F2: Group accounts

Answer: C. Under IFRS 3 (full goodwill / fair value method): Goodwill = consideration transferred + NCI at fair value − fair value of identifiable net assets = £800,000 + £200,000 − £750,000 = £250,000. This method recognises the NCI's share of goodwill as well as the parent's share. The £200,000 figure is the NCI at acquisition, not goodwill. The £50,000 would arise from subtracting only the parent's 80% of net assets: £800,000 − (£750,000 × 80%) = £200,000 — still wrong. The proportionate method would give a different, lower goodwill figure.

Answer: D. Proportionate NCI method: NCI is measured as the NCI percentage × fair value of net assets = 20% × £750,000 = £150,000. Goodwill = consideration transferred + NCI (proportionate) − fair value of identifiable net assets = £800,000 + £150,000 − £750,000 = £200,000. This method only recognises the parent's share of goodwill (not the full economic goodwill including the NCI's share). The full-goodwill (fair value NCI) method from the previous question gives £250,000 — the difference of £50,000 represents the NCI's unrecognised share of goodwill.

Answer: A. IFRS 10 defines control through three cumulative elements: (1) power over the investee (the ability to direct relevant activities); (2) exposure or rights to variable returns from involvement with the investee; and (3) the ability to use that power to affect the amount of those returns. Legal ownership of more than 50% is a strong indicator but not the sole test — an entity can control another with a smaller interest (through contractual rights or de facto power) or lack control despite majority ownership (if significant veto rights exist). Owning any shares without the three elements is not sufficient for control, and geography is irrelevant.

Answer: B. Equity method: initial cost £250,000 + investor's share of post-acquisition profit (30% × £60,000 = £18,000) − dividends received (nil) = £268,000. The carrying amount is updated each period for the investor's share of the associate's profit or loss. Leaving the value at the original cost of £250,000 ignores the equity method adjustment. Adding the full £60,000 profit (£310,000) fails to apply the 30% ownership proportion. Deducting £18,000 instead of adding it (£232,000) would represent a share of a loss, but the associate was profitable.

Answer: C. IFRS 11 distinguishes joint arrangements by the rights and obligations of the parties. In a joint operation, parties have direct rights to assets and direct obligations for liabilities — they recognise their own share of each. In a joint venture, parties have rights only to the net assets (the whole arrangement) and use the equity method to account for it, recognising a single investment line. Proportionate consolidation (recognising a share of individual assets and liabilities) is prohibited for joint ventures under IFRS 11 — that treatment applies to joint operations only. The number of parties is not a distinguishing criterion.

Answer: D. Selling price = £240,000 × 1.25 = £300,000. Intragroup profit = £300,000 − £240,000 = £60,000. Proportion remaining in inventory = 1/3. Unrealised profit to eliminate = £60,000 × 1/3 = £20,000. The £60,000 figure is the total intragroup profit on the full shipment, but only the profit on goods still held is unrealised at year end — goods already sold to third parties have been realised. £15,000 takes 25% of the £60,000 total profit instead of the one-third still held, and £80,000 is the cost of the goods still held (£240,000 × 1/3), not the profit on them. Consolidation requires removing only the unrealised portion.

Answer: A. NCI at reporting date = NCI at acquisition + NCI's share of post-acquisition profit = £200,000 + (20% × £100,000) = £200,000 + £20,000 = £220,000. The NCI is updated each period for its share of the subsidiary's profit (and loss). Leaving it at £200,000 ignores the profit share. Taking 20% of £100,000 = £20,000 alone gives only the movement, not the total balance. The £180,000 figure would arise from deducting rather than adding the profit share.

Answer: B. Under IAS 21, when translating a foreign subsidiary's financial statements using the closing rate method: all assets and liabilities are translated at the closing (reporting date) spot rate; income and expense items are translated at the actual rate at each transaction date or a practical approximation (e.g. period average); equity items (share capital, pre-acquisition reserves) are translated at the historical rate at the date they arose. Using a uniform historical rate for all assets would produce stale values. The average rate is used for income statement items, not the balance sheet. The closing rate method gives consistent period-end values for balance sheet positions.

Answer: C. Basic EPS = profit attributable to ordinary shareholders ÷ weighted average number of shares = £1,200,000 ÷ 4,000,000 = £0.30 = 30p. The weighted average (not period-end) share count is used to reflect the shares that were actually in issue during the year. Common errors: using shares outstanding at year end rather than the weighted average; dividing the weighted average by the profit (inverting the formula, giving 3.33); or using total reported profit rather than the portion attributable to ordinary shareholders (if preference dividends are in play). 25p and 40p do not follow from the figures given, and 12p misplaces the decimal point.

Answer: D. Diluted EPS adjusts both earnings and shares. Adjusted earnings = £1,200,000 + £37,500 (interest saved, net of tax) = £1,237,500. Adjusted shares = 4,000,000 + 500,000 = 4,500,000. Diluted EPS = £1,237,500 ÷ 4,500,000 = £0.275 = 27.5p. Adding the shares without adjusting earnings gives 26.7p (£1,200,000 ÷ 4,500,000), which is not among the options. 26.1p and 29.2p do not follow from the figures. Using a pre-tax interest saving would also overstate the earnings adjustment. Basic EPS (30p) is always higher than diluted EPS since dilution by definition reduces it.

Answer: A. IFRS 3 requires goodwill to be tested for impairment annually (or more frequently if indicators arise) under IAS 36 rather than amortised. When goodwill is impaired, the write-down is recognised in profit or loss. Crucially, IAS 36 prohibits the reversal of goodwill impairment in any subsequent period — even if circumstances change. This is a strict rule designed to prevent manipulation of reported profits. Goodwill impairment does not go to OCI; it is a P&L charge. And goodwill is not amortised under IFRS (unlike CIMA's BA3 level or US GAAP for private companies).

Answer: B. On consolidation, the intragroup element of the subsidiary's dividend is eliminated: the parent received 80% × £50,000 = £40,000, which was recorded as income in the parent's individual accounts. This £40,000 is eliminated against the parent's dividend income — only the NCI's share (£10,000) remains as a debit to NCI in equity. Eliminating the full £50,000 would incorrectly eliminate the NCI portion as well. The NCI's £10,000 share is not an intragroup item — it leaves the group to an external party and should not be eliminated.

Answer: C. Under IAS 28, the investor recognises its share of the associate's losses (25% × £400,000 = £100,000) through the equity method, reducing the investment's carrying amount. However, the investor should not recognise losses beyond the carrying amount of its investment (i.e. the investment cannot be reduced below zero) unless the investor has incurred legal or constructive obligations on behalf of the associate, or has made payments on its behalf. Once the investment is fully written down, further losses are suspended. Losses are definitely recognised under the equity method — the statement 'never recognised' is incorrect.

Answer: D. IFRS 11 requires joint ventures to be accounted for using the equity method (the same method as associates under IAS 28). The venturer recognises a single investment line, initially at cost, and subsequently adjusted for its share of the joint venture's profit or loss and other comprehensive income. Proportionate consolidation — recognising a share of each individual asset and liability — is explicitly prohibited for joint ventures under IFRS 11 (it applies instead to joint operations). Cost-only and FVTPL are not permitted treatments for joint ventures in individual or group financial statements under IFRS.

Answer: A. IFRS 3 requires all identifiable assets acquired and liabilities assumed to be measured at their acquisition-date fair values — the date on which the acquirer obtains control of the acquiree. The acquisition date is a specific date determined under IFRS 10 control principles, which may not be the same as the agreement date. Year-end fair values would be inappropriate since they would include post-acquisition movements. The completion of due diligence has no specific significance under IFRS 3 for measurement purposes — what matters is the point at which control passes.

Answer: A. A bonus issue creates additional shares without economic substance (no consideration received). IAS 33 requires retrospective adjustment of the weighted average shares and all prior year EPS figures presented for comparison. Bonus issue = 2,000,000 × 1/4 = 500,000 new shares; total post-bonus shares = 2,500,000. Restatement factor = 2,000,000 ÷ 2,500,000 = 0.80. Restated prior year EPS = 30p × 0.80 = 24p. The original 30p is unadjusted. The 37.5p figure arises from dividing by the pre-bonus shares (inflating EPS). The 25p figure comes from applying an incorrect restatement factor.

Answer: C. Under IAS 21 (closing rate method for foreign subsidiaries), the net assets are retranslated at the closing rate each period. The difference between the net assets at closing rate (£400,000) and at the historical rate (£380,000) = £20,000 gives rise to a foreign currency translation reserve, recognised in other comprehensive income and accumulated in equity. This avoids P&L volatility from currency movements on the net investment. The gain is £20,000 (closing exceeds historical), not a loss. The cost basis is not simply maintained — retranslation is mandatory under IAS 21 for subsidiaries using the closing rate method.

Answer: C. IFRS 3 requires contingent consideration to be recognised at its fair value at the acquisition date, included in the total consideration transferred (and therefore in goodwill). Subsequent changes in fair value of contingent consideration classified as a financial liability are recognised in profit or loss after acquisition. Ignoring it until targets are met understates goodwill. A 50% probability threshold is not the applicable test — fair value at acquisition date is recognised regardless. Expensing in the payment year incorrectly treats it as a post-acquisition cost rather than part of the purchase price.

Answer: D. Under IFRS 10, consolidation begins from the date the parent obtains control. Here, control is obtained on 1 October, so only the 3-month post-acquisition period (October, November, December) is included in the consolidated income statement for the year. Pre-acquisition profits are not part of the group's results — they belong to the previous owner and are reflected instead in the fair value of net assets at acquisition (and hence in goodwill). Including 12 months would overstate group income; 9 months would incorrectly include the pre-acquisition period.

Answer: A. Two adjustments are needed: first, the £30,000 intragroup profit is unrealised from the group's perspective (the asset has not been sold outside the group) and must be eliminated — reducing the asset's carrying amount and group profit/equity. Second, the parent is now depreciating the inflated value, causing excess depreciation of £30,000 ÷ 5 = £6,000 per year; this excess depreciation must be reversed (adding back to profit and to the asset's carrying amount). At end of year 1, the net effect on the asset is −£30,000 + £6,000 = −£24,000. Omitting either adjustment leaves intragroup profits partially in the consolidated accounts.

Answer: B. IAS 28 creates a rebuttable presumption that holding 20% or more but less than 50% of the voting rights of an investee gives rise to significant influence — a presumption that can be rebutted by evidence to the contrary (e.g. legal proceedings, no board representation). Significant influence means the ability to participate in, but not control, financial and operating policy decisions. More than 50% would typically give control (consolidation), not merely significant influence. Less than 10% would not normally give significant influence. While contractual arrangements can grant significant influence below 20%, the 20–50% range is the standard presumption.

Answer: C. Intragroup monetary balances denominated in a foreign currency are retranslated at the closing rate. The resulting exchange difference is recognised in profit or loss unless the balance forms part of the net investment in the foreign operation (which requires specific criteria and deliberate designation). A simple trade-type intercompany balance would generate a P&L difference. On consolidation, the intragroup balance itself is eliminated, but the exchange difference recognised by the individual entities in their separate financial statements remains in the consolidated P&L. The OCI treatment is reserved for net investment hedges or designated long-term intragroup balances meeting IAS 21's net investment criteria.

Answer: D. A rights issue at below market price contains a bonus element (shares issued at a discount effectively include a free share component). IAS 33 requires: (1) the bonus fraction to be calculated as market price before issue ÷ TERP, and applied to shares in issue before the rights issue date; then (2) the new shares are added from the issue date, weighted for the remaining portion of the year. Prior year EPS is also restated by the bonus fraction. This treatment separates the bonus element (retrospective, like a bonus issue) from the cash-raised element (time-weighted from issue date). Adding all shares from 1 January or ignoring the bonus fraction would misstate EPS.

Answer: A. IFRS 3 requires the acquirer to recognise all identifiable assets and liabilities at fair value at the acquisition date — even those not previously recognised in the acquiree's financial statements. A customer list that is separable (can be sold, transferred or licensed independently) meets IAS 38's identifiability criterion and must be recognised at fair value as a separate intangible, reducing the residual goodwill figure. Including it within goodwill would overstate goodwill. Assets need not have been on the acquiree's pre-acquisition balance sheet to be recognised — that is one of the key features of IFRS 3. Transaction costs are expensed separately from asset recognition.

Answer: D. IFRS 3 requires that when an investor achieves control through a step acquisition, the previously held equity interest (here the 30% associate) is remeasured to its fair value at the date control is obtained. Any difference between the fair value and the carrying amount of the previously held interest is recognised in profit or loss. This is consistent with the principle that a business combination is accounted for as though the previously held interest was disposed of and reacquired at fair value on the acquisition date. Keeping it at equity method carrying value or original cost would not reflect this remeasurement principle.

Answer: A. The unrealised profit arises in the subsidiary — that is the entity that sold at a mark-up and recorded the intragroup gain in its income statement. On consolidation, the subsidiary's profit (and the related inventory balance in the parent) is adjusted: the unrealised profit is deducted from the subsidiary's contribution to group profit and the inventory carrying amount is reduced to original cost to the group. The parent recorded the goods at the inter-company purchase price — it did not record a profit on this transaction. For part-owned subsidiaries, the elimination reduces the NCI's share of profit if the sale was made by the subsidiary (not the parent).

Answer: B. The investor only acquires significant influence from 1 July, so only the post-acquisition profit is included. Half-year profit = £400,000 ÷ 2 = £200,000. Investor's 25% share = £200,000 × 25% = £50,000. Including the full-year profit (£100,000 = 25% × £400,000) wrongly includes the pre-acquisition period. The £200,000 figure applies no ownership percentage. The full £400,000 includes neither the ownership percentage nor time-apportionment. Both adjustments — time-apportionment and ownership percentage — are required.

Answer: D. A rights issue (since it includes a bonus element via the discounted price) requires the shares in issue before the rights issue to be adjusted by a rights factor (cum-rights price ÷ theoretical ex-rights price) before time-weighting. A bonus issue has no cash effect and is applied retrospectively to ALL shares in issue at any point during the year (and to comparative EPS figures), rather than being time-apportioned from its issue date — it simply increases the share count from the start of the earliest period presented. Both adjustments are required together in a combined scenario like this, in that order (rights factor applied first to the relevant weighted shares, then the whole weighted average multiplied by the bonus fraction) — neither adjustment is ignored, and EPS is never based on the closing share count alone.

Answer: D. Preference shares of a subsidiary held by external investors represent an outside interest in the subsidiary that is not held by the parent group. In the consolidated financial statements, these are presented as part of non-controlling interest (NCI) within equity, separately from the equity attributable to the parent's shareholders. They are not a liability of the parent — the parent does not personally owe the preference share payments. They are not eliminated — only intragroup balances between parent and subsidiary are eliminated on consolidation. Preference shareholders in a subsidiary are simply a type of external investor, classified as NCI.

Answer: A. IFRS 3 allows a measurement period of up to one year after the acquisition date, during which the acquirer may obtain additional information about the acquisition-date fair values of assets acquired and liabilities assumed. Adjustments made within this period are treated retrospectively — the opening consolidated balance sheet is adjusted as if the correct fair values had been known and recognised at acquisition, with a corresponding adjustment to goodwill. After the measurement period ends, any further revisions are recognised in profit or loss prospectively. This retrospective treatment ensures goodwill reflects the final acquisition-date values.

Answer: B. The consolidated financial statements present the group as a single economic entity. A loan between parent and subsidiary is an internal transaction — from the group's perspective, the 'asset' in one entity and the 'liability' in the other cancel out, and should not inflate reported group totals. Eliminating these balances gives a true picture of the group's external assets and obligations. The subsidiary's external assets and liabilities are not removed — only the intragroup amounts cancel. IAS 27 does not prohibit intragroup lending. Elimination reduces, not increases, the reported total assets of the group.

Answer: A. On losing control, the group derecognises the subsidiary's identifiable net assets (£4m), goodwill (£0.6m) and the non-controlling interest (£0.9m), and compares the consideration received against the net amount derecognised. Net assets derecognised = net assets (£4m) + goodwill (£0.6m) − NCI (£0.9m) = £3.7m. Gain on disposal = consideration £5.2m − £3.7m = £1.5m. The NCI is subtracted (not added) because it represents a claim against the subsidiary's net assets that the group no longer has to satisfy once control — and the NCI itself — is derecognised; this is the step most commonly got wrong in this calculation. A £0.3m loss adds the NCI instead of deducting it (£5.2m − £5.5m), and a £2.1m gain leaves out the goodwill (£5.2m − £3.1m).

Answer: B. Where control is retained after a partial disposal, IFRS 10 treats the transaction as one between owners (the group and the non-controlling interest), recognised directly in equity — the difference between the consideration received and the change in the carrying amount of the NCI is recorded within equity, not as a gain or loss in profit or loss. This is a deliberately different treatment from a full disposal (or a partial disposal that does result in loss of control), which does generate a P&L gain or loss. The subsidiary continues to be fully consolidated (not deconsolidated) since control is retained, and the transaction is recognised in the period it occurs, not deferred.

Answer: D. Under IAS 21, goodwill arising on the acquisition of a foreign subsidiary is treated as an asset of the foreign subsidiary (denominated in its functional currency) and translated at the closing rate at each subsequent reporting date. The resulting exchange differences are recognised in OCI and accumulated in the foreign currency translation reserve in equity — consistent with the treatment of all other net assets of the subsidiary. Using the historical rate would freeze goodwill at the acquisition-date value, which is not the IAS 21 requirement. Goodwill is not written off on acquisition under IFRS 3 — it is tested for impairment annually.

Answer: A. IAS 28 requires the investor to apply IAS 36 (Impairment of Assets) to test the carrying amount of an investment in an associate whenever objective evidence of impairment exists. Unlike goodwill (tested annually regardless), the associate investment is tested for impairment only when indicators of impairment are present — consistent with IAS 36's general approach. The investment is tested as a whole (not split into components such as goodwill separately). Impairment of associate investments is permitted and required when applicable — it is not prohibited. Consecutive losses may be an indicator but are not the sole trigger.

Answer: B. IFRS 3 defines a business as an integrated set of activities and assets capable of being conducted and managed to provide a return. The definition requires at minimum: inputs (such as PP&E, intangibles, or workforce) and a substantive process (such as a skilled workforce or a management team with the ability to create outputs). Simply acquiring individual assets does not constitute a business combination — asset acquisitions are accounted for differently (allocating cost to assets, no goodwill). A 50% ownership threshold is not required — control under IFRS 10 can be achieved below 50%. Business combinations can involve private and public companies alike.

Answer: C. IAS 27 permits a parent, in its separate financial statements, to account for investments in subsidiaries (and associates and joint ventures) either at cost, in accordance with IFRS 9 (fair value), or using the equity method — the choice being applied consistently for each category of investment. Line-by-line consolidation is the treatment in the consolidated financial statements, not the separate ones — that is precisely the distinction separate financial statements exist to draw. Fair value is one permitted option, not the only one. The investments clearly appear in the separate financial statements; the whole purpose of IAS 27 is to specify how.

Answer: C. This situation is a bargain purchase (colloquially 'negative goodwill'). IFRS 3 first requires the acquirer to reassess whether all assets acquired and liabilities assumed have been correctly identified and measured, and whether the consideration and any NCI have been correctly measured — since a bargain purchase is relatively unusual and often indicates a measurement error rather than a genuine bargain. If, after reassessment, a gain is confirmed, it is recognised immediately in the acquirer's profit or loss on the acquisition date — unlike positive goodwill, which is capitalised (and tested for impairment, never amortised). This scenario is not impossible and is not simply ignored.