Chapter 21 Associates

1.
1.1 1.2 1.3 1.4

Objectives
Define an associate. Explain the principles for the use of equity accounting. Prepare a consolidated statement of financial position to include a single subsidiary and an associate. Prepare a consolidated income statement to include a single subsidiary and an associate.

A s s o c ia te s

D e f in it io n s

# o n s o lid a t e d $P

# o n s o lid a te d !

A s s o c ia te

! n # o n s o lid a te d $P % & o n %c u rre n t A sse ts ' a la n c e ( it h A s s o c ia t e % & ot # ancel

, r a d in g ( it h A s s o c ia t e % D o n o t E lim in a t e a le s o r P u r c h a s e s D i- id e n d s f r o m A s s o c ia te % E x c lu d e f r o m # !

ig n if ic a n t ! n f lu e n c e

E q u it y " e th o d

) n r e a lis e d P r o f it % A d *. D e p e n d s o n + h o e lle r is

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2.
2.1

Investments in Associates
Definitions .a/ Associate 0 An entity1 including an unincorporated entity such as a partnership1 o-er (hich an in-estor has significant influence and (hich is neither a subsidiary nor an interest in a *oint -enture. Significant influence 0 is the power to participate in the financial and operating polic decisions of the in-estee but is not control or *oint control o-er those policies. ignificant influence is assumed (ith a shareholding of 223 to 423. !"uit method 0 A method of accounting (hereby the in-estment is initially recorded at cost and ad*usted thereafter for the post%acquisition change in the in-estor5s share of net assets of the in-estee. ,he profit or loss of the in-estor includes the in-estor5s share of the profit or loss of the in-estee.

.b/

.c/

#.
3.1

Associates in the Consolidated Statement of $inancial %osition

,he associate is included as a non%current asset in-estment calculated as6 7222 #ost of in-estment 8 hare of post acquisition profits 8 9ess6 !mpairment losses .8/ 9ess6 )nrealised profit .8/ 8

3.2

!&ample 1 : 9td acquired 243 interest in A 9td for 71221222 on 1 ;anuary 2212. At the date of the acquisition1 A 9td has the follo(ing shareholders5 funds6 7 <rdinary shares .71 each/ 2221222 hare premium 421222 =etained earnings 1>21222 $or the year ended 31 December 22121 A 9td records profit after tax of 71>1222 and declared di-idend of 7121222.

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;ournal entries6 1 ;anuary 2212 Dr .7/ !n-estment in associate 1221222 'an? .'eing in-estment in associates recorded at cost./

#r /7/ 1221222

31 December 2212 .in boo?s of : 9td5s consolidated financial statements/ !n-estment in associate .71>1222 x 243/ 41222 hare of profit of associate 41222 .'eing equity account for 243 interest in the associate5s profit./ 'an? .7121222 x 243/ !n-estment in associate .'eing di-idend recei-ed from associate./ 21422 21422

3.3

3.4

!"uit method is meaningful because it allows a measure of responsibilit of an in-estor for the performance of an associate by including the associate5s profits or losses into account. !n addition1 the carrying -alue of in-estment may better appro&imate its current value than the cost value. ,he carrying -alue of in-estment is deemed to be increased (hen the associate ma?es profits (hile a decrease in -alue of in-estment is recorded (hen the associate sustains losses. Steps for %reparing the CS$% including associate .+1/ hareholding in the subsidiary .+2/ #onsolidation ad*ustments. .+3/ &et assets of subsidiary At date of ac"uisition 7 8 8 8 At the reporting date 7 8 8 8

3.4

hare capital =eser-es6 hare premium =etained earnings

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8 .+4/ @ood(ill

Parent holding .in-estment/ at fair -alue &#! -alue at acquisition .A/ 9ess6 $air -alue of net assets at acquisition .+2/ @ood(ill on acquisition !mpairment of good(ill #arrying good(ill

7 8 8 8 .8/ 8 .8/ 8

.A/ !f fair -alue method adopted1 &#! -alue B fair -alue of &#!5s holding at acquisition .number of shares 'CI own ( subsidiar share price/. .A/ !f proportion of net assets method adopted1 'CI value ) 'CI * ( fair value of net assets at ac"uisition .from +2/. .+4/ &on controlling interest 7 8 8 .8/ 8

&#! -alue at acquisition .as in +3/ &#! share of post%acquisition reser-es .+2/ &#! share of impairment .fair -alue method only/

.+>/ @roup retained earnings 7 8 8 8 .8/ 8

Parent retained earnings .1223/ @roup 3 of sub5s post%acquisition retained earnings @roup 3 of associate post%acquisition retained earnings 9ess6 Parent share of impairment . C A/ .+4/

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.+D/ !n-estment in associate #ost of in-estment Post%acquisition profits .+>/ 9ess6 !mpairment 9ess6 )nrealised profits 7 8 8 .8/ .8/ 8

3.>

!&ample 2 'elo( are the statements of financial position of three companies as at 31 December 2212. : 9td 9td A 9td 'on+current assets 7222 7222 7222 Property1 plant and equipment 11122 EF2 F42 !n-estments >D21222 shares in 9td >44 % % 1>F1222 shares in A 9td 224 % % 11EFF Current assets !n-entory =ecei-ables 'an? ,otal assets !"uit and liabilities !"uit 71 <rdinary shares =etained earnings Current liabilities ,rade payables ,axation 3F2 1E2 34 >24 214E3 EF2 >42 312 4F 1122F 11EFF F42 1E2 122 4> 33> 111D>

11122 11232 21342 142 E1 241

F42 >22 11442 4F2 >> 44> 11EFF

4>2 44F 1122F 13> 32 1>F 111D>

,otal equity and liabilities

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214E3

Gou are also gi-en the follo(ing information6 1. 2. 3. 4. : 9td acquired its shares in 9td on 1 ;anuary 2212 (hen 9td had retained losses of 74>1222. : 9td acquired its shares in A 9td on 1 ;anuary 2212 (hen A 9td had retained earnings of 71421222. An impairment test at the year end sho(s that good(ill for 9td remains unimpaired but the in-estment in A 9td has impaired by 721F22. ,he : @roup -alues the non%controlling interest using the fair -alue method. ,he fair -alue on 1 ;anuary 2212 (as 71>21222.

-e"uired. Prepare the consolidated statement of financial position as at 31 December 2212. Solution. +1 hareholdings @roup &on%controlling interest 9td F23 223 1223 +2 &et asset of 9td At date of acquisition 7222 F42 .4>/ DF4 +3 #alculation of @ood(ill #ost of in-estment $air -alue of &#! 9ess6 1223 net assets at acquisition 7222 >44 1>2 F24 .DF4/ At the reporting date 7222 F42 >22 11442 A 9td 323 %

hare capital =etained earnings

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@ood(ill +4 &on%controlling interest $air -alue of &#! 223 post%acquisition profit H223 x .4> C >22/I

22

7222 1>2 131.> 2E1.>

+4 @roup retained earnings : 9td 9td HF23 x .4> C >22/I A 9td H323 x .44F 0 142/I 9ess6 !mpairment of associate 7222 11232 42>.4 E2.4 .2.F/ 11F4F +> !n-estment in associate #ost of in-estment Post acquisition profits .+4/ 9ess6 !mpairment 7222 224 E2.4 .2.F/ 313.> Consolidated statement of financial position as at #1 December 2/1/ 'on+current assets 7222 7222 @ood(ill .+3/ 22 Property1 plant and equipment .11122 C EF2/ 21122 !n-estment in associate .+>/ 313.> 21433.> Current assets !n-entory .3F2 C >42/ =ecei-ables .1E2 C 312/ #ash .34 C 4F/ ,otal assets !"uit and liabilities !"uit
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11222 422 E3

11>13 4124>.>

71 ordinary shares =etained earnings .+4/ &on%controlling interest .+4/ Current liabilities ,rade payables .142 C 4F2/ ,axation .E1 C >>/ ,otal equity and liabilities

11122 11F4F 21E>F 2E1.> 3124E.> >32 14D

DFD 4124>.>

3.D

0alance with associate @enerally the associate is considered to be outside the group. ,herefore balances bet(een group companies and the associate (ill remain in the consolidated statement of financial position. !f a group company trades (ith the associate1 the resulting payables and recei-ables (ill remain in the consolidated statement of financial position.

3.F

1nrealised profit in inventor )nrealised profits on trading bet(een group and associate must be eliminated to the extent of the in-estor5s interest .i.e. 3 o(ned by parent/. .a/ %arent selling to associate 0 the profit elements is included in the parent company5s accounts and associate holds the in-entory. Dr. @roup retained earnings #r. !n-estment in associate .b/ Associate selling to parent compan 0 the profit element is included in the associate company5s accounts and the parent holds the in-entory. Dr. @roup retained earnings #r. @roup in-entory

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2.
4.1

Associates in the Consolidated Income Statement

Associate in consolidated income statement .a/ .b/ !"uit accounting 0 @roup shares of the associate3s profit after ta& less an impairment of the associate in the year. ,rading with the associate 0 sales or purchases between group companies and the associate are not normall eliminated and (ill remain part of the consolidated figures in the income statement. !t is normal practice to instead adjust for the unreali4ed profit in inventor . Dividends from associates 0 they are excluded from the consolidated income statementJ the group share of the associate5s profit is included instead.

.c/

4.2

!&ample # 'elo( are the income statements for :1 2212. and A for the year ended 31 December : 9td 7222 F1222 .41D42/ 31242 .D42/ 21422 .D22/ 11F22 9td 7222 41422 .21D22/ 11F22 .122/ 11D22 .422/ 11222 A 9td 7222 31222 .21242/ E42 .42/ E22 .322/ >22

=e-enue <perating expenses Profit from operations $inance costs Profit before tax ,ax Profit for the year

Gou are also gi-en the follo(ing information6 1. 2. 3. 4. : acquired F23 of se-eral years ago. : acquired 323 of the equity share capital of A on 1 ;anuary 222E. During the year1 : sold goods to A for 71 million at a mar?%up of 243. At the year%end1 A still held one quarter of these goods in in-entory. At 31 December 22121 it (as determined that the in-estment in the associate (as impaired by 73412221 of (hich 7221222 related to the current year.

-e"uired.

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Prepare the consolidated income statement for the group for the year ended 31 December 2212. Solution. +1 hareholdings @roup &on%controlling interest 9td F23 223 122 +2 )nrealised profit in in-entory B 711222 x 24K124 x 1K4 x 323 B 714 !ntercompany balances bet(een the parent and associate are not eliminated as the associate is outside the group. ,herefore1 no ad*ustment in respect of the sale for 71 million needs to be made. !n the consolidated income statement1 unrealiLed profit in in-entory (ill increase cost of sales since the parent is selling company. Consolidated income statement for the ear ended #1 December 2/1/ 7222 =e-enue .F1222 C 41422/ 121422 <perating expenses .41D42 C 21D22 C 14 .+2// .D14>4/ Profit from operations hare of associate H.323 x >22/ 0 22 impairmentI $inance costs .D42 C 122/ Profit before tax ,axation .D22 C 422/ Profit for the year 41234 1>2 .F42/ 41344 .11222/ 31144 A 9td 323 %

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!&amination St le 5uestions
5uestion 1 'elo( are the statements of financial position of three entities as at 32 eptember 2211. P 7222 141222 121222 241222 >1222 321222 A 7222 31222 % 31222 11422 41422

'on+current assets Property1 plant and equipment !n-estments #urrent assets ,otal assets Equity and liabilities Equity hare capital .71 each/ =etained earnings &on%current liabilities #urrent liabilities

7222 D1422 % D1422 31222 121422

121222 D1422 1D1422 F1222 41422 321222

11222 41422 >1422 11242 21D42 121422

422 21422 31222 422 11222 41422

$urther information. 1. 2. 3. 4. 4. >. P acquired D43 of the equity share capital of se-eral years ago1 paying 74 million in cash. At this time the balance on 5s retained earnings (as 73 million. P acquired 323 of the equity share capital of A on 1 <ctober 222E1 paying 7D421222 in cash. At 1 <ctober 222E the balance on A5s retained earnings (as 71.4 million. During the year1 P sold goods to A for 71 million at a mar? up of 243. At the year%end1 A still held one quarter of these goods in in-entory. As a result of this trading1 P (as o(ed 72421222 by A at the reporting date. ,his agrees (ith the amount included in A5s trade payables. At 32 eptember 22111 it (as determined that the in-estment in the associate (as impaired by 7341222. &on%controlling interests are -alued using the fair -alue method. ,he fair -alue of the non%controlling interest at the date of acquisition (as 71.> million.

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-e"uired. Prepare the consolidated statement of financial position of the P group as at 32 eptember 2211. 5uestion 2 P acquired F23 of on 1 December 222F paying 74.24 in cash per share. At this date the balance on 5s retained earnings (ere 7FD21222. <n 1 "arch 2211 P acquired 323 of A5s ordinary shares. ,he consideration (as settled by share exchange of 4 ne( shares in P for e-ery 3 shares acquired in A. ,he share price of P at the date of acquisition (as 74.22. P has not yet recorded the acquisition of A in its boo?s. ,he statement of financial position of the three companies as at 32 &o-ember follo(s6 P 'on+current assets 7222 7222 Property 11322 F42 Plant and equipment 442 212 !n-estments 11F24 % Current assets !n-entory =ecei-ables #ash ,otal assets Equity and liabilities Equity hare capital 71 hare premium =etained earnings 2211 are as A 7222 E22 142 %

442 322 122 41444

232 342 42 11>F2

222 422 142 11DE2

11F22 242 11144 311E4

422 F2 422 EF2

242 % 11222 11442

&on%current liabilities 123 loan notes #urrent liabilities ,rade payables !ncome tax

422

322

422 332

332 D2

242 E2

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,otal equity and liabilities ,he follo(ing information is rele-ant6 1.

41444

11>F2

11DE2

2. 3. 4.

4.

>.

As at 1 December 222F1 plant in the boo?s of (as determined to ha-e a fair -alue of 7421222 in excess of its carrying -alue. ,he plant had a remaining life of 4 years at this time. During the post%acquisition period1 sold goods to P for 74221222 at a mar?%up of 243. P had a quarter of these goods still in in-entory at the year%end. !n eptember A sold goods to P for 71421222. ,hese goods had cost A 71221222. P had 7E21222 .at cost to P/ in in-entory at the year%end. As a result of the abo-e inter%company sales1 P5s boo?s sho(ed 7421222 and 7221222 as o(ing to and A respecti-ely at the year%end. ,hese balances agree (ith the amounts recorded in 5s and A5s boo?s. &on%controlling interests are measured using the fair -alue method. ,he fair -alue of the non%controlling interest at the date of acquisition (as 73>F1222. @ood(ill has impaired by 71421222 at the reporting date. An impairment re-ie( found the in-estment in the associate (as to be impaired by 7141222 at the year%end. A5s profit after tax for the year is 7>221222.

-e"uired. Prepare the consolidated statement of financial position as at 32 &o-ember 2211.

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5uestion # 9aurel acquired F23 of the ordinary share capital of :ardy for 71>21222 and 423 of the ordinary share capital of #omic for 7D21222 on 1 ;anuary 228D (hen the retained earnings balances (ere 7>41222 in :ardy and 7241222 in #omic. 9aurel1 #omic and :ardy are public limited companies. ,he statements of financial position of the three companies at 31 December 228E are set out belo(6

Gou are also gi-en the follo(ing information6 1. <n 32 &o-ember 228E 9aurel sold some goods to :ardy for cash for 7321222. ,hese goods had originally cost 7221222 and none had been sold by the year%end. <n the same date 9aurel also sold goods to #omic for cash for 7221222. ,hese goods originally cost 7121222 and #omic had sold half by the year end. 2. <n 1 ;anuary 228D :ardy o(ned some items of equipment (ith a boo? -alue of 7441222 that had a fair -alue of 74D1222. ,hese assets (ere originally purchased by :ardy on 1 ;anuary 2284 and are being depreciated o-er > years. 3. @roup policy is to measure non%controlling interests at acquisition at fair -alue. ,he fair -alue of the noncontrolling interests in :ardy on 1 ;anuary 228D (as calculated as 73E1222.
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4.

#umulati-e impairment losses on recognised good(ill amounted to 7141222 at 31 December 228E. &o impairment losses ha-e been necessary to date relating to the in-estment in the associate.

-e"uired. Prepare a consolidated statement of financial position for 9aurel and its subsidiary as at 31 December 228E1 incorporating its associate in accordance (ith :MA 2F.

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5uestion 2 <n 1 <ctober 222> Plateau acquired the follo(ing non%current in-estments6 3 million equity shares in a-annah by an exchange of one share in Plateau for e-ery t(o shares in a-annah plus 71.24 per acquired a-annah share in cash. ,he mar?et price of each Plateau share at the date of acquisition (as 7> and the mar?et price of each a-annah share at the date of acquisition (as 73.24. 323 of the equity shares of Axle at a cost of 7DN42 per share in cash. <nly the cash consideration of the abo-e in-estments has been recorded by Plateau. !n addition 74221222 of professional costs relating to the acquisition of a-annah are also included in the cost of the in-estment. ,he summarised draft statements of financial position of the three companies at 32 eptember 222D are6

,he follo(ing information is rele-ant6 .i/ At the date of acquisition a-annah had fi-e years remaining of an agreement to supply goods to one of its ma*or customers. a-annah belie-es it is highly li?ely that the agreement (ill be rene(ed (hen it expires. ,he directors of Plateau estimate that the
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.ii/

.iii/

.i-/ .-/

.-i/ .-ii/

-alue of this customer based contract has a fair -alue of 71 million and an indefinite life and has not suffered any impairment. <n 1 <ctober 222>1 Plateau sold an item of plant to a-annah at its agreed fair -alue of 72.4 million. !ts carrying amount prior to the sale (as 72 million. ,he estimated remaining life of the plant at the date of sale (as fi-e years .straight%line depreciation/. During the year ended 32 eptember 222D a-annah sold goods to Plateau for 72ND million. a-annah had mar?ed up these goods by 423 on cost. Plateau had a third of the goods still in its in-entory at 32 eptember 222D. ,here (ere no intra%group payablesKrecei-ables at 32 eptember 222D. !mpairment tests on 32 eptember 222D concluded that neither consolidated good(ill nor the -alue of the in-estment in Axle (ere impaired. ,he a-ailable%for%sale in-estments are included in PlateauOs statement of financial position .abo-e/ at their fair -alue on 1 <ctober 222>1 but they ha-e a fair -alue of 7E million at 32 eptember 222D. &o di-idends (ere paid during the year by any of the companies. !t is the group policy to -alue non%controlling interest at acquisition at full .or fair/ -alue. $or this purpose the share price of a-annah at this date should be used.

-e"uired. .a/ .b/ Prepare the consolidated statement of financial position for Plateau as at 32 eptember 222D. .22 mar?s/ A financial assistant has obser-ed that the fair -alue exercise means that a subsidiaryOs net assets are included at acquisition at their fair .current/ -alues in the consolidated statement of financial position. ,he assistant belie-es that it is inconsistent to aggregate the subsidiaryOs net assets (ith those of the parent because most of the parentOs assets are carried at historical cost. -e"uired. #omment on the assistantOs obser-ation and explain (hy the net assets of acquired subsidiaries are consolidated at acquisition at their fair -alues. .4 mar?s/ .,otal B 24 mar?s/ .Amended A##A $D $inancial =eporting December 222D P1/

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5uestion 6 :edra1 a public listed company1 acquired the follo(ing in-estments6 .i/ <n 1 <ctober 22841 D2 million shares in al-ador for an immediate cash payment of 71E4 million. :edra agreed to pay further consideration on 32 eptember 2284 of 74E million if the post acquisition profits of al-ador exceeded an agreed figure at that date .ignore discounting/. :edra has not yet accounted for this 74E million (hich is regarded as being at fair -alue. al-ador also accepted a 742 million F3 loan from :edra at the date of its acquisition. .ii/ <n 1 April 22841 42 million shares in Aragon by (ay of a share exchange of t(o shares in :edra for each acquired share in Aragon. ,he share mar?et -alue of :edra Os shares at the date of this share exchange (as 72.42. :edra has not yet recorded the acquisition of the in-estment in Aragon. ,he summarised statements of financial position of the three companies as at 32 eptember 2284 are6

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,he follo(ing information is rele-ant. .a/ $air -alue ad*ustments and re-aluations6 .i/ :edraOs accounting policy for land and buildings is that they should be carried at their fair -alues. ,he fair -alue of al-adorOs land at the date of acquisition (as 722 million in excess of its carrying -alue. 'y 32 eptember 2284 this excess had increased by a further 74 million. al-adorOs buildings did not require any fair -alue ad*ustments. ,he fair -alue of :edraOs o(n land and buildings at 32 eptember 2284 (as 712 million in excess of its carrying -alue in the abo-e statement of financial position. .ii/ ,he fair -alue of some of al-adorOs plant at the date of acquisition (as 722 million in excess of its carrying -alue and had a remaining life of four years .straight0line depreciation is used/. .iii/ At the date of acquisition al-ador had unrelie-ed tax losses of 742 million from
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.b/

.c/

.d/ .e/

pre-ious years. al-ador had not accounted for these as a deferred tax asset as its directors did not belie-e the company (ould be sufficiently profitable in the near future. :o(e-er1 the directors of :edra (ere confident that these losses (ould be utilised and accordingly they should be recognised as a deferred tax asset. 'y 32 eptember 2284 the group had not yet utilised any of these losses. ,he income tax rate is 243. ,he retained earnings of al-ador and Aragon at 1 <ctober 22841 as reported in their separate financial statements1 (ere 722 million and 7222 million respecti-ely. All profits are deemed to accrue e-enly throughout the year. An impairment test on 32 eptember 2284 sho(ed that consolidated good(ill should be (ritten do(n by 722million. :edra has applied !$= 3 'usiness combinations since the acquisition of al-ador. ,he in-estment in Aragon has not suffered any impairment. !t is the group policy to -alue non%controlling interest at acquisition at full .or fair/ -alue. ,he directors -alue the good(ill attributable to the non%controlling interest at acquisition at 712m.

-e"uired. Prepare the consolidated statement of financial position of :edra as at 32 eptember 2284. .24 mar?s/ .Amended A##A 2.4 $inancial =eporting December 2224 P1/

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5uestion 7 'elo( are the summarised statements of financial position for three companies as at 31 "arch 222E6

&otes6 Pacema?er is a public listed company that acquired the follo(ing in-estments6 .i/ !n-estment in yclop <n 1 April 222D Pacema?er acquired 11> million shares in yclop for an immediate cash payment of 7212 million and issued at par one 123 7122 loan note for e-ery 222 shares acquired. yclopOs retained earnings at the date of acquisition (ere 7122 million. .ii/ !n-estment in Qardine <n 1 <ctober 222F Pacema?er acquired 32 million shares in Qardine in exchange for D4 million of its o(n shares. ,he stoc? mar?et -alue of Pacema?erOs shares at the date of this share exchange (as 71N>2 each. Pacema?er has not yet recorded the in-estment in Qardine. .iii/ Pacema?erOs other in-estments1 and those of yclop1 are a-ailable%for%sale in-estments (hich are carried at their fair -alues as at 31 "arch 222F. ,he fair -alue of these in-estments at 31 "arch 222E is 7F2 million and 73D million respecti-ely. <ther rele-ant information6 .i-/ Pacema?erOs policy is to -alue non%controlling interests at their fair -alues. ,he directors of Pacema?er assessed the fair -alue of the non%controlling interest in yclop at the date of acquisition to be 7>4 million.

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.-/

,here has been no impairment to good(ill or the -alue of the in-estment in Qardine. At the date of acquisition of yclop o(ned a recently built property that (as carried at its .depreciated/ construction cost of 7>2 million. ,he fair -alue of this property at the date of acquisition (as 7F2 million and it had an estimated remaining life of 22 years.

$or many years yclop has been selling some of its products under the brand name of OMy?lopO. At the date of acquisition the directors of Pacema?er -alued this brand at 724 million (ith a remaining life of 12 years. ,he brand is not included in yclopOs statement of financial position. .-i/ ,he in-entory of yclop at 31 "arch 222E includes goods supplied by Pacema?er for 74> million .at selling price from Pacema?er/. Pacema?er adds a mar?%up of 423 on cost (hen selling goods to yclop. ,here are no intra%group recei-ables or payables at 31 "arch 222E. .-ii/ QardineOs profit is sub*ect to seasonal -ariation. !ts profit for the year ended 31 "arch 222E (as 7122 million. 722 million of this profit (as made from 1 April 222F to 32 eptember 222F. .-iii/ &one of the companies ha-e paid any di-idends for many years. -e"uired. Prepare the consolidated statement of financial position of Pacema?er as at 31 "arch 222E. .24 mar?s/ .Adapted A##A $D $inancial =eporting ;une 222E P1/

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5uestion 8 'elo( are the statements of comprehensi-e income of ,yson1 its subsidiary Douglas and associate $ran? at 31 December 228F. ,yson1 Douglas and $ran? are public limited companies.

Gou are also gi-en the follo(ing information6 1. ,yson acquired F21222 shares in Douglas for 71FF1222 3 years ago (hen Douglas had a credit balance on its reser-es of 7421222. Douglas has 1221222 71 ordinary shares. 2. ,yson acquired 421222 shares in $ran? for 7>21222 2 years ago (hen that company had a credit balance on its reser-es of 7221222. $ran? has 1221222 71 ordinary shares. 3. During the year Douglas sold some goods to ,yson for 7>>1222 .cost 74F1222/. &one of the goods had been sold by the year end. 4. @roup policy is to measure non%controlling interests at acquisition at fair -alue. ,he fair -alue of the non controlling interests in Douglas at acquisition (as 7421222. An impairment test carried out at the year end resulted in 7141222 of the recognised good(ill relating to Douglas being (ritten off and recognition of impairment losses of 721422 relating to the in-estment in $ran?. -e"uired. Prepare the consolidated statement of comprehensi-e income for the year ended 31 December 228F for ,yson1 incorporating its associate.

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5uestion 9 :oldrite purchased D43 of the issued share capital of taybrite and 423 of the issued share capital of Allbrite on 1 April 2284. Details of the purchase consideration gi-en at the date of purchase are6 taybrite6 a share exchange of 2 shares in :oldrite for e-ery 3 shares in taybrite plus an issue to the shareholders of taybrite F3 loan notes redeemable at par on 32 ;une 228> on the basis of 7122 loan note for e-ery 242 shares held in taybrite. Allbrite6 a share exchange of 3 shares in :oldrite for e-ery 4 shares in Allbrite plus 71 per share acquired in cash. ,he mar?et price of :oldriteOs shares at 1 April 2284 (as 7> per share. ,he summarised income statements for the three companies for the year to 32 eptember 2284 are6

,he follo(ing information is rele-ant6 .i/ A fair -alue exercise (as carried out for taybrite at the date of its acquisition (ith the follo(ing results6

,he fair -alues ha-e not been reflected in taybriteOs financial statements. ,he increase in the fair -alue of the plant (ould create additional depreciation of 74221222 in the post acquisition period in the consolidated financial statements to 32 eptember 2284. Depreciation of plant is charged to cost of sales. .ii/ ,he details of each companyOs share capital and reser-es at 1 <ctober 2283 are6
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.iii/ !n the post acquisition period :oldrite sold goods to taybrite for 712 million. :oldrite made a profit of 74 million on these sales. <ne%quarter of these goods (ere still in the in-entory of taybrite at 32 eptember 2284. .i-/ !mpairment tests on the good(ill of taybrite and Allbrite at 32 eptember 2284 resulted in the need to (rite do(n taybriteOs good(ill by 7D421222. .-/ :oldrite paid a di-idend of 74 million on 22 eptember 2284. taybrite and Allbrite did not ma?e any di-idend payments. .-i/ !t is the group policy to -alue the non%controlling interest at acquisition at its proportionate share of the fair -alue of the subsidiaryOs identifiable net assets. -e"uired. #alculate the good(ill arising on the purchase of the shares in taybrite and the carrying -alue of Allbrite at 1 April 2284. .F mar?s/ .b/ Prepare a consolidated income statement for the :oldrite @roup for the year to 32 eptember 2284. .14 mar?s/ .c/ ho( the mo-ement on the consolidated retained earnings attributable to :oldrite for the year to 32 eptember 2284. .2 mar?s/ .,otal B 24 mar?s/ &ote. ,he additional disclosures in !$= 3 'usiness combinations relating to a ne(ly acquired subsidiary are not required. .Adapted A##A 2.4 $inancial =eporting December 2224 P1/ .a/

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5uestion : <n 1 August 222D Patronic purchased 1F million of a total of 24 million equity shares in ardonic. ,he acquisition (as through a share exchange of t(o shares in Patronic for e-ery three shares in ardonic. 'oth companies ha-e shares (ith a par -alue of 71 each. ,he mar?et price of PatronicOs shares at 1 August 222D (as 74ND4 per share. Patronic (ill also pay in cash on 31 ;uly 222E .t(o years after acquisition/ 72N42 per acquired share of ardonic. PatronicOs cost of capital is 123 per annum. ,he reser-es of ardonic on 1 April 222D (ere 7>E million. Patronic has held an in-estment of 323 of the equity shares in Acerbic for many years. ,he summarised income statements for the three companies for the year ended 31 "arch 222F are6

,he follo(ing information is rele-ant6 .i/ ,he fair -alues of the net assets of ardonic at the date of acquisition (ere equal to their carrying amounts (ith the exception of property and plant. Property and plant had fair -alues of 74N1 million and 72N4 million respecti-ely in excess of their carrying amounts. ,he increase in the fair -alue of the property (ould create additional depreciation of 72221222 in the consolidated financial statements in the post acquisition period to 31 "arch 222F and the plant had a remaining life of four years .straight%line depreciation/ at the date of acquisition of ardonic. All depreciation is treated as part of cost of sales. ,he fair -alues ha-e not been reflected in ardonicOs financial statements. &o fair -alue ad*ustments (ere required on the acquisition of Acerbic. ,he finance costs of Patronic do not include the finance cost on the deferred consideration.
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.ii/

.iii/ Prior to its acquisition1 ardonic had been a good customer of Patronic. !n the year to 31 "arch 222F1 Patronic sold goods at a selling price of 71N24 million per month to ardonic both before and after its acquisition. Patronic made a profit of 223 on the cost of these sales. At 31 "arch 222F ardonic still held in-entory of 73 million .at cost to ardonic/ of goods purchased in the post acquisition period from Patronic. .i-/ An impairment test on the good(ill of ardonic conducted on 31 "arch 222F concluded that it should be (ritten do(n by 72 million. ,he -alue of the in-estment in Acerbic (as not impaired. .-/ All items in the abo-e income statements are deemed to accrue e-enly o-er the year. .-i/ !gnore deferred tax. .-ii/ !t is the group policy to -alue the non%controlling interest at its proportionate share of the fair -alue of the subsidiaryOs identifiable net assets. -e"uired. .a/ .b/ #alculate the good(ill arising on the acquisition of ardonic at 1 August 222D. .> mar?s/ Prepare the consolidated income statement for the Patronic @roup for the year ended 31 "arch 222F. &ote. assume that the in-estment in Acerbic has been accounted for using the equity method since its acquisition. .14 mar?s/ At 31 "arch 222F the other equity shares .D23/ in Acerbic (ere o(ned by many separate in-estors. hortly after this date pe?ulate .a company unrelated to Patronic/ accumulated a >23 interest in Acerbic by buying shares from the other shareholders. !n "ay 222F a meeting of the board of directors of Acerbic (as held at (hich Patronic lost its seat on AcerbicOs board. -e"uired. Explain1 (ith reasons1 the accounting treatment Patronic should adopt for its in-estment in Acerbic (hen it prepares its financial statements for the year ending 31 "arch 222E. .4 mar?s/ .,otal 24 mar?s/ .Adapted A##A $D $inancial =eporting ;une 222F P1/

.c/

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5uestion 1/ :osterling purchased the follo(ing equity in-estments6 <n 1 <ctober 22846 F23 of the issued share capital of unlee. ,he acquisition (as through a share exchange of three shares in :osterling for e-ery fi-e shares in unlee. ,he mar?et price of :osterlingOs shares at 1 <ctober 2284 (as 74 per share. <n 1 ;uly 228>6 > million shares in Amber paying 73 per share in cash and issuing to AmberOs shareholders >3 .actual and effecti-e rate/ loan notes on the basis of 7122 loan note for e-ery 122 shares acquired. ,he summarised income statements for the three companies for the year ended 32 eptember 228> are6

,he follo(ing information is rele-ant6 .i/ ,he other income is a di-idend recei-ed from unlee on 31 "arch 228>. .ii/ ,he details of unleeOs and AmberOs share capital and reser-es at 1 <ctober 2284 (ere6

.iii/ A fair -alue exercise (as carried out at the date of acquisition of follo(ing results6

unlee (ith the

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,he fair -alues ha-e not been reflected in unleeOs financial statements. Plant depreciation is included in cost of sales. &o fair -alue ad*ustments (ere required on the acquisition of Amber. .i-/ !n the year ended 32 eptember 228> :osterling sold goods to unlee at a selling price of 71F million. :osterling made a profit of cost plus 243 on these sales. 7D.4 million .at cost to unlee/ of these goods (ere still in the in-entories of unlee at 32 eptember 228>. .-/ !mpairment tests for both unlee and Amber (ere conducted on 32 eptember 228>. ,hey concluded that the good(ill of unlee should be (ritten do(n by 71.> million and1 due to its losses since acquisition1 the in-estment in Amber (as (orth 721.4 million. .-i/ All trading profits and losses are deemed to accrue e-enly throughout the year. .-ii/ !t is group policy to -alue the non%controlling interest at acquisition at its proportionate share of the fair -alue of the subsidiaryOs identifiable net assets. -e"uired. .a/ .b/ .c/ #alculate the good(ill arising on the acquisition of unlee at 1 <ctober 2284. .4 mar?s/ #alculate the carrying amount of the in-estment in Amber at 32 eptember 228> under the equity method prior to the impairment test. .4 mar?s/ Prepare the consolidated income statement for the :osterling @roup for the year ended 32 eptember 228>. .1> mar?s/ .,otal 24 mar?s/ .Adapted A##A 2.4 $inancial =eporting December 222> P1/

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