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Dear Tutor,
I am working on a consolidated question from Bubbles Sep/Dec15.
“Salt” as a subsidiary has a contingent liability of 5 Million which was not included in the net assets. At the time of acquisition, this CL had a fair value of 1M. Now in answer this is how it has been treated.-1m from working 2 at acquisition,
+1m in liability.
deducting 1m from total net assets.Now i easily understand the double entry of 1m from retained earnings of subsidiary and an increase in liability but I do not understand the 1m deduction from subs net asset.
Hi,
If the contingent liability has not been recorded at fair value then it needs to be recorded on consolidation at fair value.
When we record it this will then reduce the net assets as we are increasing the value of the liabilities.
We normally have to deal with fair value adjustment that in crease the value of the net assets at acquisition, such as those relating to PPE, but here it is with regards to a liability and hence the reduction in the net assets.
Thanks
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