F1 QandAarticle December2012

(F1) Intra-Group Accounting (continued)
Following on from the initial article published in December 2012 Velocity and extended web version
of that article, Cathy Sibley will now work through a detailed example of how to tackle an exam
question on this topic.
The group question of a paper can be one of the most straightforward if you are structured in the way
you approach the answer. Here, we work through a typical consolidation question to gain that
structured approach.
Below is question 4 from the May 2012 exam paper which we will work through as if we were in the
exam. Start by reading the question through carefully.
Question 4
The draft statements of financial position at 31 March 2012 and statements of comprehensive income
for the year ended 31 March 2012 for three entities, Loch, River and Stream are given below:
Statements of Financial Position as at 31 March 2012:
Notes Loch River Stream

$000 $000 $000
Non-current Assets
Property, plant and equipment (iv) 1,193 767 670
Investments:
Loan to River (iii) 300 0 0
156,000 Ordinary shares in (vi) 223 0 0
Stream at cost
1,716 767 670
Current Assets
Inventory (vii) 1,107 320 87
Trade receivables 1,320 570 90
Current a/c with River (viii) 101 0 0
Cash and cash equivalents 62 58 14
2,590 948 191
Total Assets 4,306 1,715 861
Equity and Liabilities

Equity shares of $1 each 3,500 600 520
Retained earnings 413 385 125
3,913 985 645
Non-current liabilities
Loan from Loch (iii) 0 300 0
Current liabilities
Trade payables 393 340 216
Loan interest payable (ix) 0 15 0
Current a/c with Loch (viii) 0 75 0
393 430 216
Total Equity and Liabilities 4,306 1,715 861
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December 2012
Statements of Comprehensive Income for the year ended 31 March 2012
River Stream Loch

$000 $000 $000
Revenue 1,500 693 227
Cost of sales (865) (308) (84)
Gross profit 635 385 143
Expenses (124) (70) (35)
511 315 108
Finance cost (80) (40) (12)
431 275 96
Income tax
expense (118) (20) (16)
Profit for the year 313 255 80
Additional information:
(i) Loch holds shares in two other entities, River and Stream.
(ii) Loch acquired all of River’s equity shares on 1 April 2011 in a share for share exchange. The agreed
purchase consideration was $950,000, however Loch has not yet recorded the acquisition in its
accounting records. On the 1 April 2011 Loch’s shares had a market value of $2.00 each. River’s
retained earnings were $130,000 on 1 April 2011.
(iii) On 1 April 2011 Loch advanced River a 10 year loan of $300,000.
(iv) The fair value of River’s property, plant and equipment on 1 April 2011 exceeded its carrying value
by $144,000. The excess of fair value over carrying value was attributed to buildings owned by River. At
the date of acquisition these buildings had a remaining useful life of 12 years. Loch’s accounting policy
is to depreciate buildings using the straight line basis with no residual value.
(v) Loch carried out an impairment review of the goodwill arising on acquisition of River and found that
as at 31 March 2012 the goodwill had been impaired by $20,000.
(vi) Loch purchased its shareholding in Stream on 1 April 2011 for $223,000 when Stream’s retained
earnings were $45,000. The fair value of Stream’s net assets was the same as its carrying value at that
date. Loch exercises significant influence over all aspects of Stream’s financial and operating policies.
(vii) Loch occasionally trades with River. During September 2011 Loch sold River goods for $220,000.
Loch uses a mark-up of 50% on cost. At 31 March 2012 all the goods remained in River’s closing
inventory.
(viii) River posted a cheque to Loch for $26,000 on 29 March 2012 which did not arrive until 7 April
2012.
(ix) At 31 March 2012 $15,000 loan interest was due and had not been paid. River had accrued the loan
interest due at the year end but Loch had not accrued any interest income.
Required:
(a) Prepare the journal entry to record the purchase of River in Loch’s accounting records.
(3 marks)
2
December 2012
(b) Prepare the consolidated statement of comprehensive income for Loch for the year ended 31
March 2012 AND a consolidated statement of financial position for Loch as at 31 March 2012, in
accordance with the requirements of International Financial Reporting Standards.
(22 marks)
Notes to the financial statements are not required, but all workings must be clearly shown.
(Total for Question Four = 25 marks)
Having read the question let’s answer part a) before we get lost in the calculations and consolidation.
(a) Prepare the journal entry to record the purchase of River in Loch’s accounting records.
Using note (ii)

ii) Loch acquired all of River’s equity shares on 1 April 2011 in a share for share exchange. The agreed
purchase consideration was $950,000, however Loch has not yet recorded the acquisition in its
accounting records. On the 1 April 2011 Loch’s shares had a market value of $2.00 each. River’s
retained earnings were $130,000 on 1 April 2011.
In a share for share exchange the parent company issues brand new shares to the shareholders of the
subsidiary in return for their shares in the subsidiary – they swap shares.
Loch has paid $950,000 to acquire the equity shares in River. Each Loch share is worth $2 so Loch must
have issued 475,000 new shares ($950,000 ÷ $2) in order to acquire River. The shares must be
recorded at nominal value with any balance being recorded in share premium.
(a) Consideration for River paid in shares:
Journal
Dr Investment in River $950,000 (per note ii)

Cr Equity shares $475,000 (nominal value)
Cr Share premium $475,000 (balance)
The investment value will then be used in the goodwill calculation later but make sure you record the
extra shares. You can write these on your question to remind yourself to include them later.
Remember only the share capital of the parent is included in the consolidated statement of financial
position.
$000 $000 $000
Non current assets
Investments:
Shares in River +950
Equity shares of $1 each 3,500 +475 SP 475 600 520
3,913 985 645
Now let’s establish the relationship between the three companies based on the investments made.
3
December 2012
Using note i) again we see that River is a wholly owned subsidiary as all of the equity shares were
acquired and therefore control was obtained on 1 April 2011.
For Stream we need to use note vi)

We also see in the statement of financial position

$000 $000 $000
Non-current Assets
Investments:
156,000 Ordinary shares in (vi) 223 0 0
Stream at cost

When you compare the number of shares purchased to the number in existence we can calculate the
percentage acquired: 156,000 ÷ 520,000 = 30%
The fact that we have 30% ie greater than 20%, of the shares of Stream combined with the statement -
Loch exercises significant influence over all aspects of Stream’s financial and operating policies tells us
that Stream is an associate.
The group structure now looks like this:
(W1) Group structure

Loch
1.4.11
1.4.11
100%
Stream
River 30%
Our first calculation for the subsidiary will be goodwill at acquisition which will include the concept of
fair values discussed in a previous article.
From the question we need notes iv) and v)
4
December 2012
Start with the simple numbers that make up net assets - share capital and reserves from the question
itself.
(W2) Net assets of River

Acquisition SFP
$’000 $’000
Equity shares 600
Retained earnings 385
These numbers are simply copied from the statement of financial position of River.
Next we think about the date of acquisition. The share capital of the subsidiary will never change in
your questions so you are safe to copy the same share capital figure across to the acquisition column
automatically. The retained earnings at acquisition is given to you back in note ii) - River’s retained
earnings were $130,000 on 1 April 2011.

Acquisition SFP
$ $
Equity shares 600 600
Retained earnings 130 385
Now for the fair value adjustment.
Start by adding the excess fair value onto the net assets at the date of acquisition

Acquisition SFP
$’000 $’000
Fair Value adj:
Buildings 144
As long as there is nothing to say the building has been sold before the reporting date the adjustment
must be repeated at the end of the year also. Once the cost of the building to the group has been
established at acquisition this value must be used in all consolidation calculations and the consolidated
statement of financial position itself.
5
December 2012
Acquisition SFP
$’000 $’000
Fair Value adj:
Buildings 144 144
Note iv) also gives you the depreciation policy of the group and the remaining useful life of the
buildings. So far only the carrying value of the buildings has been depreciated. We must depreciate the
excess fair value in line with group policy for the exact period between the date of acquisition 1 April
2011 and the reporting date 31 March 2012 – one full year.

Acquisition SFP
$’000 $’000
Fair Value adj:
Buildings 144 144
Depn (144 ÷ 12 years) x 1 year - (12)
Any adjustment made to the SFP column must also be put through the consolidated statement of
financial position so these two adjustments can be written on your question to remind you.
Notes Loch River Stream Consol.

$000 $000 $000 Adj.
Non-current Assets
Property, plant and equipment (iv) 1,193 767 670 +144-12
The extra depreciation for the year must also be included in the statement of comprehensive income.
Loch River Stream Consol. Adj

$000 $000 $000
Revenue 1,500 693 227
Cost of sales (865) (308) (84) +12
By adding the Consol. Adj. heading we are reminding ourselves that we are not adjusting the figures of
River but are adjusting the group overall.
Now total the net assets working ready for use in the goodwill and retained earnings calculations.
6
December 2012
Acquisition SFP
$’000 $’000
Fair Value adj:
Buildings 144 144
Depn (144 ÷ 12 years) x 1 year - (12)
874 1,117
We can now use the acquisition column to help us calculate goodwill as follows:
(W3) Goodwill
$’000
Cost of investment 950
Fair value of net assets acquired W2 (874)
Goodwill at acquisition 76
The cost of investment of $950,000 that we recorded with the journal in part a) is cancelled and
replaced with this goodwill figure.
Loch River Stream Consol. Adj.
$000 $000 $000
Non-current Assets
Investments:
Shares in River +950 - - -950
Although goodwill is an intangible asset it is never amortised, only impaired. The value of the
impairment will be given to you in the question. In this case in note v)
To record the impairment we must:
Dr Impairment expense in the SOCI $20,000

Cr Goodwill $20,000
$’000
Fair value of net assets acquired W2 (874)
Goodwill at acquisition 76
Less impairment to date (20)
Goodwill at 31 March 2012 56
Adjust the statement of comprehensive income to show the impairment as an expense.
7
December 2012
$000 $000 $000
Expenses 124 70 35 +20
Continuing with the subsidiary for the time being there are a number of intra group trading adjustments
to be done from notes vii), viii) and ix).
inventory.
2012.
(W4) Intra group trading
inventory.
As in the intra group adjustments article we have two considerations here. The sale and purchase
between group companies must be cancelled and the unrealised profit in inventory dealt with.
Start with the sale and purchase cancellation
Dr Group revenue $220,000

Cr Group cost of sales $220,000
Update your question for these adjustments

$000 $000 $000
Revenue 1,500 693 227 -220
Cost of sales (865) (308) (84) +12-220
All of these goods remain in inventory at the end of the year so the full $220,000 will be used in the
PUP calculation.
$220,000 x 50 = $73,000 (rounded down)

150
Closing inventory must now be reduced to cost to the group which means adjusting closing inventory in
both cost of sales and current assets.
8
December 2012
Dr Group cost of sales $73,000
Cr Group current assets - inventory $73,000

$000 $000 $000
Revenue 1,500 693 227 -220
Cost of sales (865) (308) (84) +12-220 +73
Loch River Stream Consol, Adj

$000 $000 $000
Current Assets
Inventory 1,107 320 87 -73
2012.
You can see from the statements of financial position that the current accounts differ by $26,000 exactly
which is of course the cash in transit. We must reinstate the cash balance and cancel the current
account balances before consolidating.
Dr Group cash and cash equivalents $26,000

Dr Current account with Loch $75,000
Cr Current account with River $111,000

Current Assets $000 $000 $000
Current a/c with River 101 0 0 -101
Cash and cash equivalents 62 58 14 +26
Current liabilities
Current a/c with Loch 0 75 0 -75
Start by accruing the interest receivable by Loch in its own books rather than as a group adjustment.
Dr Receivables – interest due SFP $15,000

Cr Interest receivable SOCI $15,000
Loch River Stream

$000 $000 $000
Current Assets
Trade receivables 1320 570 90
Loan interest receivable - +15* - -
9
December 2012
SOCI River Stream Loch
$000 $000 $000
Interest receivable - +15* - -
Remember whatever updates the SOCI during the year will also update retained earnings.
Loch River Stream

Equity and Liabilities $000 $000 $000
Retained earnings 413 +15* 385 125
This puts in place the receivable so you can cancel it against the payable in the books of River.
Dr Group loan interest payable SFP $15,000

Cr Group receivables – interest due SFP $15,000
The need to show the receivable is cancelled and the payable in the SFP is also cancelled in full.

$000 $000 $000
Current Assets
Trade receivables 1320 570 90
Loan interest receivable - +15* - - -15
Current liabilities
Loan interest payable 0 15 0 -15
In the same way that the receivable and payable are cancelled in the statement of financial position
the interest income and cost must cancelled in the statement of comprehensive income.
Dr Group interest receivable SOCI $15,000

Cr Group finance cost SOCI $15,000

$000 $000 $000
Interest receivable - +15* - - -15
Finance cost 80 40 12 -15
*Notice that the adjustment for the interest due to Loch has been added next to the figures of Loch
itself as these are bookkeeping entries in Loch as an individual company rather than consolidation
adjustments. Overall loan interest receivable in the statement of financial position and the statement
of comprehensive income both cancel in full.
Finally, if we are dealing with interest receivable and payable there must be a loan that creates this!
Cancel the inter company loan within the statements of financial position.
Dr Loan from Loch $300,000

Cr Loan to River $300,000
10
December 2012
$000 $000 $000
Non-current Assets
Investments:
Loan to River 300 0 0 -300
Loan from Loch 0 300 0 -300
Now let’s turn our attention to the associate. The associate is not controlled by the group instead the
group exercises significant influence over the associate. Therefore, we must use a different method of
consolidation to reflect this difference in influence- the equity method. This is applied as follows:
(W5) Investment in associate

$,000
Cost of investment X
Add group share of post acquisition profits X
____
Investment at 31 March 2012 X
The information we need is found in the statement of financial position and note vi)
Loch River Stream

Equity and Liabilities $000 $000 $000
$,000
Add group share of post acquisition profits
30% x (125 per SFP – 45 at acqn) 24
_____
Investment at 31 March 2012 247
The investment figure of $223,000 in the statement of financial position of Loch will now be cancelled
and replaced with the Investment in associate figure.

$000 $000 $000
Non-current Assets
Investments:
156,000 Ordinary shares in Stream 223 0 0 -223
at cost
For the SOCI we take a share of the associates profit after tax and include it as an investment income
type item below operating profit – see the consolidated statement of comprehensive income statement
below.
11
December 2012
We can now combine all three entities in retained earnings for the group based on ownership by the
group.
(W6) Group retained earnings

$’000
100% Loch X
100% River post acquisition profits X
30% Stream post acquisition profits X
Less impairment to date (X)
Less PUP (X)
Loch’s reserves are simply slotted in from the statement of financial position but remember the
adjustment you made for interest receivable of $15,000 earlier.
Stream should include the same amount that we calculated for the investment in associate figure in
working 5.
For River we have two options that give the same result.
1. Calculate post acquisition profits in the same way that you did for the associate. Then go
through the workings looking for any adjustments that would update the profit of the
subsidiary – in this case the extra depreciation on the fair value adjustment.
$’000
100% x (385 from SFP – 130 at acqn) 255
Less extra depreciation on fair value adj. W2 (12)
____
243
2. Use W2 as a short cut. As share capital never changes in your questions the movement in net
assets will be the movement in retained earnings including any adjustments such as
depreciation.
$’000
100% x (1117 – 874) W2 243
Overall the working would look like this:
$’000
100% Loch 413
Add Interest receivable W4 15
100% River post acquisition profits 243
30% Stream post acquisition profits 24
Less impairment to date W3 (20)
Less PUP W4 (73)
_____
602
The final stage of the process is to consolidate the statement of financial position and statement of
comprehensive income. The parent and subsidiary are added together 100% line by line making any
adjustments (SHOWN IN RED) that we have dealt with previously in our workings.
12
December 2012
If you have updated your question for all the adjustments done within the working above the final line by
line consolidation should be quick and simple.
To ensure you have all the adjustments your question should now look like this:
Statements of Financial Position as at 31 March 2012:

$000 $000 $000
Non-current Assets
Property, plant and equipment 1,193 767 670 +144-12
Investments:
Shares in River +950 -950
Loan to River 300 0 0 -300
156,000 Ordinary shares in 223 0 0 -223
Stream at cost
1,716 767 670
Current Assets
Inventory 1,107 320 87 -73
Trade receivables 1,320 570 90
Loan interest receivable +15 -15
Current a/c with River 101 0 0 -101
Cash and cash equivalents 62 58 14 +26
2,590 948 191
Total Assets 4,306 1,715 861

Equity shares of $1 each 3,500 +475 SP 475 600 520
Retained earnings 413 +15 385 125
3,913 985 645
Loan from Loch 0 300 0 -300
Current liabilities
Trade payables 393 340 216
Loan interest payable 0 15 0 -15
Current a/c with Loch 0 75 0 -75
393 430 216
Total Equity and Liabilities 4,306 1,715 861
River Stream Loch Consol. Adj.

$000 $000 $000
Revenue 1,500 693 227 -220
Cost of sales (865) (308) (84) +12-220+73
Expenses (124) (70) (35) +20
13
December 2012
511 315 108
Interest receivable +15 -15
Finance cost (80) (40) (12) -15
431 275 96
Income tax
expense (118) (20) (16)
Profit for the year 313 255 80
Your final answer will be as follows:
Loch Group - Consolidated Statement of Financial Position as at 31 March 2012
$000 $000
Non-Current Assets
Property, plant and equipment (1,193+767+144-12) 2,092
Goodwill W3 56
Investment in associate W5 247
2,395
Current Assets
Inventory (1107+320-73) 1,354
Trade receivables (1,320 + 570) 1,890
Cash and cash equivalents (62+58+26) 146
3,390
Total assets 5,785

Equity Shares (3500+475) 3,975
Share premium 475
Retained Earnings 602

5,052
Current Liabilities
Trade payables (393+340) 733
5,785
Loch Group – Consolidated Statement of Comprehensive Income for year ended 31 March 2012
$’000
Revenue(1500+693-220) 1,973
Cost of sales (865+308+12-220+73) (1,038)
Gross profit 935
Expenses (124+70+20) (214)
Profit from operations 721
Share of profit of associated entity (30% x 80) 24
Interest receivable (15-15) -
Finance cost (80+40-15) (105)
Profit before tax 640
Income tax expense (118+20) (138)
Profit for the year 502
14
December 2012
This technique shows all the workings being completed first and the consolidation done at the end
whilst utilising the question as part of your workings. An alternative approach would be to complete
the basic consolidated financial statements after the group structure so rather than writing
adjustments on the question to consolidate later you write the adjustments directly in your answer. As
long as you show all your workings clearly either approach will work.
15
December 2012

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(F1) Intra-Group Accounting (continued)

Statements of Financial Position as at 31 March 2012:

Notes Loch River Stream

Equity and Liabilities

River Stream Loch

Using note (ii)

(a) Consideration for River paid in shares:

Dr Investment in River $950,000 (per note ii)

3,913 985 645

For Stream we need to use note vi)

Notes Loch River Stream

Equity and Liabilities

The group structure now looks like this:

(W1) Group structure

From the question we need notes iv) and v)

(W2) Net assets of River

(W2) Net assets of River

Now for the fair value adjustment.

(W2) Net assets of River

(W2) Net assets of River

Notes Loch River Stream Consol.

Loch River Stream Consol. Adj

To record the impairment we must:

Dr Impairment expense in the SOCI $20,000

Adjust the statement of comprehensive income to show the impairment as an expense.

(W4) Intra group trading

Start with the sale and purchase cancellation

Dr Group revenue $220,000

Update your question for these adjustments

Loch River Stream Consol. Adj

$220,000 x 50 = $73,000 (rounded down)

Loch River Stream Consol. Adj

Loch River Stream Consol, Adj

Dr Group cash and cash equivalents $26,000

Loch River Stream Consol, Adj

Dr Receivables – interest due SFP $15,000

Loch River Stream

Loch River Stream

Dr Group loan interest payable SFP $15,000

Loch River Stream Consol, Adj

Dr Group interest receivable SOCI $15,000

Statements of Comprehensive Income for the year ended 31 March 2012

Loch River Stream Consol. Adj

Dr Loan from Loch $300,000

(W5) Investment in associate

Loch River Stream

Loch River Stream Consol. Adj.

(W6) Group retained earnings

Overall the working would look like this:

Statements of Financial Position as at 31 March 2012:

Loch River Stream Consol. Adj.

Equity and Liabilities

Statements of Comprehensive Income for the year ended 31 March 2012

River Stream Loch Consol. Adj.

Your final answer will be as follows:

Loch Group - Consolidated Statement of Financial Position as at 31 March 2012

Total assets 5,785

Equity and Liabilities

Retained Earnings 602