Consolidated SFP – Solutions to revision questions (Dec 2015)

Question 1
a)
£m £m Marks
Cost of investment 595 0.5
Assets acquired:
Share capital 100 0.5
Share premium 300 1
Retained earnings 60 1
Revaluation reserve 300 1
760
Group share 75% (75/100) 570 1
Goodwill 25
Total 5

b)
£m £m
Beano plc retained earnings 2,793 0.5
Dandy Ltd retained earnings 120 0.5
Less: Pre acquisition earnings (60) 1
Less: Unrealised profit ((65-25) x 50%) (20) 1
40
Group share 75% 30 1
Consolidated retained earnings 2,823
Total 4

c)
£m
Dandy Ltd - share capital 100 0.5
Dandy Ltd - share premium 300 0.5
Dandy Ltd – Retained earnings 120 0.5
Less: Unrealised profit (20) 1
Revaluation reserve 300 1
800

Non-controlling interest (Minority interest) 25% 200 0.5

Total 4
d) Beano plc Consolidated Statement of Financial Position at 31 March 2013

1
 Workings
B Plc D Ltd Adj's
£m £m £m £m Marks
Non-current assets
Property, plant and equipment 5,500 720 300 6,520 2
Goodwill (a) 25

Current assets
Inventory 108 75 (20) 163 2
Receivables 65 65 (21) 109 1.5
Cash 43 0 43 0.5
6,860

Equity and reserves

Ordinary £1 shares 1,000 100 1,000 0.5
Share premium 2,500 300 2,500 0.5
Retained earnings (b) 2,823
Non-controlling interest (c) 200

Non-current liabilities
Debentures 100 300 (200) 200 2

Current liabilities
Payables 97 28 125 0.5
Overdraft 0 12 12 0.5
6,860
Total 10

e)

IAS 38 / IFRS 3 does not allow internally generated goodwill to be capitalised as there
is no reliable monetary value.
Therefore doesn’t meet criteria for capitalisation (or inclusion as an asset under IASB Up to 2
Framework). marks
Purchased goodwill should be capitalised as it has an available monetary value (the
purchase price).
As a consequence it would not be possible to revalue the goodwill upwards after initial
recognition because this would mean recognising additional goodwill which has been Up to 2
internally generated (not allowed in IAS 38). marks

2
 f)
Marks
Brief written explanation of what impairment is and how to account for impairment of Up to 2
goodwill marks
Answer should make reference to how impairment will impact on figures shown in SFP:
£m £m
Original goodwill (a) 25
Less: impairment (10) 0.5
Revised goodwill 15 0.5

Original consolidated retained earnings (b) 2,823

Less: impairment (10) 0.5
Revised consolidated retained earnings 2,813 0.5
Total 4

g)

Goodwill is the difference between the consideration paid and the fair value of assets
Up to 2
acquired. Negative goodwill is when the fair value of assets is greater than the amount
marks
paid to acquire those assets.
The organisation should first check to ensure that no errors have been made in arriving at
1 mark
the calculation of negative goodwill.
Once this has been done IAS 38 / IFRS 3 requires that negative goodwill is immediately Up to 1
credited to the income statement. marks
Total 4

3
Question 2 (35 marks)

(a) (i)
£m £m Marks
Cost of investment 305 0.5
Assets acquired:
Share capital 100 0.5
Share premium 80 0.5
Retained earnings 95 1
Revaluation reserve 50 1
325
Group share 80% (80/100) 260 0.5
Goodwill at 01 October 2013 45
(a) (ii)
Amortisation (15) 1
Goodwill at 30 September 2014 30
(5)

(b)
£m £m
K plc retained earnings 550 0.5
W Ltd retained earnings 120 0.5
Less: Pre acquisition earnings (95) 0.5
Less: Unrealised profit ((120 x 20/120) x 50%) (10) 1.5
15

Group share 80% 12 0.5

562
Amortisation of goodwill (15) 0.5
Consolidated retained earnings 547

(4)

4
 (c)
£m £m
Share capital 100 0.5
Share premium 80 0.5
Revaluation reserve 50 1
Retained earnings 120 0.5
Less: Unrealised profit ((120 x 20/120) x 50%) (10) 1
340
Non-controlling interest (20%) 68 0.5
(4)

d)
Kenilworth plc
Consolidated statement of financial position at 30 September 2014

Workings
K plc W Ltd Adj's
£000 £000 £000 £000 Marks
Non-current assets
Property plant and equipment 980 452 50 1,482 1.5
Goodwill (a) 30

Current assets
Inventory 64 39 (10) 93 1.5
Receivables 98 49 (15) 132 1.5
Cash and cash equivalents 24 0 24 0.5

1,761
Equity and Reserves
Ordinary share capital 500 0.5
Share premium 400 0.5
Retained earnings (b) 547
Non-controlling interest (c) 68

Non-current liabilities
Debentures 0 200 (50) 150 1

Current liabilities
Payables 56 28 84 1
Owed to W Ltd 15 0 (15) 0 0.5
Overdraft 12 0.5
1,761
(9)

5
(e) It is not possible to revalue goodwill upwards after initial recognition because
1.5
this would mean recognising goodwill that has been internally generated.
IAS 38 does not allow internally generated goodwill to be capitalised… 0.5
…since no reliable monetary value exists. 1
(3)

(f) £000
Consideration 240
Fair value of net assets acquired (from (a) above) 260
Negative goodwill (20) 1

This would result in negative goodwill (when the consideration paid to acquire a
1
business is less than the fair value of the net assets acquired - bargain purchase)
Once checked for errors… 1
…negative goodwill must be immediately credited to the IS (as other operating
1
income).
(4)

(g) Company that has 1 or more subsidiaries Up to 2

ie: controls / owns >50% of voting power of subsidiary marks
Kenilworth plc owns 80% of the share capital in Wroxall Ltd

Company that is controlled by another (ie: its parent) Up to 2

Kenilworth plc owns 80% of the share capital in Wroxall Ltd marks

Shares in a subsidiary not owned by parent Up to 2

20% of shares in Wroxall Ltd not owned by Kenilworth plc marks
(6)

(35)