PROBLEM SOLVING SESSION

C1: CORPORATE REPORTING

FOR MAY 2021 EXAMS

[SET 03]

Prepared By: Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348
616 | Phone1: +255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com
 C1: CORPORATE REPORTING PROBLEM SOLVING SESSION [SET 03]

QUESTION ONE []

Truck-N Trailer Group comprises of companies manufacturing spare parts and accessories for
diesel vehicles. The separate statements of financial position for the parent, Truck-N and its
investees, Trailer and Scooter as at 30 June, 2018 are given below:

TRUCK-N TRAILER SCOOTER

Non-Current Assets: TAS ’000 TAS ’000 TAS ’000

Property, Plant and Equipment 58 400 45 000 37 860

Investments 47 680 18350

106 080 63 350 37 860

Current Assets:

Inventory 8 500 13 250 8 590

Trade and Other Receivables 25 400 10 800 8 720

Cash and Cash Equivalent 1 200 2 800 3 350

35 100 26 850 20 660

Total Assets 141 180 90 200 58 520

Equity:

Ordinary shares of K1.00 each 80 000 42 000 18 500

Retained Earnings 48 000 22 800 18 200

128 000 64 800 36 700

Non-current Liabilities:

Long term borrowings 15 000 2 000

Current Liabilities:

Trade and Other Payables 13 180 10 400 19 820

Total Equity and Liabilities 141 180 90 200 58 520

Prepared By :Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348
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 C1: CORPORATE REPORTING PROBLEM SOLVING SESSION [SET 03]

Other information:

(i) Truck-N acquired 80% of Trailer’s equity on 1 July 2016 through a share exchange of 2
shares in Truck-N for every 5 shares acquired in Trailer. In addition, Truck-N paid a
cash consideration amounting to TAS 30 million including a loan amount to Trailer of
TAS 10 million on that date. The fair value of each Truck-N share on 1 July 2016 was
TAS 3. The fair value of each Trailer share on 1 July 2016 was TAS 2.5. Truck-N has not
yet accounted for the issue of shares consideration in its financial statements.

(ii) On 1 July 2016 Truck-N also purchased 7.4 million shares of Scooter for a cash
consideration of TAS 14.8 million. Truck-N has a board member representing its interest
on the Scooter board but no power to appoint the majority of the board members for
Scooter.

(iii) The retained earnings of Trailer and Scooter on 1 July 2016 were TAS 14.5 million and
TAS 3.8 million respectively.
(iv) During the year to 30 June 2018 Trailer supplied goods to Truck-N worth TAS 6.4 million.
Trailer adds a markup of 25% on cost in pricing these goods. Truck-N in turn sold half
of the goods received from Trailer to Scooter for TAS 4 million. The rest of the goods
bought by Truck-N from Trailer are still in Truck-N closing inventory. All the goods
bought by Scooter from Truck-N are still in Scooter’s closing inventory.

(v) Goodwill on acquisition of Trailer has been impaired by TAS 5 million whilst the
investment in scooter has been impaired by TAS 2.5 million.

(vi) The fair value of Trailer’s identifiable net assets were equal to their carrying amount at
1 July 2016 except for Land and Buildings whose fair value exceeded carrying amount
by TAS 6 million. Of this amount, 75% relates to buildings whose remaining life at 1 July
2016 was 40 years.
(vii) Truck-N payables include TAS 1.4 million payable to Trailer. However, Trailer’s
receivables include TAS 6.4 million as receivable from Truck N. The difference between
Truck-N’s payables and Trailer’s receivables is due to a consignment of inventory priced
at TAS 0.5 million sent by Trailer but not yet received by Truck-N and a cash in transit
remitted by Truck-N but not yet received by Trailer.

(viii) Truck-N accounts for non-controlling interest at fair value. For this purpose, the fair
value of each Trailer share at 1 July 2016 is representative of the fair value of the NCI
shares.

(ix) On 1 January 2017, Truck-N sold a used item of plant and machinery to Trailor at TAS
15 million. The carrying amount of the plant at that date was K10 million. The plant
had a remaining useful economic life of 5 years at 1 January 2017.
Required:

a) Prepare the Consolidated Statement of Financial Position for Truck-N group as at

30 June 2018.
b) Discuss the circumstances in which a company may be considered to be a subsidiary
even though the size of shareholding is not more than 50%.

Prepared By :Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348
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 C1: CORPORATE REPORTING PROBLEM SOLVING SESSION [SET 03]

Solution part b

A subsidiary is an investee company over which the investor exercises control by virtue of its
voting rights. An investor is said to have control over the investee if it has the right to receive
variable return and has the ability to affect those returns by virtue of the power over the
investee. There are two circumstances in which the investor may exercise control and the
investee company will be treated as a subsidiary:

i) Where the investor has actual control because its effective shareholding is 51% or more.
The company will be able to affect returns by its decisions
ii) Where the investor has de facto power arising from a contract giving it unconditional right
to purchase shares from other investors. The existing shareholding plus those to be
acquired under the contract would effectively amount to 51% or more, thereby giving the
investor more voting power than other investors. Even before such acquisition of shares,
the said company would be able to exercise control over the investee company (because
of the unconditional right).
(International Financial Reporting and Analysis, David Alexander, et. al. 2017)

There are factors that are used to identify the acquirer of an investee but they do not necessarily
determine who has control over the investee. However, in most cases ultimately the acquirer
exercises control. The acquirer is identified as:

i) The entity that transfers a significant amount of cash or other assets, or incurs the most of
liabilities in a business combination.
ii) The entity that receives or gains the largest portion of the voting rights to the combined
entity.
iii) The entity whose management is able to dominate in the selection of the management
team of the resulting combined entity.
iv) The entity whose owners is able to elect or appoint or remove a majority of the members
of the governing body of the combined entity.

Prepared By :Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348
616 | Phone1: +255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com Page | 3
 C1: CORPORATE REPORTING PROBLEM SOLVING SESSION [SET 01]

QUESTION TWO []
Paul holds investments in Saul and Abraham. Draft financial statements of Paul Group for the
year ended 31 March 2018 are as follows:

Paul Saul Abraham

TAS ’000 TAS ’000 TAS ’000
Assets
Non-current Assets
Property, Plant and Equipment (note 2) 427,200 400,000 352,000
Other investments (note 9) 100,000
Investments (notes 1 and 3) 423,358 Nil Nil
Total Non-current Assets 950,558 400,000 352,000
Current Assets
Inventories (note 4) 136,000 80,000 64,000
Trade Receivables (note 5) 120,000 72,000 57,600
Cash and Cash Equivalents 22,000 16,000 12,800
Total Assets 1, 228,558 568,000 486,400

Equity and Liabilities

Equity Shares of TZS 1 each 312,000 160,000 128,000
Retained Earnings 449,868 248,000 160,000
Total Equity 761,868 408,000 288,000
Non-current Liabilities
Loan Notes 152,000 72,000 80,000
Deferred Consideration (note 1) 99,172 Nil Nil
1,013,040 480,000 368,000
Current Liabilities
Trade and Other Payables (note 5) 89,918 72,000 86,400
Short-term Borrowings 125,600 16,000 32,000
Total Equity and Liabilities 1, 228, 558 568,000 486,400

Additional information:

Prepared By :Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348
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 C1: CORPORATE REPORTING PROBLEM SOLVING SESSION [SET 01]

1. On 1 April 2016, Paul acquired 120 million shares of Saul’s shares when Saul’s retained
earnings were TAS 128 million, on the following terms:

(a) Paul issued 2 shares for every 3 shares acquired in Saul. On the date of this acquisition,
the market value of Paul’s single share was TAS 3.50; while that of Saul was TAS 2.
(b) Paul incurred TAS 2 million directly attributable (due diligence) costs on acquisition of
Saul. This amount was included in the carrying amount of the investment in Saul in
Paul’s own statement of financial position.
(c) On 31 March 2019, Paul was to make a deferred cash payment of TAS 1 per Saul share
acquired. Saul’s required rate of return at the date of acquisition was estimated at 10%
per annum.
(d) Agreed to pay a further amount on 1 April 2025 contingent upon the post-acquisition
performance of Saul. At the date of acquisition the fair value of this contingent
consideration was assessed at TAS 5 million but by 31 March 2018 it had become clear
that the amount due would be TAS 6 million (Ignore discounting). Paul has recorded
only the share exchange consideration, directly attributable costs and provided for the
deferred consideration.

2. The directors of Paul carried out a fair value exercise to measure identifiable assets and
liabilities of Saul at 1 April 2016. The following matters emerged:

(a) Plant and equipment having a carrying value of TAS 160 million had an estimated fair
value of TAS 176 million. At the time, the estimated future economic life of the plant
was five years and this estimate remains valid. Saul disposed of 20% of this plant and
equipment since 1 April 2016.

(b) An item of inventory’s carrying value was TAS 4.8 million less than its estimated
market value. At 31 March 2018, this inventory had all been sold.

3. Paul acquired 51.2 million equity shares of Abraham at its date of incorporation and paid a
consideration of TAS 51.2 million in cash. This investment is recognised in Paul’s draft
financial statements at cost and no goodwill was computed.

4. The figure for inventories in draft financial statements of Saul and Abraham at 31 March
2018 includes components purchased from Paul during the year at a cost of TAS 24 million
to Saul and TAS 20 million to Abraham. Paul had applied a mark-up of 25% on this sale.
Ignore deferred tax implications.

5. Trade receivables of Paul include TAS 12.8 million and TAS 9.6 million due from Saul and
Abraham respectively; while Trade payables of Saul and Abraham include equivalent
amounts payable to Paul.

6. An impairment test at 31 March 2018 on the consolidated goodwill concluded that it should
be written down by TAS 5 million.

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616 | Phone1: +255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com Page | 2
 C1: CORPORATE REPORTING PROBLEM SOLVING SESSION [SET 01]

7. It is group policy to value non-controlling interests in subsidiaries at the date of acquisition

at fair value.
8. Neither Saul nor Abraham issued shares in the post-acquisition period. Further, no
dividends were paid during the year by any of the companies.

9. The other investments are included in Paul’s statement of financial position above at their
fair value on 31 March 2018.

10. Incomes and expenses should be deemed to accrue evenly throughout the year.

Required:

(a) Prepare Paul’s Consolidated Statement of Financial Position as at 31 March 2018.

(b) Explain why it is necessary to eliminate unrealised profits when preparing group
financial statements.
(c) Explain why consolidated financial statements are useful to the users of financial
statements (as opposed to just the parent company’s separate (entity) financial
statements).
Solutions
(b) Unrealised profits arise when group companies trade with each other. In their own
individual company accounts, profits and losses will be claimed on these transactions,
and goods bought from a fellow group company will be recorded at their invoiced cost
by the purchaser. However, consolidated accounts are drawn up on the principle that a
group is a single economic entity. From a group point of view, no transaction occurs
when goods are traded between group companies, and no profits or losses arise. Revenue
and profits will only be claimed when the goods are sold onto a third party outside of
the group.
(c) Usefulness of consolidated financial statements.
The main reason for preparing consolidated accounts is that groups operate as a single
economic unit and it is possible to understand the affairs of the parent company without
taking into account the financial position and performance of all companies it controls.
The Directors of the parent company should be held fully accountable for all the money
they have invested on the shareholders behalf. The parent company’s individual
financial statements only show the original cost of the investment and dividends
received from any subsidiaries, not a full picture. This hides the true value and nature of
the investment in the subsidiary, and could be used to manipulate the reported results
of the parent. In addition, goodwill can only be quantified and reported if consolidated
accounts are prepared and fair value of assets controlled by the group is only taken into
account through consolidation and thereafter noncontrolling interest is taken into
account

Prepared By :Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348
616 | Phone1: +255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com Page | 3
 C1: CORPORATE REPORTING PROBLEM SOLVING SESSION [SET 01]

Further, without consolidation, assets and liabilities of the subsidiary are camouflaged.
Hence, consolidation reveals the underlying performance and profitability of the group
as a whole.

QUESTION THREE []
The Lucky Dairy, a public limited company, produces milk for supply to various customers. It is
responsible for producing 25% of the country's milk consumption. The company owns 150 farms
and has 70,000 cows and 35,000 heifers which are being raised to produce milk in the future. The
farms produce 2.5 million kilograms of milk per annum and normally hold an inventory of 50,000
kilograms of milk (Extracts from the draft accounts to 31 May 2021).

The herds comprise at 31 May 2021:

70,000 – 3-year old cows (all purchased on or before 1 June 2020)

25,000 – heifers (average age 1½ years old – purchased 1 December 2020)

10,000 – heifers (average age 2 years – purchased 1 June 2020)

There were no animals born or sold in the year. The per unit values less estimated point of sale
costs were as follows.

TZS

2-year old animal at 1 June 2020 50

1-year old animal at 1 June 2020 and 1 December 2020 40

3-year old animal at 31 May 2021 60

1½-year old animal at 31 May 2021 46

2-year old animal at 31 May 2021 55

1-year old animal at 31 May 2021 42

The company has had a difficult year in financial and operating terms. The cows had contracted
a disease at the beginning of the financial year which had been passed on in the food chain to a
small number of consumers. The publicity surrounding this event had caused a drop in the
consumption of milk and as a result the dairy was holding 500,000 kilograms of milk in storage.

The government had stated, on 1 April 2021, that it was prepared to compensate farmers for the
drop in the price and consumption of milk. An official government letter was received on 6 June
2021, stating that TZS1.5 million will be paid to Lucky on 1 August 2021. Additionally on 1 May
2021, Lucky had received a letter from its lawyer saying that legal proceedings had been started
against the company by the persons affected by the disease. The company's lawyers have advised
them that they feel that it is probable that they will be found liable and that the costs involved

Prepared By :Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348
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 C1: CORPORATE REPORTING PROBLEM SOLVING SESSION [SET 01]

may reach TZS2 million. The lawyers, however, feel that the company may receive additional
compensation from a government fund if certain quality control procedures had been carried out
by the company. However, the lawyers will only state that the compensation payment is
'possible'.

The company's activities are controlled in three geographical locations, Dale, Shire and Ham. The
only region affected by the disease was Dale and the government has decided that it is to restrict
the milk production of that region significantly. Lucky estimates that the discounted future cash
income from the present herds of cattle in the region amounts to TZS1.2 million, taking into
account the government restriction order. Lucky was not sure that the fair value of the cows in
the region could be measured reliably at the date of purchase because of the problems with the
diseased cattle. The cows in this region amounted to 20,000 in number and the heifers 10,000 in
number. All of the animals were purchased on 1 June 2020. Lucky has had an offer of TZS1 million
for all of the animals in the Dale region (net of point of sale costs) and TZS2 million for the sale of
the farms in the region. However, there was a minority of directors who opposed the planned
sale and it was decided to defer the public announcement of sale pending the outcome of the
possible receipt of the government compensation. The board had decided that the potential sale
plan was highly confidential but a national newspaper had published an article saying that the
sale may occur and that there would be many people who would lose their employment. The
board approved the planned sale of Dale farms on 31 May 2021.

The directors of Lucky have approached your firm for professional advice on the above matters.

Required: Advise the directors on how the biological assets and produce of Lucky should be
accounted for under IAS 41 Agriculture and discuss the implications for the published financial
statements of the above events.

Note. Candidates should produce a table which shows the changes in value of the cattle for the
year to 31 May 2021 due to price change and physical change excluding the Dale region, and the
value of the herd of the Dale region as at 31 May 2021. Ignore the effects of taxation. Heifers are
young female cows, whilst 'cattle' refers to both cows and heifers.

Prepared By :Mshana Ally A.: MFA- (OG), B.Com Accounting (Hons), CPA (T), ATEC (II) |Phone1: +255 717 / 769 348
616 | Phone1: +255 714 965 564 | Email: info@covenantfinco.com |Website: www.covenantfinco.com Page | 5