Goodwill - FV of NA (more detail)

NotesQuiz

Goodwill

So let’s remind ourselves of the goodwill working:

Consideration 800
NCI 330
FV of Net Assets Acquired (1,000)
Goodwill 130

We have just looked in more detail at the sort of surprises the examiner can spring on us in the first line “consideration” - now let´s look at the bottom line in more detail:

Fair values of Net Assets at Acquisition

Operating leases. If terms are favourable to the market - recognise as an asset

Internally generated intangibles would now have a reliable measure and would be brought in the consolidated accounts

Remember both of these items would need to be depreciated in our equity table working

contingent liabilities (see bottom of this page)

Illustration

1/7/x5 H acquired 80% S for 16m, nci measured at share of net assets. FV of NA was 10m.

S had a production backlog with a FV of 2m (uel 2 years) and unrecognised trademarks with a FV of 1m. These are renewable at any time at a negligible cost.

S made a profit of 5m in the year to 31/12/x5.

What would goodwill be in the consolidated SFP?

Consideration 16
NCI 2.6
FV of Net Assets Acquired (13)
Goodwill 5.6

FV of NA working

Per Accounts 10 + FV adj (2+1)  3

Provisional Goodwill

We get “provisional goodwill’ when we cannot say for certain yet what the FV of Net Assets are at the date of acquisition.

This is fine, we just state in the accounts that the goodwill figure is provisional. 

This means we then have 12 months (from the date of acquisition) to change the goodwill figure IF AND ONLY IF the information you find (within those 12 months) gives you more information about the conditions EXISTING at the year-end.

Any information after the 12 month period (even if about conditions at acquisition) does not change goodwill. 

Any differences are simply written off to the income statement.

So, in summary, the FV of NA can be altered retrospectively if within 12 months of acquisition. 

This means goodwill would change. Any alteration after 12 months is through the income statement.

Illustration

A acquired 70% B on 1/7/x7, NCI measured at share of net assets acquired. 

A provisional fair value only was used for plant and machinery of £8m (UEL 10yrs). 

Goodwill was £4m. 

The year-end of 31/12/x7 accounts were then approved on 25/2/x8.

On 1/4/x8 the FV of the plant was finalised at 7.2m.

How would this affect the consolidated accounts?

Provisional goodwill is acceptable if disclosed as such in the accounts.

The parent then has one year after acquisition to finalise the FV and alter goodwill. Should the finalisation occur after one year - no adjustment is required to goodwill.

Provisional Goodwill 4m

Adjusted Goodwill

Original 4m + (0.8 x 70%) = 4.56m

Contingent liabilities

Normally these are just disclosures in the accounts. 

However, remember that when a sub is acquired, it is brought into the accounts at FV. 

A contingent liability does have a fair value. 

Therefore they must be actually recognised in the consolidated accounts until the amount is actually paid.

So the rules are:

  1. Bring in at the FV

  2. Measure afterwards at this amount unless it then becomes probable. As usual, a probable liability is then measured at the full liability

Note. If it remains just possible then keep it at the initial FV until it is either written off or paid

Illustration

1/7/x6 P acquired all of S when it’s NA had a CV of £2m. However, they had disclosed a contingent liability. This has a FV of £150,000.

1/12/x7 this potential liability was paid at an amount of £200,000.

How are the accounts affected?

Well we would bring it into the equity table (at acquisition column) in the workings at its FV of 150. This would affect goodwill working accordingly.

Keep it at this amount until it either becomes probable (show at full amount) or paid

Here it is paid so the year end would show no liability - and the post-acquisition column +150. This would then affect the NCI and reserves working accordingly.

The extra 50 paid will have already been taken into account when the full amount was paid

NotesQuiz