Advanced Consolidation Question 61

QUESTION 61: ADVANCED CONSOLIDATION

The following draft statement of financial position relate to Rod, a public limited company, Reel, a
public limited company and Line, a public limited company, as at 30 Nov 2012:
Rod Reel Line
$m $m $m
Non-current assets
PPE – at cost/ valuation 1,230 505 256
Investment in Reel 640
Investment in Line 160 100
2,030 605 256
Current assets
Inventory 300 135 65
Trade receivables 240 105 49
Cash at bank and in hand 90 50 80
630 290 194
Total assets 2,660 895 450

Capital and reserves

Share capital 1,500 500 200
Share premium 300 100 50
Revaluation reserve 70
Retained earnings 625 200 60
2,425 800 380

Non-current liabilities 135 25 20

Current liabilities 100 70 50

Total equity and liabilities 2,660 895 450

The following information is relevant to the preparation of the group financial statements:
(i) Rod has acquired 80% of the ordinary share capital of Reel on 1 Dec 2009 when the
retained earnings of Reel were $100 million. The fair value of the net assets of Reel was
$710 million at 1 Dec 2009. Any fair value adjustment related to net current assets and
these net assets had been realised by 30 Nov 2012. There had been no new issues of
shares in the group since the current group structure was created. The non controlling
interest is to be calculated as a proportionate share of the subsidiary’s net asset, i.e. not at
fair value and with no goodwill attaching.

(ii) Rod and Reel had acquired their holdings in Line on the same date as part of an attempt to
mask the true ownership of Line. Rod acquired 40% and Reel acquired 25% of the ordinary
share capital of Line on 1 Dec 2010. The retained earnings of Line on that date were $50
million and those of Reel were $150 million. There was no revaluation reserve in the books
of Line on 1 Dec 2010. The fair values of the net assets of Line at 1 Dec 2010 were not
materially different from their carrying values.

(iii) The group operates in the pharmaceutical industry and incurs a significant amount of
expenditure on the development of products. These costs were formerly written off to profit
or loss as incurred but then reinstated when the related products were brought into
commercial use. The reinstated costs are shown as Development Inventory. The costs do

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Advanced Consolidation Question 61

not meet the criteria IAS 38 for classification as intangibles and it is unlikely that the net
cash inflows from these products will be in excess of the development costs. In the current
year, Reel has included $20 million of these costs in inventory. Commercial sales of this
product had commenced during the current period. The accounting now wishes to ensure
that the financial statements comply strictly with IFRSs as regards this matter.

(iv) Reel had purchased a significant amount of new production equipment during the year. The
cost before trade discount of this equipment was $50 million. The trade discount of $6
million was recognized in profit or loss. Depreciation is charged on the straight line basis
over a 6 years period.

(v) The policy of the group is now to state the PPE at depreciated historical cost. The group
changed from the revaluation model to the cost model under IAS 16 in the year ended 30
Nov 2012 and restated all of its PPE to historical cost in that year except for the PPE of
Line which had been revalued by the directors of Line on 1 Dec 2011. The values were
incorporated in the financial records creating a revaluation reserve of $70 million. The PPE
of Line were originally purchased on 1 Dec 2010 at a cost of $300 million. The assets are
depreciated over six years on the straight line basis. The group does not make an annual
transfer from revaluation reserves to the retained earnings in respect of the excess
depreciation charged on revalued PPE. There were no additions or disposals of the PPE of
Line for the two years ended 30 Nov 2012.

(vi) During the year directors of Rod decided to form a defined benefit pension scheme for the
employees of the parent company and contributed cash to it of $100 million. The following
details related to the scheme at 30 Nov 2012:
$m
Present value of obligation 130
Fair value of plan assets 125
Current service cost 110
Interest cost – scheme liabilities 20
Expected return on pension scheme assets 10

The only entry in the financial statements made to the date is in respect of the cash
contribution which has been included in Rod’s trade receivables. The directors have been
uncertain as to how to deal with the above pension scheme in the consolidated financial
statements because of the significance of the potential increase in the amount recognized
in the profit or loss relating to pension scheme. They wish to immediately recognise any
actuarial gain.

Required:
(a) Show how the defined benefit pension scheme should be dealt with in the consolidated
financial statements. (6 marks)
(b) Prepare a consolidated statement of financial position of the Rod Group as at 30 Nov 2012
in accordance with the standards of the IASB. (29 marks)

ACCA P2 – December 2002 – Q1a

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Advanced Consolidation Question 61

ANSWER TO QUESTION 61: ADVANCED CONSOLIDATION

Part (a) Defined benefit pension scheme

IAS 19 only allows immediate recognition of actuarial gains or losses in other comprehensive
income.
RE (Rod) $110 CSC + 20 IC – 10 ER 120
Other reserves (Rod) – Actuarial gain 15
Non-current liabilities (pension) 5
Receivables (cash contributed) 100
Net pension liability has been calculated on the basis of actuarial value, which means any
resulting actuarial gain or loss has been immediately recognized

Plant assets $m
Contribution 100
Expected return 10
Expected value 110
Actuarial gain (β) 15
Fair value of plan assets 125

Plant obligations
Current service cost 110
Interest cost 20
Expected value 130
Actuarial loss or gain (β) 0
Present value of defined benefit obligations 130

NET liability 5

Part (b)
ROD Group
Consolidated SFP as at 30 November 2012
$m $m
Non-current assets
PPE $1,230+505+256 – 6 J3 + 1 J4 - 56 J5 1,930
Goodwill W3 132 2,062

Current assets
Inventories $300+135+65 – 20 J2 480
Trade receivables $240+105+49 – 100 J6 294
Cash at bank and in hand $90+50+80 220 994
3,056

Share Capital 1,500

Share Premium 300
Other reserves W6 15
Retained earnings W6 571
2,386
NCI W5 265 2,651

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Advanced Consolidation Question 61

Non-Current Liabilities $135+25+20 + 5 J6 185

Current Liabilities $100+70+50 220

3,056

W1 GROUP STRUCTURE
Reel Subsidiary Acquisition: 1 Dec 2009 Group 80% NCI 20%
Line Subsidiary Acquisition: 1 Dec 2010 Group 40% + (80% x 25%) = 60% NCI 40%
$m

W2 NET ASSETS (of subsidiaries) AT ACQUISITION Reel Line

Equity share capital 500 200
Share premium 100 50
Retained earnings (pre) 100 50
J1 10 -
710 300

W3 GOODWILL Reel Line

Investment [640] ; [160 + 100 – 20 J7] 640 240
Less: [710 W2 x 80%] ; [300 W2 x 60%] (568) (180)
72 60

W4 POST ACQUISITION RESERVES RS RE

Reel Line Reel Line
Balance 0 70 100 10
J1 (10)
J2 (20)
J3 (6)
J4 1
J5 (70)
J5 14
0 0 65 24

W5 NON CONTROLLING INTEREST Reel Line

[710 W2 x 20%] ; [300 W2 x 40%] 142 120
[65 W4 x 20%] ; [24 W4 x 40%] 13 10
J7 (20)
135 130

W6 GROUP RESERVES OR RE
Parent reserves 625
J6 15 (120)
505
Reel [65 W4 x 80%] 52
Line [24 W4 x 60%] 14
15 571

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Advanced Consolidation Question 61

$m
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

RE – Reel 10
(i) 1
RE (pre) – Reel 10
FV adjustment $710 - [$500m+100m+100m] = $10m assets realised in post acquisition period.

RE - Reel 20
(iii) 2
Inventory 20
Amounts written off which were not allowed to be recognized as an asset as per IAS 38.

RE - Reel 6
(iv) 3
PPE 6
Assets should be recognized net of trade discounts (IAS 16). So the entry of trade discount along
with effect on PPE has been reversed.

PPE 1
(iv) 4
RE (post acq.) Reel 1
Reduction in depreciation due to PPE amount reduce due to trade discount $6/6 years =$1m

RR - Line 70
(v) 5 PPE (β) 56
RE - Line 14
Revaluation reserve has been written back. The excess depreciation charged under previous
policy has to be reversed under new policy over remaining useful life from the date of revaluation
$70m /(6-1years) = $14m. The PPE should be reduced by balancing figure.

RE – Rod 120
Other reserves (Rod) 15
(vi) 6
Non-current liabilities (pension) 5
Receivables (cash contributed wrongly included) 100
Recording pension liability using immediate recognition policy (see part a)

NCI (Reel) 20
(-) 7
Investment in Line (sub-subsidiary) 20
Indirect investment
100 x 20% = $20

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