Fare value of shares at acqusition

Hello Sir,

In the following question They said that the fare price of shares at acquisition is $ 1.2 so,

for calculation of NCI at the reporting date

I would do the following :
$000
Share capital 20000 * 1 = $20000
Share premium 20000 * .2 = $ 4000
Total = $24000

Add : Total Post acquisition R.E= 11200
Total = 35200
to get the NCI
Multiply by 25% = 8800

the same figure as they shown in the book answer

is that ok ,we must change the breakup of capital as per the new fare value of shares ($1.2),or otherwise we will not get the correct amount,

because in your lectures you said to to take share capital of NCI as it was at acquisition, so that
was little bit confusing to me
Thanks,

————————————————————————————————————————

On 1 October 20X2, Paradigm acquired 75% of Strata’s equity shares by means of a share
exchange of two new shares in Paradigm for every five acquired shares in Strata. In addition,
Paradigm issued to the shareholders of Strata a $100 10% loan note for every 1,000 shares it
acquired in Strata. Paradigm has not recorded any of the purchase consideration, although it
does have other 10% loan notes already in issue.
The market value of Paradigm’s shares at 1 October 20X2 was $2 each.
The summarised statements of financial position of the two entities as at 31 March 20X3 are:
Paradigm Strata
Assets $000 $000
Non?current assets
Property, plant and equipment 47,400 25,500
Financial asset: equity investments (notes (i) and (iii)) 7,500 3,200
––––––– –––––––
54,900 28,700
Current assets
Inventory (note (ii)) 20,400 8,400
Trade receivables 14,800 9,000
Bank 2,100 nil
––––––– –––––––
Total assets 92,200 46,100
––––––– –––––––
Equity and liabilities
Equity
Equity shares of $1 each 40,000 20,000
Retained earnings/(losses) – at 1 April 20X2 19,200 (4,000)
– for year ended 31 March 20X3 7,400 8,000
––––––– –––––––
66,600 24,000
Non?current liabilities
10% loan notes 8,000 nil
Current liabilities
Trade payables 17,600 13,000
Bank overdraft nil 9,100
––––––– –––––––
Total equity and liabilities 92,200 46,100
––––––– –––––––

The following information is relevant:
(i) At the date of acquisition, Strata produced a draft statement of profit or loss which
showed it had made a net loss after tax of $2 million at that date. Paradigm accepted
this figure as the basis for calculating the pre? and post?acquisition split of Strata’s
profit for the year ended 31 March 20X3.
Also at the date of acquisition, Paradigm conducted a fair value exercise on Strata’s
net assets which were equal to their carrying amounts (including Strata’s financial
asset equity investments) with the exception of an item of plant which had a fair value
of $3 million below its carrying amount. The plant had a remaining useful life of three
years at 1 October 20X2.
Paradigm’s policy is to value the non?controlling interest at fair value at the date of
acquisition. For this purpose, a share price for Strata of $1.20 each is representative of
the fair value of the shares held by the non?controlling interest.
(ii) Each month since acquisition, Paradigm’ssalesto Strata were consistently $4.6 million.
Paradigm had marked these up by 15% on cost. Strata had one month’s supply ($4.6
million) of these goods in inventory at 31 March 20X3. Paradigm’s normal mark?up (to
third party customers) is 40%.
(iii) The financial asset equity investments of Paradigm and Strata are carried at their fair
values as at 1 April 20X2. As at 31 March 20X3, these had fair values of $7.1 million and
$3.9 million respectively.
(iv) There were no impairment losses within the group during the year ended 31 March
20X3.
Required:
(a) Prepare the consolidated statement of financial position for Paradigm as at 31 March
20X3. (15 marks)
(b) A financial assistant has observed that the fair value exercise means that a subsidiary’s
net assets are included at acquisition at their fair (current) values in the consolidated
statement of financial position. The assistant believes that it is inconsistent to
aggregate the subsidiary’s net assets with those of the parent because most of the
parent’s assets are carried at historical cost.
Required:
Comment on the assistant’s observation and explain why the net assets of acquired
subsidiaries are consolidated at acquisition at their fair values. (5 marks)

——————————————–
Answer
PARADIGM
(a) Paradigm – Consolidated statement of financial position as at 31 March 20X3
$000 $000
Assets
Non?current assets:
Property, plant and equipment
(47,400 + 25,500 – 3,000 fair value + 500 depreciation) 70,400
Goodwill (W3) 8,500
Financial asset: equity investments (7,100 + 3,900) 11,000
–––––––
89,900
Current assets
Inventory (20,400 + 8,400 – 600 PUP (W6)) 28,200
Trade receivables (14,800 + 9,000) 23,800
Bank 2,100
–––––– 54,100
–––––––
Total assets 144,000
–––––––
Equity and liabilities
Equity attributable to owners of the parent
Equity shares of $1 each (40,000 + 6,000 (W3)) 46,000
Share premium (W3) 6,000
Retained earnings (W5) 33,925
Non?controlling interest (W4) 8,800
–––––––
Total equity 94,725
10% loan notes (8,000 + 1,500 (W3)) 9,500
Current liabilities
Trade payables (17,600 + 13,000 + 75 interest (W7)) 30,675
Bank overdraft 9,100
–––––– 39,775
–––––––
Total equity and liabilities 144,000
–––––––
Workings
(W1) Group structure
Paradigm

75%

Strata
(6 months)

(W2) Net assets
At
acquisition
At
reporting
date
Post?
acquisition
$000 $000 $000
Share capital 20,000 20,000 –
Retained earnings (6,000) 4,000 10,000
Fair value adjustment (3,000) (3,000) –
Fair value depreciation (3,000 × 6
/36) 500 500
Gain on equity investment 700 700
–––––– –––––– ––––––
11,000 22,200 11,200
–––––– –––––– ––––––
(W3) Goodwill
$000
Share exchange ((20,000 × 75%) × 2
/5 × $2) 12,000
10% loan notes (15,000 × $100/1,000) 1,500
Non?controlling interest (20,000 × 25% × $1.20) 6,000
Less: Fair value of net assets at acquisition (W2) (11,000)
––––––
Goodwill on acquisition 8,500
––––––
The market value of the shares issued of $12 million would be recorded as
$6 million share capital and $6 million share premium as the shares have a
nominal value of $1 each and an issue value of $2 each.
(W4) Non?controlling interest
$000
Fair value on acquisition (W3) 6,000
Post?acquisition profits (11,200 (W2) × 25%) 2,800
–––––
8,800
–––––
(W5) Group retained earnings
$000
Paradigm’s retained earnings (19,200 + 7,400) 26,600
Strata’s post?acquisition profit (11,200 (W2) × 75%) 8,400
PUP in inventory (4,600 × 15/115) (600)
Loss on equity investments (7,500 – 7,100) (400)
Additional loan note interest (1,500 × 10% × 6
/12) (75)
––––––
33,925
––––––

(b) IFRS 3 Business Combinations requires the purchase consideration for an acquired
entity to be allocated to the fair value of the assets, liabilities and contingent liabilities
acquired (henceforth referred to as net assets) with any residue being allocated to
goodwill. This also means that those net assets will be recorded at fair value in the
consolidated statement of financial position. This is entirely consistent with the way
other net assets are recorded when first transacted (i.e. the initial cost of an asset is
normally its fair value). This ensures that individual assets and liabilities are correctly
valued in the consolidated statement of financial position. Whilst this may sound
obvious, consider what would happen if say a property had a carrying amount of $5
million, but a fair value of $7 million at the date it was acquired. If the carrying amount
rather than the fair value was used in the consolidation it would mean that tangible
assets (property, plant and equipment) would be understated by $2 million and
intangible assets (goodwill) would be overstated by the same amount.
There could also be a ‘knock?on’ effect with incorrect depreciation charges in the years
following an acquisition and incorrect calculation of any goodwill impairment. Thus the
use of carrying amountsrather than fair values would not give a ‘faithful representation’
as required by the Framework.
The assistant’s commentregarding the inconsistency of valuemodelsin the consolidated
statement of financial position is a fair point, but it is really a deficiency of the historical
cost concept rather than a flawed consolidation technique. Indeed the fair value of the
subsidiary’s net assets represent the historical cost to the parent. To overcome much of
the inconsistency, there would be nothing to prevent the parent from applying the
revaluation model to its property, plant and equipment.