You are the management accountant of Complex plc, a listed company with a number of subsidiaries located throughout the United Kingdom. Your assistant has prepared the first draft of the financial statements of the group for the year ended 31 August 1999. The draft statements show a group profit before taxation of £40 million. She has written you a memorandum concerning two complex transactions which have arisen during the year.

The memorandum outlines the key elements of each transaction and suggests the appropriate treatment.

Transaction 1

On 1 March 1999, Complex plc purchased 75% of the equity share capital of Easy Ltd for a total cash price of £60 million. The Directors of Easy Ltd prepared a balance sheet of the company at 1 March 1999. The total of net assets as shown in this balance sheet was £66 million. However, the net assets of Easy Ltd were reckoned to have a fair value to the Complex group of £72 million in total. The Directors of Complex plc considered that a group reorganisation would be necessary because of the acquisition of Easy Ltd and that the cost would be £4 million. This reorganisation was completed by 31 August 1999. Your assistant has computed the goodwill on consolidation of Easy Ltd shown opposite. Your assistant has noted that unless the goodwill had previously been written off, the loss on disposal would have been even greater.

Requirements

Draft a reply to your assistant which evaluates the suggested treatment and recommends changes where relevant. In each case, your reply should refer to the provisions of relevant Accounting Standards and explain the rationale behind such provisions.

The allocation of marks is as follows:

Transaction 1 

Transaction 2