Topic: Business Combinations (IFRS 3)

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CR – Nov 2024 – L3 – Q1 – Consolidated Financial Statements

Prepare the consolidated statement of financial position for Okaekwei PLC, considering acquisitions and fair value adjustments.

Question

The following financial statements relate to Okaekwei PLC (Okaekwei), Ablekuma PLC (Ablekuma), and Katamanso PLC (Katamanso), three companies operating in the manufacturing industry.

Statement of Financial Position as at 31 October 2024

Description	Okaekwei (GH¢’000)	Ablekuma (GH¢’000)	Katamanso (GH¢’000)
Non-current assets:
Property, plant and equipment	88,307	53,657	82,875
Investments	102,500	78,095	–
Total Non-current Assets	190,807	131,752	82,875
Current assets:
Inventory	9,492	4,618	14,642
Trade receivables	4,573	8,101	18,085
Cash and Bank	11,625	4,599	30,056
Total Current Assets	25,690	17,318	62,783
Total Assets	216,497	149,070	145,658
Equity & Liabilities:
Share capital (GH¢1)	106,250	63,750	61,625
Retained earnings	38,607	42,361	27,025
Other component of equity	3,825	3,060	2,678
Total Equity	148,682	109,171	91,328
Liabilities:
Non-current liabilities	40,851	20,327	31,582
Current liabilities	26,964	19,572	22,748
Total Liabilities	67,815	39,899	54,330
Total Equity & Liabilities	216,497	149,070	145,658

Additional Information:

Acquisition of Katamanso:
- On 1 November 2023, Ablekuma acquired 60% of the ordinary shares of Katamanso at a cost of GH¢55 million.
- Due diligence costing GH¢0.25 million was undertaken and included in the investment cost.
- Retained earnings and other components of equity of Katamanso at acquisition were GH¢21.6 million and GH¢1.65 million, respectively.
Fair Value Adjustments:
- A fair value exercise was conducted, with a building’s fair value exceeding its carrying value by GH¢1.2 million (remaining useful life: 20 years).
- The financial statements of Katamanso do not yet reflect this adjustment.
- Non-controlling interest is measured using the proportionate share of identifiable net assets.
Acquisition of Ablekuma by Okaekwei:
- On 1 November 2022, Okaekwei purchased 80% of the ordinary shares of Ablekuma for GH¢92 million.
- The investment value reflects the fair value of the subsidiary at 31 October 2024.
- Retained earnings and other equity components at acquisition: GH¢29.6 million and GH¢2.32 million.
Deferred Tax on Fair Value Adjustments:
- Deferred tax is to be provided at 25% on temporary differences arising from fair value adjustments.
Intragroup Transactions:
- On 1 June 2024, Ablekuma sold inventory (cost: GH¢2 million) to Katamanso for GH¢1.8 million.
- As of 31 October 2024, these goods were still in Katamanso’s inventory, valued at the purchase cost. The fair value of the inventory at year-end was GH¢1.78 million.
Intragroup Transfer of PPE:
- On 1 August 2024, Okaekwei transferred a production machine to Ablekuma at GH¢2 million (carrying value: GH¢2.4 million).
- The remaining useful life was five years, but Ablekuma depreciates it over four years.
- Okaekwei harmonizes accounting policies upon consolidation.

Required:

Prepare the Consolidated Statement of Financial Position of Okaekwei PLC as at 31 October 2024.

(All workings are to be rounded to the nearest thousand).

Answer

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Tags: Consolidation Adjustments, Goodwill, Group Accounts, Intragroup Transactions, Non-Controlling Interest
Level: Level 3

Topic: Business Combinations (IFRS 3), Consolidated Financial Statements
Series: Nov 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

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)

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)

Answer

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Tags: Acquisition, Financial Ratios, Leverage, Profit margin, ROCE, Valuation
Level: Level 3

Topic: Business Combinations (IFRS 3)

FR – Nov 2023 – L2 – Q2 – Business Combinations (IFRS 3)

Analyze Oyowood Limited's financials and adjust ratios based on acquisition considerations.

Question

Chisom Plc experienced rapid growth in recent years through the acquisition and integration of other companies. Chisom Plc is interested in acquiring Oyowood Limited, a retailing company, which is one of several companies owned and managed by the same family.

The summarized financial statements of Oyowood Limited for the year ended December 31, 2022, are as follows:

From the above financial statements, Chisom Plc has calculated for Oyowood Limited the ratios below for the year ended December 31, 2022. It has also obtained the equivalent ratios for the retail sector average, which can be taken to represent Oyowood‟s sector.

Additional Information:

Oyowood Limited buys all inventories from family companies at a 10% discount below market prices.
Post-acquisition, Chisom Plc would replace the board of directors with a new board at a remuneration cost of ₦2.5 million per annum.
Directors’ loan accounts will be refinanced through a 10% interest-bearing commercial loan of the same amount.
The purchase price for Oyowood Limited is expected to be ₦30 million.

Required:

a. As the financial analyst for Chisom Plc, recalculate the ratios for Oyowood Limited after adjustments based on points (i) to (iv) above. (10 Marks)

b. Draft a memo to the managing director of Chisom Plc commenting on the adjusted performance of Oyowood Limited. (10 Marks)

Answer

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Tags: Acquisition Analysis, Financial Adjustments, Performance Evaluation, Ratio Analysis
Level: Level 2

Topic: Business Combinations (IFRS 3)

FR – May 2016 – L2 – Q3 – Business Combinations

Calculate goodwill and prepare the consolidated income statement for Panda Group, including post-acquisition adjustments.

Question

On October 1, 2015, Panda purchased 75% of the equity shares in Sanda through a share exchange of two shares in Panda for every three shares in Sanda. The stock market price of Panda’s shares on October 1, 2015, was N6 per share.

The summarized statements of comprehensive income for the two companies for the year ending March 31, 2016, are as follows:

Item	Panda (N’000)	Sanda (N’000)
Revenue	675,000	360,000
Cost of Sales	(390,000)	(165,000)
Gross Profit	285,000	195,000
Distribution Costs	(35,400)	(18,000)
Administrative Expenses	(40,500)	(34,500)
Finance Costs	(2,250)	(1,800)
Profit Before Tax	206,850	140,700
Income Tax Expense	(72,000)	(41,700)
Profit for the Year	134,850	99,900
Other Comprehensive Income
Gain on Revaluation of Land	3,750	1,500
Loss on Fair Value of Equity Financial Asset	(1,050)	(600)
Total Comprehensive Income	137,550	99,900

Additional Information:

Equity at October 1, 2015:
- Panda: Equity Shares (N1 each) N375,000, Share Premium N150,000, Revaluation Reserve (Land) N12,600, Retained Earnings N135,000
- Sanda: Equity Shares (N1 each) N240,000, Retained Earnings N220,500
Immediately after acquisition, Panda transferred a plant item to Sanda valued at N7.5 million (carrying amount: N4 million). The plant had a remaining life of two and a half years, and depreciation is charged to cost of sales.
After the acquisition, Sanda sold goods to Panda for N60 million, which cost Sanda N45 million. N18 million of these goods remained in Panda’s closing inventory.
Non-controlling interest in Sanda is valued at fair value, set at N150 million by Panda’s directors.
The goodwill of Sanda has not suffered impairment.
All items in the comprehensive income statements accrue evenly over the year.

Required:

a) Calculate the amount paid by Panda and the goodwill arising on the acquisition of Sanda. (6 Marks)

b) Prepare the consolidated statement of comprehensive income for Panda Group for the year ending March 31, 2016. (14 Marks)

Answer

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Tags: Business Combinations, Consolidated Income, Financial Reporting, Goodwill Calculation
Level: Level 2

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

FR – May 2016 – L2 – Q4 – Business Combinations (IFRS 3)

Calculate and assess Quintet Plc's performance against industry averages using ratio analysis.

Question

Quintet Plc sells provisions through its stores located in various retail shopping centers in the major cities in Nigeria. It has recently been experiencing declining profitability, and the board is concerned whether this issue is specific to the company or related to the sector as a whole. Additionally, concerns regarding the company’s solvency have been raised. To address these, the company has engaged a consulting firm specializing in corporate report analysis to provide average ratios across the business sector to rate performance.

Below are the ratios provided by the consulting firm for Quintet Plc’s business sector based on the year ending June 30, 2015:

Debt to equity: 38%
Gross profit margin: 35%
Operating profit margin: 12%
Return on year-end capital employed (ROCE): 16.8%
Net asset turnover: 1.4 times
Current ratio: 1.25:1
Average inventory turnover: 3 times
Trade payables’ payment period: 64 days

The financial statements of Quintet Plc for the year ending September 30, 2015, are as follows:

Income Statement

Item	Amount (N’000)
Revenue	224,000
Opening Inventory	33,200
Purchases	175,600
Closing Inventory	(40,800)
Gross Profit	56,000
Operating Costs	(39,200)
Finance Costs	(3,200)
Profit Before Tax	13,600
Income Tax Expense	(4,000)
Profit for the Year	9,000

Statement of Financial Position

Item	Amount (N’000)
Assets
Non-current assets
Property and shop fittings	102,400
Deferred development expenditure	20,000
Total Non-current assets	122,400
Current Assets
Inventory	40,800
Bank	4,000
Total Current Assets	44,800
Total Assets	167,200
Equity and Liabilities
Equity
Equity shares of N1 each	60,000
Property revaluation reserve	12,000
Retained earnings	34,400
Total Equity	106,400
Non-current Liabilities
10% loan notes	32,000
Current Liabilities
Trade payables	21,600
Current tax payable	7,200
Total Current Liabilities	28,800
Total Equity and Liabilities	167,200

Note:

Net asset is defined by the consulting firm as total assets less current liabilities.
The deferred development expenditure relates to a one-off payment for a franchise as a sole distributor of a particular product under negotiation but not concluded as of September 30, 2015, although payment has been made.

Required:

a) Compute the equivalent ratios for Quintet Plc provided by the consulting firm for the business sector.
(9 Marks)

b) Write a report to the board assessing the profitability and solvency performance of Quintet Plc compared to its business sector averages. For clarity, solvency measures both liquidity and gearing.
(11 Marks)

Answer

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Tags: Financial Reporting, Profitability, Ratio Analysis, Sector Comparison, Solvency
Level: Level 2

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

FR – May 2016 – L2 – Q2a – Business Combinations (IFRS 3)

Calculate goodwill for a parent company's acquisition using both proportionate share and fair value methods.

Question

A Parent Company acquired 60% equity interest in a subsidiary company for N440 million. The market value of the net assets of the subsidiary on the acquisition date was N400 million. The parent company estimates that the full 100% interest in the subsidiary company would have cost N640 million.

Required:

Calculate the goodwill at acquisition date where non-controlling interest is measured:

i. As a proportionate share of the net assets of the subsidiary company.
ii. At fair value (the full goodwill method).

Answer

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Tags: Acquisition, Fair Value, Goodwill, Non-Controlling Interest
Level: Level 2

Topic: Business Combinations (IFRS 3)
Series: MAY 2016

FR – Nov 2022 – L2 – Q3b – Bargain Purchase and IFRS 3 Review Requirements

Explanation of a bargain purchase and IFRS 3 items requiring review when gain from bargain purchase arises.

Question

b. A gain from a bargain purchase may arise in the course of a business combination and when this happens, the acquirer must review or reassessthe procedure used to measure certain items at the acquisition date.
Required:
Explain the term “Gain from a bargain purchase” and identify the three
items stipulated in IFRS 3 that must be reviewed.

Answer

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Tags: Acquisition Date, Bargain Purchase, IFRS 3, Negative Goodwill, Reassessment
Level: Level 2

Topic: Business Combinations (IFRS 3)
Series: NOV 2022

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

FR – NOV 2016 – L2 – Q1b – Business Combinations (IFRS 3)

Calculation of gain on bargain purchase arising from business acquisition with consideration of fair values and non-controlling interests.

Question

Harmony Limited acquired 70% interest in the equity shares of Foremost Limited for N3,000,000 on January 1, 2015. The abridged Statement of Financial Position of both companies at the date of acquisition were as follows:

	HARMONY LIMITED	FOREMOST LIMITED
	N’000	N’000
Identifiable Assets	32,800	8,000
Investment in Foremost Limited	3,000	_____
	35,800	8,000
Equity	24,000	4,800
Identifiable Liabilities	11,800	3,200
	35,800	8,000

The fair value of the identifiable assets of Foremost Limited amounts to N11,200,000 and the fair value of its liabilities is N3,200,000. The Non-Controlling Interest will be measured as a percentage of the Net Asset of the acquiree.

Required:

Calculate the Gain on Bargain Purchase arising from the acquisition.

Answer

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Tags: Acquisition Accounting, Bargain Purchase, Business Combinations, Fair Value
Level: Level 2

Topic: Business Combinations (IFRS 3)
Series: NOV 2016

CR – Nov 2024 – L3 – Q1 – Consolidated Financial Statements

Prepare the consolidated statement of financial position for Okaekwei PLC, considering acquisitions and fair value adjustments.

Question

The following financial statements relate to Okaekwei PLC (Okaekwei), Ablekuma PLC (Ablekuma), and Katamanso PLC (Katamanso), three companies operating in the manufacturing industry.

Statement of Financial Position as at 31 October 2024

Description	Okaekwei (GH¢’000)	Ablekuma (GH¢’000)	Katamanso (GH¢’000)
Non-current assets:
Property, plant and equipment	88,307	53,657	82,875
Investments	102,500	78,095	–
Total Non-current Assets	190,807	131,752	82,875
Current assets:
Inventory	9,492	4,618	14,642
Trade receivables	4,573	8,101	18,085
Cash and Bank	11,625	4,599	30,056
Total Current Assets	25,690	17,318	62,783
Total Assets	216,497	149,070	145,658
Equity & Liabilities:
Share capital (GH¢1)	106,250	63,750	61,625
Retained earnings	38,607	42,361	27,025
Other component of equity	3,825	3,060	2,678
Total Equity	148,682	109,171	91,328
Liabilities:
Non-current liabilities	40,851	20,327	31,582
Current liabilities	26,964	19,572	22,748
Total Liabilities	67,815	39,899	54,330
Total Equity & Liabilities	216,497	149,070	145,658

Additional Information:

Acquisition of Katamanso:
- On 1 November 2023, Ablekuma acquired 60% of the ordinary shares of Katamanso at a cost of GH¢55 million.
- Due diligence costing GH¢0.25 million was undertaken and included in the investment cost.
- Retained earnings and other components of equity of Katamanso at acquisition were GH¢21.6 million and GH¢1.65 million, respectively.
Fair Value Adjustments:
- A fair value exercise was conducted, with a building’s fair value exceeding its carrying value by GH¢1.2 million (remaining useful life: 20 years).
- The financial statements of Katamanso do not yet reflect this adjustment.
- Non-controlling interest is measured using the proportionate share of identifiable net assets.
Acquisition of Ablekuma by Okaekwei:
- On 1 November 2022, Okaekwei purchased 80% of the ordinary shares of Ablekuma for GH¢92 million.
- The investment value reflects the fair value of the subsidiary at 31 October 2024.
- Retained earnings and other equity components at acquisition: GH¢29.6 million and GH¢2.32 million.
Deferred Tax on Fair Value Adjustments:
- Deferred tax is to be provided at 25% on temporary differences arising from fair value adjustments.
Intragroup Transactions:
- On 1 June 2024, Ablekuma sold inventory (cost: GH¢2 million) to Katamanso for GH¢1.8 million.
- As of 31 October 2024, these goods were still in Katamanso’s inventory, valued at the purchase cost. The fair value of the inventory at year-end was GH¢1.78 million.
Intragroup Transfer of PPE:
- On 1 August 2024, Okaekwei transferred a production machine to Ablekuma at GH¢2 million (carrying value: GH¢2.4 million).
- The remaining useful life was five years, but Ablekuma depreciates it over four years.
- Okaekwei harmonizes accounting policies upon consolidation.

Required:

Prepare the Consolidated Statement of Financial Position of Okaekwei PLC as at 31 October 2024.

(All workings are to be rounded to the nearest thousand).

Answer

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Tags: Consolidation Adjustments, Goodwill, Group Accounts, Intragroup Transactions, Non-Controlling Interest
Level: Level 3

Topic: Business Combinations (IFRS 3), Consolidated Financial Statements
Series: Nov 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

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

Topic: Business Combinations (IFRS 3)

CR – Nov 2018 – L3 – SB – Q3 – Business Combinations (IFRS 3)

Evaluation of Abana and Doha as potential acquisition targets using adjusted financial ratios.

Question

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)

Answer

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Tags: Acquisition, Financial Ratios, Leverage, Profit margin, ROCE, Valuation
Level: Level 3

Topic: Business Combinations (IFRS 3)

FR – Nov 2023 – L2 – Q2 – Business Combinations (IFRS 3)

Analyze Oyowood Limited's financials and adjust ratios based on acquisition considerations.

Question

The summarized financial statements of Oyowood Limited for the year ended December 31, 2022, are as follows:

Additional Information:

Oyowood Limited buys all inventories from family companies at a 10% discount below market prices.
Post-acquisition, Chisom Plc would replace the board of directors with a new board at a remuneration cost of ₦2.5 million per annum.
Directors’ loan accounts will be refinanced through a 10% interest-bearing commercial loan of the same amount.
The purchase price for Oyowood Limited is expected to be ₦30 million.

Required:

a. As the financial analyst for Chisom Plc, recalculate the ratios for Oyowood Limited after adjustments based on points (i) to (iv) above. (10 Marks)

b. Draft a memo to the managing director of Chisom Plc commenting on the adjusted performance of Oyowood Limited. (10 Marks)

Answer

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Tags: Acquisition Analysis, Financial Adjustments, Performance Evaluation, Ratio Analysis
Level: Level 2

Topic: Business Combinations (IFRS 3)

FR – May 2016 – L2 – Q3 – Business Combinations

Calculate goodwill and prepare the consolidated income statement for Panda Group, including post-acquisition adjustments.

Question

The summarized statements of comprehensive income for the two companies for the year ending March 31, 2016, are as follows:

Item	Panda (N’000)	Sanda (N’000)
Revenue	675,000	360,000
Cost of Sales	(390,000)	(165,000)
Gross Profit	285,000	195,000
Distribution Costs	(35,400)	(18,000)
Administrative Expenses	(40,500)	(34,500)
Finance Costs	(2,250)	(1,800)
Profit Before Tax	206,850	140,700
Income Tax Expense	(72,000)	(41,700)
Profit for the Year	134,850	99,900
Other Comprehensive Income
Gain on Revaluation of Land	3,750	1,500
Loss on Fair Value of Equity Financial Asset	(1,050)	(600)
Total Comprehensive Income	137,550	99,900

Additional Information:

Equity at October 1, 2015:
- Panda: Equity Shares (N1 each) N375,000, Share Premium N150,000, Revaluation Reserve (Land) N12,600, Retained Earnings N135,000
- Sanda: Equity Shares (N1 each) N240,000, Retained Earnings N220,500
Immediately after acquisition, Panda transferred a plant item to Sanda valued at N7.5 million (carrying amount: N4 million). The plant had a remaining life of two and a half years, and depreciation is charged to cost of sales.
After the acquisition, Sanda sold goods to Panda for N60 million, which cost Sanda N45 million. N18 million of these goods remained in Panda’s closing inventory.
Non-controlling interest in Sanda is valued at fair value, set at N150 million by Panda’s directors.
The goodwill of Sanda has not suffered impairment.
All items in the comprehensive income statements accrue evenly over the year.

Required:

a) Calculate the amount paid by Panda and the goodwill arising on the acquisition of Sanda. (6 Marks)

b) Prepare the consolidated statement of comprehensive income for Panda Group for the year ending March 31, 2016. (14 Marks)

Answer

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Tags: Business Combinations, Consolidated Income, Financial Reporting, Goodwill Calculation
Level: Level 2

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

FR – May 2016 – L2 – Q4 – Business Combinations (IFRS 3)

Calculate and assess Quintet Plc's performance against industry averages using ratio analysis.

Question

Below are the ratios provided by the consulting firm for Quintet Plc’s business sector based on the year ending June 30, 2015:

Debt to equity: 38%
Gross profit margin: 35%
Operating profit margin: 12%
Return on year-end capital employed (ROCE): 16.8%
Net asset turnover: 1.4 times
Current ratio: 1.25:1
Average inventory turnover: 3 times
Trade payables’ payment period: 64 days

The financial statements of Quintet Plc for the year ending September 30, 2015, are as follows:

Income Statement

Item	Amount (N’000)
Revenue	224,000
Opening Inventory	33,200
Purchases	175,600
Closing Inventory	(40,800)
Gross Profit	56,000
Operating Costs	(39,200)
Finance Costs	(3,200)
Profit Before Tax	13,600
Income Tax Expense	(4,000)
Profit for the Year	9,000

Statement of Financial Position

Item	Amount (N’000)
Assets
Non-current assets
Property and shop fittings	102,400
Deferred development expenditure	20,000
Total Non-current assets	122,400
Current Assets
Inventory	40,800
Bank	4,000
Total Current Assets	44,800
Total Assets	167,200
Equity and Liabilities
Equity
Equity shares of N1 each	60,000
Property revaluation reserve	12,000
Retained earnings	34,400
Total Equity	106,400
Non-current Liabilities
10% loan notes	32,000
Current Liabilities
Trade payables	21,600
Current tax payable	7,200
Total Current Liabilities	28,800
Total Equity and Liabilities	167,200

Note:

Net asset is defined by the consulting firm as total assets less current liabilities.
The deferred development expenditure relates to a one-off payment for a franchise as a sole distributor of a particular product under negotiation but not concluded as of September 30, 2015, although payment has been made.

Required:

a) Compute the equivalent ratios for Quintet Plc provided by the consulting firm for the business sector.
(9 Marks)

Answer

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Tags: Financial Reporting, Profitability, Ratio Analysis, Sector Comparison, Solvency
Level: Level 2

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

FR – May 2016 – L2 – Q2a – Business Combinations (IFRS 3)

Calculate goodwill for a parent company's acquisition using both proportionate share and fair value methods.

Question

Required:

Calculate the goodwill at acquisition date where non-controlling interest is measured:

i. As a proportionate share of the net assets of the subsidiary company.
ii. At fair value (the full goodwill method).

Answer

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Tags: Acquisition, Fair Value, Goodwill, Non-Controlling Interest
Level: Level 2

Topic: Business Combinations (IFRS 3)
Series: MAY 2016

FR – Nov 2022 – L2 – Q3b – Bargain Purchase and IFRS 3 Review Requirements

Explanation of a bargain purchase and IFRS 3 items requiring review when gain from bargain purchase arises.

Question

Answer

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Tags: Acquisition Date, Bargain Purchase, IFRS 3, Negative Goodwill, Reassessment
Level: Level 2

Topic: Business Combinations (IFRS 3)
Series: NOV 2022

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

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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

FR – NOV 2016 – L2 – Q1b – Business Combinations (IFRS 3)

Calculation of gain on bargain purchase arising from business acquisition with consideration of fair values and non-controlling interests.

Question

	HARMONY LIMITED	FOREMOST LIMITED
	N’000	N’000
Identifiable Assets	32,800	8,000
Investment in Foremost Limited	3,000	_____
	35,800	8,000
Equity	24,000	4,800
Identifiable Liabilities	11,800	3,200
	35,800	8,000

Required:

Calculate the Gain on Bargain Purchase arising from the acquisition.

Answer

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Tags: Acquisition Accounting, Bargain Purchase, Business Combinations, Fair Value
Level: Level 2