Group accounting: associated companies and negative goodwill

December 13, 2003

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Group accounting is the subject of compulsory questions in all Financial Reporting papers. It is therefore an important area candidates to study. During recent student meetings and teachers’ conferences, examination technique has also been an area of great interest.

The terminology of the question below attempts to cover both International- and UK-based terminology. Its format is based on IAS 1 Presentation of Financial Statements (including the use of the $ symbol), but it should be readily understandable by candidates sitting UK-based papers. Where the workings differ they are presented separately. See Figure 1.

Figure 1: Question
Augment, a public listed company with a year-end of 30 September, entered into an expansion programme on 1 October 2001. On that date the company purchased 80% of Caldershaw’s share capital and 40% of Debut’s share capital. The terms of the acquisition of Caldershaw was that Augment paid total consideration of $20 million. This was settled by issuing a $15 million 8% loan note (at par) and the balance by a new issue of $1 ordinary shares. Debut was acquired by a 1 for 1 share exchange. The market value of Augment’s shares at the date of acquisition was $2.50.

Note: Augment has not recorded the acquisition of the above investments nor the issue of the new shares.

Summarised balance sheets at 30 September 2002 are: