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I am a bit confused about the contingent liability in business combination subsequent treatment in the dec/2014(INT) question 1(2) Margy subsequently had a contingent liability reversal of 5 million on the pre combination loss then no provision has been recognized from the contingent liablity after combination.
But at the dec/2009(int)question 1(ii) a similar contingent liability at business combination subsequent treatment Grange didnot revers the pre combination loss of 30 million due to exceed of 12months adjustment period then subsequently recognized a provision after the contingent liability met the criteria as a provision after the combination, to me it seems like to double account the liability .I’m not able to access the December 2009 question but here’s an explanation of December 2014 adjustment.
I’m going to ignore the remeasurement of $1 and treat the liability as $5 with effect from date of acquisition
On acquisition, the effect of acknowledging the contingency was to increase goodwill and increase liabilities by $5
Subsequently, in the 12 month reassessment, the company has recognised as a provision $5 warranty and put that through the post-acquisition profit or loss.
But of course, this was recognised as a pre-acquisition liability. So now we need to reverse the post-acquisition double counting
The effect of recognising in post acquisition was to increase liabilities and reduce profits. To correct, we need to reduce liabilities and increase post-acquisition retained earnings
This we do by crediting group retained earnings by 70% of the correction and crediting nci with their 30% of the correction
Does that make sense?
Thank u for the explanation
So the accounting treatment was to eliminate the double accounting of the contingent liability at ACQ date.If I understood it correctly? But should I de-recognize a liability for 5million to match the debit profit subsequently?No, there’s no need for you to recognise any further liability. The liability was recognised by the inclusion at date of acquisition of the contingency.
Upon acquisition, the parent has recognised Dr S Retained Earnings Cr Provision
Then S has repeated this entry.
What we are now doing is simply reversing the second entry and leaving the original one that was made as at acquisition
Ok?
then what to do with the remaining 1$ because at acquisition date we recognized 6$ and now it is confirmed that liability would be 5$ and provision has been created by subsidiary we reversed the impact by 5$ to eliminate the double accounting. but now what to do with that 1$.
What do you mean “We reversed the impact by $5 to eliminate the double accounting.”? I have no idea what you are doing here with a “reversal” and until I can understand that, I’m hesitant about telling you what to do with the adjustment for $1
Hope to hear from you soon!
Hi Mike,
As you explained above about the reversing the second entry and leaving the original one that was made as at acquisition, however, in the answer of Dec 14, i can’t see any adjustment related to Liabilities. I want to know why we only make adjustment to RE without adjustment for Liabilities ( $5m)Aca1, now I see your problem! And in answer to your question, the adjustment of 1 was classified as a re-measurement and the goodwill calculation has been adjusted accordingly
Hung Vu, it appears that, when recognising the provision during this year, the amount of 5 has been credited to the cost of the investment (shown in the parent’s records as 1,675 whereas the original holding fair value was 705 and the cost of the additional investment was 975 – a total of 1,680)
On acquisition the entry should have been debit cost of investment, credit liability 6 (later amended to 5)
Following the assessment at the year end the entry put through has been debit profit or loss and credit provision
To correct, we need the entry debit goodwill credit retained earnings
The goodwill calculation now shows 975 + 705 (a total of 1,680) whereas the parent’s own statement of financial position had investment in Margy of 1,675
I hope that that does it for you – the printed solution is not very clear!
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