Fair Value Adjustment Upon Acquisition

COMPANY ACCOUNTING 1
Company Accounting
Name
Institution
Submission Date

COMPANY ACCOUNTING 2
TO: Power Ltd {Authorized person}
FROM: Julia Edwards
DATE: 4th May 4, 2019 {audience}
SUBJECT: Fair Value Adjustment Upon Acquisition
After the acquisition of Cargo Ltd, there has been confusion whether the liabilities and
assets of Cargo Ltd are supposed to be recognized in the consolidated financial worksheet at
their fair value or to be appreciated in the accounts of Cargo Ltd. This memo seeks to clear the
existing confusion by providing relevant answers to the directors’ question concerning the
concerned legislation in Australia.
Regardless of the time that consolidation occurs whether one week or a month after the
subsidiary acquisition by the parent or thirty years after the acquisition, the procedures followed
whether general, or the rational are treated the same. There are two issues which need to be
addressed one the book value acquisition and second the acquisition that is above the book value.
According to AASB, the acquirer is supposed to identify the acquisition date to which it took
control over the acquiree. This acquisition date legally considers the acquirer (Israeli, 2012,
p.234). Moreover, on this date the acquirer receives the ownership rights of the acquired assets
and assumes the acquiree liabilities. As of the acquisition period acquirer shall recognize all the
assets acquired as well as liabilities thought which will be separate to goodwill as well as
acquiree non-controlling assets. A recognition condition applies about AASB 1048 that to
qualify for recognition, the acquired asset and assumed liability must meet the definitions of an
asset or liability. Upon acquisition, the acquirer is expected to measure the identifiable
obligations assumed as well as an asset acquired at their fair value on the day of acquisition and
present the same on the consolidated worksheet.
Upon acquisition several adjustments are required to be made directly to the acquire
books of accounts; moreover, the same modifications are needed to be made in the subsidiaries
account. According to AASB 102 where the face value of the assumed liabilities and assets are
higher than the cost, adjustments are not supposed to be made in the books of account of their
subsidiary (Aasb.gov.au, n.d.). Secondly, AASB does not allow recognition of goodwill that was
internally generated by the acquiree. If the BCVR entry on consolidation is recorded in ARS
account (International Accounting Standards Board, 2008), it is also recorded in the G/L

COMPANY ACCOUNTING 3
account of the subsidiary and once entered carries to future periods. But if the BCVR is recorded
on the consolidated worksheet, it is required to be manually carried to future periods.
In conclusion, the fair value of the acquired asset and assumed inabilities upon
acquisition date is expected to be recorded in the consolidated worksheet. And upon acquisition,
the parent should adjust its accounts for reflecting their sub-incomes and atomization expenses
which are related to excess acquisition date fair value which is over the book value as well as
goodwill and allocations. Power Ltd should record surplus fair value over the distribution of
book value and goodwill. The company should also eliminate income balances of their
investments and finally remove divided declarations (International Accounting Standards
Board, 2008). Hence upon consolidation, the acquirer is supposed to record all the fair value to
the consolidated worksheet unless the Australian tax standards state an exemption.
TO: Power Ltd
FROM: Julia Edwards
DATE: 4th May 4, 2019
SUBJECT: Assets Revaluation And Liability Recognition Upon Acquisition {Audience}
Upon the acquisition of Cargo Ltd Power Ltd, directors are wondering the number of
equity accounts will be used to revalues the acquired asset as well as whether different equity
accounts should be used to recognize liabilities. This memo provides clear information to Power
Ltd directors on the types of equity account to be used in revaluing asset and also an answer to
whether the recognition of liability can be achieved through several equity accounts.
Upon acquisition Power, Ltd will be required to revalue different assets which will
include the fixed assets as well as the current assets. Besides, the company will be necessary to
use several equity accounts to recognize the assumed liabilities. The capital account is one of the
equity accounts that the company will be essential to use during revaluation (Accounting
Standard AASB 2018-7 Amendments to Australian Accounting Standards – Definition of