FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT ACCOUNTING, ECONOMICS AND FINANCE

BACHELOR OF ACCOUNTING
_____________________________________________________________________________

FINANCIAL ACCOUNTING 320 (GFA 712S)

Date: 23 August 2019

Duration: 11/2 Hours (90 minutes)
Marks: 50
TEST 1 MEMORANDUM

INSTRUCTIONS
1. This test paper is made up of two (2) questions
2. Answer both the questions and in blue or black ink
3. Start each question on a new page in your answer booklet & show all your workings
4. Questions relating to this paper may be raised in the initial 30 minutes after the start of the
paper. Thereafter, candidates must use their initiative to deal with any perceived error or
ambiguities & any assumption made by the candidate should be clearly stated.

Examiners: D Kamotho
Moderator: A Simasiku

This paper consists of 6 pages including this cover page

1
Solution 1
(a)

D limited” exerts significant influence over “E limited” √

D limited” exerts significant influence over “F limited” √
M limited” exerts control over “N limited” √
M limited” exerts control over “O limited” √
(√= 1 Mark each, Total, 4 Marka)
(b)

Explain deferred consideration:

Deferred consideration arises when an acquisition agreement provides that some of the
payment due for the acquired entity will be paid to the seller at a later date√.
The amount is agreed in advance. This may be to assist with the cash flow management of the
purchaser, or as a way for the purchaser to ensure any misrepresentations by the seller can be
compensated for in the future more easily√.

Accounting treatment of deferred consideration:

Deferred consideration must be recognised by the purchaser at the acquisition date at its fair
value. This is normally the agreed cash amount discounted to the acquisition date at the
purchaser’s cost of capital. √
The discount is unwound over time by the purchaser, by recognising it as a finance cost in the
post-acquisition period as time passes. √
The liability at any reporting date will be the initial fair value plus the amount of the discount that
has unwound to date. √

Any √ = 3 marks Max

Explain contingent consideration:

Contingent consideration is when the seller and purchaser agree that a portion of the
consideration be measured and paid in the future√.,
But at the acquisition date the amount is subject to uncertainty√.

The amount is often dependant on the future performance of the acquired entity.

2
For example, a further $100 million may be paid to the seller 2 years after acquisition provided
profits exceed a stated figure in each of the two years√.

Any √ = 3 marks Max

Accounting treatment of contingent consideration:

Any contingent consideration must also be recognised at acquisition at its fair value. √
This will normally include a discount to reflect the time delay before payment, plus a discount to
reflect the probability that the amount will be paid in part or in full√.
Goodwill is calculated based on this estimate. At each reporting date after acquisition, the fair
value is re-estimated, with any change being taken to profit or loss (of the purchaser) in the year
of re-estimation. √
Any change due to the unwinding of the time value of money discount is recognised as a
finance cost. The revised amount is carried as a liability until further re-estimated, or paid. √

Any √ = 3 marks Max

(c)
IFRS 3 allows (as an option) a non-controlling interest to be valued at its proportionate share of
the acquired subsidiary’s identifiable net assets; √
Its effect on the statement of financial position is that the resulting carrying value of purchased
goodwill only relates to the parent’s element of such goodwill and as a consequence the non-
controlling interest does not reflect its share of the subsidiary’s goodwill. √
Any impairment of goodwill under this method would only be charged against the parent’s
interest, as the non-controlling interest’s share of goodwill is not included in the consolidated
financial statements. √

Any √ = 2 marks Max

The second method of valuing the non-controlling interest at its fair value would (normally)
increase the value of the goodwill calculated on acquisition. √

3
This increase reflects the non-controlling interest’s ownership of the subsidiary’s goodwill and has
the effect of ‘grossing up’ the goodwill and the non-controlling interests in the statement of financial
position (by the same amount). √
It is argued that this method reflects the whole of the subsidiary’s goodwill/premium on acquisition
and is thus consistent with the principles of consolidation. √
Under this method any impairment of the subsidiary’s goodwill is charged to both the
controlling (parent’s share) and non-controlling interests in proportion to their holding of shares in
the subsidiary. √

Any √ = 2 marks Max

(d)
Discuss whether the “Holiday homes” hotel meets the definition of a business
as defined in IFRS 3 Business Combinations.

A business is defined as an integrated set of activities and assets that is capable of √

being conducted and managed for the purpose of providing a return in the form of
dividends, lower costs or other economic benefit to investors/ owners or other members. [IFRS
A business consists
3.Appendix A] of inputs and processes applied to those inputs that have the ability to
create outputs. [IFRS 3.B7]
There are therefore 3 main elements in ‘a business’:

INPUTS √
Inputs are any economic resource that creates, or has the ability to create, outputs when √
one or more processes are applied to it. [IFRS 3.B7(a)]
The “Holiday homes” hotel has the following identifiable inputs:
 the building ½
 furnishings ½
 linen ½
 kitchen and dining equipment ½
 computer equipment ½

PROCESSES √
Any system, standard, protocol, convention or rule that when applied to an input or √
inputs,
The “Holiday homes” hotel has the following identifiable processes:

4
  booking systems ½
 kitchen workflow programmes ½
 organised workforce ½

OUTPUT √
The result of inputs and processes applied to those inputs that provide or have the ability √
to provide a return in the form of dividends, lower costs or other economic benefits
directly to investors or other owners, members or participants. [IFRS 3.B7(C)]

The Holiday homes hotel can easily be integrated with any existing business practices of a √
market participant that operates hotels and is an ideal opportunity to expand operations into the
Western
Thus, even though it is currently run-down, the “Holiday homes” hotel has the ability to be √
operated as a hotel and generate profits/ dividends/ returns in the future.

CONCLUSION
The “Holiday homes” hotel does meet the definition of a business. √C

Sub-total: (14) Limited to (11 Max)

5
Solution 2 (25 marks)
(i) Calculation of Goodwill in Woodlands√
$’000 $’000
Controlling interest
Share exchange 24,000 √
Deferred consideration (5,000 x 80% x 1.54/1.1) 5,600 √
Non-controlling interest (5,000 x 20% x $6.50) 6,500 √ 36,100

Equity shares 10,000 √

Pre-acquisition reserves 18,000 √
Fair value adjustments – plant 1,440 √ (29,440)
Goodwill arising on acquisition 6,660 √

each √ = 1 mark,( max 7 marks)

(a) Forest Limited

Consolidated statement of financial position
as at 31 December 2018 √

Assets $'000 $’000

Non-current assets:
Property, plant and equipment (46,100 √ + 28,500 √ + 2,000 √ fair 76,200 √
value – 400 √ depreciation)
Goodwill w (a above) 3.610 √
79,810 √
Current assets
Inventory w (ii) (13,900 + 10,400 – 300 URP) 24,000 √
Trade receivables w (ii) (10,200 + 5,500) 15,700 √
Bank w (ii) (26,100 + 600) 26,700 √ 66,400
Total assets 146,210 √

6
 Equity and liabilities
Equity attributable to owners of
the parent
Equity shares of $2 each 33,000 √
Reserves:
Share premium 33,600 √
Retained earnings w (iii) 31,260 √ 64,860
97,860 √
Non-controlling interest (w (iv) 7,742 √
Total equity 105,602 √
Non-current liabilities
11% loan notes (12,000 + 4,000 – 2,500 intra-group) 13,500 √
Deferred tax (4500+560-112 ) 4,948 √ 18,448
Current liabilities
Deferred consideration w (iii) (5,600 + 560 unwinding of discount) 6,160 √
Other current liabilities w (ii) 12000 + 4000√ 16,000 √ 22,160
Total equity and liabilities 146,210 √

each √ = ½ mark,( max 12 marks)

Workings (figures in brackets are in $’000)

(i) Consolidated retained earnings:
$’000
Forest’s retained earnings (16,200 + 14,000) 30,200√
Woodlands’s post-acquisition profit (6,212 see below x 80%) 4,970√
Interest on deferred consideration (5,600 x 10%) (560) √
Amortisation (3,050) √
URP in inventory (w (iii) (300) √
31,260

The adjusted post-acquisition profits of Woodlands are:

As reported 6,500
Additional depreciation on plant (2,000/5 years) *0.72√ (288)

7
 6,212

(iv) Non -controlling interest

$’000
Fair value on acquisition (w (i)) 6,500√
Post-acquisition profit (6,112 x 20% √ (w (iv) 1,242
7,742

(√ = 1 mark, max 6 marks for workings)