- 25 Marks
FR – L2 – Q97 – Business Combinations
Question
Peak Plc acquired the following non-current investments on 1 April 20X3:
(1) 4 million of Flare Plc’s 5 million equity shares, by means of an exchange of one share in Peak for every one share in Flare Plc, plus GH¢6.05 million in cash for each Flare Plc share acquired. The professional fees associated with the acquisition amounted to GH¢1 million. The market price of shares in Peak Plc at the date of the acquisition was GH¢9 per share. The market price of Flare Plc shares just before the acquisition was GH¢7. The cash part of the consideration is deferred and will not be paid until two years after the acquisition.
(2) 25% of Crest Ltd’s 6 million equity shares, at a cost of GH¢6 per share. The money to make this payment was obtained by issuing one million new shares in Peak Plc at GH¢9 per share.
None of these transactions has yet been recorded in the summary statements of financial position that are shown below.
The summarised draft statements of financial position of the three companies at 31 March 20X4 are as follows:
| Statement of financial position | Peak Plc | Flare Plc | Crest Ltd |
|---|---|---|---|
| GH¢ million | GH¢ million | GH¢ million | |
| Assets | |||
| Non-current assets | |||
| Property, plant and equipment | 60.0 | 31.0 | 16.0 |
| Other equity investments | 0.8 | nil | nil |
| 60.8 | 31.0 | 16.0 | |
| Current assets | 18.2 | 8.0 | 9.0 |
| Total assets | 79.0 | 39.0 | 25.0 |
| Equity and liabilities | |||
| Equity shares | 18.0 | 9.0 | 10.0 |
| Retained earnings: at 1 April 20X3 | 36.0 | 16.0 | 8.0 |
| – for year ended 31 March 20X4 | 8.0 | 3.0 | 2.0 |
| 62.0 | 28.0 | 20.0 | |
| Non-current liabilities | |||
| 6% loan notes | 10.0 | – | – |
| 7% loan notes | – | 6.0 | 3.0 |
| Current liabilities | 7.0 | 5.0 | 2.0 |
| Total equity and liabilities | 79.0 | 39.0 | 25.0 |
The following information is relevant:
(1) Peak Plc has chosen to value the non-controlling interest in Flare Plc using the fair value method permitted by IFRS 3 (revised). The fair value of the non-controlling interests at the acquisition date is estimated to be the market value of the shares before the acquisition.
(2) At the date of acquisition of Flare Plc, the fair values of its assets were equal to their carrying amounts.
(3) The cost of capital of Peak Plc is 10% per year.
(4) During the year ended 31 March 20X4, Flare Plc sold goods to Peak Plc for GH¢3.6 million, at a mark-up of 50% on cost. Peak Plc had 75% of the goods in its inventory at 31 March 20X4.
(5) There were no intra-group receivables and payables at 31 March 20X4.
(6) On 1 April 20X3, Peak Plc sold a group of machines to Flare Plc at their agreed fair value of GH¢3 million. At the time of the sale, the carrying amount of the machines was GH¢2 million. The estimated remaining useful life of the plant at the date of the sale was four years. Plant and machinery is depreciated to a residual value of nil using straight-line depreciation and at 1 April 20X3 the machines had an estimated remaining life of five years.
(7) “Other equity investments” are included in the summary statement of financial position of Peak Plc at their fair value on 1 April 20X3. Their fair value at 31 March 20X4 is GH¢0.65 million.
(8) Impairment tests were carried out on 31 March 20X4. These show that there is no impairment of the value of the investment in Crest Ltd or in the consolidated goodwill.
(9) No dividends were paid during the year by any of the three companies.
Required
Prepare the consolidated statement of financial position for Peak Plc as at 31 March 20X4.
Answer
Consolidated statement of financial position as at 31 March 20X4
| GH¢000 | |
|---|---|
| Non-current assets | |
| Property, plant and equipment (working 1) | 90,000 |
| Goodwill (working 4) | 23,000 |
| Investment in associate (working 6) | 9,500 |
| Other investments | 650 |
| 123,150 | |
| Current assets (working 5) | 24,300 |
| Total assets | 147,450 |
| Equity and liabilities | |
| Equity shares of GH¢1 each (working 3) | 63,000 |
| Retained earnings (working 8) | 43,730 |
| Non-controlling interests (working 7) | 7,420 |
| Total equity | 114,150 |
| Non-current liabilities | |
| Deferred consideration for Flare shares | 5,500 |
| 6% loan notes | 10,000 |
| 7% loan notes | 6,000 |
| Current liabilities: 7,000 + 5,000 | 12,000 |
| Total equity and liabilities | 147,450 |
Workings
- Property, plant and equipment (PPE)
| GH¢000 | |
|---|---|
| Peak | 60,000 |
| Flare | 31,000 |
| Profit on transfer of machines (3 million – 2 million) | 1,000 |
| Less: Depreciation on this amount in accounts of Flare (1,000/5 years) | (200) |
| Unrealised profit in machines | (800) |
| PPE in consolidated statement of financial position | 90,000 |
- Deferred consideration
The present value of the deferred consideration at 1 April 20X3 is GH¢6.05 million × 1/(1.10)² = GH¢5 million.
During the year to 31 March 20X4 there is a finance charge of 10% (= GH¢500,000) on this amount, reducing the parent’s share of the consolidated profit.
The deferred consideration at 31 March 20X4 is GH¢5 million + GH¢500,000 = GH¢5,500,000. This is payable in just over 12 months and is included in the consolidated statement of financial position as a non-current liability. - Share issues
The share issues to acquire the shares in Flare and Crest are not recorded in the summary statement of financial position of Peak (as stated in the question).
| Share capital GH¢000 | |
|---|---|
| To acquire the shares in Flare | |
| Peak shares issued: (4 million at GH¢9) | 36,000 |
| To acquire the shares in Crest | |
| Peak shares issued: (1 million at GH¢9) | 9,000 |
| Increase in share capital of Peak | 45,000 |
| In summary statement of financial position | 18,000 |
| In consolidated statement of financial position | 63,000 |
- Goodwill
Peak has acquired 4 million/5 million = 80% of the shares of Flare.
At 1 April 20X3 the fair value of the net assets of Flare was (share capital plus reserves) = GH¢(5 + 4 + 16) million = GH¢25 million
| GH¢000 | |
|---|---|
| Purchase consideration paid by the parent company | |
| Issue of 4 million shares at GH¢9 | 36,000 |
| Deferred consideration | 5,000 |
| 41,000 | |
| Fair value of parent company share of net assets (80% × GH¢25 million) | 20,000 |
| Purchased goodwill attributable to parent | 21,000 |
| Fair value of NCI at acquisition date (1 million shares × GH¢7) | 7,000 |
| NCI share of net assets at this date (20% × GH¢25 million) | 5,000 |
| Purchased goodwill attributable to NCI | 2,000 |
There has been no impairment of goodwill during the year.
| GH¢000 | |
|---|---|
| Purchased goodwill attributable to parent | 21,000 |
| Goodwill attributable to NCI | 2,000 |
| Total goodwill in consolidated statement of financial position | 23,000 |
Alternatively, total goodwill could be calculated as follows:
| GH¢000 | |
|---|---|
| Purchase consideration paid by the parent company (see above) | 41,000 |
| Fair value of NCI at acquisition date | 7,000 |
| Net assets of the subsidiary at the acquisition date (at fair value) | (25,000) |
| Total goodwill (parent and NCI) | 23,000 |
- Current assets
The cost of the goods sold by Flare to Peak was GH¢3,600,000 × 100/150 = GH¢2,400,000 and the profit was GH¢1,200,000.
Since 75% of these goods are in closing inventory, the unrealised profit on intra-group sales is 75% × GH¢1,200,000 = GH¢900,000. Current assets in the consolidated statement of financial position (inventory) should be reduced by this amount.
The question states that the transaction costs of the acquisition of Flare have not yet been recorded. These costs reduce the consolidated profit, and also (presumably) reduce the current assets of Peak.
| GH¢000 | |
|---|---|
| Current assets on consolidation | |
| Peak | 18,200 |
| Flare | 8,000 |
| Less: unrealised profit in closing inventory | (900) |
| Less: expenses of acquisition of Flare | (1,000) |
| Current assets in consolidated statement of financial position | 24,300 |
- Investment in associate (Crest)
Since Peak owns 25% of the equity of Crest, it is assumed that Crest is an associated entity.
| GH¢000 | |
|---|---|
| Cost of investment: 25% × 6 million shares × GH¢6 | 9,000 |
| Share of post-acquisition retained profit: 25% × GH¢2 million | 500 |
| Investment in associate | 9,500 |
- Non-controlling interests
| GH¢000 | |
|---|---|
| Share of net assets of Flare at 31 March 20X4 (20% × GH¢28 million) | 5,600 |
| Goodwill attributable to NCI (working 4) | 2,000 |
| NCI share of unrealised profit in inventory (20% × GH¢900,000) | (180) |
| NCI at 31 March 20X4: fair value method | 7,420 |
- Consolidated retained earnings
| GH¢000 | |
|---|---|
| Peak retained earnings (36,000 + 8,000) | 44,000 |
| Flare | |
| Profit for year-ended 31 March 20X4 | 3,000 |
| Unrealised profit in closing inventory | (900) |
| 2,100 | |
| Parent company share (80%) | 1,680 |
| Share of post-acquisition retained profits of Crest (25% × GH¢2 million) | 500 |
| Costs of acquisition of Flare (expensed) | (1,000) |
| Additional finance costs: deferred consideration | (500) |
| Unrealised profit in machines (working 1) | (800) |
| Loss on other (800 – 650) | (150) |
| Consolidated retained earnings at 31 March 20X4 | 43,730 |
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