1. avatar says

    hello in example one in chapter 24. Seems odd to me that p owns only 80% of company S yet we use all the 100% of assets from company S and 100% of liabilities and get 58,000 for both, I understand how we get 58,000 for both just need explained why this is correct method. If we just use 80 20 throughout makes more sense to me and balances spot on aswell as both answers below come to £53,800. So would be very grateful if you can find the time to explain why we keep all assets and liabilities but only fiddle with the S share capital and retained earnings.

    non current assets 30 + 0.8*15 = 42
    current assets 7 + 0.8* 6 = 11.8

    Total 53.8

    share capital 25
    retained earnings 15 + 0.8*8 = 21.4
    current liabilities 5 + 0.8* 3 = 5.4

    Total 53.8

    • Avatar of johnmoffat says

      The consolidated accounts are produced as though it is one big company, and the assets and liabilities of the ‘big’ company are the totals of the assets and liabilities of the individual company.

      The fact that not all of the ‘big’ company is owned by the shareholders of P is reflected in the reserves – 80% of them are owned by the shareholders of P, and 20% are owned by non-controlling shareholders.

    • Avatar of johnmoffat says

      The goodwill is the difference between the total worth of the subsidiary (I.e. What the parent paid for their share plus what the non-controlling interest was worth) and the total asset value of the subsidiary (I.e. It’s share capital plus it’s reserves plus, if relevant, the adjustment for the fair value of the assets).

      If you watch the lecture again you will see the workings.

      • Avatar of johnmoffat says

        It is because the fair value of the NCI was 30,000 at the date of acquisition. This means that the 40% shareholding was worth 30,000 (it effectively includes the share capital).
        The only reason that the NCI is worth more at the date of the consolidation is because of their share of profits that have been made since the date of acquisition.

        (We used to do things differently – not bother about fair value and use the share capital instead. However the ‘rules’ changed and now we do it as in this example.)

      • avatar says

        Ok. However, it seems confusing to me that we didnt use 60% of S/Cap while working out the Goodwill but instead took the whole of the 20k this time whereas in the previous question we took 80% odf the S/Cap both while valuing G/will and while NCI (I understand why we didnt take 40% of S/Cap for NCI calculation as you mentioned now but why not during the time of valuation of G/will?)
        And if the rules have changed, How would we know how to distinguish between which questions require to be solved in the old fashion as in Ques 1 (from the course notes) and Ques. 2 where we took the entire S/cap of 20k instead of taking 60% of it in G/will valuation?

      • Avatar of johnmoffat says

        Old rules are completely irrelevant for Paper F3 – only the current rules as explained in these notes/lectures.

        The reason we took 20% of the share capital in calculating the NCI in question 1 is that the date of acquisition was also the date of incorporation (i.e. the date that the company was formed). Because of this the fair value of the NCI at the date of acquisition can only be the value of the NCI’s share capital. It is when the acquisition is at a later date that the NCI’s shares will be worth more and in that case you will be given the fair value of them.

        With regard to the goodwill, what the goodwill is is the difference between the total ‘true’ value of the subsidiary at the date of acquisition and the total balance sheet value at the date of acquisition (the total values – not just the parent company or the NCI’s share).

        In example 2, the total value at the date of acquisition is whatever the parent company paid for their share (40,000) and the fair value of the NCI’s share (30,000). So the total ‘true’ value was 70,000.
        However the total balance sheet value would have been simply the total share capital (20,000) plus the reserves at the date of acquisition (6,000), so the total balance sheet value at the date of acquisition was 26,000.

        Why was the subsidiary actually worth 70,000 when the balance sheet showed it was being worth only 26,000? The difference must be the goodwill.

        (And, of course, goodwill only occurs when the date of acquisition is later than the date the company is formed. In example 1 (which is a baby introductory example) the shares were acquired on the date of incorporation and so the ‘true’ value at the date is the same as the total share capital – it cannot suddenly have been worth more for no reason :-) )

  2. avatar says

    it is likely just me but, why at minute 20 share capital of S is 20000,while in previous example we’ve checked our % (it was 80% of 10000), looks like when we have non-controlling interest given, we ignore our % calculation for goodwill?

  3. Avatar of MikeLittle says

    @souganthika, I’m not sure I understand the question. Whether it’s a proportional issue or a full fair value issue, we still need to iclude the nci’s investment in the calculation of goodwill

    By the way, instead of saying “Please respond”, why not post your question on “Ask the tutor”? It’s only by chance that I happen to log on and see “recent posts”

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