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I am not following the credit of the remeasured amount to group retained earnings and the NCI.
I understand that this amount at acquisition date was unrecognized and was included in net asset at that date. And would be included in the financial statement in the post acquisition period since the recognition criteria was met.
I am however lost as where the corresponding debit would be.
Please assist as i am not able to figure this one.
Thanks.
Hi, yes, this is a tricky one!
On acquisition the contingent liability has been taken into account (and then adjusted by 1m) the entry in the workings was Dr Goodwill account / calculation and credit a contingent liability account
Then it later satisfies the requirements of a provision and an entry has specifically gone through Marge’s figures of debit profit or loss and credit current liabilities
But this is a pre-acquisition matter and should not have an affect on this year’s profit or loss, some need to add it back
The double entry is therefore debit the contingent liability account and credit this year’s profit or loss.The effect of increasing the profit or loss is that nci will get their share of this additional 5m and the other 3.5m will go into consolidated retained earnings
The problem is that we never actually see this contingent liability account but it was there! It was created when we adjusted the working to find goodwill in the acquisition
Is that ok?
Thank you.
This is my understanding.
Since the contingent liability was unrecognized at acquisition and would have been included in the goodwill calculation at acquisition. It was effectively duplicated in current year financials. Then the current year entry needs to be reversed.
For unrecognized amounts at the date of acquisition, is it safe to always treat as being recognized at that date given that goodwill would have included the unrecognized amount?.
Hi Mike,
Would you please advise about the adjustment of the decrease of 1m in the goodwill? I thought that the liability has reduced from 6 to 5 will result in an increase in goodwill instead of decrease?
Many thanks
Hi,
The reduction in a liability reduces the net assets at acquisition. If the net assets are reduced then the goodwill will increase as we are acquiring a subsidiary with a smaller value of identifiable net assets.
If you want to think about it with double entries then essentially we are DR N.A @ acquisition and so the other side of the entry will be to CR goodwill.
Hope this helps.
Thanks
Hello. Please could you explain how reduction in liability results in reduction in net assets? I see it as fall in liability leads to increase in Net current assets hence increase in net assets. Thank you !!
Looking around in the internet and this is the best,clear explanation that satisfies my question. To sum up,the final result will be:
P&L in the current year(should not be affected by pre-acq matter):Nill(thanks to yhe reverse entry)
SoFP:Debit GW/Credit ProvisionHi,
Glad you have found the explanation useful, thanks!
Yes, the entry on the SFP that you mention is correct. Any future movement in the liability will then go through retained earnings.
Thanks
MikeLittle wrote:Hi, yes, this is a tricky one!
Hi,
I still blur with the pre-acquisition matter, can you clarify it further??Please help cause I am not sure why it is a pre-acq matter??
Thanks in advance.
Assume that S does something wrong and gets sued BEFORE P buys S.
As part of the goodwill calculation the contingent liability must be at measured at FV – it makes no difference whether it is possible or probable. If probable the FV will be big and if possible the FV will be small.
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