AFR Revision - Qns-Ans

AFR Revision_Qns-Ans
UNIT 1. VERTICAL AND MIXED COMPLEX GROUPS, PIECEMEAL ACQUISITIONS AND DISPOSALS
OF SUBSIDIARIES (IFRS3, IFRS10, IFRS11, IAS7)
Calculating the effective interests in the sub-subsidiaries
10 The rules for vertical groups
When the one-stage method of consolidation is used, the indirect interest of the holding company in a sub-
subsidiary is calculated, as a percentage, as follows:
This indirect holding may be less than 50%.
20 The rules for mixed groups

The group interest in the sub-subsidiary is the sum of the direct interest and the indirect interest in SS.
%
Direct holding by P in SS X
Indirect holding in SS= (% Direct holding by P in S) × (% Direct holding by S in SS) Y
P Group interest in SS X+Y
NCI % (Z) = 100% – (X + Y)%
Calculating the non-controlling interest and goodwill

For a direct subsidiary S, this is not a problem. The non-controlling interest in S is the percentage of
shares held directly by the NCI in S, multiplied by the net assets of S.
For a sub-subsidiary, or any other subsidiary with an indirect non-controlling interest (SS):
Non-controlling interest in the P group:
NCI in S (% NCI in S) x (Net assets of S) X
NCI in SS (use effective interest of NCI% in SS) (% NCI in SS) x (Net assets of SS) Y
Direct and indirect NCI in S and SS X+Y
Subtract double counting: Cost of indirect NCI in SS (% NCI in S) x (COI by S in SS) (Z)
NCI in P Group X+Y-Z
An alternative way of calculating the non-controlling interest would be as follows:

Net assets of S, excluding investment in SS XX
NCI share of these assets in S (%NCI in S*XX) YY
NCI share of net assets of SS (Direct and indirect NCI in SS) ZZ
NCI in P Group YY+ZZ
30 Cost of the parent entity’s investment in sub-subsidiaries

Simply use the COI by S in SS x P’s% in S, or total S’s COI in SS less NCI’s indirect COI in SS
Having calculated the non-controlling interest in SS, we can calculate the parent’s share of the cost of the
investment in SS. The cost of the indirect non-controlling interest in SS must be subtracted from the total
cost of the investment by S in SS, to obtain the cost of the group’s investment in SS:
Cost of investment of S in SS A
Cost of indirect NCI in SS B = (X + Y – Z) above
Cost of parent’s investment in SS A–B
The cost of the parent’s investment in SS is then used to calculate the purchased goodwill on the
acquisition of SS.
40 Calculating the purchased goodwill
Where 100% of the subsidiary is acquired, the calculation is as follows:
$
Cost of investment (= value of the subsidiary) X
Net assets of subsidiary (X)
Goodwill X
Where less than 100% of subsidiary is acquired, the value of subsidiary comprises two elements:
- The value of the part acquired by the parent
- The value of the part not acquired by the parent, known as the noncontrolling interest
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There are 2 methods in which Goodwill may now be calculated following the update to IFRS3:
(i) Partial Goodwill (old method)
Cost of investment (COI) X
Less: Parents % of Sub’s net assets at acquisition date (X)
Goodwill - Parent's share X
The partial goodwill (proportion of net assets) method calculates the portion of goodwill attributable to the
parent only, while fair value method calculates the goodwill attributable to the group as a whole.
(ii) Full Goodwill (new method)
Cost of investment (COI) X
Less: Parents % of Subsidiary’s Net Assets at acquisition (X)
Goodwill - Parent share X
FV of NCI at acquisition (NCI shares x Sub. share price at acquisition) X
Less: NCI share of subsidiary’s net assets at acquisition (X)
Goodwill - NCI share X
Total/Gross/Full goodwill X
This method is referred to as “the full goodwill method”, as it results in 100% of the goodwill being shown
in the group statement of financial position – that belonging to the shareholders of the parent and that
belonging to the noncontrolling interest (as this is the assets that the group controls).
An alternative presentation of the full goodwill method as allowed by the standard is shown below:
Cost of investment (COI) (value of acquired part) X
Add: Fair value of NCI at acquisition (value of part not acquired) X
Total Fair Value of Sub’s Net Assets at acquisition X
Less: 100% of the Sub’s Net Assets at acquisition (W2) (X)
Total/Gross/Full goodwill X
In words, IFRS 3 (revised) states: Consideration paid by parent + fair value of non-controlling interest –
fair value of the subsidiary's net identifiable assets = consolidated goodwill
Positive goodwill is presented as a noncurrent asset on the face of the consolidated statement of financial
position and is subject to impairment reviews to assess whether its value has fallen.
A negative goodwill (when COI<NA purchased). Negative goodwill is the commonly used term but under
IFRS 3, this is referred to as a discount on acquisition. Most likely reason for this to arise is a
misstatement of the fair values of assets and liabilities and accordingly the standard requires that the
calculation is reviewed. After such a review, any negative goodwill remaining is credited directly to the
income statement (it is a gain from purchase bargain).
CONSOLIDATED SFP AND SPL INCLUDING SUB-ASSOCIATES

10 Consolidating investment from associates
Investment in associate company (SFP): equity accounting method
Cost of investment X
Add: Parent’s share of the associate’s post-acquisition profits X
Add: Parent’s share of the associate’s post-acquisition OCI X
Less: Impairment of investment in associate (X)
X
Fair value and the associate
If fair value of the associate’s net assets at acquisition are materially different from their book value, the net
assets should be adjusted in the same way as for a subsidiary.
Balances with the associates

The associate is considered to be outside the group. If a group company trades with the associate,
• the balances between group companies and the associate will remain in the CSFP,
• payables and receivables will remain in the CSFP.
Unrealised profit in inventory

Unrealised profits on trading-in between group and associate must be eliminated to the extent of the
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investor’s interest (i.e. % owned by parent).
Adjustment must be made for unrealised profit in inventory as follows:
(1) Determine the value of closing inventory which is the result of a sale to or from the associate.
(2) Use mark-up/margin to calculate the profit earned by the selling company.
(3) Make the required adjustments, these will depend up on who the seller is;
Parent company selling to associate

The profit element is included in the parent company’s accounts and associate holds the inventory.
Dr Group retained earnings
Cr Investment in associate
Associate selling to parent company
The profit element is included in the associate company’s accounts and the parent holds the inventory.
Dr Group retained earnings
Cr Group inventory
Associate in the consolidated income statement

The associate is considered to be outside the group. The equity method of accounting requires that the
consolidated income statement:
(1) adjusts for the unrealised profit in inventory.
(2) does not eliminate any sales/purchases between group companies and the associate (will remain
part of the consolidated figures in the income statement);
(3) does not include dividends from the associate.
(1) includes group share of associate’s profit after tax less any impairment of the associate in the year.
20 Consolidating investment from sub-associates
In a single-stage consolidation, the effective interest is sub-subsidiary used to consolidate
simultaneously parent and all subsidiaries and sub-subsidiaries. For sub-associate, this is used only in
calculating the post-acquisition reserves belonging to the parent and NCI.
The multi-stage consolidation practice involves:

Step 1: The investment is equity accounted into the financial statements of the main subsidiary.
Step 2: The revised statements of the main subsidiary are then consolidated with those of parent
STEP ACQUISITIONS
General principle:
• Any preexisting equity interest in an entity is accounted for according to:
- IFRS 9 in the case of simple investments
- IAS 28 in the case of associates and joint ventures
- IFRS 11 in the case of joint arrangements other than joint ventures
• At the date when equity interest is increased and control achieved:
(1) remeasure the previously held equity interest to fair value
(2) recognise any resulting gain or loss in profit or loss for the year
(3) calculate goodwill and noncontrolling interest on either a partial (i.e. proportionate) or full (i.e. fair
value) basis in accordance with IFRS 3 Revised. The cost of acquiring control will be the fair value
of the previously held equity interest plus the cost of the most recent purchase of shares at
acquisition date.
• If there has been remeasurement of any previously held equity interest that was recognised in other
comprehensive income, any changes in value recognised in earlier years are now reclassified from
equity to profit or loss.
• The situation of a further purchase of shares in a subsidiary after control has been acquired (for
example taking the group interest from 60% to 75%) is regarded as a transaction between equity
holders; goodwill is not recalculated.
10 Investment or Associate becomes a Subsidiary: calculation of goodwill

Consideration transferred (cost of new shares to arrive at control) X
Add: FV of acquirer's previously held equity interest X
Add: NCI (at % FV of new assets or 'full' FV) X
Less: Net FV of identifiable assets acquired and liabilities assumed (X)
Goodwill X
* If proportionate method is used, the FV of existing investment = new PC× (former %/new %)]
20 Acquisitions where control is retained: adjustment to parent's equity

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• An increase or decrease in controlling interest where control is retained is accounted for under
the IFRS 3 as a transaction between owners.
• The difference between the consideration and change in NCI is shown as an adjustment to
parent’s equity.
The calculation is as follows.
Fair value of consideration paid (cash) (X)
Add: Decrease in NCI in net assets at date of transaction X
Add: Decrease in NCI in goodwill at date of transaction* X
= Adjustment to parent's equity (increase or decrease) (X)
STEP DISPOSALS
10 Disposals where control is not lost (control is retained = increase in NCI)
Adjustment to the parent's equity is calculated as follows
Fair value of consideration received (cash proceeds) X
Increase in NCI in net assets at disposal* (X)
Increase in NCI in goodwill at disposal ** (X)
Adjustment to parent's equity X
Notes: *Increase in NCI in net assets at disposal = NCI % increase × NAs at disposal date
** This line is only required where NCIs are measured at fair value at the date of acquisition (i.e where
there is an increase in the non-controlling interest share of goodwill already recognised).
20 Disposals where control is lost

Calculation of gain on disposal in parent's separate financial statements
The proceeds are compared with the carrying value of the investment sold. The investment will be held at
cost or at fair value if held as an investment in equity instruments:
Less: Carrying value of investment disposed of (usually cost of shares sold) (X)
Profit/(loss) on disposal X/(X)
Tax (amount or rate given in question) (X)
Calculation of gain on disposal group’s financial statements

Add: Fair value of any investment retained X
Less: Share of consolidated carrying value at date control lost (disposal date):
net assets at disposal date X
unimpaired Goodwill at disposal date X
less carrying value of NCI at disposal date (X)
(X)
Group profit/(loss) X/(X)
This gain may need to be disclosed separately if it is material. This needs to be adapted for the
circumstances in the question, in particular whether it is a full or partial disposal:
Consolidated statement of comprehensive income

The consolidated statement of comprehensive income might previously have recognised gains or losses
relating to the subsidiary in other comprehensive income.
For example, when control in the former subsidiary is lost, the subsidiary might hold some available-for-
sale financial assets, for which a gain has previously been included in other comprehensive income.
Similarly, when control in the former subsidiary is lost, the subsidiary might have non-current assets for
which a revaluation gain has previously been reported in other comprehensive income.
As a result of the disposal of the shares by the parent, there will be a gain or loss on disposal attributable
to the owners of the parent entity. The total gain or loss should be analysed in order to decide how much
should be reported:
(1) as a direct transfer to retained earnings
(2) as a reclassification adjustment from other comprehensive income to profit or loss, and
(3) in profit or loss, as a gain or loss on disposal.
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If a gain or loss previously recognised in other comprehensive income would be reclassified to profit and
loss on disposal of the related assets (or liabilities), the parent should re-classify the previously recognised
gain from equity to profit or loss as a reclassification adjustment when control in the subsidiary is lost.
For example, if a subsidiary has available-for-sale financial assets on which a gain has previously been
reported in other comprehensive income, the parent should reclassify the gain to profit or loss.
If a gain on revaluation previously recognised in other comprehensive income would be transferred
directly to retained earnings on disposal of the asset, the parent should transfer the revaluation surplus
directly to retained earnings when it loses control of the subsidiary.
Any balancing gain or loss on loss of control is reported as a gain or loss in profit and loss, before tax.
The total gain or loss on loss of control in a subsidiary is as follows:

FRw
Consideration (if any) received from transaction resulting in loss of control A
Add: Fair value of any retained investment in the former subsidiary B

A+B= X
Carrying value of former subsidiary’s net assets at date control is lost C
Minus: Carrying value of NCI share of these net assets (including accumulated other comprehensive
(D)
income attributable to the NCI)
C-D= Y
Total gain (or loss): X – Y Z
Amounts previously recognised as other comprehensive income relating to the former subsidiary,
now accounted for as a direct transfer to retained profit or as a reclassification adjustment (+/-)
E/(E)
Gain or loss to report in profit or loss: Z±D G
CONSOLIDATED STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS (Direct method)
Cash flows from operating activities
Cash receipts from customers XX
Cash paid to suppliers and employees (XX)
Cash generated from operations XX
Interest paid (XX)
Income taxes paid (XX)
Net cash from operating activities XXX
Cash flows from investing activities
Purchase of property, plant and equipment (XX)
Proceeds from sale of equipment XX
Interest received XX
Dividend received XX
Net cash used in investing activities XXX
Cash flows from financing activities
Proceeds from issue of shares XX
Proceeds from long term borrowing XX
Dividends paid (XX)
Net cash used in financing activities XXX
Net increase/(decrease) in cash and cash equivalents XXX
Cash and cash equivalents at start of period XXX
Cash and cash equivalents at end of period XXX
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STATEMENT OF CASH FLOWS (Indirect method)
OPERATING ACTIVITIES
Profit before tax as per the SPLOCI X
Adjustments for noncash items dealt with in arriving at operating profit:
Interest payable X
Depreciation and amortisation charges X
Loss on impairment charged to Profit or Loss X
Income/(Loss) from associate (X)/X
Gain/Loss from foreign exchange rate differences (X)/X
Gain/Loss on disposal of noncurrent assets (X)/X
Gain/Loss on disposal of subsidiary (X)/X
X
Changes in working capital:
(Increase)/decrease in inventories (X)/X
(Increase)/decrease in receivables (X)/X
Increase/(decrease) in payables X/(X)
Cash generated from operations X
Interest paid (X)
Taxation paid (X)
Net cash Inflow(outflow) from operating activities X
INVESTING ACTIVITIES
Payments to purchase NCA (X)
Receipts from NCA disposals X
Net cash paid to acquire subsidiary (X)
Net cash proceeds from subsidiary disposal X
Dividend received from associate X
Interest received X
Net cash inflow(outflow) from investing activities X/(X)
FINANCING ACTIVITIES
Proceeds from share issue X
Proceeds from loan or debenture issue X
Cash repayment of loans or debentures (X)
Finance lease repayments (X)
Equity dividend paid by parent (X)
Dividend paid to NCI (X)
Net cash inflow(outflow) from financing activities X/(X)
Increase (Decrease) in cash and equivalents for the year X/(X)
Cash and equivalents brought forward X/(X)
Cash and equivalents carried forward X/(X)
AVOIDING DOUBLE COUNTING WHEN A SUBSIDIARY HAS BEEN ACQUIRED
Calculation of the cash paid for a subsidiary

Cash element in the purchase consideration X
Less: Cash assets of the subsidiary at the acquisition date (X)
Cash payment on acquisition of subsidiary, net of cash received X
This net cash payment is the amount shown in the group statement of cash flows.
INVENTORIES, TRADE RECEIVABLES, TRADE PAYABLES

Opened Inventory accounts and record amounts of inventory b/d, sold and c/d; then debit inventory from
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acquired subsidiary and credit inventory related to subsidiary disposed of. For Trade receivables do the
same for inventory but for Trade payable credit the amount payable related to the acquired subsidiary and
debit the one related to the subsidiary disposed of.
Dividend paid to Non-Controlling Interests

Non-Controlling Interests Account
Details FRw Details FRw
NCI share of foreign exchange loss X Bal. b/f X
Dividend paid to NCI (balancing figure) X NCI acquired in subsidiary X
Bal. c/f X Profit Attributable to NCI (SPL) X
NCI share of foreign exchange gain X
X X
Calculating dividends received from an associate (or JV)

Investment in Associate/JV Account
Details $’000 Details $’000
Bal. b/f X Impairment of investment in associate X
Group share of profits after tax X Dividend received (balancing figure) X
Bal. c/f X
X X
Finance lease transactions

When rentals under a finance lease are paid, the interest and capital elements are split out and included
under net cash from operations (interest paid)' and 'financing activities’ headings respectively.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

STATEMENT OF CHANGES IN EQUITY
Share Share Foreign Revaluation Retained NCI Total
capital premium currency reserve earnings Equity
translation
Opening balance X X X X X X
Share issues X X X
Revaluation gains X X X
Profit for period X X X
Dividends* (X) (X) (X)
Exchange gain** X X X
Closing balance X X X X X X
**Exchange gain = exchange gain on translation of subsidiary
*Dividend paid to owners of the parent company (if any)
Retained Earnings Account

Details FRw Details FRw
Dividend paid to owners of parent (bal fig) X Bal. b/f X
Bal. c/f X Group share of profits (attributed to parent) X
X X
Vertical groups
10 P owns 80% of the equity of S, and that S in turn owns 75% of the equity of SS. It would appear as
follows:
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P holds a controlling interest in S which in turn holds a controlling interest in SS. SS is therefore a
subsidiary of a subsidiary of P, in other words, a sub-subsidiary of P.
• P owns 80% of 75% = 60% of SS
• The non-controlling interest in S owns 20% of 75% = 15% of SS
• The non-controlling interest in SS itself owns the remaining 25% of the SS equity
SS is nevertheless a sub-subsidiary of P, because it is a subsidiary of S which in turn is a subsidiary of P.
The chain of control thus makes SS a sub-subsidiary of P which owns only 60% of its equity.
The total NCI in SS may be checked by considering a dividend of $100 paid by SS where S then
distributes its share of this dividend in full to its own shareholders.
$
S will receive $75
P will receive 80% × $75 = 60
Leaving for the total NCI in SS 40
100
10 A acquired 75% of B on 1 January 20X7 after B had acquired 60% of C on 1 January 20X4. What is the
group structure and when does C become a member of the A group?
Solution
A
75% 1 January 20X7
60% 1 January 20X4
C
C becomes a member of the A group at the later of the two dates of acquisition – i.e. from 1
January 20X7. The effective group interest in C is: 75%x60%=45%. The effective NCI in C is 55%
Mixed/D-shape groups
In this example, H Ltd owns 60% of S Ltd and 40% of T Ltd; S Ltd owns 20% of T Ltd; S Ltd is a subsidiary
of H Ltd; T Ltd is also a subsidiary of H Ltd. The explanation is that
• H Ltd and S Ltd between them own more than 50% of T Ltd (the fact that S Ltd is not a wholly-owned
subsidiary of H Ltd is irrelevant).
• H Ltd controls T Ltd because it owns 40% directly and because it controls another 20% through its
control of S Ltd which puts SS be a sub-subsidiary of P.
20 The group structure of the P Group is as follows:
Required: Calculate when S1 and S2 became subsidiaries in the P Group in each of these situations:
(a) Situation 1: P acquired its shares in S1 on 1 May 20X1, and its shares in S2 on 1 May 20X2, and S1
acquired its shares in S2 on 1 May 20X3.
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(b) Situation 2: P acquired its shares in S1 on 1 May 20X4, and its shares in S2 on 1 May 20X2, and S1
acquired its shares in S2 on 1 May 20X1.
Solution
The interest of P in S2 is 30% + (80% × 45%) = 66%.
The effective NCI in S2 is 100%-66% =36%
Situation 1
• P obtains control of S1 on 1 May 20X1 and the pre-acquisition profits of S1 at that date are used for
consolidation purposes.
• The date that P acquires control of S2 is the date that S1 acquires its stake in S2, which is 1 May
20X3. The pre-acquisition profits of S2, when consolidating the 66% effective interest of P, are the
accumulated profits as at 1 May 20X3.
• From 1 May 20X2 to 1 May 20X3, S2 is an associate of P.
Situation 2
• P obtains control of S1 on 1 May 20X4 and the pre-acquisition profits of S1 at that date are used for
consolidation purposes.
• The date that P obtains control of S2 is 1 May 20X4, which is the date that he acquires his stake in S1
and hence gains indirect control over S1’s holding in S2.
• From 1 May 20X2 to 1 May 20X4, S2 is an associate of P.
In practice, groups are usually larger and more complex, but the consolidation procedures for large
groups will not differ from those we shall now describe in this unit.
Question 1. The draft statements of financial position of P Co, S Co and SS Co on 30 June 20X7 were as
follows:
P Co S Co SS Co
ASSETS $ $ $
Non-current assets
Tangible assets 105,000 125,000 180,000
Investments, at cost
80,000 shares in S Co 120,000 – –
60,000 shares in SS Co – 110,000 –
Current assets 80,000 70,000 60,000
Total assets 305,000 305,000 240,000
EQUITY AND LIABILITIES
Equity
Ordinary shares of $1 each 80,000 100,000 100,000
Retained earnings 195,000 170,000 115,000
275,000 270,000 215,000
Payables 30,000 35,000 25,000
Total equity and liabilities 305,000 305,000 240,000
P Co acquired its shares in S Co on 1 July 20X4 when the reserves of S Co stood at $40,000; and S Co
acquired its shares in SS Co on 1 July 20X5 when the reserves of SS Co stood at $50,000. It is the group's
policy to measure the non-controlling interest at acquisition at its proportionate share of the fair value of
the subsidiary's net assets.
Note. Assume no impairment of goodwill.
Required: Prepare the draft consolidated statement of financial position of P Group at 30/6/20X7.
Answer: Working 1. Group Structure
P Effective Interests in SS
80% 1 July P Group (80% *60%) = 48%
20X4 NCI = (100% - 48%) = 52%
S
60 1 July
% 20X5
SS
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Working 2: Net Assets of subsidiaries
S SS
Acq. date Rep. date Acq. date Rep. date
Share Capital 100,000 100,000 100,000 100,000
Retained Earnings 40,000 170,000 50,000 115,000
Total FV of NA Acquired 140,000 270,000 150,000 215,000
Post-acquisition profits (in ‘000) 270-140=130 215-150=65
Groups share (130,000*80%); (65,000*48%) 104,000 31,200
NCI share (130,000*20%); (65,000*52%) 26,000 33,800
Working 3: Goodwill (NCI is measure using proportionate share of Subs' NA)

P in S S in SS Total
FV of purchase consideration (COI) 120,000 88,000
Add: Fair Value of NCI at acquisition 28,000 78,000
148,000 166,000
Less: FV of Identifiable Net assets acquired 140,000 150,000
Goodwill at acquisition = CV because no impairment 8,000 16,000 24,000
Working 4: Non-Controlling Interest in the group

S SS Total
FV of NCI at acquisition (W3) 28,000 78,000
Add: NCI share of post-acquisition profits (W2) 26,000 33,800
Less: NCI share in the COI by S in SS (Cost of indirect NCI in SS) (22,000)
54,000 89,800 143,800
Working 5: Group Retained Earnings

P’s retained earnings 195,000
P’s share in S’s post acquisition profits (W2) 104,000
P’s share in SS’ post acquisition profits (W2) 31,200
Consolidated retained earnings c/f 330,200
P Co
Consolidated Statement of Financial Position at 30 June 20X7
$
ASSETS
Non-current assets
Tangible assets (105+125+180) 410,000
Goodwill (W3) 24,000
434,000
Current assets 210,000
Total assets 644,000
Equity
Ordinary shares of $1 each fully paid 80,000
Retained earnings (W5) 330,200
Shareholders’ funds 410,200
Non-controlling interest (W4) 143,800
554,000
Payables (30+35+25) 90,000
Total equity and liabilities 644,000
follows:
10 | P a g e
P Co S Co SS Co
ASSETS $ $ $
Non-current assets
Tangible assets 105,000 125,000 180,000
80,000 shares in S Co 120,000 – –
60,000 shares in SS Co – 110,000 –
Current assets 80,000 70,000 60,000
Total assets 305,000 305,000 240,000
Equity
275,000 270,000 215,000
Payables 30,000 35,000 25,000
Again, using the same figures in above question but now assume that:
(a) S Co purchased its holding in SS Co on 1 July 20X4
(b) P Co purchased its holding in S Co on 1 July 20X5
(c) The retained earnings figures on the respective dates of acquisition are the same, but on the date P
Co purchased its holding in S Co, the retained earnings of SS Co were $60,000. It is the group’s policy
to measure the NCI at its proportionate share of the fair value of the subsidiary’s net assets.
Answer
Working 1: Group Structure
P
80% 1 July 20X5
60% 1 July 20X4
SS
Effective Interests in SS
P Group (80% *60%) = 48%
NCI = (100% - 48%) = 52%
W2. Subs' Net assets

S SS
Share Capital 100,000 100,000 100,000 100,000
Total 140,000 270,000 160,000 215,000
Post-acquisition reserves 130,000 55,000
Groups share (130,000*80%) ; (55,000*48%) 104,000 26,400
NCI share (130,000*20%) ; (55,000*52%) 26,000 28,600
130,000 55,000
Working 3. Goodwill (NCI is measured using proportionate share of Subs' NA)
S SS Total
Add: Fair Value of NCI at acquisition (140,000*.2) ; (160,000*.52) 28,000 83,200
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148,000 171,200
Goodwill at acquisition = Carrying value because no impairment 8,000 11,200 19,200
Working 4. Non-Controlling Interest

S SS Total
54,000 89,800 143,800
Working 5. Retained Earnings
P's retained earnings as per question 195,000
P's share in S's Post Acquisition retained earnings (W2) 104,000
P's share in SS's Post Acquisition retained earnings (W2) 26,400
325,400
P Co
$
ASSETS
Non-current assets
Tangible assets (105+125+180) 410,000
429,200
Current assets (80+70+60) 210,000
Equity
549,200
Payables (30+35+25) 90,000
follows:
P Co S Co SS Co
ASSETS $ $ $
Non-current assets
Tangible assets 105,000 125,000 180,000
80,000 shares in S Co 120,000 – –
60,000 shares in SS Co – 110,000 –
Current assets 80,000 70,000 60,000
12 | P a g e
Total assets 305,000 305,000 240,000
Equity
275,000 270,000 215,000
Payables 30,000 35,000 25,000
P Co acquired its shares in S Co on 1 July 20X4 when the reserves of S Co stood at $40,000; and S Co
acquired its shares in SS Co on 1 July 20X5 when the reserves of SS Co stood at $50,000. It is the group's
policy to measure the non-controlling interest at fair value at the date of acquisition. The fair value of the
non-controlling interests in S on 1 July 20X4 was $29,000. The fair value of the 52% noncontrolling interest
on 1 July 20X5 was $80,000.
Note. Assume no impairment of goodwill.
Required: Prepare the draft consolidated statement of financial position of P Group at 30/6/20X7
Answer
P
80% 1 July 20X4
60% 1 July 20X5
SS
Effective Interests in SS
P Group (80% *60%) = 48%
NCI = (100% - 48%) = 52%

S SS
Share Capital 100,000 100,000 100,000 100,000
Total 140,000 270,000 150,000 215,000
Groups share (130,000*80%) ; (65,000*48%) 104,000 31,200
NCI share (130,000*20%) ; (65,000*52%) 26,000 33,800
130,000 65,000

S SS
Add: FV of NCI at acquisition as given 29,000 80,000
149,000 168,000
Goodwill at acquisition = Carrying value because no impairment 9,000 18,000
Total 27,000
13 | P a g e
S SS
55,000 91,800
Total 146,800
P's share in SS's Post Acquisition retained earnings (W2) 31,200
Total 330,200
P Co
$
ASSETS
Non-current assets
Tangible assets (105+125+180) 410,000
410,000
Current assets (80+70+60) 210,000
Total Equity 410,200
Payables (30+35+25) 90,000
Question 4. The statements of financial position of Antelope Co, Yak Co and Zebra Co at 31 March 2014
are summarized as follows:
Antelope Co Yak Co Zebra Co
FRw FRw FRw
ASSETS
Non-current assets
Freehold property 100,000 100,000
Plant and machinery 210,000 80,000 3,000
Total PPE 310,000 180,000 3,000
Investments in subsidiaries
Shares, at cost 110,000 6,200
Loan account 3,800
Current accounts 10,000 12,200
Total Investments 120,000 22,200 3,000
Current assets
Inventories 170,000 20,500 15,000
Receivables 140,000 50,000 1,000
Cash at bank 60,000 16,500 4,000
Total Current Assets 370,000 87,000 20,000
14 | P a g e
Total Assets 800,000 289,200 23,000
Ordinary share capital 200,000 100,000 10,000
Retained earnings 379,600 129,200 (1,000)
Total Equity 579,600 229,200 9,000
Current liabilities
Trade payables 160,400 40,200 800
Due to Antelope Co 12,800 600
Due to Yak Co 12,600
Taxation 60,000 7,000
Total Current Liabilities 220,400 60,000 14,000
Additional Information:
(i) Antelope Co acquired 75% of the shares of Yak Co in 2011 when the credit balance on the retained
earnings of that company was FRw 40,000. No dividends have been paid since that date.
(ii) Yak Co acquired 80% of the shares in Zebra Co in 2013 when there was a debit balance on the
retained earnings of that company of FRw 3,000. Subsequently FRw 500 was received by Zebra Co
and credited to its retained earnings, representing the recovery of an irrecoverable debt written off
before the acquisition of Zebra's shares by Yak Co.
(iii) During the year to 31 March 2014 Yak Co purchased inventory from Antelope Co for FRw 20,000
which included a profit mark-up of FRw 4,000 for Antelope Co. At 31 March 2014 one half of this
amount was still held in the inventories of Yak Co. Group accounting policies are to make a full
allowance for unrealized intra-group profits.
(iv) It is the group's policy to measure the non-controlling interest at its proportionate share of the fair
value of the subsidiary's net assets.
Required: Prepare the consolidated statement of financial position of Antelope Co at 31 March 20X4.
(Assume no impairment of goodwill.)
Answer
W 1. Group structure
Antelope
Co
75% 2011
Yak Co
80 2013
%
Zebra Co
Effective Interests in Zebra Co

P Group (75% *80%) = 60%
NCI = (100% - 60%) = 40%
Yak Co Zebra Co
Share Capital 100,000 100,000 10,000 10,000
Retained Earnings 40,000 129,200 (3,000) (1,000)
Adjustment for bad debts recovered (previously written off) 500
Total 140,000 229,200 7,500 9,000
Groups share (89,200*75%) ; (1,500*60%) 66,900 900
NCI share (89,200*25%) ; (1,500*40%) 22,300 600
89,200 1,500
S SS
15 | P a g e
Add: Fair Value of NCI at acquisition (140,000*.25) ; (7,500*.4) 35,000 3,000
145,000 7,650
Goodwill at acquisition = Carrying value because no impairment 5,000 150
Total 5,150
S SS
Add: NCI share of post-acquisition profits (W2) 22,300 600
57,300 2,050
Total 59,350
P's share in SS's Post Acquisition retained earnings (W2) 900
PUP (W6) (2,000)
Total 445,400
W6. Inter-company trading $ $

Inter-company sales to be eliminated in full when Dr Group sales 20,000
consolidating the P/L&OCI: 20,000
Cr Group cost of sales 20,000
Provision for unrealised profit on unsold inventory at the year-end (downstream transaction):
4,000*1/2=2,000
Dr Group retained earnings 2,000
Cr Group inventory 2,000
Note: All current accounts from inter-company investments are cancelled each other (Receivables are offset
against payables)
Consolidated Statement of Financial Position at 31 March 2014

$
ASSETS
Non-current assets
Freehold property (100+100) 200,000
Plant and machinery (210+80+3) 293,000
Goodwill (W3) 5,150
Total non-current assets 498,150
Current assets
Inventories (170+20.5+15-2 seeW6) 203,500
Receivables (140+50+1) 191,000
Cash at bank (60+16.5+4) 80,500
Total current assets 475,000
Total Assets 973,150
Equity
Ordinary share capital 200,000
16 | P a g e
Shareholders’ funds (Owners of Antelope Co) 645,400
Non-Controlling Interest (W4) 59,350
Total Equity 704,750
Current liabilities
Trade payables (160.4+40.2+.8) 201,400
Taxation (60+7) 67,000
Total Current Liabilities 268,400
Question 5. The draft statements of financial position of H plc, M Co and T Co as at 31 May 20X5 are as
follows:
H plc M Co T Co
$ $ $
ASSETS
Non-current assets
Tangible assets 90,000 60,000 60,000
Investments in subsidiaries(cost):
Shares in M Co 90,000
Shares in T Co 25,000 42,000
205,000 102,000 60,000
Current assets 40,000 50,000 40,000
Total assets 245,000 152,000 100,000
Equity
Ordinary shares $1 100,000 50,000 50,000
Revaluation surplus 50,000 20,000
Non-current liabilities
12% Loan – 10,000 –
Current liabilities
Payables 50,000 40,000 25,000
Additional information:
(a) H plc acquired 60% of the shares in M Co on 1 January 20X3 when the balance on that company's
retained earnings was $8,000 (credit) and there was no share premium account.
(b) H plc acquired 20% of the shares of T Co and M Co acquired 60% of the shares of T Co on 1 January
20X4 when that company's retained earnings stood at $15,000.
(c) There has been no payment of dividends by either M Co or T Co since they became subsidiaries.
(d) There was no impairment of goodwill.
(e) It is the group's policy to measure the non-controlling interest at acquisition at its proportionate
share of the fair value of the subsidiary's net assets.
Required: Prepare the consolidated statement of financial position of H Group as at 31 May 20X5.
Solution
W1. Group Structure
H
Effective Interests in T
1/1/20X3 P Group 20%+(60% *60%) = 56%
60% NCI = (100% - 48%) = 44%
1/1/20X4
20%
M
60% 1/1/20X4
17 | P a g e
M T
Ordinary share capital 50,000 50,000 50,000 50,000
Revaluation surplus - 20,000 - -
Total 58,000 102,000 65,000 75,000
Post-acquisition revaluation surplus 20,000 -
Groups share (20,000*60%); (N/A) 12,000
NCI share (20,000*40%); (N/A) 8,000
Post-acquisition retained earnings 24,000 10,000
Groups share (24,000*60%); (10,000*56%) 14,400 5,600
NCI share (24,000*40%); (10,000*44%) 9,600 4,400
W3. Goodwill (NCI is measured using proportionate share of Subs' NA at acquisition)

H in M M in T Total
FV of Purchase Consideration (COI) - Direct (by H in M and T) 90,000 25,000
Indirect (by H in T) [42,000*60%] - 25,200
90,000 50,200
Add: FV of NCI at acquisition (58,000*40%); (65,000*44%) 23,200 28,600
113,200 78,800
Less: FV of Identifiable Net assets acquired (58,000) (65,000)
Goodwill at acquisition = CV because no impairment 55,200 13,800 69,000
W4. Non-Controlling Interest in H Group

M T Total
Add: NCI share of post-acquisition revaluation surplus (W2) 8,000
Add: NCI share of post-acquisition retained earnings (W2) 9,600 4,400
Less: NCI share in the COI by M in T (Cost of indirect NCI in T) (16,800)
24,000 33,000 57,000
W5. Group reserves

Consolidated revaluation surplus
P's revaluation surplus as per question 50,000
P's share in M's Post Acquisition revaluation surplus (W2) 12,000
62,000
Consolidated retained earnings
P's share in M's Post Acquisition retained earnings (W2) 14,400
P's share in T's Post Acquisition retained earnings (W2) 5,600
65,000
H Group
Consolidated Statement of Financial Position as at 31 May 20X5
$
ASSETS
Non-current assets
18 | P a g e
Tangible assets (90+60+60) 210,000
279,000
Current assets (40+50+40) 130,000
Equity
Ordinary shares $1 100,000
Revaluation surplus (W5) 62,000
Shareholders' funds 227,000
Non-controlling interests (W4) 57,000
284,000
12% Loan 10,000
Current liabilities
Payables (50,000+40,000+25,000) 115,000
Question 6. H Ltd acquired 75% of S Ltd on 1 January 20X4 when the retained profits of S were $40,000.
S Ltd acquired 20% of T Ltd on 30 June 20X4 when the retained profits of T Ltd were $25,000. They had
been $20,000 on the date of H Ltd’s acquisition of S Ltd.
Draft statements of financial position of H Ltd, S Ltd and T Ltd, as at 31.12.20X4, are as follows:
H Ltd S Ltd T Ltd
$’000 $’000 $’000
Other assets 280 110 100
Investment in S 120
Investment in T 80
400 190 100
Share capital 200 100 50
Retained profits 100 60 30
Liabilities 100 30 20
400 190 100
Required: Prepare the consolidated statement of financial position for H Group as at 31.12.20X4
Answer
Group structure
A
Ltd
75% 1 January 20X4
B Ltd
20% 30 June 20X4
T Ltd
Multi-step consolidation method
Step 1: Equity account T into S
Net assets summary of T (in $’000)
19 | P a g e
At date of At date of Post-acquisition
acquisition consolidation profits
Share capital 50 50
Net assets 75 80
In S’s books (in $’000)

Dr Cost of investment (CSFP) 1
Cr Income from T Ltd-Associate (P&L) (20% × 5) 1
S’s balances change as follows (in $’000):

Investment in S Retained profits
Per question 80 60
Share of post-acquisition profits 1 1
81 61
Step 2: Consolidate S into H

Net assets summary of S (in $’000)
At date of acquisition At date of consolidation Post-acquisition profits
Share capital 100 100

Net assets 140 161
Goodwill on acquisition of S (in $’000)

$
Cost of investment 120
Non-controlling interest at acquisition (25% × 140) 35
155
Net assets at acquisition (see above) -140
Carrying value (No impairment) 15
Non-controlling interests in S (in $’000) $

NCI’s share of net assets of S at the date of acquisition (25% × 140) 35.00
NCI’s share of the post-acquisition retained profits of S (25% of 21 (see above)) 5.25
NCI’s share of net assets at the date of consolidation 40.25
Consolidated retained profits (in $’000): $
All of H’s retained profits 100
H’s share of the post-acquisition retained profits of S (75% of 21 (see above)) 15.75
115.75
Single step consolidation method
Under single step consolidation method, we use effective interest in sub-associate as follows:
% Group = 75% of 20% i.e 75%*20% = 15%; Group share = 15%*(30-25) = 0.75 i.e $750
% NCI = 25% of 20% i.e 25%*20% = 5%; NCI share = 5%*(30-25) = 0.25 i.e $250
Group retained earnings = 100,000+ 75%*(60,000-40,000) + 750 =$115,750

NCI share = 25%*(100,000+40,000) + 25%*(60,000-40,000) + 250 = $40,250
Then, consolidate parent and subsidiary line by line for assets and liabilities
A consolidated statement of financial position as at 31 Dec. 20X4 can be prepared as follows:

H Group
Consolidated Statement of Financial Position at 31/12/20X4
ASSETS $’000
Goodwill (see working) 15.00
Investment in associate 81.00
20 | P a g e
Other assets 390.00
Total assets 486.00

EQUITY AND LIABILITIES $’000
Share capital 200.00
Consolidated retained profits (see working) 115.75
Non-controlling interest (see working) 40.25
Current liabilities 130.00
Total equity and liabilities 486.00
Question 7. Step or piecemeal acquisitions

(a) A plc holds a 10% investment in B ltd at FRw 24,000 in accordance with IFRS 9. On 1 June 20X7, it
acquires a further 50% of B ltd’s equity shares at a cost of FRw 160,000. On this date fair values are as
follows:
B ltd’s net assets FRw 200,000
The non-controlling interest FRw 100,000
The 10% investment FRw 26,000
Note: the non-controlling interest is to be valued using the full goodwill method.
Required: How do you calculate the goodwill arising in B ltd?
Answer
Calculation of the gain or loss on de-recognition of previous investment
FRw
FV of previous investment (10%) in B ltd at date control obtained 26,000
Cost of previous investment (10%) in Bltd 24,000
Gain on de-recognition (to Profit or Loss) 2,000
Dr Investment in B ltd 2,000
Cr Profit or loss 2,000
Calculation goodwill arising on acquisition of B ltd

FRw
FV of previous investment (10%) in B ltd at date control obtained 26,000
FV of consideration paid for new shares (50%) in B ltd 160,000
186,000
Add: FV of NCI at date control is obtained 100,000
286,000
Less: 100% identifiable net asset at date control is obtained (200,000)
Goodwill arising on acquisition of B ltd 86,000
(b) S has share capital of 1,000 $10 shares, unchanged since incorporation. H acquires an 80% holding in
S over two years, as follows:
Date Shares acquired Cost of investment Net assets of S
1 January 20X5 (30%) 300 $20,000 $60,000
1 January 20X7 (50%) 500 $90,000 $90,000
31 December 20X7 $105,000
The net assets of S at 1 January 20X5 are at fair value. The fair value of the 30% shareholding of H at 1
January 20X7 is measured as $45,000. The fair value of the net assets of S at 1 January 20X7 is measured
as $150,000. Required: Gain on remeasurement and goodwill arising on the date control obtained.
Solution
The initial investment is probably accounted for as an associate by the equity method. It is assumed that
there has been no impairment to the investment, so that the carrying value of the investment at 1 January
20X7, when control is obtained, is:
$
Investment at cost 20,000
Add: Share of post- investment retained profits (30% × $(90,000 – 60,000) 9,000
Carrying value of investment 29,000
When control is obtained on 1 January 20X7, the previous investment in 30% of S is re-valued to fair value,
$45,000. There is a gain on re-measurement, which is reported in profit or loss of H.
21 | P a g e
$
Investment at fair value 45,000
Less: Carrying value of investment at date control is obtained 29,000
Gain on re‐measurement, take to profit or loss 16,000
Dr Investment in S $16,000
Cr Profit or loss $16,000
For the consolidated statement of financial position, the goodwill on acquisition attributable to the equity
holders of H, using the partial goodwill method, is calculated as follows:
$
Previous investment at fair value 45,000
Add: Cost of additional 500 shares 90,000
= Purchase consideration + Previous investment at fair value 135,000
Less: H’s share of fair value of net assets of S (80% × 150) 120,000
= Goodwill arising on acquisition 15,000
(c) On 1 January Year 9, Haff acquired 50% of the equity shares of Staff for $90 million.
It already held a 20% equity holding in Staff which had been acquired for $30 million but which was valued
at $36 million at 1 January Year 9. The fair value of the non-controlling interest at 1 January Year 9 was
$60 million and the fair value of the identifiable net assets in Staff at that date was $166 million. Using the
full goodwill method of consolidation, the purchased goodwill would be calculated as follows:
$ million
Purchase consideration for shares at 1 January Year 9 90
Add: Value of interest already held, as at 1 January Year 9 36
Add: Fair value of NCI 60
Less: Fair value of identifiable net assets (166)
Goodwill 20
(d) On 1 January Year 1, H purchased 25% of the equity of S for FRw 80 million. H then acquired an
additional 40% of the equity of S for FRw 160 million on 30 June Year 1. At this date it was estimated that
the fair value of the original 25% shareholding in S was FRw 95 million. During the year S did not issue any
new shares or make any distribution to its shareholders. The carrying value of the net assets of S were as
follows:
FRw million
At 1 January Year 1 260
At 30 June Year 1 300
H decides to use the fair value method to measure the non-controlling interests, and estimates that the
value of goodwill in S attributable to the non-controlling interest at 30 June Year 1 is FRw 15 million. The
financial year of H ends on 30 June.
Required: For the consolidated financial statements of H for the year to 30 June Year 1, state:
(i) the total gain or profit attributable to the investment in S for the year
(ii) total amount of goodwill arising with the acquisition
(iii) the value of the non-controlling interest in S.
Answer
The profits of S since the investment was acquired (all retained) are $40 million (= $300m – $260m).
During this period, H held 25% of the equity of S and it is assumed that S is an associate. Profits
attributable to H for the year are therefore $10 million (= 25% × $40 million).
$ million
Initial investment in associate at cost 80
Share of post-investment retained profits 10
90
Fair value of investment at 30 June 95
Gain recognised when step acquisition occurs 5
The total gain/profit recognised for the year from the investment in AS is therefore $10 million + $5 million
= $15 million.
Goodwill $ million
Fair value of investment in 25% of S 95
22 | P a g e
Cost of additional 40% of shares 160
255
H share of net assets of AS at 30 June (65% × 300) 195
Goodwill attributable to owner of H 60
Goodwill attributable to non-controlling interests 15
Total goodwill 75
$ million
Fair value of investment in 25% of AS (35% × 300) 105
Goodwill attributable to non-controlling interests 15
Total NCI 120
(e) On 1 January Year 9, Hak acquired 70% of the equity shares of Stak for FRw 450 million. The fair value
of the identifiable net assets in Stak at that date was FRw 600 million. The fair value of the NCI at 1 January
Year 9 was FRw 264 million. Hak subsequently acquired another 10% of the equity shares of Stak on 31
December Year 9 for FRw 102 million. The carrying value of the net assets of Stak at 31 December Year 9
was FRw 670 million. Hak wishes to use the full goodwill method for consolidation.
Required: Calculate the goodwill and necessary adjustment to Hak's equity
Answer
Using the full goodwill method, the purchased goodwill lat 1 January Year 9, when the original 70% of the
shares in Stak were acquired, is calculated as follows:
$ million
Purchase consideration for shares at 1 January Year 9 450
Fair value of NCI at 1 January Year 9 264
714
Fair value of net assets acquired 600
Purchased goodwill 114
When the additional 10% of shares are purchased from NCI on 31 December, this is treated as an ‘equity
transaction’ or ‘treasury transaction’ between equity interests in the group, and there is no alteration to the
goodwill.
However, the NCI has been reduced from 30% to 20%, resulting in a reduction in NCI by 10%/30% = 1/3.
$m
Fair value of NCI at 1 January Year 9 264
NCI share of retained profits 1 January - 31 December = 30% × (670 – 600) 21
NCI net asset at 31 December (before share sale) 285
Transfer to equity of Hak equity shareholders (10/30) (95)
NCI: Balance at 31 December after share sale 190
The consideration paid for the extra 10% of the shares was $102 million. There is an adjustment to the
equity attributable to Hak shareholders, as follows:
$m
Consideration paid (102)
Equity transfer from NCI 95
Reduction in equity attributable to Hak shareholders (7)
Question 8. Step or piecemeal disposals
(a) On 1 January Year 9, Hak acquired 70% of the equity shares of Stak for FRw 450 million. The fair value
of the identifiable net assets in Stak at that date was FRw 600 million. The fair value of the NCI at 1 January
Year 9 was FRw 264 million. Hak subsequently sold 10% of the equity shares of Stak on 31 December
Year 9 for FRw 102 million. The carrying value of the net assets of Stak at 31 December Year 9 was FRw
670 million. Hak wishes to use the full goodwill method for consolidation.
Required: Adjustment to Hak’s equity
Answer: Hak is selling 10% of its shares in Stak, whilst still retaining a controlling interest (instead of
acquiring an extra 10%). The purchased goodwill at 1 January Year 9 was $114 million.
$m
Stak net assets at 1 January Year 9 600
Increase in net assets to 31 December 70
Stak net assets at 31 December Year 9 670
Consideration received for shares 102.0

Transfer to NCI: 10% × (net assets 670 + goodwill 114) (78.4)
Increase in equity attributable to Hak shareholders 23.6
23 | P a g e
(b) On 1 January Year 2, P acquired 80% of the equity of S for FRw 620 million in cash. On 30 June Year 2
it sold 10% of the equity in S for FRw 94 million. S did not issue any shares or make any distribution to its
shareholders in the year to 31 December Year 2. P uses the partial goodwill method to account for the
acquisition of S and no goodwill is attributed to the non-controlling interest. The net assets of S were as
follows, at carrying value:
FRw million
At 1 January Year 2 700
At 31 December Year 2 900
At 31 December Year 2, P carries out an impairment review and decides that the goodwill in its investment
in S has been impaired by FRw 8 million.
Required:
(i) Explain how the disposal of the shares in S should be accounted for.
(ii) Show much profit or loss would be recognised in consolidated statement of comprehensive income for
the year to 31 December Year 2, and how much of this is attributable to the equity owners of P.
Answer
The disposal of 10% of the shares in S leaves P with a controlling interest; therefore, the disposal of the
shares should be accounted for as an equity transaction between owners of the group. No gain or loss is
recognised in the consolidated financial statements of P.
It is assumed that the profits of S for the year were $200 million (all retained; therefore $900 million - $700
million). At 30 June it is assumed that profits for the year to date were $100 million (= $200 million × 6/12);
therefore the net assets of S at this date were $800 million.
P NCI
$m $m
Before the share sale (80% × 800) 640 (20%) 160
After the share sale (70%) 560 (30%) 240
Change in interest in S - 80 +80
The shares were sold for $94 million adding to the assets in P’s statement of financial position. The
transaction should therefore be accounted for in equity as follows:
Dr Cash $94 million
Cr NCI $80 million
Cr Reserves attributable to P (= gain = balance) $14 million
$ million $ million
Post-acquisition profit attributable to S (see above) 200
Less: Impairment of goodwill (8)
Recognised profit 192
Attributable to equity owners of P
1 January – 30 June (80% × 200 × 6/12) 80
1 July – 31 December (70% × 200 × 6/12) 70
Goodwill impairment (8)
142
Attributable to NCI
1 January – 30 June (20% × 200 × 6/12) 20
1 July – 31 December (30% × 200 × 6/12) 30
50
192
(c) On 1 January Year 9, Hevi acquired 90% of the equity shares of Sevi for FRw 120 million. The fair
value of the identifiable net assets in Sevi at that date was FRw 111 million. The fair value of the NCI at 1
January Year 9 was FRw 9 million. Hevi subsequently sold 65% of the equity shares of Sevi on 31
December Year 9 for FRw 97 million. The carrying value of the net assets of Sevi at 31 December Year 9
was FRw 124 million. Of the increase in net assets of Sevi between 1 January and 31 December, FRw 10
million had been reported in profit or loss and FRw 3 million in comprehensive income.
The remaining equity in Sevi held by Hevi at 31 December was valued at FRw 36 million, and this
investment is classified as an associate. (As a result of the sale of the shares in Sevi, no other investor
obtained overall control.) Hevi uses the full goodwill method for consolidation.
Required: Calculate the goodwill to be de-recognised in consolidated accounts and the gain on disposal
recognised in profit or loss.
Answer
The gain on disposal recognised in profit or loss should be calculated as follows:
24 | P a g e
$m $m
Consideration received for shares in Sevi on 31 December 97.0
Fair value of remaining interest, valued as an associate 36.0
Value of NCI at 31 December (10% × 124 million) 12.4
Gain reported in comprehensive income 3.0
148.4
Net assets and goodwill de-recognised in consolidated accounts
Net assets de-recognised 124.0
Goodwill de-recognised: (120 + 9 – 111) 18.0
(142.0)
Gain on disposal, reported in profit or loss 6.4
(d) Can a parent lose control and keep all the shares?
YES. A parent can lose control without selling one piece of shares.
For example, a subsidiary might issue new shares to the third party and parent’s voting rights will be
diluted. Or, some contractual agreement giving control to the parent has just expired and a parent lost
control. If any of these happens and a parent loses control, then you need to deal with the disposal of a
subsidiary in a similar manner as described above.
Question 9. Group statement of cash flows

Cash = cash in hand + cash at bank – bank overdraft.
Cash equivalents = short-term highly liquid investments that are readily convertible into known amounts of
cash and which are subject to an insignificant risk of changes in value.
Consolidated statements of financial position as at 31 March
20X5 20X4
$’000 $’000
Non-current assets
Property, Plant and Equipment 11,970 8,800
Goodwill 1,180 260
Investment in associate 340 280
13,490 9,340
Current assets
Inventories 2,000 1,860
Receivables 2,680 2,280
Short-term deposits 70 40
Cash at bank 360 240
5,110 4,420
18,600 13,760
Equity
Share capital 4,000 3,000
Share premium 600 100
Revaluation reserve 100 20
Retained earnings 6,970 6,640
11,670 9,760
Non-controlling interests 1,160 350
12,830 10,110
Interest-bearing borrowings 2,800 2,000
Obligations under finance leases 420 90
Deferred tax 680 610
3,900 2,700
Current liabilities
Trade payables 1,770 870
Accrued interest 14 18
Income tax 56 42
25 | P a g e
Obligations under finance leases 30 20
1,870 950
18,600 13,760
Consolidated Income Statement for the year ended 31.3.20X5
$’000
Revenue 1,750
Cost of Sales (880)
Gross profit 870
Other operating expenses (420)
Profit from operations 450
Finance cost (200)
Gain on sale of subsidiary 60
Share of associate’s profits 80
Profit before tax 390
Tax (105)
Profit after tax 285
Attributable to: Non-controlling interests 50
Equity holders of the parent 235
285
NOTES:
Property, Plant and Equipment
The following transactions took place during the year:
– Land was revalued upwards by $80,000 on 1 April 20X4. None of this revaluation gain was attributable
to Non-controlling interest shareholders.
– During the year depreciation of $160,000 was charged in the income statement.
– Additions includes $600,000 acquired under finance leases.
– A property was disposed of during the year for $500,000 cash. It had a carrying value of $590,000 at
the date of disposal. The loss on disposal has been included within cost of sales.
Acquisition of subsidiary
On 1 September 20X4 K acquired 60% of the share capital of S for $4 million, payable in cash.
The net assets of S at the date of acquisition had fair values as follows:
$’000
Tangible non-current assets 3,700
Inventory 450
Receivables 370
Cash and cash equivalents 60
Trade payables (315)
Taxation (40)
4,225
Gain on sale of subsidiary
On 1 January 20X5, K disposed of an 80% owned subsidiary for $780,000 in cash. The subsidiary had the
following net assets at the date of disposal:
$’000
Property, Plant and Equipment 1,270
Inventory 40
Receivables 90
Cash 70
Payables (260)
Income tax (10)
Interest-bearing borrowings (400)
800
This subsidiary had been acquired on 1 January 20X1 for a cash payment of $440,000 when its net assets
had a fair value of $450,000. Goodwill relating to this subsidiary had not been impaired since acquisition.
26 | P a g e
Foreign exchange
K holds a 75% shareholding in a foreign subsidiary, resulting in a foreign exchange gain of $170,000 being
recorded in group retained earnings in the year. This was made up as follows:
Parent shareholders NCI shareholders Total
$’000 $’000 $’000
Opening net assets
Property, Plant and Equipment 90 30 120
Inventory 18 6 24
Receivables 12 4 16
Payables -15 -5 -20
Profit for the year 42 14 56
Goodwill 23 - 23
170 49 219
Dividends
Dividends paid to the shareholders of the parent amounted to $75 million.
ANSWER
$'000 $'000
Cash flows from operating activities
Profit before tax 390
Depreciation 160
Impairment 488
Loss on disposal of property (500 - 590) 90
Foreign exchange gain on profit 56
Share of associate’s profits (80)
Gain on sale of subsidiary (60)
Finance costs 200
Cash generate from operations before change in working capital 1,244
Decrease in inventory 294
Increase in receivables (104)
Increase in payables 825
Cash from operations 2,259
Finance costs paid (204)
Tax paid (51)
2,004
flows from investing activities
Sale proceeds of non-current assets 500
Purchases of non-current assets (690)
Dividends received from associate 20
Acquisition of subsidiary (4,000 – 60) (3,940)
Sale of subsidiary (780 – 70) 710
(3,400)
Cash flows from financing activities
Issue of interest-bearing borrowings 1,200
Repayment of finance leases (260)
Issue of shares ((4,000 - 3,000) + (600 – 100)) 1,500
Dividends paid to parent shareholders (75)
Dividends paid to Non-controlling interest shareholders (819)
1,546
Net increase in cash and cash equivalents during the year 150
Opening cash and cash equivalents (40+240) 280
Closing cash and cash equivalents (70+360) 430
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UNIT 2. FOREIGN CURRENCY TRANSACTIONS AND OPERATIONS (IAS21)
Question 1
Background
Carbise is the parent company of an international group which has a presentation and functional currency
of the dollar. The group operates within the manufacturing sector. On 1 January 20X2, Carbise acquired
80% of the equity share capital of Bikelite, an overseas subsidiary. The acquisition enabled Carbise to
access new international markets. Carbise transfers surplus work-in-progress to Bikelite which is then
completed and sold in various locations. The acquisition was not as successful as anticipated and on 30
September 20X6 Carbise disposed of all of its holding in Bikelite. The current year end is 31 December
20X6.
Bikelite trading information

Bikelite is based overseas where the domestic currency is the dinar. Staff costs and overhead expenses
are all paid in dinars. However, Bikelite also has a range of transactions in a number of other currencies.
Approximately 40% of its raw material purchases are in dinars and 50% in the yen. The remaining 10% are
in dollars of which approximately half were purchases of material from Carbise. This ratio continued even
after Carbise disposed of its shares in Bikelite. Revenue is invoiced in equal proportion between dinars,
yen and dollars. To protect itself from exchange rate risk, Bikelite retains cash in all three currencies. No
dividends have been paid by Bikelite for several years. At the start of 20X6 Bikelite sought additional debt
finance. As Carbise was already looking to divest, funds were raised from an issue of bonds in dinars, none
of which were acquired by Carbise.
Acquisition of Bikelite
Carbise paid dinar 100 million for 80% of the ordinary share capital of Bikelite on 1 January 20X2. The net
assets of Bikelite at this date had a carrying amount of dinar 60 million. The only fair value adjustment
deemed necessary was in relation to a building which had a fair value of dinar 20 million above its carrying
amount and a remaining useful life of 20 years at the acquisition date. Carbise measures non-controlling
interests (NCI) at fair value for all acquisitions, and the fair value of the 20% interest was estimated to be
dinar 22 million at acquisition. Due to the relatively poor performance of Bikelite, it was decided to impair
goodwill by dinar 6 million during the year ending 31 December 20X5.
Rates of exchange between the $ and dinar are given as follows:
1 January 20X2: $1:0·5 dinar
Average rate for year ended 31 December 20X5 $1:0·4 dinar
31 December 20X5: $1:0·38 dinar
30 September 20X6: $1:0·35 dinar
Average rate for the nine-month period ended 30 September 20X6 $1:0·37 dinar
Disposal of Bikelite
Carbise sold its entire equity shareholding in Bikelite on 30 September 20X6 for $150 million. Further
details relating to the disposal are as follows:
Carrying amount of Bikelite’s net assets at 1 January 20X6 dinar 48 million
Bikelite loss for the year ended 31 December 20X6 dinar 8 million
Cumulative exchange gains on Bikelite at 1 January 20X6 $74·1 million
Non-controlling interest in Bikelite at 1 January 20X6 $47·8 million
Required:
(a) Prepare an explanatory note for the directors of Carbise which addresses the following issues:
(i) what is meant by an entity’s presentation and functional currency. Explain your answer with
reference to how the presentation and functional currency of Bikelite should be determined.
(ii) a calculation of the goodwill on the acquisition of Bikelite and what the balance would be at 30
September 20X6 immediately before the disposal of the shares. Your answer should include a
calculation of the exchange difference on goodwill for the period from 1 January 20X6 to 30
September 20X6.
(iii) an explanation of your calculation of goodwill and the treatment of exchange differences on
goodwill in the consolidated financial statements. You do not need to discuss how the disposal will
affect the exchange differences.
Note: Any workings can either be shown in the main body of the explanatory note or in an appendix to
the explanatory note.
(b) Explain why exchange differences will arise on the net assets and profit or loss of Bikelite each year
and how they would be presented within the consolidated financial statements. Your answer should
include a calculation of the exchange differences which would arise on the translation of Bikelite
(excluding goodwill) in the year ended 31 December 20X6.
(c) (i) Calculate the group profit or loss on the disposal of Bikelite.
28 | P a g e
(ii) Briefly explain how Bikelite should be treated and presented in the consolidated financial
statements of Carbise for the year ended 31 December 20X6.
ANSWER
(a) Explanatory note to: Directors of Carbise
Subject: Foreign subsidiary Bikelite
(i) The presentation currency is the currency in which the financial statements are presented. IAS 21 The
Effects of Changes in Foreign Exchange Rates permits an entity to present its individual financial
statements in any currency. It would therefore be up to the directors of Bikelite to choose a presentation
currency for its individual financial statements. Factors which could be considered include the currency
used by major shareholders and the currency in which debt finance is primarily raised.
The functional currency is the currency of the primary economic environment in which the entity operates.
Since transactions are initially recorded in an entity’s functional currency, the results and financial position
would need to be retranslated where this differed to the presentation currency.
When determining the presentation and functional currency of Bikelite, consideration should first be given
to whether the functional currency of Bikelite should be the same as Carbise, at least whilst under the
control of Carbise. It appears that Bikelite has considerable autonomy over its activities. Despite being
acquired to make more efficient use of the surplus inventory of Carbise, purchases from Carbise were only
5% of Bikelite’s total purchases. Revenue is invoiced in a range of currencies suggesting a geographically
diverse range of customers which, although this allows Carbise access to new international markets, is
unlikely to be classified as an extension of the parent’s operations. The volume of the transactions involved
between Carbise and Bikelite would seem to be far too low to come to this conclusion. Bikelite also
appears free to retain cash in a range of currencies and is not obliged to remit the cash to Carbise in the
form of dividends. Nor does Bikelite appear to be dependent on financing from Carbise with other
investors taking up the bond issue at the start of 20X6. The functional currency of Bikelite does not need to
be the same as Carbise.
In choosing its functional currency, Bikelite should consider the following primary factors: the currency
which mainly influences the sales price for their goods, the currency of the country whose competitive
forces and regulations determine the sales price and also the currency which influences labour, material
and overhead costs. The key determinant here is the currency which the majority of the transactions are
settled in. Bikelite invoices and is invoiced in a large range of currencies and so it would not be
immediately clear as to the appropriate functional currency. Nor is there detail about whether there is a
currency in which competitive forces and regulations could be important. We do not know, for example,
what currency Bikelite’s major competitors invoice in.
Secondary factors including the currency in which financing activities are obtained and the currency in
which receipts from operating activities are retained can help guide the entity where it is not immediately
clear. In relation to Bikelite, a significant volume of their sales are invoiced in dinars and the majority of
their expenses too, given that wages and overheads are also paid in dinars. Funds were raised in dinars
from the bond issue and so it would appear that the dinar should probably be the functional currency for
Bikelite. It is also possible that Bikelite may lose their autonomy on Carbise’s sale of their shares which
could have implications for the determination of the functional currency.
(ii) Goodwill in dinars on the acquisition of Bikelite would be dinar 42 million calculated as follows:
Dinars millions
Consideration 100
FV of NCI 22
Less net assets at acquisition (60 + 20) (80)
––––
Goodwill at acquisition 42
––––
On acquisition, the goodwill in $ would be (dinar 42m/0·5) $84 million.
Goodwill at 30 September 20X6 would be:
Dinar millions rate $ millions
Goodwill at 1 January 20X2 42 0·5 84
Impairment y/e 31 December 20X5 (6) 0·4 (15)
Exchange gain 25·7 (bal)
––– ––––––
Goodwill at 31 December 20X5 36 0·38 94·7
Current year exchange gain ___ 8·2 (bal)
Goodwill at 30 September 20X6 36 0·35 102·9
29 | P a g e
Workings
Dinar impairment of 6 million is translated at the average rate of $1:0·4 dinar = $15 million.
Goodwill at 31 December 20X5 would be translated at last year’s closing rate of $1:0·38 dinar = $94·7m.
Goodwill at 31 September 20X6 will be translated at $1:0·35 dinar = $102·9m.
(iii) On a business combination, goodwill is calculated by comparing the fair value of the consideration plus
non-controlling interests (NCI) at acquisition with the fair value of the identifiable net assets at acquisition.
Carbise measures NCI using the fair value method. This means that goodwill attributable to the NCI is
included within the overall calculation of
goodwill. An adjustment of dinar 20 million is required to the property of Bikelite to ensure the net assets at
acquisition are properly included at their fair value.
At each year end, all assets (and liabilities) are retranslated using the closing rate of exchange. Exchange
differences arising on the retranslation are recorded within equity. Since the non-controlling interest is
measured under the fair value method, the exchange difference would be apportioned 80%/20% between
the owners of Carbise and the non-controlling interest. Only the current year’s exchange difference would
initially be recorded within other comprehensive income for the year ended 31 December 20X6 whereas
cumulative exchange differences on goodwill at 30 September 20X6 would be recorded within equity.
(b) The net assets of Bikelite would have been retranslated each year at the closing rate of exchange.
There is therefore an exchange difference arising each year by comparing the opening net assets at the
opening rate of exchange with the opening net assets at the closing rate of exchange. An additional
exchange difference arises through the profit or loss of Bikelite each year being translated at the average
rate of exchange in the consolidated statement of comprehensive income. The profit or loss will increase
or decrease the net assets of Bikelite respectively which, as is indicated above, will be translated at the
closing rate of exchange within the consolidated statement of financial position. As with goodwill, the
exchange differences are included within equity with 80% attributable to the shareholders of Carbise and
20% to the NCI. Cumulative exchange differences will be included within the consolidated statement of
financial position with just current year differences recorded within other comprehensive income.
The carrying amount of the net assets of Bikelite on 1 January 20X6 was dinar 48 million. The fair value of
their opening net assets therefore would be dinar 64 million (dinar 48 + 16/20 x dinar 20 million). Bikelite
would only be consolidated for the first nine months of the year since Carbise loses control on 30
September 20X6. Losses per the individual accounts for the year ended 31 December 20X6 were dinar 8
million, so only dinar 6 million would be consolidated. Additional depreciation of dinar 0·75 million (dinar
20m/20 x 9/12) would be charged for the first nine months of the year. Net assets at disposal in dinars
would therefore be dinar 57·25 million (dinar 64 – dinar 6·75). The exchange difference arising in the
statement of comprehensive income for the year ended 31 December 20X6 would be $13·4 million
calculated as follows:
$ millions
Opening net assets at opening rate (dinar 64/0·38) 168·4
Loss for 9 months at average rate (dinar 6·75/0·37) (18·2)
Current year exchange gain (balance) 13·4
––––––
Net assets at 30 September 20X6 (dinar 57·25/0·35) 163·6
––––––
$10·7 million of the exchange differences are attributed to the shareholders of Carbide (80% x $13·4) and
$2·7 million to the NCI.
(c) (i) Group profit or loss on disposal on Bikelite

$ millions
Proceeds 150
Net assets at disposal (see (b)) (163·6)
Goodwill at disposal (see (a)(ii)) (102·9)
NCI at disposal 48·5
Exchange gains recycled to profit and loss 76·6
––––––
Group profit on disposal 8·6
––––––
Workings
Exchange gains at 1 January 20X6 per question are $74·1 million. Current year exchange differences on
goodwill are $8·2 million (see (b)(i)) and on the net assets are $13·4 million (see (b)). Cumulative exchange
30 | P a g e
gains at 30 September 20X6 are therefore $95·7 million. On disposal, the parent’s share (80%) = $76·6
million should be recycled to profit or loss.
NCI at disposal is calculated as follows:
$ millions
NCI at 1 January 20X6 per question 47·8
NCI share of loss to 30 September 20X6 (20% x dinar 6·75m (see (b))/0·37) (3·6)
NCI share exchange gains for 9 months to 30 September 20X6 (20% x (13·4 + 8·2)) 4·3
–––––
NCI at 30 September 20X6 48·5
–––––
(ii) For the year ended 31 December 20X6, Carbise will consolidate Bikelite for the first nine months of the
year up to the date of disposal of the shares and subsequent loss of control. NCI will be calculated on the
first nine months of losses. Exchange differences on the translation of the net assets, profits and goodwill
in relation to the nine months to 30 September 20X6 will initially be recognised in other comprehensive
income classified as gains which will be reclassified subsequently to profit or loss.
On 30 September 20X6, a consolidated profit or loss on disposal will be calculated in the consolidated
financial statements of Carbise. In effect, the proceeds are compared to the net assets and unimpaired
goodwill not attributable to the non‐controlling interest at the disposal date. The cumulative exchange
differences on the translation of Bikelite would be reclassified to profit or loss.
Consideration should be given as to whether the disposal of Bikelite would constitute a discontinued
operation. For Bikelite to be classified as a discontinued operation, it would need to represent a separate
major line of business or geographical area of operations. Since Bikelite was initially acquired by Carbise
to gain easier access to international markets, it is likely that the criterion would be met.
Question 2. Big Ltd. acquired 80% of Cahama Inc. on 1st July 20X1. Cahama Inc. are based in Belgium
where the functional currency is Francs (Frs). The financial statements for the year to 30 June 20X2 are
below.
Statements of financial positions
Big Cahama
$ Frs
Investment in Cahama 5,000
Non-Current Assets 10,000 3,000
Current Assets 5,000 2,000
Total assets 20,000 5,000
Share Capital 6,000 1,500
Retained Earnings 4,000 2,500
Liabilities 10,000 1,000
Total equity and liabilities 20,000 5,000
Statements of profit or loss

Big Cahama
$ Frs
Revenue 25,000 35,000
Operating Costs (15,000) (26,250)
Profit Before Tax 10,000 8,750
Tax (5,000) (7,450)
Profit for the Year 5,000 1,300
There was no other comprehensive income for either entity in the period.
Other information:
(i) The fair value of the net assets of Cahama was Frs 6,300 on the date of acquisition with any
increase being attributable to land held at historic cost.
(ii) Big sold goods to Cahama during the year for $1,000 cash.
(iii) The NCI is valued using the Fair Value method at Frs 2,000 at acquisition.
(iv) The Goodwill in Cahama was impairment tested at the year end and was impaired by Frs 200. The
impairment was deemed to have accrued evenly over the year so the average rate should be used
to treat it.
31 | P a g e
(v) Exchange rates to $1:
Frs
1 July 2001 1.5
Average rate 1.75
1 June 1.9
30 June 2
Required: Prepare the group statement of financial position and statement of profit of loss and other
comprehensive income.
Answer
W1. Group structure
Big Ltd
80% 1st July 20X1
Cahama Inc.
W2. Net Assets (in Subsidiary’s functional currency)

At Acquisition At reporting
Frs Frs
Share Capital 1,500 1,500
Accumulated Profits 1,200 2,500
Fair Value Adjustment on land (Balancing figure) 3,300 3,300
6,000 7,300
Post-acquisition profit: 7,300-6,000= 1,300

Share of post-acquisition profits: Parent: 1,300*80% = Frs 1,040
Share of post-acquisition profits: NCI: 1,300*20%= Frs 260
Calculation of foreign exchange gains and losses on retranslation of net assets

Frs Rate $
Opening net assets (here, Net assets at acq.) translated at Opening rate 6,000 1.5 4,000
Add: Profit for year translated at average rate for each year 1,300 1.75 743
Exchange loss on retranslation of net assets (bal. figure) bal. (1,093)
Closing Net assets (NA at reporting date) translated at closing rate 7,300 2 3,650
Closing net assets should have been 4,000+743=4,743, so being 3,650 a loss was recorded
Parent share of exchange loss on retranslation of goodwill @80% (874.40)

NCI share of exchange loss on retranslation of goodwill @20% (218.60)
W3. Goodwill
Frs
Cost of Parent Investment (5,000 @ 1.5) 7,500
Add: Fair Value NCI at acq. 2,000
Less: Net assets at acquisition 9,500
(6,000)
Goodwill on acquisition date 3,500
Impairment loss (200)
Unimpaired goodwill at reporting date in subs's functional currency 3,300
Retranslation of goodwill at each report date
Frs Rate $
Goodwill on acquisition 3,500 1.5 2,333.33
Less: Impairment loss (10%) (200) 1.75 (114.29)
Exchange loss arising on retranslation of goodwill bal. fig 569
Unimpaired goodwill at reporting date i.e 30 June 20X2 3,300 2 1,650
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Goodwill c/f would have been 2,333-114 i.e 2,119, so being 1,650 means a loss was recorded
Parent share of exchange loss on retranslation of goodwill @80% (455.20)
NCI share of exchange loss on retranslation of goodwill @20% (113.80)
W4. NCI in SFP

Frs Rate $
Fair Value of NCI at Acquisition Rate 2,000 1.5 1,333.33
Add: NCI share of subs' post acquisition profits (W2) (20% x 1,300) 260 1.75 148.57
Less: NCI share of goodwill impairment loss (W3) 200*20% 40 1.75 (22.86)
Less: NCI share of exchange loss on retranslation of subs' net assets (W2) (218.60)
Less: NCI share of exchange loss on retranslation of goodwill (W3) (113.80)
Total 1,126.8~1,127 1,127
W5. GROUP RESERVES
Group Retained Earnings
Frs Rate $
Parent’s Accumulated Profits 4,000
Add: Parent share of subs' post acquisition profits (W2) (80% x 1,300) 1,040 1.75 594.29
Less: Parent share of goodwill impairment loss (W3) 200*80% 160 1.75 (91.43)
4,502.86
Group Foreign exchange reserves or losses

$
Less: Parent share of exchange loss on retranslation of subs' net assets (W2) (874.40)
Less: Parent share of exchange loss on retranslation of goodwill (W3) (455.20)
(1,329.60
W6. Total Exchange Differences

Exchange difference arising on retranslation of net assets W2 (1,093)
Exchange loss on retranslation of on retranslation of goodwill (W3) (569)
(1,662)
W7. NCI Share Profit/Loss for Period

P&L TCI
Frs Rate $ $
NCI Share Profit in Period 20% x 1,300 260 1.75 149 149
Less: NCI Share Goodwill Impairment 20% x 200 40 1.75 (23) (23)
126 126
NCI share of exchange loss on retranslation of subs' net assets (W2) (219)
NCI share of exchange loss on retranslation of goodwill (W3) (114)
(207)
Group Statement of Comprehensive Income

$
Revenue 25,000+(35,000/1.75)-1,000Inter Co 44,000
Operating Costs -15,000+(26,250/1.75)-1,000Inter Co -29,000
Profit Before Tax 15,000
Tax -5000 + (7,450 / 1.75) -9,257
Profit for the Year 5,743
Other comprehensive income: Item that may be reclassified
to profit or loss in future periods:
Exchange loss arising on retranslation of net assets (1,093)
33 | P a g e
Exchange loss arising on retranslation of goodwill (569)
Total exchange difference arising on foreign operations (1,662)
Total Comprehensive Income for the year 4,081
Net Profit Attributable to:
Non-Controlling Interests 126
Owners of Parent (Balance) 5,617
5,743
Total Comprehensive Income for the year attributable to:
Non-Controlling Interests (207)
Owners of Parent (Balance) 4,288
4,081
Group Statement of Financial Position

ASSETS $
Non-Current Assets 10,000 + ((3,000+ 3,300) / 2) 13,150
Goodwill (W3) 1,650
Current Assets 5,000 + (2,000 / 2) 6,000
Total 20,800
Share Capital 6,000
Retained Earnings (Acc. Profit less FX losses) 4,502.86-1,229.60=3,173.26~3,173 3,173
9,173
NCI W4 1,127
10,300
Liabilities 10,000 (1,000 / 2) 10,500
Total 20,800
34 | P a g e
UNIT 3. FINANCIAL INSTRUMENTS (IAS32, IFRS7, IFRS9)
Question 1. Explain why each of the transactions listed below gives rise to a financial instrument as
defined by international standard IAS32:
(a) a company makes an issue of loan stock
(b) a company sells goods to a customer on credit
(c) a company deposits money into its bank account
(d) a company overdraws its bank account
(e) a company makes an issue of ordinary shares
(f) a company invests in newly-issued ordinary shares of another company.
Answer
(a) The issue of loan stock creates a contractual obligation on the part of the company to repay the loan at
some time in the future. The contract between the company and the lenders is a financial instrument
because:
(i) the lenders now have the right to be repaid (a financial asset)
(ii) the company is now under an obligation to repay the loan (a financial liability)
(b) A sale on credit creates a contractual obligation on the part of the customer to pay for the goods. The
contract with the customer is a financial instrument because:
(i) the company now has a trade receivable (a financial asset)
(ii) the customer now has a trade payable (a financial liability).
(c) In effect, a bank deposit is a loan to the bank and the bank is contractually obliged to repay this
money. The contract with the bank is a financial instrument because:
(i) the company now has the right to withdraw its cash (a financial asset)
(ii) the bank is now under an obligation to repay the cash (a financial liability).
(d) A bank overdraft is a form of bank loan and the company is contractually obliged to repay this loan.
The contract with the bank is a financial instrument because:
(i) the bank now has the right to be repaid (a financial asset)
(ii) the company is now under an obligation to repay the bank (a financial liability).
(e) Ordinary shares are an equity instrument, as defined by IAS32. The issue of ordinary shares creates a
contract between the company and its shareholders. This contract is a financial instrument because:
(i) the shareholders now own the shares (a financial asset)
(ii) the company now has extra share capital (an equity instrument).
(f) This purchase of ordinary shares creates a contract between the investing company and the issuing
company. This contract is a financial instrument because:
(i) the investing company now owns the shares (a financial asset)
(ii) the issuing company now has extra share capital (an equity instrument).
Question 2. Financial asset (contract giving rights to receive cash)

On 1st January 2019 Mahoko Co purchases a debt instrument for its fair value of FRw 1,000. The debt
instrument is due to mature on 31 December 2023. The instrument has a principal amount of FRw 1,250
and the instrument carries fixed interest at 4.72% that is paid annually. (The effective interest rate is 10%.)
How should Mahoko Co account for the debt instrument over its five-year term?
Solution
Mahoko Co will receive interest of Frw59 (i.e 1,250 x 4.72%) each year and Frw1,250 when the instrument
matures. Mahoko Co must allocate the discount of Frw 250 and the interest receivable over the five-year
term at a constant rate on the carrying amount of the debt. To do this, it must apply the effective interest
rate of 10%.
Amortisation table
Year Amortized cost at Profit or loss: Interest Interest received during Amortized cost at
beginning year income for year (@10% year (cash inflow) end of year
2019 1,000 100 (59) 1,041
2020 1,041 104 (59) 1,086
2021 1,086 109 (59) 1,136
2022 1,136 113 (59) 1,190
2023 1,190 119 (59+1,250) -
1 Jan. 2019 Dr Financial asset (Loan to xz company) 1,000
Cr Cash 1,000
31 Dec. 2019 Dr Financial asset 100
Cr Interest income 100
Dr Cash 59
Cr Financial asset 59
35 | P a g e
Presentation in SFP
Financial asset /Investment 1,041
Presentation in PL
Interest income 100
Question 3. Financial assets at FVTOCI

X purchased a loan on 1 January 20X5 and classified it as measured at fair value through OCI.
Terms:
– Nominal value $50 million
– Coupon rate 10%
– Term to maturity 3 years
– Purchase price $48 million
– Effective rate 11.67%
Fair values at each year end to maturity are as follows
– 31 December 20X5 $49.2 million
Required: Show the double entry for each year to maturity of the bond. (Ignore loss allowances).
Solution
The amortisation table can be constructed in the usual way and it can be extended to show the cumulative
fair value adjustment at each reporting date. This can then be used to calculate the annual fair value
adjustment.
Year Amortised Interest at Cash receipt Amortised cost Fair Cumulative fair value
cost b/f 11.67% c/f value(given) adjustment
20X5 48.00 5.60 (5.00) 48.60 49.20 0.60
20X6 48.60 5.65 (5.00) 49.25 49.50 0.25
20X7 49.25 5.75 (5+50=55.00) nil nil nil
Only the fair value adjustments are recognised in OCI. Other transactions in respect of the financial asset
(e.g. interest) are recognised in P&L in the usual way.
1 Jan. 20X5 Dr Financial asset (Loan to xz company) 48.00
Cr Cash 48.00
31 Dec. 20X5 Dr Financial asset 5.56
Cr Interest income (P&L) 5.56
Dr Cash 5.00
Cr Financial asset 5.00
31 Dec. 20X5 Dr Financial asset 0.60
Cr OCI 0.60
Presentation in SFP
Financial asset /Investment (48+5.56-5+0.6) 49.20
Presentation in PLOCI
Interest income 5.56
OCI 0.60
Question 4. Impairment of financial assets

Debita Bank applies the expected credit loss impairment model of IFRS 9. At 30 September 20X4, the
bank approved a total of $10 million overdraft facilities which have not yet been drawn.
Debita Bank considers that $8 million is in Stage 1 (i.e, no significant increase in credit risk). Of that $8
million in Stage 1, $4 million is expected to be drawn down within the next 12 months, with a 3%
probability of default over the next 12 months.
Debita Bank considers that $2 million is in Stage 2 and $2 million is expected be drawn down over the
remaining life of the facilities, with a probability of default of 10%.
Required: Calculate the additional allowance required in respect of the undrawn overdraft facilities, taking
account of the above information.
Solution
Expected credit loss
$
Stage 1 $4 million × 3% 120,000
Stage 2 $2 million × 10% 200,000
320,000
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Question 5. Financial liability (contract giving obligation to pay cash)
Galaxy Co issues a bond for $503,778 on 1 January 20X2. No interest is payable on the bond, but it will be
redeemed on 31 December 20X4 for $600,000. The effective interest rate of the bond is 6%.
Required: Calculate the charge to profit or loss of Galaxy Co for the year ended 31 December 20X2 and
the balance outstanding at 31 December 20X2.
Solution
The bond is a 'deep discount' bond and is a financial liability of Galaxy Co. It is measured at amortised
cost. Although there is no interest as such, the difference between the initial cost of the bond and the price
at which it will be redeemed is a finance cost. This must be allocated over the term of the bond at a
constant rate on the carrying amount.
The effective interest rate is 6%.
The charge to profit or loss for the year is $30,227 (i.e 503,778 x 6%)
The balance outstanding at 31 December 20X2 is $534,005 (i.e 503,778 + 30,227)
Year Amortized cost at Profit or loss: Interest Interest received during Amortized cost
beginning year income for year (@6% year (cash inflow) at end of year
20X2 503,778 30,227 - 534,005
20X3 534,005 32,040 - 566,045
20X4 566,045 33,955* 600,000 0
566,045*6%=33,963 but only 33,955 needed i.e 600,000-566,045
1 Jan 20X2 Dr Cash 503,778
Cr Financial liability (Loan from) 503,778
31 Dec. 20X2 Dr Cash 30,227
Cr Financial liability 30,227
Presentation in SFP
Financial liability/Bond 534,005
Presentation in PL
Interest expense 30,227
Derecognition of financial assets and liabilities

Derecognition is the removal of a previously recognised financial asset or financial liability from an entity’s
statement of financial position.
Derecognition of a financial liability
A financial liability (or a part of a financial liability) is derecognised when, and only when, it is extinguished.
This is when the obligation specified in the contract is discharged or cancelled or expires.
Derecognition of a financial asset
Most transactions involving derecognition of a financial asset are straightforward. However, financial assets
may be subject to complicated transactions where some of the risks and rewards that attach to an asset
are retained but some are passed on. IFRS 9 contains complex guidance designed to meet the challenge
posed by complex transactions.
The guidance is structured so that a transaction involving a financial asset is subject to a series of tests to
establish whether the asset should be derecognised. These tests can be framed as a series of questions.
1. Have the contractual rights to cash flows of the financial asset expired?
– If the answer is “yes” – derecognise the financial asset
– If the answer is “no” – ask the next question
2. Has the asset been transferred to another party?
– If the answer is “no” – the asset is retained (not derecognised)
– If the answer is “yes” – ask the next question
3. Have substantially all of the risks and rewards of ownership passed?
– If the answer is “the risks and rewards are neither passed nor retained (i.e. some are passed but
some kept)” – ask the next question
4. Has the asset been transferred in a way such that risks and rewards of ownership have neither passed
nor been retained but control has been lost.
This all sounds very complicated but what it means is that a financial asset is derecognised if one of three
combinations of circumstances occur:
– The contractual rights to the cash flows from the financial asset expire; or
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– The financial asset is transferred and substantially all of the risks and rewards of ownership pass to
the transferee; or
– The financial asset is transferred, substantially all of the risks and rewards of ownership are neither
transferred nor retained but control of the asset has been lost.
Example 1. ABC collects $10,000 that it is owed by a customer.

Yes, Derecognise the asset
Dr Cash $10,000
Cr Receivable $10,000
Example 2. ABC sells $100,000 of its accounts receivables to a factor and receives an 80% advance
immediately. The factor charges a fee of $8,000 for the service. The debts are factored without recourse
and a balancing payment of $12,000 will be paid by the factor 30 days after the receivables are factored.
Answer
No, ask the next question
Yes (for 80% of it)
3. Have substantially all of the risks and rewards of ownership passed? The receivables are factored
without recourse so ABC has passed on the risks and rewards of ownership.
ABC must derecognise the asset transferred.
Dr Cash $80,000
Cr Receivables $80,000
In addition, ABC has given part of the receivable to the factor as a fee:
Dr P&L $8,000
Example 3. ABC sells $100,000 of its accounts receivables to a factor and receives an 80% advance
immediately. The factor charges a fee of $8,000 for the service. The debts are factored with recourse and
a further advance of 12% will be received by the seller if the customer pays on time.
Answer
No – ask the next question
Yes (for 80% of it)
3. Have substantially all of the risks and rewards of ownership passed?
The debt is factored with recourse so the bad debt risk stays with ABC. In addition, ABC has access to
future rewards as further sums are receivable if the customers pay on time.
As ABC has kept the future risks and rewards relating to the $80,000, this element of the receivable is not
derecognised.
Dr Cash $80,000
Cr Liability $80,000
Being receipt of cash from factor – This liability is reduced as the factor
collects the cash.
Dr Liability $X
Cr Receivable $X
In addition, ABC has given part of the receivable to the factor as a fee:
Dr P&L $8,000
Question 6. Hedge accounting

A company owns inventories of 20,000 gallons of oil which cost $400,000 on 1 December 20X3. In order
to hedge the fluctuation in the market value of the oil the company signs a futures contract to deliver
20,000 gallons of oil on 31 March 20X4 at the futures price of $22 per gallon. The market price of oil on 31
December 20X3 is $23 per gallon and the futures price for delivery on 31 March 20X4 is $24 per gallon.
Required: Explain the impact of the transactions on the financial statements of the company:
(a) Without hedge accounting
(b) With hedge accounting
Solution
The futures contract was intended to protect the company from a fall in oil prices (which would have
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reduced the profit when the oil was eventually sold). However, oil prices have actually risen, so that the
company has made a loss on the contract
Without hedge accounting:
The futures contract is a derivative and therefore must be re-measured to fair value under IFRS 9. The loss
on the futures contract is recognized in profit or loss:
Dr Profit or loss 20,000 x (24 – 22) $40,000
Cr Financial liability $40,000
With hedge accounting:
The loss on the futures contract is recognized in the profit or loss as before. The inventories are revalued
to fair value:
Fair value at 31 December 20X3 (20,000 x 23) 460,000
Cost (400,000)
Gain 60,000
The gain is also recognized in profit or loss:
Dr Inventory $60,000
Cr Profit or loss $60,000
The net effect on the profit or loss is a gain of $20,000 compared with a loss of $40,000 without hedging.
What is hedging?
Hedging is the process of entering into a transaction in order to reduce risk. Simply hedging is a means of
reducing risk. Companies may use derivatives to establish ‘positions’, so that gains or losses from holding
the position in derivatives will offset losses or gains on the related item that is being hedged.
What is hedged item

A hedged item can be a recognised asset or liability, an unrecognised firm commitment, a forecast
transaction or a net investment in a foreign operation.
– The hedged item can be a single item or a group of items (subject to certain conditions).
– A hedged item can also be a component of such an item or group of items.
Only the following types of components (including combinations) may be designated as hedged items:
• changes in the cash flows or fair value of an item attributable to a specific risk or risks (risk
component) as long as the risk component is separately identifiable and reliably measurable;
• one or more selected contractual cash flows; or
• components of a nominal amount, i.e. a specified part of the amount of an item.
A hedged item must be reliably measurable. If a hedged item is a forecast transaction (or a component
thereof), that transaction must be highly probable.
What is hedging instrument

The following instruments may be designated as a hedging instrument:
– A derivative measured at fair value through profit or loss (except for some written options);
– A non-derivative financial asset measured at fair value through profit or loss;
– A non-derivative financial liability measured at fair value through profit or loss (unless it is a financial
liability designated as at fair value through profit or loss for which the amount of its change in fair value
that is attributable to changes in the credit risk of that liability is presented in other comprehensive
income).
– the foreign currency risk component of a non-derivative financial instrument may be designated as a
hedge of foreign currency risk provided that the instrument is not an investment in an equity
instrument for which an election has been made to present changes in fair value in other
comprehensive income.
Qualifying criteria for hedge accounting

Hedge accounting can only be used where all of the following criteria are met:
• the hedging relationship consists only of eligible hedging instruments and eligible hedged items.
• at the inception of the hedging relationship there is formal designation and documentation of the
hedging relationship and the entity’s risk management objective and strategy for undertaking the
hedge.
• The documentation must include:
– identification of the hedging instrument,
– identification of the hedged item,
– the nature of the risk being hedged; and
– how the entity will assess whether the hedging relationship meets the hedge effectiveness
requirements.
• the hedging relationship meets all of the following hedge effectiveness requirements:
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– there is an economic relationship between the hedged item and the hedging instrument;
– the effect of credit risk does not dominate the value changes that result from that economic
relationship; and
– the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the
hedged item that the entity actually hedges and the quantity of the hedging instrument that the
entity actually uses to hedge that quantity of hedged item.
Hedge accounting is allowed but not required. Where the conditions for using hedge accounting are met,
the method of hedge accounting to be used depends on the type of hedge. IFRS 9 identifies three types of
hedging relationship:
– fair value hedge
– cash flow hedge
– hedge of a net investment in a foreign entity (accounted for as a cash flow hedge).
Fair value hedge

A fair value hedge is a hedge of the exposure to changes in fair value of a recognised asset or liability or
an unrecognised firm commitment, or a component of any such item, that is attributable to a particular risk
and could affect profit or loss
For example:
• oil held in inventory could be hedged with an oil forward contract to hedge the exposure to a risk of a
fall in oil sales prices; or
• the risk of a change in the fair value of a fixed rate debt owed by a company could be hedged using an
interest rate swap.
Accounting treatment of fair value hedges

Accounting for a fair value hedge is as follows:
• The gain or loss on the hedging instrument (the derivative) is taken to profit or loss, as normal. (Note
the exception to this that is explained below).
• The carrying amount of the hedged item is adjusted by the loss or gain on the hedged item
attributable to the hedged risk with the other side of the entry recognised in profit or loss.
Example 1.
Entity X holds an inventory of 100 barrels of oil at a cost of $70 a barrel.
• 30th September 20X1: Oil is trading at $100 a barrel. Entity X decides to hedge the fair value of its oil
inventory by entering into a 12m forward contract to sell the oil at $100 per barrel.
• 31st December 20X1: Oil is trading at $90 per barrel.
Required: Assuming that the hedge has been properly documented explain the accounting treatment for
this hedge (ignore time value).
Answer
Hedging instrument (gain)
The forward contract gives Entity X the right to sell oil at $100 per barrel but it is only worth $90 per barrel.
This represents a gain of $10 per barrel
Dr Derivative asset (100 barrels @ $10) $1,000
Cr P&L $1,000
Hedged item (loss)

The fair value of oil has fallen by $10 per barrel. The carrying amount of the inventory is adjusted by this
amount.
Dr P&L $1,000
Cr Inventory $1,000
Note that the hedged item is not fair valued. Its carrying amount is adjusted by the change in its fair value.
Summary
Debit/(credit)
Inventory Derivative (asset) P&L
30th September 20X1 10,000
31st December 20X1:
Fair value change
Derivative 1,000 (1,000)
Inventory (1,000) 1,000
9,000 1,000 nil
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Financial asset measured at fair value through other comprehensive income
A financial asset measured at fair value through other comprehensive income would (of course) normally
result in the recognition of the full fair value change in OCI. If such an asset is a hedged item in a
relationship that qualifies for fair value hedge accounting, that part of the value change due to the hedged
risk is recognized in profit or loss.
Example 1. X Plc purchased a financial asset for $1,000. This asset was classified as at fair value through
OCI. X Plc hedged this item with a derivative instrument.
At the reporting date
The financial asset had a fair value of $1,050. Only $40 of this value change related to the hedged risk. The
fair value of the hedging instrument was $40 liability.
Required
a) Show the double entries to account for the hedge if the hedge accounting criteria were not met.
b) Show the double entries to account for the hedge if the hedge accounting criteria were met
a) Hedge accounting criteria not met Debit Credit

Financial asset 50
Other comprehensive income 50
Being: Recognition of fair value gain on financial asset
Statement of profit or loss 40
Derivative 40
Being: Recognition of fair value loss on derivative
b) Hedge accounting criteria met Debit Credit

Financial asset 50
Other comprehensive income 10
Being: Recognition of fair value gain on hedged financial asset
Derivative 40
Being: Recognition of fair value loss on derivative
This rule does not apply to equity instruments for which an election has been made for gains and losses to
be recognised in OCI.
Cash flow hedge

A cash flow hedge is a hedge of the exposure to variability in cash flows that is attributable to a particular
risk associated with a recognised asset or liability or a highly probable forecast transaction, and could
affect profit or loss
Hedges relating to future cash flows from interest payments or foreign exchange receipts are common
cash flow hedges.
For example:
➢ floating rate debt issued by a company might be hedged using an interest rate swap to manage
increases in interest rates;
➢ future US dollar sales of airline seats by a UK company might be hedged by a US$/£ forward contracts
to manage changes in exchange rates.
Accounting treatment of cash flow hedges

Accounting for a cash flow hedge is as follows:
• The change in the fair value of the hedging instrument is analysed into ‘effective’ and ‘ineffective’
elements.
• The ‘effective’ portion is recognised in other comprehensive income (and accumulated as a reserve in
equity).
• The ‘ineffective’ portion is recognised in profit or loss.
• The amount recognised in other comprehensive income is subsequently released to the profit or loss
as a reclassification adjustment in the same period as the hedged forecast cash flows affect profit or
loss.
Example 1: Entity X is based in France. It expects to sell $1,000 of airline seats for cash in six months’
time. The current spot rate is €1 = $1. It sells the future dollar receipts forward to fix the amount to be
received in euros and to provide a hedge against the risk of a fall in the value of the dollar against the euro.
At inception, the anticipated future sale is not recorded in the accounts, and the derivative (the forward
contract) has an initial value of zero.
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Reassessment at the end of the reporting period
Three months later, at the end of the reporting period, the fair value of the forward contract is reassessed.
The contract is now a financial asset with a value of €80. The change in expected cash flows in euros from
the forecast seat sales has fallen by €75, from €1,000 to €925.
The hedge is highly effective, because the change in the value of the forward contract (+ €80) closely
matches the change in the value of the forecast sales receipts (– €75).
Assuming the company has designated and documented the hedge, hedge accounting can be used.
The derivative has generated a gain of €80. This must be split into ‘effective’ and ‘ineffective’.
– The ‘effective’ gain is the amount of the gain that matches the fall in value in the hedged item. In
this example, this is €75.
– The ‘ineffective’ gain is the surplus gain. This arises as a speculative element in the hedged
position. In this example it is €80 - €75 = €5.
The effective gain is treated as other comprehensive income and transferred directly to equity. The
ineffective element of €5 is reported as a gain in profit or loss for the period.
€ €
Dr Derivative 80
Cr Equity reserve (via OCI) 75
Cr Profit or loss 5
At settlement
At the end of six months, suppose that the forward contract is settled with a gain of €103. The airline seats
are sold, but the proceeds in euros are €905, not the €925 estimated at the end of the reporting period: – a
further drop of €20.
Between the end of the previous reporting period and settlement date for the forward contract, the
derivative has generated a further gain of €23 (€103 – €80).
This must be split into effective and ineffective:
– Effective = €20 (€ 925 – € 905, which is the loss on the euro receipts)
– Ineffective = €3 (the balance, €23 – €20).
When the cash flows from the seat sales occur, the ‘effective’ gains on the derivative, currently held in the
equity reserve, can be released to profit or loss. (Note: The effective gain previously reported as other
comprehensive income must also be reported as a reclassification adjustment in other comprehensive
income.) In this way the gain on the effective part of the hedge offsets the ‘loss’ in actual cash flows (the
lower sales revenue now shown in profit).
The income from the sale is €905. The accumulated reserve created by the effective gains is €95 (€75 in
the previous financial year and €20 in the current year). The release of the €95 to profit or loss means that
the total income from the seat sales and the effective hedged gains is €1,000. This was the amount of
income that was ‘hedged’ by the original forward contract.
The hedge accounting has offset the loss on the underlying position (cash receipts) with gains on the
derivatives position.
Summary
Debit / (Credit)
Cash Derivative(asset) Equity reserve (via OCI) P&L
End of reporting period 80 (75) (5)
After the reporting period: next year
Fair value change 23 (20) (3)
Sale of seats 905 (905)
Transfer from equity:
Reclassification adjustment 95 (95)
Settle forward contract 103 (103)
––––––– ––––––––––––– ––––––––––––– –––––––
1,008 0 0 (1,008)
The statement of profit or loss includes €1,000 revenue that the company ‘locked into’ with the hedging
position, plus the gain of €8 (€5 + €3) on the ineffective part of the hedge (= the speculative element of the
derivative).
Cash flow hedge – Basis adjustment

A cash flow hedged transaction might be the future purchase of a non-financial asset. A basis adjustment
is required for hedges of non-financial assets and liabilities but is not allowed for hedges of financial assets
and liabilities.
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Hedges of a net investment in a foreign operation
For consolidation purposes, an investment in a foreign subsidiary or other foreign operation, the net assets
of the foreign subsidiary are translated at the end of each financial year, and any foreign exchange
differences are recognised in other comprehensive income (until the foreign subsidiary is disposed of,
when the cumulative profit or loss is then reclassified from ‘equity’ to profit or loss).
IFRS 9 allows hedge accounting for an investment in a foreign subsidiary. An entity may designate an
eligible hedging instrument for a net investment in a foreign subsidiary, provided that the hedging
instrument is equal to or less than the value of the net assets in the foreign subsidiary.
Question 7. Compound or hybrid financial instrument (liability and equity components)

Split accounting for compound instruments
On initial recognition of compound instrument, the credit entry for the financial instrument must be split
into the two component parts, equity and liability.
To do this, the following steps are necessary:
(1) Step 1. Derive the fair value of the liability
(2) Step 2. Calculate the equity component as the difference between the total amount for the instrument
and the fair value of the liability.
(3) Step 3. Any transaction costs incurred by issuing the instrument should be allocated to each
component, the liability and equity, according to the split in value above.
A company issues a convertible bond. The details are as follows:
– Number of bonds issued 2,000
– Nominal value per unit $1,000
– Annual interest rate 5%
– Market rate at date of issue 9%
– Issue date 1st January 20X5
– Redemption dates 31st December 20X7
– Terms of conversion Six $1 shares per $10 nominal value of bond
– The cash proceeds of the issue are $2 million. (So debit Cash $2 million.)
Solution
31st December Cash ($) Discount factor at 9% Present value in $
20X5 - interest 100,000 0.9174 91,743
20X6 - interest 100,000 0.8417 84,168
20X7 - interest 100,000 0.7722 77,218
20X7 - principal 2,000,000 0.7722 1,544,367
Fair value of bond 1,797,496
Value of equity (balance) 202,504
Proceeds from issue of bond 2,000,000
On issue, the bond will therefore be recorded as follows:

$ $
Dr Cash 2,000,000
Cr Liability 1,797,496
Cr Equity - option proceeds 202,504
The financial liability is measured at amortised cost in the accounts of the issuing company (the borrower).
Under the amortised cost model the value of the liability element in the statement of financial position each
year is as follows:
b/f 9% effective interest Interest: cash payment c/f
$ $ $ $
20X5 1,797,496 161,775 (100,000) 1,859,271
20X6 1,859,271 167,334 (100,000) 1,926,605
20X7 1,926,605 173,395 (100,000) 2,000,000
If all the bond holders convert on 31st December 20X7:

• 1,200,000 new shares will be issued ($2,000,000 nominal value of the bonds × 6 shares per $10 of
bonds)
• The nominal value of the shares will be $1,200,000 (1,200,000 shares at $1).
$ $
Dr Bond 2,000,000
Dr Equity - option proceeds 202,504
Cr Share capital 1,200,000
Cr Share premium 1,002,504
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UNIT 4. REPORTING PERFORMANCE INVOLVING EARNINGS PER SHARE, IMPAIRMENT OF ASSETS,
AND RELATED-PARTY TRANSACTIONS
Question 1: Gerard's earnings for the year ended 31 December 20X4 are $2,208,000. On 1 January
20X4, the issued share capital of Gerard was 9,200,000 6% preference shares of $1 each and 8,280,000
ordinary shares of $1 each. The company issued 3,312,000 ordinary shares at full market value on 30
June 20X4. Required: Calculate the EPS for Gerard for 20X4.
Answer
Issue at full market price
Date Actual number of shares Fraction of year Total
1 January 20X4 8,280,000 6/12 4,140,000
30 June 20X4 11,592,000* 6/12 5,796,000
Number of shares in EPS calculation 9,936,000
*New number of shares
Original number 8,280,000
New issue 3,312,000
New number 11,592,000
Question 2: Dorabella had the following capital and reserves on 1 April 20X1:
$000
Share capital ($1 ordinary shares) 7,000
Share premium 900
Revaluation reserve 500
Retained earnings 9,000
Dorabella makes a bonus issue, of one share for every seven held, on 31 August 20X2.
Dorabella plc’s results are as follows:
20X3 20X2
$000 $000
Profit after tax and NCI 1,150 750
Required: Calculate EPS for the year ending 31 March 20X3, together with the comparative EPS for 20X2
that would be presented in the 20X3 accounts.
Answer
The number of shares to be used in EPS calculation for both years is 7,000,000+1,000,000 = 8,000,000.
The EPS for 20X2 is 750,000 / 8,000,000 = $0.094
The EPS for 20X3 is 1,150,000 / 8,000,000 = $0.144
Alternatively adjust last year’s EPS (20X2) = 750,000/7,000,000 × 7/8 = $0.094
Question 3:
(a) NAT, a listed entity, had 10,000,000 ordinary Frw 1 shares in issue on 1 January 2013. On 1 April 2013,
NAT made a 1 for 2 bonus issue. On 1 October 2013 NAT issued 2,000,000 ordinary Frw 1 shares at their
full market price of Frw 7.60 per share. NAT’s shares were trading at Frw 8.05 per share on 31 December
2013. NAT’s profit after tax for the year ended 31 December 2013 was Frw 8,200,000. The basic earnings
per share for the year ended 31December 2012 was previously reported at Frw 0. 623.
Required:
(i) Calculate the basic earnings per share to be reported in the financial statements of NAT for the year
ended 31 December 2013, including the comparative figure, in accordance with IAS 33 EPS
(ii) Explain why the bonus issue of shares and the share issue at full market price are treated differently in
the calculation of the Basic Earnings Per Share
(b) NAT issued a convertible debt instrument on 1 January 2013. The liability element of the instrument
had a value of Frw 6,000,000 on 1 January 2013. The effective interest rate in respect of this liability was
5% per annum. If fully converted 1,500,000 ordinary Frw 1 shares would be issued. NAT is subject to
corporate income tax at a rate of 30%.
Required:
(iii) Calculate the Diluted Earnings Per Share to be reported in the financial statements of NAT for the year
ended 31 December 2013, in accordance with IAS 33 Earnings Per Share
Answer
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(i) Basic Earnings Per Share (EPS)
Profit attributable to ordinary shareholders Rwf 8,200,000
Weighted average number of issued ordinary shares during the year ended 31 December 2013:
(10,000,000 x 9/12) + (12,000,000 x 3/12) + 5,000,000 (bonus) = 15,500,000
EPS = 8,200,000/15,500,000 = Rwf 0.529
EPS for y/e 31 Dec 2012 (restated) 0.623x 2/3= 0.415
(ii) A bonus issue does not raise any new finance and therefore the profit for the year will have been
generated with the same level of resources throughout the year. As the issue results in no additional
resources it is treated as if it had always been in existence. Comparative figures also need to be restated
as if the bonus issue was made at the earliest reported period. The issue at full market price brings
additional resources, which will impact on profits from the date of issue. Therefore, a weighted average
number of shares is used to calculate basic EPS.
(iii) Diluted earnings per share (DEPS)

Profit attributable to ordinary shareholders Rwf 8,200,000
Post-tax saving on interest expense (70%x (5% x Rwf6,000,000)) Rwf 210,000
Rwf 8,410,000
Weighted average number of issued ordinary shares and potential ordinary shares during the year ended
31 December 2013 = 15,500,000+1,500,000 = 17,000,000
(i.e Weighted average number of issued ordinary shares during the year ended 31 Dec 2013 from part (a):
15,500,000 + Potential ordinary shares 1,500,000)
DEPS = 8,410,000/17,000,000 = 0.495
Bonus issue of shares

10 Accounting entries for a bonus issue
A bonus issue is accounted for in the main ledger as follows:

Dr Reserves
Cr Ordinary share capital (with the nominal value of the new shares)
A bonus issue is accounted for in the main ledger as follows:
Dr Reserves xx
Cr Ordinary share capital (with the nominal value of the new shares) xx
Question 4: The company L had 36,000,000 shares in issue on 1 January Year 2. It made a 1 for 4 rights
issue on 1 June Year 2, at a price of $4 per share. The share price just before the rights issue was $5.
Total earnings in the financial year to 31 December Year 2 were $25,125,000. The reported EPS in Year 1
was $0.64. Required: Calculate the EPS for the year to 31 December Year 2, and the adjusted EPS for
Year 5 for comparative purposes.
Answer: After the rights issue, there will be 1 new share for every 4 shares previously in issue
4 existing shares have a ‘cum rights’ value of (4 × $5) $20.00
1 new share is issued for $4.00
5 shares after the issue have a theoretical value of $24.00
Theoretical ex-rights price = $24.00/5 =$4.80
Number of Time Rights Weighted average
shares factor fraction number of shares
1 Jan b/f 36,000,000 × 5/12 × 5.00/4.80 15,625,000
1 June Rights issue (1 for 4) 9,000,000
31 Dec c/f 45,000,000 × 7/12 26,250,000
41,875,000
EPS Year 2 = $25,125,000/41,875,000 = $0.60
Comparative EPS in Year 1 = $0.64 × ($4.80/$5.00) = $0.6144
Rights issue of shares

10 Accounting for a rights issue
Accounting for a rights issue involves a preliminary working to determine how much cash the company will
raise and the share premium involved.
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This will be followed by the double entry to account for the transaction:
Dr Cash (included in Net Assets) xx
Cr Issued Share Capital xx
Cr Share Premium (if any) xx
Question 5: In 20X7 Farrah Co had a basic EPS of $1.05 based on earnings of $105,000 and 100,000
ordinary $1 shares. It also had in issue $40,000 15% convertible loan stock which is convertible in two
years' time at the rate of four ordinary shares for every $5 of stock. The rate of tax is 30%. In 20X7 gross
profit of $150,000 was recorded. Required: Calculate the diluted EPS.
Answer
Step 1. Number of shares: the additional equity on conversion of the loan stock will be
40,000 × 4/5 = 32,000 shares
Step 2. Earnings: Farrah Co will save interest payments of $6,000 (i.e $40,000*15%) but this increase in
profits will be taxed. Hence the earnings figure may be recalculated:
$
Gross profit $(150,000 + 6,000) 156,000
Tax (30%) 46,800
Profit after taxation 109,200
Step 3. Calculation: Diluted EPS = $109,200/132,000 = $0.827≈$0.83
Step 4. Dilution: the dilution in earnings would be $1.05 - $0.83 = $0.22 per share.
Question 6: Ardent Co has 5,000,000 ordinary shares of $0.25 each in issue, and had in issue in 2014:
a) $1,000,000 of 14% convertible loan stock, convertible in three years' time at the rate of 2 shares per
$10 of stock.
b) $2,000,000 of 10% convertible loan stock, convertible in one year's time at the rate of 3 shares per $5
of stock.
The total earnings in 2014 were $1,750,000. The rate of income tax is 35%.
Required: Calculate the EPS and DEPS.
Answer
(a) EPS = $1,750,000/5million = $0.35
(b) DEPS
On dilution, the (maximum) number of shares in issue would be:
Shares
Current 5,000,000
On conversion of 14% stock 200,000
On conversion of 10% stock 1,200,000
6,400,000
$ $
Current earnings 1,750,000
Add interest saved (140,000 + 200,000) 340,000
Less tax thereon at 35% 119,000
221,000
Revised earnings 1,971,000
Fully Diluted EPS= $1,971,000/6.4 million = $0.30.8 ≈ $0.31
Question 7: The following information relates to three assets:
A B C
$’000 $’000 $’000
Carrying value 100 150 120
Net realisable value 110 125 100
Value in use 120 130 90
Required: (a) What is the recoverable amount of each asset?
(b) Calculate the impairment loss for each of the three assets.
Answer
(a) Recoverable amounts are $120,000 for A, $130,000 for B, and $100,000 for C
(b) Calculation of the impairment loss for each of the three assets
Asset Carrying value Net realisable value Value in use Recoverable amount Impairment loss
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($) ($) ($) ($) ($)
A 100,000 110,000 120,000 120,000 Nil
B 150,000 125,000 130,000 130,000 20,000
C 120,000 100,000 90,000 100,000 20,000
Question 8: Information about an asset is given below.

$’000
Carrying amount 500
Fair value less costs to sell 300
Future cash flows (per annum) for 2 years 200
Discount rate 10%
Required: Determine the outcome of the impairment review.
Answer
Net selling price is lower than carrying amount, so it is necessary to calculate value in use:
$000 $000
Cash flow Year 1 (200 × 0.909) 182
Cash flow Year 2 (200 × 0.826) 165
Recoverable amount (value in use) 347 347
Carrying amount 500
Impairment loss 153
Question 9: A company acquired a new machine on 1 st July 2010 and has projected its cash flows for the
next five accounting period as follows:
Year ended Cash inflows Cash outflows
FRw FRw
30June 2011 16,500 6,950
30June 2012 21,900 10,995
30June 2013 27,480 12,500
30June 2014 12,500 10,900
30June 2015 5,500 4,500
The machine is not expected to have any residual or resale value at the end of its five years. However, the
cost to dispose of the machine environmentally is expected to be FRw 2,500. The company applies a
standard 10% discount rate.
Required:
a) Determine the value in use of the new machine for the company
b) Comment on the cash inflows and cash outflows supplied by the company.
Answer
(a) Value in use is calculated as follows:
Year ended Cash inflows Cash outflows Net cash flows Discount factor Present value
FRw FRw FRw @ 10% FRw
30June 2011 16,500 6,950 9,550 0.909 8,681
30June 2012 21,900 10,995 10,905 0.826 9,008
30June 2013 27,480 12,500 14,980 0.751 11,250
30June 2014 12,500 10,900 1,600 0.683 1,093
30June 2015 5,500 4,500+2,500=7,000 (1500) 0.621 (932)
Value in use 29,100
Value in use is based on discounted net cash flows of the machine at a 10% discount factor. The disposal
cost of the machine at the end of the fifth year was added to the cash outflow because this cost is borne
by the company.
(b) Comments
The cash flows provided by the company must satisfy the requirement of IAS 36:
• They should be based upon the machine in its current condition and exclude any cash flows that
may arise from any enhancements to its performance
• The cash flows should exclude any obligations that have already been recognized
• The cash inflows and outflows arising from financing activities should be excluded from any tax
payments or receipts
• The cash flows should have supportive, reliable and reasonable evidence, preferably obtained
from an independent external source.
Note: When an asset suffers an impairment loss, its carrying amount is reduced to recoverable amount.
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The impairment loss is recognized as an expense. However, when an asset is revalued and impairment
loss arises, the resulting impairment loss is recognized as a reduction in the revaluation reserve.
Therefore, the revaluation is debited with the impairment loss and reflected in the statement of profit or
loss and other comprehensive income as a negative amount.
Question 10: Impairment of asset previously revalued (IAS 36)

An entity owns a property which was originally purchased for $300,000. The property has been revalued to
$500,000 with the revaluation of $200,000 being recognised as other comprehensive income and
recorded in the revaluation reserve. The property has a current carrying value of $460,000 but the
recoverable amount of the property has just been estimated at only $200,000.
Required: What is the amount of impairment and how should this be treated in financial statements?
Answer
Impairment = $460,000 – 200,000 = $260,000. Of this $200,000 is debited to the revaluation reserve to
reverse the previous upwards revaluation (and recorded as other comprehensive income) and the
remaining $60,000 is charged to the income statement.
Dr Revaluation reserve $200,000
Dr Profit or loss $ 60,000
Cr Property $260,000
Question 11: On July 2015, a company had a cash generating unit with the following assets:
Asset Carrying Amount in FRw ‘000
Goodwill 300
Property 750
Plant and Machinery 500
1,550
Notes: (1) On 30 June 2016, the recoverable amount of the plant and machinery was FRw 475,000
(2) On 30 June 2016, the CGU recoverable amount was FRw 1,010,000
Required: Produce the impairment loss as at 30 June 2016, and show how it should be allocated across
the items with the cash generating units.
Answer
Carrying amount Impairment loss Carrying amount
1July 2015 30 June 2016 30 June 2016
FRw 000 FRw 000 FRw 000
Goodwill 300 300 0
Property 750 215 535
Plant and machinery 500 25 475
1,550 540 1,010
The carrying amount of CGU on 30th June is FRw 1,010,000 which means that the total impairment loss is
FRw 540,000 (i.e 1,550,000-1,010,000). This impairment is allocated as follows:
• first, to the goodwill: 300,000 (whole carrying amount)
• next, to the other assets in the CGU on a pro-rata basis (540,000-300,000) = 240,000.
The FRw 240,000 is allocated to the two remaining assets on a pro-rata basis:
o Property: (240,000*750,000)/(750,000+500,000) = 144,000
o Plant and machinery: (240,000*500,000)/(750,000+500,000) = 96,000
However, this would result in plant and machinery having a carrying amount of FRw 500,000-96,000 =FRw
404,000 and remember that the recoverable amount of plant and machinery was FRw 475,000 and that
the carrying amount of an asset should not be reduced below the higher of its fair value less cost to
disposal (if measurable) or its value in use (if measurable), or zero.
Therefore, we must allocate an impairment to plant and machinery so that its carrying value does not go
below 475,000 which leads us to only charge an impairment loss of 500,000-475,000=25,000 and the
balance is entirely allocated to the remaining assets, that is FRw 215,000 (i.e 240,000-25,000) to Property.
Question 12: There was an explosion in a factory. The carrying amounts of its assets were as follows:
Goodwill $100,000
Patents $200,000
Machines $300,000
Computers $500,000
Buildings $1,500,000
Carrying value $2,600,000
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The factory operates as a cash-generating unit. An impairment review reveals a net selling price of $1.2m
for the factory and value in use of $1.95m. Half of the machines have been blown to pieces but the other
half can be sold for at least their book value. The patents have been superseded and are now considered
worthless.
Required: Show the effect of the explosion on the asset values.
Answer: As the value in use is higher than the net selling price, the impairment loss is $650,000
($2,600,000 – $1,950,000). It is allocated:
• first to goodwill, leaving $550,000 (i.e 650-100) to be dealt with
• then to patents (200) and half the machines (150), leaving $200,000 to be dealt with
• then pro rata to computers (200×500)/(500+1,500) and buildings (200×1,500)/(500+1,500) (note that
because they can be sold for at least their book value, the remaining machines are not included in this
pro rata exercise).
Opening Impairment Closing
$000 $000 $000
Goodwill 100 (100) Nil
Patents 200 (200) Nil
Machines 300 (150) 150
Computers 500 (50) 450
Buildings 1,500 (150) 1,350
2,600 (650) 1,950
Question 13: The following information relates to a 60% subsidiary, Cedar:

Net assets at Net assets at Fair value of NCI at Cost of investment at Recoverable amount at
acquisition reporting date acquisition acquisition reporting date
$m $m $m $m $m
500 600 250 800 1,000
Required: Determine the outcome of the impairment review at the reporting date.
Solution: IMPAIRMENT OF GROSS GOODWILL
The gross goodwill at acquisition is:
$m
Parent investment 800
Add: FV of NCI 250
1,050
Less: FV of net assets at acquisition (500)
Gross goodwill 550
Impairment review of gross goodwill at reporting date:

$m
CV of net assets 600
Add: CV of unimpaired goodwill 550
Total carrying value 1,150
Recoverable amount 1,000
Impairment loss 150
Allocation of total impairment loss to parent and NCI at reporting date:

$m
Parent’s share of impairment loss: 150*60% 90
NCI share of impairment loss: 60*40% 60
Total 150
The goodwill asset reported on the group statement of financial position will be $550m less $150m =
$400m. Note that recoverable amount of a subsidiary is normally for the entity as a whole.
Question 14: On 1 January 20X5, Lucky group purchased 80% of Happy for 500,000. The net assets of
Happy at the date of acquisition amounted to $560,000. It is Lucky Group policy to value the non-
controlling interest at its proportionate share of the fair value of the subsidiary's identifiable net assets.
The carrying amount of Happy’s assets at 31 December is $520,000. Happy is a cash-generating unit on
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its own. At 31 December 20X5 the recoverable amount of Happy is $510,000.
Required: Calculate the impairment loss in Happy and explain how this would be dealt with in the financial
statements of the Lucky group.
Answer: IMPAIRMENT OF PARTIAL GOODWILL
Goodwill:
$
Fair value of consideration paid 500,000
NCI share of net assets at acquisition (20% × $560,000) 112,000
612,000
Less: fair value of net assets at acquisition (560,000)
Proportionate goodwill (Partial goodwill) 52,000
Gross up goodwill:
Total notional goodwill 52,000 × 100/80 = $65,000*
Impairment review of gross goodwill at reporting date:

CV of Assets excluding goodwill 520,000
Total notional goodwill (CV of unimpaired goodwill) 65,000
Total carrying value 585,000
Recoverable amount 510,000
Impairment loss 75,000
Allocation of total impairment loss:

This loss is allocated to total notional goodwill first, writing off the entire balance of $65,000. As $13,000
(i.e 65,000*20%) is attributable to the non-controlling interest, only $52,000 of the loss is charged to profit
or loss relating to the parent’s goodwill.
The remaining $10,000 impairment loss is allocated to the other assets. They would be written down on a
pro-rata basis according to their carrying values.
* if 80% → 52,000, 1% → 52,000/80%, therefore, 100% → 52,000*100/80%
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UNIT 5. EMPLOYEE BENEFITS (IAS19)
Question 1. An entity makes contributions to the pension fund of employees at a rate of 5% of gross
salary. The contributions made are $10,000 per month for convenience with the balance being contributed
in the first month of the following accounting year. The wages and salaries for 2016 are $2.7m.
Required: Calculate the pension expense for 2016, and the accrual/prepayment at the end of the year.
Answer
This appears to be a defined contribution scheme.
The charge to income should be: $2.7m × 5% = $135,000
The statement of financial position will therefore show an accrual of $15,000, being the difference between
the $135,000 and the $120,000 paid in the year.
Question 2. The following information is relevant for a X Ltd which maintains a defined benefit pension
plan for its employees:
• The pension assets brought forward in 20X0 $1,800 with a closing balance of $2,700.
• The company contributes $90 per year into the scheme.
• Benefits paid out in the period were $100.
• The liabilities of the scheme were $1,600 at the start of the period and $2,100 at the end.
• The discount rate is 12%.
• The terms of the scheme have changed meaning that past service costs have arisen of $35 and
the current service costs for the period are $70.
Required: Show the treatment for the pension plan in the financial statements of the company.
Question 3. At 1 January 20X2 the fair value of the assets of a defined benefit plan were valued at
$1,100,000 and the present value of the defined benefit obligation was $1,250,000. On 31 December
20X2, the plan received contributions from the employer of $490,000 and paid out benefits of $190,000.
The current service cost for the year was $360,000 and a discount rate of 6% is to be applied to the net
liability/ (asset). After these transactions, the fair value of the plan's assets at 31 December 20X2 was
$1.5m. The present value of the defined benefit obligation was $1,553,600.
Required: Calculate the gains or losses on re-measurement through OCI and the return on plan assets
and illustrate how this pension plan will be treated in the statement of profit or loss and other
comprehensive income and statement of financial position for the year ended 31 December 20X2.
Answer: It is always useful to set up a working reconciling the assets and obligation:
Assets Obligation
$ $
Fair value; present value at 1/1/X2 1,100,000 1,250,000
Interest (1,100,000 × 6%); (1,250,000 × 6%) 66,000 75,000
Current service cost 360,000
Contributions received 490,000
Benefits paid (190,000) (190,000)
Return on plan assets excluding amounts in net interest (bal. fig) (OCI) 34,000 -
Loss on re-measurement (balancing figure) (OCI) - 58,600
1,500,000
1,553,600
The following accounting treatment is required.
(a) In the statement of profit or loss and other comprehensive income, the following amounts will be
recognised
$
In profit or loss:
Current service cost 360,000
Net interest on net defined benefit liability (75,000 – 66,000) 9,000
In other comprehensive income (34,000 – 58,600) 24,600

(b) In the statement of financial position, the net defined benefit liability of $53,600 (i.e 1,553,600 –
1,500,000) will be recognised.
Question 3: The following data applies to the post employment defined benefit compensation scheme of
BCD Co.
Discount rate: 10% (each year)
Present value of obligation at start of 20X2: $1m
Market value of plan assets at start of 20X2: $1m
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The following figures are relevant:
20X2 20X3 20X4
$'000 $'000 $'000
Current service cost 140 150 150
Benefits paid out 120 140 150
Contributions paid by entity 110 120 120
Present value of obligation at year end 1,200 1,650 1,700
Fair value of plan assets at year end 1,250 1,450 1,610
Additional information:
(1) At the end of 20X3, a division of the company was sold. As a result of this, a large number of the
employees of that division opted to transfer their accumulated pension entitlement to their new
employer’s plan. Assets with a fair value of $48,000 were transferred to the other company’s plan and
the actuary has calculated that the reduction in BCD’s defined benefit liability is $50,000. The year-end
valuations in the table above were carried out before this transfer was recorded.
(2) At the end of 20X4, a decision was taken to make a one-off additional payment to former employees
currently receiving pensions from the plan. This was announced to the former employees before the
year end. This payment was not allowed for in the original terms of the scheme. The actuarial valuation
of the obligation in the table above includes the additional liability of $40,000 relating to this additional
payment.
Required: Show how the reporting entity should account for this defined benefit plan in each of years
20X2, 20X3 and 20X4. All transactions are assumed to occur at the year end and remember that the
actuarial gain or loss is established as a balancing figure in the calculations.
Answer
Solution
Present value of obligation
20X2 20X3 20X4
$'000 $'000 $'000
PV of obligation at start of year 1,000 1,200 1,600
Interest cost (10%) 100 120 160
Past service cost - - 40
Benefits paid (120) (140) (150)
Settlements (50)
Actuarial (gain)/loss on obligation: balancing figure 80 320 (100)
PV of obligation at end of year 1,200 1,600* 1,700
*(1,650 – 50)
Market value of plan assets
20X2 20X3 20X4
$'000 $'000 $'000
Market value of plan assets at start of year 1,000 1,250 1,402
Interest on plan assets (10%) 100 125 140
Contributions 110 120 120
Benefits paid (120) (140) (150)
Settlements - (48) -
Gain on re-measurement through OCI: balancing figure 160 95 98
Market value of plan assets at year end 1,250 1,402* 1,610
*(1,450 – 48)
In the statement of financial position, the liability that is recognised is calculated as follows.
20X2 20X3 20X4
$'000 $'000 $'000
1,200 1,600 1,700
1,250 1,402 1,610
(50) 198 90
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The following will be recognised in profit or loss for the year:
20X2 20X3 20X4
$'000 $'000 $'000
Past service cost - - 40
Net interest on defined benefit liability (asset) - (5) 20
Gain on settlement of defined benefit liability - (2) -
Expense recognised in profit or loss (Net pension expense) 140 143 210
The following re-measurements will be recognised in other comprehensive income for the year:
20X2 20X3 20X4
$'000 $'000 $'000
Actuarial (gain)/loss on obligation 80 320 (100)
Return on plan assets (excluding amounts in net-interest) (160) (95) (98)
Question 2: The following information relates to a funded defined benefit plan (all transactions are
assumed to occur at the year-end):
Present value of obligations at year start $400m
Market value of plan assets at year start $390m
Discount rate at start of year 10%
Current service cost $14m
Benefits paid $26m
Contributions paid $34m
Present value of obligations at year end $530m
Market value of plan assets at year end $370m
There was a variation in the benefit terms during the year, which resulted in a past service cost of $100m.
Required: (a) Financial statement effects for the year.
Following the above, the pension is wound up at the year end. The market value of the plan assets is
unchanged by the curtailment. But the liability is affected. The employees departing the scheme agree to
receive the plan assets in full plus a further payment of $167m. The cash was paid just before the year
end.
Required: (b) Explain the effect of the above curtailment on the current financial statements.
A few years later, the company has a new defined benefit pension scheme with new employees. This
scheme is in surplus with an asset value of $100m and a liability value of $82m. Of course, because the
asset exceeds the liability, it is expected that in the future it will be possible to reduce contributions into the
scheme. However, the present value of the reductions in future contributions is only $16m.
Required: (c) Explain the effect of the above asset ceiling on the current financial statements.
Answer
(a) On assets
Market value at start of the year 390
Expected return on the assets (390*10%) 39
Contributions 34
Benefits paid (26)
Actuarial gain (loss) (balancing figure) (67)
Market value at end of the year 370
On obligations
Obligation at start of the year 400
Interest (400*10%) 40
Service cost (14 + 100) 114
Benefits paid (26)
Actuarial (gain) loss (balancing fig) 2
Obligation at end of the year 530
Statement of financial position

Pension assets 370
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Pension obligations (530)
Net pension asset (liability) (160)
Statement of profit or loss

Operating
Service cost (current cost + past service cost) (114)
Finance
Finance cost (39-40) also (390-400)10% (1)
Other Comprehensive Income

Actuarial (loss) on assets (67)
Actuarial (loss) on obligations (2)
Net Actuarial (loss) (69)
(b) Curtailment
Curtailment is the technical name for the winding up of the policy and paying off the employees. It is a
nasty business where the entity tries to pay the employees less than they are owed and the employees try
to fight for every penny but in fear of their jobs.
Financial statement effects

The asset, the liability and the settlement cash are swept into the statement of profit or loss to give a profit
or loss on settlement:
$m
Asset 370
Liability (530)
Net pension liability (160)
Settlement cash 167
Settlement loss 7
This is a loss because the company has paid more than they thought they owed.
(c) Asset ceiling

Asset ceiling is the present value of the reductions in the future contributions. It is so called because it sets
an upper limit on any net pension asset. On rare occasions the asset ceiling may fall below the value of the
net pension asset. In this case this has occurred and the top of the net pension asset is shaved off and
dumped in the statement of profit or loss.
Financial statement effects

$m
Asset 100
Liability (82)
Apparent net pension asset 18
De-recognition loss (2) to profit or loss as operating cost
Recorded net pension asset limited by asset ceiling 16 to SFT as NCA
Note that although the net pension asset at first appears to be $18m because $2m has been written off,
only $16m is recorded on statement of financial position.
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SHARE-BASED PAYMENTS (IFRS 2)
Question 1 (a) INES Ltd buys some inventory on 1 January 2017 for $100,000, but instead of settling in
cash it pays for the inventory by issuing 10,000 $1 shares to the supplier on 31 January 2017. You are to
show the entry to be passed in the books of INES Ltd.
Solution
The direct measurement method will be used to measure the fair value of this equity settled share-based
transaction.
Dr Purchases $100,000
Cr Share capital (nominal value) $10,000
Cr Share premium (balance) $90,000
(b) INES Ltd awards 1,000 shares to its top sales team at the end of the year. The shares have a nominal
value (par value) of $1 and a market value of $5 each. Required: Journal entries.
Solution
This is another equity-settled share-based transaction but here it is not possible to measure the
contribution provided by the sales team to the company. As it is not possible to fair value their services,
the direct method cannot be used. Instead, the indirect method is used and the transaction is measured
using the fair value of the shares granted, $5,000 (1,000 shares × $5).
Dr Wages and salaries $5,000
Cr Share capital (nominal value) $1,000
Cr Share premium (balance) $4,000
(c) A company issued share options on 1 June 2016 to pay for the purchase of inventory. The value of the
inventory on 1 June 2016 was $6m and this value was unchanged up to the date of sale. The shares
issued have a market value of $6.3m.
Required: Show how this transaction will be dealt with in the financial statements.
Solution
Dr Inventory 6m
Cr Equity reserve (SBP reserve) 6m
Note: Do not be confused here, for equity-settled share-based payment transactions, rights are exercised
at fair value of option determined at grant date.
Question 2. A company issues fully paid shares to 500 employees on 31 July 2018. Shares issued to
employees normally have vesting conditions attached to them and vest over a three-year period, at the
end of which the employees have to be in the company’s employment. These shares have been given to
the employees because of the performance of the company during the year. The shares have a market
value of $2m on 31 July 2018 and an average fair value for the year of $3m. It is anticipated that in three
years’ time there will be 400 employees at the company.
Required: Show how this transaction will be dealt with in the financial statements.
Solution
Dr Operating expenses 2m
Cr Share capital 2m
Question 4: On 1 January 2013 an entity grants 250 share options to each of its 200 employees. The only
condition attached to the grant is that the employees should continue to work for the entity until 31
December 2016. Five employees leave during the year. The market price of each option was $12 at 1
January 2013 and $15 at 31 December 2013.
Required: Show how this transaction will be reflected in the financial statements for the year ended 31
December 2013.
Solution
The remuneration expense for the year is based on the fair value of the options granted at the grant date
(1 January 2013). As five of the 200 employees left during the year it is reasonable to assume that 20
employees will leave during the four-year vesting period and that therefore 45,000 options (i.e 250* 180)
will actually vest. Therefore, the entity recognises a remuneration expense of $135,000 (i.e $12*45,000*¼)
in profit or loss and a corresponding increase in equity of the same amount.
Question 5: A company grants 1,000 share options to each of 200 employees. Each grant is conditional
on the employees working for at least three years for the company. The value of the options at the grant
date is estimated at $12 per option, using an option pricing model.
Year 1: The company estimates that 20% of the employees will leave within three years and so will lose
their right to their options. During Year 1, 13 employees leave the company, and the estimate that 20% will
leave within three years is not changed.
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Year 2: During Year 2, another 12 employees leave, and the company does not change its estimate that
20% will leave within three years.
Year 3: At the end of Year 3, a total of 40 employees have left the company, and the remaining 160
receive the right to exercise their share options.
Required: Calculate the remuneration expense that will be recognised in respect of the share-based
payment transaction for each of the three years.
Solution
Year Options No Fair % of % of Options Timing Cumulative Expense
end employee value failure vests that vest ratio expense recognized
t A B C Given D E=A*B*D F G=E*C*F H=Gt1-Gt0
1 1,000 200 12 20% 80% 160,000 1/3 640,000 640,000
2 1,000 200 12 20% 80% 160,000 2/3 1,280,000 640,000
3 1,000 200 12 20% 80% 160,000 3/3 1,920,000 640,000
1,920,000
At the end of each year end, the following entry will be made:
Dr Employment costs $640,000
Cr Equity reserve $640,000
Note: In practice, the estimate of the number of share options that will eventually vest is likely to change
each year. The cumulative cost each year should be based on the best current estimates of the number of
equity instruments that will eventually vest.
Question 6: AZIZI Ltd has set up an employee option scheme to motivate its sales team of ten key sales
people. Each sales-person was offered 1 million options exercisable at $0.10, conditional upon the
employee remaining with the company during the vesting period of 5 years. The options are then
exercisable three weeks after the end of the vesting period.
This is year two of the scheme. At the end of year one, two sales people suggested that they would be
leaving the company during the second year. However, although one did leave, the other recommitted to
the company and the scheme. The other employees have always been committed to the scheme and
stated their intention to stay with the company during the 5 years.
Relevant market values are as follows:
Date Share price Option price
Grant date $0.10 $0.20
End of Year One $0.24 $0.38
End of Year Two $0.21 $0.33
The option price is the market price of an equivalent marketable option on the relevant date.
Required: Show the effect of the scheme on the financial statements of AZIZI Ltd for Year Two.
Solution
The expense is measured using the fair value of the option at the grant date, i.e. $0.20.
At the end of year two the amount recognised in equity should be $720,000 (ie 1m×(10–1)×$0.20×2/5)
At the beginning of year two the amount recognised in equity was $320,000 (i.e 1m × 8 × $0.20 × 1/5).
The charge to profit for Year Two is the difference between the two: $400,000 (i.e 720,000 – 320,000).
Question 7: A company grants 1,000 share options to each of 200 employees. Each grant is conditional
on the employees working for at least three years for the company. The value of the options at the grant
date is estimated at $12 per option, using an option pricing model. Initially, the company expects that 20%
of these employees will leave before the end of the three years.
Year 1: During Year 1, 18 employees leave the company, and it revises the estimates of the number of
employees who will leave from 20% to 25%. The current value of the share options is now $14.
Year 2: During Year 2, 5 more employees leave the company, and the company revises its estimate of the
number of employees who will leave from 25% to 15%.
Year 3: At the end of Year 3, a total of 38 employees have left the company, and the remaining 162 receive
the right to exercise their share options.
payment transaction for each of the three years.
Solution
Year Options No Fair % of % of Options Timing Cumulative Expense
end employee value failure vests that vest ratio expense recognized
t A B C Given D E=A*B*D F G=E*C*F H=Gt1-Gt0
56 | P a g e
1 1,000 200 12* 20% 75% 150,000 1/3 600,000 600,000
2 1,000 200 12 20% 85% 170,000 2/3 1,360,000 760,000
3 1,000 200 12 20% 81% 162,000 3/3 1,944,000 584,000
1,944,000
Question 8: On 1 January 2011 an entity grants 100 share options to each of its 400 employees. Each
grant is conditional upon the employee working for the entity until 31 December 2013. The fair value of
each share option is $20. During 2011, 20 employees leave and the entity estimates that 20% of the
employees will leave during the three-year period. During 2012 a further 25 employees leave and the
entity now estimates that 25% of its employees will leave during the three-year period. During 2013 a
further 10 employees leave.
payment transaction for each of the three years ended 31 December 2013.
Solution
IFRS 2 requires the entity to recognise the remuneration expense, based on the fair value of the share
options granted, as the services are received during the three-year vesting period.
In 2011 & 2012 the entity estimates the number of options expected to vest (by estimating the number of
employees likely to leave) and bases the amount that it recognises for the year on this estimate.
In 2013 it recognises an amount based on the number of options that actually vest. A total of 55
employees left during the three-year period and therefore 34,500 options ((400 – 55) x 100) vested.
The amount recognised as an expense for each of the three years is calculated as follows:
Year end Cumulative expense at year-end Expense for year
2011 (100*400)*80%*$20*1/3 = 213,333 213,333-0 = 213,333
2012 (100*400)*75%*$20*2/3 = 400,000 400,000-213,333 = 186,667
2013 100*(400-55)*$20*3/3 = 690,000 690,000-400,000 = 290,000
690,000
Journal entries (SBP = Share-Based Payment)
At the end of 2011:
Dr Employees cost (P/L) $213,333
Cr Equity (SBP) reserve $213,333
At the end of 2012:
At the end of 2013:
Question 9: On 1 January 2018, a company which prepares accounts to 31 December grants 5,000 share
options each to twelve of its senior employees. The fair value of one share option at 1 January 2018 is £9.
The specified vesting date is 31 December 2020 and the grant is conditional upon the achievement of
certain performance targets by that date.
On 31 December 2018, it is estimated that all twelve of the employees will achieve their performance
targets by the vesting date. However, by 31 Dec. 2019 this estimate has fallen to eleven employees and in
fact only ten of the employees actually achieve their targets by 31 December 2020.
Required: Show how these transactions should be treated in the company's financial statements.
Solution
At 31 December 2018, the total cost of the options is expected to be £540,000 (i.e 12×5,000×£9). One
third of the vesting period has expired by 31 December 2018. So an expense of £180,000 (1/3rd of
£540,000) should be recognised in the company's financial statements for the year to 31 December 2018
and equity should be increased by £180,000.
At 31 December 2019, the total cost of the options is expected to be £495,000 (11×5,000×£9). Two thirds
of the vesting period have now expired so the expense to date is £330,000 (i.e 2/3rds of £495,000). An
expense of £180,000 was recognised in the previous year so a further expense of £150,000 (£330,000 –
£180,000) should be recognised in the financial statements for the year to 31 December 2019 and equity
increases by £150,000.
At 31/12/2020, the final cost of option scheme is £450,000 (i.e 10×5,000×£9). Previously recognised
57 | P a g e
expenses are £330,000 so an expense of £120,000 (i.e £450,000 – £330,000) should be recognised in
the financial statements for the year to 31 Dec. 2020 and equity should be increased by £120,000.
The amount of £450,000 shown in equity for the share options will be transferred to share capital (and
possibly share premium) when the options are exercised by the successful employees. If any of these
employees decide not to exercise their options, any remaining balance in the "shares to be issued"
account may be transferred to retained earnings.
Question 10: At the beginning of year 1, an entity grants 1 share options to each of its 500 employees
over a vesting period of 3 years at a fair value of $15
Year 1, 40 leave, further 70 expected to leave;
Share options now repriced (as market value of shares has fallen) as the Fair Value of the options had
fallen to $5. After the repricing they are now worth $8. The modification has therefore increased the Fair
Value from $5 to $8.
Year 2, 35 leave, further 30 expected to leave
Year 3, 28 leave
Required: Account for the above share options
Solution
The repricing has increased the fair value of the option by $3. This amount is recognised over the
remaining two years of the vesting period, along with remuneration expense based on the original option
value of $15
Original vesting conditions
Year Total employees Option Proportion of vesting Cumulative cost Cost for each period
expected to qualify value period (Timing ratio) Dr Expense Cr SBP reserve
1 390 15 1/3 1950 1,950
2 395 15 2/3 3950 3,950 - 1,950= 2,000
3 397 15 3/3 5955 5,955- 3,950 = 2,005
Changes in vesting conditions

Year Total employees Option Proportion of vesting Cumulative cost Cost for each period
expected to qualify value period (Timing ratio) Dr Expense Cr SBP reserve
2 395 3 1/2 593 593
3 397 3 2/2 1,191 1,191 - 593 = 598
Updated plan of share options

Year Original charge Additional charge Total charge in year
1 1,950 1,950
2 2,000 593 2,593
3 2,005 598 2,603
Total 5,955 1,191 7,146
Question 11. X plc is a company with a 31st December year end. On 1st January Year 1 X plc grants 100
shares to each of its 500 employees on condition that the employees remain with the company in the
vesting period. The shares will vest at:
• 31st December Year 1 if X plc’s earnings grow by 18% or more; or
• 31st December Year 2 if X plc’s earnings grow by an average of 13% or more over the two years; or
• 31st December Year 3 if X plc’s earnings grow by an average of 10% or more over the three years.
At the grant date X plc estimates that the fair value of each share is $30.
31st December Year 1

Earnings have grown by 14% therefore the shares do not vest at this date. X plc makes the following
estimates:
• earnings will increase at 14% in the next year with the result that the shares are expected to vest at the
next year end.
• 88% of employees are expected to still be with the company at that time.
Year Expected outcome (at grant date value) Accumulated in equity by end Charge to Profit or Loss $
end of year $
1 500 × 88% × 100 × $30 = $1,320,000 $1,320,000 ×1/2= $660,000 660,000

Earnings have grown by 10% therefore the shares do not vest at this date. The growth rate over the two
58 | P a g e
years is less than an average of 13%. Therefore, the shares do not vest at this date. X plc makes the
following estimates:
• earnings will increase at 6% in the next year with the result that the shares are expected to vest at the
next year end.
• 84% of employees are expected to still be with the company at that time.
Year Expected outcome (at grant date value) Accumulated in equity by end Charge to Profit or Loss $
end of year
1 500 × 88% × 100 × $30 = $1,320,000 $1,320,000 ×1/2= $660,000 660,000
2 500 × 84% × 100 × $30 = $1,260,000 $1,260,000× 2/3= $840,000 840,000-660,000=180,000

Earnings have grown by 8%. This gives an average growth rate of 10.67% so the shares vest. There are
419 employees who receive shares.
Year Expected outcome (at grant date Accumulated in equity by end Charge to Profit or Loss $
end value) of year
1 500 × 88% × 100 × $30 = $1,320,000 $1,320,000 ×1/2 = $660,000 660,000
2 500 × 84% × 100 × $30 = $1,260,000 $1,260,000× 2/3= $840,000 840,000-660,000=180,000

3 419 × 100 × $30 = $1,257,000 $1,257,000 ×3/3= $1,257,000 1,257,000-840,000=417,000
Question 11: Jay, a public limited company, has granted 300 share appreciation rights to each of its 500
employees on 1 August 2015. The management feels that as at 31 July 2016, the year-end of Jay, 80% of
the awards will vest on 31 July 2017. The fair value of each share appreciation right on 31 July 2016 is
$15. You are required to show how this transaction will be dealt with in the financial statements for the
year ended 31 July 2016.
Solution
Opening 0
Increase 900
Closing 300 x 500 x 80% x 15 x 1/2 900
Question 12: Entity X grants 100 cash-settled share appreciation rights (SARs) to each of its 500
employees. The grant is conditional on the employee working for Entity X for the next three years. The
company must settle in cash, which means that each time the share price rises the cost to the company of
issuing the rights increases.
By the end of year 1, 400 employees are expected to stay for three years and collect their rights. Over the
year, the company’s share price has increased by $9.
By the end of year 2, 410 employees are expected to stay until the rights vest. The fair value of a right is
now $11.
Required: Account these transactions in the financial statements.
Solution
Year No employees No of SAR per Fair value Timing Cumulative liability at Expense for year
end expected to vest employee of SAR ratio year end (increase)
t A B C($) D E=A*B*C*D F=Et1-Et0
1 400 100 9 1/3 360,000 360,000
2 410 100 11 2/3 300,667 180,667
At the end of year 1
Dr Wages and Salaries 120,000
Cr SAR Liability 120,000
At the end of year 2
Dr Wages and Salaries 180,667
Question 13: On 1 January 2011 an entity grants 100 cash share appreciation rights (SARS) to each of its
500 employees, on condition that the employees continue to work for the entity until 31 Dec. 2013. During
2011, 35 employees leave. The entity estimates that a further 60 will leave during 2012& 2013. During
2012, 40 employees leave and the entity estimates that a further 25 will leave during 2013. During 2013,
22 employees leave. At 31 December 2013, 150 employees exercise their SARs. Another 140 employees
59 | P a g e
exercise their SARs at 31 December 2014 and the remaining 113 employees exercise their SARs at the
end of 2015. The fair values of the SARs for each year in which a liability exists are shown below, together
with the intrinsic values at the dates of exercise.
Year Fair value Intrinsic value

$ $
2011 14.40
2012 15.50
2013 18.20 15.00
2014 21.40 20.00
2015 25.00
Note: intrinsic value is difference between the fair value of the shares to which the counterparty has the
(conditional or unconditional) right to subscribe or which it has the right to receive, and the price (if any)
the counterparty is (or will be) required to pay for those shares. For example, a share option with an
exercise price of $15 on a share with a fair value of $20, has an intrinsic value of $5.
Required: Calculate the amount to be recognised in the profit or loss for each of the five years ended 31
December 2015 and the liability to be recognised in the statement of financial position at 31 December for
each of the five years.
Answer
For the three years to the vesting date of 31 Dec. 2013 the expense is based on the entity's estimate of the
number of SARs that will actually vest (as for an equity-settled transaction). However, the fair value of the
liability is re-measured at each year-end.
The intrinsic value of the SARs at the date of exercise is the amount of cash actually paid.
Year No Expected to vest No No of SAR SAR Intrinsi Timing Liability at Expense for the year
end less No exercised Exercis per Fair c ratio year end Dr Staff cost Cr Liability
ed employee value value (Cumul.)
t A B C D($) E($) F G=A*C*F H=(Gt1-Gt0)+(B*C*E)
1 500-(35+60)=405 100 14.40 1/3 194,400 194,400
2 500-(35+40+25)=400 100 15.50 2/3 413,333 218,933
3 500-(35+40+22)- 150 100 18.20 15.00 3/3 460,460 47,127+225,000= 272,127
150=253
4 253-140=113 140 100 21.40 20.00 241,820 -218,640+280,000= 61,360
5 113 113 100 25.00 Nil -241,820+282,500= 40,680
Total 787,500
Entries in Journal and Ledger

2011 Dr Employee costs (Profit or loss) 194,400
Cr Cash 225,000
Dr SAR Liability 218,640
Cr Cash 280,000
Dr SAR Liability 241,820
Cr Cash 282,500
Employee costs
31.12.2011 SAR Liability 194,400 31.12.2011 Profit or Loss 194,400
Cash 225,000
60 | P a g e
31.12.2014 Cash 61,360 31.12.2014 Profit or Loss 61,360
31.12.2015 Cash 40,680 31.12.2015 Profit or Loss 40,680
Cash
31.12.2013 Employee costs 225,000
31.12.2014 Employee costs 61,360
31.12.2014 SAR Liability 218,640
31.12.2015 SAR Liability 241,820
787,500
SAR Liability
31.12.2011 Bal. c/f 194,400 31.12.2011 Employee costs 194,400
194,400 194,400
31.12.2012 Bal. c/f 413,333 1.1.2012 Bal. b/f 194,400
31.12.2012 Employee costs 218,933
413,333 413,333
31.12.2013 Bal. c/f 460,460 1.1.2013 Bal. b/f 413,333
460,460 460,460
31.12.2014 Cash 218,640 1.1.2014 Bal. b/f 460,460
31.12.2014 Bal. c/f 241,820
460,460 460,460
31.12.2015 Cash 241,820 1.1.2015 Bal. b/f 241,820
241,820 241,820
Question 1. The fair value of the shares Bigger Ltd offered directors an option scheme based on a three-
year period of service. The number of options granted to each of the ten directors at the inception of the
scheme was 1 million. The options were exercisable shortly after the end of the third year. Upon exercise
of the share options, those directors eligible would be required to pay $2 for each share of $1 nominal
value. The fair value of the options and the estimates of the number of options expected to vest were:
Year Rights expected to vest Fair value of the option
Start of Year One 8m $0.30
End of Year One 7m $0.33
End of Year Two 8m $0.37
End of Year Three 9m $0.74
Required:
(a) Show how the option scheme will affect the financial statements for each of the three years of the
vesting period.
(b) Show the accounting treatment at the vesting date for each of the following situations:
(i) fair value of a share was $5, all eligible directors exercised their share options immediately
(ii) fair value of a share was $1.50, all eligible directors allowed their share options to lapse.
Solution
Year Expense Amount included in equity
Reporting date year 1 (7m × $0.30 × 1/3) = 700,000 700,000
Reporting date year 2 (8m × $0.30 × 2/3) = 900,000 1,600,000
Reporting date year 3 (9m× $0.30×3/3) = 1,100,000 2,700,000
Note: the expense is measured using the fair value of the option at the grant date, i.e. the start of year one.
Part b(i) all eligible directors exercised their options:

$m Satisfied by: $m
Cash paid (9m × $2) 18.0 Share capital (nom. value of shares (9m×$1) 9.0
Use of equity reserve 2.7 Share premium (balancing figure) 11.7
20.7 20.7
Part b(ii) no options are exercised
The equity reserve remains on the statement of financial position. An entity can choose whether or not it
61 | P a g e
wants to make a transfer to retained earnings for the amount of the equity reserve.
Question 2. J&B granted 200 options on its $1 ordinary shares to each of its 800 employees on 1 January
2011. Each grant is conditional upon the employee being employed by J&B until 31 December 2013. J&B
estimated at 1 January 2011 that:
(i) The fair value of each option was $4 (before adjustment for the possibility of forfeiture).
(ii) Approximately 50 employees would leave during 2011, 40 during 2012 and 30 during 2013
thereby forfeiting their rights to receive the options. The departures were expected to be evenly
spread within each year.
The exercise price of the options was $1.50 and the market value of a J&B share on 1 January 2011 was
$3. In the event, only 40 employees left during 2011 (and the estimate of total departures was revised
down to 95 at 31 Dec. 2011), 20 during 2012 (and the estimate of total departures was revised to 70 at 31
Dec. 2012) and none during 2013, spread evenly during each year.
Required: The directors of J&B have asked you to illustrate how the scheme is accounted for under IFRS
2 Share-based payment.
(a) Show the double entries for the charge to profit or loss for employee services over the three years and
for the share issue, assuming all employees entitled to benefit from the scheme exercised their rights
and the shares were issued on 31 December 2013.
(b) Explain how your solution would differ had J&B offered its employees cash based on the share value
rather than share options.
Required: Show how the company will report the accrual and issue of share options as well as share
appreciation rights in the financial statements over vesting period.
Solution
Year Options No Fair No of No of Options Timing Cumulative Amount
end employee value failure vests that vest ratio cost recognized
A B C Given D E=A*B*D F G=E*C*F H=G1-G0
2011 200 800 4 95 705 141,000 1/3 188,000 188,000
2012 200 800 4 70 730 146,000 2/3 389,333 201,333
2013 200 800 4 60 740 148,000 3/3 592,000 202,667
592,000
(a) Accounting entries

Debit ($) Credit ($)
31.12.2011 Dr Staff costs (Profit or loss) 188,000
Cr Equity reserve ((800 – 95)*200*$4*1/3) 188,000
Cr Equity reserve (389,333-188,000) 201,333
Cr Equity reserve (592,000-389,333) 202,667
Issue of shares:
31.12.2013 Dr Cash (740*200*$1.50) 222,000
Dr Equity reserve 592,000
Cr Share capital (740*200*$1) 148,000
Cr Share premium (balancing figure): 222+592-148 666,000
Equity reserve-Share options

188,000 188,000
1.1.2012 Bal. b/f 188,000
389,333 389,333
31.12.2013 Share capital 148,000 1.1.2013 Bal. b/f 389,333
31.12.2014 Share premium 444,000 31.12.2013 Employee costs 202,667
592,000 592,000
Cash
62 | P a g e
31.12.2013 Share capital 148,000
31.12.2013 Share premium 74,000
Employee costs
31.12.2011 Equity reserve 188,000 31.12.2011 Profit or Loss 188,000
(b) Cash-settled share-based payment

If J&B had offered cash payments based on the value of the shares at vesting date rather than options, in
each of the three years an accrual would be shown in statement of financial position representing the
expected amount payable based on the following:
• The movement in the accrual would be charged to profit or loss representing further entitlements
received during the year and adjustments to expectations accrued in previous years.
• The accrual would continue to be adjusted (resulting in a profit or loss charge) for changes in the fair
value of the right over the period between when the rights become fully vested and are subsequently
exercised. It would then be reduced for cash payments as the rights are exercised.
Example on share-based payments and deferred tax

On 1 January 2012, Bic Ltd granted 5,000 share options to an employee vesting two years later on 31
December 2013. The fair value of each option measured at the grant date was $3.
Tax law in the jurisdiction in which the entity operates allows a tax deduction of the intrinsic value of the
options on exercise. The intrinsic value of the share options was $1.20 at 31 December 2012 and $3.40 at
31 December 2013 on which date the options were exercised. Assume a tax rate of 30%.
Required: Show the deferred tax accounting treatment of the above transaction at 31 December 2012, 31
December 2013 (before exercise), and on exercise.
FAST FORWARD
Solution
31 Dec. 12 31 Dec. 13
before exercise
Carrying amount of share-based payment expense 0 0
Less: Tax base of SBP expense (5,000 $1.2 ½); (5,000 $3.40) (3,000) (17,000)
Temporary difference (3,000) (17,000)
Deferred tax asset @ 30% 900 5,100
Deferred tax (Cr P/L) (5,100 – 900 – 600) see Working) 900 3,600
Deferred tax (Cr Equity) (Working) 0 600
On exercise, the deferred tax asset is replaced by a current tax one. The double entry (reversal) is:
Dr Deferred tax (I/S) 4,500
Dr Deferred tax (equity) 600
Cr Deferred tax asset 5,100
Dr Current tax asset 5,100
Cr Current tax (I/S) 4,500
Cr Current tax (equity) 600
Working
Accounting expense recognised (5,000 $3 ½); (5,000 $3) 7,500 15,000
Tax deduction (3,000) (17,000)
Excess temporary difference 0 (2,000)
Excess deferred tax asset to equity @ 30% 0 600
63 | P a g e

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This indirect holding may be less than 50%.

20 The rules for mixed groups

Calculating the non-controlling interest and goodwill

An alternative way of calculating the non-controlling interest would be as follows:

30 Cost of the parent entity’s investment in sub-subsidiaries

CONSOLIDATED SFP AND SPL INCLUDING SUB-ASSOCIATES

Balances with the associates

Unrealised profit in inventory

Parent company selling to associate

Associate in the consolidated income statement

The multi-stage consolidation practice involves:

10 Investment or Associate becomes a Subsidiary: calculation of goodwill

20 Acquisitions where control is retained: adjustment to parent's equity

20 Disposals where control is lost

Calculation of gain on disposal group’s financial statements

Consolidated statement of comprehensive income

The total gain or loss on loss of control in a subsidiary is as follows:

Consideration (if any) received from transaction resulting in loss of control A

Add: Fair value of any retained investment in the former subsidiary B

CONSOLIDATED STATEMENT OF CASH FLOWS

AVOIDING DOUBLE COUNTING WHEN A SUBSIDIARY HAS BEEN ACQUIRED

Calculation of the cash paid for a subsidiary

INVENTORIES, TRADE RECEIVABLES, TRADE PAYABLES

Dividend paid to Non-Controlling Interests

Calculating dividends received from an associate (or JV)

Finance lease transactions

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Retained Earnings Account

75% 1 January 20X7

60% 1 January 20X4

20 The group structure of the P Group is as follows:

Working 3: Goodwill (NCI is measure using proportionate share of Subs' NA)

Working 4: Non-Controlling Interest in the group

Working 5: Group Retained Earnings

80% 1 July 20X5

60% 1 July 20X4

W2. Subs' Net assets

Working 4. Non-Controlling Interest

80% 1 July 20X4

60% 1 July 20X5

W2. Subs' Net assets

Working 3. Goodwill (NCI is measured using proportionate share of Subs' NA)

Effective Interests in Zebra Co

W6. Inter-company trading $ $

Consolidated Statement of Financial Position at 31 March 2014

W3. Goodwill (NCI is measured using proportionate share of Subs' NA at acquisition)

W4. Non-Controlling Interest in H Group

W5. Group reserves

20% 30 June 20X4

In S’s books (in $’000)

S’s balances change as follows (in $’000):

Step 2: Consolidate S into H

Share capital 100 100

Goodwill on acquisition of S (in $’000)

Non-controlling interests in S (in $’000) $

Group retained earnings = 100,000+ 75%*(60,000-40,000) + 750 =$115,750

A consolidated statement of financial position as at 31 Dec. 20X4 can be prepared as follows:

Total assets 486.00

Question 7. Step or piecemeal acquisitions

Calculation goodwill arising on acquisition of B ltd

Consideration received for shares 102.0