Q3.3 Fair values and identifiable assets of a subsidiary (Section 3.4.2)
Through the acquisition of a controlling interest in a company, the parent entity acquires the rights of the shareholders in that company and thus their equity interest in the net assets of the company. The cost of the investment will comprise the interest in the net separable or severable assets of the subsidiary plus (minus) any goodwill (excess) on acquisition. At the date of acquisition, the carrying amounts of the net separable assets in the books of the subsidiary will not usually provide an adequate basis for determining the equity acquired in those net assets. Only if the net separable assets of the subsidiary are measured at their fair value, from the viewpoint of the parent entity, will we be able to have reliable measures of the shareholders’ equity of the subsidiary at acquisition (pre-acquisition equity), the equity acquired in the net assets of the subsidiary and of the goodwill (gain) on acquisition.
As a general principle, at the date of acquisition, the equity acquired in the net assets of a subsidiary means the equity acquired in the net separable assets of the subsidiary measured in terms of their fair value from the viewpoint of the parent entity. At the date of acquisition, therefore, the net assets of the subsidiary are restated to their fair value from the viewpoint of the parent entity. The net assets comprise the subsidiary’s separable assets, its liabilities and contingent liabilities. An intangible asset is recognised separately only if it is identifiable, separable and its fair value can be measured reliably (paragraphs 45 and 46]. A contingent liability is recognised separately only if its fair value can be measured reliably [paragraph 37].
In Appendix B to AASB 3, there are a whole host of rules to be applied in determining the fair values of specific assets and liabilities. In the case of Gui Ltd, it is a matter of applying these rules to the various problems.
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Big M gold mine—costs of mine development $7.5million
The exploration, evaluation and development costs of the Big M gold mine have been capitalised in accordance with accounting standards. These costs may be broken down into exploration and evaluation costs, development costs and infrastructure costs. This capitalisation results in the recognition of assets whose carrying amounts are considered recoverable. The carrying amounts are unlikely to result in a measure of the fair value of the mine property.
The fair values of the production facilities and infrastructure facilities may be determined on the same basis as any other item of property, plant and equipment. The capitalised exploration and evaluation costs represent the cost of locating a mineral resource. There is no ‘active’ market for outcome of these activities so that there is no market-based evidence of fair value. This estimated fair value may be subject to such uncertainty that Gui Ltd may use the recorded estimated recoverable costs as a last resort.
Probable future successes in exploration activity
In each undeveloped area of interest there are probably capitalised area of interest tenancy costs and exploration costs. The capitalised exploration and evaluation costs represent the cost of locating a mineral resource. As the areas of interest are still in the exploration phase, there is no ‘active’ market for outcome of these activities so that there is no market-based evidence of fair value. This estimated fair value may be subject to such uncertainty that Gui Ltd may use the recorded estimated recoverable costs as a last resort.
Unused tax losses—$13million
The tax benefits to be derived from unused tax losses are recognised if it probable that
the tax benefits will be derived and the benefits are reliably measurable. Where a subsidiary has not had a profit history, it is unlikely that the tax benefits of unused losses would be recognised as a deferred tax asset. What is not probable from the subsidiary viewpoint may be probable from the group viewpoint. If, from the group viewpoint, it is probable that the benefits from the unused tax losses will be realised, the fair value of the tax benefits relating to the losses must be taken into account.
According to AASB 3, the fair value of the deferred tax asset arising from tax losses is assessed from the viewpoint of the combining entity (group) and is accounted for as per AASB 12 Income Taxes. Assuming that the tax losses were probably recoverable and a tax rate of 30%, a deferred tax asset of 30% of $13 000 000 = $3 900 000 would be part of the equity acquired in the net assets of Cisa Ltd.
Inventory of gold
In the separate statement of financial position of CISA Ltd, the inventory of gold is carried at the lower of cost and net realisable value $15 000 000.
In measuring the fair value of the equity acquired in the net assets of Cisa Ltd, however, any inventory held by that company is also measured at its fair value. In the case of inventories, the fair value is the defined in AASB 102 and may not equal net realisable value
Assuming that the fair value of the inventory of $18 000 000 has been calculated in accordance with AASB 102, a valuation increment of $3 000 000 would be recognised – $2 100 000 after an assumed tax rate of 30%.
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