Subject Code : NBS-6001Y
NBS-6001Y:  Advanced Financial Accounting Presentation Assessment Answer
Assessment Task:

IFRS 3 Business Combinations was revised in 2008 as part of the IASB-FASB harmonisation project. IFRS 3 revised allows a choice of accounting treatment for NCI at acquisition. Prior to 2008 IFRS required that NCI at acquisition be measured as a percentage share of the subsidiaries net assets.
The revised IFRS 3 permits NCI at acquisition to be valued at fair value.

Expander plc wishes to acquire a 70% stake in Target plc by purchasing 280 million of Target’s 400 million £1 ordinary shares. Target currently has retained earnings of £1,460 million and is not expecting to issue any shares or pay any dividends in the immediate future. The purchase of Target will be paid for through a combination of cash payments and shares in Expander plc.

Expander will pay £5,000 million of cash at the date of acquisition, plus a further £1,100 million in two years’ time. In addition Expander will issue new shares to the current shareholders of Target plc at the date of acquisition. Expander will issue 1 new share for every 2 shares it acquires in Target. Expander shares are currently trading at £35 per share.
The expander will issue up to a further two shares for every share it has acquired in Target in two years’ time if Target has met a certain level of profitability. There is a 30% chance that it will not issue any further shares, a 40% chance that it will issue one share for each share acquired and a 30% chance it will issue the maximum two shares for each Target share originally acquired. The offer of contingent shares is estimated to have a fair value of £4,000 million.

Target has some valuable brands, trade names and internet domain names. These are not currently recognized in Target’s financial statements. The estimated fair value of these assets is £5,000 million and these brands and domain names are estimated to have a useful life of approximately 8 years. The expander has not yet determined whether it should measure non-controlling interest in its subsidiaries on the basis of a proportionate interest in the identifiable net assets of the subsidiary or
whether it should use the “full goodwill” method. The fair value of a 30% holding in Target is estimated to be £3,200 million. Where appropriate you should assume a discount rate of 5% per annum.

Required
a) Discuss why IFRS 3 introduced a choice of the accounting treatment for NCI at acquisition.

b) Illustrating your answer with supporting calculations, discuss the reliability and relevance of the goodwill arising on acquisition of Target plc. 

c) Discuss the effect on the consolidated financial statements of selecting either the fair value method or the proportion of the net asset method for measuring NCI. (20 marks)

d) Advise the board of Expander as to the appropriate accounting policy to adopt in respect of measuring non-controlling interest at acquisition.

 


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  • Posted on : November 06th, 2018

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