Question Tag: Goodwill Impairment

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  • 30 Marks

CR – Nov 2014 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Bagat Plc, incorporating details on acquisitions, impairments, and inter-company balances.

Bagat Plc has two subsidiaries (Megat and Mingat) and one associate (Cagat). Since the adoption of IFRS by Government Bagat has been preparing its consolidated financial statements in accordance with the principles of International Financial Reporting Standards (IFRS). The draft Statements of Financial Position of Bagat and its two subsidiaries as at 31 May 2013 are as follows:

Draft Statements of Financial Position as at 31 May 2013

The following information is relevant to the preparation of the group financial statements:

i. On 1 June, 2012, Bagat acquired 80% of the equity interest of Megat Plc. On the date of acquisition, the retained earnings of Megat were N2.72 billion and other components of equity were N80 million. There had been no new issue of capital by Megat since the date of acquisition. The purchase consideration comprised cash of N6 billion whereas the fair value of the identifiable net assets of Megat on this date was N8 billion. The excess of the fair value of the net assets is due to an increase in the value of non-depreciable land. An independent valuer has stated that the fair value of the non-controlling interests in Megat was N1.72 billion on 1 June, 2012. It is the policy of Bagat to measure non-controlling interests on the basis of their proportionate share in the identifiable net assets of the acquired subsidiary and not at fair value (full goodwill method).

ii. Also on 1 June, 2012, Bagat acquired 70% of the ordinary shares of Mingat. The consideration for the acquisition of these shares was N2.56 billion. Under the purchase agreement of 1 June, 2012, Bagat is required to pay the former shareholders of Mingat 30% of the profits of Mingat on 31 May, 2014 for each of the financial years to 31 May, 2013 and 31 May, 2014. The fair value of this arrangement was estimated at N120 million at 1 June, 2012, and this value has not changed. This amount has not been included in the financial statements. The fair value of the identifiable net assets at 1 June, 2012 of Mingat was N3.52 billion and the retained earnings and other components of equity were N1.1 billion and N140 million respectively. There had been no new issue of share capital by Mingat since the date of acquisition and the excess of the fair value of the net assets is due to an increase in the value of property, plant, and equipment (PPE). The fair value of the non-controlling interests in Mingat was N1.06 billion on this date. PPE is depreciated on a straight-line basis over seven years.

iii. Finally, Bagat acquired a 25% interest in Cagat Plc on 1 June, 2012 for N400 million achieving significant influence over that company in its financial and operating policy decisions. Cagat Plc retained earnings for the year to 31 May, 2013 was N200 million.

iv. Included in trade receivables of Bagat at 31 May, 2013 is a receivable from Megat of N30 million. Unknown to Bagat, Megat has paid this amount through a bank transfer by the close of work on 31 May, 2013, but it had not yet been reflected in the bank statement of Bagat. Megat has already passed accounting entries to reflect this transaction.

v. Goodwill arising on the purchase of Mingat was tested for impairment on 31 May, 2013, and this provided evidence of impairment to the tune of N36 million. No accounting entries have been passed to reflect the impairment.

Required:

Prepare a consolidated statement of financial position as at 31 May, 2013 for the Bagat Group. (30 Marks)

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  • 20 Marks

FR – Nov 2021 – L2 – Q2 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of profit or loss and other comprehensive income for Okechukwu Group for the year ended December 31, 2019.

The statements of profit or loss and other comprehensive income of Okechukwu and its subsidiary, Ogenta Limited, for the year ended December 31, 2019, are presented below:

Item Okechukwu Plc (N’000) Ogenta Ltd (N’000)
Revenue 487,500 330,800
Cost of sales (304,500) (258,300)
Gross profit 183,000 72,500
Investment income 26,300 10,200
Distribution cost (24,050) (13,370)
Administrative expenses (40,625) (21,120)
Finance costs (10,500) (9,860)
Profit before tax 134,125 38,350
Income tax expense (33,800) (13,000)
Profit for the year 100,325 25,350
Other comprehensive income 23,880 10,440
Total comprehensive income 124,205 35,790

Additional information:

  1. Okechukwu Plc acquired 300 million of the ordinary shares issued by Ogenta Limited for N428 million.
  2. During the year ended December 31, 2019, Okechukwu Plc invoiced goods worth N80 million to Ogenta Limited. It is the policy of Okechukwu Plc to invoice goods at cost plus 33⅓%. Three-quarters of these goods are yet to be sold by Ogenta Limited at the year-end.
  3. Extracts from the books of Ogenta Limited at the date of acquisition reveal the following capital structure:
    • Issued ordinary shares of 50 kobo each: N200 million
    • General reserves: N80 million
    • Retained earnings: N52.5 million
  4. The fair value of the non-controlling interests at the acquisition date amounted to N92.5 million.
  5. An impairment test on the goodwill of Ogenta Limited conducted on December 31, 2019, indicated that the goodwill should be written down by N3.2 million.
  6. On the acquisition date, the fair value of net assets of Ogenta Limited was equal to their carrying amount, except for land and building and office equipment, which had fair values of N5 million and N1.5 million, respectively, in excess of their carrying amounts. The group non-current assets are depreciated at the rate of 10% per annum on a straight-line basis and charged to administrative expenses.
  7. Ogenta Limited paid a total of N20 million as dividends to all its shareholders for the year ended December 31, 2019. Okechukwu Plc has accounted for the dividend received.
  8. The finance cost of Ogenta Limited includes N2 million paid to Okechukwu Plc as interest on a loan. Okechukwu Plc has recognized the amount as interest received.

Required:
Prepare the consolidated statement of profit or loss and other comprehensive income for Okechukwu Group for the year ended December 31, 2019.

 

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  • 20 Marks

AAA – Dec 2023 – L3 – Q3 – Audit Evidence | Evaluation and Review

Assess the risk of material misstatement and audit implications related to goodwill impairment, accounting policies, auditor’s opinion, and going concern.

As the Audit Manager for Grep & Co., you are currently overseeing the audit of Kellwin Ltd., a company operating in the food processing industry. The audit for the financial year ended 31 October 2023 is nearing completion. However, several issues have been brought to your attention by the audit team, requiring your review and further action.

a) Goodwill Impairment
Kellwin Ltd. acquired a subsidiary, Fresh Foods Plc, on 1 November 2021. The purchase consideration for the acquisition was GH¢18 million. The goodwill arising on the acquisition was recognized at GH¢3 million in Kellwin Ltd.’s consolidated financial statements for the year ended 31 October 2022. The directors have conducted an impairment review of goodwill and have concluded that no impairment is necessary, with the carrying amount of goodwill remaining at GH¢3 million as at 31 October 2023. The directors have explained that the recoverable amount of the cash-generating unit (CGU) to which the goodwill has been allocated exceeds the carrying amount. (8 marks)

b) Accounting Policies
During the audit, it was identified that Kellwin Ltd. changed its accounting policy for recognizing revenue from contracts with customers. Previously, revenue was recognized when goods were delivered to customers. However, from 1 January 2023, the company started recognizing revenue when the goods were dispatched from the warehouse. This change was applied retrospectively, and the comparative figures in the financial statements were restated. The impact of this change is an increase in revenue by GH¢1.5 million for the year ended 31 October 2023. The directors have justified the change by stating that it provides more relevant information to users of the financial statements. (6 marks)

c) Auditor’s Opinion and Going Concern
Kellwin Ltd. has experienced significant financial difficulties during the year due to adverse economic conditions. As a result, the company has incurred a net loss of GH¢2 million and has breached its loan covenants. The directors have initiated discussions with the company’s bank to secure a waiver of the covenant breaches and to obtain additional funding. The financial statements have been prepared on a going concern basis, and the directors are confident that they will secure the necessary funding. However, the negotiations with the bank are still ongoing, and there is significant uncertainty regarding the company’s ability to continue as a going concern. (6 marks)

Required:
i) Assess the risk of material misstatement in relation to each of the issues described above.
ii) For each issue, state the audit procedures that should be performed to address the risks identified.

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  • 30 Marks

CR – Nov 2014 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Bagat Plc, incorporating details on acquisitions, impairments, and inter-company balances.

Bagat Plc has two subsidiaries (Megat and Mingat) and one associate (Cagat). Since the adoption of IFRS by Government Bagat has been preparing its consolidated financial statements in accordance with the principles of International Financial Reporting Standards (IFRS). The draft Statements of Financial Position of Bagat and its two subsidiaries as at 31 May 2013 are as follows:

Draft Statements of Financial Position as at 31 May 2013

The following information is relevant to the preparation of the group financial statements:

i. On 1 June, 2012, Bagat acquired 80% of the equity interest of Megat Plc. On the date of acquisition, the retained earnings of Megat were N2.72 billion and other components of equity were N80 million. There had been no new issue of capital by Megat since the date of acquisition. The purchase consideration comprised cash of N6 billion whereas the fair value of the identifiable net assets of Megat on this date was N8 billion. The excess of the fair value of the net assets is due to an increase in the value of non-depreciable land. An independent valuer has stated that the fair value of the non-controlling interests in Megat was N1.72 billion on 1 June, 2012. It is the policy of Bagat to measure non-controlling interests on the basis of their proportionate share in the identifiable net assets of the acquired subsidiary and not at fair value (full goodwill method).

ii. Also on 1 June, 2012, Bagat acquired 70% of the ordinary shares of Mingat. The consideration for the acquisition of these shares was N2.56 billion. Under the purchase agreement of 1 June, 2012, Bagat is required to pay the former shareholders of Mingat 30% of the profits of Mingat on 31 May, 2014 for each of the financial years to 31 May, 2013 and 31 May, 2014. The fair value of this arrangement was estimated at N120 million at 1 June, 2012, and this value has not changed. This amount has not been included in the financial statements. The fair value of the identifiable net assets at 1 June, 2012 of Mingat was N3.52 billion and the retained earnings and other components of equity were N1.1 billion and N140 million respectively. There had been no new issue of share capital by Mingat since the date of acquisition and the excess of the fair value of the net assets is due to an increase in the value of property, plant, and equipment (PPE). The fair value of the non-controlling interests in Mingat was N1.06 billion on this date. PPE is depreciated on a straight-line basis over seven years.

iii. Finally, Bagat acquired a 25% interest in Cagat Plc on 1 June, 2012 for N400 million achieving significant influence over that company in its financial and operating policy decisions. Cagat Plc retained earnings for the year to 31 May, 2013 was N200 million.

iv. Included in trade receivables of Bagat at 31 May, 2013 is a receivable from Megat of N30 million. Unknown to Bagat, Megat has paid this amount through a bank transfer by the close of work on 31 May, 2013, but it had not yet been reflected in the bank statement of Bagat. Megat has already passed accounting entries to reflect this transaction.

v. Goodwill arising on the purchase of Mingat was tested for impairment on 31 May, 2013, and this provided evidence of impairment to the tune of N36 million. No accounting entries have been passed to reflect the impairment.

Required:

Prepare a consolidated statement of financial position as at 31 May, 2013 for the Bagat Group. (30 Marks)

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  • 20 Marks

FR – Nov 2021 – L2 – Q2 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of profit or loss and other comprehensive income for Okechukwu Group for the year ended December 31, 2019.

The statements of profit or loss and other comprehensive income of Okechukwu and its subsidiary, Ogenta Limited, for the year ended December 31, 2019, are presented below:

Item Okechukwu Plc (N’000) Ogenta Ltd (N’000)
Revenue 487,500 330,800
Cost of sales (304,500) (258,300)
Gross profit 183,000 72,500
Investment income 26,300 10,200
Distribution cost (24,050) (13,370)
Administrative expenses (40,625) (21,120)
Finance costs (10,500) (9,860)
Profit before tax 134,125 38,350
Income tax expense (33,800) (13,000)
Profit for the year 100,325 25,350
Other comprehensive income 23,880 10,440
Total comprehensive income 124,205 35,790

Additional information:

  1. Okechukwu Plc acquired 300 million of the ordinary shares issued by Ogenta Limited for N428 million.
  2. During the year ended December 31, 2019, Okechukwu Plc invoiced goods worth N80 million to Ogenta Limited. It is the policy of Okechukwu Plc to invoice goods at cost plus 33⅓%. Three-quarters of these goods are yet to be sold by Ogenta Limited at the year-end.
  3. Extracts from the books of Ogenta Limited at the date of acquisition reveal the following capital structure:
    • Issued ordinary shares of 50 kobo each: N200 million
    • General reserves: N80 million
    • Retained earnings: N52.5 million
  4. The fair value of the non-controlling interests at the acquisition date amounted to N92.5 million.
  5. An impairment test on the goodwill of Ogenta Limited conducted on December 31, 2019, indicated that the goodwill should be written down by N3.2 million.
  6. On the acquisition date, the fair value of net assets of Ogenta Limited was equal to their carrying amount, except for land and building and office equipment, which had fair values of N5 million and N1.5 million, respectively, in excess of their carrying amounts. The group non-current assets are depreciated at the rate of 10% per annum on a straight-line basis and charged to administrative expenses.
  7. Ogenta Limited paid a total of N20 million as dividends to all its shareholders for the year ended December 31, 2019. Okechukwu Plc has accounted for the dividend received.
  8. The finance cost of Ogenta Limited includes N2 million paid to Okechukwu Plc as interest on a loan. Okechukwu Plc has recognized the amount as interest received.

Required:
Prepare the consolidated statement of profit or loss and other comprehensive income for Okechukwu Group for the year ended December 31, 2019.

 

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  • 20 Marks

AAA – Dec 2023 – L3 – Q3 – Audit Evidence | Evaluation and Review

Assess the risk of material misstatement and audit implications related to goodwill impairment, accounting policies, auditor’s opinion, and going concern.

As the Audit Manager for Grep & Co., you are currently overseeing the audit of Kellwin Ltd., a company operating in the food processing industry. The audit for the financial year ended 31 October 2023 is nearing completion. However, several issues have been brought to your attention by the audit team, requiring your review and further action.

a) Goodwill Impairment
Kellwin Ltd. acquired a subsidiary, Fresh Foods Plc, on 1 November 2021. The purchase consideration for the acquisition was GH¢18 million. The goodwill arising on the acquisition was recognized at GH¢3 million in Kellwin Ltd.’s consolidated financial statements for the year ended 31 October 2022. The directors have conducted an impairment review of goodwill and have concluded that no impairment is necessary, with the carrying amount of goodwill remaining at GH¢3 million as at 31 October 2023. The directors have explained that the recoverable amount of the cash-generating unit (CGU) to which the goodwill has been allocated exceeds the carrying amount. (8 marks)

b) Accounting Policies
During the audit, it was identified that Kellwin Ltd. changed its accounting policy for recognizing revenue from contracts with customers. Previously, revenue was recognized when goods were delivered to customers. However, from 1 January 2023, the company started recognizing revenue when the goods were dispatched from the warehouse. This change was applied retrospectively, and the comparative figures in the financial statements were restated. The impact of this change is an increase in revenue by GH¢1.5 million for the year ended 31 October 2023. The directors have justified the change by stating that it provides more relevant information to users of the financial statements. (6 marks)

c) Auditor’s Opinion and Going Concern
Kellwin Ltd. has experienced significant financial difficulties during the year due to adverse economic conditions. As a result, the company has incurred a net loss of GH¢2 million and has breached its loan covenants. The directors have initiated discussions with the company’s bank to secure a waiver of the covenant breaches and to obtain additional funding. The financial statements have been prepared on a going concern basis, and the directors are confident that they will secure the necessary funding. However, the negotiations with the bank are still ongoing, and there is significant uncertainty regarding the company’s ability to continue as a going concern. (6 marks)

Required:
i) Assess the risk of material misstatement in relation to each of the issues described above.
ii) For each issue, state the audit procedures that should be performed to address the risks identified.

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