ACCA. Paper P2 (INT & UK) Corporate Reporting. Dec-2013

Transcription

1 ACCA Paper P2 (INT & UK) Corporate Reporting Dec-2013 To gain maximum benefit, do not refer to these answers until you have completed the interim assessment questions and submitted them for marking.

2 ACCA P2 (INT & UK): CORPORATE REPORTING Kaplan Financial Limited, 2013 The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties. Please consult your appropriate professional adviser as necessary. Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, and consequential or otherwise arising in relation to the use of such materials. All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing. 2 KAPLAN PUBLISHING

3 1 HEEL (a) Heel Group Note the SOFP of Sole has been translated at the closing rate of 2.0 dinars = $1 Consolidated statement of financial position as at 30 April 20X9 $m Marks Goodwill (W3) 99 Property, plant and equipment (843 + (( ) / 2.0)) 1,062 Current Assets: Inventories (264 + (62 / 2.0)) Receivables (442 + (202 / 2.0)) Financial assets (W5) Cash and equivalents ((17 + (86 / 2.0)) ,963 Equity and liabilities $m Equity $ Share premium Group reserves: Retained earnings (W5) Group exchange difference (W6) ,099.1 Non-controlling interest (W4) Total equity of the group 1,174.5 Non-current liabilities (70 + (55 5(W7)) / 2.0) 10 IC Loan)) Current liabilities: Trade payables (598 + (51 / 2.0)) Income tax (50 + (20 / 2.0)) Bank overdraft 20 1,963 KAPLAN PUBLISHINGH 3

4 ACCA P2 (INT & UK): CORPORATE REPORTING Consolidated statement of profit or loss and other comprehensive income for the year-ended 31 October 20X9 Note the SOCI of Sole has been translated at the average rate of 2.3 dinars = $1 $m Marks Revenue (600 + (300 / 2.3) 5 (W8)) Cost of sales (440.6) 2.0 (350 + (( (W2) + 22(W3)) / 2.3) 5 (W8)) Gross profit Distribution and administrative expenses (114.3) 1.0 (100 +((38 5(W7) / 2.3)) Investment income (Held for trading FA)(W5) Profit before taxation Tax (60 + (20 / 2.3)) (68.7) 1.0 Profit for the year Other comprehensive income items that may be reclassified to profit or loss in subsequent periods: Exchange difference on translation of foreign subsidiary (45.2(W2) (W3)) Total comprehensive income for the year Profit for the year attributable to: Owners of the parent (bal fig) 99.9 Non-controlling interest (((49(W2) 22(W3)) / 2.3) 25%) Profit for the year Total comprehensive income attributable to: $m Owners of the parent (bal fig) Non-controlling interest (2.9 (as above) (W2) + 5.2(W3)) Total comprehensive income for the year Workings (W1) Group structure Heel 75% Control exercised all year. Sole 4 KAPLAN PUBLISHING

5 (W2) Net assets of subsidiary and FX gain/loss on retranslation Acq n date e Rep date Marks Dinar (m) Dinar (m) Share capital Share premium Retained earnings FVA Land FVA P&M FVA P&M Dep n (6) 1.0 FX gain on loan (W7) FX gain on retranslation Dinar (m) Rate $m Aq n Profit ( ) FX gain on retranslation Bal fig Rep date Allocate exchange gain or loss on retranslation of net assets between group and NCI based upon shareholdings: $m Marks Group: 75% $45.2m NCI: 25% $45.2m (W3) Full goodwill in subsidiary functional currency and FX gain/loss on retranslation Calculated in functional currency Dinar (m) Marks Cost of acquisition 2.5) FV of NCI at acquisition Less net assets at acquisition (W2) (420) FV goodwill at acquisition 220 FX Gain on retranslation Dinar (m) Rate $m Marks Full goodwill at acquisition Impaired in year (10%) (22) 2.3 (9.6) 0.5 FX gain on retranslation Bal fig KAPLAN PUBLISHINGH 5

6 ACCA P2 (INT & UK): CORPORATE REPORTING Allocate exchange gain or loss on retranslation of goodwill between group and NCI based upon shareholdings: $m Group: 75% $20.6m NCI: 25% $20.6m (W4) Non-controlling Interest Dinar (m) Rate $m Marks NCI at acquisition date Share of profit (25% 49) (W2) Share of goodwill impairment (5.5) 2.3 (2.4) 0.5 (25% (22)) (W3) Share of net assets retranslation gain (W2) Share of goodwill retranslation gain (W3) (W5) Group retained earnings Dinar (m) Rate $m Marks Heel Sole (75% 49) (W2) Share of goodwill impairment (16.5) 2.3 (7.2) 0.5 (75% (22)) (W3) Financial assets remeasured to FV (500,000 ($6 $4) (W6) Group foreign exchange reserve $m Gain on retranslation of net assets (W2) 33.9 Gain on retranslation of goodwill (W3) (W7) Sole exchange gain on foreign currency loan from Heel $(m) Dinar (m) $(m) Marks 1 November 20X October 20X Gain 5 6 KAPLAN PUBLISHING

7 (W8) Intercompany purchases from Heel There are intra-group sales and purchases with a value of $5 million. There is no unrealised profit adjustment as all of the goods have been sold on outside the group. There is no exchange gain or loss adjustment required to the trade payables of Sole as the question states that this has already been accounted for when the liability was settled. (b) (i) When additional shares are purchased in an entity which is already a subsidiary, this transaction is regarded as a transaction within equity i.e. between the parent and the NCI. No gain or loss arises from such a transaction, rather a difference arises that is taken directly to equity and is included in the statement of changes in equity. (1 mark) (ii) It is not included within the statement of total comprehensive income for the year. This is in accordance with the entity concept which regards the NCI as part of equity / the ownership of the group. (0.5 mark) In effect, the impact of this transaction is that the controlling group are buying out a proportion of the NCI. The increase or decrease in equity is calculated as follows: Cash paid by group Reduction in NCI: %age extra shares purchased NCI CV at trans' n date NCI %age before transactio n $000 (X) X Increase (decrease) in equity X(X) (1 mark) Note that goodwill is not restated as a result of this transaction and the subsidiary continues to be consolidated as normal in the group accounts. (0.5 mark) Like the previous situation, where there has been no change in control as a result of the controlling group selling shares in the subsidiary, the transaction is regarded as a transaction within equity i.e. between the parent and the NCI. No gain or loss arises from such a transaction, rather a difference arises that is taken directly to equity and is included in the statement of changes in equity. (1 mark) It is not included within the statement of total comprehensive income for the year. This is in accordance with the entity concept which regards the NCI as part of equity / the ownership of the group. (1 mark) In effect, the impact of this transaction is that the controlling group are selling some of their total investment in the subsidiary (i.e. net assets plus goodwill) to the non-controlling interest shareholders. KAPLAN PUBLISHINGH 7

8 ACCA P2 (INT & UK): CORPORATE REPORTING (iii) The increase or decrease in equity is calculated as follows: $000 Cash received by group X CV of subsidiary at transaction date: Net assets X Unimpaired goodwill X Take %age of equity capital sold to X (X) arrive at increase in NCI Increase (decrease) in equity X(X) (1 mark) When shares are sold in a subsidiary and the parent losses control then there is a disposal and, from that date, the subsidiary will no longer be consolidated in the group accounts. In terms of the statement of the financial position this results in derecognition of the goodwill, NCI and net assets of the subsidiary. (0.5 mark) However, if there is residual interest held (whether an associate or mere investment) then this is introduced at fair value at the transaction date. (0.5 mark) In terms of the statement of comprehensive income the results of the subsidiary are only consolidated up to the date that control is lost. There will be time apportionment of the subsidiary s results up to the date control is lost. An exception gain or loss will arise on the disposal of a subsidiary that will be reported in profit or loss for the year. (1 mark) If the results of the subsidiary are regarded as discontinued operation then they are presented in a single line at the foot of the statement of profit or loss and there is no line-by-line aggregation. This is to assist the users in interpretation the performance of the group by facilitating an extrapolation on a continuing basis. (0.5 mark) A discontinued operation is a component of an entity that either has been disposed of or is classified as held-for-sale (per IFRS 5), and represents either a separate major line of business or a geographical area of operations, and is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale and the disposal involves loss of control. (0.5 mark) 8 KAPLAN PUBLISHING

9 (c) In most countries, there is a legal obligation on the directors to produce financial statements that show a true and fair view. The incorrect accounting for the sale of shares in a subsidiary would probably have a material effect on interpretation and perception by users of the performance and position of the group. (1 mark) When considering ethics, members of the ACCA are specifically bound by their own professional code. This code includes the principle of competence. To incorrectly account for the sale of shares in a subsidiary in the group accounts would be regarded as incompetent and consequently unethical. It is a complex area that has recently changed, but as members of a professional body accountants have a duty to stay up to date (continuing professional development). (1 mark) The ACCA code also identifies integrity as a key pillar. As such, creative accounting (i.e. the manipulation of the financial statements) is regarded as unethical as it is intended to create a misleading impression. (1 mark) If the entity in which shares are being sold is highly geared and / or loss-making then there could be a crude attempt to argue that control has been lost to avoid the consolidation of poor results and high liabilities (off balance sheet finance) in future. This would be creative accounting and unethical. (1 mark) ACCA marking scheme Marks (a) Group SOFP & SOCI 35 (b) Discussion 9 (c) Discussion Professional marks 4 2 Total 50 KAPLAN PUBLISHINGH 9

10 ACCA P2 (INT & UK): CORPORATE REPORTING 2 HAND Consolidated statement of financial position as at 30 June 20X3 $m $m Marks Non-current assets Property, plant and equipment (W7) Intangible non-current assets brand (W6) Intangible non-current assets goodwill (W3) Investment in associate (W8) Current assets ( (W9) (3.2(W9)) Total assets Capital and reserves $m Called up share capital Share premium account Retained earnings (W5) Non-controlling interest (W4) Non-current liabilities ( ) Current liabilities ( (W9)) ,068.9 Workings (W1) Hand acquired its Holdings in Wrist and Finger on 1 July 20X2, so control over them for the purpose of the group accounts was gained on that day. For the purpose of the Hand Group, the earlier date of acquisition of Finger by Wrist is not relevant. Hand s effective interest in Finger: Thumb 35% 80% 65% Hand Wrist 25% Direct 25% Indirect 80% 65% 52% 77% Non-controlling interest 23% Finger 10 KAPLAN PUBLISHING

11 (W2) Net assets Wrist At acquisition At reporting date Marks $m $m Equity capital Share premium Retained earnings Fair value adjustments ( ) Dep n on FVA (60 5% 2 yrs) (6) 0.5 Impairment of brand (10 6)(W6) (4) Net assets Finger At acquisition At reporting date Marks $m $m Equity capital Share premium Retained earnings Fair value adjustments (135 95) Additional depreciation (40 5% 2 yrs) (4) 1.0 PURP on sales by Finger (W9) (3.2) (W3) Goodwill full goodwill method $m Marks Wrist Cost of investment Fair value of NCI at acq n Net assets acquired (W2) (340) 0.5 Full goodwill to SOFP 90 Finger Cost of investment (75 + (80% 55)) Fair value of NCI at acq n Net assets acquired (W2) (135) 0.5 Full goodwill to SOFP 14 KAPLAN PUBLISHINGH 11

12 ACCA P2 (INT & UK): CORPORATE REPORTING (W4) Non-controlling interest $m Marks Wrist FV of NCI at acquisition (20% ( )(W2)) (1.0) 0.5 Less: NCI share of cost of investment (20% 55) (11.0) 1.0 Finger FV of NCI at acquisition (23% ( )(W2)) (W5) Group retained earnings $m Marks Hand Wrist (80% ( )(W2)) (4.0) 1.0 Finger (77% ( )(W2)) Income from associate (35% ($28m $22m)(W8)) (W6) Brand name IFRS 3 Business Combinations and IAS 38 Intangible Assets require that intangible assets acquired as part of an acquisition should be recognised separately as Hand as a reliable value can be placed on such assets. There is no option not to show the intangible asset separately under IAS 38. In this case the brand can be separately identified and sold. Therefore, it should be shown separately. Also the brand should be reviewed for impairment as its fair value has fallen from $10m to $6m. The brand should, therefore, be reduced to this value and $4m charged to profit or loss and retained earnings reduced accordingly. (3 marks) (W7) Property, plant and equipment $m Marks Hand 350 Wrist Finger Brand reclassified as intangible asset (10) Fair value adjustments: Wrist (W2) Finger (W2) Additional depreciation Wrist (W2) (6) 0.5 Finger (W2) (4) KAPLAN PUBLISHING

13 (W8) Thumb The investments are to be marked to market by Thumb and, therefore, a profit will have arisen during the period of ($28m $22m) $6 million. The investment in Thumb will, therefore, be stated at ($13m cost + (35% $6m profit) $15.1m. (2 marks) (W9) Inter-group trading PURP by Finger 25/125 $16m = $3.2m Also need to reduce trade receivables and trade payables by $3m for the balance still outstanding. Fair value calculation assets Goodwill Brand name Property, plant and equipment Group retained earnings Thumb Non-controlling interest Non-current liabilities Current liabilities Current assets Share capital and premium Total ACCA marking scheme Marks KAPLAN PUBLISHINGH 13

14 ACCA P2 (INT & UK): CORPORATE REPORTING 3 ROLLS GROUP (a) Rolls Group Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 20X6 SOCI Marks Workings $m R B M 8/12 Adj Revenue Continuing operations 15,000 10,000 1,667 (60) 26, Cost of sales (10,500) (6,500) (733) 60 (17,681) 2.0 Unrealised profit (W2) (3) 0.5 Goodwill impaired (5) (W3) Gross profit 8,926 Admin expenses (1,250) (600) (160) (2,010) 1.5 Distribution costs (1,600) (900) (200) (2,700) Operating profit 1,650 2, (5) 4,216 Interest expense (15) (8) (23) 1.0 Bank interest income Profit before tax 4,203 Income tax expense (495) (600) (170) (1,265) 1.5 Profit for the year 1,150 1, (5) 2,938 Other comprehensive income items that will not be reclassified to profit or loss in future periods: Revaluation of PPE 4 4 1,154 1, (5) 2,942 Total comprehensive income attributable to: Equity holders of the parent 2,354 Non-controlling interest 1,400 6/12 30% ,400 6/12 40% % , KAPLAN PUBLISHING

15 (b) Group retained earnings at 31 December 20X6: (c) Parent $m Marks Rolls bal b/fwd 3,750 Plus profit for the year 1, Less dividend paid (125) 0.5 4,775 Bentley bal b/fwd 70% (2, ) 1, First half of year 70% (1,400 6/12) Second half of year 60% (1,400 6/12) ,555 Morgan post-acq n profit 75% ((593 8/12) 3(W2)) Less goodwill impairment: 0.5 Bentley (W4) (245) Morgan (W3) (5) 7,744 Difference to equity / increase in NCI $m Proceeds received on sale of shares in Bentley to NCI 300 Increase in the NCI 15/150 3,500 (W5) net assets 350 (1 mark) Decrease in equity 50 Bentley has total issued share capital of 105 x 100/70 = 150 of which 15 has been sold by Rolls during the year i.e. a disposal of a 10% interest in Bentley. This disposal of shares did not result in loss of control of the subsidiary company. Consequently, there is no group gain or loss on disposal to report in the statement of comprehensive income. Instead, this is regarded as a transaction between equity holders and will be included in the statement of changes in equity. (1 mark) Workings (W1) Group structure R B (6/12) 70% M (8/12) 75% B (6/12) 60% i.e. control all year KAPLAN PUBLISHINGH 15

16 ACCA P2 (INT & UK): CORPORATE REPORTING (W2) Unrealised profit $m $15m 25/125 3 (W3) Net assets and calculation of goodwill Morgan $m Marks Net assets at acquisition Share capital 200 Retained earnings at 1.1.X6 1,000 Income to 30.4.X6 (4/12 593) 198 1, Goodwill $m Cost of investment 1, FV of NCI at acq n (1,398 25%) 350 1,650 FV of NA at acquisition 1,398 Proportionate goodwill 252 Impairment in year charged to cost of sales (per note (i)) (5) 0.5 Prop basis all allocated to Rolls Unimpaired goodwill to SOFP 247 (W4) Net assets working and calculation of goodwill Bentley $m Marks Net assets acquired: Share capital ( ) 150 Retained earnings Goodwill $m Cost of investment FV of NCI at acq n (450 30%) FV of NA at acquisition All fully written off in earlier years Prop basis all allocated to Rolls KAPLAN PUBLISHING

17 (W5) Net assets of Bentley at date of increase in NCI $m $m Share capital ( ) 150 Retained profits b/fwd 2,650 Add profit for the 6 months to the date of disposal (6/12 1,400) 700 3,350 Net assets at 1 July 20X6 3,500 ACCA marking scheme Bentley net assets and goodwill Morgan net assets and goodwill Revenue Cost of sales/gross profit Admin expenses Distribution costs Interest receivable & payable Tax Non-controlling interest Other comprehensive income revaluation of PPE Retained earnings at 31 December 20X6 Equity transfer Total Marks KAPLAN PUBLISHINGH 17

18 ACCA P2 (INT & UK): CORPORATE REPORTING 18 KAPLAN PUBLISHING