Dear All,
one of our Client has purchased a 100 % interest in a Subsidiarywhich is loss Making…
 
He has passed the following entry in their own books
 
Goodwill DR                120,000
Investment CR                          20,000       (Equity of subsidiary)
Payable to subsidiary              100,000        (purchase price)
 
My question is can Investment AC be -VE at initiation. and as far as i remember the initial recognition of an asset should be at its cost.and my plea to the Client is that the entry should be
 
Investment DR 100,000
                 Payable           100,000
and goodwill be shown in Consolidated ACs.
 
Kindly comment….and correct me if i am wrong.
 
Regards

I think the entry you proposed is correct as goodwill from acquisition would only be shown in consolidated a/c. 


If it is a loss making sub the main advise to your client is that he has to right away have a plan for impairment testing of the investment, I think that is the main issue

 

If Your client bought a business (and not a company) in its account receives Fixed Assets, Current Assets and Creditors of the business combination, so
 
Fixed Asset            100.000
Current Assets          20.000
– Creditors                                  100.000
Goodwill                     80.000

 

Sc

 

 

 

 

 
The treatment by client is very improper.

The asset should be shown at initial cost and thereafter goodwill may be shown in consolidated financial statements.

Regards

Your cllient is permitted to show the investment in its separate financial statements valued at cost or in accordance with IAS 39. Unless of course it has been classified as held for sale in which case IFRS 5 would apply.

 

In the consolidated financial statements, IFRS 3 would be applicable in determining the goodwill.

Please note that the revised IAS 27 and IFRS 3 can be early adopted and the treatment for goodwill recognition would be impacted if your client early adopts IFRS 3 in which case IAS 27 revised would also have to be early adopted. 

 

 

Your plea is correct.
 

Thank you very much for ur guidance..Your thoughts were very precious to me.
Regards