Jubilee, a public limited company, is preparing its group financial statements for the year ended 31 March 20X5. The group comprises three companies, Jubilee, the holding company, and its 100% owned subsidiaries Plot and Gibon, both public limited companies. The group financial statements at first appeared to indicate that the group was solvent and in a good financial position.

However, after the year end, but prior to the approval of the financial statements, mistakes have been found which affect the financial position of the group to the extent that loan covenant agreements have been breached.

As a result, the loan creditors require Jubilee to cut its costs, reduce its operations and reorganise its activities. Therefore, redundancies are planned and the subsidiary, Plot, is to be reorganised. The carrying value of Plot’s net assets, including allocated goodwill, was $85 million at 31 March 20X5, before taking account of reorganization costs. The directors of Jubilee wish to include $4 million of reorganisation costs in the financial statements of Plot for the year ended 31 March 20X5. The directors of Jubilee have prepared cash flow projections which indicate that the net present value of future net cash flows from Plot is expected to be $84 million if the reorganisation takes place and $82 million if the reorganisation does not take place.

Jubilee had already decided prior to the year end to sell the other subsidiary, Gibon. Gibon will be sold after the financial statements have been signed. The contract for the sale of Gibon was being negotiated at the time of the preparation of the financial statements and it is expected that Gibon will be sold in June 20X5.

The carrying amounts of Gibon and Plot including allocated goodwill were as follows at the year-end:

	Gibon	Plot
	$m	$m
Goodwill	30	15
Property, plant and equipment – cost	120	55
– valuation	180
Inventory	100	20
Trade receivables	40	10
Trade payables	(20)	(5)
	450	85

The fair value of the net assets of Gibon at the year-end was $415 million and the estimated costs of selling the company were $5 million.

Additionally, Jubilee had purchased, on 1 April 20X4, 150,000 shares of a public limited company, Rat, at a price of $20 per share. Jubilee had incurred transaction costs of $100,000 to acquire the shares. The company is unsure as to whether to classify this investment as at fair value through other comprehensive income or ‘at fair value through profit and loss’ in the financial statements for the year ended 31 March 20X5. The quoted price of the shares at 31 March 20X5 was $25 per share.

The shares purchased represent approximately 1% of the issued share capital of Rate.

There is no goodwill arising in the group financial statements other than that set out above.

Required:

Discuss the implications, with suitable computations, of the above events for the group financial statements of Jubilee for the year ended 31 March 20X5.

In you answer you should

1. 1.discuss the impact of the loan covenants being breached,
2. 2.discuss whether the reorganisation costs should be included in the financial statements for the year ended 31 March 20X5 and whether Plot is impaired,
3. 3.discuss whether Gibon will be treated as a disposal group held-for-sale and calculate any impairment loss on Gibon
4. 4.discuss how to account for the investment in Rat as the company is unsure as to whether to classify this investment as at fair value through other comprehensive income or ‘at fair value through profit and loss’ in the financial statements for the year ended 31 March 20X5

Answer rating: 100% (QA)

1 Impact of Loan Covenants Being Breached The breach of loan covenant agreements is a significant event that has both shortterm and longterm implications for the groups financial statements Shortterm ... View the full answer