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Hi Mike, I want to know that, what is the Basis for Calculate Subsidiary Net Assets at Acquisition which will be used to calculate goodwill?
As I have gone through your lecture (video) and both BPP and Kaplan text, the Net Assets at acq. will be:
Share Capital + Share Premium + Retained Earning + Revaluation Surplus.There is no liabilities included at all (even if the question provide the loan figures (both current and non-current) at acq. date), and why is that?
Further more, when I did the BPP Kit, question number 121, P acquired S’s share capital of 90% (Total share 10M) at 1 Jan 20X2. (I will skip unnecessary information) in the note they provided:
S had a contingent liability which P estimated to have a fair value of $0.45M. This had not changed as at 30 Sep 20X2. S has not incorporated these fair value changes into its financial statements.
With BPP answer, the contingent liability has been subtracted from the net assets calculation, I have wonder about that, can you please clarify this for me?
First of all, look at the title “the Net Assets at acquisition”:
With a HEAVY EMPHASIS on the word NET ie assets less liabilities
“Share Capital + Share Premium + Retained Earning + Revaluation Surplus”
This aggregation is alternatively known by the title “Shareholders’ Funds” and, as you may remember from your F3 studies Shareholders’ Funds = Net Assets
This is THE fundamental equation that holds good whether the entity is Joe Soap Market Trader or some multi-continental super conglomerate
In both those situations and every other situation between those two extremes, Shareholders’ Funds ALWAYS equals net assets.
Always
With reference to the contingent liability, IAS 37 explains what we should do with these possible liabilities. We make a disclosure note for the benefit of the readers of the financial statements and other stakeholders
However, when it comes to the situation of one entity acquiring another, IFRS 3 Revised steps in and says “Where there is a contingent liability in the soon-to-be-acquired subsidiary, that liability shall be measure at fair value and included within the calculation of net assets at date of acquisition”
OK?
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