you are the consolidation accountant of worldwide plc a uk company with subsidiaries 565691

You are the Consolidation Accountant of Worldwide plc, a UK company with subsidiaries located throughout the world. You are currently involved in preparing the consolidated financial statements for the year ended 30 September 2002. Your assistant has prepared the consolidated profit and loss account, the consolidated statement of total recognised gains and losses, the consolidated balance sheet and some supporting schedules. The material your assistant has prepared is given overleaf.

Worldwide plc – consolidated profit and loss account for the year ended 30 September 2002

Turnover	£ million
Cost of sales	4000
Gross profit	(2200)
Other operating expenses	1800
Operating profit	(800)
Gain on sale of subsidiary (Note 1)	1000
Interest payable (Note 2)	58
Profit before taxation	(200)
Taxation	858
Profit after taxation	(180)
Minority interests	678
	(128)
Group profit	550
Dividends paid:
– preference shares	(40)
– ordinary shares	(200)
Retained profit	310

Worldwide plc – consolidated statement of total recognised gains and losses for the year ended 30 September 2002

	£ million
Group profit for the period	550
Exchange differences (Note 3)	47
Total gains and losses for the period	597

Worldwide plc – consolidated balance sheets at 30 September

	2002		2001
	£ million	£ million	£ million	£ million
Fixed assets:
Goodwill on consolidation	42		65
Tangible assets (Note 4)	5900		4100
		5942		4165
Current assets:
Stocks	950		800
Trade debtors	1000		900
Short term investments	60		80
Cash	20		18
	2030		1798
Creditors: amounts falling due within
one year:
Trade creditors	450		400
Accrued interest	25		20
Taxation	130		120
Obligations under finance leases	45		25
Bank overdrafts	65		40
	715		605
c/f	1315	5942	1193	4165
Net current assets		1315		1193
Total assets less current liabilities		7257		5358
Creditors: amounts falling due after
more than one year:
Obligations under finance leases	225		140
Long term loans	1554		1200
		(1779)		(1340)
Provisions for liabilities and charges:
Deferred taxation		(278)		(218)
		5200		3800
Capital and reserves:
Ordinary share capital		2500		2000
8% preference share capital		500		500
Share premium account		500		–
Profit and loss account		1157		800
		4657		3300
Minority interests		543		500
		5200		3800

Note 1 – gain on sale of subsidiary

On 1 April 2002, Worldwide plc disposed of a 75% owned subsidiary incorporated in the UK for £250 million in cash. The balance sheet of the subsidiary drawn up at the date of disposal showed the following:

	£ million
Tangible fixed assets	200
Stock	100
Trade debtors	110
Cash	10
Trade creditors	(80)
Taxation payable	(25)
Long term loan	(75)
	240

This subsidiary had been acquired on 1 April 1994 for a cash payment of £110 million when its net assets had a fair value of £120 million. Goodwill on consolidation is amortised on a monthly basis over 20 years.

Note 2 – interest payable

During the year, the group constructed a factory in the UK. Construction commenced on 1 November 2001 and the factory was ready for use on 1 June 2002. However, production did not begin at the factory until 1 August 2002. The construction of the factory was financed by general borrowings denominated in £s. Your assistant has included the interest relating to the period from 1 November 2001 to 1 June 2002 in the cost of tangible fixed assets rather than taking it to the profit and loss account. The amount of interest that was treated in this way is £10 million. The figure was arrived at by applying a relevant capitalization rate to expenditure on the factory in the period 1 November 2001 to 1 June 2002.

Note 3 – exchange differences

	Total	Group share
	£ million	£ million
Arising on retranslation of opening net assets:
Tangible fixed assets	25	20
Stock	20	15
Debtors	20	16
Trade creditors	(9)	(6)
	56	45
Arising on retranslation of profit for the period	16	12
Offset of exchange loss on Worldwide plc loans (see below)	(10)	(10)
	62	47

Worldwide plc has taken out a number of long term loans denominated in foreign currencies to partly finance the equity investments in its foreign subsidiaries. Your assistant has offset the exchange differences arising on the retranslation of these loans against the exchange differences arising on the retranslation of the net investments in the relevant subsidiaries. The exchange gain on retranslation of the profit and loss account (from average rate for the year to the closing rate) relates to operating profit excluding depreciation.

Note 4 – tangible fixed assets

• During the period, the depreciation charged in the consolidated profit and loss account was £320 million.
• Apart from the disposal mentioned in note 1, the group disposed of tangible fixed assets having a net book value of £190 million for cash proceeds of £198 million.
• During the period, the group entered into a significant number of new finance leases. Additions to tangible fixed assets include £250 million capitalised under finance leases.

Required:

(a) Prepare the consolidated cash flow statement of the Worldwide plc group for the year ended 30 September 2002. You should use the indirect method. Notes to the cash flow statement are NOT required.

(b) Evaluate the extent to which the accounting treatment for capitalising interest described in note 2 above is in accordance with existing Accounting Standards.

(c) Evaluate the extent to which the accounting treatment of exchange differences described in note 3 above is in accordance with existing Accounting Standards. Your answer should refer to any relevant current developments that have the potential to affect your evaluation.

Note: Your evaluations for requirements (b) and (c) should not change your answer to requirement (a) of this question.