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LESSON ONE

1

LESSON ONE
GROUP ACCOUNTS
LESSON ONE
...
1
ANSWERS FOR REINFORCEMNT QUESTIONS
...
1 Introduction and learning objectives
1
...
3 Group Structures
1
...
5 Jointly controlled entity (IAS 31)
1
...
7 Foreign Subsidiaries (IAS 21)
1
...

2
...

4
...

The Study Text below
...

Compare your answers with those given

STUDY PACK

LESSON ONE

2

1
...
It then looks at the requirements of IFRS 3
business combinations
...
As the name suggests, step-by-step acquisitions involve acquiring control of a company in
stages
...

When you have studied this chapter you should be able to do the following
...

Explain the principles of measurement relating to the fair value of the consideration and the
net assets acquired
...

Prepare consolidated financial statements where including Associate companies, jointly
controlled entities and foreign of subsidiaries
...


1
...

The following are important definitions in IAS 27:
Consolidated financial statements: The financial statements of a group presented as those of a single
economic entity
...

Parent: An entity that has one or more subsidiaries
...

Control is presumed when the parent acquires more than half of the voting rights of the enterprise
...

A parent is required to present consolidated financial statements in which it consolidates its
investments in subsidiaries
...
the parent is itself a wholly-owned subsidiary, or is a partially owned subsidiary of another
entity and its other owners, including those not otherwise entitled to vote, have been informed
about, and do not object to, the parent not presenting consolidated financial statements;
2
...
the parent did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organisation for the purpose of issuing any class of
instruments in a public market; and
4
...

The consolidated accounts should include all of the parent's subsidiaries, both domestic and foreign
...
Also, as a result of an amendment of IAS 27 by IFRS 5 in March 2004, there
is no exception for a subsidiary for which control is intended to be temporary because the subsidiary
is acquired and held exclusively with a view to its subsequent disposal in the near future
...
This may arise even where the activities
of the SPE are predetermined or where the majority of voting or equity are not held by the reporting
enterprise
...

The consolidation process
Intragroup balances, transactions, income, and expenses should be eliminated in full
...
Some of the
adjustments requires during consolidation include:
(i)
(ii)

Elimination of unrealized profit on inventory and Property, plant and equipment that has
been sold within the group
...


The financial statements of the parent and its subsidiaries used in preparing the consolidated financial
statements should all be prepared as of the same reporting date, unless it is impracticable to do so
...
And in no case may the
difference be more than three months
...

Minority interests should be presented in the consolidated balance sheet within equity, but separate
from the parent's shareholders' equity
...

Where losses applicable to the minority exceed the minority interest in the equity of the relevant
subsidiary, the excess, and any further losses attributable to the minority, are charged to the group
unless the minority has a binding obligation to, and is able to, make good the losses
...

Requirements of IFRS 3 ‘Business combination
Cost of a Business Combination
Fair value of consideration given plus costs
...
If equity instruments are issued as consideration for the acquisition, the market price of
those equity instruments at the date of exchange is considered to provide the best evidence of fair
value
...

The acquired identifiable assets, liabilities, and contingent liabilities are measured initially by the
acquirer at their fair values at the acquisition date, irrespective of the extent of any minority interest
...

Step acquisitions
...


Goodwill
Recognition and measurement of goodwill
...

No amortization of goodwill
...
Instead goodwill must be tested for impairment at least
annually in accordance with IAS 36 Impairment of Assets
...
Before concluding that "negative goodwill" has arisen, however, IFRS 3 requires that the
acquirer reassess the identification and measurement of the subsidiaries’ identifiable assets, liabilities,
and contingent liabilities and the measurement of the cost of the combination
...
On 30
September 2005, the trial balances of the two companies were as follows:

Cash at bank
Receivables
Dividend: Interim paid
Expenses (including depreciation of fixed assets)
Freehold land and buildings (net book value)
Investment in Andei Limited
Motor vehicles (net book value)
Purchases
Plant and machinery (net book value)
Inventory
Taxation: installment tax paid
Bank overdraft (secured on land and buildings)
Payables

STUDY PACK

Mtito Ltd
...
‘000’
62,300
4,500
184,700
25,500
94,260
6,700
375,400
28,900
22,100
9,100
813,460
6,700
38,200

Andei Ltd
...
‘000’
11,500
51,600
3,000
123,600
18,900
4,900
335,200
21,600
17,600
6,380
594,280
17,100

LESSON ONE

5

Sales
Share capital: Authorised, issued and fully paid
Ordinary shares of Sh
...

2
...

4
...

6
...


Closing inventory was Sh
...
19,200,000 in Andei
...

Mtito paid its interim dividend on 15th May 2005; Andei paid its interim dividend on 31 March
2005
...

Between 1 May 1996 and 30 September 2005, Mtito sold gods to Andei
...
30 million
...
5% on the selling price of these
goods
...

Included in the debtors figure for Mtito was Sh
...

The self assessment tax returns of Mtito and Andei show the corporation tax charge for the
year at Sh
...
7,980,000 respectively; both companies have paid instalment tax
on the preceding year basis
...
6 million and Andei
Sh
...

Goodwill arising on the acquisition of Andei is considered to be impaired at sh
...


Required:
A consolidated income statement for the year ended 30 September 2005 (including reconciliations of
the retained profit for the year and carried forward) and a consolidated balance sheet as at 30 September
2005
...
It will be important therefore to prepare then three set of accounts on and present
them in columnar form for the purpose of presentation
...

Mtito Ltd and Andei Ltd
Income statement for year to 30 September 2005
Mtito
Andei
Group
Sh
...
‘000’
Sh
...
‘000’
121,960
121,960
77,180
(77,180)
-

Yr
Sh
...
‘000’
132,040
( 3,000)
(1,000)
128,040
86,000
(82,325)
3,675
2,940

Mtito
Sh
...
’000’

Group
Sh
...
10
Profit and Loss
MI
Current liabilities
Payables
Tax payable
Proposed dividends

STUDY PACK

LESSON ONE

Div to M1
Bank o/d
Total Equity and Liabilities

8

6,700
51,820
243,860

21,700
127,700

600
6,700
63,920
276,100

1
...
Apart from a situation where the holding company has only one subsidiary, the following
are examples of different types of structures and their accounting approach:
(i)

Holding company with more than one subsidiary: This type of situation is straight
forward as the procedure involves consolidating the results of the holding with its
subsidiaries the normal way
...

(ii)
Holding company with a subsidiary company and a sub-subsidiary: In these type of
structure, the holding company owns a subsidiary company which owns another
subsidiary company called a sub-subsidiary company: The consolidation process is also
the same as before only that for the purpose of consolidating the sub-subsidiary, we
need to determine the effective shareholding and minority interest for the group
...

Example 2 – Sub-subsidiary
Ademo Limited is a company quoted on the Nairobi Stock Exchange
...
On 1 October 1997 it purchased shares in Afro
clothing Limited
...
All the companies make up their accounts to 31 March each
year
...

Ademo Ltd
Sh
...
m
853
STUDY PACK

Afro Ltd
Sh
...
m
685
(355)
330
(78)
(72)
0
180
(50)
130
(100)
30
420
450

Afro Ltd
Sh
...
m
495

LESSON ONE

9

Investment in Afro
Investment in Piki

702

Current assets
Inventory
Trade receivables
Cash at bank
Total assets

1555

405
820

495

368
380
120
2,423

200
230
115
1,365

190
240
91
1,016

Ordinary share capital
Retained profits
Shareholders funds

900
703
1,603

200
660
860

100
450
550

Non current liabilities
10% loan stock

500

200

0

140
30
150
2,423

175
30
100
1,365

346
20
100
1,016

Current liabilities
Trade and other payables payables
Current tax
Proposed Dividends
Total equity and liabilities

The following additional information is available:
(i)
On 1 October 1997 Ademo Ltd acquired 16 million sh
...
For sh
...
490 million
...

(ii)
On 1 April 1998 Afro Ltd acquired 7
...
10 ordinary shares in Piki Ltd for sh
...
300 million
...
40 million in excess of the book value and
10 years remaining on the lease
...

(iii)
In the year ended 31 March 2000 Piki Ltd sold goods at a price of Sh
...
Piki Ltd
had marked up these goods by 100% on cost
...

(iv)
In the year ended 31 March 2000 Afro Ltd sold Ademo Ltd goods at a price of sh
...
Afro Ltd had marked up these goods by 80% on cost
...

(v)
On 1 April 1999 Ademo Ltd sold sewing machines to Afro Ltd for sh
...
Afro
Ltd included these machines in its PPE and charges depreciation of 20% on cost
...
Afro Ltd includes the depreciation of
these machines in its cost of sales
...
24 million and Ademo Ltd owing Afro Ltd sh
...
Meanwhile the group
had not yet paid the interest due on the respective loan stocks, the balances included in
the trade and other payables
...
This
impairment loss is to be charged as a separate item in the income statement
...

(25 marks)
Solution:
Ademo and Its subsidiaries
Consolidated Income statement for the year ended 31 March 2000
Sh
...

Revenue
2,507
Cost of Sales
(1,322
...
00
Expenses
Distribution Costs
Administration Expenses
Goodwill impaired
Finance costs
Profit before tax
Income tax expense
Profit for the period

338
...
00
55
...
00

Profit attributable to: Holding Company
Minority interest

228
...
40
301
...


Retained Profits
Sh
...
60
228
...
20
(150
...
20

Balance as at 1 April 1999
Profit for the period
Less proposed dividends
Balance as at 31 March 2000

STUDY PACK

(714
...
00
(170
...
00

LESSON ONE

11

Ademo and Its subsidiaries
Consolidated Balance sheet as at 31 March 2000
Non Current Assets
Property, plant and equipment
Goodwill

Sh
...
00
808
...
00

Ordinary Share Capital
Retained Profits

Non-Current Liabilities
10% Loanstock

600
...
00
3,672
...
00
957
...
20
330
...
00

Minority Interest
Shareholders funds

Statement of retained profits

Sh
...
00
55
...
00

609
...
00
195
...
00
3,672
...
00
96
...
60
878
...
00)
100
...
60
78
...
00
196
...
20
957
...
00

713
...
00)
80
...
00
(50
...
00)
(25
...
00
80
...
00
(50
...
00)
688
...
00
(490
...
00
-

50
...
00
(10
...
00
(490
...
00
(10
...
00
96
...
00
75
...
00
100
...
00
75
...
00
196
...
Interest
Add:
UPCS: Pi to Af
UPCS: Af to Ad
Depreciation due to FV

2
...
00
(300
...
00

30
...
00

450
...
00)
150
...
00)
116
...
60

(20
...
00)
6
...
60

(20
...
00)
122
...
20

Revenue
1,368
...
00
685
...
00

COS
810
...
00
355
...
00

(80
...
00)
(150
...
00)
(90
...
00)
(10
...
00

FIN
50
...
00
____70
...
00

4
...
00

60
...
00)
50
...
00

Piki

602
...
00
392
...
00
60
...
00
170
...
00)

20
...
00
2,507
...
00
73
...
00
257
...


DIST
196
...
00
78
...
00

324
...
00
180
...
00

25
...
00)
60
...
00

Profit attributable to Minority Interest in the P & L
Afro
150
...
00)
_____-

(10
...
00
(20
...
00)

(24
...
00

106
...
00
150
...
00

MI’s share at 20% and 40%

150
...
00

MI’s share at 20% and 40%

30
...
40

4
...

610
...
00)
120
...

420
...
00)
120
...
00
96
...
00)
116
...
60

Less depreciation on FV adjustment b/f
Share of Ad @ 80% & 60%

5
...


165
...
60

Minority interest in the balance sheet

Shareholders funds
ADD: FV adjustment
Excess depreciation
Dividends in Piki (0
...
(2 yrs)
Adjusted shareholders funds
MI’s share at 20% and 40%

Afro
Shm

Piki
Sh
...
00
10
...
00
75
...
00)

550
...
00
____590
...
00
187
...
00)
(8
...
00
224
...
2 x 405)

(iii)

411
...
00)
330
...
The following example illustrates this position:

Example 3
Rain Ltd
...
and Thunder Ltd
...
Their balance
sheets as at 30 September 2003 were as below:

STUDY PACK

LESSON ONE

Non-current assets:
Non-current assets
(net of depreciation)
Shares in subsidiaries
Current assets:
Inventory
Trade payables
Cash
Current liabilities:
Trade payables
Net current assets

14

Rain Ltd
...

Sh
...

Sh
...

“000”
“000”

14,000
5,000
19,000

Thunder Ltd
...

Sh
...
100
Each fully paid
10% preference shares of Sh
...
Rain Ltd
...
on 1 October 2001 for Sh
...
600,000
...

purchased 5,000 ordinary shares in Thunder Ltd
...
1,000,000
...
purchased 11,000
ordinary shares in Thunder Ltd
...
1,900,000 on the same date
...
Balances are as given below:
Profit and loss account
1 October 2001
1 October 2002
Thunder Ltd
...


Storm Ltd
...


General reserve
1 October 2001
1 October 2002
1 October 2002

Sh
...

Sh
...

Sh
...

Sh
...
2,000,000
-

STUDY PACK

LESSON ONE

15

3
...

Thunder Ltd
...
600,000 due from Thunder Ltd
...
300,000 due from Rain Ltd
...
200,000 due from Thunder Ltd
...
On 30 September 2003, thunder Ltd
...
200,00 to Rain Ltd
...
There were no other inter-company balances
...
Rain Ltd
...
for Sh
...
The goods had originally cost Rain Ltd
...
600,000
...
still had Sh
...

Required:
Prepare the consolidated balance sheet of Rain Ltd
...

Solution:
Rain Ltd and its subsidiaries
Consolidated Balance sheet as at 30 September 2003
Non Current Assets
PPE
Goodwill (W2)

Sh
...
’000’
22,000
1,006
23,006

Current Assets
Inventory (2 + 1
...
6 – 0
...
7 + 1
...
14 + 0
...
100 ordinary shares fully paid
General reserve (W5)
Retained Profits (W4) (300 + 2,028)

16650
39656
15,000
7,780
2,328
25,108
6,048
31,156

Minority interest (W3)
Current liabilities:
Payables

8500
39,656

TOTAL EQUITY AND LIABILITIES

Workings
1
...


(60% x 55%)

5/6

Cost of Control
Sh
...
’000’
3,400
600
500
200
4,300
1,160
174
806
6,440

Total goodwill on consolidation = 806 + 200 = 1,006

3
...
’000’
760
320
6,048

_____

7,128

4
...
’000’

Rain Ltd
UPCs (200/800 x 200)
Bal b/f
Thunder ltd:
Cost of control a/c
25% x 300
75
33% x 300
99
Minority interest
(42% x 400)
Consolidated balance sheet

50
800

174
168
2,328
3,520

STUDY PACK

Bal b/d: Rain
Cost of control a/c
(60% x 500)
Minority Interest A/c
(40% x 800)
Bal b/d: Thunder

Sh
...
’000’
2,500

300
320
400

____
3,520

LESSON ONE

5
...

Rain Ltd
Storm Ltd
Thunder Ltd

17

Consolidated General reserve
Sh
...
’000’
4,800
2,000
800

____
7,600

7
...
’000’
900
8,500
____
9,400

Rain Ltd
Storm Ltd
Thunder Ltd

Sh
...
’000’
200
400
300
200
6,500
7,600

Sh
...
It is not examinable within this scope and
applies only in practice
...

Under IAS 39, those investments are measured at fair value with fair value changes recognised in profit
or loss
...

Significant influence: Power to participate in the financial and operating policy decisions but not
control them
...

Identification of Associates
A holding of 20% or more of the voting power (directly or through subsidiaries) will indicate significant
influence unless it can be clearly demonstrated otherwise
...

The existence of significant influence by an investor is usually evidenced in one or more of the
following ways:
(i) representation on the board of directors or equivalent governing body of the investee;
participation in the policy-making process;
(ii) material transactions between the investor and the investee; interchange of managerial personnel;
or
(iii) provision of essential technical information
...

1
...

Under IAS 39, those investments are measured at fair value with fair value changes recognised
in profit or loss
...
In
those separate statements, the investment in the associate may be accounted for by the cost
method or under IAS 39
...
the investor is itself a wholly-owned subsidiary, or is a partially-owned subsidiary
of another entity and its other owners, including those not otherwise entitled to vote,
have been informed about, and do not object to, the investor not applying the equity
method;
2
...
the investor did not file, nor is it in the process of filing, its financial statements
with a securities commission or other regulatory organisation for the purpose of
issuing any class of instruments in a public market; and
4
...

Applying the Equity Method of Accounting
Basic principle
...

Distributions and other adjustments to carrying amount
...
Adjustments to the carrying amount may also be
required arising from changes in the investee's equity that have not been included in the income
statement (for example, revaluations)
...
Although potential voting rights are considered in deciding whether
significant influence exists, the investor's share of profit or loss of the investee and of changes in the
investee's equity is determined on the basis of present ownership interests
...

Implicit goodwill and fair value adjustments
...
Appropriate adjustments to the investor's share of the profits or
losses after acquisition are made to account for additional depreciation or amortization of the
associate's depreciable or amortizable assets based on the excess of their fair values over their carrying
amounts at the time the investment was acquired
...

Discontinuing the equity method
...
The carrying amount of the investment at that date should be regarded as
a new cost basis
...
If an associate is accounted for using the equity method, unrealised
profits and losses resulting from upstream (associate to investor) and downstream (investor to
associate) transactions should be eliminated to the extent of the investor's interest in the associate
...

Date of associate's financial statements
...
If it is impracticable, the most recent available financial statements
of the associate should be used, with adjustments made for the effects of any significant transactions
or events occurring between the accounting period ends
...
[
Associate's accounting policies
...

Losses in excess of investment
...
The "interest
in an associate" is the carrying amount of the investment in the associate under the equity method
together with any long-term interests that, in substance, form part of the investor's net investment in
the associate
...
If the associate subsequently reports profits, the investor
resumes recognizing its share of those profits only after its share of the profits equals the share of
losses not recognized
...
The impairment indicators in IAS 39, Financial Instruments: Recognition and
Measurement, apply to investments in associates
...
The recoverable amount of an investment in an associate
is assessed for each individual associate, unless the associate does not generate cash flows
independently
...
496 million and 20% of the ordinary share capital of Ukwala Limited on 31 July 1998 for Sh
...
Profits in all companies are deemed to accrue evenly over the year
...
million
414
552
966

Sawana
Ltd
Sh

...

million
220
220

180
240
28
448

210
140
12
362

70
56
21
147

189
7
63
259
189
1,155

109
3
40
152
210
490

45
2
40
87
60
280

Profit and loss accounts for the year ended 30
April 1999
Amua
Sawana Ukwala
Ltd
Ltd
Ltd
Sh
Sh
Sh
...
million
...
10
each
Retained earnings
S/holders Funds
15% Debentures

20

700
175
875
280
1,155

For the year
Brought
200 forward
80
Carried forward
280

200
290
490

120
175

190
290

(40)
80

Additional information:
1
...

2
...

Required:
The consolidated income statement (which should be in accordance with the International
Accounting Standard No
...

Solution:
Amua Ltd and it’s subsidiary co
...

Sales
Cost of sales
Gross profit
Share of profit after tax in associate co
Distribution costs
Administration costs
Finance cost
Profit before tax
Income tax expense
Profit for the period
Profit attributable to : ordinary shareholders
: Minority Interest

Statement of changes in equity extract

Bal as at 30
...
98

Sh
...
4
42

Retained
Profits
Sh
...
M
2,946
(1,969)
977
24

1,001
(749
...
6
(82)
169
...
6
7
169
...
4
...
6
63
(63)
219
...

Balance sheet as at 30 April 1999

Sh
...
M
694
95
69
...
6

Current assets
Inventory
Receivables
Dividend receivable from Ukwala
Bank

390
380
8
40

Capital and Reserves
Ordinary share @ sh
...
6
700
2
217
...
6

Minority interest
Non current liabilities
15% debentures

98

Current liabilities
Payables
Tax payable
Proposed dividends Group
Dividend to MI

298
10
63
8

TOTAL EQUITY AND LIABILITIES

280
1,297
...


379
1676
...
M
98 OSC
____ P& L
98

Bal C/d

Capital Reserve
Goodwill written off: S
U
Balance c/d

Retained Profits
Sh
...
4 P& L
217
...
2m)
OSC
P& L

Sh
...


Investment in associate

54

38
16
2
...
M
...
M
175
20
18
8
6
227

Sh
...
M
40
58
98

18
(2
...
M
496 Pre-acquisition dividend
OSC
P& L
Goodwill: Written off
5
____
C/d
95
496

Sh
...
6
69
...
M
24
160
212
100
496

1
...


STUDY PACK

LESSON ONE

23

Important definitions in IAS 31
Joint venture: A contractual arrangement whereby two or more parties undertake an economic
activity that is subject to joint control
...

Investor in a joint venture: A party to a joint venture and does not have joint control over that
joint venture
...

Joint control: The contractually agreed sharing of control over an economic activity such that no
individual contracting party has control
...
Each venturer uses its own assets, incurs its own expenses
and liabilities, and raises its own finance
...
[IAS 31
...
Each venturer may take a share of the output from the assets and each bears a
share of the expenses incurred
...

(iii) Jointly Controlled Entities
A jointly controlled entity is a corporation, partnership, or other entity in which two or more
venturers have an interest, under a contractual arrangement that establishes joint control over the
entity
...

Those contributions are included in the accounting records of the venturer and recognised in the
venturer's financial statements as an investment in the jointly controlled entity
...

(ii) Equity method of accounting
...
Under IAS 39, those investments are measured at fair value with fair value changes recognised in
profit or loss
...
In those
separate statements, the investment in the jointly controlled entity may be accounted for by the cost
method or under IAS 39
...
the investor is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of
another entity and its other owners, including those not otherwise entitled to vote, have
been informed about, and do not object to, the investor not applying proportionate
consolidation or the equity method;
2
...
the investor did not file, nor is it in the process of filing, its financial statements with a
securities commission or other regulatory organization for the purpose of issuing any
class of instruments in a public market; and
4
...

(i) Proportionate Consolidation
Under proportionate consolidation, the balance sheet of the venturer includes its share of the assets
that it controls jointly and its share of the liabilities for which it is jointly responsible
...

IAS 31 allows for the use of two different reporting formats for presenting proportionate
consolidation:]
The venturer may combine its share of each of the assets, liabilities, income and expenses of the jointly
controlled entity with the similar items, line by line, in its financial statements; or
The venturer may include separate line items for its share of the assets, liabilities, income and expenses
of the jointly controlled entity in its financial statements
...

1
...
A business combination is the bringing together of
separate entities or businesses into one reporting entity
...
IFRS 3 applies to all business combinations except combinations of entities under
common control, combinations of mutual entities, combinations by contract without exchange of
ownership interest, and formations of joint ventures
...
All business combinations within the scope of IFRS 3 must be accounted for using
the purchase method
...

Acquirer must be identified
...
Under the pooling of interest method/merger accounting no goodwill arose on
consolidation, there was no distinction between the post acquisition and pre acquisition profits and
consolidation was carried out as if the companies have been one entity despite acquisition partway
during the year
...
However, the investment in the ‘acquiring’ company was valued at the par value of

STUDY PACK

LESSON ONE

25

shares issued
...
Difference on
consolidation is a debit balance that was written off against the group reserves while a merger reserve
is a credit balance that is shown in the consolidated balance sheet together with the other group
reserves
...
) he merger method of accounting has
been used for illustrative purpose only and is not to be used
...
Under IFRS 3, an acquirer must be identified
for all business combinations
...
, a company quoted on the Nairobi Stock Exchange, with 200 million shares in issue
on I April 1996, has owned 75% of the ordinary share capital and 60% of the preference share
capital of Fanya Limited since 1 April 1990 when the balance on the profit and loss account of Fanya
Ltd
...
120 million
...
purchased 40% of the ordinary share capital of Guvu Ltd
...

On 1 October 1996, Embamba Ltd
...
;
the other 50% was purchased by ABC Inc
...
Embamba and ABC both have joint
control of Hadithi
...
, issued 138 million of its ordinary shares of Sh
...
, which has 100 million ordinary
shares u
...
10 in issue and which are quoted on the Nairobi Stock Exchange
...
The market
values of the shares in Embamba and Imani were Sh
...
60 respectively as at the time
...


E Ltd

F Ltd

G Ltd

H Ltd

Sh
...
m

Sh
...
M

I Lttd
Sh
...
440

960

820

7,200

Profit for the year

1,320

280

290

220

1,600

Dividends received

74

20

1394

300

(460)

(100)

(90)

(60)

(600)

934

200

200

160

1,000

Taxation

Profit after tax

STUDY PACK

LESSON ONE

26

-

(40)

-

-

-

(200)

(40)

(50)

(40)

(300)

(1,014)

(60)

(70)

(60)

(300)

(1,214)

(100)

(120)

(100)

(600)

(280)

60

80

60

400

Preference divs paid

Ordinary dividends:
Interim paid
Final proposed
Retained profit for year
Statement of retained earnings

At 1 April 1996

2,480

580

360

210

1,200

Retained profit for year

(280)

60

80

60

400

At 31 March 1997

2,200

640

440

270

1,600

All companies paid their interim dividends in the month of December 1996
...

Considers that all goodwill is impaired at the rate of 20% per annum from the date of acqusition
...
was Sh
...
The goodwill paid
by Embamba Ltd
...
was Sh
...
The premium
paid by Fanya on the purchase of its shares in Guvu Ltd
...
Embamba Ltd
...
in the same way as ABC Inc
...
e
...

Required:
A consolidated income statement for the group in accordance with the relevant International
Financial Reporting Standards; include a Statement of Retained Earnings, disclosing how much of
the retained profit for the year and carried forward is included in the holding company, the
subsidiary companies, the joint venture and the associated company
...
The format given was that used before ICPAK adopted
International Accounting Standards
...
Pay attention to the workings
...


Turnover
Profit for the year: Group Loss
Share of associate co
...

Share of associate co
...
25

STUDY PACK

Sh
...
25
3,315
...
25)
2120
(131)
1989

LESSON ONE

27

Dividends: Interim paid
Final proposed
Retained profits: For year
B/f
C/f

476
1290

Retained Profit
Embamba
Imani (Merger)
Fanya (subsidiary)
Goro (Associate)
Hadithi (J
...
)
Group Co
...

1940
1104

Yr
Sh
...

1705
1472

3044
345
____3389

133
57
18
__15
223

3175
402
18
__15
3612

LESSON ONE

28

Workings
i)

Turnover:
Embamba
F Ltd
H Ltd (50 x
G Ltd

Sh
...


Minority Interest

3250

Tax
90
67
...
25

Sh
...
5
65
...

80

40%x40

16
35
131

Retained Profits

E Ltd
Div Receivable F
H
Re-acquisition div
H Ltd
(50% x 100 x

b/f
Sh
...


c/f
Sh
...


c/f
Sh
...


Share of E 75%

LESSON ONE

Difference on
Consolidation

I Ltd
Share of E 92%

29

(460)

-

(460)

1940

(235)

1705

1200

400

1600

G Ltd

1472

9
8x
x 40% x 75
12

1104

368

H Ltd
60 x 50% x

6
12

-

15

15

-

18

18

Difference on Consolidation
Sh
...


Sh
...
Ltd
...
(30%)
Investment in M
...
(50%)
Current assets:
Stock
Debtors
Cash
Current liabilities:
Creditors
Taxation
Proposed dividends

Ordinary share capital
(Sh
...

Sh
...
Ltd
...

million

M Ltd
...

million

N Ltd
...

million

264
(92)
172
30

295
(108)
187
20

198
(62)
136

504
(101)
403

150
773

132
____
334

____
207

_____
136

____
403

463
317
78
858

310
290
20
620

390
315
45
750

218
182
110
510

540
430
90
1,060

188
15
410
613
245
1,018

170
10
100
280
340
674

150
17
160
327
423
630

126
20
200
346
164
300

203
25
250
478
582
985

500
50
468
1,018

300
60
164
524
150

200
50
180
430
200

100
80
120
300

500
485
985

375

STUDY PACK

LESSON ONE

30

674

630

Additional information:
1
...


3
...


5
...

7
...


J Ltd
...
on 1 December 1995, when the
balance on the profit and loss account of K Ltd
...
80 million
...
Ltd
...
purchased unincorporated
business: this goodwill is being amortised on a straight line basis over 4 years
...
purchased 30% 0f the ordinary share capital of L Ltd
...
was Sh
...
Exactly one year later, L
Ltd
...
The balance on the profit and loss account
of L Ltd
...
140 million
...
and another quoted company, Ounga Limited each bought 50% of the share capital of
M Ltd
...
J Ltd
...
have joint control of M Ltd
...
M Ltd
...
220
million
...
issued 32 million ordinary shares of Sh
...
10 each in N Ltd
...
were trading
on the exchange at Sh
...
were trading at Sh
...

The registrar of companies has given his approval for the merger method of accounting to be
used
...

Included in the stock of J Ltd
...
12 million worth of goods purchased from M
...
, which
cost M Ltd
...
8 million
...
These goods had been purchased in September 1997
...
owes M Ltd
...
12 million; K Ltd
...
Sh
...
owes K Ltd
...
20 million
...

No company paid interim dividends in the year ended 30 November 1997; neither J Ltd
...
have yet accounted for dividends receivable
...


Required:
The consolidated balance sheet of the group as at 30 November 1997 in accordance with relevant
International Financial Reporting Standards
...
)
Cash

1,420
1,089
20
48
243

Financed by
Ordinary share capital
Merger Reserve
Share premium
Profit and loss account

2820
3903
820
160
50
1436
...
1

Minority interest

176
...
Div
P&L

Sh m
50
40
50
55
195

P&L (working)
GW Amortised: K
GWA
L
UPCS

Bal c/d

Sh m
Sh m
36
J
468
4
...
Received: M
50
Div
...
Received: L
36
Profit
K
63
Goodwill written back 22
...
6 Net P&L
465
...
1
1,479
...

Goodwill on aq
...
4
K: DWSL
192
...
4
12
192
...
5
...
Invest
Balance c/d

Sh m
320
160
480

J
K
L

30
...
94

30
...
95

30
...
96

30
...
97

75%
30%

50%
96%

M
N

30
...
97

Investments in L Ltd
At acq
100%
GW
60
N Assets
330
390
OSC
200
Share Premium 50
P&L
140

30%
18
99

30
...
97
100%
20
410
430
200
50
180

30%
6
123

STUDY PACK

Equity method
Proportionate Consolidate

LESSON ONE

Goodwill

34

390

15
132

430
W/off (15 – 6)

9
138

1
...
The principal issues are which exchange rate(s) to use and how to report the
effects of changes in exchange rates in the financial statements
...
The term 'functional currency' is used in the 2003 revision of IAS 21 in place of
'measurement currency' but with essentially the same meaning
...

Exchange difference: The difference resulting from translating a given number of units of one
currency into another currency at different exchange rates
...


Foreign Currency Transactions
A foreign currency transaction should be recorded initially at the rate of exchange at the date of the
transaction (use of averages is permitted if they are a reasonable approximation of actual)
...

Non-monetary(like property, plant and equipment) items carried at historical cost should be reported
using the exchange rate at the date of the transaction
...

Exchange differences arising when monetary items are settled or when monetary items are translated
at rates different from those at which they were translated when initially recognized or in previous
financial statements are reported in profit or loss in the period, with one exception
...
If a gain or loss on a non-monetary item is recognised directly in equity
(for example, a property revaluation under IAS 16), any foreign exchange component of that gain or
loss is also recognised directly in equity
...
That option was eliminated in the 2003 revision
...

(a)

Purchase of property, plant and equipment:

Joki Ltd agreed to purchase a piece of plant and machinery from a Dutch company for Guilders 2450
on 31 March 2001 to be paid for on 31 August 2001 at a contract rate of KSh 30
...
The Exchange
rates on 31 March 2001 was G1 = KSh 30
...
This cost can be ascertained
by reference to the effective fixed shilling price of KShs 74,725
...
5 x 2,450)
Notes payable A/c

KShs
74,725

KShs
74,725

This is the true liability for such a purchase and should therefore be used to value the creditor for the
period that the debt is outstanding
...

Similar arguments would apply Joki Ltd had entered into a forward contract to purchase G2450 at KSh
30
...

If no contract rate had been agreed the asset would have to be recorded as costing KSh 73,500 (G2450
@ KSh 30) and as before no subsequent translations would be necessary
...

(b)

Payables

A Kenyan company purchases goods from a UK company in July 2001 for Kshs
...
The company
paid off Kshs
...
e
...

2002
...
2001

Kshs
...
1 =
Kshs
...
1
KSh 82
...
2001 Cash A/c
(200 x 80
...
2001 Bal
...
7)

16,020

Payables Account
July 2001 Purchase A/c
(550 x 70)

KShs
38,500

P & L (Bal figure)
28,945
44,965

6,465
44,965

STUDY PACK

LESSON ONE

(c)

36

Receivables

A Kenyan company sells goods to a German company for DM 3000
...
Exchange rates were:
May 2001
August 2001

1 DM = KShs 27
...
7

The Kenyan company would make the following entries in the ledger account:

May 2001 Sales A/c
(27
...
2001 Cash A/c
81,900
(3,000 x 26
...
If the
invoicing were in Kenya Shillings, accounting problems would be far simpler
...
10,
000
...
The year-end for the Amabera
Ltd is on 31 December 2001
The Exchange rates were as follows:
1 Jan 2001
31 December 2001
31 December 2001

1Kshs
...
3
1Kshs
...
4
1Kshs
...
9

The loan account in the books of Amabera Ltd would appear as follows:
Loan Account
Kshs
31 Dec
...
4 x 10,000)
P & L A/c
(Exchange gain)

Kshs

334,000
19,000
______

1 Jan 2001
Cash A/c (35
...
12
...
9 x 10,000)

349,000
______

353,000

353,000
1
...
02 Bal b/d
P & L A/c
(Exchange loss)

349,000

Notes:

STUDY PACK

334,000
15,000
______
349,000

LESSON ONE

i
...


37

The amounts outstanding at each year end (Kshs
...

Exchange differences (2001 gain of 19,000/-, 2002 loss of 15,000/-) should according to the
requirements of IAS 21 be reported in the profit and loss account as part of the profit from
ordinary operations, but must be disclosed in the notes as an unrealised holding gain/loss
...

The major problem is to determine which Currency to be used (determining the functional
currency)
A holding company with a foreign operation must translate the financial statements of those operations
into its own reporting currency before they can be consolidated into group accounts
...
IAS 21 requires the firm to consider the following factors in
determining its functional currency:
(i) The currency that influences the sales price for goods,
(ii) The currency of the country whose competitive forces and regulations mainly determine the sales
price of its goods and services,
(iv)

The currency that influences labor, material and other costs
...

Two methods commonly used are:
(a) The Presentation Currency Method (Formerly called Net investment or Closing rate
method)
This approach is normally used if the operations of the operations of the subsidiary company are
different from those of the parent company and therefore the subsidiary is considered to be semi
autonomous from the holding company
...
e
...
e
...


For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, for
example an average rate for the period, is often used to translate income and expense items
...


STUDY PACK

LESSON ONE

38

Under such circumstances, it is assumed that changes in the exchange rate has little or no direct effect
on the activities or present and future cash flows from operations of either the parents or the foreign
entity and because the foreign operation is not an integral part of the operations of the parent
...

Profit and loss account of the foreign entity
Items should be translated at either an average rate for the period, or at the closing rate
...
For example, land and buildings translated last year at one rate will be included
in the consolidated balance sheet this year at a different rate
...

The exchange differences may also arise out of measurements of cash flow differences (occurring
immediately or in the future)
...
e
...

IAS 21 gives the following as examples of situations where the temporal method should be used, where:
i
...

iii
...

The foreign entity produces a raw material or manufactures parts or sub-assemblies which are
then shipped to the investing company for inclusion in its own products
...


Note
Each subsidiary company must be considered separately
...
The method should then be used consistently from period to period unless the financial
and other operational relationships which exist between the investing company and the subsidiary
changes
...


STUDY PACK

LESSON ONE

(b)

39

Profit and loss items
Item
Sales, cost of sales
Depreciation charge
Expenses
Tax charge
Dividend paid
Dividend proposed

(c)

Rate
Average
Historical
Average
Average
Actual (at date of payment)
Year end (closing)

Balance sheet items
Item

Rate

Fixed assets

(1) if acquired before subsidiary became
part of the group, use exchange rate of
date of acquisition of subsidiary
(2) if acquired post acquisition, use
historical cost
...

Goodwill arising on consolidation is considered to be an asset of the subsidiary company and
should therefore be translated using the closing rate method
...

Example
Kenya Curios (KC) Limited purchased 80% of the ordinary share capital of Tanzan Artefacts (TA)
Limited, a company incorporated in Tanzania; on 1 October 1995 when there was a credit balance on
the profit and Loss Account of Tanzania (T) shillings 630 million
...

Draft income statements for the
year ended 30 September 1998

Revenue
Opening inventory
purchases

KC
Ksh
...

Million PPE (Net book value)
2,211 Land and buildings
537 Equipment
1,353 Motor vehicles
1,890

STUDY PACK

KC

Ksh
...

Million
1,764

60
12
162

84
60
1,908

LESSON ONE

40

Closing inventory
Cost of sales
Gross profit
Operating expenses
Depreciation

(57)
775
155
(29)
(18)
(47)
108
8
116
(33)
83
(20)
(40)
(60)
23

Operating profit
Dividend from subsidiary
Profit before tax
Taxation
Profit after tax
Dividends: Interim paid
Final proposed
Retained profit:
For the year
Brought forward
Carried forward

(702)
1,188
1,023
(99)
(76)
(175)
848

Investment in subsidiary
Current Assets:
Inventory
Receivables
Bank

312

Current liabilities:
Payables
(242) Taxation
606 Proposed dividend
(112)
(420)
(532)
74
Financed by:
74 Ordinary shares Sh
...

In the year ended 30 September 1998, KC Limited sold goods worth Ksh
...
These goods had cost KC Limited Ksh
...
In the group accounts, the
unrealised profit at the commencement of the year was Ksh
...
8 million at the
end of the year
...
Dividends payable to minority interests are shown as current liabilities
...

Both companies were established on 1 October 1993
...
All the motor vehicles in both companies were
replaced on 29 September 1997 – No depreciation had been charged on these motor vehicles in
the year ended 30 September 1997
...

4
...

6
...

Sales, purchases and expenses occur evenly over the year
...
At 30
September 1998, TA owed KC Tsh
...
24 million
...
The interim dividend was paid
when the exchange rate was Ksh
...
11
...

Relevant rates of exchange are:
1 October 1993
1 October 1995
31 March 1997

Ksh
...
6
Ksh
...
7
Ksh
...
9
...
2 = Tsh
...
1 = Tsh
...
1 = Tsh
...
7

LESSON ONE

41

30 June 1997
Ksh
...
9
...
1 = Tsh
...


Ksh
...
12

Required:
The directors of KC Limited have directed you to prepare the consolidated income statement for the
year ended 30 September 1998 and the consolidated balance sheet as at 30 September 1998
...

(i)

Presentation Method

Consolidated income statement

Ksh

Revenue
Cost of sales
Gross profit
Operating expenses
Profit before tax
Income tax expense
Profit for the period

1,033
...
00)
250
...
00)
187
...
00)
132
...
00
11
...
00

Statement of changes in equity extract
Retained profit b/f
Share in TA

Ksh
155
...
04)
123
...
00
244
...
00)
(40
...
96

KC(less UPOI)

Profit for the period
Less dividends

Interim paid
Final proposed

Retained profit c/f

Share of retained profits b/f in TA

Ksh

Opening net assets in TA(Ksh)
Net assets on acqusition (ksh)
Reduction in net assets ( Loss)
Share of the holding Co@80%

251
...
00
(38
...
04)

STUDY PACK

LESSON ONE

42

Consolidated balance
sheet
Non Current assets
Property plant and
equipment
Goodwill

Ksh
321
...
00
458
...
50
191
...
00

351
...
50

Ordinary share capital

400
...
44
184
...
40

Minority interest

43
...
50

Current liabilties
Accounts
payable
Current tax

100
...
00

Proposed dividends
Balance sheet

47
...
00
813
...
00

1/12

159
...
00

1/12

58
...
00

1/12

55
...
00

1/12

22
...
00

135
...
00

1/12

33
...
00

1/12

11
...
00

1/12

35
...
00

79
...
00

56
...
00

215
...
00

1/7

200
...
00

1/7

90
...
00

bal fig

(74
...
00

215
...
00

Opening stock

1/11

201
...
00

537
...
00
1,890
...
00)

Cost of sales

1,188
...
00

93
...
00)

1/11

(9
...
00)

1/11

(7
...
00)

848
...
00

(242
...
00)

1/11

606
...
00)
55
...
00)

1/11
...
00)

(420
...
00
CoC

1/12

(35
...
00

STUDY PACK

LESSON ONE

44

Ksh
Inv in S

Ksh

312
...
00

P&L(80%x90)

72
...
00

312
...
00

Goodwill restated
(80X12/7)

137
...
00)

Gain on exchange to Foreign exchange reserve

57
...
50

Net opening assets of TA in KSh(2586-74)/10

251
...
70)

Less increase in retained profits ( P&L in KSh)
Foreign exchange loss

10
...
70)

Group P & L
Ksh
Coc

72
...
24 TA
Dividends
receivable

UPCI
Balance c/d

Ksh
184
...
50
28
...
00 Forex Loss

45
...
96
273
...
20

Foreign Exchange reserve

STUDY PACK

LESSON ONE

45

Ksh
Group P & L

Ksh

45
...
7)
Goodwill

Balance c/d

9
...
00

20
...
14

66
...
00

Share of profit

12
...
24

Less share of forex loss

(9
...
10

(ii)

Functional Method

STUDY PACK

LESSON ONE

46

KC Ltc & Its Subsidiary
Consolidated Income Statement for Year Ended 30
...
95
KC
Ksh
...


930
(775)
155

201 930 + 201 - 98
(117) 775 + 117 – 98 – 6+ 8
84

1033
796
237

(47)
-

(66)
(16)

8
116
(33)
83
-

(19) 47 + 19
- See Cost of Control
See Step 3 on
- computation
65
Ignore Investment
- Income
65
22 33 + 22
43 2
- 20% x 43 - 3

83
(20)
(40)
23

43
(10) Only for KC (HC)
(35)
(2)

89
(20)
(40)
29

Exchange Loss
Operating Profit
Investment Income Dividends
Profit before tax
Taxation
Profit after tax
Minority Interest
Profit attributable to KC

108

Dividends; Interim paid
Final proposel
Retained Profits for the year

KC
TA
Group

TA Adjustments
Ksh
...
6
(4)
160
...
6
189
...
9
...
M

113
191
53

Ordinary Share Capital
Retained Profits
Shareholders funds
Minority interest workings

Ksh
...
6
589
...
4

Current Liabilities
Payables
Taxation
Proposed Dividends

100
18
47

STUDY PACK

165
821

LESSON ONE

47

Workings
Step 1

Translate income statement of subsidiary co
...
M

Sales

2211

Opening Inventory
Purchases

537
1353
1890

Closing Inventory
Cost of Sales
Gross Profit
Expenses

(702)
1188
1023

Average

1
(Date stock was
9
...
M
201
____
58

39
...
6

95
1
Rate on 1st October
7

16
...
4

95
Motor

Vehicles
Total Expenses
Operating Profit

Taxation
Profits after tax
Dividends; interim paid

proposed

Final

Retained profit for the
year

1
Rate on 30
10

20

2

September 97
175
848

19
65
1
Average
11

(242)
606
(112)

(420)
____
74

1
(Rate on date of
11
...

Non-current Assets
Land and Buildings
1764
1
Rate on 1
...
95
Equipment

Motor Vehicles

84

60
1908

Current Assets
Inventory

702

Receivables

660

Bank

264
1626

7
1
Rate on 1
...
95
7
1
Rate on 1
...
95
7

1
Rate stock was acquired
11
1
Rate on b/sheet
12
1
Rate on b/sheet
12

TA
Ksh
...

312 OSC 80% x 200
P & L at acq 80% x 90
Goodwill Amortized b/f
Amortized for year
Bal c/d Amortized – B/Sheet
___
312

Investment of TA

Step 3

Ksh
...

332
337
...
1)

Closing Net assets of subsidiary (translator) as at 30
...
98
Opening net assets of subsidiary as at 30
...
97
Decrease in Net Assets
Less loss as per translated income statement of subsidiary
co
...
1

Workings for opening Net assets

T
Non-Monetary
Assets

TA M

Exchange Rate

Land & Buildings
1803
...
8

Motor Vehicles
80
Stock
537
Net Monetary
Items

1
7
1
7
1
10
1
9
...

257
...
4
8
58

Balancing figure
(9)
2512

(0
...
1

Workings for retained profits
KC
As per the accounts
Less Goodwill amortised
UPCS
UPCS
Dividends receivable
80% x 35

B/fwd
161
(32)
(6)
-

Year
23
(16)
6
(8)

C/fwd
184
(48)
(8)

-

28

28

123

33

156

STUDY PACK

LESSON ONE

50

A – Share of post acquired profits
As per the accounts
Less exchange loss
Adjusted past acq
...
6

Workings for B/Sheet Continued
PRE;
Land and Buildings
Equipment
Motor Vehicle

Bal c/d

(2)
(3)
(5)
(4)

45
(3)
42
33
...
M
OSC 20% X 200
66
...
4

TA

270
Sh
...
4
66
...
8 DISPOSAL OF SUBSIDIARIES (IFRS 5)
IFRS 5 replaced IAS 35 Discontinuing Operations
...
However the timing of the classification
now depends on when the discontinued operation satisfies the criteria to be classified as held for sale
...
Further, IFRS 5 requires the results of
discontinued operations to be presented as a single amount on the face of the income statement
Non Current asset held for sale
In general, the following conditions must be met for an asset (or 'disposal group') to be classified as held for
sale:
(i)
(ii)
(iii)
(iv)
(v)
(vi)

management is committed to a plan to sell
the asset is available for immediate sale
an active programme to locate a buyer is initiated
the sale is highly probable, within 12 months of classification as held for sale (subject to limited
exceptions)
the asset is being actively marketed for sale at a sales price reasonable in relation to its fair value
(v) actions required to complete the plan indicate that it is unlikely that plan will be significantly
changed or withdrawn
...
Therefore, operations that are expected to be wound down or
abandoned would not meet the definition (but may be classified as discontinued once abandoned)
...
Immediately before the initial classification of the

asset as held for sale, the carrying amount of the asset will be measured in accordance with applicable
IFRSs
...


STUDY PACK

LESSON ONE

51

(ii) After classification as held for sale
...


(iii) Impairment
...
Immediately prior to classifying an asset as
held for sale, measure and recognise impairment in accordance with the applicable IFRSs
(generally IAS 16, IAS 36, IAS 38, and IAS 39)
...

After classification as held for sale
...
Any
impairment loss that arises by using the measurement principles in IFRS 5 must be
recognised in profit or loss, even for assets previously carried at revalued amounts
...
For such assets, the requirement to
deduct costs to sell from fair value will result in an immediate charge to profit or loss
...
A gain for any subsequent increase in fair value less costs to
sell of an asset can be recognised in the profit or loss to the extent that it is not in excess of the
cumulative impairment loss that has been recognised in accordance with IFRS 5 or previously in
accordance with IAS 36
...
Non-current assets that are classified as held for sale shall not be depreciated
...
Assets classified as held for sale, and the assets and liabilities included
within a disposal group classified as held for sale, must be presented separately on the face of the
balance sheet
...
Non-current assets classified as held for sale must be disclosed separately from other assets in
the balance sheet
...

Disposal of a subsidiary
Before we look at the detail requirements of IFRS 5 it is important to remember that the holding company
can dispose partly, the investment held in subsidiary company
...
The subsidiary will still be consolidated only that in the income
statement, care should be taken in computing minority interest
...
The respective minority interest percentage share in the
subsidiary for each period will apply
...
The group will also report a profit or loss on the sale of the partial investment
...

Care should be taken especially if the disposal takes place during the year
...

In the period after disposal we will use the requirements of IAS 31 i
...
In the consolidated balance sheet we shall use the requirements of IAS 31
...

(iii) From subsidiary to Associate companies
...
Care should also be taken especially if the disposal takes place during the year
...
In the period after disposal we will use the requirements of IAS 28 i
...
In the
consolidated balance sheet we shall use the requirements of IAS 28
...

(iv) From subsidiary to an investment
...
This means that the remaining
shareholding will be accounted for according to the requirements of IAS 32 and 39 : Financial instruments
which we shall see later
...
In the remaining period and the balance sheet the requirement of IAS 32 and
39 will apply
...


STUDY PACK

LESSON ONE

53

A 'disposal group' is a group of assets, possibly with some associated liabilities, which an entity intends to
dispose of in a single transaction
...

The following rules also apply in measurement and presenting discontinued operations:
(i) After classification as held for sale
...
[IFRS 5
...
Impairment must be considered both at the time of classification as held for sale and
subsequently:
At the time of classification as held for sale
...
Any impairment loss is recognised in profit
or loss unless the asset had been measured at revalued amount under IAS 16 or IAS 38, in
which case the impairment is treated as a revaluation decrease
...
Calculate any impairment loss based on the difference
between the adjusted carrying amounts of the disposal group and fair value less costs to sell
...
This is
supported by IFRS 5 BC
...
48, which indicate the inconsistency with IAS 36
...
Disposal groups that are classified as held for sale shall not be depreciated
...
Assets classified as held for sale, and the assets and liabilities included within a
disposal group classified as held for sale, must be presented separately on the face of the balance sheet
...
The assets of a disposal group classified as held for sale must be disclosed separately from other
assets in the balance sheet
...

Additional rules and matters regarding disposal of subsidiaries
Defintition
...

Income statement presentation
...

Detailed disclosure of revenue, expenses, pre-tax profit or loss, and related income taxes is required either in
the notes or on the face of the income statement in a section distinct from continuing operations
...

Cash flow statement presentation
...

No retroactive classification
...

Disclosures
...


STUDY PACK

LESSON ONE

54

(ii) If an entity ceases to classify a component as held for sale, the results of that component previously
presented in discontinued operations must be reclassified and included in income from continuing operations
for all periods presented
...
In the early 1990’s it
diversified its operations by purchasing 100% of the shares of United Autos Limited (UAL) on 1 November
1990, 80% of the shares of Utility Chemicals Limited (UCL) on 31 October 1991 and 70% of the shares in
Uday Drycleaners Limited (UDL) on 30 April 1992
...
In
the year ended 31 October 1999, USL decided to sell its entire 100% shareholding in UAL, and half of its
shareholding in UCL
...
162
million and the sale of shares in UCL took place in a single transaction on 31 July 1999 for Sh
...
In
both cases proceeds were credited into the account for the investment in the books of USL
...

Profit and loss accounts for the year ended 31 October 1999
USL
UAL
UCL
UDL

STUDY PACK

LESSON ONE

Revenue
Cost of sales
Gross profit
Distribution costs
Administration expense
Profit from operations
Dividends received
Finance costs
Profit before tax
Income tax expense
Profit/ (loss) after tax
Dividends:
Interim paid 31 May
Final proposed

55

Sh
...
million
840
(630)
210
(120)
(120)
(240)
(30)
(30)
(30)

Sh
...
million
480
(200)
280
(70)
(50)
(120)
160
160
(50)
110

(50)
(50)
(100)
40

(30)

(20)
(40)
(60)
20

(40)
(40)
(80)
30

Retained profit/ (loss)

Property, plant and equipment
Investments:
UAL
UCL
UDL
Current assets
Current liabilities
Net current assets
Ordinary share capital
Profit and loss account

Balance sheet as at 31 October 1999
USL
UAL
UCL
Sh
...
million
Sh
...
million
400

6
39
270
300
(210)
90
1,045
500
545
1,045

140
(60)
80
300
50
250
300

150
(70)
80
260
100
160
260

130
(80)
50
450
200
250
450

Additional information:
1
...

3
...


USL had purchased its shareholding in UAL, UCL and UDL when the balance on the profit and loss
accounts were Sh
...
,Sh
...
100 million respectively
...

USL impairs goodwill that arises on the acquisition of subsidiary or an associate at the rate of 20% per
annum
...

There is no tax charge or allowance on the profit or loss on the disposal of shares
...

Solution
USL and its subsidiaries
Consolidated income statement for the year ended 31st Oct 1999
Continuing
Discontinuing
Enterprise as a
whole
...
Millions
Sales
2730
560
3290
Cost of sales
(1850)
(420)
(2270)
Gross profit
880
140
1020
Other incomes(profit on disp)
57
57
Share of PBT in Associate
10
10
Distribution costs
(215)
(80)
(295)
Administration costs
(230)
(80)_
(310)
Other expenses (loss on disp)
0
(148)
(91)
Finance cost
(50)
0
(50)
Profit before tax
452
(168)
274
Income tax Expense
_(121)
-__
(121)
Profit for the period
331
(168)
284
USL ltd and its subsidiaries
Consolidated balance sheet as at 31st October 1999
Property, plant and equipment
Investment in associates

1,040
104

Current assets

446
1,590

Financed by
Share capital
Profit and loss A/C
Minority interest
Share holders funds

500
693
135_
1328

Current liabilities

262
1590

Workings
(i)
Structures
...
4
...
1190)

80%
(31
...
91)

UAL

UDL
UCL

STUDY PACK

LESSON ONE

(b)

57

After disposal
USL
70%

(31
...
99)
40%

UCL

(ii)

UDL

Gain / Loss on disposal
(a)

Sale of shares either cum-dir or ex-dir
...
Millions
270

100
110
210
(168)
-__

200
100
300
(210)

LESSON ONE

58

Goodwill

80

Proceeds
Dividends sold
Cost of investment
Gain/loss as per Holding company
Goodwill amortised
Increase in value of net assets
UAL (260 – 38)
UCL 40% (155 – 110)

Minority interest
UCL: 20% x 80 x 9/12
UDL: 30% x 110
Profit attrie to members of group
Dividend: - Interim paid
Proposed
Retained earnings for the yr

Retained earning B/forward (545 – 40)
Goodwill amortised

40

60

UAL
Sh/Millions
162
-__
162
(168)
(6)
80

UCL
Sh/Millions
169
(10)_
159
(104)
55
20

(222)
-__
(148)

(18)_
57

12
33………………………………………………
...
118
…………………………………………………
...
(50)
…………………………………………………
...
Millions
505
(180)
325
242
24
84_
675
18_
693

545
10
55
16
28
20

LESSON ONE

59

______
______

CBS

UDL

Minority Interest
Share capital: 30% x 200
135 P& L A/C
135

Investment in Associates A/C
Balance B/f
104 Premium Amortised
Post – acquisition retained earnings:
40% (160 – 110)
20 CBS
124
USL
UDL
Dividend from: UCL
UDL

Intra-group trading
CBS

Current Assets
300 Intra group trading
130
16
28 CBS
474
Current Liabilities A/C
28 USL
262 UDL
290

STUDY PACK

250
_______
60
75
135
20
104
124
28
446
474
210
80
290

LESSON ONE

QUESTION ONE

60

REINFORCEMENT QUESTIONS

M
...
started operating several years ago
...
10 each in H Ltd
6,000,000 7% non-cumulative preference shares
Of Sh
...
10 each in A Ltd
6,400,000 equity shares in C Ltd and Sh
...
10 each
7% non-cumulative preference shares of Sh
...
Ltd
Sh
...
Ltd
Sh
...
Ltd
Sh
...

Sh
...
The general reserve of all the companies were the same as they were one year ago
...
Ltd
...
Ltd were Sh
...
21 million respectively at the time their
shares were purchased, one year previous to the preparation of the balance sheets provided
...
M Ltd
...
The balance on the profit and loss
account of H Ltd
...
‘000’
28,000
32,000
60,000
(15,600)
44,400

Profit and loss account balance on 31 December 20X0
Net profit for the period ended 31 December 2001
Less proposed dividend
Profit and loss account balance on 31 December 2001

3
...
at the acquisition date is after providing for
preference dividend of Sh
...
6 million and a proposed ordinary dividend of Sh
...

4
...
in respect of debenture interest due from, or proposed
dividends from two of its investments, except that dividends due from A Ltd
...
’s
profit and loss account and the corresponding entry made in its debtor
...
The debentures of H Ltd
...


STUDY PACK

LESSON ONE

61

6
...
on 31 December 2001 includes Sh
...
These goods had been sold by M Ltd
...
earned a profit of 20% on
the invoice price
...
The group policy is to account for any associate company using the equity method
...
All
unrealised profit on closing stock is removed from the accounts of the company that realized it, giving a
proportionate charge to the minority interest is appropriate
...
Dividends to minority interest shareholders are shown as part of minority interest
...
H Ltd
...
for Sh
...
H Ltd
...
H Ltd’s accountant
erroneously used the selling price for depreciation purposes, however, the cost of assets reflected the
correct amounts
...
and its subsidiaries as at 31 December 2001
...

B Ltd
...
10
Revaluation reserve
Retained earnings

E Ltd
...
million
1,280
840
2,120

Sh
...
million
700
700

420
680
80
1,180

410
540
90
1,040

210
390
70
700

390
40
300
730
450
2,570

380
20
250
650
390
2,060

210
10
200
420
280
980

600
1,970
2,570

500
260
1,300
2,060

500
480
980

Additional information:
1
...


3
...

A Ltd
...
on 1 April 1990, when the balance of retained
earnings in B Ltd
...
800 million
...
were approximately the same as book values
...

had depreciated significantly in value: the directors commissioned Uptown Estate Agents to revalue the
fixed assets, which resulted in the reserve stated in the accounts
...

B Ltd
...
on 30 September 1998
...
was Sh
...
20

STUDY PACK

LESSON ONE

4
...


62

million in excess of book value
...
possessed patent rights of fair value Sh
...
E Ltd depreciates fixed assets
at 10% per annum and intangible assets at 20% per annum (both figures being reduced proportionately
for a period which is less than a year)
...
had
been sold by 31 March 1999
...
’s sales to A Ltd
...
were Sh
...
160 million respectively
...
and B Ltd
...
Sh
...
32 million
respectively
...
’s net profit for the year, after tax but before dividends, was Sh
...

Neither A Ltd
...
Has accounted for dividends receivable
...
333% per year, with a proportionate charge for a period of less than one year
...


Required:
The consolidated balance sheet of Aberdare Limited and its subsidiaries as at 31 March 1999 in accordance
with the International Accounting Standard 1 – presentation of financial statements (Revised 2004)
QUESTION THREE
Umma Ltd
...
A public
company which is situated in a foreign country, Timoa
...
Umma Ltd
...
on 30 April 1999 for Ksh
...
were TR 610
million
...
has not issued any shares since acquisition
...

Balance sheet at 31 December 2000
Ugeni Ltd
TR ‘million’

Umma Ltd
Ksh
...
‘million’
Turnover
Cost of sales
Gross profit
Administrative and distribution cost

1,650
(945)
705
(420)

STUDY PACK

3,060
(2,550)
510
(51)

LESSON ONE

63

Income from Ugeni Ltd
...


8
(22)
271
(79)
192
(20)
172

(102)
357
(153)
204
(52)
152

Additional information:
1
...
sold goods to Umma for TR 104 million and made a profit of TR 26 million on
the transaction
...
At
31 December 1999 there were goods sold by Ugeni Ltd
...
These
goods were valued at Ksh
...
made a profit of Ksh
...

2
...
paid the dividend for the year ended 31 December 2000 on 30 June 2000
...
The tax effect has been accounted for and may be ignored
...
The fair value of the net assets of Ugeni Ltd
...
The fair value
increment all due to tangible fixed assets has not however been incorporated in the books of Ugeni Ltd
...
Goodwill does not influence with changes in the exchange rate and is to be impaired at 33
...
Treat this goodwill as an asset of the holding co
...
Tangible non current assets are depreciated over five years on a straight-line basis with a full year’s
charge provided in the year of acquisition
...
A loan of Ksh
...
from Umma Ltd on 31 May 2000
...
The loan is included in the cost investment in Ugeni Ltd
...
The amount had not been received by Umma Ltd
...

7
...
0
4
...
7
5
...
2
5
...
1

8
...

Required:
(a)
...

(c)
...
Limited is a company quoted on the Nairobi Stock Exchange
...
It
purchased 80% of the ordinary share capital of Q Limited on 1 January 1998
...
P
...
R
...
is a leading producer of decorative coatings
...
A suitable purchaser bought the complete shareholding on 31 August 2002
...
The financial statements of the companies
for the year ended 31 December 2002 are as follows:
Income statement
For year ended 31 December 2002

Sales
Cost of sales
Gross profit
Expenses
Operating profit
Dividend received
Finance cost
Profit on disposal of
subsidiary
Profit before tax
Tax
Profit after tax

P
Ltd
...

million
5,400
(2,700)
2,700
(1,800)
900
390
(75)

Q
Ltd
Sh
million
4,800
(3,200)
1,600
(900)
700
-

R
Ltd,
Sh
...

Sh
...

Million

R
Ltd,
Sh
million

1,320
680
2,000
730
2,730
500
1,510
2,010
100
620
2,730

980

1,100

570
1,550
500
640
1,140
410
1,550

480
1,580
400
710
1,110
470
1,580

Additional information:
1
...
Ltd
...
when the balances of retained earnings were
Sh
...
200 million respectively
...
Ltd has issued any ordinary shares
since they were acquired by P Ltd
...
and R Ltd
were equal to their carrying values at the dates of acquisition
...
Ltd had cost P
...

Sh
...

2
...
Ltd impairs goodwill that arises on the acquisition of a subsidiary at 10% per annum
...
No impairment losses have occurred in respect of their
investment
...
P Ltd
...
and R Ltd
...
500 million, Sh
...
200 million
respectively on 31 July 2002
...
There is no tax charge on the sale of the investment in R
...

5
...
Ltd, Q Ltd and R Ltd
...
The group ‘s primary segment
reporting format is business segments
...
There were no impairment losses in any of the assets of R Ltd prior to its sale
...
A public announcement was made on 31 August 2002
...
The directors want the amount of the revenue, expenses, pre-tax profit and the tax expense of the
discontinuing operation to be shown in separate column of the income statement and the amount of the
cash flow attributable to the operating, investing, financing activities of the discontinuing operation shown
in a separate column of the cash flow statement
...


Define, in the context of International Accounting Standard (IAS) 35, what is meant by “the initial
disclosure event” with respect to a discounting operation
...

(c )
...
state the day of initial disclosure event
...
) which should be included
in the financial statements in relation to the discounting operation
(4 marks)

STUDY PACK

LESSON ONE

(d)
...


(f)
...
Should the financial statement for the year ended 31 December
2001 disclose any information about the plan sale of R Ltd
...
The accounting policy note in the financial
statements include the following clause: Operating results of subsidiaries sold during the financial year
are included up to the date effective control ceased
...

(7 marks)
Prepare the group balance sheet as at 31 December 2002
...


A statement of changes in equity as at 31 December 2002 showing only one column for ‘retained
earnings’
...
offered to acquire 75% of the issued share capital of Nyama ltd
...
The offer became
final on 1 May 1999
...
177,000,000
...
as at 1
April 1999 and 1 May 1999 were Sh
...
137,560,000 respectively
...
had acquired 25% of Mshipa Ltd
...
On 1 September 1999 it acquired the remainder
of the share capital, the consideration of which was Sh
...
The net assets of Mshipa Ltd
...
74,000,000
...
on 2 September 1999 acquired 40% of Ngozi Ltd
...
28,980,000
...
as at 1 January 1999 were Sh
...

The income statements of the four companies for the year ended 31 December 1999 were as follows:

STUDY PACK

LESSON ONE

Turnover
Cost of sales
Gross profit
Expenses
Operating profit
Dividend income
Interest income
Profit before tax
Taxation
Profit after taxation
Dividends
Ordinary
Interim
Final
Preference
Retained profit for the year

66
Mifupa Ltd
...
‘000’
3,237,840
2,238,624
999,216
248,736
750,480
1,440
4,800
756,720
269,600
487,120

Nyama Ltd
...
‘000’
687,760
489,312
198,448
54,368
144,080
2,000
146,080
61,000
85,080

Mshipa Ltd
...
‘000’
136,800
92,160
44,640
10,240
34,400
34,400
15,600
18,800

Ngozi Ltd
...
‘000’
102,600
69,120
33,480
7,680
25,800
25,800
11,700
14,100

(22,000)
(2,000)
(480)
462,640

(960)
(480)
83,640

(480)
(240)
18,080

(270)
(270)
13,560

Additional information:
1
...

2
...
had sold to Mifupa Ltd
...
1,260,000
...
Sh
...
It is the group’s policy to provide a full
year’s depreciation on machinery at the rate of 10% on cost in the year of purchase but not in the year
of sale, and to carry group assets at their original cost to any number of the group
...


3
...


Required:
The consolidated income statement of the Mifupa group for the year ended 31 December 1999
...

(Total: 20 marks)
QUESTION SIX
The following summarized accounts relate to three private companies C Ltd
...
as at 30 June
2000
Summarized balance sheets
as at 30 June 2000
Goodwill
Tangible fixed assets
Investments
Intercompany loans
Net current assets (liabilities)
Loans’ from third parties
Ordinary shares of Sh
...
20 each
Reserves

C Ltd
...

Sh, ‘000’
38,500
1,200
34,860
74,560
20,000
24,000
30,560
74,560

P Ltd
...

S Ltd
...

Sh, ‘000’
4,000
4,000
(800)
(1,600)
1,600
2,800
4,400

The following additional information is available:
1
...
Preference shares carry a vote only when their dividends are in arrears
...

2
...

Sh
...

30,000
400,000 preference shares in S Ltd
...

1,600
39,600
S Ltd
...

1,200
C Ltd
...

3
...


When C Ltd
...
and P Ltd
...
8,000,000 and Sh
...
S Ltd
...

in 1994, Fair values should be assumed to be balance sheet values in 1996 other than for S Ltd
...
No
accruals or provisions which may be required have been made for dividends receivable
...


STUDY PACK

LESSON ONE

68

NOW CHECK YOUR ANSWERS WITH THOSE GIVEN IN
MODEL ANSWERS TO REINFORCING QUESTIONS
LESSON ONE
QUESTION ONE
Structure
M Ltd

30%
A Ltd

75%
H Ltd
80%
C Ltd

Holdings in C Ltd
Group
75% x 80% =
Minority
Direct
Indirect
25% x 80%
Cost of control
Investment in H Ltd

60%
20%
20%
100%

165,000 Ordinary share capital
75% x 100,000
Pre-acquisition dividend
Ordinary 75% x 5,000
Preference 75% x 5,600
Profit & Loss A/C
75% x 28,000
General reserve
75% x 40,000
______ Goodwill
165,000
Minority interest
20% x 10,200
Ordinary share capital
60% x 80,000
General reserve
Profit & Loss A/C
______
60% x 16,000
102,000

STUDY PACK

75,000
3,750
4,200
21,000
30,000
31,050
165,000
20,400
48,000
24,000
9,600
102,000

LESSON ONE

69

Consolidated Profit & Loss Account
UPS 20% x 6,000
COC – H Ltd
UPS (PPE)
Minority Interest – H Ltd
(25% x 40,400)
COC – C LTD
Minority Interest- C Ltd
40% x 100,000
Good will amortized
31,050 x 20%
Pre-acquisition dividend
C
...
S

1,200 M Ltd
2,100 Dividend receivable
4,000 ordinary
H Ltd 75% x 10,000
10,100 Preference
9,600 Debenture interest
Depreciation adjustment
40,000 H Ltd
C Ltd
6,210 Investment in A Ltd
7,950 (30% x 30,000 – 21,000)
158,140
258,200

98,500
7,500
4,200
300
600
44,400
100,000
2,700
______
258,200

Minority Interest

Investment in C Ltd

C
...
S

20,400

H Ltd Ordinary share
Preference shares
General reserve
Profit & Loss A/C
Dividends –Ordinary
Preference
Depreciation adjustment
(25% x 800)

25,000
20,000
10,000
10,100
2,500
1,400
200

C Ltd
Share capital
General reserve
136,800 Profit & Loss A/C
157,200

32,000
16,000
40,000
______
157,200

145,500 UPS
143,400 C
...
S
120,000
408,900

1,200
407,700
______
408,900

250,000 UPS (20% x 20,000)
220,000 C
...
S
200,000
670,000

4,000
666,000
______
670,000

M Ltd
800 H Ltd
229,200 C Ltd
230,000

60,000
130,000
40,000
230,000

Current assets
M Ltd
H Ltd
C Ltd
Property, Plant and equipment
M Ltd
H Ltd
C Ltd
Provision for depreciation
Overcharge (20% x 4000)
C
...
S

Premium on acquisition

STUDY PACK

LESSON ONE

70

Cost of investment
Net Assets acquired
Ordinary shares
General reserve
Profit & Loss A/C

26,100
60,000
6,000
21,000
87,000

26,100
NIL

30% x

j
Balance
Post-acquisition reserve

26,100
2,700
28,800

M Limited and its Subsidiaries consolidated Balance sheet
As at 31 December 2001
Non – Current Assets
Property and equipment
Provision for depreciation

Sh
...
Million
436,800

31,050
(6,210)

Investment in Associate
Current Assets
Current liabilities
Trade payables
Accrued debenture interest
Proposed dividends

24,840
28,800

407,700
207,300
900
30,000
238,200

Net current Assets

169,500
659,940

Ordinary share of Sh
...
3
...

9
30

STUDY PACK

Sh
...
in B

Inv
...

1280 Depreciation FV adj:
920 Group P & L (36 X 3)
700 MI (64% X 3)
21
...
4
2960

Sh
...

680 Due from E A
540
B
390 Bal c/d
1610

Sh
...

840 B: OSC (60% x 500)
P & L (60% x 800)
G/will -amortised

Sh
...
(36% x 20)
Int
...
6
7
...
6

STUDY PACK

LESSON ONE

72

Pre-acquisition due
(36% x 100)
Goodwill Amortized
____ Bal c/d
1290

36
6
30
1290

MI
Sh
...
In E Ltd
Depreciation - PPE
Int
Inventory sold

Bal c/d

A
B
E
Coc: FV adj
MI: FV adj

Due to A
B
Bal c/c

MI 46% X 60%
Group Net Profit
Pre –acq (30% x 100) E
Post acq (36% x 100) E
Bal c/d

300
1
...
64
10
...
8

B: OSC (40% x 500)
P & L (40% X 1300)
RR (40% X 260)
E: OSC (64% X 500)
P & L (64% x 480)
FV Adjustment
PPE (64% X 60)
Inv
...
(64 x 10)
Dividend from E
(40% x 60% x 200)

Group Inventory
Sh
...
8 Bal c/d
1090
Group A/c Payable
Sh
...

48 A
150 B
36 E
36
480
750

STUDY PACK

Sh
...
4
12
...
4
___48
1556
...

576
10
...

390
380
210
980

Sh
...
– FV adj
PPE
Intangible
Inventory sold
Goodwill Amortised
Bal c/d

73

Revaluation Revenue
Sh
...

260
___
260

Group Retained Profit
Sh
...
6 Dividends Receivable
307
...
08
0
...
76
6
2390
3936
Patents
Sh
...
6 Depreciation
6
...
Translation
a)

Income Statement for the year ended 31st Dec 2000
Turnover
Costs of sales
Gross profit

TR Million Rate
Kshs
...
1
600
(2550)
5
...
36
0
...

480
200
680

Less: Profits for year
Bal b/d
Profits for the year
Retained profits at acq
...


Retained Profits at Acquisition for E Ltd:
Bal c/d
Add back dividends

Sh
...
1)
5
...
1
5
...
Million
378
129
(22)
284

240
80

4
4

60
20
21
...
5
73
...
6
1268 x 1/5

275
...
6
22

Profit for the year
As per income statement
At closing rate of 5
Exchange loss

Investment in Ugeni
Limited loan

30
(30
...
4
22 - 0
...
6
Cost of Control
270 Share capital
(50) Share premium
Profit and loss account
Revaluation reserves
___ Goodwill
220

48
16
122
22
12
220

Minority Interest
Exchange loss

4
...
1 Share premium
Revaluation reserves
___ Profit and loss account
63
...
5/5x2
27
...

Revaluation reserves (1040 930) /4

4
5
...
9
63
...
5)
Depreciation adjustment
Ups 26/3
...

Ugeni Ltd
...
9
6
...
6

895
225
...
6

Net current Assets
Umma Ltd
...

Cash in transit

Inter group
CBs

735
129
13
877

Creditors falling due after one year
37 Umma Ltd
...

598

Balance

598

21
...
3
17
...
6
...
2
205

STUDY PACK

5
872
877

375
223

Exchange Con
21
...
6)
___
CBS

80%x(40+2-5-5
...
2

Reconciliation
Retained earnings
Umma Ltd
...
7
720
...
7
88
...
5
(1
...
5
(4)

(4
...
5
748
...
4)
17
...
2

(8
...
7
934

Ugeni Lltd
...
1-30)
Ups –Beginning
- Ending
Depreciation

Statement of Movement Resources

As at 1
...
2000
For the period
As at 31
...
2000

Share
Premium
Kshs
...
Million
(17
...
3

Accumulated
profit
Kshs
...
8
185
...
0

Total
Kshs
...
8
167
...
7

Umma ltd
...
5)
Operating profit
Interest payable
Profit before taxation
Taxation
Profit after taxation
Umma ltd
...
Million
2230
1428
802
(4)
435
...
5
(42)
320
...
0
211
...
Million
1339
...
7

5
...
8

Financed by: Share capital
Share premium
Exchange loss
Profit and loss account
Shareholders funds
Minority Interest

330
350
(17
...
7
59
...
8

QUESTION FOUR
(a) Initial disclosure events is the occurrence of one of the following whichever occurs earlier
...

(b)

No information that have been given in the question that states the date of the initial disclosure
event
...


(e)
(i)

Workings:
Goodwill arising on acquisition

A description of the discontinuing operation
The business segment in which it is reported
The date and nature of the initial disclosure event
...


Costs of investments
Net Assets acquired
Share capital
Retained earnings
Q Ltd
...
: 75%
(ii)

Q Ltd
...
‘million’
680

R Ltd
...
‘million’
570

500
100
600
(480)
200

400
200
600
(450)
120

Loss on sale of subsidiary

Sh
...
‘million’

LESSON ONE

78

Proceeds from sale (570 + 200)
Dividends received not earned
200 x 0
...
67
1106
...
‘million’
P LTD
Q Ltd

COC 80% X 100
80
M
...

Sh
...
million
2,300
100
1,300
3,700
500
1842
2342
228
2570
100
1030
3700

Ordinary share capital
Retained earnings
Shareholders funds
Minority interest
Non-current liabilities
Current – liabilities
(g)

1510
640

P Limited and its subsidiaries

STUDY PACK

LESSON ONE

79

Consolidated Statement of changes in equity
for the period ended 31 December 2002
...
million
As at December 31
...

Continuing Discontinuing
operations
operation
Sh
...
million
Sales
10200
2400
Cost of sales
5900
1600
Gross profit
4300
800
Expenses
(2700)
(600)
Amortisation of goodwill
(20)
____
Operating profit
1580
200
Finance costs
(75)
Loss on sale of subsidiaries
(94)
_____
Profit before tax
1411
200
Taxation
(460)
(60)
Profit after tax
951
140
Minority interest
(98)
(35)
Net profit for the period
853
105

Enterprise as a
whole
Sh
...


Solution

Mifupa Ltd
...
9
...
5
...


Nyama Ltd
...
9
...

(ii)
...

1440 x 75% x 4/12

Nyama Ltd
...
’000’
177,000

Mishipa Ltd
...
’000’
112,000

(360)

STUDY PACK

Ngozi Ltd
...
’000’
28,980

LESSON ONE

80

Mishipa Ltd
Dividends received
(25% x 480) + 240
Dividend earned
(25% x 720) + (75% x 720 x 4/12)
Ngozi Ltd
...

(75% x 137,560)
Mishipa Ltd
(75% x 74,000)
Ngozi Ltd
...
1
...

Nyama Ltd
...

(4/12 x 136,800)

(iv)
...

Add understatement of depreciation
(150,000 – 126,000)
Nyama Ltd
...
(4/12 x 10,240)

(vi)

(vii)

(viii)

(ix)

81

3,237,840
458,507
45,600
_________
3,741,947
2,238,624
326,208
30,720
2,595,552
Sh
...
34,400 x 25% x 8/12
Ngozi Ltd
...

Nyama Ltd
...

(4/12 x 15,600)

269,600
40,667
5,200
315,467

Tax of Associate
Mishipa Ltd
...

25% x 85,080 x 8/12 – 15

14,165

STUDY PACK

LESSON ONE

82

Mifupa Ltd
...
’000’
Sh
...

514,954
TUTORIAL NOTE
The ordinary dividends should be included in statement of changes in equity
...
as at 30
...
2000
Profit after taxation
Minority interest
...
’000’

Sh
...
Ltd
...
Ltd

---