Business Combination: Goodwill, NCI, and Contingent Consideration

Under the partial goodwill method (NCI at proportionate share of identifiable net assets), goodwill is calculated as: Consideration transferred + NCI (proportionate share of net assets) - Fair value of identifiable net assets acquired.

First, determine the fair value of identifiable net assets acquired:

• Carrying amount of net assets: CU700,000
• Fair value uplift on equipment: +CU200,000
• Contingent liability recognized at fair value: -CU50,000 (because it is a liability assumed in the business combination, and it is recognized at fair value even if it was not recognized by the acquiree) Fair value of identifiable net assets = 700,000 + 200,000 - 50,000 = CU850,000.

But wait: The problem states 'Subsidiary's identifiable net assets have a fair value of CU900,000.' That might already include the adjustments. Let's read carefully: 'At the acquisition date, Subsidiary's identifiable net assets have a fair value of CU900,000. The carrying amount of Subsidiary's net assets was CU700,000. The difference relates to equipment with a remaining useful life of 5 years (fair value uplift of CU200,000) and a contingent liability that was not recognized by Subsidiary (fair value CU50,000).' So the fair value of identifiable net assets is given as CU900,000. But then the difference between carrying amount (700,000) and fair value (900,000) is 200,000. However, the equipment uplift is 200,000 and the contingent liability is 50,000, which would sum to 250,000, not 200,000. There is an inconsistency. Perhaps the fair value of identifiable net assets is 900,000, which includes the equipment uplift of 200,000 and the contingent liability of 50,000, but then the carrying amount would be 900,000 - 200,000 + 50,000 = 750,000? No. Let's parse: The difference between fair value (900,000) and carrying amount (700,000) is 200,000. That difference is attributed to equipment uplift of 200,000 and a contingent liability of 50,000. That would imply that the fair value of net assets is 700,000 + 200,000 - 50,000 = 850,000, not 900,000. So there is a contradiction. Possibly the fair value of identifiable net assets is 900,000, and the carrying amount is 700,000, and the difference of 200,000 is due to equipment uplift of 200,000, and the contingent liability is an additional adjustment that reduces the fair value? But then the fair value would be 700,000 + 200,000 - 50,000 = 850,000. So the given 900,000 might be a typo. In exam questions, sometimes the fair value of net assets is given as 900,000, and the components are given to explain the difference. But if the components sum to 150,000 net (200,000 - 50,000), then the fair value should be 850,000. Alternatively, maybe the contingent liability is already included in the 900,000? The problem says 'the difference relates to equipment ... and a contingent liability'. So the difference of 200,000 consists of equipment uplift of 200,000 and a contingent liability of 50,000, which would mean the net difference is 150,000, not 200,000. So there is an inconsistency.

Given the ambiguity, I will assume that the fair value of identifiable net assets is CU850,000, calculated as carrying amount 700,000 + equipment uplift 200,000 - contingent liability 50,000 = 850,000. The mention of CU900,000 might be a distractor or an error. However, the problem explicitly states 'Subsidiary's identifiable net assets have a fair value of CU900,000.' That is a direct statement. Perhaps the contingent liability is not part of the identifiable net assets? But under IFRS 3, contingent liabilities are recognized as part of identifiable net assets if they meet the recognition criteria. So they should be included. Therefore, the fair value of identifiable net assets should be 900,000, and the components given (equipment uplift 200,000 and contingent liability 50,000) might be additional information that is already reflected in the 900,000? That would mean the carrying amount before these adjustments was 900,000 - 200,000 + 50,000 = 750,000, not 700,000. So that doesn't match either.

Given the confusion, I will proceed with the fair value of identifiable net assets as CU900,000 as explicitly stated. The other details about equipment and contingent liability are likely to explain the difference between carrying amount and fair value, but the numbers don't add up. In an exam, you should use the explicit fair value given. So I'll use CU900,000.

Thus, fair value of identifiable net assets = CU900,000.

Consideration transferred = CU800,000. NCI at proportionate share = 20% × 900,000 = CU180,000. Goodwill = 800,000 + 180,000 - 900,000 = CU80,000.

Alternatively, if we use the calculated fair value of CU850,000, then NCI = 20% × 850,000 = 170,000, and goodwill = 800,000 + 170,000 - 850,000 = CU120,000. Which one is correct? The problem says 'fair value of CU900,000', so I'll use that. But then the equipment and contingent liability details are irrelevant for goodwill calculation? They might be relevant for subsequent measurement (depreciation and settlement). So I'll stick with CU900,000.

However, to be thorough, I'll note the inconsistency and provide the calculation based on the explicit fair value. So goodwill = CU80,000.

Contingent consideration at acquisition date: Under IFRS 3, contingent consideration is measured at fair value at acquisition date and is part of the consideration transferred. Here, fair value is CU60,000. So the total consideration is CU800,000 cash + CU60,000 contingent consideration = CU860,000. Goodwill should be recalculated: Goodwill = 860,000 + NCI (20% × 900,000 = 180,000) - 900,000 = CU140,000.

Journal entry at acquisition: Dr Investment in Subsidiary 860,000 Cr Cash 800,000 Cr Contingent consideration liability 60,000

At 31 December 20X5, the fair value of the contingent consideration is CU80,000. Under IFRS 3, changes in the fair value of contingent consideration after acquisition are accounted for as follows: if the contingent consideration is classified as a liability, it is remeasured at fair value at each reporting date, with changes recognized in profit or loss (unless it is a measurement period adjustment). Here, the change from CU60,000 to CU80,000 is CU20,000. This is not within the measurement period (assuming the measurement period has ended; the problem doesn't specify, but typically measurement period is up to one year, so it could be within. However, the problem says 'by 31 December 20X5', which is within one year of acquisition. But the change is due to reassessment of the probability of achieving the target, which is new information about facts and circumstances that existed at acquisition date? If so, it could be a measurement period adjustment. But the problem doesn't specify. In exam, usually changes in fair value of contingent consideration after acquisition are recognized in P&L unless they are measurement period adjustments. Given the ambiguity, I'll assume it's not a measurement period adjustment, so the increase of CU20,000 is recognized as an expense (or loss) in profit or loss.

Journal entry at 31 Dec 20X5: Dr Loss on contingent consideration 20,000 Cr Contingent consideration liability 20,000

Alternatively, if it is a measurement period adjustment, it would adjust goodwill. But I'll go with P&L.

Now, NCI at 31 December 20X5: NCI at acquisition = 20% × 900,000 = CU180,000. NCI share of post-acquisition profit: Subsidiary's profit for 20X5 is CU120,000. But we need to adjust for fair value adjustments:

• Additional depreciation on equipment: Fair value uplift CU200,000 over 5 years = CU40,000 per year. So profit is reduced by CU40,000.
• Contingent liability settlement: The liability was recognized at fair value CU50,000 at acquisition. It is settled in 20X5 for CU40,000. This results in a gain of CU10,000 (because the liability was CU50,000 but paid CU40,000). However, under IFRS 3, the subsequent settlement of a contingent liability is accounted for in accordance with IAS 37 or IFRS 9, and any difference is recognized in profit or loss. So the gain of CU10,000 increases profit. But careful: The contingent liability is part of the identifiable net assets acquired. Its fair value at acquisition was CU50,000. If it is settled for CU40,000, the gain is CU10,000. This gain is recognized in the consolidated profit or loss? Actually, the contingent liability is a liability of the subsidiary. In the consolidated financial statements, the subsidiary's assets and liabilities are included at fair value at acquisition. The subsequent settlement is a transaction of the subsidiary, so it affects the subsidiary's profit. But the subsidiary's own profit of CU120,000 does not include this gain because the liability was not recognized by the subsidiary. So we need to adjust the subsidiary's profit for consolidation purposes: add back the gain on settlement of CU10,000 (since the liability was not on the subsidiary's books, the settlement would have been expensed? Actually, if the subsidiary did not recognize the liability, when it pays CU40,000, it would record an expense of CU40,000. But for consolidation, we already recognized the liability at CU50,000 at acquisition. So the settlement should be: Dr Liability 50,000 Cr Cash 40,000 Cr Gain 10,000. But the subsidiary's own records would have Dr Expense 40,000 Cr Cash 40,000. So to adjust to consolidation, we need to reverse the expense of 40,000 and recognize the liability settlement. So the net effect on consolidated profit is a gain of 10,000 compared to subsidiary's profit. So we add 10,000 to subsidiary's profit for consolidation. Also, the additional depreciation of 40,000 reduces profit. So adjusted profit of subsidiary for consolidation = 120,000 - 40,000 + 10,000 = CU90,000.

NCI share of adjusted profit = 20% × 90,000 = CU18,000. NCI at 31 Dec 20X5 = 180,000 + 18,000 = CU198,000.

Consolidated profit for 20X5: Parent's profit: not given, so we only compute the group profit attributable to owners of the parent and NCI. But we can compute the subsidiary's contribution to group profit. Group profit includes Parent's profit plus share of subsidiary's adjusted profit. But we don't have Parent's profit. So we can only compute the subsidiary's contribution and the NCI share. The question asks for consolidated profit for 20X5, but without Parent's profit, we cannot compute total. So I'll compute the subsidiary's contribution to consolidated profit and the split between owners and NCI.

Subsidiary's adjusted profit = CU90,000. NCI share = CU18,000. Owners' share = CU72,000.

Additionally, the loss on contingent consideration of CU20,000 is recognized in Parent's profit or loss? Actually, the contingent consideration is a liability of the Parent (since it is the acquirer). So the remeasurement loss of CU20,000 is recognized in the Parent's separate profit or loss, and thus in the consolidated profit or loss. So it reduces consolidated profit by CU20,000.

So total consolidated profit effect from subsidiary and contingent consideration = 90,000 - 20,000 = CU70,000, of which NCI share is 18,000 and owners' share is 52,000 (72,000 - 20,000). But we need to be careful: The contingent consideration loss is attributable to the owners of the parent, not NCI.

Thus, if we had Parent's profit, we would add 70,000 to it to get consolidated profit. But since Parent's profit is not given, we can only present the subsidiary's contribution and the NCI.

I'll present the calculations clearly.