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Hey, I hope you’re in good health.
(Question#1)
Is it true that there are basically two factors upon which the subsidiary value is examined in consolidation such as:1. Shares value
2. Post-acquisition Profits(Question#2)
Firstly, The shares value changes when subsidiary decides to issue new shares in the market plus they can be issued at premium which will eventually increase the market value of subsidiary’s net assets.(Questions#3)
Secondly, The post-acquisition profits includes many factors that will increase the market value of subsidiary’s net assets BUT i don’t know whether they fall under post-acquisition changes that will changes market value eventually or not.i) Fair value adjustments
ii) Goodwill
iii) Intangible assets bought
iv) Business Partnership
v) Research and Development initiatives
vi) Biddings / Takeovers
vii) Major business changesPlease explain this to me. I was so confused with this?
Hi,
I’m not to sure what you mean when you mention the value of the subsidiary, sorry. The only thing I can think about when we are looking at group accounts that might be linked to this is the valuation of the NCI. So looking at the value of the shares owned by the non-controlling interest shareholders. This is done via the fair value method or the proportionate share of net assets method. The FR exam focuses solely on the fair value method.
You then talk about the change in value of the shares and its impact on the net assets of the subsidiary. The value of the company shares is not linked to the value of the net assets, so I’m not too sure where you’re thought process is coming from here as this isn’t something that we’d be looking at.
When looking at the net assets of the subsidiary we need to value them at fair value, so we will need to make adjustments to the net assets working to reflect their fair value. These adjustments commonly relate to PPE, inventory and contingent liabilities. I’d recommend that you use the class notes and videos to guide you through each of these.
Thanks
I meant that the valuation of subsidiary net assets which you already explained. Thanks to you.
I have questions arising related to all this.
1. Is it true that the true value of subsidiary is explained by the fair value of its net assets?
2. Is it also true that there are basically one factor that causes the market value of subsidiary net assets to change which is “post-acquisition profits”?
3. However, post-acquisition profits term encompasses many factors that will increase the market value of subsidiary’s net assets eventually such as:
i) Fair value adjustments
ii) Goodwill
iii) Intangible assets bought
iv) Business Partnership
v) Research and Development initiatives
vi) Biddings / Takeovers
vii) Major business changes1. No, the true worth of a subsidiary it the value of its shares in issue. The fair value of the net assets is just accounting terminology.
2. The net assets of a subsidiary will change for a variety of reasons but we look at the change in post acquisition profits as this equates the change in the net assets of the subsidiary.
3. The main thing to focus on here are the fair value adjustments and any goodwill in the subsidiary that is eliminated.
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