Melville: International Financial Reporting, Instructor's Manual, 5th edition

Chapter 18
Groups of companies (1)
18.6
Group statement of financial position as at 31 December 2015
£000 £000
Assets
Non-current assets
Property and equipment (4,761 + 521 + 411 + 30) 5,723
Goodwill (W1) 90
–––––
5,813
Current assets
Inventories (1,532 + 222 + 187 – 3) 1,938
Trade receivables (1,947 + 258 + 202 – 48) 2,359
Cash at bank (239 + 30 + 13) 282 4,579
––––– –––––
10,392
–––––
Equity
Ordinary share capital 5,000
Revaluation reserve (W3) 2,536
Retained earnings (W2) 518
–––––
8,054
Non-controlling interest (W4) 405
–––––
8,459
Liabilities
Current liabilities
Trade payables (1,607 + 211 + 163 – 48) 1,933
–––––
10,392
–––––
Notes:
(i) The goods invoiced to DD Ltd for £8,000 must have cost CC Ltd £5,000 (£8,000 × 100/160). So the
unrealised profit is £3,000.
(ii) A total of £48,000 of intra-group debts (£15,000 + £25,000 + £8,000) must be subtracted from trade
receivables and from trade payables.
(iii) Workings W1 to W4 are given below.

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W1. Goodwill
£000 £000
DD Ltd
Price paid by parent 600
Subsidiary's share capital at 1 January 2014 500
Subsidiary's retained earnings at 1 January 2014 280
Fair value adjustment 30
–––
60% × 810 486
––– –––
Goodwill at 1 January 2014 114
Less: Impairment (50%) 57
–––
Goodwill at 31 December 2015 57
–––
EE Ltd
Price paid by parent 575
Subsidiary's share capital at 1 January 2015 300
Subsidiary's retained earnings at 1 January 2015 230
Subsidiary's revaluation reserve at 1 January 2015 60
–––
90% × 590 531
––– –––
Goodwill at 1 January 2015 44
Less: Impairment (25%) 11
–––
Goodwill at 31 December 2015 33
–––
Total goodwill at 31 December 2015 (57 + 33) 90
–––
W2. Group retained earnings
£000 £000
Parent's retained earnings at 31 December 2015 547
DD Ltd
Subsidiary's retained earnings at 31 December 2015 320
Less: Subsidiary's retained earnings at 1 January 2014 280
–––
60% × 40 24
–––
EE Ltd
Subsidiary's retained earnings at 31 December 2015 250
Less: Subsidiary's retained earnings at 1 January 2015 230
–––
90% × 20 18
–––
Less: Goodwill impairment (57 + 11) (68)
Less: Unrealised profit on inventories (3)
–––
Group retained earnings at 31 December 2015 518
–––

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 Melville: International Financial Reporting, Instructor's Manual, 5th edition

W3. Group revaluation reserve

£000 £000
Parent's revaluation reserve at 31 December 2015 2,500
EE Ltd revaluation reserve at 31 December 2015 100
Less: EE Ltd revaluation reserve at 1 January 2015 60
–––
90% × 40 36
––– –––––
Group revaluation reserve at 31 December 2015 2,536
–––––
W4. Non-controlling interest
£000 £000
DD Ltd
Subsidiary's share capital at 31 December 2015 500
Subsidiary's retained earnings at 31 December 2015 320
Fair value adjustment 30
–––
40% × 850 340
–––
EE Ltd
Subsidiary's share capital at 31 December 2015 300
Subsidiary's retained earnings at 31 December 2015 250
Subsidiary's revaluation reserve at 31 December 2015 100
–––
10% × 650 65
––– –––
Non-controlling interest at 31 December 2015 405
–––

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18.7
Group statement of financial position as at 31 October 2016
£m £m
Assets
Non-current assets
Property and equipment (425 + 288) 713
Goodwill (W1) 9
Investments (147 – 120 + 13) 40
––––
762
Current assets
Inventories (88 + 73 – 2) 159
Trade receivables (147 + 106 – 18) 235
Other current assets (37 + 22) 59
Cash and cash equivalents (36 + 15) 51 504
–––– ––––
1,266
––––
Equity
Ordinary share capital 300
Retained earnings (W2) 188
––––
488
Non-controlling interest (W3) 141
––––
629
Liabilities
Non-current liabilities (150 + 82) 232
Current liabilities
Trade payables (184 + 56 – 18) 222
Current tax payable (89 + 69) 158
Bank overdraft 25 405
–––– ––––
1,266
––––
Notes:
(i) Tuli's ordinary share capital consists of 150m shares and Multa owns 90m of these shares. This is a
60% holding.
(ii) The price of the goods sold by Multa to Tuli included a profit of £10m (40% × £25m). 20% of these
goods have not yet been sold so the unrealised profit is £2m (20% × £10m).
(iii) Intra-group debts of £18m must be subtracted from trade receivables and from trade payables.
(iv) Workings W1 to W3 are given below.

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W1. Goodwill
£m £m
Price paid by parent 120
Subsidiary's ordinary share capital at 1 November 2014 150
Subsidiary's retained earnings at 1 November 2014 30
–––
60% × 180 108
––– –––
Goodwill at 1 November 2014 12
Less: Impairment 3
–––
Goodwill at 31 October 2016 9
–––
W2. Group retained earnings
£m £m
Parent's retained earnings at 31 October 2016 157
Subsidiary's retained earnings at 31 October 2016 90
Less: Subsidiary's retained earnings at 1 November 2014 30
–––
60% × 60 36
–––
Less: Goodwill impairment (3)
Less: Unrealised profit on inventories (2)
–––
Group retained earnings at 31 October 2016 188
–––
W3. Non-controlling interest
£m £m
Subsidiary's ordinary share capital at 31 October 2016 150
Subsidiary's retained earnings at 31 October 2016 90
–––
40% × 240 96
–––
Subsidiary's preference share capital at 31 October 2016 45
–––
Non-controlling interest at 31 October 2016 141
–––

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 Melville: International Financial Reporting, Instructor's Manual, 5th edition

Chapter 19
Groups of companies (2)
19.5
(a) Group statement of comprehensive income for the year to 30 June 2016
£000
Sales revenue (21,545 + 5,328 – 2,400) 24,473
Cost of sales (13,335 + 3,552 – 2,400 + 192) 14,679
––––––
Gross profit 9,794
Operating expenses (4,087 + 410 + 26) 4,523
––––––
Profit before tax 5,271
Taxation (1,500 + 450) 1,950
––––––
Profit for the year 3,321
Attributable to the non-controlling interest 242
––––––
Attributable to the group 3,079
––––––
Notes:
(i) Intragroup sales of £2,400,000 must be subtracted from group sales and from group cost of
sales. There is unrealised profit of £192,000 (£512,000 × 60/160) which must be eliminated
from inventories and added to cost of sales.
(ii) Goodwill arising at acquisition was £260,000 (see Working 1). Impairment in the year to 30
June 2016 is £26,000 (10% × £260,000). This has been included in operating expenses.
(iii) Dividends received by JJ Ltd from KK Ltd have been cancelled out. These consist of ordinary
dividends of £375,000 (75% × £500,000) and preference dividends of £2,000 (10% × £20,000)
giving a total of £377,000. The remaining £143,000 (£520,000 – £377,000) of dividends paid
by KK Ltd were paid to the non-controlling interest.
(iv) The profit of KK Ltd for the year to 30 June 2016 is £916,000 of which £20,000 belongs to the
preference shareholders and £896,000 belongs to the ordinary shareholders. So the profit
attributable to the non-controlling interest is £242,000 ((90% × £20,000) + (25% × £896,000)).

(b) Group statement of changes in equity for the year to 30 June 2016

Share Retained Total Non- Total

capital earnings controlling equity
interest
£000 £000 £000 £000 £000
Balance b/f 7,800 307 8,107 1,163 9,270
Profit for the year 3,079 3,079 242 3,321
Dividends paid (1,880) (1,880) (143) (2,023)
–––– –––– –––– –––– ––––
Balance c/f 7,800 1,506 9,306 1,262 10,568
–––– –––– –––– –––– ––––
Note:
The opening and closing figures for group retained earnings and the non-controlling interest are
derived in the workings below.

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(c) Group statement of financial position as at 30 June 2016

£000 £000
Assets
Non-current assets
Property, plant and equipment (5,961 + 2,667 + 600) 9,228
Goodwill (W1) 156
––––––
9,384
Current assets
Inventories (2,215 + 1,052 – 192) 3,075
Trade receivables (1,823 + 829 – 216) 2,436
Cash at bank (101 + 5) 106 5,617
––––– ––––––
15,001
––––––
Equity
Ordinary share capital 7,000
Preference share capital 800
Retained earnings (W2) 1,506
––––––
9,306
Non-controlling interest (W3) 1,262
––––––
10,568
Liabilities
Current liabilities
Trade payables (2,004 + 695 – 216) 2,483
Taxation (1,500 + 450) 1,950 4,433
––––– ––––––
15,001
––––––
Workings:
W1. Goodwill
£000 £000
Price paid by parent 3,153
Subsidiary's ordinary share capital at 1 July 2012 2,500
Subsidiary's retained earnings at 1 July 2012 704
Fair value adjustment 600
––––
75% × 3,804 (2,853)
––––
Parent's 10% stake in subsidiary's preference shares (40)
––––
Goodwill at 1 July 2012 260
Less: Impairment (40%) 104
––––
Goodwill at 30 June 2016 156
––––

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W2. Group retained earnings

£000 £000
Parent's retained earnings at 30 June 2016 1,949
Subsidiary's retained earnings at 30 June 2016 508
Less: Subsidiary's retained earnings at 1 July 2012 704
––––
75% × (196) (147)
––––
Less: Goodwill impairment (104)
Less: Unrealised profit on inventories (192)
––––
Group retained earnings at 30 June 2016 1,506
––––
Group retained earnings at 30 June 2015 were £829,000 + (75% × (£112,000 – £704,000)) –
impairment £78,000 = £307,000. It is assumed that there were no unrealised profits at 30
June 2015.

W3. Non-controlling interest

£000 £000
Subsidiary's ordinary share capital at 30 June 2016 2,500
Subsidiary's retained earnings at 30 June 2016 508
Fair value adjustment 600
––––
25% × 3,608 902
––––
NCI's 90% stake in subsidiary's preference shares 360
––––
Non-controlling interest at 30 June 2016 1,262
––––
Non-controlling interest at 30 June 2015 was (25% × (£2,500,000 + £112,000 + £600,000)) +
£360,000 = £1,163,000.

(d) If the intra-group sales were from KK Ltd to JJ Ltd, 25% of the unrealised profit would be deducted
from the non-controlling interest. The profit attributable to the non-controlling interest shown in the
group statement of comprehensive income would fall by £48,000 (25% × £192,000) to £194,000
and the profit attributable to the group would increase by £48,000 to £3,127,000.
These amendments would be reflected in the group statement of changes in equity and in the group
statement of financial position. Group retained earnings would rise by £48,000 to £1,554,000 and
the non-controlling interest would fall by £48,000 to £1,214,000.

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