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Goodwill on acquisition of a Ltd company (Subsidiary)

KerryB
  • 269 posts
  • # 78544

Hi,

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 May 2009 Bee Ltd purchased 70% of Aye Ltd’s

£1 ordinary shares for £9,000,000. At that date Aye Ltd’s accumulated profits were £750,000.

What was the goodwill arising on this acquisition at 1 May 2009?


My Calculation;

Consideration: 9,000,000
NCI (30% of 10m):   3,000,000
Total shares - Aye Ltd: (10,000,000)
Retained Profits: (750,000)
= Goodwill: 1250,000

However the answer would be 1475,000 (Retained Profits = 70 % of 750,000 = 525,000)

Now I completely get 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. This is not and ICB exam by the way, so 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.

Many thanks in advance

Kindest regards,

Kerry



Edited at 20 Jan 2012 08:58 AM GMT

  • www.berrybookkeeping.co.uk

    My responses are based on my opinions, not necessarily facts.

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  • 698 posts
  • # 78560

Hi Kerry

This is an interesting one I guessing this is from the ACCA.

I my very humble opinion I would say you are deducting 70% on the basis that it is the proportion of the company profits that are now owned by Bee Ltd the remaing 30% is still owned by the company itself.

This is merely a stab at this as I have not studied this myself just looking from a logical view point perhaps one of the other ACCA studies can jump in.

Warmest regards
Stuart

  • Forum Moderator, South East & Greater London Regional Chairman

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KerryB
  • 269 posts
  • # 78564

Hi Stuart,

Yes it is ACCA, and you are correct it what you say regarding the deduction of 70%, which makes perfect sense to me, but this conflicts with the study text that I have. In the text it seems to always deduct the full retained profits rather than just a percentage ref what is owned in shares i.e. 70% in this case. Hence why I am getting confused! Embarassed

I am going to have a good read over that particular chapter again (for the 4th time!), just incase I am missing something - which I am sure I must be!

Kind regards,

Kerry

  • www.berrybookkeeping.co.uk

    My responses are based on my opinions, not necessarily facts.

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  • 60 posts
  • # 78568

At date of acquistion Company A would be worth £10,750,000. (share capital + retained reserves).

B would be acquiring 70% thereof £10,750,000 * 70% = £7525000.

Goodwill in B books = 9000000-7525000= 1475000.

You need to look at the total value of A.

I hope this is of help
Brianh
  • 56 posts
  • # 78569

Hi Kerry

As at the date of acquisition A's total reserves are £10,00,0000 issued share capital + retained earnings £750,000 = £10,750,000.

B acquires 70% of these = £10,750,000 x 70% = £7,525,000

It pays £9,000,000 (investment in subsidiary) for this, so goodwill arising on consolidation as at the acquisition date = £9,000,000 less £7,525,000 = £1,475,000.

It would be 100% if all of the share capital and revenue reserves had been acquired but only 70% was-  leaving a 30% Minority Interest in A.

Regards
Brian
  • 60 posts
  • # 78571

Two answers the same
KerryB
  • 269 posts
  • # 78572

Brian/Adrain,

Oh wow! When you put it like that it seems to make so much more sense!

I actually think that it is the wording of the question that threw me. I had a look at another question worded slightly different; basically they gave you the NCI's fair value interest as a total figure, which I am assuming includes their part of the retained profits, which is how I based my workings orginally. Whereas this question needed me to calculate the NCI's interest, hence reducing the retained profit figure by the % (if that makes sense!).

If I am wrong in what I have said please do say! As I am excited thinking I have it!

And thank you so much for your advice, I shall use that method of calculation in future for the orginal worded question.

Thanks again, much appreciated.

Kind regards

Kerry

Edited at 20 Jan 2012 03:51 PM GMT

  • www.berrybookkeeping.co.uk

    My responses are based on my opinions, not necessarily facts.

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