Section A – THIS ONE question is compulsory and MUST be attempted
1、(a) The following draft statements of financial position relate to Bread and its subsidiary Butter, both public listed entities, as at 31 December 2017.
The following information is relevant to the preparation of the group financial statements:
1. Bread acquired an 80% equity interest in Butter on 1 January 2014 for a consideration of $1,000 million. At this date the retained earnings and other components of equity were $344 million and $46 million respectively. The fair value of the identifiable net assets of Butter at 1 January 2014 was $1,070 million. The difference between the carrying amount and the fair value of the net assets at 1 January 2014 was due to unrecognised intangibles with a remaining useful life of five years. It is group policy to measure non-controlling interests using the proportional method of the fair value of the net assets.
Goodwill has been reviewed annually for impairment and, as at 1 January 2016, none had occurred. The recoverable amount of the net assets of Butter at 31 December 2017 was estimated as $1,328 million.
2. Bread acquired all of the equity shares in Jam on 1 January 2015 for a consideration of $1,250 million. The carrying amount and fair value of the identifiable net assets at acquisition were $1,230 million. At 31 December 2017, Bread was in the process of selling its entire shareholding in Jam and so it was decided that Jam should be treated as a disposal group held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations at that date. The carrying amounts of Jam’s net assets before classification as held for sale at 31 December 2017 in the individual financial statements are as follows:
The group has a policy of revaluing its property, plant and equipment in accordance with IAS 16 Property, Plant and Equipment. There have been no revaluations or any other gains or losses included within Jam’s other components of equity since the date of acquisition as the carrying amount was deemed to be a close enough approximation to fair value. However, at 31 December 2017, property with a carrying amount of $330 million was deemed to have a fair value of $340 million. No adjustment has yet been made for this fair value.
The total fair value less costs to sell of the disposal group at 31 December was estimated to be $1,220 million. There have been no previous impairments to the goodwill of Jam.
3. Bread operates a defined benefit scheme which at 31 December 2016 was in deficit by $120 million. Details for the current year are as follows:
The rate of interest applicable to good quality corporate bonds was 5% at 31 December 2016. The cash contributions for the scheme have been correctly accounted for in the financial statements for the year ended 31 December 2017. This is the only adjustment which has been made in respect of the scheme.
4. On 1 January 2016, Bread gave 10,000 of its employees 200 share options each conditional that they worked for Bread for a further three years. During 2016, 980 employees left and a figure was correctly recorded in the financial statements of $3·9 million for the year ended 31 December 2016. During 2017, a further 950 employees left and it was estimated that 920 would leave in the following year. Details of the fair value of each option are given below.
(a)
Working 1 – Goodwill on acquisition of Butter
Working 2 – Impairment of Butter
As the non-controlling interest (NCI) of Butter is measured using the proportional method, goodwill should be grossed up by 100/80 so that it is comparable with the recoverable amount. $144m x 100/80 = $180m. Notional goodwill is therefore $36m ($180m – $144m). The net assets of Butter at 31 December 2017 are therefore as follows:
Since the recoverable amount is only $1,328m, an impairment arises of $44m ($1,372m – $1,328m). Impairments of cash generating units are allocated initially to goodwill. This will be apportioned 80/20 between the goodwill recognised within the consolidated financial statements and the notional goodwill. Therefore the impairment to be adjusted for on consolidation is (80% x $44m) = $35·2 million (W1). All of this impairment will be charged to the profits of Bread and will therefore reduce their retained earnings by $35·2m (W12).
Working 3 – Jam
Goodwill in Jam would originally be calculated as $20m ($1,250m – $1,230m). The net assets Jam are now $1,292m at 31 December 2017 ($1,272m per question and $20m goodwill).
Since the group has a revaluation policy under IAS 16 Property, Plant and Equipment, the group must revalue the property plant and equipment of Jam to fair value of $340m on classification as held for sale. A gain of $10m ($340m – $330m) would be recorded within other components of equity (W14). The net assets of Jam would now have a carrying amount of $1,302m including $846m for property, plant and equipment. On classification as held for sale, Jam must be measured at the lower of carrying amount and fair value less costs to sell. An impairment arises of $82 million ($1,302m – $1,220m). This will first be allocated to the goodwill of $20m. The remaining impairment of $62 million is allocated to non-current assets to which the measurement requirements of IFRS5 Non-current Assets Held for Sale and Discontinued Operations apply. No impairment will therefore be allocated to the current assets of Jam.
Tutorial note:
The remaining impairment loss of $62 million should be allocated to property, plant and equipment and other intangible assets in proportion to their respective carrying amounts as follows:
Property, plant and equipment $62m x ($846m/($846m + $428m)) = $41m
Other intangible assets $62m x ($428m/($846m + $428m)) = $21m or:
The table below summarises the allocation of the impairment:
The assets and the liabilities of the disposal group should be separately presented within the current assets and current liabilities of the consolidated financial statements. $1,796m ($805m + $407m + $584m) or (836 + 10 + 428 – 62 + 584) will be included within current assets and $576m ($322m + $254m) within current liabilities.
Working 4 – Pension adjustment
The defined benefit scheme for the year should have been recorded as follows:
The benefits paid do not affect the net liability for the year. Since only the cash contributions have been recorded for the year, the net obligation should be increased by $63m ($83m – $20m) (W10). $72 million should be expensed to profit or loss (W12) being the service cost component (current and curtailment) plus the interest charge. $9m should be credited to other components of equity being the gain on remeasurement (W14).
Working 5 – Share-based payment
The share-based payment is an equity settled scheme and the fair value of the options should be measured using the fair value at the grant date. An expense is charged against profits and spread over the three-year vesting period. A corresponding credit should be recorded within equity. The number of leavers each year and an estimate of future leavers should be considered as a non-market based vesting condition.
At 31 December 2017 (10,000 – 980 – 950 – 920) x 200 x $8 x 2/3 = $7·6m.
A further $3·7m ($7·6m – $3·9m) should be charged to the profits of Bread (W12) with a corresponding increase in other components of equity (W14).
Working 6 – Joint operation
The manufacturing facility is classified as a joint operation as key decisions require unanimous consent and each party has rights to the facility. Bread has correctly included their $50m share of the facility within property, plant and equipment but the asset should have been depreciated from 31 March 2017 as the facility was ready for use. The depreciation adjustment required is $1·9m ($50m/20 x 9/12).
Each investor should include a third of the profits from the facility within their individual accounts. An adjustment of $19m ($57m x 1/3) is required to the current assets of Bread (W9) and $12m ($36m x 1/3) should be added to their current liabilities (W11). Overall, the profits of Bread will increase by $7m ($19m – $12m) (W12).
