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Hey sir. i’m having difficulty answering question 92 in the bpp rev kit on page 28. I don’t understand why we include fair value adjustments when calculating the NCI i.e why do we include (250\40 *30%) and why are we calculating depreciation charge by the difference of the carrying amount and the fair value, why are we using 250 instead of the carrying amount of 600.
Please help sir.Hi – I don’t possess any BPP material so you’ll need to give me the full question – sorry 🙁
Witch acquired 70% of the 200,000 equity shares of Wizard, its only subsidiary, on 1 April 20X8 when the retained earnings of Wizard were $450,000. The carrying amounts of Wizard’s net assets at the date of acquisition were equal to their fair values apart from a building which had a carrying amount of $600,000 and a fair value of $850,000. The remaining useful life of the building at the acquisition date was 40 years.
Witch measures non-controlling interest at fair value, based on share price. The market value of Wizard shares at the date of acquisition was $1.75.
At 31 March 20X9 the retained earnings of Wizard were $750,000. At what amount should the non controlling interest appear in the consolidated statement of financial position of Witch at 31 March 20X9?Answer:
Fairvalue at acquisition (200000*30%*$1.75) = $150000
share of post acquisition reserves(750-450)*30% = $90000
Depreciation on fair value adjustments(250\40)*30% = $(1875)
NcI as at reporting date = $193125I don’t understand why and how we calculated the fair value adjustment when calculating the NCI i.e ($1875)
“why we include fair value adjustments when calculating the NCI i.e why do we include (250\40 *30%) and why are we calculating depreciation charge by the difference of the carrying amount and the fair value, why are we using 250 instead of the carrying amount of 600.”
In F3 you may remember that shareholders’ funds = net assets
That equation holds good no matter what situation you look at … shareholders’ funds ALWAYS = net assets
In the Wizard case, the net assets are understated by $250,000 so shareholders’ funds are also understated as at date of acquisition
IF Wizard had put through an adjustment in respect of this $250,000, TNCA would increase by that much and so too would the Wizard reserves and then depreciation would be calculated on the asset’s revised carrying value of $850,000
But that adjustment has not been made so depreciation is being calculated only on the original $600,000
Now, one year later, by how much is that item of TNCA overstated?
$250,000 less one year’s worth of depreciation on the $250,000 addition and one year’s worth of depreciation on $250,000 over a 40 year period is $6,250 per annum
The original $600,000 is being depreciated in the ‘normal’ way
It’s just this extra $250,000 that needs our special attention
Is that better?
”Now, one year later, by how much is that item of TNCA overstated?”
Sir I’m having difficulty understanding everything after that statement.
Wouldn’t it be understated ?
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