ACF301 – Financial

Accounting I
Week 2 – Statement of Financial Position Adjustments
Session objectives
Statement of Financial Position adjustments including:
➢ Goodwill impairment
➢ Fair Values
➢ Cost of Investment
➢ Fair value of assets
➢ Theory
➢ Non-controlling interest
➢ Choice between Fair Value of Proportion of Net Assets
➢ Theory
Goodwill
Goodwill is an asset representing future economic benefits arising from
assets acquired through a business combination

Intangible asset Impairment Amortisation

Goodwill - impairment
On 1 January 2017, ABC Plc acquired 100% of the share capital of XYZ Limited for £25m.
At this date, the fair value of net assets was £20m. On the 31st December 2017 goodwill
was impaired by 10%

Required
Calculate the value of goodwill as at 31st December 2017
Goodwill – impairment answer
W3 Goodwill

Cost of investment £25m

% share of net assets (100% x £20m) (£20m)
£5m
Impairment (10% x £5m) £0.5m
£4.5m
How to treat impairment
Dr Impairment expense
Cr Goodwill
Fair values
To ensure that an accurate figure is calculated for goodwill:
➢ The consideration paid for a subsidiary must be accounted for at fair value
➢ The subsidiary’s identifiable net assets and liabilities acquired must be accounted
for at their fair values
➢ Intangible assets can be recognised where their value can be reliably measured

IFRS 13 defines fair value as:

“the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date”
Calculation of cost of investment
➢Cash paid
➢Fair value of other consideration:
➢Deferred consideration
➢Contingent consideration

Note:
Costs of acquisition such as legal, accounting or other professional fees are expensed as
incurred
Cost of investment example
Alpha acquires 30 million £1 shares (70%) of the ordinary shares of Beta by offering a
share-for-share exchange of two shares for every five shares acquired in Beta and a cash
payment of £1.50 per share payable three years later. Alpha’s shares have a nominal
value of £1 and a current market value of £1.60. The cost of capital is 8%.

Required
(1) Calculate the cost of investment and show the journals to record it in Alpha’s
accounts
(2) Show how the discount would be unwound in future years
W3 – Goodwill
“a share-for-share exchange”
“a cash payment”

Cost of investment:
1) Share exchange
2) Deferred consideration
W3 – Goodwill (cont’d)
1) Share exchange
“a share-for-share exchange of two shares for every five shares ”
Number of shares: (30,000 x 2)/5 = 12,000 shares
Nominal price = £1
Premium price = 1.6 - 1 = £0.6
SC: 12,000 x 1 = £12,000
SP: 12,000 x 0.6 = £7,200
Total cost of 1): 12,000 + 7,200 = 19,200

Dr Goodwill cost of investment 19,200

Cr Share capital 12,000
Share premium 7,200
W6 Deferred Consideration
Part of W3 Goodwill, i.e., working 2)

“a cash payment of £1.50 per share payable three years later”

Value of cash payment: 12,000 x 1.5 = £18,000

Fair value: 18,000/(1 + 0.08)3 = 14,289

Dr Goodwill cost of investment 14,289

Cr Deferred consideration 14,289
Fair values – how to include fair values in
consolidation workings

At acquisition At reporting Post

date acquisition
Share capital and other reserves (separate line X X X
items)
Fair value adjustments X X
Fair value depreciation adjustment (X) (X)
Note the treatment for post-acquisition revaluations differs
Reasons for using fair values
IFRS 3 states:
“All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value”

IFRS 13 defines fair value as:

“the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date”

Ignoring

Future intentions
Perspective of the group Value of goodwill
Post-acquisition events
Losses / costs arising
from acquisition
Non controlling interest – choice of methods

Proportion Fair value

of net at
assets acquisition
Alternatives for calculating fair values
➢Estimating the control premium

➢Active market price for non-controlling interest shares

➢Internal forecasted measures such as discounted cash flows

Arguments for and against include non-controlling interest
goodwill

Non controlling interest goodwill

Purchased v Control Faithful

Group concept Measurement
non-purchased element representation
Impact on Goodwill (W3) – Example
Daniel acquired 80% of the ordinary share capital of Craig on 31 December 2016 for
£78,000. At this date the net assets of Craig were £85,000

Required
Calculate the goodwill (W3) arising on acquisition if:
(i) The NCI is valued using the proportionate net assets approach
(ii) The NCI is valued using the fair value method and the fair value of the NCI on the
acquisition date is £19,000. What if goodwill is impaired?
W3 - Goodwill
“Daniel acquired 80% of the ordinary share capital of Craig on 31 December 2016 for £78,000”

(i)
Cost of investment: £78,000
% share net assets: 80% x 85,000 = £68,000

So, parent goodwill: 78,000 – 68,000 = £10,000

W3 – Goodwill (FV method)
“Daniel acquired 80% of the ordinary share capital of Craig on 31 December 2016 for £78,000”

(ii)
Cost of investment: £78,000
Fair value of NCI: £19,000
£97,000
Less 100% net assets at acquisition: (£85,000)
£12,000: £10,000 parent goodwill
£2,000 NCI goodwill (i.e., 19,000 – 85,000 x 20%)

If goodwill is impaired by 10%, parent: 10,000 x 10% = £1,000

NCI: 2,000 x 10% = £200
Impact on Non-controlling interest (W4) – example (cont’d)
Daniel acquired 80% of the ordinary share capital of Craig on 31 December 2016 for
£78,000. At this date the net assets of Craig were £85,000. On 31 December 2017 the
net assets of Craig were £105,000.

Required
Calculate the value of the non-controlling interest (W4) if:
(i) The NCI is valued using the proportionate net assets approach
(ii) The NCI is valued using the fair value method and the fair value of the NCI on the
acquisition date is £19,000
W4 – NCI
W2 net assets
at acquisition at reporting date post acquisition
Net assets £85,000 £105,000 £20,000

(i) W4 NCI
% share of net assets at acquisition: 20% x 85,000 = £17,000
% share of post acquisition: 20% x 20,000 = £4,000
NCI: 17,000 + 4,000 = £21,000

(ii) W4 NCI
Fair value of NCI: 17,000 + 2,000 = £19,000
% share of post acquisition: 20% x 20,000 = £4,000
Less impairment: £200 (see previous calculation)
NCI: 19,000 + 4,000 -200 = £22,800