Intra group current account

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.