Question 1

SECTION A

Background:
VerdantCorp is a multinational agri-tech company that prepares its consolidated financial statements in US Dollars ($) in accordance with IFRS. You are the group financial controller, and the financial year-end is 31 December 20X5.

Event 1: Acquisition of CropData
On 1 January 20X3, VerdantCorp acquired a 20% equity interest in CropData, a foreign company operating in the fictional country of Ozeria, for 15 million Ozerian Dinars (OZD). VerdantCorp exercised significant influence. 
On 1 January 20X5, VerdantCorp acquired a further 55% of the equity shares in CropData for OZD 50 million, gaining control. On this date, the fair value of the original 20% interest was OZD 18 million. The fair value of the non-controlling interest (NCI) at acquisition was OZD 22 million. The fair value of CropData's identifiable net assets on 1 January 20X5 was OZD 70 million. 
CropData's functional currency is the OZD. Goodwill is calculated using the full fair value method. Exchange rates (OZD to $1) are:
- 1 January 20X5: 2.0
- 31 December 20X5: 2.5
- Average for 20X5: 2.2

Event 2: Biological Assets
Included in CropData's net assets at acquisition were specialized genetically modified seed crops. Under local Ozerian GAAP, these were held at cost. For IFRS consolidation, VerdantCorp determined their fair value less costs to sell on 1 January 20X5 was OZD 10 million higher than their carrying amount. By 31 December 20X5, the fair value less costs to sell of these specific crops had increased by a further OZD 4 million.

Event 3: Intercompany Trading
During 20X5, VerdantCorp sold specialized drone farming equipment to CropData for $5 million. The equipment cost VerdantCorp $3 million to manufacture. CropData recorded the equipment as Property, Plant and Equipment (PPE) and depreciates it over 5 years on a straight-line basis. The transaction occurred on 1 July 20X5.

Requirements:
(a) Explain and calculate the goodwill arising on the acquisition of CropData on 1 January 20X5, detailing the accounting treatment of the step acquisition and the translation of goodwill into the presentation currency at year-end. (14 marks)
(b) Discuss the accounting treatment of the biological assets acquired, including the impact on the consolidated financial statements for the year ended 31 December 20X5. (8 marks)
(c) Prepare the necessary consolidation adjustment journals (in US Dollars) for the intercompany sale of the drone farming equipment as at 31 December 20X5. (8 marks)

Accepted Answer

Step 1: For part (a), identify that this is a step acquisition. Calculate goodwill in the local currency first, remembering to include the fair value of the previously held interest and the fair value adjustment to net assets. Then apply IAS 21 rules for translating goodwill. Step 2: For part (b), apply IFRS 3 for the initial recognition of the biological asset at fair value, and IAS 41 for the subsequent measurement, noting the translation rates. Step 3: For part (c), calculate the unrealized profit on the equipment and the subsequent over-depreciation, then draft the standard consolidation journals to eliminate these.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Students often forget to adjust the net assets at acquisition for the biological assets' fair value before calculating goodwill. Another common error is translating goodwill at the historical rate instead of the closing rate.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA SBR — Strategic Business Reporting Practice Exam 4

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