Calculation of Partial Goodwill Method of Nina Limited Over Carl Limited Assessment Answer
Answer
Partial Goodwill Method
According to the method of partial goodwill, the valuation of goodwill is done by deducting the share of the acquirer company in the fair value (FV) of Net Identifiable (NI) Assets of acquired company from the total consideration paid. (Grathwohl, & Voeller, 2016).
A. Acquisition Analysis for Nina Limited that has acquired 95 % of issued shares of Carl Limited
Net fair value of identified assets and liabilities of Carl Ltd
| Particulars | Amount | |
| Equity ($662800+$497100+$248550) | $ 14,08,450 | |
| Inventories ($5000*(1-0.30)) | $ 3,500 | |
| Land (12000*(1-0.30)) | $ 8,400 | |
| Vehicle (31000*(1-0.30)) | $ 21,700 | |
| Patent (50000*(1-0.30)) | $ 35,000 | |
| Research & Development cost (38000(1-0.30)) | $ 26,600 | |
| Less: Contingent Liability ($20,000*(1-.30)) | $ -14,000 | |
| Net Identifiable Assets | $ 14,89,650 | |
| Calculation of Goodwill | ||
| (a)Consideration Transferred | $ 16,57,000.00 | |
| (b) Non controlling Interest | (5% of $1,489,650) | $ 74,482.50 |
| Aggregate of (a) and (b) | $ 17,31,482.50 | |
| Goodwill | $ 2,41,832.50 |
A. Journal Entries for Business combination valuation
Date | Particulars | Debit | Credit | |
01-Jul-18 | Patent A/c Dr | $50,000 | ||
To Deferred Tax Liabilities A/c | $15,000 | |||
To Business Combination Valuation Reserve A/c (To record the Patents) | $35,000 | |||
01-Jul-18 | Research and Development Cost A/c Dr | $38,000 | ||
To Deferred Tax Liabilities A/c | $11,400 | |||
To Business Combination Valuation Reserve A/c (To record the Research & Development Costs) | $26,600 | |||
01-Jul-18 | Inventory A/c Dr | $5,000 | ||
To Deferred Tax Liabilities A/c | $1,500 | |||
To Business Combination Valuation Reserve A/c (To record the Inventories) | $3,500 | |||
01-Jul-18 | Goodwill A/c Dr | $2,41,833 | ||
To Business Combination Valuation Reserve A/c (To Record the Goodwill) | $2,41,833 | |||
Pre Acquisition Journal Entries | ||||
Date | Particulars | Debit | Credit | |
01-Jul-18 | Share Capital A/c Dr | $6,29,660 | ||
General Reserves A/c Dr | $4,72,250 | |||
Assets Valuation Reserves A/c Dr | $2,36,120 | |||
Business Combination Valuation Reserve A/c Dr | $77,140 | |||
Goodwill A/c Dr | $2,41,830 | |||
To Shares in Carl Limited A/c (To record pre acquisition transactions) | $16,57,000 | |||
Accumulated Depreciation A/c Dr | $38,000 | |||
To Vehicle A/c | $7,500 | |||
To Deferred Tax Liability A/c | $9,300 | |||
To Business Combination Valuation Reserve A/c
| $21,000 |
B. Journal Entry to recognise Non Controlling Interest at Acquisition Date
| Date | Particulars | Debit | Credit |
| 01-Jul-18 | Share Capital A/c Dr | $33,140 | |
| General Reserves A/c Dr | $24,855 | ||
| Assets Valuation Reserves A/c Dr | $12,428 | ||
| Business Combination Valuation Reserve A/c Dr | $4,060 | ||
| To Shares in Carl Limited A/c (To recognise Non Controlling Interest) | $74,483 |
Note: The figures have been derived by multiplying the non controlling interest i.e. 5% to aggregate amounts (Kasper, 2009)
C. Consolidated Worksheet Entries at 30th June 2019
| Particulars | Debit | Credit |
| Accumulated Depreciation A/c Dr | $38,500 | |
| To Vehicle A/c | | $7,500 |
| To Deferred Tax Liability A/c | | $ 9,300 |
| To Business Combination Valuation Reserve A/c | | $21,700 |
| (To record depreciation on Vehicle) | | |
| Depreciation Expense A/c Dr | $7,750 | |
| To Accumulated Depreciation A/c | | $ 7,750 |
| (To record depreciation on Vehicle) | | |
| Deferred Tax Liability A/c Dr | $ 2,790 | |
| To Income Tax Expense A/c | | $ 2,790 |
| (To book income tax liability) | | |
| Goodwill A/c Dr | $ 2,41,833 | |
| To Business Combination Valuation Reserve A/c | | $ 2,41,833 |
| (To Record the Goodwill) | | |
Note: Income Tax expenses = Tax Rate (30%)*Deferred Tax Liability
| Particulars | Debit | Credit |
| Share Capital A/c Dr | $ 6,29,660 | |
| General Reserves A/c Dr | $ 4,72,250 | |
| Assets Valuation Reserves A/c Dr | $ 2,36,120 | |
| Business Combination Valuation Reserve A/c Dr | $ 77,140 | |
| Goodwill A/c Dr | $ 2,41,830 | |
| To Shares in Carl Limited A/c | | $ 16,57,000 |
| (To record pre acquisition transactions) | | |
Non Controlling Interest share of equity
| Particulars | Debit | Credit |
| Share Capital A/c Dr | $ 33,140 | |
| General Reserves A/c Dr | $ 24,855 | |
| Assets Valuation Reserves A/c Dr | $ 12,428 | |
| Business Combination Valuation Reserve A/c Dr | $ 4,060 | |
| To Shares in Carl Limited | | $ 74,483 |
| (To recognise Non Controlling Interest) | | |
| Note: The figures have been derived by multiplying the non controlling interest i.e. 5% to aggregate amounts. | ||
D. Full Goodwill Method
If the above calculation has been done on the basis of full goodwill method then the value of derived goodwill will change along with the change in Journal Entries
The Fair Value of Carl Limited = $16,57,000/0.95 = $17,44,211
The Fair Value (FV) of Net Identifiable (NI) Assets of Carl Limited = $14,89,650
Hence, the goodwill will be $17,44,211 - $14,89,650 = $254,561
Journal Entry for Goodwill
| Date | Particulars | Debit | Credit | |
01-Jul-18 | Goodwill A/c Dr | $2,54,561 | ||
| To Business Combination Valuation Reserve A/c (To Record the Goodwill) |
|
Note: Non Controlling Interest shall be calculated as 5 % of Fair Value (FV) of the total assets ($17,44,211*5%)
E. Accounting Standards in Consolidation Process
IFRS 3: Business Combinations
IFRS 3 has been issued to explain the treatment for Business combinations in accounting. As per this standard, assets and liabilities shall be measured at their fair value at the date of acquisition of business. For initial recognition, organisation may either measure the non controlling interest (minority interest) at its fair value or fair value of proportionate share in net identifiable assets. (De Moville & A. G, 2019)
The Target Company has not recorded the research and development cost which should have been recorded.
IAS 38: Intangible Assets
IAS 38 has been issued to explain the treatment for Intangible assets in accounting. As per this standard, Intangible assets shall initially be recognised and measured at cost. For subsequent measurement of the assets, IAS permits use of two methods in Intangible Assets for i.e. Cost Model and Revaluation Model. In cost model, Intangible assets are carried out at cost after deduction of accumulated depreciation. In revaluation model, Intangible assets are carried out at their fair value. (Daum, 2013).
IFRS only permits the use of partial goodwill method in calculation of the goodwill at any business combination.
The target company in the given case has not recognised patents in books, but it should have been recorded in its books.
F. Nina Acquires 20% of issued shares of Carl Limited.
If Nina Ltd had acquired 20 % of issued shares of Carl Limited then it would not have control over Carl Limited. To establish control a company shall acquire at least 51% of issued shares of other company.
Holding company is the company which acquires or holds at least 51% of total issued shares of the subsidiary company.
Considering the current situation, if Nina Ltd. acquires 20% shares in Carl Limited then it will become ordinary member in Carl Limited which has non-controlling interest in the affairs of the company.
The calculation of the fair values of assets and consideration paid will be of no use in this situation as it does not fall under the definition of the business combination. Holding only 20% shares will give right to receive dividend and not to control the matters of the Carl Limited.
All the journal entries done or calculation for the non controlling interest will not be required if Nina Ltd. acquires only 20% of issued shares.
Business Combination happens when a controlling right is established by one company over the other. So all the calculation or arrangements are only done when that right is established.
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