This document discusses fair value adjustments that need to be made when a parent company (P) acquires a subsidiary (S). It provides an example where P values S's assets at higher fair values than their book values on S's balance sheet. The adjustments include: (1) increasing the asset values on S's books to reflect fair values, with corresponding entries to asset accounts and reserves; and (2) increasing S's depreciation expense to reflect amounts based on fair values instead of book values. The purpose is to properly reflect the acquired assets and depreciation from the group's perspective.
This document discusses fair value adjustments that need to be made when a parent company (P) acquires a subsidiary (S). It provides an example where P values S's assets at higher fair values than their book values on S's balance sheet. The adjustments include: (1) increasing the asset values on S's books to reflect fair values, with corresponding entries to asset accounts and reserves; and (2) increasing S's depreciation expense to reflect amounts based on fair values instead of book values. The purpose is to properly reflect the acquired assets and depreciation from the group's perspective.
This document discusses fair value adjustments that need to be made when a parent company (P) acquires a subsidiary (S). It provides an example where P values S's assets at higher fair values than their book values on S's balance sheet. The adjustments include: (1) increasing the asset values on S's books to reflect fair values, with corresponding entries to asset accounts and reserves; and (2) increasing S's depreciation expense to reflect amounts based on fair values instead of book values. The purpose is to properly reflect the acquired assets and depreciation from the group's perspective.
Fair value adjustments of assets in the subsidiary Purchase price = Net identifiable assets taken over (fair values) + goodwill Example P acquired 90% of the ordinary shares in S on 1.1. X9. In determining the purchase price for the shares in S, the assets in S were valued by P on 1.1.X9 as follows: Fair value Book value(S) Plant & Machinery $450,000 $400,000 Fixtures & fittings $180,000 $190,000 Brand $ 20,000 Nil No adjustment has been made in the books of S to reflect the fair values. P & M are depreciated at 10% based on the book value and fittings at 5% on the book value. The groups policy is not to depreciate brand. NAMG Sem 1 2017/18 2 Fair value adjustmentscontd (1) To reflect the fair values (Compare the fair value on the date of acquisition to the book value on the date of acquisition) Fair value Book value (S) Difference Plant & Machinery $450,000 $400,000 $50,000 Fixtures & fittings $180,000 $190,000 $10,000 Brand $ 20,000 Nil $20,000 (a) Dr P & M (S) 50,000 Brand (CSFP) 20,000 Cr F & F (S) 10,000 Cr Asset Revaluation Reserve 60,000
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Fair value adjustmentscontd (b) On consolidation, Dr Asset Revaluation Reserve 60,000 Cr COC (90%) 54,000 Cr NCI (10%) 6,000
Same treatment as any other pre-acquisition
reserves in the subsidiary
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Fair value adjustments contd (2) Adjustment for depreciation (Compare the amount of depreciation provided by S (BV) to the amount that should be provided from the groups point of view (FV)
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Fair value adjustmentscontd In S (BV) Depreciation charge for the year X9; P&M: 10% x 400,000 = 40,000 F&F: 5% x 190,000 = 9,500 49,500 From the groups point view (FV), P&M:10% x 450,000 = 45,000 F&F : 5% x 180,000 = 9,000 54,000 Under-provision of depreciation by S of 4,500 NAMG Sem 1 2017/18 6 Fair value adjustmentscontd To increase the depreciation charge for the year from 49,500 to 54,000; Dr P&L (S) 4,500 Dr Acc depreciation F&F (S) 500 Cr Acc depreciation P&M (S)5,000