Master in Management of Banking & Finance

IFRS Accounting & Reporting

Case study 2 – Goodwill and impairment test 1

Territory S.A. (“Territory”) acquired 100 % of the ordinary share capital of Yukon S.A.
(“Yukon”) on 31 May 20x6. The balance sheet of Yukon S.A. at 31 May 20x6 was as
follows:

Yukon S.A. – Balance sheet as of 31 May 20x6

EUR’000’ EUR’000’
Non-current assets Shareholders’ equity
Intangible assets 6.020 Share capital (represented by 10.000
10.000.000 shares)
Tangible assets 38.300 Share premium 5.570
Total non-current assets 44.320 Retained earnings 42.664
Current assets Total shareholders’ equity 58.234
Inventory 21.600 Liabilities
Receivables 23.200 Non-current liabilities 15.686
Cash 8.800 Current liabilities 24.000
Total current assets 53.600 Total liabilities 39.686
Total assets 97.920 Total shareholders’ equity 97.920
and liabilities

Additional information relating to the above balance sheet

1. The intangible assets of Yukon were brand names currently utilised by the company.
The directors felt that they were worth EUR 7.000.000 but there was no readily
ascertainable market value at the balance sheet date, nor any information to verify the
directors’ estimated value.
2. The provisional market value of the land and buildings was EUR 20.000.000 at 31
May 20x6. This valuation had again been determined by the directors. A valuer’s
report received on 30 November 20x6 stated the market value of the land and
buildings to be EUR 23.000.000 as at 31 May 2006. The depreciated replacement cost
of the remainder of the tangible fixed assets was EUR 18.000.000 at 31 May 20x6.
3. The replacement cost of inventories was estimated at EUR 25.000.000 and its net
realisable value was deemed to be EUR 20.000.000. Trade receivables and trade
payables due within one year are stated at the amounts expected to be received and
paid.
4. The non-current liabilities include, for EUR 12.100.000, a long-term loan with a bank.
The initial loan on 1 June 20x5 was EUR 11.000.000 at a fixed interest rate of 10%
per annum. The total amount of the interest is to be paid at the end of the loan period
on 31 May 20x9. The current bank lending rate is 7% per annum.

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Adapted from Elliott & Elliott, Financial Accounting, Reporting and Analysis, International edition, 2nd
edition, 2006

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 5. Also included in the non-current liabilities is a provision for charges of
EUR 3.586.000. This provision relates to the costs of Yukon. The provision has been
set up by the directors of Yukon prior to the offer by Territory and the reorganisation
would have taken place even if Territory had not purchased the shares of Yukon.
Additionally, Territory wishes to set up a provision for future losses of
EUR 10.000.000 which it feels will be incurred by rationalising the group.
6. The offer made to all of the shareholders of Yukon was 2,5 ordinary shares of
Territory at a market price of EUR 2,25 per share plus EUR 1 cash per Yukon
ordinary share
7. The directors of Yukon informed Territory that, as at 31 May 20x7, the brand names
were worthless as the products to which they related had recently been withdrawn
from sale because they were deemed to be a health hazard
8. In view of the adverse events since acquisition, the directors of Territory have
impairment-tested the goodwill relating to Yukon and they estimate its current value at
EUR 1.000.000.

Required:

Compute the goodwill at acquisition date (31 May 20x6) and compute the charge for
impairment in the income statement of Territory for the accounting period ending on 31 May
20x7.