Indirect holding adjustment (Ashanti June 10 adapted)

Hi P2-D2,

I’m using the latest version of Kaplan’s P2 exam kit and just attempted question 14 (Ashanti Jun 10 adpated).

I’m a bit puzzled about how they have treated the NCI in the answer and am getting generally confused about how to deal with the indirect holding adjustment generally.

On acquisition of Ceram, the consideration paid was 136, the fair value of the NCI 26 and the fair value of the assets 115. As Ceram was acquired by Bocham which was only 70% owned by Ashanti at the time, an indirect holding adjustment of 30% * 150 = 40.8 is required. Therefore goodwill is calculated as 136 + 26 – 40.8 – 115 = 6.2

I follow the goodwill calculation, but the bit that confuses me is the indirect holding adjustment is actually bigger than the fair value of the NCI. In the textbook it says that the indirect holding adjustment is deducted from the value of the NCI on the balance sheet. Therefore the NCI at this point would be 26 – 40.8 = -14.8. This doesn’t make sense to me?

This would make the journal effectively

Cr Consideration 136
Dr Net Assets 115
Dr Goodwill 6.2
Dr NCI 14.8

It makes more sense to me for the indirect holding adjustment to be deducted from the consideration and the NCI to be 26 as quoted. This makes a more sensible looking journal:

Cr Consideration 95.2
Dr Net Assets 115
Dr Goodwill 6.2
Cr NCI 26

But that doesn’t match how the textbook explains it in the chapter on complex groups?

Confused, I took the NCI as -14.8 and then calculated the increase in net assets since consolidation of 160 – 115 = 45, of which 56% * 45 = 19.8, added this to the negative NCI to get an NCI at disposal of 5. The question gives you the fair value of the NCI at disposal as 35, but I thought this was a red herring. I thought the fair value of the NCI is irrelevant after acquisition, as the NCI at disposal should equal NCI at acquisition +/- NCI share of change in net assets.

However the question uses the value of 35, which even if you use the NCI value of 26 and add 19.8 you don’t get. I don’t see how the NCI could be 35, unless you give it 20% of the share of net assets = 9 and add that to 26. But as the group share is effectively 56% not 80% I don’t see why this is the case?

Clearly I’m missing something! Could you shed some light on this please?