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Plago Co Case

On 1 April 20X3 Plago acquired 75% of Saleo’s equity shares in a share exchange of three shares in Plago for every two shares in Saleo. The market prices of Plago’s and Saleo’s shares at the date of acquisition were $3.20 and$4.50 respectively.

In addition to this Plago agreed to pay a further amount on 1 April 20X4 that was contingent upon the post‐acquisition performance of Saleo. At the date of acquisition Plago assessed the fair value of this contingent consideration at $4.2 million, but by 31 March 20X4 it was clear that the actual amount to be paid would be only$2.7 million (ignore discounting). Plago has recorded the share exchange and provided for the initial estimate of $4.2 million for the contingent consideration. On 1 October 20X3 Plago also acquired 40% of the equity shares of Aroma paying$4 in cash per acquired share and issuing at par one $100 7% loan note for every 50 shares acquired in Aroma. This consideration has also been recorded by Plago. Plago has no other investments. The summarised statements of financial position of the three entities at 31 March 20X4 are $ $Consideration transferred 960,000 Fair value of non-controlling interest 360,000 1,320,000 Fair value of net assets: Shares 100,000 Retained earnings 480,000 (580,000) 740,000 650,000$'000 Shares (18m × 2/3 × $4.85) 58,200 Deferred consideration (18m ×$1.98 × 1 / 1.1) 35,640 93,840 Subsidiary profits ($400,000 x 6/12) 200,000 Write off goodwill (per question, this is fully impaired) (12,500) Additional depreciation ($450,000/10 x 6/12) (22,500) 165,000 NCI at 20% 35,500 177,500 $'000 Property, plant and equipment 3,000 Identifiable intangible asset 500 Inventories 300 Trade receivables less payables 200 4,000 Lease liabilities ($000) b/f 310 Paid (balance) 80 New asset additions 70 c/f 300 380 380 Plago Saleo Aroma $'000$'000 $'000 Assets Non‐current assets Property, plant and equipment 37,500 24,500 21,000 Investments 45,000 Nil Nil 82,500 24,500 21,000 Current assets Inventory 10,000 9,000 5,000 Trade receivables 6,500 1,500 3,000 Total assets 99,000 35,000 29,000 Equity Equity shares of$1 each 25,000 8,000 5,000 Share premium 19,800 Nil Nil Retained earnings  – at 1 April 20X3 16,200 16,500 15,000 – for the year ended 31 March 11,000 1,000 6,000 72,000 25,500 26,000 Non‐current liabilities 7% loan notes 14,500 2,000 Nil Current liabilities Contingent consideration 4,200 Nil Nil Other current liabilities 8,300 7,500 3,000 Total equity and liabilities 99,000 35,000 29,000

The following information is relevant:

1. At the date of acquisition the fair values of Saleo’s PPE was equal to its carrying amount with the exception of Saleo’s factory which had a fair value of $2 million above its carrying amount. Saleo has not adjusted the carrying amount of the factory as a result of the fair value exercise. This requires additional annual depreciation of$100,000 in the consolidated financial statements in the post‐ acquisition period.
Also at the date of acquisition, Saleo had an intangible asset of $500,000 for software in its statement of financial position. Plago’s directors believed the software to have no recoverable value at the date of acquisition and Saleo wrote it off shortly after its acquisition. 2. At 31 March 20X4 Plago’s current account with Saleo was$3.4 million (debit). This did not agree with the equivalent balance in Saleo’s books due to some goods‐in‐ transit invoiced at $1.8 million that were sent by Plago on 28 March 20X4, but had not been received by Saleo until after the year end. Plago sold all these goods at cost plus 50%. 3. Plago’s policy is to value the non‐controlling interest at fair value at the date of acquisition. For this purpose Saleo’s share price at that date can be deemed to be representative of the fair value of the shares held by the non‐controlling interest. 4. Impairment tests were carried out on 31 March 20X4 which concluded that the value of the investment in Aroma was not impaired but, due to poor trading performance, consolidated goodwill was impaired by$3.8 million.

5. Assume all profits accrue evenly through the year.

Required:

A. Prepare the consolidated statement of financial position for Plago as at 31 March 20X4.
B. At 31 March 20X4 the other equity shares (60%) in Aroma were owned by many separate investors. Shortly after this date Spekulate (an entity unrelated to Plago) accumulated a 60% interest in Aroma by buying shares from the other shareholders. In May 20X4 a meeting of the board of directors of Aroma was held at which Plago lost its seat on Aroma’s board.

Required:
Explain, with reasons, the accounting treatment Plago should adopt for its investment in Aroma when it prepares its financial statements for the year ending 31 March 20X5.