Name of Student
Topic: Expander PLC
Date of Submission
Table of Contents
The acquisition deal was analyzed to look at the goodwill or consideration provided by the acquirer to the Target in the form of either cash or in consideration by providing shares or options to cash in a future date.
Effect of nature of consideration on the calculation of goodwill:
The nature of consideration affects the calculation of goodwill in such a way that when the company tries to evaluate the assets and liabilities acquired at the fair values as at the acquisition date. This makes it easier for the company to measure the non-controlling interest such as in the case of Expander PLC it is 30%, which is not owned by the company. This makes it difficult for the company to identify the most appropriate option for calculating the consideration value either under the fair value method or under identifiable net assets value method.
The nature of consideration also affects the decisions of shareholders when the acquirer company acquires the Target Company. The shareholders or Stakeholders are affected by this decision. The other stakeholders, which are affected by the decision, include Lenders or creditors, customers, auditors, suppliers, target shareholders and the competitors as well, if the companies are involved in the acquisition process.
Moreover, the parent company may provide different stock options to the existing shareholders of the subsidiary company to attract their investments and secure their interests in the company and generate more equity funding. This will lead to the better value creation in the form of higher interest and support from the shareholders.
The company cannot recognize those assets and liabilities, which are not falling under the definition of IFRS, as assets or liabilities, and they should meet the certain requirements as mentioned in the standards to qualify for recognition such as the non-recognition of intangibles by Target Company cannot be recognized (IFRS 3, 2017).
The company has an opportunity to provide the consideration in different forms, which are allowed by IFRS. The consideration given by the Acquirer may be in the form of cash or money, share options, shares, now or future contracts, contingent assets based on the conditions, which may be beneficial for both the companies. Moreover, it may also include the physical assets such as land, building and inventory, which may be considered as consideration. Moreover, the acquirer may provide consideration in the form of Employee Share options of the target company at discounted prices or may offer more shares to attract them. This may also include the assumption of the liabilities of Target Company at the fair value and the same will be considered while calculating the goodwill at the time of acquisition.
Furthermore, company may face the problem at the time of recognition of assets and liabilities because there is an exception in the rule that company cannot recognize contingent liabilities as assumed liability, income taxes, indemnification assets, employee benefits, share-based payment awards, reacquired rights and assets held for sale while calculating the fair value of the Target Company.
Moreover, IFRS has provided two methods, which have been mentioned above. The fair value method can be used when consideration is transferred and net assets method can be used when the company has different non-controlling interests in the company, which would be calculated by measuring the net assets of the company after realizing all stock options given to the existing shareholders (IFRS 3, 2017).
Requirements of IFRS 3:
The recognition of full goodwill is evaluated by the different methods, which include that the identifiable assets should be disclosed and meet the requirements mentioned in IFRS. It is the duty of the acquirer to make sure that all the classifications and contractual based designations are properly maintained and other factors needed to be fulfilled consist of operating and accounting policy requirements, economic conditions and other necessary or pertinent conditions, which exists at the date of acquisition.
The effective way of approaching the decision of adopting an accounting policy is to communicate the intent through disclosure in financial statement’s notes. This should also be communicated to the internal shareholders such as Board of directors and accounts department. Moreover, the other shareholders might be the major external shareholders such as standard setters (IASB), regulatory bodies and government bodies such as tax collection authority etc. so that it meets the requirements of taxation purpose as well because the tax liability is calculated according to the leverage provided by the tax authorities.
Moreover, the different methods used by the IFRS 3 consists of the major methods for calculation of goodwill through the Fair Value or Net Assets valuation methods. Under these methods, it is required to successfully implement the recognition and measurement principle whereas, there are few restrictions to consider these as liabilities or assets for the calculation of goodwill such as contingent liabilities, employee benefits, indemnification assets, share-based payment transactions, reacquired rights and assets held for sale along with the income taxes. (IFRS 3, 2017)
IFRS 13 describes the measurement method of fair value in more detail for the calculation of goodwill. It determines that the shareholders would like to know the exact value of goodwill through the measurement of the real assets valuation and liabilities to be assumed before the acquisition takes place because their interests will be on stake once the acquirer gets enough control over the management of the Target Company. The fair value provides an estimate for the recognition of all the assets and liabilities at the current date i.e. acquisition date. Moreover, the full goodwill method is also known as fair Value method, which takes into account the best use and higher measurement of the non-financial assets through fair value method (IFRS 3, 2017).
Moreover, the communication would be done through the effective medium of the notice provided before the Annual general meetings or it would be decided in the annual general meetings and later it would be circulated to the concerned parties, who are directly and indirectly affected by the decisions of change in accounting policies.
The shareholders may exercise power by opposing or giving their votes by showing poll or vote by hand in the general meeting where this decision is being discussed before implementation because it would provide a better option to the shareholders and company to resolve the issue of acquisition with the consent of its shareholders to secure its liquidity position. Top management through present value of deferred payment and realizable value of assets will take the major decision.
Calculation of goodwill:
The acquisition deal was calculated by using both the recommended methods such as fair value or proportion of net assets method. The goodwill at the acquisition date was calculated by using both the methods separately (Acca Global, 2016).
|Acquisition of shares of target Plc||280||400|
|Amounts in Millions|
|Non-Controlling Interest at Net Assets||Non-Controlling Interest at Fair Value||Discount Rate||Cash after 2 years||In next two years|
|Deferred Consideration||998||998||35||Share price||4,000|
|Probability of issuance of shares||4,000||960||0.30||0.40||0.30|
|Less: FV of Net assets acquired|
|Ordinary Share capital||400||400|
|Fair Value Adjustments||656||420|
|Goodwill at Acquisition||7,481||4,678|
The above table shows that the acquired company has secured the control of Target Company by acquiring around 70% holding in it. This means that the company has received around 280 million shares out of 400 million shares. The available data were analyzed through the net assets proportion, which shows that the values were calculated by first taking in to account the consideration given in cash. The amount of consideration given in cash is amounting to around 5000 million pounds. This amount is also taking into consideration an amount of deferred consideration, which is calculated by discounting the amount of 1100 pounds for the 2 years at the rate of 5%, which results in the deferred consideration of 998million Pounds.
Moreover, the data was further processed and the calculation of the probability of issuance of shares was calculated, which forms an amount of 4000 million Pounds after taking in to account 30%, 40% and 30% probability chances for no share, 1 share and maximum 2 shares respectively. This shows that non-controlling interest would be around 9,998 million pounds after adding consideration in cash, deferred consideration and in the form of stock option to existing shareholders. The analysis was further performed by deducting ordinary share capital of 400 million pounds, retained earnings of around 1460 million pounds and value added adjustments of around 656.25 million pounds, which makes a total of around 2516.25 million pounds. Moreover, the amount of 656.25 was calculated by discounting the fair value of the assets over the life of assets and it was discounted at a rate of 5% as well. This makes the total goodwill at acquisition date amounting to 7,481 million pounds (Kumar, 2015).
The available data were analyzed through the fair value method, which shows that the values were calculated by first taking in to account the consideration given in cash. The amount of consideration given in cash is amounting to around 5000 million pounds. This amount is also taking into consideration an amount of deferred consideration, which is calculated by discounting the amount of 1100 pounds for the 2 years at the rate of 5%, which results in the deferred consideration of 998 million Pounds.
Moreover, the data was further processed and the calculation of the probability of issuance of shares was calculated, which forms an amount of 960 million pounds after taking in to account 30% probability of the fair value. This shows that non-controlling interest would be around 6,958 million pounds after adding consideration in cash, deferred consideration and in the form of stock option to existing shareholders. The analysis was further performed by deducting ordinary share capital of 400 million pounds, retained earnings of around 1460 million pounds and value added adjustments of around 420 million pounds, which makes a total of around 2280 million pounds. Moreover, the amount of 420 was calculated by discounting the fair value of the assets over the life of assets and it was discounted at a rate of 5% as well. This makes the total goodwill at acquisition date amounting to 4,678 million pounds (Acca Global, 2016).
Conclusion and Recommendations:
The acquisition deal was analyzed through the requirements of IFRS and the Target Company was receiving its consideration in cash and stock options along with the deferred payment after two years, which have been evaluated through the two methods suggested by IFRS for the calculation of goodwill at the time of acquisition. The two methods consist of calculating by the proportion of net assets and another method is to calculate goodwill through the fair value of its liabilities and assets for getting values that are more comprehensive for the value generation for Target Company and the Acquirer Company.
Expander Plc did the acquisition deal at the payment of around 5000 million pounds at the time of acquisition, which was backed by another payment of around 1100 million pounds in the time of next two years, which was discounted for the two years at the rate of 5%. Moreover, the terms were decided such that the company will provide an option of splitting the current shares from one to two per share. It also showed the probability of 30% for not providing any share, 40% probability that company would only provide one common share to the convertible share and 30% chances that it will provide the maximum two shares. The fair value of the investment in contingent shares is offered at 4000 million pounds.
Target Company has not recognized its intangible assets in its books of accounts such as trade names, valuable brands and internet domain names. These assets are valued at the fair value of around 5000 million pounds and these would be amortized for a useful life of around 8 years. The acquirer is unable to evaluate the non-controlling interest in Target and other subsidiaries too based on full goodwill method or identifiable net asset’s proportionate interest. Target’s holding is around 30%, which is valued at a fair value of around 3200 million pounds.
The above table shows the results of the calculation based on the available data and assumptions and the results can be concluded as the comparative figures. It means that the company will have to pay the goodwill at acquisition to the Target Company in case of Proportion of net assets an amount of 7044 million pounds, which is greater than the amount of goodwill at the acquisition of around 4240 million pounds based on fair value method.
It can be recommended to the board of Expander to calculate the value of goodwill at acquisition by using the Fair Value method because it will be showing relatively lower payment of amount to Target Company in terms of goodwill and it will be showing a relatively better valuation method for the company as per IFRS (IFRS 3, 2017).
Acca Global, 2016. Acca Global Exams. [Online]
Available at: http://www.accaglobal.com/pk/en/student/exam-support-resources/professional-exams-study-resources/p2/technical-articles/business-combinations-ifrs3-revised.html
[Accessed 8 July 2016].
IFRS 13, 2017. IFRS 13. [Online]
Available at: https://www.iasplus.com/en/standards/ifrs/ifrs13
[Accessed 27 November 2017].
IFRS 3, 2017. IFRS 3. [Online]
Available at: http://www.ifrs.org/issued-standards/list-of-standards/ifrs-3-business-combinations/
[Accessed 25 11 2017].
Kumar, S., 2015. Valuation of Goodwill: Need, Factors and Methods | Enterprises. Article Library Journal, 2(125).