Solutions to Gripping IFRS: Graded Questions Financial reporting framework Solution 1.1 a) The objectives of the IASB are: to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in the financial statements to help participants in the various capital markets of the world and other users of the information to make economic decisions to promote the use and rigorous application of those standards to work actively with national standard setters to bring about convergence of national accounting standards and International Financial Reporting Standards to high quality solutions b) The IASB consists of fourteen individuals and has sole responsibility for setting accounting standards The foremost qualification for IASB membership is technical expertise The constitution requires the membership to comprise at least: five practicing auditors three preparers of financial statements three users of financial statements one academic The publication of a Standard or Exposure Draft requires approval by eight of the IASB’s fourteen members c) International Financial Reporting Standards are developed through a formal system of due process and broad international consultation that involves accountants, financial analysts and other users of financial statements, the business community, stock exchanges, regulatory and legal authorities and academics The formal due process usually involves the following steps: IASB staff review all the issues associated with the topic and consider the application of the IASB Framework to the issues Study of national accounting requirements Consulting the IASB Standards Advisory Council (SAC) about the advisability of adding the topic to the IASB’s agenda Formation of an advisory group to give advice to the IASB on the project Publishing a discussion document for public comment Publishing an Exposure Draft and a Basis for Conclusions Consideration of all comments received Consideration of the possibility of holding a public hearing Approval and publishing of a Standard and a Basis for Conclusions Kolitz & Sowden-Service, 2009 Chapter 1: Page Solutions to Gripping IFRS: Graded Questions Financial reporting framework Solution 1.2 Fair presentation is achieved by compliance with applicable IFRSs This requires: selecting and applying appropriate accounting policies presenting information in a manner that provides relevant, reliable, comparable and understandable information providing additional disclosures where the requirements in IFRSs are insufficient to meet users needs (IAS 1, para 17) Inappropriate accounting treatments are not rectified either by disclosure of accounting policies used or by notes or explanatory material (IAS 1, para 18) In the extremely rare circumstances when management concludes that compliance with a requirement in an IFRS would be misleading that it would conflict with the objective of financial statements set out in the Framework, the entity shall depart from that requirement if the regulatory framework requires, or otherwise does not prohibit, such a departure: that management has concluded that the financial statements fairly present the entity’s financial position, financial performance and cash flows, that it has complied in all material respects with applicable IFRSs except that it has departed from a standard in order to achieve a fair presentation, the title of the IFRS from which the entity has departed, the nature of the departure, including the treatment that the IFRS would require, the reason why that treatment would be misleading in the circumstances and the treatment adopted, and the financial effect of the departure on each item in the financial statements that would have been reported in complying with the requirement (IAS 1, para 20) In the extremely rare circumstances in which management concludes that compliance with a requirement in an IFRS would be so misleading that it would conflict with the objective of financial statements set out in the Framework, but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing: the title of the IFRS in question, the nature of the requirement, and the reason why management has concluded that complying with that requirement is so misleading in the circumstances that it conflicts with the objective of financial statements set out in the Framework; and for each period presented, the adjustments to each item in the financial statements that management has concluded would be necessary to achieve a fair presentation (IAS 1, para 23) Kolitz & Sowden-Service, 2009 Chapter 1: Page Solutions to Gripping IFRS: Graded Questions The framework Solution 2.1 In order for financial statements to be reliable, they should: not include material error or bias; be a faithful representation; show the substance rather than the legal form of the transaction; be neutral; be prudent (but not to the extent that reserves become hidden); and be complete (within the confines of materiality and cost) Kolitz and Sowden-Service, 2009 Chapter 2: Page Solutions to Gripping IFRS: Graded Questions The framework Solution 2.2 The framework is not an International Financial Reporting Standard [paragraph of framework] Faithful representation forms part of the discussion of reliable information (qualitative characteristic) of useful information as addressed in the framework IAS p13 states that fair presentation requires faithful representation of transactions and elements as defined in the framework As a result, IAS 1, p13, therefore requires a user to incorporate the principles set out in the framework (although it is not an IFRS) as well as the definitions of the elements, so as to achieve fair presentation Kolitz and Sowden-Service, 2009 Chapter 2: Page Solutions to Gripping IFRS: Graded Questions The framework Solution 2.3 The qualitative characteristics are: Understandability; Comparability Reliability; and Relevance; Understandability Since entities are allowed to use a variety of measurement models to report their financial information, understandability is impaired For example, IAS 16 (Property, plant and equipment) allows the cost model or the revaluation model to be used for different classes of assets: users may not understand how different classes of property, plant and equipment can be measured using different measurement models Conversely, IAS 39 (Financial instruments) allows the fair value model to be used for both ‘financial assets at fair value through profit and loss’ and ‘financial assets available for sale’: users may not necessarily understand how financial assets that are classified differently are measured in the same way Comparability Comparability amongst similar entities is impaired by permitting choice between measurement models and further detracts from their understandability For example, two similar entities may choose different models (i.e one may choose to measure their noncurrent assets at cost less accumulated depreciation (cost model) and another entity may choose to measure them at fair value less accumulated depreciation (revaluation model)) Reliability With regard to IAS 16 (Property, plant and equipment), for example, the cost model may be argued to be more reliable than the revaluation model On the other hand, it is unlikely to provide relevant values for the statement of financial position as the depreciated cost is unlikely to have any relevance to its true value Relevance The fair value and revaluation models are more likely to produce relevant values, but may be criticized as being unreliable in the absence of active markets The fair value and revaluation models aid comparability as similar assets with differing historical costs could be reported as the same value in the statement of financial position It may, however, be noted that fair value accounting can also detract from comparability in extremely volatile markets Conclusion: It can be seen that it is difficult to successfully meet all four qualitative characteristics Kolitz and Sowden-Service, 2009 Chapter 2: Page Solutions to Gripping IFRS: Graded Questions The framework Solution 2.4 a) Users and their information needs Investors The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments They need information to help them determine whether they should buy, hold or sell Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends Employees Employees and their representative groups are interested in information about the stability and profitability of their employers They are also interested in information which enables them to assess the ability of the entity to provide remuneration, retirement benefits and employment opportunities Lenders Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due Suppliers and other trade creditors Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due Trade creditors are likely to be interested in an entity over a shorter period than lenders unless they are dependent upon the continuation of the entity as a major customer Customers Customers have an interest in information about the continuance of an entity, especially when they have a long-term involvement with, or are dependent on, the entity Governments and their agencies Governments and their agencies are interested in the allocation of resources and, therefore, the activities of entities They also require information in order to regulate the activities of entities, determine taxation policies and as the basis for national income and similar statistics Public Entities affect members of the public in a variety of ways For example, entities may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers Financial statements may assist the public by providing information about the trends and recent developments in the prosperity of the entity and the range of its activities b) Relationship between users and other investors While all of the information needs of these users cannot be met by financial statements, there are needs which are common to all users As investors are providers of risk capital to the entity, the provision of financial statements that meet their needs will also meet most of the needs of other users that financial statements can satisfy Kolitz and Sowden-Service, 2009 Chapter 2: Page Solutions to Gripping IFRS: Graded Questions The framework Solution 2.5 Statement of fact The credit entry represents equity Explanation Introduction: An account with a credit balance is normally a liability, income or equity The definitions of each of these elements will now be discussed Definition of a liability and discussion thereof a present obligation of the entity, as a result of past events, the settlement of which is expected to result in an outflow of economic benefits There is an essential difference between an equity participant and a financier An equity participant (shareholder) invests money in a company for an indefinite period of time He is considered to be a part owner, who never expects to be refunded the capital contributed Instead, the shareholder hopes for dividend distributions and growth in the value of his share certificates through the success of the company The financier (e.g bank), on the other hand, lends money to the company for a defined period of time, meaning that as soon as the finance is received there is an obligation to repay this amount (This discussion was not required) Although there is a past event – the issue of shares – this event, in itself, does not create an associated present obligation The transaction in question involves equity participants and accordingly, there exists no obligation to repay the amount of C120 000 By default, there will be no related settlements resulting in the outflow of future economic benefits Both the share capital and the share premium are obviously not liabilities Definition of income and discussion thereof an increase in future economic benefits during the accounting period, in the form of inflows or enhancements of assets or decreases in liabilities, resulting in an increase in equity other than through contributions from equity participants There has been an inflow of assets during the period: an amount of C 120 000 in cash upon the issue of shares But, the definition specifically excludes contributions from equity participants: therefore both the share capital and share premium cannot be considered to be income since it represents a contribution from equity participants Definition of equity and discussion thereof the residual interests in assets, after deducting all liabilities Since the transaction creates an asset of C120 000 (cash in bank) and does not create a liability at all (as explained in the discussion above), the residual interest resulting from the transaction is a net asset of C120 000 with the result that both the share capital and the share premium should therefore be treated as equity Please note: The required specifically referred to a ‘discussion of the relevant definitions’ whereas no reference was made to the discussion of the recognition criteria – this is the reason why the recognition criteria were not discussed here Had the required not specified ‘definitions’ but rather required a discussion in terms of the ‘Framework’ in general, then a discussion of both definitions and recognition criteria would have been required Kolitz and Sowden-Service, 2009 Chapter 2: Page Solutions to Gripping IFRS: Graded Questions The framework Solution 2.6 Definitions and recognition criteria: Income definition: There must be an increase in economic benefits during the accounting period in the form of inflows or the enhancement of an asset/s; or decrease in liabilities resulting in an increase in equity other than contributions from equity participants Liability definition: There must be a present obligation of the entity as a result of a past event the settlement of which is expected to result in an outflow of future economic benefits Recognition criteria for a liability: A liability may only be recognised in the financial statements if: it is probable that future economic benefits will flow to/from the entity; and the element has a cost or value that can be reliably measured Recognition criteria for income: Income may only be recognised in the financial statements if: there is a probable increase in future economic benefits through either an increase in assets or decrease in liabilities; and this increase can be measured reliably Discussion: The bookkeeper is incorrect in the accounting treatment of the receipt since it does not meet the definition of ‘income’: although the cash received from the tenant is an increase in economic benefits during the accounting period (December 20X3); and the receipt has increased Hazyview Mall Ltd’s assets (bank); there has been a simultaneous increase in liabilities since Hazyview Mall Ltd has an obligation to provide the tenant with occupation for January 20X4 or refund the C65 000; with the result that there has been no increase in equity (assets: 65 000 – liabilities: 65 000) The receipt of C65 000 meets the definition of a liability: Hazyview Mall Ltd has a present obligation to provide the tenant occupation in January 20X4 or refund the C65 000; as a result of a past event, being the receipt of the C65 000; the settlement of which is expected to result in future economic benefits flowing from Hazyview Mall Ltd in the form of occupation rights or a refund of the cash receievd Kolitz and Sowden-Service, 2009 Chapter 2: Page Solutions to Gripping IFRS: Graded Questions The framework Solution 2.6 continued … Both the recognition criteria for the recognition of a liability have been met in that: the outflow of future economic benefits is probable (the tenant is a long-standing tenant and, as such, it is not expected that Hazyview Mall Ltd would fail to provide occupation to the tenant in January 20X4 or would cancel the lease agreement and not refund the cash) the value can be reliably measured (C65 000) Conclusion: The bookkeeper must treat the receipt as a current liability in the financial statements of Hazyview Mall Ltd as at 31 December 20X3 The correcting journal entry is as follows: 31 December 20X3: Rental income Rental income received in advance (L) Rent income received in advance Kolitz and Sowden-Service, 2009 Debit 65 000 Credit 65 000 Chapter 2: Page Solutions to Gripping IFRS: Graded Questions The framework Solution 2.7 The accountant has debited an expense and credited a liability Both of these elements will now be discussed in terms of the arguments presented by the accountant Definition of a liability a present obligation of the entity, arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits Recognition criteria for a liability it must be probable that the future economic benefits will flow from the entity, the item must have a cost that can be reliably measured Definition of an expense Decreases in economic benefits, during the accounting period, in the form of outflows or depletions of assets or incurrence of liabilities, that result in decreases in equity, other than those relating to distribution to equity participants Recognition criteria for an expense An expense may only be recognised in the financial statements if: there is a probable decrease in future economic benefits through either an decrease in assets or an increase in liabilities; and this decrease can be measured reliably Discussion of the definition of a liability Although a possible outflow of economic benefits would result in the event of a theft or other calamity, this outflow is not expected since: no past event has occurred: neither an insurance contract has been signed (requiring the payment of insurance premiums) nor has a calamity occurred (requiring a repair or replacement); and thus there is no present obligation (for an obligation to be a present obligation, there has to be a past event) Furthermore, there is no obligation as the company is not obliged, (legally or otherwise), to repair or replace any items damaged An obligation derives from either a legal obligation or a constructive obligation (e.g public expectations created through a public announcement) Neither a legal nor a constructive obligation exists here since there is simply an internal management decision that can obviously be rescinded Discussion of the recognition criteria for a liability It can be argued that the cost of C480 000 is reliably measured, as it represents the best estimate of the insurance expense based on past experience Although the liability has been estimated based on past insurance contributions, the actual claims have historically been significantly less than the insurance premiums This means that the C480 000 may be slightly overestimated but still acceptable on the grounds that this is a prudent approach The outflow of economic benefits is, however, not probable since no past event has occurred; the outflow is only possible at this stage Kolitz and Sowden-Service, 2009 Chapter 2: Page Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.9 a) THE COLOUR GROUP LIMITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 20X8 R 195 000 Revenue [P 500 000 + Sc 820 000 + (Si 000 000 – 125 000)] Profit before tax [(P 365 000 – 24 000 – 200) + (Sc 168 000 + 110 000 – 50 000) +(Si 208 000 – 000)] [P 94 584 + (Sc 62 440 – 14 000) + (Si 58 240 – 560)] Income tax expense Profit for the period Other comprehensive income Total comprehensive income Attributable to: Equity holders of the parent Non-controlling interest 771 800 (290 704) 481 096 481 096 375 280 105 816 481 096 [Sc 44 890+ (Si 56 126 + 800)] b) THE COLOUR GROUP LIMITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 20X8 Attributable to Share Retained equity holders capital NDR earnings of parent R R R R 500 000 ^470 454 970 454 Balance 30/06/X7 375 280 375 280 TCI 32 400 (32 400) Transfer to NDR (70 000) (70 000) Dividend 500 000 32 400 743 334 275 734 Balance 30/06/X8 NCI R Total R *131 370 101 824 105 816 481 096 ~(20 800) 216 386 (90 800) 492 120 ^ [P 382 000 + (Sc 73 000 – 12 000 – 15 250 + 11 000) + (Si 87 000 – 32 000 – 000 + 840 – 21 136) * [(Sc 37 000 + 15 250) + (Si 57 984 + 21 136) # (79 200 – 36 000 – 10 800) ~ (Si Ord 16 000 + Pref 800) © Kolitz & Sowden-Service, 2009 Chapter 31: Page 30 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.9 continued # Scarlet RE NDR (Transfer of after tax profit of C110 000 X 0.72) Dr Cr 79 200 79 200 Group adjustments NDR RE (50 000 – 14 000) 36 000 36 000 NDR 10 800 RE (79 200 – 36 000) X 0,25 or (60 000 X 0.72 X 0.25) or NCI RE 10 800 12 900 12 900 NDR NCI 10 800 10 800 c) THE COLOUR GROUP LIMITED EXTRACT FROM CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 30 JUNE 20X8 R ASSETS Non-current assets Goodwill, at cost Land, at cost Plant and equipment - Cost - Accumulated depreciation 13 024 600 000 391 500 679 000 (287 500) (600 000+ 500 000 – 500 000) (400 000+ 290 000 – 29 000+ 18 000) (210 000+ 101 500 – 29 000 + 000) d) Non-distributable reserve Deferred tax Land Non-distributable reserve NCI (FP) © Kolitz & Sowden-Service, 2009 Debit 36 000 14 000 Credit 50 000 10 800 10 800 Chapter 31: Page 31 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.9 continued Workings Analysis of equity of Scarlet Limited Total At acquisition Share capital 100 000 Retained earnings Land Deferred tax (50 000 x 0.28) 12 000 50 000 (14 000) Fair value of consideration transferred NCI (155 000 X 0,25) Fair value of identifiable net assets Gain on acquisition Beginning of year RE at 1/7/X7 At acquisition 148 000 100 000 37 000 137 000 (148 000) 11 000 Current year Profit before tax 168 000 Profit on sale of land Group adjustment - profit Group adjustment - tax Taxation 110 000 (50 000) 14 000 (62 440) 179 560 Non Controlling Interest © Kolitz & Sowden-Service, 2009 75% 37 000 111 000 15 250 45 750 44 890 134 670 73 000 (12 000) 61 000 Land & buildings Selling price Cost Profit / loss 25% 97 140 Subsidiary 610 500 110 Group 610 550 60 Chapter 31: Page 32 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.9 continued Workings continued … Analysis of equity of Silver Limited At acquisition Share capital Retained earnings Plant & equipment Deferred tax Fair value of consideration transferred NCI (144 960 X 0.40) Fair value of identifiable net assets Goodwill Beginning of year RE at 1/7/X7 At acquisition Additional depreciation Deferred tax Total 40% 100 000 32 000 18 000 (5 040) 144 960 100 000 57 984 157 984 144 960 13 024 52 840 208 000 (58 240) (2 000) 560 Preference dividend 148 320 (8 000) Dividends Non-controlling interest 140 320 (40 000) 298 120 Profit Dividends © Kolitz & Sowden-Service, 2009 57 984 86 976 21 136 31 704 56 126 (16 000) 119 248 84 192 (24 000) 87 000 (32 000) 55 000 (3 000) 840 Current year Profit before tax Taxation Additional depreciation Deferred tax Preference share capital 60% Total 60% 40% 000 (8 000) 800 (4 800) 200 (3 200) Chapter 31: Page 33 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.9 continued Workings continued … Revaluation of plant Cost 1/1/X5 Years Subsidiary Revaluation Group Deferred tax 10 290 000 Depreciation 30/6/X5 (1/2) (14 500) Depreciation 1/1/X6 (1/2) (14 500) *9 261 000 18 000 279 000 Depreciation 30/6/X6 (1/2) (14 500) (1 000) (15 500) (280) Depreciation 30/6/X7 (1) (29 000) (2 000) (31 000) (560) Depreciation 30/6/X8 (1) (560) Carrying amount 1/1/X6 Carrying amount 30/6/X8 (29 000) (2 000) (31 000) 188 500 13 000 201 500 040 640 *101 500 accumulated depreciation / 29 000 = 3.5 yrs at 30/06/X8 Bought 01/01/X5 Proforma consolidation entries for ordinary dividends Debit Silver PBT (P) NCI (FP) Dividends declared Shareholders for dividend Accounts receivable (P) Credit 24 000 16 000 40 000 24 000 24 000 Proforma consolidation entries for preference dividends Debit NCI (FP) PBT Preference dividends paid © Kolitz & Sowden-Service, 2009 Credit 800 200 8000 Chapter 31: Page 34 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.10 (a) Journal entries relating to equipment of Skype Limited and related tax consequences JOURNAL OF SKYPE LIMITED Debit 01/10/X5 30/09/X6 400 000 Equipment Revaluation reserve Deferred tax 150 000 Depreciation expense Accumulated depreciation 125 000 400 000 106 500 43 500 125 000 Deferred tax Tax expense 30/09/X7 Credit Accumulated depreciation Equipment 250 250 Depreciation expense Accumulated depreciation 125 000 125 000 Deferred tax Tax expense 250 250 Accumulated depreciation Equipment (125 000 + 125 000) 250 000 Equipment Revaluation reserve Deferred tax 100 000 250 000 71 000 29 000 (b) At acquisition, pro-forma consolidation adjusting entry relating to the ordinary share capital of Skype Limited for the year ended 30 September 20X7 Debit Share capital Retained earnings Revaluation reserve Investment in Skype Limited Goodwill Non-controlling interest (FP) (At acquisition) © Kolitz & Sowden-Service, 2009 Credit 800 000 240 000 106 500 100 000 182 800 229 300 Chapter 31: Page 35 Not required for answer Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.10 continued (c) Pro-forma consolidation adjusting entries relating to the preference share capital of Skype Limited for the year ended 30 September 20X7 Debit Preference share capital Non-controlling interest (FP) (At acquisition) Credit 100 000 100 000 Non-controlling interest (CI) Non-controlling interest (FP) (Preference income for current year) 000 Non-controlling interest (FP) Dividends - preference (Preference dividend declared) 000 000 000 (d) Journal entry in accounting records of Phone Limited and the pro-forma consolidation adjusting entries relating to the ordinary dividends declared by Skype Limited for the year ended 30 September 20X7 Debit Credit Journal of Phone Limited 12 800 Accounts receivable Profit before interest and tax / Dividend income (16 000 X 0.80) 12 800 Pro-forma consolidating adjusting entries Profit before interest and tax / Dividend income Non-controlling interest (FP) Dividends (Reversing Phone Limited’s income) Shareholders for dividend Dividend receivable Accounts payable (Reversing Skype Limited’s liability) (Reversing Phone Limited’s asset) (Non-controlling share) © Kolitz & Sowden-Service, 2009 (Non-controlling share) (Reversing Skype Limited’s dividends) 12 800 200 16 000 16 000 12 800 200 Chapter 31: Page 36 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.10 continued (e) TALK FOR EVER GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20X7 C Profit before interest and tax Interest expense Profit before tax Taxation expense Profit for the period Other comprehensive income Revaluation surplus Total comprehensive income P (383 600 – 12 800 – 10 800) S (289 600 ) S (18 000 – 10 800) 649 600 (7 200) 642 400 (184 012) 458 388 (108 112 + 75 900)) 71 000 529 388 Profit for the period attributable to Equity holders of parent Non-controlling interest (37 540 + 000) Total comprehensive income attributable to: Equity holders of parent Non-controlling interest (Proof: 412 848 + 56 800) (37 540 + 000 + 14 200) 412 848 45 540 458 388 469 648 59 740 529 388 (f) Attributable to equity holders of parent C ~213 000 C ^1 036 000 C 2449 000 C *393 300 C 842 300 #56 800 412 848 469 648 59 740 529 388 269 800 (20 000) 428 848 (20 000) 898 698 **(11 200) 441 840 (31 200) 340 488 200 000 Total Retained earnings C 200 000 Noncontrolling interest Revaluation reserve Balance at 30/09/X6 Total comprehensive income Dividends Balance at 30/09/X7 Share capital TALK FOR EVER GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER 20X5 ~ (213 000 + 106 500 – 106 500) ^ (740 000 + 560 000 – 240 000 – 64 000 + 40 000) * (229 300 + 64 000 + 100 000) ** (3 200 + 000) # (100 000 X 0.71 = 71 000 X 0.80 = 56 800) (Dr Revaluation reserve 14 200 Cr NCI (FP) 14 200) © Kolitz & Sowden-Service, 2009 Chapter 31: Page 37 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.10 continued Workings W1 Analysis of equity of S Limited – Ordinary shares Total At acquisition Share capital Retained earnings Revaluation reserve Fair value of consideration transferred NCI (1 146 500 X 0.20) Fair value of identifiable net assets Goodwill Retained earnings at 01/10/X6 Retained earnings at acquisition Revaluation reserve at 01/10/X6 Revaluation reserve at acquisition Current year Profit before interest and tax Interest expense Tax expense Preference dividend paid Ordinary dividend declared Revaluation 800 000 240 000 106 500 146 500 NCI (20%) Parent (80%) 229 300 917 200 64 000 256 000 100 000 229 300 329 300 146 500 182 800 560 000 240 000 320 000 106 500 106 500 289 600 (18 000) (75 900) (8 000) 187 700 (16 000) 71 000 709 200 - - 37 540 (3 200) 14 200 150 160 (12 800) 341 840 W2 Analysis of equity of S Limited – Preference shares Total At acquisition Share capital Current year Preference income Dividend declared © Kolitz & Sowden-Service, 2009 NCI (100%) Parent (0%) 100 000 100 000 - 000 (8 000) 100 000 000 (8 000) 100 000 - Chapter 31: Page 38 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.10 continued W3 S Limited equipment and deferred tax 01/10/X5 Carrying amount Revalue Yr 30/09/X7 TB 600 000 TD 150 000 30/09/X6 CA 600 000 Depreciation / tax allowance (750 000 / 6) (600 000 / 6) Depreciation / tax allowance Revalue © Kolitz & Sowden-Service, 2009 RS 43 500 750 000 600 000 (125 000) (100 000) 625 000 500 000 (125 000) (100 000) 500 000 400 000 150 000 43 500 L 125 000 36 250 L 106 500 L 106 500 71 000 177 500 (7 250) 100 000 29 000 29 000 400 000 106 500 106 500 (7 250) 100 000 600 000 DT X29% 200 000 58 000 L Chapter 31: Page 39 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.11 a) Pro-forma consolidation adjusting entries relating to the equipment of Sky Limited for the year ended 30 September 20X5 Debit Ordinary share capital Retained earnings Property Equipment Deferred tax Non-controlling interest (FP) Investment in Sky Limited Goodwill Credit 800 000 420 000 200 000 150 000 43 500 305 300 800 000 578 800 Retained earnings Accumulated depreciation (Group depreciation adjustment from 01/10/X3 – 30/09/X4) 25 000 Deferred tax Retained earnings (Group deferred tax adjustment from 01/10/X3 – 30/09/X4) 250 Depreciation expense Accumulated depreciation (Current year group depreciation adjustment) 25 000 Deferred tax Taxation expense (Current year group deferred tax adjustment) (7 250 + 29 000) 36 250 Profit before tax Equipment Accumulated depreciation (Adjusting the R40 000 profit to Sky to give a R60 000 loss to the group) 100 000 25 000 250 25 000 36 250 150 000 50 000 Note from authors: There is no reversal of the accumulated depreciation at acquisition of R400 000 as the equipment has been sold b) Pro-forma consolidation adjusting entries relating to the dividends declared by Sky Limited for the year ended 30 September 20X5 Debit Dividend income Non-controlling interest (FP) Dividends (Interim dividend paid) 200 800 000 Dividend income Non-controlling interest (FP) Dividends (Reversing Pie’s income) Shareholders for dividend Dividends receivable Accounts payable (Reversing Sky’s liability) (Reversing Pie’s asset) (Non-controlling share) © Kolitz & Sowden-Service, 2009 Credit 400 600 (Reversing Sky’s dividends) 000 000 400 600 Chapter 31: Page 40 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.11 continued … c) PIE AND SKY GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 SEPTEMBER 20X5 Profit before tax Taxation expense Profit for the period Other comprehensive income Revaluation surplus C 506 000 P (320 000 + 600 – 600) S (280 000 + 31 000 – 25 000 – 100 000) (94 800 + 59 500 – 36 250) (118 050) 387 950 50 000 437 950 Total comprehensive income Attributable to: Equity holders of parent – Form profit (355 400) for the period Non-controlling interest – From other comprehensive income 395 400 42 550 437 950 d) Balance at 30/09/X4 Total comprehensive income Dividends Balance at 30/09/X5 C C C Total Noncontrolling interest C Attributable to equity holders of parent Revaluation reserve C Retained earnings Share capital PIE AND SKY GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER 20X5 C 000 000 ~40 000 ^1 123 400 355 400 123 400 395 400 *339 750 42 550 463 150 437 950 000 000 40 000 (16 000) 462 800 (16 000) 502 800 (2 400) 379 900 (18 400) 882 700 ^ (985 600 + 610 000 – 420 000 – 25 000 + 250 – 34 450) * (305 300 + 34 450) ~ [(250 000 – 200 000) X 0.80] (Dr Revaluation reserve 200 000 Cr Property 200 000) and (Dr Revaluation reserve 10 000 Cr Non-controlling FP 10 000) © Kolitz & Sowden-Service, 2009 Chapter 31: Page 41 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.11 continued … e) Pro-forma consolidation journal entries affected by the property and the equipment of Sky Limited for the year ended 30 September 20X6 Debit Ordinary share capital Retained earnings Property Equipment Deferred tax Non-controlling interest (FP) Investment in Sky Limited Goodwill Credit 800 000 420 000 200 000 150 000 43 500 305 300 800 000 578 800 Revaluation reserve Property (50 000 x 20%) Revaluation reserve Non-controlling FP (50 000 x 20%) Retained earnings Deferred tax Equipment (50 000 - 43 500 + 100 000) 200 000 200 000 10 000 10 000 106 500 43 500 150 000 Or Retained earnings Accumulated depreciation 50 000 Deferred tax Retained earnings 43 500 Retained earnings Accumulated depreciation Equipment © Kolitz & Sowden-Service, 2009 50 000 43 500 100 000 50 000 150 000 Chapter 31: Page 42 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries Solution 31.11 continued … Workings Analysis of equity of Sky Limited At acquisition Share capital Retained earnings Property Equipment Deferred tax Total Minorities (20%) Parent (80%) 800 000 420 000 200 000 150 000 (43 500) 526 500 305 300 1221 200 800 000 578 800 610 000 (420 000) 190 000 (25 000) 250 172 250 34 450 137 800 Investment in Sky Goodwill Beginning of year Retained earnings at 01/10/X4 Retained earnings at acquisition Group depreciation adjustment Group deferred tax adjustment Current year Operating profit before tax Dividend income Tax expense Group depreciation adjustment Group deferred tax adjustment (7 250 + 29 280 000 31 000 (59 500) (25 000) 36 250 000) Group adjustment to profit on sale of equipment (100 000) Interim dividend paid Final dividend declared Equipment of Sky Limited Cost 01/10/X3 30/09/X4 30/09/X5 Deferred tax 01/10/X3 30/09/X4 30/09/X5 Carrying amount Depreciation Depreciation Group 750 000 (125 000) (125 000) 500 000 (500 000) © Kolitz & Sowden-Service, 2009 10 (4) Tax 600 000 (100 000) (100 000) 400 000 (400 000) 162 750 (4 000) (8 000) 32 550 (800) (1 600) 849 500 369 900 Cost 000 000 (400 000) 600 000 (100 000) (100 000) 400 000 Group adjustment Temporary difference 150 000 (25 000) (25 000) 100 000 (100 000) 130 200 (3 200) (6 400) Group 150 000 (25 000) (25 000) 100 000 Deferred tax (X0,29) 43 500 (7 250) (7 250) 29 000 (29 000) 750 000 (125 000) (125 000) 500 000 Cr Dr Dr Cr Dr Chapter 31: Page 43 Solutions to Gripping IFRS : Graded Questions Partly owned subsidiaries 0 Solution 31.11 continued … Workings continued … Selling price Carrying amount Sky Limited 440 000 (400 000) 40 000 © Kolitz & Sowden-Service, 2009 Group 440 000 (500 000 (60 000) Chapter 31: Page 44 ... needed to be discussed and obviously a mark allocation was unavailable to guide the extent of the answer) Kolitz and Sowden-Service, 2009 Chapter 2: Page 10 Solutions to Gripping IFRS: Graded. .. in equity, other than those relating to distributions to equity participants Kolitz and Sowden-Service, 2009 Chapter 2: Page 16 Solutions to Gripping IFRS: Graded Questions The framework Solution... be seen that it is difficult to successfully meet all four qualitative characteristics Kolitz and Sowden-Service, 2009 Chapter 2: Page Solutions to Gripping IFRS: Graded Questions The framework