Ham Plc Acquired 100% Of The Common Shares Of Burg Plc On 1

Ham Plc Acquired 100 Of The Common Shares Of Burg Plc On 1 January 20

Ham Plc acquired 100% of the common shares of Burg Plc on 1 January 20X0, gaining control over Burg Plc. The financial information for both companies as of the acquisition date includes their assets, equity, and liabilities. Key notes indicate that the fair value of assets equals the book value, with a negative goodwill of £15,000 arising due to the acquisition of net assets below their fair value. Additionally, the remaining negative goodwill covers expected losses in the subsequent two years. The task requires preparing a consolidated statement of financial position for Ham Plc as of the acquisition date and explaining the treatment of negative goodwill resulting from the acquisition.

Paper For Above instruction

Introduction

The acquisition of a subsidiary by a parent company involves complex accounting procedures, especially concerning the recognition of goodwill or negative goodwill. When a parent acquires 100% of a subsidiary, consolidation of financial statements ensures a comprehensive and accurate reflection of the group's financial position. This paper discusses the preparation of a consolidated statement of financial position as of the acquisition date (1 January 20X0) for Ham Plc acquiring Burg Plc and explains the accounting treatment of negative goodwill resulting from this acquisition.

Understanding the Acquisition and Financial Information

On 1 January 20X0, Ham Plc obtained complete control over Burg Plc by acquiring all its shares. The net assets of Burg Plc at the acquisition date are fundamental to consolidating its financial position into Ham Plc’s statement. The provided data shows that the fair value of Burg’s net assets matches their book value, simplifying the valuation process. Notably, a negative goodwill (£15,000) arises, indicating Burg Plc was acquired for less than its fair value of net assets, primarily due to expected future losses.

Consolidation Process at Acquisition

To prepare the consolidated statement of financial position, the following steps are essential:

1. Combine the assets, liabilities, and equity of both companies.

2. Eliminate the investment account (Ham’s investment in Burg) against Burg’s net assets.

3. Recognize any goodwill or negative goodwill from the acquisition.

4. Adjust for any fair value differences and expected losses covered by negative goodwill.

Since the fair value equals the book value, the assets and liabilities of Burg are recognized at their book (and fair) values. The total net assets of Burg at acquisition include:

- Property, plant, and equipment

- Investment in Burg (eliminated in consolidation)

- Current assets

- Liabilities

Given the data constraints, the specifics of Burg’s assets are summarized, assuming the total net assets are calculated or provided.

Calculation of the Consolidated Financial Position

The key elements involved in the consolidation are:

- Elimination of the investment’s carrying amount (£90,000, presumed from the note "Investment in Burg")

- Recognition of negative goodwill (£15,000)

- Adjustment for future expected losses (£3,000 in year 20X0, and £2,000 in year 20X1)

The negative goodwill of £15,000 reflects an excess of the fair value of Burg's net assets over the purchase consideration. According to accounting standards (e.g., IFRS 3), negative goodwill is initially recognized as a gain in the income statement but may be allocated over future periods to offset expected losses and other expenses.

The consolidated statement of financial position as at 1 January 20X0 includes:

- The combined assets of Ham and Burg, adjusted for eliminations.

- The non-controlling interest (since control is achieved, it equals 100%, so no non-controlling interest applies).

- Adjusted equity to reflect the negative goodwill and expected losses.

Sample Simplified Consolidated Statement (Note: figures are illustrative based on typical assumptions):

| Assets | £000 |

|------------------------------|--------|

| Non-current assets | 90,000 |

| Current assets | (unspecified, assumed) |

| Total assets | (sum of above) |

| Equity and liabilities | £000 |

|------------------------------|--------|

| Share capital (equity) | (assumed) |

| Retained earnings | (assumed) |

| Negative goodwill deduction | (adjustment, £15,000) |

| Total equity and liabilities | (balance) |

Important to note, specific asset and liability details are limited, but the key aspect is the recognition of the negative goodwill against the assets.

Treatment of Negative Goodwill

According to IFRS 3 — Business Combinations, negative goodwill (also referred to as a gain from a bargain purchase) occurs when the purchase consideration exceeds the fair value of net identifiable assets acquired. Traditionally, negative goodwill is recognized directly in profit or loss in the period of acquisition, highlighting the gain from acquiring undervalued assets or favourable purchase conditions.

In this case, the negative goodwill amounting to £15,000 signifies that Burg Plc was acquired at a discount, with part of this difference attributed to expected future losses (£3,000 in 20X0 and £2,000 in 20X1). The remaining negative goodwill can be allocated to reduce the recognized assets, effectively adjusting their carrying amounts to reflect the expected losses.

The standard approach involves:

- Recognizing the entire negative goodwill as a gain in the income statement immediately if it doesn't relate to expected future losses.

- Otherwise, allocating the negative goodwill to reduce the carrying amounts of non-current assets, liabilities, or to recognize a deferred gain that will amortize over future periods as losses are realized.

In this scenario, since the negative goodwill arises primarily because of future expected losses, the most appropriate treatment would be to recognize it as a reduction of expenses over the periods when the losses are expected to materialize, thus aligning the accounting treatment with the matching principle and providing a more accurate depiction of the group's future financial position.

Conclusion

The process of consolidation at acquisition involves aggregating the assets and liabilities of both entities, eliminating intra-group investments, and recognizing any goodwill or negative goodwill. The negative goodwill in this case indicates a bargain purchase, which is recognized as a gain, but since it contains provisions for expected future losses, a nuanced approach involves allocating this negative goodwill over future periods to offset these anticipated expenses. Proper treatment ensures transparency and compliance with international financial reporting standards, ultimately providing stakeholders with a true and fair view of the group's financial health.

References

  • IFRS 3 - Business Combinations, IFRS Foundation
  • Hu, B., & Simmonds, N. (2020). Consolidated Financial Statements: Concepts, Standards, and Practice. Cambridge University Press.
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  • Needles, B. E., & Powers, M. (2018). Financial Accounting. Cengage Learning.
  • Revsine, L., Collins, D., & Johnson, W. (2018). Financial Reporting and Analysis. Pearson.

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