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Negative Goodwill

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Negative Goodwill

  • This topic has 1 reply, 2 voices, and was last updated 3 years ago by P2-D2.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • October 10, 2021 at 7:36 pm #637415
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    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.

    October 16, 2021 at 8:37 am #637791
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    Negative goodwill is credited to the group retained earnings.

    The change in contingent consideration will go through group retained earnings too.

    There is lots to do in the question but deal with each part individually and remember that you do not need to get everything correct.

    Thanks

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