Acquisition Accounting – case study

FOR INTERNAL USE ONLY

Henderson Corp. – Background Information

It is 22 December 2022. You are the new controller of Henderson Corporation (Henderson).
Henderson operates in the United Kingdom and is a manufacturer and seller of farm
equipment, including tractors, threshers, and other large-scale equipment.

Henderson was privately owned for many years by a family; however, it was recently
purchased by Klopp Corporation (Klopp), a Dutch multinational corporation. The sale closed
on 19 September 2022. Klopp purchased Henderson to obtain its advanced farm technology,
patents, customer lists and international connections in the Americas, Europe and Asia-
Pacific. Klopp acquired Henderson by purchasing 100% of its share capital for CU 185m.

You have just sat down to attend a meeting with Mr. Salah, the CFO of Klopp. Mr. Salah called
the meeting to discuss the current accounting needs of Henderson Corporation and how they
relate to the reporting requirements of Klopp.

Mr. Salah:

Welcome aboard and we are happy to have you join the Klopp group of companies.

When Klopp acquired Henderson, your predecessor decided to leave the company as she
had been very close with the former owners. This has left the financial records of Klopp in
a bit of disarray, if I am being honest with you.

The first order of business must be to ensure we are ready for Klopp’s financial year-end,
which is 31 December, as well as preparing for Henderson’s local reporting requirements.
Both Klopp and Henderson use IFRS Accounting Standards and have 31 December year-ends,
therefore, I expect this will be very simple.
When the previous controller left the company, I was in charge of making sure we had IFRS-
compliant figures for Henderson to use for Klopp’s Q3 financial statements as at 30
September 2022. It’s been a while since I’ve overseen ‘debits and credits’, but I feel pretty
confident in my abilities.

Henderson has bank loans, which require a quick turnaround of its accounts by 31 January
2023. In order to make things simple, I propose we start with the figures I put together as
at 30 September 2022 for use in Klopp’s consolidated financial statements and just roll
everything forward. That’s just accounts receivable, accounts payable, payroll,
depreciation, etc. so it will be easy!

Here is a summary of the Henderson balance sheet as at 30 September 2022, which I

mentioned earlier:

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Henderson Corporation - amounts included in Klopp consolidation
Statement of financial position
As at 30 September 2022
in 000s of
CUs Notes
Assets
Current assets
Cash and cash equivalents
Accounts receivable 4,500
95% of inventories are heavy
Inventories 1,200 equipment ready for sale
5,700
Non-current asssets
consists primarily of owned
Property, plant and equipment 5,900 manufacturing facilities
Henderson sells equipment on
Long-term receivables - equipment financing 6,750 deferred payment terms
Right-of-use assets 3,400
Goodwill 11,200
Intangible assets - customer lists and patents 3,900
Deferred tax assets 1,430
32,580
Total assets 38,280

Liabilities
Current liabilities
Trade and other payables 900
Loans and borrowings 500
Lease liabilities 200
Current income taxes payable 900
2,500
Non-current liabilities
Loans and borrowings 4,500
Lease liabilities 3,250
Henderson has a defined benefit
pension plan with its factory
Employee benefit liabilities 1,200 employees
Deferred tax liabilities 1,100
10,050
Total liabilities 12,550

Equity attributable to owners of the parent

Purchase accounting bump (FOR ELIMINATION) 13,230
Share capital - for elimination with Klopp Holdings' investment 500
Retained earnings - for elimination with Klopp Holdings' investment 12,000
25,730
Total liabilities and equity 38,280

Polling Question 1:
Based on the facts provided, what do you think of Mr. Salah’s plan for Henderson’s 31
December 2022 accounts?

A. Sounds like a great plan

B. Some minor adjustments will be required
C. That isn’t going to work

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Polling Question 2:
Why do you think Mr. Salah was able to use figures from past business combinations in the
separate financial statements of subsidiaries in the past?

A. He made errors and the auditors did not notice them

B. Difference in US GAAP and IFRS
C. Difference in the form of the consideration paid by the acquirer

Polling Question 3:
How many assets and liabilities do you believe will requirement adjustment from the
acquisition accounting amounts prepared by Mr. Salah?

A. 1-2
B. 3-4
C. 5-6
D. 7+

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