Fair value adjustment and consolidation adjustment

Fair value adjustment

Fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Until now we have calculated goodwill as the difference between the consideration transferred and the
carrying value of net assets acquired by the group. If this calculation is to comply with the definition
above we must ensure that the carrying value of the subsidiary's net assets is the same as their fair value.

There are two possible ways of achieving this.

 The subsidiary company might incorporate any necessary revaluations in its own books of
account. In this case, we can proceed directly to the consolidation, taking asset values and
reserves figures straight from the subsidiary company's statement of financial position.
 The revaluations may be made as a consolidation adjustment without being incorporated in the
subsidiary company's books. In this case, we must make the necessary adjustments to the
subsidiary's statement of financial position as a working. Only then can we proceed to the
consolidation.

Fair value adjustments can affect both the assets and liabilities, the issue is how should we account for
these adjustment.
Fair value adjustments on asset:
If it increases the assets: Dr: consolidated assets
Cr: Net assets @ acquisition

If it decreases the assets:Dr: net assets @ acquisition

Cr: Consolidated assets

If there is a fair value adjustment on an asset and the asset is depreciable we will need to determine if
the asset has been under-depreciated or over-depreciated. To determine the amount of depreciation to
be charged it will be computed as :
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For under-depreciation/additional depreciation: Dr: Retained earnings of who owns the asset
Cr: Consolidated asset
For over-depreciation: Dr: Consolidated asset
Cr: Retained earnings of who owns the asset

Fair value adjustment on liability:

If it increases the liabilities: Dr: Net asset @ acquisition
Cr: Consolidated liability
If it decreases the liabilities: Dr: Consolidated liability
Cr: Net asset @ acquisition

Consolidation adjustment/intra group trading

The parent and the subsidiary may trade with each other, leading the following potential problem
areas/adjustments:
 current accounts balance between the parent and the subsidiary.
 cash-in-transit.
 goods-in-transit.
 loans held by one company in the other.
 unrealised profits on sales of inventory.
 unrealised profits on sales of non-current assets

Current Accounts
If the parent and the subsidiary trade with each other, then this will probably be done on credit, leading
to:
 receivables (current) account in the one company,
 Payable (current) account in the other company.
Intra-group current accounts are amounts owing within the group rather than outside the group and
therefore they must not appear in the consolidated statement of financial position. They are therefore
cancelled out against each other on consolidation.

Cash/Goods in Transit
At the year end, current accounts may not agree, due to the existence of in-transit items such as goods
or cash. The usual rules are:
 If the goods or cash are in transit between the parent and the subsidiary, make the adjusting entry
to the statement of financial position of the recipient:
 Cash-in-transit adjusting entry is:
Dr: Cash-in-transit
Cr: Receivables current account
 Goods-in-transit adjusting entry:
Dr: Inventory
Cr: payables current account
 Once in agreement, the current accounts may be contracted and cancelled as part of the process of
cross casting the assets and liabilities. This means that reconciled current account balance
amounts are removed from both receivables and payables in the consolidated statement of
financial position.

Unrealized profits on inventory

Profits made by members of a group on transactions with other group members that are; recognized in
the accounts of the individual companies concerned, but in terms of the group, such profits are
unrealized and must be eliminated from the consolidated accounts.
Unrealized profit may arise under the following:
 Inventories have been transferred at a profit.
 The inventory is still being carried in the books of the buyer as at the year end.
The situation of unrealized profit results in two problems within the group:
 The profit made by the seller is unrealized. The profit will only become realized when the goods
are sold to third party customers.
 The closing inventory of the buyer would have been overstated.
An adjustment will need to be made, so that the single entity concept can be upheld. That is, the group
should report external profits, external assets, and external liabilities only. The adjustments are as
follows:
Dr: Retained Earnings of the seller
Cr: Consolidated Inventory

Unrealized profit on non-current assets

The parent and the subsidiary may transfer non-current assets within the group. Similarly unrealized
profit will occur when the assets have been transferred at a profit, and they remain in the books of the
buyer upon consolidation. The unrealized profits on the transfer of non-current assets within the group
should be eliminated accordingly.
IAS 16 cost model requires all property plant & equipment be carried at cost less accumulated
depreciation. Hence, transfer of PPE at a profit will result in the buyer charging extra depreciation on
such assets. Any extra depreciation charge on transfer of non-current assets should be eliminated in the
buyer’s books. The accounting entries for the elimination of extra depreciation are:
Dr: Non-current assets
Cr: Retained Earnings

Mid-year acquisitions
If a parent company acquires a subsidiary mid-year, the net assets at the date of acquisition must be
calculated based on the net assets at the start of the subsidiary's financial year plus the profits of up to
the date of acquisition. To calculate this, it is normally assumed that the subsidiary’s profit after tax
accrues evenly over time.
 Practice questions
Fair value adjustment
Question 1
A Parent Company acquired 60% equity interest in a subsidiary company for ₦440million. The market
value of the net assets of the subsidiary on acquisition date was ₦400million. The parent company
estimates that the full 100% interest in the subsidiary company would have cost ₦640million.
Required: Calculate the goodwill at acquisition date where non-controlling interest is measured:
i. As a proportionate share of the net assets of the subsidiary company.
ii. At fair value (the full good will method)

Question 2
The statement of financial position of HAND and SWEET as at December 31, 2015 were
as follows:
HAND SWEET
₦OOO ₦000
Property Plant & Equipment 9,000 5,000
Investment in SWEET 5,000
Other Assets 2,000 1,500
16,000 6,500
Share Capital 500 500
Retained Earnings 14,500 5,000
Other liabilities 1,000 1,000
16,000 6,500

HAND acquired 80% equity interest in SWEET two (2) years ago. At the date of acquisition SWEET's
retained earnings stood at ₦3million and the fair value of its net assets was ₦5million. This was
₦l.5million above the carrying amount of the net assets at this date.
The fair value adjustment related to an asset that had a remaining useful economic life of 10 years as at
the date of acquisition. The goodwill arising on consolidation has not suffered any impairment.
Required:
Prepare consolidated statement of financial position of HAND Group as at December 31, 2015.

Question 3
On 30 June 2014, Cat Ltd pays ₦60,000 to acquire all the shares of Dan Ltd. The statements
of financial position of the two companies just after this transaction are as follows:
Cat Ltd Dan Ltd
₦ ₦
Assets
Non-current assets
Property, plant and equipment 410,000 30,000
Investment in D Ltd 60,000
470,000
Current assets 231,000 25,000
701,000 55,000
Equity
Ordinary share capital 400,000 `25,000
Retained earnings 187,000 17,000
587,000 42,000
Liabilities
Current liabilities 114,000 13,000
701,000 55,000
The fair value of the property, plant and equipment of Dan Ltd on 30 June 2014 is ₦40, 000.
Required: Prepare a consolidated statement of financial position as at 30 June 2014.
Question 4
The statements of financial position of Amo and Star at 30 June 2021 are as follows:
Amo Star
₦ ₦
Assets
Non-current assets
Property, plant and equipment 527,000 39,000
Investment in Star 48,000
575,000
Current assets 326,000 31,000
901,000 70,000
Equity
Ordinary share capital 600,000 32,000
Retained earnings 148,000 22,000
748,000 54,000
Liabilities
Current liabilities 153,000 16,000
901,000 70,000
On 1 April 2017, Amo paid ₦48,000 to acquire 75% of the shares in Star. On that date, the retained
earnings of Star were ₦10,000 and the fair value of the company’s non-current assets was ₦8,000 more
than their book value. This revaluation has not been reflected in the books of Star. Star has issued no
shares since being acquired by Amo.
Goodwill arising on consolidation has suffered an impairment loss of 40% since acquisition. Prepare a
consolidated statement of financial position as at 30 June 2021.

Question 5
GREEN acquired 80% of the share capital of Wood two years ago, when the reserves of WOOD stood
at $125,000. Green paid initial cash consideration of $1 million. Additionally, Green issued 200,000
shares with a nominal value of $1 and a current market value of $1.80. It was also agreed that Green
would pay a further $500,000 in three years’ time. Current interest rates are 10% per annum.
The appropriate discount factor for $1 receivable three years from now is 0.751. The shares and
deferred consideration have not yet been recorded.
Below are the statements of financial position of Green and Wood as at 31 December 20x4:
GREEN WOOD
$000 $000
Investment in WOOD at cost 1,000
Property, plant & equipment 5,500 1,500
Current assets;
Inventory 550 100
Receivables 400 200
Cash 200 50
7,650 1,850

Share capital 2,000 500

Retained earnings 1,400 300
3,400 800
Non-current liabilities 3,000 400
Current liabilities 1,250 650
7,650 1,850
Additional information:
1. At acquisition, the fair values of Wood’s plant exceeded its book value by $200,000. The plant
had a remaining useful life of five years at this date.
2. For many years Wood has been selling some of its products under the brand name of spearmint.
At the date of acquisition, the directors of Green valued this brand at $250,000 with a remaining
life of 10 years. The brand is not included in Wood’s statement of financial position.
3. The consolidated goodwill has been impaired by $258,000.
4. The Green Group values the non-controlling interest using the fair value method. At the date of
acquisition, the fair value of the 20% non-controlling interest was $380,000.
Required; prepare the consolidated statement of financial position as at 31 December, 20x4.
Question 6
Spiral ltd purchased a 90% share of a locally incorporated company, Saw ltd. The following
are the brief details of the acquisition:
Date of acquisition January 1, 20x8
Total paid up capital of Saw ltd (₦10 each) ₦500,000,000
Purchase price per share ₦30
Net assets of Saw ltd (as per 20x7 audited accounts) ₦650,000,000
Fair value of net assets (other than intangible assets) of Saw ltd ₦1,100,000,000

Saw ltd has an established line of products under the brand name of “SLC”. On behalf of Spiral ltd, a
firm of specialists has valued the brand name at ₦100 million with an estimated \useful life of 10 years
at 1 January 20x8. It is expected that the benefits will be spread equally over the brand’s useful life.
An impairment test of goodwill was carried out on December 31 20x8 which indicated an impairment
of ₦50 million in the value of goodwill.
An impairment test carried out on December 31 20x9 indicated a decrease of ₦13.5 million in the
carrying value of the brand.
Required; calculate the goodwill arising on acquisition, and show how the goodwill and the brand
name will be accounted for up to 20x9.

Consolidation adjustments

Question 7
 P transfers inventory to S at a cost ₦750,000. P marks up its sales by 25% to achieve profit.
Determine the unrealized profit.
 P transfers inventory to S at a cost of ₦840,000. These goods had cost P ₦560,000. One quarter
of this transfer is still in the inventory of S at the year end. Required; determine the unrealized
profit and state how it should be accounted for in the consolidated statement of financial position.
 P has owned 75% of the shares of S since the incorporation of that company. During the year to
31 December 2002, S sold goods costing ₦16,000 to P at a price of ₦20,000 and these goods
were still unsold by P at the year end. Calculate the unrealized profit and state how it should be
accounted for.

Question 8
H has owned 60% of S for several years. On 1 January 2001, S sells plant costing ₦10,000 to
H for ₦12,500. The companies make up account to 31 December every year. On 31 December 2001,
the balances on their retained earnings at that date were:
H ₦21,000

S ₦18,000

Required; Show all the workings to reflect this transaction. (Assume a depreciation rate of 10%)

Question 9
Health bought 90% of the equity share capital of Safety on 1 January 20x2 when the retained earnings
of Safety stood at $5,000. Statements of financial position at the year end 31 December 20x4 are as
follows:
Health Safety
$000 $000
Non-current assets:
Property plant & equipment 100 30
Investment in Safety 34
134 30
Current assets:
Inventory 90 20
Receivables 110 25
Bank 10 5
344 80
Equity:
Share capital ($1) 15 5
Retained earnings 159 31
174 36
Non-current liabilities 120 28
Current liabilities 50 16
344 80
Safety transferred goods to Health at a transfer price of $18,000, with a mark-up of 50%. Two-thirds
remained in inventory at the year end. The current account in Health and Safety stood at $22,000 on
that day. Goodwill has suffered an impairment of $10,000.
The Health group uses the fair value method to value non-controlling interest. The fair value of the
non-controlling interest at acquisition was $4,000.
Required; prepare the consolidated statement of financial position as at 31 December 20x4.

Question 10
Reprise acquired 75% of Encore for $2,000,000, 10 years ago when the balance on its
retained earnings was $1,044,000. The statements of financial position of the two
companies as at 31 March 20x4 are as follows:
Reprise Encore
$000 $000
Non-current assets:
Property plant & equipment 4,870 2,555
Investment in Encore 2,000
6,870 2,555
Current assets:
Inventory 890 352
Receivables 1,372 514
Cash and cash equivalents 89 51
9,221 3,472
Equity:
Share capital ($1) 1,000 500
Revaluation surplus 2,500
Retained earnings 4,225 2,610
7,725 3,110
Non-current liabilities 500
Current liabilities:
Trade Payables 996 362
9,221 3,472
The following information is available:
 Included in the trade receivables of Reprise are amounts owed by Encore of $75,000. The current
accounts do not at present balance due to a payment for $39,000 being in transit at the year end
from Encore.
 Included in the inventories of Encore are items purchased from Reprise during theyear for$31,200.
Reprise marks up its goods by 30% to achieve its selling price.
 $180,000 of the recognized goodwill arising is to be written off due to impairment losses.
 Encore shares were trading at $4.40 just prior to acquisition by Reprise.
Required; prepare the consolidated statement of financial position for the Reprise group as at 31 March
201x4.

Question 11
On 1 January, 2009 Linas acquired 60% of the equity share capital of Asta for $160,000 when the
balance on Asta’s retained earnings was $275,000.
The statements of financial position of the two entities as at 31 December 2009 are as follows:
Linas Asta
$000 $000
Non-current assets:
Tangible 400 240
Investment in Asta 160 -
560 240
Current assets 440 510
Total assets 1000 750
Equity:
$1 Equity shares 300 120
Retained earnings 500 600
800 720
Current liabilities 200 30
1000 750

The following information is relevant: During the year ended 31 December 2009 Linas sold a piece of
plant and equipment to Asta for $90,000.
The asset originally cost $200,000 and had been written down to $80,000 as at 31 December 2008.
Both entities depreciate non-current assets on a straight-line basis over 5 years, with a full year’s
charge in the year of purchase and none in the year of sale. Asta is depreciating the cost of the asset
over its remaining useful life of 2 years.
The directors of Linas value the NCI on a proportionate basis. Prepare the consolidated statement of
financial position for the Linas group as at 31 December 2009.

Question 12
SOUNDMAN acquired a subsidiary, Electric ltd, on 1 October 2013. The statements of financial
position of SOUNDMAN and Electric ltd as at 30 September 2014 are as follows:
SOUNDMAN Electric ltd
$000 $000
Assets
Non-current assets:
Property, plant and equipment 53,181 36,762
Investment in Electric ltd 29,000
82,181 36,762
current assets 28,484 10,337
110,665 47,099
Equity
Ordinary share capital 20,000 5,000
share premium account 10,000 2,000
Retained earnings 34,225 28,370
64,225 35,370
Liabilities
Non-current liabilities:
Long-term loan 35,000 8,000
current liabilities 11,440 3,729
110,665 47,099
Additional information:
 The share capital of Electric ltd consists of Ordinary shares of $1 each. There have been no
changes to the balances of share capital and share premium during the year. No dividends were
paid or proposed by Electric ltd during the year.
 SOUNDMAN acquired 3,000,000 shares in Electric ltd on 1October 2013.
 At 1 October 2013, the retained earnings of Electric ltd were $24,700,000.
 The fair value of the non-current assets of Electric ltd at 30 September 2014 was $37,000,000.
The book value was $33,000,000. The revaluation has not been recorded in the books of Electric
ltd.
 The directors have concluded that goodwill on acquisition of Electric ltd has been impaired during
the year. They estimate that the impairment loss amounts to 20% of the goodwill.
 During the year ended 30 September 2014, SOUNDMAN sold inventory to Electric ltd for
$15,000,000. SOUNDMAN earned a uniform margin of 40% on these sales. During the year
ended 30 September 2014, Electric ltd resold 80% of this inventory. On 30 September 2014,
Electric ltd had unpaid invoices totaling $8,000,000 payable to SOUNDMAN in respect of these
purchases.
Required; prepare the consolidated statement of financial position for the SOUNDMAN group as at 30
September, 2014.

Question 13
you are provided with the following statement of financial position for SHARK and MINNOW
SHARK MINNOW
₦000 ₦000
ASSETS
NON-CURRENT ASSETS
Plant 325 70
Fixtures 200 50
Investment in Minnow 200 --
725 120
CURRENT ASSETS
Inventory 220 70
Receivables 145 105
Bank 100 --
TOTAL ASSETS 1,190 295
EQUITY AND LIABILITIES
EQUITY
Ordinary shares (₦1) 700 170
Retained earnings 215 50
915 220
CURRENT LIABILITIES
Payables 275 55
Bank overdrafts -- 20
TOTAL EQUITY AND LIABILITIES 1,190 295

The following information is also available:

 Shark purchased 70% of the issued ordinary share capital of Minnow four years ago, when the
retained earnings of Minnow were ₦20,000. There has been no impairment of goodwill.
 For the purposes of the acquisition, plant in Minnow with a book value of ₦50,000 was revalued
to its fair value of ₦60,000. The revaluation was not recorded in the accounts of Minnow.
Depreciation is charged at 20% using the straight-line method.
 Shark sells goods to Minnow at a mark-up of 25%. At 31 October 20x0, the inventories of
Minnow included ₦45,000 of goods purchased from Shark.
 Minnow owes shark ₦35,000 for goods purchased and Shark owes Minnow ₦15,000.
 It is the group’s policy to value the non-controlling shareholders at fair value.
 The market price of the shares of MINNOW just before the acquisition was ₦1.50.

Required; prepare the consolidated statement of financial position of Shark as at 31 October 20x0.

Question 14
On May 1, 2007, Karl bought 60% of Susan paying $76,000. The summarized statements of
financial position for the two companies as at 30 November 2007 are:
Karl Susan
Non–current assets;
PPE 138,000 115,000
Investments 98,000 --
Current assets;
Inventory 15,000 17,000
Receivables 19,000 20,000
Cash 2,000 ---
272,000 152,000
Equity
Share capital ($1) 50,000 40,000
Retained earnings 189,000 69,000
Non-current liabilities:
8% loan notes -- 20,000
Current liabilities 33,000 23,000
272,000 152,000

The following information is relevant:

 The inventory of Susan includes $8,000 of goods purchased from Karl at cost plus 25%
 On 1 June 2007 Susan transferred an item of plant to Karl for $15,000. Its carrying amount at that
date was $10,000. The asset had a remaining useful economic life of 5 years.
 The Karl group values the non-controlling interest using the fair value method. At the date of
acquisition, the fair value of the 40% non-controlling interest was $50,000.
 An impairment loss of $1000 is to be charged against the goodwill at the year end.
 Susan earned a profit of $9,000 in the year ended 30 November 2007.
 The loan note in Susan’s books represents monies borrowed from Karl during the year. All the
loan note interest has been accounted for.
 Included in Karl’s receivables is $4,000 relating to inventory sold to Susan during the year. Susan
raised a cheque for $2,500 and sent it to Karl on 29 November 2007. Karl did not receive this
cheque until 4 December 2007.

Required; prepare the consolidated statement of financial position as at 30 November 2007.