Question 1
| Alpha | Beta | Gamma | |
|---|---|---|---|
| $’000 | $’000 | $’000 | |
| Assets Non-current assets: Property, plant and equipment (Note 2) | 610,000 | 310,000 | 160,000 |
| Investments (Note 1) | 370,700 | Nil | Nil |
| –––––––––– | –––––––– | –––––––– | |
| 980,700 | 310,000 | 160,000 | |
| –––––––––– | –––––––– | –––––––– | |
| Current assets: | |||
| Inventories (Note 3) | 140,000 | 85,000 | 66,000 |
| Trade receivables | 95,000 | 70,000 | 59,000 |
| Cash and cash equivalents | 16,000 | 13,000 | 11,000 |
| –––––––––– | –––––––– | –––––––– | |
| 251,000 | 168,000 | 136,000 | |
| –––––––––– | –––––––– | –––––––– | |
| Total assets | 1,231,700 | 478,000 | 296,000 |
| –––––––––– | –––––––– | –––––––– | |
| Equity and liabilities | |||
| Equity: | |||
| Share capital ($1 shares) | 240,000 | 120,000 | 100,000 |
| Retained earnings | 550,700 | 168,000 | 59,000 |
| Other components of equity (Notes 2, 6 and 7) | 202,000 | Nil | Nil |
| –––––––––– | –––––––– | –––––––– | |
| Total equity | 992,700 | 288,000 | 159,000 |
| –––––––––– | –––––––– | –––––––– | |
| Non-current liabilities: | |||
| Long-term borrowings (Note 7) | 100,000 | 70,000 | 60,000 |
| Deferred tax | 59,000 | 38,000 | 35,000 |
| –––––––––– | –––––––– | –––––––– | |
| Total non-current liabilities | 159,000 | 108,000 | 95,000 |
| –––––––––– | –––––––– | –––––––– | |
| Current liabilities: | |||
| Trade and other payables | 60,000 | 52,000 | 32,000 |
| Short-term borrowings | 20,000 | 30,000 | 10,000 |
| –––––––––– | –––––––– | –––––––– | |
| Total current liabilities | 80,000 | 82,000 | 42,000 |
| –––––––––– | –––––––– | –––––––– | |
| Total equity and liabilities | 1,231,700 | 478,000 | 296,000 |
| –––––––––– | –––––––– | –––––––– |
| Note 1 – Summary of Alpha’s investments | |
|---|---|
| The investments figure in the individual financial statements of Alpha is made up as follows: | |
| $’000 | |
| Investment in Beta (Note 2) | 236,500 |
| Investment in Gamma (Note 3) | 121,200 |
| Other equity investments (Note 4) | 13,000 |
| –––––––– | |
| 370,700 | |
| –––––––– |
Note 2 – Alpha’s investment in Beta
On 1 October 2012, Alpha acquired 90 million shares in Beta by means of a share exchange of two shares in Alpha for every three shares acquired in Beta. On 1 October 2012, the market value of an Alpha share was $3·90. Alpha incurred directly attributable costs of $2·5 million on acquisition of Beta relating to the cost of issuing its own shares.
On 1 October 2012, the individual financial statements of Beta showed retained earnings of $60 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:
– Property which had a carrying amount of $150 million (land component $45 million) had an estimated fair value of $210 million (land component $66 million). The buildings component of the property had an estimated remaining useful life of 30 years at 1 October 2012.
– Plant and equipment which had a carrying amount of $122 million had an estimated fair value of $145 million. The estimated remaining useful life of the plant at 1 October 2012 was four years.
– On 1 October 2012, the directors of Alpha identified a brand name relating to Beta which had a fair value of $25 million. This brand name was not recognised in the individual financial statements of Beta as it was internally developed. The directors of Alpha considered that the useful life of the brand name was 25 years from 1 October 2012.
– 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 calculating deferred tax. The rate of deferred tax to apply to temporary differences is 20%.
No impairment of the goodwill on acquisition of Beta has been evident since 1 October 2012. On 1 October 2012, the directors of Alpha initially measured the non-controlling interest in Beta at its fair value on that date. On 1 October 2012, the fair value of an equity share in Beta (which can be used to measure the fair value of the non-controlling interest) was $2·35.
Note 3 – Alpha’s investment in Gamma
On 1 October 2016, Alpha acquired 80 million shares in Gamma by means of a cash payment of $120 million. Alpha incurred due diligence costs of $1·2 million associated with this purchase. The purchase agreement provided for an additional cash payment of $56 million to the former holders of the 80 million acquired shares on 1 October 2018. An appropriate annual discount rate to use in any relevant discounting to measure the fair value of this additional cash payment is 8%.
On 1 October 2016, the individual financial statements of Gamma showed retained earnings of $50 million.
On 1 October 2016, the fair values of the net assets of Gamma were the same as their carrying amount with the exception of some inventory which was recognised in the individual financial statements of Gamma at a cost of $12 million. The directors of Alpha considered that this inventory had a fair value of $15 million on 1 October 2016. This inventory was all sold by Gamma prior to 30 September 2017. The fair value adjustment was not 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 calculating deferred tax. The rate of deferred tax to apply to temporary differences is 20%.
No impairment of the goodwill on acquisition of Gamma has been evident since 1 October 2016. On 1 October 2016, the directors of Alpha initially measured the non-controlling interest in Gamma at its fair value on that date. On 1 October 2016, the fair value of an equity share in Gamma was $1·75.
Note 4 – Other equity investments by Alpha
Alpha has a portfolio of equity investments which are classified in accordance with IFRS 9 – Financial Instruments – as ‘fair value through profit or loss’. The carrying amount included in the financial statements of Alpha represents the fair value of the portfolio at 1 October 2016, which has been correctly adjusted for purchases and disposals in the year. The fair value of the portfolio at 30 September 2017 was $13·8 million.
Note 5 – Trade receivables and payables
On 29 September 2017, Gamma made a payment of $8 million to Beta to eliminate the intra-group balances at that date. This payment was received and recorded by Beta on 2 October 2017.
Note 6 – Share-based payment
On 1 October 2015, Alpha granted 200 senior managers options to buy 100,000 shares each between 30 September 2018 and 31 December 2018. The options are due to vest on 30 September 2018 provided the relevant managers remain employed over the three-year vesting period ending on that date. Since 1 October 2015 the expectation of the number of managers for whom the options would vest has varied as follows:
| Date | Expected number of managers for whom the options will vest |
|---|---|
| 1 October 2015 | 200 |
| 30 September 2016 | 180 |
| 30 September 2017 | 190 |
In preparing the financial statements of Alpha for the year ended 30 September 2016, the directors of Alpha debited retained earnings and credited other components of equity with the appropriate amount required by IFRS 2 – Share-based payment. The directors of Alpha have made no additional accounting entries in respect of the options in the draft financial statements for the year ended 30 September 2017.
On 1 October 2015, the fair value of one option was estimated to be $1·20. The fair value of the same option at 30 September 2016 and 2017 was estimated to be $1·25 and $1·30 respectively
Note 7 – Long-term borrowing
On 1 October 2016, Alpha issued 60 million $1 loan notes at par. The annual rate of interest (payable in arrears) on the loan notes is 6%. The loan notes are repayable at par on 30 September 2026. As an alternative to repayment, the holders of the loan notes can elect to convert their loan notes into equity shares of Alpha on 30 September 2026. Had the conversion option not been available, the investors in the loan notes would have required an annual return of 9%.
Discount factors which may be relevant at 6% and 9% are as follows:
| Discount rate | Present value of $1 receivable in 10 years | Present value of $1 receivable at the end of years 1–10 |
|---|---|---|
| 6% | 55·8 cents | $7·36 |
| 9% | 42·2 cents | $6·42 |
In preparing the draft financial statements for the year ended 30 September 2017, the directors of Alpha credited $60 million to long-term borrowings and showed the interest paid to the investors as a finance cost.
Required:
Prepare the consolidated statement of financial position of Alpha at 30 September 2017. You need only consider the deferred tax implications of any adjustments you make where the question specifically refers to deferred tax.