Different Accounting Problems (Essay Sample)

Accounting
Name
Institution
Question 1
Note 1
Portsmouth investment in Sports Lisbon as at 1st April 2005 was recognized only as an investment as at that data because the transaction does not amount to acquisition. 1st April 2006 was the official data of acquisition. Under IFRS, the net identifiable assets are recorded at fair value, since purchase of loans notes were at par; the net realizable value is zero. IFRS defined fair value as the amount that an asset could be exchanged or a liability to be settled in an arm’s length transaction.
Land is the only assets whose book value is different from its fair value and was not adjusted as per the date of acquisition. Assuming that all both current and noncurrent liabilities are zero then the net identifiable asset is calculated as follows:
Portsmouth (80%)NCI (20%)Total£000£000£000Ordinary Shares8000200010000Reserves2400600300010400260013000Add Revaluation(increase) on land31278390Net identifiable assets10712267813390
The fair value of non controlling interest was £3000, 000 which is 20% of total fair value at the date of acquisition. Therefore the fair value of Sports Lisbon subsidiary is given as follows  QUOTE


IFRS provides that goodwill measured at the date of acquisition is the net of fair value of the subsidiary less net identifiable assets. Therefore, total goodwill, and the proportion of goodwill allocated to Portsmouth (the parent company) and non controlling interest are given as follows:
Fair Value of subsidiary 15000300018000Net identifiable assets 10712267813390Goodwill42883224610
Note 2: Investment in Ajax
Portsmouth investment in Ajax does not amount to business combination; IFRS defines business combination as one where a parent company acquires controlling stock of the subsidiary company. Portsmouth acquired 40% of Ajax Controlling stock. However, IFRS provides that the investment be carried at fair value. Therefore, the appointment of two directors should appear as and all material facts related to financial performance of Ajax must be captured as notes in the final year consolidated financial statement.
Note 3:
IFRS does not allow amortization but allows regular impairment annually if the carrying value of goodwill is impaired. Therefore, goodwill impairment of £1688, 000 should be impaired against Portsmouth retained earnings.
Note 4:
The objective of consolidated financial statement is to prepare the financial position of the parent and subsidiary company as a single entity. Therefore, IFRS provides that unrealized profits from intra group sales should be eliminated in consolidated financial statements. Intra group sales are recorded as revenue by the seller and cost of sales by the purchaser, if all the goods are sold (therefore not held as inventory by the purchaser) at the time of reporting, then the transaction has zero effect on the balance sheet.
A problem only arises when some of the goods are still held as inventory by the purchaser. Since consolidation presents combined financial position, the inventory of the purchaser includes unrealized profits equal to the sellers mark up. In our case, Sports Lisbon sold Souvenirs to Portsmouth at a mark up of 25% in March 2008, since the transaction took place two years before, we assume that all the goods were sold and intra group transaction was cancelled out in the process. If some of the goods are not sold (for example, 500,000) then unrealized profits should be eliminated as follows
£000Cost of inventory (Portsmouth)Mark up 25%500,000Cost of sales(Sports Lisbon) 500,000* 100%/125%400000Unrealized profits100,000
Note 5
IFRS provides that determination of goodwill should be grossed up and then apportioned proportionately to the parent company and non controlling interest. Impairment of goodwill should first be calculated as a whole and thereafter allocated using the same basis. From the information provided, the fair value of non controlling interest reduced from £3000, 000 at the date of acquisition to£2,400, 000 as at 31st march 2010, we can therefore attribute the reduction in non controlling interest to impairment of goodwill due to reduction in value of cash generating units of Sports Lisbon.
 Separate Financial StatementConsolidated AdjustmentMinority Interest 20%Consol Fin. StmtAssetsPortsmouthSporting LisbonRefDR.ReCR.    £000£000 £000 £000 £000Non-current assets      Property, plant and eqpt.25,0009,400131234,712Investments36,00021,000 Investment in Sports Lisbon210400 1312 34,288Goodwill3428848883,400 61,0009,40059,112Current assetsInventories14,40016,00030,400 Trade receivables12,6008,60021,200Cash16001,600 28,60024,60053,200Total assets89,60034,000112,312Equity and liabilitiesOrdinary shares £1: Portsmouth 20,00020,000 Sports Lisbon10,00080002000Retained earnings: Portsmouth28,0003168826,312Sports Lisbon2,0001600400 48,00012,00046,312Loan notes20000600026,000Current liabilitiesTrade payables17,80013,40031,200Tax2,6002002,800 Overdraft12002,4003,600 21,60016,00037,600Non Controlling interest-24002,400Total equity and liabilities89,60034,00015,88815,888112,312
Note 1
DR £000CR £000Property, plant and equipment 312Investment in Sports Lisbon312To recognize Portsmouth share of revaluation increment in land
Note 2
DR £000CR £000Investment in Sports Lisbon10400000Ordinary Share Capital 10000000 shares*80%8000000Reserves 3000000* 80%2400000To recognize investment in Sports Lisbon
Note 3
Investment in Lisbon10,712,000Goodwill4,288,000Cash 15,000,000To recognize goodwill on investment at Lisbon
Note 4
DR £000CR £000Retained earnings1,688,000Share of Loss (Sports Lisbon) (3,000,000-2000,000)*80%800,000Retained earnings account888,000Being goodwill impairment and share of loss now written off
Question 2.
Convertible bonds are financial instruments that give the holder the right to convert the bonds into a fixed amount of the issuing organizations common stock. IAS 32 holds that Convertible bonds have two components, the equity component and debt/liability component. Therefore, both debt/liability and equity should adequately be recognized at fair values. Prius Convertible bonds have both equity and liability component to the issuer.
Firstly, the liability component is measured using the effective interest rates, i.e. the rate of similar non convertible bonds prevailing in the market. Total liability payable in five years is annual interest rates plus principle sum paid at the date of maturity. Therefore assuming zero cost, the fair value of liability component is given by the present value of all cash outflow discounted at the prevailing market interest rates of non convertible bonds. The Equity component on the other hand is difference between present values of fair value of the bonds less the fair value of similar bonds without conversion option.
In the table below, the fair value of Prius convertible bonds has been calculated using both convertible interest rates (5%) and the interest rates of non convertible bonds in the market, from the information, equity and liability component are given as follows:
  6%PVYear 1500.94347.15Year 2500.8944.5Year 3500.8442Year 4500.79239.6Year 510500.747784.35Total  957.6
Fair value of liability component is calculated using 6% interest rate and is given as £957,600
Equity Component is determined as follows
£000Face value of Convertible Bonds1000fair Value of liabilities957.6Equity Component42.4
Therefore, the transactions will be recorded as follows:
DR £000CR £000Cash1,000Liabilities957.6Equity42.4Being liability and equity components of convertible bonds now recorded
b).
IAS 40 classifies investment as property, plant and equipment held as capital assets for the purposes of production, rental or both. Investments classified as ‘available for sales are therefore not classified as inventory. Available for sales investments are recorded at fair value in the balance sheet and recognized directly through statement of equity. Interest gains and expenses associated with the investments are recognized in the profit and loss. Therefore Increase in value of Bradford’s investment will not be included as gains in profit and loss statement. The cost incurred in acquiring the investment will be treated as follows:
£000Profits before investments32,000,000Less transaction cost AFS investment 1,000,000Net profit31,000,000
Question 3
Accrual Ratio 2010200920082007Total Assets – cash99330.0094600.0086000.0080000.00Total liabilities-total debtors-9683.52-9222.40-8384.00-4000.00Net Operating assets 109013.52103822.4094384.0084000.00Aggregate Accruals [NOA(t)-NOA(t+1)]/25191.129438.4010384.00    [NOA(t)+NOA(t+1)]/2106417.9699103.2089192.00    Accrual Ratio4.88%9.52%11.64% Cash Operating cycle  2010200920082007Inventory Turnover days148143136136Receivable Days78757164Payable days62605754Cash Operating cycle 163159150146
Discussion
Firstly, accrual ratio measures the difference between accounting income and cash income, from financial perspective, accounting inco...