Question 2 Helter and Skelter

On 1st October 20X2 Helter plc acquired 140,000 of the 200,000 £1 ordinary shares in Skelter ltd, paying £4
per share in cash. On 1st October 20X2 the reserves of Skelter Ltd were £390,000.

Helter plc Skelter Ltd

£'000 £'000
Revenue 980 590
Cost of sales (660) (395)
Gross profit 320 195
Other income - investment income 25
Operating expenses (118) (92)
Profit before tax 227 103
Taxation (70) (25)
Profit after tax 157 78

Statement of Changes in Equity - Extract

Retained Retained
earnings earnings
£'000 £'000
Profit after tax 157 78
Dividends paid (48) (20)
Retained profit for the year 109 58
Retained profit brought forward 508 475
Retained profit carried forward 617 533

ANSWER Helter Skelter Ltd Total Cancel Helter plc

Parent % Sub Consol
£'000 £'000 £'000 £'000 £'000
Revenue 980 590 1570 -360 1210 1.0 Working 1
Cost of sales -660 -395 -1055 315 -740 1.5 Working 1
Gross profit 320 195 515 -45 470
Other income - investment income 25 25 -14 11 1.0 Working 2
Sellind and Distribution expenses -78 -70 -148 -148 0.5
Administrative expenses -40 -22 -62 -27 -89 1.0
Profit before tax 227 103 330 -86 244
Taxation -70 -25 -95 -95 0.5
Profit after tax 157 78 235 -86 149
Attributable to Non-Controlling Interests -9.9 Working 3
Attributable to equity holders of the group 139.1 1.0

Helter plc - Statement of Changes in Equity - Extract Retained

earnings
Profit attributable to ordinary shareholders 139.1
Dividends paid - Parent company only -48 1.0
Retained profit for the year 91.1
Retained profit brought forward 567.5 Working 4
Retained profit carried forward 658.6

Working 1
Eliminate intercompany sales £360,000

The goods were invoiced at cost plus 1/3.

Half of these goods remained in stock of Helter PLC at the year-end.

profit on stock £'000

360,000 x 1/4 = 90
unrealised 1/2 45

Working 2 Dividends received by H from S

£'000 % £'000
Ordinary 20 70% 14
14

Working 3 Non-controlling interest £'000 £'000

Profit after tax of Skelter Ltd 78
 Less unrealised profit 45
Profits attributable to minority 33 30% 9.9 2.0

Working 4 Retained profit brought forward £'000

Parent Company H plc 508
Share of S Ltd's post-acquistion reserves
(475,000-390,000) x 70% 59.5
567.5 2.0
11.5
Part b) Goodwill
Consideration (140,000 x4) 560
NCI at acqn (30%*590) 177
737
Assets acquired
Share capital 200
Revenue Reserve 390
590

147
Less impairment -27
120 3.5

Discussion 5.5
Positive goodwill should be recognised as an asset in the consolidated Statement of Financial Position
and should be reviewed annually for impairment.
If the calculation of goodwill gives a negative balance The view of the IASB is that where an acquisition
appears to create negative goodwill, a careful check of the assets acquired and whether any liabilities have been omitted
is required. Any remaining negative goodwill after this reassessment should be recognised immediately in the income
statement and increase the group’s reserves.

Part c

Goodwill would increase because the NCI at acqn would be valued at fair value instead of the NCI's share of
net assets of the subsidiary.

Assuming that the fair value of the NCI holding is £4 per share, then the NCI at acquisition would be
£4*60,000 shares = £240,000

Goodwill on the fair value basis would become

Consideration (140,000 x4) 560
NCI at acqn (60,000*£4) 240
800
Assets acquired
Share capital 200
Revenue Reserve 390
590

210
Less impairment -27
183

Increasing goodwill by £63,000