IFRS - Accounting and Finance - Jane Doe Case Study Assessment Answer

Jane Doe Case Study Assessment Answer

Assignment Task: The Acquisitive case study Background Jane Doe is the recently appointed Group Accountant at Acquisitive—a company listed on the Antarctican Stock Exchange. 1 She is preparing to deliver ‘her’ first press release and investor conference call—to announce Acquisitive’s preliminary consolidated results for the year ended 31 December 20x5, and she anticipates receiving a number of questions from existing and potential shareholders and the financial press about some significant issues that are mentioned in the forthcoming release. Jane is aware that Acquisitive has operated successfully in the Antarctican manufacturing sector for more than fifty years and for many years has prepared its financial statements in accordance with International Financial Reporting Standards (IFRS). In accordance with the listing requirements of the Antarctican Stock Exchange, Acquisitive also prepares half-yearly interim financial statements in accordance with IAS 34 Interim Financial Reporting. Issue 1—goodwill On 1 July 20x5 Acquisitive gained control of Introspective when it purchased all of Introspective’s issued equity for CU25 billion cash. Jane observes that the forthcoming release includes a statement that a CU2 billion goodwill an asset is, in accordance with IFRS 3, recognised in Acquisitive’s accounting for the acquisition of Introspective. Her examination of the due diligence reports that informed the acquisition decision identifies, in support of recognising CU2 billion goodwill:

• CU1 billion—significant synergies between Acquisitive’s pre-existing operations and Introspective’s operations;
• CU0.4 billion—synergies between the assembled collection of net assets that make up Introspective’s business; and
• CU0.6 billion—premium paid solely to entice the last remaining pre-existing Introspective shareholders to sell their shares to Acquisitive.

For the six-month period ended 31 December 20x5 Introspective’s operations decreased the Acquisitive group’s profit by CU1 billion. The loss related primarily to the three months’ production lost at its Antarctican ice lolly plant, which was due to sustained industrial action. Introspective’s other businesses all performed in line with, or better than, management’s forecasts made on the basis of the due diligence reports that informed the acquisition decision. Issue 2—controlling shareholder buys out the non-controlling interests On 1 July 20x5 Acquisitive increased its equity interest in its subsidiary Booming from 75 per cent to 100 per cent in exchange for CU10 billion cash. While Jane is aware that this transaction is between equity holders (and consequently, in accordance with IFRS, has no effect on reported earnings) she recalls last night reading a related issue in Warren Buffett’s letter to Berkshire Hathaway Inc. shareholders (see extract reproduced below) and consequently she expects that some might ask her about the effects of Acquisitive’s purchase of Booming’s non-controlling interests on Acquisitive’s soon-to-be-released preliminary consolidated financial information.

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