Evaluate the fair value of the net assets, Financial Management

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IFRS 3 Business combinations necessitate goodwill on gaining to be calculated at the date control is gained. The second gaining gives ROB a 75% holding and consequently control over PER. The simple asset of 15% will be derecognised and the 75% holding will be fully consolidated as a supplementary in the group financial statements. The goodwill will be evaluated as the cost of the 60% acquired in the year plus the fair value of the previously held interest of 15%, evaluate with the fair value of the net assets at the date of acquisition, 1 April 2010.

(b)

Consolidated statement of financial position for the ROB Group as at 31 September 2010. All workings in $000

         ROB

 

 

ASSETS

 

$000

 

 

Non-current assets

 

Property, plant and equipment (22,000+5,000)

27,000

 

Goodwill (Working 1)

405

 

27,405

 

Current assets

 

Inventories (6,200+800- 40 (Working 2))

6,960

 

Receivables (6,600+1,900)

8,500

 

Cash and cash equivalents (1,200+300)

1,500

 

16,960

 

Total assets

44,365

 

EQUITY AND LIABILITIES

 

Equity

 

Share capital ($1 equity shares)

20,000

 

Retained earnings (Working 3)

8,629

 

Other components of equity (Working 6)

-

 

28,629

 

Non-controlling interest (Working 4)

1,604

 

Total equity

30,233

 

Non-current liabilities

 

5% Bonds 2013 (Working 5)

4,032

 

Current liabilities (8,100+2,000)

10,100

 

Total liabilities

14,132

 

Total equity and liabilities

44,365

 

Working 1 Goodwill

$000

$000

Consideration transferred for the 60%

2,900

Fair value of 15% holding at 1 April 2010

800

Fair value of non-controlling interest

1,250

4,950

Net assets acquired:

Share capital

1,000

Retained earnings (5,000- 1,500)

                                      3,500

                           (4,500)

450

Impaired by 10%

(45)

Net value of goodwill

405








 

Working 4 Non-controlling interest

               $000

Fair value at 1 April 2010

1,250

Plus 25% adjusted post-acquisition reserves 1,460 (working 3)

365

Less NCI share of goodwill impairment (25% x 45)

(11)

NCI at 30 September 2010

1,604

 

Working 5 Bonds - amortised cost

           $000

               $000

         $000

           $000

 

                              Opening value

Effective rate 8.5%

Interest paid 5% x $4m

Value at 30 September

To 30 September 2010

3,900

          332

(200)

               4,032

 










 

Working 6 Other reserves and AFS investment

 

IFRS 3 necessitate that the 15% simple investment be derecognised and on un-acknowledgment any gain/loss would be considered realised. The gain of $200,000 (FV of $800,000 at date of un-acknowledgment less the investment cost of $600,000) represents the group gain and will be incorporated in the consolidated reserves.

 

The balance on other reserves once more relates to the treatment of the investment in the parent's own accounts and the gains on the AFS investment (PER) and not applicable for the group accounts - as the PER has been fully consolidated.

 

Financial position

 

The gearing has fallen from 50% to 18% in the year due to the repayment of the loan. The repayment amounted to a significant cash outflow in the year; however the lender must have been assured that GD could afford to service and repay the loan. The interest cover is more than enough; however the issue will be whether or not GD will have enough cash to actually pay the interest. In addition, the enduring loan is to be repaid by 2011 and the entity emerges to be short of liquid funds.

The current and rapid ratios have fallen mainly due to the improved payables and the introduction of the overdraft. The quick ratio has dropped from 0.74 to 0.52 and indicates cash crisis and the fall in current ratio is to 1.03 and so GD is hazardously close to bankruptcy.

Resources are still being accumulated within 35 days which shows good credit control, or loyal customers. This however is not enough to generate sufficient liquid funds and payables are being stretched as a result, from 63 days to 80 days. This is not a good strategy at a time when there is a new market associate as suppliers may choose to switch provisions to them. In addition, GD needs to negotiate with its suppliers to reduce costs in order to recover the limits and therefore a good relationship is vital.

The increase in inventories days is consistent with the falling revenue, but GD should test for obsolescence on account from the packaging business.

Conclusion and recommendation

GD has liquidity problem, however the management organization appears to be well prearranged. Credit control appears to be a main concern and the management have made some good investments, with upward assessment in both non-current assets and held for do business investments.

The minutes of the Board meetings designate that management are receptive to change and have reacted completely by applying for long term investment prior to the existing loan being repaid and organising a meeting with suppliers to bargained better terms. GD is likely to fare enhanced in these meetings if payables have been established and to this end the funding would supported. The proposal is to put the application forward for further deliberation.


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