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Preparation of Consolidated Financial StatementsConsolidationIFRS 3IFRS 10Section C

ACCA · Question 31 · Preparation of Consolidated Financial Statements

SECTION C

Stellar Dynamics Group (Stellar), an aerospace manufacturing company, acquired 80% of the equity shares of Nova Tech on 1 July 20X6. The financial year-end for both companies is 31 December 20X6.

Consideration transferred:
Stellar issued 2 shares for every 5 acquired in Nova Tech. Stellar's share price at 1 July 20X6 was $6.00. Stellar also agreed to pay $1,210,000 in cash on 1 July 20X8. Stellar's cost of capital is 10%. (PV factor for 2 years at 10% is 0.826).

Draft Statements of Financial Position at 31 December 20X6:

Assets ($'000)
Non-current assets:
Property, plant & equipment: Stellar 45,000; Nova Tech 12,000
Investments: Stellar 8,000; Nova Tech Nil

Current assets:
Inventory: Stellar 6,500; Nova Tech 3,200
Receivables: Stellar 4,800; Nova Tech 2,500
Cash: Stellar 1,200; Nova Tech 800

Equity and Liabilities ($'000)
Equity:
Share capital ($1 shares): Stellar 20,000; Nova Tech 5,000
Retained earnings: Stellar 28,500; Nova Tech 8,500

Non-current liabilities:
Borrowings: Stellar 10,000; Nova Tech 2,000

Current liabilities:
Payables: Stellar 7,000; Nova Tech 3,000

Additional Information:

  1. At 1 July 20X6, Nova Tech's retained earnings were $7,500,000.
  2. At acquisition, the fair value of Nova Tech's plant exceeded its carrying amount by $2,000,000. The plant had a remaining useful life of 5 years. Depreciation is charged straight-line to cost of sales.
  3. Stellar measures the non-controlling interest (NCI) at fair value. The fair value of the NCI at 1 July 20X6 was $2,800,000.
  4. During the post-acquisition period, Stellar sold components to Nova Tech for $1,500,000 at a mark-up on cost of 20%. At 31 December 20X6, Nova Tech still held $600,000 of these components in inventory.
  5. At 31 December 20X6, Nova Tech's payables included $400,000 owed to Stellar. Stellar's receivables included the same amount.
  6. Stellar has not yet recorded the share exchange or the deferred consideration. The $8,000,000 investment relates to other non-group entities.

REQUIREMENT:
Prepare the Consolidated Statement of Financial Position for Stellar Dynamics Group as at 31 December 20X6. Show all workings clearly.

How to approach this question

Step 1: Calculate Consideration Transferred (Shares + PV of deferred cash). Step 2: Calculate Net Assets of Subsidiary at acquisition and reporting date (include fair value adjustments and depreciation). Step 3: Calculate Goodwill. Step 4: Calculate NCI at reporting date. Step 5: Calculate Consolidated Retained Earnings (deduct PURP). Step 6: Draft the CSFP, eliminating intra-group balances.

Full Answer

WORKINGS: W1: Group Structure Stellar owns 80% of Nova Tech. Acquired 1 July 20X6 (6 months ago). W2: Consideration Transferred Shares acquired = 5m * 80% = 4m shares. Shares issued = 4m * (2/5) = 1.6m shares. Value of shares = 1.6m * $6.00 = $9,600,000. Deferred cash PV = $1,210,000 * 0.826 = $999,460 (round to $1,000,000 for simplicity). Total consideration = $10,600,000. W3: Net Assets of Nova Tech Share capital: Acq 5,000 | Rep 5,000 Retained earnings: Acq 7,500 | Rep 8,500 FV adj (Plant): Acq 2,000 | Rep 2,000 Depreciation on FV adj (2,000 / 5 yrs * 6/12): Acq Nil | Rep (200) Total Net Assets: Acq $14,500 | Rep $15,300 Post-acquisition increase = $800 W4: Goodwill Consideration: $10,600 NCI at FV: $2,800 Less: Net assets at acq: ($14,500) Goodwill = $10,600 + $2,800 - $14,500 = ($1,100) -> Bargain Purchase (Negative Goodwill). This is credited to Retained Earnings immediately. W5: PURP Remaining inventory = $600. Mark-up 20%. Profit = 600 * (20/120) = $100. Stellar is the seller, so deduct entirely from Stellar's RE and Group Inventory. W6: Deferred Consideration Unwinding $1,000,000 * 10% * 6/12 = $50. Liability at year-end = $1,050. W7: Non-Controlling Interest NCI at acq: $2,800 + NCI share of post-acq net assets (800 * 20%): $160 NCI at year-end = $2,960 W8: Consolidated Retained Earnings Stellar's own RE: $28,500 Bargain purchase (W4): $1,100 Less: PURP (W5): ($100) Less: Finance cost on deferred cons (W6): ($50) + Share of Nova post-acq (800 * 80%): $640 Consolidated RE = $30,090 CONSOLIDATED SFP ($'000): Non-current assets: PPE (45,000 + 12,000 + 2,000 FV - 200 dep) = 58,800 Investments = 8,000 Current assets: Inventory (6,500 + 3,200 - 100 PURP) = 9,600 Receivables (4,800 + 2,500 - 400 intra) = 6,900 Cash (1,200 + 800) = 2,000 Total Assets = 85,300 Equity: Share capital (Stellar only + 1,600 new shares) = 21,600 Share premium (1,600 shares * $5 premium) = 8,000 Retained earnings = 30,090 NCI = 2,960 Total Equity = 62,650 Non-current liabilities: Borrowings (10,000 + 2,000) = 12,000 Deferred consideration = 1,050 Current liabilities: Payables (7,000 + 3,000 - 400 intra) = 9,600 Total Equity & Liabilities = 85,300

Common mistakes

Forgetting to record the share capital and share premium for the shares issued by the parent. Forgetting to unwind the discount on the deferred consideration. Miscalculating the PURP by using 20% instead of 20/120.
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