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ACF301 – Coursework 2024-25

Advance information

Please read this document carefully.

The coursework forms 25% of the marks for the assessment of this module and comprises of an individual test based on the case study set out in this document. This test takes place starting at 9am (UK time) Wednesday 11^th December 2024 (Week 10).

Coursework instructions

· The test will take place online through Moodle.

· You can access the test at any time on Wednesday 11^th December 2024 from 9am onwards and the submission folder will remain open until 5pm (UK time).

· You are recommended to spend no more than 60-90 minutes completing this test. There is no time limit on the test.

· The coursework test is based on the accounting issues which arise from the scenario set out in the advance information in this document. You will be provided further impact information and the requirements on Wednesday 11^th December 2024 time of this test.

· You may prepare for the test in study groups or on your own, however you must complete the test itself on your own.

· The test is open book.

· You should prepare your answer to this test using Microsoft Word and upload to Moodle. Answers to numerical questions may be handwritten however you may only upload one document to moodle.

Please note: you will not be required to produce a full set of consolidated financial statements.

Background

Elektrik plc

Elektrik plc (Elektrik) is a manufacturer of vehicle batteries used in the production of electric cars and vans. All transactions are in £ sterling.

Historically Elektrik had taken a cautious approach to growth. A new CEO was appointed on 1 January 2023. The new CEO implemented a more aggressive growth strategy which is being delivered through the acquisition of shares in companies.

Elektrik has a year end of 30 June.

Your role

You are a recent graduate of Lancaster University, employed as the Financial Accountant at Elektrik. You have received the following e-mail from the Finance Director:

To: Financial Accountant

From: Finance Director

When the new CEO joined Elektric in January 2023, she was keen that Elektric start to grow more aggressively to take advantage of the increasingly profitable market for vehicle batteries.

On 1 October 2023, Elektric bought 3 million ordinary shares of Sparks Ltd (Sparks), a supplier. Due to the strategic fit with our company, Elektric paid a substantial premium to gain control over Sparks. A small number of other investors continue to hold shares in Sparks.

The acquisition of Sparks means that Elektrik will prepare consolidated financial statements for the first time. I am not sure how to calculate some of the figures for inclusion in the consolidated statement of financial position. I am also unsure about some of the requirements of IFRS3 and IFRS10 and would like your help.

Elektrik is also considering a further investment opportunity in Wiring Ltd (Wiring) . I have provided some information about the investment in Sparks and the further investment opportunity in Wiring in Exhibit 1.

An extract from the draft consolidated financial statements for the Elektrik group at 30 June 2024, along with an extract of the accounting policy note are provided in Exhibit 2.

The directors receive a bonus based on the performance. Details of the bonus arrangements are provided in Exhibit 3.

Further information will be available on Wednesday 11th December together with the tasks you must perform.

Exhibit 1: Investment in Sparks and potential investment in Wiring

Investment in Sparks

On 1 October 2023, Elektrik bought 3 million ordinary shares in Sparks. The acquisition resulted in Elektrik having control over Sparks.

The acquisition of shares was paid for as follows:

Ø An immediate cash payment of £3.20 per share acquired.

Ø A 1 for 6 share exchange.

Ø A future cash payment, payable on 30 September 2028.

Ø A future cash payment, payable only if an application for a patent of Sparks is successful.

The financial statements of Sparks also show the following information relevant to the purchase:

Ø Sparks has a number of intangible assets.

Ø The notes to the financial statements show a contingent liability.

Elektrik chose to account for the non-controlling interest in Sparks using the fair value method. Management judgement was applied to calculate a control premium and determine the fair value per share held by the non-controlling interest.

Potential investment opportunity in Wiring during the year ending 30 June 2025 (the next financial year)

Elektrik is currently in negotiations to buy 40% of the ordinary share capital of Wiring from an existing shareholder. Wiring is a major supplier of raw materials used by Elektrik in the manufacture of batteries.

The other 60% of the share capital of Wiring is currently owned by a single investor, Abacus plc (Abacus). Abacus would like Elektrik’s input into key decisions made to improve the profits of the company. As part of the investment, Elektrik would therefore be able to appoint a number of directors.

Elektrik is also in negotiations to acquire some convertible debt securities which would be converted into new ordinary shares.

Exhibit 2: Draft consolidated financial statements extract and policy note extract

Draft consolidated financial statements (extract)

Consolidated statement of profit or loss for the year ended 30 June (extract)

Consolidated statement of financial position at 30 June 2024 (extract)

Accounting policy note (Extract)

Basis of consolidation

The consolidated financial statements incorporate the financial statements of Elektrik plc and subsidiaries controlled by Elektrik plc (the “Group”).

Elektrik plc has arrangements over which it has control and which qualify as subsidiary companies. Acquisitions of subsidiaries are accounted for using the acquisition method. When the Group completes a business combination, the fair values of the identifiable assets acquired and liabilities assumed are measured at fair value. The consideration transferred is measured at fair value and includes the fair value of any contingent consideration.

Any non-controlling interest in an acquisition is initially measured either at fair value or at the non-controlling shareholders’ proportion of net assets. The choice of measurement basis is made on an acquisition-by-acquisition basis.

Transactions and balances between subsidiaries are eliminated. Unrealised profits on transactions between group companies are eliminated.

Joint ventures and associates

Where the Group has the ability to exercise joint control over entities, they are accounted for as joint ventures. Where the Group has the ability to exercise significant influence over entities, they are accounted for as associates.

For joint ventures and associates, the Group recognises its interest in the joint venture or associate as an investment in joint ventures or associates. The group uses the equity method of accounting.

Exhibit 3: Bonus arrangements

The directors receive a bonus based on consolidated profit before tax attributable to the equity holders of the parent.

The bonus target is set using earnings per share based on amounts attributable to the equity holders of the parent.