Question 1
Alpha, a parent with a subsidiary Beta, is preparing the consolidated statement of financial position at 30 September 20X7. The draft statements of financial position for both entities as at 30 September 20X7 are given below:
| Alpha | Beta | |
|---|---|---|
| $’000 | $’000 | |
| Assets | ||
| Non-current assets: | ||
| Property, plant and equipment (note 1) | 966,500 | 546,000 |
| Development project (note 1) | 0 | 20,000 |
| Investment in Beta (note 1) | 450,000 | 0 |
| –––––––––– | –––––––– | |
| 1,416,500 | 566,000 | |
| –––––––––– | –––––––– | |
| Current assets: | ||
| Inventories (note 2) | 165,000 | 92,000 |
| Trade receivables | 99,000 | 76,000 |
| Cash and cash equivalents | 18,000 | 16,000 |
| –––––––––– | –––––––– | |
| 282,000 | 184,000 | |
| –––––––––– | –––––––– | |
| Total assets | 1,698,500 | 750,000 |
| –––––––––– | –––––––––– | |
| Equity and liabilities | ||
| Equity | ||
| Share capital ($1 shares) | 360,000 | 160,000 |
| Retained earnings | 570,000 | 360,000 |
| Other components of equity | 102,000 | 0 |
| –––––––––– | –––––––– | |
| Total equity | 1,032,000 | 520,000 |
| –––––––––– | –––––––– | |
| Non-current liabilities: | ||
| Long-term borrowings (note 3) | 300,000 | 85,000 |
| Pension liability (note 4) | 187,500 | 0 |
| Deferred tax (note 1 and 2) | 69,000 | 54,000 |
| –––––––––– | –––––––– | |
| Total non-current liabilities | 556,500 | 139,000 |
| –––––––––– | –––––––– | |
| Current liabilities: | ||
| Trade and other payables | 70,000 | 59,000 |
| Short-term borrowings | 40,000 | 32,000 |
| –––––––––– | –––––––– | |
| Total current liabilities | 110,000 | 91,000 |
| –––––––––– | –––––––– | |
| Total equity and liabilities | 1,698,500 | 750,000 |
| –––––––––– | –––––––– |
Note 1 – Alpha’s investment in Beta
On 1 April 20X7, Alpha acquired 120 million shares in Beta. Alpha made a payment of $450 million in exchange for these shares. The individual interim financial statements of Beta showed a balance of $340 million on its retained earnings on 1 April 20X7.
The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at 1 April 20X7. The following matters emerged:
− Plant and equipment having a carrying amount of $440 million had an estimated fair value of $480 million. The estimated remaining useful life of this plant and equipment at 1 April 20X7 was four years.
− An in-process development project of Beta’s had a carrying amount of $8 million and a fair value of $18 million.
During the six-month period from 1 April 20X7 to 30 September 20X7, Beta incurred further development costs of $12 million relating to this project. These costs were correctly capitalised in accordance with the requirements of IAS® 38 – Intangible Assets. No amortisation of the capitalised costs of this project was required prior to 30 September 20X7.
− 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%.
On 1 April 20X7, the directors of Alpha measured the non-controlling interest in Beta at its fair value on that date. On 1 April 20X7, the fair value of an equity share in Beta was $3·80.
Note 2 – Intra-group trading
Since 1 April 20X7, Alpha has supplied a product to Beta. Alpha applies a mark-up of 25% to its cost of supplying this product. Sales of the product by Alpha to Beta in the period from 1 April 20X7 to 30 September 20X7 totalled $30 million. One-third of the products which Alpha has supplied to Beta since 1 April 20X7 were still unsold by Beta at 30 September 20X7. Any adjustment which is necessary in the consolidated financial statements as a result of these sales 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 amounts were owing to Alpha by Beta in respect of these sales at 30 September 20X7.
Note 3 – Long-term borrowings
Prior to 1 October 20X6, Alpha had no long-term borrowings. On 1 October 20X6, Alpha borrowed $300 million to finance its future expansion plans. The term of the borrowings is five years and the annual rate of interest payable on the borrowings is 6%, payable in arrears. Alpha charged the interest paid on 30 September 20X7 as a finance cost in its financial statements for the year ended 30 September 20X7.
The borrowings are repayable in cash at the end of the five-year term or convertible into equity shares on that date at the option of the lender. If the borrowings had not contained a conversion option, the lender would have required an annual return of 8%, rather than 6%. Discount factors which may be relevant are as follows:
| Discount factor | Present value of $1 payable at the end of year 5 | Cumulative present value payable at the end of years 1–5 inclusive |
|---|---|---|
| 6% | 74·7 cents | $4·21 |
| 8% | 68·1 cents | $3·99 |
Note 4 – Pension liability
Alpha has established a defined benefit pension plan for its eligible employees. The statement of financial position of Alpha at 30 September 20X7 currently includes the estimated net liability at 30 September 20X6. The following matters relate to the plan for the year ended 30 September 20X7:
– The estimated current service cost was advised by the actuary to be $60 million.
– On 30 September 20X7, Alpha paid contributions of $70 million into the plan and charged this amount as an operating expense.
– The annual market yield on high quality corporate bonds on 1 October 20X6 was 8%.
– The estimated net liability at 30 September 20X7 was advised by the actuary to be $205 million.
No benefits have been paid to date.
Required:
Using the draft statements of financial position of Alpha and its subsidiary Beta at 30 September 20X7, and the further information provided in notes 1–4, prepare the consolidated statement of financial position of Alpha at 30 September 20X7. Unless specifically told otherwise, you can ignore the deferred tax implications of any adjustments you make.
Note: You should show all workings to the nearest $’000.