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Acquisition accounting/goodwill

Noob question regarding acquisition accounting and calculation of goodwill

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Let’s say we bought a subsidiary with the below TB at acquisition date. 

Dr Assets 1m
Cr Liabilities 500k
Cr Share capital 100k
Cr Reserves 400k

Let’s say we paid 1m for it. 

The balance sheet of the sub will be as above. Is the journal in the parent:

Cr Cash 1m
Dr Investments 100k
Dr Goodwill 900k

I believe that this is correct. Now lets say the TB of the sub is: 

Dr Assets 1m
Cr Liabilities 1.3m
Cr Share capital 100k
Dr Reserves 400k

I.e they have b/f losses and are insolvent. Let’s say we paid zero for it. 

Dr Investments 100k
Cr Goodwill 100k ?

This follows the same logic as above example but appears to be nonsense. We are still paying more than the book value (book value -300k but we paid zero) so goodwill should be a debit but it is not. 

I guess my question comes down to how do you treat the reserves balance of a subdiary when it is acquired when calculating goodwill in the parent?

Replies (8)

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By johngroganjga
24th Apr 2017 11:08

The holding company hasn't bought any goodwill. It has bought shares for £1 million. That is all.

Goodwill comes in on consolidation only. Are you preparing consolidated accounts?

Thanks (1)
Replying to johngroganjga:
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By mcplums
24th Apr 2017 11:26

Ah I see thanks! I had it in my head that GW appears in company accounts not consolidated.

But...and I know this is a stupid question but I can't figure out how immediately- in the consolidated accounts, would it be

Dr GW X
Cr Reserves X

Where X = the net book value of the sub? It is the credit entry I am not too sure of.

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Replying to mcplums:
By johngroganjga
24th Apr 2017 11:38

If you are consolidating the subsidiary you have acquired for £1 million your first consolidation adjustment is to replace the £1 million investment with the individual assets and liabilities of the subsidiary, including goodwill. Your second adjustment is to deal with the goodwill now in the group accounts - impairing, amortising etc., whatever is appropriate.

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Replying to mcplums:
By Ruddles
24th Apr 2017 11:40

It's simple arithmetic.

In the consolidated accounts you will be reflecting the sub's net assets of £500k. The parent has paid out £1m. So the difference (goodwill) is ... ?

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Replying to johngroganjga:
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By Dds44
30th Mar 2019 12:02

Hi John,if the sale of business was structured as an asset sale I.e. there was no parent / subsidiary relationship can goodwill arise during this process if the consideration transfered was greater than the value of the assets? Or does goodwill only ocurr when there is a consolidation?

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By Ruddles
24th Apr 2017 11:11

If you are talking about the parent's own accounts then the entry for example 1 will be

Cr cash £1m
Dr investment in sub £1m

In the second example you have nothing to show on the parent's balance sheet.

Now, if you're taking about goodwill on consolidation ...

EDIT - beaten to the punch by John

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Replying to Ruddles:
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By mcplums
24th Apr 2017 11:28

Thanks, yes I got confused- thought GW was in company accounts not consolidated. I have a follow up question, see my response to John :) Thanks!

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Replying to Ruddles:
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By Dds44
30th Mar 2019 12:02

Hi ruddles,if the sale of business was structured as an asset sale I.e. there was no parent / subsidiary relationship can goodwill arise during this process if the consideration transfered was greater than the value of the assets? Or does goodwill only ocurr when there is a consolidation?

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