Advanced Consolidation Question 50

QUESTION 50: ADVANCED CONSOLIDATION

Traveler, a public limited company, operates in the manufacturing sector. The draft statements of
financial position are as follows at 30 November 2011:

Traveler Data Captive

$m $m $m
Assets:
Non-current assets
Property, plant and equipment 439 810 620
Investments in
subsidiaries Data 820
Captive 541
Financial assets 108 10 20
1,908 820 640
Defined benefit asset 72
Current assets 995 781 350
Total assets 2,975 1,601 990

Equity and liabilities:

Share capital 1,120 600 390
Retained earnings 1,066 442 169
Other components of equity 60 37 45
Total equity 2,246 1,079 604
Non-current liabilities 455 323 73
Current liabilities 274 199 313
Total liabilities 729 522 386
Total equity and liabilities 2,975 1,601 990

The following information is relevant to the preparation of the group financial statements:
1. 1 On 1 December 2010, Traveler acquired 60% of the equity interests of Data, a public
limited company. The purchase consideration comprised cash of $600 million. At
acquisition, the fair value of the non-controlling interest in Data was $395 million. Traveler
wishes to use the ‘full goodwill’ method. On 1 December 2010, the fair value of the
identifiable net assets acquired was $935 million and retained earnings of Data were $299
million and other components of equity were $26 million. The excess in fair value is due to
non-depreciable land.

On 30 November 2011, Traveler acquired a further 20% interest in Data for a cash
consideration of $220 million.

2. On 1 December 2010, Traveler acquired 80% of the equity interests of Captive for a
consideration of $541 million. The consideration comprised cash of $477 million and the
transfer of non-depreciable land with a fair value of $64 million. The carrying amount of the
land at the acquisition date was $56 million. At the year end, this asset was still included in
the non-current assets of Traveler and the sale proceeds had been credited to profit or loss.

At the date of acquisition, the identifiable net assets of Captive had a fair value of $526
million, retained earnings were $90 million and other components of equity were $24
million. The excess in fair value is due to non-depreciable land. This acquisition was

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Advanced Consolidation Question 50

accounted for using the partial goodwill method in accordance with IFRS 3 (Revised)
Business Combinations.

3. Goodwill was impairment tested after the additional acquisition in Data on 30 November
2011. The recoverable amount of Data was $1,099 million and that of Captive was $700
million.

4. Included in the financial assets of Traveler is a ten-year 7% loan held at amortised cost. At
30 November 2011, the borrower was in financial difficulties and its credit rating had been
downgraded. At this date, the gross carrying amount of the loan asset was $30 million and
the loss allowance was $1 million. Traveler has agreed for the loan to be restructured; there
will only be three more annual payments of $8 million starting in one year’s time. Current
market interest rates are 8%, the original effective interest rate is 6·7% and the effective
interest rate under the revised payment schedule is 6·3%.

5. Traveler acquired a new factory on 1 December 2010. The cost of the factory was $50
million and it has a residual value of $2 million. The factory has a flat roof, which needs
replacing every five years. The cost of the roof was $5 million. The useful economic life of
the factory is 25 years. No depreciation has been charged for the year. Traveler wishes to
account for the factory and roof as a single asset and depreciate the whole factory over its
economic life. Traveler uses straight-line depreciation.

6. The actuarial value of Traveler’s pension plan showed a surplus at 1 December 2010 of
$72 million, represented by plan assets with the fair value of $322 million and, the present
value of the defined benefit obligation of $250 million. The aggregate of the current and
past service costs and the net interest component amount to $55 for the year ended 30
November 2011.

After consulting with the actuaries, the company contributed $45 million into the plan on the
last day of the year.

No entries had been made in the financial statements for the above amounts. At the year
end, the fair values of the plan assets are $340 million and the present value of the
obligation amounts to $288 million. At both the start and end of the year, the pension
surplus falls below the asset ceiling.

Required:
Prepare a consolidated statement of financial position for the Traveler Group for the year
ended 30 November 2011.
(35 marks)

ACCA P2 – December 2011 – Q1a

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Advanced Consolidation Question 50

ANSWER TO QUESTION 50: ADVANCED CONSOLIDATION

Traveler Group
Consolidated Statement of Financial Position as at 30 November 2011
$m
PPE $439+810+620+32 J1 – 56 J3 – 3 J6 1,842
Goodwill W3 69
Financial assets $108+10+20 – 8 J5 130
Defined benefit assets $72 – 20 J7 52

Current assets $995+781+350 – 45 J7 2,081

4,174

Share Capital 1,120

Other reserves W6 74
Retained earnings W6 1,000
2,194
NCI W5 343
2,537
Non-current liabilities $455+323+73 851

Current Liabilities $274+199+313 786

4,174

W1 GROUP STRUCTURE
Data Subsidiary Acquisition: 1 Dec 2010 Group 60% NCI 40%
Captive Subsidiary Acquisition: 1 Dec 2010 Group 80% NCI 20%
$m

W2 NET ASSETS (of subsidiaries) AT ACQUISITION Data Captive

Equity share capital 600 390
Other reserves (pre) 26 24
Retained earnings (pre) 299 90
J1 10 22
935 526

W3 GOODWILL Data Captive

Investment [820 – 220 J2] ; [541] 600 541
Less: [935 W2 x 60%] ; [526 W2 x 80%] (561) (421)
39 120
Fair value of NCI 395
Less: [935 W2 x 40%] (374)
21
60 120
Impairment (50) (61)
10 59

W4 POST ACQUISITION RESERVES OR RE

Data Captive Data Captive
Balance 11 21 143 79

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Advanced Consolidation Question 50

J4 (50)
11 21 93 79

W5 NON CONTROLLING INTEREST Data Captive

[935 W2 x 40%] ; [526 W2 x 20%] 374 105
NCI goodwill W3 21 -
[11 & 93 W4 x 40%] ; [21 & 79 W4 x 20%] 42 20
437 125
J2 (218)
218 125

W6 GROUP RESERVES OR RE
Parent reserves 60 1,066
J2 (2)
J3 (56)
J4 (61)
J5 (8)
J6 (3)
J7 (10) (55)
50 881
Data [11 W4 x 60%] ; [93 W4 x 60%] 7 56
Captive [21 W4 x 80%] ; [79 W4 x 80%] 17 63
74 1,000

$m
JOURNAL ENTRIES WITH WORKINGS Dr. Cr.

PPE (non-depreciable land) 32

1& RE (pre) – Data 10
1
2 RE (pre) – Captive 22
Fair value adjustment Data Captive
Share capital 600 390
Other reserves 26 24
Retained 299 90
earnings 10 22
Fair value adjustment (β) 935 526
. Total fair value of net assets

NCI – Data 218

1 2 RE – Traveler 2
Investment in Data 220
Further acquisition of 20%
$437 x 20/40 = $218

RE – Traveler 56
2 3 PPE 56
Correction of disposal of land on acquisition of Captive

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Advanced Consolidation Question 50

RE – Data (Full) 50
3 4 RE – Traveler (partial) 61
Goodwill 111
Impairment – Data $1,099 – (935 W2 + 60 W3 + 11 + 143 W4) = $50
Impairment – Captive $700 – (526 W2 + 120 W3 x 100/80 + 21+ 79 W4) = $76 x 80% = $61

RE – Traveler 8
4 5 Financial assets 8

Date $m DF @ 6.7% $m
Year 1 Cash flows 8 1/1.067 7.50
Year 2 Cash flows 8 1/1.0672 7.03
Year 3 Cash flows 8 1/1.0673 6.59
PV of cash flows 21
Carrying amount 29
Impairment loss 8

RE – Traveler 3
5 6 PPE 3
Depreciation
Roof $5/5years = $1
Factory ($45 – 2)/25 years = $1.72

RE (Traveler) – Service cost and net interest 55

Other reserves (Traveler) – Re-measurement loss 10
6 7 Cash (contribution paid) 45
Defined benefit asset $72 – 52 20
Pension surplus opening $322 – 250 $72
Service costs and net interest component $55
Contribution paid ($45)
Re-measurement loss (balancing figure 10
Pension surplus closing $340 – 288 $52

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