Consolidated Financial Statements: Answers To Your Questions (Part 2 of 3)

Negotiations Where a group of companies are in place, it may be necessary for the group to prepare consolidated financial statements. The purpose of these financial statements is to present the figures of the group as if it were one single economic entity. Some of the fundamental points of consolidations are set out below;

Treatment of Acquisitions

Where companies are acquired by the group, goodwill is likely to arise on the acquisition. This is because the consideration paid is likely not to equal the value of the pre-acquisition reserves of the acquired company. Any difference between the amount paid and the value of the assets is goodwill. This goodwill is treated as an intangible fixed asset and amortised over its useful life. In accordance with FRS 102, this life is assumed to be finite. Consideration should be made of the useful life of the goodwill purchased (so if for example, the goodwill relates to a customer list then the consolidated accounts should estimate a term over which this goodwill is expected to be utilised over and amortise this goodwill to the profit and loss account accordingly). In certain circumstances where an estimate cannot be reliably reached, the deemed useful life should not exceed 10 years.

Negative Goodwill

Occasionally, negative goodwill will arise on consolidation. This occurs where the value of the assets are greater than the consideration paid. This is sometimes known as a bargain purchase. Again, this goodwill should be recognised over the period in which the benefit is expected to arise. Any amount held at the year end should be shown as a negative fixed asset on the balance sheet of the group. This should be identified separately from any goodwill arising from other business combinations on the group balance sheet.

What questions do you have?

We are happy to help. Please post your comment below or contact our friendly and knowledgeable team on 01 677 9000.  To keep in touch, connect with us on Linkedin. If this article helped you, please share it with other businesses.