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05 DEC Question

05 DEC Question

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Published by khengmai

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Published by: khengmai on Dec 31, 2009
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FinancialReporting
(International Stream)
PART 2THURSDAY8 DECEMBER2005QUESTION PAPER
Time allowed
3 hoursThis paper is divided into two sectionsSection A
This ONE question is compulsory and MUST beanswered
Section B
THREE questions ONLY to be answered
Do not open this paper until instructed by the supervisorThis question paper must not be removed from the examinationhall
   P  a  p  e  r   2 .   5   (   I   N   T   )
The Association of Chartered Certified Accountants
 
Section A – This ONE question is compulsory and MUST be attempted1
Hedra, a public listed company, acquired the following investments:(i)On 1 October 2004, 72 million shares in Salvador for an immediate cash payment of $195 million. Hedra agreedto pay further consideration on 30 September 2005 of $49 million if the post acquisition profits of Salvadorexceeded an agreed figure at that date. Hedra has not accounted for this deferred payment as it did not believeit would be payable, however Salvador’s profits have now exceeded the agreed amount (ignore discounting).Salvador also accepted a $50 million 8% loan from Hedra at the date of its acquisition.(ii)On 1 April 2005, 40 million shares in Aragon by way of a share exchange of two shares in Hedra for eachacquired share in Aragon. The stock market value of Hedra’s shares at the date of this share exchange was$2·50. Hedra has not yet recorded the acquisition of the investment in Aragon.The summarised balance sheets of the three companies as at 30 September 2005 are:
HedraSalvadorAragon
Non-current Assets
$m$m$m$m$m$m
Property, plant and equipment358240270Investmentsin Salvador245nilnilother45nilnil648240270Current AssetsInventories13080110Trade receivables1429770Cash and banknil272418120200Total assets920421470Equity and liabilitiesOrdinary share capital ($1 each)400120100Reserves:Share premium4050nilRevaluation 15nilnilRetained earnings24029560110300300695230400Non-current liabilities8% loan notenil50nilDeferred tax4545nil50nilnilCurrent liabilitiesTrade payables11814140Bank overdraft12nilnilCurrent tax payable50180nil1413070Total equity and liabilities920421470The following information is relevant:(a)Fair value adjustments and revaluations:(i)Hedra’s accounting policy for land and buildings is that they should be carried at their fair values. The fairvalue of Salvador’s land at the date of acquisition was $20 million in excess of its carrying value. By30 September 2005 this excess had increased by a further $5 million. Salvador’s buildings did not requireany fair value adjustments. The fair value of Hedra’s own land and buildings at 30 September 2005 was$12 million in excess of its carrying value in the above balance sheet.(ii)The fair value of some of Salvador’s plant at the date of acquisition was $20 million in excess of its carryingvalue and had a remaining life of four years (straight-line depreciation is used).2
 
(iii)At the date of acquisition Salvador had unrelieved tax losses of $40 million from previous years. Salvadorhad not accounted for these as a deferred tax asset as its directors did not believe the company would besufficiently profitable in the near future. However, the directors of Hedra were confident that these losseswould be utilised and accordingly they should be recognised as a deferred tax asset. By 30 September 2005the group had not yet utilised any of these losses. The income tax rate is 25%.(b)The retained earnings of Salvador and Aragon at 1 October 2004, as reported in their separate financialstatements, were $20 million and $200 million respectively. All profits are deemed to accrue evenly throughoutthe year.(c)An impairment test on 30 September 2005 showed that consolidated goodwill should be written down by$20 million. Hedra has applied IFRS 3
Business combinations
since the acquisition of Salvador.(d)The investment in Aragon has not suffered any impairment.
Required:Prepare the consolidated balance sheet of Hedra as at 30 September 2005.(25 marks)
3[P.T.O.

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