Group Financial Statements

Transcription

1 IAS 27 & 28 IFRS 3 IFRS 10, 11 & 12 IFRS 13 Group Financial Statements 04 CONCEPT OF GROUP ACCOUNTS Many large companies actually consist of several companies controlled by one central or administrative company. Together these companies are called a group. The controlling company, called the parent (or holding) company, will own some or all of the shares in the other companies, called subsidiaries. 1 There are many reasons for businesses to operate as group; for the goodwill associated with the name of the subsidiaries, for tax or legal purposes and so forth. In many countries, company law requires that the results of a group should be presented as a whole. Consolidated financial statements ignore the legal boundaries of the separate legal entities. But why are they considered necessary? They are important because the users of parent s financial statements need to know about the financial position, results of operations and changes in financial position of the group as a whole. The shareholders of parent company can make better economic decisions if the results of group operations are presented to them as a single economic unit. For example: P Ltd has shareholding investment of 100% in S Ltd. P Ltd prepares separate financial statements in which Investment in S Ltd is shown as non-current asset. P Ltd prepares consolidated financial statements in which P Ltd includes all the assets of S Ltd as its own because P Ltd controls S Ltd and, of course, eventually all net assets of S Ltd. IMPORTANT DEFINITIONS [IAS 27] Consolidated financial statements Separate financial statements Group Parent Subsidiary Control Non-controlling interest The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity. are those presented by a parent (ie an investor with control of a subsidiary) or an investor with joint control of, or significant influence over, an investee, in which the investments are accounted for at cost or in accordance with IFRS 9 Financial Instruments. A parent and its subsidiaries. An entity that controls one or more entities. An entity that is controlled by another entity. An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Thus, an investor controls an investee if and only if the investor has all the following: (a) power over the investee; (b) exposure, or rights, to variable returns from its involvement with the investee; and (c) the ability to use its power over the investee to affect the amount of the investor s returns Equity in a subsidiary not attributable, directly or indirectly, to a parent.

2 ICMAP S1 AFA&CR 2 EXEMPTION FROM GROUP ACCOUNTING Each parent must present consolidated financial statements. However following may not need to present consolidated financial statements, if and only if: (a) the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting the consolidated financial statements; (b) the parent s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets); (c) (d) the parent did not file, not is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in the public market; and the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRSs. WHY DIRECTORS MAY NOT WISH TO CONSOLIDATE? Sometimes directors do not wish to consolidate subsidiaries because of poor operational results of such subsidiaries. The exclusion of a subsidiary from consolidation is a common method used by entities to manipulate their results. If a subsidiary which carries a large amount of debt can be excluded, then the gearing of the group as a whole will be improved. In other words, this is a way of taking debt off the SFP. However non-consolidation is prohibited in these cases. In order to exclude an entity from consolidation, the control must actually be lost. NON COTERMINOUS YEAR ENDS The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall be prepared as of the same reporting date. When the reporting dates of the parent and a subsidiary are different: (a) the subsidiary shall prepare (for consolidation purposes) additional financial statements as of reporting date of parent s financial statements unless impracticable. (b) if reporting date is different, adjustments shall be made for the effects of significant transactions for events that occur between two reporting dates. (In any case difference between two reporting dates should not exceed three months). UNIFORM ACCOUNTING POLICIES Consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events in similar circumstances. Adjustments must be made where members of a group use different accounting policies, so that their financial statements are suitable for consolidation. START / END OF CONSOLIDATION An entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it gains control (acquisition date) until the date when the entity ceases to control (disposal date) the subsidiary.

3 Class Notes CONSOLIDATION PRINCIPLES Generally, the financial statements of parent and subsidiary are to be combined on line-byline basis. The consolidated financial statements are to be presented using the concept that the group is a single entity. In other words, inter-company transactions and their effect is to be eliminated. Subsidiary s results, assets and liabilities are to be consolidated on whole basis, and the NCI should be calculated and presented separately. 3 Only parent s share capital and share premium are presented in consolidated financial statements. PRE and POST ACQUISITION PROFITS Acquisition date is date when parent entity acquires control of subsidiary. In order to calculate goodwill, subsidiary s reserves at the date of acquisition are important to be determined. These are called pre-acquisition reserves. Any change in reserves after this date is denoted as post-acquisition reserves. Remember: Net Assets = Equity = Equity Share Capital + Reserves & that s why Net Assets at acquisition = Equity Capital + Pre-acquisition Reserves CONSOLIDATED SFP: BASIC WORKINGS W1 GROUP STRUCTURE S Name Subsidiary Acquisition date:?? Group??% NCI??% Rs.000 W2 NET ASSETS (of subsidiary) AT ACQUISITION S Equity share capital Reserves (pre-acquisition) J? / () W3A GOODWILL (Partial) S Investment (Fair value of consideration provided) Less: Net assets (capital + reserves) at acquisition W2 x G% W1 () Goodwill (negative goodwill) at acquisition J? impairment / transfer (X) In exam questions, it is usually stated as: it is group policy to value the NCI at proportion of net assets method. W3B GOODWILL (Full) S Investment (Fair value of consideration provided) Less: Net assets (capital + reserves) at acquisition W2 x G% W1 () Goodwill related to parent Fair value of NCI X Less: Net assets (capital + reserves) at acquisition W2 x N% W1 (X) Goodwill of NCI X Goodwill (negative goodwill) at acquisition J? impairment / transfer (X) In exam questions, it is usually stated as it is group policy to value the NCI at its fair value at the date of acquisition.

4 ICMAP S1 AFA&CR W4 POST ACQUISITION RESERVES (of subsidiary) RS OR RE Total reserve pre reserves balance J? X /(X) X /(X) X /(X) 4 W5 NON CONTROLLING INTEREST Net assets (capital + reserves) at acquisition W2 x N% W1 NCI goodwill W3 [only in case of full goodwill method] Post-acquisition reserves W4 x N% W1 S W6 GROUP RESERVES RS OR RE Parent reserves J? X /(X) X /(X) X /(X) Post-acquisition reserves W4 x G% W1 The pre-acquisition reserves of subsidiary are not included in group reserves because they have not been earned by the group. QUESTION 01 The draft SFPs of PK and SL on 31 December 2010 are as follows: PK SL Rs.000 Rs.000 Property, plant and equipment Investment in SL at cost 110 Current assets Ordinary share capital Retained earnings Current liabilities PK had bought 80% of the ordinary shares of SL on 1 January 2010 when the retained profits of SL were Rs.10,000. No impairment of goodwill has occurred to date. Prepare a consolidated SFP as at 31 December 2010, assuming that PK group values the NCI using the proportion of net assets method. QUESTION 02 The draft SFPs of Ping and Sing on 31 December 2008 are as follows: Ping Sing Rs. Rs. Tangible assets 85,000 18,000 Investment in Sing at cost 60,000 Current assets 160,000 84, , ,000 Ordinary share capital 65,000 20,000 Share Premium 35,000 10,000 Retained earnings 70,000 25,000 Current liabilities 135,000 47, , ,000

5 Class Notes Ping acquired its 80% holding in Sing on 1 January 2008, when Sing s retained earnings stood at Rs.20,000. On this date, the fair value of the 20% NCI in Sing was Rs.12,500. There has been no impairment of goodwill since acquisition. The Ping group uses the full goodwill method to value the NCI. Prepare the Consolidated SFP as at 31 December ADJUSTMENTS: INTRA GROUP TRADING Trade payables (-) 1 Trade receivables Intra group current account balances Parent and subsidiary may trade with each other. In such case, it is possible that one company in group has amount owed to other company. As in consolidation group is considered to be a single entity such balances should be cancelled. 5 In same way, any other balances (e.g. interest or dividend receivable and interest or dividend payable) within group are cancelled against each other. Trade payables (-) 2 Inventory / Cash / Bank overdraft Trade receivables Goods / Cash in Transit At year end, current accounts may not agree due to goods in transit or cash in transit. In such case, the following entry may be passed. RE / COS (seller company) (-) 3 Inventory Unrealized Profit in Inventory A group company may buy inventory from the other in post acquisition period. To the extent, such inventory is sold outside group, the profit is realized to group and so, no adjustment is required. However, for inventory not yet sold outside group, the unrealized profit portion included in inventory should be eliminated. RE / Other Income (seller company) (-) 4 PPE Unrealized Profit in Sale of Non-Current Assets A group company may buy non-current asset from the other in post acquisition period and recognize the resultant gain or loss in its individual financial statements. Such unrealized gain or loss should be eliminated from RE and PPE etc. PPE (-) 5 RE / Cost of Sales (buyer company) Extra depreciation due to unrealized Profit in Sale of Non-Current Assets As the buyer company records the asset bought on higher amount, the depreciation charged is also higher which should be reversed considering group as a single entity.

6 ICMAP S1 AFA&CR 6 QUESTION 03 The draft SFPs of PIN and SIN on 31 March 2007 are as follows: PIN SIN Rs.000 Rs.000 Tangible non-current assets Investment in SIN at cost 180 Current assets Inventory Trade receivables Cash Ordinary share capital Share Premium 0 30 Retained earnings % Loan notes 65 Current liabilities (i) PIN bought 80,000 shares in SIN on 1 April 2001 when Sin s reserves included a share premium of Rs.30,000 and retained profits of Rs.5,000. (ii) PIN accounts show Rs.6,000 owing to SIN; SIN s accounts show Rs.8,000 owed by PIN. The difference is explained as cash in transit. (iii) During the year, SIN sold goods of Rs.60,000 to PIN at a selling margin of 25%. PIN s inventory still includes one third of this inventory. Prepare a consolidated SFP as at 31 March 2007, assuming that PIN group values the NCI using the proportion of net assets method. ADJUSTMENTS: GOODWILL RE / COS / Operating expenses (Parent) (-) 6 Goodwill Impairment of goodwill (partial) Under IFRS 3 goodwill is annually tested for impairment. As under partial goodwill method, the goodwill only relates to owners of parent (and not to NCI) the impairment loss should only be charged to Parent s RE. Sometimes, notional goodwill is to be calculated under this method to determine the amount of impairment loss. RE / COS /Operating expenses (S) (-) 7 Goodwill Impairment of goodwill (full) Under IFRS 3 goodwill is annually tested for impairment. As under full goodwill method, the goodwill relates to owners of parent and to NCI as well, the impairment loss should be charged to Parent s RE and NCI both according to their respective shareholding. Goodwill (-) 8 RE /Other Income (Parent) Negative goodwill The cost of investment may be less than the value of net assets purchased, so the negative goodwill arises. Most likely reason may be a misstatement of fair value of net assets acquired or consideration given, so IFRS 3 requires that in such cases the calculation should be reviewed. After any such review, any negative goodwill is credited directly to SPL.

7 Class Notes ADJUSTMENTS: INVESTMENT IN SUBSIDIARY Investment in subsidiary Cash Share Capital (parent) (-) 9 Share Premium (parent) Deferred consideration Contingent consideration Any other consideration given Recording of investment Consideration paid for a subsidiary must be accounted for at fair value. This consideration includes the cash paid and fair value of other consideration. Incidental costs of acquisition such as legal, accounting, valuation and other professional fees should be expensed as incurred. 7 Sometimes, a parent issues its own shares to (previous) shareholders of subsidiary in exchange of shares of subsidiary purchased from them. The shares issued should be recorded at market value at the date of transaction with any excess over par value to be credited to share premium account. Deferred consideration is amount payable in future usually after 12 months or more. Initially such deferred consideration should be recorded as liability at its fair value (i.e. its present value using entity s cost of capital). Any contingent consideration should always be included (usually as liability) as long as it can be measured reliably even if it is not probable of payment at the date of acquisition. This will be indicated where relevant in an exam question. Where contingent consideration involves issue of shares, there is no liability (obligation to transfer economic benefits). This should be recognized, in such cases, under the equity as shares to be issued. Some exam question state that only cash consideration has been recorded. In such case, record the remaining consideration and debit the investment in subsidiary. Some exam question state investment figure which includes investment in subsidiary and other investments as well. In such case, we have to separate investment in subsidiary from other investment. This is done by debiting the investment in subsidiary and crediting investment. RE / Finance costs (Parent) (-) 10 Deferred consideration / Contingent Consideration etc. Subsequent changes in Deferred / Contingent consideration As the time passes by, the present value of deferred (or contingent) consideration increases. Such increase should not affect cost of investment and should be recognized as finance cost. This is also called unwinding of discount. ADJUSTMENTS: NET ASSETS ACQUIRED PPE / Other asset etc. (-) 11 Pre-acq. reserves (Subsidiary) Fair value adjustment IFRS 3 requires that the subsidiary s assets and liabilities are recorded at their fair value at the date of acquisition for the purposes of calculation of goodwill etc. Adjustments will therefore be required where the subsidiary s accounts themselves do not reflect fair value. The assets and liabilities not included in the subsidiary s own SFP, including contingent assets and liabilities are to be included in consolidated financial statements if they meet recognition criteria.

8 ICMAP S1 AFA&CR 8 RE / COS /Operating expenses (Subsidiary Post Acq.) (-) 12 PPE or other assets realized Depreciation impact of fair value adjustment If amount of assets of subsidiary is increased due to fair value adjustment, then this implies that further depreciation should be recognized as well for this increase over remaining useful life of the assets. IFRS 3: GUIDANCE ON FAIR VALUE MEASUREMENT GENERAL IMPORTANT Restructuring and future losses IFRS 3 sets out general principles for arriving at the fair values of a subsidiary s assets and liabilities. The acquirer should recognize the acquiree s identifiable assets liabilities and contingent liabilities at the acquisition date only if they satisfy the following criteria. (a) In the case of an asset other than an intangible asset, it is probable that any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably. (b) In the case of a liability other than a contingent liability, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and its fair value can be measured reliably. (c) In the case of an intangible asset or a contingent liability, its fair value can be measured reliably. The acquiree s identifiable assets and liabilities might include assets and liabilities not previously recognized in the acquiree s financial statements. For example, a tax benefit arising from the acquiree s tax losses that was not recognize by the acquiree may be recognized by the group if the acquirer has future taxable profits against which the unrecognized tax benefits can be applied. An acquirer should not recognize liabilities for future losses or other costs expected to be incurred as a result of the business combination. IFRS 3 explains that a plan to restructure a subsidiary following an acquisition is not a present obligation of the acquiree at the acquisition date. Neither does it meet the definition of a contingent liability. Therefore an acquirer should not recognize a liability for such a restructuring plan as part of allocating the cost of the combination unless the subsidiary was already committed to the plan before the acquisition. Intangible assets This prevents the creative accounting. An acquirer cannot set up a provision for restructuring or future losses of a subsidiary and then release this to profit or loss in subsequent periods in order to reduce losses or smooth profits. The acquiree may have intangible assets, such as development expenditure. These can be recognized separately from the goodwill only if they are identifiable. An intangible asset is identifiable only if it: (a) Is separable, ie capable of being separated or divided from the entity and sold, transferred, or exchanged, either individually or together with a related contract, asset or liability, or (b) Arises from contractual or other legal rights.

9 Class Notes Contingent liabilities Measurement period Contingent liabilities of the acquire are recognized of their fair value can be measured reliably. This is a departure from the normal rules in IAS 37; contingent liabilities are not normally recognized, but only disclosed. After their initial recognition, the acquirer should measure contingent liabilities that are recognized separately at the higher of: (a) The amount that would be recognized in accordance with IAS 37. (b) The amount initially recognized. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, provisional figures for the consideration transferred, assets acquired and liabilities assumed are used. Adjustments to the provisional figures may be made up the point the acquirer receives all the necessary information (or learns that is not obtainable), with a corresponding adjustment to goodwill, but the measurement period cannot exceed one year from the acquisition date. 9 Thereafter, goodwill is only adjusted for the correction of errors. CSFP: MIDYEAR ACQUISITIONS If a parent company acquires a subsidiary during the current year, the net assets (equity) at the date of acquisition are calculated as follow: = Net assets (equity) at start of year + Profits up to date of acquisition It is assumed that Subsidiary s profit after tax accrues evenly over time unless indicated otherwise. QUESTION 04 Paint acquired 80% of the share capital of Saint two years ago, when the reserves of Saint stood at Rs.125,000. Paint paid initial cash consideration of Rs. 1 million. Additionally Paint issued 200,000 shares with a nominal value of Rs. 1 and a current market value of Rs It was also agreed that Paint will pay a further Rs.500,000 in three years time. Current interest rates are 10% per annum. The appropriate discount factor for Rs. 1 receivable three years from now is The shares and deferred consideration have not yet been recorded. Statement of financial position of Paint and Saint as at 31 December 2004 Paint Rs.000 Saint Rs.000 Investment in Saint at cost 1,000 Non- current assets 5,500 1,500 Current assets Inventory Receivables Cash ,650 1,850 Share capital 2, Retained earnings 1, , Non-current liabilities 3, Current liabilities 1, ,650 1,850

10 ICMAP S1 AFA&CR 10 At acquisition the fair values of Saint s non-current assets exceeded their book value by Rs.200,000. They had a remaining useful life of five years at this date. The consolidated goodwill has been impaired by Rs.258,000 of its value. The Paint group values the noncontrolling interest using the full goodwill method. At the date of acquisition the fair value of the 20% non-controlling interest was Rs.380,000. Required: Prepare the consolidated statement of financial position at 31 December 2004 QUESTION 05 CSFP PE 401 Nov Following is the Statement of Financial Position of A Limited and B Limited as of December 31, 2009: (Rupees in.000) A Limited B Limited Non-Current Assets Property, plant and equipment 47,000 38,000 Investment in B Limited 34,400 Current Assets Inventory 5,000 6,000 Trade receivables 12,500 12,000 Cash and cash equivalents 4,100-21,600 18,000 Total Assets 103,000 56,000 Liabilities and Equity Share capital 43,000 20,000 Revaluation reserve 11,000 5,000 Retained earnings 24,000 26,000 78,000 51,000 Payables 25,000 5,000 Total Liabilities and Equity 103,000 56,000 Additional Information: (i) A Limited acquired 80% of the ordinary shares of B Limited on January 1, 2009 when B Limited had balance in its retained earnings account of Rs.6 million. There is no change in revaluation reserve account of B Limited since the date of acquisition. (ii) B Limited sells goods to A Limited at cost plus 20%. A Limited has unsold goods to the value of Rs.3 million in the inventory as of December 31, (iii) Trade receivable of B Limited include an amount of Rs.1 million due from A Limited. (iv) There is no impairment of goodwill. Required: Prepare the Consolidated Statement of Financial Position of.a. Limited as of December 31, (20)

11 Class Notes QUESTION 06 CSFP B F2 EQB 10 Reprise purchased 75% of Encore for Rs. 2,000, years ago when the balances on its retained earnings was Rs. 1,044,000. The statements of financial position of the two companies as at 31 March 20X4 are as follows; Reprise Rs. 000 Encore Rs. 000 Non current assets Land and building 3,350 - Plant and equipment 1,010 2,210 Motor vehicles Investment in Encore 2,000-6,870 2,555 Current assets Inventories Trade and other receivables 1, Cash and cash equivalents , ,221 3, Equity Share capital (Rs. 1 ordinary shares) 1, Retained earnings 4,225 2,610 Revalution surplus 2,500-7,725 3,110 Non current liabilities 10% debentures Current liabilities Trade payables ,221 3,472 The following additional information is available; (1) Included in trade receivables of Reprise are amounts owed by Encore of Rs. 75,000. The current accounts do not at present balance due to a payment of Rs. 39,000 being in transit at the year ende of Encore. (2) Included in the inventories of Encore are items purchased from Reprise during the year for Rs. 31,200. Reprise marks up its goods by 30% to achieve its selling price. (3) Rs. 180,000 of the recognized goodwill arising is to be written off due to impairment losses. (4) Encore shares were trading at Rs just prior to acquisition by Reprise. Required: Prepare the consolidated statement of financial position for the Reprise Group of companies as at 31 March 20X4. It is the group policy to value the non- controlling interest at full (or fair) value.

12 ICMAP S1 AFA&CR CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 12 Revenue (Adjustment Column) (-) 1 Cost of Sales (Adjustment Column) Intra group sales and purchases (TRADING) Parent and subsidiary may trade with each other. For consolidation, group is considered to be a single entity such sales and purchases should be eliminated. However, such adjustment shall have no effect on SFP as net effect on RE is nil. In same way, any other transactions (e.g. interest income and interest expense) within group are cancelled against each other. The unrealized profit in inventory is adjusted in seller s financial statements. In the same way, other transactions are adjusted. IMPORTANT POINTS Expense for the year only NCI share Mid year acquisitions Once any expense (e.g. impairment) is identified, only the charge for the year will be recognised. Impairment of goodwill is usually charged in operating expenses, however, examiner may require otherwise. This is simply: Subsidiary s profit after tax x NCI% Subsidiary s OCI x NCI% If subsidiary is acquired part way through the year, then the subsidiary s results should only be consolidated from the date of acquisition, i.e. the date on which control is obtained. For this purpose, it is often assumed that profit accrues evenly throughout the year. QUESTION 07 The draft SPLs of PINT and SINT for the year 31 March 2009 are as follows: PINT SINT Rs.000 Rs.000 Sales revenue 303, ,700 Cost of Sales (143,800) (102,200) Gross Profit 159, ,500 Operating costs (71,200) (51,300) Other Income 2,800 1,200 Profit before tax 91,400 65,400 Taxation (46,200) (32,600) Profit after tax 45,200 32,800 On 30 November 2008 PINT acquired 75% of the issued ordinary capital of SINT. The profits of both companies are deemed to accrue evenly over the year. Prepare a consolidated statement of profit or loss for the year ended 31 March 2009.

13 Class Notes QUESTION 08 The draft SPLs of PONG and SONG for the year ended 31 December 2007 are set out below. On 1 January 2006 PONG purchased 75,000 ordinary shares in SONG at a cost of Rs.170,000. The issued share capital of SONG is Rs.100,000 Rs.1 ordinary shares. At that date the retained earnings of SONG showed a credit balance of Rs.60,000. PONG SONG Rs.000 Rs.000 Sales revenue Cost of Sales (360) (140) Gross Profit Operating costs (93) (45) Finance Costs 0 (3) Profit before tax Taxation (50) (32) Profit after tax The following information is relevant: 1. During the year SONG sold goods to PONG for Rs.20,000, making a markup of onethird. Only 20% of these goods were sold before the end of year, the rest were still in inventory. 2. Goodwill has been subject to an impairment review at the end of each year since acquisition. The first review at the end of last year revealed an impairment of Rs.4,000 and the review at the end of this year revealed another impairment of Rs.6,000. The current impairment is to be recognized as operating costs. Prepare a consolidated statement of profit or loss for the year ended 31 December CONSOLIDATED STATEMENT OF CHANGES IN EQUITY The figures in the statement involve no new calculations. They are worked out as follows: (a) The opening and closing balances of equity attributable to owners of the parent are calculated by adding together the parent share capital and the group reserves balance calculated using the workings you have prepared for consolidated statement of position examples. (b) The opening and closing balance non-controlling interest balances are also calculated using the workings you have seen in the context of the statement of financial position. (c) The figures for total comprehensive income are taken from the reconciliation at the end of the statement of comprehensive income. (d) The dividend shown in equity attributable to owners of the parent is the dividend paid by the parent. (e) The dividend shown in the non-controlling interest column is the non-controlling interest share of the dividend paid by the subsidiary.

14 ICMAP S1 AFA&CR 14 QUESTION 09 CSPL PE 401 May X Limited acquired 75% of the ordinary shares of Y Limited on January 1, The summarized Income Statements of the two companies for the year ending December 31, 2010 are as follows: X Limited Y Limited (Rs..000) (Rs..000) Sales 78,000 42,000 Cost of sales (33,000) (24,000) Gross profit 45,000 18,000 General and administrative expenses (11,000) (6,000) Selling and distribution expenses (3,000) (2,000) Profit before taxation 31,000 10,000 Taxation (9,000) (3,000) Profit after taxation 22,000 7,000 Retained earnings b/f 88,000 16,000 Retained earnings c/f 110,000 23,000 Additional information: (i) During the year, Y Limited sold goods worth of Rs.5,000,000 to X Limited at cost plus 25% profit. 50% of the goods remained in the inventory of X Limited as of December 31, (ii) Y Limited has proposed a dividend of Rs.2,000,000 to its ordinary shareholders on December 31, (iii) At the time of acquisition, Y Limited had pre-acquisition profits of Rs.5,000,000. Required: Prepare Consolidated Statement of Comprehensive Income of.x. Limited for the year ended December 31, (15) QUESTION 10 CSPL PE 401 May Part (a) Investor Limited acquired 27 million Rs.10 shares of Investee Limited on January 1, This acquisition was effected by means of an exchange of 3 shares in Investor Limited for every 5 shares in Investee Limited. In addition, Rs.100 million were to be paid after two years. Market price of Investor Limited.s shares at acquisition was Rs.20 each. (Considering 12% as cost of capital of the Investor Limited, PV of Rs.1 receivable in two years time may be taken as Rs.0.797). Fair value of the plant at acquisition was Rs.25 million against the book value of Rs.20 million. The plant had a remaining useful life of 5 years. Depreciation is to be charged using straight line method. At acquisition, Investee Limited had unrelieved tax losses of Rs.25 million. Directors of the Investor Limited believed that these losses could be utilized and hence should be recognized as deferred tax asset. Share capital and reserves of Investee Limited at acquisition were Rs.300 million (of Rs.10 each) and Rs.25 million respectively. Applicable tax rate is 35%. Required: Find goodwill at acquisition. (05)

15 Class Notes Part (b) Alpha Limited acquired 65% of share capital of Beta Limited for Rs.2.6 million on October 01, 2008 when the book value of the net assets of Beta Limited was Rs.3.35 million. The statements of comprehensive income for the year ended March 31, 2009 were: Alpha Ltd. Beta Ltd. (Rs..000) (Rs..000) Sales 5,000 2,910 Cost of goods sold (3,000) (2,120) Gross profit 2, Administrative expenses (1,000) (150) Selling and distribution expenses (650) (180) Operating profit Other income Financial charges (50) (210) Profit/(loss) before taxation Taxation (300) (70) Profit/(loss) after taxation Additional information: (i) On October 01, 2008, Beta Limited issued Rs.1.8 million 5% debentures to Alpha Limited. Both companies have accounted for the interest receivable/ payable at 31st March (ii) The fair value of the plant of Beta Limited on October 01, 2008 was in excess of its book value by Rs.200,000. The plant has remaining useful life of 20 years at that date. Beta Limited has not adjusted its accounting records to reflect fair value. (iii) Beta Limited sold goods amounting to Rs.360,000 at a markup of 20% on cost. Rs.60,000 of goods were still unsold at the end of the period. (iv) Both companies use straight-line method of depreciation and charge a full year's depreciation in the year of acquisition and none in the year of disposal. Depreciation on fair value adjustments is time apportioned from the date of acquisition. (v) It is the group's policy to value non-controlling interest at its proportionate share of the fair value of the subsidiary's identifiable net assets. Required: Prepare the Consolidated Income Statement for Alpha Group for the year ended March 31, (15) QUESTION 11 CSPL + CSFP PE 401 Aug PK Limited acquired 75% shares of SK Limited on January 1, 2009 on SK Limited's incorporation. The summarized financial statements of the two companies for the year ended December 31, 2011 are as follows: Income Statement For the year ended December 31, 2011 PK Limited SK Limited (Rs..000.) Sales 85,000 38,000 Cost of sales (44,500) (20,000) Gross profit 40,500 18,000 Other income - Dividend from SK Limited 2,250 - Operating expenses (9,000) (8,000) Profit before tax 33,750 10,000 Income tax expense (10,500) (2,000) Profit after tax 23,250 8,000 Dividends paid 6,000 3,000

16 ICMAP S1 AFA&CR Movement in retained earnings: Retained earnings balance b/f 87,000 17,000 Profit retained 17,250 5,000 Retained earnings balance c/f 104,250 22, Statements of Financial Position As at December 31, 2011 PK Limited SK Limited Non-Current Assets (Rs..000.) Property, plant and equipments 125,000 60,000 Investments 37, ,500 60,000 Current assets 58,750 27,000 Total Assets 221,250 87,000 Equity Ordinary shares of Rs.10 each 100,000 50,000 Retained earnings 104,250 22, ,250 72,000 Current liabilities 17,000 15,000 Total Equity and Liabilities 221,250 87,000 Additional Information: During the year SK Limited recorded sales to PK Limited for Rs.10,000,000. SK Limited applies mark-up of 25% over cost. One half of the goods remained unsold and appeared in PK Limited inventory as at December 31, PK Limited and SK Limited paid dividends of Rs.6,000,000 and Rs.3,000,000 respectively to their shareholders on December 31, Required: (i) Prepare the Consolidated Income Statement and Statement of Changes in Retained Earnings for the year ended December 31, (12) (ii) Prepare Consolidated Statement of Financial Position as of December 31, (13) QUESTION 12 CSPL CSCE B F2 EQB 11 Fallowfield acquired a 60% holding in Rusholme three years ago when Rusholme s equity was Rs. 56,000 (share capital Rs. 40,000 plus reserves Rs. 16,000). Both businesses have been very successful since the acquisition and their respective income statements for the year ended 30 June 20X8 are shown below; Fallowfield Rs. Rusholme Rs. Revenue 403, ,000 Cost of sales (201,400) (92,600) Gross profit 202, ,400 Distribution costs (16,000) (14,600) Administration costs (24,250) (17,800) Dividends for Rusholme 15,000 - Profit before tax 176,750 68,000 Income tax expense (61,750) (22,000) Profit for the year 115,000 46,000

17 Class Notes Statement of changes in equity (extract) Fallowfield Rs. Rusholme Rs. Balance as at 30 June 20X7 243, ,000 Profit for the period 115,000 46,000 Dividends (40,000) (25,000) Balance at 30 June 20X8 318, , Additional information: (1) During the year Rusholme sold some goods to Fallowfield for Rs. 40,000, including 25% mark up. Half of these items were still in inventories at year end. (2) Fallowfield had 80,000 Rs.1 shares in issue throughout the year. Required: Produce the consolidated income statement and statement of changes in equity (showing parent and non controlling interest shares) of Fallowfield Co and its subsidiary for the year ended June 30, 20X8. Goodwill is to be ignored. QUESTION 13 Basic Consolidation PE Model 2013 Q1ab The Nutra group carries on business of import and supply of nutrition products range in the country for infant only. Nutra was incorporated in 2006 and expanded its business activities to include the distribution of its product and import of other range of nutrition products by the acquisition of shares in Prime in 2010 and in Gohar in The draft statements of profit or loss for Nutra, Prime and Gohar for the year ended June 30, 2012 are as follows: Nutra Limited Prime Limited Gohar Limited (Rs. in million) Revenue 44,000 30,000 25,000 Cost of sales (30,800) (19,500) (18,750) Gross profit 13,200 10,500 6,250 Operating expenses (6,800) (5,400) (2,500) Finance costs (325) (100) (150) Profit / (Loss) before tax 6,075 5,000 3,600 Income tax expenses (1,800) (1,500) (1,080) Profit / (Loss) after tax 4,275 3,500 2,520 The draft statements of financial position for Nutra, Prime and Gohar for the year ended June 30, 2012 are as follows; Nutra Limited Prime Limited Gohar Limited Non-Current Assets (Rs. in million) Property, plant and equipment 14,000 17,500 12,000 Investments: Shares in Prime 10, Shares in Gohar 13, Loan assets Current Assets Inventories 14,000 12,000 5,520 Accounts receivable 8,000 6,000 3,000 Cash and bank 2,000 2,000 1,000 24,000 20,000 9,520 61,600 37,500 21,520 Equity Ordinary share Rs.10 each 20,000 8,000 7,000 Retained earnings 26,500 18,200 11,520 46,500 26,200 18,520

18 ICMAP S1 AFA&CR Long-term Liabilities Long-term loan 1, ,000 Current Liabilities Current liabilities 13,300 10,500 2,000 61,600 37,500 21, The following information is available related to Nutra, Prime and Gohar: (i) On 1st July 2010 Nutra acquired 640 million shares in Prime for Rs.10,000 million at which date there was a credit balance on the retained earnings of Prime of Rs.2,425 million. No shares have been issued by Prime since Nutra acquired its interest. (ii) (iii) (iv) (v) (vi) (vii) On 1st Jan 2012 Nutra acquired 420 million shares in Gohar for Rs.13,500 million. No shares have been issued by Gohar since Nutra acquired its interest. It is assumed that profit of Gohar accrue evenly throughout the year. During the year, Prime made inter-company sales to Nutra of Rs.260 million making a profit of 25% on cost and Nutra could sell only 75% of these goods during the period. On 1st April 2012 Nutra imported machine having landed cost of Rs.200 million and sold Prime for Rs.240 million. Nutra kept this machine in inventory. Prime has included this machine in its non-current assets. Prime charge 20% on machine and full year s depreciation is charged in the year of acquisition in cost of sales. Prime purchased a new wrapping machine for packaging of its finished material to avoid damages during distribution of goods. The cost of machine was Rs.500 million before trade discount of 10%, which was charged to profit or loss. Depreciation is 20% on machine and full year.s depreciation is charged in the year of acquisition to the cost of sales. Nutra has a loan assets carried at Rs.100 million and held at amortized cost. The effective interest rate is 10%. On 1st July 2011, Nutra felt that because of the financial problem of the borrower, it would receive Rs.40 million in two years. time i.e., 30 June At year end Nutra still expects to receive same amount on the same date. These facts were not accounted for in the draft financial statements. It is group policy to account for non-controlling interest on a proportionate basis. The goodwill of Prime has been fully written off as a result of an impairment review which took place in Required: (a) Prepare Consolidated Statement of Profit or Loss for the year ended June (14) (b) Prepare Consolidated Statement of Financial Position as at June 30, (21) QUESTION 14 Basic Consolidation PE Extra 2014 Q1ab Innovators Ltd., an engineering company, is engaged in manufacturing and supply of industrial machines. The company is specialized in textile machinery and is engaged in this business for the last 20 years. In 2010, management decided to increase the business by manufacturing machinery for other industries as well. This required huge investment and long time to setup the basic structure, so the management decided to acquire another company. On July 1, 2011, Innovators Ltd., purchased 8 million shares of Elite Engineering at Rs. 25 per share.

19 Class Notes Elite Engineering is newly incorporated company engaged in manufacturing and supply of machinery related to a Fast-Moving Consumer Goods (FMCG) company. Till the time of acquisition, Elite Engineering could not gain good market share but Innovators Ltd., expected that they would capture good market share using their experience and goodwill. On January 1, 2013, after successful operation of Elite Engineering, the management of Innovators Ltd., also acquired 60% share in Alco Company, importer and supplier of machine parts. Innovators Ltd., paid Rs per share at the time of acquisition and would pay Rs. 2.8 per share after one year. Innovators Ltd..s cost of capital is 12%. 19 The summarised statements of profit or loss of three companies for the year ended June 30, 2013 are: Statement of Profit or Loss Rs. 000 Innovators Limited Elite Engineering Alco Company Revenue 225, ,300 72,000 Cost of sales (141,000) (68,850) (54,000) Gross profit 84,000 36,450 18,000 Marketing and distribution expenses (11,100) (4,050) (3,150) Administrative expenses (18,750) (8,100) (5,850) Other income (including dividend) 15,000 1, Financial charges (3,000) (1,215) (450) Profit before tax 66,150 24,085 9,050 Income tax (15,600) (4,860) (3,600) Profit after tax 50,550 19,225 5,450 Additional Information: (i) The fair value of net assets of Elite Engineering was higher than carrying value by Rs. 20 million, which pertains to the property having remaining useful life of 20 years at acquisition. While the fair value of Alco Company was higher than carrying value by Rs. 10 million, which pertains to the plant having remaining useful life of 10 years at the date of acquisition. It is the company policy to charge depreciation of above assets to cost of sales. (ii) The statement of changes in equity showed following balances: Rs. in.000. Items Innovators Ltd. Elite Engineering Alco Company 30/06/ /06/ /06/ /06/2012 Share capital (Rs.10 each) 250, , ,000 80,000 Share premium 100,000 25,000 25,000 5,000 Retained earnings 160,000 40,000 55,000 12,000 No new shares have been issued by any company in (iii) In May 2013, Innovators Ltd., received an order of supply of a machine from a FMCG company for Rs. 5 million. The management of Innovators Ltd., asked Elite Engineering to supply the machine. In June 2013, Elite Engineering imported this machine for Rs million and supplied the same to Innovators Ltd., for Rs million. Innovators Ltd., after customer satisfaction delivered the machine in July The revenue from the machine was recorded in the month of July 2013 by Innovators Ltd. (iv) In March 2013, Alco Company sold machine parts to Innovators Ltd., for Rs million and charged 20% margin on sales. 50% of these parts are still in the inventory of Innovators Ltd., at year-end.

20 ICMAP S1 AFA&CR (v) In January 2013, Innovators Ltd., and Alco Company paid interim dividends of Rs. 2 and Re. 1 per share respectively on all shares in issue at that date. On June 30, 2013, Elite Engineering also paid dividend of Rs. 1.5 per share as final dividend. 20 (vi) On July 1, 2012, Elite Engineering recognized development expenditure of Rs million as intangible assets. This is being amortized over its useful life of four years. However, on further investigation, it was discovered that only Rs million of the development expenditure should have been capitalized at July 1, The remaining balance does not meet the capitalization criteria of IAS-38, Intangible Assets. The useful life was reassessed and this was confirmed as being correct as at the date of capitalization. All research and development costs are presented in marketing and distribution cost. (vii) It is company policy to value non-controlling interest using the proportionate share of the subsidiary's identifiable net assets. All items in the above statement of profit or loss are deemed to accrue evenly over the year. Required: (a) Calculate Goodwill. (08) (b) Prepare Consolidated Statement of Profit or Loss of Innovators Group for the year ended June 30, (27) IAS 28: ASSOCIATE AND JOINT VENTURE Associate is an entity over which investor has significant influence. Significant Influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. A holding of 20% or more of the voting power is presumed to give significant influence, unless it can be clearly demonstrated that this is not the case. A joint venture is a form of joint arrangement where the parties have joint control of the arrangement and have rights to the net assets of the arrangement. This will normally be established in the form of a separate entity to conduct the joint venture activities. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. IAS 28: METHOD OF ACCOUNTING Associates and joint ventures are not consolidated rather they are accounted for under the equity method. The equity method is a method of accounting whereby the investment 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.

21 Class Notes IAS 28: EQUITY METHOD: ADJUSTMENTS Investment in associate/jv (-) 1 Cash or other consideration given Initial investment in associate This is recorded in the same way as investment in subsidiary is recorded. Investment in associate / JV 4,500 (-) 2 Revaluation surplus / OCI (Parent) 1,500 RE / Share of profit from associate (Parent) 3,000 Share of Change in net assets of associate This is debited to investment in associate. Only group share is taken. For example, if a 30% associate earned profit of Rs.10,000 and increased its revaluation surplus by Rs.5,000. We will pass entry with amounts as given above. 21 Dividend income (P) (-) 3 Investment in associate Dividend from associate For consolidation, this is not to be shown in statement of profit or loss, rather credited to investment. RE / Share of Profit from associate/jv (Parent) Dr. (-) 4 Investment in associate / JV Cr. Impairment Loss This is calculated by comparing carrying value of investment in associate with group share of recoverable amount of associate. RE / Share of Profit from associate / JV (Parent) Dr. (-) 5 Investment in associate Cr. Unrealized profit in inventory or other assets (Downstream: Parent is seller) Only group share is to be eliminated. (Remember in case of subsidiary whole unrealized profit is eliminated.) RE / Cost of sales (Parent) Dr. (-) 6 Inventory Cr. Unrealized profit in inventory or other asset (Upstream: Associate is seller) Only group share is to be eliminated. (Remember in case of subsidiary whole unrealized profit is eliminated.) As associates are considered outside group, the balances between group companies are not cancelled. In the same way, sales and purchases are not cancelled as well. QUESTION 15 The following are the summarized accounts of P, S and A. Statement of profit or loss P S A For the year ended 31 December 2004 Rs. Rs. Rs. Sales revenue 573, , ,000 Cost of sales (300,000) (200,000) (90,000) Gross profit 273, ,000 60,000 Operating costs (20,000) (14,000) (8,000) Dividend income from A 4,000 Dividend from other sources 10,000 Profit before tax 267, ,000 52,000 Tax (72,000) (30,000) (16,000) Profit after tax 195,600 70,000 36,000

22 ICMAP S1 AFA&CR 22 Statement of Financial Position P S A As at 31 December 2004 Rs. Rs. Rs. Investment in S Ltd (60%) 60,000 Investment in A Ltd (25%) 50,000 Other assets 300, , , , , ,000 Ordinary shares 20,000 30,000 10,000 Retained earnings 330,000 66,000 70, ,000 96,000 80,000 Current liabilities 60,000 24,000 20, , , ,000 The shares in S and A were acquired on 1 January 2004 when the balances of retained earning accounts were Rs.20,000 and Rs.50,000 respectively. Goodwill in S has suffered an impairment of Rs.6,000 (charge to COS) and in the associate an impairment of Rs.7,000 needs to be charged. The P group values the NCI at its proportionate share of the fair value of the subsidiary s identifiable net assets. Prepare the Consolidated statement of profit or loss and consolidated statement of financial position for P group. WHEN EQUITY METHOD IS NOT USED? The equity method is not used when: The investment is classified as held for sale under IFRS 5. The investor is itself a subsidiary exempt from consolidation. IFRS 11: JOINT ARRANGEMENTS Joint arrangement is an arrangement of which two or more parties have joint control. Joint arrangements are classified as either joint operations or joint ventures. IFRS 11: JOINT OPERATIONS Definition Example Separate FS of Venturer Consolidated FS of Venturer Joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. A and B decide to enter into a joint venture agreement to produce a new product. A undertakes one manufacturing process and B undertakes the other. A and B each bear their own expense and take an agreed share of the sales revenue from the product. A venturer shall recognize in its financial statements: (a) the assets that it controls and the liabilities that it incurs; and (b) the expenses that it incurs and its share of the revenue that it earns from the sale of goods or services by the joint venture. No further adjustment or consolidation procedure is required.