Question Tag: Intragroup Transactions

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  • 20 Marks

FR – March 2024 – L2 – Q1 – Group Financial Statements and Consolidation

Consolidation of Chicha Plc and Wale Plc financial statements, involving adjustments for intra-group transactions, non-controlling interest, and goodwill.

On 1 July 2022, Chicha Plc acquired 80% of the ordinary shares of Wale Plc at a cost of GH¢2,570,000. On the same date, it also acquired 50% of Wale Plc’s 10% loan notes at par. The summarised draft financial statements of both companies are:

Statements of Profit or Loss for the year ended 31 March 2023
Chicha Plc Wale Plc
Sales revenue 15,000 6,000
Cost of sales (10,500) (5,000)
Gross profit 4,500 1,000
Operating expenses (1,500) (50)
Loan interest received/(paid) 18.75 (50)
Profit before tax 3,018.75 900
Income tax expense (750) (150)
Profit for the year 2,268.75 750
Statements of Financial Position as at 31 March 2023
Chicha Plc Wale Plc
Non-current assets
Property, plant and equipment 4,830 2,000
Investments 2,820 –
Total Non-current assets 7,650 2,000
Current assets 3,750 2,000
Total assets 11,400 4,000
Equity and liabilities
Equity
Stated capital 2,500 500
Retained earnings 6,400 2,100
Total equity 8,900 2,600
Non-current liabilities
10% loan notes – 500
Current liabilities 2,500 900
Total equity and liabilities 11,400 4,000

The following information is relevant:

  1. The fair values of Wale Plc’s assets were equal to their book values except for its plant, which had a fair value of GH¢800,000 more than its book value at the date of acquisition. The remaining life of all of Wale Plc’s plant at the acquisition date was four years. Depreciation is on a straight-line basis and charged to cost of sales. Wale Plc has not adjusted the value of its plant as a result of the fair valuation of the assets.
  2. In the post-acquisition period, Chicha Plc sold goods to Wale Plc for GH¢3,000,000. These goods had cost Chicha Plc GH¢2,250,000. During the year, Wale Plc had sold GH¢2,500,000 of these goods for GH¢3,750,000.
  3. The current accounts of the two companies were reconciled at the year-end with Wale Plc owing Chicha Plc GH¢187,500.
  4. The goodwill was reviewed for impairment at the end of the reporting period and had suffered an impairment loss of GH¢75,000, which is to be treated as an operating expense.
  5. Chicha Plc’s and Wale Plc’s retained earnings as at 1 April 2022 were GH¢4,131,250 and GH¢1,350,000, respectively. No dividends were paid or declared by either entity during the year.
  6. It is the group policy to value the non-controlling interest at acquisition at fair value. The directors valued the non-controlling interest at GH¢625,000 at the date of acquisition.
  7. Revenues and profits should be deemed to accrue evenly throughout the year.

Required:
Prepare for Chicha Plc a Consolidated Statement of Profit or Loss for the year ended 31 March 2023 and Statement of Financial Position as at 31 March 2023.

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  • 17 Marks

FR – Nov 2016 – L2 – Q1a – Group Financial Statements and Consolidation

Prepare the consolidated statement of financial position for Bantama Ltd Group as at 30 September 2016, with provided details of acquisition and adjustments.

Bantama Ltd acquired six million of Abrepo Ltd’s ordinary shares on 1 April 2016 for an agreed consideration of GH¢25 million. The consideration was settled by a share exchange of five new shares in Bantama Ltd for every three shares acquired in Abrepo Ltd, and a cash payment of GH¢5 million. The cash transaction has been recorded, but the share exchange has not been recorded.

The draft statements of financial position of the two companies as at 30 September 2016 are:

Additional information:

  1. The fair value of Abrepo Ltd’s land at the date of acquisition was GH¢4 million in excess of its carrying value. Abrepo Ltd’s financial statements contain a note of a contingent asset for an insurance claim of GH¢800,000 relating to some inventory that was damaged by a flood on 5 March 2016. The insurance company is disputing the claim. Bantama Ltd has taken legal advice on the claim and believes that it is highly likely that the insurance company will settle it in full in the near future.
  2. At the date of acquisition, Bantama Ltd sold an item of plant that had cost GH¢2 million to Abrepo Ltd for GH¢2.4 million. Bantama Ltd has charged depreciation of GH¢240,000 on this plant since it was acquired.
  3. Bantama Ltd’s current account debit balance of GH¢820,000 with Abrepo Ltd does not agree with the corresponding balance in Abrepo Ltd’s books. Investigations revealed that on 26 September 2016, Bantama Ltd charged Abrepo Ltd GH¢200,000 for its share of central administration costs. Abrepo Ltd has not yet recorded this invoice. Intercompany current accounts are included in accounts receivable or payable as appropriate.
  4. Abrepo Ltd paid a dividend of GH¢400,000 on 30 September 2016. The profit and dividend of Abrepo Ltd are deemed to accrue evenly throughout the year. Abrepo Ltd’s retained earnings of GH¢8.8 million for the year to 30 September 2016 as shown in its statement of financial position are after the deduction of the dividend. Bantama Ltd’s policy is to credit to income only those dividends received from post-acquisition profits. Bantama Ltd has not yet accounted for the dividend from Abrepo Ltd. The cheque has been received but not banked.
  5. At the year-end, an impairment review was carried out on the consolidated goodwill arising from the acquisition of Abrepo Ltd, and an impairment loss of GH¢595,000 was identified. No adjustment has yet been made for this. It is group policy to value non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary’s identifiable net assets.

Required:

Prepare the consolidated statement of financial position of Bantama Ltd group as at 30 September 2016.

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  • 10 Marks

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

Edi Ltd, based in Accra, Ghana, is a multinational company with two wholly-owned subsidiaries: Gil Plc based in Nigeria and Zep Ltd based in South Africa. Until recently, the Edi group has been doing well, returning a stable level of dividends to its shareholders. The financial performance of the Edi group has dipped in the past two years. In the last quarter of last year, the directors approved the establishment of a central treasury department based at the group’s headquarters in Accra. It is believed that the central treasury function will help boost effectiveness and efficiency in the group’s liquidity management, currency risk management, dividend remittances, and borrowing.

Intragroup Currency Transfers:
There are a lot of intragroup credit transactions that are often settled independently between the parties involved. This year, the treasury department has been tasked to manage the settlement of intragroup indebtedness through netting to reduce the volume of currency transactions. It has been agreed that all settlements will be made in the Ghanaian cedi at the prevailing spot mid-market exchange rate.

Below is a list of intragroup indebtedness at the end of the first quarter to be settled today:

Required:

i) Suppose the currency netting is implemented. Calculate the intragroup company currency transfers that will be required for settlement by each member of the Edi group.
(6 marks)

ii) Suppose the treasury department is recommending the use of currency futures to hedge net currency exposures. Discuss the advantages and disadvantages of the Edi group using currency options instead of currency futures in hedging net currency exposures.

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  • 20 Marks

CR – Mar 2024 – L3 – Q1 – Consolidated Financial Statements

This question requires preparing the consolidated statement of financial position for Sankom Group, including adjustments for goodwill impairment and fair value adjustments.

Sankom Ltd (Sankom) in the last three years acquired Makpa and Biiri. The statement of financial position for the three companies as at 31 December 2023 is as follows:

Additional Information:

i) The following information relates to the acquisition of Makpa and Biiri:

  • Makpa: Date of acquisition: 1 January 2021, Shareholding percentage: 80%, Goodwill arising from the acquisition: GH¢44,800,000
  • Biiri: Date of acquisition: 30 June 2022, Shareholding percentage: 60%, Goodwill arising from the acquisition: GH¢38,400,000

ii) An upward fair value adjustment of GH¢4,400,000 was required for Makpa’s production machinery with a useful life of five years.

iii) Makpa sold goods to Biiri worth GH¢2,240,000, with a margin of 20%, and 30% of the goods were unsold by Biiri as of 31 December 2023.

iv) No impairment losses were previously recognized, but impairment reviews at 31 December 2023 indicated the recoverable amounts of the net assets of Makpa and Biiri were GH¢133,244,800 and GH¢116,544,000, respectively.

v) Sankom rented a building to Makpa at an annual rental of GH¢2,000,000, which Sankom accounted for as investment property, recognizing a fair value gain of GH¢1,200,000.

Required:
Prepare the consolidated statement of financial position for Sankom Group as at 31 December 2023.

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  • 20 Marks

FR – March 2024 – L2 – Q1 – Group Financial Statements and Consolidation

Consolidation of Chicha Plc and Wale Plc financial statements, involving adjustments for intra-group transactions, non-controlling interest, and goodwill.

On 1 July 2022, Chicha Plc acquired 80% of the ordinary shares of Wale Plc at a cost of GH¢2,570,000. On the same date, it also acquired 50% of Wale Plc’s 10% loan notes at par. The summarised draft financial statements of both companies are:

Statements of Profit or Loss for the year ended 31 March 2023
Chicha Plc Wale Plc
Sales revenue 15,000 6,000
Cost of sales (10,500) (5,000)
Gross profit 4,500 1,000
Operating expenses (1,500) (50)
Loan interest received/(paid) 18.75 (50)
Profit before tax 3,018.75 900
Income tax expense (750) (150)
Profit for the year 2,268.75 750
Statements of Financial Position as at 31 March 2023
Chicha Plc Wale Plc
Non-current assets
Property, plant and equipment 4,830 2,000
Investments 2,820 –
Total Non-current assets 7,650 2,000
Current assets 3,750 2,000
Total assets 11,400 4,000
Equity and liabilities
Equity
Stated capital 2,500 500
Retained earnings 6,400 2,100
Total equity 8,900 2,600
Non-current liabilities
10% loan notes – 500
Current liabilities 2,500 900
Total equity and liabilities 11,400 4,000

The following information is relevant:

  1. The fair values of Wale Plc’s assets were equal to their book values except for its plant, which had a fair value of GH¢800,000 more than its book value at the date of acquisition. The remaining life of all of Wale Plc’s plant at the acquisition date was four years. Depreciation is on a straight-line basis and charged to cost of sales. Wale Plc has not adjusted the value of its plant as a result of the fair valuation of the assets.
  2. In the post-acquisition period, Chicha Plc sold goods to Wale Plc for GH¢3,000,000. These goods had cost Chicha Plc GH¢2,250,000. During the year, Wale Plc had sold GH¢2,500,000 of these goods for GH¢3,750,000.
  3. The current accounts of the two companies were reconciled at the year-end with Wale Plc owing Chicha Plc GH¢187,500.
  4. The goodwill was reviewed for impairment at the end of the reporting period and had suffered an impairment loss of GH¢75,000, which is to be treated as an operating expense.
  5. Chicha Plc’s and Wale Plc’s retained earnings as at 1 April 2022 were GH¢4,131,250 and GH¢1,350,000, respectively. No dividends were paid or declared by either entity during the year.
  6. It is the group policy to value the non-controlling interest at acquisition at fair value. The directors valued the non-controlling interest at GH¢625,000 at the date of acquisition.
  7. Revenues and profits should be deemed to accrue evenly throughout the year.

Required:
Prepare for Chicha Plc a Consolidated Statement of Profit or Loss for the year ended 31 March 2023 and Statement of Financial Position as at 31 March 2023.

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  • 17 Marks

FR – Nov 2016 – L2 – Q1a – Group Financial Statements and Consolidation

Prepare the consolidated statement of financial position for Bantama Ltd Group as at 30 September 2016, with provided details of acquisition and adjustments.

Bantama Ltd acquired six million of Abrepo Ltd’s ordinary shares on 1 April 2016 for an agreed consideration of GH¢25 million. The consideration was settled by a share exchange of five new shares in Bantama Ltd for every three shares acquired in Abrepo Ltd, and a cash payment of GH¢5 million. The cash transaction has been recorded, but the share exchange has not been recorded.

The draft statements of financial position of the two companies as at 30 September 2016 are:

Additional information:

  1. The fair value of Abrepo Ltd’s land at the date of acquisition was GH¢4 million in excess of its carrying value. Abrepo Ltd’s financial statements contain a note of a contingent asset for an insurance claim of GH¢800,000 relating to some inventory that was damaged by a flood on 5 March 2016. The insurance company is disputing the claim. Bantama Ltd has taken legal advice on the claim and believes that it is highly likely that the insurance company will settle it in full in the near future.
  2. At the date of acquisition, Bantama Ltd sold an item of plant that had cost GH¢2 million to Abrepo Ltd for GH¢2.4 million. Bantama Ltd has charged depreciation of GH¢240,000 on this plant since it was acquired.
  3. Bantama Ltd’s current account debit balance of GH¢820,000 with Abrepo Ltd does not agree with the corresponding balance in Abrepo Ltd’s books. Investigations revealed that on 26 September 2016, Bantama Ltd charged Abrepo Ltd GH¢200,000 for its share of central administration costs. Abrepo Ltd has not yet recorded this invoice. Intercompany current accounts are included in accounts receivable or payable as appropriate.
  4. Abrepo Ltd paid a dividend of GH¢400,000 on 30 September 2016. The profit and dividend of Abrepo Ltd are deemed to accrue evenly throughout the year. Abrepo Ltd’s retained earnings of GH¢8.8 million for the year to 30 September 2016 as shown in its statement of financial position are after the deduction of the dividend. Bantama Ltd’s policy is to credit to income only those dividends received from post-acquisition profits. Bantama Ltd has not yet accounted for the dividend from Abrepo Ltd. The cheque has been received but not banked.
  5. At the year-end, an impairment review was carried out on the consolidated goodwill arising from the acquisition of Abrepo Ltd, and an impairment loss of GH¢595,000 was identified. No adjustment has yet been made for this. It is group policy to value non-controlling interest at acquisition at its proportionate share of the fair value of the subsidiary’s identifiable net assets.

Required:

Prepare the consolidated statement of financial position of Bantama Ltd group as at 30 September 2016.

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  • 10 Marks

AFM – May 2019 – L3 – Q5a – The role of the treasury function in multinationals

Calculate intragroup currency transfers through netting and discuss the pros and cons of using currency options versus futures for hedging net exposures.

Edi Ltd, based in Accra, Ghana, is a multinational company with two wholly-owned subsidiaries: Gil Plc based in Nigeria and Zep Ltd based in South Africa. Until recently, the Edi group has been doing well, returning a stable level of dividends to its shareholders. The financial performance of the Edi group has dipped in the past two years. In the last quarter of last year, the directors approved the establishment of a central treasury department based at the group’s headquarters in Accra. It is believed that the central treasury function will help boost effectiveness and efficiency in the group’s liquidity management, currency risk management, dividend remittances, and borrowing.

Intragroup Currency Transfers:
There are a lot of intragroup credit transactions that are often settled independently between the parties involved. This year, the treasury department has been tasked to manage the settlement of intragroup indebtedness through netting to reduce the volume of currency transactions. It has been agreed that all settlements will be made in the Ghanaian cedi at the prevailing spot mid-market exchange rate.

Below is a list of intragroup indebtedness at the end of the first quarter to be settled today:

Required:

i) Suppose the currency netting is implemented. Calculate the intragroup company currency transfers that will be required for settlement by each member of the Edi group.
(6 marks)

ii) Suppose the treasury department is recommending the use of currency futures to hedge net currency exposures. Discuss the advantages and disadvantages of the Edi group using currency options instead of currency futures in hedging net currency exposures.

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  • 20 Marks

CR – Mar 2024 – L3 – Q1 – Consolidated Financial Statements

This question requires preparing the consolidated statement of financial position for Sankom Group, including adjustments for goodwill impairment and fair value adjustments.

Sankom Ltd (Sankom) in the last three years acquired Makpa and Biiri. The statement of financial position for the three companies as at 31 December 2023 is as follows:

Additional Information:

i) The following information relates to the acquisition of Makpa and Biiri:

  • Makpa: Date of acquisition: 1 January 2021, Shareholding percentage: 80%, Goodwill arising from the acquisition: GH¢44,800,000
  • Biiri: Date of acquisition: 30 June 2022, Shareholding percentage: 60%, Goodwill arising from the acquisition: GH¢38,400,000

ii) An upward fair value adjustment of GH¢4,400,000 was required for Makpa’s production machinery with a useful life of five years.

iii) Makpa sold goods to Biiri worth GH¢2,240,000, with a margin of 20%, and 30% of the goods were unsold by Biiri as of 31 December 2023.

iv) No impairment losses were previously recognized, but impairment reviews at 31 December 2023 indicated the recoverable amounts of the net assets of Makpa and Biiri were GH¢133,244,800 and GH¢116,544,000, respectively.

v) Sankom rented a building to Makpa at an annual rental of GH¢2,000,000, which Sankom accounted for as investment property, recognizing a fair value gain of GH¢1,200,000.

Required:
Prepare the consolidated statement of financial position for Sankom Group as at 31 December 2023.

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