Basic Consolidation Question 89

QUESTION 89: BASIC CONSOLIDATION

Highveldt, a public listed company, acquired 75% of Samson’s ordinary shares on 1 April 2004.
Highveldt paid an immediate $3·50 per share in cash and agreed to pay a further amount of $108
million on 1 April 2005. Highveldt’s cost of capital is 8% per annum. Highveldt has only recorded
the cash consideration of $3·50 per share.

The summarized statements of financial position of the two companies at 31 March 2005 are
shown below:
Highveldt Samson
$ million $ million $ million $ million
Tangible non-current assets (note (i)) 420 320
Development costs (note (iv)) Nil 40
Investment (note (ii)) 300 20
720 380

Current assets 133 91

Total assets 853 471
Equity and liabilities:
Ordinary shares of $1 each 270 80
Reserves:
Share premium 80 40
Revaluation reserve 45 Nil
Retained earnings – 1 April 2004 160 134
- year to 31 March 2005 190 350 76 210
745 330
Non-current liabilities
10% intercompany loan (note (ii)) Nil 60

Current liabilities 108 81

Total equity and liabilities 853 471

The following information is relevant:

(i) Highveldt has a policy of revaluing land and buildings to fair value. At the date of acquisition
Samson’s land and buildings had a fair value $20 million higher than their book value and at
31 March 2005 this had increased by a further $4 million (ignore any additional
depreciation).

(ii) Included in Highveldt’s investments is a loan of $60 million made to Samson at the date of
acquisition. Interest is payable annually in arrears. Samson paid the interest due for the year
on 31 March 2005, but Highveldt did not receive this until after the year end. Highveldt has
not accounted for the accrued interest from Samson.

(iii) Samson had established a line of products under the brand name of Titanware. Acting on
behalf of Highveldt, a firm of specialists, had valued the brand name at a value of $40 million
with an estimated life of 10 years as at 1 April 2004. The brand is not included in Samson’s
statement of financial position.

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Basic Consolidation Question 89

(iv) Samson’s development project was completed on 30 September 2004 at a cost of $50
million. $10 million of this had been amortized by 31 March 2005. Development costs
capitalized by Samson at the date of acquisition were $18 million. Highveldt’s directors are
of the opinion that Samson’s development costs do not meet the criteria in IAS 38 ‘Intangible
Assets’ for recognition as an asset.

(v) Samson sold goods to Highveldt during the year at a profit of $6 million, one-third of these
goods were still in the inventory of Highveldt at 31 March 2005.

(vi) Highveldt’s policy is to value non-controlling interests using the proportionate share of
subsidiary’s identifiable net assets.

An impairment test at 31 March 2005 on the consolidated (full) goodwill concluded that it
should be written down by $29 million. No other assets were impaired.

Required:
(a) Calculate the following figures as they would appear in the consolidated statement of
financial position of Highveldt at 31 March 2005:
(i) goodwill; (8 marks)
(ii) non-controlling interest; (4 marks)
(iii) the following consolidated reserves:
share premium, revaluation reserve and retained earnings. (8 marks)
Note: show your workings

(b) Explain why consolidated financial statements are useful to the users of financial
statements (as opposed to just the parent company’s separate (entity) financial
statements). (5 marks)
(25 marks)

ACCA F7 – June 2005 – Q1

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Basic Consolidation Question 89

ANSWER TO QUESTION 89: BASIC CONSOLIDATION

Part (a)
(i) Goodwill W3 $66m
(ii) Non controlling interest W5 $87m
(iii) Share premium (parent only) $80m
Revaluation Reserve W6 $48m
Retained earnings W6 $362m

W1 GROUP STRUCTURE
Samson Subsidiary Acquisition date:1 Apr 2004 Group = 75% NCI 25%
$m

W2 NET ASSETS (of subsidiary) AT ACQUISITION S

Equity share capital 80
Share premium 40
Retained earnings (pre) 134
J5 20
J7 40
J9 (18)
296

W3 GOODWILL S
Investment $100 J1 + 210 J4 310
Less: 296 W2 x 75%W1 (222)
88
J11 (22)
66

W4 POST ACQUISITION RESERVES (of subsidiary) RS RE

Balance 0 76
J5 4
J8 (4)
J9 (22)
J10 (2)
4 48

W5 NON CONTROLLING INTEREST S

296 W2 x 25%W1 74
4 & 48 W4 x 25% W1 13
83

W6 GROUP RESERVES RS RE
Parent reserves 45 350
J2 (8)
J6 6
J11 (22)
45 326
4&48W4 x 75% W1 3 36
48 362

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Basic Consolidation Question 89

$m
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

-& Investment in Samson ordinary shares 100

1
(ii) Deferred consideration payable 100
PV of deferred consideration = $108 m x (1+0.08)-1 = $100m

-& RE (P) 8
2
(ii) Deferred consideration payable 8
Unwinding of interest on deferred consideration payable

-& Inter - company loan @ 10% 60

3
(ii) Investment (loan) 60
Cancellation of inter-company loan

-& Investment in Samson ordinary shares 210

4
(ii) Investment (immediate cash) 210
Immediate cash = 80m shares x 75% x 3.5 per share = $210m

Tangible NCA 24
(i) 5 Reserves (S Pre) 20
Revaluation Surplus (S) 4
Recording tangible assets at fair value in accordance with group policy

Cash in transit 6
(ii) 6
RE (P) 6
Cash (interest) in transit to be recorded
$60m x 10% = $6m

Brand (intangible assets) 40

(ii) 7
Reserve (S Pre) 40
Recognition of brand at acquisition date

RE (S) 4
(iii) 8
Brand 4
$40m/10years=$4m

Reserves Pre (S) 18

(iv) 9 RE (S) 22
Development costs 40
Written off development cost not meeting the criteria for recognition

RE (S) 2
(v) 10
Inventory 2
$6m x 1/3 = $2m

RE (P) 22
(vi) 11
Goodwill 22
$29 m x 75% = $21.75m or say $22m

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