Business combinations (ii): consolidation technique and goodwill

Knowing that a company has been bought is the easy part. The hard part is the arithmetic. You must add the parent and the subsidiary together, remove what the group owes itself, restate the subsidiary’s assets to what they were worth when it was bought, and split the equity between the group and the outside owners.

The same seven steps work every time, once you see why each one exists.

This topic covers the step-by-step consolidation of a statement of financial position, fair value adjustments and the extra depreciation they cause, assets the subsidiary never recognised, the non-controlling interest, consolidated retained earnings, goodwill after acquisition, the impairment of goodwill (partial and full methods) and bargain purchases. The previous topic covered control and the acquisition accounting. The next topic covers the consolidated statement of profit or loss. November 2025 Question 1 tested this area for 30 marks.

Key terms in plain English

Syllabus check

This topic is examinable under syllabus area C. It covers:

• the preparation of a consolidated statement of financial position with fair value adjustments, intra-group items and unrealised profit;
• goodwill, impairment testing and bargain purchases.

CAMA 2020 and consolidation

The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow International Financial Reporting Standards (IFRS) and give a true and fair view.

The seven steps

1. Group structure. The parent’s share and the NCI’s percentage.
2. Individual adjustments. Any double entries needed in the parent or subsidiary before consolidation (for example, items in transit or unrecorded costs). Mark them on the question.
3. Skeleton. Set out the statement and fill in the easy lines: assets and liabilities added line by line, and the parent’s share capital only.
4. Net assets summary of the subsidiary at the acquisition date and at the reporting date: share capital, retained earnings, fair value adjustments (and the extra depreciation on them) and any unrecognised asset.
5. Goodwill: cost of investment + NCI at acquisition − net assets at acquisition.
6. NCI: NCI at acquisition + its share of the post-acquisition change in net assets (retained earnings and other reserves). Or, with the partial method, its share of the closing net assets.
7. Retained earnings: all of the parent’s + the parent’s share of the subsidiary’s post-acquisition retained earnings (after adjustments such as extra depreciation and unrealised profit), less any goodwill impairment charged to the parent.

Complications

• Before consolidation: the cost of acquisition, assets the subsidiary has not recognised (such as a brand), and the fair value exercise.
• During consolidation: a mid-year acquisition (build a net assets figure at the acquisition date), intra-group balances (cancelled) and unrealised profit in inventory (eliminated).
• After consolidation: impairment of goodwill and bargain purchases.

Fair value adjustments and extra depreciation

The subsidiary’s books are not changed. The adjustments are made only in the consolidation. An asset fair valued above its book value at acquisition (for example plant) is added to the group figure, and the extra depreciation since acquisition (adjustment ÷ remaining life × years held) reduces the subsidiary’s post-acquisition profit, so it affects both the group and the NCI.

Land is not depreciated. An unrecognised intangible (a brand) is added at fair value and amortised over its life.

Goodwill after acquisition

Goodwill is carried at cost less accumulated impairment. It is not amortised. It is tested for impairment annually (and when there is an indicator) under International Accounting Standard (IAS) 36. It cannot be tested alone, so it is allocated to a cash-generating unit (or units), and the carrying amount of the unit is compared with its recoverable amount.

An impairment is charged first against goodwill and then against the other assets of the unit. It is an expense in the consolidated profit or loss (usually in administrative expenses). It does not appear in the individual statements of the parent or the subsidiary.

Partial goodwill method

The recoverable amount of the unit includes cash flows that relate to the NCI’s share of goodwill, but that share is not in the books. To compare like with like, gross up the carrying amount by the NCI’s share of goodwill in a working only (it is not part of the double entry). If the grossed-up amount exceeds the recoverable amount, the loss is allocated to goodwill.

Only the parent’s share of the loss is recognised, because only the parent’s share of goodwill is in the statements.

Full goodwill method

The carrying amount of the unit already includes the whole goodwill. A loss is allocated between the parent and the NCI on the same basis that profit or loss is shared (IAS 36 Appendix C), not in proportion to the goodwill each holds.

Bargain purchase

If goodwill is negative, reassess the identification and measurement of the assets and liabilities, the NCI and the consideration. Any amount left is a gain in profit or loss on the acquisition date. IFRS 3 attributes the gain to the acquirer.

Note: ICAN’s notes say the gain is shared with the NCI under the full goodwill method. IFRS 3 attributes the gain to the acquirer whatever the NCI measurement, so our treatment is slightly different from ICAN’s. In the exam, state that the gain is in profit or loss and attributed to the parent.

The rules in more depth

Why goodwill uses the date-of-acquisition net assets

Profits earned before the parent bought the subsidiary belong to the old owners and were paid for in the price. Only the profits after acquisition belong to the group.

Why extra depreciation reduces the NCI too

The fair value adjustment is an expense of the subsidiary in the group’s view. The NCI owns part of the subsidiary, so it carries part of the expense.

Why goodwill is tested and not amortised

The standard setter chose an annual test because a fixed amortisation period for goodwill is arbitrary. The test shows when the benefits have gone.

Why the full method shares the loss 80:20

The NCI shares in the subsidiary’s profit in the same proportion as it shares in its losses, so the impairment follows that rule.

Effect on analysis

Large goodwill with the NCI at fair value inflates group assets and equity. Impairments reduce profit with no cash effect, but show that the price paid was too high.

Worked examples

1. S’s net assets: at acquisition ₦150,000 (100,000 + 50,000); now ₦200,000.
   Post-acquisition = ₦50,000.
2. Goodwill = ₦450,000 + NCI (30% × ₦150,000 = ₦45,000) − ₦150,000 = ₦345,000.
3. NCI = ₦45,000 + 30% × ₦50,000 = ₦60,000 (also 30% × ₦200,000).
4. Retained earnings.
   ₦650,000 + 70% × ₦50,000 = ₦685,000.
5. Statement.
   goodwill 345,000 + other assets 850,000 = ₦1,195,000.
   Equity: share capital 100,000 + retained earnings 685,000 + NCI 60,000 = 845,000; liabilities 350,000.

1. Goodwill = ₦450,000 + ₦75,000 − ₦150,000 = ₦375,000.
2. NCI = ₦75,000 + 30% × ₦50,000 = ₦90,000.
   Retained earnings are unchanged at ₦685,000.
3. Total assets.
   375,000 + 850,000 = ₦1,225,000.
   Equity = 100,000 + 685,000 + 90,000 = 875,000; liabilities 350,000.

1. Net assets at acquisition.
   100,000 + 600,000 + 100,000 = ₦800,000.
2. Brand now.
   ₦100,000 − (100,000 × 2/20) = ₦90,000.
3. Post-acquisition profit.
   (1,000,000 − 600,000) − 10,000 amortisation = ₦390,000.
4. Goodwill = ₦1,000,000 + (20% × ₦800,000 = ₦160,000) − ₦800,000 = ₦360,000.
5. NCI = ₦160,000 + 20% × ₦390,000 = ₦238,000.
   Retained earnings = ₦2,900,000 + 80% × ₦390,000 = ₦3,212,000.
6. Total assets.
   brand 90,000 + goodwill 360,000 + PPE 2,800,000 + other 700,000 = ₦3,950,000.

1. Goodwill = ₦1,000,000 + (20% × ₦1,000,000 = ₦200,000) − ₦1,000,000 = ₦200,000.
2. Land is not depreciated, so post-acquisition profit.
   ₦1,000,000 − ₦600,000 = ₦400,000.
3. NCI = ₦200,000 + 20% × ₦400,000 = ₦280,000.
   Retained earnings = ₦2,900,000 + 80% × ₦400,000 = ₦3,220,000.
4. If the ₦300,000 had been on plant with a 10-year life, extra depreciation over two years = ₦60,000, post-acquisition profit = ₦340,000, NCI = ₦268,000, retained earnings = ₦3,172,000 and PPE = 1,800,000 + 1,000,000 + 300,000 − 60,000 = ₦3,040,000.

Note: in ICAN’s solution for the plant version, the label on the retained earnings working reads “80% of 390,000”, which is copied from the brand question. The figure actually used is ₦340,000, and the total of ₦3,172,000 is right. Ours is slightly different in presentation.

1. Goodwill = ₦2,400 − 80% × ₦2,500 (₦2,000) = ₦400.
   NCI = 20% × ₦2,500 = ₦500.
2. Notional goodwill.
   ₦400 ÷ 80% = ₦500.
   Grossed-up carrying amount = ₦2,500 + ₦500 = ₦3,000.
3. Impairment = ₦3,000 − ₦2,700 = ₦300, allocated to goodwill.
4. Recognised by the group.
   80% × ₦300 = ₦240.
   Goodwill is now ₦400 − ₦240 = ₦160.

Note: the ICAN example for this method states the recoverable amount as ₦1,400 and the net assets as ₦1,520, but its working uses ₦1,520 as the recoverable amount and ₦1,500 as the net assets, giving a loss of ₦480 and a group charge of ₦384. The statement of the facts and the working do not agree, so ours is slightly different. The method is the same.

1. NCI at fair value.
   2m shares × ₦1.20 = ₦2.4m.
2. Goodwill = ₦11.6m + ₦2.4m − ₦10m = ₦4.0m (parent ₦3.6m, NCI ₦0.4m).
3. Impairment of ₦1.5m is shared 80:20 (as profit is): parent ₦1.2m, NCI ₦0.3m. Not 3.6 : 0.4.
4. Goodwill after impairment = ₦2.5m (parent ₦2.4m, NCI ₦0.1m).

How to score full marks

• Follow the seven steps and label every working.
• Build the net assets summary first. Include fair value adjustments, unrecognised assets and the extra depreciation.
• State the NCI choice and use it in goodwill and in the NCI working.
• Show the group share of post-acquisition profit, not the whole.
• For impairment, say which method applies and show the grossing up (partial) or the profit-sharing ratio (full).
• Cross-check that total assets equal equity plus liabilities.

Common mistakes in the exam

• Using the subsidiary’s book values instead of fair values.
• Forgetting extra depreciation on a fair value adjustment.
• Depreciating land.
• Taking the whole post-acquisition profit into group retained earnings.
• Using the parent’s percentage for the NCI.
• Amortising goodwill.
• Recognising 100% of an impairment under the partial method.
• Allocating a full-method impairment in proportion to goodwill and not profit shares.

Quick revision

• Seven steps. Net assets summary at acquisition and at the reporting date.
• Goodwill = cost + NCI − net assets at acquisition.
• NCI = NCI at acquisition + its share of post-acquisition profit.
• Retained earnings = all of the parent’s + the parent’s share of post-acquisition profit.
• Goodwill is tested annually. Partial: gross up, group share only. Full: share by profit ratio.
• Bargain purchase: reassess, gain to the parent.
• CAMA 2020: ss. 377(1), 378, 379 to 381, 374(1), 385, 404(7).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

Spotted a mistake? Tell us and we will check it.