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.