Buying a subsidiary

Barry

A client purchases a wholly owned subsidiary and incurs legal and due diligence fees during the acquisition.
Can these costs be included in the cost of acquisition? I say they can't buy my senior says they can.

Steve Collings

That would all depend. If your client is reporting under IFRS then you are right as IFRS 3 requires transaction costs associated with the acquisition to be expensed. If you are reporting under UK GAAP you do recognise transaction costs in the cost of acq, hence your senior is correct.

Regards

steve

Barry

Thanks Steve. It is UK GAAP but I can't find anything in FRS 2 on this issue so presumably it's silent on the subject. Does that mean automatic default in recognising all the costs ?

Steve Collings

You are looking at the wrong standard in UK GAAP. It's FRS 7 you need - specifically para 26.

Barry

Ok thanks. Could we not write off the transaction costs anyhow? It seems to me that FRS 2 is significantly out of sink with the revised IFRS3 so surely to get a true and fair view we should look to IFRS3.

Steve Collings

Barry wrote: »

Ok thanks. Could we not write off the transaction costs anyhow? It seems to me that FRS 2 is significantly out of sink with the revised IFRS3 so surely to get a true and fair view we should look to IFRS3.

Definitely not! You can't mix and match GAAPs Just because FRS 7 is not consistent with IFRS 3 in terms of the cost of acquisition doesn't make FRS 7 wrong! Your client's figures will still show a true and fair view with the incremental costs of acquisition included in the cost of the acquisition - the difference is that your goodwill figure will be higher under FRS 7 than it would be under IFRS 3 because the cost of the investment is higher.

Barry

Sorry Steve to be a pain but my understanding is that if it is not addressed in a specific standard you default to IFRS for best practice. I think FRS 2 is specific here because we are accounting for a subsidiary and the standard is silent so surely that's a reason to write off the incremental costs?

Steve Collings

FRS 2 is silent on incremental costs, because FRS 7 'Fair Values in Acquisition Accounting' deals with the subject. When you acquire a subsidiary you adopt 'acquisition accounting'. FRS 7 says that incremental costs such as professional fees paid to merchant banks, accountants, legal advisers, valuers and other consultants are included in the cost of acquisition. It's irrelevant the fact that FRS 2 doesn't specifically make reference to these costs - FRS 2 merely requires a parent to prepare consolidated financial statements to show the economic resources controlled by the group and outlines how this is achieved. FRS 7 governs your initial query.

Sorry if this isn't the answer you want, but UK GAAP is clear on these issues I'm afraid. You would only default to IFRS if UK GAAP did not cover such issues, but acquisition accounting is dealt with in FRS 7.