Question 1a
Statements of profit or loss and other comprehensive income
| Alpha | Beta | Gamma | |
|---|---|---|---|
| $’000 | $’000 | $’000 | |
| Revenue (Note 3) | 260,000 | 200,000 | 180,000 |
| Cost of sales (Notes 1-3) | (130,000) | (110,000) | (90,000) |
| –––––––– | –––––––– | –––––––– | |
| Gross profit | 130,000 | 90,000 | 90,000 |
| Distribution costs | (20,000) | (15,000) | (13,500) |
| Administrative expenses (Note 4 ) | (25,000) | (20,000) | (18,000) |
| Redundancy and reorganisation costs (Note 5) | (14,000) | Nil | Nil |
| Investment income (Note 6) | 12,600 | Nil | 1,500 |
| Finance costs (Note 7) | (26,000) | (15,000) | (12,000) |
| –––––––– | –––––––– | –––––––– | |
| Profit before tax | 57,600 | 40,000 | 48,000 |
| Income tax expense | (14,000) | (10,000) | (12,000) |
| –––––––– | –––––––– | –––––––– | |
| Profit for the year | 43,600 | 30,000 | 36,000 |
| Other comprehensive income: | |||
| Items that will not be reclassified to profit or loss | |||
| Gains on financial assets designated at fair value | |||
| through other comprehensive income (Note 8) | 9,000 | Nil | 1,400 |
| –––––––– | –––––––– | –––––––– | |
| Total comprehensive income | 52,600 | 30,000 | 37,400 |
| –––––––– | –––––––– | –––––––– | |
| Summarised statements of changes in equity | |||
| Balance on 1 October 2013 | 180,000 | 140,000 | 120,000 |
| Comprehensive income for the year | 52,600 | 30,000 | 37,400 |
| Dividends paid on 31 December 2013 | (30,000) | (10,000) | (14,000) |
| –––––––– | –––––––– | –––––––– | |
| Balance on 30 September 2014 | 202,600 | 160,000 | 143,400 |
| –––––––– | –––––––– | –––––––– |
Note 1 – Alpha’s investment in Beta
On 1 October 2001, Alpha acquired 75% of the equity shares of Beta. This gave Alpha control over Beta. On 1 October 2001, the net assets of Beta had a fair value of $80 million. None of the assets and liabilities of Beta which existed on 1 October 2001 were still assets or liabilities of Beta on 30 September 2013. On 1 October 2001, Alpha measured the non-controlling interest in Beta at its fair value of $22 million. Goodwill on consolidation of $18 million arose on the acquisition of Beta. No impairment of goodwill on the acquisition of Beta has been necessary up to and including 30 September 2013.
Beta has four operating segments which are also cash generating units (CGUs) for the purposes of impairment reviews. On 1 October 2001, the goodwill on acquisition of Beta was allocated between these units on the following basis:
Unit 1 – $8 million.
Unit 2 – $4 million.
Unit 3 – $3 million.
Unit 4 – $3 million.
On 30 September 2014, the carrying amounts of the net assets (excluding goodwill) and recoverable amounts of the four CGUs of Beta were as follows:
| Unit 1 | Unit 2 | Unit 3 | Unit 4 | Total | |
|---|---|---|---|---|---|
| $’000 | $’000 | $’000 | $’000 | $’000 | |
| Carrying amount | 45,000 | 55,000 | 30,000 | 30,000 | 160,000 |
| ––––––– | ––––––– | ––––––– | ––––––– | –––––––– | |
| Recoverable amount | 50,000 | 65,000 | 35,000 | 35,000 | 185,000 |
| ––––––– | ––––––– | ––––––– | ––––––– | –––––––– |
Any impairment of goodwill should be charged to cost of sales.
Note 2 – Alpha’s investment in Gamma
On 1 February 2014, Alpha acquired 80% of the equity shares in Gamma and gained control of Gamma.
On 1 February 2014, the fair value of Gamma’s property, plant and equipment exceeded the carrying amounts in the individual financial statements of Gamma as follows:
– Property excess $20 million (land element of excess $11 million). The estimated remaining useful life of the buildings element of the property at 1 February 2014 was 25 years.
– Plant and equipment excess $7·2 million. The estimated remaining useful life of the plant and equipment of Gamma at 1 February 2014 was three years.
All depreciation of property, plant and equipment is charged to cost of sales.
Alpha measured the non-controlling interest in Gamma on 1 February 2014 at its fair value of $28 million. There was no impairment of the goodwill arising on the acquisition of Gamma in the year ended 30 September 2014. The profit of Gamma for the year ended 30 September 2014 accrued evenly over the year, but see note 8 regarding the other comprehensive income of Gamma.
Note 3 – Intra-group trading
Alpha supplies a component used by both Beta and Gamma. Alpha applies a mark-up of 25% to cost when computing the intra-group selling price. All of the sales of this component by Alpha to Gamma occurred after the acquisition of Gamma on 1 February 2014. Details of the sales of the component, and the holdings of inventory of the component by group entities, are as follows:
| Beta | Gamma | |
|---|---|---|
| $’000 | $’000 | |
| Sales of the component | 12,000 | 5,000 |
| ––––––– | –––––– | |
| Inventory of component at 30 September 2014 (at cost to Beta/Gamma) | 2,400 | 2,000 |
| ––––––– | –––––– | |
| Inventory of component at 30 September 2013 (at cost to Beta/Gamma) | 1,800 | Nil |
| ––––––– | –––––– |
Note 4 – Post-employment benefits
The group makes contributions into both defined benefit and defined contribution retirement benefit plans. All the employees of Beta and Gamma are members of defined contribution plans but many of the employees of Alpha are members of a defined benefit plan. The following are relevant details regarding the defined benefit plan:
– Obligation at 30 September 2014: $40 million (30 September 2013: $32 million).
– Fair value of plan assets at 30 September 2014: $34 million (30 September 2013: $27 million).
– Current service cost for the year ended 30 September 2014: $6 million.
– Contributions paid into the plan by Alpha in the year ended 30 September 2014: $5·4 million.
– Benefits paid to retired members: $2 million.
– Relevant market yield: 5% per annum throughout the period.
Alpha has charged the contributions paid into the defined benefit plan in the year ended 30 September 2014 ($5·4 million) as an administrative expense. Alpha has made no other entries in respect of the plan in the statement of profit or loss and other comprehensive income. However, Alpha correctly accounted for the defined benefit plan in the financial statements for the year ended 30 September 2013.
Note 5 – Redundancy and reorganisation costs
Following the acquisition of Gamma on 1 February 2014, the directors of Alpha formulated a plan to reorganise the group. The plan involved some redundancies and some employees changing their roles within the group. As a result of the reorganisation, certain non-current assets of Alpha will no longer be required. The final version of the plan was agreed on 31 July 2014 and made public on 15 August 2014. The plan was implemented from 1 November 2014. The total cost of the plan will be borne by Alpha. The directors of Alpha made a provision, with a corresponding charge to profit or loss, in respect of the plan as follows:
| $’000 | |
|---|---|
| Redundancy costs | 10,000 |
| Costs of training staff in new roles | 5,500 |
| Expected profit on the sale of surplus non-current assets | (1,500) |
| ––––––– | |
| 14,000 | |
| ––––––– |
Note 6 – Investment income
All of the investment income of Alpha, including dividends received from subsidiaries, has been correctly recognised in the individual financial statements of Alpha.
Note 7 – Bond issue
On 1 October 2013, Alpha issued 300 million $1 bonds at par. The interest payable on the bonds is 5% per annum, payable on 30 September in arrears. The bonds are repayable at par on 30 September 2023. Alternatively, the investors have the option to convert the bonds into equity shares in Alpha on 30 September 2023.
On 1 October 2013, Alpha recognised a financial liability of $300 million in its statement of financial position. On 30 September 2014, Alpha recognised the interest paid on that date as a finance cost in its statement of profit or loss.
On 1 October 2013, investors would have expected an annual return of 8% on non-convertible bonds. At a discount rate of 8% per annum, the present value of $1 receivable at the end of year 10 is 46·3 cents and the present value of $1 receivable at the end of each of years 1 to 10 is $6·71.
Note 8 – Other comprehensive income
Both Alpha and Gamma have financial assets which are appropriately classified as fair value through other comprehensive income. On 1 February 2014, the fair value of the financial assets of Gamma had not changed from 30 September 2013.
Note 9 – Forward currency contract
On 15 August 2014, Alpha entered into a commitment to supply a large consignment of components to a foreign customer whose currency is the Kroner. The agreed value of the order was 25 million Kroner and this amount is expected to be paid by the customer on 30 November 2014. On 15 August 2014, Alpha entered into a contract to sell 25 million Kroner for $13 million on 30 November 2014. Currency fluctuations in August and September 2014 were such that on 30 September 2014 the fair value of this currency contract was $1·1 million (a financial liability). The draft financial statements of Alpha do not include any amounts in respect of this currency contract since it has a zero cost. Alpha wishes to use cash-flow hedge accounting whenever permitted by International Financial Reporting Standards. The directors of Alpha have estimated that the currency contract is a perfectly effective hedge of the commitment to supply the components.
Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income of Alpha for the year ended at 30 September 2014. You do not need to consider the deferred tax effects of any adjustments you make. (32 marks)
Note: You should show all workings to the nearest $’000.