Case Study: JJ Victoria Group’s Investments In DAC Enviro Ltd And B2V Ltd – Financial Statements Preparation

Adjustments for Standalone Financial Statement Preparation

The case study related to JJ Victoria Group and its investments in DAC Enviro Limited, a 60% owned subsidiary of the company and B2V Limited in which the company holds 40 % stake. The assignment deals with two cases of preparing final standalone financial statement based on draft financial statement and the adjustment provided. Further, the report also preparation of final consolidated profit and loss account based on the draft financial statement and adjustment provided.

Under Task 1 of the report, standalone Financial statement has been prepared for JJ Victoria group whose reporting currency is Sterling. The standalone financial statement has been finalised after incorporating the various adjustment in compliance with International Financial Reporting Standards. The adjustments have been detailed here-in-below:

• In term of International Financial Reporting Standard 15, Revenue shall be recognised in the books of account once the transfer of title takes place and the liability of goods lies in the hand of the buyer or in other words liability of seller is off loaded. In the present case, since liability of goods has not been transferred. Accordingly, revenue of Sterling 62 Million. Thus, on the basis of above the cost of sales shall be reduced by Sterling 35.3 Million.
• Under International Financial Reporting Standard “Percentage of Completion method”, revenue shall be recognised uptill the amount of work carried out by the seller based on a certificate. In the present case, since the work has been completed upto 70% on the basis of certificate. Thus, revenue of 70% shall be recognised in books and receivable of Sterling 100,000 shall stand as outstanding. Further, cost shall recognised uptill the actual cost incurred by the company.
• In terms of International Financial Reporting Standard “Property Plant and Equipment” cost incurred by the company which is associated with plant and machinery shall be capitalised rather than being expended. Accordingly, the same has been capitalised in the books of company and the same has been reduced from distribution and administration expense.
• In addition, depreciation has been computed under Straight Line Method for the plant and machinery added over the period of 10 year basis except specific and substantial machinery on which depreciation has been charged over the period of three years.
• The depreciation charged has been adjusted from cost of sales in terms of company policy;
• The construction cost which has been shown as asset in the books of company has been expended into Profit and loss under cost of sales as IFRS does not recognises the concept of complete contract method;
• The total consideration paid for the acquiring DAC Enviro Limited has been valued at Sterling 52.25 Million based on the discount rate of 6% on the future payment to be made. Accordingly, the revised investment value stood at 52.25 million Sterling and a corresponding liability of 22.25 Liability has been shown under long term liability as the same is not due in an year;
• Investment in B2V (Joint Venture) has been reported at the investment value of 10 Million sterling.
• Accounts Receivable has been adjusted in the books of company by the amount of sales that has been booked without the transfer of ownership and the amount of revenue on account of not booked on account of build on order;

Inventory has been increased by the amount of cost of sales which were booked without transfer of title to be in compliance with IFRS.  

Percentage of Completion methods accounting treatment and computation falls under IFRS 15.It is the method of recognition of revenue in which the firm or the company recognizes revenue over the period of the projects i.e the revenue is recognised on an ongoing basis. Generally, Percentage of completion method is used for a longer-term projects and revenue and expenses are recognised based on project completion over a period of time. (CFI Education INC, 2019)

There are two form of Long term Contract:

• Completed Contract: in this case, revenue is recognised when the project is completed.
• Percentage of Completion: In this case, revenue is recognised over a period.

Under IFRS 15 ,percentage of completion method were revenue of the project is recognised on the basis of its percentage of completion .The revenue and expenses both is recognised on the basis of the proportion of  completeness of the Project. Through cost-to-cost method, it is measured. (CFI Education INC, 2019)

There are two states under which the percentage of completion method can be adopted:

• Collection of revenue from the project must be certain
• Completion of project and costs of such project must be properly estimated.

In cost-to-cost approach, Percentage of completion of the project depends on the cost incurred till date to the estimated total costs in order to complete the project.

Percentage completion=Cost incurred to date/Estimated total costs

The revenue recognition equation in case of percentage of completion method:

Revenue=Cost incurred till date/Estimated total costs*Contract price-Previous recognized revenue.

International Accounting Standard 16 deals with Property Plant and Equipment. This standard also deals with the recognition of deprecation, recognition of carrying value of the assets, any impairment loss of the assets.

To be recognised as Property Plant and Equipment under IFRS 16 the items should meet the following criteria:

• It should be a tangible items(Audit It, 2019)
• Should be used for Production, supply of goods and services.(Audit It, 2019)
• Benefit from that assets can be taken for more than one accounting period(Audit It, 2019)

The formula for computation of PPE=Gross PPE +Capital Expenditures-Accumulated Depreciation.

Percentage of Completion Method for Long-Term Projects

The initial purchase price of Property Plant and Equipment includes the purchase price, import duties if any incurred, taxes which are generally non refundable, discount on sales, cost which is directly incurred in bringing the assets to the specified locations necessary for the operational purposes, cost which is to be incurred in dismantling the assets and re-establish the site on which the asset is located. This is commonly referred to as an Asset retirement obligation.

Any Capital expenditure which is incurred are generally form part or added to the Property Plant and Equipment balance .When the company incur money either in maintaining the existing equipment or modification to the same or purchase of new assets ,this totally is added and form parts of balance sheet. (CFI Education Inc., 2019)

Under Task 2 of the report, Consolidated Financial statement has been prepared for JJ Victoria group considering the accounts of Subsidiary and Joint Venture of the group whose reporting currency is Sterling. The standalone financial statement has been finalised after incorporating the various adjustment in compliance with International Financial Reporting Standards. The adjustments have been detailed here-in-below:

• All the adjustment that has been made to standalone financial statement of JJ Victoria shall equally be applicable to the preparation of financial statement of the group;
• Removal of unrealised profit on interunit transfer of goods from subsidiary to parent which are lying at the disposal of parent company i.e. 30% of goods sold;
• Elimination of double recognition of sales in the consolidated revenue in the books of company;
• Elimination of double recognition of cost in the consolidated cost of sales in the books of company;
• Recognition of Goodwill in the books of the company on the basis of adjusting the value of assets of the DAC to Fair value and determining the value of 40% of non-controlling in terms of price of Sterling 65 per share;
• Allocation of profits of the company post acquisition to the non-controlling interest and controlling interest;
• Recognition of investment made in B2V at 40% of the net asset value of the company;
• In terms of International Financial Reporting Standard “Property Plant and Equipment” cost incurred by the company which is associated with plant and machinery shall be capitalised rather than being expended. Accordingly, the same has been capitalised in the books of company and the same has been reduced from distribution and administration expense.
• In addition, depreciation has been computed under Straight Line Method for the plant and machinery added over the period of 10 year basis except specific and substantial machinery on which depreciation has been charged over the period of three years.

International Financial Reporting standards i.e IFRS are a bunch of accounting standard developed by the International Accounting standards Board i.e IASB which is generally now a days a globalised standard according to which the financial statements (profit and loss, Balance sheet, and Cash flow statement) of the public company is prepared. The IFRS standards are adopted worldwide in order to bring transparency, accountability, regulation all over the word in the financial market. (IFRS Foundation , 2017)

International Accounting Standard 27 (IAS 27) defines the non controlling interest .Non controlling means the ownership of the company does not pass to the shareholder of the company. The investor can take the advantages from its subsidiary company by monitoring the company rules and the financial policy of the company in order to reap benefit from the subsidiary company. The control can be established if the company 50 percent voting right is exercised by any other company. If the holding is less than 50 percent than it is said to be the non controlling interest.

The accounting treatment in case of non controlling interest can be explained with the help of an example: Company A holds 80 percent of the shares of the company B, as company A is holding more than 50 percent shares of the company B so company A will consolidate all the financial statement of the Company B with its own. The part of the share which A does not hold is recorded as the non controlling interest in the financial statement of the company A. Income of the company B will also be consolidated on the basis of the percentage of ownership i.e 80 percent to company A and remaining as non controlling interest.Non controlling interest is to be shown in the equity part of the company A balance sheet separated from its own equity. (Audit it, 2019)

Goodwill is considered as an intangible Assets of the company that can comes in many forms such as in the form of brand value, reputation, secrets of the company .Sometimes it is considered very difficult in computation of Goodwill, but there are two ways to compute the goodwill portion. International Financial Reporting Standard  38  talks about the intangible assets that does not allow to recognize the goodwill which is internally generated like generation of brand name ,lists of customers and items similar in nature.IFRS 38 only allows to record the goodwill in financial statement which is generated externally  i.e either through Business combinations or through acquisitions.

According to International Financial Reporting Standard 3 “Business Combination “Goodwill is computed as the difference between the values of consideration transferred from acquire to acquiree and net value of assets acquired. The general method of calculating the Goodwill under IFRS is:

Goodwill=Consideration transferred+Amount of non controlling interests+fair value of previous non controlling interests-Net value of Assets recognised till date. (Body of Professional Accountants, 2017)

As from the above, we can see that in the formula of Goodwill computation, Amount of non controlling interest appears .Computation of non controlling interest will be affected under determining the value of goodwill.IFRS 3 comprises of two methods in order to measure the non controlling interest:

• Fair Value
• Non Controlling interest proportionate share of the company who acquires the same that company net identiable assets.(Body of Professional Accountants, 2017)

References

Audit It, 2019. IAS 16 – Properties, Plant and Equipment (detailed review). [Online] Available at: https://www.readyratios.com/articles/ifrs/ias-16-properties-plant-and-equipment.html[Accessed 25 JAnuary 2019].

Audit it, 2019. Non-controlling Interest (NCI). [Online] Available at: https://www.readyratios.com/reference/accounting/non_controlling_interest_nci.html[Accessed 25 January 2019].

Body of Professional Accountants, 2017. Goodwill recognition in IFRS 3. [Online] Available at: https://www.accaglobal.com/in/en/member/discover/cpd-articles/corporate-reporting/goodwill-recognition17.html[Accessed 25 January 2019].

CFI Education Inc., 2019. PP&E (Property, Plant and Equipment). [Online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/ppe-property-plant-equipment/[Accessed 25 January 2019].

CFI Education INC, 2019. Percentage of Completion Method. [Online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/accounting/percentage-of-completion-method/[Accessed 25 January 2019].

IFRS Foundation , 2017. IFRS. [Online] Available at: https://www.ifrs.org/[Accessed 25 January 2019].