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i am looking in question WAR at the end of the BPP’s textbook.
my question is why the 50 000 USD, arising from the issue of the new shares, are deducted from the finance costs and accounted as a reduction of equity?
indeed IAS 37 points that transaction costs of an equity transaction should be accounted for as a deduction from equity,
but on other hand:
IFRS says costs, directly attributable to the acquisition of a bussiness are expensed in the periodSorry, “at the end of the BPP’s text book” is not precise enough” Give me a page reference ….but I warn you, I only have a text “for exams in 2011”
the question was taken out of the text for 2010:
On 1 May 20X7, War Co acquired 70% of the ordinary share capital of Peace Co by issuing to
Peace Co’s shareholders 500,000 ordinary $1 shares at a market value of $1.60c per share. The
[/b]costs associated with the share issue were $50,000.
As at 30 June 20X7, the following financial statements for War Co and Peace Co were available.
INCOME STATEMENTS
FOR THE YEAR ENDED 30 JUNE 20X7
War Co Peace Co
$’000 $’000
Revenue 3,150 1,770
Cost of sales (1,610) (1,065)
Gross profit 1,540 705
Distribution costs (620) (105)
Administrative expenses (325)* (210)
Interest payable (70) (30)
Dividends from Peace Co 42 –
Profit before taxation 567 360
Income tax expense (283) (135)
Profit for the year 284 225
*Note. The issue costs of $50,000 on the issue of ordinary share capital are included in this figure.in the solution- these costs were takesn out of the finance costs and charged against retain earnings and share premiuim
Hi, that’s better! The “directly attributable costs” referred to in the IFRS are costs such as accountancy costs and other professional costs. These used to be included within the cost of acquisition of the subsidiary, but no longer. Costs associated with the share issue itself are ideally deducted from ( debited to ) the Share Premium Account rather than included within a cost category in the Statement of Income.
Does that help?
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