Below are extracts of equity and reported profit the financial statements of Hull plc (Hull) and two entities in which Hull has made investments during the year ended 31 December 2021: At 31 December 2021: Hull Step Arm Equity and Liabilities £’000 £’000 £’000 £1 Ordinary shares 6,000 5,000 2,000 Share premium 2,000 - - Retained Earnings 7,540 2,900 580 Total Equity 15,540 7,900 2,580 Profit after tax for the year ended 31 December 2021 (from income statement): 7,440 2,160 280

The accountant for Hull has prepared draft consolidated financial statements but is unsure of their accuracy and has asked you for advice. You have found out the following: 1. Investment in Arm: On 1 July 2021, Hull paid £900,000 in cash to acquire 30% of the ordinary shares of Arm when Arm's retained earnings was £440,000. The accountant has included this as a simple investment at a cost of £900,000 in the consolidated financial statements. 2. Investment in Step: On 1 May 2021, Hull acquired 55% of the ordinary shares of Step when the retained earnings of Step stood at £1.46m. Consideration comprised cash of £3.0m and a share exchange based on 1 share in Hull for every 2 held by shareholders of Step. Hull's shares had a market value of £2.20 at that time. There was no movement in Step’s shares during the year. Hull had not accounted for the share exchange in the above extracts. The accountant had (incorrectly) worked out goodwill as follows: Incorrect Goodwill calculation: £'000 £'000 Cash 3,000 NCI (45% x 6,460) [NCI’s share of net assets] 2,907 Ordinary Shares 5,000 5,907 Retained earnings (at acquisition) 1,460 Net assets at acquisition (6,460) Incorrect Goodwill (bargain purchase) (553) On 1 May 2021 fair values (not included in the calculations above) were: a) Non-controlling interest (NCI) had a fair value of £4.5m b) One of Step’s buildings had a fair value £1.2m higher than the carrying value, and its useful life was 20 years (with no residual value). Depreciation is charged by month.

Required: 

a) Explain, with workings, why the accountant’s treatment for the investment in Aim is not correct and how it should be accounted for in Hull’s consolidated statement of financial position and in Hull’s consolidated income statement.

b) Explain, with workings, why the accountant’s negative goodwill calculation (above) indicates that it is likely to be incorrect, and how goodwill should be accounted for in accordance with IFRS 3, using the full goodwill method incorporating fair values provided. Include all corrections required (for example, as journals) and provide a reworked calculation for Goodwill under IFRS 3.

Answer rating: 100% (QA)

a The accountants treatment for the investment in Arm is not correct and it should be a... View the full answer