Answers - ACCA Global

1 Answers13 Diploma in International Financial ReportingJune 2004 Answers1(a)According to IAS27 Presentation of Consolidated Financial Statements Gamma is a subsidiary of Alpha if Alpha controlsGamma. Control means the power to govern the financial and operating activities so as to obtain benefits from Gamma sactivities. We know that there has been at least one occasion when Alpha has been unable to do this and so it is most unlikelythat Gamma would be regarded as a subsidiary. It appears that Gamma will be regarded as an associate of Alpha. Accordingto IAS28 Accounting for Investments in Associates Gamma is an associate of Alpha if Alpha can exercise a significantinfluence over Gamma and Gamma is neither a subsidiary or a joint venture of Alpha.

2 As stated already, Gamma is not asubsidiary of Alpha and Gamma cannot be a joint venture in the absence of a contractual arrangement with another does appear to exercise significant influence over Gamma through its substantial shareholding and representation onthe board of directors of Gamma. Therefore Gamma would be regarded as an associate of requires that associates (other than those held exclusively with a view to disposal in the near future) should beconsolidated using the equity method of consolidation. This involves initially recording the investment at cost in theconsolidated balance sheet, adjusting the subsequent carrying value for the post acquisition change in Alpha s share ofGamma s net assets.

3 The consolidated income statement should reflect Alpha s share of the results and operations of Gamma.(b)CONSOLIDATED INCOME STATEMENT YEAR ENDED 31 MARCH 2004$ 000 Revenue (65,000 + 60,000 6,000)119,000 Cost of sales (balancing figure)(56,140) Gross profit (W1)62,860 Distribution costs (7,000 + 6,000)(13,000)Administrative expenses (8,000 + 6,500 + 200 (W2))(14,700) Profit from operations35,160 Share of profits of associates (W4)2,380 Other income from investments (W6)500 Finance cost (W7)(5,000) Profit before tax33,040 Income tax expense:Group (5,000 + 3,600)(8,600)Associate (30% x 3,200 x 8/12)(640) Profit after tax23,800 Minority interest (20% x 10,900)(2,180) Net profit for the period21,620 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY YEAR ENDED 31 MARCH 2004$ 000 Balance at 1 April 2003 (W8)57,900 Net profit for the period21,620 Dividends paid(6,000) Balance at 31 March 200473,520 WORKINGS ALL IN $ profit$ 000 Alpha + Beta63,000 Movement in provision for unrealised profit (40/140 x (1,540 1,050))(140) 62,860 expenses$ 000 Alpha + Beta14,500 One year s write off of goodwill of Beta (2,000 (W3) x 1/10)

4 200 14,700 on acquisition of Beta$ 000 Cost of investment19,60080% of the equity of Gamma at the date of the investment (22,000)(17,600) 2,000 of profits of Gamma$ 0008/12 x 30% of profit before tax2,5008 months write off of goodwill (1,800 (W5) x 1/10 x 8/12)(120) 2,380 on acquisition of Gamma$ 000 Cost of investment14,13030% of the equity of Gamma at the date of the investment (38,000 + 4/12 x 9,300) (12,330) 1,800 income$ 000 Total for Alpha6,500 Dividend from Beta (80% x 3,500)(2,800)Dividend from Gamma (30% x 4,000)(1,200)Interest from Beta (25,000 x 8%)(2,000) 500 cost$ 000 Alpha + Beta7,000 Intra-group interest (W6)(2,000) 5,000 equity$ 000 Alpha44,000 Beta (80% x (42,000 22,000))16,0009 years amortisation of goodwill on acquisition of Beta(1,800)Unrealised profit in opening inventory (40/140 x 1,050)(300) 57,900 2(a)Income statement for the year ending 31 March 2004 Analysis of operationsContinuingDiscontinuingTotal$ 000$ 000$ 000 Revenue (120,000 + 30% x 60,000 (W4))124,00014,000138,000 Cost of sales (W1)(89,860)(8,000)(97,860) Gross profit34,1406,00040,140 Distribution costs (W1)(7,000)(1,000)(8,000)Administrative expenses (W1)(12,000)(1,500)(13,500) Profit from operations15,1403,50018,640 Loss on disposal of business segment(3,000)(3,000)Finance cost (W5)(4,600)(4,600)

5 Profit before tax10,54050011,040 Income tax expense (W6)(2,350)(300)(2,650) Net profit for the period8,1902008,390 15(b)Balance sheet as at 31 March 2004$ 000$ 000 ASSETSNon-current assets:Property, plant and equipment (W7)79,900 79,900 Current assets:Amounts due under construction contracts (W4)13,200 Inventories21,000 Trade receivables44,000 Bank balances26,790 104,990 184,890 EQUITY AND LIABILITIESC apital and Reserves:Issued capital50,000 Accumulated profits (W8)51,390 101,390 Non-current liabilities:Interest bearing borrowings40,000 Deferred tax (W9)6,400 Lease liabilities (W3)16,830 63,230 Current liabilities:Trade and other payables (W10)12,500 Lease liabilities (24,600 (W3) 16,830)7,770 20,270 184,890 Workings all in $ of operating expensesCost ofDistributionAdministrativesalescostsex penses$ 000$ 000$ 000 Opening inventory18,200 Expenses per TB70,0008,00012,000 Closing inventory(21,000)Depreciation (W2).

6 Buildings360 Plant5,000 Fixtures1,500 Leased asset (W2)10,000 Asset used on construction contract (W2) Arising on construction contract (W4)15,300 Total in income statement97,8608,00013,500 of non-current assets$ 000 Buildings 2% x 18,000360 Purchased plant 1/3x (21,000 6,000)5,000 Fixtures 25% x 6,0001,500 Leased asset 1/4x 40,00010,000 Asset used on construction contract 6/24x 14,0003,500 Total depreciation for the period20,360 assetThe lease is a finance lease under the provisions of IAS17 Leases. Substantially all the risks and rewards of ownershipare transferred to Delta. Evidence for this fact is: Negligible value for the asset at the end of the lease. Delta is responsible for security and maintenance.

7 No escape clauses under the means that 40,000 is included in assets and borrowings. The borrowing is treated as shown below;Year endedOpeningFinanceCashClosingbalancecos tpaidbalance$ 000$ 000$ 000$ 00031 March 2004*32,0001,600(9,000)24,60031 March 2005*24,6001,230(9,000)16,830*The opening payable is reduced by the deposit of 8,000 The finance cost for the current year is 1,600 The closing borrowing is 24,600, of which 16,830 is a non-current contract$ 000(a) Estimated total profit:Revenue60,000 Costs:Materials etc. to date(12,000)Materials etc. in future(25,000)Plant(14,000) 9,000 (b) Income statement for current year:Revenue (30% x 60,000)18,000 Cost of sales (balance)(15,300) Gross profit (30% x 9,000)2,700 (c) Balance sheet presentation.

8 Costs incurred to date materials etc12,000 Depreciation of plant used on contract (W2)3,500 Attributable profit (see (b) above)2,700 Progress payment received(5,000) Amount due from customer13,200 cost$ 000 Interest payable on long term borrowings3,000 Relating to finance lease (W3)1,600 4,600 tax expense$ 000 Estimate on the profits of the current year2,500 Overprovision in the previous year(250)Deferred tax400 2,650 , plant and equipment$ 000 Cost as per Trial Balance (30,000 + 27,000)57,000 Leased asset40,000 Asset used on construction contract14,000 Accumulated depreciation as per TB (3,240 + 7,500)(10,740)Depreciation charge for the current year (W2)(20,360) 79,900 profits$ 000As per TB45,000 Net profit for the period8,390 Dividends paid(2,000) As per closing balance sheet51,390 tax$ 000As per TB6,000 Transfer for the period400 As per closing balance sheet6,400 10.

9 Trade and other payables$ 000 Trade payables per TB10,000 Income tax estimate2,500 As per closing balance sheet12,500 3(a) Global prepares financial statements under international financial reporting standards because this is permitted in ourreporting jurisdiction. However we are a multinational enterprise with listings on a number of different capital markets. Whena multinational seeks a listing on a capital market other than in its own jurisdiction (often referred to as a cross-border listing)then it needs to comply with whatever reporting requirements the relevant securities exchange chooses to apply for foreignenterprises. An increasing number of exchanges, for example most European exchanges, allow enterprises seeking cross-border listings to file financial statements that comply with international financial reporting standards.

10 This practice is ofbenefit to our enterprise as it reduces the need for the preparation of reconciliation statements in accordance with a numberof different sets of securities exchanges require multinationals to prepare a statement reconciling key figures from their original financialstatements to the equivalent figures prepared according to local accounting standards. The US and Japanese stock exchangesare two examples of this type of exchange and this presumably explains the need for the reconciliation to US and is certainly true that international financial reporting standards are increasing in prominence. In 2000 the InternationalOrganization of Securities Commissions (IOSCO) recommended that all its members allowed multinationals to useinternational standards in cross-border listings, supplemented by any supplemental treatments necessary to addressparticular issues at national and regional level.