Fair value adjustment

Why does it matter in a group?

A fair value adjustment is a consolidation entry, not a change to the subsidiary’s own books. It sets the subsidiary’s assets and liabilities at what they were worth on the acquisition dateAcquisition dateThe date on which a parent obtains control of another company. The new subsidiary's results are included in the group accounts from this date.Open the glossary entry, so that goodwillGoodwillThe amount by which the price paid for an acquisition, together with any non-controlling interest and any previously held stake, exceeds the fair value of the identifiable net assets acquired.Open the glossary entry is measured on real values.¹ Where an adjusted asset wears out, the group makes an extra charge each month on the uplift. Deferred tax usually applies to the uplift when the tax base does not change.

A small example

Fernhollow’s land is in its books at GBP 1,000,000 and is worth GBP 1,600,000 at the acquisition date. The adjustment of 600,000 raises land in the group accounts. Deferred tax at 25 percent is 150,000, so net assets rise by 450,000 and goodwill is 450,000 lower.