POINTS ON ADDITIONAL INFORMATION 1 TO THE ICAN QUESTION

So, you have skimmed through the question. Good! Let now get our hands dirty with solving the question. By now, I need not tell you that there should be a simple calculator on your side, and most especially your attention at this junction should be undivided.

Now to the first additional information in the question:

a.    Summary of additional information 1:

Here Barewa acquired 80% of the equity interests or shareholding of Megida Plc on 1 June 2012 when the retained earnings of Megida were N1.36billion (i.e. N1,360million) and other components of equity were N40million. The purchase consideration (i.e. what he paid to acquire the equity in Megida) was a cash amount of N3billion (i.e. N3,000million).

On this date, the fair value (not book value or carrying amount) of the net asset of Megida was N4billion (i.e. N4,000million) while the fair value of the non-controlling interest was given as N860million.

Lastly, we were informed that it is the policy of Barewa to measure or value non-controlling interests on the basis of their proportionate share (interest) in the identifiable net assets of the acquired subsidiary and not at fair value (full goodwill method).

b.    Explanation on what to do about additional information 1

With this information you are expected to calculate the cost of control (either the goodwill or gain on bargain purchase) from the acquisition of 80% of the equity interest in Megida. According to IFRS 3, Business Combination, cost of control (i.e. either goodwill or gain on bargain purchase) can be calculated as follows:

Fair value of Purchase Consideration                                            XX

Add: Fair value of Non-controlling Interest in the subsidiary      XX

                                                                                                        XX

Less: Fair value of the net asset of the subsidiary                        XX

Goodwill/(Gain on Bargain Purchase)                                             XX

The format above is a derivative of what IFRS 3 called the FULL GOODWILL method. Here all the three parameters i.e. purchase consideration, non-controlling interest in the subsidiary and the net assets of the subsidiary are at FAIR VALUE hence the word ‘full goodwill’. On the other hand, a company can adopt a PARTIAL GOODWILL method as in the case of Barewa in this question. In a partial goodwill method, all other parameters (i.e. purchase consideration and net asset of the subsidiary) are measured at fair value except the non-controlling interest that is measured as a proportion of the carrying value of the net asset of the subsidiary. In this wise, for Barewa group, you can substitute the proportionate share of non-controlling interest in the carrying amount (or book value) of each of the subsidiaries (i.e. Megida and Mindara) in place of the fair value. Therefore, the format for partial goodwill method will look like this:

Fair value of Purchase Consideration                                          XX

Add: Proportionate share of non-controlling Interest

        in the subsidiary                                                                   XX

                                                                                                      XX

Less: Fair value of the net asset of the subsidiary                      XX

Goodwill/(Gain on Bargain Purchase)                                           XX

Furthermore, if the addition of the fair value of purchase consideration and the fair value of non-controlling interest in the subsidiary is greater than the fair value of the net asset of the subsidiary, then the result is goodwill. Otherwise, we have a gain on bargain purchase.

In the same vein, net asset is total assets less total liabilities. This is usually the same as the total equity of a business entity which is the addition of the share capital, all reserves, retained earnings and other components of equity.

Similarly, always remember that values from additional information usually have two ‘legs’. The item concerned will be affected while retained earnings (or reserve) will equally be affected.

Lastly, from this first additional information, we shall calculate the cost of control (to determine either the goodwill or gain on bargain purchase from the acquisition of Megida), revaluation surplus, the post-acquisition retained earnings/reserve and the value of the non-controlling interest in Megida as at 31 May, 2013. To calculate these, reference should be made to the statement of financial position.

c.     Working notes on additional information 1

NOTE 1: Calculation of the cost of control in Megida

	=N= 'Million	=N= 'Million
PURCHASE CONSIDERATION		3,000.00
ADD: PROPORTIONATE SHARE  OF NONCONTROLLING INTEREST IN THE BOOK VALUE OF THE NET ASSET OF MEGIDA
SHARE CAPITAL (20% X 2,200)	440.00
RETAINED EARNINGS(20% X 1,360)	272.00
OTHER COMPONENT OF EQUITY(20% X 40)	8.00
		720.00
		3,720.00
LESS: FAIR VALUE OF NET ASSET		4,000.00
GAIN ON BARGAIN PURCHASE		(280.00)

NOTE 2: Calculation of the post-acquisition retained earnings/reserves in Megida

AS AT 31 MAY 2013:	=N= 'Million	=N= 'Million
SHARE CAPITAL	2,200.00
FAIR VALUE OF RETAINED EARNING(INCLUSIVE OF REVALUATION SURPLUS OF 400)	1,900.00
OTHER COMPONENT OF EQUITY	40.00
		4,140.00
AS AT 1 JUNE 2012:
SHARE CAPITAL	2,200.00
FAIR VALUE OF RETAINED EARNING(INCLUSIVE OF REVALUATION SURPLUS OF 400)	1,760.00
OTHER COMPONENT OF EQUITY	40.00
		4,000.00
POST-ACQUISITION RETAINED EARNINGS		140.00

NOTE 3: Calculation of non-controlling interest in Megida as at 31 May 2013

	=N= 'Million	=N= 'Million
BALANCE AS AT 1 JUNE 2012 (i.e. 20% X [2,200 + 1360 + 40])		720.00
ADD: SHARE OF POST-ACQUISITION RETAINED EARNING (20% x 140)		28.00
		748.00

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