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  1. Dear sir

    The previous replies really helped!

    For the calculation of N.C.I in example 2, why was the method of calculation different from example 1? (20%x10000 + 20%x8000) compare to using the fairvalue + retained earnings.

    Was the $34000 N.C.I in example 2 inclusive of goodwill in it? or was it because it was acquire halfway through the operations and the value of the shares have change?
    Following example 1, shouldnt example 2 N.C.I be calculated as 40%x20,000 + 4000?

    If so, which methods of calculation is correct?

    Thanks!!!

    • In example 1, P acquired their holding on the date of incorporation.
      Therefore the fair value of the NCI on that date was equal to their share 10,000.

      In example 2, the date of acquisition was later than the date of incorporation and therefore the value at the date of acquisition would be expected to be higher. For this reason we have to be told the fair value of the NCI at the date of acquisition. The value at the date of the consolidated statements will be higher still by the NCI’s share of post-acquisition earnings.

      The calculations in both examples are correct – if acquisition is at the date of incorporation then the fair value is simply the share capital; if (more likely in the exam) acquisition is at a later date then the fair value needs to be given in the question.

      (In later exams, you could be expected to estimate a fair value, but not in Paper F3 – it will be given if acquisition is at a later date than incorporation.)

      • Sorry one last question

        The value at the date of the consolidated statements will be higher still by the NCI鈥檚 share of post-acquisition earnings.

        What does this sentence means?

      • The value of the NCI will have increased since the date of acquisition by their share of the earnings of the subsidiary that have occurred since that date (the post-acquisition earnings).

  2. If a question appears where there is no indication of fair value of non controlling interest how would goodwill be calculated? Also my tutor has suggested for us to simply deduct the figures of share capital and retained earnings (pre acquisition or current) from the consideration investment rather than having to add value of non controlling interest. Would appreciate your help

    • You will be given the fair value of the non-controlling interest in the exam.

      (In practice there are several things you might do – the most obvious will be to take a proportion. So the controlling interest is 80% for which they paid 80,000, then to value the reminaining 20% at 20/80 x 80,000.)

      • Great!
        If there is a scenario where there is a reduction in value of goodwill, where should this be adjusted ? If there is no pre acquisition retained earnings from the subsidiary company how would consolidated retained earnings be calculated?

      • If goodwill is impaired, the impairment is subtracted from the consolidated retained earnings.

        If there are no pre-acquisition retained earnings, there is no difference in the way that consolidated retained earnings are calculated. As always, it is the parent companies share of post-acquisition – in this case it is all post-acquisition.

    • Example 1 was just a ‘baby’ example to show the idea regarding retained earnings and NCI. Goodwill was not relevant because we bought the shares on the date that the company was formed, and we paid for the share capital that we bought.

      Example 2 is a ‘proper’ example where we bought the shares when there was already retained earnings and the company was effectively being valued at more than the book value (because of goodwill).

      To calculate the goodwill, we always compare the ‘true’ value at the date of acquisition (the amount we pay for our shares, plus the fair value of the NCI) and the ‘book value’ of the net current assets (which is always equal to the total share capital plus the total retained earnings at the date of acquisition) – the difference between the two is the goodwill arising on consolidation.

      • Thank you for your reply,im sorry i still have doubt on example 2, when you calculate goodwill the consideration,NCI ok,but comes to share capital P acquired 60% so the share capital amount should be 60%*20000=12000 isn’t it? at the same time in retained earning P’s portion is 60%*6000=3600 is’t it? because P only acquired 60% of shares so the share capital and retained earning P should have 60% when calculating the fairvalue of the business the rest 40% is for NCI.

      • No – example 2 is correct.

        We compare the total of what we paid PLUS the fair value of the NCI ( i.e. the total value of the subsidiary) with the total sh cap and reserves of the subsid. We have to calculate the total goodwill of the subsid (not just our share).

  4. In Example 2, the bit that i dont understand if why you add share capital of $20,000 (S) under calculation of the Goodwill arising on consideration? P acquire 60% of S, meaning P is holding more than 50%. Why share capital is not $50,000 instead?

    Thanks 馃檪

    • I do not know what you mean by ‘consideration calculating’. I think you mean the calculation of the goodwill arising on consolidation.

      The goodwill is the difference between the actual value of the subsidiary at the date of acquisition, and fair value of the net assets at the date of acquisition. The actual value of the subsidiary, is the total of what the parent paid for their shares, plus the fair value of the non-controlling interest (40,000 + 30,000).
      The fair value of the net assets of the subsidiary is equal to the share capital plus reserves at the date of acquisition, which is 20,000 + 6,000.

      The goodwill therefore is 70,000 – 26,000 = 44,000

      (If you have ever seen consolidations before – at university or somewhere – then you may well have seen a different calculation. However, rules changed some time ago and we are not interested in old rules 馃檪 )

  6. hello in example one in chapter 24. Seems odd to me that p owns only 80% of company S yet we use all the 100% of assets from company S and 100% of liabilities and get 58,000 for both, I understand how we get 58,000 for both just need explained why this is correct method. If we just use 80 20 throughout makes more sense to me and balances spot on aswell as both answers below come to 拢53,800. So would be very grateful if you can find the time to explain why we keep all assets and liabilities but only fiddle with the S share capital and retained earnings.

    non current assets 30 + 0.8*15 = 42
    current assets 7 + 0.8* 6 = 11.8

    Total 53.8

    share capital 25
    retained earnings 15 + 0.8*8 = 21.4
    current liabilities 5 + 0.8* 3 = 5.4

    Total 53.8

    • The consolidated accounts are produced as though it is one big company, and the assets and liabilities of the ‘big’ company are the totals of the assets and liabilities of the individual company.

      The fact that not all of the ‘big’ company is owned by the shareholders of P is reflected in the reserves – 80% of them are owned by the shareholders of P, and 20% are owned by non-controlling shareholders.

    • The goodwill is the difference between the total worth of the subsidiary (I.e. What the parent paid for their share plus what the non-controlling interest was worth) and the total asset value of the subsidiary (I.e. It’s share capital plus it’s reserves plus, if relevant, the adjustment for the fair value of the assets).

      If you watch the lecture again you will see the workings.

      • It is because the fair value of the NCI was 30,000 at the date of acquisition. This means that the 40% shareholding was worth 30,000 (it effectively includes the share capital).
        The only reason that the NCI is worth more at the date of the consolidation is because of their share of profits that have been made since the date of acquisition.

        (We used to do things differently – not bother about fair value and use the share capital instead. However the ‘rules’ changed and now we do it as in this example.)

      • Ok. However, it seems confusing to me that we didnt use 60% of S/Cap while working out the Goodwill but instead took the whole of the 20k this time whereas in the previous question we took 80% odf the S/Cap both while valuing G/will and while NCI (I understand why we didnt take 40% of S/Cap for NCI calculation as you mentioned now but why not during the time of valuation of G/will?)
        And if the rules have changed, How would we know how to distinguish between which questions require to be solved in the old fashion as in Ques 1 (from the course notes) and Ques. 2 where we took the entire S/cap of 20k instead of taking 60% of it in G/will valuation?

      • Old rules are completely irrelevant for Paper F3 – only the current rules as explained in these notes/lectures.

        The reason we took 20% of the share capital in calculating the NCI in question 1 is that the date of acquisition was also the date of incorporation (i.e. the date that the company was formed). Because of this the fair value of the NCI at the date of acquisition can only be the value of the NCI’s share capital. It is when the acquisition is at a later date that the NCI’s shares will be worth more and in that case you will be given the fair value of them.

        With regard to the goodwill, what the goodwill is is the difference between the total ‘true’ value of the subsidiary at the date of acquisition and the total balance sheet value at the date of acquisition (the total values – not just the parent company or the NCI’s share).

        In example 2, the total value at the date of acquisition is whatever the parent company paid for their share (40,000) and the fair value of the NCI’s share (30,000). So the total ‘true’ value was 70,000.
        However the total balance sheet value would have been simply the total share capital (20,000) plus the reserves at the date of acquisition (6,000), so the total balance sheet value at the date of acquisition was 26,000.

        Why was the subsidiary actually worth 70,000 when the balance sheet showed it was being worth only 26,000? The difference must be the goodwill.

        (And, of course, goodwill only occurs when the date of acquisition is later than the date the company is formed. In example 1 (which is a baby introductory example) the shares were acquired on the date of incorporation and so the ‘true’ value at the date is the same as the total share capital – it cannot suddenly have been worth more for no reason 馃檪 )

  12. it is likely just me but, why at minute 20 share capital of S is 20000,while in previous example we’ve checked our % (it was 80% of 10000), looks like when we have non-controlling interest given, we ignore our % calculation for goodwill?

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