1 On 1 August 2007 Patronic purchased 18 million of a total of 24 million equity shares in Sardonic. The acquisition
was through a share exchange of two shares in Patronic for every three shares in Sardonic. Both companies have
shares with a par value of $1 each. The market price of Patronic’s shares at 1 August 2007 was $5·75 per share.
Patronic will also pay in cash on 31 July 2009 (two years after acquisition) $2·42 per acquired share of Sardonic.
Patronic’s cost of capital is 10% per annum. The reserves of Sardonic on 1 April 2007 were $69 million.
Patronic has held an investment of 30% of the equity shares in Acerbic for many years.
The summarised income statements for the three companies for the year ended 31 March 2008 are:
Patronic Sardonic Acerbic
$’000 $’000 $’000
Revenue 150,000 78,000 80,000
Cost of sales (94,000) (51,000) (60,000)
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Gross profit 56,000 27,000 20,000
Distribution costs (7,400) (3,000) (3,500)
Administrative expenses (12,500) (6,000) (6,500)
Finance costs (note (ii)) (2,000) (900) nil
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Profit before tax 34,100 17,100 10,000
Income tax expense (10,400) (3,600) (4,000)
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Profit for the period 23,700 13,500 6,000
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The following information is relevant:
(i) The fair values of the net assets of Sardonic at the date of acquisition were equal to their carrying amounts with
the exception of property and plant. Property and plant had fair values of $4·1 million and $2·4 million
respectively in excess of their carrying amounts. The increase in the fair value of the property would create
additional depreciation of $200,000 in the consolidated financial statements in the post acquisition period to
31 March 2008 and the plant had a remaining life of four years (straight-line depreciation) at the date of
acquisition of Sardonic. All depreciation is treated as part of cost of sales.
The fair values have not been reflected in Sardonic’s financial statements.
No fair value adjustments were required on the acquisition of Acerbic.
(ii) The finance costs of Patronic do not include the finance cost on the deferred consideration.
(iii) Prior to its acquisition, Sardonic had been a good customer of Patronic. In the year to 31 March 2008, Patronic
sold goods at a selling price of $1·25 million per month to Sardonic both before and after its acquisition. Patronic
made a profit of 20% on the cost of these sales. At 31 March 2008 Sardonic still held inventory of $3 million
(at cost to Sardonic) of goods purchased in the post acquisition period from Patronic.
(iv) An impairment test on the goodwill of Sardonic conducted on 31 March 2008 concluded that it should be written
down by $2 million. The value of the investment in Acerbic was not impaired.
(v) All items in the above income statements are deemed to accrue evenly over the year.
(vi) Ignore deferred tax.
Required:
(a) Calculate the goodwill arising on the acquisition of Sardonic at 1 August 2007. (6 marks)
(b) Prepare the consolidated income statement for the Patronic Group for the year ended 31 March 2008.
Note: assume that the investment in Acerbic has been accounted for using the equity method since its
acquisition. (15 marks)
(c) At 31 March 2008 the other equity shares (70%) in Acerbic were owned by many separate investors. Shortly
after this date Spekulate (a company unrelated to Patronic) accumulated a 60% interest in Acerbic by buying
shares from the other shareholders. In May 2008 a meeting of the board of directors of Acerbic was held at which
Patronic lost its seat on Acerbic’s board.
Required:
Explain, with reasons, the accounting treatment Patronic should adopt for its investment in Acerbic when it
prepares its financial statements for the year ending 31 March 2009. (4 marks)
(25 marks) 1 (a) Cost of control in Sardonic: $’000 $’000
Consideration
Shares (18,000 x 2/3 x $5·75) 69,000
Deferred payment (18,000 x 2·42/1·21 (see below)) 36,000
––––––––
105,000
Less
Equity shares 24,000
Pre-acquisition reserves:
At 1 April 2007 69,000
To date of acquisition (13,500 x 4/12) 4,500
Fair value adjustments (4,100 + 2,400) 6,500
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104,000 x 75% (78,000)
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Goodwill 27,000
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$1 compounded for two years at 10% would be worth $1·21.
The acquisition of 18 million out of a total of 24 million equity shares is a 75% interest.
(b) Patronic Group
Consolidated income statement for the year ended 31 March 2008 $’000
Revenue (150,000 + (78,000 x 8/12) – (1,250 x 8 months intra group)) 192,000
Cost of sales (w (i)) (119,100)
–––––––––
Gross profit 72,900
Distribution costs (7,400 + (3,000 x 8/12)) (9,400)
Administrative expenses (12,500 + (6,000 x 8/12)) (16,500)
Finance costs (w (ii)) (5,000)
Impairment of goodwill (2,000)
Share of profit from associate (6,000 x 30%) 1,800
–––––––––
Profit before tax 41,800
Income tax expense (10,400 + (3,600 x 8/12)) (12,800)
–––––––––
Profit for the year 29,000
–––––––––
Attributable to:
Equity holders of the parent 26,900
Minority interest (w (iii)) 2,100
–––––––––
29,000
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(c) An associate is defined by IAS 28 Investments in Associates as an investment over which an investor has significant
influence. There are several indicators of significant influence, but the most important are usually considered to be a holding
of 20% or more of the voting shares and board representation. Therefore it was reasonable to assume that the investment in
Acerbic (at 31 March 2008) represented an associate and was correctly accounted for under the equity accounting method.
The current position (from May 2008) is that although Patronic still owns 30% of Acerbic’s shares, Acerbic has become a
subsidiary of Spekulate as it has acquired 60% of Acerbic’s shares. Acerbic is now under the control of Spekulate (part of
the definition of being a subsidiary), therefore it is difficult to see how Patronic can now exert significant influence over
Acerbic. The fact that Patronic has lost its seat on Acerbic’s board seems to reinforce this point. In these circumstances the
investment in Acerbic falls to be treated under IAS 39 Financial Instruments: Recognition and Measurement. It will cease to
be equity accounted from the date of loss of significant influence. Its carrying amount at that date will be its initial recognition
value under IAS 39 and thereafter it will be carried at fair value.
Workings
(i) Cost of sales $’000 $’000
Patronic 94,000
Sardonic (51,000 x 8/12) 34,000
Intra group purchases (1,250 x 8 months) (10,000)
Additional depreciation: plant (2,400/ 4 years x 8/12) 400
property (per question) 200 600
––––
Unrealised profit in inventories (3,000 x 20/120) 500
––––––––
119,100
––––––––
Note: for both sales revenues and cost of sales, only the post acquisition intra group trading should be eliminated. (ii) Finance costs $’000
Patronic per question 2,000
Unwinding interest – deferred consideration (36,000 x 10% x 8/12) 2,400
Sardonic (900 x 8/12) 600
––––––
5,000
––––––
(iii) Minority interest
Sardonic’s post acquisition profit (13,500 x 8/12) 9,000
Less post acquisition additional depreciation (w (i)) (600)
––––––
8,400
x 25% = 2,100 |
发表于 2008-10-11 14:47
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