UKAF4034 Advanced Corporate Reporting (Tutorial 6)

TUTORIAL 6 –Increasing shareholding (Answer)

Tutorial 6

Question 1-answer
See separate excel worksheet.

Question 2-answer
See separate excel worksheet

Question 3-answer
(a)
Rainy Cloudy
Cost of Investment 640 240
-
NCI @ FVNA 162 120

802 360

(-) FVNA (w2) (810) (300)

(Bargain Purchase)/ Goodwill (8) 60

(b) Sunny Group

Consolidated Statement of Financial Position as at 30 June 2020
RM
million
Non-Current Assets
Property, Plant & Equipment (w12) 2,057
Patent 200
Brand name 56
Goodwill (60-18) 42
2,355
Current Assets
Inventories (250+135+65)-0.5 449.5
Trade Receivables (240+125+49)-5 409
Financial Asset 40
Cash & Bank (75+50+80)+3 208
1,106.5
3,461.5
Equity & Liabilities
Called-up Share Capital 2,000
Revaluation Reserve (50+20*80%+60*60%) 102
Retained Earnings (w10) 489.2
Non-Controlling Interest (w11) 322.3
2,913.5

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UKAF4034 Advanced Corporate Reporting (Tutorial 6)

Non-Current Liabilities
Deferred Tax (35+25+20) 80
Bank loan 200 280

Current Liabilities
Trade Payables (115+40+45)-2 198
Tax Liabilities (35+30+5) 70
Provision -
268
3,461.5

(c) This additional acquired of 20% in Cloudy will eventually no change the control of
Cloudy. Sunny’s holding percentage is then increase to 80% (60% + 20%). The
consolidated financial statement will still be prepared. Goodwill will not be recalculated as
Goodwill only calculate once Cloudy become the subsidiary, ie 1 December 2018. This
transaction is transfer between the NCI and the Group. Hence, Sunny needs to calculate the
different between the consideration paid and the step adjustment on NCI value on the date
and acquisition.

Working:
W1: Group Structure
R is subsidiary, effective interest=80%, NCI=20%
C is subsidiary, effective interest = 60%, NCI = 40%

*all figures are in RM million

W2: Net Assets Schedules
At Acquisition At Reporting Post Acq
Rainy
Share Capital 600 600 -
Retained Earnings 100 140 40
Revaluation Reserves 40 60 20
FVA – Brand name 70 70
- Depreciation (70/10*2) (14) (14)
810 856 RE=26, OCE= 20
Cloudy
Share Capital 250 250 -
Retained Earnings 50 70 20
Revaluation Reserves - 60 60
300 380 RE=20, OCE= 60

W3: Production Equipment

Original Entry
Dr PPE 50
Cr Bank 45
Cr Trade discount 5 (this should not be taken into account as other income. PPE should
be taken as R45m)

Dr RE-Depreciation 10
Cr PPE 10

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UKAF4034 Advanced Corporate Reporting (Tutorial 6)

Adjustment
i) Trade Discount shall be expensed off.
Dr CRE (80%) 4
Dr NCI (20%) 1
Cr PPE 5
ii) The depreciation of the equipment is overstated;
Dr PPE 1 (45/5 - 50/5)
Cr CRE (80%) 0.8
Cr NCI (20%) 0.2

W4: Impairment on Cloudy

Dr GRE (30%*60) 18
Cr Goodwill 18

W5: Unrealised Profit

RM1.25 x 12 month x 20/120 * 20% = 0.5
Dr CRE (80%) 0.4
Dr NCI (20%) 0.1
Cr inventory 0.5

W6: Cash in transit

Dr Trade Payable 2
Dr Bank 3
Cr Trade Receivable 5

W7: Provision
Company should not recognized provision when is possible. This contingent liability will
only disclose in the financial statements.
Dr Provision 20
Cr CRE 20

W8: Financial Asset ()

Under MFRS 9, the subsequent measurement of AFS is fair value.
Dr CRE 25
Cr FA 25

W10: CRE ()
Sunny (ALL) 475
Rainy: 80% * 26 20.8
Cloudy: 60% 20 12
Bargain Purchase (part a) 8
Equipment – trade discount (w3) (4)
Equipment – depreciation (w3) 0.8
Impairment – Cloudy (w4) (18)
URP (w5) (0.4)
Provision (w7) 20
FA (w8) (25)
489.2

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W11: NCI
Rainy: FVNA(w3) 162
Rainy: 20% * 26 5.2
Rainy: RR 20% * 20 4
Cloudy: FVNA 120
Cloudy: 40% *20 8
Cloudy: RR 40% *60 24
Equipment – trade discount (w4) (1)
Equipment – depreciation (w4) 0.2
URP (w6) (0.1)
322.3

W12: PPE ()
Sunny 1220
Rainy 585
Cloudy 256
Equipment – trade discount (w4) (5)
Equipment – depreciation (w4) 1
2,057

Question 4
i) Gain on remeasurement
Fair value of previously held interest 30% at 1.7.2017 RM'000
(30% x 3m shares x RM7.50) 11,700
Less : Cost of investment 3,600
Post-acquisition profit
(12,000 x 6/12 x 30%) 1,800 (5,400)
Gain on remeasurement 6,300

ii) Goodwill computation

Sahabat - Goodwill computation
Scenarios 60% 40% Total
RM'000 RM'000 RM'000
Consideration -30% 11,700.0 11,700.0
Remaining shares30%
(30% x 3m shares x $13) 11,700.0 11,700.0
NCI at fair value 15,600.0 15,600.0
(40% x 3m shares x$ 13)
Less; NA at date of acq.
Equity shares 3,000.0
Retained Profit-1/1/17 12,075.0
Current profit year to 1/7/17 6,000.0
Land - Fair Value 100.0

21,175.0 (12,705.0) (8,470.0) (21,175.0)

10,695.0 7,130.0 17,825.0

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Impairment of Goodwill-
10% (1,069.5) (713.0) (1,782.5)
9,625.5 6,417.0 16,042.5

Kawan- Goodwill computation

Scenarios 60% 40% Total
RM'000 RM'000 RM'000
Consideration-60% 6,240.0 6,240.0
NCI at fair value 4,000.0 4,000.0
(40% x2m shares x $5.0)
Less; NA at date of acq.
Equity shares 2,000.0
Retained Profit-1/1/17 5,898.0

7,898.0 (4,738.8) (3,159.2) (7,898.0)

1,501.2 840.8 2,342.0
1,501.2 840.8 2,342.0

iii) Amount charge to equity (OCE).

Kawan
RM'000 Journal entries

NCI fair value at acquisition 4,000 RM'000 RM'000

Post -acq profit Dr : NCI 3,400.0
(14,000 x 6/12 x40%) 2,800 Cr : Cost of inves. 2,000.0
NCI as at 1/7/2017 6,800 Cr : OCE 1,400.0

3,400.0 3,400.0

Additional 20% (6,800 x 20%/40%) 3,400

Consideration paid (2,000)
Amount credit equity (OCE). 1,400

iv) Consolidated Statement of Profit or Loss and OCI for the year ended
31.12.17

Sahabat Consol
Rakan (6/12) Kawan Adjust. Adjust. P/L
RM’000 RM’000 RM’000 RM’000 RM’000

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Revenue 50,000 12,000 20,000 (480.0) UPR 81,520.0 √√

Cost of sales (20,000) (3,000) (4,000) 480.0 (10.0) (26,530.0) √√√

Gross profit 30,000 9,000 16,000 54,990.0

IL
Operating expenses (4,000) (1,000) (1,000) (1,782.5) (7,782.5) √√

Finance costs (300) (300.0) √

Re-measurement gain 6,300.0 √
Share of Associate's (6k
(Sahabat) profit x30%) 1,800.0 √√
Profit before taxation
55,007.5

Taxation (8,300) (2,000) (1,000) (11,300.0) √

Profit for the year 17,400 6,000 14,000 43,707.5

Profit attributable to :

Owner of equity 37,822.50 √

NCI - Sahabat (6,000-1,782.5) x 40% 1,687.0 √
NCI - Kawan (14,000 x 6/12) x 40% 2,800.0 √
NCI -Kawan (7,000-10) x20% 1,398.0 5,885.0 √
43,707.5

v)
Consolidate SOFP as at 31.12.17
Rakan Sahabat Kawan Adjust SOFP
Non-current Assets RM'000 RM'000 RM'000 RM'000 RM'000
PPE 18,593.0 28,073.0 13,063.0 100.0 59,829.0 √
Goodwill (ii) 16,042.5 2,342.0 18,384.5 √
Current Assets 1,568.0 9,025.0 8,883.0 (10.0) 19,466.0 √

97,679.5
Equity shares 8,000.0 8,000.0 √
GRE (W1) 43,060.5
OCE (iii) 1,400.0 √
NCI (W2) 22,085.0
74,545.5
Current liabilities 13,063.0 10,023.0 48.0 23,134.0 √
21,063.0 10,023.0 48.0 97,679.5
-

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UKAF4034 Advanced Corporate Reporting (Tutorial 6)

Working 1- Group Retained

Earnings/Profit
As per Rakan as at 1/1/2017 14,738.00 √
As per Consol PL 37,822.50 √
Dividends paid (9,500.00) √
43,060.50
Working 1- Alternative method - Group Retained Earnings/Profit (maximum 3 marks)
Rakan Sahabat Kawan Kawan
RM'000 RM'000 RM'000 RM'000
As per SOFP 22,638.0 24,075.0 19,898.0
Less: Pre-acquisition profit (18,075.0) (12,898.0)
Post-acquisition profit 6,000.0 7,000.0 7,000.0
URP ( 50,000 x 25/125) (10.0)
Impairment of goodwill (1,782.5)
Share of associate profit (6K x
30%) 1,800.0
Share of subsidiary profit
- Sahabat from 1/7/17 2,530.5 4,217.5 7,000.0 6,990.0
- Kawan 60% 4,200.0 60% 60% 80%
- Kawan 80% 5,592.0
Remeasurement gain 6,300.0

Total 43,060.5 -

Working- 2 NCI
Sahabat Kawan Total
RM'000 RM'000 RM'000

NCI fair value at acquisition 15,600 4,000.0 19,600

Post -acq profit
- Sahabat from 1/7/17- 40% 1,687.0 1,687.0
- Kawan 40% 2,800.0 2,800.0

NCI at 1/1/17 6,800.0 6,800.0

- Kawan 20% 1,398.0 1,398.0
Decrease in NCI-20% (6,800 x20/40) (3,400.0) (3,400.0)

Total NCI at 31.12.17 17,287 4,798.0 22,085.0

√ √
Alternative method- NCI computation using net assets (maximum 2 marks)
Sahabat Kawan
RM'000 RM'000

Net assets as per SOFP 27,075 21,898.0

Land at fair value /URP 100 (10.0)

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27,175 21,888.0
% of NCI 40% 20%
10,870.0 4,377.6
NCI goodwill (W1) 6,417.0
NCI goodwill (840.8 x 20/40) 420.4
As per working 2 above 17,287.0 4,798.0
Question 5
Answer:
Tutorial note: Always start by drawing a group structure in order to establish the
relationship between the investing company and its investments.
(W1) Group Structure
Jaya

30% 40%
+40% +20%
70% 60%

Menang Harta

At the start of 1 December 2017, Jaya increased its shareholding in Menang from 30% to
70%, thus gaining control. On this date, the previously held investment must be
remeasured to fair value with any gain or loss being recorded in profit or loss.
The carrying amount of Menang at the date control was achieved was:
RMm
Consideration 600
Profit share 90
Revaluation share 10
––––
Carrying amount 700
––––
On the date control is achieved, the investment is remeasured from RM700 million to its
fair value of RM705 million. The gain of RM5 million is recorded in profit or loss.

Tutorial note: Establishing the net assets of Menang at the acquisition date is tricky
because the relevant information is spread over the first three notes in the question.
During the measurement period the acquirer in a business combination must
retrospectively adjust the provisional amounts recognised at the acquisition date to
reflect new information obtained about facts and circumstances that existed as of the
acquisition date. The measurement period ends no later than twelve months after the
acquisition date. It is important to note that the RM2,250m fair value of the net assets at
the acquisition date does not take into account the changes in estimates relating to the
valuation of the provision and building that arise in the measurement period. Therefore,
the RM2,250m must be adjusted.

(W2) Net assets

Menang Acq’n date Rep date
RM’m RM’m

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Share capital 1,020 1,020

OCE 70 80
Retained earnings 900 980
Contingent liability (6) –
Land (bal. fig) 266 266
–––––
Fair value of identifiable net
assets before measurement period adjustments 2,250
Provision (to adjust liability from RM6m to RM5m) 1 –
Buildings (40) (40)
Depreciation reduction (RM40m/20) 2
––––– –––––
2,211 2,308
––––– –––––
Harta Acq’n date Rep date
RM’m RM’m
Share capital 100 100
OCE 20 20
Retained earnings 130 150
––––– –––––
250 270
––––– –––––
(W3) Goodwill
Tutorial note: When dealing with a step acquisition, the goodwill calculation must
include the fair value of the consideration paid for the new shares plus the fair value of
the previous shareholding.
Menang RM’m
Fair value of consideration 975
Fair value of previous shareholding 705
NCI at acquisition 620
Fair value of identifiable net assets (W2) (2,211)
––––––
Goodwill 89
––––––

Harta RM’m
Fair value of consideration-20% (64m-2m) 62
Fair value of previous shareholding -40% 115
NCI at acquisition -40% 115
Fair value of identifiable net assets (W2) (250)
––––––
Goodwill 42
––––––
On a step acquisition MFRS 3 Business Combinations requires the original 40%
investment to be recognised at its acquisition-date fair value and the resulting gain or loss
in profit or loss or other comprehensive income. The original shareholding would have
been equity accounted as follows:
RM’ m
Cost of investment (40%) 100
Plus 40% of (RM250m – RM230m) 8

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––––
Investment in associate at 30 June 2016 108
––––
Since the fair value of a 40% interest at 1 December 2017 is RM115 million, a gain of
RM7 million (RM115m – RM108m) should be recorded within profit or loss of parent’s
books. In addition, the legal fees of RM2 million should not have been included in the
cost of investment but should be expensed.
(W4) Non-controlling interest
RM’m
NCI in Menang at acquisition (W3) 620.0
NCI % of post-acquisition net assets (30% × (RM2,308m – RM2,211m) (W2)) 29.1
NCI in Harta at acquisition (W3) 115.0
NCI % of post-acquisition net assets (40% × (RM270m – RM250m) (W2)) 8.0
–––––
772.1
–––––

(W5) Retained earnings

RM’m
Jaya 3,340.0
Re-measurement Gain on step acquisition (W1) 5.0
Menang: 70% × ((RM2,308m – RM2,211m) – (RM80m – RM70m)) (W2)) 60.9
Harta: 60% × (RM270m – RM250m) (W2)) 12.0
Legal fees (2)
Re-measurement gain step acquisition of Harta 7.0
3,422.9

(W6)Other components of equity

RM’m
Jaya 250.0
Menang: 70% × (RM80m – RM70m) (W2) 7.0
257.0

Consolidated statement of financial position at 30 November 2018

RM’m
Assets:
Non-current assets
PPE (2,823+2,000+300-40+2) 6,351
Goodwill (89+42) 131
Current assets (985+861+60) 1,906
––––––––
Total assets 8,388
––––––––
Equity and liabilities:
Equity attributable to owners of parent
Share capital 850
Retained earnings (W5) 3,422.9
Other components of equity (W5) 257
––––––––

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4,529.9
Non-controlling interest (W4) 772.1
Non-current liabilities (RM1,895 + RM675 + RM30) 2,600
Current liabilities (320+106+60) 486
––––––––
Total equity and liabilities 8,388
––––––––

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