You are the auditor-in-charge of the Spidey Ltd group of companies, a JSE Ltd listed South...

 

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You are the auditor-in-charge of the Spidey Ltd group of companies, a JSE Ltd listed South African group involved in the manufacture of toys. Spidey Ltd's group financial statements for the year ended 31 December 20.8 will be authorised for issue on 28 February 20.9. On 31 December 20.8, Spidey Ltd acquired 80% of the issued ordinary shares of MJ Ltd. At that date, the trial balance of MJ Ltd was as follows: Share capital Retained earnings Debtors Inventories Research and development intangible asset Plant Other net assets MJ Ltd R'000 YOU ARE PROVIDED WITH THE FOLLOWING ADDITIONAL INFORMATION: 12 000 15 772 27 772 2 400 1 700 1 100 9 600 12 972 27 772 At acquisition date, Spidey Ltd determined the following in recognising and measuring the identifiable assets acquired and liabilities assumed in MJ Ltd: At acquisition date, Spidey Ltd determined the following in recognising and measuring the identifiable assets acquired and liabilities assumed in MJ Ltd: 1. 2. 3. Spidey Ltd considered the fair value of the debtors balance of MJ Ltd to be R3 million. On 31 December 20.8, the fair value of MJ Ltd's inventories was R2,5 million. MJ Ltd's research and development intangible asset comprises development costs - both complete (R700 000) and in-process (R400 000) appropriately capitalised by the company in terms of IFRS. For ethical reasons however, Spidey Ltd will not use the research and development intangible assets of MJ Ltd after acquisition. The fair value of the research and development intangible asset, based on its use by other market participants in the industry is reliably estimated at R2 million. 4. 5. 6. On acquisition date, Spidey Ltd announced to all the affected parties, the main features of its firm intention to restructure the operations of MJ Ltd during July 20.9 at a cost of R1,4 million. On 1 February 20.9, the detailed formal plan for the restructuring was finalised at a board meeting of the group directors. No provision for restructuring was recognised by MJ Ltd at 31 December 20.8. MJ Ltd has a skilled assembled workforce which Spidey Ltd deemed valuable during the takeover negotiations of the acquiree. Spidey Ltd estimated that it will cost R900 000 to recruit and train a workforce of equivalent calibre. 8. At the acquisition date, MJ Ltd was being sued for environmental damage for an amount of R1,5 million. The company's attorneys have indicated that MJ Ltd does have a present obligation in respect of this claim at reporting date but due to certain technicalities relating to environmental legislation, it is not probable that they will be required to settle the obligation. MJ Ltd will disclose a related contingent liability of R1,5 million in its own 20.8 financial statements. Spidey Ltd considered the fair value of this tax-deductible obligation at acquisition date to be reliably measured at R300 000. 7. At 31 December 20.8, the fair value of MJ Ltd's plant was determined at R10.5 million. The following details relate to the consideration transferred to the sellers of the shares and related costs in connection with the acquisition of MJ Ltd: On 31 December 20.8, Spidey Ltd issued 1 million Spidey Ltd ordinary shares to the sellers with a fair value of R10 each. Related share issue costs amounted to R124 000. 8. 9. On 31 December 20.8, Spidey Ltd issued 1 million Spidey Ltd ordinary shares to the sellers with a fair value of R10 each. Related share issue costs amounted to R124 000. On the same date, 2 million R5 10% Spidey Ltd Debentures were issued to the sellers at their fair value of R4,80 each. Debenture issue expenses amounted to R130 000. 10. A cash payment of R4 million was contracted for and due to the sellers on 1 January 20.10. In terms of its agreement with the sellers of MJ Ltd, Spidey Ltd also agreed to pay a further cash amount of R1 million to a nominated creditor of the sellers on 1 January 20.10. 11. A further amount of R5,8 million is payable in cash on 31 December 20.10 contingent upon MJ Ltd achieving cumulative earnings of R15 million for the two-years ending 31 December 20.10. On 31 December 20.8 and 28 February 20.9, the contingent consideration had a fair value of R3,9 million and R4,2 respectively. General • At acquisition, the non-controlling interest in MJ Ltd was measured at its fair value of R6,9 million. • An appropriate discount rate is 12% per annum. The company tax rate is 30%. REQUIRED Calculate, for inclusion in the 20.8 Spidey Ltd group financial statements, the goodwill arising on the acquisition of MJ Ltd. Where any of the items in 1 to 7 above are not taken into account in the calculation, you are required to provide brief supporting reasons. You are the auditor-in-charge of the Spidey Ltd group of companies, a JSE Ltd listed South African group involved in the manufacture of toys. Spidey Ltd's group financial statements for the year ended 31 December 20.8 will be authorised for issue on 28 February 20.9. On 31 December 20.8, Spidey Ltd acquired 80% of the issued ordinary shares of MJ Ltd. At that date, the trial balance of MJ Ltd was as follows: Share capital Retained earnings Debtors Inventories Research and development intangible asset Plant Other net assets MJ Ltd R'000 YOU ARE PROVIDED WITH THE FOLLOWING ADDITIONAL INFORMATION: 12 000 15 772 27 772 2 400 1 700 1 100 9 600 12 972 27 772 At acquisition date, Spidey Ltd determined the following in recognising and measuring the identifiable assets acquired and liabilities assumed in MJ Ltd: At acquisition date, Spidey Ltd determined the following in recognising and measuring the identifiable assets acquired and liabilities assumed in MJ Ltd: 1. 2. 3. Spidey Ltd considered the fair value of the debtors balance of MJ Ltd to be R3 million. On 31 December 20.8, the fair value of MJ Ltd's inventories was R2,5 million. MJ Ltd's research and development intangible asset comprises development costs - both complete (R700 000) and in-process (R400 000) appropriately capitalised by the company in terms of IFRS. For ethical reasons however, Spidey Ltd will not use the research and development intangible assets of MJ Ltd after acquisition. The fair value of the research and development intangible asset, based on its use by other market participants in the industry is reliably estimated at R2 million. 4. 5. 6. On acquisition date, Spidey Ltd announced to all the affected parties, the main features of its firm intention to restructure the operations of MJ Ltd during July 20.9 at a cost of R1,4 million. On 1 February 20.9, the detailed formal plan for the restructuring was finalised at a board meeting of the group directors. No provision for restructuring was recognised by MJ Ltd at 31 December 20.8. MJ Ltd has a skilled assembled workforce which Spidey Ltd deemed valuable during the takeover negotiations of the acquiree. Spidey Ltd estimated that it will cost R900 000 to recruit and train a workforce of equivalent calibre. 8. At the acquisition date, MJ Ltd was being sued for environmental damage for an amount of R1,5 million. The company's attorneys have indicated that MJ Ltd does have a present obligation in respect of this claim at reporting date but due to certain technicalities relating to environmental legislation, it is not probable that they will be required to settle the obligation. MJ Ltd will disclose a related contingent liability of R1,5 million in its own 20.8 financial statements. Spidey Ltd considered the fair value of this tax-deductible obligation at acquisition date to be reliably measured at R300 000. 7. At 31 December 20.8, the fair value of MJ Ltd's plant was determined at R10.5 million. The following details relate to the consideration transferred to the sellers of the shares and related costs in connection with the acquisition of MJ Ltd: On 31 December 20.8, Spidey Ltd issued 1 million Spidey Ltd ordinary shares to the sellers with a fair value of R10 each. Related share issue costs amounted to R124 000. 8. 9. On 31 December 20.8, Spidey Ltd issued 1 million Spidey Ltd ordinary shares to the sellers with a fair value of R10 each. Related share issue costs amounted to R124 000. On the same date, 2 million R5 10% Spidey Ltd Debentures were issued to the sellers at their fair value of R4,80 each. Debenture issue expenses amounted to R130 000. 10. A cash payment of R4 million was contracted for and due to the sellers on 1 January 20.10. In terms of its agreement with the sellers of MJ Ltd, Spidey Ltd also agreed to pay a further cash amount of R1 million to a nominated creditor of the sellers on 1 January 20.10. 11. A further amount of R5,8 million is payable in cash on 31 December 20.10 contingent upon MJ Ltd achieving cumulative earnings of R15 million for the two-years ending 31 December 20.10. On 31 December 20.8 and 28 February 20.9, the contingent consideration had a fair value of R3,9 million and R4,2 respectively. General • At acquisition, the non-controlling interest in MJ Ltd was measured at its fair value of R6,9 million. • An appropriate discount rate is 12% per annum. The company tax rate is 30%. REQUIRED Calculate, for inclusion in the 20.8 Spidey Ltd group financial statements, the goodwill arising on the acquisition of MJ Ltd. Where any of the items in 1 to 7 above are not taken into account in the calculation, you are required to provide brief supporting reasons.

Answer rating: 100% (QA)

Answer Goodwill on Acquisition of MJ Ltd Goodwill is a premium paid for an acquisition above the fair value of the net identifiable assets acquired Th... View the full answer