P13 Fin Acctg 3 Ques Nov 2015

MODULE E PROFESSIONAL EXAMINATION 2 PAPER 13 - FINANCIAL ACCOUNTING 3

MONDAY 23rd NOVEMBER 2015 Time allowed - 3 hours SECTION A This question is compulsory

SECTION B Any THREE questions to be answered

(FOUR questions in all) Clear workings should be submitted with all your answers. All calculations should be made to the nearest $ (or $000) as appropriate.

You are allowed an additional 15 minutes reading time before the exam begins, during which you should read the question paper and, if you wish, make notes on the question paper. You are not allowed to open the exam script booklet and start writing or use your calculator during the reading time. 1

SECTION A Question ONE is compulsory and must be attempted

1. Stream is a public limited company and operates in a number of countries. The group’s main activity involves the manufacture of consumer goods. The following statements of comprehensive income for the year ended 31 October 2015 relate to the Stream Group:

Stream Rill Wadi $m $m $m Revenue 508 146 90

Cost of sales 396 83 46

Gross profit 112 63 44 Other income 27 9 2 Administrative costs (19) (11) (16) Finance costs (6) (8) (6) Other costs (44) (24) (10) ___ ___ ___ Profit before tax 70 29 14

Income tax expense (24) ___ (11) ___ (6) ___ PROFIT FOR THE YEAR 46 18 8

Other comprehensive income: Items that will not be reclassified to profit or loss (net of tax) Surplus on revaluation of property, plant and equipment Investments in equity instruments 13 7 ___ ___

__ Other comprehensive income for the year, net of tax 20 __-_ _-_

TOTAL COMPREHENSIVE INCOME FOR THE YEAR 66 18 8

The following information is relevant to the preparation of the Stream Group’s statement of comprehensive income:

(i) Stream acquired 70% of the equity interests of Rill, a public limited company, on 1 November 2013 for a cash consideration of $99 million. At that date, the fair value of Rill’s identifiable net assets was $135 million and the fair value of the non-controlling interest in Rill was $57 million. For all acquisitions, it is group policy to measure non-controlling interests at fair value as at the date of acquisition. Stream entered into an arrangement with Rill before the acquisition that required Rill to restructure its manufacturing activities. The restructuring plan became effective upon the change in control. The fair value of Rill’s identifiable net assets included a liability of $5 million in connection with this plan.

The carrying value of Rill’s identifiable net asset as at the date of acquisition was $121 million. The excess of fair value over carrying value at that date was due to a parcel of land held for long-term capital appreciation.

Stream carried out an impairment test on goodwill on 31 October 2014 and found that the asset’s value had been reduced by 25%. However, due to an improvement in consumer confidence and thereby increases in the sale of goods and in asset values post recession, Stream calculated that the value of goodwill had increased by 50% over the year. Stream has included this increase in the above draft statement in ‘other income’. 2

(ii) On 31 October 2015, Stream disposed of 10% of the equity interests of Rill for a cash consideration of $20 million. The gain has been accounted for in the above statement in ‘other income’. Stream accounts for its investments in subsidiaries by electing to include gains and losses in other comprehensive income under IFRS9 Financial Instruments. The carrying value of the investment in Rill at 31 October 2014 was $80 million and had increased by $4 million before the disposal of the equity interest.

(iii) Stream gained control of Wadi, a public limited company, on 31 October 2013 when it acquired 55% of Wadi’s equity interests for a cash consideration of $89 million. At that date, the fair values of Wadi’s identifiable net assets and non-controlling interests were $109 million and $36 million respectively. Acquisition fees of $5 million were capitalised by Stream.

On 1 May 2015, Stream disposed of 36% of Wadi’s equity interest for a cash consideration of $64 million. Stream retained its representation on Wadi’s board of directors, provides Wadi with essential technological information and participates in Wadi’s policy-making processes. At the date of disposal, the fair value of Wadi’s identifiable net assets and non-controlling interests were $114 million and $43 million respectively. The fair value of the remaining equity interest in Wadi was $51 million. No entries have been made in the above financial statements concerning these transactions.