Under the terms of a contract between Topaz Ltd and Diamond Pte Ltd, Topaz will issue 5,000,000 shares to the existing shareholders of Diamond in exchange for the entire 2,000,000 shares of Diamond.

Additional information:

(a) Topaz has 2,000,000 outstanding shares before the share issue.

(b) Fair value of Topaz shares is $2 per share and fair value of Diamond’s shares is $6 per share.

(c) Assume that the fair value of shares has incorporated the effects of the acquisition.

(d) Assume that the share issue is accepted in full by existing shareholders of Diamond.
Financial statement information as at date of exchange is as follows:

Required:
1. Assuming that it is a “normal” acquisition,

(a) What is the fair value of consideration transferred if:
(i) Fair value of Topaz’s share is reliably determined (and Diamond’s share is not)?
(ii) Fair value of Diamond’s share is reliably determined (and Topaz’s share is not)?

(b) Assuming (a)(i) above, what is the goodwill on consolidation?

(c) What is the amount of net assets of the combined entity as at the date of acquisition assuming (a)(i) above?
2. Assuming that it is a “reverse” acquisition,

(a) What is the fair value of consideration transferred if:
(i) Fair value of Diamond’s share is reliably determined (and Topaz’s share is not)?
(ii) Fair value of Topaz’s share is reliably determined (and Diamond’s share is not)?

(b) What is the goodwill on consolidation under the scenario in (a)(i) above?

(c) What is the amount of net assets of the combined entity as at the date of acquisition assuming (a)(i)?
3. Based on the information above, how would you assess whether the above arrangement is a “normal” or “reverse” acquisition? What other information would you require?

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Projected annual revenue. Net fair value of identifiable net assets. Book value of net assets.. .... Topaz $20,000,000 2,000,000 1,800,000 Diamond $50,000,000 9,000,000 $8,000,000