Pension obligations – NBC Institute

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.

Question

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:

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.
Some land and buildings of ZL would be sold for ₦8 million (after tax).
Pre-tax advertising and distribution savings of ₦1.50 million per year (at current prices) would be possible.
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)

Answer

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Tags: Consolidated Statement of Financial Position, Ethical considerations, Goodwill, Non-Controlling Interest, Pension obligations
Level: Level 3

Topic: Business Valuation Techniques

CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits

Recommend accounting treatment for pension obligations and restructuring costs in financial statements in accordance with relevant IFRS.

Question

Kaase Ltd, a public limited company, operates in the technology sector in Ghana. The company has decided to restructure one of its business segments, affecting employees in two locations. In the first location (A), half of the factory units were closed by 31 March 2021, and the affected employees’ pension benefits were frozen. After restructuring, the present value of the defined benefit obligation in this location was GH¢8 million. Before restructuring, the value was GH¢10 million, and the fair value of plan assets was GH¢7 million, resulting in a net pension liability of GH¢3 million.

In the second location (B), all activities were discontinued, and employees will receive GH¢4 million in exchange for a pension liability of GH¢2.4 million. Kaase Ltd estimates that restructuring costs excluding pension costs will be GH¢6 million. No formal announcement has been made due to a planned rights issue. The pension liability is currently included in non-current liabilities.

Required:
Recommend the accounting treatment of the above transaction in the financial statement of Kaase Ltd, including financial statement extracts for the year ended 31 March 2021, in accordance with relevant International Financial Reporting Standards (IFRS).

Answer

Find Related Questions by Tags, levels, etc.

Tags: Defined benefit plans, Employee Benefits, IAS 19, IAS 37, Pension obligations, Restructuring costs
Level: Level 3

Topic: IAS 19: Employee Benefits
Series: APR 2022

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.

Question

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:

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.
Some land and buildings of ZL would be sold for ₦8 million (after tax).
Pre-tax advertising and distribution savings of ₦1.50 million per year (at current prices) would be possible.
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:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Consolidated Statement of Financial Position, Ethical considerations, Goodwill, Non-Controlling Interest, Pension obligations
Level: Level 3

Topic: Business Valuation Techniques

CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits

Recommend accounting treatment for pension obligations and restructuring costs in financial statements in accordance with relevant IFRS.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Defined benefit plans, Employee Benefits, IAS 19, IAS 37, Pension obligations, Restructuring costs
Level: Level 3

Topic: IAS 19: Employee Benefits
Series: APR 2022

Question Tag: Pension obligations

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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.

Summarised financial data:

Economic data:

Expected effects of the acquisition:

Required:

CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits

Recommend accounting treatment for pension obligations and restructuring costs in financial statements in accordance with relevant IFRS.

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.

Summarised financial data:

Economic data:

Expected effects of the acquisition:

Required:

CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits

Recommend accounting treatment for pension obligations and restructuring costs in financial statements in accordance with relevant IFRS.

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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.

Summarised financial data:

Economic data:

Expected effects of the acquisition:

Required:

You're reporting an error for "FM – May 2023 – L3 – Q1a – Business Valuation Techniques"

CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits

Recommend accounting treatment for pension obligations and restructuring costs in financial statements in accordance with relevant IFRS.

You're reporting an error for "CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits"

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.

Summarised financial data:

Economic data:

Expected effects of the acquisition:

Required:

You're reporting an error for "FM – May 2023 – L3 – Q1a – Business Valuation Techniques"

CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits

Recommend accounting treatment for pension obligations and restructuring costs in financial statements in accordance with relevant IFRS.

You're reporting an error for "CR – Apr 2022 – L3 – Q2b – IAS 19: Employee benefits"

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