QUESTION 91: BASIC CONSOLIDATION. Statement of profit or loss and other comprehensive incomes for the year ended 31 March 2006

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1 QUETION 91: BAIC CONOLIDATION On 1 October 2005 Hydan, a publicly listed company, acquired a 60% controlling interest in ystan paying $9 per share in cash. Prior to the acquisition Hydan had been experiencing difficulties with the supply of components that it used in its manufacturing process. ystan is one of Hydan s main suppliers and the acquisition was motivated by the need to secure supplies. In order to finance an increase in the production capacity of ystan, Hydan made anon-dated loan at the date of acquisition of $4 million to ystan that carried an actual and effective interest rate of 10% per annum. The interest to 31 March 2006 on this loan has been paid by ystan and accounted for by both companies. The summarized draft financial statements of the companies are: tatement of profit or loss and other comprehensive incomes for the year ended 31 March 2006 Hydan ystan preacquisition postacquisition $ 000 $ 000 $ 000 Revenue 98,000 24,000 35,200 Cost of sales (76,000) (18,000) (31,000) Gross profit 22,000 6,000 4,200 Operating expenses (11,800) (1,200) (8,000) Interest income 350 Nil Nil Finance costs (420) Nil (200) Profit/(loss) before tax 10,130 4,800 (4,000) Income tax (expense)/relief (4,200) (1,200) 1,000 Profit/(loss) for the period 5,930 3,600 (3,000) tatement of financial positions as at 31 March 2006 Hydan ystan $ 000 $ 000 Non-current assets Property, plant and equipment 18,400 9,500 Investments (including loan to ystan) 16,000 nil 34,400 9,500 Current assets 18,000 7,200 Total assets 52,400 16,700 Equity and liabilities Ordinary shares of $1 each 10,000 2,000 hare premium 5, Retained earnings 20,000 6,300 35,000 8,800 Non-current liabilities 7% Bank loan 6,000 nil 10% loan from Hydan nil 4,000 Current liabilities 11,400 3,900 Total equity and liabilities 52,400 16,700 Page 1 of 5 (kashifadeel.com)

2 The following information is relevant: (i) At the date of acquisition, the fair values of ystan s property, plant and equipment were $1 2 million in excess of their carrying amounts. This will have the effect of creating an additional depreciation charge (to cost of sales) of $300,000 in the consolidated financial statements for the year ended 31 March ystan has not adjusted its assets to fair value. (ii) (iii) (iv) In the post acquisition period ystan s sales to Hydan were $30 million on which ystan had made a consistent profit of 5% of the selling price. Of these goods, $4 million (at selling price to Hydan) were still in the inventory of Hydan at 31 March Prior to its acquisition ystan made all its sales at a uniform gross profit margin. Included in Hydan s current liabilities is $1 million owing to ystan. This agreed with ystan s receivables ledger balance for Hydan at the year end. Hydan s policy is to value the non-controlling interest using the proportionate share of subsidiary s identifiable net assets. An impairment review of notional goodwill (grossed up for non-controlling interest) at 31 March 2006 revealed that its current value was 12.5% less than its carrying amount. (v) Neither company paid a dividend in the year to 31 March Required: (a) Prepare the consolidated statement of profit or loss and other comprehensive income for the year ended 31 March 2006 and the consolidated statement of financial position at that date. (20 marks) (b) Discuss the effect that the acquisition of ystan appears to have had on ystan s operating performance. (5 marks) (25 marks) ACCA F7 June 2006 Q1 Page 2 of 5 (kashifadeel.com)

3 ANWER TO QUETION 91: BAIC CONOLIDATION HYDAN Group - Consolidated PL for the year ended 31 March 2006 HYDAN YTAN Group $000 $000 $000 ales revenue 98,000 35,200 (30,000 J5) 103,200 Cost of ales (76,000) (31, J4+200J6) 30,000 J5 (77,500) Gross Profit 22,000 3,700 25,700 Operating costs (11, J8) (8,000) 20,175 Interest income 350 Nil (200 J2) 150 Finance costs (420) (200) 200 J2 (420) Profit before tax 9,755 (4,500) 5,255 Taxation (4,200) 1,000 (3,200) Profit after tax 5,555 (3,500) 2,055 NCI share of loss $(3,500) x 40% 1,400 Profit attributable to owners of Parent 3,455 HYDAN Group Consolidated FP as at 31 March 2006 Assets $000 $000 Goodwill W3 2,625 Investments $16,000 14,800J1 1,200 PPE $18,400+9,500+1,200J3 300J4 28,800 32,625 Current assets $18,000+7,200 1,000 J7 200 J6 24,000 Total assets 56,625 Equity Equity shares of $1 each 10,000 hare premium 5,000 Retained earnings W6 17,525 32,525 Non Controlling interest W5 3,800 36,325 Non - current liabilities 7% bank loan 6,000 10% loan from Hydan $4,000 4,000J1 nil 6,000 Current Liabilities $11,400+3,900 1,000 J7 14,300 Total equity and liabilities 56,625 W1 GROUP TRUCTURE ystan ubsidiary Acquisition date:1 Oct 2005 Group = 60% NCI 40% $000 Page 3 of 5 (kashifadeel.com)

4 W2 NET AET (of subsidiary) AT ACQUIITION Equity share capital 2,000 hare premium 500 Retained earnings (pre) [$6,300 (3,000)] 9,300 J3 1,200 13,000 W3 GOODWILL InvestmentJ1 10,800 Less: 13,000 W2 x 60%W1 (7,800) 3,000 J8 (375) 2,625 W4 POT ACQUIITION REERVE (of subsidiary) RE Balance (3,000) J6 (300) J8 (200) (3,500) W5 NON CONTROLLING INTERET 13,000 W2 x 40%W1 5,200 (3,500) W4 x 40% W1 (1,400) 3,800 W6 GROUP REERVE RE Parent reserves 20,000 J9 (375) 19,625 (3,500)W4 x 60% W1 (2,100) 17,525 JOURNAL ENTRIE WITH WORKING Dr. $ 000 Cr. Investment in ystan 10, % intra group loan 4,000 Investment (all) 14,800 2,000 shares x 60% x $9 per share = $10,800 Interest income 200 (-) 2 Finance costs 200 Cancellation of intra group interest PPE 1,200 (i) 3 Reserves Pre () 1,200 Fair value adjustment Page 4 of 5 (kashifadeel.com)

5 CO / RE () 300 (i) 4 PPE 300 Additional depreciation due to fair value adjustment Revenue 30,000 (ii) 5 Cost of sales 30,000 Cancellation of intra group sales and purchases CO /RE () 200 (ii) 6 Inventories 200 $4,000 x 5% = $200 Current liabilities 1,000 (iii) 7 Current assets 1,000 Cancellation of intra group receivables and payables Operating expenses / RE (P) 375 (iv) 8 Goodwill 375 Impairment of goodwill $3,000 W3x 12.5% = $375 Page 5 of 5 (kashifadeel.com)