UK Pre-acquisition fair value revised

May 26, 2020
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United Kingdom
A company acquired a subsidiary for say £1k and net assets were £3k mainly receivables which were difficult to collect and fair value of the receivables agreed at acquisition was £1.8k (£3k receivables less bad debt provision of £1.2k) , meaning a bargain purchase gain of £0.8k.

1 year later, the company under new management managed to recover 0.5k of the bad debts which were fully provided at acquisition. The subsidiary accounted for this as Dr cash Cr receivables

I’m not sure how to treat the £0.5k in the group accounts, as we still have at acquisition journals showing £1.2k provision against the receivables. My guess is the other leg is Cr P&L but other leg is Dr ???

Your help would be greatly appreciated



You should normally have gross receivables and value adjustments on two different G/L accounts, so your opening balances at acquisition date should be:
Receivables, gross: 3.0
Receivables, value adjustment: -1.2
Total Receivables: 1.8

When a customer repays a receivable, which was adjusted, this in the first place affects the gross receivable account:
Dr Cash / Cr Receivables, gross: 0.5
At the same moment, you should consider that the initial bad debt adjustment is not valid anymore and do a dissolution of the corresponding bad debt adjustment (100% in your case):
Dr Receivables, value adjustment / Cr Gain from dissolution of unused bad debt value adjustment: 0.5

If you don't keep two separate accounts for gross values and value adjustments, then it's hard to see the steps, but essentially, the cash-in in years after the year of the initial value adjustment means a gain from reversal of the value adjustment:
Dr Cash / Cr Receivables 0.5
Dr Receivables / Cr Gain from dissolution of unused bad debt value adjustment 0.5

For the sake of completeness: If you receive cash in the same year when you provide for the value adjustment, you would show no gain from reversal but rather set the unrealized bad debt expense to zero (net method).

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