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How to treat the contingent consideration and the additional information point(i) regards to intangible asset for the paper acca june 2010
On 1 April 2009 Picant acquired 75% of Sander’s equity shares in a share exchange of three shares in Picant for every
two shares in Sander. The market prices of Picant’s and Sander’s shares at the date of acquisition were $3·20 and $4·50 respectively.
In addition to this Picant agreed to pay a further amount on 1 April 2010 that was contingent upon the post-acquisition
performance of Sander. At the date of acquisition Picant assessed the fair value of this contingent consideration at $4·2 million, but by 31 March 2010 it was clear that the actual amount to be paid would be only $2·7 million
(ignore discounting). Picant has recorded the share exchange and provided for the initial estimate of $4·2 million for the contingent consideration.(i) At the date of acquisition the fair values of Sander’s property, plant and equipment was equal to its carrying amount
with the exception of Sander’s factory which had a fair value of $2 million above its carrying amount. Sander has
not adjusted the carrying amount of the factory as a result of the fair value exercise. This requires additional annual
depreciation of $100,000 in the consolidated financial statements in the post-acquisition period.
for the point below how to treat it ?
Also at the date of acquisition, Sander had an intangible asset of $500,000 for software in its statement of
financial position.Picant’s directors believed the software to have no recoverable value at the date of acquisition
and Sander wrote it off shortly after its acquisition.Contingent consideration in the affairs of an entity that is now the subject of a takeover is included within the fair valued net assets at date of acquisition as though it were an actual liability
The post-acquisition movement in the estimated amount of that contingent consideration is adjusted through the statement of profit or loss and the goodwill figure is, maybe surprisingly, not re-calculated
Re the software, it was in Sander’s records at $500,000 and it’s now being revalued to fair value. Calculate the fair valued net assets of the subsidiary as at date of acquisition in the normal way, but make sure that you deduct that $500,000 from the total.
It’s only the same as a fair value adjustment to a tangible non-current asset
The factory had a fair value adjustment of + $2,000,000 and the software had a fair value adjustment of – $500,000
OK?
Mike I am having the same issue with neshnesh from the same questions under acca answer y the impairment of goodwill is reduce from subsidiary post profit ? in normally we will reduce from parent ltd
The adjustment to the provision for contingent consideration due to events occurring after the acquisition is reported in
income (goodwill is not recalculated).
Post-acquisition adjusted losses of Sander are:
Profi t as reported 1,000
Add back write off software (treated as a pre-acquisition fair value adjustment) 500
Additional depreciation on factory (100)
Goodwill written off (w (i)) (3,800)
––––––– (2,400)Excuse me but I am having a problem with this,
Why do we need to add back the written off software to the Group RE???Hi,
We wrote it off at the acquisition date so would have reduced the net asset by 500 in the net assets working. As the subsidiary wrote it off after the acquisition date we no longer need this adjustment so at the reporting date the FV adjustment is nil. The adjustment has gone from negative 500 to nil and so an increase in the profits. Use the net assets working we use and you will see it more clearly.
Thanks
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