ACC 3501: Advanced Group

Accounting

Fair value adjustments and recognition of

unrecognized assets in the subsidiary

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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.
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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
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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

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