Purchased Goodwill Method under Ind AS 103
DipIFR 3 Business Combinations
The acquisition of subsidiaries results in Goodwill calculation and also records net assets of the subsidiary at fair value on the date of acquisition. Let’s get answers to all the questions related to Goodwill, valuation of NCI, and impairment relating to them.
Q1 — What are the ways in which an entity can make payment for purchase consideration?
– Cash
– Share exchange
– Deferred payment
– Contingent consideration
Q2 — How is deferred payment dealt, when it forms part of purchase consideration?
ANS: The deferred payment is discounted to present value and included in the cost of consideration. At the end of each year, the liability is increased by unwinding the discount, until the payment is settled. For example,
An amount of Rs. 108,000 was deferred to be paid after 2 years. The discount rate applicable is 8%. The net present value today of Rs. 108,000 is equal to (108,000 * 1) / (1.08) ^2)= Rs. 92,593 included in purchase consideration.
A liability of Rs. 92,593 is recorded on the same day.
At the end of the year, the unwinding of discount (8%*92593) results in a charge of Rs. 7,407 to profit & loss a/c for the unwinding of discount, increasing the Liability to Rs. 100,000 (92,593 + 8%*92593 = Rs. 100,000).
Q3 — How to deal with contingent consideration and how it is different from the standard on provisions?
ANS: The requirement of Ind AS 103 Business Combinations needs to fair value the contingent consideration forming part of negotiations of purchase consideration.
This is superseding the standard on provisions and requires re-measurement of the fair value of contingent at the end of each year. For example,
In the purchase consideration, the fair value of contingent consideration is included at Rs. 20,000.
The amount of Rs. 20,000 is shown under the head of Liabilities and re-measured at the end of each year, which may increase the fair value of contingent consideration to Rs. 24,000 resulting in a charge of Rs. 4,000 to profit & loss a/c and increasing the liability by Rs. 4,000.
Q4 — Which method is used for Goodwill calculation?
ANS: Purchased goodwill is applicable under Ind AS 103 business combinations, wherein all the assets & liabilities of the subsidiary are measured at fair value on the date of acquisition, with close identification of assets being recognized for the first time on the valuation of net assets.
Deferred taxes are calculated on the increase/decrease in the valuation of net assets.
The goodwill calculated is not amortized and tested for impairment annually, regardless of indicators of impairment.
The pooling of interest method is allowed only in case of common control transactions, where there is no transfer of control, comparing the purchase consideration with book values of assets/liabilities to calculate goodwill.
Q5 — What if purchase consideration is less than the fair value of net assets acquired?
ANS: It is considered a bargain purchase and directly credited to capital reserve.
Ind AS 103 requires bargain purchase gain arising on business combination to be recognized in other comprehensive income and accumulated in equity as capital reserve.
Q6 — How is goodwill & non-controlling interest linked for valuation purposes?
ANS: The valuation of Non-controlling interest determines the valuation of goodwill. The entity has a choice to value — –on-controlling interest:
– On a proportionate basis
– Fair value basis
If Non-controlling interest valued on a proportionate basis, the goodwill calculated is Partial goodwill, only belonging to the parent.
If Non-controlling interest is valued on a fair value basis, the goodwill calculated is Full goodwill, belonging to Parent plus Non-Controlling interest (NCI).
Q7 — How does the valuation of NCI have an impact on the treatment of impairment?
ANS: If the NCI is valued on a proportionate basis, and there is impairment of goodwill, the impairment loss is charged only to Group retained earnings.
For example, Goodwill impaired by 5000 Group retained earnings Dr 5000 Goodwill Cr 5000
If the NCI is valued on a fair value basis, and there is impairment of goodwill, the impairment loss is charged to Group retained earnings as well as Non-controlling interest.
For example, Goodwill impaired by 5000 and NCI has a share of 20%
Group retained earnings Dr 4000 Non-controlling interest Dr 1000 Goodwill Cr 5000
There is no impact on re-statement of goodwill, but it does differ when charging impairment loss to Group retained earnings only or it is also charged to Noncontrolling interest if NCI valued on a fair value basis.
Hope you enjoyed reading and understand all about Purchased Goodwill.
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