Question Tag: Acquisition

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  • 9 Marks

AT – Nov 2024 – L3 – Q2b – Tax Implications of 100% Acquisition in Mining Operations

Explain the tax implications of a 100% acquisition and compute the gains from the acquisition.

Tongo LTD (Tongo) is a mining company operating in the Upper East Region of Ghana. The following relates to the operations of Tongo for the 2023 year of assessment:

Description GH¢
Revenue (Gross) 200,000,000
Cost of Operations 80,000,000
Margin/Profit 120,000,000

Additional Information:

  1. Tempane Mines LTD acquired 100% interest in Tongo for a consideration of GH¢310,000,000 at the end of 2023.
  2. The cost of assets acquired at their respective acquisition dates are as follows:
Year Cost of Assets (GH¢)
2020 100,000,000
2021 75,000,000
2023 50,000,000

Required:

i) Explain the tax implication of the 100% acquisition.

ii) Compute the gains from the above acquisition and determine how the gains should be treated.

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  • 20 Marks

FM – May 2016 – L3 – Q4 – Mergers and Acquisitions

Estimating the additional equity value created by combining two companies and analyzing the impact of premium increases on shareholders.

Eko Product Plc (EP Plc) is a producer of a variety of vegetable oil and other household products in Lagos. The company presently faces significant competition in the market for one of its major raw materials – palm oil. To secure a regular flow of the raw material, the Directors of EP Plc are now considering making an offer for the entire share capital of Benin Oil Plc (BO Plc), a palm oil producing company in Benin.

The following financial information is provided for the two companies:

Parameter EP Plc BO Plc
Equity beta 1.2 1.2
Asset beta 0.9 1.2
Number of shares (million) 210 200
Current share price N29 N12

It is thought that combining the two companies will result in several benefits. It is estimated that combining the two companies will generate free cash flow to the firm (FCFF) of N1,080 million in current value terms, but these will increase by an annual growth rate of 5% for the next four years before reverting to an annual growth rate of 2.25% in perpetuity. In addition to this, combining the companies will result in cash synergy benefits of N100 million per year for the next four years. These synergy benefits are not subject to any inflationary increase, and no synergy benefits will occur after the fourth year.

The debt-to-equity ratio of the combined company will be 40:60 in market value terms and it is expected that the combined company’s cost of debt will be 4.55% before tax.

The income tax rate is 20%, the current risk-free rate of return is 2%, and the market risk premium is 7%. It can be assumed that the combined company’s asset beta is the weighted average of EP Plc’s and BO Plc’s asset betas weighted by their current market values.

EP Plc has offered to acquire BO Plc through a mixed offer of one of its shares for two BO Plc shares, plus a cash payment, such that a 30% premium is paid for the acquisition. Shareholders of BO Plc feel that a 50% premium would be more acceptable. EP Plc has sufficient cash reserves if the premium is 30%, but not if it is 50%.

You are required to:

(a) Estimate the additional equity value created by combining EP Plc and BO Plc based on the free cash flow to firm method. Comment on the results obtained and discuss briefly the assumptions made. (11 Marks)

(b) Estimate the impact on EP Plc’s equity holders if the premium paid is increased to 50% from 30%. (5 Marks)

c. Estimate the additional funds required if a premium of 50% is paid instead of 30% and discuss how this premium could be financed. (4 Marks)

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  • 4 Marks

ATAX – May 2016 – L3 – Q4a – Capital Gains Tax (CGT)

Define disposal and explain when an acquisition/disposal is considered effective under the Capital Gains Tax Act.

a. With respect to the Capital Gains Tax Act Cap C1 LFN 2004 (As Amended)
i. What is ‘Disposal’? (2 marks)
ii. When can an Acquisition/Disposal be said to be effective? (2 marks)

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  • 2 Marks

ATAX – May 2019 – L3 – Q4a – Capital Gains Tax (CGT)

Define when acquisition or disposal is effective under the Capital Gains Tax Act.

a. With respect to the Capital Gains Tax Act Cap C1 LFN 2004 (as amended), when is acquisition or disposal effective? (2 Marks)

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  • 8 Marks

CR – Nov 2014 – L3 – SC – Q4b – Income Taxes (IAS 12)

Evaluate the impact of deferred tax on fair value adjustments for property, plant, and equipment in an acquisition.

On 1 June 2013, Bam Plc acquired Mango Limited for N3,150 million.
The fair value of the identifiable net assets of Mango Limited at this date was N825 million, and N2,550 million and retained earnings and other components of equity were N105 million, respectively. Mango Limited’s share capital was N1,500 million.

The excess of the fair value of the net assets is due to an increase in the value of property, plant, and equipment.

Required:
Evaluate the impact of full deferred tax on the excess of the fair value of the net assets attributable to the increase in the value of property, plant, and equipment of Bam Plc.

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  • 30 Marks

FM – May 2024 – L3 – SA – Q1 – Business Valuation Techniques

Evaluate the potential acquisition of Kenny Ltd (KL) by Bolade Plc, calculating share value using various valuation methods, assessing these methods, and outlining merger benefits.

You are employed by Bolade Plc (BP), a very large printing firm with retail outlets across Nigeria. Its board is considering making an offer to buy 100% of the shares of Kenny Ltd (KL), a competitor of Bolade in Aba. KL’s financial year-end is 28 February, and its most recent financial statements are summarised below:

KL Income Statement for the Year Ended 28 February 2023

Item ₦m
Revenue 17.3
Profit before interest and tax 5.9
Interest (0.3)
Profit before taxation 5.6
Tax at 21% (1.2)
Profit after taxation 4.4
Dividends declared 1.1

KL Statement of Financial Position at 28 February 2023

Item ₦m
Non-current assets:
Freehold land and buildings (original cost ₦4.1m) 3.5
Machinery (original cost ₦8.8m) 5.3
Total Non-current assets 8.8
Current assets:
Inventories 3.0
Receivables 0.5
Cash and bank 2.8
Total Current assets 6.3
Current liabilities:
Trade payables 3.5
Dividends 1.1
Taxation 1.2
Total Current liabilities (5.8)
Net Current assets 0.5
Net assets 9.3
Non-current liabilities:
10% bonds (redeemable 2031) (3.0)
Net assets after non-current liabilities 6.3
Equity:
Ordinary shares of ₦1 each 2.1
Retained earnings 4.2
Total equity 6.3

Additional Information:

KL’s management had some of the company’s assets independently revalued in January 2023. Those values are shown below:

Asset ₦m
Freehold land and building 8.3
Machinery 4.1
Inventories 3.1

The average price/earnings ratio for listed businesses in the printing industry is 9, and the average dividend yield is 6% p.a.
The cost of equity of businesses in the printing industry, taking account of the industry average level of capital gearing, is 14% p.a.

KL’s finance department has estimated that the company’s pre-tax net cash inflows (after interest) for the next four trading years ending 28 February, before taking account of capital allowances, will be:

Year to ₦m
2024 4.6
2025 4.3
2026 5.2
2027 5.7

KL’s existing equipment has a tax written-down value of ₦3.6 million at 28 February 2023. The equipment attracts 18% (reducing balance) tax allowances in every year of ownership by the company, except the final year.

You should assume that KL will not be purchasing or disposing of any machinery in the years 2024-2027 and that it would dispose of the existing equipment on 28 February 2027 at its tax written-down value.

Bolade’s board estimates that in four years’ time, i.e., 28 February 2027, it could, if necessary, dispose of KL for an amount equal to four times its after-tax cash flow (ignoring the effects of capital allowances and the disposal value of the equipment) for the year to 28 February 2027.

Assume that the company income tax rate is 21% p.a.

Required:

Using the information provided, prepare a report for Bolade’s board by:

a. Calculating the value of one share in KL based on each of the following methods:

  • i. Net asset basis (historic cost)
  • ii. Net asset basis (revalued)
  • iii. Price/earnings ratio
  • iv. Dividend yield
  • v. Present value of future cash flows
    (16 Marks)

b. Explain the advantages and disadvantages of using each of the five valuation methods in (a).
(8 Marks)

c. What are the possible benefits from the merger between Bolade Plc (BP) and Kenny Limited (KL).
(6 Marks)

(Total: 30 Marks)

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  • 20 Marks

FM – Nov 2018 – L3 – Q3 – Business Valuation Techniques

Valuation of acquisition target using free cash flow forecast and P/E ratio analysis in the context of an acquisition.

Lagelu Plc. (LP) is a very successful entity. The company has consistently followed a business strategy of aggressive acquisitions, looking to buy companies that it believes were poorly managed and hence undervalued. LP can be described as a modern-day conglomerate with business interests stretching far and wide.

Its board of directors has chosen the takeover targets with care. LP has maintained its price earnings (P/E) ratio on the stock market at 12.2.

LP’s figures show a profit after tax of ₦4,430 million, and it has 375 million shares.

Lam Technical (LT) is a well-established owner-managed business. It has had its ups and downs in financial terms, corresponding directly with the state of the global economy. Since 2001, its profits have fallen each year, with the 2017 results as stated below:

With economists predicting an upturn in the global economy, LT’s management team feels that revenue will increase by 6% per annum up to and including year 2021. The company’s operating profit margin is not expected to change in the foreseeable future.

Operating profits are shown after deducting non-cash expenses (including tax-allowable depreciation) of ₦650m. This is expected to increase in line with sales. However, the company has recently spent ₦1,050m on the purchase of non-current assets, and LT’s management believes this will need to increase by 10% per annum until year 2021 to enable the company to remain competitive.

LT is currently financed by debt and equity. It has maintained a constant debt-to-total-asset ratio of 40% and has no intention to change this financing mix in the near future.

The company has a cost of equity of 17% and a weighted average cost of capital of 12%.

Assume a tax rate of 25% in all cases.

Some of LT’s major shareholders are not so confident about the future and would like to sell the business as a going concern. The minimum price they would consider would be the fair value of the shares plus a 10% premium. LT’s Chief Financial Officer believes the best way to find the fair value of the shares is to discount the forecast Free Cash Flows to the firm, assuming that beyond the year 2021, these will grow at a rate of 3% per annum indefinitely.

Required:

a. Prepare a schedule of forecast Free Cash Flows to the firm for each of the years from December 31, 2018, to 2021. (5 Marks)

b. Estimate the fair value of LT’s equity on a per-share basis. (6 Marks)

c. LP intends to make an offer to LT based on a share-for-share swap. LP will exchange one of its shares for every two LT shares. Assuming that LP can maintain its price earnings (P/E) ratio of 12.2, calculate the percentage gain in equity value that will be earned by both groups of shareholders. (6 Marks)

d. What factors should the LT shareholders consider before deciding whether to accept or reject the offer made by LP? (3 Marks)

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  • 20 Marks

CR – Nov 2018 – L3 – SB – Q3 – Business Combinations (IFRS 3)

Evaluation of Abana and Doha as potential acquisition targets using adjusted financial ratios.

Banny Plc. (Banny) is a diversified company that has achieved its present size through vertical and horizontal acquisition. The directors have identified two potential target entities for acquisition. The first is Abana Limited (Abana), which operates a cement business near Offa, Kwara State. The second is Doha Limited (Doha), also in the cement industry, located near Oturukpo, Benue State. Banny has obtained copies of their audited financial statements, along with additional information notes.

Statement of Profit or Loss for the Year Ended December 31, 2017

Item Abana (₦’m) Doha (₦’m)
Revenue 136,000 132,000
Cost of sales (84,000) (91,900)
Gross profit 52,000 40,100
Other operating expenses (36,000) (28,000)
Profit from operations 16,000 12,100
Finance costs (6,000) (8,000)
Profit before tax 10,000 4,100
Income tax expense (3,000) (2,000)
Net profit for the period 7,000 2,100

Statement of changes in equity for the year ended December 31, 2017

Statement of financial position as at December 31, 2017

Additional Notes:

  1. Doha revalued its non-current assets for the first time following IFRS adoption on January 1, 2017. Abana maintains its non-current assets at historical cost.
  2. Banny uses the following ratios to evaluate acquisition targets: Return on Capital Employed (ROCE), Gross Profit Margin, Turnover on Capital Employed, and Leverage.

Required:

a. Compute adjustments for the revaluation of property, plant, and equipment, making Abana and Doha comparable for analysis. (14 Marks)

b. Calculate the four ratios (ROCE, Gross Profit Margin, Turnover on Capital Employed, and Leverage) after adjustments. (4 Marks)

c. Advise Banny on the better acquisition target based on adjusted ratios. (2 Marks)

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  • 30 Marks

CR – Nov 2018 – L3 – SA – Q1a – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Adegaga Laboratories Plc., including the effects of an acquisition and goodwill impairment.

Adegaga Laboratories Plc (“AdeLabs”) is one of the largest companies in Nigeria engaged in cosmetic development and manufacturing. Its largest customer base is in the healthcare sector for post-surgery patients and the Nigeria movie industry (aka Nollywood). In the prior financial period, AdeLabs’ expansion strategy has been largely focused on growth by acquisition and joint ventures.

Additional Information:

  1. As part of this, AdeLabs acquired 80% of the equity share capital of Bodegas Limited (“Bodegas”) on January 1, 2015, when the retained earnings of Bodegas was N93.75 million. Following the share acquisition, AdeLabs had control over Bodegas – no shares have been issued by Bodegas following the acquisition. The non-controlling interest in Bodegas was measured at its fair value of N20 million at the date of acquisition.
  2. On January 1, 2016, AdeLabs acquired 50% of the equity share capital of ChidePlastics Limited (“ChidePlast”) when the retained earnings of ChidePlast was N41.25 million. This acquisition was classified as a joint venture in accordance with IFRS 11 Joint Arrangements. ChidePlast has not issued any shares since the acquisition date.
  3. The balance on “other reserves” relates to movements in the values of investments in Bodegas and ChidePlast in the books of AdeLabs. N18.75 million relates to Bodegas, and the remainder to ChidePlast.
  4. AdeLabs’ non-current liabilities relate to a borrowing (long-term) taken out on January 1, 2017. This borrowing has an agreed coupon rate of 4% p.a., and the interest expense due in respect of 2017 has been paid and accounted for in profit for the year. The effective interest rate estimated with this financial liability is 8% p.a.
  5. As part of its annual impairment review, AdeLabs concluded that the goodwill on the acquisition of Bodegas was impaired by 20% at December 31, 2017. No other impairments of goodwill have arisen.
  6. AdeLabs sold goods to ChidePlast with a value of N75 million and a selling margin of 40% in November 2017. As at year-end December 31, 2017, 75% of these items are unsold.

Accounts for all companies are made up to December 31 annually.

Required:

Prepare for Adegaga Laboratories Plc:

  1. A consolidated statement of financial position as at December 31, 2017. (20 Marks)
  2. On January 1, 2018, AdeLabs acquired an additional 10% of the equity shares of Bodegas. The purchase consideration for this additional acquisition was N52,500,000.

    i. Briefly explain how this additional acquisition will impact the preparation of AdeLabs’ consolidated financial statements for the year ended December 31, 2017. (4 Marks)

    ii. Calculate the adjustment that will be required to be made to AdeLabs’ statement of financial position as a result of this acquisition. (6 Marks)

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  • 30 Marks

AAA – Nov 2022 – L3 – SB – Q1 – Group Audits

Evaluate the justification for joint auditors, present options for audit concerns, and prepare an appropriate report for disputed acquisition.

Mr. Johnson is the Senior Partner of Johnson, Odewole, Thomas & Co., Chartered Accountants. During the last audit of Mandarin Manufacturing Plc, which the firm did with Messrs Ark Professional Services (APS) for the year ended 30 September, 2020, Mr. Johnson expressed displeasure on some of the conclusions reached by APS on certain audit areas. The manager in charge of the audit at Johnson, Odewole, Thomas & Co. had drawn Mr. Johnson’s attention to matters marked “For Partner’s Attention.” Discussions with the corresponding partner of APS on these matters were considered unsatisfactory.

Mr. Johnson’s views differed significantly from those of the corresponding partner of APS. It was agreed to proceed to the board meeting where these disputed positions would be presented and discussed with the directors before a final decision was reached. Of significance is the acquisition of a property from a former staff member for the opening of a new branch warehouse. The acquisition process was hurried and exceeded the capital expenditure provisions for the period. Mr. Johnson’s team viewed the acquisition as a potential fraud on the company, while APS aligned with the director of finance, who considered it a normal transaction.

At the board meeting to discuss the financial statements, members were divided between the two audit firms’ views, leading the chairman to reschedule the meeting. He requested additional information on both parties’ positions and asked them to harmonize their views before the next meeting the following day.

Required:

a. Evaluate the justification or otherwise of an entity having joint auditors. (8 Marks)

b. Following the concerns of Johnson, Odewole, Thomas & Co., present the options available to the firm. (5 Marks)

c. Discuss the points on which the Chairman needs to base his decision, according to standard acquisition procedures. (7 Marks)

d. If the Chairman agrees with the position of Johnson, Odewole, Thomas & Co., determine the reporting requirement and draft an appropriate report for inclusion in the auditors’ report. (6 Marks)

e. Discuss the composition of items that could be marked “For Partner’s Attention” during the conclusion of an audit process. (4 Marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q2 – Mergers and Acquisitions

Calculate Raymond Plc.'s valuation, analyze Harold Limited's acquisition value, and assess the offer price from shareholders' perspectives.

Raymond Plc. is a successful IT services company incorporated 10 years ago. It was listed on the Stock Exchange 3 years ago. The company has a broad customer base mainly consisting of small and medium-sized companies. Raymond Plc. has achieved rapid growth in recent years by obtaining regular business from satisfied customers and also by acquiring other IT services companies.

The Directors of Raymond Plc. have identified Harold Limited, an unlisted company, as a possible acquisition target. Harold Limited has a number of large multinational clients, and, in general, its clients tend to be larger than those of Raymond Plc. If successful, the acquisition would go ahead on January 1, 2018.

Forecast financial data for Raymond Plc. and Harold Limited as of December 31, 2017, are summarized below:

Financial Item Raymond Plc. Harold Limited
Share capital (Ordinary ₦1 shares) ₦150m ₦40m
Market share price ₦4.90 N/A

N/A: Not applicable (not listed).

Additional information:

  1. If Harold Limited were to remain an independent company, its Directors estimate that reported Profit After Tax would be ₦15 million for 2018 and then grow by 2% yearly in perpetuity;
  2. If the acquisition were to go ahead, Raymond Plc.’s Directors estimate that Harold Limited’s profit after tax would be 5% higher for 2018 than if the company remains an independent company, and that profit after tax would then grow by 3% yearly in perpetuity;
  3. The average ungeared Cost of Equity for the industry is 8%;
  4. Both Raymond Plc. and Harold Limited are wholly equity financed; and
  5. Profit after tax can be assumed to be a good approximation of free cash flow attributable to investors.

The Directors of Raymond Plc. are considering offering to purchase Harold Limited at a price of ₦7.00 per share. It is estimated that transaction costs of ₦8 million would be payable on the acquisition and that ₦2 million would be required in the first year to cover the costs of integrating the two companies.

Required:

  • (a) Calculate:
    • i. The value of Raymond Plc. as at December 31, 2017.
    • ii. The value of Harold Limited as at December 31, 2017 before taking the possible acquisition of the company by Raymond Plc. into account.
    • iii. The overall increase in value created by the acquisition of Harold Limited by Raymond Plc. (8 Marks)
  • (b)
    • i. Explain how value might be created by the proposed acquisition. (2 Marks)
    • ii. Comment on the difficulties which Raymond Plc. is likely to face in realizing the potential added-value, after the acquisition. (2 Marks)
  • (c) Evaluate the proposed offer price of ₦7.00 per share for Harold Limited from the point of view of:
    • i. Harold Limited’s shareholders.
    • ii. Raymond Plc.’s shareholders. (8 Marks)

(Total 20 Marks)

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  • 15 Marks

AT – Nov 2017 – L3 – Q7 – Tax Implications of Mergers and Acquisitions

Advise on tax implications for Aba Foods merger/acquisition options with Ifedi Foods.

The prevailing economic condition has led to the business cessation of many SMEs. Aba Foods Limited, a well-known food and beverage company in Abia State, faced difficulties in securing long-term loans, preventing the replacement of its outdated equipment and leading to losses. To ensure continuity, the company considered mergers or acquisitions and entered discussions with Chief Egodi of Ifedi Group. Chief Egodi, concerned about the tax implications of potential arrangements, sought advice from your firm, Aliyara & Co., Chartered Accountants.

Required:
Provide a presentation in the form of advice:

(a) Explain the tax implications of Aba Foods Limited merging with Ifedi Foods and Beverage Limited, with Ifedi inheriting all assets and liabilities. (5 Marks)
(b) Explain the tax implications if Ifedi Foods and Beverage Limited is reconstituted to take over Aba Foods’ assets and liabilities. (5 Marks)
(c) Explain the tax implications if Ifedi Foods and Aba Foods enter a Joint Venture or Partnership Agreement. (5 Marks)

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  • 5 Marks

FR – May 2016 – L2 – Q2a – Business Combinations (IFRS 3)

Calculate goodwill for a parent company's acquisition using both proportionate share and fair value methods.

A Parent Company acquired 60% equity interest in a subsidiary company for N440 million. The market value of the net assets of the subsidiary on the acquisition date was N400 million. The parent company estimates that the full 100% interest in the subsidiary company would have cost N640 million.

Required:

Calculate the goodwill at acquisition date where non-controlling interest is measured:

i. As a proportionate share of the net assets of the subsidiary company.
ii. At fair value (the full goodwill method).

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  • 15 Marks

FR – May 2022 – L2 – SB – Q7 – Consolidated Financial Statements (IFRS 10)

Evaluate the acquisition of Warri Health PLC by computing financial ratios and drafting a technical report to the Chief Accountant of Owerri PLC.

The Board of Directors of Owerri PLC is planning to acquire a controlling interest in Warri Health PLC, a vaccine-producing company, to expand the profitability of the group. Both companies are quoted on the Nigerian Stock Exchange (NSE). The Chief Accountant of Owerri PLC has been given the industrial average and the financial statements of Owerri PLC and Warri Health PLC for the year ended December 31, 2020. This was done to enable the Chief Accountant compute the relevant ratios and evaluate the inherent potentials of the acquisition.

The following comparative ratios of Warri Health PLC and Owerri PLC with the industrial average are provided:

You are required to:
a. Compute the cost of sales ratio and earnings yield (EY) for both companies for the year ended December 31, 2020. (2 Marks)

b. Draft a technical report to the Chief Accountant of Owerri PLC, evaluating and advising on the desirability of acquiring a controlling interest in Warri Health PLC. (13 Marks)

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  • 3 Marks

FR – May 2020 – L2 – Q1b – Consolidated Goodwill Calculation

Calculate the goodwill for the acquisition of Shormeh Ltd by Naa Ltd on 1st April 2019.

Calculate the consolidated goodwill that arose on the acquisition date for Naa Ltd’s acquisition of Shormeh Ltd. (3 Marks)

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  • 5 Marks

FR – May 2021 – L2 – Q1a – Calculation of Goodwill in Consolidation

Calculate goodwill for Abirem at acquisition and at reporting for a group financial statement consolidation.

Tafo Group is a key player in the food processing industry made up only of Tafo Ltd (Tafo) and Abirem Ltd (Abirem). Below are the consolidated statement of comprehensive income of Tafo Group and the separate statements of comprehensive income of Tafo and Bonsu Ltd (Bonsu) for the year ended 31 December 2020.

Statements of Comprehensive Income for the Year Ended 31 December 2020

GH¢ Million Tafo Group Tafo Bonsu
Revenue 116 90 25
Cost of Sales (78) (62) (15)
Gross Profit 38 28 10
Distribution Costs (7) (5) (1.6)
Administrative Expenses (11) (7.5) (3.4)
Finance Costs (8.5) (2) (0.5)
Investment Income 6 5.3 –
Profit Before Tax 17.5 18.8 4.5
Tax (5.6) (4.8) (1.5)
Profit for the Year 11.9 14 3
Other Comprehensive Income
Gain on Revaluation (Net of Tax) 4.5 3.4 –
Total Comprehensive Income 16.4 17.4 3

Additional Information:

  1. Tafo purchased 80% of the 10 million ordinary shares (all issued at GH¢2 each) of Abirem on 1 January 2020 when the balance of Abirem’s reserves was GH¢35 million. Tafo agreed to settle the consideration in two unconditional instalments as follows:
    • Cash payment of GH¢33 million on 1 January 2021.
    • Cash payment of GH¢30.25 million on 1 January 2022.

    The policy of the group is to value any non-controlling interests at fair value. For this purpose, it was agreed to use the share price of Abirem as an approximation of its fair value. Abirem’s market capitalisation figures at 1 January 2020 and 31 December 2020 stood at GH¢70 million and GH¢75 million, respectively. The appropriate discount rate for Tafo is 10%. The required unwound discount has been included in the group’s (but not Tafo’s) finance costs.

  2. On 1 January 2020, a fair value exercise was carried out on Abirem’s net assets. The results showed that the book value of the depreciable plant was higher than its fair value by GH¢4 million. Post-acquisition depreciation adjustment of GH¢0.8 million is required.
  3. Tafo has held a 20% equity interest in Bonsu for several years. On 31 December 2020, an impairment loss of GH¢0.2 million was estimated for the investment in the associate. The group’s policy is to present the share of the associate’s profit before tax and share of the associate’s tax expense separately within the consolidated statement of comprehensive income. The investment income of the group shown above includes the group’s share of associate’s profit before tax (including the effects of the GH¢0.2 million impairment loss).
  4. Sales from Abirem to Tafo occurring evenly throughout the year amounted to GH¢8 million. By 31 December 2020, Tafo had sold all these goods except for items worth GH¢1.8 million. Abirem applies a cost-plus 20% markup on all sales.
  5. At 31 December 2020, it was concluded that 5% of the goodwill in Abirem had been impaired. The impairment has been charged to administrative expenses.
  6. Assume that all the necessary consolidation adjustments are correctly included in the above consolidated statement of comprehensive income.

Required:
a) Calculate the goodwill in Abirem at acquisition and reporting.
(5 marks)

 

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  • 20 Marks

FA – Nov 2015 – L1 – SB – Q4 – Financial Statements Preparation

Determine total acquisition cost and prepare journals for share issue transactions.

a. The information below shows the analysis of costs of a newly purchased equipment by JONAK Nig. Ltd.

Description N
Cost of equipment 3,000,000
2% cash discount for payment within 30 days (enjoyed) 60,000
Transport cost 100,000
Hospitality cost for factory workers during installation 25,000
Installation cost 150,000
Repair cost prior to use 65,000
Salaries of operators 125,000

Determine the total acquisition cost of the equipment. (5 Marks)

b. MEMORY Nigeria Limited decided to issue 100,000,000 N1 ordinary shares. The terms of issue are stated below:

  • (i) 30k on application
  • (ii) 45k (including premium) on allotment
  • (iii) 20k to be called one month after allotment
  • (iv) 25k final call made four months later after allotment.

On December 29, applications were received for 120,000,000 shares. On January 1, the shares were allotted so that every applicant received two-thirds of the number of shares applied for. Excess application monies were held against the amount due on allotment. On January 4, the cash due on allotment was received. On February 1, the first call was made and on February 3, cash was received. On May 1, the second call was made and cash was received on May 3.

Required: b. Raise the necessary Journals to record these transactions. (11 Marks) c. State the difference between authorised share capital and called-up share capital (4 Marks)

(Total 20 Marks)

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  • 20 Marks

FR – May 2018 – L2 – Q4 – Consolidated Financial Statements (IFRS 10)

Assess the financial performance and position of two companies using specified ratios and explain the limitations of ratio analysis.

Ibadan Nigeria Limited is considering acquiring a suitable private limited liability company. The board of directors engaged a financial consultant to analyze the financial position of two companies, Abuja Limited and Rivers Limited, which are both receptive to the acquisition. The draft financial statements of the two companies are as follows:

Statements of Profit or Loss

a. Draft a report to the chairman of the board of directors of Ibadan Limited to assess the financial performance and position of the two companies using the following specific ratios: (12 Marks) i. Profitability ratios: Gross profit percentage and net profit margin. ii. Liquidity ratios: Acid test ratio, current ratio, trade receivable period. iii. Long-term financial stability ratios: Gearing ratio and proprietary ratio. iv. Efficiency ratios: Total asset turnover and non-current asset turnover.

b. Explain the limitations of ratio analysis and further information that may be useful to the board of directors when making the acquisition decision. (8 Marks)

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  • 4 Marks

FR – May 2018 – L2 – Q1b – Business Combinations (IFRS 3)

Calculate goodwill on acquisition based on fair value measurement of the non-controlling interest.

A parent acquired 600,000 equity shares of its subsidiary three years ago for N1,200,000. The subsidiary’s issued equity share capital on that date was N250,000, with each share having a nominal value of 25 kobo. Other components of the subsidiary’s net assets at the acquisition date included share premium of N550,000 and retained earnings of N680,000. The subsidiary’s shares were quoted at N1.80 per share when the parent took control.

Required: Calculate the goodwill on acquisition if the parent measures non-controlling interest at its fair value.

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Has Case Study
  • 14 Marks

SCS – Nov 2019 – L3 – Q1c – Methods of development

iscuss the strategic alliance proposal between Ghanalux and Sunlit Hotels.

i) Discuss the issues that should be considered when responding to proposals for a strategic alliance between Ghanalux and Sunlit Hotels.
(7 marks)

ii) Discuss the issues that should be considered when responding to proposals for a business combination with the tour company in Kumasi.
(7 marks)

 

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