Subsequent years the excess is subsumed into the

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Subsequent years : The excess is subsumed into the opening balance of retained earnings. It reduces the balance recorded by the subsidiary as the parent paid less for the subsidiary than the fair value of the identifiable assets and liabilities of the subsidiary. 6.At the date the parent acquires a controlling interest in a subsidiary, if the carrying amounts of the subsidiary’s assets are not equal to fair value, explain why adjustments to these assets are required in the preparation of the consolidated financial statements. AASB 3, paragraph 18, requires that identifiable assets and liabilities of the subsidiary be shown at fair value. The standard-setters believe that the fair value of the assets and liabilities provides the most relevant information to users.
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Even though the standard refers to an allocation of the cost of a business combination, the standard does not require the identifiable assets and liabilities acquired to be recorded at cost. The only asset acquired that is not measured at fair value is goodwill. The fair value approach is emphasised by the required accounting for any bargain purchase on combination. It is not accounted for as a reduction in the fair values of the identifiable assets and liabilities acquired such that these items are recorded at cost. Instead, the fair values are unchanged and the excess is recognised as a gain. 7. How does AASB 3 Business Combinations affect the acquisition analysis? The formation of a parent–subsidiary relationship by the parent obtaining control over the subsidiary is a business combination. The parent, being the controlling entity is an acquirer, with the subsidiary being the acquiree. The acquisition analysis is then totally based on AASB 3. The acquisition analysis reflects the application of the acquisition method: Step 1: Identify the acquirer – in this case, it is the parent. Step 2: Determine the acquisition date Step 3: Recognise and measure the identifiable assets acquired and the liabilities assumed at fair value. The differences between the carrying amounts and fair values of the identifiable assets, liabilities and contingent liabilities of the subsidiary are recognised via business combination valuation reserves. The effect is to recognise the assets and liabilities of the subsidiary at fair value. Step 4: Recognise and measure goodwill or a gain from a bargain purchase. The goodwill is recognised in the BCVR entries while the gain is recognised in the pre-acquisition entries. 8. What is the purpose of the business combination valuation entries? The purpose of these entries is to make consolidation adjustments so that in the consolidate balance sheet the identifiable assets, liabilities and contingent liabilities of the subsidiary are reported at fair value. This is to fulfil step 3 of the acquisition method required to account for business combinations by AASB 3.
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