ACCA paper 2 international corporate reporting class notes

International Accounting Standards IASs/International Financial Reporting Standards IFRSs IAS 1 Presentation of Financial Statements IAS 2 Inventories IAS 7 Statement of Cash Flows IAS

ACCA Paper P2 (International)

Corporate Reporting

Class Notes December 2009

© The Accountancy College Ltd, July 2009

All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of The Accountancy College Ltd

Contents

PAGE

CHAPTER 5: CORPORATE SOCIAL RESPONSIBILITY AND CURRENT ISSUES 57

Introduction to the

paper

AIM OF THE PAPER

The aim of the paper is to test your understanding of financial reporting and probably more importantly to test your ability to solve problems in accounting scenarios that are every bit as messy as real life

FORMAT OF THE EXAM PAPER

The syllabus is assessed by a three hour paper-based examination The paper has

15 minutes reading time There are four questions of which you must do three as follows:

Section A (Compulsory Case Study)

(q1) The case will be based around a group scenario There will be 35 marks of

numbers and 15 marks of narrative

(50 marks)

Section B (Choice of 2 from 3 questions)

(q2) Focus Typically the second question in the exam focuses on a single

technical subject, such as pensions, financial instruments or deferred tax Often these questions require thorough technical knowledge

(25 marks) (q3) Mix Usually there are roughly 5 mini scenarios, each valued at 5 marks and

covering a wide range of financial reporting issues These questions require problem solving and usually far less technical knowledge than question two

(25 marks) (q4) Current Issues and CSR Whether you call this question ―Corporate Social

Responsibly‖, ―pure narrative‖ or another less polite phrase, there is no getting away from the very low technical content and the very high potential for letting your pen wander across a whole range of ideas These questions have to be seen to be believed So look at the chapter on Corporate Social Responsibility to get a feel for their style

(25 marks)

In reality, the examiner plays with the flavour of the B section Often the style of question 2, 3 and 4 can be so similar as to make distinction irrelevant

INTERNATIONAL EXAMINABLE DOCUMENTS (JUNE 2009)

Knowledge of new examinable regulations will not be required until at least six calendar months after the last day of the month in which the document

was issued, or the legislation passed Documents may be examinable even if the effective date is in the future

The documents listed as being examinable are the latest that were issued

prior to 31 May of the same year for the December examinations, and 30 November of the previous year for the June examinations The study guide offers more detailed guidance on the depth and level at which the

examinable documents will be examined The study guide should be read in conjunction with the examinable documents list

International Accounting Standards (IASs)/International Financial Reporting Standards (IFRSs)

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 7 Statement of Cash Flows

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors IAS 10 Events after the Reporting Period

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 16 Property, Plant and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee Benefits

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 23 Borrowing Costs

IAS 24 Related Party Disclosures

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economies

IAS 31 Interests in Joint Ventures

IAS 32 Financial Instruments: Presentation

IAS 33 Earnings per Share

IAS 34 Interim Financial Reporting

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurement

IAS 40 Investment Property

IAS 41 Agriculture

IFRS 1 First-time Adoption of International Financial Reporting Standards IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations

IFRS 7 Financial Instruments: Disclosures

IFRS 8 Operating Segments �

Other Statements

Framework for the Preparation and Presentation of Financial Statements

Interpretations of the International Financial Reporting Interpretations Committee (IFRIC)

SIC-12 Consolidation – Special Purpose Entities

SIC-13 Jointly Controlled Entities – Non monetary Contributions by

Venturers

SIC-15 Operating Leases – Incentives

SIC-21 Income Taxes – Recovery of Revalued Non-depreciable Assets

SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease

SIC-32 Intangible Assets – Website Costs

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

IFRIC 4 Determining Whether an Arrangement Contains a Lease

IFRIC 5 Rights to Interests from Decommissioning Restoration and

Environmental Rehabilitation Funds

IFRIC 7 Applying the Restatement Approach under IAS 29, Financial

Reporting in Hyperinflationary Economies

IFRIC 8 Scope of IFRS 2

IFRIC 9 Reassessment of Embedded Derivatives

IFRIC 10 Interim Financial Reporting and Impairment

IFRIC 11 IFRS 2: Group and Treasury Share Transactions

IFRIC 12 Service Concession Arrangements

IFRIC 13 Customer Loyalty Programmes

EDs, Discussion Papers and Other Documents

ED IFRS for Small and Medium-sized Entities

DP Management Commentary

DP Fair Value Measurements

DP Preliminary Views on an Improved Conceptual Framework for Financial Reporting - The Objective of Financial Reporting and Qualitative

Characteristics of Decision-useful Financial Reporting Information

UK EXAMINABLE DOCUMENTS (JUNE 2009)

FOR REFERENCE ONLY

Knowledge of new examinable regulations will not be required until at least six calendar months after the last day of the month in which the document

was issued, or the legislation passed Documents may be examinable even if the effective date is in the future

The documents listed as being examinable are the latest that were issued

prior to 31 May of the same year for the December examinations, and 30 November of the previous year for the June examinations The study guide offers more detailed guidance on the depth and level at which the

examinable documents will be examined The study guide should be read in conjunction with the examinable documents list

Statements of Standard Accounting Practice (SSAPs)

SSAP 4 Accounting for government grants

SSAP 5 Accounting for Value Added Tax

SSAP 9 Stocks and long-term contracts

SSAP 13 Accounting for research and development

SSAP19 Accounting for investment properties

SSAP 21 Accounting for leases and hire purchase contracts

SSAP 25 Segmental reporting

Financial Reporting Standards (FRSs)

FRS 1 Cash Flow Statements

FRS 2 Accounting for Subsidiary Undertakings

FRS 3 Reporting Financial Performance

FRS 5 Reporting the Substance of Transactions

FRS 6 Acquisitions and Mergers

FRS 7 Fair Values in Acquisition Accounting

FRS 8 Related Party Disclosures

FRS 9 Associates and Joint Ventures

FRS 10 Goodwill and Intangible Assets

FRS 11 Impairment of Non current assets and Goodwill

FRS 12 Provisions, Contingent Liabilities and Contingent Assets

FRS 15 Tangible Non current assets

FRS 21 Events After the Statement of financial position Date

FRS 22 Earnings per share

FRS 23 The Effect of Changes in Foreign Exchange Rates

FRS 24 Financial Reporting in Hyperinflationary Economies

FRS 25 Financial Instruments: Disclosure and Presentation

FRS 26 Financial Instruments: Recognition and Measurement

FRS 28 Corresponding Amount

FRS 29 Financial Instruments: Disclosures

Reporting Statement

Operating and Financial Review (OFR)

Other Statements

Statement of Principles for Financial Reporting

FRSSE Financial Reporting Standard for Smaller Entities

Urgent Issues Task Force (UITF) Abstracts

Foreword to UITF Abstracts

UITF Abstract 4 Presentation of long-term receivables in current assets UITF Abstract 5 Transfers from current assets to non current assets

UITF Abstract 24 Accounting for start-up costs

UITF Abstract 27 Revision to estimates of the useful economic life of

goodwill and intangible assets

UITF Abstract 28 Operating lease incentives

UITF Abstract 29 Website development costs

UITF Abstract 31 Exchanges of businesses or other non-monetary assets for

an interest in a subsidiary, joint venture or associate

UITF Abstract 34 Pre-contract costs

UITF Abstract 36 Contracts for sales of capacity

UITF Abstract 40 Revenue recognition and service contracts

UITF Abstract 41 Scope of FRS 20

UITF Abstract 42 Reassessment of embedded derivatives

UITF Abstract 44 FRS 20 (IFRS 2) Group and Treasury Share Transactions

Discussion Papers and Other Documents

Revenue recognition

STREAM SELECTION

All students, regardless of circumstances should be switching to the international stream for P2 Corporate Reporting Because GBR stream students are effectively required to understand both UK GAAP and International GAAP, GBR stream has become unbearable International students only have to know International GAAP

The differences in the exam questions

There is very little difference between the dominant International stream and the GBR variant This is both technically and in terms of the exam UK financial reporting has long been converging with International Financial Reporting Standards and so the UK FRS are largely copies of the International FRS But more importantly, the GBR exam is a copy of the International examination As the examiner explained at a conference in February 2007; the examiner first writes the international examination, checks it, rethinks it, and checks it again; then he converts it to the GBR exam by changing the $ to £, reformatting and adjusting for minor differences

So there is really no difference between the International Stream examination questions and the GBR variant

The differences in the exam answers

Often the exam answers are also the same for both streams However, where there is a difference, it is always the International students who have the easier ride The international Deferred Tax is much easier than the UK equivalent The same is true for cash flow statements, associates and goodwill depreciation

Sometimes the differences between the knowledge a GBR student is required to understand and the equivalent knowledge required by an international student can

be come quite extreme For business combinations for example, an international student is required to know the new rules, which are quite substantial A GBR student would be required to know the old rules and the new rules So giving an even more specific example, a GBR student would be required to be able to do a step acquisition two different ways; the old way and the new way That‘s one heck

of a challenge

Course Structure

The weekend and evening courses for P2 Corporate Reporting are delivered in 10 sessions; that is 10 evening classes or 5 days at the weekend The course will lean heavily towards the International stream This is after all, the way in which the examiner sees the exam; International is the principal exam and GBR is a variant But, I will use the language of the International stream and the GBR variant interchangeably; so some times I‘ll use the word ―stock‖ sometimes ―inventory‖

Super Sunday

Hopefully, all students are already or will convert to International stream However, should there be sufficient demand for GBR, then I will run a one day GBR session on a Sunday at the end of the end of the course, to give those students remaining in GBR the extra knowledge required for GBR

Stream Selection Frequently Asked Questions

Which stream should I select?

International Regardless of your circumstances, you should be doing P2 Corporate Reporting International The examiner is focussed on the International stream and

so the questions make the most sense in the International exam All the listed UK companies use International FRS already and International FRS will very soon apply

to absolutely all companies in the UK UK FRS are walking dead Get out of the GBR variant now

I did my F7 Financial Reporting using the GBR stream Should I really change?

Absolutely, change now Well done, you are through FR Now to get through CR The easiest stream is the International stream The most useful stream is the International stream So change stream All the stuff you learnt from F7 GBR will help you with P2 International You will hardly notice the difference All that basic knowledge regarding P&L report, Balance Sheet, Cash Flow Statement, leases, fixed assets, grants, tax etc still applies

I learnt a load of FRS numbers at F7 GBR Will they help at P2 International?

If you learnt a whole load of UK FRS numbers for F7, well those FRS numbers are useless, it is true But so are International FRS numbers, because the P2 examiner does not focus on FRS numbers An FRS number is never the answer to the question at P2 If the examiner sets out a scenario describing provisions, discontinued and pensions; then he wants to hear about accounting for provisions, discontinued and pensions He does not want a list of FRS numbers; either International or UK FRS numbers

I want to change to International stream Is it easy?

Very easy I have not done it myself of course, but the students who have changed stream over the last two years have had no problem Most simply send an email requesting a change of stream for P2 and have received a new exam docket showing P2 International shortly after Others have used the phone, which seems

to work fine as well But the downside is that you often have to wait a long time to get through to the ACCA on the phone

What happens if I accidentally use a GBR phrase in my International exam?

Nothing The examiner does not care if you use language interchangeably He himself is constantly switching between UK and International language in his answers, which I think is fair enough This is an advanced financial reporting exam looking at the substance of a highly political communication science Not a test of rote learning a load of formats

I am still a little uncertain as to which stream to use Can I talk it through?

Of course It‘s good to talk as they say Give me (Martin Jones) a call on my mob The number is 07940 101520 Leave a message if I don‘t pick up Text is good too!

RECENT EXAM CONTENT

Question Pilot Dec 2007 June 2008 Dec 2008 June 2009

1 (groups) Zambeze

Classic CFS Narrative

on quasi sub and creative accounting

Beth

Classic B/S with share based payment, derivatives and off B/S finance

Narrative

on corporate social responsibilit

y

Ribby

Classic B/S with foreign sub, share based payment and pensions

Narrative

on currencies and creative accounting

Warrburt

Challenging CFS, with CFS interpretati

on and ethics

Bravado

Group B/S with plenty going on, plus a discussion

of goodwill and ethics

2 (focus) Kesare

Deferred tax

Macaljoy

Pensions and provisions

Norman

Operating segments and revenue

Marrgret

Discussion

on business combination

s

Aron

Financial instruments

3 (mix) Electron

Mix of revenue, provisions, leases, PBSE, share based payment and more

Ghorse

Mix of impairment, discontinue

d, deferred tax,

revaluation, leases and more

Sirus

Mix of financial instruments, goodwill, employee payments and more

Johan

Dense mix

of intangibles, revenue and other issues

Carpart

Mix with a heavy leaning to revenue recognition

General discussion

of the importance

of FR

Smith

Actuarial pension issues

INTERACTIVE STUDENT ADVICE

The following is advice aimed at students using the on line media to do battle with P2

Firstly, I would advise that you treat this course as if it were a classroom course Set an evening each week (or a half day each weekend) to study the subject Sit yourself in front of your computer with paper, pen, calculator and these notes and copy what I am doing as if you and I were in class together

Then rework the questions from the recorded lectures until you are happy with them Any parts you are unsure about, review the relevant recording and rework the problem a couple of times

Once you are satisfied with your understanding of the essentials as recorded to video, then provided time allows work the supplementary questions that have not been recorded There are answers to all the questions in the back, but obviously it‘s the answers to the unrecorded questions that will interest you most

If you are really stuck, then post your problem to the discussion board See if you can help others with their problems posted to the discussion board I will review the boards when I can and point you and others in the right direction My advice is that the little things with which you struggle are often so minor as to be near irrelevant Concentrate on the big picture, make sure you can do all the basics and when you come back to the same question for the third or fourth time, the tricky issues that seemed hard then will resolve themselves

Emails Really I should not be corresponding through email as this denies other students the opportunity to see our correspondence I can see that email is very tempting, but it is against the spirit of Interactive You guys are supposed to interact with one another as well as with me This is why the discussion board is the way to communicate

Finally, I wish you very good luck with your on line studies and with the exam at the end of term

Chapter 1

Basic groups

This means the group fs include a share of the profit on the income statement and

a share of the net assets on the statement of financial position (in the UK we show three lines on the P&L, share of operating profit, finance and tax)

A joint venture is an entity over which the parent has joint control Despite its name, joint control is taken to mean very significant influence So a JV is accounted for as a 50% associate There has never been a question in which students were required to consolidate a joint venture

Investment

When a parent has no relationship with another entity, then that entity is known as

an investment and brought into the fs using investment accounting This means that the shares are carried at fair value Investment accounting is covered in much more detail later, in the chapter on financial instruments

The development of accounting for goodwill

Until 2009, Goodwill disclosed on the statement of financial position was ‗our‘

goodwill (that is until recently goodwill has shown ownership) This is often called

‗partial goodwill‘ (or ‗net goodwill‘) There is a newly reissued IFRS (IFRS3(2008revised)) that recommends goodwill disclosed be changed to the entire

goodwill of the entity (so that goodwill would then show control) This is in order to

make goodwill consistent with the rest of the statement of financial position where

we already use control This recommendation is usually called ‗full goodwill‘ However, the new IFRS continues to allow net goodwill, making the whole situation very confused

Process of development

The process of development is undertaken by the International Accounting Standards Board (IASB) There are three phases ending with an IFRS The three phases are as follows:-

DP Discussion Paper

ED Exposure draft IFRS Financial reporting standard

This is the higher of VIU and NRV

● VIV = Value in use

● NRV = Net realisable value

Impairment of subsidiary

Goodwill impairment is identified by looking at the impairment of the whole subsidiary

Question: Fakenstock

A parent, Fakenstock, bought 100% of the equity of a sub at the year start for

$900m Share capital was $100m, reserves were $400m and retained profits for the year were $200m

Goodwill has in infinite life and an impairment review of the sub at the first year end revealed a value in use (VIU) of $780m and net realisable value (NRV) of

During the year the sub made profits retained of $50m and sold goods valued at

$12m to the parent with a margin of 25%; one third of which is still in inventory in the parent

Goodwill has an infinite life and a year end review reveals a value in use (VIU) of

$360m and net realisable value (NRV) of $666m

It is the group‘s policy to value the non-controlling interest at fair value (full goodwill)

Required

Goodwill and NCI

CHANGES IN OWNERSHIP

A parent may simply buy or sell shares However, the group viewpoint is quite different A group only acquires a sub when it gets control and only sells a sub when it loses control Other share exchanges are simply changes in ownership and result in transfers The examiner has written an article on this element of IFRS3

It is available at accaglobal.com within the P2 section under ―Technical Articles‖ It was published in February 2009 The following illustrative questions take their inspiration from that article

Question: Top

At the year start, Top acquired a 15% interest in Dog at a cost of $15m At the year end Top acquired a further 40% interest in Dog at a cost of $60m and obtained control The fair value of the initial 15% interest at this time was $21m and the fair value of the NCI was $58.5m The fair value of the identifiable net assets was $100m The group has recently changed the policy of recognising the non-controlling interest from valuation at fair value of identifiable net assets (partial goodwill) to valuing at fair value as indicated by market price at acquisition (full goodwill)

At the year end Star had identifiable net assets of $430m The growth of $30m had been reported through the income statement

Required

Profit on disposal to be recognised in the income statement

Supplementary Question: Freddie

On 1 January four years ago, Freddie acquired 80% of the shares of Mercury for

$500,000 Mercury had share capital of $100,000 (nominal $1 each) and had reserves of $200,000 No shares have been issued since acquisition At acquisition, the fair value of the net assets was $320,000 The fair value adjustment related to inventory, that was sold immediately after the acquisition Goodwill has been tested for impairment at each year end since acquisition No goodwill has been impaired since then It is the group‘s policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary‘s net assets

The income statements for the year ended 31 December in the current year are as follows:

Freddie Group Mercury

Opening retained earnings at the current year start 5,000 340

Freddie sold half of its holding in Mercury on 1 July in the current year Freddie received cash proceeds of $430,000, but this has been recorded in a suspense account on the statement of financial position The group accounts of Freddie group have been prepared and are presented above However, the accounts of Mercury have not yet been consolidated because of the mid year disposal

Freddie retains influence over Mercury via its remaining shareholding The fair value of the associate retained is measured at $420,000 at disposal

Mercury paid the interim dividend in cash on 17 April in the current year prior to the disposal

Required

Prepare the consolidated income statement for the year ended 31 December

Classic question: Hebrides (parent sub associate with goodwill impairment)

Exactly half way through the year, Hebrides acquired 80% of the share capital of Skye and 30% of the share capital of Aran Hebrides acquired Skye by way of share for share exchange Hebrides issued five of its own shares for two Skye shares The market value of Hebrides‘ shares was $5 on that day The share issue has not yet been recorded Aran shares were acquired for $500,000 cash consideration

It is the group‘s policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary‘s net assets

The summarised draft financial statements are as follows:

Income Statement or Profit and loss account for the year ended 31 March

Statement of financial position as at 31 March

$‘000 $‘000 $‘000 $‘000 $‘000 $‘000 Non current assets

The following information is relevant:

(1) At acquisition the fair value of all Aran‘s assets was reasonably represented by the book value The same was true of Skye with the exception of some land and plant These had fair values of $400,000 and $300,000 above book values The plant had a remaining life of five years Depreciation is charged

to cost of sales

(2) In the post acquisition period Skye sold goods to Hebrides at $120,000 Transfer transactions were calculated to give a margin of 20% (mark up of 25%) Skye held five sixths of these goods in inventory at the year end (3) Goodwill related to the Skye acquisition was subject to a brief impairment review and this was sufficient to confirm that there was no impairment However, a similar review of the goodwill related to Aran revealed that there may be an impairment So a more detailed review was conducted which revealed a value in use of $790,000 and a net realisable value of $560,000 Goodwill impairment is separately discloseable on the face of the income statement

(4) The current account between Hebrides and Skye did not agree due to cash in transit from subsidiary to parent of $4,000 Hebrides recorded a receivable of

$25,000 at the year end Dividends were paid in the last month before the year end

Required

Income statement (Profit and loss report) and statement of financial position (balance sheet) for the group for the year ended 31 March

Chapter 2

Complex groups

CHAPTER CONTENTS

VERTICAL GROUP STRUCTURE - 31

VERTICAL GROUP STRUCTURE

This occurs when a sub buys a sub-sub Vertical group structure can often lead to

a non-controlling interest greater than 50% The examiner has written an article

on this element of IFRS3 It is available at accaglobal.com within the P2 section under ―Technical Articles‖ It was published in April 2009 the following illustrative questions take their inspiration from that article

It is the group‘s policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary‘s net assets (partial goodwill)

The Statements of financial position are as follows:

$‗000 $‗000 $‗000 Investment in S (14,000 shares) 60

Question: Dee (slight return)

At the year start, on 1 January Mersey (M) bought 40% of Irwell (I)

On 1 July Dee acquired 75% of M and 25% of I

Goodwill has not been impaired It is the group‘s policy to value the non-controlling interest at fair value Fair value of the nci and reserves where as follows:

Exam question: Rodney

The following draft statements of financial positions relate to Rodney, a public limited company, Del, a public limited company, and Trigger, a public limited company, as at 30 November:

Total equity and liabilities 2,660 _ 895 450

It is the group‘s policy to value the non-controlling interest at fair value

The following information is relevant to the preparation of the group financial statements:

(i) Rodney had acquired eighty per cent of the ordinary share capital of Del on

1 December three years ago, when the retained earnings of Del were $100 million The fair value of the non-controlling interest was $154m at acquisition The fair value of the net assets of Del was $710 million at that date Any fair value adjustment related to inventory and these had been realised by the current year end There had been no new issues of shares in the group since the current group structure was created

(ii) Rodney and Del had acquired their holdings in Trigger on the same date as

part of an attempt to mask the true ownership of Trigger Rodney acquired forty per cent and Del acquired twenty-five per cent of the ordinary share capital of Trigger two years ago The fair value of the non-controlling interest in Trigger was $149m at acquisition The retained earnings of Trigger on that date were $50 million and those of Del were $150 million There was no revaluation reserve in the books of Trigger at acquisition The fair values of the net assets of Trigger at acquisition were not materially different from their carrying values

(iii) The group operates in the pharmaceutical industry and incurs a significant

amount of expenditure on the development of products These costs were formerly written off to the income statement as incurred but then reinstated when the related products were brought into commercial use The reinstated costs are shown as ‗Development Inventory‘ The costs do not

meet the development criteria in IAS 38 Intangible Assets for classification

as intangibles and it is unlikely that the net cash inflows from these products will be in excess of the development costs In the current year, Del has included $20 million of these costs in inventory

(iv) Del had purchased a significant amount of new production equipment early

in the year The cost before trade discount of this equipment was $50 million The trade discount of $6 million was taken to the income statement Depreciation is charged on the straight line basis over a six year period (v) The policy of the group is now to state tangible non-current assets at

depreciated historical cost The group changed from the revaluation model

to the cost model under IAS 16 Property, Plant and Equipment at the current

year start and restated all of its tangible non-current assets to historical cost

in that year except for the tangible non-current assets of Trigger These had been revalued by the directors of Trigger on the first day of the current year The values were incorporated in the financial records creating a revaluation reserve of $70 million The tangible non-current assets of Trigger were originally purchased on 1 December two years before the current year end,

at a cost of $300 million The assets are depreciated over six years on the straight line basis The group does not make an annual transfer from revaluation reserves to the retained earnings in respect of the excess depreciation charged on revalued tangible non-current assets There were

no additions or disposals of the tangible non-current assets of Trigger for the two years to the current year end

(vi) The goodwill resultant from the Del acquisition was impairment tested at the

first and second year end after acquisition and again at the current year end The first and second impairment reviews revealed no problems However, the current review identified a recoverable value of $809m for Del There has been no impairment in Trigger goodwill since acquisition

Required

Prepare a consolidated statement of financial position of the Rodney Group as at 30 November

(35 marks) (ACCA December 2002 rewritten)

Chapter 3

Foreign currency

translation

CHAPTER CONTENTS

INTRODUCTION TO FOREIGN CURRENCY TRANSLATION - 37 FOREIGN TRANSACTIONS - 37 FOREIGN SUBSIDIARIES - 39

INTRODUCTION TO FOREIGN CURRENCY TRANSLATION

This chapter addresses the process of translating foreign currency information into the home currency (IAS 21 and FRS 23)

This chapter answers two questions:

Creditors > 1 year (x)

_

xx _

Question: Feature (continued)

The company pays the creditor on schedule in the new year

FOREIGN SUBSIDIARIES

Group stage

A foreign subsidiary needs translation before consolidation:

Statement of financial position Closing rate

Goodwill

Goodwill is a subsidiary asset so from the parent point of view it‘s a foreign asset There is no guidance in IFRS3 or IAS21 as to how movements in the full goodwill would be split between controlling interest and non-controlling interest Therefore,

it is likely that any foreign sub examined would use the partial goodwill assumption

If by some chance full foreign goodwill is examined, simply ignore the goodwill policy and answer using partial foreign goodwill That assumption will lose very few marks, possibly just 1 mark, and will make you so much quicker that you will gain back many more marks with your speed

Question: Kenya

Kenya owns 90% of the ordinary shares of a foreign subsidiary, Malawi, which has the functional currency of the kwacha The subsidiary was acquired at the start of the current accounting period for 1,200,000 kwachas, when its reserves were 700,000 kwachas

At the date of the acquisition the fair value of the net assets of the subsidiary were 1,000,000 kwachas This included a fair value adjustment in respect of land The land has not been sold

Goodwill is estimated to have an infinite life, but has not been impaired It is the group‘s policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiary‘s net assets

Statement of financial position Kenya

Relevant exchange rates are:

Date Exchange rate (Kwachas to 1 Shilling)