Intra group current account

Hello Sir,

Why for the following question they deducted the total balance of C/A (group AR) which is $3.4m instead of 1.8 which is the transaction value,
I mean how to match this total difference with the value of the goods in transit.
I am not able to correlate this total amount amount to the transaction amount.

How to breakup this amount to show the transaction amount.

Please help sir,

Thanks a lot.

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Q

400 PICANT
On 1 April 20X3 Picant acquired 75% of Sander’s equity shares in a share exchange of three
shares in Picant for every two shares in Sander. The market prices of Picant’s and Sander’s
shares at the date of acquisition were $3.20 and $4.50 respectively.
In addition to this Picant agreed to pay a further amount on 1 April 20X4 that was contingent
upon the post?acquisition performance of Sander. At the date of acquisition Picant assessed
the fair value of this contingent consideration at $4.2 million, but by 31 March 20X4 it was
clearthat the actual amount to be paid would be only $2.7 million (ignore discounting). Picant
has recorded the share exchange and provided for the initial estimate of $4.2 million for the
contingent consideration.
On 1 October 20X3 Picant also acquired 40% of the equity shares of Adler paying $4 in cash
per acquired share and issuing at par one $100 7% loan note for every 50 shares acquired in
Adler. This consideration has also been recorded by Picant.
Picant has no other investments.
The summarised statements of financial position of the three entities at 31 March 20X4 are:
Picant Sander Adler
Assets $000 $000 $000
Non?current assets
Property, plant and equipment 37,500 24,500 21,000
Investments 45,000 nil nil
–––––– –––––– ––––––
82,500 24,500 21,000
Current assets
Inventory 10,000 9,000 5,000
Trade receivables 6,500 1,500 3,000
–––––– –––––– ––––––
Total assets 99,000 35,000 29,000
–––––– –––––– ––––––
Equity
Equity shares of $1 each 25,000 8,000 5,000
Share premium 19,800 nil nil
Retained earnings – at 1 April 20X3 16,200 16,500 15,000
– for the year ended 31 March
20X4
11,000 1,000 6,000
–––––– –––––– ––––––
72,000 25,500 26,000
Non?current liabilities
7% loan notes 14,500 2,000 nil
Current liabilities
Contingent consideration 4,200 nil nil
Other current liabilities 8,300 7,500 3,000
–––––– –––––– ––––––
Total equity and liabilities 99,000 35,000 29,000
–––––– –––––– ––––––

The following information is relevant:
(i) At the date of acquisition the fair values of Sander’s property, plant and equipment
was equal to its carrying amount with the exception of Sander’s factory which had a
fair value of $2 million above its carrying amount. Sander has not adjusted the carrying
amount of the factory as a result of the fair value exercise. This requires additional
annual depreciation of $100,000 in the consolidated financial statements in the post?
acquisition period.
Also at the date of acquisition, Sander had an intangible asset of $500,000 forsoftware
in its statement of financial position. Picant’s directors believed the software to have
no recoverable value at the date of acquisition and Sander wrote it off shortly after its
acquisition.
(ii) At 31 March 20X4 Picant’s current account with Sander was $3.4 million (debit). This
did not agree with the equivalent balance in Sander’s books due to some goods?in?
transit invoiced at $1.8 million that were sent by Picant on 28 March 20X4, but had not
been received by Sander until after the year end. Picant sold all these goods at cost
plus 50%.
(iii) Picant’s policy is to value the non?controlling interest at fair value at the date of
acquisition. For this purpose Sander’s share price at that date can be deemed to be
representative of the fair value of the shares held by the non?controlling interest.
(iv) Impairment tests were carried out on 31 March 20X4 which concluded that the value
of the investment in Adler was not impaired but, due to poor trading performance,
consolidated goodwill was impaired by $3.8 million.
(v) Assume all profits accrue evenly through the year.
Required:
(a) Prepare the consolidated statement of financial position for Picant as at 31 March
20X4. (15 marks)
(b) At 31 March 20X4 the other equity shares (60%) in Adler were owned by many
separate investors. Shortly after this date Spekulate (an entity unrelated to Picant)
accumulated a 60% interest in Adler by buying shares from the other shareholders. In
May 20X4 a meeting of the board of directors of Adler was held at which Picant lost its
seat on Adler’s board.
Required:
Explain, with reasons, the accounting treatment Picant should adopt for its
investment in Adler when it prepares its financial statements for the year ending
31 March 20X5. (5 marks)
(Total: 20 marks) ?

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Answer

PICANT
Key answer tips
Part (a) required the preparation of a statement of financial position that is relatively
straightforward. Ensure that you do not include the associate on a line?by?line basis and
equity account instead. One of the complications in this question is the contingent
consideration. The contingent consideration should be accounted for at the acquisition date
regardless of its probability providing it can be reliably measured. The fair value of the
consideration has then changed at the year end. Under IFRS 3 Business Combinations the
change in the consideration is taken via group retained earnings and the goodwill calculation
is not adjusted for.
(a) Consolidated statement of financial position of Picant as at 31 March 20X4
$000 $000
Non?current assets:
Property, plant and equipment (37,500 + 24,500 + 2,000
FV adj – 100 FV depn)

63,900
Goodwill (16,000 – 3,800 (W3)) 12,200
Investment in associate (W6)) 13,200
–––––––
89,300
Current assets
Inventory (10,000 + 9,000 + 1,800 GIT – 600 PUP (W7))) 20,200
Trade receivables (6,500 + 1,500 – 3,400 intra?group (W7)) 4,600
–––––– 24,800
–––––––
Total assets 114,100
–––––––

ANSWERS TO CONSTRUCTED RESPONSE QUESTIONS – SECTION C : SECTION 6
KAPLAN PUBLISHING 343
Equity and liabilities
Equity attributable to owners of the parent
Equity shares of $1 each 25,000
Share premium 19,800
Retained earnings (W5)) 27,500
–––––– 47,300
–––––––
72,300
Non?controlling interest (W4)) 8,400
–––––––
Total equity 80,700
Non?current liabilities
7% loan notes (14,500 + 2,000) 16,500
Current liabilities
Contingent consideration 2,700
Other current liabilities (8,300 + 7,500 – 1,600 intra?
group (W7)) 14,200
–––––– 16,900
–––––––
Total equity and liabilities 114,100
–––––––
Workings (all figures in $ million)
(W1) Group structure
Picant
75%
Adler 40%
Sander
(1 year ago) (6 months ago)
(W2) Net assets
Acquisition
Reporting
date Post?acq’n
$000 $000 $000
Share capital 8,000 8,000 –
Retained earnings 16,500 17,500 1,000
Fair value adjustments:
Factory 2,000 2,000 –
Fair value depreciation (100) (100)
Software written off (500) 500
–––––– –––––– ––––––
26,000 27,400 1,400
–––––– –––––– ––––––
W3 W4/W5

(W3) Goodwill
Parent holding (investment) at fair value
$000
– Share exchange (8,000 × 75% × 3
/2 × $3.20) 28,800
– Contingent consideration 4,200
––––––
33,000
NCI value at acquisition (8,000 × 25% × $4.50) 9,000
––––––
42,000
Less:
Fair value of net assets at acquisition (W2) (26,000)
––––––
Goodwill on acquisition 16,000
Impairment (3,800)
––––––
12,200
––––––
(W4) Non?controlling interest
$000
NCI value at acquisition (W3) 9,000
NCI share of post?acquisition reserves
(1,400 × 25% (W2)) 350
NCI share of impairment (3,800 × 25%) (950)
–––––
8,400
–––––
(W5) Group retained earnings
$000
Picant’s retained earnings 27,200
Sanders post?acquisition profits (1,400 × 75% (W2)) 1,050
Group share of impairment (3,800 × 75%) (2,850)
Adler’s post?acquisition profits (6,000 × 6
/12 × 40%) 1,200
PUP in inventories (1,800 × 50/150) (600)
Gain from reduction of contingent consideration
(4,200 – 2,700) 1,500
––––––
27,500
––––––

(W6) Investment in associate
Investment at cost: $000
Cash consideration (5,000 × 40% × $4) 8,000
7% loan notes (5,000 × 40% × $100/50) 4,000
––––––
12,000
Adler’s post?acquisition profits (6,000 × 6
/12 × 40%) 1,200
––––––
13,200
––––––
(W7) Goods in transit and unrealised profit (PUP)
The intra?group current accounts differ by the goods?in?transit sales of
$1.8 million on which Picant made a profit of $600,000 (1,800 × 50/150). Thus
inventory must be increased by $1.2 million (its cost), $600,000 is eliminated
from Picant’s profit, $3.4 million is deducted from trade receivables and
$1.6 million (3,400 – 1,800) is deducted from trade payables (other current
liabilities).
(b) An associate is defined by IAS 28 Investments in Associates and Joint Ventures as an
investment over which an investor has significant influence. There are several
indicators of significant influence, but the most important are usually considered to be
a holding of 20% or more of the voting shares and board representation. Therefore it
was reasonable to assume that the investment in Adler (at 31 March 20X4)
represented an associate and was correctly accounted for under the equity accounting
method.
The current position (from May 20X4) isthat although Picantstill owns 30% of Adler’s
shares, Adler has become a subsidiary of Spekulate as it has acquired 60% of Adler’s
shares. Adler is now under the control of Spekulate (part of the definition of being a
subsidiary), therefore it is difficult to see how Picant can now exert significant
influence over Adler. The fact that Picant has lost its seat on Adler’s board seems to
reinforce this point. In these circumstancesthe investment in Adler fallsto be treated
under IFRS 9 Financial Instruments. It will cease to be equity?accounted from the
date of loss of significant influence. Its carrying amount at that date will be its initial
recognition value under IFRS 9 (fair value) and thereafter it will be accounted for in
accordance with IFRS 9.