It looks like a question relating to consolidating group accounts which does actually lead to Goodwill being created in the consolidated balance sheet.
Kerry, it's a loooong time since I've done Consolidations / goodwill calculations but I can't understand why the Acquiring company would be entitled to more than is %share of retained earnings / capital.
-- Edited by ADAS on Friday 20th of January 2012 02:39:55 PM
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
I totally agree with what you are saying, and understand why the answer is what it is, but my text book taught me otherwise! In the examples they use, they clearly deduct 100% of the retained earnings. That's why I am getting confused. I have literally laid out the workings 'text book' fashion, and when I looked at the correct answer, it was all correct apart from the retained profits (although I understand how and why they got this figure).
I believe I am missing something really simple here! like a date thing or something .
I am going to have another read and see what I have missed. The last thing I want to do is go to my exam and with the view that I need to deduct the % off the retained profit (like 30% in this case) only to find my text book was in fact correct, or vice versa!
Thanks again, kind regards,
Kerry
-- Edited by KerryB on Friday 20th of January 2012 02:46:01 PM
-- Edited by KerryB on Friday 20th of January 2012 02:46:38 PM
I was hoping some wise fellow out there could help me with regards to the goodwill calculation when acquiring a % of a company.
I thought I was OK, then did a mock exam and found the answer was based on calculating the retained earning as the % of shares acquired. When checking my study text it has not shown me to do this, not what I can see anyway.
For example - Question:
Aye Ltd has 10 million £1 issued ordinary shares. At 1 June 2010 Bee Ltd purchased 70% of Aye Ltds
£1 ordinary shares for £9,000,000. At that date Aye Ltds accumulated profits were £750,000.
What was the goodwill arising on this acquisition at 1 June 2010?
My Calculation;
Consideration: 9,000,000 NCI (30% of 10m): 3,000,000 Total shares - Aye Ltd: (10,000,000) Retained Profits: (750,000) Answer - Goodwill: 1250,000
However the answer would be 1475,000 (Retained Profits = 70 % of 750,000 = 525,000)
Now I completely understand why they would do this, but when I refer back to my study text it seems to always deduct the full (100%) retained profits.
I am sure I am just missing something, and there is a very simple explanation!
I have my exam tomorrow, so any urgent help would but extremely appreciated. I hope I am OK to ask this question, if not please advise and I will remove asap - I have changed names and figures, so as not to copy the actual question - but the calcuation principles are the same.
I would have thought that anything more than the share value would be consdidered 'Share Premium', but using your example I suppose that it makes sense that the 'goodwill' would be the amount paid that was surplus to the share value (i.e. £2M). Then you have a share I suppose of the assets of the business which would be 70% of £750,000......that is £525,000.
So the actual amount 'overpaid' would be £2M - £525,000 = £1,475,000.
One way of looking at it is that you pay £9M for shares and assets worth £7,525,000.
You have to calculate the 70% of assets as that is part of what you are buying and if that has a value then it can't be 'goodwill'. You have to ask 'what am I buying here'?
Maybe I have misunderstood the question....hope this helps.
I think it is the wording of the question that is confusing me! I have had a look at another question worded different and calculates the goodwill the way I had originally. I believe it is all to do with whether or not the question mentions the Non-controlling interest figure. If they tell you the figure then it must include their part of the retained profits, meaning that you then do not need to deduct the NCI % of the retained profits.
I either get it or I am just confusing myself further!
Just a thought - could it be in the other examples there's isn't any non-controlling interest and the company bought 100% of the shares? I would assume that any question would need to tell the %ge of shares bought by the investing company and it's that % that drives your answer.
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
No it was definitely where there was a % of shares.
However, I do think I am understanding it now. If the question doesn't give me the figure of the NCI's interest then of course I only need to deduct the acquiring company's % of the retained profits, because I need to calculate the NCI's fair value. Whereas if the question gives me the figure of the fair value of the NCI, this includes their part of the retained profits - so I assume anyway!
For example (with the above question) If they gave me a figure of the NCI's fair value as 3,225,000 (shares + profit share) I would have then worked it out as follows;
Consideration 9,000,000
NCI's Interest 3,225,000
Total shares (10,000,000)
Retained profit (750,000)
Answer = Goodwill 1,475,000
Many thanks for your help. Fingers crossed, I think I understand. I need to read the question very carefully!
I've read through this thread and I would say that you understand the subject matter absolutely perfectly.
Just calculated the two methods and agree with you totally. Any other answer given is methinks the book that's in error.
I know that in the 2011 Kaplan study text for ACCA paper P2 (which covered this material in depth) there were 19 pages of corrections issued!
If you have a Kaplan text for your studies then there will be a code in the inside cover. You can register your book with Kaplan Engage to get access to the corrections.
For info, my two calculations were :
kind regards,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I am certainly feeling more confident with the subject now!
It is a big shame that some study texts contain typos. When you have previously found errors in study text it just puts doubt in your mind to whether what you are learning is actually correct, even though it more than likely is! It just causes confusion.
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