4. RELATO AUTOBIOGRÁFICO
4.1 TEJIENDO ENTRE LUCES Y SOMBRAS
4.1.4 TEJIENDO CON DIVERSOS COLORES
The separate financial statements of XYZ, Inc. included
"extraordinary items."
Additional information (a) above states that ADM400 million of the extraordinary items pertain to research costs which were previously capitalized by XYZ but were written off due to the attempt on adapting IFRSs.
9 PAS 1 Presentation of Financial Statements prohibits the presentation and disclosure of extraordinary items. PAS 38 Intangible Assets prohibits the capitalization of research costs.
9 PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires corrections of errors to be accounted for as adjustment to the opening balance of retained earnings and not in profit or loss.
The correcting entry is as follows:
Correcting entry #1
Dec. 31 Retained earnings – XYZ, Inc.
Extraordinary items
to adjust the opening balance of retained earnings for prior period error
400
400
(a2) Extraordinary items – Impairment loss
Additional information (a) above states that the remainder of the extraordinary items pertains to the decline in value of a plant that was damaged during the year.
9 This amount should be recognized as impairment loss and not as extraordinary item.
Entry made (EM) – erroneous entry 20x1 Extraordinary items
Accumulated impairment losses
400
400
‘Should be’ entry (SBE) – correct entry 20x1 Impairment loss
Accumulated impairment losses
400
400
119 Correcting entry #2
Dec. 31 Impairment loss Extraordinary items
to reclassify the erroneous debit to extraordinary items
400
400
(b & c) Fair value adjustments
Fair value of net assets after research costs (given) 8,000 Adjusted carrying amount of net assets, Jan. 1 a (5,600) Fair value adjustment (in drams) 2,400
Divide by: Useful life 5
Annual depreciation of FVA (in drams) 480
a The adjusted carrying amount of net assets is computed as follows:
Share capital 400
Share premium 800
Retained earnings - adjusted (4,800 - 400) (Step 1.a1) 4,400 Adjusted carrying amount of net assets, Jan. 1 5,600 (d) Intercompany inventory transaction
The intercompany sale of inventory is downstream.
Sale price of intercompany sale (in pesos) ₱120 Cost of intercompany sale (₱120M x 80%) (96)
Gross profit 24
Multiply by: Unsold portion in ending inventory 50%
Unrealized gross profit (in pesos) ₱12 Additional information (d) above states that a “foreign exchange difference remains in current liabilities.” This is analyzed as follows:
XYZ's books
Sept. 1 Raw materials inventory (₱120M x AMD6) Accounts payable
to record the purchase of inventory from parent
720
720
Entry made (EM) – erroneous entry
Sept.
21 Accounts payable
Cash in bank (₱120M x AMD6.5) to record the payment of accounts payable
780
780
‘Should be’ entry (SBE) – correct entry
Sept.
21 Accounts payable FOREX loss
Cash in bank (₱120M x AMD6.5) to record the payment of accounts payable
720 60
780
120 Correcting entry #3
Dec.
31 FOREX loss
Accounts payable 60
60 (e) Inter-company loan transaction
The loan payable was recorded at the exchange rate on January 1 and no adjustment has yet been made as of year-end for the change in exchange rate.
The year-end adjustment is determined as follows:
Loan payable at opening rate (₱200M x AMD5) 1,000 Loan payable at closing rate (₱200M x AMD8) 1,600 Increase in loan payable - FOREX loss(in drams) (600)
Correcting entry (Adjusting entry) #4 Dec. 31 FOREX loss
Loan payable 600
600 Additional information (e) above states that ABC Co. has recorded the loan receivable in current assets while XYZ, Inc. has recorded the loan payable in noncurrent liabilities. This provides evidence that the settlement of the loan is neither planned nor likely to occur in the foreseeable future. Therefore, the loan shall form part of ABC's net investment in XYZ.
Accordingly, the FOREX loss of AMD600 shall be recognized in profit or loss in XYZ's separate financial statements but recognized in other comprehensive income in the consolidated financial statements.
(f) Inter-company dividends
Since the dividends were declared and settled on the same date, no foreign exchange difference shall arise from the transaction.
The dividends paid by XYZ, Inc. are allocated to the owners of the parent and to NCI as follows:
(in drams)
(in pesos) AMD8:₱1 Dividends declared by XYZ, Inc. (in drams) 3,200 400 Allocation:
Dividends to ABC Co. (60%) 1,920 240
Dividends to NCI (40%) 1,280 160
121 Step 2: Analysis of net assets
XYZ, Inc. Acquisition
date
Consolidation date
Net change
Share capital 400 400
Share premium 800 800
Retained earnings – adjusted(Step 1.a1) 4,400 8,000 Totals at carrying amounts (in drams) 5,600 9,200 Fair value adjustments (Step 1.b&c) 2,400 2,400 Depreciation of FVA (Step 1.b&c) NIL (480) Unrealized profits (Upstream only) NIL -FOREX loss on trade payable(Step 1.d) NIL (60)
Net assets at fair value (in drams) 8,000 11,060 3,060 Forex loss on loan payable (Step 1.e) (600) (600) Net assets at fair value (in drams) 8,000 10,460 2,460 The FOREX loss on the loan payable is segregated from the other adjustments because this item is presented in the consolidated financial statements as part of other comprehensive income and therefore should not affect consolidated retained earnings. When computing for the consolidated retained earnings, the net change of
“₱3,060” will be used (see Step 5).
Step 3: Goodwill computation Formula #1:
Consideration transferred(₱1,760 investment in subsidiary x AMD5) 8,800 Non-controlling interest in the acquiree (8,000 x 40%) (Step 2) 3,200 Previously held equity interest in the acquiree - Total 12,000 Fair value of net identifiable assets acquired (Step 2) (8,000)
Goodwill at acquisition date 4,000
Accumulated impairment losses since acquisition date - Goodwill, net – current year (in drams) 4,000
Divide by: Closing rate 8
Goodwill, net – current year (in pesos) ₱500 Step 4: Non-controlling interest in net assets
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2) 10,460
Multiply by: NCI percentage 40%
Total 4,184
Add: Goodwill to NCI net of accumulated impairment losses - NCI in net assets – Dec. 31, 20x1 (in drams) 4,184
Divide by: Closing rate 8
NCI in net assets – Dec. 31, 20x1 (in pesos) ₱523
122 Step 5: Consolidated retained earnings
ABC's retained earnings – Dec. 31, 20x1 ₱6,960 Consolidation adjustments:
ABC's share in the net change in XYZ's net assets(a) 297 Unrealized profit (Downstream only) (Step 1.d) (12) Gain or loss on extinguishment of bonds -Impairment loss on goodwill attributable to Parent
-Net consolidation adjustments 285
Consolidated retained earnings ₱7,245
(a) ABC’s share in the net change in XYZ’s net assets is computed as:
Net change in XYZ’s net assets (in wons) (Step 2) 3,060 Add back: Prior period adjustment of subsidiary(b) 400 Adjusted net change in XYZ’s net assets (in wons) 3,460
Multiply by: Controlling interest 60%
ABC’s share in the change in XYZ’s net assets (in wons) 2,076 Divide by: Average exchange rate 7
ABC’s share in the net change in XYZ’s net assets (in pesos) ₱297
(b) The prior period adjustment of 400M research costs (Step 1.a1) is added back because the parent shall share only in the net change in the subsidiary’s net assets after the acquisition date. The parent shall not share in the changes in the subsidiary’s net assets prior to the acquisition date.
Step 5A: Translation gain (loss)
The translation gain (loss) recognized in other comprehensive income is computed as follows:
Share in translation difference ABC Co.
(60%)
XYZ, Inc.
(40%) 1) Translation of XYZ's opening net assets
Net assets, Jan. 1 - at opening rate (8,000 ÷ 5) 1,600 Net assets, Jan. 1 - at closing rate (8,000 ÷ 8) 1,000
Decrease in net assets - loss (600) (360) (240)
Cumulative translation difference – Jan. 1 - - -
2) Translation of changes in XYZ’s net assets during the period Profit - at average rate (a) (6,260 ÷ 7) 894
Profit - at closing rate (a) (6,260 ÷ 8) 783
Increase in profit – gain (111) (67) (44) 3) Translation of goodwill
Goodwill, Dec. 31 - at opening rate (4,000 ÷ 5) 800 Goodwill, Dec. 31 - at closing rate (4,000 ÷ 8) 500
123
Increase in goodwill - gain (300) (300) -
4) FOREX loss on loan payable
(Step 1.e) (600 ÷ 7) (86) (52) (34)
5) Translation of FOREX on loan payable
FOREX loss at average rate (600 ÷ 7) (86) FOREX loss at closing rate (600 ÷ 8) (75)
Decrease in loss – gain 11 7 4
Total translation loss – OCI (1,086) (772) (314)
a The profit is computed as follows:
Profit for the year before adjustments (in drams) 6,400 Research costs (Correcting entry #1) (Step 1.a1) 400 FOREX loss on trade payable (Correcting entry #3) (Step 1.d) (60) Adjusted profit before FVA (in drams) 6,740 Depreciation of FVA, in total (Step b & c) (480) Adjusted profit after FVA (in drams) 6,260 Correcting entry #2 does not affect the reported profit because it is just a reclassification entry (i.e., from extraordinary item to impairment loss).
The FOREX loss on the loan payable is not included in the computation of profit above because it will be presented in OCI.
Additional notes:
) The total translation adjustment to goodwill is attributed only to ABC because goodwill is measured at proportionate share and therefore no goodwill is attributed to NCI.
) The translation differences on the loan payable are included in the computations above because the loan payable forms part of ABC's net investment in XYZ. (See discussion in Step 1.e)
Step 6: Consolidated profit or loss and comprehensive income