Page 210 - SBR Integrated Workbook STUDENT S18-J19

Chapter 13

3.4 Consolidation issues: Fair value adjustments

The identifiable assets and liabilities of the acquired subsidiary are consolidated at
fair value but the tax base derives from the subsidiary's individual financial
statements.

A temporary difference is created, giving rise to deferred tax in the consolidated
financial statements. This will affect the amount of goodwill recognised at the
acquisition date.

Example 6

Fair value uplifts

On 30 June 20X6, Chai acquired 0.6 million of the 1 million $1 ordinary shares
in Espresso. The cost of this investment was $18 million. At the acquisition
date, the retained earnings of Espresso were £16 million and the fair value of
the non-controlling interest (NCI) was $10 million. The group policy is the
measure the NCI at acquisition at its fair value. The carrying amounts of
Espresso’s net assets as at 30 June 20X6 approximate their fair values, with
the exception of its inventories. The fair value of the inventories exceeds cost
by $3 million. The tax base of the inventories is based on cost as per the
individual (non-consolidated) financial statements. The tax rate is 20%.

In relation to the consolidated financial statements of Chai, the directors
require advice about the deferred tax implications of the above and the
value of goodwill that will be recognised on the acquisition of Espresso.

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