Adjustments to the single entity financial statements

Assignment Help Financial Accounting

Reference no: EM133099432

Task Details/Description:

You are a newly appointed Head of finance at JJ Gen Plc.

You have to undertake 3 tasks, which are outlined below. Further details of the requirements are provided within the case study.

Task 1

Using the information in Section 1, provide the necessary journal adjustments in accordance with International Financial Reporting Standards (IFRS) to correct the draft single entity financial statements of JJ Gen Plc. for the year ended 30 September 2021.

In a separate document please provide:
• Workings carried out to calculate any adjustments required under IFRS. These should be clearly presented for ease of reference.
• Succinct explanatory notes for any necessary adjustments under IFRS.

Your explanatory notes should identify and explain the correct treatment under IFRS as well as evaluate the requirements of the relevant standard/s using the International Accounting standard Boards (IASB) Conceptual Framework so provide further insight to the outcome of the correct treatment under IFRS within the financial statements.

(Note the format for this task is a professional document and should be structured accordingly)
(Word count guidance: 800 words)

Task 2
Taking into consideration the additional information provided in section 2, prepare:
• Consolidated Statement of Profit or Loss and Other Comprehensive income.
• Consolidated Statement of Financial Position.
for JJ Gen Group as at 30 September 2021 in accordance with IFRS.

In a separate document please provide:
• Workings carried out to calculate any adjustments and balances. These should be clearly presented for ease of reference.
In a separate document, prepare notes which explains and evaluates:
• The purpose of preparing consolidated financial statements.
• The balance recognised for Goodwill. (Please consider recognition and measurement)
• The treatment of Angel Ltd. in the consolidated financial statements.

(Note the format for this task is a professional document and should be structured accordingly)
(Word count guidance: 600 words)

Task 3:
Review the extract from an email sent to you on page 19 by a new Non-executive Director, Jessica Wang, along with the additional information provided in Section 3.

Prepare a briefing note as requested.

JJ Gen Plc. Case study information and background

You are the newly appointed head of the finance team for JJ Gen Plc. (JJ Gen), a manufacturer of power generators. The company's primary operation is to manufacture and supply backup generators for industrial use, however the business does have a division which specialises in providing smaller units for household use.

As a result of a strategy to expand its customer base and gain a competitive advantage in green technologies, JJ Gen has undertaken substantial investments in two companies during the current financial period: At the start of the current financial year, JJ Gen purchased 910,000 ordinary shares in Windspan Ltd (of 1.3 million shares in issue) and 250,000 ordinary shares in Angel Ltd (of 1 million shares in issue).

Windspan Ltd (Windspan) manufactures wind turbine generators which they supply to local government bodies as well as to private sector customers. The company is known to be a highly innovative and dynamic company, with a reputation for continuous improvement in their own production methods as well as product development to serve increasing demands for clean energy sources.

Angel Ltd (Angel) manufactures solar energy panels. As a result of a significant growth in the demand for solar panels for household use, the company has been extremely successful. The company is widely recognised within the market to have the best product on the market for small scale use in the solar power generation. The technological innovations and development team of Angel are highly regarded and considered second to none within the industry.

TASK 1

Adjustments to the single entity financial statements of JJ Gen Plc. for the year ended 30 September 2021.

One of your first tasks as head of the finance team is to review the draft single entity financial statements of JJ Gen Plc. (JJ Gen) for the year ended 30 September 2021. These draft statements were prepared prior to your appointment as Head of the finance team.

Kiran, one of the members of the finance team, has sent you an email in respect to the figures included within the draft financial statements. An extract from this email (below) includes further details on some potential issues which require evaluation.

Additional information: Section 1

‘In respect to the draft single entity financial statements for JJ Gen Plc:

I have attached a copy of the draft financial statements of JJ Gen for the year ended 30 September 2021. I've included some information below for a few transactions which I believe requires your review to assess if they have been correctly accounted for under International Financial reporting standards (IFRS).
Can you please review and confirm if we need to make any adjustments?

(i) Preference Shares:
JJ Jen has raised new finance through the issue of five million £1, 3% redeemable preference shares. The shares were issued on 1 October 2020 for £5 million. The terms of issue include that the shares are redeemable at a premium of £315,250 over the nominal amount on 1 October 2023 (three years from the issue date).
The £5 million received on issue have been recognised in a separate line within equity on the draft statement of financial position, and the 3% dividend of £150,000, (which was paid on 30 September 2021) has been deducted from retained earnings.
The contracts in place relating to these redeemable preference shares identifies an effective annual return of 5% for the shares. We are unsure what this ‘5%' relates to, so have not made any further adjustments to take this into account.

ii) Investment in equity shares:
There were some investments in shares made during the year. The most significant investments were for shares in Windspan Ltd and Angel Ltd.

Windspan shares: Purchased 910,000 shares on 1 October 2020

The cost of this investment of 910,000 equity shares in Windspan comprised consideration of £5.2 million cash and a share exchange where JJ Gen issued one new share in JJ Gen for every ten shares acquired in Windspan.

The investment in shares is included as ‘investments' within non-current assets in the draft financial statements at £5,291,000. This amount reflects the cash amount paid (on 1 October 2020) and the £1 per share nominal value of JJ Gen shares issued (on 1 October 2020) in exchange for equity shares of Windspan.

The nominal value of JJ Gen shares is £1 however the market value of a share in JJ Gen is a lot higher - the share price currently stands at £6.22. I've also checked JJ Gen's the share price on 1 October 2020 and this was £6.10 per share. We have disregarded this as no cash was received on issue so the issue of new JJ Gen shares has simply been recorded at £1 per share.

Angel shares: Purchased 250,000 shares on 1 October 2020

The investment in Angel cost £3 million cash. This is the only consideration for the investment in the equity shares of Angel. The draft financial statements for JJ Gen includes this investment at £3 million within non-current assets.

Our Treasury department has for a long time invested in shares in a variety of companies but the investments made in both Windspan and Angel are different. These investments were made as part of long-term strategic objectives to expand JJ Gen's market base and accelerate innovations in green energy product development. Unlike the other investment (see below), JJ Gen do not intend to sell the shares in the short term even if selling the shares would result in sizable gains.

The investments remain at their cost at the year end. I have tried to find out a market share price for both Windspan Ltd and Angel Ltd at 30 September 2021, but as the companies are not publically traded, there is no quoted share price so no market valuation available for these shares.

Other investments in equity: Held for trading purposes

Further investment have been made in shares of a number of publically traded companies during the year. The total cost of these investments is £2 million. (No investment representing more than a 1% holding).

My understanding is that these investments were made for short-term profit making purposes. We have recorded these investment within non-current asset (as with the investment is shares in Windspan and Angel) at their cost value of £2 million.

The expectation was that the shares would increase in value, but due to widespread market uncertainties which continue as a result of the global pandemic, on 30 September 2021, the market value of the shares decreased to £1.8 million.

The value of these shares do fluctuate and have actually increased to £2.3 million soon after the year end, and whilst this upward trend has generally continued, values continue to fluctuate as the market confidence is still unstable due to the impact of the pandemic.

No further adjustment has been made in the draft financial statements so the investments remain at their purchase at cost of £2 million within non-current assets.

(iii) Employee benefits:

JJ Gen provides a Defined benefit pension scheme for all of its employees. I have included below an extract from the actuarial report for the scheme for the year ended 30 September 2021:

Actuarial valuation: 30 September:	2021	2020
	C000	E'000
Assets	8,740	10,150
Liabilities	14,250	14,100
Net liability	5,510	3,950
For the year ending 30 September 2021		£'000
Current service costs		1,900
Contributions paid into plan		3,000
Benefits paid		1,200
Interest rate applied		2%

A payment of £3.0 million was made in September 2021 as stated in the actuarial report for contributions to the scheme (see above). This amount has been recognised as an employee cost in the draft profit or loss for the year.

No Further adjustments have been made in respect of this defined benefit scheme. My concern is that the draft statement of financial position as at 30 September 2021 still recognises a net pension liability of £3.95 million which was the correct value last year, but not this year. We are unsure how to make the adjustments.

(iv) New sales deal for household generators
During the year JJ Gen commenced a new sales deal where customers can purchase a smaller range of household generators and pay £3,000 in 2 years if they signed up by 5 October 2020. On signing, customers receive a generator immediately. The customer is, at this point responsible for the generator so we encourage that the take out insurance against loss or damage.

The scheme has been quite a success with 5,000 customers signing up for the deal at the start of the year.
As no amounts have been received from these customers, no amounts have been recognised as revenue in respect to the deal.
End of email extract
NB/ Please assume a suitable risk adjusted discount rate of 6% to reflect the risk adjusted cost of financing for JJ Gen.

REQUIRED:
Taking into consideration the additional information provided in Section 1:

a) Prepare journal adjustments for the Financial Statements for JJ Gen Plc. for the year ended 30 September 2021.
Please use the Pro-forma provided in Appendix 1 to complete the Journal adjustments.

b) For the purposes of training and development of the junior members of staff in the finance team, please include a document which includes:
any relevant workings for the adjustments, clearly laid out for ease of reference and accompanying explanatory notes for the adjustments. Please reference IFRS and the IASB's Conceptual Framework where relevant within your explanatory notes.

Your explanatory notes should identify and explain the correct treatment under IFRS as well as evaluate the requirements of the relevant standard/s using the International Accounting Standard Boards (IASB) Conceptual Framework so provide further insight to the outcome of the correct treatment under IFRS within the financial statements.

TASK 2

Preparation of Consolidated Financial Statements for JJ Gen Group for the year ended 30 September 2021

JJ Gen Plc, Windspan Ltd and Angel Ltd have a financial period ending on 30 September.

The Financial statements for the period ended 30 September 2021 for all three companies are shown below.

The Financial Statements for JJ Gen are presented after adjustments in respect to the additional information provided in section 1 and the statements for Windspan and Angel have been authorised for issue by the respective boards of directors so do not need any further adjustments.

It is your task to prepare the consolidated financial statements but Kiran, who is keen to assist and learn how to do this in the future has sent you an email which includes the following:

After further investigations on the investments made in Windspan and Angel, you discover the following:

Additional information: Section 2

1. (i) JJ Gen acquired 70% of the equity shares of Windspan on 1 October 2020 for total consideration of £5.755 million.
On the same date JJ Gen acquired 25% of the equity shares of Angel for £3 million. The retained earnings of Windspan at acquisition were £3.6 million, and that of Angel, £858,000.

2. (ii) JJ Gen Plc has decided on a policy to measure non-controlling interest at its full fair value. On the date of acquisition of Windspan Ltd. (1 October 2020), the fair value of an equity share in Windspan was £5.90.

3. (iii) A due diligence exercise carried out on the acquisition of Windspan found the carrying values of the net assets of Windspan to equal their fair values on the acquisition date with the exceptions of:

Land which had a fair value of £100,000. The carrying value in Windspan's financial statements is at historic cost of £40,000. There had been no change to the fair value of the land by 30 September 2021.

Intangible asset: The £2 million recognised intangible assets in Windspan's financial statements is for patents over the company's innovations which on 1 October 2020 have a remaining useful life of 5 years. The fair value of these patents, on 1 October 2020 is determined to be £3 million.

4. (iv) Windspan has undertaken research into the development of a new turbine technology which would improve efficiency of the power generation of its products. This project commenced 2 years ago but due to limited resources was put on hold. There has been no capitalisation relating to this research in the financial records of Windspan (in line with relevant IFRS).
The due diligence report includes a valuation for the research at £1.6 million on 1 October 2020. This valuation has been undertaken by a reputable firm who specialises in the valuation of intangible assets. The fair value of the research remains at £1.6 million on 30 September 2021.

5. (v) On 12 August 2020, Windspan sold goods to JJ Gen for £600,000 on credit terms. The goods cost Windspan £510,000. On 30 September 2021, 80% of these items have been sold on to companies outside the group.
JJ Gen had not paid Windspan for the good by the year end so the intercompany balance of £600,000 remained outstanding.

6. (vi) Impairment test were carried out on both investments and there was no impairment to goodwill acquired in Windspan, nor was there any impairment in respect to the investment in Angel.

7. REQUIRED:

8. Prepare the consolidated statement of profit or loss and other comprehensive income for JJ Gen Group for the year ended 30 September 2021 and a consolidated statement of financial position on that date in accordance with IFRS.
Please ensure that you take into account the additional information provided in section 2 for the acquisition of Windspan the investment made in Angel.

9. The single entity Financial Statements of JJ Gen Plc. shown on pages 13 - 15 have been adjusted for the issues raised in Task 1, so you may assume that these statements are correct and do not need further adjustment.
o aid the training and development of the junior members of staff in the finance team;
• Ensure that you clearly present your workings and reference these appropriately to
the amounts included in the consolidated financial statements where relevant.
You may include some brief notes to your workings to add clarity where you feel it necessary.
• Provide some notes which succinctly explain:
o - The purpose of preparing consolidated financial statements.
You may refer to some of the adjustments / workings when undertaking the
consolidation if you think it might add clarity to your explanation.
o - What is goodwill, when goodwill should be recognised and how it is measured
within financial statements under IFRS.
o - The treatment of Angel Ltd within the consolidated financial statements under IFRS.

You may refer to relevant workings / adjustments done when preparing the consolidated statements if this would add clarity to your explanation.

TASK 3
Briefing Note: Impact of changes to reporting requirements under International Financial Reporting Standards
Having provided both the single entity Financial Statements for JJ Gen and the consolidated financial statements for the group to the Board, you receive an email from a recently appointed Non-executive Director, Jessica Wang.
An extract from her email is given below.

Additional information Section 3
JJ Gen group applied IFRS when preparing is financial statements.
JJ Gen group holds plant and equipment as well as some properties through relatively short term contract lease agreements between three to five years. None of these were recognised as assets in the statement of financial position for the year ended 30 September 2019 as it continued to apply IAS 17: Leases. The company first applied IFRS 16: Leases in the financial year to 30 September 2020 and has continued to do so in the current year (FY ending 30 September 2021).

Required:
Draft a briefing note for Jessica which:

(i) Explains the Impact of IFRS 16 - Leases on the reporting of lease transactions on financial statement prepared under IFRS, and how this differs from the application of the pervious relevant accounting standard. You explanation does not require any detailed calculations however you should provide a general overview of where the application of the standard impact the financial statements when the current IFRS on leases is applied. Your explanation should also evaluate how (and if) the standard IFRS 16 - Leases applies the revised Conceptual framework's principles in respect to the recognition of relevant assets and liabilities within the financial statements.

(ii) Discusses how items within the financial statements are ‘measured', including a brief overview on the use and impact of fair value accounting under International Financial Reporting Standards (IFRS).

(iii) Identifies and explains the financial reporting considerations of a significant downturn as well as any other issues for businesses following the COVID-19 pandemic.

You may use some of the balances within the financial statements shown on Pages 13 - 15 of this coursework brief, as well as the consolidated financial statements you have produced in task 2 to illustrate.

Please ensure that you include appropriate references to any external sources used within task 3.
Suggested word count for briefing note: 1,000 words (maximum)

ADDITIONAL GUIDANCE FOR TASKS: Tasks 1:

The explanations for adjustments should be clear, succinct and professional in tone. The use of bullet points is recommended for the explanatory notes.

Ensure that you make suitable references to appropriate financial reporting standards. The quality of this section will be enhanced by the clarity of your presentation of workings for any adjustments.

Note: words included in any of your workings are not included in the word limit.

Task 2:

The quality of the preparation of consolidated financial statements is enhanced through clear presentation of workings and referencing these to the appropriate line items within the financial statements.

Please note that most of the marks allocated to the numerical element of this task are allocated to the workings.

In the explanatory notes, please ensure that you make suitable references to appropriate financial reporting standards where relevant.

Task 3: Briefing note as requested by Non-executive Director, Jessica Wang.

Ensure that you reference the IASB's Conceptual Framework as well as relevant International Financial Reporting Standards.
Consideration should be given to:
- How the application of IFRS 16: Leases aligns to the definition of assets and liabilities in accordance with the IASB's Conceptual Framework
- Please use the additional information provided on page 20 to help frame your answer in respect to the accounting for leases.
- The different measurement bases which can be applied under IFRS and the use and impact of Fair Value Accounting.
- Other significant financial reporting implications following the impact of COVID-19 pandemic on the business environment.

Attachment:- Task Details.rar

Reference no: EM133099432

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