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  1. If an associate makes say 17000 profit for the year ending 31st Dec 2013. And X acquired 22% of the share capital at a cost of $26,000 on 30th June 2013.
    Also the $26000 given represents the value of the share of the net assets.
    Therefore I’m assuming there is no goodwill.
    However I’m confused as to how the Share of X’s retained earnings in the associate will be calculate

    • Dear Kiara,

      If it is an associate the calculations would be done using equity accounting and not consolidation for goodwill as the company has only “significant influence” in policy decisions and does not “control” to make it a subsuduary

  2. 1. If NCI was not valued on proportional basis will they get a portion of the negative goodwill?

    2. If negative goodwill is impaired will NCI get a portion of the impairment if it is not valued on
    proportional basis?

  3. Thank you very very much Sir Mike. I understood now. Very well explained. Words are short to explain how well you have been explaining the concepts. At the highest, I have only thank you to say.
    Because of your explanations, i am motivated to ask more doubts and study!!

    Thank you for being such a good tutor. I thank God for this.

      • Goodwill is an asset of the subsidiary. It is sometimes defined as “the value of old established customers returning” During the day-to-day existence of a company the directors and employees are trying to win more business and they do so by building a reputation in their market.

        And then along comes a predator in the form of another company that wants to take over the existing company with its good reputation.

        But that good reputation is not reflected by any figure or line item within the financial statements. The company knows it exists and the auditors know it exists. The bank knows it’s there and the taxman knows all about it. The shareholders and the buying company are fully aware that the good reputation exists. But there’s no amount shown in the financial statements.

        It is, therefore, and unrecognised intangible asset of the subsidiary.

        And the predator is going to buy the shares of the subsidiary from the subsidiary’s shareholders. But to make it an attractive offer that the shareholders will find difficult to refuse, the predator says:

        “We’ll offer buy your shares and we’ll not just pay you the market price nor the asset valuation per share amount. NO! We’ll pay you a premium over that asset value, a surplus above that market value. And why? Because we recognise the fact that your company has a good reputation and that reputation is not reflected within your financial statements. So we shall offer to buy that unrecognised intangible asset at the same time that we are offering to buy the right to control all the other assets”

        And the shareholders (or shareholders holding a majority of the subsidiary’s voting power) are impressed with this offer and sell their shares to the predator.

        Now, how does the predator reflect the fact in the predator’s own financial records?

        Debit various assets and credit the liabilities taken over (say debit net assets) of $5million in made up round figures and credit cash with say $6million ie the amount actually paid

        But that’s a double entry that doesn’t balance – we’re missing a $1million debit representing the extra payment to buy the “good reputation”

        And that “extra” amount has bought “Goodwill” and that’s why goodwill is an asset

        Better?

  6. Hi Mike, if there is an impairment of goodwill, how would you treat it? Will it be deducted from the W2 before arriving at the final goodwill/(bargain purchase) figure, and in W3 and in NCI calculation?

      • I don’t use any text book. All the worked examples are from the course notes that are freely available on this site. There are some worked solutions to some of the past examination questions (masquerading as “revision notes”) but certainly no textbook

        You WILL definitely need a revision kit from one of the reputable publishers but to buy a study text is a choice I shall leave entirely to you!

  8. hi mike
    just confused a little – working 3 ( consolidated retained earnings )can also be for other types of reserves like – revaluation reserve?. We can get a question with consolidating other reserves like share premium or revaluation reserve. If yes please send a worked example to clarify.
    Thanks

    • Because it’s pre-acquisition – it’s included in the goodwill calculation in working 2. Incidentally, the shares in the subsidiary also are part of the goodwill calculation and they too are NOT added into the CSoFP

      Clear?

  16. Why do we not have share premium in subsidary incorporated into CS of FP?Beacause it was formed before acquisition?what’s the treatment for new share premium,that is generated by subsidary issuing new share after acquisition?

    • @ginduja21, because it’s like a “profit” – it’s called a bargain purchase. We USED to have a complicated way of crediting negative goodwill to the retained earnings over a number of years, but that method has now gone.

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