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Financial Accounting assignment question help

  • 13-12-2010 3:01pm
    #1
    davidj515
    Closed Accounts Posts: 3 ✭


    Hi there,

    I need some help with a financial accounting assignment that I'm doing right now involving consolidation of group accounts.

    The issue I'm having is with one of the adjustments that I have to make. Basically, the parent has a different inventory valuation policy to the subsidiary. If the subsidiary had adopted the same policy as the parent at the acquisition date, the inventory of the subsidiary would have been valued at €20,000 less. However, it didn't adopt the same policy and now the required change to closing inventory to ensure uniform accounting policies is €30,000 less.

    How should I adjustment for this in terms of my goodwill calculation under IFRS?


Comments

  • #2
    Pawwed Rig
    Moderators, Category Moderators, Home & Garden Moderators, Recreation & Hobbies Moderators Posts: 22,434 CMod ✭✭✭✭Pawwed Rig


    davidj515 wrote: »
    Hi there,

    I need some help with a financial accounting assignment that I'm doing right now involving consolidation of group accounts.

    The issue I'm having is with one of the adjustments that I have to make. Basically, the parent has a different inventory valuation policy to the subsidiary. If the subsidiary had adopted the same policy as the parent at the acquisition date, the inventory of the subsidiary would have been valued at €20,000 less. However, it didn't adopt the same policy and now the required change to closing inventory to ensure uniform accounting policies is €30,000 less.

    How should I adjustment for this in terms of my goodwill calculation under IFRS?
    Correct me if I am wrong here but the parent takes over the subsidiary at Fair market value. Any discrepancy from FMV will be included in the value of the goodwill.
    The sub should adopt the accounting policies of the parent so you will need to do an adjustment based on the FMV unless there is an impairment or revaluation. With inventory I am assuming that one uses FIFO and the other AVCO as they both should be using the lower of cost and NRV?
    I would say then adopt the policy of the parent for both. I stand to be corrected though but hey at least I got the ball rolling for you:D


  • #3
    ari101
    Registered Users, Registered Users 2 Posts: 2,835 ✭✭✭ari101


    My understanding of this is as follows, I cannot say for sure it is 100% correct:

    FV of the Net Assets at acquisition should be adjusted downwards by 20k before calculating Goodwill - this will also affect the value of the NCI at acquisition date if valued using the proportionate method (no change under full fair value method)

    I think you then need to examine the movement in FV Adj:
    Opening -20k
    Movement ?
    Closing ?
    If all the inventory have been sold you have a closing of 0 and therefore a movement in the value of +20k which will need to be added back to the Subsidiary's Profits before determining the group or NCI % of post acquisition reserves.
    (None sold = no movement & therefore no adjustment, etc...)

    You also need to adjust the consolidated inventories by a further -10k and again the Subsidiaries profits before consolidation
    Dr Subsidiaries Profits
    Cr Closing Inventories

    Hope this helps - but dont ask me to explain the FV Adj Movements as I still have trouble getting my head around them :)


  • #4
    HeinekenTicket
    Registered Users, Registered Users 2 Posts: 146 ✭✭HeinekenTicket


    davidj515 wrote: »
    Hi there,

    I need some help with a financial accounting assignment that I'm doing right now involving consolidation of group accounts.

    The issue I'm having is with one of the adjustments that I have to make. Basically, the parent has a different inventory valuation policy to the subsidiary. If the subsidiary had adopted the same policy as the parent at the acquisition date, the inventory of the subsidiary would have been valued at €20,000 less. However, it didn't adopt the same policy and now the required change to closing inventory to ensure uniform accounting policies is €30,000 less.

    How should I adjustment for this in terms of my goodwill calculation under IFRS?


    The difference in accounting policy at acquisition date does not affect the goodwill calculation. Parent recognises the subsidiary inventory at its fair value at acquisition date.

    The difference in accounting policy is relevant at the reporting date, at which time a common measurement policy is applied to all inventory in the group.


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