groups: another explanation required - fair value adjustments & consolidated reserves

lisnic
lisnic Registered Posts: 141 ? ? ?
ok when doing the consolidated bs i am happy with

goodwill
group net asets

when it comes to consolidated reserves when there is a fair value adjustment i need a bit of explanation

the explanation (very vague!) given is

fair value adjustment of 30,000 is included in pre-acquisition reserves, but additional depreciation affects post-acquisition results

it then shows the following example for calculating consolidated reserves (i can do this when there isnt a fair value adjustment fine!)

P Ltd 420,000 (this is the retained earnings)

S Ltd
- at balance sheet date (202000+30000-400) 231,600 (the 202,000 is retained earnings, 30000 fair value adjustment and 400 additional depreciation)

-at acquisition (140,000+30,000) 170000 (140000 was the reserves value at acquisition and 30000 fair value adjustment)

giving 481,600

so i can follow this but im confused why the 30000 fair value adjustment is in twice and in order for me to be able to learn what im doing and understand it can someone please explain it better than the pants very brief explanation that bpp have given

bpp are coming up trumps in this (very important!) chapter today! great isnt it!!

Comments

  • Steve Collings
    Steve Collings Registered Posts: 997
    I have reworked this for you. P's retained earnings of 481,600 consist of their own retained earnings at the reporting date of 420,000. In addition their subsidiary (S) has made post acquistion profits of 62,000 (202,000 at the balance sheet date less the retained earnings at the date of acquisition 140,000). The fair value adjustment has given rise to an additional 400 worth of depreciation which needs deducting from the reserves as this would normally be a charge against profit (if you were doing the cons. statement of comprehensive income) but as we are just preparing the consolidated statement of financial position, it reduces retained earnings instead (the effect is still the same), so:

    P retained earnings = 420,000
    S post acq profits = 62,000
    Fair value deprec = (400)
    Equals:
    P consolidated reserves 481,600

    If you think what happens journal wise when a fair value adjustment is done -in this case the fair value exercise has resulted in S's non current assets being uplifted by 30,000, so the double entry is:

    DR non current assets 30,000
    CR revaluation reserve 30,000

    This is why you are seeing 30,000 twice. Once because it is part of the non current assets at the reporting date, less the 400 depreciation. Secondly because by virtue of the double entry above, it forms part of the equity section of the statement of financial position and at the date of acquisition P purchased 100% of S's net assets - the revaluation reserve being part of the net assets acquired.

    Hope that helps. Sorry for the long winded reply, but hopefully this illustrates how the figures have been arrived at in your book.

    Regards
    Steve
  • gabriellenlewis
    gabriellenlewis AAT Student Posts: 129
    Why for the certain % (however much the acquisition is for), are retained earnings AT point of acquisition counted and not SINCE acquisition? When Minority Inteteredt includes both in the total fair value?
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