cosolidation question. (the effect of inventory’s Fair value adjustment)

Ssherlock15y ago

Dear sear, I have a question about this part of a long consolidation question in (bpp) and how they answered it.

"(c) When Hever (parent) acquired its shares in Spiro (subsidiary) the fair value of Spiro's net assets equalled their book
values with the following exceptions:
$'000
Property, plant and equipment 50 higher
Inventories 20 lower (sold during 20X4)
Depreciation arising on the fair value adjustment to non-current assets since this date is $5,000."

Now I am asked to prepare the consolidated financial statements for the year ended 31 dec 20X4.

In terms of working 2 (goodwill), 30000 (50-20) will be added to net assets at date of acquisition. I understand this no problem.

In working 3 (retained earnings), the retained earnings of the subsidiary will be affected by the additional depreciation. So we deduct 5000 from the retained earnings of the subsidiary. I understand this no problem either. But now we also add to the retained earnings of the subsidiary 20000 pertaining to the inventory which was sold during the current year. So the effect on working 3 is -5 dep.+20 inventory= +15. I would like some clarification about why we add back 20000 to working 3.

In working 4a NCI, net assets of the subsidiary are increased by 50000 (fair value adjustment of TNCA) and decreased by 5000 (additional depreciation) no problem with this. But here in working 4a, we ignore the inventory. I would like some clarification about this point as well.

And thank you sir.

MikeLittleTutor15y ago#1

Hi

If the inventory was overvalued by 20k at date of acquisition and therefore needs a reduction by 20k, then the cost of sales calculation for the POST acquisition period needs to be reduced by that 20k and that in turn will increase the profit for that post-acq period. Or, saying the same thing but in a slightly different way - that 20k overvalued inventory as at date of acqn becomes the opening inventory figure for the post acq period. Without the adjustment, the cost of sales figure will be too high.

The W4A is a working as at consolidation date - a balance sheet working. The nci is entitled to their share of the subsid's net assets as at balance sheet date. Was that 20k overvalued stock part of the subsid's assets at balance sheet date? No, it had all been sold. W4A is nci %age * the S net assets at consol date, and that inventory which needed adjustment at date of acqn is now no longer included within the S net assets. The benefit is automatically reflected in the post-acq ret ears

That's why there's no adjustment for it

Hope that helps

Ssherlock15y ago#2

thanks, you have been very helpful

AAlex9y ago#3

Hi Mike, Hi Mike, All the examples I've seen so far regarding fair value difference of inventory at acquisition has been cases where all of the inventory in question was sold by year end. In the case above, if some of the inventory was left over at year end then would the adjustment be as follows?? Dr Retained Earnings Cr Inventory i.e. If 50% of that inventory was left: Dr Retained Earnings 10k Cr Inventory 10k Thanks in advance! Alex

MikeLittleTutor9y ago#4

If, at date of acquisition, the fair value of inventory exceeds its carrying value by $15,000, then the fair value adjustment in working W2 Goodwill is to increase the fair value of subsidiary net assets at date of acquisition by that $15,000 and that will automatically reduce the value of the goodwill Then, at the year end, there is still inventory from date of acquisition that is undervalued by $10,000, the net adjustments to the working W3 Retained Earnings will be: Adjustment as at year end: Increase net assets as at the year end (so increase retained earnings) by $10,000 and increase the retained earnings figure for ore-acquisition by $15,000 The NET adjustment is a reduction of $5,000 from the retained earnings figures picked up from the financial statements given in the question I'm not happy with any journal entry that involves "Inventory" because, strictly speaking, any double entry that DOES involve inventory is: Dr Inventory (statement of financial position) Cr Inventory (statement of profit or loss) or the reverse Your entries above have the same effect because, as you credit (closing) inventory, you automatically reduce profits OK?

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