Question 1c

Alpha holds investments in a number of entities, including Beta and Gamma. The statements of profit or loss and other comprehensive income and summarised statements of changes in equity of the three entities for the year ended 31 March 2017 were as follows:

Statements of profit or loss and other comprehensive income

Alpha Beta Gamma
$’000 $’000 $’000
Revenue (Note 3)
468,000

260,000

240,000
Cost of sales (Notes 1-3) (312,000)
(135,000)
(120,000)
–––––––– –––––––– ––––––––
Gross profit 156,000 125,000 120,000
Distribution costs (26,000) (20,000) (18,000)
Administrative expenses (Note 4) (44,000) (28,000) (27,000)
Investment income (Note 5) 28,000 Nil Nil
Finance costs (20,000)
(22,000)
(21,000)
–––––––– –––––––– ––––––––
Profit before tax 94,000 55,000 54,000
Income tax expense (24,000)
(14,000)
(13,500)
–––––––– –––––––– ––––––––
Profit for the year 70,000 41,000 40,500
Other comprehensive income:
Items that will be reclassified to profit or loss
Gains/(losses) on effective cash-flow hedges (Note 6) Nil
Nil
Nil
–––––––– –––––––– ––––––––
Total comprehensive income 70,000
41,000
40,500
–––––––– –––––––– ––––––––
Summarised statements of changes in equity
Balance on 1 April 2016 250,000 193,000 166,500
Comprehensive income for the year 70,000 41,000 40,500
Dividends paid on 31 December 2016 (40,000)
(18,000)
(16,000)
–––––––– –––––––– ––––––––
Balance on 31 March 2017 280,000
216,000
191,000
–––––––– –––––––– ––––––––

Note 1 – Alpha’s investment in Beta
On 1 April 2001, Alpha acquired 80 million of the 100 million $1 equity shares of Beta and gained control of Beta. Alpha paid $150 million in cash for these shares.

On 1 April 2001, the net assets of Beta had a fair value of $147 million, all of which had been disposed of or settled by 31 March 2016.

Alpha used the fair value method for measuring the non-controlling interest when recognising the goodwill on acquisition of Beta. The fair value of an equity share in Beta on 1 April 2001, which was $1·50, was used for this purpose. No impairments of goodwill on acquisition of Beta have been necessary in the consolidated financial statements of Alpha up to and including 31 March 2016.

Beta has three cash generating units. On 31 March 2017, the annual impairment review indicated that the recoverable amounts of the net assets, including goodwill, of the three cash generating units of Beta at that date were as follows:

– Unit 1 – $87 million.
– Unit 2 – $84 million.
– Unit 3 – $80 million.

Net assets and goodwill are allocated equally to the three units and any impairments of goodwill should be charged to cost of sales.

Note 2 – Alpha’s investment in Gamma
On 1 August 2016, Alpha acquired 60 million of the 80 million $1 equity shares in Gamma and gained control of Gamma. The acquisition was financed as follows:

– Alpha issued two new shares to the former shareholders of Gamma for every three shares Alpha acquired in Gamma. On 1 August 2016, the fair value of an equity share in Alpha was $4·50.

– Alpha agreed to pay a total of $16·2 million in cash to the former shareholders of Gamma on 31 July 2017. Alpha’s incremental borrowing rate at 1 August 2016 was 8% per annum.

– Alpha agreed to issue additional shares in Alpha to the former shareholders of Gamma on 30 September 2019 if the cumulative profits of Gamma for the three-year period from 1 August 2016 to 31 July 2019 exceed a target amount. On 1 August 2016, the fair value of this contingent equity consideration was $26 million.

Alpha has not yet accounted for this acquisition in its individual financial statements. However, you can assume that no impairment of the goodwill on acquisition of Gamma is necessary in the consolidated financial statements of Alpha for the year ended 31 March 2017. Alpha has resolved to use the proportion of net assets method for measuring the non-controlling interest when recognising the goodwill on the acquisition of Gamma.

On 1 August 2016, the fair values of the net assets of Gamma were the same as their carrying amounts in the financial statements of Gamma with the exception of:

– Land – whose fair value exceeded the carrying amount by $30 million.
– Plant and equipment – whose fair value exceeded the carrying amount by $12 million. The estimated remaining useful life of the plant and equipment of Gamma at 1 August 2016 was five years.

All depreciation of property, plant and equipment is charged to cost of sales. You can assume that the profit of Gamma for the year ended 31 March 2017 accrued evenly over the year.

Note 3 – Intra-group trading
Alpha supplies a component used by both Beta and Gamma. Alpha earns a profit margin of 20% on these supplies.
Details of the sales of the component, and the holdings of inventory of the component by group entities, are as follows:

Beta Gamma
$’000 $’000
Sales of the component (for Gamma all sales since 1 August 2016) 20,000 10,000
––––––– –––––––
Inventory of component at 31 March 2016 (at cost to Beta/Gamma) 4,000 Nil
––––––– –––––––
Inventory of component at 31 March 2017 (at cost to Beta/Gamma) 6,000 4,800
––––––– –––––––

Note 4 – Decommissioning provision
On 1 April 2016, Alpha completed the construction of an energy generating facility and brought the facility into use immediately. The cost of construction of the facility was included in property, plant and equipment and was also appropriately depreciated over the useful life of the facility, which was estimated at 16 years at 1 April 2016. At the end of the useful life of the facility, Alpha has an obligation to decommission the facility and restore its location to its former condition. The estimated cost of this decommissioning and restoration is $8 million, payable on 31 March 2032. The directors of Alpha made a provision of $8 million in respect of this liability, and charged $8 million to administrative expenses in the year ended 31 March 2017. An appropriate discount rate to use in any discounting calculations is 8% per annum. At 1 April 2016, the present value of $1 payable in 16 years’ time at 8% can be taken as 30 cents.

Note 5 – Investment income
The investment income which is shown in Alpha’s statement of profit or loss represents dividends received from Beta and Gamma and also dividends received from a portfolio of other equity investments. This portfolio is classified by Alpha as fair value through profit or loss. The gain on remeasurement of the portfolio to fair value at 31 March 2017 was $6·5 million. This gain has not yet been recognised in the financial statements of Alpha.

Note 6 – Cash flow hedge
On 1 January 2017, Alpha agreed to purchase goods from a foreign supplier. This purchase is due to be made and paid for on 30 June 2017. The directors of Alpha decided to hedge the cash-flow risk attaching to this future purchase by entering into a derivative contract and to formally designate the derivative as a hedging instrument. The hedge met all of the effectiveness requirements for the use of hedge accounting. On 31 March 2017, the derivative had a positive fair value resulting in a gain to Alpha of $5 million. Between 1 January 2017 and 31 March 2017 the expected cash flows in respect of the purchase of goods on 30 June 2017 had increased by $4·2 million. Alpha has not made any accounting entries in respect of this arrangement.

Required:
(c) Prepare the summarised consolidated statement of changes in equity of Alpha for the year ended 31 March 2017, including a column for the non-controlling interest. (7 marks)

Note: You should show all workings to the nearest $’000.