Financial Accounting and Reporting 2 Analysis Report

This financial analysis report, prepared by a graduate accountant for Power Ltd, addresses the accounting issues surrounding fair value measurement of assets during business combination and consolidation. The report explains fair value accounting as per the AASB framework, emphasizing the revaluation of identifiable assets and liabilities of Cargo Ltd to their respective fair values in consolidated financial statements. It details the calculation of goodwill, equity accounts used for asset revaluation, and the accounting treatment for revaluation gains and losses, including relevant journal entries. The report references key accounting standards like IAS 16 and provides an example of goodwill calculation. The report concludes with a summary of the key principles of fair value measurement in consolidation, emphasizing its importance in financial reporting. The report also includes references from ACCA Global, Kfknowledgebank.kaplan.co.uk, Shareholdersandinvestors.bbva.com and Toppr-guides.

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ACCOUNTING FINANCIAL
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To: Daniel Ford ([e-mail])
From: Julia Edwards ([e-mail])
Re: Accounting Issues: Business combination and consolidation
Date: May 25, 2019
Question presented: fair value measurement of assets on consolidation
I do understand your concern with regard to the issues pertaining to the fair value accounting.
I will try to explain these as per the AASB framework as easily as possible.
All of the identifiable assets and the liabilities of Cargo Ltd shall be reported at their
respective fair values in the consolidated financial statements. And any amount of different
between the net identifiable assets and the purchase consideration shall be reported as
goodwill in the books of Power Ltd.
The following further explains these provisions of accounting:
Fair values in consolidation:
Fair value is defined as the amount which an asset or a liability would fetch in the market if
sold or bought. As per the AASB framework, whenever there is a company which is
purchasing shares of another company, then the acquirer shall revalue the assets of the
acquire at its respective fair values. And this amount shall be taken account when calculating
the amount of the goodwill.
When preparing the consolidated financial statements. The consideration which is paid to the
acquiree shall be reported and recorded in the final accounts at their respective fair values.
Since cash is never revalued, all the revaluations shall be done for the non-cash items only.
The example include inventory, property, land etc.

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These assets and the liabilities are reported and are recorded at their fair values due to the
reason that the difference between the fair values and the book values are required for the
purposes of calculating their respective values and for the calculation of the amount paid for
them.
There is a need to report these assets and the liabilities at their respective fair values due to
the fact that the statement of the financial position has to be prepared using the fair values.
And as per the rules, the statement of financial position is usually prepared at the historical
costs. The assets are reported at their respective values less any amount of depreciation. This
would mean that the book value of the assets are very much different from their respective
current market or the fair values. The example include land and buildings.
All of the identifiable assets and the liabilities of the acquiree are included in the consolidated
statement at their respective fair values and this is done to the following reasons:
 The accounts of consolidation are prepared from the view point of the group and not
from the point of view of the individual companies. The book values of the assets and
the liabilities of the subsidiary are of an utmost importance since if the holding
companies goes to the market and sells its assets, then it would get the market value
of the assets and not the carrying values. Hence, these are of an utmost importance.
The fair values of the assets shall be the reported at their fair values that exists as on
the date of the acquisition of these assets and the liabilities of the subsidiary (BBVA,
2019).
 The goodwill which is bought by the company is the difference between the net
identifiable value of the assets and the liabilities of the subsidiary and the amount of
the consideration for which the subsidiary has been purchased. In case, there are no

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fair values, then there shall be no value of the goodwill. This is the amount which is
reported under the Assets of the company (Knowledge Kaplan, 2019).
The following is an example which shows the calculation of goodwill as on the date of the
consolidation:
Equity: Share capital
General reserve
Retained earnings
Add: revaluations
Plant (Fair value-
carrying value)(net of
taxes)
Inventory (Fair value-
carrying value)(net of
taxes)
Land (Fair value-
carrying value)(net of
taxes)
Patents (Fair value-
carrying value)(net of
taxes)
Less: damages payable
Consideration transferred
Goodwill

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Equity accounts used for the revaluation of assets:
The following are the equity accounts that are used for the purposes of revaluing the assets
during the time of consolidation:
As per the rules of IAS 16, there are 2 ways of treating the revaluation in respect of the
property, plant and equipment which are as follows:
 The cost model which involves the carrying cost less any amount of depreciation or
the impairment
 Then there is a revaluation model which is the carrying value of the asset reported and
recorded at its fair values as on the date of the revaluation less any amount of
additional depreciation of the accumulated depreciation due to the impairment.
In case, revaluation is being done for any particular asset, then the same rule or the policy
will have to be applied on all of the assets belonging to the entire category of the assets. This
means that the revaluations shall be done for all of the carrying amounts of the different
assets and this would be done by the way of using the fair values as on the date of reporting.
With regard to the accounting for revaluating, there are a number of adjustments that have to
be made with regard to the revaluation of a non-current asset which are as follows:
At the time of the initial revaluation, the following shall be the working:

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Carrying amount of non-current asset at revaluation date X
Valuation of non-current asset X
Difference = gain or loss revaluation X
With regard to the above stated difference between the carrying value or the book value of
the assets and the fair value of the assets, the amount shall be transferred on to the equity
account.
Any amount of gain on the revaluation shall always be reported in the equity account by the
way of using the revaluation reserve, unless and until there was a gain that was recognised
and was reported on the same asset that was previously reported in the statement of income.
This gain is an unrealised gain since no cash is received or no cash has been paid for it. This
is the unrealised amount which shall become realised at a later stage, as and when and if the
asset is sold.
The following shall be its accounting entry:
Dr Non-current asset cost (difference between valuation and original cost/valuation)
Dr Accumulated depreciation (with any historical cost accumulated depreciation)

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Cr Revaluation reserve (gain on revaluation)
Any amount of loss (which means that the fair value of the asset is less than the carrying
value or the book value of the asset) on the revaluation shall always be reported in the equity
account by the way of using the revaluation reserve, unless and until there was a gain that
was recognised and was reported on the same asset that was previously reported in the
statement of income. This loss is an unrealised loss since no cash is received or no cash has
been paid for it. This is the unrealised amount which shall become realised at a later stage, as
and when and if the asset is sold. In the case of a revaluation loss, the same shall be adjusted
using the revaluation surplus in respect to that specific asset. Any amount incurred towards
the additional amount of loss shall be charged and shall be reported as an expense in the
statement of profit or loss.
The following shall be its accounting entry:
Dr Revaluation reserve (to maximum of original gain)
Dr Income statement (any residual loss)
Cr Non-current asset (loss on revaluation) (ACCA global, 2019).
As per the general rules and regulations laid down under the IAS 16, each company has the
choice of either valuing its assets using the cost model or the revaluation model. But it is also
true that whichever model is decided or chosen, the same will have to be applied to the entire
class or the group of the assets. These are the assets that are of a same nature and perform the
same function for the company. In order to illustrate, the property would belong to one class
of the assets whereas the plant and equipment would belong to another. In case, the model of
revaluation is chosen, then the revaluations shall be done in order to report them at their

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respective fair values. But then it is also true that the requirements of IAS 16 is also not
specific as to how these assets have to be revalued.
When the model of revaluation is to be used, then these assets will have to be carried at their
respective fair vales which is the amount which the asset would fact in the market and is as
per the best knowledge and is in line with the arm’s length transaction price of that asset. The
arm’s length price is the amount which is market value or the price which anyone would
incur or pay when the asset is sold in the market or its fair value.
In respect of the revaluation gains, all of these gains or losses are reported in the equity
accounts unless and until there is a reversal of a revaluation loss on the same asset which has
been recognised in the statement of income. Such is the case wherein the gain or the loss on
revaluation shall be reported in the statement of income and loss. Any amount or sort of
changes that takes place in the amount of the depreciation on the asset would affect any
subsequent charges of the depreciation expense on that asset (Toppr, 2019).
Existence of equity accounts:
These equity accounts of revaluation surplus are permanent accounts and are used to record
any increase or decrease in the fair values of the assets or the liabilities. Hence, these would
exist lifelong (ACCA Global, 2019).
In order to conclude, all of the identifiable assets and the liabilities of Cargo Ltd shall be
reported at their respective fair values in the consolidated financial statements. And any
amount of different between the net identifiable assets and the purchase consideration shall
be reported as goodwill in the books of Power Ltd.

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References:
https://www.accaglobal.com, A. (2019). Accounting for property, plant and equipment |
ACCA Global. [online] Accaglobal.com. Available at:
https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-
study-resources/f7/technical-articles/ppe.html [Accessed 25 May 2019].
https://www.accaglobal.com, A. (2019). Revaluation and derecognition | F7 Financial
Reporting | ACCA Qualification | Students | ACCA Global. [online] Accaglobal.com.
Available at:
https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-
study-resources/f7/technical-articles/revaluation-derecognition.html [Accessed 25 May
2019].
Kfknowledgebank.kaplan.co.uk. (2019). Consolidation. [online] Available at:
https://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Fair%20Value.aspx [Accessed
25 May 2019].
Shareholdersandinvestors.bbva.com. (2019). 2. Principles of consolidation, accounting
policies and measurement bases applied and recent IFRS pronouncements - financial
statements 2012. [online] Available at:
https://shareholdersandinvestors.bbva.com/microsites/informes2012/en/
Consolidatedfinancialstatements/2.html [Accessed 25 May 2019].
Toppr-guides. (2019). Adjustment and Revaluation of Assets: Revaluation Account and
Examples. [online] Available at: https://www.toppr.com/guides/accountancy/admission-of-a-
partner/adjustment-and-revaluation-of-assets/ [Accessed 25 May 2019].

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