- 25 Marks
FR – L2 – Q98 – Consolidated Financial Statements
Question
Kari Plc acquired 90% of Kane Ltd’s GH$1 ordinary shares on 1 April 20X2 paying GH$3.00 per share. The balance on Kane Ltd’s retained earnings at this date was GH$800,000. On 1 October 20X3, Kari Plc acquired 30% of Kora Ltd’s GH$1 ordinary shares for GH$3.50 per share. The statements of financial position of the three companies at 31 March 20X4 are shown below:
| Kari Plc | Kane Ltd | Kora Ltd | ||||
|---|---|---|---|---|---|---|
| GH$000 | GH$000 | GH$000 | GH$000 | GH$000 | GH$000 | |
| Non-current assets | ||||||
| Property, plant and equipment | 8,050 | 3,600 | 1,650 | |||
| Investments | 4,000 | 910 | nil | |||
| 12,050 | 4,510 | 1,650 | ||||
| Current assets | ||||||
| Inventory | 830 | 340 | 250 | |||
| Accounts receivable | 520 | 290 | 350 | |||
| Bank | 240 | nil | 100 | |||
| 1,590 | 630 | 700 | ||||
| Total assets | 13,640 | 5,140 | 2,350 | |||
| Equity and liabilities | ||||||
| Equity: | ||||||
| Ordinary shares of GH$1 each | 5,000 | 1,200 | 600 | |||
| Reserves: | ||||||
| Retained earnings b/f | 6,000 | 1,400 | 900 | |||
| Profit year to 31 March 20X4 | 1,400 | 600 | 300 | |||
| 7,400 | 2,000 | 1,200 | ||||
| 12,400 | 3,200 | 1,800 | ||||
| Non-current liabilities | ||||||
| 10% Loan notes | 500 | 240 | nil | |||
| Current liabilities | ||||||
| Accounts payable | 420 | 960 | 350 | |||
| Taxation | 220 | 250 | 100 | |||
| Overdraft | nil | 490 | nil | |||
| 640 | 1,700 | 450 | ||||
| Total equity and liabilities | 13,640 | 5,140 | 2,350 |
The following information is relevant:
(i) The fair value of the non-controlling interest in Kane Ltd at the date of acquisition was GH$2.50 per share.
(ii) In January 20X4 Kari Plc sold goods to Kora Ltd for GH$65,000. These were transferred at a mark-up of 30% on cost. Two thirds of these goods were still in the inventory of Kora Ltd at 31 March 20X4.
(iii) To facilitate the consolidation procedures the group insists that all inter-company current account balances are settled prior to the year-end. However a cheque of GH$40,000 from Kane Ltd to Kari Plc was not received until early April 20X4. Inter-company balances are included in accounts receivable and payable as appropriate.
(iv) Kora Ltd is to be treated as an associated company of Kari Plc.
(v) An impairment test at 31 March 20X4 on the consolidated goodwill of Kane Ltd and Kora Ltd concluded that it should be written down by GH$468,000 and GH$12,000 respectively. No other assets were impaired.
Required
(a) Prepare the consolidated statement of financial position of Kari Plc as at 31 March 20X4.
(b) Discuss the matters to consider in determining whether an investment in another company constitutes associated company status.
Answer
(a). Kari Plc
Consolidated statement of financial position as at 31 March 20X4
| GH$000 | |
|---|---|
| Non-current assets | |
| Property, plant and equipment (8,050 + 3,600) | 11,650 |
| Goodwill (W2) | 702 |
| Licence (180 – 60) (W3) | 120 |
| Investments | |
| Associate (W5) | 705 |
| Others (4,000 + 910 – 3,240 – 630 + 120 FV) | 1,160 |
| 14,337 | |
| Current assets | |
| Inventory (830 + 340) | 1,170 |
| Accounts receivable (520 + 290 – 40) | 770 |
| Bank (240 + 40) | 280 |
| 2,220 | |
| Total assets | 16,557 |
| Equity and liabilities | |
| Equity attributable to equity holders of the parent: | |
| Ordinary shares of GH$1 each | 5,000 |
| Retained earnings (W4) | 8,403 |
| 13,403 | |
| Non-controlling interest (W3) | 374 |
| 13,757 | |
| Non-current liabilities | |
| 10% Loan notes (500 + 240) | 740 |
| Current liabilities | |
| Accounts payable (420 + 960) | 1,380 |
| Taxation (220 + 250) | 470 |
| Overdraft | 190 |
| 2,040 | |
| Total equity and liabilities | 16,557 |
Workings
(W1) Net assets in subsidiary
| At end of reporting period | At acquisition | Post-acquisition | |
|---|---|---|---|
| GH$000 | GH$000 | GH$000 | |
| Share capital | 1,200 | 1,200 | – |
| Retained earnings | 2,000 | 800 | 1,200 |
| Fair value adjustment (W3) | 120 | 120 | – |
| 3,320 | 2,120 | 1,200 |
(W2) Goodwill
| GH$000 | |
|---|---|
| Cost of acquisition (90% × 1,200 × 3) | 3,240 |
| Fair value of NCI at acquisition (10% × 1,200 × 2.50) | 300 |
| 3,540 | |
| Less: Net assets at acquisition (W1) | (2,120) |
| Goodwill | 1,420 |
| Less: Impairment | (718) |
| Goodwill at 31/3/X4 | 702 |
(W3) Non-controlling interest
| GH$000 | |
|---|---|
| Fair value at acquisition (W2) | 300 |
| NCI share of post-acquisition profit (10% × 1,200 (W1)) | 120 |
| NCI share of fair value adjustment (10% × 120) | 12 |
| Less: Impairment of goodwill (10% × 718) | (72) |
| NCI at reporting date | 374 |
Fair value adjustment for licence: fair value GH$180,000; carrying amount GH$60,000, therefore adjustment = GH$120,000.
(W4) Consolidated retained earnings
| GH$000 | |
|---|---|
| Kari Plc (6,000 + 1,400) | 7,400 |
| Kane Ltd (90% × 1,200 (W1)) | 1,080 |
| Kora Ltd (30% × (1,200 – 900)) | 90 |
| Less: Impairment of goodwill (90% × 718 + 100% × 12) | (657) |
| Less: Unrealised profit in inventory (W5) | (10) |
| Consolidated retained earnings | 8,403 |
(W5) Investment in associate
| GH$000 | |
|---|---|
| Cost of investment | 630 |
| Share of post-acquisition profits (30% × (1,200 – 900)) | 90 |
| 720 | |
| Less: Impairment | (12) |
| Less: Unrealised profit in inventory | (3) |
| 705 |
Unrealised profit in inventory:
Selling price = GH$65,000; mark-up 30% on cost, therefore cost = 65,000 × 100/130 = GH$50,000.
Profit = 65,000 – 50,000 = GH$15,000.
2/3 in inventory at year-end: 2/3 × 15,000 = GH$10,000.
Group share: 30% × 10,000 = GH$3,000.
(b). IAS 28 Investments in Associates and Joint Ventures defines associates. In order for an investment to be classified as an investment in an associate the investor must have ‘significant influence’ over the investee. Significant influence is presumed to exist where there is a holding of 20% or more of the voting power unless the investor can clearly demonstrate that this is not the case. Conversely a holding of less than 20% is presumed not to be an associate, unless it can be clearly demonstrated that the investor can exercise significant influence. The voting rights can be held directly or through subsidiaries.
IAS 28 says that a majority holding by one investor does not preclude another investor having significant influence. An investing company owning a majority holding in another company normally has control over the investee and would thus class it as a subsidiary. In normal circumstances it is difficult to see how a company could be controlled by one entity and be significantly influenced by a different entity unless ‘control’ was passive. The 20% test is not definitive and the following other evidence should be considered.
Does the investing company:
- have representation on the Board of the investee?
- participate in the policy making processes (operational and financial)?
- have material transactions with the investee?
- interchange managerial personnel with the investee?
- provide technical expertise to the investee?
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