assume the same facts as in above except that entity c rather than acquiring entity 611767

Acquisition method cash consideration less than the fair value of business acquired

Assume the same facts as in above, except that Entity C, rather than acquiring Entity B from Entity A for cash at its fair value of £1,000, only pays cash of £700. How should this be reflected by Entity C when applying the acquisition method for its acquisition of Entity B?

In our view, there are two acceptable ways of accounting for this. Either:

(a) the consideration transferred is the fair value of the cash given as consideration, i.e. £700. Accordingly, goodwill of only £100 ( £700 less £600) is recognised; or

(b) the consideration transferred is the fair value of the cash given as consideration ( £700), together with a deemed capital contribution received from Entity A for the difference up to the fair value of the business of Entity B, i.e. £300 ( £1,000 less £700), giving a total consideration of £1,000. Accordingly, goodwill of £400 is recognised. The capital contribution of £300 would be reflected in equity.