Page 39 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

basis of segmental disclosures should Grapple choose to disclose such information in its financial
statements. Equally, segmental disclosures could be made on a geographical basis. Given that the
sales budget is classified according to product range, this would appear to be the basis upon
which management exercises control and makes decisions. This should be the basis of any
segmental disclosures based upon IFRS 8.

Group accounting issues ‐ IFRS 3 Business Combinations
IFRS 3 requires that if a transaction which meets the definition of a business combination takes
place, goodwill must be calculated and recognised in the consolidated financial statements.
Goodwill is then subject to an annual impairment review to ensure that it is not over‐stated.

Goodwill at the date of acquisition is calculated as the fair value of consideration paid, plus the
fair value of any non‐controlling interest, less the fair value of the net assets at that date.

The fair value of consideration paid consists of cash paid at the date of acquisition, plus the
present value of any deferred consideration or contingent consideration plus the fair value of any
shares issued as part of the transaction. Goodwill arising on consolidation of a subsidiary is not
amortised; instead, it is subject to an annual impairment review. In the case of negative goodwill
arising on consolidation, this will be taken to profit or loss immediately.

Application to Grapple
Currently, Grapple does not have any subsidiaries. However, if if did decide to make an acquisition
(e.g. of a competitor such as TigerFizz where the owner is potentially looking to sell the business
and retire), it would need to calculate, recognise and account for goodwill arising on acquisition of
a subsidiary. Given that TigerFizz has struggled in recent years, it may be that goodwill arising on
acquisition is not as high as it may have been in an earlier year.

As a related issue, if Grapple didi acquire a subsidiary, the means of financing the acquisition
would need to be considered. If Grapple has limited access to cash resources, it may be that the
shares in TigerFizz are acquired principally by means of a share exchange. This would minimise
the amount of any immediate cash outflow as a consequence of making the acquisition. Similarly,
it may be possible to defer any cash payment until, say, two or three years after the date of
acquisition. This would also minimise the immediate cash outflow, albeit that there would be a
cash outflow in a subsequent reporting period.

For the purposes of calculating goodwill, all elements of the consideration paid to acquire control
would need to be stated at their fair value as at the acquisition date.

Group accounting issues ‐ IFRS 10 Consolidated Financial Statements

IFRS 10 requires that consolidated financial statements are prepared when one entity acquires
control of another via a business combination. In order to confirm that control has been acquired,
it is necessary to comply with three criteria:
● power of the investor over the investee
● exposure or rights to variable returns in the investee

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