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(A) Calculation of Non-Controlling Interests (NCI) : Determine The Fair Value of Melt Co at Acquisition

The document outlines the calculation of Non-Controlling Interests (NCI) for Melt Co, detailing the fair value at acquisition, NCI share of post-acquisition profits, and adjustments for goodwill impairment, resulting in a carrying amount of $410,000. It also presents financial ratios for Vaughan Group, indicating improvements in gross profit margin but declines in operating margin and interest cover, suggesting increased operating expenses and financial risk post-acquisition. The overall impact of the acquisition is mixed, with challenges in realizing expected benefits due to integration costs and goodwill impairment.

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Abdul Rehman
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24 views4 pages

(A) Calculation of Non-Controlling Interests (NCI) : Determine The Fair Value of Melt Co at Acquisition

The document outlines the calculation of Non-Controlling Interests (NCI) for Melt Co, detailing the fair value at acquisition, NCI share of post-acquisition profits, and adjustments for goodwill impairment, resulting in a carrying amount of $410,000. It also presents financial ratios for Vaughan Group, indicating improvements in gross profit margin but declines in operating margin and interest cover, suggesting increased operating expenses and financial risk post-acquisition. The overall impact of the acquisition is mixed, with challenges in realizing expected benefits due to integration costs and goodwill impairment.

Uploaded by

Abdul Rehman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd

(a) Calculation of Non-Controlling Interests (NCI)

1. Determine the Fair Value of Melt Co at Acquisition:


o Share price at acquisition: $1.75
o Number of shares: 1,000,000
o Total fair value: $1.75 * 1,000,000 = $1,750,000
2. Determine the NCI Percentage and Fair Value:
o NCI percentage: 20%
o NCI fair value at acquisition: $1,750,000 * 20% = $350,000
3. Calculate NCI Share of Post-Acquisition Profits:
o Melt Co profit from 1 July 20X4 to 31 December 20X4 (6 months): $1,600,000 /
2 = $800,000
o NCI share of profits: $800,000 * 20% = $160,000
4. Adjust for Goodwill Impairment:
o Goodwill impairment allocated to NCI: $500,000 * 20% = $100,000
5. Calculate Carrying Amount of NCI:
o NCI at acquisition: $350,000
o NCI share of post-acquisition profits: $160,000
o Less: Goodwill impairment: ($100,000)

Carrying amount of NCI=$350,000+$160,000−$100,000=$410,000

(b) Calculation of Ratios


Summary of Ratios

Vaughan Co
Ratios Vaughan Group (20X4)
(20X3)
Gross Profit Margin 42.67% 40.91%
Operating Margin 5.33% 9.09%
Interest Cover 1.74 times 3.33 times

(c) Comparison of Performance

Gross Profit Margin

 Vaughan Group (20X4): 42.67%


 Vaughan Co (20X3): 40.91%

Analysis: The gross profit margin has improved slightly post-acquisition, which indicates that
the group is managing its cost of sales effectively despite increased competition and integration
challenges.

Operating Margin

 Vaughan Group (20X4): 5.33%


 Vaughan Co (20X3): 9.09%

Analysis: The operating margin has decreased significantly. This decline is likely due to
increased operating expenses post-acquisition, including the costs related to the integration of
Melt Co, such as closing redundant outlets and transferring administrative functions.

Interest Cover

 Vaughan Group (20X4): 1.74 times


 Vaughan Co (20X3): 3.33 times

Analysis: The interest cover ratio has declined considerably. This is mainly because Vaughan Co
used debt financing to acquire Melt Co, leading to higher finance costs. The reduced interest
cover indicates a higher risk of financial distress due to the increased debt burden.

Impact of the Acquisition

 Cost Savings and Increased Profits: The acquisition aimed at cost savings and
increased profits by eliminating a competitor. While gross profit margin shows slight
improvement, the overall impact on profitability is mixed due to high operating expenses
and finance costs.
 Marketing Campaign: The significant marketing campaign to attract and retain
customers post-acquisition might have contributed to increased operating expenses.
 Goodwill Impairment: The impairment of goodwill ($500,000) indicates that the
expected benefits from the acquisition might not fully materialize, affecting overall
profitability.
 Internal Sales: The intra-group sales ($2m) with a mark-up of 25% and the associated
inventory adjustments might have also impacted the consolidated profit margins.

Conclusion

The Vaughan Group's performance post-acquisition shows a nuanced picture. While gross profit
margin has improved slightly, operating margin and interest cover ratios have deteriorated. The
acquisition's intended benefits of cost savings and increased profits have not yet fully
materialized, possibly due to integration challenges and higher operating and finance costs. The
long-term success of this acquisition will depend on how effectively Vaughan Group can manage
these costs and realize synergies from the integration of Melt Co.

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