BEA2001 Financial Accounting

1 Simple Groups I BEA2001 Financial Accounting (EE20-24, pp. 543-624; iGAAP35-38, pp. 2307-2616)

Dr Petros Vourvachis

p.vourvachis@exeter.ac.ukOffice (STC 200) hours: Tuesdays 13.50-14.50 Fridays 13.00-14.00

12Q1 P Co and S Co In order to prepare the consolidated balance sheet:You need to calculate Ps interest in S and, subsequently, the minority (non- controlling) interest (P owns 12,000 1 shares at cost of the total 20,000 ordinary share capital of S, therefore P owns 60% of Ss share capital, therefore:Minority interest: 40% of Ss net assets (=equity) = 40% x (66,000-36,000) = 40% x 30,000 = 12,000Then, add assets (both non-current assets and current) and liabilities (both non-current and current) of the two companies, but part-cancel the liability component of Ps investment, therefore:Non-current liabilities: (original of P +) 26,000 8,000 = 18,000 Finally, calculate the percentage of Ss revaluation reserve and retained earnings that P owns (i.e. 60% of each)23Q1 P Co and S Co Consequently, P Groups consolidated balance sheet would be:

34Q2 Bath, Jankin and Arthur In order to prepare the consolidated balance sheet:As in Q1, you need to calculate the minority interest in Jankin and Arthur (20% and 40% respectively, as per question):Minority interest: 20% of Js net assets + 40% of As net assets = 20%x137,400 + 40%x610,000 = 27,480 + 244,000 = 271,480.Since (obviously from question) Bs investments in J and A are not at cost, youll need to work out goodwill (i.e. the difference between the cost of acquisition and the value of the subsidiaries net assets). All reserves prior to the acquisition must be incorporated in the cancellation: Goodwill, Jankin: 153,000 80% x134,400 (retained earnings for 20X1 [3,000] are excluded, since acquisition took place 1st Jan.) = 153,000-107,520= 45,480.Goodwill, Arthur: 504,000 60% (556,000 + 54,000x6/12 [since acquisition took place half-way through the year])= 504,000 60%(556,000 + 27,000) = 504,000 60%x583,000 = 504,000 349,800 = 154,200.Hence, total goodwill = 45,480 + 154,200 = 199,680.45Q2 Bath, Jankin and Arthur Then youll need to aggregate assets, liabilities and cancel out intergroup components of these. Particularly note:Group retained earnings: original Bs are 221,000 + 37,000 intergroup profit of 1,840 (=1,600 + 240 ) = 256,160. Add to that 80% of Js 3,000 = 2,400 and 60% of As 27,000 (= 54,000 for the year 27,000 already considered for goodwill) = 16,200, therefore, total retained earnings = 274,760.Group inventories: Bs 206,000 + Js 99,000 + As 294,200 = 599,200. Add goods in transit at cost: 960 (=1,200 240) and deduct Bs 1,600 profit included in Js inventory figures, therefore, total inventories = 598,560.Note also how current (intergroup) accounts are cancelled out: Bs 12,700 remittance 1,700 inventory in transit 1,200 = Js 9,800.Hence, B Groups consolidated balance sheet would be:

56Q2 Bath, Jankin and Arthur

67Q3 On negative goodwillGoodwill on consolidation is governed by IFRS3 and it should be capitalised and reviewed for impairment every year. It is the difference between the cost of acquisition and the value of the subsidiarys net assets. This is normally positive but can be negative e.g. because:There have been errors measuring the fair value of either the cost or the subsidiarys assets or liabilitiesFuture costs have been taken into accountThere has been a bargain purchase.If goodwill is estimated to be negative, accountants are required to reassess the amounts at which it was first measured to check for errors. If negative goodwill remains, it should be recognised immediately in the income statement [but note that FRS10 requires that it should be recognised in the Income Statement in the periods expected to benefit from it].7