Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Seven – An introduction to consolidation
Exhibit 7.2: Acquisition without goodwill
Great SA acquired Notes SA on 1st January year 1
Inputs
Consideration 40,000
% acquired 100%
Retained earnings @
acquisition 30,000
Balance sheets before and after consolidation
Great SA Notes SA Adjustments Consolidated
Investment in Notes SA 40,000 - -40,000
Other assets 130,000 40,000 170,000
Total assets 170,000 40,000 170,000
Common stock 38,000 10,000 -10,000 38,000
Retained earnings 132,000 30,000 132,000
170,000 40,000 170,000
Points to note
1. Assets are those controlled by Great SA. There is no application of
‘proportional consolidation’.
2. No minority interest due to 100 per cent acquisition.
3. Common stock is only that of Great SA, a standard consolidation technique.
4. No goodwill has arisen. This is considered in the next section.
5. Retained earnings are only those of Great SA. We cannot consolidate
earnings of Notes SA as these arise pre acquisition and as a result were not
controlled by the group.
3.2 Goodwill – Premium on acquisition
The rules governing the recognition of goodwill are covered in IFRS 3. A revised
IFRS 3 was issued in January 2008. It provided for two ways of calculating
goodwill. Below we explain the partial goodwill method, and in the notes after
the calculation in 7.4 we show the alternative ‘full’ method. Goodwill is a very
significant part of the consolidation process although its valuation significance is
less clear. In summary IFRS 3 requires that:
1. A premium is calculated as the difference between the value of the
consideration paid and the value of separable assets acquired. This is then
allocated to separable intangibles with the unidentifiable portion being
goodwill.
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