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Intra group current account

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Intra group current account

  • This topic has 2 replies, 2 voices, and was last updated 3 years ago by alawi sayed.
Viewing 3 posts - 1 through 3 (of 3 total)
  • Author
    Posts
  • October 17, 2021 at 12:03 pm #637870
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    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.

    ———————————————————————————————————————————–
    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) ?

    ——————————————————————————————————————————–

    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.

    October 20, 2021 at 8:07 pm #638648
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7156
    • ☆☆☆☆☆

    Hi,

    Deal with the goods in transit first DR Inventory CR Payables with the $1.8m

    You can then eliminate the equal intra-group balances DR Payable CR Receivables $3.4m

    In the answer they have DR Payables with $1.6m, which is the net figure from the two entries to payables made above.

    Thanks

    October 20, 2021 at 10:17 pm #638651
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    Hello Sir,

    Thanks you very much for .

  • Author
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