How the loans of the parent company would be repaid if the cash available is used for the proposed acquisition and both the parent and subsidiaries have high debt to equity ratio and they both have some covenants.Therefore,these covenants should be considered as if any is covenant breached whilethe acquisition is done and what should be done so that the covenant should not be breached. Should the company purchase as an associate or as a subsidiary?

Goodwill under both methods of acquisition

The goodwill is only calculated under the subsidiary accounting as according to IAS 28, the accounting for anassociate is considered by adding the percentage of profit of the associate in the purchase consideration paid by the parent in the purchase of the associate. The percentage of profit is the percentage of the acquisition i.e. 40% of Cup’s profit. There is no impairment of assets of Cup as if there were some impairment costs then the parent company i.e. Cover Ltd should deduct the percentage of impairment and the percentage of impairment would be the percentage the company has acquired under the associate. The investment in associate will be increased with the passage of time as the profit percentage would be added every year in the investment in the associate. The intracompany transaction profits would be deducted from those profits andwould be included in the profits of the associate and this will lead to a reduction in the investment in associate of the parent. (AUSTRALIAN ACCOUNTING STANDARD BOARD, 2011)

On the other hand, the accounting for consolidation refers to the fact that the goodwill should be calculated by taking the purchase consideration and deducting the net assets at the date of acquisition.This amount is being paid by the company due to the reputation of the company being acquired as that amount is the excess of the value of net assets acquired. Then in subsequent years, the subsidiary’s profit will be added to the retained earnings as the parent company has 100% acquisition of the subsidiary so the company’s assets and liabilities will be added to the assets and liabilities of the parent. If the parent would have acquired less than 100% i.e. if the parent acquired 90% then10% would go to non-controllinginterest, then the percentage of profit added to the parent’s retained earnings will be 90% instead of 100% but in this case, as the acquisition is 100% so the whole profit will be added to the parent’s retained earnings. The intracompany sales would be adjusted in the accounts as the profit would tend to be the unrealized profit. (Consolidated and Separate, 2007)

There willbe no goodwill calculation under the associate equity accounting as the parent company has significant control and accounts are only consolidated if the parent company has the control over the other company.

The company is assumed to be acquired at the year-end but when the company is acquired in mid-year then the profit of six months would be used for the calculation of goodwill.Theprofit of 6 months would be included in retained earnings for the calculation of goodwill. See Exhibit NO 1

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