Page 303 - F1 Integrated Workbook STUDENT 2018

Accounting for Investments in Subsidiaries and Associates

Goodwill

When a controlling investment is made the parent is investing in the net assets of the
subsidiary. The value of the assets presented on the statement of financial position is
unlikely to be what is paid by the investing entity.

Usually, the owners of a profitable business will expect to receive more in exchange
for the investment than its net asset value. This additional amount arises for various
reasons. It is quite likely that the assets recognised in the statement of financial
position do not represent all the assets of the firm and intangibles such as good
reputation and customer loyalty may be worth something to the purchaser. The
difference between the cost of investment and the fair value of the net assets
acquired is known as goodwill on acquisition, and the accounting standard IFRS 3
Business Combinations requires its recognition in consolidated financial statements.

293