a Definition

Fair value is defined by FRS 7 as the amount at which an asset or liability could be exchanged in an arm's length transaction between informed and willing parties, other than in a forced or liquidation sale.

b Fair Values and Goodwill Measurement

FRS 7 refers to positive or negative goodwill as the difference between:

• the cost of acquisition, and

• the fair value of the identifiable assets and liabilities acquired.

c Cost of Acquisition

The cost of acquisition should consist of:

• amount of cash paid;

• the fair value of other purchase consideration;

• expenses of acquisition.

If the consideration includes an element which is contingent on one or more future events, such as profit performance, the cost of acquisition should include the fair value of amounts expected to be payable in the future. Cost of acquisition may therefore be subject to subsequent revision.

d Fair Values of Identifiable Assets and Liabilities Acquired

FRS 7 specifies two general principles:

1. the identifiable assets and liabilities should be those of the acquired entity that existed at the date of acquisition;

2. the recognized assets and liabilities should be measured at fair values that reflect the conditions at the date of acquisition. Fair value is defined as the amount at which an asset or liability could be exchanged in an arm's length transaction between informed and willing parties, other than in a forced or liquidation sale.

The effect of the following should be excluded from the fair value...