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Corporate Financial Reporting · Consolidated Financial Statements and Separate Financial Statements

Fair Value Adjustments on Acquisition of a Subsidiary

Updated 11 October 2026 · Fact-checked

On acquisition, you restate the subsidiary's identifiable assets and liabilities to fair value for consolidation. Goodwill is consideration plus NCI less net fair value. After acquisition, charge depreciation on the fair-valued amounts, not the subsidiary's book values. Fair value uplift is never booked in the subsidiary's own books.

Understand Fair Value Adjustments and Acquisition Accounting

A subsidiary's balance sheet shows book values. When a parent gains control, the group is buying the subsidiary's assets and liabilities at what they are worth on that date. So the consolidation uses fair values at the acquisition date, and Ind AS 103 sets the acquisition accounting.

The difference between book value and fair value is a fair value adjustment (FVA). A land uplift of ₹10,00,000 is an example. You do not change the subsidiary's books. You make the adjustment only in the consolidation worksheet. Net identifiable assets at fair value = share capital + pre-acquisition reserves + net FVA.

Goodwill is then worked out against these fair-valued net assets. A higher fair value for net assets means lower goodwill. Contingent consideration, if any, is part of the consideration. It is included at its acquisition-date fair value.

After acquisition, the adjustment keeps working. Ind AS 110 (para B88) says income and expenses of the subsidiary are based on the amounts of assets and liabilities recognised in the consolidated statements at the acquisition date. For example, depreciation after the acquisition date is based on the fair values of the depreciable assets. So an uplift on a depreciable asset creates extra depreciation each year. That extra depreciation reduces post-acquisition profit, and NCI bears its share of it.

The same logic applies to inventory uplift (charged when the stock is sold) and to fair-valued liabilities. Deferred tax on the adjustments follows Ind AS 12, and your question may ask for it.

Key rules to remember

Net identifiable assets at acquisition
Share capital + Pre-acquisition reserves ± Fair value adjustments (net of deferred tax, if asked)
This is the base for goodwill and for NCI where NCI is measured at proportionate share of net assets.
Goodwill (capital reserve if negative)
Consideration transferred + NCI at acquisition-date measure − Net identifiable assets at fair value
Contingent consideration is included in the consideration at acquisition-date fair value. A negative result is a bargain purchase, dealt with under Ind AS 103.
Extra depreciation on uplift
(Fair value − Book value) ÷ Remaining useful life
Use the remaining life from the acquisition date. Charge it in the consolidated profit and loss from the acquisition date.
Elimination of investment (Ind AS 110, B86(b))
Parent's investment is offset against parent's portion of the subsidiary's equity
Any difference goes to goodwill under Ind AS 103.
Income and expenses from acquisition date (B88)
Subsidiary's income and expenses are based on acquisition-date fair values of assets and liabilities
This is the rule behind depreciation on fair value uplift.

How to solve Fair Value Adjustments and Acquisition Accounting questions

Use this order for any question on fair value adjustment in consolidation.

  1. 1List the acquisition date, the stake acquired, the consideration and how NCI is to be measured.
  2. 2Prepare an FVA table: each asset or liability, book value, fair value, and the difference.
  3. 3Add contingent consideration at its acquisition-date fair value to the consideration. Take deferred tax on FVAs only if the question asks.
  4. 4Compute net identifiable assets: share capital + pre-acquisition reserves + net FVA.
  5. 5Compute goodwill (or capital reserve) and NCI at acquisition.
  6. 6Compute the extra depreciation or the stock charge for each year since acquisition. Split it between pre- and post-acquisition periods if needed.
  7. 7Reduce the subsidiary's post-acquisition profit by the extra charge. Then allocate the adjusted profit to the parent and NCI.
  8. 8Build the consolidated balance sheet. Show assets at fair value less the extra depreciation charged so far.

Quickest way: Net-asset shortcut with FVA column

When to use it: When the question gives a balance sheet at acquisition and asks only for goodwill, NCI and consolidated reserves.

  1. Write net FVA as one number: uplift less any downward adjustments.
  2. Write the extra annual charge as one number and multiply by the years elapsed.
  3. Goodwill = consideration + NCI − (capital + pre-acquisition reserves + net FVA).
  4. Adjusted post-acquisition profit = reported post-acquisition profit − cumulative extra charge.
  5. Parent share goes to consolidated reserves. NCI share goes to NCI. Tick off that total equals the net assets.

Common mistakes in Fair Value Adjustments and Acquisition Accounting

  • Ignoring the FVA when computing goodwill

    Students use book net assets because the balance sheet is given in front of them.

    Fix: Always check for a fair value note first. Adjust net assets before computing goodwill.

  • Not charging extra depreciation after acquisition

    The uplift is treated as a one-time entry at acquisition.

    Fix: Divide the uplift by the remaining useful life and charge it every year, as Ind AS 110 para B88 requires.

  • Charging the whole uplift of a depreciable asset to pre-acquisition reserves

    Confusion between the acquisition-date adjustment and the later depreciation.

    Fix: The uplift raises net assets at acquisition. Later depreciation on it reduces post-acquisition profit only.

  • Leaving NCI out of the extra depreciation

    Students charge it fully to the parent.

    Fix: The extra depreciation reduces the subsidiary's adjusted profit, so NCI bears its share.

  • Excluding contingent consideration from the cost of acquisition

    It is not yet paid, so it feels like a future event.

    Fix: Include it at acquisition-date fair value. It is part of consideration transferred.

  • Recording the uplift in the subsidiary's own books

    Mixing up revaluation in separate books with consolidation adjustments.

    Fix: Make FVAs in the consolidation worksheet only.

Worked examples

Example 1

H Ltd acquired 80% of S Ltd on 1 April 2025 for ₹9,00,000. On that date S Ltd had share capital ₹5,00,000 and reserves ₹2,00,000. Land with book value ₹3,00,000 had a fair value of ₹4,00,000. Plant with book value ₹2,00,000 had a fair value of ₹3,00,000, with 5 years remaining life. NCI is measured at its proportionate share of net identifiable assets. Compute goodwill and NCI at acquisition.

Show the solution
  1. Net FVA = (4,00,000 − 3,00,000) + (3,00,000 − 2,00,000) = ₹2,00,000.
  2. Net identifiable assets = 5,00,000 + 2,00,000 + 2,00,000 = ₹9,00,000.
  3. NCI = 20% × 9,00,000 = ₹1,80,000.
  4. Goodwill = 9,00,000 + 1,80,000 − 9,00,000 = ₹1,80,000.

Answer: Goodwill is ₹1,80,000 and NCI at acquisition is ₹1,80,000.

Example 2

Continuing the facts above, on 31 March 2027 S Ltd reports reserves of ₹6,00,000. Calculate the extra depreciation, the adjusted post-acquisition profit, and the shares of H Ltd and NCI in it.

Show the solution
  1. Extra depreciation per year on plant = 1,00,000 ÷ 5 = ₹20,000. Land is not depreciated.
  2. Two years have passed (1 April 2025 to 31 March 2027), so cumulative extra depreciation = ₹40,000.
  3. Post-acquisition reserves of S Ltd = 6,00,000 − 2,00,000 = ₹4,00,000.
  4. Adjusted post-acquisition profit = 4,00,000 − 40,000 = ₹3,60,000.
  5. H Ltd's share (80%) = ₹2,88,000. NCI's share (20%) = ₹72,000.
  6. NCI at 31 March 2027 = 1,80,000 + 72,000 = ₹2,52,000, being 20% of the adjusted net assets 12,60,000.

Answer: Cumulative extra depreciation is ₹40,000. Adjusted post-acquisition profit is ₹3,60,000, of which ₹2,88,000 goes to H Ltd's consolidated reserves and ₹72,000 to NCI.

Exam tips

  • Look for words like 'fair value', 'revalued' or 'remaining life' in the question. They signal an FVA table is needed.
  • Always show the FVA table and the working for extra depreciation. Marks go to the method even if arithmetic slips.
  • In MCQs, check whether NCI is at fair value or proportionate net assets before computing goodwill.
  • State the paragraph logic in a line, for example Ind AS 110 B88 for depreciation on fair values. It supports your answer.
  • Check your final answer by proving that consolidated net assets agree to parent equity plus NCI.

Practice questions from Consolidated Financial Statements and Separate Financial Statements

Fair Value Adjustments and Acquisition Accounting in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fair Value Adjustments and Acquisition Accounting: frequently asked questions

Is the fair value uplift recorded in the subsidiary's books?

No. The adjustment is made only in the consolidation worksheet. The subsidiary keeps its own book values, and you re-apply the adjustment each year when you consolidate.

How is depreciation on the fair value uplift treated?

Ind AS 110 para B88 says depreciation after acquisition is based on the acquisition-date fair values. So you charge the uplift over the remaining useful life. It reduces the subsidiary's post-acquisition profit, shared with NCI.

Does contingent consideration affect goodwill?

Yes. It is included in consideration transferred at its acquisition-date fair value. A higher consideration increases goodwill, all else equal.

What happens if fair value net assets exceed the consideration plus NCI?

It is a bargain purchase under Ind AS 103. Review the measurements first. Under Ind AS 103 the gain is generally recognised in capital reserve. In Ind AS 28 for associates, the excess goes directly to capital reserve.