Purchase Consideration · Goodwill on Acquisition · Fair Value Adjustments · Consolidated SFP · Non-Controlling Interest | Cambridge A Level Accounting 9706
An acquisition occurs when one company (the parent) obtains control over another company (the subsidiary) by purchasing a majority of its shares. The two companies remain separate legal entities but are reported as a single economic unit — the group — in consolidated financial statements.
| Term | Definition |
|---|---|
| Parent Company | The acquiring company — owns >50% of voting shares of the subsidiary |
| Subsidiary | The acquired company — controlled by the parent |
| Group | The parent and all its subsidiaries treated as one economic entity |
| Consolidated SFP | Combined statement showing the group as a single entity — eliminates intra-group balances |
| Purchase Consideration | Total price paid by the parent for the subsidiary's shares — may be cash, shares issued or a mix |
| Non-Controlling Interest (NCI) | Portion of subsidiary's equity NOT owned by the parent — also called minority interest |
| Goodwill on Acquisition | Excess of purchase consideration over parent's share of fair value of subsidiary's net assets |
Goodwill arises because the parent pays more for the subsidiary than the fair value of its identifiable net assets. It represents reputation, customer relationships, brand strength and other unrecognised intangibles.
Lahore Industries Ltd acquires 80% of Karachi Components Ltd for $480,000 on 1 January 2026. Fair value of Karachi Components' net assets at acquisition: $370,000.
Goodwill of $184,000 is shown as a non-current asset in the consolidated SFP.
When the parent owns less than 100% of the subsidiary, the remaining shareholders are the NCI (minority interest). Their stake in the subsidiary's net assets must be shown separately in the consolidated SFP.
Using Example 1: NCI = 20% × $370,000 = $74,000 at acquisition. NCI is shown in the equity section of the consolidated SFP — not as a liability.
Only the subsidiary's post-acquisition retained earnings contribute to group retained earnings. Pre-acquisition retained earnings were already included in the goodwill calculation (as part of net assets at acquisition).
Cancel the parent's "Investment in Subsidiary" against the sub's share capital and pre-acquisition reserves. The difference becomes goodwill (W1).
Goodwill on acquisition is added as a non-current intangible asset in the consolidated SFP.
Adjust subsidiary's assets/liabilities to fair value at acquisition. Uplifts increase both the asset line and the net assets used in W1.
Cancel any amounts owed between parent and subsidiary — loans, current account balances, receivables and payables.
Non-Controlling Interest shown separately in consolidated equity — their stake in the subsidiary's net assets at reporting date.
Parent's RE + parent's share of sub's post-acquisition RE. Never include pre-acquisition RE of subsidiary twice.
| Item | Lahore (Parent) $ | Karachi Components (Sub) $ |
|---|---|---|
| Investment in Karachi Components | 480,000 | — |
| Property | 600,000 | 300,000 |
| Equipment | 240,000 | 110,000 |
| Inventories | 90,000 | 52,000 |
| Trade Receivables | 75,000 | 42,000 |
| Intra-group receivable (from Sub) | 20,000 | — |
| Bank | 45,000 | 28,000 |
| Trade Payables | (85,000) | (62,000) |
| Intra-group payable (to Parent) | — | (20,000) |
| Debentures | (150,000) | (100,000) |
| Ordinary share capital | (800,000) | (200,000) |
| Share premium | (200,000) | (80,000) |
| Retained earnings | (315,000) | (70,000) |
Additional information: Sub's retained earnings at 1 Jan 2026 (acquisition) = $30,000. Post-acquisition RE = $70,000 − $30,000 = $40,000. Sub's net assets at 1 Jan 2026 (FV) = $200,000 + $80,000 + $30,000 = $310,000.
W1 — Goodwill: $480,000 − (80% × $310,000) = $480,000 − $248,000 = $232,000
W2 — NCI at 31 Dec 2026: Sub net assets now = $200,000 + $80,000 + $70,000 = $350,000. NCI = 20% × $350,000 = $70,000
W3 — Group RE: $315,000 + (80% × $40,000) = $315,000 + $32,000 = $347,000
| Form | Journal in Parent | Notes |
|---|---|---|
| Cash | DR Investment | CR Bank | Cash leaves the parent's bank |
| Share exchange | DR Investment | CR Share Capital + CR Share Premium | Parent issues new shares at market price; premium = market price − nominal value |
| Deferred consideration | DR Investment | CR Liability (PV) | Future payment discounted to present value; unwinding charged to I/S |
Sindh Holdings Plc issues 400,000 new shares at nominal value $0.50, market price $1.80 as consideration. Total consideration = 400,000 × $1.80 = $720,000.
Goodwill on acquisition is not amortised. It is tested for impairment annually. If the carrying amount exceeds the recoverable amount, the shortfall is charged to the Income Statement as an impairment loss.
| Treatment | Goodwill on Acquisition (IFRS 3) | Partnership Goodwill |
|---|---|---|
| Recognised? | ✅ Yes — purchased goodwill | ❌ No — internally generated |
| Amortised? | ❌ No — impairment test instead | N/A — never recognised |
| Written off? | Only if impaired | Immediately via capital accounts |
W1 Goodwill: Consideration − (Parent% × FV net assets at acquisition)
W2 NCI: NCI% × Sub's net assets at reporting date
W3 Group RE: Parent RE + (Parent% × Sub's post-acquisition RE)
Always prepare W1, W2, W3 before building the consolidated SFP.
Always eliminate: Investment in sub · Sub's share capital and pre-acquisition reserves · Intra-group balances (receivables and payables)
Never eliminate: Sub's post-acquisition retained earnings (parent's share goes into W3)
Question 1 Knowledge — 2 marks Paper 1
Explain the term goodwill on acquisition and state how it is treated in the consolidated SFP under IFRS 3.
Goodwill on acquisition is the excess of purchase consideration over the parent's share of the fair value of the subsidiary's net assets at acquisition — representing the premium for reputation, customer relationships and unrecognised intangibles. (1 mark)
Under IFRS 3 it is recognised as a non-current intangible asset, not amortised, but subject to an annual impairment review. (1 mark)
Question 2 Application — 6 marks Paper 3
Islamabad Holdings Ltd acquired 70% of Rawalpindi Retail Ltd on 1 January 2026 for $560,000. Fair value of net assets at acquisition: $640,000. Net assets at 31 Dec 2026: $720,000 (retained earnings increased by $80,000). Islamabad Holdings' own retained earnings at 31 Dec 2026: $420,000.
Calculate: (a) Goodwill (b) NCI at 31 Dec 2026 (c) Group retained earnings.
(a) W1 Goodwill: $560,000 − (70% × $640,000) = $560,000 − $448,000 = $112,000 (2 marks)
(b) W2 NCI: 30% × $720,000 = $216,000 (2 marks)
(c) W3 Group RE: $420,000 + (70% × $80,000) = $420,000 + $56,000 = $476,000 (2 marks)
Question 3 Analysis — 3 marks Paper 1
State three differences between goodwill on acquisition (IFRS 3) and partnership goodwill treatment.
Question 4 Application — 4 marks Paper 3
A parent issues 500,000 shares of $0.25 nominal at market price $2.20 as acquisition consideration. (a) Calculate total consideration. (b) Prepare the journal entry. (c) State effect on parent's equity.
(a) 500,000 × $2.20 = $1,100,000 (1 mark)
(c) Share capital +$125,000, share premium +$975,000. Total equity increases by $1,100,000 — offset by the investment asset of the same amount. No net change to equity from the issue itself. (1 mark)
Question 5 Analysis — 3 marks Paper 3
Explain why intra-group balances must be eliminated in the consolidated SFP, and give one example.
The consolidated SFP presents the group as a single economic entity. Balances between companies within the group are internal — the group cannot owe money to itself. (1 mark)
Failing to eliminate would overstate both total assets (receivable) and total liabilities (payable) giving a misleading picture of the group's external obligations. (1 mark)
Example: Parent has a $50,000 receivable from subsidiary; subsidiary has a $50,000 payable to parent. Both are cancelled in the consolidated SFP — this is an internal transfer, not an external balance. (1 mark)