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Preparation of Consolidated Financial StatementsConsolidationIFRS 3IFRS 10Section C

ACCA · Question 31 · Preparation of Consolidated Financial Statements

Section C

AquaTech is a multinational company specializing in water desalination. On 1 January 20X5, AquaTech acquired 80% of the equity share capital of HydroGen.

The consideration consisted of:

  • A cash payment of $12 million made immediately.
  • A deferred cash payment of $5 million payable on 31 December 20X6. AquaTech's cost of capital is 10%. (Discount factor at 10% for 2 years is 0.826).

At the date of acquisition, the fair values of HydroGen's identifiable net assets were equal to their carrying amounts, with the exception of a specialized filtration plant. This plant had a carrying amount of $4 million and a fair value of $6 million. The plant had a remaining useful life of 5 years at the acquisition date. Depreciation is charged on a straight-line basis.

AquaTech measures Non-Controlling Interest (NCI) at fair value. The fair value of the 20% NCI at acquisition was $3.5 million.

During the year ended 31 December 20X5, HydroGen sold goods to AquaTech for $2 million. HydroGen applies a markup of 25% on cost. At 31 December 20X5, one-quarter of these goods remained in AquaTech's inventory.

Draft Statements of Financial Position as at 31 December 20X5:

Assets
Non-current assets:
AquaTech: $45,000,000 | HydroGen: $15,000,000
Investment in HydroGen: $12,000,000 | HydroGen: Nil

Current assets:
AquaTech: $18,000,000 | HydroGen: $8,000,000

Equity and Liabilities
Equity shares ($1 each):
AquaTech: $20,000,000 | HydroGen: $5,000,000
Retained earnings:
AquaTech: $35,000,000 | HydroGen: $12,000,000
(Note: HydroGen's retained earnings at 1 Jan 20X5 were $8,000,000)

Non-current liabilities:
AquaTech: $10,000,000 | HydroGen: $3,000,000

Current liabilities:
AquaTech: $10,000,000 | HydroGen: $3,000,000

Required:
Prepare the Consolidated Statement of Financial Position for the AquaTech Group as at 31 December 20X5.
(Show all workings for Consideration, Goodwill, Net Assets, NCI, and Retained Earnings).
(20 marks)

How to approach this question

Follow the standard 5-step consolidation process: 1. Establish Group Structure (80% parent, 20% NCI). 2. Calculate Net Assets of Subsidiary at Acquisition and Reporting Date (include FV adjustments and extra depreciation). 3. Calculate Goodwill (Consideration + NCI at FV - Net Assets at Acq). Remember to discount deferred consideration. 4. Calculate NCI at Reporting Date (NCI at Acq + share of post-acq reserves). 5. Calculate Group Retained Earnings (Parent RE + share of sub's post-acq RE - PUP - unwinding of discount on deferred consideration). Finally, aggregate the SFP lines, eliminating the investment and adding goodwill.

Full Answer

**Working 1: Group Structure** Parent: AquaTech (80%) NCI: 20% Acquisition date: 1 Jan 20X5. Reporting date: 31 Dec 20X5 (1 year). **Working 2: Net Assets of HydroGen** | Item | At Acquisition ($'000) | At Reporting Date ($'000) | Post-Acq ($'000) | |---|---|---|---| | Share Capital | 5,000 | 5,000 | - | | Retained Earnings | 8,000 | 12,000 | 4,000 | | FV Adj (Plant) | 2,000 | 2,000 | - | | Extra Depn ($2m/5yrs) | - | (400) | (400) | | PUP (Sub is seller) | - | (100) | (100) | | **Total** | **15,000** | **18,500** | **3,500** | *PUP Calculation: Sales $2m. Markup 25% = Profit fraction 25/125. Total profit = $400k. Unsold = 1/4. PUP = $100k. Since Sub is seller, deduct from Sub's net assets.* **Working 3: Goodwill** Consideration transferred: - Cash = $12,000,000 - Deferred cash ($5m x 0.826) = $4,130,000 Total Consideration = $16,130,000 NCI at fair value = $3,500,000 Less: Net assets at acquisition (W2) = ($15,000,000) **Goodwill = $4,630,000** **Working 4: Non-Controlling Interest** NCI at acquisition = $3,500,000 Add: 20% of post-acq net assets (20% x $3,500,000) = $700,000 **NCI at reporting date = $4,200,000** **Working 5: Group Retained Earnings** AquaTech's own retained earnings = $35,000,000 Add: 80% of HydroGen's post-acq (80% x $3,500,000) = $2,800,000 Less: Unwinding of discount on deferred cons ($4,130,000 x 10%) = ($413,000) **Group Retained Earnings = $37,387,000** **Consolidated Statement of Financial Position** **Assets** Non-current assets ($45m + $15m + $2m FV - $0.4m depn) = $61,600,000 Goodwill = $4,630,000 Current assets ($18m + $8m - $0.1m PUP) = $25,900,000 **Total Assets = $92,130,000** **Equity and Liabilities** Equity shares = $20,000,000 Retained earnings = $37,387,000 NCI = $4,200,000 **Total Equity = $61,587,000** Non-current liabilities ($10m + $3m + $4.13m + $0.413m) = $17,543,000 Current liabilities ($10m + $3m) = $13,000,000 **Total Equity and Liabilities = $92,130,000**

Common mistakes

1. Forgetting to unwind the discount on the deferred consideration and charge it to parent's RE. 2. Deducting the PUP from the Parent's RE instead of the Subsidiary's net assets (since the sub was the seller). 3. Forgetting the extra depreciation on the fair value adjustment.
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