Portfolio Question 4
Set out below are the statements of financial position of Wolff plc, Bannon plc and Rex Ltd. at 31 March 2018.
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Statements of financial position as at 31 March 2018 |
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| Wolff plc | Bannon plc | Rex Ltd | ||||
| €’m | €’m | €’m | €’m | €’m | €’m | |
| Non current assets | ||||||
| Property, plant and equipment | ||||||
| Land and Buildings | 26,400 | 24,200 | 7,200 | |||
| Plant and equipment | 18,350 | 16,100 | 4,400 | |||
| 44,750 | 40,300 | 11,600 | ||||
| Investments | ||||||
| Investment in Bannon plc | 14,000 | |||||
| Investment in Rex Ltd | 1,250 | |||||
| Loan to Bannon plc | 5,000 | |||||
| 65,000 | 40,300 | 11,600 | ||||
| Current assets | ||||||
| Inventory | 12,200 | 7,200 | 4,200 | |||
| Trade receivables | 14,400 | 6,100 | 3,700 | |||
| Amount due from Bannon plc | 2,100 | |||||
| Amount due from Rex Ltd | 300 | |||||
| Bank | 1,300 | 1,000 | 500 | |||
| 30,300 | 14,300 | 8,400 | ||||
| Total assets | 95,300 | 54,600 | 20,000 | |||
| Equity | ||||||
| Ordinary share capital nominal value €1 | 20,000 | 8000 | 1,000 | |||
| Retained earnings | 49,700 | 12,500 | 4,000 | |||
| 69,700 | 20,500 | 5,000 | ||||
| Non current liabilities | ||||||
| Debentures | 10,000 | 15,000 | 10,000 | |||
| Loan from Wolff plc | 5,000 | |||||
| 10,000 | 20,000 | 10,000 | ||||
| Current liabilities | ||||||
| Trade and other payables | 15,600 | 13,100 | 4,700 | |||
| Amounts owed to Wolff plc | 1000 | 300 | ||||
| 15,600 | 14,100 | 5,000 | ||||
| Total equity and liabilities | 95,300 | 54,600 | 20,000 | |||
- Wolff plc holds 80% of the ordinary share capital of Bannon plc. This holding was acquired on the 1 April 2013, when the retained earnings of Bannon plc amounted to €5,000 million.
- Non controlling interests in Bannon plc are valued at full fair value (full goodwill method)
- The market price (fair value) of the ordinary share of Bannon plc at 1 April 2013 was €2.18 per share.
At 1 April 2013 the following differences existed between the fair values and carrying values of the assets of Bannon plc:
| Fair values | Carrying values | |
| €’m | €’m | |
| Land | 7,000 | 5,000 |
| Brand names | 500 | 0 |
| Buildings | 5,000 | 4,000 |
| Inventory | 2,000 | 2,400 |
- The fair values of all other assets and liabilities of Bannon plc approximated their carrying values at the date of acquisition.
- The extra depreciation arising in the consolidated financial statements as a result of the fair value of buildings exceeding carrying values at acquisition date amounts to €40 million each year.
- The brand names are to amortised over a useful life of 10 years in the consolidated financial statements
- All of the inventory held by Bannon plc at 1 April 2013 had all been sold by 31 March 2014.
- Wolff plc also holds a 25% of the ordinary share capital of Rex Ltd. This holding was acquired on 1 April 2012, when the retained earnings of Rex Ltd amounted to €3.200 million.
- This 25% holding of ordinary shares in Rex Ltd gives Wolff plc significant influence over Rex Ltd.
- The fair values of all assets and liabilities of Rex Ltd approximated their carrying values on the date Wolff plc acquired its 25% holding in Rex Ltd.
- Wolff plc, Bannon plc and Rex Ltd traded with each other on credit during the year ended 31 March 2018.
- Wolff plc had invoiced Bannon plc for goods sold amounting of €300 million. These goods had cost Wolff plc €250 million. The invoice and the inventory had not been received by Bannon plc at 31 March 2018 and consequently were not reflected in the above financial statements of Bannon plc.
- Bannon plc had sent a cheque for €800 million in settlement for goods received. This cheque had not been received by Wolff plc at 31 March 2018 and consequently was not reflected in the above financial statements of Wolff plc.
- Bannon plc held inventory of €600 million at 31 March 2018 which it had purchased from Wolff plc. All goods sold by Wolff plc to Bannon plc are invoiced at cost plus 20%.
- Trade and other payables of Bannon plc includes interest payable on loans from Wolff plc amounting to €350 million. Wolff plc has not taken account of interest receivable from Bannon plc in its statement of financial position for the year ended 31 March 2018.
- On 1 April 2017 Bannon plc sold plant and equipment with a carrying value of €60 million to Wolff plc for €85 million. Both companies depreciate plant and equipment at 20% reducing balance.
- €130 million of the goodwill of Bannon plc was written off due to impairment losses at 31 March 2018.
- The investment in Rex Ltd has suffered an impairment loss of €10 million since the date of its acquisition.
Requirement
Prepare the consolidated statement of financial position of the Wolff group as at 31 March 2018. Show all workings.
Portfolio Question 5
You are the financial accountant of Spectre plc. Spectre plc prepares consolidated financial statements in accordance with International Financial Reporting Standards. The company has major investments in Skyfall Ltd and Moonraker Ltd. The statements of profit or loss for the year ended 31 December 2017 (the reporting date of all three companies) are given below:
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Statements of profit or loss for the year ended 31 December 2017 |
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| Spectre plc | Skyfall Ltd | Moonraker Ltd | |
| €’000 | €’000 | €’000 | |
| Revenue | 60,000 | 45,000 | 27,000 |
| Cost of sales | 30,000 | 25,000 | -18,000 |
| Gross profit | 30,000 | 20,000 | 9,000 |
| Operating expenses | 15,000 | 10,000 | 6,000 |
| Operating profit | 15,000 | 10,000 | 3,000 |
| Investment income | 2,810 | ||
| Finance cost | 1,000 | 1,200 | |
| Profit before tax | 16,810 | 8,800 | 3,000 |
| Income tax expense | 1,600 | 1,200 | 960 |
| Net profit for the period | 15,210 | 7,600 | 2,040 |
Extract from
| Statement of changes in equity for the year ended 31 December 2017 | |||
| Retained Earnings | |||
| Spectre plc | Skyfall Ltd | Moonraker Ltd | |
| €’000 | €’000 | €’000 | |
| Balance 1 January 2017 | 30,000 | 17,000 | 16,000 |
| Profit for the year | 15,210 | 7,600 | 2,040 |
| Ordinary dividends paid | -4,500 | -2,000 | -1,500 |
| Balance at 31 December 2017 | 40,710 | 22,600 | 16,540 |
.
The ordinary dividend paid by Moonraker Ltd of was paid in December 2017 and was in respect of the year ended 31 December 2017.
The following additional information is available:
- Investment by Spectre plc in Skyfall Ltd:
| Date of acquisition | 1 January 2013 |
| % of ordinary shares acquired | 70% |
| €’000 | |
| Purchase consideration | 24,600 |
| Share Capital of Skyfall Ltd at date of acquisition | 20,000 |
| Retained Earnings of Skyfall Ltd at date of acquisition | 10,000 |
Skyfall Ltd’s only reserve is retained earnings.
The fair value of the non controlling interests in Skyfall Ltd at the date of acquisition amounted to €10,500,000.
The fair value of the net assets of Skyfall Ltd exceeded their carrying values by €3,000,000 at the date of acquisition. The difference between carrying values andfair values at date of acquisition is made up as follows:
| Land | Fair value exceeded carrying value by €2,000,000 |
| Plant | Fair value exceeded carrying value by €800,000 |
| Inventory | Fair value exceeded carrying value by €200,000 |
The plant was purchased by Skyfall Ltd in 2011 and is being depreciated by Skyfall Ltd over a 10 year useful life.
All the inventory held by Skyfall Ltd on 1January 2013 was sold during the year ended 31 December 2013.
- Investment by Spectre plc in Moonraker Ltd:
| Date of acquisition | 1 September 2017 |
| % of ordinary shares acquired | 80% |
| €’000 | |
| Purchase consideration | 20,400 |
| Share Capital of Moonraker Ltd at date of acquisition | 8,000 |
The consideration of €20,400,000 paid by Spectre plc for Moonraker Ltd includes €50,000 professional fees to legal advisors on acquisition.
| €’000 | |
| Fair value of net assets of Moonraker Ltd at date of acquisition | 17,000 |
| Carrying value of net assets of Moonraker Ltd at date of acquisition | 16,850 |
The difference between the fair value and carrying value of the net assets of is due to the fair value of the inventory being €150,000 higher than its carrying value at the date of acquisition. Half of the inventory held by Moonraker Ltd at the date of acquisition was unsold at 31 December 2017.
The profits of Moonraker Ltd arose evenly over the year ended 31 December 2017.
- Intra group sales
Spectre plc sold goods with an invoice value of 6,000,000 to Skyfall Ltd during the year ended 31 December 2017. One tenth of the goods sold by Spectre plc to Skyfall Ltd were still held in inventory by Skyfall Ltd at 31 December 2017. Spectre plc charged a mark-up of 25% on cost on all goods supplied to Skyfall Ltd.
Skyfall Ltd sold goods to Moonraker Ltd in December 2017 with invoice value of €1,000,000. 80% of the goods sold by Skyfall Ltd to Moonraker Ltd were still held in inventory by Moonraker on 31 December 2017. Skyfall Ltd made a gross profit percentage 25% on all good sold to Moonraker Ltd.
- Investment income
Investment income of Spectre plc includes ordinary dividend income from Skyfall and ordinary dividend of €1200,000 from Moonraker Ltd, in addition to dividend income from other long term investments that are neither subsidiaries or associates.
- Intra group management charges
Spectre plc’s revenue figure of €60,000,000 includes €900,000 of management charge income, which Spectre plc has charged Skyfall Ltd for management services that it provided during the year ended 31 December 2017. Skyfall Ltd has not included any amount in its expenses figures for management services received from Spectre plc.
- Goodwill and impairment losses Non controlling interests in Skyfall Ltd are valued at fair value (i.e. full goodwill). The goodwill on acquisition of Skyfall suffered impairment losses of €600,000 in 2016 (i.e. in the previous year) and suffered further impairment losses of €310,000 in the year ended 31 December 2017 (i.e. in the current year).
Non controlling interests in Moonraker Ltd are valued at the proportionate share of the fair value of the net assets (i.e. partial goodwill).
Requirement
(a) Calculate the goodwill on acquisition of:
(i) Skyfall Ltd
(ii) Moonraker Ltd
(b) Prepare the consolidated statement of profit or loss and other comprehensive income of the Spectre Group for the year ended 31 December 2017.
(c) Prepare an extract from the consolidated statement of changes in equity of the Spectre group showing the movement in retained earnings for the year ended 31 December 2017.
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