Background
Banana is the parent of a listed group of companies which have a year end of 30 June 20X7. Banana has made a number of acquisitions and disposals of investments during the current financial year and the directors require advice as to the correct accounting treatment of these acquisitions and disposals.

The acquisition of Grape
On 1 January 20X7, Banana acquired an 80% equity interest in Grape. The following is a summary of Grape’s equity at the acquisition date.

The purchase consideration comprised 10 million of Banana’s shares which had a nominal value of $1 each and a market price of $6·80 each. Additionally, cash of $18 million was due to be paid on 1 January 20X9 if the net profit after tax of Grape grew by 5% in each of the two years following acquisition. The present value of the total contingent consideration at 1 January 20X7 was $16 million. It was felt that there was a 25% chance of the profit target being met. At acquisition, the only adjustment required to the identifiable net assets of Grape was for land which had a fair value $5 million higher than its carrying amount. This is not included within the $70 million equity of Grape at 1 January 20X7.

Goodwill for the consolidated financial statements has been incorrectly calculated as follows:

The financial director did not take into account the contingent cash since it was not probable that it would be paid. Additionally, he measured the non-controlling interest using the proportional method of net assets despite the group having a published policy to measure non-controlling interest at fair value. The share price of Grape at acquisition was $4·25 and should be used to value the non-controlling interest.

The acquisition and subsequent disposal of Strawberry
Banana had purchased a 40% equity interest in Strawberry for $18 million a number of years ago when the fair value of the identifiable net assets was $44 million. Since acquisition, Banana had the right to appoint one of the five directors on the board of Strawberry. The investment has always been equity accounted for in the consolidated financial statements of Banana. Banana disposed of 75% of its 40% investment on 1 October 20X6 for $19 million when the fair values of the identifiable net assets of Strawberry were $50 million. At that date, Banana lost its right to appoint one director to the board. The fair value of the remaining 10% equity interest was $4·5 million at disposal but only $4 million at 30 June 20X7. Banana has recorded a loss in reserves of $14 million calculated as the difference between the price paid of $18 million and the fair value of $4 million at the reporting date. Banana has stated that they have no intention to sell their remaining shares in Strawberry and wish to classify the remaining 10% interest as fair value through other comprehensive income in accordance with IFRS® 9 Financial Instruments.

The acquisition of Melon
On 30 June 20X7, Banana acquired all of the shares of Melon, an entity which operates in the biotechnology industry. Melon was only recently formed and its only asset consists of a licence to carry out research activities. Melon has no employees as research activities were outsourced to other companies. The activities are still at a very early stage and it is not clear that any definitive product would result from the activities. A management company provides personnel for Melon to supply supervisory activities and administrative functions. Banana believes that Melon does not constitute a business in accordance with IFRS 3 Business Combinations since it does not have employees nor carries out any of its own processes. Banana intends to employ its own staff to operate Melon rather than to continue to use the services
of the management company. The directors of Banana therefore believe that Melon should be treated as an asset acquisition but are uncertain as to whether the International Accounting Standards Board’s exposure draft Definition of a Business and Accounting for Previously Held Interests ED 2016/1 would revise this conclusion.

The acquisition of bonds
On 1 July 20X5, Banana acquired $10 million 5% bonds at par with interest being due at 30 June each year. The bonds are repayable at a substantial premium so that the effective rate of interest was 7%. Banana intended to hold the bonds to collect the contractual cash flows arising from the bonds and measured them at amortised cost.

On 1 July 20X6, Banana sold the bonds to a third party for $8 million. The fair value of the bonds was $10·5 million at that date. Banana has the right to repurchase the bonds on 1 July 20X8 for $8·8 million and it is likely that this option will be exercised. The third party is obliged to return the coupon interest to Banana and to pay additional cash to Banana should bond values rise. Banana will also compensate the third party for any devaluation of the bonds.

Required:
(c) Discuss how the derecognition requirements of IFRS 9 Financial Instruments should be applied to the sale of the bond including calculations to show the impact on the consolidated financial statements for the year ended 30 June 20X7. (7 marks)