Reference to Chapter 1, Question 1 of Exams notes June 2013

Your point number 2 in fact refers to the fair value adjustment for inventory with its affect on both pre and post acquisition profits. I therefore cannot understand your first question where you say ” I have difficulty to understand the reason for not accounting the fair value adjustment on stock in the calculation of goodwill.”!!!

The reason that the inventory adjustment affects BOTH the pre and the post acquisition profits is that the value of inventory as at date of acquisition is used in the calculation of cost of sales as at date of acquisition and therefore cost of sales for that pr period needs to be reduced by the fair value adjustment.

BUT, at the same time, that increased value of inventory is part of the cost of sales for the post acquisition period and therefore cost of sales for the post acquisition period needs to be increased by that fair value adjustment, thus reducing the profit for that second period.

Is that clear?

Now, the pup on the asset transfer. I cannot remember how I treated it in the recording, but the “new” treatment is to calculate the profit, deduct the appropriate depreciation from that profit element, and arrive at a net figure. That net figure represents the up to date position with reference to how much pup has NOT been used up by the passage of time. And it’s that figure (the net pup) which is used to make the adjustment to the retained earnings of the entity which has recognised this unrealised profit.- Dr Retained Earnings in the selling entity and Cr TNCA by this net amount.

Yes, I know, it’s the buying entity’s TNCA which is overstated – so why do we credit in the selling entity’s records?

Ask yourself, is there any difference between 40 + 50 – 30 (=60) and 40 – 30 + 50 (=60)

What IS important is that the adjustment is made to the appropriate Retained Earnings figure because THAT will potentially affect the nci calculation

All clear?