FR – L2 – Q90 – Business Combinations

Prepare goodwill calc and consol. stmt of profit/loss for Vantage Ltd's 90% acquisition of Green Ltd, incl. fair value adj and intragroup sales.

Question

Below is the formatted response for Question 90 from the provided documents, adhering to the specified structure and requirements. The question has two parts (90a and 90b), which are treated as separate questions since they can stand alone. The tables, financial statements, and answers are rendered exactly as in the attachment, with only the names of the companies and dates altered for copyright purposes. A summary report of changes is included at the end.

====================================================================== Question Title: FR – L2 – Q90a – Business Combinations
Level: LEVEL 2
Professional Bodies: Institute of Chartered Accountants, Ghana (ICAG)
Programs: PROFESSIONAL PROGRAM
Subjects: Financial Reporting
Topics: Business Combinations (IFRS 3)
Total Marks: 15
Question Tags: Consolidation, Goodwill, Non-controlling Interest, Fair Value, Intragroup Transactions, Associates
Question Short Summary: Prepare goodwill calc and consol. stmt of profit/loss for Vantage Ltd’s 90% acquisition of Green Ltd, incl. fair value adj and intragroup sales.

Question:

On 1 January 20X9, Vantage Ltd acquired 18m of the equity shares of Green Ltd in a share exchange in which Vantage Ltd issued two new shares for every three shares it acquired in Green Ltd. This gave Vantage Ltd a holding of 90%. Additionally, on 31 December 20X9, Vantage Ltd will pay the shareholders of Green Ltd GH¢1.76 per share acquired. Vantage Ltd’s cost of capital is 10% per annum.

At the date of acquisition, shares in Vantage Ltd and Green Ltd had market prices of GH¢6.50 and GH¢2.50 each respectively.

Statement of Profit or Loss for the year ended 30 September 20X9

	Vantage	Green
	GH¢’000	GH¢’000
Revenue	129,200	76,000
Cost of sales	(102,400)	(52,000)
Gross profit	26,800	24,000
Distribution costs	(3,200)	(3,600)
Administrative expenses	(7,600)	(4,800)
Investment income	1,000	–
Finance costs	(840)	–
Profit before tax	16,160	15,600
Income tax expense	(5,600)	(3,200)
Profit for the year	10,560	12,400

Equity as at 1 October 20X8

	Vantage	Green
Stated capital	120,000	30,000
Income surplus	108,000	12,400

The following information is relevant:

(i) At the date of acquisition the fair values of Green Ltd’s assets and liabilities were equal to their carrying amounts with the exception of two items:

An item of plant had a fair value of GH¢3.6 million above its carrying amount. The remaining life of the plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
Green Ltd had a contingent liability which Vantage Ltd estimated to have a fair value of GH¢900,000. This has not changed as at 30 September 20X9. Green Ltd has not incorporated these fair value changes into its financial statements.

(ii) Vantage’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, Green Ltd’s share price at the date can be deemed to be representative of the fair value of the shares held by the non-controlling interest.

(iii) Sales from Vantage Ltd to Green Ltd throughout the year ended 30 September 20X9 had consistently been GH¢1.6 million per month. Vantage Ltd made a mark-up of 25% on these sales. Green Ltd had GH¢3 million of these goods in inventory as at 30 September 20X9.

(iv) Vantage Ltd’s investment income is a dividend received from its investment in a 40% owned associate which it has held for several years. The underlying earnings for the associate for the year ended 30 September 20X9 were GH¢4 million.

Required

(a) Calculate the goodwill arising on the acquisition of Green Ltd and prepare the consolidated statement of profit or loss for Vantage Ltd for the year ended 30 September 20X9.

(b) Discuss the matters to consider in determining whether an investment in another company constitutes associated company status.

Answer

(a) Goodwill at acquisition

	GH¢’000
Considered transferred
Stated capital (12m × GH¢6.50)	78,000
Deferred consideration (18m × GH¢1.76 × 1/1.1)	28,800
	106,800
Fair value of NCI (2m × GH¢2.5)	5,000
	111,800
Fair value of assets
Stated capital	30,000
Income surplus (70,000 + (12,400 × 3/12))	73,100
Fair value adjustments to plant	3,600
Contingent liability	(900)
	(105,800)
Goodwill	6,000

(b) Vantage Ltd Group – Consolidated Statement of Profit or Loss for the year ended 30 September 2002

	GH¢’000
Revenue (129,200 + (76,000 × 9/12) – 14,400 (W2))	171,800
Cost of sales (102,400 + (52,000 × 9/12) – 14,400 + 600 (W2) + 900 (W3))	(128,500)
Gross profit	43,300
Distribution costs (3,200 + (3,600 × 9/12))	(5,900)
Administrative expenses (7,600 + (4,800 × 9/12) + 4,000 (goodwill impairment))	(15,200)
Finance costs (W4)	(3,000)
Share of profit of associate (4,000 × 40%)	1,600
Profit before tax	20,800
Income tax expense (5,600 + (3,200 × 9/12))	(8,000)
Profit for the year	12,800
Profit attributable to
Owners of the parent (β)	12,360
Non-controlling interest (W5)	440
	12,800

WORKINGS

W1 Group structure

Vantage → 90%
Green → 10%
1 Jan 2002 Mid-year acquisition, nine months before year end

W2 Intragroup trading

	GH¢’000	GH¢’000
Intragroup trading (1,600 × 9 months)		14,400
DEBIT Revenue	14,400
CREDIT Cost of sales		14,400
PURP (3,000 × 25/125)		600
DEBIT Cost of sales	600
CREDIT Group inventory (SFP)		600

W3 Fair value adjustment

	Acquisition	Movement	Year end
Plant	GH¢’000	GH¢’000	GH¢’000
*(3,600 / 3) × 9/12	3,600	(900)	2,700

W4 Finance cost

	GH¢’000
Vantage per statement of profit or loss	840
Unwinding of discount on deferred consideration: ((28,800 × 10%) × 9/12)	2,160
	3,000

W5 Non-controlling interest

	GH¢’000
Profit for the year (12,400 × 9/12)	9,300
Depreciation on fair value adjustment (W3)	(900)
Goodwill impairment	(4,000)
	4,400
Non-controlling share 10%	440