Question 1

SECTION B

CASE SCENARIO: Quantum Logistics Group acquired 100% of the equity of a foreign subsidiary, Velocity Trans, on 1 January 20X9. Quantum paid $5,000,000 in cash and agreed to pay further contingent consideration in two years. The present value of this contingent consideration at acquisition was $1,000,000. At acquisition, Velocity Trans had an internally generated brand not recognized in its financial statements, with an estimated fair value of $2,000,000. The applicable tax rate is 20%. Velocity Trans is currently defending a legal claim from a customer. Quantum's legal team estimates a 60% probability of losing and paying $3,000,000, and a 40% probability of losing and paying $1,000,000. Velocity Trans's functional currency is the Dinar, while Quantum's is the Dollar.

QUESTION: What is the net increase to the fair value of Velocity Trans's identifiable net assets at acquisition due to the unrecorded brand?

Accepted Answer

Recognize the brand at fair value. Calculate the deferred tax liability on this fair value adjustment. The net increase is the fair value minus the deferred tax.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to account for deferred tax on fair value adjustments during consolidation.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 3

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