Advanced Consolidation
Question 50
QUESTION 50: ADVANCED CONSOLIDATION
Traveler, a public limited company, operates in the manufacturing sector. The draft statements of
financial position are as follows at 30 November 2011:
Assets:
Non-current assets
Property, plant and equipment
Investments in subsidiaries
Data
Captive
Financial assets
Traveler
$m
Data
$m
Captive
$m
439
810
620
10
820
20
640
Defined benefit asset
Current assets
Total assets
820
541
108
1,908
72
995
2,975
781
1,601
350
990
Equity and liabilities:
Share capital
Retained earnings
Other components of equity
Total equity
Non-current liabilities
Current liabilities
Total liabilities
Total equity and liabilities
1,120
1,066
60
2,246
455
274
729
2,975
600
442
37
1,079
323
199
522
1,601
390
169
45
604
73
313
386
990
The following information is relevant to the preparation of the group financial statements:
1. 1 On 1 December 2010, Traveler acquired 60% of the equity interests of Data, a public
limited company. The purchase consideration comprised cash of $600 million. At
acquisition, the fair value of the non-controlling interest in Data was $395 million. Traveler
wishes to use the ‘full goodwill’ method. On 1 December 2010, the fair value of the
identifiable net assets acquired was $935 million and retained earnings of Data were $299
million and other components of equity were $26 million. The excess in fair value is due to
non-depreciable land.
On 30 November 2011, Traveler acquired a further 20% interest in Data for a cash
consideration of $220 million.
2. On 1 December 2010, Traveler acquired 80% of the equity interests of Captive for a
consideration of $541 million. The consideration comprised cash of $477 million and the
transfer of non-depreciable land with a fair value of $64 million. The carrying amount of the
land at the acquisition date was $56 million. At the year end, this asset was still included in
the non-current assets of Traveler and the sale proceeds had been credited to profit or loss.
At the date of acquisition, the identifiable net assets of Captive had a fair value of $526
million, retained earnings were $90 million and other components of equity were $24
million. The excess in fair value is due to non-depreciable land. This acquisition was
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Advanced Consolidation
Question 50
accounted for using the partial goodwill method in accordance with IFRS 3 (Revised)
Business Combinations.
3. Goodwill was impairment tested after the additional acquisition in Data on 30 November
2011. The recoverable amount of Data was $1,099 million and that of Captive was $700
million.
4. Included in the financial assets of Traveler is a ten-year 7% loan held at amortised cost. At
30 November 2011, the borrower was in financial difficulties and its credit rating had been
downgraded. At this date, the gross carrying amount of the loan asset was $30 million and
the loss allowance was $1 million. Traveler has agreed for the loan to be restructured; there
will only be three more annual payments of $8 million starting in one year’s time. Current
market interest rates are 8%, the original effective interest rate is 6·7% and the effective
interest rate under the revised payment schedule is 6·3%.
5. Traveler acquired a new factory on 1 December 2010. The cost of the factory was $50
million and it has a residual value of $2 million. The factory has a flat roof, which needs
replacing every five years. The cost of the roof was $5 million. The useful economic life of
the factory is 25 years. No depreciation has been charged for the year. Traveler wishes to
account for the factory and roof as a single asset and depreciate the whole factory over its
economic life. Traveler uses straight-line depreciation.
6. The actuarial value of Traveler’s pension plan showed a surplus at 1 December 2010 of
$72 million, represented by plan assets with the fair value of $322 million and, the present
value of the defined benefit obligation of $250 million. The aggregate of the current and
past service costs and the net interest component amount to $55 for the year ended 30
November 2011.
After consulting with the actuaries, the company contributed $45 million into the plan on the
last day of the year.
No entries had been made in the financial statements for the above amounts. At the year
end, the fair values of the plan assets are $340 million and the present value of the
obligation amounts to $288 million. At both the start and end of the year, the pension
surplus falls below the asset ceiling.
Required:
Prepare a consolidated statement of financial position for the Traveler Group for the year
ended 30 November 2011.
(35 marks)
ACCA P2 – December 2011 – Q1a
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Advanced Consolidation
Question 50
ANSWER TO QUESTION 50: ADVANCED CONSOLIDATION
Traveler Group
Consolidated Statement of Financial Position as at 30 November 2011
$m
1,842
69
130
52
PPE $439+810+620+32 J1 – 56 J3 – 3 J6
Goodwill W3
Financial assets $108+10+20 – 8 J5
Defined benefit assets $72 – 20 J7
Current assets $995+781+350 – 45 J7
2,081
4,174
Share Capital
Other reserves W6
Retained earnings W6
1,120
74
1,000
2,194
343
2,537
851
NCI W5
Non-current liabilities $455+323+73
Current Liabilities $274+199+313
786
4,174
W1 GROUP STRUCTURE
Data
Subsidiary Acquisition: 1 Dec 2010
Captive
Subsidiary Acquisition: 1 Dec 2010
Group 60%
Group 80%
NCI 40%
NCI 20%
$m
W2 NET ASSETS (of subsidiaries) AT ACQUISITION
Equity share capital
Other reserves (pre)
Retained earnings (pre)
J1
Data
600
26
299
10
935
Captive
390
24
90
22
526
W3 GOODWILL
Investment [820 – 220 J2] ; [541]
Less: [935 W2 x 60%] ; [526 W2 x 80%]
Data
600
(561)
39
395
(374)
21
60
(50)
10
Captive
541
(421)
120
Fair value of NCI
Less: [935 W2 x 40%]
Impairment
W4 POST ACQUISITION RESERVES
Balance
OR
Data
11
120
(61)
59
RE
Captive
21
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Data
143
Captive
79
Advanced Consolidation
Question 50
J4
11
21
W5 NON CONTROLLING INTEREST
[935 W2 x 40%] ; [526 W2 x 20%]
NCI goodwill W3
[11 & 93 W4 x 40%] ; [21 & 79 W4 x 20%]
(50)
93
Data
374
21
42
437
(218)
218
J2
W6 GROUP RESERVES
Parent reserves
J2
J3
J4
J5
J6
J7
Captive
105
20
125
125
OR
60
(10)
50
7
17
74
Data [11 W4 x 60%] ; [93 W4 x 60%]
Captive [21 W4 x 80%] ; [79 W4 x 80%]
PPE (non-depreciable land)
RE (pre) – Data
RE (pre) – Captive
Fair value adjustment
Share capital
Other reserves
Retained earnings
Fair value adjustment (β)
Total fair value of net assets
RE
1,066
(2)
(56)
(61)
(8)
(3)
(55)
881
56
63
1,000
$m
JOURNAL ENTRIES WITH WORKINGS
1&
2
79
Dr.
Cr.
32
1
10
22
Data
600
26
299
10
935
Captive
390
24
90
22
526
.
NCI – Data
RE – Traveler
Investment in Data
Further acquisition of 20%
$437 x 20/40 = $218
218
2
RE – Traveler
PPE
Correction of disposal of land on acquisition of Captive
56
1
2
2
3
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Advanced Consolidation
Question 50
RE – Data (Full)
50
3
4 RE – Traveler (partial)
61
Goodwill
111
Impairment – Data $1,099 – (935 W2 + 60 W3 + 11 + 143 W4)
= $50
Impairment – Captive
$700 – (526 W2 + 120 W3 x 100/80 + 21+ 79 W4) = $76 x 80% = $61
4
5
Date
Year 1
Year 2
Year 3
RE – Traveler
Financial assets
8
Cash flows
Cash flows
Cash flows
PV of cash flows
Carrying amount
Impairment loss
RE – Traveler
PPE
Depreciation
Roof $5/5years
Factory ($45 – 2)/25 years
5
8
$m
8
8
8
DF @ 6.7%
1/1.067
1/1.0672
1/1.0673
$m
7.50
7.03
6.59
21
29
8
3
6
3
= $1
= $1.72
RE (Traveler) – Service cost and net interest
Other reserves (Traveler) – Re-measurement loss
6
7
Cash (contribution paid)
Defined benefit asset $72 – 52
Pension surplus opening $322 – 250
$72
Service costs and net interest component
$55
Contribution paid
($45)
Re-measurement loss (balancing figure
10
Pension surplus closing $340 – 288
$52
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10
45
20