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IAS 27 & 28 IFRS 3

IFRS 10, 11 & 12 IFRS 13

Group Financial Statements

04

CONCEPT OF GROUP ACCOUNTS

Many large companies actually consist of several companies controlled by one central or administrative company. Together these companies are called a group. The controlling company, called the parent (or holding) company, will own some or all of the shares in the other companies, called subsidiaries. There are many reasons for businesses to operate as group; for the goodwill associated with the name of the subsidiaries, for tax or legal purposes and so forth. In many countries, company law requires that the results of a group should be presented as a whole. Consolidated financial statements ignore the legal boundaries of the separate legal entities. But why are they considered necessary? They are important because the users of parent’s financial statements need to know about the financial position, results of operations and changes in financial position of the group as a whole. The shareholders of parent company can make better economic decisions if the results of group operations are presented to them as a single economic unit. For example: P Ltd has shareholding investment of 100% in S Ltd. P Ltd prepares separate financial statements in which Investment in S Ltd is shown

as non-current asset. P Ltd prepares consolidated financial statements in which P Ltd includes all the

assets of S Ltd as its own because P Ltd controls S Ltd and, of course, eventually all net assets of S Ltd.

IMPORTANT DEFINITIONS [IAS 27]

Consolidated financial statements

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

Separate financial statements

are those presented by a parent (ie an investor with control of a subsidiary) or an investor with joint control of, or significant influence over, an investee, in which the investments are accounted for at cost or in accordance with IFRS 9 Financial Instruments.

Group A parent and its subsidiaries. Parent An entity that controls one or more entities. Subsidiary An entity that is controlled by another entity.

Control

An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

Thus, an investor controls an investee if and only if the investor has all the following: (a) power over the investee; (b) exposure, or rights, to variable returns from its involvement with

the investee; and (c) the ability to use its power over the investee to affect the amount

of the investor’s returns Non-controlling interest

Equity in a subsidiary not attributable, directly or indirectly, to a parent.

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EXEMPTION FROM GROUP ACCOUNTING

Each parent must present consolidated financial statements. However following may not need to present consolidated financial statements, if and only if: (a) the parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary

of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting the consolidated financial statements;

(b) the parent’s debt or equity instruments are not traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets);

(c) the parent did not file, not is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in the public market; and

(d) the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use that comply with IFRSs.

WHY DIRECTORS MAY NOT WISH TO CONSOLIDATE?

Sometimes directors do not wish to consolidate subsidiaries because of poor operational results of such subsidiaries. The exclusion of a subsidiary from consolidation is a common method used by entities to manipulate their results. If a subsidiary which carries a large amount of debt can be excluded, then the gearing of the group as a whole will be improved. In other words, this is a way of taking debt off the SFP. However non-consolidation is prohibited in these cases. In order to exclude an entity from consolidation, the control must actually be lost. NON–COTERMINOUS YEAR ENDS

The financial statements of the parent and its subsidiaries used in the preparation of the consolidated financial statements shall be prepared as of the same reporting date. When the reporting dates of the parent and a subsidiary are different: (a) the subsidiary shall prepare (for consolidation purposes) additional financial

statements as of reporting date of parent’s financial statements unless impracticable. (b) if reporting date is different, adjustments shall be made for the effects of significant

transactions for events that occur between two reporting dates. (In any case difference between two reporting dates should not exceed three months).

UNIFORM ACCOUNTING POLICIES

Consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events in similar circumstances. Adjustments must be made where members of a group use different accounting policies, so that their financial statements are suitable for consolidation. START / END OF CONSOLIDATION

An entity includes the income and expenses of a subsidiary in the consolidated financial statements from the date it gains control (acquisition date) until the date when the entity ceases to control (disposal date) the subsidiary.

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CONSOLIDATION PRINCIPLES

Generally, the financial statements of parent and subsidiary are to be combined on line-by-line basis. The consolidated financial statements are to be presented using the concept that the group is a single entity. In other words, inter-company transactions and their effect is to be eliminated. Subsidiary’s results, assets and liabilities are to be consolidated on whole basis, and the NCI should be calculated and presented separately. Only parent’s share capital and share premium are presented in consolidated financial statements. PRE and POST ACQUISITION PROFITS

Acquisition date is date when parent entity acquires control of subsidiary. In order to calculate goodwill, subsidiary’s reserves at the date of acquisition are important to be determined. These are called pre-acquisition reserves. Any change in reserves after this date is denoted as post-acquisition reserves. Remember: Net Assets = Equity = Equity Share Capital + Reserves & that’s why Net Assets at acquisition = Equity Capital + Pre-acquisition Reserves

CONSOLIDATED SFP: BASIC WORKINGS

W1 GROUP STRUCTURE S Name Subsidiary Acquisition date: ?? Group ??% NCI ??% Rs.000 W2 NET ASSETS (of subsidiary) AT ACQUISITION S Equity share capital XX Reserves (pre-acquisition) XX J? XX / (XX) XX W3A GOODWILL (Partial) S Investment (Fair value of consideration provided) XX Less: Net assets (capital + reserves) at acquisition W2 x G% W1 (XX)

Goodwill (negative goodwill) at acquisition XX J? impairment / transfer (X) XX In exam questions, it is usually stated as: “it is group policy to value the NCI at proportion of net assets method”. W3B GOODWILL (Full) S Investment (Fair value of consideration provided) XX Less: Net assets (capital + reserves) at acquisition W2 x G% W1 (XX)

Goodwill related to parent XX Fair value of NCI X Less: Net assets (capital + reserves) at acquisition W2 x N% W1 (X)

Goodwill of NCI X Goodwill (negative goodwill) at acquisition XX J? impairment / transfer (X) XX In exam questions, it is usually stated as “it is group policy to value the NCI at its fair value at the date of acquisition”.

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W4 POST ACQUISITION RESERVES (of subsidiary) RS OR RE Total reserve – pre reserves balance XX XX XX J? X /(X) X /(X) X /(X) XX XX XX W5 NON CONTROLLING INTEREST S Net assets (capital + reserves) at acquisition W2 x N% W1 XX NCI goodwill W3 [only in case of full goodwill method] XX Post-acquisition reserves W4 x N% W1 XX XX W6 GROUP RESERVES RS OR RE Parent reserves XX XX XX J? X /(X) X /(X) X /(X) XX XX XX Post-acquisition reserves W4 x G% W1 XX XX XX XX XX XX The pre-acquisition reserves of subsidiary are not included in group reserves because they have not been earned by the group.

QUESTION 01 The draft SFPs of PK and SL on 31 December 2010 are as follows:

PK SL Rs.000 Rs.000 Property, plant and equipment 90 100 Investment in SL at cost 110 Current assets 50 30 250 130 Ordinary share capital 100 100 Retained earnings 120 20 Current liabilities 30 10 250 130

PK had bought 80% of the ordinary shares of SL on 1 January 2010 when the retained profits of SL were Rs.10,000. No impairment of goodwill has occurred to date. Prepare a consolidated SFP as at 31 December 2010, assuming that PK group values the NCI using the proportion of net assets method.

QUESTION 02 The draft SFPs of Ping and Sing on 31 December 2008 are as follows:

Ping Sing Rs. Rs. Tangible assets 85,000 18,000 Investment in Sing at cost 60,000 Current assets 160,000 84,000 305,000 102,000 Ordinary share capital 65,000 20,000 Share Premium 35,000 10,000 Retained earnings 70,000 25,000 Current liabilities 135,000 47,000 305,000 102,000

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Ping acquired its 80% holding in Sing on 1 January 2008, when Sing’s retained earnings stood at Rs.20,000. On this date, the fair value of the 20% NCI in Sing was Rs.12,500. There has been no impairment of goodwill since acquisition. The Ping group uses the full goodwill method to value the NCI. Prepare the Consolidated SFP as at 31 December 2008.

ADJUSTMENTS: INTRA GROUP TRADING

(-) 1 Trade payables XX Trade receivables XX

Intra group current account balances Parent and subsidiary may trade with each other. In such case, it is possible that one company in group has amount owed to other company. As in consolidation group is considered to be a single entity such balances should be cancelled. In same way, any other balances (e.g. interest or dividend receivable and interest or dividend payable) within group are cancelled against each other.

(-) 2 Trade payables XX Inventory / Cash / Bank overdraft XX Trade receivables XX

Goods / Cash in Transit At year end, current accounts may not agree due to goods in transit or cash in transit. In such case, the following entry may be passed.

(-) 3 RE / COS (seller company) XX Inventory XX

Unrealized Profit in Inventory A group company may buy inventory from the other in post acquisition period. To the extent, such inventory is sold outside group, the profit is realized to group and so, no adjustment is required. However, for inventory not yet sold outside group, the unrealized profit portion included in inventory should be eliminated.

(-) 4 RE / Other Income (seller company) XX PPE XX

Unrealized Profit in Sale of Non-Current Assets A group company may buy non-current asset from the other in post acquisition period and recognize the resultant gain or loss in its individual financial statements. Such unrealized gain or loss should be eliminated from RE and PPE etc.

(-) 5 PPE XX RE / Cost of Sales (buyer company) XX

Extra depreciation due to unrealized Profit in Sale of Non-Current Assets As the buyer company records the asset bought on higher amount, the depreciation charged is also higher which should be reversed considering group as a single entity.

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QUESTION 03 The draft SFPs of PIN and SIN on 31 March 2007 are as follows:

PIN SIN Rs.000 Rs.000 Tangible non-current assets 100 140 Investment in SIN at cost 180 Current assets Inventory 30 35 Trade receivables 20 10 Cash 10 5 340 190 Ordinary share capital 200 100 Share Premium 0 30 Retained earnings 50 20 250 150 10% Loan notes 65 Current liabilities 25 40 340 190

(i) PIN bought 80,000 shares in SIN on 1 April 2001 when Sin’s reserves included a

share premium of Rs.30,000 and retained profits of Rs.5,000. (ii) PIN accounts show Rs.6,000 owing to SIN; SIN’s accounts show Rs.8,000 owed by

PIN. The difference is explained as cash in transit. (iii) During the year, SIN sold goods of Rs.60,000 to PIN at a selling margin of 25%.

PIN’s inventory still includes one third of this inventory. Prepare a consolidated SFP as at 31 March 2007, assuming that PIN group values the NCI using the proportion of net assets method.

ADJUSTMENTS: GOODWILL

(-) 6 RE / COS / Operating expenses (Parent) XX Goodwill XX

Impairment of goodwill (partial) Under IFRS 3 goodwill is annually tested for impairment. As under partial goodwill method, the goodwill only relates to owners of parent (and not to NCI) the impairment loss should only be charged to Parent’s RE. Sometimes, notional goodwill is to be calculated under this method to determine the amount of impairment loss.

(-) 7 RE / COS /Operating expenses (S) XX Goodwill XX

Impairment of goodwill (full) Under IFRS 3 goodwill is annually tested for impairment. As under full goodwill method, the goodwill relates to owners of parent and to NCI as well, the impairment loss should be charged to Parent’s RE and NCI both according to their respective shareholding.

(-) 8 Goodwill XX RE /Other Income (Parent) XX

Negative goodwill The cost of investment may be less than the value of net assets purchased, so the negative goodwill arises. Most likely reason may be a misstatement of fair value of net assets acquired or consideration given, so IFRS 3 requires that in such cases the calculation should be reviewed. After any such review, any negative goodwill is credited directly to SPL.

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ADJUSTMENTS: INVESTMENT IN SUBSIDIARY

(-) 9

Investment in subsidiary XX Cash XX Share Capital (parent) XX Share Premium (parent) XX Deferred consideration XX Contingent consideration XX Any other consideration given XX

Recording of investment Consideration paid for a subsidiary must be accounted for at fair value. This consideration includes the cash paid and fair value of other consideration. Incidental costs of acquisition such as legal, accounting, valuation and other professional fees should be expensed as incurred. Sometimes, a parent issues its own shares to (previous) shareholders of subsidiary in exchange of shares of subsidiary purchased from them. The shares issued should be recorded at market value at the date of transaction with any excess over par value to be credited to share premium account. Deferred consideration is amount payable in future usually after 12 months or more. Initially such deferred consideration should be recorded as liability at its fair value (i.e. its present value using entity’s cost of capital). Any contingent consideration should always be included (usually as liability) as long as it can be measured reliably even if it is not probable of payment at the date of acquisition. This will be indicated where relevant in an exam question. Where contingent consideration involves issue of shares, there is no liability (obligation to transfer economic benefits). This should be recognized, in such cases, under the equity as “shares to be issued”. Some exam question state that only cash consideration has been recorded. In such case, record the remaining consideration and debit the investment in subsidiary. Some exam question state “investment” figure which includes investment in subsidiary and other investments as well. In such case, we have to separate investment in subsidiary from other investment. This is done by debiting the “investment in subsidiary” and crediting “investment”.

(-) 10 RE / Finance costs (Parent) XX Deferred consideration / Contingent Consideration etc. XX

Subsequent changes in Deferred / Contingent consideration As the time passes by, the present value of deferred (or contingent) consideration increases. Such increase should not affect cost of investment and should be recognized as finance cost. This is also called unwinding of discount.

ADJUSTMENTS: NET ASSETS ACQUIRED

(-) 11 PPE / Other asset etc. XX Pre-acq. reserves (Subsidiary) XX

Fair value adjustment IFRS 3 requires that the subsidiary’s assets and liabilities are recorded at their fair value at the date of acquisition for the purposes of calculation of goodwill etc. Adjustments will therefore be required where the subsidiary’s accounts themselves do not reflect fair value. The assets and liabilities not included in the subsidiary’s own SFP, including contingent assets and liabilities are to be included in consolidated financial statements if they meet recognition criteria.

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(-) 12 RE / COS /Operating expenses (Subsidiary Post Acq.) XX PPE or other assets realized XX

Depreciation impact of fair value adjustment If amount of assets of subsidiary is increased due to fair value adjustment, then this implies that further depreciation should be recognized as well for this increase over remaining useful life of the assets. IFRS 3: GUIDANCE ON FAIR VALUE MEASUREMENT

GENERAL

IFRS 3 sets out general principles for arriving at the fair values of a subsidiary’s assets and liabilities. The acquirer should recognize the acquiree’s identifiable assets’ liabilities and contingent liabilities at the acquisition date only if they satisfy the following criteria. (a) In the case of an asset other than an intangible asset, it is probable

that any associated future economic benefits will flow to the acquirer, and its fair value can be measured reliably.

(b) In the case of a liability other than a contingent liability, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and its fair value can be measured reliably.

(c) In the case of an intangible asset or a contingent liability, its fair value can be measured reliably.

IMPORTANT

The acquiree’s identifiable assets and liabilities might include assets and liabilities not previously recognized in the acquiree’s financial statements. For example, a tax benefit arising from the acquiree’s tax losses that was not recognize by the acquiree may be recognized by the group if the acquirer has future taxable profits against which the unrecognized tax benefits can be applied.

Restructuring and future losses

An acquirer should not recognize liabilities for future losses or other costs expected to be incurred as a result of the business combination. IFRS 3 explains that a plan to restructure a subsidiary following an acquisition is not a present obligation of the acquiree at the acquisition date. Neither does it meet the definition of a contingent liability. Therefore an acquirer should not recognize a liability for such a restructuring plan as part of allocating the cost of the combination unless the subsidiary was already committed to the plan before the acquisition. This prevents the creative accounting. An acquirer cannot set up a provision for restructuring or future losses of a subsidiary and then release this to profit or loss in subsequent periods in order to reduce losses or smooth profits.

Intangible assets

The acquiree may have intangible assets, such as development expenditure. These can be recognized separately from the goodwill only if they are identifiable. An intangible asset is identifiable only if it: (a) Is separable, ie capable of being separated or divided from the entity

and sold, transferred, or exchanged, either individually or together with a related contract, asset or liability, or

(b) Arises from contractual or other legal rights.

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Contingent liabilities

Contingent liabilities of the acquire are recognized of their fair value can be measured reliably. This is a departure from the normal rules in IAS 37; contingent liabilities are not normally recognized, but only disclosed. After their initial recognition, the acquirer should measure contingent liabilities that are recognized separately at the higher of: (a) The amount that would be recognized in accordance with IAS 37. (b) The amount initially recognized.

Measurement period

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, provisional figures for the consideration transferred, assets acquired and liabilities assumed are used.

Adjustments to the provisional figures may be made up the point the acquirer receives all the necessary information (or learns that is not obtainable), with a corresponding adjustment to goodwill, but the measurement period cannot exceed one year from the acquisition date. Thereafter, goodwill is only adjusted for the correction of errors.

CSFP: MIDYEAR ACQUISITIONS

If a parent company acquires a subsidiary during the current year, the net assets (equity) at the date of acquisition are calculated as follow: = Net assets (equity) at start of year + Profits up to date of acquisition It is assumed that Subsidiary’s profit after tax accrues evenly over time unless indicated otherwise.

QUESTION 04 Paint acquired 80% of the share capital of Saint two years ago, when the reserves of Saint stood at Rs.125,000. Paint paid initial cash consideration of Rs. 1 million. Additionally Paint issued 200,000 shares with a nominal value of Rs. 1 and a current market value of Rs.1.80. It was also agreed that Paint will pay a further Rs.500,000 in three years time. Current interest rates are 10% per annum. The appropriate discount factor for Rs. 1 receivable three years from now is 0.751. The shares and deferred consideration have not yet been recorded.

Statement of financial position of Paint and Saint as at 31 December 2004 Paint

Rs.000 Saint

Rs.000 Investment in Saint at cost 1,000 Non- current assets 5,500 1,500 Current assets Inventory 550 100 Receivables 400 200 Cash 200 50 7,650 1,850 Share capital 2,000 500 Retained earnings 1,400 300 3,400 800 Non-current liabilities 3,000 400 Current liabilities 1,250 650 7,650 1,850

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At acquisition the fair values of Saint’s non-current assets exceeded their book value by Rs.200,000. They had a remaining useful life of five years at this date. The consolidated goodwill has been impaired by Rs.258,000 of its value. The Paint group values the non-controlling interest using the full goodwill method. At the date of acquisition the fair value of the 20% non-controlling interest was Rs.380,000. Required: Prepare the consolidated statement of financial position at 31 December 2004 QUESTION 05 CSFP PE 401 Nov 2010 2 Following is the Statement of Financial Position of A Limited and B Limited as of December 31, 2009: (Rupees in .000) A Limited B Limited Non-Current Assets Property, plant and equipment 47,000 38,000 Investment in B Limited 34,400 Current Assets Inventory 5,000 6,000 Trade receivables 12,500 12,000 Cash and cash equivalents 4,100 - 21,600 18,000 Total Assets 103,000 56,000 Liabilities and Equity Share capital 43,000 20,000 Revaluation reserve 11,000 5,000 Retained earnings 24,000 26,000 78,000 51,000 Payables 25,000 5,000 Total Liabilities and Equity 103,000 56,000 Additional Information: (i) A Limited acquired 80% of the ordinary shares of B Limited on January 1, 2009 when

B Limited had balance in its retained earnings account of Rs.6 million. There is no change in revaluation reserve account of B Limited since the date of acquisition.

(ii) B Limited sells goods to A Limited at cost plus 20%. A Limited has unsold goods to the value of Rs.3 million in the inventory as of December 31, 2009.

(iii) Trade receivable of B Limited include an amount of Rs.1 million due from A Limited. (iv) There is no impairment of goodwill. Required: Prepare the Consolidated Statement of Financial Position of .A. Limited as of December 31, 2009. (20)

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QUESTION 06 CSFP B F2 EQB 10 Reprise purchased 75% of Encore for Rs. 2,000,000 10 years ago when the balances on its retained earnings was Rs. 1,044,000. The statements of financial position of the two companies as at 31 March 20X4 are as follows;

Reprise Rs. 000

Encore Rs. 000

Non – current assets Land and building 3,350 - Plant and equipment 1,010 2,210 Motor vehicles 510 345 Investment in Encore 2,000 - 6,870 2,555 Current assets Inventories 890 352 Trade and other receivables 1,372 514 Cash and cash equivalents 89 51 2,351 917 9,221 3,472 Equity Share capital (Rs. 1 ordinary shares) 1,000 500 Retained earnings 4,225 2,610 Revalution surplus 2,500 - 7,725 3,110 Non – current liabilities 10% debentures 500 - Current liabilities Trade payables 996 362 9,221 3,472

The following additional information is available; (1) Included in trade receivables of Reprise are amounts owed by Encore of Rs. 75,000. The

current accounts do not at present balance due to a payment of Rs. 39,000 being in transit at the year ende of Encore.

(2) Included in the inventories of Encore are items purchased from Reprise during the year for Rs. 31,200. Reprise marks up its goods by 30% to achieve its selling price.

(3) Rs. 180,000 of the recognized goodwill arising is to be written off due to impairment losses.

(4) Encore shares were trading at Rs. 4.40 just prior to acquisition by Reprise. Required: Prepare the consolidated statement of financial position for the Reprise Group of companies as at 31 March 20X4. It is the group policy to value the non- controlling interest at full (or fair) value.

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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(-) 1 Revenue (Adjustment Column) XX Cost of Sales (Adjustment Column) XX

Intra group sales and purchases (TRADING) Parent and subsidiary may trade with each other. For consolidation, group is considered to be a single entity such sales and purchases should be eliminated. However, such adjustment shall have no effect on SFP as net effect on RE is nil. In same way, any other transactions (e.g. interest income and interest expense) within group are cancelled against each other. The unrealized profit in inventory is adjusted in seller’s financial statements. In the same way, other transactions are adjusted. IMPORTANT POINTS

Expense for the year only

Once any expense (e.g. impairment) is identified, only the charge for the year will be recognised. Impairment of goodwill is usually charged in “operating expenses”, however, examiner may require otherwise.

NCI share This is simply: Subsidiary’s profit after tax x NCI% Subsidiary’s OCI x NCI%

Mid year acquisitions

If subsidiary is acquired part way through the year, then the subsidiary’s results should only be consolidated from the date of acquisition, i.e. the date on which control is obtained. For this purpose, it is often assumed that profit accrues evenly throughout the year.

QUESTION 07 The draft SPLs of PINT and SINT for the year 31 March 2009 are as follows:

PINT SINT Rs.000 Rs.000 Sales revenue 303,600 217,700 Cost of Sales (143,800) (102,200) Gross Profit 159,800 115,500 Operating costs (71,200) (51,300) Other Income 2,800 1,200 Profit before tax 91,400 65,400 Taxation (46,200) (32,600) Profit after tax 45,200 32,800

On 30 November 2008 PINT acquired 75% of the issued ordinary capital of SINT. The profits of both companies are deemed to accrue evenly over the year. Prepare a consolidated statement of profit or loss for the year ended 31 March 2009.

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QUESTION 08 The draft SPLs of PONG and SONG for the year ended 31 December 2007 are set out below. On 1 January 2006 PONG purchased 75,000 ordinary shares in SONG at a cost of Rs.170,000. The issued share capital of SONG is Rs.100,000 Rs.1 ordinary shares. At that date the retained earnings of SONG showed a credit balance of Rs.60,000.

PONG SONG Rs.000 Rs.000 Sales revenue 600 300 Cost of Sales (360) (140) Gross Profit 240 160 Operating costs (93) (45) Finance Costs 0 (3) Profit before tax 147 112 Taxation (50) (32) Profit after tax 97 80

The following information is relevant: 1. During the year SONG sold goods to PONG for Rs.20,000, making a markup of one-

third. Only 20% of these goods were sold before the end of year, the rest were still in inventory.

2. Goodwill has been subject to an impairment review at the end of each year since acquisition. The first review at the end of last year revealed an impairment of Rs.4,000 and the review at the end of this year revealed another impairment of Rs.6,000. The current impairment is to be recognized as operating costs.

Prepare a consolidated statement of profit or loss for the year ended 31 December 2007. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The figures in the statement involve no new calculations. They are worked out as follows: (a) The opening and closing balances of equity attributable to owners of the parent are

calculated by adding together the parent share capital and the group reserves balance calculated using the workings you have prepared for consolidated statement of position examples.

(b) The opening and closing balance non-controlling interest balances are also calculated using the workings you have seen in the context of the statement of financial position.

(c) The figures for total comprehensive income are taken from the reconciliation at the end of the statement of comprehensive income.

(d) The dividend shown in equity attributable to owners of the parent is the dividend paid by the parent.

(e) The dividend shown in the non-controlling interest column is the non-controlling interest share of the dividend paid by the subsidiary.

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QUESTION 09 CSPL PE 401 May 2011 2 X Limited acquired 75% of the ordinary shares of Y Limited on January 1, 2008. The summarized Income Statements of the two companies for the year ending December 31, 2010 are as follows: X Limited Y Limited (Rs. .000) (Rs. .000) Sales 78,000 42,000 Cost of sales (33,000) (24,000) Gross profit 45,000 18,000 General and administrative expenses (11,000) (6,000) Selling and distribution expenses (3,000) (2,000) Profit before taxation 31,000 10,000 Taxation (9,000) (3,000) Profit after taxation 22,000 7,000 Retained earnings b/f 88,000 16,000 Retained earnings c/f 110,000 23,000 Additional information: (i) During the year, Y Limited sold goods worth of Rs.5,000,000 to X Limited at cost plus

25% profit. 50% of the goods remained in the inventory of X Limited as of December 31, 2010.

(ii) Y Limited has proposed a dividend of Rs.2,000,000 to its ordinary shareholders on December 31, 2010.

(iii) At the time of acquisition, Y Limited had pre-acquisition profits of Rs.5,000,000. Required: Prepare Consolidated Statement of Comprehensive Income of .X. Limited for the year ended December 31, 2010. (15) QUESTION 10 CSPL PE 401 May 2010 2 Part (a) Investor Limited acquired 27 million Rs.10 shares of Investee Limited on January 1, 2008. This acquisition was effected by means of an exchange of 3 shares in Investor Limited for every 5 shares in Investee Limited. In addition, Rs.100 million were to be paid after two years. Market price of Investor Limited.s shares at acquisition was Rs.20 each. (Considering 12% as cost of capital of the Investor Limited, PV of Rs.1 receivable in two years time may be taken as Rs.0.797). Fair value of the plant at acquisition was Rs.25 million against the book value of Rs.20 million. The plant had a remaining useful life of 5 years. Depreciation is to be charged using straight line method. At acquisition, Investee Limited had unrelieved tax losses of Rs.25 million. Directors of the Investor Limited believed that these losses could be utilized and hence should be recognized as deferred tax asset. Share capital and reserves of Investee Limited at acquisition were Rs.300 million (of Rs.10 each) and Rs.25 million respectively. Applicable tax rate is 35%. Required: Find goodwill at acquisition. (05)

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Part (b) Alpha Limited acquired 65% of share capital of Beta Limited for Rs.2.6 million on October 01, 2008 when the book value of the net assets of Beta Limited was Rs.3.35 million. The statements of comprehensive income for the year ended March 31, 2009 were:

Alpha Ltd. Beta Ltd. (Rs. .000) (Rs. .000) Sales 5,000 2,910 Cost of goods sold (3,000) (2,120) Gross profit 2,000 790 Administrative expenses (1,000) (150) Selling and distribution expenses (650) (180) Operating profit 350 460 Other income 230 0 Financial charges (50) (210) Profit/(loss) before taxation 530 250 Taxation (300) (70) Profit/(loss) after taxation 230 180

Additional information: (i) On October 01, 2008, Beta Limited issued Rs.1.8 million 5% debentures to Alpha Limited. Both companies have accounted for the interest receivable/ payable at 31st March 2009. (ii) The fair value of the plant of Beta Limited on October 01, 2008 was in excess of its

book value by Rs.200,000. The plant has remaining useful life of 20 years at that date. Beta Limited has not adjusted its accounting records to reflect fair value.

(iii) Beta Limited sold goods amounting to Rs.360,000 at a markup of 20% on cost. Rs.60,000 of goods were still unsold at the end of the period.

(iv) Both companies use straight-line method of depreciation and charge a full year's depreciation in the year of acquisition and none in the year of disposal. Depreciation on fair value adjustments is time apportioned from the date of acquisition.

(v) It is the group's policy to value non-controlling interest at its proportionate share of the fair value of the subsidiary's identifiable net assets.

Required: Prepare the Consolidated Income Statement for Alpha Group for the year ended March 31, 2009. (15) QUESTION 11 CSPL + CSFP PE 401 Aug 2012 2 PK Limited acquired 75% shares of SK Limited on January 1, 2009 on SK Limited's incorporation. The summarized financial statements of the two companies for the year ended December 31, 2011 are as follows:

Income Statement For the year ended December 31, 2011

PK Limited SK Limited (Rs. .000.) Sales 85,000 38,000 Cost of sales (44,500) (20,000) Gross profit 40,500 18,000 Other income - Dividend from SK Limited 2,250 - Operating expenses (9,000) (8,000) Profit before tax 33,750 10,000 Income tax expense (10,500) (2,000) Profit after tax 23,250 8,000 Dividends paid 6,000 3,000

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Movement in retained earnings: Retained earnings balance b/f 87,000 17,000 Profit retained 17,250 5,000 Retained earnings balance c/f 104,250 22,000

Statements of Financial Position As at December 31, 2011

PK Limited SK Limited Non-Current Assets (Rs. .000.) Property, plant and equipments 125,000 60,000 Investments 37,500 - 162,500 60,000 Current assets 58,750 27,000 Total Assets 221,250 87,000 Equity Ordinary shares of Rs.10 each 100,000 50,000 Retained earnings 104,250 22,000 204,250 72,000 Current liabilities 17,000 15,000 Total Equity and Liabilities 221,250 87,000 Additional Information: During the year SK Limited recorded sales to PK Limited for Rs.10,000,000. SK

Limited applies mark-up of 25% over cost. One half of the goods remained unsold and appeared in PK Limited inventory as at December 31, 2011.

PK Limited and SK Limited paid dividends of Rs.6,000,000 and Rs.3,000,000 respectively to their shareholders on December 31, 2011.

Required: (i) Prepare the Consolidated Income Statement and Statement of Changes in Retained Earnings for the year ended December 31, 2011. (12) (ii) Prepare Consolidated Statement of Financial Position as of December 31, 2011. (13)

QUESTION 12 CSPL CSCE B F2 EQB 11 Fallowfield acquired a 60% holding in Rusholme three years ago when Rusholme’s equity was Rs. 56,000 (share capital Rs. 40,000 plus reserves Rs. 16,000). Both businesses have been very successful since the acquisition and their respective income statements for the year ended 30 June 20X8 are shown below;

Fallowfield Rs. Rusholme

Rs. Revenue 403,400 193,000 Cost of sales (201,400) (92,600) Gross profit 202,000 100,400 Distribution costs (16,000) (14,600) Administration costs (24,250) (17,800) Dividends for Rusholme 15,000 - Profit before tax 176,750 68,000 Income tax expense (61,750) (22,000) Profit for the year 115,000 46,000

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Statement of changes in equity (extract) Fallowfield

Rs. Rusholme Rs.

Balance as at 30 June 20X7 243,000 101,000 Profit for the period 115,000 46,000 Dividends (40,000) (25,000) Balance at 30 June 20X8 318,000 122,000

Additional information: (1) During the year Rusholme sold some goods to Fallowfield for Rs. 40,000, including 25%

mark up. Half of these items were still in inventories at year end. (2) Fallowfield had 80,000 Rs.1 shares in issue throughout the year. Required: Produce the consolidated income statement and statement of changes in equity (showing parent and non – controlling interest shares) of Fallowfield Co and its subsidiary for the year ended June 30, 20X8. Goodwill is to be ignored. QUESTION 13 Basic Consolidation PE Model 2013 Q1ab The Nutra group carries on business of import and supply of nutrition products range in the country for infant only. Nutra was incorporated in 2006 and expanded its business activities to include the distribution of its product and import of other range of nutrition products by the acquisition of shares in Prime in 2010 and in Gohar in 2012. The draft statements of profit or loss for Nutra, Prime and Gohar for the year ended June 30, 2012 are as follows:

Nutra Limited

Prime Limited

Gohar Limited

(Rs. in million) Revenue 44,000 30,000 25,000 Cost of sales (30,800) (19,500) (18,750) Gross profit 13,200 10,500 6,250 Operating expenses (6,800) (5,400) (2,500) Finance costs (325) (100) (150) Profit / (Loss) before tax 6,075 5,000 3,600 Income tax expenses (1,800) (1,500) (1,080) Profit / (Loss) after tax 4,275 3,500 2,520

The draft statements of financial position for Nutra, Prime and Gohar for the year ended June 30, 2012 are as follows;

Nutra Limited

Prime Limited

Gohar Limited

Non-Current Assets (Rs. in million) Property, plant and equipment 14,000 17,500 12,000 Investments: Shares in Prime 10,000 - - Shares in Gohar 13,500 - - Loan assets 100 - - Current Assets Inventories 14,000 12,000 5,520 Accounts receivable 8,000 6,000 3,000 Cash and bank 2,000 2,000 1,000 24,000 20,000 9,520 61,600 37,500 21,520 Equity Ordinary share capital @ Rs.10 each 20,000 8,000 7,000 Retained earnings 26,500 18,200 11,520 46,500 26,200 18,520

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Long-term Liabilities Long-term loan 1,800 800 1,000 Current Liabilities Current liabilities 13,300 10,500 2,000 61,600 37,500 21,520

The following information is available related to Nutra, Prime and Gohar: (i) On 1st July 2010 Nutra acquired 640 million shares in Prime for Rs.10,000 million at

which date there was a credit balance on the retained earnings of Prime of Rs.2,425 million. No shares have been issued by Prime since Nutra acquired its interest.

(ii) On 1st Jan 2012 Nutra acquired 420 million shares in Gohar for Rs.13,500 million.

No shares have been issued by Gohar since Nutra acquired its interest. It is assumed that profit of Gohar accrue evenly throughout the year.

(iii) During the year, Prime made inter-company sales to Nutra of Rs.260 million making

a profit of 25% on cost and Nutra could sell only 75% of these goods during the period.

(iv) On 1st April 2012 Nutra imported machine having landed cost of Rs.200 million and sold Prime for Rs.240 million. Nutra kept this machine in inventory. Prime has included this machine in its non-current assets. Prime charge depreciation @ 20% on machine and full year’s depreciation is charged in the year of acquisition in cost of sales.

(v) Prime purchased a new wrapping machine for packaging of its finished material to avoid damages during distribution of goods. The cost of machine was Rs.500 million before trade discount of 10%, which was charged to profit or loss. Depreciation is charged @ 20% on machine and full year.s depreciation is charged in the year of acquisition to the cost of sales.

(vi) Nutra has a loan assets carried at Rs.100 million and held at amortized cost. The effective interest rate is 10%. On 1st July 2011, Nutra felt that because of the financial problem of the borrower, it would receive Rs.40 million in two years. time i.e., 30 June 2013. At year end Nutra still expects to receive same amount on the same date. These facts were not accounted for in the draft financial statements.

(vii) It is group policy to account for non-controlling interest on a proportionate basis. The goodwill of Prime has been fully written off as a result of an impairment review which took place in 2011.

Required: (a) Prepare Consolidated Statement of Profit or Loss for the year ended June 30 2012.

(14) (b) Prepare Consolidated Statement of Financial Position as at June 30, 2012.

(21) QUESTION 14 Basic Consolidation PE Extra 2014 Q1ab Innovators Ltd., an engineering company, is engaged in manufacturing and supply of industrial machines. The company is specialized in textile machinery and is engaged in this business for the last 20 years. In 2010, management decided to increase the business by manufacturing machinery for other industries as well. This required huge investment and long time to setup the basic structure, so the management decided to acquire another company. On July 1, 2011, Innovators Ltd., purchased 8 million shares of Elite Engineering at Rs. 25 per share.

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Elite Engineering is newly incorporated company engaged in manufacturing and supply of machinery related to a Fast-Moving Consumer Goods (FMCG) company. Till the time of acquisition, Elite Engineering could not gain good market share but Innovators Ltd., expected that they would capture good market share using their experience and goodwill. On January 1, 2013, after successful operation of Elite Engineering, the management of Innovators Ltd., also acquired 60% share in Alco Company, importer and supplier of machine parts. Innovators Ltd., paid Rs. 12.5 per share at the time of acquisition and would pay Rs. 2.8 per share after one year. Innovators Ltd..s cost of capital is 12%. The summarised statements of profit or loss of three companies for the year ended June 30, 2013 are: Statement of Profit or Loss Rs. 000

Innovators Limited

Elite Engineering

Alco Company

Revenue 225,000 105,300 72,000 Cost of sales (141,000) (68,850) (54,000) Gross profit 84,000 36,450 18,000 Marketing and distribution expenses (11,100) (4,050) (3,150) Administrative expenses (18,750) (8,100) (5,850) Other income (including dividend) 15,000 1,000 500 Financial charges (3,000) (1,215) (450) Profit before tax 66,150 24,085 9,050 Income tax (15,600) (4,860) (3,600) Profit after tax 50,550 19,225 5,450

Additional Information: (i) The fair value of net assets of Elite Engineering was higher than carrying value by

Rs. 20 million, which pertains to the property having remaining useful life of 20 years at acquisition. While the fair value of Alco Company was higher than carrying value by Rs. 10 million, which pertains to the plant having remaining useful life of 10 years at the date of acquisition. It is the company policy to charge depreciation of above assets to cost of sales.

(ii) The statement of changes in equity showed following balances: Rs. in .000.

Items Innovators Ltd. Elite Engineering Alco Company 30/06/2012 30/06/2011 30/06/2012 30/06/2012

Share capital (Rs.10 each) 250,000 100,000 100,000 80,000 Share premium 100,000 25,000 25,000 5,000 Retained earnings 160,000 40,000 55,000 12,000

No new shares have been issued by any company in 2012-2013.

(iii) In May 2013, Innovators Ltd., received an order of supply of a machine from a FMCG

company for Rs. 5 million. The management of Innovators Ltd., asked Elite Engineering to supply the machine. In June 2013, Elite Engineering imported this machine for Rs. 3.50 million and supplied the same to Innovators Ltd., for Rs. 4.50 million. Innovators Ltd., after customer satisfaction delivered the machine in July 2013. The revenue from the machine was recorded in the month of July 2013 by Innovators Ltd.

(iv) In March 2013, Alco Company sold machine parts to Innovators Ltd., for Rs. 2.50 million and charged 20% margin on sales. 50% of these parts are still in the inventory of Innovators Ltd., at year-end.

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(v) In January 2013, Innovators Ltd., and Alco Company paid interim dividends of Rs. 2 and Re. 1 per share respectively on all shares in issue at that date. On June 30, 2013, Elite Engineering also paid dividend of Rs. 1.5 per share as final dividend.

(vi) On July 1, 2012, Elite Engineering recognized development expenditure of Rs. 2.50 million as intangible assets. This is being amortized over its useful life of four years. However, on further investigation, it was discovered that only Rs. 1.50 million of the development expenditure should have been capitalized at July 1, 2012. The remaining balance does not meet the capitalization criteria of IAS-38, Intangible Assets. The useful life was reassessed and this was confirmed as being correct as at the date of capitalization. All research and development costs are presented in marketing and distribution cost.

(vii) It is company policy to value non-controlling interest using the proportionate share of the subsidiary's identifiable net assets. All items in the above statement of profit or loss are deemed to accrue evenly over the year.

Required: (a) Calculate Goodwill. (08) (b) Prepare Consolidated Statement of Profit or Loss of Innovators Group for the year

ended June 30, 2013. (27) IAS 28: ASSOCIATE AND JOINT VENTURE

Associate is an entity over which investor has significant influence. Significant Influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. A holding of 20% or more of the voting power is presumed to give significant influence, unless it can be clearly demonstrated that this is not the case. A joint venture is a form of joint arrangement where the parties have joint control of the arrangement and have rights to the net assets of the arrangement. This will normally be established in the form of a separate entity to conduct the joint venture activities. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. IAS 28: METHOD OF ACCOUNTING

Associates and joint ventures are not consolidated rather they are accounted for under the equity method. The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income.

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IAS 28: EQUITY METHOD: ADJUSTMENTS

(-) 1 Investment in associate/JV XX Cash or other consideration given XX

Initial investment in associate This is recorded in the same way as investment in subsidiary is recorded.

(-) 2 Investment in associate / JV 4,500 Revaluation surplus / OCI (Parent) 1,500 RE / Share of profit from associate (Parent) 3,000

Share of Change in net assets of associate This is debited to investment in associate. Only group share is taken. For example, if a 30% associate earned profit of Rs.10,000 and increased its revaluation surplus by Rs.5,000. We will pass entry with amounts as given above.

(-) 3 Dividend income (P) XX Investment in associate XX

Dividend from associate For consolidation, this is not to be shown in statement of profit or loss, rather credited to investment.

(-) 4 RE / Share of Profit from associate/JV (Parent) Dr. XX Investment in associate / JV Cr. XX

Impairment Loss This is calculated by comparing carrying value of investment in associate with group share of recoverable amount of associate.

(-) 5 RE / Share of Profit from associate / JV (Parent) Dr. XX Investment in associate Cr. XX

Unrealized profit in inventory or other assets (Downstream: Parent is seller) Only group share is to be eliminated. (Remember in case of subsidiary whole unrealized profit is eliminated.)

(-) 6 RE / Cost of sales (Parent) Dr. XX Inventory Cr. XX

Unrealized profit in inventory or other asset (Upstream: Associate is seller) Only group share is to be eliminated. (Remember in case of subsidiary whole unrealized profit is eliminated.) As associates are considered outside group, the balances between group companies are not cancelled. In the same way, sales and purchases are not cancelled as well. QUESTION 15 The following are the summarized accounts of P, S and A. Statement of profit or loss P S A For the year ended 31 December 2004 Rs. Rs. Rs. Sales revenue 573,600 314,000 150,000 Cost of sales (300,000) (200,000) (90,000) Gross profit 273,600 114,000 60,000 Operating costs (20,000) (14,000) (8,000) Dividend income from A 4,000 Dividend from other sources 10,000 Profit before tax 267,600 100,000 52,000 Tax (72,000) (30,000) (16,000) Profit after tax 195,600 70,000 36,000

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Statement of Financial Position P S A As at 31 December 2004 Rs. Rs. Rs. Investment in S Ltd (60%) 60,000 Investment in A Ltd (25%) 50,000 Other assets 300,000 120,000 100,000 410,000 120,000 100,000 Ordinary shares 20,000 30,000 10,000 Retained earnings 330,000 66,000 70,000 350,000 96,000 80,000 Current liabilities 60,000 24,000 20,000 410,000 120,000 100,000 The shares in S and A were acquired on 1 January 2004 when the balances of retained earning accounts were Rs.20,000 and Rs.50,000 respectively. Goodwill in S has suffered an impairment of Rs.6,000 (charge to COS) and in the associate an impairment of Rs.7,000 needs to be charged. The P group values the NCI at its proportionate share of the fair value of the subsidiary’s identifiable net assets. Prepare the Consolidated statement of profit or loss and consolidated statement of financial position for P group.

WHEN EQUITY METHOD IS NOT USED?

The equity method is not used when: The investment is classified as held for sale under IFRS 5. The investor is itself a subsidiary exempt from consolidation.

IFRS 11: JOINT ARRANGEMENTS

Joint arrangement is an arrangement of which two or more parties have joint control. Joint arrangements are classified as either joint operations or joint ventures.

IFRS 11: JOINT OPERATIONS

Definition Joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.

Example A and B decide to enter into a joint venture agreement to produce a new product. A undertakes one manufacturing process and B undertakes the other. A and B each bear their own expense and take an agreed share of the sales revenue from the product.

Separate FS of Venturer

A venturer shall recognize in its financial statements: (a) the assets that it controls and the liabilities that it incurs; and (b) the expenses that it incurs and its share of the revenue that it earns from the sale of goods or services by the joint venture.

Consolidated FS of Venturer No further adjustment or consolidation procedure is required.

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IFRS 11: JOINT VENTURES

Definition Joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Example

E and F enter into a joint venture agreement to manufacture and sell a new product. They set up entity that carries out these activities. E and F each own 50% of the equity share capital of the entity and are its only directors. They share equally the major policy decisions and are each entitled to 50% of the profits of the entity.

FS of Joint Venture A jointly controlled entity usually keeps its own accounting records.

Separate FS of Venturer

In the separate financial statements of the venturers, the investment in the joint venture is recorded at cost or under IFRS 9.

Consolidated FS of Venturer Equity method is used (as discussed above).

QUESTION 16 Associate PE 401 Nov 2009 2 Assume you work as an accountant responsible for the Sun Group consolidation. The Income Statements of Sun Limited, Moon Limited and Star Limited for the year ended December 31, 2008 are given below:

Income statements For the year ended December 31, 2008

Sun Ltd. Moon Ltd. Star Ltd. Rs.000 Rs.000 Rs.000 Revenue 135,000 65,000 115,000 Cost of sales (55,000) (39,000) (79,000) Gross profit 80,000 26,000 36,000 Operating expenses (25,000) (16,000) (17,500) Investment income 4,200 0 0 Financial charges (3,800) (2,200) (1,900) Profit before taxation 55,400 7,800 16,600 Taxation (14,100) (2,100) (7,400) Profit after taxation 41,300 5,700 9,200

Sun Limited supplies a component, which is used by both Moon Limited and Star Limited. Because of the close relationship among the three companies, the component is supplied at a mark-up of only 10% on cost. Details of inter-company sales of the product for the year to December 31, 2008 are as follows:

(Rs.000) To Moon Limited 9,000 To Star Limited 5,000

Details of the inventories of the component supplied by Sun Limited, which are included in the books of Moon Limited and Star Limited at the end of the year are:

(Rs.000) Moon Limited 2,200 Star Limited 1,100

Sun Limited holds 75% of the issued share capital of Moon Limited and 40% of the issued share capital of Star Limited. Both Sun Limited and Moon Limited recognize investment income on accruals basis. The income statement of Sun Limited shows investment income as being the cash dividends receivable. On the date of acquisition, the shareholders’ equity of Moon Limited and Star Limited stood at Rs.8 million and Rs.7 million respectively.

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Your assistant is responsible for preparing the draft consolidated financial statements for your review. He is aware how Moon Limited will be dealt with as a 75% subsidiary but he is unsure of the way of dealing with Star Limited. Required: Prepare a consolidated income statement of Sun Limited for the year ended December 31, 2008 as per the relevant IAS/IFRS. (15) QUESTION 17 Associate PE 401 Nov 2011 2 Power Plus Ltd., acquired 60% shares of Super Plus Ltd., and 25% shares of Advance Plus Ltd., on December 31, 2009. Their Statements of Financial Position as of December 31, 2010 were as under:

(Rupees in million) Power Plus

Ltd. Super Plus

Ltd. Advance Plus

Ltd. Non-Current Assets Property, plant and equipment 385 205 330 Investments 236 - - 621 205 330 Current Assets Inventories 142 92 155 Trade receivables 135 99 76 Cash and cash equivalents 45 29 24 322 220 255 Total Assets 943 425 585

Liabilities and Equity Share capital 210 100 85 Share premium 80 75 140 Retained earnings 566 190 290 856 365 515 Current Liabilities Trade payables 87 60 70 Total Liabilities and Equity 943 425 585

Additional Information: (i) The investments of Power Plus Ltd., comprise investment in Super Plus Ltd., for

Rs.141 million and in Advance Plus Ltd., Rs.95 million. (ii) The pre-acquisition retained earnings balances were as follows:

Super Plus Ltd. - Rs. 25 million Advance Plus Ltd. - Rs.130 million

(iii) At the time of acquisition fair value of property, plant and equipment of Super Plus Ltd., was greater than its book value by Rs.50 million. If Super Plus Ltd., had revalued its property, plant and equipment on December 31, 2009 , an additional depreciation of Rs.5 million would have been charged to income statement for the year ended December 31, 2010.

(iv) The book value of inventory of Super Plus Ltd., was in excess of its fair value by Rs.20 million at acquisition date. The inventory was sold during the year.

(v) During the year, Power Plus Ltd., sold goods to Super Plus Ltd., for Rs.21 million, which originally cost Power Plus Ltd., Rs.15 million. 1/3rd of the goods were still unsold as of December 31, 2010.

(vi) Share capital and share premium accounts remained unchanged since acquisition. (vii) There is no impairment of goodwill since acquisition. Required: Prepare the Consolidated Statement of Financial Position of Power Plus Ltd., as of December 31, 2010. (15)

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QUESTION 18 Associate PE 501 Feb 2013 3 Season Limited acquired 65% of Summer Limited for Rs.26 million when the book value of Summer Limited was Rs.34 million on March 1, 2012. Season Limited also acquired an associate Winter Limited on July 1, 2011 at a cost of Rs.12 million. Season Limited acquired 25% shares out of 2.20 million shares; the total of Winter Limited's equity at the date of acquisition was Rs.40 million. The companies. statements of profit and loss and other comprehensive income for the year ended June 30, 2012 were: Season

Limited Summer Limited

Winter Limited

(Rs. .000.) (Rs. .000.) (Rs. .000.)

Revenue 9,500 7,275 3,460 Cost of sales (6,500) (4,230) (2,020) Gross profit 3,000 3,045 1,440 Operating expenses (1,000) (375) (196) Other income 230 . . Finance costs . (210) (24) Profit / (Loss) before tax 2,230 2,460 1,220 Income tax expenses (300) (300) (72) Profit / (Loss) after tax 1,930 2,160 1,148 Other comprehensive income 130 120 8 Total comprehensive income for the year 2,060 2,280 1,156 Dividend paid during the year 500 - 160 Additional information: On July 1, 2011, Summer Limited issued Rs.2.10 million 10% loan notes to Season Limited. Interest is payable on January 1 and July 1. Season Limited has accounted for the interest received on January 1, 2012 only. Whereas Summer Limited has accounted for whole year’s interest expense. One machine (included in PPE) of Summer Limited on March 1, 2012 was valued at Rs.500,000 (book value is Rs.350,000) and was acquired on July 1, 2011. The machine has a total useful life of ten years. Summer Limited has not adjusted its accounting records to reflect fair values. The company uses straight-line method to depreciate the machine (to be charged to administrative expenses). The group accounting policy is to measure non-controlling interest (NCI) at its proportionate share of the fair value of subsidiary’s net identifiable assets at acquisition. On March 31, 2012, Summer Limited sold goods to Season Limited at Rs.300,000. The company made a profit on the goods of 10% on selling price. 2/3 of these goods were held by Season Limited on June 30, 2012. Impairment test indicated impairment loss of Rs.250,000. The group policy is to recognize impairment losses on goodwill in the cost of sales. Required: Prepare Consolidated Statement of Comprehensive Income for the year ended June 30, 2012. (25)

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QUESTION 19 Basic Consolidation PE Aug 2013 Q2 Cell Limited is a listed company incorporated in 2004 and engaged in the manufacturing and supplying of health care products for the local market. On July 1, 2010, Cell Limited acquired 60% shares in Gel Limited. In July 2010, Cell also acquired 40% shares in Well Limited. The draft statements of financial position of the above-mentioned companies are as follows: Statements of Financial Position As at June 30, 2012

Cell Limited Gel Limited

Well Limited

Non-Current Assets (Rs. in million) Property, plant and equipment 10,000 4,000 2,400 Investments: Shares in Gel Limited 3,250 - - Shares in Well Limited 900 - - 14,150 4,000 2,400 Current Assets Inventories 550 250 250 Accounts receivable 450 150 200 Cash and Bank 200 100 150 1,200 500 600 15,350 4,500 3,000 Equity Ordinary share capital @ Rs.10 each 4,400 1,000 1,200 Share premium 1,500 - - Retained earnings 4,150 3,250 1,300 10,050 4,250 2,500 Long-term Liabilities Long-term loan 2,500 - 100 Deferred consideration 2,000 - - 4,500 - 100 Current Liabilities Current Liabilities 800 250 400 15,350 4,500 3,000

Following information is related to the above three companies: (i) The consideration paid by Cell Limited to acquire Gel Limited:

The transfer of 60 million shares in Cell Limited with a nominal value of Rs.10.00 each and a market value on the date of acquisition of Rs.13.50 each.

Rs.338 million of cash paid on July 1, 2010 and Rs.2000 million of cash, payable on July 1, 2012 (a discount rate of 10% has

been used to value the liability in the financial statements of Cell Limited). The investment was classified as fair value through other comprehensive income. The gain earned to date is included in retained earnings of Cell Limited.

(ii) On July 1, 2010, Gel Limited had retained earnings of Rs. 2,300 million. It is group policy to value non-controlling interest at fair value at the date of acquisition. The fair value of non-controlling interest on July 1, 2010 was Rs.1,800 million

(iii) On July 1, 2010, the fair value of the net assets acquired was the same as the book value with the following exceptions: The fair value of property, plant and equipment was Rs.450 million higher than

the book value. These assets were assessed to have a minimum useful life of 5 year from the date of acquisition.

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The fair value of inventories was estimated to be Rs.100 million higher than the book value. All of these inventories were sold by June 30, 2012.

(iv) On July 1, 2010, Cell Limited also acquired shares in Well Limited for Rs.900 million

when the retained earnings of Well Limited were Rs.750 million.

(v) Gel Limited sold goods to Cell Limited in the year for Rs.300 million. Goods with sales value of Rs.75 million remain in Cell Limited.s inventories at June 30, 2012. Gel Limited makes 25% mark-up on cost to Cell Limited.

(vi) Up to June 30, 2012, the investment in Well Limited has been impaired by Rs.40 million of which the current year loss was Rs.10 million.

Required: Prepare Consolidated Statement of Financial Position as at June 30, 2012. (25) IFRS 13: FAIR VALUE MEASUREMENT

Introduction IFRS 13 Fair value measurement gives extensive guidance on how the fair value of assets and liabilities should be established.

Objective IFRS 13 sets out to: (a) Define fair value (b) Set out in a single IFRS a framework for measuring fair value (c) Require disclosure about fair value measurements

Definition

'the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date'. The previous definition used in IFRS was 'the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction'. The price which would be received to sell the asset or paid to transfer (not settle) the liability is described as the 'exit price' and this is the definition used in US GAAP. Although the concept of the 'arm's length transaction' has now gone, the market-based current exit price retains the notion of an exchange between unrelated, knowledgeable and willing parties.

Previous Situation IFRS 13

Definition

The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

The price that would be received to sell an asset or paid to transfer a liability in orderly transaction between market participants at the measurement date.

Which price?

IFRS definition is neither explicitly an exit (selling) price nor an entry (buying) price.

The SFAS definition is explicitly an exit (selling) price.

Between whom?

Knowledgeable, willing parties in an arm’s length transaction.

Market participants

Liabilities Amount at which the liability is settled. Notion that the liability is transferred.

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SCOPE OF IFRS 13 IFRS 13 applies when another IFRS requires or permits fair value measurements or disclosures. The measurement and disclosure requirements do not apply in the case of SBPT under IFRS 2, NRV under IAS 2 and VIU under IAS 36. Disclosures are not required for: (a) Plan assets measured at fair value in accordance with IAS 19 (b) Plan investments measured at fair value in accordance with IAS 26; and (c) Assets for which the recoverable amount is fair value less disposal costs under IAS 36

IFRS 13: VALUATION TECHNIQUES AND APPROACHES

VALUATION TECHNIQUES IFRS 13 establishes a three-level hierarchy for the inputs that valuation techniques use to measure fair value:

Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly, e.g. quoted prices for similar assets in active market or for identical or similar assets in non-active markets or use of quoted interest rates for valuation purposes.

Level 3 Unobservable inputs for the asset or liability, i.e. using the entity’s own assumption about market exit value.

VALUATION APPROACHES

Income approach

Valuation techniques that convert future amounts (e.g. cash inflows or income and expenses) to a single current (i.e. discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.

Market approach

A valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or group of assets and liabilities, such as business.

Cost approach

A valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

Entities may use more than one valuation techniques to measure fair value in a given situation. Change in valuation technique is change in estimate under IAS 8.

Fair value (vs historical cost) Advantages Disadvantages

Relevant to users’ decisions Subjective (less reliable estimate) Consistency between companies Hard to calculate if no active market Predict future cash flows Time and cost Lack of practical experience Misleading in volatile market

IFRS 12: DISCLOSURE OF INTEREST IN OTHER ENTITIES

Objective The objective of this standard is to require entities to disclose information that enables the user of the financial statements to evaluate the nature of, and risks associated with, interests in other entities, and the effects of those interests on its financial position, financial performance and cash flows.

Scope

IFRS 12 covers disclosures for entities which have interest in: Subsidiaries Joint arrangement Associates Unconsolidated structured entities

Class Notes

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Structured entity

An entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.

IFRS 12: DISCLOSURE REQUIREMENTS

Main disclosures

The IFRS establishes disclosure objectives according to which an entity discloses information that enables users of its financial statements (a) to understand:

(i) the significant judgement and assumptions (and changes to those judgement and assumptions) made in determining the nature of its interest in another entity or arrangement (ie control, joint control or significant influence), and in determining the type of joint arrangement in which it has an interest; and

(ii) the interest that non-controlling interests have in the group’s activities and cash flows; and

(b) to evaluate: (i) the nature and extent of significant restrictions on its ability to

access or use assets, and settle liabilities, of the group; (ii) the nature of, and changes in, the risks associated with its

interests in consolidated structured entities; (iii) the nature and extent of its interests in unconsolidated

structured entities, and the nature of, and changes in, the risks associated with those interests;

(iv) the nature, extent and financial effects of its interests in joint arrangements and associates, and the nature of the risks associated with those interests;

(v) the consequences of changes in a parent’s ownership interest in a subsidiary that do not result in a loss of control; and

(vi) the consequences of losing control of a subsidiary during the reporting period.

Further guidance on disclosures

The IFRS specifies minimum disclosures that an entity must provide. If the minimum disclosures required by the IFRS are not sufficient to meet the disclosure objective, an entity discloses whatever additional information is necessary to meet that objective. The IFRS requires an entity to consider the level of detail necessary to satisfy the disclosure objective and how much emphasis to place on each of the requirements in the IFRS. An entity shall aggregate or disaggregate disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have different characteristics.