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I am little bit confused by the treatment of excess depreciation in group retain earnings
so i have seen question where if there is a intra group sale , if there is excess depreciation, it is added in the retain earnings of the selling entity , for examplePer question 500,000
Less pup (10,000)
Excess depreciation 5,000……
but
i have seen that if there is excess fair value adjustment and there is excess depreciation, it is subtracted from the retain earnings of the subsidary for example
Per question 500,000
Less pup (10,000)
Excess depreciation (5,000)…….i dont get the logic behind the two treatments.both are excess dep, then why different treatment please explain. thank you.
With the intra-group situation, the surplus over original carrying value IS recorded in the buying company’s records so the buyer is charging excess depreciation on that surplus
For the purposes of the group financial statements, that excess depreciation charged within the buying company’s records is eliminated by adding the appropriate amount back into the buying company’s retained post-acquisition profits
In the situation of a fair value adjustment on acquisition, the fair value increase is NOT reflected in the subsidiary’s figures but that fair value increased asset needs to be brought into the consolidated financial statements at its fair value (that carrying value has invariably not been changed to fair value … at least, it hasn’t in an F7 question)
So, on consolidation, the assets of the subsidiary are increased, both at reporting date and at acquisition date. But, at reporting date, we need to make adjustment of the depreciation on that notional increase of fair value over carrying value
Is that ok for you now?
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