Question 1

SECTION C

Stellar Dynamics Group (Stellar), an aerospace manufacturing company, acquired 80% of the equity shares of Nova Tech on 1 July 20X6. The financial year-end for both companies is 31 December 20X6.

Consideration transferred:
Stellar issued 2 shares for every 5 acquired in Nova Tech. Stellar's share price at 1 July 20X6 was $6.00. Stellar also agreed to pay $1,210,000 in cash on 1 July 20X8. Stellar's cost of capital is 10%. (PV factor for 2 years at 10% is 0.826).

Draft Statements of Financial Position at 31 December 20X6:

Assets ($'000)
Non-current assets: 
Property, plant & equipment: Stellar 45,000; Nova Tech 12,000
Investments: Stellar 8,000; Nova Tech Nil

Current assets:
Inventory: Stellar 6,500; Nova Tech 3,200
Receivables: Stellar 4,800; Nova Tech 2,500
Cash: Stellar 1,200; Nova Tech 800

Equity and Liabilities ($'000)
Equity:
Share capital ($1 shares): Stellar 20,000; Nova Tech 5,000
Retained earnings: Stellar 28,500; Nova Tech 8,500

Non-current liabilities:
Borrowings: Stellar 10,000; Nova Tech 2,000

Current liabilities:
Payables: Stellar 7,000; Nova Tech 3,000

Additional Information:
1. At 1 July 20X6, Nova Tech's retained earnings were $7,500,000.
2. At acquisition, the fair value of Nova Tech's plant exceeded its carrying amount by $2,000,000. The plant had a remaining useful life of 5 years. Depreciation is charged straight-line to cost of sales.
3. Stellar measures the non-controlling interest (NCI) at fair value. The fair value of the NCI at 1 July 20X6 was $2,800,000.
4. During the post-acquisition period, Stellar sold components to Nova Tech for $1,500,000 at a mark-up on cost of 20%. At 31 December 20X6, Nova Tech still held $600,000 of these components in inventory.
5. At 31 December 20X6, Nova Tech's payables included $400,000 owed to Stellar. Stellar's receivables included the same amount.
6. Stellar has not yet recorded the share exchange or the deferred consideration. The $8,000,000 investment relates to other non-group entities.

REQUIREMENT:
Prepare the Consolidated Statement of Financial Position for Stellar Dynamics Group as at 31 December 20X6. Show all workings clearly.

Accepted Answer

Step 1: Calculate Consideration Transferred (Shares + PV of deferred cash). Step 2: Calculate Net Assets of Subsidiary at acquisition and reporting date (include fair value adjustments and depreciation). Step 3: Calculate Goodwill. Step 4: Calculate NCI at reporting date. Step 5: Calculate Consolidated Retained Earnings (deduct PURP). Step 6: Draft the CSFP, eliminating intra-group balances.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to record the share capital and share premium for the shares issued by the parent. Forgetting to unwind the discount on the deferred consideration. Miscalculating the PURP by using 20% instead of 20/120.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 3

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