Page 23 - CIMA MCS Workbook November 2018 - Day 2 Tasks

Chapter 10

ADVANCED FINANCIAL REPORTING

(F2) PRACTICE TASKS

TASK 1 – ACQUISITION OF A SUBSIDIARY

Trigger and task
You receive the following email

From: Roger Grapple (Chief Executive)

To: Finance Manager

Subject: Acquisition of a subsidiary

In the absence of David Guy (FD) who is away at an accountancy seminar, could you provide me
with some information to aid my understanding of a couple of financial reporting issues?

If you have read the latest edition of the Zedland Weekly Times you’ll be aware that Digby Denton
is likely to want to sell his controlling interest in TigerFizz before too long. This is of interest to me
due to the strong demand for some of the carbonated drinks produced by TigerFizz.

Grapple is considering the acquisition of a subsidiary within the soft drinks industry. If this
possibility is to be progressed, Grapple needs to evaluate the value of the target entity and to
determine how much should be paid to obtain a controlling interest. Additionally, Grapple would
need to determine how the value of any consideration to be paid should structured.

Given that Grapple is a family owned business, there is limited immediate cash availability within
the entity. Similarly, as the major shareholder, I have limited financial resources available to
contribute towards any cash outlay for the acquisition. The other family shareholders have no
long‐term interest in Grapple and would not contribute towards financing of the acquisition.

I need two things as follows:

First ‐ could you summarise and explain to me how the acquisition of a subsidiary could be
achieved with little or no immediate cash resources available to buy‐out a majority of the
shareholders in the target entity and how they will be accounted for in the financial statements?

Second ‐ I am aware that Grapple would need to prepare consolidated financial statements if it
did acquire a controlling interest in TigerFizz or any other entity. As I understand things, this
would simply consist of adding together the financial statements of Grapple and the acquired

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