Chapter 2: More Group Accounts

Question 1

Fair value / market value

Answer 1

the amount for which an asset could be exchanged in an arms length transaction by knowledgeable and willing parties

Question 2

Intragroup trading

Cash in transit
Goods in transit
Eliminate intragroup receivable and payable

Answer 2

Cash in transit
Dr Cash
Cr Receivables

Goods in transit
Dr Inventories
Cr Payables

Eliminate intragroup payables and receivables
Dr Payables
Cr Receivables

Question 3

Provision for unrealised profits (PUP Adjustment)

Inventories sold at a profit to other group companies

Answer 3

Sale by Parent to sub
Dr Retained earnings (seller)
Cr Consolidated inventories

Sale by sub to parent
Dr Retained earnings (Seller)
Cr Consolidated inventories

Question 4

PUP formula if some inventory has been sold and some in still in stock

Answer 4

Profit on intercompany sale x % of goods still in inventory at the year end

Question 5

PUP for PPE

Answer 5

Original PUP on transfer x (remaining life at year end / remaining life left at date of transfer)

or

work out carrying amount if PPE was not sole and carrying amount of PPE now.

Dr expense/retained earnings (seller)
Cr PPE

Question 6

NCI and Goodwill at full or fair value

Answer 6

NCI allocated proportion of goodwill acq

What would it cost if we bought all the shares?

Question 7

impairment on goodwill using fair value

Answer 7

Dr RE
Dr NCI
Cr GW

Question 8

What is deferred consideration

Answer 8

Refers to any amount payable in the future.
The fair value used in the goodwill calculation is the present value of the future amount payable, using the purchaser’s cost of capital.

The unwinding of the discount will be reflected in the liability and finance costs in future accounting periods.

Question 9

What is a contingent consideration?

Answer 9

usually payable to the former owners and is dependant on some future event. For example: profit levels

The future amount payable should be measured at the fair value at acquisition.

Estimates of the amount payables and the likelihood of it being issued are both taken into account in estimating the fair value.

If an estimate is revised, movement is taken to the Pnl and NOT put through the goodwill working.

Question 10

Share for share exchanges

Answer 10

Sometimes company A acquires the shares in company B bu issuing some of its own shares.

These should be recorded at market value at acq.

If the parent company has not recorded the share issue in its accounts, then the share capital and share premium account balances will need to be increased.

If the company is quoted (listed), fair value of the shares is the published price at the date of the exchange transaction.
Directly attributable costs must be treated as an expense and not added to cost of investment.