ACC Course

8/19/2019 ACC Course

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ACC 401 COURSEWARE

COURSE DETAILS

Conceptualisation and preparation of group accounts: Preparation of consolidated statement

of financial position involving elimination of intra group balances; accounting for profit on

intra-group transactions, accounting for non-controlling interest; accounting for goodwill

arising from business combination; intra-group sale of non-current asset; acquisition of

subsidiaries during its accounting period; Fair value in acquisition accounting; Preparation of

consolidated statement of financial performance (profit and loss and other comprehensive

income; Accounting for associates: the equity method; preparation of consolidated financial

General Information

Course Title Advanced Financial Accounting

Course Code ACC 401

Units 3 credits

Status Compulsory

Course Duration Three hours per week for 15 weeks (45hours)

Lecturer Alley, Ibrahim Saliu

BSc (Ibadan), MSc (Abertay Dundee, UK)

E-mail:[email protected]

[email protected]

Department Department of Economics and Financial Studies

College of Management and Social Sciences

Fountain University, Osogbo

Osun State, Nigeria Location Lecturers’ Suite

College of Management & Social Sciences,

Fountain University, Osogbo, Osun state, Nigeria.

Consultation Hour Tuesdays 12 – 2pm

DEPARTMENT OF ECONOMICS AND FINANCIAL STUDIES

COLLEGE OF MANAGEMENT AND SOCIAL SCIENCES

FOUNTAIN UNIVERSITY, OSOGBO

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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position and performance involving an associate(s); accounting for merger and acquisition

problems of group companies.

Course Description

This course is a first semester course, introducing the students to the preparation of group

accounts and accounting treatment of merger and acquisition. Though studying for this

course officially requires no prerequisite, handling the intricacies involved is made easier by

the knowledge acquired in Financial Accounting courses in lower levels. The focus of this

course is the preparation of group accounts. Group accounting is a very wide topic and will

take most of the periods allocated to this course so as to be able to touch the technical aspects

of the topic. Emphasis will also be laid on business combination with particular reference to

partnership and will also treat piecemeal dissolution which is a follow up of wholesome

dissolution that have been treated at the lower level. Other contemporary topics like price

level change accounting and the behavioural aspect of accounting is also included.

Course Justification

The knowledge of Financial Accounting is not complete without knowing Accounting

treatment of Group (Parent, Subsidiaries, and Associate) transactions and other related issues.

Group accounts and most of the other topics are entirely new topics to the students because

they have not been mentioned at all at the lower levels. Students are therefore required to pay

attention and must pass this course before they can graduate more so that it is the concluding

aspect of financial accounting. This is to equip the students with knowledge of these

advanced level corporate problem situations. Financial accounting as a course will not be

taken in the subsequent level of the programme.

Course Objectives

At the end of this course, students will be able to:

- Prepare consolidated accounts

- Understand the laws and practices of group accounting

-

Account for fairly real partnership dissolution situation

-

Account for conversion of a partnership concern to a limited liability company- Account for price level change, and


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Course Requirements

This is a compulsory course. All students taking it must attend normal classes and participate

in robust debates during the lectures. Students will be expected to carry out assignments.

They are expected to attend 75% of classes before they can sit for the examination.

Methods of Grading

S/N Types of Grading Scores (%)

1 Impromptu tests 5

2 Assignments 10

3 Mid-Semester Test 15

4 Final Examination 70

5 Total 100

Course Delivery Strategies

- Physical delivery of lectures, using appropriate texts, notes and other learning

(enhancement) materials

-

Interactive discussion of pertinent issues and analysis of practical situations- Assessment of the feed- backs in terms of students’ response to direct and indirect

questions on concepts taught in class, and as they apply to practice.

LECTURE CONTENT

Week 1: Introduction to Group Accounts

Objective: At the end of this lecture, students are expected to understand the concepts,

relevant standards and regulatory frameworks guiding the preparation of group accounts and

some other introductory issues surrounding business combination.

Description

Background to group accounting: definition (of control), relevant laws in group accounting,

reason for preparation of group accounts, when a parent company may not be required to

prepare consolidated account and when a parent company may exclude a subsidiary from

consolidation.


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Study Questions

1.

Differentiate between a subsidiary and an associated company

2. What constitute cost of acquisition?

3.

What is cost of control account used for?

4.

Under what conditions can a subsidiary be excluded from consolidation?

5. Agbajowo is considering an investment in Aladase whose capital structure is s

follows: 10,000 A voting ordinary shares and 10,000 B non-voting ordinary shares.

Both classes of shares have the same dividend rights.

Required:

Describe the appropriate group accounting for Aladase if:

i.

Agbajowo purchased 6,000 A ordinary shares

ii. Agbajowo purchased 10,000 B and 4,000 A ordinary shares

Reading List

1.

Elliot, B. and Elliot J. (2006). Financial Accounting, Reporting and Analysis. 2nd

Edition. Edinburg Gate: Prentice Hall.

2. ACCA BBP Study Pack (2012). Financial Reporting (International and UK Stream).

6

th

Edition. London: BPP Learning Media.3. ACCA BBP Study Pack (2009). Financial Reporting. Berkshire: Kaplan Publishing

UK

Week 2: Introduction to Consolidation Procedures

Objective: At the end of this lecture, students are expected to understand the basic

procedures governing preparation of consolidated statement of financial position.

Description

Cancellation: shares and other investment in subsidiary companies; set off against net asset;

issues of intra-group trading. Part-cancellation: partial acquisition of subsidiary companies,

share and other consideration.


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Study Questions

1. The following statements of financial positions of Palmat and Salmat have

been prepared at 30th June, 2010.

PALMAT SALMAT

N'000 N'000

Non- Current Asset

Property, Plant & Equipment 120,000 100,000

Investment

Shares in Salmat Ltd 80,000

20% shares of 12% loan stock in Salmat 20,000

220,000

Current Assets

Inventory 50,000 60000

Receivables 40,000 30,000

Current account with Salmat 18,000

Cash 4,000 6,000

332,000 196,000

Financed by

Equity and Liabilities:

Equity

Ordinary Shares 100,000 80,000

Retained Earnings 95,000 28,000

195,000 108,000

Non-Current Liabilities

10% loan stock 75,000

12% loan stock 50,000

Current Liabilities

Payables 47,000 16,000

Taxation 15,000 10,000

Current Account with Palmat 12,000

62,000 38000

Total Equity and liabilities 332,000 196,000

Palmat has owned all the ordinary shares and 40% of the loan stock of Salmat sinceincorporation. Also, the difference on the current account arises because of goods in transit.

Required

Prepare the consolidated Statement of financial position of Palmat


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Reading List

1.



2.

ACCA BBP Study Pack (2012). Financial Reporting (International and UK Stream).

6th Edition. London: BPP Learning Media.

3. ACCA BBP Study Pack (2009). Financial Reporting. Berkshire: Kaplan Publishing

UK

Week 3: Treatment of Non-Controlling Interests

Objective: At the end of this topic, students should be able understand the concept non-

controlling interest, know when it arises and account for it appropriately in the group account.

Study question

The following statement have been prepared at 31st December 2010

PETERNAL

PLC

SANTANA

LTD

N'000 N'000

Non- Current AssetProperty, Plant & Equipment 85,000 18,000

Investment

Shares in Santana Ltd 60,000

145,000

Current Assets 160,000 84,000

305,000 102,000Financed by Equity and

Liabilities:

Equity

Ordinary Shares 65,000 20,000Shares Premium 35,000 10,000

Retained Earnings 70,000 25,000

170,000 55,000

Current Liabilities 135,000 47,000

305,000 102,000

Paternal Plc acquired its 80% holding in Santana Ltd on 1st January 2010, when Santana

Ltd’s retained earnings stood at N20 million. On this date, the fair value of 20% non

controlling interest in Santana wasN12.5 million.


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There has been no impairment of goodwill since acquisition. The Paternal Group uses the fair

value method to value the non-controlling interest.

Required:Prepare the consolidated Statement of financial position of Paternal Group as at 31 st

December 2010.

Reading List

1.



2.




UK

Week 4 &5: Treatment of Goodwill Arising on Consolidation

Objective: At the end of the lectures, students should be able account for goodwill, using

different methods: proportion of the net asset method, and the fair value method.

Description

Calculation of goodwill when there are acquisition profits, valuing goodwill when there is a

non-controlling interest valued at fair value; impairment of goodwill, gain on bargain

purchase, forms of considerations: contingent consideration, deferred consideration; share

exchange, expenses and issue cost; consolidation adjustments

Study questions

1. Pat acquired the ordinary shares of Sat on 31st March 2010 when the dract statement

of financial position of each coma were as follows

Pat

Asset N

Non-current assets

Investment in 50,000 shares of Sat at cost 80,000

Current Asset 40,000


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Total assets 120,000

Equity and liabilities

Equity

Ordinary shares 75,000Retained earnings 45,000

Total equity and liabilities 120,000

Sat

Current assets 60,000

Equity 50000

50,000 ordinary shares of N1 each 10,000

Retained earnings 60,000

Required:

Prepare the consolidated statement of financial position

Reading List

1. Elliot, B. and Elliot J. (2006). Financial Accounting, Reporting and Analysis. 2nd





UK

Week 6: Intra-group trading and other transactions

Objective: On the completion of this topic, students are expected to understand accounting

for intra-group transaction when preparing consolidated statement of financial position

Description


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Accounting for unrealised profits; accounting for non-controlling interests in unrealised intra-

group profits; intra-group sales of non-current assets.

Study questions

Hazelnut acquired 80% of the share capital of Peppermint two years ago, when the

reserves of Peppermint stood at N125 million. Hazelnut paid initial cash consideration of

N1billion. Additionally, Hazelnut issued 200 million shares with a nominal value of N1

and a current market value of N1.80. It was also agreed that Hazelnut would pay a further

N500 million in three years time. The current interest rate is 10%, and the share and

deferred considerations are yet to be recorded.

Below is the statement of financial position of Hazelnut and Peppermint as at

31/12/2004.

HazelnutPeppermint

N’million N’million

Investment in Peppermint at cost1,000

Non current asset 5,5001,500

Current assets

Inventory 550100

Receivables 400200

Cash 20050

7,6501,850

Financed by equity and

liability

Share capital 2,000 500

Retained earnings 1,400300

3,400800

Non-current liability 3,000400

Current liability 1,250650

7,6501,850


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At acquisition, the fair value of the Peppermint’s non-current assets exceeded their book

value by N200 million. They had the remaining useful life of five years remaining at this

date. The consolidated goodwill has been impaired by one-fifth of its value.

The Hazelnut group values its goodwill using fair value method. At the date of acquisition the

fair value of the 20% non-controlling interest was N380 million.

Required:

Prepare the consolidated statement of financial position as at 31 st December, 2004

Reading List






UK

Week 7: Acquisition of a Subsidiary during its Accounting Period

Objective: On the completion of this topic, students are expected to understand accounting

for consolidation when acquisition takes place amid the financial period of the subsidiary.

Description

Consolidation while taking note of pre-acquisition profits, assumption of even accrual of

profit, relaxation of the assumption

Study question

Pat Co acquired 80% of the ordinary shares of Sat Co on April 2005. On 31st December 2004,

Sat Co accounts showed a premium account of N4million and retained earnings of

N15million. The statements of financial position of the two companies at 31st December,

2004 are set out below. Neither of the two companies has paid dividends during the year.

Non-controlling Interest should be valued at full fair value. The market price of the


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subsidiary’s shares was N2.50 prior to acquisition by the parent. There has been no

impairment of goodwill

Pat Sat

Asset N’000 N’000

16 million ordinary shares of 50 kobo each in Sat 50,000

Property, Plant and Equipment 32,000 30,000

82,000

Current assets 85,000 43,000

167,000 73,000

Financed by equity and liability

Equity

Ordinary shares of N1 each 100,000

Ordinary shares of 50 kobo each 10,000

Share premium account 7,000 4,000

Retained Earnings 40000 39000

147,000 53,000

Current liabilities 20,000 20,000

Total equity and liabilities 167,000 73,000

Required:

Prepare the consolidated statement of Financial Position of Pat as at 31 st December, 2005.

Reading List





3.

ACCA BBP Study Pack (2009). Financial Reporting. Berkshire: Kaplan Publishing

UK


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Week 8: Fair Values in Acquisition Accounting

Objective: On the completion of this topic, students are expected to account for various

aspects of consolidation in terms of their fair values.

Description

Goodwill, fair value adjustments, restructuring and future losses, intangible assets, contingent

liabilities, cost of business combination

Reading List



2.




UK

Week 9 & 10: Preparation of Consolidated Statement of Profit and loss & OtherComprehensive Income

Objective: On the completion of the lectures, students should be able to prepare consolidated

statement of financial performance

Description

Consolidation procedures; intra-group trading; intra-group dividends; pre-acquisition profits

Study Questions

Given below are the income statements for the Herman Berger Plc and its subsidiary, QCC

Constructions, for the year ended 31 December, 2005.

Herman Berger QCC

N' million N' million

Revenue 3,200 2,560

Cost of sales (2,200) (1,480)

Gross profit 1,000 1,080


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Distributive costs (160) (120)

Administrative expenses (400) (80)

440 880

investment income 160 -

600 880

Taxation (400) (480)

Profit for the year 200 400

Additional information

Herman Berger Plc paid N1.5 billion on 31st December 2001 for 80% of QCC’s

ordinary shares capital of N800 million. The balance of the QCC’s earnings was N600

million at that time.

Goodwill impairment at 1st January 2005 amounted to N152 million. A further

impairment of N38 million was found to be necessary at the year end. Impairments

are included within administrative charges.

Herman Berger made sales to QCC, at a selling price of N600 million during the year.

Not all sales had been sold externally by the year end. The profit element included in

QCC Construction’s closing inventory was N30 million.

The figure for investment income in Herman Berger’s income statement comprises

the parent share of the subsidiary‘s total dividend for the year.

Herman Berger values the non controlling interest using the proportion of the net

asset method.

Required:

Prepare a consolidated income statement for the year ended 31 st December 2005 for the

Herman Berger Group.

Reading List



2.




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UK

Week 11 & 12: Accounting for Associates

Objective: On the completion of the lectures, students should be able to prepare consolidated

statement of financial position and performance when the group structure involve (an)

associate(s)

Description

Definitions; separate financial statements of the investor; the equity method and application

to preparation of statement of financial position and performance

Study Questions

1.

Cola Coca Plc acquired 80% of Sipep Ltd on 1st December 2004 paying N4.25 in cash

per share. At this date the balance on Sipep Ltd’s retained earnings were N870

million. On 1st of March 2007 Cola Coca Plc acquired 30% of Sevenup Incorporated’s

ordinary shares. The consideration was settled by share exchange of 4 new sharesacquired in Sevenup Incorporated. The share price of Cola Coca Plc at the date of

acquisition was N5.00. Cola Coca Plc has not yet recorded in its books.

The statements of financial position of the three companies as at 30th November 2007 are as

follows:

Cola Coca Sipep Sevenup

N'million N'million N'million

Non-current asset

Property 1,300 850 900

Plant and Equipment 450 210 150

Investment 1,825

Current Asset

Inventory 550 230 200

Receivable 300 340 400

Cash 120 50 140

4,545 1,680 1790


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Financed by Equity and

Liabilities

Share capital (N1) 1,800 500 250

Share premium 250 80

Retained Earnings 1,145 400 1200

3,195 980 1450

Non-Current liabilities

10% loan notes 500 300

Current liabilies

Trade payables 520 330 250

Income tax 330 70 90

4,545 1,680 1790

Additional Information

As at 1st December 2004, plant in the books of Sipep was determined to have a fair

value of N50 million in excess of its carrying value. The plant had a remaining life of

5 years at this time.

During the year, Sipep sold goods to Cola Coca for N400 million at a mark-up of

25%. Cola Coca had a quarter of these goods still in inventory at the year end.

In September, 2007 Sevenup sold goods to Cola Coca for N150 million. These goods

had a cost of N100 million. Cola Coca had N90 million (at cost to Cola Coca) in

inventory at the year end

As a result of the above transactions, Cola Coca’s books showed N50 million and

N20 million as owning tp Sipep and Sevenup respectively at the year end. These

balances agreed with the amount recorded in Sipep and Sevenup’s books.

Non-controlling interests are measured using the proportion of the net asset method.

Goodwill is to be impaired by 30% at the reporting date. An impairment review found

the investment in the associate was to be impaired by N15 million at the year end.

Sevenup profit after tax for the year is N600 million.

Required:

Prepare a consolidate statement of financial position as at 30th November, 2007


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2. On 1 April 2009 Pandar purchased 80% of the equity shares in Salva. The acquisition

was through a share exchange of three shares in Pandar for every five shares in Salva.

The market prices of Pandar’s and Salva’s shares at 1 April 2009 were N6 per share

and N3.20 respectively.

On the same date Pandar acquired 40% of the equity shares in Ambra paying N2 per share.

The summarised income statements for the three companies for the year ended 30 September

2009 are:

Pandar Salva Ambra

N' 000 N' 000 N' 000Revenue 210,000 150,000 50,000

Cost of sales (126,000) (100,000) (40,000)

Gross profit 84,000 50,000 10,000

Distribution costs (11,200) (7,000) (5,000)

Administrative expenses (18,300) (9,000) (11,000)

investment income (interest and

dividends) 9,500

Finance costs (1,800) (3,000) nil

Profit befroe tax 62,200 31,000 (6,000)

Income tax (expense) relief (15,000) (10,000) 1,000Profit (loss) for the year 47,200 21,000 (5,000)

The following information is relevant:

Panda Salva Ambra

Equity shares of N1 each 200,000 120,000 40,000

Share premium 300,000 Nil nil

Retaied earnings 1st October

2008 40,000 152,000 15,000

Profit (loss) for the year ended 30th September

2009 47,000 21,000 (5,000)

Dividends paid (26th September 2009) nil (8,000) nil

The following information is relevant:

The fair values of the net assets of Salva at the date of acquisition were equal to their

carrying amounts with the exception of an item of plant which had a carrying amount

of N12 million and a fair value of N17 million. This plant had a remaining life of five

years (straight-line depreciation) at the date of acquisition of Salva. All depreciation

is charged to cost of sales. In addition Salva owns the registration of a popular


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internet domain name. The registration, which had a negligible cost, has a five year

remaining life (at the date of acquisition); however, it is renewable indefinitely at a

nominal cost. At the date of acquisition the domain name was valued by a specialist

company at N20 million.The fair values of the plant and the domain name have not

been reflected in Salva’s financial statements. No fair value adjustments were

required on the acquisition of the investment in Ambra.

Immediately after its acquisition of Salva, Pandar invested N50 million in an 8% loan

note from Salva. All interest accruing to 30 September 2009 had been accounted for

by both companies. Salva also has other loans in issue at 30 September 2009.

Pandar has credited the whole of the dividend it received from Salva to investment

income.

After the acquisition, Pandar sold goods to Salva for N15 million on which Pandar

made a gross profit of 20%. Salva had one third of these goods still in its inventory at

30 September 2009. There are no intra-group current account balances at 30

September 2009.

The non-controlling interest in Salva is to be valued at its (full) fair value at the date

of acquisition. For this purpose Salva’s share price at that date can be taken to be

indicative of the fair value of the shareholding of the non-controlling interest.

The goodwill of Salva has not suffered any impairment; however, due to its losses,

the value of Pandar’s investment in Ambra has been impaired by N3 million at 30

September 2009.

All items in the above income statements are deemed to accrue evenly over the year

unless otherwise indicated.

Required:

Prepare the consolidated income statement for the Pandar Group for the year ended 30

September 2009.

Reading List






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UK

Week 13 & 14: Merger, Acquisition and Dissolution: Partnership Firms

Objective: At the end of these lectures to account for combination of merging partnership

firms as well as their wholesome and piecemeal dissolution.

Description:

Amalgamation of firms, dissolution of firms: wholesome and piecemeal, distribution to

partners.

Study Questions

1. Under what circumstances can a court decree a dissolution?

2. What is the priority of payment/claims when the firms’ resources are not sufficient to

pay off the liabilities of the firm?

3. The balance representing profit and loss on realization is shared using what ratio and

transferred to what account?

4.

How are assets taken over by partners treated?

5. How are liabilities taken over by partners treated?

6. Differentiate between wholesome and piecemeal dissolution?

7.

How are assets taken over by partners treated?

8. What ratios are used to distribute losses on partnership dissolution?

9. What ratio is being used to write off unrealized assets that are regarded as worthless

at each stage of the realization?

10.

What rule is applied when a partner becomes insolvent in the course of adjusting

profits or losses?

11.

When a partnership is to be dissolved, the current account (if any) is merged with

which account?


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Reading list

1.

Thomas and Ward (2012): Introduction to Financial Accounting. Seventh edition.

Berkshire: McGraw Hill

2.

Wood and Sangster (2008): Business Accounting 1. Eleventh edition. Edinburg Gate:

Prentice Hall

Week 15: Revision

Objective: This week is specifically left for revision of all topics and sub-topics covered

during the teaching of the course. Students are required to ask any question related to the

course while the lecturer will ask the students questions to determine the level of

understanding of the course. Moreover, the revision is expected to refresh the students’

memory and understanding of cogent issues and concepts they are expected to master for

practical use and examination purposes.


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Revision Questions

1


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2


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Documents

ACC Course