CSoFP-Example 10

“Why is negative goodwill being CREDITED to the Statement of Profit or Loss and Other Comprehensive Income?”

Look half way down page 34 in the free course notes on this site

“where does its corresponding DEBIT Entry go?”

Think of the working W2 Goodwill. This is going to be tricky for you (seriously) but imagine working W2 done as a T account called Cost of Control Account with double entry debits and credits

Normally the debits will include things like Cash, Share Capital, Share Premium and so on with the corresponding credit entries in the accounts for Cash, Share Capital and Share Premium

On the credit side of the Cost of Control Account we’re going to find the fair valued net assets with the debits in the respective asset accounts

Normally the debits will exceed the credits and that will leave us with a debit balance to carry down and show as an asset on the SoFP

But, unusually, the credits sometimes exceed the debits and that’s called a bargain purchase and gives rise to negative goodwill

So now we have a credit balance brought down as a result of putting through all the double entry on the acquisition of the subsidiary

What to do with this credit balance? It’s not a liability. So what is it? Well, it’s like a profit made on the acquisition isn’t it (although I must not call it a profit. Between you and me, and you must not repeat it – treat it as our secret – it’s a profit! We’ve paid out, say, 8,000 and we’ve acquired assets with a fair value of, say, 10,000. What’s that if it’s not a profit?)

So there we have a credit balance on the Cost of Control Account representing negative goodwill. IFRS 3 says “Get rid of it! Credit it to Statement of Profit or Loss at the next accounting reference date” and the double entry to do that is ….

Dr Cost of Control Account
Cr Profit or Loss

OK?