Question

Hero is a trader. To be able to control the full spectrum of that market Hero acquired 80% of the voting shares of Seal. This transaction happened on 1st April 2014.

It is clear that Hero obtained the control and this transaction was a business combination. Both companies are preparing their financial statements under IFRS.

On 31st December 2014 the individual balance sheets of the two entities are the following (each amounts are in thousand dollars, k$):

		Hero    (k$) 31/Dec/2014	Seal    (k$) 31/Dec/2014
Investment in Seal		700	-
Land and building		300	1 000
Plant and equipment		1 000	400
Inventory		400	300
Receivables		600	200
Cash and equivalent		1 000	100
TOTAL ASSETS:		4 000	2 000
Issued capital		100	50
Share premium		-	100
Retained earnings		1 900	450
Equity:		2 000	600
Long term loans		900	400
Account payables and other short term liabilities		1 100	1 000
Liabilities		2 000	1 400
OWNERS EQUITY + LIABILITY:		4 000	2 000

The following information is relevant (acquisition):

1. The issued capital and share premium of both companies are the same since incorporation.

2. The movement in the retained earnings of the companies were the following during 2014:

	Hero	Seal
1st January 2014 (opening)	1000	150
Net profit (2014)	1500	300
Dividend declared	(600)
31st December 2014 (closing)	1900	450

The profit of Seal is NOT generated equally during the year. The following table illustrates how the profit was generated during 2014 (in percentage):

Period	% of Revenue
Q1 jan-march	20%
Q2 april-june	10%
Q3 july -sep	30%
Q4 oct-dec	40%
Total	100%

The following items – that belong to Seal – were identified at acquisition of the subsidiary:

One of the reasons of the acquisition was to acquire the customer relations of Seal, so Hero can enter into new markets. These customer relations are recorded in a customer list. A firm that has expertise in this area professionally evaluated the customer list. The fair value of the customer list is said to be 80 k$. The list was extended by Hero (Hero wrote up his own information on the list). The list – with this addition – had a value of 120 k$. The useful life of the list – regardless of the fact if it is the extended or the original list – is 4 years.

Seal had an ongoing litigation for years. The legal advisers of Seal said that there is a very little chance that the company will loose the case so this issue was classified being a contingent liability and was not recognized – correctly – as a liability in the separate financial statement of Seal. The fair value of this obligation was evaluated to be 15 k$ at the date of the acquisition. By the end of the year the case was closed and unexpectedly the court decided against Seal. Therefore Seal was obliged to pay 60 k$ to the other party. (Noting was recorded yet in the financial statements of Seal due to this matter.)

The fair value of net assets of Seal was the same with their book value except the land and buildings. Seal only has a land (under the heading land and building). The fair value of this land at the date of the acquisition was 1 200 k$.

Intercompany transactions:

5. The members of the group had the following intercompany transactions:

a. Hero sold one of his plants to Seal on 1st July 2014. The cost of this asset was 100 k$ and the book value of the asset was 50 k$ at the date of the sale. The selling price was 90 k$. The remaining useful life of the sold asset was four years at the date of the sale. Seal paid only one-third of the invoice until the end of the reporting period.

b. Seal sold inventory to Hero for 200 k$. The cost of the goods sold was 120 $k. Until the end of the year 25% of these goods were sold to customers outside the entity. On 30th December 2014 Hero paid 50 k$ to Seal. The payment was only received and credited to the bank account of Seal on 3rd January 2015.

6. Hero calculated that the goodwill on the acquisition is impaired by 44 k$.

Prepare the consolidated balance sheet of Hero Group for 31st December 2014!

Answer 1

Answers

1, the Issued Capital

Particulars	Hero	Seal	Remarks
Balances as on 01.01.14	100	50	150
Less : 80 % Acquired by Hero	0	40	40
Balance after adjustment	100	10	110

2. Share Premium

Particulars	Hero	Seal	Total
Balance as on 31.12.14	0	100	100
Less : Share Premium paid by Hero	0	0	0
Balance after adjustment	0	0	100

3. Investments in Seal by Hero

Particulars	Amount.
Balance as on 31.12.14	700
Less : Face Value of Equity Shares acquired in Seal	-40
Less : Share of Post Acquisition retained profits	-112

3. Retained Earnings

Particulars	Hero	Seal	Total
Balance as on 31.12.14	1900	450	2350
Less : Balance as on 01.01.14	1000	150	1150
Increase in retained earnings during the year	900	300	1200
Less : Profits for pre-acquisition period	0	60	60
Retained Profits for the year after acquisition	900	240	1140
Less : Court Case lost earlier recoded as contingent liability	0	-60	-60
Less/Add: Intercompany profit on sale of assets.	-40	40	0
Less / Add : Inter Company profit on sale of inventory	80	-80	0
Post Acquisition profits after adjusting intercompany transactions	940	140	1080
Less :Share of Retained Profits of Hero (Post Acquisition)	0	-112	-112
Retained Profits of the year after adjusting intercompany transaction	940	28	968