1. avatar says

    sir , i want ask a question that :
    P Co acquired 80% of the share capital of S Co ( total ordinary share of S Co is 10,000 $1 shares ) at market value of $12 and issues 1 of P Co share for every 4 shares in S co . Calculate the Fair Value of the consideration

  2. avatar says

    Dear sir

    The previous replies really helped!

    For the calculation of N.C.I in example 2, why was the method of calculation different from example 1? (20%x10000 + 20%x8000) compare to using the fairvalue + retained earnings.

    Was the $34000 N.C.I in example 2 inclusive of goodwill in it? or was it because it was acquire halfway through the operations and the value of the shares have change?
    Following example 1, shouldnt example 2 N.C.I be calculated as 40%x20,000 + 4000?

    If so, which methods of calculation is correct?


    • Avatar of johnmoffat says

      In example 1, P acquired their holding on the date of incorporation.
      Therefore the fair value of the NCI on that date was equal to their share 10,000.

      In example 2, the date of acquisition was later than the date of incorporation and therefore the value at the date of acquisition would be expected to be higher. For this reason we have to be told the fair value of the NCI at the date of acquisition. The value at the date of the consolidated statements will be higher still by the NCI’s share of post-acquisition earnings.

      The calculations in both examples are correct – if acquisition is at the date of incorporation then the fair value is simply the share capital; if (more likely in the exam) acquisition is at a later date then the fair value needs to be given in the question.

      (In later exams, you could be expected to estimate a fair value, but not in Paper F3 – it will be given if acquisition is at a later date than incorporation.)

      • avatar says

        Sorry one last question

        The value at the date of the consolidated statements will be higher still by the NCI’s share of post-acquisition earnings.

        What does this sentence means?

      • Avatar of johnmoffat says

        The value of the NCI will have increased since the date of acquisition by their share of the earnings of the subsidiary that have occurred since that date (the post-acquisition earnings).

  3. avatar says

    If a question appears where there is no indication of fair value of non controlling interest how would goodwill be calculated? Also my tutor has suggested for us to simply deduct the figures of share capital and retained earnings (pre acquisition or current) from the consideration investment rather than having to add value of non controlling interest. Would appreciate your help

    • Avatar of johnmoffat says

      You will be given the fair value of the non-controlling interest in the exam.

      (In practice there are several things you might do – the most obvious will be to take a proportion. So the controlling interest is 80% for which they paid 80,000, then to value the reminaining 20% at 20/80 x 80,000.)

      • avatar says

        If there is a scenario where there is a reduction in value of goodwill, where should this be adjusted ? If there is no pre acquisition retained earnings from the subsidiary company how would consolidated retained earnings be calculated?

      • Avatar of johnmoffat says

        If goodwill is impaired, the impairment is subtracted from the consolidated retained earnings.

        If there are no pre-acquisition retained earnings, there is no difference in the way that consolidated retained earnings are calculated. As always, it is the parent companies share of post-acquisition – in this case it is all post-acquisition.

    • Avatar of johnmoffat says

      Example 1 was just a ‘baby’ example to show the idea regarding retained earnings and NCI. Goodwill was not relevant because we bought the shares on the date that the company was formed, and we paid for the share capital that we bought.

      Example 2 is a ‘proper’ example where we bought the shares when there was already retained earnings and the company was effectively being valued at more than the book value (because of goodwill).

      To calculate the goodwill, we always compare the ‘true’ value at the date of acquisition (the amount we pay for our shares, plus the fair value of the NCI) and the ‘book value’ of the net current assets (which is always equal to the total share capital plus the total retained earnings at the date of acquisition) – the difference between the two is the goodwill arising on consolidation.

      • avatar says

        Thank you for your reply,im sorry i still have doubt on example 2, when you calculate goodwill the consideration,NCI ok,but comes to share capital P acquired 60% so the share capital amount should be 60%*20000=12000 isn’t it? at the same time in retained earning P’s portion is 60%*6000=3600 is’t it? because P only acquired 60% of shares so the share capital and retained earning P should have 60% when calculating the fairvalue of the business the rest 40% is for NCI.

      • Avatar of johnmoffat says

        No – example 2 is correct.

        We compare the total of what we paid PLUS the fair value of the NCI ( i.e. the total value of the subsidiary) with the total sh cap and reserves of the subsid. We have to calculate the total goodwill of the subsid (not just our share).

  4. Avatar of Alice says

    In Example 2, the bit that i dont understand if why you add share capital of $20,000 (S) under calculation of the Goodwill arising on consideration? P acquire 60% of S, meaning P is holding more than 50%. Why share capital is not $50,000 instead?

    Thanks :)

    • Avatar of johnmoffat says

      I do not know what you mean by ‘consideration calculating’. I think you mean the calculation of the goodwill arising on consolidation.

      The goodwill is the difference between the actual value of the subsidiary at the date of acquisition, and fair value of the net assets at the date of acquisition. The actual value of the subsidiary, is the total of what the parent paid for their shares, plus the fair value of the non-controlling interest (40,000 + 30,000).
      The fair value of the net assets of the subsidiary is equal to the share capital plus reserves at the date of acquisition, which is 20,000 + 6,000.

      The goodwill therefore is 70,000 – 26,000 = 44,000

      (If you have ever seen consolidations before – at university or somewhere – then you may well have seen a different calculation. However, rules changed some time ago and we are not interested in old rules :-) )

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