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If fair value is less as in the question below how should it be treated.
P acquired 70% of S on 1 January 20X1 for ?1,000,000 The retained
earnings of S were ?50,000 at that date. Also, at the date of acquisition S held an item of plant with a carrying amount of 250,000 less than its fair value. This asset had a remaining useful life of 10 years as from that date. It is P’s policy to recognise non-controlling interest at the date of acquisition as a proportionate share of net assets.How should the 250,000 be treated. What about the depreciation?
Hi,
If the fair value is less then the net assets are reduced, so we would reduce them by the 250,000. As the fair value is less then this would mean that the depreciation charge is less in the group accounts than what has been charged in S’s individual accounts, so we have a depreciation saving. The saving will then increase the net assets.
This is a tricky one and it isn’t often seen. Effectively we are doing exactly the opposite of what we do if the fair value was higher than the carrying value.
Thanks
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