Harlow plc: goodwill and the unrealised profit
On 1 January 2025 Harlow plc acquired 75% of Seaton Ltd, paying £3,600,000 in cash. Seaton's equity at that date was share capital £2,000,000 and retained earnings £1,200,000. A valuation showed that Seaton's freehold land, carried at £900,000, had a fair value of £1,300,000; the land is not depreciated and was still held at the year end. The non-controlling interest was measured at its fair value of £1,100,000.
At 31 December 2025 Seaton's retained earnings were £1,900,000. During 2025 Seaton sold goods to Harlow for £500,000 at a mark-up of 25% on cost. One quarter of those goods remained in Harlow's inventory at 31 December 2025; the rest had been sold on outside the group.
Harlow's own retained earnings at 31 December 2025 were £4,000,000. Harlow has no other subsidiaries and there were no impairments.
1. Calculate the goodwill arising on acquisition and explain how it is treated after initial recognition.
Read the worked answer
| £ | |
|---|---|
| Consideration transferred | 3,600,000 |
| Fair value of NCI | 1,100,000 |
| 4,700,000 | |
| Less fair value of net assets acquired: share capital 2,000,000 + retained earnings 1,200,000 + land uplift 400,000 | (3,600,000) |
| Goodwill | 1,100,000 |
The £400,000 land uplift must be included: the group measures the identifiable net assets at fair value at acquisition, so the uplift reduces goodwill rather than sitting in post-acquisition reserves. Because the land is not depreciated, none of the uplift is written off after acquisition.
Goodwill is not amortised. It is held at cost as an intangible non-current asset and tested for impairment at each reporting date; an impairment would be charged to consolidated profit or loss.
2. Calculate the unrealised profit, the consolidated retained earnings at 31 December 2025 and the NCI, showing your reasoning at each step.
Read the worked answer
Unrealised profit (PUP). Sales of £500,000 at 25% mark-up on cost means cost was £400,000 and profit £100,000. One quarter of the goods (selling price £125,000, cost £100,000) is still in group inventory, so the profit still inside the group is £25,000. This must be eliminated, and because Seaton is the seller it reduces Seaton's reserves and is shared 75:25.
Seaton's post-acquisition reserves
- 1,900,000 − 1,200,000 = 700,000
- Less PUP (25,000) = 675,000
Consolidated retained earnings
- Harlow: 4,000,000
- Plus 75% × 675,000 = 506,250
- = £4,506,250
Non-controlling interest
- FV at acquisition 1,100,000
- Plus 25% × 675,000 = 168,750
- = £1,268,750
The key judgement is that Harlow's own reserves are untouched by the PUP; only the seller's reserves bear it. If Harlow had been the seller, the full £25,000 would have been deducted from group retained earnings with no NCI share.
3. The auditors ask what the figures would have been had Harlow measured NCI at its proportionate share of net assets. Recalculate and explain the difference.
Read the worked answer
At acquisition
- NCI = 25% × 3,600,000 = 900,000
- Goodwill = 3,600,000 + 900,000 − 3,600,000 = £900,000
At 31 December 2025
- NCI = 900,000 + (25% × 675,000) = £1,068,750
Comparison
| Full goodwill | Proportionate | Difference | |
|---|---|---|---|
| Goodwill | 1,100,000 | 900,000 | 200,000 |
| NCI at year end | 1,268,750 | 1,068,750 | 200,000 |
The £200,000 difference is the goodwill attributable to the NCI - the amount by which the fair value of the NCI exceeds its share of the net assets. Under the full goodwill method it is recognised on the face of the group balance sheet; under the proportionate method only the parent's share of goodwill is recognised. Total equity is unchanged in substance; only its split between owners of the parent and NCI moves.