Question #66

Parent reported acquisition goodwill of $300,000 ($2,000,000 purchase price − $1,700,000 fair value of Sub's net assets). Since the carrying value of 1,980,000 exceeds the fair value of 1,950,000, an impairment exists. New goodwill = fair value of subsidiary – fair value of subsidiary's assets = 1,950,000 – 1,775,000 = 175,000 Impairment loss = 300,000 – 175,000 = $125,000 (Module 8.7, LOS 8.a) Global Life Insurance (GLI) holds a wide range of assets in a range of different portfolios across its various divisions. Some of these assets are held long term to meet future liabilities, whereas others are held short term to make profits and meet shorter term liquidity needs. GLI set up a small portfolio of U.S. equities in one of its smaller divisions last year. GLI's chief investment officer has recently contacted the accounting department to discuss the correct treatment of the portfolio in the group accounts. Details of the portfolio's transactions and results for the previous period are shown below in Exhibit 1. Exhibit 1 - Equity Portfolio Results 2013 Q1 2013 Q2 2013 Q3 2013 Q4 Shares purchased (sold) 1,000 (200) 700 0 Total shares quarter-end 1,000 800 1,500 1,500 Purchase price 50.00 45.00 Sale price 45.00 Quarter-end market price 52.00 43.00 52.00 60.00 Total dividends 500 400 750 750 The chief investment officer's also provides the following extract from the portfolio's investment policy statement: IPS Extract 1. The portfolio should consist solely of U.S. mid-cap equities. 2. The number of transactions in the portfolio should be kept to a minimum. Shares should not be purchased on a speculative basis for short term profits. 3. The anticipated average holding period for securities in the portfolio is 3.5 − 4 years. 4. Securities should only be sold to meet urgent liquidity needs. Another reporting issue the accounting department is looking at concerns a fixed income portfolio. An overview of the portfolio is given in Exhibit 2: Exhibit 2 – Fixed Income Portfolio Par Value $25,000,000 Coupon rate 5% (paid semi-annually) Current Market Value $27,000,000 The portfolio consists of $1000 par value, 5 year bonds issued by RTF Inc. They were purchased on the date of issue 1st January 2012 for $25,893,577. For the year ending 31st December the bonds were carried at amortized cost. The chief investment officer believes a more appropriate classification would be fair value through profit or loss, as he is not convinced the bonds will be held for the remaining 3 years.