F7 Consolidated Financial Statement

Which of the following definitions is not included within the definition of control per

IFRS 10 Consolidated Financial Statements?

• A Having power over the investee

• B Having exposure, or rights, to variable returns from its investment with the investee

• C Having the majority of shares in the investee

• D Having the ability to use its power over the investee to affect the amount of the

  investor’s returns

Answer explanation

While having the majority of shares may be a situation which leads to control, it does not

feature in the definition of control per IFRS 10 Consolidated Financial Statements.

Pamela acquired 80% of the share capital of Samantha on 1 January 20X1. Part of the

purchase consideration was $200,000 cash to be paid on 1 January 20X4. The applicable

cost of capital is 10%.

What will the deferred consideration liability be at 31 December 20X2?

• A $150,262

• B $165,288

• C $200,000

• D $181,818

Answer explanation

At 31 December 20X2 the deferred consideration needs to be discounted to present value

by one year.

$200,000/1.1 = $181,818

If you chose C, you have not discounted the consideration. If you chose A, you have not

unwound the discount. If you chose B, you have only done the first year calculation.

Philip acquired 85% of the share capital of Stanley on 1 October 20X1. The profit for the

year ended 31 December 20X1 for Stanley was $36,000. Profits are deemed to accrue

evenly over the year. At 31 December 20X1 Stanley’s statement of financial position

showed:

Equity share capital $200,000

Retained earnings $180,000

What were the net assets of Stanley on acquisition?

Answer explanation

calculated.

The retained earnings at the end of the year are given as $180,000, and there has been a

profit of $36,000 for the year.

As Philip has owned Stanley for 3 months, then 3 months of this profit is regarded as postacquisition.

Therefore $9,000 has been made since acquisition.

Once this has been worked out, the retained earnings at acquisition can be calculated by

deducting the post‐acquisition retained earnings of $9,000 from the closing retained

earnings of $180,000 to give $171,000.

Net assets at acquisition = $200,000 share capital + $171,000 retained earnings = $371,000.

On 30 June 20X4 GHI acquired 800,000 of JKL’s 1 million shares.

GHI issued 3 shares for every 4 shares acquired in JKL. On 30 June 20X4 the market price of

a GHI share was $3.80 and the market price of a JKL share was $3.

GHI agreed to pay $550,000 in cash to the existing shareholders on 30 June 20X5. GHI’s

borrowing rate was 10% per annum.

GHI paid professional fees of $100,000 for advice on the acquisition.

What is the cost of investment that will be used in the goodwill calculation in the

consolidated financial statements of GHI?

Answer explanation

The cost of investment is worked out as follows:

Shares: 800,000 × ¾ × $3.80 = $2,280,000

Deferred cash = $550,000 × 1/1.1 = $500,000

The professional fees cannot be capitalised as part of the cost of investment. Therefore the

total cost of investment is $2,280,000 + $500,000 = $2,780,000

MNO has a 75% owned subsidiary PQR. During the year MNO sold inventory to PQR for an

invoiced price of $800,000. PQR have since sold 75% of that inventory on to third parties.

The sale was at a mark‐up of 25% on cost to MNO. PQR is the only subsidiary of MNO.

What is the adjustment to inventory that would be included in the consolidated

statement of financial position of MNO at the year‐end resulting from this sale?

• A $120,000

• B $40,000

• C $160,000

• D $50,000

Answer explanation

The profit on the $800,000 sale is $160,000 ($800,000 × 25/125).

As 75% of the goods have been sold on to third parties, 25% remain in inventory at the year

end. Unrealised profits only arise on goods remaining in inventory at the year end, so the

unrealised profit is $40,000 ($160,000 × 25%).

West has a 75% subsidiary Life, and is preparing its consolidated statement of financial

position as at 31 December 20X6. The carrying amount of property, plant and equipment in

the two companies at that date is as follows:

West $300,000

Life $60,000

On 1 January 20X6 Life had transferred some property to West for $40,000. At the date of

transfer the property, which had cost $42,000, had a carrying amount of $30,000 and a

remaining useful life of five years.

What is the carrying amount of property, plant and equipment in the consolidated

statement of financial position of West as at 31 December 20X6?

Answer explanation

The unrealised profit on the non‐current asset transfer needs to be removed.

The carrying amount at the year‐end after the transfer is $32,000 ($40,000 less 1 year’s

depreciation).

The carrying amount of the asset if it had not been transferred would have been $24,000

($30,000 less 1 year’s depreciation).

Therefore the unrealised profit on the non‐current asset is $8,000 ($32,000 – $24,000)

The total property, plant and equipment is $300,000 + $60,000 – $8,000 = $352,000.

Which TWO of the following situations are unlikely to represent control over an investee?

• A Owning 55% and being able to elect 4 of the 7 directors

• B Owning 51%, but the constitution requires that decisions need the unanimous

  consent of shareholders

• C Having currently exercisable options which would take the shareholding in the

  investee to 55%

• D Owning 40% of the shares but having majority of voting rights within the investee

• E Owning 35% of the ordinary shares and 80% of the preference shares of the investee

Answer explanation

The fact that unanimous consent is required would suggest that there is no control over the

investee. Preference shares carry no voting rights and therefore are excluded when

considering the control held over an investee.

Peter acquires 80% of the share capital of Paul on 1 August 20X6 and is preparing its group

financial statements for the year ended 31 December 20X6.

How will Paul’s results be included in the group statement of profit or loss?

• A 80% of Paul’s revenue and expenses for the year ended 31 December 20X6

• B 100% of Paul’s revenue and expenses for the year ended 31 December 20X6

• C 80% of Paul’s revenue and expenses for the period 1 August 20X6 to 31 December

  20X6

• D 100% of Paul’s revenue and expenses for the period ended 1 August 20X6 to

  31 December 20X6

Answer explanation

All of Paul’s revenue and expenses will be time‐apportioned from the date of acquisition to

the date of consolidation to reflect the period for which these were controlled by Peter.

Which of the following would result in an unrealised profit within a group scenario?

• A A parent sells a building originally costing $800,000 to its subsidiary for $900,000. The

  subsidiary still holds this asset at the date of consolidation.

• B A parent sells a building originally costing $800,000 to its subsidiary for $900,000. The

  subsidiary has sold this asset before the date of consolidation.

• C A parent sells goods which originally cost $14,000 to its subsidiary for $18,000. The

  subsidiary has sold all of these goods at the date of consolidation.

• D A parent sells goods which originally cost $14,000 to an associate for $18,000. The

  associate has sold all of these goods at the date of consolidation.

Answer explanation

The asset has not been sold outside of the group and therefore there is an unrealised profit

to adjust for on consolidation.

Which of the following is not a condition which must be met for the parent to be exempt

from producing consolidated financial statements?

• A The activities of the subsidiary are significantly different to the rest of the group and

  to consolidate them would prejudice the overall group position

• B The ultimate parent produces consolidated financial statements that comply with

  IFRS Standards and are publicly available

• C The parent’s debt or equity instruments are not traded in a public market

• D The parent itself is a wholly owned subsidiary or a partially owned subsidiary whose

  owners do not object to the parent not producing consolidated financial statements

Answer explanation

The activities of the subsidiary are irrelevant when making the decision as to whether to

produce consolidated financial statements or not.