Alpha has owned 75% of the equity shares of Beta since the incorporation of Beta. Therefore, Alpha has prepared consolidated financial statements for some years. On 1 July 20X6 Alpha purchased 40% of the equity shares of Gamma. The statements of comprehensive income and summarised statements of changes in equity of the three entities for the year ended 30 September 20X6 are given below:

Notes to the financial statements

Note 1 €“ Inter-company sales

Alpha sells products to Beta and Gamma, making a profit of 25% on the cost of the products sold. All the sales to Gamma took place in the post-acquisition period. Details of the purchases of the products by Beta and Gamma, together with the amounts included in opening and closing inventories in respect of the products, are given below:

There were no other inter-company sales between Alpha, Beta or Gamma during the period.

Note 2 €“ Investment income

Alpha€™s investment income includes dividends received from Beta and Gamma and interest receivable from Beta. The dividend received from Gamma has been credited to the statement of comprehensive income of Alpha without time apportionment. The interest receivable is in respect of a loan of $20 million to Beta at a fixed rate of interest of 6% per annum. The loan has been outstanding for the whole of the year ended 30 September 20X6.

Note 3 €“ Details of acquisitions by Alpha

There has been no impairment of the goodwill arising on the acquisition of Beta or of the investment in Gamma since the dates of acquisition of either entity.

The fair value adjustment has the effect of increasing the fair value of property, plant and equipment above the carrying value in the individual financial statements of Gamma. Group policy is to depreciate property, plant and equipment on a monthly basis over its estimated useful economic life.

The estimated life of the property, plant and equipment of Gamma that was subject to the fair value adjustment is five years, with depreciation charged against cost of sales.

Note 4 €“ other information

— The purchase of shares in Gamma entitled Alpha to appoint a representative to the board of directors of Gamma. This meant that Alpha was potentially able to participate in, and significantly influence, the policy decisions of Gamma.

— No other investor is able to control the operating and financial policies of Gamma, but on one occasion since 1 July 20X6 Gamma made a policy decision with which Alpha did not fully agree.

— Alpha has not entered into a contractual relationship with any other investor to exercise joint control over the operating and financial policies of Gamma.

— All equity shares in Beta carry one vote at general meetings.

— The policy of Alpha regarding the treatment of equity investments in its consolidated financial statements is as follows:

€“ Subsidiaries are fully consolidated.

€“ Joint ventures are proportionally consolidated.

€“ Associates are equity accounted.

€“ Other investments are treated as available for sale financial assets.

Your assistant has been reading the working papers for the consolidated financial statements of Alpha for previous years. He has noticed that Beta has been consolidated as a subsidiary and has expressed the view that this must be because Alpha owns more than 50% of its shares. He has further stated that Gamma should be treated as an available-for-sale financial asset since Alpha is unable to control its operating and financial policies.

Required:

(a) Prepare the consolidated statement of comprehensive income and consolidated statement of changes in equity of Alpha for the year ended 30 September 20X6. Notes to the consolidated statement of comprehensive income are not required. Ignore deferred tax.

(b) Assess the observations of your assistant regarding the appropriate method of consolidating Beta and Gamma. Your assessment need NOT include an explanation of the detailed mechanics of consolidation. You should refer to the provisions of international financial reporting standards where you consider they will assist yourexplanation.

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Statements of comprehensive income Alpha Beta Gamma $'000 s'000 $'000 Revenue (Note 1) 150,000 100,000) 96,000 Cost of sales (110,000) (78,000) (66,000) 30,000 Gross profit 40,000 22,000 Distribution costs (7,000) (6,000) (6,000) Administrative expenses Profit from operations Investment income (Note 2) (8,000) (7,200) 16,800 (7,000) 25,000 9,000 6,450 Nil Nil (4,200) 12,600 (5,000) 26,450 (3,000) 6,000 Finance cost Profit before tax Income tax expense (7,000) (1,800) (3,600) 9,000 Net profit for the period 19,450 4,200 Summarised statements of changes in equity Balance at I October 20X5 91,000 122,000 82,000 9,000 (5,000) Net profit for the period Dividends paid on 31 July 20X6 Balance at 30 September 20X6 19,450 4,200 (6,500) 134,950 (3,000) 92,200 86,000