Consolidation in case of Issue of shares at Premium

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CA Aditya Shah (Querist)
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13 November 2021 Dear Sir, Thanks for your time for reading out my query and answering it.

Company A has acquired controlling interest (52% shares) in Company B on 15 April 2020 by subscribing to further issue of shares by Company B, face value Rs 10 at a premium of let's say, Rs 15 per share.

Thus net assets of Company B increased from eg Rs 500,000 on 1 April 2020 to Rs 12,50,000 on 15 April 2020 due to receiving the share application & securities premium premium money.

Assuming Company B did not earn any profit during this period, What value of Net assets will be considered for the purpose of Goodwill calculation?

Will it be Rs 5,00,000 or Rs 12,50,000 ?

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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06 July 2024 For the purpose of calculating Goodwill in the scenario where Company A acquires controlling interest (52% shares) in Company B, the value of net assets to consider would typically be the fair value of net assets at the date of acquisition. Here’s how it would typically be approached:

1. **Date of Acquisition Consideration**: The acquisition date is 15 April 2020, and the net assets of Company B increased from Rs 5,00,000 to Rs 12,50,000 due to the issuance of shares and the receipt of securities premium.

2. **Fair Value of Net Assets**: The fair value of net assets at the acquisition date (15 April 2020) would be considered for calculating Goodwill. Fair value reflects the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

3. **Calculation of Goodwill**: Goodwill is typically calculated as the difference between:
- The total consideration paid (which includes the fair value of the consideration transferred, the fair value of any equity instruments issued, and the fair value of any liabilities incurred or assumed)
- And the fair value of the net assets acquired.

Since the net assets increased to Rs 12,50,000 on 15 April 2020 due to the issuance of shares and securities premium, this higher value (Rs 12,50,000) would generally be used for the Goodwill calculation. This reflects the updated financial position of Company B after the issuance of shares and premium, which is considered more reflective of its current fair value.

### Example Calculation:

Assuming the consideration paid by Company A for the 52% shares was Rs X (comprising cash and/or other considerations), and the net assets fair value at acquisition date (15 April 2020) is Rs 12,50,000, Goodwill would be calculated as:

\[ \text{Goodwill} = \text{Consideration Paid} - \text{Fair Value of Net Assets} \]

Where:
- Consideration Paid = Rs X (actual amount paid or fair value of consideration transferred)
- Fair Value of Net Assets = Rs 12,50,000

### Conclusion:

To determine Goodwill accurately, you should consider the fair value of net assets of Company B as of the acquisition date (15 April 2020), which in this case is Rs 12,50,000. This higher value reflects the updated financial position of Company B after the issuance of shares and premium and is typically used for Goodwill calculation purposes in such acquisitions.

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