Problem 2: Goodwill Calculation HB paid $2.50 per share to acquire 100% of PN’s equity shares...

Problem 2: Goodwill Calculation HB paid $2.50 per share to acquire 100% of PN’s equity shares on 1 September 2009. At that date PN’s statement of financial position showed the following balances with equity: $000 Equity shares of $1 each 180 Share premium 60 Retained earnings 40 PN’s net asset values were the same as their book values, except for land which was valued at $70,000 more than its book value. HB directors estimate that any goodwill arising on the acquisition will have a useful life of 10 years. Required: (i) Calculate goodwill arising on the acquisition of PN. (ii) Explain how HB should record the goodwill in its group financial statements for the year ended 31 August 2010, in accordance with IFRS 3 Business Combinations. .

Solutions

Expert Solution

1) GOODWILL CALCULATION

180000 EQUITY SHARES OF $ 1 EACH - $ 180000 ( 180000*1 )

SHARE PREMIUM - $ 60000 ( 60000*1 )

RETAINED EARNINGS - $ 40000 ( 40000*1 )

TOTAL - $ 280000

VALUE OF LAND - $ 70000 NET ASSETS RECOGNIZED - $ 350000

AMOUNT PAID FOR ACQUISITION - $ 450000 ( 18000*2.5 )

THEREFORE GOODWILL - $ 100000

USEFUL LIFE OF GOODWILL ARISING ON ACQUISITION- 10 YEARS

NOTES: AS PER IFRS 3 BUSINESS COMBINATIONS, GOODWILL IS RECOGNIZED AS AN INTANGIBLE ASSET AND IT IS NOT AMORTIZED BUT TESTED FOR IMPAIRMENT ANNUALLY. IF NEGATIVE GOODWILL ARISES, IT IS RECOGNIZED IN PROFIT AND LOSS ACCOUNT IMMEDIATELY. ASSETS AND LIABILITIES ARE ACQUIRED BU RECOGNITION OF MORE INTANGIBLE ASSETS AND CONTINGENT LIABILITIES AT FAIR VALUE AT ACQUISITION DATE.

FOR CALCULATING GOODWILL, FOLLOWING EQUATION IN SIMPLE TERMS CAN BE USED

GOODWILL = CONSIDERATION AMOUNT OF TRANSFER + AMOUNT OF NON CONTROLLING INTEREST + FAIR VALUE OF PREVIOUS EQUITY INTEREST - NET ASSETS RECOGNIZED

DISCLOSURE

AFTER A BUSINESS COMBINATION, THE ACQUIRER MUST DISCLOSE ANY ADJUSTMENTS RECOGNIZED IN THE CURRENT REPORTING PERIOD THAT RELATES TO THE BUSINESS COMBINATION THAT HAPPENED IN THE CURRENT OR PREVIOUS REPORTING PERIODS.

* NAME AND A DESCRIPTION OF ACQUIREE ( HERE "PN")

* ACQUISITION DATE ( 1 SEPTEMBER 2009 )

* PERCENTAGE OF VOTING EQUITY INTEREST ACQUIRED ( 100% )

* PRIMARY REASON FOR BUSINESS COMBINATION AND A DESCRIPTION OF HOW THE ACQUIRER OBTAINED THE CONTROL OF ACQUIREE.

* DESCRIPTION OF FACTORS AND HOW GOODWILL RECOGNIZED.

NOTE- IN THIS QUESTION THERE IS NO NON- CONTROLLING INTEREST AS HB ACQUIRED 100% EQUITY OF PN )

ekkarill92 answered 1 year ago

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