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Question 1

On 1 July 2020, Perry plc (Perry) paid £10m cash (inclusive of £0.5m professional fees) to acquire 80% of the equity share capital of Shirley plc (Shirley), with a further £5m cash due to be paid on 1 July 2023. Perry also gave the previous owners of Shirley one share in Perry for every three Shirley shares acquired. Only the initial cash consideration of £10m has been recorded and this amount is all  held in investments.

Perry shares had a market value of £4.10 each at 1 July 2020. Perry has a cost of capital of 7%.

Below are the individual statements of financial position for Perry and Shirley as at 31 December 2020:

The following notes are relevant:

Requirements:

(a) Produce the consolidated statement of financial position for the Perry group as at 31 December 2020.

(24 marks)

(b) Discuss the principles and indicators of goodwill impairment, particularly in respect of the judgements required in assessing if goodwill is impaired.

(5 marks)

(c) Comment on any ethical issues that may arise in respect of the finance director’s current assessment of the situation.

(5 marks)

Total: (34 marks)

Question 2

Pudi plc (Pudi) has a number of subsidiary companies which it acquired several years ago. On 1 January 2020 Pudi  purchased 75% of Slater Ltd (Slater). At that date Slater’s net assets had the following fair values:

The consolidated financial statements of the Pudi group (including the correct consolidation of Slater) for the year ended 31 December 2020 included the following extracts:

Consolidated statement of profit or loss for the year ended 31 December 2020

Additional information:

(a) Depreciation on property, plant and equipment for the year was £244,500. There were no disposals of property, plant and equipment during 2020.

(b) Pudi acquired Slater for £920,000 cash plus £150,000 Pudi shares worth £3.50 each. The non-controlling interest is valued using the proportionate share of net assets.

(c) There was a goodwill impairment at the end of the year.

Requirements:

(a) Identify the amounts that would be recorded in the consolidated statement of cash flows for the year ended 31 December 2020 from the information given above.

(12 marks)

(b) Explain how the concepts of control and ownership are reflected in a consolidated statement of cash flows. (4 marks)

Total: (16 marks)

Question 3

The individual statements of profit or loss for Pelton plc (Pelton) and Spacetime Ltd (Spacetime) for the year ended 31 December 2020 are shown below.

Additional information

(1) Pelton acquired 70% of Spacetime’ £60m, £1 equity share capital for £265m on 1 January 2019 when retained earnings were £135m. At this date Spacetime had property with a fair value of £48m above it’s carrying amount which had a remaining life of 20 years. Depreciation is charged to operating expenses.

(2) During the year, Spacetime sold goods to Pelton for £18.5m, making a 30% margin. 20% of these remained in inventory at the year end.

(3) On 1 July 2020 Pelton gave Spacetime a £70m 7% loan. All interest has been correctly recorded in the individual accounts of both entities.

(4) Spacetime paid a dividend of 20p per share on 1 October 2020.

(5) On 1 March 2020 Pelton acquired 40% of Abed Ltd (Abed). Abed mad a profit of £15m for the year to 31 December 2020 and paid a £7m dividend on 30 May 2020. Assume all profits accrue evenly over the year.

(6) The non-controlling interest is valued at fair value. An independent valuation expert estimated that the fair value of the non-controlling interest of Spacetime on 1 January 2019 was £90m.

(7) At 1 January 2020 Pelton had retained earnings of £241m and Spacetime had retained earnings of £152m.

(6) Since acquisition, goodwill has been impaired by £8m. Of this, £3.5m was recorded in 2019, with the remainder occurring in 2020.

Requirements:

(a) Prepare the consolidated statement of profit or loss for the Pelton group for the year ended 31 December 2020.

(15 marks) 

(b) Prepare the non-controlling interest column from the consolidated statement of changes in equity for the year ended 31 December 2020.

(5 marks) 

(c) Explain and quantify which figures would be different if the Pelton group prepared their financial statements under UK GAAP and not IFRS.

(4 marks) 

Total: (24 marks)

Question 4

Winger plc has entered several new financing transactions during the year as part of its expansion, the details of which are shown below.

· On 1 January 2020 Winger plc issued £5m 6% loan notes, incurring £200,000 issue costs in the process. These are repayable in three years at a premium, which gives them an effective rate of 9%.

· On 1 January 2020 Winger plc also issued £6m 2% convertible bonds. These bonds can be converted into equity shares by the holder. If not converted, these will be repayable in three years. The market rate of similar bonds is 8%.

· On 1 January 2020 Winger plc entered into an agreement to rent a building under a short three-year lease. Under the terms of the lease, Winger plc will pay £1.5m a year annually on 1 January each year, beginning on 1 January 2020. The total payments have a present value of £4.175m, discounted at Winger’s effective rate of 8%. The accountant would like to know if they can utilise the short-term lease exemption per IFRS 16 Leases in respect of this agreement.

Requirements

(a) Explain the correct financial reporting treatment and produce financial statement extract for the items above for the year ended 31 December 2020.

(19 marks)

Winger plc has recently completed the acquisition of 80% of Hawthorne Ltd, one of its main competitors. The acquisition is under review by the Competitions and Markets Authority, who are examining the possibil