Question 1

The following information is relevant to the preparation of the group financial statements of Marchant,
a public limited company, for the year ended 30 April 20X4:

(i) On 1 May 20X2, Marchant acquired 60% of the equity interests of Nathan, a public limited
company, for cash of $80 million. The fair value of the identifiable net assets acquired was
$110 million at that date. The fair value of the non-controlling interest (NCI) in Nathan was
$45 million on 1 May 20X2. Marchant uses the ‘full goodwill' method for all acquisitions. The
share capital and retained earnings of Nathan were $25 million and $65 million respectively and
other components of equity were $6 million at the date of acquisition. The excess of the fair value
of the identifiable net assets at acquisition was due to non-depreciable land.
Goodwill has been tested for impairment annually and as at 30 April 20X3, an impairment loss of
20% of the carrying amount of goodwill was correctly recorded in the group accounts. However,
during the year to 30 April 20X4, the impairment of goodwill had reversed and goodwill was
valued at $2 million above its original carrying amount. Marchant has recorded both the reversal
of the impairment loss and the increase in the value of goodwill in the draft group accounts by
debiting goodwill and crediting profit or loss.

(ii) Marchant disposed of an 8% equity interest in Nathan on 30 April 20X4 for a cash consideration
of $18 million and accounted for the gain or loss on disposal in its individual statement of profit or
loss. The carrying amount of the net assets of Nathan at 30 April 20X4 was $120 million before
any adjustments on consolidation. Marchant accounts for investments in its individual financial
statements using IFRS 9 Financial Instruments and has made an election to present gains and
losses in other comprehensive income. The carrying amount of the investment in Nathan was
$90 million at 30 April 20X3 and $95 million at 30 April 20X4 before the disposal of the equity
interest.
(iii) Marchant acquired 60% of the equity interests of Option, a public limited company, on
30 April 20X2 for cash of $70 million. Option's identifiable net assets had a fair value of
$86 million and the NCI had a fair value of $28 million at the date of acquisition. On
1 November 20X3, Marchant disposed of a 40% equity interest in Option for a cash consideration
of $50 million. Option's identifiable net assets were $90 million and the carrying amount of the
NCI was $34 million at the date of disposal. The remaining equity interest had a fair value of $40
million at the date of disposal. After the disposal, Marchant exerts significant influence over
Option. Any increase in net assets since acquisition has been recognised in profit or loss and the
carrying amount of the investment in Option has not changed since acquisition. Goodwill has not
been impaired. No entries have been made in the financial statements of Marchant in respect of
this transaction, other than to record the cash received.
(iv) Marchant sold inventory to Nathan at its fair value of $12 million. Marchant made a loss on the
transaction of $2 million and Nathan still holds $8 million of this inventory at the year end.
(v) Ignore the taxation effects of the above adjustments.
Required

(a) (i) Explain, including relevant calculations, how goodwill should have been calculated on the
acquisitions of Nathan and Option and subsequently treated in the consolidated financial
statements of Marchant. For the purposes of this requirement, you should ignore the
subsequent disposals of equity interests in Nathan (note ii) and in Option (note iii). (9 marks)
(ii) Explain, with suitable calculations, whether any adjustment on consolidation is required in
respect of the IFRS 9 gain on the investment in Nathan included in Marchant's separate
financial statements. (3 marks)
(iii) Discuss, with suitable workings, how the disposal of Option and the resulting gain should
have been treated in Marchant's consolidated financial statements. (4 marks)
(iv) Explain, with supporting workings, the adjustments needed to the consolidated financial
statements to correctly reflect intragroup trading. (4 marks)

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 (b) Explain, with suitable calculations, how the disposal of the 8% interest in Nathan should be dealt
with in the consolidated statement of financial position of the Marchant Group as at 30 April
20X4. Your answer should include a discussion of any consolidation adjustment required in
relation to the gain on disposal of the interest in Nathan recognised in Marchant's separate
financial statements. (10 marks)
(Total = 30 marks)

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