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I have encountered the below difficulties when trying to workout this question.
Working 1 of the examiner – The examiner changed the profit for the year with 2 adjustments. Can I make the adjustment necessary without changing the profit or loss? i.e. e,g adding $1 ECL instead of deducting $7 impairment loss and then adding $8 in cash flow (impairment on amortised cost of asset)?
If I have to change the profit of the year, how could I know what transactions do I exactly need to account for in adjusting the profit for the year?
Working 3 – Why is the bank overdraft of $2 added back for the calculation of the Net proceeds on the disposal of Northern?
Moreover, I faced difficulties on how to know if the points for adjustment are included in the statements provided or not. e.g. Viii) how did the examiner know that the $4 Gain on contingent consideration was included in the SPLCI provided in the question?
Thanks and regards,
Yes, you can net the two adjustments if you wish and transactions that are non-cash that have gone through profit from operations will need to be adjusted for.
When we’ve sold Northern then we need to look at the net cash figure, so there is an inflow of the sales proceeds and we won’t need to pay the overdraft that was previously in the subsidiary, so this benefit is added back to the proceeds.
On your last point you just have to work it through based on the information the examiner gives, and the figure calculated will have then gone through P/L unless told otherwise. So in this instance the contingent liability was $10m at the start of the year, and will have been increased by $1m when unwound to the year-end value. At year-end it now stands at $11m when it was finally paid. On payment we would then do the following:
CR Bank $7m
CR Gain $4m
DR Cont liab $11m
Hope this helps.