Page 42 - CIMA May 18 - MCS Day 1 Suggested Solution

CIMA MAY 2018 – MANAGEMENT CASE STUDY

Although there are three regions, the operational structure of Menta is based upon the nature of
the transport service required: rural, city and long‐distance. This would seem to be appropriate as
the risks and rewards of each type of service provision are different.

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.

Application to Menta

Menta has many subsidiaries and would therefore calculate goodwill on acquisition of each
subsidiary.

It may be that one or more subsidiaries was acquired during 2017 as the carrying amount for
goodwill in the SOFP has increased from C$142.8m in 2016 to C$171.3m in 2017. Some of this is
almost certainly due to retranslation of goodwill arising on consolidation of a foreign subsidiary,
but there is insufficient information available to confirm this. There is no indication of any
impairment to goodwill during 2017.

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
 ability to use power to affect the variable returns
In practical terms, control is normally demonstrated by one entity holding the majority of equity
shares in another. This enables the investor to control the membership of the board of directors
and, consequently, to control the strategic and operating policies of the investee. It will therefore
be in a position to exert power and receive the benefit of the variable returns generated by the
investee.

86 KAPLAN PUBLISHING