Auckland Case : IFRS 3 R Version

To make a long story short, at 1 January 2005 the business of Auckland Ltd is acquired by Wellington
Ltd, with Auckland Ltd going into liquidation. Both companies are active in the same business being
the facility management of regional airports.

The terms of acquisition are as follows:

 Wellington Ltd is to take over all the assets of Auckland Ltd as well as the accounts payable of
Auckland Ltd
 Costs of liquidation of 350 are to be paid by Auckland Ltd with funds supplied by Wellington
Ltd.
 Preference shareholders of Auckland Ltd are to receive two fully paid shares in Wellington
Ltd for every three shares held or, alternatively, $1 per share in cash payable at exchange date.
 Ordinary shareholders of Auckland Ltd are to receive two fully paid ordinary shares in
Wellington Ltd for every share held or, alternatively, 2,50 in cash, payable half at the exchange
date and half in one year's time.
 Debenture holders of Auckland Ltd are to be paid in cash out of funds provided by
Wellington Ltd. These debentures have a fair value of $102 per $100 debenture.
 All shares being issued by Wellington Ltd have a fair value of 1,10 per share. Holders of 3.000
preference shares and 5.000 ordinary shares elect to receive the cash
 Cost of issuing and registering the shares issued by Wellington Ltd amount to 40 for the
preference shares and 100 for the ordinary shares.
 Costs expected to be incurred in delivering and installing the acquired assets amount to 1.000.

The incremental borrowing rate for Wellington Ltd is 10% per annum
The trial balance below represents the financial position of Auckland Ltd at 1 January 2005

AUCKLAND LTD

Trial balance as at 1 January 2005

Debit Credit
Share capital
Preference – 6.000 fully paid shares 6.000
Ordinary – 30.000 fully paid shares 30.000
Retained earnings 21.500
Equipment 42.000
Accumulated depreciation - Equipment 10.000
Inventory 18.000
Accounts receivable 16.000
Patents 3.500
Debentures 4.000
Accounts payable 8.000
79.500 79.500
At the date of acquisition, Wellington Ltd assesses the fair values of the identifiable assets, liabilities
and contingent liabilities of Auckland Ltd to be as follows:
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Equipment 36.000

Inventory 20.000
Accounts receivable 9.000
Patents 4.000
Furniture 6.000
75.000
Accounts payable 8.000
67.000

Few months after the acquisition it seems that Wellington Ltd was wrong in its assessment of the fair
values of the identifiable assets and liabilities of Auckland Ltd. They are definitely assessed to be:
Equipment 45.000
Inventory 25.000
Accounts receivable 9.000
Patents 5.000
Furniture 6.000
90.000
Accounts payable 8.000
82.000

Wellington Ltd ask you to help them in accounting for the acquisition.

You will first compute the consideration of the business combination, secondly you will prepare,
at the acquisition date, the acquisition analysis and explain the accounting treatment of the
difference between the consideration of the business combination and the net fair value of the
identifiable assets, liabilities and contingent liabilities acquired. Finally you explain the accounting
treatment of the identified change in fair value of the assets acquired.
Wellington decide to depreciate equipment over 10 years. You are not expected to take into account
tax matters.

Solution

CONSIDERATION OF BUSINESS COMBINATION

Purchase consideration

Cash: Costs of liquidation 0

Preference shareholders (3.000 x 1,00) 3.000
Ordinary shareholders
 payable immediately (1/2 x 5000 x 6.250
2,50)
 payable later (1/2 x 5.000 x 2.50 x 5.682
0.909091)*
Debentures, including premium (4.000 x 4.080 19.012
1,02)
Shares: Preference sharholders (2.000 x $ 1,10) 2.200
Ordinary shareholders (5.0000 x $ 1,10) 55.000 57.200
Consideration paid to Aucklang Ltd 76.212

Directly attributable costs

Incidental costs 0
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Consideration of the business combination 76.212

*5.682 is the cash payable in one year's time discounted at
10%p.a

Net fair value of identifiable assets, liabilities and contingent liabilities acquired:

Equipment 36.000
Inventory 20.000
Accounts receivable 9.000
Patents 4.000
Furniture 6.000
75.000
Accounts payable 8.000
Net fair value acquired 67.000

Goodwill acquired:
Net fair value acquired = 67.000
Consideration of business combination = 76.212
Goodwill = 9.212

The journal entries in the records of Wellington Ltd at acquisition date are:

Journal of Wellington Ltd

Equipment Dr 36.000
Inventory Dr 20.000
Accounts receivable Dr 9.000
Patents Dr 4.000
Furniture Dr 6.000
Transaction costs (P/L) Dr 1.350
Goodwill Dr 9.212
Accounts payable Cr 8.000
Consideration payable Cr 19.012
Share capital - preference Cr 2.200
Share capital - ordinary Cr 55.000
Costs payable Cr 1.350

(Acquisition of the assets and liabilities of

Auckland Ltd)
Consideration payable Dr 13.330
Cash Cr 13.330

(Payment of cash consideration)

Costs payable Dr 1.350
Cash Cr 1.350

(Payment of directly attributable costs)

Share capital - ordinary Dr 100
Share capital - preference Dr 40
Cash Cr 140
(Share issue costs)
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Taking into account the change in fair value, the acquisition analysis now shows:
Net fair value of assets and liabilities acquired = 82.000
Cost of business combination = 76.212
Excess on acquisition = 76.212
= 5.788