Negative Goodwill of NCI

[mrafaykhan]

Dear Sir,

Hope you all are fine and doing fine in your lives. I have query regarding revised IFRS-3 that if we are using full goodwill method and while calculating good will we found following cases
1- Negative Parent goodwill and negative NCI part of goodwill.
2- Negative Parent goodwill and Positive NCI part of goodwill.
3- Positive Parent goodwill and negative NCI part of goodwill.

Now in above cases I am facing the following issues

1- Negative goodwill of parent will add in consolidated reserves as we did as per previous version of IFRS-3 and after that the SOFP will tie now what we will do with NCI negative goodwill part.

2- In this situation the parent's Negative goodwill will add in group reserves and the goodwill of NCI will appear at face of SOFP on assets side and the same amount will add in NCI, and so the SOFP will tie. Am I correct here?

3- In this situation the Parent Positive goodwill will apprear at SOFP but here I am facing the same problem as in Case 1 that where we take the negative goodwill of NCI.

Conclusively you can say I am facing problem in the treatment of negative goodwill of NCI. Kindly also tell me whether netting off of parent's and NCI goodwill is allowed or not.

Kind Regards,

Muhammad Rafay

[mrafaykhan]

Dear Kamran and Faisal, kindly give your expert suggestion on the above mentioned points.

[mrafaykhan]

Yet no reply from anyone. Kindly just tell me what will be the treatment of negative goodwill of NCI in consolidation.

[june23am]

i think negetive good will of NCI will be recognized as gain in p&l account in consolidation as "gain from bargain purchase". lets see what others say about it.
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by mrafaykhan</i>
<br />Yet no reply from anyone. Kindly just tell me what will be the treatment of negative goodwill of NCI in consolidation.


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[june23am]

IFRS 3 and goodwill
under ifrs 3 term "negative goodwill" has been replaced by "excess of the acquirer's interest in the net failr value of the acquiree's identifiable assets, liabilities, and contingent liabilities over the cost"
<b>ifrs assumes that negative goodwill would arise only in exceptional circumstances, therefore before determining that negative goodwill has arisen, the acquirer has to reassess the identification and measurment of the net assets and contingent liabilities acquired and also to look at the measurement of the cost of business combination. if negative goodwill still arisen than it must recognize immediately in profit or loss</b>
now according to ifrs 3 we got two ways to further eleminate negative goodwill, first is to reasses fair value of net assets and second is to recognize negative goodwill as gain in profit n loss.
here take an example
business A bought 70% shares (7 shares at 10 each) of business B at a value of 50 giving arise to negative goodwill of 20 (70-50). at the acqusition date balance sheets of both businesses were
business A
ASSETS
investment in subsidiary (7shares)50
inventory 150
bank account 50
CAPITAL
share capital 250

business B
ASSETS
inventory 70
bank 30
CAPITAL
share capital (10 at 10) 100
it is assumed fair value is correct in the balance sheet of business B, so negative goodwill is written off in profit & loss account as gain
A & B consolidated balance sheet
ASSETS
inventory (150+70) 220
bank (30+50) 80
TOTAL = 300
CAPITAL
share capital 250
retained profit (amount of negative goodwill)20
minority interest (NCI) 30
TOTAL = 300

If company instead of charging it to profit & loss reassess the assets and is to reduce any asset inventory or bank to eliminate this amount of 20 negative goodwill.
In this case fact that 30% of business B is owned by minority interests and in order to eliminate the negative goodwill of 20 an amount greater than 20 needs to be deducted from the net assets of business B. that amount is equal to 20+ 20 times 30/70 (minority interest share of the net assets divided by the parent entity’s share) 28.57 approximately. By assuming inventory is to be reduced by this amount business B’s balance sheet will be
ASSETS
Inventory (70-28.57) 41.43
Bank 30
Total assets = 71.43
CAPITAL
Share capital 71.43 (10 at 7.143)
A&B CONSOLIDATED BALANCE SHEET
ASSETS
INVENTORY (41.43+150) 191.43
BANK (30+50) 80
TOTAL ASSETS = 271.43
CAPITAL
SHARE CAPITAL 250
MINORITY INTEREST (NCI) 21.429
TOTAL CAPITAL = 271.43 AFTER ROUNDIG OFF
hope it is clear now, and please correct me if I am wrong in it, jazakALLAH

[mrafaykhan]

Dear,
Your reply is correct in the context of proportionate goodwill method...I know the treatment but my question is that if your are using full goodwill method and then negative goodwill of minority arise then what will be the treatment...ok for more ease, let take an example
Statement of Financial Position as at December 31, 2010
ASSETS H S
PPE 100,000 80,000
Investment in S 50,000 -
Current assets 60,000 30,000
------- -------
210,000 110,000
======= =======
EQUITY + LIABILITIES
Share Capital 120,000 65,000
Retained earning 50,000 30,000
Current Liabilities 40,000 15,000
------- -------
210,000 110,000
======= =======
H acquire 80% shares of S Ltd at January 1st, 2010. Retained earning at that date was zero and fair value of NCI share was Rs. 12,000.
Now using full goodwill method prepare statement of financial position as at 31st December, 2010.

[june23am]

Goodwill under full goodwill method
at 1st january retained earning was 0 and NCI share was 12000
Now fair value of net assets with 0 retained earning of business S was 65000, by calculating goodwill under full goodwill method
Consideration paid by company H 50000
Add fair value of minority interest 12000
Less 100% of the fair value of the net assets of the subsidiary acquired 65000
So (50000+12000-65000) is -3000 under full goodwill method
under partial goodwill such is
considereation paid by company H 50000
Less fair value of S 65000
Add NCI (20% of 65000)13000
So (50000-65000+13000) -2000
Or consideration paid 50000
Less parent share of subsidiary acquired's assets (80% if 65000)52000
By using full goodwill method leaving negative goodwill of 3000 out of which NCI's portion of negative goodwill 1000

Second step

H&S CONSOLIDATED BALANCE SHEET
ASSETS
Pep (100000+80000) 180000
Current assets (60000+30000) 90000
<b>TOTAL 270000</b>
CAPITAL/LAIBILITES
Share capital 120000
Retained earning (50000+30000+3000)83000
Current liabilities (40000+15000)55000
Minority interest (NCI) 12000
<b>TOTAL 270000</b>
Retained earning includes both parent’s acquired part of negative goodwill and NCI part of negative goodwill of 3000

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by mrafaykhan</i>
<br />Dear,
Your reply is correct in the context of proportionate goodwill method...I know the treatment but my question is that if your are using full goodwill method and then negative goodwill of minority arise then what will be the treatment...ok for more ease, let take an example
Statement of Financial Position as at December 31, 2010
ASSETS H S
PPE 100,000 80,000
Investment in S 50,000 -
Current assets 60,000 30,000
------- -------
210,000 110,000
======= =======
EQUITY + LIABILITIES
Share Capital 120,000 65,000
Retained earning 50,000 30,000
Current Liabilities 40,000 15,000
------- -------
210,000 110,000
======= =======
H acquire 80% shares of S Ltd at January 1st, 2010. Retained earning at that date was zero and fair value of NCI share was Rs. 12,000.
Now using full goodwill method prepare statement of financial position as at 31st December, 2010.
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