Help on goodwill please

cornflower

I am having a problem with this question and need some help please. I am beginning to get quite worried about my current performance in P2.

Parent purchased 80% in subsidiary for C80,000 during 19X1 when the fair value of the subsidiary assets were 87500. Goodwill on consolidation that arose is being amortised over its estimated life of 10 years and a full years charge was made in the consolidated accounts to 31.12.X1. Parent sold subsidiary on 31.12.X4 for 100,000. The book value of the subsidiary's net assets in the consolidated accounts on the date of sale were 112,500.

Show how the disposal will be accounted for.

I know this is quite an old question but I'm trying to do quite a few questions to get better and this is a UK based question under FRS 2.

Steve Collings

Hmmm. I'm a bit concerned about your strategy here for P2. P2 examines IFRS, but anyhow here goes:

The parent's income statement for X4 will show a gain on the sale of the investment of C20,000 calculated like this:

Sale proceeds......................................... 100k
Cost of investment..................................(80k)
Gain on sale in the parent's accounts......20k

The group's income statement for X4 will show a gain on the sale of the subsidiary of 4,000 calculated like this:

Sale proceeds..........................................................................100k
Less share of net assets at disposal date (112.5k x 80%)......(90k)
Less goodwill on consolidation unamortised at date of sale....(6k)
Gain on disposal in the group accounts.....................................4k

The unamortised goodwill on consolidation is calculated like this:

Fair value of consideration at date of acquisition........................80k
Less fair value of net assets at date of acq (87,500 x 80%)......(70k)
Goodwill on consolidation............................................................10k
Amortisation (4 years x 1,000)....................................................(4k)
Unamortised goodwill at 31 December X4...................................6

Hope that helps but I wouldn't be looking at UK GAAP for P2 at all.

Steve

uknitty

Not sure if this is the right answer but I am studying this area right now for my AAT/ACA FA top up paper so it is good question practice for me !

This is what I would respond in an exam... will be interesting to hear feedback so I can improve my technique/understanding

____________________________________________________________________________

Working 1 - Goodwill

Consideration 80,000

Net Assets Acquisition : (87,500)

NCI: 17,500

Goodwill Acquired: 10,000

Impairment to date of disposal (4,000)

Goodwill at 31.12 X4 6,000

____________________________________________________________________________

Working 2 Profit/ Loss on Disposal of Subsidiary

Proceeds from disposal 100,000

Less Goodwill Disposed (6,000)

Less Net Assets at Disposal (112,500)

Add back NCI 22500

Net Assets Disposed of (96,000)

Profit on Sale 4,000



The profit/loss on sale will be disclosed separately in the income statement as proceeds from discontinued operations. (per IFRS 5)

The net assets disposed of will be disclosed separately in the NCI section of the CSOCIE .

Upon disposal the subsidiary will no longer be reflected in the Consolidated Statement of Financial Position

Steve Collings

Hi UKnitty

I agree with your answers. I also worked out what the gain on disposal would have been in the parent's individual financial statements, merely because the Q didn't specify which accounts were being prepared and as you can see the profit on disposal is significantly higher in the individual financial statements than in the consolidated financial statements.

Just a point on goodwill - be careful because IFRS 3 contains 2 options for calculating - gross or proportionate. If the Q specifies a particular way goodwill should be calculated make sure you are familiar with the way the 2 calcs work.

Kind regards
Steve