Section 1 — Preparation questions 1 Financial instruments (@)__ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME ( $ { Finanee income (4,014 > wt) 8%) 35,281 i I STATEMENT OF FINANCIAL POSITION Non-current assets \ Financial asset (41,014 + 35,281) 476,208 t Working: Effective interest rote 3605 «. from tables intorest rote is 8% (©) Compound instrument { s i Presontation Non-current lites ity component of convertible bond (Working) 1,797,467 Financia | Bir Equity component of convertible bond (2,000,000 - Working) 1,797,467) 202,533, \ Working: Fair value of equivalent non-convertible debt Present value of principal payoble at end of 3 years. 1,544,367 | (4.000 x $500"82m x —3) 09) Present value of intrest annuity payable annually in arrears for years (6% x S2m) x 2.53] | 2 Leases (©) _ Interest rate implicit in the lease | PV = onnuity x cumulative discount factor (CDF) 250,000 = 78,864 x CDF | cor 170 conterest rote is 10% (©) _Atthe inception of the lease, Sugar Co recognises o right-of-use asset ond c lease lcbilty. ‘ The right-of-use asset is measured at the amount of the lease liility, which is the present | ‘lus of the future lease payments discounted at the rate of interest implicit in the lease, here $250,000. At 31 December, the right-of-use asset is measured ot cost less - coccumulated depreciation: $250,000 - $(250,000/4) = $187,500. The leose obit is ‘measured by inereasing the carrying amount to reflect interest on the lease liability ond ae reducing the carrying amount to reffect the lease payments made. Answers 89‘STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X1 (EXTRACT) Property, plant and equipment $ Right-of use asset 187,500 Non-current liabilities Lease fabilties QW) 136,886 Current faites Lease liabilities (W) (196,196 ~ 136,886) 59,250 ‘STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20xt (EXTRACT) (PROFIT OR LOSS SECTION) Depreciation on right-of-use asset 62,500 Finance charges 25,000 Working: Lease liabiity $ Year ended 31 December 20X1: 1Axt Liability b/d 250,000 AAX1 - 31.12X1 Interest at 10% 25,000 S1i2Xt instalment in arrears ) Buraxi Liability e/d 196,136 Yeor ended 31 December 20X2: 1X2 ~ B112K2 Interest at 10% 19,61 31.12.K2 Instolment in arreors 73,804) 31.12.x2 Liability ofa 136,886 3 Defined benefit plan NOTES TO THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Defined benefit expense recognised in profit or loss Sm. Current sarviee cost 1 Post service cost 10 Net interest on the net defined benefit asset (10% x (110 + 10)) ~ (1085 x 150) 2 18 Other comprahensive income (items that willnot be reclessfiad to profit o 1s) Remeasurement of defined benefit plans Sm Remeosurement gain on defined benefit o v Remecsurement loss on plan assets (22) & NOTES TO THE STATEMENT OF FINANCIAL POSITION [Net defined benefit asset recognised in the statement of financial position 31December 31 December 20x! 20x0 $m Sm Present value of pension obligation 16 110 Fair valu of plan assets 040) 150) Net osset ey) i) PP 90 Strotegic Business Reporting (SBR) yaaa‘Changes in the present value of the defined benefit obligation Opening defined benefit obligation Interest on obligation (10% x (110 + 10)) Current service cost Past service cost Benefits paid Gain on remeasurement through OCI (balancing figure) Closing defined benefit obligetion Changes in the fair value of plan assets Opening fair value of plan assets Interest on plan assets (10% x 150) Contributions Benefits paid Loss on remeasurement through OCI (balancing figure) Closing foir value of plan assets Tutorial note. $m 10 2 1” 10 ao) aD 16 Sm. 150 % 0) aC) 140 ‘Tho intorest on the defined benefit obligation is calculcted on the balance at the start of the year (8110 milion) plus the increase in obligation of $10 million due to past service costs. Interest is charged on the increase in obligation dus to past service costs because the $10 million given in the question is the present value at the stort of the yeor (if it were the present value ot the end of the year, no interest would be required). & Sundry standards Workbook reference. Employee benefits are covered in Chapter 5 of the S88 Workbook, ‘embedded derivatives in covered in Chapter 8. (©) _ NOTES TO THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Defined benefit expense recognised in profit or loss Current service cost Net interest on the net defined benefit icbility (818 - 306) Curtailment cost $1000 28 2 cs 2S Other comprehensive income (items that will not be reclossitied to profit or loss) Remeasurement of defined benefit plans Remeasurement loss on defined benefit obligation Remeasurement gain on plan assets Answers 91NOTES TO THE STATEMENT OF FINANCIAL POSITION ‘Net defined benefit liability recognised in the stotement of financial position 31 Jonuary 31 January 20X8 20X7 $m s'000 Present value of pension obigation 460 4,900 Foir value of plan assets 9) 6.690 Net labitty 425 700 ‘Changes in the present value ofthe defined benefit obligation 000 Opening defined benefit obligation 4,00 Benefits paid (330) Interest on obligotion (4,300 ~ 330) x 8% 318 Curteilment. 58 Current service cost ee Loss on remeasurement through OCI (balancing figure) ® Closing defined benefit obligation Bu Changes inthe fair valve of plan assets $000 Opening fair valve of plan assets 3,600 Contributions ‘550 Benefits paid (830) Interest on plon assets (3,400 + 850 - 330) « 8%) 306, Gein on remeasurement through OCI (balancing figure) _ 89 Closing fair volue of plan assets a2 (©) Settlement © — Colculation of net defined benefit ability Changes in the present value of the defined benefit obligation 20x8 $'000 Opening defined benefit obligation (1.1.X€) 40,000 Interest on obligation (40,000 x 8%) 3,200 Current service cost 2,500 Post service cost 2,000 Benefits paid 974) 5,726 Loss on remeasurement through OCI (bol. fig) 2m Closing defined benefit obligation (31.12.X8) 46,000 20x9 $'000 Opening defined benefit obligation (1.1.X9) 46,000 Interest on obligation (46,000 x 9%) 4,140) Current service cost 2,860 Settlement (11,400) Benefits paid (2,200) 99,400 Loss on remeasurement through OCI (bal. fig.) 4.400 Closing defined benefit obligation (31.12.X9) 140.800 PP 92. Strategic Business Reporting (SBR) yarn“ BPP Changes in the fair value of plan assets 20%8 $000 Opening fair value of plan assets (1.1.X8) 40,000 Interest on plan assets (40,000 x 8%) 3,200 Benefits poid 1.974) Contributions paid 2,000 43,226 Loss on remeasurement through OCI (bal. fig) 226) Closing fair value of plan assets (31.12.X8) 143,000 $'000 Opening fair value of plant assets (11.X9) 43,000 Interest on plan assets (43,000 x 9%) 3,870 Settlement (10,800) Benefits paid 2,200) Contributions paid in 2,200 36,070 Loss on cemeasurement through OCI (bal. fig) (90) Closing foir value of plon assets (31.12.X9) 35,680 + During 20X8, there ison improvernant in the future benefits available under the plan ond as.a result there is a past service cost of $2 milion, being the increase in the present value of the obligation as a result of the change. © During 209, Sion sells part ofits operations and transfers the relevant part of the pension plan to the purchoser. This is a settlement. The overall gain on. settlement is calculated os: $'000 Present value of obligation settled 11,400 Foir volue of plon assets transferred on settlement (0,800) Cash transferred on settlement (400) Goin 200 Financial statements extracts ‘STATEMENT OF FINANCIAL POSITION 20X8 20x9 $000 $7000 Net defined benefit ibility (46,000 ~ 43,000)/(40,800 - 35,680) 3,000 5,120 ‘STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 20x8 20x9 $1000 $'000 Profit or loss ‘Current service cost 2,500 2,860 Past service cost 2,000 - Gain on settlement - (200) Net interest: (8,200 ~ 3,200)/¢4,140 ~ 3,870) - 270 (Other comprehensive income Remeasurement loss on defined benefit pension plan (274 + 226)/0,400 +390) 500 1790 Answers 93(© Classification of financial essets Bed's deposit isc financial asset. According to IFRS 9 Financial instruments, fincnctol ‘assets are classified as measured at either amortised cost or fair value. ‘financial asset is measured ot amortised cost whore: The asset is held within a business model where the objective isto hold financial ‘ossets in order to collect contractual cash flows: ond The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount ‘outstanding. All other financial assets ore measured at fair value. Deposit with Em Bank At first glance, it appears that this deposit may meet the criteria to be measured at ‘amortised cost because Bod will receive cosh flows comprising the principal amount (610 million) and interest (2.5%). However, IFRS 9 requires the cash flows to be consistent with a bosic lending arrangement, where the time value of money and credit risk are ‘typically the most significant elements of interest. Contractual terms that introduce ‘exposure to risk or volatility in the contractual cash flows that is unrelated io « bo: lending arrongement, such as exposure to changes in exchange rates, do net give rise to contractual cash flows that are solely payments of principal and interest. ‘The cdditionol 3% interest Bed will receive ifthe exchange rate torget is reached, exposes Bed to risk In cash flows that are unrelated to a basic lending arrangement (movernent in exchange rates). Therefore, the contract with Em Bank does not give rise to contractual ‘cash flows that are purely payments of principal and interest and as 0 result, it should not bbe measured at omortised cost. This type of contract is referred to os a ‘hybrid contract’ ‘This additional 3% dependent on exchange rates is on embedded derivative. Derivatives ‘embedded within a host which is a financial asset within the scope of IFRS 9 are not separated out for acccunting purposes. Instead the usual IFRS 9 measurement, requirements should be applied to the entire hybrid contract. Since the contract with Em Bank does not meet the criteria to be measured at amortised cost, the entire contract (including the term entiting Bed to an additional 3% if the ‘exchange rate target is met) should be measured at fair value through profit or loss. 5 Control (©) __IFRS 10 states that an investor controls an investee if and only if t has all of the following, (D Powar over the invastes; @) Exposure, or rights, to variable returns from its invalverent with the investeo; and () The ability to use its power over the investee to affect the amount of the investor's returns. Power is defined os existing rights that give the current ability to direct the relevant octivities of the investee. There is no requirement for that power to have been exercised. Relevant acti may include: '* Selling and purchasing goods or services '* Manoging financial assets © Selecting, acquiring and disposing of assets © Researching and developing new products ond processes © Determining a funding structure or obtaining funding In some cases assessing power is straightforward, for example, where power is obtained Girectly and solely from having the majority of voting rights or potential voting rights, ond 8 result the ability to direct relevant activities. 9% Strategic Business Reporting (SBR)(b) © o - > Twist v 1Rothers x 5% = 60% Shareholder] ogg ‘agreement = Olver ‘and the relative size of the other shareholdings alone ‘re not conclusive in determining whether the investor has rights sufficient to give it power. However, the foct that Twist hos ¢ contractual right to appoint, remove and set the remuneration of management is sufficient to conclude that it has power over Oliver. The fact that Twist has not exercised this right is not a determining factor when ascessing whether Twist has power. In conclusion, Twist does control Oliver, and should consolidate it. Copperfele Murdstone Steerforth others x1% 23% ss 26% 2086 Speniow In this cose, the size of Copperfiela's voting interest and its size relative to the other shareholdings are sufficient to conclude that Copperfield does not have power. Only two ‘other investors, Murdstone and Steerforth, would need to co-operate to be able to prevent Coppertiald from directing the relevant activities of Spentow. Scrooge Morley Crotchet Scrooge holds a majority of the current voting rights of Crotchett, so is likely to meet the power criterion because it appears to have the current ability to direct the relevant coctivitles. Although Marley hos currently exercisoble options to purchase additional vating rights (thot, if exercised, would give it « majority of the voting rights in Cratchett), the terms and conditions associated with those options aré such that the options are not considered substantive. Thus voting rights, even combined with potential voting rights, may not be the deciding factor. Scrooge should consolidate Cratchett. Answers 956 Associate J GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5. Assets Non-current assets Freehold property (1,950 + 1,250 + 370 (W7)) Plant and equipment (795 + 375) Investment in associate (WS) Current assets Inventories (575 + 300 - 20 (W)) ‘Trade receivables (830 + 290) Cosh at bank and in hond (60 + 120) Equity and liabilities Equity attributable to owners of the porent Issued share capital Retained earnings Non-cantrolling interests (WS) Total equity Non-current liabilities 12% debentures (500 + 100) Current liabilities Bonk overdraft Trade payables (680 + 350) Total liabilities Workings 1 Group structure J 00/100 60% 30% 225/750 P ‘s Pre-aequisition profits $200k $150k 96 Strategic Business Reporting (S82) $'000 3,570 13170 80 5200 855 620 70 iss, 6.868 2,000 11788 3788 290 600 560 4,930 1590 20 6,865 @ websNCI (at ‘full FV: 400 x 81.65) Net ossets acquired: Share capital Retained earnings ot acquisition Fair value adjustment (W7) Impairments to date Year-end value Investment in associate Cost of associate Share of post-ccquisition retained reserves (Wi) Less impairment of investment In associate Retained earnings Retained earnings per question Unvealised profit (W6) Fair volue adjustment movernent (W6) Retained earnings at acquisition P Co: share of post-acquisition retained earnings (60% x 635) § Co: shore of post-acquisition retained eornings 30% x 240. Goodwill impairments to date P Co: 60 (W2) x 60% S$Co Non-cantrolling interests NCI at cequisition (W2) NCI shore of post-acquisition retained earnings (WW) 636 x 40%) NCI shore of impairment losses ((W2) 60 x 40%) Unrealised profit on inventories Po ———e JCo BPP $'000 4,000 400 $'000 500.0 720 2.0) 90.0 JCo $000 44460 361 72 6a 2) 7785 $100k x 25/125 = $000 4,000 1,600) 60 60) PCo $000 885 (20) 0) 220) ced SCo 000 390 [z Is I $1000 660 es) 890 $20,000 Answers 977 Foirvolue adjustment table At reporting At acquisition Movement date $'000 $'000 $'000 Lond 200 200 Buildings 200 0) 170,200» 34/40) 99 2) 70 7 Part disposal (@) ANGEL GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8. $1000 Non-current assets Property, plant and equipment 200.00 Investment in Shane (W3) 133.15 393.15 Currant assets (690 +120 (cash on soe) 1.910.00 isis Equity attibutabo to owners ofthe porent Share capital 500.00, Retained resarves (Wt) 533.15, 709335 Current bites 310.00 1818 ANGEL GROUP CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20X8 $000 Profit before interest and tax [100 + 20 x 6/12)] 110.00 Profit on disposal of shores in subsidiary (Wé) £0.30 Share of profit of associate (12 x 35% x 6/12) 2:10 Profit before tox Income tax expense [40 + (8x 6/12)] Profit for the yeor (ther comprehensive income (not reclassified to P/t) net oftax [10+ (6 x 6/12) Shore of other comprehensive income of associate (6 x 35% x 6/12) Other comprehensive income for the year Total comprehensive income for the year Profit attributable to: ‘Owners of the parent Non-controlling interests (12 x 6/12 x 30%) Totel comprehensive income attributable to: ‘Owners of the parents Non-controling interests (18 x 6/12 x 30%) 98 Strategic Business Reporting (SBR)ANGEL GROUP. ‘CONSOLIDATED RECONCILIATION OF MOVEMENT IN RETAINED RESERVES Bolonce ot 31 December 20X7 (W5) Total comprehensive income for the year Balonce ot 31 December 20X8 (W14) Workings 1 Timeline ood 1 J Group gain on disposal 2 — Goodwill - Shane Consideration transferred Non-controliing interests (FV) Less: Shore copital Retained reserves 3 Investment in ossociate Fair value at date control lost Shore of post ‘acquisition’ retained reserves (W'4) 4 Group retained reserves Angel $'000 Per question/date of disposal (0 ~ (18 x 6/12) 400.00 Group profit on disposal (WH) 80.30 Less retcined reserves ot acquisition/date of disposal Shane: 70% x71 49.70 Shane: 35% x9 3.15 533.15 000 100 10 Equity occount in ‘SOFP. $'000 120.0 5, (10.0) Oh $1000 130.00 3.15 193.5 Shane $000 35% retained 90 is lo Answers 995 Retained reserves b/t Angel Shane $000 $'000 Per question 330.0 7 Less pre-coquisition retained reserves a 0) “@ ‘Shane - Share of post-acquisition ret'd reserves (62 x 70%) 6 Group profit on disposal of Shane $'000 Foie value of consideration received 120.0 Foir value of 35% investment retoinad 130.0 Less share of carrying amount when contrat lost Net essets 190 (18 x 6/12) 1810 Goodwill (W2) 614 Less non-controling interests (W7) wan 069. 7 Non-controling interests at date of cisposo! $'000 Non-controlling interest at acquisition (FV) S14 NCI share of post-acq'n retained earnings (30% x 71{W4)) 23 jaz (©) Angel disposes of 10% ofits holding If Angel disposos of 10% of its holding in Shane, Shane goes from bsing « 70% subsidiary to 4.60% subsidiary. In other words contral is ratained. No accounting boundary hos been crossed, and the event is treated as a transaction between owners. The accounting treatment isos follows: Statement of profit or loss and other comprehensive Income ® The subsidiary is consolidated in full for the whole period. Gi The non-controlling interest in the statement of profit or loss and other ‘comprehensive income will be based on percentage before ond after disposal, ie time opportion. il) ‘There is no profit or loss on disposal. Statement of financial position (© The change (increase) in non-controlling interests is shown os on adjustment to the parent's equity (i) Goodwill on acquisition is unchanged in the consolidated stotement of financial position. In the cose of Angel ond Shane you would time apportion the non-controlling interest in the statement of profit or loss and other comprehensive income, glving 30% for the first half the \yeor ond 40% for the second half, You would also calculate the adjustment to the parent's equity as follows: $'000 Fair value of consideration received x Increase in NCIin net assets and goodwill at disposal rc) Adjustment to parent's equity x 100 Strategic Business Reporting (SBR)8 Step acquisition (@) Prior to the acquisition of 20% on 1 Morch 20X1, SD already controls KL with its 60% investment, 50 KL is already a subsidiary ond would be fully consolidated. in substance, this is not an aoquisition. Instead, it is treated in the group accounts os « transaction between the group shareholders e the parent has purchased a 20% shareholding from the non-controlling interests (NC). No goodwill is calculated on the additional investment. ‘The value of the NCI needs to be worked out at the date of the additional investment (1 March 20X1), and the proportion purchased by the parent needs to be removed from NCI. The difference between the consideration transferred and the amount of the reduction in the NCI is included as on adjustment to equity. KL must be consolidated in the group statement of profit ar loss ond other ‘comprehensive income for the full yeor but NCI will be pro-rated with 40% for the first eight months and 20% for the following four months. In the consolidated statement of financial position, KL will be consolidated with a 20% NCI. (©) Goodwill $1,450,000 (w2) Group retained earnings $9,843,999 (W3) Gil) Non-controlling intarests $1,096,001 (W') Workings 1 Group structure sD 1.7.0 60% 13x 20% a KL Pre-acquisition retained earnings $2,760,000 Timeline 7x0 13.1 30.6.x1 sPLOCI Consolidate for full year ieee ae eee See tee NCI 40% x 8/12 | soins Acquired 60% Acquired 20% Consol in subsidiary 60% + 20% SOFP with = 80% Subsidiory 20% NCI 2 Goodwill (colculated at date when control was originally obtained) $ s Consideration transferred 3,280,000 NCI at foir value 1,960,000 Less net assets at acquisition: Shore capital 4,000,000 Pre-acquisition retained earnings (W1) 2,760,000 (3,760,000) Goodwill 4,450,000 Answers 101Consolidated retained eomings SD KL 60% S s ‘At year end/step acquisition 9,400,000 3,186,667 Unrealised profit (WS) ‘At ocquisition/step acquisition (2,760,000) 426,667 Group share (60% x 426,667) 256,000 (80% x 153,333) 122,666 ‘Adjustment to parent's equity W6) 65,333 Ki 80% s 3,400,000 (60,000) (2.186.667) KL's retained earrings for the yeor to 30 June 20X1 (8,400,000 ~ 2,760,000) = $640,000 KL's retained earnings for the 8 months to 28 February 20%1 (640,000 x 8/12) = $426,667 KU's retained earings os at 28 February 20X1 (2,760,000 + 426,667) = $3,186,667 Non-controlling interest NClot acquisition NCI share of post-ocquisition retained earnings to 28.2.X1 (40% x 426,667 (W3)) Decrease in NCI on further acquisition (209/409 x 2,130,667) NCI share of post-acquisition retained earnings to 30.6.Xt (20% x 153,383 (WS) Provision for unrealised profit Introgroup sales by KL $750,000 Vor 67.000 28x40 = Ssno00 (odjust in KL's retained eornings for the period after 1 March 20X1) Adjustment to equity on acquisition of further 20% of KL Foir value of consideration paid Decrease in NCI (W4) Adjustment to equity Adjustment would be: Debit (2) Non-conteoling interest 1,065,333 Credit (1) Group equity Credit () Cash (consideration) 102 Strategic Business Reporting (SBR) $ 1,960,000 170,667 2,130,667 (1,065,339) 30,667 7,096,001 s (1,000,000) 1,065,383 65,333 1,000,000 Ox9 Foreign operation CONSOLIDATED STATEMENT OF FINANCIAL POSITION $000 Property, plont and equipment (1,285 + 543 (W2)) Goodwill Wis) ‘Current assets (110 + 247 (W2)) Shore capital Retained earnings (W5) Other components of equity ~ translation reserve (W8) Non-controlling intarest (Wé) Loans (200 + 37 (w2)) Current liabilities (400 +99 (W2)) CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME $000 Revenue (1,125 + 619 (W3)) 1744 Cost of sales (410 + 27% (W3)) (684) Gross proft i080 Other expenses (180 + 108 (W3)) (288) Goodwill impairment loss (W4) 1) Profit before tax 754 Income tax expense (180 + 76 (W3)) (256) Profit for the yoor “We Other comprehensive income tame thot may subsequently be reclassified to profit or loss Exchonge diference on transating foreign operations (WS) 09 Total comprehensive income forthe yeor 7 Profit attbutobe to (Owners ofthe parent (baloncing igure) 866 Nor-contraling interests (W/7) 22 cy Total comprehensive income attributable to: ver of the parant 525 Nor-contrling interests 7) Ae Ea Workings 1 Group stucture Stondara 120% 80% ‘Odense, 2,500,000 krone BPP atv Answers 1082 Translation of Odense ~ Statement of financial position Kr000 Rate $000 Property, plant ond equipment ae Current essets ea uo Bo Share coptl 4000 9m we Pre-acquistion retoined earnings —-«« 250066 Post-acquston retained earnings + 2Ox8 pri 1200 9a . 20X5 dividend (345) 88 G9) . 20X6 profit, 1,350 Buy 161 470 . 20X6 dividend (405) 84 (0) Exchonge difference on net assets —— —Balfig ZB 5300 Su Loone 300 81g? Current libilities, 800 at # 1.100 Be $400 70 3 Tronsiation of Odense ~ statement of profit or loss and other comprehensive income: Odense Rate Odense Kr'000 $'000 Revenue 5,200 84 69 Cost of sales. @,300) 84 (274) Gross profit 2,900 345 Other expenses 1) 8% oe) Profit before tox 1,990 237 Income tax expense. (40) 84 76) Profit/Total comprehensive income for the year 1,350 tet & — Goodwit Kr000 Kr'000_ Rate $'000 Consideration transferred (520 x 9.4) 4,888 520 Non-controlling interests (3,500 x 20%) 700, % Share capitol 1,000 on Retained earnings 21500 @.500) @ 2,068 ead Exchange differences 20X5 8 1 ACSIA KS 208 88 Impairment losses 20X6 48) Bt (1g) Exchange differences 20X6 = 6B a At B112K6 TH 81 |B 5 Consolidated retained earnings Standard Odense $'000 $1000 A yer end nt At acquston es) a0 Group share of post-acquisition retained comings 204x808) 160 Less: impairment losses to date (Wii) _(t8) “iee9 BPP {04 strtegi Business Reporting (S88) a6 Non-contolling interests (statement of financial position) $000 ™ NCI share of post-acquisition retained earnings of Odense (204 (WS) x 20%) 4 NCI share of exchange differences on net assets (78 (W2) x 20%) 6 ist 7 Non-controlling interests (statement of profit or loss and other comprehensive income) PFY Tcl $'000 $'000 Profit/Total comprehensive income for the year (W3) 11 ‘1 Other comprehensive income: exchange assets (W9) pains a vet 209 NCI share 20% 20% 22 iene 8 Consolidated translation reserve $'000 Exchonge differences on net assets (78 (W2) x 80%) ra Exchonge cifferences on goodwl (15+ 21 (Ws) 36 8 9 Exchange differences $000 On translation of nat assets: Closing NA @ CR (W2) 654 Opening NA @ OR (1,000 + 3,355 = 4,355* @ 8.8) 95) Less retained profit as translated (PFY ~ cividends)(161 (WS) - 405 @ 8.3) an 48 (On good! (W's) 2 2 * The opening net assets have been calculated as share capital (from Odense's statement of finonciel position) plus opening retained earnings (from Odense’s statement of changes in equity extract). Alternatively, they could have been coloulated as closing net assets less total ‘comprehensive income for the year plus dividends: Kr(S,300,000 ~ 1,350,000 + 405,000). Tutorial note. ‘As Standard chose to measure the non-controlling interest in Odense ot the proportionate share of net assets at acquisition, only group goodwill is recognised in the consolidated statement of financial position and therefore, no goodwill is recognised for the non-controlling interests (NCD. ‘Therefore, there ore no exchange differences on goodwill reloting to NCI. This is why only the ‘exchange differences on net assets (and not the exchange differences on goodwill are included in the NCI workings ((W6) and (W7). Since cll the recognised goodwill relates to the group, in the consolidated translation reserve working (W8), the exchange differences on goodwill are not ‘multiplied by the group share. lf Stondard had measured NCI at fair value ot acquisition, both group goodwill and goodwill relating to the NCI would have been recognised. Therefore, in the NCI workings, the exchange differences on goodwill would be included. In the consolidated translation reserve working, the ‘exchange differences on goodwill would be multiplied by the group shara (in the same way as the ferences on net assets have been treated). Answers 105Ikimight hel i you think about the treatment of exchange difforences on goodwill as being the some asthe traatment for impairment loeses on goodwill So when NOI is measured ot the proportionate shore of net assets ot acquisition, a al ofthe recognised goodwil relates tothe up, all ofthe impairment losses and exchange differences on goodwil belong tothe group 4 they should be recognised in full in the consolidated retcined earnings and translation reserve workings respectively and neither would be included in NCI workings. Wherens forthe fll goodwill method, impctrment losses and exchange differences on goodmil are cpportioned between the group (inthe retoined earnings and translation reserve workings) and the NCI Gn the NCI workings). 10 Consolidated statement of cash flows. ‘STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X5, $'000 $'000, Adjustments for: Impairment losses (W1) 240, Increase in trade receivables (W4) (1,700) van finda (sion Increase in trade payables (Wi) ,200 ainceteanidh rations Zao Income tne oid 6200 Net cash from operating activities 13,440 Cosh flows from investing activities Acquisition of subsidiary net of cash acquired (600) Purchase of property, plant and equipment (#1) Net cash used in investing activities Cosh fiows from finanoing activtios Proceeds from issue of share capital (W2) Dividends poid (W2) Dividends poid to non-controling interest (W2) (40) Net cash from financing cetivties [Net increase in cash and cash equivalents Cosh and cash equivalents at the beginning of the period Cosh and cash equivalents at the end of the period (13,700) Workings 1 Assets Property, plant and equipment Goodwill $000 $000 b/d 25,000 - OCI (revaluation) 500 Depreciation/impairment (6,800) (240) B Acauisition of sub/associote 2,700 1,640 (WS) Cash paid/{rec'd) B a old 1400 me et aesonies, oEquity Share Shore Retained copital premium earnings $'000 '$'000 $'000 b/d 10,000 2,000 21,900 SPLOCI 11,100 Acquisition of subsidiary 1,800 2,500 Cash (paid)/rec'd 800 4,300 (900)* od 42,300 5,800 2300 “Dividend paid is given In question but working shown for clarity, Lobilties Tox payable $1000 bid 4,000 PAL 8.200 Acquistion of subsidiary 200 Cash (paid)/rec'd (4.200) p old 5,200 Working capital changes Inventories Receivables $'000 $000 Bolance b/d 10,000 7,500 Acquisition of subsidiary 1,600 600 71,600 100 Increase/(decrease) (balancing figure) 4,400 4,700 Bolonee c/a ¥6,000 3,800 Purchase of subsidiary Cash received on acquisition of subsidiary Less cash consideration Cosh outflow Non- controlling interest $000 350 44440 (ws) vo) 1,750 Payables $'000 6.100 300 6400 1,200 7,600 $'000 oo 4,000) QD Note. Only the cash consideration Is included in the figure reported in the statement of ‘cosh flows. The shares issued as part of the consideration are reflected in the share copital working (W2) above. ‘Goodwill on acquisition (before impairment): Consideration: 86 + 695 (WS) + 120 (W2) * 216 Non-contraling interest: 4,800 x 30% Net assets acquired Goodwill Answers 107Section 2 —- Exam-standard questions 11 Robby ‘Workbook references. The underlying principles of IFRS 3 are covered in Chapter tl, Business combinations achieved in stages are covered in Chapter 12. Joint operations are covered in Chapter 15 and financial instruments in Chapter 8. The Conceptual Framework is covered in Chapter 1. Top tips. You must make sure that you explain the principles underlying the accounting for goodwill os the marks available for calculations are limited. The examining teom is looking for an understanding of the accounting involved and not rote learning of conselidation workings, In Part (b), you need to evaluate whether the requirements of IFRS 9 relating to the factoring arrangement are in agreement with the Conceptual Framework. This kind of evaluation in light of the Conceptual Framework is likely to be a feature of questions in the SBR examination, so you need to make sure you are familiar enough with the Conceptual Framework to be able to answer questions in this way, DRED en Marke ©) © — Goodwill Explanation of IFRS 3 principles Hail - calculation Zine ~ coleulation 6 (i) doint operation SOFP) 3 Explanation ~ 1 mork per point up to a maximum a 7 (b) Discussion -1 mark per point up toa moximum az 30 (© _ Sections for inclusion in the finance director's report @ — Goodwi IFRS 3 Business Combinations requires goodwill to be recognised in o business ‘combinotion. & business combination tokes place when one entity, the acquirer, ‘obtains control of another entity, the acquiree. IFRS 3 requires gocdwill to be colculated and recorded as « non-current asset ot the acquisition date, Goodmill is colculated at the acquisition date as the folr value of the consideration transferred by the acquirer plus the omount of cry non-controlling interest less the {alr value of the net ossets of the acquire. When the business combination is achieved in stages, as is the cose for Zinc, the consideration transferred by the ‘acquirer will include any previously held interest in the new subsidiary which must be remeasured to its fair value at the date control is obtained, bpp 108 Strategic Business Reporting (SER) aeGoodwill is not amortised, but instead is tested for impairment at each year end, Applying these principles, the goodwill on the acquisition of Hail and Zine for inclusion in the consolidated financiol statements at 31 May 20X3 is coleulated as follows Goodwill related to the acquisition of Hall Goodwill ot acquisition: Sm $m Consideration transferred for 80% interest ‘Cosh payable on t June 20X1 50 Deferred cash consideration ($24.2 milion/(1.10)) 20 Contingent consideration 40 Fair value of non-contralling interest x 140. Fair valve of identifiable net assets acquired 130 Contingent liability 2 ‘The immediate, deferred and contingent consideration transferred should be measured at their fair values at the acquisition date. Deferred consideration ‘The fair value of the deferred consideration is the cmount payable on 31 May 20X'+ discounted to its present value ct the coquisition date. The requirement to discount to present value is consistant with other standards. The present value should be ‘unwound in the period to 31 May 20X3 which will increase the carrying amount of the obligation and result in a finance cost in profit or oss, The unwinding of the discount does not affect the goodwill calculation as it is based on the amount payoble at the date of acquisition. Contingent consideration ‘The fair value of the contingent consideration payable should take Into account the various milestones set under the acquisition agreement. At the cicquisition date the {ir velue of the contingent consideration is $40 milion, As the contingent consideration willbe paid in cash, the amount payable should be remeosured at 31 May 20XS to it fir value of $42 milion. This eemeasurement does not affect the goodwill calculation, but the increase in the far value of the cbligation ‘of $2 milion should be token to profit or loss. If the contingent consideration was to be settled in equity, no remeasurement would be required. Contingent lability ‘The contingent liability disclosed in Hail’ financial stotements is recognised as @ liability on acquisition in accordance with IFRS 8, provided that its foir value can be reliably measured and Its a present obligation. This is contrary to the normal rules in AS 37 Provisions, Contingent Liabilities and Contingent Assets where contingent liabilities are not recognised but only disclosed, Conelusion ‘There is no indication that the goodwill balance is impaired at 31 May 20X3. Thus ‘goodwill of $12 million on cequisition of Hail should be included in the group financial statements at $1 May 20%3. Ox. heGoodwill related to the aoquisition of Zine Substance over form drives the accounting treatment for a subsidiary acquired in stages. The legal form is that shores have been acquired, however, in substance: () The 8% investment hos been ‘sold’. Per IFRS 3, the investment previously held is remeasured to foir value at the date control is obtained and © gain or loss ! reported in profit or ass: i Sm Fair value of 5% at date control achieved (1 December 20X2) 5 i Fair value of carrying amount of 5% per SOFP at 31 May 20X2 ® Remeasurement gain (1 June 20X2 to 1 December 20X2) 2 @) __Asubsidiary hos been 'purchosed’. The previously held 8% investment is. | effectively re-aequired at fir value, and so goodwill is calculated including the fir value of the previously held 5% invastment, Goodwill $m $m j Consideration transferred ~ for 55% 16 Foir volue of non-controlling interest 9 Foir value of previously held intorest (for 5% ot 8 1 December 20X2) a ; 30 ' Foir value of identiioble net assets at acquisition: Provisional measurement 2% i Ajustment to fair volue of PPE (within measurement | period) 3 iLlg For value of PPE The fair value of PPE was provisional at the date of acquisition, with an increase of | $3 milfon subsequently identified when the figures were finalised in March 20X3, IFRS 3 permits adjustments to goodwill for adjustments to the fair value of essets ond liabilities acquired. provided this adjustment is made within one year of the date of acquisition (the measurement period). Conctusion Theres no indication thatthe goodill balonceis impaired ot St Moy 20XS. Thue i g00dnil reloted to the acquisition of Zinc tobe included in the group financiol ‘ statements at 31 Mey 20X3 is $1 milion {9 Joint operation station. Under IFRS 1 Joint Arrangements, a jaint artongement is one in which two or more parties ore bound by a contractuel arrangement which gives them joint control ‘over the arrangement, Joint arrangements con either be joint ventures or joint operations. The classification {a5 a joint venture or joint operation depends on the rights and obligations of the parties to the arrangement. It is important to correctly classify the arrangement as i the accounting requirements for joint ventures are different to those for joint operations. IFRS 11 states that o joint crrangement that is not structured through @ separate i Vehicle isa joint operation. In Robby's case, no separate entity has been set up for the joint arrangement, therefore it is ¢ joint operation. Robby has joint rights to the assets and revenue, and joint obligations for the liabilities and costs of the joint arrangement. Robby has a joint arrangement with another party In respect of the natural gas 1 | i Therefore, Robby, in its capacity os a joint operator, must recognise on a line-by-line basis its own assets, liabilities, revenues and expanses plus its share (40%) of the(b) Joint ossets, lobilties, revenue ond expenses of the joint operation os prescribed by IFRS 11. This treatment is applicable to both the consolidated and separate financial statements of Robby. ‘The figures ore calculated os follows: Statement of financial posit Property, plant and equipme 4 June 20X2 cost: gas station 15 x'40%) diementting provision (2 x 40%) Accumulated depreciation: 6.8/10 years 81 May 20X3 carrying amount Trade receivables (rom other joint operator): 20 (revenue) x 4O% Trade payables (to other joint operator): (16+ 0.5) (costs) x 40% Dismantling provision: ‘At June 202 Finance cost (unwinding of discount): 0.8 x 5% At 31 May 20X3 Accounting treatment Trade receivables are financial assets ond therefore the requirements of IFRS 9 Financiol Instruments need to be applied, The moin question here is whether the factoring arrangement means that Robby should derecognise the trade receivables from the financial statements. Por IFRS 9, an entity should derecognise a financial asset when: (The contractuol rights to the cash flows from the financial asset expire; or @__Theentity transfers the finoncial asset or substantially oll the risks and rewards ‘of ownership of the financial asset to enother party. In the case of Robby, the contractual rights to the cash flows have not expired as the receivables balances are still outstanding and expected to be collected. In respect of the risks and rewards of ownership, the substance of the factoring ‘orrangement naads to be considered rather than its legal form. Robby has transferred the receivables to the bank in exchange for $3. millon cash, but remains liable for any shortfall between $3.6 milion and the amount collected. In principle, Robby is able for the whole $3.6 million, although its unlikely that the defoult would be os much es this. Robby therefore retains the oredit risk. In addition, Robby is entitled to receive the benefit (less interest) of repayments in excess of $3.6 milion once the $3.4 million has been collected and therefore retains the potenticl rewords of full settlement. Substantially all the risks ond rewards ofthe financiol asset therefore remain with Robby, and the receivables should continua to be recognised. In oddition, o financial liability should be recognised in respect of the consideration received from the bonk. Conceptual Framework According to the Conceptual Fromework derecognition normally occurs when control of all or part of an asset is lost. ‘The requirements for derecognition should aim to faithfully represent both: (@) Any essets and liabilities retained after derecognition; ond (©) The change in the entity's assets and liabilities os a result of derecogrition. Answers 11Meeting both of these aims becomes cifficult i the entity disposes of only port of an asset cr retains some exposure to that asset. It con be difficult to foithfully represent the legal form (which in this cose is the decrease in assets under the foctoring arrangement) with the ‘substance of retaining the corresponding risks ond rewards. Because of the difficulties in proctice in meeting these two aims, the Conceptual Framework does not advocate using a control approach or the risks-and-rewards ‘approach to derecogrition in every circumstance. Instead, it describes the options ‘available and discusses what factors the IASB would need to consider when developing Standords. As such, there appears to be no conflict in principles between the Conceptual Framework and the requirements of IFRS 9 for derecognition. 12 Banana Marke (© © Application of the following discussion to the scenario: ‘Goodmill ond contingent consideration 3 Why the existing goodwill valuation is incorrect 4 i Correcting entry 4 i 8 | (i) Application of the following discussion to the scenario: | Nature of significant influence 2 The equity method of accounting for an associate 1 | Calculation of the carrying amount of the investment 4 & (ii) Calculation of the gain on disposal of Strowberry 2 Application of the following discussion to the scenario: Rationale for the ealeulation of gain on cisposal 1 Correct treatment of Strawberry after disposal 1 4 (9) Explonation of treatment of settlement 2 Explonation of 2018 omandments to IAS 19 1 | 3 (©) Application of the following discussion to the scenario: Rationale for inclusion as business combination 4 © Application of the following discussion to the scenario: ‘Consideration of IFRS 9 principles 4 ‘Transfer of rights/eonclision 1 Carrying amount of bonds 2 By 30 I (a) Explanatory note to: Directors of Banana Subject: Consolidation of Grape and Strawberry © Goodwill should be colculated by comparing the fair value of the consideration with the for vole of the identifiable net cssets at acquisition. The shares have been 112 Strategic Business Reporting (SBR)wo) ail) correctly valued using the market price of Banana at acquisition, Contingent consideration should be included atts fir value which should be assessed taking into account the probobilty of the targets being achieved as wall as being discounted to present value, It would appecr reasonable to measure the consideration at a value of $+ milion (S16 millon x 25%). corresponding abiity should be included within the consolidated financial stotements with subsequent remeasurement. This would bbe odjusted prospectively to profit or loss rather thon adjusting the consideration cand goocil The finance director has erroneously measured non-controling interest using the proportioncl method rather than at foir value. Although ether method is permitted 6on an acquisition by acquisition basis, the accounting policy of the Banana group is to measure non-contoling interest at far value. The fair value ofthe non-controling interest at acquisition is (20% x $20 milion x $4.25) = S17 milion. Net assets at acquisition were incorrectly included at their carrying amount of $70 million. This should be adjusted to fair vaiue of $75 millon with a corresponding ‘$5 milion increase to land in the consolidated statement of financial pesition. ‘Goodwill should have been coiculated as follows: $m Fair volue of share exchange 68 4 Non-controling interest at acquisition 7 Foir value of dentiiable net ossets acquired ow Goodwill zs ‘The correcting entry required to the consolidated financial statements I: Debit Goodwill $2 milion Debit Lond $5 milion Credit Non-controling interest $3milion Credit —_Liobilties St milion lan entity holds 20% or more of the voting power of the investes, itis presumed that the entity has significant influence unless it can be clearly demonstrated that this is not the case. The existence of significant influence by on entity is usually evidenced by representation on the board of directors or participation in key policy making, processes, Banana has 40% of the equity of Strawberry and ean appoint one director to the board. It would appear that Banana has significant influence but not ‘control. Strawberry should be classified os an associate and be equity accounted for within the consolidated financial statements. ‘The equity method is o method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor's share of the investee's net assets. The investor's profit or loss includes its share of the investee's profit or loss and the investor's other comprehensive income lncludes its share of the investee's other comprehensive income. At | October 20X7, Strawberry should have been included in the consolidated financial statements at & Volue of $20.4 mition (S18 milion + 40% x $50 milion ~ Sut milion). ‘On disposal of 75% of the shares, Banana no longer exercises significant influence over Strawberry and « profit on disposal of $3. million should have been calculated $m Proceeds 19.0 Foie value of retained interest 45 Carrying amount of investment in associate (see part (i)) Go. Gain on eisposel 31 Banane is incorrect to have recorded a loss in reserves of $14 milion and this should be reversed. Instead, a gain of $3.1 millon should have been included within the Answers 113.© © consolidated statement of profit or loss. The investment is initially restated to foir value of $4.5 milion. Banana does not intend to sell thalr remaining interest and providing that they make an irrecoverable election, they can treat the remaining interest at fair value through other comprehensive income. The investment will bo restated to $¥ million at the reporting date with « corresponding loss of $0.5 milion reported in other comprehensive income. (The potential tronsfer of port of Bonana's defined benefit pension plan isa settlement under IAS 19. gain or loss on a settlement is recognised in profit or loss when the settlement occurs. At the date of settioment, the fair value of the plan assets and the present value of the obligation should be remeasured. Using the estimated figures for illustration purposes, a gain of $100,000 should be recognised: $m Present value of obligation settled By Foir value of plan assets transferred on settlement 64) Cosh transferred on settlement (0.2) Goin os The accounting entries that would be required ore: Debit (decrease) Obligation $5.7 milion Credit (decrease) Plon cssets, $54 milion Credit (decrease) Cash $0.2 milion Credit (nerease) Profit or oss $0.1 million The 2018 amendments to IAS 19 require that, when @ plan amendment, curtailment ‘or settlement tokes place, the updated actuarial assumptions used to remecsure the net defined benefit/asset should also be used to determine current service cost and net interest for the remainder of the reporting period. Prior to the omendments, the ‘current service cost and net interest would have been calculoted using the ‘essumptions in place at the beginning of the reporting period. Melon should only be treated os an asset acquisition where the acquisition falls the definition of a business combination. In accordance with IFRS 3 Business Combinations, on ‘entity should determine whether o transaction is « business combination by applying the definition of a business in IFRS 3. A business is an intagrated set of activities and assets which are copable of being conducted and managed for the purpose of providing « return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. A business will typically hove inputs ond processes applied to the ability to create outputs. Outputs are the result of inputs and processes ond are usually present within c business but ore not ¢ necessary requirement for a set of Integrated activities and assets to be defined os o business at acquisition. Its clear that Melon has both inputs and processes. The licence is an Input os its an economic resource within the control of Melon which is capable of providing outputs once one or more processes are applied to It. Additionally, the seller does not have to be operating the activities as a business for the acquisition to be clossified as a business. It is rot relevant therefore that Melon does not have staff and outsources ite activities. The definition of a business requires just that the activities could have been operated as o business. Processes are in place through the research octivties, integration with the ‘management company and supervisory and administrative functions performed. The research activities are still tan early stage, so no output is yet obtainable but, as identified, this is not a necessary prerequisite for the acquisition to be treated as @ business. it can be concluded that Melon is a business ond its incorrect to treat Melon as. ‘an asset acquisition. IFRS 9 Financial Instruments requires that a financial asset only qualifies for derecognition ‘once the entity has transferred the contractuol rights to receive the cash flows from the ‘asset or where the entity has retained the contractual rights but has an unavoidable obligation to pass on the cash flows to a third party. The substance of the disposal of the bonds needs to be assessed by a consideration of the risks and rewards of ownership. PBanana has net transferred the contractual rights to recelve the cash flows from the bonds. The third party is obliged to return the coupon interest to Banana and to pay additional ‘amounts should the fair values of the bonds increase. Consequently, Banana still has the rights associated with the interest and will also benefit from any oppreciation in the value Of the bonds. Banana stil retains the risks of ownership os it hos to compensate the third party should the fair value of the bonds depreciate in value. I would be expected that, if the sole were @ genuine transfer of risks and rewards of ‘ownership, then the sales price would be opproximate to the foir value of the bonds. It ‘would only be in unusual circumstances such as « forced sole of Bonano’s assets arising from severe financial difficulties that this would not be the case. The soles price of $8 milion is well below the current fair value of the bonds of $10.5 million. Adgitionally. Banona is likely to exercise their option to repurchase the bonds. It can be concluded that no transfer of rights has token place and therefore the osset should not be derecognised. To measure the asset at amortised cost, the entity must have ‘a business model where they intend to collect the contractuel cash flows over the life of the asset. Banana maintains these rights and therefore the sale does not contradict thelr business model. The bonds should continua to be moasured at omortised cost in the ‘consolidated financial statements of Banana. The value of the bonds at 30 June 20X6 would have been $10.2 milion ($10 million + 7% x $10 milion ~ 6% x $10 milion). Amortised cost prohibits o restatement to fair value. The value of the bonds at 30 June 20X7 should be $10.!414 million $10.2 milion + 7% x $10.2 milion ~ 5% x $10 milion). The proceeds of ‘$8 milion should be treated os « fincnciol icbiity and would also be measured at “amortised cost. An interest charge of $0.8 million would cccrue between 1 July 20X6 ond 1 July 20X8, being the ifference between the sale ond repurchase price of the bonds 13 Hill MEARS © © © @ Marks Application ofthe following discussion to the scenario: + Deferred consideration 2 * Property, plont and equipment 2 + NC 1 + Goodwill impoirment 3 Goodwill colculations ond corrections required 8 18 Calculations of + Profit on disposal 8 + Treatment as associate a 4 Application of the following discussion to the seenorlo: + Compound instrument treatment 3 + Calcuiotion of tabiity and adjustments 2 5 Application ofthe following discussion to the seenorlo: + Treatment of deferred tax asset 4 + Implications of loon covenant breach a 38 30 atin Answers 115.@) Deferred consideration When calculating goodwil, IFRS 3 Business Combinations states thot purchase consideration should be measured at fair value. For deferred cash consideration, this will bee the present value of the cash flows. This amounts to $29 millon ($82m x 1/(.059 or '$32m x 0.907). Goodwil arising on ccquistion should be increased by $29 milion and ‘corresponding liability should be recognised: Debit Goodwit $29 million Credit Liobiity $29 millon Interest of $1.5 milion (S29m x 5%) should be recorded. This is charged to the statement of profit or loss ond increases the carrying amount of the ebiity Debit Financecosts $1.5 milion Credit Libilty $1.5 milion Property, plant and equipment (PPE) During the measurement period IFRS 3 states thet adjustments should be mode retrospectively f new information is determined about the value of consideration transferred, the subsidiary's identifiable net assets, or the non-contralling interest. The measurement period ends no later than 12 months after the acquisition date, ‘The survey detailed that Chandler's PPE was overvalued by $10 million as at the acquisition dote. It wos received four months after the acquisition date and so this revised voluation ‘wos received during the measurement period. As such, goodwill at acquisition should be recalculated. As ct the acquisition date, the carrying amount of PPE should be reduced by ‘$10 million and the corrying omount of goodwill increased by $10 millon: Debit Goodwill $10 millon Credit PPE $10 million NC} ‘The NCI ot acquisition was valued ot $34 milion but it should have been valued ot $32 milion ($170m - $10m PPE adjustment) x 20%). Both NCI at acquisition and goodwill Ct acquisition should be reduced by $2 milion Debit NCI $2 million Credit Goodwill Goodwill Goodwill arising on the acquisition of Chandler should hove been calculated os follows: Sm Fair value of consideration ($150m + $29m) 179 NClat acquisition 32 Fair valve of identifiable net assets acquired (160) Goodwill at cequisition St Goodwill impairment According to IAS 36 Impairment of Assets, a cosh-generating unit to which goodwill s cllocated should be tested for impairment annuclly by comporing its carrying amount to its recoverable amount. As goodwill has been calculated using the proportionate method, then. this must be grossed up to include the goodwill attributable to the NCI. $m $m Goodwill 51.0 Notional NCI ($5im x 20/80) x Total notional goodwill 63.8 BPP 116 Strategic Business Reporting (SBR) aye© © $m $m Net assets at reporting date: Foir value at start of period 160.0 Profit for period 22.0 212.0 Total carrying amount of assets 275. Recoverable amount (250.0) Impairment The impcirment is allocated against the total notional goodwill The NCI share of the {goodwill hos nct been recognised in the consolidated financial statements and so the NCI share of the impairment is also not recognised. The impairment charged to profit or loss is therefore $20.6 millon ($25.8m x 80%) and this expense is all attributable to the equity holders of the parent company, Debit Operating expenses $20.6 milion Credit Goodwill $20.6 milion The carrying omount of the goodwill relcting to Chandler ct the reporting date will be $30.4 milion (85Im ccquistion ~ $20.6m impairment). Doyle Co Until Apr 20X6, Doyle Co is a subsidiary of Hill Co ond so should be consolidated until thet date. The sale ofthe shares on 1 April 20X6, results In Hill Co losing control over Doyle Co. The goodwil, net assets and NCI of Doyle Go must be derecognised from the consolidated statement of financial postion. The difference between the proceeds from the disposal {including the fair value of the shares retcined) and these cmounts will give rise to o $47 milion profit on disposal. This is calculated as follows: sm Sm Proceeds 140 Foir value of remaining interest 300, 440 Goodwill at disposal 0) Net assets at disposal (690) NCI: At acquisition 215 NCI% of post acquisition profit (40% x ($590m - $510m)) 32 NCI ot disposal ed Profit on disposal w After the shore sole, Hill Co owns 40% of Dayle Co's shares and has the cbilty to appoint two of the six members of Doyle Co's board of directors. IAS 28 Investments in Associates ‘ond Joint Ventures states that an associate is an entity over which an investor has significant influence. Significant influence is presumed when the investor hos shareholding of between 20 and 50%, Representation on the board of directors provides further evidence that significant influence exists. Therefore, the remaining 40% sharehelding in Doyle Co should be accounted for as on ‘associate. It will be initially recognised at its far value of $300 milion and cecounted for using the equity method. This means that the group recognises its share of the associate's profit after tox, which equates to $24.6 milion (S128m x 6/12 x 40%), As at the reporting dote, the associate will be carried at $324.6 milion ($300m + $24.6m) in the consolidated statement of financial position, Convertible bond Hill Co has issued a compound instrument because the bond has characteristics of both a fincncial liability (an obligation to repay cash) and equity (on obligation to issue a fixed Answers 17‘number of Hill's own shares). IAS 92 Financial Instruments: Presentation specifies that ‘compound instruments must be split into: + Aliabitity component (the obligation to repay cash); and * Anequity component (the obligation to issue o fixed number of shares). ‘The split of the liability component ond the equity component at the issue dote is calculated as follows: ‘The liability component is the present value of the cash repayments, discounted Using the market rate on non-convertible bonds; '* The equity component is the difference between the cash received ond the liability ‘component at the issue date. The initia carrying omount of the liability should have been measured at $17.9 million, calculoted os follows Date Cash flow Discount rate Present value $m Sm 90 September 20X6 08 0.909 073 ‘80 September 20X7 20.8 0.826 The equity component should hove been initially measured at $2.1 million ($20m — $17.91). ‘The adjustment required is: Debit Non-current licbilties — $2.1m Credit Equity $2.1m The equity component remains unchanged. After initial recagnition, the lability is measured at omortised cost, as follows: Finance charge 30 September 1 October 20X5 (10%) Cash paid 20X6 $m Sm ‘Sm. Sm 79 18 (0.8) 18.9 ‘The finance cost recorded for the yeor wos $0.8 million end so must be increased by $1.0 million ($1.8m = $0.8m). Debit Finonce costs $1.0m or ies $1.0m The liability has a carrying omount of $18.9 million as at the reporting date. (@) Deferred tox According to IAS i2 Income Toxes, an entity should recognise 0 deferred tax asset in respect of the carry-forward of unused tax losses to the extent that itis probable that future toxable profit will be ovcilable against which the losses cam be utilised. IAS 12 stresses that the existence of unused losses is strong evidence that future taxable profit ‘may not be available. For this reason, convincing evidence is required about the existence of future taxable profits Non-current fib |S 12 soys that entities should consider whether the tax losses result from identifiable causes which ore unlikely to recur. Hill has now made losses In three consecutive financial yeors, and therefore significant doubt exists about the likelihood of future profits being generated. Although Hill Co is forecasting an improvernent in its trading perfarmance, this is a result of new products which are currently under development. It wil be difficult to reliably forecast. the performonce of these products. More emphosis should be placed on the performance of existing products and existing customers when assessing the likelihood of future trading profits. Finally, Hill Co breached a benk loan covenant ond some uncertainty exists about its bility to continue as o going concern. This, again, places doubts on the likelihood of future profits ond suggests that recognition of a deferred tax asset for unused tax losses would be inappropriate.MEE Marks (2) Application of the following discussion to the scenario: How FV should be determined 5 ‘Why depreciation replacement cost is unsuitable 2 7 )Colculation marks for: Correct FV of net assets Cotrect NCI figures 3 (©) Discussion of what constitutes an impairment and CGUs Correct calculation of impcirment losses for both methods Notional goodwill Impairment allocation Discussion of how and why methods differ 1" © © Coleuiation FV of deferred shares 1 Calcuiction of FV of options Discussion ofthe above caleuiations and Application to the scenario 2 4 (@_—Colculation share expense 1 Application of the following discussion to the scenario: ‘Why expense required 2 Vesting conditions 2 (©) _IFRS13 Fair Value Measurement permits a range of valuotion methods to estimote foirvaive including market based, income estimates and a cost-bosed approach. However, the characteristics of each asset should be considered when determining the most eppropriate methodology, Fair value is defined as the price which would be received to sell an asset or paid to transfer c liability in an orderly transaction between market participants at the measurement date. Foir value is therefore not supposed to be entity specifie but, rather to be market focused. The estimate consequently should consider whet the morket would be prepared to pay for the asset. The market would consider all alternative uses for the ossesement ofthe price Which they would be willing to pay. Fair value should therefore be measured by consideration of the highest and best use of the osset. There is o presumption that the current use would be the highest and best use ‘The highest and best use of the asset would appear to be as residential property and not the current industrial use. The intentions of Colyson Co are not relevant as foir value is not entity specific. The alternative use would need to be bosed upon fair and reasonable assumptions, In particular, it would be necessary to ensure that plenning permission to demolish the factory ond convert into residential properties would be likely. Since several nearby sites have been given such permission, this would oppear tobe the case, P 120 Strategic Business Reporting (SBR) 9 amr‘The fair volue of the factory site should be volued as if converted into residential use. Since this cannot be determined on a stand-alone bosis, the combined value of the and and buildings is calculated. The 1 million demolition and planning costs should bbe deducted from the market value of $24 milion. The fair value of the land and buildings shoul be $23 million, The fair value of the identifiable net ossets at ‘ocquisition cre $88 million (S65m + 23m). Depreciated replacement cost should only be considered as o possible method for estimating the fatr value of the asset when other more suitable methods are not available. This may be the cose when the asset is highly specialised and market date 's therefore limited or unavailable. This Is not the case with the factory site. In any cose, the rise in value of land and properties particularly for residential use would mean that to use depreciated replacement cost would undervalue the asset. The exit volue for the asset, whether it wos based on the principal or most advantageous. market, would need to be the same os the entry price. Depreciation may not also be on occurate reflection of all forms of obsolescence including physical deterioration. The estimate would need to be adjusted for such foctors even where industrial use remained the best use of the asset. : (Goodwill should be calculated as follows: Fair value Proportional | method method | $m Consideration 90 Nen-controling intarest (NCD ot acquisition 22 Net assets at aequistion 8) Good 2 NCI at acquisition under proportional method is $17.6 milion (20% x $88m). The fair value of the net assets at acquisition is $88 million as per part a() (S65m + $23m). Tutorial note: Goodwill under the proportional method could also be calculated os: Consideration 890m Less FV of net assets acquired (80% x $88m) (670.4)m Goodwill on acquisition $19.6m (©) An impairment arises where the carrying amount of the net assets exceeds the recoverable ‘amount. Where there is a clear indication of impairment, this asset should be reduced to the recoverable amount. Where the cash flows cannot be independently determined for individual assets, they should be assessed as a cosh generating unit. That is the smallest group of assets which independently generate cosh flows. Impairments of cash generating units are ollocated first to goodwill and then pro rata on the other assets. It should be noted that no asset should be reduced below its recoverable ameunt, Fair value method The overall impairment of Colyson Co is $30 million ($106m + goodwill $24m - $100m). The damaged builing should be impaired by 8 millon with « corresponding charge to profit ‘rls, Since $4 milion has already been allocated tothe land and builsings, £26 milion remains. The goodwill should therefore be written off and expensed inthe concofdoted statement of profit or loss. OF the remaining $2 milion, $1.28 milion wil be alocated to the plont and machinery (5/18 +9) x 2m) and $0.75 millon wil be allocated to the remaining intangibles (@/( + 15) x 2m). As no assets have been previously revelued, al the impairments are charged to profit or loss. $2 millon (80% x $30m) wil be attributable to tho owners of Luploid Co ond $6 milion to the NCIin the consolidated statement of comprehensive income Answers 121‘The cllocation of the impoirment is summarised in this table: Original Impairment Revised CV 422 Strategic Business Reporting (SBR) value $m Sm $m Lond and buildings 60 4 56 Plont and machinery 15 1.25 13.75 Intangibles other than goodwill 9 0.75 8.25 Goodwill 2 a ° Current assets (ct recoverable amount) 22 a) 22 Total 80 wb “00 Proportionate method ples ond rule for impoirment is the same as the fair value method and so will again first be written off agcinst the land and buildings. The problems arise when performing the impairment review as o cash ganerating unit. When NCI is measured Using the proportional shore of net assets, no goodwill is attributable to the NCI since goodwill isnot included within the individual nat assets of the subsidiary. This means that the goodwill needs to be grossed up when an impairment review is performed so that itis comporable with the recoverable omount. Under the fair value method, the NCI fully represents any premium the other shareholders would be prepared to pay for the net ‘ossets and so goodwill does not need to be grossed up. ‘The goodwill of $19.6 milion is grossed up by 100/80 to a value of $24.5 milion. This extra $84.9 milion is known as notional goodwil. The overall impcirment is now $30.5 milion ($tO6m + $24.5m ~ $100m) of which $% milion has olready been allocated. Since the remaining impairment of $26.5 million exceeds the volue of goodwill, the goodwill is written down to zero. However, a8 only $19.6 milion goodwill is recognised within the consolidated ceccounts, the impairment atvibutable to the notional goodwill is not recognised. Only 19.6 milion is deducted in full from the owners of Luploid Co's share of profits since there is. ‘no goodwill attributable to the non-controliing interest. The remaining $2 milfon impairment is llocated between plant and machinery and intangibles (other than goodwill). NCI willbe allocated 20% of $6 milion (Sm + 2m), ie $1.2 milion. Consolidated retained earnings willbe charged with 80% of $6 milion (ie $4.8 milion) plus $19.6 milion goodwill impaitrment (e $24.4 n total). The allocation of the impairment is sunmarised inthis table: Tutorial note: Notional goodwill and impairment of notional goodwill does not impact on the consolidated financial statements. Original Revised carrying carrying amount Impairment amount sm $m $m Lond and buildings 60 4 56 Plant ond machinery 6 125 1375 Intongibles other than goodwill 9 076 8.25 Goodwill 19.6 19.6 ° (Notional goodwil) 4g 49 ° Current assets (at recoverable amount) 22 ee 22 Total i908 305 100Sa aa eee ea ee Marks (©) @ Building renovation 4 (Profit before taxation 4 (ii) Cosh generated from operations — up to 2 marks per item 4 (b) (Discussion 1 mark per point to.@ maximum, 8 (i) Discussion 1 mark per point for each non-financial disclosure to. maximum a cd © © Building renovation ‘The building renovation has been incorrectly accounted for because Angel has debited the cash spent to revenue and this needs to be corrected in order to capitalise the correct amount for the enhancement of the asset. The correcting ceniries ore: Debit Property, plant and equipment (PPE) $m Credit Revenue sam Being copitalisation of renovation of building and correction of charge to revenue Angel treats grant income on capital-bosed projects as deferred income so it should not have credited the cash received from the grant te PPE and it needs to be reclassified to deferred income on the statement of financial position. The grant will then be released in line with future depreciation charges 20 as to recognise the benefit over the some period as the related costs iis intended to compensate. However, the grant of $2 milion needs to be split equally between renovation (Copia) and job creation (revenue). There do not appear to be any future performance conditions relating to the job creation portion of the grant, so that part ‘may be released immediately to profit and loss atthe time the cash has become recowable. The correcting entries for this ore: Debit Property, plant and equipment (PPE) ‘Sem Credit Retained earnings — proft or loss Sim Credit. Deferred income Sim Being correction of treatment of grant income (® Adjustments to profit before tax Profit before tax needs to be adjusted to take eecount of: () The correcting entries for the building refurbishment and grant in Part (a), 2) The $4 milion construction costs for the machine have been incorrectly charged to other expenses and need to be capitalisad os part of property, plant and equipment (information point (i). @) The reloted interest of $1 million which is allowable as part of the cost of the asset under IAS 23 Borrowing Costs needs to be capitalised (information point (i): Correcting entries for points (2) and (3) are: Debit Property, plont and equipment $5m_ Credit Profit or loss $5m 126 Swatege Business Reporting (3A) OR.a Eo Being correction of construction costs charged to operating expenses ond. capitalisation of interest under IAS 23. Therefore, profit before tox may be adjusted os follows to arrive at a correct figure for inclusion in the cash flow statement: Sm Per question i Correction of renovation costs ond grant (0}) 4 Correction of construction costs and intrest (ci) 8 ® ANGEL GROUP EXTRACT FROM STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 NOVEMBER 20X3 $m Operating activities Profit before tox ort (o}) 193.0 Adjustments for: Profit on sole of property, plant ond equipment: (Wi) 40) Depreciation (per question/W2) 2.0 Impairment of goodwill and intangible assets (per question/W3): '$26.5m + $90m Shore of profit of associate (per question/ Wu) Interest expense: Stim per question less Sim capitalised (i) (WS) Decrease in trade receivables (Wé) Decrease in inventories (W6) Decrease in trade payables (W6) Cash generated from operations Workings 1 Profit on sole of property, plant end equipment (PPE) $m Proceeds from sole of PPE 63 Less carrying amount of PPE disposed wd Profit on sale of property, plant and equipment 4 ‘This omount needs to be deducted from profit before tox because the profit of ‘$14 million ¢@ non-cash credit currently included within profit before tox. The cash proceeds figure of $63 milion will be included in the investing activities section. 2 Depreciation The depreciation charge of $29 milion which has been deducted in arriving at the profit before tox figure. Itis non-cash and must be added back. 3. Impairment of goodwill and intangible assets The impoirment charge of $116.5 millon, which has been deducted in arriving ot the profit before tox figure, is a non-cash movement and, as with Gepreciation, it must be added back. 4 Share of profit of associate The profit share of $12 million recorded in Angel's profit or oss is again @ non= cash figure and should therefore be deducted to orrive at a cash figure reloted to operations. Any dividend received by Angel from its associate during the xyeor will be included os a cash receipt in the investing activities section of Angel's cosh flow statement, Answers 125) 126 Strotegie Business Reporting (SER) 0 5 Interest expense ‘The interest charge of S10 millon (being the Stim paid loss the Sim copitalised) is a cosh payment. tis reclassified ond shown in the cash flow statement below cosh generated from operations os a charge to this figure, long with tax, to arrive at a net cosh from operating activities figure. 6 — Working copitol changes Trade Trade Inventories | receivables | payables Sm $m Sm b/d 190 130 261 Acquisition of subsidiary 6 3 5 ++ Increase/(decrease) one {58)9 2s od 155 5 8 Movements in working capital ore brought into the cash generated from ‘operations figure. if the inventories balance has fallen, there is less cosh tied up in inventory held and the cosh position benefits. The key point here is that Angel acquired a subsidiary, Sweety, during the financial year and gained inventory ond trade receivable and payable balances without a related operctional movement in cash. Therefore, these amounts must be adjusted when calculating the correct cash flaw. The cash payment to acquire Sweety (Pet of the cash acquired) will be incluced in the investing activities section of the cash flow statement. Finantiel statement differences Angel is o wholesale manufocturer and has made on investment gaining significant Influence in ¢ digital company. It is important thot the stakeholders of Angel, which includes is directors, manage their expectotions in terms of the information presented in the financial statements of Digitool. At a high level, os « wholesale manufacturer, Angel will hove a significant level of property, plant and equipment (@ foctory, « distribution warehouse and monufacturirig machinery) and it wal hold inventories either in the form of finished goods or work in progress. As a result of its long established relationships with large customers, it would be expected to have o relatively high level of trade receivables. Contrast this with Digitool. Its non-current ‘assets will comprise its data centre and related equipment. Digital companies ciso frequently invest in research and development relating to new techniques and processes and may therefore have significant capitalised development costs. It ‘would not be expected to have inventory, other than some work in progress relating to-any ongoing contracts, In terms of the ratios commenly reviewed, tis important that ratise are reviewed in the context of the specific entity. Its unlikely thot the directors willbe oble to compore the ratios they regularly review for Angel with equivalent catios for Digitool. The 97088 profit morgin will not be comparable between the companies. The cost of soles of Digitool wll mainly comprise employee costs and therefore its gross profit ‘margin is kely to be higher than that for Angel. Digitoo! will, however, have dditional operating costs relating to research, and advertising and promotion expenditure incurred in generating new customers that Angelis un\ikely to have, thus net profit margins may be more comparable. The return on copital employed is likely to be lower for Angel as it has been established for a number of years, hos goodwill {rom its investments in other entities and is heavily capitolsed. The inventory helding period is 0 very important ratio for a manufacturing company but is not relevant for € digital company 08 it does not hold a physical inventories and any work in progress would be expected to convert to revenue quickly. is nat cleor whct the credit terms offered to customers are, but given Angel has long-standing contracts with regular customers, itis ikely to have a longer receivables collection period than Digitool which has @ number of new contracts. PPa) Non-financial performance measures ‘Tho non-financial performance measures reported by Digitool ore in keeping with expectations for o digital company: ‘+ Relationships with customers ~ its essential for componies that do not sell a physical product and instead sell business solutions’ to their customers to Communicate well with their customers to understand their needs and be able to tailor solutions to them. Digitool may report factors such as customer satisfaction scores, the number of individual engagements with thelr customers inc period or the average number of repeat customers. Although traditional manufacturers must also hove a customer focus to keep their products relevont, because Angel produces mass-produced furniture, i ie less likely to interact with the final customer. ‘+ Emissions levels ~ perhaps surprisingly, data centres produce large levels of emissions ond digital companies come under the some social and political pressures to reduce emissions os heavy manufacturing componies. + Invesiment in human capital - digital companies rely on ther staff to be atthe cutting edge of technological developments in order to keep them ahead ot competitors. Companies compete to attract the best talent and are renowned forhoving creative working spaces, flexible working conditions ond good solaries to ensure they ore seen 03 good places to work, Traditionel companies, hove requirements to poy ste far rates and must comply with strict health cand sofety requirements, particularly when operating rmachinery, but wll generally have a more traditional work environment. Marks (2) @ Calculation of cash flow generated from operations 6 Explanation of the adjustments and use of the scenario 4 2 (Application ofthe following discussion to the scenario: + Purchase consideration (shares and deferred cosh) 1 + Impact on consolidated statement of cash flows of =" Subsistary ecquisiton {including dividens) 3 = Subsidiary aisposol 2 ‘ Gi) JFRS 5 definition of discontinued operation ond application to the scenario 3 Consideration of held for sale and application to the. seanorio 1 Consideration of loss of control and application to the seenario 2 6 (©) Share-based poyment a x BPI Answers 127© © Explanatory note to: The directors of Moyes Subject: Cash generated from operations $ Profit before tox 209 Shore of profit of associate Cc) i Service cost component. ry : Contributions into the pension scheme (15) Impairment of goodwill 10 Depreciation 99 u Impairment of property, plant and equipment (S43m - $20m) 23 Movement on inventory ($165m ~ $126m - Sém) 33 | Loss on inventory 6 : Increase in receivables a Inorease in current liabilities _8 Cosh generated from operations 3 \ Cash flows from operating activities ore principally derived from the key trading ‘activities of the entity. This would include cash receipts from the sale of goods, cash Payments to suppliers ond cash payments on behalf of employees. The indirect ‘method adjusts profit or loss for the effects of transactions of a non-cash nature, tony deferrals or accruals from post or future operating cash receipts or poyments cand any items of income or expense associated with investing or financing cash flows. ‘The share of profit of associate ison item of income associated with investing i ‘ctivities and so hos been deducted. Likewise cash paid to acquire property, plant | cond equipment is an investing cash flow rather thon an operating one, Noni-cosh flows which have reduced profit and must subsequently be added back include the service cost component, depreciation, exchange lasses and impairments, With the impairment of property, plant and equipment, the first S20 milion of impairment will i be allocated te the revaluation surplus so only $23 million would have reduced ‘operating profits ond should be added back. In relation to the pension scheme, the remeasurement component can be ignored as i's neither @ cash flow nor an | ‘expense to oporating profits. Cash contributions should be deducted, though, os these represent on operating cash payment ultimately to be received by Moues” : employees. Benefits poid are a cash outflow for the pension scheme rather than | Moyes and so should be ignored The movernents on receivables, payables and inventory are adjusted so that the timing differences between when cash is poid or received and when the items are ‘occrued in the financial statements are accounted for. inventory is measured at the lower of cost ond net reaisable volue. The inventory hs suffered an overall loss of $6 milion (Dinar 80 million/S ~ Dinar 60 milion/6). OF this, $2.7 millon is an exchange loss | (@inar 80 mition/5 ~ Dinar 80 milfion/6) ond $3.3 millon is an impairment loss (Dinor {G0 - 60) milion/é). Nether of these are cash flows ond would be added back to profits in the reconciliation. However, the loss of $6 millon should also be adjusted in the movement ofthe inventory as a non-cash flow. The net effect on the statement of cash flows wil be nil (i) When the parent company acquires or solls ¢ subsidiary during the financial year, ‘cash flows arising from the acquisition or disposal are presented within investing ‘activities. In relation to Davenport, no cash consideration has been paid during the ‘current year since the consideration consisted of o shore for share exchange and some deferred cash. The deferred cash would be presented as @ negative cosh flow | within investing activities but only when paid in two years’ time. 128 Strategic Business Reporting (SBR)This does not mean that there would be no impact on the current year's statement of cash flows. On gaining control, Moyes would consolidate 100% of the ossets ‘and liabilties of Davenport which would presumably include some cash or cash equivalents at the date of acquisition. These would be presented as a cash inflow at the dote of acquisition net of any overdrafts held at acquisition. Adjustments would ‘also need to be made to the opening balances of assets and ticbilities by adding the {oir values of the identifiable net assets at acquisition to the respective balances. ‘This would be necessary to ensure that only the cash flow effects are reported in the consolidated statement of cash flows. Fair value adjustments to assets ond liabilities could also have deferred tax effacts which would need adjusting so that only cash payments for tox ore included within the statement of cash flows. Dividends received bby Moyes from Dovenport are not included in the consolidated statement of cash flows since cash hos in effect been transferred from one group member to another. ‘The non-controlling interest’s share of the dividend would be presented as o cash outflow in Financing activities. (On the disposol of Barham, the net ossets at disposal, including goodwl, are removed from the consolidated financial statements. Since Barham is overdrawn, this will have a positive cash flow effect for the group. The overdraft will be added to the proceeds (less any cash and cash equivalents at disposal) to give an overall inflow presented in investing octivties. Care would once again be necessary to ensure that ail balances ot the disposal date are removed from the corresponding ‘assets ond liabilities 90 that only cash flows are recorded within the consolidated stotement of cash flows. (H)__IFRS 8 Non-current Assets Held for Sole ond Discontinued Operations defines © discontinued operation os a component of an entity which either has been disposed of or Is classified os held for sale, and: (Represents a separate mojor line of business or geographical area of operations; Is @single co-ordinated plan to dispose of a separate major line of area of operations; ond Gi) Isa subsidiary acquired exclusively for resol. Both entities would be components of the Moyes group since their operations and cosh flows are clearly distinguishable for reporting purposes. Barham has been sold during the year but there oppear to be other subsidiaries which operate in similor ‘geographical regions and produce similar products. Little guidance is given as to ‘whot would constitute a separate major line of business or geogrophical area of ‘operations. The definition is subjective and the directors should consider factors, such as materiality and relevance before determining whether Barham should be presented os discontinued or not: Tobe clossified as held for sole, a sale has to be highly probable and the entity should be available for sole in its present condition. At face value, Watson would not ‘appear to meat this definition os no sales transaction is to teke place. IFRS 5 does not explicitly extend the requirements for held for sale to situations ‘where controls lost. However, the international Accounting Standards Board (IASB) has confirmed thet in inetonces where control is lost, the subsidiories' assets and lobilties should be derecognised. Loss of contol is a significant economic event and fundamentally changes the investor — investee relationship. Therefore situations ‘where the parent is committed to lose control should trigger « reclossification os held for sale. Whether this should be extended to situations whore contra is lost due to other causes would be judgemental. Itis possibie therefore that Watson should be clossfied os held for sale but to be classified os 0 discontinued operation, Watson \would need to represent a separate mojor fine of business or geographical area of operation. Om. ee(©) Share-bosed payment IFRS 13 applies when another IERS requires or permits for volue measurements of disclosures cbout fair value measurements (and measurements, such as fair value less costs to sell, based on fir value or disclosures about those measurements). IFRS 13, speeifically excludes transactions covered by certain other standards including share~ based payment transactions within the scope of IFRS 2 Share-bosed Payment. For cash settled share-based poyment transactions, the folt value of the liability is ‘measured in accordance with IFRS 2 initially, at each reporting dote and at the date of settlement using an option pricing model. The measurement reflects oll conditions ond: outcomes on o weighted average basis, unlike equity settled transactions. Any changes in fair value are recognised in profit or loss in the period. Therefore, the SARs should have been accounted for as follows: Year Expense Liability Calculation $ s GO September 20X6 64,250,250 285 500x59%% Tme-opportioned over vesting pertod, Using the tetimated (800 x 99%) 285 managers 30 September 20X7 926,250 1,567,500. 285x500 $i Expense is difference between Babies at 30 September 2027 ond 30 September 20X6 80 September 20X8 97,500 1,950,000 228x500xSI2 Cash pld 60 x 500 x $10.50, ie $315,000. The labilty has reduced by $217,500 and therefore the expense is the difference of $97,500 The fair volue of the liability is $1,850,000 at 30 September 20X8 and the expense for the year is $97,500. 17 Weston Workbook reference. Group statements of cash flow are covered in Chapter 17. Debt factoring is covered in Chopter 8. Top tips. In Part (c), the proceeds of disposal calculation is a Iittle tricky, but the best way to. ‘approach itis to set out the working as for a profit/oss on disposal and find the proceeds as a } bbolancing figure. Its also important to distinguish between cash flows and non-cash flows os well {8 being clear on signage. in Port (b) considers debt factoring. Remember that the substance of the arrangement must be considered | Easy marks. There are many straightforward cash flows included in this question; the key is to think each transaction through and ensure you include all of the areos of the statement of eash flows affected in your answer. It is usually more than one.je se + BEE i Marks © @ _ Discussion of director's expectation 1AS 7 requirements IAS 7 extracts Loss on disposal working [Net assets at disposcl working Goodwill working NCI ot disposal working 15 (i) Discussion of impact of Southlond ‘acquisition IAS 7 extract and workings ©) Debt factoring © IFRS 9 requirements © agreement 1 © agreement 2 I8lo ©) @ _ Effect of Northern disposal on Weston's consolidated statement of cash flow ‘The directors’ expectation that the loss on disposal of Northern will be added back to the profit before tax figure in the operating cash flows section of the cash flow to arrive at net cosh flow from operating activities is incorrect. The profit before tox. figure of $183 million excludes the results from the discontinued operation, which is presented separately in accordance with IFRS 5 Non-current Assats Held for Sole ‘and Discontinued Operations. The overall discontinued result of $25 milion is, however, represented as cash flows In the consolidated stotement of cash flows. it must be analysed between the clement relating to the trading activities of Northern, which will cease on disposol, ‘and that relating to the disposal transaction, which is 0 one-off benefit to the ongoing group: + The proft reloting to troding activities is adjusted to calculate cash generated from discontinued operations, and + Theoss on cisposal is replaced with cash proceeds from the sale (plus Northern's overdraft atthe disposol date), whichis reported as an investing ‘cash flow of the Group. In addition Northern's other cash flows must be classified as operating, investing or financing and reported in the consolidated stotement of cash flows. Cosh flows ottributoble to the operating, investing and financing activities of the Noxthern discontinued operation must be disclosed either on the face of the ‘consolidated statement of cash flows or in the notes, in accordance with IFRS 5, so ‘that a picture of the continuing group can be derived by the user. Aga Answers 134In accordance with IAS 7 Statement of Cash Flows, the net cash flows arising from losing control of a subsidiary, that is the proceeds on disposal less ony cash held! in the subsidiary, must be presented separately and classified as cash flows from investing activites. In accordance with IAS 7, Weston must disclose each of the following: @ The total consideration received $85.4m (Wi); The portion of the consideration consisting of cash and cash equivalents $85.4; (i) The cmount of cash and cash equivalents held by Northern when control is lost ($2m); end (¥) The amount of the assets and liabilities other than cash or cosh equivalents in Northern when control is lost, summarised by each major category (see W2 below). EXTRACT FROM WESTON GROUP STATEMENT OF CASH FLOWS. FOR THE YEAR ENDED 31 JANUARY 20X6: Proceeds on disposal of Northern Cosh flows from investing activities Sm $m Proceeds on disposal of Northern: 85.4 (Wh) + 2 874 Net eash from investing activities, 874 The bank overdraft of $2 milion is added back to the fair value of consideration received of $85.4 million, in order to show proceeds net of cash and cash equivalents disposed of as part of the transaction, Workings 1 Loss on disposal of Northern $000 $1000 Fair value of consideration received p 854 Less share of carrying amount when control lost: Net assets (W2) 129.0 Goodwill (W3) 90 Less non-controling interests (WY) (23.6) amy Loss on disposal per question @.0) 2 Net assets at date of disposal The fair volue of the property, plant and equipment at disposal will be S80m {98 por the question plus the remaining bolance of the $16m fair value uplift Gl6m less 4/8 years depreciation = $88m). A deferred tax lability on the fair value adjustment would arise of (25% x $16m) = Slim which would be released inline with the extra depreciation, so the carrying amount at disposal will be. only $2m (Stim ~ (4m x 4/8). The carrying amount of the entire deferred tox lability ct disposal is therefore $8m (S6m per question + $2m), $000 Property, plant and equipment (see Note above) 88 Inventories 38 Trade and other receivables 23 Trade and other payables 10) Deferred tox (see Note above) © Bank overdraft _@ 7) P 192 Strotegic Business Reporting (SBR)3 Goodwill on acquisition of Northern Sm. Consideration transferred 182 Fair value of non-contraling interest 28 760 Fair value of net assets ot acquisition (tas) Goodwill at acquisition 36 Impairment (75%) Dp Carrying amount of goodwill ot disposal a 4 Non-controling interests ot date of disposal $'000 Non-controling interest ot acquisition (FV) 28.0 NCI share of post-acquisition retained earnings: 20% x (929 ¢w2)~ 124 (W), 10 NCI share of goodwill impairment (20% x 27 0W3)) 6) 238 Impact of acquisition of Southland on Weston's consolidated statement of cash flows In accordance with IAS7 Statement of Cash Flows, when accounting for an Invastment in an associate, the statement of cash fiows should show the cash flows between the investor and associate, for example, dividends and advances. So, ‘Weston includes in its statement of cash flows the cash flows in respect of its Investments in Southlond, and distributions and other payments or receipts between it and the associate, ‘Therefore, the net cashflow from operating activities of the Weston group is etermined by adjusting the consolidated profit or loss for the share of profits ofthe essociate, Southland, because itis « non-cash contribution to group profits. The investing section of the stotement of cash flows Incorporates: © The cash outflow on the purchase of the 40% interest in Southland on 1 February 205. (The cash inflow received by the Weston Group, being its 40% shore of the dividend paid out by Southland during the fincncial year, received in Weston's opacity as an equity shareholder. EXTRACTS FROM WESTON GROUP STATEMENT OF CASH FLOWS: FOR THE YEAR. ENDED S1 JANUARY 20X6: Impact of Southland associate Cash fiow from oparating activities Profit for the yeor: x Share of profit of associate 18) Cosh fiows from investing activities Dividends received from associate ($10m x 40%) 4 Purchase of associate (W1) (90) Net cash used in investing activities eo Answers 133©) 134 Strategic Business Reporting (SBR) Or Workings Associate $m b/d (per question) ° en. 16 Acquistion of associate 908 Cash rec'd (div. from associate) 40% 40% m0) &/4 (Gor question) ee Debt factoring IFRS 9 Financial instruments requires Weston to consider the commercial substance rather than the legal form of the debt factoring arrangements. Under |ERS 9, the trade receivables should be derecognised from the financial statements of Weston when the following conditions ore met: WhenWestonhasnofurtherrightstoreceivecash from the factor; and either (When substantially oll of therisks andrewards of ownershiprelatingtothe receivables havebbeentransferredtothe factor, or if substantially all ofthe risks and rewards have not been transferred, then (i) WhenWestonhasnofurthercontroloverthetrade receivables ‘Agreament one With agreement one there is a sharing of the risks and rewards of ownership os the factoring is non-recourse except that Weston retains an obligation to refund the factor 9% of Irecoverable debts. it con be seen, however, thot substantially all the risks and rewards cof ownership have passed to the factor. The probability of an individual defaults low given that there is low credit risk ond the factor would suffer the vast mojority ofthe loss orising from any defauit. Weston also has no further access to the rewards of ownership as the Initia! $32 million (80% x $40 milion} isin full and final settlement. Furthermore, the foctor has assumed full control over the collectability of the receivables. The trade recelvables should be derecognised from the financial statements of Weston and $8 milion, being the difference between the value of the receivables sold and the cash received, should be Charged as an irrecoverable debt expense against the profits of Weston, The guarantee should be treoted as o separate financial liability in accordance with IFRS 9. This would initially be measured at its fair value of $50,000. Agreement two The risks and rewards of ownership do not initially poss to the factor in relation to ‘agreement two. The foctor has full recourse to Weston for a six-month periad so the ‘ecoverable debt risk is still with Weston, Furthermore, Weston sill has the right to receive further cosh payments from the factor, the amounts to be received being dependent on when and if the customers pay the factor. Weston therefore stil has the risks assoctated with slow payment by thelr customers. The receivables must net intiolly be derecognised from the financial statements with the $8 million (20% « 40m) proceeds being treated os a short-term liability due to the factor. The receivables ond liability balances would gradually be reduced os the factor recovered the cash from Westen's customers which would be ‘adjusted for the imputed interest and expensed in profit or oss. Should there be any indication of impairment during the six-month petiod, the receivables should be credited with a corresponding charge to profit or loss Following six months the risks and rewards of ownership have passed to the factor and the balances on the loan and the receivables would be offset. The remaining bolance following offset within the receivables of Weston should be expensed in profit or loss as on inrecovercble debt.18 Bubble Workbook referenes, Foreign exchange is covered in Chapter 16. i Top tips. In Part (0), you are asked to set out and explain various extracts from the preparation of « consolidated statomant of financial position for a simple group structure involving on overseas subsidiary with an adjustment for an intra-group loan. It's Important to grab the easy marks for bbosic consolidation workings and not get bogged down in ony adjustments you find challenging Part (o) (i) requests the transition of Tysla’s statement of financial position, whichis very straightforward. Its necessary to provide e brief explanation of the adjustments, in case the figures ore wrong. Part (b) consists mainly in describing the principles of IAS 21. Do not worry too much if you did not know the answer to the last part of the question, relating to the potential disposal of shares in ‘Tyslor ~ you con score a pass on this port of the question without getting ital ight. Easy marks. These are available in Part (ei) for simply translating the statement of finonciol position ct the correot rate. The Salt goodwill calculation is olso o straightforward one. Clear workings, referenced logically, are always Important. In Part (b), moke sure you read the question properly and discuss the treatment of monetary ond. | non-monetary items as well og the eloments of the question related to the translation and possible disposal of an overseas entity, with the retention of a loon. | ee Marks © © Intragroup loan : : ()_Tronslotion of Tyslar SOFP Discussion i: Colevation ‘ : 8 Gi) Goodwill ~ Salt _ | Goodwill = Tyslor 3 ; 8 ‘1 merk per point up to a maximum © 0 _Intragroup toon ‘The loan ie foreign currency monetary item in Tyslar's financial statements which i rmeons it needs to be reirorslated at the losing rate of exchonge. The exchange differences should have been recorded through Tysiar’s profit or loss and wil therefore offact retained earnings. Exchange Sm rate Dinars m 1 February 20x5 10 9 dinors:St Cash poid § July 20X5 o 10 dinars:$1 Exchange rate loss - bolancing figure | 31 October 20X6 5 9.8 diners:$t i BPP i cht Answers 135{As Tyslor has not retransiated the lean outstanding at year end, a correction is needed to increase Tyslar's non-current liabillties by 7.5 million dinars ond reduce retained earnings by « corresponding omount. Debit __—Profitorloss(retoined earnings) 7.8 dinars (to (0) @)) Credit Non-current Fobilties 755 dinars (to (0) (9) In addition, after retransiation, $5 million will be cancelled from both financial ‘assets and non-current liabilities to eliminate intragroup balances on consolidation. The intragroup loan willbe eliminated from the consolidated SOFP. Debit Non-current liabilities $5m Credit Financial assets $m 4) Translation of Tyslar's SOFP In order to covert Tuslar's statement of financial position appropriately in preparation for consolidation into Bubble’s financial statements, the ossets and liabilities shown in the foreign operation's statement of financial position are translated ot the closing rote at the year end, being 9.5 dinars to the dollar as ot 31 October 20XS, regardless of the date on which those items originated, For consolidotion purposes, o subsidiary's share capital and any reserves balances {at acquisition are translated ot the historic rate at the date of acquisition (being 8 dinors to the dollar on 1 November 20X's when Bubble acquired ite interest). The post-acquisition movements in retained earnings are broken down inte the profit ond dividend for each year post-acquisition (here just one year - the yeor tended 31 October 20X5). The profit for each post-acquisition yeor is translated at actual rate or average rate for that year ifit isa close opproximotion. Dividends are translated at the actual rate. Tysler did not pay a dividend in the current yeor. The balancing figure on translating the statement of financial position represents the exchange difference on translating the foreign subsidiary's net assets. A further ‘exchange difference crises on goodwill because itis treated as an asset of the subsidiary and is therefore retranslated at the closing rate each year end. The ‘exchange difference for the yeor is reported in other comprehensive income in the consolidated statement of profit or oss and other comprehensive income. The group share of cumulative exchange differences are recorded in the translation reserve ‘and the non-controlling interests’ (NCD share is recorded in the NCI werking. ‘The translated assets ond liabilities must then be aggregated with Tyslar's assets ‘and liabilities in the consolidated statement of financial position on o line by line bosis ‘The loon correction colculated in (o)() must be Incorporated into Tyslor's statement of finoncial position stated in cinars before the translation into dollars of the corrected position is performed. Translation of SOFP of Tyslar ot 31 October 20X5 Dinars (m) loan agj Dinars(m) (Rate $m Property, plant and equipment 390 95 wit Financial assets 8 95 103 Inventories 6 95 17 ‘Trade and other receivables 36 95 38 Cosh and cash equivalents 20. 95 95 BO BH eae eae oe On.