Fair value adjustments of the associate

Learning objectives

• Calculate the adjustment to the share of profit or loss for the additional depreciation based on the fair value excess at the acquisition date.L2, L3

Normative references

• IAS 28 §32The equity method is applied from the date on which the investment becomes an associate or a joint venture. On acquisition, the difference between the cost of the investment and the entity's share of the net fair value of the investee's identifiable assets and liabilities is accounted for as follows: (a) goodwill is included in the carrying amount of the investment and its amortisation is not permitted; (b) any excess of the share of net fair value over cost is income included in the share of profit or loss of the period of acquisition. The subsequent share of profit or loss is adjusted, for example for depreciation based on fair values at the acquisition date and for impairment losses (goodwill, property, plant and equipment).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• At the date Alba SA acquired Brise SA (an associate), the fair value of one of Brise's buildings exceeded its carrying amount by {fair_value_excess}. Case convention: the building is depreciated on a straight-line basis over its remaining useful life of {useful_life}, with no residual value. Calculate the additional annual depreciation to be taken into account in the share of profit (before applying Alba's percentage).L2
• Alba SA holds 30% of Brise SA, an associate. Brise reports a profit of 400,000. At the acquisition date, a building of Brise had a fair value 500,000 above its carrying amount; it is depreciated on a straight-line basis over the remaining 10 years (case data). What share of profit does Alba recognise?L3
• Alba SA holds 40% of Cime SA, an associate whose profit is 280,000. At acquisition, the fair value excess on an item of equipment was 240,000, with 8 years remaining. A colleague recognises a share of 112,000, i.e. 40% of 280,000. What is the error?L2