Page 16 - CIMA May 18 - MCS Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

CHAPTER TEN
TASK 1 GROUP ACCOUNTING ISSUES

From: Financial Manager
To: CFO
Date: Today

Group accounting issues:

1. Control – this is defined by IFRS 10 Consolidated Financial Statements and requires three
criteria to be complied with as follows:
 power exercised by investor (Menta) over the investee (subsidiary acquired)
 exposure or rights or variable returns from the investee, and
 ability to use power over the investee to affect the amount of the variable returns.
Power is usually demonstrated by owning the majority of voting (equity) shares in an
investee. In the case of Menta, it owns a controlling shareholding interest in many
subsidiaries.

Exposure or rights to variable returns arises from ownership of equity shares, which are
entitled to dividends if declared, provided that there are sufficient retained earnings within
the subsidiary. If a subsidiary has little or no retained earnings, it will be very difficult to pay
dividends to shareholders.

Ability to use power is normally demonstrated by having control over the strategic and
operating policies (including declaring and paying dividends) of a subsidiary. This is normally
achieved by controlling the composition of the board of directors of each subsidiary and
voting Menta representatives or nominees on to the board of directors of each subsidiary.

If one entity has control over another, consolidated accounts should be prepared to show
the combined income and expenses and assets and liabilities under the control of the
investor.

2. Goodwill is defined by IFRS 3 Business Combinations as the difference between the fair
value of consideration paid to acquire control of a subsidiary in a business combination,
plus the fair value of the non‐controlling interest at the date of acquisition, less the fair
value of the net assets at the date of acquisition. Goodwill is recognised as a non‐current
asset in the consolidated financial statements and is subject to annual impairment review.
The fair value of consideration paid may comprise any or all of the following components:

 cash paid at the date of acquisition
 deferred consideration, which is stated at its present value at the date of acquisition
 contingent consideration is stated at its present value and adjusted to reflect the
uncertainty of whether or not it will actually be paid
 shares issued by the parent in a share exchange – the shares are stated at fair value
at the date of issue

KAPLAN PUBLISHING 103