Business combinations: consolidation at acquisition

Question 1

IFRS vs ASPE

Answer 1

IFRS 3

• acquisition has to be accounted for using the acquisition method
• at the time that control is acquired, the parent is required to record the purchase of hte acquiree in its own internal f/s

ASPE 1591: subsidiaries. has a choice:

• acquisition method (consolidation)
• equity method
• cost method

Question 2

Purchase of net assets. what initial entry would you record?

Answer 2

DR Assets

CR Liabilities

CR Cash, shares, consideration given up.

*a one time entry

Question 3

Purchase of shares

Answer 3

Initial acquisition

DR Investment in sub

CR Consideration given up (cash)

The sub still remains its own separate legal status, it will continue to maintain its own f/s, independent of the parent

Parent required to report its investment on a consolidated basis

Question 4

Acquisition process (steps)

Answer 4

1. Identify the acquirer
2. Determine the date of acquisition
3. Determine the purchase price
4. Analyze the acquisition differential
   
   • recognize and measure identifiable assets acquired and liabilities assumed
   • recognize and measure goodwill at acquisition
5. Allocate NCI, if any

Question 5

Factors in determining the acquirer:

Answer 5

• which of the original companies’ have the largest portion of voting rights of the combined entity (including potential voting rights from convertible shares)
• what is the composition of the governing body of the combined entity
• what is the composition of senior mgmt that governs the combined entity after acquisition
• which entity initiated the business combination

Question 6

What is used as the purchase price?

Answer 6

Fair value of the compensation

parent may incur transaction costs (finders fees, legal fees, brokerage fees, etc). these are expensed and are not included!

Question 7

What is the acquisition differential?

Answer 7

the difference b/w the purchase price and the book value of the subs net assets