Seminar 3 2017

ACCT7104
Corporate Accounting
Seminar Three: Consolidation Fair Value Adjustments and Tax Effects
S01 2017 Week Date Lecture Reading Set Work Assessment
1 27/02 Introduction to Consolidation Arthur et al Chapter 1 and 2; AASB 10 Consolidated
Q1.1; Q1.2; Q1.3; Q1.9;
Financial Statements; AASB 12 Disclosure of Interests
Q1.11.
in Other Entities
2 06/03 Consolidation: Basic Principles Arthur et al Chapter 1 and 2; AASB 3 Business Q2.3; Q2.4; Q2.5; Q2.6; Case Study and rubric
Combinations; AASB 13 Fair Value Measurement E2.1; E2.2; E2.8; E2.10. available this week
3 13/03 Consolidation: Fair Value Arthur et al Chapter 3; AASB 112 Income Taxes; AASB Q3.1; Q3.3; Q3.6; Q3.8;
Adjustments and Tax Effects 6 Exploration for and Evaluation of Mineral Resources. E3.3; E3.7.
4 20/03 Consolidation: Intra-Group Arthur et al Chapter 4; AASB 102 Inventories; AASB Q4.2; Q4.3; Q4.11; E4.1;
Transactions 116 Property, Plant & Equipment E4.5; E4.7.
5 27/03 Consolidation: Partly Owned Arthur et al Chapter 5; AASB 101 Presentation of Q5.1; Q5.3; Q5.8; E5.1; E5.3;
Subsidiaries (DNCI) Financial Statements E5.9.
6 03/04 or Mid-Semester Exam (30%) In-Class exam. Students must attend their sinet (Census #1 date)
07/04 registered seminar session. Mid semester exam
Good Friday 14/04. 7 10/04 Consolidation: Partly Owned Arthur et al Chapter 6; AASB 127 Separate Financial
Q6.1; Q6.5; Q6.6; Q6.8;
No Friday seminar this Subsidiaries (INCI) Statements; AASB 1024 Consolidated Accounts.
E6.1; E6.3; E6.8,
week.
Easter Monday 17/04 Semester break: no classes or
17/04 consultation this week
Anzac Day Tuesday 25/04 8 24/04 Accounting for Joint Arthur et al Chapter 8; AASB 11 Joint Arrangements Q8.2; Q8.3; Q8.6; Q8.7;
(Census #2 date)
Arrangements/Joint Ventures E8.1; E8.5; E8.8.
May Day 9 01/05 The Equity Method Arthur et al Chapter 9; AASB 128 Investments in Q9.1; Q9.2; Q9.4; Q9.9;
Monday 01/05 Associates and Joint Ventures E9.2; E9.3; E9.8.
No Monday seminar this
week.
10 08/05 Foreign Currency Translation Arthur et al Chapter 10; AASB 121 The Effects of Case Study due Thursday
Q10.1; Q10.3; E10.2; E10.6
Changes in Foreign Exchange Rates 11 May.
11 15/05 Segment Reporting Arthur et al Chapter 11; AASB 8 Operating Segments. QQ11.1; Q11.8; Q11.11;
E11.1; E11.6.
12 22/05 External Administration and Dagwell et al Chapter 20 available at Q20.2; Q20.3; Q20.4;
Liquidation http://www.library.uq.edu.au/lr/acct7104 Problem 20.9;
Comprehensive Exercise
20.13.
13 29/05 Review and sample paper Sample final paper available on Blackboard Centrally organised final
walkthrough exam during exam period
SWOTVAC
Seminar 3 Objectives 3
Review the requirements of AASB 3 Business Combinations

Understand the requirements of AASB 3 with respect to the allocation of
the cost of a business combination
Be able to apply the two methods for the recognition of fair values on
acquisition of a subsidiary
Understand the application of AASB 112 Income Taxes to the preparation
of consolidated financial statements
Be able to prepare simple consolidation adjusting entries, worksheets and
financial statements recognising fair value adjustments and tax effects
Seminar 3 Reading and Set Work 4
Reading: Arthur et al Chapter 3; AASB 112 Income Taxes; AASB 6 Exploration

for and Evaluation of Mineral Resources
Questions and problems from Arthur et al: Q3.1; Q3.3; Q3.6; Q3.8; E3.3;
E3.7.
FVA and tax effects 5
In previous weeks, we have looked at equity investments where the

subsidiarys net assets were recorded at fair value
Weve also assumed zero taxes
In todays seminar, those assumptions will be relaxed
Our focus will be:
1. The fair value adjustments often needed to apply the acquisition
method required by AASB 3 Business Combinations; and
2. The tax effects of consolidation as required by AASB 112
AASB 3 Business combinations 6
Recall that AASB 3 Business Combinations requires the use of the

acquisition method in accounting for business combinations
The acquisition method involves:

1. Identifying an acquirer
2. Determining the cost of acquisition at fair value
3. Recognising and measuring at fair value all identifiable assets
acquired and the liabilities assumed; and
4. Recognising any goodwill or gain on bargain purchase
In todays seminar well spend some time on 3 and 4 above

Then well turn to tax effects
AASB 3 and fair value adjustments
7
AASB 3.32 states that any goodwill arising in a business combination at

date of acquisition of must be measured as the excess of:
a) the consideration (cost) at acquisition date fair value; over
b) the fair value of the net identifiable assets, liabilities and contingent
liabilities acquired
8
In accordance with AASB 3.18, the cost of the business combination

is allocated to all assets acquired and liabilities and contingent
liabilities assumed on the basis of their fair values at acquisition date
AASB 3.10-3.31 sets out the rules governing this allocation

Allocating the cost of a business
combination: recognition criteria 9
For identifiable items, AASB 3 indicates that:
For an asset other than an intangible asset, it is probable that any

associated future benefits will flow to the acquirer and its fair value
can be measured reliably;
For a liability other than a contingent liability, it is probable that an

outflow of resources embodying economic benefits will be required
to settle the obligation, and its fair value can be measured reliably;
For an intangible asset or a contingent liability, its fair value can be

measured reliably.
Allocating the cost of a business
combination: measurement 10
Acceptable measurement methods include the following:
Land & buildings and plant & equipment should be measured at current
market values
Receivables should be measured at the present value of the amounts to be

received, less uncollectable debts and collection costs
Ready for sale inventory should be valued at its sales price less selling costs
less a reasonable profit margin
Most liabilities will be measured at their present value

AASB 3 and fair value adjustments 11
Fair value adjustments on consolidation in compliance with AASB 3 are

often required because:
The subsidiary may use the cost model to record its assets and fair value
differs from this (depreciated) cost
The recorded values of inventory and/or accounts receivable may be
over/under stated relative to their FV as determined by AASB 3
The subsidiary may control unrecorded, internally generated intangible
assets that AASB 138 Intangible Assets does not allow it to recognise
There may be contingent liabilities that must be recorded by the business
combination but that cannot be recorded by the subsidiary under AASB 137
Provisions, Contingent Liabilities and Contingent Assets
12
There are 2 methods for accounting for the differences between the
fair values and the carrying amount of the net assets of an acquired
subsidiary in consolidated financial statements:
1. Revalue the identifiable assets in the accounting records of the

subsidiary (the subsidiary adopts the revaluation model)
2. Recognise the necessary adjustments on consolidation
Method 1: subsidiary adopts revaluation
model 13
If the subsidiary adopts the revaluation model for its identifiable assets
then this constitutes an adoption of the fair value basis of measurement
for each class of non-current assets revalued
The carrying amount of each class of revalued asset cannot vary

materially from its fair value at each subsequent reporting date so
regular valuations required
FV adjustments on consolidation may still be needed even if the

subsidiary adopts the revaluation model because of contingent liabilities
or intangible assets which cannot be recognised in the subsidiarys
statement of financial position but must be recognised on consolidation
under AASB 3
model 14
If subsidiary is using the cost model, it must justify the adoption of the
revaluation model
The revaluation model must be applied to the relevant classes of asset

for the entire group
But the record keeping can be less complex, with no need to record the
FV adjustment and associated tax and depreciation effects as a
consolidation adjustment
Instead the following entry or similar would be recognised by the

subsidiary
model 15
Assuming that FV > carrying amount and the tax rate is 30%, the generic
entry for the revaluation in the books of the subsidiary is:
General Journal of Subsidiary
Dr Asset
Cr Revaluation Surplus
Dr Revaluation Surplus
Cr Deferred tax liability (30%)
Whole value of asset and all tax effects are dealt with in subsidiary,
therefore no consolidation adjustment for this asset will be needed
Method 2: FV adjustments on
consolidation 16
The second way to recognize the necessary fair value adjustments is to

make those adjustments on consolidation
A FV adjustment on consolidation does not represent an election to adopt

the revaluation model
FV represents the cost of the net assets to the group, not a revaluation
But, the consolidation FV adjustments, and particularly consequent

consolidation entries, can be complex
Lets take an overview look at a couple of examples

Fair value adjustments on consolidation:
zero tax rate 17
First consider the case where a fair value adjustment is needed

because the fair value of a non depreciable asset (like land) is higher
than its carrying value in the subsidiarys books
Assuming 0% company income tax rate, the generic consolidation
adjustment is:
Consolidation Adjustment
Dr Non-depreciable Asset (100%) X
Cr Fair value adjustment(100%) X
zero tax rate 18
Non Depreciable Asset
Example
At acquisition, a 100% subsidiary, which records non-current assets at cost,
has land with carrying value $200,000, but which has fair value of $300,000.
Assuming a zero tax rate, what consolidation adjustment is required?
Dr Non-depreciable Asset (100%) 100,000
Cr Fair value adjustment (100%) 100,000
Fair value adjustments on
consolidation: zero tax rate 19
Now consider the case of a depreciable asset
Effectively the asset is new to the group it was acquired at the time the
subsidiary was acquired
Its cost to the group must be restated to FV at acquisition and any

depreciation on the asset must also be adjusted
zero tax rate 20
Assuming a depreciable asset and a zero company income tax rate the generic
entries are:
Before any revaluation/fair value adjustment, any accumulated depreciation
must be set off against the asset. This is known as a write back of the
accumulated depreciation. Thus, reverse this before recording change in fair
value:
Dr Accumulated depreciation @ DOA X
Cr Depreciable Asset X
zero tax rate 21
Then record increase in Fair Value:
Dr Depreciable Asset (100%) X

Cr Fair value adjustment (100%) X
zero tax rate 22
Example: Depreciable Asset

At acquisition, a 100% subsidiary, which records non-current assets at cost, has plant
with carrying value $260,000 (original cost $500,000), but which has fair value of
$380,000. At date of acquisition, the plant had a remaining useful life of four (4)
years and zero salvage value. Assuming a zero tax rate, what consolidation
adjustments are required?
Overview analysis ($000): Cost 500

Accumulated depreciation (240)
Carrying Amount 260
FV 380
zero tax rate 23
What needs to be considered?

1. Accumulated depreciation
2. Fair Value adjustment
3. Depreciation in future years
zero tax rate 24

1. Accumulated Depreciation
Because the plant is effectively a new asset to the Group, from the groups
point of view there can be no accumulated depreciation attached to the plant
at the DOA.
Therefore, as a consolidation adjustment, an elimination of the accumulated
depreciation on the plant must be recorded:
Dr Accumulated depreciation @ DOA 240,000
Cr Depreciable Asset 240,000
zero tax rate 25
After the writeback of the accumulated depreciation, the plant is valued in the
Group at $260,000:
($000)
Subs Adj Group
Cost 500 (240) 260
Accumulated depreciation (240) 240 0
Carrying amount 260 0 260
zero tax rate 26

2. Fair Value Adjustment
Because the plant must be recorded at fair value to the group, the increase from
group carrying value ($260,000) to fair value ($380,000) must be recognised (that
is, the FVA = $120,000).
Therefore, the consolidation adjustment will be:

Dr Plant 120
Cr Fair value adjustment 120
zero tax rate 27
After the FVA, the plant is valued in the group at $380,000:

($000)
Pre Jnl Post
Plant 260 120 380
zero tax rate 28

3. Depreciation in current and future years
In subsequent years, the group will need to show depreciation based on

the FV it has recorded. But the subsidiary is recording depreciation based
on the cost in its own books.
Therefore, there needs to be a consolidation adjustment to increase the

depreciation being recorded in the group up to the level required for fair
value depreciation.
zero tax rate 29
FV based depreciation (group viewpoint):
FV = $380,000, 4 year life, no salvage
Depreciation = 380,000/4 = $95,000 per year
Subsidiary depreciation (subsidiary viewpoint):
Carrying value at acquisition = $260,000, 4 year life, no salvage
Depreciation = 260,000/4 = $65,000 per year
The Group therefore needs to record an additional $30,000 per year depreciation
in the consolidated accounts.
zero tax rate 30

a. Consolidation adjustment required 1 year after acquisition:
Dr Depreciation expense 30,000
Cr Accumulated depreciation 30,000
zero tax 31

b. Consolidation adjustment required two years after acquisition

Dr Depreciation expense 30,000
Dr Retained earnings 30,000
Cr Accumulated depreciation 60,000
comprehensive example 32
On 1 July 2008, Bill Ltd purchased all of the issued shares of Ben Ltd for a
cash payment of $2,500,000. At that date, both companies recorded non-
current assets using the cost model. For Bill Ltd, the recorded amounts
(using the cost model) also represented fair value. The statements of
financial position of Bill Ltd and Ben Ltd at acquisition date were as
follows:
Fair Value Adjustments on consolidation:
comprehensive example
Statement of Financial Position at 1 July 2008 ($000)
Bill Ltd Ben Ltd
Recorded Recorded Fair Value
Assets
Cash 3,400 -- --
Accounts receivable 500 200 200
Plant at cost 2,000 1,000 1,500
Accumulated depreciation plant (800) (200) --
Land 500 400 600
Total Assets 5,600 1,400 2,300
Statements of Financial Position at 1 July 2008
Bill Ltd Ben Ltd
Liabilities
Accounts payable 650 120 (120)
Non-current borrowings 950 --
Total Liabilities 1,600 120
Net Assets 4,000 1,280 2,180
Shareholders Equity
Issued capital 3,800 1,000
Retained earnings 200 280
Total Equity 4,000 1,280 2,180
Additional information:
At the time of its purchase on 1 July 2006, the plant held by Ben Ltd had an estimated
useful life of 10 years with a zero residual value, and was depreciated straight line
Assume a zero company income tax rate for parts a) to c) below
Required:
a) Show the general journal entry recorded by Bill Ltd to account for its acquisition of
Ben Ltd on 1 July 2008.
b) Show the consolidation adjusting entries required to complete consolidated financial
statements for the Bill and Ben group at 1 July 2008.
c) Show the consolidation adjusting entries required to complete consolidated financial
statements for the Bill and Ben group at 30 June 2009 and complete the consolidation
worksheet provided. (note the balances for 30 June 2009 are provided for you)
d) Repeat parts a), b) & c) above with 30% company income tax rate
a) Bill Ltd completes the following general journal to account for its
acquisition of Ben Ltd:
General Journal of Bill Ltd ($000)

1 July 2008
Dr Investment in Ben Ltd 2,500
Cr Cash 2,500
Q: What entries does Ben Ltd complete to record its acquisition by

Bill Ltd?
b)
Acquisition analysis:
Calculation of Fair Value Adjustment ($000):
Cost Accumulated Carrying Fair Fair Value

Depreciation Amount Value Adjustment
Land 400 ----- 400 600 +200
Plant 1,000 (200) 800 1,500 +700
Total FV increase +900
Consolidation adjustments are required for A/D (200) & FV +900

Acquisition Analysis 1 July 2008 $ $
Cost of acquisition of investment in Ben Ltd
Fair value of purchase consideration for 100% of Ben Ltds 2,500,000
equity
Less fair value of identifiable net assets of Ben Ltd
Recorded value of equity (equals carrying amount of
identifiable net assets)
Issued capital 1,000,000
Retained earnings 280,000 1,280,000
Add/subtract fair value adjustments to identifiable net
assets 900,000
Fair value of identifiable net assets of Ben Ltd acquired 2,180,000
Goodwill: cost of acquisition > fair value of identifiable net 320,000

assets
b) Consolidation Adjustments ($000)

1 July 2008
(1)
Dr Accumulated Depreciation - plant 200
Cr Plant 200
(2)
Dr Plant 700
Dr Land 200
(1) Write-back of accumulated depreciation at date of acquisition and (2) FVA

b) Consolidation Adjustments ($000)

1 July 2008
(3)
Dr Issued capital 1,000
Dr Retained earnings 280
Dr Fair value adjustment 900
Dr Goodwill 320
Cr Investment in Ben 2,500
Elimination of investment against subsidiarys pre-acquisition
equity
c) Consolidation Adjustments ($000)

30 June 2009
(1)
Cr Plant 200
(2)
Dr Plant 700
Dr Land 200
(1) Write-back of accumulated depreciation at date of acquisition and
(2) FVA

30 June 2009
(3)
Dr Goodwill 320
Elimination of investment against subsidiarys pre-acquisition equity
Calculation of depreciation charge 30 June 2009:
Original Cost $1,000,000 on 10 year straight line depreciation
At DOA, accumulated depreciation = $200,000 => 2 years old
No change in useful life advised => 8 years left @ DOA
Value to Group @ DOA = FV $700,000

1st year depreciation charge = FV/remaining useful life
= $700,000/8 years = $87,500

30 June 2009
(4)
Dr Depreciation expense 87.5
Cr Accumulated depreciation - plant 87.5
Current year depreciation charge on subsidiarys plant at fair value
Consolidation Worksheet SOFP at 30 June 2009 ($000)
Bill Ltd Ben Ltd Adjustments Group
Assets Dr Cr
Cash 700 260 960
Accounts receivable 850 240 1,090
Investment in Ben Ltd 2,500 (3) 2,500 ---
Plant at cost 2,250 1,000 700 (2) 3,750

(1) 200
Accum depn plant (1,000) (300) 200 (1) (1,187.5)
(4) 87.5
Land 500 400 200 (2) 1,100
Goodwill --- --- 320 (3) 320
Total Assets 5,800 1,600 6,032.5
Bill Ben Adjustments Group
Ltd Ltd
Liabilities Dr Cr
Accounts payable 700 100 800
Non-current borrowings 900 -- 900
Total Liabilities 1,600 100 1,700
Net Assets 4,200 1,500 4,332.5
Shareholders Equity
Issued capital 3,800 1,000 1,000 (3) 3,800
Retained earnings 400 500 280 (3) 532.5
87.5 (4)
FV Adjustment --- --- 900 (3) ---
(2) 900
Total Equity 4,200 1,500 3,687.5 3,687.5 4,332.5
Fair value adjustments on consolidation;
subsequent periods 47
Consequent effects of the FV adjustment can continue for multiple

reporting periods
Any profits/losses on the subsequent sale of relevant assets may also
require adjustment in the group accounts
FV related adjustments will be kept as group consolidation adjustments
even after any asset derecognition as the initial elimination adjustment will
remove them.
These adjustments will not be finally removed until the subsidiary is sold
outside the Group or ceases to exist.
Time for a short break
William Bustard (1894-1973) The

Brisbane River (c1940), Watercolour on
paper, Museum of Brisbane Painting
with Light Exhibition
(https://www.museumofbrisbane.com.
au/whats-on/william-bustard/)
Consolidated financial statements and
49
AASB 112 Income taxes
AASB 112 Income Taxes states that the principles of tax effect accounting
apply to groups (AASB 112.11)
This means that tax effect accounting must be implemented in the

consolidated financial statements
A quick review
Tax effect accounting
50
Tax effect accounting requires the recording of deferred tax assets (DTAs) or
deferred tax liabilities (DTLs) arising on temporary differences between the
carrying amount of an asset or liability and its tax base
Temporary differences arise because of differences in the way some items are
treated for tax versus reporting purposes
For example, businesses can use different depreciation methods for tax and
for external reporting (e.g. diminishing balance depreciation for tax and
straight-line depreciation for external reporting) and this generates a
temporary difference
Temporary differences (by definition) will reverse in time

Tax effect accounting 51
AASB 112 requires the adoption of tax effect accounting

adjusts tax expense and
creates deferred tax assets or liabilities
based on the temporary differences between the carrying amounts of
those assets and liabilities and the tax base of those assets and
liabilities.
(Note: CA = Carrying Amount, TB = Tax Base, DTL = Deferred Tax Liability, DTA = Deferred Tax
Asset)
52
Classification of Temporary Differences
CA asset > tax base Assessable temporary difference (ATD)
CA asset < tax base Deductible temporary difference (DTD)
CA asset = tax base Nil
CA liability > tax base Deductible temporary difference (DTD)
CA liability < tax base Assessable temporary difference (ATD)
CA liability = tax base Nil

Tax effects and consolidation
53
Australia has a tax consolidation regime such that companies can be taxed
on a group basis provided that certain conditions are met (e.g. subsidiaries
must be wholly-owned)
Tax consolidation is not mandatory and companies may choose whether or

not to adopt
Once tax consolidation is chosen, it is irrevocable for all wholly-owned

qualifying subsidiaries
We assume throughout (consistent with Arthur et al) that tax consolidation is

not adopted
54
We assume that tax consolidation has not been adopted, which means
that each entity in the group is a separate taxable entity
Each entity in the group will record income tax entries consistent with
AASB 112 Income Taxes (i.e., apply tax effect accounting in their own
books)
55
As part of the initial aggregation process, each entitys tax-related entries will be
incorporated into the consolidation worksheet
Therefore, only changes in Deferred Tax Assets (DTA) and Deferred Tax Liabilities
(DTL) arising from consolidation worksheet adjustments require adjusting entries on
consolidation
Generally, these tax related consolidation adjustments are of 2 types:

1. Temporary differences arising from elimination of unrealised profits on
intragroup transactions (well look at these next week)
2. The deferred tax assets or liabilities associated with a consolidation fair value
adjustment - our focus this week
re-visited at 30% tax rate 56
Consider again the situation where a consolidation fair value adjustment is

required for a non-depreciable asset because its fair value exceeds its
carrying amount.
This time at tax = 30%, because there has been a change in the assets
carrying amount, there will be a deferred tax effect:
Consolidation Adjustments
Dr Non-depreciable Asset (100%) X
Cr Fair value adjustment (70%) X
Cr Deferred tax liability (30%) X
Example: Non Depreciable Asset

At acquisition, a 100% subsidiary, which records non-current assets at cost,
has land with carrying value $200,000, but which has fair value of $300,000.
Assuming a 30% tax rate, what consolidation adjustment is required?
Difference between FV and carrying amount = $100,000

Consolidation Adjustments
Dr Non-depreciable Asset (100%) 100,000
Cr Fair value adjustment (70%) 70,000
Cr Deferred tax liability (30%) 30,000
At acquisition, a 100% subsidiary, which records non-current assets at cost, has
plant with carrying value $260,000 (original cost $500,000), with a fair value of
$380,000. At date of acquisition, the plant had a remaining useful life of four (4)
years and zero salvage value. Assuming a 30% tax rate, what consolidation
adjustments are required?
Overview analysis ($000):
Cost 500
Accumulated depreciation (240)
Carrying Amount 260
FV 380
What needs to be considered?

1. Accumulated depreciation
2. Fair Value adjustment
3. Depreciation in future years
Example: Depreciable Asset (30% tax rate)
Because the PPE is effectively a new asset to the group, there can be no prior
accumulated depreciation attached to the plant in the group financial statements
Therefore, as a consolidation adjustment, a write-back of accumulated

depreciation must be recorded:
Consolidation Adjustments ($000)
Dr Accumulated depreciation @ DOA 240
Cr Plant 240
After the write-back of depreciation and before the FVA, the plant is valued in the
Group at $260,000:
Subs Adj Group
Cost ($000) 500 (240) 260
Accumulated depreciation ($000) (240) 240 0
260 0 260
Note: no deferred tax effect as no change in net asset value


Because the plant must be recorded at fair value to the group, the increase from group
carrying value ($260,000) to fair value ($380,000) must be recognised (that is, FVA
+$120,000):
Dr Plant 120
Now there is also a deferred tax effect as net asset value has increased:
Dr Fair value adjustment (120*30%) 36
Cr Deferred tax liability 36

Thus, after the fair value adjustment including tax, the plant is valued in the
group at FV $380,000:
Pre Adj Post
Plant($000) 260 120 380
3. Depreciation in current and future Years
As before:
FV based depreciation
FV = $380,000, 4 year life, no salvage
=> depreciation = 380,000/4 = $95,000 per year
Subsidiary depreciation Carrying value at acquisition = $260,000, 4 year life, no salvage
=> depreciation = 260,000/4 = $65,000 per year
The group therefore needs to record an additional $30,000 per year depreciation in the
consolidated financial statements

a. Consolidation adjustment required for 1st year after acquisition

Dr Depreciation expense 30
Cr Accumulated depreciation 30
Now there is a deferred tax effect as net asset value has decreased:
Dr Deferred tax liability (30*30%) 9
Cr Income tax expense 9

Question: why is the tax adjustment on the previous slide not a Dr to

Deferred Tax Asset?
Because it is a reversal of the deferred tax liability set up at DOA
A partial decrease in value has occurred, thus causing part of the DTL to
crystalise, being one-quarter in value given the four year life of the asset
b. Consolidation adjustment required two years after acquisition:
Dr Depreciation expense 30
Cr Accumulated depreciation 60
Now there is a deferred tax effect as net asset value has decreased:
Dr Deferred tax liability (30*30%*2) 18
Cr Retained earnings 9
Cr Income tax expense 9
Tax effects of FV adjustments:
comprehensive example revisited 68
Lets go back to the data for the Bill & Ben comprehensive example but this
time assume a 30% tax rate:
On 1 July 2008, Bill Ltd purchased all of the issued shares of Ben Ltd for a
cash payment of $2,500,000. At that date, both companies recorded non-
current assets using the cost model. For Bill Ltd, the recorded amounts
(using the cost model) also represented fair value. The statements of
financial position of Bill Ltd and Ben Ltd at acquisition date follow.
Additional information:
At the time of its purchase on 1 July 2006, the plant held by Ben Ltd had an estimated
useful life of 10 years with a zero residual value, and was depreciated straight line
Assume a zero company income tax rate for parts a) to c) below
Required:
a) Show the general journal entry recorded by Bill Ltd to account for its acquisition of Ben
Ltd on 1 July 2008.
b) Show the consolidation adjusting entries required to complete consolidated financial
statements for the Bill and Ben group at 1 July 2008.
c) Show the consolidation adjusting entries required to complete consolidated financial
statements for the Bill and Ben group at 30 June 2009 and complete the consolidation
worksheet. (note the balances for 30 June 2009 are provided for you)
d) Repeat parts a), b) & c) above with 30% company income tax rate
Statement of Financial Position at 1 July 2008 ($000)
Bill Ltd Ben Ltd
Assets
Cash 3,400 -- --
Accounts receivable 500 200 200
Plant at cost 2,000 1,000 1,500
Accumulated depreciation plant (800) (200) --
Land 500 400 600
Total Assets 5,600 1,400 2,300
Statements of Financial Position at 1 July 2008
Bill Ltd Ben Ltd
Liabilities
Accounts payable 650 120 (120)
Non-current borrowings 950 --
Total Liabilities 1,600 120
Net Assets 4,000 1,280 2,180
Shareholders Equity
Issued capital 3,800 1,000
Retained earnings 200 280
Total Equity 4,000 1,280 2,180
We are going to complete part d) repeat parts a) to c) with a 30% tax

rate:
d)
The answer to part a) is unchanged, the parent entity records the
investment at cost:
General Journal of Bill Ltd ($000)
1 July 2008
Dr Investment in Ben Ltd 2,500
Cr Cash 2,500
The answers to parts b) and c) change because:

The investment analysis must now include the
deferred tax liability created by the FV adjustment
The DTL must be recorded on consolidation
The depreciation adjustment also has a tax effect
Acquisition Analysis 1 July 2008 $ $
Cost of acquisition of investment in Ben Ltd
Fair value of purchase consideration for 100% of Ben Ltds 2,500,000
equity
Less fair value of identifiable net assets of Ben Ltd
Recorded value of equity (equals carrying amount of
identifiable net assets)
Issued capital 1,000,000
Retained earnings 280,000 1,280,000
Add/subtract fair value adjustments to identifiable net
assets after tax 630,000
Fair value of identifiable net assets of Ben Ltd acquired 1,910,000
Goodwill: cost of acquisition > fair value of identifiable net 590,000

assets
b) 1 July 2008 Consolidation Adjustments ($000)
(1)
Cr Plant 200
(2)
Dr Plant 700
Dr Land 200
(3)
b) 1 July 2008 Consolidation Adjustments ($000)
(4)
Dr Goodwill 590
c) 30 June 2009 Consolidation Adjustments ($000)
(1)
Dr Accum Depn - plant 200
Cr Plant 200
(2)
Dr Plant 700
Dr Land 200
(3)
(4)
Dr Goodwill 590
(5)
Dr Depreciation expense 87.5
(slide 43)
Cr Accum Depn- Plant 87.5
(6)
Dr Deferred tax liability 26.25
Cr Income tax expense 26.25
Bill Ltd Ben Ltd Adjsutments Group
Assets Dr Cr
Cash 700 260 960
Accounts receivable 850 240 1,090
Investment in Ben Ltd 2,500 (4) 2,500 ---
Plant at cost 2,250 1,000 700 (2) 3,750
(1) 200
Accum depn plant (1,000) (300) 200 (1) (1,187.5)
(5) 87.5
Land 500 400 200 (2) 1,100
Goodwill --- --- 590 (4) 590
Total Assets 5,800 1,600 6,302.5
Bill Ltd Ben Ltd Adjustments Group
Liabilities Dr Cr
Liabilities
Accounts payable 650 100 750
Non-current 950 -- 950
borrowings
Deferred tax liability (3) 270 243.75
26.25 (6)
Total Liabilities 1,600 100 1,943.75
Net Assets 4,200 1,500 4,358.75
Consolidation Worksheet - Balance Sheets at 30 June 2009 ($000)
Bill Ltd Ben Adjustments Group
Ltd
Shareholders Equity
Issued capital 3,800 1,000 1,000 (4) 3,800
Retained earnings 400 500 280 (4) 558.75
87.5 (5)
(6) 26.25
Fair value adjustment --- --- 630 (4) ---
(2) 900
270 (3)
Total Equity 4,200 1,500 3,983.75 3,983.75 4,358.75
Other issues re tax effect accounting 83
We assume that there is no tax effect associated with intra-group dividends. This
assumption generally holds in the case of fully-franked dividends paid between Australian
corporate entities
We also assume a zero tax effect for the investment in subsidiary account. This
assumption is based on AASB 112.39 and AASB 112.40 which indicate that deferred tax
liabilities on the investment asset need not be recognised by the parent entity under
most circumstances.
The single entities within the group recognise the deferred tax assets and liabilities
payable to the Australia tax authorities. They therefore have a legal right to offset DTAs
against DTLs. No such right exists at the group level and we assume tax consolidation is
not adopted so DTAs and DTLs relating to different items cannot be offset and the
consolidated financial statements will likely report both DTAs and DTLs.
Wrapping up 84
Today we covered two important issues in consolidation accounting: FVA and tax
effects
Weve walked through several different applications of the concepts, with and then
without tax effects
The seminar also briefly reviewed tax effect accounting before turning to the
application of tax effect accounting at the group level
To help your learning on this material you should attempt the remaining set work
questions at home
Next weeks seminar on elimination of intra-group transactions builds on todays

seminar.
Thats all for now see you next
time! 85

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ACCT7104

Review the requirements of AASB 3 Business Combinations

Reading: Arthur et al Chapter 3; AASB 112 Income Taxes; AASB 6 Exploration

In previous weeks, we have looked at equity investments where the

Recall that AASB 3 Business Combinations requires the use of the

The acquisition method involves:

In todays seminar well spend some time on 3 and 4 above

AASB 3.32 states that any goodwill arising in a business combination at

In accordance with AASB 3.18, the cost of the business combination

AASB 3.10-3.31 sets out the rules governing this allocation

For identifiable items, AASB 3 indicates that:

For an asset other than an intangible asset, it is probable that any

For a liability other than a contingent liability, it is probable that an

For an intangible asset or a contingent liability, its fair value can be

Receivables should be measured at the present value of the amounts to be

Most liabilities will be measured at their present value

Fair value adjustments on consolidation in compliance with AASB 3 are

1. Revalue the identifiable assets in the accounting records of the

The carrying amount of each class of revalued asset cannot vary

FV adjustments on consolidation may still be needed even if the

The revaluation model must be applied to the relevant classes of asset

Instead the following entry or similar would be recognised by the

The second way to recognize the necessary fair value adjustments is to

A FV adjustment on consolidation does not represent an election to adopt

But, the consolidation FV adjustments, and particularly consequent

Lets take an overview look at a couple of examples

First consider the case where a fair value adjustment is needed

Non Depreciable Asset

Now consider the case of a depreciable asset

Its cost to the group must be restated to FV at acquisition and any

Then record increase in Fair Value:

Dr Depreciable Asset (100%) X

Example: Depreciable Asset

Overview analysis ($000): Cost 500

Example: Depreciable Asset

What needs to be considered?

Example: Depreciable Asset

Example: Depreciable Asset

Example: Depreciable Asset

Therefore, the consolidation adjustment will be:

Example: Depreciable Asset

After the FVA, the plant is valued in the group at $380,000:

Example: Depreciable Asset

In subsequent years, the group will need to show depreciation based on

Therefore, there needs to be a consolidation adjustment to increase the

Example: Depreciable Asset

Example: Depreciable Asset

b. Consolidation adjustment required two years after acquisition

General Journal of Bill Ltd ($000)

Q: What entries does Ben Ltd complete to record its acquisition by

Cost Accumulated Carrying Fair Fair Value

Consolidation adjustments are required for A/D (200) & FV +900

Goodwill: cost of acquisition > fair value of identifiable net 320,000

b) Consolidation Adjustments ($000)

(1) Write-back of accumulated depreciation at date of acquisition and (2) FVA

b) Consolidation Adjustments ($000)

c) Consolidation Adjustments ($000)

c) Consolidation Adjustments ($000)

At DOA, accumulated depreciation = $200,000 => 2 years old

No change in useful life advised => 8 years left @ DOA

Value to Group @ DOA = FV $700,000

c) Consolidation Adjustments ($000)

Plant at cost 2,250 1,000 700 (2) 3,750

Consequent effects of the FV adjustment can continue for multiple