Financial Reporting by Groups of Companies

Question 1

Why are the subsidiary’s identifiable assets and liabilities included at their fair values in the consolidated financial statements?

Answer 1

Consolidated accounts are prepared from the perspective of the group and must reflect their cost to the group (to the parent), not the original cost to the subsidiary. The book values of the subsidiary’s assets and liabilities are largely irrelevant in the consolidated financial statements. The cost to the group is the fair value of the acquired assets and liabilities at the date of acquisition. Fair values are therefore used to calculate the value of goodwill.

Question 2

Why is it necessary to use the fair values of a subsidiary’s identifiable assets and liabilities when preparing consolidated financial statements?

Answer 2

(a) as consolidated accounts are prepared from the perspective of the group, they must reflect the cost to the group, not the book values of the subsidiary’s assets and liabilities. The cost to the group is their fair value at the date of acquisition.

(b) the value of the purchased goodwill is meaningless without the use of fair values. Purchased goodwill is measured as the difference between the cost of an acquisition (the value of an acquired entity) and the aggregate of the fair values of that entity’s identifiable assets and liabilities (the value of the subsidiary’s net assets acquired).