Financial Reporting (FR) Mar / June 2021 Examiner’s report
What is the correct answer?
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- Điều hướng trang này:
- Liabilities overstated Liabilities NOT overstated $000 $000
| What is the correct answer?
Statement 1 – True Statement 2 – True A gain on bargain purchase will be credited to the consolidated statement of profit or loss immediately. It is not recognised in the consolidated statement of financial position. If liabilities are overstated, then the net assets would be understated. This would cause any goodwill recognised to be overstated. For example, the calculations below illustrate the impact of preparing a goodwill calculation for acquiring 100% of the share capital of a subsidiary for $100,000 cash. For the purposes of this illustration, we will assume that the correct fair value of the net assets acquired were $75,000. In one calculation, the liabilities have been overstated by $30,000, causing the net assets to be incorrectly included in the calculation at $45,000 ($75,000 - $30,000). In the second calculation, the liabilities are not overstated, and the net assets are included at their correct fair value of $75,000: Liabilities overstated Liabilities NOT overstated $'000 $'000 Fair value of consideration transferred 100 100 Less net assets acquired (45) (75) Goodwill at acquisition 55 25 As you can see, overstating the liabilities causes the goodwill to be overstated. Where did candidates go wrong? Many candidates knew that statement 1 was true but thought that statement 2 was false. Although not necessary, approaching this question by using some invented numbers in a basic goodwill calculation may have helped candidates to visualise the fact that overstating liabilities reduces net assets and consequently will overstate goodwill. |