题目内容

Section A – BOTH questions are compulsory and MUST be attempted
Pursuit Co, a listed company which manufactures electronic components, is interested in acquiring Fodder Co, an unlisted company involved in the development of sophisticated but high risk electronic products. The owners of Fodder Co are a consortium of private equity investors who have been looking for a suitable buyer for their company for some time. Pursuit Co estimates that a payment of the equity value plus a 25% premium would be sufficient to secure the purchase of Fodder Co. Pursuit Co would also pay off any outstanding debt that Fodder Co owed. Pursuit Co wishes to acquire Fodder Co using a combination of debt finance and its cash reserves of $20 million, such that the capital structure of the combined company remains at Pursuit Co’s current capital structure level.
Information on Pursuit Co and Fodder Co
Pursuit Co
Pursuit Co has a market debt to equity ratio of 50:50 and an equity beta of 1·18. Currently Pursuit Co has a total firm value (market value of debt and equity combined) of $140 million.
Fodder Co, Income Statement Extracts
Fodder Co has a market debt to equity ratio of 10:90 and an estimated equity beta of 1·53. It can be assumed that its tax allowable depreciation is equivalent to the amount of investment needed to maintain current operational levels. However, Fodder Co will require an additional investment in assets of 22c per $1 increase in sales revenue, for the next four years. It is anticipated that Fodder Co will pay interest at 9% on its future borrowings.
For the next four years, Fodder Co’s sales revenue will grow at the same average rate as the previous years. After the forecasted four-year period, the growth rate of its free cash flows will be half the initial forecast sales revenue growth rate for the foreseeable future.
Information about the combined company
Following the acquisition, it is expected that the combined company’s sales revenue will be $51,952,000 in the first year, and its profit margin on sales will be 30% for the foreseeable futue. After the first year the growth rate in sales revenue will be 5·8% per year for the following three years. Following the acquisition, it is expected that the combined company will pay annual interest at 6·4% on future borrowings.
The combined company will require additional investment in assets of $513,000 in the first year and then 18c per $1 increase in sales revenue for the next three years. It is anticipated that after the forecasted four-year period, its free cash flow growth rate will be half the sales revenue growth rate.
It can be assumed that the asset beta of the combined company is the weighted average of the individual companies’ asset betas, weighted in proportion of the individual companies’ market value.
Other information
The current annual government base rate is 4·5% and the market risk premium is estimated at 6% per year. The relevant annual tax rate applicable to all the companies is 28%.
SGF Co’s interest in Pursuit Co
There have been rumours of a potential bid by SGF Co to acquire Pursuit Co. Some financial press reports have suggested that this is because Pursuit Co’s share price has fallen recently. SGF Co is in a similar line of business as Pursuit Co and until a couple of years ago, SGF Co was the smaller company. However, a successful performance has resulted in its share price rising, and SGF Co is now the larger company.
The rumours of SGF Co’s interest have raised doubts about Pursuit Co’s ability to acquire Fodder Co. Although SGF Co has made no formal bid yet, Pursuit Co’s board is keen to reduce the possibility of such a bid. The Chief Financial Officer has suggested that the most effective way to reduce the possibility of a takeover would be to distribute the $20 million in its cash reserves to its shareholders in the form. of a special dividend. Fodder Co would then be purchased using debt finance. He conceded that this would increase Pursuit Co’s gearing level but suggested it may increase the company’s share price and make Pursuit Co less appealing to SGF Co.
Required:
Prepare a report to the Board of Directors of Pursuit Co that
(i) Evaluates whether the acquisition of Fodder Co would be beneficial to Pursuit Co and its shareholders. The free cash flow to firm method should be used to estimate the values of Fodder Co and the combined company assuming that the combined company’s capital structure stays the same as that of Pursuit Co’s current capital structure. Include all relevant calculations; (16 marks)
(ii) Discusses the limitations of the estimated valuations in part (i) above; (4 marks)
(iii) Estimates the amount of debt finance needed, in addition to the cash reserves, to acquire Fodder Co and concludes whether Pursuit Co’s current capital structure can be maintained; (3 marks)
(iv) Explains the implications of a change in the capital structure of the combined company, to the valuation method used in part (i) and how the issue can be resolved; (4 marks)
(v) Assesses whether the Chief Financial Officer’s recommendation would provide a suitable defence against a bid from SGF Co and would be a viable option for Pursuit Co. (5 marks)
Professional marks will be awarded in question 1 for the format, structure and presentation of the report. (4 marks)

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Section B – TWO questions ONLY to be attempted
Lockfine, a public limited company, operates in the fishing industry and has recently made the transition to International Financial Reporting Standards (IFRS). Lockfine’s reporting date is 30 April 2011.
(a) In the IFRS opening statement of financial position at 1 May 2009, Lockfine elected to measure its fishing fleet at fair value and use that fair value as deemed cost in accordance with IFRS 1 First Time Adoption of International Financial Reporting Standards. The fair value was an estimate based on valuations provided by two independent selling agents, both of whom provided a range of values within which the valuation might be considered acceptable. Lockfine calculated fair value at the average of the highest amounts in the two ranges provided. One of the agents’ valuations was not supported by any description of the method adopted or the assumptions underlying the calculation. Valuations were principally based on discussions with various potential buyers. Lockfine wished to know the principles behind the use of deemed cost and whether agents’ estimates were a reliable form. of evidence on which to base the fair value calculation of tangible assets to be then adopted as deemed cost. (6 marks)
(b) Lockfine was unsure as to whether it could elect to apply IFRS 3 Business Combinations retrospectively to past business combinations on a selective basis, because there was no purchase price allocation available for certain business combinations in its opening IFRS statement of financial position.
As a result of a major business combination, fishing rights of that combination were included as part of goodwill. The rights could not be recognised as a separately identifiable intangible asset at acquisition under the local GAAP because a reliable value was unobtainable for the rights. The fishing rights operated for a specified period of time.
On transition from local GAAP to IFRS, the fishing rights were included in goodwill and not separately identified because they did not meet the qualifying criteria set out in IFRS 1, even though it was known that the fishing rights had a finite life and would be fully impaired or amortised over the period specified by the rights. Lockfine wished to amortise the fishing rights over their useful life and calculate any impairment of goodwill as two separate calculations. (6 marks)
(c) Lockfine has internally developed intangible assets comprising the capitalised expenses of the acquisition and production of electronic map data which indicates the main fishing grounds in the world. The intangible assets generate revenue for the company in their use by the fishing fleet and are a material asset in the statement of financial position. Lockfine had constructed a database of the electronic maps. The costs incurred in bringing the information about a certain region of the world to a higher standard of performance are capitalised. The costs related to maintaining the information about a certain region at that same standard of performance are expensed. Lockfine’s accounting policy states that intangible assets are valued at historical cost. The company considers the database to have an indefinite useful life which is reconsidered annually when it is tested for impairment. The reasons supporting the assessment of an indefinite useful life were not disclosed in the financial statements and neither did the company disclose how it satisfied the criteria for recognising an intangible asset arising from development.
(d) The Lockfine board has agreed two restructuring projects during the year to 30 April 2011:
Plan A involves selling 50% of its off-shore fleet in one year’s time. Additionally, the plan is to make 40% of its seamen redundant. Lockfine will carry out further analysis before deciding which of its fleets and related employees will be affected. In previous announcements to the public, Lockfine has suggested that it may restructure the off-shore fleet in the future.
Plan B involves the reorganisation of the headquarters in 18 months time, and includes the redundancy of 20% of the headquarters’ workforce. The company has made announcements before the year end but there was a three month consultation period which ended just after the year end, whereby Lockfine was negotiating with employee representatives. Thus individual employees had not been notified by the year end. Lockfine proposes recognising a provision in respect of Plan A but not Plan B. (5 marks)
Professional marks will be awarded in question 2 for clarity and quality of discussion. (2 marks)
Required:
Discuss the principles and practices to be used by Lockfine in accounting for the above valuation and recognition issues.

Section A – This ONE question is compulsory and MUST be attempted
Rose, a public limited company, operates in the mining sector. The draft statements of financial position are as follows, at 30 April 2011:
The following information is relevant to the preparation of the group financial statements:
1 On 1 May 2010, Rose acquired 70% of the equity interests of Petal, a public limited company. The purchase consideration comprised cash of $94 million. The fair value of the identifiable net assets recognised by Petal was $120 million excluding the patent below. The identifiable net assets of Petal at 1 May 2010 included a patent which had a fair value of $4 million. This had not been recognised in the financial statements of Petal. The patent had a remaining term of four years to run at that date and is not renewable. The retained earnings of Petal were $49 million and other components of equity were $3 million at the date of acquisition. The remaining excess of the fair value of the net assets is due to an increase in the value of land.
Rose wishes to use the ‘full goodwill’ method. The fair value of the non-controlling interest in Petal was $46 million on 1 May 2010. There have been no issues of ordinary shares since acquisition and goodwill on acquisition is not impaired.
Rose acquired a further 10% interest from the non-controlling interest in Petal on 30 April 2011 for a cash consideration of $19 million.
2 Rose acquired 52% of the ordinary shares of Stem on 1 May 2010 when Stem’s retained earnings were 220 million dinars. The fair value of the identifiable net assets of Stem on 1 May 2010 was 495 million dinars. The excess of the fair value over the net assets of Stem is due to an increase in the value of land. The fair value of the non-controlling interest in Stem at 1 May 2010 was 250 million dinars.
Stem is located in a foreign country and operates a mine. The income of Stem is denominated and settled in dinars. The output of the mine is routinely traded in dinars and its price is determined initially by local supply and demand. Stem pays 40% of its costs and expenses in dollars with the remainder being incurred locally and settled in dinars. Stem’s management has a considerable degree of authority and autonomy in carrying out the operations of Stem and is not dependent upon group companies for finance.
Rose wishes to use the ‘full goodwill’ method to consolidate the financial statements of Stem. There have been no issues of ordinary shares and no impairment of goodwill since acquisition.
The following exchange rates are relevant to the preparation of the group financial statements:
3 Rose has a property located in the same country as Stem. The property was acquired on 1 May 2010 and is carried at a cost of 30 million dinars. The property is depreciated over 20 years on the straight-line method. At 30 April 2011, the property was revalued to 35 million dinars. Depreciation has been charged for the year but the revaluation has not been taken into account in the preparation of the financial statements as at 30 April 2011.
4 Rose commenced a long-term bonus scheme for employees at 1 May 2010. Under the scheme employees receive a cumulative bonus on the completion of five years service. The bonus is 2% of the total of the annual salary of the employees. The total salary of employees for the year to 30 April 2011 was $40 million and a discount rate of 8% is assumed. Additionally at 30 April 2011, it is assumed that all employees will receive the bonus and that salaries will rise by 5% per year.
5 Rose purchased plant for $20 million on 1 May 2007 with an estimated useful life of six years. Its estimated residual value at that date was $1·4 million. At 1 May 2010, the estimated residual value changed to $2·6 million. The change in the residual value has not been taken into account when preparing the financial statements as at 30 April 2011.
Required:
(a) (i) Discuss and apply the principles set out in IAS 21 The Effects of Changes in Foreign Exchange Rates in order to determine the functional currency of Stem. (7 marks)
(ii) Prepare a consolidated statement of financial position of the Rose Group at 30 April 2011, in accordance with International Financial Reporting Standards (IFRS), showing the exchange difference arising on the translation of Stem’s net assets. Ignore deferred taxation. (35 marks)
(b) Rose was considering acquiring a service company. Rose stated that the acquisition may be made because of the value of the human capital and the opportunity for synergies and cross-selling opportunities. Rose estimated the fair value of the assets based on what it was prepared to pay for them. Rose further stated that what it was willing to pay was influenced by its future plans for the business.
The company to be acquired had contract-based customer relationships with well-known domestic and international companies and some mining companies. Rose estimated that the fair value of all of these customer relationships to be zero because Rose already enjoyed relationships with the majority of those customers.
Required:
Discuss the validity of the accounting treatment proposed by Rose and whether such a proposed treatment raises any ethical issues. (6 marks)
Professional marks will be awarded in part (b) for clarity and quality of the presentation and discussion. (2 marks)

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