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Question 1 Answer by SCR

Question 1 Answer by SCR

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Published by: studycorporatereporting on Jul 12, 2011
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Question 1 (June 2011)
(a)
(i)The currency that mainly influences sales prices for goods or services.(ii)(iii)The currency that mainly influences labour, material and other costs of providing goods and services.(iv)The currency in which funding from issuing debt and equity is generated.(v)The currency in which receipts from operating activities are usually retained.Therefore, it can be concluded that the functional currency of Stem is the dinar.Stem is not dependent upon group companies for finance which means that Stem generates its own fundsfrom equity or debt in its local currency, i.e. the dinar.The functional currency is the currency of the primary economic environment in which an entity operates. Inmost cases, this will be the local currency. It is the currency that an entity will use in its day to daytransactions.IAS 21
The Effects of Changes in Foreign Exchange Rates 
states that an entity should consider the followingfactors in determining its functional currency:The currency of the country whose competitive forces and regulations mainly determine the sales pricesof goods and services.In the case of Stem, the currency that mainly influences the sales prices of its mine output is the dinar as it'sincome is denominated and settled in dinars.As the output of the mine is routinely traded in dinars and its price is determined initially by local supply anddemand, the currency of the country whose competitive forces and regulations mainly determine the salesprices of goods and in which receipts from operating activities are retained is also the dinar.In addition, Stem pays 40% of its costs and expenses in dollars with the remainder being incurred locally andsettled in dinars. This means that the dinar is the currency that mainly influences labour, material and othercosts of operating the mine.1
 
(b)Rose GroupConsolidated statement of financial position as at 30 April 2011$m
AssetsNon-current assetsGoodwill [16 (W4) + 6.2 (W5)]22.2 Patent [4 (W2) - 1 (W2)]3 Property, plant and equipment (W13)603.65 Financial assets (15 + 7 + 10)32 660.85 Current assets (118 + 100 + 66)284 Total assets944.85 Equity and liabilities:Share capital158 Retained earnings (W10)277.47 Other components of equity (W11)6.98 Non-controlling interests (W12)89.75 Total equity532.20 Non-current liabilities [56 + 42 + 32 + 0.65 (W8)]130.65 Current liabilities (185 + 77 + 20)282 Total liabilities412.65 Total equity and liabilities944.85 2
 
W1:Group structure
RosePetalStem
W2:Net assets of Petal and Stem
Petal
At acquisitionAt reportingPost-datedateacquisition$m$m$m
Share capital3838-  Retained earnings49567  Other components of equity341  Patent44-  Amortisation of patent ($4m/4years)-(1)(1)  Fair value adjustment - land3030-  1241317  Stem
Dinars mDinars mDinars m
Share capital200200-  Retained earnings22030080  Fair value adjustment - land7575-  49557580 
$m$m$m
Translate to $ at closing rate (@ 5)9911516 
W3:Cost of investment in Stem
Cost of investment paid at acquisition date is $46 million @ 6 = 276 million dinars
$m
At historic rate: 276 million dinars @ 646 At closing rate: 276 million dinars @ 5(55.2) Exchange gain(9.2) Adjustment:
$m
DrInvestment in Stem9.2 CrRetained earnings9.2 70% + 10% 52%3

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