ACC491 Seminar 2 Discussion Questions 2022 PDF

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SINGAPORE UNIVERSITY OF SOCIAL SCIENCESSCHOOL OF BUSINESSACC491 Advanced Consolidation and Corporate Reporting Academic Year 2021-22, Semester 2Seminar 2 Consolidation for Complex Group StructuresLearning Outcomes: 1. Assess the identity of companies in a complex group structure. 2. Compute the non-...

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SINGAPORE UNIVERSITY OF SOCIAL SCIENCES SCHOOL OF BUSINESS ACC491 Advanced Consolidation and Corporate Reporting Academic Year 2021-22, Semester 2 Seminar 2 Consolidation for Complex Group Structures Learning Outcomes: 1. Assess the identity of companies in a complex group structure. 2. Compute the non-controlling interest and group profit and reserves for a group with a complex group structure. 3. Discuss the consolidation process and adjustments for a group with a complex group structure. 4. Prepare consolidation journal entries and consolidated financial statements for a group with a complex group structure. 5. Verify the items in the consolidated financial statements for a group with a complex group structure by providing independent calculations. 6. Examine the additional issues and adjustments when the subsidiary and the sub-subsidiary in different tiers of the complex group structure are acquired on different dates. Required readings: • Relevant sections in Chapter 5 of: o Ng, E. J. (2013). Consolidated Financial Statements: Singapore (3rd ed.). McGrawHill. • Relevant paragraphs of the following Singapore Financial Reporting Standards (International) (SFRS(I)) issued by the Accounting Standards Council (2022): o SFRS(I) 10 Consolidated Financial Statements. Question 1 On 1 January 20x5, A Ltd acquired 70% of B Ltd’s ordinary shares and 40% of C Ltd’s ordinary shares. On the same date, B Ltd acquired 30% of C Ltd’s ordinary shares. For the year ended 31 December 20x9, the profit after tax of A Ltd, B Ltd, and C Ltd were $300,000, $200,000, and $100,000, respectively. Assume that more-than-50% of direct shareholding gives rise to control, and a 20%-or-more but less-than-50% of direct shareholding gives rise to significant influence. Required: (i) Assess the identity of C Ltd from B Ltd’s perspective. (ii) Assess the identities of B Ltd and C Ltd from A Ltd’s perspective. (iii) Compute the direct, indirect, and effective percentages of shareholdings held in B Ltd and C Ltd from the perspective of the ultimate parent, A Ltd. (iv) Compute the direct, indirect, and effective percentages of shareholdings held in B Ltd and C Ltd from the perspective of the non-controlling shareholders. (v) Compute the 20x9 profit attributable to non-controlling interest. (vi) Compute the 20x9 profit attributable to the shareholders of A Ltd.

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Question 2 Assume that the net assets of 3 companies, G Ltd, H Ltd and I Ltd are represented by their respective share capital and retained profit, as follows: As at 4 April 20x4: G Ltd H Ltd I Ltd As at 5 May 20x5: G Ltd H Ltd I Ltd As at 6 June 20x6: G Ltd H Ltd I Ltd As at 31 December 20x8: G Ltd H Ltd I Ltd

Share capital $’000 300 200 100

Retained profit $’000 400 300 200

300 200 100

600 500 300

300 200 100

700 600 500

300 200 100

1,000 900 800

For each of the following three independent scenarios, compute the amount of (i) group retained profit and (ii) non-controlling interest in G Ltd’s consolidated statement of financial position as at 31 December 20x8. Scenario I: G Ltd acquires 90% controlling interest in H Ltd on 4 April 20x4 and H Ltd acquires 80% controlling interest in I Ltd on 5 May 20x5. Scenario II: H Ltd acquires 80% controlling interest in I Ltd on 5 May 20x5, and G Ltd acquires 90% controlling interest in H Ltd on 6 June 20x6. Question 3 In K Ltd paid $200,000 to acquire , when the fair value of L Ltd’s identifiable net assets was represented by share capital of $100,000 and retained profit of $100,000. In J 6, when the fair value of K Ltd’s identifiable net assets was represented by share capital of $200,000 and retained profit of $200,000, except for a contingent liability under which K Ltd had a 40% probability of paying a damage claim of $100,000 to a third party and a 60% not having to pay at all. On this date, L Ltd’s retained profit was $340,000. The contingent liability was settled by . On On this date, the equipment had an accumulated depreciation of $90,000 and a remaining useful life of 4 years. As at 31 December 20x8, the equipment was still being used as property, plant, and equipment by K Ltd.

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Question 3 (continued) The 20x8 individual financial statements of the companies are as follows: (i)

Statements of financial position as at 31 December 20x8

Property, plant, and equipment, at cost Investment in K Ltd, at cost Investment in L Ltd, at cost Other assets Share capital Retained profits Liabilities

(ii)

J Ltd $'000 300

K Ltd $'000 400

L Ltd $'000 500

450 – 250 1,000

– 200 300 900

– – 300 800

300 600 100 1,000

200 500 200 900

100 600 100 800

Statements of profit or loss and other comprehensive income for the year ended 31 December 20x8 J Ltd $'000 Sales Cost of sales Gross profit Add dividend income Less litigation loss Less operating expenses Profit before tax Less tax Profit after tax Other comprehensive income Total comprehensive income

800 330 470 63 – 233 300 60 240 – 240

K Ltd L Ltd $'000 $'000 500 200 300 72 45 147 180 30 150 – 150

450 100 350 – – 150 200 40 160 – 160

(iii) Statements of changes in equity (partial) for the year ended 31 December 20x8

Beginning retained profit Add profit for the year Less dividend Ending retained profit

J Ltd $'000

K Ltd $'000

L Ltd $'000

480 240 120 600

440 150 90 500

520 160 80 600

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Question 3 (continued) All the companies adopt the Singapore Financial Reporting Standards (International) (SFRS(I)) and present annual financial statements with 31 December year-ends. All the relevant SFRS(I) that were issued by the Accounting Standards Council Singapore as at 1 January 2022 are assumed to have been effective in March 20x3. All the excess payments are for goodwill, and goodwill has not been impaired. The group policy was to measure non-controlling interests at the acquisition date based on the proportionate share of the acquisition-date fair value of identifiable net assets of the subsidiaries acquired. The group and company policies were to account for property, plant and equipment at cost. All dividends were declared out of 20x8 profits, and had been duly paid and received. Required: (a)

Prepare the consolidation journal entries, the consolidation worksheet, as well as the consolidated statement of financial position, the consolidated statement of profit or loss and other comprehensive income, and the consolidated statement of changes in equity (partial) for the J Ltd group for the year ended 31 December 20x8. Assume there are no deferred tax effects arising from the consolidation.

(b)

Provide independent calculations of the following items in J Ltd’s consolidated financial statements for the year ended 31 December 20x8: (i) (ii) (iii) (iv)

Profit after tax attributable to the shareholders of J Ltd, Profit after tax attributable to the non-controlling interests, Retained profit in the consolidated statement of financial position, and Non-controlling interests in the consolidated statement of financial position.

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Question 4 The individual financial statements of three companies in a group for the year ended 31 December 20x8 are as follows: (i)

Statements of financial position as at 31 December 20x8 M Ltd $'000

N Ltd $'000

O Ltd $'000

Investment in N Ltd Investment in O Ltd Other assets

600 – 800 1,400

– 500 700 1,200

– – 1,200 1,200

Share capital Retained profits Liabilities

800 400 200 1,400

400 500 300 1,200

400 600 200 1,200

(ii) Statements of profit or loss and other comprehensive income for the year ended 31 December 20x8

Sales Cost of sales Gross profit Dividend income Operating expenses Profit before tax Taxation Profit after tax Other comprehensive income Total comprehensive income

M Ltd $'000

N Ltd $'000

O Ltd $'000

600 200 400 54 314 140 40 100 – 100

500 200 300 – 150 150 30 120 – 120

400 200 200 – 100 100 20 80 – 80

(iii) Statements of changes in equity (partial) for the year ended 31 December 20x8

Beginning retained profits Profit for the year Dividend paid Ending retained profits

M Ltd $'000

N Ltd $'000

O Ltd $'000

300 100 – 400

440 120 60 500

520 80 – 600

The share capital of M Ltd comprises 800,000 ordinary shares. The share capital of N Ltd and O Ltd each comprises 400,000 ordinary shares.

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Question 4 (continued) On 1 January 20x6, , and N Ltd has been selling inventory to M Ltd since the last quarter of 20x7. During 20x7, some of the inventory that N Ltd sold to M Ltd were not sold to external parties and had an unrealised . This inventory was sold to external parties only in 20x8. During 20x8, the sales from N Ltd to M Ltd amounted to $105,000 and the profit related to these sales were $50,000. . All the dividends were declared out of the 20x8 profits, and had been duly paid and received. All the companies adopt the Singapore Financial Reporting Standards (International) (SFRS(I)) and present annual financial statements with 31 December year-ends. All the relevant SFRS(I) that were issued by the Accounting Standards Council Singapore as at 1 January 2022 are assumed to have been effective on 1 January 20x6. All the excess payments are for goodwill. There has been no impairment of goodwill. The group policy was to measure non-controlling interests at the acquisition date based on their proportionate share of the acquisition-date fair value of identifiable net assets of the subsidiaries acquired. Assume that a direct shareholding of more than 50% gives rise to control and a direct shareholding of 20% or more but less than 50% gives rise to significant influence. Required: (a)

Prepare the consolidation journal entries, the consolidation worksheet, as well as the consolidated statement of financial position, the consolidated statement of profit or loss and other comprehensive income, and the consolidated statement of changes in equity (partial) for the M Ltd group for the year ended 31 December 20x8. Assume there are no deferred tax effects arising from the consolidation.

(b)

Provide independent calculations of the following items in M Ltd’s consolidated financial statements for the year ended 31 December 20x8: (i) (ii) (iii) (iv)

(c)

Profit after tax attributable to the shareholders of M Ltd, Profit after tax attributable to the non-controlling interests, Retained profit in the consolidated statement of financial position, and Non-controlling interests in the consolidated statement of financial position.

Comment on the main differences between the group of companies in Question 3 and the group of companies in Question 4 that result in differences in the consolidation adjustments.

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