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Question 1

Alpha holds investments in two entities, Beta and Gamma. The draft statements of financial position of the three entities at 30 September 2016 were as follows:
Alpha Beta Gamma
$’000 $’000 $’000
Assets
Non-current assets:
Property, plant and equipment (Notes 1 and 3) 524,000 370,000 162,000
Investments (Notes 1 and 3) 423,000
Nil
Nil
–––––––––– –––––––– ––––––––
947,000
370,000
162,000
–––––––––– –––––––– ––––––––
Current assets:
Inventories 120,000 75,000 60,000
Trade receivables (Note 4) 90,000 66,000 55,000
Cash and cash equivalents 15,000
12,000
10,000
–––––––––– –––––––– ––––––––
225,000
153,000
125,000
–––––––––– –––––––– ––––––––
Total assets 1,172,000 523,000 287,000
–––––––––– –––––––– ––––––––
Equity and liabilities
Equity
Share capital ($1 shares) 140,000 100,000 80,000
Retained earnings (Notes 1 and 3) 573,000 210,000 90,000
Other components of equity (Notes 1 and 3) 250,000
10,000
Nil
–––––––––– –––––––– ––––––––
Total equity 963,000
320,000
170,000
–––––––––– –––––––– ––––––––
Non-current liabilities:
Provisions (Note 5) 1,250 Nil Nil
Long-term borrowings 82,750 90,000 48,000
Deferred tax 45,000
28,000
30,000
–––––––––– –––––––– ––––––––
Total non-current liabilities 129,000
118,000
78,000
–––––––––– –––––––– ––––––––
Current liabilities:
Trade and other payables 60,000 50,000 30,000
Short-term borrowings 20,000 35,000 9,000
–––––––––– –––––––– ––––––––
Total current liabilities 80,000 85,000 39,000
–––––––––– –––––––– ––––––––
Total equity and liabilities 1,172,000 523,000 287,000
–––––––––– –––––––– ––––––––

Note 1 – Alpha’s investment in Beta
On 1 October 2013, Alpha acquired 80 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 2013, the market value of an Alpha share was $7·00.

Alpha incurred directly attributable due diligence costs of $3 million on acquisition of Beta. The directors of Alpha included these acquisition costs in the carrying amount of the investment in Beta in the draft statement of financial position of Alpha. There has been no change to the carrying amount of this investment in Alpha’s own statement of financial position since 1 October 2013.

On 1 October 2013, the individual financial statements of Beta showed the following balances:
– Retained earnings $150 million.
– Other components of equity $5 million.

The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at 1 October 2013. The following matters emerged:
– Property having a carrying amount of $160 million (land component $70 million, buildings component $90 million) had an estimated fair value of $200 million (land component $80 million, buildings component $120 million). The buildings component of the property had an estimated useful life of 30 years at 1 October 2013.

– Plant and equipment having a carrying amount of $120 million had an estimated fair value of $140 million. The estimated remaining useful life of this plant at 1 October 2013 was four years. None of this plant and equipment had been disposed of between 1 October 2013 and 30 September 2016.

– On 1 October 2013, the notes to the financial statements of Beta disclosed a contingent liability. On 1 October 2013, the fair value of this contingent liability was reliably measured at $6 million. The contingency was resolved in the year ended 30 September 2014 and no payments were required to be made by Beta in respect of this contingent liability.

– The fair value adjustments have not been reflected in the individual financial statements of Beta. In the consolidated financial statements the 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%.

The directors of Alpha used the proportion of net assets method when measuring the non-controlling interest in Beta in the consolidated statement of financial position.

Note 2 – Impairment review of goodwill on acquisition of Beta
No impairment of the goodwill on acquisition of Beta was evident when the reviews were carried out on 30 September 2014 and 2015. On 30 September 2016, the directors of Alpha carried out a further review and concluded that the recoverable amount of the net assets of Beta at that date was $400 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 2015, Alpha acquired 60 million shares in Gamma by means of a cash payment of $140 million. The purchase agreement provided for an additional payment on 31 October 2017 to the former holders of the 60 million acquired shares. The amount of this additional payment is dependent on the financial performance of Gamma in the two-year period from 1 October 2015 to 30 September 2017. On 1 October 2015, the fair value of this additional payment was estimated to be $20 million. This estimate was revised to $24 million on 30 September 2016. Alpha has not made any entries in its draft financial statements to record this potential additional payment.

On 1 October 2015, the individual financial statements of Gamma showed a balance on retained earnings of $75 million.

On 1 October 2015, 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 $50 million and a fair value of $70 million. This land continued to be an asset of Gamma at 30 September 2016. 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%.

No impairment issues arose concerning the measurement of Gamma in the consolidated statement of financial position of Alpha at 30 September 2016.

The directors of Alpha used the full goodwill (fair value) method when measuring the non-controlling interest in Gamma in the consolidated statement of financial position. On 1 October 2015, the fair value of a share in Gammawas $2·30.

Note 4 – Trade receivables and payables
Group policy is to clear intra-group balances on a given date prior to each year end. Beta complied with this policy at 30 September 2016 but Gamma was late in making the required payment of $10 million to Alpha. The payment was made by Gamma on 29 September 2016 and received and recorded by Alpha on 2 October 2016.

Note 5 – Provision
On 1 October 2015, Alpha completed the construction of a non-current asset with an estimated useful life of 20 years. The costs of construction were recognised in property, plant and equipment and depreciated appropriately. Alpha has a legal obligation to restore the site on which the non-current asset is located on 30 September 2035. The estimated cost of this restoration work, at 30 September 2035 prices, is $25 million. The directors of Alpha have made a provision of $1·25 million (1/20 x $25 million) in the draft statement of financial position at 30 September 2016. An appropriate annual discount rate to use in any relevant calculations is 6% and at this rate the present value of $1 payable in 20 years is 31·2 cents.

Required:
Prepare the consolidated statement of financial position of Alpha at 30 September 2016. You need only consider the deferred tax implications of any adjustments you make where the question specifically refers to deferred tax.