Fair value adjustments and contingent liability

GGrant8y ago

Hi there, I can get my head around FV adjustments on acquisition as it relates to PPE, i.e. PPE increases, goodwill decreases, then just need to deduct cumulative extra depreciation in retained earnings. I just now want to get my head around a contingent liability. So if we recognise a contingent liability on acquisition, it has the effect of decreasing goodwill and creating a liability. So what happens if this contingent liability then reduces between acquisition and group reporting date? It still won't be recognised in the sub's accounts, but we recognised it when calculating good will for the group. What would the double entry then be? Debit liability and credit what?

P2-D2Tutor8y ago#1

Hi, A contingent liability would be recognised in the group accounts at fair value. This will reduce the net assets acquired at acquisition as the liabilities are increasing. As the net assets have been reduced by recognising the contingent liability then the goodwill be increase. If the value of the contingent liability changes between the acquisition date and the reporting date then the change is recognised through group retained earnings (W5). If you want the double entry then we are DR/CR Contingent liability (group accounts) CR/DR Group RE. Remember that the contingent liability is not recognised in the individual accounts of S as per IAS 37. Thanks

GGrant8y ago#2

Doh! Goodwill increases, of course it does. Sorry about that. So when you say CR/DR to group RE - would this form part of the adjustments to the subsidiary's RE since acquisition same as the extra depreciation on a FV adjustment to PPE? Therefore, S% of it allocated to group RE Or would the whole adjustment be brought in? Thanks

P2-D2Tutor8y ago#3

Yes but it all takes care of itself automatically through the standard workings. Thanks

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