Q1 Kutchen (Specimen Exam 1) (Sep 2018)

Hi,

My question relates to the acquisition and disposal of Niche in the question.

The question is as follows:

Kutchen had purchased an 80% interest in Niche for $40 million on 1 January 20X6 when the fair value of the identifiable net assets was $44 million. The partial goodwill method had been used to calculate goodwill and an impairment of $2 million had arisen in the year ended 31 December 20X6. The holding in Niche was sold for $50 million on 31 December 20X6. The carrying value of Niche’s identifiable net assets other than goodwill was $60 million at the date of sale. Kutchen had carried the investment in Niche at cost. The finance director calculated that a gain arose of $2 million on the sale of Niche in the group financial statements being the sale proceeds of $50 million less $48 million being their share of the identifiable net assets at the date of sale (80% of $60 million). This was credited to retained earnings.

The answer given is as follows:

The finance director had calculated that a gain arose of $2 million on the sale of Niche in the group financial statements being the sale proceeds of $50 million less $48 million which is their share of the identifiable net assets at the date of sale (80% of $60 million). However, the calculation of the gain or loss on sale should have been the difference between the carrying amount of the net assets (including any unimpaired goodwill) disposed of and any proceeds received. The calculation of net assets will include the appropriate portion of cumulative exchange differences and any other amounts recognised in other comprehensive income and accumulated in equity. Additionally, the loss on sale should have been reported as a loss in profit or loss attributable to the parent.

The gain on the sale of Niche should have been recorded as follows:

Sale proceeds $50m
Less Share of identifiable net assets at date of disposal (80% x $60 million) = (48)
Less Goodwill ($40m – (80% of $44m) – impairment $2m) (2·8)
–––––
Loss on sale of Niche recognised in group profit or loss (0·8)
–––––

I would kindly like to ask you the following:

(1) Why have they deducted the “share of identifiable net assets”? Because when a subsidiary is disposed, we deconsolidate the goodwill, NCI and 100% of the net assets of the subsidiary.

(2) In the question, it is said that the partial goodwill method was used. I calculated an NCI of $8.8m ($44m × 20%) during the goodwill calculation. However, no NCI is included in the above answer. Could you please explain why?

In contrast, here is my calculation which I did following BPP’s method:

Sales Proceeds $50m
(Less) Share of Consolidated Carrying Amount @ Date Control Lost:
Net Assets @ Date control lost $60m
Goodwill @ Date control lost $2.8m
NCI @ Date control lost ($8.8m)
–––––
Loss on disposal $4m
–––––

Thanks