Advanced Financial Accounting: Chapter 3 Group Reporting II: Application of the Acquisition Method...

Advanced Financial Accounting: Chapter 3

Group Reporting II: Application of the Acquisition Method under

IFRS 3

Tan & Lee Chapter 3 1© 2009

Learning Objectives

1. Understand the difference between investor’s separate financial statements and the consolidated statements;

2. Understand the consolidation process;

3. Appreciate the acquisition method and its implications;

4. Know how to determine the cost of consideration transferred;

5. Understand the identification of the acquirer;

6. Know how to recognize and measure identifiable net assets under IFRS 3;

7. Understand the nature of goodwill;

8. Review the concept of non-controlling interests (NCI) with respect to parent and entity theories; and

9. Know how to prepare consolidation journal entries relating to fair value adjustment at acquisition date and subsequent years


Content

Tan & Lee Chapter 3 © 2009 3

1. Introduction

2. Overview of the consolidation process

3. The acquisition method

4. Determining the amount of consideration transferred

5. Recognition and measurement of identifiable assets, liabilities

and goodwill

6. Accounting for non-controlling interests under IFRS 3

7. Effects of amortization, depreciation and disposal of undervalued

or overvalued assets and liabilities subsequent to acquisition

8. Goodwill impairment tests

1. Introduction

Separate Vs Consolidated Financial Statements


Separate financial statements

(Legal entity)

Consolidated financial statements

(Economic entity)

Income recognition Dividends Share of profits

Asset recognition

Investment in a Subsidiary carried at:

• Cost (IAS 27) or

• As a financial instrument (IAS 39)

Investment in Subsidiary:

• Investment is eliminated and subsidiary’s net assets are added to the parent (IAS 27)

Investment in an associate carried at:

• Cost (IAS 28) or

• As a financial instrument (IAS 39)

Investment in an associate:

• Equity method (IAS 28)

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Consolidation Process

• Consolidation is the process of preparing and presenting the financial statements of a group as an economic entity

• No ledgers for group entity

• Consolidation worksheets are prepared to:– Combine parent and subsidiaries financial statements

– Adjust or eliminate intra-group transactions and balances

– Allocate profit to non-controlling interests


Parent’s Financial

Statements+

Subsidiaries' Financial

Statements+/- Consolidation adjustments

and eliminations =Consolidated

financial statements

Legal entities Economic entity

Intragroup Transactions

• Intragroup transactions are eliminated to:– Show the financial position, performance and cashflow of the economic (not

legal) entity– Avoid double counting of transactions

Example:

• Parent sold inventory to subsidiary for $2M• The original cost of inventory is $1M• Subsidiary eventually sold the inventory to external parties for $3M

Q: What is the journal entry to eliminate intragroup sales transaction?


Consolidation adjustment

Dr Sale 2,000,000 Cr Cost of sale 2,000,000

Intragroup Transactions


Extract of consolidation worksheet

Parent's Income

Statement

Subsidiary’s Income

Statement

Consolidation elimination entries and adjustments

Consol.Income

StatementWithout

elimination Dr Cr

Sales $2,000,000 $3,000,000 2,000,000 $3,000,000 $5,000,000

Cost of sales (1,000,000) (2,000,000) 2,000,000 (1,000,000) ($3,000,000)

Gross profit $1,000,000 $1,000,000 $2,000,000 $2,000,000Note: Without elimination the consolidated sales and cost of sales figures will be overstated by $2 M.

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Business Combinations 結合


Business combinations

Legal mergerof net assetsof acquired

businesses into acquirer’s books

Businessesbecome

subsidiaries ofacquirer

Net assetsof combining

entities transferredto a newly-formed

entity

Formerowners of a

combining entityobtains control

of combined entity

Where an acquirer obtains control of one or more businesses (IFRS 3 App A)

Examples: IFRS 3 App B:B6

The Acquisition Method

• IFRS 3 requires all business combinations to be accounted for using the acquisition method

• The procedures:


Identify the acquirer

Determine the acquisition date

Recognize and measure the identifiable assets acquiredthe liabilities assumed and any non-controlling

interest in the acquiree; and

Recognize and measure goodwill ora gain from a bargain purchase

Group financial

statements if acquire

subsidiaries

4-step approach: IFRS 3:5

Identify the Acquirer

• IFRS 3 requires the identification of the acquirer in all circumstances

– Acquirer is the entity that obtains control of another combining entities

– Control is the power to govern the financial and operating policies of an

entity so as to obtain benefits from its activities




Additional control criteria under IFRS 3 Appendix B

Acquirer is the entity that:

• Transfers cash or other assets or incurs liabilities to acquire another entity

Issues shares as purchase consideration

Pays a premium over the fair value of the equity interest

Acquirer is the entity that:

• Has the largest relative voting rights in a combined entity

• Holds the largest minority voting interest in the combined entity (if no other entity has significant voting interest)

• Is relatively larger in size

Acquirer is the entity:

• Whose owners have the ability to elect, appoint or remove a majority of directors

• Whose management is dominant in the combined entity

•Who initiates the business combination

Based on consideration transferred

Based on entity size Based on dominance


• Reverse acquisition – Legal parent is the acquiree and legal subsidiary is the acquirer

– Often initiated by the legal subsidiary

– Has other motive of entering into such an arrangement (eg. Backdoor listing)

• Exchange of shares in a reverse acquisition


Owners of Company B (Legal subsidiary)

Company A (Legal parent)

Company B (Legal subsidiary)

1. Company A (Legal parent) takes over shares of Company B from owners

2. Company A issues own shares to owners of Company B as purchase consideration

3. Company B has the power to govern the financial and operating policies of the legal parent

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Determine the Amount of Consideration Transferred

• Fair value of the consideration transferred:– Determined on the acquisition date

– Acquisition date is the date when the acquirer obtains control and not the date when consideration is transferred


Fair value of assets

transferred

+ Fair value of liabilities

incurred

+ Fair value of equity

interests issued by acquirer

Consideration transferred = + Fair value of

contingent consideration

Fair Value of Assets Transferred or Liabilities Assumed

• If assets transferred or liabilities assumed are not carried at fair value in the acquirer’s separate financial statements:– Remeasured gain or loss is recognized in the acquirer’s separate


– Remeasured gain or loss is not recognized if the assets or liabilities remain in the combined entity’s financial statements

• If transfer of monetary assets or liabilities are deferred: – The fair value will be the present value of the future cashflows

– Eg. Future cash settlement of $1,000,000 is due 3 years later and 3% interest is levied

Fair value = $1,000,000/ (1+0.03)^3

= $915,142


Fair value of Equity Interests Issuedby the Acquirer

• Fair value of equity interests issued is measured by:

– Market price

– If market price is not available or not reliable:

• A proportion of acquirer’s fair value or proxied by the fair value of

equity interest acquired, whichever is more reliably measurable


Illustration 1:Fair Value of Equity Issued

P Ltd acquires 100% of S Co through an issue of 5,000,000 shares

to the vendors of S Co.


P Ltd S Co

Number of existing shares 10,000,000 2,000,000

Number of new shares issued 5,000,000 -

Market price per share $2.00 -

Fair value of equity $24,000,000 $9,000,000

Illustration 1:Fair Value of Equity Issued


Q1: P Ltd’s market price is a reliable indicator

Consideration transferred = 5,000,000 shares x $ 2.00 = $10,000,000

Q2: P Ltd’s market price is not a reliable indicator; a proportional interest in the fair value of P Ltd is a better estimate

Consideration transferred = (5,000,000/15,000,000) x $24,000,000

= $8,000,000

Q3: Fair value of S Co is a better estimate

Consideration transferred = $9,000,000

Fair Value of Contingent Consideration

• Contingent consideration

– Obligation (right) of the acquirer to transfer (receive) additional assets or

equity interests to (from) acquiree’s former owner if specific event

occurs

• Eg. Acquirer gets a refund of a part of the consideration transferred if the

acquiree does not achieve the target profit

– Fair value of the contingent consideration (refund) is added to (deducted

from) consideration transferred


Acquisition-Related Costs

• All acquisition-related costs are expensed off• Costs of issuing debt are recognized in accordance with IAS 39

– As yield adjustment to the cost of borrowing and are amortized over the life of the loan

– Journal entry for the payment of debt issuance cost

• Costs of issuing equity are recognized in accordance with IAS 32– A reduction against equity– Journal entry to record the payment of cost of issuing equity


Dr Unamortized debt issuance costsCr Cash

Dr EquityCr Cash

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5. Recognition and measurement of identifiable assets, liabilities and

goodwill

Elimination of Investment Account

• Investment account is eliminated – Substituted with subsidiary’s 1. identifiable net assets and 2.goodwill (residual)– Avoid recognizing assets in two forms (investment in parent’s balance sheet and

individual assets and liabilities of the subsidiary)


Share of book value of

subsidiary’s net assets at acquisition

date

+

Share of excess of fair

value over book value of identifiable net

assets

+Goodwill

Consideration transferred

=

Eliminated against subsidiary’s share capital and pre-acquisition retained earnings

What the parent is paying for

Recognition Principle


Business Combination accounted under the acquisition method

At acquisition date, the acquirer will recognizesubsidiary’s net assets at fair value

Rationale:

There has been an exchange transaction at arm-length pricing

There is an effective ”purchase”* of the subsidiary’s identifiable assets and

liabilities at fair value

To qualify for recognition:

Identifiable net assets must meet the definition of an asset or a liability

Identifiable net assets must be priced into the “consideration transferred”

*Look at next slice



Effective purchases

Meaning:

Under acquisition method, an acquirer obtains control through purchases of equity interests in an acquiree, there is deemed to be an effective purchases of the assets and assumption of the liabilities of the acquireeby an acquirer.



Fair value differential(FV-BV) of

identifiable netassets

Book value of subsidiary’s

identifiable net assets

In separate financial

statements

Book value of subsidiary’s

identifiable net assets

recognized in consolidated


At acquisition date:• Fair value differential will be recognized in the consolidation worksheet

In subsequent years:• Depreciation/amortization/ cost of sale of asset will be based on the fair value recognized at the acquisition date

These entries have to be re-enacted every year until disposal of investment

Intangible Assets

• IFRS 3 requires the acquirer to recognize the fair value of an acquiree’s unrecognized identifiable asset (e.g. intangible asset) in the combined financial statements– Justified by the acquisition of the subsidiary by the parent

• To qualify for recognition, the intangible asset must be:

Or must arise from contractual or legal rights

Example:

• Assembled workforce with specialized knowledge

• Fails to meet the separability criterion

• Opportunity gains from an operating lease in favorable market conditions

• Meets the contractual-legal criterion


Contingent Liabilities & Provisions

• Contingent liabilities are recognized if they are:– Present obligations arising from past events and

– Reliably measurable in their fair value, even if outcome is not probable (IFRS 3:23)

• Provisions for restructuring & termination cost are recognized if they are:

Present constructive or

legal obligations arising from past

events

Reliably measurable


Probable outflow of economic resources

Indemnification Assets 賠償

• Contractual indemnity– Provided by the sellers of the acquiree to the acquirer to make good any

loss arising from contingency or an asset or a liability

• Treatment for indemnity – The acquirer has to recognize an “indemnification asset” at the same

time the indemnified asset or liability is recognized– The indemnification asset is measured on the same basis as the

indemnified asset or liability

• Eg. An acquiree is exposed to a contingent liability. Based on probabilistic estimation, the FV of the contingent liability is $100,000. The seller provides a contractual guarantee to indemnify the acquirer of the loss. – In the consolidated balance sheet, contingent liabilities and an

indemnification asset of $100,000 will be recognized at fair valueTan & Lee Chapter 3 © 2009 30

Deferred Tax Relating to FV Differentials of Identifiable Assets and Liabilities

• The recognition of fair value differential may give rise to future tax payable or future tax deduction– tax effects need to be accounted for if the basis of taxation does not

change in a business combination

– i.e. If original asset is deductible based on book value, the FV differential will give rise to a temporary taxable/deductible different

• No deferred tax liability is recognized on goodwill


FV > Book value of identifiable assets Deferred tax liabilities

FV < Book value of identifiable assets Deferred tax assets

FV < Book value of identifiable liabilities Deferred tax liabilities

FV > Book value of identifiable liabilities Deferred tax assets

Measurement Period

• IFRS 3 allows adjustments to be made retrospectively 回顧地 to goodwill, fair value of identifiable net assets and consideration transferred:

– If new information about facts and circumstances existing at acquisition date arises,

– Within 1 year of acquisition date

• After 1 year, any correction of errors will be deemed as a prior - period adjustment

• Any change in estimate arising from new information on facts and circumstances after the acquisition date will be recognized in the current period and not retrospectively


Goodwill

• A premium that a parent pays to acquire the subsidiary– Must be recognized separately as an asset – Determined as a residual

• IFRS 3 allows 2 ways of determining goodwill:


Fair value of consideration transferred+

Amount of non-controlling interests+

Fair value of the acquirer’s previously held interest (before control was

achieved) in the acquiree

- Acquiree’s recognized net

identifiable assets measured in

accordance with IFRS 3

Goodwill =

Amount of non-controlling interests

Measured at fair value at acquisition date (include goodwill)

Measured as a proportion of identifiable assets as at acquisition date

Goodwill


Goodwill

An expectation of future economic benefits

arising from acquisition

Integral to the entity as a whole, not individually identifiable or severable as a standalone asset

Goodwill

• The “top-down approach” (Johnson and Petrone, 1998) results in measurement errors in goodwill

Tan & Lee Chapter 3 35

Goodwillresidual

Consideration transferred + Amount of non-controlling interests

Identifiable net assets

Overpayment for an acquisition or overvaluation of consideration transferred

Measurement and recognition errors

Above errors impact goodwill

© 2009

Goodwill

• In a “bottom-up” approach (Johnson and Petrone, 1998), goodwill is substantiated as follows:


Goodwill

Internally-generated goodwill Fair value of synergies

“Going concern element” and represent the ability of an entity to generate higher rate of return over its individual assets or “core goodwill”

Generated from the unique combination of the acquirer and acquiree or “combination goodwill”

Gain From a Bargain Purchase

• A gain from bargain purchase arises when:

• The acquirer must re-assess the fair value of identifiable net assets, consideration transferred and non-controlling interests. If there is no measurement error:– The gain will be recognized immediately in the income statement


Fair value of consideration transferred+

Amount of non-controlling interests+

Fair value of the acquirer’s previously held interest in the acquiree

Acquiree’s net identifiable assets

measured in accordance with

IFRS 3<

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6. Accounting for non-controlling interest under IFRS 3

Non-Controlling Interests’ Share of Goodwill

• IFRS 3 Para 19 allows NCI to be measured in either of two ways


Non-controlling interests

Measured at Fair value at acquisition

date (include goodwill)

(Fair value option)

Measured as a proportion of identifiable assets as at acquisition

date


• Under the fair value option:– FV is determined by either the active market prices of subsidiary’s

equity share at acquisition date or other valuation techniques

– FV per share of NCI may differ from parent due to control premium paid by parent

– NCI comprises of 3 items:


Non – controlling interests

Share of book value of net assets

Share of unamortized

FV adjustment(FV - BV)

Share of unimpaired goodwill


• Under the fair value option:– Journal entry to record NCI at fair value (re-enacted each year):


Dr Share capital of subsidiary Dr Retained earnings at acquisition date

DrOther equity at acquisition date (eg. RS, SP, GR)

Dr/Cr FV differentials (FV- BV)/ (BV-FV)

Dr Goodwill (Parent & NCI)

Dr/CrDeferred tax asset/ (liability) (JUST)on fair value

adjustmentCr Investment in subsidiary

Cr Non-controlling interests (At fair value) -FP


• Under the 2nd option:– NCI is a proportion of the acquiree’s identifiable net assets

– NCI comprises of 2 items:





of FV adjustments (FV- BV)


• Under the 2nd option:– Journal entry to record NCI (re-enacted each year):


Dr Share capital of subsidiary

Dr Retained earnings at acquisition date

Dr Other equity at acquisition date

Dr FV differentials

Dr Goodwill (Parent only)

Dr/Cr Deferred tax asset/ (liability) on FV adjustment

Cr Investment in S subsidiary

Cr

Non-controlling interests (NCI % x FV of identifiable net assets of that

company)



NCI measured at FV

NCI measured as a proportion of the

acquiree’s identifiable net assets

Book value of net assets

Fair value – Book value of net assets

Goodwill

Accounting for Non-Controlling Interests under IFRS 3

• In consolidation, non-controlling interests have a share of: Profit after tax Dividends declared Share capital Retained earnings and other comprehensive income (eg. Revaluation

reserve) at acquisition date Change in retained earnings and other comprehensive income from the

date of acquisition to the current period Fair value differential of a subsidiary’s net assets at acquisition date Goodwill (if the fair value alternative is adopted)


Reconstructing NCI on Balance Sheet


Date of acquisition

Beginning of current year

End of current year

NCI have a share of

1. Share capital

2. Retained earnings

3. Other equity

4. Fair value differentials

5. Goodwill

NCI have a share of

1. Change in share capital*

2. Change in retained earnings

3. Change in other equity

4. Past amortization of fair value differential

5. Past impairment of goodwill

NCI have a share of

1. Profit after tax

2. Current amortization of fair value differential

3. Current impairment of goodwill

4. Dividends as a repayment of profits

5. Change in other equity

Allocation to Non-controlling Interests


1. Allocation of the change in equity from date of acquisition to the current year

• To transfer the NCI’s share of subsidiary’s retained earnings to NCI

2. Allocation of current profit after tax to NCI

Dr Retained earnings (NCI % x in RE from acquisition date to beginning of current period) Cr NCI

Dr Income to NCI Cr NCI

Allocation to Non-controlling Interests


3. Allocation of dividends to NCI• A realization of residual in a subsidiary

• Reduces the NCI’s stake in the net assets of the subsidiary

• Elimination of dividends as follows:

4. Can NCI be a debit balance?• If NCI’s share of losses in a subsidiary > NCI’s existing share of

subsidiary’s net assets:• NCI will have a debit balance under IAS 27

Dr Dividend income (Parent)

Dr NCI (BS)

Cr Dividends declared (Subsidiary)

Analytical check on Non-controlling Interests’ balance


NCI’s balance at year-end

NCI’s share of:

a) Book value of net assets of subsidiary at year-end -/+ unrealized profit/loss from upstream sale

b) Unamortized balance of FV adjustments at year-end

c) Unimpaired balance of goodwill at year-end

=

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In Subsequent PERIOD


• At acquisition date, we recognize:– Fair value of identifiable net assets,

– Intangibles, contingent liabilities, and

– Deferred tax assets or liabilities on the above

• In subsequent years:– Amortization, depreciation and cost of sales of the acquired assets must be

based on the fair value as at acquisition date

– Since net assets are carried at book value in the separate financial statements,

the subsequent amortization/depreciation/disposal are adjusted in the

consolidation worksheet

– Eg. When an identified asset is sold or depreciated:

(FV- BV) adjustment to expense =

FV of expense in consolidated


BV of expense in separate financial

statements

+Adjusted in consolidation worksheet

Illustration 2: Amortization of Fair Value Differentials


• P Co paid $6,200,000 and issued 1,000,000 of its own shares to acquire 80% of S Co on 1 Jan 20X5

• Fair value of P Co’s share is $3 per share• Fair value of net identifiable assets is as follows:

Book value Fair value Remaining useful life

Leased property 4,000,000 5,000,000 20 years

In-process R&D 2,000,000 10 years

Other assets 1,900,000 1,900,000

Liabilities (1,200,000) (1,200,000)

Contingent liability (100,000)

Net assets 4,700,000 7,600,000

Share capital 1,000,000

Retained earnings 3,700,000

Shareholders’ equity 4,700,000


Additional information:• Contingent liability of $100,000 was recognized as a provision by

the acquiree in Dec 20X5• FV of NCI at acquisition date was $2,300,000• Net profit after tax of S Co for 31 Dec 20X5 was $1,000,000• No dividends were declared during 20X5• Shareholders’ equity as at 31 Dec 20X5 was $5,700,000

Q1 : Prepare the consolidation adjustments for P Co for 20X5

Q2 : Perform analytical check on balance of NCI as at 31 Dec 20X5



• Consideration transferred = Cash consideration + Fair value of share issued

= $6,200,000 + (1,000,000 x $3) = $9,200,000

• Deferred tax liability = 20% x ($7,600,000 - $4,700,000) = $580,000

• Goodwill = Consideration transferred + NCI – Fair value of net identifiable assets, after-tax = $9,200,000 + $2,300,000 – ($7,600,000 - $580,000) = $4,480,000




• P’s share of goodwill = Consideration transferred – 80% x Fair value of net identifiable assets, after tax = $9,200,000 – 80% x $7,020,000 = $9,200,000 – $5,616,000 = $3,584,000

• NCI’s share of goodwill = Consideration transferred – 20% x Fair

value of net identifiable assets, after tax

= $2,300,000 – 20% x $7,020,000

= $2,300,000 – $1,404,000

= $896,000



Consolidation adjustments for 20X5

CJE 1: Elimination of investment in S

Dr Share capital 1,000,000

Dr Retained earnings 3,700,000

Dr Leased property 1,000,000

Dr In-process R&D 2,000,000

Dr Goodwill 4,480,000 Cr Contingent liability 100,000

Cr Deferred tax liability 580,000

Cr Investment in S 9,200,000Cr Non-controlling interests 2,300,000



$200,000

Dep exp: $50,000

Dep. of leased

property

Based on book value Based on FV

$200,000

Under dep. by $50k

$ 0

Amort exp: $200,000

Amort. of R&D

Based on book value Based on FV

Under amort. by $200k

CJE 2: Depreciation and amortization of excess of FV over book value

Dr Depreciation of leased property 50,000

Dr Amortization of in-process R&D 200,000Cr Accumulated depreciation 50,000 Cr Accumulated amortization 200,000



CJE 3: Reversal of entry relating to provision for lawsuit

DrProvision for lawsuit -FP

100,000 Cr Loss from lawsuit -I/S 100,000Note: Contingent liability was already recognized in CJE 1. The recognition by the acquiree results in double counting; hence this reversal entry is necessary

CJE 4: Tax effects on CJE 2 & CJE 3

Dr Deferred tax liability 30,000

Cr Tax expense 30,000

20% * (200k +50k -100k)



CJE 5: Allocation of current year profit to non-controlling interests (NCI)

Dr Income to NCI 176,000

Cr NCI 176,000

Net profit after tax 1,000,000

Excess depreciation (50,000)

Excess amortization (200,000)

Reversal of loss from lawsuit 100,000

Tax effects on FV adjustments 30,000

Adjusted net profit 880,000

NCI’s share (20%) 176,000



NCI balance:

NCI at acquisition date (CJE 1) $2,300,000

Income allocated to NCI for 20x5 (CJE 5) 176,000

NCI as at 31 Dec 20x5 $2,476,000



Q2 : Perform an analytical check on the balance of NCI as at 31 Dec 20X5




FV adjustment

Share of unimpaired goodwill

$5,700,000 x 20%

= $1,140,000+ ($1,000,000 x 19/20 x

80% x 20%) + ($2,000,000 x 9/10 x 80% x 20%) = $440,000

+ $896,000 = $2,476,000

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8. Goodwill impairment tests 8. Goodwill impairment tests

Goodwill Impairment Test

• IAS 36: Goodwill has to be reviewed annually for impairment loss

– Reviewed as part of a cash-generating unit (CGU)

• CGU is the lowest level at which the goodwill is monitored for internal

management purposes and

• Not larger than a segment determined under segment reporting

– Goodwill will be allocated to each of the acquirer’s CGU, or group of

CGUs




1. Carrying amount:– Net assets of the cash-generating unit

– It includes entity goodwill attributable to parent and NCI

2. Recoverable amount:– Higher of 1.FV less cost to sell (an arms-length measure), or

• Uses market based inputs in the pricing mechanism– 2.Value in use

• Uses internal or entity-specific input to determine the future cash flows

3. If carrying amount > recoverable amount– Impairment loss is allocated to goodwill– Then to other assets in proportion to their individual carrying amounts– Impairment once made is not reversible, as it may result in the

recognition of internally-generated goodwill which is prohibited under IAS 38



Determine the carrying amount of the CGU

Determine the recoverable amount of the CGU

If carrying amount ≤ recoverable amount

If carrying amount ≥ recoverable amount

No impairment lossAllocate impairment loss

to goodwill first and balance to other net assets

Recoverable amount: Higher of fair value or value in use

Steps for impairment test



NCI at FV at acquisition date

NCI as a proportion of identifiable net asset at

acquisition date

Goodwill on consolidationIncludes NCI’s share of goodwill

Excludes NCI’s share of goodwill

Carrying amount of cash-generating unit

Goodwill is allocated to cash-generating unit without further adjustment

Goodwill has to be grossed up to include NCI’s share

Notionally adjusted goodwill

= Recognized goodwill/ parent’s interest

Impairment loss

Impairment loss is shared between parent and NCI on the same basis on which profit or loss is allocated

Impairment loss is borne only by parent as goodwill for NCI is not recognized

Conclusion


• All business combinations are accounted for using the acquisition

method:

– Consideration transferred = Fair value of (assets transferred + liabilities

incurred + equity interests issued by acquirer + contingent

consideration)

– Investment account is eliminated and substituted with:

• Subsidiary’s identifiable net assets; and

• Goodwill

– Goodwill = Fair value of (consideration transferred + non-controlling

interests + acquirer’s previously held interest in the acquiree) –

Acquiree’s recognized net identifiable assets

Conclusion

• In consolidation:

– All intragroup balances and transactions are eliminated

– Non-controlling interests have a share of: Profit after tax

Dividends declared

Share capital

Retained earnings and other comprehensive income (eg. Revaluation

reserve) from acquisition date to current period

Fair value differential of a subsidiary’s net assets at acquisition date

Goodwill (if the fair value alternative is adopted)

– In the subsequent years, amortization, depreciation and cost of sales of

the acquired assets are based on fair value as at acquisition date


Conclusion

• Dr/ Cr Goodwill/ Gain from a bargain purchases• Dr/Cr FV (whole)• Dr/Cr FV (diff)• Dr Net Asset• Cr/ Dr Contingent Liability / Contingent Asset• Cr Investment in a subsidiary• Cr NCI• Cr/ Dr Deferred Tax Liability/ Deferred Tax asset


Advanced Financial Accounting: Chapter 3 Group Reporting II: Application of the Acquisition Method...

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