ACCT 3041 Case Study Due Thursday November 25 @ 11:55 PM 30% of the final grade The following draft financial statements relate to Sunrise, a public limited company: SUNRISE DRAFT GROUP STATEMENTS OF FINANCIAL POSITION AT 30 JUNE 2020

2020 2019 $m $m

Assets: Non-Current Assets: Property, plant, and equipment 1,315 1,005 Goodwill 30 25 Investment in associate 270 290 1,615 1,320

Current Assets Inventory 650 580 Trade receivables 610 530 Cash at Bank and cash equivalents 50 140 1,310 1,250 Total Assets 2,925 2,570 Equity and liabilities Equity Share capital 100 85 Share premium account 30 15 Revaluation reserve 50 145 Retained earnings 254 250 434 495 Non-controlling interest 60 45 Total equity 494 540 Non-current liabilities 850 600 Current liabilities 1,581 1,430 Total liabilities 2,431 2,030 Total equity and Liabilities 2,925 2,570

SUNRISE DRAFT GROUPSTATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2020 $m Revenue 4,700 Cost of Sales (3,400) Gross profit 1,300 Distribution and administrative expenses (600) Finance costs (40) Share of profit in associate 20 Profit before tax 680 Income tax expense (200) Profit for the year 480 Other comprehensive income Foreign exchange difference of associate (5) Impairment losses on property, plant and equipment offset against revaluation surplus

(95) Total comprehensive income for the year 380 Profit attributable to Owners of the parent 455 Non-controlling 25 480 Total comprehensive income attributable to Owners of the parent 355 Non-controlling interest 25 380

SUNRISE DRAFT STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2020

$m Balance at 1 July 2019 540 Issue of share capital 30 Total comprehensive income for the year 380 Acquisition of non-controlling interest of Cloud 48 Dividends paid (parent and non-controlling interest) (504) Balance at 30 June 2020 494

The following relates to Sunrise: (a) Sunrise acquired a seventy percent holding in Cloud, a public limited company, on 1 July 2019. The fair values of the assets acquired were as follows:

$m Property, plant, and equipment 70 Inventories and work in progress 90 160

The purchase consideration was $100 million in cash and $25 million (discounted value) deferred consideration which is payable on 1 July 2020. The difference between the discounted value of the deferred consideration ($25 million) and the amount payable ($29 million) is included in the finance costs. Sunrise wants to set up a provision for the reconstruction cost of $10 million retrospectively on the acquisition of Cloud. This provision has not yet been set up. (b) There had been no disposal of property, plant, and equipment during the year. Depreciation for the period charged in cost of sales was $60 million. (c) Current liabilities comprised of the following:

2020 2019 $m $m Trade payables 1,341 1,200 Interest payable 50 45 Taxation 190 185 1,581 1,430

(d) Non-current liabilities comprised the following:

2020 2019 $m $m Deferred Consideration purchase of Cloud 29 - Liability for the purchase of property, plant, and equipment 144 - Loans repayable 621 555 Deferred tax liability 30 25 Retirement benefit liability 26 20 850 600

(e) The retirement benefit liability comprised the following:

$m

Movement in year Liability at 1 July 2015 20 Current and past services cost charged to profit or loss 13 Contributions paid to retirement benefits scheme (7) Liability 30 June 2016 26 There was no actual gain or loss in the year.

(f) Goodwill was impairment tested on 30 June 2020 and any impairment was included in the financial statements for the year ended on 30 June 2020. (g) The Finance Director has set up a company, Star, through which Sunrise conducted its investment activities. Sunrise has paid $400 million to Star during the year and this has been included in dividends paid. The money was invested in a specified portfolio of investments. Ninety-five per cent of the profits and one hundred percent of the losses in the specified portfolio of investments are transferred to Sunrise. An investment manager has charge of the companys investments and own all the share capital of Star. An agreement between the investment manager and Sunrise sets out the operating guidelines and prohibits the investment manager from obtaining access to the investments for the managers benefit. An annual transfer of the profit/loss will occur on 30 June annually and the capital will be returned in four years time. The transfer of $400 million cash occurred on 1 January 2020, but no transfer of profit/loss has yet occurred. The statement of financial position of Star at 30 June 2020 is as follows: STAR: STATEMENT OF FINANCIAL POSITION AT 30 JUNE 2020

$m Investment at fair value through profit or loss 390 390 Share Capital 400 Retained earnings (10) 390

(h) It is the groups policy to value the non-controlling interest at its proportionate share of the fair value of the subsidiarys identifiable net assets.

Required 1) Prepare a group cash flows from operating activities (ONLY) for the Sunrise Group for the year ended 30 June 2020 using the indirect method (20 marks) 2) Discuss the issues which determine whether STAR should be consolidated by SUNRISE in the group financial statement (20 marks) 3) Discuss briefly the importance of ethical behavior in the preparation of financial statements and whether the creation of Star could constitute unethical practice by the finance director of Sunrise (20 marks)