Semester 2 Week 7 PP (Group Accounting 2) Flashcards
Fisher Plc. are considering taking over Warren Ltd. and have entered initial discussions.
What will both parties do before the deal gets very far?
Both parties will do a proper review and valuation of the assets.
The (current) shareholders of Warren will want to ensure that they get a fair price.
Fisher will want to pay the right price. The price paid and received will therefore be based on the actual value of the assets rather than the carrying value in the accounts.
Both parties will be aware of the true value of the business and will therefore base their expectations on this amount.
What is the layout for changing asset values?
How do we approach inventory questions when the current CV (carrying valve) is more than the inventories value?
Where companies have inventories valued at more than current carrying value the following approach is taken:
Adjust the value of inventories in the financial statements
Calculate goodwill
Pass on any adjustment to retained earnings
Freya Plc. paid £14,000,000 cash to acquire Carter Ltd. on 1 April 20X4. Carter had retained earnings of £10,000,000 at that date.
The SFP of Carter Ltd. at the year end of 31/03/X5 is given on the next slide. All the assets were at their correct value at acquisition except for the inventories which are considered to be worth £400,000 in excess of the amount given.
All the inventories on acquisition had been sold by the year end.
Initially this will increase inventories – therefore impacting on goodwill
At acq Change At consolidation
+ 400
Cost of investment 14,000
Share capital 1,000
Retained earnings 10,000
Fair value adjustment 400
Net assets on acquisition 11,400
Goodwill 2,600
This was at 1/4/X4, the question tells us that the goods have all been sold by the year end.
Therefore if we did no further adjustment we would be double counting this gain:
In recognising this fair value uplift on acquisition.
The profit when Carter actually sold these goods in the year at their fair value will already be recognised in Carter’s financial statements (which we consolidate for).
We therefore reduce retained earnings by 400 to remove one of these gains
At acq Change At consolidation
+ 400 -400
Therefore there is nil net effect on the final financial statements (+400 – 400 = 0)
At acq Change At consolidation
+ 400 -400 -
Summary of Changes:
Investment in Carter -14,000
Goodwill +2,600
Inventories +400, -400
Share capital -1,000
Retained earnings -10,000, - 400
Summary of changes net:
Investment in Carter -14,000
Goodwill +2,600
Inventories -
Share capital -1,000
Retained earnings -10,400
June Plc. paid £12,000,000 cash to acquire July Ltd. on 1 April 20X4. Carter had retained earnings of £8,000,000 at that date.
The SFP of July Ltd. at the year end of 31/03/X5 is given on the next slide. All the assets were at their correct value except for PPE which are considered to be worth £500,000 in excess of the amount given.
This PPE has a useful economic life of 5 years.
Initially this will increase PPE – therefore impacting on goodwill
At acq Change At consolidation
+ 500
Cost of investment 12,000
Share capital 1,000
Retained earnings 8,000
Fair value adjustment 500
Net assets on acquisition 9,500
Goodwill 2,500
As the PPE has gone up in value there will also be an increase in depreciation.
An additional 500,000 depreciated over 5 years =
500,000/5 years = £100,000 per year
We therefore reduce retained earnings by 100 to recognise this additional depreciation
At acq Change At consolidation
+ 500 -100
Therefore there is an overall increase in the financial statements of 400 (+500 – 100 = +400)
At acq Change At consolidation
+ 500 -100 +400
Summary of Changes:
Investment in July -12,000
Goodwill +2,500
PPE +500, -100
Share capital -1,000
Retained earnings -8,000, - 100
Summary of Changes net:
Investment in July -12,000
Goodwill +2,500
PPE +400
Share capital -1,000
Retained earnings -8,100
Dee Ltd. have recently bought the Inchmalcolm Tower, a prestigious hotel and spa. Upon acquisition goodwill of £4m was recognised.
Since acquisition, however:
A wedding was double booked
A Christmas party for a prestigious employer ended up with the majority of the guests suffering from food poisoning
The spa was closed due to an outbreak of Legionnaires disease.
What impact do you think this will have on the reputation of the hotel?
Would you like to go there?
Would this have an impact on goodwill?
An extreme example but it shows you how a company’s reputation, trading history etc. could be damaged.
As goodwill is based on this it would be inappropriate to hold goodwill at this higher value.
We therefore consider goodwill to be impaired.
The adjustment for impairment is to reduce goodwill and reduce retained earnings
George Ltd. acquire Bernard Ltd. on 1 July 20X8 for £12,000,000. At the date of acquisition there was share capital of £2,000,000 and retained earnings of £8,000,000.
At the year end the goodwill was considered to be 50% impaired.
We therefore need to reduce goodwill and retained earnings by 1,000,000 to account for this impairment.
Waters Ltd. acquires 100% of Bridge Ltd. on 1 April 20X5 for £19 million cash. The statements of financial position for both companies as at 31 March 20X6 are given on the following slide.
At the point of acquisition Bridge had retained earnings of £11,500,000.
The fair value of the assets at acquisition was as listed except for the following which exceed their carrying amounts as follows:
PPE (remaining useful life 10 years): 600,000
Inventories: 300,000
All the inventories on acquisition had been sold by the year end.
At 31/3/X6 goodwill was considered to be impaired by 20%.
Add the financial statements together – just like before.
£,000 Waters group
PPE 30,700
Investment in Bridge 19,000
Inventories 3,500
Other current assets 7,500
Total assets 60,700
Share capital (£1 ord) 8,000
Retained earnings 46,200
Current liabilities 6,500
Total equity and liabilities 60,700
Using the three column approach as before.
Initially this will increase inventories – therefore impacting on goodwill
At acq Change At consolidation
PPE +600
Inventories +300
Take to goodwill
Cost of investment 19,000
Share capital 1,000
Retained earnings 11,500
Fair value adjustment 900
Net assets on acquisition 13,400
Goodwill 5,600
Adjustments:
Assets
Decrease investment 19,000
Increase PPE 600
Increase inventories 300
Increase goodwill 5,600
Equity
Decrease share capital 1,000
Decrease retained earnings 11,500
We are told there is impairment of 20%
Cost of investment 19,000
Share capital 1,000
Retained earnings 11,500
Fair value adjustment 900
Net assets on acquisition 13,400
Goodwill 5,600
Impairment (20%) (1,120)
This would reduce goodwill by 1,120
And reduce retained earnings by 1,120
Initially this will increase inventories – therefore impacting on goodwill
At acq Change At consolidation
PPE +600 -60 +540
Inventories +300 -300 -
Take to goodwill Take to retained earnings
We post the final adjustments. Check image. Check image.
£,000 Waters Group
PPE 31,240
Goodwill 4,480
Inventories 3,500
Other current assets 7,500
Total assets 46,720
Share capital (£1 ord) 7,000
Retained earnings 33,220
Current liabilities 6,500
Total equity and liabilities 46,720
