POINTS ON ADDITIONAL INFORMATION 2 TO THE ICAN QUESTION
Now to the second additional information in the
question;
a.
Summary of additional information
2:
Barewa acquired 70% of the equity interests of
Mindara on 1 June 2012 when the retained earnings of Mindara were N550million and other components of equity
were N70million. Here the purchase
consideration is made up of two (2) components namely, cash of N1.28billion (i.e. N1,280million) and an arrangement (which can be deemed a
contingent liability), with a fair value of N120million.
On this date, the fair value (not book value or
carrying amount) of the net asset of Mindara was N1.76billion (i.e. N1,760million)
while the fair value of the non-controlling interest was given as N530million.
Lastly, here the policy of Barewa as to measurement
or valuation of 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) will also apply. PPE is also
depreciated on a straight-line basis over seven years.
b.
Explanation on what to do about
additional information 2
What to do with this additional information 2 is almost similar to what we did with the
additional information 1. The only issue is in relation to what value to take
as the purchase consideration with regards to the acquisition of Mindara.
The question here then is: Should this
arrangement which is contingent upon Mindara’s profits in the financial years
ending on 31 May 2013 and 31 May 2014 be included in the purchase consideration
for the acquisition of Mindara, and in computing the cost of control?
This standard defined it as a “possible
obligation arising from past event which existence depends on whether some
uncertain future events occur, or a present obligation that arises from past
event but payment is not probable or the amount cannot be reliably measured”.
The conclusion of this standard is that contingent liability which is a present
obligation should NOT be recognized in the financial statements but rather to
be disclosed by way of note to the accounts. But is this position the
conclusion on this matter?
No! But according to IFRS 3, Business
Combination, contingent liability which is a possible obligation can be
recognized and brought into the financial statements. With present obligation,
payment is not probable or the amount cannot be reliably measured. The question
here then is: Is this contingent liability a possible obligation or a present
obligation?
Looking at the arrangement to pay in the future
30% of the profit of Mindara for both the financial years ending in 31 May 2013
and 31 May 2014 to the former shareholders of Mindara, one will realize it is a
possible obligation and not a present obligation. The amount involved had also
been reliably measured at a fair value of N120million.
To simply put it, this amount should also be included in the purchase
consideration.
Lastly, the addition to the value of PPE through
revaluation will have to be depreciated in line with IAS 16, Property, Plant and Equipment, on a
straight-line basis by dividing the revaluation surplus using the estimated
useful life of 7 years. In the same vein, Mindara’s post acquisition retained
earnings (which will be split between the controlling and non-controlling
interests) will have to be reduced by the amount of the depreciation figure
arrived at.
Now with this conclusion, the format for
computing our cost of control in Mindara will look like this:
Fair value of Purchase
Consideration XX
Contingent Liability as part of the
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
c.
Working note on additional
information 2
NOTE
4: Calculation of the cost of control in Mindara on 1 June 2012
=N= 'Million
|
=N= 'Million
|
|
PURCHASE CONSIDERATION
|
1,280.00
|
|
ADD: FAIR VALUE OF THE 30% OF MINDARA'S PROFIT TO PAY TO THE
SHAREHOLDERS
|
120.00
|
|
ADD: PROPORTIONATE SHARE OF
NONCONTROLLING INTEREST IN THE BOOK VALUE OF THE NET ASSET OF MEGIDA
|
||
SHARE CAPITAL (30% X
1,000)
|
300.00
|
|
RETAINED EARNINGS(30% X
550)
|
165.00
|
|
OTHER COMPONENT OF
EQUITY(30% X 70)
|
21.00
|
|
486.00
|
||
1,886.00
|
||
LESS: FAIR VALUE OF NET ASSET
|
1,760.00
|
|
GOODWILL
|
126.00
|
NOTE
5: Calculation of revaluation surplus on the property, plant and equipment of
Mindara as at 1 June 2012
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 EARNING
|
140.00
|
NOTE
6: Calculation of the carrying value of the PPE of Mindara as at 31 May 2013
=N= 'Million
|
||
BALANCE AS AT 31 MAY 2013
|
1,610.00
|
|
ADD: REVALUATION SURPLUS
|
140.00
|
|
1,750.00
|
||
LESS: DEPRECIATION (140million/7 years)
|
20.00
|
|
1,730.00
|
NOTE
7: Calculation of the post-acquisition retained earnings/reserves in Mindara as
at 31 May 2013
=N= 'Million
|
=N= 'Million
|
|
AS AT 31 MAY 2013:
|
||
SHARE CAPITAL
|
1,000.00
|
|
RETAINED EARNINGS AS PER ACCOUNT
|
800.00
|
|
REVALUATION SURPLUS OF 140million LESS DEPRECIATION of 20million)
|
120.00
|
|
OTHER COMPONENT OF EQUITY
|
70.00
|
|
1,990.00
|
||
AS AT 1 JUNE 2012:
|
||
SHARE CAPITAL
|
1,000.00
|
|
FAIR VALUE OF RETAINED EARNING(INCLUSIVE OF REVALUATION SURPLUS OF
140)
|
690.00
|
|
OTHER COMPONENT OF EQUITY
|
70.00
|
|
POST-ACQUISITION RETAINED EARNINGS
|
230.00
|
NOTE
8: Calculation of non-controlling interest in Mindara as at 31 May 2013
=N= 'Million
|
=N= 'Million
|
|
BALANCE AS AT 1 JUNE 2012 (i.e. 30% X [1,000 + 550 + 70])
|
486.00
|
|
ADD: SHARE OF POST-ACQUISITION RETAINED EARNING (30% x 230million)
|
69.00
|
|
555.00
|
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