Name
Shobhit Prabhakar
Course
CSAC4520 Advanced Financial Accounting - Full-Time Fall 2021
Student No.
218355172
Topic
Hand-in Participation #4
Instructor
Saurab Mehta
Case 4-1
Barring the fair value enterprise (FVE) method, only the portion of Leaf’s goodwill
purchased by Maple is disclosed on the consolidated balance sheet under all the
consolidation methods. For an acquisition cost of $1200000, $528000 got paid
as the share of Leaf's goodwill (presented in the first column of Exhibit 1). Placing
a value on 100% of Leaf’s goodwill is subjective, as there are different ways of
determining this value.
Firstly, assuming a linear relationship between the amount paid for 60% and the
value of 100% of the subsidiary. As per this scenario, if 60% of the shares equals
$1200000, 100% of them must be $2000000. So, consequently, 100% of the
goodwill would be measured at $880000 (presented in the second column of
Exhibit 1).
Secondly, in response to the argument put forth by the Maple management, a
non-linear relationship between the amount paid for 60% and the value of 100%
of the subsidiary can be considered. The management fully states its willingness
to pay $240000 over and above the market price of Leaf shares to gain control.
Also, the premium would stand at $240000, irrespective of the percentage of
shares acquired. Accordingly, in this scenario, the total value of Leaf’s would be
$1840000. Goodwill amounting to $720000 would be allocated out of this
amount (indicated in the third column of Exhibit 1).
Under IFRS 3.19, the value assigned to the goodwill does affect the reported
value for non-controlling interest, as per the fair value enterprise (FRV) method.
For the goodwill measured at $880000, the reported value of non-controlling
interest would be $800000 (indicated in the third column of Exhibit 2). As for
the goodwill valued at $720000, the value of non-controlling interest would be
$640000 (marked in the fifth column of Exhibit 2).
The subsidiaries assets and liabilities are transferred onto the consolidated
balance sheet at fair values, only at the date of acquisition. These fair values
become the historical values for reporting purposes, consequent to the date of
acquisition. It implies that the subsidiary’s assets and liabilities are not
remeasured to fair value on each reporting date, after the date of acquisition.
The FVE method highlights the fair value of the net assets of the subsidiary,
including goodwill at the date of acquisition. Since the fair value is often a good
indicator of the economic reality of the business combination, this method is
increasingly prominent. But, the FRV method also presents the highest value for
assets. It can cause the lowest percentage return on assets in subsequent
periods, as these assets need to be depreciated, expensed, or written off at some
point. For this reason, the management of Maple may prefer not to use the fair
value enterprise method when preparing the consolidated financial statements.
Exhibit 1
Allocation of Acquisition Cost (in 000 $)
60 %
Cost of 60% of Leafs
100 %
100 %
1200
2000
Implied Value of 100% of Leafs (Note 1)
1840
Implied Value of 100% of Leafs (Note 2)
(400)
(400)
960
1600
1440
Fair Value excess for identifiable assets
(480)
(800)
(800)
Fair Value excess for liabilities
48
80
80
Goodwill
528
880
720
Carrying amount of Leafs net assets
[ 60%* (2000-1600) ]
(240)
Acquisition Differential
Allocated
Notes
1) Assuming a linear relationship, the implied value is computed as follows:
If 60 % = $1200000
Then 100 % = 1200000/60*100 = $2000000
2) Assuming a non-linear relationship, the implied value is computed as
follows:
Control Premium = $240000 ; Value per share = $40
➢ Shares Outstanding = 240000/.06 = 40000 shares
Total Value of Leafs = 40000*40 + 240000 = $1840000
Exhibit 2
Maple Company
Consolidated Balance Sheet
At December 31, Year 7
( In 000 $ )
( see notes )
Proprietary
(a)
Identifiable Assets
5680
Parent
Ex
(b)
6800
Goodwill
528
528
880
720
6208
7328
7680
7520
4008
4680
4680
4680
2200
2200
2200
2200
Liabilities
Entity
(c1)
Entity
(c2)
6800
6800
Shareholders Equity
Controlling Interest
Non-controlling
Interest
6208
448
800
340
7328
7680
7520
Notes
1. The assets and liabilities are calculated as follows:
(a) Carrying amounts for Maple and 60% of fair values for Leafs
(b) Carrying amounts for Maple and carrying amounts for Leafs plus 100%
of fair value excess for Leafs’ identifiable assets and liabilities plus 60% of
the value of Leafs goodwill
(c1) Carrying amounts for Maple and carrying amounts for Leafs plus 100%
of fair value excess for Leafs’ identifiable assets and liabilities plus 100
% of the value of Leafs’ goodwill assuming a linear relationship between
the value of 60% and the value of 100%
(c2) Carrying amounts for Maple and carrying amounts for Leafs plus 100%
of fair value excess for Leafs’ identifiable assets and liabilities plus 100
% of the value of Leafs’ goodwill assuming a non-linear relationship and
a control premium of $120,000
2. The non-controlling interest is calculated as follows:
(b) 40% x fair value of Leafs’ identifiable assets and liabilities
(c1) 40% x fair value of Leafs’ identifiable assets, liabilities, and goodwill
(c2) 40% x fair value of Leafs’ identifiable assets and liabilities and Leafs’
goodwill in total less goodwill purchased by Maple.
i.e., 40% x ((2,800,000 –1,680,000) + (720,000 –528000))
P 4-8
In $
Cost of 90% of Whyte
292500
Implied Value of 100% of Whyte
325000
-
Goodwill
(50000)
Fair Value of Whyte’s Identifiable Net Assets
275000
Fair Value Differences (FV-CA)
Land
$50000
Buildings
$20000
Equipment
($10000)
$ 60000
Note Payable
($5000)
(55000)
Carrying amount of Whytes Net Assets
= Carrying amount of Whytes Shareholders Equity
Retained Earnings (as given in question)
Common Shares
220000
(140000)
80000
Balance Sheet of Whyte Inc. as on January 1, Year 5
In $
Cash [ 52000-36000 ]
16000
Accounts Receivable [ 168000-116000 ]
52000
Inventory [ 234000-144000 ]
90000
Land [ 280000-210000-50000 ]
20000
Buildings (net) [ 720000-640000-20000 ]
60000
Equipment [ 338000-308000+10000 ]
40000
278000
Accounts Payable [ 96000-88000]
8000
Notes Payable [ 562500-507500-5000 ]
50000
Common Shares
80000
Retained Earnings
140000
278000