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1.I am actually having some difficulties to understand the overall concept of fair value adjustment. Could you please explain it to me?
2. Here is an example which I am having some difficulties.
P has acquired 80% of S.
P-share capital $2,000
RE $1,400S-share capital $500
RE $300(a)At acquisition the fair values of S plant exceeded it”s book value by $200,000. The plant had useful life of 5 years.
(b)For many years S has been selling some of its products under the brand name of ‘M’. At the date of acquisition directors of P valued this brand at $250,000 with a remaining life of 10 years. The brand is not inclueded in S statement of financial position.
-I have not understand these 2 adjustments. Apart from the calculations, could you please explain the logic behind?
Thanks in advance.
This goes back, I believe, to the basic, fundamental accounting equation where we can say quite definitively, that Net Assets = Capital Employed
According to the scenario that you have set up, the S capital employed is $800 (share capital of $500 and retained earnings of $300)
But the net assets that are represented by capital employed, unless we make adjustments for fair values, are going to be shown at historic values
According to your question, the (very basic) statement of financial position for S as at date of acquisition is:
Net assets at book value 800
Share capital 500
Retained earnings 300These net assets include PPE that is undervalued by 200 and an unrecognised brand name with a fair value of 250
So that 800 figure for net assets should really have a fair value of 800 + 200 + 250
Whatever figure P is paying to acquire a controlling interest of 80% in the shares of S, the fair value of the net assets acquired is not simply the $800 as stated in the question but needs to be increased by this $450 fair value adjustments
So the consideration from P to acquire the S shares needs to be compared with 80% of $1,250 (ignoring for a moment the nci and their 20%)
OK?
Thank you sir for the clarification. I’ve got your point.
But is there any other adjustment that need to be made like depreciation of the plant and so on in calculating the net assets of S? If yes or if no also, could you explain why?Thanks
Not as at date of acquisition but later, on the date of the financial year end, we need to calculate the depreciation on the fair value adjustment
Why? Because the assets are undervalued as at date of acquisition and IFRS 3 states that we should use fair values for the acquisition calculations and subsequent financial statements
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