Question 1

**SECTION A**

**Background:**
AeroGrid Group is a rapidly expanding multinational entity operating in the renewable energy sector. Its functional and presentation currency is the Dollar ($). On 1 January 20X4, AeroGrid acquired a 30% equity interest in BreezeTech, a wind-turbine manufacturer located in a foreign jurisdiction whose functional currency is the Krona (KR). This investment gave AeroGrid significant influence, and it was correctly accounted for as an associate. The cost of the 30% investment was $40 million.

On 1 July 20X4, AeroGrid acquired a further 50% of the equity shares in BreezeTech for a cash consideration of $120 million, achieving control.

**Additional Information at 1 July 20X4:**
1. The fair value of AeroGrid's previously held 30% interest in BreezeTech was determined to be $65 million.
2. The fair value of the identifiable net assets of BreezeTech was $180 million.
3. AeroGrid has chosen to measure the non-controlling interest (NCI) in BreezeTech at fair value. The fair value of the 20% NCI at 1 July 20X4 was $45 million.
4. BreezeTech's net assets included an unrecognised internally generated patent for blade aerodynamics. The fair value of this patent was reliably measured at $15 million and is included in the $180 million net asset valuation.

**Year-End Translation (31 December 20X4):**
BreezeTech's operations are highly autonomous. At the year-end, the exchange rates fluctuated significantly. AeroGrid's directors are unsure how to treat the goodwill arising on acquisition and the fair value adjustments when translating BreezeTech's financial statements into Dollars for consolidation purposes.

**Required:**

**(a)** Discuss the financial reporting principles under IFRS 3 *Business Combinations* for accounting for the step acquisition of BreezeTech on 1 July 20X4, including the treatment of the previously held equity interest. (10 marks)

**(b)** Calculate the goodwill arising on the acquisition of BreezeTech on 1 July 20X4, and explain the recognition of the internally generated patent in the consolidated financial statements. (10 marks)

**(c)** Advise the directors of AeroGrid on the application of IAS 21 *The Effects of Changes in Foreign Exchange Rates* regarding the translation of BreezeTech's results, goodwill, and fair value adjustments at the year-end 31 December 20X4. (10 marks)

Accepted Answer

Approach this systematically: Part (a) requires the theory of step acquisitions (remeasurement of previous interest). Part (b) is a standard goodwill calculation but ensure you explicitly address the unrecognised patent. Part (c) requires specific knowledge of IAS 21 regarding goodwill and fair value adjustments belonging to the foreign subsidiary, not the parent.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Students often forget to remeasure the previously held 30% interest to fair value, or they calculate goodwill using the original cost of the 30% interest. In part (c), a common error is stating that goodwill is held at historical cost in the parent's currency.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA SBR — Strategic Business Reporting Practice Exam 1

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