chapter 10 – consolidated statement of financial … grpb lesson - 16.pdfchapter 10 –...

CHAPTER 10 – CONSOLIDATED STATEMENT OF FINANCIAL POSITION

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Paradigm (Jun 2013 Q1)

(a) On 1 October 2012, Paradigm acquired 75% of Strata’s 20 million equity shares by means of a share exchange of two new shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to the shareholders of

Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. Paradigm has not recorded any of the purchase consideration, although it does have other 10% loan notes already in issue.

The market value of Paradigm’s shares at 1 October 2012 was $2 each. The summarised statements of financial position of the two companies as at 31

March 2013 are: Paradigm

$’000 Strata $’000

Assets Non-current assets Property, plant and equipment Financial asset: equity investments (notes (i) and (iv))

Current assets

Inventory (note (ii)) Trade receivables (note (iii)) Bank

Total assets Equity and liabilities

Equity Equity shares Retained earnings/(losses) – at 1 April 2012 – for year ended 31 March 2013

Non-current liabilities 10% loan notes

Current liabilities Trade payables (note (iii)) Bank overdraft

Total equity and liabilities

47,400 7,500

––––––– 54,900

20,400 14,800 2,100 –––––––

92,200 –––––––

40,000 19,200 7,400

––––––– 66,600

8,000

17,600 nil

––––––– 92,200 –––––––

25,500 3,200

––––––– 28,700

8,400 9,000 nil –––––––

46,100 –––––––

20,000 (4,000) 8,000

––––––– 24,000

nil

13,000 9,100

––––––– 46,100 –––––––

The following information is relevant: (i) At the date of acquisition, Strata produced a draft statement of profit or loss

which showed it had made a net loss after tax of $2 million at that date. Paradigm accepted this figure as the basis for calculating the pre- and post-acquisition split of Strata’s profit for the year ended 31 March 2013.

Also at the date of acquisition, Paradigm conducted a fair value exercise on Strata’s net assets which were equal to their carrying amounts (including Strata’s financial asset equity investments) with the exception of an item of plant which had a fair value of $3 million below its carrying amount. The

plant had a remaining economic life of three years at 1 October 2012.


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Paradigm’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, a share price for Strata of $1·20 each is representative of the fair value of the shares held by the non-controlling interest.

(ii) Each month since acquisition, Paradigm’s sales to Strata were consistently

$4·6 million. Paradigm had marked these up by 15% on cost. Strata had one

month’s supply ($4·6 million) of these goods in inventory at 31 March 2013. Paradigm’s normal mark-up (to third party customers) is 40%.

(iii) Strata’s current account balance with Paradigm at 31 March 2013 was $2·8

million, which did not agree with Paradigm’s equivalent receivable due to a payment of $900,000 made by Strata on 28 March 2013, which was not received by Paradigm until 3 April 2013.

(iv) The financial asset equity investments of Paradigm and Strata are carried at their fair values as at 1 April 2012. As at 31 March 2013, these had fair values of $7·1 million and $3·9 million respectively.

(v) There were no impairment losses within the group during the year ended 31

March 2013.

Required: Prepare the consolidated statement of financial position for Paradigm as at

31 March 2013. (20 marks) (b) Paradigm has a strategy of buying struggling businesses, reversing their decline and then selling them on at a profit within a short period of time. Paradigm

is hoping to do this with Strata. Required:

As an adviser to a prospective purchaser of Strata, explain any concerns you would raise about basing an investment decision on the information available in Paradigm’s consolidated financial statements and Strata’s

entity financial statements. (5 marks)

(25 marks)


335

Pyramid (Specimen Dec 2014)

On 1 October 2013, Pyramid acquired 80% of Square’s equity shares by means of a share exchange of two shares in Pyramid for every three acquired shares in Square. In addition, Pyramid would make a deferred cash payment of 88 cents per acquired

share on 1 October 2014. Pyramid has not recorded any of the consideration. Pyramid’s cost of capital is 10% per annum. The market value of Pyramid’s shares at 1 October 2013 was $6.

The following information is available for the two companies as at 30 September 2014:

Pyramid Square

Assets $’000 $’000 Non-current assets Property, plant and equipment 38,100 28,500

Equity and liabilities Equity Equity shares of $1 each 50,000 9,000 Other components of equity 8,000 nil

Retained earnings – at 1 October 2013 16,200 19,000 – for the year ended 30 September 2014 14,000 8,000

The following information is relevant: (i) At the date of acquisition, Square’s net assets were equal to their carrying

amounts with the following exceptions:

an item of plant which had a fair value of $3 million above its carrying amount. At the date of acquisition it had a remaining life of five years (straight-line

depreciation).

Square had an unrecorded deferred tax liability of $1million, which was unchanged as at 30 September 2014.

(ii) Pyramid’s policy is to value the non-controlling interest at fair value at the date

of acquisition. For this purpose a share price of $3·50 each is representative of the fair value of the shares in Square held by the non-controlling interest at the

acquisition date. (iii) Consolidated goodwill has not been impaired.

Required: Prepare extracts from Pyramid’s consolidated statement of financial

position as at 30 September 2014 for: (a) Consolidated goodwill; (5 marks)

(b) Property, plant and equipment; (2 marks) (c) Equity (share capital and reserves); (6 marks)

(d) Non-controlling interests. (2 marks)

(15 marks)


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Pacemaker (Jun 2009 Q1) Below are the summarised statements of financial position for 3 companies as at 31 March 2009:

Pacemaker Syclop Vardine Assets $m $m $m $m $m $m Non-current assets Property, plant and equipment 520 280 240

Investments 345 40 nil –––––– –––– –––– 865 320 240 Current assets

Inventory 142 160 120 Trade receivables 95 88 50 Cash and bank 8 245 22 270 10 180

–––– –––––– –––– –––– –––– –––– Total assets 1,110 590 420 –––––– –––– –––– Equity and liabilities

Equity shares 600 145 100 Retained earnings 130 260 240 –––––– –––– ––––

730 405 340 Non-current liabilities 10% loan notes 180 20 nil Current liabilities 200 165 80

–––––– –––– –––– Total equity and liabilities 1,110 590 420 –––––– –––– ––––

Notes: Pacemaker is a public listed company that acquired the following investments:

(i) Investment in Syclop On 1 April 2007 Pacemaker acquired 116 million of the 145 million equity shares in Syclop for an immediate cash payment of $210 million and issued at par one 10% $100 loan note for every 200 shares acquired. Syclop’s retained

earnings at the date of acquisition were $120 million. (ii) Investment in Vardine

On 1 October 2008 Pacemaker acquired 30 million of the 100 million equity shares in Vardine in exchange for 75 million of its own shares. The stock market value of Pacemaker’s shares at the date of this share exchange was $1·60 each. Pacemaker has not yet recorded the investment in Vardine.

(iii) Pacemaker’s other investments, and those of Syclop, are available-for-sale

investments which are carried at their fair values as at 31 March 2008. The fair value of these investments at 31 March 2009 is $82 million and $37

million respectively.


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Other relevant information:

(iv) Pacemaker’s policy is to value non-controlling interests at their fair values.

The directors of Pacemaker assessed the fair value of the non-controlling interest in Syclop at the date of acquisition to be $65 million.

There has been no impairment to goodwill or the value of the investment in Vardine.

(v) At the date of acquisition, Syclop owned a recently built property that was

carried at its (depreciated) construction cost of $62 million. The fair value of this property at the date of acquisition was $82 million and it had an

estimated remaining life of 20 years.

For many years Syclop has been selling some of its products under the brand name of ‘Kyklop’. At the date of acquisition the directors of Pacemaker valued

this brand at $25 million with a remaining life of 10 years. The brand is not included in Syclop’s statement of financial position.

The fair value of all other identifiable assets and liabilities of Syclop were equal to their carrying values at the date of its acquisition.

(vi) The inventory of Syclop at 31 March 2009 includes goods supplied by

Pacemaker for $56 million (at selling price from Pacemaker). Pacemaker adds a mark-up of 40% on cost when selling goods to Syclop. There are no intra-group receivables or payables at 31 March 2009.

(vii) Vardine’s profit is subject to seasonal variation. Its profit for the year ended

31 March 2009 was $100 million. $20 million of this profit was made in the six months from 1 April 2008 to 30 September 2008.

(viii) None of the companies have paid any dividends for many years. Required:

Prepare the consolidated statement of financial position of Pacemaker as at 31 March 2009.

(25 marks)


340

Plateau (Dec 2007 Q1 and Examiner’s Article pg 319) On 1 October 2006, Plateau acquired the following non-current investments:

Three million of the four million equity shares in Savannah by an exchange of one share in Plateau for every two shares in Savannah, plus $1.25 per acquired Savannah share in cash. The market price of each Plateau share at the date of acquisition was $6, and the market price of each Savannah share at the date of

acquisition was $3.25. Thirty per cent of the four million equity shares of Axle at a cost of $7.50 per share in cash.

Only the cash consideration of the above investments has been recorded by Plateau. In addition, $500,000 of professional costs relating to the acquisition of

Savannah are included in the cost of the investment.

The summarised draft statements of financial position of the three companies at 30

September 2007 are:

Assets

Non-current assets: Property, plant and equipment Investments in Savannah and Axle

Financial asset investments Current assets: Inventory

Trade receivables Total assets

Equity and liabilities Equity shares Retained earnings – at 30 September 2006

– for year ended 30 September 2007 Non-current liabilities 7% Loan notes

Current liabilities

Total equity and liabilities

Plateau $’000

18,400 13,250

6,500 38,150

6,900

3,200

48,250

10,000

16,000

9,250

35,250

5,000

8,000

48,250

Savannah $’000

10,400

nil

nil 10,400

6,200

1,500

18,100

4,000

6,000

2,900

12,900

1,000

4,200

18,100

Axle $’000

18,000

nil

nil 18,000

3,600

2,400

24,000

4,000

11,000

5,000

20,000

1,000

3,000

24,000

The following information is relevant:

(i) At the date of acquisition, Savannah had five years remaining of an agreement to supply goods to one of its major customers. Savannah believes it is highly likely that the agreement will be renewed when it expires. The directors of Plateau estimate that the value of this customer based contract

has a fair value of $1m, an indefinite life, and has not suffered any impairment.


341

(ii) On 1 October 2006, Plateau sold an item of plant to Savannah at its agreed

fair value of $2.5m. Its carrying amount prior to the sale was $2m. The estimated remaining life of the plant at the date of sale was five years (straight-line depreciation).

(iii) During the year ended 30 September 2007, Savannah sold goods to Plateau

for $2.7m. Savannah had marked up these goods by 50% on cost. Plateau

had a third of the goods still in its inventory at 30 September 2007. There

were no intra-group payables/receivables at 30 September 2007.

(iv) At the date of acquisition the non-controlling interest in Savannah is to be

valued at its fair value. For this purpose Savannah’s share price at that date can be taken to be indicative of the fair value of the shareholding of the non-controlling interest. Impairment tests on 30 September 2007 concluded that

neither consolidated goodwill nor the value of the investment in Axle had been impaired.

(v) The financial asset investments are included in Plateau’s statement of financial

position (above) at their fair value on 1 October 2006, but they have a fair value of $9m at 30 September 2007.

(vi) No dividends were paid during the year by any of the companies.

Required

(a) Prepare the consolidated statement of financial position for Plateau as at 30 September 2007. (20 marks)

TUTORIAL NOTE Note (iv) may instead have said that the fair value of the NCI at the date of acquisition was $3,250,000. Alternatively, it may have said that the goodwill

attributable to the NCI was $500,000. All these are different ways of giving the same information.

(b) A financial assistant has observed that the fair value exercise means that a subsidiary’s net assets are included at acquisition at their fair (current) values in the consolidated statement of financial position. The assistant believes that it is

inconsistent to aggregate the subsidiary’s net assets with those of the parent because most of the parent’s assets are carried at historical cost. Required:

Comment on the assistant’s observation and explain why the net assets of acquired subsidiaries are consolidated at acquisition at their fair values. (5

marks)

(25 marks)

chapter 10 – consolidated statement of financial … grpb lesson - 16.pdfchapter 10 –...

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