36 others answered this question

Question 1b

Alpha holds investments in two other entities, Beta and Gamma. The statements of profit or loss and other comprehensive income of the three entities for the year ended 31 March 2014 were as follows: Statements of profit or loss and other comprehensive income
Alpha Beta Gamma
$’000 $’000 $’000
Revenue (note 4)
420,000

335,000

292,000
Cost of sales (note 4) (240,000)
(192,000)
(168,000)
–––––––– –––––––– ––––––––
Gross profit 180,000 143,000 124,000
Distribution costs (20,000) (16,000) (14,000)
Administrative expenses (40,000) (32,000) (28,000)
Contributions to retirement benefit plan (note 5) (5,000) Nil Nil
Finance costs (20,000) (15,000) (12,000)
Investment income (note 6) 33,000
Nil
Nil
–––––––– –––––––– ––––––––
Profit before tax 128,000 80,000 70,000
Income tax expense (32,000)
(20,000)
(16,000)
–––––––– –––––––– ––––––––
Profit for the year 96,000 60,000 54,000
Other comprehensive income:
Items that will not be reclassified to profit or loss
Gain on property revaluation (note 7) 25,000
Nil
12,000
–––––––– –––––––– ––––––––
Total comprehensive income for the year 121,000
60,000
66,000
–––––––– –––––––– ––––––––
Notes to the statements

Note 1 – Acquisition of Beta
On 1 April 2005, Alpha purchased 80% of the equity shares of Beta and gained control of Beta. Goodwill arising on the acquisition of Beta totalled $80 million. At 1 April 2005, Beta had three cash-generating units and the goodwill on acquisition was allocated to the three units as follows:

– Unit 1 – 40%
– Unit 2 – 35%
– Unit 3 – 25%

No impairment of this goodwill had occurred in the years ended 31 March 2006 to 2013 inclusive. However, in the year ended 31 March 2014, despite Beta making a profit overall, Beta suffered challenging trading conditions. Therefore the directors of Alpha carried out an impairment review on the goodwill at 31 March 2014 and obtained the following results:

Unit Carrying value of net assets (excluding goodwill) at 31 March 2014 Recoverable amount at 31 March 2014
$’000 $’000
1 215,000 255,000
2 185,000 220,000
3 130,000 140,000
–––––––– ––––––––
Total 530,000 615,000
–––––––– ––––––––

None of the assets or liabilities of Beta which Alpha identified on 1 April 2005 remained in the statement of financial position of Beta at 31 March 2013 or 2014. Any impairment of goodwill should be charged to cost of sales.

Alpha measures all non-controlling interests based on their fair values at the date of acquisition of the relevant subsidiary.

Note 2 – Acquisition of Gamma
On 1 July 2013, Alpha acquired 40% of the equity capital of Gamma. The purchase consideration comprised the following:

– An issue of equity shares.
– A cash payment of $65·34 million due on 30 June 2015. On 1 July 2013, Alpha’s borrowing rate was 10% per annum. No entry has yet been made in Alpha’s financial statements regarding this future cash payment.

The other 60% of Gamma’s shares are held by a wide variety of investors, none of whom owns more than 0·5% individually. None of the other shareholders has any arrangements to consult any of the others or make collective decisions. Since 1 July 2013, Alpha has actively participated in establishing the operating and financial policies of Gamma.

When reviewing the net assets of Gamma as at 1 July 2013, the directors of Alpha ascertained the following:

– The properties of Gamma had been revalued at 31 March 2013 and there was no significant difference between their carrying values at 1 July 2013 and their fair values at 31 March 2013.

– The plant and equipment of Gamma had a carrying value at 1 July 2013 of $70 million and a fair value at that date of $78 million. The estimated future useful life of the property, plant and equipment at 1 July 2013 was four years, with zero residual value.

– On 1 July 2013, Gamma was in the process of completing the development of a new method of production which will significantly reduce wastage. As at 1 July 2013, Gamma had recognised an intangible asset of $10 million in its financial statements in respect of this development. The directors of Alpha believed that, as at 1 July 2013, the process had a fair value of $22 million and that the process will produce economic benefits evenly for ten years from 1 January 2014.

– On 1 July 2013, Gamma had a contingent liability which it did not recognise in its own financial statements. This contingent liability still existed, and was still unrecognised by Gamma, at 31 March 2014. As at 1 July 2013, the directors of Alpha believed that the contingent liability had a fair value of $16 million. On 31 March 2014, they reassessed its fair value at $12 million. The reassessment was due to a change in circumstances after 1 July 2013.

The directors of Alpha believe that the facts described in this note mean that Gamma has been a subsidiary of Alpha since 1 July 2013 and wish to consolidate it. Based on the assumption that Gamma is consolidated, no impairment of the goodwill on consolidation is required at 31 March 2014. The profit of Gamma for the year ended 31 March 2014 accrued evenly over the year. However, as noted above, all of the other comprehensive income of Gamma arose after 1 July 2013. Any consolidation adjustments which are necessary as a result of the information given in this note should be regarded as temporary differences for the purpose of computing deferred taxation. The rate of corporate income tax in the jurisdiction in which all three entities are located is 25%.

Note 3 – Presentation of depreciation and amortisation
All depreciation and amortisation charges should be presented as part of cost of sales

Note 4 – Trading between Alpha and Beta
1. Alpha supplies a component to Beta which is used by Beta in its production process. Alpha marks up its cost of production by one-third in arriving at the selling price. In the year ended 31 March 2014, the revenues of Alpha included $30 million in respect of the sale of these components. On 31 March 2014, the inventories of Beta included $6 million. On 31 March 2013, the inventories of Beta included $4·4 million in respect of identical unsold components purchased from Alpha at the same mark up on cost.

2. During the year ended 31 March 2013, Alpha manufactured a machine which was to be used by Beta from 1 April 2013. The costs of manufacture totalled $12 million. On 1 April 2013, Alpha transferred the machine to Beta for an invoiced price of $16 million, including relevant amounts in revenue and cost of sales. Beta included the machine in its property, plant and equipment and depreciated the machine over its estimated useful life of four years, with no residual value.

Any consolidation adjustments which are necessary as a result of the information given in this note should be regarded as temporary differences for the purpose of computing deferred taxation.

Note 5 – Defined benefit retirement benefits plan 
Certain senior executives of Alpha belong to a defined benefit retirement benefits plan. In the financial statements of Alpha, the contributions paid into this plan have been shown as an expense in the statement of profit or loss and other comprehensive income. Relevant information regarding this plan is as follows:

– The pension liability was $60m at 31 March 2013. This liability increased to $68m by 31 March 2014.
– The pension asset was $40m at 31 March 2013. This asset increased to $46m by 31 March 2014.
– The current service cost was $4·5m.
– Alpha’s borrowing rate at 31 March 2014 was 9% per annum. On that date market yields on government bonds were 8% per annum.

The salary costs of the senior executives who belong to this plan are presented in administrative expenses. You should ignore any adjustment to deferred tax as a result of the information included in this note.

Note 6 – Payment of dividends 
On 31 December 2013, Beta paid a dividend of $30 million and Gamma paid a dividend of $20 million. Alpha recognised its share of both dividends in its investment income.

Note 7 – Property revaluations  
It is the policy of the Alpha group to measure freehold properties using the fair value model and all freehold properties were revalued on 31 March 2014. Beta leases all of its properties and all of Beta’s property leases are operating leases. The gains shown in the financial statements of Alpha and Gamma do not take account of the deferred tax implications of the revaluations.

Note 8 – Hedge of future property purchase
On 1 February 2014, Alpha entered into a firm commitment to purchase a property on 31 May 2014 for €40 million. In order to eliminate the impact of currency fluctuations, on 1 February 2014 Alpha entered into a contract to purchase €40 million for $48 million on 31 May 2014. This contract had no cost and Alpha did not record it in the financial statements for the year ended 31 March 2014. On 31 March 2014, the contract had a fair value of $3·6 million (financial asset). Alpha uses hedge accounting whenever permitted by International Financial Reporting Standards. Where a choice of hedge accounting method exists, Alpha uses cash-flow hedge accounting.

You should ignore any adjustment to deferred tax as a result of the information included in this note.

Required:
(b) Prepare the consolidated statement of profit or loss and other comprehensive income of Alpha for the year ended 31 March 2014. For this part you should assume that Gamma is a subsidiary of Alpha from 1 July 2013. (35 marks)