When preparing group statements of financial position, the basic rule with the assets and liabilities of the subsidiary is that they will cross cast. In exam questions often the majority of the marks are allocated for the consolidation adjustments around goodwill, NCI, post-acquisition profits and fair value adjustments. Let’s have a look at an exercise where these issues all feature.
Two years ago, Weller paid $90,000 for a controlling interest of 80% in the equity of Foxton when the retained earnings of Foxton were $25,000. An extract of the statement of financial positions at the reporting date shows;
|Ordinary sharews ($1)||25,000||15,000|
- The fair value of the NCI of Foxton at the date of acquisition was $20,000.
- It is group policy to measure the NCI at acquisition at fair value.
- For consolidation purposes an upwards fair value adjustment of $25,000 was made on certain items of Foxton’s property plant and equipment which at the date of acquisition had a remaining life of five years.
- By the reporting date goodwill has been impaired by $1,000.
- a) Calculate the goodwill at the reporting date.
- b) Prepare the equity section of the Weller group statement of financial position.
Now in approaching such a question there are five regular workings that have to be processed. It is first necessary to prepare a group structure to ensure that we have noted the parent’s and the NCI’s interest in the subsidiary’s profits and noted how long the subsidiary has been a member of the group.
W1 Group structure
|Two years ago||80% / 20% NCI|
Our next working is to establish the fair value of the net assets of the subsidiary both at the date of acquisition and at the reporting date. The net assets of the subsidiary are represented by its equity. Note that the subsidiary’s net assets at the date of acquisition need a fair value adjustment on its property plant and equipment. This adjustment is still necessary at the reporting date as the asset is still held, in fact, at the reporting date it also creates the additional adjustment of more depreciation.
W2 Net assets
|At acquisition||At reporting date|
|Fair value adjustments on PPE||25,000||25,000|
|Less depreciation(1/5 x 25,000 X 2 years)||(10,000)|
From the net asset working we can see that the rise in the net assets since the subsidiary was acquired is $5,000. This is known as the post-acquisition profits of the subsidiary and is allocated 80% to the parent w5 and 20% to the NCI w4. Further we can note that the net assets of the subsidiary at acquisition is $65,000, a key figure for the calculation of goodwill which is our next working. The goodwill arising on consolidation is subject to an annual impairment review. Where the NCI at acquisition has been measured at fair value then the goodwill is said to be the full goodwill of the group and as such any impairment loss has be allocated between the parent w5 and the NCI w4 in the normal proportions that they share profits and losses.
|FV of Parent’s investment||90,000|
|FV of NCI||20,000|
|FV of Net assets||(65,000)|
|Goodwill at acquisition – full||45,000|
|Less impairment loss (80% / 20%)||(1,000)|
|Goodwill at the reporting date||44,000|
Next we determine the NCI at the reporting date. NCI is part of equity (the ownership) and so the balance at the date of acquisition will increase with its share of any profits and decrease with any share of losses that we have seen above.
|Plus NCI% of post -acquisition profit||1,000|
|Plus NCI% of post -acquisition profit (20% x 5000)||1,000|
|Less NCI% impairment loss on full goodwill (20% x 1,000)||(200)|
Our final working is the retained earnings of the group.
W5 Retained earnings
|Plus parent’s % of post acquisition profit (80% x 5,000)||4,000|
|Less parent’s % of impairment loss on full goodwill (80% x 1,000)||(800)|
To recap, in answer to the requirements
- a) Goodwill at the reporting date; per w3 above , $44,000
- b) Equity section of the group statement of financial position
|Ordinary shares||(parent only)||25,000|
The second edition of Tom’s book – A Student’s Guide to Group Accounts is now available from Kaplan Publishing. Use the discount code kmb9dv8-s for £5 off and free delivery!
Main image courtesy of Images_of_Money via Flickr.