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Hi, I want to ask something relating to the accounting treatment of Fair value adjustments for subsidiary’s NCA at acquition date.
As far as I know, under IFRS3, for the purpose of consolidation and calculation of Goodwill, if there is an increase in the fair value of the subsidiary’s non-current asset at the acquisition date, the amount of incease of the fair value of the Subsidiary’s NCA will be accounted as :
Dr. NCA
Cr. Subsidiary’s Retained EarningsHowever, according to the IAS16 Revaluation Model, for instance, if PPE has an increase in their fair value, the amount of increae will be charged to Revaluation Reserves and recorded as:
Dr. NCA
Cr. RRThus, what I want to know is why it should be recorded as RE, not RR? and if it is because it has to be at fair value, what if it goes to RR? What is the effect on calculating the FairValueNetAsset of the Subsidiary?
Also, I want to know why should I use RE when I recognise the fairvalue of assets from Subsidiary upon consolidation at year end.
For example,
In a question, it says
Parent’s and Subsidiary’s equity investments are carried at their fairvalues as at 31.3.2008 which is last year. The fairvalue of these investments at 31.3.2009 is increased by $20 million and decreased by $3 million respectively.In given answer, the entries are
In Parent’s book,
Dr. Equity Investment
Cr. REIn Subsidiary’s book,
Dr. RE
Cr. Equity InvestmentI don’t understand why it goes to RE…
I’ll wait for your answer. Thanks 🙂
“Thus, what I want to know is why it should be recorded as RE, not RR?”
There is no requirement for the subsidiary to change its accounting records to reflect any fair value adjustment s, for the sake of the CSoFP, there could well be no Revaluation Reserve in the subsidiary’s records
It’s quicker and easier simply to credit any increase to Retained Earnings
“and if it is because it has to be at fair value, what if it goes to RR? What is the effect on calculating the FairValueNetAsset of the Subsidiary?”
There is NO affect – calculation is EXACTLY the same as if it were credited to Retained earnings
“I don’t understand why it goes to RE…”
There is presumably no irrevocable election made to treat these investments through OCI
But, eventhough we assume that the equity investment is FVTOCI, according to IFRS9, originally the increased amount of fair value goes to OCI. Then, why is RE used in that case?
“originally the increased amount of fair value goes to OCI”
There isn’t an account called Other Comprehensive Income Account
The existence of the OCI addition at the foot of the Statement of Profit or Loss (or its own separate statement) is there for disclosure and explanatory purposes
Any increase in fair value will be disclosed in OCI but it’s part of a change in the entity’s equity
So where in the Statement of Changes in Equity are you going to locate this fair value change?
Your choices are Retained Earnings column, Revaluation Reserve column or Other Equity Reserves column
The choice is yours
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