Share Exchange – NBC Institute

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.

Question

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:

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.
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.

Answer

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Tags: Consolidation, Goodwill, Group Restructuring, Intercompany Balances, Non-Controlling Interests, Share Exchange
Level: Level 3

Topic: Business Combinations (IFRS 3)

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.

Question

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)

Answer

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Tags: Business Combinations, Consolidation, Fair Value Adjustments, Goodwill, Intra-group Transactions, Share Exchange
Level: Level 2

Topic: Business Combinations (IFRS 3), Consolidated Financial Statements (IFRS 10)
Series: NOV 2016

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

Question

Olongon Plc (Olongon) and Kwatrikwa Plc (Kwatrikwa) are competitors listed on the Ghana Stock Exchange. Due to poor managerial decisions, Kwatrikwa’s earning power has been uncertain in recent years, making shareholders contemplate selling the business. However, the management of Kwatrikwa has used various defensive tactics to block any takeover they perceive to be hostile. In the just-ended Annual General Meeting (AGM), Kwatrikwa’s shareholders resolved to sell the company. Shareholders of Olongon have expressed interest in acquiring Kwatrikwa and have suggested to the board to put a proposal together for consideration in the next extraordinary meeting. Olongon’s board has gathered the information below to guide the drafting of the proposal:

Company	Olongon	Kwatrikwa
Earnings per share (GH¢)	0.50	0.50
Retention ratio	0.60	0.40
Price per share (GH¢)	10.00	5.00
Number of shares	25,000	25,000

Required:

a) Assuming the acquisition will be financed with shares, how many shares of Olongon should be exchanged for all the shares of Kwatrikwa based on market value?
(4 marks)

b) Assuming the share price of the combined business after the acquisition is the same as the share price of Olongon, calculate the market value, earnings per share, and the Price/Earnings ratio of the combined business.
(6 marks)

c) Calculate the cost of the acquisition if Olongon pays GH¢130,000 in cash for Kwatrikwa.
(2 marks)

d) Explain FOUR (4) defensive tactics the management of Kwatrikwa can employ to prevent Olongon from acquiring the company.
(8 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Defensive Tactics, Earnings Per Share, Market Value, Share Exchange
Level: Level 2

Topic: Mergers and acquisitions
Series: MAR 2024

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.

Question

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

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:

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.
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:

Answer

Find Related Questions by Tags, levels, etc.

Tags: Consolidation, Goodwill, Group Restructuring, Intercompany Balances, Non-Controlling Interests, Share Exchange
Level: Level 3

Topic: Business Combinations (IFRS 3)

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.

Question

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.

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)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Business Combinations, Consolidation, Fair Value Adjustments, Goodwill, Intra-group Transactions, Share Exchange
Level: Level 2

Topic: Business Combinations (IFRS 3), Consolidated Financial Statements (IFRS 10)
Series: NOV 2016

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

Question

Company	Olongon	Kwatrikwa
Earnings per share (GH¢)	0.50	0.50
Retention ratio	0.60	0.40
Price per share (GH¢)	10.00	5.00
Number of shares	25,000	25,000

Required:

a) Assuming the acquisition will be financed with shares, how many shares of Olongon should be exchanged for all the shares of Kwatrikwa based on market value?
(4 marks)

c) Calculate the cost of the acquisition if Olongon pays GH¢130,000 in cash for Kwatrikwa.
(2 marks)

d) Explain FOUR (4) defensive tactics the management of Kwatrikwa can employ to prevent Olongon from acquiring the company.
(8 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Defensive Tactics, Earnings Per Share, Market Value, Share Exchange
Level: Level 2

Topic: Mergers and acquisitions
Series: MAR 2024

Question Tag: Share Exchange

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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.

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.

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

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.

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.

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

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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.

You're reporting an error for "CR – May 2021 – L3 – Q4 – Business Combinations (IFRS 3)"

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.

You're reporting an error for "FR – NOV 2016 – L2 – Q1c – Business Combinations (IFRS 3)"

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

You're reporting an error for "FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions"

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.

You're reporting an error for "CR – May 2021 – L3 – Q4 – Business Combinations (IFRS 3)"

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.

You're reporting an error for "FR – NOV 2016 – L2 – Q1c – Business Combinations (IFRS 3)"

FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions

This question focuses on calculating the share exchange ratio, the market value, EPS, and P/E ratio of a combined business after acquisition, and discusses defensive tactics that can be used to prevent a hostile takeover.

You're reporting an error for "FM – MAR 2024 – L2 – Q2 – Mergers and acquisitions"

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