Fv of the SNA AT DOA

Fair value of net assets at date of acquisition? If you think back to your F3 days, you’ll remember that shareholders’ funds = net assets (the same as capital employed = net assets)

And we know the value of shareholders’ funds because that’s share capital + reserves

But that’s only the BOOK value of net assets and we’re looking for the FAIR value (Another way of saying “book value” is “carrying value”)

An exam question will typically state “The carrying value of the subsidiary net assets was the same as their fair value with the exception of …”

So we make the adjustment for that difference between carrying value and fair value and now we have arrived at the fair value of the subsidiary net assets as at the date of acquisition

“Why do we have to add …?”

We don’t! 99 times out of a 100 we have to SUBTRACT the depreciation on the fair value adjustment from the retained earnings

On just a couple of occasions the examiner has set a question where fair value was lower than carrying value so the subsidiary has charged depreciation on the carrying value and thus charged too much depreciation in arriving at the year’s profits

So we make adjustment in those rare cases by adding back the excess depreciation that relates to the amount by which carrying value exceeded fair value

But normally you’ll find that we deduct the notional additional depreciation calculated on the excess of fair value over carrying value

OK?