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LECTURE 6

LECTURE 6. PIECEMEAL ACQUISITION. Piecemeal Acquisition. Entity is acquired in stages over a period of time Step by step purchase lead to acquiring ctrl or gaining sig. influence Part of strategic plan of the acquirer or investor May change the relationship bet investor and investee

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LECTURE 6

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  1. LECTURE 6 PIECEMEAL ACQUISITION

  2. Piecemeal Acquisition Entity is acquired in stages over a period of time Step by step purchase lead to acquiring ctrl or gaining sig. influence Part of strategic plan of the acquirer or investor May change the relationship bet investor and investee E.g. On 1/1/x6 Cergas Bhd bought 40% equity shares in Dinamik Bhd. Two years later, Cergas Berhad acquired another 20% equity interest in Dinamik Berhad. On March 30, 20x9, Cergas acquired a further 15% equity interest in Dinamik. How much is the current equity interest of Cergas in Dinamik Bhd? When Cergas gained control in Dinamik Bhd?

  3. Continuation…Piecemeal situations andAccounting Treatments Initially Investor A held 60% interest in B. Later it acquired another 20% in B. A equity interests increased to 80%, MI or NCI dropped to 20% H held 40% eq. interests in K in 20X6. In 20X9 it acquired additional 30% eq. in K. K was an associates of H in 20X6. In 20X9 H gained ctrl in K with the holding of > 50% eq . and became H’s Sub Z started with 10% equity ownership in Y. Later, it bought 35% additional eq in Y. It wanted to gain control of Y and subsequently acquired a further 30% interest in Y. In the beginning Z has a simple investment in Y. Later it established a sig. influence and Y became its associates. Finally Y becomes Z’s subsidiary with controlling interests of 75%.

  4. Deemed Acquisition When Investee buys back issued shares, its issued capital, investor still maintains same number of issued shares Example: Delima Bhd has issued share capital of RM20 Mil of ordinary shares of RM 1 each. Mutiara Bhd holds 80% of the issued shares. Delima buys back from other than Mutiara and cancels 10% of its issued shares. The buys back issued share capital of Delima to RM 18 Mil. Mutiara still holds 16 Mil shares but it interest has gone to 88.89%.

  5. Implications of Changes of Interests in Investee Effect relationship between investor and investee (i.e. Equity ownership) Effect Preparation and Presentation of Consolidated Finl Stat.

  6. FRS 3: Business Combination Achieved in Stages (Para 58 -60) • Acquirer: • To treat each acq. separately • To identify cost of transaction and FV information at date of each exchange (i.e. acquisition) transaction accordingly • To determine goodwill arises from each exchange transaction Step by step comparison at each exchange transaction of the cost of individual investment with acquirer’s interest in FV of acquiree’s Identifiable Net Assets

  7. Continue….. When there are > than 1 acquisition transaction, FV of Acquiree’s INA changes accordingly, WHY? Acquiree’s INA notionally restated to their FV as at date of respective acq. to determine amount of associated goodwill Hence, Acquirer has to recognise FV of acquiree’s INA as at the date of respective acq.

  8. Continue…How should we value previously held equity? Adjustments to previously held interest is a revaluation? and accounted accordingly x similar to the application of specific accounting policy for revaluing items after initial recognition such as FRS 116: Property Plant and Equipment? WHY? An investment in associates accounted based on equity method in accordance to FRS 128: Investments in Assocites

  9. Accounting treatment:Changes to FV relating to previous acquisition? 1/3/x4 ; 54% Pre= RM3 Mil x 54% 31/12/x8 ; 21% Pre = RM4 Mil x 21% INCREASED BY RM1 MIL To be accounted as post-acquisition reserve Example On 1st March 20X4 Starlight Bhd acquired 54% interest in Diamond Bhd. The carrying value of Diamond’s plant was RM10 million but at the date of acquisition its fair value was RM3 million higher. Later on 31st December 20X8, Starlight bought another 21% equity in Diamond. On the same date, its plant has a fair value of RM 4 million higher than its carrying amount on 1/3/20X4. Interpretation The first RM 3 million revaluation surplus was a pre-acquisition reserve of Strarlight where its portion was (3Mil x 54% = 1.62Mil). For the second stage of acquisition of 21%, the pre-acquisition reserve of Starlight is 4 x 21% = 0.84Mil and post acquisition reserve would be (4-3)Mil x 54% = 0.54

  10. Increase in Controlling Interest (i) Initially Established Control – Parent Subsidiary Subsequently from 51% 65% 80% (> share of eq.) Parent Subsidiary : R/ship stays the same (ii) Goodwill calculation? To account separately for newly acquired equity (iii) Subsidiary will be consolidated and in the CBS MI or NCI interest will be as per the amount at the yr end. If Gamma held 70% eq of Beta on 1/1/X6 and on 1/9/X6 Increased interest to 80%, the MI or NCI disclosed in CBS would be 25% of Net Assets of Beta (iv) CIS, Subsidiary will be consolidated, but MI or NCI share of profits will be time apportioned. If Honey held 65% interest in Jam on 1/1/X7 and on 1/4/X7 increased its interests to 79%, and the PAT of Jam for X7 was RM120,000, the amount of profit for the year attributable to MI or NCI in Jam would be [(35% x 120,000 x 3/12) +(21% x 120,000 x 9/12)]

  11. Continue…Example 1 Liberty Bhd made the following acquisitions of Freedom Bhd; Date No of shares purchased Cost Freedom Bhd’s reserve (RM ‘000) balance (RM’000) 1/06/x4 22,000 80 60 31/12/x5 30,000 110 100 31/12/x7 10,000 70 150 28/2/x8 20,000 120 170 As at 31st December 20x8, the issued share capital of Freedom Bhd was 100,000 ordinary shares and it reserves were RM210,000. As at 31st December20x8, determine the amount of pre-acquisition reserves, post acq reserves and Goodwill Using both the step by step method and More than 50% method

  12. Solutions 1 PRE-ACQUSITION RESERVES : (a)Step by Step Method 22% x 60Mil = 13.2Mil 30% x 100Mil = 30Mil 10% x 150Mil= 15Mil 20% x 170Mil = 34Mil 92.2Mil (b) More than 50% method (based on the date control is acquired) 52% x 100Mil = 52Mil What is your view on the resulting differences?

  13. Continue….Solution 1 Goodwill computation (a) Step by Step Method 22%: Cost – PreAcq INA = 80-[22% x (100+60)] = 44.8Mil 30%: Cost – PreAcq INA = 110–[30% x (100+100)] = 50Mil 10%: Cost – PreAcq INA = 70–[10% x (100 + 150)] = 45Mil 20%: Cost – PreAcq INA = 120–[20% x (100 + 170)] = 66Mil 205.8Mil OR 380 - 82% x [100:OSC] – 92.2 (Accumulated Pre-Acq Res) = 205.8 Mil (b) More than 50% method 190 {Accumulated Cost of Invest} - 52% x (100 + 100) = 86Mil 70 – 10% x (100+150) = 45 Mil 120 – 20% x (100+170) = 66 Mil 197 Mil What is your view on the resulting differences in goodwill figures?

  14. Solution Eg 1 …continue Difference ? (iii) Post Acquisition Reserves: (a) Step by step method 22% x (210-60)Mil = 33Mil 30% x (210 – 100)Mil = 33Mil 10% x (210 -150)Mil = 6Mil 20% x (210 -170)Mil = 8Mil 82%80Mil OR (82% x210) – (Accumulated pre-acq)] = 80Mil (b) More than 50% method 52% x (150-100) = 26 Mil (Date ctrl is acquired) + 52% x (210-150) = 31.2Mil 57.2 Mil or 52% x (210-100) 10% x (210-150) = 6 Mil 20% x (210-170) = 8 Mil Total post acq reserve, 31/12/x8 = 71.2

  15. Continue….. Para 58 of FRS 3 requires business combinations achieved in stages to be accounted using STEP BY STEP METHOD

  16. Exercise 1 and 2… Questions 2Lecture 6 Exercise 1 & 2 4DEC2009 LATEST.doc

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