Q7.

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q2.

Alpha, a parent company with one subsidiary, Beta, is preparing the consolidated statement of profit or loss and other comprehensive income for the year ending 31 March 20X5. The draft statements of profit or loss and other comprehensive income are as follows: Alpha Beta $'000 $'000 Revenue (Note 2) 64,800 39,000 Cost of sales (Notes 2 and 4) (26,000) (16,000) - Gross profit 38,800 23,000 Distribution costs (5,000) (2,000) Administrative expenses (9,000) (3,500) Investment income (Notes 1 and 3) 7,000 O Finance costs (Note 1) (4,000) (2,500) Profit before tax 27,800 15,000 Income tax expense (7,000) (4,000) - Profit for the year 20,800 11,000 - Other comprehensive income: Items that will not be reclassified to profit or loss: Gains on property revaluation (Note 4) 5,000 3,000 Other comprehensive income for the year: 5,000 3,000 - Total comprehensive income for the year 25,800 14,000 Note 1 - Alpha's investment in Beta On 1 April 20X3, Alpha acquired 180 million equity shares in Beta. On that date Beta had 200 million equity shares in issue. Alpha made a cash payment of $60 million to the former shareholders of Beta on 1 April 20x3 and agreed to make a further payment of $26.62 million on 31 March 20X6. Alpha had correctly accounted for the deferred payment in its financial statements for the year ended 31 March 20X4 but has made no further entries in its financial statements for the year ended 31 March 20X5. An appropriate annual rate to use in any discounting calculations is 10%. At a discount rate of 10% per annum the present value of $1 payable in three years is $0.7513. On 31 December 2004, Beta paid a dividend of $5 million. This was the only dividend paid by Beta in the year ended 31 March 20X5 and was appropriately recognised by Alpha. On 1 April 20X3, Alpha made a long-term loan to Beta of $25 million. The loans are included in the financial statements of Beta at this amount. These long-term loans attract interest at an annual rate of 8%. Both Alpha and Beta have correctly accounted for this interest in their individual financial statements for the year ended 31 March 20X5. No impairments of the goodwill on acquisition of Beta have been evident up to and including 31 March 20X5. Note 2 - Intra-aroun tradina Alnha sunnlies Beta with a raw IVULET Alpha's investment in Beta On 1 April 20X3, Alpha acquired 180 million equity shares in Beta. On that date Beta had 200 million equity shares in issue. Alpha made a cash payment of $60 million to the former shareholders of Beta on 1 April 20X3 and agreed to make a further payment of $26.62 million on 31 March 20X6. Alpha had correctly accounted for the deferred payment in its financial statements for the year ended 31 March 20X4 but has made no further entries in its financial statements for the year ended 31 March 20X5. An appropriate annual rate to use in any discounting calculations is 10%. At a discount rate of 10% per annum the present value of $1 payable in three years is $0.7513. On 31 December 20X4, Beta paid a dividend of $5 million. This was the only dividend paid by Beta in the year ended 31 March 20X5 and was appropriately recognised by Alpha. On 1 April 20X3, Alpha made a long-term loan to Beta of $25 million. The loans are included in the financial statements of Beta at this amount. These long-term loans attract interest at an annual rate of 8%. Both Alpha and Beta have correctly accounted for this interest in their individual financial statements for the year ended 31 March 20X5. No impairments of the goodwill on acquisition of Beta have been evident up to and including 31 March 20X5. Note 2 - Intra-group trading Alpha supplies Beta with a raw material which it uses in its production process. Alpha applies a mark-up of one-third to its cost. Sales of the raw material by Alpha to Beta in the year ended 31 March 20x5 totalled $10 million. On 31 March 20X4 and 20X5, the inventories of Beta included goods costing $2 million and $3 million respectively which had been purchased from Alpha. Note 3 Alpha's other investments Apart from its investments in the equity shares and loans of Beta, Alpha has a portfolio of equity investments which are correctly classified as fair value through profit or loss. The investment income of Alpha for the year ended 31 March 20x5 currently correctly includes dividend income from this portfolio. However, the carrying amount of the portfolio has not yet been adjusted to its fair value at 31 March 20X5. On 31 March 20X5, the carrying amount of the portfolio was $32 million and its fair value $33.5 million. 3 [P.T.O. Note 4 Revaluation of property, plant and equipment (PPE) Both Alpha and Beta measure their PPE using the revaluation model. PPE is re-measured at the end of each financial year. In previous periods Alpha had recorded net revaluation losses of $3.5 million. These Beta, Alpha has a portfolio of equity investments which are correctly classified as fair value through profit or loss. The investment income of Alpha for the year ended 31 March 20X5 currently correctly includes dividend income from this portfolio. However, the carrying amount of the portfolio has not yet been adjusted to its fair value at 31 March 20X5. On 31 March 20x5, the carrying amount of the portfolio was $32 million and its fair value $33.5 million. 3 (P.T.O. Note 4 Revaluation of property, plant and equipment (PPE) Both Alpha and Beta measure their PPE using the revaluation model. PPE is re-measured at the end of each financial year. In previous periods Alpha had recorded net revaluation losses of $3.5 million. These losses were correctly accounted for under the requirements of IAS 16 - Property, Plant and Equipment. In the financial statements of Alpha for the year ended 31 March 20X5, re-measurement gains of $5 million were entirely recognised in other comprehensive income. These gains related to the same properties which had previously suffered revaluation losses. Beta has only ever recorded revaluation gains. All depreciation and impairments of PPE are recognised in cost of sales. Note 5 - Equity settled share based payment scheme On 1 April 20X3, Alpha granted 500 senior executives 4,000 share options each. The options vest on 31 March 20x7. The options only vest for senior executives who remain employed by Alpha on 31 March 20X7. The following information is relevant: Date Fair value of option Number of executives for whom ($) the option is expected to vest 1 April 20X3 1:20 400 31 March 20X4 1.35 420 31 March 20X5 1.50 450 This transaction was correctly accounted for in the financial statements of Alpha for the year ended 31 March 20X4 and the cost was recognised as an administrative expense. However, no further entries have yet been made in the financial statements for the year ended 31 March 20X5. Required: Prepare the consolidated statement of profit or loss and other comprehensive income of Alpha for the year ended 31 March 20X5. Where relevant you should round all figures to the nearest $'000. purchase outright and has a useful life of around 25 years. How can it be presented as Omega's asset in these circumstances? - Where does the figure of $1.8 million come from? - Apart from the right-of-use asset, how else will this transaction affect our financial statements? | don't need detailed workings here, just explanations. (11 marks) Question 2 - Segment reporting I know that, because we're a listed entity, we are required to disclose details of the financial performance and financial position of different business segments in the notes to our financial statements. I thought it would be interesting to compare the segment report in our financial statements with that of a key competitor. When I did this, I found myself very confused. Our segment report was based on the performance and position by geographical area whereas our competitor's report was based on the performance and position by product type. How can this be correct when both of us are preparing our financial statements in accordance with International Financial Reporting Standards (IFRS Standards) is there not a definition of a 'segment that would be applied to all businesses? (8 marks) Question 3 - Immaterial transactions You may know that the contract for cleaning our Head Office has been given to a firm which is controlled by my brother. This contract was approved in the normal way and I was not involved in the approval process to avoid any perception of a conflict of interest as my brother and I are known to holiday and socialise together. The contract has normal commercial terms and is very insignificant in the context of Omega as an entity. I'm very surprised, therefore, to see details of this contract disclosed in our financial statements when many other much more financially significant contracts are not disclosed in the same detail. Surely this disclosure is unnecessary when the monetary amounts are so small and there is nothing out of the ordinary' about the contract? (6 marks) Required: Provide answers to the questions raised by one of Omega's directors relating to the financial statements for the year ended 31 March 20X5