Advanced Accounting — Consolidation After Acquisition: Amortizing Fair Value Differences and Allocating to NCI

The consolidation at acquisition in chapter 2 combined only the statements of financial position at one date. In the years after acquisition, the subsidiary’s profit, the extra depreciation on assets written up to fair value and the subsidiary’s dividends all enter consolidation. This chapter deals with those three without intragroup transactions; eliminating intragroup transactions is added in chapter 4.

1. Subsequent treatment of fair value differences

If the subsidiary’s assets were written up to fair value at acquisition, the group must depreciate them or recognize cost of sales on those higher amounts. The subsidiary’s own books do not contain the differences, so they are reflected as consolidation adjustments.

• Inventory: the fair value difference is added to cost of sales in the year the inventory is sold.
• Depreciable assets: extra depreciation is recognized over the remaining useful life.
• Land: not depreciated; the gain or loss is adjusted on disposal.
• Intangibles (customer relationships, etc.): amortized over their useful lives.

2. The subsidiary’s adjusted profit and its allocation

3. Worked example

We continue with P and S from the previous chapters. The fair value differences at acquisition were land of ₩1.5 million and customer relationships of ₩500,000 (useful life five years). Suppose there was also a building fair value difference of ₩1 million (remaining useful life ten years). Identifiable net assets at acquisition are then ₩11 million, proportionate NCI ₩2.2 million, and goodwill $1{,}050 + 220 - 1{,}100 = 170$ (₩10,000), i.e. ₩1.7 million.

In 20X1 S reported profit of ₩2 million and paid dividends of ₩500,000. P’s own profit (including ₩400,000 of dividend income from S) is ₩5 million.

The ₩400,000 of dividends P received from S is money moving within the group and is eliminated. Otherwise S’s profit would be counted twice: once as dividend income and again in the combination.

A. Closing NCI

To check: S’s closing book net assets are ₩8 million at acquisition plus profit of ₩2 million less dividends of ₩500,000, i.e. ₩9.5 million. Adding the fair value differences still remaining, ₩2.8 million (land 150, building 90, customer relationships 40), gives net assets on a fair value basis of ₩12.3 million, 20% of which is ₩2.46 million. NCI measured at the proportionate share can thus be verified backwards as the subsidiary’s net assets on a fair value basis × NCI percentage.

4. Consolidated retained earnings

Consolidated retained earnings are the parent’s retained earnings plus the parent’s share of the subsidiary’s adjusted profit since acquisition, less the dividends the parent received. The subsidiary’s pre-acquisition retained earnings were eliminated against the investment and are not part of consolidated retained earnings.

Check your understanding

At the beginning of 20X1 company U acquired 70% of V. At the acquisition date V’s net assets had a carrying amount of ₩20 million; inventory had a fair value ₩600,000 above carrying amount and machinery ₩2 million above (remaining useful life four years). The inventory was all sold in 20X1. V’s reported profit for 20X1 is ₩4 million, its dividends ₩1 million, and NCI is measured at the proportionate share. What are profit attributable to NCI for 20X1 and closing NCI?

V’s adjusted profit is $400 - 60 - 200/4 = 290$ (₩10,000). Profit attributable to NCI is $290 \times 30\% = 87$. NCI at acquisition is $(2{,}000 + 60 + 200) \times 30\% = 678$. Closing NCI is $678 + 87 - 100 \times 30\% = 735$, i.e. ₩7.35 million. To check: closing net assets on a fair value basis are book net assets of 2,300 plus the remaining machinery difference of 150, i.e. 2,450, 30% of which is 735.

References

• Korea Accounting Standards Board, K-IFRS 1110 Consolidated Financial Statements
• Korea Accounting Standards Board, K-IFRS 1103 Business Combinations
• Joe Hoyle, Thomas Schaefer and Timothy Doupnik, Advanced Accounting, ch. 3–4