Net Identifiable Assets

In a business combination, net identifiable assets represent the subsidiary’s total assets minus its total liabilities. The fair value of net identifiable assets is compared with the fair value of purchase consideration and non-controlling interest, if any, to find out if any goodwill arises on acquisition.

When a company acquires another company or its total assets, the acquirer is called the parent and the acquiree is called subsidiary. The amount the parent pays to its subsidiary or its (previous) shareholders in the form of cash or stock is called purchase consideration. Where the parent doesn’t purchase 100% of the outstanding stock of the subsidiary, some portion of the subsidiary’s equity is held by outside investors, which is called non-controlling interest. The fair value of purchase consideration plus the fair value of the non-controlling interest represent the subsidiary’s total value.

In preparation of the consolidated financial statements, the parent must tabulate the assets and liabilities of the subsidiary recognized in the subsidiary’s books, identify assets which are not recognized in the subsidiary’s books such as intangible assets (brands, copyrights, etc.) and assign appropriate fair values to all assets and liabilities. Any excess of the sum of purchase consideration (including any contingent consideration) plus the fair value of non-controlling interest over the fair value of net identifiable assets is called goodwill.

At the time of acquisition, the parent must record the subsidiary’s assets and liabilities at their corresponding fair values and recognize any associated goodwill.


Arthur Ltd. purchase John Ltd. by paying $140 million in cash. The following is an extract from John’s balance sheet just before acquisition date:

Subsidiary's assets and liabilities USD in million
Intangible assets 20
Fixed assets 80
Accumulated depreciation (25)
Net fixed assets 55
Long-term investments 25
Inventories 35
Accounts receivable 55
Total assets 190
Long-term debt 40
Short-term debt 15
Accounts payable 25
Accrued expenses 10

Given the information above, the assets and liabilities must be adjusted for the fair value changes as shown below:

Subsidiary's assets and liabilities (USD in million) Carrying Value Adjustment Fair Value
Intangible assets 20 + 10 30
Fixed assets 80
Accumulated depreciation (25)
Net fixed assets 55 + 15 70
Long-term investments 25 + 5 30
Inventories 35 -3 32
Accounts receivable 55 -5 50
Total assets 190 212
Long-term debt 40 40
Short-term debt 15 15
Accounts payable 25 25
Accrued expenses 10 10
Net identifiable assets 100 122

Goodwill in this acquisition amounts to $18 million (purchase consideration of $140 million minus fair value of net identifiable assets of $122 million).

Written by Obaidullah Jan, ACA, CFA and last modified on