FRF7
Syllabus D. PREPARATION OF FINANCIAL STATEMENTS D2efg. Calculating Goodwill

D2efg. Make sure you use FV of Consideration 2 / 5

Syllabus D2efg)

e) Account for the effects of fair value adjustments (including their effect on consolidated goodwill) to:

i) depreciating and non-depreciating non-current assets
ii) inventory
iii) monetary liabilities
iv) assets and liabilities not included in the subsidiary’s own statement of financial position, including contingent assets and liabilities

f) Account for goodwill impairment.

g) Describe and apply the required accounting treatment of consolidated goodwill.

Consideration is simply what the Parent pays for the sub.

It is the first line in the goodwill working as follows:

FV of Consideration X
NCI X
FV of Net Assets Acquired (X)
Goodwill X

Normal Consideration


This is straightforward. It is simply:

Dr Investment in S
Cr Cash

Future Consideration


This is a little more tricky but not much. Here, the payment is not made immediately but in the future. So the credit is not to cash but is a liability.

Dr Investment in S
Cr Liability

The only difficulty is with the amount.

As the payment is in the future we need to discount it down to the present value at the date of acquisition.

Illustration

P agrees to pay S 1,000 in 3 years time (discount rate 10%).

Dr Investment in S 751
Cr Liability 751 (1,000 / 1.10^3)

As this is a discounted liability, we must unwind this discount over the 3 years to get it back to 1,000. We do this as follows:

Year 1 2 3
Dr Interest Cr Liability 75 84 91

Contingent Consideration


This is when P MAY OR MAY NOT have to pay an amount in the future (depending on, say, S’s subsequent profits etc.). We deal with this as follows:

Dr Investment in S
Cr Liability

All at fair value

You will notice that this is exactly the same double entry as the future consideration (not surprising as this is a possible future payment!).

The only difference is with the amount.

Instead of only discounting, we also take into account the probability of the payment actually being made.

Doing this is easy in the exam - all you do is value it at the FV

(this will be given in the exam you’ll be pleased to know).

Illustration

1/1/x7 H acquired 100% S when it’s NA had a FV of £25m. H paid 4m of its own shares (mv at acquisition £6) and cash of £6m on 1/1/x9 if profits hit a certain target.

At 1/1/x7 the probability of the target being hit was such that the FV of the consideration was now only £2m. Discount rate of 8% was used.

At 31/12/x7 the probability was the same as at acquisition.

At 31/12/x8 it was clear that S would beat the target.

Show the double entry

Contingent consideration should always be brought in at FV. Any subsequent changes to this FV post acquisition should go through the income statement.

Any discounting should always require an winding of the discount through interest on the income statement

Double entry - Parent Company

1/1/x7
Dr Investment in S (4m x £6) + £2 = 26
Cr Share Capital 4
Cr Share premium 20
Cr Liability 2

31/12/x7

Dr interest 0.16
Cr Liability 0.16

31/12/x8

Dr Income statement 4 (6-2)
Dr Liability 2
Cr Cash 6