3 Ashlee, a public limited company, is preparing its group financial statements for the year ended 31 March 2005. The company applies newly issued IFRSs at the earliest opportunity. The group comprises three companies, Ashlee, the holding company, and its 100% owned subsidiaries Pilot and Gibson, both public limited companies. The group financial statements at first appeared to indicate that the group was solvent and in a good financial position. However, after the year end, but prior to the approval of the financial statements mistakes have been found which affect the financial position of the group to the extent that loan covenant agreements have been breached. As a result the loan creditors require Ashlee to cut its costs, reduce its operations and reorganise its activities. Therefore, redundancies are planned and the subsidiary, Pilot, is to be reorganised. The carrying value of Pilot’s net assets, including allocated goodwill, was $85 million at 31 March 2005, before taking account of reorganisation costs. The directors of Ashlee wish to include $4 million of reorganisation costs in the financial statements of Pilot for the year ended 31 March 2005. The directors of Ashlee have prepared cash flow projections which indicate that the net present value of future net cash flows from Pilot is expected to be $84 million if the reorganisation takes place and $82 million if the reorganisation does not take place. Ashlee had already decided prior to the year end to sell the other subsidiary, Gibson. Gibson will be sold after the financial statements have been signed. The contract for the sale of Gibson was being negotiated at the time of the preparation of the financial statements and it is expected that Gibson will be sold in June 2005. The carrying amounts of Gibson and Pilot including allocated goodwill were as follows at the year end: The fair value of the net assets of Gibson at the year end was $415 million and the estimated costs of selling the company were $5 million. Part of the business activity of Ashlee is to buy and sell property. The directors of Ashlee had signed a contract on 1 March 2005 to sell two of its development properties which are carried at the lower of cost and net realisable value under IAS 2 ‘Inventories’. The sale was agreed at a figure of $40 million (carrying value $30 million). A receivable of $40 million and profit of $10 million were recognised in the financial statements for the year ended 31 March 2005. The sale of the properties was completed on 1 May 2005 when the legal title passed. The policy used in the prior year was to recognise revenue when the sale of such properties had been completed. Additionally, Ashlee had purchased, on 1 April 2004, 150,000 shares of a public limited company, Race, at a price of $20 per share. Ashlee had incurred transaction costs of $100,000 to acquire the shares. The company is unsure as to whether to classify this investment as ‘available for sale’ or ‘at fair value through profit and loss’ in the financial statements for the year ended 31 March 2005. The quoted price of the shares at 31 March 2005 was $25 per share. The shares purchased represent approximately 1% of the issued share capital of Race and are not classified as ‘held for trading’. There is no goodwill arising in the group financial statements other than that set out above. Required: Discuss the implications, with suitable computations, of the above events for the group financial statements of Ashlee for the year ended 31 March 2005. (25 marks)