Step four

This chapter explains how to account for an acquisition that creates a group (a parent-subsidiary relationship) using the acquisition method. The focus is on the final step of the acquisition method: recognising and measuring goodwill at the acquisition date.

You’ll also see how to determine the consideration paid by the parent (in cash or shares) and how that amount feeds into the goodwill calculation.

Learning objectives

By the end of this subchapter, you should be able to describe the components of and prepare a consolidated statement of financial position or extracts thereof, including:

• Fair value of consideration transferred from cash and shares (excluding deferred and contingent consideration)
• Goodwill (excluding impairment of goodwill) where the non-controlling interest is valued at its fair value at the acquisition date

Recognition and measurement of goodwill

When a parent acquires shares in a subsidiary, it may pay more than the fair value of the subsidiary’s identifiable net assets (total assets minus liabilities). That extra amount is goodwill.

Definitions

Goodwill

The excess of the fair value of consideration transferred plus the fair value of the non-controlling interest over the fair value of the subsidiary’s identifiable net assets at the acquisition date. Goodwill reflects intangible value derived from factors such as established customer relationships and market reputation.

Goodwill arises because an acquirer is often willing to pay a premium above the fair value of the identifiable net assets of the acquired business. This premium reflects unidentifiable intangible benefits - items that add value but can’t be separately recognised as assets - such as a loyal customer base, a skilled workforce, strong brand recognition, or a favourable market position.

Goodwill has no physical substance, so it is presented as an intangible non-current asset in the consolidated statement of financial position. Under IFRS, goodwill is not amortised; instead, it is reviewed annually for impairment.

At the acquisition date, we determine whether goodwill arises by comparing:

• the total value attributed to the business (consideration plus NCI), with
• the fair value of the subsidiary’s identifiable net assets.

Goodwill is computed as:

	$
Consideration*	XXX
NCI at fair value at acquisition date	XXX
Net assets at acquisition date	(XXX)
Goodwill at acquisition	XXX

When calculating net assets at the acquisition date, use fair values, not carrying amounts. If the subsidiary has assets or liabilities whose fair values differ from their book values at acquisition, you must adjust the net assets figure for those fair value differences. If you don’t, the goodwill figure will be wrong.

Consideration is treated in detail below.

Exam tip: this syllabus values the non-controlling interest at its fair value at the acquisition date - not as a proportionate share of net assets. It also excludes goodwill impairment, additional depreciation arising from fair value adjustments, and deferred or contingent consideration from the goodwill calculation.

Example: Determining the goodwill

JB Limited acquired 150 million shares of GG Co. Limited for $100 million on 1 January 20X5. GG Co. Limited has 200 million $0.50 shares (share capital $100 million) and retained earnings of $750,000 at the acquisition date. The fair value of the non-controlling interest at 1 January 20X5 was $30 million (its 50 million shares at $0.60 each). GG Co. Limited owned land with a carrying amount of $5 million, which had a fair value of $6 million as at the acquisition date. The fair value difference had not yet been incorporated into the accounting records of GG Co. Limited as at the date of the acquisition.

Required: Compute the goodwill at the acquisition date.

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Consideration

Definitions

Consideration

It represents the total value paid by the acquirer to obtain control. Consideration can be in the form of any of the following:

• Cash consideration
• Share exchange consideration
• Deferred consideration
• Contingent consideration

This syllabus focuses on cash and share exchange consideration.

• For cash consideration, the fair value of the consideration equals the monetary amount paid.
• For share exchange consideration, the fair value is based on the acquirer’s share price at the acquisition date.

Definitions

Share exchange consideration

This is where acquisition is paid using shares.

$$\text{Fair value of the consideration}=\text{Market price of acquirer’s shares on acquisition date}\times \text{Number of shares transferred}$$

Exam tip: use the market price of the acquirer’s shares (the parent), not the subsidiary’s shares, when calculating share-based consideration. The number of shares issued by the acquirer comes from the agreed exchange ratio - multiply that by the acquirer’s market price at the acquisition date to get the fair value of the consideration.

Recording an unrecorded share issue: where the share issue effect has not yet been recognised by the parent company, record it with the following journal entry:

• Debit: Investment in subsidiary
• Credit: Share capital (nominal value of shares issued)
• Credit: Share premium (excess of fair value over nominal value)

Example: Share-based consideration

Kwahu Ltd acquired 60,000 shares of Konongo Ltd’s 80,000 shares by issuing five (5) of its own shares for every three (3) shares in the subsidiary. The market price of Kwahu Ltd’s shares on the date of acquisition was $3.00.

Required: Calculate the consideration offered by Kwahu Ltd.

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