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Arsi University: College of Business and Economics Department of Accounting and Finance
Arsi University: College of Business and Economics Department of Accounting and Finance
Content page
Part I
1. IAS 1: PRESENTATION OF FINANCIAL STATEMENTS 3
Overview –IAS 16 Sets out the principles of accounting for property, plant and equipment
(PP&E).
Property, plant and equipment are tangible items that are: held for use in the production
or supply of goods or services, for rental to others or for administrative purposes
This Standard does not apply to:
Non current Asset held for sale (IFRS 5) and investment property (IAS 40)
Inventories (IAS 2)
Biological assets (IAS 41)
Mineral Resources and Mineral rights (IFRS 6)
Basic terminologies
Cost is the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or construction.
Entity specific value is the present value of the cash flows an entity expects to arise
from the continuing use of an asset and from its disposal at the end of its useful life.
Carrying amount is the amount at which an asset is recognized in the statement of
financial position after deducting any accumulated depreciation and accumulated
impairment losses.
Residual value is the net amount which the entity expects to obtain for an asset at the
end of its useful life after deducting the expected costs of disposal.
An impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
Initial recognition and measurement
Depreciation
o Depreciation is charged systematically over the useful life of the asset, using a method
that reflects the pattern of benefit consumption, to its residual value.
o Different depreciation methods are acceptable (including straight-line, diminishing
balance and units of production), but not a method that is based on the revenue the
asset generates.
o Components of an asset with differing patterns of benefits are depreciated separately.
o The residual value is the amount the entity would receive currently if the asset were
already of the age and condition expected at the end of its useful life.
The Revaluation Model
Carry at fair value at date of revaluation less subsequent accumulated depreciation
and impairment losses
Fair value is usually market value as determined by professionally qualified valuers.
Revaluations shall be made with sufficient regularity The frequency of valuation
depends on the volatility of the fair values of individual items of property, plant and
equipment.
The more volatile the fair value, the more frequently revaluations should be carried
out. Where the current fair value is very different from the carrying value then a
revaluation should be carried out.
When an item of property, plant and equipment is revalued, the whole class of assets to
which it belongs should be revalued. Why?
All the items within a class should be revalued at the same time, to prevent selective
revaluation of certain assets and to avoid disclosing a mixture of costs and values from
different dates in the financial statements.
Revalued assets must continue to be depreciated
The revaluation model is used only if the fair value of the item can be measured reliably.
Derecognition
The carrying amount of an item of PPE should be derecognised
when it is disposed of/traded-in or when no future economic
benefits are expected from its use
The proceeds from the sale of the asset (or trade-in allowance) is
compared with the carrying amount of the asset and a profit or
loss recognised
Gains or losses arising from the Derecognition of an item of
property, plant and equipment are:
the difference between the net disposal proceeds, and the
Investment in associate (w (ii)) 7,700
106,700
Current assets
Inventory (11,200 + 8,400 – 600 URP (w (iii))) 19,000
Trade receivables (7,400 + 5,300 – 1,300 intra-group (w (iii))) 11,400
Bank 3,400
33,800
Equity and liabilities
Equity attributable to owners of the parent
Equity shares 50,000
Retained earnings (w (iv)) 35,200
85,200
Non-controlling interest (w (VI)) 7,900
Total equity 93,100
Non-current liabilities
Deferred tax (15,000 + 8,000) 23,000
Current liabilities
Bank overdraft 2,500
Workings (figures in brackets are in $’000)
(i) Goodwill in Saracen
$’000 $’000
Controlling interest (see below)
Immediate cash 32,000
Deferred consideration (5,400 x 100/108) 5,000
Non-controlling interest (10,000 x 20% (see below) x $3·50) 7,000
44,000
Equity shares 10,000
Pre-acquisition reserves:
At 1 October 2010 12,000
Fair value adjustments – plant 4,000
– Intangible
Equity shares 10,000
Pre-acquisition reserves:
At 1 October 2010 12,000
The cost of the majority shareholding in Saracen was $32 million. Paladin acquired eight
million shares and Saracen has
10 million shares, this gives a controlling interest of 80% and a non-
controlling interest of 20%.
The customer relationship asset is recognized as an intangible asset in the consolidated fi
nancial statements under FRS 103
(ii) Carrying amount of Augusta at 30 September 2011
$’000
Cash consideration 10,000
Share of post-acquisition profits (1,200 x 8/12 x 25%) 200
Impairment loss (2,500)
7,700
(iii) Unrealized profit (URP) in inventory/intra-group current accounts
The URP in Saracen’s inventory (supplied by Paladin) of $2·6 million is $600,000 (2,600 x 3
0/130). The current account
Balances of Paladin and Saracen should be eliminated from trade receivables and payable
s at the agreed amount of $1·3 million.
(iv) Consolidated retained earnings:
$’000
Paladin’s retained earnings (25,700 + 9,200) 34,900
Saracen’s post-acquisition profits (4,500 (w (v)) x 80%) 3,600
Augusta’s post-acquisition profits (w (ii) 200
Augusta’s impairment loss (2,500)
URP in inventory (w (iii)) (600)
Finance cost of deferred consideration (5,000 x 8%) (400)
35,200
(v) Post-acquisition adjusted profit of Saracen is:
$’000
Profit as reported 6,000
Additional depreciation of plant (4,000/4 ye (1,000)
Additional amortization of customer relationship asset (3,000/6 years) (500)
4,500
(vi) Non-controlling interest
$’000
Fair value on acquisition (w (i)) 7,000
Post-acquisition profits (4,500 (w (v)) x 20%) 900
7,900
2. Basic Exercise 12 - Holmes & Deakin Group
Holmes, a public limited company, has owned 85% of the ordinary share capital of Deakin,
a public limited company, for some years. The shares were bought for $255m and Deakin
reserves at the time of purchase were$20m.
On 28 February 20X3 Holmes sold 40m of the Deakin shares for $160m. The only entry
made in respect of this transaction has been the receipt of the cash, which was credited to
the 'investment in subsidiary' account. No dividends were paid by either entity in the
period.
The following draft summarized financial statements are available:
HOLMES GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31.5.X3
$m
Non-current assets
Property, plant and equipment 713.00
Goodwill w - 1 68.00
781.00
Current assets
Inventories 510
Trade receivables 425
Cash 169
1,104
Total Asset 1,885.00
Equity
$1 ordinary shares 500.00
Retained earnings w - 493.50
993.50
Non-controlling interest w - 129.50
Total equity 1,123.00
Current liabilities
Trade payables 466
Income tax payable (80+60+30) 170
Provisions 126
762
Total 1, 885.00
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 20X3
$m
Profit before gain on disposal of shares in subsidiary 190.00
Tax (40 + 20) (90.00)
Profit for the year 100.00
Other comprehensive income, net of tax 30.00
Total comprehensive income for the year 130.00
Profit attributable to:
Owners of the parent 92.00
Non-controlling interests (40x9/12)x15% + (40x3/12)x35% 8.00
100.00
Total comprehensive income attributable to: 120.00
Owners of the parent 10.00
Non-controlling interests (50x9/12)x15% + (50x3/12)x35% 130.00
STATEMENT OF CHANGES IN EQUITY AS AT 31.5.X3
Share capita Retained earnings Subtotal NCI Total
Balance at 1 June 20X2 500.00 285.00 785.00 48.00 833.00
Adjustment arising on sale of
shares to NCI (net of tax) 88.50 88.50 71.50 160.00
Total comprehensive 120.00 120.00 10.00 130.00
Balance at 31 May 20X3 500.00 493.50 993.50 129.50 123.00
Working – 1
Cost of control
Balance 255
Share capital 170
Pre-acquisition retained earnings 17
Goodwill 68
255
Working – 2
Deakin retained earning
Pre-acquisition reserves 17.00
Balance 170.00
NCI - up to disposal (120+(50*9/12)) x15% 23.63
NCI - after disposal 50x3/12x35% 4.38
Consolidated reserves 125.00
170.00
Working – 3 NCI
Share capital 30.00
Retained earnings 28.00
Goodwill - -
Adjustment to NCI for disposal 71.50
Consolidated reserves 129.50
Working – 4
Consolidated Retained Earning
Holme's balance 310.00
Tax on profit on disposal 30.00
Deakin retained earnings 125.00
Adjustment for NCI 88.50
Balance C/D 493.50
523.50
Working - 5
Gain on disposal in parent's separate financial statements $m
Fair value of consideration received 160.00
Less: original cost of shares (255 × 20%/85%) (60)
100.00
Less: tax on parent's gain (30%) (30.00)
70
Working - 6
Adjustment to parent's equity on disposal $m
Fair value of consideration received 160.00
Increase in NCI in net assets at disposal *370 – (50 × 3/12)) x 20%) (71.50) 88.50
Comprehensive Problem 4 – Standard Group
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
For the year ended 20x6
Standard Odense Rate Odense Consolidate
$000 kr000 $000 $000
Non current asset
Property, plant and equipment 1,285 4,400 8.1 543 1,828
Investment in Odense 520 - - -
Goodwill (W2) - - - 222
1,805 4,400 - 543 2,050
Current assets 410 2,000 8.1 247 657
Total 2,215 6,400 790 2,707
Equity
Share capital 500 1,000 9.4 106 500
Retained earnings (W3) 1,115 - - - 1,411
For the year ended 20x6
Standard Odense Rate Odense Consol
$'000 Kr'000 $'000 $'000
1,125 5200 8.4 619 1744
Revenue
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 395 1,350 161 567
Standard 915
Add post-acquisition retained earnings of Odense
(4,355@8.8–3,500@9.4)*80% 4339
Less goodwill impairment losses (W2) 0
Exchanged differences on good will (W 52
5202
$000
On translation of net asset
Closing NA 654
Opening NA (5,300-1,350+405=4355) 495