Tutorial Letter 202/1/2012 Group Financial Reporting

Transcription

1 /1/2012 Tutorial Letter 202/1/2012 Group Financial eporting FAC3704 Semester 1 Department of Financial Accounting This tutorial letter contains important information about your module. Bar code

2 CONTENTS 1 INTODUCTION LECTUE AND CONTACT DETAILS SUGGESTED SOLUTIONS TO ASSIGNMENT 01/ MAY 2012 EXAMINATION: PEPAATION AND EXAM APPOACH OCTOBE 2011 EXAMINATION AND SUGGESTED SOLUTION MAY 2011 EXAMINATION AND SUGGESTED SOLUTIONS MAY 2010 EXAMINATION AND SUGGESTED SOLUTION OCTOBE 2010 EXAMINATION AND SUGGESTED SOLUTION

3 1 INTODUCTION Dear Student Attached please find the suggested solutions to assignment 01/2012 for the first semester and previous exam papers with the suggested solutions. It is in your own interest to work through the suggested solution in conjunction with the assignment or exam and your answer. You will notice in our suggested solutions, dealing with company financial statements, opposite certain items calculations are shown in brackets. Such calculations are given for tuition purposes only and consequently do not form part of the statutory disclosure requirements. 2 LECTUE AND CONTACT DETAILS Please use only the following address for all communication with the lecturers: Students registered for first semester: FAC370412S1@unisa.ac.za Students registered for second semester: FAC370412S2@unisa.ac.za Please use the following telephone number for all communication with the lecturers: Lecturer Office Ms K Papageorgiou AJH van der Walt Building 0269 Ms MG Grobler AJH van der Walt Building 0267 Ms M Scott AJH van der Walt Building 0297 Ms CM van der Merwe AJH van der Walt Building Mr J Hodsdon AJH van der Walt Building 0298 Ms T Sekhaulela (Secretary/ Administration officer) AJH van der Walt Building

4 3 SUGGESTED SOLUTIONS TO ASSIGNMENT 01/2012 Each question counts 1 mark. 1. The correct answer is (1) Goodwill in terms of IFS 3.32: Consideration transferred at acquisition date ( ) Noncontrolling interests at fair value ( x 40% x 3.50) Less: net amount of identifiable assets and liabilities acquired at acquisition date ( ) ( ) Goodwill The correct answer is (3) The amount that will be disclosed as longterm borrowings in the consolidated statement of financial position of the Peanut Ltd Group as at 31 December 2011 is: Peanut Ltd (given) aisin Ltd (given) Elimination of the intragroup loan ( ) The correct answer is (3) The amount that should be disclosed as cost of sales in the consolidated statement of profit or loss and other comprehensive income of the Peanut Ltd Group for the year ended 31 December 2011 is: Peanut Ltd (given) aisin Ltd (given) Elimination of intragroup sales for 2011 (88 000) eversal of unrealised intragroup profit in opening inventory ( x 25 / 125 ) (4 800) Elimination of unrealised intragroup profit in closing inventory ( x 25 / 125 ) The correct answer is (1) The amount that should be disclosed as other income in the consolidated statement of profit or loss and other comprehensive income of the Peanut Ltd Group for the year ended 31 December 2011 is: Peanut Ltd (given) aisin Ltd (given) Elimination of unrealised intragroup profit on sale of machine (40 000) Elimination of intragroup dividend received ( x 60%) (12 000) Elimination of intragroup management fees received (2 500 x 4) (10 000)

5 SOLUTIONS TO ASSIGNMENT 1 (continued) FAC3704/ The correct answer is (2) The amount that should be disclosed as other expenses in the consolidated statement of profit or loss and other comprehensive income of the Peanut Ltd Group for the year ended 31 December 2011 is: Peanut Ltd (given) aisin Ltd (given) Elimination of intragroup management fees paid (2 500 x 4) (10 000) ealisation on unrealised profit depreciation (40 000/4 x 6 / 12 ) (5 000) The correct answer is (1) The amount that should be disclosed as the opening balance (1 January 2011) of the noncontrolling interests in the consolidated statement of changes in equity of the Peanut Ltd Group for the year ended 31 December 2011 is: Noncontrolling interests at fair value at acquisition date (3.50 x x 40%) Noncontrolling interests equity since acquisition date retained earnings (( ) x 40%) Noncontrolling interests equity since acquisition date revaluation surplus (( ) x 40%) The correct answer is (4) The amount that should be disclosed as other comprehensive income in the current year for the noncontrolling interests in the consolidated statement of changes in equity of the Peanut Ltd Group for the year ended 31 December 2011 is: Other comprehensive income revaluation of land ( (given) x 40%) The correct answer is (2) The amount that will be disclosed as inventory in the consolidated statement of financial position of the Peanut Ltd Group as at 31 December 2011 is: Peanut Ltd (given) aisin Ltd (given) Elimination of unrealised intragroup profit in closing inventory ( x 25 / 125 ) (9 200)

6 SOLUTIONS TO ASSIGNMENT 1 (continued) 9. The correct answer is (2) Goodwill in terms of IFS 3.32 on ordinary shares: Consideration transferred at acquisition date Noncontrolling interests (( ) x 12%) Less: net amount of identifiable assets and liabilities acquired at acquisition date ( ) (65 000) Goodwill Goodwill in terms of IFS 3.32 on preference shares: Consideration transferred at acquisition date Noncontrolling interests ( x 60%) Less: net amount of identifiable assets and liabilities acquired at acquisition date (20 000) Goodwill Goodwill at acquisition date ( ) Impairment of goodwill (3 000) Goodwill as disclosed in consolidated statement of financial position The correct answer is (3) The amount that will be disclosed as total comprehensive income attributable to noncontrolling interests in the consolidated statement of profit or loss and other comprehensive income of the Chip Ltd Group for the year ended 28 February 2012 is: Noncontrolling interests ordinary shares profit (( ) x 12%) Noncontrolling interests preference dividend (( x 10%) x 60%) Preference shareholders have a preferential right and claim to the profit of the company. The claim amount is the percentage of the value of the share, x 10%, a dividend of per year. Even if no dividend is declared or paid to cumulative preferential shareholders, a dividend will accrue to them. Therefore the preference dividend is subtracted from the profit of the current year in order to obtain the profit attributable to the ordinary shareholders. The percentage attributable to the noncontrolling interests for the ordinary and preference shares can differ; therefore we need to calculate the profit and preference dividend separately. In addition to the above the preference dividend payable (liability) amount that will be disclosed in the consolidated statement of financial position of the Chip Ltd Group as at 28 February 2012 is: Noncontrolling interests preference dividend (2 000 x 60% x 2) Noncontrolling interests preference dividend 2012 (2 000 x 60%)

7 SOLUTIONS TO ASSIGNMENT 1 (continued) FAC3704/202 The allocation between the owners interest and the noncontrolling interests must be made even if the subsidiary has made no provision for the preference dividends in their separate financial statements. An entity shall recognise a dividend from a subsidiary in profit or loss in its separate financial statements when its right to receive the dividend is established. Cumulative preference shareholders have a right to the arrear and current preference dividends. Therefore the proforma consolidation journal entry will transfer a portion of the preference dividend owning to noncontrolling interests: Dt Kt Noncontrolling interests (SFP) Preference dividend payable (SFP) The following journals are provided for explanatory purposes: In the separate financial records of Chip Ltd (parent) at 28 February 2012: Dt Kt Dividends receivable asset (SFP) Dividends received (P/L) The preference dividend attributable to the owners of Dip Ltd is 800 (40% x ( x 10%)) per year. Therefore for three years it is 800 x 3 = In the separate financial records of Dip Ltd (subsidiary) at 28 February 2012: Dt Kt Dividend paid (SOCIE) Preference dividend payable liability (SFP) ecognising the cumulative preference dividend for the financial periods On consolidation the following journal entries will be made: Dt Kt Dividend received (P/L) Noncontrolling interests (SFP) Dividend paid (SOCIE) Eliminate the intragroup dividend. Preference dividend payable liability (SFP) Dividends receivable asset (SFP) Eliminate the intragroup dividend payable (liability) and receivable (asset) 7

8 SOLUTIONS TO ASSIGNMENT 1 (continued) The following analysis were not required, but provided for explanatory purposes: Analysis of owners equity of aisin Ltd At acquisition date 100% 60% 40% Total At Since NCI Share capital etained earnings ( ) evaluation surplus Equity represented by goodwill Consideration and NCI at fair value ( x 3.50) Since acquisition date etained earnings ( ) evaluation surplus ( ) Current year Profit after adjustments Profit for the year Sales Other income Cost of sales ( ) Other expenses ( ) Income tax expense ( ) Unrealised profit machine sale (40 000) Taxation effect machine sale ( x 28%) ealisation of the unrealised profit depreciation on sale of machine (40 000/4 x 6 / 12 ) Taxation effect realisation (5 000 x 28%) (1 400) Other comprehensive income revaluation of land Dividends paid (20 000) (12 000) (8 000)

9 The following analysis were not required, but provided for explanatory purposes: Analysis of owners equity of Dip Ltd ordinary shares FAC3704/ % 88% 12% Total At Since NCI At acquisition date Share capital etained earnings Equity represented by goodwill Consideration and NCI Since acquisition date etained earnings ( ) (Preference dividend = ( x 10% x 2)) Current year Profit for the year ( ) Analysis of owners equity of Dip Ltd preference shares 100% 40% 60% Total At Since NCI At acquisition date Share capital Equity represented by goodwill Consideration and NCI Since acquisition date Cumulative preference dividend Current year Cumulative preference dividend Cumulative preference dividend payable (6 000) (2 400) (3 600)

10 4 MAY 2012 EXAMINATION: PEPAATION AND EXAM APPOACH The following matters regarding the examination paper deserves your attention: ELATIVE IMPOTANCE OF CETAIN TOPICS IN THE STUDY MATEIAL There are no topics in the study material that are more important than others and no discussion will be conducted in this regard. You will be examined on all study material as per the indicated sections in the prescribed books and all tutorial letters. It is not sufficient to only work through your assignments because all the principles are not tested in there. Please ensure that you have received the following study material: 1. Study guide for FAC Tutorial letter 101/ Tutorial letter 102/ Tutorial letter 103/ Tutorial letter 201/ Tutorial letter 202/ Tutorial letter 203/2012 CHOICE OF COECT PAPE: FAC3704 It is your responsibility to ensure that you receive the correct paper in the examination. If you are handed the wrong paper, you must immediately request the invigilator to hand you the correct paper. FOMAT OF THE EXAMINATION PAPE The examination paper for the May examination will consist of TWO (2) questions and the duration is 2 hours. SUPPLEMENTAY EXAMINATIONS AND EMAKING OF SCIPTS Please take note of the following important information regarding supplementary examinations and remarks: To qualify for a supplementary examination opportunity, you must obtain a final mark of 40% 49% in study units offered by the School of Accounting Sciences (for example FAC3704). Only the examination mark will be taken into account in the supplementary examination (the year mark will not be taken into account). Supplementary examinations will be conducted in October 2012 for students who fail the May 2012 examination paper and achieve a final mark between 40% 49% in FAC3704. Only those students who obtain a final mark of 35% 49% or 68% 74% in a module may apply for the remark of such an examination answer book. A student will not be entitled to a supplementary examination (if applicable) on grounds of a remark result. 10

11 For more information refer to the general rules for study and examinations in the my Unisa booklet. EMAKING OF EXAM SCIPTS Students who apply for the remarking of their scripts should provisionally register for the module as if they have failed. egistration can be cancelled if the remark was successful. EXAM PEPAATION Steps to follow when preparing for the exam: First read through the theory at the start of each study unit or subsection of a unit, and your book making sure that you understand the principles involved; you must not read the next sentence unless you understand what you have just read. Work through examples that demonstrate the application of the principles. Do not memorise the examples; try to understand why the specific calculations were done. When you work through an example always try to prepare the journal entries or Taccounts for the different transactions. One set of journal or Taccounts must be done from the company s own viewpoint and another set from the South African evenue Services view point. The second set will assist you in understanding where the tax base figures in the deferred tax calculations come from. In addition When working through the examples please be aware of the disclosure requirements in terms of the International Financial eporting Standards which are required by certain sections (i.e. cash flow statements, associates and joint arrangements). Make sure you understand why it has been disclosed in that specific manner. Once you understand, memorise the disclosure by referring back to the accounting standard and your study guide. Prepare a summary of all the principles involved on each topic and the accounting treatment and disclosure thereof. The next step is to attempt the assignment questions. Answer the questions without referring to the solution by following the steps described under the heading exam technique of this tutorial letter under the section how should you answer a question. Only once you have completed an answer should you compare your answer with the suggested solution. If your answer differs from the suggested solution refer back to the study guide and the accounting standard. If you still don t understand what has been done in the suggested solution, contact one of your lectures. emember if you don t understand the principles involved it will be to no avail to work through numerous questions. If you understand the principles, working through one or two questions per scenario should be sufficient. Please do not attempt new questions in the few hours before you write your exam. It will only confuse and unsettle you if you come across something you cannot do. emember you must be both cognitively and psychologically prepared. 11

12 On the morning of the day of your exam refresh your memory by reading through the summary you have compiled and reciting the disclosure requirements. This will help you to relax as you will be familiar with the information by then. EXAM TECHNIQUE If students apply the correct exam technique they will be able to complete the answer within the time frame allowed and their answers will be structured as to obtain the marks in the shortest time possible. How should you answer a question? ead the EQUIED section first. Ensure that you are clear on what is required of you. Please note that marks will not be awarded if you do not complete what is required. For example: If you are required to provide only the note to the statement of financial position, no marks will be awarded for disclosing the statement of financial position and/or notes to the statement of profit or loss and other comprehensive income (e.g. profit before tax and current tax notes). It is also important that you read what is not required as it will result in a waste of time if you prepare unnecessary workings and disclosure. TIME MANAGEMENT IS VEY IMPOTANT IN ANY PAPE. Start off by writing the layout (wording) of the disclosure. The disclosure will then be a guide for deciding what calculations to prepare. After you have written down the layout (disclosure), start with the calculations. Once you have done a calculation transfer the answer to your layout (disclosure). Don t wait until all the calculations have been done before transferring the answer. NO MAKS will be awarded if calculations are not transferred or referenced the required section correctly! It is advisable to show shorter calculations on the face of the statement of profit or loss and other comprehensive income, statement of financial position or notes (whichever is required) in brackets next to the disclosure. This will save time and avoid duplication. Longer calculations which cannot fit into the line next to the disclosure or the next line must be done on a separate page marked calculations. The figures in the disclosure should then be cross referenced to the calculations. NO MAKS will be awarded if calculations are not transferred or referenced the required section correctly! Never exceed the time allocated per question. Attempt each question in the paper. Leaving out a question could be the reason you fail. When answering an examination paper, it is normally advisable to answer the questions in the order that they have been given. When an examination paper is prepared due care and consideration is given in determining the sequence of the questions. A question on a topic that you may consider to be easy may in fact be the more difficult question of the paper and answering it first might cause you to spend too much time on it or upset you so much that it influences your ability to answer the rest of the paper. If in doubt, always go back to the basic principles, especially where two or more topics are combined. 12

13 Show all calculations, even if it is as simple as adding two figures together. Marks cannot be allocated if we cannot see how the amount has been made up. Make sure that you transfer the calculated amounts correctly to the disclosure. If the EQUIED section stipulates for instance prepare the statement of financial position then marks will not be awarded to calculations that have not been transferred to the layout (disclosure). If the EQUIED has asked for calculations then the calculations will be marked. Students will only lose marks once for an error. When the figure as calculated by the student is used (even though calculated incorrectly) in other calculations or disclosure, marks will be allocated if the principle is applied correctly. PESEVEE We would like to encourage you to tackle your studies with enthusiasm. emember, success can only be achieved by effort and perseverance. Every year we find that many students do not turn up at the examination venue. You must never inflict this disservice on yourself. emember that if you write, you have a chance; if you don t, you have no chance at all. All the best with your studies! 13

14 5 OCTOBE 2011 EXAMINATION AND SUGGESTED SOLUTION Question number Subject Marks Time (minutes) 1 Consolidation journals Change in ownership and consolidated statement of cash flows TOTAL QUESTION 1 (40 marks)(48 minutes) The following balances were extracted from the trial balances of the individual companies in the Alpha Ltd Group for the year ended 31 December 2010: Alpha Ltd Dr/(Cr) Beta Ltd Dr/(Cr) Omega Ltd Dr/(Cr) Share capital ordinary shares ( ) ordinary shares ( ) ordinary shares ( ) etained earnings 1 January 2010 ( ) ( ) ( ) Marktomarket reserve (only for investment in Beta Ltd) (25 800) Deferred tax on marktomarket reserve (4 200) Profit after tax ( ) ( ) ( ) Investment in Beta Ltd at fair value Investment in Omega Ltd at fair value Ordinary dividends paid 31 December Shortterm loan to Beta Ltd Additional information 1. Beta Ltd On 1 January 2010 Alpha Ltd acquired of the ordinary shares of Beta Ltd. This acquisition enables Alpha Ltd to control Beta Ltd. On the acquisition date of Beta Ltd, no unidentified assets, liabilities or contingent liabilities existed and the fair value of all the assets, liabilities and contingent liabilities were confirmed to be equal to the carrying amounts thereof. 2. Omega Ltd Beta Ltd acquired of the ordinary shares in Omega Ltd on 1 January 2007 when the retained earnings of Omega Ltd amounted to This acquisition enables Beta Ltd to control Omega Ltd. On the acquisition date of Omega Ltd, no unidentified assets, liabilities or contingent liabilities existed and the fair value of all the assets, liabilities and contingent liabilities were confirmed to be equal to the carrying amounts thereof. 14

15 QUESTION 1 (continued) FAC3704/ On 1 June 2010, Alpha Ltd made a shortterm loan of to Beta Ltd. The loan is interest free and repayable in full on 31 May The shortterm loan has been included in trade and other payables of Beta Ltd. 4. Included in profit after tax are management fees paid to Alpha Ltd by Beta Ltd and Omega Ltd. Management fees are paid annually and calculated at 10% of revenue made by the company for the year. No management fees were in arrears. evenue for the year ended 31 December 2010 was as follows: Alpha Ltd Beta Ltd Omega Ltd 5. Accounting policies The Alpha Ltd Group measures its investments in equity instruments at fair value through other comprehensive income. The fair value of the investment in Omega Ltd is equal to the cost price thereof. The Alpha Ltd Group uses the partial (proportionate) goodwill method to recognise goodwill. 6. Sundry information On 31 December 2010 the directors of the Alpha Ltd Group assessed goodwill and found that the goodwill in both Beta Ltd and Omega Ltd had not been impaired from the time that the investments were acquired. The share capital of the companies has remained unchanged since the acquisition dates of the companies. Assume that each share carries one vote. The SA normal tax rate has remained unchanged at 28% and capital gains tax is calculated at 50% thereof. EQUIED: Prepare the pro forma consolidation journal entries of the Alpha Ltd Group for the year end 31 December When referring to entries relating to noncontrolling interests clearly indicate if the entry relates to noncontrolling interests in the statement of financial position (SFP) or the statement of profit or loss and other comprehensive income, (SP/LOCI). The noncontrolling interests column is not required. (40) No journal narrations are required Your answer must comply with the requirements of the International Financial eporting Standards. ound off all amounts to the nearest and. 15

16 QUESTION 1 (SUGGESTED SOLUTION) Proforma consolidation journals: Omega Ltd: J1 Share capital etained earnings Gain on bargain purchase Investment in Omega Ltd Noncontrolling interests (SFP) ( ( ) x 40%) Elimination of owners equity at acquisition against the investment in Omega Ltd and recognition of NCI J2 Noncontrolling interests (SP/LOCI) ( ( ) x 40%) Noncontrolling interests (SFP) ecording of NCI interest in the profit of the year J3 Profit after tax/other income ( x 60%) Noncontrolling interests (SFP) ( x 40%) Dividend paid (Omega Ltd)(given) Elimination of intragroup dividend and recording the portion relating to NCI J4 Profit after tax/management fees received (Alpha Ltd) ( x 10%) Profit after tax/management fees paid (Omega Ltd) Elimination of intragroup management fees Proforma consolidation journals: Beta Ltd: J5 Marktomarket reserve (given) Deferred tax liability (SFP) (given) Investment in Beta Ltd eversal of marktomarket reserve (fair value adjustment) of Beta Ltd J6 Share capital etained earnings 1 January 2010 Gain on bargain purchase Omega Ltd Dr Goodwill Investment in Omega Ltd ( ( )) Noncontrolling interests (SFP) (( ) x 10%) Elimination of equity at acquisition against investment and recognition of NCI J7 Noncontrolling interests (SP/LOCI) ( ( ) x 10%) Noncontrolling interests (SFP) ecording of NCI interest in the profit of the year of Beta Ltd J8 Noncontrolling interests (SP/LOCI) ( ( x 60%) x 10%) Noncontrolling interests (SFP) ecording of NCI interest in the profit of the year of Omega Ltd Cr 16

17 QUESTION 1 (suggested solution)(continued) FAC3704/202 Dr Cr J9 Profit after tax/other income ( x 90%) Noncontrolling interests (SFP) ( x 10%) Dividend paid (Beta Ltd)(given) Elimination of intragroup dividend and recording of portion relating to NCI J10 Trade and other payables/beta Ltd Trade and other receivables/omega Ltd Elimination of intragroup loan J11 Profit after tax/management fees received (Alpha Ltd) ( x 10%) Profit after tax/management fees paid (Omega Ltd) Elimination of intragroup management fees QUESTION 2 (60 marks)(72 minutes) The Clarkson Ltd Group is a top car retail and entertainment company listed on the Stock Exchange. The following are the trial balances of Clarkson Ltd and Hammond Ltd for the year ended 28 February 2011: Investment in Hammond Ltd at fair value Investment in Stig Ltd at fair value Investment in May Ltd at fair value Investment in Coulthard Ltd at fair value Property, plant and equipment at carrying amount Dividends paid 28 February 2011 Inventories Trade and other receivables Cash and cash equivalents Other expenses Income tax expense Share capital ( and ordinary shares) etained earnings 1 March 2010 Marktomarket reserve 1 March 2010 evaluation surplus 1 March 2010 Deferred tax Longterm borrowings Trade and other payables Gross profit Other income Other comprehensive income (current year): evaluation of land (after tax) Marktomarket reserve (after tax) Clarkson Ltd Dr/(Cr) ( ) ( ) (12 040) (30 000) ( ) ( ) ( ) ( ) (46 000) (51 600) Hammond Ltd Dr/(Cr) ( ) ( ) (76 000) (26 400) ( ) ( ) ( ) ( ) (17 200) 17

18 QUESTION 2 (continued) Additional information 1. Hammond Ltd 1.1 On 1 March 2007, Clarkson Ltd acquired shares in Hammond Ltd for On this date Clarkson Ltd obtained significant influence over the financial and operating policy decisions of Hammond Ltd. The analysis of owner s equity of Hammond Ltd was correctly prepared on the date of acquisition as follows: 18 At acquisition Share capital etained earnings 1 March 2007 Total At Goodwill Investment in Hammond Ltd Clarkson Ltd acquired an additional shares in Hammond Ltd on 1 August 2010 for 8.50 per share. This acquisition enabled Clarkson Ltd to control Hammond Ltd. The market value per share on this date was 8.89, which is equal to the fair value of the noncontrolling interest and the fair value of the previously held interest. Noncontrolling interests is measured at fair value. The fair value of the net identifiable assets, liabilities and contingent liabilities of Hammond Ltd on 1 August 2010 (acquisition date) were as follows: Property, plant and equipment Investment in equity instruments Inventories Trade and other receivables Cash and cash equivalents Longterm borrowings ( ) Trade and other payables ( ) All income and expenses of Hammond Ltd were earned evenly throughout the year. 1.4 Since the acquisition of Hammond Ltd, Hammond Ltd sold inventories to Clarkson Ltd at a markup of 25% on cost. Included in the closing inventories of Clarkson Ltd is inventories purchased from Hammond Ltd (28 February 2010: ). On 28 February 2011 the inventories of were written down to a net realisable value of by Clarkson Ltd. 1.5 The investment in Hammond Ltd increased in fair value by in the current year. 2. Stig Ltd The investment in Stig Ltd increased in fair value by in the current year.

19 QUESTION 2 (continued) FAC3704/ May Ltd 3.1 On 1 March 2010 Clarkson Ltd acquired shares in May Ltd for cash and obtained significant influence over the financial and operating policy decisions of May Ltd. On the acquisition date the share capital amounted to ( ordinary shares) and retained earnings amounted to On this date there were no unidentified assets, liabilities or contingent liabilities and the fair value of all assets and liabilities were considered to be equal to the carrying amounts of these items. 3.2 May Ltd incurred a loss of in the current year and as a result the directors of May Ltd did not declare a dividend. 3.3 During the current year May Ltd sold inventory to Clarkson Ltd to the value of Inventory is sold at cost plus 20%. On 28 February 2011 Clarkson Ltd had of the inventory purchased from May Ltd on hand. 4. Clarkson Ltd Group 4.1 The following is an extract from the consolidated statement of financial position of the Clarkson Ltd Group as at 28 February 2010: ASSETS Noncurrent assets Property, plant and equipment Investment in equity instruments Investment in associate Depreciation for the current year was as follows: Clarkson Ltd Hammond Ltd (1 August February 2011) During the current year Clarkson Ltd sold equipment for to an outside party. The profit on this disposal of is included in other income. 4.4 Except for the given information, no other noncash flow items existed which could influence the cash flow statement. 5. General accounting and policy notes 5.1 The group uses the full goodwill method to recognise goodwill. At 28 February 2011 the directors of the Clarkson Ltd Group determined that the goodwill in Hammond Ltd was impaired by All investments in associates are accounted for in accordance with the equity method. 19

20 QUESTION 2 (continued) 5.3 Clarkson and Hammond Ltd measure its investments in equity instruments at fair value through other comprehensive income. The fair value of all the equity instruments is equal to the cost thereof, unless otherwise stated. 5.4 The share capital of the companies has remained unchanged since the acquisition dates of the companies. Assume that each share carries one vote. 5.5 The SA normal tax rate has remained unchanged at 28%% and capital gains tax is calculated at 50% thereof. EQUIED: (i) Calculate the following amounts that will be disclosed in the statement of financial position of the Clarkson Ltd Group for the year ended 28 February 2011: goodwill; and (4) investment in associate (3½) (ii) Prepare the following for the Clarkson Ltd Group for the year ended 28 February 2011: the statement of profit or loss and other comprehensive income; and (33) the statement of changes in equity (13½) (iii) Prepare only the cash flow from investment activities section to the statement of cash flows for the Clarkson Ltd Group for the year ended 28 February (6) Your answer must comply with the requirements of International Financial eporting Standards. Comparative figures are not required. All calculations must be shown and amounts must be rounded off to the nearest and. 20

21 QUESTION 2 (SUGGESTED SOLUTION) Part (i): Goodwill in terms of IFS 3.32: Consideration transferred at acquisition date ( x 8.50) Fair value of previously held equity ( x 8.89) Noncontrolling interests at fair value ( ( ) x 8.89) Less: net amount of identifiable assets acquired and liabilities assumed at acquisition date ( ) Goodwill at acquisition date Impairment (5 000) Goodwill as per SFP as at 28 February Investment in associate At acquisition: Investment in May Ltd at cost price given Gain on bargain purchase Current year: Loss for the year ( x 45%) (22 500) = x 45% = = Comment 1: The unrealised profit on the intragroup sale of inventory will not affect the investment in associate balance in the statement of financial position as May Ltd, the associate, sold the inventory, in other words made the profit. The unrealised profit will only affect the share of profit of associate in profit or loss, due to the fact that May Ltd made the profit on the sale of inventory. The inventory is in the records of Clarkson Ltd and thus the unrealised profit will be eliminated against the inventory of Clarkson Ltd. 2: The investment in Hammond Ltd changed from an associate to a subsidiary during the current year. Due to the fact that Hammond Ltd is a subsidiary of Clarkson Ltd at year end, no investment in associate balance will exist in the SFP relating to the investment in Hammond Ltd. 21

22 QUESTION 2 (suggested solution)(continued) Part (ii): CLAKSON LTD GOUP CONSOLIDATED STATEMENT OF POFIT O LOSS AND OTHE COMPEHENSIVE INCOME FO THE YEA ENDED 28 FEBUAY 2011 Gross profit ( ( ( x 5 / 12 )) ) Other income ( ( ( x 5 / 12 ) ) Share of profit of associate ( ) Other expenses ( ( ( x 5 / 12 )) ) ( ) Profit before tax Income tax expense ( ( ( x 5 / 12 )) ) ( ) POFIT FO THE YEA Other comprehensive income: Items that will not be reclassified to profit or loss: Marktomarket reserve after tax (fair value adjustment to investment) ( ( x 86%) ) or (( x 86%) ) evaluation surplus after tax(given) TOTAL COMPEHENSIVE INCOME FO THE YEA Profit attributable to: Owners of the parent Noncontrolling interests (C1) Total comprehensive income attributable to: Owners of the parent Noncontrolling interests ( ( x 40%)) (( x 25 / 125 ) ( )) = Elimination of intragroup dividends ( x 60%) 3 Impairment of goodwill 4 emeasurement loss (C1) 5 ( x 28%) = Comment 3: Clarkson Ltd obtained control over Hammond Ltd on 1 August Thus Hammond Ltd should be consolidated at year end. Hammond Ltd was only a subsidiary of Clarkson Ltd for a period of 7 months, acquisition date 1 August Therefore the consolidation effect of the 5 months while Hammond Ltd was an associate needs to be eliminated in the SP/LOCI. The 45% share of profit of associate will reflect the profit share for the 5 month period. emember that the SP/LOCI is for a 12 month period. 22

23 QUESTION 2 (suggested solution)(continued) CLAKSON LTD GOUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FO THE YEA ENDED 28 FEBUAY 2011 Share capital etained earnings evaluation surplus Mark to market reserve Total Noncontrolling interests Balance at 1 March Changes in equity for 2011 Total comprehensive income for the year Profit for the year Other comprehensive income for the year Transfer of reserves (34 200) Acquisition of subsidiary Dividends paid (90 000) (90 000) (40 000) ( ) Balance at 28 February Total equity (( ) + ( x 25 /125 x 72%) x 45%) = x 45% ( x 86%) ( x 40%) = x

24 QUESTION 2 (suggested solution)(continued) C1 Analysis of owners equity of Hammond Ltd 1 st acquisition: / = 45% After 2 nd acquisition: / = 60% First share purchase Acquisition date: 1 March 2007 Share capital etained earnings Equity represented by goodwill % 45% to 60% 45% 40% Total At Since CA NCI Consideration paid Since 1 st purchase etained earnings ( ) Intragroup inventory ( x 25 / 125 ) (25 000) (11 250) Tax effect ( x 28%) evaluation surplus (given) Current year before 2 nd purchase Profit for the first 5 months Profit ( x 5 / 12 ) Intragroup inventory Tax effect (7 000) (3 150) Second share purchase Acquisition date: 1 August 2010 Equity acquired before Equity earned since first purchase emeasurement loss (6 020) (6 020) Fair value of previously held interest Consideration paid Noncontrolling interests ( x 40%) Net of the identifiable assets acquired and liabilities assumed on acquisition date ( ) Goodwill Fair value of NCI Current year after 2 nd purchase Profit for the 7 months after change Profit for year ( x 7 / 12 ) Intragroup profit on inventory Tax effect ( x 28%) Impairment of goodwill (30 000) (5 000) (18 000) (3 000) (12 000) (2 000) OCI: Marktomarket reserve Dividends paid ( ) 1 ( ) = (60 000) (40 000)

25 QUESTION 2 (suggested solution)(continued) C2 Analysis of owners equity of May Ltd Total Clarkson Ltd 45% At Since CA 45% At acquisition: Share capital etained earnings Equity represented by gain on bargain purchase (2 000) (2 000) Consideration paid Current year: Gain on bargain purchase Loss for the period (50 000) (22 500) (22 500) Intragroup inventory ( x 20 / 120 ) (16 000) (7 200) Tax effect ( x 28%) (27 684) Part (iii) Cash flow from investment activities Acquisition of property, plant and equipment Disposal of property, plant and equipment (given) Acquisition of subsidiary Acquisition of associate ( ) ( ) ( ) Calculations Acquisition of property, plant and equipment Opening balance given Closing balance Clarkson Ltd ( ) Closing balance Hammond Ltd ( ) Acquisition of subsidiary Hammond Ltd evaluation of land ( x 100 / 86 ) Disposal of property, plant and equipment ( ) ( ) Depreciation Clarkson Ltd ( ) Depreciation Hammond Ltd (70 000) Acquisition of property, plant and equipment Acquisition of subsidiary Consideration paid ( x 8.5) ( ) Cash received Acquisition of subsidiary ( ) 25

26 QUESTION 2 (suggested solution)(continued) FAC3704/202 Acquisition of associate Opening balance given (C1) Share of profit of associate Hammond Ltd first 5 months (C1) Share of loss of associate May Ltd (C2) (22 500) Gain on bargain purchase May Ltd (C2) Associate changes to subsidiary ( ) Closing balance (part (i)) (94 500) Acquisition of associate given OCTOBE 2011 EXAMINATION GENEAL MISTAKES MADE BY STUDENTS During the marking process general mistakes made by students were identified. Listed below are items that were not correctly answered by the majority of students. QUESTION 1 Students included the 60% and 90% figures in the journal entries, instead of using 100% figures and then taking out the NCI portion. Students forgot to deduct the dividend paid by Omega Ltd to Beta Ltd of from the profit of Omega Ltd that is carried over to Beta Ltd s analysis. Students forgot to carry over the gain on bargain purchase from Omega Ltd to the at acquisition of Beta Ltd, which influenced the goodwill figure at acquisition of Beta Ltd. Students did not use the retained earnings of on 1 January 2010 (that is the date that it actually became a group). Instead they used the retained earnings of on the date that Beta Ltd acquired its interest in Omega Ltd. This caused the gain on bargain purchase to become a goodwill figure. Students thus included a since acquisition to the beginning of the current year movement in retained earnings for Omega Ltd amounting to = which is not correct. There should be no since acquisition to the beginning of the current year portion as the group for which consolidated financial statements should be prepared only formed on 1 January 2010 when Alpha acquired its interest in Beta Ltd. Students incorrectly accounted for dividends paid in the journal as other expenses in the SP/LOCI instead of as dividend paid in the SOCIE. Students did not indicate which noncontrolling interests they were debiting or crediting in the current year s profit journal where the noncontrolling interests s part of the profit was allocated to the NCI balance. Students must distinguish between noncontrolling interests in the consolidated statement of profit or loss and other comprehensive income (SP/LOCI) and noncontrolling interests in the consolidated statement of financial position (SFP). Dr. Noncontrolling interests (SP/LOCI) Cr. Noncontrolling interests (SFP) Students forgot to account for the intragroup management fees and to eliminate the intragroup balances of the trade payables against the loan receivable. 26

27 GENEAL MISTAKES (continued) Students included the adjustment for the management fees in the analysis, which was incorrect. The adjustment should only be done in the statement of profit or loss and other comprehensive income. This is a realised intragroup transaction; only adjust for unrealised intragroup transactions in the analysis. If it is a realised transaction adjust in the consolidated statement of profit or loss and other comprehensive income. The profits in the analysis should only be adjusted for unrealised intragroup transactions e.g. unrealised profit included in closing inventory Students incorrectly credited trade and other payables and debited loans receivable. Students recorded the share capital of Beta Ltd as instead of Students recorded the dividends paid by switching around the amount of the dividend paid and the amount of the dividend received in the journal, also the student credited the noncontrolling interests instead of debiting it. Students did not specify whether the noncontrolling interests used in the journal was a SFP or SP/LOCI item. Students combined the reversal of the marktomarket reserve with the at acquisition elimination journal but never adjusted the investment in the subsidiary with the amount of the marktomarket reserve and the deferred tax. Or students included the marktomarket reserve as part of the at acquisition reserve which was incorrect. Marktomarket reserve will only be included in the at acquisition reserves if it relates to other investments in the records of the subsidiary. QUESTION 2 Part (i): EQUIED: Calculate the following amounts that will be disclosed in the consolidated statement of financial position of the Clarkson Ltd Group for the year ended 28 February 2011: Goodwill: As at 28 February 2011 only Hammond Ltd was a subsidiary of Clarkson Ltd. Only Clarkson s Ltd and the related noncontrolling interests in the goodwill had to be taken into account in the goodwill to be disclosed in the SFP. The goodwill that originated on the initial acquisition of the interest in Hammond Ltd formed part of the carrying amount of the associate and does not form part of the goodwill to be disclosed on 28 February Many students took the goodwill into account on 28 February The goodwill to be disclosed originated on the second acquisition of an additional shares in Hammond Ltd on 1 August 2010, when Hammond Ltd became a subsidiary of Clarkson Ltd, and not on the original acquisition of the associate. Goodwill had to be calculated on the full goodwill method, thus taking into account the goodwill of the noncontrolling interests as well. The net asset value of Hammond Ltd was given in the question as

28 GENEAL MISTAKES (continued) Students had to calculate the goodwill by determining the surplus of the fair value of the existing interest and cost of the additional interest obtained measured against the net asset value of the total interest as given at acquisition date. Clarkson paid 8.50 per share for the shares (given) At that stage Clarkson had shares valued at 8.89 per share The remaining shares ( ) belonged to the noncontrolling interests and had a fair value of 8.89 per share (full goodwill method). The goodwill is the difference between the net asset value given and fair value determined and consideration paid as on 1 August Some students also did not account for the impairment of goodwill of (given). It is very important to note, that if the marker cannot determine what calculations were used in your final answer, or if the final answer do not relate to the calculations (even if correct), students will not receive all the possible marks. It is very important to answer the required and to indicate on your answer paper what your final answer is. Investment in Associate: As at 28 February 2011, May Ltd was the only associate. Hammond Ltd became a subsidiary on 1 August 2010, when an additional shares were acquired. Many students calculated the correct amounts but did not include it as part of the carrying amount to be disclosed as the investment in associate. The consideration of was given, the mark to market reserve related to the investments in Hammond Ltd and Stig Ltd and did not change the fair value/consideration paid by Clarkson Ltd for the investment in May Ltd. Many students were able to calculate the gain on bargain purchase but did not add it back as part of the carrying amount. Even if the calculations were correct, if the values are not transferred correctly, it cannot be marked, as it does not demonstrate that students are aware of the correct disclosure. The share of profit from associate that should form part of the carrying amount of the investment in associate only relates to the actual net profits and should not include any of the intercompany transactions where the associates sells, as it does not affect the investment in associate. Students also need to allocate the profits only on the 45% share that relates to Clarkson Ltd and not 100%. It is very important to note, that if the marker cannot determine what calculations were used to calculate your final answer, or if the final answer do not relate to the calculations (even if correct), students will not receive all the possible marks. It is very important to answer the required and to indicate on your answer paper what your final answer is. 28

29 GENEAL MISTAKES (continued) Part (ii): EQUIED: Prepare the following for the Clarkson Ltd Group for the year ended 28 February 2011: Consolidated statement of profit or loss and other comprehensive income On 1 August 2010 Hammond Ltd became a subsidiary of Clarkson Ltd. All income and expenses were earned evenly throughout the year. Prior to 1 August 2010 Hammond Ltd was an associate of Clarkson Ltd. Students had to allocate the income and expenses for 5 / 12 months to the associate and 7 / 12 months for the subsidiary. Many students did not calculate the allocation correctly. For all SP/LOCI line items students had to add the total of all SP/LOCI lines for Clarkson Ltd and 7 / 12 months of Hammond Ltd together. Gross profit Students did not calculate the unrealised profits on inventory correctly, by deducting the write down to net realisable value from the unrealised profits that needed to be eliminated ( x 25 / 125 ) NV adjustment ( ) = (30 000) Some students also accounted for the deferred taxation under gross profit and not correctly under income tax expense. Other income Some students did not eliminate the intercompany dividend paid by Hammond Ltd to Clarkson Ltd from other income ( x 60%) or students used the wrong percentage. Share of profit from associate May Ltd The total 45 % share of profit from May Ltd had to be included in the SP/LOCI. Many students included the intercompany transactions and taxation on those transactions for May Ltd under Gross profit, other income, other expenses and income tax expense and not correctly under Share of profit from associate. The gain on bargain purchase on acquisition of May Ltd occurred in the current year and should be included under share of profit for associate, Share of profit from associate Hammond Ltd The total share of profit from Hammond Ltd for the period March 2010 July 2010 (5 months) had to be included in the SP/LOCI. The share of profits from associates for Hammond Ltd was only for 45% for the 5 months. Many students did not correctly adjust for the unrealised profits on inventory that were eliminated in the prior year, which should have been recognised in the current year. Students also incorrectly recognised the profits on inventory under gross profits. Other expenses Some students did not include the impairment of goodwill under other expenses or they deducted the impairment incorrectly. 29