Subject (SQ): FINANCIAL REPORTING

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  • 20 Marks

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.

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:

  1. 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.
  2. 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.

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  • 10 Marks

FR – L2 – Q89 – Business Combinations

Prepare consolidated statement of profit or loss and retained profit movement for Melody Ltd for year ended 31 Dec 20X4, including negative goodwill and intra-group adjustments.

Melody Ltd
Statement of profit or loss for the year ended 31 December 20X4.

Melody Ltd GH¢’000 Harmony Ltd GH¢’000
Revenue 304,900 195,300
Cost of sales (144,200) (98,550)
Gross profit 160,700 96,750
Operating costs (76,450) (52,100)
Operating profit 84,250 44,650
Investment income 10,500 2,600
Profit before tax 94,750 47,250
Income tax expense (42,900) (16,500)
Profit for the year 51,850 30,750

Statement of changes in equity (extracts) for the year ended 31 December 20X4

Melody Ltd GH¢’000 Harmony Ltd GH¢’000
Retained earnings brought forward 80,200 31,000
Profit for the year 51,850 30,750
Proposed ordinary dividend (20,000)
112,050 61,750

The following information is also available.
(1) Melody Ltd acquired 75% of the share capital of Harmony Ltd on 31 August 20X4.
(2) Negative goodwill of GH¢3.8 million arose on the acquisition.
(3) Profits of both companies are deemed to accrue evenly over the year except for the investment income of Harmony Ltd all of which was received in November 20X4.
(4) Melody Ltd has bought goods from Harmony Ltd throughout the year at GH¢2 million per month. At the year-end Melody Ltd does not hold any inventory purchased from Harmony Ltd.

Required
Prepare the consolidated statement of profit or loss and a working showing the movement on consolidated retained profit for the year ended 31 December 20X4.

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  • 10 Marks

FR – L2 – Q88 – Business Combinations

Prepare Haven Ltd's consolidated statement of profit or loss and retained earnings movement for 20X4, adjusting for intercompany sales and dividends.

Haven Ltd
The following are the statement of profit or loss for the year ended 31 December 20X4 of Haven Ltd and its subsidiary Seren Ltd.

Haven Ltd GH¢’000 Seren Ltd GH¢’000
Revenue 1,120 390
Cost of sales (610) (220)
Gross profit 510 170
Distribution costs (50) (40)
Administration costs (55) (45)
Operating profit 405 85
Investment income 20 4
Finance costs (18) (4)
Profit before tax 407 85
Income tax expense (140) (25)
Profit for the year 267 60
Retained profit brought forward 100 45
Profit for year 267 60
Dividends paid and proposed (50) (20)
Retained profit carried forward 317 85

The following information is relevant.
(1) Haven Ltd acquired 75% of Seren Ltd six years ago when Seren Ltd’s retained earnings were GH¢9,000.
(2) Haven Ltd made sales to Seren Ltd totalling GH¢100,000 in the year. At the year end the statement of financial position of Seren Ltd included inventory purchased from Haven Ltd. Haven Ltd had taken a profit of GH¢3,000 on this inventory.
(3) Haven Ltd’s investment income includes GH¢15,000 being its share of Seren Ltd’s dividends.

Required
Prepare a consolidated statement of profit or loss and a working showing the movement on consolidated retained profit for the year ended 31 December 20X4.

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  • 20 Marks

FR – L2 – Q87 – Business Combinations

Prepare HeadSpace Plc's consolidated statement of financial position as at 31 March 20X9, including fair value adjustments and impairment.

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.

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  • 25 Marks

FR – L2 – Q86 – Business Combinations

Prepare Drobo Ltd's consolidated statement of financial position as at 31 March 20X4, incorporating fair value adjustments, intra-group transactions, and goodwill impairment.

On 1 April 20X3, Draco Limited acquired 90% of the equity shares in Aboro Limited. On the same day Draco Limited accepted a 10% loan note from Aboro Limited for GH₵200,000 which was repayable at GH₵40,000 per annum (on 31 March each year) over the next five years. Aboro Limited’s retained earnings at the date of acquisition were GH₵2,200,000.

Statements of financial position as at 31 March 20X4

Draco Limited Aboro Limited
GH₵000 GH₵000 GH₵000 GH₵000
Non-current assets
Property, plant and equipment 2,120 1,990
Intangible – software – 1,800
Investments – equity in Aboro Limited 4,110 –
Investments – 10% loan note Aboro Limited 200
Investments – others 65 210
6,495 4,000
Current assets
Inventories 719 560
Trade receivables 524 328
Aboro Limited current account 75
Cash 20
1,338 888
Total assets 7,833 4,888
Equity and liabilities:
Capital and reserves
Equity shares of GH₵1 each 4,000 2,000
Retained earnings 2,900 1,955
6,900 3,955
Non-current liabilities
10% Loan note from Draco Limited 160
Government grant 230
390
Current liabilities
Trade payables 475 472
Draco Limited current account 60
Income taxes payable 228 174
Operating overdraft 27
730 706
Total equity and liabilities 7,833 4,888

The following information is relevant
(i) Included in Aboro Limited’s property at the date of acquisition was a leased property recorded at its depreciated historical cost of GH₵400,000. The property had been sub-let for its remaining life of only four years at an annual rental of GH₵80,000 payable in advance on 1 April each year. The directors of Draco Limited are of the opinion that the fair value of this property is best reflected by the present value of its future cash flows. An appropriate cost of capital for the group is 10% per annum.
The present value of a GH₵1 annuity received at the end of each year where interest rates are 10% can be taken as:
3 year annuity GH₵2.50
4 year annuity GH₵3.20

(ii) The software of Aboro Limited represents the depreciated cost of the development of an integrated business accounting package. It was completed at a capitalised cost of GH₵2,400,000 and went on sale on 1 April 20X2. Aboro Limited’s directors are depreciating the software on a straight-line basis over an eight-year life (i.e. GH₵300,000 per annum). However, the directors of Draco Limited are of the opinion that a five-year life would be more appropriate as sales of business software rarely exceed this period.

(iii) The inventory of Draco Limited on 31 March 20X4 contains goods at a transfer price of GH₵25,000 that were supplied by Aboro Limited who had marked them up with a profit of 25% on cost. Unrealised profits are adjusted for against the profit of the company that made them.

(iv) On 31 March 20X4 Aboro Limited remitted to Draco Limited a cash payment of GH₵55,000. This was not received by Draco Limited until early April. It was made up of an annual repayment of the 10% loan note of GH₵40,000 (the interest had already been paid) and GH₵15,000 of the current account balance.

(v) The accounting policy of Draco Limited for non-controlling interests (NCI) in a subsidiary is to value NCI at a proportionate share of the net assets.

(vi) An impairment test at 31 March 20X4 on the consolidated goodwill concluded that it should be written down by GH₵120,000. No other assets were impaired.

Required
Prepare the consolidated statement of financial position of Draco Limited as at 31 March 20X4.

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  • 12 Marks

FR – L2 – Q85 – Business Combinations

Prepare Greetings Ltd's consolidated statement of financial position as at 31 Dec 20X4, including fair value adjustments for Farewell Ltd.

On 1 January 20X1, Greetings Ltd acquired 60% of the ordinary share capital of Farewell Ltd for GH₵110,000. At that date Farewell Ltd had a retained earnings balance of GH₵60,000.
The following statements of financial position have been prepared as at 31 December 20X4.

Assets Greetings Ltd Farewell Ltd
Non-current assets GH₵ GH₵
Property, plant and equipment 225,000 175,000
Investments in Farewell Ltd 110,000 –
Current assets 271,000 157,000
Total assets 606,000 332,000
Equity and liabilities
Capital and reserves
Share capital 100,000 100,000
Retained earnings 275,000 90,000
375,000 190,000
Current liabilities 231,000 142,000
Total equity and liabilities 606,000 332,000

The fair value of Farewell Ltd’s net assets at the date of acquisition was determined to be GH₵170,000.
The difference between the book value and the fair value of the net assets at the date of acquisition was due to an item of plant which had a useful life of 10 years from the date of acquisition.
Required
Prepare the consolidated statement of financial position of Greetings Ltd and its subsidiary as at 31 December 20X4.

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  • 12 Marks

FR – L2 – Q84 – Business Combinations

Prepare Prime Ltd's consolidated statement of financial position as at 31 Dec 20X4, considering acquisition of Nexus Ltd, fair value adjustments, and unrealised profits.

On 1 July 20X1 Prime Ltd acquired 128,000 of Nexus Ltd’s 160,000 shares. The following statements of financial position have been prepared as at 31 December 20X4.

Prime Ltd GH¢000 Nexus Ltd GH¢000
Property, plant and equipment 152,000 129,600
Investment in Nexus Ltd 203,000 –
Inventory at cost 112,000 74,400
Receivables 104,000 84,000
Bank balance 41,000 8,000
Total 612,000 296,000

Prime Ltd GH¢000 Nexus Ltd GH¢000
Share capital 100,000 160,000
Retained earnings 460,000 112,000
Payables 52,000 24,000
Total 612,000 296,000

The following information is available.
(1) At 1 July 20X1 Nexus Ltd had a debit balance of GH¢11 million on retained earnings.
(2) Property, plant and equipment of Nexus Ltd included land at a cost of GH¢72 million. This land had a fair value of GH¢100,000 at the date of acquisition.
(3) The inventory of Nexus Ltd includes goods purchased from Prime Ltd for GH¢16 million. Prime Ltd invoiced those goods at cost plus 25%.

Required
Prepare the consolidated statement of financial position of Prime Ltd as at 31 December 20X4.

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  • 12 Marks

FR – L2 – Q83 – Business Combinations

Prepare Tough Ltd's consolidated statement of financial position as at 31 Dec 20X4, adjusting for intra-group asset transfer and fair value.

On 31 December 20X0, Tough Ltd acquired 60% of the ordinary share capital of Gentle Ltd for GH¢110 million. The following statements of financial position have been prepared as at 31 December 20X4. Statements of Financial Position as at 31 December 20X4

Tough Ltd Gentle Ltd
GH¢’000 GH¢’000
Assets
Non-current assets
Property, plant and equipment 225,000 175,000
Investments in Gentle Ltd 110,000 —
Current assets 271,000 157,000
606,000 332,000
Equity and liabilities
Capital and reserves
Share capital 115,000 110,000
Retained earnings 260,000 80,000
375,000 190,000
Current liabilities 231,000 142,000
606,000 332,000

During the year to 31 December 20X4, Tough Ltd sold a tangible asset to Gentle Ltd for GH¢50 million. The asset was originally purchased in the year to 31 December 20X1 at a cost of GH¢100 million and had a useful economic life of five years. Gentle Ltd’s depreciation policy is 25% per annum based on cost. Both companies charge a full year’s depreciation in the year of acquisition and none in the year of disposal. Required Prepare the consolidated statement of financial position of Tough Ltd and its subsidiary as at 31 December 20X4.

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  • 12 Marks

FR – L2 – Q82 – Business Combinations

Prepare Furry Ltd's consolidated statement of financial position as at 31 Dec 20X4, adjusting for intra-group inventory and cash in transit.

The summarised statements of financial position of Furry Ltd and Webber Ltd as at 31 December 20X4 were as follows.

Assets Furry Ltd GH₵000 Webber Ltd GH₵000
Non-current assets
Property, plant and equipment 120,000 60,000
Investments 55,000 —
Current assets
Cash 11,000 4,000
Investments — 3,000
Trade receivables 72,600 19,100
Current account – Furry Ltd — 3,200
Inventory 17,000 11,000
Total 275,600 100,300

Equity and liabilities Furry Ltd GH₵000 Webber Ltd GH₵000
Capital and reserves
Share capital 120,000 60,000
Capital reserve 23,000 16,000
Retained earnings 91,900 7,300
Current liabilities 38,000 17,000
Total 275,600 100,300

The following information is relevant:
(1) On 31 December 20X1, Furry Ltd acquired 48,000 shares in Webber Ltd for GH₵55,000,000 cash. Webber Ltd has 60,000 shares in total.
(2) The inventory of Furry Ltd includes GH₵4,000,000 goods from Webber Ltd invoiced to Furry Ltd at cost plus 25%.
(3) The difference on the current account balances is due to cash in transit.
(4) The balance on Webber Ltd’s retained earnings was GH₵2,300,000 at the date of acquisition. There has been no movement in the balance on Webber Ltd’s capital reserve since the date of acquisition.

Required:
Prepare the consolidated statement of financial position of Furry Ltd and its subsidiary Webber Ltd as at 31 December 20X4.

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  • 12 Marks

FR – L2 – Q81 – Business Combinations

Prepare PrimeCare Ltd's consolidated statement of financial position as at 31 December 20X4, including Frost Ltd, with adjustments for dividends and cash in transit.

PRIME CARE LTD
The following are the draft statements of financial position of PrimeCare Ltd and its subsidiary Frost Ltd as at 31 December 20X4.

PrimeCare Ltd GH¢000 Frost Ltd GH¢000
Assets
Non-current assets
Property, plant and equipment 100,000 68,000
Investments 68,000
Current assets
Cash 11,000 2,000
Trade receivables 72,600 19,100
Frost Ltd current account 3,200
Inventory 17,000 11,000
271,800 100,100
Equity and liabilities
Shareholders’ equity
Share capital 120,000 60,000
Retained earnings 91,900 16,000
Capital reserve 23,000 7,000
Current liabilities
PrimeCare Ltd current account 3,200
Trade payables 33,900 12,900
Proposed dividend 3,000 1,000
271,800 100,100

Notes
(1) Frost Ltd has 50,000 shares in issue. PrimeCare Ltd acquired 45,000 of these on 1 January 20X1 for a cost of GH¢65,000,000 when the balances on Frost Ltd’s reserves were:

  • Capital reserve: 20,000
  • Retained earnings: 10,000

(2) PrimeCare Ltd declared a dividend of GH¢3,000,000 before the year end and Frost Ltd declared one of GH¢2,000,000. These transactions have been approved by the shareholders but have not been accounted for.

(3) The current account difference is due to cash in transit.

Required
Prepare the consolidated statement of financial position as at 31 December 20X4 of PrimeCare Ltd.

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