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Hi Mike
Following on from the last post, could you explain why, when dealing with goodwill from the sub, we take the percentage of the goodwill impaired but for an associate we take the full impairment off the parents retained earnings? In this question we have an associate Augusta who we own 25%. I mistakenly took 25% of the goodwill rather than the full amount. I’m not certain why this was wrong?
Could you explain Thanks!
Because the premium on acquisition (it’s not called ‘goodwill’ when we pay over the fair value for our investment) is all ours
The only element of an associate’s activities that we bring in to the accounting is just our share
That premium arose because we (the parent) paid an excess for OUR SHARE of the associate’s activities so any impairment in the value of our investment is just that … it’s an impairment in the value of OUR investment
OK?
I think so!
Could you just check i’ve got the right reasoning…
So effectively when dealing with a subsidiary we need to account for the NCI because we have control. What we are doing is still representing the FULL impairment in the financial statements but separating this in two distinct parts on the Balance sheet. (This is why we take the percentages to the different Retained Earnings)
Since this is an associate we do not have control but significant influence only, we ARE the NCI! and of course do NOT have to represent anything other than our own share. Therefore it will be impaired by the full amount stated.
That’s spot on. The investment in the associate is just ours – as you so correctly quote my words “We ARE the nci”
So any impairment in connection with an associate is an impairment in the value of our investment and, again as you correctly state, that impairment is all ours
OK?
Brilliant!
I’ve got it! Thanks Mike. It’s so easy to just follow a proforma without actually knowing what you are doing! I’ll never make this mistake again now because I actually understand why I’m doing the calculation.
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