02-28-2010, 08:55 PM
IFRS 3 and goodwill
under ifrs 3 term "negative goodwill" has been replaced by "excess of the acquirer's interest in the net failr value of the acquiree's identifiable assets, liabilities, and contingent liabilities over the cost"
<b>ifrs assumes that negative goodwill would arise only in exceptional circumstances, therefore before determining that negative goodwill has arisen, the acquirer has to reassess the identification and measurment of the net assets and contingent liabilities acquired and also to look at the measurement of the cost of business combination. if negative goodwill still arisen than it must recognize immediately in profit or loss</b>
now according to ifrs 3 we got two ways to further eleminate negative goodwill, first is to reasses fair value of net assets and second is to recognize negative goodwill as gain in profit n loss.
here take an example
business A bought 70% shares (7 shares at 10 each) of business B at a value of 50 giving arise to negative goodwill of 20 (70-50). at the acqusition date balance sheets of both businesses were
business A
ASSETS
investment in subsidiary (7shares)50
inventory 150
bank account 50
CAPITAL
share capital 250
business B
ASSETS
inventory 70
bank 30
CAPITAL
share capital (10 at 10) 100
it is assumed fair value is correct in the balance sheet of business B, so negative goodwill is written off in profit & loss account as gain
A & B consolidated balance sheet
ASSETS
inventory (150+70) 220
bank (30+50) 80
TOTAL = 300
CAPITAL
share capital 250
retained profit (amount of negative goodwill)20
minority interest (NCI) 30
TOTAL = 300
If company instead of charging it to profit & loss reassess the assets and is to reduce any asset inventory or bank to eliminate this amount of 20 negative goodwill.
In this case fact that 30% of business B is owned by minority interests and in order to eliminate the negative goodwill of 20 an amount greater than 20 needs to be deducted from the net assets of business B. that amount is equal to 20+ 20 times 30/70 (minority interest share of the net assets divided by the parent entityâs share) 28.57 approximately. By assuming inventory is to be reduced by this amount business Bâs balance sheet will be
ASSETS
Inventory (70-28.57) 41.43
Bank 30
Total assets = 71.43
CAPITAL
Share capital 71.43 (10 at 7.143)
A&B CONSOLIDATED BALANCE SHEET
ASSETS
INVENTORY (41.43+150) 191.43
BANK (30+50) 80
TOTAL ASSETS = 271.43
CAPITAL
SHARE CAPITAL 250
MINORITY INTEREST (NCI) 21.429
TOTAL CAPITAL = 271.43 AFTER ROUNDIG OFF
hope it is clear now, and please correct me if I am wrong in it, jazakALLAH
under ifrs 3 term "negative goodwill" has been replaced by "excess of the acquirer's interest in the net failr value of the acquiree's identifiable assets, liabilities, and contingent liabilities over the cost"
<b>ifrs assumes that negative goodwill would arise only in exceptional circumstances, therefore before determining that negative goodwill has arisen, the acquirer has to reassess the identification and measurment of the net assets and contingent liabilities acquired and also to look at the measurement of the cost of business combination. if negative goodwill still arisen than it must recognize immediately in profit or loss</b>
now according to ifrs 3 we got two ways to further eleminate negative goodwill, first is to reasses fair value of net assets and second is to recognize negative goodwill as gain in profit n loss.
here take an example
business A bought 70% shares (7 shares at 10 each) of business B at a value of 50 giving arise to negative goodwill of 20 (70-50). at the acqusition date balance sheets of both businesses were
business A
ASSETS
investment in subsidiary (7shares)50
inventory 150
bank account 50
CAPITAL
share capital 250
business B
ASSETS
inventory 70
bank 30
CAPITAL
share capital (10 at 10) 100
it is assumed fair value is correct in the balance sheet of business B, so negative goodwill is written off in profit & loss account as gain
A & B consolidated balance sheet
ASSETS
inventory (150+70) 220
bank (30+50) 80
TOTAL = 300
CAPITAL
share capital 250
retained profit (amount of negative goodwill)20
minority interest (NCI) 30
TOTAL = 300
If company instead of charging it to profit & loss reassess the assets and is to reduce any asset inventory or bank to eliminate this amount of 20 negative goodwill.
In this case fact that 30% of business B is owned by minority interests and in order to eliminate the negative goodwill of 20 an amount greater than 20 needs to be deducted from the net assets of business B. that amount is equal to 20+ 20 times 30/70 (minority interest share of the net assets divided by the parent entityâs share) 28.57 approximately. By assuming inventory is to be reduced by this amount business Bâs balance sheet will be
ASSETS
Inventory (70-28.57) 41.43
Bank 30
Total assets = 71.43
CAPITAL
Share capital 71.43 (10 at 7.143)
A&B CONSOLIDATED BALANCE SHEET
ASSETS
INVENTORY (41.43+150) 191.43
BANK (30+50) 80
TOTAL ASSETS = 271.43
CAPITAL
SHARE CAPITAL 250
MINORITY INTEREST (NCI) 21.429
TOTAL CAPITAL = 271.43 AFTER ROUNDIG OFF
hope it is clear now, and please correct me if I am wrong in it, jazakALLAH
