- This topic has 7 replies, 4 voices, and was last updated 12 years ago by
.
- Posts
At the date of acquistiion, Sander had an intangible asset of $500k for software in its statement of financial position. Picant’s(parent) director believed the software to have no recoverable value at the date of acquisition and Sander wrote it off shortly after its acquisition.
at acq, they deduct the 500k and at reporting they add back 500k. why is that? what is recoverable value?
any help appreciated.Recoverable amount is taken as the higher of fair value less costs to sell (net realisable value) and value in use. An impairment exists if carrying value of a non-current asset exceeds its recoverable amount.
now, to the qn of Picant & Sander
Since the software have no recoverable value at the date of acq, its write-off after acq is treated as a fair value adjustment at the date of acq for consolidation purposes.that is why it is deducted at the acq date.at the reporting date, it is not added back as an asset in the CSFP. But, in retained earnings calculation this 500 is added. bcoz, the profit for the year is after charging the write-off of 500.
since we treat the write-off as a pre-acq FV adjustment, 500 charged to the I/S need to be removed to get the correct post-acq profits. that is, to say, add 500 to the reported profit.Hope that helps
Hi Najiya, thanks for the above. Can you further explain – But, in retained earnings calculation this 500 is added. bcoz, the profit for the year is after charging the write-off of 500? I cant understand the part after bcoz the profit….Many thanks.
retained earnings at the reporting date includes the profit for the year.
the write-off actually happened during the current year and thus will be charged in the current year’s IS.
But, for consolidation purposes, we are treating the write-off as a pre-acq item.If we were asked to prepare the CIS, we will not include the write-off expenses which will be shown in the IS in the question. (hope you agree with this.)
suppose the only adjustment was the write-off, then the profit according to newly produced IS and the profit according to the IS in the question will be a difference of 500; newly produced IS showing 500 more than the profit in the IS in the question.
Here, we are not producing an entire IS, but just adjusting the retained earnings. Effect of the write-off is increase in profit (from the above explanation). that is, we have to add 500 to the profit given in the question.Hope that clears your doubt.
so what I can understand now is 500 added back to S’s post acquisition profit to eliminate double deletion of 500 according to the question, right?
Because 1) P believed no recoverable amount, so during consol, treating 500 as F.V.adjustment to remove 500 at acqui. 2) S wrote it again after its acqui to arrive at profit for the year 1000. As a result, 500 being deducted twice? To correct it, we just increase profit for this year from 1000 to 1500 if no other adjustment?Hi, Njiya, i have an another problem regarding the question you discuss above. The impariment of goodwill are charged against to the retained earnings of S for consol of financial position. I wonder why coz i thought good impairment should be charged against P’s earnings. Thank you very much!
- You must be logged in to reply to this topic.