Consolidation Review Questions [PDF]

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CONSOLIDATION REVIEW QUESTIONS QUESTION ONE A. The objective of IFRS 10: Consolidated Financial Statements is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 requires a parent company to present consolidated financial statements. Required State the conditions under which a parent company needs not to present consolidated financial statements. B. The statements of financial position of P and S at 31 December 2018 are shown below. ASSETS Non-Current Assets Property, Plant and Equipment Investment in S Current assets Accounts receivables Other current assets Total assets EQUITY AND LIABILITIES Share capital: equity shares of TZS 250 each Retained earnings Current liabilities Accounts payables Other liabilities

P TZS “000” 400,000 270,000

S TZS “000” 300,000 -

50,000 40,000 760,000

20,000 80,000 400,000

150,000 490,000

100,000 270,000

10,000 110,000 760,000

10,000 20,000 400,000

i.

P acquired 320,000 shares in S many years ago when the retained earnings of S were TZS 120,000,000. The accounting policy of P is to value non-controlling interests in S at fair value. The market price of each share of S just before acquisition was TZS 600.

ii.

Goodwill impairment test reveals that, at the end of 2018, it has been impaired by 25%.

iii.

During the year S sold goods to P at a standard mark-up of 50% on cost for TZS 160,000,000 and at the end of the year TZS 24,000,000 of this was still held as inventory by P.

iv. v.

At 31 October 2018 S has receivables of TZS 10,000,000 million owed by P The recorded revenue and profit after tax of P and S for the year to 31 December 2018 were:

Revenue Profit after tax

P TZS 600,000,000 50,000,000

S TZS 480,000,000 40,000,000

Required 1) Prepare a consolidated statement of financial position as at 31 December 2018. 2) Calculate the revenue and the profit after tax for the year that will be reported in the consolidated statement of profit or loss and other comprehensive income QUESTION TWO A. IFRS 10 Consolidated Financial Statements establishes principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. Required Discuss why parent company is required to prepare consolidated financial statements. B. ALEXIS Plc holds shares in YAVA Plc. On 1st April 2014, ALEXIS purchased 600,000 shares in YAVA at a cost of TZS 1,600 per share. The fair value of YAVA’s tangible assets on 1st April 2014 was TZS 126,000,000 more than book value. The retained profits of YAVA on 1st April 2014 were TZS 120,000,000. The excess of fair value over book value was attributed to buildings held by YAVA. On 1st April 2014, the buildings had an estimated remaining useful life of 21 years. The draft summarized financial statements for the two entities as of 31st March 2018 are given below: SUMMARIZED STATEMENT OF FINANCIAL POSITION AS AT 31st MARCH, 2018: ALEXIS YAVA ASSETS TZS “000” TZS “000” Non-Current Assets Property, plant and equipment 1,210,000.00 700,000.00 Investment in YAVA at cost 960,000.00

Current Assets Sundry debtors Current account with YAVA ltd Total assets EQUITY AND RESERVES Equity shares of TZS 1,000 each Retained earnings Current Liabilities Trade payable Current account with ALEXIS Total equity and liabilities

2,170,000.00

700,000.00

1,780,000.00 80,000.00 1,860,000.00 4,030,000.00

620,000.00 620,000.00 1,320,000.00

2,000,000.00 400,000.00 2,400,000.00

600,000.00 300,000.00 900,000.00

1,630,000.00 1,630,000.00 4,030,000.00

360,000.00 60,000.00 420,000.00 1,320,000.00

SUMMARIZED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31st MARCH 2018: TZS “000” TZS “000” Revenue 910,000.00 390,000.00 Cost of sales (461,000.00) (171,000.00) 449,000.00 219,000.00 Gross profit Other income - dividends received 50,000.00 Expenses (110,000.00) (43,000.00) Finance cost (30,000.00) (22,000.00) 359,000.00 154,000.00 Taxation (43,000.00) (12,000.00) 316,000.00 142,000.00 Profit for the year Additional information: i. YAVA paid an interim dividend of TZS 50,000,000 on 31st December 2017. ii. YAVA sent a cheque for TZS 20,000,000 to ALEXIS on 30th March 2018. iii. ALEXIS occasionally trades with YAVA. In November 2017 sold goods to YAVA for TZS 90,000,000. ALEXIS uses a markup of 50% on cost. On 31st March 2018, YAVA had not paid for the goods and they were all still in YAVA’s closing inventory.

Required: Prepare a consolidated Statement of Profit or loss and other Comprehensive Income for the year ended 31st March 2018 and a consolidated Statement of Financial Position for the ALEXIS group of entities as at 31st March 2018. QUESTION THREE A. The objective of IFRS 10 “Consolidated Financial Statements” is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. Required Discuss why groups are required to publish consolidated financial statements. B. Set out below are the draft statements of profit or loss of Prunes and its subsidiary company Sultanas for the year ended 31 December 2017. On 1 January 2016 Prunes purchased 75,000 ordinary shares in Sultanas from an issued share capital of 100,000 TZS 1,000 ordinary shares. The following additional information is relevant: Statements of profit or loss for the year ended 31 December 2017 Prunes Sultanas TZS 000 TZS 000 Revenue 600,000 300,000 Cost of sales (360,000) (140,000) –––– –––– Gross profit 240,000 160,000 Operating expenses (93,000) (45,000) –––– –––– Profit from operations 147,000 115,000 Finance costs (3,000) –––– –––– Profit before tax 147,000 112,000 Tax (50,000) (32,000) –––– –––– Profit for the year 97,000 80,000 –––– –––– (i) During the year Sultanas sold goods to Prunes for TZS 20,000,000 making a markup of one third. Only 20% of these goods were sold before the end of the year, the rest were still in inventory.

(ii) Goodwill has been subject to an impairment review at the end of each year since acquisition and the review at the end of this year revealed another impairment of TZS 5,000,000. The current impairment is to be recognised as an operating cost. (iii) At the date of acquisition a fair value adjustment was made and this has resulted in an additional depreciation charge for the current year of TZS 15,000,000. It is group policy that all depreciation is charged to cost of sales. (iv) Prunes values the non-controlling interests using the fair value Required Prepare the consolidated statement of profit or loss for the year ended 31 December 2017 QUESTION FOUR Barcelona acquired 60% of Madrid's ordinary share capital on 1 October 2012 at a price of Tshs 1.06 per share. The balance on Madrid's retained earnings at that date was Tshs 104million and the general reserve stood at Tshs 11million. Their respective statements of financial position as at 30 September 2016 are:

Non-Current Assets Property , plant and equipment Patents Investment in Madrid Current Assets Inventories Trade and other receivables Cash and cash equivalents Equity Share capital Retained earnings General reserve Non-Current Liabilities Long-term borrowings Current Liabilities

Barcelona Tshs “million” 2,848 45 159

Madrid Tshs “million” 354

895 1,348 212 5,507

225 251 34 864

920 2,086 775 3,781

50 394 46 490

558

168

Trade and other receivables 1,168 Current portion of long-term borrowings 5,507

183 23 864

At the date of acquisition the fair values of some of Madrid's assets were greater than their carrying amounts. One line of Madrid's inventory had a fair value of Tshs 8million above its carrying amount. This inventory had all been sold by 30 September 2016. Madrid's land and buildings had a fair value Tshs 26million above their carrying amount. Tshs 20million of this is attributable to the buildings, which had a remaining useful life of ten years at the date of acquisition. It is group policy to value non-controlling interests at full (or fair) value. The fair value of the non-controlling interests at acquisition was Tshs 86million. Annual impairment tests have revealed cumulative impairment losses relating to recognised goodwill of Tshs 20million to date. Required Produce the consolidated statement of financial position for the Barcelona Group as at 30 September 2016. QUESTION FIVE A. The objective of IFRS 10: “Consolidated Financial Statements” is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. Required: Define the term “control” and discuss why groups are required to publish consolidated financial statements? B. Hyder plc acquired 75% of Cyder Ltd’s ordinary shares on 1 April for an agreed consideration of TZS. 25 million when Cyder had retained earnings of TZS. 10,200,000. The draft statements of financial position of the two companies at 31 December are: Hyder (TZS. 000 ) Non-current assets: Property, plant and equipment Investment in Cyder Current assets Inventory Accounts receivable Cash and bank Total assets Equity

Cyder (TZS. 000)

78,540 25,000

27,180 nil

7,450 12,960 nil 123,950

4,310 4,330 920 36,740

Share capital Share premium Retained earnings Non-current liabilities Bank loan Current liabilities Accounts payable and accruals Bank overdraft Taxation Total equity and liabilities

30,000 20,000 64,060 114,060

8,000 2,000 15,200 25,200 6,000

5,920 2,100 1,870 9,890 123,950

4,160 Nil 1,380 5,540 36,740

The following information is relevant i. The fair value of Cyder Ltd’s land at the date of acquisition was TZS. 4 million in excess of its carrying value. The fair value of Cyder Ltd’s other net assets approximated to their carrying values. ii. During the year Cyder plc sold inventory to Hyder Ltd for TZS. 2.4 million. The inventory had originally cost Cyder plc TZS. 2.0 million. Hyder Ltd held 25% of these goods at the yearend. iii. The two companies agreed their current account balances as TZS. 500,000 payable by Cyder Ltd to Hyder plc at the year-end. Inter-company current accounts are included in accounts receivable or payable as appropriate. iv. An impairment test at 31 December on the consolidated goodwill concluded that it should be written down by TZS. 625,000. Required: Prepare a consolidated statement of financial position as at 31 December.

QUESTION SIX On 1 April 2014, Father plc acquired 60% of the equity share capital of Daughter plc in a share exchange of two shares in Father plc for three shares in Daughter plc. The issue of shares has not yet been recorded by Father plc. At the date of acquisition shares in Father plc had a market value of Tshs 6 each. Below are the summarised draft financial statements of both companies. Income statements for the year ended 30 September 2014 Father plc Tshs ’000 Revenue 85,000 Cost of sales (63,000) –––––––– Gross profit 22,000 Distribution costs (2,000) Administrative expenses (6,000)

Daughter plc Tshs ’000 42,000 (32,000) –––––––– 10,000 (2,000) (3,200)

Finance costs Profit before tax Income tax expense Profit for the year

(300) –––––––– 13,700 (4,700) –––––––– 9,000 ––––––––

Statements of financial position as at 30 September 2014 Assets Tshs ’000 Non-current assets Property, plant and equipment Current assets Total assets Equity and liabilities Equity shares of Tshs 1 each Retained earnings

Non-current liabilities 10% loan notes Current liabilities Total equity and liabilities

(400) –––––––– 4,400 (1,400) –––––––– 3,000 ––––––––

Tshs ’000

40,600 16,000 –––––––– 56,600 ––––––––

12,600 6,600 –––––––– 19,200 ––––––––

10,000 35,400 –––––––– 45,400

4,000 6,500 –––––––– 10,500

3,000 8,200 –––––––– 56,600 ––––––––

4,000 4,700 –––––––– 19,200 ––––––––

The following information is relevant: i. At the date of acquisition, the fair values of Daughter plc’s assets were equal to their carrying amounts with the exception of an item of plant, which had a fair value of Tshs 2 million in excess of its carrying amount. It had a remaining life of five years at that date [straight-line depreciation is used]. Daughter plc has not adjusted the carrying amount of its plant as a result of the fair value exercise. ii. Sales from Daughter plc to Father plc in the post-acquisition period were Tshs 8 million. Daughter plc made a mark up on cost of 40% on these sales. Father

iii. iv.

v.

plc had sold Tshs 5.2 million (at cost to Father plc) of these goods by 30 September 2014. Other than where indicated, income statement items are deemed to accrue evenly on a time basis. Daughter plc’s trade receivables at 30 September 2014 include Tshs 600,000 due from Father plc which did not agree with Father plc’s corresponding trade payable. This was due to cash in transit of Tshs 200,000 from Father plc to Daughter plc. Both companies have positive bank balances. Father plc has a policy of accounting for any non-controlling interest at fair value. For this purpose the fair value of the goodwill attributable to the noncontrolling interest in Daughter plc is Tshs 1.5 million. Consolidated goodwill was not impaired at 30 September 2014.

Required: (20 marks) 1. Prepare the consolidated income statement for Father plc for the year ended 30 September 2014. 2. Prepare the consolidated statement of financial position for Father plc as at 30 September 2014.