IAS 3 Business Combinations

Question 1

What is the objective of IFRS 3?

Answer 1

IFRS 3 establishes principles and requirements for how an acquirer in a business combination:

• recognises and measures in its financial statements the assets and liabilities acquired, and any interest in the acquiree held by other parties;
• recognises and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and
• determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.

The core principles in IFRS 3 are that an

• > acquirer measures the cost of the acquisition at the fair value of the consideration paid;
• > allocates that cost to the acquired identifiable assets and liabilities on the basis of their fair values;
• > allocates the rest of the cost to goodwill; and
• > recognises any excess of acquired assets and liabilities over the consideration paid (a ‘bargain purchase’) in profit or loss immediately.

->The acquirer discloses information that enables users to evaluate the nature and financial effects of the acquisition.

Question 2

Key things that are changed in the group accounts?

Answer 2

• Cancellation of ‘Investment in Company x’ and replacing with Goodwill and NCI
• Cancellation of amounts to prevent overstatement
• Adding Line by Line of certain accounts to show the CONTROL the investor has

Question 3

What is ‘Purchased good will’?

Answer 3

The figure on the CSOFP is known as ‘purchased goodwill’ and is the difference between;

the cost of the parent Co investment at fair value

and

the fair value of the identifiable assets,liabilities,contingent liabilities

Question 4

how often is good will reviewed for impairment?

Answer 4

It is reviewed annually for impairment

Question 5

What is negative good will

Answer 5

Negative goodwill arises when the purchase consideration is less than the fair value of the net assets acquired.

Question 6

how do you deal with negative good will?

Answer 6

When goodwill calculates as negative, an investor/ parent company must check the accuracy of the calculation. If it proved accurate it should be credited directly to the statement of profit or loss.

Question 7

whats another word for negative good will

Answer 7

Bargain purchase

Question 8

What are the methods used to measure GW and NIC

Answer 8

Fair value method

Proportion of Net Assets method

Question 9

IAS 3 requires that at the date of acquisition, the acquired net assets are measured at fair value.

What is the guidance provided for intangible assets ?

Answer 9

Fair value = IAS 38 carrying value

Question 10

IAS 3 requires that at the date of acquisition, the acquired net assets are measured at fair value.

What is the guidance provided for PPE ?

Answer 10

Fair value = Market value but if there is no evidence of
market value depreciated replacement cost should be
used

The difference and new depreciation calculation is taken to w2- Net assets

Question 11

IAS 3 requires that at the date of acquisition, the acquired net assets are measured at fair value.

What is the guidance provided for Marketable securities i.e. those traded on an active market?

Answer 11

Fair value=Current market value (quoted price)

Question 12

IAS 3 requires that at the date of acquisition, the acquired net assets are measured at fair value.

What is the guidance provided for Non-marketable securities ?

Answer 12

Fair value=Estimated value. (Looking at comparable
securities of similar quoted enterprises may be
helpful)

Question 13

IAS 3 requires that at the date of acquisition, the acquired net assets are measured at fair value.

What is the guidance provided for Inventories (finished goods)?

Answer 13

Fair value=Selling prices less the sum of disposal costs

and a reasonable profit allowance

Question 14

IAS 3 requires that at the date of acquisition, the acquired net assets are measured at fair value.

What is the guidance provided for inventories (work in progress)?

Answer 14

Fair value=Ultimate selling prices less the sum of
completion costs, disposal costs and a reasonable
profit allowance

Question 15

IAS 3 requires that at the date of acquisition, the acquired net assets are measured at fair value.

What is the guidance provided for inventories raw materials ?

Answer 15

Fair value=current replacement costs

Question 16

IAS 3 requires that at the date of acquisition, the acquired net assets are measured at fair value.

What is the guidance provided for receivables ?

Answer 16

Fair value=Present value of the amounts expected to
be received, determined at appropriate current
interest rates less allowance for un-collectability and
collection costs if necessary. Discounting is unlikely to
be necessary for short term receivables.

Question 17

IAS 3 requires that at the date of acquisition, the acquired net assets are measured at fair value.

What is the guidance provided for payables?

Answer 17

Fair value=Present value of amounts expected to be

paid.

Question 18

IFRS3 requires that at the date of acquisition both the purchase consideration and the acquired net assets are measured at _____?.

Answer 18

Fair value

Question 19

list the 5 methods used for consideration

Answer 19

▪ Immediate transfer of cash
▪ Immediate transfer of shares
▪ Deferred cash
▪ Deferred shares
▪ Contingent deferred cash
▪ Contingent deferred shares

Question 20

which costs cannot be included?

Answer 20

issue cost of shares/securities

Other professional costs

Question 21

How are deferred considerations dealt with?

Answer 21

Deferred consideration should be discounted, using a rate at which the acquirer could obtain similar borrowing.

cash- discounted to PV
Shares- current market value

Question 22

How are deferred contingent considerations dealt with?

Answer 22

Regardless of the likelihood of the contingent event to occur, consideration is to be measured at it’s FV at the acquisition date.

Any contingent consideration should always be included at fair value.

Where contingent consideration involves the issue of shares there is no liability. Recognise this as part of equity (Other Components of Equity), representing shares to be issued

Question 23

what is DR and CR for deferred contingent & deferred cash as consideration?

Answer 23

DR Investment in x/GW

CR Liability

Question 24

what is DR and CR for deferred contingent & deferred shares as consideration?

Answer 24

DR Goodwill

CR Other components of Equity (shares to be issued in the future reserve)

Question 25

what is DR and CR for immediate transfer of shares as Considerations ?

Answer 25

DR Investment in x/GW
CR Equity share capital
CR Share premium

Question 26

explain why the net assets of acquired subsidiaries are consolidated at acq at their fair value

Answer 26

( b ) IFRS 3 Business Combinations requires the purchase consideration for an acquired entity to be allocated to the fair value of the assets , liabilities and contingent liabilities acquired ( henceforth referred to as net assets ) with any residue being allocated to goodwill . This also means that those net assets will be recorded at fair value in the consolidated statement of financial position . This is entirely consistent with the way other net assets are recorded when first transacted ( i.e. the initial cost of an asset is normally its fair value ) .

This ensures that individual assets and liabilities are correctly valued in the consolidated statement of financial this may sound obvious , consider what would happen if say a property had a carrying amount of $ 5 million , but a fair value of $ 7 million at the date it was acquired . If the carrying amount rather than the fair value was used in the consolidation it would mean that tangible assets ( property , plant and equipment ) would be understated by $ 2 million and intangible assets ( goodwill ) would be overstated by the same amount . There could also be a ‘ knock - on ‘ effect with incorrect depreciation charges in the years following an acquisition and incorrect calculation of any goodwill impairment . Thus the use of carrying amounts rather than fair values would not give a ‘ faithful representation as required by the Framework .

The assistant’s comment regarding the inconsistency of value models in the consolidated statement of financial position is a fair point , but it is really a deficiency of the historical cost concept rather than a flawed consolidation technique . Indeed the fair value of the subsidiary’s net assets represent the historical cost to the parent . To overcome much of the inconsistency , there would be nothing to prevent the parent from applying the revaluation model to its property , plant and equipment .

The directors will assess whether the company can continue to trade for the foreseeable future . They will prepare forecasts to help with this assessment . The auditor will evaluate the directors ‘ assessment to ensure that it is reasonable . The directors must make disclosure of going concern uncertainties in the financial statements . The auditor will highlight that disclosure in their auditor’s report . The auditor does not make disclosure in the financial statements . The directors must consider a period of twelve months from the reporting date .