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Fare value of shares at acqusition

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Fare value of shares at acqusition

  • This topic has 1 reply, 2 voices, and was last updated 3 years ago by P2-D2.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • August 20, 2021 at 1:46 pm #632330
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    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.

    August 29, 2021 at 10:40 am #633340
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    To work out the NCI at acquisition we need to know S’s share price ($1.20) and the number of shares owned by the NCI, so here 25% of the 20,000 in issue. We can then multiply the $1.20 by the 5,000 NCI shares to give the $6,000 and then we add on the NCI% of the post-acquisition movement in net assets.

    I’m not too sure that you’ve tried to do in your answer at the start but the model answer is correct.

    Thanks

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