The consolidated financial statements incorporate the financial statements of the subsidiary (Stitch Limited) of Patch Limited ("Parent") as at the reporting date. Patch Limited and its subsidiary together are referred to in these financial statements as the "Group" or the consolidated entity.

The subsidiary is an entity over which the Parent has control. The Parent controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

The subsidiary is included in the consolidated financial statements using the acquisition method of consolidation. It is fully consolidated from the date on which control is transferred to the Parent.

The Group recognises any non-controlling interest at its proportionate share of the subsidiary net identifiable assets.

The Subsidiary, Stitch

On 31 December 2016 Patch Limited acquired 50% of the shares in Stitch Limited.

On that date, the equity of Stitch Limited comprised: $m

Share capital

400

Retained earnings

200

Equity

$600

Patch shareholding entitled it to appoint two directors to the board of Stitch. Valcro Limited owned the remaining shares (50%) in Stitch and was also able to appoint two directors. In addition, Valcro was able to appoint a third director - the chair of the board of directors.

At acquisition, the book value of the assets and liabilities of Stitch Limited were considered to be at fair value, except that there were patents pending that had a book value of zero and where Patch assessed the fair value to be $200m. The tax rate is 30% for consolidation adjustments affected by deferred taxation.

Intragroup plant sales

On 1 January 2017, as part of the acquisition arrangements Patch sold Stitch plant (Cost $900m, Accumulated depreciation $600m, estimated useful life 9 years) for $400m. Stitch decided to depreciate the plant over 5 years.

Intragroup merchandise sales

On 1 July 2017, Patch sold merchandise to Stich that cost $80m for $100m. Stich sold half of this merchandise to external parties by the end of 2017 and paid Patch 60% of the amount owed.

Intragroup loans

Also on 1 January 2017, as part of the acquisition, Patch gave Stitch a 5 year, interest free loan of $400m to buy the plant. In addition, for as long as the loan was outstanding, the right to appoint the board chair was transferred to Patch. This right was considered to give Patch control over Stitch.

Goodwill impairment

At the most recent balance date (31 December 2017), the returns from Stitch were not as high as expected. The directors of Patch considered that acquired goodwill had been impaired by 40%.

The directors have also decided to account for the non-controlling interest using the proportionate-share of the subsidiary's identifiable net assets.

Financial statements

Income statement for year end 31 December & Balance sheet as at 31 December 2017

Patch($m)

Stitch ($m)

Sales

(2,000)

(700)

Cost of goods sold

1000

300

Operating expenses (incl. Dep & Impair)

200

100

Operating profit

(800)

(300)

Gain on sale of plant

(100)

Investment income

(45)

(10)

Income Tax

300

100

Net Income

(645)

(210)

Opening Retained earnings

(900)

(200)

(1,545)

(410)

Dividends paid

500

90

Closing retained earnings

(1,045)

(320)

Share capital

(1,000)

(400)

Total equity

(2,045)

(720)

Accounts Payable

(500)

(150)

Non-current liabilities

(500)

(500)

Deferred tax

(100)

Total liabilities

(1,100)

(650)

Total liabilities and equity

(3,145)

(1,370)

Cash

50

60

Accounts Receivable

100

150

Inventory

100

150

Loan to Stitch

400

Investment in Stitch

500

Plant (net)

1,995

1,010

Total assets

3,145

1,370

Required:

Prepare the consolidated group financial statements for Patch and Stitch for the year ended 31 December 2017.

Consolidated ($m)

Sales

Cost of goods sold

Operating expenses (incl. Dep & Impair)

Operating profit

Gain on sale of plant

Investment income

Income Tax

Net Income

Non-controlling interests

Opening Retained earnings

Dividends paid

Closing retained earnings

Share capital

Non-controlling interests

Total equity

Accounts Payable

Non-current liabilities

Deferred tax

Total liabilities

Total liabilities and equity

Cash

Accounts Receivable

Inventory

Loan to Stitch

Investment in Stitch

Intangibles

Goodwill

Plant (net)

Total assets

Use the information in Part A to prepare the financial statements of Patch for the year ended 31 December 2017, assuming Stitch is accounted for as an associate.

Patch and associate ($m)

Sales

Cost of goods sold

Other expenses

Operating profit

Gain on sale of plant

Associate income

Income tax

Net Income

Non-controlling interests (if any)

Opening Retained earnings

Dividends paid

Closing retained earnings

Share capital

Non-controlling interests (if any)

Total equity

Accounts Payable

Non-current liabilities

Deferred tax liability

Total liabilities

Total liabilities and equity

Cash

Accounts Receivable

Inventory

Loan to Stitch

Investment in Stitch

Intangibles

Goodwill

Plant (net)

Total assets

Draft a briefing note that compares and contrasts (i.e., comment on) the following ratios for Part A and Part B:

a) Return on equity

b) Return on assets

c) Asset turnover

d) Debt to total assets

Ratio

Definition

Consolidation

Associate

a)Return on equity

b)Return on assets

c)Asset turnover

d)Debt to total assets