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During the year ended 31 December 20X6, Guidance Co stated that it had reorganised its assets and set up a SPE. Guidance Co transferred property to the SPE at its carrying amount of $50 million, but had incorrectly charged revaluation reserves with this amount rather than showing the transfer as an investment in the SPE. The property was the SPE’s only asset. However, Guidance Co still managed the property, and any profit or loss relating to the assets of the entity was remitted directly to Guidance Co. Guidance Co had no intention of consolidating the SPE.
Examiner answer was:
By transferring their assets to a SPE, the asset turnover ratio will be significantly larger. However, the SPE should be consolidated by Guidance Co in its group financial statements and the property included in assets and the charge eliminated from revaluation reserves in its single entity financial statements. The latter will increase shareholder equity.
sir my question is that why the share holders equity will increase? / why does it say ‘the latter will increase shareholders equity’
If assets increase – equity increases.
Dr Asset Cr Revaluation Reserve
Remember – net assets + equity.
I’m so sorry to bring this back from the dead but I had a doubt with this question and the question posted contains all the details I would need to mention.
After reading the question and especially the part about the property being the only asset of the SPE my immediate thoughts were – it’s not a business as the val is concentrated on one asset and hence the treatment in the question is right.
Could you please tell me why I’m wrong and the SPE must be consolidated?
I can see where you are coming from, but……………….
If it is an SPE it will be consolidated so the PPE will be in the group accounts.
If it is not an SPE it will not be consolidated so the PPE will be in the individual accounts of the parent. If the parent has subs, the PPE will be consolidated into the group accounts.
Either way, the PPE will be in the published accounts, and that’s what matters.
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