The subject of complex group accounting is examined in Paper P2 and students should ensure they are very familiar with the accounting treatment required.
In this article I am going to illustrate complex group accounting by working through a past exam question updated to incorporate the new ideas developing around group accounting. So this article looks at the 35 marks of computation required in Question 1 of the Paper P2 exam.
To give you an example of how the subject of complex groups might appear in an exam question on this subject, I have adapted a past exam question.
The original question was called Rod, so I have called the adjusted version Rodney. Here it is:
In Table 1, draft statements of financial position relate to Rodney, a public limited company, Del, a public limited company, and Trigger, a public limited company, as at 30 November:
It is the group’s policy to value the non-controlling interest at fair value.
The following information is relevant to the preparation of the group financial statements:
Prepare a consolidated statement of financial position of the Rodney Group as at 30 November.
The starting point for group accounting questions is to establish the group structure. This is especially important when dealing with a complex group.
Indirect (80% x 25%) 20%
In order to calculate the correct goodwill figure, we need to establish the net assets at acquisition of both subsidiaries. This can often be complicated as there are accounting adjustments that need to be made first. Net assets at acquisition are as shown in Table 1.
Net assets notes
The following explanatory notes are just that and are certainly not required in the exam.
Inventory error (iii)
Reinstatement of costs that have previously been written off to the income statement is never permissible. The development inventory must be written off. The correcting double entry is:
Dr retained earnings 20
Cr inventory 20
Discount error (iv)
The erroneous recognition of the discount in the income statement has caused a corresponding overstatement of non-current assets of $6m at the beginning of the year. As NCA are depreciating, the error is also depreciating. Over the year $1m of error has dropped off the b/s into the i/s as depreciation. So only $5m is still left on the b/s in net assets at the year end. The correcting double entry is shown in Table 2.
Trigger’s accounting policy for property, plant and equipment (PPE) must be consistent with that of the parent. The revaluation of NCA must be removed and the assets reverted back to historic cost. To remove it correctly there must be two corrections. This is because Trigger has made two mistakes. First, we must recognise the realisation of the reserve and put through the transfer that Trigger has ignored. Second, we must remove the remainder of the revaluation reserve and reduce the tangibles back to their historical net book value. Revaluation reserves should be realised over their lives. The life of the Trigger tangibles was six years at the point of purchase. But the revaluation is one year after purchase and so the revaluation reserve has a life of only five years from revaluation. The first of those five years is this year. So one-fifth of the $70m must be realised, therefore $14m is transferred to retained earnings, leaving $56m in the revaluation reserve. This is set against the $256m in tangibles. The revised balance is $200m, which is where it would have been had Trigger not put through the revaluation. After all, the tangibles are two years through a six-year life and had originally cost $300m. The correcting double entry is shown in Table 3.
Exam tip – there are always going to be difficult areas in the exam. Have a go, but if you feel you are getting bogged down, then move on. Do not waste too much time trying to deal with an adjustment that you are unsure about.
Once the net assets have been ascertained, then the goodwill can be calculated as shown in Table 4.
The NCI in the statement of financial position relates to the investment in Del and the investment in Trigger. It is calculated as shown in Table 5.
Martin Jones is a lecturer at the London School of Business and Finance