- 20 Marks
CR – Nov 2018 – L3 – SB – Q3 – Business Combinations (IFRS 3)
Evaluation of Abana and Doha as potential acquisition targets using adjusted financial ratios.
Question
Banny Plc. (Banny) is a diversified company that has achieved its present size through vertical and horizontal acquisition. The directors have identified two potential target entities for acquisition. The first is Abana Limited (Abana), which operates a cement business near Offa, Kwara State. The second is Doha Limited (Doha), also in the cement industry, located near Oturukpo, Benue State. Banny has obtained copies of their audited financial statements, along with additional information notes.
Statement of Profit or Loss for the Year Ended December 31, 2017
| Item | Abana (₦’m) | Doha (₦’m) |
|---|---|---|
| Revenue | 136,000 | 132,000 |
| Cost of sales | (84,000) | (91,900) |
| Gross profit | 52,000 | 40,100 |
| Other operating expenses | (36,000) | (28,000) |
| Profit from operations | 16,000 | 12,100 |
| Finance costs | (6,000) | (8,000) |
| Profit before tax | 10,000 | 4,100 |
| Income tax expense | (3,000) | (2,000) |
| Net profit for the period | 7,000 | 2,100 |
Statement of changes in equity for the year ended December 31, 2017
Statement of financial position as at December 31, 2017
Additional Notes:
- Doha revalued its non-current assets for the first time following IFRS adoption on January 1, 2017. Abana maintains its non-current assets at historical cost.
- Banny uses the following ratios to evaluate acquisition targets: Return on Capital Employed (ROCE), Gross Profit Margin, Turnover on Capital Employed, and Leverage.
Required:
a. Compute adjustments for the revaluation of property, plant, and equipment, making Abana and Doha comparable for analysis. (14 Marks)
b. Calculate the four ratios (ROCE, Gross Profit Margin, Turnover on Capital Employed, and Leverage) after adjustments. (4 Marks)
c. Advise Banny on the better acquisition target based on adjusted ratios. (2 Marks)
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