Question 1b

Alpha currently has investments in two other entities, Beta (Note 1) and Gamma (Note 2). The draft statements of financial position of Alpha and Beta at 30 September 2018 were as follows:
AlphaBeta
$’000$’000
Assets
Non-current assets:

Property, plant and equipment (Notes 1and 5)

775,000

380,000
Investments (Notes 1–3)410,000
Nil
––––––––––––––––––
1,185,000
380,000
––––––––––––––––––
Current assets:
Inventories (Note 4)150,00095,000
Trade receivables (Note 4)100,00080,000
Cash and cash equivalents18,000
15,000
––––––––––––––––––
268,000
190,000
––––––––––––––––––
Total assets1,453,000570,000
––––––––––––––––––
Equity and liabilities
Equity
Share capital ($1 shares)520,000160,000
Retained earnings693,000
200,000
––––––––––––––––––
Total equity1,213,000
360,000
––––––––––––––––––
Non-current liabilities:
Long-term borrowings100,00080,000
Deferred tax60,000
45,000
––––––––––––––––––
Total non-current liabilities160,000
125,000
––––––––––––––––––
Current liabilities:
Trade and other payables60,00055,000
Short-term borrowings20,000
30,000
––––––––––––––––––
Total current liabilities80,000
85,000
––––––––––––––––––
Total liabilities240,000
210,000
––––––––––––––––––
Total equity and liabilities1,453,000570,000
––––––––––––––––––

Note 1 – Alpha’s investment in Beta
On 1 October 2011, Alpha acquired 120 million shares in Beta and gained control of Beta on that date. The acquisition was financed by a cash payment by Alpha of $144 million to the former shareholders of Beta on 1 October 2011 and a further cash payment of $145·2 million to the former shareholders of Beta paid on 1 October 2013. The annual rate to use in any discounting calculations is 10% and the relevant discount factor is 0·826. Alpha correctly accounted for the payments made to the former shareholders of Beta in its own financial statements. The cost of investment figure in the financial statements of Alpha was rounded to the nearest $ million.

Alpha incurred due diligence costs of $1 million relating to the acquisition of Beta and included these costs in the carrying amount of its investment in Beta. On 1 October 2011, the individual financial statements of Beta showed retained earnings of $80 million.

The directors of Alpha carried out a fair value exercise to measure the identifiable assets and liabilities of Beta at 1 October 2011. The following matters emerged:

– Property which had a carrying amount of $120 million (land component $40 million) had an estimated fair value of $160 million (land component $60 million). The buildings component of the property had an estimated remaining useful life of 40 years at 1 October 2011.

– Plant and equipment having a carrying amount of $120 million had an estimated fair value of $130 million. The estimated remaining useful life of this plant at 1 October 2011 was two years.

– The fair value adjustments have not been reflected in the individual financial statements of Beta. In the consolidated financial statements, the fair value adjustments will be regarded as temporary differences for the purposes of computing deferred tax. The rate of deferred tax to apply to temporary differences is 20%.

On 1 October 2011, the directors of Alpha initially measured the non-controlling interest in Beta at its fair value on that date. On 1 October 2011, the fair value of an equity share in Beta (which can be used to measure the fair value of the non-controlling interest) was $1·70. No impairments of the goodwill on acquisition of Beta have been evident up to and including 30 September 2018.

Note 2 – Alpha’s investment in Gamma
On 1 October 2015, Alpha acquired 36 million shares in Gamma by means of a cash payment of $145 million. Gamma’s issued share capital at that date was 120 million shares. On 1 October 2015 and 30 September 2018, the individual financial statements of Gamma showed retained earnings of $45 million and $65 million respectively. Since 1 October 2015, no other investor has owned more than 2% of the shares of Gamma.

Note 3 – Alpha’s investment in Delta
On 1 October 2012, Alpha issued 80 million of its own shares in exchange for an 80% shareholding in Delta. Delta has an issued share capital of 100 million shares. The fair value of an equity share in Alpha on that date was $1·40.

The fair values of the net assets of Delta at 1 October 2012 were the same as their carrying amounts.

On 1 October 2012, the directors of Alpha initially measured the non-controlling interest in Delta at its fair value on that date. On 1 October 2012, the fair value of an equity share in Delta (which can be used to measure the fair value of the non-controlling interest) was $1·10.

The individual financial statements of Delta showed net assets at the following amounts:
– $110 million on 1 October 2012.
– $170 million on 30 September 2017.

In the year ended 30 September 2018, the individual financial statements of Delta showed a profit of $24 million. On 31 March 2018, Delta paid a dividend of $9 million.

On 30 June 2018, Alpha disposed of its shareholding in Delta for cash proceeds of $180 million. The individual financial statements of Alpha recognised the correct profit on disposal of its shareholding in Delta. No impairment of the goodwill on acquisition of Delta had been necessary between 1 October 2012 and 30 June 2018.

Note 4 – Intra-group trading
Alpha supplies a component to Beta at a mark-up of 25% on its production cost. The trade receivables of Alpha at 30 September 2018 include $10 million receivable from Beta in respect of sales of the component. Beta paid Alpha $10 million to clear the outstanding balance on 29 September 2018. Alpha received and recorded this amount on 3 October 2018.

On 30 September 2018, the inventories of Beta included $15 million in respect of components purchased from Alpha. All such inventory is measured at original cost to Beta.

Note 5 – Property lease
On 1 October 2017, Alpha began to lease a property under a 10-year lease. The annual rate of interest implicit in the lease was 5%. The lease rentals payable by Alpha were $10 million, payable annually in arrears. The lease does not transfer ownership of the property to Alpha at the end of the lease term. The lease contains no option for Alpha to purchase the property at the end of the lease term. On 1 October 2017, Alpha incurred direct costs of $4 million in arranging this lease. The only accounting entries made by Alpha in respect of this lease were to charge $14 million to the statement of profit or loss. Using a discount rate of 5%, the cumulative present value of $1 payable annually in arrears for ten years is $7·72.

Required:
(b) Prepare the consolidated statement of financial position of Alpha at 30 September 2018. You need only consider the deferred tax implications of any adjustments you make where the question specifically refers to deferred tax. (33 marks)

Note: You should show all workings to the nearest $’000.

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