Alpha holds investments in two other entities Beta and

Gamma #4692
Alpha holds investments in two other entities, Beta and Gamma. All three entities prepare
financial statements to 31 March and the statement of financial positions of the three entities at
31 March 2007 were as follows:Note 1 - purchase of shares in BetaOn 1 April 2006 Alpha
purchased 40 million shares in Beta by issuing one share in Alpha for every two shares
purchased in Beta. This share issue has not been recorded in the books of Alpha.The quoted
price of an Alpha share at 1 April 2006 was $6 and the quoted price of a Beta share at the same
date was $2.40. Alpha incurred incremental legal and professional costs of $2 million in
connection with the acquisition, of which $800 000 related to the cost of issuing its shares.
These acquisition costs have been charged as an expense in the statement of comprehensive
income of Alpha for the year ended 31 March 2007.The retained earnings of Beta as shown in
its statement of financial position at 31 March 2006 were $35 million. The directors of Alpha
carried out a fair value exercise on the net assets of Beta at that date. The following matters
arose out of the exercise:(i) Property, plant and equipment comprised non-depreciable land with
a carrying amount of $50 million and a market value of $60 million, plus plant and equipment
with a carrying amount of $30 million and a market value of $38 million. The estimated future
economic life of the plant and equipment at 1 April 2006 was four years (straight line
depreciation). None of the property, plant and equipment held by Beta at 1 April 2006 had been
disposed of by 31 March 2007.(ii) At 1 April 2006 Beta was engaged in legal action against a
supplier in respect of damages caused by the supply of faulty products, Beta was claiming
damages of $5 million. In the middle of March 2006 the customer had offered an out of court
settlement of $3 million and Beta's lawyers advised that this was a fair offer given the likelihood
of success in court. However, Beta refused the offer, took the case to court, and subsequently
won the case. The directors of Beta had not recognized any receivable in respect of the case in
the statement of financial position at 31 March 2006 because the claim was a contingent asset.
The directors of Alpha considered that the fair value of the contingent asset at 1 April 2006 was
$3 million.(iii) At 1 April 2006 Beta had a long-standing portfolio of loyal customers that regularly
ordered goods and services from Beta. In addition, the workforce of Beta was highly trained and
the expertise of the workforce was seen by the directors as conferring significant competitive
advantage to Beta. The customer relationships and the expertise of the workforce were not
included in the statement of financial position of Beta at 31 March 2006 because the directors
did not consider that they met the recognition criteria in IAS 38, Intangible Assets for internally
developed intangible assets. The directors of Alpha considered that the customer relationships
had a market value of $20 million at 1 April 2006 and that based on the life cycle of the existing
products, the existing customers would continue to order goods and services from Beta for at
least five years from that date. They estimated that the fair value of the competitive advantage
conferred by the workforce was $15 million at 1 April 2006 and that the average period to
retirement for a typical employee was 20 years.(iv) The financial director of Alpha has stated
that the fair value adjustments will create temporary differences for deferred tax purposes.Note
2 - purchase of shares in GammaOn 1 April 2005 Alpha purchased 20 million shares in Gamma
for a cash payment of $1.60 per share. The retained earnings of Gamma were $15 million at 1
April 2005. This shareholding has resulted in the directors of Alpha being able to exercise a
significant influence over the operating and financial policies of Gamma. The fair value of the
net assets of Gamma at 1 April 2005 was equal to their carrying amounts in Gamma's
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 statement of financial position.Note 3 - inventoriesThe inventories of Beta and Gamma at 31
March 2007 included components purchased from Alpha during the year at a cost of $20 million
to Beta and $16 million to Gamma. Alpha supplied these components at cost plus a mark-up of
25%.Note 4 - trade receivables and payablesThe trade receivables of Alpha included $5 million
receivable from Beta and $4 million receivable from Gamma in respect of the purchase of
components (see Note 3). The trade payables of Beta and Gamma include an equivalent
amount payable to Alpha.Note 5 - other information(i) Neither the goodwill arising on acquisition
of Beta nor the investment in Gamma has suffered any impairment since the dates of
investment by Alpha in these entities.(ii) The rate of tax to apply to temporary differences is
25%.Required:(a) Prepare the consolidated statement of financial position of Alpha at 31 March
2007.(b) Explain the effect on your answer to (a) if the acquisition agreement with the former
shareholders of Beta provided for an additional cash payment of 50 cents per share acquired.
The additional amount, payable on 31 March 2008, is contingent on the profits of Beta
exceeding a given level in the two years ending 31 March 2008.View Solution:
Alpha holds investments in two other entities Beta and Gamma

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