Week 8 - Piecmeal acquisitions, joint arrangements and disclosures

Question 1

Investment to subsidiary piecemeal: How to calculate goodwill?

Answer 1

Consideration = consideration paid for additional % + Fair value of previously held investment

Question 2

Associate to subsidiary piecemeal acquisition: What to do when control is achieved?

Answer 2

Remeasure investment in associate to fair value
* Essentially treat as if associate ‘sold’ and a subsidiary purchased
* Gain/loss to profit or loss (not OCI)

Question 3

Group Accounts working stages

Answer 3

1 - Group structure and NCI%

2 - Add together assets and liabilities, share capital is just parent co’s

3 - Goodwill in this format:
Consideration
NCI (Subsid. share cap x Market Value per subsid. share x NCI%)
Less: fair value of net assets acquired
Impairment
Goodwill at 31/12/X2:

4 - Any adjustment i.e. Intangible assets:
Value at acquisition:
Amortisation
NBV at 31/12/X2:

5 - Intercompany trading, URP:
Standard URP adjustment
Entity who sells the inventory needs RE reduced by the URP, and Inventory line reduced

6 - Retained Earnings:
Columns: Parent, Subsidiary (30/6/X2, 85%), Associate (1/1X0 - 30/6/X2, 25%)

Per Question 31/12/X2:
At 30/6/X2
At 1/1/X0
Adjustments (e.g. URP, Impairments)
Post acquisition RE:
Group Share (%): E.g. 85% x Post acq. RE for subsid and 25% x Post acqui. RE for asso.
Impairment
Parent’s gain on remeasurement
Less: revaluation gain recognised by parent in RE

Total

7. NCI
   NCI at acquisition (from goodwill working) + NCI share of post acq. RE (calculated in RE) e.g. 20% x ‘x’, less impairment

Question 4

Retained Earnings Working

Answer 4

Table as follows:

Parent Subsidiary (30/6/X2 - 30/12/X2) Associate (1/1/X2 - 30/6/X2)

At 31/12/X2

At 30/6/X2 (Subsid. RE - Profit for the year pre acquisition) In this row, the Subsidiary’s number should be negative, Asso. same number but positive

At 1/1/X2 (only fill for Asso., Figure will be their RE at the time from Q)

Adjustments
Post Acquisition RE (Sum of the above figures)
Group Share (85% x Subs. Total)
Group Share (25% x Asso. Total)
Impairment (from Q Notes. If NCI is at FV then multiply impairment by groups share e.g. 85%. If proportianate then subtract the full figure)

Parent’s gain on Associate remeasurement (Difference between the fair value of the associate investment and the actual price paid e.g. £75k vs £50k
Multiply the Associate’s Post Acqui. RE from above by the % e.g. 25%
Add this to the original cost (£50k), giving £62.5k
Subtract this from the FV £75K = £12.5k

Less: revaluation gain recognised by parent in RE (Parent paid £50k, then £450k for the 85% total = £500k) but in their SoFP they recognise £550k for “investment in ‘x’ “. We just subtract the difference here: £550k - £500k = £50k. Which we subtract from the total RE

Total:

Question 5

NCI Working

Fair Value Method

Answer 5

NCI at acquisition (from goodwill working) + NCI share of post acq. RE (calculated in RE) e.g. 20% x ‘x’, less impairment

Question 6

NCI Working
Proportionate Method

Answer 6

RE Calc. will be slightly different, instead of taking total Impairment we only take the Group’s share e.g. 80%, so if impairment is 5 in Fair Value method, instead we subtract 1 in Proportionate method

Then formula is same as FV Method:

NCI at acquisition (Calculated in Goodwill) + NCI share of post acq. RE (calculated in RE) e.g. 20% x ‘x’
NCI share of post acqui reserve is the SUBSIDIARY Number from RE working, not the Asso number
But we also subtract the NCI’s share of impairment (e.g. 1 in this case)

Question 7

Goodwill Working

Answer 7

Goodwill in this format:

Consideration (Consideration + Fair value of 1st piecemeal acq.)
Add NCI (NCI% x Subsidiary Share Cap x Subsidiary Market Value per Share)
OR
If it’s proportianate NCI, just take the NCI’s share of Equity (as Equity = Net Assets). NOT EQUITY FROM STATEMENT, equity = Subsid. RE at acquisition + Subsid. Nominal Share capital
Less: fair value of net assets acquired (Subsid. RE at acquisition + Subsid. Nominal share capital)
Impairment
Goodwill at 31/12/X2:

Question 8

Fair value adjustment example

Answer 8

Intangible asset FV of £40k in 1/6/X2, had remaining useful life of 10 years from then

40

(Amortisation= 40/10 = 4)
4/2 = 2 as only been 6 months

,’, Intangible asset fair value to go in SoFP = 38

Question 9

URP Working

Answer 9

Markup of 20% on £96k intercompany trade, 25% remain the other 75 has been sold

96/120 = 80
Profit made = 800.2 = 16
Only 25% remains ,’, URP = 160.25 = 4

Question 10

Proportionate goodwill

Answer 10

Goodwill = FV of consideration + NCI - FVNA - Impairment

NCI in proportionate is % of subsidiary FVNA
, (Net Assets = Equity)
However, NOT Equity in balance sheet, their Retained earnings at acquisition (given in Q) + ordinary share capital e.g. RE at acq. is £6,500 and Share Cap £1,000, Equity = £7,500

Question 11

JV Consolidated SoFP working

Answer 11

JV treated like an equity investment

In the consolidated SoFP, have line i NCA for “investment in Joint Venture” (= cost of consideration + share of post acquisition profit)

In RE Calc, have a column for JV, just put their RE in the 31/12/XX section, then we take the group share of that (e.g. 40%)

Question 12

Consolidated SoCI

Answer 12

Most line items, including Rev., CoS, Taxation are Parent’s + Subsid. (6/12 or 3/12 etc.)

OpEx = Parents + 6/12 Subsid. - Impairment - Amortisation

Omit dividend income as now same company

Revaluation reserve added in Other Comprehensive Income

Question 13

joint operation vs joint venture

Answer 13

Joint Operation: at least 2 parties share control, but each operator has rights to specific assets/liabilities rather than interest in net assets of operation. ,’, Do not equity account for a Joint Operation instead showing their share of the specific assets, liabilities etc. as per contract

JV: Do Equity account, investment in JV (Cost+Share of PA Reserves)
Also put them in RE workings

Question 14

Subsidiary to Subsidiary:

What to do with NCI?

Answer 14

Reduce NCI by:

NCI at step acquisition x (NCI% purchased / NCI% before Step Acqn.)

We subtract this figure from NCI

Question 15

Subsidiary to Subsidiary full working

Answer 15

1) Group structure

2) Goodwill at first date of control

3) NCI:
NCI at acqn. (from goodwill) + NCI share of post acqn. reserves until piecemeal acq.
= NCI at step acqn.

Less Decrease in NCI at step acqn. (NCI at Step Acqn. x (% Purchased/NCI % Before Acqn.))
Nci after acqn. =
+ NCI share of post acqn reserves

Adjustment to parents equity working (to go in RE Calc):
Fair value of consideration for additional shares
Less Decrease in NCI above
= Adjustment to parent’s equity

Retained Earnings (standard but adjustment to parent’s equity subtracted after group share’s