Exercises Flashcards
Acquisition accounting requires an acquirer and an acquiree to be identified for every business combination. Where a new entity (H) is created to acquire two preexisting entities, S and A, which of these entities will be designated as the acquirer?
a. H.
b. S.
c. A.
d. A or S
d. A or S
IFRS 3 (R) requires all identifiable intangible assets of the acquired business to be recorded at their fair values. Many intangible assets that may have been subsumed within goodwill must be now separately valued and identified. Under IFRS 3, when would an intangible asset be “identifiable”?
a. When it meets the definition of an asset in the Framework document only.
b. When it meets the definition of an intangible asset in IAS 38, Intangible Assets, and its fair value can be measured reliably.
c. If it has been recognized under local generally accepted accounting principles even though it does not meet the definition in IAS 38.
d. Where it has been acquired in a business combination
a. When it meets the definition of an asset in the Framework document only.
Which of the following examples is unlikely to meet the definition of an intangible asset for the purpose of IFRS 3?
a. Marketing related, such as trademarks and Internet domain names.
b. Customer related, such as customer lists and contracts.
c. Technology based, such as computer software and databases.
d. Pure research based, such as general expenditure on research
d. Pure research based, such as general expenditure on research
An intangible asset with an indefinite life is one where
a. There is no foreseeable limit on the period over which the asset will generate cash flows.
b. The length of life is over 20 years.
c. The directors feel that the intangible asset will not lose value in the foreseeable future.
d. There is a contractual or legal arrangement that lasts for a period in excess of five years.
a. There is no foreseeable limit on the period over which the asset will generate cash flows.
An intangible asset with an indefinite life is accounted for as follows
a. No amortization but annual impairment test.
b. Amortized and impairment tests annually.
c. Amortized and impairment tested if there is a “trigger event.”
d. Amortized and no impairment test
a. No amortization but annual impairment test.
If the impairment of the value of goodwill is seen to have reversed, then the company may
a. Reverse the impairment charge and credit income for the period.
b. Reverse the impairment charge and credit retained earnings.
c. Not reverse the impairment charge.
d. Reverse the impairment charge only if the original circumstances that led to the impairment no longer exist and credit retained earnings.
c. Not reverse the impairment charge.
The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities, and contingent liabilities over cost” (formerly known as negative goodwill) should be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized immediately in profit or loss.
c. Reassessed as to the accuracy of its measurement and then recognized in retained earnings.
d. Carried as a capital reserve indefinitely
b. Reassessed as to the accuracy of its measurement and then recognized immediately in profit or loss.
IFRS 3 requires that the contingent liabilities of the acquired entity should be recognized in the statement of financial position at fair value. The existence of contingent liabilities is often reflected in a lower purchase price. Recognition of such contingent liabilities will
a. Decrease the value attributed to goodwill, thus decreasing the risk of impairment of goodwill.
b. Decrease the value attributed to goodwill, thus increasing the risk of impairment of goodwill.
c. Increase the value attributed to goodwill, thus decreasing the risk of impairment of goodwill.
d. Increase the value attributed to goodwill, thus increasing the risk of impairment of goodwill
d. Increase the value attributed to goodwill, thus increasing the risk of impairment of goodwill
On January 1, 2008, A acquired a 60% interest in B for $80 million. A already held a 10% interest which had been acquired for $12 million but which was fair valued at $15 million at January 1, 2008. The fair value of the noncontrollinginterest at January 1, 2008, was $47 million and the fair value of the identifiable net assets of B was $130 million. A gain relating to the revaluation of the original equity interest would be recorded as follows
a. $3 million.
b. $12 million.
c. $35 million.
d. $38 million
a. $3 million.
Explain in no more than 100 words what is meant by the “acquisition method” of accounting
for business combinations.
The acquisition method (called the ‘purchase method’ in the 2004 version of IFRS 3) is used for all business combinations. [IFRS 3.4]
Steps in applying the acquisition method are: [IFRS 3.5]
- Identification of the ‘acquirer’ (i.e. the entity that obtains control)
- The one who transfer cash or other assets
- The acquirer is usually, but not always, the entity issuing equity interests (But also other factors, e.g. voting rights etc that might affect control)
- The acquirer is usually the entity with the largest relative size
- For business combinations involving multiple entities, consideration is given to the entity initiating the combination - Determination of the ‘acquisition date’
- An acquirer considers all pertinent facts and circumstances when determining the acquisition date, i.e. the date on which it obtains control of the acquiree. The acquisition date may be a date that is earlier or later than the closing date - Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest (NCI, formerly called minority interest) in the acquiree
- IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a business combination:
- > Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree, are recognised separately from goodwill [IFRS 3.10]
- > Measurement principle. All assets acquired and liabilities assumed in a business combination are measured at acquisition-date fair value. [IFRS 3.18]
- > Several exceptions e.g. contingent liabilities - Recognition and measurement of goodwill or a gain from a bargain purchase
Goodwill is measured as the difference between:
the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the amount of any non-controlling interest (NCI, see below), and (iii) in a business combination achieved in stages (see below), the acquisition-date fair value of the acquirer’s previously-held equity interest in the acquiree, and the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed (measured in accordance with IFRS 3). [IFRS 3.32
what is meant by contributory asset charges (CAC’s) when applying the excess earnings method.
When applying the multi-period excess earnings
approach, the contributions of assets other than the
subject asset to cash flows must be removed from
the cash flows. The process of doing this is to make
a contributory asset charge in respect of such other
assets
The determination of CACs comprises three steps:
6.55.1 identification of the assets contributing to
the cash flows;
6.55.2 measurement of the fair values of such
assets; and
6.55.3 determination of an appropriate fair return
on the capital value of such assets.
what is meant by the “return on” and the” return of” assets when applying the excess earnings method.
- PV of the earnings attributable to the subject intangible asset after providing for the proportion of the earnings that attribute to returns for contributory assets. - In order to determine a fair return „on‟ and/or „of‟ these contributory assets, their value must be capable of being determined in priority.
