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“On 1 June 2010, Premier acquired 80% of the equity share capital of Sanford. The consideration consisted of two elements: a share exchange of three shares in Premier for every ?ve acquired shares in Sanford and the issue of a $100 6% loan note for every 500 shares acquired in Sanford. The share issue has not yet been recorded by Premier, but the issue of the loan notes has been recorded. At the date of acquisition shares in Premier had a market value of $5 each and the shares of Sanford had a stock market price of $3·50 each. Below are the summarised draft ?nancial statements of both companies.
The following information is relevant:
(i) At the date of acquisition, the fair values of Sanford’s assets were equal to their carrying amounts with the exception of its property. This had a fair value of $1·2 million below its carrying amount. This would lead to a reduction of the depreciation charge (in cost of sales) of $50,000 in the post-acquisition period. Sanford has not incorporated this value change into its entity ?nancial statements.
(iv) Premier’s investments include some available-for-sale investments that have
increased in value by $300,000 during the year. The other equity reserve relates to these investments and is based on their value as at 30 September 2009. There were no acquisitions or disposals of any of these investments during the year ended 30 September 2010.Required:
(a) Prepare the consolidated statement of comprehensive income for Premier for the year ended 30 September
2010.
(b) Prepare the consolidated statement of ? nancial position for Premier as at 30 September 2010”This is extracted from Premier – consolidation question
I want to ask u about note (i) and (iv)
Note (i) talks about impairment loss of Sanford’s property which resulted in reduction of depreciation charge ( reducing in COS)
1st double entry for this is:
Dr Impairment loss of property/ RE(Sanford) 1.2m
Cr PPE 1.2mIt reflects to RE of Sanford and why does impairment loss expense not appear in CSOCI??
2nd one is:
Dr PPE 50,000
CR COS/RE (sanford) 50,000Note (iv) is about financial assets which is FV through P&L (available-for-sale) or FV through OCI??
I see in the answer the increase of 300,000 is located in OCI section-> FV through OCI“There were no acquisitions or disposals of any of these investments during the year ended 30 September 2010” i understood this sentence like the entity had no intention to sell it and keep in long term to collect dividend
Is that correct? How about irrevocable election criteria?
and also increase in Other equity reserve
Is other equity reserve represented for Revaluation reserve??
Because i think it eventually goes into Revaluation reserveDr Investments 300,000
Cr Other equity reserve/OCI 300,000The question specifically states that no entry has been made in the Sanford accounting records to reflect the fall in the fair value of the property
This note is not looking for you to account for the impairment on Sanford’s behalf
It’s a note for the fair value adjustment for the purposes of calculating goodwill (working W2) in the first place and for post-acquisition movement in retained earnings in the second
Sanford apparently doesn’t want to reflect the $1.2m fair value adjustment. But it IS reflected in the consolidated figures (goodwill, depreciation, TNCA and retained earnings)
Your entry Dr Investments Cr Other Equity Reserve (CI) 300,000 seems correct
As for you “understanding this sentence like the entity had no intention …..” there will be no need for you to take the step of interpreting entity intentions. The examiner will make it perfectly clear for you as is the case here.
You are told that Other Equity Reserve relates to these investments and the 300,000 therefore must be credited there
OK?
You’re welcome (I hope you’re telling all your friends and colleagues about OpenTuition!)
Definitely Mike!!! I always introduce this website for them, it’s really a good place to study and you’re a passionate person 🙂
Sorry but about the financial assets in this question, it must be FV through OCI right? and it was appointed to credit to other equity reserve
If FV through PL then it will go to RE eventuallyHello Mike,
Just a further question with regards to the property revaluation in (i). I understand that the sub is not recognising the property revaluation, therefore there is no charge to the RE in terms of the amount written off, but rather instead the revaluation changes our calculation of goodwill, increasing our goodwill by the amount written off, 1.2 mil.
My question is, hypothetically, in the future if the sub decides to go ahead and do a revaluation of their property and writes off 1.2 mil on the property, then in the consolidated statement of financial position would this be charged against our goodwill instead of retained earnings?
It would seem unfair to charge against RE seeing as we already accounted for the revaluation at the point of acquisition by incorporating it into our goodwill calculation.
Thanks.
“would this be charged against our goodwill instead of retained earnings?”
Now there’s an interesting concept!
So you’re asking whether, when we later credit the value of the subsidiary’s property, we should correspondingly debit the goodwill? An asset account? Increase the goodwill?
Did you think through the double entry that you propose before you committed your thoughts to the internet?
Hi Mike.
Sorry for my stupidity there! Haha. I think in my mind I was getting confused with impairment of cash generating areas where we charge goodwill first.
So after initial recognition, if the sub decides to recognize impairment of the building it will be recognized in the consolidated financial statements by debiting retained earnings?
Thanks,
No problem – just happy to be able to sort it out for you
Incidentally, the word “charged” is a technical word in accounting and is a synonym for “debited”
“… where we charge goodwill first.” is therefore an incorrect expression again! Sorry
It would be preferable to have said “… where we write off the impairment first against goodwill”
Ahh. Again my apologies. I’m still getting to grips with all the terminology.
I understand at acquisition we value all the assets and liabilities of the sub at fair value. Hence in the original question, although the sub hasn’t recognised the impairment, for the acquisition we therefore must recognise the impairment for fair value purposes. Hence the impairment has an effect on goodwill as you said.
I’m also aware that all changes to the acquired assets and liabilities, and the resulting gains and losses, that arise after control of the acquired entity has passed to the acquirer are reported as part of the post acquisition financial performance of the group.
My question is just that since we already accounted for the impairment at acquisition, if later on down the line the sub accounts for the impairment in their financial statements do we reverse the impairment treatment in the consolidated accounts since we already accounted for it at acquisition? Otherwise it seems like double counting.
Again apologies for not explaining my thinking clearly in previous posts.
By recognising the impairment in fair value as at date of acquisition, the goodwill on acquisition is “unfairly” increased
When / if the subsidiary later accounts for that impairment through its statement of profit or loss, the profits of the subsidiary will be reduced and the parent’s share of those profits will be “hit”
The net effect is not double counting – quite the opposite, in fact!
On the one hand the asset of goodwill appears in the consolidation on the event of the acquisition whereas, on the other hand, the consolidated retained earnings are being reduced on the event of the subsidiary’s recognition
That later adjustment is, in effect, cancelling the “unfair” increase in the goodwill
Hi Mike.
Thank you very much for your explanation!
When the sub accounts for the impairment the NCI will also take a share of the impairment loss right? Meaning only the parents share of the profits will be “hit”. So does this mean that on acquisition the NCI will also get a share of the gain on goodwill?
Thanks
“So does this mean that on acquisition the NCI will also get a share of the gain on goodwill?”
That depends entirely on the basis upon which the directors have originally valued the nci
If the nci has been valued on a proportionate basis then they have no goodwill attributable to them.
That means that this latest ‘hit’ on the subsidiary’s post-acquisition profits will be partly attributable to the nci but they have no ‘unfair’ increase in the goodwill to sweeten the blow
Life is unfair (when the nci is valued on a proportional basis!0
But that’s their own fault for being the nci – they had the opportunity to sell their shares at the same price paid by the parent upon the event of the take-over.
The nci chose not to sell so they now have to live with the consequences of their decision
Tough
Vuviet, I’m not sure that I understand “Sorry i unfollow this thread”
Do you mean that you don’t understand what the explanation to Alexpaj means?
If so, start your own thread and tell me where you have started to get lost
I had been looking into students concerns on Premier and found this thread.
I have 2 concerns here;
Under the investment portion, how was the 800 (consideration) computed? and why was it deducted from the investment account?
In computing for working 2 Net Assets, I find it hard to understand the ” post acquisition portion” which composed of RE 1300, depreciation 50 and PUP 400.
How was the RE computed especially the 3900 x 4/12?
Please help me. Thank you
Hi,
1. The 800 relates to the issue of the loand stock as part of the consideration. We have acquired 4,000 shares in the subsidiary (80% x 5,000) and we issue $100 of loan stock for every 500 shares acquired. We therefore are issuing 800 of loan stock (4,000 / 500 = 8 x 100). As this has been recorded within the investment then this will need to be removed.
2. There is a mid-year acquisition and so the profits for the year of 3,900 are pro-rated for the number of months since the acquisition, so four months from 1 June to 30 September. The saving on depreciation is added as this will increase profits, and the PUP is deducted as it removes the profit on inventory unsold within the group at the reporting date.
Hope the above clears the issues up for you.
Thanks
Hello Sir, I have the same question as above. for RE calculation I understand the answer uses 3900 as profit for the year figure. Its not provided in the question. How do we calculate it?
Hi,
In the original question in the December 2010 exam you were given the statement of profit or loss for the year, and this gave you the profit or the year of 3,900.
Thanks
But in the Kaplan Revision Kit, only the SOFP is given in the question, and nothing is mentioned of the profits for the current year in the notes. How did they expect us to know of the profit for the current year?
Yes, Mike. but in case of increase in FV I will affect the net assets by revaluation surplus, as if the subsidiary did this revaluation (hypothetical) , so why in the opposite case I will not affect the RE by impairment loss same as Depreciation expense ?!!
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