BOTSWANA ACCOUNTANCY COLLEGE

ACCA

STRATEGIC BUSINESS REPORTING

PROGRESS TEST 1.

INSTRUCTIONS

ANSWER ALL 3 QUESTIONS

Pony ep

USE THE ACCA BLANK SOFTWARE

TIME ALLOWED IS 2 hours 30 minutes.
UPLOAD AND SUBMIT YOUR PDF ANSWERS ON TEAMS ASSIGNMENTS
 Question 1
Question text

Ribby is a listed entity with two subsidiaries, Hall, and Zian. The Ribby group’s reporting date is
31 May 20X8. No ordinary shares have been issued by Hall or by Zian since acquisition.
The following exhibits provide information relevant to the question:
Exhibit 1 — Acquisition of Zian
Ribby acquired 60% of the ordinary shares of Zian for 330 million dinars on 1 June 20X7 when Zian's
share capital was 209 million dinars and its retained earnings were 220 million dinars. The acquisition
gave Ribby control over Zian. The fair value of the net assets of Zian was equal to their carrying
amount at the date of acquisition. Ribby elected to measure the non-controlling interest in Zain at its
fair value of 220 million dinars at acquisition.
Zian is located in a foreign country and imports its raw materials at a price which is normally
denominated in dollars. The product is sold locally at selling prices denominated in dinars and
determined by local competition. All selling and operating expenses are incurred locally and paid in
dinars. Distribution of Zian’s profits is determined by the parent company, Ribby. Zian's management
have a considerable degree of authority and autonomy in carrying out the operations of Zian and are
not dependent upon group companies for finance.
At 31 May 20X8 the retained earnings of Zian were 302.5 million dinars and goodwill arising on its
acquisition was determined to be impaired by 30% at that date.
The following exchange rates are relevant to the preparation of the group financial statements:
Dinars to $1
1 June 20X7 10
31 May 20X8 12
Average for year to 31 May 20X8 11
Exhibit 2 — Acquisition of Hall
Ribby obtained control over Hall by acquiring 70% of Hall’s ordinary shares on 31 May 20X8 for a
total consideration of $98 million. At the date of acquisition, Hall's share capital was $45 million, its
retained earnings were $60 million and the fair value of the net assets of Hall was $120 million. The
excess of the fair value over the carrying amount of the net assets of Hall was due to an increase in
the value of non-depreciable land. Ribby elected to measure the non-controlling interest in Hall at its
fair value of $42 million at acquisition.
Exhibit 3 — Notes on the preparation of the draft consolidated financial statements
The following information is relevant to the preparation of the consolidated financial statements:
1 The accountant has included Hall’s assets, liabilities and equity in the draft consolidated
statement of financial position (Exhibit 4) on a line-by-line basis. The only adjustment made was
to eliminate the cost of the investment in Hall recognised in Ribby's accounts against Hall's
share capital. The resulting difference has been presented as the sundry assets balance within
current assets.
Zian’s financial statements have been correctly translated in accordance with IFRS Accounting
Standards and the translated assets and liabilities are included in the draft consolidated
Statement of financial position. Zian’s acquisition date equity has been correctly eliminated
against the cost of the investment, resulting in the recognition of goodwill and non-controlling
interests at acquisition. No subsequent accounting has taken place in respect of goodwill or
non-controlling interests.

HB2023
BPP
LEARNING
MEDIA
 Ribby operates a defined benefit pension plan that provides a pension to its employees, subject
to a minimum service period. On 1 June 20X7, Ribby enhanced the pension entitlement of each
employee which applied to all prior years’ service of the employees. As a result, the present
value of the defined benefit obligation on 1 June 20X7 increased by $3.5 million. Ribby has not
accounted for the improvement in the pension plan.
Exhibit 4 - Draft consolidated statement of financial position at 31 May 20X8

$'000
Non-current assets
Property, plant and equipment 451,900
Goodwill 12,100
464,000
Current assets
Inventories 28,000
Receivables 62,000
Cash 13,000
Sundry assets 53,000
156,000
Total assets 620,000

Equity and liabilities

Share capital 50,000
Retained earnings 257,555
Foreign exchange reserve (4,665)
302,890
Non-controlling interests 25,110
328,000
Non-current liabilities
Borrowings 150,000
Defined benefit pension obligation 78,000
228,000
Current liabilities 64,000
Total equity and liabilities 620,000
Requirements
(a) With reference to Exhibit 1, discuss and apply the principles set out in IAS 21 The Effects of
Changes in Foreign Exchange Rates in order to determine the functional currency of Zian.
(6 marks)
(b) Using the information in Exhibit 1 and Exhibit 2, explain, with supporting calculations, the
goodwill arising on the acquisition of Zian and Hall. Your answer should include an explanation
of the subsequent accounting for goodwill in Zian. (6 marks)
(c) Explain, with supporting calculations, how the statement of financial position and statement of
profit or loss and other comprehensive income of Zian should be translated into the group
presentation currency prior to consolidation. You should refer to the exchange difference
arising on translation and the treatment of this amount in the separate financial statements of
Zian and the consolidated financial statements. (6 marks)

fs RPP ; ito
ne to
pre-p opula ted sprea dshee t, toget he ith Exhibits 1 — 4, adjust the spreadsheet
(d) i ng the
preparea a correcontected con solida ted state ment of financ ial
amend foranyenurs or omissions and (12 marks)
position at 31 May 20X8.
(Total = 30 marks)
QUESTION 2
Marrgrett, a public limited company, is currently planning to acquire and sell interests in
other entities and has asked for advice on IFRS 3 Business Combinations and IFRS 10
Consolidated Financial Statements.
Marrgrett is considering purchasing additional shares in an associate, Josey, a public
limited company. This will increase the holding from 30% to 70%. Marrgrett will pay cash
to the shareholders of Josey. Purchase consideration will also include a fixed number
shares in Marrgrett which are contingent upon a certain level of profitability being
achieved by Josey over the next two years. Marrgrett anticipates that it will pay $5 million
in transaction costs to lawyers and bankers.
Josey owns several intangible assets that are used primarily in marketing or promotion of
its products. These include trade names, internet domain names and non-competition
agreements. These are not currently recognised in Josey’s separate financial statements.
Marrgrett wishes to use the ‘full goodwill’ method but is unsure as to whether this
method is mandatory, or what the effects are of recognising ‘full goodwill’.
To finance the acquisition of Josey, Marrgrett intends to dispose of a partial interest in
two subsidiaries. Marrgrett will retain control of the first subsidiary. It will sell the
controlling interest in the second subsidiary but will retain significant influence. Because
of its plans to change the overall structure of the business, Marrgrett wishes to recognise
a re-organisation provision at the date of the business combination.

Required:

Discuss the principles and the nature of the accounting treatment of the above plans under
International Financial Reporting Standards. (25 marks)

QUESTION 3. ( Note, The parts of this question are independent and not based on the same
Company )

(a) On 1 May 20X2, Circle introduced a share option scheme. It granted 500 share options to
each of its 10,000 employees. To be entitled to the share options, the employees must still
work for the company on 30 April 20X5 and Circle’s share price on that date must exceed
$5 per share. The fair value of each share option was $3 on 1 May 20X2, $0.30 on 30 April
20X3, and $0.10 on 30 April 20X4.
At 30 April 20X3, 9,700 of the employees remained and it was expected that 9,000 would still
be employed by 30 April 20X5.
At 30 April 20X4, 9,200 of the employees remained and it was expected that 8,800 would still
be employed by 30 April 20X5.
Shortly after the grant date, Circle’s share price fell dramatically and has not recovered. It is
believed that the share price vesting condition will not be met. No accounting entries have been
posted in respect of the scheme since the grant date. ( year end 30 April 20x4 ) (6 marks)

(b) On 1 January 20X2, Spruce granted 20,000 share appreciation rights (SARs) to each of its 52
senior managers and directors. The SARs entitle these employees to a cash bonus based on
Spruce’s share-price on 31 December 20X4 as long as they are still employed on this date.
By 31 December 20X2, two senior managers had left Spruce. It is estimated that another
five will leave prior to the vesting date. The fair value per right was $3 on 1 January 20X2
and $5 on 31 December 20X2. No accounting entries have been posted in respect of the
SARs. ( Note Year end is 31 December 20x2)
(4 marks)

© On 31 December 20X2, Spruce issued 10 million $1 convertible bonds at par and recorded
them as equity. The bonds are redeemable for cash on 31 December 20X4 at par, although
bondholders can instead opt for conversion in the form of a fixed number of shares. Interest on
the bond is payable in arrears at a rate of 7% a year. The interest rate on similar debt without a
conversion option is 10%. ( Note Year end is 31 December 20x2)
(4 marks

(d) BAC operates a defined benefit pension scheme.

The following details relate to the pension scheme in the year ended 31 December 20X1:
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Present value of the obligation at 31 December 20X1 300
Present value of the obligation at 1 January 20X1 270
Fair value of plan assets at 31 December 20X1 228
Fair value of plan assets at 1 January 20X1 216
Current service cost 15
Contributions into the scheme by BAC 18
Pension benefits paid during the year 6

The interest rates available on good quality corporate bonds have been as follows:

1 January 20X1 5%
31 December 20X1 4%

How should the scheme be accounted for in the year ended 31 December 20X1? (6 marks)

Required:
Discuss the correct financial reporting treatment of the transactions above in the
financial statements.
Note: The mark allocation is shown against each of the transactions above. ( TOTAL 20)