Page 15 - CIMA OCS Workbook May 2019 - Day 1 Tasks

CIMA MAY 2019 – OPERATIONAL CASE STUDY

EXERCISE TWO (GROUP ACCOUNTING)
From: Finance Officer.
To: Melanie Tan, Sales and Marketing Director
Subject: Acquisition of Probio

Thank you for your email.

I have considered your request and prepared the following notes on the calculations.

Note 1. Group Structure

This calculation is determining the level of control that is exercised by VitaMine over Probio.
This is important as International Financial Reporting Standard 10 Consolidated Financial Statements
(IFRS 10), requires that when one entity has control over another, then consolidated financial
statements need to be prepared to show the financial position and performance of the business
combination.

It can be seen that under the terms of this acquisition VitaMine would own 60% of the ordinary share
capital (600,000 shares) of Probio and therefore has control over the voting rights of Probio.

Note 2 Non-controlling Interests

Non-controlling interests demonstrate that, whilst VitaMine has control of the business by owning
more than 50% of the ordinary share capital, it does not own 100% of the issued share capital of
Probio.

This means that the remaining 40% of Probio is owned by other parties and as such they are entitled
to a share of the returns generated by Probio.

This is important as in the consolidated statement of financial position all of the assets and liabilities
of Probio would be included to demonstrate the level of control over those assets and liabilities and
an adjustment will be made in the equity section to reflect the level of ownership of those net assets.

Note 3 Goodwill

Goodwill represents the premium above the current value of the assets that VitaMine is willing to pay
in order to acquire the controlling shareholding in Probio. It represents the reputation, brand value
and potential synergies that can be developed through control of the business.

It can be seen that the current share price is E$12.00 which would already incorporate an element of
goodwill, but it can be assumed that greater value would be created by acquiring control of Probio
and thus VitaMine would be willing to pay a premium in excess of the current share price.

Note 4 Fair Value of the Investment

The E$8,100,000 represents the amount that VitaMine would pay to acquire the 600,000 ordinary
shares of Probio required to gain a 60% stake in the business.

This represents an effective share price of (E$8,100,000/600,000 shares) E$13.50, which gives a
premium over the current share price of E$1.50.

68 KAPLAN PUBLISHING