Page 18 - CIMA MCS Workbook November 2018 - Day 2 Suggested Solutions

CIMA NOVEMBER 2018 – MANAGEMENT CASE STUDY

An issue of equity shares by Grapply would affect your percentage interest in the entity. Care
would need to be exercised to ensure that your controlling interest was not diluted any further
than you are willing to accept.

The shares issued by Grapple would be valued at fair value and form part of the fair value of
consideration paid to acquire TigerFizz. It would therefore result in an increase in the issued share
capital and share premium of Grapple.

Issue of loan notes ‐ the issue of loan notes by Grapple in exchange for Digby’s shares would
form part of the fair value of consideration paid. As the loan is a liability, it would not affect your
controlling interest in Grapple.

However, it would affect gearing and stakeholders in Grapple (lenders, suppliers, customers etc)
may perceive that financial risk in Grapple has increased which may affect their decisions whether
to continue their business relationship with Grapple. Interest payments will be a expense against
profit and must be paid irrespective of the profitability of the business.

A further possibility is to acquire a controlling interest now by purchasing, say, a 60% interest in
the target company, and then increasing Grapple’s shareholding in stages (to e.g. 80% and then
100%) at subsequent dates to be agreed. By staggering the acquisition of shares over a period of
time (having initially acquired a controlling interest), this will help to manage the flow of
resources from Grapple to achieve the acquisition. If this occurred, the subsequent purchases of
shares would be treated as transactions within the SOCIE between the controlling group and the
non‐controlling interest shareholders.

Consolidated financial statements

If control of another entity can be demonstrated, then there is a parent‐subsidiary relationship
between the investor and investee. Consequently, the investor (Grapple) is required to prepare
consolidated financial statements for the business combination. Inter‐alia, this will normally
include:

Calculation and recognition of goodwill on acquisition. The calculation of goodwill is governed by
IFRS 3 Business Combinations and requires that the fair value of consideration paid to acquire
control is added to the fair value of the non‐controlling interest (i.e. the fair value of any TigerFizz
shares not acquired by Grapple) at the date of acquisition. From this total, the fair value of net
assets at acquisition date is deducted to arrive at goodwill. Goodwill is accounted for as an
intangible non‐current asset. It is not subject to annual amortisation but, instead, subject to an
annual impairment review.

Recognition of group reserves, consisting of the reserves of Grapple plus the group share of post‐
acquisition reserves of TigerFizz.

Recognition of the non‐controlling interest in the group. This will comprise the non‐controlling
interest as at the date of acquisition (as used in the goodwill calculation) plus they are entitled to
their share of post‐acquisition reserves of TigerFizz. Non‐controlling interest is classified within
equity in the consolidated statement of financial position.

108 KAPLAN PUBLISHING