Contingent consideration – see pages 166-168
Contingent consideration is the additional consideration that may be payable for the acquisition of a business. The additional consideration is dependent upon whether certain future events occur (or do not occur).
The contingent consideration should be measured at fair value at the date of acquisition. The parent should assess the amount expected to be paid in the future under different scenarios, assign probabilities as to the likelihood of the scenarios occurring, derive an expected value of the likely amount to be paid, and use a discount rate to derive the value of the expected payment in today’s dollars.
If contingent consideration is settled with cash or another asset, it is classified as a liability. If settled with shares, classify as equity.
Negative goodwill exists when the purchase price is less than the fair value of the subsidiary’s identifiable net assets.
Under the Acquisition method, requires negative goodwill be allocated to first reduce any value of the subsidiary’s goodwill to zero and to record the Parent’s % of any remaining amount as a gain (closed to Cons. RE at the date of acquisition). (See pages 161-162)
If Parent owns less than 100%, only the parent’s % of the gain can be recognized hence must use the parent company extension theory – see pages 162-163 and pages
Under the equity method, the gain would be recorded as a increase to the Investment in Subsidiary account (DR) and CR gain on purchase of Subsidiary, which is closed to Parent’s net income and retained earnings (see example page 162).
Not the same as negative acquisition differential (CV of sub’s net assets exceed acquisition cost). If FV of net asset < CV of net assets, the FVIs negative amounts could offset some or exceed the negative AD, hence result in a positive goodwill.
Subsidiary with Goodwill:
Do not carry forward goodwill appearing on the subsidiary’s balance sheet, as it is not considered to be an identifiable asset at the time of the business combination.
Subtract from Subsidiary’s CV before taking parent’s percentage when calculating the acquisition differential (AD).
See example pages 164-165 and WP adjustment page 179
Reasons a parent would choose to purchase less than 100% of the outstanding shares of a subsidiary:
Investors may simply want to acquire control. This can usually be accomplished by acquiring a majority interest in the investee company, for example, by acquiring greater than 50% of the voting shares.
The investor may not have or want to spend the funds necessary to acquire 100% of the shares (lower capital investment).
ACCT 4455 Class notes 7th ed
Barbara Wyntjes, MBA, B.Sc., CPA, CGA
Shareholders outside the parent company may provide alternative points of view and expertise, diversifying the risk of 100% ownership and creating a stronger corporate group. The noncontrolling shareholders may provide business contacts and access to other companies or businesses for the parent.
Four theoretical approaches to consolidation using the acquisition method for a nonwholly-owned subsidiary:
The four approaches assume the business combination is a purchase transaction thus parent has obtained control over subsidiary. Parent’s assets and liabilities remain at carrying value (CV).
The differences between the four approaches are: the percentage of the subsidiary’s assets and liabilities consolidated, the percentage of the fair value increments (FVIs) reported by parent and how the noncontrolling interest’s (NCI) share of the subsidiary’s net assets is assigned and where it is presented.
1. Proprietary theory: 100% Par’s CV + % Subs’ CV +/- % FVIs.
Under the proprietary theory (proportionate consolidation method), consolidated statements present the legal form of the relationship since only the parent’s share of the
CV and FVIs of the