233. Promise Co
On 1 January 20X5, Promise acquired 75% of Strey’s equity shares by means of an immediate share exchange of two shares in Promise for five shares in Strey. The fair value of Promise and Strey’s shares on 1 January 20X5 were $4 and $3 respectively. In addition to the share exchange, Promise will make a cash payment of $1.32 per acquired share, deferred until 1 January 20X6. Promise has not recorded any of the consideration for Strey in its financial statements. Promise’s cost of capital is 10% per annum.
|
|
Promise |
Strey |
|
|
$’000 |
$’000 |
| Assets |
|
|
|
| Non‐current assets (note (ii)) |
|
|
|
| Property, plant and equipment |
|
55,000 |
28,600 |
| Financial asset equity investments (note (v)) |
11,500 |
6,000 |
|
|
66,500 |
34,600 |
|
|
|
|
| Current assets |
|
|
|
| Inventory (note (iv)) |
|
17,000 |
15,400 |
| Trade receivables (note (iv)) |
|
14,300 |
10,500 |
| Bank |
|
2,200 |
1,600 |
|
|
33,500 |
27,500 |
| Total assets |
|
100,000 |
62,100 |
The summarised statements of financial position of the two entities as at 30 June 20X5 are:
The following information is relevant:
1 Strey’s business is seasonal and 60% of its annual profit is made in the period 1 January to 30 June each year.
2 At the date of acquisition, the fair value of Strey’s net assets was equal to their carrying amounts with the following exceptions:
The fair value of Strey’s financial asset equity investments, carried at a value of $6 million, was $7 million (see also note (v)).
Strey owned the rights to a popular mobile (cell) phone game. At the date of acquisition, a specialist valuer estimated that the rights were worth $12 million and had an estimated remaining life of five years.
3 Following an impairment review, consolidated goodwill is to be written down by $3 million as at 30 June 20X5.
4 Promise sells goods to Strey at cost plus 30%. Strey had $1.8 million of goods in its inventory at 30 June 20X5 which had been supplied by Promise. In addition, on 28 June 20X5, Promise processed the sale of $800,000 of goods to Strey, which Strey did not account for until their receipt on 2 July 20X5. The in‐transit reconciliation should be achieved by assuming the transaction had been recorded in the books of Strey before the year end. At 30 June 20X5, Promise had a trade receivable balance of $2.4 million due from Strey which differed to the equivalent balance in Strey’s books due to the sale made on 28 June 20X5.
5 At 30 June 20X5, the fair values of the financial asset equity investments of Promise and Strey were $13.2 million and $7.9 million respectively
6 Promise’s policy is to value the non‐controlling interest at fair value at the date of acquisition. For this purpose the value given for Strey’s shares may be used.
Required:
Prepare the consolidated statement of financial position for Promise as at 30 June 20X5.
Promise – Consolidated statement of financial position as at 30 June 20X5
Assets $000
Non‐current assets
Property, plant and equipment (55,000 + 28,600) 83,600
Goodwill (W3) 3,000
Game rights (12,000 – 1,200 (W2)) 10,800
Financial asset equity investments (13,200 + 7,900) 21,100
118,500
Current assets
Inventory (17,000 + 15,400 + 800 GIT – 600 (W6)) 32,600
Trade receivables (14,300 + 10,500 – 2,400 intra‐group) 22,400
Bank (2,200 + 1,600) 3,800
58,800
Total assets 177,300
Equity and liabilities
Equity attributable to owners of the parent
Equity shares of $1 each (20,000 + 6,000 (W3)) 26,000
Other components of equity (share premium) (4,000 + 18,000 (W3)) 22,000
Retained earnings (W5) 52,425
100,425
Non‐controlling interest (W4) 15,675
Total equity 116,100
Current liabilities
Deferred consideration (18,000 + 900 finance cost (W5)) 18,900
Other current liabilities (25,800 + 18,100 + 800 GIT – 2,400 intra‐group) 42,300
61,200
Total equity and liabilities 177,300
Workings
(W1) Group structure
Promise ———– Strey
75% – owned for 6 months
(W2) Net assets
Acquisition Reporting date Post‐
acquisition
$000 $000 $000
Share capital 20,000 20,000 –
Retained earnings
(see below) 18,000 24,000 6,000
Fair value: game rights 12,000 12,000 –
Amortisation × 1 /5 × 6 /12 (1,200) (1,200)
Fair value investments 1,000 1,900 900
51,000 56,700 5,700
W3 W4/W5
Strey makes 60% of its profit in the period from 1 June. Therefore the post‐ acquisition retained earnings is $6 million (60% × $10 million), making the retained earnings at acquisition $18 million ($24 million less $6 million).
(W3) Goodwill in Strey
$000
Share exchange (20,000 × 75% × 2 /5) = (6,000 × $4) 24,000
Deferred consideration (20,000 × 75% × $1.32/1.1) 18,000
Non‐controlling interest (20,000 × 25% × $3) 15,000
57,000
Net assets at acquisition (51,000)
Goodwill on acquisition 6,000
Impairment (3,000)
Goodwill at 30 June 20X5 3,000
The shares issued by Promise (6 million at $4 – see above) would be recorded as share capital of $6 million (6,000 × $1) and share premium in other components of equity of $18 million (6,000 × $3).
(W4) Non‐controlling interest
$000
Fair value on acquisition (W3) 15,000
Post‐acquisition profit (5,700 × 25% (W2)) 1,425
NCI share of impairment (3,000 × 25%) (750)
15,675
(W5) Consolidated retained earnings:
$000
Promise’s retained earnings (26,200 + 24,000) 50,200
Strey’s adjusted post‐acquisition profit (5,700 (W2) × 75%) 4,275
Promise’s share of impairment (3,000 × 75%) (2,250)
Finance cost on deferred consideration (18,000 × 10% × 6 /12) (900)
PUP in inventory (W6) (600)
Gain on equity investments (13,200 – 11,500) 1,700
52,425
(W6) Provision for unrealised profit (PUP)
The inventory of Strey at 30 June 20X5 (adjusted for goods‐in‐transit (GIT) sale of $800,000) is $2.6 million (1,800 + 800). The unrealised profit on this will be $600,000 ($2.6m × 30/130)
