Financial Reporting II (ACC2012W) - Groups (2021)
Groups: Lecture Examples (Part A – First semester)
Lecture example 3 – Identifying and recognising goodwill at the acquisition date
Learning outcomes
Recognise the net assets of the SUBSIDIARY at FAIR VALUE at the acquisition date
Fair value at the date of acquisition represents cost price of the asset to the GROUP
Recognise and measure goodwill at the acquisition date
ASSUME that on 31.12.x1:
– Co. P buys all 100 shares in Co. S for R1,000 (paid in cash)
– Co. P considers the land (i.e. PPE) recognised by Co. S to have a fair value of R800.
– Co. S applies the cost model for PPE.
You are provided with the following extracts from the separate trial balances of Co. P and Co. S as at
31.12.x1.
Trial Balance Company P Company S
31.12.x1 DR CR DR CR
PPE 1200 700
Investments 1000 0
Inventory 400 200
Receivables 200 100
Cash 500 0
Liabilities 900 250
Share capital 400 100
Retained earnings 2000 650
Net assets 2400 750
REQUIRED:
1. Think about the journal entries related to the purchase of shares by Co. P that would have been
recorded in the books of Co. P and Co. S…
Co. S:
Co. P:
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Financial Reporting II (ACC2012W) - Groups (2021)
(Lecture example 3 – Continued)
2. What is the effect of this new information about the fair value of Co. S’s land in:
a. The separate books of Co. S?
b. The separate books of Co. P?
c. The group accounts at acquisition (31.12.x1)?
3. What is the difference between FV of net assets and FV of consideration, and how should it be
accounted for in:
a. The separate books of Co. P?
b. The consolidated group accounts.
(w1) Goodwill at acquisition
Fair value of consideration paid: (A)
Book value of net assets:
Adjustments for fair value (PPE)
Fair value of net assets acquired: (B)
Difference (Goodwill) (A-B)
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Financial Reporting II (ACC2012W) - Groups (2021)
(Lecture example 3 – Continued)
4. Prepare the consolidated (or group) statement of financial position of Co. P as at 31.12.x1 (i.e. at acquisition).
P+S= Group TB
Preparing the Group TB Company P Company S "Starting Point" Adjustment "End Point"
31.12.x1 DR CR DR CR DR CR DR CR DR CR
PPE 1200 700
Goodwill (w1) 0 0
Investments 1000 0
Inventory 400 200
Receivables 200 100
Cash 500 0
Liabilities 900 250
Share capital 400 100
Retained earnings 2000 650
Net assets 2400 750 2400
①Some important points relating to goodwill: This goodwill arises in a business combination. We apply the ACQUISITION method we derive the goodwill or
bargain purchase recognised by Co P at the acquisition date. Goodwill only arises on consolidation. We only consolidate when parent controls another entity.
Goodwill is NOT recognised in the separate FS and will NOT appear in the SP. Why? Goodwill is an ASSET and only arises on consolidation. The process of
consolidation only applies at a GROUP level not in the separate FS.
To calculate the goodwill at acquisition, we compare the purchase consideration paid to the fair value of the net assets of the subsidiary at the acquisition
date.
If the group is applying the IFRS for SMEs reporting framework, goodwill is amortised over its estimated useful life limited to ten years.
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Financial Reporting II (ACC2012W) - Groups (2021)
5. Prepare the pro-forma journal entries necessary when preparing the consolidated financial statements of Co P. as at 31.12.x1.
① This entry reflects the group adjustment required to recognise the net assets of Co S at fair value at the acquisition date.
② This entry results in goodwill recognition in the group FS. Goodwill is reflected as zero in the SP but EP must show an asset of R150.
③ This entry replaces the investment (R1000) with the PARENT’S share of the fair value of the net assets of Co S. In this LE, Co P controls 100% of Co S so
100% of the net assets is controlled by Co P at a group level.
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Financial Reporting II (ACC2012W) - Groups (2021)
LE 3 - ADDITIONAL SUGGESTED EXAMPLE RE BARGAIN PURCHASE: What if Co P paid R600 (not R1000) on 31.12.x1?
P+S= Group TB
Preparing the Group TB Company P Company S "Starting Point" Adjustment "End Point"
31.12.x1 DR CR DR CR DR CR DR CR DR CR
PPE 1200 700
Investments 600 0
Inventory 400 200
Receivables 200 100
Cash 900 0
Liabilities 900 250
Share capital 400 100
Retained earnings 2000 650
P/L – Bargain purchase - -
Net assets 2400 750 2650
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Financial Reporting II (ACC2012W) - Groups (2021)
(w2) Bargain purchase at acquisition Pro forma journals at 31.12.x1:
Some important points relating to bargain purchase:
This bargain purchase arises in a business combination. We apply the ACQUISITION method we derive the bargain purchase recognised by Co P at the
acquisition date. A bargain purchase only arises on consolidation. We only consolidate when parent controls another entity. This bargain purchase is an
income for the parent company. This income is only recognised at the acquisition date.
Bargain purchase is NOT recognised in the separate FS and will NOT appear in the SP. Why? Bargain purchase only arises on consolidation. The process of
consolidation only applies at a GROUP level not in the separate FS.
To calculate the bargain purchase at acquisition, we compare the purchase consideration paid to the fair value of the net assets of the subsidiary at the
acquisition date. In this instance, the FV of net assets is MORE than the purchase consideration. Basically, Co P is purchasing the net assets of Co S at a
discount.
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Financial Reporting II (ACC2012W) - Groups (2021)
