EXAMPLES OF BASIC CONCEPTS OF CONSOLIDATION

1. Calculating consideration transferred

Example 1
P acquired 75% of ordinary shares in S with a cash
payment of RM500,000 and 250,000 units of
ordinary shares of P with the market price of
RM3.00/share on the acquisition date. Calculate
consideration transferred.
​ ​ ​ ​ ​ ​ ​ ​ RM
Cash
payment ​ ​ ​ ​ ​ ​ ​500,000
Ordinary shares (250,000 units x
RM3) ​ ​ ​750,000
Consideration transferred ​ ​ ​ ​
1,250,000

Example 2
P acquired 80% of the ordinary shares in S with
cash payment of RM420,000 payable in 2
instalments; RM200,000 on the date of acquisition
and the balance of RM220,000 payable in one
year’s time.
Calculate consideration transferred. Cost of capital
is 10%.
​ ​ ​ ​ ​ ​ ​ ​ RM
Cash paid @ acquisition
date ​ ​ ​ ​ ​200,000
Cash payable in 1 year’s time
 (220/1.1) ​ ​ ​200,000
Consideration
transferred ​ ​ ​ ​ ​400,000

Example 3
P acquired 60% of ordinary shares in S wth cash
payment of RM350,000, loan stocks of RM40,000
and an additional cash payment of RM108,000 if
S’s profit increased by 20% one year after the
acquisition. Calculate consideration
transferred.Cost of capital 8%.
​ ​ ​ ​ ​ ​ ​ ​ RM
Cash
payment ​ ​ ​ ​ ​ ​ ​350,000
Loan stocks ​ ​ ​ ​ ​ ​ ​ 40,000
Contingent consideration
(108/1.08) ​ ​ ​ ​100,000
Consideration
transferred ​ ​ ​ ​ ​490,000

Example 4
On 1 January 20X6, P Bhd acquires 100% interest
of ordinary shares of S Sdn Bhd. On this date, the
identifiable assets and liabilities of S Sdn Bhd are
valued at RM200 million. The maintainable profits of
S Bhd are estimated at RM40 million per year.
The purchase consideration consists of the
following terms:
i. An initial payment of RM100 million on 1 January
 20X6
ii. An amount of RM110 million payable on 1
January 20X7 contingent on the achievement of
the maintainable profit of RM40 million in the first
year; and
S’s maintainable profits have been averaging about
RM40 million per year in the past five years and it is
probable that this level of profits would be
maintained in the foreseeable future. At the
acquisition date, P’s borrowing cost is 10% per
year.

Consideration transferred:
Initial
payment ​ ​ ​ ​ ​ ​ ​RM100 million
Contingent consideration
110/(1.1) ​ ​ ​ ​RM 100 million
Cost of combination / CT ​ ​ ​ ​ ​RM
200 million

2. Calculating goodwill

Example 1
Statement of Financial position as at 31.12.X8
Parent (RM) Subsidiary (RM)
Non-current assets 2,500,000 1,200,000
Current assets 1,800,000 250,000
Total 4,300,000 1,450,000

Ordinary shares 2,000,000 1,000,000

Retained earnings 1,800,000 300,000
Liabilities 500,000 150,000
Total 4,300,000 1,450,000
 Additional information:
Parent acquired 60% of the ordinary shares in
subsidiary at cash consideration of RM900,000 on
31.12.X8. Calculate the partial goodwill on that
date.
Note: SOFP date equals acquisition date.

Working ​ ​ ​ ​ ​ ​RM ​ ​R
M
Consideration
transferred ​ ​ ​ ​ ​ ​ 00,000
9
Add) Non-controlling interest ​(40% x
FVNA) ​ ​ ​ ​520,000
Less) Fair value of net assets:
Ordinary shares ​ ​ ​ ​ ​ ,000,000
1
Retained earnings ​ ​ ​ ​ ​ 300,000
​(1,300,000)
Goodwill ​ ​ ​ ​ ​ ​ ​ ​
120,000

Example 2
Statement of Financial position as at 31.12.X8
Parent (RM) Subsidiary (RM)
Non-current assets 2,500,000 1,200,000
Current assets 1,800,000 250,000
Total 4,300,000 1,450,000

Ordinary shares 2,000,000 1,000,000

Retained earnings 1,800,000 300,000
Liabilities 500,000 150,000
Total 4,300,000 1,450,000

Additional information:
 Parent acquired 80% of the ordinary shares in
subsidiary at cash consideration of RM 1 million on
31.12.X7. The retained earnings of S on this date
was RM200,000.
Calculate the partial goodwill.
Note: SOFP date is after acquisition date.
Working ​ ​ ​ ​ ​ ​RM ​ ​R
M
Consideration transferred ​ ​ ​ ​ ​
1,000,000
Add) Non-controlling interest ​(20% x
FVNA) ​ ​ ​ ​240,000
Less) Fair value of net assets:
rdinary shares ​ ​ ​ ​ ​ ​1,000,000
Retained earnings ​ ​ ​ ​ ​
200,000 ​(1,200,000)
Goodwill ​ ​ ​ ​ ​ ​ ​ ​
40,000

Example 3
Statement of Financial Position as at 31.12.X8
Parent (RM) Subsidiary (RM)
Non-current assets:
Land 1,900,000 800,000
Building 600,000 200,000
Current assets:
Trade receivables 800,000 250,000
Bank 1,000,000 200,000
Total 4,300,000 1,450,000

Ordinary shares 2,000,000 1,000,000

Revaluation reserve 300,000 50,000
Retained earnings 1,500,000 250,000
Liabilities 500,000 150,000
Total 4,300,000 1,450,000

Parent acquired 80% of the ordinary shares in

subsidiary at cash consideration of RM1,200,000 on
31.12.X7. The retained earnings of S on that date
was RM200,000. On the date of acquisition, fair
value of land belonging to S was RM900,000.
Calculate the partial goodwill.
Note: SOFP date is after acquisition date.

Working ​ ​ ​ ​ ​ ​ ​RM ​
​RM
Consideration
transferred ​ ​ ​ ​ ​ ​ 1,200,000
Add) Non-controlling interest ​(20% x
FVNA) ​ ​ ​ ​ ​270,000
Less) Fair value of net assets:
Ordinary
shares ​ ​ ​ ​ ​ ​1,000,000
Revaluation reserve ​ ​ ​ ​ ​ ​
150,000
Retained earnings ​ ​ ​ ​ ​ ​
200,000 (1,350,000)
Goodwill ​ ​ ​ ​ ​ ​ ​ ​
120,000
 Example 4
P acquired 90,000 units (90%) of the ordinary
shares of S on 1.1.X16 with cash consideration of
RM250,000. Retained earnings on this date was
recorded as RM65,000. The market value of S’s
shares on acquisition date was RM2.50. There are
no other reserves on that date.
Calculate full goodwill.

Working ​ ​ ​ ​ ​ ​ ​RM ​
​RM
Consideration
transferred ​ ​ ​ ​ ​ ​ 250,000
Add) Non-controlling interest ​(10,000 units x
RM2.50) ​ ​ ​25,000
Less) Fair value of net assets:
Ordinary shares ​ ​ ​ ​ ​ ​100,000
Retained earnings ​ ​ ​ ​ ​ ​
65,000 ​(165,000)
Full
goodwill ​ ​ ​ ​ ​ ​ ​ ​ ​
110,000
Note: In calculating full goodwill, the NCI used is
based on market share price and not the fair value
of net assets – fair value of shares held.
Full goodwill means goodwill is calculated for both
parent and non-controlling interest.
GW Parent ​101,500 ​ ​GW NCI (110,000-
101,500) = 8,500
 3. Contingent consideration
Example
On 1 January 20X6, P Bhd acquires 100% interest of
ordinary shares of S Sdn Bhd. On this date, the
identifiable assets and liabilities of S Sdn Bhd are
valued at RM200 million. The maintainable profits of S
Bhd are estimated at RM40 million per year.
The purchase consideration consists of the following
terms:
iii. An initial payment of RM100 million on 1 January
20X6
 iv. An amount of RM110 million payable on 1
January 20X7 contingent on the achievement of
the maintainable profit of RM40 million in the first
year; and
S’s maintainable profits have been averaging about
RM40 million per year in the past five years and it is
probable that this level of profits would be
maintained in the foreseeable future. At the
acquisition date, P’s borrowing cost is 10% per
year.

Required:
Calculate the cost of combination on 1 January
20X6 and the goodwill on combination. Also, show
the journal entries to record the investment.

Solution
Cost of combination:
Initial
payment ​ ​ ​ ​ ​ ​ ​RM100 million
Contingent consideration
110/(1.1) ​ ​ ​ ​RM 100 million
Cost of combination ​ ​ ​ ​ ​ ​RM
200 million
The investment @ acquisition shall be recorded as
follows:
DR Investment ​ ​ ​200m
CR Cash account ​ ​ ​ ​100m
CR Deferred payment ​ ​ ​ ​100m

The goodwill on combination is calculated as follows:

​ ​ ​ ​ ​ ​ ​ ​RM (million)
FV of consideration
transferred ​ ​ ​ ​200 ​
Fair value of net assets
(assume) ​ ​ ​ ​(150)
Goodwill ​ ​ ​ ​ ​ ​ ​ 50
At the end of year X6, interest on the contingent
consideration needs to be recorded
​ ​ ​ ​ ​ ​RM (million)
DR Cost of capital / Interest expense ​ ​ ​10
​CR Deferred payment ​ ​ ​ ​ ​10
4. Consolidation comprehensive example

SOFP as at 1.1.20X1 Parent (P) Subsidiary(S)

RM’000 RM’000
Ordinary share capital (issued at 1,000 400
RM1)
Retained profits 600 200
Long term liabilities 300 200
Current liabilities 100 100
TOTAL 2,000 900

Properties 1,000 400

Plant & machinery 300 200
Current assets 700 300
TOTAL 2,000 900

On 1.1.20X1, P acquired 80% of the ordinary

shares belonging to S by paying RM500,000 in
cash and issuing 200,000 of P’s ordinary shares
with market value of RM2.50 on date of acquisition.

SOLUTION
Consideration transferred:
Cash = RM500,000
Ord share cap (200,000 units x RM2.50) =
RM500,000
 The journal entries to record investment or
consideration transferred are as follows:

DR Investment ​ ​ ​ ​1,000,000
​CR Cash ​ ​ ​ ​ ​ ​500,000
​CR Ord share capital (200k x
RM2.50) ​ ​500,000
​
(Adjustments made in Parent’s books)

The modified SOFP can be viewed as follows:

Parent (P) Subsidiary(S) RM’000
RM’000
Ordinary share capital (1,000+500) 1,500 400
Retained profits 600 200
Long term liabilities 300 200
Current liabilities 100 100
TOTAL 2,500 900

Investment in S (+1000) 1,000 nil

Property 1,000 400
Plant and equipment 300 200
Current assets (-500) 200 300
TOTAL 2,500 900

Step 1 – calculating goodwill

RM’000
Consideration transferred
(500+500) ​ ​ ​ ​ ​ ,000
1
Add) NCI (20% x FVNA) ​ ​ ​ ​ ​ ​
120
Less) Fair value of net assets:
Ordinary Share capital ​ ​ ​ ​ ​400
Retained
 earnings ​ ​ ​ ​ ​ ​200 ​(600)
Goodwill ​ ​ ​ ​ ​ ​ ​ ​ 520

Step 2 – recording goodwill

Consolidated accounts is showing the financial

results of the parent and its subsidiaries as one
entity. Therefore the “Investment value in the
subsidiaries” must be eliminated since the SOFP
balances of the subsidiaries are added to the
parent’s SOFP balances. The goodwill which arises
from the business combination will be reported in
the consolidated SOFP instead. The adjustments
are as follows:
​DR Ordinary share capital of S ​ ​400
​DR Retained profits of S ​ ​ ​200
​DR Goodwill on combination ​ ​ ​520
​ ​CR Investment in S ​ ​ ​ ​1,000
​ ​CR NCI ​ ​ ​ ​ 120
(to eliminate cost of investment against share
capital and pre-acquisition reserves)
Please note the components in the above
adjustments are balances used in calculation of
goodwill

Using the modified SOFP the consolidation is

prepared as follows:
​The modified SOFP can be viewed as follows:
P RM’000 S RM’000 Workings Conso
Ordinary share capital 1,500 400 1500+400-400 1500
Retained profits 600 200 600+200-200 600
Non-controlling interest 120
Long term liabilities 300 200 300+200 500
Current liabilities 100 100 100+100 200
TOTAL 2,500 900 2920

Investment in S 1,000 1000-1000 0

Goodwill 100 520
Property 1,000 400 1000+400 1400
Plant and equipment 300 200 300+200 500
Current assets 200 300 200+300 500
TOTAL 2,500 900 2920

​Note:
There are cases where “the fair value of net assets
@ acquisition date > consideration transferred. This
will result in bargain purchase or sometimes known
as “negative goodwill. For presentation purposes,
bargain purchase is accounted for in retained
earnings of parent company. This will zerorise the
“bargain purchase account” and will not be
presented in Conso SOFP as a separate line item.
The adjustment to eliminate the Investment
value in the subsidiary will be as follows:
DR Ordinary share capital of S ​ ​X
​DR Revaluation reserves of S ​ ​X
​DR Retained profits of S ​ ​ ​X
​ ​CR Investment in S ​ ​ ​ ​X
​ ​CR Bargain purchase / RE ​ ​ ​X
DISCUSSION QUESTIONS
Question 1
P acquired 140,000 units of OS of S on 1.1.20X5 with
the following considerations:
a. P issued 120,000 units of its ordinary shares as part of
the payment
b. P issued RM55,000 debentures payable on 1.1.20X6
Cost of capital is determined at 10%. The following data
were extracted from the books:
​ ​ ​ ​ 1.1.X5(RM) ​ ​
1.1.X6 (RM) ​ ​
Ordinary share price
P ​ ​ ​2.80 ​ ​ ​3.20
Ordinary share price
S ​ ​ ​2.20 ​ ​ ​2.50

P’s equity balances ​ ​ ​ 1.1.X5 ​ ​

1.1.X6
Ordinary share value
P ​ ​2,000,000 ​ ​2,000,000
Retained
earnings ​ ​ ​1,700,000 ​ ​1,950,000
Revaluation reserve ​ ​ ​ 100,000 ​ ​
150,000

S’s equity balances ​ ​ ​ 1.1.X5 ​ ​

1.1.X6
Ordinary share value
S ​ ​200,000 ​ ​200,000
Retained
earnings ​ ​ ​165,000 ​ ​180,000
Revaluation reserve ​ ​ ​ 30,000 ​ ​
36,000

Required:

Calculate partial and full goodwill.

Assume all ordinary shares issued at RM1/share.

Question 2

P acquired 200,000 units (80% OS) in S with cash

consideration of RM150,000 and ordinary shares
exchange of 1 share in P for every 2 shares acquired in
S. The acquisition was made 31.12.X6 when the share
price of P was RM2.00/share. P will also make an
additional cash payment of RM112,000 if the net profit of
S increases by 20% or more for year ended 31.12.X7.
Cost of capital is 12%.
The retained earnings of S on acquisition date was
recorded at RM220,000 and other reserves remained
unchanged. The following is an extract from the
statement of financial positon as at 31.12.X7:
 ​ ​ ​ ​ ​P (RM) ​ ​ ​ ​S (RM)
Ordinary
shares ​ ​ ​1,000,000 ​ ​ ​250,000
General reserve ​ ​ ​ 146,000 ​ ​ ​
80,000
Retained earnings ​ ​ ​
899,000 ​ ​ ​256,000
Liabilties ​ ​ ​ ​
540,000 ​ ​ ​149,000 ​

Required:

Calculate partial goodwill.

Question 3

P acquired 7.5 million units out of total 10 million

ordinary shares issued by S on 31.12.X7. P also
acquired 200,000 units of preference shares issued by S
on 1.1.X9. P has fully recorded both investments. P paid
RM200,000 for the preference shares and the
investment value for both investments is recorded at
RM11.5 million. Retained earnings on this date was
recorded as RM1.5million.
On the date of acquisition, both P and S plants are
estimated to have a fair value of RM1 million and
RM300,000 more than the carrying value. On 31.12.X9,
both of these plants have risen by another RM500,000
for P and RM100,000 for S. None of these fair value
adjustments have been recorded.
An extract of S’s equity balances on 31.12.X9 are as
follows:
​ ​ ​ ​ RM
Ordinary shares ​ ​11,000,000
Preference shares ​ ​ 250,000
Revaluation reserve ​ ​ 80,000
Retained earnings ​ ​ 2,350,000

Required:
Calculate the partial goodwill.