Topic: Business combinations and consolidation

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  • 20 Marks

CR – May 2020 – L3 – Q1 – Consolidated Statement of Financial Position

Prepare the consolidated statement of financial position for Phato Ltd and its subsidiaries as at 30 September 2019, including relevant calculations for goodwill, non-controlling interest, and asset impairments.

Phato Ltd, is a Public Limited Liability Company which operates in the service sector in Ghana. Phato Ltd has a business relationship with two other Ghanaian companies, Sakara Ltd and Saadi Ltd, which are public limited liability companies too. The draft statements of financial position of these three companies are as below as at 30 September 2019.

Phato Ltd GH¢ million Sakara Ltd GH¢ million Saadi Ltd GH¢ million
Assets:
Non-current assets
Property, plant, and equipment 460.0 150.0
Investment in subsidiaries
Sakara Ltd 365.0
Saadi Ltd 160.0
Investment in Azuri Ltd 24.0
Intangible assets 99.0 15.0
Total Non-current assets 948.0 325.0
Current assets 447.5 240.0
Total assets 1,395.5 565.0
Equity and liabilities:
Equity:
Share capital 460.0 200.0
Other components of equity 36.5 18.5
Retained earnings 447.5 221.0
Total equity 944.0 439.5
Non-current liabilities 247.5 61.5
Current liabilities 204.0 64.0
Total liabilities 451.5 125.5
Total equity and liabilities 1,395.5 565.0

Additional relevant information:

  1. Phato Ltd, on 1 October 2017, acquired 60% of the equity interests of Sakara Ltd. The cost of the investment comprised cash of GH¢360 million. At acquisition, the fair value of the non-controlling interest in Sakara Ltd was estimated at GH¢146 million. The fair value of the identifiable net assets acquired totaled GH¢417.5 million, including retained earnings of GH¢159.5 million and other components of equity at GH¢13.5 million. The excess in fair value results from non-depreciable land.
  2. Sakara Ltd, on 1 October 2018, acquired 70% of Saadi Ltd for GH¢160 million. The fair value of non-controlling interest was estimated at GH¢36 million. The fair value of the identifiable net assets of Saadi Ltd at acquisition was GH¢181 million, retained earnings GH¢53 million, and other components of equity GH¢10 million.
  3. Phato Ltd acquired a 14% interest in Azuri Ltd for GH¢9 million on 1 October 2017. On 1 April 2019, Phato Ltd acquired an additional 16% interest in Azuri Ltd for GH¢13.5 million, achieving significant influence.
  4. Phato Ltd purchased patents for GH¢5 million and incurred other development costs for product development.
  5. Impairment tests were conducted on Sakara Ltd and Saadi Ltd.

Required:
Prepare the consolidated statement of financial position for the Phato Ltd Group as at 30 September 2019.

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  • 20 Marks

CR – Nov 2020 – L3 – Q1i – Consolidated Profit or Loss and OCI

Prepare a consolidated statement of profit or loss and other comprehensive income for a parent, foreign subsidiary, and associate, accounting for goodwill impairment, disposal, and foreign currency translation.

Bolga Ltd is a limited liability company in Ghana, which has investments in a number of other companies. The draft statements of profit or loss for Bolga Ltd and its other investments for the year ended April 30, 2020, are given below:

Bolga Ltd Navrongo Ltd Serrekunda Ltd
Revenue GH¢286,000 GH¢136,000 GMD840,000
Cost of sales (GH¢122,000) (GH¢84,000) (GMD504,000)
Gross profit GH¢164,000 GH¢52,000 GMD336,000
Distribution costs (GH¢20,000) (GH¢12,000) (GMD56,000)
Administrative expenses (GH¢46,000) (GH¢20,000) (GMD116,000)
Operating profit GH¢98,000 GH¢20,000 GMD164,000
Investment income GH¢2,000 GH¢4,000 –
Finance costs (GH¢4,000) (GH¢8,000) (GMD12,000)
Profit before tax GH¢96,000 GH¢16,000 GMD152,000
Income tax expenses (GH¢22,000) (GH¢4,000) (GMD36,000)
Profit for the period GH¢74,000 GH¢12,000 GMD116,000

Additional relevant information:
i) Bolga Ltd purchased 80% of Navrongo Ltd’s three million GH¢5 ordinary shares for GH¢12 million two years ago. At the acquisition date, the carrying value of Navrongo’s net assets was GH¢10 million, and this was deemed to be the same as their fair value. The non-controlling interest was measured using the proportion of net assets method. Goodwill on acquisition of Navrongo is not impaired. On 31 October 2019, Bolga Ltd sold one million, four hundred and forty thousand of its shares in Navrongo Ltd for GH¢13 million. The fair value of the interest retained was GH¢19 million. The retained earnings of Navrongo Ltd was GH¢5 million as at April 30, 2019. The only entry posted in Bolga Ltd’s individual financial statements was the GH¢13 million cash received. This was debited to the bank account and the credit posted to the suspense account.

ii) On 1 May 2019, Bolga Ltd acquired 60% of Serrekunda Ltd’s one million GMD1 ordinary shares for GMD284 million. Serrekunda is a Gambian-based company with Gambian Dalasi (GMD) as its currency. The non-controlling interest at acquisition was valued at GMD116 million using the fair value method. At 1 May 2019, the carrying amount of Serrekunda Ltd’s net assets was GMD240 million but the fair value was GMD280 million. The excess in the fair value was due to a brand with a remaining useful economic life of 5 years at the date of acquisition.

On 30 April 2020, it was determined that goodwill arising on the purchase of Serrekunda Ltd was impaired by GMD16 million. Goodwill impairments are charged as administrative expenses.

iii) On 28 February 2020, Navrongo Ltd paid a dividend of GH¢2 million to its ordinary shareholders.

iv) On 1 June 2019, Bolga Ltd started construction of a new building project and financed this out of its general borrowings. The construction was completed on 30 April 2020 at a total cost of GH¢20 million, excluding interest on borrowings. Bolga Ltd has had the following loans outstanding for the whole financial year:

  • 10% bank loan: GH¢28,000
  • 8% loan notes: GH¢12,000

All the interest for the year has been expensed to the statement of profit or loss. None of the loan notes are held by any other companies within Bolga Ltd.

v) On 1 November 2019, Bolga Ltd granted 20,000 share options to each of its 100 managers. These options will vest on 31 October 2021 if the managers are still employed. However, five managers had left the company by 30 April 2020, and it is expected that another five will leave by 31 October 2021. The fair value of the share options was GH¢3.10 on 1 November 2019, and GH¢10 on 30 April 2020. There have not been any accounting entries posted in relation to this scheme.

vi) The following exchange rates are relevant:

  • GMD: GH¢1
    • May 1 2019: 10.0
    • April 30 2020: 8.0
    • Average for the year ended 30 April 2020: 9.2

Required:
Prepare the consolidated statement of profit or loss and other comprehensive income for the year ended 30 April 2020.

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  • 5 Marks

CR – Nov 2020 – L3 – Q4b – Fair Value in Consolidation

Explain why a fair value exercise is performed when a parent acquires a controlling stake in a subsidiary.

Under IFRS 3: Business Combinations, the identifiable assets, liabilities, and contingent liabilities of subsidiaries are required to be brought into the consolidated financial statements at their fair value rather than their book value.

Required:
Explain the justification for undertaking a fair value exercise when a parent acquires a controlling stake in a subsidiary company.

 

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  • 20 Marks

CR – May 2021 – L3 – Q1 – Consolidation with Subsidiaries and Associate

Prepare consolidated statement of financial position including two subsidiaries and an associate. Adjust for goodwill, non-controlling interest, and contingent consideration.

Required:
Prepare a consolidated statement of financial position as of 31 May 2020 for the Blavo Group.

 

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  • 5 Marks

FR – Mar 2023 – L2 – Q5d – Business combinations and consolidation

Explains fair value in IFRS 13 and its application to assets and liabilities in business combinations.

d) IFRS 3: Business Combinations defines fair value consistently with IFRS 13: Fair Value Measurement. IFRS 3 requires the acquiree’s assets and liabilities to be incorporated into the consolidated financial statements at their fair values rather than at their carrying amounts.

Required:
i) Explain the meaning of fair value in accordance with IFRS 13. (2 marks)
ii) Explain the reasons why the acquiree’s assets and liabilities are measured and recognised at their fair value within the consolidated financial statements. (3 marks)

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  • 20 Marks

CR – May 2019 – L3 – Q1 – Consolidated financial statements | Business combinations and consolidation

The question requires the preparation of a consolidated statement of profit or loss and other comprehensive income for HO group for the year ended 30 September 2018, including adjustments for intra-group sales, goodwill impairment, and partial disposal of a subsidiary.

On 1 October 2016, HO acquired 60% of the equity interest of Sunyani, a public limited company in Ghana. The purchase consideration is made up of cash of GH¢40 million and the fair value of the identifiable net assets acquired was GH¢55 million at that date. The fair value of the non-controlling interest (NCI) in Sunyani was GH¢22.5 million on 1 October 2016.

HO wishes to use the ‘full goodwill’ method for all acquisitions. The share capital and retained earnings of Sunyani were GH¢12.5 million and GH¢32.5 million respectively, and other components of equity were GH¢3 million at the date of acquisition. The excess of the fair value of the identifiable net assets at acquisition is due to non-depreciable land. Goodwill has been tested for impairment annually and as at 30 September 2017 had reduced in value by 20%. However, at 30 September 2018, the impairment of goodwill had reversed and goodwill was valued at GH¢1 million above its original value. This upward change in value has already been included in the draft financial statements of HO below prior to the preparation of the group accounts.

HO group:

Draft statements of profit or loss and other comprehensive income for the year ended 30 September 2018

HO (GH¢’000) Sunyani (GH¢’000) Kumasi (GH¢’000)
Revenue 200,000 57,500 35,000
Cost of sales (156,000) (32,500) (18,000)
Gross profit 44,000 25,000 17,000
Other income 10,500 3,500 1,000
Administrative costs (7,500) (4,500) (6,000)
Other expenses (17,500) (9,500) (4,000)
Operating profit 29,500 14,500 8,000
Finance costs (2,500) (1,500) (2,000)
Finance income 3,000 2,500 4,000
Profit before tax 30,000 15,500 10,000
Income tax expense (9,500) (4,500) (2,500)
Profit for the year 20,500 11,000 7,500
Other comprehensive income – revaluation surplus 5,000 – –
Total comprehensive income for year 25,500 11,000 7,500

The following information is relevant:

i) HO disposed of an 8% equity interest in Sunyani on 30 September, 2018 for a cash consideration of GH¢9 million and had accounted for the gain or loss in other income. The carrying value of the net assets of Sunyani Ltd at 30 September, 2018 was GH¢60 million before any adjustments on consolidation. HO accounts for investments in subsidiaries using IFRS 9 financial instruments and has made an election to show gains and losses in other comprehensive income. The carrying value of the investment in Sunyani was GH¢45 million at 30 September 2017 and GH¢47.5 million at 30 September, 2018 before the disposal of the equity interest.

ii) HO acquired 60% of the equity interest of Kumasi Ltd, a limited liability company also in Ghana on 30 September, 2016. The purchase consideration was cash of GH¢35 million. Kumasi’s identifiable net assets were fair valued at GH¢43 million and the non-controlling interest had a fair value of GH¢14 million at that date. On 1 April 2018, HO disposed off a 40% equity interest in Kumasi for a consideration of GH¢25 million. Kumasi’s identifiable net assets were GH¢45 million and the value of the non-controlling interest was GH¢17 million at the date of disposal. The remaining equity interest was fair valued at GH¢20 million. After the disposal, HO exerts significant influence. Any increase in net assets since acquisition has been reported in profit or loss and the carrying value of the investment in Kumasi had not changed since acquisition. Goodwill had been tested for impairment and found that no impairment was required. No entries had been made in the financial statements of HO for this transaction other than for cash received.

iii) HO sold inventory to Sunyani for GH¢6 million at fair value. HO made a loss on the transaction of GH¢1 million and Sunyani still holds GH¢4 million in inventory at the year end.

iv) On 1 October 2016, HO purchased an item of property, plant and equipment for GH¢6 million and this is being depreciated using the straight line basis over 10 years with a nil residual value. At 30 September 2017, the asset was revalued to GH¢6.5 million but at 30 September 2018, the value of the asset had fallen to GH¢3.5 million. HO uses the revaluation model to value its non-current assets. The effect of the revaluation at 30 September 2018 had not been taken into account in total comprehensive income but depreciation for the year had been charged.

v) On 1 October 2016, HO made an award of 4,000 share options to each of its seven directors. The condition attached to the award was that the directors must remain employed by HO for three years. The fair value of each option at the grant date was GH¢100 and the fair value of each option at 30 September 2018 was GH¢110. At 30 September 2017, it was estimated that three directors would leave before the end of three years. Due to an economic downturn, the estimate of directors who were going to leave was revised to one director at 30 September 2018. The expense for the year as regards the share options had not been included in profit or loss for the current year and no director had left by 30 September 2018.

Required:
Prepare a consolidated statement of profit or loss and other comprehensive income for the year ended 30 September 2018 for the HO group.

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  • 4 Marks

CR – April 2022 – L3 – Q4b – Business combinations and consolidation

Explain the reasons why it may be difficult to identify the acquirer in a business combination.

b) All business combinations are accounted for by the acquisition method, which involves identifying the acquirer. However, it might not be easy to identify the acquirer.

Required:
Explain TWO (2) reasons why it might be difficult to identify the acquirer.
(4 marks)

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  • 20 Marks

CR – Apr 2022 – L3 – Q1 – Consolidated financial statements, Business combinations and consolidation,

Prepare a consolidated statement of financial position for a group of companies considering complex adjustments for goodwill, impairments, and non-controlling interests.

Below are the statements of financial position for three companies as of 31 July 2021:

Statements of Financial Position as at 31 July 2021 Papa Plc GH¢’million Mama Plc GH¢’million Bebe Plc GH¢’million
Non-current assets:
Property, plant, and equipment 3,888 1,680 1,224
Investments 3,560 2,600 200
Total non-current assets 7,448 4,280 1,424
Current assets:
Inventories 1,080 368 300
Trade receivables 1,376 416 100
Cash & bank 368 104 64
Total current assets 2,824 888 464
Total assets 10,272 5,168 1,888
Equity:
Share capital of GH¢1 each 4,000 1,200 640
Revaluation surplus 2,400 960 400
Retained earnings 1,432 800 760
Total equity 7,832 2,960 1,800
Current liabilities:
Trade payables 1,144 1,080 56
Taxation 1,296 1,128 32
Total current liabilities 2,440 2,208 88
Total equity and liabilities 10,272 5,168 1,888

Additional information:

  1. Papa Plc bought 720 million shares in Mama Plc on 1 August 2019 at GH¢2.50 per share in cash. On that date, Mama’s retained earnings were GH¢480 million, and net assets equaled their carrying amounts except for property, plant, and equipment, which had a fair value excess of GH¢320 million.
  2. Papa implements a policy of carrying property, plant, and equipment at fair values across group companies from the date of acquisition.
  3. On 1 August 2020, Mama bought 512 million shares in Bebe Plc. The consideration was GH¢3 per share in cash with an additional payment of GH¢1 per share due on 31 July 2022. The fair value of the contingent consideration was GH¢320 million on 1 August 2020 and GH¢416 million on 31 July 2021. Bebe’s retained earnings were GH¢664 million, and the revaluation surplus was GH¢360 million.
  4. Bebe controls the brand “Y start,” with a fair value of GH¢40 million and a useful life of 20 years. This has not been recognized in the accounts.
  5. Papa uses the fair value method for non-controlling interests, using GH¢2.50 per share for this purpose.
  6. Goodwill impairment loss of GH¢40 million for Mama and GH¢20 million for Bebe was recognized on 31 July 2021.
  7. Mama bought goods from Bebe for GH¢16 million, with 60% unsold at year-end. These goods cost Bebe GH¢12 million.

Required: Prepare the Consolidated Statement of Financial Position for Papa Group as of 31 July 2021, in accordance with IFRS.

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  • 10 Marks

CR – May 2016 – L3 – Q1a – Business Combinations and Consolidation

Discuss appropriate treatment of various investments in consolidated financial statements, including subsidiaries, associates, and held-for-sale assets.

The Avocado Ltd is preparing its consolidated financial statements for the year ended 31st December, 2015. Avocado Ltd has a number of investments in other entities. Details of these investments are as follows;

Investment in Akwadu Productions Avocado acquired 12% of the issued ordinary share capital of Akwadu Productions on 1st January 2010 for GH¢10,000,000. On 1st October, 2015 Avocado acquired a further 45% of the issued ordinary share capital for GH¢45,000,000. The fair value of the net assets at 1st October 2015 was GH¢120,000,000 and on 1st January 2010 was GH¢80,000,000. The previously held interest had a fair value on 1st October 2015 of GH¢17,000,000.

Investment in Akpakpa Ventures Ltd Avocado Ltd acquired 90% of the issued ordinary share capital of Akpakpa Ventures Ltd on 1st March 2015 for GH¢6,000,000 when the book value of the net assets was GH¢5,800,000. The fair value of these net assets was estimated at GH¢6,800,000 at the date of acquisition. The difference between fair value and the book value of the net assets related to depreciable property with a remaining useful life at the date of acquisition of 40 years.

Investment in Waatre Impex Ltd At the date of acquisition of Akpakpa Ventures Ltd, Akpakpa Ventures Ltd held 65% of the issued ordinary share capital of Waatre Impex Ltd. The operations of Waatre Impex Ltd do not fit within the strategic plans of Avocado Ltd and so the directors plan to sell this investment. The investment is currently being marketed with a view to selling it within 4 months.

Investment in Akutu Brothers Ltd Avocado Ltd acquired 40% of the issued ordinary share capital of Akutu brothers on 1st January 2014 for GH¢2,000,000 when the book value of the net assets was GH¢5,500,000. The fair value of these net assets was estimated at GH¢6,000,000 at the date of acquisition.

Required: a) Discuss the appropriate treatment of each investment in the consolidated financial statements of the Avocado Group Ltd as at 31st December 2015. (10 marks) (Note: Calculations are not required)

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  • 5 Marks

CR – Nov 2023 – L3 – Q4b – Business combinations and consolidation

Outline factors to consider in determining the acquirer in a business combination according to IFRS 3.

b) Mmebusem Plc has been negotiating with Anansesem Plc for several months, and agreements have finally been reached for the two companies to combine. In considering the accounting for the combined entities, management realises that, in applying IFRS 3, an acquirer must be identified. However, there is a debate among the accounting staff as to which entity is the acquirer.

Required:

In accordance with IFRS 3: Business Combinations, outline FOUR (4) factors that should be considered in determining which entity is the acquirer. (5 marks)

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  • 5 Marks

CR – Mar 2024 – Q4b – Business combinations and consolidation

Identify factors to consider when determining if reacquired rights constitute identifiable intangible assets in a business combination.

An acquirer may reacquire a right that it had previously granted to the acquiree to use one or more of the acquirer’s recognised or unrecognised assets. Examples of such rights include a right to use the acquirer’s trade name under a franchise agreement or a right to use the acquirer’s technology under a technology licensing agreement. Such reacquired rights generally are identifiable intangible assets that the acquirer separately recognises from goodwill.

Required: Identify FOUR (4) factors that should be considered in deciding on whether reacquired rights constitute an identifiable intangible asset.

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  • 5 Marks

CR – Mar 2023 – L3 – Q4b – Business combinations and consolidation Series

Explanation of protective rights under IFRS 10 and examples of situations where voting or contractual rights may be considered protective.

Whether an investor’s rights in an entity are voting or contractual under IFRS 10: Consolidated Financial Statements, these rights should be carefully evaluated to find out whether they are mere protective or actually confer power over the investee.

Required:
Explain protective rights, providing FOUR (4) instances where voting or contractual rights could be regarded as protective. (5 marks)

 

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  • 5 Marks

CR – July 2024 – L3 – Q4b – Business combinations and consolidation

Explanation on how an acquirer can obtain control of an acquiree without transferring consideration.

An acquirer may obtain control of an acquiree without transferring consideration. In such cases, IFRS 3 requires an acquirer to be identified, and the acquisition method to be applied.

Required:
Briefly explain how this situation may come about and highlight the appropriate consolidation treatment required.

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  • 5 Marks

CR – Dec 2022 – L3 – Q4b – Business combinations and consolidation

Explain how an investor can lose control over a subsidiary and the related accounting treatment in consolidated financial statements.

The loss of control of a subsidiary that is a business, other than in a nonreciprocal transfer to owners, results in the recognition of a gain or loss on the sale of the interest sold and on the revaluation of any retained non-controlling investment. A loss of control is an economic event, similar to that of gaining control, and therefore is a re-measurement event.

Required:

Explain in what ways an investor may lose control over an investee, indicating how such an accounting event should be dealt with in the consolidated financial statements.
(Total: 5 marks)

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