EXAMPLE 3

This comprehensive example is an adaptation of a previous consolidation question looking at

many of the elements of goodwill outlined above. This is good practice for how a
consolidated statement of financial position question might be asked, with a common format
of presenting the answer. This question contains other adjustments, so it is important that you
have read through other learning materials on group accounting, including associate
companies, before attempting it.

On 1 October 20X6, Plateau Co acquired the following non-current investments:

1. Three million equity shares in Savannah Co by an exchange of one share in Plateau

Co for every two shares in Savannah Co, plus $1.25 per acquired Savannah Co share
in cash. The market price of each Plateau Co share at the date of acquisition was $6,
and the market price of each Savannah Co share at the date of acquisition was $3.25.
At 1 October 20X6 Savannah Co had retained earnings of $6 million.

2. Thirty percent of the equity shares of Axle Co at a cost of $7.50 per share in cash. At
this date Axle Co had retained earnings of $11 million.

Only the cash consideration of the above investments has been recorded by Plateau
Co. In addition, $500,000 of professional costs relating to the acquisition of Savannah
Co are included in the cost of the investment.

The summarised draft statements of financial position of the three companies at 30

September 20X7 are shown here.

The following information is relevant:

(i) At the date of acquisition, Savannah Co has an unrecognised internally generated brand
name. This was deemed to have a fair value of $1m at 1 October 20X6 and has not suffered
any impairment since acquisition.

(ii) On 1 October 20X6, Plateau Co sold an item of plant to Savannah Co at its agreed fair
value of $2.5m. Its carrying amount prior to the sale was $2m. The estimated remaining life
of the plant at the date of sale was five years (straight-line depreciation).

(iii) During the year ended 30 September 20X7, Savannah Co sold goods to Plateau Co for
$2.7m. Savannah Co had marked up these goods by 50% on cost. Plateau Co had a third of
the goods still in its inventory at 30 September 20X7. There were no intra-group
payables/receivables at 30 September 20X7.

(iv) At the date of acquisition, the non-controlling interest in Savannah Co is to be valued at

its fair value. For this purpose, Savannah Co’s share price at that date can be taken to be
indicative of the fair value of the shareholding of the non-controlling interest. Impairment
tests on 30 September 20X7 concluded that neither consolidated goodwill nor the value of the
investment in Axle Co had been impaired.

(v) The financial asset investments are included in Plateau Co’s statement of financial
position (above) at their fair value on 1 October 20X6, but they have a fair value of $9m at 30
September 20X7.
Required:
Prepare the consolidated statement of financial position for Plateau Co
as at 30 September 20X7.

Answer
Consolidated statement of financial position of Plateau Co as at 30 September 20X7 (see
here).

(w1) Group structure:

Plateau Co – owned 75% of Savannah Co for 1 year
Plateau Co – owned 30% of Axle Co for 1 year

(w2) Net assets of Savannah Co:

Post acq’n
SFP date
Acquisition $000
$000
$000
Share capital 4,000 4,000 -
Retained earnings 6,000 8,900 2,900
Fair value adjustment 1,000 1,000 -
Excess depreciation (w7) 100 100
PURP on inventories (w8) (300) (300)
11,000 13,700 2,700

(w3) Goodwill:

$000
Consideration:
- Shares issued (3,000/2 x $6) 9,000
- Cash (3,000 x $1.25) 3,750
Non-controlling interest at acquisition (1m x $3.25) 3,250
Less: Net assets at acquisition (w2) (11,000)
Goodwill at acquisition 5,000

Tutorial note:
The consideration given by Plateau Co for the shares of Savannah Co works out at $4.25 per
share – ie consideration of $12.75m for 3 million shares. This is higher than the market price
of Savannah Co’s shares ($3.25) before the acquisition and could be argued to be the
premium paid to gain control of Savannah Co. This is also why it is (often) appropriate to
value the NCI in Savannah Co’s shares at $3.25 each, because (by definition) the NCI does
not have control.

The 1.5 million shares issued by Plateau Co in the share exchange, at a value of $6 each,
would be recorded as $1 per share as capital and $5 per share as other components of equity
(share premium), giving an increase in share capital of $1.5m and a share premium of $7.5m.

(w4) Non-controlling interest:

 $000
Fair value at acquisition (see (w3) 3,250
NCI % x S post acq’n (25% x 2,700 (w2)) 675
3,925

(w5) Retained earnings:

$000
Plateau Co’s retained earnings 25,250
Professional fees (500)
P% x S post acq’n 75% x 2,700 (w2) 2,025
P% x A post acq’n 30% x (5,000 (16,000 – 11,000)) 1,500
Non-current asset PURP (w7) (500)
Investment gain (9,000 – 6,500) 2,500
30,275

(w6) Investment in associate:

$000
Cost (4,000 x 30% x $7.50) 9,000
Share post-acquisition profit (see w5) 1,500
10,500

(w7) Property, plant and equipment

The transfer of the plant creates an initial unrealised profit (URP) of $500,000 being the
difference between the agreed FV ($2.5m) and the carrying amount ($2m). This should be
eliminated from Plateau Co’s retained earnings and from the carrying amount of the plant to
restate as if the transfer had not taken place.

The carrying amount of the plant is reduced by excess depreciation of $100,000 for each year
([$2.5m/ 5years] – [$2m/ 5 years]) in the post-acquisition period. Therefore, the net
adjustment in the carrying amount of property, plant and equipment is $400,000.

The excess depreciation charge should also be eliminated on consolidation and, since it will
have arisen in Savannah Co’s individual accounts, the elimination of the depreciation will
have the effect of increasing Savanah Co’s post-acquisition retained earnings and,
consequently, the profits attributable to the non-controlling interest.

(w8) Inventory
The unrealised profit (URP) in inventory intra-group sales are $2.7m on which Savannah Co
made a profit of $900,000 (2,700 x 50/150). One third of these are still in the inventory of
Plateau Co, thus there is an unrealised profit of $300,000.

Tutorial note:
In this question, there is no goodwill impairment. If there had been an impairment, say of $1
million, then the full $1 million would have been deducted from goodwill. As the non-
controlling interest is recorded at fair value, this impairment would have been split between
the non-controlling interest and the parent based on the percentage owned. Therefore
$250,000 (25% of the impairment) would be deducted from the non-controlling interest
figure in equity and $750,000 (75% of the impairment) would be deducted from retained
earnings in equity.