1. Group Financial Reporting ACF 202 PART 2 Fair value
Cynthia Fortin, CPA, CMA
Spring 2017

2. Objective
Describe and explain the importance of fair valuation and the treatment of goodwill in group accounting

3. Learning outcomes Non-controlling interest Fair value of consideration
Fair value of S’s net assets
GOODWILL
Learning outcomes

4. P’s investment at date of acquisition
IFRS 13: Fair value measurement: ‘Amount that would be received to sell an asset at market value’

5. Types of consideration given
Shares
Deferred
consideration
CASH
Interest
bearing loans
Contingent
consideration

6. How to measure consideration?
CASH
Share issued
or share exchange
Cash paid
Shares issued at market value or
Shares exchange ratio
# P’s shares for * P’s market price * (P’s % * S’s total shares)
# S’s shares

7. Measure consideration
Deferred
consideration
Liabilities
at present value
Shares
at market value
Contingent
consideration
Liabilities if settled
at different amount,
Difference to Income
Interest
bearing loans
Shares if not issued
No change in equity
At nominal value
Always at fair value

8. Exercise
Let’s do Poland

9. Non-controlling interest
Fair value of
consideration
Fair value of S’s net assets
GOODWILL

10. W4 Non-controlling interest (NCI)
Subsidiary
Voting shares
Parent
controls
NCI is nil
100%
Subsidiary
Voting shares
Parent
controls
NCI is 25% of Subsidiary’s net assets
25% of W2
75%

11. Goodwill Second method
Impairment loss is split between Parent and NCI which is not the case in NCI as proportion of net assets.
Goodwill

12. Excel demo problems.xlsx
Let’s do Mount
Then Thames

13. Non-controlling interest
Fair value of
consideration
Fair value of S’s net assets
GOODWILL

14. Measuring S’s net assets at acquisition at fair value
Parent
If Fair value is higher
than net assets, then a
fair value adjustment is made
at doa and depreciation is
taken at yearend
Performs a fair value
exercise of S’s
net assets

15. Measuring S’s net assets at acquisition at fair value
Let’s do Malta
Then Barbados
Measuring S’s net assets at acquisition at fair value

16. Non-controlling interest
Fair value of
consideration
Fair value of S’s net assets
GOODWILL

17. Goodwill NCI at fair value NCI at proportionate
goodwill is attributable
to parent only and
so is the impairment loss.
goodwill is full and impairment
loss is split between P and NCI.

18. amount exceeds the recoverable amount, no gain is recorded
Goodwill is impaired when
Recoverable amount
Carrying amount
Fair value less cost to sell
Accounting records
after deducting
accumulated depreciation
and impairment loss
If the carrying
amount exceeds the recoverable amount, no gain is recorded

19. IAS 36 does not allow goodwill impairment
Goodwill impairment loss
Asset written down
Must be recorded
IAS 36 does not allow goodwill impairment
loss to be reversed

20. Impairment of an asset
Carrying value (Assets – liabilities + goodwill) X
Less recoverable amount (X)
Impairment loss X
Why is goodwill added to the carrying amount? Because it is inseperable from the net assets of the subsidiary.
Recoverable amount: Cash generating unit is a collection of assets and liabilities that generate an independent stream of cash.

21. Let’s do Oman Then Singapore

22. What I need to know
Fair value (FV) is the price to be received to sell an asset.
P records the investment in the S at FV of the consideration given.
FV of P’s shares issued for the investment in S will be measured at their market value.
FV of deferred consideration given for the investment in S creates a liability that is measured at present value of future cash flow.

23. What I need to know
Consideration given for the investment that is dependent on a contingency is recorded at FV and creates a provision for a liability (if cash) or and equity reserve (if settled in shares).
If provision for liability for contingent consideration does not have to be paid it is derecognised and a gain recognised in income.

24. What i need to know
FV of P’s interest bearing loan notes issued as consideration given is recorded at nominal value.
NCI at acquisition can be measured at FV and goodwill will be in full.
NCI at acquisition can be proportionate of S’s net assets and goodwill will be given to P only.
At doa net assets of S have to be adjusted to FV

25. What i need to know
If at year-end FV asset adjustments are depreciated, then S’s profits must be adjusted as well.
Asset is impaired when the carrying value is higher than the recoverable amount.
Impairment loss on full goodwill is shared between P(W5) and NCI (W4).
Impairment loss on goodwill attributable to P is wholly charged against P’s profits (W5).

26. Mid-year acquisitions Assumption on Post acquisition profits
When acquisition occurs during a period, assume profits accrue evenly during the period and that no dividends will have been paid by Subsidiary.

27. Example
If S was acquired at May 1, 2014 and retained earnings at December 31, 2013 were $100m and at December were $148m, then to calculate retained earnings at date of acquisition: Retained earnings $100m__________$?_doa_______________$148m $ =$48 post acquisition profits 48/12 months = $4 per month From Jan. 1 to April 30 = 4 months Therefore balance of Retained Earnings as at May 1 can be $ = $116m

28. References
Clendon, Tom (2013), “A Student's Guide to Group Accounts, 2nd Ed.”, Kaplan Publishing UK ISBN: chapters 4, 5, 6, 7 and 10. Recap pp