income ( ) Cost of sales Finance costs Other expenses Income tax expense (88 000) (2 000) (20 000) (4 200) 9 800

27 27 C6. Proof of goodwill of Sydney Ltd (IFS 3.32) Consideration transferred at acquisition date Fair value of remaining non-controlling interests (( ) x 20%) Acquisition date fair value of previously held equity Net amount of identifiable assets acquired and liabilities assumed at acquisition date ( ) Goodwill Impairment at 31 December (59 000) (10 000) PAT B (a) Pro forma consolidation journal J1 Share capital (SCE) etained earnings (SCE) Goodwill (SFP) (balancing) Non-controlling interests (SFP/SCE) Investment in Sydney Ltd (SFP) Elimination of owners equity at acquisition. Dr Cr (1) (1) (1) (4) COMMENT When NCI is measured at fair value, NCI will share in impairment losses relating to goodwill. All the journals for when NCI is measured at fair value (Part B) and when NCI is measured at the proportionate share of the identifiable net assets (Part A) are the same except for J8 and J2 that differs in Part B from Part A. Compare the journal above with J2 in Part A (a). Note that NCI is measured differently in Part B compared to Part A. Therefore, the amount of goodwill recognised in Part B, will differ from the amount of goodwill recognised in Part A. COMMENT If all pro forma journals were required in Part B, the impairment of goodwill journal (J8 in Part A) would be as follows: Dr Cr Other expenses (impairment of goodwill) (P/L) Accumulated impairment losses (SFP) Non-controlling interests (SFP/SCE) Non-controlling intertests (P/L) Impairment of Sydney Ltd s goodwill at 31 December The impairment loss allocated to NCI will be in the profit sharing ratio i.e. 20% x

28 28 (b) ASSET portion of the statement of financial position BONN LTD GOUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBE ASSETS Non-current assets Property, plant and equipment ( [C1] + 750[C1]) Goodwill ( (impairment)) Deferred tax ( (J1) [C1] 210[C1]) Current assets Inventories ( ) Trade receivables ( ) Total assets (2½) (2½) (2) (1½) (1½) (10) CALCULATIONS C1. Analysis of the owners equity of Sydney Ltd At acquisition Share capital etained earnings Equity represented by goodwill Total Bonn Ltd 80% NCI At Since f Consideration and NCI Since acquisition etained earnings ( ) h Current year Profit for the year Profit for the year - York Ltd Gain taken to SCI - York Ltd Total current year profit (before impairment losses) Dividend (5 000) (4 000) (1 000) k Impairment of goodwill (10 000) (8 000) (2 000)

29 29 C2. Proof of goodwill of Sydney Ltd (IFS 3.32) Consideration transferred at acquisition date Fair value of remaining non-controlling interests (given) Acquisition date fair value of previously held equity Net amount of identifiable assets acquired and liabilities assumed at acquisition date ( ) (59 000) Goodwill Impairment at 31 December (10 000) EXAM TECHNIQUE The proof of goodwill calculation is only provided for completeness purposes and should not be prepared if an analysis of owners equity is also prepared. The proof of goodwill calculation is a duplication of the at acquisition section of the analysis of owners equity therefore only one of the two calculations should be used.

30 30 QUESTION 1.2 (34 marks 51 minutes) Beach Holidays Ltd acquired 75% of & Ltd s ordinary share capital for on 1 March Beach Holidays Ltd sells holiday time share and & Ltd sells holiday apartments in the Bloubergstrand area. The trial balance of & Ltd on the date of acquisition was as follows: Carrying value Fair value Inventory holiday apartments Office building Trade and other receivables Bank Ordinary share capital ( ) ( ) 10% Preference share capital ( ) ( ) etained earnings ( ) ( ) Long-term loan ( ) ( ) Trade and other payables (90 000) (90 000) Additional information 1. The assets and liabilities of & Ltd were fairly valued on the date of acquisition, with the exception of inventory. No adjustments were made in the separate statements of & Ltd. 2. At 30 September % of the inventory acquired has been sold. You can assume that no inventory was sold during the current year. 3. Both companies have a 30 September financial year end. 4. The retained earnings of & Ltd increased by from acquisition until the beginning of the year. The current financial year presented a profit of and a dividend of was declared and paid. 5. Beach Holidays Ltd also acquired 80% of & Ltd s non-redeemable preference share capital at acquisition for All the preference dividends were declared and paid. Should & Ltd be liquidated, Beach Holidays Ltd will be entitled to receive a proportionate share of the assets available for distribution. The holders of the preference shares have equal rights and ranking to the holders of ordinary shares in the event of liquidation. 6. & Ltd issued debentures to Beach Holidays Ltd on 1 May at a premium of 5%. It is redeemable on 30 April at the nominal value. A payment of is made annually on 30 April. 7. Assume a current tax rate of 28% and a capital gains tax inclusion rate of 80%. Ignore Value Added Tax (VAT) and Dividend Tax. 8. Beach Holidays Ltd has elected to measure non-controlling interests at the proportionate share of the identifiable net assets at acquisition date. 9. None of the companies are considered a share trader for income tax purposes or an investment entity as defined in IFS 10 Consolidated Financial Statements.

31 31 EQUIED Prepare the pro forma consolidation journal entries for the Beach Holidays Ltd Group for the year ended 30 September Communication skills: Presentation and layout Marks 33 1 Please note: Journal narrations are required. Your answer must comply with International Financial eporting Standards (IFS).

32 32 QUESTION 1.2 Suggested solution Pro forma consolidation journal entries Dr Cr J1 Ordinary share capital (SCE) Preference share capital (SCE) etained earnings (SCE) Inventory (SFP) ( ) (1½) Investment in & Ltd (SFP) ( ) (1½) Non-controlling interests (SFP/SCE) ( [C1] [C2]) (4½) Deferred tax liability (SFP) (1) Goodwill (SFP) ( [C1] [C2]) (1) Elimination of owners equity in & Ltd on acquisition date J2 etained earnings (SCE) ( x 65%) (1½) Inventory (SFP) (see comment box below) Account for inventory sold in the previous year J3 Deferred tax (SFP) ( x 28%) (1) etained earnings (SCE) Taxation on inventory sold in previous year J4 etained earnings (SCE) Non-controlling interests (SFP/SCE) [C1] or [( ) x 25%] (2) ecognition of non-controlling interests in the since acquisition earnings until the beginning of the current reporting period J5 Non-controlling interests (P/L) ( [C1] [C2]) (3) Non-controlling interests (SFP/SCE) ecognition of the non-controlling interests in the profit for the year J6 Dividends received (Beach Holidays) (P/L) ( [C1] [C2]) (2½) Non-controlling interests (SFP/SCE) ( [C1] [C2]) (2½) Dividends paid (&) (SCE) ( ) (1½) Elimination of intragroup dividend and accounting of noncontrolling interests portion of dividend J7 Interest received (P/L) (Beach Holidays) [C3] (3½) Finance charges (P/L) (&) Elimination of interest on intragroup debentures J8 Debentures liability (SFP) (&) [C3] (1½) Investment in debentures (SFP) (Beach Holidays) Elimination of intragroup debentures (33) Communication skills: Presentation and layout (1) COMMENT For further guidance on the treatment of preference share capital refer to: Group Statements Vol 1 Par Work through these examples: Group Statements Group Statements Vol 1 Vol 1 Example 6.18 Example 6.21

33 33 COMMENT Journal 2 CALCULATIONS 65% of the inventory that was fair valued on acquisition date of 1 March were sold at 30 September Therefore 65% of the fair value adjustment will be realised in retained earnings. If the question was silent on the percentage of inventory sold, you should have assumed that 100% was sold in the subsequent financial year as inventory is a current asset and current assets will realise within 12 months. C1. Analysis of owners equity of & Ltd ordinary share capital Total Beach Holidays 75% NCI At Since At acquisition Ordinary share capital [½] etained earnings [½] Inventory adjustment taken to retained earnings [1] Deferred tax (19 600) [½] Equity represented by goodwill [½] Consideration and NCI Since acquisition etained earnings [ ( x 72% x 65%)] Current year Profit for the year [ (pref div)] [1½] Dividends ( ) ( ) (45 000) [2] C2. Analysis of owners equity of & Ltd preference share capital Total Beach Holidays 80% NCI At Since At acquisition Preference share capital [½] Equity represented by goodwill Consideration and NCI [½] Current year Profit attributable to preference shareholders ( x 10%) [1] Preference dividend (15 000) (12 000) (3 000) [2]