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Fair Values in Acquisition Accounting
FRS 7 sets out the principles of accounting for a business combination under the acquisition method of accounting. Companies legislation in the UK requires the identifiable assets and liabilities of the acquired entity to be included in the consolidated financial statements of the acquirer at their fair value at the date of acquisition. FRS 7 sets out how the fair values of identifiable assets and liabilities should be determined and what 'identifiable assets and liabilities' means. The difference between the sum of these fair values and the cost of acquisition is recognised as goodwill or negative goodwill.
The standard also gives guidance on the period available to investigate and identify the fair values of assets and liabilities of an acquired entity and how to account for any subsequent adjustments. The objective of the FRS is to ensure that, when a business entity is acquired by another, all the assets and liabilities that existed in the acquired entity at the date of acquisition are recorded at fair values reflecting their condition at that date. All changes to the acquired assets and liabilities, and the resulting gains and losses, that arise after control of the acquired entity has passed to the acquirer are reported as part of the post acquisition financial performance of the group. FRS 7 is effective in respect of business combinations first accounted for in financial statements relating to accounting periods ending on or after 23 December 1994.
To find out how to obtain a copy of this FRS, go to Publications. |
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