Question Tag: Goodwill

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  • 20 Marks

CR – May 2017 – L3 – Q4 – Revenue Recognition (IFRS 15)

Advise on the correct accounting treatment for transactions involving contracts, licences, and purchase of components.

Dango Plc is a conglomerate company operating in Nigeria with diverse interests across Africa. It prepares its financial statements in accordance with International Financial Reporting Standards with a year-end of September 30. The following transactions relate to Dango Plc.

(a) In February 2016, Dango Plc won a significant new contract to supply large quantities of rice to the government of Guyama, a small West African country, for the next two years. Under the terms of the arrangement, payment is made in cash on delivery once goods have been cleared by customs. The rice will be delivered in batches four (4) times every year, on April 1, July 1, October 1, and January 1. The batches for April 1, 2016, and July 1, 2016, amounting to N250 million and N380 million respectively, were delivered and paid. Dango incurred significant costs on customs duties for the first batch of delivery. The October 1 batch, valued at N520 million, was shipped prior to the year-end but delivered and paid for on October 1, 2016.

(b) On October 1, 2010, a 12-year licence was awarded to Dango Plc by the Federal Government to be the sole manufacturer of a chemical used in the Nigerian pharmaceutical industry. The licence was recognised on that date at its fair value of N196 million. The award of the licence motivated Dango Plc in 2011 to purchase a division of another Nigerian competitor company making similar products. Goodwill of N240 million was recognised on the purchase of the division. Dango Plc merged the activities of the newly acquired division with its own to create a specialist chemical sub-division, which it now classifies as a separate cash-generating unit. By 2016, the revenue of this cash-generating unit now amounts to 5% of the Group’s revenue.

(c) Dango Plc buys raw materials from overseas suppliers. It has recently taken delivery of 1,000 units of component X, used in the production of chemicals. The quoted price of component X was N1,200 per unit, but Dango Plc has negotiated a trade discount of 5% due to the size of the order. The supplier offers an early settlement discount of 2% for payment within 30 days, and Dango Plc intends to achieve this. Import duties of N60 per unit must be paid before the goods are released through customs. Once the goods are released, Dango Plc must pay a delivery cost of N5,000 to have the components taken to its warehouse.

Required:
Write a report to the directors advising them on the correct accounting treatment of the above transactions in the financial statements for the year ended September 30, 2016, in accordance with the provisions of the relevant standards.

Note: You may consider the relevance of the following standards to the transactions: IAS 20, IAS 2, IAS 38, IFRS 3, and IFRS 15.

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  • 5 Marks

CR – May 2017 – L3 – Q3c – Impairment of Assets (IAS 36)

Allocate an impairment loss across assets in a cash-generating unit based on IAS 36.

A cash-generating unit holds the following assets:

Asset Value (N’Million)
Goodwill 160
Patent 320
Property, Plant and Equipment 480

An annual impairment review is required as the cash-generating unit contains goodwill. The most recent review assesses its recoverable amount to be N720 million. An impairment loss of N240 million has been incurred and has been recognised in profit or loss.

Required:
Show how the value of the assets held by the cash-generating unit will change after the impairment test based on the information provided above.

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  • 30 Marks

CR – May 2017 – L3 – Q1 – Foreign Currency Transactions and Translation (IAS 21)

Assess functional currency and prepare a consolidated statement of financial position under IFRS.

Rapuya Plc. is a Nigerian public limited company operating in the mining industry. The draft Statements of Financial Position of Rapuya Plc., and its two subsidiaries, Puta Limited and Soma Limited as at April 30, 2017, are as follows:

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

(i) On May 1, 2016, Rapuya acquired 52% of the ordinary shares of Soma Limited, a foreign subsidiary. The retained earnings of Soma Limited on this date were 220 million defas. The fair value of the identifiable net assets of Soma Limited on May 1, 2016, was 990 million defas. The excess of the fair value over the net assets of Soma Limited is due to an increase in the value of non-depreciable land.

Rapuya Plc. wishes to use the ‘full goodwill’ method to consolidate the financial statements of Soma. The fair value of the non-controlling interest in Soma Limited at May 1, 2016, was 500 million defas.

Soma Limited is located in Tome, a small country in West Africa, and operates a mine. The income of Soma Limited is denominated and settled in defas. The output of the mine is routinely traded in defas, and its price is determined initially by local supply and demand. Soma Limited pays 30% of its costs and expenses in naira, with the remainder being incurred locally and settled in defas. Soma’s management has a considerable degree of authority and autonomy in carrying out the operations of Soma Limited and is not dependent upon group companies for financial support. The Finance Controller is not certain from the above whether the defas or naira should be taken as the functional currency of Soma Limited.

There have been no issues of ordinary shares and no impairment of goodwill since acquisition.

(ii) Also on May 1, 2016, Rapuya Plc. had acquired 70% of the equity interests of Puta Limited. The purchase consideration amounted to N226 million, which Rapuya Plc. paid through bank transfer in compliance with the cashless policy of the Federal Government of Nigeria. The fair value of the identifiable net assets recognized by Puta Limited was N240 million, excluding the patent below. The identifiable net assets of Puta Limited at May 1, 2016, included a brand with a fair value of N8 million. This had not been recognized in the financial statements of Puta Limited. The brand is estimated to have a useful life of four years. The retained earnings of Puta Limited were N98 million, and other components of equity were N6 million at the date of acquisition. The remaining excess of the fair value of the net assets is due to an increase in the value of non-depreciable land.

Rapuya Plc. wishes to use the ‘full goodwill’ method in consolidating the financial statements of this subsidiary. The fair value of the non-controlling interest in Puta Limited was N92 million on May 1, 2016. There have been no issues of ordinary shares since acquisition, and goodwill on acquisition is not impaired.

(iii) The following exchange rates are relevant for the preparation of the group financial statements:

Defas to Naira Exchange Rate
May 1, 2016 3:1
April 30, 2017 2.5:1
Average for year to April 30, 2017 2.9:1

Required:

(a) Advise the Finance Controller on what currency should be taken as the functional currency of Soma Limited, applying the principles set out in IAS 21 – The Effects of Changes in Foreign Exchange Rates. (5 Marks)

(b) Prepare a consolidated statement of financial position of the Rapuya Group as at April 30, 2017, in accordance with International Financial Reporting Standards (IFRS). (Show all workings) (25 Marks)

(Total: 30 Marks)

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  • 30 Marks

CR – Nov 2016 – L3 – SA – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare a Consolidated Statement of Financial Position for Bata Plc and subsidiaries; explain IAS 21 principles for translating foreign subsidiaries.

a. Bata Plc, which operates in the manufacturing sector, has been surviving the challenges operating in the Nigerian economic environment. The draft Statements of Financial Position of Bata Plc and its subsidiaries as at October 31, 2016, are as follows:

Bata N’million Jewe N’million Gaba N’million
Non-current assets Property, plant, and equipment 4,320 360 420
Investments in subsidiaries 1,110 600 –
Financial assets 500 – –
Total Non-current assets 5,930 960 420
Current assets 1,050 570 540
Total assets 6,980 1,530 960
Equity Share capital – N1 ordinary shares 2,400 600 300
Retained earnings 3,410 540 390
Other components of equity 450 – –
Total equity 6,260 1,140 690
Current liabilities 720 390 270
Total liabilities and equity 6,980 1,530 960

Additional Information:

  1. Acquisition of Subsidiaries:
    • Bata Plc acquired 60% of the share capital of Jewe Plc on November 1, 2012, and 10% of Gaba Plc on November 1, 2013. The costs of the combinations were N852 million and N258 million, respectively.
    • Jewe Plc acquired 70% of the share capital of Gaba Plc on November 1, 2013.
  2. Retained Earnings Balances:
Date Jewe Plc (N’million) Gaba Plc (N’million)
November 1, 2012 270 –
November 1, 2013 360 240
  1. Fair Value Adjustments:
    • At acquisition dates, the fair value of the net assets was N930 million for Jewe Plc and N660 million for Gaba Plc. The difference in the fair value and book value relates to non-depreciable land.
    • The fair value of non-controlling interest (NCI) was N390 million for Jewe Plc and N330 million for Gaba Plc. Bata Plc adopts the full goodwill method under IFRS 3 to account for NCI.
  2. Impairment Testing:
    • Jewe Plc suffered an impairment loss of N60 million.
    • Gaba Plc did not suffer any impairment loss.
  3. Intra-group Inventory Sales:
    • During the year ended October 31, 2016, Bata Plc sold inventory to Jewe Plc and Gaba Plc.
    • The invoiced prices of the inventories were N480 million and N360 million, respectively.
    • Bata Plc invoices goods to achieve a markup of 25% on cost to all third parties, including group companies.
    • At the year-end, half of the inventory sold to Jewe Plc remained unsold, but the entire inventory sold to Gaba Plc had been sold to third parties.
  4. Financial Asset:
    • Bata Plc purchased a deep discount bond for N500 million on November 1, 2015.
    • The bonds will be redeemed in 3 years for N740.75 million and are carried at amortized cost in line with IAS 39.
    • The Accountant has not passed the correct entries to reflect amortized cost valuation at year-end, and the financial asset is shown at N500 million.

Compound sum of N1: (1 + r)^n

Year 12% 14%
1 1.1200 1.1400
2 1.2544 1.2996
3 1.4049 1.4815
4 1.5735 1.6890

Required:

  1. Prepare a Consolidated Statement of Financial Position for Bata Plc and its subsidiaries as at October 31, 2016.       (25 Marks)
  2. Explain to the directors of Bata Plc how the assets, liabilities, income, and expenses of a foreign subsidiary, including the resulting goodwill, are translated for consolidation purposes under IAS 21. (5 Marks)

(Total: 30 Marks)

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  • 30 Marks

CR – May 2019 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare the consolidated statement of financial position for a group with a foreign subsidiary and inter-company transactions as at September 30, 2017.

Oyin Plc. a Nigerian company acquired 960 million equity share capital of Kemy Plc., a foreign subsidiary based in Brazil, on 1 October, 2015 for 1.08 billion Brazilian real (BRL). The functional and presentation currency of Kemy Plc. is the BRL. Since acquisition, Kemy Plc., has operated autonomously of Oyin group.

The statements of financial position of Oyin Plc. and Kemy Plc. as at 30 September, 2017 are as follows:

Additional Information:

  1. It is the policy of Oyin Plc. group to recognize non-controlling interest at acquisition at the proportionate share of the net assets. The retained earnings of Kemy Plc., at the date of acquisition were 390 million BRL.
  2. Kemy Plc. sells goods to Oyin Plc. at cost plus a mark-up of 33 1/3%. At 30 September, 2017, Oyin Plc. held N15 million of the goods. The goods were purchased at an exchange rate of N1 to 5 BRL. On 28 September, 2017, Oyin Plc. sent Kemy Plc., a payment for N15 million to clear the intra-group payables. Kemy received and recorded the cash on 2 October, 2017.
  3. On 1 October, 2016, Kemy Plc. purchased a leasehold building for 375 million BRL, taking out a loan note payable after five years to finance the purchase. The estimated useful life of the building on 1 October, 2016 was 25 years with no estimated residual value. The building is to be depreciated on a straight-line basis. The building was professionally revalued at 450 million BRL on 30 September, 2017 and the directors have included the revalued amount in the statement of financial position.Both companies adopt a policy of revaluation for their properties. There was no difference between the carrying amount and fair value of the property of Oyin Plc. at 30 September, 2017.
  4. Exchange Rates:
Date BRL to N1
1 October, 2015 6.0
30 September, 2015 5.5
30 September, 2017 5.0
Average for the year to 30 September, 2016 5.2

Required:
Prepare the consolidated statement of financial position of Oyin group at 30 September, 2017.

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  • 12 Marks

CR – Nov 2014 – L3 – SB – Q4a – Income Taxes (IAS 12)

Compute the impact of deferred tax on retained earnings and advise Lagos Plc on IAS 12 compliance.

The following is the statement of financial position of Lagos Plc as at 31 December, 2013, with its immediate two comparative years.

The management of Lagos Plc is not sure of the impact of IAS 12 (Income Taxes) on its retained earnings as at 31 December, 2013, as well as what the new deferred tax balance will be on migrating to IFRS.

The following information was also available as at the year-end:

Details Value (N’000)
Tax written down value of PPE 40,300
Tax written down value of goodwill 4,300
Tax base of trade receivables 29,800
Tax base of trade payables 13,000

Assume that current tax has been correctly computed in line with the applicable tax laws at 30%.

Required:
Using relevant computations, advise the management of Lagos Plc on the impact of deferred tax calculated on retained earnings in accordance with IAS 12.

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  • 20 Marks

CR – May 2021 – L3 – Q4 – Business Combinations (IFRS 3)

Evaluate the impact of restructuring plans on individual and group accounts for Tanimo PLC and its subsidiaries.

Emili PLC and Wagbo PLC are both public limited companies wholly owned by Tanimo PLC, also a public limited company. Tanimo group PLC operates in the agro-allied industry; but the directors felt that the current structure does not serve their intended purpose and are therefore considering two different restructuring plans for the group.

The statements of financial position of Tanimo PLC and its subsidiaries Emili PLC and Wagbo PLC as at May 31, 2021, are as follows:

Statements of Financial Position as at May 31, 2021

Item Tanimo PLC (Nm) Emili PLC (Nm) Wagbo PLC (Nm)
Property, Plant, and Equipment 600 200 45
Cost of Investment in Emili PLC 60 – –
Cost of Investment in Wagbo PLC 70 – –
Net Current Assets 160 100 20
Total Assets 890 300 65
Equity & Liabilities:
Share Capital (Ordinary Shares of N1 each) 120 60 40
Retained Earnings 770 240 25
Total Equity & Liabilities 890 300 65

Tanimo PLC acquired the investment in Wagbo PLC on June 1, 2015, when the company’s retained earnings balance was N20 million. The fair value of the net assets of Wagbo PLC on June 1, 2015, was N60 million.

Emili PLC was incorporated by Tanimo PLC on June 1, 2015, and has always been a wholly owned subsidiary. The fair value of the net assets of Emili PLC as at May 31, 2021, was N310 million, and of Wagbo PLC, it was N80 million. The fair values of the net current assets of both Emili PLC and Wagbo PLC are approximately the same as their carrying amounts.

The directors are not certain what effects the following plans would have on the individual accounts of the companies and the group accounts. Local companies’ legislation requires that the amount at which share capital is recorded is dictated by the nominal value of the shares issued, and if the value of the consideration received exceeds that amount, the excess is recorded in the share premium account. Shares cannot be issued at a discount. In the case of a share-for-share exchange, the value of the consideration can be deemed to be the carrying amount of the investment exchanged.

It is the group’s policy to value non-controlling interests at its proportionate share of the fair value of the subsidiary’s identifiable net assets.

The two different plans to restructure the group are as follows:

  1. Plan 1
    • Emili PLC is to purchase the whole of Tanimo’s PLC investment in Wagbo PLC.
    • The directors are undecided as to whether the purchase consideration should be 50 million N1 ordinary shares of Emili PLC or a cash amount of N75 million.
  2. Plan 2
    • The assets and trade of Wagbo PLC are to be transferred to Emili PLC at their carrying amount.
    • Wagbo PLC would initially become a non-trading company.
    • The consideration for the transfer will be N60 million, which will be left outstanding on the intercompany account between Emili PLC and Wagbo PLC.

Required:

Discuss the key considerations and the accounting implications of the above plans for the Tanimo PLC group. Your answer should show the potential impact on the individual accounts of Tanimo PLC, Emili PLC, and Wagbo PLC and the group accounts after each plan has been implemented.

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  • 26 Marks

FM – May 2023 – L3 – Q1a – Business Valuation Techniques

Evaluate ZL's valuation using multiple methods and recommend whether KK should acquire ZL. Discuss takeover regulation factors.

KK, a company quoted on the Stock Exchange, has cash balance of ₦230 million which are currently invested in short-term money market deposits. The cash is intended to be used primarily for strategic acquisitions, and the company has formed an acquisition committee with a remit to identify possible acquisition targets. The committee has suggested the purchase of ZL, a company in a different industry that is quoted on the AIM (Alternative Investment Market). Although ZL is quoted, approximately 50% of its shares are still owned by three directors. These directors have stated that they might be prepared to recommend the sale of ZL, but they consider that its shares are worth ₦220 million in total.

Summarised financial data:

Economic data:

  • Risk-free rate of return: 6% p.a.
  • Market return: 14% p.a.
  • Inflation rate: 2.4% p.a., expected to remain stable.

Expected effects of the acquisition:

  1. 50 employees of ZL would immediately be made redundant at an after-tax cost of ₦12 million. Pre-tax annual wage savings are expected to be ₦7.50 million (at current prices) for the foreseeable future.
  2. Some land and buildings of ZL would be sold for ₦8 million (after tax).
  3. Pre-tax advertising and distribution savings of ₦1.50 million per year (at current prices) would be possible.
  4. The three existing directors of ZL would each be paid ₦1 million per year for three years for consultancy services. This amount would not increase with inflation.

Required:

a. Calculate the value of ZL based upon:
i. The use of comparative P/E ratios (3 Marks)
ii. The dividend valuation model (4 Marks)
iii. The present value of relevant operating cash flows over a 10-year period (10 Marks)
iv. Provide an evaluation of each of the three valuation methods in (i) to (iii) above. (7 Marks)
v. Recommend whether KK should go ahead with the offer for ZL. (2 Marks)

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  • 22 Marks

CR – May 2023 – L3 – Q1a – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Omi PLC and subsidiaries.

The draft statement of financial position of Omi PLC, Ruwa Limited, and Mmili Limited as of November 30, 2020, are as follows:

Additional Information for Consolidated Financial Statements Preparation:

  1. Acquisition of Ruwa Limited:
    • Omi PLC acquired 80% of Ruwa Limited’s ordinary share capital on December 1, 2017.
    • Retained earnings of Ruwa Limited at acquisition: N400 million.
    • Fair value of Ruwa Limited’s net assets: N2,840 million.
    • Any fair value adjustment pertains to net current assets, which had been realized by November 30, 2020.
    • No new issue of shares occurred in the group since the establishment of the current structure.
  2. Acquisition of Mmili Limited:
    • On December 1, 2018, Omi PLC acquired 40% and Ruwa Limited acquired 25% of Mmili Limited’s ordinary share capital.
    • Retained earnings of Mmili Limited at acquisition: N200 million.
    • Retained earnings of Ruwa Limited at acquisition: N600 million.
    • No revaluation surplus existed in Mmili Limited’s books at acquisition, and the fair value of Mmili Limited’s net assets was consistent with their carrying amount.
  3. Development Costs:
    • Significant expenditure incurred on developing internet products. These were initially written off but later reinstated as development inventories upon commercial use.
    • Costs do not meet the recognition criteria of IAS 38 – Intangible Assets.
    • Ruwa Limited included N80 million of these costs in its inventory, of which N20 million relates to expenses from periods before December 1, 2017.
    • The group wishes to ensure compliance with IFRS for this treatment.
  4. Internet Equipment:
    • Ruwa Limited purchased new internet equipment for N200 million, excluding a trade discount of N24 million.
    • The discount was recorded in the income statement.
    • Depreciation is calculated using the straight-line method over six years.
  5. Property, Plant, and Equipment Policy:
    • The group transitioned from the revaluation model to the cost model under IAS 16 – Property, Plant, and Equipment in 2020.
    • Mmili Limited’s assets were revalued on December 1, 2019, creating a revaluation surplus of N280 million.
    • Mmili Limited’s property was originally purchased in December 2018 for N1,200 million, with depreciation over six years.
    • The group does not transfer excess depreciation from revaluation reserves to retained earnings.
  6. Valuation of Non-controlling Interests:
    • The group values non-controlling interests at acquisition using their proportionate share of the subsidiary’s identifiable net assets.
  7. Defined Benefit Pension Scheme:
    • Omi PLC established a defined benefit pension scheme, contributing N400 million to it.
    • Details as of November 30, 2020:
      • Present value of obligation: N520 million.
      • Fair value of plan assets: N500 million.
      • Current service cost: N440 million.
      • Interest cost (scheme liabilities): N80 million.
      • Expected return on pension assets: N40 million.
      • Actuarial gain: N60 million.
    • The only recorded entry was the cash contribution, included in Omi PLC’s trade receivables.
    • Directors propose recognizing actuarial gain immediately in the statement of profit or loss.

Required:
Prepare the consolidated statement of financial position of Omi Group for the year ended November 30, 2020, in accordance with relevant IFRS.

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  • 30 Marks

CR – Nov 2021 – L3 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare consolidated financial position of Makoko Group for the year ended Dec 31, 2021, and discuss accounting implications of significant influence.

Makoko Intercontinental Holdings Limited is a global merchant of cash crops. A policy of strategic acquisitions over the years has placed the company in a position to source for export products competitively. The lockdown arising from the recent pandemic posed a significant challenge for the export of their products throughout the year 2020. At a board meeting to review the performance of the company for that year and discuss the impact of the pandemic, the Managing Director noted the significant drop in the general performance indices. In order to get a greater market presence and higher demand locally, the board decided to acquire the following investments on January 1, 2021:

  • 60% of the equity share of Ojodu Limited;
  • 50% of 10% loan notes of Ojodu Ltd at par;
  • 40% stake in the ordinary shares of Egbeda Confectioneries Limited.

In the opinion of the board, both Ojodu Limited and Egbeda Confectioneries Limited are the biggest local customers of Makoko Intercontinental Holdings Limited and a control through shareholding would give the investing company greater stake in the operational decisions of the investee companies. Importantly, it would also boost revenue by allowing unrestricted access to local markets. It is believed that this will forestall any adverse impact of further lockdowns that may hinder export sales in the future.

The draft financial statements of the companies for the year are as follows:

Statements of financial position as at December 31, 2021

Additional Information:

  1. Makoko Limited paid N90 million for the acquisition of Ojodu Limited when the retained earnings of Ojodu Limited were N13 million.
  2. The fair value of Ojodu’s freehold property was N6.5 million higher than the carrying amount as at the date of acquisition. This valuation has not been reflected in the books of Ojodu Limited.
  3. Makoko Limited paid N41 million for the shareholding in Egbeda Limited when the retained earnings of Egbeda Limited were N12 million.
  4. An impairment test as at December 31, 2021 showed that goodwill was impaired by N3.5 million and the investment in Egbeda Limited was impaired by N0.8 million.
  5. During the year, Makoko Limited sold products to Egbeda Limited at a price of N8 million. These goods had cost Makoko Limited N5 million. Half of the goods were still in the inventory of Egbeda Limited as at December 31, 2021.
  6. The companies issued share capital has not changed since the date of acquisition.
  7. No dividends were paid during the year.
  8. Non-controlling interests in subsidiaries are to be measured at the appropriate proportion of the subsidiary’s identifiable net assets.

Required: a. Prepare the consolidated statement of financial position for the Makoko Group for the year ended December 31, 2021. (20 Marks)

b. The Directors of Makoko Intercontinental Holdings Limited are concerned about getting significant influence, if not absolute control, of all entities they intend to buy into. The five-year strategic plan of the company (2020 – 2024) focuses on having control of the cash crops segment of the agribusiness sector of the economy. This is in order to make them ready to roll out the next developmental phase of the business, which is to migrate from exporting raw products to finished products for industrial and household use.

Towards this goal, the board requires the Group Accountant to make a presentation on the accounting implications of gaining significant influence in another entity.

Required: Discuss the issues involved in the requirements of the Board as specified above. (5 Marks)

c. A friend to the Chief Accountant of Makoko Intercontinental Holdings Limited, who is a consultant to Ojodu Limited and Egbeda Confectionaries Limited, is requesting for information on the new acquisitions from his friend, the Chief Accountant.

Required: Identify the ethical issues involved in the above scenarios and their implications. (5 Marks)

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  • 20 Marks

FR – May 2024 – L2 – SA – Q3 – Consolidated Financial Statements

Preparation of consolidated financial statements, calculation of goodwill, and non-controlling interest.

Olu Nigeria PLC has a subsidiary, Oba Limited, which it acquired on January 1, 2022. The financial statements of the companies are detailed below:

Statements of Profit or Loss for the year ended September 30, 2022

Additional Information:

  1. Olu PLC acquired its 70% interest in Oba Limited through a share exchange of three shares in Olu PLC for every five shares in Oba Limited. At the acquisition date, the shares of Olu PLC were sold at ₦8.10 each on the Nigerian Exchange (NGX). The parent company has not recorded this share issue in its books.
  2. At the acquisition date, the fair value of Oba Limited’s assets equaled their carrying amounts except for an item of plant, which had a fair value of N30,000,000 above its carrying amount. This fair value increase has not been adjusted in Oba Limited’s books. The plant’s remaining life at acquisition was five years.
  3. During the year, Oba Limited transferred goods worth N40,000,000 to Olu PLC. These goods were invoiced at cost plus 25%, and only a quarter of them were sold by Olu PLC at year-end.
  4. Included in the other income was N6,550,000 received from Oba Limited as interest paid on a loan granted by Olu PLC. The loan was fully repaid before September 30, 2022.
  5. An impairment test revealed a goodwill impairment of N28,000,000 at the acquisition date.
  6. It is the group’s policy to value non-controlling interests at fair value. The prevailing market price per ordinary share of Oba Limited at January 1, 2022, was ₦5.05.
  7. The gain on the revaluation of property arose from an independent valuation of the group’s property in September 2022.
  8. Administrative expenses of Oba Limited included N10,000,000 paid as management fees to Olu PLC, and the income has been duly recorded in Olu PLC’s books.
  9. Income and expenses accrue evenly over the period.

Required:

a. Prepare the consolidated statement of profit or loss and other comprehensive income for Olu Group for the year ended September 30, 2022. (12 Marks)

b. Calculate the goodwill on acquisition and the non-controlling interest at the reporting date. (4 Marks)

c. IFRS 10 – Consolidated Financial Statements states that a parent must present consolidated financial statements for its investments in subsidiaries.

Required:
State FOUR exceptions to this pronouncement. (4 Marks)

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  • 15 Marks

FR – Nov 2015 – L2 – Q5 – Consolidated Financial Statements (IFRS 10)

Prepare the consolidated statement of financial position and calculate goodwill and non-controlling interest for UDO Group Plc.

The trial balance of UDO Plc and its subsidiary, ALOMA Plc, as at December 31, 2014, is given below:

UDO Plc acquired 75% of ALOMA Plc on January 1, 2014, for N1,300,000,000, when the retained earnings of ALOMA Plc were N600 million and the share premium was N170 million. Neither the acquisition nor the loan notes obtained to finance the purchase were recorded in the trial balance. There has been no impairment of goodwill, and no change in share capital since acquisition. It is the group policy to value the non-controlling interest at fair value, which was estimated to be N160 million.

Required:
Prepare the consolidated statement of financial position of UDO Group Plc as at December 31, 2014.

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  • 30 Marks

FR – Nov 2015 – L2 – Q1 – Consolidated Financial Statements (IFRS 10)

Prepare consolidated financial statements for Hapu Plc and Sege Plc for the year ended December 31, 2014.

Statement of financial position as at December 31, 2014

Hapu Plc (₦’000) Sege Plc (₦’000)
Assets
Non-current assets:
Property, plant, and equipment 32,000 25,000
Investments 33,500 –
Total non-current assets 65,500 25,000
Current assets
Cash at bank and in hand 9,500 2,000
Trade receivables 20,000 8,000
Inventory 30,000 18,000
Total current assets 125,000 53,000
Equity and liabilities
Share capital 40,000 10,000
Share premium 6,500 –
Retained earnings 55,000 37,000
Total equity 101,500 47,000
Current liabilities 23,500 6,000
Total equity and liabilities 125,000 53,000

Statement of profit or loss for the year ended December 31, 2014

Hapu Plc (₦’000) Sege Plc (₦’000)
Revenue 125,000 117,000
Cost of sales (65,000) (64,000)
Gross profit 60,000 53,000
Distribution costs (21,000) (14,000)
Administrative expenses (14,000) (8,000)
Profit before taxation 25,000 31,000
Income tax expense (10,000) (9,000)
Profit for the year 15,000 22,000

Statement of changes in equity (extract) for the year ended December 31, 2014

Hapu Plc (₦’000) Sege Plc (₦’000)
Retained earnings brought forward 40,000 15,000
Retained profit for the year 15,000 22,000
Retained earnings carried forward 55,000 37,000

Additional Information:

  1. Hapu Plc owns 80% of Sege’s shares, purchased in 2011 for ₦20.5 million when Sege’s retained earnings stood at ₦7 million.
  2. Included in Sege’s inventory as of December 31, 2014, were goods purchased from Hapu for ₦3.9 million, with a 30% profit margin on cost. Total sales from Hapu to Sege amounted to ₦6 million.
  3. Hapu Plc and Sege Plc proposed dividends of ₦2 million and ₦2.5 million respectively, not yet accounted for.
  4. Goodwill impairment tests indicate no impairment in accordance with IFRS 3 and IAS 36.

Required:
Prepare the consolidated statement of profit or loss and the consolidated statement of financial position for Hapu Plc and Sege Plc as at December 31, 2014.

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  • 22 Marks

FR – NOV 2016 – L2 – Q1c – Business Combinations (IFRS 3)

Complex consolidation question involving share exchange, fair value adjustments, intra-group transactions, associate investments and goodwill impairment.

On January 1, 2016 Kehinde Plc acquired 45million of the Equity shares of Taiwo Plc in a share exchange in which Kehinde Plc issued two (2) new shares for every three (3) shares it acquired in Taiwo Plc. This gave Kehinde Plc a holding of 90%, additionally on 31 December, 2016, Kehinde Plc will pay shareholders of Taiwo Plc N1.76 per share acquired. Kehinde Plc cost of capital is 10% per annum.

At the date of acquisition, the shares in Kehinde Plc and Taiwo Plc had a market price of N6.50 and N2.50 respectively.

STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED SEPTEMBER 30, 2016

KEHINDE PLC TAIWO PLC
N’000 N’000
Revenue 323,000 190,000
Cost of Sales (256,000) (130,000)
Gross Profit 67,000 60,000
Distribution Cost (8,000) (9,000)
Administrative Expenses (19,000) (12,000)
Investment Income 2,500 –
Finance Cost (2,100) –
Profit before Tax 40,400 39,000
Income Tax Expenses (14,000) (8,000)
Profit for the year 26,400 31,000

Equity as at October 1, 2015:
Share Capital(N1 per share) 300,000 75,000
Retained Earnings 270,000 175,000

The following additional information is also relevant:

(i) At the date of acquisition the Fair Value of Taiwo Plc’s assets and liabilities were equal to their carrying amount with the exception of two items:

  • An item of plant had a fair value of N9million above the carrying amount. The remaining life of the plant at the date of acquisition was three (3) years. Depreciation is charged to cost of sales.
  • Taiwo Plc had a contingent liability which Kehinde Plc estimated to have a fair value of N2.25million. This has not changed as at September 30, 2016.
  • Taiwo Plc has not incorporated this fair value changes into its financial statements.

(ii) It is Kehinde Plc’s policy to value non-controlling interest at fair value at the date of acquisition. For this purpose, Taiwo Plc 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 Kehinde Plc to Taiwo Plc throughout the year ended September 30, 2016 had consistently been N4million per month. Kehinde Plc made a mark-up of 25% on these sales. Taiwo Plc had N7.5million of these goods in inventory as at September 30, 2016.

(iv) Kehinde Plc’s investment income is a dividend received from its investment in a 40% owned associates which it has held for several years. The underlying earnings of the associate for the year ended September 30, 2016 were N10million.

(v) Although Taiwo Plc has been profitable since its acquisition by Kehinde Plc, the market for Taiwo Plc’s product has been badly hit in recent months and Kehinde Plc has calculated that the goodwill has been impaired by N10million as at September 30, 2016.

Required:

(i) Calculate the goodwill on acquisition of Taiwo Plc. (7 Marks)

(ii) Prepare the Consolidated Statement of Profit or Loss and Other Comprehensive Income for Kehinde Plc group for the year ended September 30, 2016. (15 Marks)

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  • 5 Marks

FR – NOV 2016 – L2 – Q1a – Business Combinations (IFRS 3)

Question tests understanding of IFRS 3 treatment of non-controlling interests and its impact on consolidated financial statements.

IFRS 3 on Business Combination permits a non-controlling interest at the date of acquisition to be valued by one of two methods. i. At its proportionate share of the subsidiary’s identifiable Net Assets or ii. At its Fair Value (usually determined by the directors of the parent Company).

Required:

Explain the difference that the accounting treatment of these alternative methods could have on the Consolidated Financial Statements, including where Consolidated Goodwill may be impaired.

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  • 20 Marks

FR – Nov 2019 – L2 – Q3 – Consolidated Financial Statements (IFRS 10)

Prepare a consolidated statement of financial position for Family Plc as of September 30, 2019, including the calculation of goodwill, unrealised profit, and non-controlling interests.

Family Plc. is the parent company of Children Limited. The statements of financial position of the two companies as at September 30, 2019, are presented below:

Statement of Financial Position as at September 30, 2019

Assets Family Plc Children Ltd
Office building complex 5,000 1,920
Plant and machinery 7,000 6,000
Investment in Children Ltd shares 6,028 –
Total Non-current Assets 18,028 7,920
Current Assets
Inventory 3,600 1,900
Trade receivables 4,100 1,700
Other receivables 300 20
Tax assets 0 100
Bank balances 1,440 840
Total Current Assets 9,440 4,560
Total Assets 27,468 12,480
Equity and Liabilities Family Plc Children Ltd
Ordinary shares of N1.50 each 21,600 9,600
Retained earnings 1,260 480
Total Equity 22,860 10,080
Current Liabilities
Trade payables 2,000 280
Other payables 928 200
Overdrafts 1,680 1,920
Total Current Liabilities 4,608 2,400
Total Equity and Liabilities 27,468 12,480

Additional Information:

  1. Family Plc acquired 4.8 billion shares in Children Limited a year ago when Children Limited had retained earnings of N144 million, and the fair value of the non-controlling interest was N3.396 billion. Profits were evenly distributed over the years.
  2. During the year ended September 30, 2019, Family Plc sold goods with an invoiced value of N576 million at cost plus 20% to Children Limited. Half of the goods were still in Children Limited’s inventory as at the end of the year.
  3. Children Limited owed Family Plc N72 million for goods purchased during the year.
  4. Included in the other payables is the proposed dividend of 2.5 kobo per share for Children Limited for the year ended September 30, 2019. Both companies agreed that the proposed dividend should be paid by the directors of Children Limited before consolidation.

Required:

Prepare the Consolidated Statement of Financial Position for Family Plc as at September 30, 2019.
(20 Marks)

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  • 1 Marks

FA – May 2012 – L1 – SA – Q32 – Elements of Financial Statements

Identifying the intangible business asset related to reputation and customer loyalty.

An intangible business asset which relates to reputation, customers’ loyalty, and popularity garnered over the years, and due to the expertise of the business owner or the quality of goods produced or services rendered, is called ………………………….

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  • 1 Marks

FA – May 2012 – L1 – SA – Q8 -Partnership Accounts

Identifying actions taken during the admission of a partner.

Which of the following is NOT an action for admission of a partner during the year?

A. Preparing the financial statements up to the date of admission
B. Determining goodwill, if any, at that date
C. Preparing a statement of account
D. Preparing a statement of financial position
E. Partners will decide if goodwill should be maintained in books or not.

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  • 1 Marks

FA – May 2012 – L1 – SA – Q6 – Partnership Accounts

Calculating the value of goodwill in a partnership.

The profits of ABC Partnership firm for 5 years ended 31 December 2011 were as follows:

Year      Profits
2007     N15,000,000
2008     N9,000,000
2009     N4,500,000
2010      N7,500,000
2011       N10,500,000

The firm intends to admit a new partner on 1 January 2012. What is the value of goodwill where the partners have decided to value goodwill at 4 years’ purchase of the average super profit over the last 5 years based on normal profits of N3,000,000 per annum?

A. N6,300,000
B. N9,300,000
C. N25,200,000
D. N25,300,000
E. N25,350,000.

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  • 10 Marks

AA – Nov 2021 – L2 – Q1a – Audit Reports

Define Key Audit Matters (KAMs) as per ISA 701 and how they are communicated in the auditor’s report.

Independent Auditor’s Report
To The Members Of Fair Deals Limited (Extract)

Key Audit Matters
Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Goodwill
Goodwill under IFRSs: the company is required to annually test the amount of goodwill for impairment. This annual impairment test was significant to our audit because the balance of N3,024,115 as of December 31, 2020 is material to the financial statements. In addition, management’s assessment process is complex and highly judgmental and is based on assumptions, specifically achieving projected revenue which are affected by expected future market or economic conditions, particularly those in the North East zone.
Our audit procedures included, among others, using a valuation expert to assist us in evaluating the assumptions and methodologies used by the company in particular those relating to the forecast revenue growth and profit margins for domestic wares production. We also focused on the adequacy of the company disclosures about those assumptions to which the outcome of the impairment test is most sensitive, that is, those that have the most significant effect on the determination of the recoverable amount of goodwill.

Revenue Recognition
The amount of revenue and profit recognised in the year on the sale of domestic wares and after-market services is dependent on the appropriate assessment of whether or not each long-term after-market contract for services is linked to or separated from the contract for sale of domestic wares. As the commercial arrangements can be complex, significant judgment is applied in selecting the accounting basis in each case. In our view, revenue recognition is significant to our audit as the company might inappropriately account for sales of domestic wares and long-term service agreements as a single arrangement for accounting purposes and this would usually lead to revenue and profit being recognised too early because the margin in the long-term service agreement is usually higher than the margin in the domestic wares sale agreement.
Our audit procedures to address the risk of material misstatement relating to revenue recognition, which was considered to be a significant risk, included:

  • Testing of controls, assisted by our own IT specialists, including, among others, those over: input of individual advertising campaigns’ terms and pricing; comparison of those terms and pricing data against the related overarching contracts with advertising agencies; and linkage to viewer data;
  • Detailed analysis of revenue and the timing of its recognition based on expectations derived from our industry knowledge and external market data, following up variances from our expectations.

Abuja, Nigeria (signed)
Date
Chartered Accountants

ISA 701 Communicating key Audit matters in the Independent Auditors Report was introduced to make the auditor’s report more informative and useful for the intended users.

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