ACA Financial Accounting and Reporting 2 — Questions and Answers
Question 1: A parent company owns 80% of a subsidiary. The subsidiary reports profit after tax of £100,000. In the consolidated statement of comprehensive income, what amount is shown as the non-controlling interest (NCI) share of profit?
- £80,000
- £20,000 (Correct answer)
- £100,000
- £0
Correct answer: £20,000
The non-controlling interest represents the 20% of the subsidiary not owned by the parent. NCI share of profit = 20% × £100,000 = £20,000. The full £100,000 profit is included in consolidated revenue and expenses, but £20,000 is then allocated to NCI in the income statement.
Question 2: Under FRS 102, when should an entity recognise a contingent liability?
- As a provision in the statement of financial position
- As a disclosure in the notes to the financial statements only (not recognised in the statement of financial position) (Correct answer)
- It should be ignored entirely
- As revenue in the statement of comprehensive income
Correct answer: As a disclosure in the notes to the financial statements only (not recognised in the statement of financial position)
Under FRS 102 Section 21, a contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events. It is not recognised in the financial statements but is disclosed in the notes unless the possibility of an outflow is remote.
Question 3: In a consolidated statement of financial position, how is goodwill arising on acquisition calculated under FRS 102?
- Fair value of consideration paid minus the book value of the subsidiary's total assets
- Fair value of consideration paid minus the fair value of the subsidiary's identifiable net assets acquired (Correct answer)
- The total assets of the subsidiary at the date of acquisition
- The market capitalisation of the subsidiary
Correct answer: Fair value of consideration paid minus the fair value of the subsidiary's identifiable net assets acquired
Under FRS 102 Section 19, goodwill on acquisition = Fair value of consideration transferred (plus NCI at proportion of net assets, if applicable) minus the fair value of the subsidiary's identifiable net assets at the acquisition date. Goodwill represents the premium paid for factors such as brand value, customer relationships, and synergies.
Question 4: Under FRS 102, what is the maximum useful life over which goodwill must be amortised if the entity cannot make a reliable estimate?
- 10 years
- 5 years (Correct answer)
- 20 years
- Indefinite — no amortisation required
Correct answer: 5 years
Under FRS 102 Section 19, if the useful life of goodwill cannot be reliably estimated, it is presumed to be 5 years. Goodwill must be amortised over its useful life (unlike full IFRS where goodwill is tested annually for impairment rather than amortised).
Question 5: A company holds an investment property under FRS 102. How should it be measured at each reporting date?
- At cost less accumulated depreciation
- At fair value, with changes in fair value recognised in profit or loss (Correct answer)
- At the lower of cost and net realisable value
- At cost less impairment only
Correct answer: At fair value, with changes in fair value recognised in profit or loss
Under FRS 102 Section 16, investment property whose fair value can be measured reliably without undue cost or effort must be measured at fair value at each reporting date, with changes recognised in profit or loss. If fair value cannot be determined reliably, the cost model under Section 17 is used instead.
Question 6: Which of the following transactions would be eliminated on consolidation when preparing group financial statements?
- Sales made by the subsidiary to external customers
- A loan from a bank to the parent company
- Intra-group sales from the parent to the subsidiary (Correct answer)
- Dividends received from external investments
Correct answer: Intra-group sales from the parent to the subsidiary
Intra-group transactions must be eliminated on consolidation under FRS 102 Section 9 to avoid double-counting. These include intra-group sales, intra-group loans, and intra-group dividends. The consolidated financial statements should present the group as if it were a single economic entity, so only transactions with external parties are shown.
ACA Financial Accounting and Reporting 2
A parent company owns 80% of a subsidiary.
The subsidiary reports profit after tax of £100,000.
In the consolidated statement of comprehensive income, what amount is shown as the non-controlling interest (NCI) share of profit?