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Interim Assessment KAPLAN PUBLISHING Page 1 of 10 ACCA INTERIM ASSESSMENT Corporate Reporting JUNE 2009 QUESTION PAPER Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall Time allowed Reading time: 15 minutes Writing time: 3 hours This paper is divided into two sections Section A This ONE question is compulsory and MUST be answered Section B Answer BOTH questions Kaplan Publishing/Kaplan Financial

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Page 1: P2 - Interim

Interim Assessment

KAPLAN PUBLISHING Page 1 of 10

ACCA INTERIM ASSESSMENT

Corporate

Reporting

JUNE 2009

QUESTION PAPER

Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

Time allowed Reading time: 15 minutes Writing time: 3 hours This paper is divided into two sections Section A This ONE question is compulsory and MUST be

answered Section B Answer BOTH questions

Kaplan Publishing/Kaplan Financial

Page 2: P2 - Interim

ACCA P2 (INT) Corporate Reporting

© Kaplan Financial Limited, 2008 All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

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Interim Assessment

SECTION A

This ONE question is compulsory and MUST be answered QUESTION 1 The following draft financial statements relate to the Baron Group. Draft consolidated statement of comprehensive income for the year ended 30 November 20X1

$m

Revenue 5,721 Cost of sales (4,560)_____

Gross profit 1,161 Distribution costs (309) Administration expenses (285)_____

567 Income from interests in joint venture 75 Defence costs of takeover bid (20) Loss on disposal of tangible non-current assets (7) Loss on disposal of discontinued operations (Note (a)) (25) Interest receivable 27 Interest payable (19)_____

Profit before tax 598 Income tax expense (Note (e)) (191)_____

Profit for the year 407 _____

Attributable to:

Equity holders of the parent 332 Non-controlling interest (75)_____

Profit for the year 407 _____ Consolidated statement of changes in equity for the year ending 30 November 20X1

$m

Opening capital and reserves 1,319 Profit for the year 332 Equity dividends paid (130) Deficit on revaluation of land and buildings (30) Deficit on revaluation of land and buildings in joint venture (15) Gain on revaluation of loan 28 _____ Closing capital and reserves 1,504 _____

KAPLAN PUBLISHING Page 3 of 10

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ACCA P2 (INT) Corporate Reporting

Draft consolidated statement of financial position as at 30 November 20X1

20X1 20X0 $m $m

ASSETS Non-current assets Tangible assets (Note (f)) 1,415 1,800 Intangible assets (Note (b)) 60 144 Investments (Notes (c) and (d)) 600 _____ − _____ 2,075 _____ 1,944 _____ Current assets Inventories 720 680 Short term investments (Note (d)) 152 44 Trade receivables (Note (g)) 680 540 Cash 24 _____ 133 _____ 1,576 _____ 1,397 _____ Total assets 3,651 _____ 3,341 _____ EQUITY AND LIABILITIES Capital and reserves Equity share capital 440 440 Reserves 134 151 Retained earnings Non-controlling interest

930 330 _____

728 570 _____

1,834 _____ 1,889 _____ Non-current liabilities Interest-bearing borrowings 186 214 Provisions – takeover bid defence costs 30 _____ 15 _____ 216 _____ 229 _____ Current liabilities Trade payables 1,300 973 Income tax 261 220 Interest payable 40 _____ 30 _____ 1,601 _____ 1,223 _____ Total equity and liabilities 3,651 _____ 3,341 _____

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Notes: The following information is relevant to the Baron Group. (a) The group disposed of a major subsidiary Piece on 1 September 20X1. Baron held an

80% interest in the subsidiary at the date of disposal.

The group required the subsidiary Piece to prepare an interim statement of financial position at the date of the disposal. The consolidated carrying values of the net assets at the date of disposal are set out below in the summarised statement of financial position at 1 September 20X1.

$m $m

Tangible non-current assets 310 Current assets Inventories 60 Trade receivables 50 Cash 130 ___

240 ___ 550 ___

Share capital 100 Retained earnings 320 ___ 420 Trade payables 105 Tax payable 25 ___

130 ___ 550 ___

(b) The carrying amount relating to goodwill in the group accounts arising on the acquisition of Piece was $64 million at 1 December 20X0. The loss on sale of discontinued operations in the group accounts comprises:

$m

Sale proceeds 375 Net assets sold (80% × 420) (336) Goodwill (64)___

(25)___

The consideration for the sale of Piece was 200 million equity shares of $1 in Meal, (the acquiring company) at a value of $300 million and $75 million in cash. During the year, the group recognised an impairment loss of $20m arising on other intangible assets.

KAPLAN PUBLISHING Page 5 of 10

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ACCA P2 (INT) Corporate Reporting

(c) During the year, Baron had transferred several of its tangible assets to a newly created company, Kevla which is owned jointly by three parties. The total investment at the date of transfer in the joint venture by Baron was $225 million at carrying value comprising $200 million in tangible non-current assets and $25 million in cash. The group has used equity accounting for the joint venture in Kevla. No dividends have been received from Kevla but the land and buildings transferred have been revalued at the year-end.

(d) The investments included under non-current assets comprised the joint venture in

Kevla ($265 million), the shares in Meal ($300 million), and investments in corporate bonds ($35 million). The bonds had been purchased in November 20X1 and were deemed to be highly liquid, although Baron intended to hold them for the long term as their maturity date is 1 January 20X9.

The short term investments comprised the following items:

20X1 20X0 $m $m

Government securities (repayable 1 April 20X2) 51 23 Cash on seven day deposit 101 _____ 21 _____ 152 _____ 44 _____

(e) The taxation charge in the statement of comprehensive income is made up of the

following items:

$m

Income tax 171 Tax attributable to joint venture 20 ___ 191 ___

(f) The movement on tangible non-current assets of the Baron Group during the year

was as follows:

$m

Cost or valuation 1 December 20X0 2,100 Additions 380 Revaluation (30) Disposals and transfers (680)_____

At 30 November 20X1 1,770 _____ Depreciation 1 December 20X0 300 Charged during year 150 Disposals and transfers (95)_____

At 30 November 20X1 355 _____ Carrying value at 30 November 20X1 1,415 Carrying value at 1 December 20X0 1,800

Page 6 of 10 KAPLAN PUBLISHING

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Interim Assessment

(g) Interest receivable included in trade receivables was $5 million at 30 November 20X1 ($4 million at 30 November 20X0).

Required:

(a) Prepare a consolidated cash flow statement for the Baron Group for the year ended

30 November 20X1, including the note relating to the disposal of Piece, in accordance with the requirements of IAS 7 Cash Flow Statements. (35 marks)

You are required to use the ‘indirect method’ to produce the cash flow statement.

Other notes to the cash flow statement are not required. (b) The Finance Director is proposing set up a company, River, through which conducts

its investment activities. Baron is proposing to pay $400 million to River during the year. The money will be invested in a specified portfolio of investments. Ninety-five per cent of the profits and one hundred per cent of the losses in the specified portfolio of investments will be transferred to Baron. An investment manager has charge of the company’s investments and will owns all of the share capital of River. An agreement between the investment manager and Baron sets out the operating guidelines and prohibits the investment manager from obtaining access to the investments for the manager’s benefit. An annual transfer of the profit/loss will occur on 30 June annually and the capital will be returned in four years’ time.

Discuss the issues which would determine whether River would be consolidated by Baron in the group financial statements. (9 marks)

(c) `Discuss briefly the importance of ethical behaviour in the preparation of financial

statements and whether the creation of River could constitute unethical practice by the finance director of Baron. (6 marks)

Two marks are available for the quality of the discussion of the issues regarding the consolidation of River and the importance of ethical behaviour.

(Total: 50 marks)

KAPLAN PUBLISHING Page 7 of 10

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ACCA P2 (INT) Corporate Reporting

SECTION B

Answer BOTH questions QUESTION 2 The following draft statements of financial position relate to Long, a public limited company, Foot, a public limited company and Short, a public limited company, as at 30 November 20X3:

Long Foot Short $m $m $m

Non-current assets Property, plant and equipment 329 185 64 Investment in Foot 345 − − Investment in Short 69 50 − Investment in Micro 11 ___ − ___ − ___ 754 235 64 Current assets 120 ___ 58 ___ 40 ___ 874 ___ 293 ___ 104 ___ Capital and reserves Called up equity share capital of $1 460 110 50 Share premium account 264 20 10 Retained earnings 120 ___ 138 ___ 35 ___ 844 268 95 Non-current liabilities – deferred tax 20 20 5 Current liabilities 10 ___ 5 ___ 4 ___ 874

___ 293 ___

104 ___

The following information is relevant to the preparation of the group financial statements: (i) Long acquired ninety per cent of the equity share capital of Foot and twenty-six per

cent of the equity share capital of Short on 1 December 20X2 in a share for share exchange when the retained earnings were Foot $136 million and Short $30 million. The fair value of the net assets at 1 December 20X2 was Long $650 million, Foot $315 million and Short $119 million. Any increase in the consolidated fair value of the net assets over the carrying value is attributable to property held by the companies. There had been no new issue of shares since 1 December 20X2.

(ii) Foot had acquired a sixty per cent holding in Short on 1 December 20W9 for a

consideration of $50 million when the retained earnings of Short were $10 million. The fair value of the net assets at that date was $80 million with the increase in fair value attributable to property held by the companies. Property is depreciated within the group at five per cent per annum.

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(iii) Long purchased a forty per cent interest in Micro, a limited liability investment company on 1 December 20X2. The only asset of the company is a portfolio of investments which is held for trading purposes. The stake in Micro was purchased for cash for $11 million. The carrying value of the net assets of Micro on 1 December 20X2 was $18 million and their fair value was $20 million. On 30 November 20X3, the fair value of the net assets was $24 million. Long exercises significant influence over Micro. Micro values the portfolio on a ‘mark to market’ basis.

(v) Foot has included a brand name in its property, plant and equipment at the cost of $9

million. The brand earnings can be separately identified and could be sold separately from the rest of the business. The fair value of the brand at 30 November 20X3 was $7 million. The fair value of the brand at the time of Foot’s acquisition by Long was $9 million.

Required: Prepare the consolidated statement of financial position of the Long Group at the year-end of 30 November 20X3 in accordance with International Financial Reporting Standards. The Long group use the proportionate consolidation method to calculate non controlling interest. (25 marks) QUESTION 3 Walsh, a public limited company, acquired 80% of the equity share capital of Marsh, a public limited company, on 1 April 20X3 when the retained earnings of Marsh were $350 million (credit). The cost of the shares of Marsh was $544 million and the share capital acquired by Walsh was 120 million of the $1 equity shares. On 1 July 20X6, Walsh sold 20 million shares of $1 of Marsh for $350 million. There has been no change in the equity share capital of Marsh since 1 April 20X3. On 1 April 20X6, Walsh acquired 85% of the 200 million equity shares of $1 of Short, a public limited company at a cost of $900 million. The draft income statements for the year ended 31 December 20X6 are:

Walsh plc Marsh plc Short plc $m $m $m

Revenue 10,000 8,000 2,000 Cost of sales (7,000)______ (5,500)_____ (800)_____

Gross profit 3,000 2,500 1,200 Administrative expenses (880) (570) (180) Distribution costs (1,310)______ (830)_____ (240)_____

Profit from operations 810 1,100 780 Interest payable (7) – (4) Bank interest receivable 5 ______ − _____ – _____

Profit before tax 808 1,100 776 Tax (250)______ (350)_____ (200)_____

Profit for the year 558 ______ 750 _____ 576 _____

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ACCA P2 (INT) Corporate Reporting

Walsh plc Marsh plc Short plc $m $m $m

Notes:

Dividends paid in the year (85)______ – _____ – _____ Retained earnings at 1 Jan 20X6 1,500 ______ 1,650 _____ 675 _____

The following information is relevant to the preparation of the group accounts. (i) The goodwill relating to the acquisition of Short has been impaired by $11m in the

current period. The goodwill relating to the acquisition of Marsh has been fully written off in the previous year.

(ii) The sale of the shares in Marsh plc has not been accounted for in the accounting

records of Walsh plc (ignore the taxation aspects of the sale). (iii) Short plc sold goods to Walsh plc to the selling value of $80 million on 1 August 20X6

at cost plus 20%. Walsh plc had sold $62 million of these goods at the year end. (iv) Assume that the fair values of the net assets of the subsidiary companies were the

same as the book values at the date of acquisition. (v) Assume that profits accrue evenly and that there are no other reserves than the

retained earnings. Required: Prepare a consolidated income statement for the Walsh Group plc, together with a summary of retained earnings, for the year ended 31 December 20X6. (25 marks)

Page 10 of 10 KAPLAN PUBLISHING

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Interim Assessment

ACCA

Paper P2 (INT)

Corporate Reporting June 2009

Interim Assessment – Answers

To gain maximum benefit, do not refer to these answers until you have completed the interim assessment questions and submitted them for marking.

KAPLAN PUBLISHING Page 1 of 16

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ACCA P2 (INT) Corporate Reporting

© Kaplan Financial Limited, 2008 All rights reserved. No part of this examination may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without prior permission from Kaplan Publishing.

Page 2 of 16 KAPLAN PUBLISHING

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Interim Assessment

ANSWER 1 (a) Baron Group – Cash flow statement for the year ended 30 November 20X1

$m $m $m

Cash flows from operating activities Net profit before taxation 598 Adjustments for: Impairment of intangibles (W6) 20 Depreciation 150 Interest income (net) (27 − 19) (8) Defence costs of take-over bid (per SOCI) 20 Loss on disposal of tangible non-current assets 7 Loss on disposal of discontinued operations 25 Profit from joint venture (75) Bid defence cash outflow ((15 + 20) − 30) (5)___

Operating profit before working capital changes 732 Increase in trade receivables (W1) (189) Increase in inventories (720 − 680 + 60) (100) Increase in trade payables (1,300 − 973 + 105) 432 ___

Cash generated from operations 875 Interest paid (30 + 19 − 40) (9) Income taxes paid (W2) ( 105)___

Net cash from operating activities 761 Cash flows from investing activities Disposal of subsidiary (130 − 75) (55) Interest received (4 + 27 − 5) 26 Purchase of tangible non-current assets (W3) (380) Sale of tangible non-current assets (W4) 68 Purchase of corporate bonds (35) Purchase of government securities (51 − 23) (28) Purchase of interest in joint venture (W7) (25)___

(88)___

Net cash used in investing activities (429) Cash flows from financing activities Dividends paid (per SOCIE) (130) Dividends paid to non-controlling interest interests (W4)

( 231)___

Net cash used in financing activities ( 361)___ Net decrease in cash and cash equivalents (29) Cash and cash equivalents at beginning of period (133 + 21) 154 ___ Cash and cash equivalents at end of period (101 + 24) 125 ___

KAPLAN PUBLISHING Page 3 of 16

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ACCA P2 (INT) Corporate Reporting

Information to students and markers: IAS 7 allows interest and dividends paid to be classified as financing or operating activities. Cash and cash equivalents have been classified strictly on a policy of liquidation within 3 months. Alternative classifications, if discussed, may be acceptable. Note: Disposal of Piece Ltd

$m $m

Net assets disposed of: Non-current assets 310 Inventory 60 Debtors 50 Cash 130 Creditors ( 130)___ 110

Non-controlling interests (20% × 420) (84) Goodwill 64 ___ 400 Loss on disposal (25)___

375 ___ Satisfied by: 200 million equity shares 300 Cash 75 ___ 375 ___

Workings (W1) Increase in trade receivables

$m

Trade receivables Trade receivables − 30.11.X1 680 Less: Interest receivable (5)___

675 ___

Trade receivables − 30.11.X0 540 Less: Interest receivable (4)___

536 ___ Increase in trade receivables 139 Disposal of subsidiary – trade receivables 50 ___ 189 ___

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Interim Assessment

(W2)

Tax paid

$m $m

Disposal of subsidiary 25 Balance b/f 220 Cash paid (bal fig) 105 Statement of

comprehensive income group only (191 − 20)

171

Balance c/f 261 ___ ___ 391 ___ 391 ___

(W3)

Tangible non-current Assets

$m $m

Bal b/fwd 1,800 Depreciation charge Revaluation Disposal to JV Subsidiary disposed Other disposals at CV (680 – 200 – 310 – 95)

150 30

200 310

75

Cash paid additions (bal fig)

380 Bal c/fwd 1,415

____ ____ 2,180 ____ 2,180____

(W4)

Disposal of TNCA

$m $m

CV of disposal (W3) 75 Cash proceeds (bal fig) 68 SOCI – loss 7

___ ___ 75 ___ 75 ___

(W5)

Dividends paid to the NCI

$m $m

Disposal of subsidiary 84 Balance b/f 570 Cash paid (bal fig) 231 Statement of

comprehensive income 75

Balance c/f 330 ___ ___ 645 ___ 645 ___

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ACCA P2 (INT) Corporate Reporting

(W6) Intangible non-current assets

Intangible assets – opening balance 144 Goodwill written off to statement of comprehensive income on disposal

(64)

Impairment loss during year (20)___

Closing balance 30.11.X1 60 ___ (W7) Interest in joint venture

Joint venture in Kevla $m $m

Investment – assets 200 – cash 25 ___ 225 Profit for period 75 Tax expense (20)___ 55 ___ 280 Loss on revaluation (15)___

Closing balance per statement of financial position 265 ___ (b) The definition of ‘control’ underpins the definition of the parent and subsidiary

relationship. IAS 27 Consolidated and Separate Financial Statements states that control is presumed when the parent acquires more than half of the voting rights of the enterprise. Even when more than one half of the voting rights is not acquired, control may be evidenced by power (IAS 27, para 13):

(i) Over more than one half of the voting rights by virtue of an agreement with

other investors.

(ii) To govern the financial and operating policies of the other enterprise under a statute or an agreement.

(iii) To appoint or remove the majority of the members of the board of directors.

(iv) To cast the majority of votes at a meeting of the board of directors. IAS 27 emphasises that the reference to power in the definition of ‘control’ means the ability to do or affect something. As a result an entity has control over another entity when it has the ability to exercise that power, regardless of whether control is actively demonstrated or passive in nature. Further SIC12, Consolidation – Special Purpose Entities says that special purpose entities (SPEs) should be consolidated where the substance of the relationship indicates that the SPE is controlled by the reporting enterprise. This may arise even where the activities of the SPE are predetermined or whether the majority of voting or equity are not held by the reporting enterprise. Under IAS 27 control of an entity comprises the ability to control the entity’s decision making with a view to obtaining benefits from the entity. The ability to control decision making alone is not sufficient to establish control for accounting purposes but must be accompanied by the objective of obtaining benefits from the entity’s activities. If a

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Interim Assessment

company obtains the benefits of ownership, is exposed to the risks of ownership, and can exercise decision making powers to obtain those benefits, then the company must control the third party. Baron should consolidate River as Baron will control through the operating guidelines. Baron also receives 95% of the profits and suffers all the losses of River. The guidelines are to be set up when River is formed and, therefore, the company was set up as a vehicle with the objective of keeping certain transactions off the balance sheet of Baron. The investment manager manages the investments of River within the guidelines and incurs no risk and receives 5% of the profits for the management services.

(c) Ethics in accounting is of utmost importance to accounting professionals and those who rely on their services. Accounting professionals know that people who use their services, especially decision makers using financial statements, expect them to be highly competent, reliable, and objective. Those who work in the field of accounting must not only be well qualified but must also possess a high degree of professional integrity. A professional’s good reputation is one of his or her most important assets.

There is a very fine line between acceptable accounting practice and management’s deliberate misrepresentation in the financial statements. The financial statements must meet the following criteria: (i) Technical compliance: A transaction must be recorded in accordance with

generally accepted accounting principles (GAAP). (ii) Economic substance: The resulting financial statements must represent the

economic substance of the event that has occurred. (iii) Full disclosure and transparency: Sufficient disclosure must be made so that

the effects of transactions are transparent to the reader of the financial statements.

In the case of River it could be argued that the first criterion may be met because the transaction is apparently recorded in technical compliance with IFRS, but technical compliance alone is not sufficient. The second criterion is not met because the transaction as recorded does not reflect the economic substance of the event that has occurred. Accounting plays a critical function in society. Accounting numbers affect human behaviour especially when it affects compensation, and to deliberately mask the nature of accounting transactions could be deemed to be unethical behaviour. If River is set up with the express purpose of keeping its activities off the balance sheet. The Finance Director has an ethical responsibility to the shareholders of Baron and society not to mask the true nature of the transactions with this entity. Further, if the transaction has been authorised by the Finance Director without the authority or knowledge of the Board of Directors, then a further ethical issue arises. River should be consolidated.

KAPLAN PUBLISHING Page 7 of 16

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ACCA P2 (INT) Corporate Reporting

MARKING GUIDE

Marks

(a) Operating activities 8 Interest paid 2 Joint venture 3 Subsidiary treatment 4 Property, plant and equipment 4 Goodwill 2 Non-controlling interest 3 Taxation 3 Dividend paid 1 Interest received 2 Purchase of bonds and securities 2 Sale of non-current assets 1 __ 35

(b) Issues 9 (c) Ethical discussion 3 River 3 __ 6__TOTAL 50__

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ANSWER 2 Consolidated statement of financial position as at 30 November 20X3 Long

$m $m

Non-current assets Property, plant and equipment (W7) 643 Intangible non-current assets – brand (W6) 7 Intangible non-current assets – goodwill (W3) 80.3 Investment in associate (W8) 12.6 ____ 742.9

Current assets (120 + 58 + 40) 218 _____ Total assets 960.9 _____ Capital and reserves Called up share capital 460 Share premium account 264 Retained earnings (W5) 122.1 Non-controlling interest (W4) 50.8 _____ 896.9 Non-current liabilities (20 + 20 + 5) 45 Current liabilities (10 + 5 + 4) 19 _____ 960.9 _____ Workings (W1) Long acquired its holdings in Foot and Short on 1 December 20X2, so control over

them for the purpose of the group accounts was gained on that day. For the purpose of the Long Group, the date of acquisition of Short by Foot is not relevant.

Long

Foot

Short

90%

60%

26%Micro

40%

Long’s effective interest in Short:

Direct 26% Indirect 90% × 60% 54% ___ 80% ___ Non-controlling interest 20% ___

KAPLAN PUBLISHING Page 9 of 16

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ACCA P2 (INT) Corporate Reporting

(W2) Net assets in Foot

At acquisition

At reporting period end

$m $m

Share capital 110 110 Share premium 20 20 Retained earnings 136 ___ 138 _____ 266 268 Fair value adjustments (315 – 266) 49 49 Additional depreciation (49 × 5%) – (2.5) Impairment of brand (9 – 7) (W6) – ___ (2.0)_____

315 ___ 312.5 _____ Net assets in Short

At acquisition

At reporting period end

$m $m

Share capital 50 50 Share premium 10 10 Retained earnings 30 ___ 35 _____ 90 95 Fair value adjustments (119 – 90) 29 29 Additional depreciation (29 × 5%) – ___ (1.5)_____

119 ___ 122.5 _____ (W3) Goodwill

$m

Foot Cost of investment 345 Net assets acquired 90% × 315 (W2) (283.5)_____

Goodwill 61.5 _____ Short Cost of investment (69 + 90% × 50) 114 Net assets acquired (80% × 119 (W2)) (95.2)_____

Goodwill 18.8 _____ Goodwill to consolidated statement of financial position 80.3 _____

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(W4) Non-controlling interest

$m

Foot Net assets at end of reporting period 10% × 312.5 31.3 Less: cost of investment (10% × 50) (5) Short Net assets at end of reporting period 20% × 122.5 24.5 _____ 50.8 _____

(W5) Group retained earnings

$m

Long 120 Foot (312.5 – 315) × 90% (W2) (2.3) Short (122.5 − 119) × 80% (W2) 2.8 _____ 120.5 Income from associate ($4m × 40%) (W8) 1.6 _____ 122.1 _____

(W6) Brand name

IFRS 3 Business Combinations and IAS 38 Intangible Assets require that intangible assets acquired as part of an acquisition should be recognised separately as long as a reliable value can be placed on such assets. There is no option not to show the intangible asset separately under IAS 38. In this case the brand can be separately identified and sold. Therefore, it should be shown separately. Also the brand should be reviewed for impairment as its fair value has fallen to $7 million. The brand should, therefore, be reduced to this value and $2 million charged against profit or loss.

(W7) Property, plant and equipment

$m

Long 329 Foot 185 Short 64 Brand reclassified as intangible asset (9) Fair value adjustments: – Foot (W2) 49 – Short (W2) 29 Additional depreciation – Foot (W2) (2.5) – Short(W2) (1.5)_____

643 _____

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ACCA P2 (INT) Corporate Reporting

(W8) Micro

The investments are to be marked to market by Micro and, therefore, a profit will have arisen during the period of $24 million – $20 million, i.e. $4 million. The investment in Micro will, therefore, be stated at (11 cost + (40% × 4) profit) million, i.e. $12.6 million. Alternatively, the investment in associate can be calculated as follows: Group share of net assets at end of reporting period

$m

(40% × $24m) 9.6 Add goodwill (see below) 3 _____ 12.6 _____ $m

Cost of investment 11 Fair value of shares at acquisition (40% × $20m) (8) _____ Goodwill 3 _____

MARKING GUIDE

Marks

Fair value calculation – assets 4 Goodwill 3 Brand name 3 Property, plant and equipment 3 Group retained earnings 3 Micro 3 Non-controlling interest 3 Liabilities 1 Current assets 1 Share capital and premium 1 __ TOTAL 25 __

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Interim Assessment

ANSWER 3 Walsh Group – Consolidated income statement for the year ended 31 December 20X6

SOCI

Workings $m

W M S 9/12 Adj

Revenue Continuing operations 10,000 8,000 1,500 (80) 19,420 Cost of sales (7,000) (5,500) (600) 80 (13,023) Unrealised profit (W2) (3) ______ Gross profit 6,397 Admin expenses (880) (570) (135) (11) (W3) (1,596) Distribution costs (1,310) ______ (830)_____ (180) _____ (2,320)______

Operating profit 810 1,100 582 (11) 2,481

Interest expense (7) (3) (10) Bank interest income 5 5 ______ Profit before tax 2,476 Income tax expense (250) ______ (350)_____ (150) _____ (750)______

Profit for the year 750 _____ 429 _____ 1,726 ______

Attributable to: Equity holder of the parent

1,462

Non-controlling interest

750 × 6/12 × 20% 75 750 × 6/12 × 1/3 125 429 × 15% 64 264 ______ Net profit for the period 558 550 1,726 ______

Group retained earnings figure at 31 December 20X6 $ Bal b/fwd (W4) 2,396 Profit for the year 1,462 Disposal adj (350 − 290) per W5 60 L (85) _____ ess dividend

Bal c/fwd (W8) 3,833

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ACCA P2 (INT) Corporate Reporting

Workings

(W1) Group structure W

M (6/12) 80% S (9/12) 85%

M (6/12) 66.67% i.e. control all year

(W2) Unrealised profit

$m

$18m × 20/120 3 ___ (W3) Calculation of goodwill – Short

$m $m

Cost of investment 900 Less net assets acquired Share capital 200 Retained earnings at 1.1.X6 675 Income to 1.4.X6 (3/12 × 576) 144 _____

1,019 ×_____ 85% (866)_____

Goodwill 34 _____ Impairment (to I/S per note (i)) 11 _____

(W4) Bal b/fwd

I00% parent 1,500 Marsh: 1,650 − 350 × 80% 1,040 Less goodwill impaired per W7 (144) _____ Bal b/fwd 2,396

(W5) Adjustment on disposal – group view

$m

Proceeds of sale 350 Less share of net assets sold 20/150 × 2,175 (W6) (290) ___ 60 ___

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Interim Assessment

(W6) Net assets of Marsh at date of part disposal

$m $m

Share capital (120 ÷ 0.8) 150 Retained profits b/fwd 1,650 Add profit for the 6 months to the date of disposal (6/12 x 750)

375 _____

2,025 _____ Net assets at 1 July 20X6 (W5) 2,175 _____

(W7) Calculation of goodwill – Marsh

$m $m

Cost of investment 544 Less net assets acquired Share capital (120 ÷ 0.8) 150 Retained profits 350 _____

500 × 80% (400)_____

Goodwill (all fully written off in prior years) 144 _____

Relating to the residual investment (144 × 100/120) 120 _____

(W8) Bal c/fwd

$m

Walsh retained profits (1,500 b/fwd + 558 – 85 divi) 1,973 Profit on sale of shares in Walsh (W9) 259 Marsh retained profits (2/3 × ((750 + 1,650) – 350)) 1,367 Short retained profits 85% × ((9/12 × 576) – 3) 365 Less: Goodwill written off: Marsh (W6) (120) Short (W5) (11)_____

3,833 _____ (W9) Profit on disposal – individual company view

$m

Proceeds of sale 350 Less cost of shares disposed of 20/120 × 544 (91)___

Profit on sale 259 ___

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ACCA P2 (INT) Corporate Reporting

MARKING GUIDE

Marks

Revenue 2 Cost of sales/gross profit 2 Unrealised profit 1½ Admin expenses 1½ Distribution costs 1½ Interest receivable 2 Tax 1½ Non-controlling interest 3 Goodwill 3 __ 18 Retained profits b/fwd 2 Disposal adjustment 2 Profit for the year ½ Dividend ½ Retained profit c/fwg 2 __ 7__TOTAL 25__

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