ACCA/P2

Consolidation

Test 1

1. The following draft balance sheets relate to Largo, a public limited company, Fusion, a public limited company and Spine, a public limited company, as at 30 November 2003: Largo Non Current assets Tangible NCA Investment in Fusion Investment in Spine Investment in Micro Current assets Capital and reserves Called up Share Capital $1 Share premium Accumulated reserves Non Current liabilities Current liabilities 329 150 30 11 520 120 640 460 30 120 610 20 10 640 Fusion 185 50 235 58 293 110 20 138 268 20 5 293 64 40 104 50 10 35 95 5 4 104 Spine 64

The following information is relevant to the preparation of the group financial statements: (i) Largo acquired ninety per cent of the ordinary share capital of Fusion and twenty-six per cent of the ordinary share capital of Spine on 1 December 2002 in a share for share exchange when the accumulated reserves were Fusion $136 million and Spine $30 million. The fair value of the net assets at 1 December 2002 was Largo $650 million, Fusion $330 million and Spine $128 million. Any increase in the consolidated fair value of the net assets over the carrying value is deemed to be attributable to property held by the companies. There had been no new issue of shares since 1 December 2002. (ii) Fusion had acquired a sixty per cent holding in Spine on 1 December 1999 for a consideration of $50 million when the accumulated reserve of Spine was $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. (iii) The directors of Largo wish to account for the business combination as a uniting of interests. On 1 December 2002, before the share exchange, the market capitalisation of the companies was $644 million: Largo; $310 million: Fusion; and $130 million: Spine. The number of employees of Largo was fifty per cent more than the combined total of the employees of both Fusion and Spine. The new Board of Directors will comprise ten directors, seven of whom will be nominated by Largo. As a result of the directors wish to use the pooling accounting method, the cost of the investment in Fusion and Spine, shown in the financial statements of Largo, is simply the nominal value of the share capital issued. The directors feel that pooling accounting is appropriate as former institutional shareholders of Fusion own a substantial amount of equity in the new business combination with the result that Largo cannot dominate the new business combination because of their influence over the management of the new entity. (iv) Largo purchased a forty per cent interest in Micro, a limited liability investment company on 1 December 2002. 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 2002 was $18 million and their fair value was $20

I-Mats College Sargodha

ACCA/P2

Consolidation

Test 1

million. On 30 November 2003, the fair value of the net assets was $24 million. Largo exercises significant influence over Micro. Micro values the portfolio on a mark to market basis. (v) Fusion has included a brand name in its tangible non-current assets 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 2003 was $7 million. The fair value of the brand at the time of Fusions acquisition by Largo was $9 million. Group policy is to amortise goodwill over three years. Required: Prepare the consolidated balance sheet of the Largo Group at the year ended 30 November 2003 in accordance with International Financial Reporting Standards, explaining the reasons why pooling of interests accounting would not be used for the business combination. (25 marks) 2. Nette, a public limited company, manufactures mining equipment and extracts natural gas. They have given you a situation which has arisen in the financial statements for the year ending 31 may 2012 where they feel that the current accounting practice is inconsistent with the framework. Situation: Nette has recently constructed a natural gas extraction facility and commenced production one year ago. There is an operating license given to the company by the government which requires the removal of the facility at the end of its life which is estimated at 20 years. Depreciation is charged on the straight line basis. The cost of the construction of the facility was $200 million and the net present value at 1 June 2011 of the future costs in order to return the extraction site to its original condition are estimated at $50 million (using a discount rate of 5%). 80% of these costs relate to the removal of the facility and 20% relate to the rectification of the damage caused through the extraction of the natural gas. The auditors have told the company that a provision for decommissioning has to be set up. Required: Explain with reasons and suitable extracts/ computations the accounting treatment of the above situation in the financial statements for the year ended 31 May 2012. 3. Jee, a public limited company acquired the following shareholdings in Gee and Hem, both public limited companies. Date of Acquisition Gee 1 June 2003 1 June 2004 Hem 1 June 2004 Jay $m 300 52 22 100 Holding Acquired Fair Value of net assets $m 40 50 32 Gee $m 40 20 Hem $m 30 15 I-Mats College Sargodha Purchase consideration $m 15 30 12

30% 50% 25%

Property plant and equipment Investment in Gee Investment in Hem Current assets

ACCA/P2 Total assets Share capital $1 Share premium Revaluation reserve Retained earnings Total equity Non Current liabilities Current liabilities Total equity and liabilities

Consolidation 470 100 50 15 139 304 60 110 474 60 10 20 16 46 4 10 60 45 6 14 10 30 3 12 45

Test 1

The following information is relevant to the preparation of the statements of the Jay Group. a) Gee and Hem have not issued any new share capital since the shareholdings by Jay. The excess of the fair value by net assets of Gee and Hem over their carrying amounts at that dates of acquision is due to increase in the value of Gees non depreciable lland of $10 million at 01 June 20X3 and a further increase of $4 million at 01 June 20X4, and Hens non depreciable land of $6 million at 01 June 20X4. At 01 june 20X4 the fair value of original 30% investment in Gee was $18 million and this was recorded by Jay. There has been no change in the value of non depreciable land since 1 June 2004. Before obtaining control of Gee, Jay did not have significant influence over Gee but has significant influence over Hem. Jay has accounted for the investment in Gee at market value with changes in value being recorded in profit or loss. The market price of the shares of Gee at 31 May 2005 had risen to $6 per share as there was speculation regarding a takeover bid. b) On 1 June 2004, Jay sold goods costing $13 million to Gee for $19 million. Gee has used the goods in constructing a machine which began service on 1 december 2004. Additionally on 31 may 2005, Jay purchased a portfolio of investment from Hem at a cost of $10 million on which Hem had made a profit of $2 million. These investments have been incorrectly included in Jays tatement of financial position under the heading investment in Hem. c) Jay sold some machinery with a carrying value of $5 million on 28 February 2005 for $8 million. The terms of the contract, which was legally binding from 28 February 2005, was that the purchaser would pay an initial deposit of $2 million followed by two installments of $3.5 million (including total interest of $1 million) payable on 31 may 2005 and 2006. The purchaser was in financial difficulties at the year end and subsequently went into liquidation on 10 June 2005. No payment is epected from the liquidator. The deposit had been received on 28 february 2005 but the first inatallment was not received. The terms of the agreement were such that jay maintained title of the machinery until the first installment was paid. The machinery was still physivally held by Jay and the machinery had been treated as sold in the financial statements. Te amount outstanding of $6 million is included in the current asets and no interest has been accrued in the financial statements. d) Groupmpolicy is to depreciate plant and equipment on the reducing balance basis over the ten years. Depreciation is calculated on a time-apportionment basis. e) There is no inter-company amount outstanding at 31 May 20X5. f) It is the group policy to value the non-controlling interest on acquisition at fair value, which is $12 for Gee at 01 june 20X4. Required: Prepare the consolidated statement OF FINANCIAL POSITION OF Jay Group as at 31 May 20X5 in accordance with IFRS. (Calculations should be to one decimal place of $ million)

I-Mats College Sargodha

ACCA/P2

Consolidation

Test 1

4. The following information is given for a funded defined benefit plan. The present value of the plan assets is $1050 and the plan obligation is $1000 at the start of the year (1 January 2010). 2010 2011 2012 Discount rate Current service cost Benefits paid Contributions paid Present Value of obligation at 31 December Fair value of plan assets at 31 December 10% 130 150 90 1141 1092 12% 140 180 100 1197 1109 9% 150 190 110 1295 1093

Describe how the defined benefit plan is reported in the financial statements of the entity. Also explain briefly, what is the difference between a settlement and a curtailment.

I-Mats College Sargodha