The Accounting standard number three on business combination has not made any particular specification regarding the place where the adjustment for the fair value shall be made in the assets and liabilities. It can be made either in the books of accounts of the subsidiary or in the consolidated financial statements. If the adjustment to the fair value takes place in the subsidiary then it will be said that the revaluation model has been followed under which the assets and liabilities have been revalued at the fair value so as to arrive at the cost to the acquirer at the fair value. In case the revaluation is made at group level, then it will not be regarded as the general adopting of the method of revaluation of the asset rather it will be treated as the identification of the cost of the asset to the parent entity (Barlev, 2013).
Thus, in this manner the adjustments to fair value can either be made in the books of the subsidiary company which is Cancer Limited or in the books of the parent entity which is Mensa Limited.
Whenever any revaluation is done for the assets, the two accounts are affected. One is the particular asset account and the other one is Revaluation Reserve or Surplus account. Revaluation reserve is grouped under the head of the Equity and is also included in the statement showing changes in equity as part of that statement. The revaluation so made is neither debited nor credited in statement of profit and loss account rather it is directly shown under the respective heads of the statement of affairs or balance sheet (Paik, 2013). Equity accounts are used when there is increase in the liabilities due to its recognition. But the major fact is that the income arising from revaluation is not transferred to statement of the profit and loss.
No the revaluation surpluses so created due to the revaluation of assets are not created for indefinite period. It is definite to the extent when the revalued amount starts declining. For instance, after two to three years the assets so revaluated becomes impaired or there are indications that the assets so revalued will be impaired in the next few months depending upon the market conditions. Then the impairment loss so arrived shall be adjusted against the equity accounts known as the revaluation surplus and when it gets exhausted then the impairment loss is set off from the carrying value of the asset so shown in the financial statements of the company.
Although these accounts are not created by the subsidiary company – Cancer Limited, the equity accounts can never happen for indefinite period rather all the equity accounts are reviewed on the regular basis and the adequate adjustments are made on timely basis.For accounting of the goodwill of the group company or the acquiring company, the effect of the goodwill as shown in the financial statements of the target company or the subsidiary company shall be taken into account. The goodwill as reflecting in the books of the subsidiary company affects the accounting treatment of the goodwill for group Company (Chalmers, 2012).
It is in the manner that if the proposed acquisition results in the goodwill then the goodwill if already present in the books of account of target Company shall be reduced by such amount. In the given case for instance the proposed acquisition results in the goodwill of $25000 then the accounting treatment of goodwill creation will be only for $10000. It is because the goodwill is already in the books of accounts at $15000. Similarly if the proposed acquisition results in goodwill of $10000 only, then the goodwill already present in the books of Cancer Limited which is $15000 shall be reduced by $5000 and the net effect will be equivalent to the $10000 as calculated in the proposed acquisition (Guthrie, 2013).
Thus, in this manner, the goodwill as reported in the books of accounts of the subsidiary has material affect in the consolidation of the whole group companies.
The impairment loss is basically determined on the basis of the subsidiary company y representing the cash generating for the company. Cash generating unit carries the value representing the consolidating values. If the goodwill is high then there will be no issues either in the accounting treatment or in any other disclosures and in case it is low then the amount left is required to be written off in the books of accounts of the subsidiary company (Wines and Windsor, 2017).
In the given case, the amount of goodwill which has been impaired is $10000. If the company at consolidation level is only $20000 then at first the $10000 as impairment shall be written off from the books of accounts and then the remaining goodwill is $10000 only and accordingly the $5000 goodwill pertaining to Draco Limited shall be written off from the books of accounts of the company. On the other hand if the goodwill would have been $50000 then there would not have been any issue (Chauvin, 2014).
Thus, in this manner depending upon the circumstances and facts the accounting treatment is done.
Barlev, B., (2013), “Business Combination and the Creation of Goodwill”, Accounting and Business Research, 41(10), pp 25-92.
Chalmers, K, (2012), “Adoption of international financial reporting standards: impact on the value relevance of intangible assets” Australian Accounting Review, 18(3), pp.237-247.
Chauvin, K.W., (2014), “Goodwill, profitability, and the market value of the firm”, Journal of Accounting and Public Policy, 130(2) pp.32-45
Guthrie, J, (2013),“Disclosure of Goodwill Impairment under AASB 136 from 2005–2010” Australian Accounting Review, 23(3), pp.216-231.
Paik, G, (2013), “The value relevance of fixed asset revaluation reserves in international accounting”, International Management Review, 5(2), p.73.
Wines, G and Windsor, C, (2017), “Implications of the IFRS goodwill accounting treatment” Managerial Auditing Journal, 172(18) pp.122-290