Business Combinations

Part A

Parent Ltd acquired 70% of the equity in Subsidiary Ltd on 1 April 2002 for $650 000. At that date the equity of Subsidiary Ltd comprised:

Share capital	$380 000
Retained earnings	200 000

Because Subsidiary Ltd used the cost model for its recognised property, plant and equipment, it had several items whose book value was lower than fair value. The book value of these assets was $330 000 and the fair value of these assets, at the date of acquisition, was $420 000. At the date of acquisition, Subsidiary Ltd had an unrecognised intangible asset with a fair value of $178 000 and a contingent liability of $35 000.

Required:

(a) Prepare the notional journal entry, as at 1 April 2002 or at 31 March 2018, to eliminate the Parent Ltd asset ‘Investment in Subsidiary Ltd’ and to eliminate the parent’s portion of equity in the Subsidiary Ltd, in accordance with NZ IFRS 10 Consolidated Financial Statements and NZ IFRS 3 Business Combinations.

Note: Your workings must be included on each line of your notional journal entry.

(b) Prepare the notional journal entry at 1 April 2002 to identify the non-controlling interest (NCI), in Subsidiary Ltd, to be reported in the group accounts in accordance with NZ IFRS 10 Consolidated Financial Statements and NZ IFRS 3 Business Combinations. The directors of Parent Ltd require the NCI in Subsidiary Ltd to be measured at fair value.

Note: Your workings must be included on each line of your notional journal entry.

(c) Prepare a 100% acquisition analysis to ‘prove’ your goodwill answers in (a) and (b) above.

Part B

Parent Ltd acquired equity in Subsidiary Ltd on 1 April 2007. At that date, the identifiable net assets were considered to be fairly valued and the equity of Subsidiary Ltd comprised:

Parent Ltd has requested your help in the preparation of their consolidated financial statements for the financial year ended 31 March 2018 and has provided you with the following information:

Question 1 Part B continued:

•  The following account balances have been extracted from the financial statements of Subsidiary Ltd on 31 March 2018:

•  In 2009 the total goodwill of Subsidiary Ltd was considered by the directors to be impaired by $ 2 000 and then again in 2014 by $4 200. The directors of Parent Ltd believe that the total goodwill has been further impaired, during this financial year ended 31 March 2018, by $3 000.
•  Subsidiary Ltd borrowed $70 000 from Parent Ltd on 8 August 2016 at an interest rate of 3% per annum; the loan is repayable in 2020. The interest due, for the year ended 31 March 2018, was paid by Subsidiary Ltd on the 31 March 2018.
•  During March 2017 Subsidiary Ltd made sales to Parent Ltd of $8 000; the sold inventory had cost Subsidiary Ltd $5 800. Parent Ltd had not sold this purchase of inventory as at 31 March 2017.
•  During March 2018 Subsidiary Ltd made sales to Parent Ltd of $6 800; the sold inventory had cost Subsidiary Ltd $4 000. The inventory Parent Ltd had on hand at 31 March 2018 included this purchase from Subsidiary Ltd.
•  During March 2017 Parent Ltd made sales to Subsidiary Ltd of $4 000 and recognised a profit of $1 860. This purchase remained in the inventory of Subsidiary Ltd as at 31 March 2017.
•  During March 2018 Parent Ltd made sales to Subsidiary Ltd of $5 300 and recognised a profit of $1 760. The inventory of Subsidiary Ltd as at 31 March 2018 held none of this purchase.

Required:

(a) Assume Parent Ltd acquired 100% of the equity in Subsidiary Ltd for $600 000 on 1 April 2007. Complete the consolidation worksheet, in the examination answer booklet, for Parent Ltd for the financial year ended 31 March 2018 in accordance with NZ IFRS 10 Consolidated Financial Statements and NZ IFRS 3 Business Combinations.

Question 1 Part B continued:

(b) Assume Parent Ltd only acquired 80% of the equity in Subsidiary Ltd for $480 000 on 1 April 2007. Prepare the notional journal entry at 31 March 2018 to identify the non-controlling interest (NCI), in Subsidiary Ltd, to be reported in the group accounts in accordance with NZ IFRS 10 Consolidated Financial Statements and NZ IFRS 3 Business Combinations. The directors of Parent Ltd require the NCI in Subsidiary Ltd to be measured at fair value. Note: Your workings must be included on each line of your notional journal entry.

(c) Paragraph 19 of NZ IFRS 3 Business Combinations requires the acquirer to measure the non-controlling interest (NCI) in the acquiree at either fair value (FV) or the NCI’s proportionate share in the recognised amounts of the acquiree’s identifiable net assets.

Start with your answer for (b) and reconcile the measurement of the NCI at FV to the alternative measurement of the NCI.