Section A – THIS ONE question is compulsory and MUST be attempted
The following draft statements of financial position relate to Robby, Hail and Zinc, all public limited companies, as at 31 May 2012:
The following information needs to be taken into account in the preparation of the group financial statements of Robby:
(i) On 1 June 2010, Robby acquired 80% of the equity interests of Hail. The purchase consideration comprised cash of $50 million. Robby has treated the investment in Hail at fair value through other comprehensive income (OCI).
A dividend received from Hail on 1 January 2012 of $2 million has similarly been credited to OCI.
It is Robby’s policy to measure the non-controlling interest at fair value and this was $15 million on 1 June 2010.
On 1 June 2010, the fair value of the identifiable net assets of Hail were $60 million and the retained earnings of Hail were $16 million. The excess of the fair value of the net assets is due to an increase in the value of non-depreciable land.
(ii) On 1 June 2009, Robby acquired 5% of the ordinary shares of Zinc. Robby had treated this investment at fair value through profit or loss in the financial statements to 31 May 2011.
On 1 December 2011, Robby acquired a further 55% of the ordinary shares of Zinc and gained control of the company.
The consideration for the acquisitions was as follows:
At 1 December 2011, the fair value of the equity interest in Zinc held by Robby before the business combination was $5 million.
It is Robby’s policy to measure the non-controlling interest at fair value and this was $9 million on 1 December 2011.
The fair value of the identifiable net assets at 1 December 2011 of Zinc was $26 million, and the retained earnings were $15 million. The excess of the fair value of the net assets is due to an increase in the value of property, plant and equipment (PPE), which was provisional pending receipt of the final valuations. These valuations were received on 1 March 2012 and resulted in an additional increase of $3 million in the fair value of PPE at the date of acquisition. This increase does not affect the fair value of the non-controlling interest at acquisition. PPE is to be depreciated on the straight-line basis over a remaining period of five years.
(iii) Robby has a 40% share of a joint operation, a natural gas station. Assets, liabilities, revenue and costs are apportioned on the basis of shareholding.
The following information relates to the joint arrangement activities:
– The natural gas station cost $15 million to construct and was completed on 1 June 2011 and is to be dismantled at the end of its life of 10 years. The present value of this dismantling cost to the joint arrangement at 1 June 2011, using a discount rate of 5%, was $2 million.
– In the year, gas with a direct cost of $16 million was sold for $20 million. Additionally, the joint arrangement incurred operating costs of $0·5 million during the year.
Robby has only contributed and accounted for its share of the construction cost, paying $6 million. The revenue and costs are receivable and payable by the other joint operator who settles amounts outstanding with Robby after the year end.
(iv) Robby purchased PPE for $10 million on 1 June 2009. It has an expected useful life of 20 years and is depreciated on the straight-line method. On 31 May 2011, the PPE was revalued to $11 million. At 31 May 2012, impairment indicators triggered an impairment review of the PPE. The recoverable amount of the PPE was $7·8 million. The only accounting entry posted for the year to 31 May 2012 was to account for the depreciation based on the revalued amount as at 31 May 2011. Robby’s accounting policy is to make a transfer of the excess depreciation arising on the revaluation of PPE.
(v) Robby held a portfolio of trade receivables with a carrying amount of $4 million at 31 May 2012. At that date, the entity entered into a factoring agreement with a bank, whereby it transfers the receivables in exchange for $3·6 million in cash. Robby has agreed to reimburse the factor for any shortfall between the amount collected and $3·6 million. Once the receivables have been collected, any amounts above $3·6 million, less interest on this amount, will be repaid to Robby. Robby has derecognised the receivables and charged $0·4 million as a loss to profit or loss.
(vi) Immediately prior to the year end, Robby sold land to a third party at a price of $16 million with an option to purchase the land back on 1 July 2012 for $16 million plus a premium of 3%. The market value of the land is $25 million on 31 May 2012 and the carrying amount was $12 million. Robby accounted for the sale, consequently eliminating the bank overdraft at 31 May 2012.
Required:
(a) Prepare a consolidated statement of financial position of the Robby Group at 31 May 2012 in accordance with International Financial Reporting Standards. (35 marks)
(b) (i) In the above scenario (information point (v)), Robby holds a portfolio of trade receivables and enters into a factoring agreement with a bank, whereby it transfers the receivables in exchange for cash. Robby additionally agreed to other terms with the bank as regards any collection shortfall and repayment of any monies to Robby. Robby derecognised the receivables. This is an example of the type of complex transaction that can arise out of normal terms of trade. The rules regarding derecognition are quite complex and are often not understood by entities.
Describe the rules of IFRS 9 Financial Instruments relating to the derecognition of a financial asset and how these rules affect the treatment of the portfolio of trade receivables in Robby’s financial statements. (9 marks)
(ii) Discuss the legitimacy of Robby selling land just prior to the year end in order to show a better liquidity position for the group and whether this transaction is consistent with an accountant’s responsibilities to users of financial statements.
Note: Your answer should include reference to the above scenario. (6 marks)