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hi mike for the group accounts,
when the parent makes a deferred cosidertation, for example it acquires the subsidiary at 1 july 2007 but will pay 10000 at 1 jly 2009. assuming the cost of capital of 8%, the present value will be 8734,
and then for the year we will unwind the discount, what i dont understand is that now when we unwind we will record it as cr liability and dr finance cost and subtract the amount from group retained earnings.
the issue is the parent alone as an individual statment will alread record this as an investment and liability , and will already record the unwindeing of fiannce costs in their own statments, so why do we double subtract the finance costs from the group retained earnings.
and overall why is this included in the group as it is an in group liablity, whereas groupshould be showing liabilities to external parties.
thanks
“the present value will be 8734,”
I calculate $10,000 at 8% discount for 2 years to be $8,573
Am I wrong?
“we will record it as cr liability and dr finance cost and subtract the amount from group retained earnings.”
Correct
“the issue is the parent alone as an individual statment will alread record this as an investment and liability , and will already record the unwindeing of fiannce costs in their own statments, so why do we double subtract the finance costs from the group retained earnings.”
This depends on whether the parent has in fact accounted correctly for the unwound discount
“as it is an in group liablity”
No it isn’t! The $10,000 payable on 1 July, 2009 is payable not to the subsidiary but to the people that used to be shareholders in the subsidiary and that sold their share in the subsidiary to the parent entity
OK?
yes, thanks mike! and if the parent doesnt record the deferred consideration, then it will be subtracted from the group retained earning, otherwise if it has already, then no issue
right?No, think about the double entry
To record the deferred consideration, the double entry would be:
Dr Cost of Investment
Cr Deferred ConsiderationThis has the effect of increasing the goodwill figure (imagine missing off the deferred consideration when preparing working W2 – the goodwill would, as a result, be understated)
So, if the parent has failed to record the obligation on the occasion of the acquisition, this would need to be corrected by the entry above in the parent’s records
OK now?
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