Advanced Consolidation Question 57

QUESTION 57: ADVANCED CONSOLIDATION

The following draft financial statements relate to Squire, a public limited company:

Draft group statement of financial position at 31 May 2002

2002 2001
Non current assets $m $m
Intangible assets 80 65
PPE 2,630 2,010
Investment in associate 535 550
Retirement benefit asset 22 16
3,267 2,641
Current assets
Inventories 1,300 1,160
Trade receivables 1,220 1,060
Cash and cash equivalents 90 280
2,610 2,500
Total assets 5,877 5,141

Capital and reserves

Called up share capital 200 170
Share premium account 60 30
Revaluation reserve 92 286
Retained earnings 508 505
860 991
Non controlling interest 522 345
1,382 1,336
Non current liabilities 1,675 1,320
Provision for deferred tax 200 175
Current liabilities 2,620 2,310
Total equity and liabilities 5,877 5,141

Draft group statement of comprehensive income for the year ended 31 May 2002
$m
Revenue 8,774
Cost of sales (7,310)
1,464
Distribution and administrative expenses (1,030)
Profit before operations 434
Exchange difference on purchase of non current assets (9)
Share of profit of associate 45
Interest payable (75)
Profit before tax 395
Income tax expense (205)
Profit for the year 190
Other comprehensive income
Foreign exchange difference of associate (10)
Imp losses of non current asset offset against revaluation surplus (194)
Total comprehensive income for the year (14)
Profit attributable to:
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Advanced Consolidation Question 57

Owners of the parent 98

Non controlling interest 92
Profit for the year 190
Total comprehensive income attributable to:
Owners of the parent (106)
Non controlling interest 92
Total comprehensive income for the year (14)

Draft statement of changes in equity attributable to owners of Squire for the year ended 31 May
2002
$m
Equity attributable to owners of Squire b/f 991
Total comprehensive income for the year (106)
Dividend paid (85)
New shares issued 60
Equity attributable to owners of Squire c/f 860

The following information relates to Squire:

(i) Squire acquired a 70% holding in Hunsten Holdings, a public limited company, on 1 June
2001. The fair values of the net assets acquired were as follows:
$m
PPE 150
Inventories and WIP 180
Provisions for onerous contracts (30)
300

The purchase consideration was $200 million in cash and $50 million (discounted value)
consideration which is payable on 1 June 2003. The provision for the onerous contracts
was no longer required at 31 May 2002 as Squire had paid compensation of $30 million in
order to terminate the contract on 1 Dec 2001. The intangible asset in the group statement
of financial position comprises goodwill only. An impairment loss of $25 million in respect of
goodwill has been recognized during the year in profit or loss. The difference between the
discounted value of the deferred consideration ($50m) and the amount payable ($54
million) is included in ‘interest payable’.

(ii) There had been no disposals of PPE during the year. Depreciation for the period charged in
cost of sales was $129 million.

(iii) Current liabilities comprised the following items:

2002 2001
$m $m
Trade payables 2,355 2,105
Interest payable 65 45
Taxation 200 160
2,620 2,310

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Advanced Consolidation Question 57

(iv) Non current liabilities comprised the following:

2002 2001
$m $m
Deferred consideration – purchase of Hunsten 54
Liability for the purchase of non current assets 351
Loan repayable 1,270 1,320
1,675 1,320

(v) The retirement benefit asset comprised the following:

$m
Surplus at 1 June 2001 16
Current and past service costs recognized in P and L (20)
Contributions paid to retirement benefit scheme 26
Surplus at 31 May 2002 22

Required:
Prepare a group statement of cash flows using the indirect method for Squire group for the year
ended 31 May 2002 in accordance with IAS 7. (35 marks)

ACCA P2 – June 2002 – Q1a

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Advanced Consolidation Question 57

ANSWER TO QUESTION 57: ADVANCED CONSOLIDATION

Group statement of cash flows for the year ended 31 May 2002
$m $m
Cash flows from operating activities
Net profit before tax 395
Adjustments for:
Share of profit in associate (45)
Exchange difference of PPE 9
Depreciation 129
Write down of goodwill (W2) 25
Interest expense 75
Retirement benefit expense 20
213
Operating profit before working capital changes 608
Increase in trade receivables (1,220 – 1,060) (160)
Decrease in inventories (1,300 – 1,160 – 180) 40
Increase in trade payables (2,355 – 2,105) 250
130
Cash generated from operations 738
Interest paid (W5) (51)
Income taxes paid (W4) (140)
Cash paid to retirement benefit scheme (26)
(217)
Net cash from operating activities 521

Cash flows from investing activities

Acquisition of subsidiary (200 + 30) (230)
Purchase of PPE (W1) (451)
Dividends received from associate (W3) 50
Net cash used in investing activities (631)

Cash flows from financing activities

Proceeds from issue of share capital 60
Repayment of long term borrowings (50)
Dividends paid (85)
Non controlling interest dividends (W2) (5)
Net cash used in financing activities (80)

Net decrease in cash and cash equivalents (190)

Cash and cash equivalents at the beginning of the period 280
Cash and cash equivalents at the end of the period 90

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Advanced Consolidation Question 57

Workings
W1 PPE
$m
Balance at 1 June 2001 2,010
Impairment losses (194)
Depreciation (129)
Purchases (by deduction) 793
Acquisition – Hunsten 150
Closing balance 2,630

Cash flow in purchases ($793m) plus the exchange difference of $9 million less non current
liabilities for the purchase of non current assets $351 million, i.e. $451 million.

W2 Purchase of subsidiary
$m
Net assets acquired 300
Group’s share of net assets (70%) 210
Goodwill 40
Purchase consideration (200 + 50) 250

Intangible assets
Balance at 1 June 2001 65
Goodwill on subsidiary 40
Impairment loss (25)
Balance at 31 May 2002 80

Non controlling interest

Balance at 1 June 2001 345
Acquisition of Hunsten (300 x 30%) 90
Profit for the year 92
Dividend (bal fig) (5)
Closing balance 522

W3 Dividend from associate

$m
Balance at 1 June 2001 550
Share of profits 45
Foreign exchange loss (10)
Dividends received (bal fig) (50)
Balance at 31 May 2002 535

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Advanced Consolidation Question 57

W4 Taxation
$m $m
Balance at 1 June 2001
Income tax 160
Deferred tax 175
Statement of comprehensive income 205
Tax paid (bal fig) (140)
Balance at 31 May 2002
Income tax 200
Deferred tax 200
400

W5 Interest paid
$m
Balance at 1 June 2001 45
Statement of comprehensive income 75
Unwinding of discount on purchase consideration (4)
Cash paid (bal fig) (51)
Closing balance 65

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