- 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.
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.
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