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Fair value adjustments at acquisition 

 X 

 

 

 

 (X) 

Goodwill  

  X 

 

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PART G: PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS 

 

426

 

 

QUESTION 

Fair value of assets on acquisition

 

P Co acquired 100% of the ordinary shares of S Co on 1 September 20X5. At that date the fair value of 

S Co's land and buildings was $23,000 greater than their carrying value and retained earnings were 

$21,000. The statements of financial position of both companies at 31 August 20X6 are given below.  

P CO 

STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6 

 

  $ 

  $ 

Assets 

 

 

Non-current assets 

 

 

 Land and buildings 

  63,000 

 

 Investment in S Co at cost 

  67,000 

 

 

 

  130,000 

Current assets 

 

   82,000 

Total assets 

 

 212,000 

Equity and liabilities 

 

 

Equity 

 

 

Ordinary shares of $1 each 

  80,000 

 

Retained earnings 

 112,000 

 

 

 

  192,000 

Current liabilities 

 

   20,000 

Total equity and liabilities 

 

 212,000 

S CO 

STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6 

 

 $ 

 $ 

Assets 

 

 

Land and buildings 

 

 28,000 

Current assets 

 

 43,000 

Total assets 

 

 71,000 

Equity and liabilities 

 

 

Equity 

 

 

Ordinary shares of $1 each 

 20,000 

 

Retained earnings 

 41,000 

 

 

 

 61,000 

Current liabilities 

 

 10,000 

Total equity and liabilities 

 

 71,000 

Required  

Prepare P Co's consolidated statement of financial position as at 31 August 20X6. 

 EXAM FOCUS POINT 

If there is a difference between the carrying amount and the fair value of a subsidiary's land and 

buildings in an exam question, you will be given the fair value. 

The ACCA examining team commented that in the December 2013 exam, the question on the 

calculation of goodwill had a low pass rate. In calculating goodwill, some students incorrectly used the 

net assets at the year-end date instead of at the acquisition date. Students were required to derive the 

net assets at the acquisition date by deducting post-acquisition retained earnings from net assets at the 

year end. 

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CHAPTER 24  

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  THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION 

 

427 

ANSWER 

P CO 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 AUGUST 20X6 

 

 $      

 $ 

Non-current assets 

 

 

Land and buildings (63,000 + 28,000 + 23,000*) 

 114,000 

 

Goodwill (W1) 

     3,000 

 

 

 

 117,000 

Current assets (82,000 + 43,000) 

 

 125,000 

 

 

 242,000 

Equity and liabilities 

 

 

Equity 

 

 

Ordinary shares of $1 each (P Co only) 

 80,000 

 

Retained earnings (W2) 

 132,000 

 

 

 

212,000 

Current liabilities (20,000 + 10,000) 

 

   30,000 

 

 

 242,000 

* The $23,000 fair value adjustment is added to the land and buildings balance, so that the 

consolidated statement of financial position shows the fair value of land and buildings acquired. 

Workings 

1 

Goodwill 

 

 $ 

 $ 

Consideration transferred 

 

67,000 

Less net acquisition-date fair value of identifiable assets acquired 

and liabilities assumed: 

 

 

 

Ordinary share capital 

 20,000 

 

 Retained 

earnings 

 21,000 

 

 

Fair value adjustment at acquisition 

 23,000 

 

 

 

  

(64,000) 

Goodwill 

 

   3,000 

2 

Retained earnings

 

 

 P Co  

 S Co 

 

 $ 

 $ 

Per question 

 112,000 

 41,000 

Pre-acquisition retained earnings 

 

  

(21,000) 

 

 

 20,000 

Post-acquisition retained earnings of S Co  

   20,000 

   

Group retained earnings 

 132,000 

 

 

2.4 Types of consideration transferred 

The consideration paid by the parent for the shares in the subsidiary can take different forms. For 

example, the parent could pay cash for the subsidiary, as we have assumed so far. However, the parent 

could pay a combination of cash as well as shares in itself, or perhaps just shares in itself to acquire the 

subsidiary.  

 

The following example shows the effect of consideration in the form of shares on the consolidated 

statement of financial position.  

 IMPORTANT 

The calculation of goodwill must be based on the fair value of the consideration transferred. For cash, 

this is straightforward; it is simply the amount of cash paid. But what about shares? The fair value of 

shares is their market price on the date of acquisition. 

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