Net Assets list….CSFP

At any one time in the life of any business, net assets always equals capital employed – that’s THE basic truth of any business

The expression “capital employed” is defined as “shareholders’ funds” and that amount is determined by aggregating share capital with the reserves of the business (proprietor’s capital in the case of a sole trader and partners’ capital in a partnership)

In a consolidation, we are never given the details of the fair value of the net assets of the acquired subsidiary as at the date of acquisition, but we ARE given details of the capital employed

We are given the values of the share capital, the retained earnings, and, where applicable, the share premium account, revaluation reserve, and other reserves

So that tells us the BOOK value of net assets (you may need to time apportion this year’s profits to arrive at the retained earnings figure as at date of acquisition)

But we are looking for the FAIR value of those net assets so, if there are any fair value adjustments to make, then that’s what we must do

For example, a question might say “At the date of acquisition, the book value of the subsidiary’s net assets were equal to their fair values with the exception of ….. that had a fair value $4 million in excess of their book value”

If capital employed equals the book value of net assets (as it always does) we need to increase the value of those net assets in working W2 Goodwill calculation by increasing the list of those net assets by that fair value adjustment

So now we have listed out:

Share capital
share premium (not always present in an exam question)
revaluation reserve (not always present in an exam question)
retained earnings brought forward, and, if the acquisition was part way through the current year,
retained earnings pre-acquisition time-apportioned for this year
and the $4 million fair value adjustment

Is that better?