Basic Consolidation Question 93

QUESTION 93: BASIC CONSOLIDATION

Hedra, a public listed company, acquired the following investments:

(i) On 1 October 2004, 72 million shares in Salvador for an immediate cash payment of $195
million. Hedra agreed to pay further consideration on 30 September 2005 of $54 million if
the post acquisition profits of Salvador exceeded an agreed figure at that date. Hedra has
not accounted for this deferred payment (ignore discounting).

Salvador also accepted a $50 million 8% loan from Hedra at the date of its acquisition.

(ii) On 1 April 2005, 40 million shares in Aragon by way of a share exchange of two shares in
Hedra for each acquired share in Aragon. The stock market value of Hedra’s shares at the
date of this share exchange was $2·50. Hedra has not yet recorded the acquisition of the
investment in Aragon.

The summarized statements of financial position of the three companies as at 30 September 2005
are:
Hedra Salvador Aragon
Non-current assets $m $m $m $m $m $m
Property, plant and equipment 358 240 270
Investments – in Salvador 245 - -
– other 45 - -
648 240 270
Current assets
Inventories 130 80 110
Trade receivables 142 97 70
Cash and bank - 272 4 181 20 200
Total assets 920 421 470
Equity and liabilities
Ordinary share capital ($1 each) 400 120 100
Reserves:
Share premium 40 50 -
Revaluation 15 nil -
Retained earnings 240 295 60 110 300 300
695 230 400
Non-current liabilities
8% loan note - 50 -
Deferred tax 45 45 - 50 - -
Current liabilities
Trade payables 118 141 40
Bank overdraft 12 - -
Current tax payable 50 180 - 141 30 70
Total equity and liabilities 920 421 470

The following information is relevant:

(a) Fair value adjustments and revaluations:
(i) Hedra’s accounting policy for land and buildings is that they should be carried at their
fair values. The fair value of Salvador’s land at the date of acquisition was $20 million in
excess of its carrying value. By 30 September 2005 this excess had increased by a
further $5 million. Salvador’s buildings did not require any fair value adjustments. The

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Basic Consolidation Question 93

fair value of Hedra’s own land and buildings at 30 September 2005 was $12 million in
excess of its carrying value in the above statement of financial position.
(ii) The fair value of some of Salvador’s plant at the date of acquisition was $20 million in
excess of its carrying value and had a remaining life of four years (straight-line
depreciation is used).
(iii) At the date of acquisition Salvador had unrelieved tax losses of $40 million from
previous years. Salvador had not accounted for these as a deferred tax asset as its
directors did not believe the company would be sufficiently profitable in the near future.
However, the directors of Hedra were confident that these losses would be utilised and
accordingly they should be recognized as a deferred tax asset. By 30 September 2005
the group had not yet utilised any of these losses. The income tax rate is 25%.

(b) The retained earnings of Salvador and Aragon at 1 October 2004, as reported in their
separate financial statements, were $20 million and $200 million respectively. All profits are
deemed to accrue evenly throughout the year.

(c) Hedra’s policy is to value non-controlling interest using the proportionate share of the
subsidiary’s identifiable net assets.

An impairment test on 30 September 2005 showed that recoverable amount of the notional
goodwill (grossed up for the non-controlling interest’s share) in respect of Salvador was $
135 million.

(d) The investment in Aragon has not suffered any impairment.

Required:
Prepare the consolidated statement of financial position of Hedra as at 30 September 2005.
(25 marks)

ACCA F7 – December 2005 – Q1

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Basic Consolidation Question 93

ANSWER TO QUESTION 93: BASIC CONSOLIDATION

Hedra Group
Consolidated Statement of financial position
As at 30 September 2005
Assets $m $m
Non – current assets
Goodwill W3 81
PPE $358 + 240 + 25 J4 + 12 J5 + 20 J6 – 5 J7 650
Investment in associate $ 200 J3 + 20 J9 220
Investments (Others) 45
Deferred tax asset $ 0+10 J7 10 1,006

Current assets
Inventory $130+80 210
Trade receivable $142+97 239
Cash and bank 4 453
Total assets 1,459

Equity
Equity shares of $1 each $400 + 80 J3 480
Share premium $40 + 120 J3 160
Revaluation reserves W6 30
Retained earnings W6 257
927
Non Controlling interest W5 112 1,039

Non - current liabilities

8% loan notes $50 – 50 J1 0
Deferred tax liability 45 45

Current Liabilities
Trade payable $118+141 259
Bank overdraft 12
Contingent consideration J2 54
Taxation 50 375
Total equity and liabilities 1,459

W1 GROUP STRUCTURE
Salvador Subsidiary Acquisition date:1 Oct 2004 Group = 60% NCI 40%
Aragon Associate Acquisition date:1 Apr 2005 Group = 40%
$m

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Basic Consolidation Question 93

W2 NET ASSETS (of subsidiary) AT ACQUISITION S

Equity share capital 120
Share premium 50
Retained earnings (pre) 20
J4 20
J6 20
J8 10
240

W3 GOODWILL S
Investment$195 J1 + 54 J2 249
Less: 240 W2 x 60%W1 (144)
105
J10 (24)
81

W4 POST ACQUISITION RESERVES (of subsidiary) RS RE

Balance 0 40
J7 (5)
J4 5
5 35

W5 NON CONTROLLING INTEREST S

240 W2 x 40%W1 96
5 & 35 W4 x 40% W1 16
112

W6 GROUP RESERVES RS RE
Parent reserves 12 240
J5 15
J9 20
J10 (24)
27 236
5 & 35W4 x 60% W1 3 21
30 257

$m
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

Investment in ordinary shares of Salvador 195

- 1 8 % loan from Hedra to Salvador 50
Investment in Salvador (as in SoFP) 245
Separating equity instrument & cancelling intra group loan.

Investment in ordinary shares of Salvador 54

- 2
Contingent consideration 54
Recording contingent consideration

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Basic Consolidation Question 93

Investment in associate 200

- 3 Share capital 80
Share premium 120
Recording investment in associate 40m shares x 2 Hedra shares=80m x $2.50 = 200m

PPE 25
(i) 4 RS (S) 5
Reserves Pre (S) 20
Fair value adjustment of land and building – subsidiary

PPE 12
(i) 5
RS (P) 12
Fair value adjustment of land and building – Parent

PPE 20
(ii) 6
Reserves Pre (S) 20
Fair value adjustment of plant – subsidiary

RE (S) 5
(ii) 7
PPE 5
$20/4 years = $5
Excess depreciation on plant

Deferred tax asset 10

(iii) 8
Reserves Pre (S) 10
$40m x 25% = $10m
Deferred tax adjustment at the date of acquisition

Investment in associate 20
(b) 9
RE (P) 20
$300m-$200m = $100mx6/12 = $50mx40%=$20m
Share of post acquisition profits of associate

RE (P) 24
(c) 10
Goodwill 24
Goodwill at acq. = $105m – ($135x60%)=$24
Impairment of goodwill

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