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Ponto Co acquired 100% of the equity share capital of Sonto Co on 1 January 20X7. A fair value exercise conducted at this date identified two issues:
Issue 1 – Sonto Co owned the rights to a brand which it had developed internally. The fair value of the brand at 1 January 20X7 was reliably measured at $20,000.
Issue 2 – Sonto Co was defending a legal claim brought against it by a former employee. The fair value of the potential liability for damages payable was reliably measured at $85,000 on 1 January 20X7. Sonto Co’s legal team had advised that there was only a 30% chance that they would lose the court case.
Both of these issues had been treated correctly in the separate financial statements of Sonto Co at 1 January 20X7. The purchase consideration paid by Ponto Co had already been agreed and will not be adjusted for the above issues.
What effect will these issues have on the calculation of the goodwill arising on the acquisition of Sonto Co in the consolidated financial statements of Ponto?
the answer is 1-increase
2-decrease
my question is why would we recognize a brand as an asset when it is internally generated
and contingent liability when its only 30% and needs to be disclosed in notes
KIndly clarifyHi,
When we are calculating the goodwill we are applying the rules from IFRS 3, where effectively we are valuing the assets/liabilities of the sub acquired at fair value.
The brand will not be recognised in the individual accounts but in the group accounts it has a fair value of $20,000 and so will be recognised at that amount.
Likewise with the claim, this will not be recognised in the individual accounts (just disclosed as a contingent liability) but will be recognised at its fair value of $85,000 in the group accounts.
Hope that helps.
Thanks
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