Chartered Financial Analyst (CFA) Practice Exam Level 2

What is recorded as an intangible asset when a parent company consolidates its subsidiary?

1. Equity share

2. Goodwill

3. Cash reserves

4. Property assets

The correct answer is: Goodwill

When a parent company consolidates its subsidiary, goodwill is recorded as an intangible asset to reflect the excess of the purchase price paid over the fair value of the identifiable net assets acquired. Goodwill encompasses factors that contribute to the subsidiary’s value but are not explicitly quantifiable as tangible assets or identifiable intangible assets. These factors can include brand reputation, customer loyalty, synergies expected from the acquisition, and the assembled workforce. In the context of consolidation, the calculation of goodwill occurs at the time of acquisition and is crucial for accurately representing the value derived from the acquisition beyond just the net assets' fair values. This recording ensures that the consolidated financial statements accurately reflect the parent company's investment in the subsidiary and the intangible benefits that may arise from that ownership.