Advanced Consolidation Question 58

QUESTION 58: ADVANCED CONSOLIDATION

Memo, a public limited company, owns 75% of the equity share capital of Random, a public limited
company which is situated in a foreign country. Memo acquired Random on 1 May 2003 for 120
million crowns (CR) when the retained profits of Random were 80 million crowns. Random has not
revalued its assets or issued any equity capital since its acquisition by Memo. The following
financial statements relate to Memo and Random:

Statement of financial position at 30 April 2004 Memo Random

$m CRm
PPE 297 146
Investment in Random 48
Loan to Random 5
Current assets 355 102
705 248
Capital and reserves
Ordinary shares of $1 / 1 CR 60 32
Share premium account 50 20
Retained earnings 360 95
470 147
Non current liabilities 30 41
Current liabilities 205 60
705 248

SPL&OCI for the year ended 30 April 2004

Revenue 200 142
Cost of sales (120) (96)
Gross profit 80 46
Distribution and administrative expenses (30) (20)
Operating profit 50 26
Interest receivable 4 -
Interest payable - (2)
Profit before taxation 54 24
Income tax expense (20) (9)
Profit for the year 34 15

The following information is relevant to the preparation of the consolidated financial statements of
Memo:
(a) During the financial year Random has purchased raw materials from Memo and
denominated the purchase in crowns in its financial records. The details of transaction are
set out below:
Date of Purchase Profit % on
Transaction Price $m Selling price
Raw materials 1 Feb 2004 6 20%
At the year end half of the raw materials purchased were still in the inventory of Random.
The inter company transactions have not been eliminated from the financial statements and
the goods were recorded by Random at the exchange rate ruling on 1 Feb 2004. A
payment of $6 million was made to Memo when the exchange rate was 2.2 crowns to $1.
Any exchange gain or loss arising on the transaction is still held in the current liabilities of
Random.

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Advanced Consolidation Question 58

(b) Memo had made an interest free loan to Random of $5 million on 1 May 2003. The loan
was repaid on 30 May 2004. Random had included the loan in non-current liabilities and
had recorded it at the exchange rate at 1 May 2003.

(c) The fair value of the net assets of Random at the date of acquisition is to be assumed to be
same as the carrying value. Goodwill is to be calculated using the full goodwill method. The
fair value of NCI at acquisition date was CR 38 million.

(d) Random operates with a significant degree of autonomy in its business operations.

(e) The following exchange rates are relevant to the financial statements:
Crowns to $
30 April / 1 May 2003 2.5
1 Nov 2003 2.6
1 Feb 2004 2
30 April 2004 2.1
Average rate for year to 30 April 2004 2

(f) Memo has paid a dividend of $8 million during the financial year.

Required:
Prepare a consolidated statement of comprehensive income for the year ended 30 April 2004 and
a consolidated statement of financial position at that date in accordance with IFRSs. (30 marks)

ACCA P2 – June 2004 – Q1a

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Advanced Consolidation Question 58

ANSWER TO QUESTION 58: ADVANCED CONSOLIDATION

Memo Group
Consolidated Statement of Financial Position
As at 30 April 2004
Non-current assets $m $m
Goodwill W3 12.4
Loan to Random $5 – 5 J5 0
PPE $297 + [CR 146 / 2.1] 366.5 378.9

Current assets $355+ [CR 102 / 2.1] – 0.6 J4 402.9

781.8

Share Capital 60
Share Premium 50
Exchange reserves W6 8.7
Retained earnings W6 365.3
484
NCI W5 20.1 504.1

Non-Current Liabilities $30 + [CR 41 / 2.1] – [CR 2/2.1] J2 – 5 J5 43.6

Current Liabilities $205 + [CR 60 / 2.1] + [CR 1.2 / 2.1] J1 234.1

781.8

Memo Group
Consolidated Statement of comprehensive income
For the year ended 30 April 2004
Memo Random [CR /2] Adj $m
Revenue 200 71 - 6 J3 265
Costs of sales (120+0.6 J4) (48) 6 J3 (162.6)
Gross profit 102.4
Distribution and admin (30) (10) (40)
Interest payable (1) (1)
Interest receivable 4 4
Exchange gain / (loss) 1 J2 – 0.6 J1 0.4
Profit before tax 65.8
Tax 20 (4.5) (24.5)
Profit after tax 7.9 41.3
NCI $7.9 x 25% (2)
Profit attributable to owners of parent 39.3
Other comprehensive income
Exchange differences 11.6
NCI Share 11.6 x 25% (2.9)
Owners of Parent 8.7

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Advanced Consolidation Question 58

W1 GROUP STRUCTURE
Random Subsidiary Acquisition: 1 May 2003 Group 75% NCI 25%
$m

W2 NET ASSETS AT ACQUISITION Random

Equity share capital [CR 32 / 2.5] 12.8
Share premium [CR 20 / 2.5] 8
Retained earnings [CR 80 / 2.5] 32
52.8
Transfer to exchange reserve W4 10
52.8 x 2.5 / 2.1 62.8

W3 GOODWILL Random
Investment 48
Less: [52.8 W2 x 75%] (39.6)
8.4
FV of NCI [CR38 / 2.5] 15.2
Less: [52.8 W2 x 25%] (13.2)
2
10.4
Transfer to exchange reserve W4 2
10.4 x 2.5 /2.1 12.4

W4 POST ACQUISITION RESERVES Random

ER RE
Balance [CR 15 / 2.1] 7.1
J1 [CR 1.2 / 2.1] (0.57)
J2 [CR 2 / 2.1] 0.95
7.5
Profit for the year rate adjustment 7.5 – 7.9 SPL (0.4) 0.4
Transfer from W2 10
Transfer from W3 2
11.6 7.9

W5 NON CONTROLLING INTEREST Random

[52.8 W2 x 25%] 13.2
NCI goodwill W3 2
[7.9 & 11.6 W4 x 25%] 4.9
20.1

W6 GROUP RESERVES ER RE
Parent reserves 360
J4 (0.6)
359.4
Random [11.6 W4 x 75%] ; [7.9 W4 x 75%] 8.7 5.9
8.7 365.3

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Advanced Consolidation Question 58

$ / CR m
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

RE /Exchange loss (Random) CR 1.2

(i) 1
Current liabilities CR 1.2
Liability booked $6m x CR2 = CR12m
Payment $6m x CR2.2 = CR13.2m
Loss = CR1.2m

Non Current Liabilities CR 2

(iii) 2
RE / Exchange gain (Random) CR 2
Liability at historic rate $5m x 2.5 = CR12.5m
Liability at closing rate $5m x 2.1 = CR10.5m
Exchange gain CR2m

Revenue 6
(ii) 3
Cost of sales 6
Inter company sales and purchases cancelled

RE / COS (Memo) 0.60

(i) 4
Inventory 0.60
$6m x ½ x 20% = $0.6m

Non current liabilities 5

(iii) 5
Loan to subsidiary 5
Cancellation of inter company loan.

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