Assignment 1:
Learning Outcomes On successful completion of this assignment you will be able to:
1. Discuss the professional and ethical duties of the CFO/accountant. Evaluate the financial reporting framework.
2. Advise on and report the financial performance of entities.
3. Prepare the financial statements of groups of entities in accordance with relevant accounting standards and Explain reporting issues relating to specialized entities.
4. Critically analyse the implications of changes in accounting regulations on financial reporting.
5. Appraise the financial performance and position of entities and Evaluate current developments.
Your Task Part A
Alpha Company prepares consolidated financial statements under the International Financial Reporting Standards (IFRS). The accountant has prepared draft financial statements but is unsure about a number of items relating to an acquisition.
On 1 April 2012 Alpha Company acquired a new subsidiary, Beta Company, purchasing all the 100 million shares of Beta Company. The terms of the sale agreement included the exchange of three shares in Alpha Company for every two shares acquired in Beta Company. On 1 April 2012, the market value of a share in Alpha Company was £20 and the market value of a share in Beta Company was £27. The terms of the share purchase included the payment of an additional £2.42 per share acquired provided the profits of Beta Company for the two years ending 31 March 2014 exceeded a target figure. Current estimates are that it is 85% probable that the management of Beta Company will achieve this target.
The individual statement of financial position of Beta Company at 1 April 2012 comprised net assets that had a fair value at that date of £2,400 million. Alpha Company also considered certain intangible assets that were not recognised in the individual statement of financial position of Beta Company. Customer relationships had a reliable estimated value of £200 million. This value has been derived from sale of customer databases in the past. Employee expertise had a reliable estimate of £80 million. An in-process research and development project with fair value estimated at £10 million that had not been recognised by Beta Company since the necessary conditions laid down in IFRS for capitalisation were only just satisfied on 1 April 2012.
Legal and professional fees associated with the acquisition of the shares of Beta Company were £2.4 million. This includes £400,000 relating to the cost of issuing shares. The directors of Alpha Company estimate that the cost of their time that can be fairly allocated to the acquisition is £200,000. This amount of £200,000 is not included in the legal and professional fees of £2.4 million.
The directors of Alpha Company are unsure how long the goodwill on acquisition of Beta Company would last but they thought that 10 years might be a prudent estimate of its useful economic life. However, they considered that the goodwill had not suffered any impairment up to 31 March 2013. The annual discount rate to use in any relevant calculations is 10%.
Required:
Compute the goodwill on consolidation of Beta Company that will appear in the consolidated statement of financial position of Alpha Company at 31 March 2013. Make appropriate references to IFRS.
Part B
P Company purchased a 90% interest in S Company for £1,200,000 cash on 1 January 2012. S Company's statement of financial position on the date of acquisition was as follows:
£
Assets
|
Cash
|
20,000
|
|
Inventory
|
280,000
|
|
Fixed assets (net)
|
1,080,000
|
|
Total assets
|
1,380,000
|
|
Liabilities and Equity
|
|
|
Accrued payables
|
180,000
|
|
Bonds payable
|
200,000
|
|
Ordinary shares (£10 par)
|
400,000
|
|
Retained earnings
|
600,000
|
|
Total liabilities and equity
|
1,380,000
|
The excess of consideration over book value was attributed to depreciable fixed assets with a 15-year remaining life and straight-line depreciation.
P Company issued £600,000, 20-year, 12% bonds at par value to pay for the acquisition. Consolidated net income for 2012 was £311,777.
P Company declared and paid dividends of £20,000 and S company declared and paid dividends of £10,000.
There were no purchases and sales of fixed assets during the year. The following information was also available at the end of 2012:
P Company 31 December 2011
| |
Debits
|
Credits
|
|
|
£
|
£
|
|
Cash
|
780,000
|
|
|
Inventory
|
380,000
|
|
|
Fixed assets
|
1,500,000
|
|
|
Accrued payables
|
|
300,000
|
|
Bonds payable
|
|
400,000
|
|
Ordinary shares (£10 par)
|
|
400,000
|
|
Additional paid-in capital
|
|
1,100,000
|
|
Retained earnings
|
|
460,000
|
|
Total
|
2,660,000
|
2,660,000
|
Consolidated 31 December 2012
| |
Debits
|
Credits
|
|
Cash
|
£
127,000
|
£
|
|
Inventory
|
908,000
|
|
|
Fixed assets Accrued payables
|
2,771,110
|
222,000
|
|
Bonds payable
|
|
1,200,000
|
|
Ordinary shares (£10 par)
|
|
400,000
|
|
Non-controlling interest
|
|
146,110
|
|
Additional paid-in capital
|
|
1,100,000
|
|
Retained earnings
|
|
738,000
|
|
Total
|
3,806,110
|
3,806,110
|
Required:
Prepare a consolidated statement of cash flows using the indirect method for P Company and its subsidiary S Company for the year ended 31 December 2012.
Part C
On 1 April 2012, Blue Company acquired 60% of the shares of Green Company.
The statement of comprehensive income for the year ended 31 December 2012 and statement of financial position as at 31 December 2012 are as follows:
Statement of comprehensive income for the year ended 31 December 2012
|
Company
|
Blue Company
|
Green
|
|
|
£
|
£
|
|
Revenue
|
240,000
|
115,000
|
|
Cost of sales
|
(55,000)
|
(120,000)
|
|
Gross profit
|
120,000
|
60,000
|
|
Other income
|
-
|
20,000
|
|
|
120,000
|
80,000
|
|
Administrative expenses (including depreciation)
|
(35,000)
|
|
|
|
|
(22,500)
|
Profit before taxation
|
57,500 |
85,000 |
| Taxation |
|
(12,000) |
| Profit after taxation |
73,000 |
48,500 |
Statement of financial position as at 31 December 2012
Company Blue Company Green
£ £ £ £
Assets
Non-current assets
Tangible assets 123,000
75,000
Investment in Green 60,000
Current assets
Inventories 29,000 39,000
Receivables 25,000 20,000
Others 7,500 18,500
61,500
77,500
Total assets 244,500
152,500
Equity and liabilities Capital and Reserves
Ordinary shares 125,000 75,000
Retained earnings 98,000 62,500 223,000
137,500
Current liabilities
Payables 21,500
15,000
Total equity and liabilities 244,500 152,500
Additional information:
Brought forward reserves 25,000 14,000
On 1 July 2012, Green Company sold non-current assets worth £40,000 to Blue Company for £60,000. Blue Company charges depreciation at 20% per annum. The unrealised profit on the sale of non-current assets creates temporary differences. The tax rate applicable to both entities is 20%. The fair value of the non-controlling interest at the date of acquisition is £40,000.
Required:
Prepare consolidated statement of comprehensive income for the period ended 31 December 2012 and consolidated statement of financial position as at 31 December 2012. Show appropriate workings for adjustments made.
Part D
Novartis AG is a Swiss multinational pharmaceutical company which prepares group financial statements. Obtain the annual report of Novartis Group for 2010 (available online on www.novartis.com) and review the information about acquisitions. This information may be provided in different parts of the annual report including financial statements.
List the acquisitions made during the year. Prepare a report which shows:
1. Your research into the reasons for success or failure of acquisitions in general.
2. Potential advantages of each of the acquisitions in 2010 for Novartis Group.
3. Impact on the consolidated financial statements of these acquisitions including adjustments to subsidiary's book values.
4. Your views about goodwill on each acquisition and subsequent goodwill impairment charges, if any.
Assignment 2:
Learning Outcomes
On successful completion of this assignment you will be able to:
1. Identify and critically analyse principles and trends in Performance Measurement and Control.
2. Determine the different budgeting techniques and critically evaluate their use in short term decision making
3. Analyse the current approach to performance measurement and control in a selected global organisation and critically appraise suggestions for improvement of current practices
4. Critically appraise the application of performance criteria in Not for profit and Public sector organisations.
Your Task
Part A: Performance Appraisal
Suppose you have recently been contracted as a financial consultant to a London-based engineering company, Alpha Products Plc. The company uses three components as part of their production process, namely, A, B and C. The budgeted production output for the forthcoming year is to produce 10,000 of each of the three components.
The variable production cost per unit of the final product is as follows:
|
|
Machine hours
|
Variable cost
|
|
|
|
£
|
|
1 unit of A
|
6
|
65
|
|
1 unit of B
|
4
|
90
|
|
1 unit of C
|
8
|
60
|
|
Assembly
|
|
50
|
|
|
Total
|
265
|
Only 112,000 hours of machine time will be available during the year, and a sub-contractor has quoted the following unit prices for supplying the three components: A £72.50; B £100 and C £88.
Required:
Write a short report, intended for CEO of Alpha Products Plc, William Smith, who is not an accountant, advising him of the following:
(a) Using the above financial data provide calculations which support your advice to the company on whether it should produce the three components or outsource them.
(b) Explain the use of the principle of opportunity cost and why cost- minimisation and profit maximisation are compatible concepts and include a table showing the total variable cost of your selected production or purchasing plan.
(c) Critically discuss the practice of outsourcing and the problems you consider may be associated with this practice.
(d) Structure and presentation of the report.
Part B: Methods of Overhead Allocation
A manufacturing company, based in Birmingham, makes auto parts for the motor industry. A division of the company makes two engine components, X and Y. Relevant information on the next budget period for these two components are given below:
|
Product parts
|
X
|
Y
|
|
Output in units:
|
13,000
|
15,000
|
|
|
|
|
|
Cost per unit:
|
|
|
|
Direct material
|
£45
|
£55
|
|
Direct labour
|
£30
|
£25
|
|
|
|
|
|
Total machine hours
|
2,500
|
2,300
|
|
Number of production runs
|
65
|
75
|
|
Orders executed
|
135
|
145
|
|
Number of shipments
|
40
|
35
|
The two components are similar and are usually produced in production runs of 200 units. The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analysed as follows:
|
Overhead
|
Budgeted cost
|
Cost driver
|
|
|
£
|
|
|
Machine department costs
|
£360,000
|
machine hours
|
|
Set-up costs
|
£99,400
|
Number of production runs
|
|
Inspection/Quality control
|
£25,900
|
Number of production runs
|
|
Material handling
|
£156,800
|
Orders executed
|
|
Delivery
|
£26,250
|
Number of shipments
|
|
|
£668,350
|
|
Required:
(a) Using the Activity Based Cost information, compare the overhead cost per unit in £ and the percentages of overhead costs for the two parts, X and Y.
(b) Using the number of units to assign overhead costs to the parts, X and Y, (a traditional approach) compare the overhead cost per unit in £s and the percentages of overhead costs allocated for the two parts.
(c) Using the data available, explain the differences between the unit overhead costs in percentages between (a) and (b) above.
(d) Discuss the advantages and disadvantages of organisational decentralisation.