(upbeat music)
Russell: HC Proprietary Limited,
has just calculated the allocable cost amount or ACA
of a joining member of its group.
SC Proprietary Limited.
It now needs to allocate the ACA
to the joining members assets.
SC's main assets with cash in the bank, trading stock,
a depreciating asset, goodwill and land.
There is a two-part process for allocating the ACA.
The first part of this process
is to allocate the ACA to retained cost cost based assets.
These are basically assets
that have a predictable stable value.
Note that work in progress is explicitly excluded
from being a retained cost based asset.
After the portion of the ACA attributable
to retained cost based assets has been carved out.
The rest of the ACA can be allocated
to reset cost based assets.
These are all of the assets of the joining entity
that are not retained cost based assets.
Work in progress, goodwill, CGT assets,
trading stock and depreciating assets
are examples of reset cost based assets.
It also includes revenue assets which are CGT assets
whose profit or loss on disposal
are not assessed under the CGT provisions
of the tax legislation.
There are two steps to allocating the remainder of the ACA
to the reset cost based assets.
The first step is allocating the ACA to each of the assets
in the proportion of each assets market value
as compared to the total market value
of the recent cost based assets.
The second step is capping the amount of ACA
that has been attributed to reset cost based assets,
that are held on revenue account.
Broadly, such assets will consist of trading stock,
depreciating assets and CGT assets
whose profit or loss on disposal
is assessed other than under the CGT provisions.
For such assets held on revenue account,
their tax value is capped to the greater
of their terminating value and market value.
There are different rules for calculating
the terminating value of trading stock,
depreciating assets and revenue assets.
Note that if the capping of tax value of these assets
leads to a reduction of their value,
this excess is apportioned
to the remaining reset cost base assets.
Let's revisit the data from the head company
of the consolidated group HC,
which calculated it's joining subsidiary SC ACA.
SC main assets were cash in the bank, trading stock,
a depreciating asset, goodwill and land.
The first part of the process is to allocate the costs
to the retained cost based assets.
Here, there is only one retained cost base asset
the cash at bank.
The balance is then allocated
to the reset cost based assets.
The next part involves allocating the remaining balance
to the reset cost base assets.
The first step of this process
is to allocate the balance of the ACA
in the proportion of the market value
of each of the reset cost based assets.
This initial allocation based on market value proportions
is done for the trading stock,
depreciating asset, goodwill and land.
The second step is to make adjustments
for the allocation to the assets held on revenue account.
Here the trading stock and the depreciating asset
are held on revenue account.
The maximum allocation to such assets
must not exceed the higher of their market value
and terminating value.
For the trading stock,
this means that its initial allocation
must be adjusted downwards to its market value.
And for the depreciating asset,
the adjustment is downwards to its terminating value.
The total amount of these downward adjustments
is then re allocated to the non-revenue
reset cost based assets being goodwill and land.
The amount is reallocated to them in the proportion
of their respective market values.
As a result, the value of the goodwill
is increased by its 20% proportion.
And the value of the land is
increased by its 80% proportion.
It needs to be kept in mind
that only certain assets can have a tax value
allocated to them under this process.
The effect of this is that certain assets
that may be recognised for accounting purposes,
but not tax purposes,
can not have a tax value allocation made to them.
To recap, there is a two-step process
for allocating the allocable cost amount
or ACA of the joining entity.
This is to firstly allocate
to the retained cost based assets,
and secondly allocate the balance
to the reset cost based assets.
The second part of this process
involves making sure that reset cost based assets
of a revenue nature have a value capped
at the greater of their market value
and terminating value.
Any downward adjustments are reallocated
among non-revenue reset cost base assets.