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When a parent obtains control over a subsidiary, the carrying amounts of the subsidiary’s assets at...

  1. When a parent obtains control over a subsidiary, the carrying amounts of the subsidiary’s assets at the date of acquisition are compared to fair value. If there are differences between these values, adjustments are required to be made in the consolidation worksheets. Explain why.
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Answer #1

The reason why adjustments are required to be made in the consolidation worksheets if the carrying amounts are different from fair values is because the adjustments are necessary for the purpose of accounting for business combination valuation and hence business combination valuation entries have to be passed.

For instance if the book value of subsidiary assets and liabilities are not equal to fair value then business combination valuation adjustment entries will have to be made. The entry will also have to be made if a contingent liability exists. The objective is to ensure that the subsidiary’s assets and liabilities are recorded at fair values. This is also as per the accounting standards and regulations that are applicable. Most importantly it is done to determine the goodwill involved in the transaction. It is important to determine and identify the fair value of consideration transferred and the fair value of net assets of the subsidiary so as to be able to compute the goodwill. Once goodwill is determined then consolidation entries can be passed. These entries will bring the subsidiary book values to their fair values.

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