1. avatar says

    Dear sir,

    When you calculate goodwill, why is the share capital of S, retained earnings and extra fair value on NCA the net assets of S? Why is the NCA, CA and CL not considered?

    Really confused about this, hope you will enlighten me!

    Lastly, the calculation of retained earnings, why is the company P not entitled to the retained profits of $6000 (pre-acquisition profits) when they acquired company S? \

    Many thanks!

    • Profile photo of John Moffat says

      The definition of net assets is non-current assets + current assets – current liabilities – non-current liabilities. The net assets are always equal to the total capital i.e. share capital plus reserves (in this case retained earnings).

      Company P is entitled to their share of pre-acquisition profits – that was part of the reason for the amount that they paid for their shares. The net assets at the date of acquisition would be equal to the total capital at the date of acquisition – i.e. share capital plus retained earnings at the date of acquisition.

      • avatar says

        That has happened to me occasionally, although a day or so later they were working fine. Are you sure it is all videos that are not working? I tihnk it may have something to do with high traffic? (although that really is a complete guess)

      • avatar says

        It had never happened to me before, just that day! and yes it was the same with all the videos’ but the next day it was all fine thankfully! PHEWW!

    • Profile photo of John Moffat says

      We are comparing what the parent paid for the shares, with what the subsidiary was ‘worth’ at the time we bought the shares.
      At the date we bought the shares, the subsidiary had not even earned the post-acquisition amount, so it would impossible to include them!!!

    • Profile photo of John Moffat says

      Retained earnings are only those that we earned since the date the parent bought the shares in the subsidiary i.e. the post-acquisition earning.

      The earnings that the subsidiary had made before the date of acquisition (the pre-acquisition earnings) had been paid for – the parent paid for them when they bought the shares in the subsidiary. It was part of the reason that the parent paid as much as they did, and so they are included in the calculation of goodwill.

    • Profile photo of John Moffat says

      @maniali272, Because the consolidated accounts treat it as though it is one big company owned by the shareholders of the holding company.

      The amount of the investment in the subsidiary ‘cancels’ out the share capital and reserves of the subsidiary.

Leave a Reply