4 The following are extracts from the consolidated financial statements of the Merino group. Group statement of profit or loss for the year ended 30 September 208 : Extracts from the group statement of financial position: The following information is also relevant to the year ended 30 September 20X8: Pension scheme Merino operates a defined benefit scheme. A service cost component of $21 million has been included within operating expenses. The remeasurement component for the year was a gain of $6 million. Benefits paid out of the scheme were $33 million. Contributions into the scheme by Merino were $35 million. Goodwill Goodwill was reviewed for impairments at the reporting date. Impairments arose of $11 million in the current year. Property, plant and equipment Property, plant and equipment (PPE) at 30 September 208 included cash additions of $137 million. Depreciation charged during the year was $66 million and an a PPE fall in value of $47 million was recognised. Prior to the impairment, the group had a balance on the revaluation surplus of $50 million of which $20 million related to PPE impaired in the current year. Subsidiary disposal During the year on 31 August 208 the group sold 37% of the equity in subsidiary Ryan limited. The group had previously held 80% and therefore retained 43% ownership. The group retained one seat on the directors' board of 5 directors and therefore recorded the remaining ownership as an associate for the remainder of the year. The working capital in the subsidiary at disposal was as follows: The group is nearing completion of the current financial statements for the year ended 30 September 20X9. However, the statement of cash flows is outstanding. The directors have received feedback from an investor regarding the interim financial statements and especially the cash flow that clearly shows that the investor does not understand this element of the financial statements. So the directors require the accountant to prepare the statement of cash flows and an explanatory note that will be used by the directors in a forthcoming meeting with the investor. Particular focus will be upon the calculation of cash generated from operations. Required: (a) Draft an explanatory note to the directors of Merino which should include: (i) a calculation of cash generated from operations using the indirect method; and (ii) an explanation of the specific adjustments required to the group profit Merino acquired a plot of land on 1 September 208 in an area where the land is expected to rise significantly in value if plans for regeneration go ahead in the area. The land is currently held at cost of $6 million in property, plant and equipment until Merino decides what should be done with the land. The market value of the land at 30 September 208 was $8 million but as at 15 October 208, this had reduced to $7 million as there was some uncertainty surrounding the viability of the regeneration plan. Merino has a property located in a foreign country, which was acquired at a cost of 8 million dinars on 1 August 208 when the exchange rate was $1=2 dinars. At 30 September 208, the property was revalued to 12 million dinars. The exchange rate at the year end was $1=1.5 dinars. The property was being carried at its value as at purchase. The company policy is to revalue property, plant and equipment whenever material differences exist between book and fair value. The property was in use for the 2 months from purchase to year end. But depreciation on the property can be assumed to be immaterial. Required: (c) Explain with suitable computations how the land and foreign property should have been recorded in the group financial statements. (8 marks) (25 marks) 4 The following are extracts from the consolidated financial statements of the Merino group. Group statement of profit or loss for the year ended 30 September 208 : Extracts from the group statement of financial position: The following information is also relevant to the year ended 30 September 20X8: Pension scheme Merino operates a defined benefit scheme. A service cost component of $21 million has been included within operating expenses. The remeasurement component for the year was a gain of $6 million. Benefits paid out of the scheme were $33 million. Contributions into the scheme by Merino were $35 million. Goodwill Goodwill was reviewed for impairments at the reporting date. Impairments arose of $11 million in the current year. Property, plant and equipment Property, plant and equipment (PPE) at 30 September 208 included cash additions of $137 million. Depreciation charged during the year was $66 million and an a PPE fall in value of $47 million was recognised. Prior to the impairment, the group had a balance on the revaluation surplus of $50 million of which $20 million related to PPE impaired in the current year. Subsidiary disposal During the year on 31 August 208 the group sold 37% of the equity in subsidiary Ryan limited. The group had previously held 80% and therefore retained 43% ownership. The group retained one seat on the directors' board of 5 directors and therefore recorded the remaining ownership as an associate for the remainder of the year. The working capital in the subsidiary at disposal was as follows: The group is nearing completion of the current financial statements for the year ended 30 September 20X9. However, the statement of cash flows is outstanding. The directors have received feedback from an investor regarding the interim financial statements and especially the cash flow that clearly shows that the investor does not understand this element of the financial statements. So the directors require the accountant to prepare the statement of cash flows and an explanatory note that will be used by the directors in a forthcoming meeting with the investor. Particular focus will be upon the calculation of cash generated from operations. Required: (a) Draft an explanatory note to the directors of Merino which should include: (i) a calculation of cash generated from operations using the indirect method; and (ii) an explanation of the specific adjustments required to the group profit Merino acquired a plot of land on 1 September 208 in an area where the land is expected to rise significantly in value if plans for regeneration go ahead in the area. The land is currently held at cost of $6 million in property, plant and equipment until Merino decides what should be done with the land. The market value of the land at 30 September 208 was $8 million but as at 15 October 208, this had reduced to $7 million as there was some uncertainty surrounding the viability of the regeneration plan. Merino has a property located in a foreign country, which was acquired at a cost of 8 million dinars on 1 August 208 when the exchange rate was $1=2 dinars. At 30 September 208, the property was revalued to 12 million dinars. The exchange rate at the year end was $1=1.5 dinars. The property was being carried at its value as at purchase. The company policy is to revalue property, plant and equipment whenever material differences exist between book and fair value. The property was in use for the 2 months from purchase to year end. But depreciation on the property can be assumed to be immaterial. Required: (c) Explain with suitable computations how the land and foreign property should have been recorded in the group financial statements. (8 marks) (25 marks)