EXAMPLES OF GOODWILL CALCULATION

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 (on date of acq) 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

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 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.

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Working RM RM
Consideration transferred 900,000
Add) Non-controlling interest (40% x FVNA) 520,000
Less) Fair value of net assets:
Ordinary shares 1,000,000
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 RM
Consideration transferred 1,000,000
Add) Non-controlling interest (20% x FVNA) 240,000
Less) Fair value of net assets:
Ordinary shares 1,000,000
Retained earnings 200,000 (1,200,000)
Goodwill 40,000

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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

**DR Land 100,000

CR Revaluation reserve 100,000

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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.
Full partial
Working RM RM
Consideration transferred 250,000
Add) Non-controlling interest (10,000 units x RM2.50) 25,000 16500
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

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 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

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4. Consolidation comprehensive example

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

RM’000 RM’000
Ordinary share capital (issued at RM1) 1,000 400
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

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Step 1 – calculating goodwill

RM’000

Consideration transferred (500+500) 1,000

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

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 520

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 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 NCI X
CR Bargain purchase / RE X

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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:

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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.

From Jane Lazar – text book

Q10.3 UNTIL 10.7 Calculate goodwill only

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