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Hi,
I can’t quite get my brain around a small detail of the goodwill calculation, and wondered if you could help please.
I don’t know if you have access to the BPP practice and revision kit, but it’s regarding question 46, taken from the December 07 exam.
When calculating the net assets of the subsidiary, the relevant share capital in the statement of the subsidiary includes the shares that were just issued to the parent, and this amount is entered in the goodwill calculation. However, it seems to me that the parent purchased these shares at a premium, yet in the answer the share premium is not included in this list.
So my question is, why is the share premium not included when working out the net assets of the subsidiary?
Thanks for your help.
I cannot believe that the subsidiary issued shares to the parent on the event of the acquisition! The more likely scenario ( you need to read the question carefully! ) is that the parent issued shares to acquire the shares of the subsidiary. But they didn’t issue these shares to the subsidiary. They issued them and gave them to the former shareholders of the subsidiary
It’s entirely possible for a parent to acquire a subsidiary without the consent or wish of the subsidiary’s board of directors! The aggressor communicates with the (soon-to-be) subsidiary’s shareholders direct and makes offers to acquire the shares from these shareholders ( and NOT from the subsidiary itself )
Hi Mike,
Thanks very much for explaining that to me. You’ve cleared something that has been baffling me for ages! Naturally I’ll try and read the question, but from what you’re saying I’ll assume the most obvious scenario is that the subsidiary does not issue shares to the parent, but if the consideration involves shares in the parent company, then the parent issues shares to the subsidiary.
Thanks again.
Still not quite right – the parent does NOT issue shares to the subsidiary! The shares which the parent issues go direct to the subsidiary’s shareholders who are now getting rid of their investment in the subsidiary and are instead getting an investment in the parent
Oh yes, sorry, it takes me a while for it to sink in! And thanks for clarifying that, I understand it now!
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