- 20 Marks
FR – L2 – Q87 – Business Combinations
Question
On 1st April 20X8, HeadSpace Plc acquired four million of the ordinary shares of Skyline Ltd, paying GH¢4.50 each. At the same time, HeadSpace Plc also purchased GH¢500,000 of Skyline Ltd 10% redeemable preference shares. At the acquisition date, the retained earnings of Skyline Ltd were GH¢8,400,000.
Reproduced below are the draft statements of financial position of the two companies at 31st March 20X9:
| HeadSpace Plc GH¢’000 | Skyline Ltd GH¢’000 | |
|---|---|---|
| Non-current assets | ||
| Land and buildings | 22,000 | 12,000 |
| Plant and equipment | 20,450 | 10,220 |
| Investments in Skyline Ltd: | ||
| Equity | 18,000 | – |
| Preference | 500 | – |
| Total non-current assets | 60,950 | 22,220 |
| Current assets | ||
| Inventories | 9,850 | 6,590 |
| Trade receivables | 11,420 | 3,830 |
| Cash at bank and in hand | 490 | – |
| Total assets | 82,710 | 32,640 |
| Equity | ||
| Ordinary shares of GH¢1 each | 10,000 | 5,000 |
| 10% Preference shares | – | 2,000 |
| Retained earnings | 51,840 | 14,580 |
| Non-current liabilities | ||
| 10% Debentures 20Y2 | 12,000 | 4,000 |
| Current liabilities | ||
| Trade payables | 6,400 | 4,510 |
| Bank overdraft | – | 570 |
| Taxation | 2,470 | 1,980 |
| Total equity and liabilities | 82,710 | 32,640 |
Extracts from the statement of profit or loss of Skyline Ltd, before intra-group adjustments, for the year to 31st March 20X9 are:
| GH¢’000 | |
|---|---|
| Profit before tax | 5,400 |
| Taxation expense | 1,600 |
| 3,800 |
The following information is relevant:
(i) Included in the land and buildings of Skyline Ltd is a large area of development land recorded at cost of GH¢5 million. Its fair value at the date Skyline Ltd was acquired was GH¢7 million and by 31st March 20X9 this had risen to GH¢8.5 million. The group valuation policy for development land is that it should be carried at fair value and not depreciated.
(ii) Also at the date of acquisition of Skyline Ltd, Skyline Ltd plant and equipment included plant that had a fair value of GH¢4 million in excess of its carrying amount. This plant had a remaining life of 5 years. The group calculates depreciation on a straight-line basis. The fair value of the other net assets of Skyline Ltd approximated to their carrying amounts.
(iii) During the year, Skyline Ltd sold goods to HeadSpace Plc for GH¢1.8 million. Skyline Ltd adds a 20% mark-up on cost to all its sales. Goods with a transfer price of GH¢450,000 were included in the inventory of HeadSpace Plc at 31st March 20X9. The balance on the current accounts of HeadSpace Plc and Skyline Ltd was GH¢240,000 on 31st March 20X9.
(iv) An impairment test carried out at 31st March 20X9 showed that the consolidated goodwill was impaired by GH¢1,488,000.
(v) Skyline Ltd had paid its preference dividends in full and ordinary dividends of GH¢500,000.
Required:
(a) Prepare the consolidated statement of financial position of HeadSpace Plc as at 31st March 20X9.
(b) Calculate the non-controlling interest in the adjusted profit of Skyline Ltd for the year to 31st March 20X9.
(c) Explain why IFRS 3 Business Combinations requires an acquirer to consolidate the fair values of the assets and liabilities of an acquired subsidiary, at the acquisition date.
Answer
(a). HeadSpace Plc Group – Consolidated statement of financial position as at 31 March 20X9
| GH¢’000 | |
|---|---|
| Non-current assets: | |
| Goodwill | 992 |
| Land and buildings (22,000 + 12,000 + 2,000 + 1,500) | 37,500 |
| Plant and equipment (20,450 + 10,220 + 4,000 – 800) | 33,870 |
| Current assets: | |
| Inventories (9,850 + 6,590 – 75 (W2)) | 16,365 |
| Trade receivables (11,450 + 3,830 – 240 (W3)) | 15,040 |
| Cash at bank and in hand | 490 |
| Equity | |
| Share capital | 10,000 |
| Revaluation (group share of post-acquisition gain (W1)) | 1,200 |
| Group retained earnings | 46,265 |
| Non-controlling interest | 6,741 |
| Non-current liabilities | |
| 10% debenture 20Y2 (12,000 + 4,000) | 16,000 |
| Current liabilities | |
| Trade payables (6,400 + 4,510 – 240 (W3)) | 10,670 |
| Bank overdraft | 570 |
| Taxation (2,470 + 1,980) | 4,450 |
WORKINGS
W1 Group structure
HeadSpace Ltd
(4m / 5m × 100)
80% control
20% NCI
Skyline Ltd
Date of acquisition/control: 01/04/20X7
Date of reporting: 31/03/20X8
Post-acquisition period: 1 year
W2 Net Assets
| Acquisition date 01/04/20X7 GH¢’000 | Reporting date 31/03/20X8 GH¢’000 | Post-acquisition retained earnings GH¢’000 | |
|---|---|---|---|
| Ordinary Share capital | 5,000 | 5,000 | – |
| Retained earnings | 8,400 | 14,580 | 6,180 |
| Fair value of dev. Land | 2,000 | 3,500 | |
| Fair value of plant | 4,000 | 4,000 | |
| Fair value dep’n – plant (4,000 / 5) | (800) | (800) | |
| PUP on inventory (20 / 120 × 450) | (75) | (75) | |
| 19,400 | 26,205 | 5,305 |
W3 Goodwill computation
| GH¢’000 | |
|---|---|
| Cost of Investment | 18,500 |
| Less: Net Assets at acquisition (W2) (19,400 × 80%) | (15,520) |
| 10% Preference shares | (500) |
| Total Goodwill | 2,480 |
| Less impairment loss | (1,488) |
| Goodwill at consolidation | 992 |
Note: proportionate method is required as the question is silent on fair value method.
W4 Consolidated income surplus
| GH¢’000 | |
|---|---|
| Balance at 01/04/20X7 | 51,840 |
| Goodwill impairment | (1,488) |
| Group share of post-acquisition profit (W2) (5,305 × 80%) | 4,244 |
| At consolidation | 46,265 |
W5 Non-Controlling interest
| GH¢’000 | |
|---|---|
| Add: NCI’s share of post-acquisition profit (20% × 26,205) | 5,241 |
| 10% Preference shares (2,000 – 500) | 1,500 |
| At consolidation | 6,741 |
(b).
| GH¢’000 | |
|---|---|
| Profit before tax before group adjustments | 5,400 |
| Adjustments: | |
| Extra depreciation on fair value gain (4,000 / 5) | (800) |
| Provision for unrealized profit | (75) |
| Adjustment profit and tax | 4,525 |
| Taxation expenses | (1,600) |
| 2,925 | |
| 10% preference dividend | (150) |
| Total NCI | 2,775 |
| NCI (20%) | 555 |
(c). IFRS 3 Business Combinations requires an acquirer to consolidate the fair values of the assets and liabilities of an acquired subsidiary at the acquisition date for the following reasons:
- True Economic Value: Fair value reflects the current market value of assets and liabilities, providing a more accurate representation of the economic resources and obligations acquired. This ensures the consolidated financial statements present a true and fair view of the group’s financial position.
- Consistency and Comparability: Using fair values aligns the accounting for the subsidiary’s assets and liabilities with the acquirer’s accounting policies and market-based measurement principles, enhancing consistency and comparability across the group’s financial statements.
- Goodwill Calculation: Fair value measurement is essential for calculating goodwill, which is the difference between the purchase consideration and the fair value of the net identifiable assets acquired. This ensures goodwill reflects the premium paid for control and synergies, not historical costs.
These principles ensure that the consolidated financial statements provide relevant and reliable information to users.
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