Explain Questions 45-49 Flashcards
Frogmette plc purchased 75% of the shares of Todpen Ltd on 1 July 2009, when the fair value of the identifiable assets acquired and liabilities assumed by Frogmette plc was £22,000,000.
The non-controlling interests and goodwill arising on the acquisition is to be calculated using the proportionate method.
The consideration for the acquisition was a cash payment on 1 July 2009 of £17,000,000.
A further cash payment of £2,000,000 will become payable on 1 July 2011 if the reported profit for the period of Todpen Ltd exceeds £1,500,000 in each of the financial years ended 30 June 2010 and 30 June 2011.
The fair values of the probable cash payment at 1 July
2009 and 1 July 2010 were £1,200,000 and £1,800,000 respectively.
A discount rate of 6% was used in assessing these fair values.
Frogmette plc recognised the cash payment of £17,000,000 on 1 July 2009 as a non-current asset investment in its draft financial statements and goodwill based on the £17,000,000 cash payment in the draft consolidated financial statements but has made no other accounting entries in respect of the acquisition.
The 75% holding gives Frogmette plc control over Todpen Ltd, so Frogmette plc should recognise Todpen Ltd’s assets, liabilities, income and expenses in its consolidated financial statements from 1 July 2009. It should also recognise the 25% non-controlling interests in Todpen Ltd’s net assets and profit.
Frogmette plc should recognise goodwill acquired in the business combination. Contingent consideration should be recognised at the date of acquisition and should form part of the calculation of goodwill.
On 1 July 2009, goodwill should be calculated as follows:
Consideration in cash 17,000,000
FV of contingent consideration 1,200,000
—–
NCI of net assets at acq:
25% x 22,00,000 = 5,500,000
———
23,700,000
(FV of assets and liabilities - 22,000,000)
——–
Goodwill = 1,700,000
On acquisition the FV of remaining consideration should be recognised as a non-current liability
At 30 June 2010:
A finance cost should be charged to the group profit or loss in respect of the unwinding of the discount incurred in the first year after acquisition:
£1,200,000 × 6% = £72,000.
The contingent consideration should be increased to £1,800,000 as that is the fair value of the probable cash payment that will become payable on 1 July 2011. Because this date is slightly more than one year after 30 June 2010, the contingent consideration remains in long-term liabilities.
The balance of £528,000 (£1,800,000 – (£1,200,000 + £72,000)) should be charged to group profit or loss as additional consideration for the acquisition.
`
Goodwill on acquisition of £1,700,000 is unaffected by the change in fair value of the contingent consideration because the increase arises after the acquisition date.
Goodwill should not be amortised but is subject to annual impairment review.
The fair value of the identifiable assets acquired and liabilities assumed by Frogmette plc on the acquisition of Todpen Ltd included £1,000,000 in respect of an internally generated brand which had not been recognised in Todpen Ltd’s own financial statements.
At 1 July 2009, the directors of Todpen Ltd expect the brand to have a remaining life of five years
IFRS 3 requires that identifiable intangible assets acquired in a business combination should be recognised separately from goodwill in the consolidated financial statements, even if they are not recognised in the separate financial statements of the acquired subsidiary.
An asset is identifiable if it is separable (capable of separate sale or transfer) or it arises from contractual or legal rights.
The internally generated brand of Todpen Ltd is not recognised in its separate financial statements because it does not meet the IAS 38 recognition criteria; it does, however, meet the definition of an asset and is separable, and is thus recognised on acquisition.
Since the brand is not recognised in Todpen Ltd’s own financial statements, it is brought into the consolidated financial statements as part of the adjustment to recognise goodwill.
As a result of this adjustment, consolidated intangible assets increase by £1 million and goodwill is recognised at an amount £1 million less than it would have been had the fair value of identifiable assets acquired and liabilities assumed not included the brand.
Because the brand has a finite life, a further consolidation adjustment is required at 30 June
2010 in respect of one year’s amortisation: £1,000,000/5 = £200,000.
The carrying amount of the brand at 30 June 2010 in the consolidated financial statements is
£1,000,000 – £200,000 = £800,000.
Consolidated profit should be reduced by amortisation of £200,000.
The group share of this adjustment is 75% (£150,000) and the non-controlling interest’s share is 25% (£50,000).
On 1 July 2009 Frogmette plc issued 3 million 4% redeemable preference shares of £1 each at par and was recognised as part of equity.
The preference shares will be redeemed on 1 July 2014 at a premium.
The effective interest rate associated with the preference shares is 6%.
The preference share dividend for the year was paid on 30 June 2010 and was recognised in Frogmette plc’s statement of changes in equity.
The preference shares have, apparently, been treated as equity because the dividend has been recognised in the statement of changes in equity, rather than in finance costs.
However, in substance, the financial instrument has the characteristics of a liability, rather than equity: it comprises a contractual obligation to deliver cash at regular intervals in the form of a preference dividend, and then to redeem the shares at a fixed amount on a fixed date.
Therefore, the preference dividend, in substance, represents an interest payment that should be recognised as part of finance costs.
Also, the actual amount of the dividend paid on 30 June 2010 is not the full finance cost; an adjustment is required to reflect the amount of the effective interest rate
Liability at 1 July 2009 3,000,000
Effective interest (6%) 180,000
Preference dividend paid (4%) (120,000)
Liability at 30 June 2010 3,060,000
The payment of £120,000 is recognised in the statement of cash flows.
Frogmette plc’s marketing director, Esther, is also a director of Ballestane Ltd, a company that has no other connection with any of the companies in the Frogmette plc group.
On 1 July 2009, Ballestane Ltd borrowed £2,000,000 from a commercial lender.
The loan was guaranteed by Frogmette plc.
Esther holds no shares in Ballestane Ltd, Frogmette plc, Todpen Ltd or Brewmin Ltd
The first point to be decided is whether or not Ballestane Ltd and Frogmette plc are related parties, because of Esther.
According to IAS 24, Related Party Disclosures, two entities are not necessarily related parties simply because they have a director in common.
There appears to be no other aspect to the case that would mean that the two companies are related, and so no disclosure arises in respect of IAS 24.
However, it is possible that disclosure, or even recognition, may be required under IAS 37,
Provisions, Contingent Liabilities and Contingent Assets. It is possible that the guarantee of the bank loan constitutes a contingent liability, but more information would be required to determine whether or not this was the case.
If the possibility of Ballestane Ltd defaulting on the loan is remote, there is no need for disclosure under IAS 37. However, if default is possible, disclosure of the circumstances will be required both in Frogmette plc’s own financial statements and in the group financial statements (assuming that the financial effect is material to the group, which seems likely).
If default were probable, then a liability would be recognised in Frogmette plc’s financial statements, and in the group financial statements if material, and if the obligation were capable of being measured
Frogmette plc purchased 30% of the ordinary shares of Brewmin Ltd several years ago. Brewmin Ltd’s non-current assets in its draft financial statements on 30 June 2010 included a piece of freehold land at carrying amount of £1,800,000.
The land was intended for the construction of a
new warehouse.
A recent survey, which cost £25,000, revealed that the land had been badly contaminated by previous industrial activity. Brewmin Ltd’s directors estimated the value in use of the contaminated land at £1,000,000 at 30 June 2010.
On the same date, the company received an offer for the land for £1,200,000 from a company specialising in land decontamination.
The agent’s commission on sale will be 5% of the selling price if the sale goes ahead. Legal costs associated with the sale are estimated at £30,000.
An option to buy another piece of land in order to build the warehouse was available on 30 June 2010 for £100,000. Brewmin Ltd did not purchase this option. Brewmin Ltd uses the cost model for all property, plant and equipment.
It appears that the piece of freehold land owned by Brewmin Ltd has suffered impairment and
that the carrying amount is overstated.
Assets should be carried at no more than their recoverable amount. Recoverable amount is the
higher of value in use and fair value less costs to sell.
The value in use at 30 June 2010 is £1,000,000 and fair value less costs to sell is:
Fair value before selling costs 1,200,000
Less costs to sell:
Agent’s commission (5%) (60,000)
Legal costs (30,000)
—————-
1,110,000
The value of the option to purchase another piece of land is irrelevant to the analysis, as is the cost of the land survey that revealed the impairment.
The recoverable amount is £1,110,000, and the amount of the impairment to be recognised by Brewmin Ltd is £690,000 (£1,800,000 – £1,110,000).
Brewmin Ltd uses the cost model for property, plant and equipment, so there is no revaluation surplus in respect of the land.
Therefore the full amount of the impairment should be recognised in Brewmin Ltd’s profit or loss.
Brewmin Ltd’s profit should be reduced to £710,000 (£1,400,000 – £690,000). Brewmin Ltd is an associate of Frogmette plc and is accounted for in accordance with the equity method.
The group share of Brewmin Ltd’s profit is £213,000 (£710,000 × 30%).
Explain the differences between IFRS Standards and UK GAAP in relation to the acquisition of Todpen Ltd in issues (1) and (2) above.
You should assume that Todpen Ltd would make an accounting policy choice to recognise intangible assets separately from goodwill, where it can do so.
UK GAAP (FRS 102) requires that, post-acquisition, subsequent adjustments to the amount of contingent consideration are treated as an adjustment to the cost of the combination, if the adjustment is probable and can be measured reliably, thus increasing or decreasing goodwill.
At 30 June 2010 the fair value is estimated at £1.8 million and this should be recognised as part of the goodwill.
Under UK GAAP, non-controlling interests is always measured using the proportionate method (ie, as a share of net assets).
Under UK GAAP an intangible asset must be recognised separately from goodwill if:
- it meets the recognition criteria (it is probable economic benefits will flow and the asset can be measured reliably); and
- it arises from contractual or other legal rights; and
- it is separable.
If an intangible asset meets the recognition criteria but not both of criteria (2) and (3), an entity can make an accounting policy choice to recognise intangible asset
separately from goodwill.
In the case of Todpen Ltd’s brand, the recognition criteria are met, the brand is separable and it is assumed that Todpen Ltd would choose to separately recognise an intangible asset, if possible, so Frogmette plc would recognise the brand separately and therefore the accounting treatment is the same as under IFRS 3.
Recalculation of goodwill under UK GAAP:
Consideration in cash 17,000,000
Contingent consideration at FV
(1 July 2010) 1,800,000
——–
18,800,000
——
Less FV of assets acquired (22,000,000 x75%)
(16,500,000)
———
2,300,000
Under UK GAAP, goodwill is amortised over its expected useful life. If this cannot be reliably estimated, it should not exceed 10 years.
On 1 October 2011 Advent plc acquired 80% of the two million ordinary shares of Brightdays Ltd. Brightdays Ltd operates a number of UK based holiday parks.
On the acquisition of Brightdays Ltd, the fair value of the identifiable assets acquired and liabilities assumed by Advent plc was equal to their carrying amount of £6.6 million.
The consideration for this acquisition comprised:
-£520,000 in cash, paid on 1 October 2011;
- 800,000 new shares in Advent plc to be issued on 1 August 2012 (the shares had a fair value of –
£2.55 at that date). Advent plc’s ordinary shares were valued at £2.30 on 1 October 2011; and
- an additional cash payment of £3.7 million payable on 30 September 2012.
In his notes to the draft financial statements, David Chin has explained that the £520,000 cash paid on 1 October 2011 has been included as an investment in the Advent plc group financial statements.
He suggests that consolidation is not required until the following year, stating:
“although we legally own the shares, the substance of the transaction arises in the following year,
when the majority of consideration is provided.”
Advent plc has decided to measure the non-controlling interests and goodwill arising on the acquisition of Brightdays Ltd using the proportionate method.
An appropriate annual discount rate for Advent is 6% pa.
The ‘Brightdays Ltd’ table below relates to Brightdays Ltd as at the date of acquisition and the current year end.
Calculation of goodwill
Control is the key to whether Brightdays Ltd is a subsidiary.
Advent plc acquires control on 1 October 2011, and so this is when consolidation is required, and goodwill ascertained.
Consideration may not necessarily pass to the acquiree’s shareholders at the date of acquisition – as is the case here.
Deferred consideration should be measured at its fair value at the acquisition date.
The fair value depends on the form of the deferred consideration, here the deferred consideration is in the form of cash and therefore Advent plc should recognise a liability at the present value of the amount payable
Advent plc should therefore recognise a liability for the deferred cash consideration, being the present value of the £3.7 million future payment, discounted at 6% for one year:
3.7m/1.06 = £3,490,566 and recognise an increase in equity of £1.84 million (800,000 × £2.30), being the present value of the shares to be issued in a year’s time
Goodwill should therefore be calculated as follows:
Cash paid 1 October 2011: 520,000
Cash payable: 3,490,566
Shares to be issued: 1,840,000
—————
5,850,566
NCI (20% x 6,600,000) 1,320,000
Less FV of acquired: (6,600,000)
—————-
Goodwill = 570,655
Deferred consideration balance at 30 June 2012
The deferred cash consideration should be increased each year by the unwinding of the discount at 6%.
In the case of Advent plc, the acquisition took place nine months before the year-end, so a finance cost of:
£157,075 (9/12 × 6% × £3,490,566) should be recognised in profit or loss, and the deferred cash consideration liability increased by the same amount.
Consolidation of Brightdays Ltd into Advent plc’s consolidated statement of financial position.
Brightdays Ltd was acquired mid-year, meaning that the company will be generating nine months of post-acquisition profit.
Extracts are provided that show the net assets of Brightdays Ltd have increased by £600,000 (£7.2m – £6.6m).
Brightdays Ltd has therefore generated post-acquisition profits of £600,000, of which 80% (600,000 × 80% = £480,000) is attributable to owners of Advent plc and 20% (600,000 × 20% = £120,000) is attributable to the NCI.
On 1 July 2011 Advent plc entered into a new contract in respect of its head office building.
The contract met the definition of a lease under IFRS 16, Leases.
The lease is for five years and lease payments are £12,000 paid annually in arrears.
The building is estimated to have a useful life of 25 years.
To encourage Advent plc to enter into the lease, it received a cash incentive of £3,000 upon commencement of the lease.
Advent plc has recognised the lease payment of £12,000 made on 30 June 2012 in administrative costs.
The £3,000 incentive payment has been included
within revenue.
The interest rate implicit in the lease is 7%, and the present value of future lease payments on commencement of the lease is £49,200.
There is no purchase option available at the end of the lease term.
The new contract meets the definition of a lease under IFRS 16, Leases. A right-of-use asset and a lease liability should be recognised to reflect the substance of the contract; that Advent plc has control over the asset and the right to economic benefits from the use of the asset and has an obligation to make lease payments over the five-year lease term.
The right-of-use asset is initially measured as the initial amount of the lease liability plus any payments made on or in advance of the commencement date plus any direct costs incurred less any lease incentives received.
In this case, Advent plc received a lease incentive of £3,000 to enter into the agreement and this should be accounted for as a reduction in the initial measurement of the right-of-use asset.
Therefore, the right-of-use asset will be calculated as the initial lease liability (being the present value of the future lease payments) of £49,200 less £3,000 (the lease incentive), giving an initial measurement of £46,200.
The lease incentive included within revenue must be reversed.
The right-of-use asset should subsequently be depreciated over the shorter of the lease term (five years) or its useful life (25 years).
Therefore, depreciation of £9,240 (£46,200/ 5 years) will be expensed to the statement of profit or loss.
The carrying amount of the right-of-use asset on 30 June 2012 is therefore £36,960 (£46,200 – £9,240).
The lease liability is initially measured at the present value of the future lease payments of £49,200.
It is subsequently measured by adding the finance cost, calculated by applying the rate of interest implicit in the lease which in this case is 7% and deducting the lease payments made
Y/E B/fw 7% LP C/fw
2012 49,200 3,444 (12,000) 40,644
2013 40,644 2,845 (12,000) 31,489
The lease payment of £12,000 should not be recognised within administrative expenses but should instead reduce the carrying amount of the lease liability.
The interest should be recognised as a finance cost in profit or loss.
The carrying amount of the lease liability at 30 June 2012 should be split between current and non-current liabilities as per IAS 1.
Non-current liabilities is the balance outstanding at 30 June 2013 = £31,489
Current liabilities is the capital amount to be paid in the next 12 months = £9,155 (£40,644 –
£31,489)
On 1 December 2011 Advent plc obtained a £200,000 government grant, representing 50% of the cost of a depreciating asset which was acquired on 1 October 2011 for a total cost of £400,000.
The asset has a four-year useful life with no residual value, and depreciation of £75,000 has been charged in the year to 30 June 2012.
The draft financial statements show the £200,000 grant as income in the year.
IAS 20, Accounting for Government Grants and Disclosure of Government Assistance requires government grants to be recognised in profit or loss over the periods in which the entity recognises as expenses the costs which the grants are intended to compensate.
It is contrary to the accrual principle to recognise grants in profit or loss on a cash receipts basis (which is the method Advent plc is currently using).
Government grants provided to assist in the acquisition of an asset should be presented in the statement of financial position either:
- Reducing-balance: By setting up the grant as deferred income in the statement of financial position, and recognising it in profit or loss on a systematic basis over the useful life of the asset, normally corresponding to the method of depreciation of the asset; or
- Netting-off: By deducting the grant in arriving at the carrying amount of the asset, thereby reducing the depreciation charge. This method will make the entity less comparable with a similar entity without government assistance.
For Advent plc, therefore, the two methods will result in the following presentation in the statement of financial position and statement of profit or loss: Method 1: SOFP: Asset 400,000 Less depn (400/4 x 9/12) (75,000) ------ 325,000
Liabilities:
Current - deferred income (12/48 x 200) 50,000
NCL - deferred income (27/48) x 200) 112,500
———
162,500
SPL:
Depreciation (75,000)
Deferred income (9/48 x 200) 37,500
Method 2: SOFP Asset (400-200) 200,000 Less depn (200/4 x 9/12) (37,500) ------- 162,500
No liabilities
SPL:
Depreciation (37,500)
The net effect on income and net assets will be the same under either method: grant income is matched with the expenses from the use of the asset.
The grant recognised in the year is £37,500 (£200,000/4 years × 9/12).
There is no impact on NCI as the grant is accounted for in Advent plc’s financial statements.
What are the journal entries for acquisition of a sub with deferred consideration and shares to be issued?
DR Goodwill DR Net assets at acquisition (add) CR NCI CR Equity - shares to be issued CR Liabilities - deferred consideration CR NCA - investments
Calculate the amount of Advent plc’s distributable reserves at 30 June 2012, explaining your calculation.
For entities within a group, the calculation of distributable profits must be made for each entity separately, not for the consolidated group.
Therefore, Advent plc’s distributable profits are those profits distributable by the parent company only.
The basic rule is that distributable profits are measured as accumulated realised profits less accumulated realised losses.
In the case of plcs, the amount of distributable profits is further reduced by any excess of unrealised losses over unrealised profits.
There is insufficient information in the scenario to identify excess.
So, assuming none exists:
- The adjustments in respect of the Brightdays acquisition do not affect the Advent plc’s parent company figures.
- The lease adjustments reduce Advent plc’s individual company retained earnings.
- The government grant was received by Advent plc and therefore any adjustments for this do affect its individual financial statements – reduce retained earnings by £162,500.
- The finance cost arising on the deferred consideration is attributable to Advent plc and so reduces retained earnings.
HoPe Ltd entered into a sale and leaseback arrangement with a bank on 1 April 2010. The arrangement involved the transfer of plant to the bank for £1,800,000 (which is the fair value of the plant), and then the immediate leasing back of the same plant for 5 years. The transfer constituted a sale in accordance with IFRS 15 Revenue from Contracts with Customers.
The sale proceeds have been credited to HoPe Ltd’s other income.
At the date of the sale, the carrying amount of the plant was £840,000 and its remaining useful life was five years.
No depreciation has been charged in respect of this plant for the year ended 31 March 2011.
Under the terms of the arrangement HoPe Ltd is to make five annual payments of £360,000, in arrears on 31 March each year.
On 1 April 2010, the present value of future lease payments in respect of the plant is £1,437,480 and the rate of interest implicit in the lease is 8%. The first payment has been made and has been debited to administrative costs
HoPe Ltd has entered into a sale and leaseback arrangement with the bank.
To correctly account for the arrangement, HoPe Ltd must:
- Derecognise the carrying amount of the plant. •
- Recognise a right-of-use asset based on the proportion of the carrying amount of plant that has been retained, calculated as the carrying amount of the plant × PVFLP / fair value of the asset.
- The right-of-use asset is then depreciated over the shorter of the lease term and the remaining useful life of the plant.
- Recognise a lease liability based on the present value of the future lease payments.
- Recognise a gain in respect of the rights transferred.
The sale proceeds have been incorrectly credited to other income, and the lease payment has been incorrectly debited to administrative costs.
Both of these amounts should be reversed.
Right-of-use asset
– Initial measurement
The right-of-use asset is initially measured as:
carrying amount of plant at date of transfer ×
(present value of the future lease payments/fair value of the plant at date of transfer)
Right-of-use asset = £840,000 × 1,437,480/1,800,000 = £670,824
Right-of-use asset – Subsequent measurement
The right-of-use asset should subsequently be depreciated over the shorter of the lease term and the remaining useful life of the plant.
Depreciation of £134,165 (£670,824/5 years) should therefore be recognised and at 31 March 2011, the carrying amount of the right-of-use asset should be £536,659 (£670,824 – £134,165).
Lease liability – Initial measurement
The lease liability is initially measured at the present value of the future lease payments of £1,437,480.
Lease liability – Subsequent measurement
The lease liability is subsequently measured by adding the finance cost, calculated based on the rate of interest implicit in the lease, and deducting the payment made.
Year ended B/fwd I.8% Payment C/fwd
31/3/2011 1,437,480 114,998 (360,000) 1,192,478
31/3/2012 1,192,478 95,398 (360,000) 927,876
In the year to 31 March 2011, the interest of £114,998 should be charged to finance costs.
Gain on sale and leaseback
HoPe Ltd can recognise a gain on the sale and leaseback transaction only to the extent of the rights transferred.
This is calculated as follows:
Total gain = £1,800,000 – £840,000 = £960,000
Calculation of the gain on the rights retained by the company :
£960,000 × £1,437,480/£1,800,000 = £766,656
Calculation of the gain on the rights transferred by the company :
£960,000 – £766,656 = £193,344
Only £193,344 of the total £960,000 gain should be recognised by HoPe Ltd.
In March 2011 a group of customers started a legal action against MilloMops plc, claiming £5 million in damages, plus estimated costs of £1 million. MilloMops plc’s legal advisers assess the probability of the claim being successful at around 20%.
The outcome of the court case for damages is a possible obligation arising from past events.
Its existence will be confirmed only by the occurrence, or non-occurrence of a future event (adjudication of the case) not wholly within the control of MilloMops plc.
An adverse outcome for MilloMops plc is not probable based on the advice of its legal advisers, and therefore there is no question of recognising a provision for the amounts claimed.
However, some doubt arises as to whether or not the possible obligation is remote in nature.
There is no guidance in IAS 37 as to the cut-off point between possible and remote.
The question to be decided by MilloMops plc’s directors is whether or not a 20% possibility of an adverse outcome to the court case can be classified as remote.
If the directors determine that the obligation is possible, and not remote, disclosure will be required of the nature of the circumstances, an estimate of the financial effect and an indication of any uncertainties involved.
On 1 April 2010, MilloMops plc sold its entire shareholding in RoPa Ltd for £11 million when the net assets of RoPa Ltd were £6.3 million.
The sale proceeds are included in investment income in MilloMops plc’s statement of profit or loss for the year ended 31 March 2011.
MilloMops plc had acquired 80% of the equity of RoPa Ltd on 1 April 2004 for £8 million and on this date the fair value of the identifiable assets acquired and liabilities assumed by MilloMops plc was £8.55 million. MilloMops plc measured the non-controlling interests and goodwill on the acquisition of RoPa Ltd using the proportionate method.
The investment in RoPa Ltd remains at cost in the single entity statement of financial position of MilloMops plc at 31 March 2011.
RoPa Ltd’s performance suffered during the recession and at 1 April 2010 MilloMops plc had recognised impairment losses of £900,000 in respect of goodwill acquired in the business combination with RoPa Ltd.
The disposal qualifies to be treated as a discontinued operation in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations
The disposal proceeds have been incorrectly included in investment income and should be removed and replaced with the profit on disposal of the investment.
As the subsidiary has been sold it should no longer be consolidated.
In MilloMops plc’s separate statement of profit or loss the profit on sale should be recognised at the sale proceeds less the original cost; this is calculated as follows:
Disposal proceeds 11,000,000
Less cost 8,000,000
——————
Profit on disposal 3,000,000
Therefore, MilloMops plc’s single entity profit will reduce by £8 million (reversal of £11 million incorrectly recognised less £3 million profit on disposal)
On consolidation the profit on disposal is calculated as follows:
Sale proceeds 11,000,000
Goodwill on consolidation:
Consideration transferred 8,000,000
NCI (£8.55m × 20%) 1,710,000
——————————-
9,710,000
FV of identifiable assets acquired and liabilities assumed (8,550,000)
————
Goodwill 1,160,000
Impairment loss already recognised (900,000)
Less: Goodwill on disposal (260,000)
Carrying amount of net assets on disposal at 1 April 2010 (6,300,000)
NCI on disposal of RoPa (£6.3m × 20%) 1,260,000
—————————
Consolidated profit on disposal of RoPa 5,700,000
As the disposal of RoPa qualifies as a discontinued operation in accordance with IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, the profit or loss of RoPa up to the date of disposal plus the consolidated profit on disposal, together with the tax element, should be presented as a single amount on the face of the statement of profit or loss.
This amount is then analysed in the notes, to show how it is made up. As the disposal took place on the first day of the reporting period, none of RoPa Ltd’s income and expenses should be reported in the consolidated financial statements of the MilloMops plc group, so the results of the discontinued operation will be simply the consolidated profit on disposal of £5,700,000.
On 1 August 2010, MilloMops plc formed Echo Ltd, a wholly-owned subsidiary.
MilloMops plc has provided accounting services and managerial support to Echo Ltd during its initial eight months trading, free of charge.
However, from 1 April 2011 a monthly management fee of £10,000 will be charged to Echo Ltd.
In the eight months to 31 March 2011, Echo Ltd paid £50,000 for editing services to Sebring Ltd.
Abelie Breeze, the majority shareholder in Sebring Ltd is the daughter of the marketing director of MilloMops plc.
Abelie was not involved in carrying out the work, although she attended the meeting when the contract with MilloMops plc was agreed.
£50,000 represents an open market value for the services provided by Sebring Ltd.
IAS 24, Related Party Transactions requires identification of related parties and disclosure of related party relationships, transactions and outstanding balances in the separate financial statements of both MilloMops plc as the parent and Echo Ltd, the subsidiary.
Any intra-group transactions should be eliminated on consolidation in the group financial statements and should therefore not be disclosed.
The relationship between the parent, MilloMops plc, and its subsidiary, Echo Ltd, is seen as important and should be disclosed in both their individual financial statements. In the financial statements of Echo Ltd the disclosure of the ultimate controlling party (MilloMops plc) is required.
Accountancy and management services
The provision of these free of charge services should be disclosed as a related party transaction.
Sebring Ltd – editorial services
IAS 24 classifies close family members of an entity’s key management personnel as parties related to the entity. This definition extends to key management personnel of the entity’s parent.
Therefore, Abelie Breeze, as the daughter of the marketing director of MilloMops plc, is a close member of his family and can be expected to be influenced by her father.
As IAS 24 extends the definition to entities controlled by related parties, Sebring Ltd is a related party of both MilloMops plc and Echo Ltd.
The fact that Abelie Breeze was not involved in carrying out the work but was present at the meeting to discuss the contract is irrelevant to the determination of Sebring Ltd as a related party.
The nature of the transaction should be disclosed in the individual financial statements of both MilloMops plc and Echo Ltd.
Disclosure is required of the nature of the related party relationship, the services provided and the amounts.
However, there is no requirement to disclose the names of the parties involved.
The fact that the transaction was at open market value may only be disclosed if this can be substantiated.
