Question

In: Accounting

Posh plc, a public limited company is expanding the group business.

Posh plc, a public limited company is expanding the group business. On 1 April 2019, Posh plc acquired 80% interest in Space Ltd and 30% interest in Aero Ltd. Posh plc is represented on Aero Ltd’s board of directors. Below are the statement of comprehensive income of Posh plc, Space Ltd and Aero Ltd for the year ended 31 March 2020.


Posh plc

($’000)

Space Ltd

($’000)

Aero Ltd

($’000)

Revenue

50,000

20,000

10,000

Cost of sales

(35,000)

(13,000)

(6,800)

Gross Profit

15,000

7,000

3,200

Operating expenses

(7,600)

(2,500)

(1,700)

Operating profit

7,400

4,500

1,500

Management services to Space Sdn Bhd

200

-

-

Dividend from Space Bhd

600

-

-

Finance Income

100

-

-

Finance costs

-

(120)

(10)

Profit before tax

8,300

4,380

1,490

Taxation

(2,500)

(1,300)

(450)

Profit after tax

5,800

3,080

1,040

Additional information:

  1. Posh plc trades with Space Ltd and during the year Posh plc sold goods for $3,000,000 to Space Ltd.

  2. Posh plc sells to Space Ltd at cost plus 25%. Half of these goods remain unsold in Space Ltd.

  3. Posh plc has recognized a dividend declared and paid by Space Ltd of $600,000 during the year.

  4. Included in the operating expenses of Space Ltd is an amount of $200,000 management fees charged by Posh plc for the services provided.

  5. Posh plc charges Space Ltd interest of $100,000 for the advances given to Space Ltd.

  6. Investment in Aero Ltd is impaired by $50,000


REQUIRED:

  1. Prepare the consolidated statement of comprehensive income for the year ended 31 March 2020. (Show all workings)                                                                                            

  1. marks)

(b)       After the above statement presented to the directors, the operation director is questioning as to how to derive at the Group Revenue and why the Revenue of Aero Ltd has not been included as part of the Group Revenue. It is Posh plc’s target to increase their revenue and profit by more than 50% after the business expansion. As a group accountant, give your explanation with justification to the director by referring to the relevant accounting standards.

                                                                                                                             (10 marks)

    (Total: 20 marks)

Solutions

Expert Solution

Posh own 80% of Space Ltd hence it is Space is subsidiary being more than 50% share holding. But Aero's only 30% shares are held by Posh and no other specific info of reveleaing Posh's control over Aero we will not consider Aero as subsidiary of Posh. Hence consolidation is only of Posh & Space.

($000)

Posh PLC Space Ltd. Consolildated Remarks
Revenue 50000 20000 67000 3000 eliminated being sale by Posh to Space
Cost of sales 35000 13000 45000.3

35000+13000+0.300-3000

3000 sale at cost 2400 profit 0.600 half of it lies in stock i.e 0.300 tobe added in cost of sales

Gross Profit 15000 7000 21999.7
Operating Expenses 7600 2500 9900 200 service charges charged by Posh to Spacer eliminated
Operating profit 7400 4500 12099.7
Dividend 600 0 0 Dividend from Space to Posh eliminated
Finance Income 100 0 100
Finance cost 0 120 20 Int. charged by Posh to Space 100 eliminated
PBIT 8300 4380 12179.7
Tax 2500 1300 3795.92 2500/8300X12179.7
PAT 5800 3080 8383.78

Ans to Q.b]

IAS 27 defines consolidated financial statements as ‘the financial statements of a group presented as those of a single economic entity.’
A group is made up of a parent and its subsidiary.

It is assumed that control exists if the parent company has more than 50% of the ordinary (equity) shares – ie giving them more than 50% of the voting power.

However, there are examples where a holding of less than 50% of the ordinary shares can still lead to control existing. IFRS 10 states control arises when the investor (the parent) has:

i. power over the investee (the subsidiary)

ii. exposure, or rights, to variable returns from its involvement with the investee, and

iii. the ability to use its power over the investee to affect the amount of the investors returns.

Power may be evidenced by all or some of the following:

  • the power over more than 50% of the voting rights by virtue of agreement with other investors
  • the power to govern the financial and operating policies of the entity under statute or an agreement
  • the power to appoint or remove the majority of the members of the board of directors, or
  • the power to cast the majority of the votes at meetings of the board of director
  • As there is no such info available we cannot treat Aero Ltd as subsidiary of Posh and hence we cannot take into consideration revenue of Aero Ltd. in consolidation .

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