TEST YOUR KNOWLEDGE

Test your knowledge of the requirements for preparing consolidated and separate financial statements in accordance with the IFRS for SMEs by answering the questions below.

Once you have completed the test check your answers against those set out below this test.

Assume all amounts are material.

Mark the box next to the most correct statement.

Question 1

A subsidiary is:

(a) an entity over which an investor has significant influence.

(b) an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (known as a parent).

(d) an entity that has one or more associates.

Question 2

Entity A owns 30 per cent of voting interests in Entity Z and owns convertible debt issued by Entity Z such that, if Entity A chose to convert now, it would have a 60 per cent voting interest in Entity Z.

How should Entity A account for its investment in Entity Z in its primary financial statements?

(a) consolidate Entity Z.

(b) account for the investment in Entity Z using the equity method.

Question 3

The facts are the same as those in Question 2. Entity A prepares separate financial statements in accordance with the IFRS for SMEs. How should Entity A account for its investment in Entity Z in its separate financial statements?

(a) at cost less accumulated impairment.

(b) at fair value with changes in fair value recognised in profit or loss.

Question 4

Entity A, a manufacturing company, acquired a controlling interest in a rugby club.

Management of Entity A decided to exclude the rugby club from consolidation on the grounds that its activities are dissimilar from those of Entity A’s normal operations. How should Entity A account for its investment in the rugby club in its primary financial statements?

(a) Because the activities of the rugby club are dissimilar from the activities of Entity A (manufacturing), it will be accounted for using the equity method.

(b) Because the activities of the rugby club are dissimilar from the activities of Entity A (manufacturing), it will be accounted for at cost less accumulated impairment.

(c) The rugby club must be consolidated. There is no exception from consolidation simply because the investor and the subsidiary partake in dissimilar activities.

Question 5

Which of the following is not a valid condition that provides an exemption from the presentation of consolidated financial statements?

(a) The parent is itself a subsidiary and its ultimate parent (or any intermediate parent) produces consolidated general purpose financial statements that comply with full IFRSs or with the IFRS for SMEs.

(b) The parent has no subsidiaries other than one that it acquired with the intention of selling or disposing of it within one year.

(c) The parent is itself a subsidiary and its ultimate parent (or any intermediate parent) produces consolidated general purpose financial statements that comply with the domestic GAAP applicable in the country in which that parent operates.

Question 6

Entity B is a venture capital organisation. Entity B holds 70 per cent of the ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. In the absence of further information, Entity B must, in its primary financial statements:

(a) Consolidate Entity C.

(b) Account for its investment in Entity C at its fair value with changes in fair value recognised in profit or loss.

(c) Account for its investment in Entity C at its fair value with changes in fair value recognised in other comprehensive income.

(d) Account for its investment in Entity C at cost less impairment.

(e) Choose any of the above. If Entity B decides not to consolidate Entity C (ie option (a)), the reasons for this decision must be disclosed.

Question 7

Entity A owns a 60 per cent voting interest in Entity B. Entity B owns a 70 per cent voting interest in Entity C. How should Entity A account for its investment in Entity C in its consolidated financial statements?

(a) Consolidate Entity C.

(b) Account for its investment in Entity C using the equity method.

Question 8

The facts are the same as those in Question 8. Determine the appropriate percentage for the attribution of post-acquisition increases in Entity C’s equity to Entity A.

(a) 70 per cent.

(b) 60 per cent.

Question 9

Entity A owns a 60 per cent voting interest in Entity B and a 10 per cent voting interest in Entity C. Entity B owns a 30 per cent voting interest in Entity C. How should Entity A account for its investment in Entity C in its consolidated financial statements?

(a) As a subsidiary, because Entity A controls Entity C.

(b) As an associate.

Question 10

Entity A owns a 60 per cent voting interest in Entity B and a 10 per cent voting interest in Entity C. Entity B owns a 50 per cent voting interest in Entity C. How should Entity A account for its investment in Entity C in its consolidated financial statements?

(a) As a subsidiary, because Entity A controls Entity C.

(b) As an associate.

Question 11

Entity A owns 100 per cent voting interest in ordinary shares that carry voting rights at a general meeting of shareholders of Entity C. Entity C sold inventory to Entity A (at a markup of 25 per cent on cost) for CU125. Entity A is still holding the inventory at the end of its accounting period. At what amount should the cost of the inventory be measured in the group’s consolidated financial statements?

(a) CU125 (b) CU100 (c) CU75 (d) CU150

Question 12

In the separate financial statements of a parent entity (if presented) investments in subsidiaries are accounted for:

(a) At cost less impairment.

(b) At fair value with changes in fair value recognised in other comprehensive income.

(d) At cost less impairment, or at fair value with changes in fair value recognised in other comprehensive income (an accounting choice).

(e) At cost less impairment, or at fair value with changes in fair value recognised in profit or loss (an accounting choice).

Question 13

Answering this question requires knowledge of paragraph 19.22 (of Section 19

Business Combinations and Goodwill). On 1 January 20X1 Entity P acquired a 100 per cent voting interest of Entity S for CU100,000. At the acquisition date, Entity S had identifiable assets at a fair value of CU250,000, liabilities at a fair value of CU120,000 and contingent liabilities at a fair value of CU50,000. At 1 January 20X1 Entity P must record an amount of goodwill in its consolidated financial statements of:

(a) CU30,000.

(b) CU20,000.

(d) CU─80,000, ie gain from a bargain purchase.

Question 14

Answering this question requires knowledge of paragraph 19.22. On 1 January 20X1 Entity R acquired a 80 per cent voting interest of Entity T for CU280,000. At the acquisition date, Entity T had identifiable assets at a fair value of CU500,000, liabilities at a fair value of CU150,000 and contingent liabilities at a fair value of CU100,000. At 1 January 20X1 Entity R should record an amount of goodwill in its consolidated financial statements of:

(a) CU30,000.

(b) CU─30,000, ie gain from a bargain purchase.

(d) CU─20,000, ie gain from a bargain purchase.

Question 15

Presentation of separate financial statements is:

(a) required for the parent by the IFRS for SMEs.

(b) required for the individual subsidiary by the IFRS for SMEs.

(c) not required for the parent entity or for individual subsidiaries by the IFRS for SMEs.

Answers

Q1 (b) See paragraph 9.4 and the Glossary.

Q2 (a) See paragraph 9.6. Entity Z is a subsidiary of Entity A.

Q3 (c) See paragraph 9.26

Q4 (c) See paragraph 9.8. A subsidiary is not excluded from consolidation simply because its activities are dissimilar from those of other entities within the group.

Q5 (c) See paragraphs 9.3. The exemption applies only if the parent or ultimate parent prepares consolidated general purpose financial statements that conform with full IFRSs or the IFRS for SMEs; it does not apply if they are prepared in terms of a domestic GAAP.

Q6 (a) See paragraph 9.7. A subsidiary is not excluded from consolidation simply because the investor is a venture capital organisation or similar entity.

Q7 (a) Entity A can, through its control of Entity B, control Entity C.

Q8 (c) Although, through its control of Entity B, Entity A can control how Entity B, for example, votes on its 70 per cent shareholding in Entity C, Entity A’s proportion of Entity C’s post-acquisition profits is less than 70 per cent—this is because Entity A does not own all of Entity B. If Entity C made a distribution of CU100, only CU70 of it would be received by Entity B and if Entity B distributed this to its owners Entity A would receive 60 per cent of it, ie, CU42.

Q9 (c) Entity A would have control over 40 per cent of the votes in Entity C—10 per cent through its holding and 30 per cent through its control of Entity B. Assuming that Entity A does not control Entity C, despite having less than half the voting power of Entity C, then Entity C is likely to be an associate of Entity A—but only if Entity A has significant influence over Entity C.

Q10 (a) Entity A controls, directly or indirectly, 60 per cent of the voting interest in

Entity C. It controls 10 per cent directly and, through its control of Entity B, it controls another 50 per cent.

Q11 (b) See paragraph 9.15. Profit resulting from intragroup transactions that is recognised in the carrying amount of inventory is eliminated in full. The cost to Entity C of the inventory was CU100.

Q12 (e) See paragraph 9.26.

Q13 (b) Goodwill is CU20,000. Calculation: CU100,000 (cost of the combination) less

CU80,000 (fair value of the net assets of the acquiree). The fair value of the net assets is identifiable assets CU250,000 less liabilities CU120,000 less contingent liabilities CU50,000.

Q14 (c) Goodwill is CU80,000. Calculation: CU280,000 (cost of the combination) less 80 per cent of CU250,000 (fair value of the net assets of the acquiree). The fair value of the net assets are identifiable assets CU500,000 less liabilities CU150,000 less contingent liabilities CU100,000.

Q15 (c) See paragraph 9.24.

In document Module 9 Consolidated and Separate Financial Statements (Page 89-94)