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Preparing Simple Consolidated Financial StatementsSyllabus GConsolidationsGoodwill Impairment

ACCA · Question 48 · Preparing Simple Consolidated Financial Statements

Section B - Case 1

Scenario: GlobalTech PLC acquired 80% of CloudServe Ltd on 1 July 20X5. Year-end is 31 December 20X5. GlobalTech paid $5m cash and issued 1m shares (market value $2 each). CloudServe's net assets at acquisition were $6m. Fair value of NCI at acquisition was $1.5m. Post-acquisition, CloudServe sold goods to GlobalTech for $1m at a 25% mark-up on cost. Half of these goods remain in inventory at year-end. CloudServe's profit for the full year was $800k (accruing evenly).

Assume that at year-end, an impairment review determines that Goodwill has been impaired by $100,000. Under the fair value method of valuing NCI, how does this impairment affect the consolidated retained earnings?

Answer options:

A.

Consolidated retained earnings are reduced by $100,000.

B.

Consolidated retained earnings are reduced by $80,000.

C.

Consolidated retained earnings are reduced by $20,000.

D.

It has no effect on retained earnings.

How to approach this question

Identify the NCI valuation method: Fair Value. This means goodwill is 'full goodwill' (belongs to both parent and NCI). Therefore, any impairment must be split between the parent (80%) and NCI (20%). Parent's share (80% of $100k = $80k) reduces consolidated retained earnings.

Full Answer

B.Consolidated retained earnings are reduced by $80,000.✓ Correct
Because the NCI was valued at fair value at acquisition, the goodwill calculated ($2.5m) is 'full goodwill', meaning it relates to both the parent's 80% and the NCI's 20%. Therefore, any impairment of this goodwill ($100,000) must be shared. The parent's share is 80% ($80,000), which reduces consolidated retained earnings. The NCI share is 20% ($20,000).

Common mistakes

Charging the full $100,000 to consolidated retained earnings (which is only correct if NCI is valued at proportionate share of net assets).
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