Question 1

SECTION A - QUESTION 1

AeroBreeze Group (AB) is a multinational entity operating in the renewable energy sector, specifically offshore wind farms. AB prepares its consolidated financial statements in accordance with IFRS Accounting Standards to 31 December 20X5. The functional and presentation currency is the Dollar ($).

Event 1: Step Acquisition of Solaris
On 1 January 20X3, AB acquired a 15% equity interest in Solaris, a foreign entity operating in the solar panel manufacturing sector, for $10 million. AB made an irrevocable election to measure this investment at fair value through other comprehensive income (FVOCI). The functional currency of Solaris is the Dinar (D).

On 1 July 20X5, AB acquired a further 45% of the equity shares in Solaris for $40 million, gaining control. On this date, the fair value of the original 15% equity interest was $14 million. The fair value of the non-controlling interest (NCI), measured at full fair value, was $35 million. The identifiable net assets of Solaris at 1 July 20X5 had a fair value of $70 million.

Event 2: Contingent Consideration
As part of the 1 July 20X5 acquisition agreement, AB agreed to pay the former owners of Solaris an additional $5 million on 31 December 20X6 if Solaris achieves a cumulative megawatt production target. At the acquisition date, the fair value of this contingent consideration was estimated at $3 million. By 31 December 20X5, due to exceptional production rates, the fair value of the contingent consideration was reassessed at $4.5 million.

Event 3: Sale and Leaseback
On 1 October 20X5, AB sold a specialized offshore wind turbine to a financial institution for its fair value of $20 million. The carrying amount of the turbine prior to the sale was $15 million. Immediately following the sale, AB leased the turbine back for 5 years, which represents the remaining useful economic life of the asset. The present value of the annual lease payments, discounted at AB's incremental borrowing rate, is $12 million. The transfer of the turbine satisfies the requirements of IFRS 15 Revenue from Contracts with Customers to be accounted for as a sale.

Required:
(a) Explain, with supporting calculations, how the step acquisition of Solaris should be accounted for in the consolidated financial statements of AB for the year ended 31 December 20X5. Your answer should address the treatment of the previously held interest, the calculation of goodwill, and the implications of Solaris having a different functional currency (IAS 21). (15 marks)

(b) Discuss the correct accounting treatment for the contingent consideration at the acquisition date (1 July 20X5) and at the reporting date (31 December 20X5). (7 marks)

(c) Advise AB on the accounting treatment for the sale and leaseback transaction of the wind turbine for the year ended 31 December 20X5, including relevant calculations. (8 marks)

Accepted Answer

1. Break down the step acquisition: remeasure the old 15% to FV, calculate goodwill using the full FV method, and state the IAS 21 rule for translating goodwill of a foreign sub.
2. Address contingent consideration: initial recognition at FV in goodwill, subsequent remeasurement through P&L because it's a financial liability.
3. Apply the IFRS 16 sale and leaseback formula: ROU asset = (Carrying Amount / Fair Value) * Lease Liability. Only recognize the gain relating to the rights transferred to the buyer.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Students often incorrectly recycle the FVOCI gain to profit or loss in a step acquisition. Another common error is adjusting goodwill for the post-acquisition change in the fair value of contingent consideration, rather than taking it to P&L. In sale and leaseback, students frequently recognize the full gain on sale instead of restricting it to the rights transferred.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA SBR — Strategic Business Reporting Practice Exam 6

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