Question

Aye Ltd acquired 90% interest in Bee Ltd on 1 January 20x1, for which the purchase consideration was structured as follows:

· Cash of $800,000.

· A parcel of freehold land with carrying amount of $300,000 in the books of Aye Ltd but had a fair value of $400,000 as at 1 January 20x1.

· A contingent payment of $100,000 payable in two years from the acquisition- date if Bee Ltd meets specific profit targets. On 1 January 20x1, based on the probability of the profit target being met as at that date, the probability-weighted discounted fair value of the contingent payment was $89,120.

· A deferred payment of $800,000 payable at the end of five years. The present value of this deferred consideration as at 1 January 20x1 was $626,821.

On 1 January 20x1, the total equity of Bee Ltd was represented by 1,000,000 ordinary shares at $1,000,000 and retained earnings of $600,880 and the fair values of all its assets and liabilities were the same as their carrying amounts, except for a machine which was estimated to have a fair value of $50,000 in excess of its carrying amount.

The accounting policy of Aye Ltd for its consolidated financial statements is to state non- controlling interest at acquisition-date at its fair value. In conjunction with the acquisition of Bee Ltd above, Aye Ltd had undertaken a valuation exercise and established that the fair value of the non-controlling interest at acquisition-date was $260,000.

Ignore deferred tax effects.

(a) Determine the following amounts as at the acquisition-date:

(i) Purchase consideration incurred by Aye Ltd for the acquisition of Bee Ltd.

(ii) Non-controlling interests.

(iii) Goodwill on consolidation.

(12 marks)

(b) Prepare the following accounting entries for the acquisition of Bee Ltd:

(i) Journal entries in the books of Aye Ltd.

(ii) Consolidation journal entries for the preparation of consolidated financial statements of Aye Ltd as at acquisition date

(17 marks)

(c) Identify the different forms of purchase consideration which may be used by an acquirer and describe potential issues in relation to the valuation of those forms of consideration. (6 marks)

Answer 1

A)(i)

Calculation of the purchase consideration incurred by Aye Ltd for the acquisition of Bee Ltd
Particulars	Amount(in $)
Cash	800000
fair value of the contingent payment	89120
present value of this deferred consideration	626821
Total Purchase Consideretion	1515941

A)(ii)

Calculation of the Non-Controlling Interest

260000

A)(iii)

Freehold property of Aye Ltd A/c Dr.	100000
To Revaluation Reserve (OCI)	100000

B)(i)

Calculation of Goodwill
Particulars	Amount(in $)	Amount(in $)
Total Purchase Consideretion		1515941
Add:Non Controlling Interest		260000
Less:Fair Value of the Net Asset of the Bee Ltd.
Net assets at Book value	1608800
Revaluation in Value of Machine	50000	1658800
Goodwill	117141

B)(ii)

1	Net assets of Bee Ltd A/c Dr.	1658800
	Goodwill A/C Dr.	117141
		To Purchase consideration A/c		1515941
		To NCI		260000
2	Purchase Consideration A/c Dr.	1515941
		To Cash		800000
		To fair value of the contingent payment		89120
		To present value of this deferred consideration		626821

C) Purcahse Consideration can be discharged in many forms, such as in form of Equity shares of the Acquirer company on the basis of the market value of the per share value of the acquirer, and by issuing Bonds or debt instrument, cash, Acquiring the debt by issuing debt.

potential issues in relation to the valuation of those forms of consideration:-

1. Its very difficult to Estimating and valuing synergies in mergers and acquisitions, Which based on measuring the value of benefits that various synergies will bring (aka it is the value enhancement of the buyer). For example, though an operating synergy may not have any monetary value, it could reduce the costs of sales, thereby increasing the profit margin.

2. Some hidden liabilities may be not shown in the financial statement such as any contingent liability like notice received from the Income tax department,Some of the books guarantees given by the company,Become surety to any contract etc.