Reference no: EM13490291

QUESTION

You have been appointed as an accountant in the group reporting division of Care-Clinic Corporation Limited, a private hospital group listed on the JSE Securities Exchange. The group operates in three regions, namely Africa (South Africa, Namibia and Lesotho), Europe (Switzerland) and the Middle East (United Arab Emirates). Its core purpose is to enhance the quality of life of patients by providing cost-effective acute specialised hospital services.

During your induction course you were provided with the following group structure:


HOLDING COMPANY: CARE-CLINIC CORPORATION LIMITED




100% 100% 100%




Care-Clinic Africa
Proprietary Limited
Care-Clinic
Switzerland
Care-Clinic Emirates
British Virgin Islands




Hospitals per region
(% shareholding)
Hospitals per region
(% shareholding)
Hospitals per region
(% shareholding)
Care-Clinic Eastern Cape
Proprietary Limited (30%)
(see note 1)
Andreas (100%) Dubai British Virgin Islands
(51%)
Care-Clinic Gauteng
Proprietary Limited (100%)
Hirslanden (100%)
Care-Clinic Mpumalanga
Proprietary Limited (100%)
Stephanshorn (100%)
Care-Clinic Northern Cape
Proprietary Limited (100%)
Zürich (100%)
Care-Clinic Swakopmund
Proprietary Limited (45%)
(see note 2)
Care-Clinic Lesotho
Proprietary Limited (100%)
Care-Clinic Tshwane
Proprietary Limited (80%)
Care-Clinic Windhoek
Proprietary Limited (40%)
(see note 2)
Notes

1 Significant influence.

2 Controlled through the shareholders' agreements.

The facilitator of the induction course did stress that the diagram had not been updated since the previous year's induction course. Since that time the group has sold its Lesotho operations and acquired a non-controlling interest in a medical centre in Zürich. The facilitator also mentioned that the accounting policy for the group is to carry investments in subsidiaries and associates at cost in the separate financial statements of the parent. After your induction course, the financial director informed you that your first task would be to prepare the consolidated statement of cash flows for the financial year ended 31 December 2011.

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To this end you extracted the following three reports from the group's accounting system:

CF001

At the end of each reporting period every individual company in the group, excluding associate companies, completes an electronic reporting pack on the group's accounting system for consolidation purposes. The reporting pack is an electronic set of financial statements. The accounting system then automatically aggregates the individual companies' financial statements on a line-by-line basis and reports the totals per operating region, namely Africa, Europe and the Middle East.

All pro forma consolidation journal entries are processed manually and are therefore not reflected in the reports. Foreign companies are required to capture the information in South African rand, translated as required in terms of International Financial Reporting Standards (IFRS). Report CF001 represents the aggregated statement of cash flows of all the relevant companies in the group (i.e. excluding associate companies).

REPORT CODE: CF001
REPORT DATE: 31/12/2011
REPORT PERIOD: 12 months
Africa Europe Middle
East
Holding
company Aggregate
R million R million R million R million R million
Cash flow from operating activities 1 303 694 288 0 2 285
Cash received from customers 10 622 5 355 2 319 18 296
Cash paid to suppliers and employees (8 246) (4 111) (1 791) (14 148)
Interest received 37 6 2 45
Interest paid (822) (412) (179) (1 413)
Tax paid (288) (144) (63) (495)
Cash flow from investing activities (1 574) (717) 16 95 (2 180)
Proceeds on sale of fixed assets 55 5 17 77
Investment in fixed assets to maintain
operations
(414)
(215)
(16)
(645)
Investment in fixed assets to expand
operations
(653)
(125)
(778)
Dividends received 290 18 20 95 423
Proceeds on sale of investments in group
companies
90
90
Purchase of investments in group companies (44) (44)
Insurance proceeds 57 57
Purchase of financial assets (999) (356) (5) (1 360)
Cash flow from financing activities 865 (36) (16) (95) 718
Proceeds of share issue 1 364 1 364
Share issue costs (33) (33)
Distributions to shareholders (310) (95) (405)
Repayment of borrowings (156) (36) (16) (208)
Net increase in cash and cash equivalents 594 (59) 288 0 823
Opening balance of cash and cash
equivalents
678
256
33
35
1 002
Exchange rate fluctuations on foreign cash 28 11 39
Closing balance of cash and cash
equivalents
1 272
225
332
35
1 864
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CF002

For the purpose of preparing the pro forma consolidation journal entries, each individual company in the group, including associate companies, has to report separately transactions that involve other companies in the group. Report CF002 provides a summary of the cash flow information of all intragroup transactions.

REPORT CODE:
CF002
REPORT DATE:
31/12/2011
REPORT PERIOD:
12 months
Date Entity Item Buy/sell Currency Amount
(R million)
07/07/2011 Zürich Equipment Sell ZAR 5
07/07/2011
Care-Clinic Windhoek
Proprietary Limited Equipment Buy (M) ZAR (5)
25/09/2011
Care-Clinic Mpumalanga
Proprietary Limited Equipment Sell ZAR 3
25/09/2011
Care-Clinic Eastern Cape
Proprietary Limited Equipment Buy (M) ZAR (3)
(M) = Maintain operations.
CF003

For the purpose of preparing the pro forma consolidation journal entries, report CF003 provides a summary of the total dividends paid in cash per individual company in the group, including associate companies.
REPORT CODE:
CF003
REPORT DATE:
31/12/2011
REPORT PERIOD:
12 months
Date Entity Currency Amount
(R million)
31/08/2011 Care-Clinic Africa Proprietary Limited ZAR (95)
31/08/2011 Care-Clinic Swakopmund Proprietary Limited ZAR (10)
15/09/2011 Care-Clinic Tshwane Proprietary Limited ZAR (190)
20/09/2011 Care-Clinic Windhoek Proprietary Limited ZAR (15)
20/12/2011 First Health Zürich ZAR (40)

Changes to the group

One of your co-workers provided you with the following information regarding the changes to the group structure that occurred during the current financial year. These represent the only changes for the year:

1 On 1 July 2011 Care-Clinic Africa Proprietary Limited ('CC Africa') sold its investment in Care-Clinic Lesotho Proprietary Limited ('CC Lesotho') for R24 million cash and R56 million deferred payments receivable on 1 January 2012. The impact of discounting was immaterial. In addition, the acquirer issued shares to CC Africa with a fair value of R10 million. The group originally incorporated the company with a capital
injection of R1 million. Because the sale transaction became effective before 31 December 2011, the CF001, CF002 and CF003 reports do not include any cash flow information of CC Lesotho, except for the inclusion of the total proceeds on the sale of R90 million under cash flow from investing activities. The R10 million received in shares is reflected in the reports as the purchase of financial assets and the

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  R56 million deferred payment receivable is included as part of cash received from customers.

The following represent the draft abridged financial statements of CC Lesotho: CC LESOTHO
STATEMENT OF FINANCIAL POSITION AS AT
Notes 30/06/2011 31/12/2010
R million R million
ASSETS
Property, plant and equipment 1.1 295 280
Inventories 8 6
Trade receivables 88 97
Cash equivalents 4 3
Hedging instrument 1.2 4 5
Total assets 399 391
EQUITY
Share capital 1 1
Retained earnings 77 65
Cash flow hedge reserve 7 5
LIABILITIES
Borrowings 1.3 225 230
Deferred tax liability 5 3
Trade payables 82 87
Bank overdraft 1.4 2 0
Total equity and liabilities 399 391
CC LESOTHO
STATEMENT OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED 30 JUNE 2011
Notes R million
Revenue 45
Changes in inventories (10)
Employee benefits (5)
Depreciation (3)
Bad debts (6)
Other operating expenses (2)
Effective interest on borrowings 1.5 (1)
Profit before tax 18
Income tax expense (6)
Profit after tax 12
OTHER COMPREHENSIVE INCOME
Fair value gain on cash flow hedge 1.6 2
TOTAL COMPREHENSIVE INCOME 14
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Notes
1.1 No items of property, plant and equipment were sold during the six months ended 30 June 2011 and all acquisitions were undertaken for the purpose of maintaining operating capacity only.
1.2 The hedging instrument was used in a cash flow hedge of revenue transactions.
1.3 The coupon interest on the borrowings is equal to the effective interest rate.
1.4 The bank overdraft is repayable with three months' notice.
1.5 Interest on the borrowings was settled in cash.
1.6 There is no deferred tax on the fair value gain on the cash flow hedge. This was the correct treatment under IFRS and tax legislation.

The cash flow hedge contained no ineffectiveness.
2 On 1 November 2011 Care-Clinic Switzerland ('CC Switzerland') acquired a noncontrolling interest of 45% in First Health Zürich ('FH Zürich'). CC Switzerland has significant influence over FH Zürich. At that date the fair value of all the identifiable assets and liabilities and contingent liabilities of FH Zürich amounted to R75 million (net), of which R13 million related to cash and cash equivalents.

R19 million of the R44 million purchase consideration was settled in cash and the balance in deferred payments payable on 1 January 2012. The impact of discounting was immaterial. The total purchase consideration is currently included under cash flow from investing activities, while the deferred payments payable are included as part of cash paid to suppliers. (Note: Report CF001 does not include cash flows of associate companies.)