Show the difference in calculation of goodwill

Discussion in 'Exams and Studying' started by liana, Dec 17, 2017.

  1. liana

    liana

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    Hi there, I was wondering if someone could help me as I am awfully confused.

    Parent company wishes to acquire 70% of a subsidiary, purchasing 280 million of the subsidiary £1 ordinary shares, out of the 400 million. subs retained earnings is £1,460 – not expected to issue any shares/pay dividends in immediate future. Sub payed via cash and shares in parent company.

    Parent pays £5,000 million cash at date of acquisition. Pays £1,100 in 2 years time. Parent will issue new shares to shareholder of sub at date of acquisition (1 new share for every 2 shares it acquires in the sub). Parents share trading at £35 currently.

    Parent will issue a further 2 share for every share it acquires in sub in 2 years if sub has met certain level of profitability.
    p = 30% parent will not issue any further shares
    p = 40% parent will issue 1 share for each share acquired
    p = 30% parent will issue max 2 shares for each sub share originally acquires
    contingent share estimated FV = £4,000 million

    Sub has valuable brands, trade name, internet domain names that are not currently recognised in subs financial statement. FV = £5,000 million and estimated useful life is approx 8 years.

    For the calculation of goodwill I am aware its …

    Consideration
    -cash
    -Deferred Cash
    – Issued shares my Parent company
    – Contingent shares

    NCI

    Less FV of Net assets
    -ordinary share capital
    -Retained earnings
    -Fair value adjustments

    Question
    1. Contingent Shares – The FV of the contingent share was given therefore for full goodwill method I have used the value of £4,000 however, I am unsure if the same value would be used for the partial goodwill method.

    2. I am aware that the 30% of the holdings in the Sub is referring to the NCI therefore for the full goodwill method NCI is £3,200 as stated. For partial goodwill method I am also aware to calculate it, it must be 30% of the net assets acquired in sub. My difficulty is measuring the net assets. I have put ordinary share capital as £400 as the sub has 400 million shares @£1 each. Retained earnings I have put £1,460 as stated. However I am unsure what to do for fair value adjustments with the intangible assets worth £5,000. I know for intangible asset, if they are internally generated they are not recognised as assets unless they can be measured reliably. However because the value of the intangible asset is given i assume it must be recognised in the financial statement therefore do I add the value of £5,000 (intangible assets) to the Net assets acquired? I also know intangible assets must be tested for impairment annually. The intangible assets have a finite useful life therefore will the value of the intangible asset be recognised for impairment on the day of acquisition?

    Sorry for the long question. I hope I have explained it well. Thank you for making time to help.
    Parent has not decide partial/full goodwill method to measure NCI. FV of 30% holding in sub is estimated FV = £3,200 million.

    Question : show the difference in calculation of goodwill using partial goodwill method and full goodwill method.
     
    liana, Dec 17, 2017
    #1
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