Asked by Adrian Barrera on Jun 23, 2024
Verified
Discuss the reasons why the fair value of a subsidiary's net assets may not be equal to their carrying amount.
Fair Value
The approximate cost at which an asset or liability might be traded between informed, consenting parties in a transaction without any prior relationship.
Subsidiary's Net Assets
The total assets minus the total liabilities of a subsidiary, representing the net worth of the subsidiary from the perspective of a parent company.
Carrying Amount
The value of an asset or liability as recorded on the balance sheet, taking into account depreciation, amortization, and impairment losses.
- Understand the approach to asset revaluation in mergers and acquisitions and its impact on the financial statements.
Verified Answer
- The carrying amounts of subsidiary assets and liabilities are not necessarily their fair value.Reasons for differences include:
- Cost model adopted for property plant and equipment assets
- Inventories/accounts receivable overstated
- Existence of unrecorded identifiable intangible assets
- Existence of contingent liabilities and understated provisions
Learning Objectives
- Understand the approach to asset revaluation in mergers and acquisitions and its impact on the financial statements.
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