Most examiner comments describe what candidates did wrong. This one is different. In the July 2023 Financial Reporting Chief Examiner’s Report, the examiner wrote: “The poor performance of the candidates may be due to the fact that some of the items in the question [contingent consideration, contingent refund of paid consideration and reversal of unwound discount] were unfamiliar to the candidates. Many lecturers ignore such areas.” That’s a direct statement that the gap sits upstream of the exam hall — in how the topic gets taught, not in how hard candidates tried.
The Scenario
Tarkwa Ltd acquires 80% of Awaso Ltd on 1 July 2021, paying GH¢1.80 per share in cash immediately. But the former shareholders of Awaso agreed to hand back part of that consideration by 30 June 2022 if Awaso’s sales growth falls below an agreed threshold. At the acquisition date, that possible refund was valued at GH¢4 million. By the December 2021 year end, with Awaso’s sales actually falling, the estimate was revised to GH¢4.5 million. Tarkwa’s own books only recorded the immediate cash payment — the contingent piece had never been booked at all.
The Mechanic, Part One: At Acquisition
Under IFRS 3, contingent consideration forms part of the cost of an acquisition, measured at fair value at the acquisition date. But because this contingent amount is a potential refund to Tarkwa rather than an extra payment Tarkwa might owe, it works in the opposite direction to the more commonly taught version of contingent consideration: it reduces the cost of investment rather than adding to it. The goodwill calculation therefore starts with the full GH¢72 million cash payment (80% × 50 million shares × GH¢1.80), deducts the GH¢4 million contingent refund, then adds GH¢15 million as the fair value of the 20% non-controlling interest (Tarkwa’s group policy is the fair value method, using Awaso’s GH¢1.50-per-share price).
Exam Tip: Contingent consideration structured as a possible refund of cash already paid moves in the opposite direction to contingent consideration structured as extra deferred payment. Read the scenario carefully to establish which direction applies before touching the goodwill calculation — this single distinction is exactly what the examiner flagged as “unfamiliar” territory.
The Mechanic, Part Two: After Acquisition
Contingent consideration doesn’t freeze at its acquisition-date estimate. It’s remeasured at each reporting date, and — provided the change reflects genuinely new circumstances rather than better information about facts that already existed at acquisition — the movement in that estimate flows through the group’s post-acquisition retained earnings, not back into the goodwill figure. Here, the refund estimate moved from GH¢4 million to GH¢4.5 million: a GH¢500,000 increase in what Tarkwa expects to recover, added directly to group retained earnings rather than adjusting goodwill.
Two Rules, Two Destinations
The initial GH¢4 million estimate reduces the cost of investment and feeds into goodwill at the acquisition date. The later GH¢500,000 movement in that same estimate bypasses goodwill entirely and lands in retained earnings. Missing either half of that distinction is enough to unravel the whole question — which is exactly the trap the examiner’s comment describes.
The Result
Working the full calculation through — GH¢72 million cash, less the GH¢4 million contingent refund, plus GH¢15 million fair value of the non-controlling interest, less Awaso’s net assets at acquisition of GH¢97.6 million — produces negative goodwill of GH¢14.6 million. Under IFRS 3, negative goodwill isn’t carried as an asset or a note of caution; it’s recognised immediately as a gain, straight through the parent’s post-acquisition retained earnings.
Conclusion
This isn’t a question that punished weak students. It’s a question that exposed a genuine coverage gap — the examiner said so himself. The fix is specific, not general: know that a contingent refund reduces cost of investment at acquisition, know that its later remeasurement moves through retained earnings rather than goodwill, and know that net assets exceeding total consideration produces negative goodwill recognised as an immediate gain. Three precise facts, not a vague instruction to “revise consolidations harder.”
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