Global Dynamics PLC [50 marks]

Introduction

Global Dynamics PLC is a large, publicly listed multinational conglomerate with its headquarters in the United Kingdom. The company's functional and presentation currency is the British Pound (£). The financial year ends on December 31, 2024. You are the Group Financial Reporting Manager, tasked with preparing a technical report for the Audit Committee on several complex accounting matters that have arisen during the year.

Part A: The 'Titan' Manufacturing Facility

On January 1, 2023, Global Dynamics commenced the construction of a new, state-of-the-art manufacturing facility, the 'Titan' project, in a developing country. This facility is a qualifying asset under IAS 23. The construction was completed and the facility became available for use on October 1, 2024.

The costs incurred were in the local currency, the 'Krone' (KR). The exchange rates were:

• January 1, 2023: £1 = KR 10.0

• Average for 2023: £1 = KR 10.5

• December 31, 2023: £1 = KR 11.0

• Average for 2024: £1 = KR 11.5

• October 1, 2024: £1 = KR 12.0

• December 31, 2024: £1 = KR 12.5

  
  

The costs incurred in Krone were:

• Land Purchase: KR 50 million on January 1, 2023.

• Construction Costs: KR 180 million, incurred evenly throughout the construction period from January 1, 2023, to September 30, 2024.

• Specialized Equipment: A key piece of equipment was imported from the US at a cost of $10 million. It was delivered and paid for on April 1, 2024. Relevant exchange rates: £1 = $1.25, KR 1 = $0.08.

  
  

The facility has several major components:

1. Main Building: Useful life of 40 years.

2. Plant & Machinery: Useful life of 15 years.

3. Robotics System: Useful life of 8 years. The costs of these components are estimated to be 50%, 30%, and 20% of the total construction and equipment costs, respectively.

   
   

To finance the project, Global Dynamics secured a specific loan of KR 150 million on January 1, 2023, at an interest rate of 8% per annum. The company's general borrowings, which are in Pounds Sterling, had an average interest rate of 6% per annum during the period. Surplus funds from the specific loan were temporarily invested, earning KR 4 million in 2023. Construction was unexpectedly halted for one month in May 2023 due to a natural disaster.

At the end of the facility's 20-year operational life, Global Dynamics has a legal and constructive obligation to dismantle the facility and restore the site. The estimated cost of this is KR 80 million in 20 years' time. An appropriate risk-adjusted pre-tax discount rate was 7% on January 1, 2023. By December 31, 2024, due to new environmental regulations, the estimated future cost increased to KR 90 million, and the appropriate discount rate changed to 7.5%.

On July 1, 2024, the government of the developing country awarded Global Dynamics a grant of KR 20 million. The grant was conditional on the company employing at least 200 local staff for a minimum of five years (an income-related condition) and for producing environmentally friendly products (an asset-related condition). Global Dynamics' policy is to net the grant against the asset's cost. The company believes it will meet the conditions.

Part B: Business Combination and Subsequent Events

On March 31, 2024, Global Dynamics acquired 100% of the shares of 'Innovate Ltd', a UK-based tech start-up. The purchase consideration was:

• An immediate cash payment of £25 million.

• The issue of 1 million of Global Dynamics' own shares. The market price per share on March 31, 2024, was £5.00.

• A contingent consideration of £8 million, payable if Innovate Ltd's post-acquisition profits exceed a certain target in the next two years. The fair value of this contingent consideration at the acquisition date was estimated to be £5 million. By December 31, 2024, due to excellent performance, its fair value had increased to £6 million.

  
  

At the acquisition date, Innovate Ltd's statement of financial position showed net assets with a carrying amount of £22 million. However, the fair values of its assets were different:

• A brand name, developed internally by Innovate Ltd, was valued at £4 million. It was not recognized in Innovate Ltd's books.

• Property, plant, and equipment had a fair value £3 million higher than its carrying amount.

• A contingent liability related to an ongoing lawsuit was identified, with a fair value of £1 million. This was not previously recognized by Innovate Ltd.

  
  

By December 31, 2024, due to intense competition, the recoverable amount of Innovate Ltd as a cash-generating unit (CGU) was estimated to be £35 million.

Part C: Asset Restructuring and Disposal

1. Sale and Leaseback: On January 1, 2024, Global Dynamics sold its head office building for its fair value of £40 million and immediately leased it back. The carrying amount of the building at that date was £32 million. The lease term is for 10 years, with annual payments of £3 million in arrears. The interest rate implicit in the lease is 5%.

2. Discontinued Operation: On September 1, 2024, the board of directors approved a formal plan to sell 'Subsidiary X', a component of the group. The subsidiary is available for immediate sale in its present condition. A buyer has been located, and the sale is highly probable to be completed by February 2025.

   • At September 1, 2024, the carrying amount of Subsidiary X's net assets was £15 million.

   • The fair value less costs to sell was estimated to be £13 million.

   • For the year to December 31, 2024, Subsidiary X made a pre-tax loss of £2 million. The applicable tax rate is 20%.

     
     

Part D: Hedging Transaction

On November 1, 2024, Global Dynamics placed an order for a specialized machine from a supplier in Germany for €5 million. The machine is expected to be delivered and paid for on February 1, 2025. To hedge against foreign exchange risk, Global Dynamics entered into a forward contract on November 1, 2024, to buy €5 million on February 1, 2025. The company has designated this as a cash flow hedge.

Date	Spot Rate (£1 = €)	Forward Rate to Feb 1, 2025 (£1 = €)
01-Nov-24	1.15	1.14
31-Dec-24	1.12	1.11

Required:

Prepare a comprehensive report for the Audit Committee addressing the following:

1. For the 'Titan' Project (Part A):

   1. Calculate the initial cost of the 'Titan' facility in Pounds Sterling, providing a detailed breakdown and justifications for the treatment of each component. (10 marks)

   2. Calculate the depreciation charge for the facility for the year ended December 31, 2024. (2 marks)

   3. Prepare the journal entries to account for the decommissioning provision for 2023 and 2024. (2 marks)

   4. Explain the accounting treatment for the government grant. (1 marks)

      
      

2. For the Business Combination (Part B):

   1. Calculate the goodwill arising on the acquisition of Innovate Ltd. (5 marks)

   2. Prepare the journal entries to record the business combination. (5 marks)

   3. Calculate the impairment loss on goodwill, if any, for the year ended December 31, 2024. (5 marks)

   4. Explain the accounting treatment of the change in fair value of the contingent consideration. (5 marks)

      
      

3. For Asset Restructuring and Disposal (Part C):

   1. Prepare the journal entries to account for the sale and leaseback transaction on January 1, 2024. (5 marks)

   2. Discuss the accounting treatment and presentation of 'Subsidiary X' for the year ended December 31, 2024, including the calculation of any impairment loss. (5 marks)

      
      

4. For the Hedging Transaction (Part D):

   1. Prepare the journal entries to account for the forward contract at December 31, 2024. (5 marks)

[50 marks]

---

Answer coming soon...