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Goodwill Calculation When Acquired Company has Negative Reserves

Hello all

If a holding company acquires a subsidary that has negative reserves due to cumulative losses, how is this investment accounted for within the holding company accounts?

e.g.

Investment £600k (paid from holding company)

Fair value reserves of Subsidary on date of acquisition - £(300k)

Would goodwill in this instance be £900k? (£600 + £300)

If so then what value would be on the Holding company's balance sheet in relation to the investment?

Many thanks

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04th May 2012 09:43

Are you talking about consolidated accounts or entity accounts?

 

If it's the individual entity accounts, then £600k - cost.

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06th May 2012 17:52

Hi thanks for your reply

 

I'm unsure of both entity and consol values of Goodwill and investment, Had the subsidiarys net assets been positive (e.g. £200k) then my understanding is that the value on the Holding Company's balance sheet would have been as follows:

 

Goodwill: £400k (Purchase Price £600k less fair value of net assets on Acquisition £200k)

Investment in Subs: £200k (Purchase Price £600k less Goodwill £400k)

 

Please correct me if I'm wrong with the above!!

 

With the company having cumulative net losses then I am unsure of how the value of Goodwill (and then in turn) the value of the investment is calculated

 

Cheers

 

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06th May 2012 18:02

You're wrong. Goodwill is only recognised on a consolidated level (unless what is being bought is the trade and assets, not the sub).

 

On the entity balance sheet, the cost is £600k. However, it could be argued that the negative reserves are an indication of impairment. In which case, it would still be recognised at £600k, but then would be impaired in the first set of financial statements.

 

In the consolidated accounts, you need to work out the fair value of all the assets and liabilities acquired and recognise those. For example, if some fixed assets were acquired the fixed assets note would show the fair value of these as acquired during the year.

The difference between the fair value and the amount paid is goodwill, which should be recognised in the group balance sheet. 

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06th May 2012 18:41

So goodwill is not held on Holding Co's balance sheet, only in the consol b/sheet?

 

There has been a fair value balance sheet created which has negative net assets/reserves, so using my example figures from original post, the Hco is purchasing (£300k) of net assets for £600k. If I assume (for now) that this cannot be argued as an indication of impairment then does this result in £900k of Goodwill? and as you mentioned above, the investment will be on the Hco entity b/sheet at the purchase price of £600k.

 

Thanks

 

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