Requirement (b) – 14 marks
This requirement is fairly lengthy and would take up the majority of the time for this
question. Candidate performance on a consolidated statement of profit or loss is
usually weaker than when a consolidated statement of financial position is examined,
and this question was no exception.
From an exam technique point of view, you may find it useful to layout the
consolidated
statement of profit or loss (and other comprehensive income if there is any)
immediately. In doing this, it is highly recommended that you also head up the split
between the profit that is attributable to the parent and that of the NCI (you will also
need a split for total comprehensive income (TCI) if there is any other comprehensive
income in the question) at the bottom of the consolidation.
Examiner’s report – FR March/June 2021
22
For example:
$’000
Profit for the period
X
Other comprehensive income
Revaluation gain etc.
X
Total comprehensive income
X
Profit for the period attributable to:
Shareholders of P
X
NCI
X
X
TCI for the period attributable to:
Shareholders of P
X
NCI
X
X
The split of profit and total comprehensive income between the
parent company and
NCI should be calculated in a separate working. You should spend time practicing and
revising this.
In Gold Co, many candidates failed to complete the split of profit for the period, with
many omitting it altogether. By not completing the split, candidates immediately lost
marks. If you spend a small amount of time laying out the split in the early part of your
answer, this will act as a reminder to attempt to complete this later on and in doing so
score valuable marks.
When completing the consolidated statement of profit or loss, ensure you get the ‘easy’
marks out of the question early on. These marks are earned in
the initial consolidation
process. You should add together all income and expenses (and other comprehensive
income if there is any) for the parent and subsidiary. Be careful though, if control of the
subsidiary was acquired mid-way through the period it will be necessary to time
apportion the subsidiary’s income and expenses. This will almost always be the case
in the FR exam and in Gold Co the post-acquisition period is nine months. This is vital
in a consolidated profit or loss question and is an area that many candidates often
forget.
It is disappointing to note that despite guidance in previous reports from the examining
team, many candidates attempted to take 90% of the subsidiary results in their
answers. This is fundamentally incorrect and the basic consolidation marks will be lost
so please DO NOT proportionately consolidate the results of the subsidiary.
Examiner’s report – FR March/June 2021
23
Having completed the
initial consolidation process, candidates should turn their
attention to the consolidation adjustments that may be required. In this question there
is an intra-group sale and purchase that needs to be eliminated, with a further
adjustment for unrealised profit on the goods that remain in inventory at the reporting
date. There is also an additional group expense in respect of fair value depreciation
and an associate company. These are standard consolidation adjustments for the FR
exam and on the whole were well attempted, although there were some common errors
or omissions noted by the marking team.
Note (4) of the question informs candidates that sales made between Gold Co and
Silver Co in the post-acquisition period had consistently been $600,000 per month.
These are internal sales and purchases within the group and will need to be removed
from both revenue and cost of sales (purchases). Often candidates removed $5.4
million ($600,000 x 9 months) from revenue but a different amount from cost of sales.
This is an error. The adjustment to cost of sales should be
the same as the adjustment
to revenue, in this case, $5.4 million. Once you have eliminated this internal
transaction, you will then need to consider any unrealised profit that remains on the
transaction. Where unrealised profit in inventory exists, the adjustment should be made
to cost of sales.
The fair value adjustment for plant will require an additional consolidation expense in
respect of fair value depreciation. This was generally done well by the majority of
candidates. However, some candidates omitted
this adjustment all together, while
others failed to time apportion the depreciation charge for the post acquisition period
(9 months).
Gold Co’s investment income currently includes a dividend from an investment in a
40% owned associate company. This dividend should be removed and replaced with
a 40% share of the associates profit for the year of $1.2 million ($3 million x 40%). This
is in accordance with IAS 28 Investments in Associates and Joint Ventures. Many
candidates successfully adjusted for the share of profit but failed to remove the
dividend income. In this instance, only partial marks were available.
The unwinding of the discount on the deferred consideration was an adjustment often
overlooked by candidates. In part (a) the deferred consideration was discounted to a
present value of $31.680 million using a cost of capital of 10%. This is another example
of where ‘own figure’ marks will be awarded. Most candidates who attempted to unwind
the discount correctly applied 10% to the deferred consideration calculated in part (a)
and added this on to finance costs. To
score full marks however, candidates need to
time apportion this adjustment (nine months) and many candidates did not do this.
Finally, note (6) contained an accounting adjustment in respect of a convertible loan
note that was issued by Gold Co on 1 October 20X1. The marking team noted that this
adjustment caused confusion for some candidates. This appeared to be because this
was an individual company adjustment rather than a traditional group accounting
adjustment. You must be prepared for adjustments such as this to be contained within
a group accounting question. In this situation, think about the appropriate accounting
treatment, show your workings accordingly and most importantly make
the adjustment
in the parent company’s accounts. Those candidates who attempted to deal with this
adjustment generally earned some marks but relatively few got the full marks available
for this transaction. The most common error when the liability was calculated correctly
was where the full finance costs for the year at 8% were added onto the consolidated
finance costs. Candidates needed to adjust finance costs for the difference between