Advanced Financial
Accounting: Chapter 4
Group Reporting III
Tan, Lim & Lee Chapter 4
© 2015
1
Learning Objectives
1.
2.
3.
4.
5.
6.
Understand the rationale for elimination of investment;
Understand the concept of non-controlling interests;
Appreciate the alternative measurement basis for non-controlling
interests under IFRS 3;
Know how to prepare consolidation journal entries relating to
goodwill, depreciation and amortization of differences between
book values and fair values of identifiable assets, contingent
liabilities of acquired subsidiaries and non-controlling interests;
Know how to prepare consolidation journal entries to allocate
current and past income to non-controlling interests; and
Understand the components of non-controlling interests and know
how to analytically determine their balances
Tan, Lim & Lee Chapter 4
© 2015
2
Content
1.
Introduction
Introduction
2.
Elimination of the investment in a subsidiary
3.
Effects of amortization, depreciation and disposal of undervalued
or overvalued assets and liabilities subsequent to acquisition
4.
Accounting for non-controlling interests under IFRS 3
5.
Goodwill impairment tests
6.
Conclusion
Tan, Lim & Lee Chapter 4
© 2015
3
Introduction
Recap of chapter 3
• Acquisition method: recognize and measure identifiable net assets
at fair value + recognize goodwill
– Recognition and measurement principles
• Different forms of business combination but in substance they share
common features
– Acquirer who gains control of one or more businesses
– Acquisition of a subsidiary = Acquisition of net assets of the
acquiree
Tan, Lim & Lee Chapter 4
© 2015
4
Introduction
Focus of chapter 4:
• Subsequent effects when identifiable net assets are consumed, extinguished or
amortized.
– Sale, consumption, use or settlement of the assets and liabilities of acquiree
should be recorded at fair value
– Test for impairment of goodwill
• Subsequent effects of acquisition
– Demonstrate how consolidation journal entries are passed to record the
subsequent effects of acquisition
• Accounting for non-controlling interests
– Show how the balance of the non-controlling interests can be analyzed with
respect to three components
– Illustrate the consolidation journal entries to recognize non-controlling interest’s
share of equity
• Accounting for business combinations in multiple periods
– Explain the re-enactment process: involving re-enacting certain past
consolidation adjusting entries.
Tan, Lim & Lee Chapter 4
© 2015
5
Content
1.
Introduction
2.
Overview ofofthe
Elimination
theconsolidation
investment inprocess
a subsidiary
3.
Effects of amortization, depreciation and disposal of undervalued
or overvalued assets and liabilities subsequent to acquisition
4.
Accounting for non-controlling interests under IFRS 3
5.
Goodwill impairment tests
6.
Conclusion
7.
Appendix 4: Illustrations of non-controlling interests measured as
a proportion of acquisition-date identifiable net assets.
Tan, Lim & Lee Chapter 4
© 2015
6
Elimination of Investment Account
What the parent is paying for
Consideration
transferred
=
Eliminated against
subsidiary’s share
capital and preacquisition retained
earnings
•
Share of book
value of
subsidiary’s
net assets at
acquisition
date
+
Share of
excess of fair
value over
book value of
identifiable net
assets
+
Goodwill
Investment account is eliminated
– To ensure that the investment account must be zero
– Substituted with subsidiary’s identifiable net assets and goodwill (residual)
– Rationale: Avoid recognizing assets in two forms (investment in parent’s
statement of financial position and individual assets and liabilities of subsidiary)
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7
Elimination of Investment Account
• Investment account is eliminated (Continued)
– Pre-acquisition retained earnings or pre-acquisition reserves of subsidiary
are not included in consolidated equity
• Rationale: Pre-acquisition retained earnings arose prior to the exercise
of control by parent
– The elimination process will result in residuals comprising of
• Goodwill; and
• Excess or deficit of fair value over book value of identifiable net assets
• Re-enactment of elimination of investment entry in subsequent year
– Re-enacted as long as the investment exists
• Rationale: parent’s legal entity financial statements would include
investment in subsidiary balance
Tan, Lim & Lee Chapter 4
© 2015
8
Illustration 1: Elimination of investment
Illustration
On 8 August 2010, Parent Co. bought 100% interest in subsidiary for
$200,000. At the date of acquisition, Subsidiary Co had the following:
Share capital:
Retained earnings:
Equity:
$50,000
$30,000
$80,000
At acquisition date, Subsidiary Co unrecognized intangible assets had
a fair value of $50,000. Tax rate was 20%
Tan, Lim & Lee Chapter 4
© 2015
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Illustration 1: Elimination of investment
Parent
Subsidiary
Consolidation
adjustments
Dr
Consolidated Statement of financial
position
Cr
Assets
Investment in
Subsidiary
200,000
Goodwill (Note 2)
Other net assets
(Note 1)
200,000
80,000
0
80,000
300,000
80,000 50,000
10,000
420,000
500,000
80,000 130,000
210,000
500,000
Share capital
100,000
50,000 50,000
100,000
Retained earnings
400,000
30,000 30,000
400,000
500,000
80,000 80,000
Equity
210,000
Tan, Lim & Lee Chapter 4
0
500,000
210,000
© 2015
10
Illustration 1: Elimination of Investment
Note 1:
Increase in other net assets due to recognition of intangible assets
Decrease in other net assets due to recognition of deferred tax liability
Net increase in other net assets
50,000
(10,000)
40,000
Note 2:
Goodwill is excess of the investment amount over the FV of identifiable net assets
Investment in Subsidiary
200,000
Book value of equity or net assets
(80,000)
Fair value of intangible asset
Book value of intangible asset
Excess of fair value over book value
Deferred tax effects
50,000
0
50,000
(10,000)
(40,000)
Goodwill
Tan, Lim & Lee Chapter 4
80,000
© 2015
11
Illustration 1: Elimination of investment
CJE1: Elimination of investment in subsidiary
Dr
Share capital
Dr
Retained earnings
Dr
Goodwill
Dr
Intangible asset
Cr
Investment in Subsidiary
Cr
Deferred tax liability
50,000
30,000
80,000
50,000
210,000
200,000
10,000
210,000
Re-enacting CJE
• Building blocks of consolidation worksheet are the legal entity financial
statements of parent and subsidiary
• CJE 1 has to be re-enacted at each reporting date as long as Parent has
control over subsidiary
• Each consolidation process is a fresh-start approach
Tan, Lim & Lee Chapter 4
© 2015
12
Content
1.
Introduction
2.
Elimination of the investment in a subsidiary
3.
3.
Effects of amortization, depreciation and disposal of undervalued
Accounting
forassets
non-controlling
interests
under IFRS
3
or
overvalued
and liabilities
subsequent
to acquisition
4.
Accounting for non-controlling interests under IFRS 3
5.
Goodwill impairment tests
6.
Conclusion
Tan, Lim & Lee Chapter 4
© 2015
13
In Subsequent Years
• At acquisition date, we recognize:
– Fair value of identifiable net assets of acquiree as at acquisition date,
– Intangibles, contingent liabilities,
– Deferred tax assets or liabilities on the above; and
– Goodwill as a residual
• In subsequent years:
– Subsequent extinguishment of assets and liabilities of subsidiary must be
determined based on the fair values at acquisition date.
– Therefore, subsequent amortization, depreciation and cost of sales of acquired
assets are determined based on fair value as at acquisition date
– Elimination of consideration transferred , recognition of fair value adjustments
and amortization entries must be repeated until:
i. Date of disposal of the investment in subsidiary; or
ii. Date when control is lost
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14
In Subsequent Years
• In subsequent years (Continued)
– Acquisition method only recognizes fair value at critical event:
acquisition date
• New internally-generated goodwill or subsequent appreciation in fair
values are not recognized subsequent to acquisition date
– Since net assets are carried at book value in the separate financial
statements, the subsequent amortization/depreciation/disposal are
adjusted in the consolidation worksheet
BV of expense in
separate
financial
statements
Tan, Lim & Lee Chapter 4
+
(FV- BV) adjustment
to expense
Adjusted in consolidation
worksheet
© 2015
=
FV of expense
in consolidated
financial
statements
15
Illustration 2:
Amortization of Fair Value Differentials
• P Co paid $6,200,000 and issued 1,000,000 of its own shares to
acquire 80% of S Co on 1 Jan 20X5
• Fair value of P Co’s share is $3 per share
• Fair value of net identifiable assets is as follows:
Book value
Leased property
4,000,000
In-process R&D
Other assets
Liabilities
Remaining useful life
5,000,000
20 years
2,000,000
10 years
1,900,000
1,900,000
(1,200,000)
(1,200,000)
Contingent liability
(100,000)
Net assets
4,700,000
Share capital
1,000,000
Retained earnings
3,700,000
Shareholders’ equity
4,700,000
Tan, Lim & Lee Chapter 4
Fair value
© 2015
7,600,000
16
Illustration 2:
Amortization of Fair Value Differentials
Additional information:
• Contingent liability of $100,000 was recognized as a provision loss
by the acquiree in legal entity financial statement on Dec 20X5
• FV of NCI at acquisition date was $2,300,000
• Net profit after tax of S Co for 31 Dec 20X5 was $1,000,000
• No dividends were declared during 20X5
• Shareholders’ equity as at 31 Dec 20X5 was $5,700,000
Q1 : Prepare the consolidation adjustments for P Co for 20X5
Q2 : Perform analytical check on balance of NCI as at 31 Dec 20X5
Tan, Lim & Lee Chapter 4
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17
Illustration 2:
Amortization of Fair Value Differentials
• Consideration transferred = Cash consideration + Fair value
of share issued
= $6,200,000 + (1,000,000 x $3)
= $9,200,000
• Deferred tax liability = 20% x ($7,600,000 - $4,700,000)
= $580,000
• Goodwill = Consideration transferred + NCI – Fair value of net
identifiable assets, after-tax
= $9,200,000 + $2,300,000 – ($7,600,000 - $580,000)
= $4,480,000
Tan, Lim & Lee Chapter 4
© 2015
18
Illustration 2:
Amortization of Fair Value Differentials
• P’s share of goodwill = Consideration transferred – 80% x Fair
value of net identifiable assets, after tax
= $9,200,000 – 80% x $7,020,000
= $9,200,000 – $5,616,000
= $3,584,000
• NCI’s share of goodwill = Consideration transferred – 20% x Fair
value of net identifiable assets, after tax
= $2,300,000 – 20% x $7,020,000
= $2,300,000 – $1,404,000
= $896,000
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19
Illustration 2:
Amortization of Fair Value Differentials
Consolidation adjustments for 20X5
CJE 1: Elimination of investment in Subsidiary
Dr
Dr
Dr
Dr
Dr
Cr
Cr
Cr
Cr
Share capital
Opening retained earnings
Leased property
In-process R&D
Goodwill
Contingent liability
Deferred tax liability (net)
Investment in S
Non-controlling interests
Tan, Lim & Lee Chapter 4
1,000,000
3,700,000
1,000,000
2,000,000
4,480,000
100,000
580,000
9,200,000
2,300,000
© 2015
20
Illustration 2:
Amortization of Fair Value Differentials
CJE 2: Depreciation and amortization of excess of FV over book value
Dr
Dr
Cr
Depreciation of leased property
Amortization of in-process R&D
Accumulated depreciation
Cr
Accumulated amortization
Under dep. by
$50k
Dep. of
leased
property
$200,000
50,000
200,000
Under amort. by
$200k
Dep exp:
$50,000
$250,000
50,000
200,000
Amort exp:
$200,000
Amort. of
R&D
$0
Based on
book value
Tan, Lim & Lee Chapter 4
Based on
book value
Based on FV
© 2015
Based on FV
21
Illustration 2:
Amortization of Fair Value Differentials
CJE 3: Reversal of entry relating to provision for loss
Dr
Cr
Provision for loss
Loss expense
100,000
100,000
Note: Contingent liability was already recognized in CJE 1. The
recognition by the acquiree in its legal entity financial statement
results in double counting; hence this reversal entry is necessary
CJE 4: Tax effects on CJE 2 & CJE 3
Dr
Deferred tax liability (net)
Cr
Tax expense
Tan, Lim & Lee Chapter 4
20% * (200k
+50k -100k)
30,000
30,000
© 2015
22
Illustration 2:
Amortization of Fair Value Differentials
CJE 5: Allocation of current year profit to non-controlling interests (NCI)
Dr
Cr
Income to NCI
NCI
176,000
176,000
Net profit after tax
Excess depreciation
Excess amortization
Reversal of loss from contingent liability
Tax effects on FV adjustments
Adjusted net profit
NCI’s share (20%)
Tan, Lim & Lee Chapter 4
© 2015
1,000,000
(50,000)
(200,000)
100,000
30,000
880,000
176,000
23
Illustration 2:
Amortization of Fair Value Differentials
Explanatory note to CJE 5:
• NCI have a share in the extinguishment of the initial FV differences
and in the impairment of goodwill.
• Net profit after tax represents that increase in the book value of
equity of the subsidiary
• Other adjustments relate to the extinguishment of the FV
differentials
• NCI have a share of $176,000 of adjusted profit which represents
– Increase in book value
– Decrease in fair value differentials
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24
Illustration 2:
Amortization of Fair Value Differentials
NCI balance:
NCI at acquisition date (CJE1)
Income allocated to NCI for 20x5 (CJE 5)
NCI as at 31 Dec 20x5
Tan, Lim & Lee Chapter 4
© 2015
$2,300,000
176,000
$2,476,000
25
Illustration 2:
Amortization of Fair Value Differentials
Q2 : Perform an analytical check on the balance of NCI as at 31 Dec
20X5
1st Step: reconstruct the balance of non-controlling interest as at 31
Dec 20x5
NCI as at acquisition date (CJE 1)
Income allocated to NCI for 20x5 (CJE5)
NCI as at 31 December 20x5
Tan, Lim & Lee Chapter 4
2,300,000
176,000
2,476,000
© 2015
26
Illustration 2:
Amortization of Fair Value Differentials
2nd step: reconcile the balance to the three components that NCI have Non – controlling
interests
Share of
Unamortized
FV adjustment
Share of book value
of net assets
$5,700,000 x 20%
= $1,140,000
Tan, Lim & Lee Chapter 4
+
($1,000,000 x 19/20 x
80% x 20%) +
($2,000,000 x 9/10 x
80% x 20%) =
$440,000
© 2015
Share of
unimpaired goodwill
+
$896,000
= $2,476,000
27
Content
1.
Introduction
2.
Elimination of the investment in a subsidiary
3.
Effects of amortization, depreciation and disposal of undervalued
or overvalued assets and liabilities subsequent to acquisition
4.
Accounting for non-controlling interests
underIFRS
IFRS33
interest under
5.
Goodwill impairment tests
6.
Conclusion
Tan, Lim & Lee Chapter 4
© 2015
28
Non-controlling interest
•
NCI only arises in consolidated financial statements where:
– one or more subsidiaries are not wholly owned by the parent (IFRS 10)
•
NCI are entitled to their share of retained earnings of the subsidiary from
incorporation
– No distinction between pre-acquisition and post-acquisition retained
earnings for NCI
•
Same applies to OCI
– NCI collectively have a share of accumulated OCI arising from
incorporate date to the current date
•
NCI are normally a credit balance
– Share of residual interests in the net assets of a subsidiary
– Total equity (parent’s and NCI) = Assets - Liabilities
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Non-Controlling Interests’ Share of Goodwill
• IFRS 3 Para 19 allows NCI to be measured in either of two ways
Non-controlling interests
Measured at Fair
value at acquisition
date (include
goodwill)
Measured as a
proportion of the
recognized amounts of
the identifiable assets as
at acquisition date
“ Fair value basis”
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30
Non-Controlling Interests’ Share of Goodwill
• Under the fair value basis:
– FV is determined by either the active market prices of subsidiary’s
equity share at acquisition date or other valuation techniques
– FV per share of NCI may differ from parent because of control premium
paid by parent (e.g. 20% premium over market price to gain control)
– NCI comprises of 3 items:
Non – controlling
interests
Share of book value
of net assets
Tan, Lim & Lee Chapter 4
Share of
unamortized
FV adjustment
(FV - BV)
© 2015
Share of
unimpaired goodwill
31
Non-Controlling Interests’ Share of Goodwill
• Under the fair value option:
– Journal entry to record NCI at fair value (re-enacted each year):
Dr
Dr
Dr
Dr
Share capital of subsidiary
Retained earnings at acquisition date
Other equity at acquisition date
FV differentials (FV- BV)
Dr
Dr/Cr
Cr
Cr
Goodwill (Parent & NCI)
Deferred tax asset/ (liability) on fair value adjustment
Investment in subsidiary
FV differentials (BV – FV)
Cr
Non-controlling interests (At fair value)
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32
Non-Controlling Interests’ Share of Goodwill
• Under the 2nd option:
– NCI is a proportion of the acquiree’s identifiable net assets (i.e. not full
fair value)
– NCI comprises of 2 items:
Non – controlling
interests
Share of
unamortized
of FV adjustments
(FV- BV)
Share of book value
of identifiable net assets
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33
Non-Controlling Interests’ Share of Goodwill
• Under the 2nd option:
– Journal entry to record NCI (re-enacted each year):
Dr
Dr
Dr
Dr
Dr
Dr/Cr
Cr
Cr
Cr
Share capital of subsidiary
Retained earnings at acquisition date
Other equity at acquisition date
FV differentials (FV – BV)
Goodwill (Parent only)
Deferred tax asset/ (liability) on FV adjustment
FV differentials (BV – FV)
Investment in S subsidiary
Non-controlling interests
(NCI % x FV of identifiable net assets)
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34
Non-Controlling Interests’ Share of Goodwill
NCI measured at FV
NCI measured as a
proportion of the
acquiree’s identifiable
net assets
Book value of net assets
Fair value – Book value of
net assets
Goodwill
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35
Illustration 3:
Non-Controlling Interests’ Share of Goodwill
The FV of NCI that owned 10% of Subsidiary A as at 31 Dec
20x1(Acquisition date) was $25,000. The financial statements of
Subsidiary A as at acquisition date are as shown below. Subsidiary A
had unrecognized intangible assets with fair value of $40,000. Tax rate
is 20%. Determine NCI’s good will as at acquisition date.
Subsidiary A’s Statement of Financial Position as at 31 December 20x1:
Net assets
160,000
Equity
140,000
Share Capital
20,000
Retained Earnings
Tan, Lim & Lee Chapter 4
160,000
© 2015
36
Illustration 3:
Non-Controlling Interests’ Share of Goodwill
Fair value of NCI
25,000
Fair value of identifiable net assets
Book value of equity
Fair value of intangible assets
Deferred tax on intangible assets
160,000
40,000
(8,000)
NCI's share of FV of identifiable net assets (10%)
NCI's goodwill (25,000 - 19,200)
192,000
19,200
5,800
Under alternative basis where NCI are measured as a proportion of the
recognized amounts of the identifiable assets as at acquisition date:
 NCI’s goodwill is zero
 Amount to be recognized as NCI is $19,200 only
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Accounting for Non-Controlling Interests
under IFRS 3
• In consolidation, non-controlling interests have a share of:








Profit after tax
Dividends declared
Share capital
Retained earnings and other comprehensive income (eg. Revaluation
reserve) at acquisition date
Change in retained earnings and other comprehensive income from the
date of acquisition to the current period
Fair value differential of a subsidiary’s net assets at acquisition date
Subsequent extinguishment of the different between the fair value and
book value of identifiable net assets; and
Goodwill (if the fair value alternative is adopted)
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Reconstructing NCI on Statement of
Financial Position
Incorporation Date of
acquisition
date
Beginning of
current year
End of current
year
NCI have a share of
NCI have a share of
NCI have a share of
1.
Share capital
1.
Change in share capital
1.
Profit after tax
2.
Retained earnings
2.
2.
3.
Other equity
Change in retained
earnings
Current amortization of
fair value differential
4.
Fair value
differentials
3.
Change in other equity
3.
4.
Past amortization of fair
value differential
Current impairment of
goodwill
4.
Past impairment of
goodwill
Dividends as a
repayment of profits
5.
Change in other equity
5.
Goodwill
5.
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39
Reconstructing NCI on Statement of
Financial Position
• At each reporting date, group will re-create NCI account in the
consolidated financial statement by recognizing the sequential build
up:
– As of acquisition date
– From acquisition date to beginning of the current period
– During the current period
• Known as the “re-enactment process” of the attribution of equity to
NCI
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40
Allocation to Non-controlling Interests
1.
Allocation of the change in equity from date of acquisition to the
beginning of the current period
Dr Retained earnings (NCI % x
in RE from acquisition date to
beginning of current period)
Cr NCI
•
No distinction between pre-acquisition or post-acquisition profits
•
To transfer the NCI’s share of subsidiary’s retained earnings to NCI
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41
Allocation to Non-controlling Interests
2.
Allocation of current profit after tax to NCI
Dr Income to NCI
Cr NCI
• Attribution of profit to NCI is not expense item and should not be shown
above the profit after tax line
• Without attribution, retained earnings of the group would be over-stated
and NCI’s share of equity would be under-stated
• The same attribution principle applies to Other Comprehensive Income
(OCI) – NCI are attributed their share of OCI arising during a period
 Examples: Revaluation surplus or deficit on property, PPE and
intangible assets etc.
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42
Allocation to Non-controlling Interests
3.
Allocation of dividends to NCI
•
•
•
Reverses the profit and loss effects of dividends in consolidated
income statement
A repayment of profits by a subsidiary
Reduces the NCI’s residual stake in the net assets of the subsidiary
Dr
Dr
Cr
Tan, Lim & Lee Chapter 4
Dividend income (Parent)
NCI (Equity)
Dividends declared (Subsidiary)
© 2015
43
Can NCI be a debit balance?
• IFRS 10 paragraph B94 (Appendix B) requires NCI to have a debit
balance if:
– NCI share of losses > NCI existing share of the subsidiary’s share capital,
retained earnings and other equity items
• Departure from an earlier version of IAS 27 that requires NCI to be
carried at zero balance
– Losses being borne by majority shareholders unless the NCI have binding
obligation to make further investments to make good the losses
• Opposing views on NCI being a debit balance
– Parent who has control of subsidiary should bear the responsibility of supporting
an insolvent subsidiary
– Limited liability argument: NCI stand to lose only their investment and have no
legal obligation to bear any further losses
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44
Can NCI be a debit balance?
• IASB’s support for NCI to be a debit balance
– NCI participate proportionally in the risks and rewards of a subsidiary
– Limited liability argument: Parent stand to lose only their investment and have no
legal obligation to bear any further losses in the absence of guarantees
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45
Analytical check on Non-controlling
Interests’ balance
• If the fair value basis is adopted
– NCI in a subsidiary have a share in the same three components that
the parent has under the acquisition method
• If NCI are recognized as proportion of FV of identifiable net assets
– Only two components apply to non-controlling interests
• Share of book value of net assets or shareholders’ equity of a
subsidiary
• Share of the balance of unamortized fair value adjustments
• If NCI have both present ownership interests (e.g. ordinary shares)
and potential ownership interests (e.g. options)
– Only present ownership interests may be measured as a proportion of
identifiable net assets
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46
Analytical check on Non-controlling
Interests’ balance
NCI’s share of (NCI % multiply by):
NCI’s balance at
year-end
=
a) Book value of net assets of subsidiary at
year-end +/- unrealized profit/loss from
upstream sale
b) Unamortized balance of FV adjustments at
year-end
c) Unimpaired balance of goodwill at year
end ([Acquisition-date FV of NCI – NCI %
x acquisition-date FV of identifiable net
assets] less any cumulative impairment)
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47
Content
1.
Introduction
2.
Elimination of the investment in a subsidiary
3.
Effects of amortization, depreciation and disposal of undervalued
or overvalued assets and liabilities subsequent to acquisition
4.
Accounting for non-controlling interest under IFRS 3
5.
Goodwill impairment
impairment tests
tests
Goodwill
6.
Conclusion
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© 2015
48
Goodwill Impairment Test
• IAS 36: Goodwill has to be reviewed annually for impairment loss
– Reviewed as part of a cash-generating unit (CGU)
• CGU is the lowest level at which the goodwill is monitored for internal
management purposes and
• Not larger than a segment determined under IFRS 8 Operating Segments
– Goodwill will be allocated to each of the acquirer’s CGU, or group of
CGUs
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49
Goodwill Impairment Test
1.
Carrying amount:
–
–
2.
Net assets of the cash-generating unit
It includes entity goodwill attribute to parent and NCI
Recoverable amount:
–
IAS 36 allows the higher of the below two metrics to determine
recoverable amount:

Higher of FV less cost to sell (an arms-length measure)

Uses market based inputs or market participants’ assumptions in the
valuation process
 Value-in-use (VIU)
 Present value of future net cash flows
 Uses internal or entity-specific input to determine the future cash flows
 VIU likely to be more discretionary as assumptions about future cash flows
are required
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Goodwill Impairment Test
3.
If carrying amount > recoverable amount
–
–
–
–
Impairment loss is first allocated to goodwill
Then to other assets in proportion to their individual carrying amounts
Impairment tests to be carried out on annual basis; regardless of
whether indications of impairment exists
Impairment once made is not reversible, as it may result in the
recognition of internally-generated goodwill which is prohibited under
IAS 38
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Goodwill Impairment Test
Steps for impairment test
Determine the carrying amount of the CGU
Determine the recoverable amount of the CGU
Recoverable amount: Higher of fair value or value in use
If carrying amount ≤
recoverable amount
If carrying amount ≥
recoverable amount
No impairment loss
Allocate impairment loss
to goodwill first and
balance to other net assets
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Goodwill Impairment Test
NCI at FV at acquisition
date
Goodwill on consolidation
Carrying amount of cashgenerating unit
Impairment loss
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NCI as a proportion of
identifiable net asset at
acquisition date
Includes NCI’s goodwill
Excludes NCI’s goodwill
Goodwill is allocated to
cash-generating unit without
further adjustment
Goodwill has to be grossed
up to include NCI’s share
Notionally adjusted goodwill
= Recognized goodwill/
parent’s interest
Impairment loss is shared
between parent and NCI on
the same basis on which
profit or loss is allocated
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Impairment loss is borne
only by parent as goodwill
for NCI is not recognized
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Illustration 4:
Goodwill Impairment Test
Company X has 80% ownership in a CGU with identifiable net assets of
$6 million as at 31 Dec 20x1. The recoverable amount of the CGU as
an entity was $5 million as at that date. Determine the impairment loss
of goodwill in the CGU under two alternative measurement basis:
(a) NC measured at FV at acquisition date. Goodwill recognized by
CGU was $1.2 million
(b) NCI measured as a proportion of FV of identifiable net assets at
acquisition date. Goodwill recognized by CGU was $1 million
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Illustration 4:
Goodwill Impairment Test
Question (a)
Goodwill Identifiable net assets
Carrying amount
1,200,000
6,000,000
Recoverable amount
Total
7,200,000
5,000,000
Impairment loss
1,200,000
1,000,000
2,200,000
Impairment loss borne by
Parent and NCI
1,200,000
1,000,000
2,200,000
Explanatory notes:
• Goodwill allocated to a CGU to enable comparison between carrying
amount of all assets of the unit and recoverable amount
• Goodwill attributable to NCI is included under recognized goodwill (no
further adjustment is required)
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Illustration 4:
Goodwill Impairment Test
Question (b)
Carrying amount
NCI's stet share of goodwill
Notionally adjusted carrying
amount
Recoverable amount
Impairment loss
Goodwill
1,000,000
Identifiable net assets
6,000,000
250000 (20% x $1million/0.8)
Total
7,000,000
250,000
1,250,000
6,000,000
1,250,000
1,000,000
7,250,000
5,000,000
2,250,000
1,000,000
1,000,000
Impairment loss recognized 1000000 (80% x $1.25 million)
Explanatory notes:
• Since comparison is done against the carrying amount of assets of a CGU,
goodwill is regrossed under alternative (b) to show theoretical goodwill as at
date of acquisition
• NCI unrecognized share of goodwill is included
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Conclusion
•
Two sets of financial statements must be presented:
– Investor’s separate financial statements for the legal entity
– Consolidated financial statements for group of companies
•
Although two sets of accounts exist, only one set of “books” has to be kept
by the legal entity
– Consolidation worksheets are used to prepare consolidated financial
statement
• Summation of line items of the financial statements of parents and
subsidiaries
• Incorporation of adjustments to eliminate and adjust intragroup
transactions and balances
• Transactions and balances in consolidated financial statement reflect
group’s perspective
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Conclusion
• All business combinations are accounted for using the acquisition
method
– Entails an “asset substitution process”
– Acquirer is deemed to have obtained control of all assets and liabilities of
acquiree.
– Acquisition date is a critical economic event (exchange of economic
resources between acquirer and the former-owners)
– Use of fair values to recognize assets and liabilities
– Unrecognized intangible assets and contingent liabilities recognized if they
meet criteria in IFRS 3
– NCI included as a component in equity
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Conclusion
•
Under the acquisition method:
– Consideration transferred = Fair value of (assets transferred + liabilities
incurred + equity interests issued by acquirer + contingent
consideration)
– Asset substitution process: Investment account is eliminated and
substituted with:
• Subsidiary’s identifiable net assets; and
• Goodwill
– Goodwill = Fair value of (consideration transferred + non-controlling
interests + acquirer’s previously held interest in the acquiree) –
acquiree’s recognized net identifiable assets
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