What must entities record when they purchase a subsidiary at fair value?

When an entity acquires a subsidiary, it is required to record the assets acquired and liabilities assumed at their fair values as of the acquisition date. This process is part of the business combination accounting under the acquisition method. As part of this accounting, any difference between the purchase price and the fair value of the identifiable net assets (assets less liabilities) acquired is referred to as a differential. This differential can create goodwill or a gain from a bargain purchase.

Recording this differential is essential because it reflects not only the recognition of the fair values but also highlights how over or under the purchase price relates to the net assets acquired. Goodwill arises when the purchase price exceeds the fair value of net identifiable assets, indicating potential synergies, investor expectations, or other intangible benefits expected from the acquisition.

In contrast, settling outstanding debts, adjusting for market fluctuations, or standardizing accounting policies are not primary requirements when recording the acquisition of a subsidiary at fair value. While these may be considerations in the broader context of financial reporting or in the management of an entity’s operations, the direct recording requirement focuses specifically on the fair values and differentials resulting from the acquisition.