Академический Документы
Профессиональный Документы
Культура Документы
ifrs 3,
business
relevant to acca qualification paper F7
combinations
If there is a change to the fair value of contingent (ii) at the non-controlling interest’s proportionate share of
consideration due to additional information obtained after the acquiree’s (subsidiary’s) identifiable net assets (this
the acquisition date that affects the facts or circumstances is the UK method).
as they existed at the acquisition date, it is treated as
a ‘measurement period adjustment’ and the contingent The differential effect of the two methods is that (i)
liability (and goodwill) are remeasured. This is effectively recognises the whole of the goodwill attributable to an
a retrospective adjustment and is rather similar to an acquired subsidiary, whereas (ii) only recognises the parent’s
adjusting event under IAS 10, Events After the Reporting share of the goodwill.
Period. Changes in the fair value of contingent consideration
due to events after the acquisition date (for example, EXAMPLE 1
meeting an earnings target which triggers a higher payment Parent pays $100m for 80% of Subsidiary which has net
than was provided for at acquisition) are treated as follows: assets with a fair value of $75m. The directors of Parent
¤ Contingent consideration classified as equity shall not have determined the fair value of the NCI at the date of
be remeasured, and its subsequent settlement shall be acquisition was $25m.
accounted for within equity (eg Cr share capital/share
premium Dr retained earnings). Method (i) Consideration $
¤ Contingent consideration classified as an asset or a Parent 100
liability that: NCI 25
– is a financial instrument and is within the scope of 125
IAS 39 shall be measured at fair value, with any resulting Fair value of net assets (75)
gain or loss recognised either in profit or loss, or in other Consolidated goodwill on acquisition 50
comprehensive income in accordance with that IFRS
– is not within the scope of IAS 39 shall be accounted In the consolidated statement of financial position the
for in accordance with IAS 37, Provisions, Contingent non‑controlling interests would be shown as $25m.
Liabilities and Contingent Assets, or other IFRSs In the above example the value of the non-controlling
as appropriate. interests of $25m as determined by the directors of Parent
is proportionate to that of Parent’s consideration ($100m x
Note that although contingent consideration is usually a 20%/80%). This is not always (in fact rarely) the case.
liability, it may be an asset if the acquirer has the right to
a return of some of the consideration transferred if certain Method (ii) Consideration $
conditions are met. Parent 100
Share of fair value of net assets
Goodwill and non-controlling interests acquired ($75m x 80%) (60)
The acquirer (parent) measures any non-controlling Consolidated goodwill 40
interest either:
(i) at fair value as determined by the directors of the In the consolidated statement of financial position the
acquiring company (often called the ‘full goodwill’ non-controlling interest would be shown at its proportionate
method); or share of the subsidiary’s net assets of $15m ($75m x 20%).
03 technical
NCI 140 $
Net assets (to be consolidated) 500
Scenario 2 Consolidated goodwill (under method (i)) 50
$ 550
Net assets included In the consolidated statement
of financial position 500 NCI (140 - (150 x 20%)) 110
Consolidated goodwill (calculated under method (ii)) 160
660 Scenario 2
Where method (ii) has been used to calculate goodwill and
NCI 100 the non-controlling interests, IAS 36 requires a notional
adjustment to the goodwill of Subsidiary, before being
An impairment review of Subsidiary was carried out at compared to the recoverable amount. This is because the
31 March 2010. recoverable amount relates to the value of Subsidiary
as a whole (ie including all of its goodwill). The notional
Required: adjustment is always based on the non-controlling interest
For scenarios 1 and 2, calculate the impairment losses and in goodwill being proportional to that of the parent.
show how they would be allocated if the recoverable amount
of Subsidiary at 31 March 2010 if the impairment review Goodwill Net assets Total
concluded that the recoverable of Subsidiary was: $ $ $
(i) $450 Carrying amount –
(ii) $550 re Parent 160 500 660
In this case, because the fair value of the non-controlling The problem with this methodology is that goodwill (or
interests in scenario 1 is proportional to the consideration what is subsumed within it) is a very complex item. If asked
paid by Parent, the notional adjustment leads to the same to describe goodwill, traditional aspects such as product
impairment losses of $450 for (i) and $550 for (ii) as under reputation, skilled workforce, site location, market share, and
scenario 1 (see *). Applying these: so on, all spring to mind. These are perfectly valid, but in
(i) the impairment loss of $250 is again applied to eliminate an acquisition, goodwill may contain other factors such as a
goodwill and the remaining $50 is applied to reduce premium to acquire control, and the value of synergies (cost
the other net assets. The non-controlling interest will be savings or higher profits) when the subsidiary is integrated
reduced by $10 being its share (20%) of the reduction of within the rest of the group. While non-controlling interests
other net assets. This gives exactly the same statement may legitimately lay claim to their share of the more traditional
of financial position as under scenario 1. aspects of goodwill, they are unlikely to benefit from the other
aspects, as they relate to the ability to control the subsidiary.
$ *Thus, it may not be appropriate to value non-controlling
Net assets (to be consolidated) 450 interests on the same basis (proportional to) as the
Consolidated goodwill controlling interests (see method (i) below).
nil IFRS 3 illustrates the calculation of consolidated goodwill
450 at the date of acquisition as:
On 1 October 2006, Plateau acquired the following The following information is relevant:
non‑current investments: (i) At the date of acquisition, Savannah had five years
Three million equity shares in Savannah by an exchange remaining of an agreement to supply goods to one of
of one share in Plateau for every two shares in Savannah, its major customers. Savannah believes it is highly likely
plus $1.25 per acquired Savannah share in cash. The market that the agreement will be renewed when it expires.
price of each Plateau share at the date of acquisition was The directors of Plateau estimate that the value of this
$6, and the market price of each Savannah share at the date customer based contract has a fair value of $1m, an
of acquisition was $3.25. indefinite life, and has not suffered any impairment.
Thirty per cent of the equity shares of Axle at a cost of (ii) On 1 October 2006, Plateau sold an item of plant to
$7.50 per share in cash. Savannah at its agreed fair value of $2.5m. Its carrying
amount prior to the sale was $2m. The estimated
Only the cash consideration of the above investments remaining life of the plant at the date of sale was five
has been recorded by Plateau. In addition, $500,000 of years (straight-line depreciation).
professional costs relating to the acquisition of Savannah are (iii) During the year ended 30 September 2007, Savannah
included in the cost of the investment. sold goods to Plateau for $2.7m. Savannah had marked
The summarised draft statements of financial position of up these goods by 50% on cost. Plateau had a third of
the three companies at 30 September 2007 are: the goods still in its inventory at 30 September 2007.
There were no intra-group payables/receivables at 30
Plateau Savannah Axle September 2007.
$’000 $’000 $’000 (iv) At the date of acquisition the non-controlling interest
Assets in Savannah is to be valued at its fair value. For this
Non-current assets: purpose Savannah’s share price at that date can be taken
Property, plant to be indicative of the fair value of the shareholding
and equipment 18,400 10,400 18,000 of the non‑controlling interest. Impairment tests on
Investments in Savannah 30 September 2007 concluded that neither consolidated
and Axle 13,250 nil nil goodwill nor the value of the investment in Axle had
Financial asset investments 6,500 nil nil been impaired.
38,150 10,400 18,000 (v) The financial asset investments are included in Plateau’s
Current assets: statement of financial position (above) at their fair value
Inventory 6,900 6,200 3,600 on 1 October 2006, but they have a fair value of $9m at
Trade receivables 3,200 1,500 2,400 30 September 2007.
Total assets 48,250 18,100 24,000 (vi) No dividends were paid during the year by any of
the companies.
Equity and liabilities
Equity shares of $1 each 10,000 4,000 4,000 Required
Retained earnings Prepare the consolidated statement of financial position for
– at 30 September 2006 16,000 6,000 11,000 Plateau as at 30 September 2007. (20 marks)
– for year ended
30 September 2007 9,250 2,900 5,000
35,250 12,900 20,000
Non-current liabilities
7% Loan notes 5,000 1,000 1,000
(iii) Carrying amount of Axle at 30 September 2007 Note that subsequent to the date of acquisition, the
$’000 non‑controlling interest is valued at its fair value at
Cost (4,000 x 30% x $7.50) 9,000 acquisition plus its proportionate share of Savannah’s
Share post-acquisition profit (5,000 x 30%) 1,500 (adjusted) post acquisition profits.
10,500
FURTHER ISSUES
(iv) The unrealised profit (URP) in inventory The original question contained an impairment of goodwill;
Intra-group sales are $2.7m on which Savannah made let’s say that this is $1m. IAS 36 (as amended by IFRS 3)
a profit of $900,000 (2,700 x 50/150). One third of requires a goodwill impairment of a subsidiary (if a
these are still in the inventory of Plateau, thus there is cash generating unit) to be allocated between the parent
an unrealised profit of $300,000. and the non-controlling interests in on the same basis
(v) The 1.5 million shares issued by Plateau in the share as the subsidiary’s profits and losses are allocated. Thus,
exchange, at a value of $6 each, would be recorded as of the impairment of $1m, $750,000 would be allocated
$1 per share as capital and $5 per share as premium, to the parent (and debited to group retained earnings
giving an increase in share capital of $1.5m and a share reducing them to $29.55m ($30,300,000 - $750,000)) and
premium of $7.5m. $250,000 would be allocated to the non-controlling interests,
(vi) Consolidated retained earnings writing it down to $3.65m ($3,900,000 - $250,000).
$’000 It could be argued that this requirement represents
Plateau’s retained earnings 25,250 an anomaly. It can be calculated (though not done in
Professional costs of acquisition this example) that of Savannah’s recognised goodwill
must be expensed (500) (before the impairment) of $5m only $500,000 (ie 10%)
Savannah’s post-acquisition relates to the non-controlling interests, but the NCI suffers
(2,900 - 300 URP) x 75% 1,950 25% (its proportionate shareholding in Savannah) of
Axle’s post-acquisition profits (5,000 x 30%) 1,500 the goodwill impairment.
URP in plant (see (i)) (400)
Gain on financial asset investments Steve Scott is examiner for Paper F7
(9,000 - 6,500) 2,500
30,300
(vii) NCI The original question contained
Fair value at acquisition 3,250
Post-acquisition profit (2,900 - 300 URP) an impairment of goodwill;
x 25% 650 let’s say that this is $1m. IAS 36
3,900
(as amended by IFRS 3) requires
a goodwill impairment of a
subsidiary (if a cash generating
unit) to be allocated between the
parent and the non-controlling
interests in on the same basis
as the subsidiary’s profits and
losses are allocated.