Goodwill and non-controlling interest in the Perth Group acquisition of Sydney Ltd
On 1 July 2024, Perth Group acquired 80% of Sydney Ltd for $72 million cash plus contingent consideration with an acquisition-date fair value of $8 million. The consideration is payable in cash in 2026 if Sydney's cumulative EBITDA exceeds $30 million. Perth had no previous interest in Sydney. At acquisition, Sydney's identifiable net assets had a carrying amount of $60 million. Fair value adjustments were: a brand of $10 million with an indefinite life, inventory of $4 million sold by 31 December 2024, and a contingent liability of $3 million not previously recognised. The tax base of the brand and the inventory uplift is nil, and the tax rate is 25%. The contingent liability is deductible when paid. Perth measures non-controlling interests at fair value, $17 million. At 31 December 2024, the contingent consideration's fair value was $9.5 million. During the post-acquisition period, Perth sold goods to Sydney for $12 million; their cost was $9 million and half remained in Sydney's inventory at year end.
1. Calculate goodwill at acquisition and the non-controlling interest recognised at 1 July 2024. Show the fair value adjustments and deferred tax effects.
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Start with Sydney's carrying amount of identifiable net assets: $60m.
Fair value adjustments:
- Brand: add $10m.
- Inventory uplift: add $4m.
- Contingent liability: deduct $3m.
Deferred tax:
- Brand has a nil tax base, so a deferred tax liability arises: $10m x 25% = $2.5m.
- Inventory uplift has a nil tax base, so a deferred tax liability arises: $4m x 25% = $1m.
- Contingent liability is deductible when paid, so a deferred tax asset arises: $3m x 25% = $0.75m.
Net identifiable assets at fair value = $60m + $10m + $4m - $3m - $2.5m - $1m + $0.75m = $68.25m.
Consideration transferred = cash $72m + contingent consideration $8m = $80m. NCI at fair value = $17m. Goodwill = $80m + $17m - $68.25m = $28.75m.
The inventory uplift is temporary because the inventory is sold by 31 December 2024. In consolidation, additional cost of sales of $4m and reversal of the related deferred tax liability of $1m will be recognised in 2024.
2. Explain the accounting for the contingent consideration at acquisition and at 31 December 2024, including its effect on goodwill and profit or loss.
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The contingent consideration is a contractual obligation to pay cash if Sydney meets an EBITDA target. It is therefore a financial liability measured at fair value at acquisition. The acquisition-date fair value of $8m is part of the consideration transferred and is included in the goodwill calculation.
At 31 December 2024 the fair value is $9.5m. A financial liability classified at fair value through profit or loss is remeasured, and the $1.5m increase is recognised in profit or loss. Goodwill is not adjusted after the acquisition date for changes in the fair value of contingent consideration that are not measurement-period adjustments.
If the consideration had been settled in a fixed number of the acquirer's own shares, it would have been classified as equity and not remeasured. The cash-settlement feature means liability classification is appropriate. The $1.5m expense reduces 2024 group profit but does not affect the NCI because it is a liability of the parent.
3. Explain the consolidation adjustment for the intra-group sale and state whether any adjustment is made to the non-controlling interest.
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Perth sold goods to Sydney for $12m that cost the group $9m, giving an intra-group profit of $3m. Half the goods remain in Sydney's closing inventory, so half the profit is unrealised: $3m x 50% = $1.5m.
Consolidation eliminates the intra-group sale and purchase in full. The unrealised profit is removed by increasing cost of sales and reducing inventory by $1.5m. The remaining $1.5m profit is realised because the other half of the goods has been sold outside the group.
The sale is downstream, from parent to subsidiary. The unrealised profit arose in Perth's own results, not in Sydney's. Therefore the elimination reduces the group's retained earnings attributable to the parent and does not change the NCI share of Sydney's profit or net assets.