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Group Accounts – Comprehensive example

ACCA F7 lectures  Download F7 notes

This lecture is applicable for Paper F7 but is also a revision lecture for Paper P2

Group Accounts – Comprehensive example 1

When Ausra bought 75% of the Danute 50c equity shares of 31 March, 2011, the value of the Ausra $1 equity shares was $4.30 and the Danute shares had a market value of $1.30.
The terms of the acquisition were a combination of elements:
– for every 3 shares acquired Ausra issued 1 new share
– a payment of $1.21 for each 2 shares acquired payable on 1 April 2013
– a payment of $0.60 per share acquired immediately
The Ausra cost of capital is 10% per annum

Only the cash payment on 31 March 2011 has so far been recorded

On 31 October 2011, the respective Statements of Financial Position were:

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1. At the date of acquisition, some of Danute’s inventory had a fair value $12,000 in excess of its carrying value. All of this inventory had been sold before the year end.
2. On 31 July 2011, Danute had sold an item of property, plant and equipment to Ausra realising a profit on sale of $36,000. Ausra was depreciating this item over its remaining useful life of 4 years. It is group policy to charge a full year’s depreciation in the year of purchase, and none in the year of sale.
3. On 1 October, 2011 Ausra had despatched goods to Danute at a transfer value of $26,000. Ausra sells goods at a margin of 30%. Danute had sold a quarter of these goods by the Statement of Financial Position date.
4. The current accounts did not reconcile at the year end because Danute had sent a payment of $6,500 to Ausra, but Ausra only received it on 2 November 2011. Before any necessary adjustment, the intra group balance in Danute’s records showed an amount owing to Ausra of $11,500.
5. Goodwill is impaired by 25%.
6. Profits for the two companies for the year to 31 October, 2011 (before any adjustments necessary to be made) were respectively $70,000 and $60,000
7. Both entities have declared but not yet accounted for a dividend per share of 10c (Ausra) and 3c (Danute).
8. The directors valued the nci investment on a fair value basis using the market value of the Danute shares as a fair measure.

Prepare a Consolidated Statement of Financial Position for the Ausra Group as at 31 October 2011.

Reader Interactions

Comments

  1. Hi Mike, my question is that date of acc is 31 march 2011, while the statement of FP given to us is of 31 October 2011, shouldn’t the 20000 new shares issued shown in Ausra Shares.
    Why we assumed that the 100000 share capital doesn’t include that 20000 new shares.

      • thanks for reply, and thanks for great lectures, since i don’t have institutes around where i live, i owe me success in December exams to you guys at opentuition.

      • Dear Tutor,
        Why we didnot include the part of dividend in nci as we did it in consolidated retain earning ?

        Thanks.

    • Sir, in this comprehensive example, assuming there is another point (say note 9) that profits or losses acrue evenly over the period except otherwise stated.
      What is effect of this on computation of pre acq ret’d ears? Please explain how the working 1b (dividing profit into pre & post) will be

      • That’s exactly what has happened – profits HAVE been evenly split except where otherwise stated!

        That was the point of the working – to find the appropriate amounts to include as pre- and post-acquisition

      • Thanks. I was confused when I saw a question given profit for the year P=5400, S=1800 in the SofCI and retained earnings P=21240, S=3900 in the SoFP. In the post acquisition period, S sold goods to P for 4800, 40% mark-up and P had sold 3120 worth of goods. Date of acquisition was 1 May 2014 and year end was 31 October 2014. 3000 was pre-acq ret ears in that “solution book”! I do not know how. That is the reason for my above question sir. Awaiting your comments please. Thanks

    • This should really be on the Ask the Tutor page as a general question!

      Yes, of course you should do the workings first and place them first in your answer booklet. It’s where the marks are – the marks are in your workings.

      • Sir, pls i need clarifications in the following:
        1 In this comprehensive example, the market value of Parent company is given therefore makes it easy to compute share premium(market value minus face value X no of new shares issued for share). In case when market value of subsidiary @ DoA is given instead of Parent’s, how will the share premium be calculated?
        2 Please kindly explain the treatment of deferred tax in the CSoFP & CSoCI.
        Thank you sir.

      • Your question is confusing! The market value of the parent is NOT given (nor will it be at F7)!

        The market value of the company’s SHARES is given and that is NOT the same as the market value of the company

        When the parent issues shares as part of the consideration payable on the acquisition of a subsidiary, the question will tell you the value to be attributable to those shares and thus you can calculate the share premium (value per share as given in the question less nominal value per share (again, as per question) multiplied by the number of shares issued)

        The only reason for giving the market value of the subsidiary’s shares is because the question will then go on later – probably 4 or 5 points further on in the question – to say that “the nci is valued on a fair value basis and for these purposes the market value was considered to be the fair value”

        Where does deferred tax fit in to the comprehensive example?

        Please direct this type of general question onto the Ask the Tutor page – I rarely look at the general comments so it was just lucky that I saw this post!

      • Sorry for asking such question here sir. i have posted the full question on Ask the Tutor page for your response please.

        Thank you for your support and clarifications.

    • When we discounted the deferred payment to bring the value down to net present value, it was as though we were borrowing the net amount and becoming obligated to pay it in the future. But, because we were effectively borrowing the net amount, is it not sensible that we should effectively account for “interest” on that effective loan?

      The rate of interest is the company’s cost of capital and that is the rate that we applied in order to discount the full amount payable.

      As each month / year goes by and we get closer and closer to eventual settlement date, so the discounted value is unrolled by the double entry:

      Debit finance charge
      Credit obligation

      Does that answer the first part of your question?

      As for the second part, the word “charge” in “finance charge” tells you that it’s an expenses. It’s an expense related to the accounting period but it hasn’t yet been recorded by the company and, when it is recorded, it will have the effect of reducing profit for the year / retained earnings

      Ok?

  4. The value of NCI is calculated using the market value of the Danute shares which is $1.30 as it says at the top of question, but in the lecture it is calculated at $2.20, a bit confused.

    • The example has been adapted since it was recorded (thank you for reminding me that this is another lecture that I need to re-record)

      The printed solution is correct

      If you follow the recorded lecture it contains and covers all the issues involved in the question. You should then be able to work through the question for yourself using the updated values

      And, of course, if you struggle, let me know the problem and I’ll get back to you

  5. Sir
    I’m a little confused on deferred consideration adjustment .I understood why we brought it to p.v to measure g/w
    but i failed to understand the concept on unrolled discounts adjustment
    Can you please explain it?
    Thanks in advance

      • Because we’re a part of one year closer to having to pay that bigger amount. We’ll keep unrolling it right up to the date of payment at which time we shall have unrolled it fully so the obligation will now be shown at the full amount immediately before we settle it.

        To unroll we debit the finance cost in the statement of profit or loss and credit the obligation – thus building that obligation up over the period of time over which we have discounted it

        Better?

  7. Sir Kindly let me know if PUP affects the profit of Subsidiary, wouldn’t that be affecting its NCI share too?? Hence doesn’t that same thing applies for Adjustment 2 in above question where Danute sold PPE at the Profit of 36,000??

  9. Dear Sir Mike,
    when will the you upload the solution for dec 2013 past papers

    i cannot understand the
    in good will caliculation why the loss was add back in dec 2013
    why not june 2013
    both has losses

  10. Dear Mike,

    Thanks for revising this comprehensive example.

    I do have a question for another example though and hope you know the answer.
    It is in regards to the Pacemaker question (Q1 06/2009), which can also be found in the BPP kit, pages 44-45.
    Putting together the CSoFP I do not understad why we do not make any adjustments for the 10% loan notes which were invested in S. P invested a total of 58 Mio in S via 10% loan notes. The solution according to BPP is the following (per Q: P=180 + S=20 = Total 200). The investment in S of 58 Mio is not mentioned – why???.

    Also, the same example, for Equity Shares we count P only, but in the mentioned example there was an investment in A of 75 Mio which is also added under equity shares. May you explain why???

    Once again thanks for your great help!

    Regards,
    ffgg

    • For those of you reading this, I have just read it for the first time (12 July, 2015) – more that one year after the question was posted!

      I keep an eye on “recent posts” but clearly I don’t see them all! If you want the guarantee of a reply from a tutor you need to post your question on the Ask the Tutor page

  11. In W1 we have reduced 60,000 profits with 36,000 (profit on PPE post acq) in order to get normal profits.
    But,
    still normal profits include Unrealized Profits on inventory (note 3) that also occured post acq. Why dont we also reduce the profits with the PURP?

  12. I understand the explanation given (October 28, 2013 at 5:13 pm):

    “If the inventory at date of acquisition had been correctly valued, the pre-acq profit would have been higher but, at the same time, the cost of sales for the post-acq period would be greater and the post-acq profit would be reduced”

    but,

    I cant see where in W3 you reduce postacq profits by 12. Shouldn’t postacq profits further reduced by 12?

    • I finally/hopefully understood the concept. Please verify if correct.
      1st case:
      If inventory say 100$ had been revalued say to 110$ (before sale) the result would be
      +10 to profits and
      +10 to inventory
      If at a later stage this inventory is sold for 120$ the result would be
      +10 to profits (120 selling price – 110 COS according to revalued amount)
      Thus total profits 10 + 10 = 20
      If alternatively
      2nd case:
      If inventory say 100$ sold again for 120$ AND had not been revalued say to 110$ as above (although it should have) the result would be AGAIN:
      +20 to profits (120 selling price – 100 COS according to the NON revalued amount)
      Thus, same profit in both cases. This means that there is no need to make adj. for “mistakes” that have been realized (i.e inventory above sold before year end).

  13. Dear Mike,

    In the question it says that Danute shares had a market value of $1.30, so I was wondering how you got the $2.20 that you have used in the lecture for the valuation of NCI at acquisition? Look forward to your answer. And many thanks for the great lectures you have made available to us, it is much appreciated as currently I am planning to sit the F5 and F7 in June.

  14. Dear Mike,
    You lectures are really helpful for me. I just need to ask that can I write abbreviations in exam like DOA, TNCA , PUPS etc instead of writing full names like you? Thanks

  15. Great lecture Mike!

    I do have one general question which I can’t seem to get my head around (I get the feeling this will be obvious to someone else).

    When we work out the cost of shares, in this example it was ‘75% x 40000 x 2/3 x 1 share’.
    However, in some books they do not include the ‘75%’ ?

    Am I missing something obvious?

    Thanks in advance.

  16. Hi Mike, dividend payable by Ausra, should it not be (100,000 + (40,000x.75/.5/3 share exchange)) = 120,000 shares and dividend then be 120,000 x .1= €12,000 instead of €10,000 as you calculated. And of that €12,000 Danute’s dividend receivable be 20,000 x .1= €2,000. This €2,000 then will go into working 3 to increase post acq earnings. As per your calculation I think post acq for Daunte is understated, and Ausra’s earnings are overstated by €2,000.

  17. Dear Sir
    I don’t understand the calculation of the value for the issued shares.
    The share price of $4.30 – is this the market price already after the additional 20k shares were issued, or before?
    If after, then I am ok.
    If before, then we should calculate diluted price.
    Anyway, thank you so much for your lectures. They are as brilliant as ever!

    • Surely we would only dilute if the value of the consideration received were less than the value of the shares issued. And there’s no suggestion that that is the case in Ausra and Danute.

      This is the equivalent of an issue at full market price and, from the earnings per share lecture, you will see that, upon the event of such an issue at full market price, there is no dilution adjustment applicable

      But good thinking anyway – it’s good to see that your thought processes are being stimulated enough to query the examples and lectures – well done 🙂

      • Is there any information about December’s question 1 (whether it will be solely on CSofFP or may also include Consolidated Statement of Profit or Loss, and Consolidated Statement of Changes in Equity?) I am struggling with Consolidated Statement of Profit or Loss and it would be very bad if it appers in exam

  20. Hi, Mike:
    I have a question on the consolidated income statement, and wish you could help.
    If it is a 60% mid-year acquisition, say 6 months, after calculating the group’s profit for the year, we attribute it to the parent and NCI.
    I have a confusion here: amount for NCI, should it be the 40% of sub’s profit for the whole year, or should it be the 40% of post acq profit only?
    I am using BPP F7 study text for exam June 2014, if you have it, it’s on page 175.
    Thank you!

    • If you have followed the lectures, and if you have remembered working W4B, you may also remember that the nci want “their share of
      this year’s
      subsidiary
      adjusted
      TIME APPORTIONED
      profit after tax”

      If we are only consolidating the post acquisition results of the subsidiary, we canonly give the nci their share of the post acquisition results.

      As the Scots might say “Ye cannae taek oot o’ yer sporran muir that ye hae puit intae it”

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