How to approach it
- Net assets at acquisition: share capital, retained earnings at that date, fair value adjustments (including unrecognised intangibles).
- Consideration: cash + contingent consideration at acquisition-date fair value (regardless of probability). Later changes go to P&L.
- Goodwill = consideration + NCI at fair value − net assets. Negative goodwill is reassessed and then recognised as a gain.
- Post-acquisition adjustments: intangible amortisation, unrealised profits (inventory and assets), dividends declared.
- Associate: cost + share of post-acquisition profits − share of unrealised profit on sales to it.
Key rules to apply
- IFRS 3: contingent consideration recognised at fair value at acquisition; remeasurement of a liability through P&L.
- A bargain purchase gain is recognised in P&L after reassessing the identification and measurement.
- IAS 28: eliminate the investor's share of unrealised profit on upstream and downstream sales.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Leaving out contingent consideration because payment was not probable at acquisition (examiners' point).
- Showing a bargain purchase as negative goodwill in assets.
- Eliminating unrealised profit on full-year intra-group sales instead of post-acquisition sales only.
- Ignoring the subsidiary's declared but unrecorded dividend.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q8 without copying it.
Original practice question
Contingent consideration and a bargain purchase
P acquires 60% of S on 1 July 2025 for Rs 300m cash plus contingent consideration with a fair value of Rs 80m (Rs 95m at 31 December 2025). NCI's fair value is Rs 180m. S's net assets are Rs 550m at book value plus an unrecognised brand worth Rs 50m (5-year life). P also holds 30% of associate A and sold A a machine on 1 October 2025 at a Rs 10m gain (5 years' life left). On 31 December S declared a dividend of Rs 20m, unrecorded by S; P has recorded its Rs 12m receivable.
Required: Calculate goodwill, the contingent consideration effect, the brand amortisation, the associate adjustment and the dividend effect.
Worked solution
| Working | Rs m |
|---|---|
| Goodwill: 300 + 80 + 180 − 600 | (40) → bargain purchase gain |
| Contingent consideration increase (P&L) | 15 |
| Brand amortisation: 50 ÷ 5 × 6/12 | 5 |
| Unrealised gain on sale to A: (10 − 10 ÷ 5 × 3/12) × 30% | 2.85 |
| Dividend: S liability | 20 (12 eliminated, 8 owed to NCI) |
Answer: Gain on bargain purchase Rs 40m in P&L after reassessment; contingent consideration liability Rs 95m; reduce the associate by Rs 2.85m; show Rs 8m dividend payable to NCI.