- 25 Marks
FR – L2 – Q97 – Business Combinations
Prepare Peak Plc's consolidated statement of financial position as at 31 March 20X4, incorporating acquisitions of Flare Plc and Crest Ltd, with adjustments for intra-group transactions and fair value.
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.
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