IFRS 3 Business Combinations & IFRS 10 Consolidated Financial Statements

Question 1

What is the method of accounting to be used in acquisitions

Answer 1

The acquisition method.

This
Measures the cost of the identifiable assets and liabilities being acquired.
and usually results in the recognition of Goodwill

Question 2

Assets and Liabilities acquired

Answer 2

The IDENTIFIABLE assets and liabilities being acquired are Identified and Valued at their FAIR VALUE on the date of acquisition

Question 3

Goodwill

Answer 3

Goodwill is an asset representing Future Economic Benefits ARISING FROM OTHER ASSETS acquired in a business combination that are not individually identified and separately recognised.

Goodwill is tested annually for Impairment under IAS 36

Question 4

Negative goodwill

Answer 4

Negative goodwill is where the cost of acquisition is less than the FAIR VALUE of assets and liabilities acquired.

IFRS 3 says that, where negative goodwill is indicated the first step should be to check the values used to ensure they are correct

Negative goodwill is is recognised IMMEDIATELY in the SPLOCI

Question 5

In Business Combinations how are fair values to be treated on acquisition - 2 points

Answer 5

1. IFRS 3 Biz Combos requires the COST of the business acquired is to be measured at the FAIR VALUES of all the IDENTIFIABLE assets and Liabilities that existed at the date of acquisition

FV … blah blah

Land & Buildings - market value
Plant and Equipment - market value
Raw materials - current replacement cost

2.
The procedure is then to RESTATE the SUB’S SFP using FAIR VALUES
Increases/Decreases to valuations of assets Credited/Debited to Revaluation Reserve (in Equity?)

Changes to the value of Liabilities are also passed through revaluation reserve.

NB to be dealt with in this way the value of Assets & Liabilities must be capable of being reliably measured

Question 6

What effect do fair values have on the calculations for

Goodwill

NCI

Post Acquisition Profits

Answer 6

Goodwill is the COST (ie the consideration paid) LESS the FAIR VALUE of the Subs IDENTIFIABLE assets & Liabilities

NCI is the PROPORTION of the Sub Owned by Others but controlled by the parent … is based on the FAIR VALUE of the Subs IDENTIFIABLE assets & Liabilities

Post acquisition profits will be affected where the use of FV leads to a different Depreciation charge (expense) from that based on HISTORIC Costs

Question 7

How does IFRS 10 define power over an investee?

Answer 7

Existing rights
that give the Current Ability to
Direct the relevant activities

Question 8

IFRS 10 criteria that give power over an investee

Answer 8

Rights in the form of voting rights (>50% voting rights)

Rights to appoint, reassign or remove key management ppl

Rights to appoint or remove another Entity that directs the relevant activities

Rights to direct the Investee to enter into, or veto any changes to, transactions for the benefit of the Investor

Other rights (eg in a management contract) that give the ability to direct the relevant activities

Question 9

Goodwill
Recognition
Subsequent

Answer 9

INITIAL RECOGNITION:

1. Recognise goodwill acquired in a business combination as an asset.
2. Initially measure goodwill at cost:
   This is the excess of the cost of the business combination, over the acquirer’s interest in the Net Assets
   (ie net amount of the Identifiable Asset, Liabilities & Cont’t liabilities)

SUBSEQUENT ACCOUNTING:

1. Amortise the goodwill asset
   GW shall be considered to have a finite useful life and shall be amortised on a systematic basis over its useful life. (If unable to make reliable estimate must not exceed 10 yrs)
2. Follow Impairment of Assets … test annually for impairment (I think)

Question 10

IMPORTANT

What are the Criteria for the Entity being a Parent

Answer 10

1. POWER over the investee

(Has power when it has rights to direct activities)
(Most common are voting but could be legal or contractual)

2. EXPOSURE, or RIGHTS to VARIABLE RETURNS from its involvement
3. The Ability to use its Power over the investee to AFFECT the amount of the investors returns