Week 2 - Statements of Financial Position Adjustments Flashcards
What does IFRS 3 Business Combinations state about fair value?
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition date at fair value.
What does IFRS13 define fair value as?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement day
What do you have to do to ensure that goodwill is accurate? (4)
The consideration paid must be accounted for at fair value
the subsidiary’s net assets and liabilities acquired must be accounted for at their fair value
Intangible assets can be recognised when they have a readily attainable market value
Contingent liabilities must be recognised
How to calculate cost of investment?
Cash paid
+ Fair value of deferred consideration
+ Fair value of contingent consideration
How is deferred consideration value calculated?
Use the NPV method
What happens when there is deferred consideration?
Interest on deferred consideration has to be calculated for each year that has passed and is put into the journal
Dr Finance costs
Cr Deferred consideration
This means that the interest would be deducted from retained earnings
How to include the fair values in consolidation workings
@ acq @reporting post acq
SC x x x
FV adj x x
FV dep’n adj (x) (x)
What to do with contingent liabilities?
Excluded from individual company financial statements
Included within consolidated financial statements at fair value at the date of acquisition
Required to calculate an accurate goodwill figure - you acknowledge the possible cost and therefore reduce the consideration to ensure that it reflects the actual cost
What are the 2 methods of calculating Non controlling interest
Proportion of net assets
Fair value at acquisition
Alternatives to calculating fair value? (3)
Estimating the control premium - (price per share paid by parent - control premium)
Active market price for non-controlling interest shares - Look at price at which shares trade post acquisition
Internal forecasted measures such as discounted cash flows
Issues with fair value and offering choice of valuing non-controlling interest? (5)
NCI has not been party to a transaction
Difficult to reliably measure it
Difficult to measure control premium + discounted future cash flows
Choice means inconsistency
What it means to whom? –> who is interested in the fair value of the NCI?
Arguments for and against including non-controlling interest goodwill? (2) (3)
Group concept –> producing statements for a group which NCI are part of that broader group
Measurement - should measure the value of NCI
Purchased v Non-purchased goodwill - only purchased goodwill should be recognised
Control element - If FV of NCI is higher than net assets method of NCI than there is an argument that there is a control premium
Faithful representation –> should show the transactions and FV of NCI is not a transaction
