Question 1a
| Alpha | Beta | Gamma | |
|---|---|---|---|
| $’000 | $’000 | $’000 | |
| Assets | |||
| Non-current assets: | |||
Property, plant and equipment (Notes 1 and 3) | 380,000 | 355,000 | 152,000 |
| Intangible assets (Note 1) | 80,000 | 40,000 | 20,000 |
| Investments (Notes 1, 3 and 4) | 497,000 | Nil | Nil |
| –––––––––– | –––––––– | –––––––– | |
| 957,000 | 395,000 | 172,000 | |
| –––––––––– | –––––––– | –––––––– | |
| Current assets: | |||
| Inventories (Note 5) | 100,000 | 70,000 | 65,000 |
| Trade receivables (Note 6) | 80,000 | 66,000 | 50,000 |
| Cash and cash equivalents (Note 6) | 10,000 | 15,000 | 10,000 |
| –––––––––– | –––––––– | –––––––– | |
| 190,000 | 151,000 | 125,000 | |
| –––––––––– | –––––––– | –––––––– | |
| Total assets | 1,147,000 | 546,000 | 297,000 |
| –––––––––– | –––––––– | –––––––– | |
| Equity and liabilities | |||
| Equity | |||
| Share capital (50c shares) | 150,000 | 200,000 | 120,000 |
| Retained earnings (Notes 1 and 3) | 498,000 | 186,000 | 60,000 |
| Other components of equity (Notes 1, 3 and 4) | 295,000 | 10,000 | 2,000 |
| –––––––––– | –––––––– | –––––––– | |
| Total equity | 943,000 | 396,000 | 182,000 |
| –––––––––– | –––––––– | –––––––– | |
| Non-current liabilities: | |||
| Provision (Note 7) | 34,000 | Nil | Nil |
| Long-term borrowings (Note 8) | 60,000 | 50,000 | 45,000 |
| Deferred tax | 35,000 | 30,000 | 25,000 |
| –––––––––– | –––––––– | –––––––– | |
| Total non-current liabilities | 129,000 | 80,000 | 70,000 |
| –––––––––– | –––––––– | –––––––– | |
| Current liabilities: | |||
| Trade and other payables (Note 6) | 50,000 | 55,000 | 35,000 |
| Short-term borrowings | 25,000 | 15,000 | 10,000 |
| –––––––––– | –––––––– | –––––––– | |
| Total current liabilities | 75,000 | 70,000 | 45,000 |
| –––––––––– | –––––––– | –––––––– | |
| Total equity and liabilities | 1,147,000 | 546,000 | 297,000 |
| –––––––––– | –––––––– | –––––––– |
Note 1 – Alpha’s investment in Beta
On 1 October 2012, Alpha acquired 300 million shares in Beta by means of a share exchange of one share in Alpha for every two shares acquired in Beta. On 1 October 2012, the market value of an Alpha share was $2·40. Alpha incurred directly attributable costs of $2 million on acquisition of Beta. These costs comprised:
– $0·8 million – cost of issuing own shares, debited to Alpha’s share premium account within other components of equity;
– $1·2 million due diligence costs – included in the carrying amount of the investment in Beta in Alpha’s own statement of financial position.
There has been no change to the carrying amount of this investment in Alpha’s own statement of financial position since 1 October 2012.
On 1 October 2012, the individual financial statements of Beta showed the following reserves balances:
– Retained earnings $125 million.
– Other components of equity $10 million.
The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at 1 October 2012. The following matters emerged:
– Plant and equipment having a carrying amount of $295 million had an estimated market value of $340 million. The estimated remaining useful economic life of this plant at 1 October 2012 was five years. None of this plant and equipment had been disposed of between 1 October 2012 and 30 September 2015.
– An in-process research and development project existed at 1 October 2012 but did not meet the recognition criteria of IAS 38 – Intangible Assets. The fair value of the research and development project at 1 October 2012 was $20 million. The project started to generate economic benefits on 1 October 2013 over an estimated period of four years.
The above two fair value adjustments have not been reflected in the individual financial statements of Beta. In the consolidated financial statements, these fair value adjustments will be regarded as temporary differences for the purposes of computing deferred tax. The rate of deferred tax to apply to temporary differences is 20%.
Alpha uses the proportion of net assets method to calculate non-controlling interests in Beta.
Note 2 – Impairment review of goodwill on acquisition of Beta
No impairment of the goodwill on acquisition of Beta was evident when reviews were carried out on 30 September 2013 and 2014. On 30 September 2015, the directors of Alpha concluded that the recoverable amount of the net assets (including the goodwill) of Beta at that date was $450 million. Beta is regarded as a single cash generating unit for the purpose of measuring goodwill impairment.
Note 3 – Alpha’s investment in Gamma
On 1 October 2014, Alpha acquired 144 million shares in Gamma by means of a cash payment of $125 million. Alpha incurred costs of $1 million associated with this purchase and debited these costs to administrative expenses in its draft statement of profit or loss for the year ended 30 September 2015. There has been no change in the carrying amount of this investment in the financial statements of Alpha since 1 October 2014.
On 1 October 2014, the individual financial statements of Gamma showed the following reserves balances:
– Retained earnings $45 million.
– Other components of equity $2 million.
On 1 October 2014, the fair values of the net assets of Gamma were the same as their carrying amounts with the exception of some land which had a carrying amount of $100 million and a fair value of $130 million. This land continued to be an asset of Gamma at 30 September 2015. The fair value adjustment has not been reflected in the individual financial statements of Gamma. In the consolidated financial statements, the fair value adjustment will be regarded as a temporary difference for the purposes of computing deferred tax. The rate of deferred tax to apply to temporary differences is 20%.
There was no impairment of the goodwill arising on acquisition of Gamma in the consolidated financial statements at 30 September 2015.
Alpha uses the proportion of net assets method to calculate non-controlling interests in Gamma
Note 4 – Other investments
Apart from its investments in Beta and Gamma, the investments of Alpha included in the statement of financial position at 30 September 2015 are all financial assets which Alpha measures at fair value though other comprehensive income. These other investments are correctly measured in accordance with IFRS 9 – Financial Instruments.
Note 5 – Intra-group sale of inventories
The inventories of Alpha and Gamma at 30 September 2015 included components purchased from Beta in the last three months of the financial year at a cost of $20 million to Alpha and $16 million to Gamma. Beta supplied these goods to both Alpha and Gamma at a mark-up of 25% on the cost to Beta.
Note 6 – Trade receivables and payables
Group policy is to clear intra-group balances on a given date prior to each year end. All group companies had complied with this policy at 30 September 2015, so at that date there were no outstanding intra-group balances.
Note 7 – Provision
On 30 September 2015, Alpha finalised the construction of an energy generating facility. The facility has an expected useful economic life of 25 years and Alpha has a legal requirement to decommission the facility at the end of its estimated useful life. The directors of Alpha estimated the costs of this decommissioning to be $34 million – based on prices prevailing at 30 September 2040. At an appropriate discount rate the present value of the cost of decommissioning the facility is $10 million. The directors of Alpha made a provision of $34 million and charged this amount as an operating cost in the financial statements of Alpha for the year ended 30 September 2015.
Note 8 – Long-term borrowings
On 1 October 2014, Alpha issued 40 million $1 bonds at par. The cost of issuing the bonds was $1 million and this cost was charged as a finance cost for the year ended 30 September 2015. No interest is payable on the bonds but they are redeemable at a large premium which makes their effective finance cost 8% per annum. The bonds are included at a carrying amount of $40 million in the statement of financial position of Alpha at 30 September 2015.
Required:
(a) Prepare the consolidated statement of financial position of Alpha at 30 September 2015. You need only consider the deferred tax implications of any adjustments you make where the question specifically refers to deferred tax. (36 marks)