This fair value is added to the consideration as part of the goodwill calculation and recognised as a provision in liabilities in the consolidated statement of financial position.Īny subsequent movement in the potential amount payable is treated like a movement in a provision under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In accordance with IFRS 3, this must be recognised initially at fair value (which will be given in the exam). In the FR exam, this will take the form of a future cash amount payable dependent on a set of circumstances.
#Journal entries to writedown goodwill full#
The full liability of $200,000 would be settled on 31 March 20X7, consisting of the $188,679 originally recognised plus the $11,321 of finance costs. In the year ended 31 March 20X7, this discount of $11,321 ($188,679 x 6%) would then be unwound and recorded as a finance cost in the statement of profit or loss. This would also be included in the consolidated statement of financial position at 31 March 20X6 as a current liability.
The goodwill calculation would include deferred consideration of $188,679 being $200,000 x 1/1.06 1. An appropriate discount rate for use is 6%.Ĭalculate the amount of deferred consideration to be recognised at 31 March 20X6 and explain how the unwinding of any discount should be accounted for. The purchase consideration included $200,000 payable on 31 March 20X7. Laldi Co acquired control of Bidle Co on 31 March 20X6, Laldi Co’s year end. A key thing to note here is that goodwill is unaffected, as goodwill is only calculated at the date control is gained. The unwinding of the discount on the liability is done by increasing the liability and recording a finance cost. The key is to initially recognise the amount payable at present value in goodwill and as a liability.Īs time elapses, the discount on the liability must be unwound as the payable date approaches. If the amount is payable in more than one year, the candidate will be given a discount factor as a decimal. For the FR exam, if the amount is payable in one year, the candidate will be given a discount rate (%) and be asked to calculate this. This is cash payable in the future and needs to be recognised initially at present value.
You will be told this and it will usually be included in the ‘investments’ line of the parent’s statement of financial position and simply needs to be moved into the goodwill calculation. This is the simplest amount of consideration and represents the cash already paid by the parent as part of the acquisition.
#Journal entries to writedown goodwill professional#
In addition to this, candidates will need to know the correct treatment for professional fees incurred as part of the acquisition. The common situations arising in the FR exam are that the parent pays for the subsidiary in cash immediately, in cash payable in the future (deferred consideration), in cash payable in the future but where that payment is dependent on certain events (contingent consideration), or through an issue of its own shares to the original shareholders of the subsidiary. The consideration paid for a subsidiary can take many forms. Each of these lines will be looked at in turn for the major elements which need to be included. In the FR exam, this can be worth many marks and contain many forms of adjustment.
Tweet Basic bookkeeping or double entry for taking up or writing off goodwill in the books of account of a business:When goodwill is ACQUIRED:
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