Page 17 - CIMA MCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

CHAPTER TEN
TASK 1 – ACQUISTION OF A SUBSIDIARY

From: Finance Manager
To: CEO
Date: Today

Financing of acquisition of a subsidiary

The financing of a subsidiary (and how they are accounted for) may consist of several
components:

Cash paid immediately at the date of acquisition. Any cash payment made at the date of
acquisition is deemed to be at its fair value. Whilst this may be of immediate benefit to Digby
Denton it is not the preferred method to acquire the shares, given the lack of immediate cash
resources available to Grapple..

Deferred consideration – this is a deferred payment made at a date following acquisition, for
example, three years following the date of acquisition. This is accounted for in the goodwill
calculation at its present value as at the date of acquisition. It will also be recognised as a liability
in the consolidated financial statements until it is paid. An annual finance charge will be
recognised during the post‐acquisition period up to the date of making the payment three years
later when hopefully the cash resources available within Grapple are better placed to make such a
payment.

Contingent consideration – this is consideration that may (or may not) be payable at some later
date depending upon achievement of specified criteria, such as achievement by the acquired
entity of a specified target or other benchmark. For example, an extra Z$2 per share acquired may
be payable to Digby Denton three years after the date of acquisition provided that, for example,
the profit before tax of TigerFizz was in excess of a minimum specified figure. This is accounted for
in the goodwill calculation based upon its’ fair value at the date of acquisition. Calculation of a
monetary value will take into account the time value of money between the date of acquisition
and the potential date of payment, along with the probability that such a payment will actually be
made at a later date.

Although it would result in a cash payment, this form of consideration would have the dual
benefit of delaying or minimising any immediate cash payment to Digby Denton following the
acquisition of TigerFizz. It would also have the advantage that it would only become payable if the
targets or benchmarks specified have been achieved. In that way, the good financial performance
of TigerFizz may help finance the cash payment made to Digby Denton.

Share exchange – all or part of the fair value of consideration paid by Grapple to acquire Digby’s
shareholding in TigerFizz would be satisfied by a share exchange. Grapple would issue shares to
Digby in exchange for acquiring her shares in TigerFizz. To the extent that this form of
consideration is used to acquire Digby’s shares in TigerFizz, there will be no cash outlay. This will
help to preserve cash resources in Grapple to use for other operational and capital commitments.

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