- Accounting for Business Combinations

Case Assignment - Ghastly Cemeteries Inc.

It is now April 1, 2018. You, CPA, have just been hired as the new controller for Ghastly

Cemeteries Inc. (GCI). GCI is one of the only Canadian publicly traded companies in the funeral

services industry. GCI operates out of Toronto, Ontario. GCI trades on the Toronto Venture

Stock Exchange and reports its financial statements using the IFRS framework.

You work under the CFO, Sabrina. Your first major task is to assist GCI with its December 31,

2017 financial statements.

Sabrina: "We are excited for you to join the Company, CPA! 2017 was a ground-breaking year

for us. We made two major transactions. We purchased Gengar Funeral Homes (GFH) on July 1,

2017. We also purchased 18% of the shares of Dusclop Funeral Homes (DFH)."

The financial statements need to be released to the shareholders on April 30, 2018.

GCI currently operates cemeteries and funeral homes within Ontario. In Canada, memorial,

funeral and crematoriums facilities are largely local family operations or non-profit religious

providers. Like most family run businesses, owners are faced with succession planning

challenges. Nearly 70 percent of the operators in Canada are not owned by a large corporation,

so the potential for new growth and acquisitions for GCI is promising. In the after-life care

industry, succession planning for local operators is made even more difficult because there are

very few new entrants in the market. The business is considered to be relatively low risk, as the

industry is stable. GCI's weighted average cost of capital (WACC) is 8%.

Acquisition of Gengar Funeral Homes (GFH)

On July 1, 2017, GCI purchased 75% of the common shares of GFH for cash of $10,000,000.

GFH is a funeral home located in Markham, Ontario. Mr. Giovanni was the sole owner of GFH

prior to the acquisition, and he retained 25% of the shares. He will continue to operate the

business until the end of 2019, at which time he will be replaced. Mr. Giovanni has extensive

experience in the funeral home industry, and as part of the deal, he also signed a non-compete to

not open another funeral home in the Markham area within the next 5 years. The funeral home

director at GFH (Mr. Abra) plans on continue working at GFH until his retirement in 10 years.

GCI will be making additional cash payments to the former owner of GFH if the revenue during

calendar years 2017 to 2019 equals or exceeds predetermined targets. The annual targets are

listed on the table below. Note, the target and payout for 2017 is half of the amounts on the table

below due to acquisition being made half way through the year. Hence, the maximum payout is

$7,500,000. The payouts are made the June 30 after the target year end.

Revenue Target (For each year) Additional Payment

$4,800,000 - $5,399,999 $1,000,000

$5,400,000 - $6,200,000 $2,000,000

Over $6,200,000 $3,000,000

GFH provided annualized pro forma financial statements for 2017. The pro-forma statements

included a sensitivity analysis, one showing revenue of low, medium and high expectations. The

low expectation was annualized revenue of $5,000,000 in 2017, medium expectation was

annualized revenue of $6,000,000 in 2017 and high expectation was annualized revenue of

$6,900,000. The revenue is expected to grow by 10% in 2018 and 5% in 2019.

GFH's reports its standalone financial statements using ASPE.

The fair value of most of the tangible assets and liabilities are expected to be similar to the book

values. However, the funeral home owns a building. A valuator has yet to be engaged, and it is

not expected a valuation of GFH can be completed until mid May 2018. Sabrina knows that the

net assets need to be recorded at fair value on that date of the acquisition, but she wants to know

what the valuator should be engaged to value. Sabrina believes that Mr. Abra's experience in the

industry is extensive, and therefore, part of the acquisition differential should be allocated to Mr.

Abra's experience.

Acquisition of Dusclop Funeral Homes (DFH)

On September 1, 2017, GCI bought 18% of the shares of Dusclop Funeral Homes (DFH), a

funeral home in Markham, Ontario. GCI paid $2,000,000 for 180,000 DFH shares.

GCI purchased the shares of DFH due to the funeral home's proximity to GFH. DFH has

invested in top of the line cremation equipment. With the investment in DFH, GFH will be able

to conduct the cremations at GFH at a reduced price.

Mr. Abra will assist with operations at DFH and has become the funeral director at DFH until a

replacement is found. Mr. Abra has made suggestions to make changes to DFH's marketing

techniques, which have seen great success, and the Company has seen growth in business in

2018.

As part of the GCI's share purchase, GCI was permitted to select one of the five DFH board

members. GCI has selected Mr. Abra as the board member.

DFH recorded a profit of $1,200,000 from January 1, 2017 to December 31, 2017. DFH's

business is very stable, and the operations have been consistent in every month of 2017. DFH

declared and paid dividends of $0.25 per share in the month of December 2017.

Required:

Please provide all of the relevant accounting treatment for the two transactions above. Your

discussions should use the case facts and the appropriate technical accounting guidance and

should be quantified when possible.

CPA handbook guidance when possible, and responses

should be quantified when possible.