Because the amount paid is higher than the recognisable assets, due to some unquantifiable future economic benefits, this capitalization of economic benefits is recorded as goodwill, as intangible assets.
In our examples we will be looking at the acquisition of the same subsidiary in different situations.
Statement of financial position - Subsidiary
Noncurrent assets
Property, plant and equipment 200
Current assets
Working capital 50
Total assets 250
Total liabilities (100)
Net assets 150
Consisting of:
Paid up share capital (100 shares) 100
Retained earnings 50
Shareholder equity 150
In our different scenarios, the parent company would have varying financial positions in the beginning. However, we will keep the FP of our subsidiary constant throughout the varying scenarios for easier comparability.
Case 1.
- Full acquisition (100% control)
- No goodwill arising from transaction
- Date of acquisition is date of SOFP. No post-acquisition adjustments required for consolidation.
Statement of financial position - Parent (non-consolidated)
Noncurrent assets
Property, plant and equipment 1000
Investment in subsidiary 150
Current assets
Working capital 200
Total assets 1350
Total liabilities (350)
Net assets 1000
Consisting of:
Paid up share capital 500
Retained earnings 500
Shareholder equity 1000
Statement of financial position - Parent (consolidated)
Noncurrent assets
Property, plant and equipment 1200 (1000+200)
Goodwill 0
Current assets
Working capital 250 (200+50)
Total assets 1450
Total liabilities 450 (350+100)
Net assets 1000
Consisting of:
Paid up share capital 500
Retained earnings 500
Shareholder equity 1000
Calculation/proof of zero goodwill
Consideration transferred 150
Less: Net assets acquired (150)
Goodwill 0
Case 2.
- Full acquisition (100% control)
- Goodwill arising from transaction
- Date of acquisition is date of SOFP. No post-acquisition adjustments required for consolidation.
In this case, the only change is the increment of investment in subsidiary from case 1, ceteris paribus. This would also mean that the parent company in case 2 have a higher amount of assets as compared to case 1, represented by a increase in retained earnings in the equity.
Statement of financial position - Parent (non-consolidated)
Noncurrent assets
Property, plant and equipment 1000
Investment in subsidiary 260
Current assets
Working capital 200
Total assets 1460
Total liabilities (350)
Net assets 1110
Consisting of:
Paid up share capital 500
Retained earnings 610
Shareholder equity 1110
Statement of financial position - Parent (consolidated)
Noncurrent assets
Property, plant and equipment 1200 (1000+200)
Goodwill 110
Current assets
Working capital 250 (200+50)
Total assets 1560
Total liabilities 450 (350+100)
Net assets 1110
Consisting of:
Paid up share capital 500
Retained earnings 610
Shareholder equity 1110
Calculation/proof of goodwill
Consideration transferred 260
Less: Net assets acquired (150)
Goodwill 110
Case 3.
- Partial acquisition (80% control)
- No goodwill arising from transaction
- Date of acquisition is date of SOFP. No post-acquisition adjustments required for consolidation.
In this case, the acquirer pays a lesser amount for investment in subsidiary compared to case 1. This would be portrayed as the parent company having lesser assets, in the form of lesser retained earnings. Ceteris paribus.
Note: Total equity will be used from now on in place of as shareholder equity. It has the same meaning.
Statement of financial position - Parent (non-consolidated)
Noncurrent assets
Property, plant and equipment 1000
Investment in subsidiary 120
Current assets
Working capital 200
Total assets 1320
Total liabilities (350)
Net assets 970
Consisting of:
Paid up share capital 500
Retained earnings 470
Total equity 970
Statement of financial position - Parent (consolidated)
Noncurrent assets
Property, plant and equipment 1200 (1000+200)
Goodwill 0
Current assets
Working capital 250 (200+50)
Total assets 1450
Total liabilities 450 (350+100)
Net assets 1000
Consisting of:
Paid up share capital 500
Retained earnings 470
Noncontrolling interests 30
Total equity 1000
Calculation/proof of zero goodwill
Consideration transferred 120 (for 80/100 shares of subsidiary)
Less: Net assets acquired 80% x (150) (120)
Goodwill 0
Noncontrolling interest = 20% (not acquired) x net assets = 30 (by net assets method)
Case 4a
- Partial acquisition (80% control)
- Goodwill arising from transaction by net asset method.
- Date of acquisition is date of SOFP. No post-acquisition adjustments required for consolidation.
- NCI is based on residual net asset value of un-acquired assets. (IFRS 3)
In this case, the acquirer pays a HIGHER amount for investment in subsidiary compared to case 3 to result in goodwill. This would be portrayed as the parent company having more assets, in the form of more retained earnings. Ceteris paribus.
Statement of financial position - Parent (non-consolidated)
Noncurrent assets
Property, plant and equipment 1000
Investment in subsidiary 180
Current assets
Working capital 200
Total assets 1380
Total liabilities (350)
Net assets 1030
Consisting of:
Paid up share capital 500
Retained earnings 530
Shareholder equity 1030
Statement of financial position - Parent (consolidated)
Noncurrent assets
Property, plant and equipment 1200 (1000+200)
Goodwill 60
Current assets
Working capital 250 (200+50)
Total assets 1510
Total liabilities 450 (350+100)
Net assets 1060
Consisting of:
Paid up share capital 500
Retained earnings 530
Noncontrolling interests 30
Total equity 1060
Calculation/proof of goodwill
Consideration transferred 180 (for 80/100 shares of subsidiary)
Noncontrolling interest 30*
Less: Net assets (150)*
Goodwill 60
*This is equivalent to case 3's %control x net assets calculations.
Noncontrolling interest = 20% (not acquired) x net assets = 30 (by net assets method)
Case 4b
- Partial acquisition (80% control)
- Goodwill arising from transaction by fair value method.
- Date of acquisition is date of SOFP. No post-acquisition adjustments required for consolidation.
- NCI is based on fair value, which is given or calculated, of un-acquired assets. If not given, automatically assume net asset value method. (IFRS 3)
In this case, the acquirer pays a HIGHER amount for investment in subsidiary compared to case 3 to result in goodwill. This would be portrayed as the parent company having more assets, in the form of more retained earnings. Ceteris paribus.
Statement of financial position - Parent (non-consolidated)
Noncurrent assets
Property, plant and equipment 1000
Investment in subsidiary 180
Current assets
Working capital 200
Total assets 1380
Total liabilities (350)
Net assets 1030
Consisting of:
Paid up share capital 500
Retained earnings 530
Shareholder equity 1030
Statement of financial position - Parent (consolidated)
Noncurrent assets
Property, plant and equipment 1200 (1000+200)
Goodwill 80
Current assets
Working capital 250 (200+50)
Total assets 1530
Total liabilities 450 (350+100)
Net assets 1080
Consisting of:
Paid up share capital 500
Retained earnings 530
Noncontrolling interests 50*
Total equity 1080
Calculation/proof of goodwill
Consideration transferred 180 (for 80/100 shares of subsidiary)
Noncontrolling interest 50
Less: Net assets (150)
Goodwill 80
*Given, does not arise from any calculations nor balancing figure consolidation related. (important)
Case 6.
- Partial acquisition (80% control)
- 'Negative' goodwill arising from transaction, bargain purchase.
- NCI is calculated using residual net asset value
- Date of acquisition is date of SOFP. No post-acquisition adjustments required for consolidation.
Statement of financial position - Parent (non-consolidated)
Noncurrent assets
Property, plant and equipment 1000
Investment in subsidiary 100
Current assets
Working capital 200
Total assets 1300
Total liabilities (350)
Net assets 950
Consisting of:
Paid up share capital 500
Retained earnings 450
Total equity 950
Statement of financial position - Parent (consolidated)
Noncurrent assets
Property, plant and equipment 1200 (1000+200)
Goodwill 0
Current assets
Working capital 250 (200+50)
Total assets 1450
Total liabilities 450 (350+100)
Net assets 1000
Consisting of:
Paid up share capital 500
Retained earnings 450 + 20**
Noncontrolling interests 30
Total equity 1000
Calculation/proof of goodwill
Consideration transferred 100 (for 80/100 shares of subsidiary)
Noncontrolling interest 30
Less: Net assets (150)
Goodwill (20)
**Negative goodwill is recognised as a gain in profit and loss statement for that FY, resulting in increased retained earnings. There is NO negative goodwill in SOFPs.
Noncontrolling interest = 20% (not acquired) x net assets = 30 (by net assets method)
- Partial acquisition (80% control)
- Goodwill arising from transaction by fair value method.
- Date of acquisition is date of SOFP. No post-acquisition adjustments required for consolidation.
- NCI is based on fair value, which is given or calculated, of un-acquired assets. If not given, automatically assume net asset value method. (IFRS 3)
In this case, the acquirer pays a HIGHER amount for investment in subsidiary compared to case 3 to result in goodwill. This would be portrayed as the parent company having more assets, in the form of more retained earnings. Ceteris paribus.
Statement of financial position - Parent (non-consolidated)
Noncurrent assets
Property, plant and equipment 1000
Investment in subsidiary 180
Current assets
Working capital 200
Total assets 1380
Total liabilities (350)
Net assets 1030
Consisting of:
Paid up share capital 500
Retained earnings 530
Shareholder equity 1030
Statement of financial position - Parent (consolidated)
Noncurrent assets
Property, plant and equipment 1200 (1000+200)
Goodwill 80
Current assets
Working capital 250 (200+50)
Total assets 1530
Total liabilities 450 (350+100)
Net assets 1080
Consisting of:
Paid up share capital 500
Retained earnings 530
Noncontrolling interests 50*
Total equity 1080
Calculation/proof of goodwill
Consideration transferred 180 (for 80/100 shares of subsidiary)
Noncontrolling interest 50
Less: Net assets (150)
Goodwill 80
*Given, does not arise from any calculations nor balancing figure consolidation related. (important)
Case 6.
- Partial acquisition (80% control)
- 'Negative' goodwill arising from transaction, bargain purchase.
- NCI is calculated using residual net asset value
- Date of acquisition is date of SOFP. No post-acquisition adjustments required for consolidation.
Statement of financial position - Parent (non-consolidated)
Noncurrent assets
Property, plant and equipment 1000
Investment in subsidiary 100
Current assets
Working capital 200
Total assets 1300
Total liabilities (350)
Net assets 950
Consisting of:
Paid up share capital 500
Retained earnings 450
Total equity 950
Statement of financial position - Parent (consolidated)
Noncurrent assets
Property, plant and equipment 1200 (1000+200)
Goodwill 0
Current assets
Working capital 250 (200+50)
Total assets 1450
Total liabilities 450 (350+100)
Net assets 1000
Consisting of:
Paid up share capital 500
Retained earnings 450 + 20**
Noncontrolling interests 30
Total equity 1000
Calculation/proof of goodwill
Consideration transferred 100 (for 80/100 shares of subsidiary)
Noncontrolling interest 30
Less: Net assets (150)
Goodwill (20)
**Negative goodwill is recognised as a gain in profit and loss statement for that FY, resulting in increased retained earnings. There is NO negative goodwill in SOFPs.
Noncontrolling interest = 20% (not acquired) x net assets = 30 (by net assets method)
