1. Group Financial Reporting ACF 202 PART 2 Fair value
Cynthia Fortin, CPA, CMA
FALL 2018

2. Objective
Describe and explain the importance of fair valuation. We will look at fair value for each element in W3 for the calculation of goodwill.

3. W3 Goodwill Non-controlling interest Fair value of consideration
Fair value of S’s net assets
GOODWILL
W3 Goodwill

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
CASH
Deferred
consideration
Shares
Contingent
consideration
Interest
bearing loans

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. Illustration Share exchange
Russia has made an acquisition of 100% of the shares in Moscow. Moscow has a share capital of 50,000 shares with a nominal value of $1 each. The consideration that Russia gave for the investment in the subsidiary included a 2 for 1 share for share exchange. The market value of Russia's shares is $3.
Shares exchange ratio
# P’s shares for * P’s market price * (P’s % * S’s total shares)
# S’s shares
2/ * $ * 100% * =$300,000

8. 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

9. Illustration deferred consideration
A liability will be paid in the future: In addition Russia will also pay cash of 80 cents per share in one year's time. Assume a relevant discount rate of 8%. We must compute the liability at present value discounting it using the 8% rate. ($0.80 per share * 100% * 50,000 shares) = $37,

10. Exercise
Let’s do Poland Russia

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

12. W4 Non-controlling interest (NCI)
Subsidiary
Voting shares
Parent
controls
NCI is nil
100%
Subsidiary
Voting shares
Parent
controls
NCI is 25%
75%

13. W3 Goodwill when NCI is proportionate of S's net assets
NCI so far we have used a method called proportionate of S’s net assets W3
Goodwill
when NCI is proportionate of S's net assets
P's investment at doa ……… x
Plus NCI % of W2 at doa or value given ………………………
Less W2 at doa ………………..
(x)
= Goodwill at doa …………… X
Less Impairment loss…………
= Goodwill at yearend ……….

14. Examples
Croatia NCI was $64m 40% OF S’S net assets $160 M = $64M Cyprus NCI $65m 25% * $260 m = $65 m Jamaica NCI $60m 20% * 300 m = $60m Whereas Tiger NCI was $50m not 40% of $300m Lion NCI was given $100m not 25% of $160m

15. Non Controlling Interest (NCI)
When parent acquires less than 100% of S’s ordinary shares, S’s other shares are owned by external third parties called NCI which is recorded in the Group equity section.
NCI at fair value is computed using the market price of S’s shares. It is usually given. So fair value of NCI at doa =
Market value of S’s shares not acquired by P.
Goodwill is called FULL goodwill and the impairment loss will be split between NCI in W4 and Parent Retained earnings in W5.

16. Goodwill Second method to record goodwill: at fair value W3
Impairment loss is split between Parent and NCI which is not the case in NCI as proportion of net assets.
Goodwill

17. Let’s do Mount Libya Then Thames

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

19. 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

20. 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

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

22. 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.

23. amount is lower than 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 is lower than the recoverable amount, no gain is recorded

24. 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

25. 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 inseparable 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.

26. Let’s do Oman Then Singapore section 2 www. kaplanpublishing. co
Let’s do Oman Then Singapore section 2 Dolphin Seal Sea lion Walrus

27. 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.

28. 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 period 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

29. 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.

30. 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.

31. 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

32. 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).

33. 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