Beth Group – Dec. 07

“1. According to item i, on 1.DEC. 05, B just has 20% share in L, how could we calculate GW at that time. GW calculation is for H to acq Sub, not asso.” No goodwill calculation for an associate. Any premium paid on acquisition is within the “Cost” to which we add the share of post-acq profits and deduct any impairments

“2. Item ii, operating lease of lose, why 10 Cr to L’s RE??? I think it should Cr. Cash 10. Another problem is if the building is acquired not at year start, should we apportion the deprn annually?” The $2m improvements should be depreciated over the 6 years. So credit the statement of income (because the $2m has been expensed instead of being capitalise and include the $2m as a TNCA (tenant’s improvements?)

From paragraph iv: “A full year’s charge
for depreciation of property, plant and equipment is made in the year of acquisition using the straight line method
over six years.” I take it that that answers the second part of your second question

“3. Intra-group sale: item iii, it is very hard to understand why 10X30% to be eliminated. I think the full amount of 10. If it is the sale between B and L – subsi, we still 10X60%? I recall in F7, it is a full elimination. Besides, why in working 5, Cr. Investment in G 3, I think it should be Cr. Inventory X coz G still held these inventory that was sold after year end.” When there is a sale to an associate, IFRIC states that it is appropriate to eliminate just the group’s share of any pup. In F7, I teach this adjustment in the “simple” way – make the entire adjustment in the associate because then, when we calculate the group’s share of the associate’s profits, that calculation automatically eliminates the group’s share of the pup. The answer should come to the same figure as in the printed solution. If the sale were made by the associate to a group company, this makes a small difference when comparing with the printed solutions in that retained earnings are lower and investment in associate is lower by the same amount

No, the adjustment should be in the records of the company that has recognised the profit on the sale giving rise to a pup. We don’t even consider the individual assets of the associate – working W5A Investment in Associate is calculated as above (cost + share of post acq retained – any impairments)

“4. Item iv, the working paper said the deposit is monetary amount retranslated using updated year end rate, but besides deposit, there is another 50% payable on Dec.11 07 (which I think should be current liability). And the deposit is included in AR (which I think should be removed), and deprn charged full year ( I think should be apportioned to 3/12 year reflecting the PPE acq date) . Therefore, there should be AR, PPE, dprn adjustment. Another point I can’t understand Beth is going to buy this PPE or not. It seems no recognition of PPE in his B/S. I think this transaction requires below double entry: Dr. PPE, Cr. R.E., CL, and the deprn adjustment” The second payment is not due until after the year end (“upon delivery and installation”) and until then, it is not a liability – even the deposit is refundable suggesting that the contract may in fact not go ahead. the fact that the deposit IS refundable tells us that it really should be shown as a current asset. The asset is not yet, at the year end, in our possession, let alone contributing to profits. The idea of depreciation is to spread the cost of an asset over those years that benefit from the use of that asset. In this case, 2007 is getting no benefit because we are still waiting for delivery and installation

“5. Item vii, pollution provision, why not capitalized these 7+4 cost of pollution to PPE? But just write off in R.E. in this year.”
Cut and paste from the printed solution explains it?
“An enterprise must recognise a provision if, and only if:
(i) a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event)
(ii) payment is probable (‘more likely than not’), and
(iii) the amount can be estimated reliably”

The $5m – there may be a moral obligation but the examiner has left you in no doubt that the company has a reputation of not being environmentally friendly.

$7m is probable (more likely than not) that the company will be faced with a legal obligation when the local law is passed

$4m – this is already a legal obligation

OK?

Will probably have access to question in hard copy tomorrow (easier to read and consider all relevant points simultaneously)

So, answering some of your post “blind” …..

3) yes, it gives the same figure for retained earnings but the figures for NCI and for Investment in Associate are different than printed solutions. Don’t worry about it – you’re stirring up a storm in a tea-cup

4) Good!

5) Yes, provision may be LTL or Current Liabilities. If Beth has (remember, I’m batting blind here) an obligation to restore the land, then the building on the land will be capitalised on acquisition of the right to use it together with any provision for site restoration at the end of the period of the right to use it.

If the issue is not about a building but is about Beth’s liabilities to decontaminate land that Beth has poisoned, then the estimated liability (in today’s terms) must be provided, discounted from the future estimated date of payment

Need to check the question for points 1) and 2)

Hi Mike, got a question this this same past paper question for point (6) regarding share based payments. why are they considering the actually individuals left in the year isn’t the equity based share payments supposed to only consider the estimations? up until it is the final year at which point the actual staff left is used.

Thanks,