Question 1

On 1 October 2018, Arnold plc acquired 60% of the ordinary share capital of Clark Ltd. The statements of profit or loss for Arnold plc and Clark Ltd for the years ended 31 December 2018 are set out below. The statement of profit or loss for Arnold plc excludes any results relating to Clark Ltd:

Statements of profit or loss for year ended 31

December 2018

Revenue

Cost of sales

Gross profit

Operating expenses

Profit from operations

Investment income

Profit before tax

Tax

Profit for the year

The following information is also available:

(704,000)  (157,000)  588,000      143,800

(302,300)    (98,280)  285,700       45,520

96,000            500

(1) Extracts from the statements of financial position at 31 December 2017, the start of the year are as follows:

Statements of financial position at 31

December 2017

Ordinary share capital (£1 shares)

Share premium

Retained earnings

Arnold

plc

£

900,000

760,000

1,120,000

Clark

Ltd

£

300,000

-

120,000

(2) On 1 October 2018 Arnold plc acquired 60% of the ordinary share capital of Clark Ltd. The consideration consisted of part cash and part share exchange of

2 shares in Arnold plc for every 1 Clark Ltd share acquired. The shares in Arnold plc were issued at a market value of £3 per share. Arnold plc choses to measure the non-controlling interest and goodwill on acquisitions using the proportionate share of net assets method.

The fair values of Clark Ltd’s assets and liabilities at the date of acquisition were the same as their carrying amounts with the exception of a machine, which had a fair value of £8,400 in excess of its carrying amount. The machine had a remaining  useful  life  of  seven  years  at  1  October  2018.  Depreciation  on machinery is to be recognised as cost of sales.

(3) On 1 October 2018 Arnold plc transferred an item of machinery to Clark Ltd for £80,000 cash. This item of machinery is different to the one noted in (2) above.

The cost of this asset was £120,000 and accumulated depreciation at the date of transfer was £43,000 (including depreciation for the 9 months to the date of transfer). The remaining useful life of the asset is 5 years from the date of transfer.  Depreciation on  machinery  is to  be  recognised  as  cost of sales. Company policy is to pro-rate depreciation where relevant. Profits or losses on sales of assets are recorded in investment income.

(4) Clark Ltd’s profits for the year ended 31 December 2018 accrued evenly over the year.

(5) The management of Arnold plc consider goodwill arising on the acquisition of Clark Ltd to be impaired by £5,000 at 31 December 2018. This has not yet been recorded in the financial statements.

(6) On 1 November 2018 Clark Ltd sold goods to Arnold plc for £24,000 at a gross profit margin of 20%. At 31 December 2018 half of these goods remain unsold and are included in Arnold plc’s inventory.

(7) In November 2018 Arnold plc declared and paid a dividend of 20p per share. In December 2018 Clark Ltd declared and paid a dividend of 1p per share.

Required

(a) Prepare the consolidated statement of profit or loss for the Arnold plc Group for the year ended 31 December 2018. You should clearly show the amounts attributable to the (i) equity holders of the parent and (ii) non-controlling interest. (27 marks)

(b) Explain  why  intra-group  transactions  need  to  be  adjusted  for  within  the consolidated statement of profit or loss. You should make reference to two of the pieces of further information (1) – (7) above. You should make specific reference to the information provided and include calculations as part of your

answer                                                                                                          (6 marks)

(c) Prepare  an  extract from  the  consolidated  statement  of  changes  in  equity showing  the  share  capital,  share  premium,  retained  earnings  and  non- controlling interest.                                                                               (9 marks)

(d) IFRS 8 Operating Segments requires certain entities to disclose information about  their  operating  segments.  Evaluate  the  extent  to  which  segmental reporting improves the usefulness of financial information of a group and its subsidiary companies

(8 marks)

Total for question 1: 50 marks

Question 2

a) Young plc owns a number of subsidiary companies. During the year Young plc has undertaken the following transactions which have not yet been accounted for in full:

(1) On 1 July 2018 Young plc purchased 40% of Daquiri Ltd’s ordinary shares for a  cash  payment of £350,000. This  investment  gave Young  plc  significant influence over Daquiri Ltd.  Daquiri Ltd made a profit of £126,000 for the year ended 31 December 2018.

The only accounting entries that have been posted are debit investments in the statement of financial position and credit bank. Young plc has not yet accounted for any further entries in relation to Daquiri Ltd in its consolidated financial statements.

(2) On 1 August 2018 Young plc disposed of a subsidiary company, Singapore Ltd, in which it held a 70% ownership. The only accounting entries that have been posted are debit bank and credit investments  in the statement of financial position. The directors of Young plc are unsure how to account for a disposal of a subsidiary company  in either the  individual company accounts or the consolidated financial statements.

(3) On 1 January 2018 Young purchased 70% of Star GmbH (a company operating in Germany). The directors of Young plc are unsure how to account for the investment in Star GmbH. The only accounting entries that have been made in relation to this acquisition are debit investments in the statement of financial position and credit bank. In particular the directors of Young plc do not know how to account for:

   Statement of profit or loss items

   Statement of financial position items

   Goodwill

Required

Explain the required IFRS financial reporting treatment of (1) to (3) above in relation to  the  consolidated  financial  statements  of Young  plc  for  the  year  ended  31 December 2018. Include all relevant calculations. You should also explain why the

specific treatment you identify is appropriate.                                              (15 marks)

b) On 1 January 2018 Charlie plc acquired 40% of the ordinary share capital of Alan Ltd. As part of the purchase agreement, the management of Alan Ltd will continue to have responsibility for the day to day running of Alan Ltd. However all major investing and financing activities of Alan Ltd require agreement from Charlie plc. Additionally, Charlie plc was granted an option to purchase a further 20% of the share capital of Alan Ltd at a price of £2 per share on 30 June 2019. The current market price of the shares in Alan Ltd is £3.

Charlie plc have appointed 4 out of the 9 directors to the Board of Directors of Alan Ltd. The directors appointed by Charlie plc have specialist knowledge, which has meant that the Board of Directors have deferred to the 4 directors appointed by Charlie plc for all major decisions since acquisition.

Charlie plc has a loan covenant in place that requires the gearing ratio (defined as Debt / (Debt + Equity) x 100) to remain below 50% of the total financing of the group. The following are summary extracts from the statements of financial position:

Statements of financial position at 31 December

2018

Total equity

Total non-current liabilities

Charlie plc Group

£000

56,223

54,550

Alan Ltd

£000

24,000

20,000

Required

(i)       Evaluate  whether  Charlie  plc  has  control  over  Alan  Ltd.  Explain  any assumptions that you have made.                      (11 marks)

(ii)       Analyse why the management of Charlie plc might prefer to account for Alan

Ltd  as  an  associate  rather than  a  subsidiary. You  should  use figures to

illustrate your answer.                                                                         (4 marks)

c) You are a financial accountant for Spaghetti  plc, a  listed group. The financial controller has asked you to produce the consolidated statement of cash flows for the year ended 31 December 2018 and has provided the following information:

(1) Extracts from Spaghetti plc’s statement of financial position as at 31 December:

(2) During the year Spaghetti plc disposed of a subsidiary called Artichoke Ltd. The

assets of Artichoke Ltd at the date of disposal were:

£

Trade receivables

Inventory

Trade payables

Non-controlling interest is valued using the fair value method and at the date of disposal was valued at £120,000.

(3) During the year ended 31 December 2018 Spaghetti plc:

    made a profit for the year of £1,035,000, of which £200,000 was attributable

to the non-controlling interest

    paid ordinary dividends

    sold a machine for £829,000 . The cost at acquisition was £1,600,000 and

accumulated depreciation £700,000

    charged depreciation of £314,000

Required

(i) As far as the information provided allows, prepare the following extracts from Spaghetti plc’s Consolidated Statement of Cash Flows:

•  Cash generated from operations

•  Cash flows from financing activities

(15 marks)