In this session we shall finish looking at the consolidated statement of financial position by considering how it should be adjusted for:
- Bargain purchases
- Changes in a subsidiary’s revaluation reserve that occurs after the date of acquisition
Bargain Purchases
A bargain purchase occurs where the amount paid by a parent company for its shares in the subsidiary is less than the fair value of the parent’s share of the net identifiable assets acquired.
The way we calculate a bargain purchase is exactly the same as the way we calculate goodwill. A bargain purchase is where the calculation results in a negative number.
The value of a bargain purchase is added to the group’s retained earnings.
Question 1
A parent company purchased 75% of the share capital of its subsidiary for £425,000. On the acquisition date the subsidiary had share capital of £400,000 and retained earnings of £150,000. Included in the assets of the subsidiary at the date of acquisition was a property with a carrying value of £80,000 and a fair value of £120,000.
Calculate the value of the bargain purchase resulting from the parent’s acquisition of the subsidiary.
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Bargain purchases are calculated using exactly the same process used to calculate goodwill.
- Amount paid by the parent: £425,000
- Add NCI share of the fair value of the identifiable net assets acquired (i.e. 25% of the NCI’ equity plus the fair value adjustment: 25% x (400000+150000+40000) = £147,500
- Less the fair value of the identifiable net assets acquired (400000+150000+40000) = £590,000
- Bargain purchase: 425,000 + 147,500 – 590,000 = £17,500
Revaluation Reserves (and similar reserves)
A Revaluation Reserve (and other similar reserves) are calculated using the same general approach as used in calculating a group’s Retained Earnings. The group’s revaluation reserve will consist of:
- The parent’s revaluation reserve; and
- The parent’s share of the movement in the subsidiary’s revaluation reserve since the date of acquisition
Question 2
A parent company owns 55% of the share capital in its subsidiary. At its year-end, the parent company and subsidiary had revaluation reserves of £90,000 and £200,000 respectively. At the acquisition date the subsidiary had a revaluation reserve of £160,000.
Calculate the value of the consolidated revaluation reserve
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The revaluation reserve will be the parent’s reserve of £90,000 plus its share of the post-acquisition movement in the subsidiary’s revaluation reserve (i.e. 55% x (200,000-160,000) = £22,000
The consolidated revaluation reserve is therefore £112,000
Illustration
Cadmus Ltd purchased 75% of the share capital of Harmonia Ltd on 01/01/2020. On the acquisition date Harmonia had share capital of £10,000, retained earnings of £275,100 and a revaluation reserve of £192,500.
The companies’ statements of financial position as at 31/12/2020 are shown below.
Group assets: non-current assets
The group’s property, plant and equipment will be calculated by adding the parent and subsidiary’s figures together (i.e. £1,440,900 plus £496,800).
The investment made by Cadmus Ltd in Harmonia Ltd will be eliminated and we will then calculate the goodwill as follows.
As the above calculation results in a negative figure, we are dealing with a Bargain Purchase rather than Goodwill. As a consequence, no entry will be made in the Non-Current Assets section of the Statement but we will in due course add the Bargain Purchase to the group’s Retained Earnings.
Group current assets and current liabilities
As this example does not involve any intragroup transactions the current assets and current liabilities of the group will be calculated by adding the parent’s figures to those of the subsidiary.
The top section of the consolidated statement of financial position is shown below.
Group equity: share capital
The share capital of the group will be the same as the share capital of the parent, Cadmus Ltd (i.e. £90,000).
Group equity: retained earnings
The retained earnings of the group will be calculated by taking the retained earnings of the parent, Cadmus Ltd (£1,345,000) plus Cadmus Ltd’s share of Harmonia Ltd’s post-acquisition retained earnings. We will also add the bargain purchase of £8,200 that resulted from the acquisition of Harmonia Ltd.
Group equity: revaluation reserve
The group’s revaluation reserve will be calculated by taking the revaluation reserve of the parent, Cadmus Ltd, and adding its share of the movement of Harmonia Ltd’s revaluation reserve since the acquisition date.
Group equity: non-controlling interest
The non-controlling interest in this example is calculated by taking the share that is not owned by the parent of the share capital, retained earnings and revaluation reserve.
The above figures can then be included in the statement.
The consolidated statement of financial position is now complete.
