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Dear Sir,
I encountered a question in BPP exam kit, which I found out that contingent liability is included in FV of net assets when calculating goodwill. I don’t understand why because I always think that contingent liability can only be disclosed, not recognised in financial statement. Could you please explain the reason behind this treatment? And what is the double entry for this, do we have to show this contingent liability as an item in the SOFP?Hi,
The contingent liability is treated under IFRS 3 in the group accounts, and the treatment is different to that in the individual accounts under IAS 37 where it is just disclosed.
IFRS 3 recognises it at fair value in the group accounts as the consideration paid will reflect the likelihood of this liability occurring and if we think there is a higher chance than the current owners of the subsidiary believe it to be then we may pay less to reflect this. Therefore we recognise it in the group accounts to reflect the true value of the net assets that we are acquiring.
There is an illustration in the class notes to demonstrate how this is done in the questions.
Thanks
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