Chester Ltd

Background

Chester Ltd has an equity interest in a range of companies including Gresham Ltd. Chester Ltd has recently acquired additional equity shares in Gresham Ltd. The directors of Chester Ltd are not clear about how this increased level of ownership in Gresham Ltd may impact upon their consolidated financial statements for Chester Ltd. Assume that the financial year end is 31st March for all companies.

Initial acquisition of Gresham Ltd significant influence

On 1st April 2022, Chester Ltd acquired a 30% stake in the equity shares of Gresham ltd. The consideration consisted of 100m cash. The carrying amount of the net assets of Gresham Ltd on 1st April 2022 was 286m which was the same as their fair value. Since then, Gresham Ltd has been correctly treated as an associate in the consolidated financial statements of Chester Ltd. Chester Ltd management often share information and strategic advice with Gresham Ltd.

Subsequent acquisition of Gresham Ltd

Chester Ltd acquired a further 18% of Gresham Ltd equity on 1st April 2026. The consideration for the further 18% of the equity shares was 66m in cash. The fair value of the original 30% equity interest was 127m on 1 April 2026. The carrying amount of the net assets of Gresham Ltd at 1 st April 2026 was 348m which included some land which had been revalued upwards by 15m and correctly accounted for on 1st April 2025. () Deferred tax at 20% had also been correctly accounted for on this gain in the individual statement of financial position of Gresham Ltd as at 31st March 2026. The rest of the increase in the net assets of Gresham Ltd since the acquisition was solely due to profits. Gresham Ltd paid no dividend during this period. The remaining 52% of the equity in Gresham Ltd at 1st April 2026 is owned by a few other investors, none of which owns more than a 10% stake in the equity of Gresham Ltd. On 1st April 2026 Chester Ltd also acquired some share options in Gresham Ltd exercisable any time until 31st March 2027. The exercise price of the options at 1st April 2026 was just above the market price of Gresham Ltd shares. Gresham Ltd has been profitable for a number of years, the share price is on an upward trend which is expected to continue. Chester Ltd would increase its ownership to 60% should it exercise its rights. It is believed that there would be additional cost savings should the additional shares be acquired as decisions at board level could be made more efficiently.

Fair Value of net assets of Gresham Ltd The carrying amounts of the net assets of Gresham Ltd on 1st April 2026 were as follows: m Non-Current Assets 355 Current Assets 214 Deferred tax (16) Other liabilities (205) Total 348

Included within the non-current assets was the land which had been previously revalued upward by 15m on 1st April 2025. The carrying amount of this land at 1st April 2025 and 1st April 2026 was 50m but its fair value was assessed to be 60m at 1st April 2026. Current assets include finished good with a cost of 84m. The fair value of these goods is 131m. On 1st April 2026 the board of directors of Chester Ltd also identified that Gresham Ltd has an internally generated data base of customers who were likely to be interested in purchasing their products. Although there no contractual or legal rights associated with this data base a professional expert has estimated that competitors of Chester Ltd would be prepared to pay 5m for the data base. Gresham Ltd has not recognised the data base as an asset within their individual financial statements. The current rate of tax is 20%. This rate should be applied to any fair value adjustments deemed necessary. Chester Ltd has a policy of measuring the non-controlling interest as the proportionate share of the net assets.

Required:

Using your own independent work, supported by appropriate academic references draft a report to the directors of Chester Ltd to address the following points.

1)Using IFRS 10 explain why it was correct to initially classify Gresham Ltd as an associate, as opposed to a subsidiary on 1st April 2022. Critically evaluate why this distinction matters from the point of view of the users of accounts.

2)Demonstrate exactly how Gresham Ltd should be accounted for as an associate using the equity method in the consolidated statement of financial position of Chester Ltd at 31st March 2026. Your answer should demonstrate and explain the necessary accounting entries. Discuss how the revaluation of the land at 1st April 2025 should have been accounted for, include any calculations you feel relevant. (20 marks).

3)Analytically discuss why the classification of Chester Ltd.s investment in Gresham Ltd should change on 1st April 2026, and what advantages to the user of Chester Ltd might there be from the production of consolidated accounts? (20 marks) NOTE : NOT SUBSEDERY, STILL NOT SURE , YES IT IS SUPPORT BYEVIDENCEE , IT SHOULD CHANGE FROM ASSOCIATE TO SUBSEDERY.

4) Demonstrate with reference to IFRS 13 how the fair value of the non-current and current assets at acquisition, including any deferred tax adjustment should be calculated to determine goodwill.

5)Demonstrate how goodwill on the additional purchase of Gresham Ltd shares should be calculated on 1st April 2026. Your discussion should include a brief analysis of the accounting treatment arising from the additional purchase of 18% equity in Gresham Ltd.