Financial Accounting Homework: Consolidation and Reporting

This assignment solution addresses key concepts in financial accounting, including the recognition and measurement of assets under HKAS 16 (Property, Plant and Equipment) and the treatment of provisions and contingent liabilities under HKAS 37. The solution analyzes the accounting for research and development costs, building purchases, and the revaluation of assets. It also includes a consolidated statement of financial position for Peter Ltd., demonstrating the consolidation of a subsidiary (Sam Ltd.), calculation of goodwill, and the treatment of non-controlling interests (NCI). The assignment covers various financial reporting aspects, such as impairment, unrealized profit, and the presentation of consolidated financial statements. The solution provides detailed journal entries and workings to support the accounting treatments.

Solution-2
Part – (a)
As per HKAS 16, Property, Plant and Equipment para 7, an item should be recognized as an asset when it
has become evident that the item has future economic benefits to the company and the cost of the item
can be reliably measured. Only the items satisfying the above criteria are recognized as an asset. Future
economic benefits means the benefits in the form of cash inflow, or savings in cash outflows, or in any
other means which helps in production or reducing expenses ("Property, Plant and Equipment", 2018).
Further, the para 15 requires to record the asset at its cost on initial recognition. However, for
measurement after recognition, the company may choose between cost model and revaluation model.
The cost model states that the asset should be recorded at cost less accumulated depreciation whereas
the revaluation model states that the assets carrying value should be reviewed at each period end and
the assets should be carried at its recoverable amount. The recoverable amount is the fair value of the
asset that will be realized in the market less any costs to sell.
In the given case, the Pharma Ltd., started developing a new cancer drug. However, the local authority
has approved the new cancer drug on 1 September 2016 only as the drug has proved to be commercially
successful. Hence, the drug will become asset on 1 September, 2016 and will be recognized as an asset
once it comes into existence, i.e. on 31 March, 2018.
So, the accounting treatment for the expenditures incurred are as follows:
Costs incurred between 1 April, 2016 to 31 August, 2016 – Will be treated as research and development
cost and should be charged to P&L.
Costs incurred between 1 September, 2016 to 31 March, 2017 – Will be treated as an asset and should
be accumulated in CWIP, i.e. capital work in process.
Costs incurred between 1 April, 2017 to 31 March, 2018 – As on 31 March, 2018 (assuming the product
has been completed) should be transferred to the Asset account from CWIP account as it fulfills the
recognition and measurement criteria of HKAS 16.
Further, as on March 31, 2018 the asset should be valued at $115,000 and the difference of $ 10,000
(125000-115000) should be treated as impairment loss on revaluation.
Part – (b)
Event -1 – The correct classification of the building purchases would be to recognize it as an assets under
property, plant and equipment since it satisfies the recognition criteria as mentioned in HKAS 16 which
stats that an item should be recognized as an asset is it has future economic benefits for the entity and
its cost can be reliably measured.
In the given case, the company purchased a building which will used for manufacturing of various drugs.
Since, without the building the drugs can’t be manufactured or developed so it means that the building
has future economic benefits to the company in the form of revenue to be generated from
manufactured drugs. Further, the purchase price of building paid is its cost.
Hence, we came at a conclusion that the building is an asset for the company.

The relevant journal entries for the year ended March 31, 2017 are as below:
Date Particulars Debit ($) Credit ($)
31-Jan-17 Building 45,000,000
To Cash 45,000,000
(To record purchase of building)
31-03-17 Depreciation (45*10^6/15/12*2) 500,000
To Accumulated Depreciation 500,000
(To record depreciation on building)
(i) As per HKAS 37, “Provisions, Contingent Liabilities and Contingent Assets”, a provision is a liability of
uncertain amount or timing. Means a liability which is sure to come but whose amount and time of
occurrence is not available. The liability means a present obligation arise due to past events which is
expected to be settled in the form of outflow of some economic benefits. In simple words, liability is an
obligation to pay certain amount for benefits taken or consumed, for example, amount payable for
wages, electricity or utilities consumed, etc. The settlement of such obligation is required to be made in
the resources valuable to the company for example by payment of cash, or by exchange of some assets
(“Provisions, Contingent Liabilities and Contingent Assets”, 2018).
Hence, the provision is the liability for which benefits are expected to be taken, but the value and timing
of such benefits is unknown.
As per para 14 of HKAS 37, the provision should be made when it satisfies the following criteria’s.
(a) An present obligation is there which has arisen due to some past events of the entity
(b) It is probable that this obligation needs to be settled in the form of outflow of some resources
having future economic benefits to the company.
(c) And an estimate can be made reliably for such expenses
Hence, if all the above conditions are satisfied then an item should be recognized as a provision in the
books and if any of the conditions are not satisfied then the item should not be recognized as a
provision.
(ii) Event -2 –
Accounting issue – Whether to account for the cost to be paid for cleaning up of contamination caused
due to chemical pollution.
Accounting Treatment – Since, this is not a legal obligation however, it is constructive obligation which
involves outflow of resources at a future date. Hence, the company should treat this expense as

provision and provision should be recognized in the books as it satisfies all the recognition criteria of
HKAS 37. Further, since the expense is going to be happen in future so the company should also discount
the amount of provision using a discount rate.
Journal Entry - The Journal Entry for recognizing the provision is as below:
Cleaning of Contamination expense Dr. $10,000,000
To Provision for cleaning of contamination $10,000,000
Event -3 –
Accounting issue – Whether to account for the cost of claim to be paid for infringement of patent.
Accounting Treatment – Since, the current scenario, does not satisfies the present obligation criteria and
further the infringement of patent has occurred after the balance sheet, hence it is not a provision.
Moreover, the provision should not be made for future losses.
Instead, this cost of claim is a contingent liability. As per HKAS 37, a contingent liability means a possible
obligation arises due to past events but whose occurrence depends upon certain future events and also
not probable that whether resources having future economic benefits needs to be paid and moreover
amount of obligation cannot be reliably measured.
Journal Entry - There will be no journal entry as contingent liability is not recognized in books instead it
is shown as a foot note to the financial statements.

Event - 4 –
Calculation of revaluation gain on building as on 31 March, 2018
Particulars Amount ($)
Carrying value of Building as on 31 March, 2017 44,500,000
Less: Depreciation for the year 3,000,000
Carrying value of Building as on 31 March, 2018 41,500,000
Fair value of building as on 31 March, 2018 43,000,000
Revaluation gain 1,500,000
Journal Entries for the year ended 31 March, 2018
Date Particulars Debit ($) Credit ($)
31-03-18 Depreciation (45*10^6/15) 3,000,000
To Accumulated Depreciation 3,000,000
(To record depreciation on building)
31-03-18 Accumulated Depreciation 3,500,000
To Building 2,000,000
To Revaluation Surplus 1,500,000
(To record revaluation gain on building)

Solution-1
Consolidated Statement of Financial Position for Peter Ltd.
As at 31 December, 2017
($ '000)
Amount
Non-current assets
Property, plant and equipment, net 68,180
Investment in Sam at cost -
Goodwill (WN-3) 5,500
73,680
Current assets
Inventories (4270-280) 3,990
Trade receivables (4,350-1,200) 3,150
Bank (2,800-200) 3,000
10,140
Total assets 83,820
Equity
Share capital 42,000
Retained earnings 20,620
NCI (WN-4) 7,100
69,720
Non-current liabilities
Loans 3,700
8% bonds 3,780
7,480
Current liabilities
Trade Payables (6,220-1000) 5,220
Bank overdraft 1,400
6,620
Total equity and liabilities 83,820

WN-1 Establish the group structure
Peter Ltd acquired 80% in Sam Ltd as on 1 July, 2017
WN-2 Net assets of subsidiary
Particulars At the date of
acquisition
At the reporting
date
Share capital 14,200 14,200
Reserves:
Retained earnings 9,000 13,200
23,200 27,400
WN-3 Goodwill on acquisition
Parent investment at fair value 23,400
NCI value at acquisition 6,500
29,900
Less: Fair value of net assets acquired (WN-2) 23,200
Goodwill on acquisition 6,700
Less: Impairment to date 1,200
Goodwill in CSFP 5,500
WN-4 NCI
NCI share of subsidiary's net assets at reporting date (27,400*20%) 5,480
NCI share of goodwill 1,860
Fair value of NCI at acquisition 6,500
Less: NCI's share of subsidiary's net assets at acquisition date
(23,200*20%) (WN-2) (4,640)
7,340
NCI share in goodwill impairment (WN-3) (1200*20%) (240)
NCI 7,100
WN-5 Group Retained earnings
Retained earnings of Peter 18,500
Add: Peter % of post-acquisition retained earnings ((13,200-
9000)*80%) 3,360
Less: Peter share of impairment (960)
Less: Unrealized profit in inventory (3.5*40%/125%*25%) (280)
20,620
References:

Property, Plant and Equipment. (2018). Retrieved from
http://app1.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeII/hkas16.pdf
Provisions, Contingent Liabilities and Contingent Assets. (2018). Retrieved from
http://app1.hkicpa.org.hk/hksaebk/HKSA_Members_Handbook_Master/volumeII/hkas37.pdf