ACCT6010 · Financial Reporting For Business Groups
Fair-Value Adjustments
At acquisition the subsidiary's identifiable assets and liabilities must be carried at fair value in the group accounts, but the subsidiary's own books still hold them at the old carrying amount. Fair-value adjustments (FVAs) bridge that gap on the worksheet, posted through the business combination valuation reserve (BCVR). The governing discipline is net of tax: an FVA changes carrying amount but not tax base, so a $100 upward adjustment carries a $30 deferred tax liability and contributes only $70. Because the worksheet carries nothing forward, the FVA recognition entry is repeated every year, and as the asset is depreciated, sold or settled the reserve is realised — with prior-year portions redirected to Opening Retained Earnings. This chapter works land (non-depreciable, realised on external sale), a recognised contingent liability, and depreciable plant (the extra depreciation each year and the Year-2 ORE redirect), which is the canonical exam roll-forward.
What this chapter covers
- 01B.1 Why FVAs are needed
- 02B.2 The net-of-tax rule and the BCVR entry
- 03B.3–4 Land — recognition every year, and realisation on external sale
- 04B.5 Contingent liabilities
- 05B.6–8 Depreciable plant — the FVA and realising it through depreciation
- 06B.9–10 Year 2 — the Opening Retained Earnings redirect and the full roll-forward
Worked example: the deferred tax on a fair-value adjustment
- +1Land uplift $100k: Dr Land 100; the temporary difference (carrying amount now exceeds tax base) creates Cr Deferred tax liability 30; Cr BCVR 70.
- +1Plant uplift $80k: Dr Plant 80; Cr Deferred tax liability 24; Cr BCVR 56.
- +1Why net of tax: the FVA lifts the accounting carrying amount but not the tax base, so each uplift carries a deferred tax liability at 30% that must be recognised against it.
- +1FVINA contribution: the two uplifts add 100 × 0.70 + 80 × 0.70 = 70 + 56 = 126 to FVINA, not the gross $180.
- +1Every year: because nothing carries forward, this recognition entry is reposted every reporting period until the asset leaves the group.
Key terms
- Fair-value adjustment (FVA)
- A consolidation-only entry restating a subsidiary's identifiable net assets to acquisition-date fair value. It changes carrying amount but not tax base, so it carries deferred tax and is posted through the BCVR.
- Business combination valuation reserve (BCVR)
- The equity reserve through which fair-value adjustments are recognised on consolidation. It is created when the FVA is booked and eliminated/realised as the underlying asset is depreciated, sold or settled.
- Net-of-tax rule
- An asset uplift contributes uplift × (1 − tax) to FVINA, the rest being a deferred tax liability; a recognised liability subtracts liability × (1 − tax), the rest being a deferred tax asset. Australian company tax is 30% in this unit.
- Realisation of an FVA
- The process by which a fair-value adjustment flows into profit as the asset is used or sold — e.g. extra depreciation each year on a plant FVA, or a one-off realisation when revalued land is sold externally. Prior-year realisation is redirected to Opening Retained Earnings.
- FVA roll-forward
- Tracking a fair-value adjustment year by year: the recognition entry (repeated every year), the current-year realisation, and the cumulative prior-year realisation redirected to ORE — the standard layout the exam expects.
Fair-Value Adjustments FAQ
Why does a fair-value adjustment create deferred tax?
Because it changes the asset's accounting carrying amount but not its tax base, creating a temporary difference (AASB 112). The tax authority still depreciates and taxes the asset on its old base, so the gap between book value and tax base must be recognised as a deferred tax liability (for an uplift) or a deferred tax asset (for a recognised liability), at the 30% rate.
Why do I repeat the fair-value adjustment entry every year?
Because consolidation entries are off-ledger and the worksheet carries nothing forward — the subsidiary's own books never record the adjustment, so each period you must re-recognise it from scratch. As the asset is depreciated or sold you also post the realisation, and any prior-year realisation is redirected to Opening Retained Earnings rather than current profit.
What is the difference between recognising and realising an FVA?
Recognition restates the asset to fair value at the reporting date (Dr asset, Cr deferred tax, Cr BCVR) and is repeated every year. Realisation is the flow into profit as the asset is consumed or disposed of — extra depreciation each year for plant, or a one-off transfer when land is sold externally — which progressively unwinds the BCVR.
How does the Year-2 entry differ from Year 1 for a depreciable plant FVA?
In Year 1 the extra depreciation reduces current-year profit. In Year 2 the same entry is reposted, but the Year-1 portion of extra depreciation already reduced last year's profit, so it is now redirected to Opening Retained Earnings, with only the current year's extra depreciation hitting current profit. This ORE redirect is the canonical roll-forward the exam tests.
Exam move
Build a fixed three-block layout for every FVA question: the recognition entry (asset, deferred tax, BCVR — reposted every year), the current-year realisation (depreciation or disposal), and the cumulative prior-year realisation redirected to Opening Retained Earnings. Practise the net-of-tax arithmetic until it is reflexive: uplift × 0.70 to the reserve, the remaining 30% to deferred tax. Work the three asset types — land (realised only on external sale), a recognised contingent liability, and depreciable plant (extra depreciation each year) — and rehearse the Year-2 plant entry specifically, because the ORE redirect is the step that separates full marks from partial.
