Luploid Co is the parent company of a group undergoing rapid expansion through acquisition. Luploid Co has acquired two subsidiaries in recent years, Colyson Co and Hammond Co. The current financial year end is 30 June 20X8.

Acquisition of Colyson Co

Luploid Co acquired 80% of the five million equity shares ($1 each) of Colyson Co on 1 July 20X4 for cash of $90 million. The fair value of the non-controlling interest (NCI) at acquisition was $22 million. The fair value of the identifiable net assets at acquisition was $65 million, excluding the following asset. Colyson Co purchased a factory site several years prior to the date of acquisition. Land and property prices in the area had increased significantly in the years immediately prior to 1 July 20X4. Nearby sites had been acquired and converted into residential use. It is felt that, should the Colyson Co site also be converted into residential use, the factory site would have a market value of $24 million. $1 million of costs are estimated to be required to demolish the factory and to obtain planning permission for the conversion. Colyson Co was not intending to convert the site at the acquisition date and had not sought planning permission at that date. The depreciated replacement cost of the factory at 1 July 20X4 has been correctly calculated as $17.4 million.

Impairment of Colyson Co

Colyson Co incurred losses during the year ended 30 June 20X8 and an impairment review was performed. The carrying amount of the net assets of Colyson Co at 30 June 20X8 (including fair value adjustments on acquisition but excluding goodwill) are as follows:

m

Land and buildings 60

Plant and machinery 15

Intangibles other than goodwill 9

Current assets (at recoverable amount) 22

––––

TotAL 106

The recoverable amount of Colyson Co’s assets was estimated to be $100 million. Included in this assessment was a building owned by Colyson Co which had been damaged in a storm and needs to be impaired by $4 million. Other land and buildings are held at recoverable amount. None of the assets of Colyson Co including goodwill have been impaired previously. Colyson Co does not have a policy of revaluing its assets.

Acquisition of Hammond Co and share-based payments

Luploid Co acquired 60% of the 10 million equity shares of Hammond Co on 1 July 20X7. Two Luploid Co shares are to be issued for every five shares acquired in Hammond Co. These shares will be issued on 1 July 20X8. The fair value of a Luploid Co share was $30 at 1 July 20X7.

Hammond Co had previously granted a share-based payment to its employees with a threeyear vesting period. At 1 July 20X7, the employees had completed their service period but had not yet exercised their options. The fair value of the options granted at 1 July 20X7 was $15 million. As part of the acquisition, Luploid Co is obliged to replace the share-based payment scheme of Hammond Co with a scheme that has a fair value of $18 million at 1 July 20X7. There are no vesting conditions attached to this replacement scheme.

Unrelated to the acquisition of Hammond, Luploid Co issued 100 options to 10,000 employees on 1 July 20X7. The shares are conditional on the employees completing a further two years of service. Additionally, the scheme required that the market price of Luploid Co’s shares had to increase by 10% from its value of $30 per share at the acquisition date over the vesting period. It was anticipated at 1 July 20X7 that 10% of staff would leave over the vesting period but this was revised to 4% by 30 June 20X8. The fair value of each option at the grant date was $20. The share price of Luploid Co at 30 June 20X8 was $32 and is anticipated to grow at a similar rate in the year ended 30 June 20X9.

Required:

Draft an explanatory note to the directors of Luploid Co, addressing the following:

(a) (i) How the fair value of the factory site should be determined at 1 July 20X4 and why the depreciated replacement cost of $17.4 million is unlikely to be a reasonable estimate of fair value.

(ii) A calculation of goodwill arising on the acquisition of Colyson Co measuring the non-controlling interest at:

– fair value

– proportionate share of the net assets.

(b) The calculation and allocation of Colyson Co’s impairment loss at 30 June 20X8 and a discussion of why the impairment loss of Colyson Co would differ depending on how non-controlling interests are measured. Your answer should include a calculation and an explanation of how the impairments would impact upon the consolidated financial statements of Luploid Co.

(c) (i) How the consideration for the acquisition of Hammond Co should be measured on 1 July 20X7. Your answer should include a discussion of why only some of the cost of the replacement share-based payment scheme should be included within the consideration.

(ii) How much of an expense for share-based payment schemes should be recognised in the consolidated statement of profit or loss of Luploid Co for the year ended 30 June 20X8. Your answer should include a brief discussion of the relevant principles and how the vesting conditions impact upon the calculations.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below A IFRS 13 Fair Value Measurement defines fair value as the price which would be received to sell an asset or paid to transfer a liability i... View the full answer