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Hi,
I have been looking at question 35 “Prodigal” in the BPP “Practice & Revision Kit” book. I have only 1 doubt in relation to the calculation of the goodwill of the subsidiary. Parent purchased 75% Subsidiary on the 1st of October 20×0. At the 31st of March subsidiary has, among Total comprehensive income for the year, $ 66’000’000 Profit for the year, Gain on revaluation for $ 1’000’000 (obtained after acquisition, Loss on fair value of equity financial asset inv. $ -400’000.
Equity of the subsidiary at 1st of April 20×0:
Equity Shares $ 160’000’000
Other reserves $ 2’200’000
Retained Earnings $ 90’000’000To calculate the Net assets of the subsidiary I would have added together:
160’000’000+2’200’000+90’000’000+(66’000’000-400’000)/12*6=285’000’000
The suggested solution in the book however does not include the -400’000 in the calculation of the goodwill, but then calculate the total comprehensive income attributable to the NCI deducting it from the 66’000’000 and re-apportioning based on time (6/12).
Please help 🙂Thank you
S.Your question is fine and clear ….. except where you get to (obtained after acquisition, Loss on fair value ….”
Should there be a closed bracket after “…..acquisition” or is the “Loss on fair value …..” also a post-acquisition matter
IF the loss o fair value is post acquisition then, yes, net assets at date of acquisition should include 6/12 x 66,000,000 without any adjustment for the loss on fair value
That loss on fair value is a strange animal! It’s not likely to have accrued evenly through the year – rather it would be a one-off exercise at a point in time “Oh look, our financial asset has lost some fair value!” and so the answer really depends upon the precise date when that loss was identified and, from your post, it appears to be subsequent to acquisition
Finally, what I can’t understand is your last comment and particularly “….and re-apportioning it based on time (6/12)”
That doesn’t make sense to me!
I seem to remember me recording an answer to Prodigal for this site – have you checked out my answer to this question (I don’t have any BPP material to hand)
Hi Mike,
thanks for your asnwer and I would like to make myself clearer in relation to that 400’000 loss. When calculating the Total comprehensive income attributable to the NCI, the book suggests :
Other comprehensive income (1,000,000 – (400,000 x 6/12) x 25%)) … to me it looks that the 400’000 are evenly spread throughout the year in this case. What I am trying to say is that in case of goodwill calculation the 400’000 are considered post acquisition, while in case of other/total comprehensive income calculation the 400’000 are considered to be evenly accrued through the year (400’000×6/12)… am I correct or am I missing something?
thank you
S.
That’s what it looks like to me too from the detail given in this recent post.
Did you check out my recorded answer to Prodigal?
I found this link below in relation to Prodigal with several comments from you and your first answer confirms more and more my theory based on which the goodwill calculation suggested into BPP revision kit might be wrong
https://opentuition.com/acca/f7/acca-f7-june-2011-question-1-prodigal/
anyway in June 2011 session, there was no request in relation to goodwill calculation, and other comprehensive income calculation considered the 400’000 split based on time
6/12…therefore I would have expected the same time apportionment to calculate the net assets at acquisition, but the 400’000 loss was not considered for 6/12 pre-acquisition for the goodwill calculation…OK I have been watching your lecture under that link and you do not include that 400’000 into the goodwill calculation but you do consider it accrued evenly over time for the calculation of other comprehensive income therefore time apportioned for 6/12. Any reason for that?
thanks
S.
I’ve been checking through the rest of my comments about Prodigal! I say in the lecture that I’m calculating goodwill for “your benefit” and that we are told specifically not to calculate goodwill.
We are told that the (400,000) DOES accrue evenly through the year and that the 1,000,000 occurred at the year end.
The profit split should therefore have been 6/12 x 65,600,000
BPP appears to have adapted the question for the purposes of their publication and I’m not going to be held responsible for any errors or inconsistencies that they may be guilty of!
OK?
Hi,
I am not trying to blame anyone here, just trying to test my understanding.
Thank you for your help
S.
I know that you’re not blaming anyone! I was merely pointing out that it appears that BPP has made a mistake and that that has caused confusion in your mind (rightly so) and that as a direct result it has involved me in trying to sort out their errors.
I’m not in any way accusing you of laying blame on anyone
But it’s a lesson learned ….. even the mighty BPP may occasionally slip up so that should keep you on your toes for your future studies
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