Strategic Business Reporting Achievement Ladder Step 6

Question 1
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Marks

(a) (i) Goodwill

Explanation of calculation of goodwill:
— FV of consideration/FV NCI at acquisition date as elected 4
— FV of net assets 1

— Impairment loss in Nathan correctly recorded 1

— Reversal of Marchant impairment loss incorrect 4
- _ Increase of $2m in Marchant goodwill incorrect, as is internally
generated 1
Calculation — Option 2
Calculation — Nathan
2
9
(ii) Investment in Nathan in separate financial statements — fair value
gain
— Marchant recorded gain of $95m — $90m = $5m in individual
accounts 1
-— Gain must be eliminated on consolidation 1
— Reason: investment in Nathan is a component of the goodwill
calc
1
3

(iii) Disposal of Option

— Gain on disposal recognised in P/L when control lost |
— Consolidate up to 1 Nov 20X3, equity account thereafter 4
Calculation
2 4

(iv) Intragroup trading

— Group accounts present results of single economic entity 1
— Adjustments required to exclude intra group sale/eliminate
unrealised profits 1
— Marchant recorded a loss/ inventory was actually impaired and
should have been written down = same overall effect 1

— Only adjustment is to eliminate intra-group sales/purchases

1 4

(b) Sale of equity interest in Nathan

Consolidation adjustment:
Disposal does not result in loss of control 4
Disposal recorded as a transaction between owners 4
No profit/loss arising, shown as movement in parent's equity 1

Gain on sale in Marchant's separate financial statements must be

reversed on consolidation 4

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 Group accounts:
— SPLOCI consolidate in full for year and NCI 40% 1
— NCI SFP based on 48% holding 1
— Goodwill unchanged, but test for impairment 1
Calculations — NCI at year end, increase in NCI 3
10
30

Workbook reference. Basic groups are covered in Chapter 11 and disposals are covered in
Chapter 13.
Top tips. Part (a) tests several key consolidation principles including relatively straightforward
goodwill calculations, an adjustment for intragroup sale of inventory was incorporated (with a ‘twist’ in
that the sale was at fair value so the loss was genuine) and two disposals, one in which control was
lost and one in which control was retained. It is important that you know the difference in the
treatment, so be sure to revise this if you had difficulty. The impairment of goodwill element of the
question requires specific knowledge that IAS 36 /mpairment of Assets prohibits the reversal of an
impairment loss to goodwill and that the subsequent increase in the recoverable amount of the
goodwill is considered to be internally generated and therefore cannot be recognised per the
requirements of IAS 38 Intangible Assets.
Easy marks. There are easy marks available for the calculation of goodwill and for the intragroup part
of the question. Remember that marks are given for correct principles even if your calculation is not
correct.
In Part (b) of the question you are asked to explain, with suitable calculations, how the sale of the 8%
interest in a subsidiary should be dealt with in group statement of financial position at 30 April 20X4.
Marks are available for the explanation and the calculation so do not simply show the calculation or
you will lose marks.

(a) (i) Goodwill

IFRS 3 requires that goodwill is calculated (separately for each investment) as the excess
of:
e The fair value of the consideration transferred at the acquisition date (Nathan -
cash of $80m on 1 May 20X2, Option - cash of $70m on 30 April 20X2); plus
e The amount of the non-controlling interest at the acquisition date, measured at
fair value as elected by Marchant (Nathan - $45m at 1 May 20X2, Option - $28m at 30
April 20X2),
Less the fair value of the acquired identifiable net assets at the acquisition date (Nathan -
$110m at 1 May 20X2, Option - $86m at 30 April 20X2)
Goodwill on the acquisition of Nathan and Option should therefore have been calculated as
follows:

$m
Fair value of consideration transferred 80.0
Fair value of non-controlling interest 45.0 28.0
Fair value of identifiable net assets acquired (110.0)
Goodwill at acquisition date 15.0

Subsequent to acquisition, goodwill should be carried in the consolidated statement of

financial position at cost less any accumulated impairment losses. An impairment loss of
20% x $15m = $3m in respect of Nathan was therefore correctly recorded in the group
accounts at 30 April 20X3.

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 In this case, Marchant recognised a loss on the sale because the sale was at fair value and
the fair value of the inventory was less than the carrying amount of the inventory in
Marchant's individual accounts. As fair value was less than carrying amount, the inventory
was actually impaired and should have been written down to its fair value (Debit profit or
loss, Credit inventory) prior to the intragroup sale taking place.
Recording the intra-group sale at a loss has the same overall effect on the consolidated
financial statements as writing down the inventory, and therefore no further adjustment is
required in relation to this loss.
The only consolidation adjustment required is therefore to cancel the intra group
sales/purchases:
DEBIT Revenue $12m
CREDIT Cost of sales (purchases) $12m

(b) Sale of 8% interest in Nathan

Consolidation adjustment
The disposal of the 8% equity interest in Nathan does not result in loss of control and Nathan
remains a subsidiary. The disposal results in a decrease in Marchant's controlling interest and is
accounted for as a transaction between the owners under IFRS 10. It is shown as a
movement in the parent's equity in the consolidated financial statements, with no profit or
loss arising. Accordingly, the gain on the sale recognised in Marchant's separate financial
statements must be reversed on consolidation.
The following consolidation adjustment is required:

$m $m
DEBIT Profit or loss (18 — (95 x 8%/60%))
9.33
DEBIT _Investment in Nathan (95 x 8%/60%) 12.67
CREDIT Other components of equity 18
Accounting treatment in the group accounts
Consolidated statement of profit or loss and other comprehensive income
(1) The subsidiary is consolidated in full for the whole period.
(2) The non-controlling interest in the consolidated statement of profit or loss and other
comprehensive income is based on its percentage equity interest before and after
disposal, ie time apportioned. In this case, the sale took place on the last day of the year, so
there is a 40% non-controlling interest for the whole year.
(3) There is no profit or loss on disposal.
Consolidated statement of financial position
(1) The change (increase) in non-controlling interests is shown as an adjustment to the parent's
equity in order to represent the reallocation of ownership between the group's equity holders.
(2) The ‘closing’ non-controlling interest will be based on the year end percentage of 48%
(40 + 8 = 48%).
(3) Goodwill on acquisition is unchanged in the consolidated statement of financial position
because it is an historical figure unaffected by the change in ownership. The sale may,
however, be an indicator of impairment and therefore the directors must test the goodwill for
impairment at disposal.

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 However, during the year to 30 April 20X4, Marchant recorded a reversal of the $3m
impairment loss as well as an additional $2m increase over the original carrying amount of
goodwill, neither of which is permitted under IFRS Accounting Standards:
e Under IAS 36, any impairment loss charged to goodwill cannot be reversed.

e The $2m increase in the value of goodwill is internally generated, and therefore under
IAS 38, cannot be capitalised.
The $3m impairment loss reversal and $2m increase cannot be recognised and must be
reversed:
DEBIT Profit or loss $5m
CREDIT Goodwill — Nathan $5m

(ii) Investment in Nathan in Marchant's separate financial statements — fair value gain
Marchant has recorded a fair value gain on the investment in Nathan of $95m — $90m =
$5m in its individual financial statements for the year ended 30 April 20X4. This gain must
be eliminated on consolidation because, the investment in Nathan is a component of the
calculation of goodwill, which is based on the fair value of the consideration at the date of
acquisition, not at the date of the current financial statements. The consolidation adjustment
required is:
DEBIT Other comprehensive income $5m
CREDIT Investment in Nathan $5m
(iii) Group profit on disposal of Option (control lost)
Marchant has lost control of Option as a result of the sale on 1 November 20X3 of a 40%
equity interest. Option's status changes from that of a subsidiary to an associate as
Marchant has retained significant influence.
In substance, a subsidiary has been disposed of and an associate has been purchased.
Therefore, under IFRS 10, a gain or loss on disposal of the subsidiary should be calculated
and recognised in consolidated profit or loss. The effective date of disposal is when control is
lost on 1 November 20X3. The gain or loss is calculated under IFRS 10 as follows.
$m $m
Fair value of consideration received 50
Fair value of 20% investment retained 40
Less share of consolidated carrying amount when control lost:
Net assets 90
Goodwill ((a) (i)) 12
Less non-controlling interests (34)
(68)
22

The consolidated financial statements of Marchant for the year ended 30 April 20X4 should
include the results of Option up 1 November 20X3 with the related non-controlling interest at
40%. The investment should be accounted for as an associate using equity accounting
thereafter.

(iv) Intragroup trading

The consolidated financial statements should present the results of the group as a single
economic entity, reporting only the transactions which are external to the group.
Therefore consolidation adjustments are needed to exclude the intra group sale between
Marchant and Nathan and to eliminate any profit on the sale that is not realised outside of
the group.

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The adjustment to the parent's equity is as follows:
Non-controlling interest at year end:

Non-controlling interest at acquisition

NCI share of post-acquisition reserves: 40% x $(120 — (25 + 65 + 6))
Impairment ($3.0m ((a)(i)) @ 40%)

Increase in NCI: $53.4m x 8%/40% = $10.68m

Fair value of consideration received

Increase in NCI in net assets and goodwill at disposal
Adjustment to parent's equity

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