Impairment of goodwill

Hi Sir,

Regarding the impairment of goodwill after the acquisition date I would like to know the double entry of that as in the following question they added the impairment to the administration expenses as well as they reduced that from the NCI post acquisition profit.

So do we have usually to consider that the impairment will affect the NCI profit or the parent one.

please clarify sir,

Thanks,

—————————————————————————————————————————–
On 1 January 20X2, Viagem acquired 90% of the equity share capital of Greca in a share
exchange in which Viagem issued two new shares for every three shares it acquired in Greca.
Additionally, on 31 December 20X2, Viagem will pay the shareholders of Greca $1.76 per
share acquired. Viagem’s cost of capital is 10% per annum. The deferred consideration has
not yet been recorded by Viagem.
At the date of acquisition, shares in Viagem and Greca had a stock market value of $6.50 and
$2.50 each, respectively.

Statements of profit or loss for the year ended 30 September 20X2
Viagem Greca
$000 $000
Revenue 64,600 38,000
Cost of sales (51,200) (26,000)
–––––– ––––––
Gross profit 13,400 12,000
Distribution costs (1,600) (1,800)
Administrative expenses (3,800) (2,400)
Investment income 500 nil
Finance costs (420) nil
–––––– ––––––
Profit before tax 8,080 7,800
Income tax expense (2,800) (1,600)
–––––– ––––––
Profit for the year 5,280 6,200
–––––– ––––––
Equity as at 1 October 20X1
Equity shares of $1 each 30,000 10,000
Retained earnings 54,000 35,000
The following information is relevant:
(i) At the date of acquisition, the fair values of Greca’s assets were equal to their carrying
amounts with the exception of two items:
– An item of plant had a fair value of $1.8 million above its carrying amount. The
remaining life of the plant at the date of acquisition was three years.
Depreciation is charged to cost of sales.
– Greca had a contingent liability which Viagem estimated to have a fair value of
$450,000. This has not changed as at 30 September 20X2.
Greca has not incorporated these fair value changes into its financial statements.
(ii) Viagem’s policy is to value the non?controlling interest at fair value at the date of
acquisition. For this purpose, Greca’s share price at that date can be deemed to be
representative of the fair value of the shares held by the non?controlling interest.
(iii) Sales from Viagem to Greca throughout the year ended 30 September 20X2 had
consistently been $800,000 per month. Viagem made a mark?up on cost of 25% on
these sales. Greca had $1.5 million of these goods in inventory as at 30 September
20X2.
(iv) Viagem’s investment income is a dividend received from its investment in a 40%
owned associate which it has held for several years. The underlying earnings for the
associate for the year ended 30 September 20X2 were $2 million.
(v) Although Greca has been profitable since its acquisition by Viagem, the market for
Greca’s products has been badly hit in recent months and Viagem has calculated that
the goodwill has been impaired by $2 million as at 30 September 20X2.

Required:
(a) Calculate the consolidated goodwill at the date of acquisition of Greca. (7 marks)
(b) Prepare the consolidated statement of profit or loss for Viagem for the year ended
30 September 20X2. (13 marks)

—————–

Answer

VIAGEM
(a) Viagem consolidated goodwill on acquisition of Greca as at 1 January 20X2
$000 $000
Investment at cost
Shares (10,000 × 90% × 2
/3 × $6.50) 39,000
Deferred consideration (9,000 × $1.76/1.1) 14,400
Non?controlling interest (10,000 × 10% × $2.50) 2,500
––––––
55,900
Net assets (based on equity) of Greca as at 1 January
20X2

Equity shares 10,000
Retained earnings b/f at 1 October 20X1 35,000
Earnings 1 October 20X1 to acquisition (6,200 × 3
/12) 1,550
Fair value adjustments: plant 1,800
contingent liability recognised (450)
––––––
Net assets at date of acquisition (47,900)
––––––
Consolidated goodwill 8,000
––––––
(b) Viagem Consolidated statement of profit or loss for year ended 30 September 20X2
$000
Revenue (64,600 + (38,000 × 9
/12) – 7,200 intra?group sales) 85,900
Cost of sales (W1) (64,250)
––––––
Gross profit 21,650
Distribution costs (1,600 + (1,800 × 9
/12)) (2,950)
Administrative expenses (3,800 + (2,400 × 9
/12) + 2,000 goodwill
impairment) (7,600)
Income from associate (2,000 × 40% based on underlying earnings) 800
Finance costs (420 + (14,400 × 10% × 9
/12 re deferred consideration)) (1,500)
––––––
Profit before tax 10,400
Income tax expense (2,800 + (1,600 × 9
/12)) (4,000)
––––––
Profit for the year 6,400
––––––
Profit for year attributable to:
Equity holders of the parent (balance) 6,180
Non?controlling interest (W2) 220
––––––
6,400
––––––

Workings
(W1) Cost of sales
$000
Viagem 51,200
Greca (26,000 × 9
/12) 19,500
Intra?group purchases (800 × 9 months) (7,200)
PUP in inventory (1,500 × 25/125) 300
Additional depreciation (1,800/3 years × 9
/12) 450
––––––
64,250
––––––

(W1) Cost of sales
$000
Viagem 51,200
Greca (26,000 × 9
/12) 19,500
Intra?group purchases (800 × 9 months) (7,200)
PUP in inventory (1,500 × 25/125) 300
Additional depreciation (1,800/3 years × 9
/12) 450
––––––
64,250

(W2) NCI
$000
Greca post?acquisition profit (6,200 × 9
/12) 4,650
Fair value depreciation (450)
Impairment (2,000)
–––––
Greca adjusted profit 2,200
–––––
Non?controlling interest at 10% 220
–––––