Fair Value adjustment on business combination

[JBHF]

All, in the event of business combination, we assess the BS of acquired entity to determine the fair value of its assets and liability. With all the necessary fair value adjustments, should these adjustments be done/booked from parent's book, acquiree's book, or elimination entity's book.

[JBHF]

In addition to above, appreciate if you can let me know if my below hypothesis is acceptable regarding to the accounting mechanic from the group ERP.

Step1: Fair value assessment and adjustment from SubCo's ledger.
Take the BS or Trial balance of the SubCo and work out the fair value of each of the asset and liability item in the balance sheet. Also, make a list of adjustment entries to be posted from the SubCo's ledger once fair value assessment is done. It's important to get the fair value from the BS corrected before the parent determines the price-consideration of the purchase.

Step2: From Parent's ledger, within ERP system.
Once you work out the fair value of SubCo, then the parent can determine the consideration. Let's say the net asset of the SubCo is $70 and the parent decides to buy 90% of the SubCo with $10. So from parent'book:
DR Investment in the Sub $10
CR Cash $10

Step 3: From SubCo's ledger, within ERP system.
Once the consideration is accepted and transferred, now SubCo belongs to the parent. Parent to transfer the trial balance of the SubCo to Parent's ERP system. The entries would mirror the corrected trial balance from step1 after the Sub corrected the BS with updated fair value on its trial balance.
DR All the assets items of SubCo $27
CR all the liabilities Items of SubCo $10
CR all the Equities Items of SubCo $17
CR all the Revenues $1
DR all the cost/expenses $1

Step 4: From Elimination Entity's ledger, within ERP system.
From Elimination entity, we record the difference between the consideration recorded from parent's book and net asset from SubCo's book while we do the elimination. As the Net asset of SubCo is $7 and Consideration is $10 (for 90% share), then the difference is goodwill.
DR Net Asset/Equity of SubCo $63 (90% of 70)
DR NCI $7 (10% of 70)
CR Investment in SubCo $10
DR Goodwill $30

[Ketan Marwah]

All, in the event of business combination, we assess the BS of acquired entity to determine the fair value of its assets and liability. With all the necessary fair value adjustments, should these adjustments be done/booked from parent's book, acquiree's book, or elimination entity's book.

Hi, these adjustments are made at the level of consolidation so you can say in the “elimination entity”. Consolidated financial statements present assets, liabilities, equity, income, expenses, and cash flows of a parent entity and its subsidiaries as if they were a single economic entity.

For your other post, I would recommend you to refer the below page and circle back if you have specific queries:

https://ifrscommunity.com/knowledge-bas ... iabilities

[JBHF]

Hi Ketan, yes I agree with you on "as if they were a single economic entity", but on

On step 1, the sub should have recognize the correct fair value regardless whether or not the acquisition exist. So this is just the sep to make sure the book is accounted correctly. With any FV correction, shouldn't that be adjusted from SubCo's book as on this first step payment hasn't been made and sub is not yet part of the parent.

the step2, you still need to record the actual cash consideration paid by parent assuming it's paid by cash from parent bank.

,

[Ketan Marwah]

Hi JBFH,

These are quite broad topics therefore I would request you to spend more time understanding those in full detail. If however, I have to answer your query by stating the overarching rule then the target company (to-be subsidiary upon acquisition) continues to follow it's accounting policies up till the acquisition date which would include making fair value adjustments for the assets/liabilities which would require fair value based measurements. These adjustments are captured in target company as it has followed it normal accounting procedures before getting acquired.
Investors need to perform “fair value adjustments” at acquisition date, because assets and liabilities are often valued in a different way – either at cost less accumulated depreciation, at amortized cost, etc. These adjustments are made and carried at a consolidated level.
The cash consideration (investment) you were referring to obviously is part of parent's books but the parent's investment in the subsidiary is eliminated as an intra-group item upon consolidation.

Why am I feeling as if I have treated IFRS 3 & 10 like a 2 minute noodle package while answering the query

[Marek Muc]

Why am I feeling as if I have treated IFRS 3 & 10 like a 2 minute noodle package while answering the query

IFRS 3? Like a walk in the park!