1、The investment in Salvador represents 80% (96/120) of its equity and is likely to give Hedra control thus Salvador should be a subsidiary.The deferred contingent consideration has now become payable and has to be accounted for.The inter-company loan should be eliminatedSince the further consideratio
2、n has not been accounted for, the individual B/S of H must be adjusted first.,analysis,Further payment,Non-current Assets GoodwillProperty, plant and equipment 358Investments in Salvador 245 other 45 648,50 loan +195 cash paymentAdjust for further considerationDR. investment 49CR. Payables 49,Curren
3、t liabilitiesTrade payables 118 +49=167 Bank overdraft 12 Current tax payable 50 180,investment at cost immediate 195 deferred 49 244Fair value of net assets acquired Ordinary shares 120 Share premium 50 Retained earnings (pre-acqu.) 20 Fair value adjustments 40 230 group share (80% ) 184 goodwill a
4、t acquisition 60 impairment (20) goodwill on consolidation 40,goodwill,Reserve,pre-acquisition reserve has been included in calculation of G/W Only post-acquisition can be included in group reservesReserve of S 60 -20% :MI 12 -80%: 48 pre-acquisition 16 post-acquisition 32Additional depreciation for
5、 the fair-value adjustment 20/4=5 -20% :MI 1 -80%: group 4 Impairment of g/w 20Consolidated retained earnings H 240 S (80%*(60-20) 32 Impairment of g/w (20) 248 Additional depreciation (4),Minority interest,3. Minority interest net assets of S at the balance sheet date : share capital 120 share prem
6、ium 50 retained earnings 60 revaluation reserve 40 additional dep. ( 5) 265 minority % x20% 53,Non-current Assets GoodwillProperty, plant and equipment 358 240Investments in Salvador 294 nil other 45 nil 648 240Current AssetsInventories 130 80Trade receivables 142 97Cash and bank nil 4 272 181 Total
7、 assets 920 421 ,-245,adjustment,60-20,assets,50+195+49,40358+240+35=633-45718130+80=210142+97=23944531171,40-5=35,consolidated,Ordinary share capital 400 120Share premium 40 50Revaluation 15 nilRetained earnings 240 60 695 230Minority interest Non-current liabilities8% loan note nil 50Deferred tax
8、45 nil 45 50Current liabilitiesTrade payables 167 141Bank overdraft 12 nilCurrent tax payable 50 nil 180 141 Equity and liabilities 920 421 ,4004015 248703,53,-50,nil4545,3081250370,1171,Equity &liability,118+49,Non-current Assets GoodwillProperty, plant and equipmentInvestments in Salvador other Cu
9、rrent AssetsInventories Trade receivables Cash and bank Total assets,40633-45718 21023944531171,Ordinary share capital Share premiumRevaluation Retained earnings Minority interest Non-current liabilitiesDeferred tax Current liabilitiesTrade payables Bank overdraft Current tax payable Equity and liab
10、ilities,400401524870353 454530812503701171,Consolidated balance sheet,Definition,A financial instrument is any contract that gives rise to a financial asset of one enterprise and a financial liability or equity instrument of another enterprise.,A financial asset is any asset that is CashAn equity in
11、strument of another enterprise ( investment in ordinary shares)A contractual right to receive cash or another financial asset from another enterprise (receivables)A contractual right to exchange financial instruments with another enterprise under conditions that are potentially favorable.,Definition
12、,A financial liability is any liability that is a contractual obligation: -to deliver cash or another financial asset to another enterprise;(e.g.trade payables,bonds) or -to exchange financial instruments with another enterprise under conditions that are potentially unfavorable.(e.g. income An equit
13、y instrument is any contract that evidences a residual interest in the assets of an enterprise after deducting all of its liabilities.,Convertible loan note is a compound financial instrument and IAS 32 Financial Instrument:disclosure and presentation requires that the debt element and the equity el
14、ement if such instruments are accounted for separately. The amount of the issue proceeds attributable to the conversion rights is classified as equity. This amount is normally calculated as the “residual” after the value of the debt has been calculated.,Part b,Value of debt-present value of the cash
15、 will be received,1.Choose the coupon rate of normal loan note :10% as discount rate2. PV of interest: annual interest: 3m X 0.06 180,000 PV factor: 0.91+0.83+0.75+0.68 3.17 570,6003.PV of capital and redemption premium 3000000 X (1+10%) X 0.68 2,244,000Value of debt 2,814,000,Equity component -resi
16、dual amount,Issue proceeds 3,000,000Value of debt 2,814,000Equity component 186,000,Finance cost,presentation,Year 1Balance sheet Current: accrual interest to be paid within one year 281.4 less 180 101,400Non-current 2,814,000Carrying value of the debt 2,915,400Income statement Finance cost: 281,400
17、,Analysis,In accordance with IAS 8 the change in accounting policy should be applied retrospectively as if the new policy had always existed,which involves restating the comparative accounts and the retained profits b/f in the comparative accounts.,Difference between policies,Accumulated exp. qualif
18、ied for amort. 300300+360=660400+660=1060_,Exp. Should Amortized300/4=75660/4=1651060/4=265-505,Actual Expenditure 420250560 -1230,=-Difference 34585 295725,Year-200220032004,accumulated profits b/ f,Accumulated profit 1 Oct. 2002 1,000Prior year adjustment 345Accumulated profit 1 Oct. 2002 (restate
19、d) 1,345,Balance sheet extract,30 sep.2004 30 sep.2003Intangible non-current assets Development expenditure: cost 1,230 670 less : amortization (505) (240) - - net book value 725 430 Accumulated profit b/f 1345,Income statement extract,Year to 30 sep.2004 30 sep.2003 Amortization 265 165,Question 4,
20、EPS,Why we need an accounting standard on earnings per share?,EPS is a ratio that is widely used by the current and potential investors to gauge the profitability of a company.It is crucial for a meaningful comparison While standard setters have attempted to discourage over-reliance on a single cond
21、ensed indicator as EPS, an accounting standard on EPS,universally applied,at least ensures that any use of EPS is valid and consistently applied.,Why more and more users of financial statements pay attention to diluted EPS?,Many companies use convertible stocks to achieve the illusion of growth in b
22、asic EPS Diluted EPS will reveal the true growth in earnings.Diluted EPS can help users assess the potential variability of future EPS and the risk attaching to it.It can function as a warning deviceTheoretical,however,Basic eps,Earnings: Net profit 1380 Less:preference dividends (276) 1104Weighted
23、Average Number of ordinary shares 4140 EPS=1104 / 4140 26.67 cents,2)Basic eps,Earnings:as above 1,104,000Weighted Average Number of ordinary shares 9/12 * 2,000,000+4,140,000 = 5,640,000EPS: 19.57 cents,3)bonus issue,Do not time-apportionRestate comparative EPS by the factor: number of shares befor
24、e bonus number of shares before bonusIf a bonus issue was after the year-end and before the publication of the financial statements,it should be taken into account in the weighted average number of shares.,3)bonus issue,Earnings:as above 1,104,000Weighted Average Number of ordinary shares 5/4 *4,140
25、,000 = 5,175,000EPS: 21.33 centsRestate the comparative eps: 17.8 X 5/4= 22.25 cents,Question 5 IAS 36 impairment of assets,Definition of CGUA cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other ass
26、ets or group of assets.,CGU,An impairment loss for a CGU should be recognized if its recoverable amount is less than its carrying value. Allocation of impairment loss for CGU first to specific assets in the unit second to goodwill (once impaired,never recoverable) any other assets on a pro-rata basi
27、sAn asset with a readily ascertainable market value should not be written down to below its NRV.,Analysis,The first impairment loss of $1 million$500,000 must be written off the engines as one of them no longer exists and is no longer a part of the CGUThe goodwill of $200,000 must be eliminatedThe b
28、alance of the loss of $300,000 is allocated pro-rata to the remaining net assets other than the engine that must not be reduced to less than its net selling price of $500,000,Analysis,The second impairment loss of $200,000The first $100,000 is applied to the license to write it down to its net selli
29、ng price.The balance of the loss of $100,000 is applied pro-rata to assets carried at at other than their net selling prices, i.e.,$50,000 to eh property and $50,000 to the rail track and coaches.,1st impairment,Original CGU1 July,GoodwillOperating licenseProperty-stations Rail track &coachSteam eng
30、ines Total,200120030030010003000,nil10002502505002000,1st impairment1 Aug,2nd impairment30 Sep,nil120030030010001800,1.Specific asset,2.All impaired,Pro-rata,300*300/1800,300*300/1800,1200*300/1800,2nd impairment,GoodwillOperating licenseProperty-stations Rail track &coachSteam engines Total,nil10002502505002000,1st impairment1 Aug,2nd impairment30 Sep,nil9002002005001800,Specific asset,250*100/500,250*100/500,1000- 2/3*200 NRV,Pro-rata,
