Bartholomew Corporation acquired all of the outstanding shares of Samson Company

Question

Bartholomew Corporation acquired all of the outstanding shares of Samson Company in Year 1 by paying $6,875,000 in cash. The fair value of Samson’s identifiable net assets is $5,000,000. Samson is a separate cash-generating unit and reporting unit. At the end of Year 1, Bartholomew compiles the following information for Samson:

Amount at which the shares of Samson could be sold ……………………. $5,000,000

Fair value of Samson’s identifiable net assets excluding goodwill ………. $4,500,000

Costs that would be incurred to sell the shares of Samson ………………... $ 200,000

Present value of future cash flows from continuing to control Samson ….. $4,750,000

A. What amount of goodwill should be reported from the acquisition of Samson under IFRS/GAAP?

B. At what amount should Samson’s identifiable net assets and goodwill be reported on Bartholomew’s consolidated balance sheet at the end of Year 1 under U.S. GAAP and IFRS?

Explanation / Answer

A. As per the IFRS/GAAP only purchased goodwill need to be accounted in the books of accounts. Any self generated goodwill will not be recognized. Paragraph 43 of FAS 141 provides that “the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed shall be recognized as an asset referred to as goodwill”

To put in simple words, any amount paid in excess of the net assets of the acquired entity will be treated as Goodwill.

Bartholomew Corporation has paid $6,875,000 in cash to acquire the identifiable net assets of Samson of value $5,000,000. So the excess amount $6,875,000 - $5,000,000 = $1,875,000 will be reported as Goodwill from the acquisition.

B. While consolidating the financial statements, investment in the 100% subsidiary and equity need to be eliminated. While acquiring the fair market value of net assets is $5,000,000 and this will be the value of Investments. At the end of the year, this value has been decreased to $4,500,000. So the investment need to be reduced to this value with an equal adjustment to the net assets. Hence the Samson’s identifiable net assets in the consolidated financial statements will be $4,500,000. Goodwill will be the $1,875,000

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