[Opinion] How to Calculate Goodwill/Capital Reserve in Case of Cross-holding As Per AS-21

CA Bharat Sonkhiya, CA Vikash Maharshi & Manasvi Rathi – [2024] 158 taxmann.com 60 (Article)

Introduction

This article explores the calculation of goodwill and capital reserve under various circumstances following the guidelines laid out in Accounting Standard 21. We’ll break down the complexities of the topic and understand the concept through definitions and examples.

Let’s begin with the first question that pops up in our minds!

What is goodwill and capital reserve and when is the need for the calculation of goodwill/capital reserve in the preparation of CFS?

Goodwill

Any excess of the cost to the parent of its investment in a subsidiary over the parent’s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made is known as goodwill.

Goodwill represents the excess of the purchase price of an acquired subsidiary over the fair value of its identifiable net assets.

Capital Reserve

When the cost to the parent of its investment in a subsidiary is less than the parent’s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, the difference should be treated as a capital reserve in the consolidated financial statements.

The goodwill or capital reserve is calculated while preparing the consolidated financial statements on the acquisition of control over another company.

What is the need for forming consolidated financial statements?

Accounting Standard (AS) 21 states that consolidated financial statements combine financial information from parent and subsidiary entities.

A parent, usually referred to as a holding entity, presents consolidated financial statements to give financial details on the economic operations of its group.

These statements aim to demonstrate the economic resources held by the group, its commitments, and the outcomes the group attains with its resources by presenting financial information about a parent and its subsidiary as a unified economic entity.

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