Acca aaa s21 Notes

September 2021 to June 2022 exams
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The calculation should be checked:
Consolidated good will = Fair value of consideration + fair value of the non-controlling interest – fair 
value of the subsidiary’s net assets 
Often this becomes:
Consolidated goodwill = Fair value of consideration – Acquirer’s share of the net assets.
Audit evidence will involve checking the bank account to see that the acquisition amounts have been 
paid and inspecting the financial statements of the new subsidiary as at the date of acquisition and 
substituting in the fair value of assets and liabilities. The proportion of shares bought also needs to be 
checked and ownership of the acquired shares must be verified. 
Subsequently, the goodwill figure will have to be tested for impairment. For example, if a component 
had begun to make a series of losses it would be difficult to sustain the idea that the goodwill on its 
acquisition was still intact.
Costs of acquisition must be treated as an expense and not capitalised (IFRS 3).
10. Deferred and contingent consideration
Both in practice, and in exam questions, deferred and contingent consideration is often part of an 
acquisition deal. For example:
Deferred: $20m paid now and another $10m to be paid in 3 years
Contingent: $20 paid now and another $10m to be paid in 3 years IF profits achieve a certain target.
Obviously, the group auditor must inspect the acquisition agreements so that the acquisition terms 
are fully understood. The appropriate accounting treatment of these type of consideration is:
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Deferred: 
the deferred amount must be discounted to its present value and included as part of 
the acquisition cost eg for the calculation of goodwill. Auditing this figure will mean that, as well 
as inspecting the acquisition agreement, the auditor will have to verify that the discount rate 
used is appropriate. Each year, as the date of payment of the deferred consideration 
approaches, the goodwill figure and provision for the deferred payment have to be altered as 
the amount will be discounted by one less year.
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Contingent:
IFRS 3 requires that contingent consideration is includes as part of the 
consideration for acquisition measured at its fair value as at the acquisition date. An exam 
question will either tell you what this fair value is or how it should be calculated.