AFACR

The following draft statements of financial position relate to Rod, a

public limited company, Reel, a public limited company, and Line, a
public limited company, as at 30 November 20X2.
Solution
Rod Reel Line Consolidated
Rs m Rs m Rs m
Non-current assets
Property, plant and equipment 1,230 505 256 (W-1&5) 1,930
Investment in Reel 640 - - Goodwill (W-2) 132
Investment in Line 160 100 - -
Current assets
Inventory 300 135 65 (W-1) 480
Trade receivables 240 105 49 394
Cash at bank and in hand 90 50 80 220
Total Assets 2,660 895 450 3,156
Capital and reserves
Share capital 1,500 500 200 1,500
Share premium 300 100 50 300
Revaluation reserves - - 70
Retained earnings 625 200 60 (W-4) 691
2,425 800 380 2,491
NCI (W-3) 265
Non-current liabilities 135 25 20 180
Current liabilities 100 70 50 220
2,660 895 450 3,156

The following information is relevant to the preparation of the group

financial statements:

(i) Rod had acquired eighty percent of the ordinary share capital of Reel
on 1 December 20W9 when the retained earnings of Reel were Rs 100
million. The fair value of the net assets of Reel was Rs 710 million at 1
December 20W9. Any fair value adjustment related to net current assets
and these net current assets had been realised by 30 November 20X2.
There had been no new issue of shares in the group since the current
group structure.

(ii) Rod and Reel had acquired their holdings in Line on the same date as
part of an attempt to mask the true ownership of Line. Rod acquired
forty percent and Reel acquired twenty-five percent of the ordinary
share capital of Line on 1 December 20X0. The retained earnings of Line
on that date were Rs 50 million and those of Reel were Rs 150 million.
There was no revaluation reserve in the books of Line on 1 December
20X0. The fair values of the net assets of Line at 1 December 20X0 were
not materially different from their carrying values.

Anjum Maqsood - ACA

AFACR

(iii) The group operates in the pharmaceutical industry and incurs a significant amount of expenditure on the
development of products. These costs were formerly written off to profit or loss as incurred but then
reinstated when the related products were brought into commercial use. The reinstated costs are shown as
'Development Inventory'. The costs do no meet the criteria in IAS 38 Intangible assets for classification as
intangibles and it is unlikely that the net cash inflows from these products will be in excess of development
cost. In the current year, Reel has included Rs 20 million of these cost in inventory. Of these costs Rs 5 million
relates to expenditure on a product written off in periods prior to 1 December 20W9. Commercial sales of this
product written off in periods prior to 1 December 20W9. Commercial sales of this product had commenced
during the current period. The accountant now wishes to ensure that the financial statements comply strictly
with IFRSs as regards this matter.

(iv) Reel had purchased a significant amount of new production equipment during the year. The cost before
trade discount of this equipment was Rs 50 million. The trade discount of Rs 6 million was recognised in profit
or loss. Depreciation is charged on the straight line basis over a six year period.

(v) The policy of the group is now to state property, plant and equipment (PPE) at depreciated historical cost.
The group changed from the revaluation model to the cost model under IAS 16 Property, plant and equipment
in the year ended 30 November 20X2 and restated all of its PPE to historical cost in that year except for the
PPE of Line which had been revalued by the directors of Line on 1 December 20X1. The values were
incorporated in the financial records creating a revaluation reserve of Rs 70 million. The PPE of Line were
originally purchased on 1 December 20X0 at a cost of Rs 300 million. The assets are depreciated over six years
on the straight line basis. The group does not make an annual transfer from revaluation reserves to the
retained earnings in respect of the excess depreciation charged on revalued PPE. There were no additions or
disposals of the PPE of Line for the two years ended 30 November 20X2.

Required:

Prepare a consolidated statement of financial position of the Rod Group as at 30 November 20X2 in
accordance with the standards of the International Accounting Standards Board. (29 marks)

Group structure

Anjum Maqsood - ACA

AFACR

Rod
Effective shareholding in Line 80%
Indirect
Direct = Reel 40%
Total = 25%
NCI of Line =
Line
(W-1) Equity of Subsidiaries Reel Line
At Acq At Rep At Acq At Rep
Share capital 500 500 200 200
Share premium 100 100 50 50
Revaluation reserve - - - 70
Retained earnings 100 200 50 60
Fair Value Adjustment 10 - - -
Development cost written off (iii) - (20) - -
Trade discount less dep ( ) (iv) - (5)
Reversal of revaluation (w-5) (v) - - - (70)
Reversal of revaluation (w-5)(v) - - - 14
710 775 300 324
(W-2) Goodwill
Reel (By Rod 80%) Alternatively (Goodwill of Line)
Investment 640 Investment
Less: (568) 72 direct 160
indirect(100x80%) 80
Line 240
(By Rod 40%) Less: ( ) 180
Investment 160 Goodwill 60
Less: (120) 40
(By Reel 25%) (W-5) PPE of Line
Investment 100 Value in SFP 256
Less: (75)
25 Historcal carrying
Rod owns Reel 20 amount 200
Total Goodwill 132 overstated by 56
(W-3) NCI Revaluation Resrve - Dr
Of Reel 135 PPE - Cr
Of Line 130 Retained ernings - Cr
265

(W-4) Group Retained Earnings

Rod 625
Reel 52
Line 14
691

Anjum Maqsood - ACA