Arab Open University

B326: Advanced Financial Accounting

TMA – Fall 2023-2024 V1
Cut-Off Date: As decided by the Deanship
About TMA:
The TMA covers the advanced accounting concepts and practices in the businesses. It is marked
out of 100 and is worth 15% of the overall assessment component. This TMA requires you to apply the
course concepts. The TMA is intended to:
 Assess students’ understanding of key learning points within chapter 1, 3, 4 and 5.
 Increase the students’ knowledge about the reality of the advanced accounting issues.
 Develop students’ communication skills, such as memo writing, essay writing, analysis and
presentation of material.
 Develop the students’ ability to understand and analyze different issues that corporations might
face in real world.
 Develop basic ICT skills such as using the internet.

The TMA requires you to:

1- Review various study chapters in addition to supplementary materials.
2- Conduct a deep information search using the internet and your E-Library. You are expected
to use E-library sources to support your answers. A minimum of 3 sources is required.
3- It’s imperative that you write your answer using your own words. Plagiarism will be
penalized depending on its severity and according to AOU plagiarism policy.
4- You should use a Microsoft Office Word and Times New Roman Font of 12 points.
5- You should use Harvard referencing style for in-text citation and list of references.

For Cut-off date: Check LMS

Criteria for Grade Distribution:

Content Structure
Criteri Referencing and Total
a Part A Part B Part C & E-library Presentation marks
of ideas
Marks 40 30 30 (5) (5) 100

The TMA Questions:

PART A
Access Philips Company website and download: the annual report for 2021. Note: this file is
available at:
https://www.results.philips.com/publications/ar22/downloads/pdf/en/
PhilipsFullAnnualReport2022-English.pdf?v=20230426085127

From 2021 annual report, answer the following questions:

1. Determine the total amount of non-controlling interest in 2020 & 2021and state in which
statement it is disclosed and in which section.
2. State the amount of controlling interest share and non-controlling interest share in Philips
Company’s profit for 2020 & 2021

3. State Philips Company acquisitions during 2021and the aggregated goodwill resulted from
these acquisitions. How does each acquisition affect the goodwill? Support your answer by
writhing the page number in annual report.

4. State the amounts of impairment losses of goodwill & other intangible assets in 2021.Also,
State which cash generating unit/division/segment suffered an impairment loss related to
goodwill in 2021?
5. How did Philips reflect the 2021 goodwill impairment in its in its Financial statements?
6. Philips Company prepared its consolidated financial statements in accordance with the
International Financial Reporting Standards (“IFRS”), as mentioned in its annual report.
Assuming that it was not mentioned in the annual report that the company is following
IFRS; provide evidence from annual report (related to course subjects studied) that indicate
that the company is following IFRS and not following GAAP?

7.

Write your answer in the space provided in the following table:

Answer Page(s) in
Annual report
1- Total non-controlling interest The net profit attributable to minority 145
interests decreased from 4 million
euros in 2021 to 3 million euros in
2022.
Consolidated statements of income

which statement it is disclosed It's disclosed in the non-controlling 38

and in which section?
2- Controlling interest share
- Non-controlling interest share
in Philips Company profit
3- Goodwill impairment in its in
its Financial statements
interest section of the group statement
of changes in equity.
Information about non-controlling
interests As of December 31, 2022,
four consolidated subsidiaries were not
wholly owned by Philips (December
31, 2021: four). In 2022, the sales with
third parties and the annual net profit
of these subsidiaries together amount
to €472 million (December 31, 2021:
€522 million) and €28 million
(December 31, 2021: €39 million),
respectively. financial income and
expenses resulted in a net expense of
200 million euros, compared to 39
million euros in 2021. 2022 includes
lower increases in value from Philips
minority interests and higher interest
expense, primarily due to financial
expenses concerned the early
redemption of EUR and USD bonds
and the issuance of new EUR bonds in
April 2022 compared to 2021.
In 2021, goodwill increased by €2,622 177
million, primarily due to preliminary
goodwill on new acquisitions of
BioTelemetry (€1,776 million) and
Capsule Technologies (€325 million)
and translation differences of €732
million. This was partially offset by
impairment charges of €15 million,
primarily related to the PERS CGU,
and €189 million disposed of during
the period, primarily related to the
household appliances business. A
impairment of EUR 15 million was
recorded in 2021. The majority of this
affected the PERS CGU, which was
classified as an asset held for sale as of
the fourth quarter of 2020. The CGU
PERS was sold on June 30, 2021.Prior
to the disposal, a goodwill impairment
charge of €13 million was recorded to
reflect a decrease in the CGU's
recoverable amount, resulting in the
CGU's goodwill balance falling to
zero.
Book value of goodwill = 10,637
 4- amounts of impairment losses
of goodwill & other intangible
assets in 2021
5- Philips reflecting the 2021
goodwill impairment in its in its
Financial statements
6- Evidence from annual report - Non-current assets are evaluated at 145
(related to course subjects their current value, which means that
studied) that indicate that the expenses are lower than depreciation
company is following IFRS and impairment losses are smaller.
-Transactions are recorded using
accrual accounting.
-The accrual concept and the going
concern assumption are also used in
the financial statements. Full
transparency is offered on the things
reflected in the financial statements for
the users' understanding.
*** Answers not provided in a tabular format will be disregarded
(40 marks)

PART B
1) Provide one example from the real world for successful mergers and acquisitions case in
recent years and state the specific reasons behind their success.
Notes:
 Do not provide general reasons behind success [as it will not be considered]

 Write your answer in the space provided in the following table:

* Names of the companies
& Detailed information about this business Reasons for Success
combination

Pfizer and Warner-Lambert This notoriety stems from the fact

Pfizer paid $90 billion for Warner-
Lambert in 2000. Both businesses were in
the pharmaceutical medicine sector, and
their merger was dubbed "one of the most
contentious acquisitions in history."
that Warner-Lambert was set to be
purchased by American Home
Products, a consumer products
corporation. Pfizer jumped in after
American Home Products backed
away from the agreement, resulting
in huge break-up fees.

Pfizer gained ownership of the

earnings of a highly sought-after
medicine (Lipitor), which totaled
over $13 billion, as a result of the
transaction.
Answers not provided in a tabular format will be disregarded.
** Examples dated before 2006 will not be considered. (10 Marks)
2) What are the different types of synergies in mergers and acquisitions?
 Write your answer in the space provided in the following table:
* Type: Explanation:
Revenue Synergies Sales synergies assume that the two companies together
can achieve higher sales than the sum of their individual
sales.
sales synergies result from:
 Cross Selling
 Reducing competition
 Access to new markets
Example of sales synergies:
Disney's acquisition of Pixar in 2006 is often cited as an
example of value-creating mergers and acquisitions, and
rightly so.
Cost Synergies Cost synergies are the savings in operating costs expected
after the merger of two companies. Cost synergies are cost
reductions due to increased efficiency in the combined
company. Cost synergies are one of the three main types of
synergies, the other two being revenue and financial
synergies.
Example of cost synergies:
The merger of Exxon and Mobil in 1998 to create the
world's largest oil company by market capitalization
resulted in huge cost savings.
Financial Synergies Financial synergies are improvements in a company's
operations and financial conditions resulting from a
transaction. These typically include a strengthened balance
sheet, lower cost of capital, tax advantages and easier
access to capital for the combined company.
Financial Synergy Example
A good example of financial synergies in a deal was the
proposed $160 billion acquisition of Allergan by Pfizer.
Answers not provided in a tabular format will be disregarded.

(10 Marks)
3) There are differences between the IFRS and GAAP (after FASB issued ASU 2020-04 to
simplify the accounting for goodwill impairment) regarding the following:
A. Assignment/allocation of goodwill. (i.e., The levels at which goodwill is assigned
/allocated)
B. Impairment of goodwill and test(s) applied and its steps (i.e., Methods of determining
impairment of goodwill)
C. How impairment loss is recognized and allocated. (i.e., impairment loss[charge] calculation
and allocation)
D. Amortization and impairment of intangible assets other than goodwill
Discuss the accounting treatment of the preceding points under IFRS only. (Comparison
is not required)
  Write your answer in the space provided in the following table:
A- Assignment/allocation of goodwill Goodwill is allocated to the reporting units
B- Impairment of goodwill
C- How impairment loss is
recognized and allocated
D- Amortization and impairment of
intangible assets other than goodwill
(You must support your answer in this question with quality and up to date references.)
IFRS
that are expected to benefit from the
business combination, regardless of
whether other assets or liabilities of the
acquired company are also allocated to
these reporting units.
An impairment loss is measured as the
difference between the carrying amount of
the CGU, including goodwill, and its
recoverable amount. The recoverable
amount is the higher of: fair value less costs
to sell (FVLCD); And. Value in use (VIU)
If the book value of the asset group exceeds
its recoverable amount, an impairment loss
is recognized. The impairment loss is
initially allocated to reduce the carrying
amount of the goodwill allocated to the
asset group and then to the other assets
included in that asset group.
An intangible asset with a finite useful life
is amortized and subjected to an
impairment test. An intangible asset with an
indefinite useful life is not amortized but is
tested annually for impairment. When an
intangible asset is sold, the gain or loss
from the sale is recognized in profit or loss.
(10 Marks)

PART C
Pat Corporation acquired an 80 percent interest in Sci Corporation for $480,000 on January 1,
2021, when Sci’s stockholders’ equity consisted of $400,000 capital stock and $50,000 retained
earnings. The excess fair value over book value acquired was assigned to goodwill. Plant assets
that were undervalued by$100,000 and to goodwill. The undervalued plant assets had a four-year
useful life.
Additional Information
1. Pat’s account receivable includes $10,000 owed by Sci.
2. Sci mailed its check for $40,000 to Pat on December 30, 2022, in settlement of the advance.
3. A $20,000 dividend was declared by Sci on December 30, 2022, but was not recorded by
Pat.
4. Financial statements for Pat and Sci Corporations for 2022 follow (in thousands):
 Statements of Income and Retained Earnings Pal Sci
for the Year Ended December 31
Sales $1,800 $600
Income from Sci 76 -
Cost of sales (1.200) (300)
Operating expenses (380) (180)
Net Income 296 120
Add: Retained earnings January 1 244 100
Less: Dividends (200)
100 (40)
Retained earnings $ 340 $180
Balance Sheet at December 31
Cash $12 $30
Accounts receivable-net 52 40
Inventories 164 120
Advance to Sci 40 -
Other current assets 160 10
Land 320 60
Plant assets—net 680 460
Investment in Sci 560
Total assets $1,988 $720
Accounts payable $48 $30
Dividends payable — 20
Other liabilities 200 90
Capital stock 1,400 400
Retained earnings 340 180
Total liabilities and stockholders' Equity $1,988 $720
Required:
1) Prepare the elimination entries required for consolidation on December 31, 2022. Show
all required computations
2) Prepare the consolidation working papers for Parent and Subsidiary for the year ended
December 31, 2022.
3) State which items have been amortized and which have not, and why?
(30 Marks)

References:

o The 8 Biggest M&A Failures of All Time Kison Patel CEO and Founder of DealRoom
o Henry, E. & Holzmann, O.J. 2012, "Costs of accounting for goodwill: Accounting
standards update 2011-08", The Journal of corporate accounting & finance, vol. 23, no. 2,
pp. 89-93.
o uke, T.W. 2001, "SUVS AND THE GREENING OF FORD: Reimagining Industrial
Ecology as an Environmental Corporate Strategy in Action", Organization &
environment, vol. 14, no. 3, pp. 311-335.
o The 7 Largest Mergers and Acquisitions Written by Global Expansion 07 | 12 | 20
o Du, J. and Chen, L., 2017. INTERCULTURAL CONFLICTS IN TRANSNATIONAL
MERGERS AND ACQUISITIONS. Conflict Management and Intercultural
Communication: The Art of Intercultural Harmony, p.278.

[END OF TMA]