Question 1 (June 2011) (a) The functional currency is the currency of the primary economic environment in which an entity

operates. In most cases, this will be the local currency. It is the currency that an entity will use in its day to day transactions. IAS 21 The Effects of Changes in Foreign Exchange Rates states that an entity should consider the following factors in determining its functional currency: (i) The currency that mainly influences sales prices for goods or services. (ii) The currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and services. (iii) The currency that mainly influences labour, material and other costs of providing goods and services. (iv) The currency in which funding from issuing debt and equity is generated. (v) The currency in which receipts from operating activities are usually retained. In the case of Stem, the currency that mainly influences the sales prices of its mine output is the dinar as it's income is denominated and settled in dinars. As the output of the mine is routinely traded in dinars and its price is determined initially by local supply and demand, the currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and in which receipts from operating activities are retained is also the dinar. In addition, Stem pays 40% of its costs and expenses in dollars with the remainder being incurred locally and settled in dinars. This means that the dinar is the currency that mainly influences labour, material and other costs of operating the mine. Stem is not dependent upon group companies for finance which means that Stem generates its own funds from equity or debt in its local currency, i.e. the dinar. Therefore, it can be concluded that the functional currency of Stem is the dinar.

(b)

Rose Group Consolidated statement of financial position as at 30 April 2011 $m Assets Non-current assets Goodwill [16 (W4) + 6.2 (W5)] Patent [4 (W2) - 1 (W2)] Property, plant and equipment (W13) Financial assets (15 + 7 + 10)

22.2 3 603.65 32 660.85 284 944.85

Current assets (118 + 100 + 66) Total assets

Equity and liabilities: Share capital Retained earnings (W10) Other components of equity (W11) Non-controlling interests (W12) Total equity Non-current liabilities [56 + 42 + 32 + 0.65 (W8)] Current liabilities (185 + 77 + 20) Total liabilities Total equity and liabilities

158 277.47 6.98 89.75 532.20 130.65 282 412.65 944.85

W1: Group structure Rose

70% + 10%

52%

Petal

Stem

W2: Net assets of Petal and Stem Petal At acquisition date $m 38 49 3 4 30 124 Stem Share capital Retained earnings Fair value adjustment - land Dinars m 200 220 75 495 $m Translate to $ at closing rate (@ 5) 99 $m 115 At reporting date $m 38 56 4 4 (1) 30 131 Dinars m 200 300 75 575 $m 16 Postacquisition $m 7 1 (1) 7 Dinars m 80 80

Share capital Retained earnings Other components of equity Patent Amortisation of patent ($4m/4years) Fair value adjustment - land

W3: Cost of investment in Stem Cost of investment paid at acquisition date is $46 million @ 6 = 276 million dinars $m At historic rate: 276 million dinars @ 6 At closing rate: 276 million dinars @ 5 Exchange gain Adjustment: $m Dr Investment in Stem Cr Retained earnings 9.2 9.2 46 (55.2) (9.2)

W4: Goodwill in Petal $m Cost of investment For 70% x 124 (W2) Parent's goodwill Fair value of NCI at acquisition 30% x 124 Total goodwill 46 (37.2) $m 94 (86.8) 7.2

8.8 16

W5: Goodwill in Stem $m Cost of investment (46 + 9.2 (W3)) For 52% x 99 (W2) Parent's goodwill Fair value of NCI at acquisition (250 million dinars @ 5) For 48% x 99 Total goodwill 50 (47.52) $m 55.2 (51.48) 3.72

2.48 6.2

W6: Step by step adjustment $m NCI before additional acquisition (30% x 131 (W2)) NCI after additional acquisition (20% x 131 (W2)) Decrease in NCI Fair value of consideration paid $m 39.3 (26.2) 13.1 (19) (5.9) Goodwill attributable to NCI before additional acquisition (W4) Goodwill attributable to NCI after additional acquisition (20/30 x 8.8) Decrease in goodwill attributable to NCI Loss to other components of equity 8.8 (5.87) 2.93 2.93 (2.97)

W7: Property The property is a non-monetary item and is therefore not being retranslated at closing rate at the year-end. The property should be accounted for as follows: $m Cost at 1 May 2010 (30 million dinars @ 6) 5 Less: Depreciation ($5m/20 years) (0.25) Carrying amount at 30 April 2011 Add: Gain on revaluation (balancing figure) Revalued amount at 30 April 2011 (35 million dinars @ 5) Adjustment: $m Dr Property, plant and equipment Cr Other components of equity 2.25 2.25 4.75 2.25 7

W8: Employees bonus scheme Rose should make a provision for the bonus payable to the employees calculated as follows: $m Salary for the year ended 30 April Salary for the year ended 30 April Salary for the year ended 30 April Salary for the year ended 30 April Salary for the year ended 30 April Total salary eligible for bonus Bonus payable (2% x $221.04m) Present value of cash payable ($4.42m x 1/1.084) Amount to be provided each year ($3.25m/5 years) Adjustment: $m Dr Retained earnings Cr Non-current liabilities 0.65 0.65 2011 2012 ($40m x 105%) 2013 ($42m x 105%) 2014 ($44.1m x 105%) 2015 ($46.31m x 105%) 40 42 44.1 46.31 48.63 221.04 4.42 3.25 0.65

W9: Plant Under IAS 16 Property, plant and equipment , the depreciable amount of an asset is its cost less its residual value. In the case of Rose, the revision of the residual value of the plant will affect the depreciation charge for the year ended 30 April 2011. Revision of residual value not taken into account $m Cost at 1 May 2007 Less: Depreciation from 1 May 2007 to 30 April 2011 [($20m - $1.4m)/6 years x 4] Carrying amount at 30 April 2011 20 (12.4) 7.6

Revision of residual value taken into account $m Cost at 1 May 2007 Less: Depreciation from 1 May 2007 to 30 April 2010 [($20m - $1.4m)/6 years x 3] Carrying amount at 30 April 2010 Less: Depreciation for the year ended 30 April 2011 ($8.1m*/3 years) Carrying amount at 30 April 2011 20 (9.3) 10.7 (2.7) 8 $m 17.4 (9.3) 8.1

* New depreciable amount at 1 May 2010 ($20m - $2.6m) Less: Depreciation charged to 30 April 2010 Remaining depreciable amount at 1 May 2010

Depreciation for the year ended 30 April 2011 has been overcharged by $0.4 million as a result of not taking into account the revision of the residual value of the plant. Adjustment: $m Dr Property, plant and equipment Cr Retained earnings 0.4 0.4

W10: Consolidated retained earnings $m Rose Petal: 70% x 6 (W2) Stem: 52% x 16 (W2) Exchange gain on cost of investment (W3) Provision for employee bonus (W8) Excess depreciation on plant (W9) 256 4.2 8.32 9.2 (0.65) 0.4 277.47

W11: Consolidated other components of equity $m Rose Petal: 70% x 1 (W2) Step by step adjustment (W6) Gain on revaluation of property (W7) 7 0.7 (2.97) 2.25 6.98

W12: Non-controlling interest Petal: 20% x 131 (W2) Stem: 48% x 115 (W2) Goodwill in Petal (W4) Goodwill in Stem (W5) Decrease in goodwill attributable to NCI (W6) $m 26.2 55.2 8.8 2.48 (2.93) 89.75

W13: Property, plant and equipment $m Rose Petal Stem (380 million dinars @ 5) Fair value adjustment - Petal (W2) Fair value adjustment - Stem (75 million dinars (W2) @ 5) Revaluation gain on property (W7) Excess depreciation on plant (W9) 370 110 76 30 15 2.25 0.4 603.65

W14: Exchange differences on translation of foreign operations $m On opening net assets: 495 million dinars @ 5 495 million dinars @ 6 Exchange gain On income: 80 million dinars @ 5 80 million dinars @ 5.8 Exchange gain On goodwill: At closing rate (W5) At historic rate: Cost of investment For 52% x 82.5 (495 million dinars @ 6) Parent's goodwill Fair value of NCI at acquisition (250 million dinars @ 6) 48% x 82.5 Total goodwill Exchange gain Total exchange differences Attributable to Group (52% x 19.74) Attributable to NCI (48% x 19.74) 41.67 (39.6) 46 (42.9) 3.1 $m $m 99 82.5 16.5

16 13.79 2.21

6.2

2.07 5.17 5.17 1.03 19.74 10.26 9.48 19.74

Alternative calculation of exchange differences on goodwill Dinars m Cost of investment For 52% x 495 Parent's goodwill Fair value of NCI at acquisition 48% x 495 Total goodwill Translate to $ at closing rate (@ 5) Translate to $ at historic rate (@ 6) Exchange gain 250 (237.6) Dinars m 276 (257.4) 18.6

12.4 31 6.2 5.17 1.03

2011 Study Corporate Reporting www.studycorporatereporting.blogspot.com