Diamond ltd is in the process of recording the acquisition of another subsidiary, Dilemma, and has identified two items when reviewing the fair values of Dilemma’s assets. The first item relates to R1 million spent on a new research project. This amount has been correctly charged to profit or loss by Dilemma, but the directors of Diamond ltd have reliably assessed the fair value of this research to be R1.2 million. The second item relates to the customers of Dilemma. The directors of Diamond ltd believe Dilemma has a particularly strong list of reputable customers which could be ‘sold’ to other companies and have assessed the fair value of the customer list at R3 million.
REQUIRED:
State whether (and if so, at what value) the two items should be recognised in the consolidated Statement of financial position of Diamond ltd on the acquisition of Dilemma.
The first item, the R1 million spent on a new research project, should be recognized in the consolidated Statement of financial position of Diamond ltd at its fair value of R1.2 million. This is because the directors of Diamond ltd have reliably assessed the fair value of this research to be higher than its cost.
The second item, the customers of Dilemma, should not be recognized in the consolidated Statement of financial position of Diamond ltd. While the directors of Diamond ltd believe that the customer list has value, it cannot be recognized as an asset unless it meets the criteria for recognition under the applicable accounting standards. As it is described as being 'sold' to other companies, it suggests that the customer list is not capable of being separated from the acquiring entity and generating future economic benefits independently. Therefore, it cannot be recognized as an asset in the consolidated Statement of financial position.
The first item, the R1 million spent on a new research project, should be recognized in the consolidated Statement of financial position of Diamond ltd at its fair value of R1.2 million. This is because the directors of Diamond ltd have reliably assessed the fair value to be R1.2 million, indicating that the research project has an increased value from its original cost.
The second item, the customer list of Dilemma, should also be recognized in the consolidated Statement of financial position of Diamond ltd at its fair value of R3 million. The directors of Diamond ltd believe that the customer list has a significant value and could be sold to other companies. Therefore, the fair value of R3 million should be recognized to reflect the potential value of the customer list.