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ACCA Strategic Professional · Strategic Business Reporting (International) · Associates and joint arrangements

Kappa held 40% of Lambda, an associate, until 1 January 20X6, when it bought another 20% for cash of $5m. Lambda becomes a 60% subsidiary. The previously held 40% had a carrying amount of $8m and a fair value of $9m. Net assets of Lambda at fair value are $20m, and Kappa chooses to measure non-controlling interest at fair value of $7m. Which figure is goodwill, and what is the profit or loss gain on the previously held interest?

Goodwill is $1m, being $5m cash plus $9m fair value of the old 40% plus $7m NCI less $20m net assets, and the gain in profit or loss is $1m, being the $9m fair value less the $8m carrying amount of the associate.

  1. AGoodwill $1m; gain $1mCorrect
  2. BGoodwill $1m; gain nil
  3. CGoodwill $0m; gain $1m
  4. DGoodwill $2m; gain $1m

Explanation

Goodwill = cash $5m + fair value of previous interest $9m + NCI $7m - net assets $20m = $1m. The gain is the fair value $9m less the carrying amount $8m = $1m in profit or loss. Nil gain wrongly uses carrying amount in the consideration. The other options miscalculate goodwill, for example by omitting or double-counting an element.

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