Transcription
Good day. Welcome to another session of Fog Accountancy Tutorials. Today, we are continuing our lesson on consolidated statement of financial position, and we are moving on to other technical areas of the topic.
Now, there are some concepts that I want to explain and then get you to understand, which are part of the consolidation process. And then, after us, we'll take a more complex question than what we have done in the previous videos.
Now, the first one I want to talk about is forms of purchase consideration. Forms of purchase consideration. Now, you know, in our previous video, we talked about the purchase consideration, and we saw that as the amount of investment you make in the subsidiary by the period. Now, we always assume, we also assume that it was always made by cash. So, you pay cash into the bank, and then you buy the net assets of a company. But practically, or in reality, this is not always the same. And so, in this topic, there are three different, or let me see, four, but the last one is the same as the last two are the same. Basically, there are three different forms of purchase consideration. In other words, you can acquire net assets or shares, equity shares, in another company through three different means.
The first one is the cash consideration, which we all know. So, these are forms of purchase consideration. We have the cash consideration. What is the cash consideration? When a parent company buys shares or equity or net assets in another company, paying by cash, then we call it a cash consideration. Okay. And these forms of purchase consideration I'm talking about will affect our goodwill calculation. That is why it's important because when you see them, they affect your goodwill calculation as well. So, cash consideration.
And then we have something called a share exchange. Now, what is a share exchange? As for the cash consideration, we know. The share exchange is when you are buying a number of shares in another company by exchanging your own shares for the other share. Okay. So, you give out your own share to some at the company you are buying in exchange for some. So, a number of shares. It will be in a proportion or a fraction. So, you can see something like three for every four shares. So, if you see three for every four shares, three for every four, you can see five for every three. Now, no matter how you see it, if you see three for every four, it is three over four. If you see five for every three, it is five over three. In other words, the first one comes up first. That is the meaning. So, in order to calculate your purchase consideration using the share exchange, they will tell you something like P Comp Company are questions in S Company Limited or, um, yes, our questions by paying, let's say, acquired 50,000 shares at a value of, let's say, three Ghana cities by exchanging three for every five shares in the company. So, it will be 50,000 shares that you are buying times, they say, three for every four. So, it will be three over four times the value of the share. If it is two cities, times two cities, then you have the final answer. So, 50,000 shares. They will tell you that a company A is buying shares in company B, buying 50,000 shares in company B by exchanging three for every chest at a value of two CD. So, this is how mathematically it should be represented. If they say four for every three, it's going to be four over three. If they say two for every five, it will be two over five. So, that is how to get the fraction. So, it is the value of the share per share times the number of shares in between, multiplied by the share exchange, in which case the share that the parent company is offering comes as a numerator, and the share that is taken from the subsidiary comes as a denominator. So, that is what we mean by the share exchange. So, that you can either pay by cash or go by share exchange. So, that is another form of purchase consideration that you can see. And nowadays, you usually see more than one type of, um, purchase consideration in the question. So, you need to do workings for purchase consideration, get your final value. So, let's say you have cash consideration, you add it. If there is any share exchange, you add the value of the share exchange, get the total purchase consideration before you use that to start the goodwill calculation. So, it's not going to be straightforward like I gave you earlier. Even to get the purchase consideration, you have to go through. If there is a cash consideration, you pick it. If there is a share exchange, you calculate the value by the procedure that I give: the number of shares times the share exchange factor times the price of the share.
Then the last form is called deferred consideration. Deferred consideration. It's called deferred consideration. Now, what do we mean by deferred consideration? Deferred consideration means that I am buying the net asset today, but I am promising to pay in some number of years' time, or one year, two, three years' time. So, in other words, I am buying on credit. Okay. So, I buy the shares today, then promise to pay later. That is deferred consideration. It can be one year's time, two years' time, three years' time. Now, what this usually means is that, okay, when there is deferred consideration, so you can get a question where you have both cash consideration, a share exchange, and a dividend. So, normally, you don't defer all the consideration. Sometimes you buy the shares, you pay parts, and you defer parts. That is the meaning. Now, if you are deferring parts, it's going to, it means that on the date of acquisition, you have to calculate goodwill, and you need your purchase consideration. Now, I am buying a company today, says in the company today, but I'm promising to pay in three years' time. But I'm paying a part now. If I want my total consideration, let's assume that there is no share exchange, but there is a cash and a deferred consideration. So, I am buying and I'm promising that I will pay cash of $5,000, but I'll also pay $6,000 in two years' time. This is the meaning of a deferred consideration. So, I am deferring. So, in other words, in your eyes, you will see that I'm going to pay a total of $11,000 consideration because I'm paying $5,000 now, and I'm going to pay $6,000 in two years' time. And so, if I want purchase consideration for my goodwill, obviously I would have just picked the $11,000 and used that to calculate the goodwill. But no, this is where the time value of money will come in because $6,000 Ghana cities today is different from $6,000 Ghana cities in two years' time. So, if in two years' time the parent company is going to pay $6,000 Ghana cities to the subsidiary, then it means that the value of $6,000 Ghana city in two years' time will not be the same as the value today. So, you need to discount it back into today's time. So, present value calculation will come in. So, the question will give you the company's cost of capital. So, what you need to do is to discount this using the present value principle into today's term. So, if you are told that the company's cost of capital is, let's say, 10%, then what you have to do is that it's going to be your $5,000, if you want to take consideration, it's going to be the $5,000, which is the cash consideration, plus the deferred. And the deferred is going to be 1 over 1 plus, you know, 10%, 0.1, raised to the power, it's in two years' time, two times the $6,000. So, this is how to discount it. So, I'm going to use this discounting factor, which is one. You know how to do discounting from financial management. You discount the $6,000 into today's terms. And so, the value will be lower than the actual $6,000 value. And the total amount you are going to get is what is going to be called your purchase consideration, which is the composition of your cash consideration and the deferred. In a case where all these three are present in a question, that means that your total purchase consideration is your cash consideration plus the value of the share exchange plus the deferred consideration, which has been discounted. You get a total, and you use that total to now go and calculate the goodwill. So, it is not as straightforward as you think it is, but I'm sure your understanding is coming. I'll talk about an around discount. But let's look at other things.
Now, before I talk about discounting and unwinding, let us also talk about something called contingent consideration, which I see to be part of the third consideration. Contingent consideration. Contingent consideration. What is contingent consideration? Contingent consideration is also a deferred consideration which comes with a condition. Now, the third consideration is, I'll pay you this amount maybe in two years' time, whether I like it or not. When it's two years' time, I must pay. Contingent consideration means that I'll pay you that amount based on a condition. So, if that condition doesn't happen, I won't pay. So, defect, contingent consideration is also defect, just that it comes with a condition. That is why we have separated that. So, you see that in some books, they will say it's four types, but I still see contingency as a subset of a deferred consideration, just that it's a special type of deferred consideration, which says that, for example, I pay $5,000 today, but promise to pay you $6,000 in two years' time, if the subsidiary is able to achieve maybe certain profit targets. So, I'll quote my own profit targets. Now, where can I achieve this profit target? If you're able to achieve that profit target within two years' time, I'll add that money to you. If you are not, I won't pay. So, that is called a contingent consideration. So, contingent consideration is also that's what will be discounted anyway. In calculating your, um, purchase consideration for the purpose of estimating the goodwill, you need your contingency consideration, and both of them will not be in the question. It's either the raw deferred or a contingent deferred. So, whatever it is, there must be a discounting. So, you discount it back into today's steps, to the days of acquisition, so that you can use that to establish your total purchase consideration and thereby be able to calculate your goodwill. In effect, so these are forms of purchase consideration: the cash consideration, the share exchange, and the deferred consideration. The deferred consideration can be the normal deferred or a contingent. And a contingent consideration will always come with a condition.
Now, we'll move on to another concept. But let me also add this, that anytime there is a deferred consideration, it comes in after discounting. We are going to show the deferred consideration as a liability in the consolidated statement of financial position. But there will also be a discount unwinding, which we are going to explain when we are solving a question. So, the unwinding of the discounts, yes, I will talk about it, but let me continue with other concepts. When I'm solving a question, and I'll talk about the unwinding of the discounts. Okay.
Now, these three, I told you, affect goodwill computation because we know that the goodwill is your purchase consideration, then you less your fair value of your net assets taking over. This purchase consideration, you may have to go through all these three, add them up before you get this figure. So, it will no more be directly stated in the question. So, that is what you should know.
The next thing we are going to look at is a situation where the fair value of NCI has been given. And I have already talked about it in a previous video. When there is fair value of NCI, that is the non-controlling interest at acquisition, they give a fair value. Now, whenever they give you a fair value of NCI, it's going to affect two things. It's going to affect your goodwill estimation, and it's also going to affect your calculation of non-controlling interest. So, these are the two things we know that the fair value of NCI. Now, what I mean by fair value of NCI is that at acquisition date, when we buy the company, we know the purchase consideration that we used to buy that cost. The value of NCI, that if it is 80-20 or 75-25, the 25% that belongs to the non-controlling interest should be able to, we should be able to know the value at the date of acquisition, either by multiplying the number of shares left. For example, if they tell you that like the parent bought 50 million shares, okay, and the subsidiary is capitalized with 20 million shares, sometimes they will give you the value of the share. So, if the value per share is, let's say, $2 per share, then it means that once the parent is buying 15 million, the balance of 5 million shares belongs to NCI. Okay. Now, to find the value of NCI, you can multiply the 5 million shares by the $2 to get a total value of NCI. That is a fair valuation. One approach. You see that they will give you the value in the question, or you yourself, you can establish the value yourself. So, if 5 million shares is what is remaining as the 25% for the non-controlling interest, then we can multiply 5 million shares by $2, and that is going to give us $10 million. So, now the value of NCI will be $10 million. So, this is how to calculate the value of NCI anytime you are given the price per share and you know the number of shares left for the NCI. If they do not tell you the non-controlling interest value themselves, then you have to calculate your own yourself by this week. Another way that you could have done this is this. Listen very carefully. Is that even though there may be a value or a price for the non-controlling interest, yet the question will give you its own value. Like in this case, we have $10 million. You know, when you calculate, you get $10 million. But the question will tell you that at the date of acquisition, acquisition, NCI was fair valued at $12 million. Now, even though when you do your own calculation, you will get $10 million, if the person tells you that NCI is fair valued at $12 million, please, and I beg you, please again, use what has been given to you in the question. Don't use your own calculation. Anytime they give you fair valuation of NCI, use what has been given in the question. So, assuming you have a fair value for NCI.
Now, how will it affect your goodwill calculation? Remember that the fair value of NCI will be given on acquisition dates. So, let us look at how if fair value of NCI is given, it will affect our goodwill computation. So, we see goodwill at acquisition date. Now, we all know we begin with our purchase consideration. Nowadays, purchase consideration, we just learned that a time is coming that it will not be given to us again. We'll give us three different forms of, or two different forms of considerations. We will do a working for that before we bring it into the goodwill account. A good estimation. Now, we know that after purchase consideration, we last forever, lost net assets. Now, lesson, taking out the fair value of net asset, whenever we get to this place, we find a percentage. So, if their parent has 70%, it will be 70% of their stated capital, 70% of the income surplus. If there is any revaluation, so plus 70, you add that, then you suffer from their own purchase consideration. So, in other words, you always find a percentage holding of the parent for the equity items before you subtract. But when you are given the fair value of NCI, you don't need to find the percentage because you have to add the fair value of NCI to your purchase consideration. Now, when you add the fair value of NCI to your purchase consideration, it then, it means that the goodwill you are now estimating is not the goodwill of the parent alone, but you are calculating the goodwill for the entire business, including the goodwill of the NCI. So, this is the format. After you are given the fair value of NCI, the goodwill calculation is going to change. It's going to be your purchase consideration plus the fair value of the non-controlling interest, which has been given. This is the 12th. So, that will also come. Then you have your total, your total consideration, before you take out the fair value of net assets. And when you are taking the fair value of net assets, in this case, you are not going to find any percentages again because the purchase consideration represents the 75%, possibly the fair value of NCI will represent the 25%. So, this total consideration that we have here is for 75. It's for 100. Sorry. The consideration that we have here is 100. 75-25 components. So, that means when you are less than the fair value of your equity items, or what we call the net assets, which I have explained that equity goes to net asset, when you take your stated capital, the full amount, you don't find any percentage. The income surplus should be at acquisition date, not at reporting date. If there is any revaluation surplus, we are moving forward. So, we can add more. Then, when we add all these things, we bring the value here. Straight away, we are not going to find any percentage again because the extra 25% we didn't want to include, the fair value of the purchase consideration has already been given. So, we have been given the fair value of NCI. That means that we need 100% of the equity items. So, that the goodwill will now be 100% of what we have in the company. So, this is how to go by the goodwill on acquisition date when the fair value of NCI is given. This time, the fair value of NCI will be added to the purchase consideration. That means we are not going to find any percentages with the equity items or the net assets.
I'm sure understanding has been achieved. And then also, let me also quickly add this here. Even though we are going to meet it somewhere, that goodwill and impair. So, when you get your goodwill, and there is any impairment provision, this is what you do. You subtract the impairment. Assuming that, assuming that you had goodwill to be 100 here, and you are told that goodwill is impaired by 10% or you are giving the value that 10, 10 cities or $10. So, it means that you less the impairment of goodwill because we need to only carry it at the value of its recoverable amount. So, if goodwill is impaired, you need to just, after calculating the goodwill, that is where you have to take out the impairment to get the 90. And this final goodwill is what you are taking to the consolidated statement of financial position. But these impairments will be treated twice. The first one is that you are taking it out of the world. The second part is that when you are doing your group income surplus, you are going to subtract the impairment of goodwill as well. If you don't do your console will not balance. Because your consolidated statement of financial position will not balance because this goodwill is going up in the asset column, the group income surplus is going down in the equity column. So, if the goodwill is reducing by 10, the group income surplus, it will affect the profit as well. So, after you have your parent company's income surplus written, and then their share of their post-acquisition profits, who also come, then the last thing to do is to take out the goodwill impairment. And when you subtract, you have your final. So, this same 10 will appear here. So, that is the mean. So, anytime there is impairment of goodwill, it's reduced from the calculation of goodwill, and then it's also reduced from the group income surplus. So, that your consolidated statement of financial position will agree. All right.
Now, the final principle that I want us to understand is how to establish the post-acquisition profit using something called the net asset list, which is very, very important. And afterwards, we will solve a question, and then that will involve some of these things I have explained. Before, in another video, I will talk about the intra-group adjustments, transfer of assets, transfer of inventories, unrealized profits, and other things that are involved to finalize the consolidated statement of financial position. And then they will take a question that is complete for an exam, a professional exam level, to type. And also look at when an associate is involved before later we see to the consolidated statement of profit or loss. So, like I told you, consolidation is a full series that I'm going to do. So, you just take time with me, and we'll move it step by step until we are okay.
Now, this is what I'm going to teach you. I'm going to talk about the net asset list and what is the importance of the net asset list. Their net asset list importance is to establish the post-acquisition profit. Now, remember that in the previous question that I solved, I explained to you that the difference between the income surplus balance at the beginning and the income surplus balance at the end is what is going to create that post-acquisition profit. Now, that will only be true and correct when you are fortunate that in this question, only the income surplus actually changed over time. What if there is a revaluation of loss and it goes up over time or goes down over time? What if there are other intangibles that are part of not net assets? So, what we are going to say is that for every question you solve, apart from the big four, you need to do the net asset list. In fact, you need to even do the net asset list before you can do your workings on the group income surplus. So, after your group structure and then the consolidate the goodwill on acquisition, you need to do the net asset list. That will give you the post-acquisition profit to even handle the group income surplus and then the non-controlling interest. And this is how to go by the net asset list. So, you say you want something at acquisition date, and then you see at a reporting date. So, this is your net asset list. It is always important to do this. So, you are going to list your net assets at acquisition date and at reporting date. So, let's say at acquisition date, your stated capital from the day you were buying the subsidiary, stated capital was $20,000. At reporting date, it is still $20,000. It has no change. This is not asset list of subsidiary, you know, of the parent. So, you do at acquisition. Then you say that at acquisition date, what was the income surplus? If the income surplus balance is $2,000 at that acquisition, and at reporting date is now $8,000, it has gone up by $6,000. If you have a revaluation surplus of, let's say, $5,000 at acquisition, and at the end is still $5,000, then you know what you are doing. You add the two. You see that over here, the total is $27,000. And then after reporting date, your total net asset is $33,000. Now, you can now find your post-acquisition profit by subtracting the closing balance of the net asset list from the opening. So, it will be $33,000 minus $27,000. That is going to give you $6,000. Now, you see in a question where this is the case, the revaluation surplus didn't change, stated capital didn't change, it is only the income surplus that changed. So, if you did not do this net asset list, you could have gotten your post-acquisition profit right because all you would have done is that you would have just compared the income surplus and see that it has gone up by $6,000, like we did in the previous video, and then you would have gotten your correct balance.
Now, let's look at something, a situation where revaluations of loss has also gone up by, let's say, $7,000. So, you see that the total of the net asset as reported indeed will now be $35,000. And that means that your post-acquisition profit is no more going to be $6,000. It will be $35,000 minus that $27,000. That is going to give us $8,000 post-acquisition profit. And this is what we are going to use for the group income surplus. The parent company gets a percentage of the post-acquisition profit, and then NCI gets a percentage of that. They share according to their holdings. Now, take note that if you had only looked at the income surplus, you would have been deceived to say that post-acquisition profit is $6,000, meaning you did not factor the post-acquisition increase in revaluation surplus and that one to the parent company must get a share, the group must get a share because it was increased during their time that they are owners. And so, looking at the income surplus to get their post-acquisition profit alone may be satisfying in a case where none of the other items are increasing, but it will be dangerous when any of them is also increasing. That means that your value for your post-acquisition profit will be wrong, and it will run through everything. That is it with that. You need to make sure that you have done the net asset list so that it will cater for any increase or decrease in any of the state equity items, and that is going to give you the final difference as a correct difference. And this difference is what you are going to share for the group income surplus and for the non-controlling interest. Remember that I have told you that in this case, the non-controlling interest from a format is going to change. Non-controlling interest, this time when the fair value of non-controlling interest is given, is going to be the fair value. And remember that I have told you that this fair value comes to replace the stated capital at acquisition and then the income surplus at acquisition, the share of NCI for those two. It replaces with a fair value. So, you now add their share of the post-acquisition profit. And their post-acquisition profit will be attained by going by the net asset list. And once you're able to do the net asset list, you should be able to get the correct difference between the two of them for your post-acquisition profit.
So, this brings us to the end of our part 3 video on consolidated statement of financial position. Just relax and then take your time and go through it again. In our next video, we are going to solve an example which involves a lot of all that I have explained. And this time, it's going to be an expanded statement of financial position. It's not going to be a compacted one that I summarized. I'm going to list all the items. And then there is also going to be a little element of, um, intra-group adjustment in the next question I'm going to solve as an introduction. So, that when I'm able to deal with all these things, and I'll talk about intra-group adjustment into detail, and then we solve another question to complete our lesson on consolidated statement of financial position. Remember to subscribe to this channel, Fogging Accountancy Tutorials, if you are new. Share this video, and then let others also have the benefit. Together, we'll be successful. And until we meet again another time, it's bye for now.