Windermere plc’s (Windermere) principal activity is the provision of a range of technology based solutions for customers across the world. Windermere focuses on the following main business areas:

1. The production and supply of electronic mobile devices such as mobile phones, tablets and laptop computers to individual consumers.
2. The provision of fully bespoke technology package for commercial customers. This includes the supply of electronic devices, cloud enabled software and other telecommunications support.

Windermere has grown quickly over the past few years and is keen to access fast growing markets globally.

Windermere has a year end of 30 September.

Exhibit 1: Draft company financial statements for the year ended 30 September 2021 for Windermere plc

Draft company statement of financial position for the period ended 30 September 2021

	£m
ASSETS
Non-current assets
Property, plant and equipment	432
Investment (at cost) (note 1)	84
	516
Current assets
Inventories	102
Trade receivables	83
Bank	35
	220
Total assets	736
EQUITY AND LIABILITIES
Equity
Ordinary share capital (£1 shares)	100
Share premium	120
Retained earnings	159
	379
Non-current liabilities
Loan (note 2)	225
Current liabilities
Trade payables	132
Total equity and liabilities	736

Notes

Note 1 – the Investment (at cost) relates to an investment in shares of Bowness Ltd. See Exhibit 2 for further information.

Note 2 – the directors of Windermere took out an additional loan as part of the acquisition of Bowness Ltd. A requirement of the loan is that gearing, defined as (debt / [debt + equity]), should not exceed 50%.

Exhibit 2:

Investment in shares in Bowness Ltd

On 1 January 2021, Windermere acquired 24m ordinary shares of Bowness Ltd (Bowness), a supplier of microchips used in the production of mobile devices. At this date, Windermere paid £24m in cash. In addition, Windermere used some cash raised by means of a bank loan and an issue of shares to finance this investment.

Future possible investment in Ambleside Ltd

Windermere has been offered 45% of the ordinary share capital of Ambleside Ltd (Ambleside), a provider of telecommunications devices in Mauritania, a new market in which Windermere has very little presence but which shows indications of strong growth.

Question 1

Assume the date is 1 October 2021. On 1 January 2021, Windermere bought 24m ordinary shares of Bowness Ltd (Bowness), a supplier of microchips used in the production of mobile devices. Cash paid At this date, Windermere paid £84m in cash as follows: (i) £24m was paid from cash reserves. In the draft company statement of financial position within Exhibit 1 of the advance information this was correctly accounted for as a debit to Investments and a credit to Bank.

(ii) The directors of Windermere took out a £60m bank loan which was correctly accounted for as a debit to Bank and a credit to Loan. The £60m cash was then used to acquire the shares in Bowness. This transaction was correctly accounted for as a debit to Investment (at cost) and credit to Bank. In the draft company statement of financial position within Exhibit 1 of the advance information this is correctly shown within Investment (at cost) and Loan. The debit to Bank and credit to Bank net each other out. These are the only transactions which have been recorded in the draft company statement of financial position within Exhibit 1 of the advance information. Consideration for the acquisition of 24m shares in Bowness

(i) As part of the consideration for the investment in Bowness, Windermere offered a share exchange of 1 share in Windermere for every 3 shares acquired in Bowness. This transaction took place on the date of acquisition on 1 January 2021. The share price of Windermere has increased throughout the year as follows: £ Share price at 1 October 2020 2.20 Share price at 1 January 2021 2.75 Share price at 30 September 2021 2.85

(ii) Windermere has agreed to pay additional consideration of £4m in cash on 1 January 2025. An appropriate discount rate is 6%.

(iii) Windermere agreed to pay £2m in cash on 1 October 2021, provided Bowness made £5m in profits since the date of acquisition. No discount is required to this payment.

Additional information

(iv) The following information was available in relation to Bowness at 1 October 2020: £m Ordinary share capital (25p shares) 10 Share premium 21 Retained earnings 62

(v) Retained earnings in Bowness at 30 September 2021 were £70m. Profits accrue evenly throughout the year.

(vi) At the date of acquisition, the fair values of assets in Bowness were equal to their carrying amount with one exception, a building, as follows: £m Cost on 1 January 2010 (and at 1 January 2021) 20 Original useful economic life at 1 January 2010 40 Fair value at 1 January 2021 18 Remaining useful economic life 1 January 2021 25

(vii) Windermere has elected to use the fair value method for determining the noncontrolling interest for the acquisition of Bowness. On 1 January 2021, the value of each share in Bowness was £1.25, which included a 25% control premium.

(viii)Goodwill is impaired by 10% at 30 September 2021.

Required:

a) Calculate the value of goodwill to be recognized in Windermere’s consolidated financial statements for the year ended 30 September 2021. You should show your workings. (25 marks)

b) Explain and justify the accounting treatment and classification of: (i) the non-controlling interest arising on acquisition (ii) goodwill. You should aim to write no more than 200 words for this requirement. (10 marks)

c) IFRS 3: Business Combinations states “The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition date fair values”. Explain and evaluate the use of fair values for consolidated financial statements. Use the characteristics of financial information in the conceptual framework to explain your points. You should use the information within items (vi) and (vii) in the Additional Information above to illustrate your answer. You should aim to write no more than 400 words for this requirement.