A acquired 30% of the issued capital of B for $1 million on December 31, 20X5. The accumulated profits at that date were $2 million. A appointed three directors to the board of B, and A intends to hold the investment for a significant period of time. The companies prepare their financial statements to December 31 each year. The abbreviated balance sheet [financial position] of B on December 31, 20X7 is
| Sundry net assets | $6 million |
| Issued share capital of $1 | $1 million |
| Share premium | $2 million |
| Retained earnings | $3 million |
B had made no new issues of shares since the acquisition of the investment by A. The recoverable amount of net assets of B is deemed to be $7 million. The fair value of the net assets at the date of acquisition was $5 million.
Required
What amount should be shown in A’s consolidated balance sheet [consolidated statement of financial position] at December 31, 20X7, for the investment in B?
Solution
Investment in associate (30% × $6 million) = $1.8 million
Alternative Calculation:
| $ million | |
| Cost | 1.0 |
| Post-acquisition profits 30% (3 – 2) | 0.3 |
| Negative goodwill (30% of $5 million) – $1 million | 0.5 |
| 1.8 |
The negative goodwill [gain from a bargain purchase] will be credited to income.
An impairment test would prove that the carrying amount of the investment is not impaired.
| $million | |
| Recoverable amount $7 million × 30% | 2.1 |
| Carrying value of investment | 1.8 |
(Goodwill should not be impairment tested separately but included in the carrying value of the investment.)
