ACA ICAEW Financial Accounting and Reporting Practice Exam

Cash consideration is valued at its fair value at the date of acquisition. Fair value is generally understood to reflect the amount of cash that would be transferred between knowledgeable, willing parties in an arm's length transaction. In the context of an acquisition, this typically means the exact amount of cash that is paid by the acquirer as part of the transaction.

Therefore, when considering cash consideration, it is reflected at the cash amount actually paid, as it represents the real economic resource exchange occurring at the time of the acquisition. This ensures that the financial statements accurately represent the resources and obligations that are transferred in the business combination.

Other methods of valuation, such as historical cost, present value of future payments, or market prices of cash equivalents, do not apply because they do not represent the immediate economic reality of the cash transaction occurring at the date of acquisition. Historical cost would look at the price paid in the past, potentially leading to irrelevant figures, while present value calculations and market prices pertain to different contexts not directly applicable to the cash consideration transferred in a business acquisition.