Activity 3 (Pg 378) (BPP SBR Course Notes Sep 2019 – Jun 2020)

Hi,

I would kindly like you to review my answer for this activity below and confirm whether it is correct.

Rankin owns 60% of Jenkin. Therefore, the NCI constitutes 40%. Hence, any exchange differences on net assets arising from the translation of Jenkin are distributed 60% to Rankin (parent) and 40% to the NCI.

If Rankin sells 5% of its interest in Jenkin, its holding will decrease to 55% and the NCI’s interest will increase to 45%. However, Rankin still maintains control over Jenkin because in substance, no disposal has occurred as no accounting boundary has been crossed. Instead, this is a transaction between the shareholders where the parent is selling 5% to the NCI.

So now, any exchange differences on net assets arising from the translation of Jenkin will be distributed 55% to Rankin (parent) and 45% to the NCI.

However, the directors of Rankin intend to transfer the exchange differences arising on the 5% interest sold to the group retained earnings instead of the NCI. This will result in the NCI getting a 40% share instead of a 45% share of the exchange differences on net assets.

The directors’ actions are unethical as they are deliberately manipulating the financial statements which will result in the financial statements not representing a true and fair view of the group.

Accountants have a social and ethical responsibility to not falsify financial statements and mislead the public. Deliberately manipulating the financial statements will bring the accounting profession into disrepute.

The directors’ actions neglect the ethical principles of integrity, objectivity and professional behaviour.

The directors must be reminded to refer to the ACCA Code of Ethics and Conduct and adhere to the ethical guidelines contained therein. They should also refer to the relevant IFRS standard to refresh their knowledge.

Thanks!