6.4 Business combinations, fair value measurement and goodwill Flashcards
When an acquirer gains control of a business, what method of accounting of business combinations does IFRS 3 require?
The “acquisition method”.
What does the acquisition method for combining business accounts require the reporting entity to do? (4 items)
1 Identify the acquirer
2 Determine the acquisition date
3 Recognize and measure the identifiable assets, liabilities and non-controlling interests acquired
4 Recognise and measure goodwill and gain
What is goodwill?
The amount by which the price paid for a company at acquisition exceeds the fair market value of the company’s net assets. i.e. amount paid for factors such as reputation, employee experience, customer base etc.
What is the calculation for goodwill at acquisition?
(Fair value of consideration paid) + (Fair value of NCI) - (FV of 100% separable net assets) - (Goodwill on acquisition)
According to which standard must goodwill be capitalized in the consolidated statement of financial position, and reviewed annually?
IAS36
To test impairment, IAS36 requires goodwill to be allocated a CGU or group of CGUs. What is a CGU?
Cash-generating unit. - entity generating cash independently of other assets.
When is an asset considered to be impaired?
When its carrying value exceeds its recoverable amount.
What factors might cause the fair market value of a goodwill asset to drop below its carrying value impairment?
- adverse economic conditions
- increased competition
- legal implications
- loss of key personnel
- declining revenue
- market value
When purchasing an entity, the purchaser may use non-cash elements for the purchase. Consideration may be split into four categories. What are these?
Cash
Shares in the parent company
Deferred consideration
Contingent consideration
What is deferred consideration?
The amount payable at a future date by an acquirer in a business combination after a predetermined time.
What is contingent consideration?
An uncertain amount that is payable at a future date by an acquirer to the acquiree, linked to a specified future event or condition (e.g. the performance of the acquiree).
What is the usual calculation for net assets?
Assets reported - liabilities
Why is it important to use the fair value measurement when preparing consolidated financial statements?
Because accounts are for the GROUP (not just the parents) and must be representative of actual value, note just the cost to the parent.
