DipIFR Syllabus D. Preparation of external financial reports - Statement of changes in equity - Past Papers ^{14 / 14}

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:
(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.

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:
(c) Prepare the summarised consolidated statement of changes in equity of Alpha for the year ended 31 March 2016, including a column for the non-controlling interest. 
(7 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:
(b) Prepare the summarised consolidated statement of changes in equity of Alpha for the year ended 30 September 2014, including a column for the non-controlling interest. (8 marks)

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