The February 2009 edition of the Level II errata addresses this question; however, I need some expanded details. Under Choice B (consolidation), we assume that NinMount (parent) while purchasing 50% of Boswell (affiliate) has controlling interest. In this case, the initial journal entries under the PURCHASE method of accounting are as follows: Dr. Investment in Boswell - 320 Cr. Cash – 320 Under the PURCHASE method, we then allocate this 320 of investment to the various balance sheet accounts on the parent (NinMount) company’s books after listing all identifiable assets and liabilities (whether or not they are currently on the affiliate’s books – namely, licensing rights). The journal entries to accomplish this would appear to be: Dr. Cash – 20 Dr. Receivables – 45 Dr. Inventory – 75 Dr. PPE – 930 Dr. Licenses – 60 Cr. Current liabilities – 90 Cr. Long term debt – 400 Cr. Investment in Boswell – 320 My debits of 1,130 exceed my credits of 810. That means there is negative goodwill, doesn’t it? If this is so, then typically the way we handle negative goodwill is to reduce the fair value of the affiliate’s identifiable non-current assets (including licenses) proportionally to the extent of the negative goodwill – at least under GAAP. Do we do the same thing under IFRS? If we do, I think it will lead to a smaller total asset balance for NinMount. In fact, it will result in a a different asset turnover number than the one presented in the February 2009 edition of the Errata. Any thoughts as to where my thinking has gone wrong?
Goodwill: Total Assets Boswell=1070 Total Liabs Boswell=490 Purchase Price=320 Share of Net Assets of Boswell=0.5 * (1070-490)=290 Goodwill = 320-290=30 And a minority interest for the 0.5 * (535 + 45 ) = 290 would be created on the balance sheet. Consolidated Balance Sheet: Cash = 50+20 = 70 Receivables=70+45 = 115 Inventory=130+75=205 PPE, Net=1570+930=2500 Goodwill=30 ***** Total Assets=2920 Current Liab=110+90=200 Long Term Debt=600+400=1000 Minority Interest=290 (.5*(535+45) Common Stock=850 Retained Earnings=580 Total Liab + Equity=2920 US GAAP so Minority int. is between Liabilities and Equity on Consolidated balance sheet. I do not like to go with Dr, Cr kind of notation… (not an accountant)
Here is an addendum to my original post above… Note that by reducing the non-current assets of PPE and Licenses for a combined total of the 320 of negative goodwill, I am deducting the 320 twice: once to clear out the “Investment in Boswell” account and another time to push my credit entries up to 1,130. Because of this, NinMounts assets, under my thinking, will be 2,630, which is precisely 320 less than what the February 2009 Errata suggests: 2,950 = 2140–320+1070 +60.
CP, I do not think is is any (positive) goodwill. By definition, goodwill is the excess purchase price over the fair value of the identifiable net assets (p. 42 of Reading 21). In this problem, we assume that “excess of the purchase over the fair value of Boswell’s net assets was attributable to previously unrecorded licenses” (p. 61 of Reading 21). It does not sound as if there is any goodwill. Goodwill has an indefinite life, while these licenses have a useful life of six years. What do you think?
so where did the 60 number come from? I am getting a 30 number Net assets = 1070 - 490 = 580 So now previously unrecorded licenses - an asset would have 320 - 0.5*580 = 30… how did that become 60?
CP, That’s the million dollar question for this problem. This was why I was doing debits and credits. It shows that there is something unusual going on with the problem. I thought it might be negative goodwill. If I gain some insight, I will post it for you, man. Thanks for being a helpful sounding board. By the way, the Errata’s solution also uses that 60 you are chasing after. Cadlag
ok… thinking about it I got it. Difference between purchase price and the fv net assets on the balance sheet today = 320 - 290 = 30 This 30 is actually 50% of the “updated FV Net assets” since only 50% was acquired. So Boswell should have a 60$ Previously unrecorded licenses otherwise the 50% would not become 30…
CP, Okay, so the 60 goes to the licenses (see my original post). Where’s the goodwill? Because if there isn’t any (either positive or negative), then the debits and credits in my original post still do not balance. Try and see it from that perspective, i.e., under the purchase method, you have allocate that 320 to your assets and liabilities with that slew of journal entries. Cadlag
licenses would be the asset with the 60. so asset side= Consolidated Balance Sheet: Cash = 50+20 = 70 Receivables=70+45 = 115 Inventory=130+75=205 PPE, Net=1570+930=2500 Unrecorded licenses=60 ***** Total Assets=2950 There would be no goodwill because the Boswell Asset side of the balance sheet would be: Cash:20 Receivables: 45 Inventory:75 PP&E, Net: 930 Unrecorded Licenses: 60 ------------------------------- Total Assets: 1130 ------------------------------- Possibly the extra 60 should show up as Common Stock or Retained earnings on Boswell to balance the A=L+E equation on the Boswell side of things… And in that case the Minority Interest would then be .5 * (535 + 45 + 60) = 320
CP, Are you suggesting that we include the 60 on Boswell’s books? If that is the case, then this would violate the assumption that the licenses were not on Boswell’s books in the first place. Maybe I am minterpreting your last post? Cadlag
Let’s look another way: FV of Boswell’s assets: 20+45+75+60+930=1130 FV of Boswell’s liabilities=90+400=490 Net Assets: 1130-490 = 640 So given 50% was purchased: Goodwill = 0 So there is now a 60 difference that needs to come somewhere to make the balance sheet balance. Something has to give somewhere…
CP, The fair value of the Boswell’s assets cannot be 1130 (as you propose). Remember, the problem assumes that the book value of Boswells’s assets and liabilites are equal: “The fair value of Boswell’s assets and liabilities other than licenses was equal to their recorded book values” (p. 61 of Reading 21). So the the 1,070 is the book value and is also the fair value of Boswell’s assets. Cadlag
Look at example 10, pg 31 -> and since currency is in pounds - this would indicate IFRS accounting. So 100% fv of the purchased assets would go on to the balance sheet of consolidation. and as a result the entire 50% * difference (1130 - 490) = 320 would go on as minority interest. and this would make balance sheet balance.
Except Boswell has fair value of assets and liabilities OTHER THAN LICENSES equal to the BV of those assets and liabilities. Goodwill is the payment in excess of the assets and liabilities (that’s what the text of the question suggests). As CPK calculated, the goodwill that NinMount recognized was 30 (bought for 320 something of net worth of 290=50%*(1070-490)). Since it represents 50% of the previously unrecognized licenses, it must be that the full value of those licenses was 60. Under IFRS, if an intangible asset (such as R&D, which need not be recognized as an asset on the BS of Boswell) can be measured reliably, and meets the definition of an intangible asset, it can be recognized when purchased, and recognized as an intangible asset - the licenses (while under USGAAP, in-process R&D needs to be expensed immediately).
Alright, thanks you two (CP and map1 ) for the assistance. Cadlag
I also found the discussion on the bottom of p. 43 to be relevant – as it also addresses how IFRS and US GAAP deal with a “bargain purchse”.