Inaccurate Goodwill Computation

Abstract

XYZ is a quoted public company registered under the companies act no. 07 of 2007 in Sri Lanka. The company operates its business activities through 92 branches covering all eight provinces. The principal business activities of the company are lease financing, hire purchasing, real estate projects, granting term loans, vehicle hiring & deposit mobilization.  Central Bank of Sri Lanka introduced a new financial sector consolidation programme in 2014. Several finance companies needed to be merged under this programme.  XYZ PLC had also acquired a medium size finance company called ABC co. Ltd to comply with the provisions given by CBSL. The main business activities of ABC is hire purchase financing, granting of term loans and real estate development Acquisition of all the shares of ABC was taken placed under two different days. a) XYZ PLC acquired 90.1% of issued ordinary share capital of ABC co. Ltd (ABC) on 12/11/2014 at a purchase consideration of Rs. 301.415 Million. b) On 24th June 2015, the company completed the acquisition of 100% of the issued ordinary shares of ABC at a total purchase consideration of Rs.334.507 Million and ABC became a fully owned subsidiary of the Company. The issue was aroused regarding the goodwill computation as at the date of acquisition. ABC had recognized its investment property on cost basis in its individual financial statements. However, the group policy is to measure investment properties on fair value basis. This had not been considered in calculating the goodwill on business combination. Also According to the purchase agreement, Rs.3,000,000.00 needs to be paid as the contingent consideration if the profits for next 3 years exceed over 1,250 Million. This had not been incorporated in goodwill calculation. With reference to the accounting standards the recommendations were given to the management to adjust the goodwill computation by including these changes.