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Sir,
From the question below, how can share premium on exchange of share for share consideration be computed when the market value of shares at the date of acquisition of subsidiary (O plc) is given instead of parent’s (K plc)?
How can I treat the deferred tax of $10m in the note 2 sir?K plc acquired 60% of the equity shares of O pls by means of share exchange of three shares in K plc for four shares in O plc. The market value of the shares of O plc at the date of acquisition which is 1 April, 2013 was $10 per share.
K would make a deferred cash payment of 70c per acquired share on 1 April, 2014. K’s cost of capital 12% per annum. None of the consideration has been recorded in the books of K. The following information was extracted from the financial statements of the two companies as at 31 March, 2014
K O
$’m $’m
Equity shares of $1 each 60,000 20,000
Share premium 15,000 Nil
Retained earnings 1 April, 2013 20,500 11,600
Retained earnings for the year 9,800 6,700
PPE 50,400 22,900
The following information is relevant:
1 An equipment had a fair value of $360m above the carrying amount. It had remaining life of four years using straight line depreciation at the date of acquisition in the books of O plc.
2 O plc had deferred tax liability of $10m as at 31 March, 2014 which had not been recorded. The company’s goodwill is not impaired.
3 NCIs are to be valued at fair value at the date of acquisition of K plc. The fair value of the shares of O plc held by NCIs at the date of acquisition is $6 per share.
Required:
Calculate the following as at 31 March, 2014:
i Equity
ii NCIs
iii Consolidated Goodwill
iv PPEYou can’t! There’s a misprint in the question! Where have you found the question?
The first share price mentioned in the question is $10 wher it says that the “market value of the shares of O Plc at the date of acquisition is $10”
That $10 should be (I guess!) the market value of the shares of K Plc
The deferred tax problem is ….. not a problem at all!
What would you have done if, instead of it being a deferred tax liability that wasn’t recorded, it had been an internally generated asset with a fair value of $10 that wasn’t reflected / recorded within the subsidiary’s figures?
You would have included this unrecognised asset at its fair value within the goodwill calculation in working W2. So, what’s different? If you’re going to include within working W2 an otherwise unrecognised asset, why would you not also include an unrecognised liability?
Is that ok?
If I’m wrong about the $10 misprint, post again with a reference where I can find the question
Thank you sir. I think you are not wrong with your guess. Your guess is exactly what I guess too. This is exactly question 2 of The Institute of Chartered Accountants of Nigeria (ICAN), the professional body in Nigeria, Financial Reporting May 2015 diet. I only change Naira (#) and Kobo (k) to Dollar($) and cent (c) to fit your domination.
Some of my colleagues are arguing the question is correct but I insisted. That is the reason why I posted the question sir.
Anyway I am waiting for their solutions that will be publish very soon. I will keep you informed
I happen to be one of your students online and I use your online materials very well. I appreciate your efforts and your materials are invaluable to both students and tuitors.Again, thank you very much sir.
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