Question

Assume that Company A acquires 70% of Company for a cash price of $10 million when the share capital and reserves of Company B are:

Share capital $8 million

Retained earnings $2 million

$10 million

(a) What amount will be shown in the consolidated statement of financial position for goodwill pursuant to AASB 3 assuming that any non-controlling interest in the acquired is measured at fair value?

(b) What amount will be shown in the consolidated statement of financial position or goodwill pursuant to AASB 3 assuming that any non-controlling interest in the acquiree is measured at the non-controlling interest’s proportionate share of the acquiree’s identifiable new assets?

(c) What are some of the implications of allowing the group to have two options in accounting for goodwill on consolidation?

Answer 1

Solutions:

A.:

Share capital and retained earns (total purchase consideration is transferred to both companies A and B only

Goodwill = (non-controlling interest) /(interest of the parent) x purchase consideration

= 30/70 x 10,000,000 = 4,285,714

For share capital:

8,000,000 in full goes to company B while.

company A

8,000,000 x 70% = 5,600,000

Non-controlling interest

8,000,000 x 30% = 2,400,000

For retained earnings:

Company B get $2,000,000 in full

Company A get 2,000,000 x 70% = 1,400,000

The non-controlling interest: 2,000,000 x 30% = 600,000

Goodwill:

Company B get 4,285,714

Company A get 4,285,714 x 70 =3,000,000 (rounded up )

While the non-controlling interest 30% , which is 4,285,715 x 30% = 1285714

.

B.

Share capital:

Company A

8,000,000 x 100% = 8,000,000

Company B

8,000,000 x70% = 5,600,000

Non-controlling interest:

8,000,000 x 30% = $2,400,000

Retained earnings:

Company A

2,000,000 x 100% = 2,000,000

Company B:

2,000,000 × 70% = 1,400,000

Non-controlling interest:

2,000,000 × 30% = 600,000

Goodwill goes to Company A who BUYING company B

Goodwill is now measured by (10,000,000 -5,600,000 – 1,400,000 = 3,000,000)

The difference between the purchase consideration (fair value) – shares and retained earnings = goodwill

Non-controlling interest gets a total of 2,400,000 + 600,000 = 3,000,000

.

C.

Preparers of financial statements have the choice of which measure to use in each business combination. For example, reporting entities can use fair value for one business combination and the proportionate share of the acquirer's identifiable net assets for another business combination. This provides reporting entities with significant flexibility when accounting for business combinations, particularly where further acquisitions of ownership interests are expected to be acquired. The availability of this accounting option will have implications for comparing the financial statements of different economic entities. Also, if the non-controlling interest in a subsidiary is measured at the non-controlling interest’s proportionate share of the subsidiary’s identifiable net assets then only a fraction (this being the parent entity’s interest) of goodwill will be shown in the consolidated statement of financial position. Strictly speaking, this is not consistent with the ‘entity concept’ of consolidation and does act to understate the total assets of the economic entity.