memo 2004

Hi Mike / ACCA tutor, I have a question on some other parts of this past ACCA exam question.

As you mention above that you do not have the revision kit I have typed below the relevant detail to which my question is based on.

My first question is on the way the ACCA solution suggests we should treat the FX revaluation on the loan from the parent to the subsidiary and this loan being included on consolidation of the financial statements (part c of question detailed below). The loan is a non current liability for the subsidiary called Random. We are given the $ value of the loan and need to derive the FX revaluation on this item since we are told it is not yet repaid by the year end. The FX revaluation is favorable for Random (i.e a gain) as its (2.1-2.5) *$5m = -CR2m hence a 2m reduction of the non current liability in Randoms individual financial statement……… The solution does this quite rightly, however on consolidation this loan and the FX revaluation are not removed? Perhaps I am missing something here but I think this is an inter-group transaction so why is this loan not eliminated on consolidation? The loan was made on the acquisition date but we are not told it formed part of the consideration so I find this baffling that it is included?

My second question is on the treatment of the dividend. There is a working proforma that we are taught in ACCA studies to derive the overall Exchange Rate differences for the Other Comprehensive Income Statement. Within this working we deduct Retained Profit for the year from unrealised FX Gains / Losses (i.e usually the revaluation of Net Assets and Goodwill). As per section ‘g’ of the question detailed below should this dividend be deducted from profit for the year to get the retained profit for year? The ACCA solution does not do this?

Your answers / insight would be really really appreciated

Past ACCA Exam Question Extracts:
Memo, a public limited company, owns 75% of the ordinary share capital of Random, a public limited company which is situated in a foreign country. Memo acquired Random on 1 May 20X3 for 120 million crowns (CR) when the retained profits of Random were 80 million crowns. Random has not revalued its assets or issued any share capital since its acquisition by Memo.

(c) Memo had made an interest free loan to Random of $5 million on 1 May 20X3. The loan was repaid on 30 May 20X4. Random had included the loan in non-current liabilities and had recorded it at the exchange rate at 1 May 20X3.

(e) The functional currency of Random is the Crown.

(f) The following exchange rates are relevant to the financial statements:

(g) Memo has paid a dividend of $8 million during the financial year and this is not included in profit or loss. It is the group’s policy to value the non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary’s identifiable net assets.

Relevant Exchange Rates
Crowns to $
30 April/1 May 20X3 = 2.5
1 November 20X3 = 2.6
1 February 20X4 = 2·5
30 April 20X4 = 2.1
Average rate for year to 30 April 20X4 = 2·5