DipIFR Syllabus D. Preparation of external financial reports - Group Income Statement - Past Papers ^{13 / 14}

Note 1 – Alpha’s investment in Beta
On 1 April 2011, Alpha acquired 75 million of the 100 million equity shares of Beta and gained control of Beta. Alpha acquired the equity shares in Beta by issuing one new share in Alpha for every two acquired in Beta. On 1 April 2011, the fair value of an equity share in Alpha was $4·40. On 1 April 2011, the net assets of Beta had a fair value of $200 million, all of which had been disposed of, or settled by, 31 March 2017.

Alpha used the proportion of net assets method for measuring the non-controlling interest when recognising the goodwill on acquisition of Beta. No impairments of goodwill on acquisition of Beta have been necessary in the consolidated financial statements of Alpha up to and including 31 March 2017.

Beta is a single cash generating unit. On 31 March 2018, the annual impairment review indicated that the recoverable amounts of the net assets, including goodwill, of Beta at that date were $350 million. Any impairments of goodwill should be charged to cost of sales.

Note 2 – Alpha’s investment in Gamma
On 1 April 2012, Alpha acquired 40 million of the 50 million equity shares in Gamma and gained control of Gamma. Alpha paid $145 million in cash for the equity shares.

On 1 April 2012, the carrying amounts of the net assets of Gamma in its individual financial statements were $150 million and their fair values were $170 million. The differences were caused by:

– Property – whose fair value exceeded the carrying amount by $12 million. $8·4 million of this difference referred to the depreciable component of this property. The estimated useful life of the depreciable component of the property at 1 April 2012 was eight years.

– Plant and equipment – whose fair value exceeded the carrying amount by $8 million. The estimated remaining useful life of the plant and equipment of Gamma at 1 April 2012 was four years.

All depreciation of property, plant and equipment is charged to cost of sales.

Alpha used the fair value method for measuring the non-controlling interest when recognising the goodwill on acquisition of Gamma. The fair value of an equity share in Gamma on 1 April 2012 was $3·50. This can be used to measure the fair value of the non-controlling interest in Gamma on 1 April 2012.

No impairments of goodwill on acquisition of Gamma have been necessary in the consolidated financial statements of Alpha up to and including 31 March 2017.

Note 3 – Disposal of shares in Gamma
On 30 November 2017, Alpha disposed of its entire equity shareholding in Gamma for a cash consideration of $196 million. Income tax payable on this disposal is expected to be $5 million. On 30 November 2017, Alpha credited the disposal proceeds to a suspense account and has made no other accounting entries. You can assume that the profits of Gamma for the year ended 31 March 2018 accrued evenly.

Note 4 – Intra-group trading
Alpha supplies a component which has been used by both Beta and Gamma. Alpha applies a mark-up of one-third to the cost of these supplies when computing the sales price. Details of sales of the component to Beta and Gamma in the current accounting period, and the holdings of inventory of the component by two entities, are as follows:

Note 5 – Leased asset
On 1 April 2017, Alpha began to lease a property. The lease term was for five years. The lease does not transfer ownership of the property to Alpha at the end of the lease term. Alpha does not have an option to purchase the property at the end of the lease term. The estimated useful life of the property at 1 April 2017 was 20 years. Rentals payable by Alpha for the use of the property were $1 million per annum, payable annually in arrears. Alpha incurred direct costs of $100,000 in arranging to lease the property. In the year ended 31 March 2018, Alpha charged both the annual rental of $1 million and the direct costs of $100,000 to administrative expenses.

The rate of interest implicit in this lease is 7% per annum. The present value of $1 payable for five years annually in arrears at a discount rate of 7% is $4·10.

All depreciation should be charged to cost of sales.

Note 6 – Investment income
The investment income, which is shown in Alpha’s statement of profit or loss, represents dividends received from its subsidiary entities and also income arising from a portfolio of loan investments. This portfolio is classified by Alpha as fair value through other comprehensive income. The gain on re-measurement of the portfolio to fair value at 31 March 2018 was $5·6 million. This gain has not yet been recognised in the financial statements of Alpha.

Note 7 – Retirement benefit plan
Alpha has established a defined benefit plan for its workforce. Relevant details are as follows:

– The net defined benefit obligation at 31 March 2017 was $2·5 million.
– The net defined benefit obligation at 31 March 2018 was $4 million.
– The current service cost for the year ended 31 March 2018 was $5 million.
– The contributions paid by Alpha into the plan during the year ended 31 March 2018 were $4·8 million.
– The benefits paid out by the plan to retired members during the year ended 31 March 2018 were $2·5 million.
– On 1 April 2017, the market yield on high quality corporate bonds was 5% per annum.

In the year ended 31 March 2018, Alpha charged the contributions paid to administrative expenses but made no other accounting entries. The post-employment plans for the employees of Beta and Gamma are defined contribution plans.

The relevant accounting entries in the financial statements of both Beta and Gamma are both correct.

Required:
Prepare the consolidated statement of profit or loss and other comprehensive income of Alpha for the year ended at 31 March 2018. You do not need to consider the deferred tax effects of any adjustments you make.

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

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:
(b) Prepare the consolidated statement of profit or loss and other comprehensive income of Alpha for the year ended at 31 March 2017. You do not need to consider the tax effects of any adjustments you make. (26 marks)

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

Alpha’s investments include subsidiaries, 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 2016 were as follows:

Statements of profit or loss and other comprehensive income

Note 1 – Alpha’s investment in Beta
On 1 April 2004, Alpha acquired 80% of the equity shares of Beta and gained control of Beta. Alpha paid $64 million in cash for these shares.

On 1 April 2004, the net assets of Beta had a fair value of $70 million. None of the assets and liabilities of Beta which existed on 1 April 2004 were still assets or liabilities of Beta on 31 March 2015.

Alpha measured the non-controlling interest in Beta using the proportion of net assets method. The resulting goodwill on acquisition of Beta was correctly recognised in the consolidated financial statements of Alpha. No impairment of goodwill on acquisition of Beta has been necessary up to and including 31 March 2015.

On 31 March 2016, the annual impairment review of the goodwill on acquisition of Beta indicated that the recoverable amount of the total net assets of Beta (including the goodwill) at that date was $180 million. Beta is regarded as a single cash generating unit for impairment purposes. Any impairment of goodwill should be charged to cost of sales.

Note 2 – Alpha’s investment in Gamma
On 1 October 2015, Alpha acquired 60% of the equity shares in Gamma and gained control of Gamma. Gamma had 50 million equity shares in issue on 1 October 2015 and has not issued any new shares since that date. 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 October 2015, the fair value of an equity share in Alpha was $2·80 and the fair value of an equity share in Gamma was $3·70.

– Alpha agreed to pay a total of $24·2 million to the former shareholders of Gamma on 30 September 2017.
Alpha’s incremental borrowing rate at 1 October 2015 was 10% per annum.

– Alpha agreed to pay a further amount to the former shareholders of Gamma on 31 December 2019 if the cumulative profits of Gamma for the four-year period from 1 October 2015 to 30 September 2019 exceed $150 million. On 1 October 2015, the fair value of this obligation was measured at $40 million. On 31 March 2016, this fair value was remeasured at $42 million.

Alpha has resolved to use the fair value method for measuring the non-controlling interest when recognising the goodwill on acquisition of Gamma. The fair value of an equity share in Gamma on 1 October 2015 can be used for this purpose. No impairment of the goodwill on acquisition of Gamma is necessary in the consolidated financial statements of Alpha for the year ended 31 March 2016.

On 1 October 2015, 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:

– Property – whose fair value exceeded the carrying amount by $25 million ($10 million of this excess relates to land). The estimated remaining useful life of the buildings element of the property at 1 October 2015 was 20 years.

– Plant and equipment – whose fair value exceeded the carrying amount by $8 million. The estimated remaining useful life of the plant and equipment of Gamma at 1 October 2015 was four 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 2016 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 10% on these supplies.

Details of the sales of the component, and the holdings of inventory of the component by group entities, are as follows:

Note 4 – Revenue of Alpha
On 1 October 2015, Alpha sold a large machine to a customer for a total price of $51·2 million and credited $51·2 million to revenue. As part of the sales agreement, Alpha agreed to provide annual servicing of the machine for four years from 1 October 2015 for no additional payment. The normal selling price of this without any annual servicing would have been $60 million and Alpha would normally charge the customer an annual fee of $1 million to service the machine. You should ignore the time value of money in respect of this transaction.

Note 5 – Alpha’s other investment
Apart from its investments in Beta and Gamma, Alpha has one other investment – in entity X. Alpha purchased this equity investment on 1 July 2015 for $40 million and designated the investment as fair value through other comprehensive income. In order to protect against a prolonged decline in the fair value of the investment in entity X, Alpha purchased a put option to sell this investment. The cost of the option was $6 million and the option was regarded as an effective hedge against a prolonged decline in the fair value of the investment in entity X. On 31 March 2016, the fair value of the equity investment in entity X was $37 million and the fair value of the put option was $8·7 million. Apart from recognising the investment in entity X and the put option at cost, Alpha has made no other entries in its draft financial statements. Alpha wishes to use hedge accounting whenever permitted by International Financial Reporting Standards.

Note 6 – Investment income
All of the investment income of Alpha has been correctly recognised in the individual financial statements of Alpha.

Note 7 – Bond issue
On 1 April 2015, Alpha issued a convertible zero-coupon bond to a single institutional investor. The bond was issued for total proceeds of $250 million and will be redeemed or converted into equity shares on 31 March 2020. If the investor chooses to redeem the bond on 31 March 2020, the investor will receive $362·32million. The incremental borrowing rate of Alpha on 1 April 2015 is 10% per annum. The present value of $1 received in five years at a discount rate of 10% per annum is 62·1 cents.

Required:
(b) Prepare the consolidated statement of profit or loss and other comprehensive income of Alpha for the year ended at 31 March 2016. You do not need to consider the deferred tax effects of any adjustments you make.
(25 marks)

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

Note 1 – Alpha’s investment in Beta
On 1 October 2001, Alpha acquired 75% of the equity shares of Beta. This gave Alpha control over Beta. On 1 October 2001, the net assets of Beta had a fair value of $80 million. None of the assets and liabilities of Beta which existed on 1 October 2001 were still assets or liabilities of Beta on 30 September 2013. On 1 October 2001, Alpha measured the non-controlling interest in Beta at its fair value of $22 million. Goodwill on consolidation of $18 million arose on the acquisition of Beta. No impairment of goodwill on the acquisition of Beta has been necessary up to and including 30 September 2013.

Beta has four operating segments which are also cash generating units (CGUs) for the purposes of impairment reviews. On 1 October 2001, the goodwill on acquisition of Beta was allocated between these units on the following basis:

Unit 1 – $8 million.
Unit 2 – $4 million.
Unit 3 – $3 million.
Unit 4 – $3 million.

On 30 September 2014, the carrying amounts of the net assets (excluding goodwill) and recoverable amounts of the four CGUs of Beta were as follows:

Any impairment of goodwill should be charged to cost of sales.

Note 2 – Alpha’s investment in Gamma

On 1 February 2014, Alpha acquired 80% of the equity shares in Gamma and gained control of Gamma.

On 1 February 2014, the fair value of Gamma’s property, plant and equipment exceeded the carrying amounts in the individual financial statements of Gamma as follows:

– Property excess $20 million (land element of excess $11 million). The estimated remaining useful life of the buildings element of the property at 1 February 2014 was 25 years.

– Plant and equipment excess $7·2 million. The estimated remaining useful life of the plant and equipment of Gamma at 1 February 2014 was three years.

All depreciation of property, plant and equipment is charged to cost of sales.

Alpha measured the non-controlling interest in Gamma on 1 February 2014 at its fair value of $28 million. There was no impairment of the goodwill arising on the acquisition of Gamma in the year ended 30 September 2014. The profit of Gamma for the year ended 30 September 2014 accrued evenly over the year, but see note 8 regarding the other comprehensive income of Gamma.

Note 3 – Intra-group trading
Alpha supplies a component used by both Beta and Gamma. Alpha applies a mark-up of 25% to cost when computing the intra-group selling price. All of the sales of this component by Alpha to Gamma occurred after the acquisition of Gamma on 1 February 2014. Details of the sales of the component, and the holdings of inventory of the component by group entities, are as follows:

Note 4 – Post-employment benefits
The group makes contributions into both defined benefit and defined contribution retirement benefit plans. All the employees of Beta and Gamma are members of defined contribution plans but many of the employees of Alpha are members of a defined benefit plan. The following are relevant details regarding the defined benefit plan:

– Obligation at 30 September 2014: $40 million (30 September 2013: $32 million).
– Fair value of plan assets at 30 September 2014: $34 million (30 September 2013: $27 million).
– Current service cost for the year ended 30 September 2014: $6 million.
– Contributions paid into the plan by Alpha in the year ended 30 September 2014: $5·4 million.
– Benefits paid to retired members: $2 million.
– Relevant market yield: 5% per annum throughout the period.

Alpha has charged the contributions paid into the defined benefit plan in the year ended 30 September 2014 ($5·4 million) as an administrative expense. Alpha has made no other entries in respect of the plan in the statement of profit or loss and other comprehensive income. However, Alpha correctly accounted for the defined benefit plan in the financial statements for the year ended 30 September 2013.

Note 5 – Redundancy and reorganisation costs 
Following the acquisition of Gamma on 1 February 2014, the directors of Alpha formulated a plan to reorganise the group. The plan involved some redundancies and some employees changing their roles within the group. As a result of the reorganisation, certain non-current assets of Alpha will no longer be required. The final version of the plan was agreed on 31 July 2014 and made public on 15 August 2014. The plan was implemented from 1 November 2014. The total cost of the plan will be borne by Alpha. The directors of Alpha made a provision, with a corresponding charge to profit or loss, in respect of the plan as follows:

Note 6 – Investment income 
All of the investment income of Alpha, including dividends received from subsidiaries, has been correctly recognised in the individual financial statements of Alpha.

Note 7 – Bond issue
On 1 October 2013, Alpha issued 300 million $1 bonds at par. The interest payable on the bonds is 5% per annum, payable on 30 September in arrears. The bonds are repayable at par on 30 September 2023. Alternatively, the investors have the option to convert the bonds into equity shares in Alpha on 30 September 2023.

On 1 October 2013, Alpha recognised a financial liability of $300 million in its statement of financial position. On 30 September 2014, Alpha recognised the interest paid on that date as a finance cost in its statement of profit or loss.

On 1 October 2013, investors would have expected an annual return of 8% on non-convertible bonds. At a discount rate of 8% per annum, the present value of $1 receivable at the end of year 10 is 46·3 cents and the present value of $1 receivable at the end of each of years 1 to 10 is $6·71.

Note 8 – Other comprehensive income 
Both Alpha and Gamma have financial assets which are appropriately classified as fair value through other comprehensive income. On 1 February 2014, the fair value of the financial assets of Gamma had not changed from 30 September 2013.

Note 9 – Forward currency contract
On 15 August 2014, Alpha entered into a commitment to supply a large consignment of components to a foreign customer whose currency is the Kroner. The agreed value of the order was 25 million Kroner and this amount is expected to be paid by the customer on 30 November 2014. On 15 August 2014, Alpha entered into a contract to sell 25 million Kroner for $13 million on 30 November 2014. Currency fluctuations in August and September 2014 were such that on 30 September 2014 the fair value of this currency contract was $1·1 million (a financial liability). The draft financial statements of Alpha do not include any amounts in respect of this currency contract since it has a zero cost. Alpha wishes to use cash-flow hedge accounting whenever permitted by International Financial Reporting Standards. The directors of Alpha have estimated that the currency contract is a perfectly effective hedge of the commitment to supply the components.

Required:
(a) Prepare the consolidated statement of profit or loss and other comprehensive income of Alpha for the year ended at 30 September 2014. You do not need to consider the deferred tax effects of any adjustments you make. (32 marks)

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

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:

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)

Note 1 – Alpha’s investment in Beta
On 1 July 2012, Alpha acquired 120 million shares in Beta by means of a share exchange. The terms of the business combination were as follows:

– Alpha issued five shares for every six shares acquired in Beta. On 1 July 2012, the market value of an Alpha share was $2·40. This share issue has been correctly reflected in the financial statements of Alpha.

– Alpha will make a further cash payment of $50 million to the former shareholders of Beta on 30 June 2015. Alpha has made no entry in its financial statements in respect of this additional payment. At 1 July 2012, Alpha’s credit rating was such that it could have borrowed funds at an annual interest rate of 10%.

It is the group policy to value the non-controlling interest in subsidiaries at the date of acquisition at fair value. The market value of an equity share in Beta at 1 July 2012 was $1·70 and can be used for this purpose.

On 1 July 2012, the individual financial statements of Beta showed the following reserves balances:
– Retained earnings $98 million.
– Other components of equity $5 million (see Note 3 below).

The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at 1 July 2012. The following matters emerged:

– Plant and equipment having a carrying value of $120 million had an estimated market value of $130 million. The estimated future economic life of the plant and equipment at 1 July 2012 was four years and this estimate remains valid. Beta has disposed of 20% of this plant and equipment since 1 July 2012.

– Intangible assets with an estimated market value of $12 million had not been recognised in the individual financial statements of Beta. At 1 July 2012, the estimated future economic lives of these intangible assets was five years.

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%.

No impairment of the goodwill on acquisition of Beta has occurred since 1 July 2012.

Note 2 – Alpha’s investment in Gamma
On 1 October 2012, Alpha acquired 48 million shares in Gamma for a total cash payment of $80 million. This share purchase followed an agreement with two other investors (who each purchased 36 million shares in Gamma on 1 October 2012) to exercise joint control over Gamma. All key operating and financial policies, including the distribution of profits, require the unanimous consent of the three investors. In its own financial statements Alpha treated the investment in Gamma as a financial asset and made an election to measure it at fair value through other comprehensive income. On 30 September 2013, the fair value of Alpha’s investment in Gamma was $82 million. Alpha did not recognise any deferred tax in respect of this restatement to fair value. Therefore on 30 September 2013 Alpha credited $2 million to other components of equity.

On 1 October 2012, the individual financial statements of Gamma showed the following reserves balances:

– Retained earnings $66 million. 
– Other components of equity $Nil

On 1 October 2012, there were no material differences between the carrying values of the net assets of Gamma in the individual financial statements and the fair values of those net assets.

You do not need to consider the deferred tax implications of Alpha’s investment in Gamma when preparing the consolidated statement of financial position of the Alpha group.

Note 3 – Property, plant and equipment of Beta
Beta measures its land under the revaluation model. The other components of equity of Beta consist entirely of revaluation surpluses arising on the revaluation of its land. On 1 July 2012, the carrying value of Beta’s land in Beta’s own financial statements was the same as its fair value. On 30 September 2013, Beta revalued its land by $7·5 million. As a result of this revaluation, Beta recognised an additional deferred tax liability of $1·5 million and credited $6 million to other components of equity. The policy of Alpha and Gamma is to use the cost model to measure all property, plant and equipment. This is the policy to be adopted in the consolidated financial statements.

Note 4 – Intangible assets of Alpha and Beta
The intangible assets of Alpha comprise expenditure incurred during the year on a project to reduce wastage incurred during the group’s production processes. The project began on 1 November 2012 and is expected to be complete by 31 May 2014. Expenditure to date has been $5 million each month. On 1 June 2013, the directors were able to assess the technical feasibility and commercial viability of the project with reasonable certainty. At this date they also received assurance that the economic benefits the project was likely to bring to the group were likely to exceed the total project costs.

The intangible assets in the individual financial statements of Beta represent goodwill which arose on acquisition of an unincorporated business in 2008. No impairment of this goodwill has been necessary since the date of acquisition of Beta by Alpha.

Note 5 – Inter-company sale of inventories 
The inventories of Beta and Gamma at 30 September 2013 included components produced by Alpha. The selling price of the components included in the inventories of Beta was $14 million. The selling price of the components included in the inventories of Gamma was $12 million. Alpha applied a mark up of one-third of its production cost in arriving at the sales price of these components. You can ignore deferred tax when making any adjustments due to the information in this note.

Note 6 – Trade receivables and payables
The trade receivables of Alpha included $8 million receivable from Beta and $7 million receivable from Gamma in respect of the purchase of components (see Note 5). The trade payables of Beta and Gamma included equivalent amounts payable to Alpha.

Note 7 – Forward currency contract
During July and August 2013 Alpha conducted a large marketing effort in Country X. The currency in Country X is the Euro. Alpha made no sales to customers in Country X in the year ended 30 September 2013 but is very confident of making substantial sales to such customers in the year ended 30 September 2014. On 5 September 2013, Alpha entered into a contract to sell €20 million for $28 million on 31 October 2013. Currency fluctuations in September 2013 were such that on 30 September 2013 the fair value of this currency contract was $1·1 million (a financial asset). The draft financial statements of Alpha do not include any amounts in respect of this currency contract since it has a zero cost. Alpha wishes to use hedge accounting whenever permitted by International Financial Reporting Standards. Alpha expects sales to customers in Country X to be at least €22 million in October 2013.

Note 8 – Long-term borrowings 
The long-term borrowings of Alpha include a loan at a carrying amount of $60 million which was taken out on 1 October 2012. The loan does not carry any interest but $75·6 million is repayable on 30 September 2015. This represents an effective annual rate of return for the investors of 8%. As an alternative to repayment, the investors can exchange their loan asset for equity shares in Alpha on 30 September 2015. The annual rate of return required by such investors on a non-convertible loan would have been 10%. Alpha has not charged any finance cost in respect of this loan for the year ended 30 September 2013.

The present value of $1 payable/receivable in three years’ time is as follows:
– 79·4 cents when the discount rate is 8% per annum.
– 75·1 cents when the discount rate is 10% per annum.

Required:
Prepare the consolidated statement of financial position of Alpha at 30 September 2013.

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

Note 1 – Alpha’s investment in Beta
On 1 April 2012, Alpha acquired 90 million shares in Beta by means of a share exchange. The terms of the business combination were as follows:

– Alpha issued eight shares for every nine shares acquired in Beta. On 1 April 2012, the market value of an Alpha share was $2·80.

– Alpha will make a further cash payment to the former shareholders of Beta on 30 June 2015. This payment will be based on the adjusted profits of Beta for the three-year period to 31 March 2015. On 1 April 2012, the fair value of this additional payment was estimated at $25 million. This estimate had increased to $28 million by 31 March 2013 due to changes in circumstances since the date of acquisition.

– Neither component of the investment in Beta has been recorded in the draft financial statements of Alpha presented above.

It is the group policy to value the non-controlling interest in subsidiaries at the date of acquisition at fair value. The market value of an equity share in Beta at 1 April 2012 can be used for this purpose. On 1 April 2012, the market value of a Beta share was $2·60.

On 1 April 2012, the individual financial statements of Beta showed the following reserves balances:

– Retained earnings $86 million. 
– Other components of equity $2·4 million.

The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at 1 April 2012. The following matters emerged:

– Property having a carrying value of $140 million (depreciable component $80 million) had an estimated market value of $160 million (depreciable component $92 million). The estimated future economic life of the depreciable component at 1 April 2012 was 16 years and this estimate remains valid.

– Plant and equipment having a carrying value of $111 million had an estimated market value of $120 million. The estimated future economic life of the plant and equipment at 1 April 2012 was three years and this estimate remains valid. Beta has not disposed of any of this plant and equipment since 1 April 2012.

– Intangible assets with an estimated market value of $8 million had not been recognised in the individual financial statements of Beta. The estimated future economic lives of these intangible assets at 1 April 2012 was four years.

– 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%.

No impairment of the goodwill on acquisition of Beta has occurred since 1 April 2012.

Note 2 – Alpha’s investment in Gamma
On 1 April 2012, Alpha acquired 40 million shares in Gamma for a cash payment of $1·85 per share and debited $74 million to investments in its own statement of financial position. This enabled Alpha to exercise significant influence over Gamma but not to control Gamma. In its own financial statements, Alpha treated the investment in Gamma as a financial asset and made an election to measure it at fair value through other comprehensive income.

On 1 April 2012, the individual financial statements of Gamma showed the following reserves balances:

– Retained earnings $66 million.
– Other components of equity $1·2 million.

On 1 April 2012, there were no material differences between the carrying values of the net assets of Gamma in the individual financial statements and the fair values of those net assets.

On 31 March 2013, the fair value of Alpha’s investment in Gamma was estimated at $78·5 million and this is the balance recorded in Alpha’s individual financial statements. On 31 March 2013, Alpha credited $4·5 million to other components of equity. No deferred tax was recognised when making this entry.

In the consolidated financial statements you can ignore deferred tax when measuring the investment in Gamma.

Note 3 – Investments by Beta and Gamma 
These investments are financial assets that are measured at fair value through other comprehensive income and have been correctly treated by Beta and Gamma. The other components of equity of Beta and Gamma relate entirely to these investments.

Note 4 – Inter-company sale of inventories 
The inventories of Beta and Gamma at 31 March 2013 included components produced by Alpha. The selling price of the components included in the inventories of Beta was $14 million. The selling price of the components included in the inventories of Gamma was $12 million. Alpha applied a mark-up of one-third of its production cost in arriving at the sales price of these components. You can ignore deferred tax when making any adjustments due to the information in this note.

Note 5 – Trade receivables and payables  
The trade receivables of Alpha included $9 million receivable from Beta and $7·5 million receivable from Gamma in respect of the purchase of components (see Note 4). The trade payables of Beta and Gamma included equivalent amounts payable to Alpha.

Note 6 – Share based payment  
On 1 April 2011, Alpha granted share options to senior executives that are due to vest on 31 March 2014. The maximum number of options that can vest is 10 million. However, there are vesting conditions that are service conditions. Each option allows the holder to purchase a share in Alpha for $2·50. Further details are as follows:

On 31 March 2012, the directors of Alpha correctly credited other components of equity and debited profit or loss with $1,104,000 in respect of these share options. No entries have been made in the financial statements since then in respect of the options.

Ignore any deferred tax implications of the granting of these share options.

Note 7 – Provision 
On 1 October 2011, Alpha entered into a 10-year lease of office premises at an annual rental of $20 million. This lease was correctly classified as an operating lease and the rentals appropriately charged to profit or loss.

On 1 October 2011, Alpha began carrying out alterations to the premises. These alterations were completed on 31 March 2012 at a total cost of $18 million. Alpha included $18 million in its property, plant and equipment at 31 March 2012 and charged depreciation in the current year based on a 9½ year useful economic life.

The terms of the lease require Alpha to vacate the premises on 30 September 2021 and leave them in the same condition as they were on 1 October 2011. The directors estimate that this will require restoration expenditure of $14,250,000 on 30 September 2021. Accordingly, the directors recognised a provision of $1,500,000 ($14,250,000/9·5) at 31 March 2013. The directors debited $1,500,000 to profit or loss when recognising this provision.

A relevant discount rate to use in any discounting calculations is 8% per annum. The present value of $1 payable in 9½ years at this discount rate is 48 cents.

Note 8 – Long-term borrowings  
The long-term borrowings of Alpha include $20 million that was received from a consortium of banks on 1 April 2012. The loan does not carry any interest but $30·6 million is repayable on 31 March 2017. Alpha incurred incremental costs of $1 million in arranging the loan which were charged to profit or loss in the year ended 31 March 2013. The effective annual rate of interest applicable to this loan is 10%.

Required: 
Prepare the consolidated statement of financial position of Alpha at 31 March 2013. Note: You should show all workings to the nearest $’000.