When the value of “Investment in subsidiary” in the holding company’s balance sheet is more than the book value of the net assets acquired, the difference represents:

Correct option is B

When the holding company invests in a subsidiary, the investment value in the subsidiary reflects the price paid for acquiring that subsidiary, including any premium over the book value of the net assets acquired. If the value of "Investment in subsidiary" is higher than the book value of the net assets acquired, the difference represents Goodwill on consolidation. This occurs when the holding company pays more for the subsidiary than the net value of the assets (assets minus liabilities) acquired.

Goodwill represents an intangible asset reflecting the excess of the purchase price over the fair value of the identifiable net assets acquired, and it arises from factors such as brand reputation, customer relationships, and expected synergies.

Key Highlights:

1. Goodwill is an intangible asset, recorded in the consolidated balance sheet after the acquisition.
2. The excess amount paid over the net asset value reflects the expected future benefits that the subsidiary will generate.
3. Goodwill is tested for impairment annually, and any impairment is recorded as an expense.

Information Booster

• Goodwill on Consolidation:
  • The excess payment for a subsidiary is classified as Goodwill because it cannot be directly attributed to any specific asset or liability.
  • Example: A holding company acquires a subsidiary for $5 million, but the net assets of the subsidiary are valued at $4 million. The $1 million difference represents Goodwill.
• Impact on Financial Statements:
  • Goodwill is reported on the consolidated balance sheet as an asset and is not amortized but subjected to annual impairment tests.

Additional Knowledge 

(a) Capital Reserve on consolidation:

• A capital reserve arises when the fair value of the subsidiary’s net assets acquired exceeds the purchase price paid.
• This is the opposite of goodwill, and it occurs in cases where the holding company pays less than the fair value of net assets, a situation rare in most acquisitions.

(c) Minority Interest:

• Minority interest refers to the portion of the subsidiary not owned by the holding company and is presented in the consolidated balance sheet.
• It represents the share of equity in the subsidiary that is attributable to other shareholders and does not relate to the difference between investment and net asset value.

(d) Post-acquisition profit:

• Post-acquisition profit represents the profits generated by the subsidiary after the acquisition date.
• This is a result of operations and not an accounting adjustment for the difference between purchase price and net assets acquired.