Question 1

SECTION A

Aeloria Energy is a European multinational renewable energy corporation with a functional currency of the Euro (€). You are the group accountant preparing the consolidated financial statements for the year ended 31 December 20X5.

**Exhibit 1: Step Acquisition of Borealis Wind**
On 1 January 20X3, Aeloria Energy acquired a 60% controlling interest in Borealis Wind, a company operating offshore wind farms in Norway, for 450 million Norwegian Krone (NOK). The functional currency of Borealis Wind is NOK. At this date, the fair value of Borealis Wind's identifiable net assets was NOK 600 million. Aeloria Energy chose to measure the non-controlling interest (NCI) at fair value, which was NOK 280 million.

On 1 July 20X5, Aeloria Energy acquired an additional 20% of the equity shares in Borealis Wind for NOK 180 million. The fair value of Borealis Wind's net assets at this date was NOK 800 million. The carrying amount of the NCI in the consolidated financial statements immediately before this transaction was NOK 320 million.

Exchange rates are as follows:
- 1 January 20X3: €1 = NOK 10.0
- 1 July 20X5: €1 = NOK 10.5
- 31 December 20X5: €1 = NOK 11.0
- Average rate for 20X5: €1 = NOK 10.8

**Exhibit 2: Solaria Tech Joint Arrangement**
On 1 January 20X5, Aeloria Energy entered into an arrangement with a competitor to establish 'Solaria Tech', a separate legal entity designed to develop next-generation solar panels. Aeloria Energy and the competitor each hold 50% of the voting rights. The legal form of Solaria Tech separates the assets and liabilities of the entity from the parties. However, a binding contractual agreement stipulates that Aeloria Energy and the competitor must purchase 100% of the solar panels produced by Solaria Tech in equal shares. The price of the panels is set to cover the production costs and administrative expenses of Solaria Tech, meaning it will operate at a break-even level.

**Requirements:**

(a) With reference to Exhibit 1, explain and calculate how the step acquisition of the additional 20% interest in Borealis Wind should be accounted for in the consolidated financial statements of Aeloria Energy for the year ended 31 December 20X5. (10 marks)

(b) With reference to Exhibit 1, discuss the principles of translating the financial statements of Borealis Wind from NOK to Euros (€), including the specific treatment of goodwill and the calculation of exchange differences arising on translation for the year ended 31 December 20X5. (10 marks)

(c) With reference to Exhibit 2, advise Aeloria Energy on the classification and accounting treatment of its interest in Solaria Tech in accordance with IFRS 11 Joint Arrangements. (10 marks)

Accepted Answer

For part (a), identify that this is a transaction between owners (IFRS 10). Calculate the consideration in Euros, the reduction in NCI in Euros, and the resulting difference to be posted to parent's equity. For part (b), state the IAS 21 rules for translating assets/liabilities vs income/expenses. Crucially, calculate the initial goodwill in NOK and explain it must be retranslated at the closing rate. For part (c), apply IFRS 11. Acknowledge the separate vehicle (pointing to JV) but use the 'other facts and circumstances' (guaranteed output, break-even pricing) to conclude it is a Joint Operation.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Students often incorrectly calculate new goodwill in part (a). In part (b), students frequently translate goodwill at the historical rate instead of the closing rate. In part (c), students often stop at the 'separate vehicle' fact and incorrectly conclude it is a joint venture.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA SBR — Strategic Business Reporting Practice Exam 5

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