Question

On the 23^rd November 2007, Wesfarmers Ltd acquired 89.4% of the shares in Coles group. They had previously held 10.6% which was purchased in April 2007.

Required:

1. How was the initial investment of 10.6% accounted for? Show and discuss the necessary journal entries ($ amounts not required).
2. Show and discuss the necessary journal entries to account for the initial investment following the acquisition of the balance of shares ($ amounts not required).
3. When disclosing this business combination in their 2008 annual report, Wesfarmers notes that provisional fair values were adjusted. What does this mean and what affect does it have on accounting for the business combination?

Answer 1

Suppose Coles group has 100000 shares of $100 each.

Initially, Wesfarmers Ltd. acquired in April 2007 10.6% shares of coles group suppose for $1500000.

(at this point of time it was with the intention of investment, i.e dividend income and capital gain.)

Initial Entry will be as follows:

Shares of Coles Group Dr, $1500000

To, Bank $1500000

(Being 10600 Shares of Coles group with FV of $100/share purchased.)

On Nevermer 23, 2007 Wesfarmers Ltd. acquired balance 89.4% shares of coles group, suppose for $14000000.

Shares of Coles Group Dr, $14000000

To, Bank $14000000

(Being 89400 Shares of Coles group with FV of $100/share purchased.)

As the 100% shares of Coles Group is been acquired by Wesfarmers Ltd. then it will transfer the controlling interest of Coles Group to Wesfarmers Ltd., In this transaction the price paid over net worth (in this case the Paid up Value of shares) of coles group will be treated as goodwill for wesfarmers Ltd. while preparing consolidated statement.

Following Entry will be made for Consolidation of Financial Statement:

Assets of Coles Group Dr.

Goodwill A/c Dr.

To Liabilities of Coles Group

To Shares of Coles Group

So, Initial Transaction done in April 2007, will be reclassified as well as the transaction done on 23rd, November.

Net Asset Dr. $10,000,000

Goodwill Dr. $5,500,000

To, Shares of Coles Group $15,500,000

(Being Assets and Liabilities of Coles Group incorporated.)

When disclosing this business combination in their 2008 annual report, Wesfarmers notes that provisional fair values were adjusted. What does this mean and what affect does it have on accounting for the business combination?

Provisional fair values were adjusted to pay off the shareholders of Coles Group for acquisition of shares on the basis of Value of Assets and obligation on Liabilities. The reduction in the fair value of identifiable assets and liabilities results in a corresponding increase to goodwill recognised on acquisition. As on the reporting date the acquisition accounting balances were provisional due to ongoing work finalising valuations and tax related matters which might impact acquisition accounting entries.