Negative Goodwill

Hello Sir This question has so many items to look at .Where should the negative goodwill go. In the following question firstly the deducted the negative goodwill from the operating expenses.Then it was added to the retained earnings of the group. So to deal with the post acquisition retained of the group in this question what has to be adjusted to it? Further ,they adjusted the change in the contingent consideration in the group retained earnings. In this question there are so many different items to consider, Sir, can you please clarify that please , ____________________________________________________________________________ Q POLESTAR Note that the level of work required to answer this question is beyond that to be expected within the exam However, it provides a useful revision exercise as it tests both statements of profit or loss and financial position. On 1 April 20X3, Polestar acquired 75% of Southstar. Southstar had been experiencing difficult trading conditions and making significant losses. In allowing for Southstar’s difficulties, Polestar made an immediate cash payment of only $1.50 per share. In addition, Polestar will pay a further amount in cash on 30 September 20X4 if Southstar returns to profitability by that date. The fair value of this contingent consideration at the date of acquisition was estimated to be $1.8 million, but at 30 September 20X3 in the light of continuing losses, its value was estimated at only $1.5 million. The contingent consideration has not been recorded by Polestar. Overall, the directors of Polestar expect the acquisition to be a bargain purchase leading to negative goodwill. Below are the summarised draft financial statements of both entities. Statements of profit or loss for the year ended 30 September 20X3 Polestar Southstar $000 $000 Revenue 110,000 66,000 Cost of sales (88,000) (67,200) ––––––– ––––––– Gross profit (loss) 22,000 (1,200) Operating expenses (8,500) (4,400) ––––––– ––––––– Profit (loss) before tax 13,500 (5,600) Income tax (expense)/relief (3,500) 1,000 ––––––– ––––––– Profit (loss) for the year 10,000 (4,600) ––––––– –––––– Statements of financial position as at 30 September 20X3 Polestar Southstar Assets $000 $000 Non?current assets Property, plant and equipment 41,000 21,000 Investments 13,500 Current assets 19,000 4,800 ––––––– ––––––– Total assets 73,500 25,800 ––––––– ––––––– Equity and liabilities Equity shares of 50 cents each 30,000 6,000 Retained earnings 28,500 12,000 ––––––– ––––––– 58,500 18,000 Current liabilities 15,000 7,800 ––––––– ––––––– Total equity and liabilities 73,500 25,800 ––––––– ––––––– The following information is relevant: (i) At the date of acquisition, the fair values of Southstar’s assets were equal to their carrying amounts with the exception of a property. This had a fair value of $2 million above its carrying amount and a remaining useful life of 10 years at that date. All depreciation is included in cost of sales. (ii) Polestar transferred raw materials at their cost of $4 million to Southstar in June 20X3. Southstar processed all of these materials incurring additional direct costs of $1.4 million and sold them back to Polestar in August 20X3 for $9 million. At 30 September 20X3 Polestar had $1.5 million of these goods still in inventory. There were no other intra?group sales. (iii) Polestar’s policy is to value the non?controlling interest at fair value at the date of acquisition. This was deemed to be $3.6 million. (iv) All items in the above statements of profit or loss are deemed to accrue evenly over the year unless otherwise indicated. Required: (a) Prepare the consolidated statement of profit or loss for Polestar for the year ended 30 September 20X3. (b) Prepare the consolidated statement of financial position for Polestar as at 30 September 20X3. There is no mark allocation for this question because the level of work required to answer this question is beyond that to be expected within the exam. However, it provides a useful revision exercise as it tests both statements of profit or loss and financial position. Answer Statements of financial position as at 30 September 20X3 Polestar Southstar Assets $000 $000 Non?current assets Property, plant and equipment 41,000 21,000 Investments 13,500 Current assets 19,000 4,800 ––––––– ––––––– Total assets 73,500 25,800 ––––––– ––––––– Equity and liabilities Equity shares of 50 cents each 30,000 6,000 Retained earnings 28,500 12,000 ––––––– ––––––– 58,500 18,000 Current liabilities 15,000 7,800 ––––––– ––––––– Total equity and liabilities 73,500 25,800 ––––––– ––––––– The following information is relevant: (i) At the date of acquisition, the fair values of Southstar’s assets were equal to their carrying amounts with the exception of a property. This had a fair value of $2 million above its carrying amount and a remaining useful life of 10 years at that date. All depreciation is included in cost of sales. (ii) Polestar transferred raw materials at their cost of $4 million to Southstar in June 20X3. Southstar processed all of these materials incurring additional direct costs of $1.4 million and sold them back to Polestar in August 20X3 for $9 million. At 30 September 20X3 Polestar had $1.5 million of these goods still in inventory. There were no other intra?group sales. (iii) Polestar’s policy is to value the non?controlling interest at fair value at the date of acquisition. This was deemed to be $3.6 million. (iv) All items in the above statements of profit or loss are deemed to accrue evenly over the year unless otherwise indicated. Required: (a) Prepare the consolidated statement of profit or loss for Polestar for the year ended 30 September 20X3. (b) Prepare the consolidated statement of financial position for Polestar as at 30 September 20X3. There is no mark allocation for this question because the level of work required to answer this question is beyond that to be expected within the exam. However, it provides a useful revision exercise as it tests both statements of profit or loss and financial position. Equity attributable to owners of the parent Equity shares of 50 cents each 30,000 Retained earnings (W5) 29,950 –––––– 59,950 Non?controlling interest (W4) 2,850 –––––– Total equity 62,800 Current liabilities Contingent consideration 1,500 Other (15,000 + 7,800) 22,800 –––––– Total equity and liabilities 87,100 –––––– Workings (W1) Group structure Polestar 75% Southstar (6 months) (W2) Net assets At acquisition At reporting date Post? acquisition $000 $000 $000 Share capital 6,000 6,000 – Retained earnings 14,300 12,000 (2,300) Fair value adjustment 2,000 2,000 – Fair value depreciation (2,000/10 years × 6 /12) (100) (100) PUP (W6) (600) (600) –––––– –––––– –––––– 22,300 19,300 (3,000) –––––– –––––– –––––– W3 W4/W5 (W3) Goodwill $000 Cash consideration (6,000/0.5 × 75% × $1.50) 13,500 Contingent consideration 1,800 Non?controlling interest 3,600 –––––– 18,900 Fair value of net assets at acquisition (W2) (22,300) –––––– Gain on bargain purchase (3,400) –––––– (W4) Non?controlling interest $000 Fair value on acquisition (W3) 3,600 Post?acquisition losses ((3,000) (W2) × 25%) (750) ––––– 2,850 ––––– (W5) Group retained earnings $000 Polestar’s retained earnings 28,500 Southstar’s post?acquisition losses((3,000) (W2) × 75%) (2,250) Change in contingent consideration 300 Gain on bargain purchase (W3) 3,400 –––––– 29,950 –––––– (W6) Cost of sales $000 Polestar 88,000 Southstar (67,200 × 6 /12) 33,600 Intra?group purchases (4,000 + 9,000) (13,000) PUP in inventory (see below) 600 Additional depreciation on leased property (W2) 100 ––––––– 109,300 ––––––– The profit on the sale of the goods back to Polestar is $3.6 million (9,000 – (4,000 + 1,400)). Therefore the unrealised profit in the inventory of $1.5 million at 30 September 20X3 is $600,000 (3,600 × 1,500/9,000). (W7) NCI (SPL) $000 Southstar post?acquisition loss ((4,600) × 6 /12) (2,300) PUP (W6) (600) Fair value depreciation (W2) (100) –––––– Southstar adjusted profit (3,000) –––––– Non?controlling interest at 25% (750) –––––– Note: IFRS 3 Business Combinations says negative goodwill should be credited to the acquirer, thus none of it relates to the non?controlling interest.