Goodwill Impairment – NBC Institute

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.

Question

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:

Okechukwu Plc acquired 300 million of the ordinary shares issued by Ogenta Limited for N428 million.
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.
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
The fair value of the non-controlling interests at the acquisition date amounted to N92.5 million.
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.
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.
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.
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.

Answer

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Tags: Consolidation, Fair Value Adjustments, Goodwill Impairment, Intra-Group Sales, NCI, Subsidiary
Level: Level 2

Series: NOV 2021

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.

Question

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.

Answer

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Tags: Accounting Policies, Auditor's Opinion, Going Concern, Goodwill Impairment, Group Audits, IAS 36, Subsequent Events
Level: Level 3

Topic: Audit evidence, Evaluation and review
Series: DEC 2023

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.

Question

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:

Okechukwu Plc acquired 300 million of the ordinary shares issued by Ogenta Limited for N428 million.
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.
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
The fair value of the non-controlling interests at the acquisition date amounted to N92.5 million.
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.
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.
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.
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.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Consolidation, Fair Value Adjustments, Goodwill Impairment, Intra-Group Sales, NCI, Subsidiary
Level: Level 2

Series: NOV 2021

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.

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Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting Policies, Auditor's Opinion, Going Concern, Goodwill Impairment, Group Audits, IAS 36, Subsequent Events
Level: Level 3

Topic: Audit evidence, Evaluation and review
Series: DEC 2023

Question Tag: Goodwill Impairment

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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.

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.

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.

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.

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Question Tag: Goodwill Impairment

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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.

You're reporting an error for "FR – Nov 2021 – L2 – Q2 – Consolidated Financial Statements (IFRS 10)"

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.

You're reporting an error for "AAA – Dec 2023 – L3 – Q3 – Audit Evidence | Evaluation and Review"

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.

You're reporting an error for "FR – Nov 2021 – L2 – Q2 – Consolidated Financial Statements (IFRS 10)"

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.

You're reporting an error for "AAA – Dec 2023 – L3 – Q3 – Audit Evidence | Evaluation and Review"

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