Acquisition


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Hi everyone
I am a university student and got stuck on an accounting problem. Would you please provide your valuable insights on h0w to address the issues? Thanks in advance.
XYZ Company acquired shares of a major manufacturing Company ABC. The BOD of XYZ are unsure whether the assets and liabilities be recognized in fair value. They are also concerned with the following issues:
i) Should the adjustments to fair value be made in the consolidation worksheets or in the accounts of ABC Ltd.? What is the best?
ii) What equity accounts should be used when revaluing the assets, and should different equity accounts such as income (similar to recognition of an excess) be used in relation to recognition of liabilities? What is the best?
iii) Do these equity accounts remain in existence indefinitely, since they do not seem to be related to the equity accounts recognized by ABC Ltd itself?
Please help.
 
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Werner Reisacher

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Suggest you post this under Exam and Studying, and please be more specific. Following the acquisition of the shares has ABC become a fully owned subsidiary of XYZ, and is XYZ acting as the mother company? (full consolidation)
 
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Could you look at my answer to issue 1? Thanks.
The subsidiary's identifiable assets and liabilities are included in the consolidated accounts at their fair values as consolidated accounts are prepared from the perspective of the group, rather than from the perspectives of the individual companies and the book values of the subsidiary's assets and liabilities are largely irrelevant. Moreover, goodwill is the difference between the value of an acquired entity and the aggregate of the fair values of that entity's identifiable assets and liabilities. If fair values are not used, the value of goodwill will be meaningless.
 
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Werner Reisacher

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You are dealing with two issues - the book value of the acquired company - and the goodwill. (Difference between the book value and the price paid for the acquisition)
Goodwill is kept in the books of the Holding company and can neither be revalued or amortized. It's assumed to have an infinite life. But, under the prudent accounting principle, it must be reviewed annually to identify potential differences between the book value of the goodwill and its actual economic value. If the BOD comes to the conclusion that the Goodwill is overstated, the book value needs to be adjusted by and impairment value adjusted, booked straight against the P&L at Holding Company level.
If however, the issue about the value of the acquisition is due to a valuation of the Balance Sheet positions of the acquired and consolidated subsidiary, such valuation adjustments need to be written off and charged to P&L in the books of the subsidiary.
 

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