Business Combination Cases

Facts 1.
Entity X is preparing its group accounts for the year ended December 31, 20X4, and has acquired investments in three
companies. The details are set out next.
(a) Entity Y
The whole of the share capital of Y was acquired on July 1, 20X4, with a view to selling the subsidiary within a year. At
the date of acquisition, the estimated fair value less cost to sell of Y is $27 million. (The fair value of the liabilities is $8
million.) At year-end, (December 31, 20X4), the estimated fair value less costs to sell is $26 million. (The fair value of
the liabilities is $7 million.)
(b) Entity Z
X has acquired, on August 1, 20X4, 48% of Z, which is a major supplier of X. X has a written agreement with another
major shareholder, which owns 30% of the share capital of Z, whereby X can receive as much of Z’s production as it
wishes. X has also made a substantial loan to Z, which is repayable on demand. If repaid currently, Z would be
insolvent.
(c) Entity W
X has acquired 45% of the voting shares of W on September 1, 20X4. The other shares are owned by V (25%) and T
(30%). V and T are both institutional investors and have representation on the board of directors. X can appoint four
members of the board; V and T appoint three each. The effective power to set W’s operating policies lies with the four
directors appointed by X. However, if there is to be any change in the capital structure of the company, then the full
board (10 directors) must vote in favor of the proposal.

Required
Discuss how these three investments should be treated in the consolidated financial statements of X group for year
ended December 31, 20X4. Give your arguments.

Facts 2
There are currently severe restrictions on the repatriation of dividends from a subsidiary located in Country A. As a
result, the directors of the parent entity wish to deconsolidate the subsidiary as they feel that this restriction may be in
place for several years. Two subsidiaries located in the country are individually immaterial but collectively material.
The directors also wish to deconsolidate these entities.
Required
Can the results of these subsidiaries be deconsolidated? Why?

Facts 3.
A French parent entity uses a revaluation method to value its property, but an American subsidiary uses the cost basis
for valuation. The directors feel that it is not practical to keep revaluing the property of the American subsidiary and
wish to discontinue revaluing the property on consolidation.
Required
Must uniform accounting policies be used under IAS 27? Why?