How to: Eliminate an investment in a subsidiary (including goodwill)

Castaway's consolidation module makes it easy to consolidate multiple forecasts into a single view. You can eliminate individual elements in each forecast to remove inter-entity transactions. You can also allow for minority interests and calculate goodwill on acquisition.

In this example, we'll step you through consolidating a parent entity with a subsidiary and recognising goodwill on acquisition. The sample files we used for this example are attached. If you want to try building these files for yourself, scroll down to the Try this yourself ... setting up the forecasts section below.

The scenario

1. In December 2022, ParentCo purchased 100% of the shares of ChildCo for $1,200,000 in cash
2. At the time, ChildCo had $900,000 of share capital, $200,000 of retained earnings, no cash and $1,100,000 in assets (we used an Other Asset/Liability element to keep things simple)
3. On consolidation, we need to recognise $100,000 of goodwill

Consolidating the Forecasts

• From the Castaway home screen, select New Consolidation
  
  
• Click the Add Forecast button and select the 2 forecasts (either multi-select , or add them one at a time)
• Click Ok to build the consolidation
  
  
  
  

Calculating Goodwill

• After consolidating the forecasts, switch to the Reporting workspace and view the Balance Sheet
• You will see the Balance Sheet is out of balance by $100,000 from December 2019 onwards. This represents the goodwill acquired on an acquisition of ChildCo
  
  
  
• to convert the out-of-balance into a Goodwill asset on the balance sheet, open the Consolidation toolbar and click the Set Goodwill button
  

The net result

After consolidating ParentCo and ChildCo, eliminating the investment transactions and creating Goodwill, the consolidated balance sheet now shows:

• Goodwill of $100,000
• Assets of $1,100,000
• a Bank Overdraft of $1,200,000

Try this yourself ... setting up the forecasts

If you would like to try setting up these forecasts for yourself, set up 2 forecasts with the Number of Years as 2, the Forecast Start Date of July 2022, and the Financial Year Start Month of July. Then, follow these instructions:

Parent Co

• Using an Investment element, ParentCo records an Investment Made of $1,200,000 in December 2019 (note you could also use an Other Asset/Liability element)
• The Eliminate on Consolidation option for that element is set to Yes
• Save the forecast as ParentCo

ChildCo

• Given that ParentCo had no interest in ChildCo until December 2022, the ChildCo forecast should contain no financial data before that month
• In this case, we've set the ChildCo forecast up with the same Forecast Start Month and Number of Years. This is good practice, but not essential
• Using an Equity element (with Share Capital sub-type), ChildCo records $900,000 of new share capital in December 2022. This element is set to Eliminate on Consolidation
• Using another Equity element (with Retained Earnings sub-type), ChildCo records $200,000 of Retained Earnings in December 2022. This element is also set to Eliminate on Consolidation
• Using an Other Asset/Liability element created under Non-Current Assets, record a payment of $1,100,000 in December 2022
• Save the forecast as ChildCo