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Sorry to ask this again sir John Moffat but i wanted to know this for paper FR – not FA.
1. Is it correct to say that the true of company’s net assets are determined from their fair values – not from the amount of assets on SOFP because they are valued at book value which is not their real worth of those assets?
2. Another reason why there is a difference between the fair value and book value of net assets is because the assets are valued at their historical costs in the SOFP, therefore, not their real current price?
3. Is it correct to say that the fair value is the price agreed between the buyer and seller but it is not actually the market value because the price is not set by the market – so market value is different than fair value?
4. When you say the fair value of net assets then does it mean fair value of total equity of the company because according to accounting equation both mean the same thing where net assets are equal to total equity?
Thanks a lot!
1. We start the value of the subsidiary’s net assets by using the book value but then adjust them accordingly to work out the fair value.
2. The assets in the subsidiary’s books are based on the accounting policies of the subsidiary and so some of the assets will not be held at their fair value.
3. Market value can be the fair value if traded on a market where there are a number of buyers/sellers (active market)
4. No, you are looking at two different things here. In an ideal world then the fair value of S’s net assets would be the same as the market value of equity but there are too many other factors to consider when looking at the share price that are not considered in the fair value of S’s net assets.
Thanks
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