Good will on consolidation
Good will on consolidation arises when the purchase consideration paid by the holding company is different from the value of the net assets acquired in the subsidiary company.
If purchase consideration is more than net assets acquired, then the difference is positive goodwill and if purchase considered is less than net assets acquired, then the difference is negative goodwill.
Goodwill will thus be computed in the following two ways:
Method 1
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£
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£
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Cost of investment in subsidiary
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xx
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less:
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Ordinary share capital of subsidiary
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x
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Capital reserves or date of acquisition
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x
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Revenue reserves (retained profits) on date of acquisition
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x
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Shareholders funds on date of acquisition
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xx
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Holding company shares acquired
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(x)
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GOODWILL POSITIVE/NEGATIVE
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xx
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£
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Cost of investment in subsidiary
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xx
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Less: share of net assets acquired (on date of acquisition)
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(x)
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xx/(xx)
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NOTE: Total assets less total liabilities i.e. net assets is the same as shareholders funds. The most common approach used in computing goodwill is by preparing an account called cost of control whereby the cost of investment is posted on the debit side and the holding company share of the ordinary share capital, capital reserves and revenue reserves on the date of acquisition in the subsidiary company are posted on the credit side. The balancing figure in that account is goodwill.