Section A – THIS ONE question is compulsory and MUST be attempted
1、(a) Moorland has investments in Lyndhurst and Tybull and all three are public limited companies. Tybull is located overseas and uses the dinar as its functional and presentation currency.
Draft statements of profit or loss and other comprehensive income for the year ended 30 June 2017
The following information is relevant to the preparation of the group statement of profit or loss and other comprehensive income:
1. Moorland had acquired 40% of the equity interests in Lyndhurst for a cost of $100 million on 1 July 2015. On 1 July 2016, Moorland acquired a further 20% of the equity interests for $64 million and obtained control. The net assets of Lyndhurst had a carrying amount of $230 million and $250 million on 1 July 2015 and 1 July 2016 respectively. No fair value adjustments were required to the net assets at either date. The fair value of the original 40% equity interest at 1 July 2016 is deemed to be $115 million. This amount is also the fair value of the non-controlling interest at 1 July 2016. The only entries in Moorland’s financial statements in relation to this transaction have been to record the investment at cost including $2 million of legal fees which have been capitalised as part of the $64 million investment. Moorland has a policy of valuing the non-controlling interest at fair value for all subsidiaries.
2. Moorland acquired 100% of the equity interests in Tybull for a cost of dinar 990 million on 1 July 2016. The fair value of the net assets at acquisition were dinar 888 million. This differed from the carrying amount of the net assets at acquisition due to plant which had a fair value of dinar 48 million in excess of its carrying amount. This plant had a remaining useful life of two years at 1 July 2016. It is group policy to classify depreciation on plant as a cost of sale. Tybull has not paid any dividends since Moorland gained control and has not reported any revaluation gains since acquisition.
3. Goodwill was reviewed for impairment on 30 June 2017 and a charge of 25% should be applied to both Lyndhurst and Tybull. This is the first time that either investment has been impaired. Goodwill impairments should be included within other expenses.
4. During the year ended 30 June 2017 Tybull sold goods to Moorland for dinar 120 million. The mark-up on these goods was 60%. Moorland has 80% of these goods still within inventories as at 30 June 2017.
Moorland and Tybull have recorded this transaction correctly within their financial statements but have not yet made any correcting adjustments required on consolidation. Tax effects in respect of this adjustment can be ignored.
5. The Moorland group has a presentation currency of the dollar ($). Exchange rates between the dollar and dinar are as follows:
6. The group has a policy of revaluing its property on an annual basis and Lyndhurst has correctly accounted for a revaluation surplus on its property in its financial statements. Moorland owns property with the following details:
Moorland has not yet provided for the revaluation gains and associated deferred tax for the year ended 30 June 2017. Moorland has a tax rate of 30% which is not expected to change in the foreseeable future. Revaluation gains are assumed to arise at the end of the year.
7. The following information relates to Moorland’s defined benefit pension scheme:
(a) Consolidated statement of profit or loss and other comprehensive income for the Moorland Group for the year ended 30 June 2017
Working 1: Consolidation schedule
Working 2: Lyndhurst – step acquisition
Moorland obtains control over Lyndhurst on 1 July 2016. Lyndhurst therefore should be consolidated for the whole year (W1).
On a step acquisition IFRS 3 Business Combinations requires the original 40% investment to be recognised at its acquisition-date fair value and the resulting gain or loss in profit or loss or other comprehensive income. The original shareholding would have been equity accounted as follows:
Since the fair value of a 40% interest at 1 July 2016 is $115 million, a gain of $7 million ($115m – $108m) should be recorded within profit or loss of Moorland (W1). In addition, the legal fees of $2 million should not have been included in the cost of investment but should be expensed (W1).
Working 3: Lyndhurst – goodwill impairment
The goodwill impairment of Lyndhurst will be calculated as follows:
Working 4: Tybull goodwill
The goodwill impairment of Tybull will be calculated as follows:
An exchange difference will arise on goodwill in the current year by comparing goodwill at the opening rate of exchange with goodwill at the closing rate of exchange.
Consequently $6·4 million will be expensed to other expenses (W1). A loss arises in other comprehensive income of $7·4 million (W6).
Working 5: Tybull translation
The intra-group transaction between Tybull and Moorland will need to be cancelled in the consolidated financial statements. Since the profits of Tybull will be translated at the average rate of exchange of $1:dinar 4, the adjustment will be $30m (120m dinar/4 (W1)). Unrealised profit of dinar 36m ((dinar 120m x 60/160) x 80%) will arise on the group transaction. Tybull’s profit for the year will be adjusted for the extra depreciation arising from the fair value adjustment. Additional depreciation of dinar 24m will be expensed (48m/2) as part of cost of sales.
Tybull’s profits will then be translated at the average rate of exchange as follows:
Note that cost of sales will be $89m ($74m + $6m +$9m) (W1).
Working 6: Other exchange differences on Tybull
Further exchange differences will be recorded in other comprehensive income on the opening net assets of Tybull and their profit for the year
The opening net assets are given as dinar 888 million. The exchange difference is calculated by translating this at the opening and closing exchange rates.
dinar 888 million at opening rate of $1:dinar 3·5 = $253·7 million.
dinar 888 million at closing rate of $1:dinar 5 = $177·6 million.
An exchange loss of $76·1 million arises ($253·7 m – $177·6 m).
The revised profit of Tybull for the year is dinar 48 million (W5).
An exchange difference arises by comparing the profit at the average rate of exchange ($12 million (W5)) with the closing rate of $1:5 dinar. Profit of dinar 48 million at closing rate of 5 = $9·6 million. A further exchange loss arises of $2·4 million ($12m – $9·6m). (Tutorial note: This excludes the goodwill impairment of Tybull since this forms part of the exchange difference on goodwill (W6))
Total exchange differences to total comprehensive income are therefore $85·9 million ($7·4 million (W4) + $76·1 million + $2·4 million).
Working 7: Revaluation of property, plant and equipment
A revaluation gain arises on the property of Moorland of $64 million ($450m – $386m). This will be included within other comprehensive income. A deferred tax liability will arise of $69 million (($450m – $220m) x 30%) at 30 June 2017. The movement on deferred tax should be posted each year and the opening deferred tax balance would have been $36·6 million (($422m – $300m) x 30%). Deferred tax must be reported in the financial statements to match the corresponding gains and losses. The movement in deferred tax is an increase of $32·4 million ($69m – $36·6m). Deferred tax on the revaluation gain must be reported in OCI of $19·2 million ($64m x 30%). This means that $13·2 million ($32·4m – $19·2m) must be added to the tax expense in the year. The necessary adjustment is summarised as follows:
Working 8: Pension scheme
The benefits paid can be ignored as they will not alter the net pension deficit for the year. The service cost component and net interest component must be expensed against profit or loss. The cash contributions will reduce Moorland’s cash balance but increase the pension scheme’s assets. A remeasurement component should be calculated and recorded in other comprehensive income for the year as follows:
The necessary adjustment is summarised as follows:
