University of Economics, Prague

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1 University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Lesson 9: Examples and Case studies Lecturer: David Procházka Contact: Web: 1FU486 IFRS

2 1 Examples Example 1: Measurement of goodwill ACQUIRER paid 150m for 60% share in SUB. The identifiable assets are measured at fair value of 250m; corresponding liabilities have fair value of 50m. An independent appraiser estimates the fair value of non-controlling interest to be 84m. Requirement: Calculate the amount of goodwill as at the acquisition date applying the fair value approach (i.e. full goodwill method) Calculate the amount of goodwill as at the acquisition date applying the proportionate share in the recognised amounts of the acquiree s identifiable net assets approach (i.e. proportional goodwill method) Solution: [Full goodwill method] [Proportional goodwill method] Example 2: Bargain purchase ACQUIRER paid 150m for 80% share in SUB. The identifiable assets are measured at fair value of 250m; corresponding liabilities have fair value of 50m. An independent appraiser estimates the fair value of non-controlling interest to be 42m. Requirement: Calculate the amount of goodwill; suggest theoretical accounting treatments and describe the procedure for the solution required by IFRS 3 Solution: David Procházka p. 2/20

3 Example 3: 1FU486/Lesson 09 Consolidated balance sheet at acquisition date (100% acquisition) GUNNERS has purchased 100% share in SPURS for 100m in cash. The acquisition date is 1 July 2X14. Data from individual financial statements and fair values of recognised net assets of SPURS are as follows. Balance sheets on 1 July 2X14 ( m) GUNNERS SPURS FV of SPURS Intangible assets PPE Deferred tax asset Share in SPURS Non-current assets Inventory Receivables and other assets Cash Current assets Total assets Share capital Retained earnings Equity Provisions Loans Deferred tax liability Non-current liabilities Loans Trade payables and other liabilities Current liabilities Total equity and liabilities Details on fair values of SPURS net assets: PPE measured at historical cost, which is below fair market value Inventory measured at cost, which cannot include profit margin Receivables: reassessment of impaired receivables, as GUNNERS is able to collect more money from SPURS indebted customers Provisions: warranty provision decreased, as GUNNERS can provide SPURS with technology enabling to process warranties in lower costs David Procházka p. 3/20

4 Further information: 1FU486/Lesson 09 GUNNERS decided to acquire SPURS to obtain an access to a unique production technology developed internally by SPURS and not recognised on balance sheet => its fair value is estimated for 6m, with estimated useful life of 3 years SPURS concluded a contract, which qualified for a special government support for private companies. The change in ownership structure, although, disqualifies SPURS from the programme with obligation to return back the subsidies received. The liability is 10m plus 3m expected loss on finalising the contract. Requirement: Prepare consolidated statement of financial position in compliance with the IFRS 3 principles as at the acquisition date Solution: Balance sheets on 1 July 2X14 ( m) G S Total Adjust Conso Intangible assets PPE Deferred tax asset Share in SPURS Goodwill Non-current assets Inventory Receivables and other assets Cash Current assets Total assets Share capital Retained earnings Equity Provisions Loans Deferred tax liability Non-current liabilities Loans Trade payables and other liabilities Current liabilities Total equity and liabilities David Procházka p. 4/20

5 Example 4: 1FU486/Lesson 09 Regular consolidated balance sheet (100% acquisition) Continuing with Example 3: At the end of December 2X14, the individual financial statements of GUNNERS and SPURS are as follows. Balance sheets on 1 July 2X14 ( m) GUNNERS SPURS Intangible assets 5 3 PPE Deferred tax asset 54 0 Share in SPURS Non-current assets Inventory Receivables and other assets Cash 46 9 Current assets Total assets Share capital Retained earnings (pre-acquisition) Retained earnings (post-acquisition) Equity Provisions Loans Deferred tax liability 11 Non-current liabilities Loans Trade payables and other liabilities Current liabilities Total equity and liabilities Details on changes in SPURS values: PPE remeasured to fair market value are still held by SPURS (with no changes in value in individual or consolidated financial statements) 25% of remeasured inventory held at acquisition date has been already sold Receivables: decrease in impairment of 4m also recognised in individual financial statements of SPURS Provisions: decrease in warranty provision incorporated in individual financial statements of SPURS David Procházka p. 5/20

6 The contract with governmental support still not settled; the corresponding amount of 13m provision has been recognised in individual financial statements of SPURS; 5m has been already return back to the government Further information: GUNNERS provided management consulting services to SPURS during the second half of 2X14; invoiced amount of 5m with unpaid balance of 2m at the end of reporting period Requirement: Prepare consolidated statement of financial position in compliance with the IAS 27 principles as at the reporting date Solution: Balance sheets on 1 July 2X14 ( m) G S Total Adjust Conso Intangible assets PPE Deferred tax asset Share in SPURS Goodwill Non-current assets Inventory Receivables and other assets Cash Current assets Total assets ,140 Share capital Retained earnings (pre-acquisition) Retained earnings (post-acquisition) Equity Provisions Loans Deferred tax liability Non-current liabilities Loans Trade payables and other liabilities Current liabilities Total equity and liabilities ,140 David Procházka p. 6/20

7 Example 5: 1FU486/Lesson 09 Consolidated balance sheet at acquisition date (with non-controlling interest) The modification of Example 3: GUNNERS spent 100m in cash to acquire 80% share in SPURS. Remaining is the same. Balance sheets on 1 July 2X14 ( m) GUNNERS SPURS FV of SPURS Intangible assets PPE Deferred tax asset Share in SPURS Non-current assets Inventory Receivables and other assets Cash Current assets Total assets Share capital Retained earnings Equity Provisions Loans Deferred tax liability Non-current liabilities Loans Trade payables and other liabilities Current liabilities Total equity and liabilities Details on fair values of SPURS net assets: PPE measured at historical cost, which is below fair market value Inventory measured at cost, which cannot include profit margin Receivables: reassessment of impaired receivables, as GUNNERS is able to collect more money from SPURS indebted customers Provisions: warranty provision decreased, as GUNNERS can provide SPURS with technology enabling to process warranties in lower costs David Procházka p. 7/20

8 Further information: 1FU486/Lesson 09 GUNNERS decided to acquire SPURS to obtain an access to a unique production technology developed internally by SPURS and not recognised on balance sheet => its fair value is estimated for 6m, with estimated useful life of 3 years SPURS concluded a contract, which qualified for a special government support for private companies. The change in ownership structure, although, disqualifies SPURS from the programme with obligation to return back the subsidies received. The liability is 10m plus 3m expected loss on finalising the contract. Requirement: Prepare consolidated statement of financial position in compliance with the IFRS 3 principles as at the acquisition date Solution: Balance sheets on 1 July 2X14 ( m) G S Total Adjust Conso Intangible assets PPE Deferred tax asset Share in SPURS Goodwill Non-current assets Inventory Receivables and other assets Cash Current assets Total assets Share capital Retained earnings Non-controlling interest Equity Provisions Loans Deferred tax liability Non-current liabilities Loans Trade payables and other liabilities Current liabilities Total equity and liabilities David Procházka p. 8/20

9 Example 6: Regular consolidated balance sheet (with non-controlling interest) Continuing with Example 5: All other data same as in Example 4: Balance sheets on 1 July 2X14 ( m) GUNNERS SPURS Intangible assets 5 3 PPE Deferred tax asset 54 0 Share in SPURS Non-current assets Inventory Receivables and other assets Cash 46 9 Current assets Total assets Share capital Retained earnings (pre-acquisition) Retained earnings (post-acquisition) Equity Provisions Loans Deferred tax liability 11 Non-current liabilities Loans Trade payables and other liabilities Current liabilities Total equity and liabilities Details on changes in SPURS values: PPE remeasured to fair market value are still held by SPURS (with no changes in value in individual or consolidated financial statements) 25% of remeasured inventory held at acquisition date has been already sold Receivables: decrease in impairment of 4m also recognised in individual financial statements of SPURS Provisions: decrease in warranty provision incorporated in individual financial statements of SPURS David Procházka p. 9/20

10 The contract with governmental support still not settled; the corresponding amount of 13m provision has been recognised in individual financial statements of SPURS; 5m has been already return back to the government Further information: GUNNERS provided management consulting services to SPURS during the second half of 2X14; invoiced amount of 5m with unpaid balance of 2m at the end of reporting period Requirement: Prepare consolidated statement of financial position in compliance with the IAS 27 principles as at the reporting date Solution: Balance sheets on 1 July 2X14 ( m) G S Total Adjust Conso Intangible assets PPE Deferred tax asset Share in SPURS Goodwill Non-current assets Inventory Receivables and other assets Cash Current assets Total assets ,140 Share capital Retained earnings (pre-acquisition) Retained earnings (post-acquisition) Non-controlling interest (RE) Non-controlling interest (P&L) Equity Provisions Loans Deferred tax liability Non-current liabilities Loans Trade payables and other liabilities Current liabilities Total equity and liabilities ,140 David Procházka p. 10/20

11 Example 7: Elimination of intragroup sales of goods (no unrealised IC gains) SUNNY s balance sheet as at 1 May 2X03 is as follows: Balance sheet on 1 May 2X03 ( m) SUNNY PPE 120 Non-current assets 120 Inventory 0 Trade receivables 0 Cash 600 Current assets 600 Total assets 720 Share capital 650 Retained earnings 0 Equity 650 Short-term loans 70 Trade payables 0 Current liabilities 70 Total equity and liabilities 720 On 1 May 2X03, SUNNY establishes a fully owned subsidiary LUNA by contributing 80m in cash into LUNA s share capital. Following transactions occurred during May 2X03: SUNNY: - purchase of 1,000,000 pieces of merchandise from IVY (which is a 3rd party company) for 200m ( 50m in cash, 150m with trade credit) - sale of 20% of merchandise to LUNA for 60m (trade credit) - sale of 60% of merchandise to ultimate customers for 175m in cash LUNA: Requirement: - purchase of 200,000 pieces of merchandise from SUNNY for 60m (trade credit) - sale of all merchandise to ultimate customers for 100m in cash Prepare the extract from individual financial statements of SUNNY as at 31 May 2X03 Prepare the extract from individual financial statements of LUNA as at 31 May 2X03 Prepare the extract from consolidated financial statements of SUNNY as at 31 May 2X03 David Procházka p. 11/20

12 Solution: Balance sheet on 31 May 2X03 ( m) SUNNY LUNA Adjust Group PPE Shares in LUNA Non-current assets Inventory Trade receivables Cash Current assets Total assets Share capital Retained earnings Equity Short-term loans Trade payables Current liabilities Total equity and liabilities Income statement for May 2X03 ( m) SUNNY LUNA Adjust Group Revenues Cost of sales Gross margin Profit for the period David Procházka p. 12/20

13 CF statement for May 2X03 ( m) SUNNY LUNA Adjust Group Opening balance of cash Cash receipts from sales Payments to operating suppliers Operating CF Acquisition of subsidiaries Investing CF Increase of share capital Financing CF Total CF Closing balance of cash CF statement for May 2X03 ( m) SUNNY LUNA Adjust Group Opening balance of cash Profit for the period Change in inventory Change in trade receivables Change in trade payables Operating CF Acquisition of subsidiaries Investing CF Increase of share capital Financing CF Total CF Closing balance of cash David Procházka p. 13/20

14 Example 8: Elimination of intragroup sales of goods (with unrealised IC gains) SUNNY s balance sheet as at 1 May 2X03 is as follows: Balance sheet on 1 May 2X03 ( m) SUNNY PPE 120 Non-current assets 120 Inventory 0 Trade receivables 0 Cash 600 Current assets 600 Total assets 720 Share capital 650 Retained earnings 0 Equity 650 Short-term loans 70 Trade payables 0 Current liabilities 70 Total equity and liabilities 720 On 1 May 2X03, SUNNY establishes a fully owned subsidiary LUNA by contributing 80m in cash into LUNA s share capital. Following transactions occurred during May 2X03: SUNNY: - purchase of 1,000,000 pieces of merchandise from IVY (which is a 3rd party company) for 200m ( 50m in cash, 150m with trade credit) - sale of 20% of merchandise to LUNA for 60m (trade credit) - sale of 60% of merchandise to ultimate customers for 175m in cash LUNA: Requirement: - purchase of 200,000 pieces of merchandise from SUNNY for 60m (trade credit) - sale of 75% of merchandise to ultimate customers for 100m in cash Prepare the extract from individual financial statements of SUNNY as at 31 May 2X03 Prepare the extract from individual financial statements of LUNA as at 31 May 2X03 Prepare the extract from consolidated financial statements of SUNNY as at 31 May 2X03 David Procházka p. 14/20

15 Solution: Balance sheet on 31 May 2X03 ( m) SUNNY LUNA Adjust Group PPE Shares in LUNA Non-current assets Inventory Trade receivables Cash Current assets Total assets Share capital Retained earnings Equity Short-term loans Trade payables Current liabilities Total equity and liabilities Income statement for May 2X03 ( m) SUNNY LUNA Adjust Group Revenues Cost of sales Gross margin Profit for the period David Procházka p. 15/20

16 CF statement for May 2X03 ( m) SUNNY LUNA Adjust Group Opening balance of cash Cash receipts from sales Payments to operating suppliers Operating CF Acquisition of subsidiaries Investing CF Increase of share capital Financing CF Total CF Closing balance of cash CF statement for May 2X03 ( m) SUNNY LUNA Adjust Group Opening balance of cash Profit for the period Change in inventory Change in trade receivables Change in trade payables Operating CF Acquisition of subsidiaries Investing CF Increase of share capital Financing CF Total CF Closing balance of cash David Procházka p. 16/20

17 Example 9: Elimination of intragroup sales of PPE (change in use) SUNNY s balance sheet as at 1 January 2X03 is as follows: Balance sheet on 1 Jan 2X03 ( m) SUNNY PPE 120 Non-current assets 120 Inventory 0 Trade receivables 0 Cash 600 Current assets 600 Total assets 720 Share capital 650 Retained earnings 0 Equity 650 Short-term loans 70 Trade payables 0 Current liabilities 70 Total equity and liabilities 720 On 1 January 2X03, SUNNY establishes a fully owned subsidiary LUNA by contributing 200m in cash into LUNA s share capital. On the same date, the SUNNY s PPE is sold to LUNA for 150m in cash. Further information about PPE: SUNNY: - purchased 4 years ago with estimated useful life of 10 years - straight-line depreciation at zero residual value LUNA: Requirement: - estimated useful life of 3 years; afterwards it will be sold back to the third party at expected market price of 60m - straight-line depreciation Prepare the extract from individual financial statements of SUNNY as at 31 December 2X03 Prepare the extract from individual financial statements of LUNA as at 31 December 2X03 Prepare the extract from consolidated financial statements of SUNNY as at 31 December 2X03 David Procházka p. 17/20

18 Solution: Balance sheet on 31 Dec 2X03 ( m) SUNNY LUNA Adjust Group PPE Shares in LUNA Non-current assets Cash Current assets Total assets Share capital Retained earnings Equity Short-term loans Current liabilities Total equity and liabilities Income statement for 2X03 ( m) SUNNY LUNA Adjust Group Depreciation charges Gain on disposal of PPE Profit for the period David Procházka p. 18/20

19 Example 10: Elimination of intragroup sales of PPE (no change in use) SUNNY s balance sheet as at 1 January 2X03 is as follows: Balance sheet on 1 Jan 2X03 ( m) SUNNY PPE 120 Non-current assets 120 Inventory 0 Trade receivables 0 Cash 600 Current assets 600 Total assets 720 Share capital 650 Retained earnings 0 Equity 650 Short-term loans 70 Trade payables 0 Current liabilities 70 Total equity and liabilities 720 On 1 January 2X03, SUNNY establishes a fully owned subsidiary LUNA by contributing 200m in cash into LUNA s share capital. On the same date, the SUNNY s PPE is sold to LUNA for 150m in cash. LUNA will take over all operations connected with the PPE instead of the parent for limited time of 3 years. Further information about PPE: SUNNY: - purchased 4 years ago with estimated useful life of 10 years - straight-line depreciation at zero residual value LUNA: Requirement: - estimated useful life of 3 years; afterwards it will be sold back to the parent (at agreed amount of 15m, which is below estimated market price by that time) - straight-line depreciation Prepare the extract from individual financial statements of SUNNY as at 31 December 2X03 Prepare the extract from individual financial statements of LUNA as at 31 December 2X03 Prepare the extract from consolidated financial statements of SUNNY as at 31 December 2X03 David Procházka p. 19/20

20 Solution: Balance sheet on 31 Dec 2X03 ( m) SUNNY LUNA Adjust Group PPE Shares in LUNA Non-current assets Cash Current assets Total assets Share capital Retained earnings Equity Short-term loans Current liabilities Total equity and liabilities Income statement for 2X03 ( m) SUNNY LUNA Adjust Group Depreciation charges Gain on disposal of PPE Profit for the period David Procházka p. 20/20

University of Economics, Prague

University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Lesson 8: Examples and Case studies Lecturer: David Procházka Contact: Email: prochazd@vse.cz