Additional Questions Strategic Business Reporting (INT)

Question CARLISLE
Carlisle is a multi-national company which has a diversified set of businesses, including several
subsidiaries that it has acquired strategically over previous years. At the most recent Carlisle
shareholder meeting in the summer, several prominent shareholders voiced concerns over the
company’s aggressive acquisition strategy, noting the impact this has already had on the share price
and the declining equity and net income presented in the financial statements.
Mrs Kenley, the head accountant of Carlisle, is reviewing the draft financial statements and
supporting documentation for the year ended 31 December 20X8. She notes the following from her
review:
Investment in Lakeland
Carlisle owns 45% of the voting shares of Lakeland, which has had significant financial difficulties in
the last several years. Carlisle has the right to appoint key management personnel and holds
currently exercisable share options which, if exercised, would increase its ownership percentage to
52%. Mrs Kenley observed that Carlisle does not consolidate Lakeland; she questioned the financial
director, who stated that Carlisle’s policy is not to consolidate ownership interests less than 50%.
Acquisitions during the year
In December, Carlisle acquired 65% ownership of Bennett. Carlisle’s management hopes that by
replacing Bennett’s management team, it can help negotiate a reduction in outstanding long-term
liabilities of Bennett and ultimately turn losses into profits within the next year. Bennett was not
included in the consolidated financial statements, with the finance director’s justification that the
acquisition was made in December and so it does not need to be consolidated until the start of the
new financial year in January.
Carlisle also acquired 60% of Ridge for $3.6 million. The purchase price was significantly lower than
the net assets acquired which reflected the fact that Ridge was loss-making. Carlisle intends to
rationalise Ridge's operations and implement a business turnaround plan but in the meantime has
chosen to present Ridge as a subsidiary acquired with a view to resale in order to keep its results
separate from those of its existing business.
Transfer of equipment
The non-current asset register shows that items of equipment with a carrying amount of $80,000
were transferred to Newark; a company owned by the wife of the chief investment officer of Carlisle.
Mrs Kenley did not see any cash receipt from the transfers and there is no disclosure of the transfers
in the notes to the financial statements. When she queried this with the finance director, he
responded that no price was charged and therefore no disclosure needed to be made.
Required:
(a) (i) Discuss whether Carlisle must consolidate Lakeland. (4 marks)
(ii) Discuss the appropriate accounting treatment for each of the
acquisitions during the year in the consolidated financial statements of
Carlisle for the year ended 31 December 20X8. (6 marks)
(iii) Discuss briefly whether the transfer of equipment to Newark should be
disclosed as a related party transaction. (3 marks)
(b) Identity and discuss the ethical issues arising from the scenario which Mrs
Kenley needs to consider and what actions she should take as a consequence.
(5 marks)
Professional marks will be awarded in part (b) for the clarity of discussion. (2 marks)
(20 marks)

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