A-1
Preparation question: Simple consolidation
BOO GROUP
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 20X8
Rs.000
Revenue (5,000 + 1,000 – 100) 5,900
Cost of sales (2,900 + 600 – 80) (3,420)
Gross profit 2,480
Other expenses (1,700 + 320) (2,020)
Profit before tax 460
Tax (130 + 25) (155)
Profit for the year 305
Profit attributable to
Owners of the parent 294
Non-controling interest (20% × 55) 11
305
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (retained earnings only)
Rs.000
Opening retained earnings (230 + (185 × 80%)) 378
Total comprehensive income for the year 294
Closing retained earnings 672
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8
Rs.000 Rs.000
Assets
Non-current assets (2,000 + 200 – 80) 2,120
Current assets
Inventory (500 + 120 + 80) 700
Trade receivables (650 – 100 + 40) 590
Bank and cash (390 + 35) 425
1,715
Total assets 3,825
Equity and liabilities
Equity attributable to owners of the parent
Share capital (Boo only) 2,000
Retained earnings (W4) 672
2,672
Non-controlling interest (W3) 68
Total equity 2,740
Current liabilities
Trade payables (910 + 30) 940
Tax (130 + 25) 155
1,095
, Total equity and liabilities 3,835
Workings
1 Group structure
Boo
80% since incorporation
Gross
2 Inter- company issues
Step 1 Record Goose's purchase
DEBIT Purchases Rs.100,000
CREDIT Payables Rs.100,000
DEBIT Closing inventory (B/S) Rs.100,000
CREDIT Closing inventory I/S (COS) Rs.100,000
Step 2 Record Goose's purchase
DEBIT COS (and retained earnings) in BOO Rs.20,000
CREDIT Inventory (B/S) Rs.20,000
Step 3: Cancel intra-group transaction
DEBIT Revenue Rs.100,000
CREDIT Cost of sales Rs.100,000
Step 4: Cancel intragroup balances
DEBIT Receivables Rs.100,000
CREDIT Payables Rs.100,000
3 Non-controlling interest
Rs.000
Share capital 100
Retained earnings 240
340
Non-controlling interest 20% 68
4 Retained earnings
Boo Goose
Rs.000 Rs.000
Per question 500 240
Unrealised profit (W1) 20
Less pre acquisition -
480 240
Goose: 80% × 240 192
Total, as per Statement of Changes in Equity 672
A-2
Hideaway
IAS 24 Related Parties
,(a) Importance of related party disclosures
Investors invest in a business on the assumption that it aims to maximize its own profits for the
benefit of its own shareholders. This means that all transactions have been negotiated at arm's
length between willing and informed parties. The existence of related parties may encourage
directors to make decisions for the benefit of another entity at the expense of their own
shareholders. This can be done actively by selling goods and services cheaply to related parties,
or by buying in goods and services at an above market price. It can also happen when directors
chose not to compete with a related party, or offer guarantees or collateral for other party's
loans.
Disclosure is particularly important when a business is being sold. It may receive a lot of custom,
supplies, services or general help and advice from family or group companies. When the
company is sold these benefits may be withdrawn.
Related party transactions are not illegal, nor are they necessarily a bad thing. However
shareholders and potential investors need to be informed of material related party transactions
in order to make informed investment and stewardship decisions.
(b) Hideaway, Benedict and Depret
The directors and shareholders of Hideaway, the parent, will maximize their wealth by diverting
profitable trade into wholly owned subsidiaries. They have done this by instructing Depret (a
55% subsidiary) to sell goods to Benedict (a 100% subsidiary) at Rs.5m below fair value. As a
result the non-controlling shareholders of Depret have been deprived of their 45% interest in
those lost profits, amounting to Rs.2.25m. The non- group directors of Depret will also lose out if
their pay is linked to Depret's profits.
Because Depret's profits have been reduced, the non-controlling shareholders might be
persuaded to sell their shares to Hideaway for less than their true value. Certainly potential
shareholders will not be willing to pay as much for Depret's shares as they would have if
Depret's profits had been maximised.
The opposite possibility is that the Directors of Hideaway are boosting Benedict's reported
performance with the intention of selling it off for an inflated price.
Depret's non-controlling shareholders might be able to get legal redress because the majority
shareholders appear to be using their power to oppress the non-controlling shareholders. This,
however, will depend on local law. The tax authorities might also suspect Depret of trying to
avoid tax, especially if Benedict is in a different tax jurisdiction.
A-3
Highveldt
(i) Goodwill in Samson
Rs.000 Rs.000
Consideration transferred 210
80m shares ° 75% ° Rs.3.50 100
, Deferred consideration; Rs.108m ° 1/1.08 310
Share of the net assets acquired at fair value
Carrying value of net assets at 1.4.20X4:
Ordinary shares 80
Share premium 40
Retained earnings 134
254
Fair value adjustments (W) 42
Fair value of the net assets at acquisition 296
75% Group share (222)
Cost of Goodwill 88
Impairment charge given in question (22)
Carrying value at 31 March 20X5 66
Goodwill: alternative working
Rs.000
Consideration transferred 310
Non-controlling interest at acquisition (296 x 25%) 74
Net assets at acquisition (296)
88
Impairment (22)
66
Notes (not required in the exam)
Goodwill is based on the present value of the deferred consideration. During the year
the Rs.8m discount will be charged to Highveldt's income statement as a finance cost. (
In (a)(iii) retained earnings will be adjusted for this accrued interest.)
Only the Rs.20m fair valuation is relevant at the date of acquisition. The Rs.4m arising
post acquisition will be treated as a normal revaluation and credited to the revaluation
surplus. (See (a)(iii) below.) Samson was right not to capitalise an internally developed
brand name because, without an active market, its value cannot be measured reliably.
However the fair value of a brand name can be measured as part of a business
combination. Therefore the Rs.40m fair value will be recognised at acquisition and an
additional Rs.4m amortisation will be charged in the consolidated income statement. At
acquisition Samson had capitalised Rs.18m of development expenditure. Highveldt does
not recognise this as an asset, so the net assets at acquisition are reduced by Rs.18m. A
further Rs.32m is capitalised by Samson post acquisition; this will be written off in the
consolidated income statement (net of the Rs.10m amortisation already charged).
(ii) Non-controlling interest in Samson's net assets
Rs.m
Preparation question: Simple consolidation
BOO GROUP
CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 20X8
Rs.000
Revenue (5,000 + 1,000 – 100) 5,900
Cost of sales (2,900 + 600 – 80) (3,420)
Gross profit 2,480
Other expenses (1,700 + 320) (2,020)
Profit before tax 460
Tax (130 + 25) (155)
Profit for the year 305
Profit attributable to
Owners of the parent 294
Non-controling interest (20% × 55) 11
305
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (retained earnings only)
Rs.000
Opening retained earnings (230 + (185 × 80%)) 378
Total comprehensive income for the year 294
Closing retained earnings 672
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8
Rs.000 Rs.000
Assets
Non-current assets (2,000 + 200 – 80) 2,120
Current assets
Inventory (500 + 120 + 80) 700
Trade receivables (650 – 100 + 40) 590
Bank and cash (390 + 35) 425
1,715
Total assets 3,825
Equity and liabilities
Equity attributable to owners of the parent
Share capital (Boo only) 2,000
Retained earnings (W4) 672
2,672
Non-controlling interest (W3) 68
Total equity 2,740
Current liabilities
Trade payables (910 + 30) 940
Tax (130 + 25) 155
1,095
, Total equity and liabilities 3,835
Workings
1 Group structure
Boo
80% since incorporation
Gross
2 Inter- company issues
Step 1 Record Goose's purchase
DEBIT Purchases Rs.100,000
CREDIT Payables Rs.100,000
DEBIT Closing inventory (B/S) Rs.100,000
CREDIT Closing inventory I/S (COS) Rs.100,000
Step 2 Record Goose's purchase
DEBIT COS (and retained earnings) in BOO Rs.20,000
CREDIT Inventory (B/S) Rs.20,000
Step 3: Cancel intra-group transaction
DEBIT Revenue Rs.100,000
CREDIT Cost of sales Rs.100,000
Step 4: Cancel intragroup balances
DEBIT Receivables Rs.100,000
CREDIT Payables Rs.100,000
3 Non-controlling interest
Rs.000
Share capital 100
Retained earnings 240
340
Non-controlling interest 20% 68
4 Retained earnings
Boo Goose
Rs.000 Rs.000
Per question 500 240
Unrealised profit (W1) 20
Less pre acquisition -
480 240
Goose: 80% × 240 192
Total, as per Statement of Changes in Equity 672
A-2
Hideaway
IAS 24 Related Parties
,(a) Importance of related party disclosures
Investors invest in a business on the assumption that it aims to maximize its own profits for the
benefit of its own shareholders. This means that all transactions have been negotiated at arm's
length between willing and informed parties. The existence of related parties may encourage
directors to make decisions for the benefit of another entity at the expense of their own
shareholders. This can be done actively by selling goods and services cheaply to related parties,
or by buying in goods and services at an above market price. It can also happen when directors
chose not to compete with a related party, or offer guarantees or collateral for other party's
loans.
Disclosure is particularly important when a business is being sold. It may receive a lot of custom,
supplies, services or general help and advice from family or group companies. When the
company is sold these benefits may be withdrawn.
Related party transactions are not illegal, nor are they necessarily a bad thing. However
shareholders and potential investors need to be informed of material related party transactions
in order to make informed investment and stewardship decisions.
(b) Hideaway, Benedict and Depret
The directors and shareholders of Hideaway, the parent, will maximize their wealth by diverting
profitable trade into wholly owned subsidiaries. They have done this by instructing Depret (a
55% subsidiary) to sell goods to Benedict (a 100% subsidiary) at Rs.5m below fair value. As a
result the non-controlling shareholders of Depret have been deprived of their 45% interest in
those lost profits, amounting to Rs.2.25m. The non- group directors of Depret will also lose out if
their pay is linked to Depret's profits.
Because Depret's profits have been reduced, the non-controlling shareholders might be
persuaded to sell their shares to Hideaway for less than their true value. Certainly potential
shareholders will not be willing to pay as much for Depret's shares as they would have if
Depret's profits had been maximised.
The opposite possibility is that the Directors of Hideaway are boosting Benedict's reported
performance with the intention of selling it off for an inflated price.
Depret's non-controlling shareholders might be able to get legal redress because the majority
shareholders appear to be using their power to oppress the non-controlling shareholders. This,
however, will depend on local law. The tax authorities might also suspect Depret of trying to
avoid tax, especially if Benedict is in a different tax jurisdiction.
A-3
Highveldt
(i) Goodwill in Samson
Rs.000 Rs.000
Consideration transferred 210
80m shares ° 75% ° Rs.3.50 100
, Deferred consideration; Rs.108m ° 1/1.08 310
Share of the net assets acquired at fair value
Carrying value of net assets at 1.4.20X4:
Ordinary shares 80
Share premium 40
Retained earnings 134
254
Fair value adjustments (W) 42
Fair value of the net assets at acquisition 296
75% Group share (222)
Cost of Goodwill 88
Impairment charge given in question (22)
Carrying value at 31 March 20X5 66
Goodwill: alternative working
Rs.000
Consideration transferred 310
Non-controlling interest at acquisition (296 x 25%) 74
Net assets at acquisition (296)
88
Impairment (22)
66
Notes (not required in the exam)
Goodwill is based on the present value of the deferred consideration. During the year
the Rs.8m discount will be charged to Highveldt's income statement as a finance cost. (
In (a)(iii) retained earnings will be adjusted for this accrued interest.)
Only the Rs.20m fair valuation is relevant at the date of acquisition. The Rs.4m arising
post acquisition will be treated as a normal revaluation and credited to the revaluation
surplus. (See (a)(iii) below.) Samson was right not to capitalise an internally developed
brand name because, without an active market, its value cannot be measured reliably.
However the fair value of a brand name can be measured as part of a business
combination. Therefore the Rs.40m fair value will be recognised at acquisition and an
additional Rs.4m amortisation will be charged in the consolidated income statement. At
acquisition Samson had capitalised Rs.18m of development expenditure. Highveldt does
not recognise this as an asset, so the net assets at acquisition are reduced by Rs.18m. A
further Rs.32m is capitalised by Samson post acquisition; this will be written off in the
consolidated income statement (net of the Rs.10m amortisation already charged).
(ii) Non-controlling interest in Samson's net assets
Rs.m
