Fair values

Fair Values

Definition

IFRS 13 para 9 defines fair value as:

"The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." i.e. it is an exit price.

Fair values in consolidated financial statements

To ensure that an accurate figure is calculated for goodwill:

• the consideration paid for a subsidiary must be accounted for at fair value. Not all consideration is for cash; other non-cash elements (such as share exchanges) must be valued appropriately,
• the subsidiary's identifiable assets and liabilities acquired must be accounted for at their fair values in order to work out the difference between their value and the amount paid for them.

The need to account on a fair value basis reflects the fact that the statement of financial position often values items (mainly non-current assets) at their historic cost less depreciation. This could mean the book value of assets (or carrying value) is vastly different to their current market values, particularly in the case of assets that tend to appreciate in value, such as land and buildings.

The subsidiary's identifiable assets and liabilities are included in the consolidated accounts at their fair values for the following reasons.

• Consolidated accounts are prepared from the perspective of the group, rather than from the perspectives of the individual companies. The book values of the subsidiary's assets and liabilities are largely irrelevant, because the consolidated accounts must reflect their cost to the group (i.e. to the parent), not their original cost to the subsidiary. The cost to the group is their fair value at the date of acquisition.
• Purchased 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.

How to include fair values in consolidation workings

(1)Adjust both columns of the net asset working to bring the net assets to fair value at acquisition and reporting date.

This will ensure that the fair value of net assets is carried through to the goodwill and non-controlling interest calculations.

The fair value adjustment represents the amount required to adjust the relevant item from their current carrying value in the SoFP to their identified fair value.