ACCT3091-WE01
CORPORATE REPORTING
2023
Q1 Wolf Group
Wolf is the holding company of a group, and the following are the statements of profit loss and other comprehensive income for the year ended 31 December 2022 for Wolf and its investments:
The following information is also relevant:
(i) Investment in Fox
Wolf acquired 80% of Fox’s 100,000 £1 shares on 1 January 2022. Consideration comprised cash of £5 per share which Wolf paid immediately on acquisition, with a further payment of £150,000 to be paid on 31 December 2023. Wolf has yet to account for the additional £150,000 payment.
At 1 January 2022, the carrying value of Fox’s identifiable net assets was £475,000. The fair values of all of Fox’s assets were equal to carrying value at acquisition, with the exception of some non-depreciable land, which had a fair value of £75,000 in excess of its carrying value. Deferred tax on the fair value difference has not yet been provided in the group accounts.
(ii) Investment in Crow
Wolf acquired 65% of the shares in Crow on 1 January 2017 for £215,000. At that date, the fair value of Crow’s identifiable net assets was £300,000, and this was equal to their carrying values.
Since acquisition, Wolf recognised cumulative impairment losses of £12,000 in relation to Crow’s goodwill. The impairments all happened and were correctly accounted for before 1 January 2022.
Wolf sold a 20% shareholding in Crow on 30 June 2022 for cash consideration of £150,000. The carrying amount of Crow’s net assets at that date were £580,000.
The remaining 45% shareholding in Crow held by Wolf was valued at £340,000 at 30 June 2022.
Since the disposal of its 20% shareholding, Wolf exerts significant influence over Crow.
(iii) Sales inside the group
Fox sold £40,000 of goods to Wolf during the year at a mark-up of 20%. Wolf had sold 60% of the goods to third party customers by the year end.
(iv) Investment in bonds
On 1 January 2022, Wolf purchased bonds with a nominal value of £600,000 and a coupon rate of 5%, for £570,000. Wolf’s business model is to hold investments in bonds until maturity, and to receive cash flows of interest and capital. Wolf incurred issue costs of £28,500 on 1 January 2022. Wolf received its first instalment of interest on 31 December 2022 and credited it to finance costs in the statement of profit or loss. The effective rate of interest on the bond is 6.5%.
Wolf chooses to recognise the non-controlling interest using the proportion share of net assets method.
Wolf’s cost of capital is 6%, and the tax rate in the jurisdiction in which the Wolf group operates is 25%.
Required:
A. Calculate the goodwill which would have arisen on the acquisition of Fox and explain
how the £150,000 future payment should be accounted for in the financial statements for the year ended 31 December 2022. (10 marks)
B. Explain how Wolf should account for the sale of its shares in Crow in the
consolidated financial statements for the year ended 31 December 2022. (6 marks)
C. Calculate the profit or loss on disposal of the group’s investment in Crow which will
appear in the consolidated statement of profit loss and other comprehensive income for the year ended 31 December 2022. (6 marks)
D. Prepare the consolidated statement of profit loss and other comprehensive income
for the Wolf group for the year ended 31 December 2022. Ignore the presentation requirements of IFRS 5 Discontinued Operations. (13 marks) (35 marks)
Q2 Goldfinch plc
Goldfinch is a large UK retail company, which is listed on the stock exchange and has a year end of 30 November.
The directors have requested your advice on the following matters:
(i) Pension schemes
Goldfinch provides a defined contribution plan for most of its employees, and has agreed to contribute 6% of employee salaries into the scheme each year. The employees which qualify for pension contributions under this scheme earned salaries of £225m in the year ended 30 November 2022. Goldfinch made payments of £1m per month to the scheme, and pays any remaining balance owing after the year end, in December.
Goldfinch also runs a defined benefit pension scheme for its more senior employees. At 30 November 2021 Goldfinch’s statement of financial position showed the deficit on the scheme was £50.3m.
Goldfinch has now received the following information from the actuary in relation to the scheme for the year ended 30 November 2022:
£m
Present value of scheme obligation at 30 138.2
November 2022
Fair value of plan assets at 30 November 2022 98.7
Current service cost 4.8
Pension benefits paid 120.0
Contributions paid into pension plan 73.7
In addition to the above information, Goldfinch granted additional benefits to a few of the most senior employees on 30 November 2022. These additional benefits will vest over the next five years and have a present value of £3.1m at 30 November 2022.
Discount rates were as follows:
At 1 December 2021 5%
At 30 November 2022 8%
Required:
Explain to the directors of Goldfinch how they should account for the two pension schemes for the year ended 30 November 2022. Prepare a note for disclosure in the financial statements showing the movement in Goldfinch’s defined benefit pension scheme. (12 marks)
(ii) Share options
On 1 December 2020, Goldfinch granted 10,000 share options to 20 directors, subject to the directors continuing to be in Goldfinch’s employment for the next four years. The fair value of each share option on 1 December 2020 was £28. This fair value had risen to £30 by 30 November 2021 and was £34 on 30 November 2022.
At 30 November 2021, Goldfinch estimated that one of the directors would leave during the vesting period. At 30 November 2022, Goldfinch estimates that a total of three directors will leave before the end of the four-year conditional period.
Tax relief on the share options will not be given until exercise, in accordance with UK company law. Intrinsic value of each share option was £24 at 30 November 2021 and had risen to £30 by 30 November 2022.
Required:
Advise the directors of the correct accounting treatment of the share options in the year ended 30 November 2022.
You should include advice on accounting for the deferred tax implications of the scheme. Assume a tax rate of 25%. (14 marks)
(iii) Foreign currency loan
On 1 December 2021, Goldfinch borrowed €100m to fund its business operations in Europe. The loan is repayable in five years’ time and carries an interest rate of 3.8%.
The directors have never borrowed money in any currency other than GBP sterling, and so require advice on how to account for this loan.
Exchange rates were as follows:
At 1 December 2021 £1 = €1.12
At 30 November 2022 £1 = €1.07
Average rate for the period from 1 Dec 2021 to 30 £1 = €1.08
Nov 2022
No entries in respect of the loan have yet been made in the financial statements. Interest accrued in relation to the period was paid in full on 30 November 2022.
Required:
Advise the directors how the €100m loan should be accounted for in the financial statements for the year ended 30 November 2022. (7 marks) (33 marks)
Q3 Robin plc
Robin plc is the holding company of a multi-national group, which operates in various different industry sectors and in many different countries. All of the companies in the group have a 31 October year end.
The directors of Robin plc require advice about how to correctly account for the following items in the accounts for the year ended 31 October 2022:
(i) Cash Generating Unit
Robin plc owns a manufacturing facility which operates in the North West of England. Due to competition from abroad and rising interest rates in the UK, the directors are considering if the manufacturing facility is impaired.
The carrying value of the manufacturing facility at the year end is made up as follows:
Note 1. Property, plant and equipment is held at depreciated historical cost.
Note 2. The recoverable amount of the patent is £280,000.
Note 3. Net current assets comprise cash, inventory and receivables.
They estimate that the facility will generate cash flows of £400,000 at the end of each of the next three years, and then no further cash flows will occur.
Robin’s cost of capital is 8%.
(ii) Deferred Tax
The deferred tax for each individual group company has been finalised, however, the directors are not sure how to account for deferred tax in the group accounts. There is no brought forward deferred tax asset or liability in the group consolidated statement of financial position. The directors have provided the following relevant information and would like you to explain how to correctly account for these items, and their deferred tax impact, in the group accounts:
a) Robin plc sold goods for £500,000 to Sparrow Ltd, a 100% subsidiary, at a margin of 30%. Half of the goods had been sold outside of the group by the year end.
b) Robin purchased all of the share capital of Pheasant Ltd three months prior to its year end. The directors have calculated goodwill of £2.2 million arising on acquisition, before accounting for the following fair value adjustment (note c).
c) At the acquisition date, Pheasant Ltd owned plant and equipment which had a fair value of £1 million in excess of book value. The directors estimated that the plant and equipment had a remaining useful life of 10 years at the acquisition date.
d) Robin plc’s subsidiaries hold unremitted profits of £800,000 at the year end. Robin plc has stated it will not require any of the subsidiaries to pay a dividend, but will leave the profits with the subsidiaries for reinvestment.
The tax rate applicable to Robin plc and all of its subsidiaries is 25%.
(iii) Hedging contract
One of Robin plc’s subsidiaries, Birdy Ltd, supplies supermarkets and other retailers with ground coffee and related products. As the price of coffee beans is volatile, Birdy Ltd decided to protect its future cash outflows (i.e. their need to purchase coffee beans in the future). On 1 August 2022, it entered into a forward contract to purchase 10,000 tonnes of coffee beans for £162 per tonne, the market price on that date, to be settled net in cash on 31 January 2023. There was no cost incurred to enter the forward contract on 1 August 2022.
At 31 October 2022, the market price of coffee beans had increased to £170 per tonne, and the fair value of the forward contract had increased to £90,000.
The directors have never engaged in hedging before, and would like an explanation of how the above arrangement should be accounted for.
Required:
Advise the directors how to correctly account for the above items. Journals are not required. (32 marks)
Note: the mark allocation for each part is as follows:
(i) 10 marks
(ii) 12 marks
(iii) 10 marks