Week 5

Question 1

What Fair Value Adjustments need to be made when Acquiring a firm
2

Answer 1

If subsidiary is acquired by issuing shares of the acquirer (rather than cash) it’s necessary to:
- Identify fair value of these shares so a Share Premium (for Equity section of SoFP) can be calculated
- Identify a fair value of the acquired firms assets and liabilities so they can be brought into the consolidated accounts

Question 2

Unrealised profit adjustments

Answer 2

As we’re showing statements as if all firms were one entity, we must eliminate elements arisen from transactions between the companies e.g. if subsidiary buys inventories for £100 and sells them to parent company for £150, we can’t put the profit of £50 into the consolidated statements, it must be removed.
In this case, £50 must be taken from profit and inventories.
If something is sold externally to ANOTHER company, it can be recorded as profit e.g. the same inventory is sold for £175 externally, profit is £75