Advanced Consolidation Question 52

QUESTION 52: ADVANCED CONSOLIDATION

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

Jocatt Group: Statement of financial position as at 30 November

2010 2009
$m $m
Assets
Non-current assets
Property, plant and equipment 327 254
Investment property 8 6
Goodwill 48 68
Intangible assets 85 72
Investment in associate 54 –
FVTOCI financial assets 94 90
616 490
Current assets
Inventories 105 128
Trade receivables 62 113
Cash and cash equivalents 232 143
399 384
Total assets 1,015 874

Equity attributable to the owners of the parent:

Share capital 290 275
Retained earnings 351 324
Other components of equity 15 20
656 619
Non-controlling interest 55 36
Total equity 711 655

Non-current liabilities:
Long-term borrowings 67 71
Deferred tax 35 41
Long-term provisions-pension liability 25 22
Total non-current liabilities 127 134

Current liabilities:
Trade payables 144 55
Current tax payable 33 30
Total current liabilities 177 85
Total liabilities 304 219
Total equity and liabilities 1,015 874

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Advanced Consolidation Question 52

Jocatt Group: Statement of comprehensive income for the year ended 30 November 2010
$m
Revenue 434
Cost of sales (321)
Gross profit 113
Other income 15
Distribution costs (55.5)
Administrative expenses (36)
Finance costs paid (8)
Gains on property 10.5
Share of profit of associate 6
Profit before tax 45
Income tax expense (11)
Profit for the year 34

Other comprehensive income after tax:

Gain on FVTOCI financial assets 2
Losses on property revaluation (7)
Net re-measurement gain on defined benefit plan 8
Other comprehensive income for the year, net of tax (3)
Total comprehensive income for the year 37
Profit attributable to:
Owners of the parent 24
Non-controlling interest 10
48
Total comprehensive income attributable to: $m
Owners of the parent 27
Non-controlling interest 10
37

Jocatt Group: Statement of changes in equity for the year ended 30 November 2010
RS
SC RE FVTOCI Total Total
(PPE) NCI $m
$m $m $m $m $m
$m
Bal. at 1 December 2009 275 324 4 16 619 36 655
Share capital issued 15 - - - 15 - 15
NCI during the year 20 20
Dividends - (5) - - (5) (13) (18)
Right issue - - - - 2 2
Total comprehensive income - 32 2 (7) 27 10 37
Bal. at 30 November 2010 290 351 6 9 656 55 711

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Advanced Consolidation Question 52

The following information relates to the financial statements of Jocatt:

(i) On 1 December 2008, Jocatt acquired 8% of the ordinary shares of Tigret. Jocatt had
treated this investment as FVTOCI in the financial statements to 30 November 2009. On 1
December 2009, Jocatt acquired a further 52% of the ordinary shares of Tigret and gained
control of the company. The consideration for the acquisitions was as follows:
Holding Consideration
$m
1 December 2008 8% 4
1 December 2009 52% 30
60% 34

At 1 December 2009, the fair value of the 8% holding in Tigret held by Jocatt at the time of
the business combination was $5 million and the fair value of the non-controlling interest in
Tigret was $20 million. No gain or loss on the 8% holding in Tigret had been reported in the
financial statements at 1 December 2009. The purchase consideration at 1 December 2009
comprised cash of $15 million and shares of $15 million.

The fair value of the identifiable net assets of Tigret, excluding deferred tax assets and
liabilities, at the date of acquisition comprised the following:

$m
Property, plant and equipment 15
Intangible assets 18
Trade receivables 5
Cash 7

The tax base of the identifiable net assets of Tigret was $40 million at 1 December 2009.
The tax rate of Tigret is 30%.

(ii) On 30 November 2010,Tigret made a rights issue on a 1 for 4 basis. The issue was fully
subscribed and raised $5 million in cash.

(iii) Jocatt purchased a research project from a third party including certain patents on 1
December 2009 for $8 million and recognised it as an intangible asset. During the year,
Jocatt incurred further costs, which included $2 million on completing the research phase,
$4 million in developing the product for sale and $1 million for the initial marketing costs.
There were no other additions to intangible assets in the period other than those on the
acquisition of Tigret.

(iv) Jocatt operates a defined benefit scheme. The current service costs for the year ended 30
November 2010 are $10 million. Jocatt enhanced the benefits on 1 December 2009
however, these do not vest until 30 November 2012. The total cost of the enhancement is
$6 million. The net interest cost of $2 million is included within finance costs.

(v) Jocatt owns an investment property. During the year, part of the heating system of the
property, which had a carrying value of $0·5 million, was replaced by a new system, which
cost $1 million. Jocatt uses the fair value model for measuring investment property.

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Advanced Consolidation Question 52

(vi) Jocatt had exchanged surplus land with a carrying value of $10 million for cash of $15
million and plant valued at $4 million. The transaction has commercial substance.
Depreciation for the period for property, plant and equipment was $27 million.

(vii) Goodwill relating to all subsidiaries had been impairment tested in the year to 30 November
2010 and any impairment accounted for. The goodwill impairment related to those
subsidiaries which were 100% owned.

(viii) Deferred tax of $1 million arose on the gains on FVTOCI investments in the year.

(ix) The associate did not pay any dividends in the year.

Required:
Prepare a consolidated statement of cash flows for the Jocatt Group using the indirect
method under IAS 7 ‘Statement of Cash Flows’
Note: Ignore deferred taxation other than where it is mentioned in the question. (35 marks)

ACCA P2 – December 2010 – Q1a

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Advanced Consolidation Question 52

ANSWER TO QUESTION 52: ADVANCED CONSOLIDATION

Jocatt Group
Statement of Cash flows for the year ended 30 November 2010
$m
Cash flows from operating activities:
Profit before tax 45
Adjustments:
Retirement benefit expense W5 & (iv) 16
Depreciation on PPE (vi) 27
Loss on replacement of investment property component part W7 & (v) 0.5
Amortisation of intangible assets W4 & (iii) 17
Profit on sale of land W9 & (vi) (9)
Profit on investment property W6 & (v) (1.5)
Associates profit W10 (6)
Impairment of goodwill W1 & (i) 31.5
Profit on FVTOCI investments W3 & (i) (1)
Finance costs (SPL) 8
Operating profit before working capital changes 127.5
Decrease in trade receivables (113 – 62 + 5) 56
Decrease in inventories (128 – 105) 23
Increase in trade payables (144 – 55) 89
Cash generated from operations 295.5
Finance costs paid (SPL) (6)
Cash paid to retirement benefit scheme W5 & (iv) (7)
Income taxes paid W12 (16·5)
Cash flow from operating activities 266

Cash flows from investing activities:

Purchase of associate W10 & (ix) (48)
Purchase of PPE W8 & (vi) (98)
Purchase of subsidiary (15 – 7) (i) (8)
Additions-investment property W6 & (v) (1)
Proceeds from sale of land W9 & (vi) 15
Intangible assets W4 & (iii) (12)
Purchases of FVTOCI investments W11 (5)
Net cash used in investing activities (157)

Cash flows from financing activities:

Repayment of long-term borrowings 71 – 67 (4)
Rights issue NCI (SCE) & (ii) 2
Non-controlling interest dividend (SCE) (13)
Dividends paid (SCE) (5)
Net cash used in financing activities (20)

Net increase in cash and cash equivalents 89

Cash and cash equivalents at beginning of period 143
Cash and cash equivalents at end of period 232

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Advanced Consolidation Question 52

W1 Goodwill
b/d 68 P&L β 31.5
Acq. W3 11.5 c/d 48
79.5 79.5

W2 NET ASSETS AT ACQUISITION Subsidiary

PPE 15
Intangible assets 18
Trade receivables 5
Cash 7
45
Deferred tax liability [45 – 40] x 30% (1.5)
43.5

W3 GOODWILL S
Investment [4 previous W11 + 1 gain + 15 shares issued + 15 cash paid] 35
Less: [43.5 W2 x 60%] (26.1)
8.9
Fair value of NCI 20
Less: [43.5 W2 x 40%] (17.4)
2.6
11.5

W4 Intangible assets W5 Pension liability

b/d 72 Amortisation β 17 b/d 22
Acq. 18 Cash 7 CSC P&L 10
Cash 8 Actuarial gain 8 PSC P&L 6
Cash 4 c/d 85 c/d 25 Interest cost 2
102 102 40 40

W6 Investment property W7 Disposal of Investment Property

b/d 6 Disposal 0.5 Carrying value 0.5 P&L 0.5
Cash 1 0.5 0.5
P&L β 1.5 c/d 8
8.5 8.5

W8 PPE W9 Disposal of PPE

b/d 254 Disposal 10 Land 10 Plant 4
Acq. 15 Revaluation 7 P&L 9 Cash 15
Plant Acq. 4 Depreciation 27 19 19
Additions 98 c/d 327
371 371

W10 Investment in Associate W11 FVTOCI Investments

b/d 0 b/d 90 Tigret acq. 4
Cash 48 Cash 5
Share of profit 6 c/d 54 OCI (2+1(viii)) 3 c/d 94
54 54 98 98

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Advanced Consolidation Question 52

W12 TAX
Cash 16.5 b/d 41
b/d 30
Acq. 1.5
c/d 35 P&L 11
c/d 33 OCI 1
84.5 84.5

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