In: Accounting
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:
Posh plc trades with Space Ltd and during the year Posh plc sold goods for $3,000,000 to Space Ltd.
Posh plc sells to Space Ltd at cost plus 25%. Half of these goods remain unsold in Space Ltd.
Posh plc has recognized a dividend declared and paid by Space Ltd of $600,000 during the year.
Included in the operating expenses of Space Ltd is an amount of $200,000 management fees charged by Posh plc for the services provided.
Posh plc charges Space Ltd interest of $100,000 for the advances given to Space Ltd.
Investment in Aero Ltd is impaired by $50,000
REQUIRED:
Prepare the consolidated statement of comprehensive income for the year ended 31 March 2020. (Show all workings)
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)
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: